Summary of a Recent
Judicial Development in
Crop Insurance

Court Rules that FCIC Properly
Cancelled Coverage

Randal Busby
National AgLaw Center Research Assistant

In an action brought by several farmers challenging a decision of the Federal Crop Insurance Corporation ("FCIC") to cancel crop revenue coverage ("CRC") policies for durum wheat, the United States District Court for the District of North Dakota has ruled that the farmers did not have a protected property interest in the CRC policies and that the FCIC had properly cancelled the farmers' policies. The court also ruled that the farmers were not required to exhaust their administrative remedies with the National Appeals Division ("NAD") before bringing suit. Kuster v. Veneman, 226 F. Supp.2d 1190 (D.N.D. 2002). See id.

The plaintiffs were farmers who purchased or attempted to purchase CRC for their durum wheat during the 2001 crop year. See id. at 1191. The defendants were the Secretary of the United States Department of Agriculture ("USDA") and the Secretary of the Risk Management Agency ("RMA") (collectively, the "government"). See id. at 1191-92. The RMA is the USDA agency that supervises the FCIC. See id.

CRC coverage "insures against revenue losses due to low yield and/or low price." Id. Under the CRC policies at issue, payments made for low yield and/or low price were to be based upon an established "base price." See id. The base price was to be determined in accordance with a specific formula. See id. The endorsement that was a part of the CRC policy at issue stated that the base price calculation would be made by March 10, 2001. See id. The CRC policy also stated that any changes made to the policy would be made before December 21, 2000, and that "either the insured or the insurer could cancel the policy at any time before the cancellation date, which was March 15, 2001." Id.

Under the policy at issue, the base price for durum wheat was equal to "'[t]he February harvest year's average daily settlement price for the harvest year's [Minneapolis Grain Exchange] September durum wheat futures contract rounded to the nearest whole cent.'" Id. (citation omitted). The average daily settlement price was equal to "the average of 'all the daily settlement prices for the [September durum wheat futures contract],' which must include at least fifteen days, each of which must be a 'full trading day.'" Id. (citation omitted).

In 2001, "trading in February on the September durum wheat futures contract was thin and, consequently, there was an insufficient number of full active trading days to calculate a price based upon the definition of base price in the endorsement." Id. at 1194. There was, however, an alternative formula for making the base price calculation. See id. The alternative calculation was as follows:

[I]f there are less than fifteen (15) full active trading days for [the September durum wheat futures contract], during [February], then additional daily settlement prices, established on full active trading days, for the contract immediately prior to [the September durum wheat futures contract], during [February], will be used until there are fifteen (15) prices from fifteen (15) full active trading days included in this average.

Id. (citation omitted).

The contract immediately prior to the September durum wheat futures contract was the July contract. Id. However, in 2001, "even with the additional daily settlement prices from July, there were still less than 15 full active trading days with which to calculate the base price." Id.

The government argued that since the September and July futures contracts for durum wheat were trading at such a low volume, a proper base price could not be calculated. See id. On March 5, 2001, the RMA "issued a bulletin which stated that: (1) it was unable to calculate a base price; and (2) no further policies could be sold after March 6, 2001." Id. The government, therefore, cancelled the existing CRC policies and stated that no further policies could be sold after March 6, 2001. See id.

The plaintiffs' action against the government challenged the RMA's conclusion "that a base price for durum wheat could not be established without an illegal amendment to the policy." Id. at 1192. Because this conclusion led to the policy's cancellation, the plaintiffs also challenged the government's decision to cancel the policy. See id. Finally, the plaintiffs argued that the government's actions constituted a violation of due process. See id. "Thus," the court explained, "the dispute in this case boils down to the agency's interpretation of the above-quoted alternative calculation for determining a base price." Id. at 1194.

The government argued that the plaintiffs had failed to exhaust administrative remedies with the National Appeals Division ("NAD"), pursuant to 7 U.S.C. § 6912(e). See id. Section 6912(e) states as follows:

Notwithstanding any other provision of law, a person shall exhaust all administrative appeal procedures established by the Secretary or required by law before the person may bring an action in a court of competent jurisdiction against - (1) the Secretary; (2) the Department; or (3) an agency, office, officer, or employee of the Department.

Id.

The plaintiffs, on the other hand, contended that the exhaustion requirement did not apply because the case involved a legal challenge to a generally applicable agency action. See id. The court stated that matters of general applicability are not subject to NAD appeal, but the decision of general applicability is at the discretion of the Director of NAD. See id. (citing 7 U.S.C. § 6992(d)).

