A Answer, Inc., No. MSB-462 (April 18, 1994) Docket No. MSBT-94-1-18-4 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. IN THE MATTER OF: ) ) Docket No. MSBT-94-1-18-4 A Answer, Inc. ) APPEARANCES For the Petitioner: For the Agency: Ms. Patsy Reese John T. Spotila, Es4. President General Counsel A Answer, Inc. David A. Fishman, Esq. 3026 San Bruno Avenue Attorney for the Agency San Francisco, CA 94134 Small Business Administration 409 Third Street, SW Washington, DC 20416 DIGEST The regulations published at 54 Federal Register 34692, et seq., on August 21, 1989 and codified at 13 CFR Part 124 must be used to evaluate all questions arising on or after August 21, 1989 concerning participation in and termination, suspension and grad uation from the Agency's 8(a) program. 13 CFR 124.1(a)(2)(i). In an 8(a) Program termination action, initiated in accordance with the provisions of Section 124.209 of the regulations (unlike a suspension action, initiated pursuant to the provisions of the regulation at Section 124.211), the Petitioner has the burden of proving, by preponderant evidence, that the Agency's finding of "good cause" for the termination of the Petitioner's Program participation was arbitrary, capricious or contrary to the law or the regulations. 13 CFR 124.209(a); 13 CFR 124.210(h)(1). "Good cause" for a participant's Program termination may be based upon, among other things: a demonstrated pattern by the Program Participant of failing to make required submissions or responses to the Agency in a timely manner. Evidence of the Program Participant's having failed or refused to accept Certified Mail, with a Return Receipt Requested, from the Agency will obviate the necessity of the Agency's having to jus tify the propriety of its procedure in effecting notification of the proposed termination on an 8(a) Program Participant. FINAL DECISION April 18. 1994 USHER, Administrative Law Judge: Jurisdiction Authority for these proceedings is found in Section 409 of the Business Opportunity Development Reform Act of 1988, Public Law 100-656 (Section 8(a)(9) of the Small Business Act of 1958, as amended; 15 U.S.C. 637(a)(9)), hereinafter referred to as "the Act," and in the regulations codified at 13 CFR Parts 124 and 134, which are referred to hereinafter by section numbers only. Issue Is there a reasonable factual basis and an evidential rationale for the conclusion of the Associate Administrator 1/ in the re cord that was before her at the time she made her determination; is it clear from the record and from the determination itself that the AA/MSB&COD did not err in interpreting or applying the law and regulations to the facts found in the record? Regulations The Agency's regulations found at Section 124.209 provide, insofar as is pertinent here: (a) General. Participation of a[n] 8(a) business con cern in the 8(a) program may be terminated [2/] by SBA prior to the expiration of the concern's Program Term for good cause. Examples of good cause include, but are not limited to, the following: * * * * * * * (6) A demonstrated pattern of failing to make required submissions or responses to the [Agency] in a timely manner, including: (i) Failure by the concern to provide SBA with required quarterly or annual financial statements within 90 days of the close of the reporting period, or required audited financial statements within 180 days of the close of the reporting period. Failure to provide SBA with requested tax returns, reports, or other available data within 30 days of the date of request. Further, the regulations at Section 124.209(b) require written notification of the Program Participant that termination of its status is intended, and the Agency must set forth in the notification letter its findings, based on the facts and in accordance with law and regulations, for every material issue relating to the grounds upon which [the] termination would be based, with specific reasons for each finding. The Participant is allowed 45 days from the date of service of the letter of notification to submit written information that would eliminate the ground(s) for termination or would explain why the proposed ground(s) should not justify termination. The regulations further provide that the Agency shall reconsider the proposed termination after the 45-day response period and then notify the Participant that the grounds for the proposed termination have been eliminated or that, despite the information (if any) that has been provided, some or all of the grounds for termination remain. According to the regulations, a second 45day delay shall be granted by the Director of the Division of Program Certification and Eligibility, 3/ "where appropriate," and a recommendation of the Participant's termination is then submitted to the Associate Administrator by the D/DPCE. Facts and Procedural History A Answer, Inc., a California corporation engaged in "general contracting," is owned and controlled by Patsy Reese, a socially and economically disadvantaged individual; on that basis, the firm was admitted as a Participant in the Agency's Section 8(a) Program on January 28, 1984. Exhibit V-2, 638/639. See also Agency's Answer, page 2. As a Program Participant, the Petitioner, A Answer, Inc., was required by its participation agreement with the Agency, and by the regulations at Sections 124.209, 124.303 and 124.501, to submit periodic financial statements as well as other reports. The administrative record adduced by the Agency indicates that, according to the San Francisco Assistant Regional Administrator's notation of January 28, 1993, the Petitioner "has ignored three letters mailed to her [sic] on September l, 1992, December 10, 1992, and December 29, 1992, requesting the 8(a) Annual Update [form], current financial statements, and the Representatives Used and Compensation Paid...