Case Information
*1 In the United States Court of Federal Claims No. 14-786C
(Filed Under Seal: October 10, 2014) (Reissued: October 16, 2014) ********************************** ) Post-award bid protest; challenge to
) decertification of Service-Disabled AMBUILD COMPANY, LLC, ) Veteran-Owned Small Business for
) eligibility for an award of a construction Plaintiff, ) contract as to which it was the apparent ) responsible, responsive lowest-cost v. ) bidder; protestor’s lack of opportunity to ) address issue treated as dispositive by the UNITED STATES, ) agency; procedural due process; 5 U.S.C.
) § 555; unconditional nature of service- ) disabled veteran’s majority ownership of Defendant. ) the business; prejudice; remedy **********************************
Thomas K. O’Gara, Ernstrom & Dreste, LLP, Rochester, New York, New York, for plaintiff. With him on the briefs was John W. Dreste, Ernstrom & Dreste, LLP, Rochester, New York.
Lauren S. Moore, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for defendant. With her on the brief were Joyce R. Branda, Acting Assistant Attorney General, Civil Division, Robert E. Kirschman, Director, and Martin F. Hockey, Jr., Assistant Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C. Of counsel was Steven E. Devine, Staff Attorney, United States Department of Veterans Affairs, Office of the General Counsel, Washington, D.C.
OPINION AND ORDER
LETTOW, Judge.
This post-award bid protest arises out of a dispute emanating from a Service-Disabled Veteran-Owned Small Business (“SDVOSB”) set-aside solicitation, issued by the Department of Veterans Affairs (“VA”). Plaintiff, AmBuild Company, LLC (“AmBuild”), was the apparent *2 responsible, responsive lowest-cost bidder. The second lowest bidder, Welch Construction, Inc. (“Welch”) filed an administrative protest, challenging AmBuild’s eligibility as a SDVOSB. The Small Business Administration (“SBA”) rejected those aspects of Welch’s protest that were within SBA’s purview. Based on grounds divorced from Welch’s protest, however, VA’s Center for Verification and Evaluation (“CVE”) and then the Executive Director of VA’s Office of Small and Disadvantaged Business Utilization (“OSDBU”) disqualified AmBuild as a SDVOSB and awarded Welch the contract. AmBuild challenges that decision on both procedural and substantive grounds, seeking reinstatement as a SDVOSB and award of the contract from which the protest stemmed.
AmBuild has submitted a motion for judgment on the administrative record pursuant to RCFC 52.1(c)(1), and the government has filed a cross-motion for judgment. The motions have been fully briefed and were addressed at a hearing held on September 26, 2014. The case is now ready for disposition.
FACTS [2]
A. AmBuild’s Certification as a SDVOSB
AmBuild is a limited liability company organized under the laws of the State of New York. Compl. ¶ 1. AmBuild’s majority owner, Mark DeChick, is a service-disabled veteran of the United States Marine Corps, who was honorably discharged after serving in the first Gulf War. Pl.’s Aff. in Support of Pl.’s Appl. for Inj. Relief (“DeChick Aff.”) ¶ 6, ECF No. 4; see also Pl.’s Mem. in Support of Pl.’s Mot. for Judgment on the Admin. Record (“Pl.’s Mem.”) at 2, ECF No. 16. Mr. DeChick formed AmBuild in 2011, Compl. ¶ 3, after gaining approximately twenty years of experience as a project manager in the construction industry, DeChick Aff. ¶ 5. From 2011 to 2014, Mr. DeChick was the sole owner and managing member of AmBuild. Compl. ¶¶ 3, 7; see also AR 28-193 (2011 Operating Agreement, Art. I). [3] In April 2012, CVE approved AmBuild as a SDVOSB and added the company to the VA VetBiz Vendor Information Pages Verification Program database (“VetBiz VIP database”), rendering it eligible for SDVOSB *3 set-aside contracts. After its verification and certification as a SDVOSB, AmBuild proceeded to bid on and win SDVOSB set-aside contracts. Hr’g Tr. 5:16 to 7:14 (Sept. 26, 2014). [4]
On March 28, 2014, CVE renewed AmBuild’s SDVOSB status. Def.’s Cross-Mot. for Judgment on the Admin. Record & Response to Pl.’s Mot. for Judgment on the Admin. Record (“Def.’s Cross-Mot.”) at 4 n.1, ECF No.17. [5] CVE’s renewal of AmBuild’s verification as a SDVOSB was supported by its examination of AmBuild’s Operating Agreement (“2011 Operating Agreement”), which provided that Mr. DeChick was the sole owner of AmBuild, and by Mr. DeChick’s declaration that there had been no amendments to AmBuild’s structure or ownership. Id . Based on CVE’s re-verification letter, AmBuild was required to inform CVE of any changes that would affect its SDVOSB status. Id.
