Citation Codes

Equivalent Citations

citation codes

Docket Number

No. 53PA96-2.

Attorney(S)

G. Eugene Boyce; and Womble, Carlyle, Sandridge Rice, P.L.L.C., by Keith W. Vaughan, W. David Edwards, and Alexander P. Sands, III, for plaintiff-appellees. Michael F. Easley, Attorney General, by Norma S. Harrell and Thomas F. Moffitt, Special Deputy Attorneys General, for defendant-appellants.

Judges

FREEMAN, Justice.

See more information ...

Smart Summary

Opinion Summary — No. 53PA96-2 (Supreme Court of North Carolina, filed April 7, 2000)

Factual and Procedural Background

Plaintiffs were state and local government retirees who challenged the collection of North Carolina state income taxes on retirement benefits for the years 1989 through 1991. In a certified opinion dated 28 May 1998, this Court held that such retirees were entitled to exemptions from state income taxes on those benefits if they were "vested" in their retirement systems as of 12 August 1989 (Bailey v. State, 348 N.C. 130, 500 S.E.2d 54 (1998), as cited in the opinion). On 11 June 1998 the parties entered a Consent Order settling the consolidated cases for $799 million and requiring creation of a Settlement Fund to return the collected taxes to plaintiffs.

The General Assembly enacted legislation stating it had "established" the reserve fund for refunds and that it "appropriated" and "transferred" funds from the General Fund to that reserve, specifying an effective date of 1 July 1998 (although the Act was enacted on 30 September 1998). The superior court approved the settlement on 9 October 1998 and stated the order would be effective as of the effective date prescribed in the Act. The Attorney General's Office advised the State Treasurer in a letter (dated 6 November 1998) that interest on the $400 million appropriated should commence "no sooner than October 9, 1998," the date of the trial court's approval. Plaintiffs moved on 8 January 1999 for a determination of the effective date of the transfer of the first payment.

On 23 April 1999 the trial court ordered that the effective date of the first installment was 1 July 1998 and directed that interest accrue to plaintiffs from that date. The State appealed; the parties filed a joint petition for discretionary review which was allowed by the North Carolina Supreme Court. The Supreme Court heard the case and issued the opinion affirming the trial court's decision.

Legal Issues Presented

What is the effective date on which interest began to accrue on the first $400 million payment appropriated by the General Assembly to the Settlement Fund created to return improperly collected income taxes on state and local government retirement benefits?

Arguments of the Parties

Plaintiffs' Arguments

The plain language of the pertinent legislation demonstrates that the money was transferred on 1 July 1998, the Act's stated effective date, and thus interest should accrue from that date.

Defendants' Arguments

Interest could not begin to accrue any sooner than 9 October 1998 (the date the trial court approved the settlement), because under the Consent Order "[a]ll interest and earnings on the principal after payment by the Treasurer to the Settlement Fund shall accrue to the Settlement Fund," and defendants contend the Treasurer had not paid to the Settlement Fund and the court had not approved the settlement on 1 July 1998.
The Attorney General's Office advised the Treasurer by letter on 6 November 1998 that interest on the $400 million should commence "no sooner than October 9, 1998," reflecting the defendants' position regarding the operative start date for interest.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bailey v. State, 348 N.C. 130, 500 S.E.2d 54 (1998)	The Court previously held that state and local government retirees challenging collection of state income taxes on retirement benefits from 1989 through 1991 were entitled to exemptions if they were "vested" as of 12 August 1989.	The opinion cites Bailey as the antecedent decision that established the illegality of the tax collection at issue and that motivated the legislative appropriation and the settlement to remediate taxes unconstitutionally collected.
Smith v. Mercer, 276 N.C. 329, 172 S.E.2d 489, 495 (1970)	Remedial legislation is presumed to operate retroactively.	The Court invoked the presumption to support the interpretation that the remedial statute establishing and appropriating the reserve fund operated retroactively to the Act's stated effective date of 1 July 1998.
Beckford v. Tobin, 27 Eng. Rep. 1049, 1051 (1749)	The centuries-old rule that "interest shall follow the principal, as the shadow the body."	The Court applied this principle to conclude that, because the settlement was effective and the principal was payable as of 1 July 1998, interest likewise began accruing on that date.

