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U.S. Court Rejects Constitutional Claims by Contractor Denied Public Works Contract
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March 3, 2008
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Thelen LLP
The Puerto Rico Public Housing Authority awarded Celta Construction Co. a contract to restore a public housing project. Plaintiff Miguel Redondo-Borges was Celta's president. Five months later, the housing authority annulled the bid award because it had determined that Redondo-Borges (and, therefore, Celta) was a "nonresponsible bidder." As a nonresponsible bidder, Celta was not eligible to receive public contracts.
The agency based its determination on the actions of another company, Redondo Construction Co., for which Redondo-Borges had been an officer. In 1998, Redondo Construction Co. had defaulted on a housing authority contract for the same project.
After the housing authority annulled the bid award, plaintiffs sued the housing authority, its officials, the U.S. Department of Housing and Urban Development and HUD officials alleging deprivation of constitutionally protected property interests. It claimed it was wrongfully denied the housing authority contract, had been suspended from taking on public contracts and had lost private business as a result of bad publicity from the bid annulment.
The U.S. District Court for the District of Puerto Rico dismissed the claims on a variety of grounds, including failure to state a viable cause of action, failure to state a cognizable claim, 11th Amendment immunity and qualified immunity.
The U.S. Court of Appeals for the First Circuit affirmed. Redondo-Borges v. U.S. Department of Housing and Urban Development, 421 F.3d 1 (1st Cir. 2005).
Plaintiffs alleged that the federal defendants were aware of the housing authority's disregard of contract award procedures but failed to act to correct the wrongdoing. The appeals court found that the facts alleged did not support a constitutional claim. In addition, it held that the plaintiffs had failed to allege a legally sufficient connection between the federal defendants and the actions central to the case, the alleged debarment, the nonresponsible bidder determination and rescission of the bid award. The court found that the plaintiffs actually were complaining of negligent supervision but had not made claims on that ground.
The appeals court next noted that the plaintiffs had conceded the 11th Amendment precluded a federal court from awarding money damages against the Commonwealth of Puerto Rico defendants in their official capacities. However, the court noted that injunctive relief could be obtained against them in their official capacities and money damages could be obtained against them in their individual capacities under 28 USC §1983.
The appeals court determined that the plaintiffs did sufficiently allege the first element of 28 USC §1983 claim, that the alleged wrongdoing occurred under color of state law.
However, the appeals court concluded that the second element of a §1983 claim, deprivation of a right secured by the Constitution or federal law, had not been sufficiently alleged. Here, plaintiffs claimed deprivation of their 14th Amendment right to procedural due process. To establish such a claim, plaintiffs must identify a protected property or liberty interest. Plaintiffs acknowledged that no liberty interest was at issue. (The court noted that a liberty interest would be implicated by fraud, dishonesty or other stigmatizing charges made against the plaintiffs.)
To establish a property interest claim, the court wrote, the plaintiff must have a legitimate claim of entitlement to the property interest. The court found that the plaintiffs had alleged three property interest claims.
The first claim was that plaintiffs had effectively been debarred for seven years from housing authority bidding. The court found that the plaintiffs had not alleged an explicit debarment or alleged that they had bid on any housing authority projects since the original bid annulment. More than one incident is needed to establish an actionable pattern and practice, the court held.
The second claim rested on plaintiffs' allegation of a property interest associated with a responsible bidder determination. The court noted that a property interest does not vest simply because the government agency has developed a responsibility-determination procedure to assist its bid-award decision making. "Award procedures are not designed to establish private entitlements to public contracts but to produce the best possible contracts for the government." Plaintiffs' "dashed hopes" of being award additional government contracts, without more, did not constitute a constitutionally protected property interest. The plaintiffs did not establish a strong enough claim of entitlement to a "responsible bidder" designation to create a constitutionally protected property interest, the court held.
Third, the plaintiffs claimed a property interest in the bid award that was annulled. The court, however, noted that it had repeatedly held that "a simple breach of contract does not amount to a constitutional deprivation of property." To hold otherwise, the court wrote, would run the risk of transforming every state commercial dispute into a constitutional case. It found no "special circumstances" present in the case to warrant departing from the rule. Rather, accepting the allegations of the complaint as true, plaintiffs at most had stated a cause of action for breach of contract.
Accordingly, because no constitutionally protected property interest was at issue, there was no basis for plaintiffs' 28 USC §1983 claim of deprivation of constitutional rights.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2008 Thelen LLP
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