Larry Grant Constr. v. Mills, Civil Action No. 12–00837(BJR).

• Decision Date: 24 July 2013
• Docket Number: Civil Action No. 12–00837(BJR).
• Court: U.S. District Court — District of Columbia
• Parties: LARRY GRANT CONSTRUCTION; and Ma–Chis Lower Creek Indian Tribe Enterprises, Inc., Plaintiffs, v. Karen G. MILLS, Administrator U.S. Small Business Administration, Defendant.

956 F.Supp.2d 93

LARRY GRANT CONSTRUCTION; and Ma–Chis Lower Creek Indian Tribe Enterprises, Inc., Plaintiffs,

v.Karen G. MILLS, Administrator U.S. Small Business Administration, Defendant.

Civil Action No. 12–00837(BJR).

United States District Court,

District of Columbia.

July 24, 2013.

Daniel Stephan Press, Van Ness Feldman, P.C., Washington, DC, for Plaintiffs.

Benton Gregory Peterson, United States Attorney's Office, Washington, DC, for Defendant.

MEMORANDUM OPINION GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BARBARA J. ROTHSTEIN, District Judge.

This matter is before the Court on Plaintiffs' motion for summary judgment. The plaintiffs, Larry Grant Construction (“LGC”) and Ma–Chis Lower Creek Indian Tribe Enterprises (“LCITE”), seek review of a decision of the Small Business Administration (“SBA”) that LGC is not a small business. Specifically, Plaintiffs claim the SBA acted arbitrarily and capriciously, in violation of the Administrative Procedure Act (APA), 5 U.S.C. § 706(2)(A), by miscalculating their combined average annual receipts. The Court has carefully considered the filings, the applicable law, and the entire record. For the reasons that follow, Plaintiffs' motion for summary judgment is GRANTED.

I. BACKGROUND

Section 8(a) of the Small Business Act, 15 U.S.C. § 637(a), authorizes the SBA to enter into a procurement contract with the federal government and to subcontract its performance to a “socially and economically disadvantaged small business.” Id. § 637(a)(1)(A)-(B). The SBA duly administers the 8(a) Business Development Program (“8(a) program”) to implement Section 8(a) of the Act. 48 C.F.R. § 19.800(d). Because the SBA may award a subcontract to an 8(a) program participant on a sole source, i.e., noncompetitive, basis, 15 U.S.C. § 637(a)(16); 48 C.F.R. § 19.800(b), admission into the program is highly desirable. A business seeking to participate in the 8(a) program must prove, among other things, that it is owned by one or more “socially and economically disadvantaged individuals” and that it is “small.” 13 C.F.R. § 124.101. The latter requirement is the centerpiece of this case.

To determine whether a business is “small,” the SBA compares the size of the business to the “size standards” published in 13 C.F.R. § 121.201. That regulation lists a maximum size, measured in either annual receipts or number of employees, for each category of business, as defined by North American Industrial Classification System (NAICS) code. Annual receipts are averaged over the three fiscal years preceding the application, id. § 121.104(c)(1), and the number of employees is averaged over the preceding twelve months, id. § 121.106(b)(1). In calculating a business's size, the SBA considers not only the business's own employees and annual receipts, but also those of any affiliated companies. “Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.” Id. § 121.103. Each affiliated business is treated as though it had the receipts and employees of all the affiliates combined. Id. §§ 121.104(d)(1) (annual receipts combined); 121.106(b)(4)(i) (number of employees combined).

Plaintiff LGC is a construction company and sole proprietorship owned by Larry Grant. Grant is a member of the Ma–Chis Lower Creek Indian Tribe of Alabama (“Tribe”), which owns plaintiff LCITE, a “company with multiple affiliates and divisions in the General Contracting business.” Administrative Record (A.R.) at 2–29. LCITE's revenues far outstrip those of LGC. In 2009, for example, LCITE reported gross receipts of about $32.7 million on its federal income tax return, id. at 10–64, while LGC reported about $513,000 on Grant's individual tax return, id. at 17–17.¹ Both LGC and LCITE fall under NAICS code 236220, Commercial and Institutional Business Construction, id. at 2–27, 29, and must therefore maintain average annual receipts at or below $33.5 million in order to qualify as small businesses, 13 C.F.R. § 121.201. At the time of the following events, LCITE was already so qualified and was a participant in the 8(a) program. A.R. at 2–29.

