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

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

May 19, 2010 Session

KAY AND KAY CONTRACTING, LLC v.

TENNESSEE DEPARTMENT OF TRANSPORTATION

Appeal from the Claims Commission for the State of Tennessee

No. 20081364-I William O. Shults, Commissioner

No. E2009-01769-COA-R9-CV - FILED JUNE 25, 2010

Kay and Kay Contracting, LLC (“Contractor”) entered into a contract with the Tennessee

Department of Transportation (“TDOT”) to build a bridge in Campbell County, Tennessee.

Contractor subsequently entered into a subcontract with Whitley County Stone, LLC

(“Subcontractor”) to provide the excavation and grading work on the project. Subcontractor

does not have a written contract with TDOT. Both Contractor and Subcontractor filed claims

with the Claims Commission alleging they were owed money by TDOT. Subcontractor was

dismissed as a party because it did not have a written contract with TDOT, as required by

Tenn. Code Ann. § 9-8-307(a)(1)(L). The Commissioner, however, determined that

Contractor was allowed to prosecute Subcontractor’s claim as a “pass-through” claim. The

sole issue on this interlocutory appeal is whether Tenn. Code Ann. § 9-8-307(a)(1)(L)

removes the State’s sovereign immunity such that Contractor can assert a “pass-through”

claim against TDOT on Subcontractor’s behalf. We conclude that sovereign immunity from

such a claim is not removed, and we reverse the judgment of the Claims Commission.

Tenn. R. App. P. 9 Interlocutory Appeal by Permission;

Judgment of the Claims Commission Reversed; Case Remanded

D. M ICHAEL S WINEY, J., delivered the opinion of the court, in which H ERSCHEL P. F RANKS,

P.J., and J OHN W. M CC LARTY, J., joined.

Robert E. Cooper, Jr., Attorney General and Reporter, Michael E. Moore, Solicitor General,

and Steven B. McCloud, Senior Counsel, Nashville, Tennessee, for the Appellant, Tennessee

Department of Transportation.

Spencer D. Noe and Timothy C. Wills, Lexington, Kentucky, and Laurie H. Hallenberg,

Knoxville, Tennessee, for the Appellee, Kay and Kay Contracting, LLC.

OPINION

Background

The relevant facts for purposes of resolving this interlocutory appeal are

undisputed. Contractor entered into a written contract with TDOT for the grading, drainage,

and construction of a concrete Bulb-Tee beam bridge on Interstate 75 in Campbell County,

Tennessee. The initial estimated cost of the project was in excess of $10.2 million.

Subsequently, Contractor entered into a separate contract with Subcontractor for the

excavation and grade work on the project. The estimated cost of the excavation and grading

work was in excess of $3.1 million.

According to Contractor, problems developed during the construction of the

bridge, resulting in several adjustments to the contract price. After TDOT allegedly

defaulted on payment for various portions of the project, both Contractor and Subcontractor

filed a claim with the State of Tennessee, Division of Claims Administration. In September

2008, the claim was transferred to the Tennessee Claims Commission. Approximately one

month later, Contractor and Subcontractor filed a complaint with the Claims Commission

against TDOT. According to the complaint, Contractor was owed $298,751.41, and

Subcontractor was owed $199,746.63.1

TDOT filed an answer and denied any liability to either Contractor or

Subcontractor. TDOT also filed a motion to dismiss Subcontractor’s claims on the basis that

the Claims Commission did not have subject matter jurisdiction over Subcontractor’s claim

because there was no written contract between TDOT and Subcontractor.

Although the Commission agreed that Subcontractor was not a proper party to

the lawsuit in the Claims Commission, the Commission nevertheless concluded that

Contractor could pursue Subcontractor’s claim by asserting what is referred to as a “pass-

through” claim. According to the Commission:

The legal issue is whether or not a general contractor

involved in a large state highway construction project can assert

a claim on behalf of one of its subcontractors against the State.

