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Coordinated to make your research easier! West's Arkansas Digest is your fast. efficient index to Arkansas state and federal case law and. through West's exclusive Key Number System. to the entire body of American case law. West's Arkansas Cases is your handy source of cases from the Arkansas Supreme Court and Court of Appeals. South Western Reporter" Advance Sheets provide you with the latest decisions for up-ta-date research. Find out more about coordinated research through West Publishing Company books. Contact your West representative or call

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By Charks B. Roseopl By Harry Ehrmberg, jr.

Retirement Income Dynamics






By William A. Martin



By Greg jonel



By Victor A. Fkming

Sara Landis Rebecca Benton



ARKANSAS HAR ASSOCIA liON ~oo \X. \larkham I itll" ROLk. Arka",." -2201






Arkansas Bar Association EDITOR & ART DIRECTOR

Paige Beavers Markman Director ofCommunications COPY EDITORS

Mediation & Arbirradon from the Anomer's Perspccrive

JAMES H. MCKENZIE: The Evolution of a President By Paig~



Meet Jim McKenzie, the lawyer, the leader, as he becomes President of the Arkansas Bar Association. Photos by Dixie Knight



Sanford &shear


William Clay Bmi! Thomas M. Carpc'm~r Daniel R. Caner Carolyn J. Clegg Boyce R. Davis John N. Fogleman 5rephen A. Geigle


By jerry Schwartz

Financial Planning: The Business Side of the Practice

OFFICERS James H. McKenzie President John P. Gill President-Elect Rodney E. Slater Secretary -Treasurer John C. Everett Executive Council Chair William A. Martin Executive Director Judith Gray Assistant Executive Director

By john D. Rothman

Ike Allen Laws, Jr. Roberr Lynn Lowery E. Lamar Penw Jerry C. Post J. Thomas Roy Eddie H. Walker. Jr.

Robert E. Young

EX-OFFICIO James H. John P. Gill

Charles B. Roscopf Rodney E. Sla(cr John C. Everen Lynn Williams


Surety Bonds for Construction Projects: PirfaIls & Solutions By David G. Paul


Mechanics' & Materialmen's Liens: A Practitioner's Checklist for Filing A Lien By Swan Gunur


Unilateral Mistakes in Bids for Construction Contracts By jack East III

The Arkilnsas uwyer (USPS 546-Q40) is published quarterly by the Arkansas B.,r Association. Second class postage paid al Little Rock, Arkansas. POSTMASTER: send address changes to The Arkansu Lawyer. 400 West Markham, Little Rock, Arkansas 72201. Subscription price to non-members of the Arkansas Bar Association $15.00 per year and 10 members SIO.oo per year included in annual dues. Any opinion expressed herein is that of the author, and not necessarily that of the Arkansas Bar Association or The Ark.lnsu uwyer. Contributions 10 The Arkan~s uwyer are welcome and should be sent in two copies to EDITOR, Arkansu uwyer< 400 West Markham. Uttle Rock. Arkansas 71201. All inquiries regarding advertising should be sent to The Arka.n5a.s uwyer at the above address.


Study the Past, But Look to the Future At the front of the National Archives building in Washington, D. c., are two monuments which bear inscriptions "Past is Prologue" and "Study the Past." In preparing this article it would be an easy task simply to recount the events of the past year, but I am not one to dwell on the past except as it may provide insights into the future. For members, those who contributed and those with interest, it would be dull and redundant. For the disinterested it would be a waste of time. Therefore in this final article, I would like to offer some observations on the future rather than to review the past. There are several areas where J believe the Bar Association can be of greater service, not only to the profession, but to the judicial system itself. PROFESSIONALISM: Jim McKenzie has already indicated that professionalism will be highlighted during his administration. I commend him for selecting this area for emphasis. The legal profession has lost considerable stature because of the decline of professionalism. If we are to restore respect for our profession we must act like professionals, not only in our public endeavors but with each other and with the judges. We must establish standards for obtaining legal business that do not demean the importance of our profession in the social structure. Those standards should be vigorously enforced. When dealing with people it is hard to gain'desirable improvements, but we should strive to create a camaraderie among Arkansas lawyers. With camaraderie comes respect and civility. Many bars are creating creeds and pledges of professionalism, not disciplinary codes but statements establishing standards of civility, not only with clients and judges, but also with fellow lawyers. We need such a creed in Arkansas. JUDICIAL DEPARTME T: The Judicial Department is one of the three branches of state government. It deserves equal treatment with the executive and legislative. The department that provides the machinery to maintain law and order in our society is grossly underfunded. It is like an abandoned child, buffeted between state and county government. The trial courts are funded on all.



I BY CHARLES B. ROSCOPF I antiquated and parochial system. Those judicial districts that have strong representation in the General Assembly receive better treatment - smaller district, more judges, more support staff. We have judges in tnis state who don't have secretaries or adequate office space and equipment. If we are to keep good judges, we must aid them in their efforts to obtain adequate compensation. The Chief Justice should not assume the role of a beggar each session of the legislature. This association should act as all. advocate and intermediary for the courts. Arkansas provides less than one percent of its resources to fund the most important department of state government. Statistics place us dead last in judicial funding. Education, health and public welfare are all worthy recipients of state largesse, but without all. effective, efficient and well supported judiciary the benefits of eduction, health, etc., are diluted by a society in disorder. Our association should establish a strong committee to act as researcher and spokesman for the judiciary. WOME A 0 MINORITIES It is hard to change ingrained attitudes. Time is one of the greatest healers, but the healing period can be accelerated with attention. The Association owes it to our women and minority lawyers to heighten sensitivity to their plight. The women and minority members of the association have made substantial contributions to the success of the Association.



The Arkansas Bar Association should provide a haven for all lawyers of every sex and race. We should hasten the day when separate associations for women and African-Americans are felt unnecessary. While the white male members of the Association are shedding their biases and smoothing the edges, the women and minority members should be removing chips and decelerating the level of protest. After all, we're all equal members of this profession and are entitled to be accorded the civility expected of any true lady or gentleman. CRIMINAL DEFENSE FOR INDIGENTS: The organized bar for too long has overlooked to hardships disproportionately imposed on the young lawyers of this state. We have stood idly by and ignored their financial rape. Certainly, the lawyers of this state have a responsibility to provide pro bono legal services. I suggest that the lawyers of this state provide more pro bono services than any other profession or licensed nonprofessional. There is a good likelihood that the Arkansas Supreme Court will join our sister states and declare unconstitutional the present method of compensation. But even that historic decision will not solve the problem. It will simply shift the issue to a new forum - to the Arkansas General Assembly. When the issue reaches the General Assembly, the Bar Association should take an active role in formulating a fair and just method of compensating the lawyers of this state for representing criminal indigents and to spread the responsibility as it should be spread, among the tax payers of the state of Arkansas. FINIS: Mary Anne an"d I are grateful to the membership of the Arkansas Bar Association for allowing us to be its ambassadors for the past year. It has certainly been a highlight in the career of a small town country lawyer. Without naming them (they know who they are) I am grateful for the cooperation which I have received. The staff of the Arkansas Bar Association, in my opinion, has no peers. To my partners, secretaries and office staff, I simply say that "I could not have done it without you,"

1 9 9 1

RtTIRtMINT INCOMI DYNAMIC~ Money. It doesn't come with an owner's manual. Personal finance is not taught to any great extent in our entire educational system. Thus, we are left to make one of our greatest financial decisions, that involving our retirement, as a "do it yourself project." To make matters worse, this "do it yourself project" doesn't come with a set of instructions, and the result is an economic nightmare for many Americans. In light of this situation, the Federal Government has, over the years, enacted a myriad of legislation to protect the retired population. Unfortunately, each law has also made the retirement planning process more complex. The purpose of this article is to prOVide you, the attorney, with a basic understanding of the dynamics which affect an individual's retirement income. The benefit to you is both professional and personal; i.e., in the advice you provide your client, as well as in planning for your own

KY fI,\RR) 1..1 flRI .\KI RC, IR, CLlI retirement.

This article will examine the following issues: 1. The amount of retirement income a retired person will need to maintain their pre-retirement standard of living, and 2. The intricacies and relationships of the following sources of retirement income: Social Security, Private Pension Plan Benefits, Personal Savings and Investments ADEQUATE RETIREMENT INCOME The President's Commission on Pension Policy has made recommendations regarding the amount of retirement income a retired person will need to maintain his/her preretirement standard of living. These are summarized in Chart 1. The reduction in needed retirement income is due primarily to


Retirement Income Required To Maintain Pre-Retirement Standard of Living Gross Pre-Retirement Income 10,000 20,000 30,000 50,000

Equivalent Retirement Income Dollars Percentage

7,786 13,185 18,062 27,384 Source: President's Commission On Pension Policy

78% 66% 60% 55%

three factors: decreased taxes, termination of work-related expenses and discontinuation of contributions to savings and investments programs. SOCIAL SECURITY Social Security, which provides a retired family up to 75% of that family's pre-retirement income, grew out of the economic and social conditions of the mid 1930's, the Depression era. It still reflects a time when families had one breadwinner, the "man of the house," and it was not unusual to have three generations living under one roof. It further reflects a non-mobile society, one where people often lived their entire lives in only one community. Social Security was designed to prOVide a retirement income to the worker and his (remember this was 1937) wife. The wife's benefit was equal to one half of her husband's benefit. After her husband died, the widow moved in with her children to help with the grandchildren (assuming she and her husband had not been living with their children prior to his death). The reduction in Social Security Retirement Income did not impose any particular financial hardship on her because she relied on her children. Because Social Security is currently a large percentage of most families' retirement income, it cannot be taken for granted. For most retirees, it is the only retirement income that increases to keep pace with inflation. For those reasons, the most pressing concern regarding

Sources of Retirement Income At Retirement

15 Years After Retirement






Social Security 33%




Social Security


Prepared by: Harry L. Ehrenberg & Associates, Inc. Social Security is the financial hardship which will result at the death of the retired worker. Chart 2 illustrates the significance of Social Security over time. Assuming that 40% of a family's retirement income is initially derived from Social Security, because of inflation, it will increase to provide 56% of the family's income over a IS-year period of time. If this family was a one income family prior to retirement, one-third of its Social Security 09%

of their entire income) will cease at the death of the retired worker. It should be noted that the age at which Social Security begins to provide full retirement benefits will be delayed from age 65 to age 67. This change will be phased in for those who were born on or after 1938. PRIVATE PENSION PLANS Private pension plans provide a different set of financial considerations, as contrasted to Social Security, and Chart 3 illustrates the

alternative distribution decisions which must be addressed. Defined Benefit plans usually provide only a monthly retirement benefit. Consequently, the most important decision for the retiring employee is to determine the most efficient method of financing a survivor benefit for his/her spouse. Prior to 1984, a retired worker was not required to prOVide his/her spouse with a survivor benefit. This, coupled with the loss of a retired

Pension Plan Distribution Alternatives Retirement Account or Lump Sum Distribution

Income Distribution


or Taxable

Survivor Benefits



or Income Averaging

Minimum Distribution

Income Distribution



No Survivor Benefits

Prepared by: Harry L. Ehrenberg & Associates, Inc. 6





No Survivor Benefits

worker's Social Security benefit,

impact of taxes on a lump sum

smallest source of income for most

could leave a surviving spouse

distribution. This decision should be balanced between the tax savings of an 1.R.A. rollover and the investment restrictions and distribution requirements of an I.R.A.. If the worker selects the I.R.A. rollover alternative, he/she must decide how and when to start taking the distribution. For example, the worker who is not dependent on the I.R.A. for income may want to defer

retired people. However, their savings and investments can play havoc with their Social Security. Most people do not realize that up to one half of their Social Security benefits will be taxed if their income (including one half of their Social Security benefit and all of their tax free municipal bond interest income) exceeds $25,000. In cases where taxpayers file jointly, this amount increases to $32,000.

destitute. This is one of the reasons that the average income for a nonmarried retired person is 61 % less than the average income for a

married retired couple according to the U.s. Department of Health and Human Services' publication, Income Resources of the Population 65 and Over. Current law no longer allows a retired person to "disinherit" his/her spouse without the spouse's consent. Moreover, it is now assumed that the worker desires to take a reduced retirement income in order to provide

a survivor benefit for his/her spouse equal to at least 50% of the worker's retirement income. It should be noted that this is, ho'wever, only an assumption and it is not mandatory for the retiring worker to provide a survivor benefit from his/her pension plan. The need to provide a survivor benefit will be a function of the retiring employee'S savings, investments and life insurance programs.

Defined Contribution plans and profit sharing plans usually provide the retiring worker the choice of either taking a lump sum distribution or receiving a monthly retirement benefit. If the worker is allowed to take a lump sum distribution, he/she must decide whether (I) to pay taxes on the entire distribution in the year it is received, or (2) to defer paying taxes on the distribution by rolling it over into an I.R.A .. If a retiring worker does elect a taxable lump sum distribution, he/she may be eligible for capital gains and/or income averaging. Chart 4 illustrates the

receiving any distribution until age

701/2. Upon attaining 701/2 the retiree will have several distribution alternatives from which to choose. On the one hand, the retiree can elect to take a minimum distribution which will produce an initial income less

than the interest income the I.R.A. is earning. As a result, a portion of the account's interest income will continue to grow, income tax deferred. On the other hand, the retiree can elect to take a level income over his/her life expectancy. Under this option, an annuity can be purchased from a life insurance company or withdrawals can be made based on a reasonable interest rate and the average life expectancy of a person the retiree's age. Unless the retiree purchases an annuity from an insurance company, there is a risk

that the retiree will outlive the retirement income if he/she lives longer than the estimated life expectancy. In either case, the retiring employee is faced with the same survivor benefit issues as discussed

If a retired person is accumulating

his/her interest income (as opposed to using it as a supplement to other retirement income) consideration

should be given to purchasing savings bonds and deferred annuities. Both of these financial instruments can provide tax deferred growth which will not cause Social Security benefits to be taxed. CONCLUSION To have a financially secure retirement requires a great deal of planning and preparation. Not the type of planning that begins a few months before you take down your shingle, but instead, it requires planning that starts closer to the time the kids are graduating from school. Charles Dickens' quote "It was the best of times, it was the worst of times," may have been an excellent way to reflect upon pre-revolutionary France, but it is certainly not the way one wants to reflect upon their retirement years. The choice is yours. If your retirement is to be the best of

times, take the time to plan for it now.


SAVINGS AND INVESTMENTS SaVings and investments are the


Tax Alternatives on Lump Sum Distributions o Special Tax Treatment

5 Year Average

10 Year Average

I.R.A. Rollover Exclusion

Lump Sum Distribution Tax

250,000 101,718

250,000 65,524

250,000 59,172


Available to Invest





Harry L. Ehrellberg, Jr., CLU, attellded the Ulliversity of Arkallsas at Fayetteville where he majored ill Finance/Insurance. He received his Chartered Life Ullderwriter (CLUJ desigllatioll ill 1977. He is the oWller of Harry L. Ehret/berg & Assoc., IIIC., a life i"surance agency and ;s a registered represelltative of O. N. Eqllity Sales. He has beell qualified as au expert ill regard to retirement bellefits alld has expertise ill the desigll, lIegotiatioll alld fillallcillg of strllctured settlemellts.





