Aim Construction and Contracting Corporation, No. MSB-593 (November 21, 1997). Docket No. MSBE-97-5-13-11 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) IN THE MATTER OF: ) Docket No. MSBE-97-5-13-11 ) Aim Construction and ) Decided: November 21, 1997 Contracting Corporation ) ______________________________ ) APPEARANCES Edward V. Collins, Esq., McElroy, Deutsch & Mulvaney, for Petitioner Aim Construction and Contracting Corporation. Audrey Liebross, Esq., John T. Spotila, Esq., for Respondent Small Business Administration. DIGEST By admitting in an 8(a) application that his ability to compete in the free enterprise system has not been impaired, the SBA can reasonably conclude that the applicant is not economically dis advantaged. The SBA need not have gone further to examine the factors that it generally uses to determine whether there is an impaired ability to compete in the free enterprise system. Based upon the evidence in the record, the SBA was reasonable in its conclusion that the applicant concern did not prove by a preponderance of the evidence that the individual claiming disadvantage unconditionally owns 51% of the applicant's stock because the stock certificates and corporate records do not establish such ownership. A nondisadvantaged individual, who is a shareholder in the applicant concern, may not have more than a 10% ownership interest in another firm in the same or similar line of business. FINAL DECISION ARKOW, Administrative Law Judge: Petitioner Aim Construction and Contracting Corporation (Aim) challenges a decision by the Respondent Small Business Administration (SBA) denying it entry into the 8(a) pro-gram [1] because the individual upon whom eligibility is based, Mr. Iqbal Ahmad, is not economically disadvantaged and does not own and control Aim. Aim contends the SBA's determination is arbitrary, capricious, and contrary to law. I find Aim's contentions to be without merit. Jurisdiction Jurisdiction to decide this appeal is proper. 15 U.S.C. Section 637(a)(9); 13 C.F.R. parts 124 and 134. The appeal was timely filed on May 9, 1997. 13 C.F.R. Sections 124.210(b), and 134.202(a). Issue Whether the action of the SBA in denying Aim Construction and Contracting Corporation entry into the 8(a) program is arbitrary, capricious, or contrary to law. 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1). Facts Aim, a construction company, applied for admission into the 8(a) program on May 21, 1996. Aim claimed that Mr. Iqbal Ahmad is socially and economically disadvantaged. It also claimed Mr. Ahmad owns and controls Aim. Mr. Ahmad is presumed to be socially disadvantaged because he is a Subcontinent Asian American. [2] The SBA denied the application on December 6, 1996. Administrative Record (AR) at Ex. 4. On January 20, 1997, Aim requested that the SBA reconsider its denial and presented evidence to support its request. AR at Ex. 3. The SBA denied the reconsideration request on March 26, 1997. There were four grounds for the denial. First, Mr. Ahmad was not economically disadvantaged because he stated in his Personal Eligibility Statement (SBA Form 1010A) that his ability to compete in the free enterprise system has not been impaired due to diminished capital and credit opportunities, as compared to others in the same or similar line of business and competitive market who are not socially disadvantaged; Mr. Ahmad's total personal assets amounted to $1,679,589; and Aim compared favorably with nondisadvantaged firms in the same or similar line of business based upon a comparison of key financial ratios as reflected by the 1996 Robert Morris and Associates industry standards. AR at Ex. 1. The SBA used Standard Industrial Classification (SIC) code 1542 as the basis for its comparison. AR at Ex. 2. Second, Aim is not 51% owned by the individual claiming disadvantage-Mr. Ahmad. The record shows: a purported "Certificate of Amendment of the Incorporation" to increase authorized shares from 200 to 400, which is not evidenced by a filing with the State of New York; the reverse side of Certificate Number 1 for 200 shares issued to Ms. Patricia Ahmad has not been properly executed for transfer; and the capital section of Aim's October 31, 1996 CPA-prepared balance sheet records 300 issued and outstanding shares, contradicting all of the other information provided. AR at Ex. 1. Third, Aim did not provide sufficient evidence that it amended the portion of Article III, Section 1 of its by-laws, which requires that the number of directors shall equal the num ber of