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Board of Education v. Hoek

Decided: June 29, 1962.


For reversal and remandment -- Chief Justice Weintraub, and Justices Jacobs, Francis, Hall, Schettino and Haneman. For affirmance -- None. The opinion of the court was delivered by Schettino, J.


Plaintiff instituted this action to recover profits on certain "cost plus" contracts, awarded without public bidding, for work performed in Asbury Park schools from September 25, 1952 through September 25, 1958. Defendant Hoek was plaintiff's secretary-business manager during the period in question and defendant Matthews is a carpenter-contractor who performed work under the contracts.

The pretrial order did not serve to crystallize the issues. With the aid of the complaint, however, it seems clear that

plaintiff sought recovery from defendant Hoek on four theories: first, that Hoek had breached his statutory duties by concealing from plaintiff the fact that defendant Matthews was overcharging on his cost plus contracts; second, that Hoek conspired with Matthews to defraud plaintiff by overcharging profits and to conceal such overcharges; third, that in violation of his statutory duties and with intent to avoid the bidding statute pertaining to contracts for repairs over $1,000, Hoek divided large projects into smaller components and concealed that fact from plaintiff so as to make it appear that contracts for repairs and enlargement costing less than $1,000 per job were involved; and fourth, that Hoek conspired with Matthews to avoid the bidding statutes by so dividing and splitting large repair contracts.

In respect to damages plaintiff alleges that Hoek is liable for all profit payments illegally disbursed in excess of 10% of cost on all contracts. (These payments will hereafter be referred to as "profit overcharges.") With respect to the allegedly "split" contracts, plaintiff seeks to recover all profits realized thereon on the theory that such contracts were illegal.

During the course of the trial, Matthews entered into a settlement with plaintiff for $1,750 in return for a covenant not to sue. Thereafter, the case was prosecuted against Hoek alone and culminated in a verdict for plaintiff in the sum of $10,292.98, less $1,750, the amount of Matthews' settlement. After judgment was entered conforming thereto, the trial court denied Hoek's motion for a new trial. It then modified the judgment to read $10,292.98, marked satisfied as to 50% representing Matthews' proportionate share. On Hoek's appeal, the Appellate Division reversed and directed entry of judgment for Hoek. 66 N.J. Super. 231 (1961). We granted plaintiff's petition for certification. Its contention is that the trial court's judgment should be reinstated or at least the case should be remanded for a new trial on all issues. Hoek, of course, urges affirmance

of the Appellate Division. This posture makes necessary our consideration of all the questions passed upon by the Appellate Division as well as other aspects of the many issues involved.

The occasion of Hoek's initial dealings with Matthews took place in 1948. In the course of his ordinary duties as business manager, Hoek examined the physical condition of the High School and discovered that a number of window sills were rotting. His attempts to remedy this condition came to the attention of plaintiff's then president, Louis Farmer. Farmer, a professional architect, indicated that a carpenter should be engaged to properly replace the sills and recommended Matthews to this end. Thereafter and throughout the years in question, Matthews' dealings with plaintiff were almost exclusively through Hoek. The parties agree that Matthews' work proved satisfactory and that whenever the need arose for a skilled carpenter, he was called. No one else was ever contacted, according to Farmer, because that "would be a poor way to show a man how much we appreciated what he did do."

From 1948 to 1950 Matthews submitted vouchers for his work, describing in general the particular project completed and listing the total amount charged. After Board members discussed this practice in the summer of 1950, plaintiff directed Hoek to require a complete breakdown of charges on all contracts and to negotiate contracts with Matthews on a cost plus 10% profit basis. Hoek conveyed this information to Matthews and the latter originally conformed to the practice, including on each voucher, on a line designated "Profit and Overhead," the figure "10%" and a dollar figure which equalled 10% of cost. In February 1951 Matthews submitted a group of vouchers properly conforming to the directed practice but containing one voucher which did not list any profit percentage figure. The profit actually charged and listed on the voucher amounted to 15% of cost. Although Matthews resumed the directed practice for a while after this incident, he discontinued

listing the percentage figure in 1952. From August 1952 on, with isolated exceptions, the actual profit charge amounted to 20% of his cost.

