United States District Court, District of Columbia
L. FRIEDRICH UNITED STATES DISTRICT JUDGE.
Foreign Agricultural Service (FAS) administers a federal
program designed to finance U.S. agricultural exports.
Plaintiffs Brett Lillemoe and GTR, LLC bring this suit
against FAS under the Administrative Procedure Act (APA) and
the equal protection component of the Fifth Amendment,
asserting that FAS intentionally applied program regulations
and policies to them unequally for no adequate reason. The
plaintiffs also bring Bivens claims against two
individual FAS employees, Phillip Rowse and Jonathan Doster,
asserting that they personally treated the plaintiffs
differently from other program participants without a
rational basis. Before the Court is the defendants'
Motion to Dismiss Amended Complaint under Rule 12(b)(6) of
the Federal Rules of Civil Procedure. Dkt. 30. For the
reasons that follow, the Court will grant the motion in part
and deny it in part.
The Program and “Rented Trade Flow” Transactions
component of the United States Department of Agriculture
(USDA)- administers the Export Guarantee Program (GSM-102) on
behalf of the Commodity Credit Corporation (CCC). First Am.
Compl. ¶¶ 4, 7, Dkt. 25; see also 7 U.S.C.
§ 5622; 7 C.F.R. § 1493, et
seq. The stated purpose of the program is to
finance the commercial export of U.S. agricultural products,
particularly to developing countries. First Am. Compl. ¶
8. Rather than finance exports directly, however, the program
guarantees private loans extended by U.S. banks to foreign
banks in connection with qualifying agricultural shipments.
Id. ¶ 9.
FAS considers a “typical” program transaction, a
registered U.S. exporter first negotiates an export sale with
an importer in a qualifying region and then applies to FAS
for a GSM-102 guarantee based on the sale. Id.
¶ 13 (citing then-current regulations attached to the
plaintiffs' complaint as Exhibit A). FAS in turn
approves, modifies, or rejects the application. Id.
¶ 15. If the application is approved, a foreign bank
issues a letter of credit (LC) in favor of the U.S. exporter,
id. ¶ 16, and then refinances its obligation
under the LC with a loan from a U.S. bank, id.
¶ 17. That loan-from the U.S. bank to the foreign
bank-is what the program guarantees. Id. Thus, if
the foreign bank fails to meet its payment obligations under
the loan, the U.S. bank can submit a notice of default to CCC
and recover a portion of its losses. Id. Thanks to
this guarantee, the U.S. bank can offer below-market interest
rates to foreign banks interested in financing agricultural
exports, thereby fulfilling the program's stated purpose
of facilitating exports to qualifying countries.
according to the plaintiffs, the vast majority of GSM-102
transactions do not follow the “typical”
structure. Instead, two separate and distinct transactions
occur: first, a physical sale of goods between a shipper (or
“Actual Exporter”) and foreign importer (or
“Consignee”), and second, a purely financial or
paper “sale” between a “GSM Exporter”
and “GSM Importer.” Pls.' Opp'n at 4,
Dkt. 33 (citing First Am. Compl. ¶ 21). The GSM Exporter
and GSM Importer are the entities identified in the guarantee
application submitted to FAS, but they play no role in the
actual export of physical goods. Id. (citing First
Am. Compl. ¶ 19). Rather, to qualify for the guarantee,
they use photocopies of shipping documents obtained through a
practice called “renting trade flows.”
Id. (citing First Am. Compl. ¶ 19). In a rented
trade flow transaction, the GSM Exporter acquires the right
to use bills of lading (BLs) and other shipping documents
from an Actual Exporter for a fee. Id. This
“rental” is accomplished through a simultaneous
and offsetting sale and repurchase by which the underlying
goods are sold from the Actual Exporter to the GSM Exporter,
from the GSM Exporter to the GSM Importer (who are often
“related companies”), and from the GSM Exporter
back to the Actual Exporter, without the goods ever
physically changing hands. First Am. Compl. ¶¶ 21,
23; see also Id. Ex. B., Dkt. 25-2 (diagram
representing rented trade flow transaction). Afterward, the
GSM Exporter uses the paper trail from these transfers to
obtain a GSM-102 guarantee based on the “sale”
between the GSM Exporter and the GSM Importer. Pls.'
Opp'n at 4 (citing First Am. Compl. ¶ 21). The GSM
Importer then applies to a foreign bank for a
“synthetic LC” that does not actually finance the
purchase of physical goods. First Am. Compl. ¶ 19-21;
see also Id. Ex. B. Although a physical shipment of
goods must still ultimately underlie each rented trade flow
transaction, the entities benefited by the GMS-102 guarantee
have nothing to do with that shipment other than
“renting” the right to use the shipping documents
after the fact. Id. at 3-5 (citing First Am. Compl.
