Oral arguments slated this week on March 5, 6 and 7
The Michigan Supreme Court will hold oral arguments on March 5, 6, and 7. Case summaries, prepared by the Court’s Office of Public Information, are below. They are also available online with briefs in the cases at http://courts.mi.gov/Courts/MichiganSupremeCourt/Clerks/Oral-Arguments/Pages/default.aspx.
Unless otherwise directed below, Court will convene at 9:30 a.m. at the Michigan Hall of Justice.
Tuesday, March 5, 2013
Macomb County Road Commission
v AFSCME Council 25 (144303)
Summary:
Under collective bargaining agreements with various unions, Macomb County provides pension plan options to its employees, including “straight life,” in which benefits end with the retiree’s death, and “joint-and-survivor,” in which the retiree’s spouse continues to receive benefits after the retiree’s death. The collective bargaining agreements provided that, upon retirement, “the employee shall receive a retirement allowance as provided in Section 22 of the [Macomb County] Retirement Ordinance.” Section 22 of the ordinance describes how a standard straight life pension benefit is to be calculated, and states that the calculation for union members shall be “as detailed in the collective bargaining agreement in effect” at the time of the union employee’s retirement. Section 26(a) of the retirement ordinance covers various joint-and-survivor options, but requires that all of the options must be the “actuarial equivalent” of a straight life pension. Many of the collective bargaining agreements also contained language referring to §26(a) and the fact that the joint-and-survivor options were required to be the “actuarial equivalent” of straight life pension benefits.
The collective bargaining agreements also provided that disputes regarding those pension provisions were subject to grievance procedures ending in binding arbitration. Except for the contract between the Macomb County Road Commission and AFSCME Local 893, all of the contracts contained the following paragraph:
Retirement Benefits. The Employer shall continue the benefits as provided by the presently constituted Macomb County Employees’ Retirement Ordinance and the Employer and the employee shall abide by the terms and conditions thereof, provided, that the provisions thereof may be amended by the Employer as provided by the statutes of the State of Michigan and provided further that an annual statement of the employee’s contributions will be furnished to the employees [sic].
Before 1982, calculations of optional joint-and-survivor pension benefits factored in the retiree’s gender because the average life spans of men and women differed. But in 1978, the U.S. Supreme Court held that the usage of separate mortality tables for male and female public retirees constituted unlawful gender discrimination. City of Los Angeles Dept of Water & Power v Manhart, 435 US 702; 98 S Ct 1370; 55 L Ed 2d 657 (1978). The Michigan Attorney General later issued an opinion that public pension systems must adopt gender-neutral mortality tables.
In response, the Macomb County Retirement Commission, after an actuarial study, adopted a gender-neutral mortality table based on 100 percent female mortality/0 percent male mortality rates. The commission recognized that doing so would result in higher overall costs to the retirement system, but adopted the table to ensure that none of the retirees would receive a lesser benefit than under the prior table. The county also amended Section 15 of the retirement ordinance to read:
The Retirement Commission shall from time to time adopt such mortality and other tables of experience, and a rate or rates of regular interest, as are necessary in the Retirement System on an actuarial basis. For purposes of determining actuarial equivalent Retirement Allowances, the Retirement Commission is currently using a 7-1/2% interest rate and a blending of male and female rates based on the 1971 group annuity mortality table projected to 1984 with ages set back 2 years .
In 2006, the Macomb County Retirement Commission adopted new gender-neutral tables — 60 percent male, 40 percent female — after an actuarial audit indicated that retirees who elected a joint-and-survivor benefit were receiving more in benefits than they would have received if they had elected to receive straight life benefits. This difference contravened the retirement ordinance’s requirement that all forms of benefits be the “actuarial equivalent” of a straight life benefit. As a result of the 2006 change, employees who retired after July 1, 2007, and elected joint-and-survivor benefits received lower monthly benefits than they would have received if they had retired before that date.
Unions representing the affected employees demanded bargaining over the change, but the respondents — Macomb County, Macomb County Road Commission, and Macomb County Circuit Court — rejected the demand. The unions then filed unfair labor practice charges with the Michigan Employment Relations Commission, claiming that the respondents had violated their duty under § 10(1)(e) of the Michigan Public Employment Relations Act to bargain over benefits. MCL 423.210(1)(e).
An administrative law judge found that pension benefits, and the method of calculating them, are mandatory subjects of bargaining. But the judge recommended that the commission dismiss the unions’ complaint, finding that their claims were covered by the collective bargaining agreements and the retirement ordinance, and that the unions’ avenue of relief was therefore limited to the grievance and arbitration procedure in the collective bargaining agreements. The judge noted that the collective bargaining agreements incorporated § 26 of the ordinance, which describes the optional joint-and-survivor benefits as “actuarially equivalent” to the straight-life benefits. The term “actuarially equivalent” represented a bargained benefit; although the meaning of the term “actuarially equivalent” as used by the parties was ambiguous, the county respondents’ unilateral change in the benefits paid under the optional joint-and-survivor plan did not give rise to an unfair labor practice claim, the judge stated.
The MERC reversed and ordered the respondents to continue using the 100% female/ 0% male mortality table and make whole any retirees whose benefits were reduced, including interest. As did the administrative law judge, MERC held that retirement benefits and the methods of calculating them are mandatory subjects of bargaining. But, the commission said, the term “actuarial equivalent” was ambiguous and the actuarial assumptions were never codified in the retirement ordinance or in the collective bargaining agreements. Moreover, the parties, by their conduct, had effectively amended their contracts to provide that the use of the actuarial table in effect from 1982 to 2007 had become a term and condition of employment because “the parties had tacitly agreed that joint and survivor benefits would continue to be as they had in the past,” the commission stated. Therefore, the unions had valid unfair labor practice charges and were not limited to the grievance and arbitration procedure in the collective bargaining agreements, the commission concluded.
The respondents appealed, but in a 2-1 published opinion, the Court of Appeals majority affirmed the MERC’s decision. The majority agreed with the MERC that the term “actuarial equivalent” was ambiguous, and that the parties’ past practices had rendered the use of the 100 percent female mortality table a term and condition of employment that cannot be unilaterally altered. Even if “actuarial equivalent” was not ambiguous, the parties’ conduct showed they intended to alter the collective bargaining agreements, the majority said.
