U.S. Grounds Maintenance, Inc., No. 4601 (December 31, 2003) Docket No. SIZ-2003-10-09-59 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) SIZE APPEAL OF: ) ) Docket No. SIZ-2003-10-09-59 U.S. Grounds Maintenance, Inc. ) ) Decided: December 31, 2003 Appellant ) ) HUBZone Decertification ) Case No. 4-2003-56 ) Office of Government ) Contracting, Area IV ) Chicago, Illinois ) APPEARANCES Frederick D. Stehlik, Esq., Shaun M. James, Esq., Gross & Welch, for Appellant U.S. Grounds Maintenance, Inc. DIGEST Alleged unfairness by Small Business Administration (SBA) officials, which appears from the record to be mere diligence in investigating a potentially other than small firm and does not result in any factually inaccurate information being used as a basis for a size determination, is not a ground to overturn a size determination. A size protest is sufficiently specific if it provides notice of the grounds on which the challenged firm's size is questioned and provides an evidentiary basis for the allegations. An Appellant's receipt from SBA officials of inaccurate information concerning size determination regulations does not estop SBA from applying the applicable regulations when making the size determination. Concerns are affiliates of one another when one concern controls or has the power to control the other, or a third party controls or has the power to control both. When the sole shareholder of a challenged firm owns 50% or more of seven firms; owns the largest single block of stock, compared to all the others, of another firm; owns, together with his wife, the majority of another firm; and owns, together with an individual with whom he has many common investments, a majority of three other firms, he will be considered to control all of these firms and all the firms must be found to be affiliated. DECISION HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq., and 13 C.F.R. Parts 121 and 134. Issues Whether alleged unfairness by Small Business Administration (SBA) officials is a ground to overturn a size determination. Whether a size protest is sufficiently specific if it provides notice of the grounds on which the challenged firm's size is questioned and provides an evidentiary basis for the allegations. Whether an Appellant's receipt from SBA officials of inaccurate information concerning size determination regulations estops SBA from applying the applicable regulations when making the size determination. Whether concerns are affiliates of one another when one concern controls or has the power to control the other, or a third party controls or has the power to control both. Whether, when the sole shareholder of a challenged firm owns 50% or more of seven firms; owns the largest single block of stock, compared to all the others, of another firm; owns, together with his wife, the majority of another firm; and owns, together with an individual with whom he has many common investments, a majority of three other firms; he will be considered to control all of these firms. I. BACKGROUND A. The Request for a Size Determination U. S. Grounds Maintenance, Inc. (Appellant), is a firm that was a certified participant in the Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program. On April 10, 2003, SBA's Procurement Center Representative (PCR) for Nebraska and Iowa contacted SBA's Area IV Office of Government Contracting (Area Office) in Chicago, Illinois, and raised the issue of whether Appellant was eligible as a small business to participate in the HUBZone program. Eventually, the PCR's concerns reached the Associate Administrator for the Office of HUBZone Empowerment Contracting (AA) and, on May 15, 2003, the AA requested the Area Office to conduct a formal size determination on Appellant. The basis for the AA's request was that Appellant's principal, John L. Hoich, President and 50% owner, owned three other companies, Hoich Enterprises, Inc.; Hoich Irrigation; and Hoich Lemke Building. Further, Appellant had two other owners, each of whom owned 25% of Appellant and together owned two other firms, M&A Enterprises and Golf Tech Designs. On May 16, 2003, the Area Office informed Appellant of the request for a size determination, stated that it would make a determination of Appellant's size as of "the present date," and requested it respond to the AA's concerns and submit a completed SBA Form 355, together with certain other information. The information was due within three business days. Appellant received an extension of time to May 30th to submit its response, and did so on June 2nd. Following this initial response, the Area Office made additional requests for information. Ultimately, on September 3, 2003, Appellant submitted a revised SBA Form 355, together with a more complete response. B. The Size Determination On September 24, 