BUCKEYE PRODUCTION CREDIT v. Farm Credit Admin.

• Decision Date: 23 March 1992
• Docket Number: Civ. No. 91-533-A.
• Citation: 787 F. Supp. 578
• Parties: BUCKEYE PRODUCTION CREDIT ASSOCIATION, et al., Plaintiffs, v. FARM CREDIT ADMINISTRATION, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

787 F. Supp. 578

BUCKEYE PRODUCTION CREDIT ASSOCIATION, et al., Plaintiffs, v. FARM CREDIT ADMINISTRATION, Defendant.

Civ. No. 91-533-A.

United States District Court, E.D. Virginia, Alexandria Division.

March 23, 1992.

Stewart Todd Leeth, Cohen, Gettings, Alper and Dunham, Arlington, Va., for plaintiffs.

Paula Pugh Newett, U.S. Attorney's Office, Alexandria, Va., for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

I. Introduction

In this case, plaintiffs, two lending associations within the Farm Credit System, are suing the Farm Credit Administration ("FCA") for allegedly violating their right under the Farm Credit Act, 12 U.S.C. § 2001, et seq. (the "Act"), to be free from competition within their exclusive territories. Essentially, at issue here is whether the FCA misconstrued § 7.8 of the Agricultural Credit Act of 1987, Pub.L. 100-233, § 416, 101 Stat. 1568 (codified at 12 U.S.C. § 2279c-1) hereinafter § 7.8, in issuing Mid-America, an Agricultural Credit Association ("ACA"), a charter that allowed Mid-America to compete with plaintiffs in their exclusive territories. For the reasons stated below, this Court holds that the FCA misinterpreted § 7.8 when it granted Mid-America a charter allowing Mid-America to offer short, intermediate, and long-term loans throughout an area that included plaintiffs' exclusive territories.

II. Background

The Farm Credit System ("the System") is a nationwide network of cooperative, borrower-owned banks and lending associations that provide agricultural credit to American farmers. The System consists of twelve farm credit districts. Since 1916, the institutions within each district have been chartered and regulated by the FCA, an independent federal agency. Plaintiff, Buckeye Production Credit Association ("Buckeye"), and plaintiff, Fostoria Land Bank Association ("Fostoria") are jointly-managed lending associations within the Fourth Farm Credit District ("Fourth District"), which consists of Indiana, Kentucky, Ohio, and Tennessee. Within the Fourth District, Buckeye, a production credit association ("PCA"), provides short and intermediate-term agricultural loans to farmers within its chartered territory, namely, eleven counties in Ohio. Also within the Fourth District, Fostoria, a federal land bank association ("FLBA"), provides long-term agricultural loans to farmers within its chartered territory, namely, sixteen Ohio counties. The chartered territories of Buckeye and Fostoria overlap in nine counties. Buckeye operates separately in two counties; Fostoria, in seven.

From 1916 to the early 1980s, the Farm Credit System was financially sound and functioning well. In the 1980s, however, economic conditions threatened the System's financial stability. Congress responded to this agricultural financial crisis by passing a series of laws aimed at restructuring the System. The first such law was the Farm Credit Amendments Act of 1985 ("1985 Amendments"). The 1985 Amendments were designed to consolidate and streamline the System by authorizing the merger of certain associations within the System. But significantly, the 1985 Amendments also took into account the importance of local control by providing a remedy to associations that did not want their territories affected by a "district-wide" merger of "like" associations. See 1985 Amendments, Pub.L. 99-205, § 201(7), 99 Stat. 1678 (codified at 12 U.S.C. § 2252(a)(2)), hereinafter § 5.17(a)(2). Section 5.17(a)(2) provided that the charter of a district-wide merger of associations could not include the territory of an association whose stockholders did not approve the merger. Thus, if an association disapproved of a district-wide merger, its territory remained unaffected.

Following the 1985 Amendments, 30 of the 35 PCAs in the Fourth District consolidated to form the Fourth District PCA and 53 of the 62 FLBAs in the Fourth District consolidated to form the Fourth District FLBA.¹ Buckeye's stockholders did not approve the merger creating the Fourth District PCA, nor did Fostoria's stockholders approve the merger of the Fourth District FLBA.² Accordingly, the FCA excluded Buckeye's territory from the Fourth District PCA's chartered territory and it excluded Fostoria's territory from the chartered territory of the Fourth District FLBA. Thus, Buckeye did not have to compete within its territory with the Fourth District PCA on short and intermediate-term loans, nor was Fostoria forced to compete with the Fourth District FLBA on long-term loans within its territory. As it happens, however, the Fourth District PCA's chartered territory included the seven counties where Fostoria operated separately from Buckeye, and the Fourth District FLBA's chartered territory included the two counties where Buckeye operated separately from Fostoria. At the time, these so-called "overlapping territories" created no problem because the Fourth District PCA offered loans different from those offered by Fostoria, and the Fourth District FLBA offered different loans from those Buckeye offered.

