ORDERS:
ORDER
STATEMENT
OF THE CASE
This
matter comes before the Administrative Law Court upon Petitioner CMI Trucking’s
request for a contested case hearing to review a decision of the Respondent,
South Carolina Department of Transportation (Department), denying Petitioner’s
application for certification as a Disadvantaged Business Enterprise (DBE). A
contested case hearing was held at the Administrative Law Court on October 4,
2005.
DISCUSSION
The
Department is required to certify eligible firms to participate in the state
DBE program pursuant to S.C. Code Ann. § 12-28-2930(B) (2000). The Department,
as a recipient of federal funds is also required to implement a DBE program in
compliance with 49 C.F.R. Part 26. The DBE program allows eligible firms to
compete for and receive portions of construction projects as subcontractors.
Participation in the DBE program is limited to firms which are certified by the
Department as a DBE, based upon the standards and procedures set forth in 25A
S.C. Code Ann. Regs. 63-703 & 63-704 (Supp. 2004) and 49 C.F.R. Part 26.
To be certified as a DBE, a firm must be owned and controlled by one or more
individuals who are either socially and economically disadvantaged ethnic
minorities or females. See, Regs. 63-703 (Supp. 2004); 49 C.F.R. Part
26 Subpart A, § 26.5. In this case, the Department contends that the
Petitioner does not possess the requisite ownership and control in order for
CMI Trucking to qualify as a DBE.
FINDINGS
OF FACT
Having observed the
witnesses and exhibits presented at the hearing and taking into consideration
the burden of persuasion and the credibility of the witnesses, I make the
following findings of fact by a preponderance of evidence:
1. Notice
of the date, time, place and nature of the hearing was timely given to all
parties.
2. Nancy L.
Gantt owns and operates CMI Trucking (CMI) as a sole proprietorship. Mrs. Gant
is a woman and an individual of Native American descent. In light of Mrs.
Gantt’s gender and ethnic origin, CMI applied to the Department for
certification as a DBE pursuant to 25A S.C. Code Ann. Regs. 63-700 et. seq.
(Supp. 2004) and 49 C.F.R. Part 26. The Department denied DBE certification by
letters dated February 3, 2005, and February 25, 2005.
3. Mrs.
Gant initially capitalized CMI with a loan in the amount of $5,000.00 and
profits from the sale of personal property in the amount of $10,500.00. The
loan was obtained from her husband’s business, Consolidated Maintenance, Inc.
in return for a promissory note, which was signed Nancy L. Gantt, d/b/a CMI
Trucking. Mrs. Gantt is making payments on the loan, pursuant to its terms, at
the rate of $152.11 per month. The remaining $10,500.00 used to initially fund
CMI was acquired from the sale of Mrs. Gantt’s 1994 Z-28 for the amount of
$4,500.00 and the sale of two motorcycles for the amount of $6,000.00. She
originally purchased the Z-28 with her salary from Consolidated Maintenance.
The motorcycles were purchased by Mrs. Gantt with funds she acquired from the
sale of her husband’s liquor store. Nevertheless, the funds used to purchase
the 1994 Z-28 and the two motorcycles appear to be Mrs. Gantt’s personal
funds. Accordingly, the funds from the sale of the Z-28 and the two
motorcycles were her personal funds.
Mrs. Gant used the
above money to acquire three trucks. More
specifically, she “put down” $5,000.00 on each vehicle. However, the trucks
were not purchased in her name but rather acquired via a “lease purchase”
agreement with her husband, Michael David Gantt. The leasing of trucks in a
business like CMI is a normal industry practice. Furthermore, all down
payments and subsequent monthly payments have been paid by CMI, as well as all
taxes, insurance and maintenance costs.
4. CMI is
in the business of hauling and transporting road construction materials such as
asphalt. Mrs. Gantt independently handles the day to day operations of CMI
including the management and managing employees, payment of employees, handling
of customer requests for trucks and dispatching trucks. She is the sole
customer contact for CMI. Neither Michael Gantt nor any other individual
possess an ownership interest or managerial responsibilities for CMI.
