Infotech International, Inc., No. 205 (March 19, 2004) Docket No. BDPT-2003-10-27-10 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) IN THE MATTER OF: ) Docket No. BDPT-2003-10-27-10 ) Infotech International, Inc. ) Decided: March 19, 2004 ) Petitioner ) ) APPEARANCES Manmohan K. Bakshi, Esq., for Petitioner Infotech International, Inc. Jennifer S. Ellison, Esq.; Timothy C. Treanor, Esq.; David A. Javdan, Esq., General Counsel, for Respondent Small Business Administration. DIGEST The SBA may terminate an 8(a) program participant prior to the completion of its program term for good cause, including failure to maintain full-time day-to-day management and control of the participant by disadvantaged individuals and failure to maintain program eligibility. Control, which is not the same as ownership, includes both the strategic policy-setting exercised by the board of directors and the day-to-day management and administration of business operations by the concern's disadvantaged owner. An essential responsibility of management for an owner of an 8(a) concern is to cooperate with the SBA to develop the business under the guidance of an SBA business opportunity specialist. Failure to cooperate with the SBA is evidence that the owner does not actively manage the concern. Once the SBA questions disadvantaged control of the concern, the onus falls on the participant to satisfy the SBA of its eligibility to the same extent required when seeking admission into the 8(a) program. FINAL DECISION ARKOW, Administrative Law Judge: Petitioner Infotech International, Inc. (Petitioner), appeals a decision by the Respondent Small Business Administration (SBA) terminating it from the 8(a) program. [1] The SBA determined Petitioner's owner failed to maintain full- time day-to-day management and control of Petitioner, and failed to maintain 8(a) program eligibility. Petitioner claims the SBA's determination is arbitrary, capricious, and contrary to law. I disagree and conclude the SBA's decision terminating Petitioner from the 8(a) program is supported in the record, reasonable and not arbitrary, capricious, or contrary to law. Jurisdiction There is jurisdiction to decide this appeal. See 15 U.S.C. Section 637(a)(9)(A), (B)(ii); 13 C.F.R. Parts 124 and 134. The appeal is timely. See 13 C.F.R. Section 134.202(a)(1). Issue Whether the SBA's termination of Petitioner Infotech International, Inc., from the 8(a) program is arbitrary, capricious, or contrary to law. See 15 U.S.C. Section 637(a)(9)(C); 13 C.F.R. Section 134.406(b). SBA Determination On May 6, 2002, the SBA advised Ms. Meghna Mehta, Petitioner's chief executive officer and the individual upon whom Petitioner's 8(a) eligibility was based, that it intended to initiate proceedings to terminate Petitioner's 8(a) program participation. Administrative Record (AR), Ex. 23 (Initiation Letter). The SBA cited, as a potential ground for termination, that Ms. Mehta failed to maintain full-time day-to-day management and control of Petitioner. On January 27, 2003, the SBA proposed to terminate Petitioner from the 8(a) program, citing two grounds: (1) 13 C.F.R. Section l24.303(a)(2), failure to maintain its eligibility for program participation, and (2) 13 C.F.R. Section 124.303(a)(3), failure to maintain full-time, day-to-day management and control by disadvantaged individuals. AR, Ex. 15 (Intent Letter). In addition to the procedures for timely responding in writing within 30 days, the Intent Letter advised Petitioner that it could request a meeting with SBA's staff to discuss the proposed termination action. AR, Ex. 15. On September 11, 2003, the SBA again notified Petitioner it was terminated from the 8(a) program. The SBA cited two grounds: (1) 13 C.F.R. Section l24.303(a)(2), failure to maintain its eligibility for program participation, and (2) 13 C.F.R. Section 124.303(a)(3), failure to maintain full- time, day-to-day management and control by disadvantaged individuals. AR, Ex. 1 (SBA Determination). The SBA concluded that Petitioner had not overcome the grounds for the proposed termination. The SBA advised Petitioner: [I]t appears that your husband, Raj[endra] Mehta, who owns 100% of a former 8(a) BD company that graduated two months before you submitted your application, controls or has the power to control the firm. According to the New York District Office, you did not attend the first meeting [sic]. Rather, this meeting was attended by your husband. That office subsequently left several telephone messages for you, which were returned by your husband, who is not eligible to again participate in the program. On April 2, 2002, the New York SBA District Office set up another meeting with you. Again, you did