Friday, March 13, 2020

More Selected Caselaw Developments of Relevance to Ag Producers

Overview

Periodically on this blog I write about recent caselaw and IRS developments that farmers, ranchers and others should be aware about.  The courts are constantly churning out cases that are important to agriculture and tax developments are always non-stop.  It’s amazing how broad the reach is of the issues the courts and IRS address that touches agriculture in one way or another.  Many of these issues may not be given much thought on a daily basis, but perhaps they should.

In today’s post, I look at a few more recent developments of relevance to agriculture – it’s the focus of today’s post.

IRS Loses Valuation Case

Grieve v. Comr., T.C. Memo. 2020-28

When interests in closely-held businesses are transferred, either by death or gift, and either federal estate or gift tax is involved, the valuation issue becomes highly relevant.  For farms and ranches, blocks of non-controlling stock may be involved and the IRS may seek to apply a premium to the value of the stock to increase estate or gift taxes owed.  Recently, the U.S. Tax Court shot down an IRS attempt to attach a premium to a gift of non-controlling stock among family members. 

In the case, after the petitioner’s wife died, he formed two LLCs (Rabbit and Angus) for financial management and estate planning purposes. He then transferred some of the Class B shares of Rabbit to a grantor-retained annuity trust (GRAT) and the Class B shares of Angus to an irrevocable trust. The petitioner filed a 2013 gift tax return (Form 709) and attached appraisal reports that reported a taxable gift of nearly $10 million. The IRS rejected that valuation, claiming that the proper valuation was $17.8 million, and issued a notice of deficiency.

The Tax Court examined both appraisal reports, noting that the petitioner’s appraisal reports included independent analysis of the LLC shares using a combination of market and income approaches to determine the total value. Conversely, the Tax Court noted that the IRS included an assumption that selling the Class B share would encourage the petitioner’s daughter (who solely owned the Class A shares) to sell her 0.2 percent interest in the entities, which would increase the petitioner’s interests. However, the daughter testified that she would not be inclined to sell her interest, and if she were to sell, would seek a much higher premium that the IRS estimated. The Tax Court also determined that the IRS appraisal also relied on additional hypothetical scenarios that were inconsistent and insufficient to consider a change to the petitioner’s appraisal and the discounts concluded in the report. In addition, the Tax Court noted that the IRS appraiser failed to provide support for the valuations, and also did not provide evidence that his appraisal methodology was subject to peer review.

The Tax Court concluded that the IRS failed to provide sufficient evident to support its expert appraiser’s conclusion that the interests of the LLCs were undervalued and that the petitioner’s gifts of the assets to the two trusts were likewise undervalued. The Tax Court rejected the IRS position that the petitioner had underreported gift tax by $4.4 million and also rejected the IRS penalties of $600,000. 

IRAs and the Constitution

Conard v. Comr., 154 T.C. No. 6 (2020)

So that people are disincentivized from using their retirement savings for things other than retirement, the IRS hits withdrawals before age 59-1/2 with a 10 percent penalty.  Exceptions to the penalty apply, but even if a taxpayer fits within an exception the amount withdrawn still must be reported into income.  Exemptions include distributions made post-death; because the account owner is total and permanently disabled, to cover qualified post-secondary education expenses; distributions made after being called to active military duty for 180 days; or within a year of a child’s birth or adoption. 

The U.S. Tax Court recently dealt with a constitutional challenge to such penalty exemptions.  In the case, the petitioner had not yet reached age 59-1/2 at the time the she received a distribution from a qualified retirement plan. Consequently, the IRS assessed the 10 percent early withdrawal penalty of I.R.C. §72(t). She sought review of the asserted tax deficiency and challenged the additional tax on the basis that the application of the tax to her early distribution violated the Constitution’s Fifth Amendment Due Process Clause because exceptions exist to the penalty that are applicable to taxpayers that haven’t reached age 59-1/2, such as for disability, etc.

The Tax Court disagreed, applying the rational basis test (low-level scrutiny) to evaluate the constitutionality of the Code provision. The Tax Court determined that test applied because the provision did not invade a substantive constitutional right or freedom or involve a suspect classification. As a result, the constitutionality of the provision could only be overcome by an explicit demonstration that the statute established hostile and oppressive discrimination against particular persons and classes. The Tax Court noted that the petitioner did not claim that the penalty provision concerned a substantive constitutional right or freedom or involved a suspect classification. Age is not a suspect classification for purposes of equal protection. Thus, the provision was presumed constitutional if it had a legitimate governmental purpose. The Tax Court noted that Committee Reports concerning the provision provided that the statute aimed “to provide means for financing retirement” and that penalties for early withdrawals were “designed to insure that retirement plans will not be used for other purposes.” An exemption from the penalty for disability, for example, satisfied a legitimate objective of encouraging taxpayers to provide for times of inability to work. 

Huge FBAR Penalty Imposed

United States v. Ott, No. 18-cv-12174, 2020 U.S. Dist. LEXIS 32514 (E.D. Mich. Feb. 26, 2020)

In recent years, some farmers and ranchers have started operations in locations other than the United States.  Others may have bank accounts in foreign jurisdictions.  Still others may serve as an agent under a power of attorney for someone that has a bank account in a foreign jurisdiction.  In that event, every year, under the Bank Secrecy Act, anyone that owns or has an interest in or signature authority over certain foreign accounts such as bank accounts, brokerage accounts and mutual funds, must report the account(s) by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.  The proper box must also be checked on Schedule B of Form 1040.  Failure to do so can trigger a penalty.  Willful failure to do so can result in a monstrous penalty.  A recent case points out how bad the penalty can be for misreporting.

In the case, the taxpayer had a foreign bank account with aggregate highest balance of $1.9 million, $770,000 and $1.76 million for the three tax years at issue. Form 1040, Schedule B contains a question with a box to be checked asking whether the taxpayer had a financial interest in or signature authority over a financial account located in a foreign country. The box on Schedule B was checked “No” which was the default in the software that the return preparer used. The taxpayer also did not file an FBAR Form for any of the three years. The FBAR Form is required to be filed when the aggregate account balance exceeds $10,000.

The IRS claimed that the taxpayer had constructive knowledge of his reporting requirements by signing his tax returns which included a reference to the FBAR on Schedule B, and that the naming his sister's Canadian address on the accounts was an act of concealment. The taxpayer argued that he was simply negligent and there was no will failure to file the FBARs. The Court examined the definition of willfulness for purposes of FBAR filing and concluded that the taxpayer could have easily determined the need to file the FBAR. Accordingly, the court held that the taxpayer willfully failed to file the FBAR Form and assessed penalties for the years at issue in the amount of $988,245. 

Lakes Have Constitutional Rights?

Drewes Farms Partnership v. City of Toledo, No. 3:19 CV 434, 2020 WL 966628 (N.D. Ohio Feb. 27, 2020) No. 3:19 CV 434 2020 U.S. Dist. LEXIS 36427 (N.D. Ohio Feb. 27, 2020)

The genesis of this case actually began in a bar in Toledo (no word on whether the bar was across from the depot).  Apparently, the inebriated were commiserating over the pollution of Lake Erie.  Ultimately, the ideas of that night got formulated into a ballot question at a special election for the citizens of Toledo concerning whether Lake Erie should be granted legal rights that people have.  It was the first rights-based legislation in the U.S. aimed at protecting an ecosystem – Lake Erie, its tributaries and the species that live there. 

When election time came, sufficient Toledo citizens voted to add the “Lake Erie Bill of Rights” (LEBOR) to the city’s charter in early 2019. The LEBOR prohibited any infringement of the “rights” of Lake Erie to “exist, flourish, and naturally evolve” without explaining the kind of conduct that would infringe those “rights.” The plaintiff, a farming operation that grows crops in four counties near Toledo and Lake Erie, sued to invalidate the LEBOR on constitutional grounds for lack of due process as being void for vagueness. The court agreed and vacated the LEBOR in its entirety. 

Conclusion

There are always developments involving agriculture.  It’s good to stay informed. 

March 13, 2020 in Business Planning, Estate Planning, Income Tax, Regulatory 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)

Tuesday, February 18, 2020

More “Happenings” In Ag Law and Tax

Overview

The law impacts agricultural operations, rural landowners and agribusinesses in many ways.  On a daily basis, the courts address these issues.  Periodically, I devote a post to a “snippet” of some of the important developments.  Today, is one of those days.

More recent developments in agricultural law and taxation – it’s the topic of today’s post.

IRS Rulings on Portability.

Priv. Ltr. Ruls. 201850015 (Sept. 5, 2018); 20152016 (Sept. 21, 2018); 201852018 (Sept. 18, 2018); 201902027 (Sept. 24, 2018); 201921008 (Dec. 19, 2018); 201923001 (Feb. 28, 2019); 201923014 (Feb. 19, 2019); 201929013 (Apr. 4, 2019).    

Portability of the federal estate tax exemption between married couples comes into play when the first spouse dies and the taxable value of the estate is insufficient to require the use of all of the deceased spouse's federal exemption (presently $11.58 million) from the federal estate tax. Portability allows the amount of the exemption that was not used for the deceased spouse's estate to be transferred to the surviving spouse's exemption so that the surviving spouse can use the deceased spouse's unused exemption plus the surviving spouse’s own exemption when the surviving spouse later dies.  Portability is accomplished by filing Form 706 in the deceased spouse’s and is for federal estate tax purposes only.  Some states that have a state estate tax also provide for portability at the state level.  That’s an important feature for those states – it’s often the case that a state’s estate tax exemption is much lower than the federal exemption.

Sometimes a tax election is not made on a timely basis.  Over the past year, the IRS issued numerous rulings on portability of the federal estate tax exemption and the election that must be made to port the unused portion of the exemption at the death of the first spouse over to the surviving spouse.  In general, each of the rulings involved a decedent that was survived by a spouse, and the estate did not file a timely return to make the portability election. The estate found out its failure to elect portability after the due date for making the election.  The IRS determined that where the value of the decedent's gross estate was less than the basic exclusion amount in the year of decedent's death (including taxable gifts made during the decedent’s lifetime), “section 9100 relief” was allowed. Treas. Reg. §§301.9100-1; 301.9100-3

The rulings did not permit a late portability election and section 9100 relief when the estate was over the filing threshold, even if no estate tax was owed because of the marital, charitable, or other deductions.   In addition, it’s important to remember that there is a 2-year rule under Rev. Proc. 2017-34, 2017-26 I.R.B. 1282 making it possible to file Form 706 for portability purposes without section 9100 relief

Not Establishing a Lawyer Trust Account Properly Results in Taxable Income. 

Isaacson v. Comr., T.C. Memo. 2020-17. 

Attorney trust accounts are critical to making sure that money given to lawyers by clients or third-parties is kept safe and isn’t comingled with law firm funds or used incorrectly. But most people (even some new lawyers) don’t fully understand attorney trust accounts.  An attorney trust account is basically a special bank account where client funds are stored for safekeeping until time for withdrawal.  The funds function to keep client funds separate from the funds of the lawyer or law firm.  For example, a trust account bars the lawyer from using a client’s retainer fee from being used to cover law firm operating costs unless the funds have been “earned.”  But, whether funds have been “earned” has special meaning when tax rules come into play – think constructive receipt here.  This was at issue in a recent Tax Court case. 

In the case, a lawyer received a contingency fee upon settling a case.  He deposited the funds in his lawyer trust account but did not report the deposited amount in his income for the tax year of the deposit claiming that his fee was in dispute and, thus, subject to a substantial limitation on his rights to the funds.  The IRS disagreed and claimed that the account was not properly established as a lawyer trust account under state (CA) law.  The IRS also pointed out that the petitioner commingled his funds with his clients’ funds which gave him access to the funds.  The IRS also asserted that the petitioner should have reported the amount in income even if he later had to repay some of the amount.  The Tax Court agreed with the IRS on the basis that the lawyer failed to properly establish and use the trust account and because the he had taken the opposite position with respect to the fee dispute in another court action.  The income was taxable in the year the IRS claimed. 

Semi-Trailer in Farm Field Near Roadway With Advertising Subject to Permit Requirement. 

Commonwealth v. Robards, 584 S.W.3d 295 (Ky. Ct. App. 2019).

Counties, towns, municipalities and villages all have various rules when it comes to billboard and similar advertising.  Sometimes those rules can intersect with agriculture, farming activities and rural land.  That intersection was displayed in a recent case.

In the case, the defendant owned farm ground along the interstate and parked his semi-trailer within view from the interstate that had a vinyl banner tied to it that advertised a quilt shop on his property.  The plaintiff (State Transportation Department) issued the defendant a letter telling him to remove the advertising material. The defendant requested an administrative hearing.  The sign was within 660 feet of the interstate and was clearly visible from the interstate. The defendant collected monthly rent of $300 from the owner of the quilt shop for the advertisement. The defendant never applied for a permit to display the banner. The defendant uses the trailer for farm storage and periodically moves it around his property. The administrative hearing resulted in a finding that the trailer was being used for advertising material and an order was adopted stating the vinyl sign had to be removed. The defendant did not appeal this order, but did not remove the banner.  The plaintiff sued to enforce the order. After the filing of the suit, the defendant removed the vinyl sign only to reveal a nearly identical painted-on sign beneath it with the same advertising. The plaintiffs amended their complaint alleging that the painted-on sign was the equivalent of the vinyl sign ordered to be removed and requesting that the trial court order its removal. The trial court found that the trailer with the painted-on sign was not advertising material as the semi-trailer was being used for agricultural purposes and was not an advertisement. The court did concede that the semi-trailer was within 660 feet of the right-of-way of the interstate; was clearly visible to travelers on the highway; had the purpose of attracting the attention of travelers; defendant received a monthly payment for maintaining the sign.  On further review, the appellate court reversed and remanded.  The appellate court concluded that the trailer served a dual purpose of agricultural use and advertising and that there was no blanket exemption for agricultural use.  The trailer otherwise satisfied the statutory definition as an advertisement because of its location, visibility, and collection of rental income. The appellate court concluded that the defendant could use the trailer for agricultural purposes in its current location, but that advertising on it was subject to a permit requirement. 

Lack of Basis Information in Appraisal Summary Dooms Charitable Deduction for Conservation Easement Donation. 

Oakhill Woods, LLC v. Comr., T.C. Memo. 2020-24.

 The tax Code allows an income tax deduction for owners of property who relinquish certain ownership rights via the grant of a permanent conservation easement to a qualified charity (e.g.,  to preserve the eased property for future generations).  I.R.C. §170(h).  But, abuses of the provision are not uncommon, and the IRS has developed detailed rules that must be followed for the charitable deduction to be claimed.  The IRS audits such transactions and has a high rate of success challenging the claimed tax benefits.

