Jason Mages v. Ann Veneman , 431 F.3d 1132 ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 03-1400
___________
Jason Mages, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Mike Johanns, Secretary, United *
*
States Department of Agriculture, *
*
Appellee. *
___________
Submitted: June 18, 2004
Filed: December 27, 2005
___________
Before BYE, JOHN R. GIBSON and BOWMAN, Circuit Judges.
___________
BYE, Circuit Judge.
Jason Mages challenges a decision of the United States Department of
Agriculture (USDA) requiring him to repay more than $470,000 in farm program
benefits on the grounds he was not a "separate person" entitled to receive benefits and
he engaged in a "scheme or device" to evade farm program requirements. We reverse
and remand.
*
Pursuant to Federal Rule of Appellate Procedure 43(c)(2), Mike Johanns is
automatically substituted for his predecessor, Ann Veneman, as Secretary of the
Department of Agriculture and appellee in this case.
I
Jason Mages (hereinafter Jason or Mages) is a young farmer. He grew up on
his parents' farm near Paynesville, Minnesota. In 1990, at age 16, Mages started his
own farming operation. When he turned 18, Mages already owned his own land and
farm equipment, and he cash-rented other land.1 He obtained his own insurance and
financing. He made his own planting decisions and performed his own labor. For all
the years between 1992 and 1999, Mages certified on applications for farm program
benefits that his farming operation was separate and distinct from any other operation
and that he provided "100 %" of the "active personal management" of his farm.
Between 1992 and 1999, Jason received $472,750.03 in farm program benefits.
Like many farmers do, Mages occasionally swapped labor or equipment with
his parents.2 He also entered a verbal agreement (the crop agreement) with RODI, a
farm corporation established by his parents, Ron and Diane Mages. Under the crop
agreement, Mages and RODI jointly purchased crop inputs such as fertilizer,
herbicides, and seed to obtain large-quantity discounts. Records were kept of the
purchases, with each paying a percentage of the purchase price commensurate with
their share of the products. Both Mages and RODI thereby realized a reduction in
input costs they could not have obtained making those purchases separately.
1
Paynesville is near the intersection of Meeker, Stearns, and Kandiyohi
counties. Jason farms land in all three counties and is regulated by farm service
agencies in each county.
2
The USDA's guidelines on payment limitations specifically allow for the
occasional exchange of labor or equipment between farmers. Using occasional
exchanges does not mean the exchanging farmers contribute to each other's farming
operations for farm payment limitation purposes. Agriculture Stabilization and
Conservation Service (ASCS) Handbook, 1-PL (Revision 1) ¶ 152E.
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The crop agreement also pertained to the sale of the crops. Mages joined his
crops with those of RODI, which in turn entered into marketing contracts with other
entities. When the crops were combined in this manner, the larger volume contracts
allowed both Mages and RODI to realize a higher per-bushel price for their
commodities than if sold separately. The contracts were in RODI's name because
Mages's father had long-term relationships with the buyers, and Mages sought to take
advantage of such relationships. Because the contracts were in RODI's name, scale
tickets issued by grain elevators were also in RODI's name even when the crops
reflected on the tickets were Mages's crops. Similar to the joint purchases of crop
inputs, Mages and RODI kept records of the crop sales and periodically settled their
respective income amounts under the crop agreement – sometimes through cash
payments to each other and at other times through the use of offsets of amounts owed
from RODI to Mages or vice versa.
In 1993, a potential wetlands violation was identified by the USDA on farmland
managed by RODI. Farming operations that commit wetlands violations are ineligible
for some or all farm program benefits. 7 C.F.R. § 12.4. In addition, persons
"affiliated" with wetlands violators may be ineligible for some or all farm program
benefits. 7 C.F.R. § 12.8. After RODI's potential wetlands violation was identified,
the USDA reviewed the status of Jason Mages's farming operation to determine
whether Mages was a "separate person" under 7 C.F.R. § 1400.3 for purposes of
receiving farm program benefits. At that time, the USDA determined Mages was a
separate person.
Ron and Diane Mages were indicted by a federal grand jury in October 1999
with a host of offenses arising, in part, from their ownership interest in RODI and
another corporation identified as GMI, Inc. The indictments included allegations the
Mageses defrauded creditors in their bankruptcy proceeding by concealing their
interests in RODI and GMI and defrauded the USDA by receiving farm program
payments despite wetlands violations committed by one or both corporations. The
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indictment also charged Jason Mages with two counts of engaging in a monetary
transaction in criminally derived property in violation of 18 U.S.C. § 1957 on the
grounds he had obtained significant funds from RODI. Ron and Diane were convicted
by a jury who found they (but not Jason) were an alter ego for RODI and GMI. Jason
contended he was innocent because the RODI payments he received were for his own
crops marketed with RODI's crops under the crop agreement. He presented detailed
evidence during the trial tracing all transactions between himself and RODI and
establishing the legitimacy of the transactions. The jury acquitted Jason of all charges.
