Inez Curry and Remer Curry, et al., Plaintiffs-appellees, v. John R. Block, Etc., et al., Defendants-appellants.james Mcleod Rowell, Plaintiff-appellant, v. Secretary of Agriculture, et al., Defendants-appellees, 738 F.2d 1556 (11th Cir. 1984)

These consolidated appeals involve actions brought by borrowers who have defaulted on loans granted under the Consolidated Farm and Rural Development Act (CFRDA), 7 U.S.C. § 1921 et seq. (1982). These borrowers challenge the Farmers Home Administration's (FmHA) implementation of loan servicing and foreclosure avoidance mechanisms contained in 7 U.S.C. § 1981a.¹  Section 1981a provides:

In addition to any other authority that the Secretary may have to defer principal and interest and forego foreclosure, the Secretary may permit, at the request of the borrower, the deferral of principal and interest on any outstanding loan made, insured, or held by the Secretary under this chapter, or under the provisions of any other law administered by the Farmers Home Administration, and may forego foreclosure of any such loan, for such period as the Secretary deems necessary upon a showing by the borrower that due to circumstances beyond the borrower's control, the borrower is temporarily unable to continue making payments of such principal and interest when due without unduly impairing the standard of living of the borrower. The Secretary may permit interest that accrues during the deferral period on any loan deferred under this section to bear no interest during or after such period: Provided, That if the security instrument securing such loan is foreclosed such interest as is included in the purchase price at such foreclosure shall become part of the principal and draw interest from the date of foreclosure at the rate prescribed by law.

7 U.S.C. § 1981a (1982). The borrowers' challenge to the FmHA's implementation of Sec. 1981a can be summarized as follows. First, they contend that Sec. 1981a requires the FmHA to establish uniform administrative procedures: the FmHA must give borrowers personal notice of their right to apply for deferral relief²  and establish a procedural framework which would afford borrowers a hearing in which they could show their entitlement to relief. Second, the borrowers contend that Sec. 1981a directs FmHA to develop substantive standards by which to judge deferral applications: the FmHA must promulgate regulations on the eligibility criteria of Sec. 1981a.³ 

In Rowell, the District Court for the Middle District of Alabama dismissed the borrower's complaint, finding that the deferral relief provided by 7 U.S.C. § 1981a is discretionary and, therefore, the borrower had no right to demand such relief. In Curry, 541 F. Supp. 506, a class action, the District Court for the Southern District of Georgia granted on motion for summary judgment the borrowers' requested relief, finding that the FmHA's current regulations were both substantively and procedurally deficient. As to substance, the court found that Sec. 1981a imposes a mandatory duty upon the FmHA to implement eligibility criteria. As to procedure, the court determined that Sec. 1981a requires the FmHA to provide borrowers with personal notice of the availability of deferral relief and an opportunity to be heard. Furthermore, the court found unsatisfactory the content and placement of the notice to be given pursuant to the FmHA's proposed regulations. The borrower in Rowell appeals the district court's dismissal of the complaint, urging this court to adopt the Curry court's position. The government in Curry appeals the court's grant of relief, arguing that the Secretary has in fact satisfactorily implemented a deferral relief program.

Issues

This appeal requires us to address, first, whether 7 U.S.C. § 1981a imposes a mandatory or discretionary duty on the Secretary of Agriculture to implement a deferral program. If a mandatory duty is imposed, we then must determine what procedures and substantive standards are essential to a properly implemented deferral program under 7 U.S.C. § 1981a. We must then decide whether current FmHA regulations and/or practices implementing the deferral program supply these essential components. If they do not, we must finally determine whether the Secretary must employ the rulemaking procedure of the Administrative Procedure Act, 5 U.S.C. § 551 et seq. (1982), to supply these missing elements.

Discussion

The parties disagree over the meaning of the following language: "the Secretary may permit ... the deferral of principal and interest on any outstanding loan ... and may forego foreclosure...." 7 U.S.C. § 1981a (emp. added). The government, in its brief and in the court below, made the sweeping argument that the permissive language "may" indicates that Congress made implementation of the program optional and gives the FmHA complete discretion to decline to implement the deferral program. The borrowers, on the other hand, argue that the program itself is not optional at all and must be implemented, but the decision whether to grant a deferral in a particular case is entrusted to the Secretary's sound discretion.

At oral argument, the government retracted from its extreme position. The government now concedes that Sec. 1981a mandates the FmHA to give borrowers notice of the availability of deferral relief. The government does not concede, however, that other procedural protections, such as an opportunity to be heard, are mandated. Furthermore, the government contends that Sec. 1981a does not require the Secretary to promulgate any substantive criteria to determine borrowers' eligibility for deferral relief.

The government's shift in position at this late stage helps point out the true focus of this appeal.⁴  To argue that the statute mandates certain procedural aspects of a deferral relief program but not certain substantive aspects is not to argue that the statute mandates no program at all; rather, the very fact that notice of a program must be given⁵  demonstrates that some sort of program must exist. In light of the government's concession that the statute requires notice, any other construction of Sec. 1981a would create an illogical statutory scheme in which the FmHA is required to give borrowers notice of a nonexistent program. Such could not be Congress' intent.⁶  Congress has created a deferral relief program and the question is not whether, but how, the FmHA is to implement it. Therefore, we now turn to this important question.

