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Decision No. 14,087

Appeal of SERVICE DYNAMICS, A FINE HOST CORPORATION, from a determination of the Levittown Union Free School District awarding a contract to Whitson’s Food Service Corp.

Decision No. 14,087

(March 10, 1999)

Bond, Schoeneck & King, LLP, attorneys for petitioner, Hermes Fernandez, Esq., of counsel

Ingerman Smith, LLP, attorneys for respondent district, Mary Anne Sadowski, Esq., of counsel

Shustak Jalil & Heller, Esqs., attorneys for respondent Whitsons Food Corp., Karen A. Monroe, Esq., of counsel

MILLS, Commissioner.--Petitioner appeals from a determination of the Levittown Union Free School District ("respondent Levittown" or "Levittown") rejecting its bid to provide food service to the district for the 1998-99 school year and awarding the contract to Whitsons Food Corp. ("respondent" or "Whitsons"). The appeal must be sustained.

Petitioner is a contract food service management company that provides food and beverage concessions, catering and other services at more than 900 locations in 40 states. Petitioner currently provides food services to more than 60 school districts in New York State. In its most recent fiscal year, petitioner had annual revenues of $275 million and approximately $240 million in assets. As of December 31, 1997, it had 3,250 full-time employees and 11,000 part-time or per event employees.

On or about March 13, 1998, respondent Levittown issued a solicitation for bids for the provision of food service to the district for the 1998-99 school year. The bid cover sheet specified a number of factors that would be considered by the district in awarding the contract, including, "[t]he financial stability of the [Food Service Contractor] as evidenced by the certified financial statement for 1997" (emphasis in original).

The bids were opened on April 8, 1998. Levittown received only two bids in response to its solicitation, one from petitioner, and one from respondent Whitsons, the incumbent vendor to the school district. Petitioner was the lowest bidder. At a "Special Emergency Meeting" convened on May 27, 1998, at 10:30 PM, Levittown’s Board of Education voted to reject both bids and re-bid the project. Respondent Levittown offers no explanation for this action and the minutes from that meeting, attached to its answer, are similarly unenlightening. The re-bid project was essentially identical to the original project, except that Levittown redefined "financial stability" to require "proof of having operated at a net profit for at least three of the last five years."

Levittown opened the bids on the re-bid project on June 29, 1998. Petitioner and Whitsons were again the only bidders, and again, petitioner’s bid was lower. Although petitioner submitted certified financial statements for the preceding five years, it was unable to submit proof of its profitability for three of the last five years, because, by its own admission, it has not enjoyed a profit in three of the last five years.

Levittown rejected petitioner’s bid as non-responsive on the grounds that petitioner had failed to submit proof of profitability for three of the last five years and then awarded the contract to Whitsons, the only remaining bidder. Petitioner was notified by letter dated July 16, 1998 that Levittown had rejected its bid "for not meeting specifications." This appeal ensued.

Petitioner alleges three separate causes of action. It claims that Levittown arbitrarily defined "financial stability" in a manner that excluded petitioner, the lowest bidder, and therefore denied the students, residents and taxpayers of the benefits of open and fair competition; the narrow definition of "financial stability" adopted by Levittown arbitrarily restricted competition by eliminating the sole competing bidder in favor of the incumbent vendor; and Levittown improperly disqualified petitioner as non-responsible without affording petitioner a hearing. For relief, petitioner requests that I invalidate the food service contract award to Whitsons and direct Levittown to award the contract to petitioner.

Respondent Levittown has not submitted an affidavit from any district official to explain the basis for its actions. However, in its answer it contends that it properly rejected petitioner’s bid because petitioner failed to submit proof of net profitability for three of the previous five years, and claims that it included this requirement to ensure that the district secured "a self sustaining food service program". Levittown offers no explanation for its failure to include this definition of "financial stability" in its initial solicitation. It also maintains it was not obligated to provide petitioner with a hearing because it did not find petitioner to be not responsible, but rather rejected petitioner’s bid as non-responsive. Respondent Whitsons contends that Levittown properly accepted its bid. Whitsons also claims that I do not have jurisdiction to hear this appeal, asserting that petitioner may only seek review of an award of a public contract by commencing an Article 78 proceeding.

Turning first to Whitsons procedural objection, Education Law "310 provides the Commissioner of Education with broad authority to review action taken by officials at the district level, including, "any act or decision of any officer, school authorities, or meetings concerning any…act pertaining to common schools" (Education Law "310(7)).

I find that this controversy falls within the purview of my authority pursuant to Education Law "310 to review action by a local district. Previous Commissioners have reviewed similar challenges to the public bidding process (See, e.g., Appeal of Western New York Computing Systems, Inc./Microage, 34 Ed Dept Rep 9; Appeal of Eastman Kodak Company, 32 id. 575).

Neither case cited by Whitsons in support of its claim that I lack jurisdiction over this matter stand for such a proposition. DiBerardino’s v. Rome Consol. School Dist., 134 Misc. 2d 288, simply states that an Article 78 proceeding, rather than an action for damages, is the proper vehicle for seeking judicial review of an award of a public bidding project. Neither DiBerardino nor Dellwood Foods, Inc. v. Board of Ed. Of Hendrick Hudson School District, 97 Misc. 2d 751, suggests that the Commissioner of Education lacks jurisdiction to review administratively such an award in the first instance. To the contrary, my authority to address a claim relating to a public bidding project has been judicially recognized (see, Matter of Harran Transportation v. Board of Education, 71 Misc 2d 139). Accordingly, I find that I have jurisdiction to review petitioner’s claims.

