Kinder Canal Co., Inc. v. Johanns

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT July 20, 2007

Charles R. Fulbruge III
No. 06-30238 Clerk

KINDER CANAL COMPANY, INC.; MIKE T. UNKEL,

Plaintiffs-Appellants,

versus

MIKE JOHANNS, SECRETARY, DEPARTMENT OF AGRICULTURE,

Defendant-Appellee.

Appeal from the United States District Court
for the Western District of Louisiana
Case No. 2:05-CV-01123-JTT-APW

Before JONES, Chief Judge, and JOLLY and STEWART, Circuit Judges.

EDITH H. JONES, Chief Judge:

Appellants Kinder Canal Company, Inc. (“Kinder Canal”)

and Mike T. Unkel (“Unkel”) challenge the district court’s

determination that they must refund farm-support payments received

between 1996 and 2003 under various programs administered by the

Department of Agriculture’s Farm Service Agency (“FSA”). Finding

that Appellants serially misrepresented program-eligibility data

they reported to the FSA on contracts for farm-support benefits,

the District Court upheld the FSA’s demand to return all payments

received by Kinder Canal and by Unkel in his individual capacity.

We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND
 The FSA program payments at issue in this case involve

Farm Serial Number 1228 (“FSN 1228”), a parcel of agricultural land

used for cultivation of wheat, oats, and rice in Allen Parish,

Louisiana. FSN 1228 encompassed 1,136.9 total cropland acres and

668.0 acres of combined wheat, oat, and rice base. FSN 1228 was

divided into seven numbered tracts: 417, 506, 507, 516, 517, 522,

and 1447. The parcel was jointly owned by seven entities,

including Kinder Canal, a Louisiana corporation consisting of

nineteen members of the Unkel family. Appellant Unkel is Kinder

Canal’s president and a shareholder. Additionally, he holds a

twenty-five percent stake in the Unkel Four Joint Venture, a

separate farming entity co-owned by Unkel and three of his

siblings. Having served as the Chairman of the FSA’s Allen Parish

Committee for approximately eighteen years, Unkel is a

sophisticated participant in the FSA’s various farm-support

programs and is well versed in their technical requirements.

On July 18, 1996, acting in his capacity as Kinder

Canal’s president, Unkel signed a Form CCC-478 Production

Flexibility Contract (“PFC”), to enroll FSN 1228 in the FSA’s PFC

Program.1 See 7 C.F.R. § 1412.101 (1997) et seq. Beginning in

1
The Program was authorized by the Federal Agricultural
Improvement and Reform Act of 1996 (“FAIR”), Pub. L. No. 104-127,
110 Stat. 888 (1996), a farm bill that replaced the decades-old
practice of subsidizing production of feed grains, wheat, upland
cotton, and rice through direct income transfers, also referred
to as deficiency payments. Whereas deficiency payments were made
only when the market price for a covered commodity dropped below
a predetermined target price, PFC payments were made irrespective

2
1996, under the Program farmers received a fixed annual payment in

return for reducing their acreage of certain agricultural

commodities. The FSA approved the Kinder Canal PFC proposal.

Kinder Canal, through Unkel, annually re-enrolled its cropland and

received PFC payments from 1996 to 2002. Additionally, from 1998

to 2001, the FSA made payments to Kinder Canal under the Marketing

Loan Assistance Program (“MLA Program”), eligibility for which was

directly tied to Kinder Canal’s participation in the PFC Program.

In December 1991, several years before Kinder Canal

enrolled in the PFC and MLA Programs, Unkel’s aunt Eva, the owner

of tract 517 (the “Eva Unkel tract”), died. Appellant Unkel had

held power-of-attorney for his aunt since 1983. In 1993, the Eva

Unkel tract was sold to two individuals unaffiliated with Unkel or

any of the family business entities. Unkel admits that when he

first applied for PFC payments in 1996 he was aware that the Eva

Unkel tract had been sold and that his power-of-attorney had

terminated at his aunt’s death. Nonetheless, on FSN 1228’s first

PFC proposal, Unkel falsely recorded Mrs. Eva Unkel as tract 517’s

owner and did not notify the FSA of the actual owners. When he

re-enrolled Kinder Canal for PFC annual payments from 1997 until

2002, Unkel continued to misrepresent to the FSA the company’s

ownership of the Eva Unkel tract.

of market fluctuations. FAIR allocated to the Secretary over $35
billion to be paid out to eligible farmers during the seven-year
period from 1996 to 2002.