In this case, the petitioner executed a deed of conservation easement on 379 acres to a qualified land trust in 2010.  The deed recited the conservation purpose of the easement. The petitioner claimed a $7,949,000 charitable deduction for the donation. Included with the petitioner’s return was an appraisal and Form 8283 which requires, among other things, basis information concerning the gifted property or an attached reasonable cause explanation of why the information was not included with the return. Basis information was not included on Form 8283, and the petitioner attached a statement taking the position that such information was not necessary. The IRS denied the deduction for noncompliance with Treas. Reg. §1.170A-13(c)(2). The Tax Court agreed with the IRS, noting that the lack of cost basis information was fatal to the deduction as being more than a minor and unimportant departure from the requirements of the regulation. The Tax Court cited its prior opinion in Belair Woods, LLC v. Comr., T.C. Memo. 2018-159. The Tax Court also rejected the petitioner’s argument that Treas. Reg. §1.170A-13(c)(4)(i)(D) and (E) was invalid. The petitioner claimed that the basis information was required with the return and not the appraisal summary, but the Tax Court rejected this argument because a “return” includes all IRS forms and schedules that are required to be a part of the return. As such, Form 8283 was an essential part of the return. In addition, the Tax Court noted that the underlying statute absolutely required basis information to be included with the appraisal summary and, in any event, the IRS’ interpretation of the statute via the regulation was reasonable. 

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).

A "cramdown" in a reorganization bankruptcy allows the debtor to reduce the principal balance of a debt to the value of the property securing it.  The creditor is entitled to receive the value, as of the effective date of the plan, equal to the allowed amount of the claim.  Thus, after a secured debt is written down to the fair market value of the collateral, with the amount of the debt in excess of the collateral value treated as unsecured debt which is generally discharged if not paid during the term of the plan, the creditor is entitled to the present value of the amount of the secured claim if the payments are stretched over a period of years.  11 U.S.C. §1129(b)(2)(A).    But, how is present value determined?  The U.S. Supreme Court offered clarity in 2004.  The matter of determining an appropriate discount rate was involved in a recent bankruptcy case involving a Washington dairy operation.

The debtor filed Chapter 11 bankruptcy and couldn’t agree with a creditor (a bank) 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 debtor proposed a 6 percent interest rate, based on the risk associated with the 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 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 lowering it on others. 

Conclusion

There’s never a dull moment in the world of ag law and ag tax.  These are just a few developments in recent weeks.

February 18, 2020 in Bankruptcy, Estate Planning, Income Tax, 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)

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)

Wednesday, January 1, 2020

Top Ten Agricultural Law and Tax Developments from 2019 (Numbers 10 and 9)

Overview

2019 contained many legal and tax developments that were of importance to agricultural producers, rural landowners, agribusinesses and others tied to the business of agriculture.  The legal and tax systems impact agriculture in many ways.  From environmental and water issues to income tax and estate/business planning issues, to bankruptcy and contract issues, to financing and liability issues as well as others, there are many ways that legal and tax issues impact agriculture.    

On Monday’s post, I highlighted what I viewed as significant developments but not significant enough to make my “Top 10” list for 2019.  In today’s post, I start the journey through the ten biggest legal and tax developments of 2019 in terms of their impact (or potential impact) on the agricultural sector.

The “Top Ten” of 2019 – developments 10 and nine.  It’s the topic of today’s post.

  1. The Relevance of Roundup Jury Verdicts

2019 saw more juries render verdicts in cases involving alleged damages by Roundup.  The jury verdicts have been in the multi-millions of dollars.  Presently, over 11,000 cases involving Roundup have been filed and are awaiting trial and adjudication.  The basic claim in each case is that the use of Roundup caused some sort of physical injury to the plaintiff.  In many of the cases, the claim is that physical injury occurred after usage (usually over a long period of time) of Roundup.  While the temptation may be great to dismiss the recent verdicts as the result of raw emotion and passion by juries that don’t have much, if any, relation to agriculture, that temptation should be resisted.  It is true that juries tend to react based on emotion to a greater degree than do judges (indeed, the judge in the 2018 case significantly reduced the jury verdict), but that doesn’t mean that there aren’t some “take-home” implications for farming and ranching operations at this early stage of the litigation.

Farming and ranching operations should at least begin to think about the possible implications of the Roundup litigation. 

  • What about lease agreements? Farmers and ranchers that lease out farmland and pasture may want to reexamine the lease terms. Consideration should be given as to whether the lease should incorporate language that specifies that the tenant assumes the risk of claims arising from the use of Roundup or products containing glyphosate.  Relatedly, perhaps language should be included that either involves the tenant waiving potential legal claims against the landlord or provides for the landlord to be indemnified by the tenant for any and all glyphosate-related claims.  Should language be included specifying that the tenant has the sole discretion to select chemicals to be used on the farm and that any such chemicals shall be used in accordance with label directions and any applicable regulatory guidance?  How should the economics of the lease be adjusted to reflect this type of lease language?  The tenant is giving up some rights and will want compensation for the loss of those rights.  If the lease isn’t in writing, perhaps this is a good time to reduce it to writing. 
  • Is the comprehensive liability policy for the farm/ranch sufficient to cover glyphosate-related claims? Many farm comprehensive general liability policies contain “pollution exclusion” clauses.  Do those clauses exclude coverage for glyphosate-related claims?  How is “pollution” defined under the policy?  Does it include pesticides and herbicides and associated claims?  Does it cover loss to livestock that consume corn and/or soybeans that were grown with the usage of chemicals containing glyphosate?  Can a rider be obtained to provide coverage, if necessary?  These are all important questions to ask the insurance agent and an ag lawyer trained in reading farm comprehensive liability policies. 
  • If the farm employs workers, should that arrangement be modified from employer/employee to independent contractor status? If employee status remains and an employee sues the employer for alleged glyphosate-related damages, what can be done?  Will enrolling the farm in the state workers’ compensation program provide sufficient liability protection for the farming/ranching operation?      

What About Food Products?

To date, the cases have all involved the use of Roundup directly over a long period of time.  At some point will there be cases where consumers of food products claim they were harmed by the presence of glyphosate in the food they ate?  If those cases arise, given the use of production contracts in agriculture and the possibility of tracing back to the farm from which the grain in the allegedly contaminated food product was grown, does the farmer have liability?  If you think this is far-fetched, remember that there is presently a member of the U.S. House that is proposing the regulation (if not elimination) of cows with flatulence.  Relatedly, there are certain segments of the population that are opposed to the manner in which modern, conventional agriculture is conducted.  These persons/groups would not hesitate in trying to pin liability all the way back down the chain to the farmer. 

The Roundup litigation shouldn’t be ignored.  It may be time to start thinking through possible implications and modifying certain aspects of the way the typical farm or ranch does business in order to provide the greatest liability protection possible. 

  1. Ag Antitrust – The Ability of a Farmer To Sue For Anticompetitive Conduct

The markets for the major ag products in the U.S. are highly concentrated.  This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers.  In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food?  If so, what can a farmer or rancher do about it?  Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party?  In 2019, the U.S. Supreme Court decided a case involving the Apple Co. and IPhone users that involves some of these concepts.  The Court’s decision has implications for agriculture. 

In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured.  In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between.

Note:   Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)).  In these states, indirect purchasers can seek recovery under state antitrust laws. 

In Apple Inc. v. Pepper, et al., 139 S. Ct. 1514 (2019), IPhone users sued Apple Inc. over its operations of the App Store.  The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick.  The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018)On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote.  Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices.  Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer.  Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.  The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply.  In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly. 

Thus, the court was unanimous that the Illinois Brick rule should remain.  However, the decision appears to reject the use of formal contracts to determine who is the first buyer.  This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct.  However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods.  In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments.  The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.

Peter Carstensen, antitrust expert and Professor Emeritus of the Wisconsin School of Law commented to me that because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law.  Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, Prof. Carstensen noted that the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm.  This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages.  This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation.  In addition, the decisions have required that there be an adverse effect on consumers and not just producers.  Prof. Carstensen noted that the Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries.  In future PSA cases proof of harm to producers should establish “harm to competition.” 

Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers).  The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer.  Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way.  In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer.  This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.

On the whole, Prof. Carstensen concluded that the Supreme Court reaffirmed the Illinois Brick rule.  However, it employs a functional analysis to identify the first buyer (seller).  This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings.  But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers.  Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages.  But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.  The Court’s opinion is a helpful one for agriculture.

Conclusion

In Friday’s post, I will continue the trek through the Top Ten of 2019. 

January 1, 2020 in Civil Liabilities, 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)

Friday, October 11, 2019

Regulatory Takings – Pursuing a Remedy

Overview

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state 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?  In a previous post I addressed U.S. Supreme Court guidance on how to determine the property that the landowner claims has been taken. 

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 U.S. Supreme Court addressed late in its last term this past June.  It’s also the topic of today’s post – pursuing a “takings” remedy in federal court for a state/local-level regulatory taking

Regulatory (Non-Physical) Takings

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

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

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

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

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

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

State/Local Takings – Seeking a Remedy

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 earlier this year.

The 2019 Case

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 violation of the ordinance.  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 (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.”

Conclusion

The Court’s decision is a significant win for farmer’s, 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.  It’s also useful to note that the decision would not have come out as favorably without the presence of Justices Gorsuch and Kavanaugh on the Court.  That’s a point that agricultural interests also note.   

 

October 11, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Wednesday, September 11, 2019

Ag Law and Tax In The Courts

Overview

This month’s installment of court developments concerning agriculture in the courts covers recent developments involving the valuation of a timber enterprise; obtaining a tax refund for an estate due to a financial disability; the calculation of a casualty loss; and the growing of hemp.

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

Estate Tax Valuation

At issue in Estate of Jones v. Comr., T.C. Memo. 2019-101 were the proper valuations, as of May 28, 2009, of limited partner units in a timber business and stock shares in a sawmill. The decedent died in 2014, having established the sawmill business in 1954 and expanding it substantially since then. The decedent bought about 25,000 acres of timber in 1989 and an additional 125,00 acres in 1992. Later in 1992, the decedent formed the limited partnership to invest in, acquire, hold and manage timberlands and real estate and incur debt. The decedent transferred the timberland, which was considered to be the sawmill’s inventory, to the limited partnership in exchange for an interest in the entity.

The decedent began doing some succession planning in 1996 with the intent of keeping the business in the family as a successful operation. That plan included making gifts of interests in the businesses to family members, including significant blocks of stock. Upon the decedent’s death, the IRS challenged the valuation for gift tax purposes of the 2009 transfers of limited partnership interests and interests of the S corporation that owned the sawmill. Transfer of the limited partnership units was also restricted via a buy-sell agreement that contained a right-of-first refusal. Thus, the determination of fair market value of the 2009 transfers had to account for lack of marketability, lack of control, lack of voting rights of an assignee and reasonably anticipated cash distributions allocable to the gifted interests.

The IRS valued the transfers utilizing a net asset value approach and the estate’s expert used a discounted cash flow approach for both the timberland and the mill. The Tax Court agreed with the valuation arrived at by the estate’s expert, a far lower amount than what the IRS had arrived at. 

There are many underlying details concerning the valuation approaches that I am not discussing here.  The major point is, however, that taking care to follow well-established valuation procedures and keeping good records is essential.  The Tax Court will often adopt the approach that is most precise and is substantiated.

Refund Claims Due To Financial Disability

I.R.C. §6511(h) establishes a statute of limitations for filing a claim for refund due to financial disability. The provision provides “an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” I.R.C. §6511(a)-(c) specifies that, “In the case of an individual, the running of the periods specified in subsections (a), (b), and (c) shall be suspended during any period of such individual’s life that such individual is financially disabled.”  In Carter v. United States, No. 5:18-cv-01380-HNJ, 2019 U.S. Dist. LEXIS 134035 (N.D. Ala. Aug. 9, 2019) a decedent’s estate sought relief on the basis that the estate’s personal representative was financially disabled for a period of time entitling the estate to file a claim for refund after the time period set forth in I.R.C. §6511(a). The estate claimed that it should be treated as in individual for relief purposes. The estate sought a refund of federal estate tax tied to the value of bank stock that the decedent held at the time of death which made up 45 percent of the gross estate value. Unknown at the time of death was that a fraud had been committed against the bank which ultimately led to the bank being shut down and the stock rendered worthless. The personal representative was traumatized by the events, suffering emotional distress which rendered her unable to manage the estate which was substantiated by a physician who maintained that the representative’s disabilities triggered § 6511(h)’s equitable tolling provision so as to excuse the untimely filing of the refund claim.

The court disagreed with the estate’s position, holding that the term “individual” in I.R.C. §6511(h)(1) did not apply to an estate. The court pointed out that I.R.C. §7701(a)(1) defines a person as “an individual, a trust, estate, partnership, association, company or corporation.” The court reasoned that this made it clear that the Congress saw individuals and estates as distinct types of taxpayers, and the use of the term individual in IRC §6511(h) limited the relief to natural persons. The court also noted that even if the estate’s claim weren’t time-barred, it would fail on its own merits because estate tax value is based on the value as of the date of death or the alternate valuation date of six months after death. Simply because the fact of the bank fraud arose post-death didn’t change the fact that it wasn’t known at the time of death and the stock was being actively traded at death, the measuring date for federal estate tax purposes. 

Calculating a Casualty Loss

While the casualty loss deduction rules have been modified for tax years beginning after 2017, the underlying manner in which a casualty loss is to be computed remains largely the same.  Those rules involve documenting the value of the property before the casualty; determining the value after the casualty; income tax basis; and the amount of insurance proceeds received.  It’s a big issue for agriculture particularly because of the exposure of agricultural property to weather.  A recent Tax Court case illustrates how a casualty loss is computed.

In Taylor II v. Comr., T.C. Memo. 2019-102, the petitioner claimed a casualty loss on his 2008 return for damage from a hurricane. An insurance company paid over $2.3 million in claims, and the claimed deduction was $888,345. The petitioner reported a basis in the property of $6.5 million, insurance reimbursement of $2.3 million and a pre-casualty fair market value of $15,442,059 and a post-casualty fair market value of $12,250,000. The pre-casualty FMV was based on the 2009 listing price of the property reduced for time spent on the market. No testimony was provided as to post-casualty FMV.

The Tax Court (Judge Paris) noted that to compute a casualty loss deduction, the pre and post-FMV values of the impacted property must be computed and the property basis must be established. The Tax Court noted that decline in value can alternatively be established via the regulations under I.R.C. §165 if the taxpayer has repaired the property damage resulting from the casualty, the taxpayer may use the cost of repairs to prove the loss of value to the property from the casualty. In that instance, the taxpayer must show that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty. The Tax Court noted that the record did not establish that the valuations were based on competent appraisals, and didn’t indicate how the petitioner’s CPAs determined the pre or post-casualty FMV of the property, even though the pre-casualty FMV was consistent with the value reported to the insurance company. The Tax Court concluded that the appraisals were not reliable measures of the taxpayer's casualty loss and didn’t rely on them. In addition, the taxpayer received insurance payments that exceed the cost of repairs. That meant that a casualty loss deduction couldn’t be claimed based on the regulations. The Tax Court disallowed any casualty loss deduction. 

