DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Virgin Islands DATE: August 10, 1989 Department of
Human Services Docket No. 89-53 Decision No. 1084
DECISION
The Virgin Islands Department of Human Services (Virgin
Islands/appellant) appealed a determination by the Administration on
Aging, Office of Human Development Services (Agency, respondent), that
there was no basis to adjust the disallowance upheld in Virgin Islands
Dept. of Human Services, DAB No. 980 (1988), for the portion
attributable to the contract awarded to Duvergee, Inc. (Duvergee), on
the island of St. Croix.
This case follows on Decisions No. 980 and 890, and we, therefore, refer
to the undisputed facts in the prior cases. The Virgin Islands received
grant funds from the Agency, starting in 1982, to provide meals for the
elderly under Title III-C of the Older Americans Act. The Virgin
Islands published a request for proposals to obtain bids from catering
service companies for furnishing meals for the fiscal year (FY) 1984.
Duvergee was awarded the contract to provide meals on the islands of St.
Thomas and St. John, and Marriott In-Flite Services (Marriott) was
awarded the contract for the island of St. Croix. These contracts were
extended through FY 1985.
For FY 1986, the Virgin Islands again solicited bids to continue the
food service program. Both Duvergee and Marriott made bids to provide
meals on St. Croix, and Duvergee and Hughsons, Ltd. made bids for St.
Thomas. Since both Marriott and Hughsons submitted lower bids than
Duvergee, they were awarded the contracts for FY 1986.
In January 1986 Duvergee brought suit in the Territorial Court of the
Virgin Islands to set aside the contract awards to Marriott and
Hughsons. Duvergee claimed that it was a local company, while its
competitors were not, and that Duvergee should receive preferential
treatment under a Virgin Islands "preferred bidders" statute designed
to
promote local entities in the awarding of government contracts. The
effect of the preferred bidders statute would be to add 15 percent to
the per meal bid of Duvergee's competitors, which would be enough to
qualify Duvergee as the lowest bidder for 1986. The Virgin Islands,
represented by its Attorney General, opposed Duvergee's suit on the
grounds that the funds in dispute were federal funds; that the preferred
bidders statute did not apply to federal procurement; and that Duvergee
did not have the best sanitary conditions of all the bidders, so that
Duvergee should have been denied the bid for this reason.
The Territorial Court agreed with Duvergee that the company was entitled
to the benefit of the preferred bidders statute. The Court also found
on the basis of testimony that Duvergee was the most responsible bidder,
and therefore ordered that contracts should be awarded to Duvergee,
effective for one year beginning on February 11, 1986. The Virgin
Islands appealed this decision to the Appellate Division of the Virgin
Islands District Court. The Board has not been informed of any
disposition of this appeal.
On February 3, 1987, the Agency issued a disallowance for the funds
involved in the Duvergee contracts for the period from February 11, 1986
(the date the contract with Duvergee for St. Thomas went into effect)
through August 31, 1986.
The Virgin Islands appealed that disallowance to the Board in Docket No.
87-34. In its briefs the Virgin Islands admitted that the preferred
bidders statute should not have been applied when federal funds were
concerned, that Duvergee was not the most responsible bidder, and that
Duvergee should not have been awarded the contracts. The Virgin Islands
argued that the Board should nonetheless reverse the disallowance
because the territory had no choice but to comply with the order of its
Territorial Court, and the federal government had an obligation to
intervene in the Territorial Court action if it intended to disallow the
funds in question.
The Board in Decision No. 890 concluded that it had no choice but to
uphold the disallowance. The appellant had in effect admitted the
merits of the Agency's disallowance determination, and the Board found,
as the Agency had argued, that the Board was not legally bound by the
decision of the Territorial Court. We also found no merit in the
appellant's argument that the Agency had an obligation to intervene in
the local court proceeding.
We denied reconsideration of Decision No. 890 in Board Docket 88-4.
In Board Docket No. 87-193 the Virgin Islands appealed the disallowance
by the Agency for the period from September 1, 1986 though March 13,
1987. This disallowance followed directly on the period covered in
Decision No. 890, and ran through the end of the period covered by the
contracts awarded by the Territorial Court.
