One common way that contractors attempt to avoid affiliation is by limiting a particular individual to a minority ownership interest (often 49%).
But as a recent SBA Office of Hearings and Appeals case demonstrates, when a company’s owners are spouses (or other close family members), the SBA may disregard the legal ownership split, and treat the family members as one person for purposes of the affiliation rules.
OHA’s decision in Size Appeal of Gregory Landscape Services, Inc., SBA No. SIZ-5817 (2017) involved an Army solicitation seeking grounds maintenance at Fort Rucker, Alabama. The solicitation was issued as a WOSB set-aside under NAICS code 561730 (Landscaping Services), with a corresponding $7.5 million size standard.
After opening bids, the Air Force announced that Gregory Landscaping Services, Inc. was the apparent awardee. An unsuccessful competitor then filed a size protest. Although the size protest was untimely, the SBA saw potential merit to the protester’s allegations. The SBA adopted the size protest and initiated a size determination.
The SBA determined that Bethany Kellis owned 51% of Gregory. Her husband, Rhett Kellis, owned the remaining 49%. Rhett’s parents and siblings controlled Kellis Joint Venture, LLC (which OHA referred to as “KJV”). Additionally, Rhett’s parents and brother controlled NaturChem, Inc. Rhett was a minority owner of KJV, and was employed by NaturChem as its Vice President of Sales.
The SBA Area Office determined that “[a]s spouses, Bethany Kelllis and Rhett Kellis are treated as one party with a shared identity of interest as there is no clear line of fracture between them.” Therefore, “Bethany Kellis and Rhett Kellis each have the power to control [Gregory].”
Next, the SBA Area Office determined that Rhett’s parents and brother controlled KJV and NaturChem, “but they too share an identity of interest with Rhett Kellis.” Therefore, Gregory was presumed affiliated with KJV and NaturChem. The only remaining question was whether Gregory could rebut the presumption of affiliation by showing a clear line of fracture between Rhett, on the one hand, and his parents and siblings, on the other.
The SBA Area Office acknowledged that Rhett “holds no ownership interest in NaturChem; that [Gregory] and NaturChem do not share employees, facilities, or equipment; that there are no ‘loans, promissory notes, or other financial assistance” between [Gregory] and NaturChem; that the two companies perform ‘different services’ and are not in the same line of business; and that the business dealings between the companies amount to less than 1% of each company’s annual revenues.” However, Rhett was an owner of KJV and an officer of NaturChem, and NaturChem had done business with Gregory. The SBA Area Office found that Gregory had not demonstrated a clear line of fracture between Rhett and his relatives. The SBA Area Office issued a size determination finding Gregory to be affiliated with KJV and NaturChem.
Gregory filed a size appeal with OHA. Gregory argued that the SBA Area Office had effectively treated the presumption of affiliation as irrebuttable, and had erred by finding Gregory affiliated with KJV and NaturChem.
OHA wrote that it has “extensive case precedent” interpreting the SBA’s affiliation regulations “as creating a rebuttable presumption that close family members have identical interests and must be treated as one person.” A challenged firm can rebut the presumption by showing a clear line of fracture. Factors that may be pertinent in showing a clear line of fracture “include whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant subcontracting between the firms; and whether the family members participate in multiple businesses together.”
In this case, OHA said, Gregory “identified several considerations that would tend to rebut the presumption” of affiliation.” Nevertheless, “the major obstacle for [Gregory] in establishing a clear line of fracture is Rhett Kellis’s employment at NaturChem.” OHA explained that “when a family member works at a company owned and controlled by other close family members, this may be grounds for finding no clear fracture between them.” Additionally, “Rhett Kellis . . . shares a common investment with his parents and brother in KJV.” On these facts, “the Area Office could reasonably conclude that [Gregory] did not establish a clear line of fracture, and did not rebut the presumption of identity of interest.” OHA affirmed the Area Office’s size determination.
OHA’s decision in Gregory Landscaping Services demonstrates how the familial relationships affiliation rule can be applied at two levels–both internally and externally. Although Rhett Kellis was only a 49% owner of Gregory, the SBA aggregated his interest with that of Bethany Kellis, his wife, and found that Rhett Kellis controlled Gregory. The SBA then looked externally, and presumed Gregory to be affiliated with companies controlled by Rhett’s parents and brother.
Gregory Landscaping Services shows that when a company’s owners are close relatives, legal ownership splits–such as the 51/49 split here–may be disregarded in the SBA’s affiliation analysis. And the decision is another reminder that small businesses must be very careful about relationships with companies controlled by close family members. Even where, as here, the companies themselves do little business together, affiliation can exist.