Czop/Specter, Inc. v. PennDOT

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Czop/Specter, Inc., :
Petitioner :
:
v. : No. 374 M.D. 2015
: Submitted: November 13, 2015
Commonwealth of Pennsylvania, :
Department of Transportation, :
Respondent :
BEFORE: HONORABLE DAN PELLEGRINI, President Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE JAMES GARDNER COLINS, Senior Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY
PRESIDENT JUDGE PELLEGRINI FILED: December 15, 2015
Before the Court are the preliminary objections of the Department of
Transportation (Department)1 to the petition for review filed by Czop/Specter, Inc.
1
As this Court has explained:
Under Pa.R.C.P. No. 1028(a)(1), preliminary objections
may be filed to a petition for review, asserting that the court lacks
jurisdiction over the subject matter of the action. In reviewing
preliminary objections, all material facts averred in the complaint,
and all reasonable inferences that can be drawn from them, are
admitted as true. However, a court need not accept as true
conclusions of law, unwarranted inferences, argumentative
allegations, or expressions of opinion. “Preliminary objections
should be sustained only in cases that are clear and free from
doubt.”
(Footnote continued on next page…)
(CSI) in our original jurisdiction under the Declaratory Judgments Act2 seeking
declaratory relief and the award of penalties and attorney fees under Section 3935
of the Procurement Code.3
(continued…)
Seitel Data, Ltd. v. Center Township, 92 A.3d 851, 858-59 (Pa. Cmwlth. 2014), appeal
dismissed, 111 A.3d 170 (Pa. 2015) (citations omitted).
2
42 Pa. C.S. §§7531-7541. Section 7533 provides, in relevant part, that “[a]ny person
interested under a … written contract … or whose rights, status, or other legal relations are
affected by a … contract, … may have determined any question of construction or validity
arising under the … contract … and obtain a declaration of rights, status, or other legal relations
thereunder.” 42 Pa. C.S. §7533. Nevertheless, Section 7541(c)(2) states that “[r]elief shall not
be available under this subchapter with respect to any … [p]roceeding within the exclusive
jurisdiction of a tribunal other than a court.” 42 Pa. C.S. §7541(c)(2).
3
62 Pa. C.S. §3935. Section 3935 states, in pertinent part:
(a) Penalty.—If … a claim with the Board of Claims or a court of
competent jurisdiction is commenced to recover payment due
under this subchapter and it is determined that the government
agency … has failed to comply with the payment terms of this
subchapter, … the Board of Claims or the court may award, in
addition to all other damages due, a penalty equal to 1% per month
of the amount that was withheld in bad faith. An amount shall be
deemed to have been withheld in bad faith to the extent that the
withholding was arbitrary or vexatious. An amount shall not be
deemed to have been withheld in bad faith to the extent it was
withheld pursuant to section 3934 (relating to withholding of
payment for good faith claims).
(b) Attorney fees.—Notwithstanding any agreement to the
contrary, the prevailing party in any proceeding to recover any
payment under this subchapter may be awarded a reasonable
attorney fee in an amount to be determined by the Board of
Claims, [or] court … together with expenses, if it is determined
that the government agency … acted in bad faith. An amount shall
be deemed to have been withheld in bad faith to the extent that the
withholding was arbitrary or vexatious.
2
CSI is a consulting engineering and surveying firm that entered into a
number of contracts with the Department to perform inspection services involving
High Occupancy Permits. On these projects, entities such as developers, utilities
or municipalities would obtain permits so that construction work could occur
within the Department’s rights-of-way by the permit holders. The Department
hires inspectors, such as CSI, to ensure that the work is done according to the
applicable legal, contractual or permit requirements which then bill the Department
for these services. Under the contracts, CSI was required to have the work of its
employees performed under the Department’s supervision and direction, and
Department personnel approved all CSI invoices prior to any payment. CSI would
bill the Department for the services performed, and the Department would then
submit those invoices to the permittees to be paid.4
In March 2013, a grand jury was convened involving alleged criminal
activity of Department management and supervisory personnel. In December
2014, a presentment was released and four former CSI employees and two
Department supervisors were charged with various theft and corruption crimes. It
was alleged that the Department personnel directed CSI inspectors to inflate
4
Section 441.6(4)(1)(i) of the Department’s regulations states:
(i) The permittee shall pay all fees, costs, and expenses incident to
or arising from the project, including the cost of related highway
improvements which increased traffic or surface drainage may
necessitate. The permittee shall reimburse the Department for any
and all inspection costs within 30 days after receipt of the
Department’s invoice.