3
 Another source of inflated PFC payments arose from FSA’s

mis-accounting for eligible acreage on certain tracts in FSN 1229

known as the Cole/Morrow tracts. Unkel asserts that he did not

notice the FSA’s mistake and accordingly requested PFC payments on

the Cole/Morrow tracts’ rice base acreage that was technically no

longer eligible during the 1997-2002 program years.

In December 2002, Unkel enrolled FSN 1431, a

reconstituted group of tracts, in a third FSA commodity-support

program — the Direct and Counter-Cyclical Payments Program (“DCP

Program”).2 See 7 C.F.R. 1412.101 (2003) et seq. In making base

acreage and yield elections as required by the DCP contract, Unkel

informed the FSA of one of the Eva Unkel tract’s new owners, but

failed to mention the second owner. And, as he had previously

reported on the PFC contracts from 1997-2002, Unkel continued to

incorrectly certify that the Cole/Morrow rice base acreage was

eligible to receive DCP payments when in fact it was not. Kinder

Canal’s first DCP contract was approved on December 18, 2002. FSN

1431 received DCP payments for the 2002 and 2003 program years.

2
The Direct and Counter-Cyclical Payments Program was
authorized by the Farm Security and Rural Investment Act of 2002
(“FSRIA”), Pub L. No. 107-171, 116 Stat. 134 (2002). As its name
suggests, the Program provides two types of subsidy payments to
enrolled farmers. Participants receive direct payments
independent of market fluctuations that are based upon the
commodity type and amount of available cropland elected by the
farmer. Counter-cyclical payments, in contrast, are based on a
farm’s historical acreage and crop yields and are triggered if
market prices for covered commodities fall below levels specified
by the FSRIA.

4
 Unkel’s misrepresentations regarding the ownership and

crop acreage bases of FSNs 1228 and 1431 were discovered in 2003 by

the Department of Agriculture’s Office of Inspector General (“OIG”)

during an audit of commodity-support programs in Allen Parish. The

audit was part of an effort by the FSA to determine farmers’

eligibility for program participation and whether the current

administration of program payments was based on valid acreage and

yield determinations. The OIG found that representations made

under Unkel’s PFC, MLA, and DCP contracts were inaccurate and that

Unkel had knowingly misrepresented the ownership and cropland

acreage bases of FSN 1431 and its predecessor parcel, FSN 1228.

The OIG additionally found that Unkel admitted to publicly

discussing the 1993 sale of the Eva Unkel tract and to knowing that

Kinder Canal had not owned or leased the tract since 1993, but that

it nonetheless was enrolled for PFC and DCP Program payments based

on the Eva Unkel tract’s crop acreage base.

Despite Unkel’s misrepresentation of the Eva Unkel

tract’s ownership and the FSA’s deletion of the Cole/Morrow tracts,

however, Kinder Canal received no excessive benefit payments,

except during 2001. This is because the company’s eligibility for

PFC, MLA, and DCP annual payments consistently exceeded the payment

limitations imposed by those programs.3 In 2001, the combined

contract misrepresentations on the Cole/Morrow and Eva Unkel tracts

3
The PFC and DCP programs allowed a maximum annual payment
of $40,000, and the maximum annual MLA payment was $75,000.

5
garnered Kinder Canal a modest $1,124.30 more than the benefits to

which they were lawfully entitled.

Nonetheless, the OIG recommended in its audit report that

the FSA’s Louisiana State Committee pursue collection of all PFC

and MLA payments Kinder Canal received between 1996 and 2002, as

well as the 2002 and 2003 DCP payments. Additionally, the OIG

recommended collection of all PFC and MLA payments Unkel received

between 1996 and 2002 that derived from his participation in the

Unkel Four Joint Venture.4 The State Committee adopted the OIG’s

recommendations. Subsequent review by an FSA National Appeals

Division Hearing Officer and the FSA’s National Appeals Division

(“NAD”) Director affirmed the OIG’s conclusions regarding Kinder

Canal’s and Unkel’s liability.

Appellants turned to federal court for a declaratory

judgment that the FSA abused its discretion in making the refund

demand. The Secretary filed a cross-motion for summary judgment.

The district court arrived at substantially the same conclusion as

the NAD Director regarding Appellants’ liability and entered

judgment for the return of the commodity-support payments. FSA

originally demanded well over a million dollars in restitution.

4
The State Committee also demanded return of commodity-
support payments received by a third entity owned entirely by
Unkel, Mike T. Unkel Farms, Inc. The National Appeals Division
Director determined that the Committee recommendation assigning
liability to Mike T. Unkel Farms was erroneous and that the FSA’s
refund demand was not supported by substantial record evidence.
Mike T. Unkel Farms was dismissed from administrative review and
is not a party to this appeal.

