South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
Case Consulting vs. DOT

AGENCY:
South Carolina Department of Transportation

PARTIES:
Petitioner:
Case Consulting

Respondent:
South Carolina Department of Transportation
 
DOCKET NUMBER:
04-ALJ-19-0006-CC

APPEARANCES:
n/a
 

ORDERS:

FINAL ORDER AND DECISION

STATEMENT OF THE CASE

This matter comes before the Administrative Law Judge Division (“ALJD”) upon the request of Petitioner Case Consulting for a contested case hearing pursuant to S.C. Code Ann. § 1-23-600(B) (Supp. 2003) and 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2003), challenging Respondent South Carolina Department of Transportation’s (“DOT”’s) denial of Case Consulting’s application for certification as a Disadvantaged Business Enterprise (“DBE”). After notice to the parties, a contested case hearing was conducted before this tribunal on February 25, 2004. Upon review of the relevant and probative evidence and the applicable law, I find that Case Consulting’s application for DBE certification should be denied.

FINDINGS OF FACTHaving carefully considered all testimony, exhibits, and arguments presented at the hearing of this matter, and taking into account the credibility and accuracy of the evidence, I make the following findings of fact by a preponderance of the evidence:

1.Notice of the time, date, place, and subject matter of the hearing was given to all parties in a timely manner.

2.Case Consulting is a partnership registered to practice in South Carolina. The primary business of Case Consulting is contract administration for construction projects and structural engineering.

3.Calvin Wise is the President and Chief Executive Officer (“CEO”) of Case Consulting. Mr. Wise is a licensed general contractor. Mr. Wise currently owns a 53% interest in Case Consulting. His two partners are Albert A. Stevens, P.E., a licensed structural engineer, and Garris M. Haynes, a structural designer. Mr. Stevens and Mr. Haynes each currently own a 23.5% interest in Case Consulting. Mr. Stevens is the responsible engineer in charge of the engineering services of Case Consulting.

4.Mr. Wise worked for another engineer, Wayne H. Mabry, for approximately eighteen years before becoming a partner in Case Consulting. Mr. Wise’s decision to become a partner in Case Consulting was prompted by his decision to go into business for himself. Mr. Wise, who had known Mr. Mabry longer than either Mr. Stevens or Mr. Haynes, asked Mr. Mabry if he would loan him some money so that he could go out on his own. Mr. Mabry agreed, and the two of them entered into a Loan Agreement whereby Mr. Mabry individually agreed to loan to Mr. Wise individually up to $12,000 for use in opening Case Consulting. The date of loan origination was listed as May 2, 2002.

5.The original Partnership Agreement pursuant to which Case Consulting was formed was entered into on May 8, 2002. Pursuant to the Partnership Agreement there were originally four partners in Case Consulting: Mr. Wise, Mr. Stevens, Mr. Haynes, and Mr. Mabry. Mr. Wise originally owned a 51% interest, Mr. Stevens and Mr. Haynes each owned a 20% interest, and Mr. Mabry owned a 9% interest in Case Consulting. The Partnership Agreement did not indicate what, if any, initial contribution each of the four original partners made to acquire their respective partnership interests, or how it was decided how much of an interest each individual would receive in the partnership. According to Mr. Wise’s testimony, each of the partners contributed his expertise to the partnership.

6.In December 2002 Mr. Wise, Mr. Stevens, and Mr. Haynes bought Mr. Mabry’s shares of Case Consulting. Pursuant to an Addendum to the original Partnership Agreement, dated December 12, 2002, Mr. Wise received 2% of Mr. Mabry’s interest, making his total share in Case Consulting 53%, and Mr. Stevens and Mr. Haynes each received 2.5% of Mr. Mabry’s interest, making each of their interests in Case Consulting 23.5%. The language set forth in the Addendum to the Partnership Agreement indicates that Mr. Wise, Mr. Stevens, and Mr. Haynes each bought Mr. Mabry’s interest in Case Consulting “in accordance with their respective interests in the Partnership.” However, even though Mr. Wise owned the majority of the interest in Case Consulting, Mr. Wise, Mr. Stevens, and Mr. Haynes each paid $1,000 for the ownership interests they acquired from Mr. Mabry. According to Mr. Wise’s testimony, the three remaining partners simply came up with an agreement as to how they would purchase and divide Mr. Mabry’s shares, which did not necessarily coincide with the language of the Addendum regarding the buy-out.

7.In order to be certified as an engineering firm within the laws of South Carolina, Case Consulting had to list on its application for certification an individual Professional Engineer who would be the responsible engineer in charge of the engineering services of Case Consulting. Case Consulting listed Mr. Stevens as its Professional Engineer.

