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