STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6889

February 6, 1996

STATE ACCIDENT FUND:

The Accident Fund Benefits Trust established by the Advisory Board of the State Accident Fund

The Advisory Board of the State Accident Fund had no authority to establish the Accident Fund Benefits Trust.

Since the Advisory Board of the State Accident Fund lacked the authority to establish the Accident Fund Benefits Trust, the Trust was void from the beginning.

The Accident Fund Company owns the assets in the Accident Fund Benefits Trust.

D. Joseph Olson

Commissioner of Insurance

P.O. Box 30220

Lansing, Michigan

You have asked three questions concerning the Accident Fund Benefits Trust (Trust). You have informed this office that the Trust was established by the Advisory Board of the State Accident Fund to pay employee benefits including unused vacation and sick leave benefits. There is approximately $760,000 in the Trust and no funds have ever been paid out from the Trust.

You first ask if the Advisory Board of the State Accident Fund had the authority to establish the Accident Fund Benefits Trust.

OAG, 1975-1976, No 5147, p 695, 698 (December 7, 1976), concluded that the Michigan State Accident Fund was a state agency and that its employees were subject to civil service classification under Const 1963, art 11, Sec. 5. Subsequently the Advisory Board of the State Accident Fund undertook numerous actions intended to bolster its claim that the State Accident Fund was an autonomous entity governed by the Advisory Board and that its employees were not part of the state classified service.

On August 25, 1983, the Advisory Board purported to create the Trust. The Advisory Board authorized execution of the Trust agreement with First of America Bank-Central on its own without the authorization of the Insurance Commissioner. The Trust was designed to pay unused vacation and sick leave benefits to State Accident Fund employees terminated for reasons other than retirement. It was prompted in part by apprehension that if the Advisory Board's claims of autonomy were rejected by the courts, State Accident Fund employees' unused vacation and sick leave pay might not be paid when those employees were incorporated into the state classified service.

Eventually the Court of Appeals definitively rejected the Advisory Board's claims of autonomy. Comm'r of Ins v Advisory Bd of the Michigan State Accident Fund, 173 Mich App 566; 434 NW2d 433 (1988), lv den 433 Mich 872 (1989). That decision affirmed the circuit court determination, among other things, that the State Accident Fund was a state agency and its employees were subject to civil service classification. The unanimous decision declared: "Simply put, the Advisory Board has no authority other than to authorize the hiring of employees by the commissioner and to advise the commissioner [of insurance] in the administration of the affairs of the fund." 173 Mich App at 586. Based on this controlling precedent, it is clear that the Advisory Board had no authority to establish the Trust.

It is my opinion, therefore, in answer to your first question, that the Advisory Board of the State Accident Fund had no authority to establish the Accident Fund Benefits Trust.

Your second question is whether, if the Advisory Board of the State Accident Fund lacked the authority to establish the Accident Fund Benefits Trust, the Trust was void from the beginning.

The Court of Appeals considered an analogous question in Feeley v Accident Fund of Michigan, 193 Mich App 404; 484 NW2d 707 (1992). In that case three Accident Fund employees filed a suit in the Court of Claims alleging wrongful discharge and breach of employment contracts and also filed a companion case in the circuit court to compel arbitration of the dispute under the contracts' arbitration clauses. The employee contracts were authorized by the Advisory Board and were executed by the manager it appointed. The contracts promised severance pay equal to two years salary if the Advisory Board lost its suit to establish itself as the controlling entity of the State Accident Fund.

The Court of Appeals unanimously affirmed the Court of Claims decision that the contracts were not legally enforceable. Following the previous decision in Comm'r of Ins v Advisory Bd, supra, the Court of Appeals held that only the Commissioner of Insurance had authority to hire employees for the State Accident Fund and then only through the state classified service. The Advisory Board lacked any statutory authority to hire employees for the State Accident Fund. Feeley, supra, at 411-412. Furthermore, the Court held that because the employment contracts were invalid, the arbitration clauses were also invalid. Therefore, the Court concluded, it was not necessary to review the circuit court holding that the state could not be compelled to arbitrate. Id. at 414. Here, by analogy, the Advisory Board lacked the authority to establish the Trust and, thus, the Trust has been void from the beginning.

It is my opinion, therefore, in answer to your second question, that since the Advisory Board of the State Accident Fund lacked the authority to establish the Accident Fund Benefits Trust, the Trust was void from the beginning.

Your third question asks who owns the assets in the Accident Fund Benefits Trust.

The State of Michigan and Blue Cross and Blue Shield of Michigan entered into an Asset Purchase Agreement June 15, 1994, for the sale of all or substantially all of the assets of the Accident Fund of Michigan to the Accident Fund Company under MCL 418.701a; MSA 17.237(701a). That Agreement defines "Acquired Assets" expansively as follows:

Also, the Asset Purchase Agreement expressly excluded "any liability or obligation of [the State of Michigan] under its Employee Benefit Plans" from the definition of "Assumed Liabilities" transferred to the Accident Fund Company.

This office has been informed that at all times since the Trust was created the Trust assets have been held by the Trustee bank, not by the State of Michigan. No payments have ever been made by the Trust. Since the Accident Fund employees were incorporated into the state classified service in 1990, the Accident Fund has either paid directly or reimbursed the State of Michigan for all salary and benefit payments made to these employees. Moreover, the Accident Fund balance sheet showed the Trust assets as assets of the Accident Fund. Since the Trust assets were not "assets associated with its [the state's] Employee Benefit Plans," the Trust assets were transferred to the Accident Fund Company under the Asset Purchase Agreement.

It is my opinion, therefore, in answer to your third question, that the Accident Fund Company owns the assets in the Accident Fund Benefits Trust.

Frank J. Kelley

Attorney General