ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This matter comes before the Administrative Law Judge Division (Division) upon the
Petitioner’s request for a contested case hearing to review a decision of the Respondent, South
Carolina Department of Transportation (Department), denying the Petitioner’s application for
certification as a Disadvantaged Business Enterprise (DBE). A contested case hearing on the merits
was held at the offices of the Division on May 15, 2003, in Columbia, South Carolina.
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 and 63-704 (Supp. 2001), 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. SeeRegulation 63-703 (Supp. 2001); 49 C.F.R. Part 26,
Subpart A, § 26.5. In this case, the Petitioner asserts that Stay Alert Safety Services, Inc. is eligible
for certification as a DBE because Melissa Babcock, as a woman, owns and controls the business as
required by 49 C.F.R. Part 26.
FINDINGS OF FACT
Having observed the witnesses and exhibits presented at the hearing and closely passed upon
their credibility, taking into consideration the burden of persuasion by the parties, I make the
following findings of fact by a preponderance of the evidence:
1.Notice of the date, time, place, and nature of the hearing was timely given to all
parties.
2.The Petitioner, Stay Alert Safety Services, Inc. (Stay Alert), is a North Carolina
corporation which applied to the Department for certification as a DBE pursuant to 25A S.C. Code
Ann. Regs. 63-700 et. seq. (Supp. 2001) and 49 C.F.R. Part 26. Though Stay Alert is certified as
a Disadvantaged Business Enterprise by the North Carolina Department of Transportation, the
Department, following its investigation, denied certification.
Stay Alert’s Organization and Capitalization
3.On March 12, 2002, Ms. Babcock’s attorney filed for the incorporation of Stay Alert
with the State of North Carolina. The North Carolina Secretary of State issued Articles of
Incorporation on March 13, 2002. Melissa Babcock was named as the initial registered agent of the
corporation and the sole member of its Board of Directors. The purposes of the corporation were
described as “to provide traffic control, safety equipment supplies and services.”
After Stay Alert’s incorporation, Kathy Babcock forwarded $270,000 in four installments to
the business between March 14, 2002 and May 2, 2002, as follows:
a.A $90,000 check marked “loan” from the joint account of “Dan or Kathy Babcock”
on March 14, 2002;
b.A wire transfer of $90,000 from the account of Kathy Babcock on March 18, 2002;
c.A $15,000 check marked “loan” from the joint account of “Dan or Kathy Babcock”
on April 12, 2002; and
d.A $75,000 check from the joint account of “Dan or Kathy Babcock” on May 2, 2002.
Dan and Kathy Babcock are Melissa Babcock’s brother-and- sister-in-law.
On May 13, 2002, Melissa Babcock, Kathy Babcock and Dan Babcock were elected as the
three members of the Board of Directors of Stay Alert. On that day the corporation also issued the
following shares of stock:
Melissa Babcock1020 shares (51%)
Kathy Babcock 400 shares (20%)
Dan Babcock 340 shares (17%)
Michael Granger 240 shares (12%)
There is nothing stated in the corporate records regarding what consideration was given for the
issuance of these shares of stock.
On May 16, 2002, Melissa Babcock, as President of Stay Alert, signed a Promissory Note
(2002 Note) and a Security Agreement (2002 Security Agreement) on behalf of the corporation to
Kathy Babcock. The 2002 Note provided that it was given for “sums advanced from time to time,
as the Lender may in his sole and absolute discretion deem reasonable and necessary for the operation
of the business of the Borrower.” The 2002 Note was not personally guaranteed by Melissa
Babcock, but was solely an obligation of the corporation. The 2002 Security Agreement gave Kathy
Babcock a security interest in all the assets of the corporation in the event the loan was not repaid.
On April 25, 2003, after this application was filed with the Department, the 2002 Note and 2002
Security Agreement were amended. Attached to those amended documents was a “Guaranty” which
indicates that Melissa Babcock personally guaranteed to Kathy Babcock all indebtedness of Stay
Alert.
4.Melissa Babcock testified that the consideration for her 51% interest in Stay Alert’s
stock consisted of the following items:
a.Approximately $2,000 that she used to purchase office equipment in April 2002;
b.Expertise in the traffic control industry that she obtained by attending the North
Carolina Department of Transportation Work Zone Rodeo and traffic control
conventions in 2001 and 2002;
and
c.Personal guarantees that she made on several notes to purchase trucks. She testified
that the cumulative total of the assumed liability for the vehicles was $140,000.