In August 2011, LGC applied to join LCITE as a participant in the 8(a) program. Tipped off, apparently, by “a protest alleging affiliation” between the two companies, A.R. at 1–15, the SBA began a review of LGC's size. The SBA first determined LGC was affiliated with a real estate company jointly owned by Grant and his wife; that determination is not at issue here. Id. at 2–29. The SBA also found, however, that for the year ending December 31, 2010, “60% of [LGC's] revenues came from subcontracts” with a joint venture in which LCITE held a 51 % stake, and “10% came from subcontracts” directly with LCITE. Id. at 2–30. “For 2011, revenues through October 31 reflect that 85.4% of current revenues are from ... LCITE, while an additional 9.4% is from ... a company also showing Ma–Chis on the invoice.” Id. Although the SBA identified no revenue from LCITE in the other two years it reviewed, 2008 and 2009, id., and despite Grant's protest that these were the first instances he had bid for subcontracts with LCITE since he began operating LGC 30 years ago, id. at 18–10, the SBA determined LGC was “economically dependent on ... LCITE ... and is therefore affiliated with it.” Id. at 2–30.

Having determined that LGC and LCITE were affiliated, the SBA requested LCITE's financial records for the relevant fiscal years—2008, 2009, and 2010—in order to add its average annual receipts to that of LGC. After some initial resistance,² James Wright, Chief of the Tribe and Chief Executive Officer of LCITE, submitted LCITE's federal tax returns for 2008 and 2009. Id. at 1–17. LCITE's chief financial officer separately submitted a draft financial statement for 2010 because the tax return for that year was not yet complete. Id. at 1–2, 1–5.

The SBA encountered immediate difficulty interpreting LCITE's 2010 draft financial statement. For the purpose of determining the size of a partner in a joint venture, the SBA assigns the partner a share of the joint venture's receipts proportional to that partner's stake in the venture, 13 C.F.R. § 121.103(h)(5); LCITE owned a 51% stake in several joint ventures and listed revenue from those ventures on its draft statement, id. at 1–40. The SBA could not tell from the draft statement, however, whether the revenue stated for each joint venture was 100% of the venture's revenue or the 51% that should be allocated to LCITE. Defendant's Opposition to Plaintiffs' Motion for Summary Judgment, Declaratory and Injunctive Relief (“Def.'s Opp.”) at 14, Dkt. No. 22; see also A.R. at 1–31 (draft financial statement). In other words, the SBA could not tell whether the revenue from LCITE's joint ventures had already been discounted, as it needed to be, by LCITE's stake in the venture. Because the joint ventures did not file their own separate tax returns, the SBA could not simply check the figures in LCITE's draft statement against another source. The SBA therefore resorted to guesswork: An analyst prepared several worksheets assuming the joint venture revenues had already been discounted, A.R. at 2–6 to 9, 2–11 to 18, while a reviewing attorney prepared a worksheet assuming that the revenues had not been discounted, A.R. at 2–10. Although the record is not entirely clear, see id. at 2–32, the SBA apparently adopted one of the analyst's calculations, along with its underlying assumption that the joint venture revenues stated on LCITE's draft financial statement had already discounted; the reviewing attorney's contrary assumption was “not part of the financial analysis.” Def.'s Opp. at 14. On this basis the SBA determined “the annual receipts of [LGC] and its affiliates ... exceeds the applicable size standard” of $33.5 million. A.R. at 2–32.

In December 2011, LGC and LCITE each filed a separate appeal to the SBA's Office of Hearing and Appeals (OHA). With its appeal LCITE included an affidavit from Chief Wright declaring, among other things, that its 2010 draft financial statement “included the total revenue from the joint ventures LCITE participated in ..., including the proportionate share of revenue from LCITE's joint ventures that is revenue of LCITE's joint venture partners and not of LCITE.” A.R. at 2–46. Without the joint venture revenue improperly attributed to it, LCITE argued, its average annual receipts, even combined with LGC's, fell below the $33.5 million threshold for being deemed a “small business.” Id. at 2–36 to 37. LCITE also argued, as did LGC in its appeal, that the two companies were not affiliated. Id. at 2–42 (LCITE's appeal), 2–62 (LGC's appeal).

In March 2012, the OHA dismissed LCITE's appeal for lack of administrative standing. The OHA reasoned that the adverse size determination pertained only to LGC and therefore had “no apparent impact or consequence to [LCITE].” Id. at 3–49. In a separate decision issued one day later, the OHA denied LGC's appeal on the merits. The OHA determined that LGC and LCITE indeed “share an identity of interest through economic dependence, thereby creating affiliation between the concerns,” id. at 3–63; in calculating their combined income, moreover, the SBA had taken “pains to include only [LCITE]'s proportionate share of the joint venture receipts.” Id. at 3–64. Because it found no error in the determination of affiliation or in the calculation of combined average annual receipts, the OHA issued a final decision affirming that LGC “is not a small business.” Id. at 3–60.

In May 2012, LGC and LCITE filed suit together to set aside the decision of the SBA. In their complaint Plaintiffs alleged, among other things, that the SBA miscalculated their combined average annual receipts, incorrectly held them affiliated, and improperly dismissed LCITE's administrative appeal for lack of standing, all in violation of the APA,...