Opposition Brief — Construction Engineers, Inc. v. Conway Corp.

No. 89-1306

Supreme Court of the United States

OCTOBER TERM, 1989

CONSTRUCTION ENGINEERS, INC.,

ASSOCIATED GENERAL CONTRACTORS OF

AMERICA, ARKANSAS CHAPTER, MICHAEL

SUTTERFIELD AND CATHERINE N. RUSHING,

Petitioners

Vv.

THE Conway CORPORATION,

Jim BREWER AND BENNIE J. McCoy,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ARKANSAS

RESPONDENTS’ JOINT BRIEF IN RESPONSE

TO PETITION FOR WRIT OF CERTIORARI

MicHaeL G. THOMPSON James M. Moopy

Counsel of Record Counsel of Record

FRIDAY, ELDREDGE & CLARK WRIGHT, LINDSEY & JENNINGS

2000 First Commercial Building 2200 Worthen Bank Building

Little Rock, Arkansas 72201 Little Rock, Arkansas 72201

(501) 376-2011 (501) 371-0808

Attorneys for the Conway Attorneys for Bennie J. McCoy

Corporation and Jim Brewer

TREVATHAN PRESS « LITTLE ROCK

ee e—————————e=eeeE=eE_____

TABLE OF CONTENTS

Ce ee ee ee ee ii

UUNOMGME OF UO CASE 2. ee es iil

a eee ee 1

Argument

|. The Petition States No Grounds

Which Warrant Review on Writ of

Gt Smee ne Gs 2

ll. The Petition Is Predicated on the

Factual Findings of the Arkansas

Supreme Court and the Inferior

Pulaski County, Arkansas Chan-

cery Court..... OE ye eee 4

lll. The Petition Lacks Merit Under the

Laws of the State of Arkansas and

the Decisions of this Court......... 9

Pe See ie a a ee ee 12

Appendix

Order of Special Master... ..........2- Al

Testuumony of Dan Stowers in the

Proceedings before the Special

WE 64-6 see Se wee ew ee AS

Testimony of Bennie J. McCoy in the

Proceedings before the Special

PN 6 CAS UR CER SS ae ew ees AQ

Testimony of James Brewer in the

Proceedings before the Special

Mostet ... 48 ee ee ee eo

Testimony of Steve Smith in the

Proceedings before the Special

baster . « 4 64 eee ee

Minutes of Board Meeting of July

7, 1986 oe ct Ree eee

Arkansas Rule of Civil Procedure

$32) «oo eS

TABLE OF AUTHORITIES

Cases:

Addington v. Texas, 441 U. S. 418, 99 S.Ct. 1804,

60 L.Ed.26. 323 CASTE) o seice ss

Armstrong v. Manzo, 380 U.S. 545, 85 S.Ct. 1187,

14 LEO.2e Ge Clee se ees

Layne & Bowler Corp. v. Western Well Works, Inc.,

261 U.S. 387, 393, 43 S.Ct. 442,

67 L.EG.26 82 (lees 2 eee

Woodruff v. Core, 23 Ark. 341, 346 (1861). .

Statutes

28 U.S.C. §1257

Rules of Procedure

Sup. Ct. RR. 87 «a + « Se ow eee es 8

Ark. KR. Civ. FP. 38% « s\eue0ses ee ee

STATEMENT OF THE CASE

Petitioner Construction Engineers, Inc.

(“CEI”) initiated the litigation from which this Petition

arises in 1986 in an effort to be instated in a public works

contract let by public bid by respondent the Conway

Corporation, a non-profit corporation chartered by the

City of Conway, Arkansas to own and operate public

utilities within the City. CEI also sought, alternatively, to

recover damages for the profit that it allegedly would

have earned on the contract. The Conway Corporation

had rejected CEI’s low bid for the contract for cause and

awarded the contract to the sccond low bidder. The trial

court, the Pulaski County, Arkansas Chancery Court,

awarded CEI judgment against those defendants who are

respondents to this Petition. This Petition is in response

to the reversal of that judgment by the Arkansas

Supreme Court.

The petition is predicated on the Arkansas

Supreme Court’s alleged reliance on proffered testimony

in support of its decision to reverse the judgment.

Although not mentioned in the Petition, much of the

evidence received at the trial level was presented before

a special master appointed to determine CEI’s claims for

preliminary injunctive relief. The special master entercd

proposed findings that the preliminary injunctive relief

should not issue because CEI had no probability of

success on the merits of its claim, because the Conway

Corporation had a reasonable basis for the rejection of

e+e

CEI’s low bid for the public works contract, and because

all defendants, including the respondents herein, had act-

ed in good faith with regard to the rejection of CEI’s bid.

Instead of accepting or rejecting the special

master’s findings as required under Arkansas law, the

chancery court accelerated the hearing on permanent

injunctive relief and heard evidence on that issue.

Respondent McCoy was excused from that hearing. At

the conclusion of the hearing, the chancery court entered

findings of fact and conclusions of law finding, among

other things, that the respondents herein, including

McCoy, were liable in money damages to CEI. The chan-

cery court then set for hearing the amount of moncy

damages.

The respondents herein appealed the judg-

ment of the Pulaski County, Arkansas Chancery Court to

the Arkansas Supreme Court. The points of error

presented to the Arkansas Supreme Court included,

among others, that the chancery court erred in refusing

to adopt the proposed findings of the special master and

that the chancery court’s findings were clearly erroneous.

