IN THE MATTER OF: XOTECH, LLC, APPELLANT
SBA No. VET-277, 20192018 WL 8786645September 14, 2018
SBA No. VET-277, 2019 (S.B.A.), 2018 WL 8786645
Small Business Administration (S.B.A.)
Office of Hearings and Appeals
[Service-Disabled Veteran Owned Small Business Concern Appeals]
*1 IN THE MATTER OF: XOTECH, LLC, APPELLANT
*1 SBA No. VET-277
*1 Solicitation No. W911SA-l7-R-3001
*1 September 14, 2018
*1 Department of the Army
*1 Mission & Installation Contracting Command
*1 Fort McCoy, Wisconsin
*1 J. Patrick McMahon, Esq.
*1 William T. Welch, Esq.
*1 McMahon, Welch & Learned, PLLC
*1 Reston, Virginia
*1 For Appellant
*1 Edmund M. Bender, Esq.
*1 Office of General Counsel
*1 U.S. Small Business Administration
*1 Washington, D.C., for the Agency
I. Introduction and Jurisdiction
*1 This appeal arises from a determination by the U.S. Small Business Administration (SBA) Acting Director of Government Contracting (AD/GC) concluding that XOtech, LLC (Appellant), is not an eligible Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC) because Appellant is not controlled by one or more service-disabled veterans. International Service Contractors, LLC (ISC), had protested Appellant's status as an SDVO SBC. On appeal, Appellant contends the AD/GC's determination is clearly erroneous and should be reversed. For the reasons discussed infra, I affirm the AD/GC's determination and deny the appeal.
*1 OHA decides appeals of SDVO SBC status determinations under the Small Business Act of 1958, 15 U.S.C. § 631 et seq., and 13 C.F.R. parts 125 and 134. Appellant filed the appeal within 10 business days of receiving the determination, so the appeal is timely. 13 C.F.R. § 134.503. Accordingly, this matter is properly before OHA for decision.
A. Solicitation and Protest
*1 On September 12, 2017, the Department of the Army, Mission & Installation Contracting Command, Fort McCoy, Wisconsin (Army) issued Request for Proposals (RFP) No. W911SA-17-R-3001 for Logistics Readiness Support Services for various Army Reserve locations. The Contracting Officer (CO) set aside the RFP for SDVO SBCs. Appellant submitted its initial offer on December 15, 2017, and its final proposal revision on January 19, 2018.
*1 On May 9, 2018, a notice of award was posted to FedBizOps announcing that Appellant was the awardee. On May 11, 2018, ISC filed protests with the CO challenging Appellant's size and SDVO SBC status. ISC alleged that VSE Corporation controls Appellant through contractual relations; and that Appellant is managed by four managing partners and, thus, a service-disabled veteran does not control Appellant's decisions. (Protest at 2-3.) ISC attached a press release, various State of Georgia filings, and other materials in support of its allegations. The CO forwarded the SDVO protest to SBA's AD/GC for a status determination.2
*1 On May 31, 2018, Appellant provided two sets of documents to the AD/GC via secure file sharing. (Protest File (PF), Exh. 6, at S7-S8.)3 Among these are Appellant's Articles of Organization and its Operating Agreement.
*2 Appellant's Amended and Restated Articles of Organization, dated January 31, 2012, and filed with the State of Georgia on February 17, 2012, is the most recent one. Article 3 states, “The LLC will be Manager-Managed.” It is executed for Appellant by: “Gary Marullo, Manager”; “Kathy Marullo, Manager”; “Joshua Marullo, Manager”; and “Jena Marullo-Webb, Manager”. (PF, Exh. 2.) Accompanying it is the “Consent of all the Managers and Members” of Appellant, executed by all of Appellant's Members, and then by all of its Managers: “Gary Marullo, Manager”; “Kathy Marullo, Manager”; “Joshua Marullo, Manager”; and “Jena Marullo-Webb, Manager”. (PF, Exh. 2.)
