90-000881 Maritime Tug And Barge, Inc. vs. Department Of Transportation Status: Closed Recommended Order on Wednesday, August 8, 1990.

Summary: Petitioner not entitled to certification as Disabled Business Enterprise; 55% owner was disadvantaged under the rules (part indian) but he did not pay for stock; promise to pay father not enough

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

MARITIME TUG & BARGE, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 90-0881

)

DEPARTMENT OF TRANSPORTATION, )

)

Respondent. )

_________________________________)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was conducted in this case on May 31,

1990, in West Palm Beach, Florida, before J. Stephen Menton, a duly designated

Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Brenda Bryant, Esquire

Fields, Wilkinson, Bryant

& Aiken, P.A.

55 East Osceola, Suite 100

Stuart, Florida 34994

For Respondent: William Peter Martin, Esquire

Department of Transportation

605 Suwannee Street, MS #58

Tallahassee, Florida 32399-0458

STATEMENT OF THE ISSUES

The issue in this case is whether Petitioner is entitled to certification

as a Disadvantaged Business Enterprise pursuant to Rule 14-78, Florida

Administrative Code.

PRELIMINARY STATEMENT

On September 25, 1989, Petitioner, Maritime Tug & Barge, Inc. ("Maritime

Tug"), applied to the Respondent, Florida Department of Transportation ("DOT"),

for certification as a Disadvantaged Business Enterprise ("DBE"). By letter

dated January 16, 1990, DOT informed Maritime Tug that its application for DBE

status had been denied. By letter dated January 29, 1990, Maritime Tug timely

requested a formal hearing on the application. The case was referred to the

Division of Administrative Hearings which noticed and conducted the hearing. At

the hearing, Petitioner presented the testimony of three (3) witnesses: Stanley

L. Kraly, (President and fifty-five percent (55%) majority owner of Maritime

Tug); Stanley R. Kraly, (Vice President and forty-five (45%) percent owner of

Maritime Tug); and Alton Russell, (employed as a tug captain by Maritime Tug).

Petitioner offered two (2) exhibits into evidence, both of which were accepted.

Petitioner's Exhibit 1 is a letter verifying Stanley L. Kraly's membership in

the Penobscot Indian Tribe of Maine, and Petitioner's Exhibit 2 is a Transfer of

Stock Agreement dated October 10, 1989. Respondent presented the testimony of

Ms. Ruth Dillard, Coordinator of DBE Certification in the Minority Programs

Office of DOT. Respondent offered four (4) exhibits into evidence, all of which

were accepted. Respondent's Exhibit 1 is a copy of Maritime Tug's application

to DOT for certification as a DBE. Respondent's Exhibit 2 is a copy of the

Bylaws of Maritime Tug. Respondent's Exhibit 3 is a copy of the lease agreement

between Maritime Tug and Maritime Fuel, Inc. Respondent's Exhibit 4 is a copy of

notes made by DOT's consultant during her on-site interview of the Kralys in

Stuart, Florida on December 20, 1989. Prior to the commencement of the hearing,

the parties stipulated that Stanley L. Kraly is 37.5 percent Penobscot Indian.

The parties also stipulated that Stanley L. Kraly is the son of Stanley R.

Kraly.

A transcript of the proceeding was filed with the Division of

Administrative Hearings on July 2, 1990. At the conclusion of the hearing, the

parties agreed that proposed findings of fact and conclusions of law were to be

filed within 15 days of the filing of the transcript. The Respondent has timely

filed a proposed recommended order. However, no post- hearing submittals have

been received from the Petitioner. A ruling on each of the Respondent's

proposed findings of fact is included in the Appendix attached hereto.

FINDINGS OF FACT

1. Maritime Tug is a tug and barge company which purchases and sells

barges in southeast Louisiana and transports them to Florida for repair, lease

or sale. The company also engages in the lease of crew boats and tug boats.

2. Stanley L. Kraly ("Stan L.") owns fifty-five percent (55%) of the stock

of Maritime Tug and is the President of the company. Stan L. is twenty-four

(24) years of age. He graduated from high school in 1984 and served four years

in the United States Marines Corps in an infantry and reconnaissance battalion.

His duties in the Marines included surface swimming, (the equivalent of a

civilian lifeguard) and amphibious assault for hydrographic underwater beach

surveys.