Approximately two months after the renewal of AmBuild’s verification, on June 3, 2014, Mr. DeChick sold two ten-percent segments of his membership interest in an effort to increase the company’s bonding limits. Compl. ¶ 7. AmBuild’s Vice President, Andrew Claus, and a non -employee insurance agent, Matthew Riedinger, each acquired a ten-percent ownership interest in AmBuild, Compl. ¶ 2, and the Operating Agreement was amended and revised to reflect AmBuild’s new ownership structure, AR 38-368 (AmBuild’s 2014 Operating Agreement). After this capital infusion, Mr. DeChick owns 80 percent of the company, remains “the highest-ranking officer in [AmBuild], and maintain[s] 100 [percent] control of the day-to day management and long-term decision making.” DeChick Aff. ¶ 12.
B. VA’s Solicitation and Action on an Administrative Protest On March 26, 2014, VA sought bids under Solicitation No. VA-528-14-B-0132 (“Solicitation”), which involved the renovation of revolving doors at the Veterans Affairs Medical Center located in Syracuse, New York. AR 9-17 to -59 (Solicitation). A public bid opening for the Solicitation was subsequently held on June 10, 2014. AR 10-60 (Pre-Bid Conference Agenda). AmBuild submitted a bid in response to the Solicitation and was the apparent lowest-cost bidder. See AR 14-90 to -93 (AmBuild’s Offer (June 10, 2014)). Welch was the second lowest bidder. See AR 15-103 to-07 (Welch’s Offer (June 10, 2014)). On June 17, 2014, Welch filed a formal protest with VA’s contracting officer for the Solicitation, alleging that Mr. DeChick did not control AmBuild as required by 38 C.F.R. § 74.4(e) and that AmBuild did not meet the size requirements for a SDVOSB. AR 30-214 to -16 (Welch’s Protest). [6] The *4 protest posited that AmBuild was closely affiliated with and receiving financial assistance from Christa Construction or its owners, evidenced in part by the fact that Mr. DeChick was a previous employee of Christa Construction and by the fact that AmBuild was currently involved in “multi[-]million dollar projects.” Id. ; see also AR 30-212 (E-mail from Carly Scott to Dennis Foley, transmitting protest (June 18, 2014)) (“Welch alleges AmBuild is ineligible because AmBuild is affiliated with another business, Christa Construction, and relies on it for the support necessary to bid, bond, manage, and perform projects.”). Welch requested that the contracting officer forward the following two protest letters:
1. One letter with attachment[s] to the VA OSDBU Office for determination that the SDVOSB is NOT “Controlled by the Owner[;]”
2. A second letter with attachment[s] to Small Business Administration to determine (1) size AND (2) if the SDVOSB firm is in violation of 13 C[.]F[.]R[. § ] 121.103(h)(4)[,] the Ostensible Subcontractor Rule.
AR 30-216.
The protest consequently was forwarded to both SBA and OSDBU. OSDBU gave notice to AmBuild of this protest and requested additional information from AmBuild regarding how it obtained its necessary bonding and whether Mr. DeChick was employed by any other companies. AR 31-244 to -45 (E-mail from VA OSDBU Status Protest to DeChick (June 26, 2014)). That same day, AmBuild responded that its attorney would file a response in “a day or two.” AR 31-244 (E-mail from DeChick to VA OSDBU Status Protest (June 26, 2014)). On the following day, AmBuild’s counsel sent to SBA and OSDBU the company’s response to the allegations of the protest and provided supporting documentation, AR 38-348 (E-mail from Thomas O’Gara to SBA and OSDBU (June 27, 2014)), which included AmBuild’s 2014 Operating Agreement indicating the change in the company’s ownership structure, see AR 38- 362 to -85.
SBA reviewed AmBuild’s supporting documentation and rejected Welch’s contentions that AmBuild did not meet the size standard applicable to the procurement and that AmBuild was affiliated with other firms. AR 32-252 to -54 (SBA Size Determination Mem. (July 11, 2014)). Notably, SBA found “[AmBuild] to be a small business for [its] referenced size *5 standard,” and concluded that “AmBuild has never subcontracted with or received financial assistance from Christa. . . . There [is] no common ownership or common management.” Id. [8]
CVE similarly concluded that AmBuild met the size requirement for the applicable procurement and that AmBuild was neither affiliated with nor receiving financial assistance from other firms. AR 33-256 to -57 (CVE Final Determination (July 21, 2014)). The grounds for Welch’s protest consequently were not accepted. CVE, however, sua sponte initiated consideration of an additional issue related to ownership that was not previously raised by Welch or the contracting officer. Specifically, upon an examination of AmBuild’s 2011 Operating Agreement, [9] CVE determined that Mr. DeChick was not an unconditional owner as required by 38 C.F.R. § 74.3(b) because the “Involuntary Withdrawal” provision of that agreement “include[s] numerous conditions, that are outside of [Mr. DeChick’s] control, which would force [Mr. DeChick] to sell his ownership interest to the [c]ompany or remaining [m]embers . . . . Mr. Claus and Mr. Ried[ing]er[, the two persons who had each acquired a ten percent interest in AmBuild,] would have an opportunity to take possession of [Mr. DeChick’s] ownership interest should [Mr. DeChick] be involuntarily withdrawn.” AR 33-258. AmBuild was never informed that CVE was investigating, sua sponte , an additional issue related to Mr. DeChick’s ownership. It learned about CVE’s action for the first time when CVE issued its Final Determination that it was sustaining Welch’s protest on the previously undisclosed ground. AR 33-259. Based on CVE’s decision, AmBuild was decertified as a SDVOSB, declared ineligible to receive an award on the Solicitation, and removed from the VetBiz VIP database. AR 33-259; see also Pl.’s Mem. at 4.