6
After it offset benefits to which the Unkel Four Joint Venture was

entitled, FSA informally reduced its demand to the “modest” sum of

$632,685.88, plus interest. See Kinder Canal Co., Inc. v. Johanns,

2006 WL 250485 (W.D. La. Jan. 31, 2006) (unpublished). This appeal

followed.

II. DISCUSSION

A. Standard of Review

We review the district court’s summary judgment grant de

novo, applying the same standard used below. City of Shoreacres v.

Waterworth, 420 F.3d 440, 445 (5th Cir. 2005). The FSA’s demand

for refund of program payments is reviewed pursuant to the

Administrative Procedures Act, 5 U.S.C. § 701 et seq., under which

this Court may set aside the FSA’s decision only if the agency

action is “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law.” Norton v. S. Utah

Wilderness Alliance, 542 U.S. 55, 64, 123 S. Ct. 2373, 2380 (2004)

(quoting 5 U.S.C. § 706(2)(A)); Waterworth, 420 F.3d at 445. This

standard of review is “highly deferential” to an agency’s

interpretation of its own regulations. Spiller v. White, 352 F.3d

235, 240 (5th Cir. 2003) (quoting Sabine River Auth. v. United

States Dep’t of Interior, 951 F.2d 669, 675 (5th Cir. 1993)). In

undertaking appellate review of the FSA’s determination, we

emphasize our role in exercising only the “narrowly defined duty of

holding agencies to certain minimal standards of rationality.”

7
Waterworth, 420 F.3d at 445 (quoting Avoyelles Sportsmen’s League,

Inc. v. Marsh, 714 F.2d 897, 905 (5th Cir. 1983)).

B. Do The Regulatory Penalty Provisions Authorize FSA’s Demand
for Return of Program Benefits from Kinder Canal?

Appellants first contend that because the misrepresenta-

tions concerning the Cole/Morrow and Eva Unkel tracts contained in

the PFC and DCP contracts did not result in their receipt of

program benefits to which they were not entitled, except during

2001, the statutory penalty provisions do not authorize the FSA’s

demand for repayment. On this score, the district court stated

that:

a mistake was made by the FSA in 1997 when the acreage
tracts [i.e., the Cole/Morrow tracts] were deleted
without removing the rice acreage basis [sic], however,
Unkel knowingly made misrepresentations year after year
after year regarding the true ownership and/or the
absence of a lease agreement [regarding the Eva Unkel
tract], consequently inflating the potential for program
benefit payments. Thus, even though [Kinder Canal] had
received the maximum amount of payments allowed by law in
every year except 2001, this fact does not justify
Unkel’s perpetual fraud upon the FSA and the various
payment benefit programs.

Appellants take issue with this conclusion, contending that “the

district court erred in finding that a potential for benefits meets

the regulatory requirement of a showing that the misrepresentation

resulted in a Program benefit.”

The language of the applicable regulations illustrates

the infirmity of Appellants’ argument. Using identical language,

the PFC and DCP penalty provisions — 7 C.F.R. § 1412.405 (1997) and

8
7 C.F.R. § 1412.604 (2003), respectively — punish producers who

“erroneously represented any fact affecting a program determina-

tion.” (Emphasis added). Appellants argue that the clause “any

fact affecting a program determination” requires that the

misrepresented fact resulted in an increased and unlawful payment

of benefits. In so doing, Appellants narrow the scope of the

regulations by effectively replacing the phrase “program

determination” with “program benefit.” Neither the PFC nor the DCP

provision requires that, to be punishable, a misrepresentation must

affect the amount of program benefits received by a producer. In

fact, the DCP provision applies to a much broader spectrum of

conduct and reaches any misrepresentation that “tends to defeat the

purpose of the program.” 7 C.F.R. § 1412.604(b)(1).5 Certainly

5
Analogizing to cases discussing the False Claims Act, 31
U.S.C. § 3729 et seq., Appellants invite this Court to
superimpose a “materiality requirement” onto the penalty
provisions. Appellants contend that since in no year except 2001
did the misrepresentations contained in the PFC and DCP contracts
affect the amount of program benefits paid out to FSNs 1228 and
1431, the misrepresentations are immaterial and cannot be
actionable under the penalty provisions. There is no statutory
basis for this contention. As instructed by one of the False
Claims Act cases cited by Appellants, we undertake a “natural
reading of the full text” to determine whether materiality is
required under a statute. Neder v. United States, 527 U.S. 1,
21, 119 S. Ct. 1827, 1839 (1999) (quoting United States v. Wells,
519 U.S. 482, 490, 117 S. Ct. 921, 927 (1997)). Both penalty
provisions’ texts plainly apply to misrepresentation of “any fact
affecting a program determination.” See 7 C.F.R. § 1412.405
(1997), 7 C.F.R. § 1412.604 (2003). Neither provision conditions
liability upon facts affecting payment of a program benefit, as
Appellants argue. Because the plain statutory language is far
broader than Appellants contend, their materiality argument is
misplaced.

