Contractor's Construction Fraud Implied

It is not unusual for a contractor to obtain any advance for construction work or materials. While that is done more often with residential construction, it is also done on some commercial projects or with individual subcontractors. What if they don't then follow through? Virginia makes "construction fraud" a crime, and in the recent appellate decision of Dennos v. Commonwealth of Virginia, 63 Va.App. 139, 754 S.E.2d 913 (2014) the Virginia Court of Appeals discussed the state's burden of proof and the application of the single larceny doctrine.

First, what does the construction fraud statute say? Here's the text:

§ 18.2-200.1. Failure to perform promise for construction, etc., in return for advances.
If any person obtain from another an advance of money, merchandise or other thing, of value, with fraudulent intent, upon a promise to perform construction, removal, repair or improvement of any building or structure permanently annexed to real property, or any other improvements to such real property, including horticulture, nursery or forest products, and fail or refuse to perform such promise, and also fail to substantially make good such advance, he shall be deemed guilty of the larceny of such money, merchandise or other thing if he fails to return such advance within fifteen days of a request to do so sent by certified mail, return receipt requested, to his last known address or to the address listed in the contract.
First, regarding proof of the construction fraud:

- The court confirmed that fraudulent intent can be inferred from conduct and representations of the contractor. In that case, the defendant fraudulently promised to do certain work (he took money but then never bought materials or performed work) and also fraudulently misrepresented the required work scope (telling the owner the roof needed replacement when it only needed repair).

- The court discussed that while the fraudulent intent must have existed at the time the contractor made the misrepresentations (in that case took the advance), circumstances were sufficient to imply the fraud, including the subsequent failure to perform the work, the failure to use the advanced funds to purchase supplies or hire needed labor and the refusal to return the advanced funds.

The court reviewed the evidence presented and found "ample evidence from which a rational factfinder could conclude that [the contractor] committed construction fraud . . . ,"

Second, regarding the single-larceny doctrine:

- The court noted the continuing applicability of that "common law" doctrine, as being one of the principles older than the Commonwealth itself, and which for some cases benefits prosecutors and for others defendants.

- The court held that the standard for applying the doctrine required that the series of larcenous acts have been done pursuant to a single impulse and in execution of a general fraudulent scheme; and so the doctrine does not apply to larcenous acts that are part of a general scheme but not individually the product of a single impulse.

The court reviewed the evidence and, giving the required deference to the factfinder, concluded that the contractor in that case committed at least two larcenous acts that were not done pursuant to a single impulse and execution of a general fraudulent scheme. Specifically, the contractor procured two separate advances on two separate dates involving two different promises. Thus, he could probably be charged and convicted respecting both.

The Virginia construction industry is overall extremely professional, but there are some "bad seeds" with any group as big as the contractor community; and this lesson provides guidance regarding the ramifications for fraudulent construction, and associated rights of the public.

Disclosure of Investigation Documents Granted for Qui Tam Realtor

My law partner Mike Sterling forwarded this summary of a recent qui tam movant's motion to compel contractors to product documents relating to their codes of business conduct investigations. It's an important issue for any government contractor. Here's Mike's summary:

 

Recently, the District Court for the District of Columbia granted a qui tam relator’s motion to compel contractors to produce documents relating to the contractor’s code of business conduct investigations. United States ex rel. Barko v. Halliburton Co., No. 1:05-cv-1276 (D.D.C. Mar. 6, 2014) According to the court, neither the attorney-client privilege nor the work product doctrine prevented disclosure. The relator sought almost 100 documents related to internal audit and fraud investigations conducted by one of the contractors. The disputed documents, were reviewed by the court reviewed in camera and described as "eye-openers.” The documents showed that a subcontractor received preferential treatment and evidence of pay-offs from the subcontractor to steer business to the company. Also, the subcontractor continued to receive subcontracts despite unsatisfactory performance, failure to complete projects and repeated double-billing. Investigation documents can be protected from disclosure only under certain circumstances. The court will consider several factors including the existence of a written code of business conduct that is followed by the company, a request for legal advice, attorney oversight of the investigation, written instructions from the attorney to any investigators,  Upjon Warnings to all current and former employees explaining that the interviews are for the purpose of providing legal advice to the company, restrictive labels on documents, reports addressed to the attorney and a documented threat of litigation. Every company should have a written code of business conduct, and investigations should be planned with care.

