Prazen v. Shoop , 2012 IL App (4th) 120048 ( 2012 )

ILLINOIS OFFICIAL REPORTS
Appellate Court
Prazen v. Shoop, 2012 IL App (4th) 120048
Appellate Court JOSEPH E. PRAZEN, Plaintiff-Appellant, v. MARVIN SHOOP, JR., as
Caption President of the Board of Trustees of The Illinois Municipal Retirement
Fund; THE BOARD OF TRUSTEES OF THE ILLINOIS MUNICIPAL
RETIREMENT FUND; THE ILLINOIS MUNICIPAL RETIREMENT
FUND; and LOUIS W. KOSIBA, as the Executive Director of the Illinois
Municipal Retirement Fund, Defendants-Appellees.
District & No. Fourth District
Docket No. 4-12-0048
Argued August 7, 2012
Filed August 31, 2012
Held The Board of Trustees of the Illinois Municipal Retirement Fund lacked
(Note: This syllabus the authority to make the determination that the corporation created by
constitutes no part of plaintiff near the time of his retirement from his supervisory position with
the opinion of the court a municipality was a guise to circumvent the return-to-work provisions
but has been prepared set forth in section 7-141.1(g) of the Pension Code; therefore, the order
by the Reporter of requiring plaintiff to return the early retirement incentives he received
Decisions for the was vacated.
convenience of the
reader.)
Decision Under Appeal from the Circuit Court of Sangamon County, No. 11-MR-427; the
Review Hon. John Schmidt, Judge, presiding.
Judgment Reversed; IMRF Board’s decision vacated.
Counsel on James G. Fahey (argued) and Jeffrey T. Baker, both of Sorling Northrup,
Appeal of Springfield, for appellant.
Beth Janicki Clark (argued), of Illinois Municipal Retirement Fund, of
Oak Brook, for appellees.
Panel JUSTICE KNECHT delivered the judgment of the court, with opinion.
Justices Steigmann and Pope concurred in the judgment and opinion.
OPINION
¶1 Plaintiff, Joseph E. Prazen, appeals the trial court’s judgment affirming the decision of
the Illinois Municipal Retirement Fund (IMRF) Board of Trustees (IMRF Board) finding
plaintiff forfeited his early retirement incentives by returning to work for an IMRF employer
in violation of section 7-141.1(g) of the Illinois Pension Code (Pension Code) (40 ILCS 5/7-
141.1(g) (West 2010)). Specifically, the IMRF Board found forfeiture of plaintiff’s early
retirement incentives and the return of $307,100.50 was appropriate after it determined
plaintiff’s corporation was created solely as a guise to circumvent the return-to-work
restrictions of the Pension Code.
¶2 I. BACKGROUND
¶3 A. ERI Retirement and Formation of Electrical Consultants, Ltd.
¶4 Joseph E. Prazen retired from his position as superintendent of the electric department
for the City of Peru, Illinois (City), under the early retirement incentive (ERI) plan previously
adopted by the City pursuant to section 7-141.1 of the Pension Code (40 ILCS 5/7-141.1
(West 1998)). He retired on December 31, 1998, after purchasing five years’ age-
enhancement credit resulting in a pension based on 32.833 years of service rather than 27.333
years. At the time of retirement, his annual salary was $82,284.20.
¶5 Three years prior, in 1995, Prazen formed a business, Peru Development Land Trust
(PLDT), with then-mayor Donald Baker and Joe Hogan. The purpose of PLDT was to
renovate and convert real estate in Peru, Illinois. In 1995, PLDT purchased a vacant building
with the intention of turning it into condominiums. The renovation required extensive
electrical upgrades and modifications. Prazen planned to perform this work under the
auspices of his then-unincorporated business, Electrical Consultants, Ltd. (ECL).
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¶6 On December 18, 1998, 13 days prior to his retirement, Prazen incorporated ECL. At the
time of incorporation, he was the secretary and president of ECL. (In 2003, Prazen’s wife,
Diane, took over as secretary and president.) On December 21, 1998, three days after ECL’s
incorporation and 10 days prior to his retirement, ECL and the City entered into a
management and supervision agreement for operation of the electric department (Agreement)
to begin on January 1, 1999, one day after Prazen retired.
