Summary of a Recent
Judicial Development in
Finance and Credit

South Dakota District Court
Upholds NAD Decision Requiring
Farmer to Pay Shared Appreciation

Harrison M. Pittman
Staff Attorney

The United States District Court for South Dakota has upheld a USDA National Appeals Division determination that the recapture provision in a farmer's shared appreciation agreement was effective upon expiration of such agreement, and that the farmer was required to pay a shared appreciation amount of $91,150.00. Bukaske v. United States Dep't. of Agric., 193 F.Supp.2d 1162 (D.S.D. 2002).

During the late 1970's and early 1980's, many farmers were unable to satisfy the loan repayments they owed to the Farmers' Home Administration ("FmHA"). See id. at 1163. The FmHA was the predecessor to the current Farm Service Agency ("FSA"). See id. With respect to these outstanding loans, Congress provided the USDA Secretary ("Secretary") the option "to compromise, adjust, or reduce claims, to adjust or modify the terms of mortgages, to defer principal and interest and to forego foreclosure for such period as the Secretary deem[ed] necessary." Id. (citing 7 U.S.C. Sec. 1981 and Curry v. Block, 541 F.Supp. 506 (S.D. Ga. 1982)). The Secretary did not implement any of these statutory provisions. See id. Instead, the Secretary issued "widespread notices of intent to foreclose" to delinquent farmer-borrowers. Id. at 1164. Congress responded by enacting the Agricultural Credit Act of 1987 ("ACA"), Pub. L. No. 100-233, 101 Stat. 1568 (1988). See id.

The ACA allowed qualified farmer-borrowers to restructure their FmHA debt by "'writing down the principal and accumulated interest charges'" to a level at which a plan of repayment could be created. Id. at 1165 (quoting 7 U.S.C. Sec. 1991(b)(3)(C)). The write-down level was designed to allow payment to the FmHA "equal to the net recovery from an involuntary liquidation at the time of the write-down." Id. (citing 7 C.F.R. Sec. 1951.902 (1989)). The net recovery value was determined by approximating the amount the federal government would recover "from a sale of the debtor's mortgaged property, minus expenses, after an involuntary liquidation." Id. (citing 7 U.S.C. Sec. 2001(c)(2)(1988)). Each farmer-borrower qualifying for the write-down was required to enter into a shared appreciation agreement ("SAA"). See id. (citing 7 C.F.R. Sec. 1951.909(e)(4)(vi) [formerly 7 C.F.R. Sec. 1951.909(e)(5)(iii)(D)]). Every agreement contained a recapture provision stating that "'[s]hared appreciation agreements 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.'" Id. at 1168 (quoting 7 U.S.C. Sec. 1991(e)(2)).

The language of the SAA at issue provided, in relevant part:

As a condition to, and in consideration of, FmHA writing down the above amounts and restructuring the loan, Borrower agrees to pay FmHA 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 this Agreement or the date Borrower pays the loan in full, ceases farming, or transfers title to the security, if such event occurs after four (4) years but before the expiration date of this Agreement. The amount of recapture by FmHA 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 term (sic)of this agreement FmHA will liquidate after the borrower has been notified of the right to appeal.

Id. at 1165.

Darrell Bukaske entered into a SAA with the FmHA on July 19, 1989. See id. The SAA was to expire on July 19, 1999. See id. On May 19, 1999, FSA (successor to the FmHA) notified Bukaske that he owed $91,150.00 for the shared appreciation value of his property. See id. at 1166. This amount represented fifty percent of the total increase in the market value ($182,300.00) of the property securing Bukaske's FmHA/FSA loan from the time he entered into the SAA until the date on which it expired. See id.

Bukaske requested that the FSA county office reconsider its decision. See id. He claimed that the terms of the SAA were ambiguous and that, in the alternative, "the appraisal value used to calculate his shared appreciation was too high so that the amount of the recapture should be lower." Id. The county farm loan officer denied Bukaske's request, claiming that he lacked "authority to make a decision on these matters." Id.

Bukaske appealed the county officer's determination to the USDA National Appeals Division ("NAD"). See id. He argued that under the terms of the SAA no shared appreciation was due. See id. The NAD hearing officer upheld the Agency's determination that Bukaske owed $91,150.00 for shared appreciation. See id.The officer also stated that the "'question of ambiguity of the SAA may be a legal matter which is beyond the administrative authority of this determination.'" Id.

