CHARLES F. LETTOW, Judge.
This post-award bid protest arises out of a dispute emanating from a Service-Disabled Veteran-Owned Small Business ("SDVOSB") set-aside solicitation, issued by the Department of Veterans Affairs ("VA"). Plaintiff, AmBuild Company, LLC ("AmBuild"), was the apparent responsible, responsive lowest-cost bidder. The second lowest bidder, Welch Construction, Inc. ("Welch") filed an administrative protest, challenging AmBuild's eligibility as a SDVOSB. The Small Business Administration ("SBA") rejected those aspects of Welch's protest that were within SBA's purview. Based on grounds divorced from Welch's protest, however, VA's Center for Verification and Evaluation ("CVE") and then the Executive Director of VA's Office of Small and Disadvantaged Business Utilization ("OSDBU") disqualified AmBuild as a SDVOSB and awarded Welch the contract. AmBuild challenges that decision on both procedural and substantive grounds, seeking reinstatement as a SDVOSB and award of the contract from which the protest stemmed.
AmBuild has submitted a motion for judgment on the administrative record pursuant to RCFC 52.1(c)(1), and the government has filed a cross-motion for judgment. The motions have been fully briefed and were addressed at a hearing held on September 26, 2014. The case is now ready for disposition.
AmBuild is a limited liability company organized under the laws of the State of New York. Compl. ¶ 1. AmBuild's majority owner, Mark DeChick, is a service-disabled veteran of the United States Marine Corps, who was honorably discharged after serving in the first Gulf War. Pl.'s Aff. in Support of Pl.'s Appl. for Inj. Relief ("DeChick Aff.") ¶ 6, ECF No. 4; see also Pl.'s Mem. in Support of Pl.'s Mot. for Judgment on the Admin. Record ("Pl.'s Mem.") at 2, ECF No. 16. Mr. DeChick formed AmBuild in 2011, Compl. ¶ 3, after gaining approximately twenty years of experience as a project manager in the construction industry, DeChick Aff. ¶ 5. From 2011 to 2014, Mr. DeChick was the sole owner and managing member of AmBuild. Compl. ¶¶ 3, 7; see also AR 28-193 (2011 Operating Agreement, Art. I).
On March 28, 2014, CVE renewed AmBuild's SDVOSB status. Def.'s Cross-Mot. for Judgment on the Admin. Record & Response to Pl.'s Mot. for Judgment on the Admin. Record ("Def.'s Cross-Mot.") at 4 n.1, ECF No.17.
Approximately two months after the renewal of AmBuild's verification, on June 3, 2014, Mr. DeChick sold two ten-percent segments of his membership interest in an effort to increase the company's bonding limits. Compl. ¶ 7. AmBuild's Vice President, Andrew Claus, and a non-employee insurance agent, Matthew Riedinger, each acquired a ten-percent ownership interest in AmBuild, Compl. ¶ 2, and the Operating Agreement was amended and revised to reflect AmBuild's new ownership structure, AR 38-368 (AmBuild's 2014 Operating Agreement). After this capital infusion, Mr. DeChick owns 80 percent of the company, remains "the highest-ranking officer in [AmBuild], and maintain[s] 100 [percent] control of the day-to-day management and long-term decision making." DeChick Aff. ¶ 12.
On March 26, 2014, VA sought bids under Solicitation No. VA-528-14-B-0132 ("Solicitation"), which involved the renovation of revolving doors at the Veterans Affairs Medical Center located in Syracuse, New York. AR 9-17 to -59 (Solicitation). A public bid opening for the Solicitation was subsequently held on June 10, 2014. AR 10-60 (Pre-Bid Conference Agenda). AmBuild submitted a bid in response to the Solicitation and was the apparent lowest-cost bidder. See AR 14-90 to -93 (AmBuild's Offer (June 10, 2014)). Welch was the second lowest bidder. See AR 15-103 to-07 (Welch's Offer (June 10, 2014)). On June 17, 2014, Welch filed a formal protest with VA's contracting officer for the Solicitation, alleging that Mr. DeChick did not control AmBuild as required by 38 C.F.R. § 74.4(e) and that AmBuild did not meet the size requirements for a SDVOSB. AR 30-214 to -16 (Welch's Protest).
AR 30-216.
The protest consequently was forwarded to both SBA and OSDBU. OSDBU gave notice to AmBuild of this protest and requested additional information from AmBuild regarding how it obtained its necessary bonding and whether Mr. DeChick was employed by any other companies. AR 31-244 to -45 (E-mail from VA OSDBU Status Protest to DeChick (June 26, 2014)). That same day, AmBuild responded that its attorney would file a response in "a day or two." AR 31-244 (E-mail from DeChick to VA OSDBU Status Protest (June 26, 2014)). On the following day, AmBuild's counsel sent to SBA and OSDBU the company's response to the allegations of the protest and provided supporting documentation, AR 38-348 (E-mail from Thomas O'Gara to SBA and OSDBU (June 27, 2014)), which included AmBuild's 2014 Operating Agreement indicating the change in the company's ownership structure, see AR 38-362 to -85.
