Taylor v. United States Department of Agriculture , 636 F.3d 608 ( 2011 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 20, 2010 Decided January 7, 2011
No. 09-1270
CHERYL A. TAYLOR AND STEVEN C. FINBERG,
PETITIONERS
v.
UNITED STATES DEPARTMENT OF AGRICULTURE AND UNITED
STATES OF AMERICA,
RESPONDENTS
On Petition for Review of Orders
of the Department of Agriculture
Stephen P. McCarron argued the cause and filed the briefs
for petitioners.
Andrew R. Varcoe, Attorney, U.S. Department of
Agriculture, argued the cause for respondents. With him on the
brief were James Michael Kelly, Associate General Counsel, and
Brian J. Sonfield, Assistant General Counsel.
Before: BROWN, Circuit Judge, and EDWARDS and
RANDOLPH, Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
EDWARDS.
Dissenting opinion filed by Circuit Judge BROWN.
2
EDWARDS, Senior Circuit Judge: The Perishable
Agricultural Commodities Act (“PACA”) requires persons who
buy or sell specified quantities of perishable agricultural
commodities at wholesale in interstate commerce to have a
license issued by the Secretary of Agriculture, see 7 U.S.C. §§
499a(b)(5)-(7), 499c(a), 499d(a), and makes it unlawful for a
licensee to engage in certain types of unfair conduct, see id. §
499b. The statute requires regulated merchants, dealers, and
brokers to “truly and correctly . . . account and make full
payment promptly in respect of any transaction in any such
commodity to the person with whom such transaction is had.”
7 U.S.C. § 499b(4). It also provides that PACA licensees may
not employ, for at least one year, any person found “responsibly
connected” to any person whose license has been revoked or
suspended, or who has been found to have committed any
flagrant or repeated violation of 7 U.S.C. § 499b. See
7 U.S.C. § 499h(b).
In January 2007, an Administrative Law Judge (“ALJ”) at
the Department of Agriculture (“Department”) found that Fresh
America, a national produce wholesaler licensed to do business
under PACA, had willfully, repeatedly, and flagrantly violated
Section 2(4) of PACA, 7 U.S.C. § 499b(4), by failing to
promptly make full payment to produce sellers between
February 2002 and February 2003. In re Fresh Am. Corp., 66
Agric. Dec. 953, 959 (U.S.D.A. 2007). Fresh America did not
contest this decision. While the case against Fresh America was
pending, the Chief of the PACA Branch of the Fruit and
Vegetable Division of the Agricultural Marketing Service
determined that the petitioners in this case, Cheryl Taylor and
Steven Finberg, who were officers of Fresh America, had been
responsibly connected to Fresh America during the violations
period and were therefore subject to the statute’s employment
restrictions. Taylor and Finberg sought administrative review of
this determination.
3
In March 2009, following a two-day hearing, an ALJ issued
a decision affirming the PACA Branch Chief’s determinations
and concluding that both Taylor and Finberg had been
responsibly connected to Fresh America during the violations
period. In September 2009, a Judicial Officer rejected the
petitioners’ administrative appeals. In re Taylor, PACA App.
Docket Nos. 06-0008, 06-0009 (U.S.D.A. Sept. 24, 2009)
(“Judicial Officer Decision”), reprinted in 1 Joint Appendix
(“J.A.”) 7. In holding against the petitioners, the Judicial
Officer found that the petitioners were not merely nominal
officers of Fresh America. The Judicial Officer also found that
Fresh America was not the alter ego of its chairman of the
board, Arthur Hollingsworth. Petitioners now seek review in
this court.
We agree with petitioners that the Judicial Officer erred in
rejecting their claims that they were merely nominal officers of
Fresh America. Under 7 U.S.C. § 499a(b)(9), an “officer” of the
offending company is not considered to be “responsibly
connected” to a violating licensee if that person was not actively
involved in the PACA violation and was “powerless to curb it,”
Quinn v. Butz, 510 F.2d 743, 755 (D.C. Cir. 1975). See also Bell
v. Dep’t of Agric., 39 F.3d 1199, 1202 (D.C. Cir. 1994). The
Judicial Officer in this case “paid little heed to circuit law on
nominal officers,” id., for his decision is devoid of any analysis
of the actual power exercised by Taylor and Finberg at Fresh
America. The disputed decision is thus fatally flawed for want
of reasoned decisionmaking. Accordingly, the petition for
review is granted in part, and the case is remanded to the
Department for further proceedings consistent with this decision.
4
I. BACKGROUND
A. Statutory Background
PACA prohibits certain conduct by merchants, dealers, or
brokers of perishable agricultural commodities in order to “help
instill confidence in parties dealing with each other on short
notice, across state lines and at long distances.” Kleiman &
Hochberg, Inc. v. U.S. Dep’t of Agric., 497 F.3d 681, 685 (D.C.
Cir. 2007) (quoting Veg-Mix, Inc. v. U.S. Dep’t of Agric., 832
F.2d 601, 604 (D.C. Cir. 1987)). PACA is “admittedly and
intentionally a tough law.” Kleiman & Hochberg, 497 F.3d at
693 (quoting S. REP. NO. 84-2507, at 3 (1956), reprinted in 1956
U.S.C.C.A.N. 3699, 3701 (internal quotation marks omitted)).
As noted above, the statute forbids, inter alia, any merchant,
dealer, or broker of perishable agricultural commodities from
“fail[ing] or refus[ing] truly and correctly to account and make
full payment promptly in respect of any transaction in any such
commodity to the person with whom such transaction is had.”