The dissenting Court of Appeals judge said that the term “actuarial equivalent” is not ambiguous. The retirement commission is vested with the authority to determine and adopt mortality tables and other statistics necessary to ensure that various retirement options are “actuarial[ly] equivalent,” the dissent said, so the matter was not a mandatory subject of bargaining. But even assuming that the change in actuarial tables was a mandatory subject of bargaining, the dissenting judge said, the unfair labor practice complaint should be dismissed because the subject was covered by the collective bargaining agreements and the retirement ordinance.
The majority and dissent both cited the Michigan Supreme Court’s decision in Port Huron Ed Ass’n v Port Huron Area School Dist, 452 Mich 309 (1996). In Port Huron, the school district had, for several years, provided health benefits for the entire summer to teachers hired mid-year, even though the collective bargaining agreement expressly provided for proration of such benefits under those circumstances. After a few years, teachers who were hired mid-year were denied benefits for a portion of the summer, and the union filed an unfair labor practice charge. The parties disagreed as to the meaning of “proration of benefits,” with the union asserting that the parties’ past practice had become a binding condition on the school district. The Court acknowledged that, as held in prior cases, where a collective bargaining agreement is silent or ambiguous, a past practice of the parties can become a binding term or condition of employment. But, the Supreme Court said, a “higher standard of proof is required” where the parties’ past practices conflict with the agreement’s plain language. That higher standard requires “[t]he party seeking to supplant the contract language [to] . . . submit proofs illustrating that the parties had a meeting of the minds with respect to the new terms or conditions — intentionally choosing to reject the negotiated contract and knowingly act in accordance with the past practice.” The party seeking to enforce the modification must also show “that the past practice was so prevalent and widely accepted that there was an agreement to modify the contract.” In the case of the Port Huron school district, the Court said, there was no basis for such a finding because there was no evidence that “the previous payments of insurance benefits were anything more than a mistake.” The Court added, “Simply because a party ‘knew or should have known’ that it was acting contrary to the agreement is insufficient to overcome [the] express language of the agreement.”
The majority said, citing Port Huron, that the parties’ actions and knowledge showed that the parties intended to make “an unequivocal modification” to the collective bargaining agreements. Relying in part on the 1982 actuarial report, in which the county’s actuary discussed the implications of various male/female mortality blends, the majority said that the parties made a “deliberative acceptance” of that modification “based on a clear understanding of the implications.” But the dissent said that “[t]he retirement commission’s long use of a 100 percent female mortality table to determine that optional retirement benefits were the actuarial equivalent of a straight-life benefit is not the clear and unmistakable evidence necessary to overcome the clear and unambiguous terms of the parties’ CBAs and the retirement ordinance … It also does not evidence that the ‘parties knowingly, voluntarily, and mutually agreed’ to amend the CBAs.”
The Court of Appeals denied the respondents’ request for reconsideration and the respondents appealed to the Supreme Court. In an order dated May 9, 2012, the Supreme Court granted leave to appeal. The Court directed the parties to “address whether the Court of Appeals properly applied the holding of Port Huron Ed Ass’n v Port Huron Area School Dist, 452 Mich 309 (1996), when it concluded that the parties intended to modify the collective bargaining agreement by use of the 100% female/ 0% male mortality tables.”
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Hillsdale County Senior Services
v Hillsdale County (144630)
Summary:
Hillsdale County Senior Services Center, Inc., is a Michigan non-profit organization doing business as Perennial Park; the center provides classes, Meals on Wheels, counseling, and other services to help seniors remain at home and independent. Perennial Park receives some funding from Hillsdale County. Under the Activities or Services to Older Persons Act, MCL 400.571, “[a] local unit of government may appropriate funds to public or private nonprofit corporations or organizations for the purposes of planning, coordinating, evaluating, and providing services to older persons.” MCL 400.573. The act also provides for local units of government to raise funds for such services through a millage. MCL 400.576.
In 2008, the Hillsdale County Board of Commissioners submitted a millage proposal to levy up to .5 mill for senior services. The ballot language read, “Shall the limitation on the amount of taxes on the general ad valorem taxes within the County of Hillsdale imposed under Article IX, Section 6, of the Michigan Constitution be increased for said County by .5 mill ($0.50 per $1000 of taxable value) for the period of 2008 to 2022, inclusive, for the intended purpose of planning, coordinating and providing services to older persons by Hillsdale County Senior Services Center, Inc., as provided by Public Act 39 of 1976? Shall the county levy such increase in millage for this purpose during such period which will raise in the first year and [sic] estimated $676,532?”
The millage was passed at the August 5, 2008, election. Because Hillsdale County voters had previously passed a senior services millage for authority to levy .5 mill for 2005-2024, Hillsdale County has current taxing authority for a maximum of 1 mill.
In November 2009, Perennial Park and Hillsdale County entered into a contract for Perennial Park to provide services for seniors from January 1, 2009, through December 31, 2010. The contract provided in part “that in no event will the annual compensation to be paid by the County to the Center under this Agreement from the Senior Citizens Millage Fund exceed the sum of revenue from the two millages, unless this Agreement is formally amended.” The contract also stated that, while a July 2005 lease agreement between Perennial Park and the county remained in effect, “the total compensation paid to the Center shall not be less than the revenue received by the County from the 2004 millage, being one-half (1/2) mill less applicable State required rollbacks (e.g., Headlee/Proposition A).” The contract also provided for the center to submit an annual appropriation request to the county commission, and added, “The Center understands that the appropriation request … shall be one of the factors used for the County Commission’s determination of the amount of the approved voted millage to be spread (levied) for the calendar year in question.”
For the 2009-2010 fiscal year, the county board of commissioners approved a budget and appropriated $836,463.00 to Perennial Park; the board levied the full .5 millage from the 2004 millage and an additional .15 mill from the 2008 millage. For the 2010-2011 fiscal year, the board proposed to appropriate $924,517.00, which included the full .5 mill from the 2004 millage and an additional .25 mill of the .5 maximum authorized by the 2008 millage.