There is conflicting testimony as to whether plaintiff was apprised of the increased profit charges. Hoek said that he may have spoken with Matthews about the increased profit charge and that Matthews possibly said, "Look, I feel I have to make a bit more money, and I will still be within the price." But there was no doubt in Hoek's mind that he brought to plaintiff's attention at a Board meeting both that Matthews was no longer listing the profit percentage figure and also that the profit charge was increased above 10% of cost. According to him, Farmer commented that the increase was perfectly agreeable in view of the increasing prices, and no other Board member objected. On the other hand, two members of the Board testified that plaintiff had never been informed about the change in procedure and amount of profit charge. No entry appears in the minutes of the Board meetings recording such a change in procedure although Hoek was the secretary.

Matthews' vouchers were submitted and intermingled with vouchers of other contractors, and certain Board members spent a portion of each meeting reviewing all vouchers. Hoek and Farmer said this procedure consumed as much as a half hour of each meeting and that the vouchers were examined in detail as to their breakdown. In contrast, the Board members who actually did the examining said they had little opportunity to do more than leaf through each group of vouchers.

There is no dispute that on top of each group of vouchers submitted to plaintiff for approval was a certification by Hoek that he had examined the vouchers and found them to be true and correct. Until 1952 or 1953 Hoek would submit all of the vouchers to the finance committee composed of three Board members. But thereafter they were submitted for approval only to the entire Board.

As specified by statute, the duties required of defendant, as plaintiff's secretary and business manager, are as follows:

"The secretary shall be the general accountant of the board and shall preserve in his office all accounts, vouchers, and contracts relating to the public schools. He shall examine and audit all accounts and demands against the board. Every such account or demand, except for salaries, exceeding $5.00 shall be verified by affidavit or contained or have annexed thereto a signed declaration in writing to the effect that such account or demand is correct in all its particulars, that the articles have been furnished or services rendered as stated therein and that no bonus has been given or received on account thereof." N.J.S.A. 18:6-34.

"All plans and specifications for the erection, improvement, or repair of public schoolhouses shall be drawn by or under the supervision of the business manager, if there is one, and shall be approved by the board.

The business manager, if there is one, shall supervise the construction and repair of all school buildings, and shall report monthly to the board the progress of the work. Repairs not exceeding the sum of one hundred dollars may be ordered by the business manager, and repairs not exceeding the sum of five hundred dollars may be ordered by the committee of the board having charge of the repair of school property, without the previous order of the board and without advertisement.

The business manager, if there is one, shall superintend all advertisements for bids and the letting of all contracts.

He shall inspect all work done and materials or supplies furnished under contract, and, subject to the approval of the board, shall condemn any work and reject any material or supplies which, in his judgment, do not conform to the specifications of the contract therefor, and shall perform such other duties as may be required by the board." R.S. 18:6-47.

The bidding statute, as originally enacted, read as follows:

"The board shall, prior to the beginning of each school year, cause advertisement to be made for proposals for furnishing supplies required in the schools and by the board during the ensuing year. If other and further supplies are required during the year, they shall be purchased in like manner; but the board may at any time authorize the purchase of supplies to an amount not exceeding two hundred and fifty dollars without advertisement.

Textbooks and kindergarten supplies may be purchased without advertisement.

No contract for the building of a new schoolhouse or for the enlargement of an existing schoolhouse shall be entered into without

first advertising for proposals therefor. No contract for the repairing of an existing schoolhouse at a cost of more than five hundred dollars shall be entered into without first advertising for proposals therefor.

The advertisements required by this section shall be made under such regulations as the board may prescribe."

In 1949 the section was amended to increase the minimum amount as to supplies to $500 and as to repairs to $1,000. L. 1949, c. 150, p. 533. The amounts were further raised by L. 1957, c. 174, p. 615, effective August 8 of that year, to $1,000 for supplies and $2,000 for repairs.

