Beth Lewis Maze v. Board of Directors for the Commonwealth Postsecondary Education Prepaid Tuition Trust Fund

• Court: Kentucky Supreme Court
• Decided: November 1, 2018
• Docket: 2017-SC-0233
• Status: Unpublished

Opinion

RENDERED: NOVEMBER 1, 2018 TO BE PUBLISHED

2017-SC-000233-DG

BETH LEWIS MAZE AND APPELLANTS UNKNOWN SIMILARLY SITUATED PURCHASERS OF KAPT CONTRACTS

ON REVIEW FROM COURT OF APPEALS V. CASE NO. 2016-CA-000496-MR FRANKLIN CIRCUIT COURT NO. 15-CI-00757

BOARD OF DIRECTORS FOR THE APPELLEES COMMONWEALTH POSTSECONDARY EDUCATION PREPAID TUITION TRUST FUND; DAVID L. ALLEN, IN HIS OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; JOHN CHESHIRE, IN HIS OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; CHARLES VINSON, IN HIS OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; ERICA L. HORN, IN HER OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; BECKY LAMB, IN HER OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; BRENT A. MCKIM, IN HIS OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; KRISTI P. NELSON, IN HER OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; LISA PAYNE, IN HER OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; BARBARA SEXTON-SMITH, IN HER OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; J. SCOTT WANTLAND, IN HIS OFFICIAL CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS; DR. GARY S. COX, IN HIS OFFICIAL CAPACITY AS AN EX OFFICIO MEMBER OF THE BOARD OF DIRECTORS; DR. TODD HOLLENBACH, IN HIS OFFICIAL CAPACITY AS AN EX OFFICIO MEMBER OF THE BOARD OF DIRECTORS; DR. TERRY HOLLIDAY, IN HIS OFFICIAL CAPACITY AS AN EX OFFICIO MEMBER OF THE BOARD OF DIRECTORS; DR ROBERT KING, IN HIS OFFICIAL CAPACITY AS AN EX OFFICIO MEMBER OF THE BOARD OF DIRECTORS; DR. LORI FLANERY, IN HER OFFICIAL CAPACITY AS AN EX OFFICIO MEMBER OF THE BOARD OF DIRECTORS; KENTUCKY HIGHER EDUCATION ASSISTANCE AUTHORITY; AND THE COMMONWEALTH OF KENTUCKY, FINANCE AND ADMINISTRATION CABINET

OPINION OF THE COURT BY JUSTICE VENTERS

REVERSING

Beth Lewis Maze, et al. (Appellants)1 appeal from a decision of the Court

of Appeals which reversed the order of the Franklin Circuit Court that granted

partial summary judgment to Appellants in a dispute concerning various

statutory amendments to the Kentucky Affordable Prepaid Tuition Fund (KAPT)

contracts previously purchased by the Appellants. Appellees are the Board of

Directors for the Commonwealth Postsecondaiy Education Prepaid Tuition

Trust Fund (Board) and its individual members named in their official

1 The Complaint and Petition for Declaratory Judgment listed as additional plaintiffs, “Unknown Similarly Situated Purchasers of KAPT Contracts.” The Motion for Discretionary Review identified same as Appellants. This provision in Maze’s complaint seemingly implicates our class-action litigation rules, CR 23. Appellees did not object to Maze’s assertion of claims for unknown KAPT participants. The supposed class- action nature of the lawsuit is not an issue before us. capacities; the Kentuclty Higher Education Assistance Authority; and the

Finance and Administration Cabinet.

The Court of Appeals disagreed with the trial court’s legal conclusion

regarding the retroactive application of the 2014 statutory changes affecting

the 2003 contracts for prepaid college tuition entered into by Maze and the

Board. The Court of Appeals interpreted those contracts as providing, in

association with their enabling statutes, that KAPT participants like Maze, and

others similarly situated, had expressly agreed to be bound by amendments to

the contracts imposed by future statutory and regulatory changes. The Court

of Appeals thus concluded that the 2014 amendments validly altered

Appellants’ contracts. The Court of Appeals reversed the trial court and held

that the Appellees, rather than Maze, should have been granted summary

judgment as a matter of law.

For the reasons stated below, we conclude that the KAPT contracts

executed by Maze and those similarly situated, and the underlying enabling

statutes, do not authorize the contractual changes imposed by the retroactive

application of the statutory amendments involved here, and that the retroactive

imposition of those amendments upon Maze unlawfully impairs her contracts

in violation of U.S. Const. Art. 1 § 10, cl. 1. and Ky. Const. § 19. Accordingly,

we reverse the Court of Appeals and reinstate the judgment of the trial court.

I. FACTUAL AND PROCEDURAL BACKGROUND

The material facts are not in dispute and may be summarized as follows.

In 2000, the Kentucky General Assembly enacted KRS 164A.700-164A.709, establishing the Commonwealth Postsecondary Education Prepaid Tuition

Trust Fund, also known as the Kentucky Affordable Prepaid Tuition Fund, or

KAPT. This program allowed and encouraged Kentucky families with pre­

college aged children to contract with the KAPT Board to “lock in” the current

tuition rates for future attendance at a public university in Kentucky.2

Allowing the prepayment of college tuition permitted the parents of young

children to insure against future increases in tuition rates. KRS 164A.701(2){b)

identifies KAPT’s primary goal as, “provid[ing] students and their parents

economic protection against rising tuition costs.” In addition to the statutory

provisions of KRS Chapter 164A, KAPT contracts are governed by the KAPT

“Master Agreement” whose provisions track the enabling statutory language,

generally providing that a contract participant will be guaranteed the state

college tuition rate existing at the time the participant entered into the

program.

