BEFORE THE ALASKA DEPARTMENT OF ADMINISTRATION

 

In the Matter of:                                 )

                                                            )

BACHNER COMPANY, INC. and  )

BOWERS INVESTMENT CO.         )

                                                            )

Appellants.                                         )   DGS RFP No. 2002-2500-2984

______________________________)   Dept. of Administration Case No. 03.10

 

 

RECOMMENDED DECISION

 

This matter is before the commissioner on remand from the superior court, following an appeal to the court after a decision in a protest appeal.

The protest appeal concerned an RFP for a real estate lease.  Commissioner Duncan issued the final administrative decision on October 16, 2002.  Bachner Company, Inc. [Bachner] and Bowers Investment Company [Bowers] appealed to the superior court, and on March 13, 2003 filed a motion for remand.  The court granted the motion on March 29.  The proceedings on remand were assigned to Hearing Officer Andrew M. Hemenway.  The hearing officer conducted the hearing on remand on July 15.

This recommended decision is based on the record from the protest appeal, the documents submitted to the commissioner on remand, the exhibits and testimony at the hearing on remand, and one supplemental exhibit.

A.        Factual Findings.[1]

1.         Contents of Solicitation.

The Division of General Services [DGS] issued RFP No. 2002-2500-2984 on December 7, 2001 soliciting proposals to lease office space and cold storage in Fairbanks for use by the Department of Transportation and Public Facilities [DOT].  The RFP provided for an initial 20-year lease with 10 two-year extension periods at the stateÕs option.  Occupancy was required Òprior to July 31, 2002Ó, with the initial lease term to run from Ò[a]pproximately August 1, 2002 through July 31, 2022.Ó

The RFP included 37 ÒLease ProvisionsÓ, including requirements for insurance.  Item 35 required lessors to provide workersÕ compensation insurance Òfor all employees of the Lessor engaged in work under this lease.Ó  It added:

A ÒCertificate of InsuranceÓ for the insurance described above should be provided with your offer.  Failure to provide satisfactory proof of insurance will cause the State to declare the Offeror non-responsible and to reject the offer.

 

The RFP listed 24 ÒBuilding RequirementsÓ, including:

(20)        Public Transportation: The building offered shall be located within 720 feet of a bus stop.  Public transportation must have regularly scheduled daily bus service Monday through Friday between the hours of 8 a.m. to 5 p.m.

 

2.         Submission and Consideration of Proposals.

A pre-bid conference was conducted on December 14.  At the conference, the question of the occupancy date was raised.  Ms. Madson, the DGS procurement officer for this solicitation, stated that the occupancy date stated in the RFP reflected the expiration date of the current lease and was firm, but that a 60 to 90 day extension of the lease term was possible.   In early January DGS obtained the agreement of the current DOT landlord, Bowers, to extend the lease for up to 90 days on a month-to-month basis, i.e., through October 31.  The July 31 occupancy dated stated in the RFP was not changed.

Eight proposals were submitted by the due date, February 4, by five offerors, including Bachner, Bowers, and McKinley Development, Inc. [McKinley].  Bachner and Bowers offered existing buildings; McKinley offered a wholly new building.

The McKinley proposal included a copy of the declarations page of Workers Compensation and Employers Liability Policy No. 01G-WW-90979, insuring McKinley Development Inc. effective 7/19/01-7/19/02.

The McKinley proposal also stated that ÒPublic Transit service is conveniently available [to the proposed new building]ÉÓ  [R.154]

A five member proposal evaluation committee [PEC] convened on February 5-7, 2002.  Before scoring the proposals, under the direction of Ms. Madson the committee contacted MACS (the Fairbanks municipal bus system) to inquire about bus service to the McKinley property, which was not on a MACS bus route.  The committee confirmed that although there was no existing bus service to the property, MACS anticipated providing service if the DOT facility was built there.

Evaluators scored the proposals three times. On the second round, one of the evaluators lowered the score he had previously awarded to the Bachner proposal in order to improve the ranking of his own preferred facility, the McKinley proposal.  On all rounds, four of the five evaluators ranked the McKinley proposal first or second and preferred the McKinley facility to the Bachner proposal.  Only Ms. Madson preferred the Bachner facility.  

3.         Post Evaluation Proceedings.

After calculating the point totals, Ms. Madson determined that the apparent highest ranked respondent was McKinley.  Anticipating an award to McKinley, on Tuesday, February 19 Ms. Madson faxed McKinley a request to provide, no later than 3:00 p.m. on Monday, February 25, Òa full financial statement for McKinley Development, Inc.Ó [Ex. H-5] On February 25, McKinley faxed to DGS a profit and loss statement and a balance sheet for McKinley, as of December 31, 2001.  On February 28, Ms. Madson issued a Notice of Intent identifying McKinley as the prospective awardee.  

That same day, Ms. Madson wrote to McKinley to initiate planning for the contract, identifying matters to be addressed and stressing the need for McKinley to maintain close contact with her.  She specifically asked that McKinley provide, prior to her scheduled trip to Fairbanks on March 7, Òconfirmed, non-interim proofs of insuranceÉÓ [Ex. H-5]

On March 8 and 11, Bachner and Bowers, respectively, filed protests.  On March 12, Ms. Madson reviewed the protests and determined that the award of the contract should not be stayed.  She found that the protests were not likely to be sustained and that it was in the best interest of the State of Alaska to proceed in order to allow sufficient time for completion of the construction prior to expiration of the current lease.

