VA CVE Unreasonably Decertified SDVOSB, Court Rules

The VA Center for Verification and Evaluation unreasonably decertified an SDVOSB based on the results of an SBA SDVOSB decision.

According to the U.S. Court of Federal Claims, it was improper for the VA to remove the SDVOSB from the VA’s database without evaluating whether the SBA’s determination was consistent with the VA’s separate SDVOSB requirements.

The Court’s decision in Veterans Contracting Group, Inc. v. United States, No. 17-1015C (2017) was the fourth in a series of battles between Veterans Contracting Group, Inc., a VA-verified SDVOSB, on the one hand, and the SBA and VA, on the other.  My colleague Shane McCall and I have previously written about each of the other three cases: the SBA Office of Hearings and Appeals decision, the Court’s first decision involving the VA, and the Court’s decision in a case challenging the SBA OHA ruling.

All four cases involved an Army Corps of Engineers IFB for the removal of hazardous materials and the demolition of buildings at the St. Albans Community Living Center in New York.  The Corps set aside the IFB for SDVOSBs under NAICS code 238910 (Site Preparation Contractors).

After opening bids, the Corps announced that Veterans Contracting Group, Inc. was the lowest bidder.  An unsuccessful competitor subsequently filed a protest challenging VCG’s SDVOSB eligibility.

DoD procurements fall under the SBA’s SDVOSB regulations, not the VA’s separate rules. (As I’ve discussed many times on this blog, contrary to common misconception the government currently runs two separate SDVOSB programs: one under SBA rules; the other under VA rules).  The protest was referred to the SBA’s Director of Government Contracting for resolution.

The SBA determined that Ronald Montano, a service-disabled veteran, owned a 51% interest in VCG.  A non-SDV owned the remaining 49%.

The SBA then evaluated VCG’s Shareholder’s Agreement.  The Shareholders Agreement provided that upon Mr. Montano’s death, incapacity, or insolvency, all of his shares would be purchased by VCG at a predetermined price.  The SBA determined that these provisions “deprived [Mr. Montano] of his ability to dispose of his shares as he sees fit, and at the full value of his ownership interest.”  The SBA found that these “significant restrictions” on Mr. Montano’s ability to transfer his shares undermined the SBA’s requirement that an SDVOSB be at least 51% “unconditionally owned” by service-disabled veterans.  The SBA issued a decision finding VCG to be ineligible for the Corps contract.

When the SBA issues an adverse SDVOSB decision, the SBA forwards its findings to the VA Center for Verification and Evaluation.  After receiving the SBA’s findings, the VA CVE decertified VCG from the VetBiz database.

The Court and OHA reached different conclusions.

As my colleague Shane McCall wrote in this post, the Court concluded that the VA should not have removed VCG from the VetBiz database. While the Court didn’t directly overrule the SBA, the Court wrote that the SBA’s application of the “unconditional ownership” requirements was flawed.

The Court cited with approval two cases dealing with the VA’s SDVOSB regulations, AmBuild Co., LLC v. United States, 119 Fed. Cl. 10 (2014) and Miles Construction, LLC v. United States, 108 Fed. Cl. 792 (2013), agreeing with these cases that a restriction on ownership that is not executory (meaning not taking effect until a future event occurs) does not result in unconditional ownership. The Court issued a preliminary injunction ordering the VA to restore VCG to the VetBiz database, but reserved a final decision until further briefing in the case.

Things turned out far differently at OHA.  As I wrote in a September post, OHA held that the restrictions in VCG’s Shareholders Agreement prevented Mr. Montano from unconditionally controlling the company. OHA issued a decision upholding the SBA’s determination, and finding VCG ineligible for the Corps contract.

VCG challenged OHA’s decision at the Court.  In a strongly-worded opinion, the Court blasted the SBA’s interpretation of its regulations as “draconian and perverse,” but nonetheless held that the SBA was within its discretion to apply its rules in this harsh manner.  The Court upheld OHA’s decision finding VCG ineligible for the Corps contract.

That brings us (finally) to the fourth decision in the battle.  Here, the question was whether the VA had acted improperly by decertifying VCG from the VetBiz database.  As Shane McCall wrote earlier, the Court had already issued a preliminary injunction ordering the VA to restore VCG to the database; the question now was whether the Court would issue a final decision in VCG’s favor on the merits, and enter a permanent injunction.

The Court explained, in some detail, the background behind the separate SBA and VA SDVOSB programs.  The Court then wrote that the regulation at issue in this case was the VA’s regulation at 38 C.F.R. 74.2(e).  Under this regulation, “[a]ny firm registered in the VetBiz VIP database that is found to be ineligible due to an SBA protest decision or other negative finding will be immediately removed from the VetBiz VIP database” and ineligible to participate in the VA SDVOSB program until the SBA decision is overturned or overcome.

“This provision is not remarkable in isolation,” the Court wrote, “but due to the differences in the VA and SBA regulations . . . it can create anomalous results.” This is because “protest decisions by SBA, presumably applying SBA’s own regulations, could potentially displace VA’s cancellation and removal process without accounting for the differences between the two agencies’ underlying regulatory eligibility criteria.”

The Court held that it “disagrees with the government that Subsection 74.2(e) relieves CVE of any obligation to look beyond the fact that SBA has issued an adverse determination before removing an SDVOSB from the VetBiz VIP database.”  The Court continued:

[T]he eligibility requirements in the VA and SBA SDVOSB set-aside programs are similar in some respects but are materially divergent in others.  The differences are insignificant if and when the SBA protest giving rise to removal from the VIP database treats an area in which the regulations are the same or similar, e.g., the size of the business; if SBA determines that an SDVOSB is not small then it would be justifiably disqualified from both programs.  But in this case, an uncritical application of Subsection 74.2(e) would require an SDVOSB’s immediate removal from the VetBiz VIP database if the business fails to meet the SBA’s . . . definition of “unconditional” despite meeting the VA’s definition of the term . . ..

The Court wrote that it was “arbitrary for VA to mechanistically apply Subsection 74.2(e) without examining the basis for SBA’s ruling.”  Rather, “[i]n light of the distinct definitions of ‘unconditional ownership’ in the two programs, CVE must look beyond the fact of a ruling by SBA, to determine whether it was based on grounds consistent with or contrary to VA’s eligibility regulations.”  Because VA failed to undertake such an analysis, “there was no rational connection between the facts found and the choice made, thus rendering CVE’s action arbitrary and capricious.”

The Court granted VCG’s motion for the judgment on this part of its appeal, and made the prior injunction permanent.  The Court essentially overturned CVE’s decision removing VCG from the VA VetBiz database.

In my last post on the Veterans Contracting Group saga, I got a few things off my chest regarding the mess the “two SDVOSB programs” system creates for well-meaning veterans like Mr. Montano.  I’ll spare you another soapbox moment, but I hate seeing small businesses (and particularly SDVOSBs) harmed by the legal complexities, interpretations and divergences seen in these cases.

Sometime in 2018, the SBA and VA should unveil their proposed joint regulation to consolidate the SDVOSB eligibility requirements.  As the Veterans Contracting Group cases make clear, a unified set of rules is sorely needed.  Stay tuned.

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