Curtis R. Duvall of Texarkana died in April. He was a former Prosecuting Attorney for Grant County. Duvall was a World War II Navy veteran and a member of the American Legion. He was a retired general claims agent for the 51. Louis Southwestern Railway Company and a member of the First United Methodist Church, where he served on the Board of Directors. Survivors include his wife, Ruth Duvall, two sons, Ralph Duvall of Dallas and Phillip Duvall of Texarkana and one daughter, Janet Ruth Lewis of New Market Indiana. Memorials may be made to the First United Methodist Church Family Life Center.


William Roy "Bill" Mitchell of Hot Springs died in May. He was an Louis J. Raffaelli of Texarkana died attorney with the Lewis-Mitchell Law in May. He practiced with the law Firm and was a former Deputy firm of Raffaelli & Howell and was a Prosecuting Attorney and Municipal former Bowie County District Judge. Mitchell was Past President of the Garland County Bar Association, Attorney. Raffaelli was a member of the Past President of the Hot Springs Texas and Arkansas Bar Associations Lions Club, served on the Board for and was President of Lawyers Title Retarded Children of the First Step Insurance Corporation. He was a School and was an Outstanding member of Sacred Heart Catholic Alumnus of the University of Arkansas at Fayetteville. Mitchell served in Church. Survivors are his wife, Mary Lou the Judge Advocate Corps and later Lineberger Raffaelli, a son, Gregory S. became a full Colonel in the Army Raffaelli of Texarkana, a daughter, Judge Advocate Corps, supervising Shannon Raffaelli of Texarkana, his Advocate units in Arkansas, Oklahoma, Texas, and Louisiana. mother, three brothers and a sister.



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IfYou Knew, What Difference Would it Make? If you knew answers to improper

interview questions when hiring a new lawyer what difference would it make? Would you apply stereotypes instead of evaluating the individual? During discussions at a program conducted by our Opportunities for Women and Minorities Committee this spring at the law school in Fayetteville, it became painfully obvious that discriminatory hiring practices are still very much alive in Arkansas. Major statistical proof included included women in the upper part of the class being offered jobs with law firms at a much slower rate than men with similar academic records. A look at law firms shows few minority associates and very very few partners. Anecdotal sharing revealed either blatant disregard by interviewing lawyers of the rules growing out of TItle 7 of the Civil Rights Act of 1964 against asking prospective employees (seemingly always women) about marital status, plans to have children and similar personal information or transparent ruses to get information. The student knew what was happening, felt violated, had doubts whether the firm was a good place to work and was left with the dilemma of whether to answer or remind the interviewer that such questions were not permitted. The interviewer often had no idea of the image he (always he) was creating of representing a firm of Neanderthals who were unwilling to abide by nondiscrimination portions of employment laws, who found using stereotypes about women with families not being as dedicated or as available for work as men was easier than thinking about the abilities of the woman and what she could contribute through her legal training and ability and who were unable to recognize that their firms risk being left behind if their associates do not reflect the diversity of today's society.

I BY WILLIAM A, MARTIN Certainly not everyone is this way. One woman graduate with an outstanding record told me of being selected as an associate by a moderate size firm who confided that they were concerned that a number of women clients or potential clients were turned off by a dozen or so white males who might lack empathy for their particular problems. As more and more women and minorities succeed in business, as they control a larger share of society's assets, as they become more able to select lawyers who look like them, the firms who do not have women and minority members are going to be left behind. How did we get this way? What do we do? What will be the result? I look to the words of that great theologian and observer of human nature who left us many profound thoughts hidden within the lyrics of musical plays, Oscar Hammerstein II. In South Pacific we are told: "You've got to be taught to be afraid of people whose eyes are oddly made and people whose skin is a different shade, you've got to be carefully taught, you've got to be taught before i~s too late, before you

are six or seven or eight, to hate all the people your relatives hate." I carry the baggage of being raised in south ArkanS<;1s in the thirties and forties when the white establishment never even questioned our biases. Without my teachers realizing what they were doing, I was carefully taught. The best I, and many of my generation, can ever hope to be is, as Pat Lynch described himself, a recovering bigot. Recovery does not come unless we work at it both individually and with groups like our Committee on Opportunities for Women and Minorities. The establishment has so long discriminated against and been insensitive to the needs of women and minority lawyers that they are suspicious of even the good faith efforts of the former discriminators to change themselves and the profession. Whether the motivation is to do right or because it makes good business sense now to be inclusive, all of us need to act as if the efforts will succeed. Then they have a much better chance. As the king sang in "It's a Puzzlement:" "Unless someday somebody trusts somebody, there'll be nothing left on Earth excepting fishes." Where will this all come out? Hillary Rodham Clinton says when she was asked to Chair the American Bar Commission on Opportunities for Women she first thought she was being asked to address problems that were solved in the sixties. As she got into the work she found the problems, especially the glass ceiling preventing advancement, are still here. We are making progress but improvements and solutions take longer than they should. Even when we are frustrated because too little changes and even that change is too slow we have to keep trying, like the nurse Nellie Forbush from Little Rock singing "Cockeyed Optimist" in South Pacific: "1'01 stuck like a dope with a thing called hope and I can't get it out of my heart."

There follows a report of the disciplillary actions taken by the Arkansas Supreme Court Committee 01/ Professio/lal Conduct for the months of March, April alld May, 1991. During March: informal complaints upon which no action was taken of a disciplinary nature numbered eight. One warning was issued. A letter of reprimand was issued to James P. Massie

for violation of Model Rules 1.3, 3.2 and 8.4(d) as a result of a Per Curiam from the Arkansas Supreme Court, Robert King, Jr., appellant. A letter of reprimand was issued to Albert Rowell Hanna for

CHRISTOPHER DONALD MITCHELL Christopher Donald Mitchell, of Paragould was issued a letter of caution for violation of Model Rules 1.3 and 8.4(d) as a result of the Arkansas Supreme Court's Per Curiam granting a motion to file a belated appeal in a criminal case on behalf of appellant Jimmy D. Montgomery.

violation of Model Rules 1.7(b), 1.8(h), 8.4(c) and 8.4(d) as a result of a complain from a judicial officer. The Committee took action on seven formal complaints

at its meeting on March 23, 1991. These actions are not final at this time. During April: Informal complaints upon which no action was taken of a disciplinary nature numbered nine. There were five letters of suspension that became final for the month of April. These letters were issued to William J. Phelps upon the following complaints: William R. Bennett for violation of Model

Rules 1.3, 1.5, 8.4(e) and 8.4(dL Mrs.

JAMES P. MASSIE James P. Massie of Little Rock was issued a letter of reprimand for violation of Model Rules 1.3, 3.2 and 8.4(c) as a result of the Arkansas Supreme Court's Per Curiam granting a motion to file a belated brief in a criminal case on behalf of appellant Robert King, Jr.

Sammie McCraw for violation of Model

Rules 1.3, 1.5, 8.4(e) and 8.4(d); A. J. Hinson for violation of Model Rules 1.3,

1.4 and 1.16(d); Carl Dean Phillips for violation of Model Rules 1.3, 1.16 and 8.4(d); and David K. Smith for violation of Model Rules 1.3, 3.2, 8.4(c) and 8.4(d). During May: Informal complaints upon which no action was take of a disciplinary nature numbered 10. Formal complaints filed with the Committee on which the members voted non action was warranted number two. Six warnings were issued. A letter of caution was issued to Christopher D. Mitchell for

violation of Model Rules 1.3 and 8.4(d) as a result of a per Curiam from the Arkansas Supreme Court, appellant Jimmy Don Montgomery. The committee took action of three formal complaints at its meeting on May 18, 1991. These actions are not final at this time.

1 0


ALBERT ROWELL HANNA Albert Rowell Hanna of EI Dorado received a reprimand for violation of Model Rules 1.7(b), 1.8(h), 8A(e) and 8.4(d) as a result of a complaint filed by a judicial officer. In August 1986, Mr. Hanna prepared and filed a petition for bankruptcy on behalf of Mr. and Mrs. Ernest Thompson. Mr. Hanna also represented the Thompsons in an accident case and had provided lega I services previously on other legal matters. Prior to filing of the bankruptcy petition, the Thompsons, on July 26, 1986, executed a



mortgage on their homestead to Mr. Hanna as security for past indebtedness for legal services. By apparent agreement, the mortgage instrument was not recorded at that time. The bankruptcy petition was found to be incomplete and the court granted leave to file another petition. On behalf of his clients, Mr. Hanna filed another petition in October 1986. In May 1987, the bankruptcy court confirmed the debtors' Chapter 13 plan. Neither of the Thompson's petitions listed Mr. Hanna as a creditor, recited the mortgage nor indicated that Mr. Hanna had received or been promised compensation from his clients within the year preceding the filings. A disagreement arose between the elients and Mr. Hanna over the outcome of the accident case and Mr. Hanna filed a motion to withdraw as their counsel in bankruptcy court. The following day, December 1, 1987, the Thompson's mortgage was recorded with the circuit elerk. In 1989, the Thompsons attempted to obtain a loan to satisfy the remaining indebtedness in bankruptcy. Their ability to secure suitable financing was restricted by the outstanding mortgage to Mr. Hanna. The debt amount claimed by the attorney was disputed by the Thompsons, and a compromise settlement was reached in the sum of $4,500.00. Mr. Hanna released the mortgage upon payment that sum in October 1989. Additionally, he obtained from the Thompsons a release from professional liability for any claim. in connection with the earlier accident lawsuit.

1 9 9 1

see "Disciplinary Actions (Continued)" pg. 45-46


The When people swear to tell the truth, the whole truth and nothing but the truth, so help them God, they say the damnedest things. I invite the readers of LLL to submit to me illustrations of this point. To get you started, I will offer a few examples of what I have in mind. James Forbis of Decatur, Texas, noted the following exchange in a deposition taken in Parker County, Texas: Q. Have you ever been in a hospital? A. Yes. Q. Okay, what were you hospitalized for? A. Ammonia. Mary Stroud of Tyler, Texas, spotted the following in the transcript of a hearing: Q. Have you been frank in your answers? A. 0, I've been telling the truth. Cindy Singleton of Dallas claims to have witnessed the following exchange: Judge. Is the defendant known by any other names? Defense Counsel. Do you have an a.k.a.? Defendant. Hell, lady, I don't even have a car. Barrett Stetson of Dallas says he heard this: Q. Have you had an opportunity to prepare for the


Said What? by Victor A. Fleming deposition today? A. I took a shower and cleaned up. David Beck of Houston participated in a deposition in which a plaintiff testified as follows: Q. Did you have your seat belt on at the time of the accident? A. 0, but I had my girdle on. Municipal Judge James Perry of Grand Prairie, Texas, thought he heard the following in his own court: Q. Officer, do you have a nickname? A. Yes, sir. believe I am known as 'Bear.' Q. Where did you get that nickname? A. Well, I believe you gave it to me the last time I threw you in jail for being drunk. The following exchange occurred in a deposi tion tha twas handled by the city of Houston,

Texas, City Attorney's Office: "Has your father, as far as you know, had any operations?" "Yes. He had a hysterectomy." Drew Mouton of Big Spring, Texas, experienced an administrative hearing, in which a bureaucrat added new dimensions to one of my favorite words. A company had been cited for serious violations of a health and safety statute. During crossexamination of the government worker who had the citation issued, the degree of seriousness as expressed in the citation itself came under fire: Q. Could you define the word 'blatant' for me please? A. I think it is something that sheep do. ote that all of these contributing lawyers are from Texas (see footnote 1). I am sure that Arkansas attorneys have likewise witnessed unusual remarks during depositions and hearings. Send your contributions to me at 111 Center Street, Suite 1600, Little Rock, Arkansas 72201. 1. All examples were origillally sllbmitted to alld prillted ill jlldge jerry Bllcltmeyer's "etc." coillmll ill tlte Texas Bar JOIl",al. My thallks to jlldge Blle/lmeyer for his permissioll to reprillt from Itis colllmll ill LLL.

Š 1991 Victor A. Fleming

MEDIATIO V. ARBITRATIO : WHAT PROMPTS PARTIES TO CHOOSE WHAT IS THE DIFFERENCE? MEDIATION OR ARBITRATIO ? Although the terms mediation and arbitration are often In many instances, parties to a dispute are forced to go used interchangeably, each involves fundamentally through an arbitration proceeding because a contract or different procedures and offers a very different alternative other document formalizing their relationship has what is to litigation. commonly called a "arbitration clause" which requires Mediation is a voluntary proceeding in which all the them to resolve any dispute "arising out of or relating to" parties to a dispute (and often their attorneys) attempt to that relationship to be resolved through arbitration. In overcome a negotiating impasse and resolve the dispute. instances where there is no such arbitration clause, the At a mediation proceeding, the parties agree to allow a parties can, of course, voluntarily agree to submit neutral person, called a mediator, to act as a facilitator of themselves to an arbitration proceeding. settlement. This mediator has merely the Parties to contracts are just beginning to place opportunity to persuade rather than the ."",. _ . . . . . "mediation clauses" in their contracts which authority to impose a particular ~ --... would require their presence at a nonsettlement figure on the parties. ., ' " binding mediation session or On the other hand, in an ~ 1\. settlement conference as part of arbitration proceeding the , ~t\. ~ the dispute resolution process. parties agree to be bound bY/ ~ However, these types of the binding decision of an ~ ....., ~ clauses are not found as arbitrator. While an arbi~., , ~p \often as the so-called trator has the authority t o / L>-- ~VI "arbitration clauses". impose his or her ~........" \ ~ Therefore, in most judgmental will upon .~ ~>- ~ \ instances, a mediation the parties, a mediator, ~. ( ~ or settlement confermerely has an opporI'~ ence arises out of the tunity to convince each â&#x20AC;˘ voluntary willingntess party that settlement is \ â&#x20AC;˘ of the parties to agree preferable to continuing to participate in such a on with the litigation ~ \ ~ / proceeding. process. In short, \ ~ although mediation and ~ '~ "- ~ WHAT HAPPE 5 AT A arbitration both fall under ~ , Y / MEDIATIO the rubric of "alternative' ~('. SESSIO ISETILEMENT dispute resolution," they are :\~ ~ ~ CONFERE CE? fundamentally different '" At an agreed-to location, processes. In many ways, " ' ,\ ~ the parties and their attorneys

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however, arbitration involves a greater


shift from what we can call "traditional dispute resolution" or the public-sponsored court system. By vesting private individuals who have not been elected or app'ointed through the democratic political process with decisional authority over disputes, arbitration represents a supplanting or replacement of the public judicial process, whereas mediation or negotiation has always been a part of the litigation process. lt is partially for this reason that parties are generally more willing to agree to submit their dispute to a mediation rather than an arbitration.

