February 14, 2024
XXXXX
XXXXX
XXXXX
Re: NAD Case No. 2023E000160
This letter responds to the Request for Director Review of
an Appeal Determination issued by a National Appeals Division (NAD)
Administrative Judge which you submitted in the above-captioned case on behalf
of XXXXX (Appellant). In the
Appeal Determination, the Administrative Judge concluded that the Farm Service
Agency (FSA) state committee did not err when it adjusted the number of Appellant’s
eligible hog sales under the Spot Market Hog Pandemic Program (SMHPP) from
10,764 to 411.[1] He further concluded that the state
committee did not err when it determined Appellant knew or had reason to know
that part of the SMHPP payment it received from FSA for its hog sales was erroneously
paid and therefore an exception to the Finality Rule applied such that FSA was
not barred from seeking repayment of the amount erroneously paid. Based on my
review of the record, as more fully explained below, I uphold the Administrative
Judge’s determination that 10,353 (10,764 minus 411) hog sales were ineligible
for payment under the SMHPP.[2] However, I
reverse his determination that an exception to the Finality Rule applies. The state committee erred when it decided
Appellant knew or had reason to know the payment for 10,353 hog sales was “potentially
erroneous” and therefore an exception to the Finality Rule existed. No exception to the Finality Rule
exists, and FSA is barred from seeking repayment of the overpaid SMHPP benefits. In light of my
decision, your request for equitable relief for Appellant is moot and I will
not address it in this decision.
Background of the Case
Appellant is a family-owned corporation raising hogs, as well as corn and soybeans, on about 2,000 acres. Appellant’s hog operation is a “farrow-to-finish operation,” with approximately 1,500 sows and 20,000 pigs on the farm year-round. Appellant has 10 full-time employees as well as part-time and seasonal labor. Appellant has had a contract for many years with XXXXX (XXXXX), a local meat packing plant, for the delivery of up to 450 hogs per week as agreed upon by Appellant and the XXXXX a week in advance of each delivery. Appellant was paid on delivery according to a formula contained in the contract, which the Administrative Judge determined was as follows: “LM-HG 200 Report 9 number ave. 5 Day roll 6.0/2.0 Loin Depth 0.8-1. 8 number is addition to the weighted average. Day of Kill. 5.9 QPM.” Appeal Determination at 3. LM-HG 200 Report 9 is a report published by USDA on the price of hogs on the domestic market. The Administrative Judge noted that “Neither the Appellant’s witnesses nor the Agency’s witnesses were able to satisfactorily explain how the formula actually worked or what its terms fully represented.” Id.
Negotiated sale means a sale by a producer of hogs to a packer
under which the base price for the hogs is determined by seller-buyer interaction
and agreement on a delivery day. The hog industry also refers to a negotiated
sale as a cash or spot market sale. The hogs are scheduled for delivery to the packer
not more than 14 days after the date on which the hogs are committed to the packer.
A negotiated formula sale is also considered a negotiated sale.
Negotiated formula sale means a hog or pork market formula
sale under which:
(1) The formula is determined by negotiation on a
lot-by-lot basis; and
(2) The hogs are scheduled for delivery to the packer not
later than 14 days after the date on which the formula is negotiated and the
hogs are committed to the packer.
See 86 Fed. Reg. 71003
(Dec. 14, 2021).
Appellant submitted an application
under the SMHPP program on December 15, 2021. It claimed 10,764 hogs sold through a
spot market sale from April 16, 2020, through September 1, 2020. See Agency Record at 55. The next day, December 16, 2021, an FSA
county office employee telephoned Appellant’s bookkeeper and read a
definition of eligible hog sales to the bookkeeper. There is a variance between the
definition that the Administrative Judge found the employee read and the
definition you assert on Director Review that the employee read. I do not need to address that difference
in light of my decision. Appellant’s bookkeeper told the FSA
employee she believed Appellant’s sales met the definition that was read. The FSA county
committee approved Appellant’s application that same day for $540,000 in
SMHPP compensation based on the 10,764 hogs claimed by Appellant.
