Legislature(2001 - 2002)
04/19/2001 01:18 PM House TRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 235- DOT&PF-RELATED CONTRACT CLAIMS CHAIR KOHRING announced that the next order of business would be HOUSE BILL NO. 235, "An Act relating to the handling of and interest on contract controversies involving the Department of Transportation and Public Facilities or state agencies to whom the Department of Transportation and Public Facilities delegates the responsibility for handling the controversies." Number 2603 HEATHER MARTEL NOBREGA, Staff to Representative Norman Rokeberg, Alaska State Legislature, came forth on behalf of the House Judiciary Standing Committee, sponsor of HB 235. She stated: We have introduced this bill at the request of the Associated General Contractors [AGC] of Alaska. ... On public works projects in the state of Alaska, a contractor encountering a condition that requires a change in the contract is required to perform the work even if there is a dispute as [to] the appropriate adjustment. Resolution of such a claim frequently takes a long time, as much as four yeas, and the state currently disallows interest on the amount of the ultimate settlement. This bill ... will require the interest to be given at the end of the adjudication of the matter, and when there's a settlement amount given ... prejudgment interest will be given. CHAIR KOHRING asked Ms. Nobrega to explain what prejudgment interest means. MS. NOBREGA explained that interest would start running from the day of the dispute until the matter is settled. She stated that there are a couple of different ways it could be settled. CHAIR KOHRING asked who makes the settlement. MS. NOBREGA responded that she believes a procurement officer can make a decision. She noted that the person could appeal at each level: a commissioner's [decision], a Department of Transportation and Public Facilities (DOT&PF) [decision], all the way up to a judicial decision. In response to a question by Chair Kohring, she said this applies universally, to all parties. It says the interest should be given to the contractor, the department, or a contracting agency. CHAIR KOHRING asked Ms. Nobrega whether she could cite some examples that have occurred. MS. NOBREGA responded that AGC would have the best examples. However, the Department of Law's opposition paper cites quite a bit of money it would have to give in prejudgment interest if required to do so. It indicates to her that this is a problem: these contractors aren't getting interest on their money. Number 2780 DICK CATTANACH, Associated General Contractors (AGC) of Alaska, testified via teleconference, saying [AGC] understands the position of the Department of Law - it likes the idea of not having to pay interest. However, a contractor has to pay all his/her bills on time, out-of-pocket; frequently [the contractor] has to borrow money just to pay those bills. Controversies come up, which is why there is a claims process; it is resolved in terms of who is at fault and who has to pay. MR. CATTANACH stated that [AGC] thinks interest on that money ought to be part of the costs of that claim, and the state ought to be responsible for its fair share if the claim goes in favor of the contractor. One thing [AGC] is concerned about is the sheer size of the state [government] and its ability to postpone claims. It places small contractors at a significant disadvantage when they are forced at times to settle claims at less than their realistic values; sometimes they go out of business because they can't afford to take on the state. He added that [AGC] doesn't think this type of interaction between the state and the contractor is just; it is bad public policy. CHAIR KOHRING asked Mr. Cattanach whether he could justify this legislation as far as how many people have actually been impacted by this. MR. CATTANACH responded that this impacts a good number of people each year. For example, a contractor right now who is working on a project on the Kenai Peninsula is basically out of business because of having to use the cost of the entire claim just to continue. In some cases, arbitrators award upwards of half a million dollars as prejudgment interest, only to have the Department of Law contest it, take it to court, and end up settling the claim for "pennies on the dollar." Number 2928 CHAIR KOHRING asked whether the court process has worked for AGC. MR. CATTANACH answered that it is a very expensive process. One thing [AGC] is working on with [DOT&PF] is a review of the entire claims process. His members say if their claim is less than $150,000, it is not economical to pursue it because of the time involved and attorney fees. Number 2975 JOHN WHEATLEY, Senior Vice President, Associated General Contractors of Alaska, testified via teleconference. TAPE 01-30, SIDE B MR. WHEATLEY stated: Contractors are required to perform the work even if there is a dispute between the parties