MINUTES OF THE
SENATE COMMITTEE ON JUDICIARY
Sixty-seventh Session
June 9, 1993
The Senate Committee on Judiciary was called to order by Chairman Mark A. James, at 2:15 p.m., on Wednesday, June 9, 1993, in Room 224 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Senator Mark A. James, Chairman
Senator R. Hal Smith, Vice Chairman
Senator Lawrence E. Jacobsen
Senator Mike McGinness
Senator Dina Titus
Senator Raymond C. Shaffer
Senator Ernest E. Adler
STAFF MEMBERS PRESENT:
Dennis Neilander, Senior Research Analyst
Sherry Nesbitt, Committee Secretary
OTHERS PRESENT:
David F. Sarnowski, Deputy Attorney General, State of Nevada,
Office of the Attorney General
Cyndy Woodgate, Deputy Secretary for Corporations, State of
Nevada, Office of the Secretary of State
Willliam L. Gardner, Attorney, Reno City Attorney's Office
John P. Fowler, Attorney, Vargas & Bartlett, Business Law Section, Nevada State Bar Association
Steven F. Stucker, Representative, Nevada Association of Independent Business
Ray Moberg, Managing Partner, Ernst & Young, President-Elect, Nevada Society of Certified Public Accountants
Joan G. Buchanan, Division Coordinator, State of
Nevada, Real Estate Division
Kirk S. Schumacher, Shareholder, Woodburn and Wedge, Representative, National Medical Enterprises, Pacific Telesis Group
Sharon E. Claassen, Attorney, Claassen and Olson
Ben Graham, Lobbyist, Nevada District Attorney's Association
William P. Cashill, Lobbyist, Nevada Trial Lawyers
Association
Roberta (Bobbie) Gang, Lobbyist, Nevada Women's Lobby
Captain Randy L. Oaks, Lobbyist, Las Vegas Metropolitan Police
Department
Andrew MacKenzie, Attorney, Allison, MacKenzie, Hartman,
Soumbeniotis & Russell, Ltd.
Senator James opened the hearing on Assembly Bill (A.B.) 77.
ASSEMBLY BILL 77: Revises provisions regarding loitering, prowling and vagrancy. (BDR 7-548)
Ben Graham, Lobbyist, Nevada District Attorney's Association, provided testimony in support of A.B. 77. Mr. Graham advised that approximately 2 years ago, a federal court found a portion of the current statute on vagrancy and loitering unconstitutional. He advised A.B. 77 essentially removes the areas of the statute found to be unconstitutional. Additionally, the bill removes the state of Nevada from the loitering and vagrancy business of enforcement. Mr. Graham advised A.B. 77 also provides local jurisdictions, if they so choose, the option to enact a constitutional loitering or vagrancy law. He advised he has worked closely with the city attorney's offices in Reno and Las Vegas, and with the Attorney General's Office, regarding A.B. 77. He advised A.B. 77 was compiled with the assistance of case law from other jurisdictions which found portions of the law similar to that of Nevada unconstitutional.
Senator Jacobsen asked if the bill is directed at people who, for example, loiter beneath underpasses.
Mr. Graham replied it was originally, and this is how the old vagrancy laws were used. He stated in past times, Nevada attempted to socially legislate in that area. He advised the courts have said if that activity is legal for one person, how can it be illegal for another person. The courts further advised caution in attempting to regulate what appears to be legal, when the circumstances are vague or over-broad. Mr. Graham advised under A.B. 77, if there is a particular problem locally, the local jurisdiction has the option to handle it.
Senator James asked if the courts said an outright prohibition cannot be made, but reasonable regulations of time, place and manner may be made regarding the conduct of begging.
David F. Sarnowski, Deputy Attorney General, State of Nevada, Office of the Attorney General, provided testimony. Mr. Sarnowski advised two courts were involved in these decisions. The United States District Court for the District of Nevada declared a portion of the statute unconstitutional. This court also asked the Nevada Supreme Court, upon certification of a question, to decide whether or not it could construe another part of the statute in such a way as to make it constitutional. The Nevada Supreme Court stated they could not do this. However, they addressed the issue in terms of the vagueness of the statute. The Nevada Supreme Court ruled the statute unconstitutional because the terms are so vague as to be unenforceable. The ruling stated the statute did not put a reasonable person on notice of what behavior is against the law. Mr. Sarnowski advised a proposal was originally submitted to attempt to amend the statute, while keeping the state in the vagrancy business. He stated the Attorney General's Office believes the current version of A.B. 77 is much preferred. It eliminates the state from that arena and gives the authority to the local jurisdictions if they choose to exercise their legislative powers and enact ordinances which proscribe loitering and prowling.
Senator James asked if one or both of the courts say it is constitutionally permissible to regulate the time, place, and manner of begging.
Mr. Graham stated this is permissible.
Senator James referred to page 1, line 10 of the bill, which reads:
Accosts other persons in any public place or in any place open to the public for the purpose of begging or soliciting alms;
Goes from house to house begging food, money or other articles, . . .
Senator James asked if this is the part that was declared unconstitutional.
Mr. Sarnowski advised that neither the Nevada Supreme Court nor the Federal District Court addressed begging. This was not an issue in the case before the courts. The courts ruled, as a matter of law, that the statute as written was vague. The courts did not say how to solve the problem. He advised, however, the city attorney's offices, which have submitted input of which A.B. 77 is a result, have done research into the area of reasonable restrictions. He stated A.B. 77 is the result, based on laws found to be permissible in other jurisdictions.
