Mickey Fowler v. Tracy Guerin , 899 F.3d 1112 ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICKEY FOWLER; LEISA MAURER, No. 16-35052
and a class of similarly situated
individuals, D.C. No.
Plaintiffs-Appellants, 3:15-cv-05367-
BHS
v.
TRACY GUERIN, Director of the OPINION
Washington State Department of
Retirement Systems,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Washington
Benjamin H. Settle, District Judge, Presiding
Argued and Submitted May 10, 2018
Seattle, Washington
Filed August 16, 2018
Before: Ronald M. Gould and Sandra S. Ikuta, Circuit
Judges, and John R. Tunheim, * Chief District Judge.
Opinion by Judge Gould
*
The Honorable John R. Tunheim, Chief United States District
Judge for the District of Minnesota, sitting by designation.
2 FOWLER V. GUERIN
SUMMARY **
Class Action / Constitutional Law / Ripeness
The panel reversed the district court’s denial of a
stipulated motion to certify a class and dismissal, as
prudentially unripe, of an action brought by Washington
public school teachers seeking the return of interest allegedly
skimmed from their retirement accounts.
Plaintiffs brought this class action seeking an order that
the Director of the Washington State Department of
Retirement Systems return interest that was allegedly
skimmed from their state-managed retirement accounts.
Specifically, plaintiffs alleged a takings claim in their suit in
federal court that the Director violated the Fifth and
Fourteenth Amendments by withholding some of the daily
interest earned on their accounts.
The panel held that the district court erred in dismissing
the plaintiffs’ takings claim as prudentially unripe. The
panel held that the Director’s withholding of the interest
accrued on the plaintiffs’ accounts constituted a per se taking
as to which Williamson County Regional Planning
Commission v. Hamilton Bank of Johnson City, 473 U.S. 172
(1985)’s prudential ripeness test did not apply. The panel
also held that the plaintiffs’ taking claim was per se because
the Director’s withholding of interest earned on funds in
interest-bearing accounts was a direct appropriation of
private property.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
FOWLER V. GUERIN 3
The panel considered the Director’s alternative grounds
for summary judgment that were not reached by the district
court, and rejected them. First, the panel held that the
plaintiffs stated a takings claim for daily interest withheld by
the Director. The panel clarified that the core property right
recognized in Schneider v. California Department of
Corrections, 151 F.3d 1194 (9th Cir. 1988), covered interest
earned daily, even if payable less frequently. Second, the
panel held that the takings claim was not barred by issue
preclusion or by the Rooker-Feldman doctrine. The panel
held that no state-court judgment resolved the precise issue
presented in this case, and the plaintiffs did not complain of
any error by the state court or seek relief from the state
court’s judgments. Finally, the panel held that the plaintiffs’
takings claim was not foreclosed by the Eleventh
Amendment.
The panel also held that the district court erred in
denying the motion for class certification on the ground that
the plaintiff’s claim for “an indivisible injunction” for all
members was really one for individualized monetary
damages. The panel held that the plaintiffs’ claim could be
certified for class treatment under Fed. R. Civ. P. 23(b)(2)
because the relief of correcting the entire records system for
the class members accounts was in the nature of injunctive
relief.
The panel remanded for the district court to reconsider
class certification, and if necessary, to permit further
discovery before deciding if the class shall be given the
requested injunctive relief.
4 FOWLER V. GUERIN
COUNSEL
Stephen K. Festor (argued), Stephen K. Strong, David F.
Stobaugh, and Alexander F. Strong, Bendich Stobaugh &
Strong P.C., Seattle, Washington, for Plaintiffs-Appellants.
Jeffrey A.O. Freimund (argued) and Michael E. Tardif,
Freimund Jackson & Tardif PLLC, Olympia, Washington,
for Defendant-Appellee.
OPINION
GOULD, Circuit Judge:
Washington public school teachers Mickey Fowler and
Leisa Maurer bring this class action to order the Director of
the Washington State Department of Retirement Systems
(“DRS”) to return interest that was allegedly skimmed from
their state-managed retirement accounts. The district court
denied the stipulated motion to certify a class and then
dismissed the action as prudentially unripe. We conclude
that both of those decisions were in error.
I
Washington public school teachers participate in the
Teachers’ Retirement System, a public retirement system
managed by DRS. See Wash. Rev. Code §§ 41.32.010, .020,
.025. The Teachers’ Retirement System comprises three
retirement plans named “Plan 1,” “Plan 2,” and “Plan 3.”