In November 1999, the Meeker County Farm Service Agency (FSA) initiated
an investigation into the relationship between the farming operations of Ron and
Diane Mages, RODI, Clem Jebb (a friend of Ron and Diane named by them as the
president of RODI in corporate documents), Jason Mages, and his sister, Sara Mages.
The Meeker County FSA Committee determined Jason Mages was not separate and
distinct from RODI. After the Stearns County and Kandiyohi County FSA
Committees made similar determinations, Jason Mages appealed the decisions to the
Minnesota State Committee.
On October 26, 2000, the State Committee issued its decision. The State
Committee made the following findings of fact:
1. Jason submitted 502 farm operating plans to FSA showing he had
100% interest in his farming operation and that he [had] no interest in
any other farming operation.
2. The fact that Jason stated in the State Committee hearing that RODI
had no written agreement with Jason to market his grain and in fact
received no monetary compensation for marketing his grain.
3. A statement from Wayne Fridgon (sic) Crop Insurance adjuster in
which Wayne say's (sic) Jason told him RODI was his farm name.
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4. A statement from Victor Bruer, Crop Insurance loss adjuster in which
Victor say's (sic) RODI scale tickets were presented to him as tickets
from all three Mage's (sic) farming operations.
5. The fact that Jason had used RODI scale tickets to claim and receive
crop insurance indemnities on his farm.
6. Testimony showing that RODI actually contracted Jason's beans. An
action which made RODI liable for delivery of beans producer (sic) on
Jason's farm.
7. The fact that RODI shared in the proceeds from Jason's farming
operation as evidenced by checks issued to RODI from the sale of crops
grown on Jason's farm.
8. The fact that court records show that from 1993 to 1999, 60-62% of
the monies paid out by RODI, went to Jason Mages.
9. The fact that Jason amended a grain contract for RODI and signed the
contract RODI Inc. by Jason Mages.
10. The fact that RODI claimed proceeds from the sale of his beans as
taxable income for RODI.
11. RODI paid Jason's debts as evidenced by testimony from Larry
Serbus, manager Klein Burger Co., Bird Island MN.
12. The fact that Clem Jeb (sic), who had been granted immunity from
prosecution if he told the truth, stated that he had never talked to Jason
about RODI, while Jason said he talked directly to Clem about issues
dealing with RODI.
Appellee's App. at 206.
Based on these fact findings, the State Committee concluded:
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Jason Mages did not meet the criteria to be considered a person separate
and distinct from any other producer. Jason's farming operation does not
meet the commensurate share rule. Jason is ineligible from FSA
program payments from 1992 through 2000. In addition the State
Committee determined that Jason had many opportunities to disclose the
information concerning his relationship to RODI. His failure to do so
prevented the County Committee's (sic) from making proper eligibility
determinations. As a result the State Committee determined that Jason
had participated in a scheme to earn payments he was not entitled to
from 1992 through 2000.3
Id. at 207.
Jason appealed the State Committee's decision to the USDA's National Appeal
Division (NAD). On January 23, 2001, after an informal hearing, the NAD Hearing
Officer made the following findings of fact:
1. The Appellant has participated in USDA programs since 1992 as a
separate person, eligible for maximum benefits under program payment
limitations. From 1992 through 1999 he collected $472,750.03 in
program benefits subject to payment limitations.
2. From 1992 through 1999, the Appellant identified and certified
himself as a separate person for USDA program purposes. He identified
farms that he owned and rented. His farm plan and annual updates show
that he contributed 100% of the labor and management including
marketing. He indicated that he had read and understood regulations
regarding the designation of a separate person.
3
Mages moved to file a supplemental brief and appendix contending the two
references in this paragraph to the year 2000 are erroneous, and in fact the disputed
years are 1992 through 1999. We agree. We therefore grant Mages's motion and
conclude the dispute in this case is limited to the years 1992 through 1999.
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3. RODI, Inc. is a separate farming entity that was managed by the
Appellant's father. The Appellant's mother was the bookkeeper. In 1993
a potential wetland violation was identified on RODI managed land.
This led to a review of the Appellant's status as a separate person because
of USDA benefits. This review ended with a determination that
Appellant was a separate person.
4. A USDA Office of Inspector General (OIG) review of RODI found
that between 1993 and 1999 nearly 62% of RODI proceeds totaling
$1,066,869.16 went to the Appellant. These proceeds were mainly from
the marketing of his crops through RODI contracts.
5. In 1995 and 1997, the Appellant documented crop losses for
insurance purposes using RODI scale tickets. He was subsequently paid
crop insurance indemnities based on them.
6. In 1996, the Appellant paid a personal debt to the Klein-Berger
Company using RODI navy beans.
