Summary of a Recent
Judicial Development in
Finance and Credit

Farmers Lose Challenge to
Shared Appreciation Agreement

Harrison M. Pittman
Staff Attorney

The United States District Court for North Dakota has dismissed an action in which the plaintiff-farmers claimed that the USDA erroneously interpreted the terms and conditions of their shared appreciation agreements as requiring payment to the USDA up to the amount of the loan written down at the expiration of the agreement. Stahl v. Veneman, No. A3-01-85, 2002 WL 1173556 (D.N.D. May 20, 2002). The court ruled that the shared appreciation agreements entitled the USDA to the recapture appreciation value upon expiration of the agreements, regardless of whether any of the "triggering events" had occurred. Id.

The 1987 Agricultural Credit Act ("ACA"), Pub. L. No. 100-233, 101 Stat. 1679 (1988), allowed farmers who were delinquent in payments for various USDA-administered loans to have their debts and debt financing restructured. Id. at *1. The ACA allowed the delinquent farmers to have their "secured debt written down to reflect the actual market value of the farm land security." Id. Individuals who participated in this program were required to sign a shared appreciation agreement ("SAA"). Id. The SAAs provided that the USDA and the farmer would receive a certain percentage of the appreciated value of the land used as collateral to secure the underlying loan. Id.

More specifically, 7 U.S.C. Sec. 2001(e)(1) states that "'[a]s a condition of restructuring a loan . . . the borrower of the loan may be required to enter into a shared appreciation agreement that requires the repayment of amounts written off or set aside.'" Id. at *2. Section 2001(e)(2) states that the 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.'" Id. The amount recaptured is 75 per cent of this difference within the first four years of the agreement, and 50 per cent of this difference after four years. Id. (citing Sec. 2001(e)(3)). "'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.'" Id. at *3 (quoting Sec. 2001(e)(4)).

The USDA argued that the SAAs should be interpreted as requiring "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 the triggers occurs sooner." Id. at *1. The plaintiffs argued that the SAAs cannot be effective after ten years, and therefore the USDA cannot collect any amount under the SAA as long as a farmer "did not sell his land, repay his loan, or cease farming within those ten years." Id. at *2. The plaintiffs also argued that if it was determined that the SAAs can be enforced after ten years, then the USDA's method of determining the amount due was incorrect. Id.

The district court ruled that the statutory language establishing and governing the SAAs supported the USDA's interpretation. Id. at *3. The court noted that the statutory language governing the SAAs established that there were two possibilities for collection of the recapture amount. Id. The court stated that "[f]irst, recapture can 'take place at the end of the term of the agreement,' which is not to exceed ten years. 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." Id. (quoting Sec. 2001(e)(2),(4)). The court added that "[i]n either event, recapture will take place, the only question is when." Id.

The court also ruled that the language of the SAAs themselves supported the USDA's interpretation. The SAAs at issue provided that:

As a condition to, and in consideration of [the 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 loans in full, ceases farming or transfers title of the security, if such event occurs four (4) year 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 [the 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 [the USDA] will liquidate after the borrower has been notified of the right to appeal.

Id. at *4.

The plaintiffs were all subject to the payment schedule detailed in paragraph two because they held their land for the ten year period under the SAA. Id., n.3. The plaintiffs contended that the word "expiration" in the first paragraph means "to end" or "cease to be effective." Id. Thus, the plaintiffs argued that a farmer who reaches the expiration date without the occurrence of a triggering event has a SAA that simply ceased to be effective. Id. The plaintiffs also argued that the concluding phrase which stated 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" did not clearly provide for recovery without the occurrence of a triggering event. Id. The plaintiffs noted that the phrase does not provide a valuation method for a farmer who ceases farming or disposes of his property. Id.

