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Case number 20-1235, Steven C. Finberg, Petitioner versus United State Department of Agriculture and United States of America.

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Mr. Diaz for the petitioner, Mr. Spignol for the respondents.

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Good morning, Council.

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Good morning, Your Honors.

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Lou Diaz appearing on behalf of the petitioner, Steven C. Finberg.

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May it please the court.

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Petitioner requests the court to reverse USDA's decision finding Mr. Finberg responsibly connected to Adams Produce because petitioner was not actively involved in the activities resulting in the violation and because USDA has determined that Adams Produce was the alter ego of Scott Grinstead, the CEO and owner of Adams Produce at the time of the violations.

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PACA's Responsibly Connected provision affords owners, officers, and directors of a PACA violator to avoid the harsh employment restrictions imposed by the statute if they can satisfy a two-pronged test.

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The first prong is they must show that they were not actively involved in the activities resulting in the specific violation.

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The second prong requires them to either show that they were a nominal officer and director or they were not the owner of the pack of violator and the pack of violator was the alter ego of somebody else.

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In this case, the violation in question was the failure to pay $1.9 million to produce suppliers of atoms.

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Which happened because the company spiraled downward and went into bankruptcy and couldn't pay suppliers, right?

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Yes, your honor, actually.

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And that happened because the bank

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the letter of credit because there were reports of mismanagement and an investigation of fraud on the Department of Defense, correct?

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No, there is no evidence that why the bank swept the funds.

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The ALJ and the judicial officer concluded that there were four main factors that caused the downfall of Adams.

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The first one being Mr. Grinstead's falsification of financial records to get a capital infusion from CIC in the amount of $7.5 million.

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The second was Mr. Grinstead's embezzlement, theft, and fraud to enrich himself personally in the amount of $400,000.

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The third was the negligence of the auditing company to uncover Mr. Grinstead's fraud of the financial records.

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And then the fourth was the sweeping

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of the bank account by PNC Bank of monies that were specifically earmarked to pay the packet trust creditors.

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There's no evidence that Mr. Finberg was involved in any of those four activities.

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There's no, but there's testimony that one of the reasons people started to lose faith in this company was a DOJ investigation of a DOD fraud.

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There is no evidence, Your Honor, that indicates that the DOJ fraud or the failure to disclose the DOD fraud was the result of the downfall of atoms.

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There is absolutely no evidence.

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In fact, the DOD fraud was the subject of a whistleblower complaint approximately one year before Mr. Finberg became aware of the DOD fraud.

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Mr. Finberg was not charged with being complicit with the DOD fraud.

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He was only charged with misprison of felony for failure to report the DOD fraud to the federal authorities.

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When he learned of the fraud, he went to his superior, Mr. Grinstead, and told him about what was going on.

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His failure was not to report it to the federal authorities.

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Here we have a violation which is failure to pay produce suppliers.

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In this case, there is no nexus.

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The department has not provided any substantial evidence to show that there was a nexus for any direct causal link between the failure to report the DOD fraud and the failure to pay produce suppliers.

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The judicial officer basically just said, you know, the the the misprison of felony was basically just the general downfall of Adams or because Mr. Finberg didn't report it, it allowed the DOD.

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I take your point that there are other causes here.

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There were other frauds in which

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Binberg was not involved and maybe they're sufficiently distinct that you think of them as different activities.

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But there was testimony that the DOD fraud was one significant piece of the company's downfall.

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Well, there's testimony that there was negative publicity, but that was offset by other testimony that said that Adams was functioning and functioning well before the sweep of the account.

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If the evidence is conflicting, then there's substantial evidence to support the determination.

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There is absolutely no substantial evidence to show that the failure to report the fraud caused the failure to pay the produce suppliers.

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In this case, you have the department could have.

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In terms of his involvement, you have the what he pleaded guilty to, which is undisputed.

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Also in the record is the indictment, which says that he was actively involved in concocting the fraud.

