Summary of a Recent
Judicial Development in
Finance and Credit

Expiration of Shared Appreciation
Agreement Triggers Recapture

Susan A. Schneider
Director, Graduate AgLaw Program
Monica M. Clark
National AgLaw Center Graduate Fellow

The Seventh Circuit recently affirmed a district court holding that the expiration of the ten year term of a Farm Service Agency's (FSA) Shared Appreciation Agreement (SAA) triggers a recapture determination. Israel v. USDA, 282 F.3d 521 (7th Cir. 2002). The plaintiffs, Donald and Patsy Israel and Richard and Shirley Quinton collectively own Israel and Quinton Farms, a partnership. They obtained a debt write down of an FSA direct farm loan in 1989. As a condition to receiving this write down, the plaintiffs were required to sign a ten year SAA. This agreement allowed the FSA to recapture a percentage of any appreciation in the mortgaged property under the following terms:

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 [FSA] 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 [FSA] will liquidate after the borrower has been notified of the right to appeal.

Id. at 523 (emphasis provided by the Court).

In April 1994, the plaintiffs informed the FSA that they were considering replacing their FSA financing with private financing. The FSA told the plaintiffs that any such replacement would constitute "payment in full" of the debt owed, triggering recapture under the SAA. Israel at 523. The FSA officers told the plaintiffs that in that event, they would owe half of the appreciated value of the property at the time of the trigger as provided in the SAA. Id. The plaintiffs never obtained private financing and continued to make payments to FSA. Id. at 523-524.

In separate letters dated April 24, 1997, November 6, 1997, and October 5, 1998, the FSA reminded the plaintiffs of the terms of the SAA. These letters included the following explanation.

Essentially what this document says is that if the value of your real estate increases after the date of the write down, you will be responsible for repaying some or all of the debt FSA wrote down. If any repayment is due, it will become due when any one of the following events happens. 1. Ten Years has passed. 2. You pay the rescheduled loan in full. 3. You ceased farming. 4. You transferred title to the property.

Id. at 524.

On June 30, 1999, the FSA wrote the plaintiffs a letter informing them that the SAA was close to expiration and set the amount of shared appreciation owed to the FSA at $96,500. Id. This amount was based on the following equation:

$345,000 (current appraisal of plaintiffs' real property) minus $152,000 (1989 appraisal of plaintiffs' real property) $193,000 (net appreciation) times .50 (Agreement percent share) equals $96,500 (appreciation demanded)

Id.

The plaintiffs protested the recapture obligation, first unsuccessfully seeking FSA reconsideration and then appealing to the National Appeals Division (NAD). They argued that at the time the SAA was signed, they were told that it would "expire" on September 14, 1999. They testified that they were led to believe that expiration was not a triggering event and that recapture would only be due if and when the borrower "pays the loan in full, ceases farming, or transfers title of the security during the term of the agreement." Id. The plaintiffs submitted the SAA contract as supporting evidence, arguing that it includes a formula for computing recapture only when the borrower "pays the loan in full, ceases farming, or transfers title of the security during the term of the Agreement." This provision did not explicitly reference expiration of the agreement. Id.

The NAD hearing officer rejected the plaintiffs' arguments, finding that the SAA and the relevant FSA regulations clearly stated that appreciation could be recaptured at the expiration of the ten-year term. Id.

The plaintiffs further appealed to the Director of NAD. The Director affirmed the hearing officer's decision, stating:

Regulations at 7 C.F.R. 1951.914(b) and the [Agreement] specify that the Agency can recapture a portion of the written-off debt by taking a share of any positive appreciation in the value of the real property. The Agency must collect 50 percent of any positive appreciation in the market value of the security between the date the [Agreement] was executed and the date it expires. . . . Notwithstanding the Appellants' arguments on review that the [Agreement] is ambiguous and regulations are irrelevant, the terms of the [Agreement] are clear and published regulations, by law, are a proper basis for the Hearing Officer's determination. . . . Substantial evidence supports the Hearing Officer's determination that the Agency did not err in establishing the amount of recapture due under the [Agreement] and requiring payment of such.

