The opinion of the court was delivered by: GREEN
[EDITOR'S NOTE: The page numbers of this document may appear to be out of sequence; however, this pagination accurately reflects the pagination of the original published documents.]
MEMORANDUM OPINION - July 22, 1987
JOYCE HENS GREEN, United States District Judge
On June 5, 1987, as a result of a two-day hearing, this Court preliminarily enjoined the defendant from suspending plaintiffs' participation in the defendant's farm programs (production adjustment program and Conservation Reserve Program) for 1987 and hereafter for the duration of the preliminary injunction, as a nine-person farm operation. Opinion and Order, June 5, 1987, hereafter Op. I, provided a 22-page explication of this action, which is fully incorporated herein as part of this opinion. Final hearing on the merits, consisting exclusively of argument, took place as scheduled July 16, 1987. No additional testimony or documentation was offered. The parties rested on the prior submissions, the administrative record, the record of the preliminary injunction hearing (and objections raised thereto), and the brief supplemental filings. During the course of argument on July 16, however, certain matters were focused and clarified.
Plaintiffs have continued to disavow any interest in recovery in this Court of any sums past due for prior crop years. Framing the instant claim as "one seeking redress for arbitrary and capricious agency action and violations of their due process rights," Op. I, slip op. at 12, they seek now a declaration of permanent eligibility for receipt of price supports and Conservation Reserve Program (CRP) benefits as a nine- rather than a one-person farm, which declaration would have the prospective effect of entitling them to federal benefits and could serve as a predicate for money damages against the government in the Claims Court.
Since 1981, as detailed in Op. I, plaintiffs have participated in one or more of USDA's farm programs. For price support programs, 7 U.S.C. § 1308 sets a total limit of $ 50,000 which any one person may receive annually from USDA. They participated in the price support programs initially in 1981 as a nine-person farm, but upon reconsideration the county committee reduced plaintiffs to a four-person entity. The Eschs accepted this determination. In 1983 and 1984 plaintiffs were paid benefits pursuant to their four-person farm application for those years. Their federal income tax returns reflected for corresponding years the same four-person partnership. The four brothers who constituted the four-person partnership received a warranty deed in mid-1984 from the seller of the property which conveyed the farm and its assets to them. In the Fall, 1984, all plaintiffs executed a partnership agreement among themselves in which the farm was sold to the new nine-person partnership with all its equipment, liabilities and other assets. The September 1, 1984 deed reflecting this transaction was recorded substantially later, on January 9, 1987.
In 1985 and 1986 plaintiffs received price support program advanced deficiency payments pursuant to their applications as a nine-person partnership. Their federal income tax returns for those years reflected the nine-person partnership.
Prior to entering into the CRP contract, binding the Eschs and the government for ten years, the partnership of nine in 1986 had approached the Douglas County Bank & Trust Co. with the prospect of bidding on the CRP announced that year. After researching the matter, the bank (secured lender for the partnership) agreed to allow the partnership to bid.
The plaintiffs entered the CRP after their bid for participation was approved and a formal contract was executed by the plaintiffs on March 14, 1986, and the Commodity Credit Corporation on April 10, 1986. The execution of this contract occurred two years after plaintiffs entered into the formal nine-person partnership in late 1984.
As a result of this contract for the ten-year period October 1, 1986 to September 30, 1995, the government, in effect, "rented" 12,367.4 acres of plaintiffs' land, which plaintiffs agreed to take out of production. Representing the share of each owner as either .1112 (Patrick) or .1111 for all others, the contract was signed by Patrick J. Esch for himself and by him for each of his eight siblings "POA."
The 1987 CRP contract covers 498.5 acres, similarly "rented" for ten years, with similar share percentages and form of execution by the Eschs. The Eschs executed this contract on August 13, 1986; the government's representative signed it on October 8, 1986.