Growing of Hemp

The 2018 Farm Bill allows for hemp (not marijuana) production and allows states and Indian tribes to opt for either primary regulatory authority, or USDA authority over any proposed hemp production. Under the primary authority option, a state may submit its own plan to the U.S. Secretary of Agriculture (Secretary). Once a plan is submitted, the Secretary has 60 days to approve or deny the plan. Under the “USDA option,” hemp can be produced under a plan established by the USDA, but the plan must still be submitted to and approved by the Secretary. The Farm Bill provides that the Secretary has explicit authority to set regulations and guidelines that relate to the implementation to both the primary regulatory authority option or the USDA option. On February 27, 2019, the USDA issued a notice that the agency had begun gathering information to promulgate rules and regulations related to the 2018 Farm Bill and the production of hemp in the United States.

In Flandreau Santee Sioux Tribe v. United States Department of Agriculture, No. 4:19-CV-04094-KES, 2019 U.S. Dist. LEXIS 95188 (D. S.D. Jun. 6, 2019), the plaintiff, an Indian tribe, submitted its own proposed hemp production plan in March of 2019.  The Secretary issued a letter in stating that the plan would be approved or denied within 60 days after hemp production regulations were finalized – likely in the fall of 2019. On May 6, the plaintiffs submitted a letter to USDA requesting a waiver of regulatory requirements so that the plaintiff could plant hemp during the 2019 growing season. A meeting was held to discuss the waiver. Later that month the plaintiff sued for a temporary restraining order or preliminary injunction seeking to force the USDA to grant the hemp planting waiver.

A hearing on the temporary restraining order was held in June. After the hearing, the court denied the plaintiff’s motion. The court determined that the plaintiff’s motion was not yet ripe and that the plaintiff was not likely to ultimately succeed on the merits of its claim. The court noted that the Farm Bill gave the Secretary broad discretion with respect to hemp production. In addition, the 60-day window to approve or reject plans did not begin until the USDA finalized regulations. The court also noted that there was no monetary remedy built into the law because the USDA was not required to pay compensation for economic losses. The court also determined that the plaintiff’s potential economic losses did not outweigh the impact on the USDA if the injunction were to be granted. The court noted that the issuance of an injunction would force the USDA to act before it could carefully lay out the regulations on hemp production. Such haste in allowing production could have detrimental long-term effects. 

Conclusion

There’s never a dull moment in ag law and tax. 

September 11, 2019 in Business Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, August 16, 2019

Court Decision Illustrates USDA’s Swampbuster “Incompetence”

Overview

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “swampbuster.” Swampbuster was introduced into the Congress in January of 1985 at the urging of the National Wildlife Federation and the National Audubon Society. It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made. Thus, there was virtually no opposition to Swampbuster.

But, the “dirt is in the details” as it is often said.  Just how does the USDA determine if a tract of farmland contain a wet area that is subject to regulation?  That’s a question of key importance to farmers.  That process was also the core of a recent court opinion, in which the court painted a rather bleak and embarrassing picture of the USDA bureaucrats. 

Swampbuster and the USDA’s process for determining land subject to the Swampbuster rules – that’s the topic of today’s post.

Swampbuster Rules

The legislation charged the soil conservation service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.  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. B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).  

Under the June 1986 interim rules, 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 Fish and Wildlife Service (FWS) had no involvement in ASCS 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, FmHA, FCIC 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 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. § 12.33(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. Under 16 U.S.C. §3801(a)(6), 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.   See, e.g., Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008).  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.

Identifying a Wetland – The Boucher Saga

The process that the USDA uses to determine the presence of wet areas on a farm that are subject to the Swampbuster rules (known as the “on-site” wetland identification criteria) are contained in 7 C.F.R. §12.31.   The application of the rules was at issue in the most recent opinion in a case involving an Indiana farm family’s longstanding battle with the USDA. 

Facts and administrative appeals.  The facts of the litigation reveal that the plaintiff (and her now-deceased husband) owned the farm at issue since the early 1980s. The farmland has been continuously used for livestock and grain production for over 150 years. The tenants that farm the land participated in federal farm programs. In 1987, the plaintiffs were notified that the farm might contain wetlands due to the presence of hydric soils.  This was despite a national wetland inventory that was taken in 1989 that failed to identify any wetland on the farm.  In 1991, the USDA made a non-certified determination of potential wetlands, prior converted wetlands and converted wetlands on the property. In 1994, the plaintiff’s husband noticed that passersby were dumping garbage on a portion of the property. To deter the garbage-dumping, the plaintiff’s husband cleaned up the garbage, cleared brush, and removed five trees initially and four more trees several years later.  The trees were upland-type trees that were unlikely to be found in wetlands, and the tree removal impacted a tiny fraction of an acre.  The USDA informed the landowners that the tree removal might have triggered a wetland/Swampbuster violation and that the land had been impermissibly drained via field tile (which it had not). 

Because the land at issue was farmed, the USDA’s Natural Resources Conservation Service (NRCS) used an offsite comparison field to compare with the tract at issue for a determination of the presence of wetland.  The comparison site chosen was an unfarmed depression that was unquestionably a wetland.  In 2002, an attempt was made to place the farm in the Conservation Reserve Program, which triggered a field visit by the NRCS. However, a potential wetland violation had been reported and NRCS was tasked with making a determination of whether a wet area had been converted to wetland after November 28, 1990. The landowners requested a certified wetland determination, and in late 2002 the NRCS made a “routine wetland determination” that found all three criteria for a wetland (hydric soil, hydrophytic vegetation and hydrology) were present by virtue of comparison to adjacent property because the tract in issue was being farmed. The landowners were notified in early 2003 of a preliminary technical determination that 2.8 acres were converted wetlands and 1.6 acres were wetlands.  The NRCS demanded that the landowners plant 300 trees per acre on the 2.8 acres of “converted wetland.”

The landowners requested a reconsideration and a site visit. Two separate site visits were scheduled and later cancelled due to bad weather. The landowners also timely notified NRCS that they were appealing the preliminary wetland determination and requested a field visit, asserting that NRCS had made a technical error. A field visit occurred in the spring of 2003 and a written appeal was filed of the preliminary wetland determination and a review by the state conservationist was requested. The appeal claimed that the field visit was inadequate.  The husband met with the State Conservationist in the fall of 2003.  No site visit occurred, and a certified final wetland determination was never made.  The landowners believed that the matter was resolved.

The husband died, and nine years later a new tenant submitted a “highly erodible land conservation and wetland conservation certification” to the FSA. Permission was requested from the USDA to remove an old barn and house from a field to allow farming of that ground. In late 2012, the NRCS discovered that a final wetland determination had never been made and a field visit was scheduled for January of 2013 shortly after several inches of rain melted a foot of snow on the property.  At the field visit, the NRCS noted that there were puddles in several fields.  The NRCS used the same comparison field that had been used in 2002, and also determined that underground drainage tile must have been present (it was not).   

Based on the January 2013 field visit, the NRCS made a final technical determination that one field did not contain wetlands, another field had 1.3 acres of wetlands, another field had 0.7 acres of converted wetlands and yet another field had 1.9 acres of converted wetlands. The plaintiff (the surviving spouse) appealed the final technical determination to the USDA’s National Appeals Division (NAD).   At the NAD, the plaintiff asserted that either tile had been installed before the effective date of the Swampbuster rules in late 1985 or that tiling wasn’t present (a tiling company later established that no tiling had been installed on any of the tracts); that none of the tracts showed water inundation or saturation; that none of the tracts were in a depression; and that the trees that were removed over two decades earlier were not hydrophytic, were not dispositive indicators of wetland, and that improper comparison sites were used.  The NRCS claimed that the tree removal altered the hydrology of the site.  The USDA-NAD affirmed the certified final technical determination.  The plaintiff appealed, but the NAD Director affirmed.  The plaintiff then sought judicial review.    

Trial court decision.  The trial court affirmed the NAD Director’s decision and granted summary judgment to the government.   Boucher v. United States Department of Agriculture, No. 1:13-cv-01585-TWP-DKL, 2016 U.S. Dist. LEXIS 23643 (S.D. Ind. Feb. 26, 2016). The court based its decision on the following:

  • The removal of trees and vegetation had the “effect of making possible the production of an agricultural commodity” where the trees once stood and, thus, the NRCS determination was not arbitrary or capricious with respect to the converted wetland determination.
  • The NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed.
  • Existing regulations did not require site visits during the growing season.
  • “Normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation.
  • The ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights.

Appellate Decision

The appellate court reversed the trial court decision and remanded the case for entry of judgment in the plaintiff’s favor and award her “all appropriate relief.”  Boucher v. United States Dep’t of Agric., No. 16-1654, 2019 U.S. App. LEXIS 23695 (7th Cir. Aug. 8, 2019).  On the comparison site issue (the USDA’s utilization of the on-site wetland identification criteria rules), 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 has 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 appellate court rather poignantly stated, “Rather than grappling with this evidence, the hearing officer used transparently circular logic, asserting that the Agency experts had appropriately found hydric soils, hydrophytic vegetation, and wetland hydrology…”.

Conclusion

The USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  Those same agency characteristics were also illustrated in the Eighth Circuit decision of Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).  Perhaps much of the USDA/NRCS conduct relates to the bureaucratic unilateral decision in 1987 to change the rules to include farmed wetland under the jurisdiction of Swampbuster.   That decision has led to abuse of the NAD process and delays that have cost farmers untold millions.  Hopefully, the clean-out of some USDA bureaucrats as a result of the new Administration that began in early 2017 will result in fewer cases like this in the future.  

August 16, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (1)

Tuesday, August 6, 2019

Kansas Revenue Department Takes Aggressive Position Against Remote Sellers

Overview

In 2018, the U.S. Supreme Court, in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), handed South Dakota a narrow 5-4 win in its quest to collect taxes from online sales.  The Court held that the Constitution’s Commerce Clause did not bar South Dakota from statutorily requiring remote sellers without a physical presence in the state to collect and remit sales tax on goods and services that are sold to buyers for delivery inside the state of South Dakota.  In so doing, the Court distinguished and at least partially overruled 50 years of Court precedent on the issue. 

But, did the Court open the floodgates for the states to tax every dollar of sales in a state from an out-of-state seller?  That’s a hard case to make because the Court ruled specifically on a South Dakota statute that contained a de minimis sales requirement before state sales tax kicked-in.  However, the Kansas Department of Revenue (KDOR) has now taken the position that any amount of sales by a remote seller (a seller without any physical presence in Kansas) to a Kansas buyer triggers the need of the remote seller to register with the state and pay Kansas sales tax. 

The Kansas position concerning sales taxation of remote sellers and implications – the focus of today’s blog post.

Online Sales - Historical Precedent

The core constitutional issues concerning a state’s ability to impose sales (and/or use) tax on a seller with no physical presence in the state involve interstate commerce and due process.  In 1967, the U.S. Supreme Court determined that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States” in holding that Illinois could not subject a mail order seller located in Missouri to use tax where the seller had no physical presence in Illinois.  National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967).  In holding the law unconstitutional, the Court reasoned that subjecting the seller’s interstate business to local “variations in rates of tax…and record-keeping requirements” would violate the purpose of the Commerce Clause “to ensure a national economy free from…unjustifiable local entanglements.” 

Twenty-five years later, the Court reaffirmed the limitations of the Commerce Clause on state regulatory authority in Quill Corporation v. North Dakota, 504, U.S. 298 (1992).  In Quill, the Court held that a mail order house with no physical presence in North Dakota was not subject to North Dakota use tax for “property purchased for storage, use, or consumption within the State.”  The Court followed closely its holding in National Bellas Hess, Inc. because doing so “encourage[d] settled expectations and …foster[ed] investment by businesses and individuals.”  As applied to internet sales, Quill (which predated the internet) does not exempt all internet sales from state sales taxes – just sales by sellers who don’t have a physical presence in a particular state.  National retailers have a presence in many states.

More recently, in 2015, the Court examined a Colorado “tattletale” law that required out-of-state sellers with no physical presence in the state “to notify…customers of their use tax liability and to report” sales information back to Colorado.  Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2013).  The trial court enjoined enforcement of the law on Commerce Clause grounds.  On appeal, the Tenth Circuit held that it couldn’t hear the challenge to the law because the Tax Injunction Act (28 U.S.C. §1341) divested it of jurisdiction and the matter belonged in state court and, ultimately, the U.S. Supreme Court.  The Tenth Circuit remanded the case for dismissal of the Commerce Clause claims and dissolution of the permanent injunction.  The U.S. Supreme Court reversed and remanded the decision of the Tenth Circuit on the jurisdiction issue and, on remand, the Tenth Circuit, invalidated the Colorado law on Commerce Clause grounds.  Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). 

In the U.S. Supreme Court’s reversal and remand of the Tenth Circuit’s decision in Direct Marketing Association, Justice Kennedy wrote a concurring opinion that essentially invited the legal system to find an appropriate case that would allow the Court to reexamine the Quill and National Bellas Hess holdings.  Hence, the South Dakota legislation. 

South Dakota Legislation and Litigation

S.B. 106 was introduced in the 2016 legislative session of the South Dakota legislature.  It requires the collection of sales taxes from certain remote sellers – those with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same timeframe. 

S.B. 106 was signed into law on March 22, 2016, and the state Department of Revenue soon thereafter began issuing notices to sellers that it thought were in violation of the law.  Several out-of-state sellers that received notices did not register for sale tax licenses as the law required.  Consequently, the state brought a declaratory judgment action against the sellers in circuit court, and sought a judicial declaration that the S.B. 106 requirements were valid and applied to the sellers.  The state also sought an order enjoining enforcement of S.B. 106 while the action was pending in court, and an injunction that required the sellers to register for licenses to collect and remit sales tax. 

The sellers tried to remove the case to federal court based on federal question jurisdiction, but the federal court rejected that approach and remanded the case to the South Dakota Supreme Court.  South Dakota v. Wayfair, Inc., 229 F. Supp. 3d 1026 (D. S.D. 2017).  On remand, the South Dakota Supreme Court invalidated S.B. 106 on Commerce Clause grounds based on the U.S. Supreme Court precedent referenced above.  State v. Wayfair, Inc., et al., 901 N.W.2d 754 (S.D. 2017)The state of South Dakota filed a petition for certiorari with the U.S. Supreme Court and the Court granted the petition.

U.S. Supreme Court Decision – The Importance of “Substantial Nexus”

Article I, Section 8 of the U.S. Constitution says that, “The Congress shall have the power...to regulate commerce…among the several states…”.  That was the key point of the Court’s 1967 Bellas Hess, Inc. decision.  As noted above, in that case the Court stated that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States.”  In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court ruled that a state tax would be upheld if it applied to an activity having a substantial nexus with the state; was fairly apportioned; did not discriminate against interstate commerce; and, was fairly related to the services that the state provided.  Later, in the Quill case, the Court determined that a physical presence in the taxing jurisdiction was what satisfied the Brady “substantial nexus” requirement. 

