In 1999, Nebraska Rubber Innovations Inc. (NRI) received a $392,000 grant from the Nebraska Department of Environmental Quality (DEQ) to establish a tire collection and recycling business, which turns used tires into crumb rubber to be remolded into new products.
The terms of the grant required NRI to match the funding, return improperly used funds and maintain appropriate financial records on how grant funds were spent.
Dennis Hvranek, NRI's president and majority shareholder, also operates a sole proprietorship known as Heartland Steel, which fabricates machinery. Hvranek, doing business as Heartland, bid on contracts to build equipment for NRI. The grant required a minimum of three competitive bids on each contract.
After NRI received two bids, Heartland would submit the last and lowest bid, and, as a result, Hvranek was awarded contracts to manufacture much of the machinery in NRI's plant. Notably, the grant did not forbid a grantee shareholder from providing, as an individual, labor and services to the grantee. (DEQ grant rules now prohibit such dealings.)
DEQ auditors looked askance at Hvranek for using his ownership interests in both companies to obtain NRI contracts through Heartland. They also believed NRI overpaid for several pieces of equipment, although Heartland built the items by staying within budget and meeting specifications, while consistently being the low bidder. Although NRI fully documented these costs, which had been set out in Heartland's bids, the auditors viewed what NRI provided as “suspicious” and apparently created only “for [DEQ's] benefit.”
Claiming insufficient documentation, DEQ disallowed NRI's expenditures for $132,000 worth of Heartland's labor and insisted that NRI return a corresponding portion of the state funding. When NRI refused, DEQ sued the company for breaching the terms of the grant. After hearing testimony and considering other evidence from both sides, the trial judge found that NRI had failed to document its expenditures for Heartland's equipment, and he ordered the company to remit $132,012.14 to DEQ. NRI appealed.
The Nebraska Court of Appeals reversed the lower court decision, rejecting DEQ's apparent motivation for bringing the lawsuit: that there was supposedly “something nefarious or untoward” about a majority shareholder in a grantee “bidding on and getting … contracts for the project” as owner of a supplier.
“In fact, the machinery … exists, it works, and it performs as it was intended,” said the court. “[G]iven the lack of a provision preventing bidding by related parties, can DEQ make ad hoc rules for documentation going beyond … the competitive bidding process that a related party has to provide to the grantee, to in turn provide to DEQ?” the opinion asked rhetorically. “DEQ cannot re-write the contract after the fact … and thus the answer to the question posed is in the negative.”
For good measure, the court noted that DEQ offered no evidence that the cost of the components produced by Heartland was unreasonable, inflated or unnecessary, “quite likely because Heartland was the low bidder … and produced a good product.”
[State ex rel. Linder v. Nebraska Rubber Innovations, Inc., No. A-06-810 (Neb. Ct. App., Apr. 8, 2008)]
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By Barry Shanoff
The columnist is a Rockville, Md., attorney and serves as general counsel of the Solid Waste Association of North America.