shareholders; there are two shareholders, and only one director elected. Id. Fourth, Aim did not provide sufficient evidence that Ms. Patricia Ahmad, a nondisadvantaged 51% owner of Aim, is no longer the majority owner of Aim Construction Corporation, a different firm, which is in the same line of business as Aim, the applicant firm. Id. Aim was incorporated in the State of New York on March 18, 1994. The corporation's Certificate of Incorporation and state filing receipt state there are 200 shares of no par value stock. AR at Ex. 8. Article VI of Aim's by-laws provides: All certificates [of stock] shall be consecutively numbered and the name of the person owning the shares represented thereby, his residence, with the number of such shares and the date of issue, shall be entered on the Corporation's books. All certificates surrendered shall be cancelled and no new certificates issued until the former certificates for the same number of shares shall have been surrendered and cancelled, except as provided for herein. . . . . [T]ransfers of stock shall be made only upon the books of the Corporation . . . upon the surrender and cancellation of the certificate or certificates for such shares properly endorsed and the payment of all taxes due thereon. . . . AR at Ex. 8. Stock Certificate Number 1, representing 200 shares, was issued in the name of Patricia Salim Ahmad on April 18, 1994. On the reverse side of the certificate is an endorsement which purports to sell, assign, and transfer the shares. The endorsement is signed by Patricia S. Ahmad but does not bear a date, is not witnessed, does not enumerate the number of shares to be transferred, and does not identify the transferee by name. [3] AR at Ex. 9. See Appendix A. Aim's stock register lists Ms. Ahmad as the holder of 200 shares of stock issued on April 18, 1994, and represented by Certificate Number 1. The register does not indicate that those shares were ever transferred. Id. See Appendix B. Further, the page reserved for cancelled stock certificates shows the original issue to Ms. Patricia Salim Ahmad but does not reflect that the shares were ever transferred, or that Certificate Number 1 was ever surrendered to Aim, or that a new certificate was issued to another individual. Id. See Appendix C. The stock register also shows that Mr. Iqbal Ahmad was issued Certificate Number 3, representing 100 shares, on September 14, 1994. Similarly the stock register does not indicate that those shares were ever transferred. [4] Id. See Appendices B & D. Position of the Parties First, Aim contends that Mr. Ahmad is economically disadvantaged, and that the SBA's conclusion to the contrary is arbitrary and capricious because it ignored facts contained in documents supporting that conclusion submitted by Mr. Ahmad. Second, Aim contends that Mr. Ahmad owns 100% of Aim because he owns 100% of its issued and outstanding shares, and that the SBA's focus on authorized shares, rather than on issued and outstanding shares, led to the arbitrary and capricious conclusion that Mr. Ahmad did not own 51% of Aim. Third, Aim asserts that the SBA's conclusion that the number of directors of Aim is inconsistent with the number of shareholders is arbitrary and capricious because the evidence establishes that Aim amended its by-laws on December 27, 1996, to reduce the number of directors to one, consistent with the number of shareholders-one. Finally, Aim argues that, for these reasons, Aim is eligible for the 8(a) program. The SBA's determination denying Aim's admission is arbitrary and capricious. The SBA contends it correctly denied Aim's 8(a) application. It asserts it reasonably determined that Mr. Ahmad was not economically disadvantaged, that Mr. Ahmad did not un conditionally own 51% of Aim's stock, and that Ms. Patricia Ahmad is the majority shareholder of a company in the same or similar line of business as Aim. For these reasons, the SBA argues that it reasonably determined that Aim failed to satisfy the requirements for admission into the 8(a) program. Discussion I Economic Disadvantage Among the requirements for admission into the 8(a) program is that the socially disadvantaged owners of the applicant concern also must be economically disadvantaged. See 13 C.F.R. Sections 124.101, 124.106. Economically disadvantaged individuals are: socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged, and such diminished opportunities have precluded or are likely to preclude such individuals from successfully competing in the open market. 