This case concerns savings that were held in Plan 2. Plan
2 contributions are invested in a comingled trust fund by the
Washington State Investment Board. DRS does not handle
deposits, but rather tracks teachers’ contributions and credits
FOWLER V. GUERIN 5
their individual accounts for accumulated interest. See id.
§ 41.32.010(1)(b). Interest is credited at “such rate as the
director [of DRS] may determine.” Id. § 41.32.010(38).
Since 1977, DRS has credited Plan 2 accounts with a 5.5%
annual rate compounded quarterly. DRS determines the
amount of interest to credit to Plan 2 accounts based on the
accounts’ balances at the end of the prior quarter. Therefore,
DRS does not credit accounts with the interest earned on the
funds in the account during that quarter. In addition, if a Plan
2 account has a zero balance at the end of a quarter, the
account is not credited with interest earned on any funds in
that account during either that quarter or the prior quarter.
Fowler and Maurer (collectively, “Teachers”) were
originally members of Plan 2, but in 1996 they transferred
their holdings into newly created Plan 3 accounts. Because
the Teachers transferred their Plan 2 holdings mid-quarter,
and thus had a zero balance in their Plan 2 accounts at the
end of the quarter in which they transferred their holdings,
DRS did not credit their accounts for the interest earned
during that quarter or the prior quarter. Instead, DRS kept
the interest and used it to pay benefits to other members.
In 2005, another Washington State employee filed a
class action suit in state court challenging DRS’s interest rate
calculations. See Probst v. State Dep’t of Ret. Sys., 271 P.3d
966, 968 (Wash. Ct. App. 2012). When this employee
settled his claim, the Teachers became the class plaintiffs.
Id.
The Teachers’ state-court complaint alleged that DRS
deprived them of earned daily interest on their Plan 2
accounts by not providing interest through the date on which
their funds were transferred to Plan 3 accounts. Id. The
Washington Superior Court rejected the Teachers’
arguments, but on appeal the Washington Court of Appeals
6 FOWLER V. GUERIN
reversed in part. Without reaching the Teachers’
constitutional arguments, that court held that DRS’s interest
rate policy was arbitrary and capricious under state law
because there was no record showing the agency gave the
issue “due consideration.” Id. at 971–73. The Superior
Court subsequently remanded the case to DRS to initiate a
new rulemaking.
DRS began the rulemaking process in July 2013. The
Teachers appealed the Superior Court’s remand to the
agency, however, and the Washington Court of Appeals
affirmed the Superior Court’s order in an unpublished
decision. Probst v. Dep’t of Ret. Sys., No. 45128-0-II, 2014
WL 7462567 (Wash. Ct. App. Dec. 30, 2014).
The Teachers then filed this suit in federal court. The
complaint omits the Teachers’ state-law claims and alleges
solely that the Director of DRS (“Director”) violated the
Fifth and Fourteenth Amendments by withholding some of
the daily interest earned on their Plan 2 accounts.
The parties filed a stipulated motion to certify a class of
all active and retired members of the Teachers’ Retirement
System who had transferred from Plan 2 to Plan 3 before
January 20, 2002. The district court denied the stipulated
motion without prejudice, concluding that the parties’
explanation was not detailed enough for the court to fulfill
its independent responsibility to ensure that the requirements
of Rule 23 were met.
The district court then granted the Director’s motion for
summary judgment, concluding that this case was
prudentially unripe pending the conclusion of DRS’s new
interest calculation rulemaking.
FOWLER V. GUERIN 7
The Teachers timely appealed. Less than a month before
oral argument in this case, DRS’s new rule took effect and
retroactively affirmed its prior interest calculation method.
See Wash. Admin. Code § 415-02-150.
II
The first question presented is whether the Teachers’
takings claim is prudentially unripe. 1 We review a dismissal
for lack of ripeness de novo. MHC Fin. Ltd. P’ship v. City
of San Rafael, 714 F.3d 1118, 1130 (9th Cir. 2013). Because
the dismissal was entered on summary judgment, we view
the facts in the light most favorable to the Teachers. See
Millennium Labs., Inc. v. Ameritox, Ltd., 817 F.3d 1123,
1129 (9th Cir. 2016).