Of crucial significance to our analysis, KRS 164A.705(1) expresses an

unequivocal assurance to plan participants that they will receive the benefits

they purchased as promised: “The prepaid tuition contract entered into by the

purchaser and the board shall constitute an irrevocable pledge and guarantee

by the fund to pay for the tuition of a qualified beneficiary upon acceptance

2 KAPT’s informational material stated that fund balances could also be used to attend private and out-of-state universities, and that any unused funds would be refunded to the contract participant. And so, the benefits of KAPT are not limited to Kentucky’s public universities. and enrollment at an eligible educational institution in accordance with the

tuition plan purchased.”

In January 2003, Maze purchased a KAPT “Standard Plan” contract for

the benefit of each of her three sons. She listed their Projected College

Entrance Years (PCEY) as 2008, 2010, and 2013, respectively. The Standard

Plan contracts permitted purchasers to pre-pay at the time of purchase up to

five years of tuition at the then-current cost of full-time tuition at Kentucky’s

most expensive public university. The payments could be paid in a single lump

sum, or through a monthly payment plan. The Plan covered both

undergraduate and graduate school tuition.

With those purchases. Maze entered into a Master Agreement which

incorporated “the terms and provisions of KAPT Regulations and KRS

164A.700-709, as may be amended from time to time.” At the time of Maze’s

purchase, neither the KAPT contracts themselves nor the statutes governing

KAPT contained a time limitation within which the prepaid tuition must be

used; nor did the contracts and governing statutes provide a time limit after

which the plan would cover something less than the full cost of tuition at any

of Kentucky’s public universities. Maze fulfilled all of her obligations under the

KAPT agreements. When their time of college enrollment came, two of Maze’s

sons received substantial academic scholarships, and they did not need

immediate use of their prepaid tuition. They intended to apply their KAPT

funds toward graduate school tuition. 2014 Legislative Changes

In 2014, with the enactment of House Bill 279, the General Assembly

made several significant changes to the KAPT program that affected the

contracts Maze had purchased eleven years earlier. Among the amendments

was the imposition of a newly devised “utilization period,” which for the first

time imposed time limitations upon the KAPT contracts. The legislation

defined the “utilization period” as “the period of time in which a prepaid tuition

contract is to be used beginning with the projected college year and continuing

for the number of prepaid tuition years purchased.” KRS 164A.700(18).

The statutorily imposed condition operated retroactively to cover the

contracts that Maze, and others, had purchased and paid for. Under this new

provision, a KAPT plan participant who had purchased four years of prepaid

tuition, with a projected college entry year of 2008, would have to use up the

prepaid tuition before the end of 2012. Under the statutory change, plan

participants lost the option of reserving their use of prepaid tuition for tuition

needs beyond the “utilization period.”3

The statutory changes also added a limit on the extent to which a

purchased plan would cover the inflation of future college tuition. Maze’s KAPT

contracts had no such limitation. House Bill (HB) 279 amended KRS

164A.705(7) to provide:

During an account’s utilization period, the value of the prepaid tuition account shall increase consistent with tuition rates for the

3 The unused prepaid tuition would not be forfeited; the participant could withdraw the balance of funds not used within the utilization period. applicable tuition plan and academic year. If all tuition benefits have not been used at the conclusion of [the utilization] period, the account value shall increase at a rate of three percent (3%) per annum or the applicable tuition plan value increase, whichever is less, for a period not to exceed two (2) additional years. No additional value shall be added to a prepaid tuition account after two (2) years past the utilization period [(2014 for Maze’s oldest child)].

Finally, the 2014 amendments also set June 30, 2028 as the termination

date of the KAPT program, requiring that any prepaid tuition not used by that

date be refunded to the purchaser. KRS 164A.709(8).

These legislative actions appear to have been an attempt to correct for a

significant miscalculation in the financial viability of the program from its

inception. In the years following the creation of the KAPT program, college

tuition for public universities in Kentucky increased at rates well beyond what

was anticipated and well beyond the growth of the fund managed by the KAPT

Board, resulting in a substantial unfunded liability in the program.

On July 14, 2015, Maze filed a Complaint and Petition, on behalf of

herself and “Unknown Similarly Situated Purchasers of KAPT Contracts,”4

seeking declaratory and injunctive relief against the enforcement of the 2014

amendments. At the time of her Complaint, unused KAPT funds remained

available in all three of her accounts. Maze asserts that her sons intended to

apply the funds in their KAPT accounts to their graduate school tuition, which

would fall outside of the “utilization period” established under the 2014 KAPT

amendments. Citing this provision and the newly imposed cap on the growth-

See note 1. rate value of her accounts, she alleges that the 2014 amendments to KAPT

unconstitutionally impaired the value and obligations of her contracts with the

Board.

The parties filed cross-motions for summary judgment. The trial court

overruled the Board’s motion and granted summary judgment to Maze. The

trial court agreed with Maze that the language of the KAPT Master Agreement

and its underlying enabling statutes do not demonstrate an intention of the

parties that amendments of the kind enacted by the 2014 legislation would

retroactively apply to their 2003 contract. Proceeding to the constitutional

question, the trial court concluded that the 2014 amendments to KAPT were an

unjustified and unconstitutional impairment of her contract rights under the

Master Agreement.

In contrast, the Court of Appeals interpreted the applicable contracts as

expressing the parties’ agreement that subsequent amendments to the

governing statutes and regulations would change the terms and conditions of

their existing contracts, thus interpreting the retroactive application of the

2014 amendments as permissible. Accordingly, the Court of Appeals reversed

the summary judgment granted to Maze and ordered the entry of judgment for

the Board. We granted discretionary review.

II. ANALYSIS “Because summary judgment involves only legal questions and the

existence of any disputed material issues of fact, an appellate court need not

defer to the trial court’s decision and will review the issue de novo” Lewis v. B

8 & R Corporation, 56 S.W,3d 432, 436 (Ky. App. 2001). Since no material issues

of fact are in dispute, our review involves a de novo review of the applicable

KAPT enabling statutes and the terms of the Master Agreement. CR 56.03.