The court explained that requiring the plaintiffs to exhaust their administrative remedies in this case "would be fruitless." Id. It noted that in Wiley v. Glickman, No. Civ. A3-99-32, 1999 WL 33283314 (D.N.D. Apr. 7, 1999), a case that involved a legal challenge to a generally applicable agency action, the court ruled that "[s]ince this claim features purely legal questions which require no agency fact-finding, none of the purposes of the exhaustion requirement would be served by requiring plaintiffs to submit the claim to NAD." Id. (citing Wiley,1999 WL 33283314 at *2 (D.N.D. Apr. 7, 1999)). Relying on Wiley, the court rejected the government's argument that the plaintiffs had failed to exhaust their administrative remedies. See id.

The court also denied the plaintiffs' motion to amend their complaint to add another claim under 7 U.S.C. § 6994, which states that NAD must provide participants who receive an adverse decision with notice of their rights. See id. The court stated that since the plaintiffs were not required to exhaust their remedies with NAD, the amendment was not necessary. See id.

The court then considered the government's argument that it was immune from suit because 7 U.S.C. § 1506(d) prohibits, among other things, injunctions against the FCIC, which was the primary remedy sought by the plaintiffs. See id. at 1193. The court noted that in Wiley the FCIC raised the same argument, and the court ruled that "the FCIC anti-injunction provision does not prohibit the Court from enjoining any action which might exceed its authority." Id. (citing Wiley, 1999 WL 33283314 at *2). The court stated that "[h]ere, plaintiffs clearly allege that the government exceeded its authority by cancelling the CRC durum contracts. So, for the reasons stated in Wiley, this attack on the Court's subject matter jurisdiction is [denied]." Id.

Next, the court considered whether "the government's interpretation of the formula used to determine the base price was either arbitrary or capricious." Id. The court noted that the plaintiffs focused on the terms "'will' and 'until' in the policy, contending that the provision requires that trading days from prior contracts will be used 'until there are fifteen (15) prices from fifteen (15) full active trading days.'" Id. at 1195. It also noted that the government argued that the plaintiffs' interpretation takes "the policy completely out of context; the full language of the provision provides that 'additional daily settlement prices, established on full active trading days, for the contract immediately prior to [the September durum wheat futures contract], . . . will be used until there are fifteen . . . prices from fifteen . . . active trading days.'" Id.

The court explained that "courts must give controlling weight to the agency's interpretation of its own regulation, unless the regulation violates the Constitution or a federal statute or is 'plainly erroneous or inconsistent with the regulation.'" Id. (citing Stinson v. United States, 508 U.S. 36, 45 (1993) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)). The court noted that the government had spent a vast amount of time on alternative propositions in interpreting the language before it reached its conclusion. See id. at 1196. It concluded that

[a]fter a careful reading of the disputed language, the government's interpretation of the disputed language seems entirely reasonable and, for that matter, correct. The "will be used" language upon which plaintiffs rely only provides the answer to the question of when and how daily settlement prices are to be used; it simply cannot be read to provide an independent directive to use other prior contracts until fifteen full active trading days are established. The Court additionally finds that the term "immediately prior" restricts the number of prior contracts to one; to read this provision otherwise would render the term "immediately" superfluous. Finally, as correctly pointed out by the government, only one contract, the July contract, could be classified as "the contract immediately prior to [the September durum wheat futures contract]."

Id.

Finally, the court rejected the plaintiffs' argument that the cancellation of the CRC was a deprivation of their due process rights. See id. The court explained that "[t]he threshold inquiry with any due process challenge is to determine whether the challenger was deprived of a protectable interest." Id. It found that the plaintiffs did not have a protectable interest in the contracts because the CRC contained an "at will" termination clause. See id. It stated that "[t]he heavy weight of the law is in favor of the defendants. As a rule, courts uniformly hold that 'at will' relationship, whether it be employment or contractual, does not give rise to a protectable interest." Id. (citations omitted). Therefore, the court denied the plaintiffs' procedural due process claim. See id.

The court stated that "[t]o the extent that plaintiffs assert a substantive due process claim, it must also fail." Id. It added that

[t]he bar for alleging a substantive due process claim is set very high; plaintiffs must allege that the action of the government was "truly irrational" or "more than arbitrary and capricious." Here, as explained above, the government has set forth rational, plausible, reasonable explanations for its decisions to cancel the policy, and the actions of the government do not rise to the very high level necessary to establish a substantive due process violation.

Id. (citation omitted). The court granted the defendant's motion for summary judgment and dismissed the complaint. See id.

The case was decided on August 1, 2002; this summary was posted June, 2003