Opposition Brief — Bank One, Stevens Point, NA v. United States Department of Commerce

OCTOBER TERM, 1988

BANK ONE, STEVENS POINT, NA, PETITIONER

V.

UNITED STATES DEPARTMENT OF COMMERCE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS IN OPPOSITION

WILLIAM C. BRYSON

Acting Solicitor General

JOHN R. BOLTON

Assistant Attorney General

JOHN F. CORDES

MARY K. DOYLE

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

MICHAEL A. LEVITT

Acting General Counsel

JAMES K. WHITE

Assistant General Counsel

GEORGE E, MADEN

WALTER J. MCLELLAN

Altorneys

Department of Commerce

Washington, D.C. 20230

QUESTION PRESENTED

Whether the government is required to honor loan guar-

antees made pursuant to provisions of the Trade Act of

1974, 19 U.S.C. 2341 et seg., when the lending bank

materially breached the terms of the loan guaranty agree-

ments and the government neither directed nor encour-

aged those breaches.

(1)

TABLE OF CONTENTS

Page

EE SE Cee TN TET OTOP ER TTT ETE TTT Ee |

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ek a edb anda e Koen Redden ees l

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TABLE OF AUTHORITIES

Cases:

Branch Banking and Trust Co. v. United States, 98 F.

Supp. 757 (Ct. Cl.), cert. denied, 342 U.S. 893 (1951) .. Y

Brown v. Marsh, 777 F.2d 8 (D.C. Cir. 1985) ........... 9

Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947) .. 7

Federal Deposit Ins. Corp. v. Harrison, 735 F.2d 408

ord eke ch caae eb bsae ese aes s 9

Finley v. United States, cert. granted, No. 87-1973 (Oct. 3,

Ne ig Caw bas eed waew ase vs 12

Franchise Tax Bd. v. United States Postal Service, 467

lea Wa Cb hig wadks duo 6 sew Kes 8

Graver Tank & Mfg. v. Linde Air Products Co., 336 U.S.

eg cece sun aes ane 11

Heckler v. Community Health Services of Crawford

ee I |. 7

Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709

a ways Gin va. n'a bee sas 10

Loeffler v. Frank, No. 86-1431 (June 13, 1988) ......... 8

Lyneyv. Payne, 476 US. 926 (1966) ................... 10

Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir.

a x pak bch de eae 0 4 9

Morgan v. Heckler, 779 F.2d 544 (9th Cir. 1985) ........ 9

Schweiker v. Hansen, 450 U.S. 785 (1981) ............. 7

Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310

Sy a SA ge 11

United Mine Workers v. Gibbs, 383 U.S. 715 (1966) ..... 12-13

United States v. Florida, 482 F.2d 205 (Sth Cir. 1973) .... 9

United States v. Mattuci, 502 F.2d 883 (6th Cir. 1974)... 9

Utah Power & Light Co. v. United States, 243 U.S. 389

eee eas 64 Hy Kn a ae's 6i-de d6 eA 7-8

(III)

IV

Cases — Continued:

Wagner v. Director, Federal Emergency Management

Agency, 847 F.2d 515 (9th Cir. 1988) ......-----+---

Wilber Nat’l Bank v. United States, 294 U.S. 120 (1935) ..

Statutes:

Consolidated Omnibus Budget Reconciliation Act of

1985, Pub. L. No. 99-272, Tit. XIII, 100 Stat. 82:

§ 13006(a)(1), 100 Stat. 304 .....- 6 eee eee rere

§ 13006(b), 100 Stat. 304 ......-... eee eee ete

Trade Act of 1974, 19 U.S.C. 2341 ef seq. ....-----+++>:

19 U.S.C. 2342(b) (Supp. IV 1986) .....--------+--

19 U.S.C. 2342(b)(I(A) «06-6 eee eee etree

19 U.S.C. 2344(d) (Supp. IV 1986) ....---------+--

19 U.S.C. 2345(a2) ... 0... 2 cee e cece e eens:

UR fate. Tawar rer rr ree tae

Page

~

aNNNNN WNW WN

Jn the Supreme Court of the United States

OCTOBER TERM, 1988

No. 88-940

BANK ONE, STEVENS POINT, NA, PETITIONER

Vv.

