Tuesday, August 21, 2018

Does the Migratory Bird Treaty Act Apply To Farmers?

Overview

The Migratory Bird Treaty Act (MBTA) protects migratory birds that are not necessarily endangered and, thereby, protected under the ESA. 16 U.S.C. § 703 et seq.   The MBTA makes it unlawful at any time, by any means or in any manner, to pursue, hunt, take, capture or kill any migratory bird.  The Act is not limited to covering only hunting, trapping and poaching activities, but extends to commercial activities that kill migratory birds. 

But, can a farmer get caught in the web that the MBTA weaves?  Potential application of the MBTA to farming activities – that’s the topic of today’s post.

MBTA Basics

The Act prohibits taking or killing of migratory birds at any time, by any means or in any manner.  See, e.g., Unitied States v. Citgo Petroleum Corp., et al., No. C-06-563, 2012 U.S. Dist. LEXIS 125996 (S.D. Tex. Sept. 5, 2012). Violation of the Act is a misdemeanor punishable by fine up to $500 and imprisonment up to six months.  Anyone who knowingly takes a migratory bird and intends to, offers to, or actually sells or barters a migratory bird is guilty of a felony, with fines up to $2,000, jail up to two years, or both. 

The MBTA is a strict liability statute, and has been applied to impose liability on farmers who inadvertently poison migratory birds by use of pesticides.  While the MBTA is a strict liability statute, constitutional due process requirements must still be satisfied before liability can be imposed.  For instance, in United States v. Apollo Energies, Inc., et al., 611 F.3d 679 (10th Cir. 2010), the court held that oil drilling operators were not liable for deaths of migratory birds under the MBTA to the extent that the operators did not have adequate notice or a reasonable belief that their conduct violated the MBTA.   Similarly, in United States v. Rollins, 706 F. Supp. 742 (D.C. Idaho 1989), a farmer was prosecuted for violating the MBTA when he used a mixture of granular pesticides on an alfalfa field. The chemicals poisoned a flock of geese and killed several of them.  The trial court held that even though the farmer had not applied the pesticide in a negligent manner and could not control the fact that the geese would land and eat the granules, liability under the Act was based on whether the farmer knew that the land was a known feeding area for geese.  The trial court concluded that “a reasonable person would have been placed on notice that alfalfa grown on Westlake Island in the Snake River would attract and be consumed by migratory birds.”  The trial court was reversed on appeal on the grounds that the MBTA was too vague to give the farmer adequate notice that his conduct would likely lead to the killing of the protected birds since the farmer's past experience with the pesticide and the geese was that it did not kill them

Again, in United States v. Van Fossan 899 F.2d 636 (7th Cir. 1990), the court confirmed the notion that the MBTA is a strict liability statute and approved its application to a defendant who used pesticides to poison birds, even though the defendant did not know that his use of the pesticide would kill migratory birds protected under the Act.

Baiting

The MBTA also prohibits the taking of migratory game birds by the aid of “baiting”.  However, it is permissible to take migratory game birds, including waterfowl, on or over standing crops, flooded harvested croplands, grain crops that have been properly shocked on the field where grown, or grains found scattered solely as the result of normal agricultural planting or harvesting. See 50 C.F.R. §§ 20.11(g), 20.21(i). The U.S. Fish and Wildlife Service (FWS) has promulgated regulations defining “normal agricultural planting” and  “harvesting.”  In one case, the court held that FWS determinations that harvesting corn after December 1 and aerial seeding of winter wheat in standing corn were not “normal planting” and that the landowners were barred from hunting next to neighbors’ baited fields were reasonable interpretation of MBTA because the determinations were based on substantial evidence. Falk v. United States Fish and Wildlife Service, 452 F.3d 951 (8th Cir. 2006).

Some states also have statutes that prohibit the baiting of wildlife for hunting purposes unless the alleged baiting was the result of commonly accepted agricultural practices.  For example, in State v. Hansen, 805 N.W.2d 915 (Minn. Ct. App. 2011), the defendant’s conviction for using bait to hunt deer was reversed.  The state statute at issue was deemed to violate the defendant’s due process as it was vague as applied to defendant’s pumpkin patch operation because it did not distinguish between normally accepted agricultural practices and the unlawful baiting of deer.

Also, with respect to the baiting issue, the MBTA permits the taking of all migratory game birds, except waterfowl, on or over any lands where shelled, shucked, or unshucked corn, wheat or other grain, salt, or other feed has been distributed or scattered as the result of bona fide agricultural operations or procedures.  In United States v. Adams 174 F.3d 571(5th Cir. 1999), a farmer was convicted of violating the MBTA for hunting doves on a field that he had recently planted to wheat.  For purposes of the “baiting” provision of the Act, the trial court judge determined that intent was not an element of the offense for which the farmer was convicted and did not allow the farmer to introduce evidence concerning the procedures commonly used to plant winter wheat in northeast Louisiana.  On appeal, the Fifth Circuit Court of Appeals reversed the trial court, holding instead that the government was required to prove that the farmer’s intentions were not in good faith and that the farmer’s acts were merely a sham to attract migratory birds to hunt.  Accordingly, the court reversed the farmer’s conviction and rendered acquittal based on the court’s determination that the farmer was entitled to have the lower court consider the evidence of his good faith in growing the wheat, and because there was no evidence from which a jury could find that the farmer’s planting was not the result of a “bona fide agricultural operation or  procedure.” 

Another MBTA “baiting” case was recently decided.  In United States v. Obendorf, No. 16-30188, 2018 U.S. App. LEXIS 18561 (9th Cir. Jul. 9, 2018), the defendant was charged with illegally baiting and conspiracy to bait ducks, under the MBTA.  FWS agents patrolled the area near the defendant’s farm by plane, and aerially spotted large piles of corn near hunting blinds.  They also noticed irregular harvesting in one field on the farm. Along with an Idaho Department of Fish and Game Agent, the FWS “snuck” on to the farm that night. The agents observed six piles of corn and a strip combined field (partly cut field, leaving strips of standing corn) as well as a lot of corn wasted on the ground around the strip. The agents left trail/game cameras hidden on the property. Two years after the initial investigation, the defendant was charged. At trial, the defendant argued that the “agricultural practice” exception of the MBTA applied. That exception states that taking birds over specified areas, including “standing crops or flooded crops,” is not baiting. The trial court jury was instructed that the government had the duty to prove that the exception did not apply in the case at hand as well as proving the defendant’s guilt. The plaintiff presented witnesses that testified that strip cropping and other farming activities by the defendant were not recommended farming practices. The jury was persuaded that the exception did not apply and, the defendant was convicted of baiting under the MBTA. On appeal the defendant claimed that the court misinterpreted the exception. The plaintiff, however, claimed that the exception only applied to “taking” and not baiting. The appellate court agreed and upheld the defendant’s conviction. 

Conclusion

The MBTA is another federal law that can entangle farmers in its provisions.  While some conduct is clearly beyond the pale and should be within the MBTA’s reach, other conduct that is otherwise innocent may also be caught.  In any event, it is important for farmers to understand the potential reach of the law and how the courts have decided the key cases.

August 21, 2018 in Environmental Law | Permalink | Comments (0)

Tuesday, August 7, 2018

WOTUS Developments

Overview

The “Water of the United States” (WOTUS) rule has caused a considerable amount of controversy in agriculture for many years.  In 2006, the U.S. Supreme Court had a chance to add clarity to the matter, but managed to “muddy the waters” instead – rendering a split 4-1-4 decision.  In subsequent years, the Environmental Protection Agency (EPA) attempted to exploit that lack of clarity by expanding the regulatory definition of a WOTUS. 

The WOTUS issue is a very important issue for agricultural and rural landowners, and the U.S. Supreme Court is being asked to hear another case involving the issue at the present time. 

So, what is the present status of the WOTUS matter?  There have been many twists and turns in recent years  Today’s post sorts out the significant recent developments

The WOTUS rule recent developments – that’s the topic of today’s post.

Background

The Clean Water Act makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” without first obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE). In March of 2014, the EPA and the COE released a proposed rule defining “waters of the United States” (WOTUS) in a manner that would significantly expand the agencies’ regulatory jurisdiction under the CWA. Under the proposed rule, the CWA would apply to all waters which have been or ever could be used in interstate commerce as well as all interstate waters and wetlands. In addition, the proposed WOTUS rule specifies that the agencies’ jurisdiction would apply to all “tributaries” of interstate waters and all waters and wetlands “adjacent” to such interstate waters. The agencies also asserted in the proposed rule that their jurisdiction applies to all waters or wetlands with a “significant nexus” to interstate waters.

Under the proposed rule, “tributaries” is broadly defined to include natural or man-made waters, wetlands, lakes, ponds, canals, streams and ditches if they contribute flow directly or indirectly to interstate waters irrespective of whether these waterways continuously exist or have any nexus to traditional “waters of the United States.” The proposed rule defines “adjacent” expansively to include “bordering, contiguous or neighboring waters.” Thus, all waters and wetlands within the same riparian area of flood plain of interstate waters would be “adjacent” waters subject to CWA regulation. “Similarly situated” waters are evaluated as a “single landscape unit” allowing the agencies to regulate an entire watershed if one body of water within it has a “significant nexus” to interstate waters. The proposed rule became effective as a final rule on August 28, 2015 in 37 states.

Recent Case

In a recent case, Georgia v. Pruitt, No. 2:15-cv-79, 2018 U.S. Dist. LEXIS 97223 (S.D. Ga. Jun. 8, 2018), the plaintiffs claimed that the WOTUS rule, implemented in 2015, violates the Clean Water Act, the Administrative Procedure Act, the Commerce Clause of the Constitution, and the Tenth Amendment.  The plaintiffs sought an injunction preventing the rule from being implemented in 11 states pending a full hearing on the merits. To receive the injunction, the plaintiffs had to prove that they would (1) likely succeed on the merits; (2) be irreparably harmed; (3) sustain more potential injury than the defendant would be harmed; and (4) establish that the injunction is not contrary to the public interest. The court determined that the plaintiffs had met the standards for all four requirements. As for success on the merits, the court determined that the WOTUS rule would not likely be upheld under the U.S. Supreme Court standard set forth in Rapanos v. United States, 547 U.S. 715 (2006), and was random and impulsive. The court also determined that the irreparable harm standard had been satisfied given the increase in federal jurisdiction of “wetlands” under the rule which overstepped states’ rights and had the potential to impose substantial monetary harm on affected landowners. As for the balancing of the equities, the court determined that the loss of state rights and the increased potential for monetary damages outweighed the harm to the government in complying with an injunction. The court also reasoned that entering an injunction would not violate public policy because the WOTUS rule may be an be an unenforceable rule as inconsistent with prior court rulings concerning the scope of the government’s jurisdiction over wetlands. Accordingly, the court entered a preliminary injunction. 

The court’s order of preliminary injunction prevented the WOTUS rule from being implemented in 11 states – Alabama, Florida, Georgia, Indiana, Kansas, Kentucky, North Carolina, South Carolina, Utah, West Virginia and Wisconsin. A prior decision by the North Dakota federal district court had blocked the rule from taking effect in 13 states – AK, AZ, AR, CO, ID, MO, MT, NE, NV, NM, ND, SD and WY. North Dakota v. United States Environmental Protection Agency, No. 3:15-cv-59 (D. N.D. May 24, 2016).

The Sixth Circuit Litigation and the Jurisdiction Issue

On October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide injunction barring the rule from being enforced anywhere in the U.S. Ohio, et al. v. United States Army Corps of Engineers, et al., 803 F.3d 804 (6th Cir. 2015). Over 20 lawsuits had been filed at the federal district court level. On February 22, 2016, the U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear the challenges to the final rule, siding with the EPA and the U.S. Army Corps of Engineers that the CWA gives the circuit courts exclusive jurisdiction on the matter. The court determined that the final rule is a limitation on the manner in which the EPA regulates pollutant discharges under CWA Sec. 509(b)(1)(E), the provision addressing the issuance of denial of CWA permits (codified at 33 U.S.C. §1369(b)(1)(E)). That statute, the court reasoned, has been expansively interpreted by numerous courts and the practical application of the final rule, the court noted, is that it impacts permitting requirements. As such, the court had jurisdiction to hear the dispute. The court also cited the Sixth Circuit’s own precedent on the matter in National Cotton Council of America v. United States Environmental Protection Agency, 553 F.3d 927 (6th Cir. 2009) for supporting its holding that it had jurisdiction to decide the dispute. Murray Energy Corp. v. United States, Department of Defense, No. 15-3751, 2016 U.S. App. LEXIS 3031 (6th Cir Feb. 22, 2016). 

In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision. National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017). About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006). The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication in the Federal Register. In November of 2017, the EPA issued a proposed rule delaying the effective date of the WOTUS rule until 2020.

In January of 2018, the U.S. Supreme Court ruled unanimously that jurisdiction over challenges to the WOTUS rule was in the federal district courts, reversing the Sixth Circuit’s opinion. National Association of Manufacturer’s v. Department of Defense, No. 16-299, 2018 U.S. LEXIS 761 (U.S. Sup. Ct. Jan. 22, 2018). The Court determined that the plain language of the Clean Water Act (CWA) gives authority over CWA challenges to the federal district courts, with seven exceptions none of which applied to the WOTUS rule. In particular, the WOTUS rule neither established an “effluent limitation” nor resulted in the issuance of a permit denial. While the Court noted that it would be more efficient to have the appellate courts hear challenges to the rule, the court held that the statute would have to be rewritten to achieve that result. Consequently, the Supreme Court remanded the case to the Sixth Circuit, with instructions to dismiss all of the WOTUS petitioners currently before the court. Once the case was dismissed, the nationwide stay of the WOTUS rule that the court entered in 2015 was removed, and the injunction against the implementation of the WOTUS rule entered by the North Dakota court was reinstated in those 13 states. Thus, given the June 2018 by the Georgia court, an injunction is presently in place in 24 states against the implementation of the rule. Another case against the WOTUS rule is currently pending in a Texas federal court.

2018 Notice of Proposed Rulemaking

Most recently, as directed by President Trump, the (COE) and the EPA issued a supplemental notice of proposed rulemaking. The proposed rule seeks to “clarify, supplement and seek additional comment on” the 2017 congressional attempt to repeal the 2015 WOTUS rule.  If the rule is repealed, the prior regulations defining a WOTUS will become the law again. The agencies are seeking additional comments on the proposed rulemaking via the supplemental notice. The comment period is open through August 13, 2018. Comments can be submitted by accessing the page at the following link: https://www.regulations.gov/docket?D=EPA-HQ-OW-2017-0203. COE/EPA, “Waters of the United States"– Reinstatement of Preexisting Rules, No. EPA-HQ-OW-2017-0203 (Jul. 12, 2018).

Conclusion

For those interested in the WOTUS issue, it may certainly be worthwhile to submit a comment to the EPA by the August 13 deadline.  We will have to wait and see what happens to the definition of a WOTUS over the coming months.  It’s a big issue for agriculture.

August 7, 2018 in Environmental Law | Permalink | Comments (0)

Wednesday, July 18, 2018

Agricultural Law and Economics Conference

Overview

Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture.  The event will be held in Manhattan at the Kansas Farm Bureau headquarters.  The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics.  The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics.  That event will be on the KSU campus in Manhattan.  The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.  

Symposium

This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills. 

The symposium can also be attended online.  For a complete description of the sessions and how to register for either in-person or online attendance, click here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Risk and Profit Conference

On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus.  The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture.  One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis.  The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law.  For a complete run down of the conference, click here:  https://www.agmanager.info/risk-and-profit-conference

Conclusion

The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic.  If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan.  See you there, or online for Day 1.

July 18, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, July 2, 2018

Regulation of Wetlands and “Ipse Dixit" Determinations

Overview

Over two thousand years ago, the Roman philosopher Cicero coined a phrase for opinions not supported by facts.  “Ipse dixit” is Latin for “he said it himself.”  It’s an assertion without proof, with the person (or entity) making the assertion claiming that a matter is because the party making the assertion said it is.  

In a recent case involving wetlands, the court determined that the U.S. Army Corps of Engineers (Corps) claimed jurisdiction over “wetlands” without any supporting evidence.  It was a wetland because the Corps said it was a wetland – an “ipse dixit” determination.  The court set the Corps’ determination aside.

This isn’t the first time this has happened.  In 1998, the USDA/NRCS did the same thing in a Nebraska case involving ditch maintenance of a hay meadow caught up in the Swampbuster regulations.

“Ipse dixit” determinations involving wetlands – that’s today’s blog post topic.

Farmed Wetlands and Swampbuster

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “Swampbuster.”  In 1986, the interim rules for Swampbuster were published in the Federal Register and evidenced general compliance with congressional intent and made no mention of “farmed wetland.”  However, the final rules published in 1987 introduced the concept of “farmed wetland,” defining a farmed wetland as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics.  Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b). The USDA/NRCS has interpreted this as meaning that farmed wetland can be used as it was before December 23, 1985 (National Food Security Act Manual (NFSAM) § 514.23), and a hydrologic manipulation can be maintained to the same “scope and effect” as before December 23, 1985. Id. § 515.10(a).  In particular, the government has interpreted the “scope and effect” regulation such that the depth or scope of drainage ditches, culverts or other drainage devices be preserved at their December 23, 1985, level regardless of the effect any post-December 23, 1985, drainage work actually had on the land involved. 

Nebraska case.  However, in 1999, the Eighth Circuit Court of Appeals invalidated the government’s interpretation of the “scope and effect” regulation.  The court held that a proper interpretation should focus on the status quo of the manipulated wetlands rather than the drainage device utilized in post-December 23, 1985, drainage activities.  Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999). 

In Barthel, to determine the original scope and effect of the manipulation, the USDA focused solely on the depth of the ditch that drained the hay meadow at issue.  In essence, the USDA interpreted the manipulation to be the ditch. The USDA pointed out that the level of the culvert (that drained the ditch beneath a road) on or before December 23, 1985, was eighteen inches higher than at the time of the litigation.  The USDA took the position that the culvert could only be placed at that higher level.  At that level, the meadow would not drain and the plaintiff’s land was flooded. 

The USDA/NRCS claimed it had the authority to “determine the scope and effect of [the] original manipulation” by selecting “any pre-December 23, 1985, manipulation ‘which can be determined by reliable evidence.’” Thus, if the agency had reliable evidence about the ditch level in 1965, then the Barthels would be stuck with those findings, even if in 1983 (still before the effective date of the Act), more far reaching modifications were made. The appellate court disagreed, noting that it was presented with a factual setting that was cyclical.  The court noted that the record showed that the ditch was continually silted-in by natural conditions and animal traffic and must be periodically cleaned out.  The court then stated that if it accepted “the government’s argument, the USDA could select a level for the original manipulation, either intentionally or unintentionally, which is at the end of the natural cycle - just before the periodic clean-up.  This would essentially redefine the cycle.  Thus, in the government’s view, if partial flooding occurred just before the clean-up, the flood level would be the best the Barthels could expect for use of their land.  An ipse dixit determination like this would drastically reduce the use of the land and even leave it underwater - reviving a wetland [citation omitted].  This interpretation conflicts with the Act considered as a whole.” 

Wetland and the Clean Water Act

In 1993, the COE and EPA adopted new regulations clarifying the application of the permit requirement of §404 of the CWA to land designated as wetland.  Section 404 of the CWA makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without obtaining a permit from the Secretary of the Army acting through the Corps.  The regulations specifically exempt prior converted wetlands from the definition of “navigable waters” for CWA purposes. 58 Fed. Reg. 45,008-48,083 (1993); 33 C.F.R. §328.3(a)(8).  Thus, prior converted cropland is not subject to the permit requirements of § 404 of the CWA.  Indeed, the Corps stated clearly that the only method for prior converted cropland to return to the Corps’ jurisdiction under the regulation was for the cropland to be “abandoned” – cropland production ceases with the land reverting to a wetland. 

In early 2009, the Corps prepared an Issue Paper announcing for the first time that prior converted cropland that is shifted to non-agricultural use becomes subject to regulation by the Corps. See Issue Paper Regarding "Normal Circumstances" (ECF No. 18-22).  The paper was the Corps’ response to five pending applications for jurisdictional determinations involving the transformation of prior converted cropland to limestone quarries. The paper concluded that the transformation would be considered an "atypical situation" within the meaning of the Corps’ Wetlands Manual and, thus, subject to regulation.  The paper further found that active management, such as continuous pumping to keep out wetland conditions, was not a "normal condition" within the meaning of 33 C.F.R. § 328.3(b).  However, no APA notice-and-comment period occurred (as required by the Administrative Procedure Act (APA) – Pub. L. 79-404, 69 Stat. 237, enacted Jun. 11, 1946)) before the Corps issued the memorandum.  Even so, the Corps implemented and enforced the rules nationwide.  The rules were challenged and in New Hope Power Company, et al. v. United States Army Corps of Engineers, 746 F. Supp.2d 1272 (S.D. Fla. Sept. 2010), the court held that the Corps had improperly extended its jurisdiction over the prior converted croplands that were converted to non-agricultural use and where dry lands were maintained using continuous pumping.  Under the Corp’s new rule, wetland determinations were being made based on what a property’s characteristic would be if pumping ceased.  The court noted that the rules effectively changed the regulatory definition of prior converted cropland without the new definition being subjected to notice and comment requirements.  Accordingly, the court invalidated the Corp’s new rule.