The interpretation of a contract, including determining whether a

contract is ambiguous, is a question of law to be determined de novo on

appellate review. Abney v. Nationwide Mutual Insurance Company, 215 S.W.3d

699, 703 (Ky. 2006); Kentucky Shakespeare Festival, Inc. v. Dunaway, 490

S.W.3d 691, 694-95 (Ky. 2016).

Our review requires the interpretation of various KAPT statutory

provisions contained in KRS Chapter 164A and contractual provisions

contained in the Master Agreement. A basic rule of contract interpretation

requires that preference be given to the “interpretation which gives a

reasonable, lawful, and effective, meaning to all the terms” over a reading

“which leaves a part unreasonable, unlawful, or of no effect.” Comstock & Co.,

Inc. v. Becon Const. Co., 932 F. Supp. 948, 967 (E.D. Ky. 1994) (quoting

Restatement (Second) of Contracts § 203(a) (1979)).

Moreover, “‘in the absence of ambiguity, a written instrument will be

enforced strictly according to its terms,’ and a court will interpret the contract’s

terms by assigning language its ordinary meaning and without resort to

extrinsic evidence.” Wehr Constructors, Inc. v. Assurance Company ofAmerica,

384 S.W.3d 680, 687 (Ky. 2012) (quoting Frear v. P.T.A. Industries, Inc., 103

S.W.3d 99, 106 (Ky. 2003)). “A contract is ambiguous if a reasonable person would find it susceptible to different or inconsistent interpretations.” Hazard

Coal Corporation v. Knight, 325 S.W.Sd 290, 298 (Ky. 2010) (citation omitted).

“When no ambiguity exists in the contract, we look only as far as the four

comers of the document to determine the parties’ intentions.” 3D Enterprises

Contracting Corporation v. Louisville and Jefferson County Metropolitan Sewer

District, 174 S.W.Sd 440, 448 (Ky. 2005) (citation omitted). If the language is

ambiguous, the court’s primary objective is to effectuate the intentions of the

parties. Cantrell Supply, Inc. v. Liberty Mutual Insurance Company, 94 S.W.Sd

381, 384 (Ky, App. 2002). “The fact that one party may have intended different

results, however, is insufficient to construe a contract at variance with its plain

and unambiguous terms.” Abney, 215 S.W.Sd at 703 (Ky. 2006) (quoting

Cantrell, 94 S.W.Sd at 385).

In construing a statute, it is fundamental that our foremost objective is

to determine the legislature’s intent in enacting the legislation. “To determine

legislative intent, we look first to the language of the statute, giving the words

their plain and ordinary meaning.” Richardson v. Louisville/Jefferson County

Metro Government, 260 S.W.Sd 777, 779 (Ky. 2008). That is, we construe a

“statute only as written, and the intent of the Legislature must be deduced

from the language it used, when it is plain and unambiguous . . . .” Western

Kentucky Coal Co. v. Nall & Bailey, 14 S.W.2d 400, 401-02 (Ky. 1929).

Therefore, when a statute is unambiguous, we need not consider extrinsic

evidence of legislative intent and public policy. County Bd. of Educ. Jefferson

County V. Southern Pac. Co., 9 S.W.2d 984, 986 (Ky. 1928). However, if the

10 statutory language is ambiguous, we will look to other sources to ascertain the

legislature’s meaning, such as legislative history and public policy

considerations. MPMFinancial Group Inc. v. Morton, 289 S.W.3d 193, 198 (Ky.

2009). Further, we “read the statute as a whole, and with other parts of the

law of the Commonwealth, to ensure that our interpretation is logical in

context.” Lichtenstein v. Barbanel, 322 S.W.3d 27, 35 (Ky. 2010); Pearce v.

University of Louisville, by and through its Board of Trustees, 448 S.W.3d 746,

749 (Ky. 2014).

III. THE KAPT CONTRACTS EXECUTED BY THE PARTIES DO NOT CONFER THE UNLIMITED AUTHORITY TO THE LEGISLATURE TO RETROACTIVELY AMEND THE CONTRACTS

The Court of Appeals concluded, and the Appellees continue to argue,

that the KAPT statutes and associated Master Agreement that existed in 2003

when Maze purchased her plans express her agreement to accept any

subsequent legislative changes to the terms and conditions of the KAPT

program, including the retroactive application of the 2014 legislative changes.

Appellees contend that the 2014 amendments fall squarely within the language

of the applicable 2003 KAPT statutes and associated Master Agreement.

If Appellees are correct in their construction of the relevant statutory and

the Master Agreement language, our inquiry ends. If the plan participants had

agreed that such changes would be accepted, the retroactive amendments

would be clearly applicable. Maze’s claim would fail, and we would not reach

the constitutional question. Therefore, we begin our analysis with an

examination of the text of the Master Agreement and the associated statutory

11 enabling language to see if the KAPT program includes provisions conferring

broad discretion upon the legislature to amend the program and to impose

retroactive application of those amendments.

A. The Positions of the Parties and the Lower Courts

Kentucky law mandates that “[n]o law shall be construed to be

retroactive, unless expressly so declared.” KRS 446.080(3). See also Jackson

V. Evans, 145 S.W.2d 1061, 1062 (Ky. 1940) (“A construction giving retroactive

effect to a statute is not favored. Hence unless the intention is manifested that

a legislative act shall have a retroactive effect, it is not so regarded.”) (internal

citations omitted).

Similarly, it is a generally accepted rule of construction that “changes in

the law subsequent to the execution of a contract are not deemed to become

part of [the] agreement unless its language clearly indicates such to have been

[the] intention of [the] parties.” Kia Motors America, Inc. v. Glassman

Oldsmobile Saab Hyundai, Inc., 706 F.3d 733, 738 (6th Cir. 2013) (citing 11

Richard A. Lord, Williston on Contracts^ 30:23 (4th ed. 1990) and Rutherford

Farmers Coop. v. MTD Consumer Grp., Inc., 124 Fed. Appx. 918, 920 (6th Cir.

