Kay & Kay Contracting, LLC v. Tennessee Department of Transportation

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
May 19, 2010 Session
KAY AND KAY CONTRACTING, LLC v.
TENNESSEE DEPARTMENT OF TRANSPORTATION
Appeal from the Claims Commission for the State of Tennessee
No. 20081364-I William O. Shults, Commissioner
No. E2009-01769-COA-R9-CV - FILED JUNE 25, 2010
Kay and Kay Contracting, LLC (“Contractor”) entered into a contract with the Tennessee
Department of Transportation (“TDOT”) to build a bridge in Campbell County, Tennessee.
Contractor subsequently entered into a subcontract with Whitley County Stone, LLC
(“Subcontractor”) to provide the excavation and grading work on the project. Subcontractor
does not have a written contract with TDOT. Both Contractor and Subcontractor filed claims
with the Claims Commission alleging they were owed money by TDOT. Subcontractor was
dismissed as a party because it did not have a written contract with TDOT, as required by
Tenn. Code Ann. § 9-8-307(a)(1)(L). The Commissioner, however, determined that
Contractor was allowed to prosecute Subcontractor’s claim as a “pass-through” claim. The
sole issue on this interlocutory appeal is whether Tenn. Code Ann. § 9-8-307(a)(1)(L)
removes the State’s sovereign immunity such that Contractor can assert a “pass-through”
claim against TDOT on Subcontractor’s behalf. We conclude that sovereign immunity from
such a claim is not removed, and we reverse the judgment of the Claims Commission.
Tenn. R. App. P. 9 Interlocutory Appeal by Permission;
Judgment of the Claims Commission Reversed; Case Remanded
D. M ICHAEL S WINEY, J., delivered the opinion of the court, in which H ERSCHEL P. F RANKS,
P.J., and J OHN W. M CC LARTY, J., joined.
Robert E. Cooper, Jr., Attorney General and Reporter, Michael E. Moore, Solicitor General,
and Steven B. McCloud, Senior Counsel, Nashville, Tennessee, for the Appellant, Tennessee
Department of Transportation.
Spencer D. Noe and Timothy C. Wills, Lexington, Kentucky, and Laurie H. Hallenberg,
Knoxville, Tennessee, for the Appellee, Kay and Kay Contracting, LLC.
OPINION
Background
The relevant facts for purposes of resolving this interlocutory appeal are
undisputed. Contractor entered into a written contract with TDOT for the grading, drainage,
and construction of a concrete Bulb-Tee beam bridge on Interstate 75 in Campbell County,
Tennessee. The initial estimated cost of the project was in excess of $10.2 million.
Subsequently, Contractor entered into a separate contract with Subcontractor for the
excavation and grade work on the project. The estimated cost of the excavation and grading
work was in excess of $3.1 million.
According to Contractor, problems developed during the construction of the
bridge, resulting in several adjustments to the contract price. After TDOT allegedly
defaulted on payment for various portions of the project, both Contractor and Subcontractor
filed a claim with the State of Tennessee, Division of Claims Administration. In September
2008, the claim was transferred to the Tennessee Claims Commission. Approximately one
month later, Contractor and Subcontractor filed a complaint with the Claims Commission
against TDOT. According to the complaint, Contractor was owed $298,751.41, and
Subcontractor was owed $199,746.63.1
TDOT filed an answer and denied any liability to either Contractor or
Subcontractor. TDOT also filed a motion to dismiss Subcontractor’s claims on the basis that
the Claims Commission did not have subject matter jurisdiction over Subcontractor’s claim
because there was no written contract between TDOT and Subcontractor.
Although the Commission agreed that Subcontractor was not a proper party to
the lawsuit in the Claims Commission, the Commission nevertheless concluded that
Contractor could pursue Subcontractor’s claim by asserting what is referred to as a “pass-
through” claim. According to the Commission:
The legal issue is whether or not a general contractor
involved in a large state highway construction project can assert
a claim on behalf of one of its subcontractors against the State.