On December 21,
2021, FSA halted all approvals and disapprovals of SMHPP payments nationwide
because of confusion about what sales were eligible. The FSA National Office followed-up by notifying
FSA state offices, including Appellant’s, in early January 2022 that county
offices must conduct spot checks requiring producers who had been paid under
the SMHPP program to produce supporting documentation. Appellant’s county office contacted
it by email on January 6, 2022, and letter dated March 17, 2022, providing
Appellant with FSA’s updated information on FSA’s definition of
eligible hog sales and requesting verification. Appellant promptly responded to both
inquiries.
The county office provided the information received from Appellant, including Appellant’s contract with the packing plant, to the National Office and to USDA’s Agricultural Marketing Service (AMS). FSA was using the AMS to review producers’ contracts and inform FSA whether the contracts were for eligible negotiated or negotiated formula sales under the SMHPP program. After reviewing Appellant’s contract, the AMS concluded:
Documentation indicates the base price is determined through a formula using grain and hog markets as inputs to determine a contract price which is updated on a monthly basis. Documentation also indicates agreement covers a period of time during which hogs are delivered on a recurring schedule. As described, this is an example of an “Other market formula purchase” which means a purchase of swine by a packer in which the pricing mechanism is a formula price based on any market other than the market for swine, pork, or a pork product. The term “other market formula purchase” includes a formula purchase in a case which the price formula is based on 1 or more futures or options contracts. As such, these sales do not reflect eligible purchase types including negotiated and negotiated formula.
Agency Record at 227 (emphasis added).
The county committee issued a decision on April 27, 2022, in which it determined the supporting documentation submitted by Appellant did not substantiate that Appellant sold the number of hogs on the spot market that it claimed (10,764). It adjusted the number of eligible hog sales to XXXXX. The basis for the county committee’s decision was that Appellant’s hog sales to the XXXXX were classified as “LMR code 3 and LMR Code 4 sales, which is not considered an eligible spot market sale.” Agency Record at 125. Prior to its deliberations, the county committee had been instructed in March 2022 by the FSA state office to find out from SMHPP program applicants the AMS Livestock Mandatory Reporting (LMR) codes used by their packers.[3] Appellant’s bookkeeper, at the county office’s request, found out from the XXXXX that it used LMR codes 3 and 4 for its hog purchases from Appellant. See Agency Record 52. Using that information, the county committee determined in its deliberations that “Hogs sold to [XXXXX] are LMR code 3 & 4 and are deemed ineligible per 1-PDAP Amend. 6 subpar. 383C. Hogs sold to individuals and XXXXX went directly to butcher as mature market hogs and are deemed eligible.” Agency Record at 135.
The county committee’s reliance on the LMR codes came about as a result of a second NOFA published by FSA in March 2022. See 87 Fed. Reg. 15358 (Mar. 18, 2022). FSA determined to publish the second NOFA in order to revise and clarify the original NOFA in response to stakeholder concerns and additional USDA analysis. The second NOFA added that ineligible hog sales include “Any other types of sales identified by the AMS Livestock Mandatory Reporting (LMR), including: Formulas linked to futures or formulas based on the cutout based on the wholesale meat prices, such as other market formula and swine or pork market formula . . .” Id., at 15360. At about the same time, FSA amended its Handbook 1-PDAP to require that FSA contact producers, such as Appellant, who had applied for SMHPP benefits prior to March 18, 2022, and provide the producers with information regarding program revisions and “. . . request supporting documentation to verify the sales of hogs through a spot market sale.” Handbook 1-PDAP, para. 385C (Amend. 7, May 10, 2022). The same handbook revision also clarified that if a producer sells hogs to a packer who reports to LMR, then the only sales to that packer that are eligible under the SMHPP program are those coded 1 or 10 by the packer and sales identified by other LMR codes are not negotiated sales and therefore not eligible.[4] Id.
