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Day v. Natural Resources Conservation Service

United States District Court, D. New Mexico

November 19, 2018

JAMES M. DAY, Petitioner,
v.
NATURAL RESOURCES CONSERVATION SERVICE, Respondent.

          MEMORANDUM OPINION AND ORDER

         This matter is before the Court on Petitioner-Appellant James M. Day's Appellate Brief in Chief filed on June 30, 2016 pursuant to the judicial review provisions of the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701-706. See ECF No. 16 (“Pet'r's Op. Br.”) The dispute between Day and the Natural Resources Conservation Service (“NRCS” or “Agency”) centers on whether NRCS properly terminated Day's Conservation Stewardship Program (“CSP”) contract and required Day to repay $160, 000 in program benefits that he received under the contract. See Joint Status Report, ECF No. 11. Having reviewed the Administrative Record and considered the parties' arguments in the petition and briefs, the Court finds that NRCS acted in accordance with the law in determining that Day was required to refund all CSP payments made to him, and therefore affirms the Agency's decision. The Court additionally affirms the National Appeals Division Director's Determination that Day is not entitled to equitable relief.

         I. FACTUAL BACKGROUND[1]

         The Court summarizes the factual and procedural history of this case, describes the relevant standard of review under the APA, and then performs its analysis.

         Day is a rancher in New Mexico and a franchisee owner of rent-to-own stores. See Administrative Record at AR-000119. He had a general sense of his business affairs such as income and losses, but not a detailed accounting-level knowledge of such information. Id. at AR-000059. Day therefore relied on an accountant to manage his taxes and financial affairs and to calculate his Adjusted Gross Income (“AGI”) and to prepare and amend his tax returns. Id.; id. at AR-000119. With his accountant's help, Day routinely amended his tax returns to carry back losses from one tax year to a prior tax year. Id. at AR-000059.

         In 2006 and 2007, Day's franchise business was not performing well, so he sold several of his stores back to the franchisor.[2] Id. This sale to the franchisor resulted in a large capital gain for Day in 2007. Id.

         In September 2009, NRCS contacted Day and encouraged Day to enroll in the CSP program. Id. “The purpose of CSP is to encourage producers to address priority resource concerns and improve and conserve the quality and condition of natural resources in a comprehensive manner by … [u]ndertaking additional conservation activities; and [] [i]mproving, maintaining, and managing existing conservation activities.” 7 C.F.R. § 1470.1[3]; See AR-000119 (citing 7 C.F.R. § 1470.1(b) and (d) (2010)). “NRCS provides financial and technical assistance to eligible producers to conserve and enhance soil, water, air, and related natural resources on their land.” Conservation Stewardship Program, 81 FR 12573-01, 2016 WL 892497. CSP encourages land stewards like Day “to improve their conservation performance by installing and adopting additional activities and improving, maintaining, and managing existing activities on eligible land.” Id.

         An applicant applying for CSP funds was required to have an average adjusted gross nonfarm income under $1 million for the three tax years preceding the most current tax year, otherwise the applicant would be ineligible to receive CSP funds. See 7 C.F.R. § 1400.500(d). In October 2009, Day completed an AGI Statement for the 2010 program year for which he was applying. See AR-000060. Day was required to complete the AGI Statement to verify that he was eligible to participate in the CSP program. Id. at AR-000120. On the AGI Statement, Day indicated that his nonfarm AGI was $1 million or less for tax years 2006, 2007, 2008. Id.

         Day completed the AGI Statement while participating in an interview with an NRCS representative. Id. He told the representative that he might have a problem with the AGI limitation for 2007 based on the sale of his franchise stores. Id. Without describing the sale, Day told the NRCS representative that in 2007 he had a large, one-time asset sale with a resulting capital gain. Id. at AR-000060. Day asked the representative whether capital gains are included in the calculation of AGI, but the representative said that she did not know. Id. Day said that he would have to check with his accountant to answer that question. Id.

         Based on information from his accountant, Day believed that his losses after 2007 would be carried back through amended tax returns, thereby reducing his AGI for 2007. Id. Day believed that the anticipated reduction of his tax liability for 2007 would allow him to comply with the nonfarm AGI limit for the CSP. Id. So Day informed the representative that his current business losses would offset the capital gain from 2007 and that he thought he would be “okay” under the AGI requirements. Id. The representative encouraged him to complete the AGI paperwork if he thought he would be okay, and Day signed the document without discussing it with his accountant. Id. By signing the AGI certification, Day acknowledged he had read the definitions on the second page of the form, which included the definitions for “nonfarm income”; certified that the information in the certification was true and correct; and certified that the income certifications were consistent with tax returns filed in with the IRS. Id. at AR-000181.