UNITED STATES DEPARTMENT OF COMMERCE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. Al-A12)

is reported at 854 F.2d 223. The opinions of the district

court (Pet. App. Al3-A20, A61-A69) are not reported.

JURISDICTION

The judgment of the court of appeals was entered on

August 8, 1988. A petition for rehearing with suggestion

for rehearing en banc was denied on September 9, 1988.

Pet. App. A75. The petition for a writ of certiorari was

filed on December 7, 1988. The jurisdiction of this Court

is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. Petitioner, a bank in Stevens Point, Wisconsin, had

for several years made loans to Weber Plastics and Weber

(1)

2

Tackle, Inc. (Weber or Weber Companies) that Weber did

not repay. Pet. App. Al, Al3. In 1979, Weber approached

petitioner for new loans to finance its fishing tackle opera-

tions and plastics manufacturing facility and to purchase

new and modernize existing equipment. Pet. App. Al4.

Because of Weber’s unsatisfactory credit history and large

debt, petitioner and other local banks refused to make the

requested loans. Jbid.

In October 1980, Weber sought financial assistance in

the form of a loan guaranty from the United States

Department of Commerce’s Economic Development Ad-

ministration (EDA) pursuant to provisions of the Trade

Act of 1974, 19 U.S.C. 2341 et seg. Pet. App. A2, Al4.

The Trade Act authorized the EDA to provide financial

assistance to American firms hurt by imports which had

“no reasonable access to financing through the private

capital market,” but provided a “reasonable assurance of

repayment of the loan.” 19 U.S.C. 2342(b)(1)(A), 2345(a)

(2)'; see Pet. App. A2. A necessary step in the loan

guaranty application process was the preparation of a

“Diagnostic Analysis and Recovery Plan.” Pet. App. Al4.

Weber presented an initial draft of the plan to the EDA

and to petitioner for review. After revisions (based upon

petitioner’s comments) were made in the recovery plan, it

was approved by EDA. Petitioner thereafter agreed to

loan Weber a total of $2.1 million, 90% of which was

guaranteed by EDA. Pet. App. Al4-Al6.

Under the terms of the guaranty agreements, petitioner

agreed to certain terms and conditions, including the re-

| The Trade Act was amended in 1986 to provide that “no direct

loans or guarantees of loans” could be made under the adjustment

assistance provisions after April 7, 1986. 19 U.S.C. 2344(d) (Supp. IV

1986). Section 2342(b) now provides for technical assistance alone.

Consolidated Omnibus Budget Reconciliation Act for 1985, Pub. L.

No. 99-272, Tit. XIII, § 13006(a)(i) and (b), 100 Stat. 304.

a ee ae

3

quirement that it would exercise “such care and diligence

in the disbursement, servicing, collection and liquidation

of the Loan as would be exercised by a reasonable and

prudent commercial bank in dealing with a loan of its

funds without guaranty * * *.” Pet. App. A2. Each guar-

anty also provided that “if the bank ‘failed to comply with

all of the material provisions’ of the agreement{,] the

government could terminate the guaranty.” Jbid.

On November 13, 1981—after the guaranty agreements

were signed, but before the loans were closed — Weber’s

accountants issued a Financial Report for the Fiscal Year

ending July 31, 1981, which showed that Weber’s losses

for that year were more than double the $250,000 loss pro-

jected in the recovery plan. Pet. App. A8, A87, A88. Peti-

tioner received a copy of the report and, on December 7,

1981, forwarded it to the EDA along with other materials.

Pet. App. A87.?

The Weber loans were closed on December 17, 1981.