On October 28, 2010, Perennial Park, and some Hillsdale residents who receive services from the center, sued the county in circuit court. The plaintiffs argued that, under the 2008 ballot proposal, the board was obligated to levy the full .5 mill each year. The circuit judge agreed, finding that, under the plain language of the ballot proposal, the voters approved a full .5 mill; accordingly, the judge ordered the county board to levy the entire 0.5 mill in December 2010 tax notices “and every year hereafter until 2022….” But the judge declined to order the county to levy the full .5 mill for 2008 and 2009, saying “there is no legal remedy at law to order the restitution of unlevied taxes for those years.”
The county appealed, and in an unpublished per curiam opinion, the Court of Appeals reversed and vacated the circuit court’s order of mandamus.
Under MCL 600.605, circuit courts have “original jurisdiction to hear and determine all civil claims and remedies, except where exclusive jurisdiction is given in the constitution or by statute to some other court or where the circuit courts are denied jurisdiction by the constitution or statutes of this state,” the appellate panel noted. But, under MCL 205.731(a), the Tax Tribunal has exclusive jurisdiction over a “proceeding for direct review of a final decision, finding, ruling, determination, or order of an agency relating to assessment, valuation, rates, special assessments, allocation, or equalization, under the property tax laws of this state.”
Citing Jackson Dist Library v Jackson Co, 146 Mich App 412 (1985), rev’d on other grounds, 428 Mich 371 (1987), the panel said that the Tax Tribunal — not the circuit court — had subject-matter jurisdiction over the dispute. MCL 205.703(d) defines a “proceeding” to include “appeal,” and the statute also defines “agency” to include “a board, official, or administrative agency” empowered to make determinations or orders which are subject to review by the Tax Tribunal, the Court of Appeals reasoned. Perennial Park was in effect appealing the county board’s final determination to roll back a tax levy, and the board could be considered an “agency,” the panel said.
“As in Jackson Dist Library, the question presented by plaintiffs’ action relates to direct review of a determination of rates under the property tax laws,” the Court of Appeals declared. “Accordingly, the Tax Tribunal has subject-matter jurisdiction and the circuit court lacked jurisdiction to enter a judgment of mandamus.”
The plaintiffs appealed. In an order dated September 21, 2012, the Supreme Court granted leave to appeal. The Court directed the parties to “address: (1) whether the Michigan Tax Tribunal has jurisdiction, pursuant to MCL 205.731, over the plaintiffs’ claim for mandamus to enforce the terms of the August 2008 Hillsdale County millage that levied an additional .5 mill for funding the Hillsdale County Senior Services Center, Inc., and (2) whether a court has the constitutional authority to issue a writ of mandamus to compel a municipality to levy and spend taxes.”
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Bailey v Schaaf (144055)
Summary:
On August 4, 2006, residents of the Evergreen Regency Townhouses in Flint observed Steven Schaaf – who was neither an Evergreen resident nor a guest – brandishing a gun and threatening to kill someone. A number of Evergreen residents called the police; Evergreen resident Laura Green said she alerted security guards William Baker and Christopher Campbell, and pointed Schaaf out to them more than once, but the guards did nothing. Minutes later, Schaaf shot Devon Bailey, a guest at the complex, rendering Bailey a paraplegic. Schaaf later pleaded no contest to assault with intent to commit murder and other charges; he is currently serving concurrent prison terms of 25 to 54 years.
Bailey sued Schaaf, security guards Baker and Campbell, and their employer, Hi-Tech Protection Inc., as well as Hi-Tech’s owner, Timothy Johnson. Bailey later amended his complaint to add Evergreen and its management company, Radney Management and Investments, Inc. Bailey claimed, among other matters, that Evergreen and Radney had a duty to protect Evergreen tenants and their guests from unreasonable risks of harm from the foreseeable criminal acts of third parties in Evergreen’s common areas. Bailey contended that Hi-Tech had a history of incompetence and failing to protect, and that Evergreen and Radney were therefore negligent in hiring Hi-Tech; he also alleged that Hi-Tech and Johnson were negligent in their hiring and supervision of Baker and Campbell, who, Bailey claimed, had a history of incompetence. Bailey also maintained that Hi-Tech and Johnson were vicariously liable for the security guards’ actions and that Evergreen and Radney were vicariously liable for Hi-Tech, Johnson, and the guards. In effect, the guards were acting as the apartment complex’s agents, Bailey claimed. Bailey also argued that, as an invitee on the Evergreen premises, he was a third-party beneficiary of the security contract between Hi-Tech, Evergreen/Radney, and that those defendants had breached a contractual duty by failing to protect him.
Schaaf failed to answer the complaint and the court later entered a default judgment against him. The other defendants moved for partial summary disposition, asking the circuit court to dismiss Bailey’s claims. The defendants argued that Baker and Campbell did not have a duty to protect or help Bailey; moreover, Evergreen owed no duty to maintain security guards, and assumed no such duty by retaining a security service, the defendants contended. In addition, the defendants maintained, Hi-Tech and Radney had no legal relationship with Bailey that would give rise to a duty to him. Bailey also moved for partial summary disposition, asking the court to rule that, as a matter of law, Evergreen, Radney, and Hi-Tech owed a duty to Bailey on the day of the shooting, based on a contract between Evergreen/Radney and Hi-Tech.
After hearing the parties’ arguments, the circuit judge ruled in favor of the defendants, ultimately dismissing all of Bailey’s claims, except those against Schaaf. Among other things, the judge ruled that there was no contract between Evergreen/Radney and Hi-Tech on the day of the shooting. The judge also rejected Bailey’s claim that Evergreen and Radney were negligent in failing to respond — through the security guards, acting as Evergreen/Radney’s agents — to the imminent threat that Schaaf posed to lawful invitees.
Bailey appealed. In a published, unanimous decision, the Court of Appeals affirmed in part and reversed in part, remanding the case to the circuit court for further proceedings. The appellate panel upheld most of the lower court’s rulings; however, the circuit court erred in holding that Bailey had failed to state a claim that Evergreen and Radney were negligent in failing to respond to the risk of imminent harm Schaaf presented, the panel said.