2003, the Area Office issued its size determination, determining Appellant's size as of September 3rd, the date it submitted its revised SBA Form 355. The applicable size standard was North American Industry Classification System (NAICS) code 561730, Landscaping Services, with a corresponding $6 million annual receipts size standard. The Area Office found that, as of that date, Mr. Hoich was the sole owner of Appellant and Hoich Enterprises, Inc. The Area Office further found that Mr. Hoich was involved in the following business ventures, all real estate firms (the real estate firms): ú CCJJ, LLC (CCJJ): Mr. Hoich is a 50% member. ú Raintree Apartments, Inc. (Raintree): Mr. Hoich owns 50%. Jerry Slusky is the other 50% shareholder. ú Hilton Head Apartments, LLC (Hilton Head): Mr. Hoich, with 46.67%, is the largest member. Mr. Slusky is a 33.333% member. ú Park Properties, LLC (Park): Mr. Hoich is a 50% member. Mr. Slusky also is a 50% member. ú Hoich Family, LLC (Family): Mr. Hoich and his immediate family own 100%. ú DH, LLC (DH); PacWest, Inc. (PacWest); and Pacific West Properties, LP (Pacific West): Mr. Hoich is the sole member of DH; he owns 50% of PacWest; and the two firms together own 50.035% of Pacific West. The remaining 49.965% of Pacific West is owned by Slusky, LP, which is 100% owned by Mr. Slusky. ú Oak Brook Partners, LLC (Oak Brook Partners); and Oak Brook Apartments, LLC (the Oak Brook firms): Mr. Hoich is a 75% member of Oak Brook Partners, LLC, which is a 40% member of Oak Brook Apartments, LLC; Mr. Hoich and his wife together own another 40% of Oak Brook Apartments, LLC. ú AHA Equities, LLC; and Southwestern Plaza, LLC (Southwestern): Mr. Hoich is a 40% member of AHA Equities, LLC, which is a 50% member of Southwestern. The other 50% member is JJJ Investments, LLC, a firm owned by Mr. Slusky. ú 192nd & Harrison Partnership, Ltd. (Harrison): Mr. Hoich is 50.01% member. ú Overlook Plaza, LLC (Overlook): Mr. Hoich is 50% member and manager. ú Lakeside 168, LLC and The Shoppes at Lakeside, LLC (Shoppes): Mr. Hoich owns 100% of Lakeside 168, LLC, which owns 50% of The Shoppes at Lakeside, LLC. The other 50% is owned by Smart Buildings, LLC, which is 50% owned by Mr. Slusky. Appellant's attorneys, in their submissions, characterized these entities as passive real estate investments and thus not relevant to the size determination. The Area Office concluded that this contention was contradicted by SBA's size regulations. It also noted that the SBA has established size standards for Lessors of Residential Buildings and Dwellings, NAICS code 531110; and Lessors of Nonresidential Buildings (except Miniwarehouses), NAICS code 531120; and, therefore, views rental real estate as a business activity. The Area Office concluded that, through his 50% or more ownership interests, or his ownership of the largest single block of stock in an entity, or his identity of interest with his wife, or his identity of interest with Mr. Slusky (an individual with whom he had many common investments), Mr. Hoich had the power to control all the entities named above. Accordingly, because Mr. Hoich is sole shareholder owner of Appellant and Hoich Enterprises, the Area Office concluded that Appellant is affiliated with all the firms named above. The Area Office aggregated the annual receipts of all the firms, concluded that these exceeded the applicable size standard, and determined that Appellant was other than small. C. The Appeal On October 9, 2003, Appellant filed the instant appeal. Appellant attaches to the appeal additional evidence, in the form of affidavits from Mr. Hoich and Appellant's counsel; and a number of documents, largely copies of correspondence regarding this case, most of which are already in the Area Office file. Appellant also requested that the full record before the Area Office be made available to its counsel and that it be allowed to present oral argument. Appellant discusses at length the process leading to the size determination. Appellant mentions several times discussions the AA had with its counsel, who allegedly received assurances from the AA that Mr. Hoich's passive investments in real estate were irrelevant to the size determination. Appellant relied on these representations by the AA. Appellant also discusses its many conversations with the Area Office's size determination specialist (SDS). Appellant documents the SDS's many attempts to elicit further information from it relative to the size determination and her requests for additional information from Appellant as more of Mr. Hoich's investments came to her attention. Appellant speculates that the SDS was fed misleading information concerning its business. Appellant objects to the SDS's statements that she felt it and its attorneys were not being forthcoming with her, when