Illinois case.  In Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017), the plaintiff was a developer that obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995.  The local town then passed a zoning ordinance allowing development of the property.  The tract was divided into three sections - 25 acres were to be developed into 168 townhomes; 61 acres to be developed into 169 single-family homes; and 14 acres in between the other acreages to function as a stormwater detention area.  The townhomes and water detention area was to be developed first and then the single-family housing.  Construction of the townhomes began in 1996, and the single-family housing development was about to begin when the defendant designated about 13 acres of the undeveloped property as “wetlands” and asserted regulatory jurisdiction under the CWA.

The defendant claimed jurisdiction on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S.   The plaintiff administratively appealed the defendant’s jurisdictional determination to the Division Engineer who agreed that the District Engineer failed to properly interpret and apply applicable the U.S. Supreme Court decision in Rapanos v. United States, 547 U.S. 715 (2006), which created a significant nexus test.  On reconsideration, the District Engineer issued a second approved jurisdictional determination in 2010 concluding that the tract had a significant nexus to the navigable river.  The plaintiff appealed, but the Division Engineer dismissed the appeal as being without merit.  In 2011, the plaintiff sought reconsideration of the defendant’s appeal decision because of a 1993 prior converted cropland designation that excluded a part of the 100-acres from CWA jurisdiction.  Upon reconsideration, the District Engineer issued a third jurisdictional determination in 2012 affirming its prior determination noting that farming activities had ceased by the fall of 1996 and wetland conditions had returned.  The plaintiff appealed on the basis that the “significant nexus” determination was not supported by evidence.  The Division Engineer agreed and remanded the matter to the District Engineer for supportive documentation and to follow the defendant’s 2008 administrative guidance.  The District Engineer issued a new jurisdictional determination with supportive evidence, including an 11-page document that had previously not been in the administrative record.  This determination, issued in 2013, constituted a final agency determination, from which the plaintiff sought judicial review. 

In court, the plaintiff claimed that the defendant didn’t follow its own regulations, disregarded the instructions of the Division Engineer, and violated the Administrative Procedures Act (APA) by supplementing the record with the 11-page document.  However, the trial court judge (an Obama appointee) noted that existing regulations allowed the Division Engineer, on remand, to instruct the District Engineer to supplement the administrative record on remand and that the limitation on supplementing the administrative record only applied to the Division Engineer.  The trial court also determined that the supplemental information did not violate the Division Engineer’s remand order, and that the supplemental information had been properly included in the administrative record and was part of the basis for the 2013 reviewable final agency determination.  The trial court also upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river.  In addition, the trial court determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned. 

On appeal, in Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 17-3403, 2018 U.S. App. LEXIS 17608 (7th Cir. Jun. 27, 2018), the appellate court three-judge panel in a unanimous opinion (the author of the opinion is a Trump appointee and another judge is also a Trump appointee; the third panel member is a Ford appointee) first noted that the Corps concluded that the tract was a WOTUS based on the 11-page document both “alone and in combination with other wetlands in the area.”  However, the appellate court held that this conclusion lacked substantial evidence.  Simply stating that wetlands filter out pollutants and that the tract has a “discrete and confined intermittent flow” to a creek that flowed to a WOTUS which gave the tract the ability to pass pollutants along was mere speculation that didn’t support a significant nexus with a navigable water.  The appellate court also that the Corps also determined that the development of the tract would result in a floodwater rise of a fraction of one percent. On this point, the court stated, “If the Corps thinks that trivial number significant, it needs to give some explanation as to why.”  The appellate court found similarly with respect to the potential increase on downstream nitrogen.  The Corps provided no reasoning for its conclusion. 

The appellate court also noted that the Corps referenced the National Wetland Inventory for a listing of all of the wetlands in the area that were in proximity to the creek that flowed into a navigable waterway.  But, again, the appellate court scolded the Corps for making a bald assertion that the wetlands in the watershed were adjacent to the same tributary without any supporting evidence.   The Corps claimed it didn’t have to show or explain how each wetland was adjacent to the creek, but the appellate court stated that constituted jurisdictional overreach.  Importantly, the court stated that, “the significant nexus test has limits:  the Corps can consider the effects of in-question wetlands only with the effects of lands that are similarly situated.  To do as the Corps did on this record – to consider the estimated effects of a wide swath of land that dwarfs the in-question wetlands, without first showing or explaining how the land is in fact similarly situated – is to disregard the test’s limits…. By contrast, the Corps’ similarly-situated finding here, lacking as it does record support or explanation, is little more than administrative ipse dixit.”

Consequently, the appellate court vacated the trial court’s grant of summary judgment to the Corps and remanded with instructions to remand to the Corps for reconsideration of its jurisdiction over the tract.

Conclusion

Two ipse dixit determinations by federal agencies against landowners.  In each situation, the appellate court found that the government had abused its discretion.  The cases point out that maybe there is some hope that the courts will hold government agencies to the requirement that they must support their determinations with solid proof.  They can’t just say that it is so because they say it is.

July 2, 2018 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, June 18, 2018

Wetlands and Farm Programs – Does NRCS Understand the Rules?

Overview

The “Swampbuster” rules were enacted as part of the conservation provisions of the 1985 Farm Bill.  In general, the rules prohibit the conversion of “wetland” to crop production by producers that are receiving farm program payments.  A farmer that is determined to have improperly converted wetland is deemed ineligible for farm program payments.  But, an exception exists for wetland that was converted to crop production before December 23, 1985 – the effective date of the 1985 Farm Bill. 

Under the Swampbuster rules, “wetland” has:  (1) a predominance of hydric soil; (2) is inundated by surface or groundwater at a frequency and duration sufficient to support a prevalence of hydrophytic vegetation typically adapted for life in saturated soil conditions, and (3) under normal circumstances does support a prevalence of such vegetation. 7 C.F.R. §12.2(a).  In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.   

However, there have been several prominent cases in recent years illustrating that the Natural Resources Conservation Service (NRCS) has trouble applying the definition as it attempts to determine whether a particular tract has wetlands.  A recent decision of the United States Department of Agriculture (USDA) National Appeals Division (NAD) makes the point.

Wetlands under the farm program rules – that’s the topic of today’s post.

Iowa Case

In B & D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008), the plaintiff purchased the tract in issue in 1997.  The tract had been farmed by the prior owner’s tenant from 1972 to 1986, and was enrolled in the Conservation Reserve Program (CRP) from 1987 to 1997.  The plaintiff purchased the property in 1999, before the USDA determined that a portion of the tract was wetland.  Despite that determination, the plaintiff removed some woody vegetation in 2000 because it was a nuisance to the plaintiff’s farming operation.  The USDA determined that the plaintiff had “converted” 0.9 acres of wetland.  However, the plaintiff claimed that the tract had been cropped before December 23, 1985, thereby making it prior converted cropland.  Also, the plaintiff introduced evidence that a drainage tile had been installed before December 23, 1985, and that the tile, along with a road ditch, removed the wetland hydrology from the tract.  But, USDA believed that the tile was not functioning as of December 23, 1985, because woody vegetation existed. 

The plaintiff’s expert civil engineer, however, concluded that if the drainage tile had been plugged, when the USDA broke the tile during the on-site field investigation, the resulting hole would have filled full of water and saturated the ground and would have continued to be fed from water from further up the tile line.  But, that did not occur.  So, the plaintiff argued that the drainage tile coupled with the installation of a road ditch removed the presence of wetland hydrology from the tract.  USDA disagreed, claiming that the presence of hydrophytic vegetation, by itself, demonstrated wetland hydrology was present.

The court didn’t buy the USDA’s argument.  The court noted the statute clearly specifies that a “wetland” has three separate, mandatory requirements:  (1) hydric soil; (2) wetland hydrology, and; (3) hydrophytic vegetation.  In addition, the court noted that the presence of hydrophytic vegetation is not sufficient to meet the wetland hydrology requirement.  In addition, the court determined that the USDA reached its conclusion by disregarding evidence contrary to its experts that were relevant on the issues involved. 

Accordingly, the court ruled that the USDA hearing officer’s “final” determination must be overturned as arbitrary and capricious, an abuse of discretion, or contrary to law.  As for attorney fees, the court stated that it would reserve the issue for consideration upon a specific application for attorney fees.  

Virginia Dispute

In a recent dispute involving a tract of land in Virginia, the USDA NAD again determined that the NRCS didn’t follow applicable rules when determining the existence of wetlands.  In re Hood, No. 2017E000755 (USDA NAD, Jun. 14, 2018).  The landowner participated in the NRCS Environmental Quality Incentives Program (EQIP) for almost a decade.  The contract covered most of his 31-acre tract.  In 2006, the NRCS determined that the landowner had converted 18.74 acres of wetland on the tract to cropland.  The NRCS issued a certified wetland determination to that effect, but neither the landowner nor the NRCS took any other action at that time.

In 2016, the NRCS again reviewed the property for compliance with the wetland provisions.  They conducted a site visit and again concluded that the landowner had converted 18.76 acres of wetland to cropland after November 28, 1990, by sheering stumps (the tract had formerly been used as a tree farm) and planting crops on former wetland.  An appeal to the Farm Service Agency (FSA) County Committee which upheld the NRCS final technical determination and held the landowner ineligible for USDA farm program benefits.  The landowner appealed the FSA decision to the NAD asserting that the FSA decision was wrong because the underlying 2006 NRCS wetland determination was inaccurate and “incompetent.”  Specifically, the landowner claimed that the NRCS did not follow its soil map, and didn’t properly identify the actual soil on his tract.  The landowner also claimed that the NRCS did not properly follow the “50/20” rule (a method to select dominant aspects for wetland evaluation.  The landowner claimed that the FSA’s decision resulted from the erroneous 2006 wetland determination, and that current and former USDA personnel had advised him that his wetland was farmable because it lacked the characteristics for wetland and contained upland and non-wetland plants.  The landowner also claimed that the tract was drained by the federal government in the 1930s via the installation of three ditches which lowered the water table, changed the land’s hydrology and made the tract dry.  The landowner also claimed that the allegedly converted wetlands were atypical and the NRCS should have reevaluated them as such. 

The landowner also asserted that the NRCS engaged in misconduct by targeting him by taking over 120 soil samples in search of a wetland as part of an ongoing feud that the NRCS had with him as a part-time FSA employee. 

The USDA NAD Secretary determined that the FSA determination was erroneous.  The landowner had sufficiently demonstrated that a natural event of water receding altered the hydrology of the land.  This hydrological change, the NAD Secretary reasoned, established that the wetland determinations were no longer reliable indicators of site conditions on the land.  The NAD Secretary specifically found that the United States Geological Survey (USGS) maps showed no wetlands or swampland related to the cleared part of the land or on any of the land not adjacent to the stream lying on the north/northwest of the property line.  Indeed, the NRCS national cooperative soil survey maps, the NAD Secretary noted, showed that the land was comprised of non-hydric sandy loam soils. 

The NAD Secretary did not have the authority to review the landowner’s claim that the FSA and/or NRCS committed misconduct.  However, the NAD Secretary noted that the landowner could file a complaint with the USDA’s Office of Inspector General.  The NAD Secretary noted that the FSA could seek NAD Director Review by filing a request within 30 days of the Secretary’s decision.

Attorney Fees

When the government’s position is not substantially justified, attorney fees and other expenses can be awarded.  In the Iowa case referred to above, the plaintiff’s lawyer did, indeed, make an application for $57,768.59 in fees and $683.00 in costs, $3,414.17 in expenses, and $13,380.43 in other fees and costs.  Those fees, costs and expenses were the result of work performed on the case that the USDA chose to drag out for over eight years.  The Equal Access to Justice Act (EAJA) allows for an award of attorney fees in cases where the plaintiff prevails against the U.S. Government and satisfies three requirements – (1) a final judgment has been rendered; (2) the plaintiff prevailed; and (3) the government’s position was not substantially justified.  The USDA denied the plaintiff’s request for fees, claiming instead that their position was substantially justified, that special circumstances made an award of fees unjust, and that the plaintiff’s lawyer put excessive hours in on the case at too high an hourly rate and didn’t have any particular expertise in wetland matters.

The court noted that fees and other expenses are to be awarded under the EAJA unless the government’s position was substantially justified or special circumstances would make awarding fees and costs unjust.  To be substantially justified, the government’s position must only have a reasonable basis in law and fact.  That’s a rather low threshold.  Basically, if the government can come up with any reasonable interpretation of statutory law, they win and no award of fees and costs will be required.  In addition, even if the government loses in court, that doesn’t create a presumption that the government’s position was not substantially justified.  But, the government still has the burden of proof to establish that its position was substantially justified. 

The court held that the government had absolutely no reasonable basis for its “conflation of the separate “hydrophytic vegetation” and “wetland hydrology” requirements for a “wetland,” and improperly placing the burden on B&D to demonstrate why wetlands were not present based on criteria not identified in the statute or regulations.”   The court also noted that USDA disregarded “saturation” evidence, disregarded evidence that wetland hydrology had already been removed because of pre-existing drainage and the adjacent road and the ditch.  The court, in a particularly pointed comment, stated:

“At each stage of the proceedings, the government sought to uphold its prior “wetlands” determination, without regard to any evidence or law to the contrary, suggesting an entrenched bureaucracy’s refusal to admit error, not an interest in proper application of the law.”

The court also held that no special circumstances existed to deny an award of fees and costs.  As for the government’s claim that the plaintiff’s attorney billed too many hours at too high an hourly rate, the court noted that the statutory rate specified $125/hour as a maximum rate unless the attorney had particular expertise.  The plaintiff’s attorney had billed some work on the case at $175/hour and other work at $185/hour.  The attorney justified the fee rate based on an inflation adjustment to the statutory rate and the attorney’s specialized skill in wetland matters.  The court agreed on both points.  USDA complained that the plaintiff’s lawyer didn’t need to put time in on a brief for injunctive relief because USDA had promised that it wasn’t necessary because they would continue to pay federal farm program benefits.  The court wouldn’t bite, stating “the court…cannot…say…that the government’s assurances were so unequivocal or binding on the government that no preliminary injunction was warranted, particularly in light of the credible threat of bankruptcy for the plaintiff posed by any enforcement action by the government during the pendency of this action.” 

Conclusion

In the Iowa case, the USDA basically harassed the plaintiff with bogus wetland violation claims for many years which placed the plaintiff within the potential peril of bankruptcy.  In addition, the USDA continued to maintain its bogus claims in an attempt to avoid paying the plaintiff’s attorney fees.  In the Virginia matter, the USDA/NRCS was conducting itself similarly and the NAD Secretary would have none of it. 

The government’s conduct in both of these matters is something that the U.S. Court of Appeals for the Eighth Circuit was concerned with in Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir 1999).  In that case, the court stated, in rejecting the USDA’s interpretation of the statute governing wetland drainage activities, that “…there is no worse statute than one misunderstood by those who interpret it.” 

The USDA is now under new leadership, but lower level field staff remain from prior Administrations.  Perhaps the requirement to pay attorney fees and costs for unreasonable positions will cause them to take more care to follow their own regulations when delineating wetlands. 

June 18, 2018 in Environmental Law | Permalink | Comments (0)

Monday, April 9, 2018

Non-Tax Ag Provisions in the Omnibus Bill

Overview

In late March, the Congress passed, and the President signed, the Consolidated Appropriations Act of 2018, H.R. 1625.  This 2,232-page Omnibus spending bill, which establishes $1.3 trillion of government spending for fiscal year 2018, contains several ag-related provisions.  I looked at one of those a couple of weeks ago – the modification to I.R.C. §199A that was included in the Tax Cuts and Jobs Act (TCJA) enacted last December and which became effective for tax years after 2017.  I.R.C. §199A, known as the qualified business income (QBI) deduction, created a 20 percent deduction for sole proprietorships and pass-through businesses.  However, the provision created a tax advantage for sellers of agricultural products sold to agricultural cooperatives.  Before the modification, those sales generated a tax deduction from gross sales for the seller.  But if those same ag goods were sold to a company that was not an agricultural cooperative, the deduction could only be taken from net business income.  That tax advantage for sales to cooperatives was deemed to be a drafting error and was modified by a provision that provides greater equity between sales to agricultural cooperatives and non-cooperatives. 

The modification to I.R.C. §199A received a lot of attention.  However, there were a couple of other provisions in the Omnibus bill that are also ag-related.  Today’s blog post examines those other two provisions. 

Animal Waste Air Reporting Exemption For Farms

Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule. Various environmental groups challenged the exemption on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the retained reporting requirement for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but did determine that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, No. 09-1017, 2017 U.S. App. LEXIS 6174 (D.C. Cir. Apr. 11, 2017).

The court’s order potentially subjected almost 50,000 farms to the additional reporting requirement. As such, the court delayed enforcement of its ruling by issuing multiple stays, giving the EPA additional time to write a new rule. The EPA issued interim guidance on October 25, 2017. The court issued its most recent stay in the matter on February 1, 2018, with the expiration scheduled for May 1. However, Division S, Title XI, Section 1102 of the Omnibus bill, entitled the Fair Agricultural Reporting Method Act (FARM Act), modifies 42 U.S.C. §9603 to include the EPA exemption for farms that have animal waste air releases. Specifically, 42 U.S.C. §9603(e) is modified to specify that “air emissions from animal waste (including decomposing animal waste) at a farm” are exempt from the CERCLA Sec. 103 notice and reporting requirements. “Animal waste” is defined to mean “feces, urine, or other excrement, digestive emission, urea, or similar substances emitted by animals (including any form of livestock, poultry, or fish). The term animal waste “includes animal waste that is mixed or commingled with bedding, compost, feed, soil or any other material typically found with such waste.” A “farm” is defined as a site or area (including associated structures) that is used for “the production of a crop; or the raising or selling of animals (including any form of livestock, poultry or fish); and under normal conditions, produces during a farm year any agricultural products with a total value equal to not less than $1,000.”

ELD Rule Involving Agricultural Commodities Defunded

The Omnibus bill also addresses an Obama-era regulation involving truckers that is of particular importance to the livestock industry.  On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule was issued in late 2015. The new rule would require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18, 2017. The devices connect to the vehicle's engine and automatically record driving hours. There are numerous exceptions to the ELD final rule.

While the mandate was set to go into effect December 18, 2017, the Federal Motor Carrier Safety Administration (FMCSA) granted a 90-day waiver for all vehicles carrying agricultural commodities. That 90-day delay was later extended. Other general exceptions to the final rule exist for vehicles built before 2000; vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)); drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)); and drivers who maintain HOS logs for no more than eight days during any 30-day period.

Under the Omnibus legislation, the ELD rule was defunded through the end of the government's current fiscal year - September 30, 2018. Under Division L, Title I, Section 132, specifies that, “None of the funds appropriated or otherwise made available to the Department of Transportation by this Act or any other Act may be obligated or expended to implement, administer, or enforce the requirements of 5 section 31137 of title 49, United States Code, or any regulation issued by the Secretary pursuant to such section, with respect to the use of electronic logging devices by operators of commercial motor vehicles, as defined in section 31132(1) of such title, transporting livestock as defined in section 602 of the Emergency Livestock Feed Assistance Act of 1988 (7 U.S.C. 1471) or insects.” 

Conclusion

The Omnibus bill is a conglomeration of many provisions, most of which don’t have a direct impact on agricultural producers or agribusinesses.  However, there were a few provisions included of importance to agriculture.  While very few people, if any, have read and understand all of the provisions in the 2,232-page bill, it is important for those in the agricultural industry to have an understanding of the provisions that apply to them.

April 9, 2018 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Tuesday, March 6, 2018

Is a CWA Permit Needed For Pollution Discharges Via Groundwater?

Overview

Under the Clean Water Act (CWA), a National Pollution Discharge Elimination System (NPDES) permit is required to discharge a “pollutant” from a point source into the “navigable waters of the United States” (WOTUS).  Clearly, a discharge directly into a WOTUS is covered.  But, is an NPDES permit necessary if the discharge is directly into groundwater which then finds its way to a WOTUS?  Are indirect discharges from groundwater into a WOTUS covered?   If so, does that mean that farmland drainage tile is subject to the CWA and an NPDES discharge permit is required?  The federal government has never formally taken that position, but if that’s the case it’s a huge issue for Midwest and other areas of agriculture. 

Recently, a federal court determined that some discharges into groundwater require an NPDES permit. But, other courts have ruled differently.  Now the Environmental Protection Agency (EPA) has opened a comment period on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater should be subject to CWA regulation.

Possible NPDES discharge permits for groundwater discharges – that’s the focus of today’s post.

CWA Discharge Permit Basics

The CWA recognizes two sources of pollution. Point source pollution is pollution which comes from a clearly discernable discharge point, such as a pipe, a ditch, or a concentrated animal feeding operation.  Under the CWA, point source pollution is the concern of the federal government.  Nonpoint source pollution, while not specifically defined under the CWA, is pollution that comes from a diffused point of discharge, such as fertilizer runoff from an open field.  Control of nonpoint source pollution is to be handled by the states through enforcement of state water quality standards and area-wide waste management plans.

