BILYEU v. BOARD OF ADMINISTRATION OF STATE EMPLOYEES RETIREMENT SYSTEM (1962)

Plaintiff Bilyeu was injured in line of duty as a California Highway Patrolman. The injury resulted from the negligence of third parties, against whom Bilyeu recovered a judgment for $62,271.11. Against this judgment the State Compensation Insurance Fund filed a lien for $17,670.51. The Board of Administration of the State Employees' Retirement System (for convenience referred to herein as ‘System’), filed a notice of lien against the judgment for the sum of $52,476.06, the actuarial equivalent of the benefits which System became obligated to pay because of Bilyeu's disability retirement from the California Highway Patrol. The trial court disallowed the lien for the actuarial equivalent, but did allow a lien for $5,076.80, the amount actually paid Bilyeu by System at the time the lien was filed. Both Bilyeu and System have appealed.

Bilyeu first attacks the constitutionality of the subrogation provisions of the State Employees' Retirement Law upon the ground of discriminatory classification. He points out that the statutes providing state retirement systems for legislators, for judges and for teachers do not require subrogation in those instances where disability is caused by the wrongful act of a third party, while System has such rights under the provisions of the State Employees' Retirement Act.

Authority for the creation of the State Employees' Retirement Act is found in the State Constitution, article, 4, section 22a, which reads as follows:

‘The Legislature shall have power to provide for the payment of retirement salaries to employees of the State who shall qualify therefor by service in the work of the State as provided by law. The Legislature shall have power to fix and from time to time change the requirements and conditions for retirement which shall include a minimum period of service, minimum attained age and minimum contribution of funds by such employees and such other conditions as the Legislature may prescribe, subject to the power of the Legislature to prescribe lesser requirements for retirement because of disability.’

The power thus vested in the Legislature is plenary, and there is no requirement that a single act be framed to include all employees. Indeed, to attempt to do so would be most difficult and impractical. Classification of State employees for retirement purposes according to the nature of their employment and the retirement problems peculiar thereto was left to the judgment of the Legislature. The exercise of this power, however, is restricted by the constitutional limitation that there must be a reasonable basis for each classification created. The principles governing review of an attack upon a classification created by legislative act is thoroughly presented in Sacramento M. U. Dist. v. Pacific Gas & Electric Co., 20 Cal.2d 684. At page 693, 128 P.2d 529 at page 535 the Court had this to say:

‘Wide discretion is vested in the Legislature in making the classification and every presumption is in favor of the validity of the statute; the decision of the Legislature as to what is a sufficient distinction to warrant the classification will not be overthrown by the courts unless it is palpably arbitrary and beyond rational doubt erroneous. (Citations.) A distinction in legislation is not arbitrary if any set of facts reasonably can be conceived that would sustain it.’

(See also State of California v. Ind. Acc. Com., 48 Cal.2d 365, 371, 310 P.2d 7.)

Applying these principles to the classifications under attack we find, first, that legislators are elected for a term of two or four years; judges are either elected or appointed, and if appointed they must stand for election for a term prescribed by law; school teachers and school administrators are hired by contract. They must measure up to certain educational standards which include continuing educational requirements. Also the teacher tenure law is peculiar to their classification. An employee, on the other hand, is hired by the State for an indefinite period and most State employees are protected from arbitrary dismissal by the State Civil Service Act. Second, it is significant that the number of employees within each classification varies greatly. We are told there are approximately 250,000 members in the employees' retirement system, 130 in the legislators' retirement system, and 609 in the judges' retirement system. Third, the risk differs with each classification because of the nature of the work performed and the average age of the employees. Risk, considered in relation to number of employees, justifies a difference in the amount of contributions by the employees and by the State, as well as a difference in benefits under each classification.

