State of La. v. Public Investors, Inc.

• Decision Date: 17 October 1994
• Docket Number: No. 93-5366,93-5366
• Citation: 35 F.3d 216
• Parties: STATE of LOUISIANA, Plaintiff-Appellee, v. PUBLIC INVESTORS, INC., et al., Defendants, v. Robert L. MARRERO, Trustee of the Bankruptcy Estate of Public Investors, Inc., Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 216

35 F.3d 216

STATE of LOUISIANA, Plaintiff-Appellee, v. PUBLIC INVESTORS, INC., et al., Defendants, v. Robert L. MARRERO, Trustee of the Bankruptcy Estate of

Public Investors, Inc., Appellant.

No. 93-5366.

United States Court of Appeals Fifth Circuit.

Oct. 17, 1994.

Rehearing Denied Dec. 5, 1994.

Edward H. Arnold, III, John M. Duck, Adams & Reese, New Orleans, LA, for appellant.

William L. Schuette, Jr., J. Rodney Ryan, Jr., Rachelle D. Dick, John B. Dunlap, Baton Rouge, LA, for State of La.

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

Before WISDOM, DAVIS and DUHE, Circuit Judges.

WISDOM, Circuit Judge:

The State of Louisiana sued a bankrupt insurance holding company, and the company's bankruptcy trustee filed a counterclaim. The State voluntarily dismissed its claim against the company. The district court then dismissed the trustee's counterclaim against the state, holding it barred by the State's Eleventh Amendment sovereign immunity and by the statutory "discretionary function" exception from liability of La.Rev.Stat. Sec. 9:2798.1. The trustee appeals the dismissal of his counterclaim. We find it unnecessary to look beyond the state statute to resolve this case, and we AFFIRM.

I.

The parties conducted little discovery, if any, before the district court dismissed this case. Most of the facts, however, are undisputed, because appellant Robert Marrero adopted the State's pleadings as his own against the other named defendants. The pertinent facts, as taken from the parties' joint pleadings, are as follows. ¹

Public Investors, Inc. is an insurance holding company. It is bankrupt, and appellant Marrero is its trustee. Public Investors engaged in several dubious financial transactions with some of its subsidiary companies and some of their officers. Some of those financial transactions were approved in advance by officials of the State. Marrero's counterclaim alleges that some State officials violated unspecified duties in approving the transactions. The two sets of transactions underlying Marrero's counterclaim are as follows.

First, in October 1989, Public Investors sold two of its wholly owned subsidiaries (Universal Guaranty Life Insurance Co. and Alliance Life Insurance Co.) to another corporation (First Commonwealth Corp.) for about $26 million in cash plus a $10 million promissory note. About $21 million of the proceeds of that sale were diverted to insurance companies outside the State of Louisiana. ² About $13 million of the proceeds of the sale were diverted to another Louisiana company. ³

Second, in a quick series of transactions over a period of about five months, Public Investors and the other defendants sold and resold a parcel of real estate to each other, inflating the price substantially each time. The property involved was Parkway Plaza, the site of an unfinished office building in San Antonio, Texas. On December 14, 1988, Hickory Development Corporation purchased Parkway Plaza from the FDIC for $1 1/2 million.

About one year after the initial purchase, the defendants conducted a quick series of repeated sales of Parkway Plaza. On November 30, 1989, Hickory Development sold the property to "Parkway Plaza Corp." or "Parkway Plaza, Inc." for $7 million. The buyer immediately resold the property on December 8, 1989 to Public Investors for $7 1/2 million. Public Investors sold the property on December 17, 1989 to Insurance Premium Assistance Corporation ("IPAC") for $10 million. IPAC resold the property two days later to Fidelity Fire & Casualty Insurance Co. ("Fidelity") for $10 million. On April 1, 1990, Fidelity sold Parkway Plaza to Southshore Holding Corp. ("Southshore") for $13 million. Two days later, Southshore resold the property for $15 million to "Concord Capitol", which resold it that same day to Midwest Life for $17 million. Each of the buyers of Parkway Plaza was alleged to have been effectively a shell corporation owned or controlled by one or more of the named individual defendants. Defendants B.F. Shamburger and Gary Jackson were alleged to have "dominated the affairs" of the various defendant corporations. The defendants also allegedly engaged in a series of transactions involving resale of the various mortgage loans on Parkway Plaza that had accumulated during the course of transactions described above.