Under 1977 amendments, tile drainage systems were exempted from CWA regulation via irrigation return flows.  See, e.g., Pacific Coast Federation of Fishermen’s Associations, et al. v. Glaser, et al., No. CIV S-2:11-2980-KJM-CKD, 2013 U.S. Dist. LEXIS 132240 (E.D. Cal. Sept. 16, 2013).  They aren’t considered to be point sources.  In addition, several courts have held that the NPDES system only applies to discharges of pollutants into surface water.  These courts have held that discharges of pollutants into groundwater are not subject to the NPDES permit requirement even if the groundwater is hydrologically connected to surface water.  See, e.g., Umatilla Water Quality Protective Association v. Smith Frozen Foods, 962 F. Supp. 1312 (D. Ore. 1997); United States v. ConAgra, Inc., No. CV 96-0134-S-LMB, 1997 U.S. Dist. LEXIS 21401 (D. Idaho Dec. 31, 1997).  Likewise, in another case, the court determined that neither the CWA nor the EPA covered groundwater solely on the basis of a hydrological connection with surface water.  Village of Oconomowoc Lake v. Dayton Hudson Corporation, 24 F.3d 962 (7th Cir. 1994), cert. denied, 513 U.S. 930 (1994).  See also Rice v. Harken Exploration Co., 250 F.3d 264 (5th Cir. 2001); Cape Fear River Watch v. Duke Energy Progress, Inc., 25 F. Supp. 3d 798 (E.D. N.C. 2014).

But, other courts have taken a different view, finding that the CWA covers pollution discharges irrespective of whether the discharge is directly into a WOTUS or indirectly via groundwater with some sort of hydrological connection to a WOTUS.   See, e.g., Idaho Rural Council v. Bosma, 143 F. Supp. 2d 1169 (D. Idaho 2001); Northern California River Watch v. Mercer Fraser Co., No. 04-4620 SC, 2005 U.S. Dist. LEXIS 42997 (N.D. Cal. Sept. 1, 2005); United States v. Banks, 115 F.3d 916 (11th Cir. 1997), cert. denied, 522 U.S. 1075 (1998); Mutual Life Insurance Co. of New York v. Mobil Corp., No. 96-CV-1781 (RSP/DNH), 1998 U.S. Dist. LEXIS 4513 (N.D. N.Y. Mar. 31, 1998).

Recent Case

The issue came up again in a recent case.  In Hawai’i Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF), which is the principal municipal wastewater treatment plant for a city. Although constructed initially to serve as a backup disposal method for water reclamation, the wells ultimately became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean. The LWRF received approximately four million gallons of sewage per day from a collection system serving approximately 40,000 people. That sewage was treated at LWRF and then either sold to customers for irrigation purposes or injected into the wells for disposal.

The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells. The defendant conceded, and its expert, confirmed that wastewater injected into wells 1 and 2 enters the Pacific Ocean. In addition, in June 2013 the EPA, the Hawaii Department of Health, the U.S. Army Engineer Research and Development Center, and researchers from the University of Hawaii conducted a study on wells 2, 3 and 4. The study involved placing tracer dye into Wells 2, 3, and 4, and monitoring the submarine seeps off Kahekili Beach to see if and when the dye would appear in the Pacific Ocean. This study, known as the Tracer Dye Study, found that 64 percent of the treated wastewater from wells 3 and 4 discharged into the ocean.  The plaintiff sued, claiming that the defendant was in violation of the Clean Water Act (CWA) by discharging pollutants into navigable waters of the United States without a CWA National Pollution Discharge Elimination System (NPDES) permit.  The trial court agreed, holding that an NPDES permit was required for effluent discharges into navigable waters via groundwater. 

On appeal, the appellate court held that the wells were point sources that could be regulated through CWA permits despite the defendant’s claim that an NPDES permit was not required because the wells discharged only indirectly into the Pacific Ocean via groundwater.  Specifically, the appellate court held that “a point source discharge to groundwater of “more than [a] de minimis” amount of pollutants that is “fairly traceable from the point source . . . such that the discharge is the functional equivalent of a discharge into a navigable water” is regulated under the CWA.”  The appellate court reached this conclusion by citing cases from other jurisdictions that determined that an indirect discharge from a point source into a navigable water requires an NPDES discharge permit.  The defendant also claimed its effluent injections are not discharges into navigable waters, but rather were disposals of pollutants into wells, and that the CWA categorically excludes well disposals from the permitting requirements. However, the court held that the CWA does not categorically exempt all well disposals from the NPDES requirements because doing so would undermine the integrity of the CWA’s provisions. Lastly, the plaintiff claimed that it did not have fair notice because the state agency tasked with administering the NPDES permit program maintained that an NPDES permit was unnecessary for the wells. However, the court held that the agency was actually still in the process of determining if an NPDES permit was applicable. Thus, the court found the lack of solidification of the agency’s position on the issue did not affirmatively demonstrate that it believed the permit was unnecessary as the defendant claimed.  Furthermore, the court held that a reasonable person would have understood the CWA as prohibiting the discharges, thus the defendant’s due process rights were not violated. 

Pending Court Cases and EPA Action

The Ninth Circuit’s decision further illustrates the different conclusions that the courts have reached on the matter.  In addition, at the present time, the U.S. Circuit Court of Appeals for both the Second and Fourth circuits have cases before them on the issue of whether the CWA applies to indirect discharges of pollutants into a WOTUS from subsurface discharges.  This all could lead to an eventual case before the U.S. Supreme Court on the matter.

On February 20, 2018, the EPA issued a Request for Comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, EPA seeks comment on whether EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA.   As noted above, the EPA has never stated that CWA permits are required for pollutant discharges to groundwater in all cases. Rather, EPA’s position has been that pollutants discharged from point sources that reach jurisdictional surface waters via groundwater or other subsurface flow that has a direct hydrologic connection to the jurisdictional water may be subject to CWA permitting requirements.

As part of its request, EPA seeks comment by May 21, 2018, on whether it should review and potentially revise its previous positions.  In particular, the EPA is seeking comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater.  The EPA also seeks comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.  Comments can be submitted by identifying them as Docket ID No. EPA-HQ-QW-2018-0063 at http://www.regulations.gov.  Follow the online instructions for submitting comments. 

Conclusion

Whether an NPDES discharge permit is required for pollution discharges that only indirectly find their way to a WOTUS via groundwater is an important issue for agriculture.  It’s a particularly big issue in the Midwest where many farm fields are drained to make crop production possible.  The purpose of drain tile is to control groundwater levels by relocating groundwater to surface water. Nitrates in excess of drinking water standards are prevalent in many parts of the Midwest. 

Interested farmers, ranchers and rural landowners should give serious consideration to submitting comments on or before May 21.    

March 6, 2018 in Environmental Law | Permalink | Comments (0)

Friday, January 5, 2018

Top Ten Agricultural Law and Tax Developments of 2017 (Five Through One)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2017.  On Monday, I discussed those developments that were important but just not quite significant enough based on their national significance to make the top ten.  On Wednesday I addressed developments 10 through 6.  Today I discuss the top five developments of 2017 – the really big ones.  These are the developments that I deem to be of the highest importance on a national scale to agricultural producers, agribusiness and rural landowners in general. 

Today’s blog post – the top five developments in agricultural law and taxation in 2017.

  • 5 – Federal Implied Reserved Water Rights Doctrine Applies to Groundwater. Water issues are big in the West, and the Federal Government owns about 28 percent of the land area of the United States, with approximately 50 percent of that amount concentrated in 11 Western states (excluding Alaska).  Across the West, most water rights are granted under and governed by state law. Federal law touching on water rights has generally deferred to state law for over 140 years, and the federal government waives its sovereign immunity from state court proceedings involving water rights.  However, the U.S. Supreme Court has long recognized that Native American tribes can be entitled to water rights under federal law, rights that supersede many of these state rights. These federal implied rights are based upon the belief that the United States, when establishing Indian reservations, “intended to deal fairly with the Indians by reserving for them the waters without which their lands would have been useless.”  But, the federal government’s water rights are not limited to its trustee capacity for Native American Tribes, but also apply to national monuments, national forests, and other public lands.  In 2017, the U.S. Court of Appeals for the Ninth Circuit became the first federal appellate case to reach a decision on this issue, and its reasoning follows multiple state court decisions across the West.  The court first held that the United States clearly intended to reserve water under federal law when it created the Tribe’s reservation. The court noted that the underlying purpose of the reservation was to establish a tribal homeland supporting an agrarian society.  That purpose would be entirely defeated, the court reasoned, without sufficient water supplies held under federal law. Thus, the Tribe was entitled to a reserved water right for the Agua Caliente Reservation.  Next, the Ninth Circuit held that the Tribe’s reserved water right extended to groundwater. It was necessary for the Tribe to access groundwater in the Coachella Valley Basin because surface supplies were clearly inadequate—a reservation without an adequate supply of surface water must be able to access groundwater as well. Thus, the court held that the reservation and establishment of the Agua Caliente Reservation carried with it an implied federal reserved right to use water from the aquifer.  The court also determined that the Tribe’s implied reserved water rights pre-empted state water rights, and the Tribe’s lack of groundwater pumping did not defeat those rights, because they are immune from abandonment.  The court also determined that the proper inquiry was whether water was envisioned as necessary for the reservation’s purpose at the time the reservation was created. Thus, the Ninth Circuit held, the issue of the Tribe’s state law-based water rights did not affect the existence of its federal implied reserved water right.  That right, the court held, always applies as a matter of federal pre-emption, regardless of how a state allocates groundwater rights.  The court’s opinion is significant because groundwater has become the dominant supply of water across the West.  The decision also has important implications for California, the number one agricultural state in the nation (in terms of cash receipts), which enacted the Sustainable Groundwater Management Act (SGMA) in 2014.  Because the Ninth Circuit’s decision establishes strong (and largely non-negotiable) rights for tribes within California’s groundwater basins, it complicates the formidable task of achieving sustainable groundwater management.  Across the West, the other implications of the decision likely depend upon what remains of basin-wide adjudications of water rights.

                Note:  On November 27, 2017, the U.S. Supreme Court denied certiorari in the first phase of the case, allowing the Ninth Circuit’s holding to stand.  Coachella Valley Water                 District v. Agua Caliente Band of Cahuilla Indians, No. 17-40, Vide No. 17-42, 2017 U.S. LEXIS 7044 (U.S. Sup. Ct. Nov. 27, 2017).

  • 4 - EPA Rule Exempting Farms From Air Release Reporting Vacated.Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting large (commercial) farms (those that emit more than 100 pounds total of hydrogen sulfide or ammonia daily) from the CERCLA reporting/notification requirement for air releases from animal waste (by issuing an annual report of “continuous releases”) on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule.  Indeed, in early 2009, EPA, pursuant to the EPCRA, issued a final regulation regarding the reporting of emissions from confined AFO’s – termed a “CAFO.”  The rule applies to facilities that confine more than 1,000 beef cattle, 700 mature dairy cows, 1,000 veal calves, 2,500 swine (each weighing 55 pounds or more), 10,000 swine (each weighing less than 55 pounds), 500 horses and 10,000 sheep.  The rule requires these facilities to report ammonia and hydrogen sulfide emissions to state and local emergency response officials if the facility emits 100 pounds or more of either substance during a 24-hour period. Various environmental activist groups challenged the exemption in the final regulation on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the carve-out for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but noted that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve-out was mooted and dismissed.  Later, the court, granted a motion filed by the EPA and ag groups to delay the removal of the exemption until November 14, 2017.  The EPA’s interim guidance on the new reporting requirements was issued on October 26, 2017, but the EPA again motioned for an extension of time to fully implement the regulations.  The court granted the motion on November 22, 2017, staying the implementation of the new reporting regulations until January 22, 2018. The reporting requirement will have direct application to larger livestock operations with air emissions that house beef cattle, dairy cattle, horses, hogs and poultry.   It is estimated that approximately 60,000 to 100,000 livestock and poultry operations will be subject to the reporting requirement.  The reporting level would be reached by a facility with approximately 330-head (for a confinement facility) according to a calculator used by the University of Nebraska-Lincoln which is based on emissions produced by the commingling of solid manure and urine.  The underlying action is Waterkeeper Alliance, et al. v. Environmental Protection Agency, 853 F.3d 527 (D.C. Cir. 2017).
  • 3 – Clean Water Act “WOTUS” Developments. In 2015, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) finalized a regulation (known as the “Clean Water Rule”) concerning “waters of the United States” (WOTUS) which expanded the parameters of waters (streams, rivers, ponds, ditches, puddles and other water bodies) that are subject to federal jurisdiction and regulation.  The final regulation became effective in the late summer of 2015, but a federal court stayed its implementation later that year in October. In early 2016, the U.S. Court of Appeals for the Sixth Circuit held that federal law placed jurisdiction with the federal appellate courts rather than the federal district courts concerning any challenges to the WOTUS rule.  In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision.  National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017).  About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006).  The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication.        

In addition, there were several important WOTUS cases decided/finalized in 2017:

  • COE jurisdictional determination is final agency action; no WOTUS present. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On further review, the U.S. Supreme Court unanimously reversed, holding that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct.  Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, the court held that it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, No. 15-290, 136 S. Ct. 1807 (2016).  On remand, the trial court granted summary judgment for the plaintiff on the grounds that the plaintiff’s property did not constitute “waters of the United States” that the defendant had jurisdiction over. The court determined that the government did not establish a “significant nexus” under the Rapanos standard between the plaintiff’s property and the Red River 93 miles away that the defendant claimed were connected via ditches and seasonal tributaries. The court also determined that the Jurisdictional Determination was not based on the “significant nexus” standard of Rapanos and was arbitrary and capricious. The court entered an injunction that ordered the defendant to not assert jurisdiction over the plaintiff’s property. In doing so, the court determined that the defendant had an adequate chance to develop a record which negated a remand back to the defendant to address the evidentiary inadequacies. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-107 ADM/TNL, 2017 U.S. Dist. LEXIS 10680 (D. Min. Jan. 24, 2017).
  • Prior Converted Cropland Exception to CWA Jurisdiction Inapplicable.The plaintiff, a developer, obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995. The defendant claimed federal jurisdiction over water on a portion of the property on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S. After exhausting administrative appeals, the court upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river. The court also determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned. The court noted that the defendant and the EPA had jointly adopted a rule in 1993 adopting the NRCS exemption for prior converted cropland. The court also that prior caselaw had held that the CWA’s exemption of “prior converted croplands” included the abandonment provision, and that it would apply the same rationale in this case. The court noted that the specific 13-acre parcel at issue in the case had not been farmed since 1996, and that conversion to a non-ag use did not remove the abandonment provision. The plaintiff also claimed that the wetlands at issue were “artificial” wetlands (created by adjacent development) under 7 C.F.R. §12.2(a) that were not subject to the defendant’s jurisdiction. However, the court noted that the defendant never adopted the “artificial wetland” exemption of the NRCS and, therefore, such a classification was inapplicable. The court granted the defendant’s cross motion for summary judgment. Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017).
  • Conviction Upheld for Clean Water Act Violations.The defendant, a disabled Vietnam Navy veteran, was charged with multiple counts of criminal violations of the (CWA) by virtue of the unauthorized knowing discharge of “pollutants” into the “waters of the United States” (WOTUS) (in violation of 33 U.S.C. §1251-1388) and depredation of U.S. property (18 U.S.C. §1361). The defendant was indicted for building illegal ponds (nine in total) in an existing stream on two parcels - one federal and one private (which the defendant did not own). The defendant did the work due to multiple fires in the area that had recently occurred and to create stock water ponds for his animals. The government claimed that the ponds resulted in the discharge of dredged and fill material into a tributary stream and adjacent wetlands and damaged both properties, even though there was no tributary from the ponds. Dredged material from the ponds had been used to create the berms and had been placed in and around the streams and wetlands. The trial court determined that the stream at issue was a WOTUS on the basis that the stream headwater and wetland complex provided critical support to trout in downstream rivers and fisheries, including the Boulder and Jefferson Rivers (60 miles away) – navigable waters of the U.S. The trial court jury, after a second trial and the introduction by the government of evidence that it allegedly manufactured, found the defendant guilty of two counts of illegal discharge of pollutants into WOTUS without a federal permit and one count of injury or depredation of U.S. property. On appeal, the appellate court affirmed. The appellate court held that U.S. Supreme Court Justice Kennedy’s opinion in Rapanos v. United States, 547 U.S. 715 (2006) was controlling and that the trial court jury instructions based on Justice Kennedy’s “significant nexus test contained in his opinion in Rapanos were proper. The appellate court also held that the definition of WOTUS was not too vague to be enforced. Thus, there was no due process violation. The defendant had fair warning that his conduct was criminal.  United States v. Robertson, 875 F.3d 1281 (9th Cir. 2017).
  • 2 – Rental and Employment Agreements Appropriately Structured; No Self-Employment Tax on Rental Income.The petitioners, a married couple, operated a farm in Texas. In late 1999, they built the first of eight poultry houses to raise broilers under a production contract with a large poultry integrator. The petitioners formed an S corporation in 2004, and set up oral employment agreements with the S corporation based on an appraisal for the farm which guided them as to the cost of their labor and management services. They also pegged their salaries at levels consistent with other growers. The wife provided bookkeeping services and the husband provided labor and management. In 2005, they assigned the balance of their contract to the S corporation. Thus, the corporation became the "grower" under the contract. In 2005, the petitioners entered into a lease agreement with the S corporation. Under the agreement, the petitioners rented their farm to the S corporation, under which the S corporation would pay rent of $1.3 million to the petitioners over a five-year period. The court noted that the rent amount was consistent with other growers under contract with the integrator. The petitioners reported rental income of $259,000 and $271,000 for 2008 and 2009 respectively, and the IRS determined that the amounts were subject to self-employment tax because the petitioners were engaged in an "arrangement" that required their material participation in the production of agricultural commodities on their farm. The Tax Court, in an opinion by Judge Paris, noted that the IRS agreed that the facts of the case were on all fours with McNamara v. Comr., T.C. Memo. 1999-333 where the Tax Court determined that the rental arrangement and the wife's employment were to be combined, which meant that the rental income was subject to self-employment tax. However, the Tax Court's decision in that case was reversed by the Eighth Circuit on appeal. McNamara v. Comr., 236 F.3d 410 (8th Cir. 2000).  Judge Paris, in the current case, determined that the Eighth Circuit's rationale in McNamara was persuasive and that the "derived under an arrangement" language in I.R.C. §1402(a)(1) meant that a nexus had to be present between the rents the petitioners received and the "arrangement" that required their material participation. In other words, there must be a tie between the real property lease agreement and the employment agreement. The court noted the petitioners received rent payments that were consistent with the integrator's other growers for the use of similar premises. That fact was sufficient to establish that the rental agreement stood on its own as an appropriate measure as a return on the petitioners' investment in their facilities. Similarly, the employment agreement was appropriately structured as a part of the petitioners' conduct of a legitimate business. Importantly, the court noted that the IRS failed to brief the nexus issue, relying solely on its non-acquiescence to McNamara (A.O.D. 2003-003, I.R.B. 2003-42 (Oct. 22, 2003)) and relying on the court to broadly interpret "arrangement" to include all contracts related to the S corporation. The Tax Court refused to do so and, accordingly, the court held that the petitioner's rental income was not subject to self-employment tax. Martin v. Comr., 149 T.C. No. 12 (2017).
  • No 1 – The Tax Bill ("To provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018"). The most significant development of 2017 with the widest impact on agricultural producers, agribusinesses and rural landowners is unquestionably the tax bill enacted into law on December 22, 2017.  The new law establishes new tax brackets, essentially doubles the standard deduction, eliminates many itemized deductions, modifies many cost-recovery provisions and changes the corporate tax rate to a flat rate of 21 percent.  The legislation also creates a new 20 percent deduction for qualified business income from a pass-through entity.  Prior law was also modified concerning cash accounting, the tax rate applicable to commodity gifts made to a non-charitable donee above certain levels of unearned income, the rules surrounding net operating losses, interest deductibility, elimination of the corporate alternative minimum tax (AMT) and modification of the individual AMT, the child tax credit and various international tax provisions.  The new law will create many planning questions and opportunities with the structure of perhaps many farm operations being modified to take advantage of the new provisions. 

Conclusion

2017 was another active year on the agricultural law and taxation front.  It was also the first year in many years where some rather significant federal regulations as applies to agriculture were either rolled back or eliminated.  2018 will be another very busy year.  That is certainly to be the case especially on the tax side of things. 

January 5, 2018 in Environmental Law, Income Tax, Water Law | Permalink | Comments (0)

Monday, January 1, 2018

The “Almost Top Ten” Agricultural Law and Tax Developments of 2017

Overview

This week I will be writing about what I view as the most significant developments in agricultural law and agricultural taxation during 2017. There were many important happenings in the courts, the IRS and with administrative agencies that have an impact on farm and ranch operations, rural landowners and agribusinesses. What I am writing about this week are those developments that will have the biggest impact nationally. Certainly, there were significant state developments, but they typically will not have the national impact of those that result from federal courts, the IRS and federal agencies.

