Tag Archives: disgorgement

DOT I’S AND CROSS T’S WHEN IT COMES TO CONSTRUCTION LICENSURE REQUIREMENTS

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It should serve as no surprise that making sure you are appropriately licensed is important.  This includes complying with any state requirement that requires licensure, as well as complying with any local licensure requirement.  Not doing so can result in the dispute centered on the lack of licensure, as opposed to leading facts relating to the substance of the dispute.   In other words, you are dealing with a technicality that could have harsh implications.  This lack of licensure issue recently played out in a dispute with a contractor and subcontractor in ABA Interior, Inc. v. The Owen Corp., 2022 WL 386103 (Fla. 4th DCA 2022), dealing with a local licensure requirement.

In this case, a subcontractor was hired by the general contractor for a commercial project in Palm Beach County.  The subcontract contained the standard provision that the subcontractor would comply with all federal, state, and local laws and ordinances.

Palm Beach County had a local ordinance that required the subcontractor to obtain a certificate of competency for specialty contracting (that included some of the work the subcontractor was hired to perform).  Palm Beach County had a local ordinance that “makes it unlawful for a person who is required but failed to possess a certificate of competency ‘to hold himself/herself out as a contractor, whether as a plaintiff, defendant or witness in any court in this county.’”  ABA Interior, supra, quoting Palm Beach County Code section 7-17(b)(2).

When the general contractor learned the subcontractor had not obtained its certificate of competency–which appeared to be learned after the subcontractor completed its performance–it stopped paying the subcontractor.  The subcontractor sued the general contractor for payment in Broward County based on the subcontract’s venue provision.  The general contractor counterclaimed to recover monies it paid the subcontractor (presumably under a disgorgement theory for unlicensed contracting) and further argued the subcontractor could NOT sue the general contractor relating to its unlicensed work.

The trial court agreed and entered summary judgment in favor of the general contractor.  The Fourth District Court of Appeal reversed in part.

The subcontractor argued that because it sued in Broward County, not Palm Beach County, any bar to suing in Palm Beach County due to its lack of licensure did not apply.  The appellate court shot this argument down as unreasonable:

 [T]he [subcontractor’s] reading of the Palm Beach County Code would make it so that section 7-17(b)(2) could never be enforced outside of Palm Beach County, even when Palm Beach County law applies.  If a contract has a venue provision outside of Palm Beach County, as is the case here, a party that falsely holds itself out as possession a required certificate of competency would effectively face no consequence.  This would be an unreasonable result.

ABA Interiors, supra.

However, the appellate court maintained that the local ordinance only barred an unlicensed contractor “from litigating claims involving work that requires additional [specialty] licensure.  [The subcontractor] was still permitted to prosecute or defend itself on claims that did not require this additional licensure.”  Id.   The subcontractor’s scope included flooring work which may not have required a specialty license.  The appellate court found there was no finding by the trial court that all of the subcontractor’s work required a specialty license and there was also no finding as to whether the subcontractor complied with its contractual requirement “by engaging properly licensed sub-subcontractors to perform the work that required Palm Beach County licensure.”  ABA Interiors, supra.   For this reason, the appellate court reversed summary judgment.

Moreover, the appellate court maintained that there was no finding by the trial court as to whether the subcontractor’s lack of this specialty license “constituted a breach of the agreement that would negate any obligation for payment, even for the work that did not require such licensure.”  Id.  For this reason too, the appellate court reversed summary judgment.

As you can see, this case dealt with the technical argument of licensure.  It did not deal with the substance of the subcontractor’s work (i.e., was it defective or nonconforming, or was the work performed correctly).   This is not the type of fight you want to be in reinforcing the importance of making sure i’s are dotted and t’s are crossed with licensing requirements.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

 

WHEN A PUBLIC SOLICITATION GOES TERRIBLY WRONG

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Unknown-1The recent Northern District of Florida opinion of Community Maritime Park Associates, Inc. v. Maritime Park Partners, LLC, 2014 WL 415955 (N.D.Fla. 2014) is a case with complex facts that illustrates what can happen if a public contract is declared void as against public policy. It illustrates what can happen when a public solicitation goes terribly wrong! In this case, the outcome was disgorgement of all profits/benefits the public body paid to its master developer and design-builder.

