Opinion
A3-01-85.
May 20, 2002
MEMORANDUM AND ORDER
I. Introduction
Before the Court is defendant's motion to dismiss the above-captioned case (doc. # 27). Also before the Court is a motion by plaintiffs for class certification and for oral argument on that motion (doc. # 18). The Court had previously stayed its consideration of these motions pending a decision by the Seventh Circuit in an analogous case. That case has now been decided, and the Court has considered the parties' supplemental briefs. The stay is therefore lifted, and the motion to dismiss is now ripe for review. For the reasons set forth below, and upon consideration of the parties' submissions and the entire file, the motion to dismiss is GRANTED. The case is thus ORDERED DISMISSED. Plaintiffs' motions to certify a class and for oral argument are therefore DENIED as moot.
II. Background
Plaintiffs are 108 farmers and ranchers who had loans written down pursuant to the 1987 Agricultural Credit Act (ACA), Pub.L. No. 100-233, 101 Stat. 1679 (1988). Defendant is the United States Department of Agriculture (USDA), sued through its secretary, Ann Veneman. The ACA allowed farmers delinquent in payments to USDA for various agricultural loans to have their debts and debt financing restructured, including having their secured debt written down to reflect the actual market value of the farm land security. Those who participated in this program were required to sign Shared Appreciation Agreements (SAA's).
In general, the SAA's provide that USDA, along with the farmer, will receive some percentage of the appreciated value of the land used as collateral to secure the underlying loans. The exact amounts USDA receives, and the conditions under which it receives them, are the primary issues in the case. In short, plaintiffs claim USDA has misinterpreted the SAA's to require payment of up to the amount of the loan written down, due upon the expiration date of the agreement, generally ten years, unless one of several triggers occurs sooner. Plaintiffs urge that repayment is only due if one of the triggers occur; if they do not, the SAA simply disappears. They also claim the amount of repayment is limited to a lower figure than USDA claims.
After filing this case, plaintiffs moved for a preliminary injunction. After conducting a hearing on the motion, the Court on August 22, 2001, issued a Memorandum and Order denying an injunction. The Court then stayed its ruling on the motion to dismiss pending the Seventh Circuit decision. That case has now been decided, and the parties have provided the Court with supplemental briefs on its effect, which the Court has considered in reaching its decision.
III. Standard of review
In reviewing a motion for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6), a court "is constrained by a stringent standard." Parnes v. Gateway 2000, Inc., 122 F.3d 539, 545-46 (8th Cir. 1997) (citations omitted). A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Id. at 546 (citations omitted). See Briehl v. General Motors Corp., 172 F.3d 623, 627 (8th Cir. 1999). Moreover, the court must accept the allegations in the complaint as true and construe them in plaintiff's favor when making this determination. Midwestern Mach., Inc. v. Northwest Airlines, Inc., 167 F.3d 439, 441 (8th Cir. 1999). "Thus, as a practical matter, a dismissal under Rule 12(b)(6) is likely to be granted only in the unusual case in which a plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief." Parnes, 122 F.3d 546.
These standards arguably operate somewhat differently here, however, as the Court is confronted with a legal challenge to an agency's interpretation of its own regulations. The parties devote much energy to arguing how deferential the Court must be to the agency's interpretations. In fact, the Court concludes that plaintiffs' theory must fail even if the Court accords little deference to USDA's interpretations. Therefore, the Court declines to resolve the question of how much deference is due.
IV. Analysis
Broadly speaking, plaintiffs make two main claims. First, they allege that the SAA's cannot be effective after ten years, and thus USDA cannot collect any amount under them if a farmer did not sell his land, repay his loan, or cease farming within those ten years. UDSDA, contrarily, argues that recapture is due when the SAA's "mature" after no more than ten years. Second, plaintiffs assert that, if the Court finds the SAA's may be enforced after ten years, USDA's method of calculating the amount due is incorrect. The Court will address each in turn.