SBA reviewed AmBuild's supporting documentation and rejected Welch's contentions that AmBuild did not meet the size standard applicable to the procurement and that AmBuild was affiliated with other firms. AR 32-252 to -54 (SBA Size Determination Mem. (July 11, 2014)). Notably, SBA found "[AmBuild] to be a small business for [its] referenced size standard," and concluded that "AmBuild has never subcontracted with or received financial assistance from Christa. . . . There [is] no common ownership or common management." Id.
CVE similarly concluded that AmBuild met the size requirement for the applicable procurement and that AmBuild was neither affiliated with nor receiving financial assistance from other firms. AR 33-256 to -57 (CVE Final Determination (July 21, 2014)). The grounds for Welch's protest consequently were not accepted. CVE, however, sua sponte initiated consideration of an additional issue related to ownership that was not previously raised by Welch or the contracting officer. Specifically, upon an examination of AmBuild's 2011 Operating Agreement,
On July 28, 2014, AmBuild invoked 48 C.F.R. § 819.307(i) and appealed CVE's Final Determination to the Executive Director of OSDBU. AmBuild averred that CVE's determination was based on grounds divorced from Welch's protest and respecting which AmBuild had never received notice or been given an opportunity to respond, AR 35-271 to -73 (AmBuild's Appeal (June 28, 2014)). AmBuild also contended that CVE's reliance on the 2011 Operating Agreement was an error of fact. AR 35-270. Finally, AmBuild argued that an "Involuntary Withdrawal" provision in the 2014 Operating Agreement addressed circumstances in which Mr. DeChick might become insolvent, thus triggering provisions comparable in effect to a right-of-first-refusal provision that was held not to condition present ownership in Miles Construction, LLC v. United States, 108 Fed. Cl. 792, 803 (2013). AR 35-275 to -78.
The Executive Director of OSDBU denied AmBuild's appeal on August 7, 2014. AR 36-313 to -18 (Appeal Decision (Aug. 7, 2014)). The denial acknowledged that CVE's consideration of the ownership issue was "not raised by the contracting officer or [Welch]," but maintained that CVE's self-initiated action was not an error under 48 C.F.R. § 819.307(e). AR 36-315. According to the Executive Director, amendments to 48 C.F.R. § 819.307 adopted on September 30, 2013 "no longer limit[] CVE to resolving only the issues raised by a contracting officer or interested party." Id. Rather, CVE can determine SDVOSB status based on the "totality of circumstances." Id. Additionally, although the Executive Director found "CVE's reliance on provisions from an outdated Operating Agreement to be a clear error of fact," he nonetheless concluded that the "Involuntary Withdrawal" provision found in Article I of the 2014 Operating Agreement, broadly defined, creates a "condition subsequent, which could potentially cause [AmBuild's] ownership interest to go to another." AR 36-315, -17. The Executive Director specifically noted:
AR 36-317 to -18. He cited Section 6.3 of the 2014 Operating Agreement, AR 38-379 (providing an optional buy-out in event of an involuntary withdrawal), as forcing Mr. DeChick to "offer to sell his shares should any of the events listed in Article [I] occur." AR 36-317.
AmBuild filed suit in this court on August 28, 2014, requesting injunctive relief, contending that VA's decision to disqualify AmBuild as a SDVOSB violated procedural due process and was arbitrary and capricious. An expedited schedule for submission of the administrative record and for briefing was adopted, providing for completion of briefing on the record within 27 days, and a hearing was held on September 26, 2014, less than a month after the protest was filed.
At the close of the hearing, the court stated on the record that a preliminary injunction would be issued later that day. The resulting preliminary injunction (1) set aside the Executive Director of OSDBU's decertification of AmBuild as a SDVOSB, (2) ordered VA to restore AmBuild as an approved and certified SDVOSB and reinstate AmBuild as a SDVOSB in the VetBiz VIP database, and (3) ordered that VA consider any bids or offers that had been or will be submitted by AmBuild, disregarding OSDBU's and CVE's grant of Welch's protest. See Order Granting Pl.'s Mot. for Prelim. Inj., ECF No. 19.
The court has jurisdiction over bid protests under the Tucker Act as amended by the Administrative Dispute Resolution Act, Pub. L. No. 104-320, § 12, 110 Stat. 3870, 3874 (Oct. 19, 1996). In pertinent part, the statute provides that
28 U.S.C. § 1491(b)(1); see Systems Application & Techs., Inc. v. United States, 691 F.3d 1374, 1380-81 (Fed. Cir. 2012) ("On its face, the statute grants jurisdiction over objections to a solicitation, objections to a proposed award, objections to an award, and objections related to a statutory or regulatory violation so long as these objections are in connection with a procurement or proposed procurement.").
