Pauly v. U.S. Dept. of Agri., 02-35731.

• Decision Date: 13 November 2003
• Docket Number: No. 02-35783.,No. 02-35731.,02-35731.,02-35783.
• Citation: 348 F.3d 1143
• Parties: Joseph E. Pauly, husband; Judy B. Pauly, wife, Plaintiffs-Appellants, v. U.S. DEPARTMENT OF AGRICULTURE; Ann M. Veneman, Secretary of the United States Department of Agriculture; National Appeals Division of The United States Department of Agriculture; Norman G. Cooper, Director of the National Appeals Division of the United States Department of Agriculture; Farm Service Agency, United States Department of Agriculture; James R. Little, Acting Administrator of the Farm Service Agency, United States Department of Agriculture, Defendants-Appellees. Joseph E. Pauly, husband; Judy B. Pauly, wife, Plaintiffs-Appellees, v. U.S. Department Of Agriculture; Ann M. Veneman, Secretary of the United States Department of Agriculture; National Appeals Division of The United States Department of Agriculture; Norman G. Cooper, Director of the National Appeals Division of the United States Department of Agriculture; Farm Service Agency, United States Department of Agriculture; James R. Little, Acting Administrator of the Farm Service Agency, United States Department of Agriculture, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

348 F.3d 1143

Joseph E. Pauly, husband; Judy B. Pauly, wife, Plaintiffs-Appellants, v. U.S. DEPARTMENT OF AGRICULTURE; Ann M. Veneman, Secretary of the United States Department of Agriculture; National Appeals Division of The United States Department of Agriculture; Norman G. Cooper, Director of the National Appeals Division of the United States Department of Agriculture; Farm Service Agency, United States Department of Agriculture; James R. Little, Acting Administrator of the Farm Service Agency, United States Department of Agriculture, Defendants-Appellees.

Joseph E. Pauly, husband; Judy B. Pauly, wife, Plaintiffs-Appellees, v. U.S. Department Of Agriculture; Ann M. Veneman, Secretary of the United States Department of Agriculture; National Appeals Division of The United States Department of Agriculture; Norman G. Cooper, Director of the National Appeals Division of the United States Department of Agriculture; Farm Service Agency, United States Department of Agriculture; James R. Little, Acting Administrator of the Farm Service Agency, United States Department of Agriculture, Defendants-Appellants.

No. 02-35731.

No. 02-35783.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 9, 2003 — Seattle, Washington.

Filed November 13, 2003.

COPYRIGHT MATERIAL OMITTED

James D. Van Ness, Salem, OR, for the plaintiffs-appellants.

Robert D. McCallum, Jr., Office of the Attorney General, Washington, D.C., James A. McDevitt, United States Attorney, Spokane, WA, Michael Jay Singer, Eric D. Miller, Appellate Staff, Civil Division, U.S. Department of Justice, Washington, D.C., for the defendants-appellees.

Appeal from the United States District Court for the Eastern District of Washington; Edward F. Shea, District Judge, Presiding. D.C. No. CV-01-05037-EFS.

Before: DOROTHY W. NELSON, ALEX KOZINSKI, and M. MARGARET McKEOWN, Circuit Judges.

OPINION

PER CURIAM.

Joseph and Judy Pauly are farmers who entered into a ten-year agreement with the United States Department of Agriculture (USDA) whereby the USDA agreed to restructure the Paulys' debt in exchange for a portion of the appreciation in the value of their farm during the term of the agreement. When the USDA sought to recapture a portion of the appreciation upon expiration of the agreement, the Paulys initiated this suit. The Paulys allege that the Government misled them by representing, through its agents, that no recapture would be due upon expiration of the agreement and that, therefore, the Government should now be estopped from recovering a portion of the appreciation. Alternatively, the Paulys argue that the Government or its agents are liable for tort damages arising from fraud in the inducement.

The district court affirmed the USDA's determination that appreciation was due under the agreement and granted in part the USDA's motion for summary judgment. However, the district court remanded to the USDA to reassess the amount of recapture under its current regulation, which excludes capital improvements from the calculation of appreciation. Both parties appealed.

We affirm in part and reverse in part. The district court was correct in enforcing the agreement according to its terms and in conformity with the statute governing the USDA's loan program. However, the district court erred in applying the USDA's regulations retroactively.

FACTUAL AND PROCEDURAL BACKGROUND

During the early 1980s, a serious financial depression, combined with several natural disasters, led to widespread farm foreclosures in the United States. As a "lender of last resort," the Farmers Home Administration (FmHA), held a portfolio that was severely threatened by the declining net worth of U.S. farmers. By the mid-1980s, the vast majority of FmHA's outstanding farm debt was delinquent. In response, Congress passed the Agricultural Credit Act of 1987, Pub.L. No. 100-233, 101 Stat. 1568 (1988) (codified in scattered sections of 7 U.S.C.), which allowed farmers who were delinquent in payments to restructure their debts. In exchange for a write-down of their debt, the USDA could ask borrowers to sign a Shared Appreciation Agreement (SAA), which required borrowers to repay a portion of any appreciation that accrued on their farm during the term of the SAA.