67 Pa. Code §441.6(4)(1)(i).
3
overtime hours, mileage, and to perform work outside the scope of the permitting
inspection contracts. The Department supervisors allegedly collected a weekly
“street tax” that if not paid would result in the removal of inspectors from
Department projects.
In December 2014, the Department sent CSI a Notice of Immediate
Suspension which attached the presentment and alleged that the conduct of CSI
was cause for future debarment. CSI answered the notice denying that it
committed any fraud in its billings and informal conferences ensued. The
administrative matter involving the suspension and debarment issues is currently
pending before the Department at Docket No. 004 A.D. 2015.
On May 22, 2015, the Department sent CSI an Offset Memorandum5
indicating that $1,119,423.17 in liability was owed the Department by CSI. (PFR
5
The Offset Memorandum indicated that it was executed in accordance with
Management Directive 215.9 which provides, in relevant part:
o. The Offset Provision (Enclosure 2, Offset Provision) shall be
included in all contracts requiring the commonwealth to make a
payment. The contractor agrees that the commonwealth may offset
the amount of any liability of the contractor or its affiliates and
subsidiaries that is owed to the commonwealth against any
payments due the contractor under this or any other contract with
the commonwealth.
(Petition for Review (PFR) Exhibit F3 at 7).
In turn, Enclosure 2, Offset Provision states:
The Contractor agrees that the Commonwealth of Pennsylvania
(Commonwealth) may set off the amount of any state tax liability
(Footnote continued on next page…)
4
Exhibit A). On June 1, 2015, the Department’s Deputy Secretary for Highway
Administration also notified CSI that a $1,119,423.17 offset would be pursued for
“improperly invoiced overtime hours, commute hours, mileage and unqualified
personnel.” (Id. Exhibit B). The letter stated that “[a]s a result, the Department
has formally entered an outstanding obligation to the Commonwealth against your
company in that amount under the Contractor Responsibility Program[6] and will
(continued…)
or other obligation of the Contractor or its subsidiaries to the
Commonwealth against any payments due the contractor under any
contract with the Commonwealth.
(Id. at 24).
6
As alleged, the Contractor Responsibility Program (CRP) was initiated via Executive
Order 1990-3, but is now found at 4 Pa. Code §§7.501-7.505, and directs the Secretary of the
Budget and the Secretary of General Services to “identify, evaluate and sanction appropriately,
contractors that do not meet the standards of responsibility, that render deficient performance, or
that engage in wrongdoing….” 4 Pa. Code §7.501. Pursuant to Sections 321(6) and 327(b) of
the Procurement Code, the Department of General Services (DGS) and the Office of the Budget
shall participate in the management and maintenance of the CRP. 62 Pa. C.S. §§321(6), 327(b).
Management Directive 215.9, issued by the Governor’s Office, establishes policy,
responsibilities and procedures for the operation of the CRP applicable “to all departments,
boards, commissions, and councils … under the Governor’s jurisdiction.” (PFR Exhibit F3 at 1).
Management Directive 215.9(6)(b) directs the Office of the Budget to participate in the
management and maintenance of the CRP in coordination with DGS and other agencies as
directed by the Governor and to “[e]nsure that the offset provision is included in all contracts or
that a written waiver is attached.” (PFR Exhibit F2 at 9). Likewise, Management Directive
215.9(6)(c) directs DGS to participate in the management and maintenance of the CRP in
coordination with the Secretary of the Budget and other agencies directed by the Governor and to
“[m]aintain a current list of contractors suspended or debarred by the commonwealth and
disseminate such information to agencies and others….” (Id.).
