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Grove, Inc. v. United States Dep't of Transportation

September 23, 2008

THE GROVE, INC. PLAINTIFF,
v.
UNITED STATES DEPARTMENT OF TRANSPORTATION, ET AL. DEFENDANTS.



The opinion of the court was delivered by: Louis F. Oberdorfer United States District Judge

MEMORANDUMANDOPINION

The Grove, Inc. (The Grove) brings this suit against the Department of Transportation (Department), the Department's Office of Civil Rights (OCR), and Joseph Austin (an Associate Director at OCR) for violation of the Administrative Procedure Act, 5 U.S.C. § 702, and denial of equal protection under the Fifth Amendment to the United States Constitution. The Grove seeks reversal of a final decision denying it eligibility to participate in the federal Airport Concessions Disadvantaged Business Enterprise program (the Program) at Seattle-Tacoma International Airport.*fn1 Each side has filed a motion for summary judgment.

I. Background

A. History of The Grove

The Grove operates concessionaire enterprises at airports in the United States. Michelle Dukler is the current majority owner with 51% of the outstanding stock, while a company, Star Foods, LLC (Star Foods) owns 49%. The Grove was founded in 1981 by two "disadvantaged individuals" (the Original Owners) whose ownership provided the basis for its 1987 certification as a disadvantaged business under the Program. In 1999, Star Foods, owned by Martin Dukler (Mrs. Dukler's husband) and Casey Cowell, purchased a 49% share for $1.32 million. Between 1999 and the time when Mrs. Dukler acquired her share of The Grove, Star Foods assumed responsibility for substantial debts owed by The Grove and made direct cash contributions, with a total capital contribution of $6.8 million. AR 1087-88. Despite its substantial contributions, Star Foods received no additional stock, leaving it a minority owner with 49%.

1. Mrs. Dukler's Purchase of a Majority Interest in The Grove

In February 2004, Mrs. Dukler purchased her 51% interest in the Grove through a series of complex transactions. AR 1088-89. On February 5, Mrs. Dukler signed two notes (the Cowell Notes), each with a 2% annual interest rate and a maturity date of October 31, 2006, to borrow $2.6 million from Mr. Cowell, the co-owner of Star Foods. Mrs. Dukler secured these notes with personal assets that she represented as having a total value of $2,654,425. Id.The next day, Star Foods and Mrs. Dukler executed two agreements, the net result of which was to transfer 36.5 shares, representing a 51% interest in The Grove, for $2.6 million. After this transaction, Mrs. Dukler had a 51% interest and Star Foods a 49% interest. The $2.6 million was paid from the Duklers' joint checking account in the form of two checks: (1) check 2249 dated February 6, 2004 for $100,000, and (2) check 2248 dated February 6, 2005 (most likely in error, since the check was negotiated February 20, 2004) for $2.5 million. Id.

In August 2004, Mrs. Dukler paid off the Cowell Notes. On August 17, 2004, Mrs. Dukler obtained a $2.6 million loan from Fifth Third Bank, secured by a promissory note (the Fifth Third Bank Note), at a floating interest rate with a maturity date of August 19, 2006. The proceeds from this note were deposited in the Duklers' joint checking account. The next day, Mrs. Dukler paid Mr. Cowell $2.6 million from that same joint checking account. AR 1090.

2. Governance and Finance of the Grove

On February 17, 2004, Mrs. Dukler executed an agreement with Fifth Third Bank (the Loan and Security Agreement) which allowed The Grove to request loans up to $2.5 million and granted a security interest in the firm's accounts, inventory, goods, trademarks / copyrights, equipment, and other items. There is no evidence on the record that Mrs. Dukler personally guaranteed these loans. The Loan and Security Agreement provides insight into the nature of Star Foods' relationship with The Grove.

Schedule 11(h) of the Loan And Security Agreement lists transactions with affiliates of The Grove. The schedule lists the following transactions with Star Foods:

1. The Grove Inc. makes license fee payments to Star Foods;

2. The Grove Inc. may make payments on behalf of Star Foods and/or Georgia's Grove and charge Star Foods and/or Georgia's Grove for such payments;

3. The Grove, Inc. may make payments to Star Foods and/or Georgia's Grove for payments Star Foods and/or Georgia's Grove have made on The Grove, Inc.'s behalf;

4. The Grove Inc. may perform accounting, administrative, or marketing functions for Star Foods and/or Georgia's Grove for which it may or may not be directly or indirectly reimbursed;

5. Any transactions of The Grove, Inc. related to its 70 percent interest and managing partner status for NEU of Chicago.

AR at 695. Schedule 11(o) of the Loan And Security Agreement lists Star Foods and Georgia's Grove, LLC (Georgia's Grove) as affiliates of The Grove.

B. Agency Proceedings

1. The Program

Under 49 U.S.C. § 47107(e), the Secretary of Transportation may approve an airport development project grant application provided the airport operator assures that at least ten percent of the businesses selling consumer products or services to the public are small businesses owned and controlled by socially and economically disadvantaged individuals. A firm seeking to be part of that ten percent must apply for certification for each airport at which it wishes to operate a concession from the appropriate state agency. For the Seattle-Tacoma International Airport (the Airport), the state agency that certifies applicants is the State of Washington's Office of Minority and Women's Business Enterprises (the Washington Office). Applicants denied certification can appeal to the United States Department of Transportation (Department).

2. Proceedings before the Washington Office

On September 12, 2005, The Grove applied to the Washington Office for certification at the Airport. This was The Grove's third application for certification, after submitting and withdrawing applications in 2003 and 2004. The Washington Office twice denied The Grove certification. The first, dated November 30, 2005, listed five grounds for denial: (1) Mrs. Dukler's contribution of capital in The Grove was not "real and substantial;" (2) Mrs. Dukler's unencumbered assets exceeded the $750,000 personal net worth limit; (3) The Grove is intertwined with Star Foods and does not operate as an "independent business;" (4) Mrs. Dukler does not control the operations of The Grove; and (5) The Grove operates as a family owned and operated business. This decision also stated that the record was insufficient to determine whether The Grove qualified as a small business. On June 28, 2006, in response to The Grove's request for informal review, the Washington Office issued a decision affirming on all grounds.

3. Proceedings before the Department

On September 26, 2006, The Grove appealed to the Department. On December 21, 2006, the Department denied the appeal on grounds (1) through (4) listed above (that is, all grounds except that The Grove operates as a family owned and operated business). AR 1085-1109. On February 15, 2007, in response to a letter from The Grove's counsel, the Department supplemented its earlier decision (together with the December 21, 2006 letter, the Final Decision), agreeing only that Mrs. Dukler did control operations of The Grove. AR 1134-40. Therefore, the Final Decision upheld the State Decision on grounds (1) through (3) listed above.

C. Procedural History

The Grove filed this action seeking review of the Final Decision on the grounds that (1) the Department's certification denial was arbitrary and capricious under the Administrative Procedure Act; and (2) the Department violated The Grove's Fifth Amendment right to equal protection under the laws. On December 6, 2007, the Department moved for ...


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