Court's Reasoning and Analysis

The Court examined the Consent Order, the legislative act, and the trial court's order approving the settlement together rather than in isolation. It concluded that:

The Consent Order made the settlement effective upon two events: (a) enactment of legislation appropriating the necessary funds and (b) court approval following notice to class members.
The General Assembly's legislation expressly stated that it "established" the reserve fund and "appropriated" and "transferred" funds to it, and the Act specified an effective date of 1 July 1998 (a retroactive date selected by the legislature despite later formal enactment).
The trial court's 9 October 1998 approval of the settlement concluded as a matter of law that the order would be effective as of the effective date prescribed in the legislative act (1 July 1998); no appeal was taken from that order, so it became the law of the case.
The Consent Order provision requiring payment of the first installment "within thirty (30) days of the entry of an order approving the settlement after class notice or enactment of legislation appropriating the funds...whichever is later" was satisfied with an effective date of 1 July 1998 for both the legislative appropriation and the court approval when read together with the Act.
Because the legislative act is remedial in purpose (designed to remedy taxes this Court previously held were unconstitutionally collected) the remedial-legislation presumption of retroactivity applied, reinforcing that the Act's retroactive effective date should be given effect.
Given that the settlement and the legislative appropriation and transfer were effective on 1 July 1998 and that "interest shall follow the principal," the Court concluded that interest began accruing for the benefit of plaintiffs from that date.

Holding and Implications

Holding: The Supreme Court of North Carolina affirmed the trial court's order and held that the effective date of the first installment paid into the legislative Settlement Fund was 1 July 1998, and that interest began accruing to the benefit of plaintiff retirees from that date.

Implications:

The practical consequence is that defendants were obligated to the principal transfer and to interest on that principal beginning 1 July 1998.
The opinion bases this result on (1) the Consent Order read with the legislative act and court approval, (2) the remedial-legislation presumption of retroactivity, and (3) the principle that interest follows the principal. The Court did not announce a broader change in precedent beyond applying these principles to the facts; the decision directly resolves the effective date for accrual of interest in this settlement context.

Affirmed.

Show full summary ...