         A different agency, the Farm Services Agency (“FSA”) initially determines a participant's compliance with the CSP AGI limitations through a self-certification such as the one Day completed. Id. at AR-000060. FSA does not initially review the information on an AGI certification provided by a participant, but FSA may audit a participant's compliance with the AGI limits. Id. This audit may occur well after the parties execute the CSP contract. Id. NRCS relies on FSA to determine a participant's compliance with the AGI limit. Id.

         In early 2010 Day and NRCS entered into the CSP contract covering over 9, 000 acres of Day's land. Id. The CSP contract included the average nonfarm AGI limitation, stating that a participant whose average adjusted gross nonfarm income exceeded $1 million would not receive any benefit from the contract. Id. at AR-000148. The CSP contract required Day to construct and install game ladders for water storage tanks and drinkers, annually map the salt and mineral blocks around the drinkers, develop a rotation plan for the mineral blocks, and to annually change and recycle the used oil from his tractor. Id. at AR-000119. In exchange for these activities NRCS would pay Day $40, 000 per year from 2010 through 2014, for a total of $200, 000. Id. at AR-00061. Day incurred no out-of-pocket expenses for constructing and installing the game ladders or mapping the salt and mineral blocks, although he did incur unspecified out-of-pocket expenses for driving to Clovis, New Mexico to have the used tractor oil recycled. Id. It is undisputed that before NRCS terminated the contract, Day fully complied with his end of the contract, and thus NRCS paid him $40, 000 annually from 2010 through 2013, for a total of $160, 000. Id. at AR-000119 - 000120.

         In 2012, FSA asked Day to provide additional income information for the 2010 tax year. Id. at AR-000120. FSA made this inquiry because in April 2012, Day's accountant sent a letter to FSA indicating that Day could be over the applicable AGI limited based on his tax returns. Id. at AR-000061. More specifically, the accountant's letter indicated that Day's average nonfarm AGI for the 2010 program year was $2, 799, 283 based on a nonfarm AGI of $1, 742, 115 in 2006, $8, 661, 764 in 2007 and a loss of $2, 006, 031 in 2008. Id. at AR-000062. Day received no response from FSA or NRCS about his accountant's April 2012 letter. Id.

         In 2012 and 2013 Day and an NRCS continued to certify that Day completed the required conservation practices for those years and that the practices met the CSP's requirements. Id. NRCS paid Day $40, 000 each of those years. Id.

         In 2014, FSA audited Day's compliance with the AGI limitations for program year 2010. Id. at AR-000120. The FSA reviewed Day's tax returns and other information Day provided and determined that Day's nonfarm income exceeded the $1 million nonfarm AGI limitation for conversation programs. Id. at AR-000120 - 000121. In a March 2014 letter to Day, FSA told Day that he was ineligible for 2010 program payments and that he was required to refund any CSP payments he had received for the 2010 program year. Id. at AR-000121. FSA notified NRCS that Day's income exceeded the AGI limit. Id.

         In response, NRCS terminated the CSP contract between it and Day. Id. The NRCS' May 2014 letter to Day referenced FSA's finding that Day did not meet income eligibility requirements at the time of the contract obligation. Id. at AR-000005; AR-000062. The letter informed Day that he was obligated to repay to NRCS $160, 000 in previous payments he received under the CSP contract and $16, 000 in liquidated damages. Id. at AR-000005. The Agency terminated the CSP contract pursuant to 7 C.F.R. § 1470.6(a)(4), which says a program participant must be compliant with the AGI provisions. Id. at AR-000275. The Agency said that under 7 C.F.R. § 1470.36(b) and (c)(4) it had no latitude to reduce the refund demand of $160, 000. Id. The letter also advised Day that he might be eligible for equitable relief under the NRCS' relief authority at 7 C.F.R. § 635. Day's lawyer responded to the Agency's decision by letter on June 17, 2014. Id. at AR-000212.

         In September 2014 the NRCS and Day engaged in mediation. Id. at AR-000121. NRCS agreed to waive the $16, 000 in liquidated damages. Id. Otherwise NRCS' position concerning refund of the $160, 000 from Day remained unchanged. Id.

         II. PROCEDURAL BACKGROUND

         In November 2014, Day's lawyer mailed to NRCS a letter containing an analysis of the case and a proposed solution. Id. at AR-000063. The letter stated that Day's accountant confirmed that because of the 2007 sale of Day's store, Day's average adjusted nonfarm income exceeded the AGI limit for 2010. Id. at AR-000014. The letter asserted that Day “acted in good faith” at the time he completed the application. Id. Reasoning that 7 C.F.R. § 1470.27[4] gave NRCS discretion to reduce its refund amount, the letter proposed that NRCS reduce its refund demand to $40, 000 Id. at AR-000014 - 000015.