Pet. App. A15S. On that date, the EDA’s Regional Director

wrote a letter to petitioner in which he opined, on the basis

of an affidavit and statements made by Weber’s President

and Treasurer (Remer Hutchinson), that since the date of

the acceptance of the guaranty agreements by the peti-

tioner, there had been “no unremedied adverse changes in

the financial condition of Weber Tackle Company suffi-

ciently serious * * * to warrant withholding disbursement

on account of the referenced loans.” Pet. App. A90.

On October 18, 1982, Weber defaulted on the loans. (It

later went out of business). Pet. App. A3, A1l6. Petitioner

timely notified EDA of the default. Pet. App. Al6. Later,

* It was undisputed in the court of appeals that the petitioner had

received the Financial Report and sent it to the EDA before the loans

were closed, although the district court was uncertain about this point.

See Pet. App. Al7.

4

on June 15, 1984, petitioner demanded that EDA honor its

guarantees and repurchase the EDA-guaranteed portion

of the loans. Jbid. On February 20, 1986, after the matter

had been investigated by the Inspector General of the

Department of Commerce, the EDA refused to acknowl-

edge liability on its guaranty agreements. Pet. App. A16,

A43.

2. Petitioner originally brought suit against Weber in

state court, seeking to foreclose on Weber’s assets that had

secured the loans. Pet. App. A3. Weber answered the

complaint and asserted a third-party complaint against the

government. Ibid. After the government removed the case

to the United States District Court for the Western District

of Wisconsin, petitioner twice amended its complaint and

ultimately named as defendants, among others, the Secre-

tary of Commerce in his official capacity,? Weber, and the

individual respondents Remer and Elaine Hutchinson.*

Pet. App. A3, A4, Al3.

3 Section 2350 of Title 19 of the United States Code provides that

the Secretary of Commerce may sue and be sued in United States

District Court regardless of the amount in controversy. Although peti-

tioner named other federal defendants in its suit (the United States

Department of Commerce, the United States, and the EDA), it sought

no separate relief against them and, as the court of appeals recognized

(Pet. App. AS), they should have been dismissed. For the sake of

simplicity, we will hereinafter refer to the governmental defendants

collectively as the “federal respondent.”

4 Remer Hutchinson, the former president of Weber Companies,

owned a controlling interest in the companies. Pet. App. A22. His

wife, Elaine Hutchinson, was the former Secretary of the companies.

Pet. App. A23. The individual respondents counterclaimed against

petitioner, alleging that petitioner had agreed to subordinate its priori-

ty position with respect to certain collateral to their personal claim for

$150,000 advanced to Weber, and filed a cross-claim against the

federal respondent, alleging that it was aware of the subordination

agreements, and by guaranteeing the loans, had effectively subordi-

5

3. The district court conducted a one-day bench trial

on the loan guaranty issues. After examining those of peti-

tioner’s activities that the federal respondent claimed had

breached the guaranty agreements, the court concluded

that the federal respondent should not be released from its

guaranty obligations. Pet. App. A13-A20.

First, the district court found that Weber’s audited

Financial Report for the year ended July 31, 1981 should

have raised questions about the viability of the recovery

plan, that both petitioner and the federal respondent

should have obtained the report prior to closing the loans,

and, therefore, that each entity should bear responsibility

for its imprudent acts. Pet. App. Al7.

Similarly, the district court was “distressed” at the peti-

tioner’s practice of allowing Weber to acquire additional

fixed assets before having them approved, and of dis-

bursing loan proceeds after Weber had defaulted. But it

found the government estopped from protesting against

these practices since it, too, generally followed “sloppy

procedures” in approving fixed asset expenses and had not

protested either that practice or the continued disburse- °

ment. Pet. App. Al7-A18.

Finally, the district court found that petitioner’s dis-

bursement of the loan proceeds into a checking account

controlled by a Weber company not party to the loans had

been imprudent, but had caused no harm. Pet. App. A18.

