Derrick Storms, A1 Procurement, LLC v. U.S. & the Dep't of Veterans Affairs, 13-CV-811 (MKB)

CourtUnited States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
Writing for the CourtMARGO K. BRODIE, United States District Judge
Decision Date20 June 2017
Docket Number13-CV-811 (MKB)


13-CV-811 (MKB)


June 20, 2017


MARGO K. BRODIE, United States District Judge:

On December 20, 2015, Plaintiffs Derrick Storms, A1 Procurement, LLC ("A1"), A1 Procurement JVH, A1 Procurement - Transportation Leasing Corp., LLC and A1 Procurement, JVG filed a Third Amended Complaint ("TAC") in the above-captioned action against Defendants the United States of America and the Department of Veterans Affairs (the "VA").1 (TAC, Docket Entry No. 112.) Plaintiffs allege that Defendants arbitrarily denied reconsideration of Plaintiffs' application to renew A1's status as a "qualified Service-Disabled, Veteran-Owned Small Business" ("SDVOSB"), in violation of the Administrative Procedures Act, 5 U.S.C. § 701 et seq. (the "APA") and Plaintiffs' due process rights under the Fifth Amendment of the U.S. Constitution. (Id. ¶ 1.)

Defendants move to dismiss the Third Amended Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing that all Plaintiffs, except for A1,

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lack standing to pursue their claims and that the TAC is moot and meritless. (Defs. Mot. to Dismiss, Docket Entry No. 126; Center for Verification and Evaluation Admin. Record ("R."), Docket Entry No. 128; Defs. Mem. in Supp. of Defs. Mot. to Dismiss ("Defs. Mem."), Docket Entry No. 129.) For the reasons discussed below, the Court grants Defendants' motion.

I. Background

Plaintiffs allege that Defendants unlawfully revoked A1's ability to obtain set-aside government contracts through the VA's SDVOSB program. The Court assumes the parties' familiarity with the underlying facts, which are described in greater detail in Storms v. United States, No. 13-CV-811, 2015 WL 1196592, at *1-4 (E.D.N.Y. Mar. 16, 2015), and repeats only the facts relevant to decide this motion.

a. Statutory and regulatory framework

Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the "Veterans Benefits Act") to increase contracting opportunities for small businesses owned by service-disabled veterans. See 38 U.S.C. §§ 8127-8128. Congress conferred upon the VA the authority to set aside certain government contracts for SDVOSBs and to maintain a database of small businesses eligible for the set-aside contracts. Id. § 8127(f). As a result, the VA maintains an online database of eligible small businesses called the VetBiz Vendor Information Pages ("VIP"). 38 C.F.R. § 74.1. 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 business are listed in the database of veteran-owned businesses maintained by the Secretary [of the VA]." 38 U.S.C. § 8127(e).

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To be listed as an SDVOSB in the VIP, a business must file an application with the VA's Center for Verification and Evaluation ("CVE"),2 which is charged with evaluating applications to determine whether a small business is "unconditionally owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses."3 38 C.F.R. §§ 74.1, 74.11, 74.2(a). According to VA regulations, "control means both the day-to-day management and long-term decision-making authority for the [business]." Id. § 74.4(a). The VA elaborates that "[a]n applicant or participant's management and daily business operations must be conducted by one or more veterans or service-disabled veterans," and that "[i]ndividuals managing the [business] must have managerial experience of the extent and complexity needed to run the [business]." Id. § 74.4(b). Among other requirements, "[o]ne or more veterans or service-disabled veteran owners . . . must devote full-time to the business during the normal working hours of firms in the same or similar line of business." Id. § 74.4(c)(3). Separately, the VA notes that:

"[o]wners need not work full-time but must show sustained and significant time invested in the business. An owner engaged in employment or management outside the applicant [business] must submit a written statement supplemental to the application which demonstrates that such activities will not have a significant impact on the owner's ability to manage and control the [business]."

Id. § 74.4(c)(1).

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If the CVE determines that a business should be verified as an SDVOSB, the business will be listed in the VIP for two years. See id. §§ 74.11(f), 74.15 (2012). A business whose application is denied may request reconsideration of the denial. Id. § 74.13(a).

b. Factual background

A1 is a limited-liability company founded by Plaintiff Storms in 2009. (Seconded Amended Complaint ("SAC") ¶ 11, Docket Entry No. 47.) Plaintiffs A1 Procurement JVH ("A1 JVH"), A1 Procurement - Transportation Leasing Corp., LLC ("A1 Transportation"), and A1 Procurement, JVG ("A1 JVG") are joint ventures of A1. (TAC ¶ 8.)

