PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
EARL C. MCDANIELS,
Plaintiff-Appellant,
v. No. 01-2086
UNITED STATES OF AMERICA,
Defendant-Appellee.
RANDOLPH F. LOVETT,
Plaintiff-Appellant,
v. No. 01-2087
UNITED STATES OF AMERICA,
Defendant-Appellee.
ALTON E. BROWN, JR.,
Plaintiff-Appellant,
v. No. 01-2088
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeals from the United States District Court
for the District of South Carolina, at Florence.
C. Weston Houck, District Judge.
(CA-00-1482-4-12, CA-00-2053-4-12, CA-00-2054-4-12)
Argued: May 7, 2002
Decided: July 29, 2002
Before WILKINSON, Chief Judge, and NIEMEYER and
LUTTIG, Circuit Judges.
2 MCDANIELS v. UNITED STATES
Affirmed by published opinion. Judge Niemeyer wrote the majority
opinion, in which Chief Judge Wilkinson joined. Judge Luttig wrote
a dissenting opinion.
COUNSEL
ARGUED: Keith Moss Babcock, LEWIS, BABCOCK & HAW-
KINS, L.L.P., Columbia, South Carolina, for Appellants. John Berk-
ley Grimball, II, Assistant United States Attorney, Columbia, South
Carolina, for Appellee. ON BRIEF: James H. Renfrow, Jr., Dillon,
South Carolina, for Appellants. J. Strom Thurmond, Jr., United States
Attorney, Columbia, South Carolina, for Appellee.
OPINION
NIEMEYER, Circuit Judge:
The Secretary of Agriculture denied the applications of farmers
Earl McDaniels, Randolph Lovett, and Alton Brown for livestock
disaster relief because each farmer’s 1997 gross revenue exceeded
$2.5 million, making him ineligible for assistance under applicable
Department of Agriculture regulations. In this action, brought under
the Administrative Procedure Act, the farmers challenge these regula-
tions, contending that they are arbitrary and capricious because gross
revenue is defined to include pass-through funds — in this case, sales
of bailment tobacco — in which the farmers had no interest.
The district court held that the applicable regulations were "reason-
able and a permissible construction" of the enabling statute and
affirmed the Secretary’s decision. For the reasons that follow, we
affirm the judgment of the district court.
I
In October 1998, Congress established the 1998 Crop Loss Disaster
Assistance Program ("CLDAP") and the 1998 Emergency Livestock
Feed Assistance Program ("LAP"). To fund these programs, it appro-
MCDANIELS v. UNITED STATES 3
priated, as an emergency measure, $1.5 billion to "producers on a
farm who have incurred losses in the 1998 crop due to disasters,"
1999 Appropriations Act § 1102(b), 112 Stat. 2681, 2681-43, and
$200 million "to make available livestock feed assistance to livestock
affected by disasters," id. § 1103, 112 Stat. at 2681-44.1 Congress
directed that the Secretary of Agriculture distribute the disaster relief
in a "fair and equitable manner," id. § 1101(a), 112 Stat. at 2681-42,
and empowered the Secretary to determine "eligibility and payment
limitation criteria," id. § 1101(b)(3), 112 Stat. at 2681-42. To "imple-
ment" the 1999 Appropriations Act, Congress instructed the Secretary
and the Commodity Credit Corporation, "as appropriate," to issue
"such regulations as are necessary" "[a]s soon as practicable after the
date of enactment." Id. § 1133(a), 112 Stat. at 2681-47. In addition,
Congress directed that the regulations be promulgated "without regard
to the notice and comment provisions of section 553 of title 5, United
States Code [the Administrative Procedure Act]." Id. § 1133(a)(1),
112 Stat. at 2681-47 (internal subdivision omitted). Congress also
provided that any such regulations take effect immediately under 5
U.S.C. § 808, before congressional review is undertaken pursuant to
5 U.S.C. § 801. Id. § 1133(b), 112 Stat. at 2681-47.
In accordance with Congress’ instructions, the Department of Agri-
culture issued regulations for the implementation of the 1998 Single-
year and Multi-year Crop Loss Disaster Assistance Program and
Emergency Livestock Assistance. See 7 C.F.R., Parts 1477, 1439. In
these regulations, the Secretary defined eligibility criteria for receiv-
ing benefits, establishing in particular and as applicable here, the cri-
terion that no person may receive benefits "who has gross revenue in
excess of $2.5 million for the 1997 tax year." 7 C.F.R. § 1477.106(f);
see also id. § 1439.11. Section 1477.106(f) then defines gross revenue
as the "total gross receipts of the person," which are not to be reduced
"for costs, expenses or pass-through funds." And "pass-through
funds" are defined as money "that goes through, but does not remain
in, a person’s account, such as money collected by an auction house."
