USDA Farm Service Agency ... Shared Appreciation Land Grab

(Note: This complex issue affects farmers and ranchers who restructured FmHA loans a decade ago, who are now being required to repay to the government a portion of the appreciation of the value of their land. Recommendation D.3 (a)(b) of the U.N. Conference on Human Habitat (1976), sets forth this policy of "recapture" of "unearned" profits from increases in land value.)

October 2002

By J.D. Evans

In January of 1988 Congress enacted public law 100-233 to be administered by the USDA Farmers Home Administration (FmHA). The legislation was in response to depressed farm commodity prices and land value. It was an attempt to restructure the unbearable debt load of many FmHA borrowers by means of debt reduction or write-off.

The legislation also prescribed re-capture of a portion of written-down debt under specific circumstances in the event that a borrower realized an increase in value of secured property. As a condition to, and in consideration of, having a portion of their debt written down and their loans restructured, borrowers were required to execute a Shared Appreciation Agreement (SAA).

Currently the Farm Service Agency (FSA) (the re-named FmHA) is attempting to circumvent the enacting legislation as well as the resulting U.S. Code (USC) and the Code of Federal Regulations (CFR) in addition to the SAA terms and conditions, by demanding, in many cases, re-payment of practically all written-down amounts. Many of these claims by FSA are unfounded, and without basis.

It has been reported that nearly 12,000 farmers all across the nation may become saddled with an unbearable $1.7 billion debt load as a result of FSA's tough but baseless demands. ⁽¹⁾ FSA's action has already resulted in the suicide death of a Greenfield, Indiana, farm wife.

SAAs Misrepresented to Borrowers

When the FmHA presented the SAAs, borrowers were given the impression by FmHA employees that if, at the expiration of the contract, they had not sold, and were still farming the land, there would be no Shared Appreciation payable. The loans were written down, and in exchange, the borrowers agreed to repay from 50 to 75% of any realized increase in land value during a ten-year period before the agreement expired.

If a borrower were to trigger recapture by selling the land, discontinuing farming, or paying off the loan within the first 4 years of the contract, he would be required to pay 75% of any appreciation of value of the land based on a current appraisal. If the borrower were to trigger recapture by selling the land, discontinuing farming, or paying off the loan during the remaining term of the agreement, he would be required to pay 50% of any appreciation in value, also based on a current appraisal. What was stated then to the borrowers, and is now in debate, is what happens when the contract expires without any triggering event having occurred.

The FSA now claims that the SAAs are "maturing" and that 50% of any increase in farm value, based on a current appraisal, is due on the expiration date, regardless of the occurrence of any of the recapture triggering events. Borrowers say that that is not right, and is not the original intent or purpose of the contract. In certain instances, as many as four witnesses can attest to the original transaction and what was agreed to, including that nothing would be due after the ten year expiration of the contract. Further, borrowers knew exactly what they signed and FmHA loan officers gave them a different message from what FSA now says. The message was that nothing would be due from the farmer after the expiration date. Borrowers were told that when the contract expired, nothing would be due and they believed what they were told. If, in fact, what they were told was not true, then they were deceived into signing a contract.

It has only recently been that borrowers have begun to communicate with each other regarding the unfair treatment they have received from the FSA. Agreements from the Pacific Northwest through the plains to Louisiana show a trend that borrowers were told one thing when they signed, and are now being told something different. Retired or former FSA personnel have indicated to borrowers that 'the Agency didn't think any farmers with SAAs would survive the ten-year agreement'. FSA seems to have thought many small family farmers would have been exited out of agriculture by default and the SAA would not be there at the end of the ten-year period.

Contrary To Law and Legislative Intent

The current attempt by the FSA to force collection of recapture on appreciation of property upon expiration of an SAA not only contradicts the contract, but also is contrary to the law. The SAAs were implemented in the late 1980s in conjunction with loan restructure/write down provisions of Public Law 100-233 and (7USC 2001) during a period of depressed land and farm product prices. Pertinent portions of these statutes are provided to facilitate understanding of the place of SAAs in the law.

"101 STAT. 1678 Public Law 100-233 - Jan. 6, 1988

SEC. 615 DEBT RESTRUCTURING AND LOAN SERVICING.

