Court Opinion

ID: 2716363
Source: CourtListenerOpinion
Date Created: 2014-08-08 07:02:08.608371+00
Date Added: 2024-06-11T10:01:48.727201
License: Public Domain

PUBLISHED

                 UNITED STATES COURT OF APPEALS
                     FOR THE FOURTH CIRCUIT

                             No. 13-1007

ROBERT   F.   CHERRY,   JR.;  ROBERT   J.  SLEDGESKI;   JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf
of all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER   OF   POLICE,   LODGE   #3,   INC.;  BALTIMORE   CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,

               Plaintiffs - Appellees,

BALTIMORE FIRE OFFICERS UNION,       LOCAL    964,    INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,

               Intervenor/Plaintiff – Appellee,

         v.

MAYOR AND CITY   COUNCIL     OF   BALTIMORE   CITY,    a   municipal
corporation,

               Defendant – Appellant,

         and

BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,

               Defendants.

                             No. 13-1115

ROBERT   F.   CHERRY,  JR.;   ROBERT   J.   SLEDGESKI;  JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf of
all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER   OF   POLICE,   LODGE   #3,   INC.;   BALTIMORE   CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,

                Plaintiffs,

          and

BALTIMORE FIRE OFFICERS UNION,          LOCAL   964,    INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,

                Intervenor/Plaintiff – Appellant,

          v.

MAYOR AND CITY    COUNCIL     OF   BALTIMORE    CITY,    a   municipal
corporation,

                Defendant – Appellee,

          and

BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,

                Defendants.

                              No. 13-1116

ROBERT   F.   CHERRY,   JR.;  ROBERT   J.   SLEDGESKI;   JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf of
all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER   OF   POLICE,   LODGE   #3,   INC.;   BALTIMORE   CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,

                Plaintiffs - Appellants,

          and

                                    2
BALTIMORE FIRE OFFICERS UNION,           LOCAL    964,    INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,

                 Intervenor/Plaintiff,

           v.

MAYOR AND CITY     COUNCIL     OF   BALTIMORE     CITY,     a    municipal
corporation,

                 Defendant – Appellee,

           and

BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,

                 Defendants.

Appeals from the United States District Court for the District
of Maryland, at Baltimore.   Marvin J. Garbis, Senior District
Judge. (1:10-cv-01447-MJG)

Argued:   May 14, 2014                           Decided:       August 6, 2014

Before TRAXLER,    Chief   Judge,    and   KEENAN     and       FLOYD,   Circuit
Judges.

Affirmed in part, vacated in part, and remanded by published
opinion.   Judge Keenan wrote the opinion, in which Chief Judge
Traxler and Judge Floyd joined.

ARGUED: James Patrick Ulwick, KRAMON & GRAHAM, P.A., Baltimore,
Maryland, for Appellant/Cross-Appellee.   Charles Owen Monk, II,
SAUL EWING LLP, Baltimore, Maryland; Robert David Klausner,
KLAUSNER    &    KAUFMAN,   PA,    Plantation,    Florida,   for
Appellees/Cross-Appellants.  ON BRIEF: Kevin F. Arthur, Jean E.

                                     3
Lewis, KRAMON & GRAHAM, P.A., Baltimore, Maryland; George
Nilson, Matthew W. Nayden, BALTIMORE CITY LAW DEPARTMENT,
Baltimore, Maryland, for Appellant/Cross-Appellee.    Devin J.
Doolan, Jr., Geoffrey M. Gamble, Baltimore Maryland, Paul M.
Heylman, SAUL EWING LLP, Washington, D.C., for Appellees/Cross-
Appellants.