13 C.F.R. Section 124.106(a)(1)(i). In assessing economic disadvantage, the SBA examines factors that fall into three general categories: (1) the personal financial condition of each individual claiming disadvantaged status, including that individual's access to credit and capital; (2) the financial condition of the applicant concern; and (3) the applicant concern's access to credit, capital, and markets. 13 C.F.R. Section 124.106(a)(2). Here, there are three economic disadvantage issues. First, whether Mr. Ahmad's total personal assets preclude a finding of economic disadvantage. 13 C.F.R. Section 124.106(a)(2)(i). Second, whether a comparison of Aim's business financial condition to other firms in the same or similar line of business would preclude a finding that Mr. Ahmad is economically disadvantaged. 13 C.F.R. Section 124.106(a)(2)(ii). Third, whether Mr. Ahmad's ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities, when compared to those who are not socially disadvantaged. 13 C.F.R. Section 124.106(a)(1)(i). The SBA concluded that, because Mr. Ahmad's personal assets totaled $1,679,589, he was not economically disadvantaged. Aim asserts that the SBA's calculation of Mr. Ahmad's total assets was arbitrary because it ignored facts which bear on the calculation and would support a finding of economic disadvantage. Specifically, Aim argues that the SBA counted Mr. Ahmad's residence and equity in Aim as assets, and failed to consider the residential mortgages, the firm's notes payable, or that the market value of a small company such as Aim should be reduced. Appeal Petition at 4. This assertion is without merit because it erroneously attempts to equate the total personal assets test with the net worth test. [5] The calculation of personal assets is distinct from a calculation of personal net worth. The Small Business Act and the regulations recognize the differences between "net worth" and "total assets," and require the SBA to consider both factors when evaluating an individual's economic disadvantage. 15 U.S.C. Section 637(a)(6)(A) ("In determining the degree of diminished credit and capital opportunities the [SBA] shall consider, but not be limited to, the assets and net worth of such socially disadvantaged individual.") (emphasis added); 13 C.F.R. Section 124.106(a)(2)(i) ("The specific factors to be considered include . . . total fair market value of all assets and the individual's personal net worth.") (emphasis added). Property excluded from "net worth" calculations is included in "total assets" calculations. Matter of Pride Technologies, Inc., SBA No. 557 (1996). Pride held that the SBA reasonably found the individual not economically disadvantaged, despite his low personal net worth, because his personal assets of $4.1 million were excessive. Id. at 10. In SRS Technologies v. United States, 843 F. Supp. 740, 747 (D.D.C. 1994) the court held the SBA properly found that an individual's total assets of $4.6 million precluded economic disadvantage, despite low personal net worth. A finding that Mr. Ahmad's total assets were $1,679,589 cannot, by itself, lead to the conclusion that Mr. Ahmad is not economically disadvantaged. The SBA must explain why it reached its conclusion that such an amount precludes a finding of economic disadvantage. For example, the SBA did not compare Mr. Ahmad's total assets with those of other entrepreneurs or other American taxpayers to determine if they are excessive. Also, Mr. Ahmad's total assets are far below the amounts previously held to be excessive. See Pride, SBA No. 557 at 10 ($4.1 million); SRS Technologies, 843 F. Supp. at 747 ($4.6 million). Absent an explanation of why total assets of $1,679,589 led the SBA to conclude that Mr. Ahmad was not economically disadvantaged, there is no rational connection between that finding and that conclusion. Matter of Tower Communications, SBA No. 587 (1997) (holding that the SBA must explain why total assets are indicative of the individual's lack of economic disadvantage; a finding that total assets amounted to $1,260,971 alone cannot lead to a conclusion that an individual is not economically disadvantaged). Accordingly, the SBA's evaluation of Mr. Ahmad's total assets is arbitrary and capricious. The SBA's comparison of Aim with other firms in the same or similar line of business also fails to comply with the requirements of 13 C.F.R. Section 124.106(a)(2)(ii). The regulations define "same or similar line of business" as "all business activities within the same two-digit 'Major Group' of the Standard Industrial Classification (SIC) System." 