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Ackerman v. United States Department of Agriculture

United States District Court, E.D. Michigan, Northern Division

April 18, 2018

GREGORY ACKERMAN, Plaintiff,
v.
UNITED STATES DEPARTMENT OF AGRICULTURE, Defendant.

          ORDER GRANTING MOTIONS TO DISMISS AND GRANTING MOTION TO AMEND COMPLAINT

          THOMAS L. LUDINGTON UNITED STATES DISTRICT JUDGE

         On June 5, 2017, a group of farmers and incorporated farms filed suit against a number of insurance companies, the United States Department of Agriculture, the Risk Management Agency, and the Federal Crop Insurance Corporation. ECF No. 1. The Plaintiffs are dry bean farmers in Michigan, Minnesota, and North Dakota who have not received indemnity for crop insurance to which they believe they are entitled. On September 22, 2017, the Federal Defendants filed a motion for partial dismissal and the Insurance Defendants filed a motion for complete dismissal. ECF No. 39, 41. On November 9, 2017, Plaintiffs filed an amended complaint. ECF No. 50. Several weeks later, the motions to dismiss were refiled. ECF Nos. 51, 52. On March 8, 2018, Plaintiffs filed a motion for leave to file a second amended complaint which corrects the names of certain Plaintiffs. ECF No. 64. For the reasons that follow, the motions to dismiss will be granted and the motion for leave to file an amended complaint will be granted.

         I.

         Plaintiffs are bringing this putative class action “on behalf of all dry bean farmers in Michigan (navy [pea] beans and small red beans), Minnesota (dark red kidney beans), and North Dakota (dark red kidney beans).” Am Compl. at 2, ECF No. 50. Each Plaintiff purchased Dry Bean Revenue Endorsement (“DRBE”) crop insurance for their dry bean crops in 2015. Id. “The purpose of this insurance was to protect dry bean farmers against a market price decline.” Id. However, even though “dry bean market prices declined greatly in 2015, no indemnity was paid to Plaintiffs.” Id. In the present suit, Plaintiffs seek a declaratory judgment invalidating certain administrative determinations related to the DBRE, reforming or invaliding the insurance contracts, and ordering Defendants to pay indemnity to Plaintiffs.

         Plaintiffs have named a multitude of insurance companies and several federal government entities as Defendants. The insurance companies each sold DRBE policies in 2015. Defendant United States Department of Agriculture (“USDA”) “is a department of the United States Government and is the parent agency of Defendant [Risk Management Agency (“RMA”)], which in turn administers Defendant [Federal Crop Insurance Corporation (“FCIC”)], a wholly government-owned corporation created under the Federal Crop Insurance Act, 7 U.S.C. § 1501, et seq.” Id. at 14.

         A.

         Pursuant to 7 U.S.C. § 1523(a)(1), the Federal Crop Insurance Corporation may conduct pilot programs for crop insurance. Those proposed programs must be submitted to the FCIC Board. The Board then evaluates “whether a proposal or new risk management tool tested by the pilot program is suitable for the marketplace and addresses the needs of producers of agricultural commodities.” Id. The current dispute arises out of a pilot program developed by “Watts and Associates, a privately owned economic consulting firm located in Billings, Montana.” Am. Compl. at 18. The FCIC Board approved the program, titled Dry Bean Revenue Endorsement, in 2012. Id. The pilot program became effective in 2013. Id. After initial success, the FCIC approved an expansion of the pilot program, to include farmers in Michigan, effective in 2014. Id.

         Pursuant to that expansion, Michigan dry bean farmers “purchased 1, 286 DBRE policies, covering 151, 464 acres” in 2015. Id. “Minnesota dry bean farmers purchased 996 DBRE policies, covering 100, 732 acres” in 2015. Id. “North Dakota dry bean farmers purchased 5, 596 DBRE policies, covering 521, 974 acres: in 2015. Id. at 19.