The district court held that the Teachers’ claim was
unripe under Williamson County Regional Planning
Commission v. Hamilton Bank of Johnson City, 473 U.S. 172
(1985). Williamson County sets forth two prudential hurdles
for takings claims. First, a takings claim is unripe until “the
government entity charged with implementing the
regulations has reached a final decision regarding the
application of the [challenged] regulations to the property at
issue.” Id. at 186. Second, the plaintiff must have sought
1
Unlike constitutional ripeness, prudential ripeness is a disfavored
judge-made doctrine that “is in some tension with [the Supreme Court’s]
recent reaffirmation of the principle that a federal court’s obligation to
hear and decide cases within its jurisdiction is virtually unflagging.”
Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2347 (2014)
(quoting Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S.
Ct. 1377, 1386 (2014)). The Court has not yet had occasion to “resolve
the continuing vitality of the prudential ripeness doctrine.” Id.
8 FOWLER V. GUERIN
and been denied “compensation through the procedures the
State has provided.” Id. at 194.
By its terms, Williamson County applies only to
regulatory, not per se, takings. In Williamson County, a land
developer obtained Planning Commission approval of a plat
for residential development. 473 U.S. at 177. When the
county changed its zoning ordinances, the Planning
Commission required the developer to change the plat. Id.
at 179. Instead, the developer filed suit, arguing that the
Planning Commission had taken its property without just
compensation by disapproving its original development
plan. Id. at 182. The Supreme Court granted certiorari on
“the question whether Federal, State, and Local governments
must pay money damages to a landowner whose property
allegedly has been ‘taken’ temporarily by the application of
government regulations.” Id. at 185. But the Court
ultimately determined that this issue of regulatory taking was
not yet ripe, because the developer had not sought variances
from the county’s ordinances, and therefore had “not yet
obtained a final decision regarding how it will be allowed to
develop its property.” Id. at 190. Nor had the developer
used state procedures for obtaining just compensation. Id. at
194.
Although Williamson County acknowledged that a
regulation that “goes too far” may constitute a taking, id. at
186 (quoting Pa. Coal Co. v. Mahon, 260 U.S. 393, 415
(1922)), this line of jurisprudence is not applicable when the
government directly takes a person’s property. The Court
explained the distinction in Horne v. Department of
Agriculture, 135 S. Ct. 2419, 2427 (2015). According to the
Court, before Pennsylvania Coal, “the Takings Clause was
understood to provide protection only against a direct
appropriation of property—personal or real.” Id.
FOWLER V. GUERIN 9
“Pennsylvania Coal expanded the protection of the Takings
Clause, holding that compensation was also required for a
‘regulatory taking’—a restriction on the use of property that
went ‘too far.’” Id. (quoting Pa. Coal, 260 U.S. at 415).
However, “a physical appropriation of property gave rise to
a per se taking, without regard to other factors.” Id. A per
se taking triggers a “categorical duty to compensate the
former owner” under the Takings Clause. Brown v. Legal
Found. of Wash., 538 U.S. 216, 233 (2003) (quoting United
States v. Pewee Coal Co., 341 U.S. 114, 115 (1951)).
Here, the Teachers bring a per se taking claim because
DRS’s withholding of interest earned on funds in interest-
bearing accounts is a direct appropriation of private
property. The Supreme Court addressed this issue in a pair
of cases concerning states’ Interest on Lawyers’ Trust
Account (“IOLTA”) programs. First, in Phillips v.
Washington Legal Foundation, the Court held that “the
interest income generated by funds held in IOLTA accounts
is the ‘private property’ of the owner of the principal.”
524 U.S. 156, 172 (1998). Then in Brown v. Legal
Foundation of Washington, the Court held that the law
requiring interest on those funds to be transferred to a third
party is evaluated not as a regulatory taking, but as a per se
taking. 538 U.S. at 235.
As a result, DRS’s withholding of the interest accrued on
the Teachers’ accounts constitutes a per se taking to which
Williamson County’s prudential ripeness test does not apply.
The district court erred in dismissing the Teachers’ takings
claim as prudentially unripe.
III
Given the many years that this case has been held up in
the courts, we proceed to consider the Director’s alternative
10 FOWLER V. GUERIN
grounds for summary judgment that were not reached by the
district court because those grounds may provide a basis to
affirm the district court. See Kohler v. Bed Bath & Beyond
of Cal., LLC, 780 F.3d 1260, 1263 (9th Cir. 2015). We
review the grant of summary judgment de novo. Id. We will
uphold the summary judgment if, viewing the evidence in
the light most favorable to the non-moving party, “there is
no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Id. (quoting Fed.
