Continental Management, Inc. v. United States

• Decision Date: 17 December 1975
• Docket Number: No. 223-74.,223-74.
• Citation: 527 F.2d 613
• Parties: CONTINENTAL MANAGEMENT, INC. and Stateside Investment Corp., Plaintiffs, Federal Deposit Insurance Corporation, Third-Party Plaintiff, v. The UNITED STATES.
• Court: U.S. Claims Court

527 F.2d 613

CONTINENTAL MANAGEMENT, INC. and Stateside Investment Corp., Plaintiffs, Federal Deposit Insurance Corporation, Third-Party Plaintiff, v. The UNITED STATES.

No. 223-74.

United States Court of Claims.

December 17, 1975.

J. Michael Hines, Washington, D. C., for plaintiff; James A. Treanor, III, attorney of record. Daniel M. Redmond and Dow, Lohnes & Albertson, Washington, D. C., of counsel.

Werner Goldman, Washington, D. C., for Federal Deposit Ins. Corp., third-party plaintiff; Douglas H. Jones, Washington, D. C., of counsel.^*

Alexander Younger, Washington, D. C., with whom was Asst. Atty. Gen. Rex E. Lee, for defendant; Leslie H. Wiesenfelder, Washington, D. C., of counsel.

Before DAVIS, NICHOLS and KUNZIG, Judges.

ON PLAINTIFF'S MOTION TO DISMISS DEFENDANT'S FIRST COUNTERCLAIM AND DEFENDANT'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT

DAVIS, Judge.

Continental Management and State-Side Investment have sued the United States for sums allegedly due them under contracts of mortgage insurance issued by the Federal Housing Administration (FHA). The Government has responded with an answer, a special plea in fraud, and four counterclaims. Only the first counterclaim, in which the Government seeks to collect from plaintiffs an amount equal to the sum of bribes paid by a former president of the plaintiffs' predecessor corporation to employees of the FHA and the Veterans Administration (VA), is before the court at this time on the parties' cross-motions.

Continental Management, formerly Inter-Island Mortgagee Corp. (Inter-Island), and State-Side Investment, a wholly owned subsidiary of Continental Management and the successor of the former Inter-Island of Puerto Rico, are mortgage bankers. Until 1972 they (their predecessors) were FHA-approved mortgagees, engaged in originating mortgages for insurance by the FHA or for guaranty by the VA. The companies were suspended as approved mortgagees in that year because an extensive FBI investigation uncovered evidence that officers and employees of Inter-Island had violated federal statutes prohibiting bribery, conspiracy, and the making of false statements to the Department of Housing and Urban Development. The FBI in its investigation focused, as does the Government in its first counterclaim, on the activities of Stanley Sirote, then president and a member of the board of directors of Inter-Island and then and now the principal stockholder of Inter-Island/Continental Management. In an affidavit executed before the suspensions, Sirote detailed payments of money and gifts made by him to numerous FHA and VA employees responsible for appraising property and approving or disapproving applications for mortgage insurance or guaranty submitted by Inter-Island. Subsequently, Sirote pleaded guilty to four bribery charges and four FHA employees also pleaded guilty to bribery.¹

The counterclaim challenged here asks for recovery from plaintiffs of the bribes paid by Sirote to the federal employees. The claimants move to dismiss this cross-demand as failing to state a claim; the defendant has reacted by seeking summary judgment that the companies are liable on this counterclaim. As will appear, we hold that the counterclaim embodies a proper demand and that the existing record is sufficient to sustain summary judgment for the Government.

The basic underlying facts are indisputable. The payment of the bribes is attested by Sirote's criminal convictions, the convictions of the bribed federal employees, and by Sirote' own affidavit. Clearly, he was a conscious wrongdoer. His conduct violated not only moral precepts but also the federal criminal statute prohibiting bribery of officials, 18 U.S.C. § 201(f), and the rigid standard of conduct established by that statute. Cf. United States v. Mississippi Valley Generating Co., 364 U.S. 520, 549-51, 559, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961). There is also no doubt that Inter-Island and its successors are responsible for his acts, committed while he was president of Inter-Island. See Wagner Iron Works v. United States, 146 Ct.Cl. 334, 337-38, 174 F.Supp. 956, 958 (1959), and cases cited. On the other hand, there is no proof or suggestion that the bribes were related, in any specific way, to the particular mortgage transactions on which plaintiffs sue.