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from the outset.

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Can we consider that?

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And if we can consider that, he's not just a passive observer, he is actively involved in a fraud that results in the downfall of the company.

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Your Honor, there was testimony by Mr. Finberg in which he specifically pled guilty to misprision of felony.

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He did not plead guilty to being complicit in the felony that was going on.

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All he pled guilty to was failure to report the actual violation.

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But the right, but the indictment is evidence in this administrative record.

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It charges him with more than that, and it's his burden in this proceeding.

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It's his burden to disprove his involvement.

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But the facts of the indictment were never proved in the court of law.

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It's merely just an indictment.

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It can't be used against Mr. Finberg because there was no trial to prove that the facts of the indictment were true.

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He merely pled guilty to failing to report the fraud to the Department of Justice.

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Again, you have to look at all the facts here in this circumstance.

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The USDA, in the companion CIC director's case, found Mr. Grinstead was the alter ego of Adams.

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He was the bad actor.

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But USDA says, Mr. Finberg, I'm sorry, you're not entitled to use that finding or the alter ego defense because you, unlike the CIC directors, didn't put personal money into the business.

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You didn't help root out the wrongdoing and you're not an innocent party.

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However, the standard doesn't require an examination of the petitioner's conduct.

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It doesn't require him to put money into the corporation to assert the alter ego defense.

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In this case, Grinstead was the alter ego of Adams.

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He was found to be the alter ego of Adams.

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And therefore, Mr. Finberg has satisfied both of these problems.

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I will reserve the rest of my time for rebuttal.

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All right.

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Thank you, Council.

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Council for respondent.

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As may it please the court, my name is Charles Spicknell.

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I'm here on behalf of the U.S.

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Department of Agriculture in the United States.

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I'll start with my opponent's arguments about active involvement.

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He says there's no evidence linking the criminal activities that petitioner Finberg participated in, which specifically was a fraud against the United States through the downfall of Adams and the resulting prompt payment violations of the PACA.

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That's wrong.

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There is.

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I mean, first of all, the government did not start investigating Adams because of any of these other activities, because Grinstead was putting personal expenses on his credit card

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because he made the outside investment firm pay too much rather get get to the point on that the question of causation whether he is responsible for the hour was a part of the causation of the acts for which the proceeding is held sorry your honor yes the uh the two directors who were on the special committee that was formed to respond to the fraud were the first to testify at the administrative hearing they said the fraud

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against the government and the government's investigation was significant for four reasons.

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First, the company hired Fulbright and Jaworski to represent them.

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They incurred millions of dollars in legal expenses.

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Second, Adams lost business, not only the government.

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Oh, I'm sorry.

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Just on that point, I thought the outside directors paid that fee, not Adams.

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Well, they were very specific.

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They did say that at the hearing, but they cleared that up.

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Mr. Johnson did he was one of the technically those expenses by the company, and they invested in Adams, an additional $2 million to help pay those costs.

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and the legal fees and to see that some of the PACA.

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So how does that then become a cause of this non-payment for which this proceeding is brought?

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Well I mean the company incurred the funds the fact that the you know outside parties wanted to save the company and put funds into the company.

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How did the activities of Mr. Feinberg cause the non-payment?

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Well, with regard to the investment that we're talking about now, at the end of the day, the company went bankrupt.

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The money they put in wasn't enough to satisfy the company's obligations.

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It went bankrupt and it left 1.9 million in produce debts unpaid, which is a violation of the packet.

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The problem is you have a lot of bad things swirling around here.

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You have at least three different

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fraudulent schemes, you have a somewhat attenuated theory of causation because the pocket violation has nothing to do with the fraud on DOD, right?

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So he's involved in defrauding DOD, which in the short term is gonna make the company more able to pay its other debts because they're having more money come in than they otherwise should.

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and then things go bad and we're trying to figure out, is it one of Grinstead's frauds?