I 2






meet in a conference room with the

"" designated mediator. Typically. the mediator will sit at the head of the conference table and each party and their counsel will sit on opposite sides of the table. As in the Federal Court Settlement Program, an individual with full settlement authority must be present for each of the parties. The mediator will begin the proceeding with a short introduction. In this introduction, the mediator will stress his or her neutrality, the confidentiality of the proceeding and begin the process of "selling settlement" by stressing some of the inherent advantages of settlement (immediacy v. delay and


1 9 9 1

certainty v. risk). The mediator will then outline the procedure which will be followed. Finally, the mediator will stress that he or she is powerless in this proceeding and has no authority. whatsoever to impose a settlement. Rather, the mediator should characterize himself or herself as a "salesperson for settlement," stressing that he or she merely has an opportunity to persuade rather than authority to impose. After the mediator's introduction is completed, the Plaintiff attorney wiJlthen be asked to give an informal characterization of the liability and damage case. This presentation is intended to be informal and does not include the testimony of live witnesses or the formal submission of documents. Rather, this presentation is, in effect, a "preview of coming attractions" in which the Plaintiff attorney indicates what witnesses he or she would call and what points would be made in establishing the liability of the defendant and proving the damage case. Frequently, the defense is willing to stipulate to liability and this presentation is focused almost exclusively on damages. During this presentation, the mediator may ask the Plaintiff attorney a series of questions which are intended to point out ce,tain weaknesses in the case. The mediator will often not give his or ber opinion on the value of the case. Rather, by asking certain pointed, rhetori<al questions, these weaknesses can be more diplomatically brought out. It is then the defense's tun to give their characterization of the liability and damage case. Once again, the mediator will ask a series of rhetorical, pointed questions intended to point out some of the weaknesses in the defense position. There are two purposes to this "presentational phase." First, the mediator, who typically has absolutely no familiarity with the case, is given an opportunity to familiarize himself or herself with the matter at hand. Second, and as importantly, each of the parties will have an opportunity to become better acquainted with the other side's position.

After this presentation phase is completed, the parties are then separated and one side is asked to leave the conference room and go to an adjacent office. The parties will not be brought back together again until the completion of the proceeding. The mediator will then spend time with each side in this "private caucus" playing a devil's advocate role. The mediator will attempt to have each side acknowledge that they don't have a perfect case and that trial would involve a great deal of risk and expense for each of them. Determining whether or not a particular settlement offer is a "good one" ultimately turns on one's assessment of the jury verdict potential of a particular claim. Given the correlation between settling lawsuits and predicting jury verdicts, the mediator will spend time with each side assessing the jury verdict ranges of those cases. Once these figures are established, each side can then more rigorously assess the value to them of a particular settlement figure.路 After this "devil's advocate" phase, the mediator will then act as a negotiating intermediary between the parties. This involves more than merely conveying each side's numbers to the other. Without ever actually pronouncing a suggested settlement figure, the mediator should subtly steer the parties toward an antie-ipated settlement figure. Confidential communications to the mediator from each side enhances the likelihood that the narrow overlap between fhe Plaintiff's lowest figure and the insurer's highest figure will be identified. At a relatively early stage in the actual negotiating process, the parties will get within "striking distance." Once it becomes apparent that the impasse has been broken and that the parties are close enough for the case to settle, then the proceeding, in effect, becomes an "auction" and the pure logic of numbers replaces concepts and theory as the force driving the parties toward the final settlement figure. At the conclusion of a successful


mediation session/settlement conference, the parties will sign a "Mediation Agreement," which is intended to be a binding settlement contract and a predecessor document to more formal releases and dismissals. WHAT HAPPE S AT AN ARBITRATIO PROCEEDING? An arbitration proceeding is very similar to an actual trial before a judge or a jury, the only real difference being that the "trier of fact" or decision maker is not a jury or a judge but, rather, an individual (or individuals) agreed to by the parties. Although both State and Federal statutes regulate the manner in which an arbitration proceeding will be conducted, one must look to the rules of the particular arbitration service which is the sponsoring entity of the proceeding. WHAT ARE THE ADVA TAGES OF SUBMIITI G A DISPUTE TO ARBITRATIO 7 The often one to three year waiting period between the filing of suit and the availability of a trial date lies at the heart of the value of arbitration as an alternative to trial. Most parties to a dispute would prefer to have it resolved sooner than later and generally an arbitration proceeding can be arranged months if not years before a trial date through the judicial system can be obtained. Predictability of result is another advantage of arbitration. Especially where a matter will be resolved by a jury, the parties are less likely to be able to predict or to control the outcome. Generally, individuals chosen to be arbitrators have some expertise or experience in the area around which the dispute is centered and this expertise and professional detachment lends a predictability to the result which is often not present where a matter is to be decided by a jury. Because arbitration is in effect a private enterprise trial and because the burden of preparation is not so different for an arbitration as an actual trial, the parties will generally not save that much money in legal fees if the matter is resolved through


l I


arbitration. On the other hand, it is very difficult to have an arbitrator's deci'sion overturned on appeal, thereby making appeals very rare. In this regard, arbitration can save the parties money by minimizing the likelihood of the expense of litigating their dispute through an appeal process. WHAT ARE THE ADVANTAGES OF MEDIATION? The primary purpose of and advantage to mediation is the generation of earlier settlement. Depending upon which study you read, anywhere from 95% to 97% of all filed lawsuits will settle short of a jury verdict. This settlement may occur before or after discovery is completed, before or after a pretrial conference, at the "courthouse steps," or after the jury has been impaneled but prior to their rendition of a verdict. Given this statistical inevitability of a settlement being reached short of a jury verdict, one can legitimately question the necessity of mediation as a settlement tool. However, the

purpose of mediation is not to generate settlement as such but, rather, earlier settlement. Earlier settlement has obvious psychological and economic advantages to the parties to a dispute. Another advantage of an effective mediation session/settlement conference is that it can act as a sieve identifying those lawsuits or disputes which are in all likelihood destined to go all the way to trial. If a dispute cannot be resolved through mediation .1nd if the parties remain at impasse after such a proceeding, then there is a substantial likelihood that the dispute will actually go all the way to a trial. The identification of a lawsuit early on as one which is destined to go to trial can be an aide to both the parties and the attorneys as the case progresses toward the actual trial date before the court. AlTORNEYS AND ALTERNATIVE DISPUTE RESOLUTION Everyone, including attorneys, has

skeptical and resistant to both mediation and arbitration. Only recently have this nation's law schools

begun to introduce alternative dispute resolution classes into their scholastic programs. In short, the novelty


of ADR 111akes it a

natural object of our distrust and skepticism. As I have indicated earlier, arbitration is in many ways merely a privatization of traditional dispute

resolution. It is adversarial, conducted pursuant to formal rules of evidence, and places decisional authority in a third party. On the other hand, mediation, by placing decisional authority within the parties themselves and by removing the straitjacket of formal rules of I evidence, involves a fundamentally different approach to dispute resolution than the courts. It is probably for this reason that attorneys tend to be even more skeptical about mediation than arbitration. As an instinctual aversion to something professionals who are trained to new. As creatures of habit, we as survive within an adversarial judicial attorneys are going to be naturally system, attorneys are going to be


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more uncomfortable with mediation than arbitration.

The discomfort which the relative novelty of ADR engenders in attorneys is compounded by the apprehension that ADR and especially mediation may supplant the attorney's role in dispute resolution. Certainly, an earlier

psychological (and often times economic) ~nterest in seeing the

matter go to trial. As attorneys, we often yearn to have our point of view

vindicated by a judge or jury and can be made understandably frustrated when a matter resolves itself through a settlement conference. However, we must balance these understandable impulses and needs with our more

settlement or resolution of a dispute will tend to lessen the legal fees which any particular dispute involves.

fundamental ethical duty to remain ever mindful of the best interest of

However, attorneys are a necessary

our clients.

and integral part of the mediation process. Although the decisional authority within ~ mediation or settlement conference contacts lies

with the parties, typically, the parties will look to their a,torneys for counsel and advice before making their final decision.

The presence of attorneys during a mediation session/ settlement conference is also necessitated by et hica 1 considera lions. Especia lIy where the mediator is an attorney, an

unrepresented party in a settlement conference will ultimately look to that mediator for guidance on whether or not to accept a particular settlement arrangement. This places the mediator in an ethical quandary in which he or she must balance his commitment to settling the case against any obligations that may be owed the parties. ALTERNATIVE DISPUTE RESOLUTION & A ATTORNEY'S ETHICAL OBLIGATIONS In an arbitration context, the ethical dilemmas faced by an attorney are in reality no different than those confronted in a traditional dispute resolution context. The attorney must ultimately balance his obligation to represent his client zealously with his often conflicting role as an officer of, in this instance, the arbitration proceeding. In a mediation context, the primary ethical challenge of an attorney is to remain mindful that his or her focus must continually be on the best interest of the client. Given the ad versa ria I system in which attorneys operate, it is natural for us to become emotionally involved in a particular dispute and to have both a

Joh" D. Rothman is tlte Legal Director of Okfahoma Mediatioll/Arbitratioll Service, Okla/lOflla's largest provider of private settleme"t co"ferences and other altemative dispute rtSO/utioll (ADR) seroices. A graduate of Harvard Ulliversity (B.A. 1977) alld BostOIl Ulliversity Sclloo/ of UlW (J.D. 1981), Mr. Rotllmall is also e1lgaged ill the private practice of law i1l Tulsa, Oklahoma. III additioll 10 servi"g as Legal Director of Oklahoma Mediation! Arbitratio" Seroice and mai"tainiug a private law practice, Mr. Rothmall has served as all Adjllnct Professor of Appellate Advocacy at the Ulliversity of Tulsa Law School a"d regularly speaks 011 the topic of alternative dispute reso/utiolJ fo busi"ess alld legal groups throughollt the State of Oklalloma.


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"It was the best CLE program I have

ever attended" Also, we ask for negative comments. If we know what concerns our registrants, we can attempt to remedy the problem. Some of these are:

Seminars & CLE Each seminar sponsored by the Arkansas Institute for Continuing Legal Education is a culmination of months of planning. The staff works with a program planner who puts together the faculty and the agenda we use. From that point on, it is our job to follow up with the speakers. We contact each one in regard to their course materials and anything they might need. We advise them of their deadlines to insure the program is on the right track. We attempt to anticipate all situations thot might arise so that on the day of the seminar, we are ready to give the registrants quality CLE. We feel AICLE is doing a good job of co-ordinating outstanding CLE. In order to get feedback from our registrants, an evaluation system is used at each seminar. Some of the positive comments we have received are:

"I commend AICLE on the professionalism of its speakers" "The large screen enhanced the program" " on-smoking seminars are appreciated" "Registration was easy-I was able to register by phone using my credit card"

"Registration was smooth, effortless...the staff is always helpful" "The materials are excellent for research and reference"

I 6


"Why can't we have the materials before the program?" We ask our speakers to turn in their materials two weeks prior to the program so they will be current. We allow ourselves enough time to get them reproduced and do not even receive them ourselves until the afternoon before the program. ''The meeting room is too hoLtoo cold ...poorly lighted" We work with various hotels and alert them to these problems. They attempt to adjust to our needs, but these are problems over which we have no control. "There are not enough visual aids"

''There are not enough supporting materials"

AICLE works with over 300 attorneys-that is 300 very different individuals who are volunteers; not professional speakers. We send to each one an evaluation summary with YOUR suggestions so each can improve and offer you a better presentation with better materials the next time they volunteer. We appreciate your taking the time to respond to the evaluation. Your comments and suggestions enable us be aware of what our registrants want from CLE seminars. AICLE has a request of you. We need your continued support by volunteering to serve as program planners and speakers. We also would like to have you give us a call with any concerns you might have or any ideas for future programs. We are



your CLE connection, so help us to help you. We can do a better job of fulfilling your needs if you will preregister by the deadline. It is very costly to order extra course materials, so we no longer do that. We regret we cannot always assure you of materials or a seaL.we could if you would pre-

register. We thank all of the attorneys who work with us and who attend our seminars. We welcome your calls at 375-3957 with any comments you might have.


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injuries. eRA focuses on the collection of factual data, interpretation and analysis of the data, and conveying facts, analyses and opinions to the attorney, judge and jury. eRA prOVides services ranging from preliminary case analysis and freezing collision evidence, to final demonstrative evidence and courtroom presentation. We have investigative personnel located in S.E. Arkansas to freeze physical evidence and document collision scenes and vehicles.


for information contact: James R. Lock P.O. Box 10256 1051 FM 2818, Suite 304 College Station, Texas 77842 voice & fax (409) 693-1651

1991 Outstanding CLE Planner Award By Deb Garrison/Sarah Polk As AICLE works with about fifty program planners each year, we find that there are many who do an outstanding job and execute their duties with careful attention to detail and a great deal of followthrough. These volunteers deserve recognition for their unselfish contributions to the professional development of the Bar. This year's recipient has been singled out by the Board of Directors and AICLE staff for exemplary achievement in CLE program planning. This person came to the initial planning meeting prepared and ready to brainstorm. The AICLE staff was advised of progress on the program and every planning deadline was met. This program planner worked with 26 speakers, the largest group assembled this year. Because of this individual's attention to the detail, the 1991 Labor Law Seminar will surely serve as a model for future labor law programs in Arkansas. Carolyn B. Witherspoon is commended for her contribution to continuing legal ed uca tion and her concern for the betterment of the legal profession. It is with great pleasure that we award the 1991 Outstanding CLE Program Planner Award to Carolyn B. Witherspoon. Thanks Carolyn!




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The end of a school year has a particular nostalgia for students, faculty and administrators. And nothing marks the end of a school year as definitively as graduation. One hundred and four relieved students graduated from UALR School of Law on May 19, 1991. The Law School Hooding Ceremony was held for the first time within the larger graduation ceremony of UALR at Barton Coliseum. Approximately 80 students were hooded by Professor Glenn Pasvogel and Associate Professor Chuck Goldner before a packed audience of well-wishers. A reception at the Radisson Legacy Hotel hosted by Interim Dean Fenton Adams followed the hooding and graduation ceremonies. A number of students are

recipients of scholarships for the 199192 academic year. A new award and scholarship has been endowed in the amount of $4,000 by Diane Larrison Gibson of Kansas City, Missouri, to honor her late husband, James H. Larrison, Jr., a prominent Little Rock attorney who practiced with the Youngdahl Firm and who taught Worker's Compensation here at the Law School. The James H. Larrison, Jr. Scholarship will be awarded annually to a law student who is a resident of Arkansas, intends to practice here and has a demonstrated ability to establish relationships with people without regard to wealth, race, religion, occupation or status. The recipient must display scholastic ability, common sense and high moral and ethical standards. Gregg Ledbetter is the first recipient of this generous scholarship. The James H. Larrison, Jr. Worker's Compensation Award honors the author of the top grade in Worker's Compensation; this year's recipient of a cash award is Ralph Burgess. The law firm of Mitchell, Williams, Selig and Tucker has also founded a new scholarship here. Four

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scholarships of $500 each wiIl be awarded annuaIly. Recipients must dis~ay financial need, scholastic achievement, extracurricular involvem~nt, high ideals, ~nd personal accomplishments. Thirtythree applicants interviewed with members of the firm for the 1991-92 awards. Edie Ervin, PhyIlis Eddins, Goodloe Partee, and Melody Peacock are the recipients. These new scholarships are in addition to a scholarship previously established by the firm. The Arkansas Association of Women Lawyers presented a $500 scholarship to Lori Hoggard. And the UALR Alumni Association presented a scholarship to Lynne RaveIlette. This, too, is a new scholarship established by the Association to benefit a law student. Of course, we appreciate all of the firms and organizations which give generously of their resources so that students may attend law school. The February, 1991, bar results reveal good news for UALR School of Law. 100% of our registrants passed (40 of 40). Christopher Thomas, Executive Director of the Arkansas State Board of Bar Examiners, and Kaye Hartenstein, Board member, visited the Law School on April 9, 1991, to discuss the upcoming july Bar exam. The one-and-one-half hour meeting drew a packed audience. The UALR Law journal Editorial Board for 1991-92 is composed of the foIlowing officers: Editor in Chief,

janey McNutt; Executive Editor, jeanne Seewald; Managing Editor, Merek Rowe; Articles Editor, David Martin; Casenotes Editor, Grant Fortson; Research Editor, Kim Kelley; and Survey/Comments Editor, Dabbs Cavin. The Rose Law firm honored apprentices of The Law journal with a reception at the firm on April 12. The Student Bar Association closed out its year on a high note. Race judicata and the faculty auction together netted a $500 contribution from the bar to CALS. Scott Ellington, the SBNs ABA Senior Representative, was awarded the national Bronze Key Award by the ABA/ LSD for leadership. ew SBA officers are: Melanie Huckaba, President; Gregg Ledbetter, Day Vice President; Gwen Hodge, ight Vice President; Scott EIIington, Secretary; Carol Duncan, Treasurer; Angie Alexander, ABA Senior Representative; and john CampbeIl, ABA junior Representative. Denese Fletcher is the new President of the Black Law Students Association. Our BLSA chapter will host the regional BLSA meeting in Little Rock next spring. The Federalist Society and the Christian Legal Society are two new organizations which will appear on campus this fall. Final moot court competition was held on April 9 in the dignified auspices of the Arkansas Supreme Court. We were honored to have Supreme Court justices jack

