And v. King Cnty.

KEVIN DOLAN and a class of similarly situated individuals, Respondents, v. KING COUNTY, a political subdivision of the State of Washington, Respondent,DEPARTMENT OF RETIREMENT SYSTEMS, Appellant.

No. 49876-6-II

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION II

May 1, 2018

UNPUBLISHED OPINION

MAXA, C.J. - This appeal involves the remedies phase of a class action lawsuit in which a class of public defenders employed by organizations with which King County contracted alleged that the County had been obligated to enroll them in Washington's Public Employees' Retirement System (PERS). The Supreme Court held that the County had such an obligation, and remanded for the trial court to address remedies. The Department of Retirement Systems (DRS) later intervened to address various remedy issues.

After more litigation and a second appeal, the class members and the County reached a settlement in which the County agreed that the class members would be retroactively eligible for PERS service credit dating back to 1978. The County also agreed to pay the full amount of retroactive contributions into PERS relating to the class members. Left unresolved was whether the County also would be required to pay approximately $64 million in interest on the retroactive contributions to replace lost investment returns or whether that amount would be "socialized" - spread out among existing PERS participants - through an increase of contributions from existing PERS participants.

While litigation regarding the interest issue was pending, DRS issued a letter informing the County that DRS had decided under authority granted in RCW 41.50.125 to charge the County the full amount of the interest on the retroactive contributions. DRS subsequently argued that because the County did not seek review of this decision under the Administrative Procedure Act (APA), chapter 34.05 RCW, the trial court did not have jurisdiction to address the interest issue. The trial court ruled that it had jurisdiction. After an evidentiary hearing, the court ruled based on equitable principles that the County would be required to pay only a portion of the interest, $10.5 million, on the retroactive contributions.

DRS appeals the trial court's order, arguing that (1) the trial court erred in ruling on the County's interest obligation because the County did not seek review of DRS's interest decision under the APA; (2) the trial court erred in applying equitable principles to determine the County's interest obligation when RCW 41.50.125 authorized DRS to make interest decisions; and (3) even if the trial court properly addressed the interest issue, the court erred because equity does not support imposing only a portion of the interest obligation on the County.

We hold that (1) because the trial court obtained original subject matter jurisdiction regarding the interest matter before DRS's interest decision, under the "priority of action" rule the trial court had exclusive authority to decide the County's interest obligation; (2) the trial court did not err in exercising its equitable authority despite DRS's interest decision becauseRCW 41.50.125's authorization to DRS to charge interest on late PERS payments was not mandatory or exclusive; and (3) the trial court did not err in ruling based on equitable principles that the County was required to pay only a portion of the interest on the retroactive PERS contributions.

Accordingly, we affirm the trial court's interest order and judgment.

FACTS

County's Liability

In 2006, Kevin Dolan filed a class action lawsuit against the County on behalf of all employees of public defender agencies with which the County had contracted to provide legal defense services. The complaint alleged that the class members were entitled to membership and benefits in PERS, but that the County had improperly failed to report their services to DRS or made retirement contributions on their behalf. The class members requested declaratory and injunctive relief concerning the County's obligation to provide PERS benefits and an order requiring the County to make all contributions needed to fund those benefits.

The parties agreed to divide the trial into separate phases to determine liability and, if necessary, remedies. In the liability phase, the trial court ruled after a bench trial that the class members should be considered public employees for purposes of coverage under PERS. Based on its decision, in April 2009 the court issued a permanent injunction requiring the County to enroll class members in PERS. The court reserved decision on all other issues.

The County appealed to the Supreme Court. Dolan v. King County, 172 Wn.2d 299, 310, 258 P.3d 20 (2011) (Dolan I). In its opinion, the court recounted events between the mid-1980s through 2005 in which the County exercised increasing control over the defender organizations. Id. at 303-08. The court concluded that the County had "gradually extended its right of controlover the defender organizations until they indeed have become vassal agencies of the county." Id. at 318-19. As a result, the court affirmed the trial court, held that the plaintiffs were County employees for purposes of PERS and were entitled to be enrolled in PERS, and remanded for further proceedings regarding remedies. Id. at 301, 322.

