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MBE/DBE Certification – Know the Law Before You Apply

Thursday, October 23rd, 2014

Many clients come to me only after their DBE/MBE certification has been denied, or after the application has been filed.  Often times this is too late.  Nevertheless, Federal regulations provide you with a guide on exactly how to achieve MBE/DBE status.  All you need to do is follow it.   What follows is the key provision from the regs, 49 C.F.R. 26.69:

(a) In determining whether the socially and economically disadvantaged participants in a firm own the firm, you must consider all the facts in the record, viewed as a whole.

(b) To be an eligible DBE, a firm must be at least 51 percent owned by socially and economically disadvantaged individuals.

(1) In the case of a corporation, such individuals must own at least 51 percent of the each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding.

(2) In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement.

(3) In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.
 
(c) The firm’s ownership by socially and economically disadvantaged individuals must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents. The disadvantaged owners must enjoy the customary incidents of ownership, and share in the risks and profits commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements.
 
(d) All securities that constitute ownership of a firm shall be held directly by disadvantaged persons. Except as provided in this paragraph (d), no securities or assets held in trust, or by any guardian for a minor, are considered as held by disadvantaged persons in determining the ownership of a firm. However, securities or assets held in trust are regarded as held by a disadvantaged individual for purposes of determining ownership of the firm, if—
 
(1) The beneficial owner of securities or assets held in trust is a disadvantaged individual, and the trustee is the same or another such individual; or
(2) The beneficial owner of a trust is a disadvantaged individual who, rather than the trustee, exercises effective control over the management, policy-making, and daily operational activities of the firm. Assets held in a revocable living trust may be counted only in the situation where the same disadvantaged individual is the sole grantor, beneficiary, and trustee.
 
(e) The contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee. Debt instruments from financial institutions or other organizations that lend funds in the normal course of their business do not render a firm ineligible, even if the debtor’s ownership interest is security for the loan.
 
(f) The following requirements apply to situations in which expertise is relied upon as part of a disadvantaged owner’s contribution to acquire ownership:
(1) The owner’s expertise must be—
(i) In a specialized field;
(ii) Of outstanding quality;
(iii) In areas critical to the firm’s operations;
(iv) Indispensable to the firm’s potential success;
(v) Specific to the type of work the firm performs; and
(vi) Documented in the records of the firm. These records must clearly show the contribution of expertise and its value to the firm.
(2) The individual whose expertise is relied upon must have a significant financial investment in the firm.
 
(g) You must always deem as held by a socially and economically disadvantaged individual, for purposes of determining ownership, all interests in a business or other assets obtained by the individual—
(1) As the result of a final property settlement or court order in a divorce or legal separation, provided that no term or condition of the agreement or divorce decree is inconsistent with this section; or
(2) Through inheritance, or otherwise because of the death of the former owner.
 
(h)  (1) You must presume as not being held by a socially and economically disadvantaged individual, for purposes of determining ownership, all interests in a business or other assets obtained by the individual as the result of a gift, or transfer without adequate consideration, from any non-disadvantaged individual or non-DBE firm who is—
(i) Involved in the same firm for which the individual is seeking certification, or an affiliate of that firm;
(ii) Involved in the same or a similar line of business; or
(iii) Engaged in an ongoing business relationship with the firm, or an affiliate of the firm, for which the individual is seeking certification.
(2) To overcome this presumption and permit the interests or assets to be counted, the disadvantaged individual must demonstrate to you, by clear and convincing evidence, that—
(i) The gift or transfer to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and
(ii) The disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who provided the gift or transfer.
 
(i) You must apply the following rules in situations in which marital assets form a basis for ownership of a firm:
(1) When marital assets (other than the assets of the business in question), held jointly or as community property by both spouses, are used to acquire the ownership interest asserted by one spouse, you must deem the ownership interest in the firm to have been acquired by that spouse with his or her own individual resources, provided that the other spouse irrevocably renounces and transfers all rights in the ownership interest in the manner sanctioned by the laws of the state in which either spouse or the firm is domiciled. You do not count a greater portion of joint or community property assets toward ownership than state law would recognize as belonging to the socially and economically disadvantaged owner of the applicant firm.
(2) A copy of the document legally transferring and renouncing the other spouse’s rights in the jointly owned or community assets used to acquire an ownership interest in the firm must be included as part of the firm’s application for DBE certification.
 
