MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventy-First Session
March 15, 2001
The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 7:00 a.m., on Thursday, March 15, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada. This meeting was video conferenced to the Grant Sawyer State Office Building, Room 4401, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Ann O’Connell, Vice Chairman
Senator Dean A. Rhoads
Senator Mark Amodei
Senator Raymond C. Shaffer
Senator Michael A. (Mike) Schneider
Senator Maggie Carlton
GUEST LEGISLATORS PRESENT:
Senator Terry John Care, Clark County Senatorial District No. 7
Assemblyman John J. Lee, Clark County Assembly District No. 3
STAFF MEMBERS PRESENT:
John Meder, Committee Research Analyst
Scott Young, Committee Policy Analyst
Sharon Spencer, Committee Secretary
OTHERS PRESENT:
Judith C. Nagle, Lobbyist, Sheet Metal and Air Conditioning Contractors National Association of Southern Nevada
Steve G. Holloway, Lobbyist, Associated General Contractors – Las Vegas
Richard L. Peel, Attorney
Robert Thorniley, Concerned Citizen, and Owner, Image Construction Incorporated
Lezlie Perkins, Credit Manager, CSR West Limited Liability Company
Ronald Allyn, Owner, Mason Contractors Association of Southern Nevada
John E.Jeffrey, Lobbyist, Southern Nevada Building and Construction Trades Council
Kim W. Gregory, Chairman, State Contractors’ Board
Dennis R. Haney, Attorney
Ruedy Edgington, Assistant Director, Operations Division, Nevada Department of Transportation
Madelyn Shipman, Lobbyist, Assistant District Attorney, Civil Division, Washoe County
Renny Ashleman, Lobbyist, Southern Nevada Home Builders Association
Richard W. Wilkie, Lobbyist, City of Henderson
Mark H. Fiorentino, Lobbyist, Attorney
Gregory S. Gilbert, Lobbyist, American Consulting Engineers Council of Nevada
James A. Duddlesten, P.E., G. C. Wallace, Incorporated
Fred L. Hillerby, Lobbyist, American Institute of Architects
Bruce Robb, State Board of Professional Engineers and Land Surveyors
Tom Gallagher, Summit Engineering Corporation
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association
Leonard V. Nevin, Lobbyist, Nevada Subcontractors Association, and Interstate Plumbing and Air Conditioning
James L. Wadhams, Lobbyist, Southern Nevada Home Builders Association
Lourdes Sylvestre, Concerned Citizen
Robert C. Maddox, Lobbyist, Attorney, Citizens for Justice
Susan Zink, Concerned Citizen
Margi A. Grein, Lobbyist, Nevada State Contractors’ Board, and Executive Officer, State Contractor’s Board
Sheri Kolbet, Concerned Citizen
Chairman Townsend opened the hearing on Senate Bill (S.B.) 274.
SENATE BILL 274: Revises provisions governing rights and duties of contractors and subcontractors under contracts or subcontracts. (BDR 54-593)
Judith C. Nagle, Lobbyist, Sheet Metal and Air Conditioning Contractors National Association of Southern Nevada, opened the testimony by introducing Steve G. Holloway, Lobbyist, Associated General Contractors-Las Vegas. Mr. Holloway said S.B. 274 was an extremely important bill because it affected the way Nevada conducted its business affairs. He said contractors and subcontractors throughout the state were being denied payment for work performed for no legal or legitimate reason, many of whom were tied up in expensive, time-consuming litigation in an effort to recover money owed to them for labor and materials. He said it was less expensive for real property owners to hire contractors and subcontractors, not pay them for their labor and materials, and have those contractors and subcontractors take them to court because the contractors and subcontractors would settle for 50 cents on the dollar or less as payment on their contracts rather than face total financial ruin and bankruptcy. Mr. Holloway stated most often contractors continue until a project has been completed despite the fact they have not been paid because recent construction contracts include provisions which successfully penalize contractors who legitimately stop working due to nonpayment in accordance with existing law. Mr. Holloway said S.B. 274 would void penalties placed on contractors who cease work for nonpayment as a matter of public policy.
Richard Peel, Attorney, explained S.B. 274 amends Nevada Revised Statutes (NRS) 624.610, and is designed to allow contractors, subcontractors, and suppliers to stop work, or terminate their contracts, in the event they are not paid in a timely manner. A key point of the proposed legislation, Mr. Peel explained, was a provision that would allow contractors, upon giving 5-day written notice to owners, the right to stop work if the owner caused the project to be stopped for a period of 5 working days or more, failed to pay the contractor within 10 days of the date the payment was due pursuant to the parties‘ written contract, or the contractor submitted a payment request if no schedule for payments was set forth in the parties’ written contract or if the contract was oral.
Mr. Peel advised adding an amendment stating if a contractor had still not been paid by the end of 5 working days and after having given an owner a 5-day written notice, the contractor could give the owner a termination notice. Contractors must serve subcontractors and suppliers with copies of all stop and termination notices, and the subcontractors shall be entitled to stop work or terminate their contracts if the contractor stops work or terminates a contract with the owner. He said the amendment was already adopted by common law and was routinely enforced by the courts who enforced the rule that once a contractor stops work for cause, the contractor was entitled to be compensated the cost of the work, materials, equipment, all services provided, profit, overhead expenses, interest on money due at a specified rate, and all attorneys fees and court costs incurred by the contractor.
Continuing his testimony, Mr. Peel discussed the extent of the hardships imposed upon contractors, subcontractors, and suppliers who performed well, provide labor, materials, and services at great cost to their businesses, and then suffered the anguish of not getting paid. The lack of payment for labor, goods, and services is causing big and small shops alike to suffer extensive economic losses and sometimes bankruptcy.
