Opinion ID: 721429
Heading Depth: 2
Heading Rank: 1

Heading: In 1972 legislation, Congress authorized the Administration to

Text: 3 make and insure loans to public, private, or cooperative organizations ... for the purpose of improving, developing, or financing business, industry, and employment and improving the economic and environmental climate in rural communities.... Such loans, when originated, held, and serviced by other lenders, may be guaranteed by the Secretary [of Agriculture].... 4 Rural Development Act of 1972, Pub.L. No. 92-419, § 118, 86 Stat. 657, 663 (current version at 7 U.S.C. § 1932(a) (1994)), reprinted in 1972 U.S.C.C.A.N. 756, 763. 5 The Administration's regulations providing procedures for applying for loans and guarantees and determining such applications state: 6 The purpose of the [business and industrial loan] program is to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities, including pollution abatement and control. This purpose is achieved through bolstering the existing private credit structure through guarantee of quality loans which will provide lasting community benefits. It is not intended that the guarantee authority be used for marginal or substandard loans or to bail out lenders having such loans. 7 7 C.F.R. § 1980.401(b) (1982). Inability to obtain credit elsewhere is not a requirement for guaranteed assistance under [the business and industrial loan program]. Id. § 1980.425(a). An Administration official testified at trial, however, that the purpose of the lender program is to get banks to make loans that they ordinarily wouldn't make. They are high risk loans. 8 Upon receipt of a request for a loan guarantee, the Administration evaluates the application and determines whether it may guarantee the loan. If [the Administration] is able to guarantee the loan, it will provide the Lender and the applicant with Form FmHA 449-14 [Conditional Commitment for Guarantee], listing all requirements for such guarantees. 7 C.F.R. § 1980.452 (1982). This form contains the Administration's advice to the lender that the material it has submitted is approved subject to the completion of all conditions and requirements set forth in 'Conditional Commitment for Guarantee.'  Id. § 1980.6(a)(4). The lender and applicant can review the conditions and requirements in the Conditional Commitment and decide whether to accept them, reject them, or propose alternate conditions. Id. § 1980.453. 9 Administration regulations state that once all requirements have been met, the Administration and the lender will execute both a lender's agreement detailing the lender's responsibilities and the loan note guarantee itself. Id. § 1980.61, 1980.6(a)(13). The regulations define loan note guarantee as [t]he signed commitment issued by [the Administration] setting forth (specifically or by reference) the terms and conditions of the guarantee. Id. § 1980.6(a)(14). The maximum loss covered can never exceed ... 90 percent of the principal and interest indebtedness. Id. § 1980.20. 10 The regulations also provide the procedures when the Administration refuses to issue a loan note guarantee: 11 If [the Administration] determines that it cannot execute the Loan Note Guarantee because all requirements have not been met, it will promptly inform the lender on Form FmHA 449-13, Denial Letter of the reasons, and give the lender a reasonable period within which to satisfy [Administration] objections. If the lender writes [the Administration] within the period allowed requesting additional time to satisfy the objections, [the Administration] may, in writing, grant such additional time as it considers necessary and reasonable under the circumstances. If the lender satisfies the objections within the time allowed, the guarantee will be issued. 12 Id. § 1980.61(d). 13 B. In the Biomass Energy and Alcohol Fuels Act of 1980, Pub.L. No. 96-294, tit. II, 94 Stat. 611, 683-712 (codified as amended in scattered sections of 7 & 42 U.S.C.), Congress found that the dependence of the United States on imported petroleum and natural gas must be reduced by all economically and environmentally feasible means, including the use of biomass energy resources. Id. § 202(1), 94 Stat. at 683. Congress authorized loan guarantees for the construction of biomass energy projects, 42 U.S.C. § 8814 (1994), which include the production of ethanol, see 42 U.S.C. § 8812(a) (1994). That legislation requires that the applicant for such loan ... establish[ ] ... that the lender is not willing without such a guarantee to extend credit to the applicant at reasonable rates and terms. 42 U.S.C. § 8814(g)(1). 14 The Senate Committee Report on the act stated that 15 [t]he loan guarantees ... would spur farmers, farm cooperatives and industry to construct alternative energy production projects. Bankers and businessmen, who frequently are reluctant to invest in new endeavors and usually take a wait and see attitude would witness, first hand, the feasibility and great potential of these government assisted projects. Once government makes this commitment, bankers and businessmen will have the confidence to proceed with similar alternative energy projects using private capital and ingenuity. 16 S. Rep. No. 387, 96th Cong., 2d Sess. 48 (1980), reprinted in 1980 U.S.C.C.A.N. 1751, 1798. 