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Is it another?

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What's going on here?

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You have a pretty short timeframe between when we know DOJ to be investigating and when the company fails and just nothing in the administrative orders

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analyzing the causation question.

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It's just pure Ipsedixit.

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Well, I mean, I think the problem is, you know, I'm not sure that this was front and center when the JO wrote her opinion.

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And I think there is substantial evidence.

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I don't think that it's, you know, I think there is ample evidence now that the issue has been raised.

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I don't think you can say the judicial officer missed something in the record that makes her opinion arbitrary and capricious.

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And that's because

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Not only did they incur legal expenses, they lost business, but they also lost outside investment, so they couldn't get enough money to save, and they also lost the bank financing.

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Do you think it's enough to meet the causation requirement of this proceeding that he closed his eyes to something else that cost the company money?

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Isn't that an awfully broad interpretation, counsel?

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I don't think so.

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It's clearly one of the activities that brought down the company that left the produce payers unpaid.

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As Judge Katz says, there was three of them.

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There were personal expenses, there was inflating the profits of the company, and there was this.

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Anything that shows they would have paid this stuff for which they had a non-payment if it hadn't meant for what he did?

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I'm sorry, I missed your question.

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It's a but far question.

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Is there anything in the record that shows the company would have paid these bills for which they made a non-payment had he not done what he did in covering up the other fraud?

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Well, I think there is.

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The directors very clearly testified that at some point they discovered what the government was investigating and they went to the bank, PNC Bank, their lender, and they said, look,

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uh here here's what we know uh employees and officers within the company have been defrauding the government and we also had this internal fraud where Greenstead was inflating the receivables so they told the bank about both and that was the pivotal event because the bank for this proceeding though is not about either one of those isn't it's about the non-payment right that's right but you know and i'm not hearing you answer my question as to what is it in the record it says they would have paid

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They would not have incurred this non-payment, but for something that Mr. Feinberg did.

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Well, I mean, I think it is linked because when they told the bank about the fraud, the bank withdrew the company's line of credit and the director said very clearly, that was it.

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We were dead in the water without new investment and without a line of credit, we couldn't operate.

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Therefore the company couldn't pay the pack of suppliers.

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So I guess the bottom line question in one sense is, was the judicial officer's opinion sufficiently specific on causation?

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Well, I don't think that's the issue.

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I think even if she wasn't.

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I think that the but for question implies that there were lots of things going on.

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that some findings that were made in the related proceeding seem contrary to the implication of the decision here.

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But as your brief points out, there's all this other evidence, but that's not what the joint judicial officers cited or even referred to.

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Right.

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But the judicial officer was affirming the ALJ, the Administrative Law Judge's decision, and she affirmed findings of facts and cited back to that decision.

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The ALJ decision was equally perfunctory on this point.

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Yeah.

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That didn't get you anywhere.

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All right.

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I mean,

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Again, I think there's substantial evidence to show that this was one of the causes, one of the activities.

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I have to ask you also about the alter ego question.

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How could the miscreant be an alter ego with the company in the proceedings with up to three other people, but not be an alter ego in this one?

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Either he was an alter ego or he wasn't an alter ego, or the company was an alter ego, wasn't an alter ego, wasn't it?

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How does it come out with two different answers to that question?

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Well, I think that, uh, you know, the standard for alter ego is Quinn and, uh, we also cite vegans.

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Okay.

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The standard is not only do you have to have a dominant owner, which Grinstead was found to be in the prior proceeding, but you also have to show an injustice and he can't show that injustice because he participated in that two different questions.

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It is two different questions, but that's clearly part of the test in Quinn, and Vegemix makes that very clear.

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This court's decision in Vegemix, which we cite in our brief, as does the A circuit's decision in Pupilo, although clearly that's not binding.