After reviewing the record of evidence before the special

master and the chancery court, the Arkansas Supreme

Court reversed and dismissed the judgment of the

chancery court on those grounds. In essence, this petition

is predicated on the sufficiency of the evidence to

support the decision of the Arkansas Supreme Court.

IV

No. 89-1306

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

CONSTRUCTION ENGINEERS, INC.,

ASSOCIATED GENERAL CONTRACTORS OF

AMERICA, ARKANSAS CHAPTER, MICHAEL

SUTTERFIELD AND CATHERINE N. RUSHING,

Petitioners

V.

THE CONWAY CORPORATION,

Jim BREWER AND BENNIE J. McCoy,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ARKANSAS

RESPONDENTS’ JOINT BRIEF IN RESPONSE

TO PETITION FOR WRIT OF CERTIORARI

SUMMARY OF ARGUMENT

The opinion of the Arkansas Supreme Court

from which this writ is sought did not reach or decide

any question of federal law. The opinion reversed the

trial court’s judgment against the respondents ‘and

dismissed the action on the grounds that the findings of

the trial court were clearly erroneous. The opinion of the

Arkansas Supreme Court is supported by the evidentiary

record and, as expressly stated by the court, was in no

way based on proffered testimony.

ARGUMENT

|. THE PETITION STATES NO GROUNDS

WHICH WARRANT A REVIEW ON WRIT

OF CERTIORARI

Rule 17 of the Rules of the Supreme Court

provides that the discretionary writ of certiorari will only

be granted when “special and important” reasons are

shown in support of the petition. Rule 17 also provides

illustrations of reasons that are “special and important”:

(b) when a state court of last resort has

decided a federal question in a way to con-

flict with the decision of another state court

of last resort or of a federal court of appeals.

(c) when a state court or a federal court

of appeals has decided an important

question of federal law which has not been,

but should be, settled by this Court, or has

decided a federal question in a way to

conflict with applicable decisions of this

Court.

The Petition is predicated on no such “special and

important” reasons, and the petitioner does not even

attempt to state “special and important” reasons for

which the Petition should be granted.

Moreover, the petitioners have not shown

that the Arkansas Supreme Court decided any question

of federal law. See also 28 U.S.C. §1257(a). The

petitioners argue that the court’s opinion reversing the

trial court was wholly based on proffered evidence for

which the petitioners were denied the right of cross-

examination. The Petition rests on one ambiguous

statement in a footnote to the court’s original opinion.

(Petition at A-20.) In response to the entry of the

Original petition, the petitioners filed motions for

reconsideration, which likewise alleged that the court’s

opinion was wholly based on proffered evidence. The

Arkansas Supreme Court thereupon clarified the

offending footnote by indicating that the opinion was

“based on the evidence considered by the master and the

chancellor.” (Petition at A-9.) The Arkansas Supreme

Court never determined whether due process under

Me is noteworthy that since the Arkansas Supreme Court expressly stated in its

substituted opinion that no proffered testimony was considered (Petition at A-9

n.2), the petitioners must maintain that the court was academically dishonest in its

substituted opinion in order to logically maintain that the court did in fact rely on

proffered testimony.

Amendment XIV to the United States Constitution i

precluded an appellate court reviewing a trial court’s

findings de novo from reviewing proffered testimony.

The substituted opinion from which this writ is sought

was limited to the sufficiency under Arkansas law of the

evidentiary record in support of the trial court’s

judgment and neither decided nor implicated any

question of federal law.” (Petition at A-11 to A-12.) |

ll. THE PETITION IS PREDICATED ON

THE FACTUAL FINDINGS OF THE

ARKANSAS SUPREME COURT AND

THE INFERIOR PULASKI COUNTY,

ARKANSAS CHANCERY COURT.

The Arkansas Supreme Court reversed the

judgment of the chancery court because its findings were

clearly erroneous and because the chancery court

erroneously rejected the master’s proposed findings.

Under Ark. R. Civ. P. 53(e)(2), an Arkansas trial court

“shall accept the master’s findings of fact unless clearly

erroneous.” The chancery court in this action did not

review the record of the proceedings before the special

master, but instead accelerated the hearing on

permanent injunctive relief and entered findings of fact

completely inconsistent with the findings of the

-The petitioners have not cited a single federal case discussing the requirements of |

due process for the de novo review of a trial court’s findings of fact by a state

appellate court. The petitioners have clearly not shown that the opinion from which

this writ is sought conflicts in any way with the decisions of another court.

seein nineeeneminel

special master. The Arkansas Supreme Court’s opinion

was entered upon a review of the entire record of

evidence, including evidence from the proceedings

before the special master and before the chancery court.

(Petition at A-9 n.2.)

The petitioners argue that no evidence in the

record supports the Arkansas Supreme Court’s decision

and therefore that the court must have relied on

proffered evidence in reaching its decision. The

petitioners’ argument is affirmatively misleading and

ignores the evidence in the record. In their statement of

the case, for example, the petitioners cite several factual

findings of the Arkansas Supreme Court that are

allegedly either supported only by proffered testimony or

are unsupported by any portion of the record, including

proffered testimony. The record squarely contradicts the

petitioners’ argument.