2005)). That is, “[c]ontracting parties are free to agree that their rights and

duties will track the law as it changes, but because the terms of their bargEiin

could be significantly altered, they must make their intent to do so clear.” Id.

HB 279 expressly declared the retroactive application of the 2014

amendments. However, as explained, because the legislature’s authority to

retroactively impose such amendments upon existing contractual rights and

12 obligations is not unlimited, the retroactive language contained in the 2014

amendment is not immediately dispositive of the issues here.

The Appellees argue that by signing the Master Agreement, Maze

expressly agreed that the General Assembly could amend the KAPT program

and the Master Agreement at any time, and that those amendments could

retroactively affect her KAPT contract. Crucial to this conclusion are two

provisions of the Master Agreement; Article X Section 10.08 and Article II

Section 2.09.

Article X Section 10.08 of the Master Agreement states:

Promulgation and Amendment of KAPT Regulations. Purchaser understands and agrees that, in consideration for the benefits afforded under the KAPT program, changes to this Agreement may be necessary to assure the program’s compliance with 26 U.S.C. 529 and related regulations. In such event, the Purchaser authorizes KAPT to amend this Agreement to the extent necessary to obtain federal income tax benefits. Accordingly, the Board, on behalf of KAPT, shall promulgate such other Regulations and procedures and shall amend such KAPT Regulations as deemed appropriate or necessary by the Board to maintain compliance with 26 U.S.C. 529 and Kentucky law. Amendments to Regulations and procedures shall be incorporated into this Agreement, and the Purchaser and Qualified Beneficiary shall be subject to all such amendments. Amendments to this Agreement shall be made with retroactive effect to the extent necessary to assure compliance with applicable state or federal law or regulations or to preserve favorable tax treatment of the KAPT program.

(Emphasis added.)

Article II Section 2.09 provides as follows:

“Prepaid Tuition Contract” means this Agreement entered into by the Board and the Purchaser for the purchase of Prepaid Tuition for a Qualified Beneficiary to attend any Participating Institution, including without limitation, the terms and provisions of KAPT Regulations and KRS 164A.700-709, as may be amended from time to time. In the event of any amendments to KAPT regulations, 13 Code Section 529, or state statute, this Agreement shall be amended consistent with any such changes, with retroactive effect or otherwise.

In opposition to the Court of Appeals’ conclusion, Maze argues that

Section 10.08 supports her position because it expressly authorizes

amendments to the KAPT agreement only as “to the extent necessary to obtain

federal income tax benefits.” Maze points out that she agreed, pursuant to

Section 10.08, only to the retroactive application of amendments “to the extent

necessary to assure compliance with applicable state or federal law or

regulations or to preserve favorable tax treatment of the KAPT program.”

Because the 2014 amendments were not necessary for that stated purpose,

they fall outside of this limited authorization provided in Section 10.08.

Maze argues, consistently with the trial court’s ruling, that Sections

10.08 and 2.09 conflict with one another and do not express a clear intention

of the parties to be bound by broad amendments like those contained in HB

279. Maze contends that the specificity of Section 10.08 with respect to the

nature of allowable retroactive amendments to the KAPT agreement means

that, under traditional rules of contract interpretation, it takes precedence over

the more general amendment authority provided by Article II Section 2.09.

Under her construction of the applicable provision, she consented to be bound

only by amendments necessary “to assure compliance with applicable state or

federal law or regulations or to preserve favorable tax treatment of the KAPT

program.”

14 Appellees argue that these provisions do not conflict, that Section 10.08

merely provides one specific reason to accept amendments to the Master

Agreement, and that Section 2.09 demonstrates the parties’ agreement that the

Master Agreement, as a whole, would track changes in state law with

retroactive effect.

The Court of Appeals relied heavily upon KRS 164A.707(9), a component

of the original KAPT legislation that remained unchanged by the 2014

legislation. KRS 164A.707{9) states as follows;

Each prepaid tuition contract is subject to, and shall incorporate by reference, all operating procedures and policies adopted by the board, the statutes governing prepaid tuition contracts in KRS 164A.700 to 164A.709 and 393.015, and administrative regulations promulgated thereunder. Any amendments to statutes, administrative regulations, and operating procedures and policies shall automatically amend prepaid tuition contracts, with retroactive or prospective effect, as applicable.

According to the Court of Appeals, KRS 164A.707(9) “expresses the

General Assembly’s intent that amendments to the statutes and regulations

regarding KAPT will have retroactive effect.” Thus, the Court of Appeals

construed this provision, incorporated into the original KAPT agreement, as a

manifestation of the parties’ intent for retroactive application of any statutory

or regulatory amendments to the KAPT plan. The Court of Appeals reasoned

that Section 10.08 operated “in addition to, and not in conflict with,” Section

2.09’s general provision concerning retroactivity; and that Section 10.08 merely

describes one instance in which statutory amendments to the terms and

conditions of the KAPT contract will apply retroactively. The Court of Appeals 15 reasoned that Maze’s construction of the Master Agreement giving precedence

to the specificity of Section 10.08 “would render Section 2.09 and its final

sentence meaningless.”

B. Analysis

As part of the KAPT program’s legislative foundation, KRS 164A.705(1)

expresses an unequivocal assurance to plan participants that they will receive

all of the benefits they purchased: “The prepaid tuition contract entered into by

the purchaser and the board shall constitute an irrevocable pledge and

guarantee by the fund to pay for the tuition of a qualified beneficiary upon

acceptance and enrollment at an eligible educational institution in accordance

with the tuition plan purchased.”