1
These programs were established and funded as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999,
Pub. L. No. 105-277 (Oct. 21, 1998), 112 Stat. 2681 et seq., 7 U.S.C.
§ 1421 note (2000) (referred to in this opinion as the "1999 Appropria-
tions Act").
4 MCDANIELS v. UNITED STATES
Id. § 1477.103. Finally, the regulation specifies that persons who
receive "50 percent or less of [their] gross receipts from farming and
ranching" may still receive assistance, but only if their 1997 gross
revenue "from all sources" was less than $2.5 million. Id.
§ 1477.106(f).
II
Earl McDaniels, Randolph Lovett, and Alton Brown are farmers in
South Carolina who derive less than 50% of their income from farm-
ing. Each, however, suffered losses in his South Carolina farming
operations and therefore applied to the Farm Service Agency ("FSA")
of the Department of Agriculture for livestock disaster assistance
under the CLDAP and the LAP. The FSA administers the distribution
of benefits for disaster assistance on behalf of the Department of
Agriculture. As these farmers received less than 50% of their gross
income from farming and ranching, their eligibility for assistance
depended on whether their total 1997 gross revenue "from all
sources" was less than $2.5 million. Because each farmer had gross
revenue that exceeded $2.5 million, when pass-through funds from
tobacco auctions at warehouses in which they had an interest were
included, the FSA denied the farmers benefits.
McDaniels owned a one-third partnership interest in New Tabor
Warehouse, located in Tabor City, North Carolina. The 1997 sales for
New Tabor Warehouse were more than $10 million (6 million pounds
of tobacco at $1.68 per pound). Lovett owned a two-thirds interest in
the stock of Big L Warehouse, Inc., a sub-chapter S corporation,
which owned and operated a tobacco warehouse in Mullins, South
Carolina. The 1997 sales for Big L Warehouse totaled $10.7 million.
And Brown owned 100% of the stock of Brown Brothers Warehouse,
Inc., which operated a tobacco warehouse located in Kingstree, South
Carolina. The 1997 sales for Brown Brothers Tobacco Warehouse
totaled $3.3 million (approximately 2 million pounds of tobacco at
$1.68 per pound).
Some of the tobacco auctioned at each of these warehouses was
owned by the warehouse owners, but most was owned by other pro-
ducers, who stored their tobacco at and auctioned it from the ware-
house under a bailment arrangement. Proceeds from the auction sales
MCDANIELS v. UNITED STATES 5
of tobacco were paid by the purchasers to the tobacco warehouses and
deposited in the warehouses’ bank accounts. In the case of McDan-
iels, the purchasers paid the warehouse partnership which, after
retaining sales commissions, distributed the net proceeds to the
tobacco owners. In the case of the Big L and Brown Brothers ware-
houses, the warehouse owners advanced the purchase price to the
tobacco owners and then billed the purchasers for the advance plus a
sales commission. But in all cases, the proceeds of the auction sales
of bailment tobacco passed through the warehouses’ bank accounts.
The FSA determined that each of the farmers’ gross revenue,
including the receipts from auction sales at the tobacco warehouses,
exceeded $2.5 million and therefore denied the farmers’ applications
for benefits. The farmers appealed the FSA’s rulings to the Depart-
ment of Agriculture’s National Appeals Division, asserting in particu-
lar that because they never took title to the bailment tobacco sold
from their warehouses on behalf of third party producers, it was erro-
neous to treat the proceeds of bailment tobacco as revenue. Following
separate evidentiary hearings, the National Appeals Division affirmed
the FSA’s determinations. Finally, the Director Review Determina-
tions affirmed the appellate decisions.
