State of Minn. v. Apfel

• Decision Date: 06 July 1998
• Docket Number: No. 97-3141,97-3141
• Citation: 151 F.3d 742
• Parties: 128 Ed. Law Rep. 643, 57 Soc.Sec.Rep.Ser. 803 STATE OF MINNESOTA, Appellee, v. Kenneth S. APFEL, Commissioner of Social Security; Social Security Administration, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 742

151 F.3d 742

128 Ed. Law Rep. 643, 57 Soc.Sec.Rep.Ser. 803

STATE OF MINNESOTA, Appellee, v. Kenneth S. APFEL, Commissioner of Social Security; Social Security Administration, Appellants.

No. 97-3141.

United States Court of Appeals Eighth Circuit.

Submitted March 12, 1998.

Decided July 6, 1998.

Frank W. Rosenfeld, Washington, DC, argued (Frank W. Hunger, David L. Lillehaug and William Kanter, Washington, DC, on the brief), for Appellant.

Thomas W. Tinkham, Minneapolis, MN, argued (John W. Windhorst, Jr., William R. Goetz, William P. Donohue and Mark B. Rotenberg, Minneapolis, MN, on the brief), for Appellee.

Before WOLLMAN and HANSEN, Circuit Judges, and GOLDBERG, ¹ Judge.

WOLLMAN, Circuit Judge.

This case involves an assessment issued by the Commissioner of Social Security against the State of Minnesota for unpaid social security contributions attributable to stipends paid to medical residents enrolled in the graduate medical education program at the University of Minnesota during 1985 and 1986. Following the issuance of the assessment, the State initiated an action seeking a redetermination of liability. The district court ² granted summary judgment in favor of the State. We affirm.

I.

The inception of the social security system can be traced to the adoption of the Social Security Act of 1935, 49 Stat. 620, as amended, 42 U.S.C. § 301 et seq. (1982 & Supp. II 1984). ³ At that time, there was some question as to whether it would be constitutionally permissible for Congress to compel the states and their political subdivisions to participate in the system. For this reason, the Act initially excluded state employees from the scope of its coverage. See 42 U.S.C. § 410(a)(7). In 1950, however, Congress enacted section 418, which allows states and their political subdivisions to voluntarily participate in the system by executing an agreement with the Commissioner. See 42 U.S.C. § 418(a)(1). ⁴ If a state enters into a section 418 agreement, covered employees and their employing agencies become subject to the payment of social security contributions and, in return, the employees earn credit toward social security old age and disability benefits.

To a certain extent, states have the ability to define the contours of their section 418 agreements. For example, states may designate particular groups of employees for coverage. However, the provisions of the agreement may not be "inconsistent with the provisions of" section 418. See 42 U.S.C. § 418(a)(1). In addition, section 418 provides for certain coverage exclusions, some of which are mandatory and some of which are optional. Among the optional exclusions is an exclusion for "any agricultural labor, or service performed by a student, designated by the State." See 42 U.S.C. § 418(c)(5). Section 418 also provides that agreements may be modified at any time to extend coverage to additional groups of state employees. See 42 U.S.C. § 418(c)(4).

Minnesota executed a section 418 agreement in 1955. See Administrative Record (A.R.) at 1. Initially, this agreement applied to only a few limited coverage groups. Shortly following the initial agreement, a number of subsequent modifications were executed in order to extend coverage to various other groups. In 1958, the State executed a modification adding "[s]ervices performed by individuals as employees" of the University of Minnesota "as an additional coverage group." A.R. at 13. This modification listed several exclusions, one of which, consistent with section 418(c)(5), excluded "[a]ny service performed by a student." A.R. at 13.

For more than thirty years after execution of the 1958 modification, the University did not withhold social security contributions from stipends paid to medical residents at its teaching hospital; nor did it pay the employer's share of contributions. This practice was consistent with the University's belief that medical residents were not included in the coverage group identified by the 1958 modification. In 1989, the Social Security Administration (SSA) initiated an investigation of the treatment of medical residents under the State's section 418 agreement. On September 13, 1990, the SSA issued a formal notice of statutory assessment asserting that the State was liable for unpaid social security contributions totaling nearly $8 million and that such contributions were attributable to stipends paid to medical residents during the years 1985 and 1986. The State sought review of this assessment on administrative appeal, and the assessment was affirmed without modification on December 8, 1993.

