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Opinions – Maryland Court of Appeals: 8/22/11

Contract Law

Breach of actuarial contract

BOTTOM LINE: Defendant breached contracts to provide actuarial services to plaintiff by repeatedly misinterpreting a data code associated with survivors’ benefits, entitling plaintiff to recover lost contributions and lost interest on those contributions.

CASE: Milliman v. Maryland State Retirement and Pension System, No. 102, Sept. Term, 2010 (filed July 20, 2011) (Judges Bell, BATTAGLIA, Greene & Barbera) (Judges Harrell, Murphy & Adkins dissenting). RecordFax No. 11-0720-21, 66 pages.

FACTS: Milliman, Inc. contracted with the Maryland State Retirement System (the System) beginning in 1982 to provide actuarial valuations for each of the State’s retirement and pension systems and continued to serve as actuary by additional contracts effective July 1, 1990, July 1, 1993, and Aug. 5, 1998, to terminate as they did, Aug. 4, 2006. The contracts required Milliman to perform valuations of the various funds, as well as an “annual certification of the employer contribution rate required to fund each retirement system for the coming year.”

In 2004, Milliman discovered a coding error affecting three retirement systems, the Judge’s Retirement System, the State Police Retirement System, and the Law Enforcement Officers’ Pension System, in which the actuary failed to include in its calculations benefits payable to surviving spouses of judges and police officers. Thereafter, Milliman reported its discovery of the valuation errors to the System and indicated that liabilities for the three affected systems had been understated by more than $130 million.

The System filed an administrative claim against Milliman. In the initial round of the administrative action, the System Procurement Officer determined that Milliman had failed to comply with its contractual duties and responsibilities, and that the System was entitled to recover $34.2 million in contributions that would have been received but for Milliman’s errors, and $38.8 million in lost income that would have been earned on those contributions, for a total of $73 million in losses to the System.

The State Board of Contract Appeals (the Board) found that Milliman had misinterpreted retirement code “00,” resulting in an understatement of contributions necessary to fund the three retirement and pension funds and that the System was entitled to recover lost contributions and lost income on those contributions.

The Board also concluded that, because the State was not a party to the proceeding, any losses sustained by the System as a result of Milliman’s calculation errors could not be offset by assets that purportedly remained in the State’s General Fund. Finally, the Board concluded that the System was not contributorily negligent.

The circuit court affirmed the Board’s decision involving Milliman’s breach, but determined that the Board erred in calculating damages to include both lost contributions and lost interest on those contributions.

The Court of Appeals granted certiorari prior to any proceedings in the Court of Special Appeals. It vacated the judgment of the circuit court and directed that the Board’s decision be affirmed.

LAW: Pursuant to SPP §21-125(a), the Board of Trustees “shall designate an actuary,” who is required to make an annual “valuation of the assets … of the funds of the several systems,” upon which the State’s (the employer’s) contributions to the System are based. SPP §21-125(b). Moreover, SPP §21-304 establishes a statutory goal for the System to have its obligations to participants fully funded by the year 2020.

In the initial review, the record was reviewed as a whole to determine whether the Board’s findings were supported by substantial evidence. Najafi v. Motor Vehicle Administration, 418 Md. 164, 173 (2011). In addition to numerous exhibits supporting its underfunding contention, the System also called various individuals who testified that Milliman’s errors caused each of the affected systems to be underfunded pursuant to the statutory funding goals.

Milliman set forth the opinion of an actuary employed by Price, Waterhouse, Coopers, who testified that Milliman’s recommended contribution rates fell within “the range of reasonableness.” The Board, however, credited the testimony and evidence presented by the System rather than that of Dr. Nicholl regarding whether Milliman erred or not. Clearly, there was substantial evidence upon which the Board relied to support its finding that the System had suffered losses totaling $73 million and that the affected systems were thereby underfunded as a result of Milliman’s coding errors.

