Aumann, Inc., No. 3743 (February 23, 1993). Docket No. SIZ-93-1-25-6 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) Aumann, Inc. ) ) Appellant ) ) Docket No. SIZ-93-1-25-6 Re: Robins Maintenance, Inc. ) ) Solicitation No. ) RFP F09650-92-R-0054 ) Department of the Air Force ) Robins AFB, Georgia ) DIGEST Where the son of the owner of an existing large firm, who has previously been an officer in that firm, establishes a new firm in a different field of operations; the new firm was financed independently; the large firm entered into an agreement with the new firm and the procuring agency, whereby the new firm assumed all the obligations and liabilities of the large firm regarding a grounds maintenance contract the large firm had with the procuring agency; and the large firm did not provide any further contracts, subcontracts, or financial assistance to the new firm, the firms will not be found affiliated under the newly organized concern rule. The presumption under the identity of interest rule that family members are to be treated as one person may be rebutted by a showing that the two firms are totally separate businesses and by factors which would render the application of the regulation unjust or inequitable under the circumstances. DECISION February 23, 1993 BLAZSIK, Administrative Judge, Presiding: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. 632 et seq., and the regulations codified at 13 CFR Part 121. Issues Whether a new firm founded by the son of a large firm's owner can be found affiliated with the large firm under the newly organized concern rule although the firms are in different fields of operations and the large firm entered into an agreement with the new firm and the procuring agency whereby the new firm assumed the obligations of the large firm with respect to a grounds maintenance contract the large firm had with the procuring agency, and the large firm did not provide any further contracts, subcontracts, or financial assistance to the new firm. Whether the new firm is affiliated with the large firm under the identity of interest regulation merely on the basis of family and historical ties. Facts On April 30, 1992, the Department of the Air Force, Robins Air Force Base, Georgia, issued this solicitation for grounds maintenance and classified it under Standard Industrial Classification (SIC) code 0782 (Agricultural Services), with a $3.5 million average annual receipts size standard. The solicitation was totally set aside for small businesses, and the offers were due on June 30, 1992. On December 1, 1992, the unsuccessful offerors were notified by mail that the successful offeror was Robins Maintenance, Inc. (Robins). Award of the contract was also made to Robins on the same day. Aumann, Inc. (Aumann or Appellant) received notification of the award on December 7, 1992, and filed a timely protest with the Contracting Officer on December 10, 1992. 1/ In its protest, Aumann alleges that Robins is affiliated with Dykes Grassing, Inc. (Grassing), a known large firm, through identity of interest among members of the same family and the newly organized concern rule. On the same day the protest was filed, the Contracting Officer forwarded the protest to the Atlanta Regional Office of the Small Business Administration (SBA) for a size determination. The Regional Office file discloses the following uncontroverted facts. 2/ Robins' SBA Form 355 shows that Everett Dykes, Jr. (Everett Jr.), is President and 100 percent stockholder of Robins. William Quincy Dykes (William Quincy), Everett Jr.'s cousin, is Vice President, and Everett Dykes, III, Everett Jr.'s son is Secretary/Treasurer. Robins was incorporated on September 24, 1991, and its sole business is grounds maintenance. Robins' SBA Form 355 reveals that, alone, its average annual receipts are below the applicable $3.5 million size standard. The Regional Office file also shows that Grassing, the alleged affiliate, was incorporated in 1971 by Everett Dykes, Sr. (Everett, Sr.), who was Everett, Jr.'s father, and who owned 100 percent of Grassing's stock. Grassing's primary business at that time was grounds maintenance, but it had some road construction work contracts. During 1989, Everett, Sr.'s three sons Everett, Jr., Richard, and Jerry Van served as Grassing's managers, and Everett, Jr. also served as Grassing's Vice-President. During that year, Grassing had a contract with Robins Air Force Base for grounds maintenance work, identical to the solicitation at issue here. The field manager for that contract was William Quincy, Everett, Jr.'s cousin. When Everett, Sr. died during 1989, Everett, Jr. asked his two brothers (Richard and Jerry Van) for permission to take over the Robins Air Force Base contract from Grassing in return for abandoning any interest he had, or would be entitled to, in Grassing. With his brothers' acquiescence, Everett, Jr. incorporated Robins, as detailed before, and Robins, Grassing, and the Department of the Air Force entered into an agreement whereby Robins assumed all the obligations and liabilities of Grassing with respect to the existing grounds maintenance contract then held by Grassing with the procuring agency. The contract was called a Novation Agreement and was signed by representatives of the three parties on November 21, 1991. 