Sana Energy Mgmt. v. United States
| Decision Date | 26 May 2021 |
| Docket Number | Case No. 19-11072 |
| Parties | SANA ENERGY MANAGEMENT, INC. et al., Plaintiffs, v. UNITED STATES OF AMERICA AND UNITED STATES DEPARTMENT OF AGRICULTURE, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
Plaintiffs Fahd Ahmed and Hussein Ajami are former owners of Plaintiff Sana Energy Management Inc. ("Sana"), which operated a retail gas station cum convenience store located at 19202 Harper Avenue in Harper Woods, Michigan.
Defendant United States of America assessed against Sana a $44,000 civil monetary transfer-of-ownership penalty for the transfer of Sana's business operations contrary to federal regulations governing the Supplemental Nutrition Assistance Program ("SNAP") administered by the Food and Nutrition Service ("FSN"). Sana had been permanently disqualified from the SNAP program before the business wasallegedly transferred. Plaintiffs now challenge the legitimacy of the assessment.
Discovery has concluded in the matter, and the parties have filed cross-motions for summary judgment on the question of whether Plaintiffs' long-term lease of physical assets to a third party, combined with the sale of inventory and other assets to the same, are sufficient to trigger the transfer-of-ownership penalty. Both motions have been fully briefed, and the court concludes that a hearing is not necessary. See E.D. Mich. LR 7.1(f)(2). For the reasons explained below, the court will grant Defendant's motion and will deny Plaintiffs' motion.
Plaintiffs Ahmed and Ajami owned Plaintiff Sana corporation which operated a Citgo branded gas station and convenience store in Harper Woods, Michigan. (ECF No. 1-3, PageID.17.) Sana leased property from MY05, LLC. (Id.) MY05 is a separate legal entity also owned by Plaintiffs Ahmed and Ajami. (ECF No. 22, PageID.206.) Though MY05 is not a party to this suit, Plaintiff Ahmed served as the president of both Sana and MY05. (ECF No. 1-3, PageID.20.)
Sana first began operating the gas station and store in 1999 when Plaintiffs Ahmed and Ajami purchased "the business, which included goodwill and intangible assets[,]" for $325,000 while leasing the physical location from an independent third party. (ECF No. 22, PageID.218.) In 2004 Plaintiffs Ahmed and Ajami, through MY05, purchased the real property including the "canopy, underground storage tanks, equipment and other trade fixtures" located on the property for $243,000 and continued leasing it to Sana. (Id.)
During the time that Sana was authorized to accept SNAP benefits, Plaintiffs admit that one of the employees was engaged in SNAP trafficking (improper use of the benefits in various ways), although Plaintiffs claim they had no knowledge of this activity. (ECF No. 22, PageID.206-07.) In a letter dated September 14, 2017, the USDA required Sana to submit "sufficient evidence" to demonstrate that it had in place preventative measures to avert SNAP trafficking. (Id.) Sana failed to timely respond to the letter, alleging that the same employee responsible for the SNAP trafficking hid the letter from Plaintiffs. (Id.) Because Sana failed to timely respond, the USDA informed Plaintiffs, in a letter dated October 4, 2017, that Sana had been permanently disqualified from participation in SNAP. (Id.) The program includes provisions designed to prevent disqualified entities from eliding the disqualification such as by conducting sham transactions. In that vein, the letter informed Plaintiffs that "if the owners sold or transferred the store after its disqualification, it would be subject to and liable for a TOCMP [Transfer-of-Ownership Civil Money Penalty] as provided by SNAP regulation." (ECF No. 1-3, PageID.20.)
Plaintiffs' complaint alleged that Sana's business significantly decreased after its disqualification from SNAP forcing it to vacate the store (ECF No. 1, PageID.4), but Plaintiff Ahmed testified that the disqualification was a "contributing factor," not a "big factor" in the decision to wind down Sana's operation. (ECF No. 24-2, PageID.297.) Instead, he cited a lack of attention given to the business by the co-owners and increased nearby competition as factors in the businesses' general decline in sales. (Id.)
Ahmed testified that there was some disagreement between the two partners on whether they should shut down the business. (Id., PageID.314.) In order to force the issue and begin unwinding the lease agreement, as president of MY05, Ahmed sent a series of three letters beginning in November 2017 advising Sana that it was behind on its rent. (ECF No. 24-8, PageID.351.) Ahmed testified that he eventually convinced co-Plaintiff Ajami that they should lease the location to an outside operator. (ECF No. 24-2, PageID.315-316.) In order to facilitate such a transaction, MY05 and Sana "reached" an agreement where Sana would leave behind its remaining inventory in lieu of back rent it owed MY05. (ECF No. 22-3; PageID.229.) Because the gas station was "in a very high-crime neighborhood," Plaintiffs decided they could not just shut the business down while they waited to find a buyer and risk that the building would be vandalized or looted. (ECF No. 24-2, PageID.312.) So, Sana kept operating until a new tenant, Wolverine Food & Fuel Inc. ("Wolverine") was found in the spring of 2018. (Id., PageID.288.)