7 U.S.C. § 499b(4). In addition, PACA prevents licensees from
employing, for a minimum of one year, “any person who is or
has been responsibly connected” to a flagrant or repeated PACA
violator. 7 U.S.C. § 499h(b).
Under this statutory scheme,
[a]n officer, director, or holder of more than ten percent of
the stock of a corporation licensed under the PACA is
presumed . . . to be ‘responsibly connected’ to that
corporation. 7 U.S.C. § 499a(b)(9). For many years the
circuits were divided over whether the presumption of §
499a(b)(9) is irrebuttable . . . or, as we held, rebuttable. See
Quinn v. Butz, 510 F.2d at 757.
Hart v. Dep’t of Agric., 112 F.3d 1228, 1230 (D.C. Cir. 1997).
Under the law of this circuit, a person could rebut the
presumption that he or she was “responsibly connected” to a
PACA violator in either of two ways:
5
The first involve[d] cases in which the violator, although
formally a corporation, [was] essentially an alter ego of its
owners, so dominated as to negate its separate personality.
...
The second way of rebutting the presumption [was] for the
petitioner to prove that at the time of the violations he was
only a nominal officer, director, or shareholder. This he
could establish by proving that he lacked an actual,
significant nexus with the violating company. Where
responsibility was not based on the individual’s personal
fault it would have to be based at least on his failure to
counteract or obviate the fault of others.
Bell, 39 F.3d at 1201 (emphasis in original) (citations and
internal quotation marks omitted).
“In 1995 the Congress amended § 499a(b)(9) to make it
clear that the presumption is rebuttable.” Hart, 112 F.3d at
1230. The statute now provides:
The term “responsibly connected” means affiliated or
connected with a commission merchant, dealer, or broker as
(A) partner in a partnership, or (B) officer, director, or
holder of more than 10 per centum of the outstanding stock
of a corporation or association. A person shall not be
deemed to be responsibly connected if the person
demonstrates by a preponderance of the evidence that the
person was not actively involved in the activities resulting
in a violation of this chapter and that the person either was
only nominally a partner, officer, director, or shareholder of
a violating licensee or entity subject to license or was not an
owner of a violating licensee or entity subject to license
which was the alter ego of its owners.
7 U.S.C. § 499a(b)(9). Thus, under the current version of the
statute, it is presumed that an officer of a corporation is
responsibly connected to the violating company unless the
6
officer can show that he or she (1) was not actively involved in
the PACA violations, and (2) was either a nominal officer of the
violating PACA licensee or a non-owner of a licensee that was
the alter ego of its owners.
B. Factual Background
Cheryl Taylor joined Fresh America as a consultant in April
2001. Her primary tasks were to prepare and review Fresh
America’s filings for the Securities and Exchange Commission
(“SEC”), confer with company accountants, and assist the
company in its efforts to secure refinancing of existing debts.
Shortly after signing a consulting agreement with Fresh
America, Taylor was given the titles of executive vice president,
chief financial officer, and secretary of the company, albeit
without any additional compensation. According to Taylor, she
was assigned these titles because the company “needed [her] to
sign documents”; however, she stated that she did not do “any
of the normal things that a CFO” does. Hearing Tr. (Jan. 29,
2008) at 362, 364, reprinted in 1 J.A. 142, 144.
In 1989, when he was a college student, Steven Finberg first
started working with Gourmet Packing, a predecessor company
to Fresh America. In 1999, after several promotions, Finberg
was given the position of vice president of sales and marketing
for Fresh America. His job responsibilities included managing
Fresh America’s national accounts and developing a marketing
message on behalf of the company. In 2001, Finberg was given
the title of executive vice president, although his job
responsibilities remained the same. Hearing Tr. (Jan. 30, 2008)
at 791-92, reprinted in 1 J.A. 277-78. In explaining his job,
Finberg testified as follows: he never assumed any authority
over the purchase of produce; he never was involved in a
payment for produce; and he did not recall ever signing a check
on behalf of the company. Id. at 799-800.
7
During the period when Fresh America committed the
PACA violations that gave rise to this case, Arthur
Hollingsworth, the co-founder and partner of the venture-capital
and private-equity fund North Texas Opportunity Fund LP
(“NTOF”), was chairman of the board. In 2001, NTOF invested
$5 million in Fresh America and, as part of a financial
restructuring of Fresh America, appointed four of the five
members of the board. The record indicates that the company
was largely run by the board. As one board member testified,
under NTOF’s leadership, “board meetings became the
management of the company.” Hearing Tr. (Jan. 29, 2008) at
146, 1 J.A. 96. And the board, not company officers or
managers, made all decisions governing the company’s bills,
capital expenditures, and personnel. Id. at 146-49, 1 J.A. 96-99.
Both Taylor and Finberg attended most of the company’s
board meetings, but they were not members of the board. And
even though they carried “officer” titles at Fresh America,
neither Taylor nor Finberg had any measurable power or
authority in board deliberations. For example, when the board
addressed problems relating to the payment of bills, Taylor and
Finberg stressed the need for the company to pay its bills on
time. Id. at 91, 1 J.A. 84. However, the board rejected the
advice offered by Taylor and Finberg. Instead, the board
followed a policy of having Fresh America pay its bills when the
company had the capacity to do so. Id. at 92, 1 J.A. 85. Both
Taylor and Finberg remained with Fresh America until at least
January 2003, when the company ceased operations.