First, the petitioners claim that the Arkansas

Supreme Court’s description of a previous construction

contract between the Conway Corporation and CEI as a

small subcontract was incorrect and supported only by

proffered testimony. (Petition at xii.) However, during

the hearing before the special master, Mr. James Brewer,

the general manager of the Conway Corporation,

testified that the previous project performed by CEI was

a small project, costing less than $35,000, and that the

Conway Corporation furnished all materials to CEI,

thereby performing what is usually a contractor’s role.

einai

(Respondents’ Appendix at A15-A16.) From this

testimony, the court could clearly conclude, and the

respondents so argued, that CEI was merely acting as a

small subcontractor on the previous project.

Second, the petitioners claim that neither the

record nor the proffers of evidence support the court’s

finding that certain notes which allegedly impeached Mr.

Bennie McCoy’s testimony were written by Mr. McCoy

for his own use and preparation for a deposition.

(Petition at xii-xiii.) The petitioners’ contention is clearly

wrong. When cross-examined about the notes at the

hearing before the special master, Mr. McCoy testificd:

“It was a log that I prepared to organize my files and

develop some chronology prior to your taking of my

deposition.” (Respondents’ Appendix at A11-A12.)

Third, the petitioners maintain that proffered

evidence provides the only basis for the court’s statement

that Mr. James Brewer’s concern about CEI’s ability to

perform the public works contract was founded upon

information received from a local school superintendent

and local newspapers and concerned problems with

plumbing, cabinet work and windows in a school building

constructed by CEI. (Petition at xiii.) However, the

testimony elicited from Mr. Brewer before the special

master clearly shows that his sources included the school

superintendent and the local newspapers. (Respondents’

Appendix at Al3, A18.) On cross-examination before the

special master, Steve Smith, the President of CEI,

admitted problems with the plumbing, windows and

cabinet work in the school building and confirmed that

the local newspapers had written about those problems.

(Respondents’ Appendix at A20-A29.)

Fourth, petitioners also argue that there was

no basis for the Arkansas Supreme Court’s finding that

after listening to information and recommendations by

James Brewer, the Board of Directors of the Conway

Corporation was unanimous in its decision to reject

CEI’s bid for the contract. (Petition at xiv.) However, the

unanimous vote following Mr. Brewer’s presentation is

in the record and in the minutes from the board meeting,

which were received into evidence. (Respondents’

Appendix at A16-A19, A30-33.)

Likewise, in their argument supporting the

grounds for the issuance of a writ of certiorari, the

petitioners state that the evidence of poor workmanship

on previous projects, which formed, in part, the basis of

the Conway Corporation’s rejection of its bid for the

public works contract, is absent from the record.

(Petition at 6.) This is clearly untrue. The problems with

CEl’s previous projects were stated repeatedly

throughout the record. In fact, the majority of their

problems were testified to by CEI’s president, Mr. Steve

Smith. These involved a wide variety of complications in

at least two projects, including CEI’s failure to use

specified materials in the construction of a school

(Respondents’ Appendix at A21), improper plumbing in

the school (Respondents’ Appendix at A23), improperly

placed insulation in the school (Respondents’ Appendix

at A25-A26), improperly installed ceiling tiles in the

school (Respondents’ Appendix at A25-A27), failure to

pay subcontractors timely (Respondents’ Appendix at

A28), failure to meet milestones on contracts for the

construction of a sewage treatment facility

(Respondents’ Appendix at All) and a “paper war” with

the consulting engineers on the sewer project

(Respondents’ Appendix at Ai0-A11.).

In addition, the petitioners specifically argue

that the testimony of the architect for the previous

school construction project contradicts any inference of

poor workmanship by CEI. (Petition at 6.) The school

architect testified during the hearing before the special

master that CEI did not properly manage its

subcontractors (Respondents’ Appendix at A5-A6), that

the project was far from complete at the scheduled date

of completion (Respondents’ Appendix at A8-A9), and

that overall it was his “worst experience” with a general

contractor (Respondents’ Appendix at A7).

The remainder of the Petition consists of |

rambling, inconsistent allegations that are not only

irrclevant to the asserted grounds for issuance of

certiorari, but are without any factual basis. The

Arkansas Supreme Court’s reversal of the judgment

entered by the chancellor is clearly supported by the

record. Because the Arkansas Supreme Court did not

EE

rely on the proffers of proof, determining whether such

reliance offends due process of law would require an

advisory opinion of this Court.

lil. THE PETITION LACKS MERIT UNDER

THE LAWS OF THE STATE OF

ARKANSAS AND THE DECISIONS OF

THIS COURT

Petitioners cite nine decisions from the

federal courts in support of their argument that the

Arkansas Supreme Court’s de novo review of the record

on appeal from the chancery court denied it due process

of law. None of the cases cited by petitioners in support

of their argument involve an appellate court’s review of

the evidentiary record supporting a chancery court’s

findings of fact. The Arkansas Supreme Court has always

recognized as a tenet of equity jurisprudence that the

record from chancery courts is subject to de novo review

on appeal.’ See Woodruff v. Core, 23 Ark. 341, 346

(1861).

Additionally, the Petition is without merit

under the holdings of the cited cases. See, e.g., Addington

v. Texas, 441 U.S. 418, 99 S.Ct. 1804, 60 L.Ed.2d 323

(1979); Armstrong v. Manzo, 380 U.S. 545, 85 S.Ct. 1187,

14 L.Ed.2d 62 (1965).

5 Under Arkansas chancery practice and procedure, all trials are to the chancellor

and no right of jury trial exists in that court.

In both Addington and Armstrong, a state

court had determined a case on grounds that clearly

involved the right to due process or law. In Addington,

the question involved the standard of proof required by

due process to civilly commit an individual, thereby

depriving him of his liberty. 441 U.S. at 423-26.