Holt, jr., Robert Brown and David ewbem judge the competition. Howard Eisenberg is now a familiar name at the Law School. Our newly appointed Dean is winding up his activities as professor of law and director of Clinical Programs at Southern Illinois University. He will begin his official duties with the Law School on August 1. In the meantime, he is becoming familiar with the Arkansas legal scene by attending various bar functions and meeting with leaders in the legal community. Dean Eisenberg attended the annual meeting of the Pulaski County Bar Association, the annual meeting of the Arkansas Bar Association, and the annual dinner of the Arkansas Bar Foundation. He has also met with members of the Harold Flowers Law Society, the Arkansas Association of Women Lawyers, and the UALR Law School Association. The Law Library again hosted its annual Law Clerk Workshop on june 6 and 7. Greta Boeringer of the Library staff taught a workshop entitled AIDS and the Law on june 18,1991. The end of the semester also brings accolades to the Law School faculty. Faculty ExceIlence Awards now belong to john DiPippa for teaching, W. Dent Gitchel for research, and Robert R. Wright for public service. Excitement continues to mount

concerning the new Law School building. American Bar Association

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199 I

President John Curtin toured the new building with Interim Dean Fenton Adams and newly appointed Dean Howard Eisenberg. The external structure of the building has been fitted with windows and the "skin." Wiring has been completed and construction continues to be onschedule for a moving date of summer, 1992.

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Dean Leonard P. Strickman to take office July 1 ewly appointed Dean Leonard P. Strickman will formally assume his duties at the Law School on July 1st. Dean Strickman, who comes to Arkansas after a distinguished term as Dean at Northern Illinois University College of Law, has already assumed an active role in the Law School, traveling to the School on numerous occasions to meet with faculty, students, and University administrators. Dean Strickman has also taken numerous opportunities to meet with graduates of the Law School and members of the bar, including receptions in Little Rock, Fayetteville, and at the annual meeting of the Bar Association in Hot Springs. Professor Mort Gitelman appointed Associate Dean Professor Morton Gitelman, whose association with the Law School has already included designation as a Distinguished Professor, has been appointed as the Law School's new Associate Dean. This position was recently created to provide support and assistance to the Dean in a variety of areas, primarily academic in nature. Gitelman will formally assume his new duties on August

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15th and will continue to teach on an active basis. Looney Travels to Moscow Jake Looney was one of ten United States delegates invited to attend the "Conference on Problems in Improving Agricultural Legislation in the USSR and East European Countries." The conference participants responded to proposals presented by Soviet legal scientists. Looney presented a paper titled "Government Regulation of Agriculture in the United States."

Other faculty news. Howard Brill was voted "Professor of the Year" by the Student Bar Association. Mort Gitelman recently served as Special Justice on the Arkansas Supreme Court. Robert B. Leflar was appointed to the Board of Directors of the American journal for the Study of Comparative Law. Paul Schwartz was appointed to their Board of Editors. Terry Kirkpatrick organized and participated in a panel discussion focusing on 'Women and Minorities in the Law." Other panelists included Ms. Hitary Rodham Clinton, Ms. Sandra Wilson Cherry, judge john Lineberger and Mr. Les Hollingsworth. Lonnie Beard taped 9 short segments for presentation on the "A.M. Agribusiness" television program. Charlie Carnes was reappointed chair of the Arkansas Bar Association ADR Committee. Claudia Driver attended the Preservation Workshop and Annual Meeting of the Southwest Association of Law Librarians in Tulsa on April 4-6. Driver also attended a Copyright Seminar sponsored by the Special Libraries Association on March 8 in Tulsa. Charlie Carnes and john Steinkamp attended the Central States Law School Association 1991 Annual Meeting in Branson, Missouri, on April 27-28.

2 0







Financial Planning: The Business Side ofthe Practice attorneys



practiced law withoul too much




consideration for the business side of the practice. They were able to make a decent living and were in a profession, so the thought of operating their practice as a business was hardly considered. They were happy to be providing a valuable service to the community, to pay the bills and take home a draw to provide for family mailers. This worked when costs were low and competition was limited. Times have changed and the allorney must recognize that the part of the practice which deals with the financial existence is a business and must be operated as a business in order to continue providing the valuable service to the community. Businesses that do not make financial plans are planning to fail. Before starting the planning process attorneys should think about the following areas: 1. Hours worked - How many billable and non-billable hours should timekeepers work? What goals should be set for income per timekeeper? How much time should be provided in the holiday, vacation and sick leave policies? How will these goals affect the quality of life of timekeepers? Differences in lifestyles and economic needs will determine the answers to these questions. 2. Areas of law - The various areas of the practice should be examined to determine preferences of timekeepers to practice in these areas, expertise of

democracy? Can discipline be introduced to the organization for the common good? A well-managed

2 2




centralized a


office insures the financial success of

the law office. 5. Marketing - Are the lawyers committed from a time and monetary means to support a marketing program? Are they willing to follow a plan for the continued growth of the practice in areas of law that they have agreed upon? ew clients and client retention are the lifeline of the law office.

IBYJERRYSC~ARTZI the professionals and profitability. Determination of the work that will and will not be accepted is very important. 3. Fees - Are minimum standard billing rates established? Are flat fee charges established for certain mailers? Is a policy in place for premium and discount work? Are these policies practiced by all? What is the policy for write-off of time on mailers? What is the policy on delinquent accounts receivable? Is suit filed against clients for nonpayment of statements? Fair billing and collection policies are essential to the success of the la w office. 4. Management - Are lawyers willing to compromise on issues for the general good of the organization over their personal preferences? Is there an understanding and



1 9 9

6. Investment - Do the lawyers

understand the need for an adequate capital base to meet operating expenses and additional capital to provide for the changes in technology and other investments to improve productivity? A continuous plan of investment in training and technology is essential to the productivity of the office After the sole practitioner or law firm has thought about and given careful consideration to these issues, it is time to sit down with pen in hand and commit these thoughts to writing.




formulation of a management, marketing and financial plan can then take place. It will be one that is well thought out, thoroughly discussed and written as a formal document for all to review and lise to achieve the goals of the practice. It is extremely important that all the partners take part in the exercise

because the views of all the owners are very important. Sometime law offices will seek outside help to facilitate the process and keep the discussions on point. The planning meetings should be held where the owners can concentrate on the issues without interference and interruptions. The planning process will point out weaknesses in current systems and management reports. These areas must be addressed if the law office is to be financially successful. The timekeeping, billing and financial information systems must provide for adequate information to insure that the plan is being implemented and to make comparisons to actual, so a judgement can be made on the success of the program. Once the plan has been established and accepted by all owners, it should be communicated to all associates, legal assistants and stall. The general goals of the firm must be common to all and understood by all if this is to be a successful endeavor. Don't go through all the ellort to establish a plan without sharing and comparing.


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une 15, 1991

marked the beginning of a continuation of tradition. James H. McKenzie of Prescott took office as President of the Arkansas Bar Association. The tradition is two-fold. McKenzie is the third generation of McKenzie lawyers to be active in the Association. He is also the third attorney from the Prescott law firm of McKenzie, McRae & Vasser to serve as President of the Association. W. V. Thompkins, one of the original members of the firm served as President in 1910-1911. He was later followed by Governor Thomas C. McRae, who was President in 1917-1918. Prescott is about 20 minutes from Hope and 50 miles from Texarkana, situated in the center of the timber country of Arkansas, in which the McKenzie family has some interests. Major industries located in the small town include Firestone and Potlatch. "We represent Potlatch of Prescott. They do a beautiful job of managing their lands around here, we think,


says McKenzie. "Owning land is a big responsibility because of the environmental issues that are involved."

The town is a quiet, laid-back place, with posted signs reading" a Loud Music - Violators will be Prosecuted." There are no political machines according to McKenzie, "Its 2 4


PRESIDENT almost a classless society." It looks like a place many Arkansans live and raise families, with a population of 4,103. He

says it's in Nevada County, pronounced wi th a long A, not like the state out west. It boasts a beautiful section of old refurbished houses set on huge lots and a new subdivision with all the comforts you would see in Little Rock. McKenzie and his wife, Betty, both grew up in Prescott, were high school sweethearts and married while in school at the University of Arkansas at Fayetteville, where McKenzie also earned his law degree. After serving as a Military Policeman in western New York State, they moved back to Prescott in 1968 so Mc-




could join his father in the practice of law. They have two daughters, Kris and Miki, both of


whom attended the University as well. Kris is married and living in Little Rock and Moo will be married in ovember and move to Little Rock. When asked if he is disappointed that neither child is coming back to Prescott McKenzie, says no. Ii] thin the

litigation. Other partners handle the variety of issues that all small town practitioners face day-to-day. An interesting point is that the firm handles cases from Texarkana to Arkadelphia and west across the state from Little Rock there. is why they're "We've I" W,,· be e n moving there. \\"'~' f'jC We haven't en. 1!JiI"' I co"'" able to enjoy 1 I"S ,,0' couraged them to .0'" V"'" a rewarding prac,'7.' \\\t come back to tf\c'i-·\,•• ol tice because we're Prescott, . ",o\.,s~,\Scf.''Iwilling to travel. We don't encouraged them to \\OII'''''o~'I,.lo''' hesitate to do that:: said McKenzie~ broaden their perspec- \,0'" The fIrm has SIX lawyers In ItS lives. It's been our offIce, located 10 the center of town. philosophy that we didn't want them The finn's other members include H. to restrict themselves to Prescott if H. McKenzie, D. L. McRae, Glenn they want to come back later that':'m Vasser, Barry Barber and Duncan be fine:' said McKenzie. "We had that Culpepper. An extensive library opportunity to do that in the Army in occupies a good deal of the building ew York. We decided to come back, and cuts the costs of research for the firm. On McKenzie's desk sits a new b u t th ere are some a d van t ages an d t t l ' " II IBM compatible computer. "I'm not · d d lsa van ages 0 IVlng In a sma good at it. I can do word processing, town an d t h ey nee d to h ave t h e , . . that s about It. But we're learnlOg, chance to decide that for themselves." ,. d" h . we re trymg to get mo ern, e says McKenZIe says Prescott needs to with a laugh. No paralegals or law fi~d its niche. "~rescott is a great clerks have ever been employed by p ace to lIve, we ve. got excellent the office. Instead, they rely on a wellschools, access to LIttle Rock and skilled secretarial staff. The newest Texarkana. We have access to the secretary in the firm has lakes and the best hunting in the worked there five years. world. We have a good employment Several others have base, but industrially it's going to be been there since 1968. tough. If you want to build Their research is and commute, have a done in their own good quality of library, though life, I think they do occaspeopl ionally get will come some online back to computer Prescott." help. When the Although ,oc' h he calls himsel ,rio. ", pone .. ,w e. ,1' 1'-\" 0, .~ II' beeps a and his partners I c:' tf\c 10' 1 -< I,,·a. voice on 'country lawyers,' {)\\" \W~. 1 'fs,.e. Uoi~""'-.,",cl' ~ 10"" 011" h e McKenzie focuses in "V . o",e. \W~·\'f 1 O· \-. ,,~I' 01'"

- - tf\c'i-' ",01"'"

intercom says "Mr. McKenzie, line two." But Jim McKenzie doesn't pick up the line. He smiles, "When they say Mr. McKenzie, they mean my daddy, if its for me they just say Jim." The elrler McKenzie is eighty-six years old and still practices law, a full day and sometimes evenings. He is still very much in control of the firm he helped restructure with Duncan McRae, or as everyone in town seems to call him "Uncle Dunc." Horace McKenzie and Duncan McRae have left their marks on the town in many ways. They helped form Prescott Federal Savings & Loan, which grew to a $40 million institution. Early in the S&L Merger era, the bank merged with First Federal of Arkansas. Jim and Betty McKenzie are

active commImicants of their church, Prescott First Metllodist

They have both been very active in the community, helping to further the industrial growth of Prescott and the prosperity of their firm. It is easy to see that both men have contributed to the continued well-being of the firm through shrewd business sense and commitment to the legal profession. The office contains several pieces of furniture that were in the firm at its beginning. A favorite of both McKenzies' is a conference table that Mr. McKenzie still works at daily. The offices are not furnished lavishly, but what is there has obviously been cared for with a gentle hand and great respect.

There is a great deal of formality between father and son. Jim McKenzie calls his father 'daddy; but

I fl



. cr\l:nzi forney 0/ lite Ih: lOns the first ~e genera/jolTs

with lawyers starting to work on

probably more handicaps than advantages," he says. On the idea that he still offers guidance to his son, he comments "It may have been that way before, but

committees and working themselves into Chair positions and other leadership positions. I'm going to go out and meet with Bar Associations in Truman and Fort Smith and Harrison, and Ashley County. We also need to improve the professionalism within the Bar. We have suffered in the past few years some public marks against the profession. We've seen an attack on lawyers in federal legislation, we need to educate the people that we are a profession, that we have certain rights, tha t we protect their Bill of Rights. We should stand up for those things, but at the same time we should be good citizens, we should not abuse the legal process. We should

says with a chuckle. ''I'm very proud of him. He's energetic, he has lots of ambition and aspiration, and well, all that coupled together usually pays off, generates success." Uncle Dunc agrees, "Jim's been very diligent in his practice of law, he's a fine young man, I've known him since he was a child, thrown many a baseball to him." It doesn't take long when visiting with Jim McKenzie to figure out that he's always business first. He seems very focused, both in his profession and in his ci vic work - someone who plans a course of action, well thought out and then sticks to it, gets it done, quickly and efficiently. His plans for the Arkansas Bar Association

"Uncle Dunc" for guidance. This is interesting because it was "Uncle Dunc's" father who taught Horace McKenzie to practice law. He says he still learned a great deal from his father though, "Daddy was always more critical of me than Uncle Dune,

but you learn to give and take," said McKenzie. "I hear people say 'I'd love to practice with my son or my father' well, you'd better be pretty dedicated to doing it, it takes a lot of work." The respect and admiration is evident in McKenzie's voice. When asked if his father still tells him what to do, he smiles and hangs his head like a child "Yes, pretty much of the time." Horace McKenzie is every bit the proud father, though he isn't at all the type to boast. He is a very reserved man, but can turn on the charm like the most gracious Southern gentleman. Though he is 86, it is hard to imagine that he could ever have been more sharp and witty than he is today. Why doesn't he retire? "I think




not now, he has his own initiative," he

was wise enough to turn him over to


"I want to carry the Arkansas Bar Association to the membership in the state, as well as to the membership in Little Rock, " he said, "I think that we need to go to the members and tell the members what the Bar Association is doing. I think it is important that they know what they can gain from participating in the Association, !he recognition they can get. Many have realized that if you participate in the programs, you gain prominence in the profession. Economically, you can gain case referrals and your clients will realize that you know that field in which you practice. We need to take that message to the membership. It starts with committee involvement,

decision from there.

addresses him as 'Sir' when asked a question. When asked how it was coming back to Prescott to practice with his father, McKenzie relates that it was a bit "testy" but that his father

2 6

idleness is still the devil's workshop, I just don't see any need in being idle if you don't have to," he says. When speaking of his work and his contributions to Prescott, he is very modest. He seems most proud of the history of the finn, the "only law firm in Southwest Arkansas with a continuous link." He is also proud of his son. "It used to be Jim McKenzie was my son, now I'm Jim McKenzie's father, I enjoy that." When it ca me time for his son to decide whether to come back to Prescott he pointed out the good aspects and the handicaps that would face him and let him make the

during his tenure are

very clear, progressive and wise -- especially in that he has taken into


d at the table that Hora" "eK,,,zi' "at' rks at dail~路 B. IV' ., still tOO McKeuZ,1

consideration the wants

and needs of lawyers throughout the state.




work with the judicial Council to improve our relationships with the state and federal judges. We need the Court's support of the Bar Association and we need to support the Court System. We need their support to operate well. Part of this is bringing to the attention of the legislature the need for the Courts to be wellfinanced, they need to educate the legislature and the public of that need. ''I'm also very interested in the new Death Penalty Resource Center, which will provide the support needed for lawyers,

be compensated for our services in a way that is commensurate to maintain

a high level of professionalism. We are not a business, we are to serve. If we are to be criticized because we protect the Bill of Rights, because we represent unpopular people or causes, then let us take that criticism, we should take it with honor. But if we are criticized because we abuse our clients, because we profiteer off the system, then lets improve that. "The third thing that ties in with that is that we need in our profession to understand each other.