not attend the meeting. Rather, this meeting was attended by your spouse and another representative. The district office subsequently contacted you via telephone, but you did not return the telephone call. Rather, a representative for your firm contacted the SBA office. There are questions about your lack of full-time devotion since you did not return any telephone calls or personally attend any meetings. Finally, we note that your firm and your husband's firm are located in the same building and that the facsimile numbers are the same. Thus, there are concerns regarding the lack of separation of the businesses. Id. Petitioner timely appealed on October 27, 2003. Appeal Petition (App. Pet.). Facts On March 15, 1999, Infosys International, Inc. (Infosys), owned by Mr. Rajendra Mehta, graduated from the 8(a) program. AR, Ex. 24. Two months later, a company known as Orient Infotech, Inc. (Orient), applied for admission into the 8(a) program. AR, Ex. 30. Orient, owned by Ms. Meghna Mehta, the wife of Mr. Rajendra Mehta, is in a similar line of business as Infosys. AR Ex. 24-30. Ms. Mehta served as the Vice-President and Secretary of Orient, and the company's President was Mr. Prakash Mehta, who is not related to Ms. Mehta by birth or marriage. AR, Ex. 30, at 1. The SBA found both Prakash Mehta and Ms. Mehta to be socially and economically disadvantaged. AR, Ex. 27, 30. On June 30, 1999, the SBA approved Orient for admission into the 8(a) program. AR, Ex. 29. On May 15, 2000, this 8(a) concern sought SBA approval for broad changes in its corporate structure. AR, Ex. 28. Prakash Mehta sought to own and manage a new corporation, which would acquire Orient's name, service operations, and contracts. The remainder of Orient would change its name to Infotech International, Inc. (Petitioner), and Ms. Mehta would maintain ownership and become its President and full-time manager. Petitioner would continue Orient's integrated hardware, software and networking product operations. Id. Because it had already found Ms. Mehta socially and economically disadvantaged, the SBA approved this change in business structure on May 30, 2000. AR, Ex. 27. On January 4, 2002, an SBA employee, Cyrilene Moulton, submitted a memo to the file stating that during a field visit, she discovered that Petitioner was located at 110 Terminal Drive, Plainview, N.Y. AR, Ex. 25. This Plainview address is also the address of Infosys, the former 8(a) participant owned by Mr. Raj Mehta. AR, Ex. 17, 24. Ms. Moulton stated that Ms. Mehta told her that, although Petitioner provided Ms. Mehta's home address in Manhasset, New York, at the time of certification, she had temporarily located the business at the Plainview address until she could afford to rent at another location. AR, Ex. 25. In an April 3, 2002, e-mail to Celeste Ford Kaptur, Georgia Ellis [2] stated her concerns that Mr. Mehta, not Ms. Mehta, was managing and controlling Petitioner. AR, Ex. 24. Ms. Ellis stated that during Petitioner's first meeting with the New York District Office, Mr. Mehta attended and did most of the talking. Additionally, Petitioner had been invited to a meeting with SBA on April 1, 2002; instead of Ms. Mehta, Mr. Mehta and another individual attended. Ms. Ellis also observed that Ms. Mehta never returned phone calls personally, even when Ms. Ellis specifically requested that she do so. Instead, the calls were returned, if at all, by Mr. Mehta or a staff member. Ms. Ellis concluded that it appeared as if Petitioner was being managed and operated by Mr. Mehta, the owner of the former 8(a) concern. Id. In the Initiation Letter, the SBA advised Petitioner that there was a "confusion of identities" between Petitioner and Infosys, because both firms occupied the same address, shared the same facsimile numbers, and had virtually indistinguishable business cards. AR, Ex. 23. Further, because Mr. Mehta, rather than Ms. Mehta, represented Petitioner in meetings and in telephone communications with SBA, it appeared that Mr. Mehta was controlling Petitioner. This confusion of identities was being presented to other Federal agencies as well as to the SBA. The SBA asked Petitioner to reply to these findings. Id. In the Petitioner's response to the Initiation Letter, Ms. Mehta stated that, since selling the commercial portion of the business to Prakash Mehta, Petitioner has had no new business. AR, Ex. 19. Ms. Mehta did not respond to the allegations concerning Mr. Mehta's involvement in, and apparent control of, Petitioner or the confusion of identities between her husband's former 8(a) concern and Petitioner. See id. Although Ms. Mehta stated that she would follow up with a visit to SBA, this visit never occurred, and