Kay v. Frerichs

• Docket Number: 1-19-2271
• Decision Date: 28 May 2021
• Citation: 2021 IL App (1st) 192271,205 N.E.3d 82,461 Ill.Dec. 585
• Parties: Melissa KAY, on Behalf of Herself and a Class of All Others Similarly Situated, Plaintiff-Appellant, v. Michael W. FRERICHS, in His Official Capacity as Illinois State Treasurer, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

2021 IL App (1st) 192271

205 N.E.3d 82

461 Ill.Dec. 585

Melissa KAY, on Behalf of Herself and a Class of All Others Similarly Situated, Plaintiff-Appellant,

v.Michael W. FRERICHS, in His Official Capacity as Illinois State Treasurer, Defendant-Appellee.

No. 1-19-2271

Appellate Court of Illinois, First District, FIFTH DIVISION.

Filed May 28, 2021

Matthew Hurst and Matthew Heffner, of Heffner Hurst, of Chicago, for appellant.

Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz, Solicitor General, and Carson R. Griffis, Assistant Attorney General, of counsel), for appellee.

JUSTICE CUNNINGHAM delivered the judgment of the court, with opinion.

¶ 1 The plaintiff-appellant, Melissa Kay, filed a putative class action complaint in the circuit court of Cook County against Michael Frerichs, in his official capacity as Treasurer of the State of Illinois, alleging that he was administering the Illinois College Savings Pool in an illegal manner. The circuit court granted the Treasurer's motion for summary determination and held that sovereign immunity barred Ms. Kay from seeking any recovery against the Treasurer other than prospective injunctive relief. The circuit court also denied Ms. Kay leave to amend her complaint. Ms. Kay now appeals those rulings. For the following reasons, we affirm the judgment of the circuit court of Cook County.

¶ 2 BACKGROUND

¶ 3 We begin with a brief summary of legislative history relevant to this matter. In 1996, Congress authorized the states to establish "qualified tuition plans," commonly known as 529 plans, that allow individuals to make contributions to tax-free investment accounts in order to pay for higher education. See 26 U.S.C. § 529 (2018). In 2000, the Illinois General Assembly passed section 16.5 of the State Treasurer Act (Act). Pub. Act 91-607, § 5 (eff. Jan. 1, 2000) (adding 15 ILCS 505/16.5 ). Under section 16.5(b) of the Act, the Treasurer has the authority to establish and administer college savings programs, in which he "may receive, hold, and invest moneys paid into the Pool and perform such other actions as are necessary to ensure that the Pool operates as a qualified tuition program." 15 ILCS 505/16.5(b) (West 2018).

¶ 4 Pursuant to that statutory authority, the Treasurer's office established two college savings programs, which comprise the College Savings Pool (Pool): Bright Start and Bright Directions. Bright Start is sold directly to, and managed by, participants; Bright Directions is sold to, and managed by, investment advisors. Both Bright Start and Bright Directions are trusts with the Treasurer serving as trustee, as the trust deeds name Illinois's currently elected treasurer as the trustee.

¶ 5 On February 16, 2018, Ms. Kay filed a putative class action complaint against the Treasurer, explaining that she has been a participant in the Bright Start plan since 2013.¹ The complaint alleged that the Treasurer improperly managed the Pool. The complaint contained five counts: alleging breach of fiduciary duty (count I), alleging a constructive trust (count II), seeking an accounting (count III), alleging unjust enrichment (count IV), and a mandamus action (count V). Specifically, the complaint alleged that the Treasurer illegally charged fees against the Pool's assets rather than its earnings, illegally retained excess administrative fees that should have been returned to the participants, and illegally charged all administrative fees against fewer than all investment funds, allowing some funds to incur no fees while others incur more than their share. Ms. Kay averred that, therefore, the Treasurer had violated section 16.5 of the Act and financially harmed the participants of the Bright Start and Bright Direction programs. For relief, Ms. Kay sought:

"A. An order requiring an accounting of the income and expenses related to the State Administrative Fee and Program Management Fee;

B. An order requiring the Treasurer to return to the participants, based on their respective contributions, the State Administrative Fees and Program Management Fees collected in excess of actual expenses;

C. An award of damages incurred as a result of the Treasurer illegally withholding excess State Administrative Fees and Program Management Fees, including any earnings that should have accrued on those excess amounts;

D. An order requiring the Treasurer to account for penalties collected;

E. An order requiring the Treasurer to return to the participants, based on their respective payments of the State Administrative Fees, penalties collected in excess of actual expenses as required by the Act;

