ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
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 the Petitioner's application for certification as a Disadvantaged
Business Enterprise (DBE). A contested case hearing on the merits of the Petitioner's request was held at the
offices of the Division in Columbia, South Carolina, on March 1, 2001. For the following reasons, I find
that the Petitioner's application for certification should be granted.
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) (Rev. 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. 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.
The Petitioner applied for certification as a DBE in January and February 2000. The Petitioner's application
was presented to the Department's Disadvantaged Business Enterprise Advisory Committee for review. By
certified letter dated June 27, 2000, the Department notified the Petitioner that its request for certification
was denied, based upon the Department's determination that the Petitioner's owner, Candace Phelps, 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.
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, Hoffman & Company, Inc., a Georgia corporation which prepares aerial surveys,
three-dimensional mapping, and land surveys for use by engineers and developers, applied to the
Department for certification as a Disadvantaged Business Enterprise pursuant to 25A S.C. Ann. Regs.
63-700 et. seq. and 49 CFR Part 26. The Department, following its investigation, denied certification.
3. Candace Phelps is the majority shareholder of Hoffman & Company. She directly owns 5,100 shares or
51% of Hoffman & Company. The contributions for Candace Phelps' ownership of the company included
approximately $49,000.00 of her savings and $225,000.00 received in a loan from her father. Her remaining
purchase price was paid by a $612,000.00 promissory note to Irving C. Hoffman. However, Ms. Phelps has
repaid a substantial portion of that loan and currently owes only $155,00000 on the note. Additionally, Ms.
Phelps has repaid the $225,000.00 loan from her father.
Although the original documentation submitted to the South Carolina Department of Transportation could
reasonably have been interpreted to question Ms. Phelps' ownership interest, her ownership interest in
Hoffman & Company is real and substantial. Additionally, the Department's concerns as to loans made for
acquisition of that interest have been allayed by the passage of time and current payments and level of
capital contribution on the part of Ms. Phelps.
4. Hoffman & Company's principal business is photogrammetric mapping. Photogrammetry is "the science
of making reliable measurements by the use of photographs and especially aerial photographs (as in
surveying)." Merriam Webster's Collegiate Dictionary 875 (10th ed. 1993). Candace Phelps has a four-year
degree in Geomatics from the College of Engineering at the University of Florida. The University of Florida
defines and describes "geomatics" as:
Geomatics is the modern scientific term referring to the integrated approach of measurement, analysis, and
management of the descriptions and locations of Earth-based data, often termed spatial data. These data
come from many sources, including earth orbiting satellites, air and sea-borne sensors and ground based
instruments. It is processed and manipulated with state-of-the-art information technology using computer
software and hardware.
Geomatics has applications in all disciplines which depend on spatial data, including environmental studies,
planning, engineering, navigation, geology and geophysics, land development and land ownership. It is thus
fundamental to all geoscience disciplines which use spatially related data, such as- Surveying, Geodesy,
Remote Sensing & Photogrammetry, Cartography, Geographic Information Systems and Global Positioning
Systems.
See http://www.surv.ufl.edu/. In other words, her degree specializes in the field in which Hoffman &
Company operates. Therefore, Ms. Phelps has the requisite skill and expertise in areas critical to the
company's operations and potential success.
After Ms. Phelps originally purchased her ownership in Hoffman & Company, she did not actively manage
the company. Rather, Irving Hoffman continued to manage the company for the first year after the purchase.
Ms. Phelps then hired Everett Roper as general manager of Hoffman & Company while she completed her
college education. After she completed her college education, Ms. Phelps assumed management duties at
Hoffman & Company in June 1999. Ms. Phelps eventually terminated the services of Mr. Roper and
assumed control of the management of Hoffman & Company in December 1999.
Ms. Phelps now acts as the Chairman of the Board of Directors, President and CEO, and Treasurer of
Hoffman & Company. While she delegates some areas of responsibility, such as recruiting or estimating,
she manages the policies, operations and fiscal affairs of the company on a day-to-day and long range basis.
She also reviews work and cost estimates of subordinates and makes changes in her discretion. Ms. Phelps
decides what equipment is necessary for the safe and efficient operation of the company, and personally
assumes the risks associated with borrowing capital to purchase such equipment.
5. Hoffman & Company is not dependent upon a relationship with any other company for its success.
Furthermore, there are no formal or informal restrictions on the company which limit the discretion of Ms.
Phelps to control the destiny of Hoffman & Company.
6. Hoffman & Company is certified as a Disadvantaged Business Enterprise by both the Alabama and
Georgia Departments of Transportation. Additionally, Hoffman & Company is certified as a Female
Business Enterprise by the City of Atlanta, Georgia.
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) (Supp.
2000) and 25A S.C. Code Ann. Regs. 63-704(K) (Supp. 2000).
2. 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) (Rev. 2000). 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. See 25A S.C. Code Ann. Regs.
63-702(A) and 63-703(A) (Supp. 2000).
3. 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 (b).
4. The Department does not contest whether Hoffman & Company meets the requirements of group
membership or business size. If Ms. Phelps 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 25A S.C. Code Ann.
Regs. 63-701(F) (Supp. 2000); 49 C.F.R. § 26.67(a). However, the Department denied certification as a
DBE to Hoffman & Company on the grounds of ownership and control. The Department contends that Ms.
Phelps did not make a real and substantial contribution to acquire her ownership of Hoffman & Company 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 Regulation 63-700(E) and 49 C.F.R. § 26.71. Hoffman & Company, on the other hand, contends
that Ms. Phelps meets the requirements of the regulations concerning ownership and control.
Ownership
5. The Department contends that Ms. Phelps does not "own" Hoffman & Company within the meaning of
the regulations because she did not make a "real and substantial" financial contribution to the firm. 49 C.F.R
§26.69(c) sets forth 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. 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.
Additionally, 49 C.F.R §26.69(e) provides that:
[t]he contributions of capital or expertise by the socially and economically disadvantaged owners to acquire
their ownership interests must be real and substantial. Examples of insufficient contributions include . . . an
unsecured note payable to the firm or an owner who is not a disadvantaged individual . . . .
(emphasis added). Ms. Phelps' initial ownership was acquired, in substantial part, by an unsecured
promissory note to Irving Hoffman. However, 49 C.F.R §26.73(b) provides:
[y]ou must evaluate the eligibility of a firm on the basis of present circumstances. You must not refuse to
certify a firm based solely on historical information indicating a lack of ownership or control of the firm by
socially and economically disadvantaged individuals at some time in the past, if the firm currently meets the
ownership and control standards of this part.
Currently, the only debt Ms. Phelps owes on her original purchase of 5,100 shares in the company is
$155,000.00 on the original note of $612,000.00 to Mr. Hoffman. Therefore, I conclude that Candace
Phelps made a real and substantial financial contribution to Hoffman & Company and that she is the
"owner" of Hoffman & Company within the meaning of 49 C.F.R. §26.69.
Management and Control
6. The Department also argues that Ms. Phelps does not "control" Hoffman & Company 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(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." Additionally, the
disadvantaged owner must "hold the highest officer position in the company" and "control the board of
directors." 49 C.F.R. §26.71(d)(1) and (2). The Department asserts that Ms. Phelps' lack of experience
prohibits her from being able to manage the company. Rather, the Department argues that Mr. Hoffman
who is still employed by Hoffman & Company is the party who possesses the requisite ability to control the
firm.
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.
With respect to the expertise necessary to control a firm, the regulations state:
[t]he 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).
Applying these guidelines to the facts of this case, it is undisputed that Ms. Phelps holds the position of
President of Hoffman & Company and is the Chairman of the Board of Directors. The evidence further
reveals that Ms. Phelps performs virtually all key management functions for Hoffman & Company. Though
David Wilkins and other employees possess management authority, Ms. Phelps ultimately possesses the
power to fire those individuals. Therefore, Ms. Phelps 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 Hoffman & Company.
The question is also whether Ms. Phelps 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). Ms. Phelps possesses education in photogrammetric mapping
and experience in the area of surveying. There is no dispute that Mr. Hoffman and some of the employees of
Hoffman & Company possess greater experience and expertise in the photogrammetric mapping industry
than does Ms. Phelps. 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. While Mr. Hoffman offers his
opinions and assistance on bids and estimates, Ms. Phelps has an understanding of, and the technical
competence and experience directly related to the business ofHoffman & Company. I therefore conclude
that Ms. Phelps possesses sufficient experience and expertise to be able to evaluate information provided by
Mr. Hoffman and others and to make independent decisions on behalf of Hoffman & Company.
ORDER
Based upon a review of all the evidence in the record, together with the applicable law, I find that Candace
Phelps "owns" and "controls" Hoffman & Company for purposes of 49 C.F.R. Part 26 and that Hoffman &
Company's application for certification as a Disadvantaged Business Enterprise must be granted.
IT IS THEREFORE ORDERED that the application of Hoffman & Company for certification as a
Disadvantaged Business Enterprise is granted.
AND IT IS SO ORDERED.
___________________________________
Ralph King Anderson, III
Administrative Law Judge
April 17, 2001
Columbia, South Carolina |
