Diamond Ventures LLC v. Baretto

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
DIAMOND VENTURES, LLC, :
:
Plaintiff, :
:
v. : CIVIL ACTION NO. 03-1449 (GK)
:
SANDY K. BARUAH, ACTING :
ADMINISTRATOR, SMALL :
BUSINESS ADMINISTRATION, :
:
Defendant. :
MEMORANDUM OPINION AND ORDER
In this case brought under the Equal Credit Opportunity Act ("ECOA"), Plaintiff, Diamond
Ventures, LLC (“Diamond”), claims that the Small Business Administration ("SBA") discriminated
against it as a minority-owned company when it failed to license it as a Small Business Investment
Company ("SBIC"). Defendant moves for summary judgment pursuant to Rule 56 of the Federal
Rules of Civil Procedure, which Plaintiff has opposed. Upon consideration of the parties'
submissions and the entire record, and for the following reasons, the Court will deny Defendant's
motion.
I. BACKGROUND
SBICs are privately owned companies the SBA licenses to provide financing and consulting
services to small businesses. See 15 U.S.C. § 681 et seq. In December 2001, Diamond submitted
to the SBA a Management Assessment Questionnaire (“MAQ”) dated December 7, 2001, to obtain
a Participating Securities SBIC license. Def’s Mot., Declaration of Harry Haskins (“Haskins Decl.”)
[Dkt. No. 90-2] ¶ 20. The MAQ was referred to SBA Financial Analyst Karen Ellis for review. Id.Subsequently, Diamond submitted a revised or amended MAQ dated March 29, 2002. Id. ¶¶ 20-21.
Diamond proposed “to focus on funding businesses in inner city low income areas with high African
American populations.” 2nd Am. Compl. [Dkt. No. 47] ¶ 57. By letter of April 24, 2002, Diamond
submitted another amended MAQ and requested the SBA to review Diamond as a Debenture
Securities Licensee, rather than as a Participating Securities Licensee. Haskins Decl., Ex. 4 (sealed).
Ellis recommended against inviting Plaintiff for an interview, and on June 4, 2002,
Defendant’s Investment Committee unanimously adopted her recommendation, effectively rejecting
Diamond’s proposal for an SBIC license. Haskins Ex. 6; see 2nd Am. Compl. ¶ 14 (“The SBA does
not accept SBIC license applications from those who have not been invited.”). Defendant explained
its decision in a detailed letter to Plaintiff dated July 23, 2002. Haskins Decl., Ex. 7. Following a
meeting with Plaintiff in September 2002, Defendant agreed to review another MAQ submitted by
Diamond, in October, 2002, Haskins Decl. ¶ 32, and assigned it to SBA Analyst Stephen Knott for
review, Haskins Decl. ¶ 33. Knott also recommended against inviting Plaintiff for an interview, and
the Investment Committee again unanimously adopted the recommendation. Id. ¶ 34. Defendant
explained its decision in a detailed letter dated February 25, 2003. Haskins Decl., Ex. 11.1
Earl Peek, who was a member of Diamond’s management team, filed this civil action pro se
on June 30, 2003. His second amended complaint filed on December 12, 2003, substituted Diamond
Ventures, LLC, as the proper plaintiff. The parties commenced discovery in June 2004 following
the Court’s denial of Defendant’s Rule 12(b)(6) motion to dismiss on the ground that Defendant is
1
In its first MAQ, Plaintiff applied for a Participating Securities License which allows
SBICs “to invest SBA guaranteed funds and issue instruments based on an equity interest in its
clients or ‘portfolio’ companies.” 2nd Am. Comp. ¶¶ 12-13. In its third MAQ submitted on April
24, 2002, Plaintiff applied for a Debenture Securities License which allows SBICs to loan money
to companies at “a stated rate of interest.” Id. This was later clarified to mean a Debenture, not a
Participating Securities, application. Plaintiff challenges Defendant’s rejection of its application for
a Debenture License. 2nd Am. Compl. ¶ 25.