3. Upon leaving the Marines, Stan L. began working for Maritime Fuel, Inc.

("Maritime Fuel") in Stuart, Florida. Maritime Fuel is owned by Stan L.'s

father, Stanley R. Kraly ("Stan R."). Maritime Fuel is engaged in the dockside

delivery of diesel fuel and marine-grade gas to privately owned boats and

marinas. At Maritime Fuel, Stan L. was as an "assistant team leader." His

duties included pulling the hose from the truck to fuel boats and assisting the

"team leader" with other jobs.

4. Maritime Tug was incorporated by Stan R. and Ken Hayes in March, 1989.

In approximately July of 1989, Stan R. bought out Ken Hayes and became the sole

owner of the company.

5. Stan L. began working for Maritime Tug in June, 1989 as a deckhand

apprentice. Stan L.'s duties as a deckhand apprentice included throwing and

splicing lines. He split his time between Maritime Tug and Maritime Fuel for

approximately three months. On October 10, 1989, Stan L. began working full-

time for Maritime Tug. At that time, he also became president and majority

stockholder of Maritime Tug as evidenced by a Stock Transfer Agreement dated

October 10, 1989.

6. Stan R. remains involved with Maritime Tug in the capacity of Vice-

President and Treasurer of the company. His duties include the following:

soliciting new business; negotiating financing on behalf of Maritime Tug and

signing notes and leases; preparing job estimates; negotiating and signing

contracts for major purchases and leases of tugs, barges, and other pieces of

equipment. The evidence established that Stan R. is primarily responsible for

the financial arrangements for Maritime Tug and only Stan R. signed for the line

of credit established at Sun Bank by Maritime Tug.

7. Stan R. completed five semesters at Maine Maritime College majoring in

marine engineering. He has been a sales correspondent and manufacturer's

representative for several companies. Stan R. has also owned a Texaco gas

station and a welding company. Stan R. currently holds an inactive real estate

license in the state of Florida. He is the sole stockholder of Maritime Fuel.

He is also a partner in a business entity known as The Hast Corporation and is

currently the president of the Marine Industry in Stuart. Because of his other

business interests, Stan R. attempts to limit his involvement in the day to day

operations of Maritime Tug. However, it is clear that Stan R. still plays an

active role in the management of the company, especially with respect to

financial matters.

8. There is some confusion regarding the timing of Stan L.'s acquisition

of his ownership interest in Maritime Tug. Maritime Tug's application to DOT

for certification as a DBE is dated September 25, 1989. On page 3, paragraph

number 10 of the application, the percentage of ownership of the company shows

Stan L. and Stan R. owning fifty-one percent (51%) and forty-nine percent (49%),

respectively. However, those numbers are crossed out on the application. On

the same page, paragraph number 11, the ownership breakdown is shown as fifty-

two percent (52%) and forty-eight percent (48%), respectively. Those

percentages were initialed on the application form by Stan L. sometime prior to

the final hearing. While both Stan L. and Stan R. testified that they had

agreed in principal during the summer of 1989 for Stan L.'s purchase of a

majority interest in Maritime Tug, there is no evidence of an actual transfer of

stock other than the Stock Transfer Agreement which is dated October 10, 1989.

On December 20, 1989, Ms. Kathy Garner, a consultant with DOT, conducted an on-

site review of Maritime Tug during which she interviewed both Stan L. and Stan

R. at Maritime Tug's place of business in Stuart, Florida. The notes recorded

by Ms. Garner during the December 20, 1989 on-site interview indicate that the

percentage of ownership was as it appears on the application, i.e., fifty- two

percent (52%) for Stan L. and forty-eight percent (48%) for Stan R. DOT was not

made aware of the October 10, 1989 stock transfer agreement between Stan L. and

Stan R. (and in fact, was told that no agreement existed) until January 17,

1990, when DOT received an unsigned copy of the October 10, 1989, agreement.

9. The October 10, 1989 Stock Transfer Agreement sets a purchase price of

fifty-five thousand dollars ($55,000) for the fifty five percent (55%) interest

purchased by Stan L. The Agreement leaves the amount of the payments to the

discretion of the buyer (Stan L.) with a single required minimum annual payment

of one thousand dollars. The Agreement states that the loan period is to be ten

years. However, there are no acceleration provisions in the Agreement.

Arguably, the buyer can take up to fifty-five years to pay off the purchase

price. The first payment is due on October 10, 1990. As of the date of the

hearing, there have been no payments made to Stan R. pursuant to the Agreement.