C. The Proceedings Before the Agency
In 2005, the Department filed a complaint against Fresh
America, alleging that the company had committed PACA
violations between February 2002 and February 2003 by failing
to promptly pay a total of more than $1.2 million to 82 sellers of
perishable agricultural commodities. The company defaulted on
these charges. In re Fresh Am. Corp., 66 Agric. Dec. 953
8
(U.S.D.A. 2007). In the summer of 2006, the Chief of the
PACA Branch of the Fruit and Vegetable Programs Division of
the Agricultural Marketing Service made an initial
determination that, pursuant to 7 U.S.C. § 499a(b)(9), Taylor
and Finberg were responsibly connected to Fresh America. In
re Taylor, PACA App. Docket Nos. 06-0008, 06-0009
(U.S.D.A. Mar. 19, 2009) ¶¶ 12-13, reprinted in 1 J.A. 31.
Taylor and Finberg petitioned the agency for review of these
determinations, and the agency joined the two cases for a
hearing before an ALJ.
After a two-day hearing, the ALJ found that Taylor, but not
Finberg, was actively involved in the PACA violations.
However, the ALJ found that both Taylor and Finberg were
responsibly connected to Fresh America within the meaning of
PACA. The ALJ concluded that the evidence presented by
Taylor and Finberg did not demonstrate, as they claimed, that
they were merely nominal officers of Fresh America. Id. ¶¶ 52-
57, 82-85, 1 J.A. 46-47, 57-59. In reaching this conclusion, the
ALJ found that Taylor was “vital to Fresh America Corp. and an
important and influential officer,” id. ¶ 56, 1 J.A. 47, and that
Finberg “was a valuable member of the team that tried to keep
Fresh America Corp. in business,” id. ¶ 82, 1 J.A. 57.
Petitioners appealed within the agency, and the ALJ’s decision
was reviewed by a Judicial Officer. Although the Judicial
Officer did not adopt the ALJ’s reasoning, he did affirm the
judgments against Taylor and Finberg.
The Judicial Officer relied on three grounds to support his
finding that Taylor and Finberg were responsibly connected to
Fresh America. First, the Judicial Officer pointed to the
petitioners’ backgrounds, noting that “each had the experience,
training, and education to serve in their positions as officers.”
Judicial Officer Decision at 13, 1 J.A. 19. Second, he noted that
the annual reports and proxy statements filed with the SEC listed
Taylor and Finberg as officers. Id. at 11-14, 1 J.A. 17-20. He
9
apparently thought this to be decisive, stating: “[T]he fact that
each was identified in the SEC filings as an officer makes it
difficult for me to conclude that they were only nominal
officers.” Id. at 14, 1 J.A. 20. Finally, the Judicial Officer relied
on the fact that “Ms. Taylor and Mr. Finberg knew of Fresh
America Corp.’s financial difficulties.” Id.
The Judicial Officer also expressed the view that, although
Taylor and Finberg told the board of directors about the payment
provisions in PACA, their “only option to avoid a responsibly
connected determination was to resign as officers of Fresh
America Corp. prior to Fresh America Corp.’s PACA
violations.” Id. Because the Judicial Officer found that Taylor
was not a nominal officer of Fresh America, he chose not to
address her separate argument that the ALJ erred in finding her
actively involved in the company’s PACA violations. Id. at 14-
15, 1 J.A. 20-21.
Finally, the Judicial Officer rejected the petitioners’
argument that Fresh America was the alter ego of
Hollingsworth:
The record makes clear that, while Mr. Hollingsworth was
a dominant chairman, the decisions attributed to Mr.
Hollingsworth were made by the board of directors. The
concept of alter ego goes well beyond the evidence
presented in the instant proceeding. Fresh America Corp.
had regular board meetings at which non-board members
were present and reported to the board. The board of
directors, with Mr. Hollingsworth as chairman, ran Fresh
America Corp. While Mr. Hollingsworth and the board of
directors made decisions usually reserved for individuals at
a lower level of authority, it is understandable, considering
Fresh America Corp.’s financial position and the recent
investment made by [NTOF], which was managed by Mr.
Hollingsworth, that such decisions came before the board
of directors.
10
Id. at 15-16 (accompanying parenthetical omitted), 1 J.A. 21-22.
In their petition for review, Taylor and Finberg contest the
Judicial Officer’s findings that they were not merely nominal
officers of Fresh America and that Fresh America was not the
alter ego of Hollingsworth.
II. ANALYSIS
A. Standard of Review
“[W]e must uphold the Judicial Officer’s decision unless we
find it to be arbitrary, capricious, an abuse of discretion, not in
accordance with law, or unsupported by substantial evidence.”
Kleiman & Hochberg, 497 F.3d at 686 (quoting Kirby Produce
Co. v. U.S. Dep’t of Agric., 256 F.3d 830, 833 (D.C. Cir. 2001))
(internal quotation marks omitted). “[A]n agency rule would be
arbitrary and capricious if the agency . . . entirely failed to
consider an important aspect of the problem [or] offered an
explanation for its decision that runs counter to the evidence
before the agency.” Motor Vehicle Mfrs. Ass’n of the U.S., Inc.
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see
also Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359,
374 (1998) (“The Administrative Procedure Act . . . establishes
a scheme of ‘reasoned decisionmaking.’ Not only must an
agency’s decreed result be within the scope of its lawful
authority, but the process by which it reaches that result must be
logical and rational.” (quoting State Farm, 463 U.S. at 52)). In
this case, the petitioners argue that the Judicial Officer’s
decision defies this requirement of reasoned decisionmaking,
because it pays no heed to the controlling law on nominal
officers.
