Title: Finn v. Virginia Retirement System

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
MARK T. FINN 
OPINION BY JUSTICE LEROY R. HASSELL, SR. 
v.  Record No. 990377 
January 14, 2000 
 
VIRGINIA RETIREMENT SYSTEM, ET AL. 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
Randall G. Johnson, Judge 
 
I. 
 
The primary issue we consider in this appeal is whether 
Code § 2.1-526.8 confers upon a former trustee of the Virginia 
Retirement System (VRS) a right of indemnification against the 
Commonwealth for legal fees he incurred to defend criminal 
investigations that allegedly arose out of the performance of 
his official duties. 
II. 
 
Mark T. Finn, a former trustee of the VRS, filed an 
amended bill of complaint seeking indemnification from the 
Commonwealth of Virginia, the VRS, William E. Landsidle, 
Comptroller, and RF&P Corporation.  Finn alleged in his 
amended bill that he is entitled to indemnification for costs 
that he incurred in defense of criminal investigations against 
him arising out of his service as a trustee of the VRS and as 
a director of RF&P.  The Commonwealth, the VRS, and Landsidle 
(collectively referred to as the Commonwealth) filed demurrers 
to the amended motion.  The circuit court sustained the 
demurrers, holding that neither Code § 51.1-124.28 nor the 
common law confers upon Finn a right of indemnification 
against the Commonwealth.  The court also rejected Finn's 
contentions that Code § 51.1-124.28 violated certain 
provisions of the Virginia and United States Constitutions.  
Finn appeals.1
 
The circuit court decided this case at the demurrer stage 
of the proceedings and, therefore, we will consider as true 
"all material facts that are properly pleaded, facts which are 
impliedly alleged, and facts which may be fairly and justly 
inferred from alleged facts."  Cox Cable Hampton Roads, Inc. 
v. City of Norfolk, 242 Va. 394, 397, 410 S.E.2d 652, 653 
(1991).  Even though the amended bill of complaint and 
exhibits exceed 100 pages, we will only state those 
allegations that are necessary for our resolution of this 
appeal. 
 
In 1990, Finn served as a trustee of the VRS.  In that 
capacity, Finn and his fellow trustees had oversight 
responsibilities for the VRS' operations and investments.  The 
VRS owned a substantial amount of stock in RF&P.  According to 
Finn's allegations, he and certain other VRS trustees were 
concerned that the CSX Corporation might increase its 
                     
1 RF&P did not file a demurrer and is not a party in this 
appeal. 
 
2
ownership of stock in RF&P to the detriment of minority 
shareholders, like the VRS, thereby compelling the minority 
shareholders "to relinquish their securities at below-market 
prices.  In order to protect the VRS from such a strategy, [a 
special committee of the VRS] reached a consensus to recommend 
. . . that the VRS purchase additional RF&P securities." 
 
The VRS Board of Trustees approved the purchase of 
additional RF&P securities.  "On August 3, 1990, the VRS 
disclosed publicly an increase in its RF&P holdings by 
1,267,000 dividend obligations.  This included its open market 
purchases and the acquisition of 1,126,400 dividend 
obligations from Norfolk Southern."  Ultimately, "CSX and VRS 
[entered into] a transaction . . . in which CSX would acquire 
RF&P's railroad assets and the VRS would [control] its real 
estate assets." 
 
This transaction gave rise to federal and state criminal 
investigations.  The Attorney General of Virginia conducted an 
investigation, and the United States Attorney for the Eastern 
District of Virginia also conducted an investigation.  Finn 
retained counsel to defend him in the criminal investigations 
as well as certain civil actions. 
 