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not a creditor within the meaning of ECOA. See Memorandum Opinion and Order of June 8, 2004
[Dkt. No. 25]. Defendant has not renewed the foregoing argument as a basis for dismissal or
summary judgment.
Defendant filed its Motion for Summary Judgment on October 30, 2008 and briefing was
completed on March 26, 2009.
II. STANDARD OF REVIEW
Summary judgment is warranted only “if the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see Celotex Corp.
v. Catrett, 477 U.S. 317 (1986). As a general rule, “[i]n deciding whether there is a genuine issue
of fact before it, the court must assume the truth of all statements proffered by the party opposing
summary judgment.” Greene v. Dalton, 164 F.3d 671, 674 (D.C. Cir. 1999). All reasonable
inferences that may be drawn from the facts must be drawn in favor of the nonmoving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The non-movant, however, “may not
rest upon the mere allegations or denials of his pleading, but . . . must set forth specific facts
showing that there is a genuine issue for trial.” Id., 477 U.S. at 248.
“A dispute over a material fact is ‘genuine’ if ‘the evidence is such that a reasonable jury
could return a verdict for the non-moving party’. . . . Factual disputes that are irrelevant or
unnecessary will not be counted.” Arrington v. United States, 473 F.3d 329, 333 (D.C. Cir. 2006)
(quoting Anderson, 477 U.S. at 248). A fact is “material” if it might affect the outcome of the case
under the substantive governing law. Anderson, 477 U.S. at 248. When facts are not controverted
in opposition to a summary judgment motion, the Court “may assume that facts identified by the
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moving party in its statement of material facts are admitted.” Local Civil Rule 7(h). When facts are
disputed, however, “credibility determinations, the weighing of the evidence, and the drawing of
legitimate inferences from the facts, are jury functions, not those of a judge.” Anderson, 477 U.S.
at 255. The Supreme Court has consistently emphasized that “at the summary judgment stage, the
judge's function is not . . . to weigh the evidence and determine the truth of the matter, but to
determine whether there is a genuine issue for trial.” Id. at 248. Our Court of Appeals has warned
that in cases alleging discrimination, summary judgment “must be approached with special caution.”
Aka v. Washington Hospital Center, 116 F.3d 876, 879-80 (D.C. Cir. 1997), rev’d on other grounds,
156 F.3d 1284 (D.C. Cir. 1998) (en banc) (citation and internal quotation omitted).
III. ANALYSIS
ECOA makes it unlawful for any creditor to discriminate against any application, with
respect to any aspect of a credit transaction . . . on the basis of race. . . .” 15 U.S.C. § 1691(a). The
purpose of ECOA is to prohibit “credit decisions based on factors such as . . . race which are
irrelevant to creditworthiness.” Miller v. Am. Express Co., 688 F.2d 1235, 1238 (9th Cir. 1982).
Pursuant to the Small Business Investment Act, the SBA licenses SBICs to “stimulate and
supplement the flow of private equity capital and long-term loan funds” to small businesses. 15
U.S.C. § 661. In general, SBICs raise their own financing capital by, among other vehicles, issuing
securities backed or guaranteed by the SBA. Thus, in the event an SBIC defaults on its commitment
to security holders, the SBA guarantees payment and the SBIC becomes indebted to the SBA for
repayment. Haskins Decl. ¶¶ 5-8. Upon receipt of an application for an SBIC license, the SBA
Administrator must determine whether the applicant meets certain private capital requirements and
whether its management “is qualified and has the knowledge, experience, and capability necessary
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to comply with this chapter.” 15 U.S.C. § 681(c)(3). Consideration is given to “the need for and
availability of financing for small business concerns in the geographic area in which the applicant
is to commence business,” the business reputation of the applicant’s owners and management and
the probable success of proposed operations, “including adequate profitability and financial
soundness.” Id.The “first step” in the process is “the [applicant’s] submission of an MAQ, which seeks
information primarily on the proposed business strategy of the SBIC and the qualifications of the
individuals who will manage the prospective SBIC.” Haskins Decl. ¶ 12. If a majority of
Defendant’s Investment Committee votes in favor of the MAQ, the “prospective management team
is invited for an interview. If that is successful, [the team] receives what is commonly referred to
as a ‘go-forth’ letter formally inviting them to submit a formal SBIC License Application.” Id. ¶ 15.
