ORDERS:
FINAL DECISION AND ORDER
This matter comes before the Administrative Law Judge Division ("Division") pursuant to S.C. Code Ann. § 1-23-600(B) (Supp.
2000) and 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2000), upon the Petitioner'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 on the merits of Petitioner's request was
held at the offices of the Division in Columbia, South Carolina, on November 15, 2000. For the following reasons, I find that the
Petitioner's application for certification should be granted.
STATEMENT OF THE CASE
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) (Supp. 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 -704 (Supp. 2000) 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 25A S.C. Code Ann. Regs. 63-703 (Supp. 2000); 49 C.F.R. Part 26,
Subpart A, § 26.5.
Petitioner applied for certification as a DBE in the area of erosion control in March of 1999. On September 30, 1999, and January
27, 2000, Petitioner's application was presented to the Department's Disadvantaged Business Enterprise Advisory Committee for
review. By certified letter dated February 22, 2000, the Department notified the Petitioner that its request for certification was
denied, based upon the Department's determination that Petitioner's owner, Ms. Sandra Brown, had failed to demonstrate that she
made a "real and substantial contribution" to fund the start up of the company or that she had sufficient ability and expertise to
control the day-to-day operations of the company. Thereafter, Petitioner filed a request for a contested case hearing before the Division.
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 evidence:
1. Notice of the date, time, place, and nature of the hearing was timely given to all parties.
2. The Petitioner, NewCon Construction, Inc. was incorporated in March of 1999 by Sandra Brown and her son Mathew Newman.
NewCon's principal place of business is 601 N. Main Street, Clover, South Carolina.
3. Prior to forming NewCon, Sandra Brown had worked in retail businesses, had developed and sold real estate, and had assisted her
parents in the operation of their motel in Clover. In 1992, Ms. Brown was hired by Blythe Construction Company, a large
construction company based in Charlotte, North Carolina. Initially, Ms. Brown worked as a grade checker and roller operator. Her
immediate supervisor at that time was Billy Brown, a project superintendent for Blythe. Ms. Brown eventually married Billy Brown
during her tenure with Blythe. During Ms. Brown's employment with Blythe, she performed various other duties such as ordering
materials, operating other pieces of construction equipment, and administrative duties. Eventually, Ms. Brown's responsibilities
grew to include becoming an office manager for a major highway construction project in Georgia, under the direct supervision of the
project manager. In this capacity, most of Ms. Brown's work was performed in the office but she periodically conducted safety
checks and attended meetings with subcontractors. During her employment with Blythe, Ms. Brown became familiar with DBE's
and began to explore the possibility of forming her own company. She left Blythe in 1997. Billy Brown also left Blythe in 1997 and
went to work for another construction company.
4. The initial bank deposit of $200.00 to start NewCon's bank account was contributed by Sandra Brown from her personal funds.
Ms. Brown also paid an attorney $500.00 for the incorporation of NewCon, of which $300.00 was paid in cash from the sale of
antiques owned by Ms. Brown and the remaining $200.00 was paid by check drawn from NewCon's operating account. In April of
1999, two deposits to the company account were made. The first deposit, in the amount of $2,635.00, was made from the proceeds
of the sale of antiques belonging to Ms. Brown. The second deposit, in the amount of $7,000.00, came from Mr. and Ms. Brown's
joint tax refund from 1998. Other contributions to the startup of the company were a $2,500.00 withdrawal from Ms. Brown's
savings account for a down payment for the company's truck, a $5,000.00 gift to Ms. Brown from her mother, and $30,801.96 from
the refinancing of the mortgage on the Browns' marital residence, which was titled jointly. Although Ms. Brown owned another
house in her own name which was being used as rental property, she did not want to borrow money on that house because the interest
rate on the loan would be higher.
5. Billy Brown was not involved in the initial incorporation of NewCon, nor did he assist in any of the administrative responsibilities
relating to the startup of the company. At the time Ms. Brown was starting NewCon, Mr. Brown was employed by another
company.
6. Originally, the stock of NewCon was issued 51% to Sandra Brown and 49% to her son, Mathew Newman, although Mr. Newman
made no contributions of capital towards the startup of the company. Ms. Brown and her son were the only shareholders and officers
of NewCon. In May of 1999, Mathew Newman left NewCon because he received another job offer. At that time, he surrendered all
his shares of stock to Ms. Brown. Sandra Brown currently is the sole shareholder and officer of NewCon.
