CVE APPEAL OF: TACTICAL OFFICE SOLUTIONS, LLC, APPELLANT CVE NOTICE OF VERIFIED STATUS CANCELLA...
SBA No. CVE-104, 20192019 WL 1349838March 18, 2019
SBA No. CVE-104, 2019 (S.B.A.), 2019 WL 1349838
Small Business Administration (S.B.A.)
Office of Hearings and Appeals
[Center for Verification and Evaluation]
*1 CVE APPEAL OF: TACTICAL OFFICE SOLUTIONS, LLC, APPELLANT
*1 CVE NOTICE OF VERIFIED STATUS CANCELLATION
*1 SBA No. CVE-104-A
*1 CANC-T3-LTR-001-REV 20171113
*1 March 18, 2019
*1 Juliane Balliro, Esq.
*1 Nelson Mullins Riley & Scarborough LLP
*1 Boston, Massachusetts
*1 Frank Mondano, Esq.
*1 Law Offices of Frank Mondano
*1 Truro, Massachusetts
*1 Jennifer Yelen, Esq.
*1 Posternak Blankstein & Lund, LLP
*1 Boston, Massachusetts
*1 For Appellant
I. Introduction and Jurisdiction
*1 On November 5, 2018, Tactical Office Solutions, LLC (Appellant) appealed the decision of the U.S. Department of Veterans Affairs (VA) Center for Verification and Evaluation (CVE) cancelling Appellant's verification in VA's Vendor Information Pages (VIP) database of eligible Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). Appellant maintains that the cancellation is clearly erroneous and requests that the U.S. Small Business Administration (SBA) Office of Hearings and Appeals (OHA) vacate the cancellation. For the reasons discussed infra, the appeal is granted.
*1 OHA adjudicates CVE appeals pursuant to 38 U.S.C. § 8127(f)(8)(A) and 13 C.F.R. part 134 subpart K.1 Appellant timely filed the appeal within ten business days of receiving the cancellation notice. 13 C.F.R. § 134.1104(a). Accordingly, this matter is properly before OHA for decision.
A. Procedural History
*1 On June 2, 2016, the Director of the CVE (D/CVE) issued a Notice of Proposed Cancellation (NOPC #1) to Appellant, stating that CVE proposed to cancel Appellant's verified status and registration in the VIP database. NOPC #1 asserted that CVE “cannot reasonably determine” whether Appellant's relationship with FENS Associates, LLC (FENS) “causes such dependence that [[Appellant] cannot exercise independent business judgment with[out] great economic risk pursuant to 38 CFR § 74.4(i)(4).” (Case File (CF), Exh. 4, at 2.) NOPC #1 noted that Appellant's primary place of business is the residence of its owner, Mr. James Apicella, a service-disabled veteran. (Id. at 1-2.) However, Appellant also leases space from FENS under a five-year lease agreement. (Id. at 2.) In addition, Appellant pays “administrative/project management fees” to FENS. These fees include Appellant's rent, as well as services such as “design, project management, install scheduling and coordination and use of office equipment and affiliated services/ overhead”. (Id.)
*1 On July 1, 2016, Appellant responded to NOPC #1. Appellant explained that James Apicella, a service-disabled veteran, is Appellant's sole owner. (CF, Exh. 6, at 1-2.) Furthermore, based on Appellant's organizational documents previously provided to CVE, James Apicella fully controls Appellant. (Id. at 2.) From 1997 to 2007, James Apicella worked sporadically at FENS, where his father, Mr. Frank Apicella, is Managing Partner. However, Appellant asserted, “[Appellant] and FENS operate independently of each other”, and “[t]here are no shared contracts, financials, equipment, employees, facilities, or control between the two [companies].” (Id. at 4.) Appellant acknowledged that, while its primary place of business is James Apicella's residence, Appellant also rents office space from FENS “in a separate area from where the FENS offices are located.” (Id. at 2.) Specifically, “FENS is on the first floor and [Appellant] is on the second floor” of the rented space. (Id.) In addition, Appellant subcontracts design and installation services to FENS. (Id. at 3.) Appellant asserted that “[n]obody at FENS, including Frank Apicella, has ever had the ability or authority to make any business or financial decisions for [Appellant].” (Id. at 4.) Accompanying its response, Appellant offered a letter from its accountant, Mr. Jeffrey C. Kirpas. (CF, Exh. 5.) The Kirpas letter stated that:
*2 The contracts between FENS and [Appellant] are in fact arm's length transactions. Each company acts independently, and they are not subject to any pressure from the other party. [Appellant] strives for the lowest price for the best service possible on all projects and works with a number of vendors in order to achieve this objective. The three managing members of FENS do not have any financial interest in [Appellant], nor do they exert any undue influence over management and administration of [Appellant]. In fact, FENS provides estimates for jobs and ultimately invoices [Appellant] for those jobs if engaged.