A. Disparate Impact Discrimination
The Supreme Court has ruled that “Title VII . . . prohibits . . . both intentional discrimination
. . . as well as, in some case, practices that are not intended to discriminate but in fact have a
disproportionately adverse effect on minorities (known as ‘disparate impact’).” Ricci v. DeStafano,
__ U.S. __, 129 S. Ct. 2658, 2672 (2009) (parenthesis in original).2
To demonstrate disparate impact, Plaintiff “must offer statistical evidence of a kind and
degree sufficient to show that the seemingly neutral practice in question has caused the exclusion
of applicants for [credit] because of their membership in a protected group.” Watson v. Fort Worth
2
Because the District of Columbia Circuit has “express[ed] no opinion about whether
a disparate impact claim can be pursued under ECOA,” this Court will follow the D.C. Circuit’s lead
and “[a]ssum[e] without deciding that a disparate impact claim is cognizable under ECOA.” Garcia
v. Johanns, 444 F.3d 625, 633 n. 9 (D.C. Cir. 2006).
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Bank and Trust, 487 U.S. 977, 994 (1988). Moreover, “a showing of a [specific or particular
practice] is an integral part of the plaintiff’s . . . case in a disparate-impact suit.” Wards Cove
Packing Company, Inc. v. Antonio, 490 U.S. 642, 657 (1989). Finally, as recently as last year, the
Supreme Court re-affirmed that a defendant may be liable for disparate impact discrimination
provided the plaintiff can prove that the challenged practice is not job related, is not consistent with
business necessity, or that there existed an equally valid, less-discriminatory alternative that served
defendant’s needs but that it refused to adopt. Ricci, 129 S. Ct. at 2678.
Plaintiff can avoid summary judgment by presenting “data showing that the [SBA approved
debenture licenses to African American owned businesses] at rates far below their numbers in the
applicant pool and the general population.” Holcomb v. Powell, 433 F.3d 889, 899 (D.C. Cir. 2006)
(citations omitted). “Under Title VII disparate impact analysis, an employment test with an adverse
impact on racial minorities is prohibited unless the test is ‘demonstrably a measure of job
performance.’” Rudder v. District of Columbia, 890 F. Supp. 23, 40 (D.D.C. 1995) (quoting Griggs
v. Duke Power Co., 401 U.S. 424, 436 (1971)). On summary judgment, however, the question is
not whether the practice is legitimate but rather “whether the plaintiff[] [has] cast such doubt on
[defendant’s] credibility that a reasonable juror could regard it as pretext and infer a discriminatory
motive, or that a reasonable factfinder could conclude it was inconsistent with business necessity or
achievable in a nondiscriminatory way.” Anderson v. Zubieta, 180 F.3d 329, 345 (D.C. Cir. 1999).
B. Plaintiff’s Allegations of Specific Practices Causing Disparate Impact
Plaintiff alleges that the SBA discriminated against it by denying its application for an SBIC
Debenture License. The SBA denies such discrimination and responds, basically, that the License
was denied because Plaintiff could not meet the agency’s qualifications. In particular, the SBA
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claims that the Plaintiff lacked sufficient experience in the area of venture capital investments and
exits from such investments, that there was inconsistency between Plaintiff’s Business Plan and
Investment Strategy, that Plaintiff’s management team had not demonstrated a history of working
together as a cohesive team on any venture related projects, and that only two of the four team
members had worked together at all previously.
