A.L.T. Corp. v. Small Business Admin.

• Citation: 801 F.2d 1451
• Decision Date: 10 October 1986
• Docket Number: No. 85-2204,85-2204
• Parties: A.L.T. CORPORATION, Plaintiff-Appellant, v. SMALL BUSINESS ADMINISTRATION, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1451

801 F.2d 1451

A.L.T. CORPORATION, Plaintiff-Appellant, v. SMALL BUSINESS ADMINISTRATION, Defendant-Appellee.

No. 85-2204.

United States Court of Appeals, Fifth Circuit.

Oct. 10, 1986.

Daniel R. Rutherford, San Antonio, Tex., for plaintiff-appellant.

Eric S. Benderson, Associate Gen. Counsel Office of Litigation, Washington, D.C., Helen M. Eversberg, U.S. Atty., Gordon D. Laws, Asst. U.S. Atty., San Antonio, Tex., for defendant-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before GARWOOD and HILL, Circuit Judges, and WILL, ^* Senior District Judge.

ROBERT MADDEN HILL, Circuit Judge:

An aggrieved business which had attempted to purchase repossessed collateral held by the Small Business Administration (SBA) obtained a state court default judgment against the SBA and then sought to enforce the judgment against the SBA in federal district court. The state court in rendering judgment had jurisdiction over the SBA and made an award based on the business' claim for damages. Another court of this state would have honored such a judgment against collateral attack on state law grounds. In dismissing the federal suit, the federal court failed to accord this judgment the full faith and credit it deserved under state and federal law, and we reverse in part. However, the state court clearly lacked jurisdiction over the portion of the claim representing a theory of recovery sounding in tort, and we affirm that portion of the federal district court's dismissal.

I.

On July 1, 1982, A.L.T. Corporation (ALT) filed suit in state district court in San Antonio, Texas, naming as defendants Republic Bank Medical Center (Republic Bank) and the SBA. The petition alleged that ALT, Republic Bank, and the SBA had entered into an oral contract in May 1982 whereby ALT agreed to buy, and Republic Bank and the SBA agreed to sell, certain collateral which Republic Bank and the SBA had acquired through foreclosure proceedings. ¹ According to the petition, a vice president of Republic Bank called this contract "iron-clad," but the SBA and Republic Bank breached the contract by failing to sell the property on the date agreed. ALT alleged that it was injured in the amount of $30,000, the amount of profit ALT expected upon resale of the collateral. The petition alleged two causes of action: one for breach of contract and one for violation of the Texas Deceptive Trade Practices-Consumer Protection Act, Tex.Bus. and Com.Code Ann. Secs. 17.41-.63 (Vernon 1986) (DTPA).

On July 8 the local sheriff's department personally served a citation and copy of the petition upon Charles Motz, and SBA loan officer in San Antonio. ² The SBA's San Antonio District Office sent copies of the citation and petition to the SBA's Office of General Counsel in Washington, D.C. According to uncontested affidavits, David Kohler, an attorney at the SBA's Office of General Counsel, discussed the case with Billy Bowe, the Supervisory General Attorney at the SBA's San Antonio District Office. According to Bowe, Bowe then called ALT's attorney to inform him that the requirements of service under Fed.R.Civ.P. 4 had not been met, in that service had not been made upon the United States Attorney General nor upon the appropriate United States Attorney.

On September 16 ALT filed an amended petition alleging the same causes of action. ALT forwarded by certified mail a copy of that pleading with a new citation issued to "Small Business Administration, by serving William French Smith, the Attorney General of the United States of America, Washington, D.C." This citation and amended petition were received in the SBA's mailroom in Washington on September 28 and the postal return receipt card was stamped by mailroom personnel on that date. Kohler received these documents on October 1. The SBA never filed any responsive pleadings in state court, nor did it make any appearances there.

On October 25, the state district judge signed a default judgment in favor of ALT against the SBA. The judgment recited that "Although citation was duly served on Defendant Small Business Administration and returned in accordance with Rules 106 and 107 of the Texas Rules of Civil Procedure, said Defendant failed to appear or answer within the time prescribed by law, and has defaulted." The judgment was in the amount of $93,000, representing $30,000 in actual damages, $60,000 in damages pursuant to the DTPA, and $3,000 in attorney's fees pursuant of the DTPA. On October 28 Kohler telephoned the United States Attorney's Office for the Western District of Texas in San Antonio, and learned that no record of the case existed in that office. Kohler called ALT's attorney later that day to inform him of service requirements, but ALT's attorney "indicated that he thought he already had a judgment." According to Kohler, the Office of General Counsel first received a copy of the default judgment on March 15, 1983. ³ Except for its defensive posture in ALT's present federal suit, the SBA has never sought to challenge this judgment in any forum.