Additionally, the Keystone Offset Program (KOP) is an initiative by the Governor’s
Innovation Council “aimed at collecting delinquent non-tax debt owed to the Commonwealth …
by utilizing existing processes to offset delinquent debt against payments in SAP.” (PFR Exhibit
(Footnote continued on next page…)
5
proceed to recoup that obligation by offsetting it against any payment due your
company under any contract or purchase order with the Commonwealth.” (Id.).
On June 13, 2015, CSI sent the Department an email regarding the
offset and the June 1, 2015 letter, stating that “[i]n reviewing the requirements for
the offset program, it appears that [the Department]’s claim (which is not a debt or
an established amount owed) would not qualify for the offset program. For
example, no dunning at all occurred on this alleged claim nor has there been any
showing that [CSI] is past due on any obligation.” (PFR Exhibit D at 1). As a
result, the email concluded, “my client requests that it receive all past due amounts
on its projects as soon as reasonably possible.” (Id.).7
(continued…)
C at 1, 3). In order for a debt to be “KOP eligible,” it must be more than 90 days past due; it
must have “a dunning level of 1-4;” and it must have been certified as valid by the receiving
agency. (Id.).
7
Section 1712.1 of the Procurement Code states, in relevant part:
(a) Right to claim.—A contractor may file a claim with the
contracting officer in writing for controversies arising from a
contract entered into by the Commonwealth.
(b) Filing of claim.—A claim shall be filed with the contracting
officer within six months of the date it accrues. If a contractor fails
to file a claim or files an untimely claim, the contractor is deemed
to have waived its right to assert a claim in any forum. Untimely
filed claims shall be disregarded by the contracting officer.
(c) Contents of claim.—A claim shall state all ground upon which
the contractor asserts a controversy exists.
62 Pa. C.S. §1712.1(a)-(c).
6
On July 2, 2015, the Department’s Assistant Counsel replied to CSI’s
email explaining that the offset was based on express offset provisions in the
contracts between the parties,8 and that its right to an offset “is in no way
contractually conditioned on some sort of strict compliance with the terms of the
‘Comptroller Operations’ document excerpts regarding the ‘Keystone Offset
Program’ that you attached to your email,” and that the Department’s “exercise of
its contractual offset right is likewise not conditioned on its having [sic] engaged in
some particular dunning activity or activities.” (PFR Exhibit D at 2). The
Department withheld $186,558.81 of the total offset to be pursued. (Id. Exhibit E).
On July 17, 2015, CSI sent the Department’s Secretary “a final appeal
for the [Department] to release all fund due to [CSI] which are being withheld due
to the pursuit of an offset.” (PFR Exhibit F at 1). CSI again alleged that the offset
was not implemented in accordance with the requirements of Management
Directive 215.9 and the KOP, and that there are no debts to offset with the money
that it is owed because the time for filing any claims for work during the period of
alleged illegality, from 2010 through 2013, and the Department cannot alter the
Procurement Code provisions to revive any future stale claims by permittees. (Id.
at 1-3).9
8
As indicated above, Management Directive 215.9(5)(o) specifically requires that the
offset provision stated in Enclosure 2, Offset Provision, be included in any contract with the
Commonwealth.
9
See Section 1712.1(b) of the Procurement Code, 62 Pa. C.S. §1712.1(b) (“A claim shall
be filed with the contracting officer within six months of the date it accrues. If a contractor fails
to file a claim or files an untimely claim, the contractor is deemed to have waived its right to
assert a claim in any forum. Untimely filed claims shall be disregarded by the contracting
officer.”).