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Contractor also requested additional relief, including an order granting Contractor “329 days of

additional time under the Contract and to terminate TDOT’s assessment of liquidated damages” against

Contractor.

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In contracts involving the federal government, as well as

nineteen (19) states which have addressed such a problem, this

sort of issue has been denominated as a “pass-through” claim.

* * *

According to the State’s position, the Commission lacks

jurisdiction here over [Subcontractor’s] claim since the General

Assembly of Tennessee, per the waiver of the State’s sovereign

immunity against contractor suits, has limited the right to

institute such causes of actions to those entities having a written

contract with the State. Here, so the argument goes,

[Subcontractor] does not have a written contract with the State

and therefore its claim for work it claims it performed, but for

which it has not been paid in full, cannot proceed before the

Commission. Additionally, the State argues that the general

contractor cannot assert such a claim - a so called “pass-through

claim” - on behalf of [Subcontractor]. Rather, the State

contended . . . [that Subcontractor should sue Contractor and] if

a final judgment is rendered . . . against [Contractor], it could,

in turn, file a claim with the Commission.

In its Response to the Motion to Dismiss, [Contractor]

concedes that under the Tennessee Claims Commission Act,

[Subcontractor] is not a proper party to this action.

Nevertheless, [Contractor] says it should be able to pursue, on

behalf of its subcontractor, a claim for work done which was an

important part of its overall contract on the . . . project. Such a

procedure would constitute utilization of the “pass-through”

theory recognized in federal government contracts and

apparently by at least eighteen of the states. In support of its

position, [Contractor] cites the United States Supreme Court

decision in United States v. Blair, 321 U.S. 730 (1944) and

quotes language from that opinion describing the general

contractor there as “. . . the only person legally bound to perform

[the] contract with the Government.” Id. at 737-738. . . .

Both parties informed the Commission that they have

been unable to find any precedent directly on point in Tennessee

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either permitting or disallowing a so-called “pass-through”

claim by a general contractor for one of its subcontractors.

The Commission then discussed federal law and law from other states, the vast

majority of which permit “pass-through” claims. After reviewing the law from other

jurisdictions, the Commission concluded that there clearly was a written contract between

TDOT and Contractor, and allowing Contractor to pursue a claim on behalf of Subcontractor

would not offend “the concept of sovereign immunity in Tennessee since the Tennessee

Claims Commission Act . . . [was amended] to direct a liberal application of its provisions

in order that its remedial purposes might be accomplished.” The Commission then

concluded:

Therefore, the Commission FINDS that although

[Subcontractor] is not a proper party to this litigation and

therefore, will be DISMISSED, the issue of [Contractor’s]

liability for nearly Two Hundred Thousand Dollars

($200,000.00) in payments allegedly owed to [Subcontractor] is

ripe for resolution now and may be prosecuted by [Contractor].

The State’s Motion to Dismiss [Contractor’s] claim on

behalf of [Subcontractor] must be respectfully DENIED. . . .

After entry of the above Order, TDOT filed a motion requesting permission to

file an interlocutory appeal to this Court on the issue of whether Tenn. Code Ann. § 9-8-

307(a)(1)(L) removes the State’s sovereign immunity for pass-through claims. The

Commission granted TDOT’s request for a Tenn. R. App. P. Rule 9 interlocutory appeal, as

did this Court. As stated, the sole issue on appeal is whether Tenn. Code Ann. § 9-8-

307(a)(1)(L) removes the State’s sovereign immunity such that Contractor can assert a “pass-

through” claim against the State on Subcontractor’s behalf.

Discussion

Since the relevant facts are undisputed, this appeal presents a question of law.

We review legal issues “under a pure de novo standard of review, according no deference to

the conclusions of law made by the lower courts.” Southern Constructors, Inc. v. Loudon

County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).

In Stewart v. State, 33 S.W.3d 785 (Tenn. 2000), our Supreme Court gave a

very thorough analysis of the subject matter jurisdiction of the Claims Commission.

