Case Brief: Grady Excavating, Inc., Ref. No.: 12-0240

Case Brief

Grady Excavating, Inc.; Ref No.: 12-0240

August 18, 2014

Brief Synopsis of the Case:

Grady Excavating, Inc. filed an appeal challenging the Washington State Office of Minority and Women’s Business Enterprises (OMWBE) Certification Committee’s (Committee) decision to decertify the firm based on an allegation that the owner was no longer economically disadvantaged. The rationale for this determination focused on the company’s success. Essentially, the agency argued that because the business had been so successful is so short a period of time, the owner could not be economically disadvantaged because “doors open easily for her”.

Holding:

On appeal the DOT reversed the Committee’s decision but remanded the case back on other grounds. On the issue of economic disadvantage the DOT made clear that agency erred when it considered the success of the business when examining the owner’s claim of economic disadvantage. “Imputing the value of the applicant firm to an owner’s personal net worth is not consistent with the intent of our rule”.

Analysis:   

This case is important because it shows it makes clear that the new regulation creating the accumulation of wealth standard doesn’t give agencies the ability to discard other provisions of the regulations such as the exclusion of the owner’s interest in the business in calculating net worth. Although not discussed in this case, it could also be argued that an agency shouldn’t consider a spouses income, joint assets or the value of the primary residence since those too are specifically excluded from the calculation of personal net worth.

 

New OIG Audit of the DBE and ACDBE Program is in the Works

ThinkstockPhotos-122413037In August 2015 the U.S. Department of Transportation, Office of the Inspector General announced that it would be conducting an audit to 1) determine the number of new and existing DBE/ACDBE firms receiving contracts or leases at the Nation’s largest airports in fiscal year 2014 and 2) assess certification factors that aided and hampered new DBE/ACDBE firms pursued contracts or leases at these airports.  You can see a copy of the letter here.

As early as September 2015 firms that had been denied DBE certification or that had been decertified received an email from the OIG asking several questions regarding the applicants’ experience in applying for DBE/ACDBE certification. The following are the questions that were asked:

  1. How long did it take the certifying agency to notify your firm that it was not qualified to become a certified DBE and/or ACDBE?
  2. Were there any deficiencies with your application that needed remediation? If so, how were you notified? What timeframes were you given to correct the issue?
  3. You were denied DBE/ACDBE certification on [state the date]. What reasons were provided to you for the denial by the certifying authority?
  4. Please explain your process when applying for your DBE and/or ACDBE certification. Did this process play a factor in the denial?
  5. Did you appeal your denial with the certifying authority and/or the Departmental Office of Civil Rights? What actions were taken by the certifying authority and/or DOCR regarding your firm’s denial of certification?
  6. Was your firm assigned a liaison or a point of contact to check the status of application and/or discuss any concerns?
  7. Did your firm attend any training, outreach, etc., before requesting certification? Was any training offered?  If so, by who?

Responses were due October 9, 2015, so we hope this means the report will becoming out soon.

Why the DBE Program’s Appendix E process has to change

Recently, Rep. Michael Fitzpatrick (R-PA) introduced a bill that would define veteran owned businesses as “Disadvantaged Business Enterprises” or “DBEs”. This is a bad idea for several reasons including if it passes it could mean the end of the Department of Transportation’s DBE program. This is because the Supreme Court has held that programs like the DBE program are constitutional so long as they are “narrowly tailored” or, in other words, not overly inclusive.

Opponents of the bill argue that the amendment is not needed because individuals who are not women or ethnic minorities can obtain DBE certification on a case by case basis using the guidelines in Appendix E to Part 26 — Individual Determinations of Social and Economic Disadvantage. However, it is almost impossible for an individual to obtain DBE certification using the Appendix E process and for Disabled Veterans I would argue that it is even less likely that they could meet the requirements. There are several reasons for this.

First, it must be noted that the Appendix E recognizes that people with disabilities have disproportionately low incomes and high rates of unemployment and recognizes that many individuals with disabilities my be socially and economically disadvantaged. However, the evidence an individual has to produce in order to prove social an economic disadvantage is difficult at best to acquire.

For example, to show that they are socially disadvantaged, an individual has to describe “personal experiences of substantial and chronic social disadvantage in American society, not in other countries”. The agency receiving the application will consider the applicant’s education, employment and business history to see if the totality of circumstances shows disadvantage in entering into or advancing in the business world. The problem is most agencies read the regulations to mean that the applicant has to show disadvantages in all three areas: education, employment and business history. Of course, most veterans, disabled or not, will have a tough time showing that that they have “substantial and chronic social disadvantage in American society” since they’ve served in the U.S. military and presumably had access to education and employment. Normally, the analysis ends there. But even if the applicant successfully shows that he meets the social disadvantage prong of the test it is all but impossible to show economic disadvantage.