[form]" and "has not submitted [the required] financial statements since December 31, 1991 in spite of numerous telephone requests and letters." Exhibit V-1, 52/53. On April 7, 1993, the Petitioner was notified of the Agency's intention to "terminate [its] 8(a) program participation" in accordance with the provisions of the regulation at Section 124.209, because of the Petitioner's: 1) Failure...to continue to maintain its eligibility for program participation, [and its] demonstrated pattern of failing to make required submissions or responses to the [Agency] in a timely manner, including: Failure...to provide [the Agency] with required quarterly or annual financial statements within 90 days of the close of the reporting period, or required audited financial statements within 180 days of the close of the reporting period. Failure to provide [the Agency] with requested tax returns, reports, or other available data within 30 days of the date of request. 2) Failure...to provide documents or certifications of continued eligibility or otherwise respond to requests for information relating to the section 8(a) program... within the time frames provided for in the requests. You failed to respond to the San Francisco District Office's request for the 8(a) Annual Update. A certified letter was sent to you on September 1, 1992, and a reminder letter was sent to you on December 10, 1992. In addition, you failed to respond to the San Francisco District Office's request for the Semi-Annual Report on Representatives Used and Compensation Paid for Services in Connection with Obtaining Federal Contracts. A letter was faxed to you on December 29, 1992. [Exhibit V-1, 39/40.] By the terms of the notification, the Petitioner's response to these allegations was required within 45 days. The record indicates that the April 7, 1993 letter was received by the Petitioner on April 9, 1993; no response was made as of July 12, 1993; and, on July 16, 1993, the Associate Administrator's representatives recommended termination of the Petitioner's participation. Exhibit V-1, 37/38. The Petitioner submitted certain financial records and a signed "Representatives-Used" form to the San Francisco Regional Office on July 30, 1993. Exhibits V-1, 21 to 31. Apparently without knowledge of the Petitioner's July 30, 1993 submission, the D/DPCE notified the Petitioner of the Agency's intention to terminate its Section 8(a) Program participation in a letter dated September 2, 1993. The D/DPCE referred to the April 7, 1993 letter and stated: "Our records indicate that A Answer, Inc. did not respond to our San Francisco Regional Office's letter of notification." 4/ The Petitioner was again given 45 days to "submit, in writing, information which will eliminate the grounds for the proposed termination or explain why the proposed grounds should not justify termination." The Petitioner was also advised of its right to seek a meeting to discuss the proposed termination, and a voluntary Withdrawal Agreement was enclosed for execution by the Petitioner, "should you wish to voluntarily withdraw from the 8(a) Program." Exhibits V-1, 16 to 19. The September 2, 1993 letter, sent by Certified Mail, with a Return Receipt Requested, was "unclaimed" by the Petitioner when delivery was attempted by the Postal Service, and the Agency was notified of that fact on either September 14, 1993 or September 24, 1993. Exhibits V-1, 13 to 15. Nevertheless, by memorandum dated December 21, 1993, the Director, DPCE, notified the Associate Administrator that "A Answer, Inc. failed to respond to the second letter of notification [which he said was dated September 9, 1993];" he recommended "that the 8(a) program participation of A Answer, Inc. be terminated and that the firm be provided with a Notice of Termination" by the AA/MSB&COD. Exhibit V-1, 12. In the meantime, on September 3, 1993, copies of IRS Forms 1120-A and 4562 were submitted by the Petitioner to the San Francisco Regional Office. Exhibit V-1, 33 to 36. The Petitioner's Vice President asserted that the Agency's April 7, 1993 letter "was not received," while admitting that "[o]ne of our people must have sign [sic] for [it] and misplaced it." Another reason given for the Petitioner's delay in responding to the Agency's April 7, 1993 letter was: "a virus in [the] computer." Exhibits V-1, 21; V- 1, 33. In a letter dated December 22, 1993, the D/DPCE, notified the Petitioner of his December 21, 1993 recommendation to the Associate Administrator because "A Answer, Inc. failed to respond to the second letter of notification." Exhibit V-1, 5. In a letter dated