Matter of Kenny, Bankruptcy No. 84-02985-B

• Decision Date: 17 June 1987
• Docket Number: Bankruptcy No. 84-02985-B,Adv. No. 84-1155-B.
• Citation: 75 BR 515
• Parties: In the Matter of Douglas F. KENNY, and wife, Marion N. Kenny, Debtors. Douglas F. KENNY and Marion N. Kenny, Plaintiffs, v. John BLOCK, individually and in his capacity as Secretary of the United States Department of Agriculture; Allen Brock, individually and in his capacity as Acting Assistant Administrator for Farmer Programs and former Acting Administrator of the Farmers Home Administration; Charles Shuman, individually and in his capacity as Administrator of the Farmers Home Administration; Calvin Lutz, individually and in his capacity as Acting State Director for Michigan; Charles E. Kelsey, individually and in his capacity as District Director; Rodney L. Plews, individually and in his capacity as County Supervisor; United States Department of Agriculture; and the United States of America, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

75 B.R. 515 (1987)

In the Matter of Douglas F. KENNY, and wife, Marion N. Kenny, Debtors Douglas F. KENNY and Marion N. Kenny, Plaintiffs, v. John BLOCK, individually and in his capacity as Secretary of the United States Department of Agriculture; Allen Brock, individually and in his capacity as Acting Assistant Administrator for Farmer Programs and former Acting Administrator of the Farmers Home Administration; Charles Shuman, individually and in his capacity as Administrator of the Farmers Home Administration; Calvin Lutz, individually and in his capacity as Acting State Director for Michigan; Charles E. Kelsey, individually and in his capacity as District Director; Rodney L. Plews, individually and in his capacity as County Supervisor; United States Department of Agriculture; and the United States of America, Defendants.

Bankruptcy No. 84-02985-B, Adv. No. 84-1155-B.

United States Bankruptcy Court, E.D. Michigan, S.D.

June 17, 1987.

COPYRIGHT MATERIAL OMITTED

Paul B. Newman, Newaygo, Mich., for debtors/plaintiffs.

Karl Overman, Asst. U.S. Atty., Detroit, Mich., for defendants.

MEMORANDUM

GEORGE BRODY, Chief Judge.

The plaintiffs, Douglas and Marion Kenny, are farmers in Michigan. Over the period of 1978-1981, they received six emergency loans from the Farmers Home Administration (FmHA) of the United States Department of Agriculture (USDA). The total principal amount borrowed was $127,500.00.¹ As part of the loan transactions, the plaintiffs executed promissory notes secured by mortgages on their home and farmland on behalf of the United States/FmHA, and they granted a security interest to the United States/FmHA in their equipment, livestock, supplies and inventory. On August 17, 1984, the plaintiffs filed a voluntary Chapter 11 bankruptcy case. On November 10, 1984, the United States filed a secured claim in the amount of $135,859.00.

On December 5, 1984, the debtors filed a complaint against: Mr. John Block, individually and as Secretary of the USDA; Mr. Allen Brock, individually and as Acting Administrator for Farmer Programs and former Acting Administrator of the FmHA; Mr. Charles Shuman, individually and as Administrator of the FmHA; Mr. Calvin Lutz, individually and as Acting Director of the FmHA for the State of Michigan; Mr. Charles Kelsey, individually and as District Director of the FmHA; Mr. Rodney Plews, individually and as County Supervisor of the FmHA for the County of Sanilac, Michigan, for damages based on various legal theories.

The United States Attorney, representing the individual defendants, filed a motion for summary judgment. In response to the motion, and with leave of the court, the plaintiffs filed an amended complaint, which, inter alia, added the United States as a defendant. The amended complaint seeks money damages from the individual defendants and the government for violations of federal statutes, regulations, and the plaintiffs' constitutional rights; breach of contract; and negligence in the performance of a voluntary undertaking to render services, which is popularly known as "good samaritan" liability. In addition, the amended complaint seeks the equitable subordination of the claim of the United States to the claims of all other creditors of the estate. The conduct which the plaintiffs allege entitles them to recover under the theories advanced consists of: failure to promulgate regulations implementing a Congressional enactment, 7 United States Code § 1981a, and making misrepresentations to Congress with regard to the USDA's implementation of the statute; failure to perform regulatory duties to supply credit counseling, planning assistance, record keeping help, borrower supervision and analysis of borrower operations set forth in 7 Code of Federal Regulations Part 1924 Subpart B (1980 and revisions); failure to provide special servicing to the plaintiffs as a delinquent and problem case, including ensuring that FmHA personnel were adequately trained to properly supervise such cases as required by 7 C.F.R. Part 1960 (current 1986 provisions which are similar are found at 7 C.F.R. §§ 1924.71-.73); adoption of an official policy of "deliberate indifference to the financial needs and plights of borrowers" contrary to Congressional policy; refusal to close an emergency loan in 1982 after such had been approved by the County Committee, and after the plaintiffs had paid for title work that had been completed along with other preliminary paperwork; refusal to restore the plaintiffs' dairy operation in 1983 when it had been foreclosed by another creditor; failure to timely inform the plaintiffs of consolidation, rescheduling, reamortization and deferral relief set forth in FmHA regulations, and subsequent refusal to consider the plaintiffs' request for such relief, despite the recommendation of the County Committee that such relief be granted; denial of operating loans for 1981, 1982 and 1983; failure to adjust the plaintiffs' repayment requirements to reflect reduced level of milk price supports; and, the failure to make emergency loans for the years 1978-1981 sufficiently large to provide the plaintiffs with the operating capital necessary to plant and harvest crops.