We again upheld the Agency in Decision No. 980, but with a proviso
discussed below. We first rejected the Agency's argument that the
appellant was precluded by the doctrine of collateral estoppel from
challenging any issue that was considered in the earlier appeal. We
considered additional arguments or evidence presented by the appellant
in support of its position that the disallowance for the second
disallowance period should be overturned, although we refused to
reconsider the disallowance for the first period.
After considering the appellant's arguments as to the merits of the
second disallowance, we concluded as follows:
Duvergee was not the lowest bidder since the local preferred
bidders statute could not preempt federal regulations;
the Agency was correct in finding that the sanitary conditions of
Duvergee's kitchen facility on the island of St. Thomas were so
poor that, with no evidence to the contrary, Duvergee could not be
said to be responsible during the period of this disallowance; and
Duvergee breached the contracts by its poor performance and
appellant should not have made payments to it.
Decision No. 980, p. 2.
In sustaining the disallowance, we did, however, give appellant an
opportunity to show that Duvergee had entirely separate kitchen
facilities on St. Croix which were unaffected by the conditions on St.
Thomas, and thereby reduce the amount of the disallowance for the
contract payments for meals provided on St. Croix. The Board's decision
indicated that any such reduction would be in line with the cost
principles in Office of Management and Budget Circular A-87. If
Duvergee in fact performed responsibly under the contract for furnishing
meals on St. Croix, but was not the lowest bidder, then any amount over
that which would have been paid to the low bidder was not necessary and
reasonable for proper and efficient administration of the grant program.
We gave appellant 30 days to submit evidence as to separate kitchen
facilities on St. Croix to the Agency, to see if it would reduce the
amount of the disallowance. If the appellant disputed the Agency's
response to evidence submitted on the St. Croix contract, the appellant
was given the opportunity to appeal that determination to the Board.
The appellant did present evidence to the Agency, which did not reduce
the disallowance. Appellant then appealed to this Board on that one
issue. As explained below, we uphold the Agency's determination not to
reduce the disallowance.
The facts in this appeal
Appellant submitted several documents to the Agency within the time
allowed; these documents are part of the record in this appeal. These
documents consisted of a page of an invitation for bids; miscellaneous
disbursement vouchers; two monitoring reports by the local Commission on
Aging, one dated September 10, 1986 and the other dated November 28,
1986; and the forwarding letter for these documents.
Based on these documents, the Agency said it did not dispute the
contention that Duvergee had established a separate kitchen on the
island of St. Croix. This conclusion did not entirely dispose of the
disallowance issue, according to the Agency.
The Agency stated that at the time of the original award of the
contracts, and at the time of the Territorial Court's order, the Agency
had been made aware of only one Duvergee kitchen, which was located on
St. Thomas. Sanitation reports demonstrated unsatisfactory performance
at the St. Thomas facility. As the St. Thomas facility was unable to
demonstrate that it was a responsible bidder, and as no information was
provided concerning any Duvergee facility on St. Croix, the Agency
stated it could not reasonably conclude that Duvergee could have been a
responsible bidder at the time the contracts were awarded.
The Agency went on to say that on the basis of the sanitation inspection
reports prepared before the contracts were initially awarded, the
Duvergee facility on St. Thomas did not comply with the requirement that
awards be made only to a responsible bidder. Also, U.S. Food and Drug
Administration (FDA) inspections conducted in February 1987 revealed
that both facilities demonstrated inadequate sanitation.
Finally, the Agency said these federal findings were consistent with the
finding of the local Commission on Aging Nutrition Program Monitor, who
observed rodent and insect infestation during two inspections, in
September and November 1986. The Agency also submitted the FDA
inspection report for February 6, 1987, showing unsatisfactory sanitary
conditions in Duvergee's facility on St. Croix.
Analysis
l. The Agency properly considered the sanitary conditions in the
Duvergee facilities on St. Croix.
In its notice of appeal, the Virgin Islands first argued that the Agency
was limited on the remand to making a factual finding, namely, whether
or not Duvergee had separate facilities on St. Thomas and St. Croix.
Appellant claimed that the Agency could not properly make a
determination of whether Duvergee was a responsible bidder on St. Croix.
