Dawson Farms v. Risk Management Agency et al
ORDER by Chief Judge Ralph R. Erickson denying Plaintiff's 34 Motion for Summary Judgment; and granting Defendant's 36 Motion for Summary Judgment. (SH)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
-vsRisk Management Agency,
Case No. 3:09-cv-67
ORDER DENYING PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT AND GRANTING
DEFENDANT’S MOTION FOR
Dawson Farms brings this action pursuant to 7 U.S.C. § 6999 and 5 U.S.C. § 701, et seq
for judicial review of a final decision of the National Appeals Division. At issue is a dispute
over crop insurance benefits that Dawson Farms claims are owed for losses sustained to its 2006
potato harvest. Having carefully considered the entire administrative record as well as the briefs
and arguments of the parties, the Court now issues this memorandum opinion and order.
II. SUMMARY OF DECISION
The Deputy Director applied the correct standard of review to the hearing officer’s
decision and did not improperly substitute his findings for those of the hearing officer. There is
substantial evidence in the record to sustain the Deputy Director’s decision, and under the
deferential review required of a reviewing court, the Director’s decision must be upheld. Lastly,
Dawson Farms did not abandon or waive its claim regarding its request to re-sample; however,
there is no duty to re-sample and thus the error by the Deputy Director has no legal effect on the
III. STATEMENT OF FACTS
Dawson Farms is a North Dakota partnership between Michael Sitzmann and Ronald D.
Offut, which operates a commercial farm located in south central North Dakota. Certified
Administrative Record 304 (hereafter “CR”). During the time relevant to this litigation,
Sitzmann was the managing partner, overseeing the day to day operations of the farm, while
Offut provided expertise in the areas of seed, agronomy services and many of the administrative
duties related to the farm. CR 480. Dawson Farms primarily grows irrigated potatoes. Id.
Dawson Farms purchased a multi-peril crop insurance policy from Rain and Hail, LLC to
cover the 2006 potato production. Rain and Hail, LLC is licensed and authorized to sell federally
insured crop insurance policies in North Dakota. CR 304. The multi-peril crop insurance policy
is reinsured by the Federal Crop Insurance Corporation (“FCIC”) under the provisions of the
Federal Crop Insurance Act, 7 U.S.C. § 1501 et seq. CR 478. The Risk Management Agency
operates and manages the FCIC under the provisions of the Act. Id.
Currently, federally insured crop insurance is sold by approximately 16 private sector
companies that both sell and service the policies they sell. Risk Management acts as a reinsurer
of the policies. Id. As a condition of providing the reinsurance, the selling and servicing
companies are required to notify the Risk Management Agency whenever a claim in excess of
$500,000 is presented. Id. After Risk Management receives notice, it may participate in all
aspects of the loss determination and adjustment. Id.
The Dawson Farms policy at issue in this case consists of:
(1) The Common Crop Insurance Policy, CR 358-375;
(2) Northern Potato Crop Provisions, CR 347-350;
(3) Northern Potato Crop Storage Coverage Endorsement, CR 354; and
(4) Special Provisions of Insurance 2006 and succeeding crop years, CR 344.
The issues before the Court revolve around the Northern Potato Crop Provisions and the
Northern Potato Crop Storage Endorsement. The policies cover the potatoes against unavoidable
losses caused by identified causes, including a loss arising out of “adverse weather conditions.”
CR 348 (Northern Potato Crop Provision ¶ 9). The insurance period for the policy in question
generally ended on October 15, 2006 . Id. at ¶ 8. However, the Storage Endorsement acts to
extend the period for 60 days beyond the end of the insurance period for any “potatoes . . .
damaged within the insurance period other than freeze that later results in [a loss covered by the
policy].” CR 354 (Northern Potato Crop Storage Coverage Endorsement ¶ 5).
Put in its simplest terms, the policy as it applies in this case provides coverage for a
quality adjustment when the subject potatoes have suffered from damage incurred before the
policy period expires or the potatoes suffer from “tuber rot that is evident at, or prior to the end
of the insurance period; and a grade inspection is performed.” CR 349 (Northern Potato Crop
Provisions ¶ 11(2)(1-2)). “Tuber rot” is defined as “any soft, mushy, or leaky condition of potato
tissue (soft rot or wet breakdown as defined in the United States Standards for Grades of
Potatoes) including, but not limited to, breakdown caused by Southern Bacterial Wilt, Ring Rot,
or Late Blight.” CR 347 (Northern Potato Crop Provisions ¶ 1).