3/ Since his death, Everett, Sr.'s property, including 100 percent of his Grassing stock, has been placed in trust for his widow, Myrtle, who is the sole beneficiary of the estate. In order to provide some income for their mother, and to secure ownership of the corporation, the brothers initiated a buyout program from the trust of the Grassing stock. At the time of Robins' establishment, the brothers each owned thirteen hundred shares of Grassing stock. Everett, Jr. then sold his share of the stock to the other two brothers in return for the assumption of the grounds maintenance contract held by Grassing. Grassing is now managed by Richard and Jerry Van, neither of whom holds stock or a management position in Robins. Similarly, Everett, Jr. gave up all his rights to profits and income from Grassing and holds no position in Grassing. In an affidavit submitted to the Regional Office, Everett, Jr. asserted that he does not contest that Robins and Grassing are owned by members of the same family, but disagreed that affiliation exists on that basis. He asserted that upon the death of his father, Everett, Sr., his two brothers, who were the other managers of Grassing, were not interested in continuing the grounds maintenance projects of the firm and wanted to concentrate on road and highway construction contracts. Accordingly, he, Everett, Jr., decided to form a new firm, Robins, whose sole line of business would be grounds maintenance. In order to take over Grassing's grounds maintenance contract, Everett, Jr. stated that he gave up all the interest he had, or would be entitled to, in the company. He asserted that no financial assistance was obtained from Grassing when Robins was founded and that the initial funding was obtained from a loan secured by him on his personal residence. He also asserted that there are no common facilities between the two firms and that the offices of the two firms are separated from each other by at least 40 miles; that there is no common management, no key employees, or common directors between Grassing and Robins; that there is no financial dependence by Robins on Grassing; that no subcontracting activity has occurred between the firms; that all equipment and materials used by Robins have been purchased or leased using its own line of credit; and that there has been no technical or any other type of assistance provided by Grassing. Finally, he asserted that since Robins' establishment, Grassing's business is devoted solely to obtaining contracts for major highway and road construction work for the State of Georgia and that Robins is engaged exclusively in grounds maintenance work. The Regional Office file also included an affidavit provided by William Quincy. He asserted that he is currently a Vice-President of Robins, but does not own any stock in Robins, nor did he ever own any stock in Grassing. He never served as an officer or key employee of Grassing but was the manager of the grounds maintenance contract Grassing had with the Robins Air Force Base before Robins' establishment. Finally, he stated that he does not own any real property either separately or as a co-owner with any member of the Dykes family. The Regional Office issued its determination on January 15, 1993. Referring to the above detailed facts, the Regional Office noted that: Robins is the incumbent contractor for the subject procurement which was novated to Robins from [Grassing]. The novation of a contract (FAR 42.1204) is a legal instrument used in the transfer of a contract from one entity to another and the government recognizes the transfer of the contract and related assets. A novated contract is not viewed in the same light as a subcontract, i.e., the transferee has a direct contractual relationship with the government and not the transferor.... The Regional Office also noted that Grassing has provided no financial or technical assistance to Robins; that Robins is not dependent upon Grassing through contractual relations because Robins is seeking other contracts and the two firms are now in separate lines of business. Additionally, the Regional Office noted that no common facilities are shared and there is no common management or shared key employees between the two companies. Finally, the Regional Office noted that while the owners of Robins and Grassing are of the same family, Everett, Jr. has made an effort to separate his firm from Grassing. Thus, "there has been a clear line of fracture between the two concerns and ... there is no connection but that of being from the same family." In consequence, the Regional Office found that the presumption that the firms should be treated as one entity had been rebutted and that it would be unjust and inequitable to treat them so. Accordingly, the Regional Office determined that Robins is a small business for the applicable $3.5 million size standard. Appellant received the Regional Office determination on January 15, 1993, the day it was issued, and filed a timely appeal from that determination by letter hand-delivered on January 25, 1993. 