*2 Upon reviewing Appellant's response to NOPC #1, CVE informed Appellant that “CVE has confirmed that [Appellant] is in compliance with the regulations”. (CF, Exh. 9, at 1.) Therefore, Appellant remained an eligible SDVOSB in the VIP database. (Id.)
*2 On July 16, 2018, the D/CVE issued a second Notice of Proposed Cancellation (NOPC #2) to Appellant. NOPC #2 stated that, pursuant to 38 C.F.R. § 74.2(c), a concern's status may be canceled if it knowingly submits false information in conjunction with its application for verified status. (CF, Exh. 18, at 1-2.) According to VA's Office of the Inspector General (OIG), Appellant's response to NOPC #1 contained false information. (Id. at 2.) More specifically, Appellant falsely stated that it operates independently of FENS. Contrary to Appellant's representations, “[the] OIG has determined that [[Appellant] and [FENS] have co-mingled accounting practices, shared office space, and shared employees and resources.” (Id.) Further, “[the] OIG has found that [Appellant] relies on [FENS] to exist and that [Appellant] has acted as a pass through to enable [FENS] to obtain SDVOSB contracts.” (Id.)
*2 NOPC #2 explained that, according to the OIG, Appellant is dependent on FENS employees, a reliance Appellant attempted to conceal by directing FENS employees to use e-mail accounts and signature blocks associated with Appellant when performing work on Appellant's contracts. (Id.) This was exemplified by James Apicella warning a FENS employee who used a FENS email account to be careful with her e-mail because Appellant was under scrutiny from CVE. (Id.) NOPC #2 also stated that, with its response to NOPC #1, Appellant provided a letter from its accountant, Mr. Kirpas, in which Mr. Kirpas stated that Appellant and FENS operate at arm's length. During an interview in August 2017, though, Mr. Kirpas stated that the two companies enjoyed a “special relationship”, and that he would be concerned about Appellant's independence if Frank Apicella had access to Appellant's bank account. (Id. at 3.) NOPC #2 noted that CVE had previously found that Frank Apicella is a joint signatory on Appellant's bank account. (Id.) Therefore, Appellant may have violated 38 C.F.R. § 74.2(c) by providing false information, and CVE could not determine that Appellant is compliant 38 C.F.R. § 74.21(c)(1)-(4). (Id.)
*3 Next, NOPC #2 stated that the OIG's findings show that Appellant is reliant upon FENS, including for credit and bonding capacity, and that the companies have co-mingled accounting practices, shared office space, and shared employees and resources. (Id.) This relationship has enabled FENS to improperly obtain VA contracts intended for SDVOSBs. (Id.) NOPC #2 noted that, although Appellant submitted a lease agreement for office space occupied by Appellant on the second floor of FENS's offices, Frank Apicella later stated in an interview that no lease actually existed “but that rent was paid as part of the fee [[FENS] charged [Appellant] for joint projects.” (Id.) NOPC #2 concluded by stating that based on the OIG findings, and “absent clarifying information”, the relationship between Appellant and FENS apparently “causes such dependence that [Appellant] cannot exercise independent business judgment without great economic risk pursuant to 38 CFR § 74.4(i)(4).” (Id.)
*3 On August 15, 2018, Appellant responded to NOPC #2. Appellant contended that its operations are independent from those of FENS, and that Appellant did not provide false information in its response to NOPC #1. (CF, Exh. 19, at 1.) Appellant highlighted that it is a Manager-managed concern, and James Apicella is Appellant's sole Member and sole Manager. (Id. at 2.) Appellant stated that FENS has partnered with other companies for VA procurements, and that after Appellant was formed in 2007, FENS began partnering with Appellant for VA contracts. (Id.) Until December 2014, when Appellant hired Ms. Laurie Rauseo to perform administrative and financial duties, James Apicella was Appellant's only employee. (Id.) Appellant added that because it was unable to hire its own designers, Appellant “contracted with FENS to utilize the services of its designers from time to time and paid FENS for those services.” (Id. at 2-3.) FENS did not provide designers to Appellant free of charge, and when working on projects for Appellant, the designers took direction from James Apicella. However, “[a]t no time did [Appellant] employ FENS' designers, or compensate them directly.” (Id. at 3.)
