Title: MT ASSN OF UNDERWRITERS v STATE

State: montana

Issuer: Montana Supreme Court

Document:

No. 13555 IN THE SUPREME COURT OF THE STATE OF MONTANA 1977 MONTANA ASSOCIATION OF UNDERWRITERS, Plaintiff and Appellant, STATE OF MONTANA, acting by and through the Department of Administration, and Montana Benefits, Inc. , Defendants and Respondents. Appeal from: District Court of the First Judicial District, Honorable Gordon Bennett, Judge presiding. Counsel of Record: For Appellant: Philip W. Strope argued, Helena, Montana For Respondent : Small, Cummins and Hatch, Helena, Montana Robert Cummins argued, Helena, Montana Michael Young argued, Helena, Montana Submitted: March 17, 1977 Decided ~ P R 2 9 1971 - - . M r . J u s t i c e Frank I. Haswell delivered the Opinion of the Court. P l a i n t i f f f i l e d an action f o r declaratory judgment and injunctive r e l i e f against t h e S t a t e Department of Administration and a private corporation t o block implementation of a deferred compensation plan f o r public employees. The d i s t r i c t court, Lewis and Clark County, the Hon. Gordon R. Bennett, d i s t r i c t judge, granted summary judgment t o defendants denying the requested r e l i e f . P l a i n t i f f appeals. P l a i n t i f f i s the Montana Association of Life Underwriters, a trade association whose members a r e involved, among other things, i n the f i e l d of employee pension plans. There a r e two defendants: The Department of Administration (DOA), an adminis- t r a t i v e agency of the s t a t e of Montana; and Montana Benefits, Inc. (MFI), a private p r o f i t corporation, which i s engaged i n establishing and administering the deferred compensation plan f o r public employees. I n 1974 the Montana l e g i s l a t u r e enacted l e g i s l a t i o n author- izing public employees t o e n t e r i n t o a deferred compensation plan. Chapter 264, 1974 Session Laws, codified a s sections 68-2701 through 68-2709, R.C.M. 1947. Essentially the l e g i s l a t i o n authorized the s t a t e o r i t s p o l i t i c a l subdivisions, a f t e r reaching agreement with i t s employees, t o e n t e r i n t o a program whereby i t s employees could defer a portion of t h e i r pay i n a qualified deferred compensation plan under the federal I n t e r n a l Revenue Code. Under such a plan the employee would not pay income taxes on the portion of h i s salary deferred u n t i l it was f i n a l l y d i s - tributed t o him under the plan. The s t a t e o r i t s p o l i t i c a l sub- division incurred no financial l i a b i l i t y f o r losses incurred by any plan established under the legislation. DOA was authorized t o contract with employees t o defer compensation under any qualified plan, to establish rules and regulations for the proper operation of the plan, and to contract with private corpora- tions or institutions for consolidated b i l l i n g and other adminis- trative services. Pursuant t o t h i s legislation, DOA entered into a written agreement on September 1 7 , 1975 with Montana Public Employees Benefit Services Co., Inc., the predecessor of MBI, wherein the corporation was given the exclusive right t o establish and administer a plan of deferred compensation for public employees. O n the same date DOA entered into a written agreement with MBI wherein t h i s corporation was granted the same exclusive right. A t the time of contracting Montana Public Employees Benefit Services Co., Inc. was not yet incorporated. Following incorpora- tion, that corporation's name was changed t o MBI. After the present s u i t was f i l e d , DOA entered into a third contract with MBI identical t o the previous contracts. The deferred compensation plan was prepared and offered by the corporation th the s t a t e , which adopted it. This plan had been approved a s a "nonqualified unfunded" plan by the Internal Revenue Service i n a private l e t t e r ruling. This ruling determined that income deferred by public employees under the plan was not includable i n the employee's gross income u n t i l actually received by the employee or h i s beneficiaries, provided s t a t e law permits implementation of the plan. Plaintiff challenges the deferred compensation plan adopted by the s t a t e on three grounds, which we are asked t o review on appeal : (1) Whether the 1974 legislation requires the s t a t e t o adopt and implement only a "qualifiedt funded deferred compensa- tion plan within the meaning of $401(a), Internal Revenue Code 1954, a s amended. (2) Whether the agreement between DOA and M B I i s void for lack