4/ Appellant argues that the basis of the Regional Office's determination finding Robins and Grassing unaffiliated is incorrect as a matter of law and rooted in an improper application of the newly organized concern rule set forth at 13 CFR 121.401(j). In support, Appellant asserts that at the time Robins was established, both firms were in the same or similar lines of business. Appellant notes that Everett, Jr., Robins' founder and sole owner, was a former officer of Grassing and that William Quincy, Robins' Vice President, was a key employee of Grassing. Appellant argues that the novation agreement signed by Robins, Grassing, and the Air Force constitutes financial assistance from Grassing to Robins within the meaning of the newly organized concern rule. In support, Appellant cites our decision in Size Appeal of Service Resources Inc., No. 3332 (1990), where we construed the novation agreement between the challenged firm and the alleged affiliate to be a form of aid that qualified under the newly organized concern rule. Appellant argues that the cited case recognizes the policy considerations embedded in situations where small business firms grow into large businesses and yet want to continue to perform small business set-asides. Appellant notes that [i]f such a concern [a large business] can novate a setaside contract to one of its principals, arming that principal with the profits, the key personnel, the staffing, and all of the attendant advantages of incumbency, a legitimate small business concern like Appellant stands no chance. Finally, Appellant argues that the Regional Office erroneously concluded that the presumption of an identity of interest that family members are to be treated as one person was rebutted and a clear line of fracture between Robins and Grassing established. To the contrary, Appellant argues that the facts here have not established such a break between the two firms. The Presiding Judge extended the close of record to permit Robins to file a reply to the appeal. In its reply received in this Office on February 16, 1993, Robins generally argues that the Regional Office determination was correct; that the case precedent cited by Appellant is inapposite to the facts present here; and that, except for the fact that Everett, Jr. belongs to the same family that owns and controls Grassing, there has been and continues to be a complete separation between the two firms. Discussion Appellant has the burden of proving error in the Regional Office determination by a preponderance of the evidence. See 13 CFR 121.1707. It attempts to sustain that burden by considering separately the elements of the newly organized concern rule and the identity of interest rule and concluding that the facts of record demonstrate that a finding of affiliation under either has been established. We disagree. The newly organized concern rule provides: (j) Affiliation with a newly organized concern. Affiliation generally arises where former officers, directors, principal stockholders, and/or key employees of one concern organize a new concern in the same or a related industry or field of operation, and serve as its officers, directors, principal stockholders, and/or key employees, and the one concern is furnishing or will furnish the other concern with subcontracts, financial or technical assistance, bid or performance bond indemnification, and/or other facilities, whether for a fee or otherwise. Analyzing the elements of the newly organized concern rule as applied to the facts here, we note that, while Everett, Jr. was a former officer of Grassing, the firm he organized, Robins, is not in the same or related industry or field of operation. The record amply shows, as demonstrated by the unrebutted affidavit of Everett, Jr., that at the time of Robins' establishment and incorporation, Grassing was phasing out of its grounds maintenance work and concentrating solely in obtaining highway and road construction contracts, especially for the State of Georgia, whereas Robins' field of business was and is grounds maintenance. In fact, the record fails to reveal that, at the time of Robins' establishment, Grassing had any other grounds maintenance contracts except for the one that Robins took over from Grassing. The fields of operations of the two businesses, thus, are neither the same nor similar. Further, as revealed in the record, Everett, Jr. is the sole owner and principal officer of Robins. There are no other common officers, directors, or key employees between the two firms. Moreover, there is no evidence that Robins and Grassing have subcontracting arrangements or that, except for substituting Robins pursuant to a novation agreement, as described above, Grassing has provided financial or technical assistance to Robins or has provided Robins with bid or performance bond indemnification. The