In Wayfair, the Court determined that a “substantial nexus” could be present without the party subjected to tax having a physical presence in the taxing jurisdiction.  But, the key point is that the “substantial nexus” test of Brady remains.  Likewise, the other three requirements of Brady remain.  A state can only impose sales (or use) tax on a remote seller without a physical presence in the state if the tax is fairly apportioned; does not discriminate against interstate commerce; and is fairly related to services that the state provides.  In other words, taxing a business without a physical presence in the state cannot unduly burden interstate commerce.  The Wayfair majority determined that the South Dakota law satisfied these tests because of the way it was structured – it had only a  limited application due to the requirement of a de minimis a dollar amount of sales or transactions in the state; it was not applied retroactively; South Dakota was a member of the Streamlined Sales and Use Tax Agreement (SSUTA); the sellers at issue were national businesses with a large online presence; and South Dakota provided tax software to ease the administrative burden. 

KDOR Notice

On August 1, 2019, the KDOR issued Notice 19-04 designed to provide “guidance” to remote sellers doing business in Kansas.  https://www.ksrevenue.org/taxnotices/notice19-04.pdf  In the Notice, the KDOR noted that Kansas law (Kan. Stat. Ann. §79-3702(h)(1)(F)) defines a “retailer doing business in this [Kansas]” as:  “any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and the law of the United States.”  The KDOR also noted that the Kansas requires online (and other remote) sellers with no physical presence in Kansas to collect and remit “the applicable” sales and use tax on sales delivered into Kansas.  KDOR indicated that remote sellers are to register and begin collecting and remitting Kansas sales and/or use tax by October 1, 2019. 

The Notice, as strictly construed, is correct.  The state can require a remote seller to register with the state and collect and remit sales and/or use tax “under the provisions of the constitution and the laws of the United States.”  That would mean as the applicable law has been defined by the U.S. Supreme Court, including the Court’s most recent Wayfair decision – which involved a state law that contained a de minimis requirement based on amount of sales or number of transactions.  However, the KDOR Notice did not specify any level of de minimis sales before sales tax was triggered.  Indeed, the Director of Research and Analysis for KDOR was quoted in the Bloomberg Daily Tax Report (online) on August 1 as stating that KDOR “does not believe it needs a de minimis threshold” based on Kan. Stat. Ann. §79-3702.  This is an inaccurate statement that will likely invite a legal challenge to the KDOR’s position.  There simply is no protection in the Wayfair decision for KDOR’s position.  The “substantial nexus” test still must be satisfied – even with a remote seller.  Indeed, during the 2019 session of the Kansas legislature, a major tax bill contained de minimis requirements that mirrored the South Dakota legislation, but the Governor vetoed the bill and the Kansas House failed to override the veto.  Presently, no other state has taken the position that the KDOR has taken. 

Conclusion

The KDOR’s position amounts to a frontal assault on the Commerce Clause post-Wayfair.  Presently, 23 states are “full members” of the SSUTA.  For those states, Wayfair at least implies that membership in the SSUTA has the effect of minimizing the impact on interstate commerce.  But, that doesn’t mean that SSUTA membership eliminates the “substantial nexus” requirement.  Indeed, South Dakota was an SSUTA member and the Court still went through the “substantial nexus” analysis.  Thus, it appears that any state legislation must have exceptions for small businesses with low volume transactions and sales revenue.  Whether a series LLC (in some states such as Iowa) or subsidiaries of a business could be created, each with sales below the applicable threshold, remains to be seen.

On a related note, could the KDOR (or any other state revenue department) go after a portion of business income of the out-of-state business via income tax?  That seems plausible.  However, the Interstate Income Act of 1959 (15 U.S.C. §381-384), requires that a business (or individual – the business form does not matter because corporations have long held personhood status under the Constitution (see, Bank of the United States v. Deveaux, 9 U.S. 61 (1809); Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014)) have some sort of connection with a state before its income can be taxed (at least with respect to the solicitation of orders for tangible personal property).  Is that legislation now unconstitutional too? Or, is there a distinction remaining between taxing receipts as opposed to income?  That may be at issue in a future Supreme Court case. 

For now, it’s practically a sure bet that, unless the Kansas legislature passes a bill containing de minimis thresholds that can withstand the Governor’s veto, the state will be devoting taxpayer resources to defending a lawsuit that will challenge the state’s (as of now) unsupportable position.  

August 6, 2019 in Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, August 2, 2019

Ag Legal Issues in the Courts

Overview

It’s been about a month since I devoted a blog post to court litigation involving agricultural producers and businesses.  So, it’s time to devote another post to the matter as an illustration of how often the law and the business of agriculture intersect.  These posts have proven to be quite popular and instructive.

“Ag in the Courtroom” – the most recent edition.  It’s the topic of today’s post.

More Bankruptcy Developments

As I have noted in numerous posts over the past couple of years, the difficult economic conditions in much of agriculture in the Great Plains and the Midwest have made bankruptcy law rise in importance.  Fortunately, legislation is headed to the President’s desk that will increase the debt limit in Chapter 12 bankruptcy to $10 million and place some of the existing Chapter 12 provisions in Chapter 11 for use by non-farm small businesses.  Those were needed pieces of legislation.

A recent Alabama bankruptcy case illustrates the peril of selling loan collateral without the creditors notice and consent.  It’s a unique set of facts because the debtor sold the collateral, a tractor, to bail her boyfriend out of jail.  In In re Reid, 598 B.R. 674 (Bankr. S.D. Ala. 2019), the Farm Service Agency (FSA) attached itself as a creditor in the debtor’s chapter 7 bankruptcy proceeding. In March of 2016 the debtor took out two FSA loans for a total of $50,000. A security agreement was also executed at the same time granting the FSA a security interest in "All farm equipment . . . and inventory, now owned or hereafter acquired by the Debtor, together with all replacements, substitutions, additions, and accessions thereto, including but not limited to the following which are located in the State of Alabama." A specific list of assets was attached, including a New Holland tractor, ten beef breeding cows, and nine calves. The debtor used the loan proceeds to purchase the equipment and livestock that was listed as collateral.

In June of the same year, the debtor was notified that she could not have cattle on the land she purchased with another loan not at issue in the case. However, the debtor was never notified of the restriction and it was not stated in the purchase contracts. Ultimately, the debtor was given thirty days to vacate the premises. Around this time, the debtor’s equipment and cattle started to go missing. The debtor was also becoming aware that her boyfriend (and father of her children) had a drug problem, and she began to suspect that he was selling the equipment and cattle for drugs. Later, the debtor attempted to stop a man from taking cattle from the property and the man said to take it up with her boyfriend. The debtor did not report the cattle or equipment as stolen. The debtor’s boyfriend was arrested about the same time for drug crimes and eluding the police. The debtor vacated the property with the only collateral remaining at the property being the New Holland tractor, which the debtor listed for sale on Facebook. The debtor testified that she sold the New Holland tractor to an unknown purchaser for between $6,000.00 and $8,000.00. But the exact price and identity of the purchaser could not be found as the debtor deleted her Facebook account. The proceeds of the tractor sale were put towards bail money for the boyfriend. The debtor never made a payment on the loans and vacated the property before the first payment was due.

The FSA attempted to recover the tractor but was unsuccessful. The FSA sought to have the bankruptcy court find the debt owed to the FSA in the amount of $52,048.56 plus interest to be non-dischargeable for fraud; fiduciary defalcation; embezzlement; and willful and malicious injury. The court averaged the alleged selling price of the tractor and rendered $7,000 non-dischargeable. The court also determined that the debtor did not fraudulently obtain the FSA loans, and did not embezzle the collateral because fraud wasn’t present. Because willful and malicious injury was present upon the debtor’s sale of the tractor without notice to the FSA and use of the proceeds for the debtor’s personal benefit, the $7,000 that the debtor received upon sale of the tractor was non-dischargeable. 

The Intersection of State and Federal Regulation

Agriculture is a heavily regulated industry.  Sometimes that regulation is apparent and sometimes it occurs an a rather unique manner.  Sometimes it comes from the federal government and sometimes it is purely at the state and local level.  In yet other situations, the regulation is an interesting (and frustrating for those subject to it) blend of federal and state/local regulation. 

In 2009, the defendant in Carroll Airport Comm'n v. Danner, No. 17-1458, 2019 Iowa Sup. LEXIS 57 (May 10, 2019), planned to construct a grain leg (bucket elevator) and grain bins. In 2013, the defendant obtained the proper county zoning permits but was told of the need to comply with the airport zoning ordinances. The grain leg stands within 10,000 feet horizontally from the end of plaintiff’s runway. The structure reaches a height of 127 feet off the ground. The parties agree the grain leg intrudes within the airport's protected airspace by approximately sixty feet. After construction began it was evident that there would be issues with the airport zoning ordinances and the plaintiff asked the Federal Airport Administration (FAA) to perform an aeronautical study of the grain leg and its impact on aviation safety. The FAA issued a letter stating, "This aeronautical study revealed that the structure does exceed obstruction standards but would not be a hazard to air navigation." It also warned, “This determination concerns the effect of this structure on the safe and efficient use of navigable airspace by aircraft and does not relieve the sponsor (i.e., the defendant) of compliance responsibilities relating to any law, ordinance, or regulation of any Federal, State, or local government body.” Lastly the FAA requested that the defendant paint the structure and add red lights to the top of it. The defendant did so. The FAA also adjusted the flight patterns in and out of the airport to accommodate this structure. The plaintiff did not seek review under this determination.

Two years later, the plaintiff (the local airport commission) sued alleging the grain leg violated certain building ordinances; city and county zoning ordinances; airport commission regulations; and constituted a nuisance and hazard to air traffic. The plaintiff sought equitable relief—an injunction requiring the defendant to modify or remove the grain leg. The defendant raised an affirmative defense of federal preemption. In June 2017, the trial court found that the grain leg violated state and local zoning ordinances and constituted a nuisance and an airport hazard. The trial court found that the grain leg did not fall within the agricultural exemption to certain zoning laws and rejected the defendants’ affirmative defense that the no-hazard letter preempted state and local zoning ordinances. The appellate court affirmed, concluding that the doctrines of express, implied, and conflict preemption did not apply to the FAA no-hazard determination. On further review, the state Supreme Court affirmed. The Supreme Court concluded that the FAA no-hazard determination did not preempt local zoning ordinances, was not legally binding, and contained language notifying the defendant that compliance with local rules was required. 

Water Rights

Rights involving surface water vary from state-to-state.  In some parts of the U.S., however, a party owning land adjacent to a watercourse has what are known as “riparian” rights to the water.  But, do those rights apply to man-made lakes, or just natural lakes?  The issue came up recently in Incline Village Board of Trustees v. Edler, No. SC97345, 2019 Mo. LEXIS 178 (Mo. Sup. Ct. Apr. 30, 2019). 

The defendants owned properties in subdivisions around a lake. One of the properties of the second subdivision abutted the lake. The properties they owned in the first subdivision did not abut the lake. During the creation of the first subdivision, restrictions were added to the land. One such restriction stated, “No structures or other improvements shall be made on or to any common area, including any body of water, other than such structures or improvements which are made by the trustees for the benefit of all lot owners. Except that, the owner of each lot which abuts any body of water, may construct one boat dock on such body of water, provided that, said boat dock extends from said lot and is first approved in writing by the trustees.” All landowners in the first subdivision were entitled to use the lake, even if they did not abut the lake. The second subdivision was not joined with the first one, but it was clear that the second subdivision was excluded from use rights on the lake. Lots in the first subdivision were subject to assessments to maintain the lakes.

The defendants built a dock on the property on the second subdivision. The trustees of the first subdivision defendants sued seeking a declaratory judgment, damages for trespass, and the removal of the dock. The district court ordered removal of the dock and determined that special circumstances existed supporting the award of attorney's fees of $70,000 in favor of the trustees.

On appeal, the appellate court determined that the lake was clearly artificial and, thus, the defendants were not riparian owners. Riparian rights are only extended to landowners adjacent to natural lakes. The appellate court also rejected the defendants’ reliance-based argument. The appellate court noted that the defendants had never had use of the lake for dock purposes or paid assessments for its maintenance. In addition, the defendants’ predecessor in title's deed to the adjacent land explicitly excepted the lake from the transfer. In addition, the plaintiffs had told the defendants of the property restrictions before the dock was built. As for attorney fees, the appellate court determined that there was not any special circumstance to merit an award of attorney fees. The plaintiff had not given any formal warning about not building the dock and the defendants had sought legal advice. 

Conclusion

It’s never a dull moment in ag law involving ag producers, agribusinesses and rural landowners.  The cases keep on rolling in. 

August 2, 2019 in Bankruptcy, Regulatory Law, Water Law | Permalink | Comments (0)

Thursday, July 25, 2019

Regulation of Food Products

Overview

Agriculture is a heavily regulated industry.  Land ownership; production activities; marketing of ag products; and food products that are in the consumer (and livestock) food supply are subject to federal and state regulations.  What are the major federal rules?  How do they apply to producers of food products?

The regulation of food products – it’s the topic of today’s post.

Overview

The government agencies with primary responsibility for ensuring the safety of the U.S. food supply are the USDA (through the Food Safety and Inspection Service (FSIS)) and the Food and Drug Administration (FDA).  While neither agency has the authority to mandate a recall of unsafe food, they have developed general oversight procedures and protocol for voluntary food recalls by private companies.  The USDA is generally responsible for the regulation of meat, poultry and certain egg products, while the FDA has responsibility for the regulation of all other food products including seafood, milk, grain products, fruits and vegetables, and certain canned, frozen and otherwise packaged foods that contain meat, poultry and eggs that USDA does not otherwise regulate.

Food Adulteration and Misbranding

The regulations generally proscribe the adulteration and misbranding of food.  In general, a food is considered adulterated if it contains a harmful substance that may pose a safety risk, contains an added harmful substance that is acquired during production or cannot be reasonably avoided, contains a unapproved substance that has been intentionally added to the food, or if it has been handled under unsanitary conditions that presents a risk of contamination that may pose a safety threat.  Under the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. §§ 301-399), the manufacture, delivery, receipt or introduction of adulterated food into interstate commerce is prohibited. However, the USDA regulations did not prevent the introduction into the human food chain of meat from downed livestock.  In Baur v. Veneman, 352 F.3d 625 (2d Cir. 2003), a beef consumer argued that the USDA should label all downed livestock as “adulterated,” and that the consumption of meat from downed animals created a serious health risk of disease transmission and that elimination of downed cattle from the human food stream was necessary to protect the public health.  In late 2003, the United States Court of Appeals for the Second Circuit held that the beef consumer had standing to challenge the USDA policy.  Shortly thereafter, the presence of “Mad-Cow” disease was discovered in the U.S., and the USDA announced on December 30, 2003, that it was changing its regulations to ban the meat from downed animals from the human food chain. FSIS issued a series of three interim rules in early 2004.  The final rule is effective October 1, 2007, and prohibits the slaughter of non-ambulatory cattle in the United States (except that veal calves that cannot stand due to fatigue or cold weather may be set apart and held for treatment and re-inspection). 72 Fed. Reg. 38699 (July 13, 2007). Also, the final rule specifies that spinal cord must be removed from cattle 30 months of age and older at the place of slaughter, and that records must be maintained when beef products containing specific risk materials are moved from one federally inspected establishment to another for further processing.  Under the final rule, countries that have received the internationally recognized BSE status of “negligible risk” are not required to remove specific risk materials.