Turning to the merits, a board of education has a statutory duty to advertise for bids and award every food service contract in excess of $10,000 to the lowest responsible bidder (General Municipal Law "103[1]; Education Law "305(14)). The public bidding statutes were enacted for the benefit of taxpayers, not for the benefit or enrichment of bidders, and should be so construed and administered as to accomplish such purpose fairly and reasonably with sole reference to the public interest (Matter of Conduit & Found. Corp. v. Metropolitan Trans. Auth., 66 NY2d 144; Jered Contr. Corp. v. New York City Tr. Auth., 22 NY2d 187; LeCesse Bros. Contr. V. Town Bd. Of Williamson, 62 AD2d 28, 34-35, aff’d, 47 NY2d 960). Those statutes were designed with the dual purpose of fostering honest competition so that the municipality might obtain the best work and supplies at the lowest possible prices and also to guard against favoritism, improvidence, extravagance, fraud and corruption (Acme Bus Corp. v Board of Education, 91 NY2d 51; Jered Contr. Corp v. New York City Tr. Auth., supra; Matter of Sweet Assoc. v. Gallman, 36 AD2d 95; aff’d 29 NY2d 902).

A municipality letting a contract may fix proper standards or limitations in its proposal for bids which bidders are obliged to observe. Thus, it may establish reasonable restrictions as to the kind and quality of material to be used, or require certain reasonable standards of experience or adequate plant facilities (Edenwald Contr. v. City of New York, 86 Misc. 2d 711, aff’d, 47 AD2d 610). However, the competitive bidding provisions of General Municipal Law "103(1) are violated when a municipality manipulates the specifications to assure the award of the contract to a specific bidder or to shut out competitive bidding or permit favoritism (Matter of McNutt Co. v. Eckert, 257 NY 100, 104; Matter of Resco Equip. & Supply Corp.v. City Council, 34 AD2d 1088). Such a scheme is illegal in the absence of a showing that it is essential to the public interest (Gerzof v. Sweeney, 16 NY2d 206, 211-212).

The record establishes that, in response to its initial solicitation, Levittown received bids from only petitioner and Whitsons, the incumbent vendor, and that petitioner’s was the lower of the two. Thereafter, for reasons unexplained by Levittown, its board of education voted to reject both bids at a Special Emergency Meeting held at 10:30 PM. Levittown then re-bid the project, but altered the criteria for "financial security" to specifications that petitioner could not meet.

I find that respondent Levittown’s inclusion of its narrow definition of "financial stability" had the effect of assuring an award of the contract to Whitsons, and as such, constitutes prima facie proof that this specification was drawn in a manner to shut out competitive bidding (J.I Case Company v. Town of Vienna, 105 AD2d 1077). Respondent Levittown therefore has the burden of establishing that its specification regarding profitability is essential to the public interest (Id.).

The only explanation offered by Levittown for its decision to include this definition of profitability is its asserted need "to have a food service program which was self-sustaining". Respondent Levittown does not explain how its definition ensures this result. Under Levittown’s rigid definition of profitability, a company sustaining significant losses for its two most recent years of operation, but a small profit for each of the three preceding years would be eligible to bid. But a company enjoying substantial profits in the two most recent years of operation, but minor losses in the preceding three years would not. It is apparent from this example that rigid application of Levittown’s criteria produces arbitrary results that do not ensure a bidder’s financial security, but may have the practical effect of excluding responsible bidders. Restrictive requirements similar to the one employed by Levittown have been stricken as illegally reducing competition. (See, Matter of Construction Contractors v. Board of Trustees, 192 AD2d 265 (requirement that bidders demonstrate successful completion of two renovation projects of buildings on National Register of Historic Places within past five years was illegal); Gerzof v. Sweeney, 16 NY2d 206 (requirement that bidders demonstrate that they had constructed at least three generators with satisfactory operating experience similar to the one specified in bid documents was illegal).

Based on the foregoing, I conclude it was not essential to the public interest to exclude any bidder that did not meet respondent Levittown’s narrow definition of financial stability, especially because the competitive bidding laws vest the district with the discretion to reject the lowest bid if it properly determines that the bidder is "not responsible", a term that encompasses the notion of financial responsibility (See, Matter of Harran Transportation v. Board of Ed., 71 Misc 2d 139). Under these circumstances, respondent Levittown’s inclusion of its narrow definition of financial stability served only to reduce competition for reasons that did not inure to the benefit of the public, and was therefore illegal. Accordingly, the award of the contract to Whitsons must be invalidated (Gerzof v. Sweeney, 16 NY2d 206).

Having concluded that the contract with Whitsons must be invalidated, I must now decide whether petitioner is entitled to an award of the contract. The determination of who is the "lowest responsible bidder" necessarily involves the exercise of discretion that ordinarily is left to a district. It is not appropriate for me to usurp a district’s exercise of its discretion, absent a showing of dishonesty, fraud, collusion, corruption or bad faith in the awarding of the contract. (Matter of Progressive v. Wyoming, 90 AD2d 214).

On the record before me, however, I must conclude that respondent acted in bad faith. Petitioner was apparently the lowest bidder on the initial bid, yet respondent found it necessary to hold an "emergency" board meeting at 10:30 PM, more than a month before the contract was to take effect, to reject the bids and decide to re-bid the project. Respondent does not explain why it took this "emergency" action. Respondent then employed an arbitrary definition of "financial stability" as a criterion that it applied to eliminate petitioner from any meaningful consideration. Against these facts, respondent offers no credible, rational explanation for its actions. I therefore conclude that it acted in bad faith in altering the bid specifications. While I am always reluctant to substitute my judgment for that of a respondent school board, I am compelled to do so under these circumstances.



IT IS ORDERED that the contract for food services for the 1998-99 school year between the Levittown Union Free School District and Whitsons Food Service Corp. is annulled; and

IT IS FURTHER ORDERED that respondent Levittown award said contract to Fine Host Corporation.