Heimann v. U.S. Gov't, CV 14-757 KG/WPL

Decision Date30 June 2016
Docket NumberCV 14-757 KG/WPL
PartiesEDWARD AND MARTHA HEIMANN, Petitioners, v. UNITED STATES GOVERNMENT, through TOM VILSACK, Secretary of the U.S. Department of Agriculture, and the FARM SERVICE AGENCY, a subdivision of the U.S. Department of Agriculture, Respondents.
CourtU.S. District Court — District of New Mexico
MEMORANDUM OPINION AND ORDER

This matter is before the Court on Edward and Martha Heimann's Petition for Judicial Review Administrative Appeal of the Federal Agency FSA. (Doc. 1). The Heimanns request review of the final adverse Director Review Determination from the National Appeals Division ("NAD"),1 dated July 16, 2014, under 5 U.S.C. § 706(2) of the Administrative Procedure Act ("APA"), 7 C.F.R. § 11.13 of the United States Department of Agriculture ("USDA") regulations, and the Due Process Clause of the Fifth Amendment. (Doc. 1) Ex. 1 at 1-6. Defendant United States, on behalf of the USDA and the Farm Service Agency ("FSA"), filed a Motion to Dismiss on November 8, 2014. (Docs. 4-5). The parties later each filed cross motions for judgment on the record on May 20, 2015; responses on June 19, 2015; and replies on July 6, 2015. (Docs. 24-27, 29-30, 32). For the reasons explained below, the Court grants the Heimann's motion for judgment on the record and denies the United States' motions.

A. Background

In August 2008, the Heimanns sought to purchase a farm in Chaves County, New Mexico. (Administrative Record ("AR") 236). On August 12, 2008, the Heimanns signed a Preferred Lender Application for Guarantee with FSA. (AR 1345-46). The Application for Guarantee contained the following provision:

The loan applicant certifies and acknowledges that any amounts paid by FSA on account of the liabilities of the guaranteed loan borrower will constitute a Federal debt owing to FSA by the guaranteed loan borrower. In such case, FSA may use all remedies available to it, including offset under the Debt Collection Improvement Act, to collect the debt from the borrower. The Agency's right to collect is independent of the lender's right to collect under the guaranteed note and will not be affected by any release by the lender of my (our) obligation to repay the loan. Any agency collection under this paragraph will not be shared with the lender.

(AR 1345).

Meanwhile, on August 15, 2008, the Heimanns took out a line of credit in the amount of $100,000 from Bank of America ("B of A"), secured by crops and inventory. (AR 1731-42). On September 30, 2008, the Heimanns received three more loans from B of A, for the following: 1) a $949,000 bridge loan for the purchase of the farmland in Chavez County, secured by the farmland; 2) $175,000 for the purchase of farm equipment, secured by the equipment, and 3) a $505,000 loan, secured by the Heimann's house in Lincoln County. (AR 1745-90). On November 3, 2008, the Heimanns signed a Farm Loan Agreement with B of A in the amount of $949,000 that paid off the bridge loan, and they executed a mortgage for B of A, with the farmland as security. (AR 574-86). FSA issued a Loan Guarantee for the $949,000 loan onJanuary 7, 2009, but not for the remaining three loans that totaled $780,000.2 (AR 2100-01). FSA also obtained a second lien on the equipment, crops, and inventory.

Later in 2009, the Heimanns defaulted on all four loans with B of A. (AR 238). B of A filed two state foreclosure actions on the loans. (AR 313-18, 1615). FSA was not a party to these actions. (See id.) The Heimanns and B of A later resolved their loan dispute by mediation, signing a Settlement Agreement and Mutual Release on April 29, 2013, "[w]ithout FSA's knowledge or approval." (Doc. 1) Ex. 2 at 9-14; (AR 239). The Heimanns and B of A settled the debts for $1.1 million. (Doc. 1) Ex. 2 at 9.

The settlement provided that B of A "agrees to release its liens and mortgages against the real and personal property owned by the [Heimanns] and not to otherwise pursue its legal remedies pursuant to the notes and mortgages with the [Heimanns]." (Id.) Pursuant to the agreement, B of A also "releases, forever discharges, and acquits [the Heimanns] . . . from all claims, suits, costs, debts, demands, actions and causes of action which each had or might have had against the other as of the date this Agreement is executed, for all damages, known or unknown, arising out of or in any way related to the claims which were made or could have been made regarding, arising out of or in any way relating to the Action." (Id.)

The Heimanns procured the $1.1 million for the settlement by selling the Chaves County farm and the farm equipment. (AR 1617-25, 2018-21). B of A released its mortgages and liens on the collateral. (AR 1612-14).

