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!