State of Nev. Employees Ass'n, Inc. v. Keating

• Citation: 903 F.2d 1223
• Decision Date: 18 May 1990
• Docket Number: No. 88-15514,88-15514
• Parties: , 12 Employee Benefits Ca 1539 STATE OF NEVADA EMPLOYEES ASSOC., INC., (SNEA), a Nevada corporation, as representative of its members; Ellen Steiner; Sue Palczewski, Harry Dudley, Russell Benzler, Darrell Reed, Reemey Brown, Joe Riolo and David Drew, as members of SNEA and on behalf of themselves and all other present and former state employee members of SNEA similarly situated, Plaintiffs-Appellants, v. Wilbur K. KEATING, Executive Officer of the Public Employees Retirement System; Tom Wiesner, Chairman, Peggy Glover, Vice-Chairman, Wilson McGowan, Joyce Woodhouse, Clair Haycock, Julius Conigliaro; Karon Brewster, members of the Public Employees Retirement Board; George Murphy, Director of the Dept. of Personnel; Darrell Daines, State Controller of the State of Nevada; Patricia Cafferata, State Treasurer of the State of Nevada; and Does I through XX, all being sued in their official and individual capacities, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1223

903 F.2d 1223

58 USLW 2702, 12 Employee Benefits Ca 1539

STATE OF NEVADA EMPLOYEES ASSOC., INC., (SNEA), a Nevada

corporation, as representative of its members; Ellen

Steiner; Sue Palczewski, Harry Dudley, Russell Benzler,

Darrell Reed, Reemey Brown, Joe Riolo and David Drew, as

members of SNEA and on behalf of themselves and all other

present and former state employee members of SNEA similarly

situated, Plaintiffs-Appellants, v. Wilbur K. KEATING, Executive Officer of the Public Employees

Retirement System; Tom Wiesner, Chairman, Peggy Glover,

Vice-Chairman, Wilson McGowan, Joyce Woodhouse, Clair

Haycock, Julius Conigliaro; Karon Brewster, members of the

Public Employees Retirement Board; George Murphy, Director

of the Dept. of Personnel; Darrell Daines, State Controller

of the State of Nevada; Patricia Cafferata, State Treasurer

of the State of Nevada; and Does I through XX, all being

sued in their official and individual capacities,

Defendants-Appellees.

No. 88-15514.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 14, 1989.

Decided May 18, 1990.

Norah Ann McCoy, Carson City, Nev., for plaintiffs-appellants.

Scott Q. Doyle, Deputy Atty. Gen., Carson City, Nev., for defendants-appellees.

Appeal from the United States District Court for the District of Nevada.

Before REINHARDT, BEEZER and KOZINSKI, Circuit Judges.

BEEZER, Circuit Judge:

The State of Nevada Employees Association ("SNEA") and individual employees ¹ argue on appeal that Nevada's termination of the right of public employees to withdraw their pension contributions without penalty constituted an unconstitutional impairment of contractual obligations and violated state law. The district court, after a three-day bench trial, decided (1) that plaintiffs' claims were barred by res judicata, (2) that Nevada's alterations to the public employees' pension plan did not unconstitutionally impair the State's contractual obligations, and (3) that the court would not exercise its discretionary jurisdiction over the pendent state claims because state law was not settled. We reverse in part and affirm in part.

I

From its inception, Nevada's state employees' pension plan permitted joint contributions by employers and employees. Nev.Rev.Stat. Secs. 286.410, 286.450. Employees could withdraw their contribution at any time without penalty. Nev.Rev.Stat. Sec. 286.410(4). In 1975, the Nevada legislature introduced an alternative pension system that permitted public employers to pay the entire contribution, but did not allow employees to withdraw pension funds without penalty prior to vesting. Nev.Rev.Stat. Sec. 286.421.

In 1983, the Nevada legislature decided to increase pension benefits paid to employees who had retired. Nev.Rev.Stat. Sec. 286.5756. To defray the costs of the post-retirement benefits increase, the legislature made employer-paid plans mandatory for all police officers and firefighters as of July 1, 1983, and for all other state employees effective July 1, 1985. Nev.Rev.Stat. Sec. 286.421.

In 1983, SNEA along with individual police officers and firefighters challenged the State's application of the mandatory employer-paid pension plan. State v. State of Nevada Employees Association, 102 Nev. 287, 720 P.2d 697 (1986). Pursuant to the statute, the employers had reduced the employees' gross wages to offset the costs of the employer-paid contributions. The plaintiffs alleged that the state employers deducted more from their wages than was permitted under Nev.Rev.Stat. Sec. 286.421. The Supreme Court of Nevada agreed. 102 Nev. 287, 720 P.2d 697.

SNEA and individual employees filed this action in 1984 challenging Nevada's 1983 amendments eliminating the right of all public employees to withdraw their pension contributions without penalty. After a trial, the district court held sua sponte that plaintiffs' claims were precluded. It additionally held that the 1983 amendments did not unconstitutionally impair the State's contractual obligations, and it declined to exercise its discretionary pendent jurisdiction to decide the state law claims. Plaintiffs appeal.