Stan L. has given no collateral for this indebtedness which is apparently his

only capital investment in the company and the only method of financing his

purchase of fifty-five percent (55%) majority ownership in Maritime Tug.

10. Stan L.'s fringe benefits are provided by Maritime Fuel, a corporation

solely owned by his father, Stan R. Maritime Tug does not employ a secretary,

but shares the full-time secretary employed by Maritime Fuel. Maritime Tug

leases its office space from Maritime Fuel pursuant to a lease agreement for one

hundred dollars per month. It is unclear whether the rental payments have been

made.

11. Since Stan L. became president and majority owner of Maritime Tug, the

tug captain for the company (one of the most important positions for the

company) was fired and a new captain was hired. Stan R. fired the former

captain and hired the current captain, Mr. Alton Russell, in late April 1990.

Stan L. was not involved in these decisions.

CONCLUSIONS OF LAW

12. The Division of Administrative Hearings has jurisdiction over the

subject matter of and the parties to this proceeding. Section 120.57(1),

Florida Statutes (1989).

13. In this proceeding, Petitioner must prove by a preponderance of the

evidence that it is entitled to certification as a DBE. See e.g., Florida

Department of Transportation vs. J.W.C. Co., Inc., 396 So.2d 778 (Fla. 1st DCA

1981).

14. DBEs are small business concerns that are owned and controlled by

socially and economically disadvantaged individuals as defined by the Federal

Surface Transportation and Uniform Relocation Assistance Act of 1987, (STURRA),

23 U.S.C. 101, et seq.

15. Pursuant to Sections 339.0805, 337.125, 337.135 and 337.137, Florida

Statutes (1989), DOT administers a certification program which certifies

applicants as DBEs. DBEs are accorded competitive advantages and preferential

treatment because they are eligible to participate in DOT's set aside program

under DBE contract goals.

16. Chapter 339, Florida Statutes, (1989) provides in pertinent part:

339.0805(1)(b)...It is the policy of the

state to meaningfully assist socially

and economically disadvantaged business

enterprises through a program that will

provide for the development of skills

through business management training, as

well as financial assistance in the form

of bond guarantees, to primarily remedy

the effects of past economic

disparity....

17. The United States Department of Transportation has promulgated 49 CFR,

Part 23, to implement STURRA and provide guidelines for state "recipients" who

receive federal highway funds. Relevant provisions of 49 CFR, Part 23 are:

Section 23.61 Purpose.

(a) The purpose of this subpart is to

implement section 105(f) of the Surface

Transportation Assistance Act of 1982

(Pub.L. 97-424) so that except to the

extent that the Secretary determines

otherwise, not less than ten percent of

the funds authorized by the Act for the

programs listed in section 23.63 of this

subpart is expended with small business

concerns owned and controlled by

socially and economically disadvantages

individuals.

Section 23.62 Definitions.

The following definitions apply to this

subpart. Where these definitions are

inconsistent with the definitions of

Section 23.5 of this part, these

definitions control for all other

purposes under this part.

"Act" means the Surface Transportation

Assistance Act of 1982 (Pub. L. 97-424).

"Disadvantaged business" means a small

business concern: (a) which is at least

51 percent owned by one or more socially

and economically disadvantaged

individuals, or, in the case of any

publicly owned business, at least 51

percent of the stock of which is owned

by one or more socially and economically

disadvantaged individuals; and (b) whose

management and daily business operations

are controlled by one or more of the

socially and economically disadvantaged

individuals who own it.

?~Small business concern" means a small

business as defined pursuant to section 3 of

the Small Business Act and relevant

regulations promulgated pursuant thereto.

18. Rule 14-78, Florida Administrative Code, is the rule which implements

STURRA at the state level and has followed the federal standards as set forth in

49 CFR, Part 23 in all parts relevant here.

19. Rule 14-78.002(3), Florida Administrative Code, defines a DBE as a

small business concern meeting two criteria. A DBE must be at least fifty-one

percent (51%) owned by "one or more socially and economically disadvantaged

individuals" and the "management and daily business operations [of the DBE) must

be controlled by one or more of the socially and economically disadvantaged

individuals who own it."