7. From 1996-1999 RODI had wetland violations on land that were (sic)
corporately controlled.
Id. at 213.
Based on these fact findings, the NAD Hearing Officer made the following
pertinent conclusions:
The regulations require a separate and distinct interest in crops, separate
responsibility, and separate accounts from that of any other entity. The
Appellant's relationship with RODI violates theses regulations because
the Appellant's interest in the crops through this informal arrangement
fails the separate and distinct test. The Agency correctly determines that
the Appellant was not a separate person for USDA programs from 1993-
1999.
...
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RODI contracts were used to market the Appellant's commodities.
Therefore RODI had a contribution to and an interest in the Appellant's
farming operation that was at risk, namely default of these marketing
contracts. The Appellant was under no written obligation to provide the
crops for the contracts.
...
The role that RODI played in marketing the Appellant's grain established
an interest in the Appellant's operation. If the Agency had known of this
arrangement, RODI would have been due a portion of the Appellant's
benefits under the commensurate share rule. Because RODI had an
interest in the Appellant's commodities, the Agency correctly concludes
that the Appellant was not a separate person for USDA benefits.
...
RODI is an entity that has been in violation of wetland provisions and
therefore ineligible for USDA benefits. Completely revealing the
Appellant's relationship with RODI could result in his ineligibility for
USDA programs. The Agency correctly concludes that not revealing this
relationship is a scheme or device that if not designed (sic) [disclosed],
has the effect of evading the correct determination of the Appellant's
operation.
...
The Agency's decision that the Appellant was not a separate person for
USDA program purposes and that he participated in a scheme or device
was not erroneous.
Id. at 215-16.
Mages made a timely request to have the NAD Hearing Officer's decision
reviewed by the Director of the NAD. On April 5, 2001, the NAD issued a Director
Review Determination adverse to Mages. Focusing on the same facts identified by
the State Committee and the NAD Hearing Officer, the Director Review made the
following pertinent conclusions:
[T]he Appellant's crops were marketed under RODI, Inc. contracts and
the proceeds were paid directly to RODI, Inc. The Appellant used
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RODI, Inc. scale tickets to claim and receive crop insurance payments.
The Appellant has not shown a separate and distinct interest in the crops
produced nor a separate responsibility for such. Substantial evidence
supports the Hearing Officer's determination that the Agency did not err
in determining that the Appellant was not a person separate and distinct
from any other individual or entity.
...
The Appellant certified himself as a person, separate and distinct from
other individuals and entities and concealed the interest that RODI, Inc.
had in his farming operation. Substantial evidence supports the Hearing
Officer's determination that the Agency did not err in its decision that the
Appellant participated with RODI, Inc. in a scheme or device to avoid
payment limitation provisions and received payments to which he was
not entitled.
Appellant's App. at 570-71.
In accordance with the provisions of the Administrative Procedure Act (APA),
5 U.S.C. §§ 701-706, Mages filed an action in federal district court requesting review
of the final agency decision. Following a hearing on cross motions for summary
judgment, the district court upheld the agency decision. Mages filed a timely appeal
with this court.
On appeal, Mages does not challenge the USDA's factual findings. Instead,
Mages challenges whether the USDA properly concluded he did not have a "separate
and distinct" interest in his farming operation and therefore was not eligible to
participate in USDA farm programs as a "separate person," and whether the USDA
properly concluded he engaged in a scheme or device to evade the farm program
requirements.
-9-
II
"When reviewing the district court's opinion upholding the administrative
agency's decision, this court must render an independent decision on the basis of the
same administrative record as that before the district court." United States v. Massey,
380 F.3d 437, 440 (8th Cir. 2004) (citing Moore v. Custis, 736 F.2d 1260, 1262 (8th
Cir.1984)). We will set aside an agency's decision if it "arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). "[W]e
accord substantial deference to an agency's interpretation of its own regulation . . .
unless the interpretation is plainly erroneous or inconsistent with the regulation."
South Dakota v. United States Dep't of Interior, 423 F.3d 790, 799 (8th Cir. 2005)
(internal citations and quotations omitted).
A. Separate and Distinct Interest
First, Mages challenges the USDA's determination he did not have a "separate
and distinct" interest in his own farming operation.
To be considered a "separate person" eligible for farm program payments, an
individual or entity must, in part, "[h]ave a separate and distinct interest in the land or
the crop involved." 7 C.F.R. § 1400.3.4 The USDA determined Mages did not have
a "separate and distinct interest" and thus was not a "separate person" after concluding
RODI had an interest in Mages's crops arising from the crop agreement. Mages
disputes RODI had any interest in his crops. In the alternative, he contends he
4
A person must also be "actively engaged in farming" to qualify for farm
program benefits. 7 C.F.R. § 1400.201(a). This is to prevent passive investors from
receiving farm program payments. See Christopher R. Kelley, Introduction to Fed.