Robert Thorniley, Concerned Citizen, and Owner, Image Construction Incorporated, testified S.B. 274 is legislation that is very much needed in Nevada because the problem of nonpayment had recently become extremely prevalent and put contractors in dire economic straits. He said he considered the legislation to be extremely timely and necessary reform because in his 27 years in the construction business it was only recently that he had to place liens on owners’ property due to nonpayment and now it had become the norm for contractors to assume all the financial risk, and most have been on the losing end. Nonpayment, he added, limits the ability of companies, both small and large, to do business in the state, and causes grave economic loss.
Lezlie Perkins, Credit Manager, CSR West Limited Liability Company, explained that she worked for a Las Vegas building materials supplier. She said suppliers were the very last to get paid. Ms. Perkins said the inability to get paid impacts suppliers in a very negative way because as long as contractors were legally bound to continue working despite not getting reimbursed, suppliers continued to provide building materials. Again, it is not the owners who finance the projects but rather it is the contractors and suppliers who finance them, she explained. Litigation continues for many years and settlement offers were unacceptable because they were only offered 35 to 50 cents on the dollar. Ms. Perkins stated companies supplied building materials in good faith and contractors worked in good faith. The quality of the building materials and the quality of the work completed were of the highest standard. She said it was only fair and expected that in good faith full payment should be received for work performed and supplies delivered, as per signed contracts. She said it was the terrible reality that owners expected contractors and suppliers to suffer severe economic losses while the owners got wealthy at the expense of contractors and suppliers.
Senator O'Connell asked if any of the cases had gotten to the courts yet, to which Mr. Holloway responded in the affirmative. He added that 9 out of 10 court decisions ruled against the Venetian Resort-Hotel-Casino, one of the biggest violators who continually refused to pay contractors and suppliers. Attorneys for the Venetian Resort-Hotel-Casino have also filed motions to stay the courts’ decisions in order to appeal the cases. Mr. Holloway added to date, no amount of money had been paid to any contractor, subcontractor, or supplier to resolve a lien claim. There were also three expedited trials on claims against mechanics’ liens release bonds by lien claimants who had already been awarded the full amount of their lien claims, or at least an amount close to that amount, and some have even been awarded attorney’s fees, court costs, and interest as well. However, the Venetian Resort-Hotel-Casino has continually appealed each of those court decisions, he said.
Senator O'Connell asked if the Venetian Resort-Hotel-Casino had paid the umbrella contractor for labor, services, and supplies. Mr. Holloway explained the owners of the Venetian had requested and received extras, add-ons, and improvements over and above the original plans. Contractors, subcontractors, and suppliers had most often not been paid for these expenses as well. The bulk of the money owed is to contractors, subcontractors, and suppliers from the original arrangements. He pointed out that in negotiations held between owners and contractors, subcontractors, and suppliers, many in the trades were forced to settle for reduced payment rates, oftentimes for less than 50 cents on the dollar, in order to stay in business or just stave off bankruptcy.
Chairman Townsend asked how widespread the problem of nonpayment to contractors, subcontractors, and suppliers was overall. Ms. Perkins said the problem was increasingly becoming more and more widespread and was continuing to adversely affect all ongoing projects in Las Vegas, both large and small.
Senator Carlton asked if the problem of nonpayment had developed prior to the Venetian incidents during the past decade of mass expansion in Las Vegas. Mr. Peel said the problem had become more prevalent in the last 4 years. Prior to the building of the Venetian, issues of nonpayment were not a routine matter as they presently are. He said pamphlets describing how owners could avoid paying the full amount to contractors, subcontractors, and suppliers were being circulated in Las Vegas by unscrupulous people. Senator Carlton asked for approximate percentage increases this problem was causing before and after the Venetian problem escalated. Ms. Perkins said nonpayment incidents for her company more than doubled since the Venetian was built from a less than 30 percent incident rate to over 60 percent currently and rising.
Chairman Townsend asked how long a company would continue working with clients before terminating their accounts due to nonpayment for labor, services, and supplies. Ms. Perkins said it was customary to wait for approximately 60 to 90 days before cutting off credit to delinquent clients.
Ronald Allyn, Owner, Mason Contractors Association of Southern Nevada, said nonpayment for labor, services, and supplies had recently become an overwhelming problem for his company which had been in existence since the 1960s. He said he was horrified that huge wealthy corporations had been able to enter the state to such a great extent and threaten to devastate the local economy of Las Vegas. Nonpayment had become a rampant issue, particularly devastating to small Las Vegas subcontracting businesses. He asked for intervention from the Legislature to help put an end to this destructive trade practice before it destroyed the economy of Nevada.
Senator Rhoads asked Mr. Allyn if he thought it was possible to receive his payments if he followed all legal procedures as they currently existed. Mr. Allyn said current law protected owners and therefore he held little hope for a fair conclusion to his plight. Senator Rhoads asked who was most at fault for the nonpayment issue, the project owner or the general contractor for the site? Mr. Allyn explained the chief culprit was not always immediately apparent, particularly because subcontractors were not privy to negotiations between site managers and project owners, nor would they share with subcontractors the fact that they were at risk for not getting paid or that they had agreed to expensive extras for the projects. Senator Rhoads asked if the bill contained penalties, to which Mr. Holloway noted the only section which might be considered a penalty stated if a contractor or a subcontractor stopped work for a legitimate reason that was confirmed through the court process that contractor would be able to recover all related costs in addition to the anticipated profits for the life of the project.
