Reliance Mills, Inc. v. United States

No. C-4614 (D. Colo. September 6, 1973)

The U.S. Forest Service did not abuse its discretion in awarding a timber sale contract to the high bidder, who had defaulted on similar contracts in the past and thereby caused the permanent loss by bug infestation of trees totaling 200 million board feet of lumber. Proof that the agency exercised poor business judgment is not enough to enjoin governmental action; its decision must prevail unless proved to be arbitrary. Under 36 C.F.R. § 221.10, the Forest Service could refuse toaward this person any new contracts, but because of the qualification of § 2431.75 of the Timber Management regulations it is not required to do so. The agency's judgment on the award was reasoned and not arbitrary, and simple bad menagement by an administrative agency cannot be attacked.

Counsel for Plaintiff
Robert C. Duthie
P.O. Box 219
Durango, Colorado 81301

Counsel for Defendants
James L. Treece U.S. Attorney
U.S. Courthouse
Denver, Colorado 80202

L. Mark Wine
Department of Justice
Washington, D.C. 20530

Howard M. Kirshbaum
Zarlengo & Kirshbaum
595 Capitol Life Center
Denver, Colorado 80203

Traylor, Harshman, Palo & Cowan
443 N. 6th Street
P.O. Box 266
Grand Junction, Colorado 81501

[3 ELR 20792]

Winner, J.

MEMORANDUM OPINION

The Forest Service awarded a timber cutting contract in the Rio Grande National Forest, the Conejos Canyon No. 4 Sale, to Pete Butus who owns or controls Michiana Lumber & Supply Co. Plaintiff was an unsuccessful bidder on that sale contract, and it brings this action seeking injunctive relief against all defendants. It asks that the award of the contract be set aside and it asks that the award of future contracts to Butus be enjoined. Additionally, plaintiff wants to mandamus debarment proceedings against Butus and Michiana. Trial was to the Court, and this opinion contains the findings and conclusions required by Rule 52.

Butus has been in the timbering business for many years. In the past, he has defaulted on contracts to cut more than 200-million board feet of lumber; he has defaulted on more than one S.B.A. loan, and he has trespassed on government land. During 1972, the Forest Service refused to award Butus the contract on four sales on which he was low bidder, but it did award him the Conejos Canyon No. 4 sale which, compared with other Forest Service sale contracts, is a small one. There was difference of opinion among Forest Service personnel as to whether Butus should be awarded a contract, but those having the last word decided to give him the job. The record of Butus' past defaults is such that it is improbable that a seller in the business world would award a contract to a buyer with whom the seller had experienced a performance record such as Butus,¹ but the test to be applied in this case is not that of substituing the Court's business judgment for that of the Forst Service officers charges with the responsibility for the award of contracts. Where agency action is challenged, proof which satisfies the Court that the agency exercised poor business judgment is not enough to enjoin governmental action. The Forest Service defends the award of the Conejos Canyon No. 4 sale on the ground that, in the exercise of its judgment, the Forest Service thought Butus had put his affairs in order and that it thought that he was entitled to another chance, even having in mind his past poor performance record. Plaintiff, on the other hand, says that Butus knowingly bids up the sales prices, betting on the speculative chance of an increase in the price of lumber which will permit performance of an otherwise uneconomic contract, and intending to default if lumber prices don't go up. Butus' record lends credence to this charge. Plaintiff points to a Butus default on 150,000,000 board foot sale in the Targhee Forest with a consequent permanent loss of bug infested timber, and plaintiff says that the Forest Service officials violated their own regulations and that they were arbitrary and abused their discretion when they awarded Butus the Conejos Canyon No. 4 sale.Thus we start from plaintiff's concession that the Forest Service has an administrative governmental privilege to use bad business judgment, and that relief can be granted here only if plaintiff can meet the extreme burden placed on it of showing (a) a faulure of the Forest Service to follow its own regulations, or (b) arbitrary action which constituted an abuse of discretion.

Plaintiff's initial hurdle is that of showing standing to bring this suit. As a disappointed bidder seeking judicial relief, plaintiff is confronted with cases such as Frothingham v. Mellon (1923) 262 U.S. 447, Alabama Power Co. v. Ickes (1938) 302 U.S. 464, Tennessee Electric Power Co. v. T.V.A. (1939) 306 U.S. 118, and Perkins v. Lukens Steel Co. (1940) 310 U.S. 113. Flast v. Cohen (1942) 392 U.S. 83, first questioned the hard and fast rule applied in the earlier cases, and it seems that there has been a gradual erosion of that rule. Scanwell v. Shaffer (1970) D.C. Cir. 424 F.2d 859, is almost directly in point, and recent cases from the Supreme Court liberalize rules of standing. See, Association of Data Processing Service Organizations, Inc. v. Camp (1970) 397 U.S. 150, Sierra Club v. Morton (1972) 405 U.S. 727, and United States v. Students Challenging Regulatory Agency Procedures (1973) U.S. , 41 L.W. 4866. A volume could be written on the many cases discussing the question of standing, but taking into account plaintiff's direct financial interest in the award of this contract, under the most recent decisions of the United States Supreme Court plaintiff has standing to assert its challenge to the award of the Conejos Canyon No. 4 sale contract. Plaintiff having cleared the standing hurdle, other problems must be faced.