(a) In General - Subtitle D (7 USC. 1981 et seq.) is amended by adding at the end thereof the following new section:

7 USC 2001.

SEC. 353. DEBT RESTRUCTURING AND LOAN SERVICING

In general - The Secretary shall modify delinquent farmer program loans -- > -- made or insured under this title, or purchased from the lender or the Federal Deposit Insurance Corporation under section 309b, to the maximum extent possible  --

(1) to avoid losses to the Secretary on such loans, with priority consideration being placed on writing-down the loan principal and interest (subject to subsections (d) and (e)), and debt set-aside (subject to subsection (e)), whenever these procedures would facilitate keeping the borrower on the farm or ranch, or otherwise through the use of primary loan service programs as provided in this section; and

(2) to ensure that borrowers are able to continue farming or ranching operations."

"PL 100-233

(e) SHARED APPRECIATION ARRANGEMENTS -

(1) IN GENERAL - As a condition of restructuring a loan in accordance with this section, the borrower of the loan may be required to enter into a share appreciation arrangement that requires the repayment of amount written off or set aside.

(2) TERMS - Shared appreciation agreements shall have a term not to exceed 10 years, and shall provide for recapture based on the difference between the appraised values of the real security property at the time of restructuring and at the time of recapture.

(3) PERCENTAGE OF RECAPTURE - The amount of the appreciation to be recaptured by the Secretary shall be 75 percent of the appreciation in the value of such real security property if the recapture occurs within 4 years of the restructuring, and 50 per cent if the recapture occurs during the remainder of the term of the agreement.

(4) TIME OF RECAPTURE - Recapture shall take place at the end of the term of the agreement or sooner - on the conveyance of the real security property; on the repayment of the loans; or if the borrower ceases farming operations.

(5) TRANSFER OF TITLE - Transfer of title to the spouse of a borrower on the death of such borrower shall not be treated as a conveyance for the purpose of paragraph (4)"

"7 USC 2001

TITLE 7 - AGRICULTURE

CHAPTER 50 - AGRICULTURAL CREDIT

SUBCHAPTER IV - ADMINISTRATIVE PROVISIONS

(B) Recapture

(i) Authority to require borrower to enter into agreement before terminating loan obligations

(I) In general - The Secretary may require, as a condition of the termination of loan obligations under this paragraph, that the borrower enter into an agreement with the Secretary providing that if the borrower sells or otherwise conveys the real property used to secure such loan within 10 years after the date of such agreement, and realizes a gain on such sale or conveyance over the amount of the recovery value of the loan, then the Secretary may recapture part or all of the difference between the recovery value of the loan and the fair market value (on the date of such sale or conveyance) of the property securing the loan."

From these citations, it is clear that the primary purpose of this legislation was to enable family farm and ranch operations to continue. Congress clearly stated that only gain realized on the transfer of security during the term of an SAA was to be subject to recapture. Congress' intent was not to have the FSA attempt to collect alleged appreciation in secured property based merely upon expiration of an SAA.

Further confirmation of this fact has been provided by former Idaho Representative, The Honorable Richard H. Stallings, who was very instrumental in drafting this enabling legislation. He recently stated: "When my colleagues and I wrote the law, we never intended that farmers and ranchers who were able to retain their land and continue farming and/or ranching beyond the expiration of their "Shared Appreciation Agreement" would be required to repay any of the written down portion of their loans on land, which had appreciated in value. Only those who sold their land or who otherwise ceased production on their land prior to expiration of their Shared Appreciation Agreement were to be required to repay a portion of the amount written down should they realize some appreciation in the value of their land. This was how the Farm Credit Association approached debt write down, and it only made common sense then for the U.S. Government to undertake a like approach."

Actions by the FSA

Despite these facts, and with full knowledge that the law and the Statute did not authorize collection based solely upon expiration, the FSA launched a campaign to do just that. As SAAs began to expire, the FSA commissioned appraisals and sent collection notices to borrowers based upon those appraisals, many of which were and continue to be highly inflated, on speculative basis having no relation to actual productive value of the land. Though the FSA ostensibly offers to amortize the payment of amounts demanded, they also demand that the borrower formulate a plan that includes a positive annual cash flow. With the added burden of the SAA debt, it is seldom possible for a producer to formulate a plan that demonstrates a positive cash flow. Hence, the unbearable debt burden forces liquidation, foreclosure or bankruptcy.