It held that petitioner’s practice of allowing Weber to

maintain substantial overdrafts and to violate certain

nated its Own interest in the collateral. Pet. App. A61-A69. Ulti-

mately, petitioner and Weber entered into a stipulation for entry of a

judgment of foreclosure and replevin against Weber. Pet. 10 n.10.

Later, the district granted summary judgment for petitioner against

the individual respondents, and summary judgment in favor of peti-

tioner and the federal respondent on the individual respondents’

counter- and cross-claims. Pet. 12.

6

negative covenants in the guaranty agreements was like-

wise harmiess. Pet. App. Al19.

4. The court of appeals reversed and directed the

district court to dismiss petitioner’s claim against the

federal respondent on the merits. Pet. App. All. Observ-

ing that “[t]he district judge agreed with the government

that the bank had acted imprudently,” the appellate court

concluded that “the bank’s conduct amounted to a

material breach * * * which therefore excused the govern-

ment from performing its obligations under the guaranty”

because “the evidence overwhelmingly established that

th{e] undemanding standard [for a material breach] was

satisfied, and the district court’s (unexplained) disagree-

ment with this conclusion we deem clearly erroneous.”

Pet. App. A9-A10.

The appellate court then turned to the district court’s

conclusion that “the bank’s imprudence was somehow can-

celled by the government’s.” Pet. App. Al0. The court of

appeals held that “nothing in the guaranty agreement en-

joins the guarantor to vigilance.” /bid. It also noted that

while some subordinate EDA officials had turned a “blind

eye” to some of the petitioner’s imprudent acts, none of

those officials had any actual or apparent authority to

modify the terms of the guaranty agreements, ibid., so

that “[t]he failure of the Economic Development Ad-

ministration’s regional staff to insist upon compliance

_ with [the provision requiring petitioner to act with the

prudence of a normal commercial bank making the loan

without a government guaranty] * * * does not open the

vaults of the Treasury to a bank that violated the provi-

sion.” Pet. App. A10-A11. Finally, although recognizing

that “[t]he question whether and in what circumstances the

federal government can be estopped by an act of its agents

remains unsettled,” the court of appeals held that

petitioner’s estoppel argument failed in any case because

petitioner had not demonstrated that even “the traditional

elements of an estoppel” were present. Pet. App. All.

ARGUMENT

1. Petitioner’s main contention is that the court of ap-

peals erred in failing to hold the government estopped by

its own imprudent behavior from asserting petitioner’s

material breach of the guaranty agreements. Petitioner’s

objection, however, is not to any error in the legal stand-

ard adopted by the court here. While we maintained below

and continue to believe that the government is not subject

to estoppel in this case (see Federal Crop Ins. Corp. v.

Merrill, 332 U.S. 380 (1947)), the court in fact assumed for

the purposes of the decision that the government was

susceptible to estoppel. Noting that “[t]he question

whether and in what circumstances the federal government

can be estopped by an act of its agents remains unsettled,”

the court explicitly followed the approach adopted by this

Court in Heckler v. Community Health Services of

Crawford County, Inc., 467 U.S. 51, 61 (1984), to hold

that “ ‘however heavy the burden might be when an estop-

pel is asserted against the Government, the private party

surely cannot prevail without at least demonstrating that

the traditional elements of an estoppel are present.’ ” Pet.

App. All. Petitioner’s objection is thus simply to the ap-

plication of that standard to the facts of this case, and spe-

cifically to the court’s conclusion that “there was no

reliance by the bank.” Jbid.; see Community Health Ser-

vices, 467 U.S. at 61, 66 (requiring “reasonable reliance”

as element of estoppel).°

5 Petitioner’s repeated attempts to distinguish cases like Schweiker

v. Hansen, 450 U.S. 785 (1981); Federal Crop Ins. Corp. v. Merrill,

332 U.S. 380 (1947); Wilber Nat'l Bank v. United States, 294 U.S. 120

(1935); and Utah Power & Light Co. v. United States, 243 U.S. 389

8

The court of appeals’ holding in this case that there was

insufficient evidence to support a finding of reasonable re-

liance does not warrant this Court’s review. Under the

plain terms of the guaranty agreements, petitioner had a

contractual responsibility “to administer the loan in the

same fashion as would a ‘reasonable and prudent commer-

cial bank’ in dealing with a loan that had not been guaran-

teed by the United States Government.” Pet. App. A7-A8.

