First National Bank v. Genina Marine Services, Inc. , 136 F.3d 391 ( 1998 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________
No. 96-30943
__________________
FIRST NATIONAL BANK, ST. MARY PARISH,
Plaintiff,
versus
GENINA MARINE SERVICES, INC.; AGATHA RIZZO KORNEGAY; THOMAS
WILSON BRIGHTMAN KORNEGAY, JR., also known as Wilson B.
Kornegay, on behalf of Thomas Wilson Brightman Kornegay, Sr.,
Defendants/Third-Party Plaintiffs/Appellants,
versus
FARMERS HOME ADMINISTRATION,
Third-Party Defendant/Appellee.
______________________________________________
Appeal from the United States District Court for the
Western District of Louisiana, Lafayette
______________________________________________
February 27, 1998
Before POLITZ, Chief Judge, BENAVIDES and PARKER, Circuit Judges.
BENAVIDES, Circuit Judge:
The principal issue presented in this appeal is whether the
Farmers Home Administration (“FmHA”) has waived its sovereign
immunity with respect to the claims of a defendant in a suit on a
note brought by a bank to which the FmHA endorsed a promissory note
that the FmHA purchased under the terms of a guaranty agreement.
The appeal also raises a threshold question regarding this court’s
jurisdiction to entertain an appeal of the order dismissing
appellants’ claims against the FmHA. We conclude that this court
has jurisdiction and affirm the district court’s dismissal of
Genina’s claims against the FmHA.
I.
Factual Background
Genina Marine Services, Inc. (“Genina”) was a family business
owned by Wilson B. (“Bright”) and Agatha Kornegay. In 1978,
Genina1 borrowed $985,000 from First National Bank in St. Mary
Parish (“FNB” or “the bank”). Genina’s obligation to FNB was
evidenced by two promissory notes. One note, representing 90% of
the amount borrowed ($886,500), was guaranteed by the FmHA under
the Consolidated Farm and Rural Development Act, 7 U.S.C. §§ 1921-
2006.2 The second note, representing the remaining 10% of Genina’s
indebtedness ($98,500), was not guaranteed.3 Both notes were
1
At that time, the company was called “Genina, Inc.” The loan
documents were modified on June 8, 1987, to reflect that the
corporation had been renamed “Genina Marine Services, Inc.”
2
When Congress reorganized the Department of Agriculture
in 1994, see Federal Crop Insurance Reform and Department of
Agriculture Reorganization Act of 1994, Pub. L. No. 103-354, 108
Stat. 3178 (1994), the FmHA was dissolved, and the Rural Economic
and Community Development Service assumed the responsibilities of
the FmHA’s Business and Industry Division. For ease of
reference, we refer to the agency as “the FmHA” throughout this
opinion.
3
Under Department of Agriculture regulations, a debt like
Genina’s that is divided into guaranteed and unguaranteed notes
at the loan closing is governed by the “multi-note system.” 7
C.F.R. § 1980.119(c)(1).
2
secured by a fleet mortgage on three of Genina’s vessels, a chattel
mortgage on two of Genina’s vehicles, and a mortgage on the
Kornegay family home. Two agreements, a Loan Note Guarantee and a
Lender’s Agreement, governed the relationship between the bank and
the FmHA.
On March 1, 1979, FNB sold the FmHA-guaranteed note to Pequot
Partners. Genina defaulted on both notes in 1983. After the
default, Pequot Partners made a written demand on FNB to repurchase
the note. When the bank declined, FmHA purchased the note as it
was obligated to do under the Loan Note Guarantee and the Lender’s
Agreement. FNB remained the holder of the unguaranteed note and
continued to act as servicing agent on the guaranteed note after
the FmHA purchased the note.
Wilson Kornegay died in 1988. According to appellants, the
FmHA then entered into negotiations with Genina during which Genina
agreed to sell, at its own expense, the three vessels securing the
loan under the fleet mortgage in return for the FmHA’s agreement
not to foreclose on the Kornegay home. Genina alleges that it sold
the vessels in reliance on this agreement. The proceeds from those
sales were applied to Genina’s indebtedness on the guaranteed and
the unguaranteed notes. Genina alleges that the FmHA then demanded
an additional cash payment if Genina wished to avoid foreclosure on
the home. The FmHA denies that it agreed not to pursue foreclosure
if Genina sold the vessels.
On or about August 30, 1991, the FmHA assigned the note to FNB
without recourse.
