SENATE COMMITTEE ON JUDICIARY

MINUTES OF THE

SENATE Committee on Judiciary

Seventy-First Session

March 22, 2001

The Senate Committee on Judiciarywas called to order by Chairman Mark A. James, at 8:30 a.m., on Thursday, March 22, 2001, in Room 2149 of the Legislative Building, Carson City, Nevada. The meeting was video conferenced to the Grant Sawyer Building Room 4400, Las Vegas. 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 Mark A. James, Chairman

Senator Jon C. Porter, Vice Chairman

Senator Mike McGinness

Senator Maurice Washington

Senator Dina Titus

Senator Valerie Wiener

Senator Terry Care

GUEST LEGISLATORS PRESENT:

Senator Ann O’Connell, Clark County Senatorial District No. 5

Senator Michael (Mike) A. Schneider, Clark County Senatorial District No. 8

STAFF MEMBERS PRESENT:

Bradley A. Wilkinson, Committee Counsel

Allison Combs, Committee Policy Analyst

Heather Dion, Committee Secretary

OTHERS PRESENT:

Scott Anderson, Deputy Secretary of State, Commercial Recordings, Office of the Secretary of State

Renee Lacey, Chief Deputy Secretary of State, Office of the Secretary of State

John Fowler, Attorney

Robert Crowell, Lobbyist, Nevada Trial Lawyers Association

John Olive, President, Nevada Association of Listed Resident Agents, Incorporated (NALRA)

Kirk Schumacher, Concerned Citizen

David R. Gamble, District Court Judge, Department 1, Douglas County, Ninth Judicial District

Steven D. McMorris, Tahoe Township Justice Court, Arbitration Commissioner Ninth Judicial District

William Cobb, Attorney, Reno

James Jackson, Lobbyist, Concerned Citizen

William Bradley, Lobbyist, Nevada Trial Lawyers Association

Richard Myers, Lobbyist, Nevada Trial Lawyers Association, Las Vegas

Charlene Stead, Attorney

William Turner, Attorney

Richard Sipan, Concerned Citizen

Frank Cassas, Attorney

Dana Bennett, Lobbyist, National Association of Independent Insurers

Chairman James opened the hearing on Senate Bill (S.B.) 356.

SENATE BILL 356: Makes various changes relating to business entities. (BDR 7‑1206)

Senator O’Connell, Clark County Senatorial District No. 5, began the testimony on S.B. 356. Senator O’Connell stated the background of the bill pertains to two letters that were complaints from constituents. The first letter Senator O’Connell referred to was written by a constituent, Nikolas Skalkotos, who had filed his corporation with the secretary of state’s office (Exhibit C).

Senator O’Connell indicated that Mr. Skalkotos received a phone call from a stranger who wanted to purchase his corporation’s name. Mr. Skalkotos attempted to discourage the caller, only to receive a second call days later. Senator O’Connell said, “The caller reported at that time that there appeared to be a problem with the corporation.” Mr. Skalkotos called the secretary of state’s office to find out that the officers of his corporation, the president and the secretary, had been changed to two persons completely unknown to him.

Senator O’Connell declared that the secretary of state’s office had responded to Mr. Skalkotos’s inquiry saying, “We are not a regulatory agency, and if you want the name changed, then send us the appropriate fee and file a new application.” Senator O’Connell commented that Mr. Skalkotos did not believe this was an appropriate response for the secretary of state’s office.

Senator O’Connell referred to the second letter (Exhibit D), explaining the situation of John Vernetti. Senator O’Connell indicated that Mr. Vernetti lost a $250,000 contract with Nellis Air Force Base because of the theft of his corporation’s name.

Senator O’Connell expressed the opinion that the current system is not acceptable when Nevada resident’s property rights are not being protected. She said, “The only recourse they [business owners] have is going to court.” Because this occurs without any notification to them, the residents have to wait until somewhere along the line to find out their property has been stolen, she added.

Chairman James remarked he was unsure if he understood the situation, and what had, apparently, happened. He noted, “I should hear from all the people (involved) to give further explanation.”

Senator O’Connell responded:

What appears to be happening is a person files the name of a corporation, and . . . thinks their title is protected. However, if the person does not check on a regular basis, then anyone else can steal the name of the corporation, or they can change the names that are listed as the corporate officers and the corporation is no longer the original filer’s. All it requires is for someone to simply go in and pay the application fee, fill out the new corporate names, and the corporation is no longer in the original name, and there is no notification.

Chairman James questioned if the list of officers and directors could be amended by anyone? Senator O’Connell replied yes, that is what the letter concerning Mr. Vernetti (Exhibit D) indicates. She continued, explaining, “Someone who had worked for Mr. Vernetti in the past went to the secretary of state’s office and filed for the officer’s names to be changed.”

Senator James interjected, “That is the part I do not understand, because ownership is not registered with the secretary of state.” He added ownership is a matter which is controlled by the corporation itself. Senator James gave the example, “I cannot get shares from a company through the secretary of state’s office, I have to go through the transfer agent of that company.”

Senator O’Connell responded that she only understands the situation through the letters that were written to her. She added that both situations seem to be concerned with the same principle of taking over ownership. Senator James noted he believed the only aspect that could be changed is the officers and directors, but that ownership could not be changed.