7. The first piece of equipment purchased on behalf of NewCon was a 1991 Ford truck. Mr. Brown co-signed for the loan on this
truck because Ms. Brown was unable to obtain the loan in her own name. Although the truck was titled in both Mr. and Ms. Brown's
names, Ms. Brown contributed the down payment on the truck, $2,500.00, by withdrawing the funds from her personal credit union
savings account. Moreover, Ms. Brown has made all the installment payments on the truck, and has since purchased additional
pieces of equipment for NewCon in her name only. In addition, Ms. Brown purchased an office building for NewCon and was the
only person who signed the note and mortgage for the purchase of that building.
8. NewCon was awarded its first contract in the summer of 1999 by O.L. Thompson, a grading contractor in Charleston, to put up silt
fencing at a construction site. Sandra Brown did the estimate and signed the contract. At about the same time that NewCon was
awarded the contract, Mathew Newman decided to leave the company. Billy Brown then volunteered to come work for NewCon,
indicating that he was somewhat "burnt out" from his then present position and that he would like to have the opportunity to spend
more time with his twelve year old son from a previous marriage, of whom he has custody. Mr. Brown was making $65,000.00 per
year at the time. Mr. Brown went to work for Ms. Brown based upon the understanding that Ms. Brown would be responsible for all
business and managerial decisions of the company, and Mr. Brown would serve as a working foreman and mechanic. Mr. Brown
transferred his contractor's license to the company after he began work with NewCon.
9. Billy Brown is the qualifying party for NewCon's licenses in the areas of grading and water and sewer lines. Mr. Brown was
required to take a technical exam in order to become certified in those areas. Sandra Brown is the qualifying party in the areas of
Highway Incidental and Interior Renovation. To qualify for her licenses, Ms. Brown had to take and pass an exam covering the
provisions in the Code of Laws which are applicable to contractor's licenses.
10. Ms. Brown has the exclusive authority to hire and fire employees and sign checks and contracts on behalf of NewCon. Ms.
Brown also handles scheduling, contract and change order negotiations, work schedules, the establishment of company policy
concerning vacations, sick leave and holidays, the purchasing of materials and equipment, the purchasing of insurance, safety
compliance, the obtaining of necessary permits, the preparation of bids and proposals, preparing and executing all company
correspondence, payment of employees, and other responsibilities inherent in the management of the company. She also works in
the field several days per week and directs field crews. Mr. Brown operates equipment, repairs machinery, assists with the field
crews, and sometimes orders materials. While Mr. Brown offers his opinions and assistance on bids and estimates, it is Ms. Brown
who has the sole authority to bind the company contractually.
11. Mr. and Ms. Brown are each paid a salary of $775.00 per month from NewCon.
12. NewCon is certified as a "Woman-owned Business" by the City of Charlotte, North Carolina. However, that certification is not
binding in determining NewCon's eligibility to participate in the DBE Program.
13. NewCon's application for DBE certification states that NewCon seeks certification in the area of erosion control. However, Ms.
Brown testified that the firm also seeks to do general highway construction work such as grading. (1)
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude, as a matter of law, the following:
Jurisdiction and Relevant Law
1. This Division has subject matter jurisdiction in this case pursuant to S.C. Code Ann. § 1-23-600(B) (Supp. 2000) and 23A S.C.
Code Ann. Regs. 63-704(K) (Supp. 2000).
2. The Department is required to certify eligible firms to participate in the South Carolina DBE program pursuant to S.C. Code Ann.
§ 12-28-2930(B) (Rev. 2000).
3. As a recipient of federal highway funds, the Department is also required to implement a DBE program in compliance with 49
C.F.R. Part 26. The Department has promulgated regulations to implement both the state and federal DBE programs in South
Carolina. See 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2000). Pursuant to the regulations, the Department has adopted the
standards for certifying DBEs which are set forth in 49 C.F.R. Part 26. 25A S.C. Code Ann. Regs. 63-702(A) and 63-703(A) (Supp.
2000).
4. A firm seeking certification as a DBE has the burden of demonstrating, by the preponderance of the evidence, that it meets the
requirements of 49 C.F.R. Part 26 concerning group membership or individual disadvantage, business size, ownership, and control.
49 C.F.R. § 26.61.
5. The Department does not contest whether NewCon meets the requirements of group membership or business size. If Ms. Brown
owns and controls the firm, the firm would qualify as a DBE because she is a member of the presumptively disadvantaged group of
women. See 49 C.F.R. § 26.67(a). The firm also qualifies as a "small business" under the regulations because its annual gross
receipts do not exceed the limitation of $7,000,000 per year for construction firms. See49 C.F.R. § 26.65 and 13 C.F.R. § 121.201.