Obviously, the resolution of this question would be of

major importance in every state. In Armstrong, the Court

was presented with the failure to give adequate notice of

a hearing which it held to be an obvious violation of “the

most rudimentary demands of due process of law.” 380

U.S. at 550. This issue would also be of significance to

similar situations in every state. Unlike Addington and

Armstrong, the case at bar does not involve a question of

national importance, but merely involves the adequacy

of the evidentiary support for the decision of the

Arkansas Supreme Court.

Additionally, the uniqueness of this

particular chancery case makes it inappropriate for

review by writ of certiorari. The parties understood that

the hearing before the chancery court was to be limited

to the issuc of permanent injunctive relief. (Petition at A-

9, n.2.) However, at the conclusion of the hearing, the

chancellor summarily rejected the proposed findings of

the special master, entered completely inconsistent

findings, and found liability for monetary damages

against the respondents, including Mr. McCoy who had

been excused from the hearing, without hearing evidence

on the issue of liability for damages. The chancellor’s

10

a ee

abrupt action necessitated the proffers of evidence to

which the petitioners object. Clearly, the proffers of

evidence was the result of an unusual chain of events

which does not often occur. As stated by Chief Justice

Taft, it is very important that the Court “be consistent in

not granting the Writ of Certiorari except in cases

involving principles, the settlement of which is of

importance to the public as distinguished from that of

the parties... .” Layne & Bowler Corp. v. Western Well

Works, Inc., 261 U.S. 387, 393, 43 S.Ct. 442, 67 L.Ed.2d

12 (1923). The present case does not command such

public importance.

11

In the Chancery Court of Pulaski County, Arkansas

First Division

Construction Engineers, Inc.

Plaintiff

VS. No. 86-3687

The Conway Corporation, M. D. Limbaugh

Construction Co., Jim Brewer, Bennie J.

McCoy, John Doe I, John Doe II, and

Defendants, Larry Graddy, Frank Robins, III,

Lou Gardy, Bill Pate, Bob Clifton and

Leo Crafton, III, as Members of the Board of

Directors of The Conway Corporation

Defendants

MASTER’S FINDINGS AND CONCLUSIONS

On March 24, 1987, Plaintiff, Construction

Engineers, Inc.’s petition for a restraining temporary

order and preliminary injunction came on for hearing at

the appointed time; Plaintiff, Construction Engineers,

Inc., appearing by David A. Orsini, its attorney, and

Stephen and Danielle Smith, as corporate representa-

tives; Bennie McCoy, appearing in person and by his

attorneys, James M. Moody and Roger Rowe; The

Conway Corporation, M. D. Limbaugh Construction

Company, Jim Brewer, Larry Graddy, Frank Robbins,

III, Lou Gardy, Bill Pate, Bob Clifton, and Leo Crafton,

III, appearing through their attorneys, Michael G.

Thompson and Michael G. Smith, and through Jim

Al

lsrewer and Michael Limbaugh. Special Master John

Plegge, appointed by Order of this Court, heard the

evidence and arguments of counsel, and recommends

that the Court adopt the following findings of fact and

conclusions of law:

1. The test for issuing a preliminary

injunction involves consideration of four factors: (1) the

threat of irreparable harm to the movants; (2) the state

of balance between this harm and the injury that granting

the injunction will inflict on other parties litigant;

(3) probability that movant will succeed on the merits;

and, (4) public interest.

2. The Plaintiff has failed to meet its burden

of proof that it will suffer irreparable harm if an

injunction is not issued. Any harm which the Plaintiff

alleges it has suffered may be remedied by an award of

monetary damages. The evidence presented at trial is

insufficient to show the irreparable harm to the plaintiff

which necessarily must be shown for the issuance of a

preliminary injunction.

3. The harm which The Conway Corporation

and the M. D. Limbaugh Construction Company will

suffer if an injunction was issued far outweighs any harm

to be suffered by Plaintiff if the injunction is not issued.

The harm to be suffered by the Defendants herein is

potentially much greater than that alleged by the Plain-

tiff. The evidence and testimony adequately support this

A2

finding.

4. Plaintiff has not shown a probability of

success on the merits of its claim. Ark. Stat. Ann. §14-612

applies and gives The Conway Corporation discretion in

awarding bids. Jim Brewer, Bennie McCoy, and the

Board of Directors of The Conway Corporation acted in

good faith and had a reasonable and rational basis for

determining that the second low bidder was the lowest

responsible bidder. Further, the Board had discretion and

acted in good faith in determining in its opinion that it

would serve the best interests of the taxing unit to award

the contract to the Limbaugh Company.

5. The public interest would be adversely

affected by the issuance of the requested injunction. The

City of Conway has had to resort to voluntary rationing

of water in previous Summers when water usage was

highest. Now, because of the construction, the maximum

capacity of the water system has been reduced

substantially. If construction were halted at this time,

there would be a serious danger that Conway would

experience severe water shortages in the coming

Summer. The harm to the public which would result

from the issuance of an injunction halting the project

outweighs any private harm to the Plaintiff which may

result from not issuing it. Furthermore, the harm to the

taxpayers of Conway which would result from issuing the

injunction far outweighs the harm Plaintiff contends they

would suffer if the contract is allowed to proceed.

6. The Plaintiff has waived its right to seek an

injunction by failing to seek a timely hearing on the

issue. The contract was let and Construction Engineers

notified that its bid had been rejected on July 7, 1986.