While neither the USDA nor the FDA can order a private company to recall unsafe food products, they can issue warning letters, create adverse publicity, seize unsafe food products, seek an injunction or begin prosecuting criminal proceedings. 

For food products over which the FSIS has jurisdiction, upon learning that a misbranded or adulterated food item may have entered commerce, the FSIS will conduct a preliminary investigation to determine whether a voluntary recall is warranted.  If a recall is deemed necessary, a determination is made as to the degree of the recall and the public is notified.  For food products subject to the FDA’s jurisdiction, a similar procedure is utilized.

Organic Foods

Organic foods are produced according to certain production standards.  For crops, “organic” generally means they were grown without the use of conventional pesticides, artificial fertilizers, human waste, or sewage sludge, and that they were processed without ionizing radiation or food additives.  For animals, “organic” generally means they were raised without the use of antibiotics and without the use of growth hormones.  In most countries, organic produce must not be genetically modified.

Historically, organic farms have been relatively small family-run farms with organic food products only available in small stores or farmers' markets.  More recently, organic foods have become much more widely available, and organic food sales within the United States have grown by 17 to 20 percent a year in recent years while sales of conventional food have grown at only about 2 to 3 percent annually.  This large growth is predicted to continue, and many companies (including Wal-Mart) are beginning to sell organic food products.

An organic food producer must obtain certification in order to market food as organic.  Under the Organic Food Production Act (OFPA) of 1990 (7 U.S.C. §§ 6501-23), the USDA is required to develop national standards for organic products.  USDA regulations are enforced through the National Organic Program (NOP) governing the manufacturing and handling of organic food products.  As enacted, the statute provides that an agricultural product must be produced and handled without the use of synthetic substances in order to be labeled or sold as “organic”.  But, under USDA regulations, a “USDA Organic” seal can be placed on products with at least 95% organic ingredients.  The 95 percent rule was challenged by a Maine organic blueberry farmer as being overly tolerant of non-organic substances and inconsistent with the statute, and the United States Court of Appeals for the First Circuit agreed, invalidated several of the regulations while scaling back the scope of other regulations.  Harvey v. Veneman, 396 F.3d 28 (1st Cir. 2005).  In response to the court’s opinion (and while the case was on appeal) the Congress amended OFPA.  Upon further review, the court determined that OFPA, as amended, permitted the use of synthetics as both ingredients in and processing aids to organic food. Harvey v. Johanns, 494 F.3d 237 (1st Cir. 2007).

Produce Safety Rule

In early 2011, the President signed into law the Food Safety Modernization Act (FSMA) of 2010.  21 U.S.C. §301, et seq. The FMSA gives the FDA expansive power to regulate the food supply, including the ability to establish standards for the harvesting of produce and preventative control for food production businesses. Beginning in 2018, the new rules will significantly impact many growers and handlers of fresh produce.

The FMSA also gives the FDA greater authority to restrict imports and conduct inspections of domestic and foreign food facilities. To implement the requirements of the FMSA, the FDA had to prepare in excess of 50 rules, guidance documents, reports under a short time constraint.  Indeed, the timeframe was so short FDA complained that they didn’t have enough time to do the job appropriately. That led to lawsuits being filed by activist groups to compel the FDA to issue several rules that were past-due. A federal court agreed with the activists in the spring of 2013 and, as a result, the FDA issued four proposed rules with comment periods that ended in November of 2013. Center for Food Safety v. Hamburg, 954 F. Supp. 2d 965 (N.D. Cal. 2013).  One of the most contentious issues involved the rule FDA was supposed to develop involving intentional adulteration of food. FDA said it needed two more years to develop an appropriate rule, but the Court ordered them to develop it immediately. The hope, at that time, was that the Congress would step in and modify the deadlines imposed on the FDA so that reasonable rules could be developed rather than being simply rushed through the regulatory process for the sake of meeting an arbitrary deadline.

In late 2015, the FDA issued its Final Produce Safety Rule that has application to growers and fresh produce handlers (those that pack and store fresh produce). The rule is designed to reduce the instances of foodborne illnesses. Effective, January 16, 2016, the rule generally covers the use of manure or compost as fertilizer, allowing (at least for the present time) a 90 to120-day waiting period between the application of untreated manure on land and the time of harvest. That timeframe is in accordance with USDA National Organic Program Standards. Relatedly, the rule requires that raw manure and untreated biological soil amendments of animal origin must be applied without contacting produce and post-application contact must be minimized. Also, the rule addresses water quality and establishes testing for water that is used on the farm such as for irrigation or handwashing purposes. Under the rule, there must be no detectible generic E coli in water that has the potential to contact produce. The rule establishes a timeframe for noncompliant growers to come into compliance with the water requirements. The rule also addresses scenarios that could involve contamination of food products by animals, both domestic and wild, and establishes standards for equipment, tools and hygiene. As for potential contamination by wild animals, the rule requires farmers to monitor growing areas for potential contamination by animals and not harvest produce that has likely been contaminated. In addition, the rule establishes requirements for worker training, health and hygiene, and particular rules for farms that grow sprouts.

Under the rule, farms that sell an average of $25,000 or less of produce over the prior three years are exempt. Similarly, exempt are farms (of any size) whose production is limited exclusively to food products that are cooked or processed before human consumption. For producers whose overall food sales average less than $500,000 annually over the prior three years where the majority of the sales are directly to consumers or local restaurants or retail establishments, a limited exemption from the rule can apply. However, these producers must maintain certain required documentation (effective Jan. 16, 2016) and disclose on the product label at the time the product is purchased the name and location of the farm where the food product originated. In addition, the rule also allows commercial buyers to require that the farms from which they purchase produce follow the rule on their own accord.

Conclusion

Food products – yet another aspect of agriculture that is substantially regulated.

July 25, 2019 in Regulatory Law | Permalink | Comments (0)

Thursday, June 27, 2019

Administrative Agency Deference – Little Help For Ag From the Supreme Court

Overview

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 yesterday, and it didn’t turn out the way that many in agriculture had hoped.

Today’s post takes a deeper look at administrative agencies, how farmers and ranchers can best deal with them, and review of administrative agency determinations by the courts.  The deference provided to administrative agency decisions – that’s the topic of today’s post.

Administrative Agency Basics

At the federal level, the Congress enacts basic enabling legislation, but leaves the particular administrative departments (such as the USDA) to implement and administer congressionally created programs.  As a result, the enabling legislation tends to be vague with the administrative agencies (such as the USDA) needing to fill in the specific provisions by promulgating regulations.  The procedures that administrative agencies must follow in promulgating rules and regulations, and the rights of individuals affected by administrative agency decisions are specified in the Administrative Procedures Act (APA).  5 U.S.C. §§ 500 et seq.  The provisions of the APA constitute the operative law for many of the relationships between farmers and ranchers and the government.

Administrative Agency Procedure

Usually, a farmer or rancher's contact with an administrative agency is in the context of participation in an agency-administered program, or being cited for failure to comply with either a statutory or administrative rule.  So, it’s helpful for farmers and ranchers to have a general understanding of how administrative agencies work and the legal effects of their decisions.  In general, disputed matters involving administrative agencies must first be dealt with in accordance with the particular agency's own procedural rules before the matter can be addressed by a court of law.  This is known as exhausting administrative remedies.  7 U.S.C. §6912(e).  See also Johnston v. Patterson, No. 4:14-CV-210-BO, 2014 U.S. Dist. LEXIS 172224 (E.D. N.C. Dec. 12, 2014).  About the only exception to the rule of exhaustion occurs when a facial challenge is made to the regulation itself.  See Gold Dollar Warehouse, Inc. v. Glickman, 211 F.3d 93 (4th Cir. 2000)Thus, participating carefully in administrative proceedings can be vitally important to a farmer or rancher, especially in terms of properly preserving a record for subsequent court review. 

Going through the administrative process is critical because, typically, an appeal to a court of law is made only on the basis of the record generated in the administrative proceeding.  Courts are limited in the extent to which they can substitute their judgment for that of an administrative agency regarding the facts of the dispute.  Thus, it is critical to preserve all disputed factual and legal issues in the record of the administrative proceeding so that they can later be considered by a court.  The exhaustion of administrative remedies, as a general rule, also requires that legal issues must be raised during the administrative process so as to be preserved for judicial review.  If they are raised in the administrative process, then they will likely be precluded.  Also, exhaustion is required as to each legal issue.  See, e.g., Ballanger v. Johanns, 495 F.3d 866 (8th Cir. 2007).

What’s the Standard For Reviewing Agency Action?

Courts generally consider only whether the administrative agency acted rationally and within its statutory authority.  Consequently, a particular farmer or rancher bears the burden of insuring that the record is adequate for the appeal of the issues involved before the matter leaves the administrative process.  Otherwise, an appeal of an administrative agency's decision must be based solely on arguments that the agency acted arbitrarily, capriciously, beyond legal authority or that it abused its discretion. 

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.  Prevailing in court on this type of a claim can be quite difficult. However, in Christensen v. Harris County, 529 U.S. 576 (2000), the U.S. Supreme Court ruled that statutory interpretations made by governmental agencies in pronouncements that do not have the force of law, such as opinion letters, policy statements, agency manuals, and enforcement guidelines, are not entitled to such great deference.  Christensen is a significant case for the agricultural sector because the USDA often makes interpretations of the laws they administer in formats that do not have the force of law. Similarly, in Meister v. United States Department of Agriculture, 623 F.3d 363 (6th Cir. 2010), the court noted than an agency is not entitled to deference simply because it is a governmental agency.  The case involved a claim that the U.S. Forest Service had failed to comply with its own regulations and a federal statute in developing its 2006 management plan for national forests in northern Michigan.  The trial court granted the government’s motion for summary judgment, but the appellate court reversed.  The appellate court noted that it was insufficient for the government to only identify the lands on which a particular activity (such as snowmobiling) could occur.  Instead, the government had to identify the supply of lands on which participants in particular activities would experience a quality recreational experience.  As a result, the issuance of the agency’s plan was arbitrary because the estimates of snowmobile and cross-country visitors to the forests were entirely arbitrary and there was no coordination with Michigan's recreational planning, and the agency did not minimize conflicts between off-road vehicle use and other uses and interests of the forests.  The court specifically noted that agency deference was not automatic.  Instead, the agency must apply the relevant statutory and regulatory authority.

On the deference issue, it was believed that a change might be in the wind.  In 1997, the U.S. Supreme Court again 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).  

The amount of deference a court gives to agency interpretations of its own regulations is important to agriculture.  For example, the USDA administers the Packers and Stockyards Act (PSA).  The PSA, bars packers (and others) from engaging in any “unfair, unjustly discriminatory, or deceptive practice.” 7 U.S.C. §192(a). The PSA also prohibits the making or giving of any “undue or unreasonable preference or advantage” to any person.  7 U.S.C. §192(b).  The courts have construed this language to require harm to competition be shown to establish a violation.  In late 2016, the USDA published an interim final rule removing the requirement to show harm to competition to establish a violation.  But, the USDA later withdrew the rule.  The withdrawal of the rule was challenged as arbitrary and capricious (the standard for overturning agency action).  But, the Eighth Circuit denied the plaintiffs’ claims.  Organization for Competitive Markets v. United States Department of Agriculture, 912 F.3d 455 (8th Cir. 2018).  The court determined that the USDA, in abandoning the proposed rule, had provided a reasoned analysis based on principles that were “rational, neutral, and in accord with the agency’s proper understanding of its authority” – the USDA didn’t want to get sued.  The case is an example of deference toward a governmental agency’s actions. 

Yesterday, the U.S. Supreme Court addressed the issue of deference again in Kisor v. Wilkie, No. 18-15, 2019 U.S. LEXIS ___ (U.S. Sup. Ct. Jun. 26, 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. 

Attorney Fees

The Equal Access to Justice Act (EAJA) (5 U.S.C. §§504 (2008); 28 U.S.C. §2412(d)(2)(A)) provides that a party who prevails administratively against government action can recover fees and expenses if the administrative officer determines that the government’s position was not substantially justified.  However, the USDA’s longstanding position is that the EAJA does not apply to administrative hearings before the USDA’s National Appeals Division (NAD) because NAD proceedings are not adversarial adjudications that are held “under” the APA.  But, the United States Court of Appeals for the Eighth Circuit rejected the USDA’s position in 1997. Lane v. United States Department of Agriculture, 120 F.3d 106 (8th Cir. 1997). The Ninth Circuit ruled similarly in 2007. Aageson Grain and Cattle, et al. v. United States Department of Agriculture, 500 F.3d 1038 (9th Cir. 2007).  The Seventh Circuit ruled likewise in 2008.  Five Points Road Venture, et al. v. Johanns, 542 F.3d 1121 (7th Cir. 2008).

Conclusion

Dealing with administrative agencies is a reality for the typical farmer or rancher.  While ag didn’t get the clear victory it sought in Kisor, perhaps it’s a baby-step in the right direction.  Only time will tell.

June 27, 2019 in Regulatory Law | Permalink | Comments (0)

Wednesday, June 19, 2019

Classification of Seasonal Ag Workers – Why It Matters

Overview

Especially with respect to fruit and vegetable crops, seasonal ag workers are vital – particularly during harvest.  But is a seasonal ag worker an employee or an independent contractor?  What are the factors for determining the proper classification?  Why does classification matter?  Actually, it matters for several important reasons including withholding of income tax and the filing of the proper tax forms; whether minimum wage requirements apply; and applicable penalties for a misclassification.

During this spring’s academic semester at the law school, my students in agricultural law were required to write a paper on a particular ag law topic.  Today’s post features the work of one of those students - Rebecca Bergkamp.  Rebecca graduated last month, is presently preparing for the Bar exam, and will then join the Hinkle Law Firm in Wichita, Kansas.  She is well-trained to enter the practice world to begin assisting agricultural clients (among others) with their legal issues.

The proper classification of seasonal ag workers – that’s the topic of today’s post.

