Steven Finberg v. AGRI

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 5, 2021 Decided August 3, 2021
No. 20-1235
STEVEN C. FINBERG,
PETITIONER
v.
UNITED STATES DEPARTMENT OF AGRICULTURE AND UNITED
STATES OF AMERICA,
RESPONDENTS
On Petition for Review of an Order
of the Department of Agriculture
Louis W. Diess, III argued the cause for petitioner. On the
briefs was Mary Jean Fassett.
Charles E. Spicknall, Attorney, U.S. Department of
Agriculture, argued the cause and filed the brief for respondent.
Before: ROGERS and KATSAS, Circuit Judges, and
SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
SENTELLE.
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SENTELLE, Senior Circuit Judge: Steven Finberg petitions
for review of an order of the United States Department of
Agriculture (“USDA”) determining that he was responsibly
connected to his employer’s violation of the Perishable
Agricultural Commodities Act and subjecting him to licensing
and employment sanctions. Finberg contends that the agency’s
Judicial Officer’s determinations that (1) he was involved in
activities that resulted in his employer failing to pay its
suppliers and (2) his employer was not the alter ego of its
owners were unsupported by substantial evidence. We agree
and reverse.
I.
A. Statutory background
The Perishable Agricultural Commodities Act prohibits
any person from acting as a merchant, dealer, or broker of fresh
fruits and vegetables without a license from the USDA. 7
U.S.C. § 499c(a). The term “person” within the Act includes
“individuals, partnerships, corporations, and associations.”
Id. § 499a(b)(1). The Secretary of Agriculture may suspend or
revoke the license of any licensee that engages in unfair
conduct in violation of the Act. Id. § 499h(a). Unfair conduct
includes, among other practices, failing to promptly make full
payment to suppliers. Id. § 499b(4).
Licensees may not employ “any person who is or has been
responsibly connected with any person whose license has been
revoked or is currently suspended.” Id. § 499h(b)(1). A person
is presumed to be responsibly connected to a corporation or
association if he is an “officer, director, or holder of more than
10 per centum of the outstanding stock.” Id. § 499a(b)(9).
However, that person can rebut the presumption by meeting a
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two-part test. First, he must show “that the person was not
actively involved in the activities resulting in a violation of”
the Act. Second, he must show that he was only “nominally
a[n] . . . officer, director, or shareholder” or was “not an owner
of a violating licensee . . . which was the alter ego of its
owners.” Id. Both showings must be made by a preponderance
of the evidence. Id.
B. Factual background
At the time of the events leading to this proceeding, Adams
Produce Company was a distributor of fresh fruits and
vegetables. Steven Finberg became an Executive Vice
President of the business in 2007. In 2009, he became the
firm’s Chief Operating Officer. In those roles Finberg oversaw
sales, marketing, and logistics. At that time, Scott Grinstead
was the CEO of Adams.
In October 2011, federal authorities began investigating
Adams Produce for fraud against the Department of Defense.
Adams Produce contracted with the Department of Defense to
supply it fruits and vegetables, ostensibly at market prices.
Unbeknownst to the government, Adams Produce was
charging well above market prices. An anonymous
whistleblower informed federal authorities that Adams
Produce was exchanging inflated invoices with another
business to provide documentation enabling Adams Produce to
fraudulently charge the government higher prices. According
to Finberg, he was completely unaware of the scheme until
later in October 2011, when two suppliers and Adams
Produce’s CFO discussed the scheme in front of him over
lunch. At that lunch, Finberg agreed with the suppliers and the
CFO to gradually end the scheme to avoid further detection.
There is no evidence in the record to suggest that Finberg knew
about the scheme earlier or was any more involved.
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Adams Produce hired a law firm to internally investigate
its operations in response to the federal investigation. The
investigation revealed that CEO Grinstead had engaged in
extensive fraud, including falsifying financial information to
convince an outside business to invest in Adams Produce and
diverting hundreds of thousands of dollars for his own use.
Adams Produce paid the law firm over $2 million for its work.
Shortly thereafter, Adams Produce’s legal troubles caused
its bank to freeze its accounts and lines of credit. Prior to the
unraveling of Grinstead’s fraud, Adams Produce had relied on
a line of credit from PNC Bank to cover invoices from
suppliers. The bank froze the business’s accounts in reaction to
the exposure of the fraudulent practices. Without its funding,
Adams Produce was unable to promptly pay produce suppliers
approximately $10 million. The business was eventually able
to arrange $8 million in payments to suppliers but was unable
to pay the remaining $2 million. Adams Produce declared
bankruptcy in April 2012.