Petitioner provided no further information to the SBA. AR Ex. 17, 18, 19. In the Petitioner's response to the Intent Letter, Petitioner's counsel asserted that Ms. Mehta was "usually available at the office from 9 A.M. to 3 P.M. on weekdays," and stated, "as the primary care-giver for a young child, she has had to juggle her business with her commitments at home." AR, Ex. 12. Petitioner also asserted that Mr. Raj Mehta has no stock or management interest in Petitioner and received no salary or commission from Petitioner. Id. In her August 28, 2003, telephone call to the SBA, Ms. Mehta stated that she did not work 40 hours a week, and that she was just learning the business from her husband. AR, Ex. 5. Petitioner's Position First, Petitioner contends the SBA Intent Letter (January 27, 2002) predates the factual allegations, occurring between May and July 2002, cited by the SBA to support its reasons for terminating Petitioner. Thus, because there are no allegations that predate the Intent Letter, there is no basis for terminating Petitioner. App. Pet. at 1-2. Second, the SBA failed to establish the good cause standard mandated by 13 C.F.R. Section 124.303. Third, citing 13 C.F.R. Section 134.204(a)(2) [sic], the SBA Determination is defective because the SBA failed to serve it on Petitioner's counsel, notwithstanding that Petitioner had advised the SBA that counsel represented it. Id. at 3. Petitioner requests, therefore, that I find the SBA's determination arbitrary, capricious, and contrary to law. Respondent's Position The SBA contends that its decision to terminate Petitioner from the 8(a) program is not arbitrary, capricious, or contrary to law. Response at 2. The SBA argues that the administrative record demonstrates that, on each of the two grounds for termination, the SBA's decision is reasonable, fully supported by the administrative record, and in accordance with its regulations. Id. at 6-11. To support its contention, the SBA argues Petitioner failed to overcome the allegations that Ms. Mehta does not maintain full- time day-to-day control and management of Petitioner. Id. at 6- 8. Further, by this failure, Petitioner necessarily failed to maintain program eligibility. Id. at 8. The SBA contends Petitioner's three arguments are without merit. First, Petitioner's argument that the events alleged to warrant termination occurred after the SBA issued its Intent Letter is without merit because the Intent Letter's date was the result of a typographical error. The Intent Letter was issued in 2003, not 2002, and this fact is apparent from its content, which discusses events that occurred in May, June, and July, 2002. Id. at 10. Second, Petitioner's argument that, to establish good cause for termination, the SBA relied on facts in the SBA Determination, but not in its Intent Letter is without merit. The facts alleged to support termination have been sufficiently provided Petitioner. Id. at 10-11. Third, there is no regulatory requirement to serve Petitioner's counsel with a copy of the SBA Determination. Id. at 9. Discussion I. Standard of Review The SBA determination must be sustained unless a review of the written administrative record demonstrates that the SBA's determination, that Petitioner should be terminated from the 8(a) program, is arbitrary, capricious, or contrary to law. As long as the SBA's decision to terminate Petitioner is reasonable, it must be upheld in this appeal. See 13 C.F.R. Section 134.406(b). My review of the administrative record is narrow and does not permit me to substitute my own judgment for that of the SBA. I must examine whether the SBA considered all the facts presented as well as the laws and regulations that guide the decision- making process. Then I must determine whether the SBA made a clear error of judgment in its decision. Only if it did can I find the SBA decision arbitrary, capricious, or contrary to law. See Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). A clear error of judgment can be found if the SBA (1) fails to properly apply the law and regulations to the facts of the case; (2) fails to consider an important aspect of the problem; (3) offers an explanation for its determination that runs contrary to the evidence; or (4) provides an implausible explanation that is more than a difference between my views and those of the SBA. In sum, the SBA must articulate a satisfactory explanation for its action, including a rational connection between the facts found and its determination. Id. II. Termination Requirement The SBA may terminate an 8(a) program participant prior to the completion of its program term for good cause. 