Legislature(2003 - 2004)

04/16/2004 01:20 PM House JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                                                               
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                                                               
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                                                               
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                                                               

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