9
one of the many purposes of the FSA’s commodity-support programs is

to accurately ascertain and track the ownership status of enrolled

farms. This purpose was thwarted by Unkel’s repeated, false

averments regarding ownership of the Cole/Morrow and Eva Unkel

tracts. Even though minuscule undeserved program benefits were

paid by the FSA, the misrepresentations certainly affected the

agency’s mistaken determination that the Cole/Morrow and Eva Unkel

tracts were eligible for program enrollment. Consequently, the

FSA’s repayment assessment was not arbitrary, capricious, or an

abuse of agency discretion. FSA may demand full repayment of the

PFC, MLA,6 and DCP payments received by Kinder Canal during 1996-

2003.

6
Because the MLA payments were conditioned on Kinder Canal’s
eligibility under the PFC Program, our finding of PFC
ineligibility requires refund of the MLA payments.

10
C. Does FSA’s Mistaken Deletion of the Cole/Morrow Tracts Affect
Kinder Canal’s Liability?

Kinder Canal next challenges the FSA’s refusal to afford

relief under 7 C.F.R. § 1412.602(a)(1),7 a provision that addresses

reporting violations of wild rice acreage. That section provides

that if a wild rice producer’s reported base acreage is inaccurate

but still within five percent of the actual acreage, the producer

must accept a reduction in the DCP payments for the overstated

acreage. See § 1412.602(a)(1), (b). Kinder Canal contends that

the FSA’s mistaken deletion of the Cole/Morrow tracts caused it to

overreport program-eligible rice base acreage by 32.9 acres, or

4.935 percent of the total base acreage. Only when the Cole/Morrow

tract overage is added to the overage caused by Unkel’s fraudulent

inclusion of the Eva Unkel tract, does the aggregate overage exceed

the five-percent regulatory tolerance under § 1412.602(a)(1).

Thus, Appellants conclude, “[i]n the interest of fairness, where

the Agency was as much at fault, if not more so, than Kinder Canal,

7
7 C.F.R. § 1412.602 states in pertinent part:
(a)(1) If an acreage report of . . . wild rice planted
on base acreage of a farm enrolled in DCP is inaccurate
but within tolerance as provided in paragraph (b) of
this section and [the Commodity Credit Corporation]
determines the producer made a good faith effort to
comply with the provisions of this section, the
producers shall accept a reduction in the direct and
counter-cyclical payments for each such acre. . . .
(b) For the purposes of this section, tolerance is the
amount by which the determined acreage may differ from
the reported acreage and still be considered in
compliance with program requirements. Tolerance for
. . . wild rice plantings is 5 percent of the reported
. . . wild rice acreage, not to exceed 50 acres.

11
this total percentage [overage] should be cut in half to meet the

5.0% tolerance allowed by law.”

We cannot agree. First, § 1412.602 applies to violations

of wild rice acreage reporting, not contract violations covered by

7 C.F.R. § 1412.401 (1997) and 7 C.F.R. § 1412.601 (2003), the

provisions applicable here. Second, even if application of

§ 1412.602 were appropriate in this case, the NAD Director’s

determination that Unkel misrepresented the Eva Unkel tract acreage

in bad faith would trigger § 1412.602(a)(3), the subsection applied

to bad-faith misrepresentations, not (a)(1) as Kinder Canal claims.

Subsection (a)(3) requires forfeiture of DCP payments and renders

a producer ineligible to receive any commodity-support payment

under Title 7 of the Code. Third, although Kinder Canal may be

correct in alleging that the FSA’s negligent deletion of the

Cole/Morrow tracts caused an overage that Unkel did not notice when

he renewed the contracts, the FSA’s action does not allow us to

ignore Unkel’s misrepresentation of the Eva Unkel tract’s ownership

for a seven-year period.8 We see no justification — under the

regulations or general equity principles — for the rationale that

8
Unkel additionally failed to comply with 7 C.F.R.
§ 1412.303(a), which requires submission of the terms of a
written lease of eligible base acreage to the County Committee
prior to approval of the benefits contract.