6. The Department has denied certification as a DBE to NewCon on the grounds of ownership and control. The Department
contends that Ms. Brown does not "own" the firm as required by 25A S.C. Code Ann. Regs. 63-700(E) and 49 C.F.R. § 26.69, nor
does she "control" the firm as required by 25A S.C. Code Ann. Regs. 63-700(E) and 49 C.F.R. § 26.71. Instead, the Department
argues that the firm is a jointly-owned business in which Mr. and Ms. Brown share equally in the ownership and control of the
business and that such businesses are not entitled to be certified as DBEs. See 49 C.F.R. § 26.71(k). NewCon, on the other hand,
contends that Ms. Brown meets the requirements of the regulations concerning ownership and control.
Ownership
7. The Department contends that Ms. Brown does not "own" NewCon within the meaning of the regulations because she did not
make a "real and substantial" financial contribution to the firm, and because both Mr. and Ms. Brown invested in the firm. 49 C.F.R
§26.69(c) and (e) provide that a firm's ownership by disadvantaged individuals "must be real, substantial, and continuing, going
beyond pro forma ownership of the firm as reflected in ownership documents," and that "[t]he contributions of capital. . . by the
socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial." In this case, the
evidence reveals that Ms. Brown contributed in excess of $29,000.00 of her own assets, which constituted nearly two-thirds of the
initial investment and capitalization of the company. These contributions included the $200.00 initial bank deposit, $500.00
attorney's fees for incorporating the company, a $2,500.00 withdrawal from savings for the down payment on the company's truck,
the proceeds of antique furniture sales in the amount of $2,635.00, a $5,000.00 gift from Ms. Brown's mother, (2) one half of the
Browns' joint tax return refund from 1998 in the amount of $3,500.00, and one half of the net proceeds from the second mortgage on
the couple's principal residence, $15,400.98. (3) There is no evidence in the record which refutes these contributions by Ms. Brown.
On the other hand, Mr. Brown's contributions to the firm were the other half of the joint tax return and the other half of the proceeds
from the second mortgage, in the total amount of $18,900.98. A firm cannot be disqualified as a DBE simply because marital assets
were used in establishing it. The regulations in fact specifically contemplate the use of marital assets to acquire an ownership
interest in a firm. See 49 C.F.R. §26.69(i). Moreover, a firm cannot be disqualified solely because a non-disadvantaged spouse
co-signed financing agreements, contracts for the purchase of real or personal property, or other documents, such as the loan
documents for the 1991 Ford truck and for the refinancing of the marital residence. See 49 C.F.R. §26.69(j)(2). Based upon the
evidence presented in this case, I therefore find and conclude that Sandra Brown made a real and substantial financial contribution to
NewCon and that she is the "owner" of NewCon within the meaning of 49 C.F.R. §26.69.
Management and Control
8. The Department also argues that Ms. Brown does not "control" NewCon according to the requirements of 49 C.F.R. §26.71
because she lacks the necessary technical expertise and experience. 49 C.F.R. § 26.71(4)(d) provides that "[t]he socially and
economically 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." The Department
asserts that Mr. Brown is the party who possesses the requisite ability to control the firm because he has greater construction
experience, he had to take and pass a technical examination to obtain the licenses in grading and water and sewer lines, he and Ms.
Brown draw equal salaries from the firm, and he serves as an advisor to Ms. Brown in the areas of bidding and estimating.
NewCon, on the other hand, argues that the Department erroneously assumed that Mr. Brown was the de facto owner of the company
because he had previously been Ms. Brown's supervisor at Blythe Construction Company, and that Ms. Brown does in fact control
the day-to-day operations of NewCon.
9. The DBE regulations do not prohibit the involvement of non-disadvantaged persons in a firm. 49 C.F.R. § 26.71(e) states 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." Nor is a firm disqualified from DBE status because non-disadvantaged family members are employed by the firm. 49
C.F.R. § 26.71(k)(1) states that "[a] socially and economically disadvantaged individual may control a firm even though one or more
of the individual's immediate family members (who themselves are not socially and economically disadvantaged individuals)
participate in the firm as a manager, employee, owner, or in another capacity." A firm in which non-disadvantaged family members
participate is judged as if the non-disadvantaged persons were not family members. Id.
10. With respect to the expertise necessary to control a firm, the regulations state:
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. The
socially and economically disadvantaged owners are not required to have experience or expertise in every critical area of the firm's
operations, or to have greater experience or expertise in a given field than managers or key employees. The socially and
economically disadvantaged 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. Generally, expertise limited to office management, administration, or bookkeeping functions
unrelated to the principal business activities of the firm is insufficient to demonstrate control.
49 C.F.R. § 26.71(g).
11. Differences in remuneration between the socially and economically disadvantaged owners of a firm and non-disadvantaged
participants may be considered in determining whether the firm qualifies as a DBE. A firm may be deemed "controlled" by its
socially and economically disadvantaged owner even though the owner's compensation is lower than that of some other participants
in the firm. 49 C.F.R. § 26.71(i)(1).