As one writer has said,

'that we get to be lawyers,' not lady lawyers, not black lawyers, not that we get to be south Arkansas lawyers, but that we bring our profession all under the umbrella of the Bar Association. We have different interest because of our practices, some of

"One other point I would like to emphasize is that the Committee on Professional Conduct is appointed by the Supreme Court. We have in the Bar Association our Professional

Ethics and Grievances Committee and Bill Allen is going to Chair that committee. I think that is an ultraimportant committee to help improve the procedural steps that are taken in processing indictments, criticisms and violations of the Code of Professional Conduct. I hope that we can engender a spirit that will give the Supreme Court the motivation and the desire to more enthusiastically support its own Committee on Professional Conduct. I think we need to provide that cultivation."

"Over all, I think my pro blem this

yea r may be that I've got too

us are criminal lawyers,

some Ii tiga tors, some corporate lawyers, civil rights lawyers, but the

many ideas.

Bar Association is not




organization. It is the



eel,/ 'Kofl/,

Ie /1,-,,;,


'Ie /IrA-a


ole/. Ii B Or -'lssOc 路

umbrella of the profession and we need to provide it in that way, that we

Ii ke

serve the entire profession. ''What I want to encourage in this

me, who have never tried a

situation is that in getting to the cutting edge of our profession we need to be an active group. I learned that even more during this last legislative session. We had lawyers going out there and working with our package, not sitting in the House of Delegates meeting talking about it, but actually going out there getting your eyes scratched, having to walk the halls when that's not your domain, and realizing that you're not always going to get your way, but learning what it takes to improve the judicial system. The legislature is one of the ways we can improve the

penalty case and are suddenly appointed. This should really cut down on our re-try rate and could make the trials a lot less long and drawn out. We're getting support from IOLTA, and in-kind support. It was a diamond in the rough for Arkansas, we were invited to attend meetings planning it. Actually, they 'put the bee on us' and said 'what is the Bar Association going to do about this' so Roscopf appointed a commiltee to study the idea and those guys, in less than a year, have put together a grant application that has been

system. During my term, I will try to

Wlo / Ii.



A1C/(ell~t7IiOJI. Mell J. __

re811/nr ;//. . eJl拢/e.



e f/I'r!



fire Pic!

"or A1.

approved and now the center plans to be up and running in September."

ffred o cRnel/... ,/ ""c-rL'

But I'm looking forward to working with the lawyers throughout the state. I think lawyers are some of the best citizens we have in

Arkansas. The legal profession has tremendous minds and talents that make them smart enough to really get things happening." Getting down to business, getting things done. That's what jim McKenzie has been taught to do, and what he does. The evolution of the Presidency of james H. McKenzie is complete.

Editor's Note: Sincere thanks is given by the Editorial Stoff to ji", McKenzie, Itis fatlter, Uncle Dllnc, and tlteir stoff for Hleir graciolislless dllri1lg our visit to

Prescott. Pltotos by Dixie Knigltt.


bonds, and payments bonds. The bid bond is a surety bond which insures that the contractor will enter into a contract by paying the penal sum of the bond or the owner's actual damages if the contractor fails to enter into the contract or fails to post the required performance or payment bonds. Insuring that the contractor will complete

By David G. Paul

his obligation under the construction contract,

performance bonds obligate the surety to complete the Construction projects are a natural breeding ground for litigation. Unlike other contractual relationships, construction projects involve a mass of multiple contracts -\' for the supplying of labor and material in order to achieve the construction of the project. The typical project may have a prime contract between the general contractor and the owner, or ~ " multiple prime contracts between the owner __ and several contractors. And underneath



the prime contract, subcontractors and

suppliers provide labor and material. for the successful completion of the project. Ideally, the owner pays the prime contractor through progress -payments; the prime contractor pays. its subcontractors and suppliers; and the subcontractors pay their subcontractors and suppliers. In reality, • however, financial problems of the owner

or the prime contractor often interrupt or

altogether prevent the payment of the prime contractor, subcontractors, and

suppliers. evertheless, protection does exist • in the form of construction surety

bonds. This article will explore the nature and scope of the protection offered by surety bonds to persons, supplying labor and material to construction projects. PURPOSE AND PARTIES PROTECTED BY THE BO D Broadly speaking, a surety bond is three-way contract whereby t h e . surety indemnifies the obligee for the contractual default of the principal. In the context of construction projects,-, the principal is the contractor who ~ provides the bond, and depending upon the type of b o n d " provided, the obligee can be the owner, the subcontractors and_ suppliers, or the prime contractor. The most common type of bonds utilized in • construction projects are bid bonds, performance

t."2""'8,---A,.....,,R...,K,.,....,.A~N~S...,A:--='S---,-L...,A...,W~YCO-=E~R,---...,J...,U,.,....,L'"7Y~ ... 1 ~99 1 "

contract or pay damages up to the penal sum of the bond upon the contractor's default. A payment bond obligates the surety to pay subcontractors, materialmen, and

the bonds generally control who can claim against the bond and for what labor or materials. Since a surety bond

laborers for material and services furnished in

normally control the question of coverage. For example, payment bonds generally will allow a materialman to

performance of the construction contract. Again, the

normal limit of the surety's liability is the penal sum of the bond. As to the scope of the protection of the bonds, the terms

is no more than a contract, the terms of the bond will

pursue a direct cause of action against the surety; a strict

performance bond, however, will not allow any party but the owner to pursue a direct action against the surety.

However, the liability of the surety generally will not extend beyond that of the principal, and any defense of the principal on the contract will normally be available to the surety. The exception to this ru Ie, however, lies in the fact that the terms of certain bonds are controlled by statute. Particular types of construction projects, namely

public projects and projects for charitable or religious organizations, require bonds to

assure that persons supplying labor and material to the project are compensated. Regardless of the terms of the bonds, certain sections of the Arkansas Code will expand the surety's liability to accommodate the requirements of the

statutes.' For example, Ark. Code Ann. ยง 22-9401 (1987) requires surety bonds for the repair and construction of public improvements and mandates that the surety shall be liable for claims for labor and materials, including such items as fuel, oil, gasoline, rentals on machinery, and equipment. Similarly, Ark. Code Ann. ยง 18-44-503 (1987) likewise requires a bond for the construction or repair of public improvements, but the application of this statute is limited to contracts exceeding $20,000. Its coverage is also similar to that of ยง22-9-401. Although separate and distinct, these statutes do not contemplate that two bonds will be required for anyone project; rather, the purpose of ยง22-9401 is to designate certain claims which are to be covered by the bond. As to what lnaterials are within the coverage of the bond, the Arkansas courts have liberally construed statutory bonds in favor of suppliers of labor or material. With respect to various materials and hand tools to a subcontractor on a highway project, the court in NaliOllnl Surely Corp. v. Ideal Lumber Co.2 held that the tools were within the coverage of the bond, despite surety's defense that the tools formed no part of the improvement and therefore were not protected by the bond. The statute in

Ideal LIIII/ber was ยง 22-9-401, which by its terms covers materials or labor not incorporated into the project but

original contract, and for want of privity does not serve to

necessary for its construction.

bring such party within the purview of the principal

person's contract is therefore but indirect and collateral to the

To the extent that a claim is being made for something other than materials and labor provided for the project, the court has limited the coverage of such bonds. For example, the court in Fallsett Bllilders Illc. v. Globe Illdemllity Co.J held that the owner could not recover from the surety on a performance bond the amount of attorney's fees spent defending claims filed after the default of the contractor. Since the contract was one of ordinary suretyship rather than an indemnity agreement, the court reasoned that the right of recovery against the surety did not extend beyond the liability of the contractor. No agreement to reimburse the owner existed; therefore, the surety also was held not liable. Similarly, the court in Proctor Tire Service. Inc. v. I National Surely Co.,'! held that the mere assumption of the supplier that the goods would be used on a project was insufficient and that the materials must have been actually used in the construction of the project before a claim against the bond could be made. To determine which parties supplying materials or labor are covered by the bond, the court has distinguished between the obligations under common law bonds and statutory bonds. If the bond is a common law obligation, its terms control the coverage. The surety may extend or restrict the coverage at will since the contractual terms control. The coverage of a statutory bond, on the other hand, must conform to the statute,

The court was quick to point out, however, that coverage would be afforded to a materialman supplying materials directly to a subcontractor. Whether a bond is a statutory or common law bond becomes even more significant when the claimant has failed to perfect its lien rights. In General Electric SlIpply Co. v. Downtown Church of Christ,' the Arkansas Court of Appeals held that even though a material supplier to a subcontractor had failed to perfect its lien rights by timely filing a materialman's lien, the material supplier could pursue its claim under the terms of the bond. oting that the bonding of a church construction project was mandatory under Ark. Code Ann. ยง 18-44-504 (1987), the COllrt held that terms of the bond incorporated the coverage requirements of tJr.e statute, thereby allowing the material supplier to pursue its claim under the bond. In comparison, the Arkansas Supreme Court has held that an "indemnity bond," which indemnified the owner against "any loss or damage directly arising by reason of the failure of the principal" to perform the prime contract, did not allow a materialman supplying material to the prime contractor to claim against the bond." DEFENSES OF THE SURETY Despite the purpose of the bond to compensate parties for certain losses, the surety is not without its

and the Arkansas Supreme Court in Sweetser Co"~trllctioll

defenses. One of the most frequent defenses is whether

Co. v. Newmall Brothers. IlIc.s adopted the "privity of contract" rule to determine which parties may claim against the bond. Stated simply, the supplier must be in privity with the principal before he can recover on the bond. In Sweetser COllstructioll Co. the contractor agreed to build a dormitory for the University of Arkansas and furnished a bond pursuant to ยง 18-44-503. Sweetser Construction placed an order for materials with Fort Smith Structural Steel Company which, in turn, contracted with United Iron and Steel Company. United then purchased the materials from the Appellee. Appellee later brought suit against Sweetser Construction and its surety for the purchase price. Reversing the lower court's ruling, the Arkansas Supreme Court held that the supplier must be in privity of contract before it can recover on the bond.

the claimant has timely claimed under the terms of the bond, and again, whether the bond is a statutory bond will determine the time limit for claiming against the bond. Although the normal statutory period for initiating actions against a bond is normally five years,' statutory bonds have a considerably shorter time period. Under these statutes, the claimant has either six 1II0nths from the date of final payment on the contract or twelve months from the date that the Arkansas State Building Services approves final payment on the contracl.'. Obviously, the time periods which control common law and statutory bonds are considerable, and sureties will utilize the

"lGlne who supplied material to a materialman, who in turn

supplies the subcontractor is to be relegated to the status of a stranger to the original contract, since such person's contract or undertaking is neither with the principal contractor. Such

3 0



contractor's bond."6

shorter time periods to bnr n claim against a statutory

bond. Although sureties have attempted to shorten the time period through language in the bond, the Arkansas Supreme Court has not been receptive to this practice. II Another defense which is almost always fatal to an action by a subcontractor is the failure of the contractor to be properly licensed. Under the requirements of Ark. Code Ann. ยง 17-22-201 et seq. (1987), any contractor who J U L Y

1 9 9 J

enters into a construction contract which equals or

exceeds the sum of $20,000 must be licensed by the State Contractors Licensing Board; otherwise, the contractor is barred from pursuing any claim at law or in equity to enforce any provision of the contract, including an action for quantum meruit. This prohibition has been held to apply to unlicensed subcontractors as well against the contention that the statute was intended to apply only to prime contractors" However, the statute has been held not to bar actions by unlicensed contractors where the prime contract is with the United States Government. 13 Primarily as a defense against the owner of project on a performance bond, the surety may argue that the obligation under the bond has been discharged by the actions of the obligee under the bond. Alteration of the prime contract, extensions of time to complete the project, or release of the principal may discharge the surety from its obligations under the bond if the surety has not consented to these actions." Most often, the surety may claim that a material change in the scope of the project has occurred, which in turn prevents a claim against the bond. This defense is based upon the theory that the surety is entitled to rely upon the terms of the original contract and that any material alteration likewise alters its obligation, thereby releasing the surety from liability. IS However, the Arkansas Supreme Court has distinguished between a material change in the contract and a breach of the contract. I. While a failure of the obligee to abide by the terms of the contract will sometimes discharge the surety's obligations, the surety will not be discharged if the deviation from the contract terms will result in little or no harm to the suretyY Another defense of the surety may come in the form of the penal sum of the bond, which normally is the limit of the surety's liability. The amount of the bond normally dictates the limits of the surety's liability to the obligee, and the surety may refuse to pay for amounts in excess of the amount of the bond. However, if the surety attempts to complete the project after the default of its principal, the surety may be held to be a "completing surety," which forfeits the surety's protection of the penal sum. The courts have held that by taking over the contract and assuming the liabilities of the contractor, the surety becomes primarily liable under the contract to the obligee, and the surety's liability is no longer limited by the penal sum of the bond. IS The significance of this rule is that the surety's liability is dramatically increased. Although the Arkansas courts have apparently not had the opportunity to apply the "completing surety" rule, certain Arkansas cases have recognized that a

completing surety stands in a different position from one that is not completing. 19 CONCLUSIO While surety bonds offer protection to persons supplying labor and material to construction projects, a surety bond is not an insurance policy and should not be viewed as such. 2o However, if one timely and properly asserts a claim against the bond, it will provide the vehicle for compensating claims on a construction project.