         On November 6, 2014, NRCS rejected Day's interpretations of this and other regulations, upheld the termination of his CSP contract, and demanded refund of $160, 000 it paid to Day under the contract. Id. at AR-000016. The Agency explained that it lacked authority to waive its demand for full repayment of the contract payments because those payments were improperly given to Day in the first place. Id.

         On November 10, 2014, Day appealed the Agency's decision to the National Appeals Division (“NAD”) of the United States Department of Agriculture. Id. at AR-000010. In February 2015, an Administrative Judge found that Day did not intentionally, fraudulently, or negligently misstate his nonfarm AGI on the 2010 AGI statement. Id. at AR-000062. The Administrative Judge characterized Day's misstatements as “erroneous.” Id. The Administrative Judge made additional findings that Day did not breach the CSP contract other than being ineligible to participate in the CSP because of the AGI limitation issue, and that Day otherwise performed his end of the contract to perform the conservation improvement activities. Id. at AR-000064. Nevertheless, the Administrative Judge affirmed the Agency's decision to terminate Day's CSP contract, reasoning that Day was never eligible to participate in the CSP program in the first place because his nonfarm AGI exceeded $1 million for the 2010 program year. Id. at AR-000064 - AR-000065. Specifically, the Administrative Judge explained that AGI eligibility is determined once based on the year in which the Agency approved the CSP contract, which was 2010. Id. The AGI determination then applies for the entire term of the contract. Id. at AR-00065 (citing 7 C.F.R. § 1400.500(e)(2008)).

         The Administrative Judge made the following three additional conclusions of law. First, Day was required to refund all CSP payments made to him because Day erroneously represented that he satisfied the CSP's nonfarm AGI limit, and that under the governing regulations a participant who erroneously represents any facts affecting a CSP determination is not entitled to contract payments and must refund all payments received. Id. at AR-000066. Second, the Agency properly denied Day's request of the Agency to waive or reduce the full refund demand of $160, 000. Id. at AR-000067. The Administrative Judge reasoned that Day's erroneous representation of fact concerning his AGI eligibility for 2010 program necessitated refund of all payments under the relevant regulations, and that the applicable regulations, the Agency's Conservation Program Manual, and the CSP contract itself permitted no exceptions to this requirement. Id. Third, the Administrative Judge rejected Day's assertion that the Agency failed to consider his request for equitable relief. Id. at AR-000068. Although Day did submit a responsive letter to the Agency's termination letter within the appropriate 30-day period to appeal, the Administrative Judge concluded that the letter only asked for the Agency to reconsider its position and requested a full waiver of liquidated damages; the letter did not request equitable relief. Id. The Administrative Judge additionally developed a factual record to enable a reviewing tribunal to decide whether to grant or deny equitable relief.[5]

         On March 11, 2015 Day appealed the Administrative Judge's decision to the Director of the National Appeals Division. Id. at AR-000077. Day also made a direct request to the Director for equitable relief. Id. On November 4, 2015, the Director affirmed the Administrative Judge's decision on the merits in all respects and denied Day's direct request for equitable relief. Id. at AR-000118 - 000128.

         After having gone through two layers of administrative review, on November 16, 2015, Day sought judicial review of the Director's determination in this Court under the APA and 7 U.S.C. § 6999 (“[a] final determination of the Division shall be reviewable and enforceable by any United States district court of competent jurisdiction ….”) Day initially filed a complaint requesting review of an erroneous decision by the Agency. See Pet'r's Compl., ECF No. 1. The complaint alleged a violation of due process and alternatively requested the Court to set aside the Agency's actions and deem its conclusions as arbitrary, capricious, and an abuse of discretion, or otherwise not in accordance with law and unsupported by substantive evidence. See Id. ¶¶ 7-8, at 2. In response, the Agency correctly pointed out that challenges to federal agency actions are not subject to the use of normal civil trial procedures because reviews of agency actions in district court must be processed as appeals. See Resp't's Resp. to Compl., ECF. No. 6 (citing Olenhouse v. Commodity Credit Corp., 42 F.3d 1560, 1580 (10th Cir.1994)). Day therefore filed this Brief in Chief as an appeal from the Director Review Determination issued by NAD. See Pet'r's Op. Br. at 4.

         Because the Agency is correct that reviews of agency action must be treated as appeals, the Court will interpret Day's complaint as a “Petition for Agency Review” and his Brief in Chief as being a memorandum in support of that petition. In his Statement of Issues for review by this Court, Day articulates his points of appeal as follows[6]:

1. Did the NRCS act in an arbitrary, capricious fashion, or otherwise abuse its discretion when it determined that it did not have the authority to decide whether to reduce its refund demand?
2. Was the Director's decision to deny equitable relief based on a finding for which there was no ...

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