A. Whether the SAA's entitle USDA to recapture after ten years
1. Statutory and regulatory background
The SAA's are intended to implement a portion of the Agricultural Credit Act of 1987. Therefore, interpretation of the SAA's must include consideration of the ACA. See Maricopa-Stanfield Irrigation and Drainage Dist. v. United States, 158 F.3d 428, 435 (9th Cir. 1998) (holding that government contracts should be interpreted "against the backdrop of the legislative scheme that authorized them"). The United States Supreme Court has applied this rule when faced with analogous situations. See generally Bennett v. Kentucky Dept. of Educ., 470 U.S. 656, 669 (1985) ("Unlike normal contractual undertakings, federal grant programs originate in and remain governed by statutory provisions expressing the judgment of Congress concerning desirable public policy"). Therefore, the Court begins with a review of the statutory framework the SAA's are intended to implement.
The provision establishing SAA's is codified at 7 U.S.C. § 2001(e). The first subsection provides that "[a]s a condition of restructuring a loan . . ., the borrower of the loan may be required to enter into a shared appreciation arrangement that requires the repayment of amounts written off or set aside." 7 U.S.C. § 2001(e)(1) (emphasis supplied). The next section states that SAA's "shall have a term not to exceed 10 years" and "shall provide for recapture based on the difference between the appraised values of the real security property at the time of restructuring and at the time of recapture." § 2001(e)(2) (emphasis supplied). The third subsection provides that the amount recaptured shall be 75% within the first four years of the agreement and 50% thereafter. § 2001(e)(3). As the emphasized phrases indicate, these sections suggest recapture will occur at some point, if the real estate security has appreciated in value.
It is the next subsection which lies at the heart of the issue before the Court. It provides:
Recapture shall take place at the end of the term of the agreement, or sooner —
(A) on the conveyance of the real security property;
(B) on the repayment of the loans; or
(C) if the borrower ceases farming operations.
§ 2001(e)(4). In the Court's view, this provision undercuts plaintiffs' argument that the SAA's simply cease to be effective after ten years. To the contrary, this provision sets up two possibilities for collection, one of which is at expiration.
First, recapture can "take place at the end of the term of the agreement," which is not to exceed ten years. § 2001(e)(2) (4). On the other hand, recapture can take place sooner, if one of three triggering events happen: conveyance of the property, loan repayment, or cessation of farming. § 2001(e)(4). In either event, recapture will take place; the only question is when. This is the interpretation of the SAA urged here by USDA, and the Court concludes that the statute supports it.
Further, the first set of regulations promulgated by USDA to enforce the Act supports this conclusion. Indeed, the 1988 regulations provide a detailed procedure for collection of amounts due under SAA's after ten years. See Servicing of Accounts Restructured Under Primary Loan Service Programs, 7 C.F.R. § 1951.914 (1988). For example, the regulations provide that "[s]ix months prior to the end of the shared appreciation Agreement, not to exceed 10 years, the Finance Office will notify the County Supervisor of the expected final date of recapture." Id. at § 1951.914(a)(3). Similarly, another subpart provides notification to a farmer that recapture is due and for a process for appraising the land at issue. Id. at § 1951.914(b)(4) C.
Also contained in the regulations is a set of instructions and explanations sent to farmers affected by ACA. Id. at Ex A., Att. 1. These instructions clearly state as follows:
During this 10 years, FmHa will ask you to repay part of the debt it wrote down if you do one of the following things:
a. Sell or convey the real estate
b. Stop farming
c. Pay off the entire debt
If you do not do one of these things during the 10 years, FmHa will ask you to repay part of the debt written down at the end of the 10 years.
Id. This paragraph further supports USDA's contention that the ACA requires repayment at the end of ten years, unless a triggering event requires earlier repayment. In conclusion, these regulations, enacted so soon after passage of the ACA and reflecting USDA's interpretation of the ACA at the time, undercut plaintiffs' interpretation.
