Frillz v. Lader

• Court: Court of Appeals for the First Circuit
• Decided: January 21, 1997
• Docket: 96-1785
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                            UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT
                                FOR THE FIRST CIRCUIT



                              _________________________


No. 96-1785



                                    FRILLZ, INC.,



                                Plaintiff, Appellant,



                                          v.



                        PHILIP LADER, AS ADMINISTRATOR OF THE

                     UNITED STATES SMALL BUSINESS ADMINISTRATION,



                                 Defendant, Appellee.



                              _________________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                   [Hon. Reginald C. Lindsay, U.S. District Judge]
                                              ___________________



                              _________________________



                                        Before



                           Selya and Stahl, Circuit Judges,
                                            ______________



                            and Woodlock,* District Judge.
                                           ______________



                              _________________________



               Evans J. Carter, with whom Hargraves, Karb, Wilcox & Galvani
               _______________            _________________________________

          were on brief, for appellant.

               Susan M. Poswistilo, Assistant United  States Attorney, with
               ___________________

          whom Donald  K.  Stern,  United  States Attorney,  and  Glenn  P.
               _________________                                  _________

          Harris, Office of General Counsel, Small Business Administration,
          ______

          were on brief, for appellee.



                              _________________________



                                   January 21, 1997



                              _________________________



          ______________



          *Of the District of Massachusetts, sitting by designation.



SELYA,  Circuit  Judge.    Plaintiff-appellant  Frillz,
                    SELYA,  Circuit  Judge.
                            ______________



          Inc., a  Massachusetts corporation,  seeks damages for  breach of



          contract against  Philip Lader, in his  capacity as administrator



          of  the  federal  Small   Business  Administration  (SBA).    The



          plaintiff bases its suit on the  SBA's alleged refusal to honor a



          loan  guaranty commitment.   The  district court  granted summary



          judgment for the SBA.  We affirm.



                                          I.
                                          I.
                                          __



                                      Background
                                      Background
                                      __________



                    In February 1993,  Frillz asked the  SBA to guaranty  a



          proposed loan.  Frillz  contemplated that the loan would  be made



          by Eastern Bank (the Lender) in the principal amount of $612,000.



          Of this  amount approximately  $240,000 would  be used to  retire



          indebtedness owed to Fleet Bank, and the balance would be used to



          expand  Frillz's retail  operations  from  fourteen to  seventeen



          stores.



                    In due course,  the SBA  approved Frillz's  application



          for  an 80%  guaranty  of  the loan.    The SBA's  loan  guaranty



          authorization contained a clause  requiring receipt by the Lender



          of  "evidence satisfactory  to it  in its  sole discretion,  that



          there has been no unremedied adverse change since the date of the



          Application . .  . in the  financial or  any other conditions  of



          [Frillz], which would warrant withholding or not  making any such



          disbursement."



                    Frillz struggled  in the  third quarter of  fiscal 1993



          (February  through April), losing $189,000.  In the next quarter,


2



however, its  operations returned  to profitability.   The Lender



          subsequently  concluded  that  the  adverse  change  in  Frillz's



          financial  picture  had  been  remedied.     Notwithstanding  the



          Lender's  satisfaction, the  SBA balked;  it informed  the Lender



          that  it did  not  believe  that  the  adverse  change  had  been



          sufficiently   ameliorated.     And,   it   announced  that   any



          disbursement of the loan must  have the approval of both  the SBA



          and the Lender.



                    Frillz filed suit claiming that  the SBA had reneged on



          its  agreement  that the  Lender  would have  sole  discretion to



          determine whether there had been an uncorrected adverse change in



          Frillz's  financial  condition.    On  cross-motions  for summary



          judgment, the district  court concluded that,  under 15 U.S.C.   



          636(a)(6)  (1994), the SBA  could not  delegate the  authority to



          determine  the financial security of a loan to any outsider.  See
                                                                        ___



          Frillz,  Inc. v.  Lader, 925  F. Supp.  83, 88  (D. Mass.  1996).
          _____________     _____



          Hence,  the court entered judgment in the defendant's favor.  See
                                                                        ___



          id.  This appeal followed.
          ___



                                         II.
                                         II.
                                         ___



                                       Analysis
                                       Analysis
                                       ________



                    Summary  judgment is  appropriate  when  "there  is  no



          genuine issue as to any material fact  and . . . the moving party



          is  entitled to judgment as  a matter of  law."  Fed.  R. Civ. P.



          56(c).    Our review  of the  district  court's grant  of summary



          judgment  is plenary, and in canvassing the record we indulge all



          reasonable  inferences in favor of the party opposing the motion.