It's tough to get it down to the ten biggest developments of the year, and I do spend considerable time sorting through the cases and rulings get to the final cut. Today’s post examines those developments that I felt were close to the top ten, but didn’t quite make the list. Later this week we will look at those that I feel were worthy of the top ten. Again, the measuring stick is the impact that the development has on the U.S. ag sector as a whole.

Almost, But Not Quite

Those developments that were the last ones on the chopping block before the final “top ten” are always the most difficult to determine. But, as I see it, here they are (in no particular order):

  • Withdrawal of Proposed I.R.C. §2704 Regulations. In the fall of 2016, the Treasury Department issued proposed regulations (REG-16113-02) involving valuation issues under I.R.C. §2704. The proposed regulations would have established serious limitations on the ability to establish valuation discounts (e.g., minority interest and lack of marketability) for estate, gift and generation-skipping transfer tax purposes via estate and business planning techniques. In early December of 2016, a public hearing was held concerning the proposed regulations.  However, the proposed regulations were not finalized before President Trump took office. In early October of 2017, the Treasury Department announced that it was pulling several tax regulations identified as burdensome under President Trump’s Executive Order 13789, including the proposed I.R.C. §2704 regulations. Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (Oct. 4, 2017).

    Note: While it is possible that the regulations could be reintroduced in the future with revisions, it is not likely that the present version will ultimately be finalized under the current Administration.

  • IRS Says There Is No Exception From Filing a Partnership Return. The IRS Chief Counsel’s Office, in response to a question raised by an IRS Senior Technician Reviewer, has stated that Rev. Prov. 84-35, 1984-2 C.B. 488, does not provide an automatic exemption from the requirement to file Form 1065 (U.S. Return of Partnership Income) for partnerships with 10 or fewer partners. Instead, the IRS noted that such partnerships can be deemed to meet a reasonable cause test and are not liable for the I.R.C. §6698 penalty. IRS explained that I.R.C. §6031 requires partnerships to file Form 1065 each tax year and that failing to file is subject to penalties under I.R.C. §6698 unless the failure to file if due to reasonable cause. Neither I.R.C. §6031 nor I.R.C. §6698 contain an automatic exception to the general filing requirement of I.R.C. §6031(a) for a partnership as defined in I.R.C. §761(a). IRS noted that it cannot determine whether a partnership meets the reasonable cause criteria or qualifies for relief under Rev. Proc. 84-35 unless the partnership files Form 1065 or some other document. Reasonable cause under Rev. Proc. 84-35 is determined on a case-by-case basis and I.R.M. Section 20.1.2.3.3.1 sets forth the procedures for applying the guidance of Rev. Proc. 84-35. C.C.A. 201733013 (Jul. 12, 2017); see also Roger A. McEowen, The Small Partnership 'Exception,' Tax Notes, April 17, 2017, pp. 357-361.

  • “Qualified Farmer” Definition Not Satisfied; 100 Percent Deductibility of Conservation Easement Not Allowed. A “qualified farmer” can receive a 100 percent deduction for the contribution of a permanent easement to a qualified organization in accordance with I.R.C. §170(b)(1)(E). However, to be a “qualified farmer,” the taxpayer must have gross income from the trade or business of farming that exceeds 50 percent of total gross income for the tax year. In a 2017, the U.S. Tax Court decided a case where the petitioners claimed that the proceeds from the sale of the property and the proceeds from the sale of the development rights constituted income from the trade or business of farming that got them over the 50 percent threshold.  The IRS disagreed, and limited the charitable deduction to 50 percent of each petitioner’s contribution base with respect to the conservation easement. The court agreed with the IRS. The court noted that the income from the sale of the conservation easement and the sale of the land did not meet the definition of income from farming as set forth in I.R.C. §2032A(e)(5) by virtue of I.R.C. §170(b)(1)(E)(v). The court noted that the statute was clear and that neither income from the sale of land nor income from the sale of development rights was included in the list of income from farming. While the court pointed out that there was no question that the petitioners were farmers and continued to be after the conveyance of the easement, they were not “qualified farmers” for purposes of I.R.C. §170(b)(1)(E)(iv)(I). Rutkoske v. Comr., 149 T.C. No. 6 (2017).

  • Corporate-Provided Meals In Leased Facility Fully Deductible. While the facts of the case have nothing to do with agriculture, the issues involved are the same ones that the IRS has been aggressively auditing with respect to farming and ranching operations – namely, that the 100 percent deduction for meals provided to corporate employees for the employer’s convenience cannot be achieved if the premises where the meals are provided is not corporate-owned. In a case involving an NHL hockey team, the corporate owner contracted with visiting city hotels where the players stayed while on road trips to provide the players and team personnel pre-game meals. The petitioner deducted the full cost of the meals, and the IRS limited the deduction in accordance with the 50 percent limitation of I.R.C. §274(n)(1). The court noted that the 50 percent limitation is inapplicable if the meals qualify as a de minimis fringe benefit and are provided in a nondiscriminatory manner. The court determined that the nondiscriminatory requirement was satisfied because all of the staff that traveled with the team were entitled to use the meal rooms. The court also determined that the de minimis rule was satisfied if the eating facility (meal rooms) was owned or leased by the petitioner, operated by the petitioner, located on or near the petitioner’s business premises, and the meals were furnished during or immediately before or after the workday. In addition, the court determined that the rules can be satisfied via contract with a third party to operate an eating facility for the petitioner’s employees. As for the business purpose requirement, the court noted that the hotels where the team stayed at while traveling for road games constituted a significant portion of the employees’ responsibilities and where the team conducted a significant portion of its business. Thus, the cost of the meals qualified as a fully deductible de minimis fringe benefit. Jacobs v. Comr., 148 T.C. No. 24 (2017).

    Note: The petitioner’s victory in the case was short-lived. The tax bill enacted into law on December 22, 2017, changes the provision allowing 100 percent deductibility of employer-provided meals to 50 percent effective Jan. 1, 2018, through 2025. After 2025, no deduction is allowed.

  • Settlement Reached In EPA Data-Gathering CAFO Case. In 2008, the Government Accounting Office (GAO) issued a report stating that the Environmental Protection Agency (EPA) had inconsistent and inaccurate information about confined animal feeding operations (CAFOs), and recommended that EPA compile a national inventory of CAFO’s with NPDES permits. Also, as a result of a settlement reached with environmental activist groups, the EPA agreed to propose a rule requiring all CAFOs to submit information to the EPA as to whether an operation had an NPDES permit. The information required to be submitted had to provide contact information of the owner, the location of the CAFO production area, and whether a permit had been applied for. Upon objection by industry groups, the proposed rule was withdrawn and EPA decided to collect the information from federal, state and local government sources. Subsequent litigation determined that farm groups had standing to challenge the EPA’s conduct and that the EPA action had made it much easier for activist groups to identify and target particular confined animal feeding operations (CAFOs). On March 27, 2017, the court approved a settlement agreement ending the litigation between the parties. Under the terms of the settlement, only the city, county, zip code and permit status of an operation will be released. EPA is also required to conduct training on FOIA, personal information and the Privacy Act. The underlying case is American Farm Bureau Federation v. United States Environmental Protection Agency, 836 F.3d 963 (8th Cir. 2016).

  • Developments Involving State Trespass Laws Designed to Protect Livestock Facilities.

    • Challenge to North Carolina law dismissed for lack of standing. The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a NC employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act stifled their ability to investigate NC employers for illegal or unethical conduct and restricted the flow of information those investigations provide in violation of the First and Fourteenth Amendments of the U.S. Constitution and various provisions of the NC Constitution.  The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).

    • Utah law deemed unconstitutional. Utah law (Code §76-6-112) (hereinafter Act) criminalizes entering private agricultural livestock facilities under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility.  Anti-livestock activist groups sued on behalf of the citizen-activist claiming that the Act amounted to an unconstitutional restriction on speech in violation of the First Amendment. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist”. For those reasons, the court determined that the act was unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017).

    • Wyoming law struck down. In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" includes numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech under the First Amendment in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection or resource data. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016).

  • GIPSA Interim Final Rule on Marketing of Livestock and Poultry Delayed and Withdrawn.In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) interim final rules that provide the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The interim final rules concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. Under the proposed regulations, "likelihood of competitive injury" is defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It includes, but is not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue. On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017. However, on October 18, 2017, GIPSA officially withdrew the proposed rule. Related to, but not part of, the GIPSA Interim Final Rule, a poultry grower ranking system proposed rule was not formally withdrawn.

  • Syngenta Settlement. In late 2017, Syngenta publicly announced that it was settling farmers’ claims surrounding the alleged early release of Viptera and Duracade genetically modified corn. While there are numerous cases and aspects of the litigation involving Syngenta, the settlement involves what is known as the “MIR 162 Corn Litigation” and a Minnesota state court class action. The public announcement of the settlement indicated that Syngenta would pay $1.5 billion.

  • IRS To Finalize Regulations on the Tax Status of LLC and LLP Members. In its 2017-2018 Priority Guidance Plan, the IRS states that it plans to finalize regulations under I.R.C. §469(h)(2) – the passive loss rules that were initially proposes in 2011. That provision creates a per se rule of non-material participation for limited partner interests in a limited partnership unless the Treasury specifies differently in regulations. Those regulations were initially issued in temporary form and became proposed regulations in 2011. Is the IRS preparing to take a move to finalize regulations taking the position that they the Tax Court refused to sanction? Only time will tell, but the issue is important for LLC and LLP members. The issue boils down to the particular provisions of a state’s LLC statute and whether there are sufficient factors under the state statute that distinguish an LLC from a limited partnership. That will be the case until IRS issues regulations dealing specifically with LLCs and similar entities. The proposed definition would make it easier for LLC members and some limited partners to satisfy the material participation requirements for passive loss purposes, consistent with the court opinions that IRS has recently lost on the issue. Specifically, the proposed regulations require that two conditions have to be satisfied for an individual to be classified as a limited partner under I.R.C. §469(h)(2): (1) the entity must be classified as a partnership for federal income tax purposes; and (2) the holder of the interest must not have management rights at any time during the entity’s tax year under local law and the entity’s governing agreement. Thus, LLC members of member-managed LLCs would be able to use all seven of the material participation tests, as would limited partners that have at least some rights to participate in managerial control or management of a partnership.

  • Fourth Circuit Develops New Test for Joint Employment Under the FLSA. The Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. §§ 201 et seq.) as originally enacted, was intended to raise the wages and shorten the working hours of the nation's workers. The FLSA is very complex, and not all of it is pertinent to agriculture and agricultural processing, but the aspect of it that concerns “joint employment” is of major relevance to agriculture. Most courts that have considered the issue have utilized an “economic realities” or “control” test to determine if one company’s workers are attributable to another employer for purposes of the FLSA. But, in a 2017 case, the U.S. Court of Appeals for the Fourth Circuit, created a new test for joint employment under the FLSA that appears to expand the definition of “joint employment” and may create a split of authority in the Circuit Courts of Appeal on the issue. The court held that the test under the FLSA for joint employment involved two steps. The first step involved a determination as to whether two or more persons or entities share or agree to allocate responsibility for, whether formally or informally, directly or indirectly, the essential terms and conditions of a worker’s employment. The second step involves a determination of whether the combined influence of the parties over the essential terms and conditions of the employment made the worker an employee rather than an independent contractor. If, under this standard, the multiple employers were not completely disassociated, a joint employment situation existed. The court also said that it was immaterial that the subcontractor and general contractor engaged in a traditional business relationship. In other words, the fact that general contractors and subcontractor typically structure their business relationship in this manner didn’t matter. The Salinas court then went on to reason that separate employment exists only where the employers are “acting entirely independent of each other and are completely disassociated with respect to” the employees. The court’s “complete disassociation” test appears that it could result in a greater likelihood that joint employment will result in the FLSA context than would be the case under the “economic realities” or “control” test. While the control issue is part of the “complete disassociation” test, joint determination in hiring or firing, the duration of the relationship between the employers, where the work is performed and responsibility over work functions are key factors that are also to be considered. Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017), rev’g, No. JFM-12-1973, 2014 U.S. Dist. LEXIS 160956 (D. Md. Nov. 17, 2014).

  • Electronic Logs For Truckers. On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect.  80 Fed. Reg. 78292 (Dec.16, 2015).  The final rule, which was issued in late 2015, could have a significant impact on the livestock industry and livestock haulers. The new rule will require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18. The devices connect to the vehicle's engine and automatically record driving hours. The Obama Administration pushed for the change to electronic logs purportedly out of safety concerns. The Trump Administration has instructed the FMCSA (and state law enforcement officials) to delay the December 18 enforcement of the final rule by delaying out-of-service orders for ELD violations until April 1, 2018, and not count ELD violations against a carrier’s Compliance, Accountability, Safety Score. Thus, from December 18, 2017 to April 1, 2018, any truck drivers who are caught without an electronic logging device will be cited and allowed to continue driving, as long as they are in compliance with hours-of-service rules. In addition, the FMCSA has granted a 90-day waiver for all vehicles carrying agricultural commodities. Other general exceptions to the final rule exist for vehicles built before 2000, vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)), drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)), and drivers who maintain HOS logs for no more than eight days during any 30-day period. One rule that is of particular concern is an HOS requirement that restricts drive time to 11 hours. This rule change occurred in 2003 and restricts truck drivers to 11 hours of driving within a 14-hour period. Ten hours of rest is required. That is a tough rule as applied to long-haul cattle transports. Unloading and reloading cattle can be detrimental to the health of livestock.

  • Dicamba Spray-Drift Issues. Spray-drift issues with respect to dicamba and the use of  XtendiMax with VaporGrip (Monsanto) and Engenia (BASF) herbicides for use with Xtend Soybeans and Cotton were on the rise in 2017. , 2017Usage of dicamba has increased recently in an attempt to control weeds in fields planted with crops that are engineered to withstand it. But, Missouri (effective July 7) and Arkansas (as of June 2017) took action to ban dicamba products because of drift-related damage issues. In addition, numerous lawsuits have been filed by farmers against Monsanto, BASF and/or DuPont alleging that companies violated the law by releasing their genetically modified seeds without an accompanying herbicide and that the companies could have reasonably foreseen that seed purchasers would illegally apply off-label, older dicamba formulations, resulting in drift damage. Other lawsuits involve claims that the new herbicide products are unreasonably dangerous and have caused harm even when applicators followed all instructions provided by law. In December of 2017, the Arkansas Plant Board voted to not recommend imposing a cut-off date of April 15 for dicamba applications. Further consideration of the issue will occur in early 2018.

January 1, 2018 in Business Planning, Civil Liabilities, Environmental Law, Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, November 10, 2017

Air Emission Reporting Requirement For Livestock Operations

Overview

Amidst all of the news recently about tax proposals in the Congress and the attention that has garnered, there is another important date that is creeping up on many livestock producers.  Unless an extension is granted, on November 15, a reporting rule administered by the federal Environmental Protection Agency (EPA) will be triggered that will apply to certain livestock operations.  The reporting applies to certain “releases” of “hazardous” substances and the requirement that the government be notified. 

Background

The federal government has been involved in regulating air emissions for over 50 years.  The first serious effort at the national level concerning air quality was passage of the 1963 Clean Air Act (CAA) amendments.  This legislation authorized the then Department of Health, Education and Welfare (now Department of Health and Human Services) to intervene directly when air pollution threatened the public “health or welfare” and the state was unable to control the problem.

The 1970 CAA amendments represented a major step forward at the federal level in terms of regulating the activities contributing to air pollution.  This legislation created air quality control regions and made the individual states responsible for sustaining air quality in those regions.  The states could regulate existing sources of pollution with less restrictive requirements. See, e.g., State, ex rel. Cooper v. Tennessee Valley Authority, et al., 615 F.3d 291 (4th Cir. 2010).  

Additional federal Specifically, under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation.

Recent Developments

On January 21, 2005, the EPA announced the Air Quality Compliance Consent Agreement to facilitate the development of scientifically credible methodologies for estimating emissions from animal feeding operations (AFOs).  A key part of the agreement is a two-year benchmark study of the air emissions from livestock and poultry operations.  The study was designed to gather data relative to the thresholds of the CAA, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), and set national air policies so that excessive levels could be regulated.  Under both CERCLA and EPCRA, the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the EPA has discretion to take remedial actions or order further monitoring or investigation of the situation.

In mid-2007, the U.S. Court of Appeals for the D.C. Circuit upheld the EPA’s ability to enter into the consent agreements with participating AFOs.  Association of Irritated Residents v. EPA, 494 F.3d 1027 (D.C. Cir. 2007).   Community and environmental groups had challenged the consent agreements as rules disguised as enforcement actions, that the EPA had not followed proper procedures for rulemaking and that EPA had exceeded its statutory authority by entering into the agreements.  The court disagreed, holding that the consent agreements did not constitute rules, but were enforcement actions within EPA’s statutory authority that the court could not review.

In early 2009, EPA, pursuant to the EPCRA, issued a final regulation regarding the reporting of emissions from confined AFO’s – termed a “CAFO.”  The rule applies to facilities that confine more than 1,000 beef cattle, 700 mature dairy cows, 1,000 veal calves, 2,500 swine (each weighing 55 pounds or more), 10,000 swine (each weighing less than 55 pounds), 500 horses and 10,000 sheep.  The rule requires these facilities to report ammonia and hydrogen sulfide emissions to state and local emergency response officials if the facility emits 100 pounds or more of either substance during a 24-hour period.

2008 Regulations and Court Case

In late 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement of CERCLA (Sec. 103) for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for CAFOs under the EPCRA’s public disclosure rule. Various environmental activist groups challenged the exemption in the final regulation on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the carve-out for CAFOs was also impermissible, but for a different reason.

The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but noted that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, No. 09-1017, 2017 U.S. App. LEXIS 6174 (D.C. Cir. Apr. 11, 2017).

The court set a deadline for the beginning of the reporting of releases, but the EPA sought an extension.  In response, the court extended the date by which farms must begin reporting releases of ammonia and hydrogen to November 15, 2017.  The reporting requirement will have direct application to larger livestock operations with air emissions that house beef cattle, dairy cattle, horses, hogs and poultry.   It is estimated that approximately 60,000 to 100,000 livestock and poultry operations will be subject to the reporting requirement.

EPA Interim Guidance

On October 26, 2017, the EPA issued interim guidance designed to educate livestock operations about the upcoming reporting requirements for emissions from animal waste. 

Under the guidance, the EPA notes that the reportable quantity for each of ammonia and hydrogen sulfide is triggered at a release into the air of 100 pounds or more within a 24-hour period.  That level would be reached by a facility with approximately 330-head (for a confinement facility) according to a calculator used by the University of Nebraska-Lincoln which is based on emissions produced by the commingling of solid manure and urine.  If that level of emission occurs for either substance, the owner (or operator) of the “facility” must inform the U.S. Coast Guard National Response Center (NRC) of any individual release by calling (800) 424-8802.  Unless changed at the last minute, this reporting must be done by November 15, 2017.  In addition, a written report must also be filed with the regional EPA office within 30 days of the NRC reporting.     

If releases will be “continuous and stable,” “continuous release reporting” is available by filing an “initial continuous release notification” to the NRC and the regional office of the EPA.  Once that is done, reporting is only required annually unless the facility’s air emissions change significantly. However, unless an extension is granted, the initial “continuous release” notification is to be filed on or before November 15, 2017.

While air emissions occurring from the crop application of manure or federally registered pesticides are not subject to reporting, spills and accidents that involve manure (other fertilizers) and pesticides must be reported if they are over applicable thresholds.  

The EPA Guidance also indicates that reporting does not apply under the EPCRA to air emissions from substances that are used in “routine agricultural operations.”  Those substances, according to the EPA don’t meet the definition of “hazardous.”  “Routine agricultural operations,” EPA states, includes “regular and routine” operations at farms AFOs, nurseries and other horticultural and aquacultural operations.  That would include, EPA notes, on-farm manure storage used as fertilizer, paint for maintaining farm equipment, fuel used to operate farm machinery or heat farm buildings, and chemicals for growing and breeding fish.  It would also appear to include livestock ranches where cattle are grazed on grass. A similar conclusion could be reached as to the term “facility” – a “facility” under CERCLA should not include a cow/calf grass operation where the livestock graze on grass.  However, at the present time, the EPA has not provided any official guidance concerning the issue.  

There doesn’t appear to be any harm in reporting when it is not clearly required.  In other words, while the land application of livestock manure would appear to fall under the “fertilizer” exemption and not be included in the definition of “facility” a producer could still report such emissions.  While grass operations could also report to be on the side of caution, the reportable emission level (if it were to apply to a grass operation) will be triggered at a higher head count of livestock because commingled solid waste and urine will not be present.   

Conclusion

Recently, the EPA filed a motion with the court to push the November 15 deadline back.  Also, on November 9, 2017, the National Pork Producers Council and the U.S. Poultry and Egg Association filed an amicus brief in support of the EPA’s motion. They are asking the court to give the EPA more time to “provide farmers more specific and final guidance before they must estimate and report emissions.”  In addition, the EPA notes that getting additional time will allow to finalize a reporting system.  

Whenever the reporting requirement becomes effective, either November 15 or sometime later if the court grants an extension, it will be important for livestock producers to comply.  For now, livestock producers should study the EPA interim guidance.  That guidance is available here:  https://www.epa.gov/epcra/cercla-and-epcra-reporting-requirements-air-releases-hazardous-substances-animal-waste-farms#Resources.  If reportable quantities of emissions will occur, the compliance deadline and proper reporting in a timely manner is very important so that applicable fines are avoided.  It is also suggested the livestock producers look for guidance from their state and national livestock associations.

