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By: Thomas H. Welby Gregory J. Spaun Published: August 2020

Contractor's Failure to Exhaust Administrative Remedies Dooms Contractor's Claim

In today’s day and age, administrative determinations can be just as troublesome to a contractor’s business as criminal prosecutions or lawsuits. While these quasi-judicial proceedings may have the look and feel of court proceedings, contractors must be aware that different rules apply to these proceedings—and appeals from these proceedings.

In Matter of Sahara Construction Corp. v New York City Office of Administrative Trials and Hearings, a court used a doctrine requiring the exhaustion of administrative remedies to deny what it described as a potentially meritorious constitutional challenge to a requirement that a contractor pay restitution in full before pursuing an administrative appeal.

 

Background

In April of 2009, Sahara Construction Corp. entered into a contract with a homeowner for an extensive renovation of a residential property in Queens. The plans for the project were approved by Department of Buildings, and construction proceeded. However, as work progressed, the homeowner noticed defects and deviations from the approved plans and, by September of 2014, Sahara had abandoned the project. The homeowner had lodged a complaint with Department of Consumer Affairs, which issued a summons to Sahara for deviating from and disregarding the approved plans. After a hearing before the Office of Administrative Trials and Hearings (“OATH”), the charges against Sahara were sustained, and the hearing officer both imposed a $5,000 civil penalty, and directed Sahara to pay restitution of approximately $230,000.

Sahara attempted to take an appeal of the hearing officer’s determination within the OATH office. However, OATH’s rules require that any party taking an appeal must pay the penalty and restitution levied by the hearing officer. OATH granted Sahara’s request for a financial hardship waiver of this requirement, but pursuant to OATH’s rules the waiver only applied to the $5,000 civil penalty, and did nothing to relieve Saraha of the obligation to pay the restitution before taking the appeal. Notwithstanding, Sahara attempted to take the appeal, but the OATH rejected it because it did not conform with OATH’s requirements to pay the levied restitution prior to taking the appeal.

Sahara commenced an administrative review (Article 78) proceeding in court to challenge the OATH’s determination. OATH responded to the petition by arguing that Sahara failed to exhaust its administrative remedies, which is a precondition to mounting an Article 78 proceeding.

Decision

The motion court denied the petition, finding that Sahara failed to properly take its appeal within the OATH office by failing to “provide[] proof of payment in full of any fines, penalties or restitution imposed by the decision”. Sahara appealed to the appellate court, arguing that it sufficiently satisfied the preconditions to appeal, and that the restitution order constituted a constitutionally excessive fine.

The appellate court upheld the denial of Sahara’s petition, finding that Sahara had, in fact, not exhausted its administrative remedies because it failed to pay the directed restitution as a condition of taking the appeal. The appellate court also declined to reach the issue of whether the restitution constituted a constitutionally excessive fine because that issue was not raised to the administrative agency, which it held should have been given the opportunity to develop the factual record for judicial review.

The appellate court also took the rare step of noting that although the issue was not raised, it was bothered, as a matter of constitutional law, by the fact that the OATH’s rules did not provide for a financial hardship waiver for the restitution payment before taking the appeal. Thus, the appellate court reasoned, the OATH could impermissibly insulate itself from effective appellate review by setting a high restitution, thus limiting appeals to only those with financial means—regardless of the merits of the appeal. (However, as this issue was not fully briefed, the appellate court did not reach it and left the lower court’s decision undisturbed.)

Comment

While an administrative hearing can very much resemble a trial, be assured that a different set of rules apply. For instance, in a conventional court proceeding, you have a near unfettered right of appeal. However, in an administrative context, before undertaking any sort of appeal to a court—where the higher “arbitrary and capricious” standard, rather than the conventional “preponderance of the evidence” standard, applies—you are required to exhaust every possible step before the administrative agency.

It was rather clear from the decision that this appellate court was sympathetic to the constitutional argument that the OATH rules requiring payment of the restitution as a precondition to taking the appeal constituted an impermissible barrier to further review. Unfortunately for this contractor, because this issue was not properly raised, the contractor was left to pay nearly a quarter of a million dollars without the possibility of further review. This emphasizes that contractors in such situations need to consult with counsel experienced in appearing before, and taking appeals from, administrative agencies.

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