record shows that Robins has purchased all equipment and materials by obtaining its own line of credit and that the firms do not share common facilities. Appellant cites our decision in Size Appeal of Service Resources in support of its argument, contending that the novation agree ment executed by Grassing, Robins, and the Department of the Air Force constitutes financial assistance within the meaning of the newly organized concern rule. We believe, however, that the facts in Size Appeal of Service Resources are sufficiently dis tinguishable from the facts here to command a different result, since the record here clearly demonstrates that Grassing and Robins are not engaged in the same or related field of operations rendering Size Appeal of Service Resources inapposite 5/. Appellant also argues that Grassing and Robins are affiliated under the identity of interest regulation codified at 13 CFR 121.401, contrary to the Regional Office's finding on that issue. That regulation provides: (d) Identity of interest between and among persons as an affiliation determinant. Affiliation can arise between or among two or more persons with an identity of interest, such as members of the same family or persons with common investments in more than one concern. In determining who controls or has the power to control a concern, persons with an identity of interest may be treated as though they were one person. While it is true that, under the terms of the regulation quoted above, firms manifesting such indicia of affiliation as familial or historical ties have been deemed affiliated, it is not true that the Regional Office's finding of nonaffiliation between Grassing and Robins was unreasonable. As we stated in Size Appeal of Golden Bear Arborists, No. 1899 (1984), the lead case on identity of interests: ...the [identity of interest] regulation does create a presumption that members of the same family are to be treated as though they are one person, for the purpose of making affiliation determinations. This presumption may be rebutted, however, with evidence showing that the familial tie is far removed, that the individuals concerned are estranged or not closely involved with each other's lives or business transactions, or by other factors which would render the application of the regulation unjust or inequitable under the circumstances. In this case, while Everett, Jr., founder of Robins, was once an officer in Grassing, there is no other connection between the two firms aside from the fact that Everett, Jr. and the principals of Grassing are in the same family. While the record does not suggest estrangement between the family members, it does evidence a clear line of fracture between the businesses and the absence of any involvement by family members in each other's business transactions. The latter is underscored by the fact that the firms are not in the same line of business. Thus, after considering the totality of the factors involved, we agree with the Regional Office that the application of the identity of interest regulation here, which would impute control over Robins to Grassing, would render an unjust and inequitable result. Size Appeal of Multi Services Assistance. Inc., No. 3605 (1992), at page 8. The presumption of identity of interest resulting from family and historical ties has, thus, been rebutted on this record. Accordingly, we affirm the Regional Office's determination finding that the two firms are not affiliated. Conclusion The Regional Office determination that Robins Maintenance, Inc. is not affiliated with Dykes Grassing, Inc. and that it is a small business under the $3.5 million average annual receipts size standard is AFFIRMED, and the appeal is DENIED. This constitutes the final decision of the Small Business Administration. See 13 CFR 121.1720(a), (b), and (c). ____________________________________ Gloria E. Blazsik (Presiding) Administrative Judge _____________________________________ Michael S. Cole (Concurring) Administrative Judge _____________________________________ Jane E. Phillips (Concurring) Administrative Judge _______________ 1/ Thus, the protest was timely filed within five business days after the date of receipt of the Contracting Officer's notification of the identity of the awardee pursuant to 13 CFR 121.1603(a)(2) and will apply to the instant solicitation. 2/ The facts are based upon Robins' SBA Forms 355 and 1340, and certified submissions responding to the protest's allegations, as well as Robins' by-laws, incorporation papers, other financial information, and affidavits from Everett Dykes, Jr. and William Quincy Dykes. 3/ While the actual Novation Agreement was not included in the Regional Office file, it was attached to an exhibit submitted by Appellant in its Notice of Appeal. 4/ Thus, the appeal was filed within the five business day rule set forth in 13 CFR 121.1705(a)(2). We note that January 18, 1993, was a legal holiday and is not counted as a business day. 5/ In Size Appeal of Service Resources, the new firm and the old firm were in the same business.