On March 22, Ms. Madson denied both protests.  In conjunction with the denial, Ms. Madson again determined not to stay award, on the ground that the protests did not have merit and because ÒWe would have to move to temporary facilities if the [extended lease date] is not metÓ, due to the seasonal constraints of the Fairbanks construction season, and to allow sufficient lead time for steel construction.  On March 26, she provided notice of award and notice to proceed with the contract.

Bachner and Bowers filed protest appeals.  An evidentiary hearing was conducted and a proposed decision issued.  The proposed decision found serious deficiencies in the procurement, including: (1) a substantial and material impropriety on the part of one member of the PEC, who had altered his scoring in order to enhance the ranking of his own preferred proposal; (2) material ambiguity in the price analysis provisions of the RFP; and (3) an appearance that factors not listed in the RFP were considered by several evaluators.

Commissioner Duncan adopted the proposed decision.  After reviewing and specifically addressing each of the statutory factors that must be considering in implementing an appropriate remedy, the commissioner sustained the protest appeal, confirmed the award of the contract to McKinley, and awarded Bachner and Bowers their full costs of proposal preparation ($50,000 and $30,000 respectively).  The commissioner concluded that as a matter of law under the Procurement Code he did not have authority to award attorneyÕs fees or damages.

4.         Superior Court Proceedings.

Bachner and Bowers filed an appeal to the superior court.  While the appeal was pending they filed a motion for a remand based on information provided by Charles Bates, an officer of McKinley at the time of the RFP.  Mr. Bates executed an affidavit dated February 19, 2003, alleging that the McKinley proposal had included fraudulent misrepresentations submitted with the intent of deceiving DGS.  The court granted the motion and ordered a remand to the Department of Administration Òfor purposes of conducting an evidentiary hearing on newly discovered evidence and reconsideration of the [commissionerÕ decision].Ó  A hearing on remand was conducted on July 15-16, 2003.

5.         Findings on Remand.

McKinley was incorporated in 1999.  Kevin Shields has been the sole shareholder in the corporation since 2001.  Mr. Shields is also the vice president of McKinley Motors, Inc., a Fairbanks car dealership; his father, Michael Shields, is the president of McKinley Motors. 

McKinley is a real estate development business.  Prior to submitting its proposal on the DOT RFP, McKinley had been engaged in two ventures, involving two substantial parcels of land.  The first parcel, the Richardson-Badger property, was a gravel site, and gravel production from that property was the corporationÕs only source of income.  The second parcel, the Twin Lakes property, was subdivided and platted by McKinley for residential development.

Charles Bates was employed by McKinley Motors and by McKinley as the latterÕs general manager.  His primary function for McKinley was to assist in bringing the Richardson-Badger gravel site to market by navigating the permitting process.  Mr. Bates also prepared the initial financial projections for McKinleyÕs response to the DOT RFP and assisted in the preparation of the McKinley proposal.  Mr. Bates did not have personal knowledge of McKinleyÕs financial status and he was largely unfamiliar with the relative roles of Kevin Shields as an individual, Michael Shields, and McKinley Motors with respect to McKinleyÕs property interests. [Tr. 64, 67]

a.         WorkersÕ Compensation Insurance.

In the fall of 2001, McKinley reasonably believed that it did not have a need for workersÕ compensation, and it allowed its policy to lapse.  The policy identified in its proposal had been cancelled in October, 2001 and was not in effect at the time the proposal was submitted.  Kevin Shields was aware that McKinley did not have a workersÕ compensation policy in effect at the time the proposal was submitted.

The RFP did not require offerors to have workersÕ compensation insurance in effect at the time proposals were submitted or at any time prior to contract award, and it did not require submission of proof of insurance as part of the proposal.  McKinleyÕs submission with its proposal of a certificate of insurance for a cancelled policy was not intended to mislead DGS regarding McKinleyÕs insurability or regarding McKinleyÕs intent to provide workersÕ compensation coverage as required by the RFP.  McKinley intended at all relevant times to provide workersÕ compensation throughout the term of a contract if it was awarded the lease.  When asked to provide proof of insurance, McKinley obtained workersÕ compensation insurance, effective March 10, 2002 for the period through March 10, 2003. [Tr. 24; Ex. M-21] On the date the notice of award was provided to McKinley, that workersÕ compensation insurance was in effect.

b.     Occupancy Date.

McKinley proposed construction of a new steel frame building.  Steel for such construction is generally fabricated Outside and shipped to Alaska, resulting in substantially longer lead times than wood frame construction.  Mr. Bachner had considered and rejected steel frame construction of a new facility, on a site adjacent to the McKinley site, because he believed that the lead time required to obtain steel made it impossible to complete construction prior to the July 31 occupancy date called for in the RFP.

Prior to submitting a proposal, McKinleyÕs construction supervisor advised Mr. Shields that it would be difficult if not impossible to complete construction in time to meet the July 31 date set out in the RFP.  Mr. Shields decided to submit a proposal knowing that McKinley was unlikely to complete a new building by July 31.  The RFP stated that if the occupancy date were not met, a penalty would be imposed.  Extension of an existing lease is common occurrence when moving into newly constructed facilities.  Mr. Shields reasonably believed that the occupancy date would be extended by agreement of DGS and its existing landlord to a date that McKinley could meet and that McKinley would be liable for any increased costs plus any penalty resulting from a delay (including the costs of moving and renting alternative space, if necessary).