(j) You may consider the following factors in determining the ownership of a firm. However, you must not regard a contribution of capital as failing to be real and substantial, or find a firm ineligible, solely because—
(1) A socially and economically disadvantaged individual acquired his or her ownership interest as the result of a gift, or transfer without adequate consideration, other than the types set forth in paragraph (h) of this section;
(2) There is a provision for the co-signature of a spouse who is not a socially and economically disadvantaged individual on financing agreements, contracts for the purchase or sale of real or personal property, bank signature cards, or other documents; or
(3) Ownership of the firm in question or its assets is transferred for adequate consideration from a spouse who is not a socially and economically disadvantaged individual to a spouse who is such an individual. In this case, you must give particularly close and careful scrutiny to the ownership and control of a firm to ensure that it is owned and controlled, in substance as well as in form, by a socially and economically disadvantaged individual.

 

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The Legal Standard for Fraud in Maryland

Wednesday, March 7th, 2012

To prevail on a claim of fraudulent misrepresentation in Maryland, a plaintiff must establish, by the heightened evidentiary standard of clear and convincing evidence:

“(1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.”  VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998), quoting Nails v. S&R, 334 Md. 398, 415 (1994).

The defendant must actually be aware of the falsity, or atleast the potential for falsity.  The requirement concerning knowledge of the falsity or reckless indifference as to the truth of the representation means either the defendant’s actual knowledge that the representation was false or the defendant’s awareness that he does not know whether the representation is true or false. Ellerin v. Fairfax Savings, 337 Md. at 231, 652 A.2d at 1124.  

Negligence or misjudgment, “‘however gross,'” does not satisfy the knowledge element. Ellerin, 337 Md. at 232, 652 A.2d at 1125, quoting Cahill v. Applegarth, 98 Md. 493, 502, 56 A. 794, 796 (1904). See also VF Corporation and Blue Bell, Inc. v. Wrexham Aviation Corp., 350 Md. 693 (1998).

A defendant must have the intent, the scienter, to cheat another: “It is well recognized under Maryland law that an action for fraud cannot be supported … without any design to impose upon or cheat another.”  VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998).  

The complaining party though, must have reasonably relied on the defendant’s representations.  To determine whether one party’s reliance upon the allegedly fraudulent statements of another party is reasonable, a court looks to all the facts and circumstances present in the particular case.  “In determining whether reliance is reasonable, a court is required to view the act in its setting….” Parker v. Columbia Bank, 91 Md. App. At 361-362. 

The One of the most important circumstances in this regard is the plaintiff’s background and experience.  For example, a complaining person who is knowledgeable in the commercial real estate realm could not be said to have reasonably relied on another’s false representations in that realm, as the complainant would have the requisite knowledge and resources to determine whether such statements were true in the first place.

 

 

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Foreign LLCs and Corporations That Transact Business in Maryland But Fail to Register in Maryland Cannot File Suit Here

Wednesday, March 7th, 2012

          Before transacting interstate or foreign business in Maryland, a foreign limited liability company (“LLC”) shall register to transact business with the State Department of Assessments and Taxation (“SDAT”) in accordance with Md. Corp. & Ass’ns. Code Ann. § 4A-1002:

“(a) Requirement. — Before doing any interstate, intrastate, or foreign business in this State, a foreign limited liability company shall register with the Department.”

           Under § 4A-1002, a foreign LLC is required to complete an application setting forth, among other information, its name, state of organization, business purpose, and resident agent, and pay a filing fee to SDAT.

          Md. Corp. & Ass’ns. Code Ann. § 4A-1007 states that any foreign limited liability company that fails to register with the SDAT in accordance with § 4A-1002 is barred from maintaining a lawsuit in any court of this State, as follows:

“(a) Barred from maintaining suit. — If a foreign limited liability company is doing or has done any intrastate, interstate, or foreign business in this State without complying with the requirements of this subtitle, the foreign limited liability company and any person claiming under it may not maintain suit in any court of this State, unless the limited liability company shows to the satisfaction of the court that:

   (1) The foreign limited liability company or the person claiming under it has paid the penalty specified in subsection (d)(1) of this section; and

   (2) (i) The foreign limited liability company or a successor to it has complied with the requirements of this title; or

     (ii) The foreign limited liability company and any foreign limited liability company successor to it are no longer doing intrastate, interstate, or foreign business in this State.”  

