Respiratory Therapy Specialists of America, Inc., No. MSB-403 (June 2, 1992) Docket No. MSBE-91-10-3-25 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. 20416 IN THE MATTER OF: ) ) ) Docket No. MSBE-91-10-3-25 Respiratory Therapy ) Specialists of America, Inc. ) APPEARANCES For the Petitioner: For the Agency: Anthony W. Parker, Esq. Michael K. Wyatt, Esq. Anthony W. Parker and General Counsel Associates, P.C. Donald A. Morrison, Esq. Suite 200 Agency Representative 2000 L Street, N.W. Small Business Administration Washington, D.C. 20036 409 Third Street, S.W. Washington, D.C. 20416 DIGEST Where, prior to the applicant's having submitted personal finan- cial data, the Agency has put the applicant on notice of the importance of accuracy in the data submission, it is neither arbitrary, capricious nor contrary to law for the Associate Administrator to refuse to give the applicant an opportunity to correct an obviously flawed personal financial statement on its Form 413, even though the Agency intends to rely on that statement in determining the applicant's eligibility for 8(a) status. In construing a personal financial statement on Form 413 that is internally inconsistent and thus obviously flawed, it is neither arbitrary, capricious, nor contrary to law for the Agency to rely on detailed supporting data rather than inconsistent summary data. An individual whose personal net worth exceeds $250,000 is not economically disadvantaged for purposes of 8(a) program entry. 13 CFR 124.106(a)(2)(i). FINAL DECISION June 2, 1992 GROSS, 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 7(j) of the Small Business Act of 1958, as amended; 15 U.S.C. 636(j)), hereinafter referred to as "the Act," and in the regulations codified at 13 CFR Parts 124 and 134. Issue May the Agency rely on an obviously flawed personal financial statement in concluding that the individual upon whom 8(a) eligibility is based is not economically disadvantaged within the meaning of 13 CFR 124.106(a)? Facts In June 1989, the Associate Administrator for Minority Small Business and Capital Ownership Development (herein after "Associate Administrator") advised Lalith Gnanasiri, the President of Respiratory Therapy Specialists of America, Inc. ("RTSA"), that its application for participation in the 8(a) program was being declined for four reasons. Two of those reasons are no longer relevant. The other two are: (1) Gnanasiri's wife, Joann, had the potential for exercising control over RTSA; and (2) in connection with Joann Gnanasiri's co-ownership of certain assets, RTSA lacked the necessary financial resources to perform successfully. (I will henceforth refer to Lalith Gnanasiri as "Lalith," and to his wife as "Joann.") Lalith responded by advising the Agency that he had "established three accounts in my name which are being pledged to provide financing for the corporation." An affidavit signed by Lalith specifies the accounts and the amounts and goes on to state: All three (3) accounts are in his name and, the undersigned [Lalith] does solemnly swear under oath, that this total sum of $250,768 will be exclusively available for meeting the financial needs of Respiratory Therapy Specialists of America, Inc. In March 1990 the Associate Administrator again turned RTSA down. The Associate Administrator no longer expressed any concern about Joann's potential control of RTSA or about the underfinancing of RTSA. Now, she said, the problem was, inter alia, that Lalith is no longer economically disadvantaged. (Again, the other reasons for refusing 8(a) status to RTSA are no longer relevant.) That reason for decline requires that we consider what the record tells us about Lalith's personal net worth. Lalith's Form 413 (Personal Financial Statement) dated December 1988 shows that he and Joann had a net worth of $512,000. Deducting the $95,000 net worth of the Gnanasiris' residence (see 13 CFR 124.106(a)(2)(i)(B)), and dividing by two (to take account of Joann's interest) produces a net worth for Lalith (for 8(a) purposes) of $208,000. As the Agency agreed, Lalith's net worth was less than the maximum of $250,000 for 8(a) program entry (see 13 CFR 124.106(a)(2)(i)). As we have seen, however, the Associate Administrator originally turned RTSA down because of underfinancing, to which RTSA responded by advising that three accounts, in Lalith's name, totaling about $251,000 had been pledged for RTSA's use. Lalith did not indicate where the $251,000 came from. As already indicated, the Associate Administrator responded to the information about the $251,000 by rejecting RTSA's applica- tion on reconsideration on the ground, among others, that Lalith was not economically disadvantaged. It is true that Lalith's Form 413 showed that his net worth for 8(a) purposes was only $208,000. But, the Associate Administrator found: in responding to our initial reasons for decline of your firm for 8(a) program participation, you transferred the three savings accounts, pledged to secure business financing...in the amount of $250,768 to your name only. By doing so you established sole ownership of these accounts, which would appear to push your personal net worth over the $250,000 threshold. Based on the record before me, that reasoning is unclear on two grounds. The first is that the Associate Administrator's March 1990 letter denying reconsideration suggests that the 1988 Form 413 of Lalith and Joann showed jointly held savings accounts totaling $251,000 (or more). But that is not so. It shows only a savings account of $75,000 and an IRA of $29,400. The second is that the Associate Administrator's denial letter seems to assume, without stating why, that Lalith got the $251,000 as gifts from Joann (or others) or from some source of income -- as opposed to increased indebtedness on Lalith's part. In any case, the Associate Administrator permitted RTSA to ask for further reconsideration, but