The following statutes are relevant:

16 U.S.C. § 475

. . . No national forest shall be established, except to improve . . . and to furnish a continuous supply of timber for the use and necessities of the citizens of the United States. . . .

16 U.S.C. § 476

. . . The Secretary of Agriculture, under such rules and regulations as he shall prescribe . . . may sell the same (timber) for not less than the appraised value . . . .

16 U.S.C. § 583

In order to promote the stability of the forest industries, of employment of communities, and of taxable forest wealth, through continuous supplies of timber; in order to provide for a continuous and ample supply of timber products.

Acting pursuant to 16 U.S.C. § 476, the Secretary of Agriculture has promulgated rules and regulations. 36 C.F.R. § 221.10, provides in material part:

(a) Advertised timber will be awarded to the highest bidder upon satisfactory showing by him of ability to meet financial requirements and any other conditions of the sale offer unless:

(4) The highest bidder is notoriously or habitually careless with fire, or has failed to comply satisfactorily with the requirements of previous contracts for national forest timber.

(5) Monopoly, injurious to the public welfare, would result from the control of large amounts of public or of public and private timber.

[3 ELR 20793]

(6) The award would result in removing or materially lessening opportunities for gainful employment to local labor; or would be against the interests of local users dependent on national forest timber; or would cause the abandonment or prevent the establishment of a local industry which should furnish a desirable permanent market for national forest products.

The language of 36 C.F.R. § 221.10 which at first blush may impose a mandatory duty to refuse the award of a contract to a bidder who "has failed to comply satisfactorily with the requirements of previous contracts for national forest timber," is softened by the provisions of § 2431.75 of the Timber Management regulations. That section provides:

Withholding Award. Circumstances under which award to the highest bidder may be withheld are stated in 36 C.F.R. § 221.10.

The debarment procedures contained in 41 C.F.R. 4-1.6 are made applicable, and this regulation in turn requires study of 41 C.F.R. § 1-1.602-1 and § 1-1.605. Those debarment procedures are at best difficult to understand, both from the standpoint of procedures to be followed and from the standpoint of their substantive meaning. In Gonzalez v. Freeman (1964) 334 F.2d 570, the Chief Justice, while a member of the District of Columbia Court of Appeals, joined by Judges Danaher and McGowan, placed government debarment procedures and their constitutional sufficiency in serious jeopardy. Almost 10 years later, the federal defendants here assure and promise that they have been and still are working diligently on new procedures which will meet the criticisms of Gonzalez, but, because of their quite deliberate speed in adopting new debarment procedures, they say that they never have been able to debar anyone. Be that as it may, neither the adoption of debarment procedures nor debarment are ministerial acts which can be reached through mandamus.

Mention is made of the thinking of the Forest Service that no one has been and no one can be debarred only to highlight the curious position from which this agency has operated for almost 10 years in accomplishing its mission of protecting out forests, promoting the stability of forest industries and providing a continuous and ample supply of timber.

Among other defenses urged by defendants is the defense that the award of timber contracts is something entrusted to agency discretion, and, absent arbitrary or capricious action, such awards are not reviewable. Defendants rely on Panama Canal Co. v. Grace Lines, Inc. (1958) 356 U.S. 309, High-Ridge Lumber Co. v. United States (1971) 9 Cir. 443 F.2d 452, Ferry v. Udall (1964) 9 Cir. 336 F.2d 706, Sellas v. Kirk (1952) 9 Cir. 200 F.2d 217, and Ickes v. Underwood (1944) D.C. Cir. 141 F.2d 546. Moreover, as was said in Pankey Land & Cattle Co. v. Hardin, (1970) 10 Cir. 427 F.2d 43:

We must examine the record to determine if the secretaries were acting within the scope of their Congressionally delegated duties. If they were, their actions are the sovereign's action and thereby immune from review by a federal court.

In Cotter Corporation v. Seaborg, (1966) 10 Cir. 370 F.2d 686, Judge Hill said:

Since the appellees were acting within the scope of their Congressionally delegated authority when they issued and carried out the regulations of which appellants complain, their actions were the sovereign's actions. What appellants request 'would require the [government official's] official affirmative action, [and] affect the public administration of government agencies.' State of Hawaii v. Gordon, 373 U.S. 57. This suit is thus a suit against the United States since it is 'well settled that whether an action is one against the sovereign is determined by the party named as defendant, but by the result of the judgment or decree which may be entered.' State of New Mexico v. Backer, 10 Cir. 199 F.2d 426. A suit may not be brought and maintained against the United States without its consent. The United States has not consented to this suit [cit. om]. The District Court properly dismissed the complaint.