2. Review of the SAA's
The Court now turns to the SAA's themselves. They begin with a recitation of the parties and the date on which the agreement is executed. Importantly, the last clause of this paragraph indicates that the agreement "expires on" a date to be filled in, which is not to exceed ten years. The next paragraph lists the loans from USDA to the farmer, as well as the notes and real estate securing these loans. The SAA then provides as follows:
As a condition to, and in consideration of [USDA] writing down the above amounts and restructuring the loan, borrower agrees to pay [USDA] an amount according to one of the following payment schedules:
1. Seventy-five (75) percent of any positive appreciation in the market value of the property securing the loan as described in the above security instrument(s) between the date of this Agreement and either the expiration date of this Agreement or the date the Borrower pays the loan in full, ceases farming or transfers title of the security, if such event occurs four (4) years or less from the date of this Agreement.
2. Fifty (50) percent of any positive appreciation in the market value of the property securing the loan above as described in the security instruments between the date of this Agreement and either the expiration date of the Agreement or the date Borrower pays the loan in full, ceases farming or transfers title of the security, if such event occurs after four years but before the expiration date of this Agreement.
The amount of recapture by [USDA] will be based on the difference between the value of the security at the time of disposal or cessation by Borrower of Farming and the value of the security at the time this Agreement is entered into. If the borrower violates the terms of the agreement [USDA] will liquidate after the borrower has been notified of the right to appeal.
As the Court understands it, plaintiffs' argument from the text of the SAA is essentially twofold. First, they focus on the word "expire" in the first paragraph, urging that its plain meaning is "to end" or "cease to be effective." Thus, they argue that a farmer who reaches this expiration date without a triggering event simply has his SAA cease to be effective. Second, they emphasize that the two alternate repayment schedules do not seem clearly to provide for recovery without a triggering event happening. They seize on the concluding phrase — that recapture "will be based on the difference between the value of the security at the time of disposal or cessation by Borrower of Farming and the value of the security at the time this Agreement is entered into" — noting there is no valuation method provided for one who does not cease farming or dispose of property.
The Court has previously expressed its view that the SAA's are poorly drafted and confusing. See Stahl, et. al v. Veneman, Order Denying Motion for Injunctive Relief, A3-01-85 (D.N.D August 22, 2002), at 5 ("The contracts are not a model of clarity; indeed, the Court finds them generally confusing"). Other courts have agreed with this view. See Bukaske v. USDA, 2002 WL 480393 at *4 (D.S.D. March 26, 2002) (describing an SAA as "poorly drafted"). While it continues to view the SAA's as examples of imperfect drafting, the Court concludes it must reject plaintiff's construction of them.
First, the Court concludes that plaintiffs' case cannot rest on the use of the word "expire" in the SAA rather than a word such as "mature," which USDA apparently now uses. Though "expire" is perhaps not the perfect word, and though it has certainly proved nettlesome in this case, plaintiffs cannot rest their case on it. This is because, as previously explained, the statute, which the SAA is intended to implement, and the regulations, of which it is part, clearly allow for recapture at the end of the agreement. Whether termed "expiration" or "maturation," the point remains that recapture is contemplated when the term of the SAA, which cannot exceed ten years, is reached. The Court's earlier discussion of the statutes and regulations supports this view.
Further, other courts to consider this question have reached the same result. Perhaps the clearest discussion of this precise point comes from In re Moncur, 1999 WL 33287727 (Bankr.D.Id. 1999). After reviewing the language of the SAA, and paying close attention to the statutory and regulatory framework, the court rejected the argument made by plaintiffs here. It concluded that "[w]ithout question, the program contemplated a recapture payment at the conclusion of the SAA term if payment in full of the write-down balance had not been made during the term of the SAA." Id. at *4. Further, four other cases, including one from another Eighth Circuit district court, resolve issues of valuation connected with enforcing SAA's on their expiration, although they do not entertain in detail the arguments made here. See Viers v. Glickman, 2000 WL 33363197 (S.D.Iowa 2000); Curtis v. USDA, 2001 WL 822413 (W.D. Mi. 2001); Wright v. USDA, 2001 WL 822417 (W.D. Mi. 2001); Pandora Farms v. USDA, Civil No. 00-1753-A (E.D.Va. July 5, 2001). These cases support the conclusion that recapture occurs upon expiration, contrary to plaintiffs' assertion.
