Respiratory Therapy Specialists of America, Inc., No. MSB-403 (June 2, 1992)
Docket No. MSBE-91-10-3-25


                    UNITED STATES OF AMERICA
                  SMALL BUSINESS ADMINISTRATION
                 OFFICE OF HEARINGS AND APPEALS
                     WASHINGTON, D.C. 20416

IN THE MATTER OF:             )
                              )
                              ) Docket No.   MSBE-91-10-3-25
Respiratory Therapy           )
Specialists of America, Inc.  )

                           APPEARANCES

For the Petitioner:           For the Agency:
Anthony W. Parker, Esq.       Michael K. Wyatt, Esq.
Anthony W. Parker and         General Counsel
  Associates, P.C.            Donald A. Morrison, Esq.
Suite 200                     Agency Representative
2000 L Street, N.W.           Small Business Administration
Washington, D.C. 20036        409 Third Street, S.W.
                              Washington, D.C. 20416

                             DIGEST

Where, prior to the applicant's having submitted personal finan-
cial data, the Agency has put the applicant on notice of the
importance of accuracy in the data submission, it is neither
arbitrary, capricious nor contrary to law for the Associate
Administrator to refuse to give the applicant an opportunity to
correct an obviously flawed personal financial statement on its
Form 413, even though the Agency intends to rely on that
statement in determining the applicant's eligibility for 8(a)
status.

In construing a personal financial statement on Form 413 that is
internally inconsistent and thus obviously flawed, it is neither
arbitrary, capricious, nor contrary to law for the Agency to rely
on detailed supporting data rather than inconsistent summary
data.

An individual whose personal net worth exceeds $250,000 is not
economically disadvantaged for purposes of 8(a) program entry. 13
CFR 124.106(a)(2)(i).


                         FINAL DECISION

                          June 2, 1992

GROSS, Administrative Law Judge:

Jurisdiction

Authority for these proceedings is found in Section 409 of the
Business Opportunity Development Reform Act of 1988, Public Law
100-656 (Section 7(j) of the Small Business Act of 1958, as
amended; 15 U.S.C. 636(j)), hereinafter referred to as "the Act,"
and in the regulations codified at 13 CFR Parts 124 and 134.

Issue

May the Agency rely on an obviously flawed personal financial
statement in concluding that the individual upon whom 8(a)
eligibility is based is not economically disadvantaged within the
meaning of 13 CFR 124.106(a)?

Facts

In June 1989, the Associate Administrator for Minority Small
Business and Capital Ownership Development (herein after
"Associate Administrator") advised Lalith Gnanasiri, the
President of Respiratory Therapy Specialists of America, Inc.
("RTSA"), that its application for participation in the 8(a)
program was being declined for four reasons. Two of those reasons
are no longer relevant. The other two are: (1) Gnanasiri's wife,
Joann, had the potential for exercising control over RTSA; and
(2) in connection with Joann Gnanasiri's co-ownership of certain
assets, RTSA lacked the necessary financial resources to perform
successfully. (I will henceforth refer to Lalith Gnanasiri as
"Lalith," and to his wife as "Joann.") Lalith responded by
advising the Agency that he had "established three accounts in my
name which are being pledged to provide financing for the
corporation." An affidavit signed by Lalith specifies the
accounts and the amounts and goes on to state:

     All three (3) accounts are in his name and, the undersigned
     [Lalith] does solemnly swear under oath, that this total sum
     of $250,768 will be exclusively available for meeting the
     financial needs of Respiratory Therapy Specialists of
     America, Inc.

In March 1990 the Associate Administrator again turned RTSA down.
The Associate Administrator no longer expressed any concern about
Joann's potential control of RTSA or about the underfinancing of
RTSA. Now, she said, the problem was, inter alia, that Lalith is
no longer economically disadvantaged. (Again, the other reasons
for refusing 8(a) status to RTSA are no longer relevant.) That
reason for decline requires that we consider what the record
tells us about Lalith's personal net worth.

Lalith's Form 413 (Personal Financial Statement) dated December
1988 shows that he and Joann had a net worth of $512,000.
Deducting the $95,000 net worth of the Gnanasiris' residence (see
13 CFR 124.106(a)(2)(i)(B)), and dividing by two (to take account
of Joann's interest) produces a net worth for Lalith (for 8(a)
purposes) of $208,000. As the Agency agreed, Lalith's net worth
was less than the maximum of $250,000 for 8(a) program entry (see
13 CFR 124.106(a)(2)(i)).

As we have seen, however, the Associate Administrator originally
turned RTSA down because of underfinancing, to which RTSA
responded by advising that three accounts, in Lalith's name,
totaling about $251,000 had been pledged for RTSA's use. Lalith
did not indicate where the $251,000 came from.

As already indicated, the Associate Administrator responded to
the information about the $251,000 by rejecting RTSA's applica-
tion on reconsideration on the ground, among others, that Lalith
was not economically disadvantaged. It is true that Lalith's Form
413 showed that his net worth for 8(a) purposes was only
$208,000. But, the Associate Administrator found:

     in responding to our initial reasons for decline of your
     firm for 8(a) program participation, you transferred the
     three savings accounts, pledged to secure business
     financing...in the amount of $250,768 to your name only. By
     doing so you established sole ownership of these accounts,
     which would appear to push your personal net worth over the
     $250,000 threshold.

Based on the record before me, that reasoning is unclear on two
grounds. The first is that the Associate Administrator's March
1990 letter denying reconsideration suggests that the 1988 Form
413 of Lalith and Joann showed jointly held savings accounts
totaling $251,000 (or more). But that is not so. It shows only a
savings account of $75,000 and an IRA of $29,400. The second is
that the Associate Administrator's denial letter seems to assume,
without stating why, that Lalith got the $251,000 as gifts from
Joann (or others) or from some source of income -- as opposed to
increased indebtedness on Lalith's part.