Ordinarily, no special written language is necessary to assure contracting

parties that, if they perform their contractual obligations, they are entitled to

receive the bargained for performance of the other party. The contract itself

provides the assurance that a promise will be kept; that is inherent in the

concept of a contract. KRS 164A.705(l) is the legislature’s imprimatur of

respect for KAPT’s obligations. In light of KRS 164A.705(l)’s direct and

unambiguous assurance that the benefits promised to KAPT plan purchasers

will be delivered to KAPT plan purchasers, we find it impossible to conceive

that the General Assembly would, in reality, assert the power to reduce the

bargained-for benefit of KAPT program participants through subsequent

modification authorized by the murky language of KRS 164A.707(9) for

retroactive effect of statutory amendments, “as applicable.” Under the

16 established rule that a statute is to be interpreted in accordance with its plain

language, we will begin with the presumption that the retroactive 2014

amendments conflict with straight-forward “irrevocable pledge” language. The

Court of Appeals’ conclusion that Maze and her fellow KAPT plan participants

agreed to a contractual provision giving the legislature carte blanche authority

to retroactively modify KAPT plans at its discretion is contrary to the

“irrevocable pledge” language contained in KRS 164A.705(l).

In reaching this interpretation, we also follow the doctrine of '‘contra

proferentem’. When interpreting contracts susceptible to two meanings, we

construe ambiguity against the drafter . . , Majestic Oaks Homeowners

Association, Inc. v. Majestic Oaks Farms, Inc., 530 S.W.3d 435, 441 (Ky. 2017)

(citing B. Perini & Sons v. Southern Ry. Co., 239 S.W.2d 964, 966 (Ky. 1951)).

Here, the Commonwealth, as guarantor of the KAPT plan, was the drafter of the

Master Agreement and the enabling statutes, and so, to the extent there is

ambiguity in the relevant language, it is to be construed in favor of the plan

participants and against the drafter. This is particularly so given the effortless

ease with which the Master Agreement could have warned plan participants

that KAPT plans were not, in fact, the “locked in” prepaid tuition benefits

portrayed in the promotional material.

By now adopting the position that the KAPT plan may be amended by the

legislature for any reason. Appellees are, in effect, acknowledging that the

Board’s promise to pay the participant’s future tuition was not an “irrevocable

pledge and guarantee by the fund to pay for the tuition.”

17 “Within every contract, there is an implied covenant of good faith and fair

dealing, and contracts impose on the parties thereto a duty to do everything

necessary to carry them out.” Farmers Bank and Trust Co. of Georgetown,

Kentucky v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005) (citing

Ranier V. Mount Sterling National Bank, 812 S.W.2d 154, 156 (Ky. 1991)); see

also Hunt Enterprises, Inc. v. John Deere Indus. Equipment, Co., 162 F.3d 1161

(6th Cir. 1998). Changing the KAPT plan in a way that impairs the benefits of

participants seeking to educate their children violates this covenant. Unlike

the Court of Appeals’ conclusion, our interpretation of the relevant provisions

avoids this result and reflects our confidence that the legislature does not

intend the statutes to be interpreted in a way that undermines the

Commonwealth’s “irrevocable pledge.”

The interpretation endorsed by the Court of Appeals and the Appellees

also results in an illusory contract. “An illusory contract may be defined as an

expression cloaked in promissory terms, but which, upon closer examination,

reveals that the promisor has not committed himself in any manner. In other

words, an illusory promise is a promise that is not a promise. The promise is

an illusion.” Harrington v. Harrington, 365 N.W.2d 552, 555 (N.D. 1985) (citing

Corbin, “The Effect of Options on Consideration,” 34 Yale L.J. 571 (1925)).

If the KAPT contract is interpreted as Eillowing the state to alter its

obligation at the will of the legislature, as suggested by the Court of Appeals

and the Appellees, the commitment made by the Commonwealth to plan

participants “is not a promise . . . [t]he promise is an illusion.” Quoting 7

18 Williston on Contracts, § 7:7, at 88-89 (4th ed. 1992), this Court held in RAM

Engineering & Construction, Inc. v. University of Louisville, 127 S.W.Sd 579, 586

(Ky. 2003):

Where an illusory promise is made, that is, a promise merely in form, but in actuality not promising anyhing, it cannot serve as consideration. Even if it were recognized by law, it would impose no obligation, since the promisor always has it within his power to keep his promise and yet escape performance of anything detrimental to himself or beneficial to the promissee. In such cases, the promisor may perform or not, solely on the condition of his whim, his promise will not serve as consideration.

If, as Appellees assert, the state as the contracting entity has reserved

unto itself unlimited discretion to alter its promise of performance for any

reason, then it has made no promise that can serve as consideration. Our

interpretation avoids that interpretation of the contract.

C. Summary

In summary, we conclude that the trial court correctly interpreted the

relevant statutory text and Master Agreement. The language of the contract

reflects the agreement of Appellants to accept future amendments of the

governing statutes only to the extent they are “necessary to assure compliance

with applicable state or federal law or regulations or to preserve favorable tax

treatment of the KAPT program.” The changes under review here do not fit

within that limited category.

Because the Court of Appeals concluded that Appellants, including Maze,

by the language of the contracts, had consented to be bound to any future

19 legislative changes, and thus had agreed to be bound to the 2014 changes, its

opinion did not need to address the Impairment Clause issue. There is no

Impairment Clause concern if the parties anticipated and agreed that future

legislation could alter the terms of their contract.

Because we conclude that Appellants’ contracts did not bind them to

future legislative amendments of their contracts, we must look further to

determine whether the impairment of contract clauses in our state and federal

constitutions protect them from the legislative amendments to the terms of the

contracts embodied in the 2014 legislation.

