How does the Maine Tort Claims Act, state purchasing law, and corporate-formality framework apply to Maine's new Student Educational Enhancement Deposit (SEED) prepaid-tuition plan and its directors?

Plain-English summary

Richard Lee, Chairman of the SEED Board, asked the AG's office a cluster of operational questions about Maine's new Student Educational Enhancement Deposit Plan, the prepaid-tuition program created by P.L. 1987, c. 527 (codified at 20-A M.R.S.A. § 12601 et seq.). Assistant AG Jeffrey Frankel answered the questions in a long memo dated July 21, 1988, attaching his earlier January 13, 1988 memo to Fred Douglas.

Tort Claims Act coverage of directors and officers. Frankel concluded that the protections of the Maine Tort Claims Act, 14 M.R.S.A. § 8101 et seq., "most likely" apply to SEED Plan members. The MTCA defines "State" in § 8102(4) broadly to include "any office, department, agency, authority, commission, board, institution, hospital or other instrumentality" of the State, with examples like the Maine Turnpike Authority, Maine Port Authority, and Maine Vocational-Technical Institute System. The SEED Plan, created in § 12603(1) as "a public body corporate and politic" administratively within the State Treasury but exercising statutory powers independently, fits the instrumentality category. Recent Law Court precedent supported the conclusion. In Young v. Greater Portland Transit District, 535 A.2d 417 (Me. 1987), the Court held that a "body politic and corporate" transit district was a "governmental entity" under § 8102(3) for MTCA purposes. In Taylor v. Herst, 537 A.2d 1163 (Me. 1988), the Court treated a municipally employed physician carrying out a state-mandated involuntary commitment as a "state employee" for MTCA purposes. Both decisions reflected a broad, not narrow, reading of MTCA coverage.

If covered, SEED directors and officers gain the absolute immunity of § 8111(1) for: legislative/quasi-legislative acts; judicial/quasi-judicial acts (granting or denying licenses, permits, or approvals); discretionary functions or duties (whether or not the discretion is abused, and whether or not the underlying authority is valid); prosecutorial functions; and intentional acts within the scope of employment (except in bad faith). The Darling v. Mental Health Institute decision (535 A.2d 421 (Me. 1987)) addresses the kinds of activity within the discretionary-function umbrella.

Contract-based liability. MTCA immunity does not reach contract claims. But Frankel saw little credible argument that SEED Board members could be personally liable for the Plan's contractual obligations. § 12604 makes the contracts run between the purchaser and the Plan (and, problematically, the State, an issue analyzed in the companion 88-07-21b opinion). The directors are not contract counterparties. By analogy to 13-B M.R.S.A. § 402(2), members and directors of a nonprofit corporation are not personally liable on the corporation's obligations.

Exposure not eliminated by MTCA. Federal-law claims remain. As the memo put it, "any suits grounded in federal law alleging the deprivation of civil rights" are not barred, and the MTCA "does not bar suits based on any federal law," so a suit alleging directors' personal liability "for violations of any federal banking or securities statute in connection with the SEED Plan" might proceed on the merits.

Insurance and indemnification. § 12611(12) expressly permits the Board to indemnify members from personal loss and to procure insurance for that purpose, including coverage for bond/note liability. § 12611(8) authorizes broader property and activity insurance. Frankel recommended consulting Tim Smith at the Division of Risk Management on insurance procurement. He also flagged 10 M.R.S.A. § 967-A (the Finance Authority of Maine immunity model), which provides absolute immunity from state-law suits and mandatory indemnification, as a possible statutory enhancement the Board could ask the Legislature to enact for the SEED Plan.

IRS ruling under § 12613(2). § 12613(2) requires the Board, before entering advance tuition payment contracts, to solicit answers from the IRS on appropriate ruling requests. The State of Michigan (whose Michigan Education Trust Act was the model for the SEED Act) had submitted an IRS request on February 19, 1987, and received a reply dated March 29, 1988. Frankel concluded the AG's office found "no substantial difference" between the Maine and Michigan laws and no arguments to add beyond those already advanced. The Board could not strictly rely on the Michigan ruling (IRS Rev. Proc. 88-1 limits revenue rulings to the requesting taxpayer). The recommended workaround was to include in the contract documents a disclosure statement summarizing the Michigan ruling, stating counsel's belief that Maine contracts would be treated similarly, noting that no independent Maine ruling had been requested, and advising prospective purchasers to consult their own counsel.

