Century Technologies, Inc., No. SDBA-123 (January 13, 2000) Docket No. SDBA-99-10-07-22 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) IN THE MATTER OF: ) ) Docket No. SDBA-99-10-07-22 Century Technologies, Inc. ) ) Decided: January 13, 2000 Petitioner ) _______________________________) APPEARANCES Donald L. Campbell, President For Century Technologies, Inc. David L. King, Esq. For the Small Business Administration DIGEST This Office will not consider on appeal new evidence, which Petitioner failed to present to the Small Business Administration (SBA) at the time of its determination, unless the Administrative Judge determines that manifest injustice would occur if he does not do so. An applicant firm owned principally by another business entity, which is in turn owned by a disadvantaged individual, fails to meet the requirement of direct ownership by a disadvantaged individual. When SBA considers an application for certification as a Small Disadvantaged Business (SDB), the SDB regulations are controlling; the size regulations cannot supersede them. INITIAL DECISION HOLLEMAN, Administrative Judge: Jurisdiction This appeal petition is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Parts 124 and 134 (1999). Issues Whether this Office will consider on appeal new evidence which Petitioner failed to present to SBA at the time of its determination. Whether an applicant firm owned principally by another business entity, which is in turn owned by the disadvantaged individual, meets the requirement of direct ownership by the disadvantaged individual. Whether, when SBA considers an application for SDB certification, the size regulations can supersede the SDB regulations. I. BACKGROUND A. Procedural Background On June 11, 1999, Century Technologies, Inc. (Petitioner) applied for certification as a Small Disadvantaged Business (SDB) with the Small Business Administration (SBA or Agency). 13 C.F.R. Section 124.1008(a) (1999). On August 26, 1999, the Acting Associate Administrator for Small Disadvantaged Business Certification and Eligibility (AA/SDBCE) denied certification. Petitioner filed an Appeal Petition with this Office on October 7, 1999. On October 8, 1999, the Administrative Judge issued a Notice and Deficiency Order (the Order), ordering Petitioner to correct specific deficiencies in its Appeal Petition by October 25, 1999. On October 21, 1999, Petitioner complied with the Order. On December 6, 1999, also in conformance with the Order, SBA timely filed the Administrative Record (AR), together with an Answer to the Appeal Petition. SBA withheld portions of three documents from the AR, claiming the deliberative process and the attorney-client privileges. Petitioner did not object to SBA's claims of privilege. On December 29, 1999, the Administrative Judge approved SBA's claims of privilege. B. The SDB Application Petitioner was incorporated in the District of Columbia in 1978. Its primary Standard Industrial Classification code is 4813, Telephone Communications, except Radiotelephone, with a corresponding 1500-employee size standard. Donald L. Campbell, the individual on whom Petitioner's claim of eligibility is based, joined the firm in 1984; he became its majority shareholder in 1987, and its sole shareholder in 1988. In August 1990, Century Technologies International, Inc. (CTI) was incorporated in Delaware as a holding company. On March 31, 1991, Mr. Campbell transferred all of his stock in Petitioner to CTI in exchange for all of CTI's voting stock. At the time of the AA/SDBCE's determination, Mr. Campbell owned over 90% of CTI's voting stock, and CTI owned all of Petitioner's stock. The AA/SDBCE denied Petitioner's application because Mr. Campbell did not own the firm. Specifically, Mr. Campbell owned only 50% of Petitioner's stock, while a holding company owned the other 50%. C. The Appeal Petition Petitioner presents two new exhibits with its Appeal Petition. One exhibit is a cancelled stock certificate showing Mr. Campbell transferred all of Petitioner's stock to CTI in 1991. Petitioner states it did not include this document with its application because of administrative oversight. Petitioner also presents State of Maryland Minority Business Enterprise (MBE) certifications for itself and for CTI. Petitioner asserts it would be a manifest injustice for the Administrative Judge not to consider this new evidence, because a finding that Mr. Campbell does not own and control Petitioner would be inequitable. As to the merits, Petitioner asserts Mr. Campbell, the disadvantaged individual, does own and control Petitioner, because