Although not stated explicitly, Taylor and Finberg also
argue that the Judicial Officer’s decision should be set aside for
want of substantial evidence, which governs “on-the-record
agency factfinding.” Allentown Mack, 522 U.S. at 377. Under
section 706(2)(E) of the Administrative Procedure Act, 5 U.S.C.
11
§ 706(2)(E), substantial evidence review requires a court to
consider the whole record upon which an agency’s factual
findings are based. See Universal Camera Corp. v. NLRB, 340
U.S. 474, 488 (1951).
In describing the whole record review of § 706(2)(E), the
Court acknowledged that the requirement “does not furnish
a calculus of value by which a reviewing court can assess
the evidence.” [Universal Camera, 340 U.S. at 488.] It
also noted that substantial evidence review does not negate
the “respect” with which courts are to review decisions
based on agency expertise. Id. Nor, the Court explained,
does whole record review mean that a court can displace an
agency’s “choice between two fairly conflicting views,”
even though the reviewing court “would justifiably have
made a different choice had the matter been before it de
novo.” Id. Rather, a reviewing court must “ask whether a
reasonable mind might accept a particular evidentiary
record as adequate to support a conclusion.” Dickinson v.
Zurko, 527 U.S. 150, 162 (1999). Or, put differently, a
court must decide whether, on the record under review, “it
would have been possible for a reasonable jury to reach the
[agency’s] conclusion.” Allentown Mack Sales & Serv.,
Inc. v. NLRB, 522 U.S. 359, 366-67 (1998).
HARRY T. EDWARDS & LINDA A. ELLIOTT, FEDERAL
STANDARDS OF REVIEW–REVIEW OF DISTRICT COURT
DECISIONS AND AGENCY ACTIONS 176 (2007) (second brackets
in original).
12
B. The Judicial Officer’s Decision that Petitioners Were
Not Nominal Officers
PACA defines a “responsibly connected” person as one who
is “affiliated or connected with a [licensee] as . . . [an] officer,
director, or holder of more than 10 per centum of the
outstanding stock.” 7 U.S.C. § 499a(b)(9). There is no dispute
that Taylor and Finberg were officers and thus come within this
definition. As noted above, however, PACA also provides that:
A person shall not be deemed to be responsibly connected
if the person demonstrates by a preponderance of the
evidence that the person was not actively involved in the
activities resulting in a violation of [PACA] and that the
person either was only nominally . . . [an] officer, director,
or shareholder of a violating licensee.
Id. The question here is whether the petitioners met their burden
of demonstrating by a preponderance of the evidence that they
were not actively involved in the PACA violations and that they
were merely nominal officers of Fresh America.
Before Congress amended PACA in 1995 to include an
express exception for nominal officers, this circuit had for a
number of years applied an “actual, significant nexus” test to
determine whether a person was responsibly connected to an
offending PACA licensee.
Prior to the amendment of § 499a(b)(9) we held that an
officer, director, or ten percent shareholder could rebut the
presumption against her by showing either that the
corporate violator is nothing more than the alter ego of its
owner or that she was only a nominal officer, director, or
shareholder of that corporation. Bell v. Department of
Agriculture, 39 F.3d 1199, 1201 (D.C. Cir. 1994). In order
to prove that the corporation is the alter ego of its owner
one must show that the owner so dominated the corporation
as “to negate its separate personality.” Quinn, 510 F.2d at
13
758. In order to prove that one was only a nominal officer
or director, one must establish that one lacked any “actual,
significant nexus with the violating company” and,
therefore, neither “knew [n]or should have known of the
[c]ompany’s misdeeds.” Minotto v. USDA, 711 F.2d 406,
408-409 (D.C. Cir. 1983). See also Quinn, 510 F.2d at 756,
n.84 (observing that situation in which “the affiliation is
purely nominal and the so-called officer had no powers at
all” is “radically different” from one in which a genuine
officer simply “does not use the powers of his office.”)
Hart, 112 F.3d at 1230-31 (brackets in original); see also Quinn,
510 F.2d at 755 (“[T]he Perishable Agricultural Commodities
Act was designed to strike at persons in authority who
acquiesced in wrongdoing as well as the wrongdoers
themselves.”); id. (persons who carry the title of officer are not
subject to the statute’s employment restrictions if they
demonstrate that they were “powerless to curb” the
wrongdoing). The law of this circuit thus laid the foundation for
the nominal officer exception enacted by Congress in 1995.
In this case, the Judicial Officer cited Hart and purported to
apply the “actual, significant nexus” test in determining that
Taylor and Finberg were responsibly connected to Fresh
America. Judicial Officer Decision at 9, 1 J.A. 15. The
petitioners do not take issue with the applicability of the “actual,
significant nexus” test. Rather, they argue that the Judicial
Officer reached the wrong conclusion because he misapplied the
legal standard. We agree.