It is clear that the SBA has proffered legitimate, non-discriminatory reasons for its denial of
Plaintiff’s SBIC license application. Therefore, the question becomes whether Plaintiff has produced
sufficient evidence for a reasonable fact-finder to conclude that the SBA’s reasons were not the
actual reasons, but only a pretext to mask intentional discrimination against Plaintiff on the basis of
race. See Brady v. Office of the Sergeant at Arms, 520 F.3d 490, 494 (D.C. Cir. 2008).
Plaintiff proffers much evidence in opposition to Defendant’s justification for denying its
application, only some of which the Court need address at this time.
First, it offers the testimony of two qualified experts who have both rendered opinions that
Plaintiff was in fact qualified to be licensed as an SBIC.3 Expert Report of Dr. Timothy Bates
(“Bates Report”), at 66, Ex. G to Declaration of Jaime W. Luse (“Luse Decl.”) (Diamond “ranks as
a particularly highly qualified SBIC applicant”); Expert Report of Edward Cleveland (“Cleveland
Report”), Ex. H to Luse Decl. at 9 (“this team will be very successful and a model for the program
in coming years”).
Second, Plaintiff presents a comparison of the areas in Diamond’s final MAQ which were
criticized by Knott, with other applications that received go-forth letters or licenses and contained
3
The question of the respective qualifications of Diamond’s experts is one of the many
disputed material acts which must be resolved by the jury.
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material in their MAQs similar to that which Diamond presented, and were not criticized. In
particular, Plaintiff asserts that this comparison shows that the SBA praised non-minority led firms
planning to invest in LMI4 areas that are not known to have high-minority populations and that
Plaintiff was criticized for proposing to invest in LMI areas with high African American populations
such as those in portions of the Southeast United States. Again, the accuracy of the facts relied
upon--and/or ignored--in these comparisons, as well as the final conclusions to be drawn from the
comparisons, are issues which only a jury can resolve.
Third, Plaintiff offers evidence that while venture capital and equity experience may be
useful proxies (or substitutes) for race, there is no study validating them as a reliable predictor of
success for SBICs.
Fourth, the main thrust of Plaintiff’s argument is that the SBA’s “five year rule”5 (which the
Court will assume is, in fact, either an absolute or de facto requirement)6 results in a disparate impact
on African American owned or managed firms, and that Defendant cannot prove that such
requirement is job-related, or consistent with business necessity, or that there are no valid, less
discriminatory alternatives. See Ricci, 129 S. Ct. at 2678.
When evaluating whether Plaintiff has sufficient evidence to survive summary judgment, it
is necessary to view the SBA’s insistence on meeting this “five year requirement” against what
Plaintiff’s expert has described as a “long, detailed history” of interacting with both African
4
None of the papers submitted by the parties define the acronym “LMI.”
5
The SBA requires that each SBI applicant have at least two principals each of whom
has five years or more of experience in venture capital investing.
6
This assumption comports with the requirement that all inferences be drawn in favor
of the non-moving party. See Anderson, 477 U.S. at 248.
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American funds and minority-oriented venture capital funds in an atmosphere of “antagonism and
distrust.” Bates Report, at 54 (citing Final Report. An Analysis of the SSBIC Program: Problems
and Prospects (Bates, 1995)).7 See also, United States Commission on Civil Rights Evaluation
Publication, Ten Year Check-Up: Have Federal Agencies Responded to Civil Rights (June 12,
2003).
In particular, Dr. Bates reports that the SBA is aware that only two African American
controlled SBICs, both owned by one firm, have ever been licensed, out of a total of approximately
350 in existence in 2003. Bates Report, at 47. Furthermore, the SBA’s own statistics show that in
Fiscal Year 2002, “50% or more Black-Owned” firms received only 2.55% of total Regular SBIC
financings, and 0.49 percent of funding from Regular SBIC funding dollars; and in Fiscal Year 2003,
“50% or more Black-Owned firms received only 5.37% of total Regular SBIC financings and
1.64[%] of Regular SBIC funding dollars.” Ex. R and S to Luse Decl. If these figures are correct,
no more than 0.86% of SBICs in 2003 were African American owned and controlled.