The proposal submitted by McKinley did not offer a completed building by July 31, but rather within 150 days of contract award.  The date of contract award was not fixed.  McKinley, and Kevin Shields, did not intend to mislead DGS regarding their ability to complete construction within a timeframe that was agreeable to DGS.  At the time proposals were submitted, DGS had already obtained an agreement from the lessor to extend the lease through October 31, 2002, a date that McKinley reasonably anticipated it could meet.  Before the contract was awarded, DGS and McKinley reached an agreement for an occupancy date of November 1.

  

            c.         Bus Service.

Prior to submitting its bid, McKinley had contacted MACS and determined that if it was awarded the contract, MACS would provide regular bus service to the proposed location.  McKinley submitted its bid reasonably believing that if it was awarded the contract, bus service would be provided to the specified location.

McKinleyÕs proposal did not misrepresent the status of bus service to the proposed location or its ability or intent to meet the terms of the RFP regarding bus service.

            d.         Financial Status.

McKinley submitted a profit and loss statement and a balance sheet.  The profit and loss statement showed net income of $75,802.10 for calendar year 2001, on income of $158,427.09 and expenses of $82,624.99.  The income had been generated primarily from gravel sales.

The balance sheet listed assets of $1,670,076.02, with liabilities of $470,933.96.  Included in the assets were a 5.5 yard dragline ($150,000), and two real estate parcels, Richardson-Badger ($450,000) and Twin Lakes ($850,000). 

                        i.          Twin Lakes.

Twin Lakes subdivision consists of 26 lots on 62 acres, including two ponds.  In 1999 the subdivision was platted for development by McKinley, which at that time owned the entire property.  The week after it recorded the plat, McKinley obtained a loan of $400,000 from Northrim, which recorded a deed of trust in that amount covering all of Twin Lakes subdivision except for Lot 11, Block 1.  On March 17, 2000, McKinley transferred title to Lots 1 and 2, Block 1, to Dennis Swarthout.  Mr. Shields constructed a residence on Lot 11, Block 1, financed by a mortgage loan to him individually in the amount of $585,000 from Northern Schools Federal Credit Union.  On July 21, 2000, Northern Schools recorded a deed of trust in that amount covering all of the Twin Lakes subdivision except Lots 1 and 2, Block 1.  On July 24, 2000 McKinley quitclaimed all of Twin Lakes subdivision except Lots 1, 2 and 11, Block 1 to Kevin Shields, individually.  In December, 2001, Northrim recorded a deed of trust in the amount of $1,250,000 on all of the Twin Lakes subdivision except Lots 1, 2, and 11, Block 1, securing McKinley MotorsÕ floor financing revolving line of credit. [Ex. M-18]

Pursuant to these transactions, on the date proposals were submitted, Kevin Shields, individually, held legal title to Lots 3-16, Block 1 and Lots 1-10, Block 2, and Tract A, of Twin Lakes Subdivision.  That property, collectively, is referred to hereinafter as Twin Lakes, or the Twin Lakes property.  The Twin Lakes property was subject to three mortgages.  One mortgage secured a loan of $400,000 to McKinley.[2]  McKinley retained equitable title to the property under that mortgage.  The other two mortgages secured a loan to Kevin Shields, individually ($585,000), and a line of credit extended to McKinley Motors ($1,250,000).

As the legal owner of Twin Lakes, Kevin Shields had authority to transfer legal title in Twin Lakes to McKinley, although his ability to due so was constrained under the terms of the applicable mortgages.[3]  The McKinley balance sheet submitted to DGS on February 25, shows the value of McKinleyÕs interest in the Twin Lakes property as $885,000.

                    ii.          Richardson-Badger.

The Richardson-Badger property is a tract of approximately 47 acres consisting of two parcels, the Oono parcel and the Gaemel-Muckelstone parcel.  Mr. Shields, individually, acquired legal title to the Richardson-Badger property in 1999.  [Ex. B-31] McKinley used the property for gravel extraction, generating a net income of approximately $80,000 in 2001.  As of December 31, 2001, legal title to the property was in Kevin Shields.  As the legal owner, Kevin Shields had authority to transfer legal title in the Richardson-Badger property to McKinley.     

                     iii.           Drag Line.

Kevin Shields had an ongoing business relationship with Bud McGee, the former owner of the dragline.  McKinley obtained title to the dragline from Mr. McGee in the course of that business relationship.  On March 26, 2002, McKinley leased the dragline to Mac Draglines, Inc.[4] [Ex. B-25]  Subsequently, on May 24, 2002, McKinley sold the dragline to Mac Draglines, Inc. [Id.]  The entire proceeds of that sale, $68,700, was paid to Bud McGee. [Id., Tr. 30] 

On the date the proposals were submitted, legal title to the dragline was in McKinley.  The balance sheet did not show an outstanding obligation to Bud McGee in the amount of $68,700, but whether that obligation was owed by Kevin Shields individually, or by McKinley, has not been established.  The nature and extent of McKinleyÕs interest in the dragline was not a significant factor in the determination of responsibility.

                    iv.            Summary.

