By Frank Parlato, The Niagara Falls Reporter
The time is coming, Sept. 3 to be exact, when perhaps the most high profile case in this area – with $100 million or more at stake – will be heard by the New York Supreme Court Appellate Division—Fourth Department.
It’s an appeal of an order of State Supreme Court Justice Catherine Nugent Panepinto on the matter of Hornblower Yachts, LLC., versus the New York State Office of Parks Recreation and Historic Preservation and Maid of the Mist Corporation.
Judge Panepinto ruled on Aug. 29, 2013 that New York State Parks was right to allow James Glynn of the Maid of the Mist Corporation to operate his Niagara Falls boat tours without public bidding for the next 30 years, based on his 2002 license agreement with the state.
Hornblower argued that changes made in Glynn’s license should have triggered a public bidding process.
At the heart of the case is the public bidding law itself, and is colored by the fact that Hornblower offered $100 million more than Glynn, which the state refused to consider.
Hornblower brought its action under Article 78 of the New York Civil Practice Law and Rules, suing New York Parks, Maid of the Mist and the New York Power Authority, which owns land where Glynn recently built new storage docks.
Since 1972, Glynn’s Maid of the Mist Corp has had exclusive license to operate boats in the Niagara Falls State Park. Glynn also had, from 1972 until 2013, a license on the Ontario side for a similar boat tour, granted by the Niagara Parks Commission.
In 2012, following a two-year series of stories in this publication, the Ontario Ministry of Tourism ordered the NPC to conduct an open bidding process on the Ontario side. Half-a-dozen companies submitted bids. Hornblower won and is paying approximately 22 percent of boat tour sales to Canada.
Glynn was paying four percent in New York.
Once Glynn lost his Canadian license, he could no longer conduct boat tours in New York without changes to his NY license since winter storage docks were located in Canada.
Rather than put it out to bid, New York negotiated with Glynn to “amend” his license in 2013 to permit him to build a $32 million winter storage dock at the bottom of the gorge outside the state park, on NYPA land.
Judge Panepinto didn’t rule on whether giving Glynn land for a dock made it a new license or a grave enough amendment, which should trigger a public bidding process. She simply deferred to state parks’ decision that it was an inconsequential amendment to Glynn’s old (2002) license and therefore, if parks said it did not require public bidding, she would defer to their opinion.
Glynn’s sweetheart deal
Hornblower’s attorney, Edward G. Kehoe of King & Spalding, an international law firm, will make the oral argument before the appellate court. Locally Hornblower is represented by John P. Bartolomei of Niagara Falls.
At the heart of the appeal is that Panepinto erred in deferring to State Parks because, they argue, Parks illegally circumvented the public bidding law which was clearly triggered by two facts: One: Glynn could no longer operate without major changes in his license. Two: Once these changes were approved, a number of companies could provide boat tours.
Their argument is buttressed by the fact that the only reason Glynn avoided public bidding in his original 2002 license was State Parks claimed he had to have the Canadian license since it was impossible to build winter docks on the New York side because of the geographical contour and ice flows.
Referring to the agreement Glynn got in 2002, Angela Berti, then-spokeswoman for New York State Parks, said, “No bids were taken because the Canadian agreement (makes Glynn) a ‘sole source’ provider’ because he has a lease on the Canadian side that allows (N.Y.) Maid of the Mist Corporation to dock its boats on the Canadian side.”
Glynn’s 2002 license, interestingly, was a 40-year agreement. He contributed $5 million out of a $25 million State investment into the construction of a new Maid of the Mist souvenir store which Glynn operates; new, high-speed elevators leading down to his boats, which he controls, and the elimination of the observation tower, which diverted tourists and used up elevator space otherwise employed to bring people down to his boat tours.
State Parks also handed Glynn control of the its observation deck, and dropped his rent for his boat tours from 10 percent (which he had paid since 1972) to four percent. This 60 percent decrease in rent made up for Glynn’s $5 million contribution within seven years (2009) of his 40-year license.
State Parks also, as part of the deal, allowed Glynn to collect 75 percent of revenue for the state-owned observation deck – for manning the ticket booths. Formerly the state collected 100 percent of their observation deck revenue.
The 2002 license for Glynn wound up as one where State Parks, as landlord, paid the tenant, Glynn. None of this was made public at the time.
After the rent reduction, the money Glynn earned operating the observation deck (about $750,000 from year one) was more than double the four percent (about $350,000) Glynn paid on boat tours, according to his own projections included in the license agreement filed with State Parks.
In Canada, Glynn paid 15 percent or about $3 million per year, for his boat tours.
(Hornblower now pays more than $10 million per year in Ontario).
Curiously, also, in 2002, when Glynn’s sole source license was signed, state officials were aware that Glynn’s Canadian license was set to expire in 2009. His Canadian license was, they claimed, the sole reason why only he could have the New York license.
New York law provides that sole source licenses be granted for the shortest duration necessary – in Glynn’s case, seven years, or up until the time Glynn’s Canadian lease expired. Somehow State Parks granted Glynn a 40-year license, until 2042 — or 33 years beyond the expiration of his Canadian lease.
On the surface, this flies in the face of New York State Finance Law, Section 163, which reads, “The term of a single source procurement contract shall be limited to the minimum period of time necessary to ameliorate the circumstances which created the material and substantial reasons for the single source award.”
