8(a) Program: “Honest Mistake” Not Grounds For Termination

An honest mistake made in a company’s 8(a) Program application may not support termination of the company from the 8(a) Program.

In a recent decision, the SBA’s Office of Hearings and Appeals held that the SBA could not validly terminate an 8(a) participant for submitting false information in the 8(a) application because the SBA had not considered whether the 8(a) participant honestly, and reasonably, believed that she was not required to report the information.

OHA’s decision in The DESA Group, Inc., SBA No. BDPT-543 (2015) involved the SBA’s decision to terminate The DESA Group, Inc. from the 8(a) Program.  The SBA provided several justifications for its decision.  Among its justifications, the SBA contended that DESA’s disadvantaged owner, Dionne Fleshman, had made a false statement during her company’s application for 8(a) certification.

The SBA noted that, at the time DESA applied, the SBA Form 912 asked applicants to state whether they had ever been arrested or charged with a crime.  The SBA noted that Ms. Fleshman had responded “no,” when in fact, she had been charged in 1991 with bouncing a check, a misdemeanor.  (DESA was admitted to the 8(a) Program in 2010–nearly 20 years after the incident in question).

Ms. Fleshman explained that she did not believe that she had been criminally charged because she was never arrested and resolved the issue by paying the check at the courthouse.  After she did so, court personnel told her that the incident was “over.”  Ms. Fleshman argued that her response on the Form 912 was not a false statement because responding “no” was an honest mistake on her part.

Citing a 2005 OHA decision, the SBA contended that it is “not a defense to a termination action that a false statement was inadvertently made.”  In other words, the SBA argued, even if Ms. Fleshman had made an honest mistake about an incident that occurred 20 years ago, her “no” answer was still a false statement and justified DESA’s termination from the 8(a) Program.

OHA noted that the termination regulation relied upon by the SBA was “silent as to whether the submission must be knowingly false.”  However, another regulation states that termination proceedings should be initiated only when the SBA learns that false information has been “knowingly” submitted by an applicant.  OHA continued:

The policy rationale for including an intentionality element should be self-evident. A deliberate lie is compelling evidence of poor character and integrity on the part of the applicant, making him or her unsuitable for the 8(a) BD Program. By comparison, a mistake shows little more than simple carelessness.

OHA held that “a honest and reasonable mistake is a valid defense” to an allegation that false information was submitted in the 8(a) application.  OHA held that the SBA had erred by failing to consider “whether a reasonable person in [Ms. Fleshman’s position] would believe the bounced check constituted a criminal offense.”

Unfortunately for DESA, it won the battle, but lost the war.  OHA held that the SBA had validly terminated DESA for another, unrelated reason, and denied DESA’s appeal.

There is no doubt in my mind that the SBA should be free to terminate a company from the 8(a) Program if that company, or its owners, knowingly submitted material, false information as part of the application process.  But I also think that 8(a) Program participation is too important to be terminated because of a reasonable, good faith mistake.  OHA’s decision in the DESA case will help ensure that 8(a) participants are not removed from the 8(a) Program due to honest mistakes during the application process.

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