However, only approximately $50,000 of the liability for those vehicles was assumed prior to the
issuance of stock More important, the amount of her assumed liability, if any, is questionable.
Furthermore, though she may be personally obligated on some of the loans, the trucks that were
purchased and given as security for the loans were new and carry a value that certainly provides some
security for the loans especially in light of the down payments made upon purchase.
5.Melissa Babcock testified the consideration for the shares issued to Kathy and Dan
Babcock was Kathy Babcock’s $270,000 loan to the corporation. She further testified that the
consideration for Mike Granger’s shares was his agreement to provide consultation to her as needed
on business matters. Mr. Granger is the President and part owner of Street Smart Rentals, a company
that rents traffic control products which are the type of inventory used by the Petitioner, and in which
Kathy Babcock possesses an ownership interest. Additionally, the 2002 Note provided that one of
the events of default was “the termination or material breach of the exclusive Lease Agreement
between Street Smart Rentals, Inc., a Delaware corporation, as Lessor, and Borrower, as Lessee.”
After this application was filed, the 2002 Note was amended on April 25, 2003 to remove the event
of default related to Street Smart Rentals. However, I do not find that this recent amendment reflects
the intention of the parties when they executed the 2002 Note.
Corporate Control
6.Dan and Kathy Babcock have both been involved in the traffic control business. They
presently own stock in two other traffic control supply companies besides Stay Alert: Work Safe
Supply Co., a company in Michigan, and Street Smart Rentals, a company in Minnesota. Kathy
Babcock has been in the traffic control business for 25 to 30 years. In fact, she operated a traffic
control business as a DBE that was sold before Stay Alert was incorporated.
Melissa Babcock’s
husband, Jim Babcock, who is in charge of sales for Stay Alert, has worked in the traffic control
business from March 1999, estimating and coordinating sales and rentals of traffic control products
and services for Protection Services, a North Carolina corporation. He has been an employee of Stay
Alert since its inception and is paid a salary of $45,000 per year.
On the other hand, Melissa Babcock has never been employed in the traffic control business
until she became President of Stay Alert. She previously worked for United Airlines as a flight
attendant from November 1990 to August 2001. While working as a flight attendant, Ms. Babcock
decided to leave her job and start a traffic control company. In furtherance of those plans, she
attended the North Carolina Department of Transportation’s Work Zone Rodeo in 2001 and 2002,
which trained individuals in the “dos” and “don’ts” of the traffic control industry. In 2001 and 2002,
she also attended the American Traffic Services Safety Convention with her husband Jim.
Since Stay Alert has been operating, Mrs. Babcock has been paid a salary of $85,000 per year.
She has attended a traffic control technician training course in January 2003 offered by the American
Traffic Safety Services Association. She also successfully completed the National Safety Council’s
Traffic Control Zone Supervisors’ course in April 2003 and a ‘construction law for subcontractors’
course in November 2002 sponsored by the Associated General Contractors of America.
Furthermore, Melissa Babcock participated in a traffic control technician course held in Southern
Pines, North Carolina, and received a passing grade on the final examination.
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 Division has subject matter jurisdiction in this case pursuant to S.C. Code Ann.
§ 1-23-600(B) (1986 & Supp. 2001) and 25A S.C. Code Ann. Regs. 63-704(K) (Supp. 2001).
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). Consequently, the Department has promulgated regulations to implement the South Carolina
DBE program which adopted the standards for certifying DBEs set forth in 49 C.F.R. Part 26. See
25A S.C. Code Ann. Regs. 63-702(A) & 63-703(A) (Supp. 2001). Those regulations provide that
a firm seeking certification as a DBE has the burden of proving by a preponderance of the 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 & 26.61 (b).
3.The Department does not contest whether Stay Alert meets the requirements of group
membership or business size. Rather, the Department contends that Ms. Babcock did not make a
“real and substantial contribution” to acquire her ownership of Stay Alert as required by Regulation
63-700(E) and 49 C.F.R. § 26.69, and that she does not “control” the firm as required by Regulation
63-700(E) and 49 C.F.R. § 26.71. Stay Alert, on the other hand, contends that Ms. Babcock meets
the requirements of the regulations concerning ownership and control.