         DBRE provides that farmers may elect its coverage only if they already have the “Common Crop Insurance Policy” and the “Dry Bean Crop Provisions” in force. DBRE at 1(b), ECF No. 50, Ex. A. The Common Crop Insurance Policy permits farmers to elect either revenue protection or yield protection for certain crops, not including dry beans. CCIP 2010 Amendments at 1, ECF No. 50, Ex. B. “Revenue protection provides protection against loss of revenue caused by price changes or low yields or a combination of both.” Id. “Yield protection provides protection for production losses only.” Id. “For crops for which revenue protection is available, a projected price and a harvest price will be determined in accordance with the Commodity Exchange Price Provisions.” Id. Yield protection guarantees are “determined by multiplying the production guarantee by the projected price.” Id. Thus, for yield protection, the “harvest price is not used.” Id. Revenue protection guarantees are “determined by multiplying the production guarantee by the greater of the guaranteed price or the harvest price.” Id. “The projected price is used to determine the premium, and any replant payment or prevented planting payment. The harvest price is used to value the production to count.” Id.

         Under the Common Crop Insurance Policy and the Dry Bean Crop Provisions addendum, dry bean farmers do not have the option of obtaining revenue protection. Rather, they are limited to yield protection guarantees. DBRE, however, provides dry bean farmers access to revenue protection guarantees.

         i.

         DBRE offers two kinds of revenue protection: revenue protection without harvest price exclusion and revenue protection with harvest price exclusion. The coverage for both kinds of protection is calculated similarly. The first step is determining the projected price for dry beans. On or before February 15 of the crop year, the RMA must collect the “offer price and expected contract volume” from dry bean buyers for the various types of dry beans covered by DRBE. DRBE § 7(e)(1)(A). After reviewing that information, the RMA will announce projected prices for bean types “no later than the third business day of March.” Id. at § (e)(1)(D). The projected price provides the baseline guarantee for purposes of revenue protection.

         Not later than December 15 of the harvest year, the RMA must announce the “harvest price” for each type of bean. Id. at § (e)(2)(E). The harvest price is determined pursuant to the following procedure: “The market price of each type for each day of publication during the period beginning on the first business day in September and ending on the last business day of November will be collected.” Id. at § (e)(2)(A). The “publication” mentioned in § (e)(2)(A) refers to the “Bean Market News, a publication of the Agricultural Marketing service, USDA, ” which publishes weekly market prices for specific types of dry beans in specific regions. § 2. Typically, the market price will be “the sum of the market prices for that type divided by the number of prices included in that sum.” Id. at § (e)(2)(D). If the reported market price for a certain date is qualified by “terms that indicate a small volume of sales or no sales” occurred on that date, that market activity will be disregarded for purposes of calculating the market price. Id. at § (e)(2)(B). And, “if there is a market price for fewer than 50 percent of the dates of publication, ” no harvest price will be established. Id. at § (e)(2)(C).

         The DBRE also provides contingencies for the event that either the projected price or harvest price cannot be calculated pursuant to the procedure provided above. Section 7(e)(3) indicates that, “[i]f a projected price for any of these types cannot be determined as described herein; . . . [t]he projected price will be determined by RMA and announced not later than the third business day of March; and . . . [t]he harvest price will equal the projected price.” Section 3(c)(1) explains that if a projected price cannot be calculated for a type of dry bean, coverage for that type of bean will be subject to the terms of § 7(e)(3). Section 3(c)(2) provides that “[i]f the harvest price cannot be calculated for the crop year for a type for which a projected price was determined in accordance with section 7 of this endorsement, the harvest price will be equal to the projected price.” Confusingly, the Dry Bean Revenue Insurance Standards Handbook, which is a reference material for DBRE, appears to identify a different contingency procedure for determining the harvest price when it cannot be calculated pursuant to section 7 of the DBRE. DBRE Handbook, ECF No. 50, Ex. D. In Section N, entitled “Inability to Determine a Harvest Price but a Projected Price was Established as Defined, ” the Handbook explains that “[i]f a harvest price cannot be determined . . . but a projected price was established . . ., RMA will establish the harvest price.” Id. at 6.