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So it's not just, you know, whether there's a potential

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you know, dominant owner, it's whether there's an injustice because, you know, we're essentially setting the corporate form aside to let someone who's really an officer go because, you know, we're going to ignore the fact they're an officer because it's an injustice that we're trying to prevent.

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And in this case, there is no injustice.

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He was a participant in the fraud against the government, which clearly had significant financial consequences for the company and ultimately for its suppliers.

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So since the statute has a presumption that places the burden of rebutting it to the Mr. Finberg here, does that reduce the obligation of the agency to demonstrate a but for

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Causation.

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Yes, I think that's true.

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I think in this case, for example, he said, you know, we don't know exactly why PNC bank went through the line of credit and swept the accounts.

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Well, it was after the company reported both frauds to them.

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He could have called someone.

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It was his burden.

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If you wanted to say, you know, PNC withdrew the line of credit.

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the decision had nothing to do with the fraud against the government, he could have called PNC Bank.

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He also had a right to cross-examine the directors at the hearing.

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So when they said all this, he could have, if he wanted to winnow out this point, that there was no connection between the fraud he participated in and ultimately the company's collapse, he had ample time to cross-examine the witnesses.

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I'm sorry, Your Honors, I see I'm out of time.

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I'd be happy to continue.

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So if the agency itself and its decision has not demonstrated a but for beyond the presumption in the statute, it doesn't matter?

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Right, it's his.

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I'm sorry to cut you off.

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I'm trying to understand.

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It's like the prosecutor issues an indictment

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But when put to its burden of proof, can't prove it.

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And you don't, the defendant can't be convicted.

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And I understand there's no burden there, but I'm just trying to understand how this statute works.

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Is it enough to say, look, Adams couldn't pay its suppliers?

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And anybody who's an official in the company

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who can't prove the two elements is necessarily implicated.

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Yes, that is our position.

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That is what the statute says.

[00:20:44] Speaker 01:
Even taking that position, hasn't the evidence demonstrated that there was not any direct connection between his actions and the particular default for which this proceeding is brought?

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That's the only way you can prove a negative is that you establish the weakness of the evidence for the positive.

[00:21:06] Speaker 01:
He's not going to have something ever that's going to be direct evidence of a negative.

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So why isn't this, in this case, a failure of that element?

[00:21:16] Speaker 04:
I don't think he has to have direct evidence of a negative.

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I think when the directors testified that they reported this fraud and the internal fraud to the bank and the bank pulled the line of credit, which put the company dead in the water,

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I think he needed to ask, you know, are you sure?

[00:21:30] Speaker 01:
You don't leave much meaning in this statute.

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If it's sufficient to show that he did something else that caused the company to lose business or lose status or lose credit.

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If that's sufficient, then you don't really need that element of this statute.

[00:21:50] Speaker 01:
You're not putting much content in this, are you, counsel?

[00:21:53] Speaker 04:
Well, I mean, I think in a lot of cases, this case is different.

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In many cases, you know, we have an officer who, for example, looted the company as it's going down.

[00:22:03] Speaker 04:
That was Norensburg, the case we cite for the standard of active involvement.

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Prior to the company's collapse, the family wrote checks to themselves and took money out that could have been used for the produce.

[00:22:13] Speaker 04:
Again, it's not, you know, and that's what we went after them for.

[00:22:19] Speaker 04:
Again, it wasn't that they

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themselves didn't pay the produce sellers.

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It was the reason the company didn't have the money to pay.

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And in this case, the reason the company couldn't fulfill its obligations under PACA was because of the various fraudulent schemes perpetrated by employees and officers within the company.

[00:22:42] Speaker 01:
All he pleaded guilty to was misprision.

[00:22:46] Speaker 01:
Is there anything that shows that had this fraud been disclosed at the moment he learned of it, there would have been any difference in this non-payment situation?

[00:22:57] Speaker 04:
Well, I think, you know, this fraud, I mean, fraud by its nature is a secret.

[00:23:02] Speaker 04:
I mean, we're speculating either way, because that's not what happened.