IV. THE 2014 AMENDMENTS TO KAPT VIOLATE THE FEDERAL AND STATE IMPAIRMENT OF CONTRACT CLAUSES

The trial court and the parties to this action rely heavily upon the

Impairment Clause analysis set forth by the Supreme Court in United States

Trust Co. of New York v. New Jersey, 431 U.S. 1 (U.S. 1977). We agree that

United States Trust sets forth the applicable analytical framework in the form of

a three-stage analysis. We begin by noting the basic principles relating to

Impairment Clause review.

A. General Principles Relating to the Contract Impairment Clauses

The United States Constitution provides that “[n]o State shall . . . pass

any bill of attainder, ex post facto law, or law impairing the obligation of

contracts . . . .” U.S. Const. Art. I § 10, cl. 1. Similarly, the Kentucky

Constitution states that “[n]o ex post facto law, nor any law impairing the

obligation of contracts, shall be enacted.” Ky. Const. § 19.

20 Despite the seemingly unequivocal language of the federal and state

Contract Impairment Clauses, “[a] constitutional prohibition against impairing

the obligation of contracts ... is not an absolute one to be read with literal

exactness. The Contract Clause does not prevent a state from enacting

regulations or statues which are reasonably necessary to safeguard the vital

interests of its people.” Energy Reserves Group v. Kansas Power & Light Co.,

459 U.S. 400, 410 (1983) (internal quotes and citation omitted). Moreover, the

Clauses do not prevent parties from agreeing that their contracts will be

subject to “present and future state and federal law.” Id. at 416; see also Allied

Structural Steel Co. v. Spannaus, 438 U.S. 234, 240 (1978); Home Bldg. & Loan

Ass’n V. Blaisdell, 290 U.S. 398, 434 (1934). Similarly, in United States Trust,

the Supreme Court stated “[a]lthough the language of the Contract Clause is

facially absolute, its prohibition must be accommodated to the inherent police

power of the State To safeguard the vital interests of its people.” 431 U.S. at

21-22 (citing Blaisdell, 290 U.S. at 434).

In Kentucky Utilities Co. v. Carlisle Ice Co., 131 S.W.2d 499, 504 (Ky.

1939), our predecessor Court discussed the scope of the General Assembly’s

authority to retroactively impair a contract as follows:

“Any law which changes the intention and legal effect of the original parties, giving to one greater or the other a less interest or benefit in the contract, impairs its obligation. The extent of the change is immaterial. Any deviation from its terms . . . imposing conditions not included in the contract, or dispensing with the performance of those that are included, however small and unimportant they may appear to be in their effect, impairs the obligation of a contract. . . . The Legislature may regulate the remedy and the methods of procedure under a past as well as a

21 future contract, but it cannot impose new restrictions upon the enforcement of a past contract, so as materially to lessen its value and benefit to either party.” O'Connor v. Hartford Accident & Indemnity Company, 97 Conn. 8, 9, 115 A. 484, 486.

“A legislative act will not be permitted, even if an attempt to do so is disclosed, to operate retrospectively where it will have the effect to invalidate or impair the obligation of contracts or interfere with vested rights.” Travelers'Insurance Company v. Ohler, 119 Neb. 121, 227 N.W. 449, 450; Cooley Const. Lim., 8th Ed., 771; R.C.L. Vol. 6, p. 362; Dunlap v. Littell, 200 Ky. 595, 255 S.W. 280.

A comparison of Carlisle Ice with the federal decisions discloses that

Kentucky jurisprudence takes a more restrictive view on the legislature’s power

to impose changes to existing contractual benefits and obligations than the

pronouncements of the federal courts.

B. United States Trust Co. of New York Test

In United States Trust, the Supreme Court used the following three-stage

analysis for determining when a legislative action violated the federal

impairment of contract clause: (1) whether the legislation operates as a

substantial impairment of a contractual relationship; (2) if so, then the inquiry

turns to whether there is a significant and legitimate public purpose behind the

regulation, such as the remedying of a broad and general social or economic

problem; and (3) if, as in this case, the government is a party to the contract,

we examine “whether that impairment is nonetheless permissible as a

legitimate exercise of the state’s sovereign powers,” and we determine if the

impairment is “upon reasonable conditions and of a character appropriate to

the public purpose justifying its adoption.” As further explained below, we are

22 persuaded that the 2014 amendments put in place by HB 279 cannot pass

muster under United States Trust analysis.

1. Stage One: Substantial Impairment Inquiry

The first step under United States Trust is determining “whether the

state law has, in fact, operated as a substantial impairment of a contractual

relationship.” Allied Structural Steel Co., 438 U.S. at 244; Energy Reserves

Group, Inc., 459 U.S. at 411. In applying this analysis, the severity of the

impairment guides the level of scrutiny to which the legislation will be

subjected, with the level of scrutiny increasing in correlation with the severity

of the impairment. Allied Structural Steel Co., 438 U.S. at 245. The destruction

of a party’s contractual expectations is not necessary for a finding of

substantial impairment. United States Trust Co., 431 U.S. at 26-27.

A significant consideration in this step of the analysis is the extent to

which the industry subject to the contract has been regulated in the past.

Allied Structural Steel Co., 438 U.S. at 242, n. 13 (citing Veix v. Sixth Ward

Bldg. & Loan Ass’n, 310 U.S. 32, 38 (1940) (“When he purchased into an

enterprise already regulated in the particular to which he now objects, he

purchased subject to further legislation upon the same topic.”)). The rationale

for this rule is thusly stated; “One whose rights, such as they are, are subject

to state restriction, cannot remove them from the power of the State by making

a contract about them.” Hudson Water Co. v. McCarter, 209 U.S. 349, 357

(1908).

