EARL R. MARSHALL, SHERIFF OF GREENUP COUNTY, KENTUCKY v. COMMONWEALTH OF KENTUCKY, BY AND THROUGH HON. EDWARD B. HATCHETT, JR., AUDITOR OF PUBLIC ACCOUNTS
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RENDERED: JUNE 2, 2000; 2:00 p.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1998-CA-003192-MR
EARL R. MARSHALL, SHERIFF
OF GREENUP COUNTY, KENTUCKY
APPELLANT
APPEAL FROM GREENUP CIRCUIT COURT
HONORABLE LEWIS D. NICHOLLS, JUDGE
ACTION NO. 1997-CI-00589
v.
COMMONWEALTH OF KENTUCKY, BY AND THROUGH
HON. EDWARD B. HATCHETT, JR., AUDITOR
OF PUBLIC ACCOUNTS
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
GUIDUGLI, JOHNSON, AND KNOPF, JUDGES.
KNOPF, JUDGE:
This is an appeal from a declaratory judgment by
the Greenup Circuit Court.
The sole issue before this Court is
whether interest earned on school tax funds placed in an interest
bearing checking account (a “NOW” account) are deemed “investment
earnings” under KRS 134.140(3)(b) and thus must be paid to the
county school districts; or whether the interest may be retained
by the Sheriff of Greenup County and used for the office’s
legitimate operating expenses.
We find that the trial court
correctly held that the interest earned must be paid to the
county school districts.
Hence, we affirm.
The parties to this action agreed to a stipulation of
facts which we will briefly summarize.
The appellant, Earl R.
Marshall, was the duly elected and acting sheriff of Greenup
County, Kentucky until December 31, 1998.
As part of his duties
as sheriff, Marshall served as tax collector for all state,
county and district taxes, including school taxes, within the
county.
KRS 134.140 and 160.500.
Each month the sheriff is
required to pay the amount of school taxes collected during the
previous month to the depository of the district boards of
education within the county.
KRS 160.510.
Until such
distribution is required, KRS 134.140 permits the sheriff to
invest any tax revenues held in his possession, subject to the
provisions of KRS 66.480.
However, the sheriff must pay to the
board of education any part of investment earnings for the month
which is attributable to the investment of school taxes.
The
sheriff is permitted to withhold up to 4% of the investment
earnings as a fee for administering the investment fund.
KRS
134.140(3)(b).
Pursuant to the statutory scheme, Sheriff Marshall
collected the 1993 and 1994 school taxes within Greenup County.
Prior to distributing the tax monies to the school districts, he
deposited the funds into several bank accounts.
Some of the
funds went into interest bearing time deposit accounts
(certificates of deposit, or “CDs”), and some went into a NOW
account.
Sheriff Marshall paid to the school districts all
school taxes and investment income from the CD account.
He also
paid over all school tax funds held in the NOW account.
However,
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he retained the interest earned on those funds in the NOW
account.
The appellee, Commonwealth of Kentucky by and through
Edward B. Hatchett, Jr., Auditor of Public Accounts (the Public
Auditor), is empowered to audit annually the books, accounts and
papers of all sheriffs within the Commonwealth of Kentucky.
43.070.
KRS
In lieu of an audit conducted by the Public Auditor,
Sheriff Marshall exercised his option under KRS 64.810 to employ
a certified public accountant to audit the books, accounts and
papers of his office.
These audits must be done in accord with
certain standards promulgated by statute.
64.810.
KRS 43.070, 43.075 and
The certified public accountant performed the tax
settlement audit and submitted a report to the Public Auditor for
review and final approval.
During the Public Auditor’s review of that report, a
dispute arose between the Public Auditor and the certified public
accountant over the proper treatment in the audit of interest
earned on tax money collected and deposited by the Sheriff
concerning the interest earned in the CDs and the NOW account.
Sheriff Marshall and the certified public accountant maintained
the position that the NOW account interest was not required to be
distributed to the school districts in the same manner as the
interest from the certificates of deposit.
Rather, they argued
that the interest earned by the NOW account could be retained and
used for the legitimate expenses of the sheriff’s office.
On the
other hand, the Public Auditor argued that all interest earned on
school tax funds constitutes investment earnings and must be
distributed to the school districts.
