Old MacDonald Had a Farm [Loan] E-I-E-I-O My

Posted on December 10, 2014 by Charles Nestrud

On December 2, 2014 the United States District Court for the Eastern District of Arkansas enjoined the Small Business Administration (SBA) and the Farm Service Agency (FSA) (together the “Agencies”) from making any payments on their loan guaranties to Farm Credit Services of Western Arkansas (Bank), pending the Agencies’ compliance with the National Environmental Policy Act (NEPA) and the Endangered Species Act (ESA).  The Bank had loaned nearly $5 million to C&H Hog Farms, Inc. (C&H) in 2012 for the construction of a confined animal feeding operation (CAFO), collateralized by a guaranty from the United States. 

The court’s decision paves the way for potential alteration of the collateral agreement terms, over two years after the non-party Bank had closed and funded the loan.  Such court action could jeopardize the farm loan guaranty program.

In its decision the court found that the SBA failed to conduct any environmental review of its loan guaranty or to consider the impact of that loan on the endangered Gray Bat that resides in an area near the CAFO, and that the FSA’s environmental impact and endangered species reviews were inadequate; the Agencies’ actions thereby violated both NEPA and ESA.  The court’s injunction precludes the Agencies from making any payment on their loan guaranties to the Bank until they have complied with their obligations under NEPA and ESA, giving them a year to do so.

In August of 2012, and as provided under state regulation, C&H received a General No Discharge Permit (Permit) from the Arkansas Department of Environmental Quality (ADEQ) that addresses the management of manure, litter, and process wastewater generated from the CAFO.  The Permit authorizes up to 6503 swine, at a location along a creek that discharges to the Buffalo National River, the nation’s first national river.

Upon completion of FSA’s review process and issuance of a Finding of No Significant Impact in August 2012, C&H obtained an initial construction loan of $3.6 million, 75% of which was guaranteed by SBA.  C&H later received a $1.3 million loan, with 90% of that loan guaranteed by FSA.  Both loan guaranties were required by the Bank.  The loans were funded, construction was completed, CAFO operations commenced, and C&H has been making timely loan payments. 

In August of 2013 the Buffalo River Watershed Alliance and several other organizations sued the Agencies, alleging that the CAFO permit contemplated at least occasional discharges of waste into surface waters that could pollute the Buffalo National River, and that the Agencies had violated NEPA, ESA, and certain other federal requirements.  The plaintiffs requested that the loan guaranties be enjoined, pending a further environmental review.  On December 2, 2014 an injunction was issued.  C&H and the Bank were not parties to the litigation.   

The significance of this decision is not the finding of a NEPA or ESA violation.  What is surprising, and noteworthy, is the Court’s conclusion that such agency action was sufficiently related to a loan arrangement between two entities that were not party to the suit, leading to possible rewriting of that loan two or more years after it was negotiated and closed, and the funds dispersed. 

The court concluded there was a sufficient causation nexus because “[w]ithout the guaranties, there would’ve been no loans.  Without the loans, no farm.”  In addition, the Court concluded that requiring further NEPA and ESA review would in fact redress the plaintiffs’ injuries for the loans already made since the Agencies have an “ongoing role in monitoring any conditions placed on their guaranties,” thereby suggesting that further restrictions could well be placed on C&H’s operation of the CAFO.    

The Agencies have now agreed to undertake the additional review within the mandated 12 month time period.   That review may result in no additional restrictions, or in restrictions that C&H can carry out without difficulty.  With C&H being current on its loan payments, this decision may ultimately have no practical impact on C&H or its Bank.  However, the “oh my” scenario is equally possible, because the court’s decision has no limits on the scope of additional restrictions that may be imposed.

As noted by the court, “[t]he federal agencies, through guaranty conditions, have control over C&H’s case-relevant behavior” and “it’s likely that more environmental review will change how C&H operates its farm.”  If C&H is unable to meet those restrictions, resulting in a loan default, the Bank will lack the guaranty it required to fund the loan in the first place.  Thus, the court has authorized the guarantor to re-write the terms if its guaranty, post hoc, to the severe detriment of the non-party Bank.

With a six year statute of limitations on filing a NEPA claim, what farm loan guaranty is safe from being altered or eliminated as a result of judicial action?  Will Old MacDonald be prohibited from obtaining next year’s crop loan until the Agencies complete an EIS, a process that will take a year to complete and likely cause him to miss the planting season? 

And what about other endangered species that could implicate the validity of other farm loan guaranties?  EPA’s proposed habitat designation for two newly listed endangered mussels will encompass over 40% of the area of the state of Arkansas, impacting one third of all property owners in the state, most of which are farmers. 