17 The Administration promulgated regulations for the new program in October 1980. Biomass Energy and Alcohol Fuels Loans and Loan Guarantees, 45 Fed.Reg. 72,044 (1980). In July 1983, the Administration repealed those regulations, because:(1) No projects have been funded under the [Biomass Energy and Alcohol Fuels] program since its inception.... The provisions of the Act and subsequent regulations were not as attractive to applicants as the [Administration] Business and Industry (B & I) guaranteed loan program regulations. 18 (2) Applicants who were pursuing alcohol fuel projects were more interested in the B & I regulations provisions; therefore, the Administration processed and funded such applications (15 originally) under those regulations. 19 (3) No subsequent appropriations have been provided since the original appropriation for the Energy Act and it is unlikely Congress will provide funding for separate [Biomass Energy and Alcohol Fuels] projects. Current Congressional appropriation actions are recommending that alcohol fuel projects be financed under the current B & I regulations rather than under the original Energy Act. 20 Guaranteed Loan Programs, 48 Fed.Reg. 30,941, 30,941 (1983). 21 C. In the present case, the borrower, American Gasohol Refiners (American), in 1982 sought a $20,000,000 loan from Mid-Kansas Federal Savings and Loan Association (Mid-Kansas) to build an ethanol manufacturing plant in rural Kansas. Ethanol is an alcohol which may be blended with gasoline for use as fuel. Its price fluctuates depending upon changes in the prices of corn and other grains (from which it is made) and of oil. See Worldwide: Wall St. Roundup HIGH PLAINS CORP. (HIPC), Wall Street Transcript, Mar. 21, 1994; Research Analyst Interview: BASIC BRANDED FOOD PRODUCTS, Wall Street Transcript, Aug. 8, 1994; Broker Report: ARCHER DANIELS MIDLAND (ADM), Wall Street Transcript, Sept. 12, 1994. 22 Mid-Kansas and American applied to the Administration for a guarantee of the loan. In the application, Mid-Kansas stated that it 23 is pleased to sponsor and recommend this loan guaranty request to the [Administration]. We believe that this application and project are well planned, financially sound and properly suited for an [Administration] loan guarantee. 24 Mid-Kansas sought a guarantee of ninety percent of the loan. 25 In October 1982, the Administration issued a Conditional Commitment to Mid-Kansas and American, containing various conditions and stating that [a] Loan Note Guarantee will not be issued until the Lender certifies that it has no knowledge of any adverse change, financial or otherwise, in the Borrower, his business, or any parent, subsidiaries, or affiliates since it requested a Loan Note Guarantee. The Conditional Commitment also stated that [w]hen these conditions and requirements are met, Farmers Home Administration will issue a loan note guarantee in the amount of ninety percent. 26 In December 1982, Wells Fargo agreed to finance American's construction of the proposed ethanol plant. Subsequently, the Conditional Commitment to Mid-Kansas and American (which changed its name to High Plains, see Wells Fargo Bank, N.A., 26 Cl.Ct. at 807 n. 2), which would have expired in 1983, was extended. The ethanol plant was built and began production in 1984, but Wells Fargo and High Plains determined that an additional $3.5 million was necessary to bring the plant to full production. Id. at 807 (footnote omitted). 27 Wells Fargo, High Plains, the Administration, and several other interested parties executed an Intercreditor Agreement, dated September 9, 1985, which addressed the terms and conditions under which additional financing would be advanced by Wells Fargo. Id. The Intercreditor Agreement extended the Conditional Commitment through June 1986, and stated that [d]ue primarily to difficulties in achieving adequate production levels at the Plant, the [Administration] Guarantee has not issued. The Agreement also reaffirmed that upon compliance with the conditions of the Commitment and [Administration] regulations, the [Administration] will issue the [Administration] Guarantee for the benefit of Mid-Kansas or if Wells Fargo [become]s the lead lender, for the benefit of Wells Fargo. A new Conditional Commitment naming Wells Fargo as the lead lender was executed in October 1986. 28 In April 1986, the Administration directed its state directors to notify lenders holding a conditional commitment for an alcohol production facility of ten items that it intended to consider in order to assure there is no adverse change in the project prior to their closing of the loan. The items included [c]urrent and future demand and markets for the product of the facility and [c]urrent and future prices of the product of the facility. Wells Fargo objected to this directive, stating that the consideration of price and other macro-economic factors in the decision whether to issue a guarantee was contrary to the policy goals of the loan guarantee program and to the understanding of the parties at the outset of the process. 29 In October 1986, the Administration wrote Wells Fargo that we do not believe, based on the information submitted to date, that High Plains Corporation or Wells Fargo have met all conditions precedent to our issuance of the loan note guarantee. The letter stated fifteen respects in which High Plains and Wells Fargo's fulfillment of the conditions was deficient. Wells Fargo immediately responded, answering the fifteen deficiencies and explaining how each of the conditions had been satisfied. Additional correspondence ensued, both between Wells Fargo and the Administration and within the Administration, some of which indicated that the Administration was satisfied with the bank's response and intended to issue the guarantee. Based on these discussions, Wells Fargo agreed to provide an additional $5,000,000 in financing for the project. 