The plenary nature of article 4, section 22a of the Constitution necessarily vests in the Legislature a wide discretion to ascertain from the facts before it whether there is justification for a classification. It is not within our province to decide whether the Legislature has acted wisely in making a particular classification. (City of Walnut Creek v. Silveria, 47 Cal.2d 804, 811, 306 P.2d 453; Sacramento M. U. Dist. v. Pacific Gas & Elec. Co., supra.) Furthermore, when a classification is attacked, every presumption favors its validity. (Blumenthal v. Bd. of Medical Examiners, 57 A.C. 251, 256, 18 Cal.Rptr. 501, 368 P.2d 101; In re Herrera, 23 Cal.2d 206, 212, 143 P.2d 345; Lelande v. Lowery, 26 Cal.2d 224, 232, 234, 157 P.2d 639, 175 A.L.R. 1109; 11 Cal.Jur.2d 726.) It cannot be said that the classifications established by the Legislature pursuant to article 4, section 22a, are rooted in caprice, and unconstitutional.

Bilyeu next asserts that the subrogation provisions of the Retirement Act impair the obligation of contract. It should be pointed out, first, that there are two aspects to the retirement system: one is retirement for years of service, under which retirement payments are earned by the employee, and as to this contractual right there can be no subrogation. The other, with which we are concerned, arises from premature retirement. Our specific problem relates to premature retirement resulting from disability caused by the wrongful act of a third party. With this in mind, we turn to Bilyeu's contention that when he went to work for the State he entered into a contract implied from the provisions of the State Employees' Retirement Act. He points out that pursuant to the contract he and the State paid their respective contributions. Upon this contract he predicates his right to retain the disability payments made to him by System, together with the entire judgment he recovered from the third-party wrongdoer.

It must be conceded that Bilyeu's right to disability retirement payments is predicated upon an implied contract. His argument, however, overlooks one of the terms of the contract, namely, that should the wrongful act of a third party cause System to permaturely pay him retirement because of disability, System is subrogated to his cause of action against the wrongdoer. The contributions paid to System by the State pursuant to the contract were approximately three times greater than those paid by Bilyeu. The larger contributions by the State were required to provide for the contingency of premature retirement caused by disability. The contract which protects the employee against this contingency also protects System by providing for the right of subrogation if the disability is caused by a third-party wrongdoer. This protection to System lends soundness to the over-all plan and does not penalize the employee, he simply cannot recover twice for the same payments, once from System and again from the wrongdoer.

The foregoing discussion disposes of Bilyeu's suggestion that his position is analogous to that of an insurance policyholder. He overlooks that the insured pays the entire premium, the carrier contributes nothing. Here the employee paid one-quarter while the State contributed three-quarters of the payments into the retirement fund, which contributions are comparable to an insurance premium. The analogy does not hold.

Bilyeu also argues that the subrogation provisions of the Retirement Act constitute an unlawful assignment of a cause of action arising from a tortious injury to the person, citing Fifield Manor v. Finston, 54 Cal.2d 632, 7 Cal.Rptr. 377, 354 P.2d 1073, 78 A.L.R.2d 813. It is true that in Fifield Mr. Justice Dooling, by way of framing the question before the court, stated, at page 639, 7 Cal.Rptr. at page 381:

‘We may therefore consider the question here presented to us as posing the problem whether a third party may be subrogated either by the operation of equitable principles (legal subrogation) or by contract with the injured party (conventional subrogation) to any part of a cause of action for injury to the person in view of the fact that under our law no such cause of action may be assigned.’

Later in the opinion, however, Mr. Justice Dooling pointed out that

‘Plaintiff has not cited to us any case in the California courts where a right of subrogation to a cause of action for tortious injury to the person has been recognized, except in cases where such right of subrogation has been expressly granted by statute. The Legislature where it has desired to give a right of subrogation in such cases, has done so in express language: * * *; Government Code, § 21451, giving the State Retirement System a cause of action against a person causing a member's injury or death, to recover the actuarial equivalent of the benefits for which the system is liable because of such injury or death; Government Code, § 31829, giving a similar right to a County Employees' Retirement System.’ (Emphasis added.)