R. Civ. P. 56(a)).
The Director contends that the Teachers fail to state a
claim because there has been no taking of property, and that
even if the Teachers do state a claim, that claim is barred by
issue preclusion, the Rooker-Feldman doctrine, and the
Eleventh Amendment. We address each argument in turn.
A
The Director argues that the Teachers’ takings claim fails
on its merits because there has been no taking of private
property here. In the state-court litigation, the Washington
Court of Appeals held that the state statutory scheme “do[es]
not require the DRS to pay daily interest.” Probst, 271 P.3d
at 971. The Director asserts that there can be no federal
takings claim without this state-law property right.
We rejected a similar argument in Schneider v.
California Department of Corrections, 151 F.3d 1194 (9th
Cir. 1998). There we observed that “constitutionally
protected property rights can—and often do—exist despite
statutes . . . that appear to deny their existence.” Id. at 1199.
Citing the Supreme Court’s opinion in Phillips, we noted
that “a State may not sidestep the Takings Clause by
disavowing traditional property interests long recognized
under state law.” Id. at 1200 (quoting 524 U.S. at 167). We
FOWLER V. GUERIN 11
then held that there is “a ‘core’ notion of constitutionally
protected property into which state regulation simply may
not intrude without prompting Takings Clause scrutiny.” Id.
This “core” is “defined by reference to traditional
‘background principles’ of property law.” Id. at 1201. In
that case, we concluded that interest income earned on an
interest-bearing account falls within this class of
fundamental property rights. Id.
We now clarify that the core property right recognized in
Schneider covers interest earned daily, even if payable less
frequently. The rule that interest accrues de die in diem—
“from day to day”—has an impressive common law
pedigree, see, e.g., Wilson v. Harman, 2 Ves. Sen. 672, 672,
27 Eng. Rep. 189, 189, and has been widely adopted by
American courts, see, e.g., Mann v. Anderson, 32 S.E. 870,
871 (Ga. 1899); Owens v. Graetzel, 126 A. 224, 227 (Md.
1924); Clapp v. Astor, 2 Edw. Ch. 379, 384 (N.Y. Ch. 1834);
In re Flickwir’s Estate, 20 A. 518 (Penn. 1890). Indeed, in
the state-court proceedings, DRS did not dispute that “at
common law, interest was deemed to accrue daily, regardless
of when it was payable.” Probst, 271 P.3d at 970 n.6 (citing
32 Halsbury’s Laws of England § 127, p. 78 (4th ed. 2005)).
Because the right to daily interest is deeply ingrained in our
common law tradition, this property interest is protected by
the Takings Clause regardless of whether a state legislature
purports to authorize a state officer to abrogate the common
law. See Schneider, 151 F.3d at 1201.
We hold that the Teachers state a takings claim for daily
interest withheld by DRS.
12 FOWLER V. GUERIN
B
Next, the Director contends that the Teachers’ claim is
barred by two related doctrines: issue preclusion and
Rooker-Feldman.
Federal courts must give the same preclusive effect to
state-court judgments as would be given in the courts of that
state. Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S.
75, 81 (1984). In Washington, the issue preclusion doctrine
bars the relitigation of issues that were actually litigated and
necessarily decided in a prior proceeding involving the same
parties. Sprague v. Spokane Valley Fire Dep’t, 409 P.3d
160, 183 (Wash. 2018). Washington courts look to four
factors in determining whether issue preclusion applies,
including whether the issues decided are “identical.” Id.
In a related vein, and pursuant to the Rooker-Feldman
doctrine, federal district courts lack jurisdiction to hear
direct or “de facto” appeals from the judgments of state
courts. See Noel v. Hall, 341 F.3d 1148, 1156 (9th Cir.
2003). “It is a forbidden de facto appeal under Rooker-
Feldman when the plaintiff in federal district court
complains of a legal wrong allegedly committed by the state
court, and seeks relief from the judgment of that court.” Id.
at 1163. This doctrine occupies “narrow ground,” Exxon
Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284
(2005), however, and “does not preclude a plaintiff from
bringing an ‘independent claim’ that, though similar or even
identical to issues aired in state court, was not the subject of
a previous judgment by the state court,” Cooper v. Ramos,
704 F.3d 772, 778 (9th Cir. 2012) (quoting Skinner v.
Switzer, 562 U.S. 521, 532 (2011)).