7
However, on July 22, 2015, the Department’s Acting Deputy Chief
Counsel informed CSI:
With respect to your arguments against the offset,
first, the authority for the offset is contractual, founded as
it is upon the offset provisions included in the respective
[Department]-CSI contracts in question. The offset
provisions were included in those contracts pursuant to
Management Directive 215.9, relating to the Contractor
Responsibility Program. Neither the offset provisions
themselves nor the management directive contain any
reference to the “KOP” or any language that would in
any way support the limitations on the Commonwealth’s
contractual right of offset that you seem to be suggesting.
Second, “liability,” as defined in the management
directive, includes an instance in which “a contractor is
not current with the payment of any … monetary
amounts owed to the commonwealth or any of its
agencies.” Reasonably read, this language seems more
than broad enough to encompass a situation in which an
agency is setting off against current contract payments
sums it claims should be refunded because they were
paid in response to fraudulently inflated invoices. That is
precisely the legal right that [the Department] is asserting
here – the right to refund of payments it makes to
contractors on the basis of fraudulently inflated invoices.
It is telling that in your entire letter requesting a refund of
amounts set off by [the Department] to date you have
never once suggested that your client did not submit
fraudulently inflated invoices or that [the Department]
did not therefore make payments to your client in
fraudulently inflated amounts.
For these reasons, [the Department] denies your
request that it “release” sums set off to date against
contract payments to your client.
(PFR Exhibit G).
8
CSI responded that same day, noting that it has contested the
fraudulent activity in its administrative appeal with the Department and expressing
disappointment with the Department’s breakdown of the amount of purported
overbilling. (PFR Exhibit H at 1). CSI also again asserted that an offset was not
appropriate because the requirements of Management Directive 215.9 and the KOP
have not been met as there are no timely claims against the Department to offset
with the monies owed CSI. (Id. at 1-2). CSI also noted “that the Secretary has not
submitted a response to my client’s letter of July 17, 2015. That letter requested a
response by [the] close of business of July 22, 2015. As that has not occurred, as
the letter references, my client’s request has clearly been denied by the agency
head.” (Id. at 2).
On July 28, 2015, CSI filed the instant petition for review10 asking this
Court to: (1) declare that the Department cannot withhold any payments due CSI
via an offset because the requirements of Management Directive 215.9 and the
KOP have not been met as no present liability exists and any future claim against
the Department would be time-barred; (2) declare that the Department must follow
Management Directive 215.9 and the Keystone Offset Program if it seeks an offset
against CSI; (3) award penalties and attorney fees under Section 3935 of the
Procurement Code; and (4) grant any other “just and equitable” relief.
10
Section 1712.1(e) of the Procurement Code provides that “[w]ithin 15 days of the
mailing date of a final determination denying a claim or within 135 days of filing a claim if no
extension is agreed to by the parties, whichever occurs first, the contractor may file a statement
of claim with the board.” 62 Pa. C.S. §1712.1(e).
9
The Department then filed the instant preliminary objections to the
petition for review, initially alleging that CSI’s claim challenging the Department’s
offset under the parties’ contracts is within the exclusive jurisdiction of the Board
of Claims under Section 1724(a)(1) of the Procurement Code11 and not in this
Court’s original jurisdiction. Specifically, the Department argues that CSI’s claims
are either within the exclusive jurisdiction of the Board of Claims or barred by
sovereign immunity under the Pennsylvania Supreme Court’s opinion in Scientific
Games International, Inc. v. Department of Revenue, 66 A.3d 740 (Pa. 2013)
(Scientific Games). We agree that CSI’s claims are within the exclusive
jurisdiction of the Board of Claims and transfer the matter to the Board.
In Scientific Games, DGS, on behalf of the Department of Revenue,
issued a request for proposals for the design, development, implementation and
maintenance of a computer system to monitor slot machines. The new system was
to replace the existing system provided by GTECH Corporation (GTECH) and
both GTECH and Scientific Games submitted proposals. Ultimately, DGS
awarded the contract to Scientific Games, an agreement on contract terms was
reached, and a final draft of the contract was completed but not fully executed by
the Commonwealth. DGS later announced that it was cancelling the request for
proposals and the award and Scientific Games filed an action in this Court’s
11
62 Pa. C.S. §1724(a)(1). Section 1724(a)(1) provides that “[t]he board shall have
exclusive jurisdiction to arbitrate claims arising from … [a] contract entered into by a
Commonwealth agency in accordance with this part and filed with the board in accordance with
section 1712.1 (relating to contract controversies).” Section 1724(c) states that “[t]he board shall
have no power and exercise no jurisdiction over a claim asserted under subsection (a)(1) unless it
is filed with the board in accordance with section 1712.1….” 62 Pa. C.S. §1724(c).