This case involves alleged tuber rot in potatoes harvested off an identified unit covered by
the insurance policy, Unit 102. Unit 102 is also referred to as the “Moss Unit” or the “Moss
field.” CR 39. The Moss Unit is a single field consisting of 134.3 acres of irrigated potatoes in
Kidder County, North Dakota. Id. Under the policy, the yield guarantee for the Moss Unit was
43,419 cwt which was calculated using a per acre guarantee of 32,330 pounds per acre. Id.
By all accounts, the potato harvest in 2006 in Kidder County started under somewhat
favorable conditions, but by mid-September had taken a decided turn for the worse. CR 306.
Cool, wet and rainy conditions predominated from September 17 through the time the Moss Unit
was finally harvested – October 7 through 10, 2006 – at which time the potatoes were placed in
storage. CR 307. While a killing frost occurred during the overnight between October 10-11,
there is no question that the Moss Unit potatoes were undamaged by frost. Id.
The harvest itself was performed under brutal conditions. First, it was too hot. When the
temperatures moderated, then the rains began to fall. Id. Whenever it was nearly dry enough to
harvest the potatoes, more rain would fall. As conditions deteriorated, Sitzmann hired more
laborers and equipment, ending up with a harvesting crew consisting of 30 field trucks and
operators, 65-70 independent semi-trucks, and another 75 general farm laborers. Id. Harvesting
equipment was frequently stuck and required other machinery to drag it through the fields. Id.
Despite the adversity, Dawson Farms was able to fully harvest the Moss Unit. Id. The
field produced a total of 65,201.7 cwt, which substantially exceeded the insurance guaranty of
43,419 cwt. The potatoes were stored in the south bin of a Hansen-Rice storage facility owned
and operated by Dawson Farms in Tappen, North Dakota. CR 307. This type of storage facility
is recognized as one of the best storage systems available for controlling ventilation and moisture
management in order “to reduce excess field health and moisture in potatoes.” CR 308. The
Northern Potato Crop Storage Coverage Endorsement covered the Moss Unit potatoes while in
the Tappen warehouse.
On October 10, 2006, Dawson Farms filed a Notice of Loss with Rain and Hail, LLC for
damages arising out of excessive moisture, which is an “adverse weather condition” that is a
covered loss under the policies. CR 348 (Northern Potato Crop Provisions ¶ 9). Rain and Hail,
LLC notified the Risk Management Agency of a potential large loss claim (one involving more
than $500,000 of exposure). CR 308. Rain and Hail, LLC made immediate arrangements for
John Bata and Paul Hodny to adjust the claim and the adjusters made their fist visit to Dawson
Farms the next day. Id.
Hodny and Bata made visits to inspect Dawson Farms’ fields on the 11th and 16th of
October – being joined in the October 16 meeting by Steve Axtman, a supervisor at Rain and
Hail, LLC, and Gabriele Kelly, a representative of the Risk Management Agency. CR 308. At no
time during these visits was any inspection made of potatoes harvested off the Moss Unit and
stored in the Tappen warehouse. Id.
On December 5, 2006, John Bata returned to the Tappen warehouse to inspect and sample
the stored potatoes. CR 309. The storage endorsement period expired on December 9, 2006, so
time for inspection and sampling was short. CR 354. Bata visually examined the potatoes in the
bin, and then collected a 56.31 pound sample of potatoes. CR 769. He explained his method of
sampling as consisting of walking in a zig-zag pattern across the surface of the pile drawing
potatoes from a depth of about six or eight inches below the surface. CR 493 (citing, Hearing 2,
Track 2, 2:36:42 through 2:51:57).