AmBuild alleges that VA's application of 48 C.F.R. § 819.307 ("SDVOSB/VOSB Small Business Status Protests") and 38 C.F.R. Part 74 ("Veterans Small Business Regulations") violates due process, the Administrative Procedure Act ("APA"), and VA's own procurement regulations. Section 74.3 of 38 C.F.R. Part 74 recites the standards CVE is to consider in determining Veteran-Owned Small Business ("VOSB") eligibility. Those standards are incorporated into the Veterans Affairs Acquisition Regulation System ("VAAR") provisions set out in 48 C.F.R. § 819.307, which govern SDVOSB and VOSB status protests with OSDBU. AmBuild's alleged violations of the Constitution, statute, and regulations in connection with a procurement fall squarely within the ambit of 28 U.S.C. § 1491(b)(1) and properly invoke this court's bid protest jurisdiction. See RAMCOR Servs. Grp., Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999) ("§ 1491(b) . . . does not require an objection to the actual contract procurement. . . . As long as a statute has a connection to a procurement proposal, an alleged violation suffices to supply jurisdiction."); see also Rothe Dev., Inc. v. United States Dep't of Def., 666 F.3d 336, 338 (5th Cir. 2011) ("[T]he Court of Federal Claims now retains exclusive jurisdiction over `action[s] by an interested party' `objecting to . . . any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.'" (quoting 28 U.S.C. § 1491(b)(1))); see also Angelica Textile Servs., Inc. v. United States, 95 Fed. Cl. 208, 215 (2010), ("The phrase `in connection with' is very sweeping in scope." (quoting RAMCOR Servs. Grp., 185 F.3d at 1289)), appeal dismissed, 462 Fed. Appx. 970 (Fed. Cir. 2012); cf. SRA Int'l, Inc. v. United States, __ F.3d __, __, 2014 WL 4494775 (Fed. Cir. 2014) (construing the words "in connection with" in the context of a provision of the Federal Acquisition Streamlining Act, codified at 41 U.S.C. § 4106(f)(1)).
When considering a bid protest, the court adheres to "the standards set forth in section 706 of title 5," i.e., the section of the Administrative Procedure Act ("APA") that prescribes the scope of judicial review of agency actions. 28 U.S.C. § 1491(b)(4). Under the APA, a court may set aside an agency decision if the decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A), assuming the criteria for equitable relief are satisfied, see PGBA, LLC v. United States, 389 F.3d 1219, 1224-28 (Fed. Cir. 2004).
This court's review is limited to evaluating whether an agency's "decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971), abrogated in part by Califano v. Sanders, 430 U.S. 99, 105, (1977) (abrogating Overton Park to the extent it recognized the APA as an independent grant of subject matter jurisdiction). In considering an agency's findings, the court "is not empowered to substitute its judgment for that of the agency." Keeton Corrs., Inc. v. United States, 59 Fed. Cl. 753, 755 (2004) (quoting Overton Park, 401 U.S. at 416). The court may set aside a procurement decision where "(1) the procurement official's decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure." Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324, 1332 (Fed. Cir. 2001). An agency's determination lacks a rational basis if the contracting officer "`failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or [the result] is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.'" Keeton Corrs., 59 Fed. Cl. at 755 (quoting Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). A procurement procedure contravenes established law where there is "`a clear and prejudicial violation of applicable statutes or regulations.'" Impresa Construzioni, 238 F.3d at 1333 (quoting Kentron Hawaii, Ltd. v. Warner, 480 F.2d 1166, 1169 (D.C. Cir. 1973)).
Upon a showing of error, "the court[] may award any relief that the court considers proper, including declaratory and injunctive relief except that any monetary relief shall be limited to bid preparation and proposal costs." 28 U.S.C. § 1491(b)(2) The determination of whether an injunction is appropriate is made by the court after consideration of the factors traditionally applied respecting equitable relief. See Centech Grp., Inc. v. United States, 554 F.3d 1029, 1037 (Fed. Cir. 2009) (citing PGBA, 389 F.3d at 1228-29).
The procurement at issue is governed by the Veterans Benefits, Health Care, and Information Technology Act of 2006 ("Veterans Benefits Act"), Pub. L. No. 109-461, tit. V, 120 Stat. 3403, 3425 (codified at 38 U.S.C. §§ 8127-28). The Act provides in pertinent part that "[i]n procuring goods and services pursuant to a contracting preference under this title or any other provision of law," VA "shall give priority to a small business concern owned and controlled by veterans," provided that the business is included in a small business database maintained by VA. 38 U.S.C. § 8128. To implement this Act, the Veterans First Contracting Program ("Program") was established in 2007, under which VA considers SDVOSB and VOSB entities as first and second priority for procurement awards.