Under the “actual, significant nexus” test, “the crucial
inquiry is whether an individual has an actual, significant nexus
with the violating company, rather than whether the individual
has exercised real authority.” Veg-Mix, Inc. v. U.S. Dep’t of
Agric., 832 F.2d 601, 611 (D.C. Cir. 1987) (internal quotation
marks omitted). Although we have consistently applied the
‘actual, significant nexus’ test, our cases make clear that what is
14
really important is whether the person who holds the title of an
officer had actual and significant power and authority to direct
and affect company operations. For example, in Kleiman &
Hochberg, the court found that the petitioner “did not prove that
he qualified for the ‘nominal’ exception, nor could he do so[,
because he] . . . concede[d that] he owned 31.6 percent of the
corporation’s outstanding stock, was the company’s President,
and was ‘actively engaged in the day-to-day operations,
management, and control of [the company].’” 497 F.3d at 692(emphasis in original). The court also tellingly rejected the
suggestion that a person cannot be responsibly connected to a
violating licensee unless he either knew or should have known
about the violations and then failed to take action to counteract
the actions of others constituting the violations. On this point,
the court noted that “neither the statutory definition of
‘responsibly connected’ nor the statutory ‘nominal’ and ‘alter
ego’ exceptions suggest such a knowledge requirement.” Id.(accompanying parenthetical omitted).
This case stands in stark contrast to Kleiman & Hochberg.
The Judicial Officer’s decision gives lip service to the “actual,
significant nexus” test, but it fails to apply the test in any
coherent fashion. Under the applicable legal standard, the
agency must carefully assess a person’s actual power and
authority at the violating company – not merely the person’s
title, background, and knowledge of PACA violations – in order
to determine whether the person was responsibly connected to
an offending PACA licensee. The Judicial Officer failed to do
this.
As noted above, in reaching the conclusion that Taylor and
Finberg were not merely nominal officers of Fresh America, the
Judicial Officer relied primarily on three factors: the
petitioners’ professional backgrounds; annual reports and proxy
statements that listed the petitioners as officers; and petitioners’
knowledge of Fresh America’s financial difficulties. Each of
15
these factors may be relevant in determining whether a person
is merely a nominal officer. However, none of these factors,
without more, is dispositive. Indeed, even taken together, these
three factors do not demonstrate a person’s actual power and
authority within a company. Petitioners may have possessed
impressive professional backgrounds and officer titles, and they
may have been aware of the company’s financial woes, and yet
still have had no power or authority to alter the course of
company operations.
The decisions in Quinn, 510 F.2d at 747, Minotto, 711 F.2d
at 407, and Bell, 39 F.3d at 1200, make it clear that an
individual’s background may be relevant to the determination of
whether he or she is a nominal officer. But we have never found
this factor to be dispositive. If an individual has past experience
in upper-level management, this would be consistent with a
finding that the individual is currently working in upper-level
management. But past experience is not proof of one’s current
station.
Similarly, although an individual’s title can be relevant to
a consideration of a person’s current situation, title alone is not
dispositive. Indeed, the statute makes this absolutely clear.
Section 499a(b)(9) states that an “officer” “shall not be deemed
to be responsibly connected” if the person demonstrates that he
or she was only “nominally” an officer of the violating licensee.
Obviously, title alone is not conclusive, unless the officer fails
to demonstrate by a preponderance of the evidence that he or she
was not actively involved in the activities resulting in a violation
of PACA and that he or she was only nominally an officer of a
violating licensee. The nominal officer exception plainly
contemplates situations in which a person’s title is not consistent
with the person’s actual responsibilities.
The Judicial Officer erred in holding that, “absent very
extraordinary circumstances, an individual who is an officer of
a publicly traded company, and identified as an officer in the
16
company’s filings with the SEC, cannot be found to be a
nominal officer as that term is used in the PACA.” Judicial
Officer Decision at 14, 1 J.A. 20. This is not a correct statement
of the governing law. “[A]n officer may be ‘nominal’ even
though the corporate records . . . make him out to be a real one.”
Bell, 39 F.3d at 1202. The Department characterizes the Judicial
Officer’s opinion on this point as mere dictum or as an
alternative holding. Resp’ts’ Br. at 39-40. We disagree, for it
is clear that the Judicial Officer viewed Fresh America’s SEC
filings as a critical factor in his decision.
Finally, the Judicial Officer cited Taylor and Finberg’s
knowledge of Fresh America’s financial difficulties in
determining that they were responsibly connected to the
licensee. This, too, resulted in an erroneous application of the
law. Knowledge may be relevant with respect to a consideration
of whether a person was “actively involved in the activities
resulting in a violation” of the statute. However, knowledge,
without more, surely does not give compelling evidence of a
person’s actual power and station within a company. This court
has made it clear that “neither the statutory definition of
‘responsibly connected’ nor the statutory ‘nominal’ and ‘alter
ego’ exceptions suggest such a knowledge requirement.”
Kleiman & Hochberg, 497 F.3d at 692 (accompanying
parenthetical omitted).
In Minotto, this court found that there was no evidence to
“support the [Department Hearing Officer’s] conclusion that
Minotto knew or should have known of the Company’s
misdeeds.” 711 F.2d at 409. But this statement was offered to
confirm that Minotto “had no policy or decision-making role”
and “was essentially a clerical employee.” Id. This is very
different from saying that it must be assumed that a person with
knowledge of a company’s wrongdoings has meaningful power
and authority within the company. There are many people in
company operations who may be aware of bad deeds by virtue
17
of where or for whom they work, but nonetheless decline to
participate in these deeds and have no power or authority to
effect change. Indeed, in this case, Taylor and Finberg knew
that Fresh America was in danger of violating PACA, but they
failed to convince the board to promptly pay produce sellers.
Just as a lack of knowledge cannot save a non-nominal officer
from the consequences of PACA, Kleiman & Hochberg, 497
F.3d at 692, mere knowledge of PACA violations cannot turn a
nominal officer into a full-fledged one.
