Aetna Cas. & Sur. Co. v. U.S.

• Decision Date: 05 December 1995
• Docket Number: D,No. 463,463
• Parties: -7853 The AETNA CASUALTY & SURETY COMPANY, Plaintiff-Appellant, v. The UNITED STATES of America, Defendant-Appellee. ocket 95-6078.
• Court: U.S. Court of Appeals — Second Circuit

Page 475

71 F.3d 475

76 A.F.T.R.2d 95-7853

The AETNA CASUALTY & SURETY COMPANY, Plaintiff-Appellant, v. The UNITED STATES of America, Defendant-Appellee.

No. 463, Docket 95-6078.

United States Court of Appeals, Second Circuit.

Argued Nov. 3, 1995.

Decided Dec. 5, 1995.

Lorraine M. Weil, Hartford, CT (G. Eric Brunstad, Jr. and Patricia A. Shackelford, Hebb & Gitlin, Hartford, CT, of counsel), for Plaintiff-Appellant.

Mary K. Doyle, Department of Justice, Washington, DC (Barbara C. Biddle, Department of Justice, Civil Division, Appellate Staff, Washington, DC, of counsel), for Defendant-Appellee.

Before: ALTIMARI, McLAUGHLIN, and LEVAL, Circuit Judges.

LEVAL, Circuit Judge:

Aetna Casualty & Surety Co. ("Aetna") appeals from decisions of the district court dismissing its complaint for lack of subject matter jurisdiction, and denying its motion to amend the complaint.

In its initial complaint, Aetna asserted a cause of action under the Federal Tort Claims Act ("FTCA"), 28 U.S.C. Secs. 1346(b), 2671-80. Subsequently, Aetna sought to amend its complaint to plead an additional cause of action under the Administrative Procedure Act ("APA"), 5 U.S.C. Sec. 702. We affirm the dismissal of the original complaint, although on different grounds, and reverse the trial court's denial of Aetna's motion to amend.

Aetna had issued a surety bond to the government guaranteeing the Black Lung payments of LTV Steel Company to the extent of $5.5 million. ¹ When LTV Steel went into bankruptcy, the United States Department of Labor began to make Black Lung payments on its behalf and called on Aetna to pay to the limits of its bond, which Aetna did. Aetna alleges that, by reason of the Black Lung payments it made on the government's behalf, the government is entitled to reimbursement from LTV Steel and that Aetna is subrogated to that reimbursement as of right.

Meanwhile, as a result of the Steel Reinvestment Fund Act, a part of the Tax Reform Act of 1986, ² LTV Steel became entitled to a tax refund exceeding $180 million.

Aetna notified the Internal Revenue Service that as the subrogee of the government for the Black Lung payments Aetna made, it was entitled to have the government offset a portion of the tax refund to be turned over to Aetna. The IRS instead paid the refund to LTV Steel, and Aetna failed to recover fully its surety payments.

Aetna's initial complaint brought this action in tort under the FTCA. Aetna claimed to be subrogee to the government's right of offset, and argued that the government had tortiously converted Aetna's property by paying the entire refund to LTV Steel instead of offsetting it for Aetna's benefit.

The district court, following Magistrate Judge Fitzsimmons' recommended ruling of January 22, 1995, dismissed the complaint for want of subject matter jurisdiction. The magistrate judge reasoned that this was a contract action and that the district court lacked subject matter jurisdiction over claims arising in contract exceeding $10,000, because the United States has waived its sovereign immunity to such suits only when they are brought in the Court of Claims. 28 U.S.C. Secs. 1346(a)(2), 1491(a)(1).

Although we do not necessarily agree with the district court that Aetna's claim sounds exclusively in contract rather than tort, there is no need to reach this issue. Even assuming, without deciding, that the government tortiously converted Aetna's interest in the tax refund, which Aetna allegedly acquired by right of subrogation, see Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37 & n. 12, 83 S.Ct. 232, 234-35 & n. 12, 9 L.Ed.2d 190 (1962), the FTCA's waiver of sovereign immunity does not apply to claims "arising in respect of the assessment or collection of ... tax[es]." 28 U.S.C. Sec. 2680(c). Thus, we affirm the district court's decision on the ground that Aetna's claim is barred under Sec. 2680(c). See Richardson v. Selsky, 5 F.3d 616, 621 (2d Cir.1993) ("[W]e may affirm on any basis supported by the record, including grounds on which the district court did not rely.").

