Ky. Emps. Ret. Sys. v. Seven Ctys. Servs., Inc. ( 2018 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 1830437n.06 F ‘ al E D
Nos. 16-5569 / 16-5644 s
AUG 24 2018
UNITED sTATES coURT oF APPEALS DEBOHAH 3_ HUNT, clerk ``
FoR THE sIXTH CIRCUIT
KENTUCKY EMPLOYEES RETIREMENT )
SYSTEM; BOARD OF TRUSTEES OF)
KENTUCKY RETIREMENT sYsTEMs, )
) oN APPEAL FRoi\/r
THE
Appellants/Cross-Appellees, ) UNITED STATES DISTRICT
V § CoUR'r FoR THE WESTERN
' ) DISTRICT oF KENTUCKY
sEVEN CoUNTiEs sER\/ICES, rNC., ) OPINION
)
)
Appellee/Cross-Appellant.
BEFORE: COLE, Chiei`` Judge; McKEAGUE and STRANCH, Circuit Judges.
ORDER OF CERTIFICATION TO THE SUPREME COURT OF KENTUCKY
PER CURIAI\/I. This Court, invoking Kentucky Rule of Civil Procedure 76.37 (entitled
“Certitication of question of iaw”), hereby requests the Suprerne Court of Kentucky to exercise its
discretion to answer a certified question of law in this cause. The answer to this certified question
may be determinative of the cause now pending before this court; Kentucl550 B.R.
741 (W.D. Ky. 2016).
But Seven Counties was not automatically pulled into KERS. Approximately six months
after Seven Counties formed, its executive director sent a letter to the Kentucky Retirement
Systems-the body that administers KERS_about Seven Counties’ participation in KERS as well
as a letter to the Attorney General asking whether it was eligible to participate in KERS. The
Attorney General’s response cited the provision in Kentucky law that allows an entity to become
a participating “department” in KERS upon issuance of an executive order, Ky. Rev. Stat.
§ 6l.510(3), and conciuded that because Seven Counties “appears to be [River Region’s] newly
created successor, it is our opinion that [Seven Counties] employe[e]s may begin to participate in
the KERS upon the issuance of an Executive Order from the Governor to that effect.” _Ky, Op.
Att’y Gen. No. 78-685, 1978 WL 26239 (Oct. 4, 1978). Seven Counties then petitioned the
Governor to sign an Executive Order to allow Seven Counties to join KERS. in January, the
Governor issued an executive order “designat[ing] Seven Counties Services, lnc. as a participating
Nos. 16-5569 / 16-5644, Ky. Emps. Rer. Sys. v. Seven Crys. Servs., Inc.
department in the Kentucky Employele]s Retirement System.” Ky. Exec. Order No. 79-78 (.``lan.
24, 1979).
KERS is a defined benefit plan. Participating employers and their employees pay into the
System at a set rate and then, upon retirement, the System pays out the defined benefit at a rate
determined by multiplying the employee’s final compensation, the “benefit factor,” and the
number of years of service credit. lf the rate at which employers pay into the System is not set
appropriately, KERS can become underfunded.
KERS became underfunded in the early ZOOOS. Recognizing the funding crisis in its public
pension system, Kentucky’s General Assembly phased in increased employer contribution rates
starting in 2008, and then, in 2013, began requiring employers participating in KERS_including
the State itself-to contribute at the full, actuarially required rate going forward See Ky. Rev.
Stat. § 61.565. Aware of the burden this placed on some participating employers, the legislature
provided assistance to CMHCs, keeping their rates somewhat lower than those of other employers
in the System. Seven Counties’ historic contribution rates were in the single-digit'range. When
Seven Counties filed its petition in April 2013, its contribution rate was just under 24% of wages
According to the bankruptcy couit, at an employer contribution rate of 24%, “Seven
Counties can perform its charitable mission or pay System contributions that will force it to
terminate operations lt cannot do both.” fn re Seven Clys. Servs., 511 B.R. at 453. And as of
2013, there was no statutory mechanism by which Seven Counties could Withdraw from KERS,3
So Seven Counties filed a Chapter l l petition. If`` Seven Counties is permitted to withdraw, KERS
estimates that it will leave behind a shortfall of over $90 million to be picked up by other employers
in the System or the Comrnonweaith.
