No. 13555
IN THE SUPREME COURT OF THE STATE OF MONTANA
1977
MONTANA ASSOCIATION OF UNDERWRITERS,
Plaintiff and Appellant,
STATE OF MONTANA, acting by and through the
Department of Administration, and Montana
Benefits, Inc. ,
Defendants and Respondents.
Appeal from: District Court of the First Judicial District,
Honorable Gordon Bennett, Judge presiding.
Counsel of Record:
For Appellant:
Philip W. Strope argued, Helena, Montana
For Respondent :
Small, Cummins and Hatch, Helena, Montana
Robert Cummins argued, Helena, Montana
Michael Young argued, Helena, Montana
Submitted: March 17, 1977
Decided
~ P 2R 1971
- -. 9
M r . J u s t i c e Frank I. Haswell d e l i v e r e d t h e Opinion of t h e Court.
P l a i n t i f f f i l e d an a c t i o n f o r d e c l a r a t o r y judgment and
i n j u n c t i v e r e l i e f a g a i n s t t h e S t a t e Department of A d m i n i s t r a t i o n
and a p r i v a t e c o r p o r a t i o n t o block implementation of a d e f e r r e d
compensation p l a n f o r p u b l i c employees. The d i s t r i c t c o u r t ,
Lewis and Clark County, t h e Hon. Gordon R. Bennett, d i s t r i c t
judge, g r a n t e d summary judgment t o defendants denying t h e r e q u e s t e d
relief. P l a i n t i f f appeals.
P l a i n t i f f i s t h e Montana A s s o c i a t i o n of L i f e Underwriters,
a t r a d e a s s o c i a t i o n whose members a r e involved, among o t h e r
t h i n g s , i n t h e f i e l d of employee pension p l a n s . There a r e two
defendants: The Department of Administration (DOA), an adminis-
t r a t i v e agency of t h e s t a t e of Montana; and Montana B e n e f i t s ,
I n c . (MFI), a p r i v a t e p r o f i t c o r p o r a t i o n , which i s engaged i n
e s t a b l i s h i n g and a d m i n i s t e r i n g t h e d e f e r r e d compensation p l a n
f o r p u b l i c employees.
I n 1974 t h e Montana l e g i s l a t u r e enacted l e g i s l a t i o n a u t h o r -
i z i n g p u b l i c employees t o e n t e r i n t o a d e f e r r e d compensation
plan. Chapter 264, 1974 Session Laws, c o d i f i e d a s s e c t i o n s
68-2701 through 68-2709, R.C.M. 1947. Essentially the legislation
a u t h o r i z e d t h e s t a t e o r i t s p o l i t i c a l s u b d i v i s i o n s , a f t e r reaching
agreement w i t h i t s employees, t o e n t e r i n t o a program whereby i t s
employees could d e f e r a p o r t i o n of t h e i r pay i n a q u a l i f i e d
d e f e r r e d compensation p l a n under t h e f e d e r a l I n t e r n a l Revenue
Code. Under such a p l a n t h e employee would n o t pay income t a x e s
on t h e p o r t i o n of h i s s a l a r y d e f e r r e d u n t i l it was f i n a l l y d i s -
t r i b u t e d t o him under t h e plan. The s t a t e o r i t s p o l i t i c a l sub-
d i v i s i o n i n c u r r e d no f i n a n c i a l l i a b i l i t y f o r l o s s e s i n c u r r e d by
any plan e s t a b l i s h e d under t h e l e g i s l a t i o n . DOA was authorized
t o c o n t r a c t with employees t o d e f e r compensation under any
q u a l i f i e d plan, t o e s t a b l i s h r u l e s and r e g u l a t i o n s f o r t h e
proper operation of t h e plan, and t o c o n t r a c t with p r i v a t e corpora-
t i o n s o r i n s t i t u t i o n s f o r consolidated b i l l i n g and o t h e r adminis-
t r a t i v e services.
Pursuant t o t h i s l e g i s l a t i o n , DOA entered i n t o a w r i t t e n
agreement on September 1 7 , 1975 with Montana Public Employees
Benefit Services Co., I n c . , t h e predecessor of M B I , wherein t h e
corporation was given t h e exclusive r i g h t t o e s t a b l i s h and
administer a plan of d e f e r r e d compensation f o r p u b l i c employees.