3
II.
Procedural History
FNB brought suit on both notes in Louisiana state court
against Genina, Agatha Kornegay, and Thomas Kornegay, Jr., as
administrator of Wilson Kornegay's estate (collectively “Genina”),
seeking to foreclose on the Kornegay home. Appellants filed a
third-party petition against the FmHA, alleging that Genina had
reached an accord and satisfaction with the FmHA, that FNB’s suit
breached that accord (and in doing so negligently and intentionally
inflicted emotional distress on Mrs. Kornegay), and that the FmHA
remains the true owner of the note.
The FmHA removed the suit to federal district court and moved
to dismiss Genina’s claims against it based on sovereign immunity
and defective service of process. The district court granted the
FmHA’s motion to dismiss without specifying grounds and remanded
the remaining claims to state court. Genina timely filed a notice
of appeal. This court vacated and remanded, instructing the
district court to state its reasons for dismissal. On remand, the
district court stated that it had dismissed the claims against the
FmHA because it “is an unincorporated department of the federal
government and, as such, is not a legal entity and may not be
sued.” Genina appealed from this clarified judgment.
III.
The threshold issue in this appeal is whether this court has
jurisdiction to review the dismissal order, which was contained in
4
the same order remanding the remaining claims to state court.
Although this court lacks jurisdiction to review a remand order
that is based on 28 U.S.C. § 1447(c), see 28 U.S.C. § 1447(d),4.
Courts of appeals may, however, review a remand order that is
based on substantive decision on the merits of a collateral issue
rather than matters of jurisdiction. Regis Assocs. v. Rank Hotels
5
(Management) Ltd., 894 F.2d 193, 194 (6th Cir. 1990). we may
review any aspect of a judgment containing a remand order that is
“distinct and separable from the remand proper.” John G. & Marie
Stella Kenedy Mem. Found. v. Mauro, 21 F.3d 667, 670 (5th Cir.
1994) (citing City of Waco v. United States Fidelity & Guar. Co.,
293 U.S. 140, 142-43, 55 S. Ct. 6, 6-7 (1934)). An order is
“separable” if it precedes the remand order “in logic and fact” and
is “conclusive.” Linton v. Airbus Industrie, 30 F.3d 592, 597 (5th
Cir. 1994) (citing City of Waco). In this context, a district
court action is conclusive if “it will have the preclusive effect
of being functionally unreviewable in state court.” Id. at 597.
For example, in City of Waco, the Supreme Court held that the court
of appeals had jurisdiction to review the dismissal of a diverse
third-party defendant whose dismissal destroyed diversity
jurisdiction even though the rest of the case was remanded to state
court in the same judgment. 293 U.S. at 143-44, 55 S. Ct. at 7.
4
We generally lack jurisdiction to review remand orders
based on lack of subject matter jurisdiction or procedural
defects. Bogle v. Phillips Petroleum Co., 24 F.3d 758, 761 (5th
Cir. 1994).
5
Like the order in City of Waco, the dismissal of Genina’s
third-party claims against the FmHA is distinct and separable from
the remand itself. The dismissal will have preclusive effect in
the state-court litigation and will not be subject to review there.
We conclude, therefore, that, under City of Waco and its progeny,
we have jurisdiction to review the district court’s dismissal of
Genina’s claims against the FmHA.
Accordingly, we turn to the issue of the FmHA’s sovereign
immunity.
IV.
We start with the basic premise that the federal government
is immune from suit unless it consents to be sued. EEOC v. First
National Bank, 614 F.2d 1004, 1007 (5th Cir. 1980). The United
States can consent to be sued “either by specific statutory consent
or by instituting a suit as to which a defendant may plead matters
in recoupment.” Id. (citations omitted). Genina argues that its
claims against the FmHA fall within the latter category of consent
to suit.
In Frederick v. United States, 386 F.2d 481, 488 (5th Cir.
1967), this court first recognized that by filing suit the
government effects a limited waiver of sovereign immunity as to the
defendant’s recoupment claims:
Our conclusion is that when the sovereign sues it waives
immunity as to claims of the defendant which assert
matters in recoupment — arising out of the same
transaction or occurrence which is the subject matter of
the government’s suit, and to the extent of defeating the
government’s claims but not the extent of a judgment in
6
the government which is affirmative in the sense of
involving relief different in kind or nature to that
sought by the government or . . . exceeding the amount of
the government’s claims. . . .
