SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter is 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 to -718 (Supp. 2000). Bob Hammond Construction, Inc. ("Hammond Construction") ⁽¹⁾ requested a contested case hearing regarding the denial of its application for certification as a Disadvantaged Business Enterprise ("DBE") by the Department of Transportation ("Department").

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, also is 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 socially and economically disadvantaged ethnic minorities or disadvantaged females. See 25A S.C. Code Ann. Regs. 63-703 (Supp. 2000); 49 C.F.R. Part 26.

In October 1999, Hammond Construction applied for certification as a DBE in the areas of land clearing, wood chipping, wood recycling, and grading. On April 27, 2000, Hammond Construction's application was presented to the Department's Disadvantaged Business Enterprise Advisory Committee for review. By certified letter dated August 3, 2000, the Department notified Hammond Construction that its request for certification was denied based upon the Department's determination that Ms. Lorie Hammond's ownership and control was not real or substantial. Hammond Construction thereafter filed a request for a contested case hearing before the Division.

A contested case hearing was held on June 14, 2001, at the Administrative Law Judge Division, 1205 Pendleton Street, Edgar A. Brown Building, Suite 224, Columbia, South Carolina. I find Hammond Construction's application for certification should be denied.

MOTION IN LIMINE

Prior to opening the record, the Department made a motion to exclude any evidence purporting to establish facts that occurred subsequent to the Department's denial of Hammond Construction's application in August 2000. The Department thereafter restated its motion on the record. The Department specifically objected to Hammond Construction's Exhibits 8, 9, 11, 12, 13, 14, 15, 17 (only the lien releases dated subsequent to August 3, 2000), 18, 19, and 21.

The Department argued events that occurred subsequent to August 3, 2000, the date of the denial, are irrelevant to the issue of whether the Department should have denied Hammond Construction's application for certification at that time. The Department also argued that "present circumstances," as referred to in the federal regulations, refers to the circumstances existing at the time of the application or, at the latest, the time of the denial.

Hammond Construction argued that "present circumstances" refers to the circumstances existing at the time of the hearing. Hammond Construction then cited two recent cases issued by the Division, Hoffman & Company, Inc. v. South Carolina Department of Transportation, Docket No. 00-ALJ-19-0533-CC (issued April 17, 2001) and NewCon Construction, Inc. v. South Carolina Department of Transportation, Docket No. 00-ALJ-19-0243-CC (issued March 6, 2001), and argued that the final decisions of the administrative law judges were based on all evidence up to the date of the hearings in those cases.

After the parties completed arguments on the motion, I explained that there are many types of cases in which jurisdiction only vests with the Division after the state agency makes a final determination. In cases involving certificates of need, for example, the Department of Health and Environmental Control makes a final decision regarding whether and who to grant a certificate of need. If an affected party appeals the grant or denial of a certificate of need, then the case is appealed to the Division. After several months of discovery and inevitable changes in facts and circumstances, a judge at the Division then conducts a de novo contested case hearing. Similarly, when a firm appeals the denial of certification as a DBE, months of discovery and inevitable changes in facts and circumstances require the judge at the Division to conduct a de novo contested case hearing. I, therefore, denied the Department's Motion to Exclude.

EXHIBITS

The Department offered exhibits 1 through 24, which were admitted without objection. Hammond Construction offered exhibits 1 through 22. After I denied the Department's Motion to Exclude, all exhibits were admitted into the record. Hammond Construction also offered Hoffman & Company order and the NewCon Construction order as supplemental exhibits. I did not admit these two orders as exhibits but took judicial notice instead.

FINDINGS OF FACT

Having carefully considered the credibility of the testimony and accuracy of the evidence presented at the hearing and taking into consideration the burden of persuasion by the parties, I make the following findings of fact:

• Notice of the date, time, place, and nature of the hearing was timely given to all parties.
• Bob Hammond Construction, Inc. was formed and organized in January 1983 and subsequently was incorporated. Hammond Construction's principal place of business is 123 Lisa Ann Lane, Moncks Corner, Berkeley County, South Carolina.
• In 1982, Lorie Hammond had $11,000 in savings from the sale of cattle, which was given to her by her grandmother. She invested $5000 in Hammond Construction. She loaned the balance of $6000 to the firm. She also sold three vehicles to the firm, including a 1978 Ford Pickup, a 1979 Ford Bronco, and a 1979 Ford LTD.
• When Hammond Construction was incorporated, Mr. Hammond was designated as the President, Secretary, and Treasurer of the firm. Ms. Hammond was designated the sole director and sole shareholder, even though no stock was issued at that time.
• In 1991, Hammond Construction issued 1000 shares of stock to Ms. Hammond only.
• When Ms. Hammond was in high school, she began doing the payroll, accounts receivable, payables, and other bookkeeping duties.
• In February 1999, Ms. Hammond began working at Hammond Construction. She ran errands, visited job sites, and learned how to bid on jobs. She also started studying for the general contracting test.
• During her first year at Hammond Construction, Ms. Hammond went to subcontractors meetings, job site meetings, and meetings with general contractors.
• In late 1999, Ms. Hammond started bidding on jobs independently.
• On November 9, 1999, the Governor's Office of Small & Minority Business Assistance issued a "Certificate of Woman-Owned Business" to Hammond Construction.
• On November 23, 1999, Ms. Hammond was issued a General Contracting License by the South Carolina Contractor's Licensing Board.
• On May 1, 2000, Ms. Hammond was elected President, Secretary, and Treasurer of Hammond Construction. Mr. Hammond was elected Vice-President.
• During the year 2000, Ms. Hammond earned $55,540 in salary and bonuses; her pay rate was $40,560. During the same year, Mr. Hammond earned $175,910 in salary and bonuses; his pay rate was $182,000. During the year 2001, Ms. Hammond's pay rate increased to $73,840 and Mr. Hammond's pay rate remained $182,000.
• On October 15, 1999, Hammond Construction applied to the Department for certification as a Disadvantaged Business Enterprise pursuant to 25A S.C. Code Ann. Regs. 63-700 to -718 and 49 C.F.R. Part 26. In a certified letter dated August 3, 2000, the Department denied certification.

CONCLUSIONS OF LAW

Based upon the foregoing findings of fact, I conclude, as a matter of law, the following:

• 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).
• 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) (2000).
• As a recipient of federal highway funds, the Department is 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).
• The determination of whether individuals or firms have met their burden of demonstrating group membership, ownership, control, and social and economic disadvantage must be made by considering all the facts in the record viewed as a whole. 49 C.F.R. § 26.61(e).
• 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).
• The Department does not contest whether Hammond Construction meets the requirements of group membership or business size. Lorie Hammond, a female, is a presumptively socially and economically disadvantaged individual, and she filed a signed, notarized certification that she in fact is socially and economically disadvantaged. See 25A S.C. Code Ann. Regs. 63-701(F) (Supp. 2000); 49 C.F.R. § 26.67(a). Hammond Construction 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. See 49 C.F.R. § 26.65; 13 C.F.R. § 121.201.
• The Department has denied certification as a DBE to Hammond Construction on the grounds of ownership and control. The Department contends that Ms. Hammond does not own the firm as required by 25A S.C. Code Ann. Regs. 63-701(E) and 49 C.F.R. § 26.69, nor does she control the firm as required by 25A S.C. Code Ann. Regs. 63-701(E) and 49 C.F.R. § 26.71. The Department argues that the firm is a business in which Ms. Hammond and her father, Robert Hammond, 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). Hammond Construction, on the other hand, contends that Ms. Hammond meets the requirements of the regulations concerning ownership and control.
• The Department contends that Ms. Hammond does not own Hammond Construction within the meaning of the regulations because she did not make a real and substantial financial contribution to gain ownership of the firm.
• 49 C.F.R §26.69(c) provides 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 the disadvantaged owners must "share in the risks and profits commensurate with their ownership interests."
• 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." The regulation specifically cites a promise to contribute capital as an example of an insufficient contribution. During the hearing, the Department argued that when Ms. Hammond was twelve years old, she merely made a promise to contribute. Ms. Hammond, however, did not make a promise to contribute at that time. She actually invested $5000 and loaned $6000 to Hammond Construction. Ms. Hammond never tried to retrieve the $5000 investment or demand the instant repayment of the $6000 loan.
• Ms. Hammond also sold three vehicles to Hammond Construction. According to Ms. Hammond, however, the three vehicles were transferred to her at the time her father's company was dissolved. I do not conclude that the vehicles were transferred to Ms. Hammond in anticipation of setting up Hammond Construction and seeking to obtain certification as a DBE seventeen years later. The vehicles, however, were sold to Hammond Construction rather than invested as startup capital. Ms. Hammond sold the vehicles at fair market value plus 10% interest. In fact, according to the proof of stock purchase dated January 24, 1982, the title for each of the three vehicles would be transferred to Hammond Construction whenever "they are paid for but not until that time." The vehicles, therefore, cannot be considered as Ms. Hammond's contribution to acquire an ownership interest in Hammond Construction.
• Ms. Hammond did not share in the risks and profits of Hammond Construction. She only risked losing the initial $5000 investment. The contract signed by Ms. Hammond and her father required Hammond Construction to repay the $6000 loan with 10% interest and to pay the fair market value of the three vehicles plus 10% interest. She did not risk losing the loan or the vehicles. There also is no evidence in the record that Ms. Hammond shared in the profits of the firm. Although Hammond Construction issued 1000 shares of stock to Ms. Hammond in 1991, there is no evidence she ever received any dividends. In 1999, Hammond Construction began paying Ms. Hammond a salary. Ms. Hammond even testified that she received a bonus. While the bonus likely is based on the profits of the firm, Ms. Hammond did not receive a bonus exclusive of all other employees in the firm. Her father also received a bonus.
• Viewing all the facts in the record as a whole, I conclude Ms. Hammond did not make a real and substantial financial contribution to obtain ownership of Hammond Construction.
• The Department also argues that Ms. Hammond does not control Hammond Construction according to the requirements of 49 C.F.R. §26.71 because she lacks the necessary technical expertise and experience.
• Although 49 C.F.R. § 26.61(b) provides the standard of proof is usually by a preponderance of the evidence, 49 C.F.R. § 26.71(l) provides:

Where a firm was formerly owned and/or controlled by a non-disadvantaged individual (whether or not an immediate family member), ownership and/or control were transferred to a socially and economically disadvantaged individual, and the non-disadvantaged individual remains involved with the firm in any capacity, the disadvantaged individual now owning the firm must demonstrate to you, by clear and convincing evidence, that: (1) The transfer of ownership and/or control to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (2) The disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who formerly owned and/or controlled the firm.

In this case, it is clear that Mr. Hammond controlled Hammond Construction prior to 1999. While Ms. Hammond was in college, she admittedly was not involved in the overall decision making. Furthermore, until May 2000, Mr. Hammond was the President, Secretary, and Treasurer of the firm. Even if Ms. Hammond controls the firm now, it was formerly controlled by Mr. Hammond, who is a non-disadvantaged individual and who continues to participate in the firm. Ms. Hammond, therefore, must show by clear and convincing evidence that the transfer of control of Hammond Construction was done for reasons other than obtaining certification as a DBE and that she actually controls the management, policy, and operations of the firm.

It is clear from Mr. Hammond's testimony that he does not want to be in control of the firm in that he does not want to be responsible for bookkeeping, employee management, and other administrative duties. Mr. Hammond also testified that he has always wanted his daughter to take over the business. Hammond Construction, however, has not shown by clear and convincing evidence that the transfer was made for reasons other than obtaining certification as a DBE.

• 49 C.F.R. § 26.71(d) provides "[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." In a corporation, the disadvantaged owner must hold the highest officer position and must control the board of directors. § 26.71(d)(1), (2). In this case, Ms. Hammond always has been the sole director of Hammond Construction. As of May 2000, Ms. Hammond has been the President, Secretary, and Treasurer of Hammond Construction as well. Ms. Hammond controls the management, policy, and operations of Hammond Construction. She prepares bids and change orders for jobs, purchases equipment, and obtains bank loans for the firm. She interviews, hires, and fires employees and sets all employee salaries. She recently revamped the employee handbook regarding the retirement plan and employee compensation. Mr. Hammond also testified that Ms. Hammond has been responsible for the management, policy, and operations of Hammond Construction since the year 2000.

Hammond Construction's exhibits include numerous documents executed in 2000 and 2001 by Ms. Hammond, including a credit line of $100,000, a purchase agreement for a new Ford truck, bids and change orders, agreements between contractor and subcontractor, Conditional Waiver and Release forms, and checks drawn on the account of Hammond Construction. Based on the testimony and exhibits presented, I conclude Ms. Hammond in fact controls the management, policy, and operations of Hammond Construction.

• 49 C.F.R. § 26.71(e) provides that individuals who are not socially and economically disadvantaged may be involved in the DBE firm but must not possess or exercise the power to control the firm or be disproportionately responsible for the operation of the firm. Furthermore, 49 C.F.R. § 26.71(k)(1) provides 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." However, if it is not apparent that the socially and economically disadvantaged owner, rather than the family as a whole, controls the firm, then the owner has failed to carry the burden of proof concerning control, even though the owner may participate significantly in the firm's activities. 49 C.F.R. § 26.71(k)(2).

In this case, Ms. Hammond's father still works for Hammond Construction. According to Ms. Hammond, she controls the firm but she values her father's opinion and consults with him on important issues. Ms. Hammond further testified that if she and her father differed on a decision, then she would make the final decision on her own. She specifically testified that if her father made a decision that she disagreed with, she "could and would override it." Mr. Hammond's testimony concurred with Ms. Hammond's testimony in that she ultimately is responsible for all long-term decisions affecting the firm. Mr. Hammond even testified that Hammond Construction could continue to operate if he left but not if Ms. Hammond left. Mr. Hammond also testified that he and Ms. Hammond were jointly controlling the firm until she came back; Ms. Hammond, however, has been controlling the firm independently since she returned in 1999. I conclude that even though Ms. Hammond may seek advice from her father based on his extensive experience in the industry, Ms. Hammond makes the final decisions independently of Mr. Hammond.

• 49 C.F.R. § 26.71(g) provides:

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.

While Ms. Hammond lacks the extensive experience her father has, the regulation does not require that she have greater expertise or experience than key employees, in this case her father. She instead must have an overall understanding of the firm's business and operations as well as the ability to analyze information presented by others and to make independent decisions based on that information. She holds the only general contracting license at Hammond Construction. She has been learning about the business and participating in all aspects of Hammond Construction since she returned in February 1999. Gregory Cook testified that although he has worked with Mr. Hammond, he has dealt with Ms. Hammond primarily for the past two years. Jafar Moghadam submitted an affidavit, which was admitted into the record, indicating he has worked with Ms. Hammond exclusively "on all aspects of the subcontracting work" completed by Hammond Construction since at least March 2000. I conclude Ms. Hammond has the knowledge and ability to control the firm's daily operations, management, and policymaking.

• According to 49 C.F.R. § 26.71(i)(1), differences in remuneration between the socially and economically disadvantaged owner and other participants in the firm may be considered in determining whether to certify the firm as a DBE. However, it can be found that a firm is controlled by its socially and economically disadvantaged owner even though the owner's remuneration is lower than that of some other participants in the firm. 49 C.F.R. § 26.71(i)(2) specifically provides:

where a non-disadvantaged individual formerly controlled the firm, and a socially and economically disadvantaged individual now controls it, you may consider a difference between the remuneration of the former and current controller of the firm as a factor in determining who controls the firm, particularly when the non-disadvantaged individual remains involved with the firm and continues to receive greater compensation than the disadvantaged individual.

Mr. Hammond, who formerly controlled the Hammond Construction, is paid a significantly higher salary than Ms. Hammond. No evidence was presented, however, indicating Mr. Hammond's salary was inappropriately high based on his experience and the industry standards. Furthermore, Mr. Hammond's salary has not increased since Ms. Hammond began controlling the firm in 1999. Ms. Hammond's salary has increased considerably during the same period of time. According to Ms. Hammond, she intends to earn as much if not more than her father within the next five years. Also, during the year 2000, Ms. Hammond earned a bonus of $18,500 while Mr. Hammond earned a bonus of only $7710. I, therefore, conclude the difference in remuneration is not a significant factor under the circumstances of this case.

• Viewing all the facts in the record as a whole, I conclude Ms. Hammond in fact controls Hammond Construction.

ORDER

Based on the foregoing findings of fact and conclusions of law and based on all the evidence, testimony, and exhibits in the record, I conclude that Ms. Hammond did not make a real and substantial contribution to obtain an ownership interest in Hammond Construction. In addition, even though I conclude Ms. Hammond controls the firm, I cannot conclude that the control was transferred to her for reasons other than obtaining certification as a DBE.

IT IS HEREBY ORDERED that the application of Bob Hammond Construction, Inc. for certification as a Disadvantaged Business Enterprise is denied.

AND IT IS SO ORDERED.

__________________________________

MARVIN F. KITTRELL

Chief Administrative Law Judge

October 30, 2001

Columbia, South Carolina

1. On April 25, 2001, the name of the corporation was changed to L. Hammond Construction, Inc. Based on the Department's objection, however, the caption of the case will not be changed.