After exhausting their administrative remedies, the farmers filed
separate complaints in the district court for judicial review of the
agency’s final decisions, pursuant to the Administrative Procedure
Act. The district court upheld the agency determinations, concluding
that the Secretary properly applied the applicable regulations in deny-
ing the farmers’ request for relief. The court noted that 7 C.F.R.
§ 1477.106(f) dictates the inclusion in gross revenue of the tobacco
warehouse sales, including pass-through funds. Because each far-
mer’s gross revenue from those sales, as defined by the regulation,
exceeded $2.5 million, the court concluded that the Secretary properly
denied relief. On the farmers’ challenge to the regulations themselves,
based on their inclusion of pass-through funds as part of gross reve-
nue, the court held that the Secretary’s regulations were reasonable
and "a permissible construction of the 1998 Act."
These appeals followed, and, because each farmer presents the
same issue, they have been consolidated.
6 MCDANIELS v. UNITED STATES
III
The farmers agree that a proper application of the regulations
required the Secretary to deny them disaster assistance because each
had gross revenue in excess of $2.5 million when including the pass-
through funds realized from auction sales of bailment tobacco. They
contend, however, that the regulations themselves exceed the Secre-
tary’s statutory authority, which requires the Secretary to distribute
the benefits in a "fair and equitable manner." They also contend that
the regulations are unreasonable, arbitrary, and capricious because
they include, as a component of gross revenue, pass-through funds for
bailment tobacco sales even though the farmers "neither owned title
to the tobacco nor had a right to the proceeds from the bailment
sales." They point out that the Secretary provided no explanation of
why such funds were included in gross revenue. The farmers assert
that, but for the inclusion of pass-through funds, they would have
qualified for disaster assistance.
We therefore must determine whether the Secretary acted reason-
ably and in accordance with his authority when he adopted regula-
tions, basing eligibility for the 1998 disaster relief funds on gross
revenue that included pass-through funds.
"[W]hen it appears that Congress delegated authority to [an]
agency generally to make rules carrying the force of law," we give
great deference to an "administrative implementation of [the] particu-
lar statutory provision." United States v. Mead Corp., 533 U.S. 218,
226-27 (2001). And in determining whether the agency acted within
the scope of its power, we are "confronted with two questions." Chev-
ron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 842 (1984). "First, always, is the question whether Congress has
directly spoken to the precise question at issue. If the intent of Con-
gress is clear, that is the end of the matter." Id. at 842-43. Even if
Congress’ intent is ambiguous, we defer to the agency’s construction
of the statute, asking only "whether the agency’s answer is based on
a permissible construction of the statute." Id. at 843. At bottom, when
Congress delegates "authority to the agency to elucidate a specific
provision of [a] statute by regulation[,] [s]uch legislative regulations
are given controlling weight unless they are arbitrary, capricious, or
MCDANIELS v. UNITED STATES 7
manifestly contrary to the statute." Id. at 843-44; see also Mead, 533
U.S. at 227.
In this case, we cannot imagine how Congress could have been
more clear in its delegation of authority to the Secretary. In enacting
the 1999 Appropriations Act, Congress gave the Secretary instruc-
tions to distribute the appropriated disaster relief funds in a "fair and
equitable manner . . . in all affected geographic regions of the United
States," 1999 Appropriations Act § 1101(a), 112 Stat. at 2681-42, and
authorized the Secretary to determine "eligibility and payment limita-
tion criteria," id. § 1101(b)(3), 112 Stat. at 2681-42. Congress appro-
priated the money on an emergency basis and directed that regulations
be promulgated as soon as practicable, bypassing public notice and
comment, as well as prior congressional review. Id. § 1133, 112 Stat.
at 2681-47.
Acting within these broad criteria to distribute the limited funds
available, the Secretary narrowed the class of persons eligible by
adopting the uniform and objective criterion of gross revenue, deter-
mining that $2.5 million in gross revenue was the cutoff point for
disaster relief under these programs. Without adopting complex
administrative criteria for determining what might constitute other
measures of economic strength, such as net revenue or net income —
undoubtedly recognizing the bureaucratic delay that would ensue —
the Secretary adopted a gross revenue criterion and defined gross rev-
enue simply to be gross receipts without any adjustments:
Gross revenue includes the total income and total gross
receipts of the person, before any reductions. Gross revenue
shall not be adjusted, amended, discounted, netted or modi-
fied for any reason. No deductions for costs, expenses or
pass-through funds will be deducted from any calculation of
gross revenue.