¶7 Pursuant to the Agreement, ECL was to provide a full-time person to perform the
contractor’s duties for the City for a term of three years, with the first year of compensation
set at $89,816.74 to be paid on a biweekly basis to ECL. The Agreement stated, “All work,
services, and other functions furnished or to be performed by [ECL] for the City *** shall
be in [ECL’s] position as an independent contractor and to no extent and in no manner shall
either [ECL] or any of its personnel *** be regarded as an employee, servant, or agent of the
City.” The Agreement gave the City the right to terminate the Agreement “upon reasonable
cause determined within the City’s sole discretion” following a 30-day written notice to ECL.
The Agreement between ECL and the City was extended eight times following the initial
1999 Agreement.
¶8 ECL employed three people during its life, Prazen, his wife Diane, and their daughter,
Natalie. The City paid ECL biweekly as required by the Agreement. ECL then paid its
employees. Prazen, Diane, and Natalie received W-2 forms from ECL for each year they
worked for the corporation.
¶9 On February 17, 2009, ECL informed the City in writing it would be terminating the
Agreement effective March 18, 2009, as allowed by the eighth rider extending the
Agreement. ECL was voluntarily dissolved on November 30, 2009.
¶ 10 B. Correspondence From Plaintiff’s Attorney
¶ 11 In 1998 and twice in 2002, Prazen’s attorney, Douglas Schweickert, who was also outside
legal counsel for the City, contacted IMRF on Prazen’s behalf to inquire about any impact
the Agreement may have on his pension. We note defendants assert Schweickert was the City
attorney and not Prazen’s personal attorney. Schweickert was acting as plaintiff’s agent when
he contacted IMRF. Thus, it is irrelevant in what official capacity he initiated the discussion
with IMRF. Schweickert documented these conversations with IMRF in three letters he
wrote to Prazen.
¶ 12 The first letter dated September 15, 1998–two months before ECL’s incorporation and
approximately 2 1/2 months before Prazen’s retirement from the City–stated Schweickert had
spoken with an IMRF representative, who advised him “a former employee who elected the
IMRF Early Retirement Incentive may work for a non-IMRF employer who contracts for
services with an IMRF employer.” Schweickert advised against this, but he noted the IMRF
representative also stated “a former employee may also contract with an IMRF employer as
an independent contractor.”
¶ 13 In the second letter dated March 21, 2002, Schweickert informed Prazen he contacted
IMRF per Prazen’s request and confirmed everything set forth in the 1998 letter still applied.
¶ 14 In the last letter dated November 19, 2002, Schweickert explained as follows:
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“[The IMRF representative] confirmed that a retired ‘early out’ IMRF employee may
work for a separate corporation which is then contracted to do work for the City from
which the IMRF employee retired. I specifically questioned whether that retired IMRF
employee may be an owner of the corporation contracting with the City. She stated that
was permiss[i]ble, but she added that the corporation cannot just be a guise to avoid the
IMRF regulations. Specifically, if the corporation hires itself out to the general public in
addition to the municipality for which it has contracted, that would be fine.”
Schweickert suggested Prazen should run some advertisements to expand ECL’s visibility
and hire other employees, even if only for brief assignments.
¶ 15 C. IMRF’s Actions and Proceedings
¶ 16 On November 5, 2010, nearly one year after ECL was dissolved and almost 12 years after
Prazen retired, general counsel for IMRF notified Prazen by letter the IMRF staff determined
his continued relationship with the City after his 1999 retirement violated the provisions of
subsection 7-141.1(g) of the Pension Code (40 ILCS 5/7-141.1(g) (West 1998)). Subsection
7-141.1(g) prohibits an ERI participant from returning to work for any IMRF employer,
subject to a few exceptions. Id. Attached to the letter were new calculations based on
Prazen’s retirement at 27.333 years and showing a $307,100.50 overpayment as a result of
plaintiff’s ERI violation. The letter did not state how IMRF would collect the overpayment
from Prazen.
¶ 17 On November 6, 2010, Prazen notified IMRF of his intent to appeal. The IMRF benefit
review committee conducted hearings on June 23, 2011, and July 21, 2011. Prior to the first
hearing, Prazen’s attorney submitted a statement arguing the following: (1) the IMRF Board
does not have authority under article 7 of the Pension Code to determine who qualifies as an
“employee”; (2) if the IMRF Board does have the authority, plaintiff does not fall within the
definition of “employee” as defined in article 7; (3) the IMRF lacks legal authority to look
beyond the corporation contracting with the City; and (4) recent changes to the Pension Code
and IMRF position paper support finding Prazen was not violating provisions of the Pension
Code.
¶ 18 The findings and conclusions of the IMRF benefit review committee were as follows:
“[(1)] Despite the failure of staff to provide a copy of their original memo and Public
Power Weekly to [plaintiff’s] counsel prior to the June 23rd meeting, [plaintiff] and his
attorney were later provided with these documents and were given adequate notice and
opportunity to respond at the July 21st hearing.
[(2)] This is not a matter requiring ‘piercing the corporate veil’. It is within the
Board’s power to make administrative decisions concerning participation and coverage
and to carry out the intent of the Fund in accordance with Article 7 of the Pension Code.
(40 ILCS 5/7-200).
[(3)] The ability of the Board to determine whether or not [plaintiff] is an employee
is irrelevant to this proceeding because no such determination is being made.
[(4)] The recent changes to Section 7-141(g) [adding an exception for auxiliary police
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officers] of the Pension Code and Staff’s position paper regarding HB 45 are irrelevant
to this matter.
[(5)] Under the facts of this appeal, [plaintiff] violated the provisions of Section 7-
1419[.1](g) because EC[L] was created as a guise to avoid the return to work prohibitions
contained therein. More specifically, [plaintiff’s] actions are contrary to the intent of the
return to work prohibitions, which were enacted to offer an [sic] mechanism to allow
individuals who are at least age 50 with 20 years of service to purchase service time and
thus retire with a higher benefit at an earlier age. ERI was created as a financial incentive
to employers (they could either not replace the retiree or hire younger [sic] employees at
a lower salary). Allowing an employee to retire with a higher benefit and yet return to
work under a contract was exactly what the General Assembly was trying to avoid when
it enacted the ERI statute with the return to work prohibitions. Specifically, the
Committee took the following into consideration when making this determination:
[(a)] The timing surrounding the creation and dissolution of EC[L].
[(b)] The timing surrounding the Agreement with the City as it relates to
[plaintiff’s] retirement.
[(c)] The de minimus nature of EC[L]’s employment outside of the Agreement
with the City.
[(d)] The letter from the City attorney dated November 19, 2002[,] advising that
he was told by IMRF that the corporation could not be a guise and further advising
that [plaintiff] take other actions such as hiring more employees and run some small
ads so that EC[L] could potentially take on some small engagements outside the
Agreement with the City.
[(e)] The fact that [plaintiff], his wife, and his daughter were the only employees
of EC[L].
[(f)] The fact that [plaintiff], at the time of the original execution of the
Agreement, was both the Secretary and President of EC[L].
[(g)] The nature of the duties required under the Agreement and the fact that
[plaintiff] alone fulfilled its requirement for a full-time staff person.
[(6) Plaintiff] must forfeit his early retirement and repay IMRF the portion of his
annuity attributable to his early retirement incentive.”
¶ 19 On July 22, 2011, the IMRF Board voted to uphold the administrative staff
determination, adopting the findings and conclusions set forth in the Board’s benefit review
committee report. Prazen appealed the IMRF Board’s decision to the circuit court of
Sangamon County. On December 21, 2011, the circuit court affirmed the IMRF Board’s
decision.
¶ 20 This appeal followed.
¶ 21 II. ANALYSIS
¶ 22 On appeal, Prazen argues (1) the clear and unambiguous language of article 7 of the
Pension Code requires a finding of “employment” or a “personal services contract” in order
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to violate the ERI return-to-work restrictions, a finding not made by the IMRF Board; (2) the
IMRF Board acted outside of its jurisdiction when it deemed itself to possess equitable
powers, typically reserved for the courts, without explicit statutory authority to do so, and
exercised those powers to forfeit Prazen’s pension by finding his corporation was a guise to
circumvent the ERI return-to-work restrictions; (3) Illinois law prohibits the IMRF Board
from making the determination of whether there is “employment” or a “personal services
contract”; and (4) even if the IMRF Board possesses equitable powers, its decision was
against the manifest weight of the evidence because the overwhelming majority of the facts
make it clear ECL was not a guise to avoid the ERI restrictions.
¶ 23 A. Standard of Review
¶ 24 We review the agency’s final determination, not the decision of the circuit court. Sartwell
v. Board of Trustees of the Teachers’ Retirement System, 403 Ill. App. 3d 719, 724, 936
N.E.2d 610, 616 (2010). Questions which involve an agency’s interpretation of a statute or
an administrative rule are questions of law and are reviewed de novo. Id. Factual
determinations are reviewed under the manifest weight of the evidence standard. Id. Only
where the opposite conclusion is clearly apparent will a finding be against the manifest
weight of the evidence. Id. at 724-25, 936 N.E.2d at 616. Mixed questions of law and fact
are reviewed under the clearly erroneous standard. Id. at 725, 936 N.E.2d at 616. An
agency’s decision is clearly erroneous where “the reviewing court comes to the definite and
firm conclusion that the agency has committed an error.” Id.
¶ 25 B. To Be Subject To Forfeiture of ERI Benefits, an ERI Annuitant
Must Have Accepted “Employment With” or Entered Into a
“Personal Services Contract With” an IMRF Employer
¶ 26 Prazen asserts pursuant to the statute, the language of which is clear and unambiguous,
the only two circumstances which will result in an ERI annuitant forfeiting his age
enhancement and creditable service are as follows: the annuitant must either have (1)
accepted employment with an IMRF employer, or (2) entered into a personal services
contract with an IMRF employer. Defendants respond section 7-141.1(g) of the Pension
Code is ambiguous because the terms “employment with” and “personal services contract
with” are capable of more than one interpretation.
¶ 27 The cardinal rule of statutory construction is to ascertain and give effect to the
legislature’s intent. People ex rel. Birkett v. City of Chicago, 202 Ill. 2d 36, 45, 779 N.E.2d
875, 881 (2002). When construing a statute, a court considers the statute in its entirety. Jones
v. Board of Trustees of the Police Pension Fund, 384 Ill. App. 3d 1064, 1068, 894 N.E.2d
962, 966 (2008). “ ‘The most reliable indicator of legislative intent is the language of the
statute, which, if plain and unambiguous, must be read without exception, limitation, or other
condition.’ ” Id. (quoting People v. Davis, 199 Ill. 2d 130, 135, 766 N.E.2d 641, 644 (2002)).
Generally, “[a] court will give substantial weight and deference to an interpretation of an
ambiguous statute by the agency charged with administering and enforcing that statute.”
Birkett, 202 Ill. 2d at 46, 779 N.E.2d at 881. However, statutes concerning pensions are
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liberally construed in favor of the pensioner. Jones, 384 Ill. App. 3d at 1068, 894 N.E.2d at
967.
¶ 28 Section 7-141.1(g) of the Pension Code provides, in part:
“An annuitant who has received any age enhancement or creditable service under this
Section and thereafter accepts employment with or enters into a personal services
contract with an employer under this Article thereby forfeits that age enhancement and
creditable service; except that this restriction does not apply to (1) service in an elective
office, so long as the annuitant does not participate in this Fund with respect to that
office, (2) a person appointed as an officer under subsection (f) of Section 3-109 of this
Code, and (3) a person appointed as an auxiliary police officer pursuant to Section 3.1-
30-5 of the Illinois Municipal Code.” (Emphases added.) 40 ILCS 5/7-141.1(g) (West
Supp. 2011).
