Israel v. United States Department of Agriculture

In the

United States Court of Appeals

For the Seventh Circuit

No. 01-1910

Donald and Patsy Israel, Richard and Shirley

Quinton, all d/b/a Israel and Quinton Farms,

Plaintiffs-Appellants,

v.

United States Department of Agriculture,

Farm Service Agency,

Defendant-Appellee.

Appeal from the United States District Court

for the Western District of Wisconsin.

No. 00 C 223--Barbara B. Crabb, Chief Judge.

Argued October 23, 2001--Decided March 8, 2002

Before Harlington Wood, Jr., Cudahy, and

Kanne Circuit Judges.

Kanne, Circuit Judge. In 1989,

plaintiffs restructured an existing loan

with the Farm Service Agency ("FSA")/1

and signed a ten-year agreement as part

of that restructuring. The agreement

required plaintiffs to pay the FSA a

percentage of appreciation that accrued

to their property if certain triggering

events transpired ("recapture"). In 1999,

the FSA determined that expiration of the

agreement was one of the triggering

events and sought recapture. Plaintiffs

sought administrative review of the FSA’s

determination and argued that only three

events triggered recapture: full payment

on the loan, cessation of farming, or

transfer of the title of their property.

The National Appeals Division of the

Department of Agriculture found that the

terms of the agreement allowed recapture

at the expiration of the agreement.

Plaintiffs appealed that decision to the

Director of the National Appeals Division

for the Department of Agriculture, who

affirmed. Plaintiffs then sought judicial

review of the agency’s determinations and

argued that they were arbitrary and

capricious, contrary to law, and

unsupported by substantial evidence. The

district court affirmed, and plaintiffs

appealed. We affirm.

I. History

A. Shared Appreciation Agreement

Plaintiffs, Donald and Patsy Israel and

Richard and Shirley Quinton, own a

farming partnership called Israel and

Quinton Farms. In the fall of 1989,

plaintiffs were indebted to the FSA in

the amount of $239,478.91. After

negotiating with the FSA, the FSA reduced

("wrote down") plaintiffs’ loan by

$100,357.34. Plaintiffs were thus left

with a restructured debt of $139,121.57,

which was secured by a preexisting real

estate mortgage.

On September 15, 1989, as consideration

for their write down, plaintiffs signed a

ten-year Shared Appreciation Agreement

("Agreement") with the FSA, which was

secured by a separate mortgage on

plaintiffs’ real property. The Agreement

provided:

As a condition to, and in consideration

of [FSA] writing down the above amounts

and restructuring the loan, borrower

agrees to pay [FSA] an amount according

to one of the following payment

schedules:

. . .

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 [FSA] 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 [FSA] will liquidate after the

borrower has been notified of the right

to appeal. [emphasis added]

In April 1994, plaintiffs advised the

FSA that they might arrange private

financing to replace their FSA loan. The

FSA told plaintiffs that this would cause

the Agreement to "kick in," and that

plaintiffs would then owe the FSA

approximately $23,000.00 under the terms

of the Agreement./2 Plaintiffs never

obtained private financing and, thus, did

not trigger the Agreement by "pay[ing]

the loan in full." On January 26, 1998,

the FSA sent plaintiffs a letter and

advised them that the payoff amount

remaining on their loan was $118,910.20.

The letter did not reference the

Agreement.

In letters to plaintiffs dated April 24,

1997, November 6, 1997, and October 5,

1998, the FSA wrote:

Our records indicate that on September

15, 1989, the Farm Service Agency (FSA)

wrote down $100,357.34 of your debt. As a

consideration for this write down you

were required to sign a Shared

Appreciation Agreement (copy attached).

Essentially what this document says is

that if the value of your real estate

increases after the date of the write

down, you will be responsible for

repaying some or all of the debt FSA

wrote down. If any repayment is due it

will become due when any one of the

following events happens.

1. Ten Years has passed.

2. You pay the rescheduled loan in full.

3. You ceased farming.

4. You transferred title to the

property.

On June 30, 1999, the FSA wrote

plaintiffs a letter that stated, "[t]he

purpose of this letter is to inform you

that the Shared Appreciation Agreement .