The profit and loss statement was substantially accurate, but the balance sheet contained several misrepresentations.  The balance sheet misrepresented the nature of McKinleyÕs interest in the Twin Lakes property and the degree to which that property was encumbered.  It also misrepresented the status of McKinleyÕs interest in the Richardson-Badger property.  However, the balance sheet did not misrepresent the value of either the Twin Lakes property or the Richardson-Badger property.

McKinley, through Kevin Shields, had access to more capital and borrowing capacity than was reflected on the balance sheet and profit and loss statement. Taken as a whole, in light of Mr. ShieldÕs personal interests and his history of intermingling of personal and corporate finances, the balance sheet and profit and loss statement did not materially misrepresent McKinleyÕs financial status.  Kevin Shields did not intend to mislead DGS with respect to McKinleyÕs financial status, its past business activities, its ability to manage and complete the construction project entailed by its proposal, or its ability to meet its obligations under the lease.  

A.            Issues on Reconsideration.

1.              Did McKinley make misrepresentations intended to mislead DGS regarding a material fact?

 

2.              Is cancellation of the lease the appropriate administrative remedy?

B.        Applicable Legal Principles.

1.     Private PartyÕs Administrative Remedy.

An unsuccessful offeror does not have standing to pursue an administrative contract claim under AS 36.30.620.  Accordingly, the Òexclusive procedure for asserting a claim against an agency in relation to a procurement under [AS 36.30]Ó is to file a protest. AS 36.30.690. [5]

Pursuant to AS 36.30.560, a protest based upon alleged fraud in the award of a contract must be filed within 10 days after a notice of intent to award the contract is issued by the procurement officer.  An untimely protest asserting fraud may be accepted upon a showing of good cause.  AS 36.30.565(a), (b).

Good cause to accept an untimely protest includes both sufficient reason for the delay and other circumstances that warrant consideration of the merits.  See generally, Appeal of Scientific Fishery Systems, Inc., No. 98.08 at 2-7 (Department of Administration, July 26, 1999).  In deciding whether to accepting an untimely protest, important factors to be considered include: (1) the timing of the protest; (2) the nature of the objections raised; and (3) the strength of the claims asserted.  See generally, Appeal of Electronic Data Systems, Inc., No. 02.23 at 7 (Department of Administration, December 30, 2002).

The protestorÕs damages when a protest is sustained are limited to reasonable bid or proposal preparation costs.  AS 36.30.585(c).  Damages for breach of contract, including the implied contract of good faith and fair consideration, may not be awarded in a protest.  However:

the commissioner may take Òappropriate actionÓ.  AS 36.30.680.  The remedies that may be considered include award of bid or proposal preparation costs; termination of an existing contract; declining to exercise options under an existing contract; resolicitation; re-evaluation; and other Òappropriate actionÓ.  Cf., 4 C.F.R. ¤21.8.  Other appropriate action could include referral to the Attorney General for investigation under the Ethics Act; referral to departmental personnel officials for consideration of disciplinary proceedings; additional procurement training; and consideration of revisions to applicable statutes, regulations, the administrative manual, or other procurement policies and procedures.  There is no statutory authority for an award of attorneyÕs fees.  See, Appeal of Human Resources, Inc., No. 97.09 at 3-4 (Dept. of Administration, October 22, 1997).

 

Appeal of J & S Services, Inc., No. 02.01 at 7-8 (Department of Administration, September 17, 2002).

            In implementing an administrative remedy for a statutory protest, all of the circumstances must be considered, including:

(1)  the seriousness of the procurement deficiencies;

(2)  the degree of prejudice to other interested parties or to the integrity of the procurement system;

(3)  the good faith of the parties;

(4)  the extent to which the procurement has been accomplished;

(5)  costs to the agency and other impacts on the agency of a proposed remedy; and

(6)  the urgency of the procurement to the welfare of the state.

 

AS 36.30.585(b).  See generally, Appeal of Waste Management of Alaska, Inc. No. 01.08 at 17-20 (Department of Administration, April 25, 2002).

2.         StateÕs Administrative Remedy.

In addition to providing interested parties with an administrative remedy by way of a protest, the Procurement Code provides the state with an administrative remedy for fraud in the procurement process, either by debarment pursuant to AS 36.30.640, or forfeiture of contractual rights pursuant to AS 36.30.687.  Those remedies are not available to an interested party and the stateÕs exercise of those remedies is not subject to review or challenge by an interested party other than the subject of the action taken.

AS 36.30.640 states:

The causes for debarment or suspension include:

(1)   conviction for commission of a criminal offense as an incident to [a procurement];

(2)   conviction under state or federal statutes of [a specified crime] indicating a lack of business integrity or business honesty that currently and seriously affects responsibility as a state contractor;

(3)   conviction or civil judgment finding a violation under state or federal antitrust statutes;

(4)   violation of contract provisions of a character that is regarded by the commissioner to be so serious as to justify debarment action, such as

(A)    knowing failure without good cause to perform in accordance with the specifications or within the time limit provided in the contract;

(B)    failure to perform or unsatisfactory performance in accordance with the terms of one or more contracts, except that failure to perform or unsatisfactory performance cause by acts beyond the control of the contractor may not be considered to be a basis for debarment;

(5)   for violation of the ethical standards set out in law or regulation;

(6)   for a violation of this chapter punishable under AS 36.30.930(2); and

(7)   any other cause listed in regulations of the commissioner determined to be so serious and compelling as to affect responsibility as a state contractor, including debarment by another governmental entity for a cause listed in the regulations.