Appellant was merely attempting to eliminate irrelevant documentation. Appellant also objects to the SDS's rejecting their reliance on the assurances of the AA. Appellant discusses the renewal of a contract at Offutt Air Force Base and accuses SBA officials of manipulating the size determination process to prevent its receiving an award. Appellant further accuses SBA's Omaha Office of being nonresponsive and giving inaccurate information about the status of the size determination-for example, the SDS told Appellant's counsel she was still working on the decision the day before the Area Office issued it. Appellant accuses the SDS of not being impartial in conducting the size determination. Appellant also discusses its communication with a Nebraska congressman about its concerns about how the size determination was handled. Appellant argues that the receipts of the real estate firms should not be considered in determining its size. Appellant asserts that Mr. Hoich is a passive investor in these firms and does not take an active part in the management of the firms. These receipts represent Mr. Hoich's personal income and his interests in the firm are his personal assets. It argues that a principal's personal assets and income are not considered in determining a firm's size, citing Size Appeal of ROH, Inc., SBA No. SIZ-4040 (1995); and Size Appeal of Triple P Services, Inc., SBA No. SIZ3607 (1992). [1] The definition of "annual receipts" is concerned only with the receipts of the firm and its affiliates and excludes the personal income of individual principals. Further, Appellant asserts it is an error of fact to assert Mr. Hoich has the power to control Hilton Head or Southwestern Plaza, because he has does not have a majority interest in those firms. Appellant further asserts the Area Office erred in relying on Size Appeal of Ben Fitzgerald Real Estate Services, L.L.C. d/b/a Rosemark, SBA No. SIZ-4542 (2003). There, true affiliation existed between the firms in question, and the principals in question were actively involved in management of the firms. Appellant also asserts the Area Office's statement that affiliation between concerns is determined by one concern's control or power to control another concern, or by a third party's control or power to control both, is in error. Appellant argues that this is not an absolute rule of law, because SBA's size determination Standard Operating Procedure states only that affiliation is "generally" determined in this way. Standard Operating Procedure 90 01 3, "Size Determination Program" (Jan. 28, 1998), Ch. 5, Paragraph 5.a (SOP). Appellant argues, citing Size Appeal of Inland Dredging Company, LLC, SBA No. SIZ-4350 (1999), that affiliation must be determined using a totality of the circumstances test. Appellant argues that the affiliation rule is not a net worth test for an individual. Under the Area Office's interpretation, Mr. Hoich could own a large amount of residential real estate personally, and his rental income would not apply towards Appellant's annual receipts; yet, rental income from any business concern he controls, no matter how small, is included. Appellant argues this is not rational, and thus an error of law. Finally, Appellant asserts that Mr. Hoich's business strategy and investments have been praised by the officials at Nebraska's Small Business Development Center (SBDC), suggesting this implies some type of sanction by SBA. D. Supplemental Pleadings On October 10, 2003, this Office issued the initial Notice and Order in this case. On October 14, 2003, Appellant filed a copy of the Size Determination, which had not accompanied the Appeal Petition, and it become clear that this case did not involve a procurement. Accordingly, on October 15, 2003, the Administrative Judge issued a Corrective Order, deleting the requirement to submit a solicitation and making three points regarding the instant appeal: First, evidence not previously submitted to the Area Office is usually not allowed on appeal, 13 C.F.R. Section 134.308(a); second, discovery is not permitted in size appeals, 13 C.F.R. Section 134.310; and, third, oral hearings are not held except on a finding of extraordinary circumstances, 13 C.F.R. Section 134.311. On October 28, 2003, Appellant moved to extend the record closing date, so that its counsel could examine the Area Office file, part of the record before this Office. That day, the Administrative Judge granted the motion and set the close of record for November 17, 2003. Counsel for Appellant then examined the Area Office file here at this Office. On November 19, 2003, Appellant filed a Supplemental Pleading, together with a motion for leave to file late, assigning as reason for the late filing counsel's miscalculation of the deadline. Appellant asserts, citing 13 C.F.R. Sections 