1
Contractor also requested additional relief, including an order granting Contractor “329 days of
additional time under the Contract and to terminate TDOT’s assessment of liquidated damages” against
Contractor.
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In contracts involving the federal government, as well as
nineteen (19) states which have addressed such a problem, this
sort of issue has been denominated as a “pass-through” claim.
* * *
According to the State’s position, the Commission lacks
jurisdiction here over [Subcontractor’s] claim since the General
Assembly of Tennessee, per the waiver of the State’s sovereign
immunity against contractor suits, has limited the right to
institute such causes of actions to those entities having a written
contract with the State. Here, so the argument goes,
[Subcontractor] does not have a written contract with the State
and therefore its claim for work it claims it performed, but for
which it has not been paid in full, cannot proceed before the
Commission. Additionally, the State argues that the general
contractor cannot assert such a claim - a so called “pass-through
claim” - on behalf of [Subcontractor]. Rather, the State
contended . . . [that Subcontractor should sue Contractor and] if
a final judgment is rendered . . . against [Contractor], it could,
in turn, file a claim with the Commission.
In its Response to the Motion to Dismiss, [Contractor]
concedes that under the Tennessee Claims Commission Act,
[Subcontractor] is not a proper party to this action.
Nevertheless, [Contractor] says it should be able to pursue, on
behalf of its subcontractor, a claim for work done which was an
important part of its overall contract on the . . . project. Such a
procedure would constitute utilization of the “pass-through”
theory recognized in federal government contracts and
apparently by at least eighteen of the states. In support of its
position, [Contractor] cites the United States Supreme Court
decision in United States v. Blair, 321 U.S. 730 (1944) and
quotes language from that opinion describing the general
contractor there as “. . . the only person legally bound to perform
[the] contract with the Government.” Id. at 737-738. . . .
Both parties informed the Commission that they have
been unable to find any precedent directly on point in Tennessee
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either permitting or disallowing a so-called “pass-through”
claim by a general contractor for one of its subcontractors.
The Commission then discussed federal law and law from other states, the vast
majority of which permit “pass-through” claims. After reviewing the law from other
jurisdictions, the Commission concluded that there clearly was a written contract between
TDOT and Contractor, and allowing Contractor to pursue a claim on behalf of Subcontractor
would not offend “the concept of sovereign immunity in Tennessee since the Tennessee
Claims Commission Act . . . [was amended] to direct a liberal application of its provisions
in order that its remedial purposes might be accomplished.” The Commission then
concluded:
Therefore, the Commission FINDS that although
[Subcontractor] is not a proper party to this litigation and
therefore, will be DISMISSED, the issue of [Contractor’s]
liability for nearly Two Hundred Thousand Dollars
($200,000.00) in payments allegedly owed to [Subcontractor] is
ripe for resolution now and may be prosecuted by [Contractor].
The State’s Motion to Dismiss [Contractor’s] claim on
behalf of [Subcontractor] must be respectfully DENIED. . . .
After entry of the above Order, TDOT filed a motion requesting permission to
file an interlocutory appeal to this Court on the issue of whether Tenn. Code Ann. § 9-8-
307(a)(1)(L) removes the State’s sovereign immunity for pass-through claims. The
Commission granted TDOT’s request for a Tenn. R. App. P. Rule 9 interlocutory appeal, as
did this Court. As stated, the sole issue on appeal is whether Tenn. Code Ann. § 9-8-
307(a)(1)(L) removes the State’s sovereign immunity such that Contractor can assert a “pass-
through” claim against the State on Subcontractor’s behalf.
Discussion
Since the relevant facts are undisputed, this appeal presents a question of law.
We review legal issues “under a pure de novo standard of review, according no deference to
the conclusions of law made by the lower courts.” Southern Constructors, Inc. v. Loudon
County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).
In Stewart v. State, 33 S.W.3d 785 (Tenn. 2000), our Supreme Court gave a
very thorough analysis of the subject matter jurisdiction of the Claims Commission.