7 C.F.R. § 1477.106(f). The adoption of this qualifying criterion for
entitlement to relief clearly falls within the statutory authorization to
the Secretary to determine "eligibility criteria." Because the regula-
tions were a direct response to Congress’ express grant of legislative
authority, we must give the regulations controlling weight.
8 MCDANIELS v. UNITED STATES
The farmers argue that the regulations should not be given control-
ling weight because the eligibility criteria chosen are "arbitrary, capri-
cious, or manifestly contrary to the statute" in that they do not meet
the statutory requirement of being "fair and equitable" and because
the Secretary, in promulgating the regulations, did not provide an
explanation for the eligibility criteria.
But Congress expressly provided that the Secretary need not pro-
vide an explanation for eligibility criteria. In the 1999 Appropriations
Act, Congress authorized the Secretary to promulgate regulations
without regard to the notice and comment requirements of the Admin-
istrative Procedure Act ("APA"). Thus, the Secretary was not required
to explain his reasoning. See 5 U.S.C. § 553(c) (requiring "a concise
general statement of [a regulation’s] basis and purpose" only "[a]fter
consideration of the relevant matter presented" during the comment
period). The only limitation on the Secretary’s authority, therefore,
was that it had to be exercised in a reasonable manner. See Chevron,
467 U.S. at 845 (stating that, where Congress does not specify an
intent with regard to how an agency should exercise its discretion, the
question before a reviewing court is whether the agency’s action was
reasonable).2
2
Our dissenting colleague has overlooked Congress’ expressed intent
to enact the 1999 Appropriations Act as an emergency matter, without
notice and comment, and to give the agency broad discretion on how to
distribute the appropriated assistance. When Congress exempts an
agency from the APA’s requirement of providing a rationale for its regu-
lation and does not specify how the authorized discretion is to be exer-
cised, our review is whether the agency’s regulation is reasonable, see
Chevron, 467 U.S. at 845, a review not unlike the evaluation of a stat-
ute’s constitutionality under the traditional rational basis review. See also
Motor Vehicle Manuf. Ass’n of the United States, Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43-44 (1983) (noting Congress’ express
requirement of a record of the agency’s rulemaking proceedings as rele-
vant to the conclusion that the agency had not articulated a sufficient
explanation for its action).
Any inquiry, therefore, into the rationality of the rule examines the
rule itself to determine whether any reasonable basis can support it; it
does not speculate on the rule’s application. See Pension Benefit Guar.
Corp. v. R.A. Gray & Co., 467 U.S. 717, 729 (1984) (holding that as long
MCDANIELS v. UNITED STATES 9
Even though reasonable minds might differ as to whether eligibility
criteria based on gross revenue — as distinct from net income, assets,
or net worth — were the best choice to measure a farmer’s economic
strength and therefore need for relief, there can be no doubt that the
basis chosen for eligibility was reasonable. Gross revenue is an eco-
nomic measure of the size of a farmer’s operations, just as are net
income, assets, and net worth. While gross revenue may overstate the
size of an operation because its net income may be only a small por-
tion, net income could be just as imprecise, failing to identify a large
operation that is managed poorly or in which substantial individual
incomes are sheltered as items of cost. There is no doubt that more
precise definitions of economic strength could be made, but with
more precise definitions come the disputes over appropriate account-
ing methods and other similar issues.
The choice of measuring a farmer’s economic strength by gross
revenue can rationally be justified as a way to "allow relief to be
made available quickly, and effectively, within the limits of the fund-
ing available for this program." 64 Fed. Reg. 18553, 18554 (Apr. 15,
1999). Using gross revenue as the basis for eligibility eases the
administrative burden of calculating each farmer’s income. Lumping
pass-through funds with revenue reduces the likelihood of sellers
manipulating the structure of their transactions to convert non-
deductible costs of goods sold into deductible pass-through funds.