Under the normal process for obtaining DBE certification, to show economic disadvantage an applicant simply has to show that their personal net worth is less than $1.32 million (minus their personal residence and interest in the DBE business). Not so for the individual seeking certification using the Appendix E process. In addition to reviewing the applicant’s personal income, personal net worth, fair market value of all assets etc. the agency will “consider the financial condition of the applicant compared to the financial profiles of small businesses in the same primary classification, or, if not available, in similar lines of business, which are not owned and controlled by socially and economically disadvantaged individuals in evaluating the individual’s access to credit and capital”.

Agencies normally read this to mean that the applicant has to produce the profiles of other business for the agency to compare. This of course is next to impossible because it would require an individual to obtain the financial information (tax returns, profit and lost statements, balance sheets, etc.) of their competitors in order to prove economic disadvantage. Anyone in business knows that this is an insurmountable hurdle. (That’s why I have unsuccessfully argued in the past that because it is impossible for the applicant to obtain this information the onus necessarily has to be on the agency, who has access to such information to do the comparison.)

While I agree that Rep. Fitzpatrick’s bill would cause irreparable harm to the DBE program and subject it to constitutional challenge, those opposing the bill would be better served not to make the argument that individuals who are not women or minorities can obtain DBE certification on a case by case basis because it is, in fact, almost impossible to do so.

DBE Appeal Case Brief: R.E. PAGE CONSTRUCTION, LLC; Ref No.: 14-0061

R.E. PAGE CONSTRUCTION, LLC; Ref No.: 14-0061
July 31, 2015

Brief Synopsis of the Case:

Montana Department of Transportation (MDT) decertified a DBE firm after receiving a complaint from a competitor. Initially, MDT alleged that the firm was ineligible for certification because: 1) the initial certification was based on factually erroneous information and misrepresentations submitted by the firm; and 2) changes in the firm’s circumstances since certification rendered it unable to meet control eligibility standards.

Apparently, the owner sought a decertification hearing pursuant to 49 CFR 26.87(d). During the hearing MDT provided evidence that for a period of seven months (following an injury to the DBE company) a non-socially and economically disadvantaged individual had run the company in the owner’s absence.

Holding:

On appeal the DOT reversed MDT decision because MDT had failed to evaluate the firm’s eligibility based on present circumstances. DOT cited Section 26.73 § (b) (1) which states, “you must not refuse to certify a firm based on historical information indicating a lack of ownership or control of the firm by socially and economically disadvantaged individuals at some time in the past, if the firm currently meets the ownership and control standards of this part.”

Analysis:

This case is important because it shows how complaints by competitors can jeopardize a firm’s DBE certification especially when the agency with oversight fails to follow the DBE regulations. Here, while there were two issues that formed the initial bases for the decertification, MDT was only able to make a case for one: changed circumstances. And that issue was improper because the changed circumstances were temporary and had been rectified by the time the decertification hearing took place.

DBE Appeal Case Brief: SURVEYING SOLUTIONS INC.; Ref No.: 14-0071

Brief Synopsis of the Case:

When the owner of Surveying Solutions, Inc., a DBE firm, passed away, majority ownership of the firm passed to non-disadvantaged individual and SSI lost its DBE certification. Subsequently, the owner of another DBE firm, GEO Precision Services (Geo) purchased SSI with the intent of making it a subsidiary of his firm.

For some reason, Michigan Department of Transportation (MDOT) took exception to this arrangement and removed the Geo’s DBE certification. The disadvantaged individual then dissolved Geo, transferred Geo’s assets to SSI and applied for DBE certification.

MDOT denied SSI’s DBE application for 1) failure to cooperate with the agencies requests for tax returns and lease agreements from two unrelated firms whose owners had familial ties with employees of SSI and 2) because MDOT alleged that the disadvantaged owner had only purchased SSI with the intent of applying for DBE certification in violation of 49 CFR § 26.71 which governs when a firm owned by a non-disadvantaged individual is purchased by a disadvantaged individual and the non-disadvantaged individual remains with the firm.

Holding:

DOT reversed MDOT’s decision because MDOT failed to show how the family ties between employees of SSI and the outside vendors affected the disadvantaged owner’s independence or control of the firm.

On the issue of transfer of ownership, DOT concluded that the record demonstrated the disadvantaged owner had purchased the company for reasons other than obtaining DBE certification.