Furthermore, Mr. Gantt is not involved in CMI or a similar business.
Though
Mr. Gantt does have substantially more business experience than Mrs. Gantt, the
evidence did not establish that he controls the business. Rather, Mrs. Gantt’s
demeanor and knowledge substantiate her ability to independently operate CMI.
In fact, her husband has less knowledge about running such a business than does
Mrs. Gantt, who has experience in the trucking industry. She obtained her
knowledge and experience through her father who was an independent truck driver
and her brothers who both operate dump trucks. Her former employment includes
a position at U.S. Textiles where she supervised the loading and receiving of
trucks. She was also once employed by one of her husband’s companies and was
responsible for ensuring that his trucks remained in compliance with Department
of Transportation regulations. Her background makes her more than capable of
operating this type of business and dispatching trucks to transport road
construction materials.
CONCLUSIONS
OF LAW
Based
upon the above findings of fact, I conclude the following as a matter of law:
Jurisdiction
and Relevant Law
1. This
Court has subject matter jurisdiction in this case pursuant to S.C. Code Ann. §
1-23-600(B) (Supp. 2004) and 25A S.C. Ann. Regs. 63-704 (K) (Supp. 2004).
2. As noted
above, the Department is required to certify eligible firms to participate in
the state DBE program in compliance with 49 C.F.R. Part 26. See, S.C.
Code Ann. § 12-28-2930 (B) (2000). To facilitate that determination in DBE
matter , the Department promulgated regulations adopting the standards for
certifying DBE’s set forth in 49 C.F.R. Part 26. See, 25A S.C. Code
Ann. Regs. 63-702 (A) and 63-703 (A) (Supp. 2004). Those regulations provide
that a firm seeking certification as a DBE has the burden of proving by a
preponderance of evidence that it is a small business which is owned and
controlled by one or more individuals who are socially and economically disadvantaged
individuals 49 C.F.R. §§ 26.5 and 26.61 (B).
3. The
Department contends that CMI is not entitled to DBE certification based on
three grounds:
(a) Mrs.
Gantt does not share in the risk of ownership of CMI and CMI is not viable
without the assistance of her husband, thus failing to establish ownership as
required by Regulation 63-700 (E) and 49 C.F.R. § 26.69;
(b) Mrs.
Gantt does not exercise the requisite control as required by Regulation 63-700
(E) and 49 C.F.R. § 26.71 in that her independence is compromised by the
involvement of her husband; and,
(c) Mrs.
Gantt does not own at least one truck as required by 49 C.F.R. § 26.55.
CMI on the other hand, contends
that Mrs. Gantt meets the requirements of the regulations concerning ownership
and control and that 49 C.F.R. § 26.55 is inapplicable.
Ownership
4. In
general, to establish the requisite ownership for a DBE, an owner must
substantiate that the firm is at least 51% owned by a socially and economically
disadvantaged individual. 49 C.F.R. § 26.69 (b). The disadvantaged
individual’s ownership must be “real, substantial, and continuing, going beyond
pro forma ownership.” 49 C.F.R. § 26.69 (c). The disadvantaged owner must
also “enjoy the customary incidents of ownership, and share in the risks and
profits commensurate with their ownership interests, as demonstrated by the
substance, not merely the form, of arrangements.” Id. The capital
contribution to “acquire” the ownership interests must also be real and
substantial. 49 C.F.R. § 26.69 (e).
The term “socially
and economically disadvantaged” includes citizens of the United States who are either “Native Americans” or women. 49 CFR § 26.5. Accordingly, CMI
is clearly more than 51% owned by a socially and economically disadvantaged
individual. The Department, however, contends that Mrs. Gantt does not
adequately share in the risks of CMI due to the fact that CMI was funded by an
unsecured loan from Consolidated Maintenance, a company owned by Mrs. Gantt’s
husband. The Department further argues that Mrs. Gantt did not establish that
her contributions were her personal funds.
