Century Technologies, Inc., No. SDBA-123 (January 13, 2000)
Docket No. SDBA-99-10-07-22
                                                                 

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

_______________________________
                               )
IN THE MATTER OF:              )
                               )   Docket No. SDBA-99-10-07-22
Century Technologies, Inc.     )
                               )   Decided:  January 13, 2000
     Petitioner                )
_______________________________)

                           APPEARANCES

                  Donald L. Campbell, President
                 For Century Technologies, Inc.
                                
                       David L. King, Esq.
              For the Small Business Administration
                                
                             DIGEST

This  Office  will  not consider on appeal  new  evidence,  which
Petitioner failed to present to the Small Business Administration
(SBA) at the time of its determination, unless the Administrative
Judge  determines that manifest injustice would occur if he  does
not do so.

An  applicant firm owned principally by another business  entity,
which  is  in turn owned by a disadvantaged individual, fails  to
meet  the  requirement  of direct ownership  by  a  disadvantaged
individual.

When  SBA considers an application for certification as  a  Small
Disadvantaged   Business   (SDB),   the   SDB   regulations   are
controlling; the size regulations cannot supersede them.

                                
                        INITIAL DECISION
                                
HOLLEMAN, Administrative Judge:

                          Jurisdiction
                                
     This appeal petition is decided under the Small Business Act
of  1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Parts 124
and 134 (1999).

                             Issues

     Whether  this  Office will consider on appeal  new  evidence
which  Petitioner failed to present to SBA at  the  time  of  its
determination.
     
     Whether  an  applicant  firm owned  principally  by  another
business  entity,  which is in turn owned  by  the  disadvantaged
individual,  meets  the requirement of direct  ownership  by  the
disadvantaged individual.

     Whether,   when  SBA  considers  an  application   for   SDB
certification,  the  size  regulations  can  supersede  the   SDB
regulations.

                          I.  BACKGROUND

                    A.  Procedural Background

     On  June  11,  1999, Century Technologies, Inc. (Petitioner)
applied for certification as a Small Disadvantaged Business (SDB)
with  the  Small  Business Administration (SBA  or  Agency).   13
C.F.R.  Section  124.1008(a) (1999).  On  August  26,  1999,  the
Acting  Associate Administrator for Small Disadvantaged  Business
Certification and Eligibility (AA/SDBCE) denied certification.
     
      Petitioner  filed an Appeal Petition with  this  Office  on
October  7,  1999.  On October 8, 1999, the Administrative  Judge
issued  a  Notice  and  Deficiency Order  (the  Order),  ordering
Petitioner  to  correct  specific  deficiencies  in  its   Appeal
Petition  by  October 25, 1999.  On October 21, 1999,  Petitioner
complied with the Order.

     On December 6, 1999, also in conformance with the Order, SBA
timely  filed  the Administrative Record (AR), together  with  an
Answer  to the Appeal Petition.  SBA withheld portions  of  three
documents from the AR, claiming the deliberative process and  the
attorney-client privileges.  Petitioner did not object  to  SBA's
claims  of  privilege.  On December 29, 1999, the  Administrative
Judge approved SBA's claims of privilege.

                     B.  The SDB Application

     Petitioner  was incorporated in the District of Columbia  in
1978.   Its  primary Standard Industrial Classification  code  is
4813,  Telephone  Communications, except Radiotelephone,  with  a
corresponding 1500-employee size standard.  Donald  L.  Campbell,
the  individual  on  whom Petitioner's claim  of  eligibility  is
based,   joined  the  firm  in  1984;  he  became  its   majority
shareholder in 1987, and its sole shareholder in 1988.
     
     In  August  1990,  Century Technologies International,  Inc.
(CTI)  was  incorporated in Delaware as a  holding  company.   On
March  31,  1991, Mr. Campbell transferred all of  his  stock  in
Petitioner to CTI in exchange for all of CTI's voting stock.   At
the time of the AA/SDBCE's determination, Mr. Campbell owned over
90%  of  CTI's  voting stock, and CTI owned all  of  Petitioner's
stock.
     
     The   AA/SDBCE   denied  Petitioner's  application   because
Mr.  Campbell  did not own the firm.  Specifically, Mr.  Campbell
owned  only  50%  of Petitioner's stock, while a holding  company
owned the other 50%.

                     C.  The Appeal Petition

      Petitioner  presents  two  new  exhibits  with  its  Appeal
Petition.   One exhibit is a cancelled stock certificate  showing
Mr.  Campbell  transferred all of Petitioner's stock  to  CTI  in
1991.   Petitioner states it did not include this  document  with
its  application because of administrative oversight.  Petitioner
also  presents  State  of Maryland Minority  Business  Enterprise
(MBE)  certifications for itself and for CTI.  Petitioner asserts
it would be a manifest injustice for the Administrative Judge not
to   consider   this  new  evidence,  because  a   finding   that
Mr.  Campbell  does  not  own  and control  Petitioner  would  be
inequitable.

