Audio Odyssey Ltd. v. U.S., 00-3147

• Decision Date: 10 April 2001
• Docket Number: No. 00-3147,00-3147
• Citation: 255 F.3d 512
• Parties: (8th Cir. 2001) AUDIO ODYSSEY, LTD., AN IOWA CORPORATION, DOGAN A. DINCER, AND ANN M. DINCER, APPELLANTS, v. UNITED STATES OF AMERICA AND THE UNITED STATES SMALL BUSINESS ADMINISTRATION, APPELLEES. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 512

255 F.3d 512 (8th Cir. 2001)

AUDIO ODYSSEY, LTD., AN IOWA CORPORATION, DOGAN A. DINCER, AND ANN M. DINCER, APPELLANTS, v. UNITED STATES OF AMERICA AND THE UNITED STATES SMALL BUSINESS ADMINISTRATION, APPELLEES.

No. 00-3147

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: April 10, 2001

Filed: July 5, 2001

Appeal from the United States District Court for the Southern District of Iowa. [Copyrighted Material Omitted] Before Bowman and Fagg, Circuit Judges, and Piersol¹, District Judge.

Piersol, District Judge

This appeal revolves around a loan that was made by Brenton First National Bank (the Bank) to Audio Odyssey, Ltd., a retail electronics store owned by Dogan and Ann Dincer (Audio Odyssey and the Dincers are referred to collectively as Audio Odyssey). The loan was guaranteed by the Small Business Administration (SBA). After the Bank filed a writ of replevin and seized Audio Odyssey's inventory, Audio Odyssey brought this action against the United States and the SBA, alleging negligence, breach of contract, and tortious interference with contract. The district court granted summary judgment to the government. We affirm in part, reverse in part, and remand for further proceedings.

I.

One of the policies underlying the Small Business Act states that the government should "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns." 15 U.S.C. § 631(a). The SBA helps to accomplish this, in part, through agreements to participate in loans made by private lending institutions. 15 U.S.C. § 636(a). In 1978, the SBA and the Bank signed a "Loan Guaranty Agreement" which allowed the Bank to make loans to small businesses with the SBA as the guarantor of those loans (1978 Guaranty Agreement).

In 1991, pursuant to the 1978 Guaranty Agreement, the Bank made a loan to Audio Odyssey that the SBA guaranteed. On October 3, 1991, in connection with this loan, the Dincers executed an SBA Note which stated:

This promissory note is given to secure a loan which SBA is making or in which it is participating and, pursuant to Part 101 of the Rules and Regulations of SBA (13 C.F.R. 101.1(d)), this instrument is to be construed and (when SBA is the Holder or a party in interest) enforced in accordance with applicable Federal law.

The next day the Dincers and the SBA also executed an "Authorization and Loan Agreement." The Authorization and Loan Agreement provides that it is subject to the provisions of the 1978 Guaranty Agreement. In addition, the Authorization and Loan Agreement requires Audio Odyssey to perform its payment obligations and keep current with all tax obligations. The loan was secured with, among other things, a security interest in Audio Odyssey's accounts receivable, contract rights, inventory, furniture, fixtures, machinery, and equipment, and a guaranty by the Dincers secured by mortgages on property they owned personally.

On July 12, 1995, John Bradley, a loan officer at the Bank, called Roger Hoffman at the SBA, who was responsible for managing the SBA's guaranteed loan program in the eastern 29 counties of Iowa. Bradley informed Hoffman that Audio Odyssey had failed to pay the loan installments for June and July, that it had fallen behind on paying its employee withholding taxes, and that it was overdrawn on its checking account. Bradley also told Hoffman that Audio Odyssey was going to hold a sale that weekend and Bradley feared that the profits would be applied to the withholding tax Audio Odyssey owed rather than to the loan from the Bank. According to Hoffman's deposition testimony, Bradley explained that the Bank representatives were going to meet with Mr. Dincer and that the Bank would give Audio Odyssey until 5:00 p.m. the next day - July 13, 1995 - to bring everything current. If that failed, the Bank was going to take possession of the collateral. Hoffman agreed.

Hoffman also received a call from Mr. Dincer on July 12, 1995. Hoffman believes the call came after he had spoken to Bradley. Mr. Dincer asked Hoffman to extend the 5:00 p.m. deadline for 30 days which would allow Audio Odyssey to become current on the loan and would give Mr. Dincer time to negotiate a payment plan with the IRS on his tax liability. Hoffman advised Mr. Dincer that he would have to discuss this workout proposal with Bradley. Mr. Dincer claims he called Bradley several times on July 13 but that his calls were not returned.