13 C.F.R. Section 124.100. Here, the SBA incorrectly used Aim's four-digit SIC code, 1542, rather than the two-digit Major Group of industries found in the SIC Manual. Thus, the SBA compared Aim with the wrong class of similar firms. This defective analysis of Aim's business financial condition is arbitrary, capricious, and contrary to law. [6] Pride, SBA No. 557 at 7; Matter of Super Solutions Corporation, SBA No. 461 at 15 (1994). Despite the SBA's improper assessment of Mr. Ahmad's total personal assets and Aim's business financial condition, other evidence in the record establishes Mr. Ahmad's lack of economic disadvantage. It is significant that Mr. Ahmad, on two occasions, responded "No" to the following statement on his 8(a) application (SBA Form 1010A): ECONOMIC DISADVANTAGE Because of racial and/or ethnic prejudice, and/or cultural bias, my ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged. (Same business area in this context means same line of business and same competitive market area). AR at Ex. 3 and 10. Mr. Ahmad first responded "No" on Aim's initial 8(a) application (SBA Form 1010A). AR at Ex. 10. The SBA, in its initial denial of that submission, advised Aim that one of the reasons it concluded Mr. Ahmad was not economically disadvantaged was because of the "No" response. AR at Ex. 4. Yet in Aim's request for reconsideration, it submitted a revised Form 1010A in which Mr. Ahmad, for a second time, answered "No" to the same statement. AR at Ex. 3. Further, nothing in the AR or the Appeal Petition indicates that Mr. Ahmad retracted the statement, modified the response in any way, or claimed that there was a misunderstanding of the statement's import. The inescapable conclusion is Mr. Ahmad meant what he said-that his ability to compete in the free enterprise system has not been impaired due to diminished capital and credit opportunities because of racial, ethnic, or cultural prejudice. Mr. Ahmad's responses are admissions that his ability to compete in the free enterprise system has not been impaired. Further, they are voluntary admissions against his own interest. Accordingly, it was appropriate for the SBA both to accord them great weight in assessing whether Mr. Ahmad is economically disadvantaged, and to use them as a basis for concluding that Mr. Ahmad is not economically disadvantaged. The regulations make clear that the 8(a) program is not intended for individuals who have not experienced, or who have overcome impediments to obtaining access to financing, markets and resources. 13 C.F.R. Section 124.106(a)(1)(ii). This expression of the 8(a) program's intent excludes persons who have not experienced diminished credit and capital opportunities. See Matter of Shashikant P. Savla, d/b/a Kabil Associates, SBA No. 375 at 15 (1991). The statement on the SBA Form 1010A mirrors the definition of economic disadvantage in the regulations. See 13 C.F.R. Section 124.106(a)(1)(i). By admitting in his 8(a) application that his ability to compete in the free enterprise system has not been impaired, the SBA can reasonably conclude that Mr. Ahmad is not economically disadvantaged. The SBA need not have gone further to examine the factors that it uses to determine whether there is an impaired ability to compete in the free enterprise system. The burden is upon Aim to establish by a preponderance of the evidence that Mr. Ahmad is economically disadvantaged. Matter of Advanced Engineering Associates, Inc., SBA No. 382 at 9 (1991). Aim failed to meet that burden, and the SBA's conclusion that Mr. Ahmad was not economically disadvantaged is a reasonable one. Even though the SBA acted arbitrarily and capriciously with respect to its assessment of Mr. Ahmad's total personal assets and Aim's business financial condition, its conclusion that Mr. Ahmad is not economically disadvantaged nonetheless must be upheld because the SBA properly reached its ultimate conclusion that Mr. Ahmad is not economically disadvantaged. See Pride, SBA No. 557 at 7. II Ownership Before an applicant may be admitted into the 8(a) program, it must establish that it is at least 51% unconditionally owned by a socially and economically disadvantaged individual. 13 C.F.R. Section 124.103. In the case of a corporate applicant such as Aim, "51 percent of each class of voting stock and 51 percent of the aggregate of all outstanding shares of stock must be unconditionally owned" by a socially and economically disadvantaged individual. 