While Bata made contact with Sitzmann prior to arriving at the Tappen warehouse for the
sampling, the actual sampling was taken outside of Sitzmann’s presence. CR 309. When
Sitzmann arrived at the warehouse, a conversation took place in which Bata indicated that he
believed the potatoes from the Moss Unit were in pretty good shape. Sitzmann disagreed, and
showed Bata potato juice streaming from the culverts under the pile. CR 309. A dispute exists
between Sitzmann and Bata about the number of culverts with potato juice present. Bata testified
that only one such culvert was shown to him (Hearing 2, Track 2, Bata Testimony 2:37:02 to
2:37:10); Sitzmann denies this observation and contends he asked for an additional sample. It is
undisputed that Bata declined to re-sample. CR 309.
Bata delivered the sample to the potato inspection laboratory in East Grand Forks,
Minnesota for disease diagnosis. The inspection resulted in a finding that tuber rot was present
in the Moss Unit sample in a total amount of 3.52%. CR 769. The inspection also confirmed the
sample was free from freeze damage. Id. No one disputes that if this testing is accurate, Dawson
Farms has not sustained a compensable loss.
Sitzmann received the grading report and immediately contacted his insurance agent,
James Percy. Sitzmann made both a telephone and a fax request that the potatoes be re-sampled.
CR 310, 1236. On December 11, 2006, Percy faxed a memo to Rain and Hail, LLC telling them
that Sitzmann “had just received the test samples on the stored potatoes from the Warehouse”
and that Sitzmann had requested a re-sampling because he disputed the 3% tuber rot finding. CR
311 at FOF 34. The insurance company determined the request for re-sampling was outside the
60-day window and denied the request. Id. at FOF 35.
On May 11, 2007, the Risk Management Agency issued an indemnity determination that
denied any loss on the Moss Unit potatoes. CR 7-8, 767. On June 4, 2007, Dawson Farms
appealed the determination of the Risk Management Agency to the National Appeals Division of
the United States Department of Agriculture (hereafter “NAD”). CR 18-24. Over a noncontinuous six day period between September 4, 2007 and October 24, 2007, the NAD Hearing
Officer conducted an in-person hearing. CR 284-89. On March 14, 2008, the hearing officer
found in favor of Dawson Farms and determined that the Risk Management Agency had erred in
its adjustment on all six of the disputed units, including the Moss Unit. CR 301-27. The basis for
the decision was that the adjusters did not correctly sample either the harvested or unharvested
potatoes. CR 322.
On April 7, 2008, the Risk Management Agency requested a Director review. CR 32942. Although the Risk Management Agency admitted there were problems with some of the
units tested, they continued to assert that the Moss Unit had been properly sampled and that the
hearing officer’s decision relating to it should be reversed. CR 340. On June 27, 2008, the NAD
issued a Director’s Review Determination that affirmed the hearing officer on all units except the
Moss Unit. CR 477-94. The Director reversed the decision of the hearing officer as it related to
the Moss Unit on the basis that there had been no error in sampling the south bin in the Tappen
Dawson Farms sought reconsideration of the Director’s Review Determination, which
was denied. CR 497-99. Dawson Farms commenced this action on July 23, 2009. Doc. #1.
Defendants answered. Docs. #9 & #13.1 The case is now before the court on competing motions
for summary judgment. Docs. #34 & #36.
IV. ISSUES PRESENTED
Although the parties disagree on many particulars, the issues presented are relatively
The Complaint named Risk Management Agency and Rain and Hail, LLC as defendants.
The parties stipulated to the dismissal of Rain and Hail, LLC (Doc. #23). The Court adopted the
stipulation and dismissed Rain and Hail, LLC from this action (Doc. #24).
Did the NAD Deputy Director apply the wrong standard of review when
reviewing the hearing officer’s determination that the Moss Unit potatoes were
not properly sampled and thus rendering the determination of the Director
arbitrary, capricious, and an abuse of discretion for failing to observe the
procedure required by law?
If not, is there substantial evidence in the record to sustain the Director’s
conclusion that the Moss Unit potatoes were properly sampled?
And finally, did the Director act arbitrarily, capriciously, or abuse his discretion in
determining that Dawson Farms had abandoned or waived its claim that the denial
of its request for re-sampling was arbitrary, capricious and an abuse of discretion?
