Steven L. BESHEAR, in His Official Capacity as the Governor of the Commonwealth of Kentucky; and Mary Lassiter, in Her Official Capacity as State Budget Director, Appellants
HAYDON BRIDGE COMPANY, INC.; Greater Louisville Auto Dealers Association; Kentucky Automobile Dealers Association; M & M Cartage Co., Inc.; Springfield Laundry 86 Dry Cleaners, Inc.; Usher Transport, Inc.; and Kentucky Workers' Compensation Funding Commission, Appellees.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Mark Stephen Pitt, Christopher Wilson Brooker, Counsel for Appellants.
Mark David Guilfoyle, H. Edward O'Daniel, Jr., Counsel for Appellees.
Francis Lee Dickerson, Counsel for Appellee Kentucky Workers' Compensation Funding Commission.
Three years ago in Beshear v. Haydon Bridge Co., Inc., 304 S.W.3d 682 (Ky.2010)( Haydon Bridge I), this Court held that provisions of the 2000-2002 and 2002-2004 Budget Bills which suspended annual General Fund appropriations to the Benefit Reserve Fund (BRF) maintained within the Kentucky Workers' Compensation Funding Commission (KWCFC) were constitutional but that other provisions of those bills ordering monies transferred from the BRF to the General Fund and the Department of Mines and Minerals were unconstitutional under Section 51 of
the Kentucky Constitution. This Court reasoned that the monies the legislature had previously appropriated to the BRF and the ongoing private contributions from assessments on workers' compensation insurance premiums were incapable of differentiation, and thus the General Assembly was without authority to transfer any BRF monies to the General Fund absent a statutory amendment and compliance with the publication requirement of Section 51 as set forth in Commonwealth ex rel. Armstrong v. Collins, 709 S.W.2d 437 (Ky.1986). On remand, the trial court granted permanent prospective relief prohibiting the future transfer of funds from the BRF to the General Fund or any other state agency, and also ordered " retroactive injunctive relief" in the form of a judgment requiring Defendants Governor Steven L. Beshear and State Budget Director Mary E. Lassiter to return any and all monies that had been transferred from the BRF to the General Fund in the decade from 2000-2010. The trial court's order addressed not only transfers from the part of the BRF known as the Special Fund but also the Coal Workers' Pneumoconiosis Fund, a separate fund maintained by KWCFC pursuant to Kentucky Revised Statutes (KRS) 342.1241 and .1242 and the focus of new claims brought by Plaintiffs in their Third Amended Complaint. Finally, the trial court held that the Plaintiffs had created a common fund through this litigation and, consequently, their attorneys were entitled pursuant to KRS 412.070 to a 25% contingency fee ($8,778,725.00) to be paid by the Commonwealth of Kentucky.
This Court accepted transfer of the ensuing appeal pursuant to Kentucky Rule of Civil Procedure (CR) 74.02. Defendants/Appellants Beshear and Lassiter (collectively " the Governor" ) maintain that sovereign immunity and the separation of powers provisions of the Kentucky Constitution preclude the " retroactive injunctive relief" ordered by the trial court, relief that in essence is an award of damages against the Commonwealth. They also maintain that because no common fund can be created in this case there is no basis for the attorneys' fee award against the Commonwealth. Finally, they contend that the Pneumoconiosis Fund claims should not have been addressed by the trial court since none of the Plaintiffs has standing, never having been subject to the assessments which support that Fund and having no interest in it. Agreeing with the Governor on all of these issues, we reverse the Judgment of the Franklin Circuit Court.
I. The Original Suit and Haydon Bridge I.
In December 2003 and February 2004, respectively, Plaintiffs Haydon Bridge Company, Inc., Greater Louisville Auto Dealers Association, Kentucky Automobile Dealers Association, M & M Cartage Co., Inc., Springfield Laundry & Dry Cleaners, Inc. and Usher Transport, Inc. (Plaintiffs) filed first a Petition for Declaration of Rights and Injunctive Relief and later a First Amended Petition against then-Governor Paul Patton and Acting State Budget Director Mary Lassiter. Plaintiffs challenged the Governor's budget reduction plan and corresponding parts of the 2000-2002 and 2002-2004 Budget Bills that affected the Special Fund portion of the BRF. The Special Fund, originally created in 1946, is addressed in KRS 342.122 and is funded through two sources, appropriations by the General Assembly and assessments against workers' compensation premiums paid by Kentucky employers such as the Plaintiffs. The original and First Amended Petitions (and an eventual Second Amended Petition naming then-Governor
Ernie Fletcher) sought a declaration that provisions in the aforementioned budget bills, which (1) temporarily suspended an annual $19 million appropriation from the General Fund to the KWCFC and (2) ordered transfers out of the Special Fund to either the General Fund or the Department of Mines and Minerals, were unconstitutional. The trial court invalidated all of the challenged budget provisions under Section 51 of the Kentucky Constitution.
