Niles Freeman Equipment v. Joseph

• Decision Date: 28 March 2008
• Docket Number: No. C053200.,C053200.
• Citation: 161 Cal.App.4th 765,74 Cal.Rptr.3d 690
• Court: California Court of Appeals Court of Appeals
• Parties: NILES FREEMAN EQUIPMENT et al., Plaintiffs and Appellants, v. Ron JOSEPH, as Director, etc., et al., Defendants and Respondents.

74 Cal.Rptr.3d 690

161 Cal.App.4th 765

NILES FREEMAN EQUIPMENT et al., Plaintiffs and Appellants, v. Ron JOSEPH, as Director, etc., et al., Defendants and Respondents.

No. C053200.

Court of Appeal, Third District.

March 28, 2008.

Greenberg Traurig, Gene Livingston, Kathryn Doi and Ray Sardo, for Plaintiffs and Appellants.

Edmund G. Brown, Jr., Attorney General, Jonathan K. Renner, Acting Senior Assistant Attorney General, Stephen Acquisto and Geoffrey Graybill, Deputy Attorneys General, for Defendants and Respondents.

MORRISON, J.

This case involves the California Disabled Veteran Business Enterprise (DVBE) Program, within the Department of General Services (Department), designed to benefit qualified disabled veterans and their businesses by giving them preferences in state contracting. (Mil. & Vet.Code, § 999 et seq.; further unspecified section references are to this code.)

Daniel Moody and Niles Freeman each had a contracting business, Moody Construction and Niles Freeman Excavating (NFX), respectively. Moody is a qualified disabled veteran, but Freeman is not. Moody and Freeman created a partnership, Niles Freeman Enterprises (NFE), certified as a DVBE by the Department. Freeman ran NFE, and derived most of its profits.

The Department "decertified" NFE as a DVBE, after an Administrative Law Judge (ALJ) upheld the Department's conclusion that NFE did not meet the definition of a DVBE.

The Department later suspended plaintiffs NFE, Moody, Moody Construction, Freeman, and NFX from participating in any state contracts for three years. Plaintiffs appealed and lost at an administrative hearing, except that the period of suspension was reduced to one year. All then filed this unsuccessful administrative mandamus petition to set aside the suspensions.

Although the notice of appeal lists all plaintiffs, we previously granted the request of Freeman and NFX to dismiss their appeal. We shall affirm the judgment as to NFE, Daniel Moody and Moody Construction (collectively Moody, except as context indicates).

STANDARD OF REVIEW

The trial court concluded that the suspension order impacted fundamental rights and required application of the independent judgment standard of review.

We agree. Depriving a contractor of the right to bid on a contract implicates a liberty interest. (Marvin Lieblein, Inc. v. Shewry (2006) 137 Cal.App.4th 700, 720, 40 Cal.Rptr.3d 547 (Lieblein); see also Golden Day Schools, Inc. v. State Dept. of Education (2000) 83 Cal.App.4th 695, 707, 99 Cal.Rptr.2d 917 (Golden Day); Stacy & Witbeck, Inc. v. City and County of San Francisco (1995) 36 Cal.App.4th 1074, 1086-1087, 44 Cal.Rptr.2d 472, fn. 6 (Stacy ).)

On appeal, we review the trial court's factual conclusions for substantial evidence and its legal conclusions de novo. (See Handyman Connection of Sacramento, Inc. v. Sands (2004) 123 Cal.App.4th 867, 880-881, 20 Cal.Rptr.3d 727 (Handyman ).)

BACKGROUND

Although we are reviewing the denial of a petition to overturn the suspension order, some of the issues raised on appeal relate to the decertification order. The facts found at the first administrative hearing provide a useful context, because the findings at the second hearing, although of more serious consequence, accord with the earlier findings.

Statutory Background

"The administering agency [of the DVBE Program] is the Department of General Services, except in the case of contracts for professional bond services." (§ 999.5, subd. (a).)

Generally, the Department may certify an entity as a DVBE if it is owned "at least 51 percent" by one or more disabled veterans and its "daily business operations" are managed by one or more disabled veterans. (§ 999, subd. (b)(7)(A).)

"This article includes language similar to that ... (commencing with Section 10115 ... of the Public Contract Code and does not create an independent or additional goal or program." (§ 999.13.) The referenced section encourages "minority, women, and disabled veteran business enterprises" in various ways, some challenged on theories not relevant herein.

The Department has adopted regulations detailing aspects of the DVBE program, including eligibility. (See, e.g., Cal. Code Regs., tit. 2, § 1896.61.)

Section 999.9, as amended in 2004 (Stats. 2003, ch. 632, § 4), providing for civil, criminal and administrative penalties for violations of the DVBE program, is set out in the Appendix.