V. STANDARD OF REVIEW
Section 6999 of Title 7, of the United States Code, provides: “a final determination of the
National Appeals Division shall be reviewable and enforceable by any United States District
Court of competent jurisdiction.” 7 U.S.C. § 6999. The Administrative Procedures Act governs
claims made against the Federal Crop Insurance Corporation and its managing entity, the Risk
Management Agency. Stewart v. Federal Crop Ins. Corp., No. 4:09-cv-101, 2010 WL 3341863
(E.D. Tenn. Aug. 25, 2010); McElmurray v. U.S. Dept. of Agriculture, 535 F. Supp.2d 1318,
1324 (S.D. Ga. 2008).
Under the Administrative Procedures Act, the standard of review is whether the action of
the agency is “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with
the law;” 5 U.S.C. § 706(2)(A), or, whether the decision is “without observance of procedure
required by law”, 5 U.S.C. § 706(2)(D), or, whether the decision is “unsupported by substantial
evidence in a case . . . reviewed on the record of an agency hearing provided by statute.” 5 U.S.C.
A court reviewing an agency decision should not interfere with the decision unless it is
arbitrary, capricious, an abuse of discretion, not in accord with the law, or unsupported by the
evidence. Even so, the reviewing court is not free to conjure up a reasoned basis for the agency
decision that has not been offered by the agency itself. Motor Vehicles Mfrs. Ass’n of U.S., Inc.
v. State Farm Mutual Auto Ins. Co., 463 U.S. 29, 43 (1983). The standard imposed on the
reviewing court is not a strenuous one – an agency action is to be invalidated only if it is not
rational, or is not based on a consideration of relevant factors. F.C.C. v. Nat’l Citizens
Committee for Broadcasting, 436 U.S. 775, 803 (1978). In reaching its decision, the district
court must be searching and careful, but it is not empowered to substitute its judgment for that of
the agency. Minnesota Milk Producers Ass’n v. Glickman, 153 F.3d 632, 641-42 (8th Cir.
Equally as narrow is the standard of review under the substantial evidence test. A
reviewing court must uphold the agency’s decision if it is supported by “substantial evidence.”
Cox v. U.S. Dept. of Agriculture, 925 F.2d 1102, 1104 (8th Cir. 1991). “Substantial evidence” is
“such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.”
Valkering, USA, Inc. v. U.S. Dept. of Agriculture, 48 F.3d 305, 307 (8th Cir. 1995) (quoting
Consolidated Edison Co. of New York v. N.L.R.B., 305 U.S. 197, 229 (1938)).
The court must also give deference to the agency’s interpretation of its rules and
regulations as long as that interpretation is not “plainly erroneous” or “inconsistent with the
regulation.” Thomas Jefferson University v. Shalala, 512 U.S. 512 (1994). The more technical
and complex the regulatory area is, the more the courts defer to the expertise of the agency as a
matter of public policy. Id. The agency need not adopt the most natural or most reasonable
interpretation, all that is required is that the interpretation be a reasonable one. Chalenor v.
University of North Dakota, 291 F.3d 1042,1045 (8th Cir. 2002) (citing Pauley v. BethEnergy
Mines, Inc., 501 U.S. 680, 702 (1991)).
The analysis of this case turns on four separate questions: (1) Did the NAD follow its
own procedures and apply the right standard of review in reaching its determination; (2) If so, is
there substantial evidence in the record to sustain its determination; (3) If so, did Dawson Farms
waive any claim arising out of the Risk Management Agencies refusal to re-sample the Moss
Unit potatoes; and (4) If Dawson Farms did not abandon or waive its claim, does liability lie for a
failure to re-sample – or put another way, did the Risk Management Agency have any duty to resample.
The Deputy Director applied the correct standard of review in the
National Appeals Division Director’s Review.
Dawson Farms asserts the Deputy Director acted arbitrarily, capriciously, and abused his
discretion or otherwise erred as a matter of law because he reviewed the decision of the hearing
officer de novo. Essentially, Dawson Farms contends the Deputy Director substituted his
findings of fact for those actually found by the hearing officer. The Risk Management Agency
contends that the question resolved was one of law, not fact.