 

Employee Bound By Arbitration Agreement in Employment Application

Last month Judge Conrad of the Western District of Virginia held that an employee was required to arbitrate his claims because the employees signed an employment application agreeing if employed to be bound by the company's Dispute Resolution Process (DRP), which included arbitration. The employee had denied signing the DRP agreement itself, but admitted he signed the employment application referencing it. In addition to finding the employment application was an agreement to arbitrate, Judge Conrad rejected the employee's arguments that: 1) the DRP violated either the National Labor Relations Act (NLRA) or the Norris-LaGuardia Act of 1932 (NLGA); 2) the arbitration agreement was unconscionable; or 3) the arbitration agreement was a contract of adhesion. While all arbitration agreements stand or fall on individual verbiage and facts, this case provides helpful guidance to employers on developing enforceable and binding arbitration agreements for its employees, and in particular establishing binding arbitration as early as the employment application itself.

Fourth Circuit Upholds Dismissal of EEOC Claims and EEOC's Obligation to Pay Attorneys Fees

The Fourth Circuit Court of Appeals recently provided a warning case to the United States Equal Employment Opportunity Commission (EEOC) about better vetting suits against employers, and acting timely for those the EEOC deems with merit. In the recently decided appeal of EEOC v. Porpoak Logistics, Inc., decided March 25, 2014 (4th Cir. Appeal No. 13-1687), the Fourth Circuit affirmed the district court's dismissal of an EEOC suit filed some six and a half years after the originally filed discrimination charges, finding that the employer had been unfairly prejudiced by the EEOC's delay. The Fourth Circuit also upheld the district court's award to the employer of its attorney's fees.

Among other things, because of the delay, important witnesses were no longer available or had "faded memories" and the company had already destroyed important documents during routine document destruction. Additionally, there were questionable underlying merits to the claim itself. While the EEOC defended its actions in part on its overburdened staff, the Fourth Circuit wholly rejected that as a defense, with one of the justices noting that private companies would not even dream about arguing such a defense to explain misconduct.

Certainly the EEOC performs necessary, important functions; but the Porpoak decision should help ensure that in performing those functions the EEOC gives greater consideration to only pursuing fully vetted claims, and if it chooses to pursue them then doing so promptly.

Carnell Construction: Major Virginia Procurement Decision Issued by U.S. Fourth Circuit Affecting Claim Recovery Under VPPA

Last week the United States Court of Appeals for the Fourth Circuit issued a decision in the Case of Carnell Construction Corp. v. Danville Redevelopment & Housing Authority with significant implication regarding Virginia Public Procurement Act (VPPA) claims. The case has a detailed history and has been sent back to the lower court for the fourth time. While it has an important holding regarding contractor discrimination claims that adopts the ability of entities, and not just individuals, to make discrimination based claims, in many ways the holdings affecting the contractor's VPPA claims are likely to have more significant implications for all contractors performing Virginia public body work. Below is a Legal Developments summary regarding the latest Carnell decision prepared by the Vandeventer Black Construction and Public Contracts Team:

 

 

GAO Decides Offeror Affiliates Should be Considered in Experience Evaluation

The Government Accountability Office recently considered whether a offeror's affiliate companies should be considered by the government in evaluating the offeror's experience in Iyabak Constr. LLC, GAO, B-409196, 2/6/14, decision released 2/11/14. The solicitation should past performance experience for similar projects within the last five years, but experience examples were limited to projects performed by the firms submitting the offers and the government did not consider Iyabak's affiliates experiences. Iyabak protested and the GAO decided that the restrictions imposed were unnecessary, recommending the government's modification of the RFP to consider the experience and past performance of offerors' affiliates showing a firm commitment to be meaningfully involved in contract performance (but noting it would be improper to consider affiliates that were not going to be meaningfully involved).

President Unilaterally Raises Minimum Wage for Federal Contracts

On February 12, 2014, President Obama signed his promised Executive Order increasing the minimum wage to $10.10 per hour for workers under new and renegotiated federal contracts. The Executive Order also increases the minimum wage for tipped workers starting January 1, 2015. The new wage rates will raise with inflation each year. Covered workers include those in the construction and service industries.

The related issues are many; but two immediate concerns for employers are: 1) the likelihood that workers on different projects / contracts will have different wages; and 2) contractors may be forced to raise the pay of workers whose wages are at or near $10 an hour to maintain the differential from newer or less skilled employees.

Contractors with unionized workforces tied to the minimum wage may be forced to renegotiate collective bargaining agreements. How else this will indirectly affect the construction and service industries remains to be seen.