At the Program's commencement, SDVOSB and VOSB entities were permitted to self-certify themselves for registration in the VetBiz VIP database. Statutory amendments found in 38 U.S.C. §§ 8127(e) and (f) now require the Secretary of VA to maintain the VetBiz VIP database, and the certification process is administered through CVE. See VA Acquisition Regulation: Supporting Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses, 74 Fed. Reg. 64,619-01 (Dec. 8, 2009) (codified at 48 C.F.R. Parts 802, 804, 808, 809, 810, 813, 815, 817, 819 and 852) (effective Jan. 7, 2010); 75 Fed. Reg. 6098-01 (Feb. 8, 2010) (codified at 38 C.F.R. Part 74) (effective Feb. 8, 2010).
Section 74.3 outlines the ownership requirement for a participant to receive verified status by VA, mandating that 51 percent of the entity must be "unconditionally and directly owned by one or more veterans or service-disabled veterans." 38 C.F.R. § 74.3. Section 74.3 elaborates that
Id. § 74.3(b).
Section 74.22 implements procedures to revoke certification of SDVOSB or VOSB status if "CVE believes that a participant's verified status should be cancelled prior to the expiration of its eligibility term." 38 C.F.R. § 74.22(a). In revocation proceedings, CVE must provide written notice to the participant, which then has thirty days to respond. Id. §§ 74.22(a), (b). Thereafter, CVE must issue a decision reciting the specific facts and reasoning that formed the basis of its decision. Id. § 74.22(c). Upon cancellation, the participant can no longer "appear as `verified' in the VetBiz VIP database." Id. § 74.22(d). The participant is permitted to administratively appeal a decision by CVE to the Executive Director of OSDBU. Id. § 74.22(e).
An unsuccessful offeror in a procurement under the Veterans First Contracting Program may also file an agency-level bid protest. Pursuant to the VAAR, "a contracting officer or an interested party may protest the apparently successful offeror's SDVOSB or VOSB status." 48 C.F.R. § 819.307(b). CVE-approved certifications may be challenged through this route, as provided in 48 C.F.R. § 819.307. The agency protests "shall be in writing and shall state all specific grounds for the protest. Assertions that a protested concern is not a SDVOSB or VOSB concern, without setting forth specific facts or allegations, are insufficient." Id. § 819.307(c). "The Director, CVE, will [then] determine the SDVOSB or VOSB status of the protested concern based upon the totality of circumstances within 21 business days after receipt of the status protest." Id. § 819.307(e). In these agency-level protests, "SDVOSB and VOSB status shall be determined in accordance with 38 C[.]F[.]R[.] [P]art 74." Id. § 819.307(a). The regulation provides that "[t]he Director, CVE, will notify the protestor and the contracting officer of the date the status protest was received by CVE and whether the status protest will be processed or dismissed for lack of timeliness or specificity." Id. § 819.307(d) (emphasis added). Notably omitted from the regulation is any requirement that notice be given to the subject of the protest, but due process protections apply in that regard to fill the gap. See Miles, 108 Fed. Cl. at 804 ("An interpretation of 48 C.F.R. § 819.307 . . . that does not allow [for] . . . basic procedural due process is plainly erroneous and cannot be upheld.").
AmBuild urges that CVE's final determination and OSDBU's denial of AmBuild's appeal violated procedural due process because both considered issues concerning AmBuild's unconditional ownership that were outside the scope of Welch's protest, and AmBuild was not provided with notice and an opportunity to respond with respect to those issues. See Pl.'s Mem at 8-12. AmBuild further contends that OSDBU's determination that AmBuild does not satisfy the unconditional ownership requirement for a SDVOSB was based on a clear error of law and constituted arbitrary or capricious agency action that prejudiced AmBuild. See id. at 17-26.
AmBuild avers that CVE and OSDBU erred procedurally by sua sponte considering Mr. DeChick's unconditional ownership under 38 C.F.R. § 74.3(b) without providing AmBuild notice of the alleged defect or an opportunity to respond. Pl.'s Mem. at 8-10.
CVE's and OSDBU's determination was an informal agency adjudication,
5 U.S.C. § 555(b); see also Advanced Sys. Tech., Inc. v. United States, 69 Fed. Cl. 474, 484 (2006) ("[S]ection 555(b) is `universally understood to establish the right of an interested person to participate in an on-going agency proceeding.'" (quoting Block v. Securities & Exch. Comm'n, 50 F.3d 1078, 1085 (D.C. Cir. 1995))).
