by Sarah Schauerte
In a landmark case, the U.S. Court of Federal Claims held that the VA’s Center for Verification and Evaluation (“CVE”) denied due process to a Service-Disabled Veteran-Owned Small Business (“SDVOSB”) by revoking its “verified” status without proper notice and also unreasonably interpreted its own rules on unconditional ownership.
For companies that want to do set-aside work with the VA, the CVE is the gatekeeper. The CVE examines applications to the Veterans First Contracting Program, assessing whether a business has shown that it meets the requirements of being both “owned” and “controlled” by a veteran. As you might guess, these terms are very loaded.
In this case, Ambuild Company, LLC v. U.S., an agency-level protest was lodged against Ambuild, an SDVOSB. No. 14-1786 (October 10, 2014). Even though neither the protestor nor the contracting officer raised an issue with whether Ambuild was unconditionally owned by a veteran, the CVE decided to investigate this on its own. The CVE determined that the veteran was not an “unconditional owner” because of an “involuntary withdrawal” provision contained in the company’s operating agreement. Ambuild was never given an opportunity to address this issue before it was de-verified and removed from VetBiz. As such, the CoFC determined that this violated Ambuild’s rights to due process.
This is the part that is cringe-worthy. The provision the CVE found unacceptable required a member to involuntarily withdraw from the company if the member “is adjudged bankrupt or insolvent or there is entered against the [m]ember an order for relief in any bankruptcy or insolvency proceeding.” While the VA claimed that this provision would terminate the veteran’s ownership shares upon the occurrence of any type of personal bankruptcy, the CoFC found that this argument was “inconsistent with federal bankruptcy law.” Regardless of what the operating agreement says, in the event of bankruptcy, the veteran’s ownership interest would go to the bankruptcy estate. Accordingly, the CoFC held that this clause is a standard commercial arrangement that does not run afoul of the SDVOSB “unconditional ownership” requirements.
Upon reading this case, I was surprised the CVE reached this interpretation of the unconditional ownership provision given that in all fifty states, as a matter of law, a member’s interest must revert to the company if certain events occur (such as death or incapacity, and in many cases, bankruptcy). This is not something you can draft around in an operating agreement. It is fairly common for operating agreements to have a provision, in the “transfer” section, that says that a member’s interest shall revert to the company “as a matter of law.” Because this is so common, I took a look at the CVE’s Verification Brief on “unconditional ownership,” and saw that it did not address this situation.
What happened here? Does the CVE not realize what situations are encompassed in “as a matter of law?” Obviously that term means something. Here, poor Ambuild got into trouble because it included additional detail. This makes little sense, as the CVE routinely comes across this “as a matter of law” provision in the operating agreements submitted to it. The examiners should know what “as a matter of law” entails.
This should be a wake-up call for the CVE. Companies are entitled to due process (See 38 CFR 74.22 and 48 CFR 819.307) before their “verified” status is revoked. And the CVE must be reasonable in interpreting its own regulations. In that way, this CoFC decision is similar to a 2012 decision, Miles Construction, which held that a “right of first refusal” transfer restriction is permissible given that it is a standard commercial arrangement.
What do you think? Will this inspire change, or will this be more of an “academic” victory for SDVOSBs?
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