he owns over 90% of CTI, which owns 100% of Petitioner. Further, Mr. Campbell holds the key management positions in both companies. [1] Therefore, the AA/SDBCE's denial of SDB certification to Petitioner is arbitrary, capricious, and contrary to law. Petitioner also asserts, relying on SBA's size regulations, 13 C.F.R. Part 121, that Mr. Campbell owns and controls Petitioner because he owns and controls its affiliate, CTI. Petitioner asserts it and CTI are affiliated through stock ownership and through common officers and directors. D. The SBA's Answer SBA opposes Petitioner's introduction of new evidence on appeal, because the Administrative Judge's review is limited to the facts before SBA at the time of the determination, unless Petitioner establishes that manifest injustice would occur if the appeal were limited to the record. SBA asserts Petitioner has failed to do so. SBA concedes that the AA/SDBCE erroneously found CTI owns only 50% of Petitioner, and that other evidence in the Administrative Record shows CTI actually owns 100% of Petitioner. Nevertheless, this error does not affect the outcome of the case. As to the merits, SBA asserts the AA/SDBCE's determination was not arbitrary, capricious, or contrary to law because the Small Business Act and SBA's regulations clearly require socially and economically disadvantaged individuals to own directly at least 51% of the firm. Petitioner here does not dispute it is wholly owned by CTI, a business entity. SBA did not address Petitioner's affiliation argument. II. DISCUSSION A. Threshold Matters Petitioner filed its Appeal Petition within 45 days after SBA denied its SDB application and, thus, it is timely. 13 C.F.R. Sections 134.202(a), 134.204(e)(2). As a threshold matter, the Administrative Judge EXCLUDES Petitioner's proffered new evidence. The Administrative Judge notes the regulations explicitly limit his review of an SDB determination to the facts before SBA at the time of the determination, and to the arguments on appeal. 13 C.F.R. Section 124.1008(f)(3)(ii). The Administrative Judge will admit new evidence only if he determines manifest injustice would occur if he does not do so (id.); that is, if his failure to admit the evidence would be plainly wrong, and would result in substantial prejudice to the Petitioner, such as would shock the judicial conscience. Matter of Aero CNC, Inc., No. SDBA-106 at 6 (1999) and cases cited therein. Petitioner's proffer of new evidence does not state why failure to admit the evidence would cause manifest injustice. It merely is an attempt to introduce previously-available evidence. [2] B. The Merits of the Appeal A firm applying for SDB certification must demonstrate to the AA/SDBCE that those individuals claiming disadvantaged status own and control the firm. 13 C.F.R. Section 124.1008(c)(2). In determining whether a firm meets this requirement, the AA/SDBCE applies the same criteria used for the 8(a) program. 13 C.F.R. Section 124.1002(a); Matter of Trisha Koch & Associates, No. SDBA- 113 at 4 (1999). The Agency must examine the relevant data and articulate a satisfactory explanation for its action, including a "rational connection between the facts found and the choice made." Matter of IRECOR, Inc., No. SDBA-104 at 5 (1999) (citing Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 461 U.S. 29, 43 (1983)) (citing Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1961)). In considering an Appeal Petition, OHA reviews the AA/SDBCE's determination. OHA's standard of review is whether the record demonstrates the determination was "arbitrary, capricious, or contrary to law." 13 C.F.R. Section 124.1008(f)(3)(ii). The scope of review under the "arbitrary and capricious" standard is narrow, and OHA cannot substitute its judgment for that of the Agency. Aero CNC, supra at 7. OHA must consider whether the AA/SDBCE's determination was based on a consideration of the relevant factors and whether there has been a clear error of judgment. IRECOR, supra at 5 (citing Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-286 (1974)). The sole issue on appeal here is whether Petitioner qualifies under the Small Business Act requirement that the firm be at least 51% owned by "socially and economically disadvantaged individuals". 15 U.S.C. Sections 637(a)(4)(A)(i)(I); 637(d)(3)(C)(i) (emphasis added). [3] SBA regulations implement the statute by requiring that, "at least 51 percent of each class of voting stock outstanding . . . must be unconditionally owned by one or more individuals determined by SBA to be socially and economically disadvantaged." 