As a matter of administrative law, the protections afforded by Section 555 of the APA correspond to procedural due process. See Pension Benefit, 496 U.S. at 655-56. The requirements of due process rest at the core of our nation's Constitution and governmental institutions and are "ingrained in our national traditions and . . . designed to maintain them." Joint Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123, 149, 161 (1951) (Frankfurter, J., concurring). As the Supreme Court said in Wisconsin v. Constantineau, 400 U.S. 433, 436 (1971), "[i]t is significant that most of the provisions of the Bill of Rights are procedural, for it is procedure that marks much of the difference between rule by law and rule by fiat." Thus, "[p]rocedural due process imposes constraints on governmental decisions which deprive individuals of `liberty' or `property' interests within the meaning of the Due Process Clause of the Fifth or Fourteenth Amendment." Mathews v. Eldridge, 424 U.S. 319, 332 (1976). "The fundamental requirement of due process is the opportunity to be heard `at a meaningful time and in a meaningful manner.'" Id. at 333 (quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965); see also Henry J. Friendly, Some Kind of Hearing, 123 U. Pa. L.Rev. 1267 (1975). What that means in the realm of administrative law was succinctly described in the Final Report of the Attorney General's Committee on Administrative Procedure in 1941:
Joint Anit-Fascist Refugee Committee, 341 U.S. at 169 n.16 (Frankfurter, J., concurring) (quoting Final Report of the Attorney General's Committee on Administrative Procedure, S. Doc. No. 8, 77th Cong., 1st Sess., at 62 (1941)).
In its argument, AmBuild points to this court's decision in Miles where OSDBU's failure in an agency protest to notify a veteran about the agency's self-initiated examination into the veteran's unconditional ownership contravened the procedural protections of Section 555 of the APA. Pl.'s Mem. at 8-9 (referring to Miles, 108 Fed. Cl. at 803-04). In that case, an administrative protest was filed against an apparently successful veteran offeror on control and ownership grounds because a disappointed bidder believed that the veteran and a non-veteran entity shared common ownership and control. Id. at 795-96. OSDBU rejected the grounds of the protest but nonetheless found that the veteran-owned entity did not meet unconditional ownership requirement of 38 C.F.R. § 74.3(b), based on OSDBU's independent inquiry into the veteran-owned entity's Operating Agreement. Id. at 796. In describing OSDBU's sua sponte consideration of the ownership issue, the court in Miles acknowledged that OSDBU has discretion to expand the grounds of a protest beyond those raised by the protestor or the contracting officer, but ruled that the veteran must be given notice of the new inquiry. Id. at 804 ("An agency should not act without affording an entity whose award or projected award is protested with notice of an alleged defect and an opportunity to respond."). Referring to Miles, AmBuild concedes that "courts have permitted the VA to broaden the scope of a bid protest," but argues that "such an expansion may only be done if the protested [veteran] is given notice and an opportunity to respond." Pl.'s Mem. in Further Support of Pl.'s Mot. for Judgment . . . and in Opp'n to Def.'s Cross-Mot. for Judgment at 4, ECF No. 18.
The government also cites Miles as precedent for the proposition that "OSDBU may review and decide status issues in addition to those presented by the protestor and contracting officer." Def.'s Cross-Mot. at 13. But, to support the result in this case, the government relies on post-Miles amendments to 48 C.F.R. § 819.307 that require CVE to determine SDVOSB status based on the "totality of the circumstances." Id. at 13-14; see 48 C.F.R. § 819.307(e) ("The Director, CVE, will determine the SDVOSB or VOSB status of the protested concern based upon the totality of circumstances within 21 business days after receipt of the status protest.").
When interpreting an agency regulation, the rules of statutory construction apply. Roberto v. Department of Navy, 440 F.3d 1341, 1350 (Fed. Cir. 2006) (citing Wronke v. Marsh, 787 F.2d 1569, 1574 (Fed. Cir. 1986)). Courts are instructed to examine the plain meaning of the statute or rule and "[i]f the words are unambiguous, it is likely that no further inquiry is required." Meeks v. West, 216 F.3d 1363, 1366 (Fed. Cir. 2000). If the language is ambiguous, the court will give deference to the controlling agency's interpretation. Id.
In this instance, it is well established that the plain meaning of "totality of circumstances" is unambiguous and simply designates a standard of review used in making a legal judgment. See, e.g., Lough v. Brunswick Corp., 103 F.3d 1517, 1519 (Fed. Cir. 1997) (recognizing that "totality of circumstances" language simply conveys "the process by which judges decide legal issues based on various facts that have been determined, utilizing the tools that judges always use, viz., the language of the statute, the purposes of the statute as indicated by legislative history, etc."). The government's strained construction of the amended form of 48 C.F.R. § 819.307 would convert CVE's scope of review into a general license to act on a protest without giving notice of issues not raised by the protesting party or contracting officer but rather generated sua sponte by CVE. The requirements of procedural due process cannot be so easily cast aside. VA's amendment of 48 C.F.R. § 819.307 in 2013 will be interpreted to establish a scope of review, but not to abrogate requirements of procedural due process.
During the agency-level protest, AmBuild did not, at a "at a meaningful time and in a meaningful manner," Mathews, 424 U.S. at 332, have notice of, or an opportunity to be heard on, issues concerning unconditional ownership. CVE acted sua sponte without giving notice to AmBuild that it was entering upon consideration of unconditional ownership. Because that issue was never raised in Welch's protest or by the contracting officer's referral of the protest, AmBuild did not address its ownership structure when it was responding to Welch's protest. Pl.'s Mem. at 10, 13. Indeed, AmBuild was entirely unaware of CVE's self-initiated investigation until its disqualification was rendered in CVE's determination of July 21, 2014. AR 33-255. There is no evidence in the Administrative Record to support OSDBU's assertion that the agency afforded AmBuild any notice, let alone adequate notice, "that it was the subject of a separate [agency-initiated] status protest and [that AmBuild] was given adequate opportunity to respond and submit documentation" based on that protest. AR 36-314 to -15.
