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Enterprise National Bank v. Vilsack

June 5, 2009


Appeal from the United States District Court for the District of Columbia. (No. 1:06-cv-01344).

The opinion of the court was delivered by: Karen Lecraft Henderson, Circuit Judge

Argued March 26, 2009

Before: HENDERSON, TATEL and KAVANAUGH, Circuit Judges.

Enterprise National Bank n/k/a Enterprise Bank of Florida (Enterprise) made a loan guaranteed in part by the United States Department of Agriculture (Agriculture). When the borrower defaulted, Agriculture declined to honor its guarantee based on Enterprise's allegedly negligent loan servicing. After Enterprise obtained a favorable decision via Agriculture's administrative appeals process, Agriculture paid a portion of Enterprise's loss claim. Enterprise filed suit in district court seeking an order compelling payment of its loss claim in full. On cross-motions for declaratory judgment, the district court granted Agriculture's motion. Enter. Nat'l Bank v. Johanns, 539 F. Supp. 2d 343, 347 (D.D.C. 2008). For the reasons set forth below, we affirm the district court's judgment.


Agriculture's Rural Business-Cooperative Service (RBS) administers the Business and Industry Guaranteed Loan Program (B&I Program). See Business and Industrial Loan Program, 61 Fed. Reg. 67,624 (Dec. 23, 1996).*fn1 Under the B&I Program, Agriculture guarantees loans made by private lenders to rural businesses "to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities." 7 C.F.R. § 4279.101(b); see also 61 Fed. Reg. at 67,624. The private lender is responsible "to ascertain that all requirements for making, securing, servicing, and collecting the loan are complied with." 7 C.F.R. § 4279.1(b). Agriculture guarantees payment to the lender of "[a]ny loss sustained by the lender on the guaranteed portion [of the loan], including principal and interest" or "[t]he guaranteed principal advanced to or assumed by the borrower and any interest due thereon," whichever is less. Id. § 4279.72(a)(2)(i) & (ii). To receive payment, the lender must submit a final report of loss to Agriculture with supporting documentation. Id. § 4287.158(c). Agriculture reviews the report and, upon approval, makes a loss payment to the lender within 60 days. Id. § 4287.158(c)(6), (g). Under the B&I Program, Agriculture's guarantee is "unenforceable by the lender to the extent any loss is occasioned by the violation of usury laws, negligent servicing, or failure to obtain the required security." Id. § 4279.72(a).*fn2

On July 19, 1999, Enterprise entered into a $5 million loan agreement with Catfish, INT., Inc. (Catfish) as the borrower and Erwin David Rabhan, president of Catfish, as the guarantor. Catfish was obligated to use the loan proceeds for the development of a catfish processing and distribution facility in Georgia. Agriculture, acting through its Georgia State Director, guaranteed 75% of the loan ($3.75 million) under the B&I Program.*fn3 The Loan Note Guarantee incorporated the language of 7 C.F.R. § 4279.72(a), supra note 2. Loan Note Guarantee at 2, Joint Appendix (JA) 63 (Oct. 1, 1999) (Loan Note Guarantee). It also defined "negligent servicing" as "the failure to perform those services which a reasonably prudent lender would perform in servicing . . . its own portfolio of loans that are not guaranteed." Id. Catfish subsequently defaulted. Agriculture's Office of Inspector General (OIG) investigated Catfish's president and its general contractor and discovered that they had "conspire[d] to defraud [Agriculture and Enterprise] out of a $5 million guaranteed B&I loan they were not entitled to receive." OIG Report of Investigation at 1, JA 755 (Feb. 4, 2003) (OIG Report). Catfish's president as well as the general contractor both pleaded guilty to one count of conspiracy and were both sentenced to a term of imprisonment.

In November 2002, Enterprise reported a $4,213,434 loss to the State Director and requested $3,160,075 (75% of the loss) under the guarantee. On May 22, 2003, the State Director denied Enterprise's claim in full based on Enterprise's allegedly negligent servicing. He relied on the OIG Report's finding that Enterprise's "lack of due diligence and negligence allowed for fraudulent actions by [Catfish]" and that Enterprise "did not comply with several conditions" of the guarantee. Letter from F. Stone Workman, State Director, USDA Rural Development, to R. Penny Rodgers, Vice President, Enterprise Bank, at 2, JA 208 (May 22, 2003).