"Finn's counsel was informed — in a letter dated December 
13, 1993 [from the United States Attorney] — that Finn 'should 
be designated a "target" in the . . . investigation.'  The 
 
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Department of Justice Manual defines a target to be 'a person 
as to whom the prosecutor or the grand jury has substantial 
evidence linking him/her to the commission of the crime and 
who, in the judgment of the prosecutor, is a putative 
defendant.'"  The United States Attorney stated in the letter 
to Finn's counsel that "'[b]ased on information from a large 
number of sources,' it appeared that Finn had committed 
'numerous violations of the securities statutes, as well as 
mail and wire fraud, and conspiracy regarding these 
offenses.'" 
 
Finn vehemently maintained his innocence throughout the 
state and federal investigations.  At the conclusion of the 
investigations, Finn was not charged with any crimes.  "In 
mounting a defense in connection with the federal 
investigations, Finn incurred expenses, including attorneys' 
fees, totaling $1,123,522.14.  Finn incurred these expenses as 
a direct result of his role and his actions taken as a 
Director of RF&P and Trustee of the VRS." 
III. 
A. 
 
Finn argues that the circuit court erred in sustaining 
the defendants' demurrers.  Finn contends that Code § 2.1-
526.8 "provides a right of indemnification to officials of the 
Commonwealth who successfully defend false criminal 
 
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allegations arising out of the performance of [their] official 
duties."  Responding, the Commonwealth argues that Code § 2.1-
526.8 does not create a statutory right for reimbursement but, 
rather, directs the Department of General Services to 
establish an insurance plan.  We agree with the Commonwealth.  
 
Code § 2.1-526.8 states in relevant part: 
 
"A.  Subject to the approval of the Governor, 
the Department of General Services through its 
Division of Risk Management shall establish an 
insurance plan, which may be purchased insurance, 
self-insurance or a combination of self-insurance 
and purchased insurance: 
 
"1.  To provide protection against liability 
imposed by law for damages resulting from: 
 
"a.  Any claim made against any department, 
agency, institution, board, commission, officer, 
agent, or employee thereof for acts or omissions of 
any nature while acting in an authorized 
governmental or proprietary capacity and in the 
course and scope of employment or authorization;  
 
. . . . 
 
 
"3.  If the Division of Risk Management is 
informed by the Attorney General's Office that it 
will not provide a defense due to a conflict or 
other appropriate reason, to provide for payment of 
attorneys' fees and expenses incurred in defending 
such persons and entities concerning any claim which 
arises from their governmental employment or 
authorization, which arises from their participation 
in such student disciplinary proceedings, or which 
is described in any such indemnification agreement. 
 
"B.  Any insurance plan established pursuant to 
this section shall provide for the establishment of 
a trust fund or contribution to the State Insurance 
Reserve Trust Fund for the payment of claims covered 
under such plan.  The funds shall be invested as 
provided in § 2.1-185 and interest shall be added to 
the fund as earned.  The trust fund shall also 
provide for payment of administrative costs, 
 
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contractual costs, and other expenses related to the 
administration of such plan. 
 
"C.  The insurance plan for public liability 
shall be submitted to the Governor for approval 
prior to implementation." 
 
 
Code § 2.1-526.8 is not self-executing.  Rather, the 
General Assembly, through the enactment of that statute, has 
directed that the Department of General Services through its 
Division of Risk Management establish an insurance plan which 
must be submitted to and approved by the Governor before 
implementation.  Code § 2.1-526.8 specifies the types of 
insurance coverages that must be included within the insurance 
plan and identifies persons and entities who must be insured 
through the insurance plan.   
 
Even though the statute describes the scope of the 
insurance coverage and the nature of the insurance coverage to 
be included within the insurance plan, the statute does not 
confer specific rights upon individuals.  Rather, any 
individual who believes that he or she may be entitled to 
reimbursement must seek payment in accordance with the 
provisions of any insurance plan that has been established 
pursuant to Code § 2.1-526.8.  Therefore, we hold that the 
circuit court properly sustained the Commonwealth's demurrer 
because Code § 2.1-526.8 does not create a statutory right of 
reimbursement for Finn.   
B. 
 