An “unsecured note
payable to the firm or an owner who is not a disadvantaged individual” is an
insufficient contribution.[2]
Therefore, I agree with the Department that in accessing the capital
contributions of Mrs. Gant the unsecured note payable to her husband’s company
should be disregarded. Nevertheless, in this case, Mrs. Gantt used $10,500.00
of her personal funds to capitalize CMI. Here, the assets from which Mrs.
Gantt obtained the $10,500.00 were not marital assets but were rather assets
held in her name.[3]
Forty-five hundred dollars of her capital contribution was obtained from the
sale of her 1994 Z-28 which was purchased with her salary from Consolidated
Maintenance. The motorcycles, however, which were sold to obtain $6,000.00 of
her capital contribution, were purchased with funds she acquired from the sale
of her husband’s liquor store.
49 C.F.R. § 26.69
(h) provides that:
(1)
You must presume as not being held by a socially and economically disadvantaged
individual, for purposes of determining ownership, all interests in a business
or other assets obtained by the individual as the result of a gift, or transfer
without adequate consideration, from any non-disadvantaged individual or
non-DBE firm who is--
(i)
Involved in the same firm for which the individual is seeking certification, or
an affiliate of that firm;
(ii)
Involved in the same or a similar line of business; or
(iii)
Engaged in an ongoing business relationship with the firm, or an affiliate of
the firm, for which the individual is seeking certification.
(2)
To overcome this presumption and permit the interests or assets to be counted,
the disadvantaged individual must demonstrate to you, by clear and convincing
evidence, that--
(i)
The gift or transfer to the disadvantaged individual was made for reasons other
than obtaining certification as a DBE; and
(ii)
The disadvantaged individual actually controls the management, policy, and
operations of the firm, notwithstanding the continuing participation of a
non-disadvantaged individual who provided the gift or transfer.
Furthermore, 49 C.F.R. § 26.69
(i) provides that other than contributions set forth in paragraph (h) above, a
contribution of capital does not fail to be “real and substantial” solely
because the disadvantaged individual acquired her ownership interest as the
result of a gift or transfer without adequate consideration.
Here, the
motorcycles sold by Mrs. Gantt were clearly in her name. The Department
nevertheless contends that the cash contribution as a result of their sale was
a gift without adequate compensation because the money used to purchase the
motorcycles came from the sale of Mr. Gantt’s liquor store. However, Mr. Gantt
is not involved with CMI or any other similar business. He is engaged in an
ongoing business relationship with CMI but only to the extent that Consolidated
Maintenance is owed the obligation to repay the loan and pay the leases upon
the trucks. Moreover, the clear and convincing evidence, as will be discussed
more extensively below, established that Mrs. Gantt fully “controls the
management, policy, and operations of the firm.” Furthermore, there was no
evidence that the money received by Mrs. Gantt as a result of the liquor store
sale was made for the purpose of obtaining certification as a DBE.
The Department also
contends that Mrs. Gantt did not adequately share in the risks of CMI due to
the fact that Michael David Gantt purchased the trucks used in the business.
An owner cannot rely upon the contributions of “an owner who is not a
disadvantaged individual.” 49 C.F.R. § 26.69 (e). The company’s trucks are
leased from Mr. Gantt to CMI. The leasing of trucks in a business like CMI is
a normal industry practice and not prohibited by the DBE regulations as long as
the independence of the DBE is not compromised. CMI leases its trucks from Mr.
Gantt with specific contractual obligations. The lease agreements, however,
were not executed until February 3, 2005 following the application for DBE
certification. To the contrary, though Mrs. Gantt had several discussions with
the Department about how she could properly establish a DBE, she was never told
that she had to own the trucks. When this was
presented as an issue, she formally entered into a lease purchase agreement for
the trucks.
Though the timing
of the lease agreement appears suspect on its face, when the history of the
leasing relationship is taken into consideration, including the fact that Mrs. Gantt
has made all payments on time and appropriately maintained the vehicles, along
with the credibility of the parties, I conclude that the lease purchase
arrangement is not a sham designed to circumvent the DBE regulations. Mr.