That the FSA was aware of the legal limitation precluding collection based on expiration, but proceeded to attempt to do so nonetheless, is evidenced by its own testimony before Congress as recorded in the Federal Register.

"[Federal Register: February 10, 1998 (Volume 63, Number 27)]

7 CFR Parts 1951

EFFECTIVE DATE: March 12, 1998.

As a condition to, and in consideration of, having a portion of their debt written down and their loans restructured, a borrower must execute an SAA. FSA collects a portion of the written off debt from appreciation of the real estate security when the property is sold, the loans are paid or the farmer quits farming. Current regulations are written so as to allow collection on an SAA only after transfer of title. The present wording has resulted in the interpretation that property must be foreclosed upon in order to effect a change in title before SAA can be enforced. This requires filing an additional civil action after foreclosure to collect proceeds that result from value appreciation of the security. This results in decreased collections on SAAs and increased litigation costs."

From its statements recorded in the Federal Register, it also becomes clear as to the tactic FSA employed. FSA effected a change in the Code of Federal Regulations (CFR) in order to make it appear that FSA had authority to collect based only upon expiration of an SAA.

"7CFR 1951.914

[Revised as of January 1, 1999]

Sec. 1951. 914 Servicing of ... Service Programs.

(a) [Reserved] (Keep this "Reserved" status in mind for future reference)

(b) When shared appreciation is due.

(ii) 50% of any positive appreciation if any one of the events listed in paragraphs (b)(1) through (4) of this section occurs more than 4 years from the date of the SAA, or if the term of the SAA expires."

The final phrase of this section, "or if the term of the SAA expires.” never appeared anywhere in the enabling legislation or in any prior version of any statute or regulation, and thus reflects the deception perpetrated upon not only borrowers but also the U.S. Congress by the FSA.

Based on the foregoing facts, it is clear that there was no legislative intent, legislative substance or contractual covenant to support the FSA's current campaign to recapture unrealized appreciation of secured property based solely upon expiration of SAAs.

Even more striking is the wholesale elimination of paragraph "(a)" which, as you will recall, has been "[Reserved]" in the 1999 revision of this portion of the code, but which previously clearly restricted the FSA as to when and under what circumstances 'shared appreciation' could be recaptured.

"[Code of Federal Regulations]

[Title 7, Volume 14, Parts 1950 to 1999]

[Revised as of January 1, 1998]

From the U.S. Government Printing Office via GPO Access

[CITE: 7CFR1951.914]

[Page 149-150]

TITLE 7 - AGRICULTURE

CHAPTER XVIII -- RURAL HOUSING SERVICE, RURAL BUSINESS -- COOPERATIVE SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT OF AGRICULTURE (CONTINUED)

Exhibit A -- [Reserved]

Subpart S -- Farmer Program Account Servicing Policies

Sec. 1951.914 Servicing of accounts restructured under Primary Loan Service Programs.

(a) Servicing Shared Appreciation Agreements. (1) The County Office will input, via the FmHA or its successor agency under Public Law 103-354 field office terminal system, an equity record. The County Office will process this transaction in accordance with the provisions in the ADPS manual and the information in exhibit D of this subpart, "Shared Appreciation Agreement.''

(2) The borrower's account will be credited with the amount of debt written down.

(3) Six months prior to the end of the Shared Appreciation Agreement, not to exceed 10 years, the Finance Office will notify the County Supervisor of the expected final date of the recapture.

(4) The County Supervisor will establish a follow-up on Form FmHA or its successor agency under Public Law 103-

354 1905-1, "Management System Card -- Individual,'' to review the County real estate records every 24 months starting from the date of the Shared Appreciation Agreement to determine if the borrower has sold the real estate property covered by the agreement or transferred title to such property. The results of the review will be recorded in the borrower's County office case file.