13 C.F.R. Section 124.303(a). The SBA alleges that it has good cause to terminate Petitioner. Good cause includes: (1) failure to maintain full-time day-to-day management and control of Petitioner by disadvantaged individuals (13 C.F.R. Section 124.303(a)(3)) and (2) failure to maintain program eligibility (13 C.F.R. Section 124.303(a)(2)). III. Analysis The same facts form the basis for the two grounds for Petitioner's termination and may be analyzed together. The substance of the allegations is that her husband, Mr. Raj Mehta, to a greater extent than Ms. Mehta, manages and thus controls Petitioner-which, if substantiated in the administrative record, also amounts to a failure to maintain Petitioner's 8(a) program eligibility. A. Petitioner's first argument, that the Intent Letter predates the factual allegations that support the reasons for termination, is without merit. I find that the "2002" date on the letter was a typographical error and the date of the letter should have been "2003." This is obvious from the content of the letter. [3] B. Petitioner's second argument, that the SBA failed to establish good cause for its determination, is without merit. The administrative record reasonably supports the SBA's determination. The SBA does not dispute that Ms. Mehta is Petitioner's sole owner and that her husband, Mr. Mehta, has no ownership interest in Petitioner. The SBA's concern, expressed in its Intent Letter was whether Ms. Mehta maintained full-time day-to-day management and control. After considering Petitioner's response, the SBA concluded Ms. Mehta is not operating, managing, and controlling Petitioner on a full-time basis, but rather, Mr. Mehta controls or has the power to control Petitioner. Control, which is not the same as ownership, includes both the strategic policy-setting exercised by the board of directors and the day-to-day management and administration of business operations by the concern's disadvantaged owner. 13 C.F.R. Section 124.106. Thus, for Petitioner's disadvantaged owner, Ms. Mehta, to control Petitioner, she must not only set its strategic policy, but also manage and conduct its daily business operations. See 13 C.F.R. Section 124.106(a)(3). If she fails to do so, no amount of strategic policy setting will suffice to establish her control. To manage Petitioner's daily business operations, Ms. Mehta must handle or supervise them. Mr. Mehta, a non-disadvantaged individual, may be involved in Petitioner's management, but only so long as he does not exercise actual control or have the power to control Petitioner. [4] See 13 C.F.R. Section 124.106(e)(1). Additionally, as the disadvantaged owner of an 8(a) participant, Ms. Mehta has an inherent obligation to be responsive to and cooperate with SBA. Petitioner must work with the SBA to develop its business to become self-sufficient at the end of its program term. An essential responsibility of management for an owner of an 8(a) concern is to work with the SBA to develop the business under the guidance of an SBA business opportunity specialist (BOS). Matter of SAM Facilities Management, Inc., SBA No. BDP-194, at 10 (2003). The record shows that Ms. Mehta failed to fulfill her responsibility to manage Petitioner's day-to-day business operations. She did not maintain personal contact with the SBA and failed to return phone calls by SBA personnel. Further, the administrative record substantiates the SBA's allegation that Ms. Mehta failed to meet the fundamental obligation of an 8(a) program participant-to cooperate with the SBA. By failing to do so, she has demonstrated that she does not actively manage the business, at least in its dealings with the SBA. On the contrary, the record contains substantial evidence that Mr. Mehta played too active a role in managing Petitioner's daily operations to comply with SBA regulations. More than merely offering advice and assistance to Ms. Mehta, Mr. Mehta actively dealt with the BOS and other SBA officials. On more than one occasion, when the SBA called for Ms. Mehta, Mr. Mehta or another staff member answered. Apparently, Ms. Mehta was unavailable. More than once, when the SBA left messages for Ms. Mehta, Mr. Mehta or another staff member responded. It is unclear why Ms. Mehta avoided dealing with the SBA. Regardless of the reason, Mr. Mehta, not Ms. Mehta displayed all the indicia of managing and controlling Petitioner. The SBA found that there was a "confusion of identities" between Petitioner and Mr. Mehta's firm, a former 8(a) program participant. Because both firms shared the same address, used the same facsimile number, and had virtually identical business cards, the SBA reasonably considered that this confusion of identities existed and cast doubt on whether Ms. Mehta actually managed Petitioner full time. This confusion of identities was presented to other Federal agencies. Petitioner failed to present adequate evidence to rebut the SBA's findings. In fact, Petitioner conceded that Ms. Mehta only worked at Petitioner from 9:00 a.m. to 3:00 p.m. because she had to take care of her child. For these reasons, the SBA's conclusion that Ms. Mehta was not the full-time day-to-day manager of Petitioner and Mr. Mehta played an inordinate role in the management of Petitioner is fully supported in the administrative record. See Facts, supra. To remain eligible for 8(a) program participation, a concern must continue to meet all eligibility criteria in 13 C.F.R. Sections 124.101 through 124.108. 