Mr. Graham advised that, even though the Nevada Supreme Court did not deal with begging, a federal court in northern California with an almost identical panhandling statute, found the begging prohibition to be unconstitutional. He advised it was the desire in the assembly to narrow the statute. Mr. Graham reiterated that local jurisdictions can enact ordinances with safeguards which will hopefully be constitutional.
Senator James asked if subsections h and i were the provisions declared unconstitutional.
Mr. Graham and Mr. Sarnowski both confirmed this is correct.
Senator James stated it seems strange for this issue to come up now. He stated there was a supreme court case, Papachristu, which long ago declared these statutes to be vague. He stated he simply wants assurance that the provision in subsection 4 is on firm constitutional ground.
Mr. Graham stated his belief that this section is constitutional. He advised this is a fairly standard provision in states which have done this sort of amendment.
Senator James referred to page 1, line 2, and the elimination of the language "solicits anyone to engage in or who engages." He asked for and received confirmation that this is not a substantive change.
Senator James asked for and received confirmation that this would not change the laws on soliciting lewd conduct.
Mr. Graham advised the committee that William L. Gardner, Attorney, Reno City Attorney's Office, was present at the hearing. Mr. Graham asked Mr. Gardner to be present to affirm that there is a definite local concern in this area.
Senator Jacobsen stated he would like to see this as a state law. He stated local jurisdiction usually does not pass anything until an incident occurs. He stated it seems one entity has a law and another does not, this would encourage an individual to go to another place.
Mr. Graham replied that he would assume Douglas County already has something similar in the ordinances. He stated the request has been made that A.B. 77 become effective on passage and approval, and he would be telefaxing notification to all local jurisdictions. He advised previously, local jurisdictions could have a law, but it had to be the same as the state. The state law was found to be unconstitutional, therefore, the local laws were also unconstitutional.
Senator Jacobsen advised he wanted the law to be tough, as parks and other places frequented by children tend to attract the types of people referred to in A.B. 77.
Mr. Gardner replied one reason for allowing local entities to pass their own laws is, in the event they are struck down, a new ordinance can be in effect in a short period of time. If a state law is struck down, 2 years must pass before the law can be changed.
Senator Titus asked if this would affect the homeless sleeping in the libraries in Las Vegas.
Mr. Graham advised Las Vegas is taking care of this, and does not believe this bill would change the situation.
Senator McGinness asked why the word "alms" is left in the language of the bill, and what is the definition of "alms."
Mr. Graham stated it probably has to do with religious freedom.
Senator James stated his belief that either an unconstitutional or constitutional statute could be drawn under the language in subsection 4.
Mr. Graham advised this will take the state out of the litigation.
Senator Jacobsen asked for and received confirmation that all local entities will be notified.
Senator James confirmed there was no further testimony on A.B. 77, and closed the hearing on that bill.
The hearing was opened on Assembly Bill (A.B.) 540.
ASSEMBLY BILL 540: Authorizes expedited temporary orders for protection against domestic violence under certain circumstances. (BDR 3-1834)
Sharon E. Claassen, Attorney, Claassen and Olson, provided testimony in support of A.B. 540. Ms. Claassen advised she has worked extensively with domestic violence prevention groups, and has represented battered women in legal matters. She advised A.B. 540 originated through the work of Judge Gaston from the family court in Las Vegas. She stated the primary objective of the bill is to allow, but not require, judges to issue orders by facsimile machine after telephone conferences confirming that domestic violence has taken place and an individual has been arrested. This bill would allow the judge to issue an order and transmit it to the holding facility or jail without the need of waiting until the next judicial day to have the courts open and to obtain paper documentation. She stated this allows the judges, in jurisdictions who wish to take part in this activity, to provide for the issuance of protective orders primarily during weekends. This would be of value in a situation where a domestic problem occurs, for example on a Friday night. The person committing the violence is arrested, but released on bail, giving rise to the possibility of the problem escalating before an protective order can be issued. She advised this procedure would take effect only where there is an arrest. She reiterated that this is not a mandatory procedure.
Roberta (Bobbie) Gang, Lobbyist, Nevada Women's Lobby (NWL), provided testimony in support of A.B. 540. She read into the record, a letter from the Executive Director of the Nevada Network Against Domestic Violence (NNADV). A copy of this letter is attached as Exhibit C. As shown in the letter, the NNADV strongly supports A.B. 540. Ms. Gang advised that domestic violence is highlighted in the NWL handbook as one of the 15 issues which needed to be addressed by the 1993 legislative session.
Senator James referred to line 24 of the bill, which reads:
If such an order is received by the facility holding the alleged perpetrator while he is still in custody, the order must be personally served by an authorized employee of the facility before the alleged perpetrator is released.
Senator James asked if there is a provision for personal service of the order, other than this language.
Ms. Claassen stated there is such a provision in another portion of Nevada Revised Statutes (NRS) 33.
Senator James asked for and received confirmation that the other section requires personal service, and the section in A.B. 540 augments that and states service must occur in the jail. He asked for confirmation that there is no danger of the person not receiving notice of entry of one of these ex parte orders.
Ms. Claassen replied the law requires that personal service be attempted. Normally if this service has not been achieved and there is another incident, there is also a provision in A.B. 540 to provide for service at that time.
Senator James asked what section requires the service.
Ms. Claassen advised it may be NRS 33.030.
Senator Jacobsen asked if there is any way to curb the incidents which occur frequently at the shelter in Stewart. He advised the sheriff is called to that area several times per week. He asked if a restriction of husbands' visitation is possible.
