and
W.K. AUBRY, JR., JAMES BRYAN BARRETT, NORMAN W. CASH, ROBERTA M.
COOK, JOHN ED DAVIS, DANIEL M. DYSON, EDWIN C. GUY, SAMUEL L.
HARMON, JOHN MARSHALL HARTLEY, DONALD ELLIOTT HARTLE, MARTHA M.
LAWING, DOUGLAS LAMAR MASON, DELMA DALTON REPASS, JR., WILLIAM
ELMER RIGGS, PAUL L. SALISBURY, JR., RICHARD A. SHARPE, NELSON
LEROY SHEAROUSE, FRANCIS C. SIMMONS and MARY E. SIMMONS, NED
RAEFORD SMITH, G. VANCE SOLOMON and EULALIA T. SOLOMON, THOMAS
LASH TRANSOU and WILBUR EUGENE YOUNG,
Additional Petitioner-Plaintiffs
v.
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THE
NORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA Respondent-Defendants
v.
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THE
NORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA, and officer ex
officio of the RETIREMENT SYSTEMS, the TEACHERS AND STATE
EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA, and the LOCAL
GOVERNMENT EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA,
Defendants
v.
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THE
NORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA,
Defendants
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THE
NORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA, and officer ex
officio of the RETIREMENT SYSTEMS, the TEACHERS AND STATE
EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA, and the LOCAL
GOVERNMENT EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA,
Defendants
v.
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THENORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA, and officer ex
officio of the RETIREMENT SYSTEMS, the TEACHERS AND STATE
EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA, and the LOCAL
GOVERNMENT EMPLOYEES RETIREMENT SYSTEMS OF NORTH CAROLINA,
CONSOLIDATED JUDICIAL RETIREMENT SYSTEM and the LOCAL GOVERNMENT
EMPLOYEES RETIREMENT SYSTEM OF NORTH CAROLINA,
Defendants
v.
STATE OF NORTH CAROLINA, and HARLAN E. BOYLES, TREASURER OF THE
STATE OF NORTH CAROLINA,
Defendants
On discretionary review pursuant to N.C.G.S. § 7A-31,
prior to a determination by the Court of Appeals, of an order
entered on 10 September 1999 by Thompson, J., in Superior Court,
Wake County. Heard in the Supreme Court 16 May 2000.
G. Eugene Boyce, Keith W. Vaughan, and W. David Edwards
for plaintiff-appellees.
Michael F. Easley, Attorney General, by Norma S.
Harrell, Special Deputy Attorney General, for
defendant-appellants.
WAINWRIGHT, Justice.
This “exceptional case” results from consolidated class
actions filed by state, local, and federal retiree plaintiffs
arising from the taxation of their retirement income and
benefits. On 10 September 1999, in Superior Court, Wake County,
the Honorable Jack A. Thompson entered an “Order Regarding Class
Membership” holding, in essence, that only federal, state, andlocal government retirees who meet the requirements of class
membership are part of and may benefit from the settlement of
this matter and that individuals other than retirees, their
beneficiaries, or estates are not part of the class benefitting
from the settlement. It is from this order that defendants
appeal. For all background, procedural matters, and factual
statements, refer to Bailey v. State, 348 N.C. 130, 500 S.E.2d 54
(1998) (Bailey II).
The question presented on appeal is a determination of
who is and who is not a class member. Plaintiffs contend the
settlement benefits of this action involving recovery of taxes
paid apply only to those individuals, their estates, or their
beneficiaries who, in fact, retired from a federal, North
Carolina state, or local government retirement system and
received retirement benefits. Defendants contend the settlement
benefits to reimburse taxes paid also apply to nonretired former
government employees who, upon their departure from public
employment, received lump-sum return of contribution payments
because they left government service for reasons other than
retirement, such as voluntary resignation or involuntary
termination. We agree with plaintiffs' position.
In Bailey II, we made multiple references to plaintiffs
as being “retirees” and “retired government employees.” See id.
Nowhere in our decision did we imply that a person who left
government employment by resignation, termination, or other than
by becoming a retiree in one of the retirement systems is a class
member. In their original petition and complaint filed 2
October 1992, plaintiffs proposed the class as follows:
All state and local government officials and
employees (or beneficiaries, survivors, etc.,
of such officials and employees) who have
heretofore retired or hereafter retire and
qualify to receive pensions, benefits or
monies which said benefits vested prior to
12 August 1989 pursuant to any of said Plans
or any other Plan, and paid or who pay income
tax on said pensions, benefits or monies and
demanded or demand refunds as herein alleged.
(Emphasis added.)
On 10 June 1998, the parties entered into a “Consent
Order” settling the consolidated lawsuits. The Consent Order
provided, in pertinent part, that
[t]he parties agree that the persons entitled
to refunds for tax years 1989 through 1997
are those persons receiving retirement
allowances by reason of five years creditable
service in a federal government retirement
system or a North Carolina state or local
government retirement system as of August 12,
1989, or their surviving beneficiaries and
estates. The parties further agree that,
henceforth, these persons shall not be liable
for North Carolina income tax on federal
government or North Carolina state or local
government retirement benefits. The parties
reserve the right to continue to seek
agreement, or in the alternative submit to
the Court for its determination, the issue of
“vesting” periods for purposes of tax
liability on withdrawals from Deferred
Compensation and 401-K Plans by federal and
North Carolina state and local government
retirees.
