Redmond v. U.S. By and Through S.E.C. of U. S., 74-1810

• Decision Date: 17 June 1975
• Docket Number: No. 74-1810,74-1810
• Parties: Thomas H. REDMOND, Plaintiff-Appellant, v. The UNITED STATES of America, By and Through the SECURITIES AND EXCHANGE COMMISSION OF the UNITED STATES, a Federal Agency, and the United States of America by and through the Treasury Department of the United States, a Federal Agency, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 811

518 F.2d 811

Thomas H. REDMOND, Plaintiff-Appellant, v. The UNITED STATES of America, By and Through the SECURITIES AND EXCHANGE COMMISSION OF the UNITED STATES, a Federal

Agency, and the United States of America by and through the

Treasury Department of the United States, a Federal Agency,

Defendant-Appellee.

No. 74-1810.

United States Court of Appeals, Seventh Circuit.

Argued April 24, 1975.

Decided June 17, 1975.

Vincent F. Kelley, Anderson, Ind., for plaintiff-appellant.

Irving Jaffe, Acting Asst. Atty. Gen., Judith H. Norris, Atty., Appellate Section, Civ. Div., U. S. Dept. of Justice, Washington, D. C., Stanley B. Miller, U. S. Atty., Indianapolis, Ind., for defendant-appellee.

Before PELL and STEVENS, Circuit Judges, and PERRY, Senior District Judge. ^*

PERRY, Senior District Judge.

This is an appeal from an order of the District Court granting a motion to dismiss the complaint and dismissing the action for lack of subject matter jurisdiction. Thomas H. Redmond, plaintiff below, filed a complaint for damages under the Federal Tort Claims Act (hereinafter "Act"), 28 U.S.C. § 1346(b) et seq., against the United States of America (hereinafter "Government") by and through the Securities and Exchange Commission of the United States and against the United States of America by and through the Treasury Department of the United States, seeking $8,000,000 in damages for the alleged wrongful conduct of employees, agents and operatives of the Securities and Exchange Commission, the Secret Service, and the Treasury Department in permitting Redmond to be defrauded by one Edward Wuensche, characterized by Redmond as a "securities dealer" and "highly competent confidence man who served 4 prison terms for dealing in stolen securities". The Government filed a motion to dismiss the complaint on the grounds that the court lacked jurisdiction over the subject matter of the action because the claim asserted by Redmond constituted the tort of misrepresentation which, by 28 U.S.C. § 2680(h), is specifically excluded from the coverage of the Act. On June 18, 1974, District Judge Cale Holder entered his judgment granting the motion to dismiss and dismissing the action for lack of subject matter jurisdiction.

The sole issue which we must decide is whether Redmond's claim is barred by the "misrepresentation" exception to the Federal Tort Claims Act provided by 28 U.S.C. § 2680(h).

Redmond strongly contends that the "misrepresentation" exception of 28 U.S.C. § 2680(h) does not apply here because he is seeking recovery not upon a misrepresentation theory, but on the ground that the Government's employees breached their duty to warn him that he was in imminent danger of becoming the financial victim of Wuensche's criminal propensities (Brief of Appellant at 7, 8).

We must first determine whether the tort alleged by Redmond is misrepresentation. To do this we shall examine the allegations set forth in the complaint. A close examination of Redmond's complaint reveals that it contains essentially the following allegations:

A. The Government "negligently fashioned an aura of respectability and conferred credibility and trustworthiness upon the defendant Wuensche" (Complaint, P VIII) by:

(1) permitting Wuensche to gain the confidence of Redmond and to be accepted as a respectable business man when the Government knew that Wuensche had served four prison terms for dealing in forged securities (P VIII(b));

(2) permitting Wuensche to prey upon Redmond when it was known that Wuensche had "worked with top crime syndicate figures" (P VIII(c));

(3) permitting Wuensche to enlist the services of Redmond to be used as a decoy in the recovery of a stolen U.S. Treasury bond (P VIII(d));

(4) conferring trustworthiness upon Wuensche during the recovery of said bond by "representing to plaintiff that Wuensche was a co-worker of the Secret Service, and as such could be trusted" (P VIII(d));

(5) permitting Wuensche to give an impression that he was an undercover agent for the Government (P VIII(e));

(6) permitting Wuensche to make unlimited long distance telephone calls at Government expense and to give orders to Government agents and employees, "all of which represented that Wuensche was a trusted public servant, which was false and known by the government to be false" (P VIII(f));

(7) permitting Wuensche to furnish the names of two Government officials as personal character references, "which falsely and fraudulently led plaintiff to believe Wuensche was a person of good character, which was false and known by the agents of the government to be false" (P VIII(g));

(8) representing to Redmond that Wuensche was a Government employee, "which representation was false and known to be false" (P VIII(h)); and

(9) representing to Redmond that Wuensche was a person of substantial means, "which representation was false and known by the government to be false" (P VIII(i)).