Suit was not filed to enjoin the construction from

proceeding until August 20, 1986. After suit was filed,

Plaintiff did not seek a hearing on the injunction issue

until late October, 1986. At that time, the Honorable

Judith Rogers (in whose Court the action was then

pending) notified the Piaintiff that she could not hear

the case until after January 1, 1987. Judge Rogers

offered to appoint a Special Master if the Plaintiff so

requested, but the Plaintiff did not make such a request.

Judge Rogers also notified Plaintiff that if it had sought

a hearing when suit was filed, it could have received an

earlier hearing. Plaintiff elected to wait until Judge

Rogers could hear the case personally, and a setting of

March 19, 1987, was made. Judge Rogers was not able to

hear the case on March 19 due to illness, and the case

was transferred to this division, whereupon a Special

Master was appointed. At the time of the hearing, the

contract was already 17% complete. It is obvious that the

pre-litigation status quo cannot be maintained nor

restored by the issuance of an injunction at this late date.

The foregoing contains my findings of fact

and conclusions of law and is recommended to the Court

for adoption as the Order of this Court on this the 14th

day of April, 1987.

A4

JOHN B. PLEGGE

Special Master

TESTIMONY OF DAN STOWERS IN THE

PROCEEDINGS BEFORE THE SPECIAL MASTER

Dan Stowers, having been previously duly

sworn on oath, testified as follows: .. .

A. McCoy did call me and I responded—

Q. What did he ask you? What did he say?

A. He asked—he said that he was doing some

follow-up work, which we normally do on our contrac-

tors when they bid our projects, and he needed a

reference for CEI. And I kind of chuckled and we talked

a little bit and I told him that CEI had not performed

well on Florence Mattison school in Conway. We had

had several problems and he didn’t really want to hear

all of that, he didn’t have time to do that. But basically

we had four or five subcontractors that had not

performed well and that became a great issue in our

contract.

But I cautioned him a little bit because, on

the surface, CE!—the owners, Steve and Danielle, are

very, very qualified. As a matter of fact, I’m amazed that

they would locate in Arkansas. They both have a

Master’s degree in engincering, they have a contractors’

license, they have the ability to bond, and I think I used

the term that they were both smarter than a tree full of

apples. My experience had been that, one thing, even

though you have a contractor’s license, it does not

indicate integrity. A contractor receives a fee for being a

general contractor. He signs up to do and perform a

certain task for an owner who does not have the people

available to him for construction. And it seemed like to

me that CEI took the attitude that they had signed

contracts to sublet their contracts. They probably did

maybe 75 to 80 percent of their work under subcontracts,

leaving on [sic] a very minor portion of the construction

work to their disposal. And any time that they had a

problem with a subcontractor, they simply side-stepped

the issue, simply turned that issue back to the owner. We

are not accustomed to that here in Arkansas.

If you have a stable contractor, most general

contractors assume responsibility for their subcontrac-

tors, and a Nabholtz or a Starkey, which are both

contractors located in the City of Conway, would assume

the responsibility and kind of take the burden on

themselves. And that’s a part of their fee, to isolate the

owner from the problems of subcontracting. Other than

that, | didn’t have anything else to add.

Q. Did you make a recommendation, though,

to him regarding —

A6é

A. No, I really didn’t, inasmuch as I said that

things could have changed, CEI could have bought

additional equipment, and their performance could have

changed. And I said he needed to investigate that matter.

Q. But you didn’t recommend them based on

your previous experience.

A. (No response.)

Q. Did you make a statement to Mr. McCoy

that this experience with the Florence Mattison School

and CEI was the worst experience you ever had in your

life with a contractor?

A. I think I said that it was not one of my

most pleasant experiences, yes, Sir... .

Cross-Examination

Q. Mr. Stowers, do you remember when the

substantial completion date was for the school?

A. The substantial completion was issucd in

two portions: one for a very minor section that was to

house a specified type of child and learning disability

type student, and another one for the major portion of

the work. And I believe that that was later turned over to

litigation. I’m not certain that that second one was ever

A7

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Q. Did he tell you there was a paper wai

A. Did he tell me that?

©. Yes.

A. Yes

Q. Did he say there was a paper

ght be one? What did he say?

A. My recollection is that he said that

gy “paper war,’ those were his words. He said

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were in a paper war,” or “It looks like we’r

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TESTIMONY OF JIM BREWER

IN PROCEEDINGS BEFORE THE SPECIAL MASTER

Jim Brewer. havi I n previously dul

sth , ‘,? / ‘ I] ‘'

©. You had 1. ncerns, did you not, Mr

,.

©. D yu know tf anyone clse on the board

Conway Corporation had any concerns?

4. Oh, not really. I don’t know

a

(). And what were vour concerns based on

A. The publicity surrounding the Matt

| project, the many conversations back through

ral years there with members of the school board;

Carl Stewart, the superintendent. And then the incident

[ the school project, that had some bearing on it, t

Mr. Orsini. There’s a couple of members of the

Council in Conway who had knowledge of that

projcct and expres ed some concern about it

Q. Let me limit my questions, Mr. Brewer, to

the point in time of the conversation we’re having, this

very first conversation you’re having with Roger Mills

and McCoy.

A. I can’t pinpoint a single conversation that

I had with these people. I visit with them on a daily basis,

Mr. Orsini. ...

Q. Did you have any knowledge about

Morrilton, the Morrilton project?