On September 27, 1983, ALT filed the current action against the SBA in federal district court in order to enforce its state default judgment. The parties filed cross-motions for summary judgment. The district court determined that the state court judgment was not entitled to full faith and credit in federal court because the state court lacked personal jurisdiction over the SBA. The district court granted the SBA's motion for summary judgment and dismissed the action. ALT appeals.

II.

Our starting point is the federal full faith and credit statute, first enacted in 1790, now codified at 28 U.S.C. Sec. 1738: "Acts, records and judicial proceedings ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken." ⁴ "It is now settled that a federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered." Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56, 61 (1984). "Section 1738 embodies concerns of comity and federalism that allow the State to determine, subject to the requirements of the statute and the Due Process Clause, the preclusive effect of judgments in their own courts." Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274, 281 (1985).

Nevertheless, these principles of full faith and credit are subject to some further limitations. A major limitation is the caveat that a state court judgment is entitled to its preclusive effect in another forum only if the first court has "power to pass on the merits--had jurisdiction, that is, to render judgment." See Underwriters National Assurance Co. v. North Carolina Life and Accident and Health Insurance Guaranty Association, 455 U.S. 691, 704, 102 S.Ct. 1357, 1366, 71 L.Ed.2d 558, 570 (1982) (quoting Durfee v. Duke, 375 U.S. 106, 110, 84 S.Ct. 242, 244, 11 L.Ed.2d 186, 190 (1963)). "This limitation flows directly from the principles underlying the Full Faith and Credit Clause. It is axiomatic that a judgment must be supported by a proper showing of jurisdiction over the subject matter and over the relevant parties." Id., 455 U.S. at 704, n. 10, 102 S.Ct. at 1366 n. 10, 71 L.Ed.2d at 558 n. 10. ⁵

The SBA has leveled its attack on the Texas judgment on three grounds which we have organized to correspond to the full faith and credit principles discussed above. First, the SBA claims that the judgment is void under Texas law, thus rendering it unworthy of full faith and credit in federal court, since such a judgment would be subject to collateral attack in a Texas court. Second, the SBA argues that the original Texas court lacked personal jurisdiction over the SBA because service of process was improper under Rule 4 of the Federal Rules of Civil Procedure. Finally, the SBA contends that the Texas court lacked subject matter jurisdiction because the SBA is cloaked in sovereign immunity for the types of action brought by ALT. We discuss each of these contentions in turn.

A.

The SBA's first argument turns on the application of Texas rules of collateral attack and claim preclusion. The SBA claims that the service of process effected by ALT did not comport with the technical requirements of Rule 106(a) of the Texas Rules of Civil Procedure. ⁶ The SBA first argues that mail delivery of the amended complaint to the SBA's Washington office was improper under Rule 106(a) because delivery was not restricted to the addressee, and because the return receipt was stamped, rather than signed, by an employee of the SBA's mailroom. ⁷ The SBA further contends, as it convinced the federal district court, that personal service upon Motz, the SBA loan officer in San Antonio, was ineffective because ALT did not affirmatively show that Motz was in fact the SBA's agent for service of process. Cf. Encore Builders v. Wells, 636 S.W.2d 722, 723 (Tex.App.--Corpus Christi 1982, no writ) (reversal of judgment on direct appeal where no such showing of agency); Bankers Life and Casualty Co. v. Watson, 436 S.W.2d 404, 406 (Tex.Civ.App.--Tyler 1968, writ ref'd n.r.e.) (same).

The SBA is correct insofar as it contends that Texas law is crucial to this portion of the inquiry. As part of full faith and credit analysis, we look to state law to determine how much credit the state judgment deserves. See Fehlhaber v. Fehlhaber, 681 F.2d 1015, 1020 (5th Cir.1982), cert. denied, 464 U.S. 818, 104 S.Ct. 79, 78 L.Ed.2d 90 (1983). "It has long been established that Sec. 1738 does not allow federal courts to employ their own rules of res judicata in determining the effect of state judgments. Rather, it goes beyond the common law and commands a federal court to accept the rules chosen...