Fifth, Plaintiff offers Dr. Bates’ report as “reliable statistical disparate impact evidence” “to
show that the seemingly neutral practice in question has caused the exclusion of applicants” because
of their race. Watson, 487 U.S. at 994. In this case, the expert’s task is made that much more
difficult because of the failure of SBA to record the race of SBIC applicants who fail to obtain
licenses. Because of that failure, it is virtually impossible to determine the number of minority and
7
It should be noted that the SBA itself commissioned this Report from Dr. Bates who
is the Distinguished Professor of Economics at Wayne State University. Both the SBA and the
Department of Justice have retained Dr. Bates, at different times, to consult about the existence of
racial discrimination in the marketplace.
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non-minority applicants who applied to the program and were rejected.8 However, the Supreme
Court has spoken directly to this difficulty, stating that “in cases where [such] statistics will be
difficult if not impossible to ascertain, . . . certain other statistics--such as measures indicating the
racial composition of ‘otherwise-qualified applicants’ for at-issue jobs--are equally probative. . . .”
Wards Cove, 490 U.S. at 651; see Malave v. Potter, 320 F.3d 321, 326 (2d Cir. 2003) (finding “error
for the District Court to have rejected out of hand [plaintiff’s] statistical analysis” where data on the
number of qualified Hispanic applicants was not available to conform to “the preferred methodology
described in Ward’s Cove” (emphasis in original)).
Based on data gathered from surveying 24 minority venture capitalists who are members of
the National Association of Investment Companies (“NAIC”), Bates Report at 12, Dr. Bates wrote
that the SBA “require[s] principal work experience in investment banking and mainstream venture
capital investing fields in which very few minorities were traditionally able to obtain such
experience,” id. at 72, “while downgrading the actual work experience” in “commercial banking and
local economic development” that most “often typifies principals of minority-oriented [venture
capital] funds.” Id.9 Dr. Bates concludes that the “result is a population of SBICs where only a
fraction of 1% of the funds are owned and controlled by African Americans.” Id. Dr. Bates
8
While it is true that the SBA does keep statistics on the race of successful applicants,
it is hard to believe that in this day and age any federal agency fails to keep statistics on those who
apply and are not successful.
9
There is no question that the SBA raises many challenges to the methodology used
by Dr. Bates in his “comparability analysis.” Both sides spend many pages in their briefs arguing
about the analysis and the validity of the comparisons. Again, however, the evaluation of expert
testimony is clearly within the province of the jury. No issue could be more “material” to the final
verdict it will render in this case than the weight it does, or does not, accord to Plaintiff’s statistical
evidence--especially in light of the absence of relevant racial statistics from the SBA.
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“believe[s] that nearly all of the profit-oriented [venture capital] funds serving black and Hispanic
(but not Asian) firms are NAIC members.” Bates Report at 12 (parenthesis in original). It appears
that he identified 24 such firms as qualified SBIC applicants, see id. at 12-13 (excluding 12 “funds”
that “were largely newer funds that had not completed or recently completed fundraising and had not
yet made VC investments”). Dr. Bates reports that “[t]he 23 [sic] minority-oriented funds
extensively discussed [] are run by principals of diverse racial backgrounds, but most are African
Americans: 28 of the 39 principals were African Americans, three were Hispanic, three were Asian
and five were white.” Id. at 45.
Although Defendant has concluded that venture capital experience is part and parcel of
running a successful SBIC, see Haskins Decl. ¶¶ 5, 13-15; Def.’s Ex. 4, Declaration of Darryl
Hairston (“Hairston Decl.”) ¶ 9, it has not proffered any empirical evidence linking the equivalent
of ten years’ venture capital experience (at least two principals each with five years’ experience) to
the success of an SBIC.