Ms. Claassen stated her belief that the shelter in Stewart, as well as most others in the state, do not allow any type of visitation or contact at the shelter itself. She advised that if the sheriff is going there, it must be for some other reason. She stated the shelters attempt to remain confidential as far as location, or in smaller towns, security is increased. She stated the protective orders currently being issued extend not only to the perpetrator but to any agent.
Senator Jacobsen advised that the facility in Stewart is an open complex. Therefore, other things are accommodated there also, and there is no security. He advised that by the time the sheriff's office arrives, the people causing the problem have vanished. He advised there has always been concern regarding liability of the state, because the state provides the facility.
Ms. Claassen stated being able to secure a protective order and having a perpetrator served so that person has notice will prevent much of the problem.
Senator James advised NRS 33.060 deals with personal service.
Captain Randy L. Oaks, Lobbyist, Las Vegas Metropolitan Police Department (Metro), provided testimony in support of A.B. 540. He advised the bill was brought by Judge Gaston of the family courts in Clark County, in an attempt to provide a means to keep down the recurrence of domestic violence. He stated Judge Gaston has seen, as a family court judge, that a person is arrested for domestic violence and must remain in custody for 12 hours. That person then returns home even more angry than when he or she was taken to jail. This leads to an additional case of domestic violence. In most cases, the other party does not have an opportunity, within those 12 hours, to obtain a temporary protective order. A.B. 540 provides a means to facilitate this process. Captain Oaks advised that the judges are willing to be on 24-hour call by cellular phone to make this possible. Therefore, when domestic violence has occurred and the perpetrator is in custody, the judge can take immediate action to prevent the violence from again occurring. Captain Oaks advised Metro believes the procedure outlined in A.B. 540 is workable. Even though it does imposes upon the courts and the police, the imposition is minimal in comparison to the potential good the bill will do.
Senator James confirmed there was no further testimony regarding A.B. 540, and closed the hearing.
The hearing was opened on Senate Bill (S.B.) 513.
SENATE BILL 513: Makes various changes regarding professional corporations and limited-liability companies. (BDR 7-1981)
John P. Fowler, Attorney, Vargas & Bartlett, Business Law Section, Nevada Bar Association, provided testimony in support of S.B. 513. He advised the intent of the bill is to permit professionals to employ the new limited-liability company. He explained the limited-liability company is a new form of business organization which came into being in Nevada in the 1991 legislative session. He advised the limited-liability company and its existence is driven entirely by the Internal Revenue Code. The intent is for the owners to have limited liability, similar to shareholders of a corporation, but still get the tax benefits of partnership-type taxation like a subchapter "S" corporation, but without the restrictions which apply to a subchapter "S" corporation. He advised the intent is to impose the same liability on professional people acting through limited-liability companies as that of professional people acting through professional corporations. He stated the liability statute is the same, word for word, except the term "limited-liability company" was substituted in place of "professional corporation." He stated these provisions will be governed by a new subsection of NRS 89, regarding professional corporations. He stated the meat of the bill is in the changes to NRS 89. He advised the rest of the bill is simply conformation throughout the title on professions in NRS, changing references currently only to professional corporations, to the professional corporations and professional limited-liability companies. Therefore, all professions in that title can have access to this new business organization if they so choose. He stated it is not the intent to make the liability of those professionals who operate limited-liability companies any different than the existing liability those professionals have, to their clients and others, when they practice in the form of professional corporations.
Senator James asked if there is a statement in the bill that there is no intent to change the liability of professionals which they would have under the professional corporation statute.
Mr. Fowler replied the only provision where this would appear would be in section 5. He compared section 5 to the correlative section of NRS 89 of professional corporations. Section 5 deals with professional liability of persons using this particular kind of entity. The wording of section 5 and that of existing NRS Chapter 89, are word for word the same, except for the reference to limited-liability companies instead of professional corporations.
Senator James referred to section 4 of the bill. He asked if the scope of business of a professional limited-liability company is being changed.
Mr. Fowler advised there is one change in S.B. 513 to existing NRS Chapter 89, which carries through to the new section in professional limited-liability companies. The existing statute for professional corporations can be interpreted to mean that one may only practice a profession in a professional corporation, and that person cannot do any other kind of business. He gave the example that an accounting firm could not own a 7-11 store. He advised the one substantive change made by S.B. 513 would require professional corporations to practice only one kind of professional activity. In other words, one could only be an accountant, and not an accountant and a dentist practicing under the same entity. However, any other business can be conducted. This would allow a professional corporation or a professional limited-liability company to practice accounting, and own a 7-11 store. Mr. Fowler advised this is the only substantive change made by the bill. He further advised that this change would carry through for both professional limited-liability companies and, by amending the existing statute, professional corporations.
Senator James asked if this was the purpose of forming the professional limited liability company; to allow a professional to engage in other business such as owning and developing real property.
Mr. Fowler replied with an example of a professional having an office located on a piece of property, and the property is in the professional corporation. If the professional wished to move, there would be a question regarding the ability of developing that piece of property for another purpose, and keeping the property in the professional corporation. He advised the change appears in the bill at section 13, page 5. This section revises NRS 89.050.
Senator James stated the statute formerly said:
. . .may not engage in any business other than rendering the professional service for which it was organized . . .
He read the change, which states:
. . .conduct any business activity authorized to be conducted by a corporation organized pursuant to chapter 78 of NRS.