In general, “a landlord must exercise reasonable care to protect invitees from known or discoverable unreasonably dangerous conditions on the land” — and that duty includes using reasonable care to protect tenants and guests “from foreseeable criminal activities in common areas inside the structures they control,” the Court of Appeals explained. But landlords do not have a duty to make common areas safer than public streets, the panel observed.
The appellate court looked to the Michigan Supreme Court’s decision in MacDonald v PKT, Inc, 464 Mich 322 (2001). In MacDonald, the plaintiffs were injured at Pine Knob music concerts by members of the crowd hurling lumps of sod. The Supreme Court observed that a merchant has a “duty to respond reasonably to situations occurring on the premises” to protect its guests from imminent and foreseeable harm, but that duty does not require merchants to “provide security personnel or otherwise resort to self-help in order to deter or quell such occurrences,” the MacDonald Court said. Rather, the merchant’s duty is to make reasonable efforts to summon the police, the Court said.
At issue, the Court of Appeals said, was whether MacDonald and similar cases applied to apartment complexes as well as merchants. “To our knowledge, this is an issue of first impression,” the appellate panel said.
“[W]e believe that the limited duty that MacDonald imposes on merchants must necessarily apply to landlords in light of a landlord’s closer relationship to its tenants and their guests,” the Court of Appeals reasoned. “If a merchant — with lesser ability or responsibility to control or protect its invitees than a landlord — is nevertheless required to take reasonable efforts to contact the police in response to a situation presently occurring on the premises that poses an imminent risk of harm to identifiable invitees, then surely it is logical to hold a landlord, who is in a relationship of higher control, to the same standard.”
Extending MacDonald to Bailey’s case, the Court of Appeals concluded that “Evergreen and Radney as premises proprietors, clearly had a duty to ‘respond[] reasonably to situations occurring on the premises,’ which included a duty to call the police when required.” Although the security guards were not employees of Evergreen or Radney, if they acted as the apartment complex’s agents, the guards had a duty to summon the police on Evergreen and Radney’s behalf, the appellate panel said. “Reading Bailey’s allegations as a whole and taking them as true, we conclude that Bailey stated a claim against Evergreen and Radney premised on the failure of their agents to respond appropriately to criminal activities on their principal’s property.”
Evergreen and Radney appealed, arguing in part that the security guards were not their agents, and that, in any event, the guards had no duty to call the police because many Evergreen residents had already done that. Moreover, Bailey cannot show that the security guards’ alleged negligence caused his injuries; even if the guards had called the police, the police could not have arrived in time to prevent the shooting, the defendants contend.
Bailey also appealed, maintaining, among other matters, that there was a security services contract between Hi-Tech and Evergreen/Radney as of July 2006 that obligated Hi-Tech to protect tenants and their guests from trespassers’ criminal acts. Moreover, the Court of Appeals erred in upholding the circuit court’s dismissal of Bailey’s claims against Hi-Tech, Bailey argued.
In an order dated May 23, 2012, the Supreme Court granted leave to appeal to the defendants. The Court directed the parties to “include among the issues to be briefed whether the Court of Appeals erred when it extended the limited duty of merchants — to involve the police when a situation on the premises poses an imminent risk of harm to identifiable invitees, see MacDonald v PKT, Inc, 464 Mich 322 (2001) — to landlords and other premises proprietors, such as the defendant apartment complex and property management company.” The Court added that Bailey’s “application for leave to appeal as cross-appellant remains pending.”
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Malpass v Department of Treasury (144430-2)
Summary:
The plaintiffs, members of the Malpass family, own and control two Michigan companies: East Jordan Iron Works, which operates an iron foundry in East Jordan, Michigan, and Ardmore Foundry, Inc. which operates a foundry and distribution center in Oklahoma. East Jordan Iron Works’ resident agent, corporate offices, and principal place of business are located at 301 Spring Street, East Jordan, Michigan; Ardmore’s resident agent is also located at this address.
The two companies are subchapter S corporations, which mean that neither pays federal income taxes. Instead, their income or loss is passed through to their shareholders, who report that income or loss on their individual income tax returns.
When the plaintiffs initially filed their individual Michigan tax returns for 2001, 2002, and 2003, they treated the business income from East Jordan and Ardmore as from two separate businesses. The plaintiffs attributed the business income from East Jordan to Michigan, and included it as income on their returns; they attributed losses from Ardmore to Oklahoma, and added those losses back into their adjusted gross income for Michigan individual income tax purposes. Mich Admin Code, R 206.12(20) provides that “Distributive income from a subchapter S corporation not allocated or apportioned to Michigan may be claimed as a subtraction from adjusted gross income. Conversely, losses not allocated or apportioned to Michigan shall be added to adjusted gross income.”
But later, the plaintiffs filed amended individual returns for the same years, treating East Jordan and Ardmore as a unitary business, offsetting East Jordan’s gains with Ardmore’s losses and applying the Michigan apportionment factors to both companies. Based on these amended returns, the plaintiffs sought refunds totaling over $1 million.
The Michigan Department of Treasury denied the plaintiffs’ amended returns; the plaintiffs appealed to the Court of Claims. The Department of Treasury moved for summary disposition, arguing that the Michigan Income Tax Act, MCL 206.1 et seq., does not allow the unitary business principle to be applied to individual income tax situations. Under the ITA, the plaintiffs were not permitted to use a combined filing method based on the unitary business principle, the department contended.
The plaintiffs countered with their own motion for summary disposition; they argued that East Jordan and Ardmore are a unitary business. In support, the plaintiffs offered an affidavit from East Jordan’s treasurer, in which he attested that the two companies constituted a unitary business.
The Court of Claims ruled in the plaintiffs’ favor, holding that East Jordan and Ardmore were a unitary business and that the plaintiffs were entitled to a tax refund. The court held that the unitary business principle is recognized in Michigan law and applies to Michigan income tax filings. Although the Legislature had not explicitly referred to the unitary business principle in the ITA, it nonetheless incorporated the principle into the act, the Court of Claims reasoned. The court cited MCL 206.110(1), which provides, “For a resident individual . . . all taxable income from any source whatsoever, except that attributable to another state under [MCL 206.111 to MCL 206.115] and subject to [MCL 206.255], is allocated to this state.” Moreover, MCL 206.115 provides, “All business income, other than income from transportation services shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3.”