That is, the bank was not supposed to look to the govern-

ment to guide its actions. To the contrary, it was obliged

by the terms of the guaranty agreements to exercise its

judgment independently, guided by the practice of other

commercial institutions. Petitioner does not contend that

the terms of the contract were modified so as to release

petitioner from its obligation to act as a “reasonable and

prudent commercial bank.”® Petitioner cannot demon-

strate how it otherwise might reasonably have relied on the

(1917), in which this Court has held estoppel against the government

inappropriate, are beside the point. The court of appeals did not reach

the question whether the government could be estopped on the facts of

this case because it found that petitioner had failed to satisfy the tradi-

tional test for estoppel. For the same reason, petitioner’s invocation of

Franchise Tax Bd. v. United States Postal Service, 467 U.S. 512 (1984)

and Loeffler v. Frank, No. 86-1431 (June 13, 1988) is gratuitous.

Franchise Tax Bd. and Loeffler concern the obligations assumed by

the Postal Service in its commercial role given a “sue and be sued”

clause, and do not concern the circumstances under which such an en-

tity might be estopped. Although petitioner cites those cases to sup-

port the proposition that when the government enters into commercial

activities, its liabilities are the same as those of other private entities,

the court of appeals had already assumed as much in this case when it

applied the principles of estoppel to the circumstances presented here.

© The court of appeals’ determination that the subordinate officials

with whom petitioner dealt had no “authority to modify the terms of

the guaranty” is germane to no wider point. See Pet. App. A10.

9

government; the court of appeals did not err in concluding

that the district court’s unexplained conclusion to the con-

trary was mistaken.

Petitioner observes (Pet. 20-22), as did the court of ap-

peals (Pet. App. All), that the law of estoppel remains

unsettled. As petitioner notes (Pet. 20-22), a number of

courts of appeals have held that the government may not

be estopped when it acts in its sovereign capacity (see, e.g.,

United States v. Florida, 482 F.2d 205, 210 (Sth Cir. 1973);

cf. United States v. Mattuci, 502 F.2d 883 (6th Cir. 1974));

other courts have held that the government may be

estopped when it acts in a “proprietary” capacity as when

its activities are arguably analogous to those of a private

concern (see, e.g., Federal Deposit Ins. Corp. v. Harrison,

735 F.2d 408, 412 (11th Cir. 1984); Branch Banking &

Trust Co. v. United States, 98 F. Supp. 757 (Ct. Cl.), cert.

denied, 342 U.S. 893 (1951)); still others have eschewed

the sovereign/proprietary distinction, and have held that

the government may be estopped only if, in addition to the

traditional elements of estoppel, the government’s agents

have engaged in “affirmative misconduct” that causes

“serious injustice” to the complainant (see, e.g., Wagner v.

Director, Federal Emergency Management Agency, 847

F.2d 515, 519 (9th Cir. 1988); Morgan v. Heckler, 779

F.2d 544, 545 (9th Cir. 1985)).’

7 Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir. 1988),

and Brown v. Marsh, 777 F.2d 8 (D.C. Cir. 1985), cited by petitioner

(Pet. 20-21), are not relevant because they do not concern estoppel. In

Maxima Corp., the court held that under contract law the government

could not retroactively apply a “termination for convenience” clause

to a contract already fully performed on both sides. In Brown, the

court held that a plaintiff had substantially satisfied his duty to ex-

haust administrative remedies, adding that, where the obligation did

not have the nature of a jurisdictional bar, the government could not

press the obligation as a legal defense when it had failed to raise the

defense sufficiently below.