Another important holding of this case (albeit in a footnote) is that MDOT improperly found lack of cooperation where the disadvantage owner failed to produce tax returns and other lease agreements from firms over which he had no control.

Analysis:

Interestingly, the events of this case starting with the death of the SSI’s original owner began in 2011 and concluded in 2015 when DOT rendered its decision. During that period it is unclear whether the SSI’s new owner ever sought the service of an attorney. It is clear that MDOT made errors besides the final error which resulted in the denial of certification. For example, MDOT’s objection to making one company the subsidiary of the other was likely improper but it doesn’t appear that the firm ever protested that decision. Nor was, MDOT’s decertification of the firm

DBE Appeal Case Brief: MCCREA LAND SURVEYING, INC.; Ref No.: 14-0093

MCCREA LAND SURVEYING, INC.; Ref No.: 14-0093
July 31, 2015

Brief Synopsis of the Case:

In December 2013, the Indiana Department of Transportation (INDOT) denied a firm’s DBE application for several reasons. However, INDOT failed to properly articulate its reasons for denial. Instead, it appears INDOT ignored evidence provided as part of the application, failed to seek clarification regarding its concerns during the firm’s on-site visit and the period leading up to the denial letter and failed to articulate how it reached its decisions. Rather than reversing INDOT’s decision the DOT remanded the case back to INDOT urging the agency to drop at least one ground for denial and to articulate it reasons for the other grounds.

Holding:

Essentially, the DOT held that INDOT could not deny the firm’s application without providing a full explanation and analysis based on evidence contained in the record.

Analysis:

This case highlights the scrutiny that firms face when a disadvantaged individual acquires a company from a non-disadvantaged individual who maintains a relationship with the firm. Here, the disadvantaged owner appears to have met his burden of proving that the transfer of ownership was for reasons other than obtaining DBE certification and the disadvantaged individual actually controls the firm. Its surprising that DOT did not reverse INDOT’s decision outright considering the disadvantaged owner waited nearly two years for the appeal decision.

DBE Appeal Decision Case Brief: WALTER MARTIN EXCAVATING, INC.; Ref No.: 14-0101

Brief Synopsis of the Case:

Kentucky Transportation Cabinet (KYTC) denied Walter Martin Excavating, Inc.’s for several grounds related to the female owner’s control of the firm. The firm was established in 1985 by the female owner’s late husband. When he passed away in 2005 she took over as majority owner of the firm. In 2011 she hired a non-disadvantaged individual as a Senior Manager to replace three managers she had fired during the Great Recession. KYTC argued that the Senior Manager was the person in control of the firm. DOT reversed KYTC’s denial for several reasons including KYTC’s failure to specifically reference the evidence in the record supporting KYTC’s conclusions.

Holding:

The case has a couple of important holdings. First, DOT made clear that “Mere reapplication is not itself an attempt to evade or subvert; arguably, it is an attempt to correct identified eligibility deficiencies.” Second, a disadvantaged owner is not required to control all aspects of the firm’s business, in order to prove control.

Analysis:

Unfortunately, women-owned businesses often face the type of scrutiny shown in this case. Although the owner had worked alongside her husband for years before assuming control of the firm and despite the fact that she had shown the ability to run the firm, the agency concluded that a non-disadvantaged male (who she hired) was somehow in control of the company despite all of the evidence to the contrary.

Proposed Amendments to Miami Dade County’s Community Small Business Enterprise (CSBE) and Small Business Enterprise Program (SBE)

Miami-Dade County’s Board of County Commissioners will soon be voting on changes to the County’s Community Small Business Enterprise (CSBE )and Small Business Enterprise (SBE) programs. Both programs are race and gender neutral and can be utilized when the County is not using federal dollars on a particular project. To be eligible for SBE certification a firm must average gross revenues for the last three (3) years not exceeding $5 million except manufacturers whose number of employees cannot exceed one hundred (100) and wholesalers whose number of employees cannot exceed fifty (50). The firm must also be located and performing a commercially useful function in Miami-Dade County.

For CSBE certification the firm must be located and performing a commercially useful function in Miami-Dade County. It cannot exceed 3 year average gross receipts of $10 million for general building, $6 million for heavy construction contractors, and $5 million for specialty trade contractors. The firm’s qualifier must own at least 10% of the certified firm’s issued stock. Finally, the Personal Net Worth (PNW) does not exceed $1,500,000 for each owner.

The amendments to the program deal mostly with the PNW requirement and the requirement that firms must be located in Miami-Dade County. If the BCC approves the changes, the PNW requirement for owners of both SBE and CSBE firms will amended so that PNW cannot exceed $1.5 million per owner. This excludes the value of the business and the value of retirement accounts (if documentation is submitted to the Small Business Development).