Aetna argues this claim is outside the exception of Sec. 2680(c) because it relates to the payment of a refund, and not "assessment or collection" of taxes. This reads the statute too narrowly. See Kosak v. United States, 465 U.S. 848, 854, 104 S.Ct. 1519, 1523-24, 79 L.Ed.2d 860 (1984) (broadly construing the "arising in respect of" language in Sec. 2680(c)); Capozzoli v. Tracey, 663 F.2d 654, 657 (5th Cir.1981) (Sec. 2680(c) bars trespass claim against IRS agent); Interfirst Bank Dallas, N.A. v. United States, 769 F.2d 299, 307 (5th Cir.1985) (Sec. 2680(c) exemption "applies to all tax-related claims") (emphasis in original), cert. denied, 475 U.S. 1081, 106 S.Ct. 1458, 89 L.Ed.2d 716 (1986); Morris v. United States, 521 F.2d 872, 874 (9th Cir.1975). We understand the Sec. 2680(c) exception to cover claims arising out of the operation of the government's mechanism for assessing and collecting taxes. The payment of refunds when due is an integral part of that mechanism. Accordingly, even assuming Aetna's action lies in tort, we construe Sec. 2680(c) to bar a claim for the IRS's tortious conversion of a tax refund. On this basis, we affirm the dismissal of the complaint pleaded under the FTCA.

Aetna also appeals from the district court's denial of its motion to amend the complaint to state a claim under the APA. The APA provides:

A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof. An action ... seeking relief other than money damages ... shall not be dismissed nor relief therein be denied on the ground that it is against the United States....

5 U.S.C. Sec. 702. Aetna argues that it is aggrieved by the government's failure to pay over funds which Aetna acquired by right of subrogation. As a result of the Black Lung payments to LTV Steel's employees, Aetna asserts that the Department of Labor ("DOL") had a right of setoff against LTV Steel's tax refund and a corresponding obligation, by reason of Aetna's subrogation right, to pay those funds to Aetna. Aetna seeks injunctive relief to compel the government to perform its legal duty and provide Aetna the money it is owed.

We understand the district court to have rejected Aetna's motion to amend its complaint on two grounds. First, the court indicated that the APA claim was barred by the same jurisdictional defect as the original complaint--that Aetna's claim is essentially contractual and not within the jurisdiction of the district courts. Aetna's claim, however, is not for performance of a contract. Rather, Aetna seeks the performance of an obligation arising through operation of law by right of subrogation. Pearlman, 371 U.S. at 136 n. 12, 83 S.Ct. at 235 n. 12 (" 'The right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties.' ") (quoting Memphis & L. R.R. v. Dow, 120 U.S. 287, 301-02, 7 S.Ct. 482, 489, 30 L.Ed. 595 (1887)).

As a second ground for denying Aetna's motion to amend the complaint, the district court cited our assertion in Ward v. Brown, 22 F.3d 516, 520 (2d Cir.1994), that the APA does not waive sovereign immunity for claims seeking money damages. The district court thus construed Aetna's amended complaint as a claim for money damages, and for this reason rejected it. This misunderstood Aetna's theory. Its suit is not for damages to compensate for the government's failure to perform a duty. Rather it seeks to require the government to perform its duty--that is, to pay to Aetna funds held by the government for Aetna's benefit. Aetna reasons that, by virtue of the Black Lung payments made by Aetna on DOL's behalf, the government was owed money by LTV Steel. When the IRS came into possession of a large tax refund payable to LTV Steel, the government had the right to offset its Black Lung entitlement against LTV Steel's refund, and furthermore an obligation, resulting from the subrogation, to pay to Aetna its share of the offset. Aetna's claim under the APA seeks to compel the government to do its duty by paying over the funds owed to Aetna. In Bowen v. Massachusetts, 487 U.S. 879, 108 S.Ct. 2722, 101 L.Ed.2d...