Rep. Jim Wayne
AGO OAG 18-10
No. OAG 18-010
Kentucky Attorney General Opinion
Commonwealth of Kentucky Office of the Attorney General
August 16, 2018
Subject:
Whether an early termination fee in a public services
contract between the Commonwealth of Kentucky, Cabinet for
Health and Family Services/Department for Community Based
Services, and Red Buffalo Ventures, LLC, is valid and
constitutional.
Requested
by: Rep. Jim Wayne
Written
by: Laura C. Tipton
Syllabus:
The contract at issue is invalid, as it did not meet the
requirements of a "sole source" contract, despite
being approved as such. Accordingly, the early termination
fee provision included in the contract is void. In general, a
reasonable early termination fee or severance provision
included in a. valid contract may be in consideration of
public services and constitutional.
Statutes
construed: KRS 45A.095(1)(b) and (2)(a); 200 KAR 5:309
§ 1(4); Ky. Const. §3; KRS 45 A.135; KRS 45 A.695
OAGs
cited: OAG 96-23; OAG 91-219; OAG 88-29; OAG 79-611; OAG
79-337
OPINION
OF THE ATTORNEY GENERAL
Rep.
Jim Wayne has requested an opinion of this office on the
validity of an early termination fee in a public services
contract between the Commonwealth of Kentucky, Cabinet for
Health and Family Services/Department for-Community Based
Services, and Red Buffalo Ventures, LLC. Pursuant to this
contract, Red Buffalo Ventures, LLC, having Daniel S. Dumas
as its sole member, was to serve as a Special Advisor to the
Commonwealth on child welfare issues. We advise that the
contract at issue violated Kentucky's Model Procurement
Code, as it was not a "sole source" contract,
despite its approval as such. Accordingly, the early
termination fee provision included in the contract was void.
In an otherwise valid and legal contract, however, a
reasonable early termination fee or severance provision may
be in consideration of public services and constitutional.
Background
On May
1, 2017, the Commonwealth of Kentucky, Cabinet for Health and
Family Services ("CHFS")/Department for Community
Based Services ("DCBS") (hereinafter collectively
"CHFS"), entered into a personal services contract
for consulting services with Red Buffalo Ventures, LLC
("Red Buffalo"), and its sole member, Daniel S.
Dumas. The contract price totaled $250,000, including a base
compensation of $240,000. Its effective term ran from June
17, 2017 to June 30, 2018, with the option for two separate
one-year renewals at the base compensation. The contract
provided that "the Contractor shall serve as a special
advisor . . . on child welfare issues affecting the
Commonwealth and its citizens." Under the contract, the
contractor was required to "perform an assessment of
Kentucky's child welfare system" and coordinate with
various state agencies "in determining current policies,
practices, and procedures affecting the foster care
system."
The
contract provided that "in the event of termination
without cause, the Contractor will be paid an early
termination fee in an amount equal [sic] three (3) months
regular base compensation subject to available funds. Based
upon an annual compensation of $240,000, the termination fee
would total $60,000." On January 16, 2018, the Cabinet
for Health and Family services terminated the contract, and
then paid the $60,000 early termination fee. At issue is
whether early termination fees such as the one in the
contract are constitutional and permissible under
Kentucky's Model Procurement Code.
At the
request of this office, CHFS and the Finance and
Administration Cabinet (the "Finance Cabinet") have
provided their analyses. In addition, upon request the
Finance Cabinet provided a copy of the Strategic Procurement
Request ("SPR") associated with the contract, as
well as the minutes from the June 13, 2017 meeting of the
Legislative Research Commission Government Contract Review
Committee where the contract was under review.
Analysis
A.
The Contract Is Invalid.
As a
threshold matter, we find that the state's contract with
Red Buffalo was invalid. Although approved as a "sole
source" contract - commonly called a "no bid"
contract - it did not meet the legal requirements for such an
agreement under the Kentucky Model Procurement Code
("KMPC"), which applies to CHFS. Accordingly, the
contract violated the KMPC.
As
stated in Pendleton Bros. Vending, Inc. v. Commonwealth,
Finance and Admin. Cab., 758 S.W.2d 24,27...