In any case, the Associate Administrator permitted RTSA to ask
for further reconsideration, but stated that if RTSA chose to do
so, Lalith and Joann would have to file updated Forms 413.

RTSA did ask for reconsideration, and Lalith and Joann did file
Forms 413 dated June 1990. But the new numbers were, on their
face, erroneous. In particular, for both Lalith and Joann: (1)
the asset figure given for real estate was less than it should
have been based on the supporting information in Section 4 of the
Forms 413; and (2) the liabilities figure for "mortgages on real
estate" was much higher than it should have been based on the
Section 4 data. 1/

Moreover, Lalith's Form 413 failed to list the $251,000 in bank
accounts as an asset. And the source of the $251,000 remained
unspecified. (Lalith's Form 413 shows a decrease in notes
payable. Had Lalith borrowed the $251,000, that is one of the
entries one would expect to have increased significantly.)

On August 20, 1991, the Acting Associate Administrator again
declined to grant 8(a) status to RTSA. This time the Agency had
only one basis for its position: Lalith was not economically
disadvantaged. More particularly the Associate Administrator
held:

     The information contained in the [June 1990] Form 413...is
     not consistent with the data presented in your previous
     Forms 413, dated ten and eighteen months earlier. [2] You
     did not provide adequate evidence to substantiate these
     differences. Thus, it appears that your present net worth,
     excluding the equity in your primary residence and your
     interest in the applicant concern, exceeds $250,000. The
     total liabilities on your June 7, 1990 personal financial
     statement [are] overstated when comparing [them] with the
     individual mortgage balances in Section 4. In fact, when all
     of the mortgage balances are added up on your June 7, 1990
     personal financial statement...your personal net worth
     exceeds the $250,000 threshold.

RTSA appealed. A revised Form 413 and the statement of a
certified public account were appended to the appeal. According
to the appeal, Lalith obtained the $251,000 by borrowing from
Joann and other relatives. In addition, claims RTSA, part of the
$251,000 should be treated as an equity investment in RTSA and
thus that part of the $251,000 should be excluded from Lalith's
net worth (see 13 CFR 124.106(a)(2)(i)(B)).

The Agency, in response, points out that the issue on appeal is
whether the determination of the Acting Associate Administrator
was arbitrary, capricious or contrary to law. And that standard
measures the Acting Associate Administrator's actions against the
record as it was before him.

Discussion

Because I agree with the Agency that new evidence may not be
submitted on appeal, I am returning the attachments to RTSA's
petition for appeal (the revised Form 413 and the CPA's
statement) to RTSA, unread. See The Matter of Trans-Tel Central
Inc., No. 383 (December 31, 1991).

Turning to the merits, at this juncture the only thing standing
in the way of RTSA's 8(a) status is the question of Lalith's net
worth. And the determination that Lalith's net worth exceeds
$250,000 is based entirely on a Form 413 that is internally
inconsistent and obviously flawed and on an assumption that the
figures in Part 4 of the Form 413 are accurate and the incon
sistent figures on page 1 of the Form are in error.

Obviously, the matter could have been handled differently -- as
by the Agency advising RTSA of the obvious problems in the Forms
413 and asking for corrections.

On the other hand, the Agency had been very clear that it
considered Lalith's net worth to be at issue and that it would
take very seriously the Gnanasiris' updated Forms 413. In
response, Lalith and Joann submitted Forms 413 that: (1) failed
to list the $251,000 in-bank accounts in Lalith's name as an
asset; (2) gave no hint of any indebtedness on Lalith's part
arising as a result of the establishment of those bank accounts;
and (3) showed Lalith's net worth to be well over the $250,000
maximum when recast so that the summary data on his Form squared
with the Form's Section 4 data -- even without taking into
account the $251,000 in bank accounts in Lalith's name, and even
after reducing the value of the real estate listed in Section 4
to take account of an obvious error. 3/

Where the Agency has put the applicant on prior notice of the
importance of an updated Form 413, I have no basis for concluding
that it was either arbitrary, capricious, or contrary to law for
the Associate Administrator to opt not to give the applicant an
opportunity to correct the Form 413 when it turned out to be
flawed. Nor do I have any basis for concluding that, where the
Agency is faced with a Form 413 that is internally inconsistent,
it is either arbitrary, capricious, or contrary to law for the
Agency to rely on the specific real estate data in Section 4
rather than on the summary real estate data on page 1.

Conclusion

I hereby conclude that the determination of the Associate
Administrator to deny Respiratory Therapy Specialists of America,
Inc. admission to the 8(a) program was NOT ARBITRARY, CAPRICIOUS
OR CONTRARY TO LAW.

This is the final decision of the Small Business Administration,
and it is binding upon all parties, including those within the
employ of the Agency. 4/ See 13 CFR 124.210(i).

                         ____________________________
                         Stephen J. Gross
                         Administrative Law Judge


______________________________

1/ Section 4 of the Forms 413 of Lalith and Joann each apparently
erroneously listed total value and mortgage liability of the real
estate properties the two held jointly. I evaluated the Form 413
data based on the assumption that the correct Section 4 figures
should be half of those listed.

2/ The reference to the Form 413 dated ten months earlier
apparently is to Lalith's statements and affidavit concerning the
three bank accounts totaling $251,000.

3/ See footnote 1, above.

4/ Decisions concerning appeals of denials of program admission
are to be rendered within 90 days after the petition is
filed, insofar as practicable. 13 CFR 124.210(j). However,
the press of work on other cases precluded me from turning
to this proceeding any earlier.