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Failing to reach a resolution of this dispute, Sheriff
Marshall filed an action in the Greenup Circuit Court on October
9, 1997, seeking a declaration of rights involving the
disposition of earnings generated by the NOW account.
The trial
court denied the Public Auditor’s motion to join as necessary
parties the three school systems who had a financial interest in
the litigation.1
However, the trial court did enter an order
stating that the school districts could permissively join the
case pursuant to CR 20.01.
None of the three school systems
chose to join the action.
The case was submitted to the trial court based upon
the stipulation of facts and upon briefs filed by both parties.
Sheriff Marshall also submitted the deposition of C. Ronald
Christmas, an attorney and president of Kentucky Bank & Trust.
After a consideration of these materials and the applicable law,
the trial court found, in part, as follows:
This entire case rests on the issue of
when an interest-bearing account becomes an
investment. If, the NOW account is
considered not an investment, then the
Sheriff can use the investment or earnings to
pay his legitimate office expenses. If the
earnings from the NOW account are considered
an investment, then the Sheriff must turn
these earnings over to the local school
districts.
As Mr. Ron Christmas testified in his
deposition, NOW accounts pay incremental
interest and certainly would not be
considered investments. (Christmas
deposition, p. 13). Few people will argue
that a NOW account is a good investment if
one is seeking the highest return possible.
Mr. Christmas pointed out that banks consider
1
These three school systems are the Greenup County School
District, Raceland-Worthington Independent School District and
the Russell Independent School District.
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NOW accounts demand deposit accounts as
opposed to investment accounts. (Christmas
deposition, p. 14-15). When demand deposit
accounts begin to earn interest, how high
must the yield be before one considers the
demand deposit account an investment? Would
bankers consider a NOW account which earned
two percent (2%) interest an investment, or
perhaps three percent (3%), or four percent
(4%) or five percent (5%) or perhaps even
seven or eight percent (7 or 8%). At what
point would the NOW account cease to be a
demand deposit account and be considered an
investment for banking purposes? Mr.
Christmas never answered this question for
the purpose of handling tax money collected
by the sheriff. He only answered it in the
context of the banking world. How does one
know where to draw the line?
Legislatures must write statutes in such
a way that the ordinary, prudent, reasonable
person will be able to understand what is and
is not a violation of the law. Thus, in
order to withstand an unconstitutional
challenge for vagueness, the Legislature must
write a law such that one can determine with
reasonable certainty from the language used
whether the contemplated conduct would amount
to a violation. Commonwealth v. Foley, 798
S.W.2d 947 (Ky., 1990). The question becomes
what standard do sheriffs use to determine
when an “interest-bearing account” ceases to
be an “investment”, and it becomes a demand
deposit account? In other words, how high
must the rate of return become before a NOW
account loses its identity as a demand
deposit account and it becomes an investment?
A sheriff needs a standard he can answer
these questions with reasonable certainty.
If the Court declared that a NOW account is
not an investment because of a minimal
return, then the sheriff would still have to
ask the question - How high does the rate of
return have to be before the NOW account
(demand deposit account) is considered an
investment? The sheriff would be left with
an amorphous sliding rule standard incapable
of reasonable certainty.
The Kentucky Constitution is the highest
law of the Commonwealth. It creates the
standard when it states that “...any sum
which may be produced by taxation or
otherwise for purposes of common school
education, shall be appropriated to the
common school, and to no other purposes.”
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Kentucky Constitution § 184. The
Constitution is clear that taxes or income
generated by taxes, “...shall be appropriated
to the common school, and to no other
purpose.” Since the Constitution is the
highest law of the Commonwealth, then its
provisions take precedent [sic] over any
statute. Thus, the people of the
Commonwealth created the standard of how to
handle the income generated by the taxes if
the money is to be earmarked for education.
It must be paid to the schools. It doesn’t
matter how slight the earnings may be, if
generated from taxes, then the earnings must
be paid back to the schools. This absolute
standard becomes one all sheriffs can apply
with reasonable certainty. Therefore, all
earnings generated by taxes earmarked for
education must be paid to the local school
districts without regard to the rate of
return of the account, regardless of the type
of account in which they are deposited,
except for the statutory limit of four
percent (4%) authorized by KRS 134.140(3)(b)
to be withheld by the sheriff for the purpose
of administering the investment fund.