According to the Supreme Court:

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It is a well-settled principle of constitutional and statutory

law in this state that “[t]he State of Tennessee, as a sovereign,

is immune from suit except as it consents to be sued.”

Brewington v. Brewington, 215 Tenn. 475, 480, 387 S.W.2d

777, 779 (1965). This doctrine of sovereign immunity “has been

a part of the common law of Tennessee for more than a century

and [it] provides that suit may not be brought against a

governmental entity unless that governmental entity has

consented to be sued.” Hawks v. City of Westmoreland, 960

S.W.2d 10, 14 (Tenn. 1997). Despite this general grant of

immunity, however, the courts of this state have frequently

recognized that the Tennessee Constitution has modified this

rule of absolute sovereign immunity by providing that “[s]uits

may be brought against the State in such manner and in such

courts as the Legislature may by law direct.” Tenn. Const. art.

I, § 17; see also Kirby v. Macon County, 892 S.W.2d 403, 406

(Tenn. 1994).

Pursuant to its constitutional power to provide for suits

against the state, the legislature created the Tennessee Claims

Commission in 1984 to hear and adjudicate certain monetary

claims against the State of Tennessee. See Tenn. Code Ann.

§§ 9-8-301 to 307 (1999). While the Claims Commission has

exclusive jurisdiction to hear claims arising against the state, cf.

Tenn. Code Ann. § 20-13-102(a) (1994), this jurisdiction is

limited only to those claims specified in Tennessee Code

Annotated section 9-8-307(a). If a claim falls outside of the

categories specified in section 9-8-307(a), then the state retains

its immunity from suit, and a claimant may not seek relief from

the state. Cf. Hill v. Beeler, 199 Tenn. 325, 329, 286 S.W.2d

868, 869 (1956) (stating that “except as the Legislature of the

State consents there is no jurisdiction in this Board of Claims to

entertain suits against the State”).

The courts of this state have traditionally held that any

statute granting jurisdiction to hear a claim against the state

must be strictly construed, as any such statute is in derogation of

the common law rule of sovereign immunity. See, e.g., Norman

v. Tennessee State Bd. of Claims, 533 S.W.2d 719, 722 (Tenn.

1975) (“We further recognize that the statutory provisions

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governing the Board of Claims have been strictly construed, in

view of the fact that they do represent an encroachment upon the

sovereign immunity and upon the assets of the State.”); State ex

rel. Allen v. Cook, 171 Tenn. 605, 609, 106 S.W.2d 858, 860

(1937) (“Statutes passed by the Legislature, under the authority

of article 1, section 17, of the Constitution, permitting suits

against the state, being in derogation of the sovereign’s

exemption from suits, must be strictly construed.”).

Nevertheless, in 1985, the General Assembly amended section

9-8-307(a) to express its intention as to the jurisdictional reach

of the Claims Commission: “It is the intent of the general

assembly that the jurisdiction of the claims commission be

liberally construed to implement the remedial purposes of this

legislation.” Tenn. Code Ann. § 9-8-307(a)(3).

Hence, although we have traditionally given a strict

construction to the scope of the Commission’s jurisdiction, we

also recognize that our primary goal in interpreting statutes is

“to ascertain and give effect to the intention and purpose of the

legislature.” Gleaves v. Checker Cab Transit Corp., Inc., 15

S.W.3d 799, 802 (Tenn. 2000) (citing Carson Creek Vacation

Resorts, Inc. v. State Dep’t of Revenue, 865 S.W.2d 1, 2 (Tenn.

1993)). If the legislature intends that its statutes waiving

sovereign immunity are to “be liberally construed,” then the

courts should generally defer to this expressed intention in cases

where the statutory language legitimately admits of various

interpretations. A policy of liberal construction of statutes,

however, only requires this Court to give “the most favorable

view in support of the petitioner's claim,” Brady v. Reed, 186

Tenn. 556, 563, 212 S.W.2d 378, 381 (1948), and such a policy

“does not authorize the amendment, alteration or extension of its

provisions beyond [the statute’s] obvious meaning.” Pollard v.