                               4
BARBARA MILANO KEENAN, Circuit Judge:

      In     this        appeal,        we     consider         certain         constitutional

challenges related to a public pension plan sponsored by the

City of Baltimore (the City).                          The plaintiffs are active and

retired      Baltimore           police        officers         and      firefighters         who

participate in the plan (the members), as well as the unions

that represent them (together, the plaintiffs).                                The plaintiffs

primarily challenge the City’s decision changing the manner in

which      annual       increases       to    pension       benefits          are    calculated,

claiming that the substitution of a cost-of-living adjustment

for a “variable benefit” violates the members’ rights under the

Contract      Clause        and       the     Takings          Clause     of        the    federal

Constitution.

      After    considering            extensive         evidence,       the    district     court

concluded      that        the        elimination         of     the     variable          benefit

constituted         a     substantial          impairment          of    certain          members’

contract rights, and that the impairment was not reasonable and

necessary     to        serve    an    important         public    purpose.           The   court

therefore held that the City had violated the Contract Clause,

and dismissed the Takings Clause claim as moot.

      Upon our review, we conclude that the members’ rights under

the   Contract          Clause    were       not       impaired,    because         the   members

retained a state law remedy for breach of contract.                                   Therefore,

we vacate the judgment of the district court with respect to the

                                                   5
City’s elimination of the variable benefit.                    We also affirm the

court’s     decision     upholding      the       remaining     portions     of   the

ordinance at issue, and vacate the court’s order dismissing the

Takings   Clause       claim.        Accordingly,      we     remand   for   further

proceedings consistent with this opinion.

                                            I.

     In 1962, the City instituted a public pension plan (the

plan) that entitles eligible retired public safety employees to

a monthly pension benefit.            The basic pension benefit is funded

by contributions of active members, annual contributions by the

City, and earnings on the plan’s investments.                   In 1983, the City

established a method by which retirees could receive increases

to their basic pension benefits (the Variable Benefit).                           The

Variable Benefit was a “gain-sharing mechanism” that did not

guarantee    an    increase     in    any    given    year.      Instead,    benefit

increases were dependent on the earnings yielded by the plan’s

investments       in   the   prior    year.        Retirees     were   entitled    to

receive a benefit increase if the investments earned more than

7.5% in the prior fiscal year.                  Under the Variable Benefit, all

the plan earnings between 7.5% and 10%, and half the earnings in

excess of 10%, would be designated for benefit increases.                         Any

such increases derived from the Variable Benefit compounded in

future years.

                                            6
       Since     its   inception,           the      Variable     Benefit       generated      a

benefit increase more than half the time, and retirees received

an average increase of 3% annually.                       However, in recent years,

the percentage increase generally has been lower.

       Beginning in 2008, the City encountered substantial budget

deficits       that    it    was       obligated        to    eliminate.              The   City

implemented several measures to reduce these deficits that were

unrelated to the plan, “including a hiring freeze, a pay freeze,

unpaid furloughs, layoffs, deferral of infrastructure projects,

rotating firehouse closures, reducing trash pickup, and cutting

library hours.”

       About the same time, the plan’s actuary determined that

certain    actuarial        adjustments       should         be   made    to    the    plan   to

improve    the    plan’s      financial       stability.            To    accomplish        this

objective,       the   City    would        be       required     to     pay    annually      an

additional $64 million into the plan, which would result in a

total annual contribution of $164.9 million.                             In light of these

financial difficulties, the City began to consider alternatives

to the Variable Benefit that would not require the City both to

bear the burden of poor investment performance and to forego

some of the investment gains in years of strong performance.

       The City considered various options, including a proposal

from   the     employees’      unions,        which      recommended           replacing      the

Variable     Benefit    with       a   2%    annual      cost     of     living   adjustment

                                                 7
(COLA) for all retirees.               The City ultimately enacted Ordinance

10-306 (the Ordinance), the legislation at issue in this case,

which became effective in June 2010.

     The       Ordinance      established         a    “Tiered   COLA”       under    which

retirees age 65 and older would receive an annual COLA of 2%,

retirees age 55 to 64 would receive an annual COLA of 1%, and

retirees       under    age    55    would    not      receive    any    COLA      benefit.