6
 
Finn argues that the circuit court erred by sustaining 
the demurrer because, he says, the Commonwealth has a common 
law duty to "reimburse public officials under the limited 
circumstances in which they successfully defend criminal 
proceedings arising out of the faithful execution of official 
duties."  Continuing, Finn, relying upon Wood v. Board of 
Supervisors, 236 Va. 104, 372 S.E.2d 611 (1988), argues that 
"[a]lthough this Court has not previously considered whether 
the common law obligates state agencies to reimburse its 
officials, the Court has recognized the basis for such a duty:  
the legitimate public policy of protecting public servants 
from frivolous criminal charges." 
 
In Wood, we considered whether Code § 22.1-82 authorized 
a school board to reimburse a division superintendent for 
expenses he incurred in criminal and civil proceedings arising 
out of the performance of his duties.2  We held that Code 
                     
2 Code § 22.1-82, the statute that was at issue in Wood, 
states: 
 
"A.  Notwithstanding any other provision of 
law, the attorney for the Commonwealth or other 
counsel may be employed by a school board to advise 
it concerning any legal matter or to represent it, 
any member thereof or any school official in any 
legal proceeding to which the school board, member 
or official may be a party, when such proceeding is 
instituted by or against it or against the member or 
official by virtue of his actions in connection with 
his duties as such member or official. 
 
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§ 22.1-82 conferred upon the school board the statutory 
authority to reimburse its division superintendent.  We 
rejected the Board of Supervisors' request that this Court 
hold, as a matter of public policy, that the superintendent 
was barred from reimbursement for fees and expenses arising 
from the defense of certain dismissed charges because he pled 
guilty to a misdemeanor offense for which he was not 
reimbursed legal fees and expenses.  Wood, 236 Va. at 115, 372 
S.E.2d at 618.  We stated: 
"Although we can appreciate the legitimacy of such a 
public policy, we decline to adopt it here for two 
reasons.  First, we acknowledge the existence of 
competing, and perhaps equally legitimate, public 
policies, e.g., protecting public servants from 
bearing the expense of defending frivolous charges.  
Second, it is the responsibility of the legislature, 
not the judiciary, to formulate public policy, to 
strike the appropriate balance between competing 
interests, and to devise standards for 
implementation." 
 
Id.
 
Even though we recognized in Wood the existence of a 
public policy of protecting public employees from bearing the 
legal expense associated with the defense of frivolous 
charges, we concluded that the General Assembly, not the 
judiciary, was the appropriate branch of government to 
                                                                
"B.  All costs and expenses of such advice and 
all costs, expenses and liabilities of such 
proceedings shall be paid out of funds appropriated  
to the school board." 
 
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implement such policy.  Likewise, we decline Finn's invitation 
to fashion public policy and create a common law right which 
would entitle a public official to obtain reimbursement from 
the Commonwealth for legal expenses.  It is the province of 
the General Assembly, not the judiciary, to create such right. 
C. 
 
In 1997, the General Assembly enacted Code § 51.1-124.28  
which states: 
 
"Upon the acquittal, dismissal of charges, 
nolle prosequi, or any other final disposition 
concluding the innocence of any trustee, advisory 
committee member, officer, or employee of the 
Retirement System brought before any regulatory 
body, summoned before any grand jury, investigated 
by any law-enforcement agency, arrested, indicted, 
or otherwise prosecuted on any criminal charge 
arising out of any act committed in the discharge of 
his official duties which alleges a violation of 
state or federal securities laws, the Board may 
reimburse all or part of the cost of employing legal 
counsel and such other costs as are demonstrated to 
have been reasonably necessary for his defense.  The 
Board shall provide for the payment of such legal 
fees and expenses out of funds appropriated for the 
administration of the Retirement System." 
 