Knox County, 886 S.W.2d 759, 760 (Tenn. 1994). Moreover,

“[w]here a right of action is dependent upon the provisions of a

statute . . . we are not privileged to create such a right under the

guise of a liberal interpretation of it.” Hamby v. McDaniel, 559

S.W.2d 774, 777 (Tenn. 1977).

Accordingly, when deciding whether a claim is within the

proper statutory scope of the Commission’s jurisdiction to hear

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and decide claims against the State of Tennessee, we will give

a liberal construction in favor of jurisdiction, but only so long as

(1) the particular grant of jurisdiction is ambiguous and admits

of several constructions, and (2) the “most favorable view in

support of the petitioner's claim” is not clearly contrary to the

statutory language used by the General Assembly. Cf.

Northland Ins. Co. v. State, 33 S.W.3d 727, 730 (Tenn. 2000)

(“The statute’s liberal construction mandate allows courts to

more broadly and expansively interpret the concepts and

provisions within its text.”). Furthermore, because issues of

statutory construction are questions of law, see Wakefield v.

Crawley, 6 S.W.3d 442, 445 (Tenn. 1999); Jordan v. Baptist

Three Rivers Hosp., 984 S.W.2d 593, 599 (Tenn. 1999), we

review the issues involving the jurisdiction of the Claims

Commission de novo without any presumption that the legal

determinations of the commissioner were correct. See

Northland Ins. Co., 33 S.W.3d at 729; Ardis Mobile Home Park

v. State, 910 S.W.2d 863, 865 (Tenn. Ct. App. 1995).

Stewart, 33 S.W.3d at 790-91 (footnote omitted)

In reaching a conclusion that pass-through claims were permissible in

Tennessee and consistent with Tenn. Code Ann. § 9-8-307(a)(1)(L), the Commission relied

heavily upon the case of Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605

(Tex. 2004), wherein the Texas Supreme Court answered the following certified question in

the affirmative: “Does Texas recognize pass-through claims, i.e., may a contractor assert a

claim against an owner on a subcontractor’s behalf when there is no privity of contract

between the subcontractor and the owner?” Id. at 607. In concluding that Texas did

recognize pass-through claims, the Texas Supreme Court discussed the various policy factors

both in support of and against allowing such claims. The Texas Supreme Court ultimately

concluded that Texas would allow pass-through claims based on the policy reasons which

favored allowing such claims. Id. at 619. Ironically, the Texas Supreme Court refused to

answer the specific question that is now posed to this Court for review:

The City argues that, before a pass-through claim against

a governmental entity can be recognized, there must be a waiver

of sovereign immunity. ICC responds that, to the extent the City

asserts that ICC’s breach of contract claims are barred by

sovereign immunity, such arguments are outside the scope of the

question certified by the Fifth Circuit. ICC also argues that the

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City did not mention sovereign immunity in its brief filed with

the Fifth Circuit, nor did the City plead sovereign immunity in

its answer filed in district court.

Although the questions certified do not limit our answers,

we decline to extend our answers in this case to the issue of

sovereign immunity, which is well beyond the scope of the

questions certified. Doing so would require us to venture into

the facts of this particular case and analyze the merits of the

parties’ claims at issue before the Fifth Circuit Court of

Appeals, rather than provide answers solely as to the status of

Texas law on the questions asked. For this reason, we confine

our answers to the questions certified. How our answer is to be

applied to the facts of this case is the province of the certifying

court. See Amberboy v. Societe de Banque Privee, 831 S.W.2d

793, 798 (Tex. 1992).

City of Dallas, 135 S.W.3d at 620.