Rules Governing Classification of Workers

Under the Fair Labor Standards Act (FLSA), a worker is presumed to be an employee, unless the worker is specifically classified as an independent contractor. The term “employee” is very expansive and means any individual employed by an employer. 29 U.S.C. §203(e)(1).  This includes individuals who might not normally qualify as an “employee” under traditional agency principles.  Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 112 S. Ct. 1344, 1350 (1992).  Likewise, a contractual designation between a farmer and the worker that the worker is an independent contractor is not controlling for purposes of determining whether that worker is an employee or independent contractor. Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S. Ct. 1473, 1476-77 (1947).  Moreover, the subjective intentions of the parties are not controlling in determining whether an employer-employee relationship exists; it does not matter whether the parties had any intention of creating an employment relationship. Brennan v. Partida, 492 F.2d 707, 709 (5th Cir. 1974).

Factors for Consideration

So how is it determined whether an ag worker is an employee or a independent contractor?  An “economic realities” test is often used.  Under this test, the courts look to various factors in assessing the economic realities of the situation to determine whether an individual is an employee, or an independent contractor.  Those factors are:  (1) the nature and degree of the worker’s control of the manner in which the work is to be performed (the less control the worker has, the more likely the worker is an employee); (2) the  worker’s opportunity for profit or loss depending upon his or her managerial skill (the less opportunity, the more likely the worker is an employee); (3) the degree of the worker’s own investment in equipment or materials required for the work or employment of other workers (the greater degree, the more likely the worker is an independent contractor); (4) whether the service rendered requires a special skill, (if so, the more likely is independent contractor classification); (5) the degree of permanency and duration of the working relationship of the parties (the longer and more permanent the relationship, the more likely employee classification will be); and (6) the extent to which the services rendered are an "integral part" of the business (the greater the extent, the more likely is employee status). No single factor is determinative.  See, e.g., Blair v. Transam Trucking, Inc., 309 F. Supp. 3d 977, 1002 (D. Kan. 2018); Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748 (9th Cir. 1979); In re Kokesch, 411 N.W.2d 559 (Minn. Ct. App. 1987); Mendez v. Brady, 618 F. Supp. 579 (W.D. Mich. 1985); Tobin v. Cherry River Boom & Lumber Co., 102 F. Supp. 763 (S.D. W. Va. 1952).

Although a farmer may have to classify many of its workers as employees due to the application of the economic realities test, a farmer is not required to classify immediate family members as employees. For the purposes of agriculture, the term “employee” does not include workers who are a parent, spouse, child, or other immediate family members.  29 U.S.C. §203(e)(3). This is an important exception for many family farming operations. 

Why Classification Matters

There are various reasons for classifying a worker either as an employee or as an independent contractor.

  • For many farmers, it’s simply easier to classify seasonal workers as independent contractors and pay them with a checks and issue Forms 1099 at year end.  In addition, independent contractors are responsible for paying both the employer and employee portion of Social Security and Medicare taxes.
  • For tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) provides for a 20 percent deduction for the “qualified business income” of an independent contractor that is other than a C corporation. Wages of an employee don’t qualify. 
  • The staffing flexibly of independent contractors can be very beneficial and, if the farming operation is in a state that has at-will employment, employees can terminate the working relationship at any time for any reason. In contrast, an independent contractor’s ability to terminate a working relationship with a farmer is governed by a contract that the parties have negotiated.   
  • If a worker is an employee, the farmer-employer, has greater control over how, when, and which projects are completed at any given time. But, the use of an independent contractor provides the farm operation the flexibility of being able to acquire talent for a specific period of time without having to maintain an ongoing commitment, financial or otherwise.

What About Minimum Wage and Overtime Pay Requirements?

If a worker is an “employee,” the FLSA requires agricultural employers who use 500 “man-days” or more of “agricultural labor” in any calendar quarter of a particular year to pay the agricultural minimum wage to certain agricultural employees in the following calendar year.  29 CFR § 780.305. Man-days are those days during which an employee performs any agricultural labor for not less than one hour.  The man-days of all agricultural employees count in the 500 man-days test, except those generated by members of an incorporated employer's immediate family.  29 U.S.C. § 203(e)(3).  Five hundred man-days is roughly equivalent to seven workers working five and one-half days per week for thirteen weeks (5.5 x 7 x 13 = 501 man-days). Under the FLSA, “agriculture” is defined broadly.  See 29 U.S.C. § 203(f).  For related entities, where not all of the entities involve an agricultural trade or business, the question is whether the business operations are so intertwined that they constitute a single agricultural enterprise that is exempt from the minimum wage rules.  See, e.g., Ares v. Manuel Diaz Farms, Inc., 318 F.3d 1054 (11th Cir. 2003).

Other agricultural exceptions from the minimum wage requirement include persons that are:  (1) members of the employer's immediate family, unless the farm is incorporated; (2) local hand-harvest, piece-rate workers who come to the farm from their permanent residences each day, but only if such workers were employed less than 13 weeks in agriculture in the preceding year; (3) children age 16 and under whose parents are migrant workers, and who are employed as hand-harvest piece-rate workers on the same farm as their parents, provided that they receive the same piece-rate as other workers; and (4) employees engaged in range production of livestock. 29 U.S.C. § 213(a)(6).  A higher monthly wage rate applies to a “ranch hand” who does not work in a remote location and works regular hours.  See, e.g., Mencia v. Allred, 808 F.3d 463 (10th Cir. 2015)

Overtime Pay

If a worker is classified as an “employee,” the FLSA requires payment of at least one and one-half times an employee’s regular rate for work over 40 hours in a week.  However, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12).  Again, for this purpose, “agriculture” is defined broadly, and the 500 man-days test is not relevant.  There are also certain workers that are exempt from being paid for hours worked that exceed 40 hours in a week.  Included in this category are those “executive” workers whose primary duties are supervisory, and the worker supervises two or more employees.  Also included are workers that fall in the “administrative” category who provide non-manual work related to the management of the business.  Also exempt are those workers defined as “professional” whose job is education-based and requires advanced knowledge.  Many larger farming and ranching operations have employees that will fit in at least one of these three categories. 

Income Tax Withholding

For employees, the employer must withhold federal (and state) income tax.  The withholding of tax from an individual’s wages is “treatment” of the individual as an employee.  See, e.g., Priv. Ltr. Rul. 8323004 (Feb. 21, 1983).   Also, it’s not possible to retroactively change the “treatment” of the workers as employees by filing Forms 941c (the Form for correcting withholding information) and requesting a refund of FICA taxes.  Even assuming the farmer could do so, the farmer would be prevented from claiming workers as nonemployees for years he did not file the proper federal information tax returns.  Likewise, “Section 530 relief” is not available to those taxpayers who did treat workers as employees by filing Forms 943 and withholding FICA taxes.  It also doesn’t apply to those who treated workers as employees as a result of past audits.

Misclassification

One of the biggest risks in hiring “independent contractors” is misclassification because it can result in violations of wage, tax, and employment laws.  Penalties can also be imposed for failing to timely deposit payroll taxes. Fines from the U.S. Department of Labor (DOL), IRS, and state agencies could total thousands of dollars. Farmers can be held responsible for paying back-taxes and interest on employee’s wages as well as FICA taxes that were not originally withheld. Failure to make these payments can result in additional fines. If the misclassification is found to be intentional, criminal penalties can apply.  In addition, for employees, an employer must keep Form I-9 on record for each employee to establish employment eligibility.  

Conclusion

Careful thought must be given to the proper classification of ag workers.  The issue is particularly acute with respect to seasonal ag workers.  Misclassifying can lead to serious consequences. 

June 19, 2019 in Regulatory Law | Permalink | Comments (0)

Monday, June 17, 2019

Eminent Domain and Agriculture

Overview

Eminent domain is the power of a state to take private property for public use consistent with the state’s constitution.  In many states, the power has been legislatively delegated to municipalities, government subdivisions, as well as private persons and private corporations.  Sometimes, the exercise of eminent domain intersects with agriculture, particularly when a pipeline is being put in or a wind energy company wants to erect industrial wind towers and landowners object.

How broad is the power of eminent domain?  How do the federal and state constitutions protect private property?  What does “public use” mean?  Can a private company exercise eminent domain? 

The exercise of eminent domain at the state level and the impact on agriculture – that’s the focus of today’s post.

The Power to “Take” Property

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.”  U.S. Const. 5th Amend.  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 Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” Just compensation” equals fair market value, generally in cash. For partial takings, “severance damages” may be awarded in addition to compensation for the part taken. See, e.g., Sharp v. United States, 191 U.S. 341 (1903).  The clause has two prohibitions: (1) all takings must be for public use; and (2) even takings that are for public use must be accompanied by compensation. 

What Does “Public Use” Mean?

Historically, the “public use” requirement operated as a major constraint on government action. For many years, the requirement was understood to mean that if property was to be taken, it had to be used by the public – the fact that the taking was “beneficial” was not enough. Eventually, however, courts concluded that a wide range of uses could serve the public even if the public did not, in fact, have possession. Indeed, so many exceptions were eventually built into the general rule of “use by the public” that the rule itself was abandoned. In 1954 and again in 1984, the U.S. Supreme Court demonstrated its willingness to define expansively “public use,” and confirmed the ability of a state to use eminent domain power to transfer property outright to a private party, so long as the exercise of the eminent domain power was rationally related to a conceivable public purpose.

In recent years, however, state courts have split on the issue of whether the government’s eminent domain power can be exercised to take private homes and businesses for the development of larger businesses by private companies. The argument is that the larger businesses enhance “economic development” that increases jobs and tax revenue in the area and that this satisfies the Fifth Amendment’s “public use” requirement.  However, in Bailey v. Myers, 206 Ariz. 224, 76 P.3d 898 (Ariz. Ct. App. 2003), the court determined that the condemnation of private property for redevelopment and sale to private parties was unconstitutional because the proposed use of the property was not public.  Similarly, the Michigan Supreme Court has ruled that the exercise of the eminent domain power is proper only if (1) the private entities involved are public utilities that operate highways, railroads, canals, power lines, gas pipelines, and other instrumentalities of commerce; (2) the property remains under the supervision or control of a governmental entity; or (3) the public concern is accomplished by the condemnation itself (i.e., blighted housing has become a threat to public health and safety). County of Wayne v. Hathcock, 684 N.W.2d 765 (Mich. 2004).

 In 2005, the Supreme Court clarified the difference among the states by again ruling that the eminent domain power can be exercised on behalf of a private party for economic development that benefits the public by increasing jobs and the tax base in the area. Kelo, et al. v. City of New London, 545 U.S. 469 (2005)Thus, if the exercise of eminent domain for a private party is done in conjunction with a development plan and does not involve obvious corruption, the taking will be allowed (and compensation will have to be paid).  While the Supreme Court’s Kelo decision was a landmark one, the Court clearly deferred to states on the issue.  At the federal level, if the condemnation of property is rationally related to a legitimate purpose of government (rather low hurdle to overcome) the taking will be approved.  But, any particular state could restrict the exercise of eminent domain on behalf of private parties if they so desired. 

In the wake of Kelo, several states either amended the state statutory process for proceedings involving condemnation of private property, or have amended the state constitution. Shortly after the Kelo decision, the Ohio Supreme Court has held that a taking providing nothing other than an economic benefit violates the Ohio constitution. City of Norwood v. Horney, 853 N.E.2d 1115 (Ohio 2006). The Ohio Supreme Court has previously held that Ohio landowners have a property interest in the groundwater underlying their land such that governmental interference with that right can constitute a taking. McNamara v. City of Rittman, 838 N.E .2d 640 (Ohio 2005)

What Does “Property” Mean?

The term “property” in the context of eminent domain, connotes all types of ownership interests – fee simple; partial interests; future interests; surface interests and even, perhaps, sub-surface interests.  For example, in The Edwards Aquifer Authority, et al. v. Day, et al. 369 S.W.3d 814 (Tex. Sup. Ct. 2012), the Texas Supreme Court unanimously held, on the basis of oil and gas law, that landownership in TX includes interests in in-place groundwater.  As such, water cannot be taken for public use without adequate compensation guaranteed by Article I, Section 17(a) of the TX Constitution. In the case, the plaintiffs were farmers that sought permit to pump underground water for crop irrigation purposes. The underground water at issue was located in the Edwards Aquifer and the plaintiffs' land was situated entirely within the boundaries of the aquifer. A permit was granted, but water usage under the permit was limited to 14 acre-feet of water rather than 700 acre-feet that was sought because the plaintiffs could not establish "historical use." The Court determined that the plaintiff's practice of issuing permits based on historical use was an unjustified departure from the Texas Water Code permitting factors.

Recent Case – The Dakota Access Pipeline

A recent opinion issued by the Iowa Supreme Court involving a pipeline seeking to exercise eminent domain, illustrates the intersection of the concept with agriculture.  In Puntenney, et al. v. Iowa Utilities Board, No. 17–0423, 2019 Iowa Sup. LEXIS 69 (Iowa Sup. Ct. May 31, 2019), the Court was faced with the Dakota Access Pipeline that sought to use eminent domain against farmland owners so that its pipeline could be completed.  The pipeline was piping oil from the oil fields of northwest North Dakota to southern Illinois. In 2014, the pipeline company filed documents with the Iowa Utilities Board (IUB) signifying its intent to lay a pipeline. The pipeline would traverse Iowa from the northwest corner to the southeast corner of the state, passing through eighteen counties over approximately 343 miles. At the end of 2014, the pipeline company held meetings in all eighteen counties.

In 2015, the pipeline company petitioned the IUB to start construction and sought “the use of the right of eminent domain for securing right of way for the proposed pipeline project” due to several landowners in the path of the pipeline refusing to grant an easement. The pipeline asserted such authority as a “common carrier” (a public or private entity that carries goods or people). In November and December of 2015, the IUB held hearings on the petition. Hundreds of people were present to give testimony for both sides. On March 10, 2016, the IUB issued a 159-page final decision and order. This order found that the pipeline would promote the public convenience and necessity, involve a capital investment in Iowa of $1.35 billion, and generate $33 million in Iowa sales tax during construction and $30 million in property tax in 2017. The order also noted that the pipeline had utilized a software program to lay the pipeline’s path to avoid critical areas, and that state law gave the pipeline the power to exercise eminent domain where necessary. After the IUB’s issuance of the order, several motions for clarification and rehearing were filed, which the IUB denied. Numerous parties sought judicial review of the order, and the parties were consolidated into a single case. On February 15, 2017, the trial court denied the petitions for judicial review.