2. Essential Components of the Deferral Relief Program

Having determined that Sec. 1981a mandates the FmHA to implement a deferral relief program of some description, we now identify the precise requisites of such a program. We agree with the Eighth Circuit in Allison v. Block, 723 F.2d 631 (8th Cir. 1983), in holding that proper implementation of a deferral relief program contains both procedural and substantive components. That is, Sec. 1981a "creates a right to have certain uniform procedures established and requires the Secretary to develop substantive standards applicable to deferral applications." Id., 723 F.2d at 634 (footnote omitted). See also Matzke v. Block, 732 F.2d 799 (10th Cir. 1984).

a. Procedural Requisites

As already noted, the government has conceded that notice is mandatory under Sec. 1981a. The district court in Curry, however, went beyond the government's concession, and analyzed the procedure question as follows:

The language of [Sec. 1981a] expressly provides that the deferral mechanism is triggered "at the request of the borrower." Further, no deferral relief will be forthcoming absent "a showing by the borrower that due to circumstances beyond the borrower's control the borrower is temporarily unable to continue making payments of such principal and interest when due without unduly impairing the standard of living of the borrower." ... Logically, the borrower is unable to request the deferral relief and show his eligibility to receive the same unless he has notice of the contents of Sec. 1981a and an opportunity to be heard.

541 F. Supp. at 522. Thus, without addressing the borrowers' due process arguments, the Curry court concluded that the statute itself embodied the procedural protections of notice and an opportunity for a hearing. Similarly, the Eighth Circuit in Allison concluded that "the rudimentary elements of adequate notice and an opportunity to be heard are embodied in the language of Section 1981a." 723 F.2d at 634. We agree with the conclusions of the Curry and Allison courts.⁷ 

b. Substantive Requisites

The district court in Curry concluded that proper implementation of the deferral relief program required the FmHA to establish eligibility criteria for Sec. 1981a relief. 541 F. Supp. at 522, 526. Likewise, the Allison court determined that " [g]ood faith consideration of the Section 1981a deferral alternative by the Secretary requires the existence of some substantive standards which, if met, entitled the borrower to relief." 723 F.2d at 636. We agree that the deferral relief program would be a mere "empty procedural shell" in the absence of eligibility criteria and, therefore, hold that Sec. 1981a requires the Secretary to develop substantive standards by which to evaluate the merits of individual applications for deferral relief.⁸ 

Having determined that Sec. 1981a mandates the FmHA to implement a deferral relief program and that, as implemented, the program must contain both procedural and substantive components, the pivotal question in this case becomes whether current FmHA regulations and practices satisfy Sec. 1981a's requirements. The government contends that the Curry court's decision was erroneous because borrowers already receive adequate procedural protections and their applications are judged fairly, liberally, and even-handedly. We agree with the Curry court's conclusion that the FmHA's current practices and regulations do not fulfill the Secretary's obligations under Sec. 1981a.

In concluding that the FmHA had not satisfied the procedural requirements of Sec. 1981a, the Curry court examined certain proposed FmHA regulations. Under these proposed regulations, borrowers would receive notice of the opportunity to apply for deferral relief during the loan-making process and at the beginning of the production season. Although the Curry court concluded that the timing of the notice provided by these proposed regulations was sufficient, the court went on to state that "the FmHA should also notify borrowers of their deferral rights when evaluating and reviewing the farmer's past production year--if it should appear that there is a potential problem." 541 F. Supp. at 524. Because the proposed regulations do not provide for post-production year notice, the Curry court effectively found that the timing of the notice provided for by the proposed regulations was deficient. To the extent that the Curry court determined that notice at the beginning of the production season and during the loan-making process is, by itself, insufficient, we agree with the court's determination. In our view, borrowers should be advised of their rights to seek deferral relief not only at the beginning of the production season and during the loan-making process, but also when any delinquency notice is mailed and again when they are given any acceleration notice. Cf. 7 C.F.R. Sec. 1951.313(b) (1984).⁹ 

The Curry court also found that the proposed regulations were "fatally deficient" in that the documents which would notify borrowers of the availability of deferral relief contained serious shortcomings. First, the court concluded that the content of the notice was deficient in that the definition of deferral was inaccurate and the notice did not provide any guidelines to the borrower so that he might submit an application in proper form. Secondly, as to the location of the notice, the court found that the notice of availability of deferral relief was buried in a section containing threatening language concerning deficiencies and borrower responsibilities and, therefore, would discourage borrowers from applying for such relief. We agree with the Curry court's analysis of the content and placement of the regulations.

