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Sunrise Cooperative, Inc. v. United States Department of Agriculture

United States District Court, N.D. Ohio, Western Division

June 6, 2017

Sunrise Cooperative, Inc., Plaintiff
v.
United States Department of Agriculture, et al., Defendants

          ORDER

          James G. Carr Sr. U.S. District Judge

         This declaratory judgment action under 28 U.S.C. § 2201 concerns a farming cooperative's right to issue “patronage rebates” to those of its members who buy crop insurance from an insurer that the cooperative partly owns.

         The plaintiff, Sunrise Cooperative, Inc. (Sunrise), is an Ohio agricultural cooperative whose members are Ohio and Michigan farmers. Sunrise owns a one-third stake in Lund and Smith Insurance Services, LLC (L&S). Sunrise declares and pays “patronage” to its members based on how much crop insurance each member buys from L&S. This “patronage” is essentially a rebate on a policy premium that creates an incentive for the cooperative's members to buy insurance from L&S.

         Since 2008, federal law has prohibited this kind of premium rebating. 7 U.S.C. § 1508(a)(9)(A). But Sunrise has continued to declare patronage under the statute's “grandfather clause, ” which allows an “entity” that, before enactment of the 2008 legislation, “was approved by the [Federal Crop Insurance] Corporation to make such payments for the 2005, 2006, or 2007 reinsurance year.” 7 U.S.C. § 1508(a)(9)(B)(iii)(I). Having been so approved for those years, Sunrise could continue making such payments after the 2008 law took effect.

         In 2016, Sunrise merged with another farming cooperative, Trupointe Cooperative, Inc. (Trupointe) and more than doubled its membership.[1] After the merger, Sunrise was the surviving corporation.

         When Sunrise inquired of the United States Department of Agriculture's Risk Management Agency (RMA) whether it could, post-merger, continue making premium rebates, the RMA advised Sunrise that it could not. The agency explained that, as a result of its merger with a non-grandfathered entity like Trupointe, Sunrise was no longer an “entity that was approved” to declare patronage.

         Having unsuccessfully contested the RMA's position administratively, Sunrise brought this challenge to the agency's decision under the Administrative Procedures Act, 5 U.S.C. § 701, et seq.

         Jurisdiction is proper under 28 U.S.C. § 1331.

         Pending are the parties' counter-motions for summary judgment. (Docs. 13, 16). For the following reasons, I grant the defendants' motion and deny Sunrise's motion.

         Background

          The RMA is the principal federal regulator of the crop-insurance market. It oversees a public-private partnership with “approved insurance providers” (AIPs) who sell and service crop-insurance policies in accordance with RMA guidelines. See 7 U.S.C. §§ 1502, 1503, 1508(k).

         The agency also determines the cost of crop-insurance policy premiums. 7 U.S.C. § 1508(d). It does so, in part, because federal funds subsidize the operational and administrative costs that the AIPs incur. 7 U.S.C. § 1516. Given this financial stake in the crop-insurance market, the RMA professes “an interest in ensuring that . . . the crop insurance market is operating efficiently and effectively to protect and strengthen the economic stability of America's agricultural producers, i.e., its farmers.” (Doc. 16 at 9) (citing Doc. 12-3 at 37-38).

         A. Premium Rebating

         Before 2000, the RMA prohibited AIPs from paying premium rebates, dividends, and patronage refunds; it did so because, in its view, such payments “may have an adverse effect on [the agency's] ability to devise and establish an effective and efficient crop insurance marketplace.” (Doc. 12-2 at 25).

         Congress altered the no-rebate rule in the Agricultural Risk Protection Act of 2000, 114 Stat. 358, which permitted a limited form of rebating:

         (B) Payment on Behalf of Producers.

(i) Payment Authorized - If state law permits a licensing fee or other payment to be paid by an insurance provider to a cooperative association or trade association and rebated to a producer with catastrophic risk protection or additional coverage, a cooperative association or trade a1ssociation located in that State may pay, on behalf of a member of the association in that State or a contiguous State who consents to be insured under such an arrangement, all or a portion of the administrative fee required by this paragraph for catastrophic risk protection.

7 U.S.C. § 1508(b)(5)(B).

         Under the RMA's interpretation of this provision, an AIP could pay a licensing fee to a cooperative, and the cooperative could use that fee to pay patronage. (Doc. 12-2 at 26-27).

         After this change in the law, some cooperatives - including Sunrise - purchased interests in crop-insurance agencies. In 2005, 2006, and 2007, the RMA approved Sunrise's arrangement with L&S's parent company and permitted Sunrise to pay premium rebates to its members. (Doc. 12-3 at 27-28).

         Responding to reports of premium-rebating abuses, Congress in 2008 changed course, enacting legislation that sought to, and did, end rebate payments by nearly all cooperatives. Its only deviation from this change in direction - at issue in this case - was the grandfather clause. That provision permitted Sunrise and other entities whom the RMA had previously approved to pay patronage to continue doing so:

(9) Premium adjustments
(A) Prohibition
Except as provided in subparagraph (B), no person shall pay, allow, or give, or offer to pay, allow, or give, directly or indirectly, either as an inducement to procure insurance or after insurance has been procured, any rebate, discount, abatement, credit, or reduction of the premium named in an insurance policy or any other valuable consideration or inducement not specified in the policy.
(B) Exceptions
Subparagraph (A) does not apply with respect to -
* * *
(iii) a patronage dividend, or similar payment, that is paid
(I) by an entity that was approved by the Corporation to make such payments for the 2005, 2006, or 2007 reinsurance year, in accordance with subsection (b)(5)(B) as in effect on the day before the date of enactment of this paragraph; and
(II) in a manner consistent with the payment plan approved in accordance with that subsection for the entity by the Corporation for the applicable reinsurance year.

7 U.S.C. § 1508(a)(9).

         The purpose of § 1508(a)(9)(B)(iii) was, according to the bill's managers, to “‘grandfather in' entities that have previously been approved by the Federal Crop Insurance Corporation to make payments in accordance with subsection (b)(5)(B) as in effect on the day before the date of enactment.” Conference Report on H.R. 2419, Food, Conservation, and Energy Act of 2008, 2008 WL 2038610, *H3659. The managers also emphasized that the exception was a limited one:

The Managers expect the Corporation to exercise strict oversight to ensure that these entities are operating consistent with federal and state law and the payment plan submitted and approved. The Managers understand through discussions with RMA that the parties covered by the grandfather clause represent the universe of parties engaged in this activity. The Managers also understand from RMA that, while two of the submissions are still under review, no further requests are pending or ...

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