Morris-Griffin Corp. v. C & L Serv. Corp.

• Decision Date: 16 August 2010
• Docket Number: Civ. No. 2:10cv298
• Citation: 731 F.Supp.2d 488
• Court: U.S. District Court — Eastern District of Virginia
• Parties: MORRIS-GRIFFIN CORPORATION, Plaintiff, v. C & L SERVICE CORPORATION, Defendant.

731 F.Supp.2d 488

MORRIS-GRIFFIN CORPORATION, Plaintiff,

v.C & L SERVICE CORPORATION, Defendant.

Civ. No. 2:10cv298.

United States District Court,

E.D. Virginia,

Norfolk Division.

Aug. 16, 2010.

Cathy Ann Hinger, Paul Arthur Kaplan, Womble Carlyle Sandridge & Rice PLLC, Washington, DC, Conrad Moss Shumadine, Willcox & Savage PC, Norfolk, VA, for Plaintiff.

Samuel Warrenton Meekins, Jr., John Frederick Sawyer, Wolcott Rivers Gates, Virginia Beach, VA, for Defendant.

ORDER

ROBERT G. DOUMAR, District Judge.

This matter comes before the Court on a Motion for Temporary Restraining Order and Preliminary Injunction filed by Plaintiff Morris-Griffin Corporation ("MGC") on June 24, 2010. Plaintiff seeks to enjoin Defendant C & L Service Corporation ("CLS") from withholding payments allegedly due under the parties' subcontract agreement, and to require CLS to restore MGC's access to a joint account.

The Court finds that MGC and CLS deliberately procured a government contract that violated applicable federal regulations, including 13 C.F.R. § 125.6(a) and 13 C.F.R. § 121.103. The parties' current dispute is a direct result of these violations and of CLS' claimed efforts to bring the parties into compliance with applicable federal regulations. The Court cannot enforce the parties' subcontract, even though CLS through Barbara Moore, its principal officer, has blatantly violated the terms and conditions of the subcontract with MGC, for it is plainly contrary to law. See Paul Arpin Van Lines, Inc. v. Universal Transp. Servs., Inc., 988 F.2d 288, 290 (1st Cir.1993); Smithy Braedon Co. v. Hadid, 825 F.2d 787, 790 (4th Cir.1987). The Court further finds that MGC is barred from injunctive relief by the doctrine of unclean hands. See Johnson v. Yellow Cab Transit Co., 321 U.S. 383, 387, 64 S.Ct. 622, 88 L.Ed. 814 (1944) ("[A] federal court should not, in an ordinary case, lend its judicial power to a plaintiff who seeks to invoke that power for the purpose of consummating a transaction in clear violation of law."); United States v. Felici, 208 F.3d 667, 670-71 (8th Cir.2000) ("The doctrine of unclean hands is an equitable doctrine that allows a court to withhold equitable relief if such relief would encourage or reward illegal activity."). Finally, the Court finds that the relief MGC requests goes beyond a mere injunction to preserve the status quo, and thus is not permitted under Merrill Lynch v. Bradley, 756 F.2d 1048 (4th Cir.1985). For these reasons, MGC's Motion for Temporary Restraining Order and Preliminary Injunction is hereby DENIED.

I. FACTUAL AND PROCEDURAL BACKGROUND

The federal government sets aside approximately one quarter of its annual procurement budget for the procurement of goods and services from small business concerns (SBCs). Many of these SBCs, standing alone, lack the resources or expertise to carry out these set-aside contracts. Accordingly, the government permits SBCs to team up with larger companies in order to perform their set-aside contracts. This case involves a dispute between a contractor and a subcontractor on an SBC set-aside contract.

1. The HUD Contract

MGC is a minority-owned firm with over twenty years of experience in the mortgage loan servicing business. (Compl. ¶ 18.) MGC's President is Theodore Griffin ("Griffin"). (Compl. ¶ 22.) Until 2007, MGC qualified as a "socially and economically disadvantaged" SBC under § 8(a) of the Small Business Act, 15 U.S.C. § 637(a). (Compl. ¶ 18-19; 21.) CLS is a minority-owned firm that qualifies as a socially and economically disadvantaged SBC under § 8(a). (Compl. ¶ 21.) CLS' President is Barbara Moore ("Moore"). (Compl. ¶ 22).

In 2003, the Department of Housing and Urban Development ("HUD") opened bidding on a loan servicing support services contract. (Compl. ¶ 19.) This contract was set aside for a socially and economically disadvantaged SBC. ( Id.) MGC teamed up with First Madison Services, Inc. ("First Madison") and successfully bid on the contract. ( Id.) MGC served as the prime contractor and the eligible socially and economically disadvantaged SBC, and First Madison provided the majority of the loan servicing support services. ( Id.) The contract was apparently completed successfully.