(5) If the County Supervisor determines that the borrower has sold the real estate or transferred title, an appraisal of the real estate will be completed. If the appraisal indicates that there is a positive value between the current market value at the time the Shared Appreciation Agreement was signed and the current market value at the time the borrower conveyed the real estate or transferred title, the borrower will be notified in writing, certified mail, return receipt requested, of the following:

(i) The amount of recapture due;

(ii) The date the recapture is due (not to exceed 30 days from the date the Notice of Recapture Letter is received by the borrower);

(iii) If the borrower disagrees with the FmHA or its successor agency under Public Law 103-354 appraisal, the borrower may appeal the appraisal. If the borrower appeals the current market appraisal, he/she may request an independent appraisal. If the difference between the FmHA or its successor agency under Public Law 103-354 appraisal and independent appraisal is not more than five percent, the borrower must choose the appraisal to be used to process the request. The borrower will select an appraiser from the list of FmHA or its successor agency under Public Law 103-354 approved appraisers. The selection of the appraiser must be made by the borrower within 15 days of the receipt of the recapture due letter;

(iv) Any appeal under this section will be concluded prior to any further action by FmHA or its successor agency under Public Law 103-354; and

(v) If the borrower does not appeal within 30 days or does not pay the amount, FmHA or its successor agency under Public Law 103-354 will proceed as set forth in Sec. 1951.907(e) of this subpart." (Emphasis provided)

All the immediately above portion of the CFR was removed, and the reference for it became "reserved" following the FSA's deceptive testimony recorded in the Federal Register shown earlier.

Based on the original CFR, particularly paragraph (5), the county supervisor was authorized to order an appraisal only if he had already determined from inspection of county records that a sale or transfer of the 'covered' property had occurred during the term of the SAA. Hence, any appraisal ordered on any property which has not been determined, by the county supervisor, to have been sold or transferred during the term of the SAA, is beyond the scope and authority of the FSA, and as such is fundamentally unfair and a denial of due process to the borrower. The total elimination of this portion of the code evidences FSA's dissimulation and disregard for not only the legal rights but also the economic viability of borrowers.

Contrary To the Contract Itself - Misinterpreted

It has been suggested that the SAA contract may be ambiguous, but also that, if understood correctly, it is in fact quite clear. The truth is that, if interpreted according to the FSA's desire, the SAA is indeed ambiguous and confusing. Though the FSA argues that paragraph 2 designates expiration as a triggering event for collection or recapture, it does not. Paragraph 2 merely establishes a 'schedule' or timetable that points out when the estimation of some possible 'amount' will occur, not that any such amount will ever become due or collectible.

The brief paragraph preceding paragraphs 1 and 2 states the purpose of both paragraphs 1 and 2 as establishing a 'schedule' for payment of 'an amount'. A schedule is merely a timetable. It is not a basis for determining whether collection or recapture of any amount is or may ever actually be in order. To wit:

"As a condition to, and in consideration of, FmHA writing down the above amounts and restructuring the loan. Borrower agrees to pay FmHA an amount according to one of the following payment schedules:

1. Seventy-five (75) percent of any positive appreciation in the market value of the property securing the loan as described in the above security instrument(s) between the date of this agreement and either the date of expiration of this agreement or the date the borrower pays the loan off in full, ceases farming or transfers title of the property, if such event occurs four (4) years or less from the date of this agreement.

2. Fifty (50) percent of any positive appreciation in the market value of the property securing the loan above as described in the security instruments between the date of this agreement and either the expiration date of this agreement or the date Borrower pays the loan in full, ceases farming or transfers title of the security, if such event occurs after four (4) years but before the expiration date of this agreement." (Emphasis provided)

Logically, "the expiration date of this agreement" in paragraph 2, can only be a reference to a point in time when the value of a property might be measured. It cannot be a reference to an "event" that "occurs" because it is impossible for "the expiration date of this agreement" to occur "before the expiration date of this agreement".

The only reasonable explanation for the inclusion of this reference in both paragraph 1 and paragraph 2 is that FmHA wished to retain the option to delay assessing the market value of a property until the SAA had expired, possibly in case they did not become aware, until expiration of the SAA, of cessation of farming or a transfer of the property, but more probably in hope that the property would have gained value between the time of loan payoff, cessation of farming or transfer of the property and the subsequent expiration of the SAA, thus resulting in a larger claim by the FmHA than would have been the case if the value had been assessed at the earlier time of pay off, cessation or transfer.

The latter has been confirmed in "Beck Vs USDA, FSA" a court case in Montana that exposed the FSA's ploy. Even though a transfer of land occurred within just a few months of the origination of the SAA, the FSA waited until expiration of the Beck's SAA to claim recapture. Fortunately, in this case, Judge Cebull issued a summary judgment in favor of the Becks.

