Summary of a Recent
Judicial Development in
Finance and Credit

Expiration of Shared Appreciation
Agreement Triggers Recapture

Amy Lowenthal
National AgLaw Center Research Fellow

Summary of Decision

In Pauly v. United States Dep't of Agric., 348 F.3d 1143 (9th Cir. 2003), the United States Court of Appeals for the Ninth Circuit held that the terms of a shared appreciation agreement (SAA) entered into between two farmers and the United States Department of Agriculture (USDA) were unambiguous and therefore required recapture of a percentage of any appreciation in the value of the borrowers' farm upon expiration of the SAA. The Ninth Circuit also held that the USDA was not estopped from recapturing the appreciation amount on the borrowers' farm due to alleged misrepresentations on the part of a USDA employee. See Pauly, 348 F.3d at 1146.

Background

The Agricultural Credit Act of 1987, 7 U.S.C §§ 1921-2009aa-13, authorized the USDA to enter into SAAs with farmers who were unable to pay the debts they owed to the USDA. See id. See also 7 U.S.C. § 2001(e)(4). Under the SAAs, farmers entered into ten-year agreements with the USDA "whereby the USDA agreed to restructure . . . [farmers' debt] in exchange for a portion of the appreciation in the value of their farm during the term of the agreement." Id. Plaintiffs Joseph and Judy Pauly entered into an SAA with the USDA. See id.

The plaintiffs sued the USDA after the USDA notified them that it would recapture a portion of the appreciation upon expiration of their SAA. See id. at 1147. The United States District Court for the Eastern District of Washington held that the USDA was entitled to recapture an appreciation amount in accordance with the terms of the SAA. See id. The plaintiffs appealed the district court's decision to the Ninth Circuit. See id.

Arguments

The plaintiffs raised two principal arguments. First, the plaintiffs argued that the USDA was not entitled to recapture the appreciation amount because the SAA was ambiguous. See id. at 1149. Second, the plaintiffs argued that even if a recapture amount was due under the SAA, the doctrine of equitable estoppel prevented the SAA from being enforced. See id. The plaintiffs asserted that during SAA negotiations they were told by a USDA representative "that no repayment would be due if they continued farming through their tenth and final year of the agreement and did not convey their property or repay their loans in the interim." Id. at 1147.

Analysis and Holdings

The Ninth Circuit explained that the SAA required the plaintiffs "to pay a percentage of any appreciation 'between the date of this Agreement and either the expiration date of this Agreement or the date Borrowers pays the loan in full, ceases farming or transfers title of the security . . . .'" Id. at 1148. The court held that this language was not ambiguous and that the plaintiffs were therefore "obliged to pay a portion of the appreciation upon expiration of the SAA if no other triggering event has occurred prior to expiration." Id. at 1149. It added that "[a]ny ambiguity in the SAA is resolved by the statute authorizing the agreement. A plain reading . . . [of the statute] suggests that recapture at the end of the term of the SAA is not only permissible, but it is also, in fact, mandatory." Id. (citation omitted). See also Stahl v. United States Dep't of Agric., 327 F.3d 697 (8th Cir. 2003) (holding that SAA terms were unambiguous) and Israel v. United States Dep't of Agric., 282 F.3d 521 (7th Cir. 2002) (same). For a summary of these cases, see Stahl and Israel .

The court next considered whether the USDA was estopped from recapturing an appreciation amount from the plaintiffs. See id. It explained that a party seeking to estop the government must satisfy the ordinary requirements that apply to estoppel, show that the government acted in "'affirmative misconduct going beyond mere negligence,'" and show that "'the government's act will cause a serious injustice and the imposition of estoppel will not unduly harm the public interest.'" Id. (quoting S & M Inv. Co. v. Tahoe Reg'l Planning Agency, 911 F.2d 324, 329 (9th Cir. 1990)).

The court noted that the plaintiffs offered no evidence to show that the USDA agent's alleged misrepresentation was "deliberate or fraudulent." See id. It stated that although the agent may have acted negligently when it allegedly provided misinformation to the plaintiffs, the plaintiffs failed to prove that the agent had knowledge of the correct information and that he deliberately misled them. See id. at 1150. The court therefore concluded that the plaintiffs did not satisfy the first requirement of "affirmative misconduct going beyond mere negligence." See id.

The court also held that the plaintiffs failed to show that "the government's act will cause a serious injustice . . . ." Id. The court explained that under the SAA, the plaintiffs "are only required to repay a debt that they had already incurred" and that "'[a]t worst, the . . . [plaintiffs] received a ten-year interest-free loan.'" Id. (citation omitted). The court further held that a government agent "cannot bind the Government beyond the scope of the statute granting them authority." Id. It explained that "'those who deal with the Government are expected to know the law and may not rely on the conduct of Government agents contrary to law.'" Id. (quoting Heckler v. Cmty. Health Servs., 467 U.S. 51, 63, 104 S.Ct. 2218 (1984)). The court concluded that the plaintiffs had the opportunity to read the SAA and that it was "well within . . . [the plaintiffs'] means to ascertain the explicit- and statutorily mandated terms- of the SAA. They had an opportunity to read the SAA, which, as discussed above, unambiguously requires repayment at the end of its term." Id.

The case was decided on November 13, 2003; this summary was posted June 10, 2004.