Chairman Townsend asked what the industry standard was for payment schedules, to which Mr. Allyn responded that payment schedules were not clearly defined; however, those that were averaged between 30 and 90 days and sometimes as much as 120 days. For a contractor who is financing an $11 billion resort casino expansion for 120 days, he added, there is very little control over when payment would be received or how much of it would be received. Chairman Townsend asked what the industry standard was for payment schedules between the general contractor and the subcontractors. Mr. Peel said no clear industry standards concerning payment schedules currently exist nor do contracts contain specific payment schedules, but there were clauses inserted in contracts stating that payments will be made no more than once a month. Mr. Peel reiterated that S.B. 274 was designed to work harmoniously within all entities involved in construction to ensure the smooth payment flow from the owners, to the general contractor, to the contractors, and then to the subcontractors.
Chairman Townsend asked Mr. Peel, considering the severity of the issue of nonpayment for labor, services, and supplies, how he advised his clients. Mr. Peel explained two different clauses appeared in contracts. One is the “pay if paid” clause, which uses very conditional and strict language, and the other is the “pay when paid” clause, which is far less strict in terms of language. Two states, California and New York, have abolished those clauses but have replaced them with legislation that protects contractors. Nevada courts have not ruled whether those clauses are valid and as yet no legislation has been passed in Nevada abolishing those clauses, contractors in Nevada must have some form of protection against being required to make payments for labor, services, and supplies furnished if the owners have not paid the contractors. In representing subcontractors, Mr. Peel continued, he would advise them to attempt to negotiate out that type of provision; however, not all subcontractors can afford to go to an attorney for advice prior to signing a contract.
Senator Shaffer asked how effective the legislation would be if there was no penalty. Mr. Peel said the proposed legislation contained language which prohibited the waiver of the protections provided by S.B. 274 which would protect contractors, subcontractors, and suppliers from nonpayment.
John E. Jeffrey, Lobbyist, Southern Nevada Building and Construction Trades Council, explained his organization supported the proposed legislation because the workers whom his agency represented depended upon a healthy and stable industry to make a living. He explained when a contractor did not pay a worker, or if a contractor did not pay into the fringe benefit program, workers had the absolute right to walk off the job. It made no sense to continue to put resources into a project for no other reason than to keep from getting sued if you were not getting paid for labor, services, and supplies. His organization was in favor of the proposed legislation, Mr. Jeffrey concluded.
Kim W. Gregory, Chairman, State Contractors’ Board, stated his organization was in favor of the proposed legislation. He said his organization had a rule which stated that when an owner paid the contractor, the contractor had 15 days to pay his subcontractors and they in turn had 15 days to pay the trade contractors. Mr. Gregory explained there was trouble regarding nonpayment by the Venetian Resort-Hotel-Casino because the money for labor, services, and supplies flowed directly from the owner to the subcontractors rather than from the owner to the general contractor. Lien laws, he continued, were weak, vague, and irrelevant to circumstances such as these. Some contracts had waiver clauses which forced contractors and subcontractors to waive their lien rights. Only two states have not declared waiver clauses illegal and those states are Florida and Nevada, he said. He suggested that it was necessary to strengthen the lien laws of Nevada.
Senator Rhoads asked how the problem of nonpayment could have been avoided, to which Mr. Gregory responded by stating contractors should be allowed to stop work for nonpayment from the first time it happened. However, the law forbids such action and contractors fear severe repercussions from lawsuits. Contractors rely on lien laws and the “pay when paid” clause in their contracts to receive their money.
Senator O'Connell asked if, as Mr. Thorniley had claimed, it was true that contractors who did not receive payment still had to pay taxes on money owed them, to which Mr. Gregory responded in the affirmative. It could take several years, a huge expense, and great deal of effort to document and prove the money owed to you was a bad debt.
Dennis R. Haney, Attorney, explained he was one of the attorneys for the contractors’ board and is presently working on taking depositions on the Venetian Resort-Hotel-Casino case. He said he concurred with Mr. Peel’s statements regarding the present situation. Mr. Haney expressed his concern that neither the general contractor nor the owners of the resort cared if the trade contractors were paid for their labor. Also, he noted, the issue went beyond gaming properties because the problem was developing in other construction projects as well. Mr. Haney explained financial statements were the most telling evidence that developers and owners were sometimes holding money intended for payments for labor, services, and supplies. Senate Bill 274, in his opinion, did not give the contractors’ board additional tools to alleviate this ever-increasing problem. Mr. Haney suggested clarifying the language in the proposed legislation to define the difference between the “pay if paid” clause as opposed to the “pay when paid” clause, both of which routinely appear in contracts as a requirement for doing business.
Senator Amodei asked Mr. Haney if the problem of nonpayment for labor, services, and supplies occurring on gaming properties was in any way causing difficulty for owners who were applying for gaming licenses due to their being labeled financial risks. Mr. Haney responded in the negative and added that in the past, problems within the industry were smaller and clearer, and it was easier to share information with the State Gaming Control Board. Referring again to the current Venetian situation, he explained that previously a construction manager was not a risk but later became a risk. When that happened, an agreement, called a “Final Guaranteed Maximum Price,” was reached; however, the document was not a declaration of any final price agreed upon because it contained $27 million of allowances. Allowances, he explained, were only guesses as to what the final price would be. The document specifically stated owner-directed work after the date of the document, which was June 17, 1998, could, and did, include changes to the property, which did not open until late 1999. These problems, he stated, would have to be resolved in the courts using an expedited procedure which will cost all those involved in the case an enormous amount of money. Mr. Haney said the owners of the Venetian sold their risk through an insurance company. The result of this action, he said, was that the resort is liable for $40 million, the insurance company is liable for $120 million, and the resort is liable for amounts above those aforementioned. For this reason, Mr. Haney noted, the owners of the Venetian did not care if trade contractors were paid.
Ruedy Edgington, Assistant Director, Operations Division, Nevada Department of Transportation (NDOT), stated he opposed S.B. 274 and wanted his agency to be exempted from the legislation. He said as the bill was currently written it appeared that prime contractors could stop work, walk off the job, and take his bonding company with him for any reason, legitimate or not. Mr. Edgington said there were instances when it was appropriate to withhold payment, particularly if the work performed was inferior or not to specification.
Senator O'Connell asked Mr. Edgington if he worked with project labor agreements, to which Mr. Edgington responded in the negative. Vice Chairman O'Connell said she had thought that then-Governor Miller had put through a regulation that all state projects had to be done with project labor agreements. She explained project labor agreements were contracts signed with labor unions that contractors would not walk off any construction project and were signed prior to the commencement of work. Mr. Edgington said he was not familiar with the regulation the senator was referring to and did not think it was a policy adopted by NDOT.
Madelyn Shipman, Lobbyist, Assistant District Attorney, Civil Division, Washoe County, offered a proposed amendment to S.B. 274 which she read into the record (Exhibit C). Ms. Shipman’s amended language affected section 3, subsection 10, of the proposed legislation and excluded that section of the legislation from applying to a contract between a residential contractor and a person who owns a single-family residence. Also, a public body and a contractor for a public works project would be exempt as well.
Mr. Holloway said it was not the intent of his organization to include public works or state and local governments from the proposed legislation and therefore those entities would be exempt. Chairman Townsend asked if there were members of Mr. Holloway’s organization who might have examples of the State Public Works Board defaulting on payment or not paying for labor, services, and supplies on a timely basis. Mr. Holloway responded in the affirmative and added that was the reason his organization sponsored legislation known as “the prompt pay bill,” Senate Bill 144 of the Seventh Session.
SENATE BILL 144 OF THE SEVENTIETH SESSION: Makes various changes concerning payments to contractors, subcontractors and suppliers for public works projects. (BDR 28-128)
Renny Ashleman, Lobbyist, Southern Nevada Home Builders Association, said there was language in the present draft of the proposed legislation that could pose a problem. Of particular concern to Mr. Ashleman was the possibility of “liens blanketing a residential area.” If this were to happen, he warned, liens could be placed on homes in residential neighborhoods whose payment was assured or had been paid, in part or in full, but liens could be placed on them for no other reason than because they were part of a development. Also important was the issue of retention schedules which are used to solve construction defects found at the end of a project. The purpose of retention payments is to ensure quality control by providing contractors with the incentive to return to a site and complete or improve certain aspects of the project which require fixing or completing. Mr. Ashleman warned that going too far in shifting the balance of power would not be beneficial. He suggested a subcommittee be called to discuss S.B. 274 would be beneficial to finding a technical remedy.
Richard W. Wilkie, Lobbyist, City of Henderson, said he wanted to echo the concerns of Ms. Shipman. He added Ms. Shipman’s proposed amendment should resolve his concerns.
Mark H. Fiorentino, Lobbyist, Attorney, explained he was representing a major contractor in the state. He also stated he was in support of S.B. 274. Mr. Fiorentino did express concern regarding several minor elements in the language of the proposed legislation. He said he would participate in a work session or subcommittee to resolve the remaining issues.
Chairman Townsend arranged for a subcommittee to meet later in the week for further discussion on S.B. 274. He explained the subcommittee will be chaired by Senator Carlton and will include Senator O'Connell and himself as members. The Chairman asked if there was any additional testimony on the proposed legislation and there was none. The Chairman closed the hearing on S.B. 274 and opened the hearing on S.B. 218.
SENATE BILL 218: Makes changes concerning certain professions. (BDR 54-76)
Gregory S. Gilbert, Lobbyist, American Consulting Engineers Council of Nevada (ACEC), testifying from the Grant Sawyer Office Building, Room 4401, Las Vegas, spoke in support of the proposed legislation. He explained the proposed legislation sought to increase the standards for licensing requirements for applicants who want to become engineers and land surveyors in the state of Nevada. The bill also established a screening panel for design professionals to consider actions on issues unrelated to construction defect matters pertaining to residential construction. Mr. Gilbert said his organization suggested slight changes to the language which included adding two provisions to provide that candidates who wished to become licensed engineers and land surveyors must attend a 4-year program approved by a local board as well as successfully complete at least 3 semesters of ethics prior to taking a formal examination.
Mr. Gilbert explained the proposed legislation needed to make changes to the design professional screening panel. He pointed out the design professional screening panel provided the opportunity for early identification and arbitration of claims that would be filed against design professionals. Design professionals, he noted, included architects, land surveyors, engineers, and registered interior designers. The claims and dispute resolution process is geared toward claims that are not residential construction defect claims. The process of using a screening panel process, Mr. Gilbert continued, is a process that has been successfully implemented in the medical profession under chapter 41A of Nevada Revised Statutes which are the statutes governing medical and dental malpractice. Mr. Gilbert suggested the composition of a design professional screening panel would consist of approximately 40 attorneys designated by the Nevada Trial Lawyers Association, 40 members from the State Board of Professional Engineers and Land Surveyors, and 40 members from the State Board of Architecture, Interior Design and Residential Design, all of whom would serve for a 1-year term. The panel would be administered through the state by the commissioner of insurance and would be considered a state agency. Under that arrangement, he explained, a claimant with a potential claim against a design professional would file a complaint supported by an affidavit from an expert setting forth the reasons for the claim. Mr. Gilbert added that the process would be a fast-track arrangement designed to expedite the review process.
