Summary of a Recent
Judicial Development in
Administrative Law

Producers' Failure to Reaffirm PFCs Prior
to Discharge Terminated Payments

Kaleb K. Hennigh
National AgLaw Center Graduate Assistant

Summary of Decision

In McKown v. United States Dep't of Agric., 276 F.Supp 2d. 1201 (2003), the United States District Court for the District of New Mexico held that a USDA decision to terminate two producers' Production Flexibility Contract (PFC) payments and subsequent Market Loss Assistance Program (MLAP) payments was subject to judicial review. The court also held that the producers' failure to reaffirm their PFC contracts prior to their bankruptcy discharge terminated their right to subsequent PFC payments.

Background

On December 10, 1998, and January 15, 1999, two producers entered into PFCs with the Commodity Credit Corporation (CCC) in order to receive MLAP payments for the 1999 production year on their individual farms. See id. at 1203. On April 12, 1999, and March 23, 1999, the producers filed for Chapter 7 bankruptcy. See id. On the bankruptcy schedules, the producers listed other Farm Service Agency (FSA) loan obligations as dischargeable debts and claimed percentages of the future 1999 MLAP payments as "exempt under 11 U.S.C. § 522(d)(5)." Id. at 1204. Both producers subsequently received discharges but failed to reaffirm their PFC's or to file succession-in-interest contracts. See id.

The FSA determined that both producers were ineligible to receive MLAP payments under their 1999 contracts because they failed to timely "reaffirm the[ir] PFCs after filing bankruptcy petitions and receiving discharges." Id. at 1205. The producers appealed the FSA's decision to the National Appeals Division (NAD) where a hearing officer reversed the FSA's decision to deny the producers' payments. See id. The NAD Director subsequently reversed the hearing officer's decision and affirmed the FSA's original decision to deny payment. See id at 1206. In making its decision, the NAD Director reasoned that

[t]he generally accepted interpretation of change of interest in a PFC used by the Agency in administering PFC contracts is that interest in the contract transferred to the bankruptcy estate when the bankruptcy [wa]s filed, that [producers'] PFCs terminated when they transferred their interest to the bankruptcy estates, and that the FSA denied the 1999 payments because [producers] had not succeeded in interest to the PFC.

Id.

The producers sought judicial review of the NAD Director's decision. See id.

Arguments

The USDA argued that § 701(a)(2) of the Administrative Procedures Act (APA) directed "that the Agency's decision [wa]s not subject to judicial review because the decision [wa]s committed to Agency discretion [by law]." Id. The producers argued that judicial review was appropriate and sought a reversal claiming that the NAD decision "was arbitrary and capricious and not in accordance with law." Id. at 1208.

Analysis and Holdings

The court held that the decision was subject to judicial review and that the conclusion made by the Agency was not arbitrary or capricious. See id. at 1210. It stated that § 701(a)(2) of the APA excepted only a "very narrow range of agency decisions" and that it did not except this decision from judicial review because the language of the applicable FSA regulation was "mandatory and not discretionary." See id. at 1207. The court also stated that the FSA did not have discretion to act, but in fact the applicable FSA regulation mandated that the FSA take action. See id. It noted that the applicable regulation provided "that a transfer in the interest [of the producer subject to the contracted acreage] shall result in the termination of the contract." Id. (emphasis added).

The court also held that the NAD Director's decision that the producers' right to subsequent payments was terminated when they failed to reaffirm their PFC contracts prior to discharge was "reasonable and consistent with the plain language of [the] regulation." Id. It stated that when the producers filed their bankruptcy petition, the interest in the PFC's transferred from them to the trustee and that their subsequent failure to reaffirm or succeed to the PFCs prior to default as well as the mandated regulatory cut-off date terminated the PFC contracts. See id.

The case was decided on July 8, 2003; this summary was posted Jan. 13, 2005.