Mr. Fowler advised the second sentence of existing NRS 89.050 states:
A professional corporation may own real and personal property appropriate to its business and may invest in any form of real property, securities or other type of investment.
He questioned whether running an active business on the site of a professional corporation's old office allows this type of activity.
Senator James stated it also questionable as to whether the new business could be developed at that location, or whether the building could be rented out.
Mr. Fowler agreed, and stated there is a question as to whether the investment must be passive.
Mr. Fowler advised that, in all events, there will be ethical limits as to what can be done. He stated his belief that if a law firm, either a professional corporation or a professional limited-liability company, were to open a business in competition with one of its clients, there would be an ethical question. He added this ethical question might also arise if the attorney were operating as a sole proprietor and did the same thing. He stated the ethical question arises notwithstanding which version of the statute is adopted regarding S.B. 513. The ethical question operates outside the statute and is regulated by the professional body and the code of ethics of that profession.
Senator James stated nothing in existing law would prevent a member, or all members, of a professional corporation from establishing another corporation to engage in another business activity.
Mr. Fowler agreed this is true.
Senator James stated the question presented by S.B. 513 is whether it is appropriate for a professional limited-liability company or a professional corporation to, for example, have a gaming license and run a gaming enterprise, under the umbrella of the professional limited-liability company.
Mr. Fowler supposed this could be done.
Mr. Fowler stated he did not see any way in which this provision would impinge upon the ability of the regulating body to regulate the profession. He stated that if there is an ethical problem of competing with a client, this would also be true with a sole practitioner. He stated he did not know of any good reason to prevent professional corporations and professional limited-liability companies the right to enter into any other non-professional business. He advised many other statutes and codes of ethics of various professions require that one of those entities only engage in that one professional practice.
Senator James stated his belief that to get to the reason, a determination would have to be made as to the intent of the legislature when the prohibition was put into the statutes.
Mr. Fowler advised NRS Chapter 89 is a creature of the late 1960s. At that time, the Internal Revenue Service (IRS) did not want to let professions practice in the form of corporations, and did everything possible to keep that from happening. There were certain tax advantages in the 1960s to professionals practicing as a corporation. The state legislatures had to change the state law. He advised there was old case law dating from the early part of this century and the latter part of the 19th century, stating professions could not practice in the form of corporations. The IRS used this as the basis to keep professionals from practicing in this way. This was the basis for NRS Chapter 89 and other statutes throughout the country. He advised he did not know the intent at that time.
Senator James referred to section 14 of S.B. 513 regarding membership of professional corporations. He stated the law previously required the member to be a natural person, licensed and authorized to render the same specific professional services for which the corporation is incorporated. The change would no longer require this. He read from this section:
No corporation organized under the provisions of this chapter may issue any of its stock to anyone other than a natural person, a partnership, or a professional limited-liability company, professional corporation or similar company. . .
Senator James asked the reason for this change.
Mr. Fowler gave an example of organizing a professional corporation, and one of the owners was to be another professional corporation, in the same profession. He saw no reason why the other professional corporation could not become a stockholder. Both are regulated in the same profession by the same board. If people wanted to do business using the different entities, he saw no reason to disallow that. He stated this does not change the liability situation. The person who commits malpractice will be personally sued. Nothing in the section referred to prevents this. He stated this section may allow out-of-state entities of the same profession, if permitted by the other state's licensing statutes, to own an ownership interest in a Nevada professional corporation or a Nevada professional limited-liability company. The wording is the same for both statutes.
Senator James asked who authorizes a professional corporation to render professional services in a given area.
Mr. Fowler stated that in Nevada before filing with the secretary of state, all of those who initially file must be members of the profession. Also, NRS Chapter 89 requires that all those who are owners must be licensed either in Nevada or elsewhere. He advised the law continues to provide that anyone who renders service in the state of Nevada must be licensed in the state of Nevada.
Senator James asked what the professional corporation law says about the liability of the person rending professional service.
Mr. Fowler replied that person is still liable. If, for example, an employee of a law firm commits malpractice, the defendants would be the law firm. Any employee or owner who actually participated in the malpractice would be liable. He advised that presumably, those who knew nothing about the action would not be held responsible.
Senator James asked for and received confirmation that, in this case, the corporate assets would subject to the judgment against the corporation. He asked if a member or owner of the Nevada professional corporation is a professional corporation organized in another state, and the other state's laws are not the same in passing through the liability to the assets, will this prevent getting the same satisfaction in Nevada as if there were not a professional corporation in another state being a member.
Mr. Fowler stated this is past his expertise, but suspects this is the case. He stated he did not believe there is any state which says an employee, officer, or director of a professional corporation is not responsible by reason of personal assets for that person's own malpractice.
Senator James stated he is comfortable with this, as long as a judgment in Nevada could be used in another state.
Mr. Fowler stated that, if a business chooses to do business this way, and an outside entity participates in the management and control of the practice in the state of Nevada, that business risks committing malpractice in Nevada which makes them liable for Nevada acts.
Mr. Fowler advised he and William P. Cashill, Lobbyist, Nevada Trial Lawyers Association, discussed S.B. 513, and Mr. Cashill had some concerns. Mr. Fowler stated he would like to meet with Mr. Cashill, attempt to address his concerns, and come back to the committee with any agreed to changes.
Senator James stated the committee would not vote on the bill at this hearing. He encouraged Mr. Fowler to return to the committee with any suggestions he may have for amendments.