David G. Paul is the Chair of the COllstrllctioll Law COII/II/iltee for the Arkallsas Bar Associatioll alld practices with the law firll/ of Sill/pSOII & Grahall/, P.A. ill Little Rock.

E DNOTES 1. See e.q Ark. Code Ann. § 22-9-403 (l987)(liability of public

works bond shall include the statutory coverage mandated by

Ark. Code Ann. § 22-9-401 (1987). 2. 249 Ark. 545, 460 S.W2d 55 (1970). 3. 220 Ark. 301, 247 S.W2d 469 (1952). 4. 242 Ark. 695, 415 S.W2d 45 (1967). 5. 236 Ark. 939, 371 S.W2d 515 (1963). 6. 236 Ark. at 943, 371 S.W.2d at 517 (quoting from city of St. Louis v. Kaplall-McGouxlII Co., 233 Mo. App. 789, 108 S.W2d 987 (1937)7. 24 Ark. App. 1,746 S.W2d 386 (1988). 8. Employers Liability Assurance Corp. v. A. W. joJmsoll Co., 234

Ark. 806, 354 S.W2d 733 (1962). 9. See Ark. Code Ann. § 16-56-112 (1987); City of Hal Sprillgs v. Naliollal SlIrely Co., 258 Ark. 1009,531 S.W2d 8 (1975). 10. See Ark. Code Ann. § 18-44-508 (l987)("No action shall be brought on the bond after six (6) months from the date final payment is made on the contract, nor outside the State of Arkansas.") and Ark. Code Ann. § 18-44-503 (Supp. 1989)(no action shall be brought on the bond after twelve months from the date that the Arkansas State Building Services approves final payment on the contract). 11. See Hartford Accident & Indemnity Co. v. Stewart Brothers

Hardware, 285 Ark. 352, 687 S.W.2d 128 (1985); City of Hot Sprillgs v. Naliollal SlIrety Co., 258 Ark. 1009,531 S.W2d 8 (1975). 12. Bird v. Pall Weslem Corp., 261 Ark. 56, 546 S.W2d 417 (1977). 13. Airporl COllstr. & Materials, Illc. V. Bivells, 279 Ark. 161, 649 S.W2d 830 (1983). 14. See gmerally A. Stearns, The Law of Suretyship §§ 6.1-.55, at 104-99 (5th ed. 1951). 15. Supra at § 6.2, at 107-08. See also O'Neal V. Kelley, 65 Ark. 550, 47 S.W. 409 (1898). 16. Carroll-Boolle Waler District V. M & P Equipl""1 Co., 280 Ark. 560,661 S.W2d 345 (1983). 17. Rolalld v. Lilldsey, 104 Ark. 49, 146 S.W 115 (1912). 18. See e.q. Caroll V. Alldrews, 133 Cal. App. 2d 402, 284 P.2d 544 (1955). 19. Argollaulills. Co. v. M & P Equipmellt Co., 269 Ark. 302, 601 S.W2d 824 (1980). See also Soutllem Surely Co. v. Pilillips/ 181 Ark. 14,24 S.W2d 870 (1930); Ulliled Slales Fidetily & Guarallty Co. v. Sellers, 160 Ark. 599, 255 S.W 26 (1923). 20. Sorry, Allan. Just had to tell you that one more time.

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MECHANICS· AND MATERIALMEN'S LIENS: APRACTITIONER'S CHECKLIST FOR FILING ALIEN By Susan Gunter allow service by mail. This Introduction Mechanics' or rna terialmen's liens amendment becomes effective july 15, impose a charge upon real estate to 1991.5 secure the payment for labor or Overview of the Arkansas Statutes materials used in erecting or repairing The Arkansas mechanics' lien structure or constructing statutes grant a lien upon any boat or a improvements on the real estate. vessel and upon buildings or The first lien statutes in the United improvements and the land upon Sta tes were proposed by Thomas which they are located, to those who jefferson and james Madison and perform work upon, or furnish any enacted by the Maryland General material, fixtures or machinery Assembly in 1791 to encourage pursuant to a conltact with the owner, construction of the nation's new his agent, trustee, contractor or a capitol city, Washington D.C.! This subcontractor. 6 A written contract is statutory departure from the English not necessary as a contract can be common law, which did not recognize implied from the circumstances or construction liens on real property, conduct of the parties? The lien arises became a model and now all fifty as soon as work "commences"8 or states have some form of construction materials are supplied by any lien statutes. qualifying laborer or materialman. History of the Arkansas Statutes The liens of later construction lien In 1895, Arkansas enacted the claimants "relate back" to the time the framework for the current Arkansas first work commenced with such construction lien statutes, now claimants haVing the same priority codified at Ark. Code Ann. §§ 18-44- regardless of when the work was 101 et. seq. Since 1970, there have performed or materials supplied. 9 A been several notable amendments: lien must be perfected within 120 surveyors and engineers were given days after the claimant performs the lien rights in 1971; a requirement was last significant work or provides the added in 1979 that prior to furnishing last materials.!O Every claimant except material, the owner of property must a laborer or the general contractor be given a specified form of notice of must give 10 days written notice the lien rights that could arise in the before the filing of a verified account, property ("due process notice");' commercial and industrial construction performed by licensed contractors was exempted from the due process notice requirement in 1983;3 lien rights were extended to • f architects, appraisers, abstractors and title insurance agents in 1987;" I"'" and in the recent 1991 legislative • f session, the archaic personal service requirement of the 10 day notice that must be given before an account is filed was amended to



to the owner or the owner's agent, setting forth the amount owed and by whom it is owed. 1I To perfect a lien, a claimant must file either a verified account!' with the clerk of the circuit court in the county in which the property is located or file suit!3 within the 120 day construction lien limitation period. Both the verified account or suit must contain a correct legal description of the property to be charged with the lien." Upon the filing of the verified account, the lien exists for 15 months!5 and a suit for foreclosure must be filed within that time. Any person desiring to remove the lien prior to or during the foreclosure suit may have it removed by filing a bond in twice the amount of the lien claimed.!6 There are several exceUent articles covering Arkansas construction lien issues in depth.t7 This article is designed to give practitioners a checklist for those occasions when a client calls you late one afternoon advising you that he has not been paid on a construction project, has exhausted his collection efforts, and needs you to file a lien. Six Critical Questions 1. When did you perform the last significant work on or provide the last materials for the property to be charged with a lien? A verified account filed within 120 days of the last significant work perfects the lien and allows 15 months to foreclose the lien. 18 However, if 110 or more days have passed from the date the last significant work or materials were prOVided, it is too late to give the 10 day notice that is a prerequisite to filing a valid account. Unless your client is exempt from giving the

notice (the general contractor or a laborer)19 then you must file a lawsuit which will perfect and foreclose the lien, and can be filed without giving the 10 day notice.20 If time permits, you shuuld file a verified account which allows 15 months to determine the identity and location of all necessary parties to the foreclosure suit. If you must file suit within the 120 day construction lien limitations period, it is critical to name all necessary parties (including the contractor, any subcontractor through which your client claims and competing interests such as mortgagees) as defendants or the lien will not be effective. Unlike other areas of the law allOWing liberal amendments, current case law on construction liens does not allow the amendment of the pleadings after the expiration of the 120 day limitations period to add necessary parties, unless you first filed a verified


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If the 120 day construction lien limitations period expired, your client has missed the construction lien statute of limitations, but may have alternative remedies as discussed in

question two. 2. Who owns the real property to be charged with the lien? If the construction lien statute of limitations has run, you still may have recourse if the owner of the property is the State of Arkansas, one of its political subdivisions, or any county, municipality, school district or other local governmental unit, the United States of America, or a church, other religious organization or charitable institution. Construction projects for the State of Arkansas, its political subdivisions, counties, municipalities, school districts or other local government units in excess of $20,000;" construction projects for the United States in excess of $25,000;23 and construction projects for churches, other religious organizations or charitable institutions in excess of $1,()()()24 are required to be bonded. Pri va te construction projects may also be bonded." If you are still within the 120 day construction lien limitations period and have

3 4



ESTABLISHED: 1980 reason to believe that the job may be bonded, the recommended practice is to file a lien in addition to making a claim on the bond. A release of the lien can be promptly filed when it is determined that the bond provides a remedy.2. If you arc outside the 120 day construction lien period and a bond exists, proceed on your bond claim. 27

3. Are you the general contractor, a subcontractor, a materialman to the general or subcontractor, or merely a supplier to a materialman? Your client must have privity of contract with the general contractor. Under current law, a supplier to a


materialman is not entitled to a lien.'" Even if you find your client in a remote position in the contractual chain, file the lien. Lack of privity is not a bar to a lien claim but merely constitutes a potential defense. The plain language of the construction

lien statutes elevates all claimants to the posture of subcontractors and a good faith argument exists for a change in the case law. 29 4. What is the street address or legal description of the real property? Use the most precise and complete description that your client can proVide or that you can obtain. A precise legal description is always preferable. Make sure your description is not too broad. 30 5. Was the due process notice given to the owner or the owner's agent prior to the commencement of work? It is the duty of the general

contractor to give the due process notice, but it may be given by anyone. Arkansas is rigorous in its

specifications of the due process notice, requiring that the notice be in all capital letters on an 81/2 x 11


9 9

sheet of paper and the statute sets forth the exact language of the notice}!

The Arkansas Supreme Court declared the exemption to the due process notice for licensed contractors performing work on commercial and industrial construction to be unconstitutional. 32 As a matter of practice in the industry, notices have not been given on commercial and industrial construction projects, in reliance on the exemption. Even if you find that the due process notice was not given, your client may still have the ability to obtain a lien for some or all of the sums which are owed: (A) If your client contracted with the general contractor, the general contractor may be the authorized agent of the owner, thus a "direct sale" occurred which requires no due process notice;33 and (B) If you represent a contractor, subcontractor or materialman whose claim includes labor, attempt to recover the labor portion of the claim even if the materials portion of the claim is barred}' There is no requirement that laborers provide the statutory notice. If your client has employed and paid laborers, obtain a written assignment of laborers' claims. Materialmen providing incidental labor are not entitled to a lien for labor unless they obtain an assignment of the laborers' rights 3S and the lack of an assignment of labor can be raised as a defense against a contractor. The statute governing assignment requires that the owner have actual notice of the assignment36 and early cases (still cited with approval) provide that the lien must be perfected before it can be assigned. 37 If you are approaching the 120 day construction lien limitations deadline, consider incorporating assignment language in the verified account and having the laborers execute the verified account effecting simultaneous perfection and assignment. 38 When pursuing labor claims, it is im porta n t to note t ha t you r attorneys' fees are recoverable as part of your client's lien. 39 6. Are any of the parties against

whom or through whom you claim your lien in bankruptcy? A call to the United States Bankruptcy Court computer in Arkansas will let you know if any necessary party has filed bankruptcy.40 A call can prevent an unintentional violation of the automatic stay of 11 U.s.c. § 362(a), which prohibits suit against a debtor. More importantly, it will allow you to proceed correctly. If the general contractor is in bankruptcy, and you are forced to file suit to perfect the lien, you may include the general contractor as a named defendant in the complaint but seek no affirmative relief against him. Alternatively, you may be able to rely on an Arkansas case which rules that the bankrupt general contractor need not be named as a party to such a suit." If the owner of the real property is in bankruptcy, it is necessary to either file a notice in the bankruptcy proceeding to perfect the lien" or to seek relief from the automatic stay·3 The filing of this notice is an alternate method of perfecting your client's lien. 44 While the filing of notice to perfect the lien has a specific exemption from the automatic stay, before taking any further action to foreclose the lien you must obtain relief from the automatic stay in the Bankruptcy Court.'s File a request for notices in the bankruptcy, review the schedules and evaluate whether you need to file a secured proof of claim before the expiration of the claims bar date'. or seek relief from the automatic stay to foreclose the lien. Conclusion This checklist is not exhaustive, but is intended to provide a general guide that you can expand over time

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Suite 410, Memphis, T 38120. (901) 685-2120. with your own experiences. The Arkansas construction lien statutes have been described as traps for the unwary attorney because the statutes in derogation of the common law, are strictly construed, the limitation periods are short and there are multiple notice requirements which must be complied with in order to properly prepare a construction lien. In spite of, or perhaps due to, the statutory complexity and changing notions of due process, this is a challenging area in which to practice. NOTES 1. See. Pasvogel. Ark. Construction Mechanics' and Materialmen's liens, § 1-2 (1982); ickles. Creditors' Provisional Remedies and Debtors' Due Process Rights: Statutory Liens In Arkansas, 32 Ark. Law Rev. 185 (1978). 2. Act 746 of 1979. Ark. Code Ann. § 18-44-115 (1987). 3. Act 304 of 1983, amending Ark. Code Ann. § 18-44- 115 (I 987). 4. Act 1035 of 1987, adding Ark. Code Ann. § 18-44-133 (1987). 5. Act 588 of 1991, amending Ark. Code Ann. § 18-44-114 (1987). 6. Ark. Code Ann. § 18-44-101 (1987). 7. See, Gillisotl Discount Bllilditlg Materials lI. To/bot, 253 Ark. 696, 488 S.W.2d 317 (1972). 8. Whether work has been commenced is a fact question. Mark's Sheet Melal. Inc. v. Repubfic Mig. Co., 242 Mk. '75,41' S.W.2d 106 (1967) (measuring the premises and locating a peg is not the commencement of work). See also. Clark v. Get/'f Elee. Co., 243 Ark. 399, 420 S.W.2d 830 (1967) (preparatory work such as grading or debris removal \\'hich is not visible does not constitute the commencement of work SO as to give a construction lien priority over a subsequently recorded construction mortgage). 9. Ark. Code Ann. § 18-44-112 (1987). See also, Planters Lumber Co. v. Jack Collier East Co., 234 Ark. 1091,356 S.W.2d 631 (1962). 10. Ark. ode Ann. § 18-44-117 (1987). As to the issue of when the 120 day period begins, see note 18, jnfra.

