SC Administrative Law Court Decisions

After timely notice of the parties, a contested case hearing on the merits of this matter was held on March 19, 2003, at the Administrative Law Judge Division in Columbia, South Carolina. Based upon the evidence and arguments presented at the hearing, I find that Petitioner’s application for certification as a DBE should be granted.

FINDINGS OF FACT

Having carefully considered all testimony, exhibits, and arguments presented at the hearing of this matter, and taking into account the credibility and accuracy of the evidence, I make the following Findings of Fact by a preponderance of the evidence:

1. Petitioner Four Seasons Erosion Control, Inc. is an erosion control company based in Spartanburg, South Carolina, specializing in the installation of erosion control materials, particularly silt fencing, at construction and other work sites in South Carolina and western North Carolina. The company has recently handled erosion control projects for Greenville Water Systems, the South Carolina Department of Transportation, and Richland County School District Four.

2. Four Seasons Erosion Control, Inc. was incorporated in South Carolina as a statutory close corporation on August 20, 2002. Carol Faulkner is the President of Four Seasons and holds 60% of the corporation’s stock. Her son, John Faulkner, is the Vice-President of Four Seasons and owns the remaining 40% of the stock. Ms. Faulkner contributed some $4800 for Four Seasons’ start-up costs, and covered certain other operating expenses of the corporation with personal funds until the corporation could begin to secure contracts. Some of the start-up costs paid by Ms. Faulkner include: a $1000 initial deposit to the corporate checking account, attorney’s fees, a liability insurance premium, computer repair bills, and labor costs. At the hearing, Ms. Faulkner estimated her total contribution to Four Seasons’ start-up to be approximately $8000 to $9000, most of which she acquired from the sale of some real estate holdings. For his contribution to the company, John Faulkner obtained a bank loan for the purchase of a $7000 Ditch Witch backhoe, which he, in turn, leased to Four Seasons. Both Carol Faulkner and John Faulkner also count their experience in and around the business of selling erosion control products toward their contributions to the firm.

3. In addition to Four Seasons Erosion Control, Carol Faulkner and her son also own a trucking company known as Four Seasons Transportation, Inc. Like Four Seasons Erosion Control, Four Seasons Transportation is a statutory close corporation with Ms. Faulkner as the President and John Faulkner as Vice-President. Four Seasons Transportation was established and incorporated in 1998, approximately four years prior to the incorporation of Four Seasons Erosion Control, and was financed largely by a loan drawn from the retirement account of Ms. Faulkner’s husband, Richard Faulkner. Currently, Ms. Faulkner holds 99% of the shares of Four Seasons Transportation, and John Faulkner holds the remaining 1% of the shares.^[1] While Four Seasons Transportation is now essentially dormant, the company does still own several trucks and trailers.

4. Four Seasons Erosion Control has no significant assets. The company is run from an office in Carol Faulkner’s home, leases its backhoe from John Faulkner, and leases trucks and trailers from Four Seasons Transportation.^[2] Further, Four Seasons Erosion Control has not yet become profitable enough for either Carol Faulkner or John Faulkner to draw a salary for their work with the company.

5. Ms. Faulkner’s duties as president and owner of Four Seasons Erosion Control include: finding jobs to bid on, preparing and submitting bids, ordering and purchasing supplies, equipment, and materials, attending pre-bid and pre-construction conferences, managing the company’s office, hiring and firing employees, handling the payroll and other accounting matters, and supervising work at the construction sites. Ms. Faulkner does not supervise work at the construction sites full-time, but she is present at the work site at the start of each job and visits the job site at least once per day thereafter. In sum, Ms. Faulkner manages the business operations of Four Seasons and makes both short- and long-term planning decisions for the firm. John Faulkner’s duties with the company extend primarily to on-site managerial responsibilities, including the full-time supervision of the installation work being done on the job site and assistance with that work when necessary. John Faulkner further testified that, while he does occasionally discuss potential jobs with his mother, he does not make the ultimate decision on whether to take those jobs and does not attend pre-bid or pre-construction conferences or conduct any negotiations related to those jobs. In addition to the Faulkners, Four Seasons Erosion Control has two part-time employees who, along with John Faulkner, carry out the actual installation work at the job sites.

