Finn v. Virginia Retirement System

Present: All the Justices

MARK T. FINN
OPINION BY JUSTICE LEROY R. HASSELL, SR.
v. Record No. 990377 January 14, 2000

VIRGINIA RETIREMENT SYSTEM, ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Randall G. Johnson, Judge

I.

The primary issue we consider in this appeal is whether

Code § 2.1-526.8 confers upon a former trustee of the Virginia

Retirement System (VRS) a right of indemnification against the

Commonwealth for legal fees he incurred to defend criminal

investigations that allegedly arose out of the performance of

his official duties.

II.

Mark T. Finn, a former trustee of the VRS, filed an

amended bill of complaint seeking indemnification from the

Commonwealth of Virginia, the VRS, William E. Landsidle,

Comptroller, and RF&P Corporation. Finn alleged in his

amended bill that he is entitled to indemnification for costs

that he incurred in defense of criminal investigations against

him arising out of his service as a trustee of the VRS and as

a director of RF&P. The Commonwealth, the VRS, and Landsidle

(collectively referred to as the Commonwealth) filed demurrers

to the amended motion. The circuit court sustained the
demurrers, holding that neither Code § 51.1-124.28 nor the

common law confers upon Finn a right of indemnification

against the Commonwealth. The court also rejected Finn's

contentions that Code § 51.1-124.28 violated certain

provisions of the Virginia and United States Constitutions.

Finn appeals. 1

The circuit court decided this case at the demurrer stage

of the proceedings and, therefore, we will consider as true

"all material facts that are properly pleaded, facts which are

impliedly alleged, and facts which may be fairly and justly

inferred from alleged facts." Cox Cable Hampton Roads, Inc.

v. City of Norfolk, 242 Va. 394, 397, 410 S.E.2d 652, 653

(1991). Even though the amended bill of complaint and

exhibits exceed 100 pages, we will only state those

allegations that are necessary for our resolution of this

appeal.

In 1990, Finn served as a trustee of the VRS. In that

capacity, Finn and his fellow trustees had oversight

responsibilities for the VRS' operations and investments. The

VRS owned a substantial amount of stock in RF&P. According to

Finn's allegations, he and certain other VRS trustees were

concerned that the CSX Corporation might increase its

1
RF&P did not file a demurrer and is not a party in this
appeal.

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ownership of stock in RF&P to the detriment of minority

shareholders, like the VRS, thereby compelling the minority

shareholders "to relinquish their securities at below-market

prices. In order to protect the VRS from such a strategy, [a

special committee of the VRS] reached a consensus to recommend

. . . that the VRS purchase additional RF&P securities."

The VRS Board of Trustees approved the purchase of

additional RF&P securities. "On August 3, 1990, the VRS

disclosed publicly an increase in its RF&P holdings by

1,267,000 dividend obligations. This included its open market

purchases and the acquisition of 1,126,400 dividend

obligations from Norfolk Southern." Ultimately, "CSX and VRS

[entered into] a transaction . . . in which CSX would acquire

RF&P's railroad assets and the VRS would [control] its real

estate assets."

This transaction gave rise to federal and state criminal

investigations. The Attorney General of Virginia conducted an

investigation, and the United States Attorney for the Eastern

District of Virginia also conducted an investigation. Finn

retained counsel to defend him in the criminal investigations

as well as certain civil actions.

"Finn's counsel was informed — in a letter dated December

13, 1993 [from the United States Attorney] — that Finn 'should

be designated a "target" in the . . . investigation.' The

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Department of Justice Manual defines a target to be 'a person

as to whom the prosecutor or the grand jury has substantial

evidence linking him/her to the commission of the crime and

who, in the judgment of the prosecutor, is a putative

defendant.'" The United States Attorney stated in the letter

to Finn's counsel that "'[b]ased on information from a large

number of sources,' it appeared that Finn had committed

'numerous violations of the securities statutes, as well as

mail and wire fraud, and conspiracy regarding these

offenses.'"

Finn vehemently maintained his innocence throughout the

state and federal investigations. At the conclusion of the

investigations, Finn was not charged with any crimes. "In

mounting a defense in connection with the federal

investigations, Finn incurred expenses, including attorneys'

fees, totaling $1,123,522.14. Finn incurred these expenses as

a direct result of his role and his actions taken as a

Director of RF&P and Trustee of the VRS."

III.

A.

