366 U.S. 696 (1961), 533, United States v. Neustadt

Docket Nº:No. 533
Citation:366 U.S. 696, 81 S.Ct. 1294, 6 L.Ed.2d 614
Party Name:United States v. Neustadt
Case Date:May 29, 1961
Court:United States Supreme Court

Page 696

366 U.S. 696 (1961)

81 S.Ct. 1294, 6 L.Ed.2d 614

United States



No. 533

United States Supreme Court

May 29, 1961

Argued May 2, 1961




Under the Federal Tort Claims Act, the United States may not be held liable to a purchaser of a home who has been furnished a statement reporting the results of a negligently inaccurate inspection and appraisal of the property made by the Federal Housing Administration for mortgage insurance purposes pursuant to the National Housing Act of 1934, as amended, and who, in reliance upon such statement, has been induced to pay a purchase price in excess of the fair market value of the property, since such a claim is one "arising out of . . . misrepresentation," within the meaning of 28 U.S.C. § 2680(h), which precludes recovery on claims arising out of negligent, as well as willful, misrepresentation. Pp. 696-711.

281 F.2d 596 reversed.

WHITTAKER, J., lead opinion

MR. JUSTICE WHITTAKER delivered the opinion of the Court.

Pursuant to the provisions of the National Housing Act of 1934,1 as amended, the Federal Housing Administration (FHA) is authorized, in certain instances, to insure the partial repayment of loans secured by mortgages executed

Page 697

to finance the purchase of private residential properties.2 When duly requested to do so by a qualified lender, the FHA, through its appraisal staff, makes an inspection of property offered for sale in order to determine whether the property is eligible for FHA mortgage insurance, and to assign an appraised value establishing the maximum amount of mortgage insurance obtainable.3

The question for decision in this case is whether the United States may be held liable, under the Federal Tort Claims Act, 28 U.S.C. § 1346(b),4 to a purchaser of residential property who has been furnished a [81 S.Ct. 1296] statement reporting the results of an inaccurate FHA inspection and appraisal, and who, in reliance thereon, has been induced by the seller to pay a purchase price in excess

Page 698

of the property's fair market value. The answer turns upon the correct interpretation of 28 U.S.C. § 2680(h), which precludes recovery under the Tort Claims Act upon "[a]ny claim arising out of . . . misrepresentation." The material facts giving rise to the controversy are not in dispute, and may be summarized as follows.

Early in 1957, the property in question, consisting of a 16-year-old single-family brick house and lot located in Alexandria, Virginia, was offered for sale by its owners. To assure that FHA mortgage insurance would be available to secure a loan in the event that the purchaser, when ascertained, might desire to finance the purchase by that method, the owners requested a qualified lending institution to take the necessary steps to have the property inspected and appraised by the FHA, and, pursuant to the lending agent's application,5 an FHA appraiser visited and inspected the premises. On the basis of that inspection, which disclosed no defects that would disqualify the property for mortgage insurance, the FHA issued to the lending agency a "conditional commitment,"6 stating that the property had been approved for mortgage insurance and, for that purpose, had been assigned an appraised value of $22,750. Under § 203(b)(2) of the National Housing Act,7 the maximum amount of

Page 699

mortgage insurance obtainable on an appraised value of $22,750 was $18,800.8

Shortly thereafter, the respondents, Mr. and Mrs. Stanley S. Neustadt, examined the property and became interested in buying it. After negotiations extending over the period of a month, in the course of which respondents were advised by the sellers that the property had been appraised by the FHA at a value of $22,750 for mortgage insurance purposes, respondents entered into a conditional contract to purchase the property at a price of $24,000. The contract was conditioned upon the respondents' obtaining a loan secured by an FHA-insured mortgage in the amount of $18,000. In accordance with § 226 of the National Housing Act,9 the contract also provided that the sellers would deliver [81 S.Ct. 1297] to respondents, prior to the sale of the property, a written statement setting forth the FHA-appraised value. Both conditions were fulfilled, and on the settlement date, July 2, 1957, respondents took title to the property, and acknowledged by their signatures that they had been furnished with a written "Statement of FHA Appraisal." This was an official FHA document, stating that the FHA

has appraised the property identified . . . and,

Page 700

for mortgage insurance purposes, has placed an FHA-appraised value of $22,750 on such property as of the date of this statement. (The FHA appraised value does not establish sales price.)