To address the question of how to measure damages caused by errors in actuarial recommendations related to pensions systems, there is a lack of statutory guidance as well as precedent. In Dardaganis v. Grace Capital Inc., 889 F.2d 1237 (2d Cir.1989), the Trustees of the Retirement Fund of the Fur Manufacturing Industry entered into an agreement with Grace Capital, Inc., in which Grace became investment manager of the assets of the retirement fund and promised to “manage the [Fund’s] Account in strict conformity with the investment guidelines promulgated by the Trustees.” Id. at 1239. Pursuant to the investment guidelines, Grace was prohibited from investing more than fifty percent of fund assets in common stocks. During an eight month period, however, Grace invested more than fifty percent of fund assets in common stock, exceeding the fifty percent ceiling each month by an average of fifteen percent. The Trustees refused to increase the ceiling above fifty percent, and Grace was fired when the common stock holdings increased to approximately eighty percent of the portfolio.

Thereafter, the Trustees sued Grace. The federal district court granted the Trustees’ motion for partial summary judgment on the issue of liability. Dardaganis, 889 F.2d at 1239. The district court awarded damages by comparing what the plan actually earned with what it would have earned had Grace invested only fifty percent of the fund’s account in equities.

The 2nd Circuit affirmed the trial court, reasoning that the Fund suffered losses as a result of Grace’s breach, and any award of damages should take into account the financial position the beneficiaries would have occupied, but for the breach.” Id. at 1243.

In Board of Trustees v. Mercer, 2003 Cal.App. Unpub. LEXIS 6236 (Cal.Ct.App.2003), the Board of Trustees for the San Luis Obispo County Pension Trust as well as the County of San Luis Obispo filed a claim against their former actuary, Mercer, for professional negligence. Mercer was the trust actuary from 1980 through 1996, when the actuary discovered errors in the computer program it used in preparing actuarial valuations for the trust, including an assumption that plan participants would have no surviving spouses. As a result, Mercer failed to account for the payment of survivors’ benefits, such that “the trust’s future liabilities were underestimated and its assets were overestimated.” Id. at *3.

At trial, Mercer admitted breaching the actuarial standard of care, but disputed liability, because “in spite of its errors, the trust was fully funded” and therefore, “suffered no damages.” Id. at *6-7. The trial judge determined that the trust suffered a loss of investment income on the nearly $11 million the county under-contributed to the fund.

The appellate court affirmed. The court recognized that although the “county may derive an incidental benefit from Mercer’s payment of damages to the trust, as will county employees and all taxpayers living within the county,” awarding damages for lost investment income would place the county in the position it would have been in had Mercer properly valued the pension’s assets and liabilities. Id. at * 12.

Here, Milliman breached its contracts, thereby causing the System to inadequately plan for the costs of retirement benefits to surviving spouses of judges and police officers. Furthermore, but for Milliman’s miscalculations, the three affected systems would have been more robust.

The circuit court reduced the Board’s damage award for lost contributions in the amount of $34.2 million on the ground that the System failed to demonstrate that the money in lost contributions “no longer exist[s]” so that the Legislature could not fund the losses sustained by the System as a result of Milliman’s breach.

Because the State was not a party to the proceeding before the Board, or before the court, whether any damage award by Milliman should be offset by an amount retained by the State was not properly before the circuit court. See Hashmi, 416 Md. at 707. Therefore, the circuit court erred in reducing the Board’s award of damages to the System by $34.2 million in lost contributions.

Accordingly, the judgment of the circuit court was vacated and the Board’s decision was affirmed in its entirety.

COMMENTARY: Milliman contended that the System and the State are the same entity, such that any award of damages must reflect that the State always retained the use and benefit of contributions not made to the System.

However, the State was not joined as a party in the proceeding before the Board. Thus, an “offset” against the State, for the retention of “the use and benefit of contributions not made to the System,” was not viable. Hashmi v. Bennett, 416 Md. 707 (2010),

Alternatively, Milliman argued that if the State and the System are regarded as distinct bodies, taxpayers are obligated to fund the retirement systems, so that despite the actuary’s repeated errors, outstanding pension liabilities will be funded.

The System and the State are certainly interrelated, because the State serves as guarantor of System pension liabilities. See SP §21-302. However, the System and the State are distinct entities so that funds held by the System are wholly distinct from other funds. The State’s General Fund is not just a pot in which the System may dip. See, e.g., Day v. New Hampshire Retirement System, 635 A.2d 493 (N.H.1993).

