Request By:
Mr. Stephen Reeder
Deputy Secretary for Legal Affairs
Transportation Cabinet
State Office Building
Frankfort, KentuckyDonald E. Bowles, President
Charolais Corporation
P.O. Box 526, Highway 862
Madisonville, Kentucky 42431
Opinion
Opinion By: Steven L. Beshear, Attorney General; Carl T. Miller, Jr., Assistant Attorney General
By separate letters to the Attorney General you have requested a formal opinion on stated legal questions pertaining to a contract which has been conditionally executed between the Charolais Corporation, the Commonwealth of Kentucky, Finance and Administration Cabinet, the Commonwealth of Kentucky Transportation Cabinet and AMCA Coal Leasing, Inc. The pending condition as to the execution of the contract is stated in Section 29 of the contract document as follows:
"29. Condition. Notwithstanding anything to the contrary contained in this agreement, this agreement shall be effective if and only if the Attorney General of the Commonwealth shall issue his opinion, on or before December 1, 1983, to the effect that the transactions contemplated by this agreement are not subject to the competitive bidding requirements of any law of the Commonwealth."
This office has reviewed the contract document and it is his formal opinion that no competitive bidding is legally required under the terms set forth in the document. As a preface to our rationale we copy below a portion of Mr. Reeder's letter:
Background and Summary of Agreement
The Commonwealth owns and holds for the benefit of Transportation some 385 acres of real property divided into two adjacent tracts and located in Hopkins County (the "property"). Charolais desires to lease the Property for the purpose of mining and selling the coal located on and under the Property. Transportation has determined that the coal reserves located on and under the Property are surplus to its needs and has requested that Finance lease the Property to Charolais as provided in the agreement.
As indicated in the recitals to the Agreement, the coal located on and under the Property cannot now be economically mined and removed because of the absence of any appropriate vehicular access to the areas of the Property containing coal deposits. To remedy that situation, Charolais proposes to construct a coal haul road (the "Coal Haul Road") through the Property from some point on U.S. 41-A south of Madisonville to the Pennyrile Parkway.
Transportation has under consideration the construction of a roadway (the "Proposed Roadway") through the Property as a connector road between U.S. 41-A and the Pennyrile Parkway. Charolais believes that its mining operations could be effectively served by constructing the Coal Haul Road along the same route as that of the Proposed Roadway, thus facilitating both the mining and removal of coal from the Property and Transportation's highway construction plans for the Property.
The Agreement actually contains two separate but related contracts. Sections 2 through 14 of the Agreement constitute a coal lease agreement (the "Coal Lease" ) between Finance and Charolais. Finance grants Charolais the exclusive right to mine and remove coal from the Property and Charolais agrees to pay a royalty of $1.25 for each ton of coal mined, shipped, and sold from the Property. All royalties due under the Coal Lease are to be paid to the First National Bank of Louisville as escrow agent for the Commonwealth (the "Escrow Agent" ).
Charolais is to construct its Coal Haul Road along or near the route of the Proposed Roadway, and to reclaim and restore all portions of the Property that it mines or otherwise disturbs as required by all applicable federal and state laws and regulations. Charolais will schedule its reclamation activities so as to permit Transporatation to commence construction of the Proposed Roadway on or before May 26, 1985.
Sections 15 through 24 of the Agreement constitute an equipment lease agreement (the "Equipment Lease" ) from Charolais to Transportation. Charolais agrees to lease to Transportation all of its on-site equipment (collectively, the "Equipment") necessary to complete the grade and drain stage of the construction of the Proposed Roadway. Charolais is also to provide personnel qualified to operate, maintain, and secure the Equipment for use by Transportation in grading the Proposed Roadway and installing necessary drain structures. Section 15 of the Agreement states that "Transportation shall be responsible for all supervision and inspection of construction" of the Proposed Roadway.
Charolais is to receive as rental for the Equipment (including payment for the services of the Equipment operators) $1.25 per cubic yard of earth or fill material required to be moved in connection with the construction of the Proposed Roadway. Rentals due Charolais under the Equipment Lease are payable solely from coal royalties received by the Escrow Agent under the Coal Lease. The Equipment rentals payable to Charolais under the Equipment Lease, then, cannot exceed the coal royalties received by the Escrow Agent under the Coal Lease. Thus, no state road funds will be expended under this Agreement, and the Commonwealth assumes no obligation to pay any Equipment rentals to Charolais.
Neither the Coal Lease nor the Equipment Lease was competitively bid. Because Charolais is headquartered in Hopkins County and has the financial resources, available manpower and equipment, and technical expertise to mine and reclaim the Property and to construct the Coal Haul Road, Transportation and Finance have determined that Charolais is uniquely situated to mine and remove the coal located on and under the Property and to supply the Equipment and operators to be used by Transportation in constructing the Proposed Roadway.
DISCUSSION OF THE LEGAL QUESTIONS
The Attorney General has been asked to address two legal questions in regard to competitive bidding: (1) Whether the Finance Cabinet may lawfully enter into the Coal Lease without first advertising for bids. (2) Whether the Finance Cabinet may lawfully enter into the Equipment Lease without first advertising for bids.
COAL LEASE
Under KRS 45.360(7) the Finance Cabinet is responsible for disposing of any surplus property belonging to the state, including any interest in real estate. Said Subsection (7) includes the following:
"Unless the secretary of the Department of Finance deems it in the best interests of the state to proceed otherwise, all such property (including any interest in real property) shall be sold by either invitation of sealed bids or by public auction, provided however that the selling price of any interest in real property shall not be less than the appraised value thereof as determined by the department, or the Department of Transportation for such requirements of that department."
The Secretary of Finance is a signatory to the Agreement and has found that it is in the best interest of the state to proceed with this contract without the benefit of sealed bids and that the royalties to be paid by Charolais under the Coal Lease are not less than the appraised value of the leasehold interest in the Property conveyed to Charolais under the Coal Lease. The Secretary's findings are set forth in the Agreement at Section 27(b)(2) and (a)(4). The Secretary's declaration of his findings sufficiently complies with the statutory procedure for dispensing with competitive bids.
EQUIPMENT LEASE
The Finance Cabinet is primarily responsible for purchasing, leasing, or otherwise procuring materials and equipment needed by other agencies of the Commonwealth. KRS 45.360(1) states as follows:
"The Department of Finance shall purchase, or shall delegate and control the purchase of the combined requirements of all spending agencies of the state including, but not limited to, interest in real property, contractural services, rentals of all types, supplies, materials, equipment, and services, except that competitive bids may not be required:
* * *
(g) For all other commodities equipment and services which, in the reasonable discretion of the Department of Finance are available from only one source. . . ."
In Section 22(b)(3) of the Agreement, the Secretary of Finance determined that: "[t]he Equipment and the operators for the Equipment are not available for use by Transportation in constructing the Proposed Roadway from any source other than Charolais." This declaration by the Secretary legally justifies dispensing with competitive bids under the circumstances prevailing as to this Agreement.
In summary, it is the opinion of this office that the necessary findings have been made by the Secretary of Finance requisite to the dispensing of competitive bidding on the several transactions incorporated in the Agreement under discussion and the Agreement is approved by the Attorney General's office as to its form and legality.