Opinion ID: 427559
Heading Depth: 1
Heading Rank: 2

Heading: Circumvention

Text: 10 The most difficult issue presented by this case is whether the USDA may refuse to register Diane in order to prevent circumvention of the suspension orders against the Corporation and Philip Jr. In short, the reason Diane's proposed business might circumvent the suspension order is that the goodwill of the Corporation could simply be maintained through her and transferred back to the Corporation when its suspension ended. This, combined with the fact that her husband would share in whatever economic benefit accrued during the twenty-one day suspension, would completely frustrate the effect of the suspensions. Before discussing the legal issue, however, we will review the evidence supporting the finding that Diane's plan would result in circumvention. This review may help to illustrate the importance of the suspension power to the administration of the Packers and Stockyards Act.
11 Our review of the factual findings made by the Secretary of Agriculture is narrow. The Secretary's findings must be sustained if they are supported by substantial evidence which is  'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion[.]'  Universal Camera Corp. v. NLRB, 340 U.S. 474, 477, 71 S.Ct. 456, 459, 95 L.Ed. 456 (1951) quoting Consolidated Edison v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938), quoted in NLRB v. Berger Transfer and Storage Co., 678 F.2d 679, 687 (7th Cir.1982). See also Swift & Co. v. United States, 393 F.2d 247, 255 (7th Cir.1968). 12 Despite Diane's arguments to the contrary, the J.O. is not required to accept the ALJ's findings of fact even when those findings are based on credibility determinations. Administrative Procedure Act (APA) Sec. 557(b), 5 U.S.C. Sec. 557(b). Rather, as the Supreme Court made clear in Universal Camera, the agency is free to substitute its judgment for that of the ALJ. The reviewing court still evaluates the J.O.'s decision using the substantial evidence test with the caveat that evidence supporting a conclusion may be less substantial when an impartial, experienced [ALJ] who has observed the witness and lived with the case has drawn conclusions different from the Board's than when he has reached the same conclusion. Universal Camera Corp. v. NLRB, 340 U.S. 474, 496, 71 S.Ct. 456, 469, 95 L.Ed. 456 (1951). See also Kopack v. NLRB, 668 F.2d 946, 951-52 (7th Cir.1982). 13 Thus the ALJ's determinations are not entitled to any special deference from the agency except insofar as the ALJ's findings are based on witness credibility determinations. The agency is free independently to weigh the evidence and draw its own inferences. The ALJ, of course, is best situated to make credibility determinations based on the demeanor of witnesses. Kopack, 668 F.2d at 953. 5 See generally 3 K.C. DAVIS, ADMINISTRATIVE LAW TREATISE 327-36 (2d ed. 1980). 14 The ALJ, finding Diane a credible witness, accepted Diane's statements that she intended to operate independently and did not intend to circumvent the suspension orders. The J.O., without explicitly rejecting the ALJ's findings, reversed on the facts holding the uncontradicted, objective circumstances [to be] more persuasive than Mrs. Mattes' testimony. J.O.'s Dec. at 21. The J.O. thus inferred from a number of facts and circumstances that Diane's application for registration was part of an attempt to avoid the effects of the suspension. 6 15 Looking at the proof on both sides, we conclude that substantial evidence supports the finding that Diane's plan was an attempt to circumvent the suspension order. The J.O. drew this inference from the following factors: the marital relationship between Diane and Philip Jr. (a suspended registrant and fifty percent shareholder in the suspended Corporation); the terms of the lease of the Corporate facilities (especially the fifteen day termination clause and the absence of a renewal option); the failure of Philip Jr. and Sr. to testify; the timing of Diane's application; her lack of prior experience; her intention to use the Corporation's employees and tariff; her admission of circumvention; the timing of her examination of the corporate books and financial statement; and her intent at first to use the Corporation's bank accounts. 16 The J.O.'s reliance on the admission of circumvention indicates that he rejected the ALJ's finding that the government's witness on this point lacked credibility. 7 If this were a close case, we might hesitate to approve the unexplained reversal of a credibility determination by an officer who has not had the opportunity to observe the witnesses. Similarly, by inferring from the circumstances noted above that Diane was involved in a plan to circumvent the suspensions, the J.O. might be deemed to have implicitly rejected the ALJ's finding that Diane was telling the truth. Thus we consider the ALJ's credibility determinations and the findings based on them to be factors weighing against the government's position in accordance with Universal Camera. 8 Nonetheless, there is no doubt that a reasonable person, confronted with this record, could find that Diane was involved in a plan (perhaps unwittingly) to avoid the effect of the suspension orders. The factors cited by the J.O., regardless of any credibility disagreements, unmistakably point to a circumvention of the suspension order. 17 The most striking fact in this balance is the lease entered into by Diane and the Corporation. The lease reserves to both parties the power to terminate on fifteen days' notice for any reason. It is perfectly reasonable to infer from this provision a scheme to use Diane as a substitute for as brief a time as possible. Whether Diane viewed it that way is irrelevant because the Corporation and Philip Jr. could have advocated the clause without telling her why it was important. 9 At oral argument, Diane's counsel could not explain what benefit Diane could derive from the termination clause. 18 The lease also lacked a renewal option, which implies that Diane was not interested in pursuing a long-term business. It is reasonable to infer from the terms of the lease that Diane intended, or at least would be in a position, to establish a business of her own only so long as necessary to avoid the effects of the suspensions. 