As our decisions have made clear, actual power and
authority are the crux of the nominal officer inquiry. In Bell, the
petitioner “seem[ed] to have been made an officer and a director
of Sunrise for the administrative convenience of the company”
and “never participated in the formal decisionmaking structures
of the corporation, such as board meetings.” 39 F.3d at 1204.
Similarly, Minotto “had no policy or decision-making role,”
Minotto, 711 F.2d at 409, and Quinn “did not to any extent
participate in the management of the company’s affairs,” Quinn,
510 F.2d at 753.
In this case, the Judicial Officer specifically found that
“[t]he board of directors, with Mr. Hollingsworth as chairman,
ran Fresh America.” Judicial Officer Decision at 15, 1 J.A. 21.
He also tellingly found that “Mr. Hollingsworth and the board
of directors made decisions usually reserved for individuals at
a lower level of authority,” id. at 15-16, 1 J.A. 21-22. Yet, the
Judicial Officer failed to take this into account in assessing
whether the petitioners were merely nominal officers.
In sum, the Judicial Officer purported to apply the “actual,
significant nexus” test, yet failed to consider whether Taylor or
Finberg had actual power and authority at Fresh America. This
defies reasoned decisionmaking. As the Court noted in
Allentown Mack:
18
Reasoned decisionmaking, in which the rule announced is
the rule applied, promotes sound results, and unreasoned
decisionmaking the opposite. The evil of a decision that
applies a standard other than the one it enunciates spreads
in both directions, preventing both consistent application of
the law by subordinate agency personnel (notably ALJ’s),
and effective review of the law by the courts.
522 U.S. at 375. Because the Judicial Officer did not faithfully
apply the applicable legal standard in determining whether the
petitioners were responsibly connected to Fresh America, we
vacate and remand to the agency to apply the correct legal
standard as we articulate it today. “It is hard to imagine a more
violent breach of [the reasoned decisionmaking] requirement
than [when an agency] appl[ies] a rule of primary conduct or a
standard of proof which is in fact different from the rule or
standard formally announced.” Id. at 374. We express no
opinion on whether Taylor was actively involved in Fresh
America’s PACA violations, because the Judicial Officer never
reached this issue.
C. The Judicial Officer’s Decision that Fresh America Was
Not the Alter Ego of Arthur Hollingsworth
Section 499a(b)(9) states:
A person shall not be deemed to be responsibly connected
if the person demonstrates by a preponderance of the
evidence that the person was not actively involved in the
activities resulting in a violation of [PACA] and that the
person . . . was not an owner of a violating licensee . . .
which was the alter ego of its owners.
The petitioners claim that the Judicial Officer erred in holding
that Fresh America was not the alter ego of its chairman of the
board, Arthur Hollingsworth. We disagree.
19
As we noted in Kleiman & Hochberg, “the ‘alter ego’
exception applie[s] to cases in which the violator, although
formally a corporation, is essentially an alter ego of its owners,
so dominated as to negate its separate personality. A petitioner
who [is] not a true owner of such a corporation [will] be spared
the consequences of the responsibly connected determination.”
497 F.3d at 692 n.8 (brackets in original) (internal quotation
marks omitted). In this case, the Judicial Officer found that “the
record contains no evidence that Mr. Hollingsworth and Fresh
America Corp. were viewed as one and the same.” Judicial
Officer Decision at 16, 1 J.A. 22. This finding is clearly
supported by substantial evidence. A fair reading of the entire
record reveals that Fresh America was dominated by the board
and its chairman, not by Hollingsworth alone. We therefore find
no merit in petitioners’ arguments on this point.
III. CONCLUSION
The petition for review is granted in part. The Judicial
Officer’s decision on the nominal officer issue is vacated and the
case is hereby remanded to the agency for further proceedings
consistent with this opinion.
BROWN, Circuit Judge, dissenting: The court vacates the
Judicial Officer’s determination that Taylor and Finberg were
responsibly connected to Fresh America because my
colleagues believe the Judicial Officer “misapplied” our
“actual, significant nexus” test. Maj. Op. 13. I respectfully
disagree. It is the court that misapplies the test in two
respects: First, the court fails to defer to the Judicial Officer’s
legitimate focus on Taylor and Finberg’s actual knowledge of
their company’s violations, in combination with other
relevant indicators of their “responsibly connected” status,
even though we have previously suggested such knowledge
may be dispositive. Second, the court makes “power and
authority” the sine qua non of responsible connection to the
PACA-violating company, even though we have previously
denied such a requirement.
I
The Judicial Officer found that Taylor and Finberg were
“responsibly connected” to Fresh America under the “actual,
significant nexus” test, in part because “they knew, or should
have known, about the violation being committed and failed
to counteract or obviate the fault of others.” Judicial Officer
Decision at 13–14, 1 J.A. 19–20. Specifically, the Judicial
Officer found, “Ms. Taylor and Mr. Finberg knew of Fresh
America Corp.’s financial difficulties. Although they told the
board of directors of the prompt payment provisions of the
PACA, they failed to convince the board of directors to
comply with the provisions of the PACA.” Id. at 14, 1 J.A.
20. The record amply supports this finding. Finberg testified
that at one point he called a meeting of the board without the
chairman’s permission, and he and Taylor talked to the board
about Fresh America’s late produce payments for “ten or
fifteen minutes.” Hearing Tr. (Jan. 30, 2008) at 813, 1 J.A.
289. Taylor testified that she discussed “PACA payables”
2
with Hollinger, but he responded, “PACA people [who] want
to get paid in . . . 30 days” were “crybabies.” Id. at 545, 1 J.A.