There is no question that “[u]nder Title VII disparate impact analysis, an employment test
with an adverse impact on racial minorities is prohibited unless the test is ‘demonstrably a measure
of job performance.’” Rudder v. District of Columbia, 890 F. Supp. 23, 40 (D.D.C. 1995) (quoting
Griggs v. Duke Power Co., 401 U.S. 424, 436 (1971)). The SBA has offered no such evidence.
Indeed the SBA has acknowledged that “successful [SBIC] managers usually have many years of
experience in venture capital or related fields.” Hairston Decl. ¶ 9 (emphasis added). In addition,
Hairston, SBA Deputy Associate Administrator for Management and Administration, who “was also
involved in creating and implementing the initial versions of the [MAQ] process,” Hairston Decl.
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¶ 3, acknowledges the “relevan[cy]” to debenture SBICs of commercial lending and economic
development experience. Id. ¶¶ 10-11.
Plaintiff has suggested that Defendant modify its evaluative criteria for SBICs to place work
experience in the commercial banking and local development fields (where African Americans have
had relevant experience) on equal footing with the venture capital experience that principals of
African American firms have traditionally lacked. See Bates Report at 46 (prior to 1999, principals
of only one minority-owned venture capital fund had prior work experience in investment banking
prior to joining the minority fund). Summary judgment “is not appropriate” if, as here, Plaintiff
shows “that there is an alternative that can satisfy the employer’s need in a nondiscriminatory
fashion.” Anderson, 180 F.3d at 344. There is no evidence that Defendant has ever considered this,
or any other alternative, to substitute for or alleviate the disparate impact of the “five year rule.”
Sixth, Plaintiff offers the Report of the SBA Inspector General, issued March 20, 2003,
concluding that “[t]he Division’s evaluation of the application [of Diamond] and the decision to deny
were not accomplished in accordance with the existing SBA procedures and criteria.” OIG Report,
Ex. CC to Luse Decl. at 2.10
Seventh, Plaintiff also offers the following evidence of what it calls “direct evidence of direct
discriminatory conduct.” While that evidence, by itself, would not suffice to convince a reasonable
10
Presumably, the jury will also be informed that the Inspector General concluded that
no decision made by SBA regarding Plaintiff was based on the race of Plaintiff’s principals.
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jury of direct discrimination,11 it may still be presented to the jury for its consideration on the issue
of disparate impact.
In view of Plaintiff’s evidence that the challenged “five year rule” disproportionately
excludes African American firms from securing SBIC licenses, the absence of any statistical or other
kinds of evidence showing a “demonstrable relationship” between the challenged criteria and an
SBIC’s success, Plaintiff’s suggested nondiscriminatory alternative solution, the SBA’s history vis-a-
vis involvement of African American owned funds into its programs, and the numerous material
facts in dispute,12 the Court finds that genuine issues of material fact exist with regard to Plaintiff’s
disparate impact claim and that Plaintiff has offered sufficient evidence from which a reasonable jury
could conclude that Defendant is liable for disparate impact discrimination on the basis of race.
Accordingly, it is
ORDERED that Defendant’s Motion for Summary Judgment [Dkt. No. 90] is denied; and
it is
11
See, for example, the early comments of Leonard Fagan, whose job was simply to
intake MAQs filed by email to the Investment Division, but e-mailed that the MAQ was “weak,” and
noted that Peak was a “frat brother” of another SBA employee who was African American, and the
comments of Karen Ellis, who reviewed Plaintiff’s first MAQ, that Peek “had a sense of entitlement
about being in the program,” and “knew that all along I didn’t think he was going to get an interview
[to receive a go-forth letter] . . . I had told them [Diamond] that probably since the day [I] started
reviewing the MAQ,” and her denials of knowing the race of the applicants when the MAQ she was
reviewing contained that information.
12
See Diamond Ventures’s Statement of Genuine Issues and Statement of Facts [Dkt.
No. 102].
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FURTHER ORDERED that the parties shall appear for a Status Conference on April 15,
2010, at 10:45 a.m.
/s/
March 29, 2010 GLADYS KESSLER
United States District Judge
Copies via ECF to all counsel of record
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