O t h e same d a t e DOA entered i n t o a w r i t t e n agreement with M B I
n
wherein t h i s corporation was granted t h e same exclusive r i g h t .
A t t h e time of c o n t r a c t i n g Montana Public Employees Benefit
Services Co., Inc. was n o t y e t incorporated. Following incorpora-
t i o n , t h a t c o r p o r a t i o n ' s name was changed t o MBI. After the
p r e s e n t s u i t was f i l e d , DOA entered i n t o a t h i r d c o n t r a c t with
MBI i d e n t i c a l t o t h e previous c o n t r a c t s .
The deferred compensation plan was prepared and o f f e r e d
by t h e corporation t h t h e s t a t e , which adopted it. This plan
had been approved a s a "nonqualified unfunded" plan by t h e
I n t e r n a l Revenue Service i n a p r i v a t e l e t t e r r u l i n g . This r u l i n g
determined t h a t income deferred by p u b l i c employees under t h e
plan was n o t includable i n t h e employee's g r o s s income u n t i l
a c t u a l l y received by t h e employee o r h i s b e n e f i c i a r i e s , provided
s t a t e law permits implementation of t h e plan.
P l a i n t i f f challenges t h e deferred compensation p l a n adopted
by t h e s t a t e on t h r e e grounds, which we a r e asked t o review on
appeal :
(1) Whether t h e 1974 l e g i s l a t i o n r e q u i r e s t h e s t a t e t o
adopt and implement only a " q u a l i f i e d t funded deferred compensa-
t i o n plan w i t h i n t h e meaning of $401(a), I n t e r n a l Revenue Code
1954, a s amended.
(2) Whether t h e agreement between DOA and MI i s void
B
f o r l a c k of l e g a l capacity by MBI t o c o n t r a c t .
(3) Whether DOA has a u t h o r i t y t o g r a n t an exclusive con-
tract to M I
B.
_The g i s t of t h e f i r s t i s s u e i s whether t h e l e g i s l a t u r e i n
using t h e words " q u a l i f i e d plan" and s i m i l a r language meant a
plan q u a l i f i e d f o r d e f e r r e d income t a x l i a b i l i t y o r whether i t
r e f e r r e d t o a q u a l i f i e d deferred compensation plan w i t h i n t h e
meaning of S401(a), I n t e r n a l Revenue Cbde 1954.
P l a i n t i f f argues t h a t t h e words " q u a l i f i e d " and "non-
q u a l i f i e d " a r e words of a r t with d i s t i n c t meanings, when used
w i t h i n t h e context of t h e I n t e r n a l Revenue Code. It argues t h e
Montana l e g i s l a t u r e used t h e words " q u a l i f i e d plan" i n t h a t
sense i n t h e deferred compensation a c t t o provide adequate funding
and s e c u r i t y of employee c o n t r i b u t i o n s from d i v e r s i o n t o o t h e r
purposes. Therefore, i t contends, t h e l e g i s l a t u r e meant a
q u a l i f i e d plan under §401(a), I n t e r n a l Revenue Code 1954 which
i n s u r e s adequate funding, security,and prevents d i v e r s i o n of
funds t o o t h e r purposes.
A t t h e o u t s e t we n o t e t h e l e g i s l a t i o n i n question provides
in pertinent part:
"68-2701. Deferred compensation programs permitted.
"The s t a t e * * fc may e s t a b l i s h , a f t e r reaching agreement
with any employee 9: 9: ff a program f o r employees t o d e f e r
any p o r t i o n of t h a t employeet s compensation up t o t h e
maximum allowed by t h e I n t e r n a l Revenue Code i n a p l a n
q u a l i f i e d f o r exemption under a p p l i c a b l e s e c t i o n s of t h e
I n t e r n a l Revenue Code." (Emphasis added.)
I n subsequent s e c t i o n s reference i s made t o "any q u a l i f i e d plan1'
( s e c t i o n 68-2702), t o " q u a l i f i e d plans" ( s e c t i o n 68-2705), t o
11 any q u a l i f i e d p r i v a t e pension plans" ( s e c t i o n 68-2706), and t o
"a11 q u a l i f i e d deferred compensation plans" ( s e c t i o n 68-2708).