According to the Supreme Court:
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It is a well-settled principle of constitutional and statutory
law in this state that “[t]he State of Tennessee, as a sovereign,
is immune from suit except as it consents to be sued.”
Brewington v. Brewington, 215 Tenn. 475, 480, 387 S.W.2d
777, 779 (1965). This doctrine of sovereign immunity “has been
a part of the common law of Tennessee for more than a century
and [it] provides that suit may not be brought against a
governmental entity unless that governmental entity has
consented to be sued.” Hawks v. City of Westmoreland, 960
S.W.2d 10, 14 (Tenn. 1997). Despite this general grant of
immunity, however, the courts of this state have frequently
recognized that the Tennessee Constitution has modified this
rule of absolute sovereign immunity by providing that “[s]uits
may be brought against the State in such manner and in such
courts as the Legislature may by law direct.” Tenn. Const. art.
I, § 17; see also Kirby v. Macon County, 892 S.W.2d 403, 406
(Tenn. 1994).
Pursuant to its constitutional power to provide for suits
against the state, the legislature created the Tennessee Claims
Commission in 1984 to hear and adjudicate certain monetary
claims against the State of Tennessee. See Tenn. Code Ann.
§§ 9-8-301 to 307 (1999). While the Claims Commission has
exclusive jurisdiction to hear claims arising against the state, cf.
Tenn. Code Ann. § 20-13-102(a) (1994), this jurisdiction is
limited only to those claims specified in Tennessee Code
Annotated section 9-8-307(a). If a claim falls outside of the
categories specified in section 9-8-307(a), then the state retains
its immunity from suit, and a claimant may not seek relief from
the state. Cf. Hill v. Beeler, 199 Tenn. 325, 329, 286 S.W.2d
868, 869 (1956) (stating that “except as the Legislature of the
State consents there is no jurisdiction in this Board of Claims to
entertain suits against the State”).
The courts of this state have traditionally held that any
statute granting jurisdiction to hear a claim against the state
must be strictly construed, as any such statute is in derogation of
the common law rule of sovereign immunity. See, e.g., Norman
v. Tennessee State Bd. of Claims, 533 S.W.2d 719, 722 (Tenn.
1975) (“We further recognize that the statutory provisions
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governing the Board of Claims have been strictly construed, in
view of the fact that they do represent an encroachment upon the
sovereign immunity and upon the assets of the State.”); State ex
rel. Allen v. Cook, 171 Tenn. 605, 609, 106 S.W.2d 858, 860
(1937) (“Statutes passed by the Legislature, under the authority
of article 1, section 17, of the Constitution, permitting suits
against the state, being in derogation of the sovereign’s
exemption from suits, must be strictly construed.”).
Nevertheless, in 1985, the General Assembly amended section
9-8-307(a) to express its intention as to the jurisdictional reach
of the Claims Commission: “It is the intent of the general
assembly that the jurisdiction of the claims commission be
liberally construed to implement the remedial purposes of this
legislation.” Tenn. Code Ann. § 9-8-307(a)(3).
Hence, although we have traditionally given a strict
construction to the scope of the Commission’s jurisdiction, we
also recognize that our primary goal in interpreting statutes is
“to ascertain and give effect to the intention and purpose of the
legislature.” Gleaves v. Checker Cab Transit Corp., Inc., 15
S.W.3d 799, 802 (Tenn. 2000) (citing Carson Creek Vacation
Resorts, Inc. v. State Dep’t of Revenue, 865 S.W.2d 1, 2 (Tenn.
1993)). If the legislature intends that its statutes waiving
sovereign immunity are to “be liberally construed,” then the
courts should generally defer to this expressed intention in cases
where the statutory language legitimately admits of various
interpretations. A policy of liberal construction of statutes,
however, only requires this Court to give “the most favorable
view in support of the petitioner's claim,” Brady v. Reed, 186
Tenn. 556, 563, 212 S.W.2d 378, 381 (1948), and such a policy
“does not authorize the amendment, alteration or extension of its
provisions beyond [the statute’s] obvious meaning.” Pollard v.