In September of 2009, A1 filed an application with the CVE to be listed in the VIP. (R. 1.) The parties do not dispute that at the time of A1's application to the CVE, Storms had a fifty-one percent ownership interest in A1 and Adrian Batlle4 had a forty-nine percent interest in A1. (See id. ¶ 11; Defs. Mem. 3-4.) Storms is a service-disabled veteran, but Batlle is not. (TAC ¶ 7; Defs. Mem. 4.) The CVE conducted a review of A1's application and, on April 7, 2010, approved A1 for listing in the VIP. (R. 3-77.) CVE's approval of A1 indicated that A1 was "both owned and controlled by Mr. Storms," as required by the VA's regulations. (TAC ¶ 11.)

On February 16, 2011, A1 filed an application to renew its SDVOSB status and inclusion in the VIP for the upcoming two years. (R. 153.) The CVE reviewed A1's tax returns, (R. 268-325); Articles of Organization, (R. 263-64); the Operating Agreement between Storms and

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Batlle, (R. 265); business registration documents filed with Florida state agencies, (R. 187-88, 266-67); a lease agreement, (R. 326-28); payroll records, (R. 329); contracts, (R. 330-36); licenses, (R. 339-41); VIP profile, (R. 277-78); Storms' disability determination, (R. 342-43); Storms' resume, (R. 337-38); and publicly available documents from the internet, (R. 179-261). The CVE also reviewed Storms' statement that he "works [forty] hours per week for A1" as its Chief Executive Officer ("CEO") and that his duties include "directing company operations, management oversight, directing marketing strategy, obtaining financing [and] creating the company culture." (R. 262; Defs. Mem. 5.) Storms' statement noted that Batlle was the president of A1 and "manage[d] . . . day to day operations, contract bidding, contract management, book keeping and payroll." (R. 262.) Storms' resume reflects that at the time, Storms was also serving as the managing partner of his law firm, Storms & Associates, P.C. ("Storms & Associates"), and as the president of Homeless Veterans of America, Inc. ("HVAI"). (R. 337-38.)

i. CVE removal decision

By decision dated August 9, 2011, the CVE denied A1's renewal application, citing Storms' failure to demonstrate that he satisfied the "control" requirements of 38 C.F.R. § 74.4 (the "CVE Removal Decision"). (R. 360-63.) The CVE noted that a service-disabled veteran must "devote full-time to the business during the normal working hours of firms in the same or similar line of business," and that "[e]ngagement in employment or management outside the applicant concern must not 'have a significant impact on the owner's ability to manage and control the applicant concern.'" (R. 360-61 (quoting 38 C.F.R. § 74.4(c)(1)).) The CVE explained that because Storms' resume stated that he was currently the president of HVAI and the managing partner of Storms & Associates, and because Storms had failed to submit the

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required supplemental statement demonstrating that his outside activities would not significantly impact his ability to manage and control A1, the CVE could not conclude that Storms was devoting his full time to A1. (R. 361.) The CVE informed A1 that A1 could request reconsideration of the decision or file a new application for SDVOSB status, and "[t]he Director . . . will issue a written decision within [sixty] days, when practicable, of receipt of the applicant's request." (R. 362-63 (quoting 38 C.F.R. § 74.13(b)).)

Plaintiffs allege that the CVE Removal Decision was the result of "[a] personal feud" between Storms and a CVE employee, David Eckenrode. (TAC ¶¶ 12, 13.) On April 25, 2011, Storms criticized Eckenrode, and shortly thereafter, Eckenrode was appointed Deputy Director of the CVE. (Id. ¶ 14.) Plaintiffs allege that Eckenrode "abused his newly appointed position" by "unjustifiably removing A1 from the VIP database without good cause." (Id. ¶ 15.)

ii. Reconsideration Decision

On August 23, 2011, A1 submitted a request for reconsideration of the CVE Removal Decision. (R. 505-663.) The CVE received the request for reconsideration on September 20, 2011,5 and informed A1 that "[a]lthough CVE has [sixty] days to complete requests for reconsideration, we seek to complete the action as soon as possible"; accordingly, A1 could "expect to receive a decision no later than November 21, 2011."6 (R. 502, 504.) As part of its request for reconsideration, A1 included a statement from Storms explaining that he worked full-

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time at A1 from 7:00 AM to 6:00 PM, five-to-six days per week, worked at HVAI three-to-four hours per month by volunteering at a soup kitchen, and worked at Storms & Associates four-to-five hours per month, primarily servicing A1's legal needs. (R. 507.) Storms explained that he worked full-time as A1's CEO and that his other obligations were minimal and did not prevent him from controlling A1. (R. 507.) Storms also attached...

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