The Tennessee statute removing the State’s immunity for claims against the

State based upon breach of contract provides, in relevant part, as follows:

(a)(1) The commission or each commissioner sitting individually

has exclusive jurisdiction to determine all monetary claims

against the state based on the acts or omissions of “state

employees,” as defined in § 8-42-101(3), falling within one (1)

or more of the following categories:

* * *

(L) Actions for breach of a written contract

between the claimant and the state which was executed

by one (1) or more state officers or employees with

authority to execute the contract . . . .

Tenn. Code Ann. § 9-8-307(a)(1)(L) (Supp. 2009) (emphasis added).

All parties to this appeal agree that Subcontractor does not have a written

contract with TDOT and, therefore, it is not a proper party to this lawsuit. Thus, the

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Commission’s dismissal of Subcontractor as a party was correct. The more difficult issue

is whether Contractor can assert a pass-through claim on Subcontractor’s behalf.

Tenn. Code Ann. § 9-8-307(a)(1)(L) is quite clear in requiring a written

contract with the State before immunity from suit is removed. The statute is neither

ambiguous nor reasonably open to several constructions. By allowing Contractor to assert

a pass-through claim on Subcontractor’s behalf, Contractor is asserting a breach of contract

claim on behalf of a party that everyone agrees does not have a written contract with TDOT.

This is contrary to the plain language of the statute.

We agree with the Commissioner that there are several sound policy reasons

which mitigate in favor of allowing pass-through claims. It is, however, the General

Assembly’s prerogative to determine the State’s public policy as to allowing suits against the

State, not this Court’s, and the General Assembly has done so. If the General Assembly

concludes that the public policy of this State is such that pass-through claims against the

State should be allowed, then the General Assembly can amend Tenn. Code Ann. § 9-8-

307(a)(1)(L) to permit such claims.

We acknowledge that we must give Tenn. Code Ann. § 9-8-307(a)(1)(L) a

liberal construction. However, in so doing we cannot amend, alter, or extend the statute

beyond its obvious meaning. Stewart, 33 S.W.3d at 791. The obvious and ordinary meaning

of requiring a “written contract between claimant and the state...” is not susceptible of more

than one meaning. A contract is either written or it is not. If we allow pass-through claims,

then we are allowing a party to sue the State and prosecute the claim of a different entity that

has no contractual relationship with the State. This is contrary to the clear and unambiguous

language of the statute requiring a written contract between the claimant and the State before

the State can be sued for breach of contract. We again note that if the General Assembly

believes that allowing pass-through claims is in the State’s best interest and public policy

favors allowing such claims, we invite the General Assembly to amend the relevant statutory

provisions to expressly allow such claims.

It is important to emphasize the scope of our holding. Our opinion applies only

to pass-through claims wherein subject matter jurisdiction is predicated on the removal of

the State’s immunity pursuant to Tenn. Code Ann. § 9-8-307(a)(1)(L). We express no

opinion on whether pass-through claims otherwise are permitted in Tennessee in other

contexts.

We also note that our holding does not allow TDOT to escape liability if

Subcontractor has a valid claim. The scope of TDOT’s contractual liability on this project

is controlled by its written contract with Contractor. The contract between Contractor and

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Subcontractor cannot expand TDOT’s liability under the original contract. As noted by the

Commission in this case:

The actual work to be performed by [Contractor] is literally

contained within the terms of the Prime Contract between the

State and [Contractor]. Paragraph 1(b) of the Contract . . .

incorporates by reference the Proposal Contract which, in turn,

in Item D of the Contract Schedule, at page 10, includes

precisely the work . . . which [Subcontractor] contends it

completed but was not paid in full for doing.

If TDOT’s liability for work performed by Subcontractor is dependent on the terms of

TDOT’s contract with Contractor, then Contractor can sue TDOT directly for any alleged

breach of that contract.

Conclusion

The judgment of the Claims Commission is reversed and this cause is

remanded to the Claims Commission for further proceedings consistent with this Opinion and

for collection of the costs below. Costs on appeal are taxed to the Appellee, Kay and Kay

Contracting, LLC.

________________________________

D. MICHAEL SWINEY, JUDGE

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