Senator O’Connell referred to the letter describing the situation of Mr. Vernetti (Exhibit D), “When Nellis personnel checked the corporation out, they found that the gentleman who made the contact . . . had nothing to do with the corporation,” and therefore, Mr. Vernetti lost the $250,000 contract.

Senator Porter said he shared the concern, “I guess I could walk in and take over the MGM Hotel Casino, Las Vegas; but could we hear from the secretary of state?” Senator O’Connell replied that she had shared the concern with the secretary of state’s office, and they were aware of such problems. She added, “Since they feel they are simply an administration office and not a regulatory office, they feel there is presently nothing they can do.”

Scott Anderson, Deputy Secretary of State, Commercial Recordings, Office of the Secretary of State, introduced himself for the record. Mr. Anderson referenced his testimony to a report distributed by the Office of the Secretary of State (Exhibit E). The report responds to questions raised from S.B. 356, and how the secretary of state is dealing with such matters.

Senator James questioned Mr. Anderson, asking, “Under the existing procedures, someone can file an amendment to the annual list?” Mr. Anderson replied the form can be downloaded from the secretary of state’s website, or from any other of the distribution services. Senator James queried if an individual could file a list, amend it at any time, for any corporation, and place any name on the corporation? Mr. Anderson responded, “That is correct, but in Chapter 239 of Nevada Revised Statutes (NRS) it is a Category C felony to file fraudulent documents within the secretary of state’s office.” He added if the secretary of state’s office does receive a complaint it is forwarded to the district attorney for investigation. The only reviews of documents the secretary of state’s office conducts are for conformity to statutory requirements, to verify they are present on the forms, he said. Mr. Anderson remarked the secretary of state’s office does not verify the validity of signatures, officers and directors, or amendments; the documents are taken at face value.

Senator James inquired of Mr. Anderson what other states do to handle such issues. Mr. Anderson said he has spoken to officials in 12 states, and all but one state leaves the issue to the courts. The only state that has a remedy for such situations is Massachusetts, which has a hearing officer assigned to complaints.

Senator McGinness asked Mr. Anderson if the situations described in the letters provided by Senator O’Connell (Exhibit C and Exhibit D) could have happened. Mr. Anderson agreed the situations could have taken place.

Senator McGinness commented:

[As it was] for this gentleman, to lose a $250,000 contract is not something most of us would take lightly. My concern is that you presented two and a half pages of information with absolutely no solution, nothing that says we will try to help, or we will look at this. I think there is a problem. And saying here that Nevada is business-friendly, well, if you are the man who lost a $250,000 contract, he is probably thinking Nevada is not so friendly.

Mr. Anderson responded in reference to the letters provided by Senator O’Connell (Exhibit C and Exhibit D), saying the letter from Mr. Skalkotos is referred to in his exhibit. When staff members in the secretary of state’s office looked at the documentation, “we realized the office had incorrectly typed a corporation number. As soon as the secretary of state’s office realized the mistake, the correction was made and Mr. Skalkotos was notified,” stated Mr. Anderson.

Mr. Anderson referred to the second letter (Exhibit D), which described the problem concerning Mr. Vernetti. Mr. Anderson reported he had looked at the documentation for the corporation on March 21, 2001, and the list of officers still reflected that of the other corporation Mr. Vernetti was disputing. Mr. Anderson mentioned the board of directors of a corporation could change its corporation’s documentation at anytime. However, personnel in the secretary of state’s office do not have the authority to change the documentation back without a refiling, because the office does not possess investigative authority, said Mr. Anderson.

Senator McGinness requested that Mr. Anderson provide the documentation from the two complaints.

Mr. Anderson called attention to a recent problem involving the Stewart Indian School Museum. He described the situation, “An opposing faction of the current board of directors of the Stewart Indian [School] Museum changed the list of officers, and attempted to take control of the Indian museum.” The situation was resolved very quickly through the court, and the rightful board of directors was reinstated, he added. The process to handle such situations, stated Mr. Anderson, is the court.

Renee Lacey, Chief Deputy Secretary of State, Office of the Secretary of State, pointed out that the secretary of state has discussed the issue with the district attorney because of the complaints discussed. Ms. Lacey stated:

It is a problem and a crime, there is a cause of action. Senator Porter, as you said, if you wanted to take over the MGM (Hotel and Casino) you could certainly do so from the records in our office. However, you would be subject to civil causes of action, and it would be considered a Category C felony. Maybe the committee could consider some way, when a customer has a concern, that the court could provide an expeditious way of handling the problem. If you want us to take the regulatory authority, we would certainly do so. However, the concern is how cumbersome does it make it . . . for people to conduct business here. And then, we would also be subject to judicial review as an administrative agency . . . It may make the process longer. So, maybe some expeditious remedies to get into court right away and tighten up some of the penalties is necessary. I am just trying to address Senator McGinness’s concern that we have not presented a remedy, and that is because we do not have the solution. We are trying to point out the concerns on the effect of our office. However, I believe there may be some solutions, because it is a crime.

