LEO E. STRINE, JR., Vice Chancellor
Dear Counsel:
This letter addresses plaintiff Holley Enterprises, Inc.'s motion for a temporary restraining order prohibiting the City of Wilmington (the "City") from proceeding with certain demolition projects.
This case arises from the City's refusal to award nine separate contracts for the demolition of certain unsafe structures to Holley even though Holley was the lowest bidder on each project. The Wilmington City Charter (the "Charter") requires that the City award contracts to the "lowest responsible bidder." The City informed Holley that it could not make an affirmative determination that Holley was a "responsible bidder" due to criminal charges pending in federal court relating to Holley's performance of public contracts in Delaware, New Jersey, and Pennsylvania. Specifically, the indictment alleges that Holley engaged in three types of misconduct on numerous occasions: 1) failing to report wages paid to employees in order to avoid paying taxes on those wages; 2) failing to comply with provisions in its contracts requiring Holley to pay its employees the prevailing wage, instead paying them "at hourly rates that were typically one-third or one-fourth of the relevant prevailing wage rate"; and 3) underreporting the hours worked by employees to employee welfare benefit plans and employee pension plans. Holley contends that the City violated the Code and acted arbitrarily and capriciously by basing its decision on an indictment because the City is only entitled to find that Holley is not a responsible bidder if Holley is convicted.
Wilm. C. (Charter) § 8-200(1).
The indictment is against Holley's President, William C. Holley, and Vice-President, Joseph E. Funk, Jr., rather than Holley itself, even though the charges relate to the conduct of Holley's business. Because the parties do not argue that that distinction is relevant here, and for the sake of simplicity, I discuss the allegations of the indictment as allegations against Holley Enterprises.
City's Opp'n Br. Ex. B ("Federal Indictment") ¶ 23.
Holley now seeks a TRO prohibiting the City from allowing any contractor to proceed on the disputed projects pending this court's evaluation of a preliminary injunction motion.
Holley seeks a TRO covering seven of the nine disputed projects. Of these seven, five have been deemed "emergency demolitions" by the City, and the City has already awarded contracts for three of these emergency demolitions to other bidders.
I. The TRO Standard
When considering a motion for a temporary restraining order, Delaware courts "look to three factors principally in informing the court's discretion: the imminence and significance of plaintiff[']s claim of irreparable injury; the probable merits of plaintiff[']s claim; and the risks to defendant in the event a restraining order were issued and it ultimately were determined that the restraining order was improvidently issued." Although, for practical reasons, TRO proceedings typically focus mostly on the relative balance of harms, the weight the court gives to these three factors ultimately depends on the circumstances of the case and the clarity of the record at the TRO stage. Thus, "[i]f the court is already in a good position to make a reasoned assessment of the merits and the equities, then it seems irresponsible to expose the parties to the substantial risks that would flow from a TRO." This is the case here, where the basic facts are not in dispute and where the issues raised by underlying case turn on basic, settled principles of administrative law.
Newman v. Warren, 684 A.2d 1239, 1244 (Del.Ch. 1996).
As noted by Chancellor Allen in Newman:
How the Court of Chancery, in the exercise[] of its discretionary judgment, balances the foregoing elements in a particular case will necessarily incorporate a complex judgment reflecting the unique blend of timing considerations, consideration of the nature and extent of the risk of injury to both sides should relief be granted or denied, and consideration of the merits to the extent conditions allow.
Newman, 684 A.2d at 1244-45; see also Cottle v. Carr, 1988 WL 10415, at *3 (Del.Ch. Feb. 9, 1988) ("No hard and fast rule governing the extent to which a court may feel able to delve into the merits on such an application is, however, possible.").
ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 103 (Del. Ch. 1999).
II. Likelihood Of Success On The Merits
Holley's ability to prevail in the underlying case turns on two issues: 1) the extent to which the City has discretion under the Charter and the Wilmington City Code (the "Code") to determine whether a bidder is a responsible bidder; and 2) whether the City abused the scope of its discretion.