6. Prior to founding Four Seasons Erosion Control, Carol Faulkner had no direct experience with the installation of erosion control products. However, Ms. Faulkner did indirectly acquire considerable knowledge of and experience in the erosion control business while working with her husband during his nearly thirty years of employment as a salesman of erosion control products. In particular, Ms. Faulkner assisted her husband in preparing bids and price quotations, accompanied her husband to job sites where she observed, and heard discussions about, the installation of erosion control products, and participated with her husband in various trade shows and industry conferences. Like Ms. Faulkner, John Faulkner acquired his experience in the erosion control business primarily through involvement in the sale of erosion control products. Specifically, he has approximately seven years of experience as both a salesman of erosion control products and as a sales manager for such products.

7. Both Ms. Faulkner’s husband, Richard Faulkner, and her son, John Faulkner, have some level of involvement in Four Seasons Erosion Control. As noted above, John Faulkner holds a subordinate position in the company, which gives him responsibility for supervising work at the job sites, but does not grant him any greater managerial or decision-making authority. Richard Faulkner is not employed by Four Seasons Erosion Control nor does he have any ownership interest in the firm.^[3] Ms. Faulkner does consult with her husband on occasion regarding the operations of Four Seasons, but she alone retains and exercises decision-making authority for the firm.

8. On August 20, 2002, Carol Faulkner submitted an application to the Department for certification of Four Seasons Erosion Control as a Disadvantaged Business Enterprise (DBE). On October 1, 2002, Alex Nelson, the DBE project director at DOT, conducted a site visit of Ms. Faulkner’s home office and met with Ms. Faulkner and her son. By letter dated October 23, 2002, the Department denied the certification request on two grounds: (1) that Ms. Faulkner had not demonstrated that she shares in the risks and profits of the firm so as to substantiate her ownership interest in Four Seasons, and (2) that Ms. Faulkner had not established that she has the technical competence and experience in the erosion control business so as to exercise true control over the operations of Four Seasons. At the hearing of this matter, the Department also questioned whether Four Seasons Erosion Control is an independent business and whether Four Seasons is not, in fact, a family-run business. Petitioner contends that Ms. Faulkner does have sufficient ownership and control of Four Seasons so as to satisfy the DBE certification criteria.

CONCLUSIONS OF LAW

Based upon the foregoing Findings of Fact, I conclude the following as a matter of law:

Jurisdiction and General Background

1. This tribunal has jurisdiction over this matter pursuant to 25A S.C. Code Ann. Regs. 63-704(K) (Supp. 2002) and S.C. Code Ann. § 1-23-600(B) (Supp. 2002).

2. S.C. Code Ann. § 12-28-2930 (2000) establishes a program to set aside expenditures of state highway funds for contracts with disadvantaged business enterprises (DBEs). Under this program, the Department, in allocating state highway funds for road, bridge, and building contracts, is required to “ensure that not less than . . . five percent are expended through direct contracts with estimated values of two hundred fifty thousand dollars or less with firms owned and controlled by disadvantaged females (WBEs).” S.C. Code Ann. § 12-23-2930(A)(1)(b) (2000).^[4] In order to certify eligible firms under Section 12-28-2930(A), see S.C. Code Ann. § 12-28-2930(B) (2000), and to comply with the federal disadvantaged business enterprises program, the Department has promulgated regulations to implement the state and federal DBE programs. See 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2002). Under those regulations, applicants for DBE certification in South Carolina must comply with and satisfy the DBE standards set forth in the federal regulations at 49 C.F.R. Part 26 (2002). See 25A S.C. Code Ann. Regs. 63-702(A) and 63-703(A) (Supp. 2002).

3. A “disadvantaged business enterprise” is defined by regulation as a “for-profit small business concern–(1) that is at least 51 percent owned by one or more individuals who are both socially and economically disadvantaged or, in the case of a corporation, in which 51 percent of the stock is owned by one or more such individuals; and (2) whose management and daily business operations are controlled by one or more of the socially and economically disadvantaged individuals who own it.” 49 C.F.R. § 26.5 (2002). In order to be certified as a DBE, an applicant has the burden of demonstrating, by a preponderance of the evidence, that it meets the regulatory criteria for DBE status, including the requirements regarding group membership or individual disadvantage, business size, ownership, and control. 49 C.F.R. § 26.61(b) (2002).

4. In the instant matter, the Department does not contest that Ms. Faulkner, as a woman, is a socially and economically disadvantaged individual pursuant to 49 C.F.R. § 26.67(a) (2002) (creating a presumption that women are socially and economically disadvantaged individuals for DBE purposes) or that Four Seasons Erosion Control qualifies as a small business pursuant to 49 C.F.R. § 26.65 (2002). Rather, the Department contends that Ms. Faulkner, the qualifying disadvantaged individual, does not sufficiently own and control Four Seasons Erosion Control, as defined pursuant to 49 C.F.R. §§ 26.69 and 26.71 (2002), respectively, so as to be eligible for DBE certification.