In essence, Md. Corp. & Ass’ns. Code Ann. § 4A-1007 bars a foreign LLC from acting as a plaintiff in any Maryland state or federal court if the LLC is doing or has done “any intrastate, interstate, or foreign business” in Maryland without registering or qualifying with SDAT. 

Foreign corporations face nearly identical Maryland statutes.  See Md. Corp. & Ass’ns. Code Ann. §§ 7-202,  and 7-301, respectively. 

The Maryland Court of Appeals stated the following in Yangming Marine Transport Corporation v. Revon Products U.S.A., Inc., 311 Md. 496 (1988):

“As pointed out above, under § 7-301, a foreign corporation that has not complied with § 7-202 or § 7-203 is barred from suing in Maryland if the corporation “is doing . . . any intrastate, interstate, or foreign business in this State.”  …. Instead, we have held that § 7-301 embodies a test for determining whether a foreign corporation is “doing business” in Maryland. See G.E.M., Inc. v. Plough, Inc., 228 Md. 484, 486, 180 A.2d 478, 480 (1962). Under this test, § 7-301 bars an unqualified or unregistered foreign corporation from suing in Maryland courts only if the corporation is doing such a substantial amount of localized business in this State that the corporation could be deemed “present” here. See, e.g., S.A.S. Personnel Consult. v. Pat-Pan, 286 Md. 335, 339-340, 407 A.2d 1139, 1142 (1979); G.E.M., Inc. v. Plough Inc., supra, 228 Md. at 488-489, 180 A.2d at 480-481.

 

 

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Legal Differences Between a Stock Purchase and an Asset Purchase

Tuesday, February 8th, 2011

A Stock Purchase refers to the sale and purchase of an ownership interest in an entity like a corporation, partnership or limited liability company. The Seller sells, and the Buyer purchases, all or part of the outstanding shares of stock in a corporation, or all or part of the membership interest in an LLC or partnership, as well as all of the existing assets and liabilities of the entity. This includes the name and goodwill of the business, which oftentimes can be valuable. The existing entity itself does not change. Rather, the owners of the stock or membership interest in the entity change from Seller to Buyer, while the entity itself continues uninterrupted.

In a Stock Purchase, unless agreed otherwise, the Seller is absolved of any obligations or liabilities stemming from its prior ownership interest in the entity, as the Purchaser becomes the owner of not only the assets of the entity, but likewise the debts and obligations as well. For this reason a Seller will generally prefer a Stock Purchase over an Asset Purchase, as a Stock Purchase allows the Seller to walk away from the business without the fear of future debts, liabilities or obligations of the business. For the Purchaser of stock in such a transaction, I cannot stress how important it is to perform the maximum amount of due diligence it can, in order the possibility of assuming any unintended or unknown liabilities and obligations, since such liabilities should have or could have been known.

Unlike a Stock Purchase, an Asset Purchase involves, as the name implies, the purchase and sale of only the assets of a particular business, without the purchase or sale of any stock or other ownership interest in the company. The Purchaser buys, and the Seller sells, only the specific assets identified in the governing document, named the Asset Purchase Agreement. Any assets not included in the Asset Purchase Agreement remain the property of Seller. The Buyer must create a new entity that will own the purchased Assets, or use an already existing entity for the transaction.

The Seller of assets retains ownership of the shares of the stock or other membership interest in the business, and as a result the Seller also retains any existing or future obligations and liabilities of such business, except those specifically transferred to the Buyer as part of the sale. For this reason a Purchaser will normally prefer an Asset Purchase to a Stock Purchase. This way, the Buyer obtains only the specific assets which it desired to purchase, and which debts, obligations and liabilities it is assuming, if any.

An additional cost that may be necessary in an Asset Purchase is the need to possibly transfer ownership of certain assets used in or by the business, and/or assign leases and other third party contracts to which Seller was a party.