13 C.F.R. Section 124.112(a). A concern must notify the SBA in writing of any changes in circumstances that would adversely affect its program eligibility, especially including changes in control of the concern. Id. Ms. Mehta's lack of participation in the full-time day-to-day management of Petitioner would adversely affect Petitioner's program eligibility. See 13 C.F.R. Section 124.303(a)(3), (5). Section 124.112 imposes on Petitioner an affirmative reporting obligation to inform the SBA of facts affecting its continued program eligibility. Once the SBA questioned Ms. Mehta's control of the concern, the onus fell on Petitioner to satisfy the SBA of its eligibility to the same extent required when seeking admission into the 8(a) program. SAM Facilities, SBA No. BDP-194, at 11. Accordingly, Petitioner must establish that Ms. Mehta is still in control and manages full-time the day-to-day business of the concern. Because Petitioner failed to show Ms. Mehta continues to control and manage Petitioner, it no longer maintains its 8(a) program eligibility, and the SBA determination is not arbitrary, capricious, or contrary to law. C. Petitioner's third argument, that the SBA did not serve the SBA Determination on its counsel, notwithstanding that it had advised the SBA that counsel represented it, also is without merit. The only requirement to serve counsel occurs during a proceeding before the Office of Hearings and Appeals. 13 C.F.R. Section 134.204(c)(1). There is no requirement to serve counsel when the SBA is considering terminating an 8(a) participant. See generally 13 C.F.R. Sections 124.301 through 124.304 (exiting to the 8(a) BD Program). Further, Petitioner did not allege that this lack of service prejudiced it in any way. D. For these reasons, the administrative record demonstrates that the SBA considered all the facts presented by Petitioner, as well as those in the SBA's records. The SBA correctly applied, to the facts of this case, the laws and regulations applicable to the termination of participants from the 8(a) program. Further, the SBA articulated a satisfactory explanation for its action, including a rational connection between the facts found and its determination. The SBA reached a reasonable conclusion and made no clear error of judgment in deciding to terminate Petitioner from the 8(a) program. Conclusion Respondent Small Business Administration's decision terminating Petitioner Infotech International, Inc., from the 8(a) program is NOT ARBITRARY, CAPRICIOUS, OR CONTRARY TO LAW. See 15 U.S.C. Section 637(a)(9)(C); 13 C.F.R. Section 134.406(b). Subject to 13 C.F.R. Section 134.409(c), this is the final decision of the Small Business Administration. See 15 U.S.C. Section 637(a)(9)(D); 13 C.F.R. Section 134.409(a). RICHARD S. ARKOW Administrative Law Judge _________________________ 1 Small Business Act of 1958, Section 8(a), as amended, 15 U.S.C. Section 637(a); 13 C.F.R. Part 124. The purpose of section 8(a) is to "promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals so that such concerns can compete on an equal basis in the American economy . . . ." 15 U.S.C. Section 631(f)(2)(A). 2 Ms. Ellis is the Assistant District Director for Business Development in the New York District Office. AR, Ex. 26. 3 The AR contains a second version of this letter, which is dated "2003." It is unclear if this corrected version was sent to Petitioner. AR, Ex. 15. 4 Under the regulations, an individual who has already used his one-time eligibility to quality a concern for the 8(a) program will be considered a non-disadvantaged individual for ownership or control purposes of another applicant or participant concern, and the rules restricting participation by non- disadvantaged individuals will apply to that individual. 13 C.F.R. Section 124.108(b)(3). Thus, because Mr. Mehta had already used his one-time eligibility to quality Infosys for the 8(a) program, he is considered non-disadvantaged and his participation in Petitioner is restricted. Posted: March, 2004