As noted above, this Court found suspension of the appropriations to be constitutional under Sections 15 and 51 of the Kentucky Constitution but agreed with Plaintiffs that transfer of funds out of the Special Fund  was unconstitutional. This Court reasoned that KRS 342.1227 prohibited funds in the possession of KWCFC from being transferred or loaned to the Commonwealth for any purpose other than those authorized by KRS Chapter 342. While the General Assembly in KRS 48.310(2) and 48.315 provided that a budget bill could be used to transfer KWCFC funds back to the General Fund, those transfers were necessarily limited by this Court's holding in Armstrong v. Collins, 709 S.W.2d at 437. Armstrong held that the legislature had no authority, via a budget bill, to transfer back to the General Fund any agency funds in which legislative appropriations and private contributions were commingled and not subject to differentiation. In Haydon Bridge I, we concluded that monies in the Special Fund could not be differentiated and thus the attempted statutory suspension of KRS 342.1227 was improper under Section 15 of the Kentucky Constitution; in fact, a statutory amendment was necessary, necessitating compliance with the publication requirement of Section 51. Because there was no compliance with Section 51, the challenged transfers from the agency funds to the General Fund and the Department of Mines and Minerals were unconstitutional.
II. The Trial Court's Orders on Remand and This Appeal.
On remand, Plaintiffs were allowed to file a Third Amended Complaint challenging provisions in the 2004-2006, 2006-2008 and 2008-2010 Budget Bills that were similar to those held unconstitutional in Haydon Bridge I and adding new claims regarding provisions in budget bills dating back to 2000 which pertain to the Pneumoconiosis Fund. The Pneumoconiosis Fund was created in 1996 for the benefit of coal industry workers whose last exposure occurred on or after December 12, 1996 and is funded solely by " employers engaged in the severance or processing of coal." KRS 342.1242. The funding comes from an assessment on the workers' compensation premiums paid by the coal industry employers
and a per ton assessment on coal severed by those entities engaged in coal severance. Id. The challenged budget bill provisions transferred monies from the Pneumoconiosis Fund to the Office of Mine Safety and Licensing. In their Third Amended Complaint, Plaintiffs once again characterized the relief sought as declaratory and injunctive relief. The injunctive relief was partially " retroactive" in that it sought the return of all funds transferred out of the Special Fund from 2000-2010 and out of the Pneumoconiosis Fund in the same timeframe. Plaintiffs also sought prospective injunctive relief as to upcoming transfers from the Pneumoconiosis Fund for the 2010-2012 biennium.
Over numerous objections from the Governor, detailed below, the trial court granted retroactive injunctive relief as to both Funds and prospective relief as to both Funds. As for the Pneumoconiosis Fund, an earlier restraining order had halted a planned transfer from that Fund to the Office of Mine Safety and Licensing as provided for in the 2010-12 Budget Bill. That temporary order became permanent when the trial court issued its August 16, 2011 permanent injunction. The trial court also granted attorneys' fees to the Plaintiffs' counsel, finding that their efforts had created a " common fund" that benefited other Kentucky employers who paid assessments to the KWCFC and reasoning that 25% of that common fund should be awarded as fees pursuant to KRS 412.070.
After the trial court entered judgment, the KWCFC Director of Fiscal Operations filed an affidavit establishing that the amounts transferred either to the General Fund or the Department of Mines and Minerals from 2000-2010 totaled $32,781,000.00. The Director did not differentiate between the Special Fund and Pneumoconiosis Fund, referring to them collectively as the Benefit Reserve Fund. However, the Director did note that a scheduled transfer from " the Benefit Reserve Fund of coal workers pneumoconiosis funds in the amount of $1,904,000 to the Department of Mines, Safety and Licensing" did not occur " due to orders issued by Franklin Circuit Court enjoining such transfer."
The Governor appealed the grant of prospective injunctive relief as to the intended transfers from the Pneumoconiosis Fund and the retroactive relief regarding transfers made from 2000-2010. Having accepted transfer from the Court of Appeals, the trial court's judgment is before us for review in all respects except as to the permanent prospective injunctive relief prohibiting transfers from the Special Fund, relief that the Governor concedes is consistent with the directive of this Court in Haydon Bridge I.
