Colorado Springs Production Credit Ass'n v. Farm Credit Admin.

• Decision Date: 26 June 1992
• Docket Number: Nos. 91-5077,s. 91-5077
• Citation: 967 F.2d 648
• Parties: COLORADO SPRINGS PRODUCTION CREDIT ASSOCIATION, et al., Appellants v. FARM CREDIT ADMINISTRATION, et al. PRODUCTION CREDIT ASSOCIATION OF SOUTHEAST MISSOURI, Appellants v. FARM CREDIT ADMINISTRATION, et al. CHATTANOOGA PRODUCTION CREDIT ASSOCIATION, et al., Appellants v. FARM CREDIT ADMINISTRATION, et al. to 91-5079.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 648

967 F.2d 648

296 U.S.App.D.C. 281

COLORADO SPRINGS PRODUCTION CREDIT ASSOCIATION, et al., Appellants v. FARM CREDIT ADMINISTRATION, et al.

PRODUCTION CREDIT ASSOCIATION OF SOUTHEAST MISSOURI, Appellants v. FARM CREDIT ADMINISTRATION, et al.

CHATTANOOGA PRODUCTION CREDIT ASSOCIATION, et al., Appellants v. FARM CREDIT ADMINISTRATION, et al.

Nos. 91-5077 to 91-5079.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 31, 1992.

Decided June 26, 1992.

Carlos C. Smith, with whom William C. Carriger, Edward D. Meyer, Chattanooga, Tenn., Jeffrey H. Howard, Washington, D.C., and Joseph C. Blanton, Jr., Sikeston, Mo., were on the joint brief, for appellants in 91-5077, 91-5078, and 91-5079. Mark B. Stern, Attorney, Dept. of Justice, with whom Stuart M. Gerson, Asst. Atty. Gen., Jay B. Stephens, U.S. Atty., and Robert S. Greenspan, Washington, D.C., Attorney, were on the brief, for appellee, Farm Credit Admin. in 91-5077, 91-5078, and 91-5079.

Warren N. Davis, Mac Asbill, Jr., and Steuart H. Thomsen, Washington, D.C., were on the brief for appellee Farm Credit System Financial Assistance Corp. in 91-5077, 91-5078, and 91-5079.

Before: EDWARDS, SILBERMAN, and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

The Farm Credit System (System) is a national network of federally chartered financial institutions whose purpose is to provide credit to the country's agricultural sector. Appellants are 20 financial institutions, known as production credit associations (PCAs), that are members of the System. PCAs are small, specialized banks, privately owned in cooperative form by their borrowers, that make short- and intermediate-term production loans directly to agricultural producers. See 12 U.S.C. § 2075.

The PCAs appeal from a district court judgment rejecting their challenge to the constitutionality of subsection 6.29 of section 201 of the Agricultural Credit Act of 1987, Pub.L. No. 100-233, 101 Stat. 1568 (1988) (codified at 12 U.S.C. § 2278b-9). That provision, which was designed to deal with a financial crisis in the Farm Credit System, forced the PCAs to transfer substantial amounts of their capital to a new corporation created by Congress, the Farm Credit System Financial Assistance Corporation (FAC). See 12 U.S.C. §§ 2278b, 2278b-1, 2278b-6(a). The 20 PCAs argue that the law requiring them to contribute to the solution of a crisis for which they were not responsible worked a taking of their property without just compensation and violated substantive due process. We think the law is consistent with the requirements of the Fifth Amendment and affirm the district court's grant of summary judgment to the Farm Credit Administration.

I.

The statutory provision at issue was enacted as part of a comprehensive bailout of the Farm Credit System. The System, which was originally established in 1916 and which took its modern shape during the New Deal, provides "a reliable and competitive source of capital" to agricultural enterprises and rural borrowers who have historically had difficulty securing access to private capital. H.R. REP. No. 100-295(I), 100th Cong., 1st Sess. 55, reprinted in 1987 U.S. CODE CONG. & ADMIN.NEWS 2723, 2726. Despite significant expansion in the nation's mainstream financial services sector since the System was established, Congress has continued to regard the credit provided by the System as "essential to modern agriculture." H.R.REP. No. 99-425, 99th Cong., 1st Sess. 7, reprinted in 1985 U.S.CODE CONG. & ADMIN.NEWS 2587, 2593.

During the period relevant to our case, the System was organized in three basic horizontal tiers. The Farm Credit Administration, which had overall regulatory and supervisory authority over the financial institutions, was at the top of the structure. See 12 U.S.C. §§ 2243, 2252. Beneath the Administration were the farm credit banks themselves, organized into twelve districts along geographical lines, and divided within each district between a Federal Land Bank, a Federal Intermediate Credit Bank, and a Bank for Cooperatives. See H.R.REP. No. 100-295(I) at 55, 1987 U.S.C.C.A.N. at 2726. At the bottom of the pyramid, the local land banks, PCAs, and cooperative banks delivered credit directly to the individual agricultural borrowers. See id.