3



See Garside v. Osco Drug, Inc., 895 F.2d 46, 48  (1st Cir. 1990).
          ___ _______    _______________



          We are  not bound by  the rationale  of the lower  court but  may



          instead affirm  an entry of  summary judgment on  any alternative



          ground  made manifest by the  record.  See  Hachikian v. FDIC, 96
                                                 ___  _________    ____



          F.3d 502, 504 (1st Cir. 1996).  We follow that avenue here.



                    Frillz  challenges the district court's holding that 15



          U.S.C.   636(a)(6)  precludes the  SBA from  delegating to  other



          than in-house  personnel  on several  grounds.   It  argues  that



          Congress in 1981 repealed the  language in section 636(a)(6) that



          restricts the SBA's  power to delegate, and thus that there is no



          statutory impediment to the SBA's  delegation of authority to the



          Lender.1  Alternatively, it asserts that even if Congress did not



          repeal the  disputed portion  of section 636(a)(6),  that statute



          should  not  be  interpreted  to  bar  delegation  of  the  SBA's



          authority.  These questions are not without complication; indeed,



          the  district court aptly described the task of answering them as



          "somewhat pedantic  and unavoidably  ponderous."  Frillz,  925 F.
                                                            ______

                              
          ____________________



               1We set  out  in  the  Appendix  the text  of  15  U.S.C.   

          636(a)(6) as  it appeared before Congress amended  it by enacting

          the Omnibus Budget Reconciliation Act of 1981 (OBRA), Pub. L. 97-

          35,     1910,  95 Stat.  778  (stating  inter  alia that  section
                                                  _____  ____

          636(a)(6)(C), which Congress described as "[s]ection[] 7(a)(6)(C)

          . . . of the Small Business Act [is]  repealed [as of] October 1,

          1985").  Frillz  claims that Congress thereby intended  to repeal

          not  only section 636(a)(6)(C) proper  but also the last sentence

          of  15 U.S.C.     636(a)(6)  (which  states  in  part  that  "any

          authority conferred  by this  subparagraph on  the Administration

          shall  be exercised solely by the Administration and shall not be

          delegated  to  other  than  Administration   personnel").    This

          sentence appears below section  636(a)(6)(C) without any  further

          letter  or numerical  reference,  yet without  indentation.   The

          compilers of  the code  apparently determined that  this sentence

          did  not  comprise  part  of  section  636(a)(6)(C),  but  Frillz

          disagrees.



                                          4



Supp. at 86.  We spare ourselves that difficulty, for the  record



          allows  us to  reach  the same  destination  by an  easier,  less



          labyrinthine  path:  the SBA official  who approved Frillz's loan



          guaranty lacked power under  existing SBA regulations to delegate



          his authority further.2



                    A  suit  against a  federal  official  in his  official



          capacity  is  in  effect a  suit  against  the  government.   See
                                                                        ___



          American  Policyholders Ins. Co. v. Nyacol Prods., Inc., 989 F.2d
          ________________________________    ___________________

                              
          ____________________



               2The   question  of  whether  Congress  repealed  the  final

          sentence  of  section 636(a)(6)  is  freighted  with uncertainty.

          When one examines the content of section 636(a)(6) as it appeared

          before  Congress amended it in  1981 through the  OBRA, the final

          sentence fits  comfortably, in structural terms,  with subsection

          (C).  At  that time, section 636(a)(6) began  by stating that SBA

          loans must be "of such sound value or so secured as reasonably to

          assure repayment," and subsections (A), (B), and (C) each limited

          this requirement:  subsection (A) with respect to loans to assist

          any handicapped individual; subsection  (B) with respect to loans

          for  energy measures;  and subsection (C)  with respect  to loans

          used  to refinance indebtedness.   The first clause  of the final

          undesignated  sentence also  dealt with  loans used  to refinance

          existing indebtedness.  It is thus reasonable to suggest that the

          final  sentence   of  section  636(a)(6)  comprises   a  part  of

          subsection (C).

                On the other hand, when Congress passed the OBRA, the final

          sentence of section 636(a)(6) appeared as it does now:  below the

          three subsections, unindented.   It did not appear from  the form

          of the  statute to have been  part of subsection (C);  and, since

          Congress specified only that subsection (C) was repealed, to hold

          now that the  final undesignated sentence comprised  part of that

          subsection would  violate the  principle that implied  repeals of

          federal  statutes are  disfavored.   See  Passamaquoddy Tribe  v.
                                               ___  ___________________

          Maine,  75 F.3d 784, 790  (1st Cir. 1996).   Moreover, subsequent
          _____

          Congresses assumed  that the final sentence  survived the repeal,

          see, e.g., H.R. Rep. No. 101-667, at 15 (1990), reprinted in 1990
          ___  ____                                       _________ __

          U.S.C.C.A.N. 3990,  3992;  H.R. Rep.  No. 102-492,  at 3  (1992),

          reprinted in 1992  U.S.C.C.A.N. 891,  892, and a  court for  that
          _________ __

          reason would be hard-pressed  to find that the sentence  had been

          deleted in 1981.   Although we need not solve  this riddle today,

          we hope that Congress will spare future courts and litigants from

          choosing between  these two disagreeable interpretations  of this

          damaged statute  and clarify  whether it intends  that the  final

          sentence of section 636(a)(6) be preserved.