19 The remaining factors listed by the J.O., with one exception, need no explanation of why they support his conclusion. That exception is the failure of Philip Sr. and Philip Jr. to testify. It is sometimes a tricky business to judge the importance of the failure of a person to testify. In this case, however, Philip Sr. and Philip Jr.'s intentions regarding the duration of the lease, the termination clause and the lack of a renewal option were of special importance. If they had satisfactorily explained those provisions (or perhaps even agreed to modify them) the J.O. might have been presented with a significantly different case. We agree with the J.O. that, when a party fails to produce a witness potentially vital to her case, such a failure supports an inference that the testimony would have been adverse. See J.O.'s Dec. at 30-31. 20 In sum, the evidentiary findings of the J.O. are amply supported by the record. The inferences made by the J.O. are perfectly reasonable. Further, we note that, in accord with Kopack, the fact that the ALJ drew different (or no) inferences from these facts is of little importance to our review because those inferences were not demeanor based. See n. 9 supra and Kopack, 668 F.2d at 954-55. Even apart from the factors enumerated above, there are several other matters in the record which constitute substantial evidence supporting the decision. 10
21 The USDA contends that implicit in its power to suspend registrants is the power to deny registration when such a denial is necessary to prevent circumvention of a suspension order. Diane rejects this contention pointing out that the Packers and Stockyards Act requires operators of regulated stockyards to register with the Secretary [of Agriculture] under such rules and regulations as the Secretary may prescribe. 7 U.S.C. Sec. 203. The regulation prescribing the standards for acceptance of registration applications, 9 C.F.R. 201.10, does not mention circumvention of suspension orders as grounds for denial of registration. Therefore, contends Diane, the USDA lacks legal authority to refuse her registration. 22 The USDA admits that Diane meets all of the requirements for registration to be found in the statute and regulations. However the USDA points to certain of its past decisions in which entities and people have been precluded from operating because of potential circumvention of agency orders. 11 Further, the Judicial Officer notes in his opinion that [i]n every case except for the present, the applicant for registration, who was refused registration during the period of a suspension order, acquiesced in the administrative decision. J.O.'s Dec. at 47. This implies that the USDA follows a practice of denying registration where necessary to prevent circumvention of suspension orders. But we have been unable to find a reported case where registration was refused to someone who was not a party to prior proceedings and not a participant in earlier violations of the Act. Therefore, we consider this a somewhat novel question. 23 Initially we reject Diane's argument that registration may only be denied for the reasons enumerated in the statute and regulations. Certainly the statute does not require such an interpretation. Further, we do not read Sec. 203(2) as abrogating the general principle that agencies are free, within the limits of statutory authority, to proceed either through general rules or through individual adjudications. NLRB v. Bell Aerospace Co., 416 U.S. 267, 294, 94 S.Ct. 1757, 1771, 40 L.Ed.2d 134 (1974); Securities and Exchange Comm'n v. Chenery Corp., 332 U.S. 194, 202-03, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995 (1947). 24 The ease with which Diane's plan might have frustrated the Secretary's effort to impose sanctions on the Corporation and Philip Jr. illustrates the importance of the ability to prevent circumventions. We do not believe that by using the phrase under such rules and regulations as the Secretary may prescribe in Sec. 203, Congress intended to deprive the USDA of the power to meet all contingencies, even if unanticipated. In granting the suspension power, Congress must have intended to include power to make suspensions effective. 25 The USDA has frequently acted to prevent manipulation of corporate structures to circumvent suspension orders. Often, suspended registrants reorganize or form new corporate entities and attempt to operate through those entities during a suspension. See, e.g., In re Townsend, 35 Ag.Dec. 1604 (1976). In Townsend, the suspended registrant leased his facilities to a new corporate entity owned by the bookkeeper of the former business. The USDA added the new corporation as a respondent and ordered it to refrain from doing business during the time the original operator was suspended. We find the situation in Townsend analogous to the one presented here. We also note that the USDA's practice of looking through corporate entities in order to effectuate the remedial goals of the Act has been approved by other circuits. See, e.g., Bruhn's Freezer Meats v. USDA, 438 F.2d 1332, 1343 (8th Cir.1971). 26 But this case differs from Bruhn and other similar cases in two respects. Diane was not made a party to the original proceedings and there is no allegation that she participated in the conduct which led to the suspensions. While it might have been neater to include Diane originally as a respondent, there is nothing in the Act which precludes, or even casts doubt upon, the procedure employed by the USDA in this case. Failure to include Diane in earlier phases of the case is immaterial. 27 First, the fact that Diane was not a party to the original proceedings did not prejudice her. She has been afforded a full hearing on her application and has availed herself of the opportunity for judicial review. In fact, the parties to this petition have shown flexibility in adapting normal procedures to new exigencies. 28 Second, Diane's lack of participation in the violations of the Act is irrelevant to whether her registration is an attempt to circumvent the suspension order. Her proposal alone is crucial and is, in itself, a cause for concern. If she were allowed to operate as proposed, the negative impacts of the suspensions might be entirely dissipated. Obviously, to protect its authority, the USDA must be able to insure that suspensions remain as onerous as designed. We conclude that the suspension power by necessary implication incorporates the authority to proceed against circumvention even in the absence of a specific rule on the subject.