*2 Appellant's Second Amended and Restated Operating Agreement, dated January 1, 2012, is the most recent one. Its Article I contains the following Defined Terms:
*2 1.17 “Majority Interest”: The Member or Members owning a majority (more than fifty percent (50%)) of the Voting Units. Further, a Majority Interest must include the affirmative vote of all Senior Members of the Company, if any.
*2 1.28 “Senior Member”: means one (1) individual who shall initially be Gary Marullo, for so long as he shall continue to own any of his Voting Units ....
*2 Article V, Members, contains:
*2 5.2. Quorum. Members holding a Majority Interest, represented in person or by proxy, shall constitute a quorum at a meeting of the Members for action on such matter. A Member may also participate by conference telephone call if all Members can hear one another on such call. Once present at a meeting, a Member shall be deemed to be present for quorum purposes for the remainder of the meeting.
*2 5.3. Manner of Acting. An affirmative vote of a Majority Interest, including the affirmative vote of the Senior Members, if any, shall constitute the act of the Members ....
*2 Article VI, Management, contains:
*2 6.01 Management by Managers. The Company shall have one or more Managers who shall manage the Company and its business and affairs. Unless the approval or consent of the Members owning Voting Units is expressly required by this Agreement or by non-waivable provisions of the Act, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding such matters and to take all action necessary or convenient to carry out the business and affairs of the Company. The Managers shall have the power to ratify and approve any action taken on behalf of the Company by any of its employees or agents and, upon such ratification and approval, any such action shall be effective for and as the act of the Company as though such action had been adopted and approved by the Managers at the time it was taken. Without limiting the generality of the foregoing, but subject to the limitations described in Section 6.03 below, the Managers shall have the power, on behalf of the Company to (a) open one or more depository accounts and make deposits into and checks and withdrawals against such accounts, (b) enter into agreements and execute contracts, documents, and instruments on behalf of the Company, (c) engage employees and agents, define their duties, and establish their compensation or remuneration, (d) obtain insurance covering the business and affairs of the Company and its property and its employees and agents, (e) prosecute or defend any proceeding in the Company's name, and (f) borrow money for the Company from banks, other lending institutions, Managers, Members, or others on such terms as the Managers deem appropriate, and in connection therewith, to hypothecate, encumber and grant security interests in the assets of the Company to secure repayment of the borrowed sums.
*3 6.3 Decisions Reserved to the Members. Notwithstanding anything in this Agreement to the contrary, the Members shall have the right, by an affirmative vote of a Majority Interest, to approve (a) the sale, exchange, lease or other transfer or disposition of all, or substantially all, of the Company's assets outside of the ordinary course of business, and (b) any reorganization, merger, liquidation, recapitalization or liquidation of the Company.
*3 6.4 Number, Designation and Tenure. The Company shall have four (4) Managers. The Members shall, from time to time, by resolution fix the precise number of Managers by an affirmative vote of a Majority Interest. Each Manager shall hold office until the first to occur of the death, resignation, legal incapacity or removal of such Manager, or until a successor to such Manager shall have been elected and qualified. The Managers shall be the Senior Member, Gary Marullo, along with Kathy Marullo, Jena Marullo-Webb and Joshua Marullo.
*3 6.06 Voting by Managers. Each Manager shall be entitled to one vote. A Manager may exercise his or her vote in person only and not by proxy.
*3 6.08 Action by Managers without Meeting. Any action required or permitted to be taken by the Managers at a meeting may be taken without a meeting if one or more written consents, setting forth the action so taken, are signed by Managers who would be entitled to vote not less than the minimum number of votes that would be necessary to authorize or take the action. Any such consents shall have the same effect as a vote of the Managers.
*3 (PF, Exh. 2.)
*3 Appellant's Second Amended and Restated Operating Agreement has been amended three times. The First Amendment to the Second Amended and Restated Operating Agreement, dated January 1, 2014, provides, at § 4, “Pursuant to Section 6.04 of the Company's Operating Agreement, the Board of Managers shall hereafter consist of four (4) persons, designated as follows: Gary Marullo; Joshua Marullo, Jena Marullo-Webb, Kathy Marullo. (PF, Exh. 2.)
