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Decided: March 6, 2014

After a series of mistrials, a jury finally rendered a verdict on claims of race discrimination, retaliation, and breach of contract brought by a “minority-owned” corporation surrounding the construction of a low-income housing project. On appeal, the Appellants presented a number of issues for review: (1) whether a minority owned corporation has standing to sue for race discrimination under Title VI of the Civil Rights Act of 1964 (“Title VI”); (2) whether the district court erred in awarding summary judgment dismissing one of the defendants from the alleged discrimination and retaliation claims; (3) whether the court abused its discretion in allowing certain impeachment evidence; (4) whether the court erred in deciding certain contract issues relating to Virginia’s Public Procurement Act; and (5) whether the court erred in modifying the jury’s award of contract damage.  In a lengthy opinion, the Fourth Circuit affirmed the district court’s decision in part and vacated the decision in part.

The dispute arose out of work performed by Carnell Construction Company (“Carnell”), a contractor in Danville, Virginia on the Blaine Square Project (“the project”), a large public housing venture designed to provide low-income housing to Virginia residents. The project was funded in part by a grant from the United States government to the Danville Redevelopment and Housing Authority (“Housing Authority”). Carnell was the successful bidder for an initial phase of the contract that included clearing the site, grading the land, and installing drainage and erosion systems. Carnell was a certified “minority owned business” under Virginia law because its owner was African-American. Shortly after awarding the contract to Carnell, HUD leased the project site and assigned its interest to Blaine Square, LCC (“Blaine”), a nonprofit instrumentality of the Housing Authority. Blaine agreed that the Housing Authority would continue to supervise the actual construction of the project. Carnell began work in 2008, and the relationship between Carnell and the Housing Authority deteriorated quickly as each side complained about the other’s poor performance.  After an unsuccessful mediation, the Housing Authority advised Carnell that it would not extend Carnell’s contract beyond the stipulated May 2009 completion date, requiring that Carnell remove its equipment and personnel from the project by that date, regardless of whether the work was completed. Carnell complied, but requested reimbursement for unpaid work. The Housing Authority refused to pay and declared default under Carnell’s performance bond. Carnell then filed suit based on claims of race discrimination and breach of contract. In response, the Housing Authority filed counterclaims for breach of contract. After two mistrials, the jury returned a verdict for Carnell on its breach of contract claims, but not for its discrimination claims. The district court then reduced the award for breach of contract damages. The parties filed cross-appeals.

On appeal, the Court first held that a minority owned corporation has standing to sue for race discrimination under Title VI. The Housing Authority conceded that Carnell had constitutional standing to sue, but contested its prudential standing to sue under Title VI on the grounds that Carnell was not in the “zone of interests protected or regulated by” Title VI. Under Title VI “[n]o person in the Untied States shall, on the ground of race…be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.” The defendants argue that Carnell, as a corporation, is not a person, and thus lacks a “race.” While the Fourth Circuit has not addressed this issue, other circuits have allowed corporations to establish a racial identity. For example, the Ninth Circuit held that a minority-owned corporation may establish an “imputed racial identity” to satisfy standing requirements. In the present case, the Fourth Circuit similarly held that Carnell had standing to bring discrimination claims under Title VI. Carnell was certified under Virginia law as a “small, women, and minority-owned business.” Carnell made this information public when it contracted to perform work for the Housing Authority. Therefore, the Fourth Circuit held that Carnell sufficiently demonstrated an imputed racial identity to satisfy standing requirements under Title VI.

Second, the Fourth Circuit held that the district court properly awarded summary judgment to Blaine on Carnell’s race discrimination claims, finding that Blaine did not engage in any of the alleged discriminatory conduct directly or as a principal for the Housing Authority. Carnell contested the district court’s finding on appeal, arguing that Blaine possessed sole control of the financing of the project and withheld payments from Carnell. The Fourth Circuit disagreed, explaining that Blaine was merely “a passive entity [that] would ensure that the checks would be written to [the Housing Authority] for purposes of paying contractors.” All decisions to withhold payments to Carnell were made by the Housing Authority. Furthermore, the court found that Blaine was not vicariously liable for the alleged discriminatory conduct of the Housing Authority because Blaine exercised no control over the Housing Authority. The agreement between Blaine and the Housing Authority grants the Housing Authority “sole responsibility for managing construction of the project as an independent contractor.” Moreover, the agreement expressly disclaims any formation of an agency relationship between the entities.

Third, the Fourth Circuit held that the district court abused its discretion by allowing defense counsel to use certain impeachment evidence in cross-examining Carnell’s president, Michael Scales. The contested evidence consisted of an unsigned proposal prepared by a marketing consulting group, which stated the consultant’s objective as to “[s]hape the initial story so that it is sympathetic to Carnell and critical of [the Housing Authority” and garner additional statewide support for Carnell. On cross-examination, defense counsel asked Scales whether he wanted to “shape” the evidence to “make out a race claim.” When Scales denied these accusations, defense counsel introduced the proposal as a prior inconsistent statement under Rule 613(b) of the Federal Rules of Evidence. The Fourth Circuit determined that the district court should have excluded the evidence under Rule 613(b) and Rule 403. First, the evidence was improper as a “prior inconsistent statement” under Rule 613(b) because there was insufficient evidence to conclude that the statement in the proposal was “reasonably attributable” to Scales. Scales denied recalling the proposal and did not sign the document. Upon signing and returning the consulting agreement to the consultants, Scales did not refer to any of the proposals. Second, the district court should have withheld the proposal under Rule 403 because the risk of unfair prejudice substantially outweighed the limited probative value of the evidence. The court found that the probative value of the proposal was minimal since the statements in the proposal were not fairly attributable to Scales. Additionally, the risk of unfair prejudice was “exceedingly high” by allowing the defense counsel to impeach Scales based on another person’s statement. Moreover, defense counsel relied on the evidence extensively at trial, even displaying a poster exhibit of the proposal during his closing argument.

Fourth and finally, the Fourth Circuit examined the competing breach of contract claims. The Fourth Circuit held that Carnell did not present sufficient evidence at trial for the court to determine that it complied with the notice requirements under Virginia’s Public Procurement Act (“VPPA”) to make claims for unpaid work. The VPPA requires that any contractor making a claim for unpaid work must provide written notice of each particular claim. In the third trial, Carnell erroneously failed to introduce evidence showing that it provided sufficient notice to the Housing Authority for its unpaid work claims. Under the VPPA, the Fourth Circuit held that Carnell could not state a claim for items of unpaid work for which it did not prove notice to the Housing Authority. Additionally, the Fourth Circuit affirmed the district court’s decision to reduce the amount of damages award under the contract for unpaid work claims pursuant to the VPPA’s limitation of the amount by which public contracts can be increased. Carnell did not contest that its contract increased more than the amount allowed under the VPPA, but rather asserts that the limitation on increase either does not apply to Carnell or, in the alternative is unconstitutional. The Fourth Circuit held that Carnell was subject to the VPPA through its participation in a public project. Furthermore, the court held that the VPPA’s limitation was neither a due process violation nor an unconstitutional taking. Finally, the court held that the district court properly denied Carnell’s claims for special damages because Carnell failed to adequately plead special damages in its breach of contract claims. Therefore, the Fourth Circuit affirmed the district court’s decision in part and reversed in part.

Full Opinion

– Wesley B. Lambert