Friday, October 23, 2020

Eminent Domain and “Seriously Misleading” Financing Statements

Overview

Farmers and ranchers encounter numerous legal issues, some more often than others.  Some involve relationships with people that have gone awry, while others are a function of the economic situation surrounding the operation.  Still others involve technical contract issues involving the sale or transfer of agricultural commodities.  Many involve farmland in one fashion or another. 

In today’s article, I examine a couple of recent cases illustrating two legal issues that farmers and ranchers encounter – eminent domain and financing arrangements.  These are the topic of today’s post.

Eminent Domain

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 “takings” clause of the Fifth Amendment has been held to apply to the states since 1897. Chicago, Burlington and Quincy Railroad Co., v. Chicago, 166 U.S. 226 (1897). 

The issue of what constitutes “just compensation” is often the thorny issue when a “taking” has occurred.  Often, the government will “low-ball” a landowner upon the exercise of its eminent domain power.  But, just compensation is to be tied to fair market value of the property taken.  The trick is how fair market value is to be determined.  That precise issue came up in a recent Nebraska case.

Recent case. In Russell v. Franklin County, 27 Neb. Ct. App. 684, 934 N.W.2d 517 (2019), the plaintiffs were landowners whose property consisted of 164 acres that was primarily cropland and pastureland. The property has been in the plaintiffs’ family for many years and includes cropland and pastureland. There was no residence on the property, and the plaintiffs used it for birdwatching, camping, hunting for game and mushrooms, and other recreational purposes. The plaintiffs gave the defendant county permission to cut down trees on the plaintiffs’ property in order to improve visibility for drivers on an adjacent county road. However, the defendant’s employees proceeded to cut down trees from an area not authorized for removal. In total, the defendant cut down 67 trees, affecting 1.67 acres of the plaintiffs’ land.

The plaintiffs filed an inverse condemnation action under Neb. Rev. Stat. §76-705, et seq. against the defendant, alleging an unlawful taking of their property for public use without just compensation. The plaintiffs claimed that the damages should be calculated by determining the replacement cost of the trees and soil from uprooted trees.  In other words, the “just compensation” should be what it would cost to put the property back to its status before the trees outside the permitted area were removed.  To that end, the plaintiffs relied upon an arborist, a salesperson from a nursery and garden center, and a representative from an excavating company to quantify their damages. Together, the experts calculated the cost to return the property to its prior condition to be $150,716.  Conversely, the defendant argued that the damages should be calculated by determining the difference in fair market value of the plaintiffs’ property before and after the trees had been cut down, which its expert said was $200.

The trial court agreed with the defendant and held that the appropriate measure of damages was the difference in the fair market value of the land. The trial court noted that the plaintiffs had argued their case under the state’s eminent domain statutes but were seeking damages based on a tort cause of action. On appeal, the plaintiffs’ argued the trial court applied the wrong measure of damages. The plaintiffs maintained their argument that the proper method for determining damages was to calculate the cost of restoring the property to its preexisting condition. The appellate court held that the correct measure for damages was in fact the difference in the fair market value of the land before and after the trees were cut down. The appellate court noted that Nebraska courts have consistently held that damages in eminent domain cases are measured based on market value of the property. Further, the appellate court pointed out that the state Supreme Court had previously held that vegetation is not valued separately and should only be considered in how its presence affects the fair market value of the land. Finally, the appellate court noted that the plaintiffs’ argument for calculating damages rested on cases that stemmed from tort actions. Because the plaintiffs had argued their case as one under the eminent domain statutes, they could not seek damages under an unlawful destruction of trees or negligence action. 

On further review, the Nebraska Supreme Court affirmed.  Russell v. Franklin County, 306 Neb. 546, 946 N.W.2d 648 (2020)

Financing Statement and Debtor’s Name

Occasionally, a lender loans money on an unsecured basis with the lender's security based solely on the borrower's reputation and promise to repay.  More likely, however, a lender will require collateral to make sure the borrower repays the loan. Usually, the lender requires the borrower to sign a written agreement (security agreement) giving the lender legal rights to the collateral (such as the borrower's crops, livestock or equipment) if the borrower fails to repay the loan. The situation where personal property or fixtures are used to secure payment of a debt or the performance of an obligation is called a secured transaction.  In this transaction, the lender receives a security interest in the debtor’s collateral.  If the debtor fails to repay the obligation, the creditor can have the collateral sold to repay the loan. 

Normally, a security interest in tangible property is perfected by filing a financing statement or by filing the security agreement as a financing statement. Indeed, filing a financing statement usually is the only practical way to perfect when the debtor is a farmer or rancher.

Under UCC § 9-506, a financing statement is effective even if it has minor errors or omissions unless the errors or omissions make the financing statement seriously misleading. A financing statement containing an incorrect debtor’s name is not seriously misleading if a search of the records of the filing office under the debtor’s correct legal name, using the filing office’s standard search logic, if any, discloses the financing statement filed under the incorrect name. However, some states have statutes or regulations defining the search logic to be used and may require that the debtor’s name be listed precisely in accordance with that logic.  A recent Minnesota bankruptcy case illustrates this point.

Recent case.  In a recent bankruptcy case from Minnesota, In re Rancher’s Legacy Meat Co., 616 B.R. 532 (Bankr. D. Minn. 2020), the debtor was a meat packing and processing company that was created by two people (one of which was a creditor) operating under the name of Unger Meat Company (UMC). The creditor leased a building to the debtor that was to be used as a processing plant. The creditor also provided startup funds through two promissory notes. The parties entered into a security agreement that granted the creditor a security interest in all of the debtor’s equipment, inventory, and accounts receivable.

The creditor perfected the security agreement by filing a financing statement with the state. UMC lost money and the creditor entered into an option agreement with a holding company to purchase UMC. Upon finalization of the sale, the holding company subsequently purchased the creditor’s shares in UMC and changed the name of the company to Rancher’s Legacy Meat Company. Fourteen months after the name change, the creditor filed a continuation statement listing the company’s name as UMC. Three years later, the creditor filed an amended continuation statement changing the debtor’s name to Rancher’s Legacy. The creditor began seeking collection on its notes and a few months later the debtor filed for Chapter 11 bankruptcy. The debtor argued that the appropriate procedure to re-perfect the creditor’s security interest was to file a new financing statement upon the debtor’s name change. The creditor claimed that the filings appropriately re-perfected the security interest, entitling the creditor to adequate protection payments. The bankruptcy court looked to local (Minnesota) law, to construe the status of the creditor’s lien. Under Minnesota law, a financing statement becomes seriously misleading and ineffective when it fails to provide the debtor’s correct name. Additionally, when the financing statement is ineffective because of seriously misleading information, an amendment must be made within four months to perfect a security interest.

The bankruptcy court held that the creditor’s security interest lapsed when four months had passed after the creditor’s financing statement became seriously misleading. Further, the bankruptcy court held that the creditor had the ability to re-perfect the security interest by filing a new financing statement. Although the security interest had lapsed, the language of the parties’ security agreement provided the creditor with the opportunity to file a second financing statement. The creditor argued that the multiple filings were sufficient to giver proper notice to any other creditors under the UCC. The bankruptcy court disagreed and held that multiple filings can occasionally give proper notice, but not when the notice had become seriously misleading.

The bankruptcy court held that the validity of the financing statement depended primarily on its ability to give notice of the security interest to other creditors. The purpose of the UCC’s notice system, the bankruptcy court noted, is to provide public notice of a secured interest without requiring parties to piece together several documents. Further, the bankruptcy court noted that the creditor’s argument for multiple filings failed because the original financing statement had lapsed. The creditor’s continuation statements were merely amendments to the original financing statement. However, the original financing statement had lapsed four months after it became seriously misleading. The bankruptcy court held that the continuation statements could not revive the financing statement once it had lapsed. Lastly, the creditor argued that the subsequent filings of the continuation statements should have been enough to re-perfect his security interest.

The bankruptcy court held that even when the creditor’s three filings were read in conjunction, they were ineffective to re-perfect his security interest. The bankruptcy court further pointed out that the UCC specifically provides that continuation statements cannot substitute for financing statements. As a result, the bankruptcy court declared that the creditor became an unsecured creditor at the time the security interests became unperfected. Because the creditor failed to re-perfect the security interest before the debtor filed Chapter 11 bankruptcy, the debtor was not required to provide the creditor with adequate protection payments. 

Conclusion

Eminent domain and getting a debtor’s name correct on a financing statement – two issues that farmers and ranchers frequently encounter.  Also, two issues that illustrate how farmers and ranchers can become entangled in legal matters so easily. 

October 23, 2020 in Environmental Law, Regulatory Law, Secured Transactions | Permalink | Comments (0)

Tuesday, October 20, 2020

The Public Trust Doctrine – A Camel’s Nose Under Agriculture’s Tent?

Overview

Centuries ago, the seas were viewed as the common property of everyone - they weren’t subject to private use and ownership.  Instead, they were held in what was known as the “public trust.”  This concept was later adopted in English law, the Magna Carta, and became part of the common (non-statutory) law of individual states in the United States after the Revolution.  Over the years, this “public trust doctrine” has been primarily applied to access to the seashore and intertidal waters, although recently some courts have expanded its reach beyond its historical application.

But, any judicial expansion of the public trust doctrine results in curtailing vested property rights.  That’s a very important concern for agriculture because of agriculture’s necessary use of natural resources such as land, air, water, minerals and the like.  Restricting or eliminating property rights materially impacts agricultural operations in a negative manner.  It also creates an economic disincentive to use property in an economically (and socially) efficient manner.

The impact of an expanded public use doctrine on agriculture – it’s the topic of today’s post.

In General

The U.S. Supreme Court’s first application of the public trust doctrine was in 1842 in Martin v. Lessee of Waddell, 41 U.S.367 (1842). In the case, the issue was who had the right to submerged land and oyster harvesting off the coast of New Jersey.  The Court, largely based on the language in the charter granted by the King to a Duke to establish a colony and for policy and economic reasons, determined that the land area in issue belonged to the state of New Jersey for the benefit of the people of the state.  The Court dealt with the issue again in 1892 in a case involving a railroad that had been granted a large amount of the Chicago harbor. Illinois Central Railroad Company v. Illinois, 146 U.S. 387 (1892).  The Court determined that the government cannot alienate (interfere with) the public’s right to access land under waters that are navigable in fact except for situations where the land involved wouldn’t interfere with the public’s ability to access the water or impair navigation. 

As generally applied in the United States (although there are differences among the states), an oceanfront property owner can exclude the public below the mean high tide (water) line.  See e.g., Gunderson v. State, 90 N.E. 3d 1171 (Ind. 2018)That’s the line of intersection of the land with the water's surface at the maximum height reached by a rising tide (e.g., high water mark).  Basically, it’s the debris line or the line where you would find fine shells.  However, traceable to the mid-1600s, Massachusetts and Maine recognize private property rights to the mean low tide line even though they do allow the public to have access to the shore between the low and high tide lines for "fishing, fowling and navigation.”  In addition, in Maine, the public can cross private shoreline property for scuba diving purposes.  McGarvey v. Whittredge, 28 A.3d 620 (Me. 2011). 

Other applications of the public trust doctrine involve the preservation of oil resources, fish stocks and crustacean beds.  Also, many lakes and navigable streams are maintained via the public trust doctrine for purposes of drinking water and recreation.

Expanding the Doctrine?

As noted above, the public trust doctrine is an ancient concept that guarantees certain rights to the public and causes other rights to be vested in private owners.  Indeed, in the United States, one of the fundamental Constitutional rights denoted in the Bill of Rights is that of the ownership of private property.  Fifth Amendment, U.S. Constitution.  As a fundamental Constitutional right, any infringement on the right is subject to “strict scrutiny” by a court.  Of course, the government (state and federal) retains the right to “take” private property for a public use, but only upon the payment of “just compensation.”  But, any expansion of the doctrine does an “end-run” around the claim that the government has committed a taking that requires compensation – the theory being that the public rights pre-existed and private property rights are automatically subject to them.  An expansion would bring non-justiciable political questions into the courts.  This technique has been tried with attempts to get the courts to decide allegations of harm and restrict usage of private property based on “global warming.”  Largely, the courts have refused citing lack of standing, congressional delegation to administrative agencies and that such claims are non-justiciable political questions.  See, e.g., American Electric Power Company v. Connecticut, 564 U.S. 410 (2011)

The notion that vested (e.g., settled, fixed, inalienable) rights can be usurped by an expanded application of the public trust doctrine makes it easier for regulation of property rights to occur without any concern that a non-physical taking of the property has occurred  that would require the private property owner to be compensated. That’s because the private property taken, the theory is, was a right that the owner never had to begin with.  In turn, an expanded public trust doctrine would require state (and, perhaps, federal) governments to take action to preserve public rights.  If they failed to do so, the legal system would be used to force action.  The courts, then, become a sort of “super legislature” via the public trust doctrine - a “court-packing” technique that is off the radar and out of public view.

How could an expanded public trust doctrine apply?  For farmers and ranchers, it could make a material detrimental impact on the farming operation.  For instance, many endangered species have habitat on privately owned land.  If wildlife and their habitat are deemed to be covered by the doctrine, farming and ranching practices could be effectively curtailed.  What about vested water rights?  A farming or ranching operation that has a vested water right to use water from a watercourse for crop irrigation or livestock watering purposes could find itself having those rights limited or eliminated if, under the public trust doctrine, a certain amount of water needed to be retained in the stream for a species of fish. 

One might argue that the government already has the ability to place those restrictions on farming operations, and that argument would be correct.  But, such restrictions exist via the legislative and regulatory process and are subject to constitutional due process, equal protection and just compensation protections.  Conversely, land-use restrictions via the public trust doctrine bypass those constitutional protections.  No compensation would need to be paid, because there was no governmental taking – a water right, for example, could be deemed to be subject to the “public trust” and enforced without the government paying for taking the right.  That’s a much different outcome than the government imposing regulations on property uses that trigger compensation for an unconstitutional regulatory taking.  In essence the government, via the doctrine, acquires an easement for the protection of certain designated natural resources (such as wildlife and wildlife habitat) that are deemed to be in the public interest.  Instead of elected politicians making these decisions and being accountable to voters, the courts are the enforcers. 

Also, an expansion of the public trust doctrine, from an economic standpoint, would have the unintended consequence of diminishing the incentive of landowners to invest in and improve the natural resource at issue. Private property has value because of the ability to exclude others from use and ownership.  A fundamental principle of economics is that the ability to exclude others from use and ownership increases the owner’s incentive to use the resource wisely.  This was, indeed, borne out in Bitterroot River Protective Association v. Bitterroot Conservation District, 346 Mont. 507 (2008).    

Recent Case

Mineral County v. Lyon County, No. 75917, 2020 Nev. LEXIS 56 (Nev. Sup. Ct. Sept. 17, 2020), involved the state of Nevada’s water law system for allocating water rights and an attempt to take those rights without compensation via an expansion of the public use doctrine.  The state of Nevada appropriates water to users via the prior appropriation system – a “first-in-time, first-in-right” system.  Over 100 years ago, litigation over the Walker River Basin began between competing water users in the Walker River Basin.  The Basin covers approximately 4,000 square miles, beginning in the Sierra Nevada mountain range and ending in a lake in Nevada.  In 1936, a federal court issued a decree adjudicating water rights of various claimants to water in the basin via the prior appropriation doctrine. 

In 1987, an Indian Tribe intervened in the ongoing litigation to establish procedures to change the allocations of water rights subject to the decree.  Since that time, the state reviews all changes to applications under the decree.  In 1994, the plaintiff sought to modify the decree to ensure minimum stream flows into the lake under the “doctrine of maintenance of the public trust.”  The federal district (trial) court granted the plaintiff’s motion to intervene in 2013.  In 2015, the trial court dismissed the plaintiff’s amended complaint in intervention on the basis that the plaintiff lacked standing; that the public trust doctrine could only apply prospectively to bar granting appropriative rights; any retroactive application of the doctrine could constitute a taking requiring compensation; that the court lacked the authority to effectuate a taking; and that the lake was not part of the basin. 

On appeal, the federal appellate court determined that the plaintiff had standing and that the lake was part of the basin.  The appellate court also held that whether the plaintiff could seek minimum flows depended on whether the public trust doctrine allowed the reallocation of rights that had been previously settled under the prior appropriation doctrine.  Thus, the appellate court certified two questions to the Nevada Supreme Court:  1) whether the public trust doctrine allowed such reallocation of rights; and 2) if so, whether doing so amounted to a “taking” of private property requiring “just compensation” under the Constitution. 

The state Supreme Court held that that public trust doctrine had already been implemented via the state’s prior appropriation system for allocating water rights and that the state’s statutory water laws is consistent with the public trust doctrine by requiring the state to consider the public interest when making allocating and administering water rights.  The state Supreme Court also determined that the legislature had expressly prohibited the reallocation of water rights that have not otherwise been abandoned or forfeited in accordance with state water law. 

The state Supreme Court limited the scope of its ruling to private water use of surface streams, lakes and groundwater such as uses for crops and livestock. The plaintiff has indicated that it will ask the federal appellate court for a determination of whether the public trust doctrine could be used to mandate water management methods.  If the court would rule that it does, the result would be an unfortunate disincentive to use water resources in an economically efficient manner (an application of the “tragedy of the commons”).  It would also provide a current example (in a negative way) of the application of the Coase Theorem (well-defined property rights overcome the problem of externalities).  See Coase, “The Problem of Social Cost,” Journal of Law and Economics, Vol. 3, October 1960. 

Conclusion

Clearly, the state and federal governments can regulate natural resources.  The power to do so is vested in state legislatures and the Congress.  As such, the power is limited by Constitutional protections and by the voting public.  But, an expansion of the public trust doctrine would void those constraints on a theory that a property right that doesn’t exist cannot be taken.  The courts would become a “super legislature” gaining the authority to make public policy decisions.  That would further blur the distinction between legislative bodies and the judiciary and the fundamental legal principle of the separation of powers. 

An expanded public trust doctrine is a big “camel’s nose under the tent” for agriculture.  Farmers and ranchers beware.

October 20, 2020 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, October 12, 2020

Principles of Agricultural Law

PrinciplesForBlog2020Fall-cropped

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 47th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; lawyers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous and can lead to unnecessary litigation. What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed? Is a liability release form necessary?  Is it valid?  What happens when a contract breach occurs?  What is the remedy? 

