Central Bridge Company, LLC subcontracted with Javier Steel Corporation for steel materials and labor for seven different road projects in Kentucky. Central Bridge was to pay Javier for the labor and materials. Alternatively Central Bridge could pay third party vendors directly. Central Bridge identified Javier as a disadvantaged business enterprise (“DBE”) and used the steel subcontract to meet the “not less than 10% expenditure on economically disadvantaged individuals” to meet the DBE requirements. The total contracts exceeded $2 million. Due to changes in software, Central Bridge overpaid Javier at least $402,423 due primarily to duplicate payments and payments made directly to third party vendors providing materials and labor to Javier, for which Javier was also paid.
The case was a decade prolonged legal proceeding. The contracts between Central Bridge and Javier were in 1999 to 2002. Central Bridge discovered it overpaid Javier and then filed suit in 2004. The trial to collect the overpayment was held in July 2005 before a circuit court judge and not a jury. Nearly three years later, in March 2008, the circuit court finally ruled on the merits of the claim. Within ten days, Javier moved to alter, amend or vacate the judgment, which was not denied until October 2009, and then followed by an appeal. The appellate decision was rendered January 20, 2011.
On appeal, the appellate court concluded sufficient evidence existed to support proof of the overpayment. But Javier further defended by asserting that the DBE credit toward labor and materials had to be fraudulently reported at the state and federal levels because the payments were made directly to third parties and not to the DBE. The state court refused to consider the issue because neither the state nor federal governments were parties to the case. Only the contract between Central Bridge and Javier was at issue. Whether a DBE credit when payments were made directly to third parties was improper did not affect the issue of whether overpayments actually occurred. Moreover, the doctrine of unclean hands, a twist to Javier’s argument that Central Bridge was defrauding the government, was inapplicable. The unclean hands doctrine applies only to the parties to the contract or transaction involving those same parties. A particular party’s purported wrongdoing in the course of a transaction with a third party did not affect the rights between the existing parties. As the circuit court put it “[t]he doctrine [of unclean hands] does not repel all sinners from a court of equity, especially where there are no injurious consequences” suffered by the party asserting the doctrine, which in this case was Javier Steel. If Central Bridge in fact overpaid Javier, Central Bridge was entitled to recoup the monies regardless of any fraud Central Bridge (if any) might have committed against any third party government. Therefore, the doctrine of unclean hands did not apply or prevent Central Bridge from recovering the overpayments made to Javier.
In sum, an action to recover overpayments did not require analysis of DBE compliance.