8.The services Mr. Wise performs within Case Consulting include negotiation, set-up, design and drafting, and construction contract administration for projects. At some point after or towards the end of the design and drafting process, Case Consulting’s Professional Engineer, Mr. Stevens, must review, sign, and seal the documents; Mr. Wise may not sign and seal the final documents, as he is not a Professional Engineer.

9.Mr. Stevens also provides the services that Mr. Wise provides for the clients he brings into the partnership. Approximately 45% of Case Consulting’s services are devoted to design, detail, and drafting, services which are provided by all three of Case Consulting’s partners.

10.Pursuant to the Partnership Agreement, Mr. Wise, as the owner of a majority interest in Case Consulting, has the ultimate power to hire and fire within the partnership.

11.According to their 2002 tax returns, Mr. Wise contributed $275 of capital in the year 2002, and Mr. Stevens and Mr. Haynes each contributed $122 of capital to Case Consulting in the year 2002.

CONCLUSIONS OF LAW

Based upon the above-listed findings of fact, I conclude the following as a matter of law:

1.The Division has subject matter jurisdiction in this case pursuant to S.C. Code Ann. § 1-23-600(B) (Supp. 2003) and 23A S.C. Code Ann. Regs. 63-704(K) (Supp. 2003).

2.DOT 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).

3.As a recipient of federal highway funds, DOT is also required to implement a DBE program in compliance with 49 C.F.R. Part 26. DOT 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. 2003). Pursuant to the regulations, DOT 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. 2003).

4.A DBE 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 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.

5.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 individual disadvantage, business size, ownership, and control. 49 C.F.R. § 26.61. DOT does not contest whether Case Consulting meets the requirements of 49 CFR Part 26 as to individual disadvantage or business size; DOT recognizes that Mr. Wise falls within the definition of a socially and economically disadvantaged individual contemplated by the DBE laws. DOT contends only that Case Consulting has failed to meet its burden of proving that it meets the requirements for ownership and control by a disadvantaged individual, in this case Mr. Wise.

6.In determining whether the disadvantaged individual of a firm owns the firm, the finder of fact must consider all the facts in the record, viewed as a whole. 49 C.F.R. §26.69(a). To be an eligible DBE, a firm must be at least 51 % owned by a disadvantaged individual. 49 C.F.R. § 26.69(b). In the case of a partnership, the ownership by the disadvantaged individual of at least 51 % of the partnership interest must be reflected in the firm’s partnership agreement. 49 C.F.R. § 26.69(b)(2). Additionally, the disadvantaged individual’s ownership of the firm must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents. The disadvantaged owner must enjoy the customary incidents of ownership and share in the risks and profits commensurate with his ownership interest, as demonstrated by the substance, not merely the form, of arrangements. 49 C.F.R. § 26.69(c).

7.In order to amount to ownership as contemplated under the DBE program, contributions of capital or expertise by the disadvantaged owner to acquire his ownership interests must be real and substantial. 49 C.F.R. § 26.69(e). Examples of insufficient contributions include a promise to contribute capital and an unsecured note payable to the firm or to an owner who is not a disadvantaged individual. Id.

8.As in determining ownership of the firm, to determine control of the firm the fact finder must consider all the facts in the record, viewed as a whole. 49 C.F.R. § 26.71(a). For the firm to be considered controlled by a disadvantaged owner, the disadvantaged owner must hold the highest officer position in the company. 49 C.F.R. § 26.71(d)(1). In a partnership, the disadvantaged owner must serve as general partner, with control over all partnership decisions. 49 C.F.R. § 26.71(d)(3). No non-disadvantaged partners may have the power, without the specific written concurrence of the disadvantaged partner, to contractually bind the partnership or subject the partnership to contract or tort liability. 49 C.F.R. § 26.71(p). A firm may only be granted DBE certification for the specific types of work in which the disadvantaged owner has the ability to control the firm. 49 C.F.R. § 26.71(n).

9.Regarding control of the firm, 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).

10.The disadvantaged owner of the firm may delegate various areas of management, policymaking, or daily operations of the firm to other participants in the firm, regardless of whether those other participants are disadvantaged individuals. 49 C.F.R. § 26.71(f). However, the disadvantaged 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).

11.According to the DBE program, if state or local law requires persons to have a particular license or other credential in order to own and/or control a certain type of firm, then the disadvantaged person who owns and controls a potential DBE firm of that type must possess the required license or credential. 49 C.F.R. § 26.71(h). If state or local law does not impose such a requirement, then the fact finder must not deny certification solely on the ground that the person lacks the license or credential; however, the fact finder may take into account the absence of the license or credential as one factor in determining whether the disadvantaged individual owner actually controls the firm. Id.

