Mattes v. U.S., 83-1339

• Decision Date: 23 November 1983
• Docket Number: No. 83-1339,83-1339
• Citation: 721 F.2d 1125
• Parties: Diane MATTES, d/b/a Diane Mattes Livestock, Philip Mattes, Jr., and Mattes Livestock Auction Market, Inc., Petitioners, v. UNITED STATES of America and United States Department of Agriculture, Respondents.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1125

721 F.2d 1125

Diane MATTES, d/b/a Diane Mattes Livestock, Philip Mattes, Jr., and Mattes Livestock Auction Market, Inc., Petitioners, v. UNITED STATES of America and United States Department of

Agriculture, Respondents.

No. 83-1339.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 15, 1983.

Decided Nov. 23, 1983.

As Amended Nov. 23, 1983.

Gerard D. Eftink, Deas, Van Hosser & Olsen, Kansas City, Mo., for petitioners.

Virginia Strasser, U.S. Dept. of Agriculture, Washington, D.C., for respondents.

Before PELL and CUDAHY, Circuit Judges, and GRANT, Senior District Judge. ^*

CUDAHY, Circuit Judge.

This matter comes before us on a petition for review of a decision by respondent United States Department of Agriculture (the "USDA") denying registration under the Packers & Stockyards Act, (the "Act"), 7 U.S.C. Secs. 181 et seq., to petitioner Diane Mattes ("Diane") to operate a stockyard. ¹ The USDA denied Diane's application for registration under the Act on the ground that the business she proposed to operate would have the effect of circumventing the suspensions agreed to by her husband Philip Mattes, Jr. ("Philip Jr.") and Mattes Livestock Auction Market, Inc. (the "Corporation") of which Philip is a fifty percent shareholder. Diane claims that the USDA is without authority to deny her registration unless she does not meet the standards set out in the Act and the regulations under it. Because we find both substantial evidence to support a finding that Diane's registration would circumvent the prior suspension order, and power in the USDA to prevent such circumvention, we affirm.

I. Background

The events which led to this litigation began in 1974 when Philip Mattes, Sr. (Diane's father-in-law) and the Corporation were charged with violating Sec. 312(a) of the Act, 7 U.S.C. Sec. 213(a) (1976), by misusing funds in a custodial account. This dispute was concluded when the USDA and the parties consented to a cease and desist order and the accounts were replenished. See In re Mattes Livestock Auction Market, Inc. and Philip Mattes, Sr., 33 Ag.Dec. 643 (1974).

In 1981 Philip Jr., Philip Sr. and the Corporation were charged with violating the 1974 cease and desist order by continuing to misuse the corporate custodial account. Once again, the parties agreed to a cease and desist order, which this time provided for suspension of the Corporation's registration for twenty-one days and for suspension of Philip Jr.'s registration for sixty days.

Meanwhile, in July, 1981, six weeks after the second complaint was filed against her husband, her father-in-law and the Corporation, Diane applied for and received licenses from the Wisconsin State Department of Agriculture. She made no use of those licenses until April, 1982, when she applied for registration under the Act as a market agency to operate a stockyard under the name "Diane Mattes Livestock." Although she had never engaged in the business before, she apparently proposed to lease the stockyard from the Corporation and to operate a livestock business completely independent of Philip Jr., at least during the period of his suspension. Diane was informed by letter that the USDA's initial decision was to deny her application for registration because it believed the plan was an attempt to circumvent the suspension orders entered against the Corporation and Philip Jr. Diane was also informed that a hearing would be held later for final determination of her application.

The hearing on Diane's application was held in June, 1982. Between the initial denial of her application and the hearing, she took several steps to prepare to commence business, including entry into a lease of the premises with the Corporation, ² establishment of the required custodial bank accounts and examination of the books and records of the Corporation. The lease had a one year term but was terminable by either party for any reason on fifteen days' notice. At the hearing she testified that she planned to operate with the same staff and that she planned on "operating in the same mode" as the Corporation. Tr. at 113-14.

The USDA argues that it would circumvent the effect of the suspension orders if, immediately upon the suspensions taking effect, Diane were to open a market agency at the same place, using the same facility, with the same employees and with the same method of operation as the suspended corporation. Essentially, the deterrent effect of the suspensions would be diminished, if not altogether eliminated, because the goodwill of the Corporation would be transferred to and preserved by Diane. ³ Diane's testimony reflects a desire to maintain continuity in the business despite the suspensions. Tr. at 113, 109.

