Family Members’ Joint Involvement In Third Company Created Affiliation, Says SBA OHA

A self-certified small business was found affiliated with a company owned by the business owner’s father, even though the son’s company had no meaningful business relationship with the father’s company.

In a recent size appeal decision, the SBA Office of Hearings and Appeals found that the self-certified small business had not rebutted the presumption of affiliation with the father’s company because the father and son were jointly involved in a third business, and thus could not establish that their personal business interests were separate.

OHA’s decision in Size Appeal of W&T Travel Services, LLC, SBA No. SIZ-5721 (2016) involved an Air Force solicitation seeking a contractor to provide bus transportation services at bases around San Antonio.  The solicitation was issued as a small business set-aside under NAICS code 485113 (Bus and Other Motor Vehicle Transit Systems), with a corresponding $15 million size standard.

After evaluating competitive proposals, the Air Force announced that BryMak & Associates, Inc. was the apparent successful offeror.  An unsuccessful competitor, W&T Travel Services, LLC, subsequently filed a size protest.  W&T alleged that BryMak was affiliated with a number of other entities.

The SBA Area Office determined that BryMak was 100%-owned by Mr. Chris Hamby, who also served as BryMak’s secretary/treasurer and sole director.  The SBA Area Office determined that Chris Hamby controlled BryMak.

The SBA Area Office found that Chris Hamby had ownership interests in several other entities.  One of these entities was Hamby Enterprises Partnership, Ltd. (HEP).  Chris Hamby owned 49% of HEP, his sister, Angela Hamby owned 49%, his father, Terry Hamby, owned 1%, and his mother, Judy Hamby, owned the remaining 1%.  Terry Hamby and Judy Hamby were the managing General Partners of HEP, while Chris Hamby and Angela Hamby were limited partners.  The SBA Area Office found that Terry Hamby and Judy Hamby had the power to control HEP by virtue of their powers as General Partners.

The SBA Area Office concluded that all four Hambys had an identity of interest based on their family relationship.  The SBA Area Office determined that BryMak was affiliated with HEP based on the family relationship.

The SBA Area Office then turned to Hamby Farms, LLC (HF).  The SBA Area Office found that Terry Hamby owned 50% of HF and served as its Managing Member.  Therefore, the SBA Area Office determined, Terry Hamby controlled HF.  The SBA found, however, that Chris Hamby and BryMak had never had any business relationship with HF.  The SBA found that BryMak and HF were not affiliated.

After reviewing BryMak’s average annual receipts (as well as the receipts of various joint ventures and affiliates, including HEP), the SBA Area Office found that BryMak did not exceed the $15 million size standard.  The SBA Area Office issued a size determination finding BryMak to be an eligible small business for purposes of the Air Force contract.

W&T filed a size appeal with OHA.  W&T argued, in part, that the SBA Area Office had erred in determining that BryMak was not affiliated with HF.  W&T argued that there was an identity of interest between Terry Hamby and Chris Hamby based on their father-son relationship, and that there was no clear fracture between Terry Hamby and Chris Hamby based on their common involvement in HEP.

OHA wrote that, under the SBA’s affiliation regulations, there is a “rebuttable presumption that close family members have identical interests and must be treated as one person.”  Although this presumption can be rebutted by showing a “clear line of fracture among the family members,” such a clear line of fracture only exists where the family members have no (or minimal) business involvement, or the family members are estranged.

In this case, the SBA Area Office found that “Chris and Terry Hamby . . . are not estranged and they both have ownership interests in HEP.”  But despite this finding, the Area Office determined that BryMak and HF were not affiliated because “BryMak and HF have no business relationships . . ..”

This analysis, OHA wrote, was “faulty.”  OHA explained, “[b]ecause it is the familial relationship that gives rise to the presumption, the inquiry takes place with respect to the family members themselves.”  OHA continued:

Accordingly, if a challenged firm does not rebut the presumption of identity of interest between family members, all of the family members’ investments are aggregated.  In this case, with respect to BryMak’s affiliation with HEP, the Area Office found that there was an identity of interest between Chris and Terry Hamby and there was not clear fracture.  Then, when considering whether BryMak is affiliated with HF, the Area Office seemingly found that there was such clear fracture.  This conclusion is clearly erroneous because it is incoherent to find an identity of interest between two family members when analyzing affiliation with one firm, and then, in the same size determination, find no affiliation with a second firm controlled by one of those family members.  Doing so implicitly denies the identity of interest just found.  Accordingly, because the Area Office explicitly found that Chris and Terry Hamby have an identity of interest, it is irrelevant whether the business connections between HF and BryMak are minimal.  Their interests are aggregated because they have mutual involvement in another concern–HEP.

OHA granted W&T’s size appeal and reversed this aspect of the SBA Area Office’s size determination.

Even when close family members understand that their familial relationship may cause affiliation, it is not unusual for those same family members to believe that affiliation won’t exist so long as the companies in question don’t do business.  But as the W&T Travel Services size appeal demonstrates, it is the business relationships between the family members, not the business relationships between the specific companies, that are at the heart of a familial relationship affiliation analysis.  Even where, as in W&T Travel Services, the companies in question do little or no business together, they may be affiliated if the family members who control those companies have mutual involvement in other businesses.