A c a r d i n a l p r i n c i p l e of s t a t u t o r y c o n s t r u c t i o n i s t h a t t h e
i n t e n t of t h e l e g i s l a t u r e must f i r s t be determined from t h e
p l a i n meaning of t h e words used, and i f i n t e r p r e t a t i o n of t h e
s t a t u t e can be so determined, t h e c o u r t s may n o t go f u r t h e r and
apply any o t h e r means of i n t e r p r e t a t i o n . K e l l e r v. Smith,
Mont . , 553 P.2d 1002, 33 St.Rep. 828; Dunphy v. Anaconda Co.,
151 Mont. 76, 438 P.2d 660, and cases c i t e d t h e r e i n .
Here t h e language of t h e a c t c l e a r l y i n d i c a t e s t h e term
" q u a l i f i e d plan" means a p l a n q u a l i f y i n g f o r d e f e r r a l of income
t a x a t i o n under f e d e r a l laws. Section 68-2701 a u t h o r i z e s a de-
f e r r e d compensation program f o r p u b l i c employees " i n a plan
q u a l i f i e d f o r exemption under a p p l i c a b l e s e c t i o n s of t h e I n t e r n a l
Revenue Code." This language demonstrates t h e underlying purpose
of t h e a c t -- t a x saving by exemption under f e d e r a l t a x laws.
The exemption i s n o t l i m i t e d t o a plan q u a l i f i e d under $401(a)
of t h e I n t e r n a l Revenue Code o r any o t h e r s p e c i f i c s e c t i o n t h e r e o f .
The a c t says a plan q u a l i f i e d f o r exemption "under a p p l i c a b l e
s e c t i o n- of t h e I n t e r n a l Revenue Code."
s I t does n o t speak of
"funded" o r "unfunded" p l a n s , $401(a) p l a n s , o r use t h e t e c h n i c a l
jargon of t h e I n t e r n a l Revenue Code.
Where t h e language of a s t a t u t e i s p l a i n , unambiguous, d i r e c t
and c e r t a i n , t h e s t a t u t e speaks f o r i t s e l f and t h e r e i s nothing
l e f t f o r t h e c o u r t t o construe. K e l l e r v. Smith, supra; Dunphy
v. Anaconda Co., supra. Our function i s simply t o d e c l a r e what i s
contained i n t h e s t a t u t e , and n e i t h e r i n s e r t what has been omitted
nor omit what has been inserted. Section 93-401-15, R.C.M.
1947; Clark v. Hensel Phelps Construction Co., Mont . 2
P.2d , 34 St.Rep.61; Hammill v. Young, - .
Mont 9
540 P.2d 971, 32 St.Rep. 935. Accordingly, we will not construe
the language of section 68-2701 - "in a plan qualified for
exemption under applicable sections of the Internal Revenue Code"
--- to mean only a 5 401(a) plan.
Plaintiff argues the deferred compensation plan in question
does not conform to Montana's statutory requirements because it is
"unfunded" and does not provide the necessary security for .
employee contributions. It is contended that a qualified, funded
$401(a) plan provides such security, and the legislature intended
to provide such security by using the term "qualified plan'' as
words of art having a special meaning in the context of the
Internal Revenue Code, specifically a $401(a) qualified and funded
plan. Plaintiff asserts the deferred compensation plan in question
does not qualify for exemption under $401(a) of the Internal
Revenue Code and cites in support Buttrey Stores, Inc. v. United
States, 375 F.2d 799, and Trebotich v. Commissioner of Internal
Revenue, 492 F.2d 1018.
We agree that the deferred compensation plan in question
does not qualify for exemption under $401(a) of the Internal
Revenue Code. A qualified plan under that section is a specialized,
highly sophisticated, and complex income deferral plan utilizing
the trust device to insure security and non-diversion of deferred
income contributions. The merits of such a plan vis-a-vis the
unfunded plan here is a policy determination to be resolved by
the legislature and DOA. The legislature has not limited a
- 6 -
" q u a l i f i e d plan'' t o a §401(a) plan by t h e p l a i n language of i t s
enactment and DOA has approved t h e p a r t i c u l a r plan involved
i n t h i s case.
