ANA Small Business Invest., Inc. v. Small Business Admin., 21214.

• Decision Date: 12 March 1968
• Docket Number: No. 21214.,21214.
• Parties: ANA SMALL BUSINESS INVESTMENTS, INC., Petitioner, v. SMALL BUSINESS ADMINISTRATION OF the UNITED STATES of America, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

391 F.2d 739 (1968)

ANA SMALL BUSINESS INVESTMENTS, INC., Petitioner, v. SMALL BUSINESS ADMINISTRATION OF the UNITED STATES of America, Respondent.

No. 21214.

United States Court of Appeals Ninth Circuit.

March 12, 1968.

COPYRIGHT MATERIAL OMITTED

Robert E. Burns (argued), G. Fred Skaff, Peter Levy, San Francisco, Cal., for appellant.

Leonard Schaitman (argued), Alan S. Rosenthal, Department of Justice, Carl Eardley, Acting Asst. Atty. Gen., Jerome Garfinkel, Civil Division, Department of Justice, Philip Ziedman, General Counsel, SBA, Washington, D. C., Earl P. Dolven, SBA, San Francisco, Cal., for appellee.

Before HAMLEY, HAMLIN and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge:

Proceeding under section 309(e) of the Small Business Investment Act of 1958 (Act), 72 Stat. 689, as amended, 75 Stat. 753 (1961), 15 U.S.C. § 687a(e) (1964), ANA Small Business Investments, Inc. (ANA), appeals from an order of the Small Business Administration (SBA), entered on July 21, 1966.

SBA is an agency of the federal government. On November 20, 1960, it licensed ANA to do business as a small business investment company (SBIC) under the Act. The agency order in question, entered as a result of show cause proceedings instituted by SBA, directed ANA to divest itself of 37,500 shares of Lease-Lite Corporation (Lease-Lite) and eleven percent of the capital stock of Tydeman Machine Works (Tydeman), and relinquish control over two other corporations, Granelli Construction Company, Inc. (Granelli), and R. W. Sperr Co. (Sperr). The order also suspended ANA's license until it complied with the order.¹

The hearing examiner found that ANA's purchase of the Lease-Lite and Tydeman stocks from individual shareholders, rather than the issuing corporation, was a violation of section 304(a) of the Act, 72 Stat. 693 (1958), as amended, 15 U.S.C. § 684(a) (1964), and SBA's regulation, 13 CFR § 107.501(b). Further, the hearing examiner found that ANA acquired and exercised indefinite control over Lease-Lite, Granelli and Sperr through stock ownership and interlocking directors, thereby violating SBA's regulation, 13 CFR § 107.510.

On November 20, 1960, ANA was licensed by the SBA to do business as an SBIC. Under the Act, an SBIC is authorized to supply equity capital to incorporated small business concerns (§ 304 of Act, 72 Stat. 693 (1958), as amended 15 U.S.C. § 684 (1964)), and make long-term loans to incorporated and unincorporated small business concerns. Section 305 of Act, 72 Stat. 693 (1958), as amended, 15 U.S.C. § 685 (1964).² The Act is part of a declared congressional policy to stimulate and supplement the flow of private equity and long-term loan funds to small business concerns (§ 102 of Act, 72 Stat. 689 (1958), 15 U.S.C. § 661 (1964)), and provides that SBIC's shall be incorporated "solely for the purpose of performing the functions and conducting the activities contemplated under this subchapter * * *." Section 301(a) of Act, 75 Stat. 756 (1961), 15 U.S.C. § 681 (1964).

Lease-Lite and Tydeman Transactions

On December 29, 1960, ANA purchased fifty percent of the common stock of Lease-Lite (37,500 shares) from Anchor Realty, a partnership owned by two of ANA's directors.³ ANA's Counsel testified that before the transaction was completed, he informed J. P. Wasserburger, head of the investment division of SBA's regional office in San Francisco, of the details of the transaction, including the parties involved. Mr. Wasserburger gave his personal approval of the transaction, but did not "officially" approve it. However, according to ANA's counsel, the only impropriety discussed was the possible self-dealing between ANA and Anchor Realty.

The Tydeman stock was purchased on May 1, 1961, from two of ANA's directors. The transaction involved eighty shares of common stock and 1,920 shares of preferred stock, the total representing eleven percent of Tydeman's capital stock. About two weeks after the Tydeman sale was consummated, ANA's counsel wrote a letter to Mr. Wasserburger explaining the details of the transaction and expressing his view that no "self-dealing" was involved. Following a conference between ANA's counsel and SBA officials, the regional counsel for the SBA expressed his opinion "that the matters described did not constitute a conflict of interest and were not improper within the intent and purposes of the Small Business Investment Act or the regulations of the SBA promulgated thereunder." ANA's counsel stated that possible violations of section 304(a) of the Act and section 107.501(b) of the regulations were not raised or discussed because "I wasn't aware of it."