The defendants filed a motion to dismiss the amended complaint on the following grounds:

1. There was no personal service on the individual defendants and thus they must be dismissed. F.R.Civ.P. 12(b)(2) & (5).

2. This adversary proceeding is not a core matter.

3. The allegations against the FmHA and the United States, sound in tort and thus must be dismissed because of the debtor\'s failure to file an administrative claim under Federal Tort Claims Act. 28 U.S.C. 2675(a); In re Kjeldahl, 52 B.R. 916, 926 (D.Minn. 1985).

4. The claims against the individual defendants must be dismissed in that such claims are barred by the absolute immunity as to common law torts and qualified immunity as to constitutional torts. Harlow v. Fitzgerald, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982); Windsor v. The Tennessean, 719 F.2d 155, 165 (6th Cir.1983).

5. The United States cannot be sued for damages for violations of the Constitution. Diminnie v. United States, 522 F.Supp. 1192, 1197 (E.D.Mich. 1981).

6. The debtors do not establish a cause of action for breach of contract.

7. The debtors fail to establish grounds for equitable subordination.

Failure to Properly Serve the Individual Defendants

Counsel for the individual defendants contends that relief was sought against them in their individual capacities for the first time in the amended complaint, thus the debtors were required to personally serve each individual with a copy of the amended complaint, and since the plaintiffs failed to do so, the actions against the defendants in their individual capacities should be dismissed. This contention lacks merit.

The caption of the original complaint names each of the six government employees as a defendant individually and in his capacity as an office holder with the government. Knowledge that each of the defendants was being sued in both their personal and official capacities is clearly demonstrated by the first paragraph of their answer to the original complaint, which provides as follows:

Now comes the defendants, John Block, Allen Brock, Charles Shuman, Calvin Lutz, Charles Kelsey, and Rodney L. Plews, both in their official capacities and individually, through their counsel, United States Attorney Leonard R. Gillman and Assistant United States Attorney Karl Overman and answer the Plaintiff\'s Complaint as follows: Emphasis added

Since the original complaint gave the individual defendants notice that they were being sued both as individuals and as government officials, and since the individual defendants recognized by their answer that they were being sued in both capacities, it was not necessary to serve each of the individual defendants with copies of the amended complaint. See Bankruptcy Rule 7005 and Rule 5(b) F.R.Civ.P.; and cf. Jackson v. Hayakawa, 682 F.2d 1344, 1348 (9th Cir.1982). Service of the amended complaint upon counsel who represented them was sufficient. Id. Accordingly, the motion to dismiss the actions against the individual defendants in their individual capacities should be denied.

Lack of Subject Matter Jurisdiction

The government contends that the claims for tort and contract damages are noncore proceedings; that a bankruptcy judge does not have jurisdiction to hear such proceedings; and, therefore, these counts of the complaint must be dismissed. Additionally, the government contends that 28 U.S.C. § 157(b)(5) (Supp. III, 1985) requires that the tort claims be tried in the United States District Court.

The plaintiffs concede that the tort and contract damage claims are not core proceedings. However, it does not follow that the bankruptcy court does not have jurisdiction to hear such matters. 28 U.S.C. § 157(c)(1) (Supp. III, 1985) provides that:

A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.

In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge\'s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

A proceeding is "otherwise related" to a bankruptcy case "whenever `the outcome of the proceeding could conceivably have any effect upon the estate being administered in bankruptcy.'" In re Salem Mortgage Co., 783 F.2d 626, 634 (6th Cir.1986), (quoting In re General Oil Distributors, Inc., 21 B.R. 888, 892 n. 13, (Bankr.N.E.N. Y.1982) citing Mazur v. U.S. Air Duct Corp. (In re U.S. Air Duct Corp.), 8 B.R. 848, 851 (Bankr.N.D.N.Y.1981)). There is no question but that the resolution of the tort and contract claims will materially affect the...