Bukaske appealed the hearing officer's determination to the NAD director. See id. He contended that no shared appreciation was due because the SAA had expired. See id.He also argued that the hearing officer incorrectly determined that "under the shared appreciation [agreement] $91,150.00 [was] owed to the Agency." Id. The director upheld the hearing officer's determination. See id.

Bukaske then sought judicial review to the district court pursuant to the Administrative Procedures Act ("APA"), 5 U.S.C. Sec. 706, as authorized by 7 U.S.C. Sec. 6999. See id. He raised two arguments on appeal. First, Bukaske argued that he owed no amount whatsoever for the shared appreciation of the farm property. See id. To support this contention, he claimed that the terms and provisions of the SAA were ambiguous and that he fulfilled his obligations under the SAA when he did not "cease farming, transfer title to the security, or pay his loan in full." Id. He argued in the alternative that if he owed an amount for shared appreciation, then that amount should be lowered because the appraisal value used by the USDA to determine the shared appreciation amount was too high. See id.

The USDA filed a motion for summary judgment, arguing that based on its interpretation of the statute, regulations, and terms of the SAA, Bukaske owed $91,150.00 for shared appreciation. See id. The USDA also argued that the district court owed Chevron-style deference to the agency's interpretation of the statute, regulations, and the SAA agreement. See id. at 1168. (citing Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)). The district court determined that it was unnecessary to determine whether Chevron deference was owed to the agency's interpretation of the statute or the regulations. See id. at 1169. The court explained that "[t]he opinion issued by the USDA is not, at any level, thorough or well reasoned [enough] to merit deference under Chevron." Id.

The district court also determined that it was not necessary to determine whether it should apply Chevron deference with respect to the USDA's interpretation of the SAA terms. See id. at 1170. The court acknowledged the split of authority over whether courts should allow Chevron deference "to an agency's interpretation of a contract in which the agency has a financial interest." Id. at 1169. The court declined to determine which line of authority was more persuasive because even though "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. at 1170 (citing Southern California Edison Co. v. United States, 226 F.3d 1349 (Fed. Cir. 2000) (holding that such deference is inappropriate); Meadow Green Wildcat Corp. v. Hathaway, 936 F.2d 601 (1st Cir. 1991); Northwest Pipeline Corp. v. Fed. Energy Reg. Comm., 61 F.3d 1479 (10th Cir. 1995); Williams Natural Gas Co. v. Fed. Energy Reg. Comm., 3 F.3d 1544 (D.C.Cir. 1993); and Muratore v. U.S. Office of Personnel Management, 222 F.3d 918, 922 (11th Cir. 2000) ("the institutional advantages of agencies apply to a broad range of administrative activities," and "contract interpretation . . . is sufficiently similar to statutory interpretation [that it] warrant[s] deference especially when the interpretation involves a policy determination within the agency's statutory domain.") (quoting from Phillip G. Oldham, Comment, Regulatory Consent Decrees: An Argument for Deference to Agency Interpretations, 62 U. Chi. L. Rev. 393, 399-400 (1995)). The district court noted that every court that has dealt with the issue of whether shared appreciation is due upon the expiration of the ten year contract (if not sooner) has agreed with the government's interpretation that it is due. See id. (citing Israel v. United States Dep't. of Agric., 135 F.Supp.2d 945 (W.D.Wis.2001), aff'd, 282 F.3d 521 (7th Cir. 2002)).

The court declined to address Bukaske's claim that the FSA incorrectly calculated the shared appreciation amount. See id. at 1172. The court reasoned that because Bukaske only made a general contention about the appreciation amount in the administrative appeals process, his more specific objections on appeal about the appraisal method would not be addressed. See id. The district court concluded that "[t]his issue was never properly raised in the administrative appeals process and the USDA has not had an opportunity to review the issue. This court therefore declines to address the issue." Id.

Bukaske also argued that he was mislead by representations made by the FmHA county supervisor (in addition to the SAA's ambiguity) that he would not owe any amount for shared appreciation if he did not pay off the restructured debt, cease farming, or sell the collateral during the ten year term of the SAA. See id. at 1170. The district court rejected this argument, based on the well-settled principle that individuals who deal with the federal government are presumed to know the law and "may not rely on the conduct of Government agents contrary to law." Id. (quoting Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 63 (1984).

This case summary was prepared in August, 2002.