SDVOSBs—and basic fairness and common sense—were big winners in a recent decision issued by the U.S. Court of Federal Claims.
In its decision, the Court held that the VA’s Center for Verification and Evaluation violated the law when it disqualified a SDVOSB, without giving the SDVOSB the opportunity to contest the reasons for the disqualification. In an opinion reminiscent of last year’s landmark Miles Construction case, the Court then held that the CVE’s substantive reasons for the disqualification were arbitrary and unreasonable.
In AmBuild Company, LLC v. United States, No. 14-786C (Oct. 10, 2014), AmBuild was the apparent lowest-cost bidder on a VA SDVOSB set-aside solicitation. The second-lowest bidder, Welch Construction Inc., filed a protest challenging AmBuild’s SDVOSB status. Welch contended that AmBuild was not controlled by a service-disabled veteran and that AmBuild exceeded the applicable size standard.
The U.S. Small Business Administration, which has jurisdiction over size issues, reviewed Welch’s small business allegation and determined it to be unfounded. The CVE proceeded to separately analyze Welch’s allegation regarding SDV control.
Although neither Welch nor the VA’s Contracting Officer had raised any allegations regarding AmBuild’s compliance with the SDVOSB ownership regulations, the CVE examined AmBuild’s Operating Agreement and determined that AmBuild did not meet the requirements for unconditional ownership.
Specifically, the CVE focused on Article 1 of AmBuild’s 2014 Operating Agreement which provides for the involuntary withdrawal of a member upon the occurrence of certain events. The CVE particularly relied on two clauses in Article I. First, Clause iii providing for involuntary withdrawal in the event a “Member is adjudged bankrupt or insolvent or there is entered against the Member an order for relief in any bankruptcy or insolvency proceedings.” Second, Clause ix providing for the transfer of ownership “on account of a court order or otherwise by operation of law.” The CVE found that Article I violated the SDVOSB ownership requirements under 38 C.F.R. § 74.3(b) because, in the CVE’s view the “Involuntary Withdrawal” provision of that agreement “include[s] numerous conditions, that are outside of [service disabled veteran owner’s] control, which would force [the owner] to sell his ownership interest to the [c]ompany or remaining [m]embers.”
During the protest process, AmBuild was never informed that CVE was investigating an additional issue, and was not given any opportunity to respond to the CVE’s concerns regarding the ownership provision. AmBuild first learned of the CVE’s Operating Agreement concern when AmBuild received a CVE determination declaring AmBuild to be ineligible for award of the contract.
AmBuild appealed the CVE’s decision to the Executive Director of VA’s Office of Small and Disadvantaged Business Utilization, which denied the appeal. AmBuild then filed suit in the Court, alleging the VA’s disqualification of AmBuild violated procedural due process and was arbitrary and capricious.
The Court first addressed the CVE’s failure to notify AmBuild of the new issue under investigation. The court wrote that although the CVE has the discretion to expand a SDVOSB investigation beyond the issues raised by the protester or the contracting officer, the SDVOSB must be given notice and the proper opportunity to respond to the inquiry. Accordingly, the VA’s termination of AmBuild’s SDVOSB status without notification or the opportunity to respond violated the “minimal requirements” for an informal adjudication.
Next, the Court turned to the substantive reason the agency disqualified AmBuild. The Court examined AmBuild’s 2014 Operating Agreement and determined that the “Involuntary Withdrawal” provisions appeared to be boilerplate clauses taken from a standard limited liability company operating agreement. The Court wrote that, contrary to the VA’s arguments, there are certain standard commercial arrangements regarding bankruptcy, receivership, and transfer by the court or operation of the law that do not abridge the ownership requirement of a SDVOSB. For example, the provision for an involuntary withdrawal in the event that a member is adjudicated bankrupt is consistent with Federal bankruptcy law because personal bankruptcy creates an estate comprised of the debtor’s property which includes his or her ownership rights in a limited liability company.
The Court held that the clauses of AmBuild’s operating agreement were not inconsistent with the ownership requirements of SDVOSB regulations because those clauses deal with “normal commercial practices” and therefore did not “affect the unconditional nature of ownership” within the meaning of 38 C.F.R. § 74.3(b). The Court ruled in AmBuild’s favor and issued an order requiring the VA to recertify AmBuild as a SDVOSB.
The Court’s decision in AmBuild is an important victory not just for AmBuild, but for all SDVOSBs. As the Court held, if the CVE questions a SDVOSB’s eligibility as part of a protest, the CVE must give the SDVOSB the opportunity to understand the CVE’s specific concerns and respond to those concerns. Moreover, (as was the case in Miles Construction), the CVE’s interpretation of its regulations should not unnecessarily prohibit “normal commercial practices,” such as the provisions in AmBuild’s operating agreement.
Hopefully, the CVE will take these lessons to heart.