Thus the holding in Fifield is exactly contrary to the position taken by Bilyeu.

Finally, Bilyeu argues that if there is any right to subrogation it must be limited to the retirement payments which accrued up to the time of entry of judgment. His position is that taking the actuarial equivalent, insofar as it is projected beyond the date of satisfaction of judgment, is an unconstitutional taking of private property.

Bilyeu recovered a judgment for $67,424.52. The actuarial lien claimed by System totaled $52,476.06. Government Code sections 21451 and 21454 which authorize the lien, make no provision for segregation of those portions of the judgment recovered for pain and suffering, for medical and hospital expenses, or for loss of wages over and above the retirement payments. A personal injury judgment of $67,424.52 necessarily includes a rather substantial sum for pain and suffering. In this particular case the State Compensation Insurance Fund also has a lien for $17,740.10, covering benefits actually paid. Thus, System's actuarial lien for $52,476.06, if allowed, would exceed the remainder of the judgment, and Bilyeu would lose his personal judgment for loss of wages and for pain and suffering. System denies that this constitutes an unlawful taking of Bilyeu's property because under similar circumstances provision is made in the Workmen's Compensation Act (Labor Code, § 3856) for a lien on the enitre amount of an employee's judgment against a third-party wrongdoer. This provision in the Labor Code was approved by the Supreme Court in Heaton v. Kerlan, 27 Cal.2d 716, at page 723, 166 P.2d 857, at page 861 with the following comment:

‘Under the statute as amended, it is clear that the employer's lien attaches to the entire judgment and that it is no longer necessary to segregate the part thereof that represents damages for pain and suffering.’

System, however, overlooks what we deem to be a critical distinction between the provisions of the Labor Code and the subrogation and lien provisions of the Employees' Retirement Act. Labor Code, section 3856, provides for a lien up to the amount of the employer's expenditures for compensation, and section 3861 provides that the remainder of the judgment over and above the amount of the lien shall be ‘a credit to the employer to be applied against his liability for compensation.’ Thus, the employee retains his judgment over and above the amount of the lien for expenditures actually paid. Future payments are simply credited against the remainder of the judgment. If the employee dies, no further credit can be claimed and the uncredited balance of the judgment which he has retained becomes a part of his estate. If he is reemployed, he retains his judgment and there is no forfeiture. On the other hand, the Retirement Act provides, first, by Government Code, section 21451, that

‘* * * the board may on behalf of this system recover from such person an amount which is the actuarial equivalent of the benefits which are provided by contributions of the State or contracting agency and for which this system is liable because of such injury or death.’;

and, second, by section 21454, that the amount of the actuarial equivalent is applied as follows:

‘Any amount recovered by way of subrogation by the employer, workmen's compensation insurer or this system shall be applied first to the amounts which the employer or its insurer has paid or become obligated to pay. The balance of the amount recovered shall be paid by this system to the fund out of which the compensation of the injured or deceased member was paid, or to the contracting agency by which the member was employed.’ (Emphasis added.)

Thus, System takes the actuarial equivalent of future payments as well as those which actually have been paid. The balance of the judgment is not credited against future payments, as is the case under the Workmen's Compensation Act. If the employee recovers and returns to his job as a reinstated employee, the disability retirement ceases and the unused balance of the lien is forfeited to System. If the employees dies without leaving a wife or dependents, the balance of the judgment is likewise forfeited. If he dies leaving a wife or dependents, the allowance is cut in half and an amount equal to the balance of the judgment may or may not be paid to his survivors depending upon their relationship to employee and their ages.