SEC ruling under § 12613(3). The AG's office lacked the specialized SEC expertise to prepare the request and recommended contracting it out under § 12621(5). If formal AG approval for the use of private counsel was required under 5 M.R.S.A. § 191, the office would provide it.

Officers and by-laws. § 12610(4) makes the Governor designate one Board member as chairman. § 12610(5) refers to president and vice-president. § 12611(9) authorizes by-law adoption and amendment. Frankel observed that the SEED Plan was not governed by Title 13-A (business corporations) or Title 13-B (nonprofit corporations). His recommendation was that the by-laws provide for election of a president, vice-president, and other officers, and that the by-laws be adopted as state agency rules under § 12611(16), following the FAME model in 10 M.R.S.A. § 969-A(14).

Companion opinion on corporate status and contracting. The attached January 13, 1988 memo to Fred Douglas concluded that the SEED Plan is a quasi-public corporation whose corporate status is self-implementing (nothing need be filed with the Secretary of State, because 13-B M.R.S.A. § 102(4)(C) excludes state instrumentalities from the nonprofit corporation definition). The same memo concluded that the SEED Plan, as a state department or agency, is subject to the state purchasing law (5 M.R.S.A. §§ 1811-1824), so its contracts for goods and services must go through the State Purchasing Agent and are subject to competitive bidding under § 1816 and Contract Review Committee approval.

Currency note

This opinion was issued in 1988. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Were SEED directors personally liable for shortfalls in the prepaid-tuition fund?

No, not under contract theory. § 12604 makes the contract between the purchaser and the Plan (and, on a contested reading, the State). The directors are not personal counterparties. They are also presumably protected by the Maine Tort Claims Act for tort-style claims arising from their official duties.

What was the workaround for the IRS ruling requirement in § 12613(2)?

Disclose the Michigan ruling in the contract, state Maine counsel's view that the Maine contracts would be treated similarly, note that no separate Maine ruling had been sought, and advise prospective purchasers to consult their own counsel. This was second best, since IRS Rev. Proc. 88-1 means another taxpayer's ruling is not binding for Maine, but it was the practical approach.

Why did the AG recommend adopting by-laws as state agency rules?

Because the SEED Plan was not governed by Title 13-A or 13-B, the standard corporate by-law adoption procedures did not apply by their terms. § 12611(16) authorized the Board to make rules. The FAME model in 10 M.R.S.A. § 969-A(14) (where FAME by-laws are adopted as state agency rules) provided a parallel template that fit the SEED Plan's structure.

Did SEED Board members enjoy any contract-liability immunity?

The MTCA does not provide contract immunity. The protection was structural rather than statutory: the contracts ran between the purchaser and the Plan (and arguably the State), not the directors, so the directors were not contract counterparties.

What federal claims remained possible against SEED directors?

Civil-rights claims under federal statutes and any federal banking or securities claims arising from SEED operations. The MTCA does not bar federal-law suits. The Board was advised to procure liability insurance under § 12611(12) and to seek a § 967-A-style statutory immunity enhancement from the Legislature.

Did the SEED Plan have to use the State Purchasing Agent?

Yes. The January 13, 1988 companion memo concluded that the SEED Plan was a department or agency of state government subject to the state purchasing law (5 M.R.S.A. §§ 1811-1824), and that its contracts had to go through the State Purchasing Agent under § 1812, comply with competitive bidding under § 1816, and obtain Contract Review Committee approval.

Background and statutory framework

The Maine SEED Plan, created in 1987 as P.L. 1987, c. 527, sat at the intersection of several legal regimes. As a "public body corporate and politic" within the State Treasury (§ 12603(1)), it was a quasi-public corporation modeled on Michigan's Education Trust Act. Its directors were appointed by the Governor (§ 12610). It had broad enumerated powers (§ 12611) including contracting, insurance, indemnification, and rulemaking. Its contracts with purchasers were the advance tuition payment contracts authorized by § 12604. The Maine Tort Claims Act (14 M.R.S.A. § 8101 et seq.) provided potential immunity for the Plan's directors and officers, with the broad definition of "State" in § 8102(4) and broad immunity in § 8111(1). The state purchasing law (5 M.R.S.A. §§ 1811-1824) applied because the Plan was a state agency. The 1988 memo synthesized these frameworks into operational guidance for the Board.