As to the second aspect of the procedural requisites of Sec. 1981a, an opportunity to be heard, the proposed regulations are patently inadequate in that they fail to provide any uniform procedure whereby a borrower could make the requisite prima facie showing to demonstrate his need for deferral relief. In this regard, the government's suggestion that the opportunity to be heard requirement is satisfied by the FmHA's county supervisors' ad hoc consideration of each problem case that comes to their attention is meritless. Such informal consideration does not satisfy Sec. 1981a's inherent requirement of uniform procedures to insure equal treatment and adequate consideration of all deferral relief applications. See Allison, supra, 723 F.2d at 636.

Finally, as to the substantive requisites of the statute, the Curry court concluded that the Secretary must "promulgate regulations on the eligibility criteria of Sec. 1981a comparable to those presently in use pursuant to the moratorium provision of the Rural Housing Loan Program, 42 U.S.C. § 1475." 541 F. Supp. at 526. Although the Sec. 1981a eligibility criteria need not parrot those found in the Sec. 1475 regulations, we agree with the Curry court that the Rural Housing regulations should provide some guidance to the Secretary in fashioning eligibility criteria under the CFRDA. We do not agree however, with the borrowers' contention that the only relevant eligibility criteria are those made explicit in the statute and that deferral relief should be forthcoming automatically upon the fulfillment of the statutory criteria. The borrowers contend that the only criteria the statute permits the FmHA to establish are two conditions: (1) circumstances must be beyond the borrower's control and (2) the borrower must be unable to continue making payments without unduly impairing his standard of living. (Br. at 27). In practice, however, the government has been conditioning the grant of deferrals not merely on the applicant's need, but also on the borrower's potential ability to repay the loan. Id. at 28. Essentially, the borrowers contend that the FmHA should promulgate regulations articulating the exact standard contained in Sec. 1981a, and if a borrower satisfies those criteria, a deferral must be granted. We disagree. First, Sec. 1981a indicates that the Secretary may grant a deferral and may forego foreclosure if, inter alia, "the borrower is temporarily unable to continue making payments...." 7 U.S.C. § 1981a (emphasis supplied). The government points out that a borrower's inability to make payments is not "temporary" if there is no reasonable prospect of ultimate repayment of the loan. (Reply Br. at 17). Thus, if the statutory standard is "temporary" inability to repay, then it would seem that an inquiry into the borrower's ultimate ability to repay is necessary, even though the statute does not explicitly make "ability to repay" a criterion. Second, the statute clearly states that even when the two explicit statutory criteria are satisfied, the Secretary may grant relief. Thus, the borrowers' argument that the only eligibility criteria the Secretary can adopt are those which are explicit in the statute and that relief must be given upon satisfaction of only those criteria is not supported by the statute.

Thus far, the circuits have split over the method by which the Secretary shall establish a deferral relief program. The Eighth Circuit has concluded, at least with respect to substantive eligibility criteria, that, although formal rulemaking would be preferable, the Secretary may utilize adjudicative processes;¹⁰  on the other hand, the Tenth Circuit has concluded that the Secretary must employ rulemaking procedure.¹¹  We agree with the Tenth Circuit that the urgent need Congress perceived for deferral relief to farmers and the national scope of the problems presented in this litigation render "it ... a bit late to begin the accumulation of decisional guides." Matzke, supra, at 802. The Matzke court relied on Morton v. Ruiz, 415 U.S. 199, 94 S. Ct. 1055, 39 L. Ed. 2d 270 (1974), in which the Supreme Court stated that

The power of an administrative agency to administer a Congressionally created and funded program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.... No matter how rational or consistent with Congressional intent a particular decision might be, the determination of eligibility cannot be made on an ad hoc basis by the dispenser of the funds.

The Administrative Procedure Act was adopted to provide, inter alia, that administrative policies affecting individual rights and obligations be promulgated pursuant to certain stated procedures so as to avoid the inherently arbitrary nature of unpublished ad hoc determinations.

415 U.S. at 231, 232; 94 S. Ct. at 1072, 1073, 39 L. Ed. 2d 270. Although Morton v. Ruiz may overstate an administrative agency's obligation to exercise its rulemaking authority,¹²  we find that under the circumstances of this case, in which many farmers across the nation are in dire need of the relief Congress intended to be made available to them, the Secretary's implementation of this program through adjudication would be an abuse of discretion. Matzke, supra, at 802. In any event, even if neither Morton v. Ruiz nor the exigencies of this case required rulemaking, this court has previously held that the Secretary is bound by his July 24, 1971 pronouncement¹³  making the procedural requirements of Section 4 of the Administrative Procedure Act, 5 U.S.C. § 553, applicable to matters relating to "loans," and, therefore, the Secretary is so bound in the instant case. See Arlington Oil Mills, Inc. v. Knebel, 543 F.2d 1092, 1095 n. 6 (5th Cir. 1976). See also South Carolina v. Block, 558 F. Supp. 1004, 1112-13 (D.S.C. 1983), and cases cited therein.

Conclusion

The decision in Rowell v. Secretary of Agriculture, et al., --- F.2d ---- (11 Cir. 1984), No. 83-7147, is REVERSED and REMANDED for proceedings consistent with this opinion; the decision in Curry v. Block, --- F.2d ---- (11 Cir. 1984), No. 82-8544, is AFFIRMED.