The opinion in this case is not strictly grounded on sovereign immunity in light of the recent developments in the law of standing, but, rather, it rests on the closely related principle of agency discretion. Most recently the United States Supreme Court has had occasion to speak again on this subject. In Butz v. Glover Livestock Commission Co., Inc. (1973) U.S. , 41 L.W. 4463, it appears that the Eighth Circuit reversed the Secretary's decision to suspend the livestock company because of its habitual practices of underweighing livestock. The Supreme Court reversed the Eighth Circuit, and held that since the matter was one as to which the Secretary had discretion, a court could not interfere with the exercise of that discretion. The same result was reached in Camp v. Pitts (1973) U.S. , 41 L.W. 3515, where the court applied the "arbitrary and capricious" standard to the actions of the Comptroller of the Currency, and held that since his action lay within the boundaries of his power, his determination would not be interfered with.

Although it is difficult to believe that a businessman would continue to do business with a buyer who had defaulted on the number of contracts Butus had breached, or that a housewife would again do business with a tradesman who had disappointed her with such regularilty, the decision to award Butus another contract was a matter within the administrative discretion of the Forest Service. The Service has power and jurisdiction to be wrong as well as right, and, since it has that power, a court can't interfere just because it disagrees with the administrative determination. The bug infested trees in the Targhee Forest can never be harvested because of Butus' default, and its trees will never be a part of "a continuous and ample supply of timber," but the Forest Service had discretion to decide that because he has employed a new logger, even with Butus' record, the taxpayers should take on the risk of more defaults, and new contracts should be awarded him.

Of course, with or withoutthe adoption of debarment procedures, the Forest Service also had and has authority and discretion to fully apply the provisions of 36 C.F.R. § 221.10 and § 2431.75 of its Timber Regulations. In other words, just as it has discretion to award contracts to Butus, even though he "has failed to comply satisfactorily with the requirements of previous contracts for national forest timber," with his record and for that reason it also has the discretionary right to refuse to award him new contracts. Good or bad, so long as it is not arbitrary, the business judgment of the Forest Service must prevail in this discretionary field. The award of the contract to Butus was not arbitrary or capricious within the legal meaning of those words. 6 C.J.S. 145 defines arbitrary as something, "based alone upon one's will, and not upon any course of reasoning and exercise of judgment." It cannot be said that the Forest Service did not reason to a judgment, and, if it made a judgment, its actions were not arbitrary. Nor was the award prohibited by the regulations of the Forest Service. Therefore, since the Forest Service's business judgment somehow permitted the award of the Conejos Canyon No. 4 sale to Butus, and since this determination was a result of its reasoned judgment, it is not necessary that other questions so ably briefed be reached. The Court cannot substitute its business judgment for that of the administrative agency charged with the responsibility for making the judgment. The award of the Conejos Canyon No. 4 sale to Butus lay within the perimeters of the administrative authority. As qualified by § 2341.75 of the Timber Management Regulations, 36 C.R.F. § 221.10 permits, but it does not mandate that Butus' poor performance record disqualify him from the award of contracts. Because Butus "has failed to comply satisfactorily with the requirements for national forest timber," under 36 C.F.R. § 221.10, as modified by § 2341.75 of the Timber Regulations, within its discretion, the Forest Service may, but surely it is not required to award sale contracts to Butus when he is the high bidder. It is just a question of how the Forest Service elects to manage the people's business, and the management decision was made to award the Conejos Canyon No. 4 sale contract to a man who has defaulted on contracts for more than 200-million board feet of lumber, must of which can never be harvested because of bug infestation compounded by Butus' default. Corporate stockholders can attack bad management, (but plaintiff couldn't attack management of a supplier corporation) but such attack is unavailable when management is by a governmental administrative agency. The dissent in Butz v. Glover Livestock Commission Co., Inc. supra, points up the problem.

[3 ELR 20794]

Because what the Forest Service has done lies within its discretion, it ordered that judgment enter in favor of defendants and against the plaintiff. Pursuant to the provisions of Rule 54(d), and in the exercise of the Court's discretion, it is ordered that each party shall pay his and its own costs. United States v. Arizona Canning Co. (1954) 10 Cir. 212 F.2d 532. Defendants are directed to submit a form of judgment consistent with this opinion within 20 days.

1. Throughout the record there is an undercurrent of a threatened lawsuit by Butus against the Forest Service, and it is possible that this threat influenced the decision to award Butus the Conejos Canyon No. 4 sales contract in spite of his past record.