                                          5



1256, 1259 (1st Cir.  1993).  We recently observed  that "parties



          seeking  to recover  against the  United States  in an  action ex
                                                                         __



          contractu have the burden of demonstrating affirmatively that the
          _________



          agent  who purported to bind  the government had actual authority



          to do  so."  Hachikian, 96  F.3d at 505.   The statutes governing
                       _________



          the SBA  permit the head of  the agency   the  Administrator   to



          authorize officers and  employees of the  SBA to exercise  powers



          granted to the agency by Congress.  See 15 U.S.C.   634(a).  Such
                                              ___



          delegations  are made  through agency  regulations.   See Chevron
                                                                ___ _______



          U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S.
          ___________    ________________________________________



          837, 843-44 (1984).



                    The regulations in effect when the SBA signed  the loan



          authorization  agreement  at   issue  here  (February   of  1993)



          stipulated that various individuals in the SBA's employ had power



          to  approve or  reject loans  up to  $750,000.   See 13  C.F.R.  
                                                           ___



          101.3-2, Pt. I    A(1)(b) (1993).  This group  included Gordon J.



          Ryan, as Chief  of the  Finance Division, who  approved the  loan



          authorization in this case.   See id.  Ryan also had the power to
                                        ___ ___



          extend disbursement periods and  to cancel, reinstate, and modify



          loan authorizations.   See id. at   (B).  But the regulations did
                                 ___ ___



          not grant  Ryan any  power to  transfer his  authority:   to  the



          precise  contrary, the  regulations  explicitly  admonished  that



          "[t]he authority delegated herein may  not be redelegated."   Id.
                                                                        ___



          at Pt. XI,   A(1).



                    Frillz  does not  dispute  that any  delegation of  the



          SBA's  authority must  be  made pursuant  to agency  regulations.


6



Instead, it argues that because the Chief of the Finance Division



          was  authorized  to approve  loans up  to  $750,000, he  was also



          empowered to set the terms and conditions of such loans, and that



          a determination by the  Lender of whether Frillz had  suffered an



          unremedied  adverse financial change  was merely  a loan  term or



          condition to which Ryan could (and  did) assent.  This is no more



          than a play on words.  Granting the Lender the right to determine



          the  soundness  of  a  loan guaranty  constitutes  a  significant



          relinquishment of  power.  Frillz  cannot circumvent the  lack of



          any  regulatory  authority sufficient  to permit  this delegation



          simply by describing it as a term or condition of the loan.



                    This  conclusion is  bolstered  by the  language of  15



          U.S.C.    634(b)(7), a statute  that grants the Administrator the



          power to  "authorize participating  lending institutions, in  his



          discretion pursuant  to regulations  promulgated by him,  to take



          such actions on  his behalf,  including, but not  limited to  the



          determination  of .  .  . creditworthiness."   The  Administrator



          exercised this authority in promulgating regulations creating the



          so-called  Preferred  Lenders Program  (PLP).   See  13  C.F.R.  
                                                          ___



          120.400  et seq.  (1993).   Although section  634(b)(7) does  not
                   __ ____



          apply here     Eastern Bank  was not  a member  of the  PLP    it



          strongly suggests that any delegation of the right to determine a
                                 ___



          prospective borrower's financial stability  must be made pursuant



          to agency regulations.   Otherwise, the cited portion of  section



          634(b)(7) would be superfluous.



                    We  hold, then, that  because the Chief  of the Finance


7



Division  had  no  authority  to  delegate  to  the  Lender   the



          determination  of  whether  Frillz  had  suffered  an  unremedied



          adverse change in its  financial condition, the government cannot



          be bound by that stipulation in the loan guaranty authorization.