And, as perhaps the most objective criterion available, it avoids the
possibility of inefficient farmers benefiting more than efficient ones,
as "a statute is supported by a legitimate legislative purpose furthered by
rational means, judgments about the wisdom of such legislation remain
within the exclusive province of" the promulgating entity); Lindsley v.
Natural Carbonic Gas Co., 220 U.S. 61, 78 (1911) (holding that under
rationality review, a law should be invalidated only where it lacks "any
reasonable basis and therefore is purely arbitrary"). And in determining
whether a reasonable basis for the rule exists, we need not determine
whether that basis is the actual reason for which the rule was passed. See,
e.g., U.S. R.R. Ret. Bd. v. Fritz, 449 U.S. 166, 179 (1980) ("Where, as
here, there are plausible reasons for Congress’ action, our inquiry is at
an end. It is, of course, ‘constitutionally irrelevant whether this reasoning
in fact underlay the legislative decision’" (quoting Flemming v. Nestor,
363 U.S. 603, 612 (1960))).
10 MCDANIELS v. UNITED STATES
as well as the potential for manipulating income through creative
accounting.
In sum, we conclude that the selection of a gross revenue criterion
without deductions of any kind, including pass-through funds, was a
rational application of the Secretary’s authority to distribute funds in
a fair and equitable manner.
Accordingly, we affirm the judgment of the district court.
AFFIRMED
LUTTIG, Circuit Judge, dissenting:
The majority’s speculation as to the rationales that might have
underlay the Department of Agriculture regulation (on the strength of
which it then upholds the regulation) constitutes yeoman’s work. It is
even possible that these speculated reasons were in fact the reasons
that the Department promulgated the regulation. But the jurispruden-
tial insight that eludes the majority is that it just may well be that
these were not the reasons that prompted the agency’s regulation that
we review today. I do not know the reasons for the agency’s inclusion
of pass-through funds in gross revenue, and neither does the majority,
for no reasons for that decision have been provided by the agency,
either in the course of the regulation’s promulgation or in the course
of this litigation. It is in this very circumstance that the Supreme
Court has cautioned the courts against their own post hoc supply of
reasons for agency action and explained that the proper procedure is,
instead, for the courts to require of the agency that it explain its own
action, after which meaningful judicial review may then be had. I
would heed the Supreme Court’s warning and hew to its mandated
procedure in this case. Accordingly, I dissent.
That an agency must give some statement of explanation for its
actions is a basic precept of administrative law. As the Supreme Court
admonished in Motor Vehicle Manufacturers Association of the
United States, Inc. v. State Farm Mutual Automobile Insurance Co.,
463 U.S. 29 (1983), "the agency must examine the relevant data and
articulate a satisfactory explanation for its action including a ‘rational
MCDANIELS v. UNITED STATES 11
connection between the facts found and the choice made.’" Id. at 43
(quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168
(1962)). The reasons provided by the agency are the only basis on
which the agency’s actions may be upheld. See State Farm, 463 U.S.
at 50 ("It is well-established that an agency’s action must be upheld,
if at all, on the basis articulated by the agency itself."). As the Court
explicitly warned in State Farm, reviewing courts are not to rely on
reasons that the agency itself has not provided: "More importantly, it
is the agency’s responsibility, not this Court’s, to explain its deci-
sion." Id. at 57.
From these premises, it follows (at least as a general matter) that
if an agency has provided no reasons for its action, a court may not
uphold that action. That is, if the Supreme Court is willing to remand
to the agency on the basis of unconvincing reasons, as it did in State
Farm, it follows a fortiori that agency action for which no justifica-
tion at all is provided, likewise, cannot be sustained. See SEC v.
Chenery Corp., 332 U.S. 194, 196 (1947) ("The rule is to the effect
that a reviewing court . . . must judge the propriety of such [agency]
action solely by the grounds invoked by the agency. If those grounds
are inadequate or improper, the court is powerless to affirm the
administrative action by substituting what it considers to be a more
adequate or proper basis." (emphasis added)).