12.No firm may engage in the practice of engineering in South Carolina unless one or more of the people in full authority and responsible charge of such work is licensed to practice such work in South Carolina. 24 S.C. Code Ann. Regs. 49-205(A)(3) (Supp. 2003). South Carolina law allows the practice of engineering by individual licensed professional engineers through a firm offering engineering services if the following criteria are met:

(1) one or more of the corporate officers, in the case of a corporation, or one or more of the principal owners, in the case of other firms, are designated as being responsible for the professional services regulated by this board and are licensed under this chapter;

(2) all personnel of the firm who act on behalf of the firm as professional engineers or land surveyors in this State are licensed under this chapter; and

(3) the firm has been issued a certificate of authorization by the board as required by this section.

S.C. Code Ann. § 40-22-250(B) (Supp. 2003).

The “practice of engineering” is defined as “any service or creative work, the adequate performance of which requires engineering education, training, and experience in the application of special knowledge of the mathematical, physical, and engineering sciences to such services or creative work as consultation, investigation, expert technical testimony, evaluation, design and design coordination of engineering works and systems, design for development and use of land and water . . . .” S.C. Code Ann. § 40-22-20(22) (Supp. 2003).

13.Mr. Wise testified that if he does not agree with the direction in which an engineer is going, he can fire that engineer and bring in someone else he feels will go in the direction he chooses. Mr. Wise thus exercises control over the engineers in Case Consulting through his power to hire and fire. However, if Mr. Wise were to fire Mr. Stevens, the sole Professional Engineer of Case Consulting, he would then have to hire another Professional Engineer and make that Professional Engineer a partner in Case Consulting and apply for re-certification of Case Consulting with that Professional Engineer designated as the person in responsible charge for the engineering services of the partnership in order for Case Consulting to be able to continue providing the engineering services that it does pursuant to South Carolina law. The Professional Engineer is an essential, integral part of Case Consulting’s operation; Mr. Stevens, the only Professional Engineer at Case Consulting, is the only partner and employee who can sign and seal final documents regarding the drafting and designing of engineering projects, and he is the sole partner and employee in full authority and responsible charge of all of the engineering work for Case Consulting.

According to Mr. Wise, engineering work is not the only work Case Consulting does; Case Consulting also serves as consultant on many projects. Mr. Wise argues that there are many components of the services provided by Case Consulting which do not constitute engineering, and that he is ultimately in charge of those areas. However, it is clear that Mr. Wise is not the person in full authority and responsible charge of all of the engineering work for Case Consulting, and it is clear that if Mr. Wise were to exercise his power to hire and fire by firing Mr. Stevens, Case Consulting would no longer be able to provide its engineering services until it gained re-certification with another Professional Engineer partner, as described above. Further, Mr. Stevens’s role in Case Consulting is not limited solely to signing off on designs Mr. Wise produces; rather, Mr. Stevens, like Mr. Wise, negotiates, sets up, drafts and designs, and administers contracts for their clients, in addition to signing and sealing final drafts.

Mr. Wise argues that “control” of the partnership means solely the ability to hire and fire. However, control must include more than merely the ability to hire and fire employees. In the present circumstances, considering all of the facts in the record as a whole, Case Consulting has not met its burden of proving that Mr. Wise controls Case Consulting within the meaning of the laws governing DBE certification.

14.As for ownership, Case Consulting has failed to establish what real and substantial capital contributions Mr. Wise made to acquire his original 51% interest in the partnership. Mr. Wise testified that the contribution he made to acquire his percent interest in Case Consulting was the Loan Agreement he entered into with Mr. Mabry. However, that money was used for operating expenses, not as a capital contribution. Additionally, that unsecured debt which Mr. Wise owed to Mr. Mabry, a non-disadvantaged partner in Case Consulting, is insufficient contribution and does not rise to the level of “real” and “substantial” contribution pursuant to the laws governing DBE certification. See 49 C.F.R. § 26.69(e). Mr. Wise failed to show any other contribution that he made to Case Consulting that rises to the level of a “real” and “substantial” contribution sufficient enough to enable him to acquire his initial 51% majority interest in the partnership. Thus, viewing all the facts in the record as a whole, Case Consulting has not met its burden of proving that Mr. Wise owns Case Consulting within the meaning of the laws governing DBE certification.

ORDER

Based upon the foregoing findings of fact and conclusions of law,

IT IS HEREBY ORDERED that Case Consulting’s application for certification as a Disadvantaged Business Enterprise is DENIED;

AND IT IS SO ORDERED.

____________________________________

C. DUKES SCOTT

ADMINISTRATIVE LAW JUDGE

March 11, 2004

Columbia, South Carolina


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