The government alternatively advances the argument that notice of CVE's determination and the right to appeal that decision satisfied Section 555 of the APA. Def.'s Mot. at 14-15 ("[T]he decision itself put AmBuild on notice that it did not meet the requirements contained in 38 [C.F.R.] § 74.3(b) with respect to unconditional ownership. . . . AmBuild then had the opportunity to be heard before the agency [on appeal] and to submit documentation into the record with respect to the unconditional ownership issue."). This effort is wholly unconvincing. AmBuild's appeal focused on the fact that CVE evaluated an outdated Operating Agreement, dating to 2011, notwithstanding that AmBuild had provided the current Operating Agreement adopted in 2014, that the 2014 Operating Agreement explicitly provided that "[t]he Company shall be managed by the Managing Member," i.e., Mr. DeChick, and that CVE had improperly concluded that provisions contained in Section 6.3 of AmBuild's Operating Agreement were legally distinguishable from a right-of-first-refusal provision and somehow restricted Mr. DeChick's ownership and control. AR 35-274 to -78 (AmBuild's Appeal); see also AR 36-313 (Appeal Decision). On appeal, the Executive Director of OSDBU corrected CVE's improper reliance on an outdated Operating Agreement and found that the current Operating Agreement adequately showed that Mr. DeChick indeed was the Managing Member with control over AmBuild. AR 36-315 to -16. The Executive Director, however, went further to construe provisions of the current Operating Agreement relating to "Involuntary Withdrawal." AR 36-317. The Executive Director pointed to events that included "being adjudicated bankrupt, having to transfer interest through a court order or operation of law, or the appointment of a trustee, receiver, or liquidator for the Member or all or any substantial part of the Member's properties without the Member's agreement or acquiescence." Id. On that basis, not previously identified, the Executive Director concluded that AmBuild was not within the unconditional ownership of Mr. DeChick, the disabled-veteran 80-percent owner. AR 36-317 to -18. Consequently, the appeal did not assuage the problem of inadequate procedural due process. See Rambus Inc. v. Rea, 731 F.3d 1248, 1255-56 (Fed. Cir. 2013) (noting that "the ultimate criterion [before the court] is whether the appellant has had before the P[atent and ]T[rademark ]O[ffice] a fair opportunity to react to the thrust of the rejection" and refusing to "let the [agency] shortcut this procedure and deprive appellants of their due process rights" (internal quotation and citation omitted)); see also Miles, 108 Fed. Cl. at 805 (invalidating OSDBU's decision to disqualify a SDVOSB where "OSDBU did not . . . notify [the plaintiff] about its self-initiated `unconditional ownership' examination" before rendering a decision); Systems Plus, 69 Fed. Cl. at 767 (finding that a "[c]ontracting [o]fficer's decision was procedurally flawed to the point that it was contrary to law" where plaintiff was not notified of the officer's investigation into a new matter until after the disqualification decision was rendered).
In short, terminating AmBuild's SDVOSB status without notifying or giving AmBuild the opportunity to respond to the unconditional ownership issue contravened "the minimal requirements" for an informal adjudication set forth in Section 555 of the APA. Pension Benefit, 496 U.S. at 655.
AmBuild further avers that the agency's decision to disqualify AmBuild as a SDVOSB and remove AmBuild from the VetBiz VIP database based on ownership clauses in its 2014 Operating Agreement was arbitrary, capricious, and contrary to law. See Pl.'s Mem. at 17-26. A SDVOSB's ownership, as defined in 38 C.F.R. § 74.3(b), must not be subject to "conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity)." These restrictions however, are qualified by inclusion of the proviso that "[t]he pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms." Id. In short, the regulation sets forth prohibited arrangements that would cause ownership benefits to vest in non-veterans, while accommodating and providing exceptions for normal commercial arrangements.
The Executive Director of OSDBU affirmed CVE's removal of AmBuild from the SDVOSB database on the ground that Article I, Clauses iii, v, and ix, of the 2014 Operating Agreement, relating to bankruptcy, receivership, and transfer by court order or operation of law, permitted sale of Mr. DeChick's 80-percent majority holding of AmBuild. See AR 36-315 to -17 (quoted in part supra, at 6).
The disparity between OSDBU's reliance on Clause v and the government's reliance on Clause vi is of no consequence because neither of those clauses abridges the ownership requirements of 38 C.F.R. § 74.3(b). Clause v addresses the transfer of ownership property only if that member "seeks, consents to, or acquiesces in the appointment of a trustee . . . [or] receiver." AR 36-367. This clause concerns personal insolvency and will be addressed below in connection with Sections iii and ix. Clause vi recites a "reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief," referring to a corporate entity, AR 38-367, and thus is inapplicable by its terms to Mr. DeChick as an individual. In short, Clause vi of AmBuild's 2014 Operating Agreement provides no basis for OSDBU's decision.