During May 1986 the Baca County ASCS office requested that a farm operating plan (ASCS-561-B) be completed by the Eschs. This "561" was a newly revised form; neither it, nor predecessor forms, had previously been required by this county committee nor used, of course, by the Eschs or any other local farmer-applicants. The appropriate 561 was finally received by the Eschs in mid-June, unaccompanied by instructions. Neither guidelines nor guidance were provided plaintiffs in their completion of the document. There was no suggestion of agency interpretation. The Eschs simply responded to the specific questions. Two are relevant to our inquiry: the first related to the percent share of all members of the partnership "having an interest in the entity." Each of the nine partners responded by attributing to himself/herself 11.1 percent interest, save for Patrick Esch who noted his interest at 11.2 percent. The more critical question on the 561 asked as to each of five categories: capital, land, equipment, labor, management, "What contribution is each member making to the entity?" No partner claimed contribution towards labor. Each partner, except Patrick Esch at 11.2 percent, reflected his/her contribution in each category as 11.1 percent. See Administrative Record (AR) 294-296). Seven - nine months later the agency would characterize these responses as not only untimely (form received in mid-June was submitted in early August), but, more significantly, as "incorrect", "inaccurate," "a device designed to evade the payment limitation rules," "false," finding "bad faith," and strongly suggesting intentional misrepresentation and fraud. Subsequently, at the preliminary injunction hearing, the Eschs testified, persuasively and credibly, that, in their intent and belief, the shares of the nine siblings were equal and commensurate to the contributions made by that partner and the others. The ascribed percentages of interest and contribution correspond precisely to those reflected on the CRP contract. Executed by the Eschs, the 561 was submitted to the county committee on August 4, 1986. On August 18, the Baca County ASCS office approved their application, determining nine separate persons for payment limitation purposes.
The Office of Inspector General (OIG) had commenced its audit of the Baca County ASCS office and plaintiffs' entity, the L. J. Farms Partnership, eight days earlier, on August 10, 1986. The payments expected by the plaintiffs in October 1986 were suspended pending determination of the audit. Plaintiffs did not alone bear the impact of this decision. It caused not only substantial unrest among plaintiffs' creditors, but profound disbelief at the government agency's actions; some creditors avowed faith in the plaintiffs' credibility. In the business judgment of one substantial creditor the Eschs' farm operation was indeed a nine-person partnership, a fact relied upon when that bank gave its agreement to the plaintiffs' participation in the CRP contract. That contract became part of the bank's collateral just as the crop proceeds would have been had the land not been taken out of production and had the partnership not destroyed 6,300 acres of wheat pursuant to that contract which the bank had financed through operating loans. Estimating that it lost $ 550,000 given up in reliance on the CRP contract ($ 300,000 for the value of the wheat and $ 250,000 deficiency payments from these crops), the Douglas County Bank & Trust Co. wrote the State Colorado ASCS on November 4, 1986:
. . . L. J. Farms operated as a nine member partnership for all of 1985, so the USDA should have had plenty of time to make such a determination and we should have been reasonably assured that such a determination had already been made. We know that they are a legal nine man partnership because of the partnership agreement that they gave us in 1984 . . . .
Bluntly stated, we relied on the signed CRP contract for our approval of the destruction of the crops and the forfeiture of the deficiency payments. L. J. Farms is now unable to plant a wheat crop for 1987, therefore, two years of income is lost because of our reliance on the contract. [AR 307-308.]
By letter of March 16, 1987 the plaintiffs were advised by the state committee that the Agricultural Stabilization and Conservation Service's Deputy Administrator for State and County Operations (DASCO) in Washington, D.C. had concurred with the OIG's determination that the partnership should be considered one person for payment limitation purposes "for the reasons contained in audit number 03099-99-KC." DASCO did not then elaborate on the reasons for this determination. Later, in June 1987, representatives from DASCO averred (at the preliminary injunction hearing) that the case was reviewed on appeal "as if it has never been looked at before" (Tr. 240, 241); yet, Thomas Von Garlem, the Assistant Deputy Administrator, had earlier testified on March 31, 1987, at the hearing on the application for temporary restraining order, that "we have some record that would indicate that they didn't tell the whole truth all the time." Tr. (TRO) at 43; id. at 47. ". . . There was definitely some suggestions of [fraud or collusion] . . . . We have not looked at it yet, at that," id., 47. DASCO did not notify plaintiffs that it suspected fraud or collusion prior to Von Garlem's testimony at this hearing, even though at least one of the audit's recommendations (which DASCO is not obligated to consider) was related to fraud. Id. 47-48. The audit was strongly critical of the local committee for its failure to adequately follow the judgment limitation program regulations and provisions as they applied in 1984 to plaintiffs and for its failure to substantiate the validity of the operation or to determine the actual number of persons involved in the partnership in 1984. (AR 362.) The audit also noted that the U.S. Attorney's Office had declined to prosecute this matter in favor of administrative remedies (AR 372).
