Montana Ass'n of Underwriters v. State Ex Rel. Department of Administration

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 /'