Knox County, 886 S.W.2d 759, 760 (Tenn. 1994). Moreover,
“[w]here a right of action is dependent upon the provisions of a
statute . . . we are not privileged to create such a right under the
guise of a liberal interpretation of it.” Hamby v. McDaniel, 559
S.W.2d 774, 777 (Tenn. 1977).
Accordingly, when deciding whether a claim is within the
proper statutory scope of the Commission’s jurisdiction to hear
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and decide claims against the State of Tennessee, we will give
a liberal construction in favor of jurisdiction, but only so long as
(1) the particular grant of jurisdiction is ambiguous and admits
of several constructions, and (2) the “most favorable view in
support of the petitioner's claim” is not clearly contrary to the
statutory language used by the General Assembly. Cf.
Northland Ins. Co. v. State, 33 S.W.3d 727, 730 (Tenn. 2000)
(“The statute’s liberal construction mandate allows courts to
more broadly and expansively interpret the concepts and
provisions within its text.”). Furthermore, because issues of
statutory construction are questions of law, see Wakefield v.
Crawley, 6 S.W.3d 442, 445 (Tenn. 1999); Jordan v. Baptist
Three Rivers Hosp., 984 S.W.2d 593, 599 (Tenn. 1999), we
review the issues involving the jurisdiction of the Claims
Commission de novo without any presumption that the legal
determinations of the commissioner were correct. See
Northland Ins. Co., 33 S.W.3d at 729; Ardis Mobile Home Park
v. State, 910 S.W.2d 863, 865 (Tenn. Ct. App. 1995).
Stewart, 33 S.W.3d at 790-91 (footnote omitted)
In reaching a conclusion that pass-through claims were permissible in
Tennessee and consistent with Tenn. Code Ann. § 9-8-307(a)(1)(L), the Commission relied
heavily upon the case of Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605(Tex. 2004), wherein the Texas Supreme Court answered the following certified question in
the affirmative: “Does Texas recognize pass-through claims, i.e., may a contractor assert a
claim against an owner on a subcontractor’s behalf when there is no privity of contract
between the subcontractor and the owner?” Id. at 607. In concluding that Texas did
recognize pass-through claims, the Texas Supreme Court discussed the various policy factors
both in support of and against allowing such claims. The Texas Supreme Court ultimately
concluded that Texas would allow pass-through claims based on the policy reasons which
favored allowing such claims. Id. at 619. Ironically, the Texas Supreme Court refused to
answer the specific question that is now posed to this Court for review:
The City argues that, before a pass-through claim against
a governmental entity can be recognized, there must be a waiver
of sovereign immunity. ICC responds that, to the extent the City
asserts that ICC’s breach of contract claims are barred by
sovereign immunity, such arguments are outside the scope of the
question certified by the Fifth Circuit. ICC also argues that the
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City did not mention sovereign immunity in its brief filed with
the Fifth Circuit, nor did the City plead sovereign immunity in
its answer filed in district court.
Although the questions certified do not limit our answers,
we decline to extend our answers in this case to the issue of
sovereign immunity, which is well beyond the scope of the
questions certified. Doing so would require us to venture into
the facts of this particular case and analyze the merits of the
parties’ claims at issue before the Fifth Circuit Court of
Appeals, rather than provide answers solely as to the status of
Texas law on the questions asked. For this reason, we confine
our answers to the questions certified. How our answer is to be
applied to the facts of this case is the province of the certifying
court. See Amberboy v. Societe de Banque Privee, 831 S.W.2d
793, 798 (Tex. 1992).
City of Dallas, 135 S.W.3d at 620.