Senator James noted he appreciated Senator McGinness’s concern, and said he believed it was an important concern because a crime has been committed. However, he added:

As the committee recognizes many corporate bills and measures to deal with corporations, if we convert the secretary of state into anything other than an administrable function [sic] all corporations in Nevada will be lost. The office has to be a purely administrable function [sic]. On the other hand, you have brought [forward] a couple of very shocking cases, and we need to do something about it. The committee is willing to work with you to do something about it. It really is a criminal justice matter. Last session we passed a bill that made it a category B felony, with a 20-year prison sentence, to steal someone’s personal identification and use it. And we could look at making these situations similar offenses. I think the only question I have for the secretary of state is, once this [fraud] comes [to] light correction needs to take place, is it easily done?

Mr. Anderson stated another document is filed and the correction takes place. Senator James remarked most of these cases come out of situations where there is struggle for control of the company. Mr. Anderson said that once the corrected documents are filed, a review would take place. The secretary of state’s office makes sure the documents are properly filed, and the information is available on the website he added. However, if there is a problem, the secretary of state’s office requires the complaint in writing, said Mr. Anderson.

Senator James mentioned, “That is an important point, that the document can be looked at on the Internet.” He also noted, “Nothing the secretary of state does can change the ultimate ownership.” Someone could use the apparent authority he or she has created by changing the documents, that can happen and is then a matter for the civil and criminal courts, stated Senator James.

Senator O’Connell noted that one possibility is adding a disclaimer when a person files a corporation. She said, “Who would think if you went in and filed a corporation, you would have to keep checking on it to verify that you are still the owner.”

Senator James inquired if it would be expensive to give notice to the original registered addressee. He furthered, “When an annual report is filed or when there is a change in the annual list, the registrar would send a card to the existing address.” Mr. Anderson replied it would be costly to do so, because the current system is 25 years old. He added his office and staff would not be able to handle the postage, processing, and hours which would be required to send each corporation a notice.

Mr. Anderson declared, “Senator O’Connell’s comment about a disclaimer, I do not think the secretary would have a problem with it.” However, he stated, he would be concerned about the possibility a disclaimer would attract people to the problem. Senator James clarified Senator O’Connell’s comment, that the disclaimer would be a reminder that it is the responsibility of the owner to monitor the list. But, he said, he did not believe the disclaimer would attract people to the problem.

Senator James also reiterated an idea from Senator Porter, to increase the filing fee by 50 cents and require all applicants to submit a self-addressed postcard with the filing. Senator James indicated the card would be sent to the owner, and if the owner did not submit a card, then the filing application would not be accepted by the secretary of state’s office.

Senator O’Connell mentioned, “If we are trying to do everything we can to become the Delaware of the West, I think people need to be alerted to the fact that it is due diligence on their part.”

Mr. Anderson commented that the secretary of state’s office could include a disclaimer on the website and with other materials, to be distributed to the resident agents. He stated the secretary of state could add the disclaimer now, without any type of legislative change. Senator James asked Mr. Anderson to provide specific language to the committee for the disclaimer.

John Fowler, Attorney, identified himself for the record, and stated he wanted to offer solutions to the issue. He directed attention to the interim study done at the behalf of Senate Current Resolution (S.C.R.) 19 of the Seventieth Session, which, he said is a catalyst for changes in the court system.

SENATE CONCURRENT RESOLUTION 19 OF THE SEVENTIETH SESSION: Directs Legislative Commission to conduct interim study of methods to encourage corporations and other business entities to organize and conduct business in this state. (BDR R-534)

The change of court rule will result in the formation of business courts, he said, which are specifically set up to deal with matters of, “internal corporate government.” Mr. Fowler added among those matters the courts deal with are “who are the actual officers of the corporation.”

Mr. Fowler said because there are business courts that are set aside specifically to deal with the internal corporate government, the judges are available on an expedited basis. Mr. Fowler stated that matters such as the situations Senator O’Connell brought forward could be dealt with very quickly through the business courts, on a preliminary injunction basis.

Senator James suggested, “Maybe we need to come up with something to augment that procedure, to make sure the procedure gets expedited in the business courts.” Mr. Fowler agreed and added, because the courts were set up by rule, any change would have to work within the rules. Senator James declared, “It does not have to reference the business court, it can just say there is a specific remedy.”

Mr. Fowler, commenting on the Massachusetts situation mentioned by Mr. Anderson, said he believes the Massachusetts hearing officer is not going to be able to act any quicker than a business court in Nevada. Mr. Fowler stressed he believes that the judiciary was aware that such problems have occurred.

Robert Crowell, Lobbyist, Nevada Trial Lawyers Association, identified himself to the committee. He stated he was aware of a similar problem that took place at his workplace. Mr. Crowell described the situation:

The situation dealt with a nonprofit corporation. It was a case where the Carson City Urban [Indians] Consortium Inc. [Incorporated] was involved, and our clients had been operating the Stewart Indian Museum. There was a disgruntled former director who changed the list of officers and asserted rights to the corporation. The former director was successful in getting some state officials to believe he was the owner of the nonprofit corporation. The result was a temporary restraining order and preliminary injunction, and the property was given back to the correct director. However, in the meantime, items from the museum were taken.

Mr. Crowell claimed he did not know what the appropriate remedy for such situations was, but he was sensitive to Mr. Anderson’s concerns. Mr. Crowell said, “What seems like a not a real-life situation, is a real one.”