Taking MCL 206.110 and MCL 206.115 together, the court stated: “Clearly, based on the plain language set forth in Sections 110 and 115, the Michigan Legislature has adopted the unitary business principle, because it has chosen to require the apportionment of all business income according to a statutory formula.” MCL 206.115 does not distinguish between unitary and nonunitary businesses, but the ITA’s apportionment formula could only be constitutionally applied to a unitary business, the Court of Claims said.
But the Court of Appeals reversed, holding that the Court of Claims erred in allowing the plaintiffs to combine their business income from the two companies for the purposes of MCL 206.115. “There is no provision in the ITA that allows individuals to combine their business income from separate businesses and then use a combined apportionment formula on the total,” the appellate court declared. “[A]llowing the plaintiffs to combine all their business income from separate entities and then apportion it based on the apportionment factors, or alternately requiring other similarly situated taxpayers to do so whether or not the result would be favorable to them, would raise due process concerns and cause the ITA to be applied inconsistently.”
Under the Due Process and the Commerce Clauses of the Constitution, a state may not, when imposing an income-based tax, “tax value earned outside its borders,” the appellate panel noted. Accordingly, states are permitted to tax multistate businesses “on an apportionable share of the multistate business carried on in part in the taxing State,” the Court of Appeals explained, citing the U.S. Supreme Court’s decision in Allied-Signal v Director, Division of Taxation, 504 US 768 (1992). “This is known as the ‘unitary business principle.’”
In determining whether companies constitute a “unitary business,” courts consider five factors: 1) economic realities, 2) functional integration, 3) centralized management, 4) economies of scale, and 5) substantial mutual interdependence, the panel explained. The Court of Appeals acknowledged that, based on the treasurer’s affidavit, the two companies “have many characteristics of a unitary business. However, they remain separate and legally distinct business entities, and nothing in the ITA allows for combined-entity reporting.” The court noted, among other matters, that Ardmore’s stock was not owned by East Jordan, but by members of the Malpass family.
The Court of Claims interpreted “all business income” in MCL 206.115 to mean “that all business income, no matter what the source, must be added together and then apportioned by the apportionment factors,” the Court of Appeals said. The Court of Claims correctly recognized that this approach would violate the constitutional prohibition against a state taxing income earned outside its borders — unless companies in different states were operating in a unitary fashion. Accordingly, the Court of Claims reasoned, the legislature must have intended to incorporate the unitary business principle into the statute.
But, “[w]hile this approach may be constitutionally permissible, it would cause MCL 206.115 to be applied inconsistently with respect to different taxpayers … For example, a petitioner who holds interests in multiple separate entities could attempt, on one hand, to exclude his or her out-of-state businesses that turn a profit from inclusion and apportionment, while arguing on the other hand that the petitioner’s other out-of-state businesses that post a loss should be included and apportioned to his or her advantage.” The Court of Claims approach would probably lead to “arbitrary decisions and unnecessarily protracted litigation,” the Court of Appeals opined.
“[A] consistent approach would be to apportion all business income at the entity level. That way, if the business conducts multistate activity, the income will be apportioned accordingly. If the business has no nexus to Michigan, none of that income will be attributed to Michigan because its property factor, payroll factor, and sales factor will all be zero,” the panel stated.
Michigan treasury regulations call for business income to be “allocated or apportioned to the state in which the activity took place,” the Court of Appeals said, citing Mich Admin Code Rule 206.12(3). “Therefore, if a resident earns business income that is derived from another state, it is allocated to that state. However, if the business income is attributable to Michigan and one or more other states, Rule 206.12(4) requires that it be apportioned as calculated by the formula in MCL 206.115.”
The income from Ardmore, including its losses, must be attributed to Oklahoma “in which the activity took place,” the panel reasoned. “Because the losses sustained by Ardmore are not attributable to Michigan, they are not allocated or apportioned to Michigan and are added back to plaintiffs’ adjusted gross income.”
The plaintiffs appealed. In an order dated October 4, 2012, the Supreme Court granted leave to appeal, ordering the case to be argued and submitted with Wheeler Estate v Department of Treasury.
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145367-70 - Wheeler Estate v
Department of Treasury
Summary:
The petitioners in this case were shareholders of an S corporation called Electro-Wire Products, which makes electrical systems for Ford Motor Company. Because Ford wanted Electro-Wire to establish a world-wide presence, in 1994, Electro-Wire acquired all the business assets of a German company, Temic Telefunken Kabelsatz, GmbH (TKG) which also manufactured and assembled electrical distribution systems. Two general partnerships were created: (1) an operating company, also named Temic Telefunken Kabelsatz, GmbH, which held all TKG’s purchased assets and (2) a holding company, Electro-Wire Products, GmbH (EWG), which held a 99.5 percent partnership interest in TKG. Electro-Wire held a 99 percent partnership interest in EWG, as well as the remaining 0.5 percent partnership interest in TKG. As an S corporation and two general partnerships, Electro-Wire, EWG, and TKG were flow-through entities for tax purposes, meaning that their income or loss is passed through to their shareholders, who report that income or loss on their individual income tax returns.
In 1994 and 1995, the petitioners received flow-through income from Electro-Wire, which included Electro-Wire’s distributive share of the partnership income from TKG. The petitioners reported this income by treating Electro-Wire and TKG as a unitary business and combining their apportionment factors.
The Michigan Department of Treasury audited the petitioners for those years and sent them a tax bill. The unitary business principle did not apply to individuals under the Michigan Income Tax Act, MCL 206.1 et seq., the treasury department asserted; accordingly, the petitioners should have applied Electro-Wire’s apportionment factors to Electro-Wire’s income alone, independently of TKG.
A Department of Treasury hearing referee concluded that the unitary business principle applied and that the petitioners were entitled to combine the apportionment factors of the S corporation and the German partnerships, but a hearings administrator rejected that recommendation and held that the unitary business principle did not apply in the absence of statutory authorization. The petitioners were ordered to pay $822,460 in taxes, plus a $81,082 penalty and $786,629 in interest.