Finn argues that the circuit court erred in sustaining

the defendants' demurrers. Finn contends that Code § 2.1-

526.8 "provides a right of indemnification to officials of the

Commonwealth who successfully defend false criminal

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allegations arising out of the performance of [their] official

duties." Responding, the Commonwealth argues that Code § 2.1-

526.8 does not create a statutory right for reimbursement but,

rather, directs the Department of General Services to

establish an insurance plan. We agree with the Commonwealth.

Code § 2.1-526.8 states in relevant part:

"A. Subject to the approval of the Governor,
the Department of General Services through its
Division of Risk Management shall establish an
insurance plan, which may be purchased insurance,
self-insurance or a combination of self-insurance
and purchased insurance:
"1. To provide protection against liability
imposed by law for damages resulting from:
"a. Any claim made against any department,
agency, institution, board, commission, officer,
agent, or employee thereof for acts or omissions of
any nature while acting in an authorized
governmental or proprietary capacity and in the
course and scope of employment or authorization;

. . . .

"3. If the Division of Risk Management is
informed by the Attorney General's Office that it
will not provide a defense due to a conflict or
other appropriate reason, to provide for payment of
attorneys' fees and expenses incurred in defending
such persons and entities concerning any claim which
arises from their governmental employment or
authorization, which arises from their participation
in such student disciplinary proceedings, or which
is described in any such indemnification agreement.
"B. Any insurance plan established pursuant to
this section shall provide for the establishment of
a trust fund or contribution to the State Insurance
Reserve Trust Fund for the payment of claims covered
under such plan. The funds shall be invested as
provided in § 2.1-185 and interest shall be added to
the fund as earned. The trust fund shall also
provide for payment of administrative costs,

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 contractual costs, and other expenses related to the
administration of such plan.
"C. The insurance plan for public liability
shall be submitted to the Governor for approval
prior to implementation."

Code § 2.1-526.8 is not self-executing. Rather, the

General Assembly, through the enactment of that statute, has

directed that the Department of General Services through its

Division of Risk Management establish an insurance plan which

must be submitted to and approved by the Governor before

implementation. Code § 2.1-526.8 specifies the types of

insurance coverages that must be included within the insurance

plan and identifies persons and entities who must be insured

through the insurance plan.

Even though the statute describes the scope of the

insurance coverage and the nature of the insurance coverage to

be included within the insurance plan, the statute does not

confer specific rights upon individuals. Rather, any

individual who believes that he or she may be entitled to

reimbursement must seek payment in accordance with the

provisions of any insurance plan that has been established

pursuant to Code § 2.1-526.8. Therefore, we hold that the

circuit court properly sustained the Commonwealth's demurrer

because Code § 2.1-526.8 does not create a statutory right of

reimbursement for Finn.

B.

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 Finn argues that the circuit court erred by sustaining

the demurrer because, he says, the Commonwealth has a common

law duty to "reimburse public officials under the limited

circumstances in which they successfully defend criminal

proceedings arising out of the faithful execution of official

duties." Continuing, Finn, relying upon Wood v. Board of

Supervisors, 236 Va. 104, 372 S.E.2d 611 (1988), argues that

"[a]lthough this Court has not previously considered whether

the common law obligates state agencies to reimburse its

officials, the Court has recognized the basis for such a duty:

the legitimate public policy of protecting public servants

from frivolous criminal charges."

In Wood, we considered whether Code § 22.1-82 authorized

a school board to reimburse a division superintendent for

expenses he incurred in criminal and civil proceedings arising

out of the performance of his duties. 2 We held that Code

2
Code § 22.1-82, the statute that was at issue in Wood,
states:

"A. Notwithstanding any other provision of
law, the attorney for the Commonwealth or other
counsel may be employed by a school board to advise
it concerning any legal matter or to represent it,
any member thereof or any school official in any
legal proceeding to which the school board, member
or official may be a party, when such proceeding is
instituted by or against it or against the member or
official by virtue of his actions in connection with
his duties as such member or official.

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§ 22.1-82 conferred upon the school board the statutory

authority to reimburse its division superintendent. We

rejected the Board of Supervisors' request that this Court

hold, as a matter of public policy, that the superintendent

was barred from reimbursement for fees and expenses arising

from the defense of certain dismissed charges because he pled

guilty to a misdemeanor offense for which he was not

reimbursed legal fees and expenses. Wood, 236 Va. at 115, 372

S.E.2d at 618. We stated:

"Although we can appreciate the legitimacy of such a
public policy, we decline to adopt it here for two
reasons. First, we acknowledge the existence of
competing, and perhaps equally legitimate, public
policies, e.g., protecting public servants from
bearing the expense of defending frivolous charges.
Second, it is the responsibility of the legislature,
not the judiciary, to formulate public policy, to
strike the appropriate balance between competing
interests, and to devise standards for
implementation."