stated that if RTSA chose to do so, Lalith and Joann would have to file updated Forms 413. RTSA did ask for reconsideration, and Lalith and Joann did file Forms 413 dated June 1990. But the new numbers were, on their face, erroneous. In particular, for both Lalith and Joann: (1) the asset figure given for real estate was less than it should have been based on the supporting information in Section 4 of the Forms 413; and (2) the liabilities figure for "mortgages on real estate" was much higher than it should have been based on the Section 4 data. 1/ Moreover, Lalith's Form 413 failed to list the $251,000 in bank accounts as an asset. And the source of the $251,000 remained unspecified. (Lalith's Form 413 shows a decrease in notes payable. Had Lalith borrowed the $251,000, that is one of the entries one would expect to have increased significantly.) On August 20, 1991, the Acting Associate Administrator again declined to grant 8(a) status to RTSA. This time the Agency had only one basis for its position: Lalith was not economically disadvantaged. More particularly the Associate Administrator held: The information contained in the [June 1990] Form 413...is not consistent with the data presented in your previous Forms 413, dated ten and eighteen months earlier. [2] You did not provide adequate evidence to substantiate these differences. Thus, it appears that your present net worth, excluding the equity in your primary residence and your interest in the applicant concern, exceeds $250,000. The total liabilities on your June 7, 1990 personal financial statement [are] overstated when comparing [them] with the individual mortgage balances in Section 4. In fact, when all of the mortgage balances are added up on your June 7, 1990 personal financial statement...your personal net worth exceeds the $250,000 threshold. RTSA appealed. A revised Form 413 and the statement of a certified public account were appended to the appeal. According to the appeal, Lalith obtained the $251,000 by borrowing from Joann and other relatives. In addition, claims RTSA, part of the $251,000 should be treated as an equity investment in RTSA and thus that part of the $251,000 should be excluded from Lalith's net worth (see 13 CFR 124.106(a)(2)(i)(B)). The Agency, in response, points out that the issue on appeal is whether the determination of the Acting Associate Administrator was arbitrary, capricious or contrary to law. And that standard measures the Acting Associate Administrator's actions against the record as it was before him. Discussion Because I agree with the Agency that new evidence may not be submitted on appeal, I am returning the attachments to RTSA's petition for appeal (the revised Form 413 and the CPA's statement) to RTSA, unread. See The Matter of Trans-Tel Central Inc., No. 383 (December 31, 1991). Turning to the merits, at this juncture the only thing standing in the way of RTSA's 8(a) status is the question of Lalith's net worth. And the determination that Lalith's net worth exceeds $250,000 is based entirely on a Form 413 that is internally inconsistent and obviously flawed and on an assumption that the figures in Part 4 of the Form 413 are accurate and the incon sistent figures on page 1 of the Form are in error. Obviously, the matter could have been handled differently -- as by the Agency advising RTSA of the obvious problems in the Forms 413 and asking for corrections. On the other hand, the Agency had been very clear that it considered Lalith's net worth to be at issue and that it would take very seriously the Gnanasiris' updated Forms 413. In response, Lalith and Joann submitted Forms 413 that: (1) failed to list the $251,000 in-bank accounts in Lalith's name as an asset; (2) gave no hint of any indebtedness on Lalith's part arising as a result of the establishment of those bank accounts; and (3) showed Lalith's net worth to be well over the $250,000 maximum when recast so that the summary data on his Form squared with the Form's Section 4 data -- even without taking into account the $251,000 in bank accounts in Lalith's name, and even after reducing the value of the real estate listed in Section 4 to take account of an obvious error. 3/ Where the Agency has put the applicant on prior notice of the importance of an updated Form 413, I have no basis for concluding that it was either arbitrary, capricious, or contrary to law for the Associate Administrator to opt not to give the applicant an opportunity to correct the Form 413 when it turned out to be flawed. Nor do I have any basis for concluding that, where the Agency is faced with a Form 413 that is internally inconsistent, it is either arbitrary, capricious, or contrary to law for the Agency to rely on the specific real estate data in Section 4 rather than on the summary real estate data on page 1. Conclusion I hereby conclude that the determination of the Associate Administrator to deny Respiratory Therapy Specialists of America, Inc. admission to the 8(a) program 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. 4/ See 13 CFR 124.210(i). ____________________________ Stephen J. Gross Administrative Law Judge ______________________________ 1/ Section 4 of the Forms 413 of Lalith and Joann each apparently erroneously listed total value and mortgage liability of the real estate properties the two held jointly. I evaluated the Form 413 data based on the assumption that the correct Section 4 figures should be half of those listed. 2/ The reference to the Form 413 dated ten months earlier apparently is to Lalith's statements and affidavit concerning the three bank accounts totaling $251,000. 3/ See footnote 1, above. 4/ Decisions concerning appeals of denials of program admission are to be rendered within 90 days after the petition is filed, insofar as practicable. 13 CFR 124.210(j). However, the press of work on other cases precluded me from turning to this proceeding any earlier.