regarding adequate and appropriate compensation. Also, construction claims frequently represent differing of opinions between the owner and the contractor regarding whether or not particular work was included in the documents at the time of bid. Resolution of these differences takes time, and the state currently disallows any interest on the amounts of ultimate settlement. A contractor incurs costs to complete the work. These costs, if recovered in a timely fashion, could be used to finance additional work and to support additional security bond credit. The inability to use these funds in their business could result in tremendous costs to the contractor in terms of lost projects, credit, and wages, [and] as we've heard in previous testimony, even their very existence. Alaska courts generally recognize awarding prejudgment interest is necessary to make a plaintiff [whole] by compensating him for the use of money .... The State of Alaska should recognize the same principle in its claim-resolution process by paying interest on contract controversy. I urge you to support House Bill 235, allowing contract claims to be [calculated] the same as all other claims in the state of Alaska. Number 2909 MIKE MILLER, MB Contracting Company, testified via teleconference. He stated that he has worked in the construction industry for 28 years in Alaska, and for 17 years for MB Contracting Company. He views this legislation as correcting an oversight in the [Alaska] Procurement Code. Prior to the procurement code, in the mid-to-late '80s, the state paid prejudgment interest. [The construction industry] is asking to be treated fairly. CHAIR KOHRING asked Mr. Miller whether there is a system like this set up at the municipal level in Anchorage or Fairbanks. MR. MILLER responded that he knows that they pay [prejudgment interest], but does not know how it is set up. When he took Legal Aspects of Engineering and Architecture at the University of Alaska Fairbanks in the late '70s, a footnote in his textbook mentioned that prejudgment interest was paid in Alaska as a matter of course. He suggested this seems to be oversight from when the model procurement code went to the procurement [code]. CHAIR KOHRING remarked that he asked the question to see if there is any system in place, either municipally or perhaps in other states, to use as an example of how it works elsewhere. MR. MILLER said he is sure the federal C.F.R. (Code of Federal Regulations) covers it. Number 2778 KEVIN BRADY, Attorney, Oles Morrison Rinker & Baker, testified via teleconference. He stated: I have been involved with approximately four of these cases that have gone through the administrative claims process. ... I should point out that there are multiple layers of review: the beginning in the field, going up through the project management, going up through the ... appropriate [DOT&PF] division, going up through the commissioner, going through the hearing officer, and going through the judicial appeals. The fastest I've ever seen one of these actually go through the process is 24 months - 24 months on a $750,000 award, which resulted in approximately $90,000 in prejudgment interest, which the contractor never received. From a legal standpoint, up through July of 1998, the commissioner's office routinely paid prejudgment interest for contractor claims. Some time after that, they arbitrarily decided that they no longer had to do it. Suffice it to say that we view that as being wrong, and our efforts are to codify the preexisting requirement that they must in fact pay prejudgment interest. There [are] a number of reasons for doing [this], not the least of which is every city, every municipality, every federal agency [is] all required to pay prejudgment interest for contractor claims. For that matter, every state agency in the State of Alaska is required to pay prejudgment interest on other contract and court [claims]. There's simply no basis for [DOT&PF] not to pay general contractors prejudgment interest; it's fundamentally unfair and it's unfriendly to business. ... The last thing I'd like to mention is there's approximately a three-year period during which the department has declined to pay prejudgment interest. ... I know of four or five contractors who have filed claims and certified their claims within this three- year period, and their interest is basically hanging out there and accruing. I would like to encourage this committee, if it sees fit to pass this bill out, to make it retroactive to cover every contractor who has a pending claim as of the effective date of the legislation. CHAIR KOHRING asked Mr. Brady when the [prejudgment] interest on claims failed to continue. Number 2616 MR. BRADY responded that he is aware of one case. The last piece of correspondence he saw was signed by Commissioner Perkins, indicating he had approved the hearing officer's recommended decision in a case known as Quality Asphalt Paving, which