W have considered t h e o t h e r arguments advanced by p l a i n t i f f
e
on t h e f i r s t i s s u e and f i n d t h a t none would change our holding,
W f i n d i t unnecessary t o go beyond t h e p l a i n language of
e
Montana's a c t , W s p e c i f i c a l l y hold t h i s language permits imple-
e
mentation of t h e deferred compensation plan involved i n t h i s case.
P l a i n t i f f ' s second i s s u e argues t h a t t h e c o n t r a c t entered i n t o
between t h e s t a t e and M f i s void a s MI lacked l e g a l c a p a c i t y t o
B B
e n t e r i n t o such agreement. A t t h e time of t h e execution of t h e
i n i t i a l c o n t r a c t between DOA and t h e predecessor of MI on
B
September 1 7 , 1975, no c e r t i f i c a t e of incorporation had been
issued t o t h e corporation. 21 days l a t e r on 0ctobe; 8 , 1975,
t h e corporation received i t s a r t i c l e s of incorporation. The
company name was l a t e r changed t o MI a t t h e request of t h e secre-
B
t a r y of s t a t e and a r t i c l e s of Xncorporation were issued i n t h a t
name on A p r i l 12, 1976.
MI was, i n e f f e c t , a defacto corporation a t the time t h e
B
c o n t r a c t i n question was executed. Although it was d e f e c t i v e
i n i t s c r e a t i o n and n o t a de j u r e c o r p o r a t i o n , t h i s was t h e
r e s u l t of a bona f i d e attempt t o incorporate under t h e e x i s t i n g
s t a t u t o r y a u t h o r i t y , coupled with t h e e x e r c i s e of c o r p o r a t e powers.
A de f a c t o corporation has t h e same c a p a c i t y t o c o n t r a c t a s a
de j u r e corporation. Proof of a de f a c t o corporate e x i s t e n c e i s
s u f f i c i e n t where t h e v a l i d i t y of a c o n t r a c t by a body of men
claiming t o be a corporation i s i n i s s u e i n a s u i t which i s
between t h i r d persons. 8 F l e t c h e r Cyc. Corp. (Perm.Ed.), Chap.
45, $3862, and cases c i t e d t h e r e i n .
Plaintiff argues the contract was not merely voidable, but
void ab initio as a result of the failure r.. to coniply- - .
with the technical requirements of incorporation. We do not agree.
The legal distinction between "void" and "voidable" contracts
is defined in 1 Williston on Contracts, 3rd Ed., $15:
"An agreement which produces no legal obligation
is frequently called a 'void' contract. Though
the phrase is often convenient, it is a contra-
diction in terms. If an agreement is void it is
not a contract. A voidable contract, however; is
common in the law. Infancy, fraud, mistake, duress,
some kinds of illegality, all afford ground for res-
cinding or refusing to perform a contract. Unless
rescinded, however, a voidable contract imposes on the
parties the same obligations as if it were not voidable,
The term is used to cover both cases where the person
having the power of avoidance must promptly take action
manifesting his election and cases where he need do
nothing unless sued, and may then assert avoidance
as a defense. Where a contract is voidable on both
sides, as where both are infants or cheats, the trans-
action is not wholly void, since in order to prevent
the contract from having its normal operation the
defense vust in some manner be asserted, and further-
more, since the contract is capable of ratification, it
affects from the outset the legal relations of the
parties.1 I
In the instant case, the failure of the corporation
possess articles of incorporation until 21 days after the execu-
tion of the contract with the state does not constitute an illegal
purpose which would void the agreement from its inception. On
the contrary, this defect rendered the contract voidable at the
state's option. The state not only has not taken any steps to void
or rescind the contract, but in fact has ratified it.
The third and final issue is whether DOA has authority to grant
an exclusive contract to MBI. The record discloses that this
issue was not researched, briefed, argued or raised before the
district court. On appeal this Court will not review issues not
presented to the trial court. Spencer v. Robertson, 151 Mont.
5 0 f , 445 P.2d 48; C l a r k v . W o r r a l l , 146 Mont. 374, 406 P.2d
622; S t a t e Highway Commission v. Yost Farm Company, 142 Mont.239,
384 P.2d 277.
The summary judgment o f t h e d i s t r i c t c o u r t i s a f f i r m e d .
Justice
W Concur:
e
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