On July 28, 2014, AmBuild invoked 48 C.F.R. § 819.307(i) and appealed CVE’s Final
Determination to the Executive Director of OSDBU. AmBuild averred that CVE’s
determination was based on grounds divorced from Welch’s protest and respecting which
AmBuild had never received notice or been given an opportunity to respond, AR 35-271 to -73
(AmBuild’s Appeal (June 28, 2014)). AmBuild also contended that CVE’s reliance on the 2011
Operating Agreement was an error of fact. AR 35-270. Finally, AmBuild argued that an
“Involuntary Withdrawal” provision in the 2014 Operating Agreement addressed circumstances
in which Mr. DeChick might become insolvent, thus triggering provisions comparable in effect
to a right-of-first-refusal provision that was held not to condition present ownership in
Miles
Construction, LLC v. United States
,
The Executive Director of OSDBU denied AmBuild’s appeal on August 7, 2014. AR 36- 313 to -18 (Appeal Decision (Aug. 7, 2014)). The denial acknowledged that CVE’s consideration of the ownership issue was “not raised by the contracting officer or [Welch],” but maintained that CVE’s self-initiated action was not an error under 48 C.F.R. § 819.307(e). AR *6 36-315. According to the Executive Director, amendments to 48 C.F.R. § 819.307 adopted on September 30, 2013 “no longer limit[] CVE to resolving only the issues raised by a contracting officer or interested party.” Id . Rather, CVE can determine SDVOSB status based on the “totality of circumstances.” Id. Additionally, although the Executive Director found “CVE’s reliance on provisions from an outdated Operating Agreement to be a clear error of fact,” he nonetheless concluded that the “Involuntary Withdrawal” provision found in Article I of the 2014 Operating Agreement, broadly defined, creates a “condition subsequent, which could potentially cause [AmBuild’s] ownership interest to go to another.” AR 36-315, -17. The Executive Director specifically noted:
[S]everal of the events listed in Article [I] are outside [Mr. DeChick’s] control, including [Clause iii,] being adjudicated to be bankrupt, [Clause ix,] having to transfer interest through a court order or operation of law, or [Clause v,] the appointment of trustee, receiver, or liquidator for the Member or all or any substantial part of the Member’s properties without the Member’s agreement or acquiescence. OSDBU therefore finds the basis for denial in this instance to be legally distinguishable from the right-of-first-refusal provisions addressed in Miles . Accordingly, OSDBU does not conclude that CVE’s initial determination regarding unconditional ownership was based upon a clear error of law.
AR 36-317 to -18. He cited Section 6.3 of the 2014 Operating Agreement, AR 38-379 (providing an optional buy-out in event of an involuntary withdrawal), as forcing Mr. DeChick to “offer to sell his shares should any of the events listed in Article [I] occur.” AR 36-317.
C. AmBuild’s Protest in this Court
AmBuild filed suit in this court on August 28, 2014 , requesting injunctive relief, contending that VA’s decision to disqualify AmBuild as a SDVOSB v iolated procedural due process and was arbitrary and capricious. An expedited schedule for submission of the administrative record and for briefing was adopted, providing for completion of briefing on the record within 27 days, and a hearing was held on September 26, 2014, less than a month after the protest was filed.
*7 At the close of the hearing, the court stated on the record that a preliminary injunction would be issued later that day. The resulting preliminary injunction (1) set aside the Executive Director of OSDBU’s decertification of AmBuild as a SDVOSB, (2) ordered VA to restore AmBuild as an approved and certified SDVOSB and reinstate AmBuild as a SDVOSB in the VetBiz VIP database, and (3) ordered that VA consider any bids or offers that had been or will be submitted by AmBuild, disregarding OSDBU’s and CVE’s grant of Welch’s protest. See Order Granting Pl.’s Mot. for Prelim. Inj., ECF No. 19.
JURISDICTION
The court has jurisdiction over bid protests under the Tucker Act as amended by the Administrative Dispute Resolution Act, Pub. L. No. 104-320, § 12, 110 Stat. 3870, 3874 (Oct. 19, 1996). In pertinent part, the statute provides that
the United States Court of Federal Claims . . . shall have jurisdiction to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement. . . . [T]he United States Court of Federal Claims . . . shall have jurisdiction to entertain such an action without regard to whether suit is instituted before or after the contract is awarded.