*3 Appellant asserted that, to avoid confusing its clients, Appellant has long provided separate e-mail accounts to FENS designers, and has requested that they not use their FENS e-mail accounts for communications pertaining to Appellant's projects. Appellant offered a copy of a 2014 e-mail in which James Apicella commented that “[w]hen [Appellant's] clients receive [Appellant's] information from a FENS employee on a FENS email, it causes confusion and questions.” (Id. at 3.) With regard to the 2016 e-mail referenced in NOPC #2, Appellant maintained that James Apicella, having only recently responded to NOPC #1, “was particularly sensitive to the need to maintain separation and, thus, reminded those FENS employees providing contracted services to [[Appellant] of the importance of remembering to use [Appellant's] email addresses.” (Id. at 3.) The 2016 email “was not intended to obscure [[Appellant's] reliance on FENS designers or to deceive federal contracting officials in any way.” (Id.)
*4 Appellant next explained that on December 31, 2013, it entered into a written lease agreement with FENS to rent office space for a five-year period. (Id.) Appellant attached a copy of the lease and general ledger entries purporting to show that Appellant has made rent payments to FENS in the required amount. Appellant stated that, because of the informal relationship between James and Frank Apicella, “[f]or a period of time, rent payments were not made by separate check from [Appellant] but, rather, were taken into account in determining the amounts [Appellant] paid FENS for all services provided. When it became clear the government was misconstruing this lack of formality, [Appellant] began paying rent by separate check.” (Id. at 4.)
*4 In response to CVE's concerns about the relationship between Appellant and FENS, Appellant stated that it “has contracted with at least ninety eight (98) other entities to perform installation on its projects, including at least ten (10) other installation companies in the New England area.” (Id. at 3, emphasis Appellant's.) Appellant offered a list of these other companies with its response. Appellant stated that it had also begun taking additional steps to distance itself from FENS. Some of those steps included: not using FENS as installer on projects; hiring a designer on a project-to-project basis until a part-time designer could be hired; training Ms. Rauseo to perform logistical/scheduling duties relating to orders awarded to Appellant; and searching for new office space separate from FENS. (Id.) Appellant estimated that, by September 1, 2018, Appellant “will no longer contract with FENS for services of any kind.” (Id.)
*4 Appellant insisted that it did not provide false information in its response to NOPC #1. With regard to the issue of accounting practices, Appellant emphasized that it maintains its own financial records; produces its own financial statements; maintains separate bank accounts; files separate tax returns; and employs its own employee for administrative and clerical work. (Id. at 5-6.) Appellant provided copies of tax records to support these assertions. Appellant added that while both Appellant and FENS use the same outside accountant, this fact alone does not show that the companies have co-mingled accounting practices. (Id. at 6.)
*4 Turning to the allegation that Appellant and FENS share office space and resources, Appellant asserted that its “desks, computers, printer, copier, project files and other records are located in the space leased by [[Appellant]”, whereas FENS's offices are located in a nearby, but separate, area. (Id. at 6.) Appellant denied that it shares employees with FENS. Although Appellant has obtained services from FENS, the FENS employees performing such work were never employees of Appellant, and always remained on FENS's payroll. (Id.) The two companies do not share bank accounts and there are no inter-company loans. (Id.) Mr. Kirpas's letter provided in response to NOPC #1 also corroborates the notion that Appellant operates independently of FENS. (Id. at 7.) Frank Apicella was previously a signatory on Appellant's bank account, but he has since been removed. Appellant explained that it had added Frank Apicella as a signatory as a precaution, in the event something catastrophic happened to James Apicella. (Id.) Before he was removed from Appellant's bank account, Frank Apicella “never signed [an Appellant] check, accessed the [Appellant] operating account, or had any authority to access [Appellant's] funds or make payment.” (Id.)