Joseph and Judy Pauly are farmers who were delinquent in their loans from the USDA. In September 1989, the Paulys executed an SAA with the FmHA, which is now the Farm Service Agency (FSA). Under the terms of the SAA, the FmHA agreed to write off $131,754.89 of the Paulys' debt to the USDA. The SAA provides:

As a condition to, and in consideration of, FmHA writing down the above amounts and restructuring the loan, Borrower agrees to pay FmHA an amount according to one of the following payment schedules:

1. Seventy-five (75) percent of any positive appreciation in the market value of the property securing the loan ... between the date of this Agreement and either the expiration date of this Agreement or the date the Borrower pays the loan in full, ceases farming or transfers title of the security, if such event occurs four (4) years or less from the date of this Agreement.

2. Fifty (50) percent of any positive appreciation in the market value of the property securing the loan... between the date of this Agreement and either the expiration date of this Agreement or the date Borrower pays the loan in full, ceases farming or transfers title of the security, if such event occurs after four (4) years but before the expiration date of this Agreement.

The amount of recapture by FmHA 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.

The SAA was entered into pursuant to 7 U.S.C. § 2001. According to the statute:

Recapture shall take place at the end of the term of the [SAA], or sooner —

(A) on the conveyance of the real security property;

(B) on the repayment of the loans; or

(C) if the borrower ceases farming operations.

7 U.S.C. § 2001(e)(4) (2000). If recapture occurs within four years of restructuring, the agency may recover seventy-five percent of the appreciation; thereafter, it may recover only fifty percent. 7 U.S.C. § 2001(e)(3). Despite the express terms of the SAA and the governing statute, FmHA County Supervisor Kuhns allegedly told the Paulys, prior to the execution of the SAA, that no repayment would be due if they continued farming through the tenth and final year of the agreement and did not convey their property or repay their loans in the interim.

On September 11, 1996, the FSA sent the Paulys a letter notifying them that the SAA would expire on September 7, 1999. The letter acknowledged that there had been some confusion as to the need to pay recapture at the end of the expiration of the SAA, but confirmed that the Paulys would need to repay the lower of either (1) the amount by which their debt was written down or (2) fifty percent of the appreciation of their property. The FSA sent another letter to the Paulys on August 26, 1998, informing them that the FSA would appraise the property to determine whether appreciation had occurred.

The FSA's appraisal of the Paulys' farm included certain capital improvements that the Paulys made to their property after 1989, such as the addition of irrigation systems and the renovation of their primary residence. The appraiser determined that the farm had appreciated by $293,000 since the Paulys entered into the SAA. The FSA then determined that the full amount of the write-down was due since fifty percent of the appreciation exceeded the amount of the debt. On June 16, 1999, the FSA sent a "Notification of Shared Appreciation Due" to the Paulys, notifying them that they would owe $131,754.89 upon recapture.

The Paulys appealed the FSA's decision to the USDA's National Appeals Division (NAD). They argued that recapture was authorized under the SAA and 7 U.S.C. § 2001 only if the borrower conveyed the real property, repaid the loans, or ceased farming. The Paulys also argued that, even if recapture was authorized, the calculation of shared appreciation should not include capital improvements made after they entered into the SAA.

On October 26, 1999, the NAD officer determined that the FSA's decision to request a payment of $131,754.89 under the SAA was not erroneous. The NAD did not enter a specific conclusion regarding which regulation should be used to calculate appreciation, but did rely on the agency's appraisal in determining the amount owed by the Paulys. The Paulys then sought Director Review of the NAD decision. The Director upheld the decision of the NAD. The Paulys then filed their complaint in the United States District Court for the Eastern District of Washington.

The district court affirmed the agency's determination that appreciation was due under the SAA and granted in part the government's motion for summary judgment. The court held that the USDA could recapture appreciation on the Paulys' farm under the terms of the SAA and the statute governing the transaction. The court also dismissed all tort claims against the government since sovereign immunity applied and the Federal Tort Claims Act (FTCA) prevented the Paulys from suing for negligent or fraudulent misrepresentation. However, the court remanded to the agency to recalculate the value of appreciation, excluding capital improvements, in accordance with its current regulations. Both parties appealed.

STANDARD OF REVIEW

We review de novo the district court's grant of summary judgment. League of Wilderness Defenders v. Forsgren, 309 F.3d 1181, 1183 (9th Cir.2002). Pursuant to the Administrative Procedure Act (APA), agency decisions may be set aside only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). An agency's interpretation of its own regulations is entitled to deference...