The National Appeals Division Guide establishes the scope of the review applicable in
this case. Section 4, Director Review, Part II (B) provides in relevant part:
Standard of Review. 7 C.F.R. §§11.9(d) and 11.10. The standard
of review is whether substantial evidence supports the findings of
fact made in the Hearing Officer’s appeal determination. While
findings of fact will not be disturbed unless contradicted by the
record, no such deference is given to the conclusions and
At the hearing officer level, evidence was presented by a number of persons. Dawson
Farms relied heavily on the grading performed on the potatoes by Simplot, the contracted buyer
of the Moss Unit potatoes, and on the testimony of Dr. Gary Secor, who opined that the
percentage of tuber rot was 20 to 25 percent based on the descriptions of witnesses other than the
adjusters, photographs, and the sales records. In support of its loss adjustment, the Risk
Management Agency relied mostly on the testimony of its grading lab supervisor Michael
Horken and the insurance adjuster John Bata.
The hearing officer weighed the evidence and made findings of fact. CR 309, see FOF
25. Applying the findings of fact to the law, the hearing officer concluded there were two
problems with the sampling: (1) the adjuster should have waited to sample the Moss Unit
potatoes until Sitzmann was present; and (2) the refusal to obtain additional samples from the
Moss Unit after Sitzmann expressed surprise at Bata’s characterization of the potatoes and made
a request of Bata to perform additional sampling on December 5, 2006, was error. CR 319.
Relying on the potato grading from Simplot, the hearing officer also concluded that the large
variance between the samples “raises the question about whether the Insurance Adjusters
obtained a representative sample” of the Moss Unit potatoes. CR 320. The hearing officer
concluded that Bata did not correctly sample the Moss Unit potatoes. CR 322. It is worthy of
note that the hearing officer stated in support of his conclusion:
I believe this is where we can inject a little common sense to this case. Since
the adjusters were already at Appellant’s Warehouse when Partner 1 advised
them of the problems with the potatoes in the south half of the Warehouse,
the adjusters should have resampled the potatoes. Thus, the Insurance
Adjusters erred in not resampling Appellants potatoes on December 5, 20116
(57th day of coverage).
On review, the Deputy Director acknowledged that Bata had a duty to take a
representative sample of the Moss Unit potatoes. He determined that Bata’s sampling had met
that duty. CR 493. The Deputy Director discounted Dr. Secor’s testimony on the basis of a lack
of first-hand knowledge of the condition of the potatoes, as compared to Bata’s opportunity to
examine and sample the potatoes. Id.
Dawson Farms asserts that these determinations by the Deputy Director constitute a reweighing of the evidence and substitution of the Deputy Director’s facts for those of the hearing
officer’s. As such, it contends the fact findings of the hearing officer should prevail, unless they
are shown to be contradicted by evidence in the record. See 7 C.F.R. §§11.9(d) and 11.10.
A close reading of the hearing officer’s opinion reveals that he never actually made a fact
finding that the insurance adjuster failed to make a proper sampling of the Moss Unit storage bin.
Instead, he stated that one needs to apply a “little common sense” in reaching a conclusion that
the adjusters should have re-sampled the potatoes. This duty to re-sample under the
circumstances present in the case is not a finding of fact – it is a conclusion of law – and a
subjective one at that. The hearing officer never pointed to any rule or regulation that compelled
his determination, instead he made plain that his conclusion was consistent with his “common
sense.” The Director is not bound by a decision that held the insurance adjuster to a standard of
the hearing officer’s own creation.
A reading of the Risk Management Loss Adjustment Manual reveals no requirement that
any specific method of sampling be followed to obtain a representative sample. Instead, it simply
requires that the adjuster take enough samples to “ensure that the combined samples will be
representative of all production in the storage structure.” CR 455-56. The hearing officer made
no finding of fact that the sampling done by Bata was inadequate, he simply determined that
there should have been an additional sample taken in response to Sitzmann’s objection. CR 319.
The Deputy Director was free to decline to accept this conclusion of law, as it appears to have
arisen solely in the hearing officer’s common sense. Id.
The interpretation of rules and regulation in technical areas are entitled to deference and
should be accepted if the interpretation is a reasonable one – even if it is not the most reasonable
interpretation possible. Chalenor, 291 F.3d at 1045 (citing Pauley, 501 U.S. at 702). While
common sense and prudence might well have suggested that Bata should have taken additional
samples, it is reasonable on this record for the Deputy Director to conclude that the sampling was
representative and sufficient. The Deputy Director applied the correct standard of review.