Senator James commented, “There is not any person on the committee that does not believe the situation to be real, and the committee takes the situation seriously.” He added that Senator O’Connell had brought forth two cases and there needs to be a remedy for the problem.

Senator Porter asked, “Assuming the transaction takes place, and the ownership is changed, what about the liability portion?” Mr. Crowell replied that the liability portion of the case is still in litigation, but the end result should be the responsibility of those who acted wrongly. Senator Porter pointed out the change of listing is a serious act, resulting in changes to taxes and liability of employees.

John Olive, President, Nevada Association of Listed Resident Agents Incorporated (NALRA), identified himself. Mr. Olive stated his concerns were addressed by the testimony from the secretary of state’s representatives. Mr. Olive said the NALRA was sympathetic to the difficulties faced by the residents who were having problems. Mr. Olive noted he believes the bill, as it is currently drafted, would place an inappropriate assignment on a state agency opposed to a private party.

Mr. Olive commented the NALRA members, as resident agents, often encounter situations where clients ask for assistance in reestablishing control over a corporation. Currently, what resident agents must do, he said “Is to inform the clients that NALRA does not have the official or legal capacity to intervene in questions of control or ownership of corporations.” Mr. Olive recognized the potential of Senator Porter’s resolution, and said he believes it may be one that would work. Mr. Olive also referred to the Massachusetts’ solution, and he said he thinks it is an inferior solution compared to the business courts. Mr. Olive offered the knowledge and experience of the NALRA to help craft a solution.

Kirk Schumacher, Concerned Citizen, testified that he opposed S.B. 356. Mr. Schumacher said he would like to offer a few suggestions, and make a few points regarding the bill.

First, Mr. Schumacher stated, changing the list does not actually make any change in the authority of any of the officers. Second, he indicated, the statute is flawed in that it only requires an annual filing and there is no requirement to update. Third, Mr. Schumacher said, a lot of the problems are due to the accessibility of the information.

Mr. Schumacher said he would like to propose solutions, “that avoid the basic problem, the public nature of the information.” He indicated there is not any fundamental public policy for the State of Nevada to require the names of officers and directors be given out freely. It should be possible to elect if a corporation wants its information kept confidential, he added. Mr. Schumacher also proposed to not provide the information publicly, at all. He said he thought in Delaware the information was available only on franchise tax reports.

Senator James closed the hearing on S.B. 356, and opened the hearing on S.B. 15.

SENATE BILL 15: Prohibits attorney whose practice involves matters relating to personal injury from acting as arbitrator in action relating to personal injury. (BDR 3-34)

Senator Michael (Mike) A. Schneider, Clark County Senatorial District No. 8, thanked the committee for scheduling the bill. Senator Schneider referred to section 1, subsection 4, paragraph (a), which would require the addition of rules with “Provisions that prohibit an attorney whose practice involves matters relating to personal injury from acting as an arbitrator in an action relating to personal injury.” He indicated he brought the bill forward because he said he feels “it is good government.” Senator Schneider said he recalled the 1999 Legislative Session, when Judge Porter (Gene T. Porter, District Judge, Department 1, Eighth Judicial District Court) testified “insurance companies are ‘going trial de novo’ [requesting new trials].” Senator Schneider said it is easy to say the insurance companies do not pay, but want to challenge every case and hold awards down. Senator James questioned, “Why is just one side coming in and going trial de novo?” Senator Schneider expressed the opinion that only one side comes forward because something is out of balance. He continued:

Something is skewed towards one side, and this is just putting balance back in. Mr. Chairman, I would say that most people who practice in this field are honorable people. On this bill, Senator Porter, since this is an insurance bill, will probably rescue himself and not vote because of a possible perception of conflict. And if I was in an auto accident and was the plaintiff, and went to Senator Porter’s office for arbitration, I would not feel comfortable. I would feel a perception of conflict and would not feel comfortable. Nor would I feel comfortable as a defendant in the case, and went to Ed Bernstein’s office, where he was the arbitrator and I was the defendant. That is why I bring this forward to you.

I think what we have to do with the public’s perception of what goes on in government, is give the public a fair shake. And I believe this bill would give them a fair shake. I understand there will be testimony on who is going to do this arbitration. I would offer to you that I would be willing to phase this in over 2, 3, or 4 years, if you would replace 25 percent of the arbitrators a year for 4 years until they are [all] replaced. I would think everyone on this panel is qualified to be an arbitrator. I have talked to several women in the community who are raising children at home; they are attorneys and would like to get involved.

I think it is time to look at this, as this is the perception we give to the public. Mr. Chairman, we share the same constituents, when I campaigned last summer, I talked to many of our constituents about this. They were in favor of this, and said that no one should have a bias in it.

Senator James clarified, “The bill you proposed would apply to either side of the case?” Senator Schneider said yes, “I do not think someone who defends insurance companies should be allowed to arbitrate.”

Senator Care commented on the background information of arbitration:

I do not do personal injury, but I do have experience with the mandated arbitration program. There is a list, from the arbitration commissioner, of five potential arbitrators. There is the option to leave the list, strike one or strike two. Ultimately, whoever becomes the arbitrator can be removed, which is the mandatory arbitration program. The bill here offers voluntary arbitration programs. But, by way of background, that is what happens in the arbitration program.

