Summary of a Recent
Judicial Development in
Farm Programs

Livestock Farmers Denied Disaster Relief

Harrison M. Pittman
Staff Attorney

The United States Court of Appeals for the Fourth Circuit has affirmed a decision that denied livestock disaster relief funds to three farmers because each of the farmers' gross revenue exceeded the amount allowed pursuant to the regulations implementing two disaster relief programs, the 1998 Crop Loss Disaster Assistance and the Emergency Livestock Feed Assistance Program. McDaniels v. U.S., 300 F.3d 407, 412-13 (4th Cir. 2002).

In October 1998, Congress established the Crop Loss Disaster Assistance Program ("CLDAP") and Emergency Livestock Feed Assistance Program ("LAP"). See id. at 408. Funds for these programs were appropriated through the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 ("the Appropriations Act"), Pub. L. No. 105-277, 112 Stat. 2681 (1998). See id. Congress provided $1.5 billion for the CLDAP to assist "'producers on a farm who have incurred losses in the 1998 crop due to disasters'" and $200 million for the LAP "'to make available livestock feed assistance to livestock affected by disasters.'" Id. (quoting 1999 Appropriations Act §§ 1102(b) & 1103, 112 Stat. 2681, 2681-43 & 2681-42). The Appropriations Act required that the Secretary distribute the disaster relief funds in a "'fair and equitable manner.'" Id. (quoting § 1101(a), 112 Stat. at 2681-42). The Appropriations Act also gave the Secretary the authority to determine the "'eligibility and payment limitation criteria.'" Id. (quoting § 1101(b)(3), 112 Stat. at 2681-42).

Congress instructed the Secretary and the Commodity Credit Corporation to issue "'such regulations as are necessary'" and "'[a]s soon as practicable after the date of enactment.'" Id. (quoting § 1133(a), 122 Stat. at 2681-47). The regulations were to be promulgated "'without regard to the notice and comment provisions of section 553 of title 5, United States Code [the Administrative Procedures Act].'" Id. at 409 (quoting § 1133 (a)(1), 112 Stat. at 2681-47)).

The Secretary issued regulations for the 1998 CLDAP and LAP pursuant to Congress' instructions. See id. (citing 7 C.F.R. Parts 1477 and 1439). One of the regulations promulgated by the Secretary mandated that "no person may receive benefits 'who has gross revenue in excess of $2.5 million for the 1997 tax year.'" Id. (quoting 7 C.F.R. § 1477.106(f) (citing § 1439.11)). Gross revenue was defined as the "'total gross receipts of the person,' which are not to be reduced 'for costs, expenses or pass-through funds.'" Id. (quoting § 1477.106(f)). This definition stated that "[g]ross revenue includes the total income and total gross receipts of the person, before any reductions. Gross revenue shall not be adjusted, amended, discounted, netted or modified for any reasons. No deductions for costs, expenses or pass-through funds will be deducted from any calculation of gross revenue." Id. at 411 (citing § 1477.106(f)).

Section 1477.103 defined pass through funds as money "'that goes through, but does not remain in, a person's account, such as money collected by an auction house.'" Id. at 409. Section 1477.103 also provided that "persons who receive '50 percent or less of [their] gross receipts from farming and ranching' may still receive assistance, but only if their gross revenue 'from all sources' was less than $2.5 million." Id.

Earl McDaniels, Randolph Lovett, and Alton Brown, plaintiffs, were livestock farmers in South Carolina. See id. at 409. In October, 1998, they applied to the Farm Service Agency ("FSA") for both the CLDAP and LAP disaster relief funds. See id. at 408-09. The FSA denied the plaintiffs' applications because it determined that they each exceeded the $2.5 million gross revenue limit set forth in 7 C.F.R. § 1477.106(f). See id. at 409.

McDaniels owned a one-third interest in a tobacco warehouse that had tobacco sales in excess of $10 million in 1997. See id. Lovett owned a two-thirds interest in a tobacco warehouse that had tobacco sales in excess of $10.7 million in 1997. See id. Brown owned 100 percent of the stock in a warehouse that had tobacco sales in 1997 of $3.3 million. See id.