Decertification Hearing

On February 17, 2004, "ALJ Roman issued a written decision after an administrative hearing, and that decision and documents leading up to it generally establish the following.

Daniel Moody was "a duly qualified disabled veteran" and a licensed contractor with an existing business named Moody Construction. He made a partnership agreement with Niles Freeman to create NFE. This is a distinct entity from NFX, Freeman's separate business.

The partnership agreement states NFE was to be owned 51 percent by Moody and that NFE's purpose was to create a DVBE entity. The partnership would provide firefighting services to the California Department of Forestry (CDF), Freeman applied for DVBE certification and the Department certified NFE for a three-year period. Of $12,000 generated by NFE's contracts in 2002, Moody was paid $1,000 and Freeman was paid $11,000.

The Department "concluded that [the partnership] had failed to demonstrate Mr. Moody's managerial and operational control of the enterprise[,]" and sought further information from the partnership. Eventually, on October 2, 2003, the Department sent NFE a three-page letter, captioned "DVBE Intent to [Revoke]," stating in part that it had determined NFE was "not in compliance with" specifically identified regulations defining a DVBE, based on facts summarized under each claimed area of noncompliance.

On October 7, 2003, NFE filed an administrative appeal. On Tuesday, December 9, 2003, an attorney wrote to ALJ Roman and stated that he had been' retained that week to represent NFE at the hearing set for Monday, December 15, 2003. The attorney sought a continuance based on calendar conflicts. ALJ Roman denied the request, stating that the notice of hearing had been issued on November 14, 2003, and no good cause for the request was shown.

As duly scheduled, on December 15, 2003, a hearing was held at which evidence (including the testimony of Moody and Freeman) was taken. On appeal Moody's briefs emphasize isolated comments by ALJ Roman at the hearing, portraying the proceeding as favorable. But ALJ Roman's written decision was unfavorable. We quote two significant passages:

"What emerges from a review of the documentation and testimony provided herein by both [the Department] and [the] partners is that [NFE] lacks any business equipment and the documentation necessary to establish Mr. Moody as a qualifying disabled veteran for purposes of certification. Despite protestations to the contrary, Mr. Freemen, largely engaged in furthering the partnership, has a greater clarity on the business enterprise than ... Mr. Moody. [NFE] has no distinct employees or work force (except as provided by Mr. Freeman) subject to Mr. Moody's supervision, no materials (except as largely provided by Mr. Freeman) and no discrete facilities (except as provided by Mr. Freeman). The manner in which [NFE's] activities are candidly vetted by Mr. Freemen's determination of financial distribution (to include compensation), notwithstanding the expressed terms of the Partnership Agreement or the partners' protestations, when balanced with the partners' actual conduct of [NFE] activities, functions to belie the Partnership Agreement's import. Simply put, Mr. Moody renders no commercially useful function to [NFE]."

"The partners, seeking to properly increase their business opportunities, fashioned a business entity that, on paper, commences with an investiture in Mr. Moody of a 51% interest. The business practice, at least with respect to financial capitalization has been, during the period of analysis: 0. Distribution of income has, however, favored Mr. Freeman. Further, it becomes abundantly clear that Mr. Moody, in several respects, fails to meet the expressed regulatory provisions relating to both managerial and operational control of the business____What the partners clearly created does not appear to be a partnership that would vest any degree of meaningful or qualifying control in Mr. Moody but, instead, a joint venture for the limited purpose of gaining D.V.B.E. status by and through Mr. Moody with its concomitant financial benefits." (Fns.omitted.)

ALJ Roman upheld the Department's decertification of NFE, and no review of his decision was sought.

Suspension Hearing

On March 4, 2005, the Department sent Freeman and Moody written notice of its intent to suspend them, NFE, Moody Construction and NFX, "from bidding on, or participating as either a contractor, subcontractor, or supplier in any state contract or project for 3 years for violation of M & VC Section 999.9(a)(1), (2) and (4)." The gist of the claim was that NFE was a sham entity that subcontracted all of its CDF work to NFX, and the partners "knowingly and with intent to defraud" sought and obtained the DVBE certification, made knowingly false statements and obtained or attempted to obtain "public moneys to which they were not entitled."

The notice alleged that Freeman had been providing CDF equipment since 1982 as NFX, and continued to provide the same services through the shell of NFE once NFE was issued the DVBE certification. Nearly 94 percent of the income from CDF contracts with NFE went to NFX, and only about 6 percent went to Moody. Moody Construction, owned by Moody, has DVBE certification, but does not own the type of equipment commonly needed by CDF, bulldozers and water trucks; Freeman owns bulldozers. Therefore, the notice alleged, "the only added benefit to Mr. Moody as a partner of NFE was the receipt of 5 percent of the profit on Mr. Freeman's equipment...