November 10, 2017 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, September 25, 2017

The Prior Converted Cropland Exception From Clean Water Act Jurisdiction

Overview

The federal government’s jurisdiction over “wetlands” continues to be a contentious issue.  In 2015, the U.S. Environmental Protection Agency (EPA) and the United States Army Corps of Engineers (Corps) jointly published a regulation (known as the “Clean Water Rule”) in an attempt to “clarify” the scope of federal jurisdiction over “waters of the United States.”  80 Fed. Reg. 37053 (Jun. 29, 2015).  The rule was immediately contested in court, its implementation stayed, and the U.S. Circuit Court of Appeals determined that it had jurisdiction to hear the challenge to the rule.  Murray Energy Corp. v. United States Department of Defense, 817 F.3d 261 (6th Cir. 2016).  In early, 2017, the Trump Administration indicated its intent to review, revise or rescind the rule.    82 Fed. Reg. 12532 (Mar. 6, 2017).   

Various exemptions can potentially apply to exclude “wetlands” from the federal government’s jurisdiction under the Clean Water Act (CWA).  One of those is for “prior converted cropland.”  That exemption stems from the “Swampbuster” provisions of the 1985 Farm Bill that were later adopted by the EPA and the Corps. 

How does the exception apply?  When does it not apply?  What’s the history behind the exception?  What have the courts had to say about it?  Is there a better way for the federal government to regulate prior converted cropland than the present manner?  A recent Illinois federal court decision involved the prior converted cropland exemption from CWA jurisdiction.  It didn’t turn out well for the landowner, however. 

The prior converted cropland exemption from CWA, that’s today’s topic.

Swampbuster

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “swampbuster.”  Swampbuster was introduced into the Congress in January of 1985.  Later, in 1985, the Swampbuster provisions were introduced into the House Agriculture Committee as an amendment to Title XII resource conservation, to deny federal farm program benefits to persons planting agricultural commodities for harvest on converted wetlands. 16 U.S.C. § 3821(a)-(b) (2008).  The USDA defines “converted wetland” as a wetland that has been drained, dredged, filled, leveled, or otherwise manipulated (including…the removal of woody vegetation or any activity that results in impairing or reducing the flow and circulation of water) for the purpose of or to have the effect of making possible the production of an agricultural commodity without further application of the manipulations described herein if: (i) such production would not have been possible but for such action, and (ii) before such action such land was wetland, farmed wetland, or farmed-wetland pasture and was neither highly erodible land nor highly erodible cropland. 7 C.F.R. § 12.2(a) (2008).

The report of the conference committee a week before the 1985 Farm Bill was signed into law stated that wetland conversion was considered to be “commenced” when a person had obligated funds or begun actual modification of a wetland.

The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules.  The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion.  Added were farmed wetlands, abandoned cropland, active pursuit requirements, FWS concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill).  This is the genesis of the “prior converted cropland” exemption.    

The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics.  Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b).  Prior converted wetlands can be farmed, but they revert to protected status once abandoned. Abandonment occurs after five years of inactivity and can happen in one year if there is intent to abandon.  A prior converted wetland is a wetland that was totally drained before December 23, 1985.  If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original scope and effect of the drainage of the affected land can be maintained.

Clean Water Act

In 1993, the COE and EPA adopted new regulations clarifying the application of the permit requirement of §404 of the CWA to land designated as wetland.  Section 404 of the CWA makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” without obtaining a permit from the Secretary of the Army acting through the Corps.  The regulations specifically exempt prior converted wetlands from the definition of “navigable waters” for CWA purposes. 58 Fed. Reg. 45,008-48,083 (1993); 33 C.F.R. §328.3(a)(8).  Thus, prior converted cropland is not subject to the permit requirements of § 404 of the CWA.  Indeed, the Corps stated clearly that the only method for prior converted cropland to return to the Corps’ jurisdiction under the regulation was for the cropland to be “abandoned” – cropland production ceases with the land reverting to a wetland. 

In early 2009, the Corps prepared an Issue Paper announcing for the first time that prior converted cropland that is shifted to non-agricultural use becomes subject to regulation by the Corps. See Issue Paper Regarding "Normal Circumstances" (ECF No. 18-22).  The paper was the Corps’ response to five pending applications for jurisdictional determinations involving the transformation of prior converted cropland to limestone quarries. The paper concluded that the transformation would be considered an "atypical situation" within the meaning of the Corps’ Wetlands Manual and, thus, subject to regulation.  The paper further found that active management, such as continuous pumping to keep out wetland conditions, was not a "normal condition" within the meaning of 33 C.F.R. § 328.3(b).  However, no APA notice-and-comment period occurred (as required by the Administrative Procedure Act (APA) – Pub. L. 79-404, 69 Stat. 237, enacted Jun. 11, 1946)) before the Corps issued the memorandum.  Even so, the Corps implemented and enforced the rules nationwide.  The rules were challenged and in New Hope Power Company, et al. v. United States Army Corps of Engineers, 746 F. Supp.2d 1272 (S.D. Fla. Sept. 2010), the court held that the Corps had improperly extended its jurisdiction over the prior converted croplands that were converted to non-agricultural use and where dry lands were maintained using continuous pumping.  Under the Corp’s new rule, wetland determinations were being made based on what a property’s characteristic would be if pumping ceased.  The court noted that the rules effectively changed the regulatory definition of prior converted cropland without the new definition being subjected to notice and comment requirements.  Accordingly, the court invalidated the Corp’s new rule.

Illinois Case

Facts.  In Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017), the plaintiff was a developer that obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995.  The local town then passed a zoning ordinance allowing development of the property.  The tract was divided into three sections - 25 acres were to be developed into 168 townhomes; 61 acres to be developed into 169 single-family homes; and 14 acres in between the other acreages to function as a stormwater detention area.  The townhomes and water detention area was to be developed first and then the single-family housing.  Construction of the townhomes began in 1996, and the single-family housing development was about to begin when the defendant designated about 13 acres of the undeveloped property as “wetlands” and asserted regulatory jurisdiction under the CWA.

Administrative process.  The defendant claimed jurisdiction on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S.   The plaintiff administratively appealed the defendant’s jurisdictional determination to the Division Engineer who agreed that the District Engineer failed to properly interpret and apply applicable the U.S. Supreme Court decision in Rapanos v. United States, 547 U.S. 715 (2006).  On reconsideration, the District Engineer issued a second approved jurisdictional determination in 2010 concluding that the tract had a significant nexus to the navigable river.  The plaintiff appealed, but the Division Engineer dismissed the appeal as being without merit.  In 2011, the plaintiff sought reconsideration of the defendant’s appeal decision because of a 1993 prior converted cropland designation that excluded a part of the 100-acres from CWA jurisdiction.  Upon reconsideration, the District Engineer issued a third jurisdictional determination in 2012 affirming its prior determination noting that farming activities had ceased by the fall of 1996 and wetland conditions had returned.  The plaintiff appealed on the basis that the “significant nexus” determination was not supported by evidence.  The Division Engineer agreed and remanded the matter to the District Engineer for supportive documentation and to follow the defendant’s 2008 administrative guidance.  The District Engineer issued a new jurisdictional determination with supportive evidence, including an 11-page document that had previously not been in the administrative record.  This determination, issued in 2013, constituted a final agency determination, from which the plaintiff sought judicial review. 

Court opinion.  In court, the plaintiff claimed that the defendant didn’t follow its own regulations, disregarded the instructions of the Division Engineer, and violated the Administrative Procedures Act (APA) by supplementing the record with the 11-page document.  However, the court noted that existing regulations allowed the Division Engineer, on remand, to instruct the District Engineer to supplement the administrative record on remand and that the limitation on supplementing the administrative record only applied to the Division Engineer.  The court also determined that the supplemental information did not violate the Division Engineer’s remand order, and that the supplemental information had been properly included in the administrative record and was part of the basis for the 2013 reviewable final agency determination.  The court also upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river. 

The court also determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned.  The court noted that the defendant and the EPA had jointly adopted a rule in 1993 adopting the Natural Resources Conservation Service (NRCS) exemption for prior converted cropland.  While the joint regulation did not refer to the abandonment exception, the defendant and EPA did explain in the Federal Register that they would use the NRCS abandonment provisions such that prior converted cropland that is abandoned and exhibits wetland characteristics are jurisdictional wetlands under the CWA.  The court noted that prior caselaw had held that the CWA’s exemption of “prior converted croplands” included the abandonment provision (see, e.g., Huntress v. United States Department of Justice, No. 12-CV-1146S, 2013 U.S. Dist. LEXIS 73805 (W.D. N.Y. May 24, 2013); United States v. Righter, No. 1:08-CV-0670, 2010 U.S. Dist. LEXIS 64686 (M.D. Pa. Jun. 30, 2010)), and that it would apply the same rationale in this case.  The court noted that the specific 13-acre parcel at issue in the case had not been farmed since 1996, and that conversion to a non-ag use did not remove the abandonment provision.  The plaintiff also claimed that the wetlands at issue were “artificial” wetlands (created by adjacent development) under 7 C.F.R. §12.2(a) that were not subject to the defendant’s jurisdiction.  However, the court noted that the defendant never adopted the “artificial wetland” exemption of the NRCS and, therefore, such a classification was inapplicable.  The court granted the defendant’s cross motion for summary judgment. 

Conclusion

A good case can be made that agricultural wetlands should be removed from Corps jurisdiction.  The Corps appears to lack the experience and the local staff needed to ably administer the regulation of continuously cropped, partially drained farmed wetlands.  The Corps regulates all wetlands in the same way irrespective of whether the wetland is agricultural, previously manipulated or something else.  In addition, the Corps will not allow drainage with compensatory mitigation without the applicant sequentially proving that drainage cannot be avoided or minimized.  Also, while the USDA and the Corps use the same wetland definition, the Corps refuses to rely upon USDA wetland determinations. This needlessly confounds agricultural property owners in the management, use and marketing of properties containing NRCS-certified farmed wetland and prior converted crop land.  Conversely, an NRCS-certified prior converted cropland determination increases the value of a property. 

In situations where a property owner has installed drainage features, and is responsible for a share of the maintenance costs of common drains built by a drainage district, a clear vested right has been established. A change in land use does not erase that vested right.  Viewed in that light, the Corps’ refusal to accept a USDA prior converted cropland determination could constitute a regulatory taking.

Perhaps a better approach would be to vest sole regulatory authority over prior converted cropland with the USDA.  With 30 years of experience and an office in practically every rural county, it would seem to make more sense that regulatory authority of prior converted wetlands rest solely with the USDA. 

With a change in Administration in the White House and new direction at the top of the EPA and the Corps, perhaps there will be a change in the way the federal government views wetlands, and the prior converted cropland exception.  These issues are very important to agriculture producers and rural landowners that own the estimated 53 million acres of prior converted cropland scattered across the U.S.

September 25, 2017 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Thursday, August 24, 2017

What Problems Does The Migratory Bird Treaty Act Pose For Farmers, Ranchers and Rural Landowners?

Overview

The Migratory Bird Treaty Act (MBTA) 16 U.S.C. § 703 et seq. (2008). protects migratory birds that are not necessarily endangered and, thereby, protected under the Endangered Species Act.  The MBTA is important to agricultural producers and rural landowners because it has been broadly interpreted such that routine daily activities can become subject to the MBTA and create criminal liability at the hands of the U.S. government.      

The Scope of the MBTA

What does “take” mean?  The MBTA makes it unlawful at any time, by any means or in any manner, to “take” any migratory bird.  “Take is defined to mean “pursue, hunt, shoot, wound, kill, trap, capture or collect any migratory bird. 16 U.S.C. §§ 703-712 (2008); 50 C.F.R. §10.12.  Practically all bird species in the United States are covered due to regulations developed by the U.S. Fish and Wildlife Service (FWS) that apply the MBTA to species that don’t even migrate internationally or even at all.  50 C.F.R. §10.13.   

The Act is not limited to covering only hunting, trapping and poaching activities, but extends to commercial activities that kill migratory birds absent an MBTA permit.  The Act prohibits taking or killing of migratory birds (including a nest or egg) at any time, by any means or in any manner.  That could include such conduct as operating oil and gas production facilities, aerogenerators, cell towers as well as commercial forestry and common agricultural activities.  16 U.S.C. §703. However, the courts are split on whether the MBTA applies strictly to truly migratory bird deaths that are not inadvertent (see, e.g., United States v. Citgo Petroleum Corporation, 801 F.3d 477 (5th Cir. 2015)) or deaths of a broader classification of birds that are killed only inadvertently. 

Type of crime.  Violation of the MBTA is a misdemeanor punishable by fine up to $500 and imprisonment up to six months. 16 U.S.C. § 707(a) (2008), as amended by 18 U.S.C. §§3559; 3571.  Anyone who knowingly takes a migratory bird and intends to, offers to, or actually sells or barters a migratory bird is guilty of a felony, with fines up to $2,000, jail up to two years, or both.

Strict liability?  The MBTA is a strict liability statute, and has been applied to impose liability on farmers who inadvertently poison migratory birds by use of pesticides.  While the MBTA is a strict liability statute, constitutional due process requirements must still be satisfied before liability can be imposed.  In other words, there still must be an affirmative act that causes the migratory bird deaths.  For example, in United States v. Apollo Energies, Inc., et al., 611 F.3d 679 (10th Cir. 2010), oil drilling operators were not liable for deaths of migratory birds under the MBTA to the extent that the operators did not have adequate notice or a reasonable belief that their conduct violated the MBTA.  Likewise, in United States v. Rollins, 706 F. Supp. 742 (D. Idaho 1989), a farmer was prosecuted for violating the MBTA when he used a mixture of granular pesticides on an alfalfa field. The chemicals poisoned a flock of geese and killed several of them.  The trial court held that even though the farmer had not applied the pesticide in a negligent manner and could not control the fact that the geese would land and eat the granules, liability under the MBTA was based on whether the farmer knew that the land was a known feeding area for geese.  The trial court concluded that “a reasonable person would have been placed on notice that alfalfa grown on Westlake Island in the Snake River would attract and be consumed by migratory birds.”  The trial court was reversed on appeal on the grounds that the MBTA was too vague to give the farmer adequate notice that his conduct would likely lead to the killing of the protected birds since the farmer's past experience with the pesticide and the geese was that it did not kill them.  But, in United States v. Van Fossan, 899 F.2d 636 (7th Cir. 1990), the court confirmed the notion that the MBTA is a strict liability statute and approved its application to a defendant who used pesticides to poison birds, even though the defendant did not know that his use of the pesticide would kill migratory birds protected under the Act.

“Baiting” of birds.  The MBTA also prohibits the taking of migratory game birds by the aid of “baiting”.  However, it is permissible to take migratory game birds, including waterfowl, on or over standing crops, flooded harvested croplands, grain crops that have been properly shocked on the field where grown, or grains found scattered solely as the result of normal agricultural planting or harvesting.  See 50 C.F.R. §§ 20.11(g); 20.21(i)(2008).  The FWS has promulgated regulations defining “normal agricultural planting” and “harvesting,” and in Falk v. United States Fish and Wildlife Service, 452 F.3d 951 (8th Cir. 2006), the court held that FWS determinations that harvesting corn after December 1 and aerial seeding of winter wheat in standing corn were not “normal planting” and that the landowners were barred from hunting next to the neighbors’ baited fields were a reasonable interpretation of the MBTA.

Some states also have statutes that prohibit the baiting of wildlife for hunting purposes unless the alleged baiting was the result of commonly accepted agricultural practices.  For instance, in State v. Hansen, 805 N.W.2d 915 (Minn. Ct. App. 2011), the defendant’s conviction for using bait to hunt deer was reversed.  The court held that the state statute violated due process because it was vague as applied to the defendant’s pumpkin patch operation.  The law did not distinguish between normally accepted agricultural practices and the unlawful baiting of deer.

In addition, the Act permits the taking of all migratory game birds, except waterfowl, on or over any lands where shelled, shucked, or unshucked corn, wheat or other grain, salt, or other feed has been distributed or scattered as the result of bona fide agricultural operations or procedures.  In United States v. Adams, 383 Fed. Appx. 481 (5th Cir. 2010), a farmer was convicted of violating the Act for hunting doves on a field that he had recently planted to wheat.  For purposes of the “baiting” provision of the Act, the trial court judge determined that intent was not an element of the offense for which the farmer was convicted and did not allow the farmer to introduce evidence concerning the procedures commonly used to plant winter wheat in northeast Louisiana.  On appeal, the Fifth Circuit Court of Appeals reversed the trial court, holding instead that the government was required to prove that the farmer’s intentions were not in good faith and that the farmer’s acts were merely a sham to attract migratory birds to hunt.  Accordingly, the court reversed the farmer’s conviction and rendered acquittal based on the court’s determination that the farmer was entitled to have the lower court consider the evidence of his good faith in growing the wheat, and because there was no evidence from which a jury could find that the farmer’s planting was not the result of a “bona fide agricultural operation or procedure.”  In another case, United States v. Andrus, 383 Fed. Appx. 481 (5th Cir. 2010), the court determined that the use of a stripper header to harvest milo was not a "normal agricultural practice" with the result that the defendant's sentence for taking migratory birds by aid of bait in violation of the MTBA was upheld.  The defendant's testimony that he could not reasonably have been expected to know that the field he was hunting in was baited because he was not a farmer was not credible.  The court noted that the defendant failed to inspect the field and that unharvested milo was clearly present near the defendant's duck blinds and decoys.

Migratory bird facilities.  The MBTA regulations specify that “no migratory bird preservation facility shall receive or have in custody any migratory game birds unless such birds are tagged.  See, e.g., 50 C.F.R. § 20.36.  The requirement has been held to apply to an individual.  See, e.g., United States v. Gilkerson, 556 F.3d 854 (8th Cir. 2009).

Conclusion

Supposedly, the FWS (the enforcing agency of the MBTA) is only interested in enforcing the MBTA on activities that “chronically” kill protected birds, and then only after notice has been given to the alleged offending party.  80 Fed. Reg. 30034 (May 26, 2015).  But, that might be of little assurance to farmers, ranchers, rural landowners and others whose fate could be left up to FWS discretion and the interpretation of the MBTA by the courts where interpretations can differ by jurisdiction. 

August 24, 2017 in Criminal Liabilities, Environmental Law | Permalink | Comments (0)

Tuesday, August 22, 2017

The Business of Agriculture – Upcoming CLE Symposium

Overview

On September 18, Washburn School of Law will be having its second annual CLE conference in conjunction with the Agricultural Economics Department at Kansas St. University.  The conference, hosted by the Kansas Farm Bureau (KFB) in Manhattan, KS, will explore the legal, economic, tax and regulatory issue confronting agriculture.  This year, the conference will also be simulcast over the web.

That’s my focus today – the September 18 conference in Manhattan, for practitioners, agribusiness professionals, agricultural producers, students and others. 

Symposium Topics

Financial situation.  Midwest agriculture has faced another difficult year financially.  After greetings by Kansas Farm Bureau General Counsel Terry Holdren, Dr. Allen Featherstone, the chair of the ag econ department at KSU will lead off the day with a thorough discussion on the farm financial situation.  While his focus will largely be on Kansas, he will also take a look at nationwide trends.  What are the numbers for 2017?  Where is the sector headed for 2018? 

Regulation and the environment.  Ryan Flickner, Senior Director, Advocacy Division, at the KFB will then follow up with a discussion on Kansas regulations and environmental laws of key importance to Kansas producers and agribusinesses. 

Tax – part one.  I will have a session on the tax and legal issues associated with the wildfire in southwest Kansas earlier this year – handling and reporting losses, government payments, gifts and related issues.  I will also delve into the big problem in certain parts of Kansas this year with wheat streak mosaic and dicamba spray drift.

Weather.  Mary Knapp, the state climatologist for Kansas, will provide her insights on how weather can be understood as an aid to manage on-farm risks.  Mary’s discussions are always informative and interesting. 

Crop Insurance.  Dr. Art Barnaby, with KSU’s ag econ department, certainly one of the nation’s leading experts on crop insurance, will address the specific situations where crop insurance does not cover crop loss.  Does that include losses caused by wheat streak mosaic?  What about losses from dicamba drift?

Washburn’s Rural Law Program.  Prof. Shawn Leisinger, the Executive Director of the Centers for Excellence at the law school (among his other titles) will tell attendees and viewers what the law school is doing (and planning to do) with respect to repopulating rural Kansas with well-trained lawyers to represent the families and businesses of agriculture.  He will also explain the law school’s vision concerning agricultural law and the keen focus that the law school has on agricultural legal issues.

Succession Planning.  Dr. Gregg Hadley with the KSU ag econ department will discuss the interpersonal issues associated with transitioning the farm business from one generation to the next.  While the technical tax and legal issues are important, so are the personal family relationships and how the members of the family interact with each other.

Tax – part two.  I will return with a second session on tax issues.  This time my focus will be on hot-button issues at both the state and national level.  What are the big tax issues for agriculture at the present time?  There’s always a lot to talk about for this session.