121.1001(a)(6) and 126.800, that this size determination is void ab initio, because it was initiated by the PCR and the SDS, who had no authority to do so. Further, Appellant takes issue with comments by the PCR about Mr. Hoich, which it asserts are prejudicial to it and tainted the entire process. Appellant also asserts, citing 13 C.F.R. Section 121.1007(a), the Area Office should not have conducted a size determination because no procurement was pending. Appellant further argues that the protest was insufficiently specific and should have been dismissed. The actions of the PCR and the SDS were fishing expeditions to support their predetermined conclusion Appellant was not a small business and prevent Appellant from receiving contract awards. II. DISCUSSION A. Threshold Issues Appellant filed the instant appeal within 30 days of receiving the size determination. Thus, it is timely. See Size Appeal of Communicar, Inc., SBA No. SIZ-4551, at 5 (2003); 13 C.F.R. Section 134.304(a)(2). The Administrative Judge will not consider evidence not previously presented to the Area Office that issued the subject size determination being appealed unless (1) the Judge sua sponte orders submission of such evidence; or (2) the proponent moves its admission, establishing good cause for its submission. Size Appeal of Leonardo Technologies, Inc., SBA No. SIZ-4597, at 13 (2003); 13 C.F.R. Section 134.308(a). Here Appellant failed to make a motion to admit its new evidence. Even if Appellant had, the new evidence is the affidavits of Mr. Hoich and his attorney, recounting their discussions with SBA officials regarding this case, and is not probative of any material fact in this case. The other documentation Appellant offers either is already in the Area Office file and thus redundant, or is irrelevant here. Accordingly, the Administrative Judge EXCLUDES Appellant's proffered new evidence. Appellant's request for discovery is DENIED, because discovery is not permitted in size appeals. 13 C.F.R. Section 134.310. Appellant's request for an oral hearing is DENIED, because oral hearings are not held except on a finding of extraordinary circumstances. 13 C.F.R. Section 134.311. Appellant's motion for leave to file its supplemental pleading late is GRANTED, because the late filing is due to excusable neglect, the motion is unopposed, and granting it will not prejudice the Agency. Appellant has the burden of proving, by a preponderance of the evidence, all elements of its appeal. Specifically, it must prove the Area Office size determination is based on a clear error of fact or law. See Size Appeal of Procedyne Corp., SBA No. SIZ-4354, at 4-5 (1999); 13 C.F.R. Section 134.314. B. Alleged Procedural Errors The Administrative Judge notes first that this Office is not empowered to make determinations as to any alleged misconduct by SBA officials and has neither the resources nor the authority to conduct any investigation. If Appellant feels it has suffered fraud or abuse at the hands of SBA officials, it should file a complaint with SBA's Office of Inspector General. 13 C.F.R. Section 101.301. Appellant's reliance on statements by the AA and the SBDC officials is misplaced. Once the AA requested the size determination, it was made by the Area Director, relying on the staff work of the SDS. 13 C.F.R. Section 121.1002. The AA had no further role, and Appellant's contacts with him were a waste of time for all concerned. Any suggestion that SBA is somehow estopped from finding Appellant other than small because of its reliance on inaccurate advice from Agency officials is meritless. The United States cannot be estopped because of a party's reliance on inaccurate information from its officials. Size Appeal of L. Freedman & Associates, P.C., SBA No. SIZ-4247, at 6- 7 (1997). Appellant's argument that it was the subject of an unfair investigation is not supported by the record. What is clear here is that the PCR strongly suspected Appellant was not a small business and worked to bring his suspicions to the attention of the appropriate Agency officials. Eventually, the information the PCR and SDS uncovered convinced the AA to request a formal size determination. The Area Office then made the size determination. This is how the process is designed to work. The PCR's comments did not taint the process because the SDS performed the staff work on the determination and the Area Director was the decision-making official. The final decision was grounded in the factual record, not in speculations about Mr. Hoich's character. Appellant's argument would have some force if it could point to any inaccurate information or misstatement of fact in the size determination or any inappropriate characterization of it. It has not done so. It merely speculates about information "probably" given to