On remand, the trial court entered an order modifying its permanent injunction and ordering that the County enroll all currently employed class members in PERS. The County complied in April 2012. The trial court's order did not address the extent to which class members were entitled to retroactive service credit and how retroactive benefits would be funded.

Initial Settlement Agreement and Trial Court Approval

In December 2012, the County and the class entered into a tentative settlement agreement that was contingent on court approval. The County agreed to pay PERS contributions for retroactive PERS-eligible service back to 1978. The agreement stated that the County's PERS contributions would total approximately $30 million, which accounted for both employer and employee contributions. The settlement agreement was expressly conditioned on the County not having to pay interest on the retroactive contributions.

As part of the settlement agreement, the class released a variety of potential claims, including for other non-PERS benefits and denial of wages. The County agreed not to pursue a statute of limitations defense that, if successful, would have limited service credit for any time period more than three years before the lawsuit was filed. The County also agreed not to seek reimbursement from class members for the employee shares of the retroactive contributions.

The County and the class filed a joint motion for preliminary approval of the settlement agreement. The trial court preliminarily approved the settlement agreement in an order in March 2013. The preliminary approval order allowed DRS to submit objections to the settlement.

Shortly after the court's preliminary approval, DRS moved to intervene. The trial court issued a ruling denying DRS full intervention. But the court allowed DRS limited intervention to object to the settlement agreement and to have the right to appeal. In addition, the court stated that DRS would be subject to the court's orders, if any, requiring implementation of the settlement agreement.

In June 2013, the trial court entered an order granting final approval of the settlement agreement. The court ruled that DRS had no legal authority to charge the County interest and added that, even if DRS had such authority, charging interest would be unfair, inequitable, and arbitrary and capricious. The court retained jurisdiction over the matter and stated that the parties, as well as DRS, were subject to and were required to comply with the order.

Settlement Agreement Appeal

DRS appealed the trial court's approval order to this court. Dolan v. King County, No. 44982-0-II (Wash. Ct. App. Nov. 18, 2014) (unpublished), http://www.courts.wa.gov/opinions/ (Dolan II). DRS argued that the APA removed the trial court's original subject matter jurisdiction for matters affecting PERS, that the court erred in ruling that its final approval bound DRS, and that the court erred in denying DRS's motion to intervene as a full party. Id. at 1.

On jurisdiction, this court noted that the superior court had original jurisdiction except where exclusive jurisdiction was vested in another court. Id. at 10. The court stated that where the APA applies, it divests superior courts of original jurisdiction. Id. But under RCW 34.05.510, the limit on a superior court's original jurisdiction applies only where there has beenan "agency action." Dolan II, slip op. at 10. The court determined that DRS had taken no specific agency action and as a result, the APA had not removed the trial court's original subject matter jurisdiction. Id. at 10-11.

On the other two issues, the court agreed with DRS. First, the court held that DRS could not be bound by the trial court's final approval order because it was not a party to the settlement agreement. Id. at 11-12. Second, the court held that the trial court had erred in granting DRS only partial intervention. Id. at 14. The court reversed the trial court's final approval order, reversed the trial court's partial intervention order, and remanded for further proceedings. Id. at 14-15.

Modification of Settlement Agreement

On remand, DRS was allowed to intervene as a full party. The class subsequently moved to modify the trial court's April 2009 permanent injunction to clarify issues of service credit for class members. The class and the County also submitted a stipulation reaffirming the prior settlement agreement and clarifying certain issues. The stipulation stated that the County would pay any interest required by agreement between the County and DRS or by court order. DRS filed an opposition to the motion to modify.

On June 5, 2015, the trial court entered an Order...