The State then filed a civil action in district court pursuant to 42 U.S.C. § 418(t), ⁵ seeking a redetermination of the assessment. Both the State and the Commissioner filed motions for summary judgment. In addition, each party stipulated that the correct amount of the assessment, if valid, was approximately $4.7 million. ⁶ The district court granted the State's motion for summary judgment and overturned the assessment. In doing so, the court relied upon alternative grounds. First, it held that the medical residents were not "employees" of the University within the meaning of the 1958 modification. Second, it concluded that, even if the residents were employees under the terms of the modification, they were excluded from coverage under the modification's student exclusion. The Commissioner now appeals.

II.

We review a grant of summary judgment de novo, applying the same standard as that employed by the district court. See Rose-Maston v. NME Hospitals, Inc., 133 F.3d 1104, 1107 (8th Cir.1998). Summary judgment is proper if the evidence, viewed in the light most favorable to the nonmoving party, demonstrates the absence of any genuine issue of material fact so that the moving party is entitled to judgment as a matter of law. See id.; Fed.R.Civ.P. 56(c).

Generally, an administrative agency has considerable discretion in carrying out the mandates of statutes it is entrusted to administer. See Mausolf v. Babbitt, 125 F.3d 661, 667 (8th Cir.1997), cert. denied, --- U.S. ----, 118 S.Ct. 2366, 141 L.Ed.2d 735 (1998). We must defer to the agency's decision so long as it "is not 'arbitrary, capricious, an abuse of discretion, or otherwise not supported by law.' " Reder v. Administrator of Fed. Aviation Admin., 116 F.3d 1261, 1263 (8th Cir.1997) (quoting Trans-Allied Audit Co., Inc. v. Interstate Commerce Comm'n, 33 F.3d 1024, 1030 (8th Cir.1994)).

The State, noting that section 418(t) provided for a "redetermination" of the assessment, urges us to disregard this deferential standard in favor of a more probing review. Whatever the merits of this argument, we conclude that the Commissioner's decision to uphold the assessment finds no support in law or fact and consequently fails to survive even the most deferential standard of review.

A.

The first of the district court's alternative holdings was that the residents were not "employees" of the University as that term is used in the 1958 modification. The court reasoned that the 1958 modification was a contract and that its terms must be interpreted by giving effect to the intent of the parties. The court further concluded that uncontroverted evidence demonstrated that when the parties executed the modification, they did not intend to extend coverage to the medical residents ⁷ and that this intent was controlling regardless of post-1958 case law holding that medical residents are employees. ⁸

The Commissioner does not seriously dispute the district court's conclusion that the parties did not contemplate extending coverage to residents when they executed the 1958 modification. Rather, he contends that the modification is not contractual in nature and that the parties' intent in 1958 is irrelevant. In support of this proposition, the Commissioner relies on the Supreme Court's decision in Bowen v. Public Agencies Opposed to Soc. Sec. Entrapment, 477 U.S. 41, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986). Bowen involved a section 418 agreement executed in 1951 by the State of California. See id. at 48, 106 S.Ct. 2390. The agreement contained a provision, authorized by section 418(g), permitting California to terminate its section 418 agreement by giving at least two years' written notice. See id. at 48-49, 106 S.Ct. 2390. In 1983, however, Congress amended section 418(g) to prohibit states from terminating section 418 agreements "on or after April 20, 1983." 42 U.S.C. § 418(g). That amendment prevented states from withdrawing from the system even if a termination notice had already been filed. See Bowen, 477 U.S. at 48, 106 S.Ct. 2390. At the time of the amendment, California had filed termination notices for a number of its employees. See id. at 49, 106 S.Ct. 2390. When the amendment prevented these notices from taking effect, the state initiated proceedings to challenge the validity of the amendment. See id. California argued that the right to terminate coverage for its employees was a contractual right and that the amendment deprived them of this right without just compensation in violation of the Fifth Amendment. See id.

The Supreme Court rejected this argument, concluding that amended section 418(g) did not constitute a taking of property within the meaning of the Fifth Amendment. See id. at 55-56, 106 S.Ct. 2390. The Court first noted that in enacting the Social Security Act, Congress had anticipated the need to be flexible in responding to changing social and economic conditions. See id. at 51-52, 106 S.Ct. 2390. For this reason, Congress expressly included a provision reserving "[t]he right to alter, amend, or repeal any provision of" the Act. Id. 42, 106 S.Ct. 2390 U.S.C. § 1304. In light of this express reservation of authority, the Court stated that "courts should be extremely reluctant to construe § 418 Agreements in a manner that forecloses Congress' exercise of that authority." Id. at 52, 106 S.Ct. 2390.

The Court concluded that because Cong...