In rejecting the plaintiffs' arguments, the district court noted that, along with other courts, it had previously described the SAAs as "poorly drafted and confusing." Id. (citing Stahl, et. al v. Veneman, Order Denying Motion for Injunctive Relief, A3-01-85 (D.N.D. Aug. 22, 2002) at *5 (observing that the contracts are generally confusing) (and citing Bukaske v. USDA, 2002 WL 480393 at *4 (D.S.D. Mar. 26, 2002) (describing the SAA's as "poorly drafted")). The court reasoned that the plaintiffs could not rely on the word "expiration" because the language of the statute and the regulations "clearly allow for recapture at the end of the agreement."

Relying on the recent Seventh Circuit decision in Israel v. USDA, 282 F.3d 521, 527 (7th Cir. 2002), the district court rejected the plaintiffs' argument that recapture upon expiration of the SAA is not allowed because the schedules arguably do not provide for it. Id. at *5. In Israel, as in this case, it was argued that recapture at expiration of the agreement was impermissible because the SAA did not contain a formula for recapture upon expiration. The Seventh Circuit rejected this argument "'[b]ecause the plain language of the Agreement provides for recapture at the expiration date of the Agreement . . . .'" Id. (quoting Israel, 282 F.3d at 527).

Having rejected the plaintiffs' first main argument, the court examined the plaintiffs' second argument that the USDA's method of calculating the recapture amount was impermissible. Id. at *6. The 1989 regulations implementing the ACA included a form on which certain information related to the write- down was recorded. Id. One section of this form required that a series of numbers be listed. Id. The first required number was the "loan balance," which was defined as "'the total unpaid balance of the loan as of the effective date of the agreement.'" Id. The second required number was the market value of the land that was used to secure the outstanding loan balance. Id. The third required number was the "net recovery value," which was defined as the amount the USDA would receive if it were to go through a liquidation process. Id. A participant also entered the write-down amount, which was equal to the loan balance minus the net recovery value. Id. The final required number was the "equity recapture account amount," which was defined as the smaller amount of difference "'between the loan balance and the net recovery value or the difference between the market value and the net recovery value.'" Id.

On June 7, 1989, the USDA gave notice that this form did "'not contain the necessary data fields to record all the required servicing information and [would be] eliminated.'" Id. at *7 (quoting FmHA An. No. 193 (June 7, 1989)). Attached to this notice was the new form which was to be used. Id. Although the new form was used after issuing this notice, the previously used form (described above) remained in the Federal Register until 1992. Id. The new form did not require an entry for "equity recapture account amount." Id. The new form also contained instructions stating that the total write-down amount "'[was] the potential recapture amount.' Id.

The plaintiffs argued that "'[u]sing plain language, the equity recapture account amount means the amount of equity that is subject to recapture.'" Id. at *8 (quoting Pls.' Resp. to Def's Mot. to Dismiss at 19). Based on this the plaintiffs inferred that the equity recapture amount, as indicated in the first form, was the maximum amount that the USDA could recapture under the SAA. Id. The plaintiffs contended that the USDA's replacement of the original form was an "impermissible shift to decreeing a new maximum amount collectible" and that the decision to replace the form was "contrary to law and hence should be rejected" by the district court. Id.

he USDA argued that the form change did not bring about any substantive changes, and that "'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.'" Id. The USDA also argued that because the equity recapture amount never established a maximum amount that could be recaptured, it "was always entitled to recapture the amount written down." Id.

The court rejected the plaintiffs' arguments, ruling that the plaintiffs' arguments were contrary to the text and purpose of the ACA. Id. The court pointed out that the plain language of the statute called for recapture "'of amounts written off or set aside.'" Id. (quoting Sec. 2001(e)(1)). The court noted that this provision did not include a limitation on the recapture amount, other than the amount written down. Id.

Finally, the court stated that absent "some clear direction, there is no reason to conclude that Congress would somehow limit that amount to less than the amount written off." Id. The court concluded that "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 the statute or the regulations." Id. at *9. For more on SAAs, see Susan A. Schneider, Shared Appreciation Agreements: Confusion and Mismanagement Threatens Family Farmers, 7 DRAKE J. AGRIC. L. 107 (2002).

This case summary was prepared in August, 2002.