The FSA completely ignores the paragraph following paragraph 2, which is the key to the establishment of amount to be 'recaptured'. It is notable that nowhere in paragraph 2, or any previous paragraph, does the term 'recapture' appear in any form. It must therefore be concluded that 'recapture' is different in meaning from 'appreciation' or else the term 'appreciation' would suffice for use in this final paragraph. However, 'recapture' is used in the final paragraph, which delineates the basis for computing 'amount' of 'recapture'

"The amount of recapture by the FmHA will be based on the difference between the value of the security at the time of disposal or cessation by Borrower of farming and the value of the security at the time this agreement is entered into. If the borrower violated the terms of this agreement FmHA will liquidate after the borrower has been notified of the right to appeal." (Emphasis provided)

From this paragraph, it is clear that the only events that provide a reason or trigger for establishing any amount of 'recapture' by the FSA are 'disposal or cessation by the borrower of farming'. This understanding is consistent with the enabling legislation and [with] all original statutes and regulations.

Hence, we see that the interpretation the FSA would impose actually contradicts the terms of its own contract form, and thereby would force the contract to oppose itself, thus creating an absurdity. Additionally, FSA's claimed interpretation would have, from the outset, placed the terms of the contract in direct conflict with the regulations at 7CFR 1951.914 issued in 1988 which, as shown above, restrict FSA's completion of an appraisal for the purpose of establishing recapture to those cases in which the FSA had determined that a sale or transfer had taken place prior to expiration of the SAA.

Since reason dictates the presumption that the FSA did not intentionally draft an absurd agreement, or worse, draft an agreement that was in direct conflict with controlling regulations, it must be concluded that the interpretation of the SAA now propounded by the FSA is fallacious, outside the scope of the law and the FSA's administrative authority, and must therefore be rejected, since it is also fundamentally unfair and results in violation of borrowers' due process.

To appreciate the duplicity of the FSA action, and the destructiveness of its consequences, one need only look at the procedure followed by the FSA in determining the amount of debt write down and the resulting debt load placed upon the embattled borrower at the time of restructure. The debt load was established according to a program referred to as "DALR$", officially termed 'a computerized decision support tool'. The basic purpose of DALR$ was to minimize loss to the government by maximizing the debt load of the borrower. The DALR$ program documentation even states, "write down amounts will be calculated so that the (borrower's) 'Balance Available' to repay debt is equal to or as close as possible to the 'Debt Repayment'."

Thus, FSA, from the outset, by design, harnessed borrowers to the maximum possible serviceable debt load. This fact in itself ensures that any added debt burden placed upon such a borrower, by the FSA's 'recapture' of arbitrarily established appreciated value upon expiration of an SAA, will be unserviceable, thereby forcing foreclosure, liquidation or bankruptcy of the borrower.

Perhaps the most discouraging turn of events is the failure by the Congress to address this tragic travesty, particularly on the part of the Democratic Senate majority, in the recently passed Farm Bill. Although Oklahoma Representative, the Honorable Wes Watkins, introduced a temporarily effective amendment, the Senators on the joint conference committee killed the Watkins amendment.

Also, since borrowers are at a decided financial disadvantage in pursuing judicial remedy against the FSA, and since administrative appeals of FSA claims of recapture based on expiration have thus far fallen on deaf ears there is as yet no general relief available. However a case on judicial review in Colorado has recently established that FSA appraisals based on other than agricultural value are in conflict with the enabling statute which specifies that the SAA's purpose is to keep farmers on the farm. In the "Evans Vs Veneman" case, District Judge Richard Matsch stated in his opinion and order that, "Moreover, consideration of the farm's development potential is inconsistent with the purpose of the shared appreciation statute which is to keep farmers on the farm. 7 U.S.C.§ 2001 (a)(2)." It is hoped that dissemination of this information will provide some hope, and possibly a rejoinder for some of those for whom it is not already too late, those who have not already lost their land to yet another spurious federal government land grab.

To contact others interested in, or for further information on this subject, feel welcome to visit the FSA Shared Appreciation Resource web site, http://www.geocities.com/fsasaainfo/

"USDA pacts cause borrower confusion" Burlington, Iowa Hawk Eye, June 25, 2000, by Alan Guebert.