The majority attempts to relieve the Department of its obligation
to provide an explanation, but this attempt results in yet another mis-
application of law. The majority concludes that because the 1999
Appropriations Act exempts the Secretary from the notice and com-
ment requirements of section 553(c) of the Administrative Procedure
Act (APA), see 1999 Appropriations Act § 1133(a)(1), 112 Stat.
2681, 2681-47, the agency was not required to give reasons for its
decision to include pass-through funds in gross revenue. See ante at
8. However, even assuming that, under section 553(c), a statement of
basis and purpose is required only if notice and comment is mandated
— a conclusion, incidentally, not required by the text of that provi-
sion — it does not follow (as the majority believes it does) that the
agency’s decision may be upheld in the absence of any stated justifi-
cation. The Secretary still must provide reasons for his decision in
order to survive arbitrary and capricious review under section
706(2)(A) of the APA.
12 MCDANIELS v. UNITED STATES
The Supreme Court has sensibly treated section 706, of its own
force, as requiring the agency to provide explanation for its action,
see Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402,
416 (1971); see also Pension Benefit Guar. Corp. v. LTV Corp., 496
U.S. 633, 654 (1990), reasoning that unexplained action is, by defini-
tion, arbitrary and capricious. And, per the direct authority of Overton
Park, this is so even in cases where an agency is not required to make
formal findings or observe the notice and comment requirement
before it takes action, because, absent agency explanation, a review-
ing court is unable to determine "whether the [agency’s] decision was
based on a consideration of the relevant factors and whether there has
been a clear error of judgment." Overton Park, 401 U.S. at 416.
Therefore, as the Supreme Court has held, the proper approach under
section 706 is not, as the majority does here, for the courts to specu-
late post hoc as to what the agency’s reasoning might have been, but,
rather, for the agency itself to explain post hoc what the reasons for
its action actually were. See id. at 420-21.
By positing reasons for the Secretary’s action, the majority has,
pure and simple, (mis)equated arbitrary and capricious review with
minimum rationality review, in contravention of the Supreme Court’s
clear instruction in State Farm, that "the presumption of constitution-
ality afforded legislation drafted by Congress and the presumption of
regularity afforded an agency in fulfilling its statutory mandate" are
not "equivalent." See State Farm, 463 U.S. at 43 n.9. The Supreme
Court only recently reaffirmed this principle, of which the majority
stands in violation, in Bowen v. American Hospital Association, 476
U.S. 610 (1986) (plurality opinion). After quoting the above noted
language from State Farm, the Court went on to explain that "the
mere fact that there is ‘some rational basis within the knowledge and
experience of the [regulators]’ under which they ‘might have con-
cluded’ that the regulation was necessary to discharge their statutorily
authorized mission will not suffice to validate agency decisionmak-
ing." Id. at 627 (internal citations omitted). Said the Court, in a pas-
sage that represents an anticipated rejection of today’s decision by the
majority, "[a]gency deference has not come so far that we [the
Supreme Court] will uphold regulations whenever it is possible to
‘conceive a basis’ for administrative action." Id. at 626.
In light of the complete absence of any agency explanation for its
inclusion of pass-through funds in the calculation of gross revenue,
MCDANIELS v. UNITED STATES 13
I would, as required by Supreme Court precedent, remand to the
Department for a statement of its reasons for this inclusion, a disposi-
tion that would thereafter permit meaningful judicial review. "[I]f the
reviewing court simply cannot evaluate the challenged agency action
on the basis of the record before it, the proper course, except in rare
circumstances, is to remand to the agency for additional investigation
or explanation." Florida Power & Light Co. v. Lorion, 470 U.S. 729,
744 (1985). Unlike the majority, I am unwilling to speculate as to the
reasons for the agency’s decision. I believe it is as unacceptable for
a court to generate its own reasons for agency action, as it is to substi-
tute its own views for those of the agency as to the propriety of partic-
ular action. The former, which the majority has indulged in here, may
seem a comparatively trivial limitation on the judicial power, but it
is not. It goes just as much to the legitimacy of the judicial process
and the independence of the executive process as does the latter. See
Chenery Corp., 332 U.S. at 196 (noting that for a court to uphold
agency action where the agency has not provided sufficient reasons
"would propel the court into the domain which Congress has set aside
exclusively for the administrative agency").
For these reasons, I respectfully dissent.