10

Under any of these approaches, however, the govern-

ment would not have been estopped here. Petitioner failed

to demonstrate even that the traditional elements of estop-

pel, let alone “affirmative misconduct” causing “serious

injustice,” existed here. Since the result in this case would

not have been different in any circuit, any conflict that ex-

ists among the courts of appeals in their treatments of

estoppel cases is not presented by the decision in this case. ®

2. Petitioner also claims that the court of appeals en-

gaged in improper factfinding. See Icicle Seafoods, Inc. v.

Worthington, 475 U.S. 709, 714 (1986). Although the

court of appeals arguably engaged in commentary un-

related to the issues developed before the district court and

unnecessary to the disposition of the case,? there was no

disagreement as to the key factual finding. The district

court found (Pet. App. A17-A20), and the court of ap-

* In a related vein, petitioner suggests (Pet. 22-23) that it might

benefit by an application of “appropriate principles of guaranty law,”

even if it cannot demonstrate the traditional elements of an estoppel.

See Pet. 22 (citing Lyng v. Payne, 476 U.S. 926, 936 (1986)). Even

assuming that such an approach would be proper here, an element of

the guaranty agreement at issue in this case was the requirement that

the bank exercise its independent “reasonable and prudent commer-

cial” judgment. There was no corresponding requirement placed on

the federal respondent to evaluate and verify whether petitioner’s ac-

tions were those of a “reasonable and prudent commercial bank.” See

Pet. App. Al0. Nor did the government ever take such action. The

petitioner failed to meet a material requirement of the guaranty; it

therefore cannot seek to enforce the guaranty.

* For example, petitioner objects (Pet. 24 n.16) to the court of ap-

peals’ characterization of petitioner’s decision to close the loans as

“yield[ing] to [the] temptation” to take advantage of the government’s

guaranty program (Pet. App. A8). This statement, however, is simply

part of the court’s generic observation that a bank could be expected

to close a deal if it decided that the deal worked to its commercial self-

interest; it is not specifically related to the court’s disposition of this

case. See /bid.

1]

peals agreed (Pet. App. A10), that petitioner had acted im-

prudently in closing the Weber loans, and in the way it

serviced those loans. This Court does not sit to review that

factual finding. Tiffany Fine Arts, Inc. v. United States,

469 U.S. 310, 317-318 n.5 (1985); Graver Tank & Mfg. v.

Linde Air Products Co., 336 U.S. 271, 275 (1949).

The main disagreement between the court of appeals

and the district court did not concern the finding that the

petitioner had acted imprudently, but the legal conse-

quences of that finding. Specifically, unlike the district

court, the court of appeals held that the imprudence of the

petitioner in closing the loans, like its subsequent im-

prudence in servicing the loans, violated its contractual

obligation to act as a “reasonable and prudent commercial

bank.” Pet. App. A7-A9. It ruled that the “reasonable and

prudent” requirement was a “central undertaking of the

promisor.” Pet. App. A9. Once that central undertaking

was recognized to be at issue, and the court of appeals had

determined that the district court’s refusal to impute

responsibility to the petitioner for the making of the loans

was mistaken,'® the conclusion that the district court had

'0 The obligation of the bank to act as a “reasonable and prudent

commercial bank” appeared in the guaranty agreements. In the court

of appeals’ view, the provision was susceptible to two interpretations:

it could be interpreted as requiring “reasonable and prudent behavior”

subsequent to the closing of each loan, or as requiring such behavior

from the beginning of the transaction (including the closing of the

loan as a necessary component of its later disbursement). Pet. App.

A9. The court of appeals correctly noted that the petitioner waived the

argument that the “reasonable and prudent” requirement did not ap-

ply to it from the beginning of the transaction by failing to make the

argument below. /bid. While petitioner suggests (Pet. 20 n.13) that it

did raise the issue below, its argument in the cited pages goes only to

the contentions that the petitioner did not act imprudently, that the

government acted imprudently as well, and that a guarantor is not en-

titled to expect prudent action from a bank. It does not assert that it

12

clearly erred when it found (Pet. App. A19) that “[t]}here

has been no substantial and material breach of duty” by

the petitioner was compelling. Pet. App. A9-A10.

