South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
CMI Trucking vs. SCDOT

AGENCY:
South Carolina Department of Transportation

PARTIES:
Petitioner:
CMI Trucking

Respondent:
South Carolina Department of Transportation
 
DOCKET NUMBER:
05-ALJ-19-0097-CC

APPEARANCES:
For Petitioner: Heath P. Taylor, Esquire

For Respondent: Deborah Brooks Durden, Esquire
 

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.[1] 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.[4] 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



[1] CMI currently operates four trucks – all of which were acquired via lease-purchase agreements with Michael Gantt.

[2] Nevertheless, there was also no evidence of any fraud or collusion in making the loan. Quite the contrary, Mrs. Gantt produced checks indicating the loan payments to her husband’s company were being timely made.

[3] Accordingly, 49 C.F.R. § 26.69 (i) is inapplicable to the analysis of this case.

[4] Those discussions clouded the time frame for examining this case because though a determination is usually based upon the initial capitalization, the Department was negotiating how the company should be structured or funded well after the application.


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