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  What about dealing with an ag cooperative and the issue of liens?  What are the priority rules with respect to the various types of liens that a farmer might have to deal with? 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.  That’s especially true with the unsettled issue of whether Payment Protection Program (PPP) funds can be utilized by a farmer in bankruptcy.  The courts are split on that issue.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation as well as help minimize the bleeding when times are tough.

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract?  How do the like-kind exchange rules work when farmland is traded? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is a critical part of the business transition process.

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  Agritourism is a very big thing for some farmers, but does it increase liability potential?  Nuisance issues are also important in agriculture.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  What constitutes a regulatory taking of property that requires the payment of compensation under the Constitution?  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

It is always encouraging to me to see students, farmers and ranchers, agribusiness and tax professionals get interested in the subject matter and see the relevance of material to their personal and business lives. Agricultural law and taxation is reality.  It’s not merely academic.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. It’s also a great investment for any farmer – and it’s updated twice annually to keep the reader on top of current developments that impact agriculture.

If you are interested in obtaining a copy, perhaps even as a Christmas gift, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  Instructors that adopt the text for a course are entitled to a free copy.  The book is available in print and CD versions.  Also, for instructors, a complete set of Powerpoint slides is available via separate purchase.  Sample exams and work problems are also available.  You may also contact me directly to obtain a copy.

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  You may also contact me directly. 

October 12, 2020 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)

Friday, October 9, 2020

TMDL Requirements - The EPA’s Federalization of Agriculture

Overview

Pollution from nonpoint agricultural sources (diffused surface runoff), particularly that originating from soil erosion, is more extensive than pollution resulting from feedlot operations.  But, because nonpoint   source pollution is largely dependent upon local topographical conditions, the Congress believed it was best left to the control of the states through the continuing planning process required by §303 (relating to water quality standards) and §208 (areawide waste management plans) of the Clean Water Act (CWA).  However, by virtue of Total Maximum Daily Load (TMDL) requirement, the U.S. Environmental Protection Agency (EPA) asserts that it has the final say on farming activities by dictating the amount of nitrogen, phosphorous and sediment that can come from a particular tract. 

The TMDL requirement and the extent EPA can use it to control farming practices – it’s the topic of today’s post.

Background

Section 303 of the CWA requires states to adopt water-quality standards, to the extent not previously done, and to carry forward those already adopted subject to EPA approval. Standards are to be set for both interstate and intrastate waters, and the standards must be updated periodically and submitted to EPA for review and approval. The standards are to take into account the unique needs of each waterway including “propagation of fish and wildlife” as well as “agricultural...and other purposes.” Any state that fails to set water quality standards is subject to the EPA imposing its own standards on the state. Section 303 does not exempt any rivers or waters, but covers all waters to the full extent of federal authority over navigable waters.

The states are to establish total maximum daily loads (TMDLs) for watercourses that fail to meet water quality standards after the application of controls on point sources.  But, a state must engage in the formal rulemaking process before a TMDL can be used as the basis for a CWA discharge permit.  See, e.g., Fairfield County Board of Commissioners v. Nally, 143 Ohio St. 3d 93 (Ohio Sup. Ct. 2015). 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. See, e.g., Anacostia Riverkeeper, Inc., et al. v. Jackson, 713 F. Supp. 2d. 50 (D. D.C. 2010)A TMDL must be set “at a level necessary to implement water quality standards.”  33 U.S.C. § 1313(d)(1)(C).  The calculation must be on a daily basis.  Friends of the Earth v. United States Environmental Protection Agency, 446 F.3d 140 (D.C. Cir. 2006)

The Congress did not define TMDL in the CWA, but the EPA’s regulations break it into a “waste load allocation” for point sources and a “load allocation” for nonpoint sources. A TMDL’s purpose is to limit the amount of pollutants in a watercourse on any particular date.

Federal Control of Nonpoint Source Pollutants?

The big issue.  A significant question is whether the EPA has the authority to regulate nonpoint source pollutants under §303 of the CWA through the TMDL process and require reductions in nonpoint source discharges. This is an important issue for agriculture because the primary source of agricultural pollution is nonpoint source. Indeed, the TMDL requirements were challenged in early 2000 by farm interests as being inapplicable to nonpoint source pollution. In Pronsolino v. Marcus, 91 F. Supp. 2d 1337 (N.D. Cal. 2000), aff’d, sub. nom., Pronsolino v. Nastri, 291 F.3d 1123 (9th Cir. 2002), cert. den., 539 U.S. 926 (2003), the plaintiffs had obtained a permit to harvest timber and became subject to restrictions designed to reduce soil erosion. The state (California) submitted its § 303(d) list to EPA in 1992 and EPA disapproved the list because it excluded 17 water segments that failed to meet water quality standards. Sixteen of those water segments were impaired solely by nonpoint source pollution. EPA, pursuant to § 303(d)(2), established a new list including these waters. The state failed to develop TMDLs for these waters, environmental groups sued EPA to compel development of TMDLs, and EPA entered into a consent decree requiring it to complete TMDLs for these waters if the state failed to do so by March 18, 1998. The state missed the deadline and EPA established the TMDLs. 

The plaintiffs theorized that the restrictions were a by-product of the TMDL criterion and challenged the EPA’s authority to impose TMDL requirements on rivers polluted only by timber-harvesting and other nonpoint sources. The court, however, held that the TMDL requirements, as a comprehensive water-quality standard under the CWA, were designed to apply to every navigable river and water in the country – that is, every navigable water of the United States or “WOTUS.”. Although the court noted that the CWA applied TMDL to point and nonpoint sources differently, it stressed that TMDL was clearly authorized for nonpoint sources. Thus, according to the court, any polluted waterway – whether the source of pollution is point or nonpoint – is subject to TMDL requirements. The case was affirmed on appeal, but the appellate court, in dictum, noted that the statute did not require states to actually reduce nonpoint source pollution flowing into these waters. The appellate court made clear that TMDL implementation of nonpoint source pollution is a matter reserved to the states. Thus, the court appeared to substantially limit the EPA’s ability to require nonpoint source pollution reduction - the EPA can develop TMDLs that highlight the need for aggressive control of nonpoint source pollution, but cannot address nonpoint source pollution by itself. Where a state fails to establish TMDLs, the EPA has the power to implement them.  See also American Farm Bureau Federation, et al. v. United States Environmental Protection Agency, et al., 984 F. Supp. 2d 289 (M.D. Pa. 2013).

Chesapeake Bay.  In 2010, the EPA published a TMDL of nitrogen, phosphorous and sediment that can be released into the Chesapeake Bay watershed. The TMDL set forth a timetable for compliance by the affected states. In addition, states were required to determine how much agriculture had to reduce runoff by adopting new technology and conservation practices. The new rules were legally challenged in 2011 on the basis that the EPA lacked the authority to regulate individual pollutants from farmland and other specific sources.  In 2014, attorneys general from 21 states joined the lawsuit. In mid-2015, the court held that likely economic injury in the form of higher compliance costs was sufficient to confer standing to challenge the TMDL, and that the EPA had acted within its authority under 33 U.S.C. §1251(d) in developing the TMDL.  The court deferred to the EPA’s judgment on the basis that the statutory definition of TMDL was ambiguous – it could reasonably be interpreted to apply to allocations from various sources and geographic areas, etc.  American Farm Bureau, et al. v. United States Environmental Protection Agency, et al., 792 F.3d 281 (3d Cir. 2015)The U.S. Supreme Court declined to hear the case.  Id.  cert. den., 136 S. Ct. 1246 (2016). 

Presently, the litigation over the Chesapeake Bay TMDL is ongoing on the claim that New York and Pennsylvania are not within the standards of the TMDL. 

Other TMDL Details 

Citizen suits?  Traditionally, the courts have not allowed disaffected persons to bring lawsuits claiming an alleged violation of a state water quality standard established in accordance with CWA §303. The standards are generally believed to be too ambiguous and nonspecific. Only specific effluent limitations set forth in an NPDES permit have historically been subject to legal challenge. However, in 1996, the Ninth Circuit Court of Appeals allowed a challenge to an alleged violation of a state water quality standard. Northwest Environmental Advocates v. Portland, 74 F.3d 945 (9th Cir. 1996), cert. den., 518 U.S. 1018 (1996).

Conclusion

Clearly, the Congress did not write language into the CWA that allows the EPA to regulate nonpoint sources of pollution such as run-off from farm fields.  The Congress left that matter up to the states.  But, through the TMDL process, the EPA is able to get around that Congressional barricade.  Via TMDL requirements, the EPA has grabbed the power to say where farming will occur by establishing limits for sediments and nutrients for individual farms.  These are essentially land use decisions that are traditionally within the domain of local governmental bodies, and not a federal government agency.  The EPA’s approach is also incredibly costly.  The Maryland School of Public Policy has estimated that the implementation of the Chesapeake Bay TMDL from 2010-2025 could be as much as $80 billion.   https://www.chesapeakebay.net/channel_files/19062/660_--_environmental_workshop_report,_final,_spring_2012.pdf.

TMDLs – yet another reason why the definition of a WOTUS matters.

October 9, 2020 in Environmental Law | Permalink | Comments (0)

Sunday, September 27, 2020

The Prior Converted Cropland Exception - More Troubles Ahead?

Overview

The federal government’s jurisdiction over “wetlands” continues to be a contentious issue.  Recently, I completed a three-part series on the USDA/NRCS Final Rule of August 28, 2020, on highly erodible land and wetland.  That series raised some questions, several of which involved the exemption for “prior converted cropland” contained in the “Swampbuster” provisions of the 1985 Farm Bill.  The exemption was later adopted by the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) for purposes of the Clean Water Act (CWA).

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? 

The prior converted cropland exemption from wetland regulation – it’s the topic of today’s post. 

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).  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).

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, Fish and Wildlife Service (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.  Barthel v. Unites Stated Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).

1996 Farm Bill

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” for purposes of USDA farm program eligibility only.  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. Also, while there is an exception from the Swampbuster restrictions for prior converted wetland that returns to wetland status after December 23, 1985, as a result of specified events.  16 U.S.C. §3822(b)(2)(D).   The exception does not apply, however, if the land had returned to wetland status before or as of December 23, 1985. 

Also, farm program payments are not forfeited for producing agricultural commodities on converted wetland if the land was determined to be “farmed wetland” or “farmed wetland pasture,” and NRCS determines that the conversion would have only a minimal effect on the wetland functions and values of wetlands in the area. 16 U.S.C. § 3822(f); 7 C.F.R. § 12.30.  See, e.g., Rosenau v. Farm Service Agency, 395 F. Supp. 2d 868 (D. N.D. 2005); Holly Hills Farm Corp. v. United States, 447 F.3d 258 (4th Cir. 2006), aff’g, No. 3.04CV856, 2005 U.S. Dist. LEXIS 12875 (E.D. Va. Jun. 29, 2005).

2020 NRCS Circular

The NRCS recently released Circular 180-20-1 with an effective date of September 1, 2020.  It can be found here:  https://directives.sc.egov.usda.gov/OpenNonWebContent.aspx?content=45476.wba.  Its stated claim is “To provide updated policy and guidance for the wetland and highly erodible land conservation policy in Title 180, National Food Security Act Manual (NFSAM), 5th Edition.  The Circular states that a new icon (a green triangle with a dot in the center) will be placed on NRCS-certified wetland determination (CWD) maps.  For lengthy water features, the green dot will appear every half-mile.  Perhaps such clear designation will make it easier for farmers to challenge the determinations – the determinations are often wrong.  But, the point is that the use of the green dot is to identify cropland areas that might be subject to federal government jurisdiction.  Any farmland containing a green dot could mean that the owner/operator will have to complete the NRCS Form CPA-026, available here:  https://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/nrcs142p2_020039.pdf.  This Form notifies the government that the land contains prior converted wetland that could be subject to federal regulations under either the Swampbuster provisions or the CWA.

In addition, the Circular states that CWD map legend will include the cautionary icon with the identifier: “Potential Jurisdictional Waters (PJW).”  The “remarks” section of Form NRCS-CPA-026 will caution that the area flagged by the icon could be within the jurisdiction of the CWA, and beyond the scope of the FSA CWD. “Areas identified as Potential Jurisdictional Waters (PJW) are not subject to the Food Security Act but are potentially subject to the Clean Water Act.  Related to this, the Circular attempts to clarify when the NRCS will provide CWA-related technical assistance to the Farm Service Agency (FSA). On this point, the Circular states, “NRCS may also provide technical assistance on prior converted cropland abandonment determinations which may affect CWA exclusion applicability.”  Likewise, the Circular states, “In some cases, it may be helpful to a USDA client to share information NRCS gathered during a previously conducted…site visit for FSA purposes with the USACE [U.S. Army Corps of Engineers] or EPA.”  For farmers (and their lawyers) who have been involved in wetland matters administratively and/or in the courts, that last quote should bother you.  It spells bureaucratic trouble.

Recent Cases

The following is a short summary of some of the relatively recent cases involving prior converted wetland under Swampbuster:

  • In Horn Farms, Inc. v. Johanns, 397 F.3d 472 (7th Cir. 2005), rev’g, 319 F. Supp. 2d 902 (N.D. Ind. 2004), cert. den., 547 U.S. 1018 (2006), the plaintiff was found to be in violation of Swampbuster for producing covered commodities on converted wetland. The plaintiff claimed that the conversion had occurred before the Swampbuster rules took effect on December 23, 1985.  The USDA determined that because the site had returned to wetland status as of the effective date of Swampbuster, the prior converted exemption of 16 U.S.C. 3822(b)(2)(D) did not apply.  The appellate court, reversing the trial court, agreed.   
  • Groenendyk v. Johanns, No. 4:06-cv-00214 JAJ, 2008 U.S. Dist. LEXIS 11153 (S.D. Iowa Feb. 12, 2008). In this case, the NRCS designated a 0.7-acre portion of the plaintiff’s field as wetland and determined that the prior converted wetland exemption did not apply.  After exhausting administrative appeals, the plaintiff sought judicial review to overturn the designation.  The court upheld the government’s decision that the 0.7-acre site was not exempt as prior converted wetland because the government’s determination was not capricious, an abuse of discretion or otherwise unlawful.  While the basic facts and data were in dispute, the court gave the government substantial deference on its determination. 
  • Riechenbach v. United States Department of Agriculture, No. 1:10-cv-994-WTL-TAB, 2013 U.S. Dist. LEXIS 1328 (S.D. Ind. Jan. 4, 2013) involved central Indiana farmland for which the plaintiffs sought the FSA’s permission to remove timber from existing fence rows. The NRCS examined the property and found a potential wetland violation, ultimately resulting in a determination that the plaintiff had converted 4.4 acres of wetland.  Later, the NRCS expanded the converted wetland acres to five.  Mediation was denied.  The plaintiffs claimed that the area in question was prior converted cropland.  After exhausting administrative appeals, the plaintiffs sought judicial review.  The plaintiffs pointed to the existence of clay tile associated with a drainage system created in 1900 according to county records, and plastic tile dating to 1988.  The NRCS claimed that the site in question had reverted to wetland status by 1985 based on aerial photos taken from 1981 to 1987 that showed the presence of wetland vegetation.  While the plaintiffs argued that the photos were insufficient evidence, they failed to raise that argument during the administrative appeal process and the court would not entertain it and dismissed the case. 
  • The timing of wetland conversion to crop production was again at issue in Maple Drive Farms Family Limited Partnership v. Vilsack, 781 F.3d 837 (6th Cir. 2015), rev’g., No. 1:11-CV-00692, 2012 U.S. Dist. LEXIS 176539 (W.D. Mich. Dec. 13, 2012). The plaintiff had installed farm field drainage tile in the 1960s to allow crop production on the tract in issue. The defendant, however, claimed that the plaintiff converted wetland in violation of Swampbuster on the basis that crop production had ceased before the effective date of the Swampbuster provisions and had reverted to wetland status when Swampbuster went into effect.  The court agreed with the defendant’s interpretation of “vague” statutory language in holding that the prior converted wetland exemption applied only to wetland that had been converted to crop production before December 23, 1985, and remained converted as of December 23, 1985 and did not exhibit wetland characteristics.  The case was reversed, however, because the defendant was required to grant the plaintiff a minimal-effect exemption and had failed to consider the plaintiff’s minimal-effect evidence. 
  • In Davids v. United States Department of Agriculture, No. 17-CV-3091-LRR, 2018 U.S. Dist. LEXIS 222979 (N.D. Iowa Oct. 16, 2018), the plaintiff installed farm field drainage tile in 2011. The next year, the county completed a drainage project. The plaintiff then filed USDA Form AD-1026 to indicate that a new drainage system existed on the land that the NRCS had not evaluated.  After a field visit, the NRCS determined that 1.55 acres of the plaintiff’s land was converted wetland as a result of the drain tile installation.  No “minimal effect” determination was made that would have exempted the 1.55 acres from Swampbuster under 16 U.S.C. 3822(f).  The plaintiff claimed that the 1.55 acres was prior converted wetland based on an expert’s report.  The government rejected the expert’s report as to whether the land should be classified as prior converted wetland because it did not constitute a functional assessment of a wetland.  After exhausting administrative remedies, the plaintiff sought judicial review.  The court determined that under the administrative rules in place during the relevant timeframe, the plaintiff bore the burden to request a minimal effect functional assessment determination (even though Form AD-1026 does not provide any place for a farmer to specifically request that NRCS perform a functional assessment) because the wetland had already been converted when the request for such a determination was made.  As such, the government was not required to make a functional assessment determination and the 1.55 acres remained classified as converted wetland rather than prior converted wetland. 

Conclusion    

The prior converted wetland rule was designed to be an important exemption for farmers who had already converted wetland to cropland before the Swampbuster rules took effect.  It has proven to be a tricky snare for farmers.  In addition, even if the Swampbuster hurdle is cleared, prior converted wetland can still be regulated by the EPA of the COE.  I will write more on that issue in a future article.

September 27, 2020 in Environmental Law | Permalink | Comments (2)

Tuesday, September 22, 2020

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Loss of Property Rights? – Part Three

Overview

In Parts One and Two of this three-part series, I have gone through various parts of the preamble to the recently issued USDA/NRCS Final Rule involving highly erodible land and wetland.  The rule is found at 85 FR 53137 and became effective August 28, 2020.  In today’s article I conclude my discussion of the nuances of additional sections of the preamble to the Final Rule.  The question is whether, as NRCS claims, the Final Rule bring clarity to the NRCS delineation process.  Is that true?  Will the Final Rule help farmers in avoiding a violation of the rules that could cause loss of farm program benefits and additional fines and penalties?

In this concluding article on the preamble to the Final Rule, I look at more areas that are of concern to farmers and ranchers.  Part Three of the three-part series on the NRCS Final rule involving highly erodible land and wetland – it’s the topic of today’s post.