Mr. Fowler referred to previous testimony with respect to NRS Chapter 89, regarding professional malpractice exposure. He advised that statute is NRS 89.060, and the title of which is "professional relationship preserved." This is the existing statute regarding professional corporations. He advised S.B. 513 is not intended to change the malpractice relationship between a client and a professional.
Senator James asked Mr. Fowler to explain the nature of the change in section 16. He read the previous language:
. . .shall certify that all stockholders who are natural persons and all directors, officers and employees are licensed or otherwise legally authorized to render professional services.
He stated the new language adds the term "rendering professional services in this state."
Mr. Fowler advised the statute recites elsewhere that those owning ownership interests in limited-liability corporations and in professional corporations as stockholders, must be licensed either in Nevada or in that same profession elsewhere. He stated the language referred to would permit this to occur. He advised the statute would still require all people rendering professional services in Nevada to be licensed in Nevada.
Senator James referred to S.B. 513 beginning at section 33, and asked Mr. Fowler to explain what is being done with professional corporations engaged in public accounting.
Mr. Fowler stated this was more a change driven by the Legislative Counsel Bureau (LCB). The LCB wanted to set forth a new set of statutes in NRS Chapter 628 with respect to accounting and limited-liability companies in a separate set of statutes. He advised the first time he drafted the language, he had all of these provisions in one statute for each subject matter. He advised there is still a lot of wording in NRS Chapter 628 regarding public accountants and certified public accountants. He understands the difference to be that certified public accountants are those who have met the proper educational standards as set forth by the board. He stated his belief that public accountants is a grand-fathered status before certification became the normal method in the way of doing business for accountants. He stated the LCB decided to set this forth in a new set of statutes, separating out professional corporations from professional limited-liability companies, basically saying the same thing approximately four times. He advised there is one set of statutes for certified public accountants, one set for public accountants, one set for professional accountants for limited-liability companies, and one set for certified public accountants for limited-liability companies.
Senator James read from section 33:
The corporation must not furnish any other professional services to the public but may conduct other business.
He asked for and received confirmation that this is the same principle discussed regarding other types of businesses.
Senator James referred to section 106 of S.B. 513. He stated this section amends Assembly Bill (A.B.) 242 regarding professional engineering.
ASSEMBLY BILL 242: Make various changes relating to regulation of professional engineers and land surveyors. (BDR 54-623)
Senator James asked for an explanation of the intention of this section.
Mr. Fowler stated he is not aware how A.B. 242 affects this section.
Senator James asked what exemption is set forth in section 72, subsection 2(c) of S.B. 513 regarding real estate brokers.
Mr. Fowler replied that section 2.2 states that the chapter does not apply to all of the exceptions. Section 2(b) states:
A corporation which, through its regular officers who receive no special compensation for it, performs any of those acts with reference to the property of the corporation.
Mr. Fowler advised section 2(c) states the same thing regarding managers or members of limited-liability companies. The intent is to make the treatment of these managers and members the same as officers of a corporation for the purposes of the exemption.
Mr. Fowler advised section 108 of S.B. 513 provides that the act becomes effective on passage and approval. Mr. Fowler advised he had discussed this with Cyndy Woodgate of the Secretary of State's Office, and Ms. Woodgate requested that she have until the normal effective date to train her people in professional limited-liability companies. Mr. Fowler stated he saw no reason why the act should become effective on passage and approval. He stated this may cause a few problems for the LCB, because of the changes to an existing assembly bill in section 106 of S.B. 513.
Senator James advised that section concerning the assembly bill could be made effective on passage and approval, and the remainder effective at a later date.
Senator James reviewed the issues to be addressed when the bill is scheduled for a work session. He asked for assurance in changing the scope of limited-liability companies in sections 4 and 13. He asked Mr. Fowler to address Mr. Cashill's concerns regarding the liability issue. He asked for further assurance, if possible, regarding a professional corporation organized under another state's laws being a member of a Nevada professional limited-liability company. He also asked for clarification regarding whether this would insulate anyone from a judgment further than they would be under existing Nevada statutes.
Senator James read section 6, subsection 3:
Any act in violation of this section is void and does not pass any rights or privileges or vest any powers, except to an innocent person who is not a member and who has relied on the effectiveness of the action.
He asked if the language is normally "who has relied in good faith."
Mr. Fowler stated that could be true. He stated this language is probably a simple recitation of existing NRS Chapter 89 on professional corporations.
Ray M. Moberg, Managing Partner, Ernst & Young, President-Elect, Nevada Society of Certified Public Accountants, provided testimony in support of S.B. 513, primarily as an issue of fairness. He stated it is not fair to expose owners of professional organizations to unlimited personal liability when owners in business organizations do not face that same risk. He stated it is not fair to expose the personal assets of partners to loss because of the tortious acts of other partners, over whom they have no control, and in many cases do not even know. He stated another very serious impact is the effect on recruitment and retention of qualified people. He stated the litigious environment has given great concern to the partners in Certified Public Accountant (CPA) firms, and creates serious questions regarding whether the reward is worth the risk in today's environment. He advised that, for those who believe unlimited liability imposed on partners of professional accounting firms might enhance quality, his association believes the profession is already effectively regulated. This regulation occurs through professional organizations and various governmental agencies. The CPAs believe the quality of their work is high, in spite of the more famous incidents reported by the press. He advised the profession is not trying to "get away with anything." He agreed with Mr. Fowler that under any organization option practitioners may chose, the partners are still going to be personally liable for the tortious acts which they, themselves, perform. The corporation they work for, along with its assets and insurance, will still be subject to that risk. He stated for that reason, his organization believes S.B. 513 should be passed.
Senator James stated his belief that the committee needs to understand exactly what the bill does with regard to changing the liability of people who are members of professional corporations.
Cyndy Woodgate, Deputy Secretary for Corporations, State of Nevada, Office of the Secretary of State, provided testimony. She stated there would be no major impact on her office with the way S.B. 513 is currently written. She did ask that a later effective date be imposed, to allow for training of the staff in her office.
Senator James stated he did not believe there would be a problem.
William P. Cashill, Lobbyist, Nevada Trial Lawyers Association, provided testimony regarding S.B. 513. He advised it is late in the session to take up a bill such as this. He stated the objective may be laudable, that is a tax-driven objective, intended to enable professional corporations to obtain tax benefits of a subchapter "S" corporation. He stated he did not know if this is the proper form in which to be addressing this problem. He suggested the IRS or Congress might be the proper form. This could be accomplished through either revenue rulings, legislation, or even a new regulation. He stated he and Mr. Fowler had agreed to address and report back to the committee on the liability aspects of the bill, which he finds troublesome. He advised there is a more troublesome aspect which the bill fails to adequately address. That aspect is whether or not the compelling interest Nevada has is seeing to it that competent professionals, and only competent professionals, are licensed to practice their professions in this state and are able to do this. He stated the language of S.B. 513 seems to allow Philadelphia lawyers, Los Angeles chiropractors and others who are not licensed here to be members of, own shares in, and have an equity interest in a limited-liability company in this state. He stated there are aspects of the bill which are unclear in that regard. He advised no one who is a professional is opposed to competent people being licensed in Nevada from wherever they come. The professionals are concerned, however, that those who do practice in this state be licensed to practice their professions in Nevada, and not be able to slip in via a "shoehorn" piece of legislation to be allowed to practice here. He advised he would be happy to work with Mr. Fowler and report back in detail to the committee.
Senator James thanked Mr. Cashill for his offer to confer with Mr. Fowler. He advised this bill was requested long ago, and it has taken this long to draft this lengthy measure. He advised the bill was only recently introduced, and the committee scheduled it immediately for hearing. Senator James stated he was particularly interested in Mr. Cashill's concern regarding the bill allowing people, not licensed under Nevada professional laws, to practice in Nevada. He advised section 14 of the bill would allow those people to own stock in the company. He stated he was concerned regarding the liability question. He advised there exist rules governing the unauthorized practice of law, and similar laws governing other professions.
Mr. Cashill referred to section 6, subsection (c). He read from this section:
No ownership interest in a professional limited-liability company may be sold or transferred except to a natural person, a partnership, or a professional limited-liability company, professional corporation or similar company or corporation organized pursuant to the corresponding law of another state, which is eligible to be a member of the limited-liability company, or to the personal representative or estate of a deceased or legally incompetent member.
Mr. Cashill stated this section seems to allow the sale of a share to another limited-liability company licensed in another state. Whether or not all the members of that second corporation are licensed to practice in Nevada, is the question he thought this committee must address. He stated if S.B. 513 clearly and plainly said that no shareholder in a limited-liability professional corporation in Nevada shall be anyone other than a person licensed to practice the profession which the limited-liability professional corporation is licensed to practice, this might solve the problem. He stated the shareholder should be a natural person, and should be licensed to practice the profession in this state. Otherwise, a window will be created, through which corporations and individuals outside of Nevada who are not licensed in the professions in Nevada, are entitled to make decisions regarding the operation of the practice in this state.
Senator James stated his belief that this exists now. He asked for confirmation that a person from another state can have an ownership interest in a Nevada.
Mr. Cashill advised any partner in a firm practicing law in Nevada, even though the offices are elsewhere, must be licensed in Nevada. He advised he is concerned about the business decisions which may affect the quality of professional care rendered in Nevada, which may be made elsewhere by persons who are not licensed in Nevada. He gave an example of deciding the amount spent on malpractice insurance. This issue, if decided by people in other states who are not serving clients day-to-day in Nevada, may be decided differently than if the issue was decided by people who are in Nevada. He stated the professionals in the state must have accountability. This is why licensing boards exist for the professions. He stated it seems essential to him that Nevada not give away the critical power that the legislature has created over the years to oversee the performance of professional responsibilities.
Senator James asked how out-of-state firms who own interest in professional corporations in Nevada establish offices. He gave examples of the law firms of Sherman and Howard; Strich, Lang; and Dawson and Associates.
Mr. Cashill advised that in the case of Sherman and Howard, all of the lawyers practicing in Nevada are licensed in Nevada. He stated his belief that there is a separate professional corporation created in Nevada to operate here.
Senator James stated his belief that S.B. 513 would still require a person performing a professional service in Nevada to be licensed in Nevada.
Mr. Fowler advised the existing statute, NRS 89.070, states who can be a shareholder of a Nevada professional corporation. He stated this statute provides that any stockholder must be a natural person who is licensed to render the same specific professional service as those for which the corporation is incorporated. He advised that any licensed attorney can own stock in a Nevada professional corporation practicing law. He advised there is no reason why a law firm could not form a Nevada professional corporation, and have it owned by the same percentage of ownership as in the out-of-state firm. He advised those who practice in Nevada must be licensed in Nevada. He stated this would remain the same under the proposals of S.B. 513.
Senator James asked for and received confirmation that S.B. 513 states this would be the same, but that the foreign owners cannot be partnerships or corporations under the professional corporations or partnership law of that state.