But the Michigan Tax Tribunal overturned that directive, concluding that the unitary business principle does apply to individual income taxes, including the petitioners’ income from the German partnerships. TKG and Electro-Wire were unitary during the years in question, and the petitioners had properly used the apportionment factors of the entire unitary business to apportion their income to the state of Michigan, the tribunal said.
The Department of Treasury appealed, but in a unanimous published opinion, the Court of Appeals affirmed the tax tribunal’s ruling, saying that the three entities did meet the criteria for a “unitary business.”
The Michigan Income Tax Act provides that income a taxpayer earns in Michigan must be allocated to Michigan for tax purposes. Section 110(1) of the MITA states:
For a resident individual . . . all taxable income from any source whatsoever, except that attributable to another state under sections 111 to 115 and subject to section 255, is allocated to this state. [MCL 206.110(1).]
But if a taxpayer has income from activities in other states as well as Michigan, that income is allocated pursuant to MCL 206.115, which provides:
Before January 1, 2012, all business income, other than income from transportation services, shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3.
The Michigan Court of Appeals cited the U.S. Supreme Court’s decision in Allied-Signal, Inc v Div of Taxation Director, 504 US 768 (1992). Recognizing that some multistate businesses cannot allocate their income to specific states, the Court held that the “unitary business principle” allows states to tax multistate businesses “on an apportionable share of the multistate business carried on in part in the taxing State.” In order to exercise multi-state apportionment under the unitary business principle, there must “be some sharing or exchange of value not capable of precise identification or measurement — beyond the mere flow of funds arising out of a passive investment or a distinct business operation — which renders formula apportionment a reasonable method of taxation,” the Allied-Signal Court stated.
In applying the unitary business principle to this case, the Michigan Court of Appeals looked to two recent Court of Appeal decisions: Preston v Dep’t of Treasury, 292 Mich App 728 (2011), and Malpass v Dep’t of Treasury, 295 Mich App 263 (2012).
In Preston, the taxpayer sought to offset gains earned by his Michigan nursing homes with losses suffered by out-of-state businesses. The Michigan nursing homes were owned by one of 22 lower-level partnerships; the remaining partnerships operated nursing homes outside Michigan. All 22 partnerships distributed their gains and losses to a higher-level partnership, which owned 99 percent of the lower-level partnerships and distributed their combined income to the taxpayer. The Court of Appeals held in that case that the high-level partnership operated the lower-level partnerships as a unitary business and that the taxpayer was entitled to apportion that income.
But in Malpass, the Court of Appeals reached a different result. In that case, the taxpayers owned two separate S corporations, one operating in Michigan and one operating in Oklahoma, and filed tax returns seeking to treat them as a unitary business. The Malpass court said that the S corporations had many characteristics of a unitary business, but rejected the taxpayers’ application of the unitary business principle, saying that the S corporations were “separate and legally distinct business entities, and nothing in the ITA allows for combined-entity reporting.”
In this case, the facts “are more analogous to those of Preston than Malpass,” the Court of Appeals ruled. “TKG is 99 percent owned by EWG, which is in turn 99.5 percent owned by Electro-Wire. Electro-Wire and TKG are not ‘separate and legally distinct business entities,’ but stand in what amounts to a parent/subsidiary relationship. Like Preston, the income to petitioners flowed through one source, in this case Electro-Wire, and not through two separate sources as in Malpass. Therefore, Electro-Wire and TKG should be permitted to avail themselves of multistate apportionment under the ITA.”
The Court of Appeals rejected the Department of Treasury’s argument that the ITA excludes foreign entities from consideration as part of a unitary business. “Pursuant to MCL 206.103, ‘[a]ny taxpayer having income from business activity which is taxable both within and without this state . . . shall allocate and apportion his net income as provided in this part,’” the appellate panel explained. “State” is defined under MCL 206.20 as ‘any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country, or political subdivision, thereof’. (Emphasis added.)” Under that “plain language,” and the language of other sections of the ITA in effect during the years at issue, “unitary, international businesses [were required] to include international apportionment factors in the calculation of property, payroll, and sales factors,” the Court of Appeals declared. “Therefore, because the ITA does not exclude foreign entities from consideration under the [unitary business principle], the Tax Tribunal did not err by granting summary disposition to petitioners.”
Moreover, the Tax Tribunal did not err by finding that Electro-Wire and TKG constituted a unitary business, the Court of Appeals said. “This Court utilizes a five-factor test … as follows: (1) economic realities; (2) functional integration; (3) centralized management; (4) economies of scale, and (5) substantial mutual interdependence. Petitioners submitted unrebutted evidence to the Tax Tribunal to establish each of these five criteria, and the Tax Tribunal concluded that petitioners had established at least four, and possibly all five, of the relevant factors.”
The “economic realities” factor was satisfied, the panel said, because the “regularly conducted activities” of Electro-Wire and TKG were not only related, but identical, although “the only requirement is that the underlying businesses be related to each other.” The petitioners also showed that the businesses were functionally integrated because Electro-Wire provided support services for TKG and managed its business activities. Businesses need not “be 100 percent integrated in order to classify them as unitary,” the appellate panel observed. The third factor, centralized management, was met by “unrebutted evidence that TKG’s overall management decisions were centralized and directed by Electro-Wire managers in North America and that Electro-Wire hired and fired all TKG officers and managers … the only requirement … is centralized management, not complete management.” The petitioners satisfied the fourth factor, economies of scale, by presenting “unrebutted evidence of economic benefits generated by the combination of Electro-Wire and TKG, such as an expanded customer base, sharing of unique and proprietary processes, and improved financing terms.” Finally, as to the “substantial mutual interdependence” factor, the petitioners had submitted “unrebutted evidence that acquiring TKG was essential for Electro-Wire to remain a supplier for Ford and that remaining a supplier for Ford was essential to Electro-Wire’s survival.”