December 30, 1993, the AA/MSB&COD notified the Petitioner of its termination and included information concerning its appeal rights under the provisions of the regulation at Section 124.210. Exhibit V-1, 3. That letter was delivered to the Petitioner on January 3, 1994, according to the Return Receipt. Exhibit V-1, 4. The Petitioner's letter of January 10, 1994, appealing the Asso ciate Administrator's termination of its Section 8(a) Program participation, was received in this Office and docketed on January 18, 1994. It reads, in pertinent part, as follows: It appears our undated records were delivered to the local San Francisco Office before they could be processed into the system at the local level the Headquarters Office had been notified the local office was not in receipt of the records [sic]. The managing officer and president had been out of country prior to this decision [sic]. We find it difficult to believe after eight (8) years into the program [sic]. We are systematically begin terminated [sic]. * * * * * * * We would like to be reinstated into the program and given the same consideration as the others who are granted 8(a) program privilege [sic]. On March 30, 1994, Counsel for the Agency filed its Answer to the Petition. 5/ The Answer included a motion that this Office "decline jurisdiction" on the basis of Section 124.210(d) of the regulations, which provides, so far as is pertinent here: The Administrative Law Judge selected to preside over an appeal shall decline to accept jurisdiction over any matter if: (1) The appeal does not, on its face, allege facts that, if proven to be true, would warrant reversal or modification of the determination.... Counsel argues that "the Petitioner has admitted to the alle gations set forth in the SBA's termination letter. Specifically, the Petitioner has failed to submit an updated business plan and has failed to timely submit requested information, including fi nancial statements." Because of the need to address what seems to have been ineptness in the handling of this termination action by the Agency's D/DPCE, the motion that I decline jurisdiction will be denied. The Agency's Counsel argued that "[t]he Petitioner has failed to assert any basis for a finding that the [Agency's] termination of [the] Petitioner from the 8(a) Program was arbitrary, capricious or not in accordance with the law," inasmuch as the Agency properly noticed the Petitioner of the pending termination proceeding and properly determined from the record before it that the Petitioner failed to provide the updated business plan and continuously failed to provide requested information, including updated financial statements, in a timely fashion. The record fully supports the [Agency's] termination. * * * * * * * The repeated failure of the Petitioner to timely submit the required financial statements constituted good cause for the termination of the Petitioner from participation in the Section 8(a) program pursuant to the provisions of Section 124.209(a)(6) of the regulations.... * * * * * * * Additionally, the Petitioner in its appeal does not provide any basis for not timely submitting the mandatory financial information. The Petitioner... asserts that the information...was provided. While the Petitioner did submit financial statements for 1992, these were submitted on August 2, 1993...eight months late. This submission is not timely and is not permitted under either the...regulations or the Petitioner's participation agreement. Regarding the required semi-annual written report to include a listing of any agents, representatives, attorneys, accountants consultants and other parties receiving fees, commissions or compensation of any kind to assist the-Program Participant in obtaining Federal contracts, Counsel points out that this was submitted by the Petitioner "over seven months late," without any adequate explanation for the tardiness. Discussion In an 8(a) Program termination action, initiated in accordance with the provisions of Section 124.209 of the regulations, the Petitioner has the burden of proving, by a preponderance of the evidence, that the Agency's action in finding good cause for the termination of the Petitioner's Program participation was arbi trary, capricious or contrary to the law or the regulations. See the Matter of John J. Lecher dba Lecher Construction Company, No. 429 (May 19, 1993). 6/ Good cause for termination under Section 124.209 may be based on, among other things, a demonstrated pattern of failing to make required submissions or responses to the Agency in a timely manner, including: failure by the concern to provide the Agency with the required quarterly or annual financial statements within 90 days of the close of the reporting period, or required audited financial statements within 180 days of the close of the report ing period and failure to provide the Agency with requested tax returns, reports, or other available data within 30 days of the date of request. The record clearly shows that the Petitioner is guilty of all of these infractions of the regulatory requirements, and, signifi cantly, has offered no reasonable explanation for its laxity. That "[t]he managing officer and president had been out of [the] country" (Petition) sounds as a pretext, not unlike the "virus in my computer" excuse. Exhibits V-1, 21; V-1, 33. The Petitioner has certainly not adduced preponderant evidence to sustain its burden of proof that the Agency's action in finding good cause for the termination of the Petitioner's Program par ticipation was arbitrary, capricious or contrary to the law or the regulations. In fact, no evidence of a lack of good cause for the Agency's action has been adduced. Furthermore, there is no assertion that the procedures employed by the Agency in notifying the Petitioner of the termination action were improper. The Petitioner appears to have been afforded all of the due process rights to which it was entitled. 