Farm Program Payment Legislation and Payment Eligibility Law, Ark. L. Notes 11,
17 (2002). There is no dispute Mages was actively engaged in farming.
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satisfied the "separate and distinct interest" test even assuming RODI had an interest
in his crops.
To satisfy the "separate and distinct interest" test, Mages need only have had
an interest "in the land or the crop involved." 7 C.F.R. § 1400.3 (emphasis supplied).
Mages had a separate and distinct interest in the land involved in his farming
operation. Mages owned his farmland or cash-rented it. There is no evidence RODI
had an interest in Mages's land. Thus, even assuming RODI had an interest in the
crops grown on the land – an issue we need not address for purposes of resolving
Mages's "separate person" status – nothing in the pertinent regulations indicates
RODI's alleged crop interest somehow negates Mages's separate and distinct interest
in the land. The USDA's decision is flawed because it required Mages to show a
separate and distinct interest in his land and crops, notwithstanding the disjunctive
nature of the regulation.5 The USDA's decision on this issue is plainly inconsistent
with the regulation and therefore cannot stand.
In addition to its determination Mages failed the "separate and distinct" interest
test because RODI had an interest in his crops, the USDA also seems to have
implicitly, if not expressly, found Mages had an interest in RODI and therefore failed
the "separate and distinct" interest test for that reason. Even assuming Mages had
some interest in RODI – an issue we need not address for purposes of resolving
Mages's "separate person" status – merely having an interest in another farming
5
On appeal, the government actually relies upon the disjunctive nature of the
regulation, but argues erroneously it was enough for the USDA to show RODI had an
interest in Mages's land or crops. Under the regulations as written, that inquiry may
be relevant to determining RODI's status as a farming operation, but it is wholly
irrelevant to determining Mages's "separate person" status. The proper inquiry for
determining Mages's status as a "separate person" is necessarily limited to whether he
had a "separate and distinct" interest in his land or crops.
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operation did not negate Mages's "separate person" status given Mages's separate and
distinct interest in his own farmland.6
B. Scheme or Device
Next, Mages challenges the USDA's decision he engaged in a "scheme or
device" to evade payment limitations under the farm program. Farm payments may
be withheld or required to be refunded if a person "adopts or participates in adopting
a scheme or device designed to evade this part [i.e., the farm program] or that has the
effect of evading this part." 7 C.F.R. § 1400.5. The regulation further provides
participation in a scheme or device includes "[c]oncealing information that affects the
application of this part [or] [s]ubmitting false or erroneous information." Id.7
The agency determined Mages participated in a "scheme or device" for three
reasons. First, the USDA determined Mages engaged in a scheme or device by
applying for farm program payments as a "separate person." Because the USDA
wrongly concluded Mages did not have a separate and distinct interest in his farming
6
Indeed, as we explain below in our discussion of the commensurate share rule,
the farm program regulations specifically contemplate farming operations having
interests in other farming operations. When such is the case, the interest must be
disclosed, but does not necessarily negate an individual's "separate person" status for
the purpose of applying for farm program payments.
7
The regulation essentially tracks the requirement of 7 U.S.C. § 1308-2, which
provides:
If the Secretary of Agriculture determines that any person has adopted
a scheme or device to evade, or that has the purpose of evading [the farm
program], such person shall be ineligible to receive farm program
payments . . . applicable to the crop year for which such scheme or
device was adopted and the succeeding crop year.
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operation, it follows he did not engage in a "scheme or device" merely by applying for
farm program payments as a separate person.
The last two reasons given in support of the "scheme or device" determination
focus primarily on Mages's crop agreement with RODI. First, the USDA concluded
RODI had an interest in Mages's crops because of the crop agreement and the
nondisclosure of the interest violated the commensurate share rule under 7 C.F.R.
§ 1400.6. Second, the USDA seems to have concluded in the alternative Mages had
an interest in RODI, and the nondisclosure of this interest prevented the agency from
making a correct determination about whether Mages was ineligible for farm
programs as an "affiliated person" of a wetlands violator under 7 C.F.R. § 12.8. We
address each of these conclusions in turn.
1) The Commensurate Share Rule
The commensurate share rule requires an individual or entity to have both a
"share of the profits or losses from the farming operation that is commensurate with
the individual's or entity's contribution to the operation," and "[c]ontributions to the
farming operation that are at risk" in order to be considered eligible for farm program
payments. 7 C.F.R. § 1400.6 (a) & (b). In accord with this commensurate share rule,
farm program payments are made to those entities or individuals (who are actively
engaged in farming) with interests in a farming operation according to those
respective interests.