Finally, Milliman argued that the System was contributorily negligent in providing a “confusing” definition of the “00” code.

The Board credited the testimony of the System’s witness, who was an actuary, rather than that of Milliman’s witness, who was not an actuary, regarding whether the data provided by the System was sufficient. Clearly there was substantial evidence upon which the Board relied to support its finding that the System was not contributorily negligent in providing the code to Milliman, given Milliman’s professional obligation to review and interpret the data.

In Hill v. Wilson, 134 Md.App. 472 (2000), a physician contended that his patient was contributory negligent because the patient was directed to return for treatment if his condition worsened and had failed to do so. The Court of Special Appeals held that the trial judge did not err in denying the physician’s motion for summary judgment, because the physician failed to demonstrate “some prominent and decisive act [by the patient] which directly contributed to the accident and which was of such a character as to leave no room for difference of opinion thereon by reasonable minds.” Id. at 492.

Although the Board noted that the System may have employed greater clarity in defining the various codes, the Board determined that the System provided ample explanation of the “00” code involving the three affected retirement systems when it provided to Milliman “its written Annual Valuation Record,” as well as “employee brochures describing retirement payment provisions.” To the extent that the coding may have been confusing, Milliman bore an express duty to solicit further clarifying information until it accurately understood the information.

DISSENT: Because the System and Milliman did not specify how damages should be calculated in the instance of a breach of the contract, the parties should be put in the position they would have been but for the breach. To do so, according to the dissent, the Court should take into consideration that the State and the System are part of a single government and that, together, they did not suffer a contributory loss, as the State continued to collect and enjoy the same amount of revenue, irrespective of Milliman’s error.

Accordingly, in the view of the dissent, the case should have been remanded to the Board with instructions to recalculate damages to reflect the fact that the State and the System are a single entity.

Criminal Procedure

Discharge of counsel

BOTTOM LINE: Judgment of the Court of Special Appeals, which granted defendant a new trial, is reversed because defendant’s vague and tentative indications that he wanted a “real lawyer” instead of his public defender were insufficient to implicate the statutory requirement for further inquiry by the trial court.

CASE: State v. Northam, No. 65, Sept. Term, 2010 (filed August 15, 2011) (Judges Bell, Harrell, Battaglia, Greene, MURPHY, Adkins & Barbera). RecordFax No. 11-0815-20, 18 pages.

FACTS: Kendall Northam was arrested on Jan. 22, 2008, and charged with second-degree murder and assault. On Jan. 28, 2008, an Assistant Public Defender entered his appearance on Northam’s behalf.

On Feb. 26, 2008, Northam wrote a letter to the Clerk of the circuit court stating that he was “dropping” his public defender. The following day, Northam wrote another letter to the District Court of Maryland. This letter was written on the front and back of a single piece of paper, and was received in damaged condition. In that letter, Northam indicated that he was “dropping” his public defender and seeking a pro bono attorney to represent him in his “high profile” case.

On March 5, 2008, a hearing took place in which the judge advised Northam that if he could not afford an attorney, a public defender would represent him. The judge acknowledged having received Northam’s letter, but stated that he did not understand what Northam was asking for. Northam stated, among other things, that he wanted a “real lawyer.” The judge responded by informing Northam that his assigned public defender, who was present at the hearing, was a “real lawyer” who, in fact, was highly experienced in cases such as Northam’s. The judge further advised Northam to think about the matter and consider that if he rejected his assigned public defender, another one from the same public defender’s office would be appointed. On Sept. 1, 2008, Northam sent another letter to the court requesting a change of venue and a court-appointed attorney.

Northam’s assigned attorney represented him at subsequent hearings pertaining to other matters. According to the record of one of those hearings, Northam specifically consented to continued representation by his assigned public defender.

A jury subsequently convicted Northam of second-degree murder and first-degree assault. Northam appealed to the Court of Special Appeals, presenting several claims. The first question for appellate review was whether the trial court erred by not addressing Northam’s discharge of counsel. After the Court of Special Appeals held that Northam was entitled to a new trial on the ground that the circuit court had failed to comply with the requirements of Maryland Rule 4-215(e), the State filed a petition for writ of certiorari that presented the following question: Did the Court of Special Appeals misapply this Court’s precedent when it determined that a Maryland Rule 4-215(e) inquiry was required even though no one brought to the court’s attention in open court that the defendant had any desire to discharge his appointed public defender?