13 C.F.R. Section 124.105(d) (emphasis added). Further, ownership by socially and economically disadvantaged individuals "must be direct ownership". 13 C.F.R. Section 124.105(a) (emphasis added). A firm owned principally "by another business entity . . . that is in turn owned and controlled by one or more disadvantaged individuals does not meet this requirement." Id. Here, in order for Petitioner to qualify as a firm owned by a socially and economically disadvantaged individual, Mr. Campbell, the only individual claiming social and economic disadvantage, must own individually and directly at least 51% of its voting stock. It is undisputed that Mr. Campbell owns directly as an individual none of Petitioner's stock, and that CTI, a corporation and thus a business entity, owns directly all of Petitioner's stock. Indeed, the Appeal Petition admits these facts. Therefore, the Administrative Judge concludes the AA/SDBCE correctly found a socially and economically disadvantaged individual does not own directly at least 51% of Petitioner's voting stock. SBA admits the AA/SDBCE erred in finding that Mr. Campbell and CTI each owned 50% of Petitioner's stock. However, the Administrative Judge concludes any error was harmless. Size Appeal of InfoTech Enterprises, Inc., No. 4346 at n. 5 (1999). The AA/SDBCE's stated reason for declining Petitioner's application was that Mr. Campbell did not own the firm individually, as required by the regulation. The error does not affect SBA's ultimate conclusion. Indeed, the error would have altered the analysis in Petitioner's favor. The Administrative Judge rejects, as contrary to the explicit regulatory language, Petitioner's argument that Mr. Campbell owns Petitioner because he owns over 90% of CTI, which in turn owns 100% of Petitioner. The regulation provides that a firm owned principally by another business entity, which is in turn owned by a disadvantaged individual, fails to meet the requirement of direct ownership by a disadvantaged individual. 13 C.F.R. Section 124.105(a). In promulgating this regulation, SBA noted the direct ownership requirement is statutory, but stated the regulation was necessary for clarification. 62 Fed. Reg. 43583, 43586 (August 14, 1997) (preamble to proposed rule). The Administrative Judge also must reject for two reasons Petitioner's reliance on SBA's size regulations, i.e., that Mr. Campbell owns Petitioner because he owns and controls its affiliate, CTI. First, this argument is essentially the same as Petitioner's first argument, that Mr. Campbell owns Petitioner because he owns its parent company (here called its affiliate), and must fail for the same reason. Second, SBA's size regulations, together with this Office's decisions interpreting those regulations, constitute a specialized corpus of law applying solely to SBA's size program. See 13 C.F.R. Part 121. They do not apply to the ownership and control requirements of the SDB program, and Petitioner cites no authority for applying them. The SDB ownership regulations control here and, as noted above, they explicitly prohibit the management structure for which Petitioner relies on the size regulations. In summary, the AA/SDBCE's determination, that Petitioner is not at least 51% owned by a disadvantaged individual, was based on explicit regulatory requirements and is fully supported by the record, including Petitioner's explicit admissions. Accordingly, the Administrative Judge concludes the SBA's determination was not arbitrary, capricious or contrary to law. III. CONCLUSION Based on the Administrative Judge's conclusion that the SBA's determination was not arbitrary, capricious or contrary to law, he AFFIRMS the determination, and DENIES the Appeal Petition. This is the initial decision of the SBA. Absent a request for review, this decision will become the SBA's final decision 30 days after the date of this decision. 13 C.F.R. Sections 134.227(b), 134.228(a) (1999). _________________________________ CHRISTOPHER HOLLEMAN Administrative Judge _________________________ [1] Because the AA/SDBCE based her denial solely on the ownership issue, the scope of this appeal is limited to that issue. [2] The Administrative Judge notes that, even if he were to admit Petitioner's proffered evidence, the result would be the same. This evidence establishes CTI owns all of Petitioner's stock. [3] The exceptions are for firms owned by economically disadvantaged Indian tribes, tribally-owned entities, or Native Hawaiian organizations. 15 U.S.C. Section 637(a)(4)(A)(i). None of these exceptions is applicable here. Posted: January, 2000