CS–360, LLC v. U.S. Dep't of Veteran Affairs, Civil Action No. 11–00078 (CKK).

Decision Date06 March 2012
Docket NumberCivil Action No. 11–00078 (CKK).
Citation846 F.Supp.2d 171
PartiesCS–360, LLC, Plaintiff, v. U.S. DEPARTMENT OF VETERAN AFFAIRS, Defendant.
CourtU.S. District Court — District of Columbia

OPINION TEXT STARTS HERE

Ralph Charles Thomas, III, Barton, Baker, Thomas & Tolle LLP, McLean, VA, for Plaintiff.

Laurie J. Weinstein, United States Attorney's Office, Washington, DC, for Defendant.

MEMORANDUM OPINION

COLLEEN KOLLAR–KOTELLY, District Judge.

Plaintiff CS–360, LLC (“CS360”) brings this action against the U.S. Department of Veteran Affairs (the VA), asserting three claims that, in one way or another, all challenge the VA's decision to deny CS360's application to be included in an online database of businesses eligible to participate in a veteran-owned small business program managed by the VA. Count I of the [1] Complaint alleges that the VA violated the Administrative Procedure Act because its denial of CS360's application was arbitrary and capricious. Count II alleges that the VA violated the Due Process Clause of the Fourteenth Amendment of the United States Constitution by failing to permit applicants to appeal application decisions to an independent decision-maker and by using “inflammatory language” in the decision to deny CS360's application. Count III alleges that the VA is without statutory authority to issue the regulations at issue in this case.

There are currently two motions before the Court: CS360's [13] Motion for Summary Judgment and the VA's [15] Motion to Dismiss and/or for Summary Judgment (Motion to Dismiss). Upon careful consideration of the certified administrative record, the parties' submissions, the relevant authorities, and the record as a whole, the Court shall GRANT–IN–PART and DENY–IN–PART CS360's [13] Motion for Summary Judgment and GRANT–IN–PART and DENY–IN–PART the VA's [15] Motion to Dismiss. On Count I, the Court finds that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application and concludes that the best course is to REMAND the action to the VA for further consideration and explanation. On Counts II and III, the Court concludes that CS360 has failed to state a plausible claim for relief. Accordingly, those claims shall be DISMISSED.

I. BACKGROUND

Unless otherwise noted, the following background is derived from the certified administrative record filed by the VA in this action.

A. Service–Disabled Veteran–Owned Small Businesses and the VA's VetBiz Vendor Information Pages Database

Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of 2006, Pub.L. No. 109–461, §§ 502–03 (codified at 38 U.S.C. §§ 8127–28), to increase contracting opportunities for small businesses owned by service-disabled veterans. See38 U.S.C. § 8127(a). To this end, Congress conferred upon the VA the authority to set aside certain government contracts for service-disabled veteran-owned small businesses (“SDVOSBs”). As part of this design, Congress required the Secretary of the VA to maintain a database of eligible small businesses. Id. § 8127(f).

Responding to this statutory command, the VA maintains the VetBiz Vendor Information Pages (“VIP”) database, an online “database of businesses eligible to participate in [the] VA's Veteran-owned Small Business Program,” 38 C.F.R. § 74.1, which is accessible at http:// www. Vet Biz. gov. By statute, [a] small business concern may be awarded a contract [set aside for SDVOSBs] only if the small business concern and the veteran owner of the small business concern are listed in the database of veteran-owned businesses maintained by the Secretary [of the VA].” 38 U.S.C. § 8127(e).

B. CS360's Application for Inclusion in the VetBiz VIP Database

The Center for Veterans Enterprise (the “CVE”), a subdivision of the VA's Office of Small and Disadvantaged Business Utilization (the “OSDBU”), is charged with evaluating applications by small businesses seeking to be included in the VetBiz VIP database. 38 C.F.R. §§ 74.1, 74.11(a). To qualify for inclusion, a small business “must be unconditionally owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses.” 38 C.F.R. § 74.2(a). Thus, eligibility turns on the twin requirements of ownership and control.

On November 4, 2009, CS360, a limited liability company that was formed less than a month earlier, submitted an application for inclusion in the VetBiz VIP database. VA00001, VA00006. On February 1, 2010, the CVE notified CS360 that its application had been received and was being processed. VA00004. While the application was under review, CS360 was listed in the VetBiz VIP database on the basis of self-reporting but, despite this listing, CS360 had not been verified, certified, or licensed as an eligible SDVOSB during this interim period.