A. My knowledge was through an alderman

there in Conway.

Q. At the point in time that you gave him the

letter—I’m not sure you're answering me

Straightforward—did you give McCoy anything other

than this letter, any other information about CEI to use?

A. I don’t recall anything, Mr. Orsini. You

might want to refresh my memory there on something.

Q. Did you intend for McCoy to rely on this

letter?

A. Well, what do you mean by rely on that

letter?

Q. You're giving this to him as part of his

Al4

investigation. Did you intend for him to rely on it or use

it in the investigation in any way?

A. Well, this serves as a statement from the

school superintendent, I presume, representing the

owner on that project.

Q. Look at Page 39 of your deposition. Do

you see Line 2 at the top?

A. Yes.

Q. The question was, ‘““What was the purpose

of giving the letter to McCoy.[”’] Do you see your answer,

“To have for his file”?

A. To have for his file, yes, sir... .

Q. In the past experience with CEI, did they

do good work, did they do bad work on their Conway

Corporation Gleason?

A. That little project they did for us was

acceptable, yes.

Q. You characterized it as a little project.

The City supplied the materials —

A. Our contract with Steve was something

less than $35,000 and we consider that pretty small. A

Al5

project like that, Mr. Orsini, has a lot of risk factor in it,

in that you’ve got to try to do it in a short time frame.

And in that respect, similar to this project, but otherwise,

it’s not. As you’ve heard from testimony this morning

from Steve, one of the real problems that contractors

have in meeting time frames on projects is delivering

materials. We took that risk out of that project

completely by furnishing all the materials to the

contractor. We took all of that responsibility. . . .

Q. And you are the General Manager?

A. Yes.

Q. How long had you been the General

Manager of Conway Corporation?

A. Since 1965.

Q. And are part of your duties and

responsibilities to make recommendations to the Board

of Directors?

A. Yes, sir.

Q. But you don’t sit as a Director on the

Board; is that correct?

A. No, sir.

Al6

Q. Has Conway experienced water problems

in the past few years?

A. Yes, sir. Conway is growing at a rather

significant rate from, oh seven to ten percent a year, I

guess, over the past several years. In 1985, the water

demand went upward from ’84 and we expcricnced a

shortfall in capacity. In other words, the demands of the

city for water exceeded the capacity of the plant to

produce water. But by the cooperation of the people in

the use of water in somewhat restricting usage, we made

it through that summer. The same thing in ’86.

Q. You had to ask the general public to

voluntarily ration. Is that what you’re saying?

A. Yes, curtailed usage, right.

Q. Based on your experience as a General

Manager of Conway Corporation, do you see any

problems this summer?

A. Yes. Our city has grown about another

seven percent in the past year. The water usage has

grown ten percent. If we don’t have that plant on the line

by the peak period of this summer, we will experience a

shortfall of water in the neighborhood of 25 percent of

need, which is very significant. We will have to ration

water.

Al7

Q. Now, you had some concerns, you’ve

already stated, with regard to CEI when you discovered

that they had checked out the bidding documents; is that

correct?

A. Yes, sir.

Q. What were those concerns based on?

A. They were based on our knowledge and

understanding of the problems they had with

coordinating work of subcontractors on the Mattison

school project and some problems that seemed to be

apparent with the Morrilton sewer project.

Q. Had you read newspaper articles?

A. Yes, sir, yes, sir. I read newspaper articles

I'd discussed through the years there with members of

the school board and the Superintendent of the school.

Q. Let me hand you a couple of documents

and ask you if you can identify them. The first once is

marked Defendant’s Exhibit Number 3.

A. Yes, sir, I believe this is a proof of

publication.

Q. Showing the advertisement for bids.

Al8

A. Yes, sir, on the waterworks improvement

project, the Gleason project.

Q. And Defendant’s Exhibit Number 4.

A. This appears to be copies of our board

meeting of July 7, 1986, with attachments, yes, sir.

Q. And that is the board meeting where the

contract was awarded to Limbaugh?

A. Yes, sir, that is the meeting where the

board heard my recommendation and reviewed the

pertinent information and authorized the manager to do

certain things, including giving the contract to the second

low bidder....

Q. Did you ever talk to anybody prior to the

award of the contract on July 9th? Did you ever talk with

anybody up at the Morrilton sewer project?

A. No, sir.

Q. So whatever you heard about the

Morrilton sewer project came from what source?

A. A couple of aldermen as I recall.

Q. There in the City of Conway?

Al9

A. Yes, Sif....

TESTIMONY OF STEVE SMITH

IN PROCEEDINGS BEFORE THE SPECIAL MASTER

Steve Smith, having been previously duly

sworn on oath, testified as follows:

Q. Would you state your name for the

record, please?

A. Steven Smith.

Q. Where you live, Mr. Smith?

A. I live in Russellville.

Q. By whom are you employed?

A. Construction Engineers, Incorporated.

Q. In what capacity?

A. I'm the President.

Q. Is your wife here in the courtroom today?

A. Yes.

Q. Is she also an officer?

A20

A. Yes, she’s Vice-President.

Q. Are you and she two of the owners of

CEI?

A. Yes.

Q. You refer to your company as “CEI”?

A. We do....

Q. And you had stated in your deposition, at

Page 33, commencing at Line 8, “The cabinets were not

constructed in accordance with the specifications. The

materials used were not the materials specified in the

drawers. I think that was—my best recollection that the

way the drawers were constructed, they were constructed

out of a laminated plywood and the specifications

required that they be constructed out of solid stock

material, and that was the reason they were holding the

$80,000.” And that was your answer on that day. Did you

say that?