*5 Next, Appellant asserted that FENS's revenues and profits are so superior to Appellant's that monies FENS received from Appellant are insignificant from FENS's perspective. Nor has FENS ever been awarded SDVOSB contracts as a result of Appellant's efforts. (Id. at 8.) In Appellant's view, it is “unreasonable to believe that FENS would place its entire business at risk for what amounts to less than five (5%) percent of its gross profits.” (Id.)
*5 In disputing the allegation that Appellant relies on FENS for credit and bonding support, Appellant acknowledged that FENS assisted Appellant with bonding on one occasion in 2015 for an Army Corps of Engineers procurement. (Id.) However, this was the only time Appellant relied on FENS for credit or bonding. (Id. at 8-9.) At no point in Appellant's existence has FENS or Frank Apicella provided loans or other direct financial support to Appellant. (Id. at 9.)
B. Notice of Verified Status Cancellation
*5 On October 24, 2018, CVE informed Appellant that CVE was cancelling Appellant's status as a verified SDVOSB. (CF, Exh. 20.) According to CVE, Appellant's response to NOPC #2 “was not adequate to justify overturning all of the findings listed in the NOPC”. (Id. at 1.)
*5 CVE reiterated that it had received information from the OIG indicating that Appellant had provided false information to CVE in the response to NOPC #1. The OIG found that Appellant and FENS “have co-mingled accounting practices, shared office space, and shared employees and resources.” (Id. at 2.) Further, “[w] hile [Appellant] and FENS appear to maintain separate operating accounts, payments for FENS' services appear to have been calculated in a manner that prevented James Apicella the ability to account for profits and losses as evidenced by correspondence regarding James Apicella's inability to demonstrate personal income from [Appellant] in 2015.” (Id.)
*5 CVE noted that Appellant initially did not provide a written lease agreement for the office space it leases from FENS. James Apicella stated in 2014 that Appellant's primary place of business was his residence, yet “employee interviews” showed that Appellant had been utilizing the leased space for years. (Id.) Although Appellant later provided a copy of the lease agreement which specified monthly rent payments for office space located on the second floor of FENS, Frank Apicella, when interviewed, “indicated that there was not actually a lease, but that the rent was paid as part of the fee FENS charged [[Appellant] for joint projects and that if [Appellant] failed to generate business, FENS is not paid a fee.” (Id.) In its response to NOPC #2, Appellant maintained that it had paid rent in accordance with the lease agreement since the lease term began, a statement that “appears to contradict” Frank Apicella's interview. (Id.) Moreover, Appellant's response included evidence of rental payments from Appellant to FENS beginning in September 2017, after Frank Apicella's interview, but no documentation was provided to confirm rental payments prior to September 2017. (Id.)
*6 Next, CVE noted that the “OIG has determined that [Appellant] is dependent upon the support of FENS employees”, as evidenced by FENS employees being “provided with and instructed to use [Appellant's] email accounts and signature blocks when performing work on [Appellant's] contracts.” (Id.) After Appellant received NOPC #1, a FENS employee used her FENS e-mail address while doing work for Appellant. This was followed by James Apicella writing an e-mail to the FENS employee asking her to be careful in using FENS e-mail as the CVE was considering cancelling Appellant's SDVOSB certification. (Id. at 3.) CVE stated that Frank Apicella, when interviewed, “explained that the [Appellant] email addresses were used by FENS employee[s] with VA contracts because the VA does not know about the FENS/[Appellant] relationship and it caused confusion”. (Id.)
*6 While Appellant has maintained that FENS and Appellant do not share employees and that Appellant instead merely contracts with FENS for certain services, the CVE found that no information was provided of any contract between FENS and Appellant for the use of FENS personnel. (Id.) Moreover, according to the OIG, “FENS employees noted that they work for both [Appellant] and FENS but only received compensation from FENS and did not account for time spent on [[Appellant's] projects”. (Id.) Therefore, CVE was unable to determine that Appellant had provided truthful and accurate information in responses to the NOPCs. (Id.) In addition, it was not evident that Appellant maintained its eligibility for program participation under 38 C.F.R. § 74.21(c)(2) and (3). (Id.)
*6 The CVE stated that Appellant “relies upon FENS for credit and bonding capacity and the entities have co-mingled accounting practices, shared office space, and shared employees and resources.” (Id.) In NOPC #1, CVE sought information on fees paid by Appellant to FENS for administrative work and project management, and Appellant responded that it operates independently from FENS. The OIG investigation, however, “has found that FENS employees assisted [Appellant] with the preparation and submission of [Appellant's] SDVOSB verification application and that, in addition to FENS granting [Appellant] free access to the use of its designers to assist [Appellant] with contractual bids, FENS employees prepared proposals for government contract solicitations on behalf of [Appellant].” (Id. at 3-4.)