Second, the Court rejects plaintiffs' argument that recapture upon expiration is impermissible because the schedules arguably do not provide for it. In so doing, the Court is guided by the recent Seventh Circuit decision in Israel v. USDA, 282 F.3d 521, 527 (7th Cir. 2002). Crucially, the court in Israel considered and rejected this very argument. Id. at 527. As here, the farmer in Israel urged that because the SAA did not contain a formula for recapture at the expiration date, as it did for the triggering events, recapture at expiration was impermissible. Id. In rejecting this argument, the court wrote:
We reject plaintiffs' contention that the formula provision negates the clear language of the recapture provision solely because the formula provision does not mention the expiration date of the Agreement explicitly, as does the recapture provision. Because the plain language of the Agreement provides for recapture at "the expiration date of the Agreement," we cannot conclude that the agency's determinations were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E).
Id. The Court agrees with this reasoning by the Seventh Circuit and thus adopts it here. This conclusion is further bolstered by the fact that, as explained earlier, the Court is firmly convinced that the controlling statute and regulations require repayment, a conclusion which influences analysis of the SAA.
The Court recognizes that plaintiffs argue the Court ought not employ the abuse of discretion standard, as the Seventh Circuit did. However, other courts have reached the same conclusion without applying the more lenient standard. Notably, Judge Kornmann of the District of South Dakota concluded that the arguments made by plaintiffs here must fail under any standard. Bukaske, 2002 WL 480393 at *7 (noting that the issue of deference is immaterial because, "in this case, all roads lead to Rome"). Judge Kornmann explained: "Although the SAA is somewhat confusing, the USDA's ruling on the agreement is without question a reasonable interpretation of the statute and regulations. The statutory basis for a SAA is very clear. Shared appreciation is due at the end of the term of the SAA, if not sooner." Id. As explained above, this Court is in complete agreement.
Finally, the Court reiterates that its holding is consistent with every court except one to have ruled on the issue thus far or to have enforced an SAA at its expiration. See Israel v. USDA, 282 F.3d 521 (affirming Israel v. U.S. Dept. of Agr., 135 F. Supp.2d 945 (W.D.Wis. 2001)); Bukaske, 2002 WL 480393; Viers, 2000 WL 33363197; Curtis, 2001 WL 822413; Wright, 2001 WL 822417; Pandora Farms, Civil No. 00-1753-A (E.D.Va. July 5, 2001); In re Moncur, 1999 WL 33287727; In re Tunnisen, 216 B.R. 834 (Bankr.D.S.D. 1996). This virtual unanimity of judicial opinion further supports the Court's conclusion.
The sole decision which has arguably held otherwise, and on which plaintiffs rely, is a 1994 Tax Court opinion which mentions, while listing the debts and assets of a taxpayer, that an SAA will leave the taxpayer with no obligations independent of the note if none of the triggers occur within ten years. Lawinger v. Commissioner of Internal Revenue, 103 T.C. 428, 431 (1994). This Court, like others to have considered it, accord this decision no precedential value, as it is older than more recent contrary opinions and does not address the issue before the Court in any depth. See Bukaske, 2002 WL 480393 at *7 (noting that Lawinger "is entitled to no weight here").
In sum, the Court holds that the SAA's entitle USDA to recapture appreciation upon their expiration, regardless of whether any of the triggering events have occurred. This conclusion is based on the text and purpose of the SAA's themselves, especially as read against the backdrop of the statute and regulations to which they are related. The Court's decision is in line with those of other courts to have considered the issue. Plaintiffs' first main claim is rejected, and defendant's motion to dismiss as to it is GRANTED.