(Emphasis added.)
The Consent Order further expressly limited the claims
released by the settlement to those “arising from the taxation of
State, local and federal retirement income and benefits from 1989
through 1997 as to every State, local or federal retiree.” (Emphasis added.) The “Order Approving Class Action Settlement”
filed 9 October 1998, approved the above-referenced Consent
Order.
On 17 June 1998, Judge Thompson entered an “Order of
Class Certification.” He concluded as a matter of law and
ordered the following:
A. Plaintiffs' motions for class
certification shall be and are hereby
granted, and the plaintiff settlement class
shall consist of (a) all persons who
received, are receiving or will receive
retirement allowances and who had five years
creditable service in a federal government
retirement system or a North Carolina state
or local government retirement system as of
August 12, 1989; (b) all persons who were
“vested”, to the extent that they were
“vested”, as of August 12, 1989, as
determined by the Court, in Deferred
Compensation or 401-K type plans offered to
federal or North Carolina state or local
government employees; and (c) all surviving
beneficiaries and estates of such persons.
B. The members of the class shall be
given the best notice practicable under the
circumstances.
The notices given to prospective class members by the
court in June 1998 included what is referred to as “the long-form
notice.” The long-form notice, in a section titled “What are the
lawsuits about?” provided as follows:
Before the tax year 1989, retirement benefits
of North Carolina state and local government
retirees were exempt from state income tax in
North Carolina. On August 12, 1989, the
General Assembly enacted a law that repealed
the tax exemption and substituted a partial
exemption. The five state and local
government retiree cases (designated as the
Bailey or Emory cases) challenged the
legality and constitutionality of the General
Assembly's 1989 repeal of the statute
exempting state and local governmentannuities and retirement benefits from state
income taxation and sought refunds of taxes
paid and interest. The state and local
government retiree cases cover the past nine
tax years, 1989 through 1997 . . . .
Patton v. State of North Carolina, the
federal retiree lawsuit, is the latest in a
series of class action lawsuits by federal
retirees which assert that North Carolina
violated the U.S. Constitution by taxing
federal retirement benefits in a manner
different from North Carolina state and local
government retiree plan benefits and that
federal government retirement benefits should
be treated no differently than state and
local government retirement benefits . . . .
Against this background, Class Counsel and
representatives of the General Assembly
negotiated a global settlement under the
terms of which the General Assembly will
authorize payment of $799 million in order to
resolve all retiree claims in these cases.
(Emphasis added.)
Judge Thompson, in the “Order Regarding Class
Membership” entered on 10 September 1999, ordered the following:
1. Only North Carolina State and local
government retirees and federal government
retirees who meet the requirements of Class
membership are part of and may benefit from
the Settlement. Individuals other than
retirees, their beneficiaries or estates are
not part of the Settlement and may not
participate in distributions from the Claims
Fund. Thus, for example, lump-sum
distributions by included retirement systems
on account of pre-retirement termination of
employment (whether voluntary or involuntary)
or pre-retirement death are not part of the
Consent Order and the Order Approving Class
Action Settlement because such payments have
not been made to Class Members.
2. For the purposes of the Settlement,
payments by included retirement systems
following the pre-retirement death of a
member of an included retirement plan to a
surviving spouse or beneficiary which are
treated as retirement allowances pursuant toa statutory election by the surviving spouse
or beneficiary are covered by the Consent
Order and Order Approving Class Action
Settlement. Taxes paid on such retirement
allowances shall be treated the same as taxes
paid on other retirement allowances with
respect to calculation of the Overpayment
Amount for the purposes of participation in
payouts from the Claims Fund.
3. Nothing in this Order shall affect
the rights of taxpayers who are not retirees.
(Italics added.)
Notwithstanding the above, defendants contend
“retirement benefits” do include the lump-sum refunds to
individuals for return of contributions. This group consists of
those who did not formally retire from a retirement system but
instead withdrew their retirement system contributions (or whose
contributions were paid to their estates or beneficiaries upon
their deaths prior to formal retirement). We conclude that a
government employee who resigns, who is fired, or who dies before
retiring is not a retiree. These categories of persons have
never been party to these consolidated cases and have taken no
timely steps to intervene. For purposes of clarity, we note that
lump-sum payments for eligible class members from retirement
plans are included in the calculation of settlement proceeds.
Defendants further contend several government
retirement plans do not conveniently fit the requirement that a
class member be a retiree. The purpose for including all the
government retirement plans in previous orders of the trial court
and our Bailey II decision, which might have been affected by the
1989 legislation, was to give anyone potentially qualified as a
class member notice to participate in the settlement fund. Thefact that certain benefits were distributed to nonretirees from
the retirement plans does not affect the definition of the class
receiving funds from this settlement.
We hold the Consent Order, the Order Approving Class
Action Settlement, and the Order Regarding Class Membership, when
read together, sufficiently reveal that persons who resigned; who
left government service for reasons other than retirement; or who
were terminated from state, local, or federal government
employment, and who thereafter received a lump-sum reimbursement
of their respective employee contributions to the retirement fund
and who paid state income taxes on such lump-sum withdrawal of
contributions are not government retirees and are not entitled to
a pro-rata share of the settlement funds and interest earned
thereon now being administered.
For the foregoing reasons, we affirm the decision of
the trial court.
AFFIRMED.
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