In other words, if RODI had a contribution to Jason Mages's farming operation
that was at risk (and RODI was otherwise eligible to participate in the farm program)
RODI would have been due a portion of Mages's farm program payments. But if
RODI was not eligible to participate in the farm program, no one, including Mages,
would have been entitled to receive the portion of the farm program payments which
corresponded to RODI's "at risk" contribution. The USDA contends Mages violated
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the commensurate share rule by receiving farm program payments which
corresponded to RODI's contribution to Mages's farming operation, and since RODI
was ineligible to receive farm program payments as a wetlands violator, no one should
have received the farm program payment attributable to RODI's interest in Mages's
farming operation.
Application of the commensurate share rule to the crop agreement between
RODI and Mages necessarily turns on whether RODI had a contribution to Mages's
farming operation that was "at risk." Id. at § 1400.6(b). "[N]either the statute nor the
regulations define the phrase 'at risk.' Presumably, it is used in its ordinary sense and
means that a contribution must be a true economic investment in the farming
operation. Such an investment carries with it the potential for personal gain or loss
in accordance with the performance of the farming operation." Christopher R. Kelley
& Alan R. Malaskey, Federal Farm Program Payment-Limitations Law: A Lawyer's
Guide, 17 Wm. Mitchell L. Rev. 199, 255 (1991).
In the agency proceedings, the only reason given by the USDA to support the
conclusion RODI had an "at risk" contribution to Mages's farming operation was:
RODI contracts were used to market the Appellant's commodities.
Therefore RODI had a contribution to and an interest in the Appellant's
farming operation that was at risk, namely default on these marketing
contracts. The Appellant was under no written obligation to provide the
crops for the contracts.
Appellee's App. at 215. Thus, the USDA concluded RODI had an "at risk"
contribution to Mages's farming operation because, without a written agreement,
RODI had no remedy if Mages failed to provide crops for RODI's contracts.
The USDA's conclusion, which turns on whether the crop agreement was in
writing, is not legally sound. The contract between RODI and Mages did not have to
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be in writing to be enforceable. See McArdle v. Williams, 258 N.W. 818, 820 (Minn.
1935) (indicating oral contracts are generally valid and enforceable under Minnesota
law); see also Eklund v. Vincent Brass and Aluminum Co., 351 N.W.2d 371, 375
(Minn. Ct. App. 1984) (quoting Rowe v. Noren Pattern and Foundry Co., 283 N.W.2d
713, 715 (Mich. Ct. App. 1979) ("Where an oral contract may be completed in less
than a year, even though it is clear that in all probability the contract will extend for
a period of years, the statute of frauds is not violated.")).
Neither Mages nor RODI, nor the USDA for that matter, dispute the existence
of an agreement between RODI and Mages. If Mages had breached the crop
agreement by failing to provide RODI sufficient crops to satisfy its marketing
contracts, RODI would be entitled to sue Mages for breach of contract. RODI's
alleged contribution to Mages's farming operation via the crop marketing agreement
was not "at risk," therefore, because Mages had a contractual duty to provide the crops
and RODI had a contractual remedy if Mages breached. RODI did not have a true
economic investment in Mages's farming operation because its interests were merely
contractual in nature. The USDA's conclusion the lack of a written agreement placed
RODI's contribution at risk is "not in accordance with law," 5 U.S.C. § 706(2)(A), and
therefore cannot stand.
Because RODI did not have a contribution to Mages's farming operation that
was "at risk," it follows Mages did not violate the commensurate share rule, or engage
in a scheme or device, by failing to disclose the existence of the crop agreement with
RODI.8
8
In addition, the USDA's implicit finding Mages had an interest in RODI (as
opposed to RODI's alleged interest in Mages) cannot support the conclusion Mages
violated the commensurate share rule through his applications for farm program
payments. Such a finding (assuming Mages's alleged interest in RODI was "at risk")
could only support a claim RODI violated the commensurate share rule through its
applications for farm program payments, if RODI's applications were at issue, which
they are not.
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2) Affiliated Person of a Wetlands Violator
As we have noted, the USDA's factual findings also seem to indicate the agency
found Mages had an interest in RODI. As we also noted, such a finding does not
support the conclusion Mages was not a "separate person" entitled to apply for farm
program payments, nor does it support a conclusion Mages violated the commensurate
share rule. Such an interest could, however, support the conclusion Mages was an
"affiliated person" of a wetlands violator under 7 C.F.R. § 12.8, if Mages's alleged
interest in RODI meets the requirements of § 12.8.
The USDA never actually determined Mages was an "affiliated person" of a
wetlands violator. Instead, after noting both § 12.8 and RODI's status as a wetlands
violator, the agency concluded "[c]ompletely revealing the Appellant's relationship
with RODI could result in his ineligibility for USDA programs." Appellee's App. at
216 (emphasis supplied).