At the hearing, much of the testimony focused on Diane's intent vis-a-vis the suspended corporation and her husband. A government witness testified that Diane told him that her intent was to circumvent the order. Diane testified, not surprisingly, that she only intended to start her own business and she intended to operate completely independent from her husband. Administrative Law Judge ("ALJ") Dorothea Baker determined that Diane was a more credible witness than the government witness and found that Diane's intention was to operate the business herself for at least the year that the lease provided. The ALJ concluded that because, in her view, Diane did not intend to circumvent the suspension order, the USDA lacked the authority to refuse her registration since she met all the requirements of the Act and regulations, 9 C.F.R. 201.10. The ALJ therefore ordered the USDA to register Diane "as a market agency and dealer to buy and sell livestock in commerce...."

The USDA appealed to a Judicial Officer ("J.O.") who reversed the decision of the ALJ. J.O. Donald A. Campbell took a different approach to the case than the ALJ, relying more on the facts and circumstances surrounding Diane's application and less on her expressed intention. While the J.O. seems to have disagreed with the ALJ on certain credibility determinations, he made it clear that he was basing his reversal on the undisputed circumstances in the record. J.O.'s Dec. at 22. Thus the J.O. inferred from the "uncontradicted, objective circumstances" that Diane's plan was an attempt to circumvent the order suspending her husband and the Corporation. J.O.'s Dec. at 21. ⁴ He therefore denied her application "until the 21-day period of suspension imposed upon Mattes Livestock Auction Market, Inc., has become effective and has expired." J.O.'s Dec. at 52.

Diane petitioned this court to review the decision of the J.O. She challenges the USDA's authority to deny her application upon the circumvention ground because, admittedly, she meets all of the published requirements for registration. She also attacks the J.O.'s rejection of the ALJ's findings and claims that the J.O.'s decision was the product of bias resulting from his former performance of operating functions within the USDA. Jurisdiction of the petition for review is proper under 28 U.S.C. Sec. 2341.

II. Circumvention

The most difficult issue presented by this case is whether the USDA may refuse to register Diane in order to prevent circumvention of the suspension orders against the Corporation and Philip Jr. In short, the reason Diane's proposed business might circumvent the suspension order is that the goodwill of the Corporation could simply be maintained through her and transferred back to the Corporation when its suspension ended. This, combined with the fact that her husband would share in whatever economic benefit accrued during the twenty-one day suspension, would completely frustrate the effect of the suspensions. Before discussing the legal issue, however, we will review the evidence supporting the finding that Diane's plan would result in circumvention. This review may help to illustrate the importance of the suspension power to the administration of the Packers and Stockyards Act.

A. Substantial Evidence Review

Our review of the factual findings made by the Secretary of Agriculture is narrow. The Secretary's findings must be sustained if they are supported by substantial evidence which is " 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion[.]' " Universal Camera Corp. v. NLRB, 340 U.S. 474, 477, 71 S.Ct. 456, 459, 95 L.Ed. 456 (1951) quoting Consolidated Edison v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938), quoted in NLRB v. Berger Transfer and Storage Co., 678 F.2d 679, 687 (7th Cir.1982). See also Swift & Co. v. United States, 393 F.2d 247, 255 (7th Cir.1968).

Despite Diane's arguments to the contrary, the J.O. is not required to accept the ALJ's findings of fact even when those findings are based on credibility determinations. Administrative Procedure Act ("APA") Sec. 557(b), 5 U.S.C. Sec. 557(b). Rather, as the Supreme Court made clear in Universal Camera, the agency is free to substitute its judgment for that of the ALJ. The reviewing court still evaluates the J.O.'s decision using the substantial evidence test with the caveat that "evidence supporting a conclusion may be less substantial when an impartial, experienced [ALJ] who has observed the witness and lived with the case has drawn conclusions different from the Board's than when he has reached the same conclusion." Universal Camera Corp. v. NLRB, 340 U.S. 474, 496, 71 S.Ct. 456, 469, 95 L.Ed. 456 (1951). See also Kopack v. NLRB, 668 F.2d 946, 951-52 (7th Cir.1982).

Thus the ALJ's determinations are not entitled to any special deference from the agency except insofar as the ALJ's findings are based on witness credibility determinations. The agency is free independently to weigh the evidence and draw its own inferences. The ALJ, of course, is best situated to make credibility determinations based on the demeanor of witnesses. Kopack, 668 F.2d at 953. ⁵ See generally 3 K.C. DAVIS, ADMINISTRATIVE LAW TREATISE...