CINCINNATI (CN) – An Ohio farming cooperative that owns part of a crop insurance provider argued Tuesday before the Sixth Circuit to retain its ability to issue refunds to members that use its insurance company.
Sunrise Cooperative Inc., represented by attorney David Barrett Jr., owns one-third of Lund and Smith Insurance Services LLC, or L&S, and had paid rebates to members who chose to use L&S as their crop insurance provider.
A 2008 change in federal law prohibited these types of “patronage rebates,” but Sunrise was able to continue making payments to its members under the statute’s grandfather clause.
In 2016, however, Sunrise merged with Trupointe Cooperative Inc., a move that more than doubled its membership.
Following the merger, the U.S. Agriculture Department’s Risk Management Agency, or RMA, informed Sunrise it was no longer allowed to declare patronage rebates, as Trupointe had not been grandfathered in under the statute.
The RMA issued its final decision in May 2016. Shortly thereafter, Sunrise sued the Agriculture Department, RMA and Federal Crop Insurance Corp. in Toledo, Ohio, federal court.
Sunrise argued in its complaint that the grandfather clause still applied because it remained the same legal entity after the merger, but U.S. District Judge James G. Carr disagreed in a ruling last year.
“By enacting the 2008 statute…Congress all but abolished the practice of premium-rebating. It left the practice intact in the grandfather clause, but as the RMA noted, only a handful of cooperatives were eligible to continue premium-rebating after the 2008 law took effect,” Carr wrote. “The RMA’s construction [of the statute] – unlike Sunrise’s construction – is consistent with Congress’s intent, as it prohibits large, abrupt increases in the amount of premium-rebating that can occur when, as in this case, a non-grandfathered entity merges with a grandfathered entity.”
On Tuesday, Sunrise’s attorney David Barrett Jr. told a Sixth Circuit panel that the case hinges on the judges’ interpretation of the term “entity.”
Barrett said he did a Google search of the term, which defined it as “an organization with an identity separate from its members.”
He argued that because Sunrise maintained the same federal tax ID number, the same CEO and other characteristics after the merger, it is still the same corporate entity.
U.S. Circuit Judge Helene White interrupted, asking what would stop Sunrise from acquiring every other co-op in the country.
“Theoretically, it’s possible,” Barrett conceded, “but it isn’t practical.”
The attorney explained that Trupointe and Sunrise merged because they shared similar business interests, including the production of grain and sale of farm supplies.
Barrett also pointed out that some members of Trupointe had already joined Sunrise prior to the merger.
Chief U.S. Circuit Judge R. Guy Cole Jr. pointed out that Congress’s intent with the 2008 statute was to “rein in patronage,” and that the merger runs contrary to that intent.
“I don’t think they’re going to gobble up a lot of other co-ops,” Barrett responded. “Merger is not a new thing … [and] the USDA doesn’t have the authority to redefine ‘entity.’”
Assistant U.S. Attorney Jody King argued on behalf of the Department of Agriculture and defended the RMA’s strict interpretation of the statute.
She called Sunrise’s actions an attempt at an “end run around the prohibition.”
Judge White asked King to clarify what makes the post-merger Sunrise co-op a “new entity” under the statute.
“You can’t overlook the fact that you have an entity who was approved and an entity who was not approved,” King said. “If you have a widespread practice of premium discounts … that interferes with the efficiency of the insurance market.”
U.S. Circuit Judge John K. Bush, who was appointed to the Sixth Circuit last August by President Donald Trump, asked the government’s attorney if the RMA would have come to the same conclusion if Trupointe’s members had simply joined Sunrise, instead of being acquired in a merger.
King replied that membership changes are not affected by the statute, but that such a radical increase in Sunrise’s membership would have been “unlikely” without “other behavior” that would have been examined by the agency.
“Sunrise must show [its interpretation is] the only interpretation … and it certainly is not,” she concluded. “This court must give deference to the RMA’s interpretation.”
During his rebuttal, Barrett was grilled by Judge White, who again brought up congressional intent regarding the grandfather provision.
White said the provision created an expectation that the practice of handing out insurance premium discounts would “dwindle, and not expand” after the 2008 rule changes.
Barrett disagreed and argued, “The USDA has decided it doesn’t like the fact that a co-op might get bigger.”
No timetable has been set for a decision by the court.