Clause iii of the 2014 Operating Agreement provides for involuntary withdrawal in the event that "the Member is adjudged bankrupt or insolvent or there is entered against the Member an order for relief in any bankruptcy or insolvency proceeding." AR 38-365. The government argues that personal bankruptcy does not ordinarily result in the divesture of ownership, but under the 2014 Operating Agreement, Mr. DeChick would be forced to terminate his ownership shares upon the occurrence of any type of personal bankruptcy. Def.'s Cross-Mot. at 20. That argument is inconsistent with Federal bankruptcy law. The commencement of a bankruptcy case "creates an estate" comprised of the debtor's property. 11 U.S.C. § 541. And, under New York law, a debtor's property subject to the bankruptcy estate includes his or her ownership rights in a limited liability company. See, e.g., In re McCormick, 381 B.R. 594, 602 (S.D.N.Y. 2008) ("Under New York's Limited Liability Company statute, membership interest in a limited liability company is considered personal property. . . . Therefore, Debtor's interest in the LLC became property of the estate."); see also in re Dixie Mgmt. & Inv., Ltd. Partners, 474 B.R. 698, 701 (W.D. Ark. 2011) ("At the time the debtor filed its bankruptcy petition, it owned a 62 [percent] membership interest in [the LLC]. That interest, and any rights the debtor held under the [Operating Agreement], becomes property of the estate under § 541."); In re Garrison-Ashburn, L.C., 253 B.R. 700, 707 (E.D. Va. 2000) ("There is no question that the economic rights, that is the membership interest, becomes property of the estate."). Upon adjudication that the debtor is bankrupt, title to the debtor's property becomes "vested in the trustee . . . with actual or constructive possession, and placed in the custody of the bankruptcy court." Mueller v. Nugent, 184 U.S. 1, 14 (1902); see also Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 737 (1931) ("The title and right to possession of all property owned and possessed by the bankrupt vests in the trustee as of the date of the filing of the petition in bankruptcy, no matter whether situated within or without the district in which the court sits."). The trustee, through the bankruptcy court, is empowered to "use, sell, or lease" the debtor's property in the bankruptcy estate. 11 U.S.C. § 363; see also Irving Trust Co. v. Fleming, 73 F.2d 423, 426-27 (4th Cir. 1934) ("[I]t is the duty of the trustee, upon his appointment and qualification, to take possession of the property of the bankrupt wherever situate and administer it."). Therefore, regardless of an owner's rights in an Operating Agreement of a limited liability company, an adjudication of bankruptcy causes the court to have power to control the debtor's membership interest. In the event of a personal bankruptcy adjudication, Mr. DeChick would lose control of his membership interest to the bankruptcy court regardless of the language of the 2014 Operating Agreement.
Clause ix of the 2104 Operating Agreement similarly is permissible under 38 C.F.R. § 74.3(b) because it deals with "normal commercial practices" for doing business. See Miles, 108 Fed. Cl. at 803 (holding that a right of first refusal provision in veteran's Operating Agreement providing for the opportunity to purchase a member's shares was not "presently executory," but rather a "standard provision used in normal commercial dealings, and [did] not burden the veteran's ownership interest unless he or she [chose] to sell some of his or her stake"). Clause ix provides for the transfer of ownership "on account of a court order or otherwise by operation of law." AR 38-367. Through a court order or other operation of law mandating the transfer of ownership, Mr. DeChick would be obligated to sell his interest regardless of whether AmBuild's Operating Agreement recited such a requirement. Clause ix describes a circumstance amounting to an "encumbrance of stock or other ownership interest," 38 C.F.R. § 74.3(b), albeit by operation of law, that "does not affect the unconditional nature of ownership" within the meaning of the Section, id.
Finally, the government intimates that the foregoing clauses create a condition subsequent because, upon the occurrence of any events listed as being an "Involuntary Withdrawal," Article 6.3 of the 2014 Operating Agreement requires Mr. DeChick offer to sell his entire ownership interest to Mr. Claus and Mr. Riedinger. Def.'s Cross-Mot. at 20-21, 23; see also AR 36-317 (reciting the Executive Director of OSDBU's finding that "Section 6.3 forces the [Member] to offer to sell his shares should any of the events listed in Article [I] occur"). Article 6.3 cannot be read in isolation, however, but rather must be interpreted in tandem with the "Involuntary Withdrawal" provisions of the Agreement. See Summerfield Hous. Ltd. P'ship v. United States, 42 Fed. Cl. 160, 166 (1998) ("A court must give reasonable meaning to all parts of the contract `so as to harmonize and give meaning to all its provisions,' and not render portions of the contract meaningless." (quoting Arizona v. United States, 575 F.2d 855, 863 (Ct. Cl. 1978)), aff'd, 217 F.3d 860 (Fed. Cir. 1999); see also Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir. 1991). Given that the "Involuntary Withdrawal" clauses do not abridge the ownership requirement under 38 C.F.R. § 74.3(b), it follows that any part of the Agreement describing the process for transferring shares upon an event of involuntary withdrawal also does not create an ownership issue for AmBuild.