On further review, Iowa Supreme Court addressed numerous issues. The Court determined that the Iowa Chapter of the Sierra Club had standing under state law on behalf of its affected members.  Those members, the Court noted under Iowa law, did not need to be landowners, just aggrieved or adversely affected by “agency action.”  On the legal issues, the Court looked at the standing of the parties. While the pipeline had already largely been constructed, the Court determined that the matter was not moot because the IUB retained the authority to impose other “terms, conditions, and restrictions” in the petitioners’ favor. On the IUB’s authority to issue a construction permit to the pipeline company based on the promotion of public convenience and necessity, the Court determined that the IUB’s decision to grant the permit was not “[b]ased upon an irrational, illogical, or wholly unjustifiable application of law” and its factual determinations were supported by “substantial evidence.” The Court noted that the evidence showed that the pipeline would reduce oil transport costs which would provide a lower price for petroleum products; transport oil more safely than rail; and provide secondary economic benefits to the citizens of Iowa. However, the Court did conclude that private economic development, by itself, is not a valid “public use.”  Thus, the Court rejected the U.S. Supreme Court’s holding in Kelo - joining Illinois, Michigan, Ohio and Oklahoma. The Court also did not find any violation of the statutory limit on the use of eminent domain with respect to farmland because the pipeline company was a common carrier under the IUB’s jurisdiction – an entity not statutorily limited on the use of eminent domain on farmland. Thus, the Iowa Constitutional provision on the use of eminent domain was not violated, nor was the Fifth Amendment of the U.S. Constitution. The Court also upheld the IUB’s determination that the pipeline route was proper and need not be rerouted based on speculative surface development, but did conclude that the pipeline be laid under existing field drainage tile where necessary.

Conclusion

The use of eminent domain at the state level and taking of private property at the federal level is a significant concern for many farmers and ranchers.  Certainly, the government must pay for what it takes (the issue of compensation is a topic for another day), but the extent to which a public use must be present is a key issue.  The recent Iowa decision sheds some light on the question – at least in Iowa. 

June 17, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Thursday, June 13, 2019

Prevented Planting Payments - Potential Legal Issues?

Overview

Weather conditions in the Midwest and the crop-growing regions of the Great Plains have made it likely that prevented planting payments will be utilized by a greater percentage of impacted farmers this summer.  If that happens, what are the regulatory and legal rules that kick-in that the recipient-farmer becomes subject to?

Prevented Planting Payments

The crop insurance final planting dates for corn have passed, but many areas of the soybean growing region (basically south of Minnesota and east of Nebraska) still have final planting dates for soybeans that remain but will expire soon.  A farmer must weigh options of changing crops, planting soybeans or simply not planting at all.   The economics of the situation will dictate the outcome.  Crop insurance companies can provide guidance on eligible acres and production practices and the applicable rules for prevented planting payments.  It’s also important to know what neighboring farmers are doing.  Being the only farmer in a particular area to utilize prevented planting payments is not a good thing.  If that happens, crop insurance adjusters and underwriters may could suddenly become reluctant to allowing payment on the claim.

Legal and Regulatory Matters

The governing statute on prevented planting payments is 7 U.S.C.  §1508a.  The language contained in that statute defines such things as “first crop,” “second crop,” and “replanted crop.”  It then lays out the options that a producer has when a “first crop” is lost and what the rules are when a “second crop” is planted.  Also, specified is the effect on actual production history and the area conditions that are required for payment.  Also, detailed are the exceptions for established double cropping practices, among other things.

As with participation in any federal government farm program, the participating farmer becomes subject to the regulatory and legal framework of the particular program.  That means that any dispute must be appealed to a final decision through the administrative process before redress can be available in the judicial system.  Failure to preserve the administrative record can result in a court being unable to provide a remedy even though it may be clear that the farmer should prevail.  That’s not a good position to be in. 

Recent Prevented Planting Court Decisions

It is common for a prevented planting dispute to end up in arbitration.  Two recent federal court opinions have concerned the operation of the arbitration process with respect to prevented planting payments.

A case from Nebraska involved the statutory time limit for the notice of application to vacate a crop insurance arbitration award and whether that statutory time limit could be waived.  In Karo v. NAU Country. Ins. Co., 901 N.W.2d 689, 297 Neb. 798 (2017), the plaintiffs farmed together in Holt County, Nebraska. They each obtained federally reinsured crop insurance policies that the defendant serviced.  In 2012, the plaintiffs submitted “prevented planting” claims under their crop insurance policies, claiming they were unable to plant corn on certain acres due to wet conditions. The defendant denied the plaintiffs’ prevented planting claims, finding that excessive moisture was not general to the surrounding area and did not prevent other producers from planting acres with similar characteristics.  Pursuant to the mandatory arbitration clause in the policies, the parties submitted their disputes to binding arbitration.

The arbitrator issued a final arbitration award in favor of the defendant on January 21, 2014. On May 15, 2014, the plaintiffs filed a petition for judicial review in the Holt County District Court seeking to vacate the arbitration award under §10 of the Federal Arbitration Act (FAA) which provides “the district court wherein the award was made may make an order vacating the award upon the application of any party to the arbitration. . . where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The district court granted the plaintiffs’ summary judgment motion and vacated the arbitration award finding that the arbitrator exceeded his powers and manifestly disregarded the law.

The defendant appealed, but failed to note in the appeal that the plaintiffs did not meet the three-month time limit for appealing. Consequently, because the defendant did not raise the issue of the violation of the three-month limit, the appellate court had to determine whether the time limit was jurisdictional in nature and, thus, could not be waived even if the parties do not raise the issue. According to the U.S. Supreme Court, absent such a clear statement, the restriction should be treated as non-jurisdictional in character. Section 9 of the FAA which enumerates the notice requirements for judicial confirmation expressly states that after service of proper notice “the court shall have jurisdiction over the adverse parties to the arbitration.” Consequently, the appellate court determined that this was a clear indication that Congress intended the statutory requirements for service notice of an application for expedited judicial review under the FAA to be jurisdictional in nature. The appellate court held that although different timeframes apply for serving notice under section 9 and section 12 of the FAA, there is no difference in the mandatory process by which the adverse party must be served with notice and no difference in the practical purpose for requiring such notice. Thus, it would make little sense for Congress to give clear jurisdictional weight to service notice in one context but not the other.

In addition, the appellate court saw no indication in the statute that Congress intended the notice requirements for expedited judicial review to be jurisdictional when a party seeks judicial confirmation, but not jurisdictional when a party seeks judicial vacatur or modification. Consequently, the court determined that whether an arbitrating party is applying for judicial review to confirm and award under section 9 or to vacate or modify an award under section 10 and 11, Congress intended that party’s failure to serve notice of the application within the mandatory time limits, would have jurisdictional consequences. Because the appellate court concluded that the three-month requirement is jurisdictional in nature and the plaintiffs failed to comply with the three-month requirement the district court did not have authority under the FAA to vacate the arbitration award.  Because the district court didn’t have jurisdiction to enter a judgment vacating the arbitration award under the FAA, the district court’s judgment was void.  That meant that the appeal from the district court’s judgment didn’t confer any appellate jurisdiction on the appellate court – the Nebraska Supreme Court.  The district court’s judgment was vacated and the appeal was dismissed for lack of jurisdiction. 

In a more recent case from North Carolina, an arbitrator’s award was vacated.  In Williamson Farm v. Diversified Crop Insurance Services, No. 5:17-cv-513-D, 2018 U.S. Dist. LEXIS 49249 (E.D. N.C. Mar. 26, 2018), the plaintiff, a farming partnership, bought crop insurance from the defendant for the 2013 crop year. The plaintiff intended to buy full crop coverage on all planted acres, and the defendant’s agents represented that the coverage purchased was full coverage. The plaintiff incurred a loss on one parcel, and was prevented from planting on two other tracts. The plaintiff filed claims for the losses under the policy and the defendant denied coverage on the basis that one tract on which the claim was made was listed under the policy as being in a different county and the tracts on which the plaintiff was prevented from planting crops were improperly claimed on an Farm Service Agency report. The defendant conceded that the errors were the fault of the defendant’s agents.

The plaintiff sought arbitration pursuant to the policy and was awarded coverage on the claims and treble damages. The arbitrator’s award was based on legal theories of negligence, breach of fiduciary duty, constructive fraud and violation of state (NC) law. The defendant challenged the arbitrator’s award as beyond the scope and authority of the arbitrator insomuch as the arbitrator engaged in interpreting the meaning, scope and applicability of the crop insurance policy at issue rather than obtaining an interpretation from the Federal Crop Insurance Corporation (FCIC).

The court agreed, noting that 7 U.S.C. §1506(l) pre-empts the arbitrator’s award unless FCIC procedures had been followed. The court also noted that the treble damages were based on the arbitrator finding a violation of NC law involving unfair and deceptive trade practices without first seeking a ruling from the FCIC. Accordingly, the court vacated the award as being beyond the arbitrator’s authority.  On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed.  Williamson Farm v. Diversified Crop Ins. Services, 917 F.3d 247 (4th Cir. 2019)

Conclusion

The decision whether to plant a crop or simply file for prevented planting payments is an important one.  In that decisionmaking process will be included the notion that this spring’s second round of market facilitation payments can only be received if a crop is planted.  That’s a key point.  But, once a claim is filed, the regulatory and administrative process kicks-in.  Those rules can be complex and confusing.  Another good reason to have an attorney specially trained in agricultural law matters at your side.

June 13, 2019 in Insurance, Regulatory Law | Permalink | Comments (0)

Thursday, May 30, 2019

Can Foreign Persons/Entities Own U.S. Agricultural Land?

Overview

During the significant economic downturn of early 2008 that continued through mid-2009 and then turned into an anemic recovery until 2017, foreign investors sought U.S. farmland as an alternative to stocks.  This has caused concern in some corners of ag. It’s an issue of national security – potentially disloyal parties should not be owning the U.S. real estate food base.  As of the end of 2016, the USDA reported that foreign individuals and entities held interests in 28.3 million acres of U.S. agricultural land.  That amounts to 2.2 percent of all privately held U.S. ag land and about one percent of all U.S. land.  This has also raised questions about whether there are laws are on the books that might protect American soil from being owned by foreign persons and interests.

Foreign ownership of agricultural land – that’s the topic of today’s post.

Historically

Under the English common law, aliens could not acquire title to land except with the King's approval.  The common law rule existed in England until it was abolished by statute in 1870.  However, by that time, the notion of limiting alien ownership of agricultural land was well imbedded in United States jurisprudence.  In the 1970s, the issue of foreign investment in and ownership of agricultural land received additional attention because of several large purchases by foreigners and the suspicion that the build-up in liquidity in the oil exporting countries would likely lead to more land purchases by nonresident aliens.  The lack of data concerning the number of acres actually owned by foreigners contributed to fears that foreign ownership was an important and rapidly spreading phenomenon.

Federal Law

In 1978, the Congress enacted the Agricultural Foreign Investment Disclosure Act (AFIDA).  7 U.S.C. 3501 et seq.  Under AFIDA, the USDA obtains information on U.S. agricultural holdings of foreign individuals and businesses.  In essence, AFIDA is a reporting statute rather than a regulatory statute.  The information provided in reports by the AFIDA helps serve as the basis for any future action Congress may take in establishing direct controls or limits on foreign investment in agricultural land and provides useful information to states considering limitations on foreign investment. The Act requires that foreign persons report to the Secretary of Agriculture their agricultural land holdings or acquisitions.  The Secretary assembles and analyzes the information contained in the report, passes it on the respective states for their action and reports periodically to the Congress and the President.

AFIDA requires reports in four situations:  (1) when a foreign person “acquires or transfers any interest, other than a security” in agricultural land; (2) when any interest in agricultural land, except a security interest, is held by any foreign person on the day before the effective date of the Act; (3) when a nonforeign owner of agricultural land subsequently becomes a foreign person; and (4) when nonagricultural land owned by a foreign person subsequently becomes agricultural land.

AFIDA defines “agricultural land” as “any land located in one or more states and used for agricultural, forestry, or timber production purposes...”.  7 U.S.C. § 3508(1).  The regulations define agricultural land as “land in the United States which is currently used for, or if currently idle, land last used within the past five years, for farming, ranching, or timber production, except land not exceeding ten acres in the aggregate, if the annual gross receipts from the sale of the farm, ranch, or timber products produced thereon do not exceed $1,000.  7 C.F.R. § 781.2(b).

The reporting provisions of the AFIDA require the disclosure of considerable information regarding both the land and the reporting party.  Individuals who are not U.S. citizens, and have purchased or sold agricultural land must report the transaction to the USDA’s FSA with 90 days of the closing.   The information must be reported on Form FSA-153, and failure to do so can result in civil penalties of up to 25 percent of the fair market value of the property.  The information to be disclosed includes: (1) the legal name and address of the foreign person; (2) the citizenship of the foreign person, if an individual; (3) if the foreign person is not an individual or government, the nature of the legal entity holding the interest, the country in which the foreign person is created or organized, and the principal place of business; (4) the type of interest in agricultural land that the person acquired or transferred; (5) the legal description and acreage of the agricultural land; (6) the purchase price paid, or other consideration given, for such interest; (7) the agricultural purposes for which the agricultural land is being used and for which the foreign person intends to use the agricultural property; and (8) such other information as the Secretary of Agriculture may require by regulation.  7 U.S.C. § 3501(a)(9) 

State Restrictions

While federal law requires informational reporting, some states have enacted statutes designed to restrict alien ownership of real property.  The state laws are generally of three types: (1) outright restrictions on the acquisition of certain types of property; (2) limitations on the total amount of land that can be acquired; and (3) limitations on the length of time property can be held.  Acquisition restrictions are common in the agricultural context, with the restriction generally applying only to the acquisition of farmland, as defined by the law.  Exceptions are common for the acquisition of land for conversion to non-agricultural purposes, land acquired by devise or descent, and land acquired through collection of debts or enforcement of liens or mortgages.  Acreage restrictions allow foreign investment, but place a premium on having an effective method of discovering and preventing multiple acquisition by the same individuals through the use of various investment vehicles.  Time restrictions generally do not apply to voluntary acquisition of the land by foreign investors, but are associated with involuntary acquisitions.  Some states require the disclosure of information concerning the land acquired and the investors.

Currently, thirty states restrict agricultural land acquisition by aliens.  Consider the following three states as examples of states that have more restrictive provisions:

 

  • Iowa - Presently, Iowa has the most restrictive limitation on nonresident alien ownership of any state in the United States. Iowa Code §9I.  The Iowa restriction provides that a “nonresident alien, foreign business, or foreign government, or an agent, trustee or fiduciary thereof, shall not purchase or otherwise acquire agricultural land in this state.” A major exception exists that allows restricted parties to acquire up to 320 acres of agricultural land for “an immediate or pending use other than farming” if the conversion is completed within five years, and annual reports on the progress of the conversion are made.  In addition, during the five-year period, the land can only be farmed on lease to a family farm, a family farm corporation, or an authorized farm corporation. The Iowa law also provides that agricultural land acquired by nonresident aliens by devise or descent must be divested within two years.  However, if the land is acquired by devise or descent from another nonresident alien, it need not be divested, unless the nonresident alien originally acquired the land in the six months preceding enactment of the law. 