The amendments would also require business have a physical location in Miami-Dade County as virtual offices will not be allowed.

Finally, firms applying for either certification must have a Miami-Dade County Local Business Tax for one year prior to certification.

Should these changes pass, we anticipate many firms that are currently CSBE or SBE certified will be come ineligible for the programs. To be clear, the CSBE and SBE programs are local programs and are different from the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. But many firms that qualify for the DBE program also qualify for one or both of the County’s local programs. We anticipate situations where a firm that had multiple certifications could lose one or more.

That’s because under the DBE program the person upon whom certification is based cannot have a PNW that exceeds $1.32 million excluding that person’s interest in the business and value of the person’s primary residence.

The County’s changes do not exclude the owner’s interest in their primary residence. It also applies to all owners. Those differences are enough to raise the possibility that some firms that currently hold all three certifications SBE, CSBE and DBE may be ineligible for one or more certification should the County enact the changes. If your firm does business in Miami-Dade County, it’s important to determine whether these changes affect your business now, before the changes are enacted. If you will be negatively impacted by the changes contact your County Commissioner immediately and voice your concerns.

How to Tell If You Need A Lawyer to Help You With Your DBE Certification.

We are often asked by potential clients why is there a need to retain an attorney to prepare their Disadvantaged Business Enterprise (DBE) application. Many potential clients are surprised when we inform them that they don’t need a lawyer or consultant to complete their application. Many companies successfully obtain their DBE certification every year without any problems. However, our response comes with one caveat: if you can afford it, if you don’t have the time, or if you have a unique situation that you think might cause you to be denied, then you really should retain the services of a professional who understands the DBE program.

Companies who should qualify for the DBE certification often fail to get certified for the simplest of reasons. This article provides some of the “red flags” that can alarm the person reviewing your application and can cause your application to be denied.

When reviewing your DBE application the certifying agency seeks to determine whether an economically, and socially disadvantaged person (ESD) owns 51% of the company and whether the ESD meets the personal net worth requirement. In order to be certified, the ESD must also show true ownership of the firm, independence from any other company and the ability to control the firm. If the ESD owner(s) does not possess the power to direct or cause the direction of the management and policies of the firm, certification can be denied. Similarly, if the disadvantaged business owner’s contribution of capital to acquire her ownership interest in the firm was not real, substantial, and continuing, certification can be denied. Likewise, if the socially and economically disadvantaged person has no experience in the firm’s line of business, certification can be denied.

Before we discuss the red flags, a review of rules regarding ownership, control and independence is in order.

OWNERSHIP
To be an eligible DBE, the rules state in part, that a firm must be at least 51 percent owned by socially and economically disadvantaged individuals. In the case of a corporation, such individuals must own at least 51 percent of the each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding. In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement. In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.
The rules further state that contributions of capital or expertise by the disadvantaged owner to acquire an ownership interest in the participating DBE business be real and substantial and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents.
Under the rules, contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee.
For purposes of determining ownership, certifying agencies are required to presume as not being held by a disadvantaged individual, all interests in a business or other assets obtained by the individual as the result of a gift, or transfer without adequate consideration, from any non-disadvantaged individual or non-DBE firm who is (i) involved in the same firm for which the individual is seeking certification, or an affiliate of that firm; (ii) involved in the same or a similar line of business; or (iii) engaged in an ongoing business relationship with the firm, or an affiliate of the firm, for which the individual is seeking certification.
To overcome this presumption and permit the interests or assets to be counted, the rules state that the disadvantaged individual must demonstrate by clear and convincing evidence, that (i) the gift or transfer to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (ii) the disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who provided the gift or transfer.
ACTUAL CONTROL
The rules require that the disadvantaged owner possess the power to control day-to-day and major decisions of their firms in critical matters. Non-disadvantaged persons may be involved in a DBE firm as owners, managers, employees, stockholders, officers, and/or directors. However, non-disadvantaged persons must not possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm.
The rules state in part, that a disadvantaged owner may delegate various areas of the management, policy making, or daily operations of the firm to other participants in the firm, regardless of whether these participants are disadvantaged individuals. Such delegations of authority must be revocable, and the disadvantaged owner must retain the power to hire and fire any person to whom such authority is delegated. The managerial role of the disadvantaged owner in the firm’s overall affairs must be such that the certifying agency can reasonably conclude that the disadvantaged owner actually exercises control over the firm’s operations, management, and policy.
The rules further require that the disadvantaged owner have the technical competence and experience directly related to the type of business in which the firm is engaged and the firm’s operations. The disadvantaged owner is not required to have experience or expertise in every critical area of the firm’s operations, or to have greater experience or expertise in a given field than managers or key employees. The disadvantaged owners must have the ability to intelligently and critically evaluate information presented by other participants in the firm’s activities and to use this information to make independent decisions concerning the firm’s daily operations, management, and policymaking. Generally, expertise limited to office management, administration, or bookkeeping functions unrelated to the principal business activities of the firm is insufficient to demonstrate control.
Finally, the rules state in part, that a disadvantaged individual may control a firm even though one or more of the individual’s immediate family members (who themselves are not socially and economically disadvantaged individuals) participate in the firm as a manager, employee, owner, or in another capacity. If the certifying agency cannot determine that the disadvantaged owners — as distinct from the family as a whole — control the firm, then the disadvantaged owners have failed to carry their burden of proof concerning control, even though they may participate significantly in the firm’s activities.
INDEPENDENCE
The rules provide that only an independent business may be certified as a DBE. An independent business is defined as a company whose viability does not depend on its relationship with another firm or firms. In determining whether a potential DBE is an independent business, certifying agencies scrutinize relationships with non-DBE firms, in such areas as personnel, facilities, equipment, financial and/or bonding support, and other resources. They consider whether present or recent employer/employee relationships between the disadvantaged owner(s) of the potential DBE and non-DBE firms or persons associated with non-DBE firms compromise the independence of the potential DBE firm. They also examine the firm’s relationships with prime contractors to determine whether a pattern of exclusive or primary dealings with a prime contractor compromises the independence of the potential DBE firm.
So, in closing, if any of the following “red flags” exist in your business, call us to assist you with your certification application.