C. Legal proceedings
The government obtained indictments against Grinstead
and Finberg for their roles in the fraud at Adams Produce.
Following the indictments, Grinstead pled guilty to wire fraud,
misprision of felony, and multiple failures to file a tax return.
Finberg, in turn, pled guilty to misprision of a felony. In his
plea agreement, Finberg admitted to agreeing with others to
bring the Department of Defense fraud in for a “soft landing”
rather than ending it immediately. App. 518.
In June 2013, a disciplinary complaint was filed against
Adams Produce with the Agricultural Marketing Service
within the USDA. The complaint alleged that Adams Produce
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violated the Perishable Agricultural Commodities Act, 7
U.S.C. § 499b(4), by failing to promptly pay its suppliers $10
million. The agency determined that Adams Produce
“willfully, repeatedly and flagrantly” violated the Act by
failing to pay. App. 16.
The agency’s determination that the company violated the
Act also triggered the Act’s employment bar for each person at
Adams Produce who was responsibly connected to the
violation. 7 U.S.C. §§ 499a(b)(9), 499h(b)(1). Finberg and
other officers petitioned for review before an ALJ to
demonstrate that they were not responsibly connected to the
violation. The other officers succeeded in their petitions, in
part, because the ALJ found that Adams Produce was the alter
ego of Grinstead. Nevertheless, the ALJ determined that
Finberg was responsibly connected. Finberg then appealed the
ALJ’s decision to the USDA Judicial Officer, the final stage of
review available to Finberg within the USDA. Due to the
Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044(2018), and the consequent appointment of a new USDA
Judicial Officer, Finberg’s case was remanded to another ALJ
who received new briefing, reviewed the existing record de
novo, and reached the same conclusion as the previous ALJ.
The case then reached the USDA Judicial Officer on its merits.
The Judicial Officer affirmed the ALJ’s decision in the
opinion now under review with little analysis or consideration
of the evidence. The Officer stated that the “actively involved”
requirement was met whenever a petitioner “exercise[s]
judgment, discretion, or control with respect to the activities
that resulted in a violation of the PACA.” App. 23 (quoting In
re Michael Norinsberg, 58 Agric. Dec. 604, 611–12 (USDA
1999)). The Officer concluded that Finberg exercised
judgment, discretion, or control once he learned of the
fraudulent scheme, stayed silent, and failed to report what he
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learned to the Department of Justice. As for the requirement
that the “activities . . . resulted in a violation of the PACA,” the
Judicial Officer provided no independent analysis. Instead, the
Officer quoted the ALJ’s statement that “Indeed, the record
demonstrates by a preponderance of the evidence that
Petitioner Finberg’s activities helped bring about the downfall
of Adams, which resulted in Adams’ violation of the PACA.”
App. 23–24. The Judicial Officer’s analysis of the alter ego
issue was similarly brief, quoting the ALJ and concluding that
Finberg did not prevail under the alter ego prong because he
“had actual knowledge of fraudulent activities, yet stayed silent
and failed to report what he learned to the Dept of Justice.”
App. 26.
Finberg now petitions us for review of the Judicial
Officer’s decision. He argues that the Judicial Officer’s order
was arbitrary and capricious and lacked substantial evidence in
its determination that he was responsibly connected to Adams
Produce’s violations of the Act. In particular, he argues that the
Judicial Officer lacked any evidence demonstrating a causal
connection between Finberg’s activities and the failure-to-pay
violations, and that moreover, Finberg’s activities improved
the financial well-being of the business. He also argues that
Adams Produce was the alter ego of Grinstead.
II.
The Administrative Procedure Act requires us to set aside
the Judicial Officer’s order if it is “arbitrary, capricious,” “not
in accordance with law,” or “unsupported by substantial
evidence.” 5 U.S.C. § 706; Taylor v. USDA, 636 F.3d 608, 613
(D.C. Cir. 2011). Agency action is arbitrary and capricious if
the agency fails to adequately explain or make statutorily-
required findings. Motor Vehicle Mfrs. Ass’n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). We do not require
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agency explanations to be “so precise, detailed, or elaborate as
to be a model for agency explanation,” FCC v. Fox Television
Stations, Inc., 556 U.S. 502, 538 (2009) (Kennedy, J.,
concurring), and will “uphold a decision of less than ideal
clarity if the agency’s path may reasonably be discerned.”
Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419
U.S. 281, 286 (1974). Substantial evidence is lacking if,
considering the record as a whole, no reasonable factfinder
could have made the same finding as the agency. Inova Health
Sys. v. NLRB, 795 F.3d 68, 80 (D.C. Cir. 2015).