386 F.2d at 488. Genina argues that, under Frederick, the FmHA
waived its sovereign immunity as to Genina’s claims when the bank
brought suit against Genina because the FmHA’s endorsement of the
guaranteed note to the bank was a sham.6 Genina urges that its
third-party claims against the FmHA should be allowed under
Frederick, even though the FmHA has not actually filed suit against
it. Genina has not cited and our research has not uncovered any
decision in which a court has applied the recoupment exception
under these or similar circumstances. We decline to do so under
the facts presented in this case.
Viewed as an isolated transaction, the FmHA’s endorsement of
the note to the bank is arguably suspect. Genina presented
evidence that FNB informed the FmHA that it had either to join a
foreclosure suit against the Kornegays or to endorse the note over
to FNB so that FNB could proceed with foreclosure. Indeed,
Theodore Panchalk, the chief of the FmHA’s Business and Industry
6
Although the government provides extensive briefing as to
why Genina cannot bring suit against it under the Federal Tort
Claims Act, 28 U.S.C. §§ 1346, 2671-2680, or the Tucker Act, 28
U.S.C. § 1491, Genina specifically disclaims any attempt to use
these avenues for bringing suit against the government and
instead relies exclusively on Frederick. A recoupment claim
within the scope of Frederick need not also fall within another
statutory waiver of sovereign immunity. See Frederick, 386 F.2d
at 488 (noting that waiver of sovereign immunity can be by
statute or by institution of suit); United States v. Johnson, 853
F.2d 619, 621 (8th Cir. 1988)(holding that when the government
waives sovereign immunity as to matters in recoupment, “it does
so even as to those claims that ordinarily are barred by the
FTCA”).
7
Division in Louisiana, testified in his deposition that he had
endorsed the note to the bank for “litigation purposes.”7 But the
endorsement must not be viewed in isolation. Rather, it must be
considered in the context of the pre-existing agreements between
the lender and the FmHA as well as the statutory and regulatory
framework within which they were operating.
Genina’s guaranteed loan was made under the Consolidated Farm
and Rural Development Act, which enables the Secretary of
Agriculture, acting through the FmHA, see 7 U.S.C. § 1981, to make
or guarantee loans for the purpose of “improving, developing, or
financing business, industry, and employment and improving the
economic and environmental climate in rural communities . . . .”
Id. § 1932(a). The Act authorizes the Secretary of Agriculture “to
make such rules and regulations, [and] prescribe the terms and
conditions for making or insuring loans, security instruments and
agreements . . . .” Id. § 1989. Under this authority, the
Secretary of Agriculture has promulgated extensive regulations to
govern the FmHA’s loan guarantee programs and has mandated the form
of the Loan Note Guarantee and the Lender’s Agreement. See 7
C.F.R. pt. 1980, subpt. A, app. A.
7
Although the FmHA’s endorsement to the bank does not
appear in the record, there is no dispute that Panchalk endorsed
the note as follows:
Without recourse, pay to the order of The First National
Bank in St. Mary Parish.
FARMERS HOME ADMINISTRATION
BY: /s/Theodore Panchalk
Theodore Panchalk
Chief, Business & Industry Division
8
Under the Loan Note Guarantee, the FmHA undertook three basic
guaranty obligations. First, the FmHA guaranteed the borrower’s
obligations to the lender by agreeing to indemnify the lender for
any loss sustained on the guaranteed note or the guaranteed
principal plus interest due, whichever sum was less. Second, the
FmHA agreed to indemnify a holder of an FmHA-guaranteed note for
any loss sustained as well as interest due on the guaranteed note.
Third, the FmHA agreed to purchase the guaranteed note from a
subsequent holder in the event of default. Under the Loan Note
Guarantee and the Lender’s Agreement, a subsequent holder of the
note may make a written demand on the bank to repurchase the note;
if the bank chooses not to repurchase the note, the FmHA is
obligated to do so. In this case, the FmHA honored its Loan Note
Guarantee by purchasing the guaranteed note from Pequot Partners
after Genina defaulted and after the bank declined to repurchase
the note.