 

AS 36.30.930(2), referred to above, provides for criminal penalties for Òa person who intentionally or knowingly contracts for or purchases supplies, equipment for the state fleet, services, professional services, or construction under a scheme or artifice to avoid the requirements of this chapter.Ó

AS 36.30.687 states:

(a)   A person who makes or uses in support of a contract claim under this chapter, a misrepresentation, or who practices or attempts to practice a fraud, at any stage of proceedings relating to a procurement or contract controversy under this chapter,

(1)  forfeits all claims relating to that procurement or contract; and

(2)  is liable to the state for reimbursement of all sums paid on the claim, for all costs attributable to review of the claim, and for a civil penalty equal to the amount by which the claim is misrepresented.

(b)  The procurement officer, commissioner or court shall make specific findings of misrepresentation, attempted fraud, or fraud before declaring a forfeiture under (a)(1) of this section.

(c)   Suits to recover costs and penalties under (a)(2) of this section must be commenced within six yearsÉ

(d)  A person who in a matter relating to a procurement or a contract controversy or claim under this chapter makes a misrepresentation to the state through a trick, scheme, or device is guilty of a class C felony.

(e)   In this section, ÒmisrepresentationÓ means a false or misleading statement of material fact, or conduct intended to deceive or mislead concerning material fact, whether it succeeds in deceiving or misleading.

 

B.             Analysis.

The record clearly establishes that McKinley misrepresented: (1) the status of its workers compensation insurance at the time proposals were submitted and (2) the nature of its interest in the Twin Lakes property (and applicable mortgages) and the Richardson-Badger property.  But it is not the fact of any misrepresentations that is primarily at issue; rather, it is whether McKinley acted with an intent to deceive DGS regarding material facts and if so whether cancellation of the contract is an appropriate or necessary administrative remedy at this time.

The Procurement Code contains two statutory mechanisms for addressing allegations of wrongdoing in connection with a solicitation: (1) a protest under AS 36.30.560, or (2) forfeiture of claims under AS 36.30.687.[6] 

1.              There is Not Good Cause to Accept an Untimely Protest Alleging Fraud.

Assuming, without deciding, that the statutory protest remedy may be invoked after a contract has been awarded, Bachner and Bowers might have sought to file an untimely protest seeking administrative relief, rather than bringing their concerns before the court in the form of a motion for remand.  Had they done so, again assuming that the protest remedy would be available, the protest would have been accepted only if Bachner and Bowers established Ògood causeÓ.  AS 36.30.565(b).  The important factors to be considered are (1) the timing of the protest; (2) the nature of the objections raised; and (3) the strength of the claims asserted.

a.              Timing of the Protest.

Bachner and Bowers lacked actual or constructive knowledge of the alleged fraud within the timeframe allowed for filing a protest, and they filed their motion seeking relief as soon they obtained Mr. BatesÕ affidavit alleging fraud.[7]  To this extent, and because Bachner and Bowers had previously raised a number of other significant issues in a timely protest, the Òtiming of the protestÓ factor would have weighed in favor of accepting an untimely protest asserting fraud by one of the participants, if Bachner and Bowers had brought such a claim to DGS.[8]  On the other hand, the RFP had been the subject of a lengthy protest and appeal process that had been completed six months previously.  The contract had not only been awarded, but performance had begun.  On balance, I find that the Òtiming of the protestÓ factor would have weighed against accepting a protest raising the issues asserted in the motion for remand. 

            b.         Nature of the Claims Asserted.

The Procurement Code provides alternative procedures for addressing fraud in the procurement process, through debarment, criminal sanctions, and forfeiture of contractual rights under AS 36.30.635-.665 and AS 36.30.687.  These alternative processes are specifically designed for addressing allegations of fraud asserted after contract award.  Given these alternative statutory remedies, the statutory protest remedy is neither intended nor appropriate for consideration of post-contract award claims of fraud.  The Ònature of the claimsÓ factor would have tilted heavily against a finding of good cause to accept an untimely protest by Bachner and Bowers raising the claims made in their motion for remand.

c.         Strength of Claims.

The claim of fraud was supported by an affidavit from an individual in a position to have personal knowledge of the underlying facts.  In light of the record as a whole at the time the motion for remand was filed, this factor would have weighed in favor of accepting a protest.

d.           Conclusion.

If Bachner and Bowers had invoked the statutory protest remedy rather than filing a motion for remand, their protest would have been untimely.  Unless there is good cause to accept an untimely protest, the agency lacks statutory authority to consider it under the statutory protest procedures.  Based on consideration of the factors set forth above, I conclude that there was not good cause to accept the Bachner-Bowers claim of fraud as an untimely protest, if it had been filed with DGS directly.

2.         Cancellation Under AS 36.30.687 Is Committed to DGSÕ Discretion.

 

Under AS 36.30.687 and 2 AAC 12.690,[9] the contract of a party who makes an intentional material misrepresentation during the procurement process is subject to cancellation.  This remedy is available at the discretion of the purchasing agency as a matter of contract administration, and is not within the scope of the statutory protest remedy.  2 AAC 12.690, which expressly and specifically is grounded in AS 36.30.687, provides that the decision to cancel a contract for misrepresentation is within the discretion of the purchasing agency, in this case DGS, and makes no provision for review of that decision by the commissioner of administration.