At the outset, we hold the USDA's conclusion Mages engaged in a scheme or
device merely on the grounds his disclosure of an interest in RODI could result in
ineligibility is arbitrary and capricious. The USDA's scheme or device determination
depends upon Mages having submitted "false or erroneous information." 7 C.F.R.
§ 1400.5. If, in fact, Mages's interest in RODI (if any) does not meet the requirements
of an "affiliated person" under 7 C.F.R. § 12.8, then it follows he did not submit false
or erroneous information by not revealing the interest and the USDA's scheme or
device determination cannot stand. We therefore review the USDA's findings to
determine whether Mages actually had an interest in RODI, the disclosure of which
would result in his ineligibility for farm program payments.
Subsections (b) and (c) of 7 C.F.R. § 12.8 divide "affiliated persons" of a
wetlands violator into two categories depending upon whether the wetlands violator
was a "person" or an "entity." In this case, the wetlands violator was RODI, a
corporation, and thus Mages had to be an affiliated person of a corporation to be
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considered ineligible for farm program payments. Under the regulation, only
shareholders holding more than twenty percent of the shares of a corporation are
"affiliated persons" of a wetlands violator. 7 C.F.R. § 12.8(c). The administrative
record contains no evidence indicating Mages held any shares in RODI. In an
abundance of caution, however, we will address the USDA's factual findings to
determine whether they support the implied conclusion RODI was, in essence, an alter
ego not only of Mages's parents, Ron and Diane, but also of Mages himself.
a) The crop agreement fact findings
Most of the USDA's factual findings focus on the crop agreement between
RODI and Mages, and certain consequences of the crop agreement in Mages's
dealings with third parties. Specifically, the USDA found:
1) The crop agreement was not in writing and RODI received no
monetary compensation from Mages for the crop agreement;
2) RODI scale tickets were presented to a crop insurance adjuster as
tickets for both RODI's and Mages's farming operations, and Mages used
RODI scale tickets to claim and receive crop insurance indemnities;
3) RODI contracted Mages's beans, making RODI liable for delivery of
beans produced on Mages's farms;
4) RODI paid Mages's debts with the Klein Burger Company; and
5) From 1993 to 1999, as much as 62% of the monies paid out by RODI
went to Mages.
Appellee's App. at 206. None of these factual findings support the implied
conclusions Mages had an interest in RODI or RODI was an alter ego for Mages.
The fact the crop agreement was not written does not mean it was invalid or
unenforceable. Nor is it significant RODI did not receive a set monetary fee.
Although Mages does not challenge the USDA's factual finding that RODI received
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no monetary benefit for the crop agreement, the factual finding is clearly erroneous.
RODI received a monetary benefit as a result of the crop agreement because Mages's
crops increased the volume of the marketing contracts entered into by RODI, giving
RODI the benefit of a higher per-bushel price for its own commodities. Thus, the
contract was supported by mutual consideration. The mere fact an individual enters
a valid and enforceable contract with a corporation does not give the individual an
interest in the corporation, nor make the corporation his alter ego.
Next, Mages's use of RODI scale tickets to claim and receive crop insurance
indemnities does not support a conclusion Mages had an interest in RODI. The
evidence presented by Mages in the administrative record demonstrates RODI scale
tickets were presented to a crop insurance adjuster and used by Mages to claim and
receive crop insurance indemnities because the crop reflected on the scale tickets was
Mages's crop, grown on his land. The scale tickets issued by grain elevators were in
RODI's name simply because the contracts were in RODI's name. That fact says
nothing about whether Mages had an interest in RODI, but it is simply a logical and
expected consequence of the manner in which grain elevators conduct their business.
The record demonstrates "it is permissible to use sales receipts in another's name [to
claim crop insurance indemnities] as long as the production actually came from the
unit it is being applied to." Appellant's App. at 218 (Statement of Insurance Agent
Bruce Tengwall).
Next, the factual findings that RODI contracted Mages's beans and paid
Mages's debt with the Klein Burger Company do not support a conclusion Mages had
an interest in RODI. The fact RODI contracted Mages's beans was the very purpose
of the crop agreement, which we have already indicated was a valid and enforceable
contract between two separate entities supported by mutual consideration. And while
the record demonstrates a seed debt was paid with marketing proceeds from a RODI
contract, the record also reflects the payment was ultimately offset by the proceeds of
navy beans produced by Mages, since RODI withheld a corresponding amount of
money from a navy bean settlement between itself and Mages. Id. at 23. Saying the
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seed debt was paid by RODI rather than Mages is a mischaracterization of the record.
Also included in the administrative record was the detailed evidence presented by
Mages in the criminal trial tracing each of his transactions with RODI, which
demonstrates each party to the crop agreement paid a commensurate share of the
purchases and received a commensurate share of the income. Appellee's App. at 467-
82.