¶¶ 18, 24). Through rented trade flows, U.S. banks
can issue program-guaranteed-and thus below-market-loans to
foreign banks for purposes unrelated to the actual purchase
of agricultural exports. Id. at 3-4 (citing First
Am. Compl. ¶¶ 18-20). And the GSM Exporter and GSM
Importer receive a fee from the foreign bank for
“facilitating the foreign bank's access to
unrestricted, low interest rate funds.” First Am.
Compl. ¶ 21.
FAS's Knowledge of and Response to Rented Trade Flow
discovered the widespread use of rented trade flows under the
program early on. Cargill Incorporated, a program
participant, disclosed the structure and use of rented trade
flows to FAS as early as 2002, and FAS neither objected nor
gave any indication that rented trade flows were not allowed.
Id. ¶ 25. Thereafter, FAS vetted and
approved thousands of rented trade flow transactions over the
course of thirteen years. Id.
that time, GTR repeatedly disclosed its own use of synthetic
LCs and rented trade flows to FAS. Id. ¶ 26. On
May 12, 2009, Brett Lillemoe, on behalf of GTR, met with Mark
Rowse, the Director of FAS's Credit Program Division, and
Peter Bonner, a USDA attorney, to explain the structure of
rented trade flow transactions in detail. Id. ¶
27. In the meeting, Lillemoe provided Rowse and Bonner with a
detailed diagram of a proposed rented trade flow transaction,
which “clearly illustrate[d]” that the Actual
Exporter and Consignee “were not directly involved in
the GSM-102 transaction” and that “the GSM
transaction would result in the foreign bank obtaining a loan
from the U.S. bank at below-market interest rates due to the
GSM guarantee.” Id. ¶¶ 28-29;
see also Id. Ex. B. Further, Lillemoe explained that
“nearly all, if not all, ” program transactions
concerning Russia and Eurasia used the rented trade flow
structure presented in the meeting. Id. ¶ 29.
the meeting, FAS “fully vetted” the use of rented
trade flows internally. Id. ¶ 30. FAS's
legal counsel stated in internal communications that rented
trade flows did not violate program regulations. Id.
And FAS approved multiple GTR guarantees identical to those
described in the May 2009 meeting without communicating any
concerns to Lillemoe. Id. In addition, FAS paid out
claims on defaulted program transactions that used rented
trade flows in 2002, 2004, 2008, 2009, and 2010. Id.
¶ 32. And the structure of those transactions would have
been abundantly clear to FAS when it investigated the claims.
Id. ¶ 33. FAS was also made aware of the
rampant use of rented trade flows when it solicited industry
comments regarding the program in 2008. Id.
¶¶ 35-37. Cargill-a major program
participant-submitted comments in which it explained the
prevalence of rented trade flow transactions, complained
about the impact of rented trade flows on pricing, admitted
to using rented trade flows itself in certain markets, and
warned that the widespread use of rented trade flows might
not withstand congressional scrutiny given the purpose of the
FAS's and Rowse's Treatment of Lillemoe and GTR Under
participated in the program, through GTR and various other
entities, for over fifteen years, and GTR became a registered
exporter in 2007. Id. ¶ 39. FAS eventually
suspended Lillemoe-or GTR, or both (the complaint does not
specify)-from the program in May 2015 following
Lillemoe's criminal indictment in February 2015.
Id. ¶ 39. But before then, from 1999 to 2012,
FAS approved over 500 applications by GTR and affiliated
entities, and all of those applications relied on rented
trade flows. Id. ¶ 41. GTR and its affiliates
were subject to multiple compliance reviews during this
period and never received a complaint. Id. ¶
October 31, 2012, the plaintiffs' relationship with FAS
changed when Rowse contacted Lillemoe to request additional
information regarding the transaction structures underlying
fifteen of GTR's then-recent and pending program
applications. Id. ¶¶ 45-46. Rowse
expressed concern with the fact that the Consignee listed on
the bills of lading differed from the importer identified on
the GSM-102 guarantee, and he requested additional
information about the role each entity played in the
transaction. Id. ¶ 45. This request
“surprised” Lillemoe because he had just spoken
with another GSM exporter who submitted similar applications
on the same day, but had not faced similar scrutiny.
Id. ¶ 47. Rowse approved the other
exporter's applications within two weeks, without inquiry
or delay. Id.
responded to Rowse's inquiry, explaining that the
transactions mirrored those discussed with Rowse and the USDA
attorney back in 2009 and that a majority of program
participants used the same structure. Id. ¶ 48.
