Déjà Vu all over again. In 2012 the US District Court for the District of Columbia remanded CS-360, LLC’s case back to the Department of Veterans Affairs (VA) “for further consideration and exclamation of its decision to deny Plaintiffs application” for registration in the VetBiz Vendor Information Page (VIP) database. Upon reconsideration, the VA once again denied CS-360’s application to be included in the VetBiz VIP database. CS-360 again challenged the VA’s determination in the Federal District Court. This time, unfortunately for CS-360, the Court granted the VA’s motion for summary judgment, sustaining the Agency’s denial of the applicant company’s conclusion in the Veterans First program.
In finding for the VA, the Court wrote:
Although the VA’s Revised Final Determination is not a model of clarity, the basis for the VA’s decision is now apparent from the VA’s written decision. Based on that decision, the Court cannot conclude that the decision is arbitrary or capricious, unsupported by substantial evidence or otherwise contrary to law. To the contrary, the Court concludes that there is an adequate basis in the record to support the decision, and the VA’s decision to deny Plaintiffs application survives this Court’s deferential standard of review.
The Center for Veterans Enterprise, now the Center for Verification and Eligibility, originally denied CS-360’s application in June 2010 and denied its Request for Reconsideration in November 2010. CS-360 filed a complaint in the Federal District Court for the District of Columbia and the court dismissed to of CS-360’s claims 1) the VA had violated CS-360’s Due Process rights; and 2) the VA had exceeded its statutory authority and promulgating the regulations underlying the case. Namely, in 2010, CS-360 had argued that the function of establishing procedures relating to the verification of SDVOSBs rested with the SBA. This argument is not terribly surprising considering that the VA’s role of verifying SDVOSBs had only really begun in earnest in 2010 following the promulgation of the final rules now contained in 38 CFR 74.
While denying those two claims, the Federal District Court did sustain CS 360’s claim that the VA violated the Administrative Procedure Act because it acted arbitrarily and capriciously in denying CS-360’s application for inclusion in the VetBiz VIP database. In sustaining that claim, the Court wrote:
Given the ambiguous relationship between the Initial Determination and Final Decision, the vague and generalized explanations provided by the CVE on the administrative level, and the new explanations proffered by the VA before this Court, the Court cannot say with any level of confidence that it knows the precise grounds for the VA's decision to deny CS360's application for inclusion in the VetBiz VIP database and whether those grounds would hold up under review. CS-360, LLC v. U.S. Dep't of Veterans Affairs, No. CV 11-78 (CKK), 2015 WL 1925996, at *2 (D.D.C. Apr. 29, 2015)
The Court remanded CS-360’s case back to the VA because the Agency had “failed to provide a satisfactory contemporaneous explanation for its decision to deny CS 360’s application.” Following this remand, the VA requested that the SBA perform a size determination, which CS-360 ultimately appealed unsuccessfully.
The Court determined this time that the VA had sufficiently supported its denial of CS-360’s inclusion in the VetBiz VIP database. The agency had concluded that non-veterans controlled or had the power to control CS-360 because of provisions in the company’s operating agreement that allowed the Managing Member (a service disabled veteran) to delegate authority to others without retaining control. The VA also cited initial funding of CS-360 by nonveterans associated with B & R Construction Services, LLC; a mentor-protégé agreement with B & R Construction Services, which suggested that B & R provided resources that allowed CS-360 to function; and CS-360’s lack of independent resources. The Court found that the Agency’s reasons taken together formed a sufficient basis for the Court to conclude that there was a “rational connection between the facts found in the choice made.”
Delegation of Authority
CS-360’s operating agreement allowed the Managing Member to:
designate employees of the company or other individuals as officers of the company as he shall deem necessary or desirable to carry on the business of the company and the Managing Member may delegate to such officers such power and authority as the Managing Member deems advisable.
The VA determined and the Court agreed that this provision without a qualifier that the Managing Member retain authority over the delegation of authority would allow delegation of authority to someone other than a service-disabled veteran without subjecting that delegation to the veteran’s authority. (Even framing the sentence was painful).
Reliance on B & R Construction
Had the Court’s analysis or the VA’s basis for denying CS-360’s inclusion in the VetBiz VIP database stopped with its effective operating agreement, this case might be ripe for appeal to the US Court of Appeals for the Federal Circuit. However, for the five reasons the VA listed for denying CS-360 in the VetBiz VIP database had to do with its reliance on B & R Construction. According to the Court’s analysis, “all of the capital for CS-360 was provided by officers and employees of B & R Construction-with none provided by the service disabled veteran.” Secondly, CS-360 only had one additional employee beyond the service disabled veteran owner, which the VA concluded was not enough employees to support the activities of the business. The VA concluded that the Court agreed that CS-360’s reliance on B & R Construction employees made it susceptible to non-veteran control.
The VA also pointed to a mentor-protégé agreement between CS-360 and B & R construction, which was approved by the Department of Homeland Security in concluding that CS-360 was reliant on B & R Construction. While not concluding that mentor-protégé agreements are in and of themselves evidence of over reliance (this is a good thing since the VA sponsored its own version of a now defunct mentor-protégé program), the VA concluded that in this unique instance the agreement between CS-360 and B & R Construction was additional evidence of CS-360’s inability to perform without the support of B & R.
The VA went so far as to call the B & R-CS 360 relationship a “classic case of rent-a-veteran.” The Court analyzed that “in light of the factors discussed here and on the agency’s experience in managing the Service Disabled Veteran Owned Small Business program,” the VA concluded that the Managing Member contributed his service-disabled status and B & R contributed everything else necessary to make the business function. The Court found that the VA’s determination was not arbitrary or capricious, unsupported by substantial evidence, or otherwise contrary to law and from the agency’s decision to exclude CS-360 from the VetBiz VIP database.
Should the CVE have denied access to the VetBiz VIP database?
Some of you reading this article will cheer the CVE’s decision to exclude CS-360 from the VetBiz VIP database. You’ll say to yourself or to others that it isn’t fair for a veteran owned business to get funding and resources from a bigger company while simply lending that company the owner’s service-disabled status. However, notice that nowhere in the Court’s decision or in the CVE denial was there discussion as to the division of profits or who was ultimately calling the shots. There is no discussion as to the veteran owner, Mr. Walter Davis’s, ability to manage the concern, his credentials including his past experience in general contracting. The accusation is that he and his business became too intertwined with a bigger, more established construction company.
38 CFR 74.4(i)(3) specifically allows for veteran owners to borrow money at commercially reasonable rates and not surrender control. So, pursuant to the regulations and the CVE’s interpretation of those regulations, borrowing money at a commercially reasonable rate is preferable to taking an equity investor’s money. This position ignores the fact that creditors assume a higher priority over owners in the event of liquidation. It also ignores that fact that banks can recall loans or shrink lines of credit, seriously jeopardizing the veteran business owner’s cash flow.
I cannot speak to whether CS-360 was a legitimate business or a sham pass through. However, the Court states three times in its decision that the CVE’s Revised Final Determination, which came nearly two years after its original denial, was not a “model of clarity.” The CVE is tasked with protecting the program. In my opinion, that does not have to be at the exclusion of the benefit of the veteran business owner looking for ways to make his or her business succeed.
I invite your comments.