B of A submitted a Guaranteed Loan Report of Loss to FSA on July 31, 2013, in the amount of $399,591.77. (AR 2102-03). B of A applied $644,831 of the settlement to the guaranteed loan, representing, according to B of A, the approximate value of the land. (AR2103). B of A subtracted the $644,831 from the outstanding value on the loan ($949,000 principal + $18,244.68 accrued interest = $967,244.68), and added half of its attorneys' fees ($231,656.78 / 2 = $115,828.39) and half the appraisal costs ($11,497.58 /2 = $5,748.79), for a total of $443,990.86.3 (AR 2102); (Doc. 1) Ex. 2 at 20. B of A then multiplied this number by ninety percent to calculate the total maximum loss payable by FSA of $399,591.77. (Id.) FSA approved payment of $327,591.77 on September 12, 2013, subtracting $72,000 from B of A's total loss claim based on the Heimann's failure to purchase a mobile home trailer pursuant to the original loan agreement. (AR 2104); (Doc. 1) Ex. 2 at 21.

On September 19, 2013, FSA notified the Heimanns by certified mail that they had a delinquent federal debt in the amount of $327,591.77. (AR 1354-57). FSA demanded payment of this sum by October 18, 2013, to avoid debt collection activities, such as centralized offset and non-centralized administrative offset procedures. (AR 1354-55). In particular, the Heimanns would likely experience offset against their tax refunds. (Doc. 26) at 19. However, FSA informed the Heimanns that they had "the right to inspect and copy Agency records, to make other arrangements for repaying your debt and to request an appeal of this demand for payment to the National Appeals Division (NAD)." (AR 1356).

FSA received an appeal of the demand for payment on October 17, 2013, in the form of a letter by the Heimann's attorney. (AR 2070-73). Upon receiving notice from a representative of the NAD that the Heimanns must personally sign a written request for appeal, the Heimann's attorney had the Heimanns sign the letter, which FSA received on November 13, 2013. (AR 2074-77). The appeal process then commenced before a hearing officer of the NAD. The Hearing Officer issued a decision in favor of the Heimanns on June 12, 2014, finding error inFSA's demand for payment. (Doc. 1) Ex. 2 at 15-30. FSA appealed this decision to the Director of the NAD for a final determination. The Director reversed the Hearing Officer's decision on July 16, 2014. (Doc. 1) Ex. 1 at 1-6.

B. Standard of Review

Upon receiving a final determination from an agency, a United States District Court may review the relevant administrative actions. 7 C.F.R. § 11.13. Judicial review of administrative actions is governed by Section 706 of the Administrative Procedure Act. Olenhouse v. Commodity Credit Corp., 42 F.3d 1560, 1573 (10th Cir. 1994). This section provides that

The reviewing court shall—
(2) hold unlawful and set aside agency action, findings, and conclusions found to be—
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.

5 U.S.C. § 706(2). Further, "the court shall review the whole record or those parts of it cited by a party." (Id.)

"'[A]n agency's decision is entitled to a presumption of regularity, and the challenger bears the burden of persuasion.'" Biodiversity Conservation Alliance v. Jiron, 762 F.3d 1036, 1060 (10th Cir. 2014) (quoting San Juan Citizens Alliances v. Stiles, 654 F.3d 1038, 1045 (10th Cir. 2011)). The court shall review legal determinations de novo, yet give "substantial deference" to an agency's interpretation of its regulations. Lockheed Martin Corp. v. Admin.Review Bd., 717 F.3d 1121, 1129 (10th Cir. 2013); Biodiversity Conservation Alliance, 762 F.3d at 1060.

C. NAD Appeal Determination

On June 12, 2014, an NAD Hearing Officer released her appeal determination regarding the Heimann's challenge to FSA demand for payment. (Doc. 1) Ex. 2 at 15-30. The parties agreed at a prehearing conference that the Hearing Officer had three questions to resolve: 1) whether FSA was bound by the Settlement Agreement between the Heimanns and B of A, 2) whether the Heimanns owe FSA a federal debt, and 3) if so, whether FSA correctly determined that the Heimanns owe $327,591.77. (Id.) at 16.

The Hearing Officer concluded that FSA was not bound by the Settlement Agreement between the Heimanns and B of A because FSA was not aware of the mediation, was not mentioned in the Settlement Agreement, and was unaware of the Settlement Agreement until B of A submitted its loss claim. (Id.) at 21.

Next, the Hearing Officer determined that the Heimanns do not owe FSA a federal debt because FSA did not pay B of A based on any outstanding liabilities of the Heimanns. (Id.) at 22. The Hearing Officer noted, "If a default cannot be cured after mediation and consideration of available servicing...

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