Gantt is the husband of the applicant but his assistance in regard to obtaining
the trucks appears to simply be a funding source to obtain the vehicles. He
testified that if a contract was breached, he would have no alternative but to
repossess the trucks as would any other typical company or person lending
capital to a business. Moreover, as set forth above, Mr. Gantt is not involved
with CMI or a similar business and the clear and convincing evidence
established that Mrs. Gantt fully “controls the management, policy, and operations
of the firm.” I, therefore, find that the evidence established that Mrs. Gantt
owns CMI in keeping with the requisites of Regulation 26.69.
Control
5. To meet
the burden of establishing control, a business must demonstrate that the
disadvantaged owner independently controls the business. “An independent
business is one the viability of which does not depend on its relationship with
another firm or firms.” 49 C.F.R. § 26.71 (b). In that regard, the
disadvantaged owner must “possess the power to direct or cause the direction of
the management and policies of the firm and to make day to day as well as long
term decisions on matters of management, policy and operations” 49 C.F.R. §
26.71 (d). In making those decisions, the owner must have “an overall
understanding of, and managerial and technical confidence and experience
directly related to, the type of business in which the firm is engaged and the
firm’s operations” 49 C.F.R. § 26.71 (g). The owner must hold the highest
officer position in the company. 49 C.F.R. § 26.71 (d)(1).
Here, Mrs. Gantt is
the sole operator of the company. The Department contends the independence of
CMI is compromised by the involvement of Mrs. Gantt’s husband in the business.
Specifically, the Department views the fact that the trucks used and leased by
CMI are secured by Mr. Gantt as a critical issue in denying DBE certification.
However, the evidence indicates otherwise.
Mrs. Gantt appears
to exercise total control over the business. She has experience in the trucking
field, understands the managerial aspects of the firm and directs the day to
day, as well as the long term operations of the business. Even though Mr.
Gantt personally secured the trucks used by CMI, the trucks are being leased
pursuant to a valid lease-purchase agreement and Mrs. Gantt appears to have
timely made all payments including payments for taxes, insurance and
maintenance. Furthermore, it appears that Mr. Gantt has less knowledge about
the business than does Mrs. Gantt. The Department’s witness also frequently
stated that he “didn’t feel” Mrs. Gantt was in control of the business. This
“feeling” was mere speculation and was not supported by any competent
evidence.
I, therefore, find
that Mrs. Gantt is fully capable of and is in fact running CMI. Furthermore,
she has the power to direct the management and policies of the business and to
make both day to day and long term decisions concerning the management policy
and operations of CMI Trucking thereby exhibiting sufficient control to warrant
DBE certification.
Ownership
of Trucks
6. Finally,
the Department contends that the Petitioner is not entitled to DBE
certification because CMI Trucking does not own its own trucks. In support of
this position, the Department relies on 49 C.F.R. § 26.55 (d)(2) which requires
that “[t]he DBE must itself own and operate at least one fully licensed,
insured, and operational truck used on the contract.” However, Regulation
26.55 does not set forth requisites to receive a DBE certification but rather sets
forth factors to use in determining whether a DBE trucking company is
performing a “commercially useful function.” “Consideration of whether a firm
performs a commercially useful function . . . pertains solely to counting
toward DBE goals the participation of firms that have already been certified as
DBEs.” Moreover, except in considering whether a firm has exhibited a pattern
of conduct indicating an attempt to “evade or subvert the intent or the
requirements of the DBE program,” the commercially useful function issues may
not be considered in any way in making decisions about whether to certify a
firm as a DBE. 49 C.F.R. § 26.73 (a)(1) and (2). Nevertheless, once certified,
49 C.F.R. § 26.55 (d)(5) sets forth the procedure for a DBE receiving “credit”
for the value of transportation services.
ORDER
Based upon the
foregoing findings of fact and conclusions of law, it is hereby ordered that
the application of CMI Trucking for certification as a Disadvantaged Business
Enterprise is granted.
AND
IT IS SO ORDERED.
______________________________
Ralph
King Anderson, III
Administrative
Law Judge
February
13, 2006
Columbia, South Carolina
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