Citations

• 20-A M.R.S.A. §§ 12601 et seq.
• 20-A M.R.S.A. § 12603(1)
• 20-A M.R.S.A. § 12604
• 20-A M.R.S.A. § 12610(4)-(5)
• 20-A M.R.S.A. § 12611(8)-(10), (12), (16)
• 20-A M.R.S.A. § 12613(2)-(3)
• 20-A M.R.S.A. § 12621(5)
• 14 M.R.S.A. § 8101 et seq.
• 14 M.R.S.A. § 8102(3)
• 14 M.R.S.A. § 8102(4)
• 14 M.R.S.A. § 8111(1)
• 13-B M.R.S.A. § 402(2)
• 13-B M.R.S.A. § 102(4)(C)
• 5 M.R.S.A. § 191
• 5 M.R.S.A. §§ 1811-1824
• 5 M.R.S.A. § 1812
• 5 M.R.S.A. § 1816
• 10 M.R.S.A. § 967-A (Supp. 1988)
• 10 M.R.S.A. § 969-A(14) (Supp. 1987-88)
• IRS Rev. Proc. 88-1
• P.L. 1987, c. 527
• Young v. Greater Portland Transit District, 535 A.2d 417 (Me. 1987)
• Taylor v. Herst, 537 A.2d 1163 (Me. 1988)
• Darling v. Mental Health Institute, 535 A.2d 421 (Me. 1987)
• Fitzpatrick v. Greater Portland Public Development Commission, 495 A.2d 791 (Me. 1985)
• Michigan Education Trust Act, Mich. Comp. Laws § 390.1421 et seq. (1988)

Source

• Landing page: https://www.maine.gov/legis/lawlib/lldl/agops/agops.htm
• Original PDF: https://lldc.mainelegislature.org/Open/AG/Opinions/1988/ag_19880721a.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

JAMES E. TIERNEY
ATTORNEY GENERAL

STATE OF MAINE
DEPARTMENT OF THE ATTORNEY GENERAL
STATE HOUSE STATION #23
AUGUSTA, MAINE 04333

July 21, 1988

TO: Richard Lee, Chairman, SEED Board
FROM: Jeffrey Frankel, Assistant Attorney General
RE: Miscellaneous SEED Act issues

This will respond to your February 26 request for additional research relating to the personal liability of officers and directors of the SEED Plan. This will also address several other issues you, David Brown and I discussed at our May 4 meeting.

Personal liability of officers and directors. In my January 13 memo to Fred Douglas (copy attached) I stated that the protections of the Maine Tort Claims Act, 14 MRSA section 8101 et seq. "most likely" applied to the members of the SEED Plan. I based this conclusion on the definition of "State" contained in 14 MRSA section 8102(4) (Supp. 1987-88), which reads as follows:

"State" means the State of Maine or any office, department, agency, authority, commission, board, institution, hospital or other instrumentality thereof, including the Maine Turnpike Authority, the Maine Port Authority, the Maine Vocational-Technical Institute System, the Maine Veterans' Homes and all such other state entities.

Title 20-A MRSA section 12603(1) (Supp. 1987-88) created the SEED Plan as "a public body corporate and politic" exercising independent discretionary authority within the administrative purview of the State Treasury. The Plan's express powers, plus its mission statement set forth in the legislative materials preceding passage of the SEED Act, demonstrate that the Plan was created as one means of furthering the public purpose of enhancing higher education opportunities for Maine residents. The SEED Plan thus appears to be an "agency, authority, commission, board ... or other instrumentality ..." of the State for purposes of section 8102(4).

Young v. Greater Portland Transit District, 535 A.2d 417 (Me. 1987) supports this interpretation of section 8102(4). There, enabling legislation authorized the formation of a transit district as "a body politic and corporate." This designation was one factor in the Court's decision that the transit district was a "governmental entity" as defined in 14 MRSA section 8102(3) for purposes of the Maine Tort Claims Act.

In Taylor v. Herst, 537 A.2d 1163 (Me. 1988) the Law Court held that a physician employed by a municipal hospital should be deemed a state employee for purposes of the Maine Tort Claims Act when participating in the state-mandated involuntary commitment procedure. The decision turned on the Court's perception that the physician was carrying out the State's responsibilities of protecting the public and treating the mentally ill when the events which resulted in suit occurred.