The county committee also determined that Appellant provided incorrect or inaccurate information concerning its eligibility. Specifically, it found Appellant could not substantiate the number of hogs it claimed it sold through a spot market sale. The FSA county committee therefore determined that an exception to the Finality Rule applied, and it would seek repayment of an unspecified amount from Appellant.[5]
You appealed the county committee’s decision to the state committee. During the appeal, the state committee sought guidance from the National Office on how to apply the Finality Rule. The National Office instructed the state office that the Finality Rule did not apply to Appellant’s case because Appellant knew or had reason to know that the determination was erroneous within the ninety-day time frame of the application for benefits being filed. The state committee then requested the National Office to inform it as to the exact date Appellant knew or should have known the determination was erroneous. See Agency Record at 208. The National Office replied that the date was January 6, 2022, the date the county office sent the email to Appellant notifying Appellant that a spot-check was being conducted and requesting further information. The state committee then upheld the county committee decision adjusting the number of Appellant’s eligible hog sales to XXXXX without discussion or elaboration. It also determined that “Finality rule cannot apply in this case since the participant knew or had reason to know the determination was potentially erroneous within the 90 [day] time frame of the application for benefits being filed.” Agency Record at 220 (emphasis added). It added that January 6, 2022, the date that the county office sent Appellant an email requesting supporting documentation, was the date that Appellant knew or should have known the determination was “potentially erroneous.” Id. (emphasis added).
Appeal
to NAD.
Appellant appealed the state committee’s decision to NAD. Its appeal was assigned to a NAD Administrative Judge who conducted an in-person hearing and then issued an Appeal Determination. The Administrative Judge found the state committee did not err when it determined 10,353 of the hog sales which Appellant claimed were ineligible under the SMHPP program. He also found the state committee did not err when it determined Appellant “had reason to believe or know that Appellant’s hog sales to the XXXXX were not eligible for SMHPP payments.” Appeal Determination at 7. He based that finding on his review of the telephone call from a county office employee to Appellant’s bookkeeper that took place on December 16, 2021. He also made a record in the event you requested that I exercise my equitable relief authority in Appellant’s case.
You requested Director Review of the Appeal Determination on behalf of Appellant. You argue that the county committee’s decision to pay Appellant for the 10,353 hog sales was correct. In the alternative, you argue that the Finality Rule barred FSA from requiring repayment of the SMHPP payment. Lastly, you request that I exercise my authority to grant Appellant equitable relief from refunding the payment.
FSA did not respond to your Request for Director review.
Analysis.
Your first argument goes to the issue of whether the state committee erred in adjusting the number of Appellant’s eligible hog sales. You say that the XXXXX breached its contract with Appellant by refusing to accept 450 hogs per week from Appellant, and at times, refusing to accept any hogs at all once COVID disrupted the market. You argue that once it breached the contract, the contract was no longer in effect and the subsequent sales met the definition of negotiated sale contained in the December 14, 2021, NOFA. Alternatively, you argue that even if effective, the hog sales under the contract were eligible because “ . . . the contract provided for a base price determined by buyer-seller interaction, an agreement on delivery days, and delivery within 14 days of the determination of the price.” Request for Director Review at 8.
I am not persuaded by either of those
arguments. One element of the
definition of a negotiated sale, contained in the NOFA and relied on by the
Administrative Judge, was that “the base price
for the hogs is determined by seller-buyer interaction and agreement on a
delivery day.” Similarly, an
element of negotiated formula sale is that the formula is “. . .
determined by negotiation on a lot-by-lot basis.” Agency Record at 279. Whether Appellant’s contract with
the XXXXX remained in effect or not,
there is no evidence in the record to support a claim that Appellant and the XXXXX at any time negotiated either the price for each delivery
of hogs on the day of delivery or that they negotiated a formula for the price on
a lot-by-lot basis. Therefore, the
findings of the Administrative Judge that Appellant’s hog sales to the XXXXX could not be either negotiated sales nor negotiated
formula sales are supported by substantial evidence and I uphold it.