3 ln 2015, the General Assembly passed a law allowing an employer to voiuntariiy withdraw from KERS
upon paying withdrawal liability. See Ky. Rev. Stat. § 61.522(3)(a).
_5_
Nos. 16-5569/ 16-5644, Ky. Emps. Ref. Sys. v. Seven Ctys. Servs., Inc.
The proceedings since filing have been lengthy and convoluted. In the instant matter,
KERS appeals the dismissal of its complaint in an adversary proceeding In that complaint, KERS
made two basic arguments: (l) that Seven Counties is a “gcvernmental unit” and therefore
ineligibie to file under Chapter 11, and (2) that Seven Counties should be required to comply with
its statutory obligations to make contributions and reports to KERS during the pendency of
bankruptcy proceedings fn the same proceeding_and addressed by the bankruptcy court in the
same ruling_Seven Counties filed a motion seeking to reject its obligation to contribute to KERS
as an executory contract The bankruptcy court found in favor of Seven Counties on all counts.
See fn re Seven Clys. Servs., 511 B.R. at 437. The district court affirmed This Court affirmed on
the first issue but requests the assistance of the Supreme Court of .i406 S.W.3d 828 (Ky. 2013). But we are aware of no
state court decisions that should guide our choice as to which of these bodies of law to apply.
Nos. 16-5569/ 16-5644, Ky. Emps. Ret. Sys. v. Seven Ctys. Servs., Inc.
The United States Supreme Court has long encouraged certification of issues that are
“immensely important to a wide spectrum of state government activities.” Elkr``ns v. Moreno,
435 U.S. 647, 662 n.l6 (1978). Though the decision on the issue in this case may resolve a
historical problem relating only to l this particular entity, it may still have far-reaching
consequences A conclusion that Seven Counties can reject its relationship with KERS could have
a significant impact on the fiscal health of the Kentucky public pension system-and therefore on
the retirement benefits of many state employees The contrary conclusion, that Seven Counties
cannot reject its relationship With KERS, may imperil the existence of Seven Counties and the
provision of mental health services for tens of thousands of people in and around Louisville.
Accordingly, the Question is properly subject to review and consideration by the Supreme Court
of Kentucky.
(c) Names of Appellants and Appellees
AppellamS/Cross-Appellees
Kentucky Employees Retirement System;
Board of Trustees of Kentucky Retirement Systems.
Appellee/Cross-Appellant
Seven Counties Services, lnc.
(d) Names and Addresses of Counsel
Coun.s'el for Kentucky Employees Retirement System & Board of Trusfees OfKentuc/cy
Retirement Systems
Daniel R. Swetnam
Victoria E. Powers
Tyson A. Crist
ICE MILLER LLP
250 West Street, Suite 700
Columbus, Ohio 43215
Nos. 16-5569! 16-5644, Ky. Emp.r. Re!. Sys. v. Seven Clys. Servs., Irrc.
Counselfor Seven Counties Servr``ces, Inc.
G. Eric Brustad, .lr.
DECHERT LLP
90 State House Square
Hartford, Connecticut 06103
David M. Cantor
SE]LLER WATERMAN LLC
Meidinger Tower, 22nd Floor
462 S. Fourth Street, Suite 2200
Louisville, Kentucky 40202
Paul J. Hershberg
GRAY & WHITE
713 E. Market Street, Second Flocr
Louisville, Kentucky 40202
(e] Certification Order
Pursuant to the foregoing, and invoking Rule 76.37 of the Kentucky Rules of Civil
Procedure, it is hereby ORDERED:
(l) that the Question be, and the same hereby is, certified to the Supreme Court cf
Kentucky;
(2) that the Clerk forward to the Supreme Court of`` Kentucky, under our official seal, a
copy of this Order of Certification; and
(3) that to the extent requested by the Supreme Court of Kentucl