The Court of Appeals held that Northam was not entitled to a new trial on the ground that the circuit court violated Maryland Rule 4-215(e).

LAW: The State argued that Northam’s Sept. 1, 2008 letter was sufficient only to alert the court that Northam desired a change of venue, and his vague request that he wanted a court-appointed attorney, buried in the final sentence of the final paragraph of what was captioned and pled specifically and solely as a change of venue motion, stood in stark contrast to other cases where 4-215 inquiries were mandated.

In White v. State, 23 Md.App. 151, 155-56 (1974), while affirming convictions for murder, and rejecting the appellant’s contention “that prejudicial error was committed by the failure of the court below to rule on the speedy trial issue he raised prior to trial [in a subparagraph],” the Court of Special Appeals stated: “Although appellant raised several preliminary questions to be decided by [the trial judge], at no time did appellant mention the undecided subparagraph.” Although the contention that failure to rule upon a pending motion may be prejudicial error, the motion “must be brought to the attention of the trial court. Id. An appellant “may not take advantage of an obscurely situate, undecided motion and stand mute in the face of repeated requests by the judge for all pending motions to be decided.” Id.

That analysis, which was entirely consistent with the Court’s opinions involving “omnibus” motions filed pursuant to Md. Rule 4-252, was fully applicable in this case. At the pretrial hearing held on Sept. 12, 2008, at the final pretrial hearing held on Sept. 24, 2008, as well as prior to trial on Sept. 25, 2008, Northam had the opportunity to request permission to discharge his attorney. Because no such request was presented to the judge on any of these occasions, Rule 4-215(e) was not implicated, much less violated, by the trial court. Northam, therefore, was not entitled to a new trial on such grounds.

Accordingly, the judgment of the Court of Special Appeals was reversed, and the case was remanded for resolution of Northam’s remaining claims.

COMMENTARY: Northam argued that it should be inferred from what occurred at the conclusion of the Sept. 24, 2008 hearing that he was attempting to request permission to discharge his attorney, but that attempt was thwarted by the judge and his attorney.

The Court declined to draw that inference, because (1) the judge’s advice that Northam should confer with his attorney was the proper response to a criminal defendant who was represented by counsel, and (2) the Court would not infer that Northam’s attorney failed to comply with the Maryland Rules of Professional Conduct.

In Garner v. State, 414 Md. 372 (2010), while rejecting the contention that the trial court erroneously failed to comply with the requirements of Md. Rule 4-215(a)(3) when responding to the defendant’s request for permission to discharge his trial counsel, the Court stated: “Members of the Maryland Bar are officers of the court who have an obligation to comply with the Rules of Professional Conduct. While serving as Petitioner’s trial counsel, Rule 1.2 required that [he] abide by Petitioner’s decision concerning the services to be performed on Petitioner’s behalf, and Rule 3.3 prohibited [him] from making a false statement to the Circuit Court. When [Petitioner’s trial counsel] stated, “I’m still in the case[,]” the Circuit Court was entitled to rely upon that statement and was not required to make further inquiry.” Id. at 390.

If — either at the conclusion of the Sept. 24, 2008 pretrial hearing, or prior to the commencement of trial on the following day — Northam requested that his attorney arrange for him to be represented by another defense counsel, his original attorney would have been obligated to notify the judge of the request. As the judge was not so notified, Northam was not entitled to a new trial on the ground that he was not permitted to explain the reasons for requesting permission to discharge his attorney.

PRACTICE TIPS: During the period of time in which there is an attorney-client relationship between a criminal defendant and his or her lawyer, it is not unusual for the defendant to express a desire for representation by a different lawyer. A transitory wish for a different lawyer at various points in time prior to trial is, however, distinguishable from a considered decision to request that the trial court permit the defendant to discharge defense counsel. Therefore, when a lawyer has been told by a criminal defendant that the defendant wants to be represented by some other lawyer, unless the defendant thereafter consents to the lawyer’s continued representation, the lawyer is obligated to advise the trial court of the defendant’s wishes.