Water.  Prof. Burke Griggs, another member of our “ag law team” at the law school, will share his expertise on water law with a discussion on interstate water disputes, the role of government in managing scarce water supplies, and what the relationship is between the two.   What are the implications for Kansas and beyond?

Producer panel.  We will close out the day with a panel consisting of ag producers from across the state.  They will discuss how they use tax and legal professionals as well as agribusiness professionals in the conduct of their day-to-day business transactions.

Conclusion

The Symposium is a collaborative effort of Washburn law, the ag econ department at KSU and the KFB.  For lawyers, CPAs and other tax professionals, application has been sought for continuing education credit.  The symposium promises to be a great day to interact with others involved in agriculture, build relationships and connections and learn a bit in the process.

We hope to see you either in-person or online.  For more information on the symposium and how to register, check out the following link:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

August 22, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, July 31, 2017

Agricultural Law in a Nutshell

Overview

Today's post is a deviation from my normal posting on an aspect of agricultural law and tax that you can use in your practice or business.  That’s because I have a new book that is now available that you might find useful as a handbook or desk reference.  Thanks to West Academic Publishing, my new book “Agricultural Law in a Nutshell,” is now available.  Today’s post promotes the new book and provides you with the link to get more information on how to obtain you copy.

Content

The Nutshell is taken from my larger textbook/casebook on agricultural law that is used in classrooms across the country.  Ten of those 15 chapters are contained in the Nutshell, including some of the most requested chapters from my larger book – contracts, civil liabilities and real property.  Also included are chapters on environmental law, water law and cooperatives.  Bankruptcy, secured transactions, and regulatory law round out the content, along with an introductory chapter.  Not included in this Nutshell are the income tax, as well as the estate and business planning topics.   Those remain in my larger book, and are updated twice annually along with the other chapters found there. 

Style

The Nutshell is designed as a concise summary of the most important issues facing agricultural producers, agribusinesses and their professional advisors.  Farmers, ranchers, agribusinesses, legal advisors and students will find it helpful.  It’s soft cover and easy to carry.

Rural Law Program

The Nutshell is another aspect of Washburn Law School’s Rural Law Program.  This summer, the Program placed numerous students as interns with law firms in western Kansas.  The feedback has been tremendous and some lawyers have already requested to be on the list to get a student for next summer.  Students at Washburn Law can take numerous classes dealing with agricultural issues.  We are also looking forward to our upcoming Symposium with Kansas State University examining the business of agriculture and the legal and economic issues that are the major ones at this time.  That conference is set for Sept. 18, and a future post will address the aspects of that upcoming event.

Conclusion

You can find out more information about the Nutshell by clicking here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/agriculturallawnutshell/index.html

July 31, 2017 in Bankruptcy, Civil Liabilities, Contracts, Cooperatives, Environmental Law, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, July 21, 2017

Spray Drift As Hazardous Waste?

Overview

The issues associated with spray-drift of dicamba have generated numerous questions to me.  I devoted a blog post to the issue last week.  Since then I have received more calls and emails from farmers experiencing drift issues.  One farmer raised an interesting question – does the drift of dicamba constitute a hazardous waste that is regulated under federal law?  That’s an interesting question and the focus of today’s blog post.

Comprehensive Environmental Response Compensation & Liability Act (CERCLA)

Hazardous waste is regulated by the federal CERCLA.  CERCLA became law in late 1980, set as a goal the initiation and establishment of a comprehensive response and financing mechanism to abate and control problems associated with abandoned and inactive hazardous waste disposal sites. In general, CERCLA was enacted as a response to several then high-profile hazardous waste trouble spots such as Love Canal in New York and the Valley of the Drums in Kentucky.  While CERCLA focuses on hazardous waste sites, it can have significant ramifications for agricultural operations because the term “hazardous waste” has been defined to include most pesticides, fertilizers, and other chemicals commonly used on farms and ranches. See, e.g., 40 C.F.R. § 261. As such, CERCLA liability is a concern any time that agricultural land is purchased or leased.

CERCLA Components. There are four basic components to CERCLA.  First, the statute sets up an information gathering and analysis system to allow state and federal governments to determine more accurately the danger level at various disposal sites and to develop cleanup priorities accordingly. 42 U.S.C. § 9604. The EPA is authorized to designate as hazardous any substance which, when released into the environment, may present a “substantial danger” to public health and welfare, or to the environment. The act requires notification of any release into the environment of these substances.  The act requires owners and operators of hazardous waste storage, treatment, and disposal sites to provide EPA with notification of the volumes and composition of hazardous wastes that can be found at their facility, and of any known or possible releases.  The EPA uses this information to develop a national priorities list (NPL) in order to prioritize hazardous waste sites from those most dangerous and in need of immediate cleanup to those least dangerous and not as urgently in need of cleanup.

With respect to releases of hazardous substances, CERCLA provides that any person in charge of a “facility” from which a hazardous substance has been released in a reportable quantity must immediately notify the National Response Center. 42 U.S.C. § 9603(a) (2008).  Releases that exceed 100 pounds per day must be reported.  A key question of major importance to agriculture is whether large-scale livestock/poultry confinement operations operated by individual growers pursuant to contractual arrangements with vertically integrated firms constitute a single “facility,” or whether each confinement structure on a farm is a separate facility.  In Sierra Club, Inc. v. Tyson Foods, Inc., 299 F. Supp. 2d 693 (W.D. Ky. 2003), the court held that Tyson was an operator of the chicken farms at issue pursuant to the production contracts with growers and that an entire chicken farm site is a facility from which releases must be reported under CERCLA. In a later case, Sierra Club v. Seaboard Farms, Inc., 387 F.3d 1167 (10th Cir. 2004), the United States Court of Appeals for the Tenth Circuit ruled similarly that the term “facility,” as defined in CERCLA, meant any site or area where hazardous substances come to be located.  As a result, a large-scale confinement hog operation was held to be subject to CERCLAs reporting requirements for ammonia emissions that exceeded the per-day limit for the operation as a whole, even though no single “facility” at the operation exceeded the limit. The rulings make it much more likely that large-scale confinement operations will be subject to the reporting requirements of CERCLA.

Second, CERCLA established two funds:  (1) the hazardous substance response trust fund (“Superfund”) which is funded by taxes on crude oil and chemicals and finances the government's response costs and damage claims for injury to or destruction or loss of natural resources; and (2) the post-closure liability trust fund which is financed by taxes on hazardous wastes and out of which payments are made to cover the costs of response damages or other compensation for injury or loss to natural resources.

Third, CERCLA provides the federal government with authority to respond to emergencies involving hazardous substances and to clean up leaking disposal sites. The EPA is given authority to require parties responsible for contamination to clean up the contamination or reimburse EPA for the costs of remediation. If the liable or “potentially responsible party” cannot be found or cannot afford to pay, then EPA may use the Superfund to clean up the contamination.

Fourth, the statute holds persons responsible for releases of hazardous material liable for cleanup and restitution costs.  Liability is strict, joint and several, and can be applied retroactively to those having no continuing control over the hazardous substance. However, liable parties at a multi-party Superfund site are not jointly and severally liable if a reasonable basis exists to apportion their liability. See, e.g., Burlington Northern and Santa Fe Railway Co., et al. v. United States et al., 129 S. Ct. 1870 (2009).  But, state law still might provide for joint and several liability. 

Elements of Liability. The government must establish four elements to prevail against a party under CERCLA.  For example, the government must establish that the site in question is a covered facility subject to CERCLA regulation. The government must also establish that a release or threatened release of a hazardous substance has occurred   which caused the U.S. to incur “response costs.” The government need not prove that a particular defendant’s waste caused the government to incur response costs. In addition, the defendant must be a “covered person” (also termed a “potentially responsible party”).  If the four elements are proved, the defendant is strictly liable (absent a statutory defense). 

Typically, the government has little trouble establishing the first three elements.  Consequently, most CERCLA litigation concerns the issue of whether the defendant is a “covered person” as defined by CERCLA.  A current owner or operator of a “covered facility” is a covered person.  This includes such individuals as tenants, as well as bankers, insurers and other lenders that finance the purchase of the land, limited partners and stockholders, officers and employees, and may also include easement holders.  Also deemed to be a “covered person” is any owner or operator of the site at the time of disposal, any person who arranged for disposal or treatment of hazardous substances at the site, and any person who transported hazardous substances to the site.  Persons or entities serving as an executor, administrator, conservator or trustee whether serving as an individual or as a corporate fiduciary may also be deemed a “current owner or operator” and, as such, be a “covered person.”  For example, in a 1994 case, the court held that a conservator or executor could be held liable as an owner under CERCLA by virtue of leasing a ranch.  Castlerock Estates, Inc. v. Estate of Markham, 871 F. Supp. 360 (N.D. Calif. 1994).  The environmental contamination at issue was caused by dipping cattle over a period of several years.  The current owner of the ranch was obligated to pay the cleanup costs under CERCLA and sought to recover the cleanup costs from a bank that had acquired another bank that had served as conservator and executor for one of the owners of the ranch who had become disabled.  While the court noted that bare legal title held by a conservator or executor was inadequate to make the conservator or executor liable for cleanup costs, the court noted that liability could attach if there were additional “indicia of ownership.”  The court said that could come from leasing the ranch (which occurred for three years), the granting of additional powers to the fiduciary (which had occurred) or participation in the operation of the ranch.  The court ultimately concluded that there was sufficient evidence to go to trial as to the fiduciary's liabilities. Consequently, fiduciaries of property in current use may want to consider executing an indemnity agreement with the operator concerning indemnification for liability arising from environmental problems caused by the operator's use. 

Pesticide Exemption.  There can be no recovery of response costs or damages under CERCLA from the application of a pesticide product registered under the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA).  This is known as the “pesticide exemption.”  However, one federal court has construed the pesticide exemption narrowly to not apply to the application of pesticides to unauthorized crops and in a manner that caused off-site drift.  See, e.g., United States v. Tropical Fruit, S.E., 96 F. Supp. 2d 71 (D. P.R. 2000).  The court held that a farmer’s improper application of pesticides was inconsistent with the product label and rendered the farmer a potentially responsible party for an “escape” of a hazardous substance.

Conclusion

The dicamba drift matter is a big issue in certain parts of the country right now.  The recent question concerning drift and hazardous waste is an interesting one.  While CERCLA contains a “pesticide exemption” there is potential for CERCLA liability when it can be established that dicamba isn’t applied in accordance with label directions.

July 21, 2017 in Environmental Law | Permalink | Comments (0)

Tuesday, June 27, 2017

Eminent Domain – The Government’s Power to “Take” Private Property

Overview

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state government.  However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.”  The clause has two prohibitions: (1) all takings must be for public use, and (2) even takings that are for public use must be accompanied by compensation.

Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner.  However, for non-physical takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  The Supreme Court has addressed this issue on numerous occasions, and most recently dealt with a key issue that is the starting point in these matters – how to define the actual property that the landowner claims that the government has taken.  This definitional issue is important to landowners because the way a tract is defined can either restrict the government’s regulation of the tract or expand it.

Regulatory (Non-Physical) Takings

A non-physical taking may involve the governmental condemnation of air space rights, water rights, subjacent or lateral support rights, or the regulation of property use through environmental restrictions.  How is the existence of a regulatory taking determined?  There are several approaches that the Supreme Court has utilized.

Multi-factor balancing test.  In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation.  In Penn Central Transportation Co. et al. v. New York City, 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development.  Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights.  In 2005, the Court confirmed the multi-factor test and noted that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property.  Lingle, et al. v. Chevron U.S.A., Inc., 544 U.S. 528 (2005).  

Total regulatory taking.  In Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), the landowner purchased two residential lots with an intent to build single-family homes.  Two years later, the state legislature passed a law prohibiting the erection of any permanent habitable structures on the Lucas property.  The law's purpose was to prevent beachfront erosion and to protect the property as a storm barrier, a plant and wildlife habitat, a tourist attraction, and a “natural health environment” which aided the physical and mental well-being of South Carolina's citizens.  The law effectively rendered the Lucas property valueless.  Lucas sued the Coastal Council claiming that, although the act may be a valid exercise of the state's police power, it deprived him of the use of his property and thus, resulted in a taking without just compensation.  The Coastal Council argued that the state had the authority to prevent harmful uses of land without having to compensate the owner for the restriction.

The Supreme Court ruled for Lucas and opined that the state's interest in the regulation was irrelevant since the trial court determined that Lucas was deprived of any economically viable alternative use of his land.  The Lucas case has two important implications for environmental regulation of agricultural activities.  First, the Lucas court focused solely on the economic viability of the land and made no recognition of potential noneconomic objectives of land ownership.  However, in the agricultural sector land ownership is typically associated with many noneconomic objectives and serves important sociological and psychological functions.  Under the Lucas approach, these noneconomic objectives are not recognized.  Second, under the Lucas rationale, environmental regulations do not invoke automatic compensation unless the regulations deprive the property owner of all beneficial use.

Under the Lucas approach, an important legal issue is whether compensation is required when the landowner has economic use remaining on other portions of the property that are not subject to regulation.

Unconstitutional conditions.  In Nollan v. California Coastal Commission,483 U.S. 825 (1987), the plaintiff owned a small, dilapidated beach house and wanted to tear it down and replace it with a larger home.  However, the defendant was concerned about preserving the public's viewing access over the plaintiff's land from the public highway to the waterfront.  Rather than preventing the construction outright, the defendant conditioned the plaintiff's right to build on the land upon the plaintiff giving the defendant a permanent, lateral beachfront easement over the plaintiff's land for the benefit of the public.  Thus, the issue was whether the state could force the plaintiffs to choose between their construction permit and their lateral easement.  The Court, held that this particular bargain was impermissible because the condition imposed (surrender of the easement) lacked a “nexus” with, or was unrelated to the legitimate interest used by the state to justify its actions - preserving the view.  The Court later ruled similarly in Dolan v. Tigard, 512 U.S. 374 (1994).  These cases hold that the government may not require a person to give up the constitutional right to receive just compensation when property is taken for a public use in exchange for a discretionary benefit that has little or no relationship to the property. The rule of the cases does not apply to situations involving impact fees and other permit conditions that do not involve physical invasions, but it would apply to monetary exactions where none of the plaintiff’s property is actually taken.  See, e.g., Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013).

Defining The Property At Issue

An important first question in non-physical takings cases is the definition of the boundaries of the subject property.  How the property is defined will often determine whether a taking has occurred.  For instance, if the government designates a portion of a farm field as a wetland that can no longer be farmed without civil and criminal penalties applying, is the property interest at issue that is subject to a takings analysis the wetland or the entire field?  If it is defined as the wetland, then the regulatory designation would result in a severe burden on the landowner with a high likelihood that a compensable taking has occurred.  If it is the entire field, then the overall burden on the landowner is much less. 

On June 23, the Court decided Murr v. Wisconsin, No. 15-214, 2017 U.S. LEXIS 4046 (U.S. Sup. Ct. Jun. 23, 2017).  In Murr, siblings owned two adjacent parcels of waterfront property.  A zoning regulation that became effective in 1976, long before the siblings came into ownership of the tracts, designated the tracts as “substandard” – neither tract could be developed individually.  But, a grandfather clause in the zoning law said that the tracts could be separately developed if they were owned by different owners and not owned (under a merger clause) in common by a group of owners (such as the siblings).  The merger provision also prevented the siblings from selling one of the tracts without selling the other tract.  That was the problem.  They wanted to sell one of the tracts, and sued for a regulatory taking.  The state trial court granted summary judgment to the state on the basis that the siblings still had options available for the use and enjoyment of their property and had not been deprived of all economic value of their property.  Indeed, they could either develop or sell the two lots together.  The court looked at the subject property as one single lot rather than two separate lots.  The case was affirmed on appeal with the appellate court noting that the siblings bought the second tract a year after the first tract and being charged with the knowledge of the merger clause in the zoning law.  The state (WI) Supreme Court denied review. 

The U.S. Supreme Court affirmed in a 5-3 opinion authored by Justice Kennedy.  The Court reasoned that the definition of the subject property, just like the takings analysis itself, is determined by a multi-factor analysis.  That multi-factor test, according to Justice Kennedy, involves state law (including lot lines), reasonable expectations about ownership of the subject property, the land’s physical characteristics and the prospective value of the land with attention paid to the effect of the burdened land on the value of other holdings.  As applied in Murr, the Court determined that the two tracts should be treated as a single tract for purposes of the takings analysis.  That was primarily because state law treated the parcels as one as a result of the merger provision, the two tracts were contiguous, and the fact that they were oddly shaped with rough terrain and bordered a river made land-use regulations foreseeable. 

The Court determined that a taking had not occurred.  The dissent was critical of the new test for determining what constitutes the subject property in a takings case, arguing that the test was “stacked” in the government’s favor. 

Conclusion

The definition of property for purposes of takings analysis is the key starting point in non-physical takings cases.  In addition, for rural landowners, “property” may also include more than just the surface estate.  See, e.g., The Edwards Aquifer Authority, et al. v. Day, et al., 369 S.W.3d 814 (Tex. Sup. Ct. 2012).  How do the “Kennedy Conditions” apply in situations where the surface estate is regulated, but the sub-surface estate is not (or vice versa)?  In one case, the plaintiffs owned oil and gas rights in west central Michigan.  In 1987, the director of the State Department of Natural Resources prohibited exploration for or development of oil and gas on the bulk of the plaintiff's property.  The state appellate court focused solely on the landowner's use of the mineral interests involved to hold that the plaintiff's property had been taken.  Even though a non-mineral interest land use possibility remained, the court held that the landowners were denied all economically viable use of the mineral interest.  The court found it immaterial that all but one of the plaintiffs had extensive landholdings outside of the protected area.  Miller Brothers v. Michigan Department of Natural Resources, 203 Mich. App. 674, 513 N.W.2d 217 (1994)

The new test of Murr will make regulatory takings cases more complex and legal outcomes more unpredictable.  The “Kennedy Conditions” could work in favor of a landowner, but are more likely to do just the opposite.  It was also Justice Kennedy’s concurring opinion in Rapanos, et ux., et al. v. United States Army Corps of Engineers, 126 S. Ct. 2208 (2006) that has created tremendous confusion for the lower courts and injected a high degree of uncertainty into the law with respect to the federal government’s jurisdiction over isolated wetlands under the Clean Water Act.   

Kennedy’s opinion in Murr again appears to be judicial micro-management, making meaningful the comment of Justice Thomas in the dissent about the need to take a “fresh look” at takings cases and whether the Court’s current analytical approach squares with the Constitution’s “original public meaning.”

June 27, 2017 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, April 10, 2017

The Application of the Endangered Species Act to Activities on Private Land

Overview

The Endangered Species Act (ESA) establishes a regulatory framework for the protection and recovery of endangered and threatened species of plants, fish and wildlife. 16 U.S.C. § 1531 et seq (2002). The U.S. Fish and Wildlife Service (USFWS), within the Department of the Interior, is the lead administrative agency for most threatened or endangered species.

The ESA has the potential to restrict substantially agricultural activities because many of the protections provided for threatened and endangered species under the Act extend to individual members of the species when they are on private land.  Approximately 90 percent of endangered species have some habitat on private land, with almost 70 percent of the endangered or threatened species having over 60 percent of their total habitat on nonfederal lands.  A recent decision of the U.S. Court of Appeals for the Tenth Circuit reiterates that the ESA applies to activities on private land.  That’s the focus of today’s post.

The Impact of Species “Listing”

Once a species has been listed as endangered or threatened, the ESA prohibits various activities involving the listed species unless an exemption or permit is granted.  For example, with respect to endangered species of fish, wildlife and plants, the ESA makes it unlawful for any person to import or export such species, deliver, receive, carry, transport or ship in interstate or foreign commerce by any means whatsoever, and sell or offer for sale in interstate or foreign commerce any such species.  The ESA, with regard to endangered species of fish or wildlife, but not species of plants, makes it unlawful for any person subject to the jurisdiction of the United States to “take” any such species. 16 U.S.C. §§ 1538(a)(1)(B), (C) (2008).  The ESA defines the term “take” to mean harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or to attempt to engage in any such conduct.  The prohibition against “taking” an endangered species applies to actions occurring on private land as well as state or federal public land, and financial penalties apply for violating the prohibition. 

1982 amendments to the ESA establish an incidental take permit process that allows a person or entity to obtain a permit to lawfully take an endangered species “if such taking is incidental to, and not the purpose of, the carrying out of an otherwise lawful activity.” 16 U.S.C. §1539(a)(1)(B).  A person may seek an incidental take permit from the USFWS by filing an application that includes a Habitat Conservation Plan (HCP) which includes a description of the impacts that will likely result from the taking, proposed steps to minimize and mitigate those impacts, and alternatives to the taking that the applicant considered and the reasons why those alternatives were not selected.  If the permit is issued, the FWS will monitor the project for compliance with the HCP and the effects of the permitted action and the effectiveness of the conservation program.  The FWS may suspend or revoke all or part of an incidental take permit if the permit holder fails to comply with the conditions of the permit or the laws and regulations governing the activity.