B. Whether USDA's method of calculation is impermissible
Plaintiffs' second argument is that USDA has impermissibly changed the maximum amount it can collect from each farmer who has recapture due. No other court has been called upon squarely to rule on this argument, as other opinions have involved a challenge in a particular case rather than a general challenge to USDA's practices. See, e.g., Bukaske, 2002 WL 480393 at *9 (holding plaintiff had waived this argument by failing to make it at the administrative level). Upon a full review of the issue, the Court rejects plaintiffs' argument.
1. Background
The issue is unfortunately somewhat confusing. In 1989, USDA promulgated regulations implementing ACA. These regulations included an Exhibit B, a form on which the information concerning the write down was recorded. Exhibit B also included instructions for preparation of this form. It is these documents which are in issue here, so the Court must review them in some detail.
Exhibit B required input of a series of numbers. The first was the "loan balance," defined as "the total unpaid balance of the loan as of the effective date of the agreement." Second, one entered the market value of the land used to secure the outstanding loan balance. The third number was the "net recovery value," which was the value of the loan to USDA if it were to go through liquidation procedures. Next, one entered the write down amount, equal to the loan balance less the net recovery value. This reflects the purpose of the program, which was writing down debt to equal the actual post-liquidation market value of the property securing it. The final number is the one at issue here, the "equity recapture account amount." This is defined as "the lessor [sic] of the difference between the loan balance and the net recovery value or the difference between the market value and the net recovery value." As will be explained more fully below, plaintiffs' theory is that the equity recapture account amount fixed the maximum amount that USDA could collect under an SAA. This Court disagrees with plaintiffs' assertion.
Surely recognizing that Exhibit B could be confusing, it includes several examples. To help explain the controversy before the Court, these examples bear repeating.
Example A
Debt outstanding: $120,000
Market value: 100,000
Net recovery value: 75,000
Equity recapture account amount: 25,000
Write down amount: 45,000
Thus, the farmer in this case has a debt greater than the value of his land ($120,000 vs. $100,000). The value of the land is further reduced by $25,000 to reflect the costs of liquidation, leaving a net recovery value of $75,000. Subtracting the recovery value from the debt outstanding leaves $45,000 as the amount USDA will write off. Finally, the equity recapture account amount is $25,000, the lesser of the difference between debt and recovery ($45,000) and market value and recovery ($25,000). This figure reflects the fact that the market value is less than the debt and is the difference between the market value and the amount owed by the farmer after the write down.
Example B
Debt outstanding: $100,000
Market value: 120,000
Net recovery value: 75,000
Equity recapture account amount: 25,000
Write down amount: 25,000
Here, of course, the market value of the land is greater than the debt owed, although the recovery value is still less than the debt. Therefore, the amount written down is significantly less. The equity recapture amount of $25,000 is the debt amount less the recovery value, since market value less recovery value is higher ($45,000). Unlike the previous example, here the equity recapture account amount reflects the fact that here the market value is greater than the outstanding debt.
This form was used for only a few years. On June 7, 1989, USDA sent out an Administrative Notice (AN) indicating that Exhibit B did "not contain the necessary data fields to record all the required servicing information and will be eliminated[.]" FmHA An. No. 193 (June 7, 1989). Attached to the AN was a new form to be used, a form which will be discussed below. USDA concedes that the new form was used following issuance of AN 193, even though the existing Schedule B was not removed from the Federal Register until 1992.
The new form is both similar to and different from the original form. First, while its format is different, this apparently reflects a new computer system; the new system likely also explains the request for information not on the original, such as net worth. Further, like the first form, it asks for the market value of the property, the net recovery value, and the total amount of debt written down.
The contentious issues are two. First, there is no entry for each farmer's "equity recapture account amount," as there was on the original form. Second, the accompanying instructions explain that the total write down amount "is the potential recapture amount." Obviously, these facts fly in the face of plaintiffs' theory that the earlier equity account recapture amount established the maximum possible recovery under an SAA. This is the basis of plaintiffs' challenge, to which the Court now turns.