There are many tax issues that must be addressed when deciding between a Stock Purchase an Asset Purchase. I advise my clients to see the advice of an accountant for such issues.

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Lessons to be Learned – Recent MDOT Denial of DBE/MBE Application

Wednesday, January 26th, 2011

A local business owner came to me recently in order to appeal MDOT’s denial of an application for Maryland DBE/MBE certification. Since I had never before read an MDOT denial opinion, there were several interesting issues raised by MDOT that I thought were worth discussing.

1. Ownership – The owners of the business are a husband and wife, and the wife applied as the majority owner of the business for MBE Certification. MDOT focused in part in denying the application on the fact that when the woman owner invested capital in the business at the outset, that her investment came from a credit card jointly held with her husband, and that the credit card balance was eventually paid in full from a jointly held checking account owned by her and her husband. Careful legal drafting of the Articles of Incorporation, and legal advice with regard to who funds the business and how it was funded, would have gone a long way at the outset in potentially avoiding MDOT’s rejection of this application.

2. Control – With regard to control, MDOT focused on two issues: i) the woman owner unquestionably has to be able to prove that she exercises control over the day-to-day operation and management of the company, and has an overall understanding, competence and experience in the business; and ii) the corporate documents, including the Articles of Incorporation, Bylaws, and Shareholder Agreement or Operating Agreement cannot in any way restrict or limit the woman owner’s ability from making the business decisions of the company without the cooperation of the non-disadvantaged owner. In this instance, the company’s Bylaws gave the non-minority owner the same voting rights as the disadvantaged owner, so that she was effectively precluded from making business decisions unilaterally. Properly drafted Bylaws may have avoided this problem.

Reading the opinion as a whole, MDOT focused on several issues which, while separately may not have added up to much, when combined, raised enough questions in MDOT’s mind so as to justify the denial of the business’s DBE/MBE application. The good news is that many of these issues can be avoided with careful legal drafting at the outset.

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Trademark Infringement and Available Remedies

Wednesday, October 6th, 2010

If you have registered your business trademark or service mark with the U.S. Patent and Trademark Office (“USPTO”), then you have the right to sue a party that is infringing your trademark rights. The criteria used to determine whether the use of your mark or a similar mark qualifies as infringement is whether such use causes a “likelihood of confusion” to the public. Likelihood of confusion exists when a court believes that the public would be confused as to the source of the goods, or as to the sponsorship or approval of such goods.

Courts deciding a trademark infringement action will mainly look at two issues in deciding an infringement action: 1) the similarity of the two marks, for example, are the marks identical or merely similar; and, 2) what goods or services are the marks associated with. The more similar the marks, and the more related the products or services of the two marks are, the more likely a court will find a likelihood of confusion and enjoin the offending party’s use of the mark.

Should your prevail in a trademark infringement action, you are entitled to some or all of the following remedies: 1) injunctive relief to enjoin the other party from using the mark; 2) profits the opposing party made as a result of its use of the infringing mark; 3) monetary damages you sustained as a result of the infringing party’s use of the mark; and, 4) the costs you incurred in bringing the infringement action. In addition, a court may award treble (triple) damages if there is a finding of bad faith on the part of the offending party.

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Why a Single Member LLC Needs an Operating Agreement

Wednesday, October 6th, 2010

Maryland law does not require that a sole member limited liability company (“LLC”) have an existing, enforceable operating agreement on file. Nevertheless, there is an excellent reason to draft and execute one: by executing an LLC operating agreement, the single member of the LLC has drawn a line of protection guarding that person against personal liability for the business debts and obligations of the LLC.

Specifically, Maryland courts have held that the protection from liability that exists by virtue of the LLC’s formation can disintegrate if the LLC fails to observe certain corporate formalities. One of these formalities is the existence of a valid operating agreement. Having an operating agreement in place can protect the single member from liability when a third party attempts to sue the individual member in order to satisfy an obligation resulting from a debt of the LLC.

Without an operating agreement, it may prove more difficult for the sole member to avoid liability. Courts sometimes blur the line between a sole member LLC with its protection from liability for its individual owners, and a sole proprietorship where such protection does not exist. However, this line becomes more clear cut, and courts will as a result hesitate to “pierce the corporate veil” and hold an individual liable for the LLC’s debts, when corporate formalities like having an operating agreement are complied with.