11. The general contractor is exempted from the 10 day notice requirement by the statute itself. Ark. Code Ann. § 18·44-114 (987). See also, Gipsoll Crane Rental v. Tysoll Foods, II/c., 272 Ark. 485,615 S.W.2d 363 (981) (labor not governed by § 18-44114). Act 588 of 1991, effective July 15, 1991, amends Ark. Code Ann. § 18-44-114 (1987) to allow the 10 day notice to be served by mail, return receipt requested. Until July 15, 1991, the 10 day notice is still required to be personally served. 12. See, Rasmussell v. c.J. Homer Co., 255 Ark. 1030,505 S.W.2d 225 (1974) (held that an affidavit was essential). 13. Liens can be enforced in circuit court, Ark. Code Ann. § 1844·120 (987), or in chancery court. See, Montgomery v. Stroud, 223 Ark. 295, 265 S. W.2d 723 (1954). See also, 10/'" E. 8ryall' & Sons Lumber CO. Y. Moore, 264 Ark. 666, 573 S.W.2d 632 (1978) (substantial compliance with the requirement for an account occurred even if a complaint filed within 120 days to perfect the lien did not attach invoices as exhibits). 14. The legal description must contain information sufficient to permit the location of the property to be charged with the lien. See, Arkhola Sand & Gravel Co. v. Hutchinson, 291 Ark 570,726 S.W.2d 674 (1987) (failure s'a'e where .79 acres was located within a 20 acre tract was fatal). See also, Natiollal Lumber Comptmy v. Advallce Development Corp., 293 Ark. 1,732 S.W.2d 840 (1987) (a dismissal of a suit for inaccurate description precluded a later refiling). 15. Ark. Code Ann. § 18-44-119 (1987). 16. Ark. Code Ann. § 18-44-118 (1987). 17. See ote 1, sl,pra. 18. See, Arkansas Louisialla Gas Co. v. Moffitt, 245 Ark. 992, 436 S. W.2d 91 (1969) (incidental cleanup or repair such as recalibration of equipment does not extend 120 day limitaHons period). Ask your dient to describe to you the construction project and what information they are relying on to determine when they proVided the last labor or materials. Also, make sure there is only one contract. If there is more than one contract, an account must be timely filed for each separate contract. Gunter Brothers Lumber Co. v. LllllllillS, 11 Ark. App. 191,669 S.W.2d 205 (Ark. App. 1984). 19. See, note 11, supra. 20. See, Wiggins v. Searcy Fed. Say. & uxm Ass'n, 253 Ark. 407, 486 SW.2d 900 (1972). 21. See, B.S.C.. Illc. v. McKinney, 263 Ark. 110, 562 S.W.2d 600 (1978) (materialman's mistake in naming the wrong contractor was not detected until after 120 days and the suit against the owner was dismissed); See also, Lowe's of Arkansas. I"c, v. Bush, 282 Ark. SOB, 669 S.W.2d 198 (1984) (failure to name mortgagee within 120 days invalidated lien); See also, Cline v. B.G. CO",,!! Co., 289 Ark. 417, 711 SW.2d 815 (986) (claimant properly named the general contractor and the owner, but the subcontractor with whom the claimant had contracted was not named until the 123rd day resulting in a summary dismissal of the lien). 22. Ark. Code Ann. §§ 18-44-501 et. seq. (1987 and Supp. 1989). These statutes give a claimant 12 months from the date of final payment to file suit. Suit must be filed in Arkansas. See, Arkhola Sand & Gravel Co. v. City of Booneville, 694 F.2d 528 (8th Cir. 1982) (if no bond was obtained, a claimant has no cause of action against the


3 6


city). See also, Beebe School DistriCl v. National Supply Co., 280 Ark. 340, 658 SW.2d 372 (983) (it is the duty of the materialmen to check the records to determine if a bond exists). 23.40 U.5.CS. § 2700 (Law. Co-op. Supp. 1990). 24. Ark. Code Ann. § 18-44-504 (1987). See, Genera/ Elec. Supply Co. v. DonmtowII Church of Christ, 24 Ark. App. 1,746 S.W.2d 386 (1988); See also, Milord & Blallks v. Arkmo Lumber & Supply Co., 272 Ark. 462, 615 SW.2d 349 (981) (if the bond is not furnished or filed, lien claimants are entitled to liens against the property). 25. Ark. Code Ann. § 18-44-505 (1987). The bond is required to be filed with the circuit clerk of the county in which the real property is located. Ark. Code Ann. § 18-44-507 (987). 26. Be sure to promptly release the lien when you determine the job is bonded, since Ark. Code Ann. § 18·44-132 (987) provides penalties for improper lien retention. 27. Ark. Code Ann. §§ 18-44-501, et. seq.; Paul, The Law of Constntction Bonds ArkmlsQSi A Review, 9 UALR L.J. 333 (98687). 28. See, Valley Metal Works. Inc. v. AD. SmitllIIl/mld.lllc., 264 Ark. 341, 572 S.W.2d 138 (978). 29. The literal wording of the statute would permit remote claims. Ark. Code Ann. § 18-44107 (987). provides that "Ialll persons furnishing things or doing work provided for by this subchapter shall be considered subcontractors except those persons having contracts therefor directly with the owner or proprietor or his agent or trustee." A contract with a subcontractor satisfies Ark. Code Ann. § 18-44-101 (1987), but this argument was rejected in Valley Meta/ Works, note 28, supra. 30. See Note 14, supra. 31. Ark. Code. Ann. § 18-44-115 (1987). 32. See, Urrey Ceramic Tile Co. v. Mosley, 304 Ark. 711,805 S.W.2d 54 (1991). On appeal, 'he Arkansas Supreme Court affirmed a ruling of the Columbia County Circuit Court holding unconstitutional section 18-44-115(f), which exempted "commercial and industrial construction performed by contractors licensed under § 17·22·101" from giving the due process notice. The lower court found that the exemption for commercial construction by licensed contractors lacks a rational basis for its discrimination between commercial and residential construction, thus violating applicable equal protection clauses. The Arkansas Supreme Court found that the statute was an unconstitutional violation of the fourteenth amendment of the United States Constitution because it fails to provide due process to commercial property owners and affirmed the decision even though the lower court "announced the wrong reason for its ruling." For prior opinion of the Arkansas Supreme Court with a different perspective on due process requirements, see, South Central Disl. v. Bruce Rogers Co., 269 Ark. 130, 599 S.W.2d 702 (Ark. 1980). The Arkansas Attorney General has issued opinion no. 91-143 interpreting the effect of Urrcy on on-going construction pro-ects. 33. Ark. Code Ann. § 18-44-115(e) (1987). See, Duncan v. Davis atld Eamest. Inc., 285 Ark. 143, 685 S.W.2d 509 (1985). 34. See, Gipson Crane Rental v. Tyson Foods. Inc., 272 Ark. 485, 615 S.W.2d 363 (1981). However, this exemption for labor may itself be constitutionally defective on either equal protection or due process grounds. 35. See, Christy v. NabllOlz Supply Co., 261 Ark. 127, 546 S.W.2d 425 (977) (requires the assignment of laborers' claims to materialmen




who provided incidental labor along with materials). 36. Ark. Code Ann. § 18-44-113 (987). The notice of assignment could be incorporated into the 10 day notice letter or in the situation where the limitations period necessitates that suit be filed, into the complaint itself. 37. See. Wyatt Lumber & Supply Co., Illc. v. Hallsen, 201 Ark. 534, 147 S.W.2d 366 (19401 (a construction lien is assignable, but the right to perfect a construction lien is not); See also, Middleton v. Watkins Hdwe. Co., 196 Ark. 133,116 S.W.2d 1043 (1938). 38. Review the separate laborer's lien statutes found at Ark. Code Ann. § 18-43·101 et. -. (1987). Ark. Code Ann. § 18-43105 (1987) gives laborers eight months after the work is done to file a sworn statement with the circuit clerk to perfect the lien. 39. In Dempsey v. McGowall, 291 Ark. 147, 722 S.W.2d 848 (1987), the Arkansas Supreme Court held that no lien attaches for the attorneys' fees of a mechanic or materialman, but Ark. Code Ann. § 1844·128 (1987) allows attorneys' fees to laborers if after 20 day notice requesting payment, no payment is made. Cf: Ark. Code Ann. § 18-43-111 (1987). 40. For information on Arkansas bankruptcies, call 324-5770 on a touch-tone phone and follow the computer instructions. 41. See, Gipsoll Cralle Refltal v. Tysoll Foods, 272 Ark. 485, 615 SW.2d 363 (1981). If you rely on Gipson, your complaint should recite the bankruptcy filing and you should send the debtor an informational copy of the complaint. 42. 11 USc. § 546(b) allows perfection of an interest in property by the filing of a notice in the Bankruptcy Court within the time allowed by law. Giving this notice does not violate the automatic stay. See, 11 USC § 362(b)(3). The notice should comply with all requirements for a verified account. 43. A motion for relief from the automatic stay is a contested matter. See, Bankruptcy Rules 4001(a)(l) and 9014. Thirty days after the motion is filed, the court must enter an order extending the stay or it is vacated and a final hearing on the motion must be held within 60 days. Expedited ex parte relief from the stay may be obtained if the requirements of Bankruptcy Rule 4001 (a)(3) can be met. 44. See, hi the Matter of Fiorillo & Co., 6 C.B.C2d 607 (Bktcy. S.D. N.Y. 1982); See a/so, III re WWG 11Iduslries. 11Ic., 13 C.B.C2d 1053 (llth Cir. 1985); I" re Jones & Lamson Maclline Co .. 11Ic., 24 CB.C2d 12 (Bktcy. D. Ct. 1990). 45. See, 11 U.5.C § 362(d). 46. Attorneys should be aware that the filing of a proof of claim in a bankruptcy subjects a claimant to the Bankruptcy Court's jurisdiction and effects a waiver of the right to a jury trial. umqellknmp v. Culp, U.S. ,111 5.Ct. 330, 112 L.Ed.2d 343 (1990). In Arkansas, if you are entitled to a jury trial and do not waive this right, the case will be referred from the Bankruptcy Court to the United States District Court. See, 111 re U1Iited Missouri Bank of Ktm5ns City. N.A., 901 F.2d 1449 (8'h Cir. 19901.

Susan CUI/ter practices with the Little Rock Law Firm of Mitchell, Williams, Selig & Tucker. Her practice is focused ill the area of Commercial Litigation & Bankruptcy, including the representation of clients with cOllstructioll matters. She is also a member of the COllstruclio'l Law Committee of the Arknnsas Bar Association.

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UNILATERAL MISTAKES IN BIDS FOR CONSTRUCTION CONTRACTS BY: JACK EAST III formation phase of their projects. 3 In the private sector it is the owner's "Instructions to Bidders" (ITB) which specifies the bid phase requirements, rights and duties.' The bid phase of competitively let contracts generally begins with a mailed pre-solicitation notice to interested contractors followed up by a published solicitation for bids (public jobs) or ITB (private jobs). These invitations briefly describe the


â&#x20AC;˘ t


....â&#x20AC;˘ t

work and owner's estimate of cost

Competitive bidding is the sine qua IJOIJ of public works construction at all levels of government. Its purpose is the prevention of fraud, favoritism and the waste of public funds.! In the private sector competitive bidding is utilized by owners concerned with project completion at the lowest possible price consistent with prevailing economic conditions. 2 This article shall briefly and generally describe the rights and remedies of bidders who have made mistakes in computing their bids and, therefore, desire to withdraw the mistaken bids on rescission grounds or obtain additional compensation from the owner.

BACKGROUND Initially, it must be noted that federal and state laws and regulations provide a detailed framework speCifying procedures to be followed by governments in the contract

3 8


involved; note the owner's architect or engineer; state where and how interested bidders may obtain copies of the bid forms, plans, specifications and other contract documents; and specify the time and place bids will be received and opened. s The solicitation or ITB usually precedes the bid opening by 30 to 45 days. Interested bidders purchase copies of the above described bid documents and prepare their bids based upon the estimated cost of labor, equipment, office and field overhead, and quotes from trade subcontractors, materialmen, suppliers and other relevant factors. After determining these costs the bidder will generally analyze the bid form in order to determine how to advantageously spread his costs and profit depending, in part, on whether the form requests bids on a lump sum or unit price basis. The interested bidder will then fiII out and sign the bid form and other necessary bid documents,



attach his bond or security and submit the "bid package" to the owner prior to the specified deadline for submission of bids. Under the law, bids received by the project owner are merely offers to

do the work, however, after opening these offers are generally irrevocable for a stated period of time either by law or the ITB. Please note that these irrevocable offers need not be supported by monetary consideration flowing from the owner to the bidder in order to be enforceable" The consideration to the bidder in exchange for his irrevocable offer is the right to have his bid considered on the merits 7 along with the bids of others who timely submit bids. At the bid-opening or letting, the owner will open and examine the bids. Those bids failing to comply with the requirements of the law, invitation for bids or instructions to bidders should be rejected. The owner or his representative will then prepare a "spread sheet" or "abstract" identifying the responsive bids in order to analyze the various offers in terms of pricing and other factorssuch as requested alternates. All things being equal, the owner should then "award" the contract to the lowest responsible bidder who submits a responsive bid for the work. The "award" is the owner's acceptance of the bidder's offer. Any prime contractor who bids on projects with a bid bond or security requirement must enter into the contract, if awarded, or run the substantial risk of a bid bond or security forfeiture. Unfortunately, it is not unusual for prime contractors to make mistakes in preparing their bids in light of the time element involved, competitive pressures and the understandable desire to obtain as many price quotes and, perhaps,

revisions to quotes from the trades and materialmen. As is well known, primes may be involved in preparing and revising their bids literally until the minute before they are due. Fair and understanding project owners will recognize the difficulties faced by prime contractors and allow


withdrawal prior to award if the

economically unrealistic perform-

profit, overhead, etc., in another

prime has made a serious, honest and

ance. 9

phase of the work. Thus, the alleged

non-negligent mistake and the mistake is apparent from either the bid itself or when compared to the owner's estimate of the cost of the work or other bids. Some owners,

ELEMENTS OF A BID WITHDRAWAL CLAIM The Arkansas Supreme Court has recently confirmed the elements of a bid withdrawal claim in Amer;can llJSllrallCe Company v. Mowr/aiu Home School Districl No.9, 300 Ark. 547, 780 S.W2d 557 (1989). These elements are: (I) The mistake must be of so great a consequence that to enforce the bid or contract as actually made would be unconscionable; (2) The matter as to which the mistake was made by the bidder must relate to a material feature of the contract; (3) The mistake must have occurred notwithstanding the exercise of reasonable care by the bidder; (4) The bidder must be able to get relief by way of rescission without serious prejudice to the owner, except for the loss of the bargain. The first element (unconscionability) focuses upon the harm to be suffered by the contractor if he is held to his bid and upon an analysis of the work to be done as compared to the price quoted by the bidder. Evidence that the bidder will suffer a loss or will be ruined financially is a factor to be considered but it is not the controlling factor. 10 Other matters to be considered insofar as the unconscionability element is






understanding and, on occasion, there is a legitimate question whether a

mistake has been made. It is these cases which frame the common law of rescission in the construction contract context.