*3 The Second Amendment to the Second Amended and Restated Operating Agreement, dated July 30, 2014, consents to a transfer of a membership interest. Section 2 and Exhibit A of this document sets the ownership percentage of each Member as: Gary Marullo, 90.28%; Kathy Marullo, 3.72%; Jena Marullo-Webb, 2%; and Joshua Marullo, 4%.
*3 The Third Amendment to the Second Amended and Restated Operating Agreement, dated January 1, 2017, recites that its purpose is “to clarify the identity of the Managers, the powers vested in the Managers ...”. Sections 2 and 3 of this document delete §§ 6.02 and 6.04 of the Second Amended and Restated Operating Agreement, replacing them with the following new sections:
*3 6.02 Execution of Instruments. Any instrument, agreement, contract, lease or other document which is signed on behalf of the Company by one or more Managers of the Company who have been authorized by the Managers shall be binding upon the Company. No Member who is not also a Manager shall have any authority to execute documents on behalf of or otherwise bind the Company, including, without limitation, Jena Marullo-Webb.
*4 6.04 Number, Designation and Tenure. The Company shall have three (3) Managers. The Members shall, from time to time, by resolution fix the precise number of Managers by an affirmative vote of a Majority Interest. Each Manager shall hold office until the first to occur of the death, resignation, legal incapacity or removal of such Manager, or until a successor to such Manager shall have been elected and qualified. The Managers shall be the Senior Member, Gary Marullo, along with Kathy Marullo, and Joshua Marullo.
*4 (PF, Exh. 2.) This document is signed by Gary Marullo on behalf of Appellant as Manager, and by Gary Marullo, Kathy Marullo, Jena Marullo-Webb and Joshua Marullo as Members.
*4 Also in Appellant's submissions is a list of persons with access to Appellant's bank accounts. This list includes: Gary Marullo, Kathy Marullo, Josh Marullo, Sandy Smith, Stan Wilson, Stacy Dayton, and Maria Bliss. (PF, Exh. 2.)
*4 On June 5, 2018, SBA asked Appellant 11 questions, and on June 8, 2018, Appellant responded to those questions and provided a third set of documents through secure file sharing. (PF, Exh. 6, at S1-S2 and S4-S6.) In Question 1, SBA asked:
*4 I understand that XOTech does not have any minutes of members and/or managers meetings. Have XOTech's members or managers had any written resolutions in lieu of a meeting? If so, could you please provide a copy of these written resolutions that have been issued for the previous five years?
*4 (PF, Exh. 6, at S1.) Appellant responded:
*4 No, there are no written resolutions in the previous 5 years.
*4 (PF, Exh. 6, at S4.) On June 19, 2018, SBA asked one follow-up question, which Appellant answered on June 21, 2018. (PF, Exh. 6, at S4, S7.)
B. AD/GC's Determination
*4 On July 27, 2018, the AD/GC issued his determination, sustaining ISC's protest. The AD/GC concluded that Gary Marullo is a qualified service-disabled veteran and meets the ownership requirements. (Determination at 3.) As for control, however, the AD/GC found he could not ascertain that a service-disabled veteran holds the highest officer position, because the Operating Agreement does not designate officers; instead it vests complete authority to manage Appellant in its Managers. (Id. at 4.) The Managers also control Appellant's bank account, may enter into agreements and contracts, engage employees, define their duties and establish their compensation. (Id., citing Operating Agreement.) These are duties typically carried out by the highest officer in a firm. (Id.) There are three Managers, Gary Marullo, Kathy Marullo, and Josh Marullo, and only Gary Marullo is a service-disabled veteran. All three members share equally in management of the firm, and so a service-disabled veteran does not hold the highest officer position within Appellant.
*4 The regulations require, for a Limited Liability Company, that one or more service-disabled veterans must serve as the managing member, with control over all decisions. 13 C.F.R. § 125.13(d). Here, because the Managers share management equally, Appellant does not meet this requirement. (Id.) Further, each Manager has one vote in a Managers' meeting. Gary Marullo may be outvoted by the others. Thus, a service-disabled veteran does not control all decisions, contrary to the regulatory requirement. (Id. at 5.)