Based upon these facts plaintiff asserted that Hoek was liable for profit overcharges. Subsequent factual emphasis is directed primarily to the contention that Hoek and Matthews conspired to avoid the bidding statute by splitting large contracts to make them appear as jobs costing less than $1,000, and thereby to defraud plaintiff. Each year Hoek, usually in company with Farmer, would review plans, inspect the buildings in the school system and prepare reports estimating the nature and extent of maintenance work which would be required for the next fiscal year. The reports would then be submitted to plaintiff for use as a basis for budget planning. Some of the projects in issue were expressly included in these reports but many were not. The school district budget figures for maintenance ran into sums in excess of $50,000 per fiscal year, except for 1952-1953 when the figure was approximately $34,000. When contrasted with total expenditures for that purpose and expenditures made for carpentry work, these figures are significant. For example, in the fiscal year 1956-1957, $97,922 was estimated in the budget for total repairs and replacements. Cash expenditures actually totaled $133,158.09. And during the same period, the cost of work performed by Matthews alone was $24,945.89. Yet none of the latter work was advertised. One of the reasons for this, according to Hoek, was because such work could not be anticipated.

As long as the statute required public bidding for repairs in excess of $500, none of the vouchers submitted by Matthews was for an amount in excess of that sum. After the statutory maximum was increased to $1,000, Matthews sometimes submitted vouchers for sums in excess of $500 but never for more than $1,000. Certain members of the Board from time to time questioned the vouchers submitted by Matthews, but there is testimony to the effect that Hoek would assure them that no bidding was necessary either because the work was of an emergency nature and could not be anticipated or the vouchers pertained to separate jobs costing less than $1,000 per job. Hoek testified to the effect that Farmer justified the non-bidding on the grounds that the work was of a specialized kind not requiring bidding.

Plaintiff introduced into evidence all or substantially all of the vouchers submitted by Matthews during the period in issue. Those vouchers which were asserted to represent large contracts which had been split into small dollar amounts so as to avoid the statutory requirement were collected according to the large contract they allegedly represented and introduced as Exhibits P-28, P-32 through P-48 and P-51. The remaining vouchers were collected according to the fiscal years in which they were submitted and introduced as Exhibits P-7, P-8, P-10, P-12, and P-13 to prove alleged profit overcharges with respect to them.

Plaintiff contends that the large contracts are evident primarily from an examination of the vouchers comprising Exhibits P-28, P-32 through P-48 and P-51. A short description of a few of these exhibits is instructive. Thus, Exhibit P-28 included six vouchers dated April 20, April 23, May 3, May 18, May 29 and June 11, 1953 totaling over $1,500. These represented work performed in the construction of a storage garage under the football stadium for a school bus and other equipment. Exhibit P-32 is made up of seven vouchers representing work allegedly performed

on consecutive days in the construction of closets and shelves in various places in the Bradley School. The vouchers are dated December 31, 1952, January 8, January 11, January 16, January 22, January 30 and February 2, 1953, and totalled over $2,000. Exhibit P-33 consisted of three contracts which were for the removal of old and the installation of new maple floors in certain classrooms in the High School. They were dated June 22, June 26, and June 30, 1953 respectively and totaled over $1,000. And Exhibit P-34 represented work performed in making certain changes in the High School library at a cost for carpentry of more than $2,500.

The bulk of the library work was performed during the months of July and August of 1953 and had been recommended one year before in an evaluation report made by the Middle States Association of Secondary Schools and Colleges. Nevertheless, Farmer, testifying for Hoek, indicated that the project only became crystallized as work progressed and that a workroom in the library had been decided upon only when the librarian made a request therefor after the library project was "pretty near completion." In contrast, the librarian subsequently testified that she had been out of the State at all times while the library work was in progress and that in fact the Middle States Association report had recommended the workroom.

Most of the other exhibits involved carpentry work such as constructing closets, shelving, doors, bulletin boards, walls, windows and trophy cases. Not all of them presented a pattern as clear as those set forth above, however. Hoek contends that they constitute such an unrelated mixture of jobs (one voucher represented in part the construction of a playhouse in the kindergarten; another involved the repair of a seesaw), that they are obviously not part of any one project. Furthermore, he would have us declare that the work provided "equipment" ...

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