In addition, the broader implications of this decision on security interests cannot be overlooked.  There were no parties in the litigation to argue that relieving the United States from its debt/collateral obligation would unfairly reward the Agencies for their failure to comply with NEPA and ESA.  The Agencies certainly did not advance that argument.   In fact, the injunction is what the Agencies requested, the court noting that its “Order will follow generally the terms [of the injunction] suggested by [the Agencies].”  The Court even ordered the Agencies to “modify or void the loan guaranties as they deem appropriate in light of their revised and supplemented NEPA and ESA analysis.”  The impact upon the agricultural loan program is clear, since these loans are routinely traded as federally insured securities.  

The Arkansas Farm Bureau has succinctly identified the potential implications of this decision:  “[The opinion] probably just made it a whole lot harder for the next guy who’s trying to get a farm loan, regardless of where they are.”  You can take that to the bank—or not!    

Litigating the “butterfly effect”: Proximate Cause, Imminent Harm and Endangered Whooping Cranes

Posted on August 6, 2014 by Molly Cagle

A recent ruling from the Fifth Circuit involving the endangered whooping crane clarifies the level of proof require to show to establish  proximate cause of  “take” under the federal Endangered Species Act (“ESA”). The case also sets important precedent on the level of imminent harm required to obtain injunctive relief in ESA litigation.

The case, The Arkansas Project v. Shaw, involves the last remaining wild flock of whooping cranes in the world. According to plaintiff, The Aransas Project (“TAP”), the Texas Commission on Environmental Quality (“TCEQ”) water permitting program in 2008-09 caused the deaths of twenty-three endangered cranes (of the approximately 300 remaining in the wild) via the following seven-link chain of causation:

1. TCEQ grants water-rights permits.

2. Water-rights holders divert water

3. Low inflows of water into bays increase bay salinities.

4. Increased salinities diminish available foods for cranes.

5. Diminished food supplies cause cranes to search upland for food.

6. Upland movement of cranes causes them stress.

7. Stress weakens flock and causes crane deaths.

Defendant TCEQ and intervenors, including the Guadalupe-Blanco River Authority and Texas Chemical Council, challenged each causation step during a week-long trial in 2011. In March 2013, the federal district court judge issued a 125-page opinion agreeing with TAP’s theory and adopted TAP’s fact findings verbatim. The district court also ordered the TCEQ to immediately apply for an incidental take permit and submit a habitat conservation plan (as if it were that easy). Additionally, the Court enjoined TCEQ from issuing any new water permits in the Guadalupe and San Antonio River Basins, interjecting itself as the watermaster for all new and modified permits in the basins.  TCEQ and intervenors appealed the order to the Fifth Circuit and successfully stayed the district court injunction. After an expedited briefing schedule, oral argument before the Fifth Circuit took place in the summer of 2013.

On June 30, 2014, the Fifth Circuit per curiam reversed the district court.  The court of appeals held that TAP failed to prove TCEQ proximately caused takes of cranes. The Fifth Circuit is one of the first court of appeals to closely examine the issue of proximate cause and ESA liability since Justice O’Connor penned her concurrence on the subject in the 1995 U.S. Supreme Court opinion Babbit v. Sweet Home. Evoking the famous 1920s Palsgraf v. Long Island Railroad case, the Fifth Circuit compared TAP’s claims to the “butterfly effect” (i.e. the idea that a butterfly flapping its wings in China can affect storm systems in New York).

Importantly, the appeals court called into question the district court’s “simplistic” conclusion that a government entity can cause take simply by authorizing an activity that ultimately affects a species. The court noted that prior instances of governmental regulatory liability for take involved actions that “directly killed or injured species or eliminated their habitat.”

Ultimately, the court examined every link of TAP’s chain of causation and concluded that the district court and TAP simply failed to account for the number of contingencies, e.g. drought, affecting each link.  As the court summed up, “only a fortuitous confluence of adverse factors caused the unexpected 2008–2009 die-off found by the district court. This is the essence of unforeseeability.”

For future ESA litigation, the court’s analysis of the standard required to obtain injunctive relief is as important as its detailed treatment of proximate causation. In particular, the court noted that the district court focused almost exclusively on the injury that occurred in 2008-2009 and could not explain how a steadily increasing flock showed that there was a reasonably certain threat of imminent harm to the cranes. The court held: “Injunctive relief for the indefinite future cannot be predicated on the unique events of one year without proof of their likely, imminent replication.” This is important precedent for future district courts examining injunctive relief even when past take liability can be proven.

TAP petitioned the Fifth Circuit for a rehearing en banc on July 28, 2014 questioning whether an appeals court can rule on proximate cause as a matter of law. So this case may not be over. But if the court’s ruling stands, it will provide fruitful discussion to examine for future ESA litigation. 

Full disclosure: ACOEL Fellow Molly Cagle represented lead intervenor Guadalupe-Blanco River Authority in the Fifth Circuit appeal. She does not attest to any lack of bias in this case and is proud of the fact that the cranes are still doing well, despite unprecedented drought in Texas.