David R. Gamble, District Judge, Department 1, Ninth Judicial District Court, stated he opposed S.B. 15. Judge Gamble said the bill would exclude 80 percent of the lawyers who can act as arbitrators, because, he said, the bill does not quantify the amount of personal injury practice that one has been involved in, nor does it qualify those who would do plaintiff or defense work.

Judge Gamble said many of the arbitrators are insurance defense counsel. However, he stated, the problem is that any attorney who has done a personal injury case would be excluded from arbitration work, and the result is that a huge percentage of qualified attorneys would be excluded from conducting arbitrations because of the bill.

If the bill were changed, said Judge Gamble, to say: “someone who primarily practices in personal injury work,” it may be helpful. However, he stated, the State Bar of Nevada does not have a test to apply to specialization. Judge Gamble said the bill would add a significant amount of work to the arbitration commissioner’s job, in addition to taking away from the pool from which he or she can obtain arbitrators.

Judge Gamble pointed out the expertise of arbitrators is also important. He gave the example, “If I were a claimant or a defendant in an arbitration claim, I would not want, if I had a construction defect case, to go in front of a lawyer or non-lawyer who is a doctor.” Judge Gamble remarked it is a great benefit to the knowledge pool that the defense and plaintiffs’ counsels, in the tort cases, can resolve things fairly and honorably.

Judge Gamble testified he disagrees with Senator Schneider about the de novo situation in Clark County. He said, “I think that is not why there are so many de novas in Clark County, and I will point to the rest of the state as an example.” He noted that there is a small sample in Douglas County, but the number of de novo trials are minimal, and come from both sides in a balanced manner.

Senator James asked Judge Gamble if it was his perception that the results of the arbitration cases are not fair. Judge Gamble said his experience is that the arbitrators are very good and fair. And, he added, last year he had an arbitration trial and the award of arbitrator was $24,328, and the jury verdict came in $20 dollars off.

Steven D. McMorris, Arbitration Commissioner, Tahoe Township Justice Court, Ninth Judicial District Court, indicated he had not heard a complaint about the arbitration system within the last six years. However, he said, a complaint he has received occurs when an arbitrator does not have the necessary experience. For example, he stated, knowledge in a personal injury case to understand comparative negligence and how to evaluate the damages is very important and takes experience.

Judge McMorris testified it was his experience the arbitration program has been an even plateau, with private investigators hearing personal injury cases. He added, “When parties see the award, they are inclined to accept it when they know it is based on knowledge from someone in the field.”

Judge McMorris referred to Senator Care’s comment that the arbitration program has built-in protections. He pointed to qualifications of arbitrators, “Nevada Arbitration Rules (NAR) Rule 7 states: “Arbitrators shall have substantial experience in their areas of expertise . . . ” Judge McMorris indicated arbitrators have experience. He also referred to Senator Care’s comment, “The same rule states that an arbitrator who would be disqualified for any reason that would disqualify a judge under the Nevada Code of Judicial Conduct shall immediately recuse [sic] himself or herself.” Judge McMorris mentioned if there is a dispute under the judicial conduct code, the arbitration commissioner has the authority to remove the arbitrator in question.

Judge McMorris remarked, “We are resolving 60 percent of the personal injury cases in the arbitration program.” Senate Bill 15 would gut the program, he said, adding there are 125 arbitrators in Northern Nevada. “From my experience, 100 plus of those handle personal injury cases,” he said.

Senator Porter asked, “This is not a question related to the bill itself, but we have looked at compensation the last few sessions and I was wondering, how are we doing?” Judge McMorris replied, “It is a $650 maximum and $75 an hour up to the $650.” An attorney with a thriving practice is billing out $2000 a day, and if there is a full day of arbitration hearing, the attorney is capped at $650, Judge McMorris said.

Judge McMorris continued saying:

I have always said that there is a pro bono aspect to this. There is no question that the attorneys doing this do not have to and it is voluntary. But the $650 helps because compensation was previously at a $500 maximum. The change was made last session. However, the hourly rate was not changed.

Senator Porter suggested to Chairman James that arbitrator compensation might be addressed as a separate issue before the end of the session. Senator James responded that many of the people he has encountered do arbitration work as a pro bono legal activity.

Judge McMorris added, “I did receive authority through Nevada Supreme Court [Chief] Justice [A. William] Maupin, that he did not think the bill was a good idea, and [he] is supporting its opposition.”

William Cobb, Attorney, stated he opposes S.B. 15. Mr. Cobb stated his firm “defends the poor, helpless insurance companies against the rich and unscrupulous widows and orphans.”

Mr. Cobb stated he does not believe there is any conflict, real or perceived, and has never been challenged as a serving arbitrator. Mr. Cobb said, “I think Judge Gamble and Judge McMorris hit the nail on the head when they said you would lose a substantial number of arbitrators with this bill.”

Mr. Cobb stated he does do arbitration work as a matter of public service. He remarked he would prefer an arbitrator who was knowledgeable in the field. And for that reason, he said, he feels it is incumbent upon him to be on the arbitration panels.