There is substantial evidence in the record to sustain the Deputy Director’s
determination that the Moss Unit potatoes claim should be denied.
Much of the analysis of this issue is consistent with the discussion thus far. It is plain that
Dawson Farms produced evidence that would support its contention that the determination of the
Director was arbitrary and capricious. Nonetheless, the standard of review applied to
determinations of the Director is deferential, and his findings are to be affirmed by a reviewing
court if supported by substantial evidence in the record as a whole. Minnesota Milk Producers
Ass’n, 153 F.3d at 641-52. Substantial evidence is less than a preponderance, but is enough that
a reasonable mind would find it adequate to support the agency’s decision. Sultan v. Barnhart,
368 F.3d 857, 862 (8th Cir. 2004).
In order to determine whether evidence is substantial, a court considers evidence that
detracts from the director’s decision as well as the evidence that supports it. Id. at 863. The
agency’s decision is not subject to reversal simply because the reviewing court would have
reached a different conclusion or because substantial evidence also exists which would support a
contrary outcome. Id.
If after review, the reviewing court is capable of drawing two
inconsistent positions and one of those positions represents the agency’s findings, the decision
must be affirmed. Syverson v. U.S. Dept. of Agriculture, 601 F.3d 793, 800 (8th Cir. 2010). In
the end, the Director’s determination must be affirmed if there is such evidence in the record that
a reasonable mind would find it adequate to support the agency’s decision.
In reviewing the evidence for substantiality, it is significant to note that the potato crop on
the Moss Unit yielded a gross hundredweight of 65,201.7, which was well in excess of the policy
yield guaranty of 43,419 hundredweight. It would follow that a large percentage of covered
damage would need to be present to result in a compensable claim. The Court has made a
searching review of the entire record of the proceedings before the hearing officer and the Deputy
Director, and on this record it appears a reasonable mind would find it adequate to support the
agency’s decision – particularly in light of the substantial loss that would be required to fall
below the policy yield guaranty. Substantial evidence exists in the record to sustain the Deputy
Director’s determination that the claim on the Moss Unit potatoes should be denied.
While Dawson Farms did not abandon or waive its claim that the Risk
Management Agency refused to re-sample, there is no duty to re-sample
upon request and thus no reversible error.
Dawson Farms correctly contends that waiver or abandonment should not be presumed
from an inartfully worded argument; rather, the waiver must be knowingly and voluntarily made.
While it is possible to argue that a failure to preserve the issue is a waiver, in this case it appears
that counsel was simply arguing, albeit a bit unclearly, that the Director would never have to get
to the issue of re-sampling because the hearing officer should have been affirmed on the issue of
inadequate sampling. CR 467. Under these circumstances, the finding of a waiver is arbitrary
Unfortunately for Dawson Farms, even though preserved, the issue is without merit. The
Court has been completely unable to find any authority for the proposition that once an adequate
sampling has been obtained by the Risk Management Agency, it is under a duty to resample upon
request. While such a policy authorizing re-sampling might be reasonable, the agency need not
adopt the most reasonable interpretation of its policy. Instead, the interpretation should be
affirmed if supported by reason. Chalenor, 291 F. 3d at 1045. The Director has advanced
possible pitfalls for allowing re-sampling upon request by the insured and those possible
problems seem realistic enough to the Court to sustain the Agency’s interpretations of its rules.
Under the facts present in this case, there was no duty to re-sample.
For the foregoing reasons, the Director’s Review Determination denying Dawson Farms’
loss claim for the Moss Unit potatoes is affirmed. The agency’s decision was supported by
substantial evidence and under the required deferential court review must be upheld. While the
Director erred in determining Dawson Farms abandoned or waived its claim regarding its request
for a re-sampling, there is no duty to re-sample and thus no reversible error.
Accordingly, Dawson Farms’ motion for summary judgment is DENIED, and Risk
Management Agency’s motion for summary judgment is GRANTED.
IT IS SO ORDERED.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated this 31st day of August, 2011.
/s/ Ralph R. Erickson
Ralph R. Erickson, Chief Judge
United States District Court
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