Marshall v. Com. ex rel. Hatchett
| Citation | 20 S.W.3d 478 |
| Decision Date | 02 June 2000 |
| Docket Number | No. 1998-CA-003192-MR.,1998-CA-003192-MR. |
| Parties | Earl R. MARSHALL, Sheriff of Greenup County, Kentucky, Appellant, v. COMMONWEALTH of Kentucky, By and Through Hon. Edward B. HATCHETT, Jr.., Auditor of Public Accounts, Appellee. |
| Court | Kentucky Court of Appeals |
Phillip Bruce Leslie, McBrayer, McGinnis, Leslie & Kirkland, Greenup, Kentucky, for appellant.
Edward B. Hatchett, Jr., Auditor of Public Accounts, Robert E. McBeath, Frankfort, Kentucky, for appellee.
Anne E. Keating, Kentucky Department of Education, Frankfort, Kentucky, J. Stephen Kirby, Kentucky School Boards Association, Frankfort, Kentucky, for amicus curiae.
BEFORE: GUIDUGLI, JOHNSON, and KNOPF, Judges.
This is an appeal from a declaratory judgment by the Greenup Circuit Court. The sole issue before this Court is whether interest earned on school tax funds placed in an interest bearing checking account (a "NOW" account) are deemed "investment earnings" under KRS 134.140(3)(b) and thus must be paid to the county school districts; or whether the interest may be retained by the Sheriff of Greenup County and used for the office's legitimate operating expenses. We find that the trial court correctly held that the interest earned must be paid to the county school districts. Hence, we affirm.
The parties to this action agreed to a stipulation of facts which we will briefly summarize. The appellant, Earl R. Marshall, was the duly elected and acting sheriff of Greenup County, Kentucky until December 31, 1998. As part of his duties as sheriff, Marshall served as tax collector for all state, county and district taxes, including school taxes, within the county. KRS 134.140 and 160.500. Each month the sheriff is required to pay the amount of school taxes collected during the previous month to the depository of the district boards of education within the county. KRS 160.510. Until such distribution is required, KRS 134.140 permits the sheriff to invest any tax revenues held in his possession, subject to the provisions of KRS 66.480. However, the sheriff must pay to the board of education any part of investment earnings for the month which is attributable to the investment of school taxes. The sheriff is permitted to withhold up to 4% of the investment earnings as a fee for administering the investment fund. KRS 134.140(3)(b).
Pursuant to the statutory scheme, Sheriff Marshall collected the 1993 and 1994 school taxes within Greenup County. Prior to distributing the tax monies to the school districts, he deposited the funds into several bank accounts. Some of the funds went into interest bearing time deposit accounts (certificates of deposit, or "CDs"), and some went into a NOW account. Sheriff Marshall paid to the school districts all school taxes and investment income from the CD account. He also paid over all school tax funds held in the NOW account. However, he retained the interest earned on those funds in the NOW account.
The appellee, Commonwealth of Kentucky by and through Edward B. Hatchett, Jr., Auditor of Public Accounts (the Public Auditor), is empowered to audit annually the books, accounts and papers of all sheriffs within the Commonwealth of Kentucky. KRS 43.070. In lieu of an audit conducted by the Public Auditor, Sheriff Marshall exercised his option under KRS 64.810 to employ a certified public accountant to audit the books, accounts and papers of his office. These audits must be done in accord with certain standards promulgated by statute. KRS 43.070, 43.075 and 64.810. The certified public accountant performed the tax settlement audit and submitted a report to the Public Auditor for review and final approval.
During the Public Auditor's review of that report, a dispute arose between the Public Auditor and the certified public accountant over the proper treatment in the audit of interest earned on tax money collected and deposited by the Sheriff concerning the interest earned in the CDs and the NOW account. Sheriff Marshall and the certified public accountant maintained the position that the NOW account interest was not required to be distributed to the school districts in the same manner as the interest from the certificates of deposit. Rather, they argued that the interest earned by the NOW account could be retained and used for the legitimate expenses of the sheriffs office. On the other hand, the Public Auditor argued that all interest earned on school tax funds constitutes investment earnings and must be distributed to the school districts.