     As  to  the  merits,  Petitioner asserts Mr.  Campbell,  the
disadvantaged  individual,  does  own  and  control   Petitioner,
because  he  owns over 90% of CTI, which owns 100% of Petitioner.
Further, Mr. Campbell holds the key management positions in  both
companies.   [1]  Therefore,  the  AA/SDBCE's   denial   of   SDB
certification   to  Petitioner  is  arbitrary,  capricious,   and
contrary to law.
     
     Petitioner  also asserts, relying on SBA's size regulations,
13   C.F.R.  Part  121,  that  Mr.  Campbell  owns  and  controls
Petitioner  because  he  owns and controls  its  affiliate,  CTI.
Petitioner  asserts  it  and  CTI are  affiliated  through  stock
ownership and through common officers and directors.
                                
                       D.  The SBA's Answer

     SBA  opposes  Petitioner's introduction of new  evidence  on
appeal,  because the Administrative Judge's review is limited  to
the  facts  before  SBA at the time of the determination,  unless
Petitioner establishes that manifest injustice would occur if the
appeal  were  limited to the record.  SBA asserts Petitioner  has
failed to do so.
     
     SBA  concedes that the AA/SDBCE erroneously found  CTI  owns
only   50%  of  Petitioner,  and  that  other  evidence  in   the
Administrative Record shows CTI actually owns 100% of Petitioner.
Nevertheless, this error does not affect the outcome of the case.
     
     As  to  the merits, SBA asserts the AA/SDBCE's determination
was  not  arbitrary, capricious, or contrary to law  because  the
Small Business Act and SBA's regulations clearly require socially
and  economically disadvantaged individuals to  own  directly  at
least  51% of the firm.  Petitioner here does not dispute  it  is
wholly owned by CTI, a business entity.
     
     SBA did not address Petitioner's affiliation argument.
     

                         II.  DISCUSSION
                                
                      A.  Threshold Matters
                                
     Petitioner  filed its Appeal Petition within 45  days  after
SBA  denied  its  SDB application and, thus, it  is  timely.   13
C.F.R. Sections 134.202(a), 134.204(e)(2).
     
     As  a  threshold  matter, the Administrative Judge  EXCLUDES
Petitioner's  proffered new evidence.  The  Administrative  Judge
notes  the  regulations explicitly limit his  review  of  an  SDB
determination  to  the  facts before  SBA  at  the  time  of  the
determination,  and  to  the  arguments  on  appeal.   13  C.F.R.
Section 124.1008(f)(3)(ii).  The Administrative Judge will  admit
new evidence only if he determines manifest injustice would occur
if  he does not do so (id.); that is, if his failure to admit the
evidence  would be plainly wrong, and would result in substantial
prejudice  to  the Petitioner, such as would shock  the  judicial
conscience.  Matter of Aero CNC, Inc., No. SDBA-106 at  6  (1999)
and  cases  cited therein.  Petitioner's proffer of new  evidence
does  not  state  why failure to admit the evidence  would  cause
manifest  injustice.   It  merely  is  an  attempt  to  introduce
previously-available evidence. [2]

                   B.  The Merits of the Appeal
                                
     A  firm  applying for SDB certification must demonstrate  to
the AA/SDBCE that those individuals claiming disadvantaged status
own and control the firm.  13 C.F.R. Section 124.1008(c)(2).   In
determining  whether a firm meets this requirement, the  AA/SDBCE
applies  the same criteria used for the 8(a) program.  13  C.F.R.
Section 124.1002(a); Matter of Trisha Koch & Associates, No. SDBA-
113  at 4 (1999).  The Agency must examine the relevant data  and
articulate a satisfactory explanation for its action, including a
"rational  connection  between the facts  found  and  the  choice
made."  Matter of IRECOR, Inc., No. SDBA-104 at 5 (1999)  (citing
Motor  Vehicle  Mfrs. Ass'n of the United States, Inc.  v.  State
Farm  Mut.  Auto.  Ins.  Co., 461 U.S.  29,  43  (1983))  (citing
Burlington Truck Lines, Inc. v. United States, 371 U.S. 156,  168
(1961)).

     In   considering  an  Appeal  Petition,  OHA   reviews   the
AA/SDBCE's  determination.  OHA's standard of review  is  whether
the   record   demonstrates  the  determination  was  "arbitrary,
capricious,   or   contrary   to   law."    13   C.F.R.   Section
124.1008(f)(3)(ii).    The scope of review under  the  "arbitrary
and capricious" standard is narrow, and OHA cannot substitute its
judgment for that of the Agency.  Aero CNC, supra at 7.  OHA must
consider  whether the AA/SDBCE's determination  was  based  on  a
consideration of the relevant factors and whether there has  been
a  clear  error  of judgment.  IRECOR, supra at 5 (citing  Bowman
Transportation, Inc. v. Arkansas-Best Freight System,  Inc.,  419
U.S. 281, 285-286 (1974)).