, 23 Our examination of the 2014 amendments demonstrates that they do

substantially impair the original contracts entered into by Maze. Specifically,

the 2014 KAPT amendments fundamentally altered Maze’s contractual right to

use, for her children, her KAPT funds for graduate school, and they directly

curtailed the financial value of the benefit by capping future growth so that all

of the promised tuition may not be paid. These changes were imposed

retroactively, significantly devaluing the benefit promised to Maze. As noted

previously, when Maze purchased her three KAPT contracts, the Master

Agreement and its enabling statutes did not restrict her use of the funds to a

specific time period, and the agreements did not cap the fund’s growth. By

imposing constraints not included in the original contract, the 2014 ,

Amendments impose upon the participant a loss of the bargained-for benefit. If

the prepaid tuition is not used within the newly-prescribed time frame, the

“irrevocable pledge” that the tuition will be locked-in at the tuition rate in effect

at the time the plan was purchased is substantially impaired. The 2028 sunset

provision interjected into the agreement by the 2014 Amendments also reduces

the value of the KAPT benefit, but perhaps to a lesser degree and with a fewer

number of participants affected.

Under the original Master Agreement, the student’s ultimate use of

KAPT’s prepaid tuition was not affected by his PCEY (projected college entrance

year), but the 2014 Amendments pegged the duration of the KAPT benefits to

the specific time frame beginning in the PCEY. This new limit indirectly affects

a participant’s ability to transfer KAPT benefits among siblings or other

24 relatives, which was an important selling point at the time Maze purchased her

contracts.

According to the Appellees’ own statistics, the cumulative financial

detriment which will befall plan participants is $20.1 million, a significant

impact by any measure. We conclude that the retroactive application of the

2014 amendments substantially impairs the contracts of Maze and the other

similarly situated participants by extinguishing vested rights of the purchasers

to benefits promised under the terms of the agreement.

2. Stage Two: Justification Review

The second stage of the United States Trust analysis involves a

determination of whether the newly-imposed conditions that impair the

contract can be justified by a significant and legitimate public purpose. 431

U.S. at 22. Among the purposes that justify such impairment is legislation

aimed at the remedying of a broad and general social or economic problem.

Allied Structural Steel Co., 438 U.S. at 247. Moreover, since Home Building &

Loan Association v. Blaisdell, 290 U.S. 393 (1934) (Minnesota’s suspension of

creditor’s remedies was not in violation of the U.S. Constitution), the Supreme

Court has indicated that the public purpose of the contract-impairing law need

not be limited to addressing an emergency or temporary situation. United

States Trust Co., 431 U.S. at 22, n. 19; Veix v. Sixth Ward Bldg. & Loan Ass’n,

310 U.S. at 39-40. For example, one legitimate state interest fitting into this

category is legislation eliminating unforeseen windfall profits. United States

Trust Co., 431 U.S. at 31, n. 30. The requirement of a legitimate public

25 purpose is justified because it guarantees that the State is exercising its police

power, rather than providing a benefit to special interests. Energy Reserves

Group, Inc., 459 U.S. at 412; Golden Rule Ins. Co. v. Stephens, 912 F. Supp.

261, 267 (E.D. Ky. 1995).

The Appellees argue that the amendments have the significant and

legitimate public purpose of protecting the Commonwealth’s treasury and

assuring that the Commonwealth will be able to meet its obligations to KAPT

account holders. They describe the amendments as an economic necessity

brought about by dramatic increases in tuition at state universities in the years

immediately following the beginning of the KAPT program. As a result of these

unforeseen tuition increases, a significant unfunded liability, as much as $52.9

million, was created. Appellees note that the 2014 KAPT amendments would

reduce the Commonwealth’s unfunded KAPT liability by $20.1 million.

Appellees also note the harmful effect upon the KAPT fund caused by KAPT

accounts being held, rather than used for educational purposes.5

As noted by the trial court, reducing a large unfunded liability is an

admirable objective, but it is not reasonable that the General Assembly would

5 In effect, participants could potentially abuse the plan by holding onto the account instead of using the money as tuitions rise, to attain what amounts to a risk­ free rate of return indexed to rising tuition costs. There is no allegation that Maze has done so, or that she has acted with anything but the utmost good faith. This decision does not extend to such circumstances. Plan participants have a duty of good faith and fair dealing in utilizing their KAPT contracts, and those that exploit the contracts to achieve risk-free high rates of return with no intention of using the funds for educational purpose are in violation of the contract. Our holding here does not foreclose the possibility of redress against such abuse.

26 pursue that goal by impairing or devaluing the state’s existing contractual

obligations, created precisely in anticipation of rising tuition costs. The KAPT

program was inspired and created by the legislature to protect participants

from the rising costs of college tuition. Parents, like Maze and others, were

induced to sign KAPT agreements because KAPT promotional material told

them that college tuition was rising, and therefore, payng at today’s lower

prices guarded against future increases. The fact that the KAPT program’s

costs of performing its contractual obligations exceeded its own expectations

does not justify altering the obligations so they more closely conform to its

faulty expectations.

In Unites States Trust, the Supreme Court disapproved of the legislative

impairment of contracts when the purported legitimate purpose related to

government spending or saving, noting the states’ self-interest as a concern.

See United States Trust Co., 431 U.S. at 26-27; see also Lynch v. United States,

292 U.S. 571, 580 (1934) (the impairment of a state’s desire to limit public

spending does not justify the impairment of a state’s contractual obligations

despite the presence of a legitimate public purpose). The only purpose of HB

279 and the 2014 KAPT amendments was to reduce the state’s liability by

abandoning a portion of its contractual obligation, which were described to the

contracting parties as an “irrevocable pledge and guarantee” to cover the cost of

future rises in tuition. We are persuaded that the Appellees have failed to

proffer a significant and legitimate public purpose behind the law.

27 In summary, we are persuaded that the 2014 amendments do not

address a broad and general social or economic problem as contemplated

under United States Trust, Allied Structural Steel Co., and Blaisdell. We

accordingly hold that the 2014 amendments cannot be sustained under step

two of the United States Trust test.