The Court of Appeals also rejected the treasury department’s contention that the petitioners should pay a 10 percent penalty for negligent failure to pay taxes. Under MCL 205.23(3), if any part of a tax deficiency is the result of negligence, a penalty of $10 or 10 percent of the deficiency, whichever is greater, plus interest is added to the deficiency — but the statue also provides that the penalty is waived if a taxpayer demonstrates that the tax deficiency resulted from reasonable cause. “Reasonable cause is generally deemed to exist when there is an honest difference of opinion with regard to the effect or application of the law,” the Court of Appeals observed. The petitioners based their tax returns on earlier Court of Appeals decisions, as well as “numerous” U.S. Supreme Court decisions, so that “substantial legal foundation” — plus the fact that the petitioners had prevailed on several levels in the tax appeal process – “underscores the reasonableness of their legal position.”
The Department of Treasury appealed. In an October 4, 2012 order, the Supreme Court granted leave to appeal, directing that this case would be “argued and submitted to the Court together with the cases of Tad Malpass v Department of Treasury.”
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Wednesday, March 6, 2013
145237 - People v Musser
Summary:
John Musser, the defendant in this case, was accused of sexually touching an 11-year-old girl while she was pretending to sleep on a couch at Musser’s home. Two Kent County detectives interrogated Musser and videotaped the interview. During the interview, Musser denied touching the girl in the way she had described; the detectives made various comments, including, “Why is she gonna put herself through that if it didn’t happen?” and “Kids don’t lie about this stuff” and “That’s [the girl’s allegations] pretty credible; that’s pretty detailed.”
Musser’s attorney objected to some police statements in the video. But the circuit court judge allowed the jury to view and hear much of the video, including the detectives’ statements. Afterwards, the judge instructed the jury that, “The questions of the lawyers are not evidence, only the answers of a witness are evidence.” Similarly, as to the video, the jury could only consider Musser’s answers to the detectives’ questions; the judge cautioned the jury that the detectives’ comments and questions were not evidence.
The jury convicted Musser of two counts of second-degree criminal sexual conduct and assault and battery. Musser was sentenced to concurrent terms of two to 15 years on the criminal sexual conduct convictions and to time served on the assault and battery. He appealed, arguing in part that the trial judge erred by not redacting from the video statements the detectives made where they appeared to vouch for the victim’s truthfulness or disparage Musser’s credibility.
But in an unpublished per curiam opinion, the Court of Appeals upheld Musser’s conviction.
Musser had failed to preserve his claims of error as to a number of the detectives’ statements, because his trial counsel had approved those portions of the transcript before trial, the appellate court said. “[M]any of the statements to which defendant objected were found on those pages that defendant expressly approved,” the panel noted. However, defense counsel had not approved a number of other transcript pages, which also contained statements by the two detectives, the Court of Appeals added. “We review unpreserved claims of evidentiary error for plain error affecting the defendant’s substantial rights.”
It is the jury’s function to assess whether witnesses are credible; “[c]onsequently, it is improper for a witness to comment or provide an opinion on the credibility of another witness,” the Court of Appeals explained.
Some of the detectives’ statements in the interview would have been inadmissible if the detectives had made them during their testimony at trial, the appellate panel observed.
“However, we find no abuse of discretion or plain error in the trial court’s decision to allow the prosecutor to include the questions and statements of the detectives in the DVD of defendant’s interview,” the Court of Appeals declared. “We agree with the trial court that the questions and statements of the detectives were ‘part of the interrogation’ of defendant and that they ‘give meaning or context to the answers or lack of answers’ by defendant. The jury needed to hear the entire context in which the answers were made in order to determine the weight to be given to defendant’s answers and in order to simply understand and properly evaluate the answers.”
The Court of Appeals continued, “Almost all of the courts that have considered the issue recognize that this form of questioning is a legitimate, effective interrogation tool. And because such comments are such an integral part of the interrogation, several courts have noted that they provide a necessary context for the defendant’s responses. We agree that such recorded statements by the police during an interrogation are a legitimate, even ordinary, interrogation technique, especially when a suspect’s story shifts and changes. We also agree that retaining such comments in the version of the interrogation recording played for the jury is necessary to provide a context for the answers given by the suspect.”
Moreover, the trial judge’s instruction to the jury that the detectives’ statements and questions were not evidence “was sufficient to cure any possible prejudice that defendant may have suffered,” the Court of Appeals added.
Musser appealed; in an order dated September 26, 2012, the Supreme Court granted leave to appeal. The Court said the appeal would be “limited to the issues: (1) whether statements in a recording of a police interview of a criminal defendant that vouch for the credibility of a witness, which would be inadmissible if stated by a trial witness, must be redacted from the recording before the jury views it; or (2) if the jury is allowed to see such a recording without redacting the vouching statements, what circumstances must be present and what, if any, protective measures must be in place.”
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144579 - Harris v Auto Club Insurance
Summary:
On July 1, 2008, Brent Harris was injured when the motorcycle he was riding was hit by a vehicle insured by Auto Club Insurance Association. Harris had a health insurance contract — also known as a “certificate” — with Blue Cross Blue Shield of Michigan.
The vehicle’s no-fault policy is an “uncoordinated policy,” meaning that Auto Club pays no-fault benefits regardless of what other insurance the insured may have. Under Michigan’s no-fault act (MCL 500.3103 et seq.), the first priority for paying personal injury benefits to an injured motorcyclist falls on the no-fault insurer of the vehicle involved in the accident; a motorcycle is not considered a “vehicle” for the purposes of no-fault personal injury benefits. Auto Club paid Harris’ medical expenses.
But the parties dispute whether Harris’ Blue Cross certificate coordinates with the no-fault policy. Blue Cross maintains that it should not have to pay benefits that Auto Club is already obligated to provide; Auto Club argues that, where an injured person is entitled to both no-fault and health insurance benefits, and those policies are not coordinated, the health insurer should pay.
Blue Cross’ certificate states that Blue Cross will not pay for “[s]ervices covered under any other Blue Cross or Blue Shield contract or any other health care benefits plan.” The contract also provides that Blue Cross “will coordinate the benefits payable under this certificate pursuant to the Coordination of Benefits Act, Public Act No. 64 of 1984 (starting at MCLA 550.251). To the extent that the services covered under this certificate are also covered and payable under another group health care plan, we will combine our payment with that of the other plan to pay the maximum amount we would routinely pay for the covered services.”
The circuit court judge determined, based on the contract’s language, that the Blue Cross certificate coordinated benefits with the no-fault policy; accordingly, Auto Club was liable to pay Harris’ medical expenses, the judge concluded. Among other matters, the judge dismissed Harris’ and Auto Club’s claims against Blue Cross.