. . you entered into as a result of

receiving a ’debt write down’ will expire

on September 14, 1999, which is 10 years

after the date you signed it. . . . We

have determined the amount of shared

appreciation due is $96,500." The FSA

calculated the amount due by using the

following equation:

$345,000 (current appraisal of

plaintiffs’ real property)

minus $152,000 (1989 appraisal of

plaintiffs’ real property)

$193,000 (net appreciation)

times .50 (Agreement percent

share)

equals $ 96,500 (appreciation

demanded)

B. Administrative Proceedings

Plaintiffs protested to the FSA,

contending that under the terms of the

Agreement they should not be required to

pay shared appreciation. On September 9,

1999, the FSA refused to reconsider its

determination and affirmed its decision

to require payment of $96,500 in shared

appreciation. The FSA noted that it was

"bound by the Code of Federal

Regulations," which provides that "shared

appreciation is due at the end of the

term of the Shared Appreciation

Agreement."

On October 7, 1999, plaintiffs appealed

to the National Appeals Division of the

Department of Agriculture. Plaintiffs

claimed, inter alia, that the Agreement

did not allow for recapture upon the

expiration of the Agreement. Plaintiffs

argued that because the formula for

calculating recapture did not explicitly

mention the Agreement’s expiration, such

expiration should not be considered a

triggering event. Under their view of the

Agreement, recapture occurred "only where

the borrower pays the loan in full,

ceases farming, or transfers title of the

security during the term of the

Agreement."

On December 9, 1999, Hearing Officer

Benner conducted an evidentiary hearing

on the matter. During that hearing,

plaintiffs testified that when they

signed the Agreement, they did not

believe that expiration of the Agreement

constituted a triggering event.

Plaintiffs also stated that conversations

in 1988 with Michael Drewiske and in the

1990s with Karolyn Corbett, both FSA

employees, led them to believe that the

expiration of the Agreement was not a

triggering event.

On January 3, 2000, Hearing Officer

Benner, relying in part on 7 C.F.R.

Sections 1951.914 and 1922.201, held that

the FSA’s decision to demand $96,500 in

shared appreciation was not erroneous.

Benner wrote:

The Appellant’s Shared Appreciation

Agreement (SAA) expired on September 14,

1999. . . . Therefore, the Agency

decision to calculate shared appreciation

due is correct according to regulations.

The Appellants argue that the agreement

"expired" on September 14, 1999, meaning

that no shared appreciation is due. They

also argue that they were told that this

was the case at the time of signature.

However, the agreement and the regulation

clearly state that shared appreciation is

due at the expiration of the agreement.

On or about February 4, 2000, plaintiffs

appealed Hearing Officer Benner’s

decision to the Director of the National

Appeals Division of the Department of

Agriculture. In a decision dated March

17, 2000, Director Norman Cooper upheld

Hearing Officer Benner’s decision and

concluded that "[a]ppellants failed to

prove by a preponderance of evidence that

the Agency decision was erroneous."

Director Cooper stated:

The Hearing Officer’s decision is

supported by substantial evidence as

follows:

1. The Appellants received a $100,357.34

write-down of Agency debt and entered

into [the Agreement] on September 15,

1989. The [Agreement] expired on

September 14, 1999.

2. The market value of the Appellants’

property was determined to be $152,000 at

the time the [Agreement] was executed. As

of May 20, 1999, the property was

determined to have a market value of

$345,000. The property valuation was

conducted by a Certified General

Appraiser and was performed in accordance

with the Uniform Standards of

Professional Appraisal Practice (USPAP).

3. The Agency considered the current

market value of the Appellant’s property

($345,000), the market value upon

execution of the [Agreement] ($152,000),

and determined that the amount of

recapture was 50 percent of the

appreciated market value ($193,000) or

$96,500.

4. The Appellants agreed to pay 50

percent of any positive appreciation in

value of the property during the term of

the [Agreement] (September 15, 1989, to

September 14, 1999).

5. On September 9, 1999, the Agency

affirmed its decision to require payment

of $96,500 in appreciation under the

Terms of the [Agreement].

Director Cooper concluded:

Regulations at 7 C.F.R. sec. 1951.914(b)

and the [Agreement] specify that the

Agency can recapture a portion of the

written-off debt by taking a share of any

positive appreciation in the value of the

real property. The Agency must collect 50

percent of any positive appreciation in

the market value of the security between

the date the [Agreement] was executed and

the date it expires. . . .