C. Appeal Petition
*5 On August 10, 2018, Appellant filed the instant appeal with the SBA Office of Hearings and Appeals (OHA). Appellant contends the AD/GC misread the Second Amended and Restated Operating Agreement (Operating Agreement) and thus clearly erred in finding Gary Marullo does not control Appellant. (Appeal at 2-3.) Appellant maintains that the Operating Agreement and its amendments contain several provisions that show Gary Marullo is the highest officer in XOtech and has the power to control Appellant's decisions. (Id. at 3.)
*5 Appellant maintains the AD/GC overlooked the consistent designation in the Operating Agreement of Gary Marullo as the “Senior Member” as well as his role. The Operating Agreement identifies him as the one individual to be designated the “Senior Member”, “for so long as he shall continue to own any of his Voting Units.” (Id. at 6, quoting Operating Agreement § 1.28.) An affirmative vote of the majority of interest, including the affirmative vote of the Senior Members, shall constitute an act of the members. (Id. at 6, Operating Agreement §§ 1.28, 5.03.) Therefore, no vote of the members, and no act of the members, can take place without the affirmative vote of the Senior Members, and Gary Marullo is the only Senior Member. Thus, Gary Marullo controls the firm. (Id.)
*5 Appellant further argues that despite the designation of multiple “managers” in the Operating Agreement, the signature page of the Third Amendment lists all the members with their signatures and lists only Gary Marullo as the manager of the company. On all the signature pages of the various Operating Agreements and Amendments to them, no other person or member is designated as “manager” other than Gary Marullo. The signature pages, signed by all members, are clear designation of Gary Marullo as Appellant's one and only manager. (Id. at 6-7.)
*5 Appellant points out Gary Marullo owns over 90% of both the voting and ownership interests in Appellant. This demonstrates the Members' intent to vest control in Gary Marullo by super-majority ownership and super majority voting units. Identifying Gary Marullo as the owner of 90.28% of the company's voting units is another indicia of control by Gary Marullo. (Id. at 7-8.)
*5 While each Manager is entitled to one vote, all effective majority votes of the company must include the affirmative vote of the Senior Member — Gary Marullo. (Id. at 8.) Another indicia of control relates to the quorum requirement for a member meeting. There must be a quorum at each meeting at which votes are cast. Members holding a majority interest shall constitute a quorum. The only holder of a majority interest in Appellant is Gary Marullo. Appellant points out that control over quorum for company meetings has been an important factor in OHA's precedent. It is clear Gary Marullo will control every meeting of Appellant's members. (Id. at 8-9, citing Alpha Terra Engineering, Inc., SBA No. VET-238 (2013).)
*6 Appellant maintains its members have consistently recognized Gary Marullo as their Manager by their signatures to the Operating Agreement and its amendments. As Senior Member, he has preferential voting rights. His 90% interest gives him control of the quorum requirement. These all designate him as holder of Appellant's highest officer position. (Id. at 10-11.)
*6 As relief, Appellant requests OHA to vacate the AD/GC Determination and conclude that Appellant is properly controlled by Gary Marullo, the service-disabled veteran. (Id. at 11.)
D. SBA's Response
*6 On August 27, 2018, SBA responded to the appeal. SBA contends the AD/GC's determination was not based on a clear error of fact or law and should be upheld. Appellant's Operating Agreement precludes a finding that Gary Marullo independently controls all of the company's decisions, as required by the regulations. (SBA Response at 3, citing Matter of Valor Contracting, LLC, SBA No. VET-194 (2010.)) The Operating Agreement provides that the managers will share full and complete authority to manage the business, and wide day-to-day operational duties. (Id. at 4, citing Operating Agreement § 6.01.) The Operating Agreement names three managers, only one of whom, Gary Marullo, is a service-disabled veteran. Therefore, Gary Marullo does not have independent control of Appellant's day-to-day management. (Id. at 4).