Acts 1997, ch. 821, cl. 2, provides:  "[t]hat the provisions 
of this act shall not authorize the Board of the Virginia 
Retirement System to reimburse any trustee, advisory committee 
member, officer, or employee of the Virginia Retirement System 
for any costs incurred in connection with any act of such 
person occurring prior to July 1, 1997."   
 
9
 
Finn alleged in his amended bill that the language in 
Acts 1997, ch. 821, cl. 2, which limits the power of the Board 
of Trustees of the VRS to reimburse trustees for claims 
arising on or after July 1, 1991, violates Virginia's 
constitutional prohibition against special laws.  Continuing, 
Finn argues that this restriction "excludes him arbitrarily 
from the benefits of the . . . Act while protecting 
identically situated trustees from being placed in the 
position in which he now finds himself."  The Commonwealth 
responds that the Act cannot be deemed a special law merely 
because it became effective in accordance with art. IV, § 13 
of the Constitution of Virginia which requires that laws 
enacted at a regular session take effect on the first day of 
July following the adjournment of the session of the General 
Assembly in which the law has been enacted. 
 
Article IV, § 14 (18) of the Constitution of Virginia 
provides, in part:  "[t]he General Assembly shall not enact 
any local, special, or private law . . . [g]ranting to any 
private corporation, association, or individual any special or 
exclusive right, privilege, or immunity."  Article IV, § 15 of 
the Constitution of Virginia, provides, in pertinent part: 
 
"In all cases enumerated in the preceding 
section . . . the General Assembly shall enact 
general laws.  Any general law shall be subject to 
amendment or repeal, but the amendment or partial 
repeal thereof shall not operate directly or 
 
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indirectly to enact, and shall not have the effect 
of enactment of, a special, private, or local law. 
 
". . . .  No private corporation, association, 
or individual shall be specially exempted from the 
operation of any general law, nor shall a general 
law's operation be suspended for the benefit of any 
private corporation, association, or individual." 
 
 
All statutes enacted by the General Assembly are presumed 
to be constitutional.  Pulliam v. Coastal Emergency Services, 
257 Va. 1, 9, 509 S.E.2d 307, 311 (1999); King v. Virginia 
Birth-Related Neurological Injury Compensation Program, 242 
Va. 404, 408, 410 S.E.2d 656, 659 (1991).  A litigant who 
challenges the constitutional validity of a statute has the 
burden of proving that the challenged legislation is 
unconstitutional, and any reasonable doubt as to the statute's 
constitutionality must be resolved in favor of its validity.  
Pulliam, 257 Va. at 9, 509 S.E.2d at 311; King, 242 Va. at 
408, 410 S.E.2d at 659. 
 
We have also stated the following principles which we 
must apply here: 
 
"The constitutional prohibition against special 
laws does not prohibit legislative classifications.  
Holly Hill Farm Corp. v. Rowe, 241 Va. 425, 430, 404 
S.E.2d 48, 50 (1991).  Rather, the prohibitions 
require that such classifications be 'natural and 
reasonable, and appropriate to the occasion.'  
Benderson Development Company v. Sciortino, 236 Va. 
136, 140-41, 372 S.E.2d 751, 753 (1988); Holly Hill, 
241 Va. at 430, 404 S.E.2d at 50.  'Taken together, 
the pervading philosophy of Article IV, sections 14 
and 15 reflects an effort to avoid favoritism, 
discrimination, and inequalities in the application 
of the laws.'  Benderson at 147, 372 S.E.2d at 756.  
 
11
Additionally, 'the necessity for and the 
reasonableness of classification are primarily 
questions for the legislature.  If any state of 
facts can be reasonably conceived, that would 
sustain it, that state of facts at the time the law 
was enacted must be assumed.'  Etheridge, 237 Va. at 
102, 376 S.E.2d at 533 (quoting Martin's Ex'rs v. 
Commonwealth, 126 Va. 603, 612-13, 102 S.E. 77, 80 
(1920))." 
 