This approach is the only way that an
absolute standard can be established
sufficiently clear for all sheriffs to
understand and apply with reasonable
certainty. It doesn’t depend on current
financial market conditions, yet it remains
consistent with all statutory and
constitutional provisions.
Declaratory Judgment Opinion and Order, November 30, 1998, pp.
5-7.
Sheriff Marshall now appeals to this Court.
The
primary question before this Court is whether interest earned on
a NOW account constitutes investment income, which the sheriff
must pay to the local boards of education.
We agree with the
trial court that the statutes are unclear on this point.
The
parties agree that this question is a matter of first impression
in the appellate courts of the Commonwealth.
Furthermore, the
trial court expressly found that Sheriff Marshall has acted in
good faith at all times.
The controversy arises from a
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legitimate dispute over the interpretation of the applicable
statutes and the constitutional provision.
With these facts in
mind, we now proceed to the matter at issue.
KRS 134.140(3)(a)&(b) provide in their entirety:
(a) The sheriff, except in urban-county
governments, may, and at the direction of the
fiscal court shall, invest any tax revenues
held in his possession from the time of
collection until the time of distribution to
the proper taxing authorities pursuant to KRS
134.300, 134.320 and 160.510. Investments by
the sheriff shall be restricted to those
permitted by KRS 66.480.
(b) At the time of his monthly distribution
of taxes to the district board of education,
the sheriff shall pay to the board of
education that part of his investment
earnings for the month which is attributable
to the investment of school taxes, but this
subsection shall not be construed to prohibit
the sheriff from obtaining his expenses not
to exceed the rate of four percent (4%) of
the earned monthly investment income for the
administration of this investment fund.
Sheriff Marshall hinges his argument on the portion of
KRS 134.140(3)(b) which provides that “the sheriff shall pay to
the board of education that part of his investment earnings which
is attributable to the investment of school taxes,. . .”.
He
points out that NOW accounts are not listed in KRS 66.480 as a
permissible investment.
Sheriff Marshall further relies upon the
testimony of Ron Christmas, who stated that the rate of return on
NOW accounts are so low that banks do not consider them to be
investments.
As a result, Sheriff Marshall contends that not all
interest income constitutes “investment earnings” for purposes of
KRS 134.140(3)(b).
This argument has some appeal.
Since sheriffs must pay
over school tax revenues on a monthly basis, it is reasonable
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that a certain amount of these funds must be maintained in a
checking account for disbursement.
Such accounts are not truly
“investments”, but they are maintained as part of the normal
performance of the sheriff’s duties as tax collector.
The
development of interest-bearing checking accounts, such as the
NOW account, has created the potential for interest earned on
these tax funds.
The General Assembly obviously did not
contemplate this possibility when it enacted KRS 134.140 in 1982,
because NOW accounts did not then exist.
Yet we also note that
the General Assembly has not considered NOW accounts as an
investment in its most recent versions of KRS 66.480.
We agree with the trial court that the banking
industry’s characterization of NOW accounts as deposits rather
than investments is not controlling for purposes of KRS
134.140(3)(b).
As pointed out by the trial court, Mr.
Christmas’s definition of “investment” posed practical, as well
as constitutional problems.
Nonetheless, the statutory scheme
remains problematic because the legislature failed to define what
it meant by the term “investment earnings.”
Therefore, we must
look to the broader purposes behind the statutes themselves to
resolve this issue.
In considering this question, we note that the facts in
this case are analogous to those presented in Phillips v.
Washington Legal Foundation, 524 U.S. 156, 141 L. Ed. 2d 174, 118
S. Ct. 1925 (1998).
In Phillips, the United States Supreme Court
considered the ownership of interest earned by an “Interest on
Lawyer Trust Account” (IOLTA).
The Court noted that the
development of NOW accounts created the possibility that client
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funds held in trust by an attorney might earn interest.
Although
the interest on individual client accounts is usually nominal,
IOLTA programs generated considerable revenue by allowing
attorneys to combine individual client accounts.
The interest
paid on these accounts was deposited by participating attorneys
into an account for the support of public legal services.
Id.,
141 L. Ed. 2d at 181-183.
A Texas attorney and a conservative legal foundation
challenged the Texas IOLTA program, arguing that the program
violated the Takings Clause of the Fifth Amendment to the United
States Constitution.
The United States Supreme Court agreed,
holding that the interest income generated by funds held in IOLTA
accounts is the "private property" of the owner of the principal.