of legal capacity by MBI t o contract. (3) Whether DOA has authority t o grant an exclusive con- t r a c t t o M B I . _The g i s t of the f i r s t issue i s whether the legislature i n using the words "qualified plan" and similar language meant a plan qualified for deferred income tax l i a b i l i t y or whether it referred to a qualified deferred compensation plan within the meaning of S401(a), Internal Revenue Cbde 1954. Plaint i f f argues that the words "qualified" and "non- qualified" are words of a r t with distinct meanings, when used within the context of the Internal Revenue Code. It argues the Montana legislature used the words "qualified plan" i n that sense i n the deferred compensation a c t t o provide adequate funding and security of employee contributions from diversion to other purposes. Therefore, it contends, the legislature meant a qualified plan under §401(a), Internal Revenue Code 1954 which insures adequate funding, security,and prevents diversion of funds t o other purposes. A t the outset we note the legislation i n question provides in pertinent part: "68-2701. Deferred compensation programs permitted. "The s t a t e * fc * may establish, a f t e r reaching agreement with any employee 9: 9 : ff a program for employees to defer any portion of that employeet s compensation up t o the maximum allowed by the Internal Revenue Code i n a plan qualified for exemption under applicable sections of the Internal Revenue Code." (Emphasis added.) I n subsequent sections reference i s made t o "any qualified plan1' (section 68-2702), t o "qualified plans" (section 68-2705), t o 11 any qualified private pension plans" (section 68-2706), and t o "a11 qualified deferred compensation plans" (section 68-2708). A cardinal principle of statutory construction i s that the intent of the legislature must f i r s t be determined from the plain meaning of the words used, and i f interpretation of the statute can be so determined, the courts may not go further and apply any other means of interpretation. Keller v. Smith, Mont . , 553 P.2d 1002, 33 St.Rep. 828; Dunphy v. Anaconda Co., 151 Mont. 76, 438 P.2d 660, and cases cited therein. Here the language of the act clearly indicates the term "qualified plan" means a plan qualifying for deferral of income taxation under federal laws. Section 68-2701 authorizes a de- ferred compensation program for public employees "in a plan qualified for exemption under applicable sections of the Internal Revenue Code." This language demonstrates the underlying purpose of the a c t -- tax saving by exemption under federal tax laws. The exemption i s not limited to a plan qualified under $401(a) of the Internal Revenue Code or any other specific section thereof. The act says a plan qualified for exemption "under applicable sections - of the Internal Revenue Code." It does not speak of "funded" o r "unfunded" plans, $401(a) plans, or use the technical jargon of the Internal Revenue Code. Where the language of a statute i s plain, unambiguous, direct and certain, the statute speaks for i t s e l f and there i s nothing l e f t for the court t o construe. Keller v. Smith, supra; Dunphy v. Anaconda Co., supra. Our function i s simply t o declare what i s contained i n the statute, and neither insert what has been omitted nor omit what has been inserted. Section 93-401-15, R.C.M. 1947; Clark v. Hensel Phelps Construction Co., Mont . 2 P.2d , 34 St.Rep.61; Hammill v. Young, - Mont . 9 540 P.2d 971, 32 St.Rep. 935. Accordingly, we will not construe the language of section 68-2701 - "in a plan qualified for exemption under applicable sections of the Internal Revenue Code" --- to mean only a 5 401(a) plan. Plaintiff argues the deferred compensation plan in question does not conform to Montana's statutory requirements because it is "unfunded" and does not provide the necessary security for . employee contributions. It is contended that a qualified, funded $401(a) plan provides such security, and the legislature intended to provide such security by using the term "qualified plan'' as words of art having a special meaning in the context of the Internal Revenue Code, specifically a $401(a) qualified and funded plan. Plaintiff asserts the deferred compensation plan in question does not qualify for exemption under $401(a) of the Internal Revenue Code and cites in support Buttrey Stores, Inc. v. United States, 375 F.2d 799, and Trebotich v. Commissioner of Internal Revenue, 492 F.2d 1 0 1 8 . We agree that the deferred compensation plan in question does not qualify for exemption under $401(a) of the Internal