This argument is based on a misreading of Decision No. 980. It is true
that in the Conclusion of that decision, we said that appellant should
submit evidence that the kitchen facilities on St. Croix were separate
from those on St. Thomas, and the Agency should consider this evidence
and respond to it.
However, on page 17, after referring to allowing appellant a last
opportunity to prove that the meals were prepared in separate kitchen
facilities, we went on to say:
If there has been no evidence to show that on St. Croix
Duvergee was not a responsible bidder, or not a
responsible party in performing the contract, even if it
was not the lowest bidder, then appellant should be held
to account for only the difference between the Duvergee
bid for St. Croix and the amount of the lowest bid.
The next paragraph in our decision illustrates the same principle:
Ordinarily . . . it is only common sense--as well as
fair--that if the contractor who was not the lowest
bidder complied with all the contract requirements and
furnished suitable meals to the elderly on St. Croix,
the Virgin Islands should not be deprived of all FFP in
the contract payments. . . .
Id.
These quotations from Decision No. 980 make it clear that on remand the
question left open was not only whether there were in fact separate
facilities for preparing meals on St. Thomas and St. Croix, but whether
Duvergee complied with contract requirements in furnishing meals on St.
Croix. It would be absurd for appellant to be able to reduce the
disallowance merely because it had separate facilities, if it did not
have proper sanitary conditions in the separate facilities. It is both
implied and expressed in Decision No. 980 that the disallowance would be
reduced only if there were separate facilities on St. Croix, and proper
sanitary conditions were maintained in that separate facility.
In Decision No. 980 we said that "it was not necessary for us to make
any finding whether Duvergee was a responsible bidder when the contracts
to it were awarded." p. 12. We stated that the evidence as to
Duvergee's poor performance and capabilities (shortly before the second
disallowance began, on St. Thomas) could "reasonably lead the Agency to
refuse to participate in the contract costs . . . irrespective of the
accuracy of the 'responsibility' label." Id. So here, it was proper
for the Agency to consider Durvergee's performance on St. Croix during
the second disallowance period. We review the record to see if the
Agency reasonably refused to participate in the contract costs on St.
Croix; we need not find whether Duvergee was a responsible bidder when
the St. Croix contract was awarded.
2. The sanitary conditions on St. Croix were unsatisfactory.
In Decision 980 we relied in substantial measure on the fact that the
Duvergee facilities on St. Thomas were in deplorable condition in May
1986, and there was no evidence to show that sanitary conditions had
improved during the disallowance period beginning in September 1986.
Here the situation is different. There is no inspection report in the
record before the start of the disallowance period for St. Croix. In
fact, the Agency determination states that the kitchen facilities on St.
Croix did not exist when the contracts were awarded, and appellant has
not disputed this statement.
There are, however, two inspection reports near the beginning of the
disallowance period. Both were conducted for the Virgin Island
Commission on Aging. The first is dated September 10, 1986, or right
after the start of the disallowance period on September 1st. The report
has a check in the "No" column beside question 6, which asks whether
there are written procedures for cleaning equipment and work areas
posted and followed consistently. Question 10 is in two parts. The
first asks whether there is any evidence of rodent or insect
infestation; this part is checked "yes." The second part asks whether
screens and doors are in good repair and close properly. This part is
checked "no." Appellant's Exhibit (Ex.) 4.
The second inspection report was on November 28, 1986. Question 6,
which asked if there were written procedures for cleaning equipment,
etc., again received a "no" answer. The two-part question 10 again
had
a "yes" answer to the part which asked if there was evidence of rodent
or insect infestation.
The second part of question 10, whether screens and doors were in good
repair and close properly, now received a "yes" answer. However, a
footnote to this answer states: "Flies are evident, the screen doors
are in good repair but stay open a good portion of the day." A comment
also refers to the absence of a thermometer. Appellant's Ex. 3.
The only other inspection report for St. Croix in the record is that of
the FDA's inspection on February 6, 1987, near the end of the
disallowance period. Respondent's Ex. R-1, page headed #11. The score
on this inspection report was 53 out of a possible 100; the forwarding
letter gives a rating score range of 0-59 an adjective rating of
"Inadequate." Id., p. 1.