included a component of interest at 10.5 percent from the date the claim was initially filed. Quality Asphalt Paving subsequently believed its award was too little and appealed it. In response to that, the Department of Law appealed the prejudgment interest issue; that has been the subject of a lot of pleadings and is currently en route to the supreme court. BILL RENNO, Attorney, Oles Morrison Rinker & Baker, testified via teleconference. He stated that over the past few years [his firm] has had the opportunity to represent a number of contractors in claims against DOT&PF. He emphasized how long it takes a contractor to get through this process. He stated: Right now in our office alone - and we're not the only law firm by any means that represents the contractor - ... we are involved in at least five or six cases that are in stages of the resolution process with [DOT&PF]. And as close as we are to a decision on this interest, ... my best guess is a year and a half to two years. The next step is to go from superior court to the supreme court. One of our clients has to file a notice of appeal by tomorrow. ... That decision in the supreme court - and that happens to be on Quality Asphalt - will affect all other pending claims. ... We would strongly recommend that the effective date, if you choose to pass this bill, would be effective to ending claim. That's the only way ... the legislature can put an end to this long, arduous, costly process that a number of contractors have found themselves wrapped up in at this time. Number 2519 MR. RENNO continued: I guess the other point is, again, to go back and make sure that the committee members understand that [DOT&PF] essentially changed positions .... Everybody else pays interest. ... The reason you're not going to see other regimes is because, as a matter of course, this is paid. What happened that derailed the process at [DOT&PF] is that the supreme court issued a decision called Danco [Danco Exploration v. DNR]. That decision actually involved a deposit on an oil lease with DNR [Department of Natural Resources]. The supreme court in that case said that the person who put down the deposit was not entitled to interest on his deposit. There's been reams of briefing on that case; I'm not going to get into it in detail. Just let me simplify it and say that case does not apply to this situation. It was not a contractor court case; it was a lease deposit, and ... the Department of Law has latched on to that case and used that as an excuse to direct [DOT&PF] not to pay interest to contractors. And to run that point home, I would like to quote from a letter that Mr. Cattanach received from Commissioner Perkins on March 17, 2000. At that time, Commissioner Perkins told Mr. Cattanach, "On the issue of paying prejudgment interest on a claim appeal, we are not avoiding making such payment by choice. Rather, we are following the advice of the attorney general's office that such payments are contrary to law." So what has happened since [DOT&PF] has been instructed by the Department of Law that they don't have to pay interest [has] actually been ... a club against contractors. And let me give you [an] example of how that club has been used. ... After the hearing officer's decision, Quality thought they were entitled to more on the principal of their claim. They appealed that to superior court. [DOT&PF] turned around after ... the commissioner had recognized that Quality was entitled to interest by adopting the hearing officer's decision. After that, [DOT&PF] reversed fields in response to Quality's appeal and cross-appealed and said, "We changed ... our minds: you are not entitled to interest." That is the case that's been tied up in superior court ... and is now heading toward the supreme court. Well, let me take this one step further. Now it's going to the supreme court, and Quality's attorneys called the AGs [attorney generals] in Fairbanks handling this case and asked those AGs, "Would you agree to allow this to go to the supreme court on the interest issue only, and agree to pay us the principal amount of our claim that has been affirmed at the hearing officer level [and] that has been affirmed at the supreme court level?" The response from the AGs [was], "No, if you dare to appeal this interest issue, we are going to appeal all other issues in the case and you're not going to see a dime." So that's the kind of abuse that has been going on from [DOT&PF] with regard to this interest issue. Interest is needed in order to give these people an incentive to sit down with the contractors, early on in the process, and resolve these disputes, or otherwise pay the penalty of having to pay the contractor at the end of the day for two, three, four years of interest. CHAIR KOHRING remarked that he was amenable to moving the bill if it was the will of the committee. Number 2228 DOUG GARDNER, Assistant Attorney General, Transportation