According to Mr. Dincer, on July 13 he went to the Bank with a large sum that would cover the missed June and July payments. Mr. Dincer instructed the teller to apply the funds to those loan payments. It is not clear from the record if those funds were credited to the loan payments. On July 14, the Bank delivered a letter to Audio Odyssey at 8:50 a.m. which stated that the Bank was accelerating the loan and that the entire balance of approximately $126,000 was due in 10 minutes at 9:00 a.m. Later that day the Bank filed for and was granted a writ of replevin. According to Mr. Dincer, the Sheriff arrived with Bradley and closed down the store, taking possession of the inventory. Hoffman claims that he was not aware of the events that took place on July 13 and 14 until several days later.²

II.

A district court's grant of summary judgment is subject to de novo review on appeal. Do v. Wal-Mart Stores, 162 F.3d 1010, 1012 (8th Cir. 1998); Thomas v. First Nat'l Bank of Wynne, 111 F.3d 64, 65 (8th Cir. 1997).

A. NEGLIGENCE CLAIM

1. Discretionary Function Exception

In its Complaint, Audio Odyssey claims the SBA, through Hoffman, was negligent because it did not follow mandatory procedures outlined in its own regulations before allowing the Bank to proceed with the liquidation. Specifically, Audio Odyssey claims that the SBA was negligent in: (1) authorizing the Bank to sue Audio Odyssey without written consent in violation of the 1978 Guaranty Agreement; (2) failing to inform the Bank that it was to take no action, including making a demand on the borrower, or file suit without written approval; (3) failing to arrange for a field visit as required by the Standard Operating Procedure Manual (SOP); (4) failing to submit the required Form 327 to obtain approval for not following the SOP; (5) failing to obtain and review a written liquidation plan from the Bank in violation of the SOP and 13 C.F.R. § 120.512; (6) failing to ensure that all guarantors were notified of the acceleration of the loan; (7) failing to follow federal regulations and the SOP in general; and (8) failing to act as a "reasonable prudent lender."

Audio Odyssey's claims of negligence are governed by the Federal Tort Claims Act (FTCA). "The Federal Tort Claims Act is a limited waiver of sovereign immunity, making the Federal Government liable to the same extent as a private party for certain torts of federal employees acting within the scope of their employment." United States v. Orleans, 425 U.S. 807, 813 (1976).³ Although the FTCA generally waives sovereign immunity with respect to tort claims, its waiver does not extend to claims "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." 28 U.S.C. § 2680(a).

To determine whether an action by a government official was discretionary, we employ a two-part test defined by the Supreme Court in Berkovitz v. United States, 486 U.S. 531, 536-37 (1988). First, we must determine if the "challenged governmental action [is] the product of 'judgment or choice.'" Dykstra v. United States Bureau of Prisons, 140 F.3d 791, 795 (8th Cir. 1998) (internal citations omitted). To do this, we must determine whether the "statute, regulation, or policy mandates a specific course of action." Id. If there is a mandate there is no discretion. Second, if the government action is the product of judgment or choice, it must be "based on 'considerations of public policy.'" Id. This requires the Court to determine if the judgment is "grounded in social, economic or political policy." Id. When the policy allows government agents to exercise discretion, "'it must be presumed that the agent's acts are grounded in policy when exercising that discretion.'" Id. at 795-96. This presumption may be rebutted. Id. at 796.

We agree with the district court that the decision to place a loan in liquidation is discretionary. The SOP provides "automatic" and discretionary means for placing an account in liquidation. See SOP 50 51 1 ¶ 4(a) (lists situations which will automatically place an account in liquidation); SOP 50 51 1 ¶ 4(b) (entitled "Non Automatic Situations (Judgmental)," it lists situations that will "ordinarily" trigger liquidation). The liquidation decision here was evidently based on the perceived threat to the collateral which is a "non-automatic" situation (that "ordinarily" triggers liquidation) expressly provided for in SOP 50 51 1 ¶ 4(b). See SOP 50 51 1 ¶ 4(b)(3). This does not end the inquiry, however, because once a loan is "in liquidation" the SOP provides certain mandatory steps that must be taken during the liquidation process.

According to SOP 50 51 1 ¶ 2(b)(1), the "mandatory parts of the SOP are identified through the use of the words 'shall,' 'will,' and 'must.'" Several of the steps that Audio Odyssey claims the SBA failed to take are written in mandatory language. For example, SOP 50 51 1 ¶ 44(a) states that when the guaranteed lender notifies the SBA of a delinquency or situation that may lead to liquidation, "[d]uring the conversation, the SBA spokesperson will arrange for the required field visit and advise the lender that no action, including making demand on the borrower, is to be taken without SBA's written approval." Audio Odyssey claims that Hoffman failed to inform the Bank that it was to take no action, including making a demand on the borrower, or file...