Setback Distance Concerns

In this section, the NRCS states that it is currently pursuing “improvements to the methods which are used to provide tile drainage setback distances from mapped wetlands to USDA program participants.”  That’s an interesting way to put it.  Presently, the NRCS is attempting to employ in the prairie pothole states a tripling of the calculated offset requirement where there is a preponderance of potential ground water discharge soils adjoining the farmed wetland.  This is already happening in Iowa at the state level.  There, a farmer must triple the setback or wait for the new requirements to be promulgated.  For example, a recent Iowa matter involved a 70-acre farmed wetland pothole where the adjoining common soils were classified as discharge soils.  The triple setback requirement increases the land area in which drain tile improvements cannot be made from 80 acres to more than 200 acres.  This diminishes the value and profitability of the farm substantially.

The NRCS approach basically amounts to a regulatory “land-grab” in areas where drainage tile is already in place in the existing pothole and adjoining soils.  Wetland hydrology is supposed to be determined under normal or average circumstances.  Indeed, existing regulations specify that “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.  See, e.g., Boucher v. United States Department of Agriculture, 149 F. Supp. 3d 1045 (S.D. Ind. 2016).  While it is true that under very wet conditions these soils may experience some groundwater discharge, it is also true that under normal conditions they rarely do because existing drainage tile normally keeps the water table below the surface. 

Wetland Hydrology Indicators Section

In this section the NRCS states that the “USDA appreciates support for the changes made by the interim rule and the expressed concerns.  In response, USDA is making changes in this final rule as explained below.”  Thus, the NRCS has made material changes to the rule without inviting additional public comment.  These changes are greatly impactful in the prairie pothole states.

In a prior post, it was noted that the NRCS failed to complete the administrative procedures associated with the interim final rule that was published in September 1996.  Now NRCS asserts that the September 6, 1996 interim rule first established that “playa, pocosin, and pothole farmed wetlands and all farmed wetland pasture have required periods of inundation, ponding, or saturation.”  This is the origin of the 7-days ponding criteria - an arbitrary NRCS determination in an uncompleted interim final rule for which public comments were ignored.  The federal definition of wetland in the Clean Water Act does not have a ponding criteria.  The criteria as set forth in the 1985 Farm Bill is that a particular tract constitutes a wetland if it has (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 are required.  See, e.g., B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).  However, the NRCS intends to move forward with its definition of farmed wetland based upon an incomplete interim final rule and Food Security Act Wetland Identification Procedures located in its National Food Security Act Manual, Part 514, which was not subjected to the public notice and comment procedures of the Administrative Procedure Act. 

The NRCS claims that “wetland hydrology field indicators are a valid and reliable method for the identification of wetland hydrology.”  The NRCS further asserts that “it would not be an efficient use of analytic techniques or onsite hydrology monitoring in every farmed wetland determination when other valid methods exist.  Let’s pick that claim apart.  The NRCS is claiming that its methods are valid because NRCS has made an ipse dixit determination that the methods are valid.  However, the NRCS has never monitored tests of mapped farmed wetland to determine the accuracy of its methods.

In 1991 the Congress directed the United States Environmental Protection Agency to engage the National Research Council (NRC) to review the several wetland determination methods of federal agencies.  The impetus for the report was to resolve the differences between the 1987 and 1989 federal wetland delineation manuals.  The NRC report, Wetlands Characteristics and Boundaries, was issued in 1995.   It remains the best authority on wetlands.  In Chapter 4 the NRC reviewed the NRCS standards for classes of wetland stating that, “A farmed wetland that is a playa, pothole or pocosin must be inundated for at least 7 consecutive days or saturated for at least 14 consecutive days during the growing season. Farmed wetlands that are not potholes, playas or pocosins must have a 50% chance of being seasonally flooded or ponded for at least 15 consecutive days during the growing season or for 10% of the growing season whichever is less.  NFSAM specifically acknowledges that these especially restrictive guidelines are intended to protect the unique wetland functions of potholes, playas and pocosins.”  The NRC did not endorse either the 1987 United States Army Corps of Engineer’s wetland manual or the USDA’s methodology for determining wetlands and their boundaries.

At the conclusion of Chapter 5 of the NRC report, Wetlands Characteristics and Boundaries, the NRC made 35 recommendations regarding wetland identification.  The following are applicable to the discussion of the NRCS Final Rule:

  1. If direct hydrologic evaluation is needed, as in the case of altered sites or when evidence from substrate and biota is not conclusive, the evaluation should be based on water table data or on evidence of anoxia.
  1. Guidance should be developed for assessment of hydrologic alteration.
  1. If the hydrology of a site has been altered, evidence from soils or vegetation must be used only with support from hydrologic analysis, including the characteristic frequency, duration and depth of saturation.
  1. Federal agencies that regulate wetlands should hire regulatory staff that makes up a balanced mixture of expertise in plant ecology, hydrology, and soil science.

Recommendation No. 19 is of particular importance because it says, in essence, that for possible wetland sites with altered wetland hydrology the NRCS method should not be used.  Instead, the hydrology must be proven.  Hydrology can only be done using mathematical modeling or direct observation via monitoring.  Unfortunately, in the Final Rule the NRCS takes the position that this cannot be done properly and that NRCS will simply make an off-the-cuff determination that is binding on farmers.   At a minimum, for hydrologically altered prairie potholes, the hydrology should be required to be proven before any limitations on farming activities are applied.

In the Final Rule, the NRCS issues a challenge to all farmed wetland owners in the prairie pothole states by declaring, “The final rule change brings transparency and codifies the method by which these determinations have been made since the establishment of farmed wetland and farmed wetland pasture designations, by stating that areas manipulated prior to December 23, 1985 but which retain wetland hydrology, as determined through Step 1 of the wetland determination process in Rule Section 12.30( c)(7) and application of the procedures described in Rule Section 12.31( c), meet the required hydrology criteria for playa, pocosin, and pothole farmed wetlands and farmed wetland pasture.  Both inundation and saturation criteria for pothole farmed wetlands were established in the September 6, 1996 interim rule and USDA does not agree that there is a need to modify these criteria.”

This is simply incorrect.  If this NRCS position is allowed to stand there will be very few challenges.  Instead, there will be more wetland that is erroneously mapped, and more landowners that will get caught in administrative appeals and litigation and suffer the loss of property rights. 

The 2018 Farm Bill Section

Here, the NRCS states in response to the 2018 Farm Bill that, “The December 2018 interim rule established in the wetland determination process in § 12.30(c)(7) that step 2 includes the determination of whether any exemptions apply, and no further modification in this final rule is needed in support of section 2101.”  This statement is incorrect.  Clearly, the Congress intended that a minimal effect determination be made, and that the NRCS make the determination whether or not a landowner requests that such a determination be made.

Conclusion

The Final Rule is troubling for farmers in many respects.  Perhaps the biggest is the NRCS position concerning wetland hydrology indicators for hydrologically altered wetland.  Millions of acres of these types of wetland are present in the prairie pothole states.  Also, of primary concern is the NRCS intent to triple the tile set-back requirements from the edge of farmed wetlands if the adjoining soil has groundwater discharge potential.  It is difficult to believe that NRCS hydrologists, botanists and soil scientists were meaningfully involved in the writing of the Final Rule.

Farmers beware.

September 22, 2020 in Environmental Law | Permalink | Comments (0)

Sunday, September 20, 2020

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Loss of Property Rights? – Part Two

Overview

In Part One earlier last week, I went through part of the preamble to the recently issued USDA/NRCS Final Rule involving highly erodible land and wetland.  The rule is found at 85 FR 53137 and became effective August 28, 2020.  In today’s article I continue to work through the nuances of the various sections of the preamble to the Final Rule.  Does the Final Rule bring clarity to the NRCS delineation process?  Will it help farmers in avoiding a violation of the rules?

Picking up where I left off last time in Part One, I continue the discussion of the preamble of the NRCS Final Rule concerning the conservation provisions of the 1985 Farm Bill – it’s Part Two of a (now) Three-Part Series and is the topic of today’s post.

Certification Status of Pre-1996 Wetland Determinations Section 

In this section, the NRCS quotes the Conference Committee Report for the 1990 Farm Bill.  In that Report, the “Managers agree that the certification process is to provide farmers with certainty as to which of their lands are to be considered wetlands for purposed of Swampbuster.”  If the NRCS statement that the Final Rule is designed to bring clarity to wetland delineation is to be believed, it means one of two things.  Either this Final Rule isn’t necessary because the certification process of 30 years ago “solved” the problem, or the Final Rule is an NRCS admission that it has failed to provide clarity for 30 years.     

Since 1990, many landowners have been told that their wetland determinations made before 1996 were invalid and they requested new ones.  The new determinations resulted in more acres being determined as wetland than were designated in the original determinations.  This resulted in the loss of land use rights and the payment of penalties.  In one instance, an Iowa farmer was forced through a myriad of appeals as a result of wetland conversions done by his drainage district in the 1990s.  Following administrative appeals and court challenges (see Gunn v. United States, 118 F.3d 1233 (8th Cir. 1997), cert. den., 522 U.S. 1111 (1998)),  and after the farmer and the drainage district were forced to mitigate, an old determination surfaced showing that there actually was no wetland on his farm.  The initial determination of no wetland should have been considered certified. Will compensation be paid for the farmer’s loss of property rights?  Hardly. 

Also in this section, the NRCS responded to a comment about changing determinations based on new technology by stating that the limited circumstances where certified wetland determinations are subject to revision are:  “if the land in question has been removed from agricultural use, upon request of the USDA program participant, or when a violation of the wetland conservation provisions has occurred.”  In actual practice, this statement is incorrect.  NRCS states in its policy manual, The Food Security Act Manual, 5th Edition, that it will not make a review upon request unless it determines that there was an error.  Will the policy manual be amended to account for this statement in the Final Rule? 

Offsite Analysis of Wetland Minimal Effect Section 

In this section the NRCS notes that a comment was received claiming that the 2018 interim rule did not address the 2017 Office of the Inspector General (OIG) Audit Report entitled, “USDA Wetland Conservation Provisions in the Prairie Pothole Region.”  In this section of the preamble, the NRCS notes its disagreement with the audit and seeks to justify its conduct in the four-state prairie pothole region concerning wetland determinations from 1990-1996.  However, the NRCS response is only part of the story.  What primarily is at issue involves the concept of “minimal effect determination.”  In 1993, the Clinton administration made a policy announcement specifying that the Soil Conservation Service (SCS) was to be designated as the lead agency for determining whether agricultural land is wetland for both CWA and Swampbuster program purposes. Procedures were to be developed jointly by the SCS, U.S. Army Corps of Engineers (COE), Environmental Protection Agency (EPA) and the Fish and Wildlife Service (FWS). In addition, SCS appeal procedures were to be utilized to contest wetland determinations, and the COE, in coordination with EPA, SCS and FWS was to develop a nationwide general permit for CWA purposes for discharges associated with “minimal effects” (see 7 C.F.R. §12.31(e)(1)) and “frequently cropped with mitigation” conversions determined by SCS and FWS to qualify agricultural wetlands for exemption from Swampbuster sanctions.  The landowner is responsible for requesting such a determination and bears the burden to prove eligibility for a “minimal effects” determination. See Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008).

In this section, the NRCS also fails to disclose that it has lost numerous court cases involving minimal effect determinations.  Without an administrative change of position, NRCS will likely lose more.  Congressional intent expressed in Conference Committee Reports dating back nearly 30 years illustrates that the Congress intended “minimal effect” determinations to be simple and widely used.  However, that has not happened.  As noted above, NRCS makes a landowner request a minimal effect determination.  That was a regulatory position staked-out by the agency in a September 17, 1987 Final Rule associated with “farmed wetland.”  If a landowner doesn’t make a request, a minimal effect determination is not made.  But, this landowner burden is not required by statute.  While the position of the NRCS in the regulation has been upheld (see the Clark case cited above), both logic and Congressional intent would seem to indicate that the NRCS should, as a matter of routine, conduct a minimal effect determination for every request for review of hydrologic manipulations.  The consequences of a landowner not requesting a minimal effect determination can be harsh – the loss of past and future farm program benefits.

PC Any Land With Pre-1985 Drainage Section 

Here, the USDA/NRCS states that “farmed wetlands” have been subject to the wetland conservation provisions since 1987 and were formally defined in regulation in 1996.  The NRCS also asserts that the Congress has not altered NRCS administration of farmed wetlands since first described in regulation. However, the NRCS comment is misleading.  A bit of history is in order.

Under the March 1986 interim rules for the wetland conservation provisions of the 1985 Farm Bill, wetland was assumed to be truly wet ground that had never been farmed. In addition, “obligation of funds” such as assessments paid to drainage districts, qualified as commenced conversions, and the FWS had no involvement in Agricultural Stabilization and Conservation Service (now Farm Service Agency (FSA)) or SCS decisions. In September of 1986, a proposal to exempt from Swampbuster all lands within drainage districts was approved by the chiefs of the ASCS, SCS, Farmers’ Home Administration, Federal Crop Insurance Corporation and the Secretary of Agriculture. However, the USDA proposal failed in the face of strong opposition from the FWS and the EPA.

The final Swampbuster rules were issued in 1987 without being subjected to the notice and comment procedures of the APA 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). If the drainage work was not completed by December 23, 1985, a request could be made of the ASCS on or before September 19, 1988, to make a commencement determination. Drainage districts must satisfy several requirements under the “commenced conversion” rules. A project drainage plan setting forth planned drainage must be officially adopted. In addition, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.

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. § 12.2.  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 before December 23, 1985. Under 16 U.S.C. §3801(a)(7), a “converted wetland” is defined as a wetland that is manipulated for the purpose or with the effect of making the production of an agricultural commodity possible if such production would not have been possible but for such action.  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.

The problem with the NRCS creation and definition of “farmed wetland” is that the law defines “converted wetland” as wetland that is dredged, drained or otherwise manipulated so as to make the production of an agricultural commodity possible where such production was not possible prior to the manipulation.  How then can farmed wetland be subject to conversion when it is, by definition, already converted?  In this section of the preamble, the NRCS claims that farmed wetland was formally defined in regulation in the September 1996 interim final rule.  However, in 1996, comments were filed with NRCS challenging the legality of subjecting farmed wetland to the wetland conservation provisions of the Farm Bill.  Under the APA the USDA was to timely respond to those comments and make appropriate revisions to the rule.  That never happened.  24 years later, the rule has not been finalized.  Now NRCS claims that the Congress has endorsed the concept.

Conclusion

What I thought would be a two-part series when I started out, will now turn into a three-part series.  In the next installment, I will continue the commentary on the preamble to the Final Rule. 

September 20, 2020 in Environmental Law | Permalink | Comments (0)

Monday, September 14, 2020

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Erosion of Property Rights? – Part One

Overview

The Congress, with passage of the 1985 Farm Bill, tied participation in federal farm programs to conservation requirements related to “highly erodible land” and “wetlands”  New concepts were introduced such as the Conservation Reserve Program, Sodbuster, Swampbuster, and abandoned cropland, just to name a few.  Of course, the “dirt is in the details” and that meant that terms needed to be defined so that a farmer could identify highly erodible land as well as wetland.  A farmer participating in federal farm programs must annually certify compliance with the conservation requirements, and production activities on areas that the government has identified as “protected” under the conservation rules can lead to ineligibility for farm program benefits.

The sub-agency within the United States Department of Agriculture (USDA) responsible for developing, administering and enforcing the rules for the various conservation programs is the Natural Resources Conservation Service (NRCS).  Late last month, the NRCS issued a Final Rule for both the highly erodible land and the conservation provisions of the 1985 farm bill.  85 Fed. Reg. 53137.  While the Final Rule is purportedly designed to bring clarity to the delineation process and aid farmers in avoiding farming activity that could result in farm program ineligibility, the Final rule does no such thing.  Instead, the Final rule expands the federal government’s regulatory power and diminishes landowner rights. 

The NRCS Final Rule on the conservation provisions of the 1985 Farm Bill – it’s Part One of a Two-Part Series and is the topic of today’s post.

The Basics – Delineation and Conversion 

The NRCS delineates (identifies) where highly erodible land and wetland is present so that a farmer can avoid farming activities in those areas.  As for wetland, the 1985 Farm Bill 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.  7 C.F.R. §12.30(c)(7).  In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology. The presence of hydrophytic vegetation, by itself, is insufficient to meet the wetland hydrology requirement and the statute clearly requires the presence of all three characteristics.  See B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008). The determination of highly erodible land involves the use of an “erodibility index” for a soil based on factors such as annual rainfall, the degree to which the soil resists erosion, and the steepness of the area.  7 C.F.R. § 12.21 (a)(1)(i)-(iii).

In addition to delineating land that cannot be farmed without violating the conservation rules, the NRCS also must determine whether wetland or highly erodible land has been impermissibly “converted” from its protected status to being farmed.  But, in general, if the land at issue was converted to use in a farming operation before the 1985 Farm Bill conservation rules took effect, it will maintain its status as land that can be farmed without violating the conservation rules.  Indeed, the conference committee report 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 conservation rules have been modified multiple times since their 1985 Farm Bill version.  Those modifications have largely dealt with the issues of conversion, “minimal effects,” and mitigation. 

New Rules

In late 2018, the USDA published a new interim rule concerning the conservation provisions that originated with the 1985 Farm Bill.  On August 28, 2020, those Final Rule was published.  The Final Rule adds definitions for “wetland hydrology,” “normal climatic conditions,” and “best drained condition.”  The Final Rule also modifies the manner in which the NRCS is to delineate the various types of wetland and states that wetland determinations made between 1990 and 1996 are to be “certified” such that USDA benefits will not be denied if a farmer conducts farming activities on land that is covered by such a certification.  7 C.F.R. §12.5(b)(6)(i).   

The Final Rule also says that USDA is to make a “reasonable effort” to include the “affected person” in an on-site investigation before determining that a wetland violation exists.  In addition, the Final Rule specifies that if a landowner disagrees with an “off-site” determination concerning a highly erodible soil determination, NRCS is to make a field visit (on-site) determination. 

Deeper Dive – Digging into the Final Rule

According to the NRCS the Final Rule does farmers a favor by providing clearer guidance on the determination of land subject to the conservation rules, the farming of which would disqualify the farmer from program benefits.  But, is that true?  A deeper analysis of the Final Rule portends the opposite. 

What follows is a section-by-section commentary on the Final Rule.