7/ On the record before her on December 30, 1993, the AA/MSB&COD concluded that the Petitioner failed to carry its burden of proving, by preponderant evidence, that its conduct did not amount to good cause for the termination of its Program parti cipation. I cannot disagree with that conclusion. The record evidences good cause for the termination of the Petitioner's Program participation. The AA/MSB&COD's determination "was based on a consideration of the relevant factors;" there was no "clear error of judgment." Motor Vehicle Manufacturers Association v. State Farm Mutual Insurance, 463 U.S. 29, 77 L.Ed.2d 443, 103 S.Ct. 2856 (1983). It is apparent that the Associate Administrator has adequately considered all factors and has demonstrated a rational connection between the facts found and the choice made. The procedures employed by the Associate Administrator in reaching her determination comply with the applicable statutory requirements and with the regulations. United States Lines. Inc. v. Federal Maritime Commission, 584 F.2d 519 (D.C. Cir. 1978). Conclusion The December 30, 1993 determination of the Associate Adminis trator, terminating the Section 8(a) Program participation of the Petitioner, A Answer, Inc., was NOT ARBITRARY, CAPRICIOUS OR CONTRARY TO LAW. This is the final decision of the Small Business Administration, and it is binding upon all parties, including those within the employ of the Agency. See Section 124.210(i). ____________________________ Benjamin G. Usher Administrative Law Judge 1/ The Associate Administrator for the Agency's Office of Minority Small Business and Capital Ownership Development may be referred to herein as the "Associate Administrator" or the "AA/MSB&COD." 2/ "Termination" is defined in Section 124.100 as "the permanent cessation of 8(a) Program Participation prior to the expiration of the concern's Program Term for good cause pursuant to Section 124. 209. " 3/ The Director of the Division of Program Certification and Eligibility, Minority Small Business and Capital Ownership Development, may be referred to herein as the D/DPCE. 4/ The record is unclear as to why the D/DPCE chose to ignore the Petitioner's July 30, 1993 submission, but, with her August 5, 1993 memorandum, forwarding the documents filed by the Petitioner on July 30, 1993 (June 30, 1993 Financial Statements; December 31, 1992 Financial Statements; and the "Representatives-Used" form), the Assistant District Director in San Francisco advised the Central Office's Division of Program Development that there was concern about these submissions being made by the son of the Petitioner's owner because "he has no ownership interest in the firm [and] this firm has never requested a change in ownership to add [the son] as Vice President." Exhibit V-1, 20. 5/ The Agency's response to the Petition was due to be filed on March 4, 1994, 45 days after the docketing of the Petition, but, on February 28, 1994, Counsel for the Agency moved for an extension of time and was allowed to file the response on or before March 30, 1994. 6/ Section 124.210(h)(1) of the regulations provides that "the determination by the AA/MSB&COD...related to [termination pursuant to Section 124.209]...shall be sustained unless such determination is found [by the Administrative Law Judge] to be arbitrary, capricious, or contrary to law." To the extent that the decision in the Matter of Carolina Welding. Inc., No. 401 (May 22, 1992) is a variance with this holding, it is erroneous. Compare the decisions in proceedings involving the suspension of 8(a) Program Participants, e.g., the Matter of Harvey Oil Company. Inc., No. 387 (December 17, 1991); and the Matter of KRW Inc., No. 379 (August 29, 1991). 7/ Although the D/DPCE relied on the erroneous assumption that the information submitted by the Petitioner on July 30, 1993 and September 3, 1993 had not been received by the Agency, his recommendation to the AA/MSB&COD regarding termination was based on good cause, i.e., the fact that the submissions were untimely. Furthermore, I can find no fault with the D/DPCE's having insisted that the Petitioner did not respond to the September 2, 1993 letter even though it was, apparently, not "received." The fact that it was "unclaimed" by the Petitioner indicates that it was, in fact, "delivered" in the sense that the Postal Service notified the Petitioner of the fact that it was awaiting a pick up at the Post Office. Presumably, the Petitioner deliberately avoided delivery.