Finally, the fact that as much as sixty-two percent of the monies paid out by
RODI went to Mages between 1993 and 1999 does not support a conclusion Mages
had an interest in RODI. The record shows RODI paid Mages sixty-two percent of
its income because Mages's crops comprised that same percentage of the joint
marketing contracts. The mere fact a corporation does the majority of its contracting
and business with one particular entity does not support the conclusion the entity
obtains an interest in the corporation.
b) The Wayne Fridgen statement
The administrative record contains a memorandum of an interview of Wayne
Fridgen, a crop insurance adjuster from Alexandria, Minnesota, conducted by two
USDA investigators. Id. at 121-22. In the memorandum, the agent who prepared the
memorandum (the record does not reflect which) says Fridgen told him "JASON
MAGES told him RODI was his farm name and the bean production belonged to
him." Id. at 122. This statement was made in the context of Mages using RODI scale
tickets to claim and receive crop insurance indemnities.
Bruce Tengwall, Mages's insurance agent, was present during the conversation
between Fridgen and Mages. Tengwall filed a statement indicating "[t]o the best of
my knowledge, [Mages] never indicated to me or anyone in my presence that he was
part of RODI, Inc. He did market his edible beans through RODI, Inc." Id. at 418.
The administrative record also contains grand jury testimony from Bruce Tengwall,
who testified under oath:
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Q. And you've never been told that RODI, Inc. is the Mageses' family
farm?
A. No.
Q. You've never been in the presence of Ron, Diane or Jason Mages
telling someone that that is their family farm?
A. No, not to my knowledge.
Id. at 424.
Setting aside the fact the USDA gave its investigator's memorandum – which
arguably constituted triple hearsay – more weight than it accorded the direct and
sworn statements of Tengwall, it is still clear Mages's statement would be insufficient
to support a conclusion Mages had an interest in RODI. Even assuming Mages made
the statement, he made it in the context of explaining why a crop loss on a crop grown
by him on his own land would be reflected by a scale ticket issued in RODI's name.
As discussed above, the fact grain elevators issued scale tickets in RODI's name
because the contracts were in RODI's name says nothing about whether Mages had
an interest in RODI, but is simply a logical and expected consequence of the manner
in which grain elevators conduct their business.
c) Amendment of grain contract
The USDA found Mages "amended a grain contract for RODI and signed the
contract RODI Inc. by Jason Mages." Id. at 206. In the administrative proceedings,
Mages's counsel explained Cargill allowed a delivery extension on a RODI grain
contract due to inclement weather. Mages signed the extension at the request of
Cargill, and on behalf of RODI, because Ron Mages was on vacation and Jason Mages
happened to be the one hauling grain for RODI on that particular day. Id. at 234. On
appeal, Mages contends this act did not give him an interest in RODI because he
merely acted as RODI's agent. We agree. Acting as an agent on behalf of a corporate
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principal, in and of itself, does not give the agent an ownership interest in the
corporation.
d) RODI reporting Mages's crop as its taxable income
The USDA found "RODI claimed proceeds from the sale of [Mages's] beans as
taxable income for RODI." Id. at 206. We would be suspicious of this fact in
determining whether Mages had an interest in RODI, were it not for the fact the record
also shows Mages paid income taxes on all crop sales attributable to him and he was
not involved in RODI's tax preparation.
e) Clem Jebb statement
The USDA found Clem Jebb (the person Ron and Diane Mages fraudulently
identified as the president of RODI) "stated that he had never talked to Jason about
RODI, while Jason said he talked directly to Clem about issues dealing with RODI."
Id. at 206. Although Mages does not challenge the USDA's fact findings on appeal,
we can find no support in the administrative record for the finding that "Jason said he
talked directly to Clem about issues dealing with RODI." This finding is based upon
an excerpt from the criminal trial against Mages's parents, in which Mages said:
Q. If you didn't feel like selling your beans, RODI assumed the risk,
correct?
A. The risk of what?
Q. Of not being able to fulfill the contract because you didn't – you got
a better price elsewhere.
A. Well, I had a trust with Clem. That would never have happened.
Q. You didn't talk to Clem Jebb about this contract?
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A. Clem knew about that before it was ever made.
Id. at 116.
The trial excerpt does not indicate Jason said he talked directly to Clem Jebb.
The excerpt indicates Jason "had a trust with Clem" and "Clem knew" about the
RODI/Mages crop agreement before it was ever made. Both Jason's "trust" and Jebb's
knowledge of the crop agreement could have been obtained via Ron Mages, Jason's
father. More importantly, we fail to see how Clem Jebb and Jason Mages making
contradictory statements about whether they discussed issues dealing with RODI is
relevant to showing Mages had an interest in RODI. At most, Mages's testimony
shows he was aware of his parents' designation of Clem Jebb as RODI's president.