         Importantly, § 3(c) of the DBRE specifies that the contingencies for determining a projected and/or harvest price supersede “section 3(c)(5) of the Basic Provisions.” Section 3(c)(5)(ii) of the Common Crop Insurance Policy, which DBRE thus supersedes, provides that when the harvest price cannot be calculated as provided by the provisions of the Common Policy, the harvest price will be determined and announced by the FCIC. Common Crop Insurance Policy § 3(c)(5)(ii), ECF No. 50, Ex. B.

         ii.

         The DBRE provides three examples which demonstrate how indemnity is calculated. First, if a farmer chooses yield protection but not revenue protection, the DRBE protections will not apply. In that scenario, the farmer obtains yield protection for a specific number of acres and specific production guarantee per acre. See § 5 Example 1. In the example provided, the farmer insured 50 acres with a 1, 600 lbs. per acre production guarantee, which totaled an 80, 000 lbs. production guarantee. Id. That guarantee is multiplied by the projected price for the type of bean, and the resulting sum is the value of the guarantee (in the example, $22, 400). If the farmer's actual yield is 25, 000 lbs., that amount is multiplied by the projected price and then subtracted from the total guarantee. The difference between the value of the total guarantee and the farmer's actual production (measured by reference to the projected price) is the farmer's indemnity.

         The second example involves a farmer choosing revenue protection (meaning the DBRE terms apply) but not harvest price exclusion. In this scenario, the “revenue protection guarantee [is] calculated using the harvest price” if the harvest price is higher than the projected price. Otherwise, the farmer “must accept 100 percent of the projected price.” Id. at Example 2. In other words, the production guarantee is multiplied by the harvest price (not the projected price) to create the revenue protection guarantee. Similarly, the farmer's actual production is multiplied by the harvest price and that sum is subtracted by the amount of the revenue protection guarantee. The difference is the farmer's indemnity. See id.

         In the third example, the farmer chooses both revenue protection and a harvest price exclusion. This is a variation on DBRE coverage. When these coverage options are chosen, the “revenue protection guarantee is based on the projected price and the production to count is valued using the harvest price.” Id. at Example 3. In other words, the revenue protection guarantee is calculated by multiplying the production guarantee by the projected price. The farmer's actual production is multiplied by the harvest price, and the value of the actual production is subtracted from the revenue protection guarantee. The remaining sum is the farmer's indemnity.

         Thus, farmers who choose only yield protection do not receive additional indemnity if the market price is lower than the projected price. Farmers who choose revenue protection without the harvest price exclusion are guaranteed to receive full market-value compensation for their production guarantee and perhaps more, if the harvest price is lower than the projected price. Farmers who choose revenue protection with the harvest price exclusion are guaranteed to receive the full projected price for their production guarantee, with the amount of indemnity decreasing if the harvest price exceeds the projected price.

         Because they are receiving greater protection, farmers who choose revenue protection pay a higher premium than farmers who choose only yield protection. Am. Compl. at 20. Nevertheless, if the harvest price equals the projected price, farmers covered by both kinds of protection receive identical indemnification.

         B.

         Plaintiffs allege that, in 2015, “the Bean Market News did not publish market prices for navy and small red beans in Michigan or for dark red kidney beans in Minnesota and North Dakota for 50% or more of the publishing dates between September and November.” Id. In fact, Plaintiffs further allege that only once in the preceding eight years had the Bean Market News published market prices for 50% or more of its publishing dates between September and November. Id. Accordingly, Plaintiffs contend that “it was not just foreseeable, but very likely, that the Bean Market News would not publish the specified number of market prices during the specified period in 2015.” Id.

