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CAR-MAR CONSTR. CORP. v. SKINNER

November 12, 1991

CAR-MAR CONSTRUCTION CORP., et al., Plaintiffs,
v.
SAMUEL K. SKINNER, SECRETARY OF TRANSPORTATION, et al., Defendants


John H. Pratt, United States District Judge.


The opinion of the court was delivered by: PRATT

INTRODUCTION

 Presently before the Court are the parties' cross-motions for summary judgment. This action was brought by plaintiffs Car-Mar Construction Corporation ("Car-Mar") and its sole owner, Carol Georgalas Pendleton ("Pendleton") against defendants Samuel Skinner in his official capacity as Secretary of the Department of Transportation, the United States, and the United States Department of Transportation ("DOT") pursuant to the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2), et seq. The action was brought after DOT upheld the decisions of the Metropolitan Transportation Authority ("MTA") and the New York City Transit Authority ("NYCTA") to deny plaintiff Car-Mar's certification as a Minority Business Enterprise ("MBE"). Plaintiffs contend that DOT's decision violated the applicable provisions of the governing regulations found in 49 C.F.R. Part 23, the APA, and the United States Constitution.

 For the reasons that follow, we deny plaintiffs' cross-motion for summary judgment and grant defendants' motion for summary judgment.

 BACKGROUND

 Car-Mar is a New York business engaged in structural steel and precast erection and general construction which was incorporated in 1975 by three women: Pendleton, Marilyn Granton, and Mary Conley. AR at 987. Each woman invested $ 3,000 into the firm's capitalization. AR at 11, 165. In 1977, Pendleton secured a second mortgage for $ 10,000 on her house to provide additional capital for Car-Mar. AR at 36-37, 174, 1626-29. That mortgage was completely paid off in 1983. In 1980, Pendleton bought out her partners to become the sole owner. AR at 22-24, 154. Prior to her relation with Car-Mar, Pendleton had no experience in the steel erection industry; she had worked strictly in administrative jobs. In contrast, Pendleton's husband, Robert Pendleton, had years of experience in the industry, working as a foreman and superintendent. AR at 458. Mr. Pendleton remains employed by Car-Mar as project manager for the company.

 The United States Department of Transportation requires that recipients of DOT-funding provide for the participation of MBEs pursuant to agency regulations. See 49 C.F.R. Part 23. The regulations define MBE to include businesses owned and controlled by racial minorities, women, and socially and economically disadvantaged individuals. *fn1" See 49 C.F.R. § 23.5. Several state and local agencies in New York are recipients of DOT funds and are required to provide MBEs with the maximum opportunity to compete for and perform certain contracts. See, e.g., 49 C.F.R. § 23.45. The state and local agencies use the standards set forth in 49 C.F.R. § 23.53 to determine whether the firm is eligible to be certified as a MBE. Denials of MBE certification may be appealed to DOT. See 49 C.F.R. § 23.55.

 The regulations require that the ownership and control of a business "be real, substantial, and continuing and shall go beyond the pro forma ownership of the firm as reflected in its ownership documents" 49 C.F.R. § 23.53(a)(2). The owner must "possess the power to direct or cause the direction of the management and policies of the firm and to make the day-to-day as well as major decisions on matters of management, policy, and operations." 49 C.F.R. § 23.53(a)(3). The regulations provide that if management power is contracted to other parties, those persons with the "ultimate power to hire and fire the managers" can be considered as controlling the business. 49 C.F.R. § 23.53(a)(4).

 Car-Mar applied for MBE certification from NYCTA on February 25, 1986. On June 25, 1986, Pendleton appeared at a NYCTA eligibility hearing. On December 23, 1986, NYCTA denied plaintiffs' application. Car-Mar applied for MBE certification from the MTA on January 16, 1986, and Pendleton appeared at a MTA eligibility hearing on March 10, 1987. The MTA denied Car-Mar's application in a letter dated July 14, 1987. Pendleton was represented by counsel at both the MTA hearing and the NYCTA hearing. Plaintiffs appealed the denials of certification to DOT, which consolidated the cases, and on May 2, 1988, DOT affirmed the denials of Car-Mar's application.

 The instant suit was brought on June 1, 1988. This Court dismissed the action without prejudice on September 8, 1988 as the parties had agreed to remand the case to the MTA and NYCTA for a de novo review. DOT remanded the case with directions to supplement the record. The agencies were directed to pay particular attention to whether Pendleton possessed the power to direct or cause the direction of the management and policies of the firm on a day-to-day basis and to make major decisions on matters of management, policy and operations. Additionally, they were to consider whether Pendleton's capital contributions were sufficient. See Letter from Hudson to Grier of September 29, 1988. On October 31, 1988, NYCTA and MTA held a remand meeting, during which time they examined Pendleton for approximately 5 1/2 hours. The agencies followed that hearing with a site visit on November 3, 1988. In a letter dated December 9, 1988, MTA and NYCTA again denied Car-Mar certification as a MBE. On March 3, 1989, plaintiffs appealed this determination to DOT. In an 8-page letter received on April 3, 1989, DOT affirmed the denial of certification. The Department noted:

 In reviewing this matter, the Department agrees that Mrs. Pendleton is actively involved in the management of Car-Mar's affairs. In totality, however, the record reveals that her responsibilities as owner of Car-Mar are not significantly different from that of an office manager who performs primarily administrative tasks. . . .

 While Mrs. Pendleton has gained some knowledge of the steel erection industry, her knowledge in comparison to that of Mr. Pendleton is limited. Mrs. Pendleton's participation in the firm primarily involves non-technical, non-critical areas. The record clearly reveals that Mr. Pendleton is the individual associated with the business who controls operational, managerial and policy decisions. MTA/NYCTA correctly concluded that Mrs. Pendleton "does not possess the wherewithal to ascertain if services are being performed in accordance with industry standards or controls." Therefore, it appears that Mrs. Pendleton is not able to intelligently use and/or critically evaluate information presented to her by individuals performing the delegated task of estimating and project management.

 See Letter from Hudson to Stewart (undated) [hereinafter DOT Final Letter]. It is from this decision of the DOT that the instant suit appeals.

 The first two counts of the complaint allege that defendants' final denial of certification violated the Administrative Procedure Act, 5 U.S.C. §§ 706(2)(A), (E), as it was unsupported by substantial evidence in the record and was arbitrary and capricious. Plaintiffs argue that the denial violated the federal regulations, 49 C.F.R. §§ 23.53, 23.55(b), as DOT allegedly did not undertake an independent or a de novo review of the MTA and NYCTA's December 9, 1988 remand decision. Further, plaintiffs argue that defendants have altered the existing regulations governing the eligibility standards for MBE certification without engaging in the rule-making procedure required by the APA. Finally, plaintiffs allege constitutional violations: that a MBE certification constituted a property right and thus that their Fifth Amendment right to due process was ...


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