Senator O'Connell asked Mr. Gilbert to describe the original problem that initiated the proposed legislation. He explained design professionals are often targeted for such claims. Mr. Gilbert turned the discussion over to James A. Duddlesten, P.E., G. C. Wallace, Incorporated, who explained he was present representing ACEC of Nevada. Mr. Duddlesten proceeded to reiterate the testimony of Mr. Gilbert by describing how his organization was routinely targeted for frivolous lawsuits. He said ACEC had to settle many of the lawsuits without admission of guilt because the cost of litigation was exorbitant. The process suggested for reviewing claims, as suggested in S.B. 218, would cut legal costs, expedite reviews, and be more equitable.
Senator O'Connell asked if it was true that presently only two insurance companies in Nevada would sell insurance to anyone in the construction business because of extensive and costly litigations which made it very difficult for construction companies to obtain insurance. Mr. Duddlesten said he was aware of that problem which caused many companies to function without insurance. That particular problem, however, did not seriously impact his organization, he added. Senator O'Connell asked how a surveyor could be guilty of any form of construction defect. Mr. Duddlesten responded that he knew of no particular circumstance in which that particular issue affected surveyors and he knew of no litigation involving land surveying.
Fred L. Hillerby, Lobbyist, American Institute of Architects, said S.B. 218 affected his organization. Mr. Hillerby said he supported the testimonies of both Mr. Gilbert and Mr. Duddlesten. He asked the committee to support the proposed legislation.
Bruce Robb, Attorney, stated his support of the proposed legislation. Mr. Robb said S.B. 218 was a unique piece of legislation because few states provide ethics education for professional engineers and land surveyors. The Accreditation Board for Engineering and Technology requires that applicants demonstrate an understanding of professional and ethical responsibility by successfully completing a separate course in ethics as a requirement for graduation. He said the screening panel proposal, which was the main focus of the bill, requests members of the State Board of Professional Engineers and Land Surveyors, who are licensees, to participate in the screening panel. He suggested the language of the bill reflect the fact the design professionals on the screening panel should be professional engineering licensees.
Senator O'Connell asked Mr. Robb if the supporters of the measure had discussions with the State Board of Professional Engineers and Land Surveyors about those issues, to which Mr. Robb responded in the negative and added discussions had occurred during the 1999 Legislature.
Tom Gallagher, P.E., Summit Engineering Corporation, spoke in favor of the measure because it would help to avoid lawsuits. Mr. Gallagher said it was beneficial for professionals to be critiqued by members of the same profession. Peers within the same industry reviewing each other, he stated, would be able to discern construction defects and other problems common to those in the same trade. The screening panel would also be cost-effective and would ensure more justice for professionals when they were involved in frivolous claims.
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association, spoke in opposition to the proposed legislation because, as a member of various panels, he said he considers the process of using screening panels to review complaints as an impediment to fair trade practices. Mr. Bradley said the number of lawsuits could actually increase because the owner would sue the general contractor, the general contractor would sue the various subcontractors including the design professionals. Our present system, Mr. Bradley explained, provides a trial judge with the assistance of a special master, knowledgeable in specific areas of expertise, to assist in discerning frivolous lawsuits and ultimately allows the judge to end the litigation. Continued appeals against particular design professionals who have been vindicated of any wrongdoing would have the right to request that the court award the defendant all court fees and other costs associated with litigation which proves to be frivolous, Mr. Bradley said.
Senator O'Connell asked why the legislation was proposed if the current system was so effective. Mr. Bradley explained there was reluctance on behalf of the judicial system to get frivolously named people out of litigation on a timely basis. The proposed legislation should expedite the process because, as the judicial system matures and younger judges get on the bench, the more probable it is that judges will make “the tough call irrespective of how it affects them in the next election,” he said. Senator O'Connell pointed out that the committee had received extensive testimony for many months about problems associated with the construction industry litigation which ties up money, time, and effort. Oftentimes, the senator added, construction businesses fall apart even if those businesses had nothing whatsoever to do with the actual problem. Mr. Bradley said he, too, was a businessman with employees to pay, and he, too, had been sued and could attest to the hardship litigation causes to a company. He explained rules of ethics existed today that required a reasonable investigation to occur and to consult with experts in various fields before filing a lawsuit.
Mr. Bradley stated often it was not the plaintiff’s lawyer who filed lawsuits against design engineers but rather the insurance companies representing general contractors who file lawsuits. He said this practice serves to perpetuate contention rather than seek resolution, as well as contributing to “spreading the risk between 30 or 40 subcontractors.” Mr. Bradley noted the screening-panel concept, which had been implemented in 1985, still had glitches that needed to be worked out, but overall the system worked well. For instance, he stated, in medical malpractice cases the entire claim was placed before the panel and usually only involved only a few people; however, the proposed legislation suggested the focus be placed only on the design engineer without including others involved in the project, such as the soil testers, Sheetrock workers, and other trades associated with construction on the site. The legislation, he concluded, revealed some level of distrust for the judicial system, but he, as an officer of the court, had great faith in the judicial system.
Chairman Townsend asked Mr. Bradley to explain how a special master assists in the process. Mr. Bradley explained because complex cases involve many lawyers and many documents and a great deal of time, as specialists in their field, special masters become referees in lawsuits, and are able to sort through all the evidence and determine the validity of the litigation and if the plaintiffs have legitimate grounds for suing a design professional. Chairman Townsend asked how special masters were assigned, to which Mr. Bradley explained that could occur in several ways including a request from both or either party involved in the lawsuit or by judicial appointment. Chairman Townsend said he wanted to make it clear the present discussion concerned the end of the process. There was still much more work to do at the beginning of the process, including discussing issues relating to codes, soils, and responsibility and compliance at the local level, all of which lend themselves to the homeowner issue, he added.