Mr. Cobb offered one other personal perspective as an attorney who does personal injury/product liability work. He said he served on a civil jury in a personal injury case. And, he said, “If you were to carry Senator Schneider’s argument to its extreme, I would be excluded from serving on the civil jury as well.”

James Jackson, Concerned Citizen, stated he is an attorney in an approximately 25-person firm; out of the 25 people, 10 of the partners serve as arbitrators. He said the comments regarding the pro bono aspect of being an arbitrator are true. Mr. Jackson said, “It basically covers the cost of my secretary and any other staff member that deals with the issue.”

Mr. Jackson indicated, in his 15 years of practice, his experience in arbitration is far less than that of his colleagues. He believed his experience over the years comes to bear to the benefit of all litigants. And if there is any possibility of a conflict, he noted, “I am both ethically bound under the rules of ethics as a lawyer and those that apply to judges.”

Mr. Jackson said there are enough safeguards between the rules of ethics and the arbitration rules to provide a good system.

Mr. Jackson referred to the de novo issue, “I think I have taken 200 cases to arbitration as a litigant, or attorney participating in litigation.” Of the 200 cases, 5 had been sent back for new trial.

Bill Bradley, Lobbyist, Nevada Trial Lawyers Association, indicated he opposed S.B. 15. Mr. Bradley stated that both Mr. Cobb and Mr. Jackson were well spoken when they addressed the issues concerning S.B. 15.

Mr. Bradley said the Nevada trial lawyers have worked very hard to implement the arbitration system. Mr. Bradley testified, “This bill defies common sense.” He added, it is desirable to have experienced people working on arbitration cases and the bill would eliminate those individuals.

Mr. Bradley said problems exist, he explained:

The problems are not because of unqualified arbitrators. It is because there is a desire that the time value of money is better kept in the industry’s bank than in getting it out and resolving the cases. And I only think it would be worsened by letting inexperienced arbitrators make decisions that would be vulnerable to attack. The Nevada trial lawyers are opposed to this, but respect this committee’s policy in trying to establish efficient arbitration. We see this bill as taking a dramatic step backwards.

Senator James asked if interest accrues on an arbitration award because it is non-binding. Mr. Bradley replied, when a complaint is filed, the statute triggers interest running at that point. He added, “What I think you are thinking about, Senator James, is that the screening panel process does not accrue interest.” Senator James inquired what the interest rate was. Mr. Bradley responded it was 2 percent above the prime interest rate.

Senator James then asked, “Why does the time value of money matter?” Mr. Bradley replied, because most of the cases settle short of trial, and by the time of trial, “people are pretty beat up and want to get out of the situation.” Mr. Bradley said it has been the trial lawyers’ perception that the investments they are able to obtain, are well in excess of what lay investors can obtain.

With regard to his personal ties to the insurance industry, Senator Porter noted S.B. 15 would not impact his direct income because he is an independent contractor. He then asked Mr. Bradley to explain how someone is appointed as an arbitrator.

Mr. Bradley responded there is a list or pool of attorneys who are willing to serve as arbitrators. An attorney notifies the commissioner, and if the attorney meets the qualification requirement in the statute, then he or she is added into the list. Then, when a complaint is filed, it is required to indicate to the court whether the reasonable value of the case exceeds $40,000. He continued, stating if the case does not exceed $40,000 then the judge puts the case in another system, the arbitration system. From the list of attorneys, six or eight names are picked (Nevada Arbitration Rules Rule 6, paragraph (c), initially stipulates that identical lists of five names be served on the appearing parties who may each strike two names; the commissioner appoints the arbitrator from those names not stricken and submitted to both sides of the case. Both sides, the plaintiff and the defendant, have the opportunity to disqualify names off the list, and the remaining pool is subject to a random draw.

Senator Care mentioned, for the benefit of the committee, that Mr. Bradley is speaking about the court-mandated program. Parties are free to enter into a contract and have an arbitration provision, he added. Mr. Bradley clarified that the arbitrator can also be selected privately without going into the system.

Senator Porter asked for clarification, “What you are saying is that both defense and the plaintiff will agree, and there is an agreement going into the case.” Senator James commented, “If you are inside the system with the list, you can strike one of the names, and if there was someone who was always biased, then they would never get picked as an arbitrator.”

Senator Porter inquired what Mr. Bradley believed the fees should be? Mr. Bradley responded, “I struggle with fees, I do think the $75 fee is too low.” However, he added, “It bothers me that anyone makes $100 an hour.” Mr. Bradley indicated that some arbitrators have dismissed the work because of the low fees, but most attorneys provide the service as pro bono work.

Senator Porter asked who pays the fees? Mr. Bradley answered the fees are split between the plaintiff and the defendant. Senator Porter voiced, “I would prefer that if it was pro bono, it would be used to help kids instead of for arbitration.”

Richard Myers, Lobbyist, Nevada Trial Lawyers Association, testified from Las Vegas. Mr. Myers stated he agreed with all the testimony offered, except that offered by Senator Schneider.

