Courthouse bond flap escalates

lblackford@herald-leader.comMarch 5, 2009 

The fight over courthouse construction escalated this week when Codell Construction, the largest builder of Kentucky judicial centers, threatened to sue a national group that questioned whether court officials allowed construction managers to underinsure their courthouse work.

Codell attorney John Hays sent a letter on Monday demanding that two national bonding groups "cease and desist from making ... spurious accusations." That was in response to the groups' letters to county judge-executives warning them that courthouse construction wasn't being fully bonded. Bonding provides insurance against faulty or incomplete work.

On Wednesday, Chief Justice John D. Minton Jr. appointed Fort Mitchell attorney William Geisen to audit the $880 million courthouse program.

Minton announced last week that he would appoint an independent auditor after the Administrative Office of the Court's head of facilities, Garlan VanHook, resigned amid questions from the Herald-Leader and national experts about the bonding of new courthouse projects.

At issue is whether the AOC has allowed some construction companies to purchase performance bonds that are much smaller than state law requires.

Several construction management companies have posted performance bonds for about 5 percent of the construction costs. State law requires construction managers to bond their work for 100 percent of the project costs. But, in previous interviews, VanHook said the subcontractors were also bonded, meaning that 100 percent of the work was insured.

State and national experts have questioned the AOC practice because they say it leaves county taxpayers at risk if a construction manager were to have financial problems.

VanHook also confirmed that his brother works for Codell Construction, which has managed 38 of 65 new courthouse projects.

This week, Codell attorney Hays wrote a letter to two national bonding experts who questioned the AOC bonding practices, and demanded that they "cease and desist" and retract their statements.

The bonding experts' original letter to county judge executives didn't mention any construction companies by name, but was sent to the counties that currently have projects under way, most of them managed by Codell.

Mark McCallum, counsel for the National Association of Surety Bond Producers and one of the letter writers who called the current practice "questionable," said his group is reviewing the letter and will respond.

'Cooling-off period'

Meanwhile, a lawyer representing two other construction companies said he had already talked with Geisen about the audit.

"I have suggested to Bill that there be a cooling-off period here," said Buckner Hinkle, who represents Alliance Construction and Branscum Construction and called Geisen a friend and colleague. (AOC also allowed Alliance to post performance bonds of 5 percent.)

"Let's get the interested parties to the table to discuss their questions and their views and try make certain that everybody is on the same page as far as the facts are concerned," Hinkle said.

This tack worries Todd Leohnert, a senior vice-president and bond manager for Wells Fargo Insurance in Louisville, who in January began questioning AOC's bonding practices.

"I'm sure Bill Geisen is a good attorney and knows the law, but my fear is he's already spoken to Buck Hinkle and I don't know how independent that is," Leohnert said. "What the auditor should be doing is reviewing the contracts, reviewing state statutory bond requirements and determining if the law requires a 100 percent performance bond, not sitting down and hearing the opposing sides."

Rep. Jim Wayne, D-Louis ville and a member of the Capital Projects and Bond Oversight Committee, said it's not appropriate for the court system to hire a Kentucky lawyer to lead the audit of the system in which he or she practices.

He also criticized the AOC's failure to make sure that courthouse construction was properly insured.

"I think it was mismanagement and not proper oversight," he said. "The AOC obviously had internal controls that were not working, and I'm not sure why that was."

AOC's practice differs from other state agencies, such as the Finance and Administration Cabinet and the University of Kentucky, which require 100 percent performance bonds from construction managers on the first day of work.

However, some Kentucky courthouse projects weren't bonded at all when work began. Washington County is about to open its new $12 million judicial center. The contract for the project was signed on March 13, 2006. The pay and performance bond was not acquired until Jan. 8, 2009.

Five percent bonds were also issued in the past two months for projects already under way in Boyd, Grant, Laurel and Logan Counties. That occurred shortly after Leohnert and construction attorney Bruce Stigger sent out a raft of open records requests to counties regarding bonds on judicial projects.

Codell said the problem was an oversight and quickly bought the needed bonds. Hays also said that Codell had the capacity to buy performance bonds for 100 percent of construction costs, rather than 5 or 6 percent.

Protecting taxpayers

In an interview Wednesday, Geisen said he would conduct the audit in phases, the first phase concerning the bond issue.

Geisen, a longtime construction lawyer, said his work would not be influenced by any of the players.

"I won't be biased or influenced in any way by the fact that, yes, I am a Kentucky lawyer rendering an opinion to the chief justice," he said.

Geisen would not discuss details of his hiring, other than to say it was not pro bono work.

As for a group sit-down, Geisen said he would certainly talk to the affected parties but had not decided how.

Minton said Geisen's findings will be made public.

"As we move forward with this review, I want to restate my commitment to ensuring that the court facilities construction program is operated with unquestionable ethics and with the utmost concern for protecting taxpayer dollars," Minton said in a statement Wednesday.

As for current projects, AOC spokeswoman Leigh Anne Hiatt said the projects will continue as they are currently bonded during Geisen's audit.

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