Through the Tiered COLA system, the City sought to provide the

largest annual increases to the oldest retirees, who were least

likely    to    have     additional      income        from    other    sources.        The

Ordinance also instituted other changes to the plan, including

increasing the retirement age, service, and member contribution

requirements.

     The plaintiffs filed a class action lawsuit in the district

court, asserting that the Ordinance violated the members’ rights

under    the    Contract      Clause    and       Takings     Clause    of   the     federal

Constitution.          The plaintiffs’ complaint also alleged a claim

for breach of contract under Maryland law as well as several

other state law claims.

     The district court initially determined that because the

substitution of the Tiered COLA for the Variable Benefit was the

only portion of the Ordinance that applied retrospectively, that

provision      was     the    only   part     of      the   Ordinance    subject       to   a

Contract Clause analysis.               The court conducted two hearings to

                                              8
determine      the   constitutionality       of     the    change,     and    concluded

that    the    substitution   of   the       Tiered       COLA   for    the    Variable

Benefit substantially impaired the contract rights of current

retirees and members who were eligible to retire but had not yet

done so.

       The district court later evaluated whether the impairment

was permissible because it advanced an important public purpose.

The    court    concluded   that   the       City    had    acted      reasonably    in

eliminating the Variable Benefit in order to stabilize the plan.

Nevertheless, the court held that by establishing the Tiered

COLA, the Ordinance violated the Contract Clause.                             The court

explained that the Tiered COLA system treated younger retirees

more harshly than older retirees, and that the impairment was

not necessary to achieve an important public purpose.                         The court

therefore declared invalid and unenforceable the portion of the

Ordinance eliminating the Variable Benefit and instituting the

Tiered COLA.

       The district court dismissed the plaintiffs’ Takings Clause

claim as moot, and granted the parties’ agreed motion for a

voluntary dismissal without prejudice of the state law claims.

Both parties have appealed from the district court’s judgment.

                                         9
                                     II.

     We first address the City’s appeal.             The City argues that

the plaintiffs’ Contract Clause claim is foreclosed, because the

Ordinance does not establish a barrier to obtaining relief for

breach of contract under Maryland law.              The City contends that

the plaintiffs may maintain a contract action under Maryland law

on the basis that the City’s enactment of the Ordinance was not

a “reasonable modification” of the pension plan under the City’s

reserved legislative power.          Therefore, the City asserts, the

district court erred in awarding any relief under the Contract

Clause.

     In   response,   the     plaintiffs   contend     that   the   City   has

extinguished   any    state    law   remedy   for    breach   of    contract,

because the City has not waived all available defenses based on

its enactment of the Ordinance.            The plaintiffs also maintain

that, by relying on its reserved legislative power to modify the

plan, the City has refused to pay damages for breach of contract

and has deprived the plaintiffs of a remedy under state law.                We

disagree with the plaintiffs’ position, which essentially is an

assertion that the plaintiffs do not have a state law remedy for

breach of contract because the City has not conceded liability

in that regard.

     The Contract Clause provides that “No State shall . . .

pass any . . . [l]aw impairing the [o]bligation of [c]ontracts.”

                                     10
U.S. Const. art. I, § 10, cl. 1.                       The Clause prevents a state

from arbitrarily “reduc[ing] its financial obligations whenever

it    want[s]   to     spend       the     money”      elsewhere,     but       nevertheless

permits the state to modify its contractual obligations subject

to certain limitations.                  U.S. Trust Co. of N.Y. v. New Jersey,

431 U.S. 1, 26 (1977).

       We conduct a three-part inquiry to “harmoniz[e] the command

of the Clause with the ‘necessarily reserved’ sovereign power of

the states to provide for the welfare of their citizens.”                                Balt.