I. Sovereign Immunity Precludes the Monetary Relief Ordered by the Court.
As we recently noted in Caneyville Volunteer Fire Dept. v. Green's Motorcycle Salvage, Inc., 286 S.W.3d 790, 799 (Ky.2009), sovereign immunity is a common law doctrine, a " bedrock component" of American government, which prohibits claims " against the government treasury absent the consent of the sovereign." In Reyes v. Hardin County, 55 S.W.3d 337, 338-39 (Ky.2001), this Court succinctly described the interplay between the doctrine and Sections 230 and 231 of our Kentucky Constitution:
[Sovereign immunity] was first recognized by our predecessor Court without question or citation to authority in Divine v. Harvie, 23 Ky. (7 T.B. Mon.) 439 (1828): ‘ It seems to be conceded on all hands, that the State cannot be made a
party defendant, and is not suable in her own courts.’ Id. at 441. The words ‘ sovereign immunity’ are not found in our Constitution. However, Section 230 provides that " [n]o money shall be drawn from the State Treasury, except in pursuance of appropriations made by law ...; " and Section 231 provides that ‘ [t]he General Assembly may, by law, direct in what manner and in what courts suits may be brought against the Commonwealth.’ Virtually identical provisions were contained in the Constitutions of 1792 (Article VIII, §§ 3, 4), 1799 (Article VI, §§ 5, 6), and 1850 (Article VIII, §§ 5, 6). Although some cases suggest that Sections 230 and 231 are the source of sovereign immunity in Kentucky, e.g., Bach v. Bach, Ky., 288 S.W.2d 52, 54 (1956), those sections are more accurately viewed as delegating to the General Assembly the authority to waive the Commonwealth's inherent immunity by direct appropriation of money from the state treasury and/or by specifying where and in what manner the Commonwealth may be sued.
Just as the State Auditor and State Treasurer could not be sued in lieu of the Commonwealth in Divine v. Harvie to obtain a garnishment against the State Treasury, several decades later this Court held that a suit demanding funds held in the State Treasury could not be maintained under the pretext of a suit against the treasurer. Tate v. Salmon, 79 Ky. 540, 543 (Ky.1881). Sovereign immunity is an indisputable limitation on the power of the judiciary. As noted in Withers v. University of Kentucky, 939 S.W.2d 340, 344 (Ky.1997), a " court has no right to merely refuse to apply it or abrogate the legal doctrine."
The Governor insists that the relief ordered by the trial court is a latter day effort to ignore sovereign immunity under the pretext of a retroactive injunction while Plaintiffs insist that the retroactive injunction flows as the obvious remedy for the constitutional violations identified in Haydon Bridge I. Despite the current diametrically opposed positions on the most recent trial court orders, there is no question that Plaintiffs' declaratory and injunctive claims, as originally pled, did not impinge on sovereign immunity.
The Commonwealth, in this case represented by the Governor, is clearly subject to a traditional declaratory judgment action. As this Court noted in Philpot v. Patton, 837 S.W.2d 491, 493 (Ky.1992), any suggestion that the Commonwealth was immune from lawsuits seeking a declaration " that the General Assembly ... has acted or failed to act in a constitutional manner" was " put ... to rest" by Rose v. Council for Better Education, Inc., 790 S.W.2d 186 (Ky.1989), the landmark public education case.
Rose held the General Assembly is not immune from suit in a declaratory judgment action to decide whether the General Assembly has failed to carry out a constitutional mandate and that members of the General Assembly are not immune from declaratory relief of this nature simply because they are acting in their official capacity. Rose held a declaratory judgment over constitutionality is not limited to deciding the constitutionality of statutes, but extends to failure to enact statutes complying with constitutional mandate. While it would be a violation of the separation of powers doctrine in the Kentucky Constitution, Sections 27 and 28, for our Court to tell the General Assembly what to do, i.e., what system or rules to enact, it is our constitutional responsibility to tell them whether the system in place complies with or violates a constitutional mandate, and, if it violates the constitutional
mandate, to tell them what is the constitutional " minimum." But by its very nature, judicial exercise of this responsibility requires great restraint.
837 S.W.2d at 493-94.
Three years earlier, in Armstrong, 709 S.W.2d 437, the 1986 case which pitted the Attorney General against Governor Martha Layne Collins, the Secretary of the Finance Cabinet and the State Treasurer in a dispute over provisions in the biennial budget bill passed in 1984, the trial court had temporarily restrained transfers from certain " trust and agency" funds. Although the trial court subsequently concluded the transfers were constitutional, this Court later reversed the trial court's legal conclusion in part, i.e., some of the transfers were deemed constitutional while others were unconstitutional, but there was no directive that the improperly transferred funds be restored. Because Armstrong was critical to Haydon Bridge I, its central holding bears repeating:
[T]he General Assembly has, constitutionally speaking, the power in a budget bill to repeal or amend the manner in which public funds are used. Ky. Const. Sec. 51, the " title" section, has not been violated by the matters clearly relating to appropriations. What we decide is simply that the transfers of funds which are merely temporary, determinable suspensions of the operation of the statutes relating to appropriations of public ...