Thus, the issue raised by the parties' cross-motions is whether Sirote's actions give rise to liability by the briber to the Government for an amount equal to the bribes, where the Government has shown only that such unlawful payments were made and has not proved direct or specific monetary injury. Contending that the Government must prove the damage resulting from the illegal acts, the plaintiffs assert, as their major point, that the Government's failure to allege provable, measurable damages and a nexus between Sirote's conduct and specific monetary harm to the Government calls for dismissal of the counterclaim, or at best a remand for trial. The defendant replies that the interference with the principal-agent relationship between it and its employees is damage enough, as well as a compensable wrong, that it need prove no other injury, and that on this type of record the amount of the bribes is a sufficient measure of damage.²

Though we know of no American case which directly confronts this precise point, an impressive accumulation of decisions pushes hard toward acceptance of the Government's position. It is well-established, as plaintiffs seem to concede, that a third party's inducement of or knowing participation in a breach of duty by an agent is a wrong against the principal which may subject the third party to liability. See, e. g., Martin Co. v. Commercial Chemists, Inc., 213 So.2d 477, 480 (Fla.Dist.Ct.App.1968), cert. denied, 225 So.2d 523 (Fla.1969); Hirsch v. Schwartz, 87 N.J.Super. 382, 209 A.2d 635, 640 (App.Div.1965); Singer Sewing Machine Co. v. Lang, 186 Wis. 530, 203 N.W. 399, 401 (1925); Restatement (Second) of Agency § 312 (1958). In nearly unbroken succession, courts have declared that victimized principals may obtain non-statutory remedies against outsiders who have knowingly participated in or induced an agent's breach of duty. See City of Boston v. Simmons, 150 Mass. 461, 23 N.E. 210, 212 (1890) (agent and third party jointly liable where they participated in scheme under which third party bought land that agent knew city might buy, sold it to city at a profit, and divided the profit with agent); City of Findlay v. Pertz, 66 F. 427, 434-35, 440 (6th Cir. 1895) (contract between city and third party may be voided, unless city has ratified, where third party has paid commissions to city's purchasing agent); Singer Sewing Machine Co. v. Lang, supra (third party liable to principal for damages where inference was strong that third party encouraged or induced agents' breach of duty); Central Illinois Public Service Co. v. Schell, 238 Ill.App. 560, 565 (1925) (third party was trustee ex maleficio of moneys received from principal and paid to agent as kickbacks); Donemar, Inc. v. Molly, 252 N.Y. 360, 169 N.E. 610, 611 (N.Y.1930) (seller and purchaser's agent liable for amount of bribe former paid to latter); Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942) (third party and agent are joint tortfeasors where third party participates in agent's breach of duty; seller and buyer's agent liable for commission paid by seller to buyer's agent); Anderson v. Thacher, 76 Cal.App.2d 50, 172 P.2d 533, 545 (1946) (judgment may be entered against those who participated in agent's breach of duty after a sum is found to be due from the agent); Hunter v. Shell Oil Co., 198 F.2d 485, 488-89 (5th Cir. 1952) (agent and third parties were constructive trustees of mineral interests acquired on basis of confidential information disclosed by agent); B. F. Goodrich Co. v. Naples, 121 F.Supp. 345, 348 (S.D.Cal.1954) (all who participate in agent's acquisition of secret profits in breach of his duty are liable with the agent for the secret profits, regardless of whether they benefit from the agent's breach); United States v. Davio, 136 F.Supp. 423, 428 (E.D.Mich.1955) (at common law, third parties are liable to principal for kickbacks paid to agents, regardless of proved damage to the principal); Sears, Roebuck & Co. v. American Plumbing & Supply Co., 19 F.R.D. 334, 342-45 (E.D.Wis.1956) (third party liable to principal for commissions paid to principal's purchasing agent); Hirsch v. Schwartz, supra (third party who causes or assists agent's breach of duty may be liable to principal); Martin Co. v. Commercial Chemists, Inc., supra (third party would have been jointly liable with the agent for agent's secret profits if participation in agent's breach of duty had been knowing). But see Kuntz v. Tonnele, 80 N.J.Eq. 373, 84 A. 624, 626 (1912) (third party not liable for one portion of agent's secret profit though he knowingly paid commission to agent).

These cases, perhaps technically distinguishable from that at bar by the fact that the monetary consequences of the agents' nefarious dealings with the third parties could be said to be clearer or more specific, enunciated or reflected the broad principle that an agent's receipt of secret profits injures the principal because it necessarily creates a conflict of interest and tends to subvert the agent's loyalty. Their reasoning suggests that all who knowingly participate in a scheme by which an agent obtains secret profits should be held liable to the principal. See City of Findlay v. Pertz, 66 F. 427, 434-35 (6th Cir. 1895), quoted in United States v. Carter, 217 U.S. 286, 307-08, 30 S.Ct. 515, 54 L.Ed. 769 (1910); B. F. Goodrich Co. v. Naples, 121 F.Supp. 345, 348 (S.D.Cal.1954); Sears, Roebuck & Co. v. American Plumbing & Supply Co., 19 F.R.D. 334, 342-44 (E.D.Wis.1956); Anderson v. Thacher, 76 Cal.App.2d 50, 172 P.2d 533, 545 (1946); City of Boston v. Simmons, 150 Mass. 461, 23 N.E. 210, 212 (1890...