Summary section.  The NRCS claims that the Final Rule was prepared to clarify how the USDA delineates, determines and certifies wetlands located on subject land in a manner sufficient for making determinations of ineligibility for certain USDA program benefits.  That is a misrepresentation of the purpose of the Final Rule.  The Final Rule does not clarify as much as it alters how the NRCS makes these determinations so as to make the process more convenient for the NRCS, and making appeals from that convenient, simplified process more difficult.  The Final Rule also represents a step away from the possible (but often inconvenient) scientific determination of wetland hydrology in regularly cropped farmed wetland across the prairie pothole region (a significant portion of the northern Great Plains and north-central Iowa and south-western Minnesota).

Supplementary Information - Background section.  This section provides background information concerning highly erodible land and wetland and the charge to the USDA by the Congress as part of the 1985 Farm Bill.  The NRCS claimed in its late 2018 interim rule that its Final Rule would provide “transparency” to USDA program participants and stakeholders concerning how USDA delineates, determines, and certifies wetlands. It also claimed that it was providing information so that farmers could “better understand” actions that may result in ineligibility for USDA farm program benefits. 

However, the reality of the Final Rule is that such “transparency” and “understanding” is defined to mean that the NRCS will unilaterally decide that status of a tract based on its own determination by virtue of its best “guestimate.”  That is evidenced by the statement in this section that, as part of the wetland delineation process that a, “[w]etland hydrology determination will be made in accordance with the current Federal wetland delineation methodology in use by NRCS at the time of the determination.”  A landowner may appeal such a determination, but given the deference that courts give to administrative agencies concerning the interpretation of agency rules, succeeding in overturning such a determination will be difficult.  See Auer v. Robbins, 519 U.S. 452 (1997).

Summary of Public Comments section.  In this section, the NRCS points out that, “[o]nsite wetland determinations and aerial imagery do not constitute an unreasonable search or seizure.  Its rationale is that a wetland determination for purposes of determining eligibility in voluntary USDA programs is not part of a criminal law proceeding.

Abandonment of Farmed Wetland and Farmed Wetland Pasture section.  Here, the NRCS asserts that the Final Rule made no changes in the interim rule with respect to abandonment of farmed wetlands and farmed wetland pasture.   7 CFR §12.33(c). Abandonment applies to farmed wetland and farmed-wetland pasture when wetland conditions return after December 23, 1985, unless certain conditions are met. NRCS states that this is a part of “long-standing policy and regulation.”  Here, the NRCs stated that it was reaffirming that USDA program participants may continue to farm farmed wetlands and farmed wetland pasture under natural conditions without risk of losing their eligibility for USDA program benefits, as long as additional hydrological manipulations do not occur.

Administrative Procedure Act section.  In this section, the USDA claims that it is not required to promulgate the conservation rules contained in  7 C.F.R. part 12 pursuant to notice and comment rulemaking under the APA.   While it mentions that §1246 of the 1985 Farm Bill, as amended by the Agricultural Act of 2014, specified that the promulgation of regulations and administration of the conservation programs are to be subjected to public notice and comment, it claims that the APA requirements for notice and comment do not apply to a matter relating to public property, loans, grants, benefits, or contracts. 5 U.S.C. §553(a)(2).  Because the matters identified in the 2018 interim rule relate to USDA program grants and other benefits, the USDA claimed that notice and comment rulemaking are not required under the APA.

However, the NRCS does not explain why all the rules, practices and policies issued and implemented before 2014 were not subjected to the APA.  Similarly, the NRCS does not explain why the requirement of the 1996 Farm Bill that all changes in policies regarding highly erodible land and wetland conservation be adopted pursuant to the APA’s rulemaking and comment procedures.  Before the adoption of the Final Rule, the NRCS had acknowledged that the 1996 Farm Bill provision remains applicable by citing it in the June 2017 rulemaking for the promulgation of the State Off-Site Method (SOSM) for the prairie pothole states.  But, it should be noted, that the Iowa NRCS changed its SOSM in December of 2018 without following notice and comment procedures. 

Appeals section.  The NRCS claims in the Final Rule that it will use the delineation methodology in use at the time of a particular delineation.  But, will the states follow this approach?  For example, the Iowa NRCS has steadfastly refused to accept the application of the Soil, Plant, Atmosphere, Water (SPAW) software for wetland surface ponding hydrology even though it was and is a method accepted by the NRCS in its wetland hydrology tools.

Area of Request for Certified Wetland Determinations section.  Here, the NRCS notes that wetland determinations, delineations, and certifications may be done on a tract, field, or sub field basis.

Best Drained Condition section.  The NRCS claims that allowing the “best drained condition” of a tract is intended…” to provide clarity regarding a long-standing and practiced statutory concept that is fundamental to the identification of…” hydrologically altered farmed wetlands.  Calling this assertion a “stretch” is an understatement of substantial degree.  The phrase “best drained condition” is derived from Barthel v. United States Department of Agriculture, 181 F.3d 984 (8th Cir. 1999).   In that case, the U.S. Court of Appeals for the Eighth Circuit held that the plaintiff landowners were entitled to the historic “wetland and farming regime” of a 450-acre hay meadow irrespective of the degree of manipulation of a ditch drainage device . After more than 15 years and multiple contempt actions brought against the U.S. Secretary of Agriculture in the Barthel litigation, the NRCS finally recognized that the Barthel decision meant that it had to apply a historic drainage (i.e., “best drained condition”) test to wetland determinations, and that the focus of the analysis was not to be on the manipulation of the drainage device, but rather on the effect of the manipulation of the drainage device on the subject property.    

Under the Final Rule, the NRCS explains how “best drained condition” is to be identified.  The NRCS asserts that the decision is to be made based upon the best available evidence.  That could include remote resources such as historical aerial imagery or other historical evidence. Indeed,  this is what the NRCS does in practice.  NRCS personnel make a decide whether or not the drainage outlet (device) is in good condition by examining the available historic aerial photographs and identifying one as providing the best historic drainage.  If the existing drainage matches that historic drainage, then aerial imagery may be used.  That’s what constitutes “best available evidence.”  One of a handful of aerial photographs taken between 1935 and 1985 is picked as the best by the agency expert.  Then it is set aside never to be used again.  The agency expert then judges if the outlet is compromised. 

This is “clarity” and “transparency.”  The NRCS personnel make a judgment call about best historic drainage and the landowner must either accept or challenge it subject to a “substantial deference” standard.   This strategy allows the NRCS to playing the regulatory and judicial system to the government’s advantage rather than focusing on a serious attempt to make an accurate determination of what is the best historic drainage even though scientific methods exist to make that determination.

Conclusion

In Part Two, I will examine the remaining parts of the Final Rule and provide some concluding thoughts. 

September 14, 2020 in Environmental Law | Permalink | Comments (0)

Monday, May 25, 2020

Conservation Easements – The Perpetuity Requirement and Extinguishment

Overview

A taxpayer that donates a “qualified real property interest” to a “qualified organization” can receive a charitable contribution deduction upon satisfying numerous technical requirements.  A primary requirement is that the easement donation be exclusively for conservation purposes.  That requirement, however, can only be satisfied if the conservation purposes are protected in perpetuity.  I.R.C. §§170(h)(2)(C); (h)(5)(A).  Essentially, that means that legally enforceable restrictions must be in place that will bar the use of the portion of the property that the taxpayer retains from being used in a manner that is inconsistent with the conservation purposes of the donated easement.

But, can anything here on earth really last forever?  What if the easement is extinguished by court action?  There’s a rule for that contingency and it requires careful drafting of the easement deed.  Numerous court opinions have dealt with the issue, including a couple in recent weeks.

Dealing with potential extinguishment of a perpetual conservation easement donation – it’s the topic of today’s post.

The Issue of Extinguishment – Treasury Regulation

While the law generally disfavors perpetual control of interests in land, for a taxpayer to claim a tax deduction for a donated conservation easement, the easement must be granted in perpetuity.  But if the conditions surrounding the property subject to a perpetual conservation easement make impossible or impractical the continued use of the property for conservation purposes, a Treasury Regulation details the requirements to be satisfied to protect the perpetual nature of the easement if a judicial proceeding extinguishes the easement restrictions.  Treas. Reg. §1.170A-14(g)(6)(i)-(ii). 

The regulation requires that, at the time of the donation, the donor must agree that the donation gives rise to a property right that is immediately vested in the donee.  Treas. Reg. §1.170A-14(g)(6)(ii).  The value of the gift must be the fair market value of the easement restriction that is at least equal to the proportionate value that the easement restriction, at the time of the donation, bears to the entire property value at that time. See Treas. Reg. §1.170A-14(h)(3)(iii) relating to the allocation of basis.  The proportionate value of the donee’s property rights must remain constant such that if the conservation restriction is extinguished and the property is sold, exchanged or involuntarily converted, the done is entitled to a portion of the proceeds that is at least equal to that proportionate value of the restriction.  The only exception is if state law overrides the terms of the conservation restriction and specifies that the donor is entitled to the full proceeds from the conversion restriction.  Treas. Reg. §1.170A-14(g)(6)(ii). 

Extinguishment – Cases

The formula language necessary to comply with the regulation must be precisely drafted.  The IRS has aggressively audited perpetual easement restrictive agreements for compliance.  Consider the following:

  • In Carroll, et al. v. Comr., 146 T.C. 196 (2016), the petitioner contributed a conservation easement on a tract of land to two qualified organizations. The easement provided that if the conservation purpose was extinguished because of changed circumstances surrounding the donated property, the donees were entitled to a proportionate share of extinguishment proceeds not to be less than the amount allowed as a deduction to the donor for federal income tax purposes over the fair market value of the property at the time of the contribution. The plaintiff claimed a charitable contribution for the year of the contribution and carried forward the remaining balance to tax years 2006-2008.

Because the easement at issue provided that the value of the contribution for purposes of the donees’ right to extinguishment proceeds was tied to the amount of the petitioner’s allowable deductions rather than the fair market value of the easement, the court determined that the easement violated the Regulation and was not protected in perpetuity under I.R.C. §170(h)(5)(A). The court also imposed an accuracy-related penalty. 

  • In Palmolive Building Investors, LLC v. Comr., 149 T.C. No. 18 (2017), the petitioner acquired a building in 2001 for $58.5 million. In 2004, the petitioner transferred a façade easement on the building via deed to a qualified charity (a preservation council) to preserve the exterior building perimeter. The easement deed placed restrictions on the petitioner and its successors with respect to the façade easement and the building – the petitioner and any subsequent owner couldn’t demolish or alter the protected elements without the charity’s permission. The building was subject to two mortgages, but before executing the easement deed, the petitioner obtained mortgage subordination agreements from its mortgagee banks. However, the easement deed provided that in the event the façade easement was extinguished through a judicial proceeding, the mortgagee banks will have claims before that of the donee charity to any proceeds received from the condemnation proceedings until the mortgage is satisfied.

By the time of the easement donation, the value of the building had increased to $257 million, of which $33.4 million was attributable to the easement. The petitioner claimed a $33.4 million charitable contribution deduction for the tax year of the easement contribution. The IRS disallowed the deduction, claiming that the easement deed failed to satisfy the perpetuity requirements of I.R.C. §170 and Treas. Reg. §1.170A-14(g)(6)(ii) because it provided the mortgagees with prior claims to the extinguishment proceeds in preference to the donee. Specifically, the lender had agreed to subordinate the debt to the charity's claims, but the easement deed said that the lender would have priority access to any insurance proceeds on the property if the donor had insurance on the property. The easement deed also said that the lender would have priority to any condemnation proceeds.

The petitioner claimed that the First Circuit's decision in Kaufman v. Comr., 687 F.3d 21 (1st Cir. 2012) applied. In that case, the First Circuit rejected the view that a subordination must remove any preferential treatment of the lender in all situations, creating an exception for unusual situations that could possibly occur at some point in the future. The First Circuit determined that the Tax Court's reading of what is necessary to grant a perpetual easement would eliminate easement donations because an easement represented only a partial interest in property. In addition, the First Circuit reasoned that a broad reading was improper because, for example, a tax lien could arise if the donor failed to pay property tax when they became due which could result in the loss of the property without the charity receiving a pro rata portion of the property value.

In the present case, the Tax Court rejected the view of the First Circuit, noting that its decision would be appealable to the Seventh Circuit and, thus, the Tax Court was not bound by the First Circuit's decision. The Tax Court reasoned that because the lender had superior rights in certain situations, the mortgages did not meet the subordination requirement of Treas. Reg. §1.170A-14(g). Thus, the donated easement did not meet the perpetuity requirement of I.R.C. §170(h)(5). The Tax court also pointed out that other Circuits had agreed with the Tax Court's interpretation of the subordination rule since Kaufman was decided. The Tax Court also noted a difference concerning what must be done to subordinate an existing liability at the time of the donation (such as a mortgage) as opposed to a possible future liability that was not yet in existence. The Tax Court also noted that the Treasury Regulations specifically mentioned mortgages in the list of requirements necessary to satisfy the perpetuity requirement, but made no mention of a need to have taxing agencies to agree to give up rights to a priority interest that might arise in the future for delinquent taxes when the taxes were not delinquent.

The IRS assessed a gross valuation misstatement penalty in 2008 and additional accuracy-related and negligence penalties in 2014. The petitioner contested the penalties, but the Tax Court, in a later proceeding, determined that there is no requirement that IRS determine the penalties at the same time or by the same IRS agent. The only requirement, the Tax Court held, was that each penalty, at the time of initial determination, was approved in writing by a supervisor before being communicated to the petitioner. That requirement was satisfied. That later proceeding on the penalty issue is at 152 T.C. No. 4 (2019).

  • In Salt Point Timber, LLC, et al. v. Comr., T.C. Memo. 2017-245, the petitioner was a timber company that granted a perpetual conservation easement on a 1,032-acre property for which the petitioner claimed a $2.13 million deduction on its 2009 return. The easement preserved the view of natural, environmentally significant habitat on the Cooper River by barring development. The petitioner received $400,000 for the donated easement, and the done satisfied the definition of a “qualified organization” under I.R.C. §170(h)(1)(B). The appraised value of the easement was $2,530,000. The IRS disallowed the deduction on the basis that the easement grant allowed the original easement to be replaced by an easement held by a disqualified entity. In addition, the IRS claimed that the grant allowed the property to be released from the original easement without the extinguishment regulation being satisfied. The petitioner claimed that there was a negligible possibility that the easement could be held by a non-qualified party. The court agreed with the IRS, noting that the grant did not define the term “comparable conservation easement” or what type of organization could hold it, just that an “eligible donee” could hold it. The court noted that an assignment of the easement is different from a replacement of the easement. As such, the grant did not restrict that the holder of the easement had to be a “qualified organization.” The court also determined that the chance that the easement could be replaced was other than negligible as Treas. Reg. §1.170A-14(g)(3) required. 
  • In PBBM-Rose Hill, Ltd., v. Comr., 900 F.3d 193 (5th Cir. 2018), the petitioner owned a tract of land subject to a use restriction requiring it to only be used for recreational facilities open space for 30 years. At the time of the petitioner’s ownership, the property was a golf course with a clubhouse. The petitioner wanted to sell the property, but before doing so wanted to remove the use restriction. A local buyer expressed interest, but also wanted to block any removal of the use restriction. The sale went through after the buyer agree to allow the removal of the use restriction. However, before the sale closed, the petitioner conveyed a conservation easement of the property to a land trust. The terms of the easement stated that the property was to remain open for public use for outdoor recreation and that fees for such use could be charged. Upon extinguishment of the easement, the land trust would be entitled to a portion of the sale proceeds equal to the greater of the fair market value of the easement at the time of the donation or a share of the proceeds after expenses of sale and an amount attributable to improvements constructed on the property. The IRS denied the charitable deduction.

The Tax Court agreed with the IRS position based on its findings that the easement did not protect the conservation purpose under I.R.C. §170(h)(4)(A) and didn’t satisfy the perpetuity requirement of I.R.C. §170(h)(5)(A) because the easement deed’s extinguishment provision did not comply with Treas. Reg. §1.170A-14(g)(6). As such, the easement donation was not “exclusively for conservation purposes as required by I.R.C. §170(h)(1)(C). The Tax Court held that the easement value was $100,000 rather than the $15.2 million that the petitioner claimed. The Tax Court also upheld the gross valuation misstatement penalty that the IRS had imposed. On appeal, the appellate court affirmed that the petitioner was not entitled to any charitable deduction and upheld the penalty. The appellate court held that when determining whether the public access requirement for a recreation easement is fulfilled, the focus is to be on the terms of the deed and not the actual use of the land post-donation. The appellate court determined that the terms of the easement satisfied the public-access requirement of Treas. Reg. §1.170A-14(d)(5)(iv)(C). However, the appellate court concluded that the contribution was not exclusively for conservation purposes because the requirements of Treas. Reg. §1.170A-14(g)(6)(ii) were not satisfied.  The deed, the appellate court noted, allowed the value of improvements to be subtracted from the proceeds before the donee took its share, and that Priv. Ltr. Rul. 200836014 no longer represented the current position of the IRS and could not be used to alter the plain meaning of the regulation which mandates that the donee receive at least the proportionate value of the “proceeds.” The appellate court also agreed with the Tax Court that the gross valuation misstatement penalty applied to the difference between the amount the petitioner deducted on its return ($15 million) and the $100,000 deduction allowed by the Tax Court. 

  • In Coal Property Holdings, LLC v. Comr., 153 T.C. No. 7 (2019), the petitioner donated to a qualified charity an open space conservation easement over property which was previously subjected to surface coal mining and which was also subject to oil and gas leases and certain improvements. The IRS denied a charitable deduction because the easement wasn’t protected in perpetuity, and the Tax Court agreed. The conservation purpose of allowing the land subject to the easement to continue to recover from and provide scientific insight into the long-term effects of mining didn’t entitle the charity to a proportionate part of the proceeds if the subject property were sold upon a judicial extinguishment of the easement. As such, the easement wasn’t perpetual in nature as required by I.R.C. §170(h)(5)(A) and I.R.C. §1.170A-14(g)(6). While the petitioner claimed that the deed language contained a “regulation override” mandating that the deed be interpreted to satisfy the perpetuity requirements of the Code and Regulations, the Tax Court rejected that argument because it was a condition subsequent constituting a savings clause that the court would not enforce. 

On this issue, the IRS also argues that when an easement deed’s proceeds allocation formula deducts (from the proceeds allocable to the done) an amount attributable to “improvements” made by the owner after the donation, no charitable deduction is allowed.  The IRS position is that the deduction violates the extinguishment regulation (Treas. Reg. 1.170A-14(g)(6)(ii)), making the charitable deduction unavailable.  See, e.g., Priv. Ltr. Rul. 200836014 (Sept. 5, 2008).