• Transfer of stocks/shares or ownership coinciding with DBE application.
• Transfer of stock/shares/ownership as gifts or with no or little exchange of funds.
• ESD individual has no experience in line of business.
• ESD individual’s previous employer has substantial ownership interest in DBE business.
• ESD individual is still employed by former employer.
• Ownership of company goes from non-DBE to DBE but former owners remain with company.
• Discrepancies between Operating Agreement and Partnership Agreement, Articles of Incorporation, etc.
• ESD individual doesn’t live in the same City as principal place of business

How to tell if you are a good candidate for DBE certification

Even if you meet all of the requirements for DBE certification you may not necessarily want to apply for certification if you won’t benefit from the program.
To decide whether you should apply you should first determine if you meet the requirements for DBE certification. You can look up the requirements on our website. The requirements can also be found here http://osdbuweb.dot.gov/DBEProgram/definitions.cfm or on your state’s Uniform Certification Program (UCP) Website. (To find you state UCP Google the following terms: “uniform certification program [and your state’s name]”. )

Next, you should determine if anyone is buying what you are selling. If you are in the construction business, particularly road construction, then the DBE certification is definitely a “must have” for your company’s growth and development. Since the DBE certification is a Department of Transportation program, its safe to assume that if you are involved in a business in the transportation industry you can benefit from the DBE program. For some industries its not as obvious.

For example, at first glance it may not make any sense why a janitorial firm would want or need DBE certification. However, We often see solicitations seeking janitorial firms with DBE certifications. That’s because in order to meet the DBE goals in their contracts, prime contractors often seek janitorial firms as subcontractors. Janitorial firms can find work at transportation hubs such as airports, public transportation centers, and highway rest areas. Janitorial firms can work at construction sites or in debris collection.

Another good example is security guard companies. Again, if though security is not transportation related per se, we often see solicitations for DBE security guard companies. Often the work is related to guarding major transportation hubs such as airports, seaports, train and rail stations etc. Often security firms can find work as subcontractors on construction projects where prime contractors need DBE subcontractors in order to meet DBE contract goals.
There are other industries such as IT services, marketing, signage, etc. etc. that are not directly transportation related but who benefit from DBE certification. The best way to learn if someone is buying the goods or services you sell from DBE companies is to research.

1. Go to your County or State website and find out what contracts are available. Often these databases allow you to search previous solicitations.

2. Go talk to a purchasing officer or someone else from your local agency such as your County or State Department of Transportation or transit department. They often know what contracts are coming up and which prime contractors are looking to hire DBE subcontractors.

3. Attend pre-bid meetings. Often, before a government agency accepts bids on a particular project, they will have a pre-bid meeting. A pre-bid meeting is a great place to learn more about the project and ask questions. More importantly a pre-bid meeting is a great place to meet prime contractors who may have an interest in teaming with you or subcontracting with you to meet their DBE goals.