Teachers Union v. Mayor & City Council of Balt., 6 F.3d 1012,

1015    (4th    Cir.       1993)    (citation         and     footnote     omitted).          In

reviewing      an    alleged       Contract         Clause    violation,        we    ask:    (1)

whether there has been an impairment of a contract; (2) whether

the state law has operated as a “substantial impairment of a

contractual         relationship”;            and     (3)     if   there     has       been    a

substantial     impairment,          whether         the    impairment     is       permissible

because it is “reasonable and necessary to serve an important

public    purpose.”            Id.       at    1015,        1018   (citations          omitted)

(emphasis in original).

       Our initial inquiry focuses on whether the law in question

has    effected       an    impairment          of     a     contract.          A    state    or

municipality        does     not     “impair         the    obligation     of        contracts”

merely    by    breaching          one    of    its     contracts     or    by       otherwise

modifying a contractual obligation.                         As we stated in Crosby v.

                                               11
City of Gastonia, “[i]t would be absurd to turn every breach of

contract by a state or municipality into a violation of the

federal Constitution.”           635 F.3d 634, 642 n.7 (4th Cir. 2011)

(quoting       Horwitz-Matthews,     Inc.      v.    City   of   Chicago,    78    F.3d

1248, 1250 (7th Cir. 1996)).              Thus, our task is not to decide

whether    a    breach    of   contract    has      occurred,    but   to   determine

whether    the     City    has   erected       a    legal   barrier    “that      [has]

prevented       the   [plaintiffs]    from         obtaining     damages,   or     some

equivalent remedy, for [any] breach.”                 Horwitz-Matthews, 78 F.3d

at 1251.

     If the plaintiffs retain the right to recover damages for

breach of contract, there is no impairment of contract under the

Contract Clause.          Crosby, 635 F.3d at 642 n.7; see also Redondo

Constr. Corp. v. Izquierdo, 662 F.3d 42, 48 (1st Cir. 2011).                        As

the Seventh Circuit explained in Horwitz-Matthews, Inc. v. City

of Chicago, a city is permitted to raise any defense to breach

of contract in a state law action, except “a defense that even

if there was a contract and it was broken the [c]ity cannot be

liable because the repealing ordinance extinguished any remedy

that the [plaintiff] would otherwise have had.”                         78 F.3d at

1252; see also Redondo Constr., 662 F.3d at 48.

     In the present case, the Ordinance neither prevents the

plaintiffs from pursuing a state law breach of contract claim

nor shields the City from its obligation to pay damages should

                                          12
it be found in breach of contract.                   Also, the City does not

cite any aspect of the Ordinance as a potential defense to the

plaintiffs’     assertion     of    a    breach    of     contract    claim.      See

Council 31 of the Am. Fed. of State, Cnty. & Mun. Emps. v.

Quinn, 680 F.3d 875, 886 (7th Cir. 2012) (plaintiffs had no

Contract Clause claim when the state’s defense did not rely on

the court’s interpretation of the legislation being challenged).

Instead, the City relies on its reserved legislative power under

Maryland      law,   which    the   City       contends    provides     the    needed

authority for replacing the Variable Benefit with the Tiered

COLA. 1

      Under    Maryland      law,   the    contract       or   vested   rights    of

employees “are subject to a reserved legislative power to make

reasonable      modifications       in    the    plan,    or   indeed    to    modify

benefits if there is a simultaneous offsetting new benefit . . .

.”   See City of Frederick v. Quinn, 371 A.2d 724, 726 (Md. Ct.

Spec. App. 1977) (emphasis added).                To qualify as a “reasonable

modification,” a revised plan must provide the employees with

      1
       The City also argues that it was not obligated under the
terms of the original contract to continue the Variable Benefit
prospectively.   In support of this contention, the City relies
on plan language pre-dating the Ordinance, which stated that
“any benefit increase . . . is not and does not become an
obligation” of the City.   This defense to a breach of contract
claim has no bearing on the plaintiffs’ ability to seek relief
under state law, because the plaintiffs claim that the passage
of the Ordinance breached the contract.

