On March 26, 2019, the Court of Federal Claims found that Xotech, LLC’s Operating Agreement does not comply with SDVOSB regulations regarding “control” over the company. Specifically, the company’s operating agreement included three managers. The service disabled veteran was one manager and his wife and son were the other managers. Each of them have the authority to enter into contracts, engage employees, obtain insurance, conduct litigation and borrow money. Because of this, the service disabled veteran was not in sole control of all day-to-day business decisions.
The Court was not moved by Xotech’s argument that the service disabled veteran could fire the other managers (his wife and son) if he did not approve of their decision making:
The fact that Gary Marullo can fire either or both of the Managers as the super majority Member under Section 6.10 of the Operating Agreement does not alter this result. The problem with XOtech’s removal authority argument is that authority does not undo binding decisions of either of those two managers before they are removed. As the government explains, Kathy Marullo and Joshua Marullo could vote for and sign a five-year automobile lease over Gary Marullo’s objection. While it is true that Gary Marullo as the Senior Member could remove his wife and son as Managers, XOtech still would remain bound to the lease because the Operating Agreement permits Kathy Marullo and Joshua Marullo as Managers to authorize and execute such contracts.
This decision is a reminder that the service disabled veteran must control all aspects of the day-to-day decision making of his or her company. While in this case the service disabled veteran thought it was a good idea to share this authority with his wife and son, it resulted in a loss of a contract.
Xotech, LLC v. United States, United States Court of Federal Claims, No. 18-1483C (March 26, 2019)