It was not until the appeals hearing in April, 1987 that plaintiffs were notified formally which of their actions had prompted the agency to suspend them from participation in any current price support/CRP program. They were then advised that:
. . . your clients presented an ASCS-561-B with incorrect information pertaining to the contributions of land, labor, capital, equipment, and management. The record also indicates that the ASCS-561-B information was first requested in May 1986, although it was not completed and submitted to the county office until August 4, 1986. Since your clients failed to provide timely or accurate information for a proper person determination, we have determined that no relief is justified for any payments otherwise earned in 1987.
April 15, 1987 decision of DASCO, at 4.
The May 6, 1987 reconsideration decision reiterated that there was no basis for granting relief for 1987, as DASCO had for 1985 and 1986. For those earlier years DASCO had determined not to hold plaintiffs responsible for the agency's error, through its county committee, in not getting the 561 filled out for 1985 and early 1986. The Baca County ASCS office had "failed to obtain the proper documents, including farm operating plans, from [the Eschs] prior to the time crops could have normally been planted in the area." May 6, 1987 decision of DASCO, at 1.
As for 1987, however, DASCO asserted that the Eschs were put on notice as early as May 1986 that their farming operations and eligibility for payment were to be the subject of the OIG audit to be completed. (It did not begin until August 10, 1986.) DASCO observed that the correct form was given to the Eschs in mid-June 1986 which, when completed:
Id. at 1. But, although this latest DASCO decision contended the Eschs should have been forewarned by May 1986, and therefore not acted to their detriment,
it is clear that the Eschs were only notified in mid-March 1987, at the earliest, of the agency's determination that the nine individual partners' contributions were not commmensurate with their claimed equal shares of the proceeds. Tr. 137.
Nonetheless, despite the clear and unmistakable language of the April and May appeals' decisions, the defendant's representatives now testify that the agency is not accusing the Eschs of lying but still believes they "hadn't told the whole truth"; that it is not accusing the plaintiffs of "fraud" or a "device to deceive" but remains convinced that the plaintiffs failed to provide accurate and adequate documentation to the county committee. This failure, it is contended, misled "the agency in general," Tr. 255; "the document  that was presented did not reveal the facts as the records revealed the facts," Tr. 257. In responding to the Court's inquiry as to where the "entire fault" could be fixed, Assistant Deputy Administrator Von Garlem testified that the fault resulted from the plaintiffs' representations that their shares were commensurate with their equal contributions.
Title 1308(5)(A) of Title 7 directs the Secretary of Agriculture to issue regulations defining "person" for purposes of payment limitations; those regulations, appearing in 7 C.F.R. § 795.7, in essence state that members of a partnership may be considered "persons" for payment limitation purposes if they each contribute a commensurate share of land, labor, management, equipment, or capital to the partnership. For "person" determination it is sufficient that any one of the foregoing criteria is met.
DASCO determined that only a series of paper transactions had occurred with no substantive change to the farm operation when the nine-person partnership was formed in 1984, "since the same land is being farmed by the same people with the same equipment, . . . through these series of events the contribution by individual members were not commensurate with the claimed shares of the proceeds," (April 15, 1987 decision at 2-3).
Without determining whether its reasoning could otherwise withstand scrutiny, the agency decision at least offers some facts relatively detailed, as to the components of land and capital; it presents some rationale as to why the agency declared plaintiffs' nine-person farm operation as one person for payment limitation purposes. But mention of the other categories -- management and equipment -- is sparse indeed, without demonstrated factual basis and without analysis for the agency's conclusion.
It is most important to understand what has happened here. The agency's final decision, prepared by Carolyn Burchett (the assigned program specialist and hearing officer for the administrative appeals hearing), for the approval of one of three persons: Assistant Deputy Administrators or the Deputy Administrator, stated that:
A further agreement was made that the various partners would fulfill specific roles ranging from general management to transportation to insurance to farm technician. Our review indicates that these specific roles do not result in equal management responsibility for the partners.
April 15, 1987 decision of DASCO, at 3.
Nonetheless, on examination at the June 1987 hearing, the following ensued:
A. (Mr. Von Garlem): I have not gotten that close to the record to make that assertion one way or the other.
The Court: So you are not contending that, but you are not not contending that. You are ...