Holley argues, in essence, that in determining whether Holley was a responsible bidder, the City did not have the discretion to look beyond the factors listed in Section 2-537(4) of the Code, which lists circumstances that are sufficient to find a contractor lacks integrity. The factors in Section 2-537(4) include "[a] conviction of the contractor . . . for commission of a criminal offense, as incident to obtaining . . . a public contract or in the performance of such contract." Holley contends that this express enumeration of a conviction precludes the City from considering Holley's mere indictment on such criminal charges. The problem for Holley is that the Code itself clearly grants the City discretion to consider factors other than those listed in Section 2-537(4).
Wilm. C. § 2-537(4)(c).
A. The Code Grants The City Discretion To Determine Who Is A Reasonable Bidder
This court has regularly recognized the broad discretion that executive branch and other contracting agencies generally have in applying procurement regulations. And, the terms of Wilmington's Charter and Code indicate that the City had such discretion here.
See, e.g., Danvir Corp. v. City of Wilmington, 2008 WL 4560903, at *5 (Del.Ch. Oct. 6, 2008) ("A state-contracting agency is vested with broad discretion. This court will not overturn an agency decision to award a contract that complies with the law unless that decision was made arbitrarily, capriciously, or in bad faith." (citing Gannett Co. v. State, 1993 WL 19714, at *3 (Del.Ch. Jan. 11, 1993))); Prison Health Servs., Inc. v. State, 1993 WL 257409, at *2 (Del.Ch. June 2, 1993) ("Public contracting agencies are vested with broad discretion in carrying out their functions. A Court will not overturn the decision of an agency to award a contract that is not illegal unless that decision is made arbitrarily, capriciously, or in bad faith. (citation omitted)); Statewide Hi-Way Safety, Inc. v. Dep't of Transp., 1983 WL 18024, at *3 (Del.Ch. June 28, 1983) ("An administrative agency is given broad discretion with regard to the qualifications for the award of a public works contract."); Furnival Mach. Co. v. New Castle County, 1977 WL 9565, at *3 (Del.Ch. Jan. 21, 1977) ("County officials are vested with broad discretion in determining which applicant is the lowest responsible bidder in a particular case and such a decision will not be disturbed unless it can be shown to have been illegally or arbitrarily exercised.").
The Charter requires that the City award contracts like the ones in dispute here to the lowest responsible bidder that emerges from a competitive bidding process. The Code elaborates on the meaning of a responsible bidder in Section 2-536, which states the general rule that "[n]o purchase shall be made from, and no contract shall be awarded to, any person unless the head of the department through which the contract is to be awarded first makes an affirmative determination that the prospective contractor is responsible." Section 2-536 goes on to state that "[i]n determining the responsibility of a prospective contractor, guidance shall be provided by the minimum standards of section 2-537." In other words, the factors described in Section 2-537 are not meant to be applied ministerially, as Holley argues, but instead serve only as guidelines to the agency in the exercise of its discretion.
Wilm. C. (Charter) § 8-200(1).
Wilm. C. § 2-536 (emphasis added).
Id. (emphasis added).
And, the language of Section 2-537 itself further reinforces the discretionary nature of the agency's determination of a who is a responsible bidder. For starters, Section 2-537 is titled "Minimum standards," suggesting an agency may require greater qualifications where appropriate. In addition, Section 2-537(4), which is the subsection that this dispute revolves around and which requires "a satisfactory record of integrity" to meet the minimum standards, states that "the following provisions, while not exclusive, shall be sufficient to justify a finding of nonresponsibility." In other words, Section 2-537(4) lists circumstances that are per se indications of a lack of integrity, but expressly contemplates that other circumstances could also support a determination that a prospective contractor lacks integrity.
Wilm. C. § 2-537(4) (emphasis added).