The money used to purchase the tobacco was paid to these warehouses and deposited in the warehouses' bank accounts. See id. at 409-10. Payments made to McDaniels's warehouse were made to the warehouse partnership. See id. The partnership then distributed the net proceeds to the tobacco owners, minus sales commissions. See id. For Lovett's and Brown's warehouses, the warehouse owners "advanced the purchase price to the tobacco owners and then billed the purchasers for the advance plus a sales commission." Id. at 410. Regardless of the specific transactional process used, the auction sales proceeds for each warehouse passed through its bank account. See id.

The FSA denied the plaintiffs' application for disaster benefits because "each farmer had gross revenue that exceeded $2.5 million, when pass-through funds from tobacco auctions at [the] warehouses in which they had an interest were included." Id. The farmers appealed the FSA's determination to the USDA National Appeals Division ("NAD"). See id. They argued that "because they never took title to the bailment tobacco sold from their warehouses on behalf of third party producers, it was erroneous to treat the proceeds of bailment tobacco as revenue." Id. The USDA NAD affirmed the FSA's determination. See id. The NAD Director subsequently affirmed the FSA and NAD determinations. See id.

The plaintiffs then sought judicial review of the NAD Director's final decision. See id. The district court ruled that the Secretary properly denied disaster relief to each of the plaintiffs because the revenue each farmer derived from the warehouse sales of tobacco exceeded the $2.5 million gross revenue limit pursuant to § 1477.106(f). See id. The district court also ruled that "the Secretary's regulations were reasonable and 'a permissible construction of the 1998 Act.'" Id. The plaintiffs appealed the district court's decision to the U.S. Court of Appeals for the Fourth Circuit. See id.

The plaintiffs conceded that the regulations required the Secretary to deny them disaster assistance as long as the pass-through funds derived from the tobacco auction sales were included in calculating the plaintiffs' gross revenue. See id. However, they argued that "the regulations themselves exceed[ed] the Secretary's statutory authority, which require[d] the Secretary to distribute the benefits in a 'fair and equitable manner.'" Id.

The plaintiffs also argued that the regulations were "unreasonable, arbitrary, and capricious because they include[d], as a component of gross revenue, pass-through funds for bailment tobacco sales even though the farmers 'neither owned title to the tobacco nor had a right to the proceeds from the bailment sales.'" Id. The plaintiffs asserted that if pass-through funds had been excluded from the gross revenue calculation, then they would have qualified for the CLDAP and LAP disaster assistance funds. See id. In making these arguments, the plaintiffs pointed out that the Secretary did not provide an explanation of why pass-through funds were included in the gross revenue calculation. See id.

The Fourth Circuit first examined whether the regulations should be given controlling weight. See id. The court stated that "'[w]hen it appears that Congress delegated authority to [an] agency generally to make rules carrying the force of law,' we give great deference to an 'administrative implementation of [the] particular statutory provision.'" Id. at 411 (quoting United States v. Mead Corp., 553 U.S. 218, 226-27 (2001)). The court also stated that the first question "'is whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter.'" Id. (quoting Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1987)). The court explained that "[e]ven if Congress' intent is ambiguous, we defer to the agency's construction of the statute, asking only 'whether the agency's answer is based on a permissible construction of the statute.'" Id. (quoting Chevron, 467 U.S. at 843). The court added that "when Congress delegates authority to an agency 'to elucidate a specific provision of [a] statute by regulation[,] [s]uch legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.'" Id. (quoting Chevron, 467 U.S. at 843-44) (and citing Mead, 533 U.S. at 227). The Fourth Circuit noted that Congress delegated authority to the Secretary to distribute the CLDAP and LAP disaster relief funds in a "'fair and equitable manner,'" to determine "'eligibility and payment limitation criteria,'" and to do this without public notice and comment. Id. (quoting § 1101(a), § 1101(b)(3) (citing § 1133)). The court observed that, based upon this statutory authority, the Secretary determined that the $2.5 million gross revenue amount would limit eligibility for CLDAP and LAP disaster relief funds. See id. The Fourth Circuit concluded that "[i]n this case, we cannot imagine how Congress could have been more clear in its delegation of authority to the Secretary." Id.