 

  • Under the Minnesota law, no natural person (unless a United States citizen or a permanent resident alien of the United States) can acquire, directly or indirectly, any interest in agricultural land, including leaseholds. Minn. Stat. Ann. § 500.221.1.  Foreign corporations cannot, either directly or indirectly, acquire or obtain any interest in title to agricultural land unless at least 80 percent of each class of stock issued and outstanding or 80 percent of the ultimate beneficial interest of the entity is held, directly or indirectly, by United States citizens or permanent resident aliens.  Land can be acquired by devise, inheritance, as security for indebtedness, by process of law in the collection of debts, or by enforcement of a lien, but land acquired in these fashions must be divested within three years of acquisition.  Similarly, land or interests acquired in connection with mining and mineral processing operations are permissible but, pending development for mining purposes, the land can only be used for farming on lease to a family farm, family farm corporation or authorized farm corporation. Another exception exists for agricultural land operated for research or experimental purpose if the total acreage does not exceed that held on May 27, 1977.

 

  • Missouri law prohibits aliens and foreign businesses from acquiring by grant, purchase, devise or descent, agricultural land in the state. Mo. Rev. Stat. §§ 442.560-442.592.  Under the legislation, “alien” is defined as any person who is not a citizen of the United States and who is not a resident of the United States or its holdings.  Mo. Rev. Stat. § 442.566(2).  A “foreign business” is defined as “any business entity whether or not incorporated, including but not limited to corporations, partnerships, limited partnerships, and associations in which a controlling interest is owned by aliens.” Mo. Rev. Stat. § 442.566(4). Agricultural land is defined as any tract consisting of more than five acres whether inside or outside the corporate limits of any municipality, which is capable of supporting an agricultural enterprise including production of agricultural crops, livestock, poultry and dairy products. Farm leasehold interests of ten years or longer or a lease renewable at the lessee's option for greater than ten years are treated as the acquisition of agricultural land.  An exception exists for agricultural land acquired for immediate or potential use in non-farming purposes, but the exception is limited to that amount of land necessary for the nonfarm business operation.  While the nonfarm activity is being developed, the land may only be farmed under lease to a family farm unit, family farm corporation, or a registered alien or foreign business.  The Missouri legislation also contains a reporting requirement requiring any foreign person holding any interest (other than a security interest) in agricultural land to submit a detailed report to the Director of Agriculture within 60 days, except for land used for the production of energy-related minerals.  The information required to be submitted includes the name and address of the foreign person, the citizenship of foreign individuals, the type of interest in acquired land held or transferred, a legal description of the land, the purchase price or consideration paid or received, information concerning transferees, and the declaration of the type of agricultural activity engaged in or the nonfarm purpose for which the land was acquired.  Failure to file a required report is subject to civil fine.

Other states that restrict foreign interests in ag land in one form or another (some restrictions are very minor) are:  Alabama, Alaska, Arkansas, California, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Virginia, Washington, Wisconsin and Wyoming.

Conclusion

While there is no bar on foreign ownership of agricultural land at the federal level, a majority of states have some sort of restriction.  In many of these states, those restrictions are minor.  The states with the most extensive restrictions tend to be in the center of the country.  Other states have no restrictions at all or place the same restrictions on foreign individuals or entities as they do domestic ones.

May 30, 2019 in Regulatory Law | Permalink | Comments (0)

Thursday, May 16, 2019

Ag Antitrust - Is There a Crack in the Wall of the “Mighty-Mighty” (Illinois) Brick House?

Overview

The markets for the major ag products in the U.S. are highly concentrated.  This is the case in the markets for hogs and poultry as well as food processing and the market for genetic characteristics of corn, soybeans and cottonseed.  The retail sector involving many ag products is also highly concentrated. This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers.  In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food?  If so, what can a farmer or rancher do about it?  Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party?  The U.S. Supreme Court recently decided a case involving the Apple Co. and IPhone users that involves some of these concepts.  Does it have implications for farmers and ranchers?

That’s the topic of today’s post – the ag implications of the recent Supreme Court decision involving Apple Inc. and IPhone users.  I have asked Peter Carstensen, Professor of Law Emeritus at the University of Wisconsin School of Law to collaborate with me on today’s post.  Peter is a Senior Fellow of the American Antitrust Institute, and formerly worked in the antitrust division of the U.S. Department of Justice.  You will find rather interesting his thoughts on the implications of this week’s Supreme Court decision for agriculture. 

Antitrust and Indirect Purchasers

The 1977 U.S. Supreme Court decision.  The questions posed above are interesting.  From a legal standpoint, what can a farmer or rancher do if they believe that they have been improperly harmed by anticompetitive conduct?  In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured.  In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between. For example, assume manufacturers or food retailers operate in a concentrated market and agree to fix the prices of their products and then sell those products to wholesalers or retailers (their direct customers).  The wholesalers and retailers then resell the goods either to other entities down the supply chain or to end consumers (i.e., indirect purchasers).  It’s those indirect purchasers that the 1977 Supreme Court decision bars from seeking damages because the court feared that defendants would be exposed to multiple claims for recovery and there would be complications in apportioning damages among the plaintiffs in the supply chain. The same reasoning has been applied to farmer claims where the alleged source of harm is a downstream conspiracy by retailers. Indirectly injured parties can still seek injunctive relief, but private lawyers are unlikely to take such cases despite the statutory right to a reasonable attorney’s fee if they succeed.  Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)).  In these states, indirect purchasers can seek recovery under state antitrust laws. 

Recent Supreme Court opinion.  In Apple Inc. v. Pepper, et al., No. 17-204, 2019 U.S. LEXIS 3397 (U.S. Sup. Ct. May 13, 2019), IPhone users sued Apple Inc. over its operations of the App Store.  The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick.  The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018)On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote.  Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices.  Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer.  Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.

The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply.  In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly.  The opinion acknowledged that there could be some difficult issues as to damages because if Apple took a lower commission (mark-up) on the apps, the app seller might have raised its prices.  Hence, the actual damages to the buyers might be difficult to calculate.  Moreover, the opinion pointed out that the developers could have a claim for damages as a result of lost sales resulting from the excessive commission charge if they would have kept a lower retail price. 

The dissent argued that the better interpretation of Illinois Brick was to focus on the party setting the price, here the developers.  Hence, they alone should have standing to claim that any Apple monopoly had harmed them as the first victim.  The dissent stressed the problems of determining damages for both upstream and downstream victims given that the majority had held that both could sue.

Thus, the court was unanimous that the Illinois Brick rule should remain.  It rejected the argument of a group of 30 states set forth  in an Amicus Brief urging the Court to reverse Illinois Brick and allow indirect purchasers with damage claims to have access to the federal courts. However, the majority decision appears to reject the use of formal contracts to determine who is the first buyer.  This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct.  However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods.  In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments.  The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.

Implications for Agriculture

The following are Prof. Carstensen’s thoughts on the ag implications of the Pepper decision:

Because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law.  Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm.  This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages.  This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation.  In addition, the decisions have required that there be an adverse effect on consumers and not just producers.  The Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries.  In future PSA cases proof of harm to producers should establish “harm to competition.”  Of course, a better understanding of the PSA, consistent with its application in various contexts such as buyer defaults and false weighing, is that its purpose is to protect individual farmers from unfair and discriminatory conduct.  But that issue must await a court willing to interpret the PSA’s provisions correctly.

Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers).  The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer.  Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way.  In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer.  This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.

Conclusion

In Pepper, the Supreme Court reaffirmed the Illinois Brick rule.  However, it employs a functional analysis to identify the first buyer (seller).  This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings.  But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers.  Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages.  But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.

The Pepper decision is not much of a crack in the (Illinois) brick house.  A small dent perhaps, but not a foundational crack.  “Ow…a brick house.”…

May 16, 2019 in Regulatory Law | Permalink | Comments (0)

Friday, March 29, 2019

More Recent Developments in Agricultural Law

Overview

The developments in agricultural law and taxation keep rolling in.  Many of you have requested more frequent posts on recent developments, so today’s post is devoted to just a handful that are important to farmers, ranchers and the professionals that represent them.  In today’s post I take a look at a couple of recent farm bankruptcy cases, the use of a trust to hold farm and ranch property, and the rights of grazing permit holders on federal land.

Selected recent developments in agricultural law and tax – it’s the topic of today’s post.

Bankruptcy

Times continue to be difficult in agriculture with bankruptcy matters unfortunately taking on increased significance.  In one recent case, In re Wulff, No. 17-31982-bhl, 2019 Bankr. LEXIS 388 (Bankr. E.D. Wis. Feb. 11, 2019), the debtor filed Chapter 12 bankruptcy and submitted a complete list of creditors. One of the creditors did not receive notice of the bankruptcy because of a bad address but became aware of the debtor’s bankruptcy upon attempting to collect on their account after the proof of claim deadline had passed. There were multiple plans submitted to the court that were rejected for various reasons, but every plan submitted accounted for the creditor that did not have notice. Ultimately, the debtor’s plan was confirmed. After confirmation, the creditor attempted to file a proof of claim and the trustee objected. The creditor maintained that it filed as soon as receiving notice of the proceedings. The court allowed the claim, but that the creditor had not established grounds for an extended timeframe to file the proof of claim. Even so, the court noted that the debtor’s initial plan and amended plans all accounted for the creditor’s claim. All the plans were consistent with the creditor’s late-filed proof of claim. Thus, the court confirmed the debtor’s reorganization plan with the late-filed proof of claim upon a finding that it was consistent with the plan. 

In another bankruptcy case, In re Smith, Nos. 17-11591-WRS, 18-1068-WRS, 2019 Bankr. LEXIS 234 (Bankr. M.D. Ala. Jan. 29, 2019), the debtor filed bankruptcy in 2017. At the time of filing, the debtor had a 2006 loan secured by his farmland that had matured. Instead of foreclosing, the creditor bank and the debtor negotiated a renewal in 2012. Another creditor, an agricultural cooperative, held a 2009 lien. In determining priority, the court held that the bank’s liens were prior to the cooperative’s liens. The court determined that the 2012 renewal of the bank note, even if the bank new of the cooperative’s lien, did not cause the bank to lose priority. While the court noted that sometimes an advancement on an existing mortgage causes the underlying mortgage to lose priority over subsequent liens, the court determined that the 2012 renewal was not an advancement. There was no evidence that additional funds were loaned to the debtor by the bank. In addition, the court determined that the bank’s lowering of the interest rate on the obligation did not cause the creditor to lose priority. 

Trusts and Estate Planning

Trusts are a popular tool in estate planning for various reasons.  One reason is that a trust can help consolidate farming and ranching interests and aid in the succession planning process.  The benefit of consolidating farm and ranch property in trust was the issue of a recent Wyoming case.  In re Redland Family Trust, 2019 WY 17 (2019), involved a family that has been involved in contentious litigation over a family trust. The case had been before the Wyoming Supreme Court on multiple occasions. The trust was created in 1989 and amended in 1995. The amendment provided for the appointment of a successor trustee; always required the service of two trustees; created a marital trust for the survivor of the settlors; and revised the buyout provision. The grantors and their five children made contributions to the trust. Upon the death of one of the grantors in 2007 one of the children was appointed as co-trustee.  Ligation arose when the surviving grantor’s property was not conveyed to the trust and then again involving removal of the trustees, and an appointed trustee moved to have the trust terminated due to the administrative difficulties to administer, family dysfunction, and because the trust no longer served its purpose. The defendants, (including the co-trustee that resigned) asserted that termination was moot and moved to have the new co-trustee removed.

The trial court did not remove the co-trustee and found that the trust was still valid. The trial court found that the co-trustee did not violate any fiduciary duties and that the defendants failed to show gross and willful misconduct to justify her removal. Further the trial court found that the co-trustee’s claims that the trust was invalid should have been raised in the original trust challenge. The trial court determined that the primary reason for the trust (to keep the lands and leases together for the Redland family) had not been frustrated and that the trust remained administratively functional and was not "unlawful, contrary to public policy, or impossible.

On appeal, the Wyoming Supreme Court affirmed. The Court determined that the trust still had a purpose - to keep the ranch holdings together to conduct business. Even though the other purpose of minimizing tax consequences had failed, consolidation of ranch holdings remained a legitimate purpose. The Court also determined that the co-trustee did not violate her fiduciary duties, her duties of impartiality or loyalty, and that her actions did not amount to gross and willful misconduct. In addition, the Court found that the duty of impartiality did not require the trustee to treat all beneficiaries fairly, but simply to act in the best interest of the beneficiaries and equally defend the intentions of the settlors. While the Court could find no precedent with respect to the duty of loyalty the Court held that merely seeking termination of the trust was not a breach of loyalty. In addition, the Court determined that hostility between parties did not warrant removal. 

Rights of Grazing Permittees

In the U.S. West, the ability to graze on federally owned land is essential to economic success.  An understanding of those rights is essential, and many legal battles in the West involve associated rights and responsibilities on federal land.  One of those issues involves the erection of improvements.  In Johnson v. Almida Land & Cattle Co., LLC, 2019 Ariz. App. Unpub. LEXIS 140 (Ariz. App. Ct. Jan. 31, 2019), the defendant owned a grazing allotment and was permitted to graze cattle on the allotted Forest Service land in Arizona. Consistent with the grazing permit, the defendant erected an electric fence on the allotment. In June 2011, the plaintiff collided with the fence while riding an off-road motorcycle, when he turned off a Forest Service road onto an unmarked, unimproved “two-track route” which the fence crossed. The plaintiff brought sued for negligence and the defendant moved for summary judgment on the basis that it owed no duty of care to the plaintiff. The trial court granted the motion, agreeing that there was no duty of care under the Restatement (Second) of Torts.

On appeal, the appellate court determined that the issue was whether a federal permittee owes a duty of care to the public with respect to construction of improvements on the land. Determination of that issue, the appellate court reasoned, was dependent on state law. On that point, the appellate court found that a criminal statute will establish a tort duty if the statute is designed to protect the class of persons in which the plaintiff is included, against the risk of the type of harm which has in fact occurred as a result of its violation, regardless of whether the statute mentions civil liability. The relevant AZ criminal statute held that a person commits a misdemeanor of public nuisance if that person knowingly and unlawfully obstructs a “public highway,” “public thoroughfare,” “roadway” or “highway.” The appellate court held that this public nuisance statute prohibiting the obstruction of certain types of pathways, also created a tort duty in those who erect improvements that impact those paths. Based on this interpretation, the court held that AZ law establishes a public policy giving rise to a tort duty with respect to the obstruction of certain types of public pathways. Consequently, a permittee on federal land owes a duty of care to the public when it erects an improvement across a publicly accessible route. However, the appellate court held that the facts were insufficient to determine, as a matter of law, whether the route at issue qualified as a “public highway,” “public thoroughfare,” “roadway” or “highway.” Consequently, the appellate court reversed on the duty of care issue and remanded to determine if the route fell within the scope of the relevant statutes. 

Conclusion

Agricultural law is a “goldmine” of issues that landowners, producers and their legal and tax counsel must stay on top of.  It’s a dynamic field.  In a few more weeks, I will dig back into the caselaw for additional key recent developments.

March 29, 2019 in Bankruptcy, Business Planning, Estate Planning, Regulatory Law | Permalink | Comments (0)