In this regard, I am unpersuaded by Holley's argument under the expressio unius doctrine that, by listing a conviction as sufficient grounds for finding a lack of integrity, the City Council meant that an indictment cannot be sufficient grounds. Section 2-537(4) is a list of circumstances that are always sufficient to show a lack of integrity. The absence of indictment from the list merely reflects the judgment of the Council that an indictment will not always be sufficient, not a judgment that a pattern of conduct outlined in a well-pled indictment can never be sufficient if the City has cause to believe the conduct occurred.
I am similarly unpersuaded by Holley's argument that, if the City wanted to look to criteria outside of Section 2-537(4), it had to take regulatory action through the purchasing review committee (the "PRC"), a body created by the Code to "help disseminate and enforce the procurement procedures and requirements of the City Charter and City Code" and that "ha[s] the authority to promulgate regulations." Wilm. C. § 2-512. The PRC appears to have been created to have purview over procurement decisions broadly, and not just to oversee determinations of responsibility. And, although the PRC is empowered to promulgate regulations, nothing in the Code indicates that it is required to do so, or that agencies can only consider the particular circumstances addressed by the PRC. Indeed, the words "while not exclusive" in Section 2-537 indicate that the Council intended to give the agencies charged with making a decision flexibility in the face of unforeseen circumstances. It would make no sense to provide that flexibility, but at the same time severely limit it by requiring the PRC to spell out in advance an "exclusive" list of additional qualifying circumstances.
Indeed, it would not make sense from a public policy perspective to read the Code as prohibiting the City from considering factors other than the enumerated ones when making its required, affirmative finding that a contractor is responsible where there is a rational basis to fear that the contractor lacks integrity. Doing so could force the City to direct public funds to a contractor who is irresponsible but has nevertheless avoided running afoul of any of the triggers in the (expressly non-exhaustive) list in Section 2-537(4). Procurement regulations serve a dual purpose of "prevent[ing] waste through favoritism and yet permit[ting] proper supervision over the qualifications of the bidders." Reading the Code as Holley suggests would nearly eliminate the second part of this purpose — ensuring qualifications — because the City would only be able to exercise supervisory power in the limited circumstances expressly addressed in the Code when Section 2-537 plainly gives the City flexibility to address unique circumstances by making the express circumstances in the Code "not exclusive."
Fetters v. Mayor and Council of Wilmington, 72 A.2d 626, 629-30 (Del.Ch. 1950).
Wilm. C. § 2-537(4).
Thus, the City had discretion under its Charter and Code to consider factors not expressly included in the Code when determining whether Holley was a responsible bidder. But, this discretion, as in all administrative decisions, was limited by the requirement that an agency not act arbitrarily or capriciously. So, the operative question here is whether the City acted arbitrarily or capriciously in basing its determination on an indictment, rather than on a conviction.
Danvir, 2008 WL 4560903, at *5; Gannett, 1993 WL 19714, at *3.
B. The City's Determination Was Not Arbitrary Or Capricious
"`Arbitrary and capricious' is usually ascribed to action which is unreasonable or irrational, or [to] that which is unconsidered or which is wilful and not the result of a winnowing or sifting process. It means action taken without consideration of and in disregard of the facts and circumstances of the case. . . ." This standard is applied deferentially in order to "prevent `second guessing' by courts of decisions that properly fall within the competence of a governmental . . . decision-making body, so long as those decisions rest upon sufficient evidence and are made in good faith, disinterestedly, and with appropriate due care." Nothing about this standard requires an agency to gather evidence that meets the high burden of proof for criminal convictions before rationally concluding that a contractor is not a responsible one. Although the parties have not been able to point to any Delaware case considering whether an indictment, as opposed to a conviction, can support a determination that a bidder is not responsible, well-reasoned decisions of courts from several other jurisdictions have held that an agency can rationally conclude that an entity is not a responsible bidder based on an indictment, or even just a criminal investigation. Such holdings comport with the well-settled principle in Delaware law that agencies need only a rational factual basis for their decisions, not a basis supporting their determination beyond a shadow of a doubt.
