District Court must abstain from taking jurisdiction over claim for

Did the U.S. District Court for the Western District of New York err when it halted the New York State Department of Labor's ongoing administrative proceedings against the plaintiff? Did the court err when it ordered the Department of Labor to rescind notices of withholding entered against the plaintiff?

In Diamond "D" Construction Corp. v. The New York State Department of Labor, et al. (docket number 01-7055), the defendant asked the U.S. Court of Appeals for the Second Circuit to vacate a preliminary injunction entered by the U.S. District Court for the Western District of New York. The injunction halted the Department of Labor's ongoing administrative proceedings against the plaintiff.

After a review of the facts, the Second Circuit determined that the "district court should have abstained from taking jurisdiction over the claim for injunctive relief." Hence the court vacated the order of the district court and remanded the case for further proceedings.

Case Background

The plaintiff, Diamond "D" Construction Corp., is a contractor that earns significant revenue from public contracts for road construction. The company has served as the general contractor for several road construction projects in Western New York, including three projects at issue here.

In June 1997, two Diamond D employees sent written complaints to the defendant, the New York State Department of Labor (DOL) asserting underpayment of wages by the company. Approximately eight months after receiving the complaints, the DOL assigned Ronald Kinn to investigate the allegations.

Kinn requested payroll records from the plaintiff for the three contracts in question. The company refused to comply with the requests and Kinn conducted his investigation using other available evidence. (His attempts to interview Diamond D management were rebuffed.)

Using the evidence he had gathered, Kinn determined that Diamond D had "grossly underpaid its workers at an estimated underpayment of almost $700,000 across the three projects investigated." He calculated the statutory rate of interest and applied the maximum civil penalty allowed.

In October 1999, as a result of Kinn's investigation, the DOL issued withholding notices on the three projects for $1.4 million.

The withholding notices forced Diamond D into an "untenable" financial position. The company was faced with a cash crisis created by the withholding notices. In addition, the company could not obtain new work because its insurer wold not bond future projects until the withholding notices were resolved.

Thus the company needed an administrative review of Kinn's investigation. However, several months had passed and the DOL had not started the administrative hearings, which the company was entitled to.

Federal Court Action

In April 2000 Diamond D filed this lawsuit in the U.S. District Court for the Western District of New York. Specifically the lawsuit alleged that the DOL's investigation and subsequent refusal to schedule hearings violated its due process rights.

The company sought an injunction to enjoin any DOL administrative proceedings and to require the DOL to withdraw the notices of withholding. In addition, Diamond D sought monetary damages pursuant to 42 U.S.C. 1983 against the state official defendants in their individual capacities.

Only after the lawsuit was filed did the DOL issue a notice of hearing.

U.S. District Court Judge John Curtain initially denied Diamond D's request for injunctive relief finding that "(1) the Younger abstention doctrine precluded the court from enjoining the state administrative proceedings; and (2) the Eleventh Amendment would likely bar the release of the withheld funds."Diamond D I, 105 F. Supp. 2d at 175-83.

Diamond D moved for reconsideration of the ruling and the court reversed itself in part by scheduling evidentiary hearings to resolve whether: "(1) the DOL acted in bad faith; and (2) the DOL's investigation and proceedings violated Diamond D's substantive due process rights." Diamond D II, 110 F. Supp. 2d at 209.

After completing its evidentiary hearings, the district court granted Diamond D's motion for a preliminary injunction. Specifically the court held, "while all the conditions for applying Younger abstention were met, the DOL's investigation was so arbitrary and its impact on Diamond D so severe that both of the established exceptations to the Younger doctrine 'bad faith' and 'extraordinary circumstances' were satisfied in this case. "Diamond D III, 142 F. Supp. 2d at 398-402.

The DOL appealed the district court order.

Court Ruling

The Law

In order to render a decision, the Second Circuit first reviewed the New York State Constitution and New York Labor Law.

Under the New York State Constitution and New York Labor Law, laborers employed by public works contractors must be paid the "prevailing rate of wages" for their trade in the New York locality where the work is done, NY Lab. Law 220(3) (McKinney 2001); see also N.Y. Const., Art. I 17. This is known as the "prevailing wage law."