Chairman Townsend asked how long a special master took to give a determination to the court. Mr. Bradley said it varied, but it was important to remember experts would be brought in by both sides. All available detail regarding the case needed to be sorted through thoroughly before any recommendation could be made to the judge. The Chairman noted neither litigation nor screening panel would get the defective work completed correctly, the work still needed to be done, done correctly, and completed in a timely manner. Mr. Bradley stated the screening panel process was lengthy and costly, and the case could still go to litigation (district court), and then it could take 2 or 3 years to get to the Nevada Supreme Court. He said screening panels could add years to an already long process, thus causing victims to wait for years to receive any possible justice. Mr. Bradley said the screening-panel review process gives plaintiffs a false sense of confidence because, for one thing, a ruling in one’s favor does not mean there will be a timely settlement.
Chairman Townsend asked if the screening panel ruled in favor of the plaintiff, but the design professionals refused to pay, and the plaintiff decided to take the matter to district court, was there a penalty cost, and if so, how much was it? Mr. Bradley said the penalty was unfair because in some cases the defendant’s insurance company must pay the penalty. He said on one side there was an institution that absorbs the loss and on the other side there is a victim who absorbs the loss. But, continued Mr. Bradley, on either side there would be certain penalties in addition to penalties already built into our legal system called offers of judgment. Chairman Townsend offered that in business the first loss is the best loss and it is sometimes better to simply make the client happy and move on.
Mr. Bradley said if the screening panel was to hold true to form, it should be modeled after other screening panels and have three attorneys and three professionals on the panel and no more. He said the proponents of S.B. 274 want to use this bill as a gatekeeper to the judicial system. Screening panels should only screen cases to determine their voracity. They should not be used to resolve the issues brought forth. If a complaint is reviewed by the screening panel and passes, the panel has met the burden of proof and has succeeded in demonstrating that case is not frivolous.
The Chairman called for additional testimony on S.B. 274 and there was none. He closed the hearing on S.B. 274 and opened the hearing on S.B. 310.
SENATE BILL 310: Creates commission to review constructional defect claims and revises various provisions governing actions resulting from constructional defects. (BDR 54-448)
Senator Schneider stated after the 1999 Legislature he became very involved with homeowner association issues and construction defects. He said it was vitally important to address the problem of bad contractors and poor-quality construction. Progress, he said, had been made through the years due to the efforts of the Senate Committee on Commerce and Labor. The measure he was introducing, Senator Schneider explained, would protect homeowners and ensure the quality of building in this state.
Senator Schneider said his proposal would set up a seven-member commission appointed by the governor to terms of 4 years each. The governor would also appoint the chairman, and the commission would include three expert contractors. The purpose of the commission would be to assist homeowners throughout the state in ensuring quality construction. He suggested a slight correction to the proposed legislation which comprised of eliminating a phrase on page 2, lines 38 and 39, section 9, subsection 1, which states, “The provisions of sections 2 to 20, inclusive, of this act do not apply to a claim that is a complex matter.” He said he wanted this change, along with other references to “not a complex matter” throughout the proposed legislation in order to ensure the proposed legislation pertained to complex matters. Also, the board would have subpoena power.
Senator Shaffer asked if the use of the term “contractors” included subcontractors, to which Senator Schneider responded in the affirmative. Senator Schneider explained the bill defined strict guidelines and time schedules for review and reconciliation of defective construction, adding that it was important for homeowners to seek resolution of defective construction as early as possible in order to acquire the guidance of experts as soon as the problem is discovered. Senator Schneider said litigation was very expensive and tied up the largest investment people have for long periods of time. Expert witnesses would inspect the property of the claimants and all repairs would be made at the expense of the contractor, his subcontractors, or his insurance company. Resolution would be guaranteed to occur in a 3- or 4-month period and homes would be promptly repaired. Senator Schneider said the intent of the proposed legislation was to identify the problem rapidly, resolve the problem promptly, and end the suffering of the homeowners as quickly as possible. He said homeowners needed to become actively involved in the issue of construction defects and their needs should be put first. To ensure those priorities, the senator said, more homeowners than experts would be placed on the commission.
Senator Shaffer noted the problem of stachybotrys mold had become extremely serious, and this particularly lethal form of mold was showing up in many new areas around the state. Senator Schneider agreed and stated the mold developed because of faulty building practices such as not building homes on dry, well-compacted soil or in areas with insufficient drainage.
Leonard V. Nevin, Lobbyist, Nevada Subcontractors Association, and Interstate Plumbing and Air Conditioning, said a remedy was necessary to resolve issues relating to faulty construction and his organization would back whatever decision the committee decided upon. Mr. Nevin said he was not absolutely certain S.B. 274 was the right vehicle to resolve those issues, but considered legislation to be a necessary step in correcting the problem of construction defects. Therefore, he said, his organization was taking a neutral position on the proposed legislation.
Senator O'Connell asked Mr. Nevin to describe the experiences he has shared with various subcontractors in attempting to correct construction defects. Mr. Nevin said the problems were continual because subcontractors would attempt to work on various projects but would be served with a restraining order and told to stop work until the litigation was completed. This process not only compounds the problems and draws more people into the lawsuit, he said, but this ever-increasing occurrence was also unfair to honest contractors who wanted to complete their work in a timely and proper manner.
James L. Wadhams, Lobbyist, Southern Nevada Home Builders Association, stated he had appeared before the committee on numerous occasions to support the right to repair problems in construction. He commended Senator Schneider for bringing the bill before the committee, for the proposed amendment to include “complex problems” within the scope of the legislation, and for recognizing the biggest problem has been getting repair work accomplished. Mr. Wadhams said his organization would support legislation that enabled prompt repairs to be done, allowed contractors to stand behind their work, and left those who would not stand behind their work at the mercy of the courts.