 

A. Facts and the Consultants’ Competitive Negotiations Act

 

The public body filed suit against its master developer for fraud and rescission of a development contract (and design-build contract). The public body is a publicly funded non-profit corporation with a board appointed by the City of Pensacola tasked to manage city owned property for purposes of a project. It was looking for a master developer for its project to competitively award the development contract pursuant to Florida’s Consultants’ Competitive Negotiations Act (“CCNA”) set forth in Florida Statutes s. 287.055. (Notably, the CCNA governs a public body’s award of professional architectural and engineering services and design-build agreements.)

 

Without going into all of the specifics of the CCNA, it is a statute that requires two main steps for public bodyies to competitively award professional services: (1) competitive selection and (2) competitive negotiation.

 

Under the competitive selection step, the public body evaluates qualifications and performance data from bidders (typically, by sending out a Request for Qualifications) and typically requires presentations regarding the qualifications by no fewer than three firms. The public body then selects in order of preference no fewer than three firms that are qualified to perform the professional services it is seeking. As the CCNA states:

 

“In determining whether a firm is qualified, the agency shall consider such factors as the ability of professional personnel; whether a firm is a certified minority business enterprise; past performance; willingness to meet time and budget requirements; location; recent, current, and projected workloads of the firms; and the volume of work previously awarded to each firm by the agency, with the object of effecting an equitable distribution of contracts among qualified firms, provided such distribution does not violate the principle of selection of the most highly qualified firms. The agency may request, accept, and consider proposals for the compensation to be paid under the contract only during competitive negotiations….” Fla. Stat. s. 287.055(4).

 

Under the competitive negotiation step, the public body then starts competitive negotiations with its preferred–most qualified–professional. “Should the agency be unable to negotiate a satisfactory contract with the firm considered to be the most qualified at a price the agency determines to be fair, competitive, and reasonable, negotiations with that firm must be formally terminated. The agency shall then undertake negotiations with the second most qualified firm.” Fla. Stat. s. 287.055(5).

 

Here, the public body submitted Request for Qualifications to potential master developers. After receiving qualifications and narrowing the list to four finalists, it submitted a Request for Proposals to the finalists getting their proposal for their concept for the development of the project. Land Capital, the entity it deemed the most qualified, submitted a proposal and put on a public presentation. Land Capital presented that it partnered in a joint venture with other real estate entities known as “Brass/Magi” and that Land Capital and Brass/Magi formed a specific development company, the defendant, to execute the development agreement with the public body. Land Capital was deemed to be the top-ranked developer and was, thus, the first entity the public body could engage in competitive negotiations with. During these competitive negotiations, Land Capital collapsed financially. When the public body became aware of this, it approached Land Capital and Brass/Magi represented that Brass/Magi was financially sound and there was no threat to the project. The public body went forward with the development agreement since its understanding was the defendant was a joint venture between Land Capital and Brass/Magi.

 

Pursuant to the proposed development agreement, the master developer (defendant) had the option of serving as the design-build contractor for an additional fee but it would need to be qualified as a design-build contractor on the date the development agreement was executed, although the design-build contract would be separately awarded. The master developer entity could not get bonding capacity to serve as the design-build contractor and had to team up with a general contractor to form a new construction company to serve as the general contractor. The public body then awarded the design-build contract to the defendant knowing the design-build contractor would be a joint venture and would not specifically be the defendant.

 

Then, after the development agreement was entered, the public body learned that Land Capital (the entity it deemed the most qualified) had in fact financially collapsed, that defendant was not a part of a Brass/Magi joint venture, and the defendant was a project-specific entity with no assets–a shell. For these reasons, the public body rescinded the contracts and filed suit, specifically to recoup the monies paid to the defendant.