*6 SBA asserts Appellant's argument that the AD/GC should have found Gary Marullo sole manager based upon signature pages, is contrary to the text of the documents themselves and, thus, fails to establish clear error by the AD/GC. (Id. at 4.) SBA does not dispute that Gary Marullo is Appellant's Senior Member and majority owner, and controls Member decisions. (Id. at 5, citing Operating Agreement § 6.03.). However, while Gary Marullo controls these long-term business decisions, the Operating Agreement clearly vests day-to-day responsibility with all three named managers. (Id. at 5, citing Operating Agreement § 6.06.) Thus, Appellant does not satisfy the regulatory requirement that service-disabled veterans control “all of the decisions” of the LLC. (Id. at 6.)4
A. Standard of Review
*6 OHA reviews the AD/GC's decision to determine whether it is “based on clear error of fact or law.” 13 C.F.R. § 134.508; see also Size Appeal of Taylor Consultants, Inc., SBA No. SIZ-4775, at 10-11 (2009) (discussing the clear error standard that is applicable to both size appeals and SDVO SBC appeals). Thus, I may overturn the AD/GC's decision only if Appellant proves the AD/GC made a patent error based on the record before him.
*6 An SDVO SBC is a concern which is both owned and controlled by a service-disabled veteran. 15 U.S.C. § 632(q)(2). SBA has promulgated separate regulations pertaining to ownership (13 C.F.R. § 125.12) and control (13 C.F.R. § 125.13) of an SDVO SBC. OHA has repeatedly held that ownership and control are distinct requirements, and if a firm fails either, it is not an eligible SDVO SBC. Matter of Precise Systems, Inc., SBA No. VET-246, at 12 (2015).
*7 A concern's management and daily business operations must be controlled by a service-disabled veteran, in order for it to be an eligible SDVO SBC. 13 C.F.R. §§ 125.11(g)(2), 125.13(a). Control means that both the long-term decision making and the day-to-day management and administration of the business operations must be conducted by a service-disabled veteran. 13 C.F.R. § 125.13(a). The service-disabled veteran must hold the highest officer position in the concern. 13 C.F.R. § 125.13(b). In the case of a limited liability company, one or more service veterans must serve as managing members, with control over all the decisions of the company. 13 C.F.R. § 125.13(d).
*7 OHA has consistently interpreted the “all decisions” language strictly in accordance with its plain meaning, and has required that the service-disabled veterans have independent control over all the decisions of the concern. Matter of Benetech, LLC, SBA No. VET-225, at 7 (2011). Therefore, “all decisions” means all decisions, and OHA has held that firms are ineligible if their operating agreements (or corporate documents) do not give the service-disabled veteran control over all decisions of the firm. Matter of Benetech, at 8 (operating agreement provided that concern was managed equally by its members, only one of whom was a service-disabled veteran); Matter of Valor Contracting, LLC, SBA No. VET-194 (2010) (minority owner who was not a service-disabled veteran had negative control due to supermajority voting requirement); Matter of Heritage of America, LLC, SBA No. VET-142 (2008) (operating agreement granted all members equal authority to act on the concern's day-to-day business); Matter of Technical and Project Engineering, LLC, SBA No. SDV-110, at 3-4, 7 (2006) (supermajority requirements for decisions including changes to the firm's organization structure or financial signature authority, or hiring of executive staff); Matter of IITS-Nabholz, LLC, SBA No. VET-114, at 9 (2007) (supermajority requirements for selling, mortgaging, or otherwise transferring company assets); Matter of CymSTAR LLC, SBA No. VET-123, at 7 (2007) (supermajority requirement for “fundamental decisions”); Matter of Firewatch Contracting of Florida, LLC, SBA No. VET-137, at 6 (2008) (supermajority requirements for appointing, compensating, or removing officers).
*8 Here, Appellant is governed by the Second Amended and Restated Operating Agreement, as amended three times in 2014 and 2017. Appellant has issued no other resolutions since then. The Operating Agreement states “The LLC will be Manager-Managed”. It further provides that Appellant will have “one or more Managers who will manage the Company”. Operating Agreement, § 6.01. Each of these Managers has full authority to manage and control Appellant's business. The Managers have the power to enter into contracts, engage employees, obtain insurance, conduct litigation, and borrow money. The Managers have the power to open bank accounts on Appellant's behalf, and to make deposits and withdrawals. That Managers other than Gary Marullo have this power is confirmed by the document showing that the other two Managers, Kathy Marullo and Josh Marullo, are listed as having access to Appellant's bank accounts. PF, Ex. 2.