Senator O'Connell asked Mr. Wadhams if homeowners shared his views, to which Mr. Wadhams responded in the affirmative. He added that witnesses were available to testify if requested. Senator O'Connell asked Mr. Wadhams to describe how lawsuits affected subcontractors who were not responsible for construction defects. He said it was a lengthy and costly ordeal not easily resolved and on the average took 3.5 years to resolve through litigation, thus compounding the plight of innocent homeowners.
Lourdes Sylvestre, Concerned Citizen, spoke from the Grant Sawyer Building in Las Vegas. Ms. Sylvestre asked if it was possible for construction companies to post bonds of sufficient amounts to cover work performed on various projects to ensure that money would be available to homeowners to pay for repair work needed if contractors or subcontractors were found to be responsible for faulty construction work. Senator O'Connell thanked Ms. Sylvestre for her statement and said the suggestion was well presented; however, that measure would be discussed shortly in S.B. 316.
SENATE BILL 316: Revises provisions relating to safety programs for certain employers. (BDR 53-556)
Robert C. Maddox, Lobbyist, Attorney, Citizens for Justice, said, with all due respect to Senator Schneider, the proposed legislation contained major problems. Mr. Maddox said the bill was unworkable in its current form, because, as drafted, the measure would greatly increase costs to homeowners, add an additional level of bureaucracy, and increase complications for homeowners. In addition, he noted, the language in the proposed legislation favored builders. He said S.B. 310 was unworkable because it did not contain a penalty for noncompliance. Mr. Maddox applauded the committee for the concept of the bill but said the measure was not the correct vehicle for remedying construction defects or remedying the plight of homeowners who often could not so much as get a response from contractors regarding complaints about their work. In addition, it was virtually impossible to get a builder to pay for repair work performed by someone else, nor could the commission get insurance companies to pay simply because they were directed to do so. He said standard commercial general liability policies did not contain provisions that would allow for such an arrangement, nor did state or public law provide such a remedy.
Mr. Maddox said enforcement was the key issue and presented a proposed amendment (Exhibit D) to S.B. 310. The proposed amendment suggested contractors be given 45 days to inspect their work and offer to correct specific construction defects found to exist in their work. Within the next 30 days, he continued, a second notice could be filed, and by the forty-fifth day, if the contractor had not responded, a claim could be filed, whereupon the contractor had 30 days to respond. On the seventy-fifth day, homeowners had 15 days to respond and by the ninetieth day, the review commission must hear the claim within 45 days of contractor’s offer. The one hundred twentieth day would be the earliest day a hearing could be held with 5 days provided to the commission to make a decision. On the one hundred twenty-fifth day, the commission’s findings had to be published. If the decision of the commission was returned in favor of the claimant, the contractor had 90 days to complete the required work with any extension granted not to exceed 45 days, or a contractor could petition for a stay pending completion of the work, as per chapter 40 of the Nevada Revised Statutes (NRS), or if an action is filed in court.
Senator Schneider asked Mr. Maddox what other body, besides the court, could provide a swift and easy way to fix homes without going to court. Mr. Maddox said the court system had evolved over several hundred years and was a system that had, and continues to have, a great deal of input into how to improve the system overall; therefore, the proposed legislation appeared to be attempting to reinvent the wheel. Senator Schneider said that was not the case because it was apparent courts did not want to deal with cases involving construction defects. He said Mr. Maddox and his processors were considered special masters and expert witnesses because courts did not want to deal with these matters. The senator reminded Mr. Maddox he had a case in court for over a decade which ultimately was lost in the Nevada Supreme Court. He said homeowners deserved better, they deserved to have their homes fixed right away. Mr. Maddox said the program for using special masters was developed by the Nevada Legislature during the Sixty-eighth Legislative Session and the process was revised during the Seventieth Legislative Session. The case to which Senator Schneider was referring preceded current law and did not include a review by a special master. As an attorney, Mr. Maddox said, he was extremely busy litigating construction-defect cases in both northern and southern Nevada. In those cases, past and present, he said he always implored contractors and subcontractors to go back to the construction site and complete repairs. Insurance companies did not release funds for repair work unless there was a trial date pending and over 90 percent of the cases set for trial were settled out of court, thus ensuring homeowners their property would be repaired, he said.
Mr. Maddox returned to his suggestions on improving the proposed legislation. He said the current language of S.B. 310 would make it necessary to shoulder the additional burden of hiring an attorney because the bill required an affidavit from an expert. There was no provision in the measure to provide homeowners a method of recovering lawyer and inspection fees, but there was a provision that contractors could recover those costs if a claimant was unsuccessful. Also, he added, many cases were relatively simple and did not require an attorney or an expert witness. Currently the contractors’ board was doing an excellent job overseeing repairs, but oftentimes the repair was merely a temporary solution. The proposed legislation did not provide any mechanism to improve the current arrangement, was biased toward builders, and was an unprecedented requirement in American jurisprudence. In addition, the bill was intimidating to homeowners because, even though the homeowners might have extremely justified claims, they ran the risk of ultimately not prevailing, and because courts did not have discretion in the matter, attorneys fees and costs would be awarded to contractors. Mr. Maddox concluded by stating if builders wanted to reduce construction-defects claims builders would have to do their jobs correctly from the start.