30 In a December 19, 1986, letter from the Administration's state director to Wells Fargo, however, the Administration stated that it was unable to execute a Loan Note Guarantee. The Administration explained that it was refusing to execute the guarantee because [t]here has been an adverse change in the financial condition of High Plains Corporation during the period of time between the issuance of the Conditional Commitment for Guarantee in 1982 and December 17, 1986. It referred to a Peat Marwick Mitchell and Company (Peat Marwick) report that indicate[d] that based on the price of ethanol ($.80 per gallon) and the cost of milo [grain] ($1.23 per bushel), the company would not generate sufficient cash flow to meet its obligations as of October 1986, or in the foreseeable future. The Administration also asserted that [t]he history of the management of the corporation reveals numerous decisions which have caused adverse results and led us to have serious concerns about the credibility of its management. 31 D. After the Administration refused to issue the loan guarantee, High Plains and Wells Fargo twice restructured the loan. As part of the first restructuring, Wells Fargo received options to purchase eighty-four percent of High Plains's stock and reduced the loan balance by $12,700,000. In the second restructuring, Wells Fargo surrendered the options in exchange for $2,500,000 in cash. 32 Following a public offering of its stock in 1993, High Plains paid its indebtedness to Wells Fargo with the exception of $389,423, which the bank forgave in exchange for receiving the proceeds of the public offering. 33 E. After the Administration denied an administrative appeal of the refusal to issue the guarantee, Wells Fargo filed a breach of contract suit in the United States Claims Court (the name of which in 1992 was changed to the United States Court of Federal Claims. For convenience's sake, we refer to the trial court by the latter name.) 34 In its opinion on liability, the court granted Wells Fargo's motion for partial summary judgment, holding that the Administration had contracted to issue the guarantee and had breached the contract. Wells Fargo Bank, N.A., 26 Cl.Ct. at 805 (1992). The court ruled that both the 1982 Conditional Commitment and the later Intercreditor Agreement were valid conditional contracts. Wells Fargo Bank, N.A., 26 Cl.Ct. at 810. According to the court, the Conditional Commitment was a unilateral contract, under which the Administration's commitment to issue the guarantee became binding when the bank began performance by making the loan to American. Id. at 810-11. The court stated that  '[t]here is ample case law holding that a contractual relationship arises between the government and a private party if promissory words of the former induce significant action by the latter in reliance thereon.'  Id. at 810 (quoting National Rural Utils. Coop. Fin. Corp. v. United States, 14 Cl.Ct. 130, 137 (1988), aff'd, 867 F.2d 1393 (Fed.Cir.1989)). In the court's view, both the Conditional Commitment and the Intercreditor Agreement constitute contracts that bind the [Administration] to issue the guarantee if the conditions were satisfied. The [Administration] was not free to withdraw its offer or to refuse to determine if the conditions were, in fact satisfied. Wells Fargo Bank, N.A., 26 Cl.Ct. at 811. 35 The court concluded that all of the conditions had been satisfied. Id. at 817. It rejected the Administration's claims that adverse changes had occurred in either the financial condition or management of High Plains. The court ruled that the first reason for denying the guarantee, insufficient cash flow due to low ethanol prices, was legally insufficient because it was based on conditions outside plaintiff's control for which the plaintiff did not assume the risk of forfeiture. Id. at 815. The court also rejected the Administration's concerns about adverse changes in company management, because many of the examples the Administration gave pre-dated the Intercreditor Agreement and did not prevent the [Administration] from signing [it], id. at 816, and also were known prior to [the Administration] indicating informally that the guarantee would be issued. Id. at 817. 36 Following a separate trial on damages, the court awarded Wells Fargo $10,885,423.86. Wells Fargo Bank, N.A., 33 Fed.Cl. at 236. This amount comprised two elements. The major portion--$10,496,000--was for profits Wells Fargo allegedly lost because it was unable to make additional loans following a capital restructuring required as a result of the government's refusal to issue the guarantee. See infra part III.A. The second item was the $389,423 that Wells Fargo forgave when it received the proceeds of High Plains's public stock sale. Wells Fargo Bank, N.A., 33 Fed.Cl. at 245-46. The court, however, denied Wells Fargo's additional request for damages of up to $26,264,000, reflecting its alleged losses from the surrender of its equity interest in High Plains, because those losses did not meet the standards of foreseeability and certainty. Id. at 248.