215. She recalled that when a $5 million investment came in,
it was made clear “that additional money . . . was not to be
used to pay down PACA payables.” Id. at 546, 1 J.A. 216.
Contrary to the court’s suggestion, the Judicial Officer
did not hold that “mere knowledge of PACA violations [can]
turn a nominal officer into a full-fledged one.” Maj. Op. 17.
We need not decide whether knowledge of company
wrongdoing is sufficient by itself, because the Judicial Officer
also relied in part on the officers’ high levels of
compensation—a detail the court does not mention. Judicial
Officer Decision at 11–12, 1 J.A. 17–18. The Judicial Officer
found Taylor and Finberg earned salaries of $175,000 and
$145,000, respectively, and compensation packages that
included “bonus potential, stock options, and other ‘fringe
benefits.’” Id. Compensation is a relevant consideration under
the “actual, significant nexus” test. See Minotto v. USDA, 711
F.2d 406, 408–09 (D.C. Cir. 1983).
Moreover, the Judicial Officer expressly considered
Taylor and Finberg’s “experience, training, and education,”
Judicial Officer Decision at 13, 1 J.A. 19, which were
consistent with genuine officers’. Id. at 10–13, 1 J.A. 16–19.
Like compensation, professional qualifications are relevant to
the “actual, significant nexus” test. See Veg-Mix, Inc. v.
USDA, 832 F.2d 601, 612 (D.C. Cir. 1987) (“[The officer’s]
legal training put him on notice of the responsibilities of a
corporate director. . . . Thus his case is easily distinguishable
from those of the nominal officer and corporate director in
Quinn and Minotto, who were unsophisticated persons
employed by the wrongdoers.”); Minotto, 711 F.2d at 409(reversing the Department’s “responsibly connected”
determination because, among other reasons, the so-called
3
officer “lacked both the training and the experience to be an
active director”).
Taylor is a certified public accountant with prior
experience as a “chief financial officer and vice president of
finance and administration” at The Great Train Store, a
company she helped to take public. Immediately before
coming to Fresh America, she worked with the CEO of
another troubled company, Intellisys Group, to get it
refinanced. When Intellisys was purchased by another
company, Taylor stayed on to help it through the transition.
Judicial Officer Decision at 11, 1 J.A. 17.
Finberg was also well qualified to serve as an officer. He
rose up through the ranks of Fresh America over several
years, starting with summer jobs at its predecessor company.
While still in college, Finberg worked full-time as general
manager of two locations. After graduating, Finberg earned a
series of promotions, serving variously as corporate liaison
with the company’s primary customer, director of customer
service, director of national programs, and general manager of
a distribution center. Only after gaining this leadership
experience was Finberg elevated to vice president of sales and
marketing, and eventually vice president of business
development. Id. at 12, 1 J.A. 18.
This case therefore presents the question whether the
Department’s “responsibly connected” determination is an
arbitrary and capricious application of the “actual, significant
nexus” test when the officer has actual knowledge of her
company’s PACA violations and a salary and résumé in
keeping with her title. I think not.
We have previously recognized that an officer’s
knowledge of her company’s PACA violations may be
4
decisive under the “actual, significant nexus” test. In Bell v.
USDA, the possibility that knowledge of company
wrongdoing might confer “responsibly connected” status on
an otherwise nominal “officer” led us to remand the
Department’s decision “for further consideration.” 39 F.3d
1199, 1202 (D.C. Cir. 1994). Bell was a produce salesman
who performed no duties “that can be specifically attributed
to his being vice-president.” Id. at 1200. He had heard,
however, “that some of the company’s checks had bounced.”
Id. at 1200. We suggested that even where the employee was
dubbed an “officer” only “for the administrative convenience
of the company” and even where he “never participated in the
formal decisionmaking structures of the corporation,” the
Department could find him “responsibly connected” by virtue
of his knowledge of the company’s PACA violations. 39 F.3d
at 1204. Although the Judicial Officer in Bell had made no
finding about Bell’s knowledge, we observed “Bell’s
awareness of some company wrongdoing may provide a
distinction between this case and Quinn and Minotto.” Id. at
1204. We rejected the Department’s litigation position that
under our prior cases “ignorance of company wrongdoing is a
sine qua non of a finding that an officer’s or director’s
relation to the corporate licensee was nominal,” id., but we
implied that the Department could reasonably interpret some
kinds of knowledge as establishing responsible connection
per se, and asked the Department on remand to “formulate
some principle delineating the role of differing degrees of
knowledge of general corporate difficulties, or of
‘transactions which gave rise to the underlying violations’, or
of the violations themselves, consistent with our cases.” Id. at
1204–05.
Although the Judicial Officer in this case did not set out
the full taxonomy we requested in Bell, he did make an
acceptable judgment about how to treat “knowledge . . . of the
5
violations themselves.” Id. Remember, Taylor and Finberg
were found to have actual—not just constructive—knowledge
of the PACA violations. The Judicial Officer said that when
Taylor and Finberg “failed to convince the board of directors
to comply with the provisions of PACA,” their “only option
to avoid a responsibly connected determination was to resign
as officers of Fresh America.” Judicial Officer Decision at 14,
1 J.A. 20. In other words, direct knowledge of a PACA
violation, in the mind of an “officer” whose compensation,
“experience, training, and education” are commensurate with
the title, constitutes “responsible connection” to the violating
company.