  • In Railroad Holdings, LLC, et al. v. Comr., T.C. Memo. 2020-22, the petitioner donated a permanent conservation easement to a qualified entity and claimed a $16 million charitable deduction. The deed granting the easement contained a clause specifying the result if the easement were extinguished as the result of a court order. The IRS pointed out that in the event of a forced judicial sale, Treas. Reg. §1.170A-14(g)(6)(ii) requires the charity to receive an equal proportionate value of the sale proceeds that extinguishes the interest to the value of the easement as compared to the value of the property at the date of the donation. The language of the deed at issue held the charity’s payment constant, equal to the value as of the date of the contribution. It did not tie the charity’s payment to a percentage of the value of the property at the time of the forced sale equal to the percentage of value the easement was to the property at the time of the donation. The IRS denied the entire $16 million donation and the Tax Court agreed.

The Tax Court noted that the deed language did not create a proportion or fraction representing the donee’s share of the property right and a corresponding fraction of the proceeds to which the donee was entitled in perpetuity. Rather, the Tax Court noted, the language gave the charity a “proportionate value…at the time of the gift” which guaranteed only that a fixed dollar amount would go to the charity. The Tax Court also held as irrelevant a declaration of intent executed by an officer of the charity that the deed language reflected the charity’s intent to be in full compliance with the Code. What mattered was the donor’s intent, not the charity’s intent. Even so, the deed language failed to conform to the Code. The Tax Court also determined that the deed language was not ambiguous. Thus, the easement was not protected in perpetuity and the full deduction was disallowed. 

Challenge to the Validity of the Regulation

In Oakbrook Land Holdings, LLC v. Comr., 154 T.C. No. 10 (2020), the petitioner challenged the validity of the extinguishment regulation.  In 2008, the petitioner donated a permanent conservation easement to a qualified organization and claimed a charitable deduction.  The easement deed specified that upon extinguishment of the conservation restriction the donee would receive a share of the proceeds equal to the fair market value of the easement as of the date of the contribution.  That value, the deed specified, was to be reduced by the value of any improvements that the donor made after granting the easement.  The IRS denied the charitable deduction because (inter alia) violated the extinguishment regulation of Treas. Reg. §1.170A-14(g)(6). 

The Tax Court, agreeing with the IRS, upheld the validity of the regulation.  The full Tax Court   held that the extinguishment regulation (Treas. Reg. §1.170A-14(g)(6)) had been properly promulgated and did not violate the Administrative Procedure Act.  The full Tax Court also determined that the construction of I.R.C.§170(h)(5), as set forth in the extinguishment regulation, was valid under the agency deference standard set forth in Chevron, U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). 

In a related memorandum opinion, the Tax Court held that the easement deed did not create a perpetual easement because the donee’s share of the extinguishment proceeds was based on fixed historical value, reduced by the value of improvements that the donor made.  Oakbrook Land Holdings, LLC v. Comr., T.C. Memo. 2020-54.  It was not, as it should have been, based on a proportionate share of extinguishment proceeds that are at least equal to the total proceeds (unadjusted by the value of the petitioner’s improvements), multiplied by a fraction defined by the ratio of the fair market value of the easement to the fair market value of the unencumbered property determined as of the date of the execution of the deed.  However, the Tax Court did not uphold penalties that the IRS imposed, finding that the petitioner’s position was reasonable.

Conclusion

The extinguishment regulation is, perhaps, the most common audit issue for IRS when examining permanent conservation easement donations.  The clause specifying how proceeds are to be split when a donated conservation easement is extinguished is routinely included in easement deeds.  The cases point out that the clause must be drafted precisely to fit the confines of the regulation.  A regulation that now has survived an attack on its validity.  Many perpetual easement donations will potentially be affected. 

May 25, 2020 in Environmental Law, Income Tax, Real Property | Permalink | Comments (0)

Thursday, April 30, 2020

Groundwater Discharges of “Pollutants” and “Functional Equivalency”

Overview

Under the Clean Water Act (CWA), a National Pollution Discharge Elimination System (NPDES) permit is required for an “addition” of any “pollutant” from a “point source” into the “navigable waters of the United States” (WOTUS).  33 U.S.C. §1362(12).  Excluded are agricultural stormwater discharges and return flows from irrigated agriculture.  33 U.S.C. §1362(14).  Clearly, a discharge directly into a WOTUS is covered. A point source of pollution is that which comes from a discernible, confined and discrete conveyance such as a pipe, ditch or well. 

But, is an NPDES permit necessary if the discharge is directly into groundwater which then seeps its way to a WOTUS in a diffused manner?  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?  1n the 48 years of the CWA, the federal government has never formally taken that position, instead leaving the matter up to the states.  The issue is a big one for agriculture.  Recently, the U.S. Supreme Court addressed the issue.

The U.S. Supreme Court, groundwater discharges and the CWA – it’s the topic of today’s post.

Court Developments in 2018

In 2018, three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue. 

  • 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). Although constructed initially to serve as a backup disposal method for water reclamation, the wells became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean.  The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells.  The wastewater seeped through the groundwater for about one-half of a mile until it reached the Pacific Ocean. The U.S. Court of Appeals for the Ninth Circuit held that the seepage into the Pacific from the point-source wells one-half mile away was “functionally one into navigable water,” and that a permit was required because the “pollutants are fairly traceable from the point source to a navigable water.”
  • In Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018), the plaintiffs claimed that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The U.S. Court of Appeals for the Fourth Circuit determined that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge, the court concluded, need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States. 
  • In Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), the U.S. Court of Appeals for the Sixth Circuit held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

The EPA Reacts

After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested 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, the EPA sought comment on whether the 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.  In particular, the EPA sought 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 sought 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.

After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

The Supreme Court and the Hawaii Case

In 2019, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019)Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants that originate “from” a point source that are discharged into a navigable water.  The NPDES system only applies to discharges of “any addition” of any pollutant from “any point source” to “navigable waters.”  Thus, by the statutory text, there must be an “addition” of a pollutant to a navigable water of the U.S. “from” a point source.  Discharges of pollutants into groundwater are not subject to the NPDES permit requirement even if the groundwater is hydrologically connected to surface water.  The legislative history of the CWA indicates that the Congress intentionally chose not to regulate hydrologically-connected groundwater, instead leaving such regulation up to the states.  See, e.g., Umatilla Water Quality Protective Association v. Smith Frozen Foods, 962 F. Supp. 1312 (D. Or. 1997)

As noted, the case involved pollutants that originated from a point source, traveled through groundwater, and then a half-mile later reached a WOTUS.  Does the permit requirement turn on a direct discharge into a WOTUS (an addition of a pollutant from a point source), or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all parties agreed.  But, are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

On April 23, the Court issued a 6-3 opinion written by Justice Breyer holding that an NPDES permit is required not only when there is a direct discharge of a pollutant from a point source into a WOTUS, but also when there is the “functional equivalent” of a direct discharge.  This conclusion, the Court noted, was somewhat of a middle ground between the Ninth Circuit’s “fairly traceable” test and the position that a permit is required only if a point source ultimately delivered the pollutant to a WOTUS.  The Court determined that because the Congress coupled the words “from” and “to” in the statutory language that the Congress was referring to the destination of a WOTUS rather than the origin of a point source.  Thus, the Court determined that a permit is required when there is a direct discharge of a point source pollutant to a WOTUS or when, in effect, that is what occurred.    The Court believed that the EPA’s recent Interpretive Statement excluding all releases of pollutants to groundwater from the permit requirement was too broad and would create a loophole that would defeat the purpose of the CWA. The Court noted that many factors could be relevant in determining whether a particular discharge is the functional equivalent of a direct discharge into a WOTUS, but that time and distance would be the most important factors in most cases.  The Court also indicated that other factors could include the nature of the material through which a pollutant traveled and the extent of its dilution or chemical change while doing so, and noted that the lower courts would provide additional guidance as they decided subsequent cases. 

Justice Thomas dissented (joined by Justice Gorsuch), pointing out that the use of the word “addition” in the statute requires an augmentation or increase of a WOTUS by a pollutant and that, as a result, anything other than a direct discharge is statutorily excluded.  Indeed, in 2010, the Court declined to hear a case where the lower court held that an NPDES permit is not required unless there is an “addition” of a pollutant to a WOTUS.  See e.g., Friends of the Everglades, et al. v. South Florida Water Management District, et al., 570 F.3d 1210 (11th Cir. 2009) reh’g., den., 605 F.3d 962 (11th Cir. 2010), cert. den., 131 S. Ct. 643 (2010).  Justice Thomas also noted that the Court’s opinion provided practically zero guidance on the question of when a permit is necessary when a direct discharge is not involved, except for the Court’s provision of a list of non-exhaustive factors.  Justice Thomas stated, “[The] Court does not commit to whether those factors are the only relevant ones, whether [they] are always relevant, or which [ones] are the most important.”

Justice Alito also dissented, similarly disenchanted with the nebulous standard and “buck-passing” of the Court to lower courts on the issue.  Justice Alito wrote that, “If the Court is going to devise its own legal rules, instead of interpreting those enacted by Congress, it might at least adopt rules that can be applied with a modicum of consistency.” 

Ultimately, the Court’s “functional equivalency” test was narrower than the “fairly traceable” test that the Ninth Circuit utilized and the Court vacated the Ninth Circuit’s opinion and remanded the case for a decision based on the Court’s standard. 

Implications for Agriculture

The Court’s opinion is significant for agriculture.  From a hydrological standpoint, surface water and groundwater systems are often connected.  Groundwater is what often maintains a presence of surface water in a stream.  From agriculture’s perspective, the case is important because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  Certainly, when manure collects and channelizes through a ditch or depression and enters a WOTUS a direct discharge requiring an NPDES permit is required.  See, e.g., Concerned Area Residents for the Environment v. Southview Farm, 34 F.3d 114 (2d Cir. 1994).  But, that’s a different situation from seepage of manure (or other “pollutants”) through groundwater.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Groundwater, by some standards, is polluted or includes pollutants.  Farm field drainage tile is deliberately installed to deliver that polluted groundwater to a watercourse which, in some instances, might be a WOTUS.  That is a significant reason that groundwater discharges have always been exempt from the NPDES permit requirement along with agricultural stormwater discharges and agricultural irrigation return flows.  Should the law now discourage agricultural drainage activities? 

Conclusion

The Court’s opinion provides no material guidance to determine the need for a federal permit when a discharge into a WOTUS is other than direct.  More litigation can be anticipated as well as conflicting opinions by the lower courts as they struggle to apply the amorphous “functional equivalency” standard.  Likewise, regulatory bodies will have nearly free reign to inflict harm on agricultural operations and tie them up in time-consuming and costly administrative procedures. 

April 30, 2020 in Environmental Law | Permalink | Comments (0)

Wednesday, April 15, 2020

Court Developments of Interest

Overview

In recent articles on this blog, I have taken a look at the various parts of recently enacted legislation as a consequence of the economic trauma the federal and state governments have imposed on businesses and individuals as a recent of the virus.  Today, I step away from virus related developments and focus on recent court opinions of relevance to agricultural law and taxation. 

Ag law and tax in the courts – it’s the topic of today’s post.

Valuation Discounting – Assignee Interests

Streightoff v. Comr., T.C. Memo. 2018-178, aff’d., No. 19-60244, 2020 U.S. App. LEXIS 10070 (5th Cir. Mar. 31, 2020).

Limited partnerships (and their variant – the family limited partnership), emerged as an important estate and business planning tool in the early 1990s.  They can be useful for farming and ranching operations of relatively higher net worth as a vehicle to transfer interests in the farming or ranching business to a succeeding generation at a discounted value.  That discounted value is often achieved by working the transferor into a minority position before death and the creation of multiple types of partnership interests, and also holding those partnership interests in different types of entities.  Discounted value can also be achieved (under the laws of some states) by transferring an assignee interest rather than the actual interest in the partnership.  Assignee interests are, in essence, limited partnership interests with economic participation equal to that of limited partnership interests but typically without the same rights.  They typically do not carry the right to vote, inspect partnership books or transfer their interests.  Thus, the claim is, they should be valued less than a general partnership interest and even less than a limited partnership interest for both federal gift tax as well as estate tax purposes - if they are established and transferred properly.  That was the issue in a recent case.

In Streightoff, the decedent had created a limited partnership under Texas law before death. The decedent held a one percent general partner interest and an 88.99 percent limited partner interest. Eight of the decedent’s family members owned the balance of the limited partner interests. The partnership didn’t conduct any meetings and held cash, equities, bonds and mutual funds. The decedent had the power to approve the sale of partnership interests and had a right of first refusal on all sales. The partnership agreement described persons who acquired partnership interests as “assignees.”

A few years before death, the decedent purported to create an “assignee” interest in his revocable trust with respect to his 88.99 percent limited partnership interest. The decedent’s estate tax return reported the decedent’s limited partnership interest as an “assignee” of the revocable trust and claimed a 37.2 percent discount for lack of marketability discount and lack of control. The estate based the level of the discount on the notion that the trust only held an assignee interest consistent with the partnership agreement which stated that, “A transferee who was not admitted as a substituted limited partner would hold the right to allocations and distributions with respect to the transferred interest, but would have no right to information or accounting or to inspect the books or records of the partnership and would not have any of the rights of a general or limited partner (including the right to vote on partnership matters)."

The IRS reduced the extent of the discount and asserted a deficiency of about $500,000. While the estate claimed that the lack of marketability discount should be 27.5 percent based on a possible holding period until 2075, the Tax Court determined that the decedent’s assignee interest was essentially the same thing as a limited partnership interest. Accordingly, the Tax Court settled on an 18 percent discount for lack of marketability. No discount for lack of control was allowed because the Tax Court found that the partnership interest was significant and carried with it the power to remove the general partner. The appellate court affirmed on appeal, concluding that the Tax Court properly determined that the assignment was essentially a transfer of the decedent’s partnership interest. The “assignment” clearly conveyed more than an assignee interest. 

 

Petition to Quiet Title Over Disputed Boundary Denied

Liddiard v. Mikesh, No. 19-0143, 2020 Iowa App. LEXIS 267 (Iowa Ct. App. March 18, 2020)

If an individual possesses someone else's land in an open and notorious fashion with an intent to take it away from them, such person (known as an adverse possessor) can become the true property owner after the statutory time period has expired via a quiet title action.  Adverse possession statutes vary by jurisdiction in terms of the requirements a person claiming title by adverse possession must satisfy and the length of time property must be adversely possessed.  A boundary between two properties can also be established by acquiescence.  This theory applies when neither of the adjacent owners knows the location of the true boundary.  Instead, the parties treat a particular marker or line as the boundary for a prescribed period of time.  Both parties simply agree (acquiesce) to treat that particular line or marker as the boundary.  Both of these concepts were involved in a recent Iowa case.

The parties had been adjoining rural landowners since 1988. When the defendant bought his tract, a survey was conducted.  That survey was relied on in litigation between the parties concerning a dispute over logged timber on a five-acre parcel where ownership between the parties was not clear via the respective deeds. A few years later the plaintiff sued to quiet title to the disputed area claiming that the true boundary was the existing fence line based on either the theory of adverse possession or boundary by acquiescence.

The trial court determined that the plaintiff had failed to establish the requirements for either theory, and refused to quiet title in the plaintiff. On appeal, the appellate court agreed. Based on the evidence, the appellate court determined that the plaintiff failed to establish exclusive use of the disputed area for the statutory period and did not substantially maintain or improve the area.  Thus not all of the elements of adverse possession were satisfied.  In addition, the plaintiff did not bring the quiet title action for six years after the initial dispute over timber. The appellate court also determined that the defendant did not treat the fence line as the boundary. Thus, no boundary by acquiescence was established because both parties did not assume the fence line was the boundary. 

Court Addresses Direct and Indirect Discharges Under CWA – Awaiting Supreme Court Guidance

Conservation Law Foundation v. New Hampshire Fish & Game Department, No. 18-CV-996-PB, 2020 U.S. Dist. LEXIS 59608 (D. N.H. Apr. 6, 2020).

The plaintiff claimed that the defendant had violated the Clean Water Act (CWA) by allowing a hatchery that the defendant owned and operated to discharge pollutants into a river in violation of the hatchery’s National Pollutant Discharge Elimination System (NPDES) permit. The plaintiff claimed that the defendant was making both direct and indirect discharges in violation of its NPDES permit. The direct discharge claims were based on current and anticipated future discharges directly from the hatchery into the river. The indirect discharge claims stemmed from past releases of phosphorus by the hatchery that became sediment at the bottom of the river.  Those discharges continued to leach phosphorus into the water.

The trial court dismissed the direct discharge claims and directed the parties to submit additional arguments with respect to the indirect discharge claims. The direct discharge claims were dismissed because in late 2019, the EPA released a new NPDES permit for the hatchery which ultimately may allow the discharges that the plaintiffs claim violate the CWA. Because the anticipated 2020 permit may moot some or all of the plaintiffs’ direct discharge claims, the court dismissed those claims. As for the indirect discharge claims, the court noted that the plaintiffs’ arguments that the defendants have violated the CWA by allowing pollutants to enter a water of the United States through a conduit is similar to an issue that is presently before the United States Supreme Court.  See Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019)Because how the Supreme Court rules on the indirect discharge claim could impact the court’s decision in this case, the court requested that the parties file additional briefing on whether the Maui case should influence the court’s decision. 

Alimony Payments Not Deductible

Biddle v. Comr., T.C. Memo. 2020-39

In divorce situations, it’s fairly common for one ex-spouse to become legally obligated to make payments to the other ex-spouse.  Before 2018, the ex-spouse making alimony payments could deduct them for federal income tax purposes.  To be deductible alimony, a payment could not be classified as fixed or deemed to be child support under a set of complex rules, as evidenced in a recent Tax Court case.

Under the facts of the case, the petitioner and his wife were married for 14 years and had four children together before divorcing in 2010. The divorce decree included provisions for “child support” and “alimony.” The decree ordered the petitioner to pay monthly child support of $1,795.63 per month until each child reached age 18, died, married, entered military school or became self-sufficient. The decree also ordered the petitioner to pay “permanent periodic alimony” of $1,592.50 for at least five years until either the youngest child reached age 18, the ex-wife or petitioner died, the ex-wife remarried at the five-year point or later, or the wife became self-supporting. The decree also specified that if the husband received a pay raise that half of the net increase would increase the alimony payment. The decree was later modified to reduce the monthly child support amount because the petitioner took custody of an additional child. No change was made to the alimony payment.