the SDS. It would be very serious indeed had actual false information made its way into the size determination because of malicious actions by Agency officials. However, there is no evidence that this happened here. Therefore, the size determination thus must be considered wholly factual. T0he Administrative Judge thus concludes that it is commendable, not censurable, that some Agency officials were determined to get the facts on Appellant's status. [2] Appellant's arguments that the size determination is void because it was initiated by the PCR's insufficiently specific complaints and that the PCR and SDS were not authorized to file a protest are meritless. These officials did not initiate the protest; they conducted a preliminary investigation and called it to the attention of the AA, who did file the protest. The AA had authority to file the protest as the program official responsible for the HUBZone program and its decertification process under 13 C.F.R. Sections 126.503 and 126.900. See 13 C.F.R. Section 121.1001(b)(6). Further, although the PCR's initial inquiry was not specific, the AA's protest, which identified Appellant's suspected affiliates, was sufficiently specific, because it provided notice of the grounds on which the AA questioned Appellant's size and provided an evidentiary basis for the allegations. Size Appeal of Dove Mailing, Inc., SBA No. SIZ-4415, at 2-3 (2000); 13 C.F.R. Section 121.1007(b). Appellant's citations to 13 C.F.R. Sections 121.1001(a)(6) and 126.800 are inapposite, because these sections deal with protests involving a particular procurement, and no procurement is at issue here. Appellant's argument that the AA's protest could be not considered because it did not pertain to a particular procurement is meritless. The regulation Appellant cites is one of a number of consecutive sections dealing with size determinations arising out of procurements. 13 C.F.R. Sections 121.1003 - 121.1007. Other regulations make it clear that the size determination process also embraces requests for a size determination not related to particular procurements. 13 C.F.R. Sections 121.1001(b); 134.304(a)(2); see, e.g., Communicar, SBA No. SIZ-4551 (Expanded Economic Injury Disaster Loan Application). Accordingly, the Administrative Judge finds that Appellant's procedural objections to the size determination are unsupported by any legal authority. Appellant has failed to object to the factual determinations in the size determination, and nothing in the record contradicts the Area Office's findings. Accordingly, the only issue remaining is whether the Area Office erred in determining as a matter of law that Appellant was affiliated with the real estate firms. C. The Issue of Affiliation The Small Business Act, 15 U.S.C. Section 631 et seq., authorizes SBA to establish size standards by regulation, in order to determine which businesses are small businesses. 15 U.S.C. Sections 632(a)(2)(A); 634(b)(6). SBA has done so, at Part 121 of 13 C.F.R. It is these regulations, as interpreted by this Office's case law, that determine whether a firm qualifies as a small business. Appellant's attempt to use one adverb in the SOP to vary the plain language of the regulation is risible and does not merit further discussion. The regulation is clear as to the basic test for determining affiliation: "Concerns are affiliates of each other when one concern controls or has the power to control the other, or a third party or parties controls or has the power to control both." 13 C.F.R. Section 121.103(a)(1). This Office has consistently adhered to this test. See, e.g., Size Appeal of Concepts in Staffing, Inc., SBA No. SIZ-4547, at 4 (2003). Appellant's attempt to replace this precedent with a totality of the circumstances test is misplaced and reveals a fundamental misunderstanding of the law. The totality of the circumstances test, as discussed in Inland Dredging, SBA No. SIZ-4350, is used to determine whether concerns control or have power to control each other. It is not a substitute for the control test in Section 121.103(a)(1), but one methodology used to determine whether control exists. Id., at 6- 7. [3] Appellant correctly asserts that an individual principal's investments and net worth, by themselves, are not a factor in determining a firm's size. Were Mr. Hoich's investments in large corporations, or small enough in each firm so that there was no issue of his having the power to control the firms, there would be no finding of affiliation. The important point here is not the nature of Mr. Hoich's investments, or his day-to-day role or lack thereof in the firms in which he invested. Rather, it is the Area Office's finding that his investments give him the power to control the firms in which he invested. It is this element of control that is vital