Section, Civil Division (Juneau), Department of Law, came forth and stated: I guess I'd like to tell some of the things that Oles Morrison Rinker, the law firm that is here to further their clients' business interests, hasn't told you about this particular bill. First of all, we have heard the comments that [DOT&PF], in the past, has paid this interest, and we have queried a senior [DOT&PF] staff and asked them for situations where they have paid interest. They have been unable to provide us with any of those instances. I wouldn't be surprised if at some point [DOT&PF] may have -- and our clients often make mistakes. ... It may be that somehow or another, somewhere along the way, some interest was paid. ... As Mr. Renno and Mr. Brady have indicated to you, ... we have been in litigation with their law firm for many years over contract claims and for ... quite a few months now on this issue. The Alaska Superior Court has twice ruled in the Quality Asphalt case ... that we have correctly interpreted Alaska law and that prejudgment interest is not paid on these claims. The reason that prejudgment interest is not paid on administrative claims is because under Alaska law ... the state has sovereign immunity; it agrees to be sued for the things it agrees to be sued for. In AS 09.52.50 the state has specifically not agreed to be sued directly in superior court on administrative claims. There's a process that has been put together, which could be described as an alternate dispute resolution process where the contractor and the [DOT&PF] represented by our office try and litigate these issues. But for claims like that, where there is no direct route into court, the payment of prejudgment interest just doesn't happen; it's not something that the state has waived its sovereign immunity to allow to have happen. ... A very closely analogous situation was raised in the Danco case. Number 2078 MR. GARDNER continued: ... The other thing that I don't think was clear from any of the testimony so far is that the concept that's being advance here is a concept, from what we've been able to determine, [that] is not a majority position in the country. The Associated General Contractors and Oles Morrison are representing to you that this is a great idea and a good thing to do. ... Other states have decided that they will pay liquidated claims, but they will not pay interest on unliquidated claims. And it gets a little complicated, but the bottom line is, the State of Alaska pays interest on a claim that's not disputed. If you've done work for us, and you're just owed the money and there's no dispute, we pay interest. If there is a disputed amount, then we don't pay interest on those types of claims for the reasons that I have just said. Something that the legislators need to consider really carefully is, ... as a consequence, this bill affects all of the agencies and would make the cost of those projects, to the extent that any interest is owed on a claim, rise. That brings the second issue up, which is how does the state pay for that kind of interest, if in fact it is owed? [DOT&PF] gets most of its funding through the Federal Highway Administration, ... gets some from FAA [Federal Aviation Administration] and some from Federal Transit Authority. But other agencies may get their funding through other federal agencies that don't participate in the payment of interest. ... The state will ultimately have to pay that interest one way or the other, whether the federal government participates or whether the state has to reach into general funds to pay those kinds of interest payments. That's certainly a consequence that this committee should seriously consider. The other consequences in this legislation are some equal protection issues. Number 1901 REPRESENTATIVE KOOKESH asked Mr. Gardner to describe what prejudgment interest is. He pointed out that in the sponsor statement it says, "This legislation would simply require that when a contract settlement with [DOT&PF] is in dispute and settled in favor of the contractor, interest must be paid to the contractor on the settlement amount from the date of the claim to the date of the decision." He said that doesn't sound like prejudgment to him. MR. GARDNER responded that he thinks a lot of terms have been used to describe this. He said it could most accurately be described as interest on administrative claims. REPRESENTATIVE KOOKESH asked when it is paid and whether it is paid prior to a settlement. MR. GARDNER answered that it probably is not a good term to use in this situation. CHAIR KOHRING asked Ms. Nobrega whether the legislation is retroactive. Number 1746 MS. NOBREGA responded that it is her understanding that it would not be retroactive unless it was specifically stated as such. CHAIR KOHRING commented that if it wasn't retroactive, other current claims might come to the forefront after the effective date of the legislation. MS. NOBREGA said she is not sure. CHAIR KOHRING remarked that assuming that were the case, he is curious as to how much money [DOT&PF] would potentially be liable to pay out in claims. Number 1709 DENNIS POSHARD, Legislative Liaison/Special Assistant, Office of the Commissioner, Department of Transportation & Public Facilities, came forth and stated his understanding that this bill would not affect claims retroactively. MR. GARDNER said a bill is not retroactive unless it's specifically made retroactive. He believes there would be serious issues with respect to federal participation in a retroactive payment; he isn't sure FHWA would participate in that kind of payment, but the sense is that it probably would not, in which case the bill would have a seven-figure fiscal note. He added that to do something retroactively, under [Alaska's] constitution, similarly situated people must be treated similarly. A retroactive provision in this bill could really just be addressing the tip of the iceberg; there may be a massive amount of people who could be entitled to raise this issue. REPRESENTATIVE KOOKESH referred to AS 09.52.50 and indicated the desire to have a legal opinion regarding sovereign immunity, as well as the state's ability to be sued, and to have to pay interest. He noted that people who testified described the prejudgment interest, but that it is not particularly mentioned in the bill. He suggested perhaps someone from AGC or Ms. Nobrega could answer that later. Number 1492 REPRESENTATIVE SCALZI said he would like to move the bill out of committee; the remarks that the state would have to pay don't bother him, because he thinks it would bring the state into compliance with the private sector and push the DOT&PF to operate more efficiently. He remarked that he thinks when a contractor goes through different change orders on a good-faith basis and then all of a sudden is faced with having to appeal his or her case, the interest accrued is a big factor in the judgment and whether or not the contractor may remain solvent. REPRESENTATIVE SCALZI moved to report HB 235 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE KOOKESH objected. He stated: I know that there's no retroactive clause in the bill, and even if there was, I know that we would have to think twice about supporting something like this because of the fiscal note it would generate. And if people continue to want to have a retroactive clause, then we have a big problem. ... I have no problem with the sponsor statement saying that, if there's a problem and they go to a decision and there's interest owed somebody, after the decision is made, ... because I think that's fair. But at the same time, we need to know how much money that is ... because I think the state itself would have to come up with that money to pay that interest payment. ... The way I interpret prejudgment interest is that you pay it upfront. ... And I really believe that if the state is relying on certain statutes that say we can only be sued by people who waive sovereign immunity, ... there's many people, ... especially in this legislature, who have stood up and said the state is a sovereign entity. And when you give away that sovereign entity to a contract or through a bill like this, then we have a problem. Number 1270 REPRESENTATIVE MASEK said it seems many issues brought up deal with the financial portion, which the House Finance Standing Committee can deal with. Therefore, she will support moving the bill. CHAIR KOHRING addressed Representative Kookesh and offered to put together a letter voicing any additional concerns. REPRESENTATIVE KOOKESH said he didn't have any more problems with moving the bill out, and would work with [Michael Krieber, committee aide for the House Transportation Standing Committee] to put together a letter for the House Finance Standing Committee. He noted that he would still have the option of voting "no" on the floor. He said he wanted to be supportive, but wanted to state his objections and the reasons. CHAIR KOHRING told Mr. Gardner he would look forward to the legal opinion as far as the sovereign immunity issue. He asked that copies be provided to himself, for circulation to committee members. He asked whether there was any further objection to the motion. REPRESENTATIVE KOOKESH said he would object "just so I could vote no." Number 1220 A roll call vote was taken. Representatives Masek, Scalzi, and Kohring voted in favor of moving the bill. Representative Kookesh voted against it. [Representatives Ogan, Wilson, and Kapsner were absent.] CHAIR KOHRING announced that HB 235 was moved from the House Transportation Standing Committee by a vote of 3-1. He assured Representative Kookesh that his concerns would be forwarded to the House Finance Standing Committee. [Representative Kookesh was one of four signers of the bill report and thus HB 235 was forwarded to the Chief Clerk.]
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