*6 With its response to NOPC #1, Appellant provided a letter from its accountant, Mr. Kirpas, wherein he asserted that Appellant and FENS operate at arm's-length. However, Mr. Kirpas later stated in an August 2017 interview that Appellant and FENS have a “special relationship”, and that before Appellant hired Ms. Rauseo, Appellant and FENS operated a “combined finance department”. (Id. at 4.) The CVE also reiterated that CVE previously had found that Frank Apicella was a signatory on Appellant's operating bank account. Although Appellant claims that this is no longer true, no confirmation was provided. (Id.) CVE also noted that “[the] OIG has found that [Appellant] has relied upon FENS for critical bonding support and that [Appellant] has acted as a pass-through entity to enable FENS to obtain SDVOSB contracts.” (Id.)
*7 Based on the OIG investigation and Appellant's response to NOPC #2, CVE determined that it could not conclude that Appellant had disclosed the full extent of FENS's participation in Appellant's management. In addition, “CVE cannot reasonably determine whether the relationship between [Appellant] and FENS causes such dependence that [Appellant] cannot exercise independent business judgment without great economic risk pursuant to 38 CFR § 74.4(i)(4).” (Id.)
*7 On November 5, 2018, Appellant appealed the cancellation to OHA. Appellant maintains that CVE committed several major errors in reaching its decision. Therefore, the cancellation should be vacated.
*7 Appellant contends that CVE failed to give Appellant proper notice of the “specific facts and reasons” for cancellation, as required by 38 C.F.R. §§ 74.21(c) and 74.22(a). Instead, Appellant argues, “CVE incorrectly relied upon unsubstantiated and vague information apparently obtained by the VA OIG that it never disclosed to [Appellant].” (Appeal at 16.) Appellant highlights that neither the OIG's findings, nor any source material supporting those findings, was ever provided to Appellant. (Id. at 26.) Appellant also complains that, in the cancellation notice, CVE relied on several additional OIG findings beyond those discussed in NOPC #2, thus depriving Appellant of any opportunity to address or refute those findings. (Id. at 13-14, 26.) Further, CVE unfairly treated the OIG's contentions as non-rebuttable, and thereby “held [Appellant] to a standard that required it to establish a fact as ‘undisputed’ to effectively rebut the allegations contained in the NOPC.” (Id. at 16.)
*7 Appellant argues that the issues described in the cancellation notice do not establish “good cause” for cancellation under 38 C.F.R. § 74.21(c). In Appellant's view, CVE based the cancellation decision on five particular issues: (1) the OIG's finding of co-mingled accounting practices, shared office space, and shared employees and resources; (2) that Appellant's payments for FENS's services appear to have been calculated in a manner that prevented James Apicella the ability to account for profits and losses; (3) the absence of evidence of rental payments prior to September 2017; (4) the lease arrangement between Appellant and FENS, which, according to CVE, called into question whether Appellant was obligated to pay rent; and (5) the OIG's determination that Appellant is dependent upon the support of FENS employees, which Appellant supposedly attempted to obscure by directing FENS employees to use Appellant's e-mail accounts. (Id. at 17.) Appellant insists that, even if true, none of these allegations would support the conclusion that James Apicella, a service-disabled veteran, has not maintained complete ownership and management of Appellant. (Id. at 18.)
*8 Appellant attacks the notion that Appellant and FENS have co-mingled accounting practices, arguing that CVE has not explained its determination on this point. (Id.) The cancellation notice does, however, make reference to a previously-undisclosed interview of Mr. Kirpas, in which he reportedly referred to a “combined finance department” operated by Appellant and FENS prior to January 2014. Appellant states that it disclosed its arrangements with FENS to CVE in 2014, 2016, and in its response to NOPC #2. (Id.) Further, the use of FENS personnel to perform administrative functions would not, in any event, prevent James Apicella from maintaining full control over Appellant.