3. Stage Three: Unforeseen or Unintended Effects

The third stage of the United States Trust analysis examines whether the

adjustment of “the rights and responsibilities of contracting parties [is based]

upon reasonable conditions and [is] of a character appropriate to the public

purpose justifying [the legislation’s] adoption.” United States Trust Co., 431

U.S. at 22. Analysis under this prong varies depending upon whether the State

is a party to the contract. When the State itself is not a contracting party, “[a]s

is customary in reviewing economic and social regulation, . . . courts properly

defer to legislative judgment as to the necessity and reasonableness of a

particular measure.” Id. at 22-23; Energy Reserves Group, Inc., 459 U.S. at

410-13.

However, when a state, operating through a state agency, enters into a

contract, the general rule is that it cannot simply walk away from its financial

obligation by absolving itself through unilateral amendments to the contract.

When the State is a party to the contract, “complete deference to a legislative

assessment of reasonableness and necessity is not appropriate because the

State’s self-interest is at stake.” United States Trust Co., 431 U.S. at 26. In

almost every case where this situation has arisen, the Supreme Court has held

28 that the governmental unit was bound to its contractual obligations. See

United States Trust Co., 431 U.S. at 25-28; W.B. Worthen Co. v. Kavanaugh,

295 U.S. 56 (1935); Murray v. Charleston, 96 U.S. 432 (1878); Energy Reserves

Group, Inc., 459 U.S. at 410-13, 14; see also A Process-Oriented Approach to the

Contract Clause, 89 Yale L.J. 1623, 1647-1648 (1980) (distinguishing public

from private contracts); cf. Faitoute Iron & Steel Co. v. City ofAsbury Park, 316

U.S. 502 (1942).

Because the Commonwealth is a party to the contract in this case, the

stricter standard applies in our evaluation of the reasonableness and necessity

of the 2014 amendments. Because the state’s self-interest is involved, we do

not accord the “complete deference to a legislative assessment of

reasonableness and necessity” that would otherwise apply to legislation that

impinges upon the obligations of purely private-party contracts. United States

Trust Co., 431 U.S. at 26.

When the state is a party to the contract impaired by the state’s

legislation, the reasonableness of the impairment is judged on whether the

existing contractual obligations of the state “had effects that were unforeseen

and unintended by the legislature” at the time the contract creating those

obligations were created. Md. State Teachers Ass’n v. Hughes, 594 F. Supp.

1353, 1362 (D. Md. 1984) (citing United States Trust Co., 431 U.S. at 31). With

respect to the necessity of a state’s contractual impairment, necessity is to be

considered on two levels: first, “whether a less drastic modification could have

29 been implemented” and second, “whether the state could have achieved its

goals without modification.” Hughes, 549 F. Supp. at 1362.

Appellees argue that the 2014 Amendments were reasonable and

appropriate in light of dramatically inflating tuition costs at state universities,

something they claim was unforeseeable when the KAPT program was created.

Appellants counter that the unanticipated underfunding problem occurred

because the KAPT fund was inadequately managed.

Upon application of the two-part Hughes analysis, we conclude that the

2014 Amendments cannot be sustained under the third stage of the United

States Trust test. Citing City of El Paso v. Simmons, 379 U.S. 497, 509 (1965),

Hughes noted that a state may not “adopt as its policy the repudiation of debts

or the destruction of contracts or denial of the means to enforce them.” Upon

review, we are persuaded that the Appellees have failed to proffer evidence that

the KAPT agreements executed prior to the 2014 KAPT amendments reasonably

resulted in effects that were unforeseen and unintended by the legislature.

As previously noted, the fundamental purpose of the KAPT program was

to protect against tuition inflation at state universities, and so, it is self-

contradictory to now claim that tuition inflation was unforeseen at the time of

the creation of the program. Indeed, the program was operating precisely as

foreseen in permitting its participants to lock-in lower tuition rates as of the

time they entered into the program. And while unexpectedly high tuition

increases resulted in a $52 million underfunding (perhaps exacerbated by a

deficient investment strategy of KAPT managers), these “unforeseen” events are

30 not such that the General Assembly may self-servingly renounce its debts and

impair $20.1 million dollars in benefits owed to the plan participants pursuant

to the agreements. We also note that the legislature was not totally powerless

with respect to control over the cost of tuition at state universities.

Similarly, a state is not free to impose a drastic impairment when an

evident and more moderate course would serve its purposes equally well.

United States Trust Co., 431 U.S. at 32. While it is likely true that the

Commonwealth could not have achieved the same level of savings, $20.1

million dollars, without modification of the KAPT agreements, there are, in fact,

other less drastic modifications which could have been made, as were noted by

the trial court.

It follows that the 2014 KAPT amendments are neither reasonable nor

necessary, and the state may not escape an unfavorable contract with

retroactive legislation that substantially impairs the state’s contractual

obligations. This result is prohibited by the respective Contract Clauses of the

United States and Kentucky Constitutions.

V. CONCLUSION

For the reasons stated above we conclude that the KAPT contracts

executed by Maze and those similarly situated, and the underlying enabling

statutes, do not provide for retroactive amendments such as those at issue

here. We further conclude that the enactment of those retroactive

amendments unlawfully impaired those contracts in violation of U.S. Const.

Art. I § 10, cl. 1. and Ky. Const. § 19. We, accordingly, reverse the Court of

31 Appeals and reinstate the partial summary judgment awarded to Maze by the

Franklin Circuit Court.

Minton, C.J.; Hughes, Keller, VanMeter, and Wright, JJ., concur.

Cunningham, J., not sitting.

COUNSEL FOR APPELLANTS:

Robert Andrew Rowland

COUNSEL FOR APPELLEES:

Laura Tipton Taylor Allen Payne Assistant Attorneys General