II

The district court on its own motion decided that plaintiffs' claims in this case are precluded by State v. State of Nevada Employees Association, 102 Nev. 287, 720 P.2d 697. Plaintiffs argue that the district court should not have raised res judicata sua sponte and that res judicata does not apply to this case. We review district court claim preclusion determinations de novo. Harbeson v. Parke Davis, Inc., 746 F.2d 517, 520 (9th Cir.1984).

Plaintiffs maintain that the State had the burden of raising res judicata as an affirmative defense. See Fed.R.Civ.P. 8(c). They contend that the State waived res judicata by failing to raise the issue, and they contend that the district court should not have raised res judicata sua sponte. There is merit to their position.

Res judicata must generally be affirmatively pleaded or waived. However, in McClain v. Apodaca, 793 F.2d 1031, 1032-1033 (9th Cir.1986), we held that it was appropriate for a bankruptcy court to raise res judicata sua sponte when it allowed the parties to submit post-trial briefs on the issue. In this case, the district court did not allow the parties to submit post-trial briefs on res judicata. Because the trial court did not subject its res judicata decision to the rigors of the adversarial process, we set aside that court's conclusion that res judicata bars plaintiffs' claims. ²

III

We review the district court's findings of fact for clear error on the contract clause claim, and we review mixed questions of law and fact de novo. Wood v. Sunn, 865 F.2d 982, 986 (9th Cir.1988).

A

The contract clause provides that "No State shall ... pass any ... Law impairing the Obligation of Contracts...." U.S. Const., art. I, Sec. 10, cl. 1. The Supreme Court invalidated a state law under the contract clause for the first time in decades in United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). The Court in Trust Co. declared a New Jersey statute unconstitutional because it impaired the state's contractual obligations to bondholders of The Port Authority of New York and New Jersey.

The Supreme Court explained that "the [contract clause's] prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula." Id. at 21, 97 S.Ct. at 1517, quoting, Home Building Loan Association v. Blaisdell, 290 U.S. 398, 428, 54 S.Ct. 231, 236, 78 L.Ed. 413 (1934). To comply with the contract clause, impairments of state contractual obligations must be "reasonable and necessary to serve an important public purpose." 431 U.S. at 25, 97 S.Ct. at 1519.

One year after Trust Co., the Supreme Court extended the Trust Co. holding to private contracts. In Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) the Court struck down a Minnesota statute which required private employers to pay a pension funding charge if they terminated a pension plan or closed an office in Minnesota when the funds in the pension plan were insufficient to cover full pensions for all employees who had worked at least ten years. The Court explained that the statute unconstitutionally modified the payment obligations of employers.

The Court retreated from its holding in Spannaus in Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983) and Exxon Corp. v. Eagerton, 462 U.S. 176, 103 S.Ct. 2296, 76 L.Ed.2d 497 (1983). See G. Gunther, Constitutional Law 498 (1985). In these cases, the Court indicated a renewed willingness to defer to the decisions of state legislatures regarding the impairment of private contracts. G. Gunther, Constitutional Law at 498. However, because Energy Reserves Group and Exxon did not involve impairments of public contracts, they have no direct effect on the Supreme Court's holding in Trust Co.

The Supreme Court has not examined the constitutionality of a state law which impairs a public contract since Trust Co. The Court's decisions in Energy Reserves Group and Exxon do not indicate that the Court would defer to state legislatures when public as opposed to private contracts are at issue. As the Court explained in Trust Co., "complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake." Id. at 26, 97 S.Ct. at 1519.

B

The State of Nevada conceded at oral argument that Trust Co. controls the outcome of this case. Accordingly, we must determine (1) whether Nevada's public employee pension statutes create contractual obligations, (2) whether the 1983 amendments to the legislation substantially impaired the State's contractual obligations, and (3) whether the impairment was reasonable and necessary to serve an important public purpose.

The State does not argue that Nevada's statutes providing pensions for public employees do not create contractual obligations. Nevada's Supreme Court has held that the State's public employees' retirement system creates contractual rights for non-vested employees. Public Employees' Retirement Board v. Washoe County, 96 Nev. 718, 615 P.2d 972, 974 (1980). Other courts consider pension rights of non-vested employees to be non-contractual gratuities. See, e.g., Creps v. Board of Firemen's Relief & Retirement Fund Trustees, 456 S.W.2d 434 (Tex.Civ.App.1970).

Federal law, not Nevada law, controls whether the state statutes at issue create contractual rights protected by the contract clause. See Continental Illinois National Bank and Trust Co. of Chicago v. State of Washington, 696 F.2d 692, 698 (9th Cir.), appeal dismissed for lack of jurisdiction sub nom. The Don't Bankrupt Washington Committee v. Continental Illinois National Bank and Trust Co. of Chicago, 460 U.S. 1077, 103 S.Ct. 1762, 76 L.Ed.2d 338 (1983); Pineman v. Oechslin, 637 F.2d 601, 604 (2d...