28 U.S.C. § 1491(b)(1);
see Systems Application & Techs., Inc. v. United States
,
AmBuild alleges that VA’s application of 48 C.F.R. § 819.307 (“SDVOSB/VOSB Small
Business Status Protests”) and 38 C.F.R. Part 74 (“Veterans Small Business Regulations”)
violates due process, the Administrative Procedure Act (“APA”), and VA’s own procurement
regulations. Section 74.3 of 38 C.F.R. Part 74 recites the standards CVE is to consider in
determining Veteran-Owned Small Business (“VOSB”) eligibility. Those standards are
incorporated into the Veterans Affairs Acquisition Regulation System (“VAAR”) provisions set
out in 48 C.F.R. § 819.307, which govern SDVOSB and VOSB status protests with OSDBU.
AmBuild’s alleged violations of the Constitution, statute, and regulations in connection with a
procurement fall squarely within the ambit of 28 U.S.C. § 1491(b)(1) and properly invoke this
court’s bid protest jurisdiction.
See RAMCOR Servs. Grp., Inc. v. United States
,
STANDARDS FOR DECISION
When considering a bid protest, the court adheres to “the standards set forth in section
706 of title 5,”
i.e.
, the section of the Administrative Procedure Act (“APA”) that prescribes the
scope of judicial review of agency actions. 28 U.S.C. § 1491(b)(4). Under the APA, a court
may set aside an agency decision if the decision was “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A), assuming the criteria
for equitable relief are satisfied,
see PGBA, LLC v. United States
,
This court’s review is limited to evaluating whether an agency’s “decision was based on a
consideration of the relevant factors and whether there has been a clear error of judgment.”
Citizens to Preserve Overton Park, Inc. v. Volpe
,
Upon a showing of error, “the court[] may award any relief that the court considers
proper, including declaratory and injunctive relief except that any monetary relief shall be
limited to bid preparation and proposal costs.” 28 U.S.C. § 1491(b)(2) The determination of
whether an injunction is appropriate is made by the court after consideration of the factors
traditionally applied respecting equitable relief.
See Centech Grp., Inc. v. United States
, 554
F.3d 1029, 1037 (Fed. Cir. 2009) (citing
PGBA
,
ANALYSIS
A. Statutory and Regulatory Framework
The procurement at issue is governed by the Veterans Benefits, Health Care, and Information Technology Act of 2006 (“Veterans Benefits Act”), Pub. L. No. 109-461, tit. V, 120 Stat. 3403, 3425 (codified at 38 U.S.C. §§ 8127-28). The Act provides in pertinent part that “[i]n procuring goods and services pursuant to a contracting preference under this title or any other provision of law,” VA “shall give priority to a small business concern owned and controlled by veterans,” provided that the business is included in a small business database maintained by VA. 38 U.S.C. § 8128. To implement this Act, the Veterans First Contracting Program (“Program”) was established in 2007, under which VA considers SDVOSB and VOSB entities as first and second priority for procurement awards.
At the Program’s commencement, SDVOSB and VOSB entities were permitted to self- certify themselves for registration in the VetBiz VIP database. Statutory amendments found in 38 U.S.C. §§ 8127(e) and (f) now require the Secretary of VA to maintain the VetBiz VIP database, and the certification process is administered through CVE. See VA Acquisition Regulation: Supporting Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses, 74 Fed. Reg. 64,619-01 (Dec. 8, 2009) (codified at 48 C.F.R. Parts 802, 804, 808, 809, 810, 813, 815, 817, 819 and 852) (effective Jan. 7, 2010); 75 Fed. Reg. 6098-01 (Feb. 8, 2010) (codified at 38 C.F.R. Part 74) (effective Feb. 8, 2010).
Section 74.3 outlines the ownership requirement for a participant to receive verified status by VA, mandating that 51 percent of the entity must be “unconditionally and directly owned by one or more veterans or service-disabled veterans.” 38 C.F.R. § 74.3. Section 74.3 elaborates that
[o]wnership must not be “subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrange- ments causing or potentially causing ownership benefits to go to another (other than after death or incapacity). The pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms.
Id . § 74.3(b).
Section 74.22 implements procedures to revoke certification of SDVOSB or VOSB status if “CVE believes that a participant’s verified status should be cancelled prior to the expiration of its eligibility term.” 38 C.F.R. § 74.22(a). In revocation proceedings, CVE must provide written notice to the participant, which then has thirty days to respond. Id . §§ 74.22(a), (b). Thereafter, CVE must issue a decision reciting the specific facts and reasoning that formed the basis of its decision. Id . § 74.22(c). Upon cancellation, the participant can no longer “appear as ‘verified’ *10 in the VetBiz VIP database.” Id . § 74.22(d). The participant is permitted to administratively appeal a decision by CVE to the Executive Director of OSDBU. Id . § 74.22(e).