         Plaintiffs argue that the “[a]ctual market prices” for navy, small red, and dark red kidney beans were contemporaneously available and remain available from the grain elevator processors which actually bought the insured beans from the Plaintiffs. Id. at 22. The actual market price which Plaintiffs paid showed “a great decline from the projected prices for the subject beans.” Id. Because the Bean Market News had not published a sufficient number of market prices for the dates in question, “the RMA set the harvest prices . . . at an amount equal to the projected prices” on December 15, 2015. Id. Plaintiffs argue that this act “was contrary to law [and] contrary to the intent and purpose of the DBRE” because it “negated the revenue protection insurance provided by the DBRE [and] . . . deprived Plaintiffs of the DBRE indemnity to which they are entitled.” Id. Plaintiffs' alleged injury has been exacerbated because the Defendant insurers have “retained the additional premium paid by Plaintiffs for DBRE coverage” even though, in Plaintiffs' view, they did not actually receive revenue protection. Id.

         C.

         On February 16, 2016, Plaintiff Greg Ackerman, the chair of the Michigan Bean Commission, and Carl Bednarski, President of the Michigan Farm Bureau, “sent a request to the FCIC's Board of Directors requesting that the harvest price be recalculated so that it reflected the actual market price.” Id. (citing Feb. 16, 2016, Letter, ECF No. 50, Ex. E). That request was denied by the Chairman of the FCIC, Dr. Robert Johansson, on March 8, 2016. Id. (citing March 8, 2016, Denial, ECF No. 50, Ex. F). Ackerman subsequently requested “a determination from the RMA and the National Appeals Division (NAD) of the USDA that the March 8, 2016 letter of Dr. Johansson constituted a ‘determination made by FCI that is a matter of general applicability [that]

         is not subject to administrative review.'” Id. at 22-23 (citing 7 C.F.R. 400.91(e)). The RMA “‘decline[d] to render a determination of general applicability . . . because the RMA has not made any determinations in regard to your client's policy.'” Id. at 23 (quoting April 28, 2016, RMA Letter, ECF No. 50, Ex. G). On June 6, 2016, the NAD sent Ackerman a letter summarizing Ackerman's request and objections and concluding that “[t]he March 8, 2016, FCIC decision is not appealable because it establishes program eligibility requirements that are generally applicable to all participants.” NAD Determination, ECF No. 50, Ex. H; Am. Compl. at 23.

         Plaintiffs subsequently filed this action. The amended complaint includes three counts. In the first count, Plaintiffs assert that the

administrative determinations of the FCIC and RMA of December 15, 2015 and March 8, 2016 interpreting the DBRE to require the harvest price to be set equal to the projected price . . . were arbitrary, capricious, an abuse of discretion, and not in accordance with law; were contrary to statutes and other law; were without observance of procedure required by law; and were unwarranted by the facts.

Am. Compl. at 23-24.

         In the second count, Plaintiffs contend that “[t]he parties to the [DBRE] contract intended that the harvest price be set by the RMA based on actual market prices in the event that the harvest price could not be determined in the manner described in the DBRE.” Id. at 24. Plaintiffs further allege that “the RMA and FCIC are required by 7 U.S.C. § 1508(c)(5) to set harvest prices that reflect actual market prices.” Id. Plaintiffs allege that

either the Plaintiffs and Defendant insurance companies both believed and relied on the RMA and FCIC's averment that the DBRE in fact provided revenue protection insurance coverage to Plaintiffs, or, Plaintiffs unilaterally believed that the DBRE provided such coverage and acted in reliance on that belief, while Defendant insurers knew that it did not, but accepted payment of DBRE premiums by Plaintiffs knowing that there was no DBRE coverage.

Id. at 25.

         For that reason, they believe that “[t]his mutual mistake or unilateral mistake with fraud necessitates reformation of the DBRE to reflect the intent of the parties at the time of contracting.” Id.

         Finally, in the third count, Plaintiffs allege that “the FCIC and RMA's approval and interpretation of the DBRE subverted the intent and understanding of the parties to the contract, resulting in a complete failure of consideration on the part of Defendant insurance companies by precluding even the possibility of recovery.” Id. at 26. Additionally, Plaintiffs believe that “allowing Defendant insurance companies to retain the premium paid by the Plaintiffs in the absence of payment of indemnities owed would result in a windfall to Defendant insurance companies and abject inequity.” Id. For this reason, Plaintiffs ask the Court “to order that the DBRE portion ...


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