                    Frillz has  a  fallback position:    it invites  us  to



          remand this case  to the district court so that  it may pursue an



          equitable  estoppel  claim  against  the  SBA.   We  decline  the



          invitation.     The  doctrine   of  equitable  estoppel   in  its



          traditional  incarnation  does  not  apply  against  the  federal



          government.   See,  e.g.,  OPM v.  Richmond,  496 U.S.  414,  419
                        ___   ____   ___     ________



          (1990); United States v.  Ven-Fuel, Inc., 758 F.2d 741,  761 (1st
                  _____________     ______________



          Cir. 1985); see also Heckler v. Community Health Servs., 467 U.S.
                      ___ ____ _______    _______________________



          51,  67  (1984)  (Rehnquist,  J., concurring)  (noting  that  the



          Supreme Court  has  never upheld  an estoppel  claim against  the



          government).    A  party  seeking to  invoke  equitable  estoppel



          against the federal government at a minimum "must have reasonably



          relied  on  some  `affirmative  misconduct' attributable  to  the



          sovereign."  Ven-Fuel, 758 F.2d  at 761.  Passing the  point that
                       ________



          even  such reliance  may be  insufficient, see  id. at  761 n.14,
                                                     ___  ___



          there is absolutely no evidence  of affirmative misconduct by the



          SBA which  might arguably be  sufficient to  support an  estoppel



          claim against the  government in  this case.   See Hachikian,  96
                                                         ___ _________



          F.3d at  506  n.3 (noting  that equitable  estoppel is  generally



          inapplicable to the federal  government when its employees induce



          reliance by their unauthorized actions).



                                         III.
                                         III.
                                         ____


8



Conclusion
                                      Conclusion
                                      __________



                    We  need go  no  further.   The  Chief of  the  Finance



          Division  lacked  authority  to  delegate  the  determination  of



          whether Frillz continued to suffer from the effects of an adverse



          financial  change.   Consequently,  Frillz  cannot  rely on  that



          portion  of the loan authorization  agreement as the  basis for a



          breach  of  contract claim  against the  government.   It follows



          inexorably, as night follows day, that the district court did not



          err in granting summary judgment in the defendant's favor.


Affirmed.
          ________


9



APPENDIX
                                       APPENDIX
                                       ________


"The Administration is  empowered .  . . to  make loans  for

          plant  acquisition,  construction,   conversion,  or   expansion,

          including the acquisition of land, material, supplies, equipment,

          and working capital,  and to  make loans to  any qualified  small

          business concern . . . for purposes of this Act.  Such financings

          may be made either directly or in cooperation with banks or other

          financial institutions  through agreements  to participate  on an

          immediate or  deferred (guaranteed) basis.  These powers shall be

          subject, however, to the following restrictions, limitations, and

          provisions:



                                 *        *        *



                    (6) All  loans made under  this subsection shall  be of

               such sound  value  or so  secured  as reasonably  to  assure

               repayment:  Provided, however, That  
                           ________  _______

                         (A)  for loans  to  assist any  public or  private

                    organization or to assist any handicapped individual as

                    provided  in  paragraph  (10) of  this  subsection  any

                    reasonable  doubt shall  be  resolved in  favor of  the

                    applicant;

                         (B)   recognizing   that  greater   risk   may  be

                    associated with loans  for energy measures as  provided

                    in  paragraph  (12)  of  this  subsection,  factors  in

                    determining `sound  value'  shall include,  but not  be

                    limited  to,   quality  of  the  product   or  service;

                    technical  qualifications  of  the  applicant   or  his

                    employees;  sales projections; and the financial status

                    of the  business concern:  Provided  further, That such
                                               ________  _______

                    status  need  not be  as  sound  as  that required  for

                    general loans under this subsection; and

                         (C)  the  Administration   shall  not  decline  to

                    participate  in a loan  on a deferred  basis under this

                    subsection  solely because  such loan  will be  used to

                    refinance all or any  part of the existing indebtedness

                    of  a small business concern, unless the Administration

                    determines that  

                              (i) the holder  of such existing indebtedness

                         is  in a position likely to sustain a loss if such

                         refinancing is not provided, and

                              (ii)  if  the  Administration  provides  such

                         refinancing through an agreement to participate on

                         a deferred basis, it will be in a position  likely

                         to  sustain part  or all  of any loss  which would

                         have otherwise been sustained by the holder of the

                         original indebtedness:  Provided further, That the
                                                 ________ _______

                         Administration   may   decline  to   approve  such

                         refinancing if  it determines that  the loan  will

                         not benefit the small business concern.



                                          10



On  that  portion of  the  loan used  to  refinance existing

               indebtedness held  by a  bank or other  lending institution,

               the  Administration  shall  limit  the  amount  of  deferred

               participation to 80 per centum of  the amount of the loan at

               the  time  of  disbursement:   Provided  further,  That  any
                                              ________  _______

               authority   conferred   by   this   subparagraph    on   the

               Administration    shall   be   exercised   solely   by   the

               Administration  and shall  not  be delegated  to other  than

               Administration personnel."



          15 U.S.C.S.   636(a)(6) (Law. Co-op. 1984).


11