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Lillemoe v. United States Department of Agriculture

United States District Court, District of Columbia

September 25, 2018

BRETT LILLEMOE, et al., Plaintiffs,



         The 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.

         I. BACKGROUND [1]

         A. The Program and “Rented Trade Flow” Transactions at Issue

         FAS-a 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.[2] 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.

         In what 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.

         But, 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.

         B. FAS's Knowledge of and Response to Rented Trade Flow Transactions

         FAS 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.

         During 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.

         After 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 program. Id.

         C. FAS's and Rowse's Treatment of Lillemoe and GTR Under the Program

         Lillemoe 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. ¶ 43.

         On 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.

         Lillemoe 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.

         Based 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.

         Lillemoe 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. ¶ 61.

         Over 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.

         In 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.

         In 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.

         D. Doster's Treatment of Lillemoe and GTR Under the Program

         In 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. ΒΆ 82. Doster investigated Lillemoe's ...

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