Failing to reach a resolution of this dispute, Sheriff Marshall filed an action in the Greenup Circuit Court on October 9, 1997, seeking a declaration of rights involving the disposition of earnings generated by the NOW account. The trial court denied the Public Auditor's motion to join as necessary parties the three school systems who had a financial interest in the litigation.1 However, the trial court did enter an order stating that the school districts could permissively join the case pursuant to CR 20.01. None of the three school systems chose to join the action,
The case was submitted to the trial court based upon the stipulation of facts and upon briefs filed by both parties. Sheriff Marshall also submitted the deposition of C. Ronald Christmas, an attorney and president of Kentucky Bank & Trust. After a consideration of these materials and the applicable law, the trial court found, in part, as follows:
This entire case rests on the issue of when an interest-bearing account becomes an investment. If, the NOW account is considered not an investment, then the Sheriff can use the investment or earnings to pay his legitimate office expenses. If the earnings from the NOW account are considered an investment, then the Sheriff must turn these earnings over to the local school districts.
As Mr. Ron Christmas testified in his deposition, NOW accounts pay incremental interest and certainly would not be considered investments. (Christmas deposition, p. 13). Few people will argue that a NOW account is a good investment if one is seeking the highest return possible. Mr. Christmas pointed out that banks consider NOW accounts demand deposit accounts as opposed to investment accounts. (Christmas deposition, p. 14-15). When demand deposit accounts begin to earn interest, how high must the yield be before one considers the demand deposit account an investment? Would bankers consider a NOW account which earned two percent (2%) interest an investment, or perhaps three percent (3%), or four percent (4%) or five percent (5%) or perhaps even seven or eight percent (7 or 8%). At what point would the NOW account cease to be a demand deposit account and be considered an investment for banking purposes? Mr. Christmas never answered this question for the purpose of handling tax money collected by the sheriff. He only answered it in the context of the banking world. How does one know where to draw the line?
Legislatures must write statutes in such a way that the ordinary, prudent, reasonable person will be able to understand what is and is not a violation of the law. Thus, in order to withstand an unconstitutional challenge for vagueness, the Legislature must write a law such that one can determine with reasonable certainty from the language used whether the contemplated conduct would amount to a violation. Commonwealth v. Foley, 798 S.W.2d 947 (Ky., 1990). The question becomes what standard do sheriffs use to determine when an "interest-bearing account" ceases to be an "investment", and it becomes a demand deposit account? In other words, how high must the rate of return become before a NOW account loses its identity as a demand deposit account and it becomes an investment? A sheriff needs a standard he can answer these questions with reasonable certainty. If the Court declared that a NOW account is not an investment because of a minimal return, then the sheriff would still have to ask the question — How high does the rate of return have to be before the NOW account (demand deposit account) is considered an investment? The sheriff would be left with an amorphous sliding rule standard incapable of reasonable certainty.
The Kentucky Constitution is the highest law of the Commonwealth. It creates the standard when it states that "... any sum which may be produced by taxation or otherwise for purposes of common school education, shall be appropriated to the common school, and to no other purposes." Kentucky Constitution § 184. The Constitution is clear that taxes or income generated by taxes, "... shall be appropriated to the common school, and to no other purpose." Since the Constitution is the highest law of the Commonwealth, then its provisions take precedent [sic] over any statute. Thus, the people of the Commonwealth created the standard of how to handle the income generated by the taxes if the money is to be earmarked for education. It must be paid to the schools. It doesn't matter how slight the earnings may be, if generated from taxes, then the earnings must be paid back to the schools. This absolute standard becomes one all sheriffs can apply with reasonable certainty. Therefore, all earnings generated by taxes earmarked for education must be paid to the local school districts without regard to the rate of return of the account, regardless of the type of account in which they are deposited, except for the statutory limit of four percent (4%) authorized by KRS 134.140(3)(b) to be withheld by the sheriff for the purpose of administering the investment fund.
This approach is the only way that an absolute standard can be established sufficiently clear for all sheriffs to understand and apply with reasonable certainty. It doesn't depend on current financial market conditions, yet it remains consistent with all statutory and constitutional provisions.
Declaratory Judgment Opinion and Order, November 30, 1998, pp. 5-7.
Sheriff Marshall now appeals to this Court. The primary...
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