*8 The Operating Agreement explicitly designates three named Managers, so it contemplates that there will be more than one Manager controlling Appellant's business. The Operating Agreement initially designated Gary Marullo, Kathy Marullo, Jena Webb-Marullo and Joshua Marullo as Managers. The Third Amendment to the Operating Agreement dropped Jena Webb-Marullo from the roster of designated Managers, but continued to provide that there would be three Managers: Gary Marullo, Kathy Marullo, and Joshua Marullo. It is therefore clear that Gary Marullo shares the management of Appellant's day-to-day operations with two other Managers who are not service-disabled veterans.
*8 Appellant points to Gary Marullo's status as Appellant's Senior Member, his 90.28% ownership and voting interest in Appellant, and his designation on the signature pages of the Operating Agreement and its amendments listing him as sole Manager of Appellant as establishing his control. However, Appellant's Articles of Organization list multiple Managers. See supra. Further, the Third Amendment to the Operating Agreement explicitly enumerates the three Managers. It is true that whenever a formal vote is taken among the Members, Gary Marullo has a controlling interest, has the ability to outvote the other Marullos in their capacities as Members, and is described as the Manager on the signature pages.
*8 Nevertheless, this does not alter the fact that Appellant's Operating Agreement designates multiple Managers, and gives them extensive authority to manage the day-to-day operations of the business. When there is voting by Managers, each Manager is entitled to only one vote, and Gary Marullo is only one of three. Operating Agreement § 6.06.
*8 An active business only rarely makes decisions based upon the formal votes of its members. These are done for only the most important matters. Here, those are the sale, exchange, lease or other transfer or disposition of all, or substantially all, of the Company's assets outside of the ordinary course of business, and any reorganization, merger, liquidation, recapitalization or liquidation of the Company. Operating Agreement § 6.03. An active business has numerous other decisions concerning the management of the company, and these must be made every day. Here, Appellant has empowered its Managers who are not service-disabled veterans to make those decisions. This is contrary to the regulatory requirement that the service-disabled veteran must control all the decisions of the company. Similar to the concerns in Benetech and Heritage, supra, Appellant has organized itself so that two Managers who are not service-disabled veterans have the authority to make many of the day-to-day decisions on the operation and administration of the company. Therefore, Gary Marullo does not have the power to make all the decisions of the company. The AD/GC was therefore not in error when he concluded Gary Marullo does not control all the decisions of the company, and that therefore Appellant is not an eligible SDVO SBC.
*9 Therefore, Appellant has failed to establish that the AD/GC's determination was based on a clear error of fact or law, and I must affirm the determination and deny the appeal. 13 C.F.R. § 134.508.
*9 Accordingly, the AD/GC's determination is AFFIRMED, and the appeal is DENIED. This is the final decision of the Small Business Administration. 13 C.F.R. § 134.515(a).
This Decision was originally issued under the confidential treatment provision of 13 C.F.R. § 134.205. After reviewing the Decision, counsel for Appellant informed OHA it had no requested redactions. Therefore, I now issue the entire Decision for public release.
The size portion of the protest was forwarded to SBA's Office of Government Contracting, Area III, for processing. Size Appeal of XOtech, LLC, SBA No. SIZ-5957 (2018).
SBA filed the PF in two parts, the first on August 23, 2018, and the second on August 24, 2018. The first part of the PF contains pages 1-1832; the second part contains pages S1-S8.
On August 29, 2018, Appellant moved to reply to SBA's Response. On August 30, 2018, SBA filed its objection to Appellant's motion. On August 31, 2018, Appellant filed its proposed reply. Appellant's Reply will not be considered. See 13 C.F.R. § 134.309(d).
SBA No. VET-277, 2019 (S.B.A.), 2018 WL 8786645
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