Management and Control
4.To meet their burden of establishing control, a business must demonstrate that the
disadvantaged owner independently controls the business. 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 competence 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 also hold the highest officer position in the company and control the Board of Directors.
49 C.F.R. §26. 71(d)(1) & (2).
Here, Ms. Babcock is the highest officer in Stay Alert and also controls the Board of
Directors in the corporation. Furthermore, she demonstrated an overall understanding of the
technical as well as the managerial aspects of her firm so as to enable her to direct the company’s day-to-day operations and make long term decisions concerning the company’s operations. Though she
has delegated responsibility of various aspects of the operation of Stay Alert to her husband and
Wade Lackey, those delegations are apparently revocable.
Likewise, shareholders Kathy Babcock
and Michael Granger possess far greater expertise in the area of Stay Alert’s operation and Melissa
Babcock has relied significantly on their advice in how to operate the business.
Nevertheless, the DBE regulations do not prohibit the involvement of non-disadvantaged
persons in a firm. 49 C.F.R. § 26.71(e) states, in part, that “[i]ndividuals who are not socially and
economically disadvantaged may be involved in a DBE firm as owners, managers, employees,
stockholders, officers, and/or directors.” Furthermore, 49 C.F.R. § 26.71(f) provides that:
[t]he socially and economically disadvantaged owners of the firm may delegate
various areas of the management, policymaking, or daily operations of the firm to
other participants in the firm, regardless of whether these participants are socially and
economically disadvantaged individuals. Such delegations of authority must be
revocable, and the socially and economically disadvantaged owners must retain the
power to hire and fire any person to whom such authority is delegated. The
managerial role of the socially and economically disadvantaged owners in the firm's
overall affairs must be such that the recipient can reasonably conclude that the socially
and economically disadvantaged owners actually exercise control over the firm's
operations, management, and policy.
In conclusion, the evidence did not establish that individuals other than Melissa Babcock were in
“control [of] the firm,” or “disproportionately responsible for the operation of the firm.” See 49
C.F.R. § 26.71(e).
Additionally, though Melissa Babcock does not have significant technical competence and
experience regarding the operations and management of the firm, prior to incorporating Stay Alert,
she attended two training courses sponsored by the traffic control industry. The Department’s staff
determined that those courses did not provide her the degree of technical expertise in the traffic
control business to operate and control the business on a day-to-day basis. While Melissa Babcock’s
experience in the operations of a traffic safety business appears to be limited, there was no competent
evidence offered that operating this business requires more training or experience than what she
currently possesses. Furthermore, since becoming President of Stay Alert, she has continued her
education and gained valuable knowledge concerning the company’s operation and management. As
set forth above, although the owner of a firm must possess an overall understanding of and
competence in the business in which the firm is engaged, the regulations do not require the
disadvantaged owner of a firm to have experience and expertise in every area of the firm’s operations
or to have greater experience and expertise than key employees of the firm. While Melissa Babcock
receives advice and assistance from her husband, Kathy Babcock, Michael Granger and Wade
Lackey, Ms. Babcock currently has a sufficient understanding of, and the technical competence and
experience directly related to the business of Stay Alert.
The Department also contends that Melissa Babcock cannot make independent decisions in
corporate matters because she does not have the authority to remove the other two members of the
Board of Directors, Dan and Kathy Babcock. However, the inability of Melissa Babcock to remove
minority shareholders from the Board of Directors of a close corporation does not denote that she
does not, or cannot, control the affairs of the corporation. I, therefore, find that Ms. Babcock has the
power to direct the management and policies of the firm and to make both day-to-day and long-term
decisions concerning the management, policy and operations of Stay Alert. See 49 C.F.R. § 26.71
(f).