Id. at 525.

The plaintiffs sought judicial review in federal district court pursuant to the Administrative Procedure Act, 5 U.S.C. 701-706. They argued that the FSA and NAD determinations were erroneous in that expiration of the ten-year term of the SAA should not be a triggering event for recapture. They based this argument on the recapture formula in the SAA and their conversations with FSA employees. In the alternative, they argued that the FSA should be estopped from collecting the $96,500 in shared appreciation because the plaintiffs had relied to their detriment on statements made by FSA officers. Id. at 526.

The district court affirmed the NAD decision, concluding that it was not "a clear error of judgment in the agency's interpretation of the Agreement." Id. The district court noted that the SAA allowed the FSA to recover appreciation "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." Id. The court focused on the word "or," the use of which confirmed the FSA's authority for recapture upon expiration of the SAA. Id. The district court refused to re-weigh evidence of the plaintiffs' conversations with the FSA officers, noting that evidence regarding these conversations had been reviewed by both the NAD hearing officer and the Director of NAD, with each finding in favor of the FSA. Id.

Finally, the district court also rejected the plaintiffs' estoppel argument, stating that the doctrine of sovereign immunity would likely bar estoppel against the FSA. Id. at 526. The district court further found that even if FSA were not immune, the plaintiffs failed to show any affirmative misconduct by the FSA. Id.

The plaintiffs appealed to the Seventh Circuit. Affirming the district court, the appellate court first noted the appropriate standard of review. Citing Sierra Club v. Marita, 46 F.3d 606, 619 (7th Cir.1995), the court stated, "the arbitrary and capricious standard is highly deferential, and even if we disagree with an agency's action, we must uphold the action if the agency considered all of the relevant factors and we can discern a rational basis for the agency's choice." Israel at 526.

The court next turned to an examination of the express language of the SAA. The court noted that if an agreement is unambiguous, its language must control. Id. at 527, citing Funeral Fin. Sys. v. United States, 234 F.3d 1015, 1018 (7th Cir.2000). The court agreed with the NAD Director's analysis and found that the plain language of the SAA provided for recapture at "the expiration date of the Agreement." Israel at 527.

The court rejected the plaintiffs' reliance upon the SAA formula provision and its failure to include a reference to the expiration date of the SAA. The court held that this provision did not negate the plain language of the general recapture provision. Id. Since that general provision provided for recapture "at the expiration of the agreement," the court held that the FSA's decision to demand recapture was not "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or "unsupported by substantial evidence." Id. (citing 5 U.S.C. Secs. 706(2)(A),(E)).

The court also found that the agency's determinations were "strongly supported by the relevant statute." Israel at 527. The court noted that "[s]ection 2001(e)(4) provides that '[r]ecapture 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; (C) if the borrower ceases farming operations.'(emphasis added)." Id. (citing 7 U.S.C. Sec. 2001(e)(4)).

As further support, the court referred to an Iowa bankruptcy case that addressed the same issue in a different context. Israel at 528 (citing In re Moncur, No. 98-03213, 1999 WL 33287727 (Bankr. D. Idaho May 27, 1999)). In that case, the bankruptcy court held that the FSA could recapture at the end of the expiration of the Agreement, concluding that "[w]ithout question, the [FSA's loan] program contemplated a recapture payment at the conclusion of the [agreement] term if payment in full of the write-down balance had not been made during the term of the [agreement]." Israel at 528, citing Moncur, No. 98-03213, 1999 WL 33287727, at *4.

Just subsequent to the Seventh Circuit decision in Israel, the federal district court in South Dakota reached the same result, holding that recapture under an SAA is triggered by the expiration of the agreement. Bukaske v. USDA, 193 F. Supp.2d 1162 (D. S.D. 2002).

This case summary was prepared July, 2002