[00:23:05] Speaker 04:
But the really, you know, had he disclosed the secret to the government, it's reasonable to assume that it would have stopped.

[00:23:12] Speaker 01:
No, we're not talking about assumptions.

[00:23:14] Speaker 01:
We're talking about

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say it's reasonable to assume it would have stopped.

[00:23:18] Speaker 01:
If it had stopped at that point, is there still any evidence that this payment would have been made?

[00:23:29] Speaker 04:
I think potentially

[00:23:33] Speaker 04:
Certainly we wouldn't be here for this responsibly connected proceeding if he hadn't concealed the fraud, which is what he admitted to in his plea and agreed to continue it, which is what he the facts he admitted to in his plea agreement.

[00:23:49] Speaker 06:
Are we allowed to

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consider the allegation that he was, he didn't simply conceal the fraud, but he was actively involved in creating it.

[00:24:08] Speaker 06:
That's the allegation in the indictment.

[00:24:10] Speaker 06:
He didn't plead to it.

[00:24:12] Speaker 06:
And a friend on the other side has at least an intuitively appealing point that

[00:24:20] Speaker 06:
That's just an allegation that hasn't been tested.

[00:24:25] Speaker 04:
Right.

[00:24:25] Speaker 04:
And that is his argument.

[00:24:27] Speaker 04:
And we didn't make much of the indictment in the brief.

[00:24:30] Speaker 04:
He does testify.

[00:24:31] Speaker 01:
Is there evidence, though, outside the indictment, is there evidence of that in this record?

[00:24:36] Speaker 04:
No, there is not.

[00:24:37] Speaker 04:
Thank you.

[00:24:41] Speaker 04:
unless there are any further questions.

[00:24:44] Speaker 03:
I have another question.

[00:24:47] Speaker 03:
You suggested, I think, that causation was not the focus before the ALJ.

[00:24:57] Speaker 03:
And now I think you said that the issue has been raised.

[00:25:02] Speaker 03:
Are you suggesting that the causation issue was not raised until

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the appeal to this court?

[00:25:14] Speaker 04:
Yes, that is what I'm suggesting.

[00:25:16] Speaker 04:
I don't think it was squarely raised to the ALJ.

[00:25:19] Speaker 04:
And I think, yeah, I'm not sure it's really raised.

[00:25:22] Speaker 02:
Let me say squarely raised.

[00:25:24] Speaker 02:
If you strike that adverb, I am ready.

[00:25:31] Speaker 04:
I'm sorry, Your Honor.

[00:25:33] Speaker 04:
Yes, I reviewed the briefs below and I it's my opinion that it was not raised.

[00:25:38] Speaker 04:
And that's why the opinion that she wrote

[00:25:40] Speaker 04:
reads the way it does.

[00:25:43] Speaker 04:
And I would say, you know, I guess, you know, we didn't raise that issue and I didn't chase it down because it would be arbitrary and capricious if the judicial officer missed, you know, a chunk of evidence in the record.

[00:25:57] Speaker 04:
But he has no evidence that the fraud he participated in was not one of the factors that resulted in the bankruptcy of the company and the tires to pay.

[00:26:08] Speaker 03:
Well, I thought that was an implicit causation argument.

[00:26:12] Speaker 03:
Maybe I'm wrong.

[00:26:16] Speaker 03:
You have proved the connection of my action to the specific charge brought against the company.

[00:26:29] Speaker 04:
Yes, the judicial officer has defined what activities resulted in the violations of the PACA.

[00:26:36] Speaker 04:
And in this case,

[00:26:38] Speaker 04:
The administrative law judge found there were three, the misuse of company funds, the fraud against the government and the fraud against the company itself.

[00:26:46] Speaker 04:
Of course, he participated in only one of those.

[00:26:48] Speaker 04:
So it was the fraud against the government was one of the activities that resulted in the violations of the PACA.

