Summary of a Recent
Judicial Development in
Finance and Credit

Decision Requiring Payments on Shared
Appreciation Agreements Affirmed

Harrison M. Pittman
Staff Attorney

In an action brought by several farmers asserting that they were not obligated to make certain payments under the Shared Appreciation Agreements they entered into with the United States Department of Agriculture ("USDA") and challenging the USDA's determination of the maximum amount that could be collected from them under the Agreements, the United States Court of Appeals for the Eighth Circuit has affirmed a district court's decision to dismiss the farmers' action. Stahl v. Veneman, No. 02-2915, 2003 WL 21003726, *4-5 (8th Cir. May 6, 2003). Stahl is the most recent decision issued in a series of litigation dealing with these particular issues. See Israel v. United States Dep't of Agric., 282 F.3d 521 (7th Cir. 2002); Bukaske v. United States Dep't of Agric., 193 F.Supp.2d 1162 (D.S.D. 2002); Stahl v. Veneman, No. A3-01-85, 2002 WL 1173556 (D.N.D. May 20, 2002).

The Agricultural Credit Act of 1987 ("ACA"), 101 Stat. 1679 (1988), was enacted so that farmers and ranchers who were delinquent in payments for various agricultural loans could restructure their debts. Stahl, No. 02-2915, at *1. Eligible farmers and ranchers were allowed to write-down their secured debts to reflect the market value of the land that secured their USDA Farmers Home Administration ("FmHA") loans. See id. To receive this write-down, they were required to enter into a Shared Appreciation Agreement ("SAA") with the USDA. See id.

The SAA provided, in relevant part, the following:

As a condition to, and in consideration of, [USDA] writing down the above amount 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 agreement(s) between the date of the Agreement and either the expiration date of this Agreement or the date the Borrower pays the loan in full, ceases 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 forming or transfers title fo the security, if such event occurs after four (4) 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 term of this agreement [USDA] will liquidate after the borrower has been notified of the right to appeal.

Id.

The appellant-farmers in this action asserted that the USDA officials with whom they signed the SAA had communicated to them that "if they had not paid the loan in full, sold their land, or quit farming before the expiration date of the agreement, they would owe nothing." Id. They brought a declaratory judgment action in federal district court seeking a determination that they owed no money to the USDA under the SAA. See id. In the alternative, they argued that they owed an amount that was much lower than what the USDA claimed they owed under the SAA. See id. The USDA filed a FRCP Rule 12(b)(6) motion to dismiss for failure to state a claim on which relief could be granted. See id. It also filed a FRCP Rule 12(b)(1) motion to dismiss for lack of jurisdiction. See id. The district court granted the USDA's Rule 12(b)(6) motion to dismiss. See id. The plaintiffs appealed the district court's decision to the Eighth Circuit. See id.

The appellants argued that "the district court erred by considering matters outside the pleadings and by refusing to convert the motion to one for summary judgment, thereby denying the appellants an opportunity to conduct discovery or present evidence." Id. Noting that the USDA's motions to dismiss were accompanied by six contract documents that pertained to the SAA, it stated that in a contract action such as this, courts "may the examine the contract documents in deciding on a motion to dismiss." Id. (citations omitted).

The court explained that exhibits one and five were copies of the SAA; exhibit two "was a copy of instructions to farmers regarding the Agreements that had been published in the Code of Federal Regulations"; exhibit four was a copy of a USDA regulation; and exhibit six was a June, 1989, Administrative Notice issued by the USDA. Id. The court stated that because these documents were all public records, the district court did not improperly consider them on a motion to dismiss. See id. (citations omitted).

Exhibit three was an affidavit of the Director of Farm Loan Servicing and Property Management Division of the USDA's Farm Service Agency. See id. The court stated that although exhibit three was "primarily relevant to the USDA's Rule 12(b)(1) motion to dismiss . . ., the affidavit contained a statement that recapture 'is triggered by certain events including expiration of the [Agreement].'" Id. The court explained that if the district court considered the affidavit to help interpret the SAA, then exhibit three "would constitute matters outside the pleadings and would require the district court to convert the motion to dismiss into one for summary judgment." Id. The court also explained, however, that the district court had "'complete discretion to determine whether or not to accept any material beyond the pleadings that is offered in conjunction with a Rule 12(b)(6) motion.'" Id. (citations omitted). It ruled that although the district court stated that "it had considered the 'entire file,' these materials were irrelevant to its resolution of the merits of the motion." Id. The Eighth Circuit concluded that the district court did not err in considering the USDA's motion as one to dismiss rather than as one for summary judgment." Id.

The court also rejected the appellants' argument that they owed no recapture amount under the SAA if the SAA expiration date was reached without any of the triggering events having occurred. See id. The triggering events were the farmers' conveyance of the secured property, the farmers' repayment of the loans, or the farmers' ceasing farming operations. See id. (citing 7 U.S.C. § 2001(e)(4)(A)-(c)). The court stated that

Although we agree with the USDA's construction of the statute, on this point we find it unambiguous. Subsection (e)(4) states that "[r]ecapture shall take place at the end of the term of the agreement." Although Congress afforded the Secretary deference in determining whether to require the borrow to enter into a shared appreciation agreement . . ., the terms governing recapture are mandatory . . . . To the extent that the Agreement is ambiguous or that representations made by the USDA county supervisors suggest that no recapture is due at the end of the term, the mandatory provisions of the statute control.

Id. (citations omitted).

Finally, the court rejected the appellants' alternative argument that "the amount of any recapture due under the Agreement is limited to a value labeled the 'Equity of Recapture Amount' . . . which was attached to the Agreement and a copy of which was given to the borrower." Id. The court explained that § 2001(e)(3) "unambiguously specifies" that seventy-five percent "of the appreciated value of the property is due if recapture occurs within four years of the write-down, and fifty percent is due thereafter." Id. (citing 7 U.S.C. § 2001(e)(3)). It also explained that the SAA does not indicate in any way that recapture was limited to the Equity Recapture Account Amount. See id. "Rather," the court observed, "the Agreement is consistent with the requirements of § 2001." Id.

The Eighth Circuit concluded that

Although we agree with the appellants that the Agreement does not represent the pinnacle of the drafter's art . . ., its terms are reasonably plain and in any case may not be construed to conflict with the conditions Congress has placed on participation in this program. We conclude that 7 U.S.C. § 2001 unambiguously requires recapture of fifty percent of the appreciated value of the property securing the loan upon the expiration date of the Agreement. Because appellants' asserted construction of the Agreement is inconsistent with the requirements of § 2001, we find no error in the district court's dismissal of their claims.

Id.

The case was decided on May 6, 2003; this summary was posted May 7, 2003