Id.

Even though we recognized in Wood the existence of a

public policy of protecting public employees from bearing the

legal expense associated with the defense of frivolous

charges, we concluded that the General Assembly, not the

judiciary, was the appropriate branch of government to

"B. All costs and expenses of such advice and
all costs, expenses and liabilities of such
proceedings shall be paid out of funds appropriated
to the school board."

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implement such policy. Likewise, we decline Finn's invitation

to fashion public policy and create a common law right which

would entitle a public official to obtain reimbursement from

the Commonwealth for legal expenses. It is the province of

the General Assembly, not the judiciary, to create such right.

C.

In 1997, the General Assembly enacted Code § 51.1-124.28

which states:

"Upon the acquittal, dismissal of charges,
nolle prosequi, or any other final disposition
concluding the innocence of any trustee, advisory
committee member, officer, or employee of the
Retirement System brought before any regulatory
body, summoned before any grand jury, investigated
by any law-enforcement agency, arrested, indicted,
or otherwise prosecuted on any criminal charge
arising out of any act committed in the discharge of
his official duties which alleges a violation of
state or federal securities laws, the Board may
reimburse all or part of the cost of employing legal
counsel and such other costs as are demonstrated to
have been reasonably necessary for his defense. The
Board shall provide for the payment of such legal
fees and expenses out of funds appropriated for the
administration of the Retirement System."

Acts 1997, ch. 821, cl. 2, provides: "[t]hat the provisions

of this act shall not authorize the Board of the Virginia

Retirement System to reimburse any trustee, advisory committee

member, officer, or employee of the Virginia Retirement System

for any costs incurred in connection with any act of such

person occurring prior to July 1, 1997."

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 Finn alleged in his amended bill that the language in

Acts 1997, ch. 821, cl. 2, which limits the power of the Board

of Trustees of the VRS to reimburse trustees for claims

arising on or after July 1, 1991, violates Virginia's

constitutional prohibition against special laws. Continuing,

Finn argues that this restriction "excludes him arbitrarily

from the benefits of the . . . Act while protecting

identically situated trustees from being placed in the

position in which he now finds himself." The Commonwealth

responds that the Act cannot be deemed a special law merely

because it became effective in accordance with art. IV, § 13

of the Constitution of Virginia which requires that laws

enacted at a regular session take effect on the first day of

July following the adjournment of the session of the General

Assembly in which the law has been enacted.

Article IV, § 14 (18) of the Constitution of Virginia

provides, in part: "[t]he General Assembly shall not enact

any local, special, or private law . . . [g]ranting to any

private corporation, association, or individual any special or

exclusive right, privilege, or immunity." Article IV, § 15 of

the Constitution of Virginia, provides, in pertinent part:

"In all cases enumerated in the preceding
section . . . the General Assembly shall enact
general laws. Any general law shall be subject to
amendment or repeal, but the amendment or partial
repeal thereof shall not operate directly or

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 indirectly to enact, and shall not have the effect
of enactment of, a special, private, or local law.
". . . . No private corporation, association,
or individual shall be specially exempted from the
operation of any general law, nor shall a general
law's operation be suspended for the benefit of any
private corporation, association, or individual."

All statutes enacted by the General Assembly are presumed

to be constitutional. Pulliam v. Coastal Emergency Services,

257 Va. 1, 9, 509 S.E.2d 307, 311 (1999); King v. Virginia

Birth-Related Neurological Injury Compensation Program, 242

Va. 404, 408, 410 S.E.2d 656, 659 (1991). A litigant who

challenges the constitutional validity of a statute has the

burden of proving that the challenged legislation is

unconstitutional, and any reasonable doubt as to the statute's

constitutionality must be resolved in favor of its validity.

Pulliam, 257 Va. at 9, 509 S.E.2d at 311; King, 242 Va. at

408, 410 S.E.2d at 659.