According to the Director, the Washington Court of
Appeals has already adjudicated two issues on which the
FOWLER V. GUERIN 13
Teachers’ takings claim depends: whether the Teachers are
entitled to daily interest, and whether their takings claim is
premature. The Director also argues that the Teachers now
seek both a direct and de facto appeal of the state court’s
decisions on these issues.
We disagree. The Washington Court of Appeals’ first
decision expressly declined to reach the merits of the
Teachers’ constitutional takings claim. Probst, 271 P.3d at
967 n.1. Its discussion of the Teachers’ entitlement to daily
interest turned solely on an issue of Washington statutory
law, not federal constitutional law. See id. at 970–71. And
the state court’s subsequent decision did not decide the
issues before us either. It found premature only the
Teachers’ speculation that the forthcoming DRS rulemaking
would effect a taking, not their argument here that DRS
effected a taking by retaining some of their earned interest
years ago. See Probst, 2014 WL 7462567, at *2, *6.
No state-court judgment resolved the precise issues
presented in this case, and the Teachers do not complain of
any error by the state court or seek relief from the state
court’s judgments. The Teachers’ takings claim is not barred
by issue preclusion or by the Rooker-Feldman doctrine.
C
Finally, the Director contends that the Teachers’ takings
claim is foreclosed by the Eleventh Amendment. In the
Director’s view, the Teachers seek monetary damages,
which would mean that the State is the real party in interest
and that a money award would impermissibly be paid from
the State’s treasury. See Pennhurst State Sch. & Hosp. v.
Halderman, 465 U.S. 89, 101 & n.11 (1984).
14 FOWLER V. GUERIN
But as the Director previously has conceded, and as the
Teachers’ complaint plainly shows, the Teachers actually
seek an injunction ordering the Director to return savings
taken from them. Rather than requiring payment of funds
from the State’s treasury, see id., this relief “will likely
involve applying a computerized formula to DRS electronic
records to determine the amount of interest that should be
moved to the class members’ . . . [P]lan 3 accounts.”
Prospective injunctive relief of this sort is readily
distinguishable from a compensatory damages award. See
Taylor v. Westly, 402 F.3d 924, 935–36 (9th Cir. 2005).
Further, Washington’s sovereign immunity shields the
State’s general fund, not investment funds held for the
benefit of its employees. See id. at 932. “Money that the
state holds in custody for the benefit of private individuals is
not the state’s money, any more than towed cars are the
state’s cars.” Id. The Eleventh Amendment does not stand
in the way of a citizen suing a state official in federal court
to return money skimmed from a state-managed account.
See id. at 935.
In sum, none of the Director’s alternative arguments
justifies the district court’s grant of summary judgment in
this case.
IV
Before mistakenly granting summary judgment, the
district court denied the parties’ stipulated motion to certify
a class. We review the class certification decision for abuse
of discretion. Yokoyama v. Midland Nat’l Life Ins. Co.,
594 F.3d 1087, 1090 (9th Cir. 2010). We have often said
that “an error of law is an abuse of discretion.” Id. at 1091.
 FOWLER V. GUERIN 15
The district court denied the stipulated motion based on
its concern that a Rule 23(b)(2) class would be inappropriate
here. As the district court pointed out, Rule 23(b)(2) “does
not authorize the class certification of monetary claims.”
Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 360 (2011).
But as explained above, the Teachers do not bring a claim
requiring individualized determinations of eligibility for
damages. The Teachers instead seek an injunction ordering
the Director to apply a single formula to DRS’s electronic
records to correct the amount of interest credited to class
members’ accounts. In the language of Dukes, DRS’s policy
of denying daily interest “is such that it can be enjoined or
declared unlawful only as to all of the class members or as
to none of them.” Id. (quoting Richard A. Nagareda, Class
Certification in the Age of Aggregate Proof, 84 N.Y.U. L.
Rev. 97, 132 (2009)). The district court erred in denying the
motion for class certification on the ground that the
Teachers’ claim for “an indivisible injunction benefitting all
its members at once” was really one for individualized
monetary damages. Id. at 362. The claim can be certified
for class treatment under Rule 23(b)(2) because the relief of
correcting the entire records system for the class member
accounts is in the nature of injunctive relief.
V
For the foregoing reasons, we reverse the decision that
this case is not ripe, and we remand for the district court to
reconsider class certification and, if necessary, to permit
further discovery before deciding if the class shall be given
the requested injunctive relief.
REVERSED AND REMANDED.