No forfeiture occurs if System recovers directly from the third-party wrongdoer, as is permitted under section 21451. In that circumstance the only issue is the amount of disability retirement that System must pay by reason of the wrongful act. The personal damages of the employee are not issues in the case. On the other hand, if System elects to simply file a lien against a judgment recovered by the employee in his personal action against the third-party wrongdoer, as in this case, we have the possibility of forfeiture of the purely personal portion of the judgment. This is true not only of that portion of the judgment attributable to pain and suffering, but also to loss of earnings. In this case Bilyeu was earning $530 per month, while his retirement payments amount to $253.84 per month. His loss of wages undoubtedly was included in the judgment and the difference between $530 wages and $253.84 retirement constitutes a personal recovery by Bilyeu

System argues that the possibility of forfeiture is part of the ‘over-all picture of a retirement plan.’ That is, the individual must expect some inequalities in a workable system since the circumstances of disability retirement are variable. We recognize that any retirement system providing disability payments must be based on incidence or range of occurrence. Events causing disability occur fortuitously and the impact of disability resulting from accident or failing health cannot be made to fall uniformly. These inevitable disparities are not repugnant to article 4, section 22a, of the Constitution, or to the legislation enacted pursuant thereto. Yet we believe the bounds of necessary and permissible inequality are exceeded by taking the projected actuarial equivalent from the personal judgment recovered by an employee. Had the Act provided for either a credit against the balance of the judgment for future payments computed on an actuarial basis, similar to the Workmen's Compensation Act (Labor Code, § 3861), or for an adjustment of the unused balance of the judgment taken by lien in case of death or reemployment, there would be no forfeiture of an employee's property and no windfall to System.

The forfeiture which we have discussed is not only unconstitutional but it also violates the purpose and spirit of the Retirement Act. Protection of an employee and his family as an inducement to competent persons to enter and remain in public employment was one reason for the enactment and ratification of article 4, section 22a. (Kern v. City of Long Beach, 29 Cal.2d 848, 856, 179 P.2d 799, and cases cited therein.) Obviously, forfeiture of a personal judgment defeats this purpose of the enabling Act.

Lest there be a misunderstanding as to the import of our holding, we again quote section 21454 of Government Code in its entirety and italicize the sentence we deem to be invalid, to wit:

‘Any amount recovered by way of subrogation by the employer, workmen's compensation insurer or this system shall be applied first to the amounts which the employer or its insurer has paid or become obligated to pay. The balance of the amount recovered shall be paid by this system to the fund out of which the compensation of the injured or deceased member was paid, or to the contracting agency by which the member was employed.’ (Emphasis added.)

This holding in nowise purports to invalidate the first sentence of section 21454, which provides for a lien up to the amount of retirement disability that System has paid or become obligated to pay. Since the last sentence of section 21454 is clearly severable from the rest of the section, its invalidity does not affect the remainder of chapter 10, title 2, of the State Employees' Retirement Act. California cases uniformly hold that if a portion of a statute is invalidated and the remainder of the statute can be administered without regard to the stricken provision, the offending part alone falls. The guiding principle in striking a part only a statute or act is that the statutory scheme or the utility of the remaining provisions must not be destroyed. (Blumenthal v. Board of Medical Examiners, supra, p. 261; Danskin v. San Diego Unified School Dist., 28 Cal.2d 536, 555, 171 P.2d 885; People v. Lewis, 13 Cal.2d 280, 284, 89 P.2d 388.) Holding the last sentence of section 21454 unconstitutional neither vitiates nor frustrates the remaining provisions of the State Employees' Retirement Act.

The judgment of the trial court limiting the lien of System to the amount of disability retirement actually disbursed by System up to the time of the entry of judgment, to wit, the sum of $5,076.80, was proper in view of our holding that the first sentence of section 21454, Government Code, is valid.

Since we have concluded that the second sentence of section 21454 is unconstitutional, the question remains of what happens to System's lien in excess of $5,076.80, that is, the actuarial equivalent of future payments. No mention of this aspect of the case appears in the order of the trial court fixing the amount of lien.