Mr. Myers said there is a gross misperception “if you think that plaintiff lawyers, as arbitrators, are some kind of give-away artists, that is totally wrong.” Mr. Myers described two cases he had dealt with in the past:

The arbitrator, Tim William, president-elect of the Nevada Trial Lawyers Association, was involved in a broken foot case. When I received the award I thought it was too low. I also had a case [in which] Andy Thomson was the arbitrator . . . involving a waiter who spilled a tray of food, and a piece of glass hit a man in the eye. I thought that award was too low as well. On the other hand, I have dealt with cases dealing with traditional, soft tissue back and neck situations, where a defense attorney turned out to be the arbitrator. If the arbitrator turns out to be either a plaintiff lawyer or a defense lawyer, I will tell my clients that it is fair, in my experience.

Charlene Stead, Attorney, Las Vegas testified that she opposed S.B. 15. Ms. Stead indicated she agreed with the testimony she heard, and believes the critical issues were addressed. She added she believes experienced people are needed in the arbitration field.

William C. Turner, Attorney, testified from Las Vegas, stated that he opposed S.B. 15. Mr. Turner said there are reasonable people who act as arbitrators. Mr. Turner stated he agreed with Mr. Myers when he said that plaintiff attorneys and defense attorneys can act as arbitrators.

Mr. Turner said his concern was under Rule 7 of the Nevada Arbitration Rules (NAR), and noted, “We do require knowledge and expertise in the area of personal injury.” Mr. Turner stated his firm conducts 450 arbitration cases a year. He voiced that difficulties arise from those who are not experienced enough in the area of arbitration. Mr. Turner remarked he would not want a pediatrician to operate on brain cancer, nor would he want a contract attorney to evaluate a broken foot. He continued, stating, “That was why NAR 7 was created by the [Nevada] Supreme Court and crafted so carefully, requiring 8 years of expertise in the area one planned to arbitrate in.” Mr. Turner acknowledged reasonable people can differ with the results of arbitrations, but overall, the system works well. He added he would be hesitant to select someone without the experience, and if the bill was enacted, there would be an increase of nova trials because the evaluations would be skewed.

Mr. Turner concluded his testimony with the issue of compensation. He said there have been a number of arbitrators who no longer arbitrate under the system. He added, “I would agree with Senator Porter that pro bono is good, but is more appropriate with children and charitable operations.” Mr. Turner stated he believed it would not be unreasonable to raise the amount of compensation to $125 per hour.

Richard Sipan, Concerned Citizen, testifying from Las Vegas identified himself as both a practicing attorney and an arbitrator. Mr. Sipan said he opposes S.B. 15.

Mr. Sipan referred to section 1, subsection 4, paragraph (a) of S.B. 15, “[The inference is] attorneys who practice in personal injury law are biased, yet my experience does not reflect that.” He continued, “If I perceive, as an arbitrator, that there is a conflict, I would inform the parties and remove myself from the case.” Mr. Sipan remarked he would not put his license in jeopardy over $650.

Mr. Sipan commented on the language of S.B. 15, “Provisions that prohibit an attorney whose practice involves matters relating to personal injury from acting as an arbitrator in an action relating to personal injury,” he said he believed the wording to be vague. Mr. Sipan said that from a constitutional standpoint the bill is a “bill of attainder.” Also, he said he believed there are equal protection concerns within the bill.

Mr. Sipan concluded his remarks saying the bill espouses “anti-specialization,” saying, “Let us take people who know little or nothing about personal injury cases, and make them arbitrators.”

Senator James closed the hearing on S.B. 15, and opened the hearing on S.B. 336 .

SENATE BILL 336: Adopts revised Uniform Arbitration Act. (BDR 3-1343)

Frank Cassas, Attorney, Reno identified himself for the record. Mr. Cassas referred to a memorandum presented (Exhibit F), which gives the highlights of a full report discussing the Uniform Arbitration Act (Exhibit G. Original is on file in the Research Library.). The full report includes the comments of the reporters and the sources professionals consult for interpretation, he said.

Mr. Cassas said the Uniform Arbitration Act (UAA) has been in the state of Nevada since the 1960s. He noted the UAA has under gone extensive review by scholars from various disciplines. Mr. Cassas stated he believed the most interesting aspect about the UAA is that it received extensive review from so many different facets of the legal community.

Mr. Cassas referred to page 3 of the memorandum (Exhibit F), noting the UAA has been endorsed by the American Arbitration Association, the National Arbitration Forum, The National Academy of Arbitrators, and by the full house of the American Bar Association and its individual sections.

Senator James asked Mr. Cassas to point out the major revisions. Mr. Cassas indicated one would be in the area of which disputes can be decided by arbitration, and how that decision is made. He said, “Oftentimes we get into a dispute of whether or not the parties have come to an agreement to arbitrate.” Mr. Cassas noted:

A typical example is a construction contract dispute between the owner and the contractor. The question is whether or not a subcontractor or engineer, who is not a party to the contract, should be brought into the proceedings. That raises an issue of arbitrability, a major issue. The question is who decides arbitrability, the arbitrator or the courts? There is a substantial body of law on the issue. But this revised Uniform Arbitration Act makes it clear that the threshold legal issue is for the courts and not the arbitrator.