An unsuccessful offeror in a procurement under the Veterans First Contracting Program may also file an agency-level bid protest. Pursuant to the VAAR, “a contracting officer or an interested party may protest the apparently successful offeror’s SDVOSB or VOSB status.” 48 C.F.R. § 819.307(b). CVE-approved certifications may be challenged through this route, as provided in 48 C.F.R. § 819.307. The agency protests “shall be in writing and shall state all specific grounds for the protest. Assertions that a protested concern is not a SDVOSB or VOSB concern, without setting forth specific facts or allegations, are insufficient.” Id . § 819.307(c). “The Director, CVE, will [then] determine the SDVOSB or VOSB status of the protested concern based upon the totality of circumstances within 21 business days after receipt of the status protest.” Id . § 819.307(e). In these agency-level protests, “SDVOSB and VOSB status shall be determined in accordance with 38 C[.]F[.]R[.] [P]art 74.” Id . § 819.307(a). The regulation provides that “[t]he Director, CVE, will notify the protestor and the contracting officer of the date the status protest was received by CVE and whether the status protest will be processed or dismissed for lack of timeliness or specificity.” Id . § 819.307(d) (emphasis added). Notably omitted from the regulation is any requirement that notice be given to the subject of the protest, but due process protections apply in that regard to fill the gap. See Miles , 108 Fed. Cl. at 804 (“An interpretation of 48 C.F.R. § 819.307 . . . that does not allow [for] . . . basic procedural due process is plainly erroneous and cannot be upheld.”).
B. CVE’s and OSDBU’s Actions
AmBuild urges that CVE’s final determination and OSDBU’s denial of AmBuild’s appeal violated procedural due process because both considered issues concerning AmBuild’s unconditional ownership that were outside the scope of Welch’s protest, and AmBuild was not provided with notice and an opportunity to respond with respect to those issues. See Pl.’s Mem at 8-12. AmBuild further contends that OSDBU’s determination that AmBuild does not satisfy the unconditional ownership requirement for a SDVOSB was based on a clear error of law and constituted arbitrary or capricious agency action that prejudiced AmBuild. See id. at 17-26.
1. Procedural due process.
AmBuild avers that CVE and OSDBU erred procedurally by sua sponte considering Mr. DeChick’s unconditional ownership under 38 C.F.R. § 74.3(b) without providing AmBuild notice of the alleged defect or an opportunity to respond. Pl.’s Mem. at 8-10.
CVE’s and OSDBU’s determination was an informal agency adjudication, governed by
the “minimal [procedural] requirements” set forth in 5 U.S.C. § 555 of the APA.
Pension Benefit
*11
Guar. Corp. v. LTV Corp.
,
A party is entitled to appear in person or by or with counsel or other duly qualified representative in an agency proceeding. So far as the orderly conduct of public business permits, an interested person may appear before an agency or its responsible employees for the presentation, adjustment, or determination of an issue, request, or controversy in a proceeding, whether interlocutory, summary, or otherwise, or in connection with an agency function.
5 U.S.C. § 555(b);
see also Advanced Sys. Tech., Inc. v. United States
,
As a matter of administrative law, the protections afforded by Section 555 of the APA
correspond to procedural due process.
See Pension Benefit
,
Before adverse action is to be taken by an agency, . . . the individual immediately concerned should be apprised not only of the contemplated action with sufficient precision to permit his preparation to resist, but, before final action, he should be apprised of the evidence and contentions brought forward against him so that he may meet them.
Joint Anit-Fascist Refugee Committee
,
required for a protest under 48 C.F.R. § 819.307, so the decisions by CVE and OSDBU on a protest constitute informal adjudications.
In its argument, AmBuild points to this court’s decision in
Miles
where OSDBU’s failure
in an agency protest to notify a veteran about the agency’s self-initiated examination into the
veteran’s unconditional ownership contravened the procedural protections of Section 555 of the
APA. Pl.’s Mem. at 8-9 (referring to
Miles
,
The government also cites Miles as precedent for the proposition that “OSDBU may review and decide status issues in addition to those presented by the protestor and contracting officer.” Def.’s Cross-Mot. at 13. But, to support the result in this case, the government relies on post- Miles amendments to 48 C.F.R. § 819.307 that require CVE to determine SDVOSB status based on the “totality of the circumstances.” Id. at 13-14; see 48 C.F.R. § 819.307(e) (“The Director, CVE, will determine the SDVOSB or VOSB status of the protested concern based upon the totality of circumstances within 21 business days after receipt of the status protest.”). The government relies on that regulatory text to construe the term “totality of circumstances” to expand the grounds on which CVE might act. Def.’s Cross-Mot. at 14.
When interpreting an agency regulation, the rules of statutory construction apply.
Roberto v. Department of Navy
,
*13
In this instance, it is well established that the plain meaning of “totality of circumstances”
is unambiguous and simply designates a standard of review used in making a legal judgment.
See, e.g.
,
Lough v. Brunswick Corp.