2. Analysis
Plaintiffs' essential argument is that, `[u]sing plain language, the equity recapture account amount means the amount of equity that is subject to recapture.' (Pls.' Resp. to Def's. Mot. to Dismiss at 19.) From this they infer that the equity recapture account amount is the maximum that can be collected under an SAA, under any conditions. They assert that the decision to discontinue use of the original Exhibit B and to replace it with the new one indicates an impermissible shift to decreeing a new maximum amount collectible, that is, the amount of the write down. They assert that this decision was contrary to law and hence should be rejected by this Court.
USDA's response is that the change from one form to another did not effect any substantive changes. Rather, it asserts "the purpose of the [change] was, as is stated in the beginning of the [administrative] notice, to clarify the way the transactions should be processed," which it did by providing more detailed forms. USDA further claims it was always entitled to recapture the amount written down, arguing the equity recapture account never established a maximum amount that could be recaptured. The Court accepts USDA's arguments. In short, there are two related fundamental flaws in plaintiff's argument. First, it flies in the face of what the Court views as the clear Congressional intent of the ACA generally and the SAA system in particular. Second, when evaluated in light of this intent, there is simply insufficient evidence to support plaintiffs' contentions and to undermine USDA's contention that the equity recapture account amount did not establish a cap on recapture. The Court will address each point in turn.
First, plaintiffs' theory is contrary to the text and purpose of ACA. The portions of ACA at issue allowed farmers and ranchers to reduce their outstanding debts to the actual value of the cost of foreclosing on the property securing their debt. 7 U.S.C. § 2001 et seq. In return for this benefit, however, a farmer or rancher was "required to enter into a shared appreciation agreement that requires the repayment of amounts written off or set aside." 7 U.S.C. § 2001(e)(1) (emphasis supplied). Congress decided the amount to be collected would be "based on the difference between the appraised values of the real security property at the time of restructuring and . . . recapture." 7 U.S.C. § 2001(e)(2). In short, Congress allowed farmers and ranchers to stay on their land and wrote down debt to the post-foreclosure value of the land, and in return USDA would receive a portion of the increased value of the land.
Two features of this scheme support USDA's position. First, the plain language of the statute calls for recapture "of amounts written off or set aside." 7 U.S.C. § 2001(e)(1). There is no limitation on this amount, other than the amount written down, as plaintiffs' position requires. Second, this is consistent with the goal of ACA: recovery, if possible, of that which the farmers and ranchers received in debt relief. Without some clear direction, there is no reason to conclude that Congress would somehow limit that amount to less than the amount written off.
This conclusion is supported by recognition of the second flaw in plaintiffs' argument: There is simply no textual support for the inferences plaintiffs draw from the existence of the equity account recapture amount. First, the phrase never appears in the statute. Second, as mentioned above, the only reference in the statute to an amount to be repaid is to "amounts written off or set aside." These facts greatly undercut plaintiffs' effort to make the equity account recapture amount into the significant limitation they urge.
The only place the equity account recapture amount appears is in the regulations, and the references there do not support plaintiffs' contentions. There appear to be two references to the equity recapture account. One is Exhibit B, discussed above. The other provides that "[t]he County Office will input via the multifunction work station, an equity receivable account in the amount shown on Exhibit B[.]" Despite plaintiffs' best efforts, these two brief references simply cannot support the premise they seek to build upon them, that the equity account amount somehow operates to limit USDA's potential recovery.
In sum, though it is not entirely clear what the function of the equity account recapture amount is, plaintiffs' efforts to read it as a limitation of recapture is unavailing. Such a construction would fly in the face of the language and goal of the statute. Further, it is simply unsupported by either the statute or the regulations. Therefore, defendant's motion to dismiss this theory is GRANTED.
V. Conclusion
As set forth above, defendant's motion to dismiss is GRANTED. Therefore, the case is ORDERED DISMISSED. Plaintiffs' motion to certify a class and for a hearing on that motion are DENIED AS MOOT.
IT IS SO ORDERED.