Id., 141 L. Ed. 2d at 188.
Since under Texas law, client funds
held by an attorney remain the private property of the client
until earned by the attorney, the Supreme Court concluded that
any interest earned on those funds also remained the private
property of the client.
Since both the Greenup County Sheriff and the local
boards of education are public entities (and the funds at issue
are school tax revenues), the Fifth Amendment prohibition against
taking of private property for public purposes is not applicable
in this case.
instructive.
Nonetheless, the analysis by the Supreme Court is
Pursuant to KRS 134.140(3), the local boards of
education are entitled to receive all school tax funds collected
by the sheriff, except for the 4% commission.
Likewise, Ky.
Const. § 184 designates that all sums produced by school taxes
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shall be appropriated to the common schools and for no other
purpose.2
Under the statutory scheme, the local school boards are
the beneficial owners of the principal generated by school tax
revenues.
Section 184 of the Kentucky Constitution emphasizes
the exclusive right of the boards of education to the tax
revenues.
trustee.
The sheriff essentially holds these funds as a
KRS 134.140(3)(b) allows the sheriff to recoup his
expenses for his administration of the investment fund at a rate
not to exceed 4% of the earned monthly investment income of the
fund.
We conclude that this commission is the sole basis under
which sheriffs are permitted to receive payment for their
administration of school tax fund investments.
If the constitutional directive of Section 184 were not
so clear, we might be inclined to agree that the interest
generated from school tax funds held in a NOW account could be
retained for legitimate expenses of the sheriff’s office.
The
statutory scheme is not clear that this income would be otherwise
considered as “investment earnings” under KRS 134.140(3)(b).
We
urge the legislature to specifically address this gap in the
2
Sheriff Marshall also contends that the trial court erred
in applying Ky. Const. § 184, because that section only deals
with the disposition of income generated from school bonds. We
disagree. Section 184 does provide for the initial bond of the
Commonwealth in favor of the board of education. However, § 184
goes on to provide: “The interest and dividends of said fund,
together with any sum which may be produced by taxation or
otherwise for purposes of common school education, shall be
appropriated to the common schools, and to no other purpose.”
(Emphasis added).
Section 184 applies equally to interest and
dividends earned by the bond fund and by public school taxes.
See, Board of Education of Calloway County School District v.
Williams, Ky., 930 S.W.2d 399 (1996).
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statute.
In the meantime, we are convinced that the Kentucky
Constitution requires that all of the principal and income earned
from school tax revenues, except for the sheriff’s commission
provided by KRS 134.140(3), is to be distributed to the local
boards.
The interest earned by the NOW account is clearly income
earned from the proceeds of the school tax funds, to which the
local school boards are entitled.
Accordingly, the judgment of the Greenup Circuit Court
is affirmed.
GUIDUGLI, JUDGE, CONCURS.
JOHNSON, JUDGE, CONCURS IN RESULT ONLY AND FILES
SEPARATE OPINION.
JOHNSON, JUDGE, CONCURRING IN RESULT: While I concur
with the result reached by the Majority Opinion, I choose to
write separately to express my opinion that the Auditor of Public
Accounts is correct in his position that the language of KRS
66.480(1)(d) is determinative.
KRS 66.480(1) states in relevant
part that the local governmental unit “may invest and reinvest
money subject to its control and jurisdiction in: . . . (d)
Certificates of deposit issued by or other interest-bearing
accounts of any bank . . .” [emphasis added].
While a “NOW”
account is not specifically listed in KRS 66.480 as a permissible
investment, I believe the plain wording of KRS 66.480(1)(d)
requires a determination that a “NOW” account is an “interestbearing account[] of any bank.”
Since the plain language of KRS
66.480(1) allows the local government unit to “invest” the “money
subject to its control,” I must conclude that the placement of
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the school tax receipts in the interest-bearing “NOW” account is
an investment.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Phillip Bruce Leslie
McBrayer, McGinnis, Leslie &
Kirkland
Greenup, Kentucky
Edward B. Hatchett, Jr.
Auditor of Public Accounts
Robert E. McBeath
Frankfort, Kentucky
BRIEF FOR AMICUS CURIAE:
Anne E. Keating
Kentucky Department of
Education
Frankfort, Kentucky
J. Stephen Kirby
Kentucky School Boards
Association
Frankfort, Kentucky
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