SB 300 - ATTORNEY'S LIEN Number 2257 CHAIR McGUIRE announced that the next order of business would be CS FOR SENATE BILL NO. 300(FIN), "An Act relating to an attorney's lien, to court actions, and to other proceedings where attorneys are employed; and providing for an effective date." Number 2224 MILES BAKER, Staff to Senator Bert Stedman, Alaska State Legislature, sponsor, presented SB 300 on behalf of Senator Stedman. He said that SB 300 is a simple bill but one that has pretty significant benefits for Alaskan taxpayers. Under current law, Alaskans who win in civil court are taxed on the gross award including any attorney fees that may be awarded and which are subsequently passed on to plaintiffs' attorneys. The Internal Revenue Service (IRS), in effect, is taxing that money twice, once as income to the plaintiff and again as income to his/her attorney. For plaintiffs who are private citizens, there are no federal tax deductions to offset incorporation of attorney fees into the plaintiff's income, though a corporation is allowed to take a tax deduction on any attorney fees it receives as part of its award. MR. BAKER said that many of the cases in question involve civil rights issues or employee grievance issues and have zero or very low monetary damage awards. For example a plaintiff might be successful in court in a wrongful termination case and get an award of $5,000 for back pay but have $100,000 in legal fees. Under current law, such a plaintiff would be taxed on the gross award of $105,000 even though $100,000 is being passed through to the plaintiff's attorney. The current law has the effect, he opined, of penalizing victims who seek redress through the courts in an effort to change illegal or inappropriate behavior. MR. BAKER relayed that SB 300 would allow Alaskans to be treated similar to residents of Oregon with regard to federal taxes. The bill will clarify that the federal tax on court-awarded attorney fees are the responsibility of the attorney and not the plaintiff, and will bring Alaska lien law in line with the Oregon law, which the 9th Circuit Court of Appeals has held is effective in eliminating double taxation on attorney fees. He noted that members' packets contain an article from The Wall Street Journal that proposes that this is really an issue that should be addressed by the U.S. Congress but, for a variety of reasons, it has not yet done so. Senate Bill 300 will make a minor change in Alaska law that will correct the problem of double taxation on attorney fee awards. Number 2090 CHAIR McGUIRE characterized SB 300 as a great bill. REPRESENTATIVE OGG declared a potential conflict, remarking that he could be someone who might benefit from not having to pay taxes on an award of attorney fees. He offered his belief that because of the Exxon Valdez oil spill, SB 300 could be of great benefit to a lot of people from coastal Alaska. He commended the sponsor for coming up with a solution to the problem of double taxation on awards of attorney fees. MR. BAKER, in response to a question, explained that SB 300 will not change an attorney's tax status at all; currently, both plaintiffs and attorneys are paying taxes on the same money, and SB 300 will ensure that only the attorneys will be responsible for paying taxes on the money that's awarded to them as fees. REPRESENTATIVE OGG concurred with Mr. Baker's statement that businesses are treated differently than individuals with regard to taxation of awards for attorney fees. Number 1969 DAVID S. CASE, Attorney at Law, Landye Bennett Blumstein LLP, shared his concern that SB 300 could have the unintended consequence of giving lawyers an ironclad guarantee for their liens on, among other things, the records of the clients they may have. He gave an example of an attorney with a conflict of interest who'd held on to a former client's records while attempting to enforce a lien. He mentioned that the Alaska Supreme Court, in the Miller v. Paul case, laid out the factors it considered to be important in determining whether a lien [by] an attorney should be allowed. He opined that although the language in SB 300 is necessary to clarify that an attorney has a property interest and a firm claim to proceeds of a settlement, it will also have the unintended consequence of foreclosing any kind of argument a former client of an attorney might have that the attorney is not entitled to keep the client's records. MR. CASE suggested adding to page 1, line 9, after "action", language that said: ";provided that, nothing herein precludes a party from contesting an attorney's lien under applicable law.". REPRESENTATIVE GRUENBERG indicated that he would be offering such language as a conceptual amendment later in the meeting. Number 1842 JO A. KUCHLE, Attorney at Law, Cook Schuhmann & Groseclose, Inc., offered the following comments: [Mr. Baker] did a good job laying out why [SB 300 is] very important from a tax point of view. We have hoped for many years that Congress would fix this problem, [but] they haven't. There is a split among the various ... federal court circuits throughout the country, and there's actually a split within the 9th Circuit [Court of Appeals], which is our own circuit. As [Mr. Baker relayed] ... Oregon's lien [statute is] different than Alaska's, so an Oregon taxpayer gets a very different tax result than an Alaskan taxpayer ... [or] a Californian taxpayer. And we don't have any hope that the [U.S.] Supreme Court's going to hear it. The ... U.S. Supreme Court, even though there's been a split among the circuits, has turned down this issue for years, and we don't really hold out much hope that that's going to happen anytime in the near future, and it does create very inequitable results because individuals ... can't deduct the attorney fees ..., particularly where there's the implication of the alternative minimum tax. So it's a very important change to the attorney lien law, and I would encourage the committee to pass the bill as written. I'm interested in Mr. Case's technical amendment, [but] my only concern would be ..., because ... [I haven't had a] chance to compare it to the Oregon law, I would hate to have gutted this bill by adding something that the IRS could hang its hat on in some way and say, "Oh, well, it's different", [and] so we'd still get the same tax result because it's not like Oregon's [law]. ... At first glance, I don't think [the suggested amendment] really changes any rights that an Alaskan already has. You can fight [about your attorney fees] ... with your attorney, there are grievance procedures through the Alaska Bar [Association] ..., [and] there is an ethics opinion ... that an attorney may not hold the records of a client if that would preclude the client's ability to pursue their case. So if records are the issue, I think that's already covered as far as an attorney's ability to keep those records because you can't, ethically, if it's going to impair the client's ability to pursue [his/her] case. ... Number 1629 REPRESENTATIVE GRUENBERG offered his belief that Mr. Case's suggested language would be helpful, and suggested that they also add an intent section to the bill. MS. KUCHLE surmised that adding an intent section would not be harmful in and of itself, but cautioned against changing the bill such that it becomes too different from Oregon law, which is very specific and has been shown to work, in a variety of cases, before the 9th Circuit Court of Appeals. MR. BAKER noted that a significant amount of work went into the creation of SB 300 so as to ensure that Alaska's law regarding this issue would be just like Oregon's law. He reiterated that the language of Oregon's law, which is contained in the bill as written, has worked in cases before the 9th Circuit Court of Appeals. He shared his concern that changing the language could negate the purpose of the bill. CHAIR McGUIRE remarked that the bill addresses a very complex area of law. REPRESENTATIVE GRUENBERG reiterated his belief that they should add an intent section to the bill. MR. CASE said he is not trying to derail SB 300, but reiterated his aforementioned concern that the bill, as currently written, could have the result of foreclosing any kind of argument a former client of an attorney might have that the attorney is not entitled to keep the client's records. CHAIR McGUIRE indicated agreement with Mr. Case's point, and suggested that the committee adopt the suggested language and research the issues raised, between now and when the bill goes to the House floor; if the committee subsequently discovers that something in the bill needs to be fixed, a floor amendment can be offered to address the problem. MS. KUCHLE reiterated her concern about changing the language such that it varies too greatly from Oregon's language. The intent of bill, she pointed out, is to create a significant- enough property interest in the lawyer so that [the award of attorney fees] is just taxed to the lawyer. Number 1180 REPRESENTATIVE GRUENBERG asked Ms. Kuchle to research the effect an intent section might have on the bill with regard to how the IRS might interpret it. MS. KUCHLE agreed to do so. MR. BAKER offered his understanding that currently, an attorney has a right to a lien for compensation regardless of the change proposed via SB 300, and that the court currently has the ability to award attorney fees across a broad [spectrum] of civil lawsuits. REPRESENTATIVE GRUENBERG offered his belief that state law provides that if one is foreclosing on any kind of a lien, one can get actual attorney fees. CHAIR McGUIRE noted that a memorandum from Legislative Legal and Research Services highlights a possible conflict with the bill: The new language prohibits parties from extinguishing or affecting an attorney's lien, including by settlement. However, AS 34.35.430(a)(4) allows a special agreement to change the amount of costs that constitute a lien. Is AS 34.35.430(a)(4) consistent with your intent? If not, do you want to delete the special agreement language from AS 34.35.430(a)(4)? CHAIR McGUIRE remarked that the memorandum helps to highlight that there are other statutory mechanisms that allow discussion of the lien itself and other issues such as those raised by Mr. Case, and that it also raises the question of whether the language in AS 34.35.430(a)(4) does anything to undermine the intent of creating a real and distinct property interest for the lawyer. MS. KUCHLE said she agrees that there are alternative ways for lawyers deal with getting paid, but does not believe that AS 34.35.430(a)(4) creates any kind of problem as far creating a property right in the view of the IRS. REPRESENTATIVE GRUENBERG indicated agreement with Ms. Kuchle. CHAIR McGUIRE posited that the memorandum also somewhat addresses Mr. Case's concern. MR. CASE relayed that he still has concerns with the bill as written. CHAIR McGUIRE ascertained that no one else wished to testify on SB 300. Number 0748 REPRESENTATIVE GRUENBERG made a motion to adopt Conceptual Amendment 1, to add to page 1, line 9, after "action", language that said: "; provided that nothing herein precludes a party from contesting an attorney's lien under applicable law.". CHAIR McGUIRE noted that the drafter would have the leeway to use whatever punctuation is appropriate. Number 0674 REPRESENTATIVE OGG objected to Conceptual Amendment 1. He said he would prefer that this amendment be made on the House floor so as to allow some research into the issues raised. REPRESENTATIVE GRUENBERG indicated a preference for adopting Conceptual Amendment 1 now, and said that if someone finds a problem with it after it's adopted, he would be willing to make an amendment, either in the House Finance Committee or on the House floor, to cure it. REPRESENTATIVE HOLM relayed that he objected to adopting Conceptual Amendment 1, and indicated a preference for allowing the House Finance Committee to address the issue of whether to adopt the language proposed by Conceptual Amendment 1. Number 0474 A roll call vote was taken. Representatives Gara - with the caveat of committing to change it later should a problem arise - Gruenberg, Samuels, and McGuire - with the caveat of committing to change it later should a problem arise - voted in favor of Conceptual Amendment 1. Representatives Ogg and Holm voted against it. Therefore, Conceptual Amendment 1 was adopted by a vote of 4-2. Number 0441 REPRESENTATIVE GRUENBERG moved to report CSSB 300(FIN), as amended, out of committee with individual recommendations and the accompanying zero fiscal notes. There being no objection, HCS CSSB 300(JUD) was reported from the House Judiciary Standing Committee.