Mr. Cassas said another issue of importance is the issue of disclosure, on the part of arbitrators. Mr. Cassas gave as an example an instance in which his firm represented a public entity in a dispute involving a large construction project, in which the asphalt failed. He said the arbitration clause was very old, and provided all parties were to appoint one arbitrator. The arbitrators that were selected were technical arbitrators, he added. Mr. Cassas stated his firm did not know what the relationships were among the parties because the arbitrators were from out of state, as were the witnesses and experts. Because of such situations, there is now a form that provides for disclosure of various relationships, testified Mr. Cassas.

Mr. Cassas continued referring to consolidation of arbitration proceedings, which he said is the rule in Nevada. He said, “Most states do not allow the consolidation of arbitration; . . . this is a part of the statute which will expedite proceedings and bring them together.”

Mr. Cassas said he recognized the award of attorney fees and punitive damages as an area where the statute is silent. He said, “This is one that I am in favor of because some cases get so big and so expensive.”

Senator James questioned, “But this does not change the law, on the American rule for attorney’s fees.” Mr. Cassas responded, “It does not change the rule, but if you ask an arbitrator under the present law to award attorney’s fees, most will rule they do not have the authority under the arbitration act.” Also, Mr. Cassas added, “The state law would allow punitive damages, the arbitrator would have that authority.”

Senator James remarked:

The language here surprised me because it says, section 28 (subsection 2) of S.B. 336, the “arbitrator may reward reasonable attorneys fees and other reasonable expenses of arbitration if such an award is authorized by law in a civil action involving the same claim or by agreement of the parties to the arbitrate proceedings.”

Senator James commented the language was unclear. He noted, “That would suggest that the parties would come into the proceedings and agree to the arbitrator that attorney fees can be awarded to the prevailing party.” However, Senator James suggested the drafters meant, “If there is a contract between the parties that provides for the shifting of litigation expenses, then the arbitrator can enforce it.” Mr. Cassas suggested the committee refer to the report (Exhibit G), for a full interpretation of the language.

Senator James also commented on the reference to punitive damages, “The statute is silent, but the case law is clear the courts have determined that it is against policy for an arbitrator to award punitive damages.” Mr. Cassas replied, even where attorney fees would normally be awarded, if it is not in the statute, arbitrators are reluctant to exercise the authority because the award may be overturned. Therefore, arbitrators keep their authority as closely defined as possible, he added.

Mr. Cassas continued, “This makes it clear that the arbitrator has the authority under the new statute.” Senator James asked for more legal analysis on his question about the punitive damages. Mr. Cassas explained the arbitrator has the same grant of authority to resolve a dispute that a judge would have. However, he added, “If you wanted to restrict that authority, then the parties are not put on the same footing in an arbitration proceedings as they would be in a legal proceeding.”

Senator James remarked:

However, because the law has been what it has been, they may have also been motivated by the desire to avoid punitive damages, which some people feel are subjective. Also, people see them as improvidently granted sometimes by juries, and so they would rather be in arbitration because it is a forum where punitive damages are not awarded. If I remember right, law school cases, saying that damages that are not compensatory, that are designed to make a statement, to punish someone, or to set an example, are not properly in the hands of an arbitrator, as the authority should lie with the court.

Mr. Cassas replied that Senator James was correct and said, “That was the state of the law when you and I went to law school.” However, he stated, the courts have stated that if the legislature decides the litigants are entitled to punitive damages, “why should not the arbitrator, resolving the same dispute, have the same authority?” The revised act decided on balance, he added.

Senator Care commented:

I have had breach of contract cases where what happens is there might be claim or counter claim that goes to fraud, and so you end up with a bifurcated case and go in front of the judge . . . Now, we have part of it in front of the judge, but the remainder of it, the contract claims, are before the arbitrator. But a judge has asked me, “What do we do about inconsistent judgments?” I have had to face the possibility of where there is no bifurcation, even though there are fraud claims, and it goes in front of an arbitrator. I am trying to think of an instance where an arbitrator would entertain punitive damages.

Mr. Cassas responded that an arbitrator would deal with punitive damages in the case where the claim was one that punitive damages would be awarded as a matter of state law. He added, “I am not comfortable of the analysis of the bifurcation.” Senator Care responded, “Maybe the problem is the way the arbitration agreements are drafted.” Senator Care noted he has seen language that says, “any dispute as to enforcement or to the interpretation.”

Richard Myers, Nevada Trial Lawyers Association, reintroduced himself and stated his association supports the bill.

Dana Bennett, Lobbyist, National Association of Independent Insurers (NAII), stated she opposed S.B. 336. Ms. Bennett referred to a memorandum from the NAII (Exhibit H), which outlined its opposition.

Senator James closed the hearing on S.B. 336.

Chairman James said there would be one committee introduction, Bill Draft Request (BDR) 8-453, requested by the Senate Committee on Judiciary.

BILL DRAFT REQUEST 8-453: Revises provisions of Uniform Commercial Code governing secure transactions. (Later introduced as Senate Bill 474.)

Chairman James asked for a motion to introduce.

SENATOR WIENER MOVED TO INTRODUCE BDR 8-453.

SENATOR PORTER SECONDED THE MOTION.

THE MOTION CARRIED UNANIMOUSLY.

*****

There being no other business, Chairman James adjourned the meeting at 11:00 a.m.

RESPECTFULLY SUBMITTED:

Heather Dion,

Committee Secretary

APPROVED BY:

Senator Mark A. James, Chairman

DATE: