NOT RECOMMENDED FOR PUBLICATION
File Name: 1830437n.06 F ‘ al E D

Nos. 16-5569 / 16-5644 s
AUG 24 2018

UNITED sTATES coURT oF APPEALS DEBOHAH 3_ HUNT, clerk `
FoR THE sIXTH CIRCUIT

KENTUCKY EMPLOYEES RETIREMENT )
SYSTEM; BOARD OF TRUSTEES OF)

KENTUCKY RETIREMENT sYsTEMs, )
) oN APPEAL FRoi\/r
THE
Appellants/Cross-Appellees, ) UNITED STATES DISTRICT
V § CoUR'r FoR THE WESTERN
' ) DISTRICT oF KENTUCKY
sEVEN CoUNTiEs sER\/ICES, rNC., ) OPINION
)
)

Appellee/Cross-Appellant.

BEFORE: COLE, Chiei` Judge; McKEAGUE and STRANCH, Circuit Judges.
ORDER OF CERTIFICATION TO THE SUPREME COURT OF KENTUCKY

PER CURIAI\/I. This Court, invoking Kentucky Rule of Civil Procedure 76.37 (entitled
“Certitication of question of iaw”), hereby requests the Suprerne Court of Kentucky to exercise its
discretion to answer a certified question of law in this cause. The answer to this certified question
may be determinative of the cause now pending before this court; Kentucl<y law is applicable
thereto; and there is no controlling precedent in the decisions of the Suprerne Court of Kentucky
or the Court of Appeals of Kentucl<ty.l Pursuant to Rule 76.37(3), this Order of Certii`lcation sets

forth the following

 

1 Rule 76.37 is invoked upon the motion of AppellantS/Cross~Appellees Kentucky Employees Retirement
System and the Boarci of'l“rustees of Kentucky Retirernent Systems.

Nos. 16-5569 / 16~5644, Ky. Emps. Ret. Sys. v. Seven Ctys. Servs., Inc.

(a) Question of law;
(b) Statement of relevant facts and nature of the controversy;
(c) Narnes of appellants and appellees; and

(d) Names and addresses of counsel.
Ky. R. Civ. P. 76.37.

(a) Question of Law

The question of law being certified (the Question) is as follows:
Wliether Seven Counties Services, lnc.’s participation as a department in and its

contributions to the Kentucky Employees Retirement System are based on a contractual or
a statutory obligation.

(b) Staterncnt of Relevant Facts and Nature of the Controversy

The Question arises out of the efforts of Seven Counties Services, lnc., a nonprofit provider
of mental health services, to reorganize pursuant to Chapter ll of the Bankruptcy Code. The
bankruptcy and district courts found in favor of Seven Counties, holding that Seven Counties is
eligible to tile for bankruptcy and that, because Seven Counties’ obligation to pay into the
Kentucky Employees Retirernent System (KERS or the Systern) is contractual in nature, that
obligation could be rejected in bankruptcy as an executory contract. On appeal, this Court affirmed
the district court’s conclusion that Seven Counties is not a “governmental unit” within the meaning
of ll U.S.C. § 101(27) and so is eligible to file for bankruptcy Sec Ky. Emps. Ret. Sys. v. Seven
Clys. Servs., Inc., Nos. l6~5569/5644, --- F.3d --- (6th Cir. Augi 24, 2018).

The remaining issue, involving Seven Counties’ ongoing obligation to contribute to KERS,
asks this Couit to determine the legal nature of the relationship between Seven Counties and
KERS. Seven Counties characterizes the relationship as a contractual one, such that, to the extent
it is executory, it may be rejected in bankruptcy See ll U.S.C. §365. KERS argues the

relationship is purely statutory, in the nature of an assessment, such that it cannot be rejected under

 

 

Nos. l6~5569/ 16-5644, Ky. Emps. Rer. Sys. v. Seven Ctys. Servs., Inc.

§ 365 and must be maintained throughout the bankruptcy proceedings See 28 U.S.C. § 959(b).
Both sides present persuasive arguments, so this Court requests the assistance of the Supreme
Court of Kentucky in resolving the issue.

Seven Counties is a Kentucky nonprofit that has provided mental health services in the area
surrounding Louisville, Kentucky since 1978. ln its role as a community mental health center
(CMHC), Seven Counties provides services to approximately 33,000 peopfe, serving as a safety
net for adults and children with mental illnesses, emotional or behavioral disorders, developmental
or intellectual disabilities, and alcohoi or drug addictions.

ln l963, Congress passed the Mental Retardation Facilities and Community Men'tal Health
Centers Construction Act, which provided federal funding to establish CMHCS. Pub. L. No. 88-
l64, 77 Stat. 282 (1963). Bef_`ore that time, mental health services in Kentucky, as in most states,
were largely provided by the state government Using federal funding, Kentucky chose to provide
services through CMHCs, passing laws that enabled their creation and regulation Seven Counties’
predecessor in the Louisville area, a nonprofit that eventually became known as River Region
Mental Health-Mental Retardation Board, was founded at that time.

When River Region and the other new CMHCS formed in 1966, many of their new
employees had previously been employees of the Kentucky Department of Mental Health. Those
employees were reluctant to leave the state system and give up the retirement benefits they had
been accruing in the state public pension system, KERS.2 In response, the Governor issued an
executive order declaring that “community mental health boards are permitted to become and are

participating agencies in the Kentucky Employefe}s Retirement System.” Ky. Exec. Order No.

 

2 KERS is a cost»sharing, multiple-ernployer, defined-benefit retirement plan. lt is not an individual defined-
contribution account, such as a 401(k). KERS is administered by the Kentueky Retirement Systems, which also
administers separate retirement systems for county employees and for the state police. Both KERS and the Board of
the Kentucky Retirement Systems are parties to this suit.

_3_

Nos. 16-5569/ 16-5644, Ky. Emps. Ret. Sys. v. Seven Crys. Servs., Inc.

66-378 (June 23, 1966). The order did not distinguish between newly hired employees and those
who were transitioning from state employment Three CMHCS declined to participate; the
remainder became part of KERS.

In 1978, River Region filed in the Bankruptcy Court for reorganization and then for
bankruptcy under Chapter XI of the Bankruptcy Act of 1898, which was granted. That same year,
Seven Counties was incorporated and became the designated CMHC for the area formerly served
by River Region. As the bankruptcy court concluded, “[e]xcept for adopting its separate corporate
identity and not assuming debt, Seven Counties was the direct successor to River Region for all
business and regulatory purposes.”l‘ -In re Seven Clys. Servs., Inc. (Ky. Emps. Ret. Sys. v. Seven
Clys. Servs., Inci), 51 l B.R. 431, 443 (Bankr. W.D. Ky. 2014), a]j“’a' inpar'f, rev ’d inparr, 550 B.R.
741 (W.D. Ky. 2016).

But Seven Counties was not automatically pulled into KERS. Approximately six months
after Seven Counties formed, its executive director sent a letter to the Kentucky Retirement
Systems-the body that administers KERS_about Seven Counties’ participation in KERS as well
as a letter to the Attorney General asking whether it was eligible to participate in KERS. The
Attorney General’s response cited the provision in Kentucky law that allows an entity to become
a participating “department” in KERS upon issuance of an executive order, Ky. Rev. Stat.
§ 6l.510(3), and conciuded that because Seven Counties “appears to be [River Region’s] newly
created successor, it is our opinion that [Seven Counties] employe[e]s may begin to participate in
the KERS upon the issuance of an Executive Order from the Governor to that effect.” _Ky, Op.
Att’y Gen. No. 78-685, 1978 WL 26239 (Oct. 4, 1978). Seven Counties then petitioned the
Governor to sign an Executive Order to allow Seven Counties to join KERS. in January, the

Governor issued an executive order “designat[ing] Seven Counties Services, lnc. as a participating

Nos. 16-5569 / 16-5644, Ky. Emps. Rer. Sys. v. Seven Crys. Servs., Inc.

department in the Kentucky Employele]s Retirement System.” Ky. Exec. Order No. 79-78 (.`lan.
24, 1979).

KERS is a defined benefit plan. Participating employers and their employees pay into the
System at a set rate and then, upon retirement, the System pays out the defined benefit at a rate
determined by multiplying the employee’s final compensation, the “benefit factor,” and the
number of years of service credit. lf the rate at which employers pay into the System is not set
appropriately, KERS can become underfunded.

KERS became underfunded in the early ZOOOS. Recognizing the funding crisis in its public
pension system, Kentucky’s General Assembly phased in increased employer contribution rates
starting in 2008, and then, in 2013, began requiring employers participating in KERS_including
the State itself-to contribute at the full, actuarially required rate going forward See Ky. Rev.
Stat. § 61.565. Aware of the burden this placed on some participating employers, the legislature
provided assistance to CMHCs, keeping their rates somewhat lower than those of other employers
in the System. Seven Counties’ historic contribution rates were in the single-digit'range. When
Seven Counties filed its petition in April 2013, its contribution rate was just under 24% of wages

According to the bankruptcy couit, at an employer contribution rate of 24%, “Seven
Counties can perform its charitable mission or pay System contributions that will force it to
terminate operations lt cannot do both.” fn re Seven Clys. Servs., 511 B.R. at 453. And as of
2013, there was no statutory mechanism by which Seven Counties could Withdraw from KERS,3
So Seven Counties filed a Chapter l l petition. If` Seven Counties is permitted to withdraw, KERS
estimates that it will leave behind a shortfall of over $90 million to be picked up by other employers

in the System or the Comrnonweaith.

 

3 ln 2015, the General Assembly passed a law allowing an employer to voiuntariiy withdraw from KERS
upon paying withdrawal liability. See Ky. Rev. Stat. § 61.522(3)(a).

_5_

Nos. 16-5569/ 16-5644, Ky. Emps. Ref. Sys. v. Seven Ctys. Servs., Inc.

The proceedings since filing have been lengthy and convoluted. In the instant matter,
KERS appeals the dismissal of its complaint in an adversary proceeding In that complaint, KERS
made two basic arguments: (l) that Seven Counties is a “gcvernmental unit” and therefore
ineligibie to file under Chapter 11, and (2) that Seven Counties should be required to comply with
its statutory obligations to make contributions and reports to KERS during the pendency of
bankruptcy proceedings fn the same proceeding_and addressed by the bankruptcy court in the
same ruling_Seven Counties filed a motion seeking to reject its obligation to contribute to KERS
as an executory contract The bankruptcy court found in favor of Seven Counties on all counts.
See fn re Seven Clys. Servs., 511 B.R. at 437. The district court affirmed This Court affirmed on
the first issue but requests the assistance of the Supreme Court of .i<lentucky in answering the
secondmthat is, in determining whether Seven Counties’ obligation to contribute to KERS is
contractual or statutory in nature.

Seven Counties argues that the obligation is contractual, on the basis that the 1978 letters
to KERS and the Attorney General, along with the subsequent petition to join KERS, constitute an
offer, which was accepted with the passage of the Executive Order. The statutes and regulations
governing participation in KERS form the terms of the contract Seven Counties argues that
consideration is adequate because by paying contributions, it accessed a pension system, in return
for which KERS promised to manage the funds and pay benefits to employees

KERS responds that the obligation is statutory, in the nature of an assessment fn essence,
employer contributions to KERS are a fee for a service, analogous to the charge for drainage
services at issue in Long Run Bapti.st Ass’n, Inc. v. Louisville & Jej”erson Counly Metropolitcm
Sewer Distrr'ct, 775 S.W.Zd 520, 521 (Ky. Ct. App. 1989). It argues that the Kentucky General

Assembly has made statutory contracts elsewhere, as with the “inviolable contract” found in Ky.

Nos. 16-5569/ 16-5644, Ky. Emps. Ret. Sys. v. Seven Ctys. Servs., Inc.

Rev. Stat. § 61 .692, but did not take that approach here, instead declaring CMHCs to be
“participating department{s]” in KERS, see Ky. Rev. Stat. § 61.510(3).

Deciding the nature of the relationship between KERS and Seven Counties requires
interpreting both Kentucky statutes governing participation in KERS and Kentucky caselaw about
the nature of a contract ln each circumstance, the key problem is one of Kentucky law. See Ky.
R. Civ. P. 76.37(1).

The Kentucky Supreme Court’s decision on this issue “niay be”_although will not
necessarily be_determinative of almost all of this cause. See Ky. R. Civ. P. 76.37(1). To be ciear,
the “cause” is KERS’s adversary proceeding, not the entirety ofSeven Counties’ bankruptcy filing
lf the Kentucky Supreme Court determined that the relationship is statutory in nature, the relatively
minor issue of whether that obligation must be faithfully maintained during the pendency of
proceedings under 28 U.S.C. § 959(b) would remain; Seven Counties’ cross appeal (assuming for
the sake of argument that it is properly presented in this proceeding) would also remain. But Seven
Counties would be unable to reject its obligation to participate in KERS as an executory contract,
which would resolve the core claim raised in KERS’s adversary proceeding

We are not aware of any precedent from Kentucky courts that provides clear guidance in
answering this question. See Ky. R. -Civ. P. 76.37(l). There are a few decisions from Kentucky
courts analyzing the statutes governing participation in KERS, see, e.g., Ky. Regz`on Eight v.
Commonwealth, 507 S.W.Zd 489, 491 (Ky. 1974), some describing statutory assessments, see,
e.g., Long Rzm Bapn`st Ass’n, 775 S.W.Zd at 521, and many more interpreting the elements of a
contract, see, e.g., Energy Homes v. Peay, 406 S.W.3d 828 (Ky. 2013). But we are aware of no

state court decisions that should guide our choice as to which of these bodies of law to apply.

Nos. 16-5569/ 16-5644, Ky. Emps. Ret. Sys. v. Seven Ctys. Servs., Inc.

The United States Supreme Court has long encouraged certification of issues that are
“immensely important to a wide spectrum of state government activities.” Elkr`ns v. Moreno,
435 U.S. 647, 662 n.l6 (1978). Though the decision on the issue in this case may resolve a
historical problem relating only to l this particular entity, it may still have far-reaching
consequences A conclusion that Seven Counties can reject its relationship with KERS could have
a significant impact on the fiscal health of the Kentucky public pension system-and therefore on
the retirement benefits of many state employees The contrary conclusion, that Seven Counties
cannot reject its relationship With KERS, may imperil the existence of Seven Counties and the
provision of mental health services for tens of thousands of people in and around Louisville.
Accordingly, the Question is properly subject to review and consideration by the Supreme Court
of Kentucky.

(c) Names of Appellants and Appellees
AppellamS/Cross-Appellees
Kentucky Employees Retirement System;

Board of Trustees of Kentucky Retirement Systems.

Appellee/Cross-Appellant

Seven Counties Services, lnc.

(d) Names and Addresses of Counsel

Coun.s'el for Kentucky Employees Retirement System & Board of Trusfees OfKentuc/cy
Retirement Systems

Daniel R. Swetnam
Victoria E. Powers

Tyson A. Crist

ICE MILLER LLP

250 West Street, Suite 700
Columbus, Ohio 43215

Nos. 16-5569! 16-5644, Ky. Emp.r. Re!. Sys. v. Seven Clys. Servs., Irrc.

Counselfor Seven Counties Servr`ces, Inc.

G. Eric Brustad, .lr.
DECHERT LLP

90 State House Square
Hartford, Connecticut 06103

David M. Cantor

SE]LLER WATERMAN LLC
Meidinger Tower, 22nd Floor
462 S. Fourth Street, Suite 2200
Louisville, Kentucky 40202

Paul J. Hershberg

GRAY & WHITE

713 E. Market Street, Second Flocr
Louisville, Kentucky 40202

(e] Certification Order
Pursuant to the foregoing, and invoking Rule 76.37 of the Kentucky Rules of Civil

Procedure, it is hereby ORDERED:

(l) that the Question be, and the same hereby is, certified to the Supreme Court cf
Kentucky;

(2) that the Clerk forward to the Supreme Court of` Kentucky, under our official seal, a
copy of this Order of Certification; and

(3) that to the extent requested by the Supreme Court of Kentucl<y, the Clerk provide that
Court with the original or copies of all or such portions of the record before this Court as
the Supreme Court of` Kentucky deems necessary to a determination of the Question.

This Order of Certification is entered by Chief.ludge Cole, as the Judge presiding at oral argument

in this Court, pursuant to Rule 76.37(4) of the Kentucky Rules of Civil Procedure, with the

concurrences of.ludge Stranch and Judge l\/lcl{eague.14
FOR THE COURT:

:.,» _ tries Quo §§

:`_`“~"* "r_ j R. Guy Co|e .lr., Chief Jiidge
i-. l Chref J ridge f the United States Court of Appeal for the Sixth Circuit

 

 

“ For the reasons stated in his dissent to the accompanying opinion, Judge Mcl(eague believes that Seven
Counties, through its Board, is an c‘instrun'lentality” of Kentucky under the Bankruptcy Code, and thus remains
ineligible to file for bankruptcy under Chapter ll. Theref`ore, he believes that this ce11ificati0n order is unnecessary

-9_