You next argue that
the Finality Rule prevents FSA from requiring repayment of the SMHPP payment
made to Appellant by FSA to the extent it was for the hog sales found
ineligible by the state committee. I
agree with the Administrative Judge’s statement that “The Finality
Rule essentially operates as a form of estoppel to prevent a producer from
being made to rectify an error made by the Agency if the producer did not set
the foundation for the Agency’s mistake or provide erroneous information.” Appeal Determination at 7. The exception to the Finality Rule that
would prevent the rule from taking effect in Appellant’s case addressed
by the Administrative Judge was whether Appellant “. . . had reason to believe
that the decision was erroneous.”
7 U.S.C. § 7001(a)(3). The
regulation giving effect to that exception states: “The participant knew
or had reason to know that the determination was erroneous.” 7 C.F.R. § 718.306(a)(4).
I recently had occasion to consider what it
meant for a program participant to have reason to know an agency decision is erroneous. See NAD Case No. 2023W000008
(Dir. Rev., Sept. 1, 2023). In that
case, I approvingly noted FSA’s definition of “reason to know”
found in its Handbook 7-Common Provisions, Ex. 2, which states that the relevant factors to consider in determining whether or
not a participant had “reason to know” are whether correct program
information or advice was available in any forum or media that could have given
the participant cause to question or suspect that information or advice or a
decision was in error, and if the error was so large that the participant had
reason to question or suspect something was not right. I also emphasized NAD’s decisions
that it is unreasonable to expect program participants to know what the agency
charged with administering a program did not. See, e.g., NAD Case No.
2013E000491 (Dir. Rev., Aug. 6, 2013) (finding that it was unreasonable to
expect an appellant to know what the county office charged with administering a
program did not know) and NAD Case No. 2022W000020 (Dir. Rev., June 21, 2022)
(finding it unreasonable to expect a program participant to request a payment
limitation extension form when the agency representative failed to provide the
optional form and explain how it would affect program payments).
You argue that it was reasonable for Appellant’s bookkeeper to believe that sales under Appellant’s contract, which set prices based on daily market prices for hogs, would qualify as eligible sales. What is notable to me about this case is the many actions FSA felt it needed to take to clarify for producers what hog sales were eligible sales under the SMHPP program. First, it suspended all decisions and payments on applications in December 2021 because it recognized there was confusion on the part of producers. It then issued a revised NOFA and made changes to its Handbook 1-PDAP in April 2022 that introduced sale eligibility based on LMR codes. Finally, FSA revised the Fact Sheet it distributed to program participants to also include use of the LMR codes for determining eligibility.
Two additional facts are notable to me. First, FSA itself found it necessary to submit Appellant’s sales contract with the XXXXX to the AMS for an expert opinion as to whether the sales contracts were eligible sales under the SMHPP program. By doing so, I infer that it was not readily apparent to FSA whether Appellant’s sales under the contract were eligible sales. The second fact that reinforces this inference is the Administrative Judge’s finding that neither Appellant’s bookkeeper nor the FSA representative at the hearing could explain how the contract determined the sale price. And, as I noted above, the basis for the county committee’s decision was that Appellant’s hog sales to the XXXXX were classified as “LMR code 3 and LMR Code 4 sales, which is not considered an eligible spot market sale.” Agency Record at 125. The state committee upheld the county committee decision without discussion, so I assume it adopted the county committee’s reliance on the LMR codes as the basis for adjusting Appellant’s number of eligible hog sales. While it does not appear that adoption of the LMR codes assigned to hog sales by XXXXX changed the underlying definition of eligible sales, it certainly indicated recognition by FSA of a need on the part of hog producers to have a means of identifying eligible sales other than by reading and understanding the definitions published in the December 14, 2021, NOFA which were read and/or provided to Appellant by email.