 

B. The Court’s Ruling

 

UnknownThe Northern District agreed concluded that a participant in a public procurement cannot gain an unfair competitive advantage by injecting material misrepresentations. “Having been chosen to negotiate in this statutory public procurement process based on qualifications, Land Capital and MPDP [master developer entity contracted] through their officers…had a continuing duty to disclose material information or withdraw if material qualifications were no longer met.” Community Maritime Park Associations, supra, at *14. Instead of complying with the continuing duty, Land Capital’s representatives misled the public body in order to enter into the contract. The Court, therefore, disgorged the entire development fee paid to the master developer irrespective of services that were rendered and the profit on the design-build contract. The only monies that were not disgorged were monies paid directly to third party subcontractors or other project professionals. (Notably, the public body wanted these monies repaid back too.)

 

C. Rumblings and Considerations

 

Look, there is no doubt that the master-developer (defendant) the public body hired did not meet the required qualifications. There is also no doubt that misrepresentations were made, although it is uncertain whether the misrepresentations were made in bad faith with the intent to deceive the public body. This case exemplifies:

 

“Where a competitive public contract was awarded in violation of a statute but in ‘apparent good faith, in an honest effort to pursue the requirements of competitive bidding statutes, and it is not shown that the contract as actually entered into is to the public’s disadvantage in any way, nor that it has been entered into with unlawful or fraudulent intent,’ the decision of whether to restrain payment to the contracting party–or, presumably the converse, whether to require complete disgorgement [of] payments received on the void contract–will rest with the court’s discretion in light of the equities involved.” Community Maritime Park Associates, supra, at *13.

 

And, considering the court found that the master development agreement with a shell-defendant was clearly not in the public’s advantage, disgorgement was the remedy. But, in light of the facts , the public body appeared part of the very problem it complained about and instead of there being potential accountability (perhaps there will be) disgorgement was the remedy.

 

For instance, the public body thought Land Capital (not a joint venture or the entity it hired) was the most qualified under the CCNA to enter into the development agreement. Even though Land Capital represented that it joint ventured with another entity to form the defendant that the public body contracted, common sense would seem to dictate that the entity was a single-purpose entity created for purposes of the project.  Or, the public body should have known that the defendant was really not what it was looking for pursuant to its solicitation requirements. There was nothing that would have prevented the public body from asking to see the joint venture agreement, partnership agreement, or any other agreement demonstrating that the proposed master developer defendant was more than a sole purpose entity. If defendant was a joint venture with separate firms, there should be an agreement memorializing this.  The fact remains that the public body found Land Capital its most qualified master developer–not any other entity! Then, during competitive negotiations, the public body learned that Land Capital collapsed financially. Instead of this being a pretty big red flag since, again, Land Capital was its preferred entity, it proceeded with the negotiations because the supposed other joint venture partner to the defendant represented it was financially sound. Well, the other joint venture partner should really have not even been in the equation because Land Capital was the entity it deemed the most qualified. Nevertheless, not only did the public body forge ahead with the negotiations and contract, but then allowed the defendant to serve as the design-builder provided it had the proper license at the time the development agreement was executed. But, it knew that the defendant was not licensed at the time (there was a delay in the execution so the defendant could obtain a license) and did not have the bonding capacity to provide public payment and performance bonds. So, instead of both of these raising potentially more red flags (since lack of bonding capacity would indicate that the defendant did not have the financial wherewithal that complied with the public body’s qualifications and lack of licensure may have indicated that it not have certain design build qualifications), the public body allowed the defendant to joint venture with a contractor that could provide the bonding capacity and then separately awarded the contract to the joint-venture design-builder.

 

The point is that neither party in this situation appears to be entirely blameless. But, because the public body utilizes public funds to competitively award a contract, what it could have done or should have done (the what ifs, could ifs, or should ifs) to potentially avoid this scenario become moot due to the perception and reality that it was bamboozled into paying public funds to a master developer that was neither qualified nor financially solvent pursuant to the public solicitation. Certainly, the master developer entity (defendant) should not get a windfall or benefit from misrepresentations that undermine the competitive solicitation process and disgorgement of its benefit (its profit and monies paid to it) make sense. Yet, now the public body is most likely left to re-start the public procurement process to locate a new qualified master developer and new design builder.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.