12. With regard to the licensing of a firm, the regulations provide that the socially and economically disadvantaged owner must
possess any license or other credential which is required by state or local law in order to own or control a certain type of firm. If
state or local law does not require the owner of a firm to have such a license or credential, certification may not be denied solely on
the grounds that the owner lacks the license. However, the lack of a license may be taken into account as a factor in determining
whether the disadvantaged owner actually controls the firm. 49 C.F.R. § 26.71(h).
13. Applying these guidelines to the facts of this case, it is undisputed that Ms. Brown holds the position of President of NewCon
and is the only member of the board of directors. See 49 C.F.R. § 26.71(d). Mr. Brown, on the other hand, has absolutely no
responsibility or authority based on the corporate records. However, this factor is not controlling. The key inquiry is whether, based
upon the entire record, Ms. Brown 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 NewCon. Id.
First, there is no dispute that Mr. Brown possesses greater experience and expertise in the construction industry than does Ms. Brown
and that he assists her in the areas of bidding and estimating. However, 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. The question is whether Ms. Brown has sufficient experience and expertise to be able
to evaluate information provided by others and to use the information to make independent decisions concerning the firm's
operations. See 49 C.F.R. § 26.71(g). The uncontradicted testimony in the record is that Ms. Brown possesses experience and
expertise in the construction business, and that her experience consisted not only of administrative functions, but also of operating
construction equipment, grade checking, performing safety evaluations, and attending subcontractor meetings. The evidence further
reveals not only that Ms. Brown performs virtually all key management functions for NewCon, as set forth in Finding of Fact
Number 10 above, but also that she works in the field on a regular basis. Furthermore, the regulations permit the disadvantaged
owner of a firm to delegate certain functions to non-disadvantaged individuals, including family members. The fact that Mr. Brown
assists with bidding and estimating, therefore, is of little consequence when the evidence is viewed in its entirety. I therefore
conclude that Ms. Brown possesses sufficient experience and expertise to be able to evaluate information provided by Mr. Brown
and others and to make independent decisions on behalf of NewCon.
Second, the fact that Mr. Brown holds the company's licenses in grading and water and sewer is not a disqualifying factor. South
Carolina law does not require that the owner of a general contracting firm be the qualifying party for that firm. See49 C.F.R. §
26.71(h); S.C. Code Ann. §§ 40-11-230 and 240 (Rev. 2000). Moreover, Ms. Brown is in fact NewCon's qualifying party in the
areas of highway incidental and interior renovation. Accordingly, NewCon must not be disqualified on this basis. Furthermore,
when viewed in the context of the evidence in the record, the fact that Mr. and Ms. Brown draw equal salaries from NewCon does
not prohibit a finding that Ms. Brown controls the firm. See 49 C.F.R. § 26.71(i)(1).
14. Based upon a review of all the evidence in the record, together with the applicable law, I find and conclude that Sandra Brown
"owns" and "controls" NewCon for purposes of 49 C.F.R. Part 26 and that NewCon Construction, Inc.'s application for certification
as a Disadvantaged Business Enterprise must be granted.
ORDER
IT IS THEREFORE ORDERED that the application of NewCon Construction, Inc. for certification as a Disadvantaged Business
Enterprise is hereby GRANTED.
AND IT IS SO ORDERED.
____________________________________
Marvin F. Kittrell
Chief Judge
Columbia, South Carolina
March 6, 2001
1. Since NewCon seeks certification only in the area of erosion control as set forth in its application, this order will address only the
question of whether NewCon is eligible to be certified as a DBE in that area. I note, however, that the DBE regulations permit a firm
to become certified in areas other than the one in which the firm originally qualified, without submitting a new application for
certification, upon a showing that the disadvantaged owner controls the firm in the additional type of work. See 49 C.F.R. §
26.73(n).
2. Since this gift was from Ms. Brown's mother who is also a presumptively socially and economically disadvantaged individual, it
must be presumed as being held and contributed by Ms. Brown. See 49 C.F.R. § 26.69(h)(1).
3. The regulations contemplate the use of marital assets to acquire an ownership interest in a firm. The provisions require the
application of the following rule in such situations: "You do not count a greater portion of joint or community assets towards
ownership than state law would recognize as belonging to the socially and economically disadvantaged owner of the applicant firm."
49 C.F.R. § 26.69(i)(1). Since the tax refund and the marital residence were in both Mr. and Ms. Brown's names, half of these
marital assets must be attributed to Ms. Brown and counted as her personal contribution to the firm. |