Appellant had no reason to believe that its hog sales were ineligible under the SMHPP because of the LMR codes assigned to its sales by the XXXXX until the revised NOFA was published and Handbook 1-PDAP was amended in April 2022. Under those circumstances, I find the mere informing Appellant of the text of the definition of eligible sales from the December 14, 2021, NOFA was insufficient to establish that Appellant knew or should have known that the vast majority of its claimed hog sales were ineligible. Likewise, it is insufficient to establish the Administrative Judge’s finding that it was supported by substantial evidence. Since the revisions did not occur until more than 90 days after Appellant’s SMHPP application was complete, they cannot form a basis for finding that the exception to the Finality Rule contained in 7 C.F.R. § 718.306(a)(4) exists in this case.
The state committee decision is erroneous. No exception to the Finality Rule exists, and FSA is barred from seeking repayment of the amount of overpaid SMHPP program benefits. See NAD Case No. 2023S000003 (Dir. Rev., June 15, 2023) (holding FSA is barred from seeking repayment by the Finality Rule when its evidence is insufficient to establish an exception to the Finality Rule exists).[6]
Equitable
Relief.
Lastly, you request equitable relief on behalf of Appellant. As stated above, your request for equitable relief is moot as a result of my decision set forth above. I therefore will not address it.
Conclusion.
In sum, I uphold the Administrative Judge’s determination that the state committee did not err when it found 10,764 of the hog sales claimed by Appellant on its application under the SMHPP were ineligible sales. I reverse the Administrative Judge’s determination that an exception to the Finality Rule exists such that FSA can demand Appellant repay the funds it received for those hog sales. The state committee erred in its application of the Finality Rule. No exception to the Finality Rule exists, and FSA is barred from seeking repayment of the amount of overpaid SMHPP program benefits.
/S/
Frank M. Wood
Director
[1] I incorporate
by reference the NAD Appeal Determination (App. Det., Nov. 27, 2023) issued in this
case.
2 I conduct a review of the Administrative Judge’s
determination using the entire case record to determine if the decision of the
Administrative Judge is supported by substantial evidence. 7 C.F.R. § 11.9(d)(1). In making my determination, I ensure
that the agency’s decision is consistent with the laws and regulations of
the agency, and with the generally applicable interpretations of such laws and
regulations. 7 C.F.R. §
11.10(b).
[3] The AMS implemented the LMR program, required by the Livestock Mandatory Reporting Act of 1999, to establish information regarding the marketing of cattle, swine, lambs, and livestock products; to improve the price and supply reporting services of the USDA; and to encourage competition in the marketplace for livestock and livestock products. See 81 Fed. Reg. 52969 (August 11, 2016). For swine packers, the reporting requirements apply to federally inspected swine processing facilities that slaughter an average of at least 100,000 swine per year. Id. at 52972. LMR Code 3 refers to a swine or pork market formula purchase.
[4] FSA also modified the SMHPP Fact Sheet given to producers. On December 14, 2021, a county office employee gave Appellant’s bookkeeper eligibility information from the December 2021 version, which did not contain any reference to the LMR codes. See Agency Record at 50, 378, and 403-404. Subsequent versions of the Fact Sheet were modified to include a discussion of sales eligibility based on LMR codes. See Agency Record 378, 393, 397, and 401. The FSA National Office noted in policy points distributed to its state offices on June 30, 2022, that “Definitions were misunderstood or misconstrued; therefore, USDA corrected the SMHPP NOFA [to] clarify eligible hogs and to require verifiable or reliable documentation. Documentation that specified LMR codes assisted producers with demonstrating hog sales to packers were an eligible sale under the SMHPP.” Agency Record at 185-186.
[5] The Finality Rule provides that a determination of an FSA county committee becomes final and binding 90 days from the date the application for benefits has been filed unless one or more of several exceptions to the applicability of the rule apply. See 7 C.F.R. § 718.306. I note the County Committee’s adjustment of Appellant’s eligible hog sales occurred more than 90 days after Appellant’s application for SMHPP program benefits was complete.
[6] You make a number of other arguments why the Administrative Judge’s decision on the finality is not supported by substantial evidence. I will not address those arguments in detail since I have found no exception to the Finality Rule exists and FSA is therefore barred from seeking repayment from Appellant of the SMHPP program payment it received.