In an effort to prohibit discrimination and to further participation of contractors owned or controlled by women and minorities in government-funded construction projects, many state and federal government contracts, including in New York, require participation by disadvantaged business enterprise (“DBE”) contractors. In recent years, DBE programs have fallen prey to fraudulent practices by DBE and non-DBE contractors alike who conspire with each other to feign compliance with DBE requirements. A recent decision from Justice Freed of the Supreme Court, New York County presents an interesting case-in-point.
In the late 1990s, the City of New York (“the City”) sought bids on the reconstruction of the Honeywell Street and Queens Boulevard Bridges. Because the U.S. Department of Transportation (“US DOT”) provided the majority of funding for the project, the general contractor receiving the contract was required to hire a certain percentage of DBE subcontractors for the project. In 1999, the City awarded the Perini Corporation with the contract based on Perini’s plan for meeting DBE requirements, which Perini had submitted to the City during the bidding process.
In 2003, Perini sued the City for $16 million in equitable adjustments in connection with certain work conditions and related delays on the project. In December 2008, while Perini’s lawsuit against the City was pending, two former Perini officers were indicted on charges alleging that they conspired with DBE and non-DBE subs to implement the DBE program fraudulently. The indictment was unsealed in March 2009 just as the parties were wrapping up the discovery phase of the lawsuit.
In September 2009, the City sought to assert counterclaims against Perini based on the indictment and to extend the discovery phase of the lawsuit, presumably to uncover further evidence of Perini’s alleged DBE-related fraud. In March 2010, the Court granted the City’s motion over Perini’s opposition, and the parties spent another two years in discovery on the City’s counterclaims.
In or around June 2012, Perini moved to dismiss the City’s counterclaims on statute-of-limitations grounds. Based on documents presumably disclosed after the court’s decision allowing the City to assert its counterclaims and extending the discovery phase of the lawsuit, Perini argued that the City knew or should have known about the alleged fraud by as early as 2001. Among the documents relied upon by Perini were: (i) a November 2002 letter from the City’s engineer documenting an investigatory meeting with the NY City and State Departments of Transportation and stating that Perini “contrived paperwork in an effort to prove higher DBE participation”; and (ii) a September 2004 US DOT press release stating that Perini’s “scheme involved [a DBE sub] acting as a ‘front’ DBE under three NY City DOT construction projects in which [a non-DBE sub] actually performed the subcontracted work, while [the DBE sub] submitted fraudulent invoices for the associated labor and materials to Perini.”
The Court granted Perini’s motion and dismissed the City’s counterclaims, finding that the City “failed to address or refute their knowledge of the US DOT press release or [the engineer’s] inspection reports which were sufficient to have put a reasonable person under a duty to make inquiry regarding the alleged fraudulent scheme.” Because a fraud claim must be asserted within two years of the date the fraudulent act was or could have been discovered, the City’s counterclaims were time-barred.