GENERAL PRINCIPLES OF RESCISSION Rescission is the cancellation of contractual obligations by consent or by a court of equity. As noted in Call

v. Un;on National Bank of lillIe Rock, 203 Ark. 1000, 159 S. W. 2d 757 (1942) rescission is generally available to a promisor only in cases of mutual mistake, or when his unilateral mistake is coupled with fraud or inequitable conduct on the promisee's part. The theory behind rescission is, of course, that contract formation requires the voluntary assent of the parties to the essential terms of a contract but such assent is lacking when the parties are mutually mistaken, or one is mistaken and

there is wrongful conduct on the part of the other. Absent mutual mistake or unilateral mistake coupled with fraud or inequitable conduct the courts are loath to interfere with the expectancy interests of a promisee who has bargained in good faith for the performance promised. In the law of construction contracts, however, the courts will

order rescission, or allow a bidder to withdraw his so-called irrevocable bid without penalty, in certain cases of unilateral mistake even where the promisee has not engaged in fraudulent or inequitable conduct. 8 Judicial acceptance of bid withdrawal prior to award, and in some cases rescission after award, constitutes a practical solution to the economic waste and destruction which could be imposed upon even the most conscientious bidders at the hands of owners looking for a windfall in the form of the bidder's security or

concerned are the owner's own

estimates of the cost of the work and other bids. If the bids submitted are tightly bunched save for the allegedly mistaken bid which is substantially lower - then the bidder alleging mistake is armed with persuasive evidence of unconscionability. Owner belief that a mistake has been made is not essential to rescission prior to award, but if the owner suspects the bidder's mistake, the chances of rescission are greatly enhanced. The second element (materiality) is closely related to the first element (unconscionability) insofar as proof is concerned. The amount of the bid is always a material feature of the contract. But note the exact error claimed. One unit price may be out of line but the overall bid may not due to the bidder's concentration of his

"mistake" may not be materiaL On

the other hand, if (for example) a unit price quoted is $.43 per unit when the bidder intended $.83 per unit resulting in a $300,000.00 error on a $1.6 million job, then the error is material. l1

The third element (reasonable care) focuses upon two things: the type of error made, and the contractor's

method of bidding. Clerical errors such as transpositions, misplaced decirnal points, etc., are classic

examples of errors for which a bid may be withdrawn, if material, and are sometimes made by even the most cautious bidders. But even if such scrivener errors cannot be identified

the bidder may be entitled to relief. Indeed, Judge Eisele quotes one authority as postulating that the offeror need not know, either objectively or subjectively, the exact nature of the error." Also analyze what measures the mistaken bidder takes during his price work-ups to prevent errors. Checks and crosschecks of unit prices, quotes, etc., indicate reasonable care. Conversely, the absence of such preventive devices may be proof of a lack of reasonable care which would defeat the bidder's attempt to withdraw. The fourth element (no prejudice) focuses upon the supposed harm to be suffered by the owner if withdrawal is allowed. Rescission is allowed only when the owner can be returned to the statlls qllo. (Again note, however, that loss of the "unfair" bargain is not the kind of prejudice which will defeat the rescission claim.) If the owner awards the contract before the notice of withdrawal, or if the owner releases other bidders, he may have suffered prejudice. Withdrawing a bid on a federal job is not quite as difficult as doing so at the state level. A bid may be withdrawn on a federal job if the bidder requests permission to withdraw in timely fashion and the evidence of mistake-other than a bidjudgment type error-is clear and convincing. 13 It must also be noted

that federal contracting officers have a positive duty to examine all bids for mistakes." If the contracting officer knows, or should know, that the successful bidder has made a mistake but awards the contract without notifying the bidder of same, the bidder may be able to subsequently obtain increased compensation for the work on a reformation theory of recovery. IS TIMING IS CRUCIAL All bidders should analyze the owner's "bid spread" immediately after the bid opening. If analysis leads a bidder to suspect an error but it is not readily apparent from the bid itself he should promptly notify the owner in writing that a mistake may have been made; that he will promptly investigate his bid to determine whether a mistake has been made; and that the owner should defer award and release of other bidders pending conclusion of the investigation. The purpose of such efforts is to prevent a change in the slaills qllo. Thereafter the bidder should comprehensively review his

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bid for typographical mistakes, errors or omissions in computation and subcontractor/materialmen errors. If the bidder has satisfied the owner or court that each of the elements discussed previously have been proven prior to award (acceptance), then he should be allowed to withdraw his bid and either the return of his bid security or the cancellation of his bid bond. If a bidder discovers a mistake after the owner has awarded the contract but before the work has begun he may still be entitled to rescission but - in addition to the four elements discussed previously - he must now

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prove a fifth element: that the owner knew or should have known at the time of award, that the bid was a mistaken one. I. After the work has begun, rescission is generally no longer available, however, reformation may be available in the federal field. J7 SUBCO TRACTOR OR SUPPLIER MISTAKES Subcontractor or supplier mistakes present special problems. The principal issue is whether the mistaken subcontractor or supplier must perform under the terms of his mistaken bid (or be liable for damages) on a theory of promissory

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estoppel. Please note that subcontractor/supplier quotes are usually not irrevocable. Thus, under common law principles should not the subcontractor or supplier have the right to revoke his offer prior to the prime's acceptance? The courts and commentators are fairly evenly divided on this question.'s Those courts refusing estoppel relief to the prime do so because the estoppel is not mutual. In other words, the prime is refused relief because the subcontractor or supplier may not force the prime to accept his bid and, therefore, it is inequitable to bind the subcontractor or supplier in such situations. The Arkansas Supreme Court has rejected this rationale. In F.B. Reynolds v. Texarlal/la Construction Company, 237 Ark. 583, 374 S.w. 2d 818 (1964) the Court concluded the better rule is that the subcontractor is bound to perform upon the terms of his bid because: Justice demands that the loss resulting

from the subcontractor's carelessness should fall upon him who was guilty of the error rather than upon the principal contractor who relied in good faith upon the offer that he received.

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Whether non-negligent subcon- principles should be remembered: tractors or suppliers successfully may 1. The bid solicitation, Plans, seek to revoke prior to the prime's Specifications, bid schedule and other acceptance in Arkansas under the Contract Documents are the owner's American Insurance Companyl9 lookout and they must be reasonably rationale is still an open question. clear, precise, unambiguous and not Please note, however, that if the prime misleading. (If the solicitation, Plans, knows, or should know, of the Specifications, etc. are unclear, vague, subcontractor's mistake or otherwise ambiguous or misleading, the engages in inequitable conduct, then "mistaken" bidder will have a much rescission is available. 2o better case for withdrawal because he PROCEDURE can rightfully assert that he made a Bid withdrawal or rescission is, of "mistake" due to the owner's course, an equitable remedy and improper conduct);22 should be pursued in chancery court 2. Assuming clarity and precision when political subdivision or private jobs are involved. In the federal context the rescission claim must first be addressed to the contracting officer. Thereafter, relief may be pursued before the ._ Comptroller General or in the .. ~ Claims Court or an appropriate .. Board of Contract Appeals I .... depending on whether an award ~ ~ has been made. 21 If claiming, or ~ ... defending against, an allegedly ~ mistaken bid the following '...


of the solicitation, etc., it is good public policy to place the heavy burden of proof, i.e., "clear and convincing," in a unilateral mistake case upon the party asserting mistake, the bidder, rather than the blameless party in such cases, the owner;23 3. "Bid-judgment" errors are not the types of mistakes justifying rescission;24 4. If the mistaken bidder can establish owner knowledge of the mistake, actual or constructive, the rescission claim is greatly enhanced because then the owner has engaged in inequitable conduct - a "classic" ground for rescission in equity when coupled with a unilateral mistake. 25 CONCLUSION Rescission is a practical solution to a recurring problem in the construction industry. This relief is a necessary corollary to sealed-bid procedures and, as long as the mistaken bidder is held to his burden of proof, shou Id not be viewed as a fortuitous escape hatch for careless bidders.

ENDNOTES 1. FOiles Bros. Hardware Co. v. Erb, Judge, 54 Ark. 654, 17 S.W. F (1891); U.5. v. Brookridge Farm, 111 F. 2d 461 (9th Cir. 1940). 2. Architect's Handbook of Professional Practice, Vol. 1, Ch. 16, p. 5 (Jan., 1971 Ed.). 3. Constitution of Ark. Art. 19, Sec. 16 (County contracts for repair of public buildings and bridges must be competitively let); Ark. Code Ann. 22-9203 (1989 Cum. Supp. - public works contracts of state and political subdivisions must be competitively let if estimated cost exceeds stated amounts); Ark. Code Ann. 27-67-206, 207 (Arkansas State Highway Commission construction and repair contracts must be competitively let); 41 U.s.c. Sec. 5, 253; 4B c.F.R. 1.101 el 4. For example, see American Institute of Architects ("AlA") Document A701



......... "路..of;' j


entitled "Instructions to Bidders". 5. See Ark. Code Ann. 22-90-203 (1989 Cum. Supp.); Standard Specifications for Highway Construction (Ed. of 1991) at Section 102.02; 41 U.s.c. sec. 253-253b; AlA Document A 701. 6. Bailey v. Carler, 211 Ark. 369, 200 S.w. 2d 313 (1947); Scali v. Ullited Slates, 44 Ct. CI. 524 (1909). 7. Scolt tl. Ulliled Slates, 44 Ct. Cl. 524 (1909).

8. State ex rei. Arkansas State Highway

Commission v. Ottinger, 232 Ark. 35, 334 S.W. 2d 694 (1960); American IIISUrallCe Company v. Mountain Home School District No.9, 300 Ark. 547, 780 S.w. 2d 557 (1989); Alta Elec. & Mech. Co. v. Ullited Slales, 90 Ct. Cl. 466 (1940). 9. See discussion in Paul Hardematm, Inc. v. Arkallsas Power & Light Co., 380 F. Supp. 298 (E.D. Ark. 1974) at pp. 316-330. 10. Presidellt alld Co,mcil of MI. 51. Mary's College v. Ael,m Casualty aud Surely Co., 233 F. Supp. 787 (D. Md. 1964). 11. Arkausas State Highway Departmeut v. Ottiuger, supra. 232 Ark. 35, 334 S.W. 2d 694 (1960). 12. Palll Hardematlt" IlIc., 380 F. Supp. 298. 13. FAR 14.406-3(b); B & A Elec. Co., B197437, Feb. 18, 1981,811 CPD para. 147; 52 Compo Gen. 25B (1972). 14. FAR 14.406-1; Amerimu Shipbuildiug CO. V. Uuiled Slales, 654 F. 2d 75 (Ct. Cl. 19 1). 15. American 5IEipb"ildillg Co. v. United Stales, 654 F 2d 75 (Ct. Cl. 1981). 16. Kelmeth E. Curran Illc. v. State, 215 A. 2d 702 ( .H.1965). 17. Broil/ley COlltracting Co., Inc. v. United Slates, 596 F. 2d 448 (Ct. Cl. t979). 18. Dn'tltw1/ v. Star Paving Co., 51 Cal. 2d 409,333 P. 2d 757 (1958); Imues Baird CO. V. Gilllbel Bros., 64 F. 2d 344 (2nd Cir. 1933); F. B. ReYl/o/ds v. Texarkalla COllstrllctioll COlllpallY, 237 Ark. 583, 374 S.w. 2d 818 (1964); HOllie Eleclric of Lelloir, fI,c. V. Hall & Ullderdow1/ Heating & Air Conditioni/lg Co., 358 S.E. 2d 539 (N.C. App. 1987). See also Siegfried & Lawrence, Home Electric v. Hall & Underdown Heating & Air Conditioning: Mutuality Remains the Only Solution to the Construction Bidding Problem, 9 The onst. L. O. 4 (November 1989); Dew::. & Ruprecht, The Pit and the Pendulum: Balancing the Equities in the Construction Bidding Process, 10 The Const. L. O. 3 (August 1990); Hughes & Hurley, Home Electric/Hall versus Drennan/Star Paving: Mutuality Is No Substitllte for Equity, 10 The Const. L. '0. 3 (August 1990); Rowe &

GWyllll, Home Eleelric v. Star Pavins Promissory Estoppel Debale: The Rules

John H. Lawrence, Jr. P.E. Member, Panel of Arbitrators, American Arbitration Association Expert Witness. Graduate Civil Engineer 20 Years experience heavy construction in design, supervision & operations Former owner - Lawrence Brothers Construction Co.

Particular areas of expertise include:

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20. Ce"tex COllstruction Co., I"c. v. James, 374 F. 2d 921 (8th Cir. 1967 - Arkansas law). 21. If rescission is sought prior to an award the Comptroller General has jurisdiction per 31 U.s.C 3551 el . (1989 Cum. Supp.). After award the Comptroller General lacks jurisdiction, Sphere Mallagelllelll, B-202976, May 26, 1981, 81-1 CPO para. 44, and the claim must go to either the Claims Court or the relevant BCA under 41 U.s.C 601 et . 22. Celltex COllstructioll Co. v. James, 374 F. 2d 921 (8th Cir. 1967). 23. 72 C).S. Supp. Pubtic Contracts Section 14. 24. State v. Hensel Phelps CO/lstrucliml Co., 634 s.w. 2d 168 (Mo. 1982). 25. Hubbard v. E1alll, 238 Ark. 976,385 S.W. 2d 925 (1965).

lack Ensl 1/1 is of COUIISei 10 I/Ie Little Rock law firm of Hardi/l & Grace. He practices primarily ill tlte area of cOllstrllctiolllitigatioll, l1/Ougl/ his practice inell/des advice Qlld litigation i" otlter areas. Mr. East is Vice Chair of the COllstmctioll Lnw Committee of the Arkmlsos Bar Associatio1/ and is a member of tile America" Bar Associatiall's Fomm Oil the Constructio/l Industry as well as tlte Fidelity a"d Surety Law Committee alld Public Regulatioll of lnsura/lce Law Commit lee of the Tort aud 11lSllrallCe Practice Sectioll. He received Itis }.D. from tlIe Universily of Arkansas at Fayelteville.

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William J. Phelps was suspended from the practice of law for a period of one year for violations of Model Rules 1.3,1.4,1.5,1.16,3.2, B.4(c) and B.4(d) as a result of several complaints filed against him. Carl Phillips stated he paid attorney Phelps $200.00 and retained his services in a probate matter in April 1990. A hearing was scheduled for May 11. 1990. Mr. Phelps did not appear at the hearing and Mr. Phillips has been unable to make contact with the attorney since that time. David Smith retained Mr. Phelps in April 19B9 to conclude divorce proceedings that had been instituted in 路1987 in Lafayette County. A reconciliation had been attempted but failed and the divorce action was never dismissed. Mr. Phelps advised his client that a dismissal would be obtained and a new action filed in Pulaski County. In the succeeding months Mr. Phelps advised Mr. Smith that a motion to dismiss was filed, a hearing scheduled before the

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A.J. Hixon hired Mr. Phelps to prepare a limited partnership agreement. The agreement was prepared and executed by all necessary parties. Pursuant to Mr. Phelp's advice, Mr. Hixon returned the completed documents to his lawyer for filing with the Secretary of State. After several unsuccessful attempts to communicate with Mr. Phelps, the client contacted the Secretary of State's office and discovered that the documents had not been filed. Mr. Hixon was left without the original or copies of the agreement. William Bennett retained Mr. Phelps on March 29, 1990, to petition for increased child support on behalf of his daughter. After approximately five weeks without communication from his attorney, Mr. Bennett checked with the court clerk and found that no petition had been filed. Thereafter, despite numerous attempts, Mr. Bennett was unable to establish contact with Mr. Phelps. Although being duly served with the complaints pursuant to the Procedures of the Arkansas Supreme Court Regulating Professional Conduct of Attorneys at Law, Mr. Phelps failed to respond.


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• A complete digest of courts containing terms. rules and jurisdiction of federal. slate and local courts with names, addresses and telephone numbers of COUr! personnel.

• A complete roster of attorneys and law firms In Arkansas with addresses and telephone numbers.











1. Attorneys Roster by County & City 2. Attorneys Alphabetical by State

Arkansas Bar Association.

• Professional and biographical data of some of the law flrms and mdlvldual practitIoners In Arkansas.

3. Firms Alphabetical by State


Order as many copies as you need today' The pnce IS 534.00' plus 53.47 lor postage and handling totaling 537.47.

FacSimIle (214) 324·9414 TelephOne (214) 321·3238

'Pnce subject 10 change Without notice.

Check must Accompany order.



William E. Brown, Sr., President Honorary Member of rhe 1 arional As ociation of Legal Secretaries -

JULY 1991  

P.\l'L F 1I0RG.\:\ 1801 Iksl'rwir R,'ad'120 01991 West Publishing Company 1-9123-616·91 I 272951 I Litt1l' R"lk ..\R ,220, Plwllc: 501, 22·l...

JULY 1991  

P.\l'L F 1I0RG.\:\ 1801 Iksl'rwir R,'ad'120 01991 West Publishing Company 1-9123-616·91 I 272951 I Litt1l' R"lk ..\R ,220, Plwllc: 501, 22·l...