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Maryland Minority Business Enterprise (MBE) powerpoint presentation

Tuesday, August 24th, 2010

Click this link to view an excellent powerpoint presentation discussing the application process for Maryland Minority Business Enterprise status as found on the Maryland Transit Administration website:

http://mta.maryland.gov/business/advertisingwithmta/MBE%20Certification%20Power%20Point%20Presentation.pdf

Please contact me if you need assistance with your MBE certification.

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Minority and Woman-Owned Business Certification in the State of Maryland

Tuesday, August 24th, 2010

If you are a minority-owned business, (at least 51% owned by a member(s) of one or more of the following groups: African American/Black, Female, Asian Pacific, Hispanic, Subcontinent Asian, American Indian/Native American?), and you wish to do business with Montgomery County, the State of Maryland, or the federal government, you should consider filing for MBE/DBE certification. The following is from the Maryland DOT website:

The Maryland Department of Transportation’s (MDOT) Office of Minority Business Enterprise has two primary functions: Minority Business Enterprise (MBE)/Disadvantaged Business Enterprise (DBE) certification for the State of Maryland and the administration and coordination of the MBE and DBE programs within the MDOT administrations.

To ensure that only bona fide MBEs/DBEs participate in the programs, Maryland has a comprehensive certification program. Only those businesses determined to be owned and controlled by socially and economically disadvantaged individuals are certified. A firm designated as an MBE and/or DBE will have its name appear in the MBE/DBE Directory, a reference document made available on the Internet to all State departments/agencies, the contracting community and the general public.

Recognizing that the potential for MBE/DBE participation is dependent upon several variables, each MDOT administration examines its respective contracts/purchase orders and establishes specific goals on a contract-by-contract basis. Procedures are followed to assure that an award of a contract is not made until a prime contractor has met the MBE/DBE goal(s) or has demonstrated a good faith effort to meet the MBE/DBE goal(s).

After a contract has been awarded, MBE/DBE participation is closely monitored by key personnel within each administration. Monitoring includes a review of the subcontract financial transactions, and visits to the job-site to verify actual work being performed by the MBE/DBE firm. The standards for MBE/DBE compliance are spelled out in the MBE/DBE Program Manual. Any deviation from compliance standards is documented and if it is not corrected, sanctions may be applied against the contractor and subcontractor(s). The MBE/DBE Program Manual identifies the sanctions which may be instituted.

Periodically, MDOT revises the MBE/DBE Program Manual for improvements and to include any applicable changes in federal and/or State regulations or laws. Persons having an interest in the program may find this guide helpful in understanding MDOT’s MBE/DBE Program. Copies of the complete Program Manual are available online in Adobe PDF format or at the following address for a nominal fee:

Maryland Department of Transportation
Office of Minority Business Enterprise
7201 Corporate Center Drive
Hanover, MD 21076
410 865-1269 or 1-800-544-6056
TTY 410 865-1342

http://www.mdot.maryland.gov/

To view the Uniform Certification Application to get certified as a Maryland minority-owned businesses, click:

http://www.mdot.maryland.gov/MBE_Program/Documents/DEEO-50%20Uniform%20Certification%20Applic.pdf

To see what documents need to accompany the application, click the following if you are a corporation:

http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-CORP0710.pdf

Click the following if you are a limited liability company (LLC)

http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-LLC0710.pdf

If you need assistance with your MBE application, please contact me.

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Information for Women-Owned Businesses.

Tuesday, August 24th, 2010

Many of my woman-owned business clients want information dealing with the certification process in order for their businesses to get certified in Maryland as a woman-owned business.

If you are a woman-owned business and you want to do business with Montgomery County or the state of Maryland, check out the following link from the Montgomery County Department of Economic Development website which contains a ton of useful information:

http://www.montgomerycountymd.gov/dedtmpl.asp?url=/content/ded/ tech_transfer/bew_resources.asp

As you will see, the available information is extremely beneficial, including information on business coaching roundtables, networking events, the local small business reserve program, the technology women’s network, and of course, how to get the certification process started as a woman-owned business.

If you need assistance with the woman-owned business certification process, please contact me.

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