The court next examined the plaintiffs' argument that the regulations were "arbitrary, capricious, or manifestly contrary to the statute" because they were not "'fair and equitable'" and because the Secretary "did not provide an explanation for the eligibility criteria." Id. at 411-12. The Fourth Circuit rejected this argument, noting that Congress expressly authorized the Secretary not to provide an explanation of the eligibility criteria by authorizing the Secretary not to resort to public notice and comment requirements contained in the Administrative Procedures Act. See id. at 412 (citing 5 U.S.C. § 553(c) (stating that "'a concise general statement of [a regulation's] basis and purpose'" is required only "'[a]fter consideration of the relevant matter presented' during the comment period")).

The court explained that "[e]ven though reasonable minds might differ as to whether eligibility criteria based on gross revenue-as distinct from net income, assets, or net worth-were the best choice to measure a farmer's economic strength and therefore need for relief, there can be no doubt that the basis chosen for eligibility was reasonable." Id. The court also explained that "[g]ross revenue is an economic measure of the size of a farmer's operations, just as are net income, assets, and net worth." Id. The court stated that "[w]hile gross revenue may overstate the size of an operation because its net income may be only a small portion, net income could be just as imprecise, failing to identify a large operation that is managed poorly or in which substantial individual incomes are sheltered as items of cost." Id. The court also stated that although more accurate definitions of economic strength could have been created, "with more precise definitions come the disputes over appropriate accounting methods and other similar issues." Id. at 412-13.

The court added that:

The choice of measuring a farmer's economic strength by gross revenue can rationally be justified as a way to 'allow relief to be made available quickly, and effectively, within the limits of the funding available for this program.' Using gross revenue as the basis for eligibility eases the administrative burden of calculating each farmer's income. Lumping pass-through funds with revenue reduces the likelihood of sellers manipulating the structure of their transactions to convert non-deductible costs of goods sold into deductible pass-through funds. And, as perhaps the most objective criterion available, it avoids the possibility of inefficient farmers benefitting more than efficient ones, as well as the potential for manipulating income through creative accounting.

Id. at 413 (quoting 64 Fed. Reg. 18553, 18554 (Apr. 15, 1999)).
The Fourth Circuit concluded that using gross revenue without any deductions, including pass-through funds, was a rational application of the Secretary's authority to distribute the CLDAP and LAD disaster funds in a fair and equitable manner. See id.

The dissent maintained that because the Secretary did not provide any reasons for its decision to include pass-through funds in the calculation of gross revenue, the case should be remanded back to the Secretary so that the Secretary could provide a statement of reasons for its decision. See id. at 413-15. The dissent opined, "[t]hat an agency must give some statement of explanation for its actions is a basic precept of administrative law. As the Supreme Court admonished in Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983), 'the agency must examine the relevant data and articulate a satisfactory explanation for its actions including a 'rational connection between the facts found and the choice made.''" Id. at 413 (quoting State Farm, 463 U.S. at 43 and Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)).

The dissent was unpersuaded by the majority's reasoning that the Secretary was not required to provide reasons for its decision because Congress authorized the Secretary to make its determinations without resort to the notice and comment requirements of § 553(c) of the Administrative Procedures Act. See id. at 414. The dissent stated that:

. . . even assuming that, under section 553(c), a statement of basis and purpose is required only if notice and comment is mandated-a conclusion, incidentally, not required by the text of that provision-it does not follow (as the majority believes it does) that the agency's decision may be upheld in the absence of any stated justification. The Secretary still must provide reasons for his decision in order to survive arbitrary and capricious review under section 706(2)(A) of the APA.

Id. (emphasis supplied).

The case was decided on July 29, 2002; this summary was prepared in September, 2002.