Following the 1985 Amendments and the formation of the Fourth District PCA and FLBA, Congress discovered that the consolidation provided for by the 1985 Amendments was inadequate to remedy the System's continuing economic crisis. Congress concluded that many of the System's problems resulted from inefficiencies associated with duplicative institutions. To remedy this and provide further assistance to the System, Congress passed the Agricultural Credit Act of 1987 ("1987 Act"), which allowed for further consolidation of entities within the System. In pertinent part, the 1987 Act mandated that any FLBA and PCA sharing substantially the same geographic territory must submit a plan for voluntary merger to their stockholders.³ See 1987 Act, Pub.L. 100-233, § 411, 101 Stat. 1568 (codified at 12 U.S.C. § 2071 note) hereinafter § 411. If the stockholders of each of the associations voted to merge, an Agricultural Credit Association (ACA), would be formed, which, under the 1987 Act, would then possess the combined lending authority of a PCA and a FLBA, that is, the authority to make short, intermediate, and long-term agricultural loans directly to farmers. See 1987 Act, § 7.8.

After the 1987 Act, a four-state Agricultural Credit Association, Farm Credit Services of Mid-America ("Mid-America"), was formed in the Fourth District, pursuant to §§ 411 and 7.8. The formation of Mid-America resulted primarily from the merger of the Fourth District PCA and FLBA, as these two institutions shared substantially the same territory.⁴ Mid-America's chartered territory included the entire state of Indiana, the entire state of Tennessee, most of Kentucky, and seventy-nine of Ohio's eighty-eight counties.

Buckeye and Fostoria were neither involved in, nor voted on the § 411 merger that created Mid-America. Yet, Mid-America's chartered territory included the seven counties where Fostoria operated separately from Buckeye because those counties had been part of the Fourth District PCA's chartered territory; Mid-America's territory also included the two counties where Buckeye operated separately from Fostoria because those counties had been part of the Fourth District FLBA's chartered territory.⁵ Given this, and because the FCA, based on its interpretation of § 7.8, granted Mid-America the power to offer short, intermediate, and long-term loans throughout its chartered territory, Buckeye and Fostoria were compelled to compete directly with Mid-America.

In implementing the 1987 Act, the FCA issued a Policy Statement, adopted on November 21, 1988, noting that:

The Farm Credit Administration Board (Board) recognizes that section 411 of the 1987 Act contemplates the possibility of Federal Land Bank Association/Production Credit Association (FLBA/PCA) mergers in which both associations do not share the identical territory. In those situations, it is possible that some of the merger proposals submitted under section 411 of the 1987 Act ... may contain proposed charters for the territory served by either one of the institutions. Any Agricultural Credit Association (ACA) chartered under section 411 of the 1987 Act, however, ... will be authorized by the Board to extend its lending authority for both long and short-term loans throughout the territory included in its charter.

To provide a remedy for associations affected by a § 411 merger, the FCA's 1988 Policy Statement went on to declare that: "If a proposed section 411 charter includes territory currently served by a third association which is not a party to the merger, the Board will consider a request from that association to convert its charter to that of an ACA."⁶ Farm Credit Administration, Policy Statement on Granting Nonexclusive Charters to Associations (Nov. 21, 1988). In acting upon such requests, the FCA said it would consider "the best interests of the borrowers and the likelihood of business success." Id.

Following the formation of Mid-America and the FCA's two Policy Statements pertaining the § 411 mergers, Buckeye and Fostoria filed applications with the FCA to amend their charters, see 12 U.S.C. § 2071, 2091, to allow them to operate in all the counties in which each entity was doing business. The charter amendments, if granted, would have given Buckeye and Fostoria the same range of lending authority (short, intermediate, and long-term) as that enjoyed by Mid-America, thereby allowing these entities to compete directly with Mid-America in their common territory without assuming the formal structure of an ACA.⁷ In April 1989, the FCA denied the charter amendment applications, stating that such approval "was not authorized under the remedies provided by the FCA to associations affected by 411 mergers."

Buckeye and Fostoria challenged the denial of their charter amendment applications by filing suit against the FCA in the United States District Court for the District of Columbia. In this suit, Buckeye and Fostoria...