I conclude that cancellation of the contract at this point in time is a matter of contract administration, not subject to statutory review by the commissioner under the Procurement Code.  If the matters raised by Bachner and Bowers had been brought to the attention of DGS, the appropriate course would have been for DGS to make an independent determination whether to cancel the contract pursuant to AS  36.30.687 and 2 AAC 12.690.  None of the parties would have had a statutory right to review of that determination by the commissioner.

C.        Remedy on Remand.

If the facts alleged in the motion for remand had been brought to the attention of the commissioner independently of a pending court proceeding, the appropriate action would have been to refer the matter to DGS for independent review pursuant to AS 36.30.687, and to decline to accept the matter as an untimely protest.

However, the courtÕs order called for an evidentiary hearing, and the commissioner has administrative discretion to direct subordinate officers in the department to take appropriate remedial action outside of the statutory review process, to the extent that the action taken is consistent with law.  For these reasons, I will address the allegations and make a recommendation for consideration by the commissioner as a matter of administrative discretion.  Any discretionary remedial action taken should be consistent with the substantive provisions of AS 36.30.687 and AS 36.30.585(b). 

1.         Cancellation for Misrepresentation is Not Warranted.

For purposes of AS 36.30.687, a fraudulent misrepresentation is one made with the intent of deceiving the purchasing agency about a material fact. AS 36.30.687(e).  Accordingly, McKinleyÕs lease is subject to cancellation at the purchasing agencyÕs discretion pursuant to 2 AAC 12.690 if McKinley made a knowing misrepresentation with the intent to deceive DGS regarding a material fact. A material fact is one that is a significant factor in the purchasing agencyÕs determination of responsiveness or responsibility. 

a.         WorkersÕ Compensation Insurance.

McKinley misrepresented that it had a workersÕ compensation insurance policy in effect on the date of bid submission that would remain in effect through October 1, 2002.  However, whether McKinley had a policy in effect at the time bids were submitted that would remain in effect through October 1, 2002 was not a significant factor for purposes of determining responsibility.  A policy in effect on the date proposals were submitted might be cancelled for any number of reasons before the requirement in the RFP to provide insurance came into effect.  All that DGS needed to know for purposes of responsibility was that McKinley was insurable.  A certificate of insurance that had previously been effective was sufficient for purposes of determining responsibility. After determining that McKinley was a responsible bidder and providing notice of intent to award McKinley the contract, Ms. Madson requested a confirmed proof of insurance, which McKinley provided after obtaining insurance coverage on March 10.  Clearly, that request was not made with the intent of determining responsibility, since the notice of intent had already been issued.  Ms. MadsonÕs inquiry after the notice of award was a matter of contract administration, in which her purpose was to obtain assurance that insurance was actually in effect. 

Clearly, that a proposal misrepresents an offerorÕs current insurance status might support an inference that the offeror intended to mislead the purchasing agency regarding its intent or ability to provide coverage in conformity with the RFP.  But in this case that is not a tenable inference.  To the contrary, there is clear and convincing evidence that at all times, McKinley had the intent and ability to provide insurance throughout the time the lease was in effect, which was all that the RFP required. 

I conclude that McKinleyÕs misrepresentation of the status of its insurance coverage at the time its proposal was submitted was not intended to mislead the purchasing agency with respect to a significant factor in determining responsibility (i.e., insurability and intent to provide insurance as required by the RFP).

b.         Occupancy Date.

On remand, Bachner and Bowers argue that at the time it submitted its proposal, McKinley knew that it could not have completed construction of the new building it had offered by the RFPÕs required occupancy date of August 1.  They rely primarily upon testimony from the initial hearing, at which Mr. Bachner testified that completion prior to August 1 was not possible for a steel construction building, because of the lead time required for fabrication and delivery of steel from Outside, as well as on Mr. BatesÕ statement in his affidavit that at the time the proposal was submitted, McKinley Òknew from discussions with its building contractor that it would be impossible to meet the occupancy date.Ó

At the remand hearing, Mr. Bates testified that it was his understanding, based upon discussions with Lowell Davis, that McKinley would not be able to meet the occupancy date due to the need to have steel delivered from Outside. [Tr. 55] He testified that he discussed this problem with Mr. Shields, Òand decided that there were provisions in the RFP or penalties if you didnÕt get it done by the July 31^st dateÓ. [Tr. 56]  He testified that Òwe didnÕt need to let the state know that [we] couldnÕt meet the July 31^st date [because] there was language in the RFP that penalized you if you didnÕt.Ó [id.]  ÒWe knew we wouldnÕt comply, but we wanted to get the contract and thatÕs why we had to submit it knowing that we wouldnÕtÉthat we would be penalized and pay the penalty accordingly.Ó [Tr. 57]

Mr. BatesÕ testimony does not establish that McKinley intended to defraud DGS with respect to the move-in date.  According to the RFP, the failure to meet the occupancy date would, as Mr. Bates and Mr. Shields recognized, result in penalties.  Extension of existing leases in order to accommodate construction schedules or other exigencies is a common occurrence.  [Tr. 103] A reasonable offeror might have construed the RFP as providing some flexibility with respect to the move-in date.  Indeed, DGS stated at the pre-bid conference (which Mr. Shields did not attend) that even though the July 31 date was ÒfirmÓ for purposes of the RFP, the actual move in date might be moved back.  Thus, even if he believed that the July 31 occupancy date would not be met, Mr. Shields could reasonably believe that he could meet DGSÕ actual needs.  And, of course, McKinleyÕs proposal did not offer occupancy by July 31, but rather within 150 days of the date of contract award (which was not a fixed date).  It has not been established that McKinley could not reasonably expect to complete construction within 150 days of the date of contract award, given that the notice of intent would precede the contract award. 