Harmony Constr., Inc. v. State Dep't of Transp., 668 A.2d 746, 750 (Del.Ch. 1995) (quoting Willdel Realty, Inc. v. New Castle County, 270 A.2d 174, 178 (Del.Ch. 1970)).
Id. at 751.
See, e.g., Trap Rock Indus., Inc . v. Kohl, 284 A.2d 161, 171 (N.J. 1971) (holding that an agency did not abuse its discretion when it temporarily suspended the bidding privileges of contractors who had been charged with bribery on the basis that they were not responsible bidders); LaCorte Elec. Constr. Maint., Inc. v. County of Rensselaer, 600 N.Y.S.2d 818, 819 (N.Y.App.Div. 1993) ("[A] bidder's honesty, integrity, good faith and fair dealing are valid considerations regarding whether a lowest bidder is a responsible bidder, and a criminal investigation or indictment can provide a rational basis for finding that such bidder is not responsible."). Holley's argument that these cases are inapposite because the relevant agencies had greater discretion than the City does here is unpersuasive; as discussed above, the City does have broad discretion in making responsibility determinations.
See Breeding v. Contractors-One-Inc., 549 A.2d 1102 (Del. 1988) ("Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. It is also defined as more than a scintilla but less than a preponderance of the evidence."). Because of this, the City's consideration of the indictment does not offend Holley's constitutional right to a presumption of innocence in a criminal proceeding, as Holley argues for the first time in its reply brief. Rep. Br. at 13 (citing Taylor v. Kentucky, 436 U.S. 478, 482, 485-86 (1978)). The City did not have to conclude that Holley was guilty in the criminal sense in order to have a sufficient factual basis for determining that it could not make the necessary, affirmative decision that Holley was a responsible bidder. See Trap Rock Indus., 284 A.2d at 166, 170 (noting that "[a]n indictment, State or federal, is hardly a neutral fact for all purposes" and holding that, on the basis of an indictment, an agency could "reasonably believe it was not in the best interest of government to deal with these contractors until the criminal allegations were resolved in some manner").
Here, the City's determination that Holley does not currently qualify as a responsible bidder because he lacks "a satisfactory record of integrity" does not appear unreasonable. There is a close nexus between the charges in the indictment and the City's legitimate concerns regarding the integrity of Holley's bids. If the charges are true, Holley was able to bid lower than other contractors because Holley acted illegally in performing public contracts. Additionally, the charges relate to a matter of importance in public contracts under the Code: payment of the prevailing wage. The Code expressly states that a contractor can be deemed nonresponsible based on a lack of a satisfactory record of contract performance if, "[i]n particular, [the contractor] fail[s] to comply with prevailing wage and related federal, state, and city requirements" as required by a contract. The City also has a legitimate interest in ensuring that its contractors withhold taxes, including wage taxes, in the required manner, and the indictment accuses Holley of several violations of this kind.
Wilm. C. § 2-537(4).
Wilm. C. § 2-537(5)(c).
With regard to the sufficiency of the evidence supporting the City's determination, the fact of the indictment alone indicates that there is a reasonable basis, at least in the view of a grand jury, for concluding that Holley performed public contracts in an unlawful manner. And, the indictment itself, which is part of the record for purposes of this motion, contains detailed factual allegations from which the City could draw its own conclusions about the strength of the government's case, including the projects involved, the dates of the alleged misconduct, and how the fraudulent schemes were carried out.
The projects included work at the Bancroft School in Wilmington, Delaware; Kennett Square High School in Kennet Square, Pennsylvania; Cheyney University of Pennsylvania in Cheyney, Pennsylvania; Redding Middle School in Middletown, Delaware; the Hockessin Library in Hockessin, Delaware; and the New Jersey State Museum in Trenton, New Jersey. Federal Indictment ¶ 22.