On petitioner’s 2015 return, he claimed a $28,000 alimony deduction. The IRS disallowed the deduction as nondeductible child support because of one of the contingencies terminating payment was petitioner’s youngest child turning 18. The Tax Court upheld the IRS position. The Tax Court noted that under I.R.C. §71(c)(2)(A), the payments would count as child support until the child turned 18. Here, the decree clearly stated that the designated alimony payments would terminate on the contingency that the petitioner’s youngest child turn 18. That was a contingency relating to a child that qualifies a payment as nondeductible child support. This is the result, the court noted, even though the decree designated separate amounts for child support and alimony. The parties’ intent also was immaterial. 

Conclusion

Even though the focus of much present thought and discussion is on the virus and the economic wreckage that (primarily) state governmental policies are causing, the courts continue to crank out important cases.  Make sure you are still paying attention to what is going on.

April 15, 2020 in Business Planning, Civil Liabilities, Environmental Law, Estate Planning | Permalink | Comments (0)

Monday, March 23, 2020

Clean Water Act – Compliance Orders and “Normal Farming Activities”

Overview

Section 404 of the Clean Water Act (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 of Engineers (COE). But, over the years, the Environmental Protection Agency (EPA) has used compliance orders to stymie the issuance of Section 404 permits.  Another aspect of Section 404 permitting is the exemption for “normal farming activities.” 

EPA compliance orders and “normal farming activities” – they are the topics of today’s post.

EPA Compliance Orders

As noted above, the EPA has issued "compliance orders" to landowners and other parties when it believes that the land in issue contains wetlands subject to its jurisdictional control. The issuance of a compliance order has the effect of freezing the affected party in place until a Section 404 permit is obtained. EPA has also taken the position that such orders do not give the affected party the right to a hearing or the ability to obtain judicial review because (in EPA's view) such orders are not "final agency action" that carries appeal rights with it. However, in Sackett v. United States Environmental Protection Agency, 566 U.S. 120 (2012), rev'g., 622 F.3d 1139 (9th Cir. 2010), a unanimous Supreme Court held that the CWA does not preclude pre-enforcement judicial review of EPA administrative compliance orders. Preclusion, the Court held, would violate constitutional due process requirements.  

Under the facts of Sackett, the plaintiff had filled-in approximately one-half acre of their property with dirt and rock in preparation to build a house.  The EPA issued a compliance order alleging that the parcel contained a wetland subject to the CWA permit requirements. The plaintiff sought a hearing with the EPA to challenge the finding, but EPA did not grant a hearing.   The EPA continued to assert jurisdiction and the plaintiff sued in federal district court seeking injunctive and declaratory relief. The trial court granted the EPA's motion to dismiss for lack of subject matter jurisdiction because, according to the court, the CWA precludes judicial review of compliance orders before EPA starts enforcement action. The case was affirmed on appeal, but the U.S. Supreme Court reversed, noting that compliance order constitutes "final agency action" under the Administrative Procedure Act, and the landowners did not have an adequate remedy at law.

In 2015, the U.S. Court of Appeals for the Eighth Circuit held that a Corps of Engineers “preliminary determination” that the wetlands at issue on a tract that the owner sought to mine for peat had a “significant nexus” to a navigable river more than 100 miles away constituted a final agency action that could be appealed.  Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, 782 F.3d 994 (8th Cir. 2015), rev’g., 963 F. Supp. 2d 868 (D. Minn. 2013), cert. granted, United States Army Corps of Engineers v. Hawkes, Co., Inc., 136 S. Ct. 615 (2015).  On further review, the U.S. Supreme Court unanimously affirmed. 136 S. Ct. 1807 (2016)The Court 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.

Exemption for “Normal Farming Activities”

An exemption from the CWA § 404 permit requirement exists for “normal farming activities” such as plowing, seeding, cultivating, minor drainage, harvesting, upland soil and water conservation projects, construction or maintenance of farm ponds, irrigation ditches, maintenance of drainage ditches and construction or maintenance of farm roads not otherwise impairing navigable waters.  33 U.S.C. § 1344(f)(1).  In general, COE regulations limit the exemption to pre-established  farming activities that do  not bring a new area into farming or require modifications to the  hydrological regime. 33 C.F.R. § 323.4(a)(1)(ii). In addition, the EPA, not the COE, is the final authority to decide the scope of the exemption. 43 Op. Att'y. Gen. 15 (1979).

In general, the courts have narrowly construed the exemption to those situations where the agricultural activity is extremely minimal and no additional areas of “navigable waters” are brought into use.  See, e.g., United States v. Huebner, 752 F.2d 1235 (7th Cir. 1985). As such, the exemption for agricultural activities applies only to prior established and continuing farming activities. For example, the conversion of wetlands to fish farming ponds has been held to constitute a new use that is ineligible for the “normal farming activities” exemption.  Also, filling to stabilize riverbanks and re-channel streambeds has been held not to fall within the scope of the exemption as normal ranching or upland soil and water conservation practices.

Exempt activities are subject to a “recapture” provision that requires a permit if a discharge changes the use of the waters, impairs the waters' flow or circulation, brings an area of navigable waters into a use to which it was not previously subject, or reduces the reach of the waters.   33 U.S.C. § 1344(f)(2).  Thus, only routine activities with relatively minor impacts on waters are exempt and the exemption will be lost if the activity is a new use and the activity reduces the reach or impairs the flow of water.  For  example, in United States v. Brace, 41 F.3d 117 (3d Cir. 1994), the court held that the “normal farming activity” exemption only applied to activities occurring on the particular site in question regardless of the relationship to the activities occurring on the remainder of the land. The site in issue adjoined cropland and was part of the same drainage system. In addition, the court held as irrelevant for CWA purposes a prior SCS classification of the drainage activities as a “commenced conversion.” The court also noted that even if the activities were held to be exempt, they would be subject to the recapture provision.

The same farming operation was still in court over a quarter of a century later over alleged wetland violations concerning their farming operations.  All of the litigation stems from not being able to use the “normal farming activity” exemption.  See United States v. Brace, No. 1:17-cv-00006 (BR), 2020 U.S. Dist. LEXIS 33423 (W.D. Pa. Feb. 27, 2020).

Conclusion

Farmers and ranchers have had to deal with the EPA and the COE for decades.  The Section 404 permitting requirement of the CWA can be a difficult issue for some farming operations.  However, it’s important to know that due process rights must be assured.  It’s also important to understand the scope of the “normal farming activities” exemption from the permit rules.  That can be a very useful exemption when needed. 

March 23, 2020 in Environmental Law | Permalink | Comments (0)

Tuesday, March 3, 2020

Recent Cases of Interest

Overview

The cases and rulings of relevance to agricultural producers, ag businesses and rural landowners continue to churn out.  In today’s post a take a brief look at three of them – a couple of bankruptcy-related cases and a case involving a claim of constitutional takings.

“Shared Responsibility” Payment Is Not a “Tax”

United States v. Chesteen, No. 19-30195 (5th Cir. Feb. 20, 2020), rev’g., No. 18-2077, 2019 U.S. Dist. LEXIS 29346 (E.D. La. Feb. 25, 2019).

In a bankruptcy proceeding, some unsecured creditors receive a priority in payments over other unsecured creditors.  These are termed “priority claims” and they are not subject to being discharged in bankruptcy.  Priority claims are grouped into 10 categories with descending levels of priority.  11 U.S.C. §507(a)(1)-(10).  One of those priority claims is for “allowed unsecured claims of governmental units” to the extent the claims are for “a tax on or measured by income or gross receipts…”.  11 U.S.C. §507(a)(8).  But, does that provision apply to the penalty that had to be paid through 2018 for not having an acceptable form of government-mandate health insurance under Obamacare – the so-called “Roberts Tax”?  The U.S. Court of Appeals for the Fifth Circuit recently answered that question.

In the case, the debtor filed Chapter 13 bankruptcy. The IRS filed a proof of priority claim for $5,100.10, later amending the claim to $5,795.10 with $695 of that amount being an excise tax under I.R.C. §5000A as a result of the debtor’s failure to maintain government mandated health insurance under Obamacare. The debtor objected to the $695 amount being a priority claim that could not be discharged, and the bankruptcy court agreed, finding that the “Roberts Tax” under Obamacare was not a priority claim, but rather a dischargeable penalty in a Chapter 13 case.  On appeal, the federal trial court reversed, holding that the penalty was a tax that was a non-dischargeable priority claim. The trial court noted that the creditor bore the burden to establish that the Roberts Tax was a priority claim and noted that it was the purpose and substance of the statute creating the tax that controlled whether the tax was a tax or a penalty. The trial court noted that a tax is a pecuniary burden levied for the purpose of supporting government while a monetary penalty is a punishment for an unlawful act or omission. On this point, the trial court noted that Chief Justice Roberts, in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), upheld the constitutionality of Obamacare on the basis that the “shared responsibility payment” was a tax paid via a federal income tax return and had no application to persons who did not pay federal income tax. The trial court noted that the amount was collected by the IRS and produced revenue for the government. It also did not punish an individual for any unlawful activity and, the trial court noted, the IRS has no criminal enforcement authority if a taxpayer failed to pay the amount.

On further review, the appellate court reversed, reinstating the bankruptcy court’s determination. The appellate court held that the “Roberts Tax” was not entitled to priority in bankruptcy because it was not among the types of taxes listed in the bankruptcy code to have priority treatment under 11 U.SC. §507(a)(8)(E)(i). The appellate court noted that the “Roberts Tax” could not be a priority tax claim in a debtor’s bankruptcy estate because the “tax” applied only when a person failed to buy the government-mandated health insurance, rather than when a transaction was entered into. As such, the “Roberts Tax” was a penalty that could be discharged in bankruptcy. The appellate court also noted that the “tax” zeroed out the “tax” beginning in 2019, thereby nullifying any tax effect that it might have had. 

Cram-Down Interest Rate Determined

In re Country Morning Farms, Inc., No. 19-00478-FPC11, 2020 Bankr. LEXIS 307 (E.D. Wash. Feb. 4, 2020).

Under the reorganization provisions of the Bankruptcy Code (Chapters 11, 12 and 13), a debtor can reorganize debts and pay for most (but not all) secured property by paying the present value of the collateral (what the collateral is presently worth) rather than the entire debt.  The procedure for doing this is commonly known as a “cram down” – the terms of the repayment are forced upon the creditor.  The debtor must pay the present value of the collateral (the creditor’s allowed secured claim) via the reorganization bankruptcy.  Because the repayment of the written-down debt will be paid over time in accordance with the reorganization plan, an interest rate is attached to ensure that the creditor receives the present value of the claim.  But, what is the appropriate interest rate in such a setting and how is it determined?  Over the years, courts struggled in determining the appropriate interest rate to use in a reorganization bankruptcy cram-down setting.  The U.S. Supreme Court settled the waters with a decision in 2004 by using the “Prime Plus” method.  The issue of the appropriate interest rate was again as issue in a dairy bankruptcy case from the state of Washington.

In the case, the debtor filed Chapter 11 bankruptcy and the debtor and the bank could not agree on the appropriate interest rate to be used in the debtor’s reorganization plan. The parties agreed that the “Prime Plus” method set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004) was the appropriate method to determine the “cram down” interest rate.” The parties agreed that the prime rate was presently 4.75 percent and that an additional amount as a “risk factor” should be added to the prime rate. The debtors proposed a 6 percent interest rate, based on the risk associated with their dairy business. The bank claimed that the appropriate interest rate was 7.75 percent – the highest rate factor under the Till analysis. The bank cited the length of the plan, the volatility of the dairy market, the debtor’s capital structure, and conflicting projections from an expert when determining the appropriate risk factor. The court determined that the appropriate interest rate was 7 percent which raised the interest rate on some of the debtor’s loans and lowered it on others. 

Reversion to Agricultural Use Classification Not a Taking

Bridge Aina Le’a, LLC v. State Land Use Commission, No. 18-15738, 2020 U.S. App. LEXIS 5138 (9th Cir. Feb. 19, 2020).

Sometimes, a governmental body enacts a statute or promulgates a regulation that restricts a private property owner’s use of their property.  The restriction on land use may be so complete that, in effect, the restriction amounts to the government “taking” the property. However, these regulatory restrictions on private property usage do not involve a physical taking of the property but can still give rise to Fifth Amendment concerns and trigger the payment of “just compensation” to the landowner.  The legal issues concerns the point at which a defacto regulatory taking has occurred.

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, the 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.  Later, the Court determined 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)The issue of a regulatory taking came up in a recent case from Hawaii. 

Under the facts of the recent case, 1,060 acres of undeveloped land on the northeast portion of the Island of Hawaii were designated as conditional urban use. For the 40 prior years, the tract was part of a 3,000-acre parcel zoned for agricultural use. In 1987, the landowner at the time sought to develop a mixed residential community of the 1,060 acres as the first phase of development on the entire 3,000 acres. The landowner petitioned the defendant to reclassify the 1,060 acres as urban. The defendant did so in 1989 on development conditions that ran with title to the land. The land remained undeveloped at the time the plaintiff acquired it in 1999. In 2005, the defendant amended the condition so that fewer affordable housing units needed to be developed. Developmental progress was hampered by the requirement that the plaintiff prepare an environmental impact statement for the development project.

In late, 2008, the defendant ordered the plaintiff to show cause for the nondevelopment. In the summer of 2010, some affordable housing units had been constructed, but upon inspection they were determined to not be habitable. The developer then stated that it lacked the funds to complete the development. In 2011, the defendant ordered the land’s reversion to its prior agricultural use classification due to the unfulfilled representations that the land would be developed. The land was given its conditional urban use classification based on those representations. The plaintiff was one of the landowners and challenged the reversion as illegal, and that it amounted to an unconstitutional regulatory taking of the land. The trial court jury found for the plaintiff on the constitutional claim and the trial court denied the defendant’s motion for a judgment as a matter of law.

On further review, the appellate court reversed The appellate court stated held that no taking had occurred under the multi-factor analysis of Penn Central Transportation Company v. City of New York, 438 U.S. 104 (1978), because the reclassification did not result in the taking of all of the economic value of the property. Rather, the land retained substantial economic value, albeit at a much lesser amount than if it were classified as urban and developed. An expert valued the land at approximately $40 million as developed land and $6.36 million with an agricultural use classification. The appellate court held that the $6.36 million was neither de minimis nor derived from noneconomic uses. Thus, the defendant was entitled to judgment as a matter of law on the issue that a complete economic taking had occurred. It had not. The appellate court also held that the reversion did not interfere substantially with the plaintiff’s investment-backed expectations given that the development conditions were present at the time the plaintiff acquired the property and the plaintiff could expect them to be enforced. The appellate court also determined that the defendant acted properly in protecting the plaintiff’s due process rights by holding hearings over a long period of time. Thus, the appellate court concluded, no reasonable jury could conclude that the reversion effected a taking under the Penn Central factors. The appellate court vacated the trial court’s judgment for the plaintiff and reversed the trial court’s the trial court’s denial of the defendant’s motion for judgment as a matter of law, affirmed the trial court’s dismissal of the plaintiff’s equal protection claim and remanded the case. 

Conclusion

The developments of relevance to agricultural interests keep rolling in.  There will be more discussed in future posts. 

March 3, 2020 in Bankruptcy, Environmental Law, Regulatory Law | Permalink | Comments (0)

Friday, January 17, 2020

Principles of Agricultural Law

Overview

Principles2020springedition400x533The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

January 17, 2020 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)

Thursday, January 9, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 4 and 3)

Overview

Today’s post continues the walk through the top legal and tax developments in 2019 impacting agriculture.  As can be gathered from the most recent several posts, the legal and tax systems have a major impact on agriculture and agricultural producers.  Agricultural law and taxation is very dynamic and the rules are often different as applied to a “farmer” than when they are applied to a non-farmer. 

In today’s post, I examine the fourth and third most important developments to impact agriculture in 2019.

  1. Regulatory Changes to the Endangered Species Act (ESA)

The 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.  The ESA has the potential to restrict substantially agricultural activities because many of the protections provided for threatened and endangered species under the ESA extend to individual members of the species when they are on private land where many endangered species have some habitat.

In late July of 2018, the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service (NMFS) issued three proposed rules designed to modify certain aspects of the ESA. Public comment on the proposed rules was accepted until September 24, 2018.  On August 12, 2019, the agencies announced the finalization of the regulations.

The regulatory modifications to the ESA stem from early 2017 when President Trump signed an executive order (Exec. Order 13777, “Enforcing the Regulatory Reform Agenda”) requiring federal agencies to revoke two regulations for every new rule issued.  The order also required federal agencies to control the costs of all new rules within their budget. In addition, the order barred federal agencies from imposing any new costs in finalizing or repealing a rule for the remainder of 2017 unless that cost were offset by the repeal of two existing regulations.  Exceptions were included for emergencies and national security.  Beginning in 2018, the order required the director of the White House Office of Management and Budget to give each agency a budget for how much it can increase regulatory costs or cut regulatory costs.  The order was touted as the “most significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981."

The ESA has long been considered critical to species protection, but it has also been one of the most contentious environmental laws largely because of its impact on the usage of private as well as public land.  The judicial and legal costs of enforcing the ESA are quite high, as both environmental and industry groups have historically brought litigation to protect their interests on account of the ESA.  As for private land, about half of ESA listed species have at least 80 percent of their habitat on private lands.  This has given concern to landowners that the presence of a listed species on their land will result in land use restrictions, loss in value, and possible involvement in third-party lawsuits.  

When a species is listed as endangered or threatened, the Secretary must consider whether to designate critical habitat for the species.   “Critical habitat” is the specific area within the geographical range occupied by the species at the time of listing that is essential to the conservation of the species. Critical habitat may also include specific areas outside the geographical area occupied by the species at the time it is listed if the USFWS determines that such areas are essential for conservation of the species. However, critical habitat need not include the entire geographical range which the species could potentially occupy.  16 U.S.C. § 1532(5).   In making a critical habitat determination, the USFWS must consider economic impacts and other relevant impacts, as well as best scientific data. See, e.g., New Mexico Cattle Growers Association. v. United States Fish and Wildlife Service, 248 F.3d 1277 (10th Cir. 2001).   The USFWS may exclude any area from critical habitat if the benefits of the exclusion outweigh the benefits of specifying the area as critical habitat, unless the USFWS determines on the basis of best scientific and commercial data available that the failure to designate an area as critical habitat will result in the extinction of the species.