In short, the government has neither "`provided a coherent and reasonable explanation of its exercise of discretion'" in decertifying AmBuild, Impresa Construzioni, 238 F.3d at 1333 (quoting Latecoere Int'l, Inc. v. United States Dep't of Navy, 19 F.3d 1342, 1356 (11th Cir. 1994)), nor articulated a "`rational connection between the facts found and the choice made,'" Motor Vehicle Mfrs., 463 U.S. at 43 (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)). Accordingly, the court finds that OSDBU's decision to decertify AmBuild and remove it from the VetBiz VIP Database was arbitrary and capricious and not in accord with VA's regulations.
To obtain relief in a bid protest, AmBuild must also demonstrate "both significant error in the procurement process and prejudice to its posture in the process." PGBA, LLC v. United States, 60 Fed. Cl. 196, 203 (2004) (citing Advanced Data Concepts, Inc. v. United States, 216 F.3d 1054, 1057 (Fed. Cir. 2000)), aff'd, 389 F.3d 1219 (Fed. Cir. 2004). In that regard, AmBuild must show that "there was a `substantial chance' it would have received the contract award but for [CVE's and OSDBU's] errors in the bid process." Bannum, 404 F.3d at 1356 (quoting Information Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1319 (Fed. Cir. 2003)). The facts of record readily demonstrate that AmBuild was substantially prejudiced by CVE's and OSDBU's actions. The agency addressed issues divorced from Welch's protest without adequately providing AmBuild with notice of, or an opportunity to respond to, the agency-initiated grounds. Moreover, the agency elided AmBuild from the list of approved SDVOSBs using arbitrary and capricious interpretations of the meaning of "unconditional ownership" in 38 C.F.R. § 74.3(b). Absent relief, AmBuild will suffer the loss of opportunities to compete for SDVOSB set-aside contracts, a substantial portion of AmBuild's revenue. AmBuild has been prejudiced by CVE's and OSDBU's actions.
When determining whether to issue a permanent injunction, "the court must consider whether (1) the plaintiff has succeeded on the merits, (2) the plaintiff will suffer irreparable harm if the court withholds injunctive relief, (3) the balance of hardships to the respective parties favors the grant of injunctive relief, and (4) the public interest is served by a grant of injunctive relief." Centech Grp., 554 F.3d at 1037 (citing PGBA, 389 F.3d at 1228-29). If all four criteria are satisfied, the court may award declaratory or injunctive relief that is appropriate in the circumstances. See 28 U.S.C. § 1491(b)(2).
AmBuild has succeeded on the merits of its protest, and it has suffered irreparable harm by OSDBU's decertification of it as a SDVOSB, disqualifying it from the contractual award under the pertinent solicitation and removing it from the VetBiz VIP database. Balancing the hardships between AmBuild and the government, the court determines that the balance tips in AmBuild's favor. The government has failed to make any showing that an injunction constitutes a hardship for VA. Any possible harm to VA has been forestalled by the accelerated briefing schedule proposed by the parties and adopted by the court, and by the fact that the agency has stayed the contract with Welch. See Hr'g Tr. 34:18-20. Considering the severity of the harm AmBuild will suffer without equitable relief, plus its success on the merits, the balance of hardships weighs in favor of granting injunctive relief. Finally, the public has a significant interest in the effective, reliable, and coherent operation of VA's Veterans First Contracting Program, just as it does in preserving the integrity of the competitive SDVOSB procurement process. Those interests are best served by adherence to required procedures and evaluative steps for a procurement. See Wackenhut Servs. Inc. v. United States, 85 Fed. Cl. 273, 312 (2008); PGBA, 60 Fed. Cl. at 221 ("[T]he public interest is well-served by ensuring that the government procurement process is fair."). The criteria for issuance of equitable relief have been satisfied, and an injunction is appropriate.
For the reasons stated, AmBuild's motion for judgment on the administrative record is GRANTED, and the government's cross-motion for judgment on the administrative record is DENIED. The determination made by OSDBU on August 7, 2014, rendering AmBuild ineligible as a SDVOSB, is set aside. VA shall restore AmBuild as an approved and certified SDVOSB and reinstate AmBuild in the VetBiz VIP database. VA shall consider AmBuild's apparent low bid in response to the Solicitation.
AmBuild is awarded its costs of suit.
It is so
One of the prior contracts won by AmBuild was subject to an administrative protest based on the contention that it was affiliated with a much larger construction company. Hr'g Tr. 7:4-10. That protest was resolved by the Small Business Administration in AmBuild's favor. Id.
