Legislature(2003 - 2004)

02/20/2004 08:05 AM Senate JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SB 300-ATTORNEY'S LIEN                                                                                 
                                                                                                                                
SENATOR BERT  STEDMAN, sponsor, recapped the  discussion about SB
300  during  the  first Senate  Judiciary  hearing.  The  measure                                                               
changes  the way  taxation is  handled on  litigation awards  and                                                               
relates   primarily  to   non-physical  personal   injury  cases.                                                               
Currently, gross  proceeds from a  settlement are awarded  to the                                                               
plaintiff, who must  pay taxes on the full  amount. The plaintiff                                                               
must then pay attorney fees and  the attorney pays taxes on those                                                               
fees.  Therefore,  under  certain  circumstances,  the  plaintiff                                                               
could  have a  net outflow  if the  taxes owed  exceed the  gross                                                               
award minus the attorney fees.                                                                                                  
                                                                                                                                
SENATOR  STEDMAN  referred  to  an article  in  The  Wall  Street                                                               
Journal  dated  February  12,  2004,  which he  said  is  a  good                                                               
synopsis  of the  issue.  He  said even  though  both Alaska  and                                                               
Oregon are  under the  jurisdiction of  the Ninth  Circuit Court,                                                               
they  are treated  differently regarding  taxation because  their                                                               
laws  differ.  If Alaska  were  to  adopt  a statute  similar  to                                                               
Oregon's  law, Alaska  would  avoid the  double  taxation of  its                                                               
citizens.  He said  this issue  has been  raised at  the national                                                               
level  but Congress  has  not  yet dealt  with  it  so Alaska  is                                                               
getting  ahead of  the curve.  He  pointed out  the IRS  National                                                               
Taxpayer  Advocate  Report  has  reported  this  double  taxation                                                               
problem several times. He brought  members' attention to a letter                                                               
from Kevin  Walsh, a  CPA from Fairbanks,  which goes  into great                                                               
detail about the taxation issue.                                                                                                
                                                                                                                                
SENATOR THERRIAULT asked if the  Department of Law or the general                                                               
public have expressed any concerns since the last meeting.                                                                      
                                                                                                                                
SENATOR  STEDMAN said  he  has  not heard  any.  He believes  the                                                               
double taxation issue is widely recognized as unfair.                                                                           
                                                                                                                                
SENATOR  OGAN asked  which state  law would  apply if  an Alaskan                                                               
filed a case in another state.                                                                                                  
                                                                                                                                
SENATOR STEDMAN said  his guess, as a layman, is  that the law of                                                               
the state in which the case was filed would apply.                                                                              
                                                                                                                                
SENATOR FRENCH informed members that choice  of law is one of the                                                               
great contested areas of the profession.  If an Alaskan were in a                                                               
traffic accident  in Montana, Montana  law would  apply. However,                                                               
law professors love to argue about  cases in which an Alaskan and                                                               
a Montanan  were involved  in a  traffic accident  in Washington,                                                               
and a  lawsuit was  filed in  Washington. He  thought SB  300 was                                                               
designed to apply to Alaskan cases tried in Alaska.                                                                             
                                                                                                                                
SENATOR STEDMAN  thought it certainly  would be  advantageous for                                                               
an Alaska  resident to have the  issue addressed in Alaska  if SB
300 passes.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS  opined that SB 300  would apply to cases  tried in                                                               
the  Alaska Court  System. The  only  time he  envisions a  venue                                                               
problem  is with  cases involving  contract law.  He pointed  out                                                               
that  many of  his  contracts  with the  Ford  Motor Company  are                                                               
subject to  the laws of Michigan.  He said he sees  the intent of                                                               
the bill as applying to cases  that are tried in the Alaska Court                                                               
System.                                                                                                                         
                                                                                                                                
SENATOR STEDMAN  clarified that  if a  business is  involved, the                                                               
tax situation  is different so  the double taxation  problem does                                                               
not apply.                                                                                                                      
                                                                                                                                
SENATOR FRENCH referred  to a summary of committee  action in the                                                               
Washington  State  Legislature  in members'  packets.  That  bill                                                               
summary reads:                                                                                                                  
                                                                                                                                
     An  attorney  has  a  lien  upon  the  action  and  its                                                                    
     proceeds to  the extent  of the  value of  the services                                                                    
     performed by  the attorney in that  action.... Proceeds                                                                    
     are limited  to monetary  sums perceived in  the action                                                                    
     so  the  lien  is   not  enforceable  against  real  or                                                                    
     personal  property.  The  attorney's lien  is  superior                                                                    
     although   it   [indisc.]   upon  the   judgment.   The                                                                    
     legislature expresses  its purpose of  making attorneys                                                                    
     fees taxable  solely to the attorney  and its intention                                                                    
     that the court will apply the statute retroactively.                                                                       
                                                                                                                                
He noted  his main interest is  the sentence that says  a lien is                                                               
not enforceable against  real or personal property.  He looked at                                                               
Alaska statute  and did  not see any  similar protection  for the                                                               
plaintiff. He asked  Senator Stedman if it is  his intention that                                                               
this lien not  be enforceable against real  or personal property.                                                               
He said  after long, contentious  lawsuits, plaintiffs  and their                                                               
attorneys sometimes  get sideways  and fees  become an  issue. He                                                               
would hate  to see  someone "lose  the farm"  after having  won a                                                               
lawsuit.                                                                                                                        
                                                                                                                                
SENATOR STEDMAN  agreed with Senator  French and said  the intent                                                               
behind SB 300 is to clean up the  tax inequity and not to allow a                                                               
broader reach to other assets.                                                                                                  
                                                                                                                                
SENATOR THERRIAULT asked:                                                                                                       
                                                                                                                                
     Wouldn't they  have a  lien already  for fees  that are                                                                    
     owed? We're talking about a  specific lien on the award                                                                    
     but, absent  that, if I'm  an attorney and do  work and                                                                    
     then my client  never pays the bill - I  mean you can't                                                                    
     walk out on  the fees they owe their  attorney. I'm not                                                                    
     sure if a lien is  automatically placed on property and                                                                    
     what-not  but an  attorney  can  protect themselves  by                                                                    
     getting a lien.  I know what Senator  French is getting                                                                    
     at but this talks specifically  about the lien it gives                                                                    
     the award and  I don't know how  that would necessarily                                                                    
     slop over onto any other assets.                                                                                           
                                                                                                                                
CHAIR SEEKINS  said he reads  it to refer  to a lien  against the                                                               
cause of  action that would not  extend to any assets  outside of                                                               
the cause of action.                                                                                                            
                                                                                                                                
SENATOR  FRENCH said  that is  how he  reads the  attorney's lien                                                               
statute. He clarified  that he is not saying that  a lawyer can't                                                               
turn around  and sue a client;  he was saying that  a lawyer does                                                               
not  automatically get  a lien  on his  client's property  as the                                                               
result of a fee dispute. The  lawyer would have to go through the                                                               
normal steps that everyone else goes through to satisfy a debt.                                                                 
                                                                                                                                
CHAIR SEEKINS said he believes  the committee's intent is that SB
300 only deals with a lien against the cause of action.                                                                         
                                                                                                                                
SENATOR STEDMAN agreed that is his intent also.                                                                                 
                                                                                                                                
CHAIR SEEKINS  noted that  no one  else wished  to testify  so he                                                               
closed public testimony.                                                                                                        
                                                                                                                                
SENATOR  OGAN  asked  what  part of  a  settlement,  for  example                                                               
punitive damages, would be taxable.                                                                                             
                                                                                                                                
SENATOR FRENCH  said he did  not know about punitive  damages but                                                               
he thought the  main injustices occur in claims  where people sue                                                               
for wrongful  termination or other workplace  matters. He pointed                                                               
out  if a  person  has to  go up  against  Wal-Mart for  wrongful                                                               
termination,  it  could  cost  that  person  $900,000  while  the                                                               
monetary damage  award might be  $30,000. That person  would then                                                               
get taxed  on $930,000 and the  attorney would also pay  taxes on                                                               
the $900,000.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS said regardless of the  type of award, SB 300 would                                                               
allow  the recipient  of the  award to  deduct the  attorney fees                                                               
before paying taxes.                                                                                                            
                                                                                                                                
SENATOR  OGAN  moved  SB  300  and its  zero  fiscal  notes  from                                                               
committee with individual recommendations.                                                                                      
                                                                                                                                
CHAIR  SEEKINS announced  that without  objection,  SB 300  would                                                               
move to the  Senate Finance Committee. He then  announced a brief                                                               
at-ease.                                                                                                                        

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