Wolverine agreed to a 10-year lease for the property and also purchased from Plaintiffs "[a]ll inventory and other personal property" at the store's location. (ECF No. 12-6, PageID.94.) The lease requires Wolverine to pay MY 05 $7,694 per month in "base rent" for the first five years of the agreement and $8,500 per month for the last five years. (ECF No. 24-13, PageID.413.) The agreement also requires Wolverine to pay "additional rent" each month to reimburse MY 05 for the cost of insurance. (Id., PageID.416.) Though a separate "bill of sale" executed at the same time, Wolverine also purchased for $32,000 all the station's current inventory with "a retail value of over $50,000" as well as undefined "other personal property." (Id., PageID.421; ECF No. 24-2, PageID.317; ECF No. 16, PageID.427.) Wolverine's owner testified that "other personal property" included the business computer as well as some office furniture. (ECF No. 24-12, PageID.407.)
While Plaintiffs contend that the inventory purchased by Wolverine was only a fraction of the $130,000 in inventory that Sana "on average" maintained at the property (ECF No. 22-2; PageID.219.), Sana kept purchasing at least some inventory leading up to the transfer, and it is undisputed that the store was turned over with enough inventory to operate. (See Id., PageID.292; ECF No. 24-12, PageID.397.) On the day Wolverine's owner came to take over the store, "it was running," and Wolverine shut the store down for a single day to do inventory and clean the store before reopening. (Id., PageID.397.)
In his deposition, the owner of Wolverine testified that when he took over the location, all the equipment he needed to operate, including gas pumps, point-of-sale-systems, freezers, slushy machine, an office computer, surveillance system, lotto machine, and coffee machine were handed over to Wolverine as part of the lease. (ECF No. 24-12, PageID.401-02 ( ).)
After the transition, Wolverine signed a new contract with the same fuel supplier. (ECF No. 24-2, PageID.291; ECF No. 24-12, PageID.409.) The appearance of the gas station and convenience store did not change when Wolverine took over as the Citgo branded signage was owned by the fuel supplier. (ECF No. 24-4, PageID.327-28; ECF No. 24-12, PageID.398.) And, Wolverine continued to rely on many of the same wholesale suppliers—sometimes paying invoices that still listed Sana as the purchaser. (ECF No. 24-12, PageID.409-10.)
The FNS subsequently assessed Plaintiffs a civil monetary transfer-of-ownership penalty in the amount of $44,000. Plaintiffs timely sought administrative review of this penalty and argued that the sale of its inventory did not amount to the sale of the business. The FNS rejected this argument. In a Final Agency Decision, the FNS determined that the sale of Sana's inventory and leasing of the store premises to Wolverine amounted to a sale of the business for which a transfer-of-ownership penalty was properly assessed. The Final Agency Decision explained that "when MY05, LLC terminated the lease of [Sana] it was little more than a paper transaction and Fahd Ahmed and Hussein Ajami appear to have maintained an ownership interest in the business." (ECF No. 1-3, PageID.20.) Accordingly, the FNS upheld the $44,000 civil monetary transfer-of-ownership penalty against Plaintiffs pursuant to 7 C.F.R. § 278.6(f)(2)-(3).
Presently at issue is Plaintiffs' count requesting review of a final agency decision. (ECF No. 1, PageID.6.) Defendant previously sought to dismiss this count, arguing that by both selling the store's inventory to Wolverine and entering a long-term lease for the property that Plaintiffs effectively transferred the business and therefore should be forced to pay the penalty. (See ECF No. 16.)
Reviewing the precedent cited by opposing parties, the court concluded that based on the allegations in the complaint it could not, as a matter of law determine that the sale of inventory to the same, independent party who leased a store's former location was "dispositive on the question of transfer" and therefore the court declined to grant Defendant's motion to dismiss the count. (Id., PageID.137.) The court noted thatwhile "Plaintiffs have stated a claim for relief that is plausible on its face" the complexion of the case may change "with the presentation of additional evidence at the summary judgment stage." (Id., PageID.139.) And the court highlighted the possibility that it could be revealed through...
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