Impact on Private Land Use Activities

The denial of an incidental take permit involving habitat modification of an underground cave bug of no known human commercial value and only found in two Texas counties has been upheld against a Commerce Clause challenge. GDF Realty Investments, LTD, et al. v. Norton, 326 F.3d 622 (5th Cir. 2004), reh’g en banc denied, 362 F.3d 286 (5th Cir. 2004), cert. denied, 545 U.S. 1114 (2005). The landowner claimed the federal government had no jurisdiction due to the lack of connection with interstate commerce.  The court upheld the denial of the incidental take permit on the basis that the bug could be aggregated with all other endangered species to show a sufficient connection with interstate commerce.  Likewise, in Rancho Viejo, LLC v. Norton, 323 F.3d 1062 (D.C. Cir. 2003), reh’g en banc denied, 334 F.3d 1158 (D.C. Cir. 2003), cert. denied, 540 U.S. 1218 (2004), a different court held that the ESA extended to the Southwestern Arroyo Toad even though the Arroyo Toad only resided in southern California and never has been an article of commerce. In 2009, a commercial wind farm was enjoined from further development until receipt of an incidental take permit due to the project’s impact on the endangered Indiana bat.  The court held that it was a “virtual certainty” that Indiana bats would be “harmed, wounded or killed” by the wind farm in violation of the ESA during times that they were not hibernating.  Animal Welfare Institute, et al. v. Beech Ridge Energy LLC, et al., 675 F. Supp. 2d 540 (D. Md. 2009).

An important issue for farmers and ranchers is whether habitat modifications caused by routine farming or ranching activities are included within the definition of the term “take.”  In 1975, the Department of Interior issued a regulation defining “harm” as “an act or omission which actually injures or kills wildlife, including acts which annoy it to such an extent as to significantly disrupt essential behavior patterns, which include, but are not limited to, breeding, feeding or sheltering; significant environmental modification or degradation which has such effects is included within the meaning of ‘harm’.” 50 C.F.R. § 17.3; 40 Fed. Reg. 44412, 44416. The regulation was amended in 1981 to emphasize that actual death or injury to the listed species is necessary, but the inclusion of “habitat modification” in the definition of “harm” led to a series of legal challenges.

The regulation was upheld by the Ninth Circuit Court of Appeals in 1988 in a case involving an endangered bird species whose critical habitat was on state-owned land in Hawaii. Palila v. Hawaii Dept. of Land & Natural Resources, 639 F.2d 495 (9th Cir. 1981). The court held that the grazing of goats and sheep threatened to destroy the endangered birds' woodland habitat and resulted in harm and a “taking” of the endangered bird.  The court ordered the Hawaii Department of Land and Natural Resources to remove the goats and sheep from the birds' critical habitat. In subsequent litigation, the plaintiffs sought the removal of an additional variety of sheep from the birds' critical habitat.  The defendant argued that, under the ESA, “harm” included only the actual and immediate destruction of the birds' food source, not the potential for harm which could drive the bird to extinction.  However, the Ninth Circuit held that “harm” is not limited to immediate, direct physical injury to the species, but also includes habitat modification which may subsequently result in injury or death of individuals of the endangered species. Palila v. Hawaii Dept. of Land & Natural Resources, 852 F.2d 1106 (9th Cir. 1988).

Recent case. In People for the Ethical Treatment of Property Owners v. Unites States Fish and Wildlife Service, No. 14-4151, 2017 U.S. App. LEXIS 5440 (10th Cir. Mar. 29, 2017). the U.S. Court of Appeals for the Tenth Circuit again illustrated the impact of the ESA on private land activities in a case involving protected prairie dogs.  In the case, the plaintiffs were landowners in Utah whose experienced problems with the prevalence of the Utah prairie dog damaging their tracts. The Utah prairie dog is a threatened species under the ESA and has approximately 70 percent of its population on private land. The Utah prairie dog is found only in Utah, and its population has increased about 12 times over since 1973.

As a threatened species, the USFWS issued a special rule regulating the “taking” of the Utah prairie dog. Under the rule, “taking” was limited to agricultural land, property within one-half mile of conservation land and areas where the species creates serious human safety hazards or disturb the sanctity of significant cultural or burial sites. Incidental taking is allowed if it occurs as part of standard agricultural practices. The plaintiffs challenged the rule as applied to private land as not authorized under either the Commerce Clause or the Necessary and Proper Clause of the U.S. Constitution and sought declaratory and injunctive relief.

The trial court granted the plaintiffs motion for summary judgment on the basis that the Commerce Clause does not authorize the Congress to enact legislation authorizing the regulation of the taking of a purely intrastate species without a substantial effect on interstate commerce and the Necessary and Proper Clause did not authorize the regulation of taking of the species because the regulation is not essential to the ESA’s economic scheme. The government appealed.

On review, the appellate court reversed. The appellate court determined that the “substantial effect” on interstate commerce was to be determined under the rational basis standard. Under that standard, the appellate court held that the Congress has the power to regulate purely local activities that are part of an economic class of activities that have a substantial effect on interstate commerce. Thus, because (in this court’s view) the Commerce Clause authorized the regulation of noncommercial purely intrastate activity that is an essential part of a broader regulatory scheme, the “take” regulation was constitutional. The appellate court noted that approximately 68 percent of ESA-protected species have habitats that do not cross state borders, as such the court reasoned that the ESA could be severely undercut if the ESA only allowed protection to those species whose habitats were in multiple states. 

Conclusion

The ESA and the underlying regulations have a significant impact on private landowners and associated agricultural activities.  With new leadership in the White House and regulatory agencies it remains to be seen whether that will amount to any change in how the rules are applied on private land.

April 10, 2017 in Environmental Law | Permalink | Comments (0)

Monday, March 13, 2017

Drainage Activities on Farmland and the USDA

Overview

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “Swampbuster.”  It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made.  The concept was met with virtually no congressional opposition, and provided that any person who in any crop year produced an agricultural commodity on converted wetlands would be ineligible for federal agricultural subsidies with regard to that commodity.

But, the Swampbuster rules have become a “quagmire” of a bureaucratic mess for many farmers and their legal counsel over the years.  Today’s post takes a brief look at the issues involved in the hope that farmers and lawyers representing them can find a bit of guidance.

Legislative Background

The original intent of Swampbuster was to deny federal farm program benefits to persons planting agricultural commodities for harvest on converted wetlands. 16 U.S.C. § 3821(a)-(b).  Committee reports indicated that the Congress did not intend the Swampbuster provisions to authorize the USDA to regulate the use of private land and wanted producers to remain eligible for farm program benefits if the production of agricultural commodities occurred on converted wetlands where the impact of such conversion on wetland functional values was slight.  A wetland conversion was deemed to have “commenced” when a person had obligated funds or begun actual modification of a wetland.

The legislation charged the Soil Conservation Service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.  All three must be present, just having hydrophytic vegetation, for example, is not enough.  See B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).

The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules.  The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion.  Added were farmed wetlands, abandoned cropland, active pursuit requirements, Fish and Wildlife Service concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill).  If the drainage work was not completed by December 23, 1985, a request could be made of the USDA on or before September 19, 1988, to make a commencement determination.  In addition, drainage districts must satisfy several requirements under the “commenced conversion” rules.  A project drainage plan setting forth planned drainage must be officially adopted.  Also, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.

On-Site Wetland Identification Criteria

The USDA Natural Resource Conservation Service (USDA-NRCS) on-site wetland identification criteria are contained in 7 C.F.R. §12.31. Those rules lay out the procedures that USDA is to use to determine whether a tract contains wetlands.  But, the implementation of the procedures has also led to litigation.   For example, in Boucher v. United States Department of Agriculture, 149 F. Supp. 3d 1045 (S.D. Ind. 2016), the court determined that the NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed. The court also noted that existing regulations do not require site visits during the growing season and “normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation. The court also determined that the ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights. As a result, the court granted the government’s motion for summary judgment. 

Likewise, in Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016), the court determined that the defendant’s method for determining hydrology by using aerial photographs taken when the tract was under normal environmental conditions was proper, given that the tract was drier than normal during the defendant’s site visit and because the plaintiffs had tilled the tract such that it was not in its normal condition at the time of the site visit. The plaintiffs’ claim that the defendant had relied on “color tone” differences in the photographs to identify the tract as a wetland was dismissed because the defendant had actually identified some of the specifically authorized wetland signatures rather than just relying on changes in color tone. The court also rejected the plaintiffs’ claim that the defendant had relied on a comparison site too distant from the tract at issue that wasn’t within the local area as the regulations required. The comparison site chosen was 40 miles away but was within the same Major Land Resource Area. As such, the comparison site satisfied the regulatory criteria contained in 7 C.F.R. §12.31(b)(2) to find a similar tract in its natural vegetative state. Accordingly, the defendant’s use of the comparison site was not arbitrary, capricious or contrary to the law.  Earlier this year, the U.S. Supreme Court declined to hear the case.

“Farmed Wetlands”

The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics.  Drains affecting these areas can be maintained, but the “scope and effect” of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b).  Prior converted wetlands can be farmed, but they revert to protected status once abandoned. A prior converted wetland is a wetland that was totally drained to make it more suitable for farming before December 23, 1985. 16 U.S.C. §3801(a)(6).  If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original drainage can be maintained. 

Drainage activities on land designated as “farmed wetlands” have led to litigation.  In Gunn v. United States, 118 F.3d 1233 (8th Cir. 1997), cert. den., 522 U.S. 1111 (1998), the Eighth Circuit Court of Appeals held that conversion from wetland to farmland of the land in question did not begin before 1985 even though the land had been cropped for 85 consecutive years after the county drainage district installed a tile main to drain the land for crop production in 1906.  Because wetland traits occurred over time in wet years as the drainage system became incapable of draining the land, a portion of the farm was classified as “farmed wetland” and a 1992 replacement of the 1906 tile main with an open ditch was held to be an illegal improvement in the drainage beyond that which existed on December 23, 1985.  The court reached this conclusion even though drainage district assessments had been paid on the land for decades.

Unfortunately, the Gunn court did not precisely address the issue of the original “scope and effect” of the 1906 drainage activities.  Under USDA regulations, farmed wetland can be used as it was before December 23, 1985, and a hydrologic manipulation can be maintained to the same “scope and effect” as before December 23, 1985.  The USDA is responsible for determining the scope and effect of original manipulation on all farmed wetlands.  Arguably, if the 1906 drainage allowed crop production to occur on all of the land at issue at that time, then the effect of the 1906 drainage on the wetland was to convert it to crop production, and that status could be maintained by additional drainage activities after December 23, 1985.  However, for farmed wetlands, the government has interpreted the “scope and effect” regulation such that the depth or scope of drainage ditches, culverts or other drainage devices be preserved at their December 23, 1985, level regardless of the effect any post-December 23, 1985, drainage work actually had on the land involved.  In 1999, the U.S. Court of Appeals for the Eighth Circuit invalidated the government’s interpretation of the “scope and effect” regulation.  Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).  The court held that a proper interpretation should focus on the status quo of the manipulated wetlands rather than the drainage device utilized in post-December 23, 1985, drainage activities.

Changes in the Rules

In 1990, the Congress tightened the Swampbuster rules by adding a new provision which provided that “any person who in any crop year subsequent to November 28, 1990, converts a wetland by draining, dredging, filling, leveling, or any other means for the purpose, or to have the effect, of making the production of an agricultural commodity possible on such converted wetlands shall be ineligible for USDA farm benefits. 16 U.S.C. § 3821(b)-(c). The rules were also changed to add a stronger penalty for wetland conversions. While converting a wetland before Nov. 28, 1990, resulted in only a proportional loss of benefits, conversion after that date results in the loss of all USDA benefits on all land the farmer controls until the wetland is restored or the loss is mitigated.  16 U.S.C. § 3821(c) (2008).  After the 1990 Swampbuster rule change, the USDA took the position that activities that made ag production “possible” on converted wetland meant that any activity that made such land more farmable was prohibited.  The USDA’s regulatory position was upheld by Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008). but rejected by Koshman v. Vilsack, 865 F. Supp.2d 1083 (E.D. Cal. 2012).

Under the 1996 Farm Bill, a farmed wetland located in a cropped field can be drained without sacrificing farm program benefit eligibility if another wetland is created elsewhere.  Thus, through “mitigation,” a farmed wetland can be moved to an out-of-the-way location.  In addition, the 1996 legislation provides a good faith exemption to producers who inadvertently drain a wetland.  If the wetland is restored within one year of drainage, no penalty applies.  The legislation also revises the concept of “abandonment.”  Cropland with a certified wetland delineation, such as “prior converted” or “farmed wetland” is to maintain that status, as long as the land is used for agricultural production.  In accordance with an approved plan, a landowner may allow an area to revert to wetland status and then convert it back to its previous status without violating Swampbuster.

Conclusion

While the Congressional intent behind the Swampbuster rules was a good one, the actual implementation has created difficult problems for farmers and ranchers.  Will a new Administration and new heads of federal agencies bring more common sense to the application of that original intent of the Congress?  Only time will tell.

March 13, 2017 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Friday, January 6, 2017

Top Ten Agricultural Law Developments of 2016 (Five Through One)

Overview

Today we continue our look this week at the biggest developments in agricultural law and taxation during 2016.  Out of all of the court rulings, IRS developments and regulatory issues, we are down to the top five developments in terms of their impact on ag producers, rural landowners and agribusinesses. 

So, here are the top five (as I see them) in reverse order:

(5) Pasture Chiseling Activity Constituted Discharge of “Pollutant” That Violated the CWA. The plaintiff bought approximately 2,000 acres in northern California in 2012. Of that 2,000 acres, the plaintiff sold approximately 1,500 acres. The plaintiff retained an environmental consulting firm to provide a report and delineation map for the remaining acres and requested that appropriate buffers be mapped around all wetlands. The firm suggested that the plaintiff have the U.S. Army Corps of Engineers (COE) verify the delineations before conducting any grading activities. Before buying the 2,000 acres, the consulting firm had provided a delineation of the entire tract, noting that there were approximately 40 acres of pre-jurisdictional wetlands. The delineation on the remaining 450 acres of pasture after the sale noted the presence of intact vernal and seasonal swales on the property along with several intermittent and ephemeral drainages. A total of just over 16 acres of pre-jurisdictional waters of the United States were on the 450 acres – having the presence of hydric soils, hydrophytic vegetation and hydrology (1.07 acres of vernal pools; 4.02 acres of vernal swales; .82 acres of seasonal wetlands; 2.86 acres of seasonal swales and 7.40 acres of other waters of the United States). In preparation to plant wheat on the tract, the property was tilled at a depth of 4-6 inches to loosen the soil for plowing with care taken to avoid the areas delineated as wetlands. However, an officer with the (COE) drove past the tract and thought he saw ripping activity that required a permit. The COE sent a cease and desist letter and the plaintiff responded through legal counsel requesting documentation supporting the COE’s allegation and seeking clarification as to whether the COE’s letter was an enforcement action and pointing out that agricultural activities were exempted from the CWA permit requirement. The COE then provided a copy of a 1994 delineation and requested responses to numerous questions. The plaintiff did not respond. The COE then referred the matter to EPA for enforcement. The plaintiff sued the COE claiming a violation of his Fifth Amendment right to due process and his First Amendment right against retaliatory prosecution. The EPA refused the referral due to the pending lawsuit so the COE referred the matter to the U.S. Department of Justice (DOJ). The DOJ filed a counterclaim against the plaintiff for CWA violations.

The court granted the government’s motion on the due process claim because the cease and desist letter did not initiate any enforcement that triggered due process rights. The court also dismissed the plaintiff’s retaliatory prosecution claim. On the CWA claim brought by the defendant, the court determined that the plaintiff’s owner could be held liable as a responsible party. The court noted that the CWA is a strict liability statute and that the intent of the plaintiff’s owner was immaterial. The court then determined that the tillage of the soil causes it to be “redeposited” into delineated wetlands. The redeposit of soil, the court determined, constituted the discharge of a “pollutant” requiring a national pollution discharge elimination system (NPDES) permit. The court reached that conclusion because it found that the “waters” on the property were navigable waters under the CWA due to a hydrological connection to a creek that was a tributary of Sacramento River and also supported the federally listed vernal pool fairy shrimp and tadpole shrimp. Thus, a significant nexus with the Sacramento River was present. The court also determined that the farming equipment, a tractor with a ripper attachment constituted a point source pollutant under the CWA. The discharge was not exempt under the “established farming operation” exemption of 33 U.S.C. §1344(f)(1) because farming activities on the tract had not been established and ongoing, but had been grazed since 1988. Thus, the planting of wheat could not be considered a continuation of established and ongoing farming activities. Duarte Nursery, Inc. v. United States Army Corps of Engineers, No. 2:13-cv-02095-KJM-AC, 2016 U.S. Dist. LEXIS 76037 (E.D. Cal. Jun. 10, 2016).

(4) Prison Sentences Upheld For Egg Company Executives Even Though Government Conceded They Had No Knowledge of Salmonella Contamination. The defendant, an executive of a large-scale egg production company (trustee of the trust that owned the company), and his son (the Chief Operating Officer of the company) pled guilty as “responsible corporate officers” to misdemeanor violations of 21 U.S.C. §331(a) for introducing eggs that had been adulterated with salmonella into interstate commerce from the beginning of 2010 until approximately August of 2010. They each were fined $100,000 and sentenced to three months in prison. They appealed their sentences as unconstitutional on the basis that they had no knowledge that the eggs at issue were contaminated at the time they were shipped. They also claimed that their sentences violated Due Process and the Eighth Amendment insomuch as the sentences were not proportional to their “crimes.” They also claimed that incarceration for a misdemeanor offense would violate substantive due process.

The trial court determined that the poultry facilities were in poor condition, had not been appropriately cleaned, had the presence of rats and other rodents and frogs and, as a result, the defendant and his son either “knew or should have known” that additional salmonella testing was needed and that remedial and preventative measures were necessary to reduce the presence of salmonella. The appellate court agreed, finding that the evidence showed that the defendant and son were liable for negligently failing to prevent the salmonella outbreak and that 21 U.S.C. §331(a) did not have a knowledge requirement. The appellate court also did not find a due process violation. The defendant and son claimed that because they did not personally commit wrongful acts, and that due process is violated when prison terms are imposed for vicarious liability felonies where the sentence of imprisonment is only for misdemeanors. However, the court held that vicarious liability was not involved, and that 21 U.S.C. §331(a) holds a corporate officer accountable for failure to prevent or remedy “the conditions which gave rise to the charges against him.” Thus, the appellate court determined, the defendant and son were liable for negligently failing to prevent the salmonella outbreak. The court determined that the lack of criminal intent does not violate the Due Process Clause for a “public welfare offense” where the penalty is relatively small (the court believed it was), the defendant’s reputation was not “gravely” damaged (the court believed that it was not) and congressional intent supported the penalty (the court believed it did). The court also determined that there was no Eighth Amendment violation because “helpless” consumers of eggs were involved. The court also found no procedural or substantive due process violation with respect to the sentences because the court believed that the facts showed that the defendant and son “had reason to suspect contamination” and should have taken action to address the problem at that time (even though law didn’t require it).

The dissent pointed out that the government stipulated at trial that its investigation did not identify any corporate personnel (including the defendant and son) who had any knowledge that eggs sold during the relevant timeframe were contaminated with salmonella. The dissent also noted that the government conceded that there was no legal requirement for the defendant or corporation to comply with stricter regulations during the timeframe in issue. As such, the convictions imposed and related sentences were based on wholly nonculpable conduct and there was no legal precedent supporting imprisonment in such a situation. The dissent noted that the corporation “immediately, and at great expense, voluntarily recalled hundreds of millions of shell eggs produced” at its facilities when first alerted to the problem. As such, according to the dissent, due process was violated and the sentences were unconstitutional. United States v. Decoster, 828 F.3d 626 (8th Cir. 2016).

(3) The IRS and Self-Employment Tax. Two self-employment tax issues affecting farmers and ranchers have been in the forefront in recent years – the self-employment tax treatment of Conservation Reserve Program (CRP) payments and the self-employment tax implications of purchased livestock that had their purchase price deducted under the de minimis safe harbor of the capitalization and repair regulations. On the CRP issue, in 2014 the U.S. Court of Appeals ruled that CRP payments in the hands of a non-farmer are not subject to self-employment tax. The court, in Morehouse v. Comr., 769 F.3d 616 (8th Cir. 2014), rev’g, 140 T.C. 350 (2013), held the IRS to its historic position staked out in Rev. Rul. 60-32 that government payments attributable to idling farmland are not subject to self-employment tax when received by a person who is not a farmer. The court refused to give deference to an IRS announcement of proposed rulemaking involving the creation of a new Rev. Rul. that would obsolete the 1960 revenue ruling. The IRS never wrote the new rule, but continued to assert their new position on audit. The court essentially told the IRS to follow appropriate procedure and write a new rule reflecting their change of mind. In addition, the court determined that CRP payments are “rental payments” statutorily excluded from self-employment tax under I.R.C. §1402(a). Instead of following the court’s invitation to write a new rule, the IRS issued a non-acquiescence with the Eighth Circuit’s opinion. O.D. 2015-02, IRB 2015-41. IRS said that it would continue audits asserting their judicially rejected position, even inside the Eighth Circuit (AR, IA, MN, MO, NE, ND and SD).