¶ 29 Section 7-141.1(g) of the Pension Code is specific and makes clear the only two
circumstances in which an annuitant must forfeit his age-enhancement or creditable-service
benefits. See 40 ILCS 5/7-141.1(g) (West 2010). While not specifically defined by statute,
neither the phrase “employment with” nor “personal services contract with” is ambiguous
and we will not read ambiguity into a statute where none exists. The term “employee” is
defined in article 7 of the Pension Code and includes a person who (1) is paid “for the
performance of personal services or official duties out of the general fund of a municipality”
or a fund controlled by the municipality, or (2) “[u]nder the usual common[-]law rules
applicable in determining the employer-employee relationship, has the status of an employee
with a municipality.” 40 ILCS 5/7-109 (West 2010). To be “employed with” an IMRF
employer, a person must first fit the definition of “employee.” Further, a personal services
contract is generally known as one which is not delegable because the services provided are
specific to the person’s unique skills. See Sanfillippo v. Oehler, 869 S.W.2d 159, 161-62
(Mo. Ct. App. 1993) (defining a personal service contract as one which “ ‘rest[s] on the
skills, tastes, or science of a party, that is, those contracts wherein personal performance by
the promisor is the essence and the duty imposed cannot be done as well by others as by the
promisor himself’ ” (quoting 17A C.J.S. Contracts § 465, at 624-25 (1963))). See also
Ballentine’s Law Dictionary 942 (3d ed. 1969) (A “personal services contract” is “[a]
contract for the furnishing of services by the promisor only, that is, services to be performed
by no person other than the promisor.”).
¶ 30 Prazen contacted the IMRF through his attorney two months before he incorporated ECL,
which had been an unincorporated business for over three years, to ensure he would not be
violating the return-to-work provisions of the ERI by working for a non-IMRF employer who
contracts with an IMRF employer. Prazen again, through his attorney, contacted the IMRF
on two occasions in 2002 to verify no changes had been made which would affect his ERI
benefits by ECL’s continued Agreement with the City. As defendants acknowledge in their
brief, “IMRF has the obligation to advise individuals who inquire about returning to work
after retiring under an ERI as to whether or not the retiree can go to work for a corporation,
or other business, that may contract with an IMRF employer and not lose their ERI benefits.
This obviously requires IMRF to interpret [s]ection 7-141.1(g) as it applies to that particular
retiree’s prospective employment.” Thus, the IMRF representative had to consider the
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meaning of “employment with” and “personal services contract with” to confirm Prazen,
based on his factual situation, would not be violating this provision of the Pension Code.
¶ 31 We find section 7-141.1(g) of the Pension Code is not ambiguous. Even if we found
ambiguity, this statute concerning a pension would be construed in favor of plaintiff. See
Jones, 384 Ill. App. 3d at 1068, 894 N.E.2d at 967. Unless the legislature has granted IMRF
the power to create new conditions which would subject an ERI annuitant to forfeiture of his
ERI benefits, an annuitant must have accepted “employment with” or entered into a
“personal services contract with” an IMRF employer.
¶ 32 C. The IMRF Board Does Not Have the Power To Determine a Corporation Is a
Guise Formed Solely To Circumvent the Return-To-Work Restrictions
¶ 33 Prazen asserts the IMRF Board does not possess the equitable power to disregard a
legally distinct entity and, thus, acted beyond its authority in finding ECL was created as a
guise by Prazen to circumvent the return-to-work restrictions expressed in section 7-141.1(g)
of the Pension Code. Defendants, however, argue its authority to find forfeiture without a
finding of “employment with” or “personal service contract with” is contained in section 7-
200 of the Pension Code. We agree with Prazen.
¶ 34 Section 7-200 provides the IMRF Board shall have the power:
“To carry on generally any other reasonable activities, including, without limitation, the
making of administrative decisions on participation and coverage, which are necessary
for carrying out the intent of this fund in accordance with the provisions of this Article.”