BRIDGES, ROSALIE T. ADAMS, JESSE M. ALMON, HELEN L. ANDREWS, WORTH B. ASKEW, BILLY A. BAKER, PARKER N. BARE, ARTHUR C. BEAMAN and GRACE G. BEAMAN, JOSEPH G. BINKLEY, ROBERT L. BLEVINS, ELLIE L. BOYLES, CHANCEL T. BROWN and JOAN W. BROWN, ELIZABETH S. BUTLER, DOROTHY T. CARMICHAEL, JOHN CARRICKER, HAROLD D. COLEY, SR., ANNA L. COOPER, CHARLES C. COOPER and BERTIE S. COOPER, T.J. DUNCAN and ESTHER P. DUNCAN, DAN R. EMORY, MARTIN W. ERICSON, FRED W. GENTRY, IVEY B. GORDON and IZORIA S. GORDON, LOUIS N. GOSSELIN, EARL T. GREEN, BOB HAMMONS, DARIUS B. HERRING, RAY F. HOLCOMB, TILLIE M. HOLCOMB, KAY C. HURT, JOHN I. KIGER and MARIE K. KIGER, CLARENCE T. LEINBACH, WALTER G. LEMING and BARBARA C. LEMING, YATES LOWE, HARRIETTE B. McCORMICK, VIRGINIA H. MICKEY, WILLIAM F. MORGAN, HARRIETTA B. McCORMICK, EARL RAY PARKER, CALVIN C. PEARCE, MICHAEL PELECH, DIANE S. PEOPLES, MILDRED R. POINDEXTER, WINNIE D. POTTS, PATSY M. REYNOLDS, GLENN D. RUSSELL, BLANCHE S. SHIPP, CLYDE R. SHOOK, HAROLD E. SIMPSON, SONNIE B. SIMPSON, LENORA S. SMITH, FRANCES J. SNOW, CHARLES A. SPEED, JUSTUS M. TUCKER, WALTER P. UPRIGHT, RALPH B. WALKER and MARTHA M. WALKER, JEAN A. WATSON, ROBERT I. WEATHERSBEE, RUBY WEBSTER, HARRY LEE WILLIAMS, DANIEL W. WILLIAMS, ELIZABETH H. WILSON, WILBUR G. WILSON, ERNEST B. WOOD, THOMAS S. WORSHAM, indi v. dually for the benefit and on behalf of all others similarly situated, Petitioner-Plaintiffs, and W.K. AUBRY, JR., JAMES BRYAN BARRETT, NORMAN W. CASH, ROBERTA M. COOK, JOHN ED DAVIS, DANIEL M. DYSON, EDWIN C. GUY, SAMUEL L. HARMON, JOHN MARSHALL HARTLEY, DONALD ELLIOTT HARTLE, MARTHA M. LAWING, DOUGLAS LAMAR MASON, DELMA DALTON REPASS, JR., WILLIAM ELMER RIGGS, PAUL L. SALISBURY, JR., RICHARD A. SHARPE, NELSON LEROY SHEAROUSE, FRANCIS C. SIMMONS and MARY E. SIMMONS, NED RAEFORD SMITH, G. VANCE SOLOMON and EULALIA T. SOLOMON, THOMAS LASH TRANSOU and WILBUR EUGENE YOUNG, Additional Petitioner-Plaintiffs

Taxation — income tax — retirement benefits — government employees — refund — settlement fund — effective date — interest

The effective date of the first installment paid into a settlement fund created by the legislature to return improperly collected income taxes on state and local government retirement benefits from 1989 through 1991 was 1 July 1998, the retroactive date of the legislative act appropriating the funds and the retroactive date of the court order approving the settlement, and interest began accruing to the benefit of plaintiff retirees on that date.

FREEMAN, Justice.

In an opinion certified on 28 May 1998, this Court held that state and local government retirees challenging the collection of state income taxes on their retirement benefits from 1989 through 1991 were entitled to exemptions from state income taxes on those benefits if they were "vested" in their respective retirement systems as of 12 August 1989. Bailey v. State, 348 N.C. 130, 500 S.E.2d 54 (1998). On 11 June 1998, plaintiffs entered into a Consent Order with the General Assembly and the State of North Carolina, settling the consolidated cases for $799 million and requiring the parties to create a Settlement Fund to return the collected money to plaintiffs.

The General Assembly enacted legislation stating that it "established" the reserve fund for the Bailey/Emory/Patton refunds, and at the same time it "appropriated" and "transferred" funds from the General Fund to the reserve. Act of Sept. 30, 1998, ch. 164, sec. 2, 1998 N.C. Sess. Laws 534, 534. The General Assembly specified the Act's effective date as 1 July 1998. On 9 October 1998, the trial court approved the proposed settlement and concluded as a matter of law that "[t]his Order shall be effective as of the effective date prescribed in the Act of 1997 Session (1998 Special Session) of the General Assembly making the initial appropriation as agreed to by the parties and approved by the Court." No appeal was taken from this order. Thus, it became the law of the case and the effective date of the court approval of the settlement is 1 July 1998.

Pursuant to an inquiry from the Department of the State Treasurer, the Attorney General's Office informed the Treasurer's Office in a letter dated 6 November 1998 that the interest on the $400 million appropriated in Chapter 164 should commence "no sooner than October 9, 1998, the date Judge Thompson's order was entered approving the settlement of the Bailey/Emory/Patton litigation." On 8 January 1999, plaintiffs filed a motion for determination of the effective date of the transfer of the first payment.