Public Investors filed its Chapter 11 bankruptcy petition on March 21, 1991. The case was converted to a Chapter 7 proceeding on May 20, 1991. On September 16, 1991, the State of Louisiana sued Public Investors and seventeen other defendants, including related corporations and some of their officers and directors, in Louisiana state court. The State sought a declaratory judgment that all the defendants constituted a "single business enterprise", an accounting of the various transactions engaged in and assets possessed by the defendants, and asked that any of the defendants' assets found to have been "improperly transferred, wasted, misapplied or misappropriated" be deposited into the registry of the court for "further disposition in accordance with law". ⁴ Marrero notes, we think correctly, that this demand for marshalling of the defendants' assets would have violated the automatic bankruptcy stay that protected Public Investors.

In response to the State's lawsuit, Marrero (1) removed the case to federal court under 28 U.S.C. Secs. 1334 and 1441, (2) filed a crossclaim against the other defendants named in the State's complaint, adopting the state's pleadings as his own in the crossclaim, and (3) filed a $28 million counterclaim against the State. The counterclaim charged that unnamed officials of the Louisiana Department of Insurance ⁵ failed to perform their duties because they approved, or failed to prevent, Public Investors's shady transactions at a time Marrero says they knew Public Investors was insolvent. ⁶ Marrero charges the State with a loss of some $21 million from the sale of Public Investors' subsidiaries, plus some $7 million from the Parkway Plaza transactions.

The State of Louisiana voluntarily dismissed its claims against Public Investors. The district court then involuntarily dismissed with prejudice Marrero's counterclaim against the State, and Marrero appealed.

II.

The district court rested its dismissal of Marrero's counterclaim on two alternative grounds. First, it concluded that the State of Louisiana's Eleventh Amendment immunity from suit in federal court barred the counterclaim, and the immunity had not been waived by the State or abrogated by federal law. Second, the district court concluded that the statutory "discretionary function" immunity of La.Rev.Stat. Sec. 9:2798.1 barred Marrero's counterclaim.

When presented with two grounds for resolving a case, one statutory and the other constitutional in nature, we will address the statutory ground first and dispose of the case solely on that basis if possible. ⁷ In this case, the district court's dismissal of Marrero's counterclaim may be affirmed solely on the basis of La.Rev.Stat. Sec. 9:2798.1, and accordingly, we do not reach the Eleventh Amendment issues.

A. "Discretionary Function" Immunity in Louisiana

In part, La.Rev.Stat. Sec. 9:2798.1 provides:

(B) Liability shall not be imposed on public entities or their officers or employees based upon the exercise or performance or the failure to exercise or perform their policy-making or discretionary acts when such acts are within the course and scope of their lawful powers and duties.

(C) The provisions of Subsection B of this Section are not applicable:

(1) To acts or omissions which are not reasonably related to the legitimate governmental objective for which the policy-making or discretionary power exists; or

(2) To acts or omissions which constitute criminal, fraudulent, malicious, intentional, willful, outrageous, reckless, or flagrant misconduct.

The Supreme Court of Louisiana has said that Sec. 9:2798.1 "is essentially the same as the exception in the Federal Tort Claims Act", ⁸ 28 U.S.C. Sec. 2680(a).

In determining whether the discretionary function exception applies, the Louisiana courts follow the two-step analysis laid out by the U.S. Supreme Court in Berkovitz v. United States. ⁹ The first question is "whether the action is a matter of choice" for the government entity or employee. ¹⁰ "If no options are involved, the exception does not apply." ¹¹ Therefore, for example, where a statute prescribes a certain course of action, the government employee has no discretion to ignore the statute's command, and "discretionary function" immunity offers no protection from liability. ¹² By comparison, statutes that merely authorize or permit a course of action may provide some discretion to perform that action or not. ¹³

If the government employee has some discretion, the inquiry proceeds to the second stage of the Berkovitz analysis, with the focus on whether the challenged conduct was an "action[ ] or decision[ ] based on considerations of public policy.... involv[ing] the permissible exercise of policy judgment". ¹⁴ The Supreme Court has recently made it clear that the determination whether policy considerations are involved does not turn on the characterization of the challenged action as "operational" or not. ¹⁵ "Decisions at an operational level can be discretionary if based on policy." ¹⁶ A policy decision is one that is "based on social, economic, or political concerns". ¹⁷ There is a presumption that when government employees exercise discretion given to them by a statute or regulation, they are doing so based on the same policy concerns that animate the controlling statute or regulation itself. ¹⁸ That presumption sets a high hurdle for a complaint to overcome when challenged with a motion to dismiss:

For a complaint to survive a motion to dismiss, it must allege facts which would support a finding that the challenged actions are not the kind of conduct that can be...