We are unable, with these inspections in the record, to see any merit in
appellant's argument in its reply brief that the respondent failed to
recognize that Exhibits in evidence "clearly show that deficiencies
cited on an earlier report were not found in a later inspection." Reply
brief, p. 3.
If the later inspection is the FDA inspection in February 1987, it
obviously was no improvement on earlier reports. The only possible
argument appellant may be trying to make is that deficiencies cited on
the September 1986 report were not found in the November 1986
inspection.
As pointed out above, there is no real improvement shown. The inspector
did find in November that the screens and doors were in good repair and
closed properly. However, this is hardly better than the September
report because the inspector stated in his footnote that flies were
evident, and although the screen doors were in good repair, they stayed
open a good portion of the day.
The purpose of having screen doors, particularly in a warm climate, is
obviously to keep flies from coming in to contaminate the food. It
would hardly help to have screen doors in good repair if they were not
kept closed. The statement that "flies are evident" was obviously
evidence of an uncorrected problem. We cannot find any basis on which
to agree with appellant's statement (reply brief, pp. 2-3) that Exhibit
3 dated November 28, 1986, reflected that the inadequacies cited in
Exhibit 4 dated September 10, 1986, were no longer in existence.
Thus we find that both at the beginning and the end of the disallowance
period sanitary conditions were unsatisfactory at the Duvergee
facilities on St. Croix. 3. The termination procedure under the
contract is irrelevant.
The parties devoted much of their argument to whether there is a
provision in the contract requiring notice before the contracts could be
terminated for a breach, such as for poor sanitary conditions. This is
actually irrelevant, since no situation ever arose where the appellant
tried to terminate the contract and was hindered in doing so because of
any notice requirement in the contract.
This issue surfaced in appellant's contention that the Agency's decision
was defective in not considering "whether or not the problems in the
inspection reports were cured, resolved, or mitigated." Appellant's
brief, p. 3. Respondent then quoted sections of the contract which it
contended did not even contemplate allowing a contractor time to cure a
breach. Respondent's brief, p. 9.
In its reply brief appellant cited a section of the contract which seems
to say that the contractor must be given 15 days notice of any sanitary
deficiencies found in an inspection, with an opportunity to correct the
deficiencies before the contract could be cancelled.
The question of whether notice and an opportunity to correct
deficiencies was required before cancellation of the contract is
actually irrelevant here. Sanitary deficiencies were found at the
beginning of the disallowance term, in September 1986, and toward the
end of the period in February 1987. The November 1986 inspection report
showed no improvement. Therefore, during the period before us in this
disallowance, as we said in Decision No. 980, (for the Duvergee
facilities on St. Thomas) "the deplorable sanitary conditions were
clearly a breach of the contract provisions." (p. 15)
The discussion on this point in Decision No. 980 focused on why
appellant had not taken any action to terminate the contract for cause,
if it knew of the unsanitary conditions. (p. 15) Here, also, there is
no evidence whatever that appellant took any steps toward terminating
the contract for St. Croix. Appellant's argument might have some merit
if it had notified Duvergee of the sanitary deficiencies, and Duvergee
had corrected them in the 15 day notice period referred to in the
contract.
But that is not the case before us. The Agency did not have to take
into account whether the problems in the inspection reports were
corrected. As we pointed out in Decision No. 980, it was reasonable to
place the burden of going forward to show that conditions improved after
an unsatisfactory inspection on the appellant, rather than requiring
respondent to show that they did not. Id., p. 13.
Adopting the language of Decision No. 980 (p. 12) for the St. Croix
situation, the evidence impugning Duvergee's performance and
capabilities when the second disallowance period began, and continuing
through it, in the absence of evidence to the contrary reasonably led
the Agency to refuse to participate in the contract costs for this
period on St. Croix, irrespective of the accuracy of the
"responsibility" label.
CONCLUSION
Based on the record, we find that the Agency properly refused to modify
the disallowance for payments under the contract with Duvergee for meals
on the island of St. Croix. The disallowance in Decision No. 980 is
therefore upheld in full.
_____________________________ Judith A. Ballard
_____________________________ Norval D. (John) Settle
_____________________________ Alexander G. Teitz Presiding Board