On 23 April 1999, the trial court entered an order in which it decreed that the effective date of the first installment was 1 July 1998, with interest accruing to the benefit of plaintiffs from that date. The State appealed. On 6 October 1999, the parties filed a joint petition for discretionary review prior to determination by the North Carolina Court of Appeals, which was allowed by this Court on 4 November 1999.

The sole issue presented on appeal is the determination of the date interest began to accrue on the first payment of $400 million appropriated by the General Assembly. Plaintiffs assert that the plain language of the pertinent legislation provides that the money was transferred on 1 July 1998. In contrast, defendants assert that interest could not begin to accrue any sooner than 9 October 1998, the date defendants contend the money was actually transferred after the trial court approved the settlement, because the plain language of the Consent Order provides that "[a]ll interest and earnings on the principal after payment by the Treasurer to the Settlement Fund shall accrue to the Settlement Fund." Thus, defendants assert that interest did not begin on 1 July 1998 because the Treasurer had not made the payment to the Settlement Fund and the trial court had not approved the settlement on that date.

We hold that the Consent Order, the pertinent legislation, and the court order approving the settlement, when read together, reveal that the effective date of the first installment is 1 July 1998, with interest accruing to the benefit of plaintiffs from that date. The Consent Order provides that the settlement becomes effective upon: (a) the enactment of legislation appropriating the money necessary to make the payments called for herein, and (b) court approval following notice to class members.

The General Assembly enacted legislation stating that it "established" the reserve fund, and it also "appropriated" and "transferred" funds from the General Fund to the reserve. The General Assembly specifically provided that the Act's effective date was 1 July 1998, which was ninety-two days before the legislation's actual enactment on 30 September 1998. Ch. 164, sec. 2, 1998 N.C. Sess. Laws at 534. On 9 October 1998, the trial court concluded as a matter of law that the effective date of the approval of the settlement was 1 July 1998.

The Consent Order states that the first installment "shall be paid within thirty (30) days of the entry of an order approving the settlement after class notice or enactment of legislation appropriating the funds necessary to make the payments called for herein, whichever is later." The effective date for these two events is 1 July 1998. The only evidence of record as to when the State actually made the payment is the appropriation and transfer of the $400 million effective on that date.

The legislative act establishing the reserve fund provides that its effective date is 1 July 1998. The 9 October 1998 court order approving the settlement allocates distribution of the funds between principal and interest as of the effective date prescribed in the legislative act, 1 July 1998. Thus, the legislative act appropriating and transferring the funds for the settlement and the order approving the settlement became simultaneously effective on 1 July 1998.

Although legislation generally operates prospectively, remedial legislation is presumed to operate retroactively. See Smith v. Mercer, 276 N.C. 329, 338, 172 S.E.2d 489, 495 (1970). The purpose of the pertinent legislation is to remedy a tax that the legislature knew, from this Court's prior decision, had been unconstitutionally collected seven to nine years earlier. The selection of the 1 July 1998 date manifests the General Assembly's commendable intent to remediate and make as near whole as possible those whose money was so taken. Thus, the settlement was effective on 1 July 1998, the retroactive date of the legislative act appropriating the funds and the retroactive date of court approval.

Since the settlement was effective on 1 July 1998, defendants were obligated to pay the principal as of that date. Under the centuries-old rule that "interest shall follow the principal, as the shadow the body," the trial court properly provided that interest began accruing in the instant case on 1 July 1998. See Beckford v. Tobin, 27 Eng. Rep. 1049, 1051 (1749).

For the foregoing reasons, the decision of the trial court is

AFFIRMED.

Justice MARTIN did not participate in the consideration or decision of this case.

BAILEY v. STATE