,
During the agency-level protest, AmBuild did not, at a “at a meaningful time and in a
meaningful manner,”
Mathews
,
The government alternatively advances the argument that notice of CVE’s determination
and the right to appeal that decision satisfied Section 555 of the APA. Def.’s Mot. at 14-15
(“[T]he decision itself put AmBuild on notice that it did not meet the requirements contained in
38 [C.F.R.] § 74.3(b) with respect to unconditional ownership . . . . AmBuild then had the
opportunity to be heard before the agency [on appeal] and to submit documentation into the
record with respect to the unconditional ownership issue.”). This effort is wholly unconvincing.
AmBuild’s appeal focused on the fact that CVE evaluated an outdated Operating Agreement,
dating to 2011, notwithstanding that AmBuild had provided the current Operating Agreement
adopted in 2014, that the 2014 Operating Agreement explicitly provided that “[t]he Company
shall be managed by the Managing Member,”
i.e.
, Mr. DeChick, and that CVE had improperly
concluded that provisions contained in Section 6.3 of AmBuild’s Operating Agreement were
legally distinguishable from a right-of-first-refusal provision and somehow restricted
Mr. DeChick’s ownership and control. AR 35-274 to -78 (AmBuild’s Appeal);
see also
AR 36-
313 (Appeal Decision). On appeal, the Executive Director of OSDBU corrected CVE’s
improper reliance on an outdated Operating Agreement and found that the current Operating
Agreement adequately showed that Mr. DeChick indeed was the Managing Member with control
over AmBuild. AR 36-315 to -16. The Executive Director, however, went further to construe
*14
provisions of the current Operating Agreement relating to “Involuntary Withdrawal.” AR 36-
317. The Executive Director pointed to events that included “being adjudicated bankrupt, having
to transfer interest through a court order or operation of law, or the appointment of a trustee,
receiver, or liquidator for the Member or all or any substantial part of the Member’s properties
without the Member’s agreement or acquiescence.”
Id.
On that basis, not previously identified,
the Executive Director concluded that AmBuild was not within the unconditional ownership of
Mr. DeChick, the disabled-veteran 80-percent owner. AR 36-317 to -18. Consequently, the
appeal did not assuage the problem of inadequate procedural due process.
See Rambus Inc. v.
Rea
,
In short, terminating AmBuild’s SDVOSB status without notifying or giving AmBuild
the opportunity to respond to the unconditional ownership issue contravened “the minimal
requirements” for an informal adjudication set forth in Section 555 of the APA.
Pension Benefit
,
2. Arbitrary and capricious nature of the agency’s decision.
AmBuild further avers that the agency’s decision to disqualify AmBuild as a SDVOSB and remove AmBuild from the VetBiz VIP database based on ownership clauses in its 2014 Operating Agreement was arbitrary, capricious, and contrary to law. See Pl.’s Mem. at 17-26. A SDVOSB’s ownership, as defined in 38 C.F.R. § 74.3(b), must not be subject to “conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity).” These restrictions however, are qualified by inclusion of the proviso that “[t]he pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms.” Id. In short, the regulation sets forth prohibited arrangements that would cause ownership benefits to vest in non-veterans, while accommodating and providing exceptions for normal commercial arrangements.
The Executive Director of OSDBU affirmed CVE’s removal of AmBuild from the SDVOSB database on the ground that Article I, Clauses iii, v, and ix, of the 2014 Operating Agreement, relating to bankruptcy, receivership, and transfer by court order or operation of law, permitted sale of Mr. DeChick’s 80-percent majority holding of AmBuild. See AR 36-315 to -17 *15 (quoted in part supra , at 6). Notably, the government now recasts the basis OSDBU’s decision, relying instead on Article I, Clauses iii, vi, and ix, as proof that Mr. DeChick’s ownership was “subject to arrangements that could cause or potentially cause his ownership interests to go to another.” Def.’s Cross-Mot. at 19.
The disparity between OSDBU’s reliance on Clause v and the government’s reliance on Clause vi is of no consequence because neither of those clauses abridges the ownership requirements of 38 C.F.R. § 74.3(b). Clause v addresses the transfer of ownership property only if that member “seeks, consents to, or acquiesces in the appointment of a trustee . . . [or] receiver.” AR 36-367 . This clause concerns personal insolvency and will be addressed below in connection with Sections iii and ix. Clause vi recites a “reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief,” referring to a corporate entity, AR 38-367, and thus is inapplicable by its terms to Mr. DeChick as an individual. In short, Clause vi of AmBuild’s 2014 Operating Agreement provides no basis for OSDBU’s decision.
Clause iii of the 2014 Operating Agreement provides for involuntary withdrawal in the
event that “the Member is adjudged bankrupt or insolvent or there is entered against the Member
an order for relief in any bankruptcy or insolvency proceeding.” AR 38-365. The government
argues that personal bankruptcy does not ordinarily result in the divesture of ownership, but
under the 2014 Operating Agreement, Mr. DeChick would be forced to terminate his ownership
shares upon the occurrence of any type of personal bankruptcy. Def.’s Cross-Mot. at 20. That
argument is inconsistent with Federal bankruptcy law. The commencement of a bankruptcy case
“creates an estate” comprised of the debtor’s property. 11 U.S.C. § 541. And, under New York
law, a debtor’s property subject to the bankruptcy estate includes his or her ownership rights in a
limited liability company.