Ownership

5. 49 C.F.R. § 26.69 (2002) sets forth the criteria for determining ownership of a firm seeking DBE certification. As a primary requirement for DBE eligibility, a firm must be at least 51% owned by socially and economically disadvantaged individuals. 49 C.F.R. § 26.69(b). Where the firm is a corporation, like Four Seasons Erosion Control, the disadvantaged individuals must own at least 51% of each class of outstanding voting stock and at least 51% of the total outstanding stock. Id. § 26.69(b)(1). However, beyond these technical ownership requirements, the regulations specify that:

The firm’s ownership by socially and economically disadvantaged individuals must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected by ownership documents. The disadvantaged owners must 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. § 26.69(c). Additionally, Section 26.69(e) provides that the “contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial.” Id. § 26.69(e).

6. In the case at hand, Ms. Faulkner holds 60 of the 100 outstanding shares in Four Seasons Erosion Control, Inc, for a 60% ownership interest in the company. Further, beyond the form of these ownership documents, Ms. Faulkner has a real, substantial, and continuing majority ownership interest in Four Seasons Erosion Control. In its denial letter, the Department cited Ms. Faulkner’s $1000 initial deposit to the company bank account as her only contribution to the firm, and credited John Faulkner with a $10,000 contribution to the firm, $7000 for the Ditch Witch leased to the company and $3000 for his prior experience in the erosion control industry. See Resp’t Ex. #1, tab 1, at 1. Accordingly, the Department found that Ms. Faulkner’s share in the risks and profits of the business was not commensurate with her 60% ownership interest. Id. However, the evidence developed at the hearing indicates that Ms. Faulkner contributed approximately $8000 of her own funds toward the start-up costs for Four Seasons, and that Ms. Faulkner has contributed her own significant experience related to the erosion control industry to the operations of the firm. Further, Ms. Faulkner’s role as president and sole decision-maker for Four Seasons suggests that she enjoys the customary incidents of ownership of the firm. Moreover, as Four Seasons is not yet profitable, an inquiry into the sharing of the profits of the firm would be unavailing. For these reasons, I conclude that Ms. Faulkner has made a real and substantial financial contribution to Four Seasons, that her share in the risks and profits of Four Seasons is commensurate with her 60% ownership interest, and that she is the “owner” of Four Seasons Erosion Control within the meaning of 49 C.F.R. § 26.69.

Control

7. 49 C.F.R. § 26.71 (2002) lays out the rules governing the determination of whether socially and economically disadvantaged owners control a firm seeking DBE certification. In order to be considered in control of a firm, the disadvantaged owners “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.” Id. § 26.71(d). Consequently, a disadvantaged owner “must hold the highest officer position in the company” and “must control the board of directors,” if the firm is a corporation. Id. § 26.71(d)(1), (2). Beyond these incidents of formal control over the firm, the regulations require that:

The socially and economically disadvantaged owners must have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the firm is engaged and the firm’s operations. . . . [These owners] must have the ability to intelligently and critically evaluate information presented by other participants in the firm’s activities and to use this information to make independent decisions concerning the firm’s daily operations, management, and policymaking.

Id. § 26.71(g).

8. Here, Ms. Faulkner, as president of Four Seasons, holds the highest officer position in the company, directs the management and policies of the firm, and makes both short- and long-term decisions regarding the management, policies, and operations of Four Seasons. Further, Ms. Faulkner has a sufficient understanding of, and managerial and technical competence and experience related to, the erosion control industry such that she can intelligently and critically evaluate information presented to her regarding Four Seasons’ activities and that she can make independent decisions regarding the management, policies, and operations of Four Seasons. In its denial letter, the Department, relying primarily upon Ms. Faulkner’s work experience as listed on her resume, determined that Ms. Faulkner “submitted no evidence of having gained, either formally or informally, the basic knowledge and experience necessary to make independent operational decisions,” and that, because she did not have such “experience and expertise directly related to erosion control,” she must rely upon the expertise of her husband and her son in running Four Seasons. See Resp’t Ex. #1, tab 1, at 2. However, the evidence presented at the hearing demonstrated that, through her informal work assisting her husband for over 25 years, Ms. Faulkner had acquired significant experience related to the erosion control industry, and that through that experience, she had gained the basic knowledge and experience necessary to control Four Seasons. Moreover, while Ms. Faulkner does consult with her husband and her son regarding the business from time to time, she retains and intelligently exercises all decision-making authority for the firm.