*8 Regarding Frank Apicella's role as a signatory on Appellant's bank account, Appellant highlights that this was only in the case a catastrophe struck James Apicella, and that Frank Apicella “never conducted a single transaction on [[Appellant's] bank account and that his name had been removed as a signatory when it was called to the attention of [Appellant] more than a year before the issuance of the Cancellation Notice.” (Id. at 19.) CVE's reliance on the rent payments is also misplaced. Prior to 2017, Appellant and FENS had agreed that the office space lease payment would be included in the payments Appellant made to FENS for services rendered. (Id.) Although CVE does not expressly take the position that rent must be made through separate payments, CVE apparently considered the absence of such separate payments to be grounds for cancellation. (Id.) Similarly, while CVE seemingly acknowledges that Appellant did, in fact, pay FENS for rent and services rendered, CVE nevertheless criticizes Appellant for failing to produce a formal contract or agreement. (Id. at 20.)
*8 Next, Appellant contends that CVE improperly relied upon, and misinterpreted, past and present circumstances in concluding that Appellant cannot exercise independent business judgement without great economic risk. Citing no documentary support and contrary to Appellant's submissions, CVE concluded that: (1) Appellant functions as a pass-through entity to enable FENS to obtain SDVOSB set-aside contracts; (2) Appellant relies on FENS for credit and critical bonding; (3) Appellant received assistance from FENS in preparing its original verification application; (4) Appellant is granted free access to FENS's designers when preparing a bid or proposal; and (5) Appellant's explanations are directly contradicted by OIG findings. (Id. at 21.)
*8 Regarding the OIG's findings, Appellant again emphasizes that it cannot respond in detail to these allegations, because CVE did not disclose the OIG findings or the source materials derived from the investigation. (Id.) Appellant complains that CVE has not identified any VA contract(s) that Appellant supposedly enabled FENS to obtain; did not state what credit or bonding support it contends Appellant relies upon; and did not explain what violations would have emerged assuming that FENS employees assisted Appellant in the matter described. (Id.) Appellant also notes that VA regulations do not bar an SDVOSB from receiving financial or bonding assistance from a non-veteran entity, unless that non-veteran entity also has an equity interest in the applicant or participant. (Id., citing 38 C.F.R. § 74.4(i)(2).) The regulation is inapplicable here, Appellant argues, because neither FENS nor its principals have any equity interest in Appellant, and, further, the “bonding support” in question is a single project several years ago, and thus could not possibly enable FENS to significantly influence Appellant's business decisions. (Id. at 22.)
*9 Appellant argues that Desa Group, Inc. v. U.S. Small Business Administration, 190 F.Supp.3d 61 (D.D.C. 2016) is analogous to the instant case. In Desa Group, the court overturned an SBA decision terminating a concern from the SBA's 8(a) Business Development program. The court reasoned that although the 8(a) concern shared office space, a receptionist, marketing and human resources services with a non-disadvantaged entity, the 8(a) concern nevertheless could independently exercise its business judgment without undue risk. According to Appellant, “[t]he facts of this case reveal no greater reliance by [Appellant] on FENS than that held to be insufficient to support a finding of great economic risk in [Desa Group].” (Id. at 23.)
*9 OHA's decisions in Matter of Chevron Construction Services, LLC, SBA No. VET-183 (2010) and Matter of DooleyMack Government Contracting, LLC, SBA No. VET-159 (2009) likewise support the conclusion that Appellant's independence is not impeded by its relationship with FENS. (Id. at 23-26.) OHA overturned the determination in Chevron, and the facts presented here are even less compelling. Unlike the situation presented in Chevron, Appellant is wholly-owned by a service-disabled veteran; Appellant does not rely on FENS for office furniture, equipment, or computers; and FENS does not employ any of Appellant's officers and has never made a capital contribution to Appellant. (Id. at 24.)
A. Standard of Review
*9 Appellant has the burden of proving, by a preponderance of the evidence, that the cancellation was based upon clear error of fact or law. 13 C.F.R. § 134.1111.
*9 VA regulations require that, when CVE believes that a participant's verified status should be cancelled prior to the expiration of its eligibility term, CVE must first issue the participant a written Notice of Proposed Cancellation which identifies “the specific facts and reasons” for the proposed cancellation. 38 C.F.R. § 74.22(a). The participant must be afforded an opportunity to respond to the Notice of Proposed Cancellation, and CVE must “consider any information submitted by the participant” before deciding to cancel the participant's verified status. Id. § 74.22(b).
