Midwest Knitting Mills, Inc. v. U.S.

• Decision Date: 18 December 1991
• Docket Number: No. 90-2984,90-2984
• Citation: 950 F.2d 1295
• Parties: 7 IER Cases 55 MIDWEST KNITTING MILLS, INCORPORATED, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1295

950 F.2d 1295

7 IER Cases 55

MIDWEST KNITTING MILLS, INCORPORATED, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 90-2984.

United States Court of Appeals Seventh Circuit.

Argued May 10, 1991.

Decided Dec. 18, 1991.

Richard F. Yanisch, (argued), Denny & Yanisch, Elm Grove, Wis., for plaintiff-appellant.

James L. Santelle, Asst. U.S. Atty. (argued), Milwaukee, Wis., for defendant-appellee.

Before BAUER, Chief Judge, and POSNER, and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Midwest Knitting Mills, Inc. (Midwest Knitting) brought this action for damages under the Federal Tort Claims Act. It alleged that the government, acting through the Small Business Administration (SBA), negligently supervised and retained an employee known to be derelict in his duties. The district court dismissed the case for lack of subject matter jurisdiction. It held that, under these facts, Wisconsin would not recognize the tort of negligent supervision or retention of an employee. For the following reasons, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

When reviewing the grant of a motion to dismiss, we assume the truth of all well-pleaded factual allegations. See Janowsky v. United States, 913 F.2d 393, 395 (7th Cir.1990). Midwest Knitting was a Milwaukee manufacturer of knitted goods. It was also a subcontractor, and the SBA was prime contractor, for several contracts under the SBA's 8(a) program. See 13 C.F.R. § 124 and Standard Operating Procedure 80.05. This program permits capital-poor minority companies to receive advance payments needed to compete. Midwest Knitting had successfully completed several 8(a) contracts prior to 1983. In 1983, the SBA assigned Frederick Matthews to act as Midwest Knitting's Business Development Specialist. Matthews had the responsibility of processing Midwest Knitting's applications for advance payments. In 1984 and 1985, Midwest Knitting was awarded five contracts, the largest in excess of $1,250,000. Allegedly because of "dereliction, negligence, and deliberate sabotage" by Matthews, Midwest Knitting never received its advance payments. R.1 at p 8. According to Midwest Knitting, Matthews had a chemical dependency that resulted in "physical, intellectual and emotional infirmities." Id. at p 9. Midwest Knitting further alleged that his supervisors retained him during this period even though they were aware of his poor performance. As a result of SBA's negligent supervision, Matthews remained in a position of responsibility. He never forwarded the advance payments to Midwest Knitting, which was forced to surrender its contracts in October 1985 and go out of business at the end of the year. Midwest Knitting seeks damages in the amount of its canceled contracts plus the value of future business lost as a result of its cessation of operations.

B. Statutory Overview

The Federal Tort Claims Act (FTCA), 28 U.S.C. §§ 1346(b) & 2671-2680 shall have exclusive jurisdiction of civil actions on claims against the United States, for money damages, ... for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

                effects a limited waiver of sovereign immunity for the United States.   With specific exceptions, the FTCA renders the federal government liable in tort as a private individual would be under like circumstances.   The FTCA provides that federal district courts
                

28 U.S.C. § 1346(b). The terms of the United States' consent to be sued in any court define the district court's jurisdiction to entertain the suit. United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976) (citing United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941)). Thus, when no explicit consent to suit exists under the FTCA, a district court is without jurisdiction to entertain a suit for damages against the United States. See Stanley v. Central Intelligence Agency, 639 F.2d 1146, 1156 (5th Cir.1981). Because the FTCA incorporates the substantive law of the state where the tortious act or omission occurred, a plaintiff must state a claim that is actionable under the substantive law in the state where the act or omission occurred. See 28 U.S.C. § 1346(b); Campbell v. United States, 904 F.2d 1188, 1191 (7th Cir.1990). Therefore, if there is no cause of action under state law, the district court is without jurisdiction.