Enter the Reporter
Fast forward to 2009, when a series of stories appeared in the Niagara Falls Reporter revealing that Ontario’s Niagara Parks Commissioners misled Ripley Entertainment about their rights to bid for boat tours Glynn operated in Canada.
The Reporter uncovered that, while commissioners were misdirecting Ripley, they were secretly speeding up drafting a new, 25-year license for Glynn, more than a year ahead of schedule. The Reporter revealed that this renewal included a cleverly crafted, “hidden” reduction in Glynn’s Canadian rent by more than $600,000 per year, something not entirely dissimilar to what happened in New York in 2002.
Once exposed, the outcry from the Canadian public was severe and the Ontario Ministry of Tourism ordered Glynn’s 2009 Canadian license be revoked and put out to bid in 2011. The Tourism Minister also ordered the firing of 11 NPC commissioners and two longtime managers, including its general manager, all of whom were involved in the Glynn license arrangements, making it one of the most significant scandals in the NPC’s 125-year history.
Even more significantly, competitive bidding resulted in a $300 million net gain for the people of Ontario over what they would have had with the Glynn deal.
In the two-nation competition for tourist dollars, Ontario got $10 million more per year to use to improve their parks. They got fair market value for their docks in their park, which brings us back to New York.
After Glynn lost to Hornblower in Canada, New York State Parks’ argument that Glynn had to have the New York boat tours because he had the Canadian docks was no longer true.
Without his winter docks, Glynn would be out of business. If nothing were done to help Glynn, Hornblower would take over the New York boat tours by the same reasoning that gave Glynn sole source status in 2002. Hornblower now had the Canadian winter docks.
At this point, state parks and Gov. Andrew Cuomo (prompted by a spate of elected officials clamoring to help Glynn) stepped in and determined that there was land to build docks after all – on NYPA land – where the Schoellkopf Power Plant stood before it collapsed in 1956.
Glynn was granted the right to build winter docks. Cuomo called it a “special circumstance,” saying the loss of Glynn’s business would be incalculable to the public. Glynn’s New York rent was raised from four to 8 percent which ended the arrangement of state parks paying their tenant to operate his concession to one where Glynn pays in effect zero rent: After collecting the revenue (more than $1 million in ticket sales) for the observation deck, and paying eight percent on boat sales, Glynn’s new payment is about equal to what he earns from the observation deck.
The Hornblower appeal
Whether this is a classic “sweetheart deal” does not figure into the appeal, nor does the fact that Hornblower offered to pay $100 million more than Glynn.
The argument is simply whether Justice Panepinto erred in deferring to the State Parks decision to call the changes in the license an amendment to Glynn’s 2002 license rather than a new license.
Hornblower’s argument that Glynn’s new winter storage docks are proof that what State Parks deemed “impossible” in 2002– to construct a winter storage dock in New York – was not impossible after all. Once it was determined that docks could be built, it should have gone out for public bidding, they say.
While the State admits that without this change, it would not have been possible for Maid to continue performing under the original contract, the state argues that building a $32 million dock is akin to a “change order” that does not “alter the identity” of the original 2002 contract, and is not consequential enough to trigger public bidding.
Hornblower argues, “It is difficult to understand how they can simultaneously argue that this critically important and material amendment is inconsequential.
“There is no principled way to reconcile State Parks’ past positions with its contradictory current positions, unless the misguided principle is to protect MaidCo from competition.”
Hornblower argued in filings, pointing to precedents that indicate a public agency’s power to modify a public contract “is not a grant of authority to make a new or different contract without complying with the competitive bidding statutes.”
If a “different or new contract [is made] without complying with the competitive bidding statutes it is void and unenforceable. The purpose of this rule is to safeguard against the extravagance or corruption of officials as well as against their collusion with vendors,” Hornblower argues.
As a means of diminishing the $100 million better offer, State Parks was dismissive of Hornblower; calling their offer “speculative” and saying the Glynn deal is the best the state could make.
“Hornblower is simply behaving as would be expected of a self-interested private corporation, seeking to eliminate its competitor and favorably positioning itself for future negotiations with State Parks for the resulting business opportunity,” State Parks wrote.
Hornblower rebutted, saying the only party that insisted New York State “take its word for it” is Maid of the Mist.
Citing case law, Hornblower argued, “The purpose of New York’s bidding requirements is that no vendor should be taken at its word, but rather all promises must be tested by bidding. Absent competitive bidding we have no way of knowing what is ‘the best agreement possible.’ (Signacon, 32 N.Y.2d at 416, 1973).
A “fair bidding process is what Hornblower seeks, and it is all that Hornblower has ever sought,” Hornblower wrote in their appeal. “The fact that Maid of the Mist is suddenly willing to pay $32 million for a docking facility that becomes the property of the State—while at the same time sharply increasing its payments to the State— proves that New York State certainly did not get best value in the 2002 license.”
Hornblower’s offer to pay $100 million more, whether speculative or not, suggests New York is not getting best value today.
There is enough at stake perhaps to dwarf the $32 million Glynn invested in docks should it go to bid. Whether Glynn would be reimbursed if bidding is allowed, and Glynn lose the bidding, is a matter to be determined later.
The $100 million Hornblower offered might not even be the best offer bidding may produce which suggests that if the boat tours do not go up for bid, the state left a lot of money on the table.
There is no time line for the Appellate court to make its decision, but a decision on whether the boat tour license must go out to bid might come within weeks or months.
Excellent overview of this interesting lawsuit. This is an important decision. Public contracts should of course be put out to bid.