B. As a direct and proximate result of the Government's failure to disclose to Redmond the "nefarious criminal activities" of Wuensche, when it is or should be apparent to the Government that such failure would cause harm to Redmond, Redmond was caused to rely upon the integrity of Wuensche. (Complaint, P IX).

C. Such failure to disclose on the part of the Government "became a plan to aid and abet Wuensche and others in the scheme to defraud plaintiff". (Complaint, P IX).

D. As a result of the foregoing acts or omissions of the Government, Redmond was induced to lose $1,065,000 by purchasing and then pledging worthless securities, and suffered substantial injury by the sudden termination of all lines of credit, by the loss of a $100,000-a-year earning capacity, by embarrassment, mental anguish, and humiliation. (Complaint, P X).

We agree with Judge Holder that the allegations of the complaint clearly state a course of events calculated to mislead Redmond by a series of mis-statements of fact, half-truths, and deception; that the Government's agents are alleged to have been involved in the dissemination of the misleading information, and that the complaint clearly alleges that the agents were attempting to represent Wuensche as being something he was not. It is clear to us, as it was to Judge Holder below, that the actual facts pleaded make out a case for misrepresentation.

Redmond contends, however, that even if the acts and omissions alleged in the complaint do constitute a form of misrepresentation, it is not the kind of misrepresentation meant to be barred from the coverage of the Act. Redmond asserts:

. . . If there were representations made by federal officers in this case, they were collateral and incidental to the negligence of those agents in failing to warn the Plaintiff of a danger which they knew to exist. More than misrepresentations which are merely incidental to negligent conduct is required to bring this case within the misrepresentation exception of 28 U.S.C. Sec. 2680(h). . . . (Emphasis added.) Brief of Appellant at 7, 8.

Redmond then cites three cases in support of his contention: Ingham v. Eastern Air Lines, Inc., 373 F.2d 227 (2nd Cir. 1967), cert. denied, 389 U.S. 931, 88 S.Ct. 295, 19 L.Ed.2d 292; United Airlines, Inc. v. Wiener, 335 F.2d 379 (9th Cir. 1964), cert. dismissed, 379 U.S. 951, 85 S.Ct. 452, 13 L.Ed.2d 549; and Murray v. United States, 327 F.Supp. 835 (D. Utah 1971), aff'd sub nom., United States v. Murray, 463 F.2d 208 (10th Cir. 1972).

We must reject this contention for several reasons. First, we agree with the Government that the allegations of false representations contained in Redmond's complaint were the sine qua non in the chain of causative events on which Redmond's claim is founded. Second, a contention similar to Redmond's was rejected in United States v. Neustadt, 366 U.S. 696, 81 S.Ct. 1294, 6 L.Ed.2d 614 (1961), and in United States v. Sheehan Properties, Inc., 285 F.Supp. 608 (D.Minn.1968).

In Neustadt, the issue was whether the Government may be held liable, under the Act, to purchasers of residential property who were furnished a statement reporting the results of an inaccurate Federal Housing Administration (FHA) inspection and appraisal and who, in reliance thereon, were induced by the sellers to pay a purchase price in excess of the fair market value of the property. The purchasers, Mr. and Mrs. Neustadt, filed suit under the Act alleging that the FHA's inspection and appraisal had been conducted negligently; that they were justified in relying upon the results of that inspection and appraisal; and that they would not have purchased the property for $24,000 (the purchase price) but for the carelessness and negligence of the FHA. After trial, the District Court found that the Neustadts in good faith relied upon the appraisal in consummating their contract of purchase, and that reasonable care by a qualified appraiser would have warned the Neustadts of serious structural defects in the house. On that basis, the court adjudged the Government liable for the difference between the purchase price and the fair market value at the time of sale. The Court of Appeals for the Fourth Circuit affirmed the District Court's judgment over the Government's strong objection that recovery was barred by the "misrepresentation" exception of 28 U.S.C. § 2680(h). The Court of Appeals deemed § 2680(h) inapplicable for the reason that the misrepresentation was "merely incidental" to the "gravamen" of the claim, i. e., "the careless making of an excessive appraisal so that (the Neustadts were) . . . deceived and suffered substantial loss". 281 F.2d 596 at 602. In order to resolve an apparent conflict between the decision of the Court of Appeals for the Fourth Circuit and the holdings of Courts of Appeals of other Circuits uniformly construing the "misrepresentation" exception of § 2680(h) to preclude recovery on closely analogous facts ¹, the Supreme Court granted certiorari and concluded that the interpretation adopted by the Court of...