40 ILCS 5/7-200 (West 2010).
Defendants assert this general grant of authority under section 7-200 to “make administrative
decisions on participation and coverage” to carry out the intent of the fund supersedes the
two specific circumstances in which the General Assembly has determined are grounds for
forfeiture of the ERI incentives. This authority would allow the IMRF Board to create new
grounds for the forfeiture of ERI benefits based on its interpretation of section 7-141.1(g).
We are not persuaded.
¶ 35 A court must construe a statute in such a way that no term or phrase is rendered
superfluous. See, e.g., Innovative Modular Solutions v. Hazel Crest School District 152.5,
2012 IL 112052, ¶ 22, 965 N.E.2d 414. If construed in the manner urged by defendants,
section 7-141.1(g) of the Pension Code would be rendered superfluous because the IMRF
Board would have discretion to find forfeiture of ERI incentives for any number of reasons
it determines carries out the legislature’s intent–rather than the two specific reasons
expressed by the legislature.
¶ 36 Administrative agencies such as the IMRF possess no general or common-law powers.
JMH Properties, Inc. v. Industrial Comm’n, 332 Ill. App. 3d 831, 832, 773 N.E.2d 736, 737
(2002). An administrative agency’s powers consist only of those granted to it by the state
legislature and “any action it takes must be specifically authorized by the legislature.” Id. at
832-33, 773 N.E.2d at 737. Any action taken by an administrative agency not provided for
by statute is an act outside the agency’s jurisdiction. Id. at 833, 773 N.E.2d at 737.
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¶ 37 Here, the legislature did not grant the IMRF Board power to find a corporation was
created solely as a guise to circumvent the return-to-work provisions expressed in section 7-
141.1(g) of the Pension Code. The legislature granted the IMRF Board the power “[t]o carry
on generally any other reasonable activities” to carry out the intent of the IMRF. Creating
new conditions–of which an annuitant has no notice, and in direct conflict with section 7-
141.1(g) in order to find forfeiture– is not a reasonable activity. Had the legislature intended
to give the IMRF Board discretion to invent new conditions to find forfeiture, surely it would
have stated as much.
¶ 38 We hold in order for an ERI annuitant to be subject to forfeiture of the ERI incentives,
the ERI annuitant must have accepted “employment with” or had a “personal services
contract with” an IMRF employer. Here, the IMRF Board expressly stated, “The ability of
the Board to determine whether or not [plaintiff] is an employee is irrelevant to this
proceeding because no such determination is being made.” Contrary to the IMRF Board’s
assertion, whether an annuitant is an employee of, or a party to a personal service contract
with, an IMRF employer is vital to finding a violation of section 7-141.1(g) of the Pension
Code. The Agreement at issue here was between the City and ECL–a distinct legal entity–not
between the City and plaintiff. Determining a corporation is a “guise” is an equitable remedy
similar to, if not the same as, a piercing the corporate veil action. While the legislature gave
the IMRF Board the power to make administrative decisions on participation and coverage
necessary for carrying out the intent of the Fund, this general power does not include
equitable remedies generally reserved for the courts.
¶ 39 D. Remaining Issues
¶ 40 If this outcome is something the General Assembly wanted to avoid, then legislative
action is required. We understand why the IMRF Board looked askance at the arrangement
between ECL and the City, but under the present statutory scheme, the IMRF Board did not
have the authority to remedy what it viewed as a guise for wrongdoing. If the General
Assembly chooses to do so, it can provide the IMRF that authority. Because we find the
IMRF Board lacks authority to determine whether ECL was created as a guise to circumvent
the return-to-work provisions expressed in section 7-141.1(g) of the Pension Code, and
because the Agreement was between ECL and the City, not Prazen and the City, we need not
address whether the IMRF Board has the authority to determine who is and who is not
employed with or has a personal services contract with, an IMRF participating employer.
Further, we need not address whether the IMRF Board’s decision was against the manifest
weight of the evidence. The agency’s order was beyond its authority, and we reverse the
circuit court’s judgment affirming it and vacate the agency’s order.
¶ 41 III. CONCLUSION
¶ 42 We reverse the circuit court’s judgment affirming the IMRF Board’s order and vacate the
IMRF Board’s order.
¶ 43 Reversed; IMRF Board’s decision vacated.
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