We have also stated the following principles which we

must apply here:

"The constitutional prohibition against special
laws does not prohibit legislative classifications.
Holly Hill Farm Corp. v. Rowe, 241 Va. 425, 430, 404
S.E.2d 48, 50 (1991). Rather, the prohibitions
require that such classifications be 'natural and
reasonable, and appropriate to the occasion.'
Benderson Development Company v. Sciortino, 236 Va.
136, 140-41, 372 S.E.2d 751, 753 (1988); Holly Hill,
241 Va. at 430, 404 S.E.2d at 50. 'Taken together,
the pervading philosophy of Article IV, sections 14
and 15 reflects an effort to avoid favoritism,
discrimination, and inequalities in the application
of the laws.' Benderson at 147, 372 S.E.2d at 756.

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 Additionally, 'the necessity for and the
reasonableness of classification are primarily
questions for the legislature. If any state of
facts can be reasonably conceived, that would
sustain it, that state of facts at the time the law
was enacted must be assumed.' Etheridge, 237 Va. at
102, 376 S.E.2d at 533 (quoting Martin's Ex'rs v.
Commonwealth, 126 Va. 603, 612-13, 102 S.E. 77, 80
(1920))."

King, 242 Va. at 409, 410 S.E.2d at 659-60.

Applying these principles, we hold that Acts 1997, ch.

821, cl. 2, does not violate Virginia's constitutional

prohibition against special laws. The only classification

which Finn challenges is the Act's distinction between legal

costs and expenses that were incurred after July 1, 1997,

which the Board of Trustees of the VRS in the exercise of its

discretion may reimburse and expenses and costs incurred

before that date, which do not fall within the scope of the

Act. Certainly, it is reasonably conceivable that the General

Assembly established this classification in accordance with

Va. Const. art. IV, § 13, which provides in part that: "[a]ll

laws enacted at a regular session . . . shall take effect on

the first day of July following the adjournment of the session

of the General Assembly at which it has been enacted." This

fact alone compels us to conclude that the challenged statute

does not constitute special legislation.

D.

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 Finn contends that Acts 1997, ch. 821, cl. 2, violates

the Equal Protection Clause of the federal constitution. Finn

argues that the General Assembly had no rational basis for

distinguishing between the current VRS trustees who may be

entitled to recover legal fees they expended after July 1,

1997 and himself. Finn's contention is without merit.

The Equal Protection Clause states, in part, that no

state shall "deny to any person . . . the equal protection of

the laws." U.S. Const. amend. XIV, § 1. Because the

classification that Finn challenges neither infringes upon a

fundamental right nor creates a suspect class, we must apply

the rational basis test to ascertain whether the statute can

withstand an equal protection challenge. Heller v. Doe, 509

U.S. 312, 319-21 (1993); Exxon Corp. v. Eagerton, 462 U.S.

176, 195-96 (1983); Hodel v. Indiana, 452 U.S. 314, 331-32

(1981); Pulliam, 257 Va. at 20-21, 509 S.E.2d at 318; King,

242 Va. at 411, 410 S.E.2d at 661.

We have held that a classification will not be

invalidated merely because it results in some inequality or

some discrimination. King, 242 Va. at 411, 410 S.E.2d at 661;

Etheridge v. Medical Center Hospitals, 237 Va. 87, 104, 376

S.E.2d 525, 534 (1989). Rather, "[t]he rational basis test is

satisfied 'if the legislature could have reasonably concluded

that the challenged classification would promote a legitimate

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state purpose.'" Id. The United States Supreme Court stated

in McGowan v. Maryland, 366 U.S. 420, 425-26 (1961), that

"the Fourteenth Amendment permits the States a wide
scope of discretion in enacting laws which affect
some groups of citizens differently than
others. . . . State legislatures are presumed to
have acted within their constitutional power despite
the fact that, in practice, their laws result in
some inequality. A statutory discrimination will
not be set aside if any state of facts reasonably
may be conceived to justify it."

Additionally, "[a] State . . . has no obligation to produce

evidence to sustain the rationality of a statutory

classification. '[A] legislative choice is not subject to

courtroom factfinding and may be based on rational speculation

unsupported by evidence or empirical data.'" Heller, 509 U.S.

at 320 (quoting FCC v. Beach Communications, Inc., 508 U.S.

307, 315 (1993)).

In applying the rational basis test, we must consider

whether any stated facts reasonably may be conceived to

justify the General Assembly's decision that Code § 51.1-

124.28 should apply to claims arising after July 1, 1997. We

hold that this test is satisfied because, as we have already

stated, the General Assembly may have relied upon Va. Const.

art. IV, § 13 when determining what expenses may be reimbursed

by the Board of Trustees of the VRS.

IV.

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 For the foregoing reasons, we will affirm the judgment of

the circuit court.

Affirmed.

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