13 C.F.R. Section 124.103(b). The SBA concluded that Aim did not establish Mr. Ahmad's unconditional ownership of at least 51% of the applicant concern. This conclusion was based, in part, on Stock Certificate Number 1. The certificate shows the shares were issued to Ms. Patricia Ahmad, the certificate was never properly and completely endorsed over to Mr. Ahmad, and Aim's stock register does not show any transfer of Ms. Ahmad's shares to Mr. Ahmad. See Appendices. Even though the purported endorsement on the stock certificate is signed by Ms. Ahmad and contains Mr. Ahmad's social security number, it is not witnessed, does not contain the name of the transferee, and does not state the number of shares to be transferred. These deficiencies coupled with the lack of evidence of an effective transfer on the stock register, the absence of a completed stock transfer page for the certificate, and the lack of evidence that the certificate was cancelled and a new certificate issued to Mr. Ahmad, all cast doubt on whether there was an effective transfer. Further, Aim's by-laws require that the shareholder's name be entered on the corporation's books. When shares are transferred, the stock certificate must be surrendered to Aim for cancellation. No new certificates may be issued until the former certificates for the same number of shares are surrendered and cancelled. Transfers of stock may be recorded on Aim's books only after the shares have been properly endorsed. Here, the transfer of Ms. Ahmad's shares failed to comply with Aim's by- laws regarding the transfer of its shares. See AR at Ex. 8. Accordingly, based upon this evidence in the record, the SBA was reasonable in its conclusion that Aim did not prove by a preponderance of the evidence that Mr. Ahmad unconditionally owns 51% of Aim's stock because Aim's stock certificates and corporate records do not establish that he owned the shares he claimed to be his. [7] III Control Additionally, a corporate applicant must establish that the socially and economically disadvantaged owner controls its board of directors. 13 C.F.R. Section 124.104(b). The regulations prohibit nondisadvantaged individuals from exercising actual control or having the power to control the applicant concern and from being an officer, director, or more than a 10% owner or stockholder of another firm in the same or similar line of business as the applicant concern. 13 C.F.R. Section 124.104(c)(1), (2). When the SBA initially denied Aim's 8(a) application it found that Mr. Ahmad's spouse, Ms. Patricia Ahmad, was the 51% owner of Aim Construction Corporation, a firm in the same line of business as the applicant concern. That conclusion is supported in the record and the SBA provided Aim the opportunity to present evidence that Aim Construction Corporation was dissolved. AR at Ex. 4. Subsequently, in its determination on reconsideration, the SBA found that Aim had failed to present sufficient evidence to satisfy the SBA's concerns regarding Ms. Patricia Ahmad's involvement in Aim Construction Corporation. AR at Ex. 1. Thus, as it also found that Ms. Ahmad was a shareholder in the applicant concern, she could not be a shareholder in both firms without violating the restriction imposed by 13 C.F.R. Section 124.104(c)(2). Aim's request for reconsideration of the SBA's initial denial, however, contains a letter from the law firm representing Ms. Patricia Ahmad with respect to her ownership in Aim Construction Corporation. The letter states: "To the best of our knowledge, Aim Construction Corp. remains dormant." AR at Ex. 3, Section VI. The SBA's conclusion, that the evidence fails to support the conclusion that Ms. Ahmad does not have more than a 10% ownership in Aim Construction Corporation, is reasonable. The fact that the corporation may be dormant begs the question of whether Ms. Ahmad is still a shareholder of the corporation. The regulations do not provide for an exception for dormant corporations. Because the corporation could lawfully become active again, the SBA has a legitimate concern regarding Ms. Ahmad's ownership in it, because it is in same or similar line of business as Aim. Accordingly, the SBA correctly concluded Ms. Ahmad had more than a 10% ownership interest in Aim Construction Corporation and that, as a shareholder also in the applicant concern, her ownership interest violates the restriction in 13 C.F.R. Section 124.104. [8] IV Standard of Review The determination of the SBA must be sustained unless a review of the written administrative record demonstrates the SBA acted