In both Young and Herst the Court took a broad rather than narrow reading of the definitions establishing the classes of entities and individuals which are included within the scope of the Maine Tort Claims Act. If faced with the issue, I believe that the Court would rule that both the SEED Plan, its directors and officers are also protected by that Act.

The Tort Claims Act confers immunity upon the SEED Plan's directors and officers from personal civil liability arising from:

A. Undertaking or failing to undertake any legislative or quasi-legislative act, including, but not limited to, the adoption or failure to adopt any statute, charter, ordinance, order, rule, policy, resolution or resolve;
B. Undertaking or failing to undertake any judicial or quasi-judicial act, including, but not limited to, the granting, granting with conditions, refusal to grant or revocation of any license, permit, order or other administrative approval or denial;
C. Performing or failing to perform any discretionary function or duty, whether or not the discretion is abused; and whether or not any statute, charter, ordinance, order, resolution, rule or resolve under which the discretionary function or duty is performed is valid;
D. Performing or failing to perform any prosecutorial function involving civil, criminal or administrative enforcement; or
E. Any intentional act or omission within the course and scope of employment; provided that such immunity shall not exist in any case in which an employee's actions are found to have been in bad faith.

The absolute immunity provided by this subsection shall be applicable whenever a discretionary act is reasonably encompassed by the duties of the governmental employee in question, regardless of whether the exercise of discretion is specifically authorized by statute, charter, ordinance, order, resolution, rule or resolve and shall be available to all governmental employees, including police officers and governmental employees involved in child welfare cases, who are required to exercise judgment or discretion in performing their official duties.

14 MRSA section 8111(1)

When we meet on July 21 I will discuss with you further the kinds of activity encompassed by these provisions, particularly in light of Darling v. Mental Health Institute, 535 A.2d 421 (Me. 1987).

The protection afforded by section 8111 does not apply to suits based on contract. However, I see little prospect of a litigant credibly arguing that SEED Board members are personally liable for the obligations of the SEED Plan. Title 20-A MRSA section 12604 clearly states that the contracts are made on behalf of the Plan and the State, not the directors. As in my January 13 memo, I analogize this situation to that of a non-profit corporation. Title 13-B MRSA section 402(2) provides that the directors, officers, employees and members of the corporation shall not, as such, be liable on its obligations.

Some types of legal action against directors and officers are not barred by Maine law. Chief among these are any suits grounded in federal law alleging the deprivation of civil rights. Furthermore, the Maine Tort Claims Act does not bar suits based on any federal law. Thus if a person alleged the directors' personal liability for violations of any federal banking or securities statute in connection with the SEED Plan, such a suit might proceed on the merits.

In the absence of wrongdoing or bad faith, I cannot imagine the State refusing to defend and indemnify a member of a State Board who has been sued for damages arising out of his State service. Nonetheless, 20-A MRSA section 12611(12) explicitly permits the Board to:

Indemnify or procure insurance indemnifying any member of the board from personal loss or accountability from liability resulting from a member's action or inaction as a member of the board, including, but not limited to, liability asserted by a person on any bonds or notes of the board.

See also 20-A MRSA section 12611(8), which authorizes the Board to "procure insurance against any loss in connection with the plan's property, assets or activities." You will probably want to contact Tim Smith, Director of the Division of Risk Management, if the Board is interested in purchasing insurance.

Another approach might be to seek an amendment of the statute along the lines of 10 MRSA section 967-A (Supp. 1988). Section 967-A provides FAME members and employees with absolute immunity from all suits based on state law which arise out of their official duties. Indemnification is made mandatory, not optional.

IRS and SEC ruling requests. Title 20-A MRSA section 12613(2) requires the SEED Board, before entering into any advance tuition payment contracts, to solicit answers from the U.S. Internal Revenue Service to appropriate ruling requests, and bars the Board from entering into any contracts without making known the status of the requests. Title 20-A MRSA section 12613(3) similarly requires the Board, before entering into any contracts, to solicit answers from the U.S. Securities and Exchange Commission to appropriate ruling requests, and bars the Plan from entering into any contracts without making known the status of the requests.