(Emphasis in original.)

Respondents moved into the house on July 10, 1957. According to their testimony, they had previously inspected the house "quite carefully," and had found "absolutely nothing which would indicate the necessity for any redecoration at all." The house was "immaculately clean," and the walls and ceilings "looked fine." However, within a month after respondents moved in, substantial cracks developed in the ceilings and in the interior and exterior walls throughout the house. When building repair contractors were unable to ascertain the cause of the cracks, the original builder of the house and four FHA field inspectors were summoned, and a thorough investigation was made by them. By drilling a hole through the concrete floor of the basement, it was discovered that the subsoil was composed of a type of clay which becomes pliable when moist. Due to poor drainage conditions on the surface, water had seeped into the clay, causing it to shift beneath the foundations of the house and to produce the cracks which had appeared in the walls and ceilings.

Ten months thereafter, respondents commenced this action against the Government, under the Federal Tort Claims Act, in the United States District Court for the Eastern District of Virginia, seeking recovery of the difference between the fair market value of the property and the purchase price of $24,000. The complaint alleged that the FHA's inspection and appraisal of the property for mortgage insurance purposes had been conducted negligently; that respondents were justified in relying upon the results of that inspection and appraisal; and that they "would not have purchased the property for

Page 701

$24,000 but for the carelessness and negligence of (FHA)."

After trial, the District Court found10 that respondents "in good faith relied upon the (FHA's) appraisal in consummating their contract of purchase," and that "reasonable care by a qualified appraiser would have warned" respondents of the "serious structural defects" in the house which had been "preponderantly proved." On that basis, the court adjudged the Government liable in the amount of $8,000, which it found to be the difference between the property's fair market value at the time of sale ($16,000) and the purchase price ($24,000).

On appeal, the judgment was affirmed by the Court of Appeals for the Fourth Circuit, 281 F.2d 596, over the Government's sedulous objection that recovery was barred by 28 U.S.C. § 2680(h), which excepts from the coverage of the Tort Claims Act "[a]ny claim arising out of . . . misrepresentation." Because of the importance of the question, and to resolve an apparent conflict between the Fourth Circuit's decision and the holdings of other Circuits uniformly construing the "misrepresentation" exception of [81 S.Ct. 1298] s 2680(h) to preclude recovery on closely analogous facts,11 we granted certiorari. 364 U.S. 926. We have concluded that the interpretation adopted by the Fourth Circuit is erroneous, and that the Government must be absolved from liability.

In its complete form, § 2680(h) excludes recovery under the Federal Tort Claims Act upon

[a]ny claim arising out of assault, battery, false imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander, misrepresentation, deceit, or interference with contract rights.

(Emphasis added.) The Government's

Page 702

position is that, since Congress employed both the terms "misrepresentation" and "deceit" in § 2680(h), it clearly meant to exclude claims arising out of negligent, as well as deliberate, misrepresentation, and therefore, even assuming that the District Court correctly found that the inaccurate FHA appraisal in this case resulted from a negligent inspection, and that respondents relied upon that appraisal to their detriment,12 the claim must nevertheless fail as one "arising out of . . . [negligent] misrepresentation."

We are in accord with the view urged by the Government, and unanimously adopted by all Circuits which have previously had occasion to pass on the question, that § 2680(h) comprehends claims arising out of negligent, as well as willful, misrepresentation.

The leading precedent has been the Second Circuit's decision in Jones v. United States, 207 F.2d 563, which involved a statement issued to the plaintiffs by the United States Geological Survey erroneously estimating the oil-producing capacity of certain land. In reliance upon that statement, plaintiffs sold securities representing oil and gas rights in the land for less than their actual value, and later sought to recoup their loss from the Government under the Tort Claims Act on a complaint alleging negligent misrepresentation. Affirming a dismissal of the complaint, the Second Circuit tersely pointed out that § 2680(h) applies to both "misrepresentation" and "deceit," and,

[a]s "deceit" means fraudulent misrepresentation, "misrepresentation" must have been meant to include negligent misrepresentation, since otherwise the word "misrepresentation" would be duplicative.

207 F.2d at 564. Following...

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