See, e.g.
,
In re McCormick
,
Clause ix of the 2104 Operating Agreement similarly is permissible under 38 C.F.R.
§ 74.3(b) because it deals with “normal commercial practices” for doing business.
See Miles
,
*17
Finally, the government intimates that the foregoing clauses create a condition
subsequent because, upon the occurrence of any events listed as being an “Involuntary
Withdrawal,” Article 6.3 of the 2014 Operating Agreement requires Mr. DeChick offer to sell his
entire ownership interest to Mr. Claus and Mr. Riedinger. Def.’s Cross-Mot. at 20-21, 23;
see
also
AR 36-317 (reciting the Executive Director of OSDBU’s finding that “Section 6.3 forces
the [Member] to offer to sell his shares should any of the events listed in Article [I] occur”).
Article 6.3 cannot be read in isolation, however, but rather must be interpreted in tandem with
the “Involuntary Withdrawal” provisions of the Agreement.
See Summerfield Hous. Ltd. P’ship
v. United States
,
In short, the government has neither “‘provided a coherent and reasonable explanation of
its exercise of discretion’” in decertifying AmBuild,
Impresa Construzioni
,
C. Prejudice
To obtain relief in a bid protest, AmBuild must also demonstrate “both significant error
in the procurement process and prejudice to its posture in the process.”
PGBA, LLC v. United
States
,
D. Equitable Relief
When determining whether to issue a permanent injunction, “the court must consider
whether (1) the plaintiff has succeeded on the merits, (2) the plaintiff will suffer irreparable harm
if the court withholds injunctive relief, (3) the balance of hardships to the respective parties
favors the grant of injunctive relief, and (4) the public interest is served by a grant of injunctive
relief.”
Centech Grp.
,
AmBuild has succeeded on the merits of its protest, and it has suffered irreparable harm
by OSDBU’s decertification of it as a SDVOSB, disqualifying it from the contractual award
under the pertinent solicitation and removing it from the VetBiz VIP database. Balancing the
hardships between AmBuild and the government, the court determines that the balance tips in
AmBuild’s favor. The government has failed to make any showing that an injunction constitutes
a hardship for VA. Any possible harm to VA has been forestalled by the accelerated briefing
schedule proposed by the parties and adopted by the court, and by the fact that the agency has
stayed the contract with Welch.
See
Hr’g Tr. 34:18-20. Considering the severity of the harm
AmBuild will suffer without equitable relief, plus its success on the merits, the balance of
hardships weighs in favor of granting injunctive relief. Finally, the public has a significant
interest in the effective, reliable, and coherent operation of VA’s Veterans First Contracting
Program, just as it does in preserving the integrity of the competitive SDVOSB procurement
process. Those interests are best served by adherence to required procedures and evaluative
steps for a procurement.
See Wackenhut Servs. Inc. v. United States
,
CONCLUSION
For the reasons stated, AmBuild’s motion for judgment on the administrative record is GRANTED, and the government’s cross-motion for judgment on the administrative record is DENIED. The determination made by OSDBU on August 7, 2014, rendering AmBuild ineligible as a SDVOSB, is set aside. VA shall restore AmBuild as an approved and certified SDVOSB and reinstate AmBuild in the VetBiz VIP database. VA shall consider AmBuild’s apparent low bid in response to the Solicitation. The clerk shall enter judgment in accord with this disposition.
AmBuild is awarded its costs of suit.
It is so ORDERED .
s/ Charles F. Lettow Charles F. Lettow Judge
Notes
[1] Because this order might have contained confidential or proprietary information within the meaning of Rule 26(c)(1)(G) of the Rules of the Court of Federal Claims (“RCFC”) and the protective order entered in this case, it was initially filed under seal. The parties were requested to review this order and to provide proposed redactions of any confidential or proprietary information. No redactions were requested.
[2] The recitations that follow constitute findings of fact by the court drawn from the
administrative record of the procurement and the parties’ evidentiary submissions regarding
standing, prejudice, and equitable factors.
See Bannum, Inc. v. United States
,
[3] “AR __” refers to the administrative record filed with the court in accord with RCFC 52.1(a). The administrative record has been subdivided into tabs. The first number in a citation to the administrative record refers to a particular tab, and the number after the hyphen refers to the page number of the administrative record, e.g. , “AR 28-193” refers to page 193, which is found in tab 28. The pages of the administrative record are paginated sequentially without regard to the tabs.
[4] The date will be omitted from further citations to the transcript of the hearing conducted on September 26, 2014. One of the prior contracts won by AmBuild was subject to an administrative protest based on the contention that it was affiliated with a much larger construction company. Hr’g Tr. 7:4-10. That protest was resolved by the Small Business Administration in AmBuild’s favor. Id .
[5] CVE’s approval of verified status extends for a two-year term. 38 C.F.R. § 74.15(a). Verification may be renewed.