Enterprise appealed the State Director's decision to the National Appeals Division (Division). See 7 U.S.C. § 6996(a) (right to appeal adverse decision to Division); 7 C.F.R. § 11.1(6) (adverse decision includes Rural Business-Cooperative Service decision).*fn4 After a hearing, the Division hearing officer upheld the State Director's decision. Enterprise sought the Division director's review. The director may uphold, reverse or modify the hearing officer's determination or remand all or a portion of the determination for further proceedings if the hearing record is inadequate or new evidence has been submitted. 7 C.F.R. § 11.9(d)(1). The Division director remanded Enterprise's case because the hearing officer had not complied with certain procedural regulations. On December 2, 2005, another hearing officer issued a fifteen-page Remand Appeal Determination (RAD) containing, inter alia, the following findings of fact. First, "[Enterprise] failed to ensure that its borrower contributed $2,950,000 to the project, and this occasioned a loss of $2,950,000." Remand Appeal Determination at 13, Enter. Nat'l Bank, No. 2004S000154 (Dec. 2, 2005) (RAD). Second, "[Enterprise] did not ensure that its borrower built [a maintenance shed and guardhouse valued at $80,000 and] . . . the absence of the facilities occasioned a loss of $80,000." Id. at 12. The hearing officer concluded the Discussion portion of the RAD as follows: "RBS's decision is erroneous because RBS has not correctly calculated the extent to which the alleged negligence and other factors occasioned a loss." Id. at 15. The Determination section of the RAD concluded:

Under 7 C.F.R. § 11.8(e), [Enterprise] has the burden of proving the adverse decision is erroneous by a preponderance of the evidence. [Enterprise] has proven that [Agriculture's] decision is erroneous.

This is a final determination of the Department of Agriculture unless a party to the appeal files a timely request for review.

Id. Neither party appealed the RAD and it became the Division's final determination. See 7 C.F.R. § 11.8(f) (hearing officer's determination final if not appealed); 7 C.F.R. § 11.9(a)(1) (participant must appeal hearing officer determination within 30 days after receipt), (2) (agency must appeal hearing officer determination within 15 days after receipt). "On the return of a case to an agency pursuant to the final determination of the Division, the head of the agency shall implement the final determination not later than 30 days after the effective date of the notice of the final determination." Id. § 11.12(a). "Implement" is defined as "the taking of action by an agency of the Department in order fully and promptly to effectuate a final determination of the Division." Id. § 11.1.

On January 12, 2006, Enterprise's counsel contacted Agriculture's Office of General Counsel by telephone regarding the loss claim. Letter from John J. Richard, Attorney, Powell Goldstein LLP, to Mark Lee Stevens, USDA Office of General Counsel, JA 26-27 (Jan. 12, 2006) (memorializing telephone conversation). According to Enterprise's counsel, he "discussed [with the General Counsel's office] . . . that [Agriculture was] currently processing [Enterprise's] loss claim for payment in full plus accrued interest." Id. at 1, JA 26. On March 3, 2006, however, the State Director notified Enterprise that Agriculture would pay only $956,252.19 under the guarantee. He explained that Enterprise's loss claim had been reduced by $3,030,000 based on Enterprise's negligent servicing, citing the hearing officer's findings that Enterprise had caused a loss of $2,950,000 based on Catfish's failure to make the required equity injection and another $80,000 loss based on Catfish's failure to build the maintenance shed and guardhouse.

On July 28, 2006, Enterprise filed a complaint in the district court pursuant to 7 U.S.C. § 6999*fn5 seeking a declaratory judgment and an order compelling Agriculture to "process[] the remainder of [Enterprise]'s loss claim for payment in full plus accrued interest without delay." Compl. at 19, Enter. Nat'l Bank, 539 F. Supp. 2d 343 (No. 06-cv-1344). Enterprise alleged that the State Director had "refused to comply with the [Division's] final determination," which, Enterprise claimed, required Agriculture to pay the full loss claim. Id. The parties filed cross-motions for declaratory judgment and the ...

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