Ownership
5.To establish the requisite ownership, a disadvantaged 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 owner’s risks must also be commensurate with that ownership
interest, “as demonstrated by the substance, not merely the form, of arrangements.” 49 C.F.R. §
26.69(b). Furthermore, the capital contributions by a disadvantaged owner to “acquire” their
ownership interests must be “real and substantial.” 49 C.F.R. § 26.69(e). An owner cannot rely upon
“a promise to contribute capital, an unsecured note payable to the firm or . . . mere participation in
a firm's activities as an employee.” Id. However, “[d]ebt instruments from financial institutions or
other organizations that lend funds in the normal course of their business do not render a firm
ineligible, even if the debtor's ownership interest is security for the loan.” Id. In addition, if expertise
is relied upon as an ownership contribution, that expertise must also be “real and substantial” and
must be:
•In a specialized field;
•Of outstanding quality;
•In areas critical to the firm's operations;
•Indispensable to the firm's potential success;
•Specific to the type of work the firm performs; and
•Documented in the records of the firm. These records must clearly show the
contribution of expertise and its value to the firm.
49 C.F.R. § 26.69(f)(1). An owner relying upon their expertise must also have made a significant
financial investment in the firm. 49 C.F.R. § 26.69(f)(2).
Here, to acquire her 51% ownership, Melissa Babcock contributed $2,000.
The remaining
shares were issued to Ms. Babcock’s brother-and-sister-in-law, Dan and Kathy Babcock, and to
Michael Granger. Though no money was paid for their stock purchases, these investors possessed
expertise in the specific field of Stay Alert’s business and their expertise was used to assist Stay Alert
in its operations. Additionally, Kathy Babcock executed a promissory note to Stay Alert to provide
the capital to start the business.
Pursuant to that note, Kathy Babcock provided $270,000 to initiate
Stay Alert. Ms. Babcock contends that it was her intention to also be personally bound by the 2002
Note. In fact when it was brought to her attention by the Department that she was not personally
bound by the 2002 Note, she had an amended note and security agreement executed. The April 2003
Promissary Note and Security Agreement are still executed between Kathy Babcock and Stay Alert.
Ms. Babcock again signed the Note and Security Agreement in her capacity as President.
Nevertheless, in April 2003, she also executed an unsecured guaranty of repayment upon the note
which she signed as “Melissa Babcock.”
However, as set forth above, the issue in this case is not what “contributions” Ms. Babcock
has made since the initiation of the business but what contribution she made to start or obtain her
interest in the business. Ms. Babcock clearly was not personally liable upon the Note at the inception
of Stay Alert. In fact, the checks subsequently issued pursuant to that note were issued to Safety
Alert. Moreover, both the original and amended Security Agreements guaranteeing the repayment
of the Promissory Note provided Kathy Babcock a security interest solely in the properties of Stay
Alert. Consequently, even if Ms. Babcock was personally responsible for the repayment, she has not
provided a security interest to insure the repayment. Accordingly, the note was unsecured for the
purposes of establishing an ownership contribution by Ms. Babcock. This is even more significant
in light of the fact that the note was not made by a financial institution or other organization in the
normal course of their business but rather was a note issued by a non-disadvantaged co-owner of the
business.
Ms. Babcock also argues that her signature upon the contract to purchase several vehicles on
behalf of Stay Alert reflects an additional capital contribution on her behalf. The Petitioner submitted
three contracts to purchase vehicles. One of the contracts reflects that Stay Alert is the buyer and
that Ms. Babcock signed on behalf of the corporation. The other two contracts show the co-buyers
as Stay Alert and Melissa Babcock. Presumably Ms. Babcock is personally bound by those two
contracts. However, it is unclear whether her signature as co-buyer is simply a signature as President
of Stay Alert ultimately only binding the corporation. Nonetheless, a subsequent capital contribution
or mere participation in a firm's activities on her behalf does not establish a contribution to acquire
the business.
In conclusion, Ms. Babcock’s contribution of $2,000 pales in comparison to the contribution
of $270,000 by Kathy Babcock. Additionally, the belated Guaranty provided by Ms. Babcock to her
sister-in-law appears to be merely a form arrangement in an attempt to establish a sufficient ownership
interest. I, therefore, find that Ms. Babcock’s contribution to Stay Alert was not sufficiently
substantial or commensurate to her 51% ownership interest.
ORDER
Based upon the foregoing Findings of Fact and Conclusions of Law, IT IS HEREBY
ORDERED that the application of Stay Alert for certification as a Disadvantaged Business
Enterprise is denied.
AND IT IS SO ORDERED.
______________________________
Ralph King Anderson, III
Administrative Law Judge
June 24, 2003
Columbia, South Carolina |