F. An injunction requiring the Treasurer to include the amount collected as penalties as income for determining the excess State Administrative Fees collected as required by the Act;

G. An injunction requiring the Treasurer to return penalties collected to the participants as required by the Act;

H. An injunction requiring the Treasurer to take Program Management and State Administrative Fees from earnings only as required by the Act, the regulations, and the Declarations of Trust;

I. An injunction requiring the Treasurer to assess [the] State Administrative Fee on all accounts and investment types as required by the Act;

J. An injunction requiring the Treasurer to not assess the State Administrative Fee or Program Management Fee in any month where earnings would not cover those fees as required by the Act; and

K. All other relief, including attorney's fees and costs, to which Plaintiff and the Class may be entitled."

¶ 6 On July 6, 2018, the Treasurer filed a motion for summary determination of a major issue. His motion asked the trial court to rule that sovereign immunity limited Ms. Kay's recovery to only prospective injunctive relief. He accordingly requested the trial court to strike paragraphs A-G and K of the complaint's request for relief.

¶ 7 In response, Ms. Kay argued that sovereign immunity was inapplicable to this case because she was not seeking damages from state funds. She also filed a cross-motion for summary determination of a major issue, asking the trial court to find that the Treasurer violated section 16.5 of the Act.

¶ 8 On October 25, 2018, Ms. Kay filed a motion for leave to amend her complaint. Her motion explained that her proposed amended complaint would name the Treasurer in "both his official and individual capacities," which was "relevant to the sovereign immunity issue." The trial court denied her motion, noting that the Treasurer's duty at issue in the case is a duty that he owes "only because of his [S]tate employment." The trial court further stated: "It's unlike a duty to drive carefully or to practice medicine without negligence or to practice law without the negligence. So my holding is that the source of duty is [the Treasurer's] state employment and the proposed amendment would not cure the defect."

¶ 9 The trial court then ordered the parties to brief the issues in their motions for summary determination. On June 24, 2019, just days before oral argument was scheduled, the Illinois Governor signed into law some amendments to section 16.5 of the Act established by the Illinois General Assembly (the 2019 amendments). The 2019 amendments revised section 16.5 of the Act to clarify, inter alia , that the Treasurer "may collect fees" (Pub. Act 101-26, § 5 (eff. June 21, 2019) (amending 15 ILCS 505/16.5(c) )) and added a clause stating that "[a]dministrative fees, costs, and expenses, including investment fees and expenses, shall be paid from the assets of the *** Pool" (id. (amending 15 ILCS 505/16.5(e) )). The amendment also deleted language stating that the Treasurer's regulations shall provide for the administration expenses to be paid from the Pool's earnings and for the excess to be credited to participants’ accounts monthly. See id. (amending 15 ILCS 505/16.5(n) ). The trial court ordered the parties to submit supplemental briefing on the impact of the 2019 amendments.

¶ 10 On October 7, 2019, following a hearing on the issues, the trial court entered an order granting the Treasurer's motion for summary determination, holding that sovereign immunity barred Ms. Kay from seeking any recovery other than prospective injunctive relief. In its written order granting the motion, the trial court cited Illinois State Treasurer v. Illinois Workers’ Compensation Comm'n , 2013 IL App (1st) 120549WC, 377 Ill.Dec. 435, 2 N.E.3d 351, and noted that the dispositive question is whether a judgment rendered in the case could operate to control the actions of the State or subject it to liability. The trial court explained that it was therefore required to analyze the nature of Trust 668, a "non-appropriated special trust fund" in which the Treasurer deposits administrative fees collected from the Pool; Trust 668 pays for the Pool's operation expenses and also serves as a reserve fund. The trial court rejected Ms. Kay's argument that the funds in Trust 668 are not state funds because they include fees from the Pool's participants’ accounts that have never been part of the state's general revenue fund. The trial court stated:

"The Court finds that the funds in Trust 668 are, in fact, state funds. Trust 668 was not set up for the purpose of paying claims such as those brought in this case. Moreover, a judgment rendered in this case could operate to control the actions of the [S]tate. The Act does not require the Treasurer to set up an account such as Trust 668. In his discretion, the Treasurer set up Trust 668 to receive the administrative fees the Treasurer charged and collected from the Pool. The Act requires the Treasurer to ‘use his or her best efforts to keep these fees as low as possible and consistent with administration of high quality competitive college savings programs.’ 15 ILCS 505/16.5(e). This gives the Treasurer broad discretion to decide what expenses to pay, when, and how, in order to meet the goals expressed in the Act.

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A large out-of-the-ordinary withdrawal from Trust 668,

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