Thus, even assuming Mages was further aware the designation was tainted with fraud,
his trial testimony merely shows he may have been reluctant to betray his parents at
their criminal trial. His parents' fraud, however, does not prove Mages himself had
an interest in RODI, and the marginal (if any) relevance of this evidence is further
undermined by the fact the jury acquitted Mages of any wrongdoing in his parents'
criminal trial.
In sum, none of the USDA's findings support the implied conclusion RODI was,
in essence, an alter ego not only of Mages's parents, but also of Mages himself.
Instead, the evidence in the administrative record overwhelmingly supports the
parallel conclusion reached by the jury in the criminal trial against Mages's parents,
that is, Ron and Diane Mages were an alter ego for RODI and GMI, but not Jason.
There is no support in the administrative record for concluding Jason Mages should
also bear responsibility for his parents' fraud.
III
Finally, we comment on two issues raised on appeal not addressed in the
administrative proceedings. On appeal, the government urges us to affirm the
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agency's decision because the USDA regulations define "active personal management"
to include the "[m]arketing and promotion of agricultural commodities produced by
the farming operation." 7 C.F.R. § 1400.3. Based on this definition of "active
personal management," the government further contends RODI contributed a
percentage of the "active personal management" of Mages's farming operation by
marketing Mages's crops through the crop agreement, and Mages therefore submitted
false information on his farm program applications when he represented he provided
"100 %" of the "active personal management" of his farm.
We decline to address this argument on appeal. See Mayo v. Schiltgen, 921
F.2d 177, 179 (8th Cir. 1990) ("[A] reviewing court may not uphold an agency
decision based on reasons not articulated by the agency itself in its decision. . . . A
court must consider the agency's rationale for its decision, and if that rationale is
inadequate or improper the court must reverse and remand for the agency to consider
whether to pursue a new rationale for its decision or perhaps to change its decision.");
but see HealthEast Bethesda Lutheran Hosp. & Rehab. Ctr. v. Shalala, 164 F.3d 415,
418 (8th Cir. 1998) (suggesting Mayo's holding should be limited to those instances
"in which an agency fails to make a necessary determination of fact or policy."). The
administrative record in this case is insufficient for us to glean from it the USDA's
policy on whether a farmer participating in a crop agreement of the type between
Mages and RODI must attribute a percentage of his "active personal management" to
the agreement.9
9
We note, however, the USDA's regulations exempt a "cooperative association
of producers that markets commodities for producers" from being considered a
"person with respect to the commodities so marketed for producers." 7 C.F.R. 1400.3,
Person (4). If the RODI/Mages crop agreement (which Mages represents included
other farmers besides RODI and Mages) qualifies as a "cooperative association of
producers" we do not believe Mages would be required to attribute a percentage of his
active personal management to RODI.
In addition, "active personal management" is "defined to exclude hired
services." Kelley, Intro. to Fed. Farm Program Payment Legislation, 2002 Ark. L.
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On remand, both parties are free to fully develop and address the question
whether Mages was required to attribute a percentage of his "active personal
management" to RODI due to the crop agreement, and if so, the consequences of his
failure to do so.
Mages also raises an issue on appeal not addressed in the administrative
proceedings. Mages contends the penalties for engaging in a "scheme or device"
under 7 C.F.R. § 1400.5 are quasi-criminal in nature, and thus the USDA cannot
determine a person engaged in a "scheme or device" without first finding the person
intended to defraud the government. Because we have resolved this appeal in favor
of Mages, we need not reach this issue. Should the USDA determine on remand,
however, that Mages was required to attribute a percentage of his "active personal
management" to RODI because of the crop agreement, Mages is certainly free to raise
this issue before the agency.
Notes at 29. As we indicated previously, although RODI did not receive a set fee from
Mages as a result of the crop agreement, RODI did receive compensation in the form
of higher per-bushel prices for its own products.
Finally, at least two USDA publications suggest marketing agreements of the
type entered into between RODI and Mages do not diminish the farmer's personal
management responsibility:
Marketing contracts refer to verbal or written agreements between the
farmer (contractee) and the buyer (contractor) generally a processing
and/or marketing company that set a price (or pricing mechanism) and
determine an outlet for a specified quantity of a commodity. Most
management decisions remain with the farmer, who retains ownership
during the production cycle. The farmer assumes all risks of production,
but shares price risk with the contractor.
USDA, Nat'l Agric. Statistics Serv., Corn, Soybeans, & Wheat Sold Through
Marketing Contracts 2001 Summary, at 2 (Feb. 2003); see also Econ. Research
Serv./USDA, Farmers Use of Marketing & Prod. Contracts, at 3 (1997) (same).
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IV
For the reasons discussed, we reverse the judgment of the district court. We
remand this case to the district court with instructions to remand this case to the
USDA for further proceedings consistent with this opinion.
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