The Final Rules

In general.  The final rules are entitled, “Endangered and Threatened Wildlife and Plants; Revision of the Regulations for Listing Species and Designating Critical Habitat.”  83 Fed. Reg. 35,193 (Aug. 12, 2019).  The final rules will be codified at 50 C.F.R. pt. 424 and clarify the procedures and criteria that are used to add or remove species from the endangered and threatened species lists and how their critical habitat is designated.  The new rules also eliminate the rule that, by default, extended many prohibitions on endangered species to those species that only had threatened stats.  In addition, the final rules further define the procedures for interagency cooperation. 

The listing process.  The final rules modify the ESA listing process.  The final rule allows for economic impacts of the potential listing, delisting or reclassifying of a species to be accounted for.  The findings of anticipated economic impact must be publicly disclosed.  In addition, the Secretary must evaluate areas that are occupied by the species, and unoccupied  areas will only be considered “essential” where a critical habitat designation that is limited only to the geographical areas that a species occupies would be inadequate to ensure conservation of the species.  In addition, for an unoccupied area to be designated as critical habitat, the Secretary must determine that there is a reasonable certainty that the area will contribute to the conservation of the species and that the area contains one or more physical or biological features essential to the conservation of the species.  Also, a “threatened” listing for a species is to be evaluated in accordance with whether the species is likely to become endangered in the “foreseeable future” (as long as a threat is probable). 

The final rules also require any critical habitat for a listed species designation to first take into account all areas that a species occupies at the time of listing before considering whether any unoccupied areas are necessary for the survival or recovery of the species. On that point, a determination must be made that “there is a reasonable likelihood that the area will contribute to the conservation of the species” before designating any unoccupied area as critical habitat.  This is consistent with the U.S. Supreme Court opinion in Weyerhaeuser Co. v. United States Fish & Wildlife Service, 139 S. Ct. 361(2018), where the Court held that an endangered species cannot be protected under the ESA in areas where it cannot survive. 

The “blanket rule.”  The ESA statutory protections, including the prohibition on an “unauthorized take” of a species apply only to endangered species. However, the USFWS has automatically extended those protections to all species listed as threatened through a broad regulation known as the “blanket 4(d) rule.” The final rules remove these automatically provided protections to threatened species that are given to endangered species.  As a result, the USFWS will be required to develop additional regulations for threatened species on a case-by-case basis to extend the protections given endangered species.    

Agency cooperation.  The final rules also provide alternative mechanisms intended to improve the efficiency of ESA consultations conducted by the USFWS and federal agencies. The revisions include a process for expedited consultation in which a federal agency and the USFWS may enter into upon mutual agreement. A 60-day limit is included for completion of informal consultations with the option to extend the consultation to no more than 120 days.

The final regulations are an attempt to inject additional common-sense into the application of the ESA and align it to a greater extent to its original purpose.  Another intended impact is a decreased burden on farmers and ranchers.  Only time will tell if that is actually accomplished. 

  1. Irrigation Return Flows and the Clean Water Act

The CWA bars the discharge of any pollutants into the nation's waters without a permit. 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. 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.

Importantly, in 1977, the Congress amended the CWA to exempt return flows from irrigated agriculture as a point source pollutant. Thus, irrigation return flows from agriculture are not considered point sources if those “...discharges [are] composed entirely of return flows from irrigated agriculture.”   See, e.g., 33 U.S.C. §1342(l)(1); 40 C.F.R. §122.3.  See also Hiebenthal v. Meduri Farms, 242 F. Supp. 2d 885 (D. Or. 2002).  This statutory exemption was elaborated in a 1994 New York case, Concerned Area Residents for the Environment v. Southview Farm, 34 F.3d 114 (2d Cir. 1994). In that case, the court noted that when the Congress exempted discharges composed “entirely” of return flows from irrigated agriculture from the CWA discharge permit requirements, it did not intend to differentiate among return flows based on their content.  Rather, the court noted, the word “entirely” was intended to limit the exception to only those flows which do not contain additional discharges from activities unrelated to crop production. 

2019 Case

In Pacific Coast Federation of Fishermen’s Associations v. Glaser, 937 F.3d 1191 (9th Cir. 2019), the plaintiffs (various fishing activist groups) filed a CWA citizen suit action claiming that the defendant’s (U.S. Bureau of Reclamation) Grasslands Bypass Project in the San Joaquin Valley of California was discharging polluted water (water containing naturally-occurring selenium from soil) into a WOTUS via a subsurface tile system under farmland in California’s Central Valley without a CWA permit.  The plaintiffs directly challenged the exemption of tile drainage systems from CWA regulation via “return flows from irrigated water” on the basis that groundwater discharged from drainage tile systems is separate from any irrigation occurring on farms and is, therefore, not exempt.  After the lower court initially refused to grant the government’s motion to dismiss, it later did dismiss the case noting that the parties agreed that the only reason the project existed was to enable the growing of crops requiring irrigation, and that the drainage of contaminated water only occurred due to irrigated agriculture.  The lower court noted that the plaintiffs failed to plead sufficient facts to support a claim that some discharges were unrelated to agricultural crop production.  Later, the plaintiffs retooled their complaint to claim that not all of the irrigated water that was discharged through the tile systems came from crop production. Rather, the plaintiffs claimed that some of the discharges that flowed into groundwater were from former farmlands that now contained solar panels.  It was this “seepage” from the non-farmland that the plaintiffs claimed was discharged in the farm field tile system and caused the system to contain pollutants that didn’t come exclusively from agricultural crop irrigation.  The lower court found the tile system to be within the exemption for “return flows from irrigation,” noting that “entirely” meant “majority” because (in the court’s view) a literal interpretation of the amended statutory language would produce an “absurd result.”  

The appellate court reversed.  The appellate court held that discharges that include irrigation return flows from activities “unrelated” to crop production are not exempt from the CWA permit requirement.  To the appellate court, “entirely” meant just that – “entirely.”  It didn’t mean “majority” as the lower court had determined. 

What’s the impact of the appellate court’s decision?  After all, shouldn’t the appellate court be praised for construing a statute in accordance with what the law actually says?  What was the concern of the lower court of a literal interpretation of the statute?  For starters, think of the burden of proof issue.  Does the appellate court’s decision mean that a plaintiff must prove that some discharges come from non-agricultural irrigation activities, or does it mean that upon an allegation that irrigation return flows are not “entirely” from agricultural crop production that the farmer must prove that they all are?  If the latter is correct, that is a next-to-impossible burden for a farmer.  Such things as runoff from public roadways and neighboring farm fields can and do often seep into a farmer’s tile drainage system. If that happens, at least in the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), a farmer’s discharges will require a CWA permit.  This is the “absurd result” that the lower court was trying to avoid by construing “entirely” as “majority.” 

The appellate court remanded the case to the lower court for further review based on the appellate court’s decision.  However, the point remains that the appellate court determined that the exception for return flows from agriculture only applies when all of the discharges involved comes from agricultural sources.  That’s why the case is important to any farmer that irrigates crops.

Conclusion

In the next post, I will address the two most significant developments of 2019.  What do you think they might be?

January 9, 2020 in Environmental Law | Permalink | Comments (0)

Tuesday, January 7, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers Six and Five)

Overview

Today I continue the survey of the top ag law and tax developments of 2019.  Up for commentary today are the sixth and fifth most important developments.  Both of them deal with the federal government’s regulation of water and its impact on farming and ranching operations 

The sixth and fifth most important developments in ag law and tax in 2019 – they are the topics of today’s blog post.

  1. SCOTUS Rules on Administrative Agency Deference

A significant amount of governmental regulation of agricultural activities is conducted by and through administrative agencies that promulgate regulations and make decisions.  The rules for and scope of regulations is determined by unelected bureaucrats and often has the force of law.  In addition, much of administrative law involves the administrative agency that developed the regulation at issue serving as judge and jury over disputed matters involving those same regulations.  This raises fundamental questions of fairness. 

In theory, governmental administrative agencies cannot exceed the authority provided by the legislative body.  Ultimately, the courts serve as the check on the exercise of authority.  But, how?  Under what standard do the courts review administrative agency decisions?  It’s an issue that was addressed by the U.S. Supreme Court (SCOTUS) in 2019, and it didn’t turn out the way that many in agriculture had hoped.

Courts generally consider only whether the administrative agency acted rationally and within its statutory authority.  In general, when dealing with administrative appeals from a federal agency such as the USDA, the court generally defers to the agency’s interpretation of its regulations as contained in the agency’s interpretive manuals.  In 1997, the U.S. Supreme Court reiterated the principle of agency deference.  Auer v. Robbins, 519 U.S. 452 (1997).  This so-called “Auer deference” involves a court deferring (or give “controlling weight”) to agency interpretations of its own ambiguous regulations.  Another type of deference, known as “Chevron deference” involves a court deferring to an agency interpretation of ambiguous statutes that the agency administers.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). However, the Court, in 2013 criticized the Court’s 1997 decision and suggested that it might be time to reconsider principles of agency deference.  Decker v. Northwest Environmental Defense Center, 133 S. Ct. 1326 (2013).  

In 2019, the U.S. Supreme Court again addressed the issue of deference in Kisor v. Wilkie, 139 S. Ct. (2019)The facts of the case didn’t involve agriculture.  That’s not the important part.  What is important is that the Court again reaffirmed (5-4, thanks to Chief Justice Roberts) Auer deference.  However, the Court did appear to place some limitations on Auer deference for future cases.  I say “appear” because the Court created a new multi-part test for review of agency action that could prove difficult for lower courts to apply and relatively easy for administrative agencies to skirt.  According to the Court, a court that reviews agency action is to review the regulatory language at issue to determine whether the regulation is ambiguous.  If it is, the court is to then apply Auer deference in determining whether the agency reached a reasonable conclusion resulting from the agency’s careful consideration and expertise after giving affected parties reasonable notice of the agency’s interpretation.  From agriculture’s perspective, it was hoped that the Court would jettison Auer deference.  That would have been the approach of Justice Gorsuch who would have eliminated the binding agency deference of Auer.  

So, the battle between agriculture and administrative agencies will continue on numerous fronts, and the arguments over the reasonableness of agency interpretations will continue with the courts largely deferring to agency determinations.  While there might be a dent in Auer deference, it still is a very functional defense to agency action.

  1. Waters of the United States (WOTUS) Definition

The final WOTUS rule was published on October 22, 2019.  84 Fed. Reg. 56626 (Oct. 22, 2019).  The rule became effective on December 23, 2019, and repeals the Obama Administration’s 2015 WOTUS rule that had established a broader set of standards for determining federal jurisdiction over waters subject to regulation under the CWA.  The 2019 final rule restores the regulatory definitions and guidance that were used to make jurisdictional determinations before the implementation of the 2015 WOTUS rule.  The 2015 rule was heavily litigated and resulted in various court decisions that enjoined the rule in 28 states and kept it in force the other states.  The repeal of the 2015 WOTUS rule restores the regulatory definition of a WOTUS that was in force before the effective date of the 2015 rule.  That regulatory definition was based on Justice Kennedy’s concurring opinion in Rapanos v. United States, 547 U.S. 715 (2006).  Thus, jurisdictional determinations will be made on a case-by-case basis using guidance developed following the Rapanos decision, as they were before the 2015 WOTUS rule.

The Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) listed four reasons for their action in repealing the 2015 rule: 1) the 2015 rule misinterpreted and misapplied the “significant nexus” standard developed by Justice Kennedy’s concurring, and controlling, opinion in Rapanos v. United States, 547 U.S. 715 (2006), despite identifying that standard as its touchstone. This error expanded federal jurisdiction beyond what Congress intended; 2) the 2015 rule encroached State authority, violating the Clean Water Act’s express policy to “recognize, preserve, and protect the primary responsibilities and rights of States to prevent, reduce, and eliminate pollution” and “to plan the develop and use … of land and water resources.” 33 U.S.C. 1251(b); 3) the 2015 rule raised serious constitutional questions in the absence of an express Congressional directive to push the envelope of the federal government’s regulatory power; and 4) the 2015 rule had been remanded by the Southern District of Texas for procedural deficiencies under the Administrative Procedure Act.

The repeal of the 2015 rule establishes a path to the development of a new and less stringent jurisdictional rule. Indeed, on December 11, 2018, the EPA and the COE proposed a new WOTUS definition.  That new definition was published in the Federal Register on Feb. 14, 2019.  84 Fed. Reg. 4154 (Feb. 14, 2019).  The proposed definition was subject to a 60-day public comment period that closed on April 15, 2019.  The publication of the new definition was in line with President Trump’s Executive Order of February 28, 2017, that the EPA and the Corps clarify the scope of waters that are federally regulated under the Clean Water Act (CWA). 

Here’s a synopsis of the 2019 proposed rule:

  • Groundwater that drains through a farm field tile system is not a point source pollutant subject to federal control under the CWA’s National Pollution Discharge Elimination System (NPDES).  Also excluded from the WOTUS definition are ephemeral streams (those only temporarily containing water) and diffuse surface runoff that doesn’t enter a WOTUS at a particular discharge point. 
  • Ditches are excluded from the definition of a WOTUS unless the ditch is connected to a tributary of a WOTUS. A tributary is defined as “…a river, stream or similar naturally occurring surface water channel that contributes ‘perennial or intermittent’ flow to a traditional navigable water or territorial sea in a typical year…either directly or indirectly through other jurisdictional waters such as tributaries, impoundments, and adjacent wetlands…”.  Dry channels are not tributaries.     
  • Prior converted (PC) wetland is also not a WOTUS. A prior converted wetland is a wetland that was totally drained before December 23, 1985.  However, farmed wetland can still be subject to regulation by the USDA.  A “farmed wetland” is a wetland that was manipulated before December 23, 1985, but still exhibits wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded.  See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).   
  • Areas that are artificially irrigated are not a WOTUS. This is an important exception for rice and cranberry farmers.  Likewise, excluded are artificial lakes and ponds (a waterbody that doesn’t have a natural outflow) that are constructed in upland areas.  This would include such structures as farm ponds, stock watering ponds, water storage reservoirs, settling basins and log cleaning ponds.  If there is no perennial or intermittent flow being contributed by the lake or pond, then the lake or pond is not jurisdictional (at least at the federal level). 
  • Other water-filled depressions (such as those created by mining or construction activity when fill, sand or gravel is excavated) are excluded from the definition of a WOTUS if they are in uplands. They are not excluded if they are created in a wetland area to begin with.
  • “[A] mere hydrological connection from a non-navigable, isolated, intrastate lake or pond…may be insufficient to establish jurisdiction under the proposed rule.” “…[E]cological connections between physically separated lakes and ponds and otherwise jurisdictional waters” are not under federal control.  

Conclusion

In the next post, I move on to commenting on the fourth and third most important developments from 2019.  Stay tuned.

January 7, 2020 in Environmental Law | Permalink | Comments (0)

Friday, January 3, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 8 and 7)

Overview

Today, I continue the journey through the most significant legal and tax developments of 2019 to impact the ag sector.  The eighth and seventh biggest developments are in today’s commentary. 

  1. SCOTUS Agrees To Hear Case Involving Groundwater Discharges into a WOTUS

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 agriculture. 

In 2018, three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue. 

  • 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). Although constructed initially to serve as a backup disposal method for water reclamation, the wells became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean.  The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells.  The wastewater seeped into the Pacific Ocean. The U.S. Court of Appeals for the Ninth Circuit held that the wells were point sources requiring NDES permits despite the defendant’s claim that NPDES permits were not required because the wells discharged only indirectly into the Pacific Ocean via groundwater.

 

    • In Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018), the plaintiffs claimed that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The U.S. Court of Appeals for the Fourth Circuit determined that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge, the court concluded, need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States.
    • In Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), the U.S. Court of Appeals for the Sixth Circuit held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested 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, the EPA sought comment on whether the 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.  In particular, the EPA sought 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 sought 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.

After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

In 2019, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019)Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants – those that originate “from” a point source that are discharged into a navigable water.  But what if the pollutant originates from a point source, travels through groundwater, and then later reaches a WOTUS?  Does the permit requirement turn on a direct discharge into a WOTUS, or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all agree.  But, what about discharges from the wells that aren’t directly into a WOTUS?  Are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

The case is very important to agriculture because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Should the law discourage agricultural drainage activities?  Thus, a ruling upholding the environmental group’s position would dramatically change agricultural production.  In addition, while large operations would be better positioned to absorb the increased cost of production activities, many mid and small-sized operations would not be able to adjust based simply on the economics involved.   The Court is expected to issue its ruling in 2020.

  1. Regulatory Takings

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 governments.  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.” 

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 (regulatory) takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  Also, if the taking is by a state or local government, must the landowner “exhaust” state court remedies before seeking compensation for a regulatory taking?  If so, it could result in a landowner having no real access to the federal court system on a constitutional taking claim.  It’s an issue that the SCOTUS addressed in 2019. 

For a landowner that has sustained a state/local regulatory (or physical) taking, can compensation be sought initially in federal court or must legal procedures be first pursued in state court with federal courts only available if compensation is denied at the state level?  The U.S. Supreme Court answered this question in 1985.  In Williamson Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), the Court held that if a state provides an adequate procedure for seeking just compensation, there is no Fifth Amendment violation until the landowner has used the state procedure and has been denied just compensation.  However, 28 U.S.C. §1738, would then be applied with the resulting effect that the failure to receive compensation at the state level generally meant that there was no recourse in the federal courts because of the preclusive effect of the landowner having already litigated the same issue(s) in the state courts.  See, e.g., San Remo Hotel L.P., v. City and County of San Francisco, 545 U.S. 323 (2005).  This “catch-22” was what the Court examined in 2019.

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the plaintiff owned a 90-acre farm in Pennsylvania on which she grazed horse and other animals.  The farm includes a small graveyard where ancestors of the plaintiff’s neighbors were buried.  Such “backyard burials” are permissible in Pennsylvania.  In late 2012, the defendant passed an ordinance requiring that “[a]ll cemeteries…be kept open and accessible to the general public during daylight hours.”  The ordinance defined a “cemetery” as “[a] place or area of ground, whether contained on private or public property which has been set apart for or otherwise utilized as a burial place for deceased human beings.”  In 2013, the defendant notified the plaintiff of her ordinance violation.  The plaintiff sued in state court for declaratory and injunctive relief on the basis that the ordinance amounted to a taking of her property, but she did not seek compensation via an inverse condemnation action.