C. The Third–Party Protest of CS360's Eligibility

On December 2, 2009, the VA announced that it was soliciting bids in connection with a construction project for a medical center in Lexington, Kentucky (the “Lexington Contract”), with the entire contract set aside for SDVOSBs. VA00022. CS360 competed for the Lexington Contract and was found to be the apparent low bidder on January 27, 2010. VA00032.

By regulation, an offeror bidding on a contract may challenge another offeror's claimed status as an eligible SDVOSB by filing a third-party protest with the OSDBU. 48 C.F.R. § 819.307(c). On January 29, 2010, the fourth lowest bidder on the Lexington Contract filed a protest challenging CS360's SDVOSB eligibility. VA00034–00036. The essential thrust of the protest was that CS360 was controlled not by a service-disabled veteran but instead by a non-veteran-owned entity—specifically, a company called B & R Constructions Services (“B & R”). VA00035.

By regulation, the OSDBU is responsible for deciding whether to sustain a third-party protest of this kind. 48 C.F.R. § 819.307(c). On March 3, 2010, the OSDBU formally notified CS360 of the protest and directed CS360 to submit evidence demonstrating that it is unconditionally owned and controlled by a service-disabled veteran. VA00058–00061.

On March 9, 2010, CS360 responded with a written submission and supporting documentation. VA00069–00179. At the time of CS360's submission, two service-disabled veterans, Walter A. Davis (“Davis”) and James A. Blanco (“Blanco”), were designated as CS360's sole Managing Members and each held a 25.5% individual interest in the company for a combined 51% interest. VA00092, VA00131. Meanwhile, six non-veterans held interests that combined to reflect the remaining 49%-namely, William R. Britt (“Britt”), David P. Vocci (“Vocci”), Edward E. Meadows (“Meadows”), Dana M. Borowy (“Borowy”), Benjamin L. Cox (“Cox”), and Gabriel R. Velicu (“Velicu”). VA00131. In its written submission, CS360 argued that it met the ownership requirement for SDVOSB eligibility because Davis and Blanco collectively held a majority interest in the company. VA00069. Similarly, CS360 argued that it met the control requirementbecause Davis held the highest position in CS360 and because Davis and Blanco could together guide the decisions of the company under the terms of CS360's Operating Agreement. VA00070. At that time, Section 4.01(a) of CS360's Operating Agreement provided that a five-person Executive Committee comprised of two service-disabled veterans (Davis and Blanco) and three non-veterans (Britt, Meadows, and Vocci) would manage and direct the company by majority vote. VA00103. However, Section 4.01(a) also contemplated that Davis and Blanco could override the will of the three non-veterans on the Executive Committee, providing that “in cases in which the Managing Members are in agreement the decision of the Managing Members shall govern.” VA00103. Finally, CS360 denied that it had an improper relationship with B & R, claiming that any “developmental assistance” provided by B & R to CS360 was in “strict compliance” with a Mentor–Protégé Agreement approved by the U.S. Department of Homeland Security (“DHS”). VA00070.

In addition to requesting materials from CS360, the OSDBU engaged an outside contractor to conduct an onsite examination of CS360. The contractor conducted the examination on April 26, 2010 and submitted its written report to the OSDBU on April 29, 2010. VA00371–00382. According to the written report, the contractor reviewed documentation and interviewed four individuals in connection with the examination. VA00372, VA00380–00382. Based upon its review, the contractor concluded that CS360 had failed to establish that Davis and Blanco unconditionally owned and controlled the company. VA00372. In terms of ownership, the contractor found that (1) the equity section of CS360's balance sheet identified six individuals who provided capital contributions to CS360, and Davis and Blanco were not included on this list; (2) there was no goodwill recorded on CS360's books and records to identify Davis and Blanco's alleged investment in the company; (3) Blanco was the owner of another entity that was also applying for inclusion in the VetBiz VIP database, contrary to regulations permitting only one company to be verified; (4) Blanco's separate entity was also certified by the Small Business Administration (“SBA”) in a program that required him to be involved full-time in the day-to-day management of that entity, preventing him from being involved in the day-to-day operations of CS360. VA00372–00374. In terms of control, the contractor took into account that (1) CS360's Operating Agreement was silent as to management percentages; (2) the Operating Agreement stated that the Executive Committee was not required to devote any particular amount of time to the performance of their duties and were able to delegate their duties to others; (3) Blanco was paid as a consultant; (4) while Davis performed the “vast amount of functions” for CS360, it was unclear whether he “fully managed the majority of the day to day operations”;...

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