                                          13
“substantially           the     program     [they]       bargained          for     and     any

diminution         thereof      must   be    balanced          by    other     benefits      or

justified by countervailing equities for the public’s welfare.”

Id.    In articulating this rule, the Court of Special Appeals of

Maryland recognized that the needs of the government may change

over    time       as   new    employees    draw    on    pension          funds,    requiring

modifications to ensure the “soundness of the fund.”                                 Id.; see

also Saxton v. Bd. of Trs., 296 A.2d 367, 369 (Md. 1972) (“In

all     states          municipal      corporations            may      make        reasonable

modifications of a pension plan at any time before the happening

of the defined contingencies.”).

       The        reasonable       modification        principle            articulated      by

Maryland’s          courts      verifies     that        the        plaintiffs       have     an

opportunity to litigate a breach of contract claim under state

law.         If    the    City’s    defense       is    unsuccessful          and    a     court

determines that the City has a contractual duty to the members

and    that       the   modification    of    the      plan     is    unreasonable         under

Maryland law, the plaintiffs may be entitled to relief.                                  Because

the    Ordinance         does    not   foreclose         any        such     claim    by    the

plaintiffs, the City has not extinguished the plaintiffs’ remedy

                                             14
under state law by enacting the Ordinance. 2                    Accordingly, the

plaintiffs do not have a viable Contract Clause claim. 3

     Our conclusion is not altered by the plaintiffs’ assertion

that,    absent   a   holding   in    their    favor,     the    City    will   have

unfettered    discretion     to      breach    its   contracts      with       public

employees and, therefore, any contracts to which the City is a

party will lack mutuality.           This contention lacks merit because,

under    Maryland     law,   the     City     is   only   permitted       to    make

reasonable modifications to its pension plans and is required to

provide members with a substantially similar program after such

modifications.        See Quinn, 371 A.2d at 726.               Any reduction in

benefits “must be balanced by other benefits or justified by

countervailing equities for the public’s welfare.”                 Id.

     In view of this protection afforded under state law for

breach of contract, we will not apply the Contract Clause to

“require a State to adhere to a contract that surrenders an

essential attribute of its sovereignty” by creating irrevocable

     2
       We disagree with the plaintiffs’ characterization of the
rule in Horwitz-Matthews and Crosby as constitutional avoidance
or abstention.     Instead, we hold that no Contract Clause
violation has occurred because the plaintiffs are unable to
demonstrate an impairment of the members’ contract rights.
     3
        Because the Ordinance has not impaired the members’
contract rights, we do not address the City’s alternative
arguments that any impairment was insubstantial, and that the
Ordinance was reasonable and necessary to achieve an important
public purpose under Baltimore Teachers Union.

                                        15
contract rights binding on all future legislatures.                        U.S. Trust

Co., 431 U.S. at 23.             We hold that the plaintiffs’ allegations

constitute “nothing more than a mere breach of contract, not

rising     to   the      level     of      a        constitutional     impairment      of

obligation,” Crosby, 635 F.3d at 642, and we vacate the district

court’s judgment finding the City in violation of the Contract

Clause.

                                           III.

     We    briefly       address     the       plaintiffs’       cross-appeal.        The

plaintiffs argue that the district court erred: (1) in rejecting

their     additional      Contract         Clause       claims     challenging     other

aspects of the Ordinance; and (2) in dismissing the plaintiffs’

Takings Clause claim as moot.

     The challenged provisions of the Ordinance at issue in the

cross-appeal       involve     the      increase        in   the    age   and    service

requirements for retirement eligibility, the use of a member’s

prior 36 months’ salary rather than prior 18 months’ salary to

calculate the basic benefit, the increase in required member

contributions      over    a   period       of      years,   the   reduction     in   the

interest    rate    on    member     contributions,          and   a   change    in   the

eligibility     requirements         for       the    deferred     retirement     option

                                               16
plan. 4   The plaintiffs argue that the district court erred in

holding that the members do not have “vested” constitutional

rights upon the commencement of their employment and, therefore,

that the court wrongly concluded that these provisions of the

Ordinance   do    not   retrospectively    impair   the    members’    rights

under the Contract Clause.