Still, Rowse denied the applications on the ground that the
GSM Importer listed on the application had no relationship
with the Consignee specified on the bills of lading.
Id. ¶¶ 49-50. And he made clear that
“any future applications utilizing the same structure
will also be denied.” Id. ¶ 50 (quoting
id. Ex. G., Dkt. 25-7). Lillemoe and GTR declined to
appeal Rowse's decision because they concluded that FAS
simply no longer approved of the rented trade flow structure
reflected in the applications. Id. ¶ 51.
on the position articulated by Rowse, Lillemoe withdrew three
pending applications in January 2013 that used rented trade
flows, and he requested a refund of application fees totaling
$122, 719.50. Id. ¶ 53. FAS refused to refund
the fees. Id.
later learned that FAS had continued to approve applications
using rented trade flows from other participants, without
inquiry or delay. Id. ¶ 59. On February 20,
2013, Rowse met with Lillemoe and reiterated FAS's
position that GTR's use of rented trade flows was
impermissible under program regulations. Id.
¶¶ 59-60. Rowse relayed FAS's concern that
“two or more parties might each apply for a GSM-102
guarantee based on the same shipment or BL, ” and he
explained that only “linear” transactions, in
which the GSM Importer has a direct link to the Consignee,
would be approved. Id. ¶ 60. When
Lillemoe told Rowse that he had heard from other participants
that FAS was still approving applications that did not comply
with that structure-including applications from competitors
Bunge and Cargill-Rowse responded that FAS was “having
the same conversations with all parties.” Id.
the next few months, Lillemoe realized that FAS and Rowse
“purposefully had misled him” and continued to
approve applications based on rented trade flows with no
relationship between the GSM Importer and the Consignee.
Id. ¶ 63. In fact, Lillemoe discovered that a
new entity, Grove Services, LLC, had executed a program
transaction for one of GTR's former customers using not
only the exact structure proposed by GTR and rejected by
Rowse but also using GTR's forms and changing only the
letterhead. Id. ¶ 64. To confirm that Grove
Services' approval was not a mistake, Lillemoe's
business partner wrote Rowse on July 20, 2013 to tell him
what happened, but never received a response. Id.
¶ 65. FAS continued to approve rented trade flow
transactions involving other applicants throughout 2013,
2014, 2015, and continuing into 2016. Id. ¶ 67.
No other applicant was ever subject to the restrictions on
rented trade flows that Rowse and FAS imposed on Lillemoe and
GTR. Id. ¶ 78.
addition to prohibiting Lillemoe and GTR from using rented
trade flows, FAS also made it difficult for them to
participate in the program using the “linear”
structure Rowse required. In January 2013, GTR had applied
for three South America guarantees using a linear structure.
Id. ¶ 56. FAS would normally confirm such
guarantees within one week or less. Id. But in this
case, FAS delayed for over two weeks, causing GTR's
customer, Bancocolombia, to grow concerned that FAS would not
approve the transactions at all. Id. ¶¶
56-57. GTR tried to reassure Bancocolumbia and persuade Rowse
to act quickly on the applications, but he did not succeed.
Id. ¶ 57. Rowse eventually approved the
applications on January 10, but by that time Bancocolumbia
had executed the transactions with one of GTR's
competitors. Id. ¶¶ 57, 58.
another instance, Lillemoe had several Russian transactions
pending with Deutsche Bank that also conformed with the
“linear” structure FAS purportedly required.
Id. ¶ 70. Without consulting Lillemoe, Rowse
informed Deutsche Bank of potential
“discrepancies” in GTR's documents, casting
doubt on their authenticity and causing Deutsche Bank to
abandon the transactions and terminate its business
relationship with Lillemoe and GTR. Id. ¶¶
72, 74. Afterward, Rowse refused to refund the fees paid in
connection with these “sabotaged” Deutsche Bank
guarantees. Id. ¶ 75.
Doster's Treatment of Lillemoe and GTR Under the
2015, Lillemoe learned that another individual FAS employee,
Jonathan Doster, had also treated GTR and Lillemoe
differently from other participants. Id. ¶ 81.
Although FAS had determined that rented trade flow
transactions did not violate program regulations in 2009,
Doster audited Lillemoe's business associate, Pablo
Calderon, in search of evidence that Lillemoe and Calderon
had rented trade flows, which Doster considered
“fraud” despite the fact that nearly all major
GSM Exporters used the same structure. Id. ¶
82. Doster investigated Lillemoe's ...