*9 In the instant case, I agree with Appellant that CVE did not give Appellant proper notice of “the specific facts and reasons” for the proposed cancellation. As Appellant observes, CVE issued Appellant a Notice of Proposed Cancellation (NOPC #2) on July 16, 2018, but that notice was based almost entirely on “findings” purportedly made by the VA OIG. Section II.A, supra. CVE did not provide Appellant copies of any OIG findings, or of any underlying source materials, such as reports, e-mails, or interview transcripts. Id. Moreover, NOPC #2 conveyed only the OIG's ultimate conclusions, without supporting facts or explanation. Thus, NOPC #2 asserted, for example, that ““[the] OIG has determined that [Appellant] and [FENS] have co- mingled accounting practices, shared office space, and shared employees and resources”. Id. NOPC #2 did not, however, identify any shared employees or shared resources, or explain any factual basis for the allegation that the two firms have co-mingled accounting practices. Similarly, NOPC #2 stated that ““[the] OIG has found that [Appellant] relies on [FENS] to exist and that [[Appellant] has acted as a pass through to enable [FENS] to obtain SDVOSB contracts”, but again provided no factual basis to support these claims. Id. Due to the vague and conclusory nature of the allegations presented, NOPC #2 fails to meet the requirement that Appellant be informed of “the specific facts and reasons” for its proposed cancellation.
*10 I further agree with Appellant that NOPC #2 also was defective because CVE based its cancellation decision on issues beyond those discussed in NOPC #2. Thus, for example, although not mentioned in NOPC #2, the cancellation decision expressed concern that “payments for FENS' services appear to have been calculated in a manner that prevented James Apicella the ability to account for profits and losses as evidenced by correspondence regarding James Apicella's inability to demonstrate personal income from [Appellant] in 2015.” Sections II.A and II.B, supra. Similarly, the cancellation decision alleged, for the first time, that according to the OIG, “FENS employees noted that they work for both [Appellant] and FENS but only received compensation from FENS and did not account for time spent on [Appellant's] projects”, and “FENS employees assisted [Appellant] with the preparation and submission of [Appellant's] SDVOSB verification application and that, in addition to FENS granting [[Appellant] free access to the use of its designers to assist [Appellant] with contractual bids, FENS employees prepared proposals for government contract solicitations on behalf of [Appellant].” Sections II.A and II.B, supra. While these allegations again are highly generalized — without, for example, identifying what “FENS employees” or “proposals for government contract solicitations” are being referenced — the more fundamental point is that these allegations were not raised in NOPC #2. Under 38 C.F.R. § 74.22, it is improper for CVE to base a cancellation decision on issues that the participant has had no opportunity to address or refute. Accordingly, the appearance of new issues for the first time in the cancellation decision further establishes that NOPC #2 did not provide Appellant adequate notice of “the specific facts and reasons” for the proposed cancellation.
*10 Appellant also contends that CVE treated the OIG's findings as non-rebuttable, thereby violating CVE's obligation to “consider any information submitted by the participant” before deciding to cancel the participant's verified status. 38 C.F.R. § 74.22(b). In addition, Appellant maintains, CVE lacked proper basis to cancel Appellant's verified status, because CVE has not disputed that Appellant was, at all relevant times, solely owned and managed by James Apicella, a service-disabled veteran. I find it unnecessary to resolve these questions at this time. Contrary to Appellant's suggestions, it is not evident from the record that CVE disregarded Appellant's response or the accompanying evidence Appellant submitted in response to NOPC #2. Likewise, while it may be true that CVE has not yet articulated a valid basis for cancellation, this does not establish that no possible basis could exist. The underlying regulation, 38 C.F.R. § 74.21, identifies several potential grounds for cancellation, including failure to maintain control by service-disabled veterans. Thus, ownership and management by a service-disabled veteran are not necessarily sufficient to insulate Appellant from cancellation, if Appellant is not also fully controlled by a service-disabled veteran.
*11 For the above reasons, the appeal is GRANTED, and the Notice of Verified Status Cancellation is VACATED. This is the final agency action of the U.S. Small Business Administration. 38 U.S.C. § 8127(f)(8)(A); 13 C.F.R. § 134.1112(d); 38 C.F.R. § 74.22(e).
The regulations at 13 C.F.R. part 134 subpart K became effective October 1, 2018. 83 Fed. Reg. 13,626 (Mar. 30, 2018).
SBA No. CVE-104, 2019 (S.B.A.), 2019 WL 1349838
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