[6] The Veterans Affairs Acquisition Regulation System (“VAAR”), codified at 48 C.F.R. Parts 801-873, permits an offeror to challenge another offeror’s SDVOSB status through an agency-level protest. See 48 C.F.R. § 819.307.
[7] In its briefing, the government represented that AmBuild did not submit this documentation to CVE. Def.’s Mot. at 4. This assertion is contradicted by the Record. See AR 38-348; see also Hr’g Tr. 9:14 to 11:8, 19:24 to 24:18. The court finds that AmBuild, through its attorney, forwarded the requested documentation, including its 2014 Operating Agreement, to both SBA and OSDBU on June 27, 2014.
[8] Two years earlier, SBA had rejected a similar protest related to AmBuild. As SBA stated in rejecting Welch’s protest in 2014: “In 2012, SBA Area office made a size determination of A[m]Build and found the company to be a small business for size standard $33.5 Million.” AR 32-253.
[9] Although AmBuild had supplied its 2014 Operating Agreement by electronic means on June 27, 2014, see AR 38-348, -364 to -85, CVE looked to the earlier 2011 Operating Agreement as the basis for its self-initiated inquiry.
[10] CVE had also concluded that Mr. DeChick did not possess control over AmBuild because Section 5 of its 2011 Operating Agreement required unanimous consent of members for various management activities. AR 33-258 to -59. On appeal, the Executive Director of OSDBU overturned CVE’s ruling on this ground because the pertinent operating agreement, i.e. , the 2014 Operating Agreement, provided that only the Managing Member’s approval was needed for management activities. AR 36-315 to -16, -18. Because Mr. DeChick served as Managing Member at the time of CVE’s Final Determination, the Executive Director found that Mr. DeChick possessed control over AmBuild pursuant to 38 C.F.R. § 74.4(e). Id.
[11] 5 U.S.C. §§ 551(5) defines rule-making as an “agency process for formulating, amending, or repealing a rule,” and Section 551(7) defines adjudication as an “agency process for the formulation of an order.” Formal, as contrasted to informal, adjudicatory procedures are addressed by 5 U.S.C. § 554(a), which “applies . . . in every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing.” No hearing is
[12] In response to the decision in
Miles
, the VA issued an interim final rule on September
30, 2013, amending 48 C.F.R. § 819.307, to establish an administrative appeal to the Executive
Director, OSDBU, from a decision by CVE, and to provide that CVE “will determine the
SDVOSB or VOSB status of the protested concern based on the totality of circumstances.” 78
Fed. Reg. 59,861-01, 59,865 (Sept. 30, 2013). VA considered that “[a] totality of the
circumstances standard is appropriate because, as the integrity of the SDVOSB/VOSB set-aside
program is paramount, this permits the Director, CVE, to consider facts or issues not specifically
raised by the protesting party that impact the SDVOSB/VOSB status and compliance with 38
C[.]F[.]R[.] Part 74 of the protested party.”
[13] AmBuild correctly notes that “[n]otification that a SDVOSB is being challenged based on the SDV’s control does not notify the SDVOSB that its ownership is also at issue.” Pl.’s Mem. at 14.
[14] These “Involuntary Withdrawal” provisions of AmBuild’s 2014 Operating Agreement appear to be boilerplate clauses taken from statutory default provisions governing LLCs that are found in the laws of many states. For example, Clauses i through vi of AmBuild’s 2014 Operating Agreement mirror the statutory provisions of Section 18-304 of the Delaware Limited Liability Company Act. Compare AR 36-366 to -67 (Clause iv of the 2014 Operating Agreement providing for involuntary withdrawal in the event that “the Member files a petition seeking for the Member any reorganization arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation”), with Del. Code Ann. tit. 6, § 18-304(1)(d) (1992) (stating that a “person ceases to be a member of a limited liability company” when that member “[f]iles a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation”); see also Ga. Code Ann. § 14-11-601.1(4) (1999); Md. Code Ann., Corps. & Ass’ns §§ 4A-606(3)-(5) (2013).
[15] The statutory default rule in many states is that the bankruptcy of a member in an LLC results in an involuntary withdrawal. For example, under Delaware statute, “[a] person ceases to be a member of a limited liability company upon the happening of [] the following event[]: . . . [the person i]s adjudged a bankrupt or insolvent, or has entered against the member an order for relief, in any bankruptcy or insolvency proceeding.” Del. Code Ann. tit. 6, § 18-304(1)(c) (1992). Correlatively, in New Jersey, “[a] person is dissociated as a member from a limited liability company when . . . [i]n a member-managed limited liability company, the person . . . becomes a debtor in bankruptcy.” N. J. Stat. Ann. § 42:2C-46(g) (2014); see also Cal. Corp. Code § 17706.02(g) (2014). These statutes demonstrate that loss of membership interest upon adjudication of bankruptcy is a standard consequence for a member of a limited liability company.
[16] The court declines to direct an award of a contract to AmBuild under the Solicitation.