As a guide to statutory construction, the Supreme Court laid down the following principles in Select Base Materials v. Board of Equalization, 51 Cal.2d 640, at page 645, 335 P.2d 672 at page 675:

‘The fundamental rule of statutory construction is that the court should ascertain the intent of the Legislature so as to effectuate the purpose of the law. (Citations.) Moreover, ‘every statute should be construed with reference to the whole system of law of which it is a part so that all may be harmonized and have effect.’ (Citation.) If possible, significance should be given to every word, phrase, sentence and part of an act in pursuance of the legislative purpose. (Citation.) Such purpose will not be sacrificed to a literal construction of any part of the act.'

Examining the statute before us in the light of these precepts we find that section 21453 of Government Code provides:

‘Under such contract, the state fund, in its own name or in the name of the board, or the Attorney General for the board, may, to recover such amounts regardless of whether such injury or death is industrial, commence and prosecute actions, file liens, or intervene in court proceedings all in the same manner and to the same extent, provided in Chapter 5, Part 1, Division 4 of the Labor Code, for the state fund or employer, * * *.’ (Emphasis added.)

Therefore we must, as directed by section 21453, Government Code, look to the Labor Code for a way out of what appears to be an impasse as to System's lien over and above the amount actually paid Bilyeu. Section 3861, which is a part of chapter 5, part 1, division 4 of the Labor Code, provides:

‘The commission is empowered to and shall allow, as a credit to the employer to be applied against his liability for compensation, such amount of any recovery by the employee for his injury, either by settlement or after judgment, as has not theretofore been applied to the payment of expenses or attorneys' fees, pursuant to the provisions of Sections 3856, 3858, and 3860 of this code, or has not been applied to reimburse the employer.’

By placing System in the position of the employer in Labor Code, section 3861, their positions being analogous, it appears that System may credit the amount of its lien for actuarial equivalent against future payments as they accrue. To do so is to treat the lien of System ‘in the same manner and to the same extent, provided in Chapter 5, Part 1, Division 4 of the Labor Code.’

Our construction of Government Code, section 21453, and looking to chapter 5, part 1, division 4 of the Labor Code for direction, follows the intent of the Legislature in its enactment of the Employees' Retirement Act. We concluded by our earlier discussion of System's right of subrogation against third-party wrongdoers, that the Legislature did not intend that System should forfeit its right to a lien for amounts over and above the payments actually made. It was expected, however, that this right would be enforced pursuant to Government Code, section 21454, which is specific, rather than by the general provisions of Government Code, section 21453. This is so because a specific statute controls over a general statute covering the same subject. (Neuwald v. Brock, 12 Cal.2d 662, 669, 86 P.2d 1047; Rose v. State of California, 19 Cal.2d 713, 723, 123 P.2d 505.) But our determination that the last sentence of the specific statute is unconstitutional leaves as controlling the general provisions of section 21453, Government Code, which incorporate by reference the provisions of chapter 5, part 1, division 4 of the Labor Code.

We have in mind that a court in construing legislative intent must consider the consequences that will follow from a particular interpretation of a statute. (Estate of Ryan, 21 Cal.2d 498, 513, 133 P.2d 626.) We are also mindful of the cardinal rule of statutory construction that a court must adopt an interpretation of a statute which will promote rather than defeat the general purpose and policy of the law. (Dept. of Motor Vehicles v. Ind. Acc. Com., 14 Cal.2d 189, 195, 93 P.2d 131; People v. Centr-O-Mart, 34 Cal.2d 702, 704, 214 P.2d 378; East Bay Garbage Co. v. Washington Township Sanitation Co., 52 Cal.2d 708, 713, 344 P.2d 289.)

The judgment allowing System a lien of $5,076.80 is affirmed. The matter is remanded to the trial court with directions to determine the amount to be allowed System as a credit against Bilyeu's judgment, in accordance with the method provided by Labor Code, section 3861.

STONE, Acting Presiding Justice.

BROWN, J., concurs. CONLEY, P. J., deeming himself disqualified, did not participate.