Moreover, rather than relying solely on the indictment, the City gave Holley's President and Vice-President an opportunity to address the City's concerns regarding the indictment in a meeting with a representative from the City Solicitor's office. At that meeting, according to the affidavit of First Assistant City Solicitor Mark Pilnick, Holley's Vice-President, "[w]hile not expressly admitting guilt, . . . acknowledged that monies were due to the government although not to the extent claimed" and that the response of Holley's President to the charges was that the government was "out to get him." But, Holley's President did not provide a plausible basis for why the United States government or the half-dozen or so public agencies whose contracts are at issue in the indictment (including the State of New Jersey, the government of New Castle County, and school districts in Delaware and Pennsylvania) would have an improper reason to single out Holley for unfair suspicion and ultimately criminal prosecution. In the end, Holley's representatives failed to "adequately alleviate[] [the City's] concerns regarding the charges against them."
Pilnick Aff. ¶ 7.
Id. ¶ 8.
The Pilnick Affidavit is unrebutted. In other words, Holley does not present record evidence that its representatives came to the meeting with the City with strenuous claims of innocence. Instead, Holley argues that its representatives were inhibited given the pending indictment and their rights against self-incrimination. This may have been a legitimate personal concern for the President and Vice-President of Holley, but their lack of assurances gave the City no basis for concluding that Holley was a responsible bidder in the face of an indictment accusing Holley of multiple violations of its legal obligations as a contractor to various public agencies.
Thus, the record shows that the City made an extra effort to give Holley a chance to reassure the City that there was no legitimate basis for concern, and Holley failed to do so. Importantly, the record is completely absent of any evidence that the City's concerns were based on any animus or improper bias against Holley, rather than a proper concern that Holley was not a responsible bidder that would follow the required legal rules governing contractors.
As a result, the City could, and appears to have, rationally and impartially concluded from the federal indictment, as well as its own inquiry into the matter, that it could not make an affirmative determination that Holley was a responsible bidder. Thus, Holley is unlikely to prevail on the merits of its claims in a later proceeding.
III. The Balance Of Harms
The parties agree that Holley would be irreparably harmed if the City improperly allowed another contractor to go forward on the disputed projects because Holley has no later ability to recover money damages for the improper award of a contract to another bidder.
See Holley's Opening Br. at 5 (citing the County And Municipal Tort Claims Act, 10 Del. C. § 4010 et seq.); City's Opp'n Br. at 4.
With regard to the public interest, the City argues that it should not be delayed in completing its "emergency demolitions" because the structures pose a threat to public safety. Holley responds that the demolitions in question are not emergencies because the structures are not in imminent danger of collapse, as evidence by the structural engineering reports submitted by the City.
See Opp. Br. Ex. A.
The City's argument is more compelling in light of the importance of the relative interests at stake. Even if the structures are not likely to collapse tomorrow, or even in the next several months, it is clear from the engineering reports that the structures are extremely decrepit, are unsafe to enter, and cannot currently be put to use. The mere unpredictability of whether these falling-apart structures will collapse or otherwise cause harm in perhaps unforeseen circumstances is a threat to public safety. Nor does it serve the public well to have these properties sitting idle and further deteriorating while the parties prepare for a preliminary injunction proceeding. And, an improvidently granted TRO would be unfair to the contractors who were awarded the disputed contracts because it would delay their ability to receive payments that they are entitled to as the lowest responsible bidder.
Problems at the various sites includes a collapsed second floor, deflected framing that is pulling on side walls, deteriorated brick, and missing lintels (a form of support beam). Opp. Br. Ex. A.
The City has awarded three of the contracts subject to this TRO to other contractors.
These considerations tip the balance of harms in favor of denying the TRO, especially because Holley remains free to pursue work from other sources of business and should be able to resolve the criminal charges very soon, given that the criminal case is set for trial on June 22, 2009.
* * *
In sum, the TRO is denied because Holley is unlikely to succeed on the merits, and the limited harm Holley would experience by losing the ability to bid on City contracts while the criminal charges are pending is outweighed by the threat a TRO poses to public safety and to the contractors already awarded disputed contracts. IT IS SO ORDERED.