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Agricultural Law Forum - November 2013

AGRICULTURAL LAW FORUM keeps you updated on legal developments affecting landowners, farmers and owners of agriculture-related businesses. If you would like more information about the items in this issue, please click on the specified links or contact any member of our Agricultural Law Practice Group. In this issue:

Gordon Feinblatt Successfully Defends Farmers from Clean Water Act Suit
Business Succession Planning for Family Farms & Agribusinesses
Department of Agriculture Proposes New Phosphorous Management Regulations
Chicken Manure in Nutrient Runoff to Chesapeake Bay Overestimated

Gordon Feinblatt Successfully Defends Farmers from Clean Water Act Suit

Gordon Feinblatt LLC successfully defended environmental claims brought by a national environmental advocacy group against a Maryland farm family and a poultry integrator in a case of national significance. After a three and a half week trial, on December 20, 2012 the Honorable William N. Nickerson rejected the plaintiff’s claims against Alan and Kristin Hudson and Perdue Farms, Inc. that the poultry farming operations on the Hudson Farm were polluting local waterways in violation of the Clean Water Act. Judge Nickerson also rejected plaintiff’s novel legal theory that Perdue, as a poultry integrator contracting with the Hudsons, was legally responsible for alleged pollution from the Hudsons’ poultry operation.

The case began in the Fall of 2009 when representatives of the Waterkeeper Alliance (“WKA”) flew over Maryland’s Eastern Shore looking for a reason to file a lawsuit against the poultry industry. Unhappy with the already substantial regulatory scheme for agriculture in the state, WKA had predetermined that litigation was the best avenue for achieving its goal of fundamentally altering the poultry industry in the Delmarva region. When WKA representatives spotted a pile of treated biosolid material that they mistook for uncovered poultry manure from the airplane, the Hudsons and Perdue quickly became the targets of the WKA litigation strategy. WKA issued a Notice of Intent (“NOI”) to sue the Hudsons and Perdue in December 2009 for nutrient discharges from the poultry production area on the farm. Undeterred by clear evidence that the pile was harmless biosolids, WKA forged ahead with its lawsuit in federal court in the Spring of 2009.

Discovery and motions practice in the case lasted over two years. During this time, WKA’s theory of the source of the alleged discharges of pollutants changed from the (non-existent) manure pile, to over-fertilization of farm fields, to their theory at trial that exhaust fans on the poultry houses and foot traffic were the source of alleged pollutants in the local waterways. Despite a warning from the trial judge in summary judgment rulings that he considered its case legally and factually weak, WKA refused to settle the matter. A three week bench trial began in early October 2012.

In his ruling, Judge Nickerson rejected WKA’s “fan and shoes” theory, concluding that the Hudson’s substantial cow herd, which was beyond the scope of the NOI, was the likely source of any elevated nutrient levels in the water surrounding the farm. The judge recognized that although an integrator can be responsible as a farm operator in some circumstances, there was insufficient evidence in this case to impose liability on Perdue. The judge also concluded that WKA had not acted “responsibly” in pursuing the case against the Hudsons and Perdue. In subsequent briefing on the defendants’ request that they be reimbursed for their legal fees and costs, the judge noted that WKA “was not seriously working to settle this matter” and that it was unfortunate that no agreement that could have benefitted the Chesapeake Bay came from the litigation.

Alan & Kristin Hudson were represented in this case by George F. Ritchie, or Margaret Witherup.

Business Succession Planning for Family Farms & Agribusinesses

Although Congress finally provided clarity regarding exemptions and rates for estate, gift and generation skipping transfer taxes, owners of family farms and agribusinesses still have to consider many remaining business succession planning issues. Owners of family farms and agribusinesses must keep in mind that business succession planning, no matter what the tax law is, will always be necessary. If a business owner fails to address his or her estate and succession plans, a business owner’s wishes concerning how the family farm will pass to family members will be put at risk and in the end more wealth will be lost to litigation, expenses and family conflict. Ultimately, planning for your non-tax goals should be of the utmost importance in preparing your business succession plan.

A family farm succession plan is not a one-size-fits-all process, rather a variety of planning tools and options must be considered. Owners of family farms and agribusinesses, in particular, struggle with unique characteristics that extend beyond the business to personal relationships. It is the ties among parents, children, siblings, spouses and in-laws that make a succession plan a necessary part of not only managing personal wealth but more importantly the business itself.

First, it is important to consider the individuals involved in the overall business succession plan. Consider what role children, step-children, grandchildren and others currently have, may have, or want to have in the business in the future. This process includes consideration of unresolved issues between family members or addressing the fact that a successor may not be prepared to lead and manage the farm business. Additionally, you must identify which family members actually want to be involved with the hands-on responsibilities of the business. It is important to understand and accept that not every family member will necessarily be qualified or even want to be involved, as many times family farms do not always provide opportunities that fit everyone’s strengths and interests. Thus, it is important to talk with your family about establishing a business succession plan to begin the process of developing a transition for your family business. With open communication between generations, it is more likely that your business goals will be met while maintaining harmony in the family.

After considering the individuals involved in the business succession plan, it is important to evaluate the variety of planning methods available in establishing a successful succession plan. Many times, there will be an on-farm heir and non-farm heirs. In looking at a business succession plan under such scenario, it many times becomes a battle of “fair” versus “equity.” It will be important to evaluate options to avoid an on-farm heir owing his or her siblings for the rest of his or her life, as the on-farm heir tries to buy out the non-farm heirs’ shares. There are several planning techniques that can assist in avoiding such a dilemma, including the use of life insurance to benefit those heirs that are not involved in the business. These techniques may achieve a balance between the on-farm and non-farm heirs, as the on-farm heir receives an interest in the family business, while the non-farm heirs are compensated equally with a cash payment from life insurance proceeds.

