When Congress amended §106 of the Bankruptcy Code in 1994, many commentators believed that the changes signified the end of sovereign immunity for the federal government in the bankruptcy process. The wholesale changes to §106 would lead many to believe that the bankruptcy courts would have little trouble invoking jurisdiction over any dispute involving a debtor and the federal government and its agencies.² There are still instances where Congress has not completely waived sovereign immunity for the federal government, such as actions involving torts in agency lending practices. "Torts," as referred to in the following analysis, involve situations where a debtor asserts that a federal agency and its officials misled or induced the debtor to participate in a particular venture such as agriculture or a small business.

While it may be rare that a bankruptcy attorney would think that actions involving torts against the United States would arise in bankruptcy, loan transactions where the debtor believes that the failure to make a loan or where there is a refusal to continue to fund the debtor may give rise to such a claim in tort, either in the context of negligence, inducement or misrepresentation.

Exhaustion of Administrative Remedies

Contemplation of a cause of action involving agency lending practices usually involves several stages. First, if a debtor believes that it was misled by the agency as to what would be the level or nature of agency funding, the debtor will have to exhaust all administrative remedies before pursuing relief in federal court. For example, if an agricultural debtor asserts that the Farm Service Agency (FSA) misled the debtor as to what programs the debtor could participate in and receive funding from, the debtor will have to take the matter to a hearing officer of the National Appeals Division of the U.S. Department of Agriculture. Should the debtor receive an adverse decision, the debtor must then appeal the decision to the director of the National Appeals Division. Exhaustion of all administrative remedies is an absolute requirement before proceeding to federal court. Bastek v. Federal Crop Ins. Corp., 145 F.3d 90, 95 (2nd Cir.), cert. denied, 179 S.Ct. 539 (1998).

The Federal Tort Claims Act

Additionally, should the debtor allege an action in tort such as negligence, the debtor must file an administrative claim with the agency prior to filing suit in federal court. 28 U.S.C. §2675(a). The agency would then have six months to pay the claim or deny it. The entire six-month period must elapse before a suit could be brought in federal court. Presentment of an administrative claim is a prerequisite to a suit in federal court. Williamson v. U.S. Dept. of Agriculture, 815 F.2d 368 (5th Cir. 1987).

The district court has exclusive jurisdiction of civil actions on claims against the United States for money damages for injury or loss of property, or personal injury caused by the negligent or wrongful act or omission of any employee of the federal government acting within the scope of his office or employment. 28 U.S.C. §1346(b). Further, the authority of any federal agency to be sued or to sue in its own name is not to be construed to authorize suits against such federal agency for actions under 28 U.S.C. §1346(b). Stated differently, suits may not be brought against a federal agency in the name of the agency, but rather against the United States as a named defendant. Meyers and Meyers Inc. v. U.S. Postal Service, 527 F.2d 1252, 1256 (2nd Cir. 1975).

The United States maintains that the non-bankruptcy waiver of sovereign immunity under 28 U.S.C. §1346(b) may not be combined with 28 U.S.C. §§157 and 1334 to waive the jurisdictional requirements of the Federal Tort Claims Act (FTCA). The United States believes that §§157 and 1334 address only subject-matter jurisdiction and do not waive sovereign immunity for the United States as to tort actions without compliance with the FTCA. See McNeil v. United States, 113 S.Ct. 1980 (1993) (Court held unanimously in a non-bankruptcy case that an FTCA action could not be maintained when the claimant failed to exhaust the administrative claim requirement even while the claim was pending).

Discretionary Function Exception

Additionally, certain types of tort actions are barred against the United States, such as suits for misrepresentation or deceit. 28 U.S.C. §2680(h). Moreover, the loan-making functions of a federal agency are covered by the discretionary function exception to the FTCA and are also not actionable.³ For example, the Fifth Circuit has held that the loan-making functions of the Farmers Home Administration (FmHA; now FSA) are discretionary in nature. Williamson, 815 F.2d at 374-76; see, also, Green v. United States, 1998 WL 275665 (W.D. Mich. 1998) (discretionary function exception barred a claim of the failure of the FSA to fund a farm ownership loan).

Williamson involved loans made and not made by the FmHA. The borrower alleged, inter alia, that the agency had reneged on a promise to finance the borrower's farming operation. The Fifth Circuit held that the agency's loan-making decisions were covered by the discretionary function exception to the FTCA. In doing so, the Fifth Circuit noted that the challenged acts of the various FmHA officials involved the granting, administration and denial of various FmHA operating and emergency loans. Williamson, 815 F.2d 374-76. The Fifth Circuit found that these actions are unmistakably committed to the discretion of the Secretary of Agriculture. Moreover, the Fifth Circuit concluded that ample judicial precedent existed to find that the granting and denial of these types of FmHA loans are acts that Congress intended to be placed behind the shield of the discretionary function exception. Id. This discretion granted to the Secretary of Agriculture is properly delegated to and exercised by FmHA officials. Id. Further, those officials are responsible for exercising the statutory discretion Congress gave the Secretary of Agriculture. Id.; Poolman v. Nelson, 802 F.2d 304 (8th Cir. 1986).

Conclusion

It is not uncommon for a debtor to have a dispute with a federal agency regarding its lending practices. Representation in such situations requires inquiry into whether an administrative process applies and whether there is a need to file an administrative claim. Further, depending on the type of action, it may be completely barred under the FTCA. Finally, consideration must be given as to whether the loan-making function is covered by the discretionary function exception to the FTCA.

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Footnotes

¹ The views expressed in this article are the author's and do not necessarily reflect the views of the U.S. Department of Justice. Return to article

² This column leaves for another day a discussion of the bankruptcy court's jurisdiction, if any, over Medicare providers and their remedies under Medicare/Medicaid laws. Return to article

³ 28 U.S.C. §2680(a) provides, in relevant part:

The provisions of this chapter [FTCA] and §1346(b) shall not apply to "any claim based upon the act or omission of an employee of the government, exercising due care, in the execution of a statute or regulation...based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the government, whether or not the discretion involved be abused." Return to article