20. Native Americans, as defined by the Rule, are those persons who are

members of "American Indian tribes acknowledged by the Secretary of the

Interior, or persons who are certified by such American Indian tribes as being

eligible for membership in their tribes. `Acknowledged by the Secretary of the

Interior' means those American Indian tribes who tribal existence has been

acknowledged by the Department of Interior pursuant to 25 CFR, Part 83." The

parties stipulated at the start of the final hearing in this case that Stan L.

is 37.5 percent Penobscot Indian and has been certified as eligible for

membership by the Penobscot Tribe of Maine. That tribe has been "acknowledged

by the Secretary of the Interior." Therefore, Maritime Tug meets the first prong

of the definition of a "Disadvantaged Business Enterprise" if Stan L. is

determined to be the owner of at least fifty-one percent of the company.

21. Rule 14-78.005(7) sets forth the standards for certification of a DBE.

Rule 14-78.005(7)(c) requires that the DBE be an "independent business entity"

and the ownership and control exercised by the socially and economically

disadvantaged individuals must be

. . . real, substantial, and continuing. . . and

go beyond mere pro forma ownership of the

firm, as reflected in its ownership

documents. The socially and economically

disadvantaged owners shall enjoy the

customary incidence of ownership and shall

share in the risks and profits commensurate

with their ownership interests, as

demonstrated by an examination of the

substance rather than form of financial and

managerial arrangements. In assessing

business independence, the Department shall

consider all relevant factors, including the

date the firm was established, the adequacy

of its resources, and the degree to which

financial relationships, equipment leasing,

and other business relationships with non-

DBE firms vary from industry practice.

22. Rule 14-78.005(7)(f) recognizes that the contributions of a

disadvantaged owner may take the form of capital or expertise, but, in either

case, the contributions by the socially and economically disadvantaged owner

must be real and substantial.

23. Rule 14-78.005(7)(f) provides:

(f) To be Certified under this rule chapter,

the DBE shall be one in which the

contributions of capital or expertise

invested by the socially and economically

disadvantaged individual owners are real and

substantial. Examples of insufficient

contributions include, but are not limited

to a promise to contribute capital, a note

payable to the DBE enterprise or its owners

who are neither socially and economically

disadvantaged individuals, or the mere

participation as an employee, rather than as

a decision-maker. (Emphasis added).

24. In this case, both the capital and the expertise for Maritime Tug have

been supplied by Stan R. who does not qualify as a disadvantaged person under

the statutes and rules. While Stan L. is the titular owner of fifty-five

percent (55%) of the stock of Maritime Tug, the evidence established that he has

not paid anything for his ownership interest. While Petitioner contends that

Stan L. is obligated to pay Stan R. $55,000 for the majority ownership interest

in the company, such a promise to pay is clearly not sufficient under Rule 14-

78.005(7)(f).

25. The transfer of shares between Stan L. and Stan R. was not an "arms

length transaction." No collateral was pledged to secure the obligation, no

interest is being charged on the indebtedness and the required annual payments

are miniscule. These factors all indicate that Stan L. should not be considered

the true owner of the majority of the corporation for the purpose of determining

DBE status. Furthermore, if Maritime Tug were to default on its existing note

to Sun Bank, only Stan R. and not Stan L. would be responsible. Because he has

not had to pledge any collateral or guarantee any financial obligations as

consideration for receiving a fifty-five percent ownership interest in Maritime

Tug, and because he has not had to sign any promissory notes or lines of credit

for Maritime Tug, Stan L. has not assumed the normal financial risks

commensurate with the ownership of a business. These factors all indicate that

Stan L. should not be considered the true owner of the majority of the

corporation for the purpose of determining DBE status.

26. Stan L. does not bring any special expertise to the company. It is

clear that Stan R. provides most of the financial, business and maritime

expertise to the company. Stan L. has very limited business or managerial

experience prior to his involvement with Maritime Tug and he admitted during the

hearing that to a large degree he was "in training" under his father at Maritime

Tug.

27. Rule 14-78.005(7)(e) requires that the socially and economically

disadvantaged owner have "the power to direct or to cause the direction of the

management, policies, and operations of the firms and to make day-to-day as well

as major business decisions concerning the firm's management, policy and

operation." This subsection specifically recognizes that one factor to consider

in making this determination is the control lodged in nondisadvantaged persons.