      In advancing this argument, the plaintiffs cite Article 22,

Section 42 of the Baltimore City Code, which provides:

      Upon becoming [a member of the plan], such member
      shall thereupon be deemed to have entered into a
      contract with the Mayor and City Council of Baltimore,
      the terms of which shall be the provisions of this
      Article 22, as they exist at the effective date of
      this ordinance, or at the time of becoming a member,
      whichever   is  later,   and  the   benefits  provided
      thereunder shall not thereafter be in any way
      diminished or impaired.

Relying   on     this   provision,   the   plaintiffs     assert   that   any

unilateral modifications of the plan made by the City impair the

members’ rights under the Contract Clause.

      We need not decide whether the district court correctly

held that Section 42 does not create constitutionally protected

rights upon the commencement of a member’s employment.                Even if

we assume, without deciding, that such rights exist, our holding

under Crosby governs our consideration of the plaintiffs’ claim

      4
       We observe that these provisions apply only to a subset of
plan members, namely, active members for whom the Ordinance does
not provide a “grandfather” exception.

                                     17
that       the    remaining      provisions       of     the   Ordinance      violate      the

Contract Clause.              As with the Ordinance’s elimination of the

Variable         Benefit,     the     plaintiffs       also    may    seek    a    state    law

remedy for breach of contract related to the other portions of

the Ordinance. 5            The members therefore have not established an

impairment          of    their       rights        under      the     Contract       Clause.

Accordingly, we affirm the district court’s judgment upholding

the Ordinance with respect to these claims.

       The plaintiffs also appeal the district court’s dismissal

of their Takings Clause claim.                   The Takings Clause prohibits the

taking       of     private      property        for     public      use,    without       just

compensation.            U.S. Const. amend. V, XIV.                  In their complaint,

the     plaintiffs        asserted        that      by    eliminating        the     Variable

Benefit, the City has effected a per se taking of the members’

property without just compensation in violation of the Takings

Clause.          After issuing its ruling on the Contract Clause claim,

the    district       court      dismissed       the     plaintiffs’        Takings    Clause

claim       as    moot.         The    court     reasoned       that    any       relief    the

plaintiffs could obtain on their Takings Clause claim would be

duplicative         of    the    relief    awarded        on   their    Contract       Clause

       5
       We express no opinion regarding whether the plaintiffs
will be able to establish the necessary elements of breach of
contract under Maryland law, or the merits of the City’s
possible defenses related to these provisions.

                                               18
claim, other than the possibility of discretionary attorneys’

fees that the court was not inclined to award.

     Given our determination that the plaintiffs have failed to

establish a Contract Clause violation, the plaintiffs’ Takings

Clause claim no longer is moot.             And, because the district court

did not address the substance of the Takings Clause claim, we

vacate the court’s order with respect to this claim and remand

it to the district court to decide in the first instance. 6

                                      IV.

     In   conclusion,        we   vacate    the   district    court’s   judgment

finding   the   City    in    violation      of   the   Contract   Clause   with

respect   to    the    Tiered      COLA,    affirm      the   court’s   judgment

upholding the remaining portions of the Ordinance challenged in

the Contract Clause claim, vacate the court’s order dismissing

the Takings Clause claim, and remand the case to the district

court for further proceedings consistent with this opinion.

                       AFFIRMED IN PART, VACATED IN PART, AND REMANDED

     6
       The plaintiffs may attempt to refile in the district court
their state law claims that were dismissed without prejudice, or
they may initiate proceedings in state court alleging breach of
contract under Maryland law. If the plaintiffs choose to pursue
either of these two courses of action, the district court may
wish to hold any proceedings regarding the Takings Clause claim
in abeyance pending the resolution of related contractual
issues.

                                       19