Although Pequot Partners succeeded to FNB’s rights under the
Loan Note Guarantee when it purchased the note from FNB, FNB
retained all of its obligations to the FmHA under the Lender’s
Agreement and the Loan Note Guarantee. Under the Lender’s
Agreement, when Genina defaulted on the guaranteed note and
liquidation became necessary, FNB was obligated to conduct the
liquidation unless the FmHA chose to do so itself.8 In this case,
8
The Lender’s Agreement also provides that “all rights
under the security instruments (including personal and/or
corporate guarantees) will remain with the Lender and in all
cases inure to its and the Government’s benefit notwithstanding
any contrary provisions of state law.” This provision does not
9
the FmHA did not choose to conduct the liquidation. Instead, the
FmHA endorsed to FNB the note that the FmHA held as a result of its
purchase under the guarantee agreement. Department of Agriculture
regulations allow the FmHA to endorse to the lender a promissory
note held by the FmHA to facilitate “servicing actions.” 7 C.F.R.
§ 1980.470(D), administrative.9 The FmHA endorsed the note to FNB
under the authority of this provision.
Genina makes much of the fact that correspondence between the
FmHA and the lender indicates that the FmHA expects to receive
proceeds from the bank’s suit against Genina. According to Genina,
this shows that the FmHA is the true owner of the note. The note,
however, is not the source of the bank’s obligation to the FmHA;
the Lender’s Agreement is. The Lender’s Agreement gives the FmHA
affect our analysis in this case; the mortgage belonged to the
bank when it brought suit, either under this provision or under
Louisiana law. See La. Civ. Code Ann. art. 2645 (West 1996)
(“The assignment of a right includes its accessories such as
security rights.”).
9
The regulation states:
If the loan was closed with the multi-note option, the
lender may need to possess all notes to take some
servicing actions. In these situations when FmHA or its
successor agency under Public Law 103-354 is holder of
some of the notes, the State Director may endorse the
notes back to the lender after the State Director has
sought the advice and guidance of OGC [Office of General
Counsel], provided a proper receipt is received from the
lender which defines the reason for the transfer.
7 C.F.R. § 1980.470(D), administrative. Although Genina complains
that the chief of the Business and Industry Division in Louisiana
rather than the State FmHA Director endorsed the note, the
regulations allow the State Director to delegate responsibilities
to the state’s chief of the Business and Industry Division. 7
C.F.R. §§ 1900.2, 1900.5, and Theodore Panchalk testified in his
deposition that he had authority to endorse the note to the bank.
10
the right to recover any losses it has paid under the guarantee.
In this case, the loss that the FmHA paid under the guarantee was
the amount for which it purchased the note from Pequot Partners
after Genina’s default. Thus, the FmHA will receive a portion of
the proceeds, if any, from the bank’s suit against Genina, not
because the endorsement of the note to the bank was a sham, but
because the FmHA is entitled to reimbursement under the Lender’s
Agreement for any losses it has paid under the Loan Note Guarantee.
Under these circumstances, we conclude that Frederick does not
permit Genina to assert third-party claims against the FmHA in the
suit brought FNB. The mere fact that the note passed through the
FmHA’s hands does not give rise to a waiver of sovereign immunity.10
V.
For the foregoing reasons, we AFFIRM the judgment of the
district court.11
10
Although we have held against Genina on the sovereign
immunity issue, the facts and circumstances Genina relied upon to
argue against sovereign immunity here may work to Genina’s
advantage in the state court proceeding. If, as Genina alleges,
the bank was aware of Genina’s potential recoupment claims
against the FmHA, that may affect the bank’s ability to establish
that it was a holder in due course. See Act of 1974, No. 92, §
1, reprinted in La. Rev. Stat. Ann. tit. 10 app. § 3-302 (West
1993). Under the Louisiana law applicable when the note was
endorsed, if the bank was not a holder in due course, it may have
taken the note subject to some defenses that Genina could have
asserted against the FmHA had the FmHA brought the suit. See Act
of 1974, No. 92, § 1, reprinted in La. Rev. Stat. Ann. tit. 10
app. § 3-306 (West 1993).
11
The parties disagree regarding whether this court’s
prior decision, which vacated the district court’s first order,
affected the portion of that order remanding the remaining claims
to state court. We conclude that it did not. We have
jurisdiction to review an order of remand only if the district
court affirmatively states a non-§ 1447(c) ground for remand.
11
Soley v. First Nat’l Bank of Commerce, 923 F.2d 406, 409 (5th
Cir. 1991). The district court did not do so in this case.
Thus, we will not construe this court’s prior decision, which did
not explicitly purport to vacate the remand order, to have
implicitly undertaken an extrajurisdictional review.
12