(e) To be certified under this rule chapter,

the DBE shall be one in which the socially

and economically disadvantaged owner shall

also possess the power to direct or cause

the direction of the management, policies,

and operations of the firm and to make day-

to-day as well as major business decisions

concerning the firm's management, policy and

operation. In determining whether the socially and

economically disadvantaged owners also

possess the power to direct or cause the

direction of the management, policies and

operations of the firm and have the

requisite decision-making authority, the

Department may look to the control lodged in

the owners who are not socially and

economically disadvantaged individuals. If

the owners who are not socially and

economically disadvantaged individuals are

disproportionately responsible for the

operation of the enterprise or if there

exists any requirement which prevents the

socially and economically disadvantaged

owners from making business decisions

without concurrence of any owner or employee

who is not a socially and economically

disadvantaged individual, then the

enterprise, for purposes of this rule

chapter, is not controlled by socially and

economically disadvantaged individuals and

shall not be considered a DBE within the

meaning of this rule chapter.

28. While Stan L. participates in the daily operations of Maritime Tug,

many of the major decisions are still made by Stan R. Stan R. handles many of

the major purchases of equipment, prepares bids and estimates on behalf of the

corporation, hires and fires key employees, negotiates contracts, and solicits

business on behalf of Maritime Tug. It is also clear that Stan R. is much more

familiar than Stan L. with the financial situation of the company. These

factors all raise significant concern as to whether Stan L. actually possesses

the power to control the corporation to the degree required to obtain DBE

certification. However, in view of the other conclusions reached herein, that

issue need not be resolved in this proceeding.

29. Rule 14-78.005(m) requires a DBE to be an independent business entity.

The evidence in this case indicates that Maritime Tug is dependent upon Maritime

Fuel, which, as noted above, is a corporation owned and operated by Stan R.

Maritime Tug leases its office space from Maritime Fuel for one hundred dollars

per month and there is conflicting testimony as to whether Maritime Tug has

actually paid any rent to Maritime Fuel. Maritime Tug does not employ a

secretary, but uses Maritime Fuel's secretary for answering the phone and

miscellaneous bookkeeping tasks. Stan L. does not receive any fringe benefits

from Maritime Tug, but, instead, receives benefits from Maritime Fuel even

though he no longer works for that company. All of these factors confirm that

Maritime Tug is not independent of Maritime Fuel and that the company is in fact

dependent upon Stan R. and his business interests and expertise.

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of law, it is

RECOMMENDED that the Respondent Department of Transportation enter a Final Order

denying Petitioner Maritime Tug's application for certification as a

Disadvantaged Business Enterprise.

DONE AND ORDERED in Tallahassee, Leon County, Florida, this 8th day of

August 1990.

___________________________

J. STEPHEN MENTON

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this day of August 1990.

APPENDIX TO RECOMMENDED ORDER CASE NO. 90-0881

The Petitioner has not filed any post-hearing proposed findings of fact, or

conclusions of law. The Respondent has submitted a Proposed Recommended Order.

The following constitutes the Hearing Officer's rulings on the proposed findings

of fact contained in that submittal.

Proposed Finding Paragraph Number in the Findings of Fact

of Fact Number in the Recommended Order where accepted

or the reason for rejection

1. Adopted in substance in Findings of Fact

2. Adopted in substance in Findings of Fact 2.

3. Adopted in substance in Findings of Fact 3.

4. Adopted in part in Findings of Fact 5. However, the last sentence is

rejected as an overly broad summary of the testimony.

5. Adopted in substance in Findings of Fact 7.

6. Adopted in substance in Findings of Fact 6.

7. Adopted in substance in Findings of Fact 8.

8. Adopted in substance in Findings of Fact 9.

9. Rejected as irrelevant. The provision in the bylaws appears to relate to

the issuance of stock by the corporation and not the transfer of stock by

individual holders of the stock.

10. Rejected as unnecessary.

11. Adopted in substance in Findings of Fact 10.

12. Adopted in substance in Findings of Fact 12.

COPIES FURNISHED:

Brenda Bryant, Esquire

Fields, Wilkinson, Bryant & Aiken, P.A.

55 East Osceola, Suite 100

Stuart, Florida 34994

William Peter Martin, Esquire

Department of Transportation

Haydon Burns Building, M.S. 58

605 Suwannee Street

Tallahassee, Florida 32399-0458

Ben G. Watts, Secretary

Department of Transportation

Haydon Burns Building, M.S. 58

605 Suwannee Street

Tallahassee, Florida 32399-0458

Robert Scanlan, Esquire

Department of Transportation

562 Haydon Burns Building

605 Suwannee Street

Tallahassee, Florida 32399-0458