While the case was pending, the defendant agreed to not enforce the ordinance.  As a result, the trial court refused to rule on the plaintiff’s action.  Without any ongoing enforcement of the ordinance, the plaintiff couldn’t show irreparable harm.  Without irreparable harm, the court noted, the plaintiff couldn’t establish what was necessary for the equitable relief she was seeking.  Frustrated at the result in state court, the plaintiff filed a takings claim in federal court.  However, the federal trial court dismissed the case because she hadn’t sought compensation at the state level.  Knick v. Scott Township, No. 3:14-CV-2223st, 2015 U.S. Dist. LEXIS 146861 (M.D. Pa. Oct. 29, 2015).  The appellate court affirmed, citing the Williamson case.  Knick v. Township of Scott, 862 F.3d 310 (3d Cir. 2017). 

In a 5-4 decision, Chief Justice Roberts (joined by Justices Alito, Gorsuch, Kavanaugh and Thomas), writing for the majority, reversed.  He pointed out that there is a distinction between the substance of a right and the remedy for the violation of that right.  It’s the takings clause of the Fifth Amendment that establishes that the government can only take (either physically or via regulation) private property by paying for it. The government’s infringement on private property is what triggers possible compensation.  The Constitutional violation has occurred and a state court decision that makes the landowner financially whole simply remedies that violation.  It doesn’t redefine the property right.  Thus, the majority opinion reasoned, laws confer legal rights and when those rights are violated there must be legal recourse.  See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).  As the majority noted, “a government violates the Takings Clause when it takes property without compensation, and…a property owner may bring a Fifth Amendment claim [in federal court]… at that time.”

The Court’s decision is a significant win for farmers, ranchers, and other rural landowners that are impacted by state and local regulations impacting land use.  A Fifth Amendment right to compensation accrues at the time the taking occurs. 

Conclusion

Next week, I will continue working my way towards the most significant development in ag law and tax.  Stay tuned.

 

January 3, 2020 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, December 30, 2019

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

Overview

It’s the time of year again where I sift through the legal and tax developments impacting agriculture from the past year, and rank them in terms of their importance to farmers, ranchers, agribusinesses, rural landowners and the ag sector in general. 

As usual, 2019 contained many legal developments of importance.  There were relatively fewer major tax developments in 2019 compared to prior years, but the issues ebb and flow from year-to-year.  It’s also difficult to pair things down to ten significant developments.  There are other developments that are also significant.  So, today’s post is devoted to those developments that were left on the cutting table and didn’t quite make the “Top Ten” for 2019.

The “almost top ten of 2019” – that’s the topic of today’s post.

Chapter 12 Debt Limit Increase

To be eligible for Chapter 12 bankruptcy, a debtor must be a “family farmer” or a “family fisherman” with “regular annual income.”  A “family farmer” is defined as an individual or individual and spouse who earned more than 50 percent of their gross income from farming either for the taxable year preceding the year of filing or during the second and third tax years preceding filing; have more than 50 percent of their debt be debt from a farming operation that the debtor owns or operates; and, the aggregate debt must not exceed a threshold amount. That threshold amount has only adjusted for inflation since enactment of Chapter 12 in 1986, even though farms have increased in size and capital needs faster than the rate of inflation.  When enacted, 86 percent of farmers were estimated to qualify for Chapter 12.  That percentage had declined over time due to the debt limit only periodically increasing with inflation and stood at $4,411,400 as of the beginning of 2019.  Thus, fewer farmers were able to use Chapter 12 to deprioritize taxes associated with the sale of farm assets used in the farming operation and ultimately put together a reorganization plan that will allow the farmer to stay on the farm to continue production activities, make restructured loan payments and have some debt written off.  However, as of August 23, 2019, the debt limit for a family farmer filing Chapter 12 was increased to $10,000,000 for plans filed on or after that date.  H.R. 2336, Family Farmer Relief Act of 2019, signed into law on Aug. 23, 2019 as Pub. L. No. 116-51.

Which Government Agency Sues a Farmer For a WOTUS Violation?

In 2019, a federal trial court allowed the U.S. Department of Justice (DOJ) to sue a farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA).  The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS.  Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated.  The COE staff then conferred with the EPA and referred the matter to the U.S. Department of Justice (DOJ).  The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.”  The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6)) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)."  The farmer moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction.  The court disagreed and determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did.  This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS.  Ultimately, the parties negotiated a settlement costing the farmer over $5 million.  United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019)United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).

USDA’s Swampbuster “Incompetence”

How does the USDA determine if a tract of farmland contains a wet area that is subject to the Swampbuster rules?  That’s a question of key importance to farmers.  That process was at issue in a 2019 case, and the court painted a rather bleak and embarrassing picture of the USDA bureaucrats.  In fact, the USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  I will skip the details here (I covered the case in a blog post earlier in 2019), but the appellate court dealt harshly with the USDA.  The USDA uses comparison sites to determine if a particular site is a wetland subject to Swampbuster rules.  In this case, the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site had the same hydrologic features as the subject tract(s).  The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case.   However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary.  Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland."  The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in.   Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor.  In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process.  The court’s decision is a step in the right direction for agriculture.  Boucher v. United States Department of Agriculture, 934 F.3d 530(7th Cir. 2019). 

No More EPA “Finger on the Scales”

During 2019, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees.  That’s an important development for the regulated community, including farmers and ranchers.  The court’s opinion ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants.  At issue in the case was a directive of the Trump-EPA regarding membership in its federal advisory committees.  The directive specified “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels.  That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters.  In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and was within the authority delegated to the agency.  The court granted the EPA’s motion to dismiss the case. Physicians for Social Responsibility v. Wheeler, 359 F. Supp. 3d 27 (D. D.C. 2019).

Coming-To-The-Nuisance By Staying Put?

Nuisance lawsuits filed against farming operations are often triggered by offensive odors that migrate to neighboring rural residential landowners.  In these situations courts consider numerous factors in determining whether any particular farm or ranch operation is a nuisance.    Factors that are of primary importance are priority of location and reasonableness of the operation.  Together, these two factors have led courts to develop a “coming to the nuisance” defense.  This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.  But, what if the ag nuisance comes to you?  Is the ag operation similarly protected in that situation?  An interesting Indiana court case in 2019 dealt with the issue.  In the case, the defendants were three individuals, their farming operation and a hog supplier.  Basically, a senior member of the family retired to a farm home on the premises and other family members established a large-scale confined animal feeding operation (CAFO) on another part of the farm nearby.  The odor issue got bad enough that the retired farmer sued.  However, the court determined that the CAFO was operated properly, had all of the necessary permits, and was within the zoning laws.  The court noted that the plaintiff alleged no distinct, investment-backed expectations that the CAFO had frustrated.  The court upheld the state right-to-farm law and also determined that a “taking” had not occurred because the plaintiff had not sold his home and moved away from the place where he grew up and lived all of his life.  Himsel v. Himsel, No. 18A-PL-645, 2019 Ind. App. LEXIS 181 (Ind. Ct. App. Apr. 22, 2019).

Obamacare Individual Mandate Unconstitutional

In his decision in 2012 upholding Obamacare as constitutional, Chief Justice Roberts hinged the constitutionality of the law on the individual mandate (contained in I.R.C. §5000A) being a tax and, therefore, within the taxing authority of the Congress.  Thus, if the tax is eliminated or the rate of the penalty tax taken to zero is the law unconstitutional?  That’s a possibility now that the tax rate on the penalty is zero for tax years beginning after 2018.  In late 2018, a federal district court noted that the payment was distinct from the individual mandate and determined that the individual mandate was no longer constitutional as of January 1, 2019 because it would no longer trigger any tax. In addition, because the individual mandate was the linchpin of the entire law, the court determined that the provision could not be severed from the balance of the law. As a result, the court reasoned, as of January 1, 2019, Obamacare no longer had any constitutional basis.  Texas v. United States, 340 F.3d 579 (N.D. Tex. 2018).  In 2019, the appellate court affirmed.  Texas v. United States, No. 19-10011, 2019 U.S. App. LEXIS 37567 (5th Cir. Dec .18, 2019).  The appellate court determined that the individual mandate was unconstitutional because it could no longer be read as a tax, and there was no other constitutional provision that justified that exercise of congressional power.  Watch for this case to end up back before the Supreme Court.  The case is of monumental importance not only on the health insurance issue.  Obamacare contained many taxes that would be invalidated if the law were finally determined to be unconstitutional. 

Conclusion

These were the developments that didn’t quite make the “Top 10” of 2019.  In Wednesday’s post, I will start the trek through the Top 10 of 2019.

December 30, 2019 in Bankruptcy, Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Thursday, November 14, 2019

Groundwater Discharges of Pollutants and the Supreme Court

Overview

In Tuesday’s post, https://lawprofessors.typepad.com/agriculturallaw/2019/11/does-a-pollutant-discharge-from-groundwater-into-a-wotus-require-a-federal-permit.html, I discussed the three U.S. Circuit Court of Appeal decisions from 2018 involving groundwater discharges of pollutants and the Clean Water Act (CWA).  The courts reached opposite conclusions on the issue of whether a CWA permit is required when pollutants originate from a point source but are conveyed to navigable waters by a nonpoint source, such as groundwater.  Last week the U.S. Supreme Court heard oral arguments in the one case of the three decisions mentioned above from 2018. 

The Court’s decision will be of monumental importance to agriculture.  In today’s post, I take a look at last week’s oral argument and explain why agriculture should care.

Framing the Issue

In Tuesday’s post, I laid out the basic requirements of the discharge permit requirements of the CWA.  To restate, the CWA requires a National Pollutant Discharge Elimination System (NPDES) permit for the discharge of pollutants into the navigable waters of the United States (WOTUS) “from” a point source.  The CWA (and the underlying regulations) defines a “point source” as a “discernable, confined, and discrete conveyance[s].”  Discharges not fitting within that definition are nonpoint source discharges and are primarily left up to the states to regulate.  The CWA also states that a “navigable” water is contained in a WOTUS, but groundwater is not. 

In the case presently before the Supreme Court, Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted sub. nom., County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019), treated wastewater from injection wells ultimately commingled with groundwater and dispersed in a manner that caused at least some of it to flow into the Pacific Ocean in a dispersed manner with no identifiable discharge point.  This had been known to occur since at least 1973 and no federal permit had ever been required.  An environmental group sued, and the trial court granted summary judgment to the group, finding that the indirect discharge of a pollutant into the ocean through a “groundwater conduit” constituted a point source of pollution, and that the CWA classifies groundwater as a “navigable water.”  The U.S. Court of Appeals for the Ninth Circuit affirmed.  The U.S. Supreme Court agreed to hear the case to clear up conflicting opinions on the issue by the Circuit Courts. 

What Does “From” Mean?

Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants – those that originate “from” a point source that are discharged into a navigable water.  But what if the pollutant originates from a point source, travels through groundwater, and then later reaches a WOTUS?  Does the permit requirement turn on a direct discharge into a WOTUS, or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all agree.  But, what about discharges from the wells that aren’t directly into a WOTUS?  Are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

At oral argument last week, the federal Environmental Protection Agency (EPA) took the position that discharges into groundwater are excluded from the NPDES permit requirement. The defendant county also pointed out that the CWA distinguishes point source and nonpoint source pollution, and that including indirect discharges into a WOTUS via groundwater would eliminate that distinction and expose countless businesses (and, I would add, farmers) to fines of $50,000 per day based on an “after-the-fact” traceability analysis (i.e., whether the pollutant can be traced from a navigable water back to the point source).  Justice Breyer along with Justice Kagan and Chief Justice Roberts seemed to reject the county’s rationale.  But Justice Alito posited an example of a homeowner with a septic tank whose contents ended up in discharging into a WOTUS.  Justices Breyer, Kavanaugh, Gorsuch and Chief Justice Roberts joined Justice Alito in expressing concern about the potential impact on such a homeowner.  They seemed to reject the environmental group’s traceability test and/or proximate cause tests.  Justice Breyer pointed out that “virtually every little drop of rain that falls finds its way to the sea” and that scientists are “geniuses” who “can trace all kinds of things.”  Justice Kavanaugh expressed concern that if the position of the environmental group were adopted that the CWA’s regulatory balance between the federal government and the various states would be severely (if not entirely) tilted in the federal government’s favor. 

Implications for Agriculture

The case is very important to agriculture because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Should the law discourage agricultural drainage activities?  Thus, a ruling upholding the environmental group’s position would dramatically change agricultural production.  In addition, while large operations would be better positioned to absorb the increased cost of production activities, many mid and small-sized operations would not be able to adjust based simply on the economics involved. 

Conclusion

What the case boils down to is whether the addition of a pollutant to groundwater that eventually reaches a WOTUS requires an NPDES permit.  If so, an NPDES permit would be required whenever any type of seepage to groundwater might occur that could reach a WOTUS.  That result is virtually always present with common agricultural practices, and an NPDES permit requirement for common agricultural husbandry practices would be most disruptive to food production in the United States.  There is a reason that the Congress left the regulation of nonpoint source pollution up to the states rather than create a blanket rule requiring an NPDES permit in practically all situations.  There is also a reason that Congress created an exemption for agricultural stormwater.  Are those reasons legitimate?  Do public policy concerns now override them?

In addition, a ruling in favor of the environmentalist group would certainly raise the issue of how the regulatory bureaucracy would administer such a massive expansion of the NPDES.

To agriculture, the definition of “from” is suddenly very important.   Sometime next year, the “word peddlers” will tell us what it means.

November 14, 2019 in Environmental Law | Permalink | Comments (0)

Tuesday, November 12, 2019

Does a Pollutant Discharge From Groundwater Into a WOTUS Require a Federal Permit?

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 agriculture. 

Last week the U.S. Supreme Court heard arguments in a case involving these issues.  The Court’s decision will have very significant implications for agriculture. 

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).

2018 Cases

Ninth Circuit case.  Three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue.  In the first case, 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 became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean. The LWRF received approximately 4 million gallons of sewage per day from a collection system serving approximately 40,000 people. That sewage is 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 that 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 appellate 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 defendant 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 appellate court held that the agency was actually still in the process of determining if an NPDES permit was applicable. Thus, the appellate 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. 

EPA seeks input.  After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested 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, the EPA sought comment on whether the 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.  Some courts have taken the view that Congress intended the CWA to regulate the release of pollutants that reach “waters of the United States” regardless of whether those pollutants were first discharged into groundwater. However, other courts, have taken the view that neither the CWA nor the EPA’s definition of waters of the United States asserts authority over groundwater based solely on a hydrological connection with surface waters. EPA has not 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, the EPA sought comment by May 21, 2018, on whether it should review and potentially revise its previous positions. In particular, the EPA sought 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 sought 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.

Fourth Circuit case.  Approximately two months after the Ninth Circuit issued its opinion, the Fourth Circuit issued its opinion in Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018)The plaintiffs, a consortium of environmental and conservation groups, brought a citizen suit under the CWA claiming that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The trial court dismissed the plaintiffs’ claim for lack of standing.

On appeal, the appellate court determined that the trial court did have subject matter jurisdiction under the CWA’s citizen suit provision because the provision covered the discharge of “pollutants that derive from a ‘point source’ and continue to be ‘added’ to navigable waters.” Thus, even though the pipeline was no longer releasing gasoline, it continues to be passing through the earth via groundwater and continued to be discharged into regulable surface waters. This finding was contrary to the trial court’s determination that the court lacked jurisdiction because the pipeline had been repaired and because the pollutants had first passed through groundwater. As such, the appellate court determined that, in accord with the Second and Ninth Circuits, that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States. 

The appellate court did, however, point out that a discharge into groundwater does not always mean that a CWA discharge permit is required. A permit in such situations is only required if there is a direct hydrological connection between groundwater and navigable waters. In the present case, however, the appellate court specifically noted that the pipeline rupture occurred within 1,000 feet of the navigable waters. The appellate court also noted that the defendant had not established any independent or contributing cause of pollution. 

Sixth Circuit Case

In the fall of 2018, the Sixth Circuit decided Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018).  The case involved a utility that burned coal to produce energy.  As a part of that production process, coal ash is produced.  The coal ash is discharged into man-made ponds. The plaintiffs, environmental activist groups, claimed that the chemicals from the coal ash in the ponds leaked into surrounding groundwater where it was then carried to a nearby lake that was subject to regulation under the Clean Water Act (CWA). They claimed that the contamination of the lake without a discharge permit violated the CWA and the Resource Conservation and Recovery Act (RCRA).

The trial court had dismissed the RCRA claim but the appellate court reversed that determination and remanded the case on that issue. On the CWA claim, the trial court ruled as a matter of law that the CWA applies to discharges of pollutants from a point source through groundwater that is hydrologically connected to navigable waters where the connection is "direct, immediate, and can generally be traced." The trial court held that the defendant’s facility was a point source because it "channel[s] the flow of pollutants . . . by forming a discrete, unlined concentration of coal ash," and that the Complex is also a point source because it is "a series of discernible, confined, and discrete ponds that receive wastewater, treat that wastewater, and ultimately convey it to the Cumberland River." The trial court also determined that the defendant’s facility and the ponds were hydrologically connected to the Cumberland River by groundwater. As for the defendant’s facility, the court held that "[f]aced with an impoundment that has leaked in the past and no evidence of any reason that it would have stopped leaking, the Court has no choice but to conclude that the [defendant’s facility] has continued to and will continue to leak coal ash waste into the Cumberland River, through rainwater vertically penetrating the Site, groundwater laterally penetrating the Site, or both." The trial court determined that the physical properties of the terrain made the area “prone to the continued development of ever newer sinkholes or other karst features." Thus, based on the contaminants flowing from the ponds, the court found defendant to be in violation of the CWA. The trial court also determined that the leakage was in violation of the defendant “removed-substances” and “sanitary-sewer” overflow provisions.

The trial court ordered the defendant to "fully excavate" the coal ash in the ponds (13.8 million cubic yards in total) and relocate it to a lined facility. On further review, the appellate court reversed. The appellate court held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court rejected the plaintiffs’ assertion that mere groundwater is equivalent to a discernable point source through which pollutants travel to a CWA-regulated body of water. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

EPA interpretive statement.  After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

Conclusion

Earlier this year, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Last week, the Court heard oral arguments in the case.  The specific question before the Court is whether the CWA requires a permit when pollutants originate from a point source but are conveyed to navigable waters by a nonpoint source, such as groundwater.  The EPA, in its April 15, 2019, interpretive statement stated that once the U.S. Supreme Court issues its opinion in the matter that the EPA may take further action, if necessary.

How the Supreme Court answers the question has critical implications for agriculture.  In Thursday’s post, I will review the oral argument and the implications for agriculture. 

November 12, 2019 in Environmental Law | Permalink | Comments (0)