12
the FSA’s negligence somehow mitigates Unkel’s affirmative

misrepresentations.9

D. Can FSA Demand Refund of Program Benefits Received by Unkel in
his Individual Capacity?

Unkel contends that the district court erred in upholding

the FSA’s assessment of his individual liability as a “producer” in

the Unkel Four Joint Venture based on the payments Kinder Canal

obtained by deception under the contracts for FSNs 1228 and 1431.

Unkel maintains that Kinder Canal alone qualifies as a “producer”

for purposes of its contracts under the applicable regulations and

that Unkel cannot therefore be liable for any repayment of benefits

without piercing Kinder Canal’s corporate veil. He contends that

the applicable regulations do not permit piercing the corporate

veil. The Secretary, however, denies piercing the corporate veil10

and argues that because Unkel qualified as a “producer” for one

purpose — the Unkel Four Joint Venture — the regulations subject

him to liability for any misstatements connected with any program

contracts. The Secretary is correct.

9
Moreover, we see no merit in Appellants’ ancillary argument
that the NAD Director abused his discretion in not affording
equitable relief under 7 C.F.R. § 11.9(e). Equitable relief is
inappropriate under that provision and 7 C.F.R. § 1412.602(a)(1)
when, as here, a producer has made repeated bad-faith
misrepresentations of eligible base acreage.
10
The Secretary notes, relatedly, that his hearing officer
determined that Mike T. Unkel Farms, Inc., as an independent
corporate “producer” on contracts not involved in the
misstatements, could not be required to refund program payments.

13
 Unkel is a “producer” on contracts involving the Unkel

Four Joint Venture within the meaning of the regulatory provisions.

The Code of Federal Regulations defines the term “producer” as used

in Chapter XIV of Title 7 as “an owner, operator, landlord, tenant,

or sharecropper, who shares in the risk of producing a crop and who

is entitled to share in the crop available for marketing from the

farm or would have shared had the crop been produced. . . .”

7 C.F.R. § 718.2. According to the penalty provisions, any

producer who has knowingly “misrepresented any fact affecting a

program determination” must refund all payments, plus interest,

received on all contracts to which the producer is a party. See

7 C.F.R. § 1412.405(b) (1997); 7 C.F.R. § 1412.604(b) (2003).11

11
7 C.F.R. § 1412.405(b) (1997) Misrepresentation and scheme
or device.
(b) A producer who is determined to have knowingly:
(1) Adopted any scheme or device that tends to
defeat the purpose of the program;
(2) Made any fraudulent representation; or
(3) Misrepresented any fact affecting a program
determination shall refund to CCC all
payments, plus interest determined in
accordance with part 1403 of this chapter
received by such producer with respect to all
contracts. The producer’s interest in all
contracts shall be terminated.

7 C.F.R. § 1412.604 (2003) Misrepresentation and scheme
or device.
(b) A producer shall refund to CCC all direct and
counter-cyclical payments, plus interest as
determined in accordance with part 1403 of this
chapter, received by such producer with respect to
all contracts if the producer is determined to
have knowingly done any of the following. In
addition, the producer’s interest in all such
contracts shall be terminated.

14
 The Secretary’s reading of these provisions is broad but

plainly reasonable. Unkel is a producer because he is a joint

venturer in the Unkel Four Joint Venture. Although no misrepresen-

tation was made by or for that entity, he nevertheless knowingly

misrepresented facts affecting program determinations on the Kinder

Canal contracts, both in his capacity as a corporate officer of

Kinder Canal and as the false agent of Eva Unkel after her death.

The cited regulations do not require a connection between the

contracts from which a producer receives benefits and those in

which misrepresentations are made. On the contrary, as has been

explained already, liability attaches when “any fact affecting a

program determination” has been misrepresented. The Secretary

literally applied this language and also literally applied the

penal consequences by ordering Unkel to refund his payments

received through the Unkel Four Joint Venture in his “producer”

capacity. He is not being held “solidarily liable” with Kinder

Canal.

Upholding the Secretary’s decision on this basis, we need

not and do not decide whether Unkel could have been deemed a

“producer” under any other interpretation of the regulations.

III. CONCLUSION

(1) Adopted any scheme or device that tends to
defeat the purpose of the program;
(2) Made any fraudulent representation; or
(3) Misrepresented any fact affecting a program
determination.

15
 For the foregoing reasons, the district court’s grant of

summary judgment to the Secretary is AFFIRMED.

16