to the finding that the firms are affiliated. Thus, the Area Office found that a third party (Mr. Hoich) had the power to control Appellant and all the real estate firms, and that these firms were thus affiliated. Because the firms were affiliated, the annual receipts of all the firms must be aggregated in determining Appellant's size. 13 C.F.R. Section 121.103(a)(4). The Area Office's conclusion that this calculation renders Appellant other than small is not disputed by Appellant and is supported by the record. Accordingly, the one issue remaining is whether the Area Office erred in determining Mr. Hoich had the power to control the real estate firms. [4] Mr. Hoich individually owns 50% or more of the stock of CCJJ, Raintree, Park, Family, DH, PacWest, Oak Brook Partners, Harrison, Overlook, and Shoppes. He clearly thus has the power to control these firms. See Size Appeal of First International Bank, f/k/a First National Bank of New England, SBA No. SIZ-4366, at 7 (1999); 13 C.F.R. Section 121.103(c)(1). Mr. Hoich owns Hilton Head's largest single block, which is large compared to any other block, so he has the power to control that firm. See Size Appeal of Cellegy Pharmaceuticals, Inc. SBA No. SIZ-4439, at 5 (2001). Mr. Hoich has an identity of interest with his wife, and thus their interests are aggregated in determining affiliation. Size Appeal of Specialized Technical Services, SBA No. SIZ-3833, at 4 (1993); 13 C.F.R. Section 121.103(a)(3). Accordingly, Mr. Hoich has the power to control the Oak Brook firms. Finally, Mr. Hoich has a number of common investments with Mr. Slusky, and thus they are treated as one party with their interests aggregated for the purposes of determining control and affiliation. See Size Appeal of Bunkoff General Contractors, Inc., SBA No. SIZ-3804, at 12-13 (1993); 13 C.F.R. Section 121.103(a)(3). Accordingly, Mr. Hoich must be found to have control of Pacific West and Southwestern as well. [5] Therefore, the Administrative Judge finds that the Area Office made no clear error of fact or law in the instant size determination. Appellant is clearly affiliated with the real estate firms, because Mr. Hoich has the power to control all the firms, and their aggregated annual receipts exceed the applicable size standard. Thus, Appellant is other than small. III. CONCLUSION For the above reasons, the Administrative Judge AFFIRMS the Area Office's size determination and DENIES the instant appeal. This is the Small Business Administration's final decision. 13 C.F.R. Section 134.316(b). CHRISTOPHER HOLLEMAN Administrative Judge _________________________ 1 Appellant alleges it has contacted the principal of Triple P Services and asserts that, like Mr. Hoich, he had unrelated investments that this Office ruled were properly excluded when determining Triple P's size. 2 Appellant's unhappiness with its interactions with the SDS during the size determination process seems part of the normal give and take between the Agency and a challenged firm. The firm does not want to give out information it considers irrelevant; however, the Agency, not the challenged firm, must determine what is relevant. See Size Appeal of Apex Group, Inc., SBA No. 4300, at 5-6 (1998). Here, it appears the SDS was diligent in extracting from Appellant information that Appellant did not understand was relevant to the size determination. Again, accusations of unfairness are not borne out by the existence of inaccurate facts in the size determination. As to the telephone call where Appellant argues the SDS misinformed it about the status of the determination, it seems a simple misunderstanding, common when Federal officials must deal with frequent status calls from firms and individuals anxious about their cases. 3 Appellant's citations to ROH, Inc., SBA No. SIZ-4040, and Triple P Services, SBA No. SIZ-3670, are inapposite, because in neither case did this Office find that the challenged firm's principal controlled the entities from which he received the investment income not included in determining annual receipts. 4 Appellant's argument that Mr. Hoich could own the properties as an individual and not have their income included in Appellant's annual receipts is meritless, considering that we must examine Appellant's status as it is actually organized when size is determined and not as it would be in counsel's alternative reality. 5 There may be some question as to Mr. Hoich's control of AHA, in which he owns 40% of the stock, which is not large in comparison to any other share. However, even if AHA's receipts are deducted from the calculation of Appellant's annual receipts, it remains large, so any error by the Area Office as to AHA is, at most, harmless. See Size Appeal of InfoTech Enterprises, Inc., SBA No. SIZ-4346, at 12 n.5 (1999). Posted: January, 2004