C. District Court Proceedings

The district court examined Midwest Knitting's claims against the United States on two theories: (1) the SBA's negligent supervision and retention of Matthews and (2) tortious interference with its own (that is, the SBA's own) contract with Midwest Knitting. Midwest Knitting Mills, Inc. v. United States, 741 F.Supp. 1345, 1348 (E.D.Wis.1990). Both parties agreed that Wisconsin substantive law would govern because that was the state where the act or omission occurred. Id. at 1349. The district court held that Wisconsin courts would not recognize the tort of negligent supervision of an employee in this situation, nor would they recognize a claim for interference with one's own contract rights. The district court then dismissed Midwest Knitting's claims with prejudice under Federal Rule of Civil Procedure 12(b)(1), for lack of subject matter jurisdiction.

The district court found no Wisconsin cases to support Midwest Knitting's contention that Wisconsin would hold an employer directly liable under a theory of negligent supervision for the acts of its employees. ¹ The court determined that the principal case upon which Midwest Knitting relied, Frew v. Dupons Construction Co., 37 Wis.2d 676, 155 N.W.2d 595 (1968), was based on the "well-established doctrine of respondeat superior " to impose liability on the employer. 741 F.Supp. at 1350. "Except to state that no Wisconsin appellate opinion has specifically rejected the tort of negligent supervision, the plaintiff has presented no reason why Wisconsin courts would recognize such a tort." Id. at 1351. The district court stated further that "[i]t is ... unlikely that Wisconsin courts would conclude that an employer can be

                sued for the negligent supervision of an administrative employee where the employee's conduct did not result in physical injury to a person or property."  Id. at 1352.   Therefore, the district court dismissed Midwest Knitting's negligent supervision claim with prejudice. 2  Id
                

II ANALYSIS

A. Guiding Principles

Midwest Knitting contends that, although there is no case directly on point, the district court had an obligation to determine more carefully whether Wisconsin would recognize the tort of negligent supervision:

Where there were no precise state precedents as to whether plaintiff's averments constituted a recognized cause of action in negligence, for which recovery could be had under the [FTCA], it was incumbent on the Federal Court to make its own determination of what the state Supreme Court would probably rule in a similar case.

Appellant's Br. at 9 (citing Quinones v. United States, 492 F.2d 1269, 1273 (3d Cir.1974)). In its brief, the government submits that the district court was under no obligation to speculate on the likely response of a Wisconsin court to the tort of negligent supervision. Appellee's Br. at 16. However, at oral argument, the government conceded that it was appropriate for the district court to look to existing precedent and to predict what Wisconsin courts would hold. This concession evidences a far more realistic assessment of the case law than the government's earlier position. This court has recognized that, in cases brought under the FTCA:

The decision of a federal court in a ... case in which state law supplies the rule of decision, is an exercise in predicting how the highest court of the state would decide the case if it were presented to it.... [T]he federal court has no choice but to speculate as to what the true grounds might be or to supply grounds that it thinks might recommend themselves to the state's courts in the future.

Konradi v. United States, 919 F.2d 1207, 1213 (7th Cir.1990). Nevertheless, we cannot agree with the appellant that the district court's opinion, when read in its totality, establishes that the district court misapprehended its responsibility to determine the content of Wisconsin law. Of course, in FTCA cases, no less than in diversity cases, see Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991), it is incumbent upon us to determine de novo the correctness of the district court's determination of the content of state law. Therefore, we must undertake an analysis of what the Supreme Court of Wisconsin would have done, if presented with this case.

B. Application to This Case

1. The tort of negligent supervision

The tort of negligent supervision places liability upon a master for injuries inflicted on third persons by its servant when the master was guilty of selecting a servant incompetent or otherwise unfit to perform the services for which he was employed. 57 C.J.S. Master and Servant § 559 (1948). As the parties correctly note, the Wisconsin Supreme Court has never explicitly recognized the existence of this tort by holding an employer liable for negligent retention or supervision of an employee. However, we have no reason to believe that Wisconsin would reject this cause of action if the matter were before its supreme court as a matter of first impression. The tort of negligent supervision of employees enjoys a secure position in the mainstream of American common law. The Restatements of both Torts ³ and Agency ⁴ recognize it, as does at least one of Wisconsin's neighbors. S...