A. Same answer today, they were constructed

out of material the manufacturer thought was superior,

he thought man-made material was superior to solid

stock, he had a lot of reasons, the architects didn’t agree.

Q. And that was CEI’s failure, was it not?

A2l

“Q. How much damage did it cause?

A: Dollarwise, I don’t know. I would say

thousands of dollars.

“Q. Several thousand?

“A. Several thousand, somcthing like that,

maybe $5,000.”

A. Your question was did I cause the school

to spend that money, where my testimony referred to

carlier in my deposition was that my company repaired

that at no cost to the owner.

Q. My question was solely it cost $5,000 in

A. You said did I cause $5,000 damage to the

and I understood that to mean that they paid the

000. I'm sorry | didn't understand your question

©. The school sustained several thousand

n damage, did it not?

A. The building, not the school

Q. The building did. Thank you. And that

was tt subject of articles in the local newspaper, was if

\. | think that’s fair. v«

) And ¢ } | also failed t yp! [ riy

tiles at the school. did it not?

A. No. I think thev were proj rly in

QO. Well, Iet me refer you to your dcy

On Page 38, commencing with Line ¢

©. Were there ceiling tiles that w

ubject of complaints by the school dist

\. | think that the specs req i |

lown clip to be installed in the T-grid

it the ceili ntractor had i

ta d all of them or had d l

[ pcr ma . nt

,

Q. As a result of these and other problems

that we've discussed here in the last few minutes, a

subcontractor filed a lawsuit against CEI for failure to

pay it on this contract; isn’t that true?

A. Yes.

Q. And then CEI filed a Third-Party

Complaint and brought the owner, the school district,

into that lntigation, didn’t it?

A. Yes.

Q. And before the litigation was over, there

were several parties involved in that litigation, several

subcontractors and the owner and CEI, isn’t that true?

A. That's truc.

Q. And this was the subject of local

newspaper articles in the community, was it not?

A. I think I already told you, Mike, about the

newspapers. I don't know.

Q. This litigation involving this school that

was built—commenced in 1980 was not finally settled

until January of 1986, was it?

A. We worked out an agreement with the

Als

school in 1982 for what would be required to settle up all

the problems. One of the major subcontractors involved

in that agreement entered bankruptcy in early 1983, and

before we could sign all the agreements, the bankruptcy

dragged on for years and years, we couldn't sign the

agreements because the person that had agreed to it now

had to defer to the bankruptcy court, and it just went on

forever. So technically, the last paperwork that my

attorneys attended to, I don’t know when it was finished.

But as far as the school was concerned, it was in 1982.

Q. But the school’s attorney finally signed the

Order of Dismissal, along with all the many other

partics, and it was entered in January of 1986; isn’t that

true?

A. I don’t know that to be true, Mike. It

could very well be.

Q. Let me show you a document and sec if

you recognize that as the Order of Dismissal.

A. I’ve never seen that document, but I take

your word for it.

Q. You know it was many years after the

school started, the project started?

A. In 1982, we worked it out with the school.

The bankruptcy dragged it on forever... .

A29

MINUTES OF BOARD MEETING OF JULY 7, 1986

At a special meeting of the Board of

Iirectors of the Conway Corporation on July 7, 1986, all

members were present. Jim Brewer, Manager; Bill

llcgeman, Manager of Finance & Accounting; and

Kennic McCoy, President, Crist Engineers, Inc. were

lso present.

The purpose of this special meeting is to

consider wages of hourly employees and alternatives

concerning the water treatment plant project.

The Manager apprised the Board that the

Arkansas Power & Light Company and the International

Krotherhood of Electrical Workers had completed their

negotiation efforts concerning wages. They agreed to a

3.75 percent increase in the wages of hourly employees.

I listorically, the results of this negotiation weighs heavily

in the annual review of hourly employees and, in the

absence of other significant criteria, the Manager

reccommended that this wage adjustment level be

adopted by the Conway Corporation and the hourly

cmployecs of the Conway Corporation wages be

adjusted upward by 3.75 percent. After some discussion

in which it was pointed out that this would impact the

cash flow of the Conway Corporation by $56,463.68 per

ycar aS it upwardly adjusts the salaries of 78 employces,

a motion was made by Luke Gordy and seconded by

Larry Graddy to accept the recommendation of the

Manager that this level of adjustment be retroactive to

the first pay period in June. This motion received

unanimous approval.

The Manager reviewed the events to date

concerning the construction of the water treatment

facility and accompanying bond issue, pointing up the

recent acceptance of bids on the project, discussed

capabilities and experiences of bidders, and

recommended that the project move forward into the

construction phase. It was pointed out that if the plant is

constructed as designed and the alternative pipeline

Schedule 2-B is constructed, a shortfall of funds in the

amount of approximately $680,000.00 will exist. Two

construction alternatives seem to be available.

(1) Pipeline Schedule 2-A would reduce the fund need by

$147,000.00. Additionally, it is believed that climination

of the sludge siphon assembly from the project would

reduce the project cost by approximately $200,000.00.

This assembly could be retrofitted later with an

estimated 25 to 35 percent increase in the present cost.

Methods of covering the shortfall of funds

include: (1) Another bond issue; (2) Using available

reserve funds; and (3) Funding from anticipated cash

flow surplus.