The Judicial Officer determined that Finberg was
responsibly connected to Adams Produce’s violations of the
Act. As previously discussed, that is presumed true because
Finberg was an officer of the business. 7 U.S.C. § 499a(b)(9).
That presumption is rebutted, however, if (1) Finberg was not
“actively involved in the activities resulting in a violation of
[the Act],” and (2) he was only nominally an officer or he was
not a shareholder and the company was the alter ego of its
owners. Id. We assume, without deciding, that Finberg was
actively involved in the scheme to defraud the Department of
Defense. Finberg does not argue that he was only nominally an
officer. The agency found that he was not a shareholder of the
firm. We turn then to the remaining questions under section
499a(b)(9): whether the activities Finberg was involved in
resulted in the charged violation of the Act, and whether
Adams Produce was the alter ego of its owners.
A.
The Judicial Officer obviously lacked substantial evidence
for the determination that the activities Finberg was involved
in resulted in Adams Produce’s failure to pay its suppliers in
violation of the Act. Indeed, the Officer completely failed to
make any factual findings connecting Finberg and the
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business’s failure to pay its suppliers. One sentence in the
entire order, quoted from the ALJ’s decision that the Judicial
Officer reviewed, alludes to causation: “Finberg’s activities
helped bring about the downfall of Adams, which resulted in
Adams’ violation of the PACA.” App. 24.
The Judicial Officer’s conclusion is a syllogism, resting
directly on multiple premises, something like the following:
The violation of the Act involved the failure to pay suppliers;
the previous fraud with which Finberg was involved deprived
the company of some financial assets; therefore, Finberg’s
actions are causally connected to the commission of the
charged acts of nonpayments. The validity of the syllogism is
subject to much question. However, even assuming that the
Judicial Officer’s view of the law was defensible, there is no
evidence to support the premise that any financial degradation
attributable to the fraud caused the ultimate failure to pay. The
Judicial Officer’s order contains no findings about how much
money the firm lost due to the scheme or what the firm’s
finances would have looked like in the absence of the scheme.
Explicitly tracing out the connection between the scheme
Finberg participated in and Adams Produce’s violations of the
Act is particularly necessary in circumstances such as these
when Adams Produce was embroiled in multiple fraudulent
schemes. It is almost certain that PNC Bank would have frozen
Adams Produce’s accounts if and when the financial
misrepresentations which were independent of the Department
of Defense fraud became known. Moreover, as Finberg
persuasively argues, the scheme to defraud the Department
increased the business’s revenues in the short term.
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B.
Likewise, the Judicial Officer lacked substantial evidence
for determining that Adams Produce was not the alter ego of its
owners. Ordinarily, a determination of whether a business was
the alter ego of its owners would consider, for example,
evidence that the owner dominated the firm or diverted
corporate assets. E.g., Norinsberg, 56 Agric. Dec. 1840, 1864
(1999). In fact, the Judicial Officer’s order did not make any
factual findings relevant to the question of whether Adams
Produce was the alter ego of Grinstead. The omission is all the
more glaring because the Judicial Officer’s order determining
that other officers of Adams Produce were not responsibly
connected to its violations emphasized “the profligate spending
by CEO Scott Grinstead using the money of Adams Produce
Company LLC as if that money were his personal funds.” In re
Jonathan Dyer, 2020 WL 8174373, at *6 (USDA Jan. 9, 2020).
Instead of considering the same factors in Finberg’s case,
the Judicial Officer cited Finberg’s knowledge of and
involvement in fraud at Adams Produce to find that the firm
was not the alter ego of its owners. The officer’s analysis
conflated the active involvement question and the alter ego
question. The text of the Act makes clear that the active
involvement inquiry and the alter ego inquiry are distinct
factors. See 7 U.S.C. § 499a(b)(9). Indeed, on the record before
us, it is clear that the only reasonable conclusion the Judicial
Officer could have made is the one made for the other officers
that sought review: that Adams Produce was the alter ego of
Grinstead. See Jonathan Dyer, 2020 WL 8174373, at *4–6.
* * *
In sum, the agency lacked substantial evidence for its
conclusion that Finberg’s activities contributed to Adams
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Produce’s violation of the Act and its conclusion that Adams
Produce was not the alter ego of Grinstead. “[W]e reverse an
agency’s decision” when, in cases such as this, “‘the record is
so compelling that no reasonable factfinder could fail to find to
the contrary.’” Orion Reserves Ltd. v. Salazar, 553 F.3d 697,
704 (D.C. Cir. 2009) (quoting Highlands Hosp. Corp. v NLRB,
508 F.3d 28, 31 (D.C Cir. 2007)).
The order of the USDA is reversed.
So ordered.