On September 30, 2021, the Appellate Division, Third Department, issued a unanimous decision annulling a denial by the New York State Division of Minority and Women Business Development of MWBE certification to a Syracuse-based company, Scherzi Systems, LLC. Jim Youngs, Chairman of the Litigation Practice Group at Hancock Estabrook, LLP, represented Scherzi Systems throughout the appeal process.
Scherzi Systems is owned by Dana Scherzi, who acquired a 51% ownership interest from her husband James a few years after he started the business. The Division denied the company’s application for certification as a woman-owned business based on James’ ownership interest and involvement in its operations. The decision by the Third Department annulling that denial has several important holdings that could impact both the MWBE application process and future appeals by other applicants who are denied certification.
First, the decision rejected the Division’s presumption that a woman’s majority ownership of a business is illegitimate if she relies on other owners or employees to help her with company operations. The Third Department clarified that a company should not be automatically disqualified from MWBE certification simply because a minority or woman owner shares some managerial tasks. This precedent acknowledges that to be successful, business owners must sometimes delegate operational processes to others so they can focus on managing and growing the business.
Second, the Court reiterated that the contributions of a woman or minority owner to the business need not be solely monetary; rather, contributions in the form of expertise may be sufficient to justify an ownership position. The Scherzi decision will require the Division to acknowledge and carefully consider the value of an owner’s contributions in determining whether his or her equity ownership is real or a mere sham. Though sweat equity alone may not be sufficient to justify an ownership position, the provision of equipment, property, or special expertise that directly grows the business may justify ownership.
Third, for those companies that have been denied certification, the Court’s decision in Scherzi has strengthened the appeal process by requiring the Division to consider all testimony and evidence presented on appeal. This may be particularly important for applicants who have been denied certification based on misunderstandings or confusion regarding the application form. In particular, the Third Department affirmed an applicant’s right in an administrative appeal to explain and expand on the application materials. The Court also indicated that the Division may not deny an application solely on the ground that the applicant failed to provide a particular piece of information where that information was not requested in the application or by the Division.
Eligibility for MWBE certification in New York State remains a complex and evolving process. Whether your company is considering applying for MWBE certification for the first time, is currently certified, or has been denied certification, the attorneys at Hancock Estabrook can help you understand and assess your eligibility for certification and guide you through administrative review.