Unique financing arrangement causes trouble for Indiana school; others be wary of any efforts which might be construed as avoiding applicable regulations.

 The Indiana Court of Appeals recently released an important opinion that discusses the impact of unique financing arrangements on public bidding requirements.

 In Alva Elec., Inc. v. Evansville Vanderburgh School Corp., 984 N.E.2d 668 (Ind. Ct. App. 2013), eight contractors (“Contractors”) brought an action against a public school corporation (“School”), claiming that the contract to renovate the school’s administrative building should have been subject to competitive bidding under Indiana Code § 34-13-4-1, et seq., and Indiana Code § 36-1-12.

 Due to reduced funding, the School moved its administrative offices into a building that was previously a warehouse. Renovation was necessary, however, before the School could move in.  After the design plans were finalized, the School discovered it did not have sufficient funds to pay for the renovation. The School met with representatives of a contractor, Industrial Contractors, Inc. (“ICI”), to discuss financing options for the renovation. 

In a new arrangement, the School proposed that the School would convey the building to an associated private Foundation, and the Foundation would contract with ICI to renovate the building. The Foundation would pay ICI with a deferred payment schedule guaranteed by a lease agreement with the School. The School told ICI that it wanted this arrangement because the Foundation was a private organization and not subject to public bidding laws. At the time of the negotiations, the Foundation was not consulted with or told of the proposal.

ICI sent a proposal to the School in which it would complete the project at a cost plus a finance charge over the five-year payment schedule. The School agreed without negotiating a price or conducting bidding.  The School then approached the Foundation and requested the Foundation’s assistance with the proposed plan. The Foundation representatives stated they would cooperate.

The Foundation then entered into a construction contract with ICI.  The Foundation president was not involved in negotiating the contract, was not aware of the payment schedule terms, and did not know how ICI was chosen to be the contractor. The Foundation executed a promissory note in ICI’s favor for the amount in the proposal, securing the note by a mortgage on the property in favor of ICI. The Foundation collaterally assigned the Foundation’s right to receive payments from the School in the event the Foundation defaulted on its payments under the contract to ICI.

The Contractors then filed suit against the School and Foundation, seeking declaratory judgment and injunctive relief. The Contractors first claimed that, pursuant to Indiana Code § 34-13-5, the renovation should have been subject to public bidding. Second, the Contractors claimed that, pursuant to Indiana Code § 24-1-2-3, the School and Foundation engaged in a scheme to restrict bidding for the project. The trial court granted the School’s and the Foundation’s motion for summary judgment and found that the renovation was not a public work project subject to competitive bidding.

The Indiana Court of Appeals reversed the trial court’s grant of summary judgment and held that the proposed scheme to finance the project was included in the definition of “public work” and “public fund,” and thus the School violated Indiana Code § 34-13-5 by not letting the project be publicly bid. The Court stated that the definition of “public work” means the “construction, reconstruction, alteration, or renovation of a public building . . . or other structure that is paid for out of a public fund or out of a special assessment.” (emphasis in original).

Even with the alternative financing structure, the Court found that the project consisted of one transaction paid for by the School using public funds. In its evaluation of the project, the Court stated that the architect was hired by the School, the architectural plans and designs were overseen by the School, the talks with ICI were led by the School, and that the School did not even inform the Foundation about the financing arrangement until well over a year into the project. As such, the renovation was one integrated project subject to the scrutiny of public evaluation and the safeguards protecting public money.

Finally, the Court emphasized that the real goal of the School’s building renovation was to fund the project with public money but to evade public scrutiny and input. Absent this scheme being authorized by the Indiana General Assembly, the Court stated that it was bound to construe legislation so as to oppose prejudice to the public interest. Thus, the Court held public policy considerations to be paramount in evaluating the impact of unique financing arrangements on public bidding.

Moving forward, schools and other regulated public entities will likely be subject to increased scrutiny regarding public bidding, even when using funding from a private foundation or other unique financing arrangement.  This case and the lessons learned from it are especially pertinent to Public Private Partnership (“P3s”), and other relatively new project delivery methods which tend to be administratively complex.  All parties involved in these projects must be aware of the rules and regulations governing their relationships with other project participants, and be wary of any efforts that might be construed as efforts to evade regulations that may apply.  When in doubt, error on the side of caution.