Revenue Code. A qualified plan under that section is a specialized, highly sophisticated, and complex income deferral plan utilizing the trust device to insure security and non-diversion of deferred income contributions. The merits of such a plan vis-a-vis the unfunded plan here is a policy determination to be resolved by the legislature and DOA. The legislature has not limited a - 6 - "qualified plan'' t o a §401(a) plan by the plain language of i t s enactment and DOA has approved the particular plan involved i n t h i s case. W e have considered the other arguments advanced by p l a i n t i f f on the f i r s t issue and find that none would change our holding, W e find it unnecessary t o go beyond the plain language of Montana's a c t , W e specifically hold t h i s language permits imple- mentation of the deferred compensation plan involved i n t h i s case. P l a i n t i f f ' s second issue argues t h a t the contract entered into between the s t a t e and M B f is void as M B I lacked legal capacity t o enter into such agreement. A t the time of the execution of the i n i t i a l contract between DOA and the predecessor of M B I on September 17, 1975, no c e r t i f i c a t e of incorporation had been issued t o the corporation. 21 days l a t e r on 0ctobe; 8, 1975, the corporation received i t s a r t i c l e s of incorporation. The company name was l a t e r changed to M B I a t the request of the secre- tary of s t a t e and a r t i c l e s of Xncorporation were issued i n that name on April 12, 1976. M B I was, i n effect, a defacto corporation a t the time the contract i n question was executed. Although it was defective i n i t s creation and not a de jure corporation, t h i s was the result of a bona fide attempt t o incorporate under the existing statutory authority, coupled with the exercise of corporate powers. A de facto corporation has the same capacity t o contract as a de jure corporation. Proof of a de facto corporate existence i s sufficient where the validity of a contract by a body of men claiming t o be a corporation i s i n issue i n a s u i t which i s between third persons. 8 Fletcher Cyc. Corp. (Perm.Ed.), Chap. 45, $3862, and cases cited therein. Plaintiff argues the contract was not merely voidable, but void ab initio as a result of the failure r . . to coniply- - . with the technical requirements of incorporation. We do not agree. The legal distinct ion between "void" and "voidable" contracts is defined in 1 Williston on Contracts, 3rd Ed., $15: "An agreement which produces no legal obligation is frequently called a 'void' contract. Though the phrase is often convenient, it is a contra- diction in terms. If an agreement is void it is not a contract. A voidable contract, however; is common in the law. Infancy, fraud, mistake, duress, some kinds of illegality, all afford ground for res- cinding or refusing to perform a contract. Unless rescinded, however, a voidable contract imposes on the parties the same obligations as if it were not voidable, The term is used to cover both cases where the person having the power of avoidance must promptly take action manifesting his election and cases where he need do nothing unless sued, and may then assert avoidance as a defense. Where a contract is voidable on both sides, as where both are infants or cheats, the trans- action is not wholly void, since in order to prevent the contract from having its normal operation the defense vust in some manner be asserted, and further- more, since the contract is capable of ratification, it affects from the outset the legal relations of the parties. 1 I In the instant case, the failure of the corporation possess articles of incorporation until 21 days after the execu- tion of the contract with the state does not constitute an illegal purpose which would void the agreement from its inception. On the contrary, this defect rendered the contract voidable at the state's option. The state not only has not taken any steps to void or rescind the contract, but in fact has ratified it. The third and final issue is whether DOA has authority to grant an exclusive contract to MBI. The record discloses that this issue was not researched, briefed, argued or raised before the district court. On appeal this Court will not review issues not presented to the trial court. Spencer v. Robertson, 151 Mont. 5 0 f , 445 P.2d 48; Clark v. Worrall, 146 Mont. 374, 406 P.2d 622; S t a t e Highway Commission v. Yost Farm Company, 142 Mont.239, 384 P.2d 277. The summary judgment of the d i s t r i c t court i s affirmed. J u s t i c e W e Concur: /'