In 2016, the IRS had the opportunity to show just how strong its opposition to the Morehouse decision is. A Nebraska non-farmer investor in real estate received a CP2000 Notice from the IRS, indicating CRP income had been omitted from their 2014 return. The CP2000 Notice assessed the income tax and SE Tax on the alleged omitted income. The CRP rental income was in fact included on the return, but it was included on Schedule E along with cash rents, where it was not subject to self-employment tax. The practitioner responded to the IRS Notice by explaining that the CRP rents were properly reported on Schedule E because the taxpayer was not a farmer. This put the matter squarely before the IRS to reject the taxpayer’s position based on the non-acquiescence. But, the IRS replied to the taxpayer’s response with a letter informing the taxpayer that the IRS inquiry was being closed with no change from the taxpayer’s initial position that reported the CRP rents for the non-farmer on Schedule E. 

On the capitalization and repair issue, taxpayers can make a de minimis safe harbor election that allows amounts otherwise required to be capitalized to be claimed as an I.R.C. §162 ordinary and necessary business expense. This de minimis expensing election has a limit of $5,000 for taxpayers with an Applicable Financial Statement (AFS) and $2,500 for those without an AFS. Farmers will fall in the latter category. In both cases, the limit is applied either per the total on the invoice, or per item as substantiated by the invoice. One big issue for farmers and ranchers is how to report the income from the sale of purchased livestock that are held for productive use, such as breeding or dairy animals for which the de minimis safe harbor election was made allowing the full cost of the livestock to be deducted. It had been believed that because the repair regulations specify when the safe harbor is used, the sale amount is reported fully as ordinary income that is reported on Schedule F where it is subject to self-employment tax for a taxpayer who is sole proprietor farmer or a member of a farm partnership. In that event, the use of the safe harbor election would produce a worse tax result that would claiming I.R.C. §179 on the livestock.

An alternative interpretation of the repair regulations is that the self-employment tax treatment of the gain or loss on sale of assets for which the purchase price was deducted under the de minimis safe harbor is governed by Treas. Reg. §1.1402(a)-6(a). That regulation states that the sale of property is not subject to selfemployment tax unless at least one of two conditions are satisfied: (1) the property is stock in trade or other property of a kind which would properly be includible in inventory if on-hand at the close of the tax year; or (2) the property is held primarily for sale to customers in the ordinary course of a trade or business. Because purchased livestock held for dairy or breeding purposes do not satisfy the first condition, the question comes down to whether condition two is satisfied – are the livestock held primarily for sale to customers in the ordinary course of a trade or business? The answer to that question is highly fact-dependent. If the livestock whose purchase costs have been deducted under the de minimis rule are not held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, the effect of the regulation is to report the gain on sale on Part II of Form 4797. This follows Treas. Reg. §1.1402(a)-6(a) which bars Sec. 1231 treatment (which would result in the sale being reported on Part I of Form 4797). In that event, the income received on sale would not be subject to self-employment tax.

In 2016, the IRS, in an unofficial communication, said that the alternative interpretation is the correct approach. However, the IRS was careful to point out that the alternative approach is based on the assumptions that the livestock were neither inventoriable nor held for sale, and that those assumptions are highly fact dependent on a case-by case basis. The IRS is considering adding clarifying language to the Farmers’ Tax Guide (IRS Pub. 225) and/or the Schedule F Instructions.

(2) TMDLs and the Regulation of Ag Runoff. Diffused surface runoff of agricultural fertilizer and other chemicals into water sources as well as irrigation return flows are classic examples of nonpoint source pollution that isn’t discharged from a particular, identifiable source. A primary source of nonpoint source pollution is agricultural runoff. As nonpoint source pollution, the Clean Water Act (CWA) leaves regulation of it up to the states rather than the federal government. The CWA sets-up a “states-first” approach to regulating water quality when it comes to nonpoint source pollution. Two key court opinions were issued in 2016 where the courts denied attempts by environmental groups to force the EPA to create additional federal regulations involving Total Maximum Daily Loads (TMDLs). The states are to establish total maximum daily TMDLs for watercourses that fail to meet water quality standards after the application of controls on point sources. A TMDL establishes the maximum amount of a pollutant that can be discharged or “loaded” into the water at issue from all combined sources on a daily basis and still permit that water to meet water quality standards. A TMDL must be set “at a level necessary to implement water quality standards.” The purpose of a TMDL is to limit the amount of pollutants in a watercourse on any particular date. Two federal court opinions in 2016 reaffirmed the principle that regulation of nonpoint source pollution is left to the states and not the federal government.

In Conservation Law Foundation v. United States Environmental Protection Agency, No. 15-165-ML, 2016 U.S. Dist. LEXIS 172117 (D. R.I. Dec. 13, 2016), the plaintiff claimed that the EPA’s approval of the state TMDL for a waterbody constituted a determination that particular stormwater discharges were contributing to the TMDL being exceeded and that federal permits were thus necessary. The court, however, determined that the EPA’s approval of the TMDL did not mean that EPA had concluded that stormwater discharges required permits. The court noted that there was nothing in the EPA’s approval of the TMDL indicating that the EPA had done its own fact finding or that EPA had independently determined that stormwater discharges contributed to a violation of state water quality standards. The regulations simply do not require an NPDES permit for stormwater discharges to waters of the United States for which a TMDL has been established. A permit is only required when, after a TMDL is established, the EPA makes a determination that further controls on stormwater are needed.

In the other case, Gulf Restoration Network v. Jackson, No. 12-677 Section: “A” (3), 2016 U.S. Dist. LEXIS 173459 (E.D. La. Dec. 15, 2016), numerous environmental groups sued the EPA to force them to impose limits on fertilizer runoff from farm fields. The groups claimed that many states hadn’t done enough to control nitrogen and phosphorous pollution from agricultural runoff, and that the EPA was required to mandate federal limits under the Administrative Procedure Act – in particular, 5 U.S.C. §553(e) via §303(c)(4) of the CWA. Initially, the groups told the EPA that they would sue if the EPA did not write the rules setting the limits as requested. The EPA essentially ignored the groups’ petition by declining to make a “necessity determination. The groups sued and the trial court determined that the EPA had to make the determination based on a 2007 U.S. Supreme Court decision involving the Clean Air Act (CAA). That decision was reversed on appeal on the basis that the EPA has discretion under §303(c)(4)(B) of the CWA to decide not to make a necessity determination as long as the EPA gave a “reasonable explanation” based on the statute why it chose not to make any determination. The appellate court noted that the CWA differed from the CAA on this point. On remand, the trial court noted upheld the EPA’s decision not to make a necessity determination. The court noted that the CWA gives the EPA “great discretion” when it comes to regulating nutrients, and that the Congressional policy was to leave regulation of diffused surface runoff up to the states. The court gave deference to the EPA’s “comprehensive strategy of bringing the states along without the use of federal rule making…”.

Also, in 2016 the U.S. Supreme Court declined to review a decision of the U.S. Court of Appeals for the Third Circuit which had determined in 2015 that the EPA had acted within its authority under 33 U.S.C. §1251(d) in developing a TMDL for the discharge of nonpoint sources pollutants into the Chesapeake Bay watershed.  American Farm Bureau, et al. v. United States Environmental Protection Agency, et al., 792 F.3d 281 (3d Cir. 2015), cert. den., 136 S. Ct. 1246 (2016).

(1) The Election of Donald Trump as President and the Potential Impact on Agricultural and Tax Policy. Rural America voted overwhelmingly for President-elect Trump, and he will be the President largely because of the sea of red all across the country in the non-urban areas. So, what can farmers, ranchers and agribusinesses anticipate the big issues to be in the coming months and next few years and the policy responses? It’s probably reasonable to expect that same approach will be applied to regulations impacting agriculture. Those with minimal benefit and high cost could be eliminated or retooled such that they are cost effective. Overall, the pace of the generation of additional regulation will be slowed. Indeed, the President-elect has stated that for every new regulation, two existing regulations have to be eliminated.

Ag policy.  As for trade, it is likely that trade agreements will be negotiated on a much more bi-lateral basis – the U.S. negotiating with one other country at a time rather than numerous countries. The President-elect is largely against government hand-outs and is big on economic efficiency. That bodes well for the oil and gas industry (and perhaps nuclear energy). But, what about less efficient forms of energy that are heavily reliant on taxpayer support? Numerous agricultural states are heavily into subsidized forms of energy with their state budgets littered with numerous tax “goodies” for “renewable” energy.” However, the President-elect won those states. So, does that mean that the federal subsidies for ethanol and biodiesel will continue. Probably. The Renewable Fuels Standard will be debated in 2017, but will anything significant happen? Doubtful. It will continue to be supported, but I expect it to be reviewed to make sure that it fits the market. Indeed, one of the reasons that bio-mass ethanol was reduced so dramatically in the EPA rules was that it couldn’t be produced in adequate supplies. What about the wind energy production tax credit? What about the various energy credits in the tax code? Time will tell, but agricultural interests should pay close attention.

The head of the Senate Ag Committee will be Sen. Roberts from Kansas. As chair, he will influence the tone of the debate of the next farm bill. I suspect that means that the farm bill will have provisions dealing with livestock disease and biosecurity issues. Also, I suspect that it will contain significant provisions crop insurance programs and reforms of existing programs. The House Ag Committee head will be Rep. Conaway from Texas. That could mean that cottonseed will become an eligible commodity for Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). It may also be safe to assume that for the significant Midwest crops (and maybe some additional crops) their reference prices will go up. Also, it now looks as if the I.R.C. §179 issue involving the income limitation for qualification for farm program payments (i.e., the discrepancy of the treatment between S corporations and C corporations) will be straightened out. Other federal agencies that impact agriculture (EPA, Interior, FDA, Energy, OSHA) can be expected to be more friendly to agriculture in a Trump Administration.

Tax policy. As for income taxes, it looks at this time that the Alternative Minimum Tax might be eliminated, as will the net investment income tax that is contained in Obamacare. Individual tax rates will likely drop, and it might be possible that depreciable assets will be fully deductible in the year of their purchase. Also, it looks like the corporate tax rate will be cut as will the rate applicable to pass-through income. As for transfer taxes, President-elect Trump has proposed a full repeal of the federal estate tax as well as the federal gift tax. Perhaps repeal will be effective January 1, 2017, or perhaps it will be put off until the beginning of 2018. Or, it could be phased-in over a certain period of time. Also, while it appears at the present time that any repeal would be “permanent,” that’s not necessarily a certainty. Similarly, it’s not known whether the current basis “step-up” rule would be retained if the estate tax is repealed. That’s particularly a big issue for farmers and ranchers. It will probably come down to a cost analysis as to whether step-up basis is allowed. The President-elect has already proposed a capital gains tax at death applicable to transfers that exceed $10 million (with certain exemptions for farms and other family businesses). Repeal of gift tax along with repeal of estate tax has important planning implications. There are numerous scenarios that could play out. Stay tuned, and be ready to modify existing plans based on what happens. Any repeal bill would require 60 votes in the Senate to avoid a filibuster unless repeal is done as part of a reconciliation bill. Also, without being part of a reconciliation bill, any repeal of the federal estate tax would have to “sunset” in ten years.

January 6, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Wednesday, January 4, 2017

Top Ten Agricultural Law and Tax Developments of 2016 (Ten Through Six)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2016.  On Monday, we highlighted the important developments that just missed being in the top ten.  Today we take a look at developments 10 through six.  On Friday, we will look at the top five. 

  1. Court Obscures Rational Basis Test To Eliminate Ag Exemption From Workers' Compensation Law. While this is a state Supreme Court decision, its implications are significant. Most, if not all, states have a statutory exemption from workers’ compensation for employers that are engaged in agriculture. The statutory exemption varies in scope from state to state and, of course, an employer that is otherwise exempt can choose to be covered by the statute and offer workers’ compensation benefits to employees. In this case, the plaintiffs claimed that their on-the-job injuries should be covered under the state (NM) workers' compensation law. One plaintiff tripped while picking chile and fractured her left wrist. The other plaintiff was injured while working in a dairy when he was head-butted by a cow and pushed up against a metal door causing him to fall face-first into a concrete floor and sustain neurological damage. The plaintiffs' claims for workers' compensation benefits were dismissed via the exclusion from the workers' compensation system for employers. On appeal, the appellate court reversed. Using rational basis review (the standard most deferential to the constitutionality of the provision at issue), the court interpreted Sec. 52-1-6(A) of the New Mexico Code as applying to the primary job duties of the employees (as opposed to the business of the employer and the predominant type of employees hired), and concluded the distinction was irrational and lacked any rational purpose. The appellate court noted that the purpose of the law was to provide "quick and efficient delivery" of medical benefits to injured and disabled workers. Thus, the court determined that the exclusion violated the constitutional equal protection guarantee. The court further believed that the exclusion for workers that cultivate and harvest (pick) crops, but the inclusion of workers that perform tasks associated with the processing of crops was a distinction without a difference. The appellate court made no mention that the highest court in numerous other states had upheld a similar exclusion for agriculture from an equal protection constitutional challenge.  On further review, the state Supreme Court affirmed. The Court determined that there was nothing to distinguish farm and ranch laborers from other ag employees and that the government interest of cost savings, administrative convenience and similar interests unique to agriculture were not rationally related to a legitimate government interest. The court determined that the exclusion that it construed as applying to ag laborers was arbitrary discrimination. A dissenting judge pointed out that the legislature’s decision to allow employers of farm and ranch laborers to decide for themselves whether to be subject to workers’ compensation or opt out and face tort liability did not violate any constitutionally-protected right. The dissent noted that such ability to opt out was a legitimate statutory scheme that rationally controlled costs for New Mexico farms and ranches, and that 29 percent of state farms and ranches had elected to be covered by workers’ compensation. The dissent also noted that the majority’s opinion would have a detrimental economic impact on small, economically fragile farms in New Mexico by imposing an additional economic cost of $10.5 million annually (as projected by the state Workers’ Compensation Administration). On this point, the dissent further pointed out that the average cost of a claim was $16,876 while the average net farm income for the same year studied was $19,373. The dissent further concluded that the exemption for farming operations was legitimately related to insulating New Mexico farm and ranches from additional costs. In addition, the dissent reasoned that the majority misapplied the rational basis analysis to hold the act unconstitutional as many other state courts and the U.S. Supreme Court had held comparable state statutes to satisfy the rational basis test. The dissent pointed out forcefully that the exclusion applied to employers and that the choice to be covered or not resided with employers who predominately hired ag employees. As such there was no disparate treatment between ag laborers and other agricultural workers. Rodriguez, et al. v. Brand West Dairy, et al., 378 P.3d 13 (N.M. Sup. Ct. 2016), aff’g., 356 P.3d 546 (N.M. Ct. App. 2015).
  • 9.  COE Jurisdictional Determination Subject to Court Review. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On appeal, the court unanimously reversed, strongly criticizing the trial court's opinion. Based on Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (2012), the court held that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct in light of Rapanos v. United States, 547 U.S. 715 (U.S. 2006). The court noted that the COE had deliberately left vague the "definitions used to make jurisdictional determinations" so as to expand its regulatory reach. While the COE claimed that the jurisdictional determination was merely advisory and that the plaintiff had adequate ways to contest the determination, the court determined that such alternatives were cost prohibitive and futile. The court stated that the COE's assertion that the jurisdictional determination (and the trial court's opinion) was merely advisory ignored reality and had a powerful coercive effect. The court held that the Fifth Circuit, which reached the opposition conclusion with respect to a COE Jurisdictional Determination in Belle Co., LLC v. United States Army Corps. of Engineers, 761 F.3d 383 (5th Cir. 2014), cert. den., 83 U.S.L.W. 3291 (U.S. Mar. 23, 2015), misapplied the Supreme Court's decision in Sackett. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, 782 F.3d 984 (8th Cir. 2015), rev'g., 963 F. Supp. 2d 868 (D. Minn. 2013). In a later decision, the court denied a petition to rehear the case en banc and by the panel. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 11697 (8th Cir. Jul. 7, 2015).  In December of 2015, the U.S. Supreme Court agreed to hear the case and affirmed the Eighth Circuit on May 31, 2016. The Court, in a unanimous opinion, noted that the memorandum of agreement between the EPA and the Corps established that jurisdictional determinations are “final actions” that represent the Government’s position, are binding on the Government in any subsequent Federal action or litigation involving the position taken in the jurisdictional determination. When the landowners received an “approved determination” that meant that the Government had determined that jurisdictional waters were present on the property due to a “nexus” with the Red River of the North, located 120 miles away. As such, the landowners had the right to appeal in Court after exhausting administrative remedies and the Government’s position take in the jurisdictional determination was judicially reviewable. Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, 136 S. Ct. 1807 (2016).  
  • 8.  Proposed Regulations Under I.R.C. §2704. In early August, the IRS issued new I.R.C. §2704 regulations that could seriously impact the ability to generate minority interest discounts for the transfer of family-owned entities. Prop. Reg. – 163113-02 (Aug. 2, 2016). The proposed regulations, if adopted in their present form, will impose significant restrictions on the availability of valuation discounts for gift and estate tax purposes in a family-controlled environment. Prop. Treas. Regs. §§25.2704-1; 25.2704-4; REG- 163113-02 (Aug. 2, 2016). They also redefine via regulation and thereby overturn decades of court decisions honoring the well-established willing-buyer/willing-seller approach to determining fair market value (FMV) of entity interests at death or via gift of closely-held entities, including farms and ranches. The proposed regulations would have a significant impact on estate, business and succession planning in the agricultural context for many agricultural producers across the country and will make it more difficult for family farm and ranch businesses to survive when a family business partner dies. Specifically, the proposed regulations treat transfer within three years of death as death-bed transfers, create new “disregarded restrictions” and move entirely away from examining only those restrictions that are more restrictive than state law. As such, the proposed regulations appear to exceed the authority granted to the Treasury by Congress to promulgate regulations under I.R.C. §2704 and should be withdrawn. A hearing on the regulations was held in early December.  
  • 7.  Capitalization Required For Interest and Real Property Taxes Associated with Crops Having More Than Two-Year Preproductive Period. The petitioner (three partnerships) bought land that they planned to use for growing almonds. They financed the purchase by borrowing money and paying interest on the debt. They then began planting almond trees. They deducted the interest and property taxes on their returns. The IRS objected to the deduction on the basis that the interest and taxes were indirect costs of the “production of real property” (i.e., the almonds trees that were growing on the land. The Tax Court agreed with the IRS noting that I.R.C. §263A requires the capitalization of certain costs and that those costs include the interest paid to buy the land and the property taxes paid on the land attributable to growing crops and plants where the preproductive period of the crop or plant exceeds two years. I.R.C. §263A(f)(1) states that “interest is capitalized where (1) the interest is paid during the production period and (2) the interest is allocable to real property that the taxpayer produced and that has a long useful life, an estimated production period exceeding two years, or an estimated production period exceeding one year and a cost exceeding $1 million.” The corresponding regulation, the court noted, requires that the interest be capitalized under the avoided cost method. The court also noted that the definition of “real property produced by the taxpayer for the taxpayer’s use in a trade or business or in an activity conducted for profit” included “land” and “unsevered natural products of the land” and that “unsevered natural products of the land” general includes growing crops and plants where the preproductive period of the crop or plant exceeds two years. Because almond trees have a preproductive period exceeding two years in accordance with IRS Notice 2000-45, and because the land was “necessarily intertwined” with the growing of the almond trees, the interest and tax cost of the land is a necessary and indispensable part of the growing of the almond trees and must be capitalized. Wasco Real Properties I, LLC, et al. v. Comr., T.C. Memo. 2016-224.

6.         No Recapture of Prepaid Expenses Deducted in Prior Year When Surviving Spouse Claims Same Deduction in Later Year. The decedent, a materially participating Nebraska farmer, bought farm inputs in 2010 and deducted their cost on his 2010 Schedule F. He died in the spring of 2011 before using the inputs to put the spring 2011 crop in the ground. Upon his death, the inputs were included in the decedent’s estate at their purchase price value and then passed to a testamentary trust for the benefit of his wife. The surviving spouse took over the farming operation, and in the spring of 2011, took a distribution of the inputs from the trust to plant the 2011 crops. For 2011, two Schedule Fs were filed. A Schedule F was filed for the decedent to report the crop sales deferred to 2011, and a Schedule F was filed for the wife to report the crops sold by her in 2011 and claim the expenses of producing the crop which included the amount of the inputs (at their date-of-death value which equaled their purchase price) that had been previously deducted as prepaid inputs by the husband on the couple’s joint 2010 return. The IRS denied the deduction on the basis that the farming expense deduction by the surviving spouse was inconsistent with the deduction for prepaid inputs taken in the prior year by the decedent and, as a result, the “tax benefit rule” applied. The court disagreed, noting that the basis step-up rule of I.R.C. §1014 allowed the deduction by the surviving spouse which was not inconsistent with the deduction for the same inputs in her deceased husband’s separate farming business. The court also noted that inherited property is not recognized as income by the recipient, which meant that another requisite for application of the tax benefit rule did not apply. Estate of Backemeyer v. Comr., 147 T.C. No. 17 (2016).

Conclusion

Those were developments ten through six, at least as I see it for 2016.  On Friday, we will list the five biggest developments for 2016.

January 4, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)