Notwithstanding the Appellants’ arguments

on review that the [Agreement] is

ambiguous and regulations are irrelevant,

the terms of the [Agreement] are clear

and published regulations, by law, are a

proper basis for the Hearing Officer’s

determination. . . .

Substantial evidence supports the Hearing

Officer’s determination that the Agency

did not err in establishing the amount of

recapture due under the [Agreement] and

requiring payment of such.

C. Judicial Review

On April 17, 2000, plaintiffs filed suit

in the Western District of Wisconsin

pursuant to the Administrative Procedure

Act, 5 U.S.C. sec.sec. 701-706. On

appeal, plaintiffs relied on the lack of

a specific reference to the expiration of

the Agreement in the formula for

calculating recapture to support their

contention that the Agreement’s

expiration was not a triggering event.

The plaintiffs also relied on their

conversations with Drewiske and Corbett

to support this reading of the Agreement.

In the alternative, plaintiffs argued

that the FSA should be estopped from

collecting $96,500 because plaintiffs

relied to their detriment on statements

made by FSA officers Drewiske and

Corbett.

On March 2, 2001, the district court

affirmed the agency’s determinations. The

district court noted that "[t]he language

of the [A]greement requires recovery of

appreciation ’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.’" The

district court noted that the use of the

disjunctive "or" strongly supported the

position that the Agreement allowed

recapture at the expiration of the

Agreement, in this case on September 14,

1999. The district court rejected

plaintiffs’ argument that any

conversation with Drewiske or Corbett

should control over the plain language of

the Agreement. The district court stated

that Hearing Officer Benner and Director

Cooper were presented with the same

evidence and found for the FSA. Further,

the district court noted that it was "not

the role of the [district] court to re-

weigh the evidence that was presented to

the agency; rather, the court must

consider whether the [Agency’s] decision

was based on a consideration of the

relevant factors and whether there has

been a clear error of judgment." The dis

trict court then held that it could not

conclude "that there was a clear error of

judgment in the agency’s interpretation

of the" Agreement.

The district court also rejected

plaintiffs’ estoppel argument. First, the

district court noted the doctrine of

sovereign immunity would likely bar the

use of estoppel in the present case. Even

if the FSA was not immune, the district

court found that plaintiffs did not

satisfy an essential element of an

estoppel claim because they had failed to

demonstrate any affirmative misconduct by

the FSA. Thus, the district court upheld

the agency’s determinations that

expiration of the Agreement was a

triggering event and that plaintiffs owed

the FSA $96,500 under the terms of the

Agreement. On April 17, 2001, plaintiffs

appealed and asserted that the agency’s

determinations were arbitrary and

capricious and were not supported by

substantial evidence.

II. Analysis

A. Standard of Review

The agency’s legal determinations will

be affirmed as long as they are not

arbitrary or capricious, and are in

accordance with the law. See Sierra

Resources, Inc. v. Herman, 213 F.3d 989,

992 (7th Cir. 2000). The arbitrary and

capricious standard is highly

deferential, and even if we disagree with

an agency’s action, we must uphold the

action if the agency considered all of

the relevant factors and we can discern a

rational basis for the agency’s choice.

See Sierra Club v. Marita, 46 F.3d 606,

619 (7th Cir. 1995). The agency’s

decision is not arbitrary or capricious

as long as "the agency’s path may be

reasonably discerned." Mt. Sinai Hospital

Med. Center v. Shalala, 196 F.3d 703, 708

(7th Cir. 1999). We will review the

agency’s factual findings under the

substantial evidence standard. See id. at

709. Under this deferential standard of

review, we review the entire record to

see whether it contains "such relevant

evidence as a reasonable mind might

accept as adequate to support a

conclusion." Aegerter v. City of

Delafield, Wis., 174 F.3d 886, 889 (7th

Cir. 1999).

B. Review of Agency Determination

Plaintiffs contend that the agency’s

determinations were erroneous because

expiration of the Agreement was not a

triggering event under the Agreement. To

determine what events triggered recapture

under the Agreement, we must examine the

language of the Agreement itself. First,

we must determine whether the relevant

clause of the Agreement is ambiguous. See

Funeral Fin. Sys. v. United States, 234

F.3d 1015, 1018 (7th Cir. 2000). If that

clause is not open to any other

reasonable interpretation, and is

therefore unambiguous, then the language

of the Agreement must dictate the

disposition of this dispute. See id.