The court is hard-pressed to call this an unreasonable
interpretation of the statute, especially since we have stated an
even harsher rule in dicta. Hart v. USDA, 112 F.3d 1228,
1231 (D.C. Cir. 1997) (“In order to prove that one was only a
nominal officer or director, one must establish that one lacked
any ‘actual, significant nexus with the violating company’
and, therefore, neither ‘knew nor should have known of the
company’s misdeeds.’” (emphasis added) (quoting Minotto,
711 F.2d at 408–09)). The Judicial Officer’s remedy is
certainly “consistent with our cases.” Bell, 39 F.3d at 1204–
05. In fact, it comes straight from Martino v. USDA:
“The fact that an individual has not exercised
‘real’ authority in the sanctioned company is
not controlling: certainly the individual could
have resigned as an officer and director. . . . It
was his free choice not to do so. Having made
that choice, the appellant[s] assumed the
burdens imposed by the Act.”
801 F.2d 1410, 1414 (D.C. Cir. 1986) (quoting Birkenfield v.
United States, 369 F.2d 491, 494–95 (3d Cir. 1966)).
6
II
The court recognizes that that an officer’s knowledge of
his company’s PACA violations is relevant to whether he is
responsibly connected, Maj. Op. 15, but concludes that it
cannot be dispositive because “actual power and authority are
the crux of the nominal officer inquiry,” Id. at 16. This turns
the doctrine on its head. Under our case law, “the crucial
inquiry is whether an individual has an ‘actual, significant
nexus with the violating company,’ rather than whether the
individual has exercised real authority.” Veg-Mix, 832 F.2d at
611. In other words, “[t]he fact that an individual has not
exercised ‘real’ authority in the sanctioned company is not
controlling.” Martino, 801 F.2d at 1414. The court now
contradicts these statements by superimposing a “power and
authority” requirement on the “actual, significant nexus” test.
Until today, that test contained no such requirement.
Instead, managerial control was a sufficient—but not
necessary—indicator of the requisite nexus with the violating
company. See Siegel v. Lyng, 851 F.2d 412, 417 (D.C. Cir.
1988). We have recognized an officer may be responsibly
connected to a violating company in multiple ways, of which
real managerial power is only one. For example, a minority
shareholder may not have actual power or authority to prevent
(or even discover) the company’s PACA violations, but our
cases have approved a sort of strict liability for so-called
“officers” who hold a certain percentage of the violating
company’s stock. See Veg-Mix, Inc. v. USDA, 832 F.2d 601,
611 (D.C. Cir. 1987) (“In Martino, we found that ownership
interest of 22.2 percent of the violating company’s stock was
enough support for a finding of responsible connection.”
(citing 801 F.2d at 1414)).
7
Even if the court’s new “power and authority” test were
one reasonable interpretation of the statute, it is not the
interpretation employed by the Judicial Officer in this case,
nor is it required by our precedent. After telling the
Department it could find at least some kinds of knowledge of
company wrongdoing to be dispositive evidence of an
officer’s “actual, significant nexus” to the violating company,
see Bell, 39 F.3d at 1204–05, we cannot now declare arbitrary
and capricious the Judicial Officer’s decision based on Taylor
and Finberg’s actual knowledge of Fresh America’s
consummated PACA violations, along with compensation and
qualifications commensurate with the officers’ titles. We must
defer to the Department’s reasonable interpretation. See
Coosemans Specialties, Inc. v. USDA, 482 F.3d 560, 564
(D.C. Cir. 2007).
III
I do not mean to suggest the Department is bound forever
to apply the “actual, significant nexus” test. We have
previously indicated the 1995 amendment to 7 U.S.C.
§ 499a(b)(9) might call for different criteria. See Norinsberg
v. USDA, 162 F.3d 1194, 1199 (D.C. Cir. 1998). Perhaps, we
could have viewed Kleiman & Hochberg, Inc. v. USDA, 497
F.3d 681 (D.C. Cir. 2007), as a paradigm shift rendering the
old test obsolete. Instead, the court treats that case as
discerning a “power and authority” requirement in the
“actual, significant nexus” test even though we neither
mentioned that test nor suggested the officer’s managerial
control was the cause-in-fact—much less a necessary
condition—of his responsible connection to the company. See
497 F.3d at 692. He also owned 31.6 percent of the
company’s stock, id., which is more than “enough support for
a finding of responsible connection,” Veg-Mix, Inc., 832 F.2d
at 611. I have no objection in principle to a demand for
8
evidence of “power and authority.” But the Judicial Officer in
this case explicitly employed the “actual, significant nexus”
test, Judicial Officer Decision at 13, 1 J.A. 19, and neither the
parties nor my colleagues have seen fit to challenge its
applicability. 1 If the “actual, significant nexus” test applies, as
the court holds it does, the Judicial Officer reasonably
determined Taylor and Finberg’s direct knowledge of their
company’s PACA violations, combined with their officer-
appropriate salaries and qualifications, makes them
responsibly connected to the violating company. Only if that
test does not apply may a finding of “power and authority” be
required instead. We cannot have it both ways.
1
We have the authority to consider the propriety of the
Department’s continued application of the “actual, significant
nexus” test even if the parties do not object. “[T]he appellate court
. . . always possesses discretion to reach an otherwise waived issue
logically ‘antecedent to and ultimately dispositive of the dispute
before it.’” Crocker v. Piedmont Aviation, 49 F.3d 735, 740 (D.C.
Cir. 1995) (quoting United States Nat’l Bank of Oregon v.
Independent Ins. Agents of America, 508 U.S. 439, 447 (1993)).