In August 2007, HUD put the loan servicing contract up for rebidding. (Compl. ¶ 21.) By this time, MGC's revenues had grown to the point that it no longer qualified as a socially and economically disadvantaged SBC. ( Id.) Griffin approached Moore about a joint MGC-CLS bid on the HUD contract. (Compl. ¶ 22.) Griffin knew Moore personally, and felt that he could work with her. ( Id.) Griffin also felt that CLS "would not be a competitor to Morris-Griffin in the loan servicing field." (Griffin Test.) ¹ In an echo of the priorarrangement between MGC and First Madison, the parties agreed that CLS would serve as the prime contractor and the qualifying SBC, and MGC would serve as a subcontractor and provide key services such as information technology ("IT") support. (Compl. ¶ 23.)

Notably, federal regulations place restrictions on SBC teaming agreements. In a set-aside service contract, at least fifty percent of all personnel costs must be incurred for payment of the SBC's employees. See 13 C.F.R. § 125.6(a). Additionally, a non-SBC subcontractor cannot perform the "primary and vital requirements of a contract," and the SBC cannot be "unusually reliant" on the subcontractor. See 13 C.F.R. § 121.103.

Flying directly in the face of these restrictions, MGC and CLS contemplated a business relationship in which MGC would take on a leading role. CLS had "no prior experience in the mortgage loan servicing industry and no capacity to provide the related and necessary IT or accounting services for HUD." (Compl. ¶ 22.) In fact, at the time, CLS was operating as a "janitorial and a maintenance firm." (Griffin Test.) Similarly, MGC "had the financial resources to fund the start-up of the HUD contract performance, while CLS did not." ( Id.). The Small Business Administration (SBA) initially rejected the parties' bid based on CLS's lack of loan servicing experience and poor financial standing. (Compl. ¶ 24.) The SBA only reversed course after HUD's contracting officer called and expressed "confidence in MGC's capabilities based on its performance of the prior contract." ( Id.)

HUD ultimately awarded the contract to CLS in September 2007. The contract between HUD and CLS (the "HUD Contract") is a fixed-price, one-year contract commencing on October 1, 2007, subject to options for renewal by HUD. (Compl. ¶ 25.) It has been renewed twice. ( Id.)

Unsurprisingly, MGC provided "the bulk of the human and financial capital needed to execute the HUD Contract." (Compl. ¶ 29.) MGC is currently the sole signatory on a number of important third-party contracts, including a lease for a loan servicing center in Tulsa, Oklahoma. (Compl. ¶ 30.) MGC also paid for the computer servers, network hardware, and software needed to perform the HUD Contract. ( Id.)

2. The Subcontract

The relationship between MGC and CLS is governed by a Subcontract Agreement (the "Subcontract") that the parties entered into on December 28, 2007. (Compl. Ex. 1). Its relevant provisions can be summarized briefly. The Subcontract identifies MGC's President, Theodore Griffin, and CLS's President, Barbara Moore as "Key Personnel." (Compl. Ex. 1 at § 2.6.) These Key Personnel are responsible for the "development, adoption and implementation of organizational policies and procedures regarding the" services provided under the HUD Contract.² ( Id.)Payments accruing from HUD must be deposited in a "Contractor Master Account," a Wachovia bank account. ( Id. § 3.2.2.) Signed approval from both Key Personnel is required for any disbursement of funds from the Contractor Master Account.

For purposes of the present dispute, one of the most important provisions in the Subcontract is its budgeting provisions. Under the Subcontract, payment of monthly costs and expenses must be made in accordance with an approved budget, unless otherwise approved by the Key Personnel. (Compl. Ex. 1 at §§ 3.1.1, 3.1.2.) At the end of the year, however, the parties can reconcile their actual expenses with the monthly payments made for the year. ( Id. § 3.1.3.) To the extent that either party's actual costs exceed monthly payments, that party is entitled to payment from gross profits. ( Id.) In other words, expenses in excess of budgeted amounts are not payable on a monthly basis without specific approval, but these expenses are payable at the end-of-the-year reconciliation.

One additional budgeting provision in the Subcontract bears mention. As noted previously, federal regulations require at least fifty percent of all personnel costs to be allocated for payment of SBC employees-in this case, CLS's employees. See 13 C.F.R. § 125.6(a). In a reflection of this requirement, the Subcontract contains a provision stating that CLS

shall at all times during the term of the Contract bear responsibility for paying no less than fifty-one percent (51%) of all direct and indirect costs and expenses incurred in performing all services required under the Contract, and [MGC] shall bear responsibility for paying the remainder of such costs and expenses, and that the Budget shall at all times during the term of the Contract provide sufficient funds from the Contractor Master Account to reimburse [MGC] for all of such costs and expenses.

(Compl. Ex. 1 at § 3.1.6).

The Subcontract contains a detailed procedure for dispute resolution. The Subcontract is "governed by and construed in accordance with all applicable federal laws and regulations, and, to the extent applicable, the laws of the Commonwealth of Virginia." (Compl. Ex. 1 at § 12.12.) The "Parties agree that if any dispute arises under [the Subcontract], they will" first attempt to resolve their dispute through mediation. If mediation proves unsuccessful, the "Parties agree that the dispute shall be settled by arbitration in...