As you know, on or about February 19, 1987 the State of Michigan submitted an IRS ruling request pursuant to the Michigan Education Trust Act, 390, 1421 et seq. (1988), the model for the SEED Act. It received a reply dated March 29, 1988.

You have asked whether the SEED Board may rely on the Michigan ruling as fulfillment of its obligations under section 12613(3), or whether it must (or should) submit its own request. You also asked if the Department of the Attorney General will prepare any necessary ruling requests.

IRS Revenue rulings are issued only to the taxpayer who requested them, are not of general applicability, and may not be relied upon by other taxpayers. See IRS Rev. Proc. 88-1. However, my office has compared the Maine and Michigan laws and reviewed the Michigan request (a full-blown legal brief) and the resulting ruling. We find no substantial difference between the two laws that lead us to believe that the IRS would rule any differently on a separate request from Maine. Nor are we aware of any argument to be made in addition to those already advanced by Michigan.

For purposes of section 12613(2), our advice is that the Board include in the contract documents a disclosure statement summarizing the Michigan ruling; stating counsel's belief that Maine advance tuition payment contracts would be similarly treated; stating that in light of this belief no independent IRS ruling on the Maine contracts has been requested; and advising prospective purchasers to consult with their own counsel for further information.

With respect to the SEC ruling request required by section 12613(3), I must reluctantly tell you that my office does not currently have on staff anyone with the very specialized expertise necessary to perform this task. This service will have to be contracted out pursuant to 20-A MRSA section 12621(5). If more formal approval from my office for the use of private counsel is necessary (see 5 MRSA section 191), I will see that it is provided.

Officers; by-laws. Title 20-A MRSA section 12610(4) provides that the Governor shall designate one of the SEED Board members as chairman. Section 12610(5) also refers to the president and vice-president of the Board. Section 12611(9) authorizes the Board to make and amend by-laws. You have asked what corporate formalities or other procedure must be followed to elect officers and adopt by-laws.

As I noted in my January 13 memo, the SEED Plan is not governed by the organizational framework set out in Titles 13-A and 13-B for business and nonprofit corporations respectively.

My recommendation is that the Board provide in its by-laws for the election of a president, vice-president and any other officers it feels are appropriate. Consistent with the rulemaking authorization contained in section 12611(16), I also recommend that the by-laws be adopted as state agency rules. See also 10 MRSA section 969-A(14) (Supp. 1987-88) (FAME by-laws to be adopted as state agency rules).

JF:lm
Attachment

Attached January 13, 1988 memo from Asst. AG Jeffrey Frankel to Fred Douglas (Director, Higher Education Services, Dept. of Educational and Cultural Services):

Subject: Student Educational Enhancement Deposit Act, P.L. 1987, c. 527

Re corporate status: 20-A M.R.S.A. § 12603 creates the SEED Plan as a public body corporate and politic, within the State Treasury but exercising statutory powers independently of the Treasurer. § 12610 provides for Board appointment; § 12611 enumerates Board powers. The SEED Plan is a quasi-public corporation organized to perform limited governmental functions in a business setting, comparable to the Finance Authority of Maine. As a state agency, the Plan and its directors are most likely covered by the Maine Tort Claims Act (14 M.R.S.A. § 8101 et seq.; see § 8102(4); cf. Fitzpatrick v. Greater Portland Public Development Commission, 495 A.2d 791 (Me. 1985)). As directors of a corporate body, members presumably enjoy the same immunity from personal liability for the debts and obligations of the SEED Plan as shareholders of a business corporation or members of a nonprofit corporation. The corporate status is self-implementing; nothing need be filed with the Secretary of State (13-B M.R.S.A. § 102(4)(C) excludes state instrumentalities from the nonprofit corporation definition).

Re contracting procedures: 20-A M.R.S.A. § 12611(5) authorizes the SEED Plan to contract for goods, services, personnel, and private consultants. 5 M.R.S.A. §§ 1811-1824 require that all purchases of products and services by the State Government or any department or agency thereof be made through the State Purchasing Agent (e.g., § 1812). The hallmark is the competitive bidding requirement in § 1816, with Contract Review Committee assistance. The SEED Plan is a department or agency of state government subject to the state purchasing law, even in the absence of any explicit reference to that law in § 12611(5). All contracts for goods and services made by the SEED Plan are subject to competitive bidding and must be approved by the Contract Review Committee.

JF:lm