arbitrarily, capriciously, or contrary to law in concluding Mr. Ahmad was not economically disadvantaged and did not establish his requisite ownership of Aim. 13 C.F.R. Section 124.210(h)(1). Such a review is narrow and does not permit me to substitute my own judgment for that of the SBA. My review must examine whether the SBA considered all of the facts presented as well as the laws and regulations which guide the decision making process. Then, I must determine whether there was a clear error of judgment by the SBA in making its decision before I can find the SBA acted arbitrarily, capriciously, 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: fails to properly apply the law and regulations to the facts of the case; fails to consider an important aspect of the problem; offers an explanation for its determination that runs contrary to the evidence; or provides an implausible explanation that is more than a difference in 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. See id. After a careful review of the entire written administrative record, I find the SBA's denial of Aim's 8(a) application is fully supported in the record and is reasonable. I conclude that the SBA's decision is based on the entire record, that it considered all of the relevant regulatory and statutory factors, and it made no clear error of judgment. I further find Aim has not established its eligibility for admission into the 8(a) program. Accordingly, the SBA's decision cannot be considered arbitrary, capricious, or contrary to law. [9] Conclusion Respondent Small Business Administration's determination denying 8(a) program entry to Petitioner Aim Construction and Contracting Corporation is NOT ARBITRARY, CAPRICIOUS, OR CONTRARY TO LAW. See 15 U.S.C. Section 637(a)(9)(C); 13 C.F.R. Section 124.210(h)(1). This is the final decision of the Small Business Administration and is binding upon all parties, including those within the employ of the Agency. 15 U.S.C. Section 637(a)(9)(D); 13 C.F.R. Section 124.210(i). ______________________________ 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] See 13 C.F.R. Section 124.105(b)(1). [3] Mr. Ahmad's social security number is listed in a block requesting the identifying number of the assignee. [4] The stock register shows that Certificate Number 2, representing 100 shares, was issued to Manzoor Ahmad also on September 14, 1994, but was transferred to Aim on June 30, 1994. There is no explanation for the discrepancy in the dates shown in the register. The stock certificate was properly endorsed over to Aim and was marked cancelled. AR at Ex. 3. See Appendices B & E. [5] An applicant's personal net worth cannot exceed $250,000. In determining net worth for purposes of 8(a) eligibility, the SBA excludes the ownership interest in the applicant concern and the equity in his primary personal residence. 13 C.F.R. Section 124.106(a)(2)(i)(B). [6] While the SBA provided Aim with the Robert Morris Agency ratios for SIC code 1542 to explain its conclusion, it withheld from the AR, as privileged, its calculation of Aim's financial ratios. Without this information, Aim was unable to contest the accuracy of the SBA's financial conclusions. Because I find that the SBA acted arbitrarily, capriciously, and contrary to law on the issue of Aim's business financial condition, I need not decide if any remedial action is necessary. See Matter of Shashikant P. Savla, d/b/a Kabil Associates, SBA No. 375 at 9 (1991) (SBA included applicant's ratios in the determination letter). [7] It is immaterial whether, under New York law, Mr. Ahmad was entitled to have the shares transferred to him. Further, it is also immaterial who ultimately is found to be the lawful owner of the shares. What is material to the disposition of this case is whether, under SBA regulations, Aim established by a preponderance of the evidence that Mr. Ahmad unconditionally owns 51% of Aim's shares. The SBA, in its evaluation of Aim's 8(a) application, need go no further than to examine the stock certificates and other corporate documents provided by Aim, to decide who owns Aim. These documents provide the best evidence of ownership and outweigh any other evidence to the contrary. [8] This conclusion is premised on the SBA's conclusion that Ms. Ahmad did not effectively divest herself of her shares in the applicant concern. [9] I have considered the other grounds for appeal and find them to be without merit. Because they are not decisionally significant, I have not addressed them in this decision. Posted: November, 1997