The Tennessee statute removing the State’s immunity for claims against the
State based upon breach of contract provides, in relevant part, as follows:
(a)(1) The commission or each commissioner sitting individually
has exclusive jurisdiction to determine all monetary claims
against the state based on the acts or omissions of “state
employees,” as defined in § 8-42-101(3), falling within one (1)
or more of the following categories:
* * *
(L) Actions for breach of a written contract
between the claimant and the state which was executed
by one (1) or more state officers or employees with
authority to execute the contract . . . .
Tenn. Code Ann. § 9-8-307(a)(1)(L) (Supp. 2009) (emphasis added).
All parties to this appeal agree that Subcontractor does not have a written
contract with TDOT and, therefore, it is not a proper party to this lawsuit. Thus, the
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Commission’s dismissal of Subcontractor as a party was correct. The more difficult issue
is whether Contractor can assert a pass-through claim on Subcontractor’s behalf.
Tenn. Code Ann. § 9-8-307(a)(1)(L) is quite clear in requiring a written
contract with the State before immunity from suit is removed. The statute is neither
ambiguous nor reasonably open to several constructions. By allowing Contractor to assert
a pass-through claim on Subcontractor’s behalf, Contractor is asserting a breach of contract
claim on behalf of a party that everyone agrees does not have a written contract with TDOT.
This is contrary to the plain language of the statute.
We agree with the Commissioner that there are several sound policy reasons
which mitigate in favor of allowing pass-through claims. It is, however, the General
Assembly’s prerogative to determine the State’s public policy as to allowing suits against the
State, not this Court’s, and the General Assembly has done so. If the General Assembly
concludes that the public policy of this State is such that pass-through claims against the
State should be allowed, then the General Assembly can amend Tenn. Code Ann. § 9-8-
307(a)(1)(L) to permit such claims.
We acknowledge that we must give Tenn. Code Ann. § 9-8-307(a)(1)(L) a
liberal construction. However, in so doing we cannot amend, alter, or extend the statute
beyond its obvious meaning. Stewart, 33 S.W.3d at 791. The obvious and ordinary meaning
of requiring a “written contract between claimant and the state...” is not susceptible of more
than one meaning. A contract is either written or it is not. If we allow pass-through claims,
then we are allowing a party to sue the State and prosecute the claim of a different entity that
has no contractual relationship with the State. This is contrary to the clear and unambiguous
language of the statute requiring a written contract between the claimant and the State before
the State can be sued for breach of contract. We again note that if the General Assembly
believes that allowing pass-through claims is in the State’s best interest and public policy
favors allowing such claims, we invite the General Assembly to amend the relevant statutory
provisions to expressly allow such claims.
It is important to emphasize the scope of our holding. Our opinion applies only
to pass-through claims wherein subject matter jurisdiction is predicated on the removal of
the State’s immunity pursuant to Tenn. Code Ann. § 9-8-307(a)(1)(L). We express no
opinion on whether pass-through claims otherwise are permitted in Tennessee in other
contexts.
We also note that our holding does not allow TDOT to escape liability if
Subcontractor has a valid claim. The scope of TDOT’s contractual liability on this project
is controlled by its written contract with Contractor. The contract between Contractor and
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Subcontractor cannot expand TDOT’s liability under the original contract. As noted by the
Commission in this case:
The actual work to be performed by [Contractor] is literally
contained within the terms of the Prime Contract between the
State and [Contractor]. Paragraph 1(b) of the Contract . . .
incorporates by reference the Proposal Contract which, in turn,
in Item D of the Contract Schedule, at page 10, includes
precisely the work . . . which [Subcontractor] contends it
completed but was not paid in full for doing.
If TDOT’s liability for work performed by Subcontractor is dependent on the terms of
TDOT’s contract with Contractor, then Contractor can sue TDOT directly for any alleged
breach of that contract.
Conclusion
The judgment of the Claims Commission is reversed and this cause is
remanded to the Claims Commission for further proceedings consistent with this Opinion and
for collection of the costs below. Costs on appeal are taxed to the Appellee, Kay and Kay
Contracting, LLC.
________________________________
D. MICHAEL SWINEY, JUDGE
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