Mr. Fowler stated S.B. 513 loosens the restrictions so that it is no longer only a natural person who can hold stock in a Nevada professional corporation. He stated the same provisions cover professional limited-liability companies elsewhere in the bill.
Senator James asked Mr. Cashill if this addressed his concern.
Mr. Cashill stated he would concede to Mr. Fowler in that respect. He advised his concern is the enabling of other entities to hold shares in a Nevada limited-liability professional company, and there is no natural person/professional overlay requirement in S.B. 513. Therefore, it will not be known whether the people making policy decisions are going to be licensed professionals who are accountable to someone in Nevada.
Senator James stated that it would be known that these persons are licensed under another state's laws. He suggested the language could be amended to say, so long as that state's laws are the same as Nevada's laws, with respect to making sure that everyone who is a part of that company is licensed. This would prevent a state allowing a person to be a professional corporation shareholder and not be licensed in the profession.
Mr. Cashill stated he would rather concentrate on what occurs in Nevada, and define who can be a shareholder in terms of being licensed in Nevada, or at least being licensed in the profession elsewhere. He suggested doing this would negate having to look to the law elsewhere.
Senator James suggested Mr. Cashill and Mr. Fowler work on the language before they return their suggestions to the committee. He asked for and received confirmation that these were Mr. Cashill's only areas of concern.
Joan G. Buchanan, Division Coordinator, State of Nevada, Real Estate Division, provided testimony. She stated the division has had many requests for issuance of limited liability licenses. Therefore, if S.B. 513 passes, her department anticipates a large request for issuance of those licenses. She advised her division does not currently have the ability to license those entities through their automated computer program. She advised she submitted a fiscal note, because computer programming will be required to accommodate issuance of these licenses. She advised she also requested in the fiscal note, statutory authority to charge $25 for the certification of the secretary of state. This will require an extra task force.
Senator James asked in which section this is found.
Ms. Buchanan advised this is in NRS 645, the real estate licensing law. She advised there currently exists a section providing for a $20 fee for a transfer from one license to another. However, it would be prudent for her department, in a business sense, to be able to charge for a certification of the license. She advised $2500 was the estimate the department received to install the computer program required. She stated her department is concerned regarding being certain the professional corporation liability could not be waived. This is a result of the agency disclosure requirement governing real estate transactions.
Senator Jacobsen asked Ms. Woodgate how many of these types of filings are received.
Ms. Woodgate stated she does not know. Since the limited-liability law was instituted in the 1991 legislation, there are approximately 150 limited-liability companies.
Andrew MacKenzie, Attorney, Allison, MacKenzie, Hartman, Soumbeniotis & Russell, Ltd., provided testimony. He advised his firm represents the state board of accountancy, and that the board supports S.B. 513.
Senator James confirmed there was no further testimony regarding S.B. 513, and closed the hearing on that bill.
The hearing was opened on Assembly Bill (A.B.) 387.
ASSEMBLY BILL 387: Makes various changes concerning corporations and similar entities. (BDR 7-548)
Ms. Woodgate provided testimony. She advised A.B. 387 is a very technical bill. It is a joint bill from the Secretary of State's Office and the subcommittee of the Business Law Section of the Nevada State Bar. She stated this bill has been in preparation for 1-1/2 years, and is a continuation and cleanup of a bill in the 1991 legislative session to clarify and simplify grey areas. She advised there has been a duplication of law, one example of which is filing lists of officers for corporations. These sections have been combined, as the same wording appears in each section. She advised there were some things missed in the 1991 legislative session concerning limited-liability law that has been inserted in A.B. 387. She advised currently there is no requirement for limited-liability companies to file an annual list. A.B. 387 contains this requirement. She stated the bill contains updating and revisions concerning Nevada limited partnerships. She advised this law has not been amended since 1987. Also, some fees under the limited partnership section have been increased. She advised all money taken in to her office is generated for the General Fund.
Mr. Fowler distributed to the committee his proposed changes and comments regarding A.B. 387. A copy of the proposed changes and comments on the bill is attached as Exhibit D. Mr. Fowler outlined the work which was done by the assembly on A.B. 387. He advised Assemblyman Sader had a hearing of the Assembly Committee on Judiciary, and then appointed a subcommittee. Mr. Fowler stated he presented 3 hours of testimony to the subcommittee, going through the bill section by section. He stated some technical changes were made. He advised he made a last-minute change to a very technical section of the bill. This refers to section 24.5 on pages 14 and 15 of the bill. He advised section 24.5 replaces the existing statutes on reverse stock splits and stock splits. He stated the real concern is reverse stock splits. He explained a reverse stock split is an action by which, for example, 5 shares of stock becomes 1 share of stock. A corporation would do this to increase its stock price. This is done because some exchanges have minimum stock price requirements which must be met in order to trade on their exchanges. He advised everyone benefits from a reverse stock split, because the stockholders have a market in which to trade. He stated the statute provides that reverse stock splits can generally be done with action by the board of directors. A shareholder vote is not needed. He advised the changes are in the exceptions, where a shareholder approval should be obtained or where dissenter's rights should be given to stockholders who are being frozen out. He explained a stockholder who is frozen out is one who gets money or script in exchange for shares. The sections in question read that if a stockholder is left only with script or money, that a stockholder can force a stockholder vote to approve the action. He advised the other subsection says that if a person is a 1 percent stockholder or greater before the deal is closed, and that person is frozen out, that person gets dissenter's rights. In other words, that person can force the corporation to value his or her fractional shares at fair market value and if he or she does not agree with that value, can properly litigate it before the appropriate court. He stated the wording supplied does not change the intent, but only makes it work better.