I conclude that the McKinley proposal did not contain a material misrepresentation with respect to the occupancy date, and that Kevin Shields did not intend to deceive DGS regarding McKinleyÕs ability to meet the agencyÕs actual needs.

                        c.         Bus Service.

The McKinley proposal stated that bus service was Òconveniently availableÓ to the premises offered.  Bus service was, in fact, available at Peger Street, some 2,000 feet from the McKinley property.  It is not unreasonable to describe that bus service as Òconveniently availableÓ in the context of a commercial lease transaction.  The McKinley proposal did not state or imply that bus service was, at the time the proposal was submitted, available at the McKinley property, nor did the RFP require it. Indeed, any such assertion, in light of the fact that bus routes are matters of public record, would have been obviously foolhardy.  At the time it submitted its proposal, McKinley had contacted MACS and received reasonable assurances that bus service would be provided to the building if it received the lease award.[10]  McKinley did not misrepresent the status of bus service at the time of bid submission, nor did it misrepresent its ability to comply with the terms of the lease.  Bachner and BowersÕ claims to the contrary are specious.[11]

d.         Financial Status.

Bachner and Bowers argue that McKinley made material misrepresentations regarding (1) legal title to the Twin Lakes property and Badger-Richardson; (2) the existence of mortgages on the Twin Lakes property; and (3) ownership of the dragline.[12]

It is apparent that the balance sheet misrepresents the nature and extent of McKinleyÕs interest in Twin Lakes and Richardson-Badger.  Legal title to both properties was in Kevin Shields, individually, rather than in McKinley, and the Twin Lakes property was encumbered by substantial mortgages (primarily not for debt owed by McKinley) that were not disclosed.[13]  The fundamental issue on remand is whether those misrepresentations warrant cancelling the contract.

McKinley was a new entrant in the Fairbanks real estate market, without a proven track record.  Lacking prior knowledge of McKinley, for purposes of responsibility DGS needed to determine whether McKinley had sufficient financial stability, management ability and business experience to justify awarding a long term lease that required construction of a new building. [Tr. 80, 86, 88] DGS requested a Òfull financial statementÓ but it had discretion to accept documentation of any kind without regard to whether it constituted a Òfull financial statementÓ for accounting purposes. [Tr. 99] What was important to DGS was the big picture: was McKinley a party with a reasonable [Tr. 87] degree of business experience, management ability and financial stability to undertake a major construction and leasing project. [Tr. 99]

McKinleyÕs financial stability was only one those three significant factors, and it was not the most important.  While it is apparent that the balance sheet misrepresented McKinleyÕs interest in Twin Lakes, the record does not establish that value assigned to the property was unreasonable, even though they property was subject to undisclosed mortgages.[14]  Furthermore, McKinley also submitted a letter from its banker stating that Kevin Shields, individually, and Òrelated companiesÓ previously maintained credit relationships in the low seven figures. [Ex. H-5] The bankÕs willingness to provide funding was not entirely based upon the lease, as counsel for Bachner and Bowers suggested, but also reflected the bankÕs past business experience with Mr. Shields.  The specific details provided by McKinley as part of the financial statement were not of particular importance to DGS. [Tr. 81, 100-101]  

Mr. Shields testified that he did not have time for his accountant to prepare a formal financial statement, and that the balance sheet submitted was simply a computer generated document from McKinleyÕs pre-existing records.  That testimony was consistent with the testimony by Bachner and Bowers expert accountant witness. [Tr. 118]  Mr. Shields also testified that at the time he submitted the balance sheet to DGS, he thought that he had deeded the Twin Lakes property back to McKinley, which is consistent with what was indicated on McKinleyÕs tax return for 2001 [Ex. M-21] as well as with was later represented to third party purchasers. [Remand Ex. 4] Even if he did know that title was in his own name, there is no evidence that in February, 2002, it was unreasonable of him, as the sole owner of the property and the corporation, to treat Twin Lakes as if it were McKinleyÕs (for purposes of McKinleyÕs financial status).  Finally, it has not been established that Mr. Shields had a motive to mislead DGS regarding McKinleyÕs financial status, since there is no showing that McKinleyÕs financial status was precarious.[15]  In conclusion, the record as a whole indicates that Mr. Shields submitted previously existing financial records to DGS and that he had no specific intent to mislead DGS as to McKinleyÕs financial status or its ability to perform.   

2.         Cancellation Under AS 36.30.585(b) is Not Appropriate.

In fashioning a remedy in a protest, the procurement officer must consider: (1) the seriousness of the procurement deficiencies; (2) the degree of prejudice to other interested parties or to the integrity of the procurement system; (3) the good faith of the parties; (4) the extent to which the procurement has been accomplished; (5) costs to the agency and other impacts on the agency of a proposed remedy; and (6) the urgency of the procurement to the welfare of the state.  AS 36.30.585(b).

