Article

Note: The Foreign Agricultural Service (FAS), a division of the United States Department of Agriculture (USDA), administered the Export Guarantee Program (GSM-102), with the stated purpose of “financ[ing] the commercial export of U.S. agricultural products, particularly to developing countries.” A typical transaction contemplated a U.S. exporter approaching a foreign importer who would in turn approach a foreign bank to obtain a letter of credit naming the U.S. exporter as beneficiary. The foreign bank would then approach a U.S. bank to obtain a guarantee against the LC, to be repaid by the foreign bank. The GSM-102 program then guarantees the payment made by the U.S. bank to the U.S. exporter.

As a fifteen-year program participant, and later federal investigation subject ultimately convicted for wire fraud and conspiracy, Brett Lillemoe (Plaintiff) alleged that FAS had long been aware that the program facilitated “rented trade flows” wherein GSM exporters and importers played “no role in the actual export of physical goods” but instead “use[d] photocopies of shipping documents” for the purpose of obtaining “synthetic LCs”. Through this practice “U.S. banks c[ould] issue program-guaranteed – and thus below-market – loans to foreign banks for purposes unrelated to the actual purchase of agricultural exports.” FAS became aware of such practices when it solicited comments from participants in 2008. The relationship between Plaintiff and FAS changed, however, when FAS inquired as to fifteen anticipated GSM-102 transactions to be facilitated by Plaintiff’s company, GTR, LLC (GTR) in October 2012. FAS was concerned with applications showing that “the Consignee listed on the bills of lading differed from the importer identified on the GSM-102 guarantee, and [FAS] requested additional information about the role each entity played in the transaction.” Ultimately, FAS denied Plaintiff and GTR’s applications but apparently approved other participant applications utilizing rented trade flows. Eventually, the relationship between FAS and Plaintiff deteriorated and culminated in criminal charges against Plaintiff after FAS audited GTR’s practices and referred the matter to the U.S. Attorney’s Office. Plaintiff’s criminal trial, however, “did not address the legality of rented trade flow transactions; it focused only on allegations that [Plaintiff] and his associate Calderon ‘created multiple entities to maximize their share of the limited number of GSM-102 guarantees’ and ‘altered bills of lading’ submitted to U.S. banks.”

Between the indictment and eventual guilty verdict, Plaintiff and GTR (collectively Plaintiffs) sued the USDA, FAS and two named defendants. In their amended complaint, Plaintiffs sought an injunction against FAS as well as return of GSM-102 application fees based on a theory of unjust enrichment. Moreover, the complaint included counts based on the Administrative Procedure Act (APA), the Equal Protection Clause of the Fifth Amendment alleging that FAS had engaged in disparate treatment of Plaintiff and GTR without a rational basis, and Bivens claims alleging implied causes of action due to disparate treatment by the two named defendants absent any rational basis. Defendants moved to dismiss the complaint under Fed. R. Civ. Pro. 12(b)(6). The United States District Court for the District of Columbia, Friedrich, J., granted the motion in part and denied the motion in part.

Regarding the requested injunction, Plaintiff sought an order for FAS to “(1) clarify its position regarding rented trade flows, and then (2) apply that determination to all program participants.” On the first question, the Judge noted that the issue was moot due to FAS having promulgated regulations expressly prohibiting rented trade flows in 2014. On the second question, however, the Judge rejected FAS’s claim that that issue was also moot because Plaintiffs had adequately pled “ongoing disparate treatment under the new rule”. Accordingly, the Judge refused to order FAS to clarify its position but would “entertain [Plaintiffs’] request that FAS be ordered to apply its newly clarified position equally to similarly situated applicants.” The Judge also allowed Plaintiffs to pursue their request for return of GSM-102 application fees based on an unjust enrichment theory under the APA. The Judge noted that the claim constituted a request for “specific relief” within the APA’s waiver of sovereign immunity and not a request for money damages at law.

The Judge then turned to Plaintiff’s principal APA claim which alleged that FAS’s conduct towards Plaintiff and GTR was “arbitrary and capricious” because FAS “deci[ded] to selectively prohibit the plaintiffs from using rented trade flows while simultaneously approving applications from other participants using the same structure.” Accepting the allegations in the amended complaint as true, the Judge noted that Plaintiffs had adequately stated an APA claim and allowed that count to proceed.

Regarding the Equal Protection claim, the Judge noted that while such lawsuits are typically brought by members of a protected class, the Supreme Court has allowed for claims by a “class of one.” To prevail at the motion to dismiss stage, a plaintiff must demonstrate “(1) disparate treatment of similarly situated parties (2) on no rational basis.” On the first element, the Judge noted that “the Court must accept at face value the plaintiffs’ allegations that the rented trade flow transactions approved for other applicants mirrored those denied and prohibited for the plaintiffs.” On the second element, however, Plaintiffs faced a “strong presumption of validity” regarding government action allegedly made without a rational basis; accordingly, the inquiry affords considerable deference to the government. Noting that Plaintiff had come under investigation for fraud during the alleged period of disparate treatment – ultimately leading to a criminal conviction – the Judge concluded that “[g]iven the discretion afforded FAS in administering the program and acting on thousands of individual guarantee applications…the Court will not second-guess FAS’s decision to prevent [Plaintiff] and GTR from using rented trade flow transactions in the program, even while allowing others to do so at the same time.”

On their final claims seeking monetary damages from two named FAS employees based on an implied cause of action theory under Bivens, the Judge noted that the Supreme Court had clarified that caution be exercised before allowing such claims “unmoored from statutory text” as Congress “is better suited than the courts” in assessing whether new legal liabilities are in the public interest. Noting that Plaintiffs’ claims were entirely distinct from prior Bivens-type cases and that “APA review – perhaps alone, but certainly in combination with substantive program regulations” warranted “hesitation” before allowing implied causes of action against government employees, the Judge stated that allowing such claims would “expose a host of agency employees to uncertain liability and would force courts to constantly meddle in executive branch action at a granular level.” Accordingly, the Judge dismissed these final claims.

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.