King, 242 Va. at 409, 410 S.E.2d at 659-60. 
 
Applying these principles, we hold that Acts 1997, ch. 
821, cl. 2, does not violate Virginia's constitutional 
prohibition against special laws.  The only classification 
which Finn challenges is the Act's distinction between legal 
costs and expenses that were incurred after July 1, 1997, 
which the Board of Trustees of the VRS in the exercise of its 
discretion may reimburse and expenses and costs incurred 
before that date, which do not fall within the scope of the 
Act.  Certainly, it is reasonably conceivable that the General 
Assembly established this classification in accordance with 
Va. Const. art. IV, § 13, which provides in part that:  "[a]ll 
laws enacted at a regular session . . . shall take effect on 
the first day of July following the adjournment of the session 
of the General Assembly at which it has been enacted."  This 
fact alone compels us to conclude that the challenged statute 
does not constitute special legislation.  
D. 
 
12
 
Finn contends that Acts 1997, ch. 821, cl. 2, violates 
the Equal Protection Clause of the federal constitution.  Finn 
argues that the General Assembly had no rational basis for 
distinguishing between the current VRS trustees who may be 
entitled to recover legal fees they expended after July 1, 
1997 and himself.  Finn's contention is without merit. 
 
The Equal Protection Clause states, in part, that no 
state shall "deny to any person . . . the equal protection of 
the laws."  U.S. Const. amend. XIV, § 1.  Because the 
classification that Finn challenges neither infringes upon a 
fundamental right nor creates a suspect class, we must apply 
the rational basis test to ascertain whether the statute can 
withstand an equal protection challenge.  Heller v. Doe, 509 
U.S. 312, 319-21 (1993); Exxon Corp. v. Eagerton, 462 U.S. 
176, 195-96 (1983); Hodel v. Indiana, 452 U.S. 314, 331-32 
(1981); Pulliam, 257 Va. at 20-21, 509 S.E.2d at 318; King, 
242 Va. at 411, 410 S.E.2d at 661. 
 
We have held that a classification will not be 
invalidated merely because it results in some inequality or 
some discrimination.  King, 242 Va. at 411, 410 S.E.2d at 661; 
Etheridge v. Medical Center Hospitals, 237 Va. 87, 104, 376 
S.E.2d 525, 534 (1989).  Rather, "[t]he rational basis test is 
satisfied 'if the legislature could have reasonably concluded 
that the challenged classification would promote a legitimate 
 
13
state purpose.'"  Id.  The United States Supreme Court stated 
in McGowan v. Maryland, 366 U.S. 420, 425-26 (1961), that  
"the Fourteenth Amendment permits the States a wide 
scope of discretion in enacting laws which affect 
some groups of citizens differently than 
others. . . .  State legislatures are presumed to 
have acted within their constitutional power despite 
the fact that, in practice, their laws result in 
some inequality.  A statutory discrimination will 
not be set aside if any state of facts reasonably 
may be conceived to justify it." 
 
Additionally, "[a] State . . . has no obligation to produce 
evidence to sustain the rationality of a statutory 
classification.  '[A] legislative choice is not subject to 
courtroom factfinding and may be based on rational speculation 
unsupported by evidence or empirical data.'"  Heller, 509 U.S. 
at 320 (quoting FCC v. Beach Communications, Inc., 508 U.S. 
307, 315 (1993)). 
 
In applying the rational basis test, we must consider 
whether any stated facts reasonably may be conceived to 
justify the General Assembly's decision that Code § 51.1-
124.28 should apply to claims arising after July 1, 1997.  We 
hold that this test is satisfied because, as we have already 
stated, the General Assembly may have relied upon Va. Const. 
art. IV, § 13 when determining what expenses may be reimbursed 
by the Board of Trustees of the VRS. 
IV. 
 
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For the foregoing reasons, we will affirm the judgment of 
the circuit court. 
Affirmed. 
 
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