     The   sole  issue  on  appeal  here  is  whether  Petitioner
qualifies under the Small Business Act requirement that the  firm
be at least 51% owned by "socially and economically disadvantaged
individuals".     15    U.S.C.    Sections    637(a)(4)(A)(i)(I);
637(d)(3)(C)(i)  (emphasis added). [3] SBA regulations  implement
the statute by requiring that, "at least 51 percent of each class
of  voting stock outstanding . . . must be unconditionally  owned
by  one or more individuals determined by SBA to be socially  and
economically   disadvantaged."   13  C.F.R.  Section   124.105(d)
(emphasis   added).    Further,   ownership   by   socially   and
economically   disadvantaged   individuals   "must   be    direct
ownership".   13 C.F.R. Section 124.105(a) (emphasis  added).   A
firm owned principally "by another business entity . . . that  is
in  turn  owned  and  controlled by  one  or  more  disadvantaged
individuals does not meet this requirement."  Id.
     
     Here, in order for Petitioner to qualify as a firm owned  by
a    socially    and   economically   disadvantaged   individual,
Mr.  Campbell, the only individual claiming social  and  economic
disadvantage, must own individually and directly at least 51%  of
its  voting  stock.   It  is undisputed that  Mr.  Campbell  owns
directly  as an individual none of Petitioner's stock,  and  that
CTI, a corporation and thus a business entity, owns directly  all
of  Petitioner's stock.  Indeed, the Appeal Petition admits these
facts.    Therefore,  the  Administrative  Judge  concludes   the
AA/SDBCE    correctly   found   a   socially   and   economically
disadvantaged individual does not own directly at  least  51%  of
Petitioner's voting stock.
     
     SBA  admits the AA/SDBCE erred in finding that Mr.  Campbell
and  CTI  each  owned  50% of Petitioner's stock.   However,  the
Administrative  Judge  concludes any error  was  harmless.   Size
Appeal  of  InfoTech Enterprises, Inc., No. 4346 at n. 5  (1999).
The   AA/SDBCE's   stated   reason  for  declining   Petitioner's
application  was  that  Mr.  Campbell  did  not  own   the   firm
individually, as required by the regulation.  The error does  not
affect  SBA's ultimate conclusion.  Indeed, the error would  have
altered the analysis in Petitioner's favor.
     
     The   Administrative  Judge  rejects,  as  contrary  to  the
explicit  regulatory  language, Petitioner's  argument  that  Mr.
Campbell  owns Petitioner because he owns over 90% of CTI,  which
in turn owns 100% of Petitioner.  The regulation provides that  a
firm  owned principally by another business entity, which  is  in
turn  owned  by  a disadvantaged individual, fails  to  meet  the
requirement  of  direct ownership by a disadvantaged  individual.
13  C.F.R.  Section 124.105(a).  In promulgating this regulation,
SBA  noted  the  direct ownership requirement is  statutory,  but
stated  the regulation was necessary for clarification.  62  Fed.
Reg. 43583, 43586 (August 14, 1997) (preamble to proposed rule).
     
     The  Administrative Judge also must reject for  two  reasons
Petitioner's reliance on SBA's size regulations, i.e.,  that  Mr.
Campbell  owns  Petitioner  because  he  owns  and  controls  its
affiliate, CTI.  First, this argument is essentially the same  as
Petitioner's  first argument, that Mr. Campbell  owns  Petitioner
because  he  owns its parent company (here called its affiliate),
and must fail for the same reason.
     
     Second,  SBA's size regulations, together with this Office's
decisions   interpreting   those   regulations,   constitute    a
specialized corpus of law applying solely to SBA's size  program.
See  13 C.F.R. Part 121.  They do not apply to the ownership  and
control requirements of the SDB program, and Petitioner cites  no
authority  for  applying  them.  The  SDB  ownership  regulations
control  here  and, as noted above, they explicitly prohibit  the
management  structure for which Petitioner  relies  on  the  size
regulations.

     In summary, the AA/SDBCE's determination, that Petitioner is
not  at least 51% owned by a disadvantaged individual, was  based
on explicit regulatory requirements and is fully supported by the
record, including Petitioner's explicit admissions.  Accordingly,
the  Administrative Judge concludes the SBA's  determination  was
not arbitrary, capricious or contrary to law.

                        III.  CONCLUSION
     
     Based  on  the  Administrative Judge's conclusion  that  the
SBA's determination was not arbitrary, capricious or contrary  to
law,   he  AFFIRMS  the  determination,  and  DENIES  the  Appeal
Petition.

     This  is  the initial decision of the SBA.  Absent a request
for review, this decision will become the SBA's final decision 30
days    after   the   date   of   this   decision.    13   C.F.R.
Sections 134.227(b), 134.228(a) (1999).

                               _________________________________
                               CHRISTOPHER HOLLEMAN
                               Administrative Judge

_________________________

       [1]   Because the AA/SDBCE based her denial solely on  the
ownership  issue,  the scope of this appeal is  limited  to  that
issue.
       [2] The Administrative Judge notes that, even if he were to
admit  Petitioner's proffered evidence, the result would  be  the
same.   This  evidence establishes CTI owns all  of  Petitioner's
stock.
       [3]    The  exceptions are for firms owned by economically
disadvantaged Indian tribes, tribally-owned entities,  or  Native
Hawaiian organizations.  15 U.S.C. Section 637(a)(4)(A)(i).  None
of these exceptions is applicable here.

                                            Posted: January, 2000