A regulatory framework binds the various System institutions together, but the primary economic link between them--and the key to the System's effectiveness--is the System's funding mechanism. All System institutions, including the PCAs, are privately owned but obtain their funds principally from a single, central source the public sale of Farm Credit System securities. See 12 U.S.C. §§ 2153, 2160. The Federal Farm Credit Banks Funding Corporation sells debt obligations in the name of the System in the public markets and downstreams the proceeds to the intermediate farm credit banks. The intermediate banks then lend the funds to the local associations, who, in turn, make loans to the ultimate borrowers.

This is an especially low-cost source of funds for System institutions, for, while Farm Credit securities are not backed by the full faith and credit of the United States, see id. § 2155(c), the Farm Credit System is regarded in the public markets as a " 'Government sponsored entity.' " H.R.REP. No. 100-295(I) at 55, 1987 U.S.C.C.A.N. at 2726. The securities of such an entity are thought to carry an implicit government guarantee and are therefore afforded a "preferred place in the Nation's money markets," trading at spreads more favorable than those of even top-rated corporate borrowers. Id. The financial strength of the entire System, moreover, stands behind the bonds: all intermediate farm credit banks are jointly and severally liable for the System-wide debt obligations, see 12 U.S.C. § 2155, and all bottom-tier institutions are required to own stock in the intermediate banks. See id. § 2154a(c)(1)(E)(i). The low cost of funds to System institutions is presumably what enables them to serve agricultural borrowers profitably.

In the mid-1980s, the System experienced severe financial difficulty. A prolonged recession in the agricultural economy had resulted in declining land values and farm income, and debt burdens on individual agricultural borrowers had become onerous. Farmers were unable to pay off their loans, default rates increased, and the System suffered "massive losses." H.R.REP. No. 100-295(I) at 56-57, 1987 U.S.C.C.A.N. at 2728-29. As the losses mounted, investor confidence in Farm Credit securities declined. The System's cost of funds accordingly increased, reducing profitability still further. System institutions, including the PCAs, asked Congress to bail out the System, and experts on farm credit told Congress that "outside financial assistance would be necessary at some point to keep the System viable." Id. at 58, 1987 U.S.C.C.A.N. at 2729.

Congress, vindicating the market's perception that the United States implicitly stood behind the Farm Credit System, acted to prevent its collapse. A comprehensive rescue program was passed in 1987 that ultimately proved successful in reversing the System's fortunes. See Agricultural Credit Act of 1987, Pub.L. No. 100-233, 101 Stat. 1568 (1988). One feature of that program was the creation of FAC, which was authorized to issue up to $4 billion of bonds that would carry an explicit government guarantee. See 12 U.S.C. §§ 2278b, 2278b-6. The bond proceeds were to be used to provide direct financial assistance to System institutions whose capital had become impaired. See id. §§ 2278a-5, 2278b-7.

Although the Treasury bore responsibility for making portions of the interest payments on these obligations in the early years in which they were outstanding, the institutions of the Farm Credit System were required to reimburse the Treasury for any funds it expended. The Treasury's ultimate legal liability under the scheme, therefore, was that of a guarantor. See id. §§ 2278b-6(c), 2278b-8(c). During the course of negotiations over the shape of the Act, the Office of Management and Budget informed Congress that the government's liability as a guarantor could be treated off-budget if the Act required System institutions to contribute an amount equal to approximately 5% of the authorized debt to the cost of the guarantee. If funds provided by the System were obliged to absorb initial defaults, even if those funds accounted for only a percentage of the total value of the guarantee, budget figures would not have to reflect the potential cost of the bailout. Key legislators believed that passage of the Act required such off-budget treatment.

Accordingly, the Act in its final form included the provision which gave rise to this litigation: a requirement that healthy institutions in the System make a one-time purchase of FAC "stock," which, because it had no market value and paid no dividends, was in reality a forced contribution to the bailout scheme. See 12 U.S.C. § 2278b-9. The PCAs and land bank associations were compelled to surrender to FAC the entire amount of their unallocated retained earnings in excess of 13% of assets, see id. § 2278b-9(a)(1)(B), to be used to capitalize a trust fund designed to cover any defaults by System institutions with respect to the interest or principal payments due on the government-guaranteed bonds. ¹ See id. §§ 2278b-5(b), 2278b-6(d)(3).

Because most of the System's financial difficulties were concentrated in the land banks and most of its capital was located in the PCAs, the burden of this assessment fell disproportionately on the PCAs--at least the healthy ones. The total capital placed in the trust fund was approximately $177 million, of which approximately $48 million came from the 20 PCAs who brought this lawsuit. ² For appellants, that contribution was substantial. Although they maintained adequate capital and loan volume in the years following the...