10
original jurisdiction seeking declaratory and injunctive relief against DGS and the
Department of Revenue. Scientific Games alleged that an enforceable contract had
been executed and could not be cancelled under the Procurement Code. As a
result, Scientific Games sought specific performance of the contract. GTECH
intervened and filed preliminary objections along with DGS and the Department of
Revenue alleging, inter alia, that Scientific Games’ claims sounded in contract and
hinged on the execution of the contract and, therefore, were either within the
exclusive jurisdiction of the Board of Claims or subject to sovereign immunity.
This Court overruled the preliminary objections. On the jurisdictional
issue, we determined that Section 1724(d) applied broadly and did not preclude
Scientific Games from bringing an action in this Court where monetary relief was
not sought. This Court also noted that Scientific Games’ complaint, in essence,
sought specific performance of the contract, and that we have long held that
specific performance is generally not an available remedy against the
Commonwealth, but that Section 1724(d) allowed a party to seek such relief.
However, on appeal, the Supreme Court reversed, explaining:
While more general clarification of the relationship
between sovereign immunity and jurisdiction may be
appropriate in the arena at large, for present purposes, we
regard sovereign immunity as a jurisdictional concern
vis-à-vis the Procurement Code. Our understanding, in
this regard, is premised on the enactment’s self-contained
reaffirmation of sovereign immunity, see 62 Pa. C.S.
§1702(a), and its explicit, limited waiver of such
immunity (among other specified and limited waivers) in
connection with a coordinate allocation of “exclusive
jurisdiction” to the Board of Claims over claims arising
11
from certain contracts entered into by a Commonwealth
agency, see id. §§1702(b), 1724(a)(1).[12] In this respect,
we agree with Appellants that—as a matter of
jurisdiction—if the General Assembly has not
specifically provided by statute for such nonmonetary
relief in a claim arising from a contract entered into by a
Commonwealth agency under the Procurement Code,
then either the claim is within the exclusive jurisdiction
of the Board of Claims or it is barred by sovereign
immunity. As Appellants argue, this is consistent with
the longstanding public policy, as established under the
[former] Board of Claims Act, of broadly channeling
12
Section 1702 of the Procurement Code provides:
(a) General Rule.—The General Assembly under section 11 of
Article I of the Constitution of Pennsylvania reaffirms sovereign
immunity, and, except as otherwise provided in this chapter, no
provision of this part shall constitute a waiver of sovereign
immunity for the purpose of 1 Pa. C.S. §2310 (relating to
sovereign immunity reaffirmed; specific waiver) or otherwise.
(b) Exception.—The General Assembly under section 11 of
Article I of the Constitution of Pennsylvania does hereby waive
sovereign immunity as a bar to claims against the Commonwealth
agencies brought in accordance with sections 1711.1 (relating to
protests of solicitations or awards) and 1712.1 (relating to contract
controversies and Subchapter C (relating to Board of Claims) but
only to the extent set forth in this chapter.
62 Pa. C.S. §1702. See also Pa. Const. art. I, §11 (“Suits may be brought against the
Commonwealth in such manner, in such courts and in such cases as the Legislature may by law
direct.”); 1 Pa. C.S. §2310 (“Pursuant to section 11 of Article 1 of the Constitution of
Pennsylvania, it is hereby declared to be the intent of the General Assembly that the
Commonwealth, and its officials and employees acting within the scope of their duties, shall
continue to enjoy sovereign immunity and official immunity and remain immune from suit
except as the General Assembly shall specifically waive the immunity. When the General
Assembly specifically waives sovereign immunity, a claimant against the Commonwealth and its
officials and employees shall be brought only in such manner and in such courts and in such
cases as directed by the provisions of Title 42 (relating to judiciary and judicial procedure) or 62
(relating to procurement) unless otherwise specifically authorized by statute.”).