Mr. Fowler advised one of the most important changes in the bill are those to the nonprofit corporation statutes. He stated changes were made in the 1991 legislative session, requiring things making it very difficult for existing Nevada foundations to operate. He gave the example of a provision requiring that a Nevada nonprofit corporation must have five directors. He advised this is a real problem for foundations, who are large and contribute much to Nevada's economy and social welfare, when the instruments by which the foundations are governed require that there be only three directors. He stated there exist other provisions which do not permit nonprofit corporations to pay their directors. He advised the directors in major foundations are professionals, and this is their only job. Their only function is to manage the foundation and give the money to the proper recipient, and they should be paid. He advised those kinds of provisions really cause problems for some foundations, and A.B. 387 is very important to cure those problems and allow those foundations to remain in the state of Nevada and benefit all of the people in the state.
Mr. Fowler advised another cleanup, which was mentioned by Ms. Woodgate, is that limited-liability companies currently do not have to file annually, and pay an annual fee. A.B. 387 provides for this to be done. He stated there are some additional changes in the remarks done in April for the assembly, and which he provided to the Senate Committee on Judiciary. He advised these proposed changes have been included in the first reprint of A.B. 387.
He advised the changes regarding business corporations are cleanup language. He stated that, even with the changes made in the 1991 legislative session, this statute is essentially the same as it was in 1925. He stated his belief that language used in current statutes is clearer than it was then. He advised many of the proposed changes were made simply to make the statute read better.
Senator McGinness asked for confirmation that nonprofit corporations would now have to pay an annual fee.
Mr. Fowler advised nonprofit corporations are currently required and continue to be required to pay a $25 annual fee. The annual fee previously omitted from the statute was for limited-liability companies. These changes will impose an annual requirement on these companies.
Senator Jacobsen stated the local fire department with which he is associated received notification to re-file, and the fee is $15.
Ms. Woodward stated this is correct. The initial filing fee is $25, and the annual fee is $15.
Senator James asked for and received confirmation that A.B. 387 incorporates all changes discussed earlier in the session regarding nonprofit corporations.
Senator Jacobsen asked if there is a pamphlet available indicating which entities are required to file.
Ms. Woodward replied her department has suggested forms, and the law in a pamphlet form. She advised that, because her department is administerial, her employees cannot advise someone whether to file or not to file. The final decision must be made by the person.
Senator Jacobsen asked if there is a time limit after which a corporation must renew its filing.
Ms. Woodward advised corporations are required to file an annual list of officers on the anniversary month of the corporation. This applies to all corporations, whether domestic, foreign, profit or nonprofit.
Mr. Fowler advised that if a nonprofit corporation was filed, for example, 50 years ago, that corporation may need to be reincorporated. He advised most of the nonprofit statutes 50 years ago allowed a life of only 50 years.
Senator Jacobsen stated he was thinking about gun clubs and that type of nonprofit organization.
Kirk Schumacher, Shareholder, Woodburn and Wedge, Representative, National Medical Enterprises, Pacific Telesis Group, Sierra Pacific Resources, provided testimony. He stated there was considerable controversy raised by A.B. 387 as originally drafted. After meetings before the Assembly Committee on Judiciary and the subcommittee, there was accommodation made and the bulk of the changes were dropped. He advised essentially what was requested originally was an entire repeal of the business combination act, which had been adopted by the legislature in 1991. He stated his clients opposed that drastic change after such a short time frame, and the assembly committee agreed with this. He advised A.B. 387 as it now reads, together with Mr. Fowler's proposed changes to the reverse stock split are acceptable to his clients.
Senator James confirmed there was no further testimony regarding A.B. 387, and closed the hearing on that bill. He advised he would have Mr. Fowler's comments in his office for anyone wishing to pick up a copy. He stated any questions will be discussed at the next hearing on the bill.
Senator James reopened the hearing on A.B. 77.
SENATOR SMITH MOVED TO DO PASS A.B. 77.
SENATOR SHAFFER SECONDED THE MOTION.
THE MOTION CARRIED. (SENATOR ADLER WAS ABSENT FOR THE VOTE.)
* * * * *
Senator James reopened the hearing on A.B. 540.
SENATOR TITUS MOVED TO DO PASS A.B. 540.
SENATOR MCGINNESS SECONDED THE MOTION.
THE MOTION CARRIED. (SENATOR ADLER WAS ABSENT FOR THE VOTE.)
* * * * *
Senator James advised a bill draft requested by the committee has been received. Bill Draft Request (BDR) 4-1862 would amend Nevada law to allow declarations under penalty of perjury to be utilized as opposed to affidavits.
SENATOR SHAFFER MOVED FOR COMMITTEE INTRODUCTION OF BDR 4-1862.
SENATOR SMITH SECONDED THE MOTION.
THE MOTION CARRIED. (SENATOR ADLER WAS ABSENT FOR THE VOTE.)
* * * * *
Senator James reminded the committee that on Thursday, June 10, 1993, the subcommittee chaired by Senator Adler will meet to deal with the child abuse and neglect bills. Senator James confirmed there was no further business to come before the committee, and adjourned the meeting at 4:06 p.m.
RESPECTFULLY SUBMITTED:
Sherry Nesbitt,
Committee Secretary
APPROVED BY:
Senator Mark A. James, Chairman
DATE:
??
Senate Committee on Judiciary
June 9, 1993
Page 1