Another method that can be implemented in a business succession plan for a family farm or agribusiness is the use of a limited liability company (“LLC”) to run the family farm or agribusiness. The owners of the LLC can gift or transfer membership interests to family members. The patriarch of the family, as manager, can retain limited control of the family business during the transition, while receiving income from the business. Additionally, as the succession plan is implemented on-farm heirs can receive management control of the LLC, while still providing non-farm heirs an interest in the business. This method allows all heirs to be treated fairly, while acknowledging the difficulty in treating them equally.

In working through the options and dynamics of a business succession plan it is helpful to enlist qualified professionals who do not have a stake in the final decisions, as they can assist you in making unbiased decisions. By taking the time to create a succession plan, a family’s vision and intentions for their farm or agribusiness can be addressed and implemented purposefully. Ultimately, succession planning helps ensure the family business can continue operating with sufficient economic viability to financially support multiple generations in the years to come.

For more information about succession planning for your family farm or agribusiness, contact Laura Johnson, 410-576-4065.

Department of Agriculture Proposes New Phosphorous Management Regulations

The Maryland Department of Agriculture (“MDA”) recently proposed new regulations governing how and when farmers can apply chicken manure, which is rich in phosphorous, to their crops. University of Maryland scientists developed the new Phosphorous Management Tool (“PMT”) to analyze areas where there is high risk of phosphorous getting into nearby waterways and to develop agricultural land management practices that will reduce the movement of phosphorous into sensitive streams and other water bodies. Although the PMT will only apply to farms where the soil fertility index value is 150 or more, a significant number of farms on the lower Eastern Shore have high phosphorous levels and will meet this criterion. The PMT will be included in the Maryland Nutrient Management Manual (which is incorporated by reference into the Code of Maryland Regulations (COMAR)) and will replace the Phosphorous Site Index that is currently used.

The regulations were originally proposed in December 2012 and revised in July 2013, but were withdrawn by MDA after farmers raised concerns about the impact of the new regulations and uncertainty about how they would be implemented. MDA then met with agricultural and environmental stakeholders to clarify and revise the regulations. The revised regulations were published in the Maryland Register on October 18, 2013.

The revised regulations now include a one year phase-in. During the phase-in, farmers’ nutrient management plans will be developed using both the existing Phosphorous Site Index as well as the new PMT. Using the new tool before it becomes effective will help farmers understand and plan for the management changes that will be necessary after the PMT is implemented. All nutrient management plans developed after October 1, 2014 will be required to use the new PMT. After January 1, 2015, all nutrient management plans will follow the PMT, regardless of when the plan was developed. Although the phase-in will help, farmers have still expressed concerns about the timeline for implementation, costs of compliance, logistics of moving manure quickly, and possible issues with stockpiling.

Comments on the proposed regulations are being accepted through November 18, 2013. For more information regarding the new PMT or to submit comments on the proposed regulations, contact Maggie Witherup, 410-576-4145.

Chicken Manure in Nutrient Runoff to Chesapeake Bay Overestimated

Many in the environmental and political communities have believed for decades that poultry farms in the Delmarva Peninsula contribute substantially to the degradation of water quality in the Chesapeake Bay. Although sewage treatment plants, septic systems and suburban runoff are also obvious sources of pollution to the watershed, agriculture, and in particular the poultry farming industry, has been targeted as the prime culprit responsible for sending large amounts of nutrients into the groundwater and surface streams. These discharges, argue environmental groups and regulatory agencies, lead to oxygen dead zones and harmful algal blooms.

A study conducted by Professor James L. Glancey in the Bioresources Engineering and Mechanical Engineering Department at the University of Delaware and released earlier this year, however, may reverse this widely-held assumption. Based on a multi-state study including thousands of manure tests, Glancey concluded that actual nitrogen levels in poultry house manure were 55% lower than the Environmental Protection Agency’s estimates, which were based on a decades-old, laboratory-based standard. This study has the potential to impact current and future regulations affecting both the poultry industry and other industries subject to environmental regulations in watershed areas.

Professor Glancey based his conclusions on two sets of data. The first data set analyzed over 4,000 poultry litter samples taken from farms in Delaware and Maryland that had also been tested by the Delaware Department of Agriculture. From 1996 to 2010, these litter samples were analyzed and showed declines of phosphorus but not nitrogen content. Some have attributed this decline in phosphorus content to requirements by poultry integrators (such as Perdue and Tysons) to utilize enzymes in chicken feed that reduce the amount of phosphorus in the manure.

Glancey’s second set of data weighed the actual amount of chicken litter produced by “clean-outs” from 800 chicken houses. A poultry house clean-out occurs between flocks of chickens, typically on a semi-annual or annual basis. Clean-out data showed that the amount of litter removed during the clean-out process was substantially lower than federal estimates. In Sussex County, Delaware, Glancey estimated that only 260,000 tons of litter were produced annually, even though the federal standards estimated 1.46 million tons of litter, a nearly 7 fold difference.

Although Glancey’s data has been criticized by some environmental groups (with other groups urging caution in interpreting the data), the study has grabbed the attention of EPA and is a welcome development to the agricultural community. EPA’s poultry litter subcommittee is currently reviewing the University of Delaware study and will issue a draft report when it has finished its review. Once that committee concludes its work, the EPA’s larger Agricultural Work Group will separately review the study. When EPA completes its review, it could lead to modifications to its Chesapeake Bay watershed model, which calculates pollution contributing to the Bay by industry sector. The agricultural community and others impacted by environmental regulations in the Chesapeake Bay will be closely watching EPA’s response to the University of Delaware study and how it may impact current and future legislation affecting the region and the poultry industry.

For more information about the University of Delaware study and its impact on environmental laws, please contact George F. Ritchie at 410-576-4131.