12
contract claims through the Board of Claims, which also
remains the initial arbiter of whether a contract exists.
Scientific Games, 66 A.3d at 756 (citations and footnotes omitted).
Based on the foregoing, the Supreme Court concluded:
The Procurement Code establishes administrative
processes to address disputes arising in the procurement
setting. On account of the doctrine of sovereign
immunity, however, contractors, bidders, and offerors
have limited recourse and remedies. Relative to
controversies in matters arising from procurement
contracts with Commonwealth agencies, the Board of
Claims retains exclusive jurisdiction (subject to all
jurisdictional prerequisites), which is not to be
supplanted by a court of law through an exercise of
original jurisdiction.
…For those attaining the status of contractor—which we
find should be deemed to occur at the time a contract is
executed by all parties … —the remedial procedure is
via Section 1712.1, subject to review within the exclusive
jurisdiction of the Board of Claims. Our holding in this
case is limited to the Procurement Code arena, in which
the scenario before us has arisen.
Id. at 760.
In this case, it is undisputed that the controversy relates to the
Department’s use of an offset to withhold payments that are purportedly due to CSI
under the contracts between the parties.13 Under Scientific Games, CSI may only
13
See Footnotes 5, 8 supra.
13
seek a remedy in the Board of Claims to recover any sums purportedly due under
the contracts, along with the award of penalties and attorney fees under Section
3935 of the Procurement Code, and may not rely upon an action in this Court’s
original jurisdiction to do so. Additionally, the General Assembly has not waived
sovereign immunity with respect to such an action in our original jurisdiction and
has not specifically preserved any right for declaratory or injunctive relief under
Section 1724(d) of the Procurement Code. Moreover, as outlined above, CSI
perfected the Board’s jurisdiction to provide such a remedy under the Procurement
Code by fulfilling the requirements of Section 1712.1 through submitting a timely
protest with the Department and by timely filing the instant petition for review in
this Court. As a result, this matter is properly transferred to the Board of Claims
for disposition.14
14
See Tallada v. East Stroudsburg University of Pennsylvania, 724 A.2d 427, 428 (Pa.
Cmwlth. 1999) (“[U]pon determining that Tallada’s contract claim fell within the jurisdiction of
the Board of Claims, the trial court should have transferred this claim to the Board of Claims
pursuant to section 5103 of the Judicial Code, 42 Pa. C.S. §5103….”); 42 Pa. C.S. §5103(a) (“If
an appeal or other matter is taken to or brought in a court … of this Commonwealth which does
not have jurisdiction of the appeal or other matter, the court … shall not quash such appeal or
dismiss the matter, but shall transfer the record thereof to the proper tribunal of this
Commonwealth, where the appeal or other matter shall be treated as if originally filed in the
transferee tribunal on the date when the appeal or other matter was first filed in a court …. of this
Commonwealth….”).
14
Accordingly, the Department’s preliminary objection is sustained and
CSI’s petition for review is transferred to the Board of Claims.15
____________________________________
DAN PELLEGRINI, President Judge
15
Based upon our disposition of this preliminary objection, we will not reach any other
remaining preliminary objections.
15
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Czop/Specter, Inc., :
Petitioner :
:
v. : No. 374 M.D. 2015
:
Commonwealth of Pennsylvania, :
Department of Transportation, :
Respondent :
ORDER
AND NOW, this 15th day of December, 2015, the preliminary objection
of the Commonwealth of Pennsylvania, Department of Transportation, is sustained
and the petition for review filed by Czop/Specter, Inc. is transferred to the Board of
Claims.
Jurisdiction is relinquished.
____________________________________
DAN PELLEGRINI, President Judge