But in a 2-1 unpublished opinion, the Court of Appeals reversed that ruling and reinstated the claims against Blue Cross. The appellate court rejected the lower court’s conclusion that the Auto Club and Blue Cross contracts were coordinated.
“If contractual language is clear and unambiguous, its meaning is a question of law, and courts must interpret and enforce the contract as written,” the majority reasoned. “Although [Blue Cross] contends that plaintiff is seeking a ‘windfall’ by obtaining duplicative payment of his medical expenses from two sources, the availability of double recovery for a person entitled to benefits from two contracts depends on the specific contracts.”
The majority rejected Blue Cross’ argument that its certificate — which provided that Blue Cross would not pay for services covered under another “health care services plan” — required coordination of benefits with Auto Club. “We note that the Coordination of Benefits Act does not include a no-fault insurer among the defined entities with which the health care providers will coordinate or a mechanism for coordination,” the majority said. “Although the benefits available under no-fault policies include payment of medical expenses, a no-fault policy is not a ‘group health care plan.’ … or a ‘health care benefits plan.’”
Blue Cross also pointed to a certificate provision that stated that Blue Cross would not pay for “care and services … which you legally do not have to pay or for which you would not have been charged if you did not have coverage under this certificate.” But the Court of Appeals majority rejected that argument. In earlier cases, the Court of Appeals has interpreted “incurred” as it is used in the no-fault act to mean “to become liable for” or “legally obligated” — in other words, that the claimants in those cases did “incur” medical expenses even though an insurer company was paying for them, because the claimants, by accepting health care services, would be legally obligated to pay those expenses. The majority acknowledged that these earlier cases only address when charges are “incurred” under the no-fault act, but added, “[T]his distinction, while factually accurate, is not legally significant because the Court defined ‘incurred’ as being synonymous with legally obligated to pay. The pertinent phrase in this case is, ‘We do not pay for . . . care and services . . . for which you legally do not have to pay . . . .’ The rationale … that a party receiving services has a legal obligation to pay for them when rendered and incurs the expense even if the expense is paid by an insurer, is applicable here, although the phrase and context are different. When [Harris] received the care and services, he legally had to pay for them.”
The majority also was not persuaded by Blue Cross’ argument that, under another provision in the certificate, Blue Cross would be entitled to reimbursement from Auto Club if Blue Cross had paid for Harris’ medical expenses. That provision “addresses the insured’s obligation to cooperate with [Blue Cross] in recovering payments from another source,” the majority reasoned. “It does purport to define when [Blue Cross] is liable or not liable for making the payments in the first instance. But …the recovery to which [Blue Cross] refers is a recovery from a judgment or settlement for a claim for personal injury damages. The plaintiff’s benefits from [Auto Club] do not arise by virtue of a claim for personal injuries resulting in a judgment or settlement for damages for personal injury.”
The dissenting judge said he would have upheld the circuit court’s dismissal of the claims against Blue Cross. “In my view, the contract between [Blue Cross] and [Harris] precluded [Harris] from receiving a double recovery,” the judge declared.
The dissent looked to the provision in the certificate stating that Blue Cross would not cover care and services “for which you legally do not have to pay or for which you would not have been charged if you did not have coverage under this certificate.” “The clause ‘for which you legally do not have to pay’ is written in the present tense,” the dissent reasoned. “Thus, whether we look to the factual situation at the time the complaint was filed or when [Harris] submitted his demand upon [Blue Cross], we know that [Harris] did not legally have to pay anything.”
The parties did not dispute that Auto Club paid Harris’ medical bills, or that Auto Club was required to do so under the no-fault act, the dissenting judge noted. “Consequently, the exclusionary clause applied because [Harris] and [Blue Cross] contractually agreed that [Blue Cross] would not pay for services which ‘you [plaintiff] legally do not have to pay.’ This clause is clear and unambiguous, and enforcement of the terms required the trial court to grant [Blue Cross’s] motion for summary disposition.” Moreover, the dissent said, the majority erred by importing the courts’ interpretation of a no-fault act term, “incur” or “incurred,” into a contract that did not contain that word.
The no-fault act allows coordination of benefits so that consumers who have health insurance can opt to pay a reduced premium for coordinated no-fault coverage, the dissenting judge explained. “And, when both the no-fault policy and the health policy are uncoordinated, the injured person may recoup from both insurers,” the dissent stated. “But what is contained in the health insurance plan is purely a matter of contract, and it is those contract terms that control what obligations [Blue Cross] has toward its insured.”
The dissent rejected Auto Club’s argument that Blue Cross unfairly benefited by Auto Club covering Harris’ medical expenses. First priority for paying the injured motorcyclist’s health care expenses fell on Auto Club under the no-fault act, the judge stated. Any benefit to Blue Cross “is merely the result of no-fault requirements and a plain reading of the contract agreed to by the parties,” the dissenting judge observed. “In essence, all parties received the benefits of their particular bargains.”
Blue Cross appealed, and, in an order dated June 6, 2012, the Supreme Court granted leave to appeal. The Court directed, “The parties shall include among the issues to be briefed whether the plaintiff is entitled to a double recovery from both Auto Club Insurance Association and Blue Cross Blue Shield of Michigan of medical expenses arising from a motorcycle accident involving a motor vehicle.”
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145055 - In re Bradley Estate
Summary:
On August 12, 2004, Nancy Mick petitioned the Kent County Probate Court, asking the court to order that her brother, Stephen Bradley, be taken into custody for a psychiatric evaluation. Mick attested in the petition that her brother’s mental health had deteriorated to the point where he was a danger to himself and others; she said that he had pointed a gun at himself and at his wife and had told Mick he was suicidal. Mick stated in the petition, “If he doesn’t get help, I’m afraid that he could kill himself and his family.” That same day, the court issued the order to pick up Bradley; Mick delivered the order to the Kent County Sheriff’s Department and met with an officer there to prepare a police information sheet to aid in picking up her brother. But the sheriff’s department failed to execute the court’s pick-up order, and on August 21, 2004, Bradley fatally shot himse