Susan Zink, Concerned Citizen, and homeowner, said she was present and testifying on behalf of other homeowners like herself. She echoed the sentiments of both Mr. Maddox and Mr. Bradley in describing the horrors she, as a homeowner, had to suffer due to extensive construction defects and lack of properly and timely completed repair work. The situation had gone on for over 3.5 years, had drained her both financially and emotionally, and had caused her and her family grave physical distress. In addition, the construction defects in her home included the invasion of a toxic mold which formed as a result of inadequate drainage and faulty construction and which was causing herself and her family serious illness. Mrs. Zink described the suffering her family underwent having to abandon their home and not being able to afford another one. Chairman Townsend asked who should have discovered the construction problems and Mr. Maddox said both the builder and the inspector should have discovered the foundation, stem walls, and subfloor had been constructed in very wet conditions using wet wood. Chairman Townsend said if there were code violations, improper inspections, and faulty construction, the responsible parties had to be identified. Mr. Maddox reminded the committee that the contractors’ board was not authorized to tell builders how to fix faulty construction which is Mrs. Zink’s problem. Chairman Townsend said much of the problems developed due to lack of communication and certain parties not behaving responsibly. Mrs. Zink provided the committee with a copy of her written statement for the record (Exhibit E).
Senator Schneider said Mrs. Zink and her family had already suffered for over 3 years and would be facing another 2 or 3 years in litigation without any guarantee her home would ever be fixed. The senator asked Margi A. Grein, Lobbyist, Nevada State Contractors’ Board, and Executive Officer, State Contractors’ Board, if S.B. 310, which would establish a commission to review construction defect claims, was a workable arrangement, adding that he would agree to amend the measure in order to “put teeth” into it, as Mr. Maddox had suggested. Ms. Grein responded in the affirmative and added that it was the goal of the contractors’ board to help resolve problems affecting homeowners as quickly as possible. She reiterated that the contractors’ board did not have the authority to dictate how builders fixed construction defects.
Senator Schneider asked Ms. Grein if it was possible to structure legislation to give the contractors’ board or the review commission the authority to dictate how builders make specific repairs. Ms. Grein said she did not feel it was appropriate for the commission or the contractors’ board to instruct builders on how to correct their work. Chairman Townsend asked Ms. Grein why the board could not dictate how repairs were made once the board requested certain repairs be made. Ms. Grein said the board could only require the repairs be made to code or within the standards of the industry. Chairman Townsend said if current building codes were weak, and if present construction standards within the industry had depreciated over time, homeowners may still not receive adequate remedy for construction defects. Ms. Grein acknowledged that scenario was possible, and added codes and standards needed to be complete, updated, and upheld in order to ensure proper construction practices.
Mr. Lynn returned to the podium to state that whenever mold was found, contractors and inspectors did not return to that property because mold was an environmental problem that needed to be removed by specialists because mold removal was a dangerous business. Stachybotrys mold spores were released into the air and it was one of the most dangerous molds found in homes. It was extremely toxic to humans, and was becoming an ever-increasing problem throughout the state. Mr. Lynn said it was possible to use special building materials in order to avoid certain problems such as mold.
Sheri Kolbet, Concerned Citizen, and homeowner, echoed the concerns and tribulations experienced by Mrs. Zink. She said she and her husband had the home built with the idea it would be their home for the rest of their lives. Mrs. Kolbet said her home was located at the bottom of the hill and every time there was precipitation all the water from her neighbors’ property drained into her basement causing several inches of standing water to gather and remain there for great periods of time. No amount of pumping could keep up with the problem, which she said she believes was a direct result of the builder cutting costs. Furthermore, the standing water in her basement had caused an infestation of mosquitoes as well as a severe mold problem to develop. As with the Zink family, construction defects in the Kolbet residence had caused the family grave health problems, serious financial difficulties, and extreme emotion anxiety, she said. The family has had to move out of their home, and cannot afford to buy another home. Mrs. Kolbet provided the committee with a copy of her testimony (Exhibit F).
Senator O'Connell asked Mr. Bradley why inspectors had failed to see the problem of inadequate drainage before the homes were built in that area and why had the county approved the plans to build homes in that location. Mr. Bradley said the county failed to do quality assurance inspections. Chairman Townsend asked if a county allowed a development to go forth, and if inspectors approved the soil quality in that site, was not the county responsible for ensuring proper conditions were met prior to the commencement of construction. Mr. Bradley responded in the affirmative. Mr. Bradley said it might be appropriate for the county to shoulder some of the responsibility when mistakes were made. Chairman Townsend said the emphasis should be on the front end of the project, not the back end, which would require strict code enforcement, adherence to soil analyses, and proper authorization and approval for building.
Chairman Townsend said, for the record, an interim committee had met to determine if the county should be responsible for enforcement of codes and proper plan approval. Mr. Bradley agreed the interim committee had decided Clark County had received a less-than-favorable rating. Mr. Bradley said if the committee determined counties should shoulder some of the responsibility when improper decisions were made, or if it was determined the county was the primary culpable party, there was no guarantee there would be enough money available to local governments to ensure legitimate claimants received just compensation for construction defects. In addition, just compensation was not guaranteed because currently a $50,000 cap for negligence is currently in place, and a determination needed to be made regarding the possibility of raising that cap to a more realistic figure because in most cases, $50,000 does not begin to provide just compensation for damages suffered by innocent homeowners, said Mr. Bradley.
Senator O'Connell asked Mr. Bradley if the correct board to review the issue was the State Board of Examiners, to which Mr. Bradley responded in the affirmative, adding that could happen after at least a couple of years of litigation. Mr. Bradley said the only claims not subject to the $50,000 cap were prisoner lawsuits and civil rights violations.
Senator Schneider said the intent of the legislation is to quickly identify the problems and get them resolved. He said he would work with all concerned entities to write the measure in language appropriate to get protection for homeowners and to curtail their suffering. Mr. Maddox suggested language should be included that would establish penalties to contractors who do not fix life-threatening construction defects immediately.
Chairman Townsend asked if there was any additional testimony and there was none. There being no further business before the committee, the hearing was adjourned at 11:45 a.m.
RESPECTFULLY SUBMITTED:
Sharon T. Spencer
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: