SC Administrative Law Court Decisions

This matter comes before the Administrative Law Judge Division (Division) upon the request of Petitioner Strock Enterprises, Inc., for a contested case hearing pursuant to S.C. Code Ann. §12-8-2930 (2000) and 25A S.C. Code Ann. Regs. 63-700 (Supp. 1999) et seq.concerning the denial of Strock Enterprises, Inc.'s application for certification as a Disadvantaged Business Enterprise (DBE).

After notice to the parties, a final hearing before the Division was conducted on July 31, 2002. Upon review of the relevant and probative evidence and the applicable law, I find that the DBE Certification of Strock Enterprises, Inc. should be DENIED.

After observing the witnesses and considering the testimony and the evidence presented at the hearing, I make the following Findings of Fact:

1. Notice of the date, time, place, and nature of the hearing was timely given to all

parties.

• Strock Enterprises, Inc. is a construction firm engaged in the general commercial

and residential contracting and renovation business in Charleston and surrounding counties.

• Stock Enterprises, Inc. was incorporated in October 1993, and Brenda Strock

became President of Strock Enterprises, Inc. She has held this position for the last nine years. At the initial meeting of Strock Enterprises, Inc., Brenda Strock was issued 2616 shares of the 5000 outstanding shares of Strock Enterprises, Inc. stock.

• Brenda Strock attended business college in Savannah, Georgia in 1965 and 1966,

where she studied accounting and business. She has worked in the accounting department at a television station and in the construction field at Diamond Enterprises Construction of Savannah, Georgia. She held this position for ten years before moving to Strock Enterprises, Inc. of Georgia as an estimator and accountant. She coordinated with the subcontractors and did layouts for the construction projects. She has over thirty years experience in the construction business.

• Regarding the South Carolina corporation at issue in this matter, Brenda Strock

works with the day to day administrative activities of Strock Enterprises, Inc. Her responsibilities include management, financial decisions, estimating and accounting for Strock Enterprises, Inc. She has the power to bind the corporation by entering into contracts on behalf of the corporation. She signs all the corporate checks and has the authority to hire and fire employees of the corporation. She manages the company, its finances and leases equipment on behalf of the corporation. Her compensation from Strock Enterprises, Inc., as shown on the corporate tax returns, was $22,945.00 in 1997, $24,854.00 in 1998 and $15,683.00 in 1999.

6. Thomas Strock, Brenda Strock's husband, has worked as a carpenter since 1963.

He served an eight year apprenticeship in Savannah before working for Diamond Enterprises for nine years. After that, he worked for Strock Enterprises in Georgia as a carpenter and estimator, and has worked in a similar capacity for Strock Enterprises, Inc. of South Carolina since 1993. Mr. Strock is the supervising contractor and estimator. He helps obtain jobs, purchase materials, estimate bids and supervises the subcontractors and employees. He sat for the General Contractor's License Exam in 1999 on behalf of Strock Enterprises, Inc. He has extensive experience in construction and contracting. His compensation from Strock Enterprises, Inc., as shown on the corporate tax returns, was $28,341.00 in 1997, $44,219.00.00 in 1998 and $27,572.00 in 1999.

• Thomas "Trey" Strock, Brenda and Thomas' son, is also now employed in the

family business and assists with overseeing the sub-contractors' work on a day to day basis.

8. The construction process for Strock Enterprises, Inc. is as follows. Trey does the

sketches from the plans in order to give to the subcontractors for their bids. Trey and Thomas Strock then assess the material and labor costs by checking books for the various materials needed. Brenda Strock is able to do this aspect of the bid process, but Thomas and Trey do most of it. Once the subcontractors have submitted their proposals, Strock Enterprises, Inc. makes their presentation to the client. Although Brenda Strock has stated that she used to go out to "wine and dine" the clients, Strock Enterprises, Inc. now receives the bulk of their business from word of mouth. Trey Strock is shown as being in charge of "marketing and sales" for the company. Once the client approves the bids, Brenda and Thomas set up a schedule for the construction. They try to get contracts signed for the various aspects of work to be done, but a good bit is done without a contract. Although Brenda formerly went to the job sites to assure acceptable completion of the various aspects of work by the subcontractors, Thomas and Trey do most of that now.

CONCLUSIONS OF LAW

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

• The Division has subject matter jurisdiction in this case pursuant to S.C. Code

Ann.§ 1-23-600(B) (Supp. 2001) and 23A S.C. Code Ann. Regs. 63-704(K) (Supp. 2001).

• 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). Businesses receiving the certification are then allocated a certain percentage of highway funds for construction and renovation projects.

• As a recipient of federal highway funds, the Department is also required to

implement a DBE program in compliance with 49 CFR 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. 2001). Pursuant to the regulations, the Department has adopted the standards for certifying DBEs, which are set forth in 49 CFR Part 26. See 25A S.C. Code Ann. Regs. 63-702(A) and 63-703(A) (Supp. 2001).

• A DBE stands for Disadvantaged Business Enterprise and is defined generally as a

small business concern owned and controlled by a socially and economically disadvantaged individual. See 49 CFR, Subpart A, Section 26.5. The regulations provide that woman owners are rebuttably presumed to be socially and economically disadvantaged for purposes of the DBE program. See 49 CFR Section 26.67(a). The regulations further set forth certain rules to be used for determining whether or not the socially and economically disadvantaged individual "owns" and "controls" the firm as required by the eligibility standards. See 49 CFR 26.69 and 26.71.

• A business seeking certification as a DBE has the burden of demonstrating, by

the preponderance of the evidence, that it meets the requirements of 49 CFR Part 26 concerning group membership or individual disadvantage, business size, ownership, and control. 49 CFR Section 26.61. The Department contends only that the firm has failed to meet its burden of proving that it meets the requirements for "ownership" and "control" by the woman-owner.

• In this matter, although Brenda Strock owns 52% of the outstanding stock of

Strock Enterprises, Inc., which constitutes "ownership" of the company pursuant to 25 S.C. Code Ann. Regs. 63-701 (N), the issue of the quality of that ownership must be addressed under the Federal Regulations:

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 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. 49 CFR, Section 26.69 (c) (Emphasis added.)

Here, Brenda Strock's majority ownership is not borne out by her compensation which has been significantly lower than that of her husband.

• Furthermore the issue of control must also be addressed. In order to be classified

as a DBE, the second requirement of "control" must also be established by the applicant by a preponderance of the evidence. The DBE regulations require that:

The socially and economically disadvantaged owner must possess the power to direct and cause the direction of the management and policies of the firm and to make the day-to-day as well as long-term decisions on matters of management, policy and operations.

49 CFR Section 26.71(d).

• In addition, the regulations provide the following in regard to the degree of

technical expertise required in order to control a firm within the meaning of the DBE regulations:

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 CFR Section 26.71(g), emphasis added.

The regulations require the disadvantaged owner to have "technical competence"

and experience directly related to the type of business in which the firm is engaged and the firm's operations. Unfortunately, however, the regulations do not define "technical competence."

• At the very least, "technical competence" must consist of "a base level of

technical knowledge of the industry" and "a sufficient background and expertise...with respect to delegated aspects of the business to be able to intelligently use and critically evaluate information" presented by employees in making "decisions concerning the daily operational activities of the business." See Car-Mar Construction Corp. v. Skinner, 777 F. Supp. 50, 55-56 (D.D.C. 1991).

10. The issue of family owned businesses is addressed in the Federal Regulations as

follows: "If you cannot determine that the socially and economically disadvantaged owners-as distinct from the family as a whole-control the firm, then the socially and economically disadvantaged owners have failed to carry their burden of proof concerning control, even though they may participate significantly in the firm's activities." 49 CFR Section 26.71 (K)(2)

ORDER

Brenda Strock's general background in finance, along with her extensive experience in

the field of construction finance and accounting, have been an asset to the company. It does not appear, however, that the Petitioners have met their burden of proof to show either that Brenda Strock "owns" or "controls" Strock Enterprises, Inc. as required by law. Her "ownership" is pro forma and is not substantiated by the requisite indicia of ownership, including sharing in the profits and losses. In addition, it is clear that Brenda Strock's daily duties do not relate to the principal business activities of the firm. The bulk of the day to day activities directly related to the construction and renovation of residential and commercial buildings have been performed by Thomas or Trey Strock, not Brenda.

Based upon the above Findings of Facts and Conclusions of Law,

IT IS HEREBY ORDERED that the application for certification as a Disadvantaged Business Enterprise of Strock Enterprises, Inc. is DENIED.

AND IT IS SO ORDERED.

___________________________________

CAROLYN C. MATTHEWS

Administrative Law Judge

December 18, 2002

Columbia, South Carolina.