Section 304(a) of the Act provides:

"It shall be a function of each small business investment company to provide a source of equity capital for incorporated small business concerns, in such manner and under such terms as the small business investment company may fix in accordance with the regulations of the Administration."

"Equity Capital" is defined by section 107.501(b) of SBA's regulations as:

"funds received by an incorporated small business concern from a Licensee as the consideration for the issuance of Equity Securities by such concern to such Licensee."

The hearing examiner found that, under the described circumstances, the purchase of Lease-Lite shares from Anchor Realty and the purchase of Tydeman shares from ANA's director were violations of section 304(a) of the Act and section 107.501 of the regulations. On the agency appeal, SBA adhered to this view.

ANA does not question the finding that the purchases were made from stockholders, and not the issuing corporation. Nor does it contend that the two small business concerns involved, Lease-Lite and Tydeman, were benefited from the purchases by way of increasing their equity capital or long-term loan funds. Rather, ANA argues, because section 304 only states that "a function" of small business investment companies is to provide equity capital for small business concerns, the Act does not prohibit purchases from individual stockholders.

We do not agree. Congress, by providing that SBIC's shall be incorporated "solely for the purpose of performing the functions and conducting the activities contemplated under * * *" the Act (§ 301(a) of Act), intended strictly to limit their activities to those consonant with the purpose of the Act, as noted above opposite footnote reference 2. Here ANA's purchase of Lease-Lite and Tydeman shares from stockholders did not provide equity capital for those small business concerns. Nor was the purchase a reasonably necessary part of the over-all sound financing of such concern.⁴ Instead, the purchase resulted in a diversion of ANA's surplus funds beyond that which is permitted by the Act.

ANA further argues, however, that if there was a violation of the Act in this respect, the violation was in good faith and in reliance on the asserted approval given the two transactions by the agency's regional office.

The evidence indicates that the specific question of purchases from an individual shareholder was not raised or discussed and, therefore, did not constitute a construction of the point presently in issue. Masao Hirasuna v. McKenney, 9 Cir., 245 F.2d 98, 104.

But assuming that ANA was misled by the assurances received from SBA's regional office, neither principles of estoppel nor any other equitable consideration entitle ANA to immunity from the statutory and regulatory proscriptions in question. This is made clear by the rule announced in Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10, involving analogous circumstances.

In the Federal Crop Insurance case, plaintiff wheat farmers, relying on misinformation by local agents of the Federal Crop Insurance Corporation, insured their crops under the Federal Crop Insurance Act and the Corporation's regulations. When plaintiffs later sued to recover their losses, the Supreme Court denied recovery, holding that the reseeded crops were not insurable under the Corporation's regulations and the agency was not bound by the misrepresentations of its local officials.

"The Wheat Crop Insurance Regulations were binding on all who sought to come within the Federal Crop Insurance Act, regardless of actual knowledge of what is in the Regulations or of the hardship resulting from innocent ignorance."

332 U.S. at 385, 68 S.Ct. at 3.⁵

It need only be added that the informal approvals of the Lease-Lite and Tydeman purchases, however broadly construed, do not have standing as binding administrative constructions of the Act and regulations. The local officials had no authority to issue regulations or formally interpret the Act. See United States v. Stewart, 311 U.S. 60, 70, 61 S.Ct. 102, 85 L.Ed. 40; United States v. Rossi, 9 Cir., 342 F.2d 505, 506-507.

We therefore conclude that SBA did not err in determining that ANA violated section 304(a) of the Act and section 107.501 of the regulations with respect to the Lease-Lite and Tydeman transactions.

Granelli and Sperr Transactions

In October 1961, ANA acquired sixty percent (750 shares) of the common stock of Sperr, a newly-formed corporation, for $7,500. Robert W. Sperr, who contributed assets of his prior unincorporated business worth $5,000, received forty percent (500 shares) of the common stock. Thereafter, ANA made loans to the corporation totalling $175,239.

In July 1962, ANA purchased eighty percent (2,000 shares) of the outstanding common stock of Granelli, also a newly-formed corporation, for $20,000. Dominic Granelli, who contributed assets of his prior unincorporated business worth $4,000, received twenty percent (500 shares) of the common stock. Thereafter, ANA made loans to Granelli totalling $45,000.

By letters dated November 7, 1962, and December 17, 1962, SBA requested ANA to submit a plan for reducing its equity investment in Sperr and Granelli so that ANA would no longer have control over those small business concerns. By...