3. Petitioner also seeks certiorari with respect to the

court of appeals’ ruling that the district court had no pend-

ent party jurisdiction over petitioner’s state law claim

against the individual respondents, the Hutchinsons. The

federal respondent is not affected by that ruling.'' We

note, however, that the issue raised by the petitioner does

not require this Court to hold the petition pending disposi-

tion of Finley v. United States, cert. granted, No. 87-1973

(Oct. 3, 1988). Petitioner’s arguments and those involved

in the Finley case concerning the propriety of pendent par-

ty jurisdiction are based on the premise that the threshold

requirements making pendent jurisdiction appropriate

have been met. See United Mine Workers v. Gibbs, 383

had no obligation to act prudently under the guaranty agreement

itself. In any event, the petitioner does not ask this Court to review the

court of appeals’ interpretation of the particularities of the guaranty

agreements employed here, an issue of little continuing importance

given the amendment of the Trade Act to exclude financial assistance

from the government. See 19 U.S.C. 2342(b), 2344(d) (Supp. IV

1986).

'! The district court granted summary judgment for the federal

respondent on a cross-claim filed against it by the Hutchinsons. The

Hutchinsons had claimed that the federal respondent, by virtue of

guaranteeing the Weber loans, had acquiesced in certain letter

agreements by which the petitioner, and therefore the federal respond-

ent, had subordinated its interest in certain collateral to that of the in-

dividual respondents. The court of appeals took no express action on

the district court’s ruling on this claim, but vacated its judgment

disposing of petitioner’s claim against the Hutchinsons and directed

that it be dismissed for lack of subject matter jurisdiction. The in-

dividual respondents have not sought review of the court of appeals’

decision. Rather, only the petitioner seeks to have the disposition rele-

vant to its claim reviewed. The pendent party claim therefore does not

concern the federal government.

13

U.S. 715, 725 (1966) (federal claim must be of sufficient

substance to support subject matter jurisdiction, federal

and state claims must be derived from “common nucleus

of operative fact,” and be such that plaintiff would or-

dinarily be expected to try both in one judicial

proceeding). Unlike the district court in Finley, the court

of appeals here rejected that premise. It found that it did

not have to consider the propriety of pendent party

jurisdiction because the petitioner had not demonstrated

that its claim against the federal government and its claim

against the individual respondents involved the same

“common nucleus of operative facts.” Pet. App. A7

(quoting Gibbs, 383 U.S. at 725). As the court explained,

“(t]he bank’s claim against [EDA] * * * concerns the terms

of the guaranty agreement and the behavior of both the

bank and the EDA in administering the loan. The bank’s

claim against the Hutchinsons involves the terms of its

agreement with the Hutchinsons. There is no overlap of

legally pertinent facts or legal principles.” Thus, contrary

to petitioner’s contention that the Seventh Circuit failed to

apply the Gibbs common nucleus test (Pet. 27), the

Seventh Circuit applied the test and determined that “[t]he

operative facts * * * are separate nuclei with much space

between them.” Pet. App. A7. Since the claim here did not

meet the threshold requirement for pendent jurisdiction,

this case does not raise the question of pendent party

jurisdiction.

14

CONCLUSION

For the foregoing reasons, it is respectfully submitted

that the petition for a writ of certiorari should be denied.

Respectfully submitted.

WILLIAM C. BRYSON

Acting Solicitor Generai

JOHN R. BOLTON

Assistant Attorney General

JOHN F. CORDES

MARY K. DOYLE

Attorneys

MICHAEL A. LEVITT

Acting General Counsel

JAMES K. WHITE

Assistant General Counsel

GEORGE E. MADEN

WALTER J. MCLELLAN

Attorneys

Department of Commerce

FEBRUARY 1989

“> US GOVERNMENT PRINTING OFFICE: 1989— 241-699 00093