[00:26:56] Speaker 06:
On the preservation question before the agency, the fraud, the causation question was raised

[00:27:07] Speaker 06:
in this court in the blue brief.

[00:27:10] Speaker 06:
And unless I missed it, you didn't argue forfeiture in your red brief.

[00:27:18] Speaker 06:
And so forfeiture arguments are themselves subject to forfeiture.

[00:27:23] Speaker 06:
So haven't you forfeited that objection?

[00:27:27] Speaker 04:
Yes, Judge Katsas, that would be correct.

[00:27:33] Speaker 03:
All right, anything further?

[00:27:36] Speaker 04:
Uh, nothing further.

[00:27:38] Speaker 04:
Um, um, we would, uh, no, nothing further from me.

[00:27:42] Speaker 04:
Thank you.

[00:27:43] Speaker 03:
Thank you, council.

[00:27:45] Speaker 03:
All right.

[00:27:46] Speaker 03:
Council for petition.

[00:27:48] Speaker 05:
Your honors.

[00:27:48] Speaker 05:
I have nothing further to add.

[00:27:50] Speaker 05:
Um, I would just like to point out, um, again, if the department of agriculture wanted to charge Adams with fraud.

[00:27:59] Speaker 05:
or fraud on the DOD, or as Judge Sentel dealt with the case where they charge the breach of an implied duty with respect to a produce transaction, they could have, but they didn't.

[00:28:12] Speaker 05:
It's solely limited to the failure to pay produce suppliers, and there's no causal connection between failure to report the DOD fraud and the failure to pay.

[00:28:23] Speaker 06:
Can I just ask one question?

[00:28:24] Speaker 06:
Suppose we think there's no

[00:28:29] Speaker 06:
connection, there's no adequately shown connection between his individual acts or omissions and the failure to pay.

[00:28:41] Speaker 06:
Don't you still have a little bit of a problem because the statute doesn't require causation between

[00:28:53] Speaker 06:
the individual's misconduct and the violation.

[00:28:57] Speaker 06:
It requires that he be actively involved in activities that cause the violation.

[00:29:04] Speaker 06:
So isn't it enough, even if we can't trace what Finberg did to the failure to pay,

[00:29:15] Speaker 06:
Isn't it enough if the record has substantial evidence that he was involved in the one fraudulent scheme and that scheme was a substantial factor of the companies not being able to pay?

[00:29:36] Speaker 05:
I think it's different though, because the way that was couched was you indicated that he was involved in the.

[00:29:44] Speaker 05:
Actively involved that nobody who said he was actively involved in the fraud.

[00:29:48] Speaker 05:
All he was found, found guilty of and pled guilty to was failure to disclose the fraud.

[00:29:53] Speaker 05:
There's no evidence that he was a participant in the fraud, so we have to show.

[00:29:58] Speaker 05:
Hey, if he reported this, would this have prevented the violation from occurring?

[00:30:04] Speaker 05:
And this court in

[00:30:05] Speaker 05:
specifically was pretty clear that the legislative history for the amendments in 1995 to the actively involved standard was that Congress wanted to make it clear that the Congress wanted to amend the definition of responsibly connected to provide that individuals were given the opportunity, and I'll quote, to demonstrate they were not responsible for the specific violation.

[00:30:29] Speaker 05:
In this case, Mr. Finberg is not responsible for the failure to pay Adams Produce suppliers.

[00:30:35] Speaker 06:
That statute reads a little bit more broadly than that.

[00:30:40] Speaker 06:
I mean, I guess you could say that concealment as a matter of law can't constitute active involvement, but I'm not sure that's right.

[00:30:51] Speaker 06:
I can conjure up a hypothetical where the concealment would be absolutely critical.

[00:30:57] Speaker 06:
Thank you, Your Honors.

[00:31:03] Speaker 03:
Thank you.

[00:31:03] Speaker 03:
We'll take the case under advisement.