The relevant provision of the Agreement

provides that plaintiffs agreed to pay

the FSA:

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.

("recapture provision") (emphasis added).

Thus, in plaintiffs’ case, the Agreement

provides for 50% recapture of

appreciation on whichever of the

following dates occurs first: the

Agreement’s expiration on September 14,

1999, the date plaintiffs pay the loan in

full, the date the plaintiffs cease

farming, or the date that the plaintiffs

transfer title of their property. Both

parties agree that plaintiffs did not pay

their loan in full, cease farming, or

transfer the title of their property.

Therefore, the Agreement’s expiration on

September 14, 1999 was the first

triggering event under the recapture

provision.

Plaintiffs contend, however, that the

Agreement does not provide a formula for

recapture at the expiration date of the

Agreement, and therefore, the Agreement’s

expiration should not constitute a

triggering event. The formula provision

states that the amount of 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 [the] Agreement is entered

into." Plaintiffs’ argument is

unpersuasive.

Director Cooper found that the plain

language of recapture provision provides

for recapture at the expiration date of

the Agreement, and we agree. The

recapture provision clearly states that

recapture is allowed at "the expiration

date of the Agreement." We reject

plaintiffs’ contention that the formula

provision negates the clear language of

the recapture provision solely because

the formula provision does not mention

the expiration date of the Agreement

explicitly, as does the recapture

provision. Because the plain language of

the Agreement provides for recapture at

"the expiration date of the Agreement,"

we cannot conclude that the agency’s

determinations were "arbitrary,

capricious, an abuse of discretion, or

otherwise not in accordance with law" or

"unsupported by substantial evidence." 5

U.S.C. sec.sec. 706(2)(A), (E).

The agency’s determinations are also

strongly supported by the language of the

relevant statute. Plaintiffs’ loan was

secured by a real estate mortgage that

stated that the Agreement was entered

into pursuant to 7 U.S.C. sec. 2001.

Section 2001(e)(4) states that

"[r]ecapture 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; (C) if the borrower ceases

farming operations." Id. at sec.

2001(e)(4) (emphasis added). Thus, the

quoted language demonstrates that the FSA

did not err in concluding that recapture

is provided for at the expiration of the

Agreement.

We have found only one other court that

has interpreted this type of agreement,

and that court reached the same

conclusion as we do now. See In re

Moncur, No. 98-03213, 1999 WL 33287727,

at *4 (Bankr. D. Idaho May 27, 1999). In

Moncur, the bankruptcy court was faced

with an identical agreement and with the

same issue. After examining the agreement

as a whole, as well as the federal

statute and regulations concerning the

agreement, the Moncur court concluded

that "[w]ithout question, the [FSA’s

loan] program contemplated a recapture

payment at the conclusion of the

[agreement] term if payment in full of

the write-down balance had not been made

during the term of the [agreement]." Id.

Therefore, the bankruptcy court construed

the agreement in favor of the FSA and

held that recapture was allowed at the

agreement’s expiration. See id./3

Finally, plaintiffs appeal the district

court’s decision insofar as it contains a

monetary judgment against them. However,

the order of the district court only

affirmed the agency determinations and

did not result in an enforceable monetary

judgment. See Israel v. U.S. Dept. of

Agr., 135 F. Supp. 2d 945, 954 (W.D. Wis.

2001).

III. Conclusion

For the forgoing reasons, we AFFIRM the

judgment of the district court in favor

of the FSA.

FOOTNOTES

/1 The FSA was formerly called the Farmers Home

Administration.

/2 The Agreement would "kick in" because private

financing would result in the FSA loan being paid

off in full, one of the triggering events under

the Agreement. The FSA calculated the amount owed

as follows: the Agreement allowed the FSA to

recapture 50% of any positive appreciation that

accrued to plaintiffs’ property. The appraised

value of the property in 1994 was $198,000 and

$152,000 in 1989. Thus, the total appreciation

was $46,000, and the FSA was entitled to half of

that amount--$23,000.

/3 Plaintiffs concede that their estoppel argument

is without merit, and therefore it need not be

addressed.