9. In addition to the issues regarding Ms. Faulkner’s work experience, the Department further challenged Ms. Faulkner’s control of Four Season Erosion Control by raising questions as to the level of family involvement in the operation of Four Seasons Erosion Control, see 49 C.F.R. § 26.71(k)(2), and as to the independence of Four Seasons Erosion Control from Four Seasons Transportation, see 49 C.F.R. § 26.71(b). However, despite these questions, it is clear that Ms. Faulkner controls Four Seasons Erosion Control. First, the significant involvement of Ms. Faulkner’s son, John Faulkner, in the operations of Four Seasons does not diminish Ms. Faulkner’s control over the firm. The relevant regulations allow non-disadvantaged individuals, including immediate family members of the qualifying disadvantaged individuals, to have substantial involvement in a DBE so long as the disadvantaged individuals retain and actually exercise control over the firm’s operations, management, and policy. See 49 C.F.R. § 26.71(e) (permitting non-disadvantaged individuals to be involved in a DBE firm as owners, managers, employees, stockholders, officers, and directors), id. § 26.71(f) (allowing the disadvantaged owners of a DBE to delegate certain managerial, policymaking, and operational duties to non-disadvantaged individuals), id. § 26.71(k)(1) (providing that a disadvantaged individual may control a firm even though one or more of that individual’s immediate family members participate in the firm as a manager, employee, or owner). Such is the case here. Even though John Faulkner is a part-owner of and key employee in Four Seasons Erosion Control, Ms. Faulkner retains and exercises full control over the operations, management, and policy of Four Seasons.^[5]

Second, Four Seasons Erosion Control is a sufficiently independent business so as to qualify for DBE certification. The regulations provide that “[o]nly an independent business may be certified as a DBE” and define an independent business as “one the viability of which does not depend on its relationship with another firm or firms,” particularly non-DBE firms. 49 C.F.R. § 26.71(b). In the case at hand, it is clear–and Petitioner acknowledges–that Four Seasons Erosion Control and Four Seasons Transportation are “sister companies being owned and operated by Carol Faulkner and John Faulkner” and that Four Seasons Erosion Control relied on the support of Four Seasons Transportation during its formation and start-up period. See Pet’r Ex. #2, at 10. However, Four Seasons Erosion Control is a viable entity distinct from Four Seasons Transportation that is capable of seeking out and undertaking jobs without the involvement of Four Seasons Transportation. Further, as Four Seasons Transportation is also owned and controlled by Ms. Faulkner, the relationship between Four Seasons Erosion Control and Four Seasons Transportation does not suggest “an impermissible inter-dependency between the applicant and a non-disadvantaged entity.” Shearin Constr., Inc. v. Mineta, 232 F. Supp. 2d 608, 612 (E.D. Va. 2002).

10. In conclusion, Ms. Faulkner owns and controls Four Seasons Erosion Control. Four Seasons is a new, small business with few assets and little profits. Accordingly, Ms. Faulkner’s modest contribution to the firm, while not overwhelming, is sufficient to support her real and continuing majority ownership interest in the business. Further, the installation work performed by Four Seasons Erosion Control is not highly-specialized or highly-technical work, and it is work that Ms. Faulkner has become very familiar with while assisting her husband during his thirty-year career in the erosion control industry. Consequently, Ms. Faulkner has the technical competence and experience necessary to exercise true control over the management, operation, and policies of Four Seasons. And, while Ms. Faulkner exercises this control in consultation with her husband and son, she alone has the final decision-making authority for Four Seasons. In short, Four Seasons Erosion Control is a small erosion control business owned and operated by a woman such that it qualifies for certification as a DBE.

ORDER

Based upon the Findings of Fact and Conclusions of Law stated above,

IT IS THEREFORE ORDERED that the Department GRANT the application of Petitioner Four Seasons Erosion Control, Inc. for certification as a Disadvantaged Business Enterprise pursuant to S.C. Code Ann. § 12-23-2930 (2000) and 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2002).

AND IT IS SO ORDERED.

______________________________

JOHN D. GEATHERS

Administrative Law Judge

Post Office Box 11667

Columbia, South Carolina 29211-1667

April 10, 2003

Columbia, South Carolina