 

 

a.         Seriousness of the Procurement Deficiency.

In this case, the only additional deficiencies identified in the proceedings on remand are the misrepresentations made by McKinley in connection with the procurement: (1) the status of its workers compensation insurance at the time proposals were submitted; and (2) the nature of McKinleyÕs interest in the Twin Lakes (and applicable mortgages) and Richardson-Badger properties.  As previously noted, however, these misrepresentations were not made with the intent to mislead DGS regarding a significant factor in the determination of responsibility.

Where a proposal contains misrepresentations, but the offeror did not intend to mislead the purchasing agency with respect to a material fact, the purchasing agency has discretion to accept the proposal if it does not consider the incorrect information material to the award of the contract.  After contract award, cancellation is appropriate if there was an intentional material misrepresentation, and cancellation is in the stateÕs best interests.  The stateÕs best interests would generally be served by cancellation if the state relied on the misrepresentation to its detriment; in the absence of detrimental reliance, the stateÕs best interests would depend upon the circumstances.

In this case, there was no intentional material misrepresentation or detrimental reliance; cancellation is therefore not appropriate under this factor. 

b.         Degree of Prejudice to McKinley and Integrity of the Procurement System.

 

Cancellation of a contract typically results in substantial prejudice to the party awarded the contract.  In this particular case, McKinley will suffer serious prejudice if the contract is cancelled.  McKinley has constructed a building and taken on a mortgage obligation that it may not be able to cover through other leases.  McKinley was not responsible for the deficiencies in the RFP and the conduct of the solicitation and is not responsible for the delay in the final administrative decision on the protests.  Only if its misrepresentations warranted cancellation of the contract would that be an appropriate remedy in terms of the ÒprejudiceÓ factor. 

With respect to the integrity of the procurement process, however, cancellation of the solicitation was deemed the preferred remedy at the time of the original decision, given the multiple serious deficiencies in the procurement.  It remains the preferred remedy with respect to that factor.  That a substantial time has passed, and that the contract has been ongoing, is of no significance in terms of this factor.

c.         Good Faith.

The commissioner previously concluded that cancellation was not warranted because neither the purchasing agency (DGS) nor the selected contractor (McKinley) had acted in bad faith.  In the absence of any finding that McKinley made misrepresentations with the intent to mislead DGS regarding material facts, the commissionerÕs previous conclusion stands.

d.         The Extent the Procurement has been Accomplished.

Because procurement was not stayed, the procurement was completed before the protest appeal was filed.  The lease has been executed, McKinley has constructed a building, and DOT has been occupying the premises for nearly one year.  DOT is pleased with the facility, and McKinley has been a responsible and responsive landlord.  

Because the procurement has been completed and performance is ongoing, this factor does not support cancellation.

e.         Costs to the Agency and Other Agency Impacts of the Proposed Remedy.

 

The potential costs to DGS in the event the contract is cancelled are significant.  First, there would be substantial disruption to the tenant agency, since it would have to prepare for the possibility of another move only one year after the first move.  Second, the transactional costs of conducting another procurement would be incurred.  Third, there is the risk that the state would be liable to McKinley for damages.  Fourth, there is a risk to the state of increased costs in the event of a new lease.  This factor does not support cancellation.  

f.          Urgency of the Procurement.

Because the tenant agency presently occupies the premises and is in control of the cancellation date, there is no urgency involved. Accordingly, this factor supports cancellation at DGSÕs convenience at a date to be determined.

g.         Other Factors.

The factors listed in AS 36.30.585(b) are not exclusive.  As noted in the initial decision, one circumstance that should be considered in fashioning a remedy is the substantial costs incurred by Bachner and Bowers in pursing their administrative remedy.  But cancellation would not provide compensation for those costs.  Rather, cancellation would impose additional costs in preparing for a new RFP with no assurance that either party would end up with the contract.  Furthermore, another factor to be considered is the administrative interest in finality.  To cancel a contract at this late date, when the conduct complained of has not caused actual harm to the state and the administrative remedy has long since been fully exhausted, is on its face disruptive to the conduct of the stateÕs business.

Conclusion

In light of the serious deficiencies in this procurement, cancellation and resolicitation were, at the time of the original decision, the appropriate remedy unless other factors outweighed that factor.  At the time of the original decision, the commissioner determined that in light of the potential costs and other impacts on the state and McKinley, and in light of McKinleyÕs lack of fault for the improprieties in the procurement that had been identified, cancellation was not the appropriate remedy.  Bachner and Bowers were awarded their full costs of proposal preparation, the maximum award possible under applicable law.

The fundamental question on remand is whether in light of McKinleyÕs misrepresentations, the calculus is any different.  Because: (1) McKinleyÕs misrepresentations were not intended to deceive DGS regarding McKinleyÕs intent and ability to perform; (2) DGS did not rely on the misrepresentations in any significant degree or to its detriment; and (3) McKinley was a responsible offeror, I recommend that on reconsideration the commissioner confirm the October 16, 2002 decision sustaining the protest appeal and awarding Bachner and Bowers their bid preparation costs, which was the maximum award possible under applicable law.  

                       

DATED February 10, 2004.

                                    ______________________________

                                                                        Andrew M. Hemenway

Hearing Officer