Information concerning the qualifications

and experience of the two low bidders was reviewed. Mr.

A3l

McCoy reviewed a letter of July 3, 1986 in which he

enclosed the resumes, financial references, experience

records, etc. of the two low bidders on Schedule 1. A

copy of that letter is attached to and hereby made a part

of these minutes. Mr. Brewer read a letter from Mr. Carl

Stuart, Superintendent of Conway schools, tclling of his

experiences with Construction Engineers, Inc. as the

contractor constructing the Florence Mattison School.

The Manager also told of a letter from Mr. John Echols,

Friday, Eldredge & Clark Law Firm outlining the

sources of funds available to fund this project. Copics of

these letters are attached to and hereby made a part of

these minutes.

After considerable discussion concerning this

project, funding of the project, alternatives, and

qualifications of the two low bidders on Schedule 1, the

Manager made the following recommendation:

1. A contract for Schedule 1 be awarded to the

second low bidder.

t

The Manager be authorized to negotiate a

reduction in cost by eliminating the sludge

siphon assembly after which a decision will

be made to include or eliminate said system.

3. Contingent upon the decision identified in

Paragraph 2, a selection of Schedule 2-A or 2-

B will be made.

A32

4. Acontract be awarded to the low bidder on

Schedule 2-A or 2-B.

5. The shortfall of funds be provided from a

combination of reserve funds and anticipated

cash flow surpluses.

After a rather lengthy discussion, a motion

was made by Mr. Gordy and seconded by Mr. Clifton

that the Board accept and approve the recommendation

of the Manager. This motion received unanimous

approval.

There being no further business requiring the

attention of the Board at this time, the meeting was

adjourned.

These minutes approved by the Board of

Directors of the Conway Corporation on

FRANK E. Rosins, [II

President

Luke GorDyY

Secretary- Treasurer

A33

CRIST ENGINEERS, INC.

Consulting Engineers

Little Rock, Arkansas 72204

July 3, 1986

Mr. James H. Brewer, General Manager

The Conway Corporation

P. O. Box 99

Conway, AR 72032

Re: Expansion of Gleason Water Plant,

Conway AR

(Bids as Received June 26, 1986)

Dear Mr. Brewer:

Enclosed please find a Certified Copy of the

Bid Tabulation of all bids as received on Schedule |

(Water Plant Expansion) and Schedule 2 (24-in.

Transmission Line) on June 26 at 1:30 PM.

We are well pleased with the number of bids

received; and consider that there was certainly an

adequate amount of competition in the bidding. It 1s our

opinion that the bids as recetved reflect a true evaluation

of the worth of the project. We do not believe that any

significant savings could be generated by rebidding the

project. There is usually a stigma associated with

rebidding work that is a detraction; and typically less bids

are received than in the initial bidding.

A34

ee

Further remarks are on the basis of the

individual Schedules of the work:

SCHEDULE 1 (Water Plant Expansion)

Low Bid Construction Engineers Inc.

Russeilville, AR $3,885,900

2nd Bid: M. D. Limbaugh Const. Co.

Sikeston, MO $3,952,000

Enclosed you will find complete Resumes,

financial references, experience records, etc. pertinent to

both of the above construction firms.

I have contacted references as given by both

of the above contractors. Following is a synopsis of

remarks made by the references for cach of the

contractors:

Construction Engineers, Inc.

Tries hard to do a good job—quality of work

usually good. One Reference reported lack

of good superintendency on project. Work

seems to go well when Steve Smith (Owner)

is running job personally. Smith sometimes

has inclination to try to “improve” on the

plans. Good administratively, but office staff

sometimes controversial. One Referenc

A35

Diamond Construction Co. ts a subsidiary of

DANCO Const. Co. | am certain that DANCO is of

known reputation to you personally. They are one of the

largest utility contractors in the State, and have

undertaken many of our projects in the past. (Their most

recent project for you at Conway was the sanitary sewer

extension to The Conway Center at a cost of approx

$195,000.) We would have no reservations what so cver

in awarding a contract for Sch. 2-B to Diamond Const

Co. if it is your decision to do so

Summarily, we would recommend contract

award to either of the low bidders on Schedules 2-A and

2-B; depending upon your ultimate decision concerning

the route of the transmission line and the implications

on the over-all project budget.

Engineers’ Recommendation:

Schedule 1 (Water Plant): Reject the low bid for

cause, and offer the contract to Limbaugh

Construction Co. in the amount of $3,952,000. If

in the final analysis it is necessary to reduce the

gross project budget, negotiate with Limbaugh

for the removal of the sludge siphon system as

discussed in conference with you and your staff

on the afternoon of June 30th. (We estimate

that $200,000 or more can be saved by this

delction and not seriously disturb the overall!

performance of the plant. The sludge siphon

A3k

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BEST AVAILAE

CONWAY PUBLIC SCHOOLS

Office of the Superintendent

Conway, Arkansas 72032

June 30, 1986

Mr. James H. Brewer

Way ¢ orporation

— NN ~

vay Arkansa ya

Our problem with Construction Engineers, I:

| recall the matter, had to be in the organizati

mpany. The company acted as a jobber for th

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ractors in all work areas. The only peoplic emy

(E-] were the owners and a building forcmar

Ihe contractor expected the building ow!

ib-contractors to work Out any problems that ar

Th hool district had problems in getting the build

finished. It seemed that everyone was involved in a

everyone suing each other including

tors. contractor. school district. and architect

Sir CT iy

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