Opinion
Civil Action No. 03-0070.
August 12, 2004
MEMORANDUM
I. INTRODUCTION
This controversy arises from the court's January 17, 2003 Order, which placed Acorn Technology Fund, L.P. ("ATF") in Receivership and appointed the United States Small Business Administration ("SBA") as Receiver. Pursuant to powers granted under this court's Receivership Order, the SBA undertook the task of marshaling the assets of ATF. This included making written demand upon certain limited partners of ATF for balances in arrears on investor agreements. Such a demand for payment was made by letter on June 5, 2003 upon Leonard and Lynne Barrack ("the Barracks"). The Barracks refused to pay. Thereafter, the SBA, in its capacity as Receiver for ATF, commenced an action against the Barracks for breach of contract. In response, the Barracks have filed a Motion to Partially Lift the Receivership Order so as to permit their pursuit of claims against ATF, Acorn Technology Partners, L.L.C. ("ATP") and the SBA. For the reasons that follow, the Barracks' Motion to Lift the Receivership Stay is denied.
ATF is a New Jersey Limited Partnership that operates as a Small Business Investment Company ("SBIC"). (Barracks Mem. Supp. Lifting Receivership Stay at 2.)
After a hearing on the record, this court determined that the licensee engaged in violations of the Small Business Investment Act, as amended, 15 U.S.C. § 661, et seq., which warranted the removal of John Torkelsen from managing and controlling ATF and the appointment of the SBA as Receiver.
The court's order of receivership requires that application be made to the court prior to the commencement of any legal proceeding against an individual, party, or entity related to ATF. The order states in relevant part that any and all civil legal proceedings of any nature, . . . involving Acorn, the Receiver, or any of Acorns' past or present officers, directors, managers, agents or general or limited partners sued for, or in connection with, any action taken by them while acting in such capacity . . . whether as plaintiff, defendant, third-party plaintiff, third-party defendant, or otherwise, are stayed in their entirety, and all courts having any jurisdiction thereof are enjoined from taking or permitting any action until further order of this court. (Barracks Mem. Supp. Lifting Receivership Stay Ex. A at 7.)
ATP is a New Jersey limited liability company that is controlled and managed by its president, John Torkelsen. (Barracks' Mem. Supp. Lifting Receivership Stay at 2.)
II. BACKGROUND
On April 7, 1998, after being heavily courted as potential investors by John Torkelsen, president and manager of ATP, the Barracks entered into an investor's agreement for a partnership interest in ATF. Under this agreement the Barracks agreed to pay $1,000,000 in exchange for an interest in the limited partnership. (Barracks Mem. Supp. Lifting Receivership Stay at 2.) Exhibit A to the Agreement of Limited Partnership shows that the Barracks purchased a 5.96% interest in exchange for their agreed upon capital contribution. (Barracks' Mem. Supp. Lifting Receivership Stay Ex D.) The agreement called for the Barracks to pay, upon execution, the sum of $250,000 and to make subsequent installments yearly thereafter in the amount of $250,000 commencing November 15, 1999, and ending November 15, 2001.
ATP is ATF's sole general partner. (Barracks Mem. Supp. Lifting Receivership Stay at 2.)
On September 15, 2000, the Barracks entered into a second subscription agreement by which they increased their capital contributions to ATF by $500,000. The September subscription agreement also called for annual payments on an installment basis at $250,000 per year. So, in the aggregate, the Barracks agreed to contribute $1,500,000 in capital in exchange for an interest as limited partners in ATF. ATF's records reflect that the Barracks paid only $750,000 of their total commitment.
Attempting to justify their non-compliance with the Receiver's demand for payment, the Barracks allege that sometime in 2001, after having already invested $750,000 in ATF, they exercised their rights under a subscription waiver that was granted by ATP upon execution of the investor agreement and that permitted them to cease making contributions to the partnership without penalty. They claim that under the terms of this waiver they were to be protected from exposure to any and all contractual penalties, including change in equity position. According to the Barracks, the waiver was granted to them by ATP in approximately March 1998. When they had not agreed to subscribe immediately, John Torkelsen, ATP's president and ATF's general partner, solicited them verbally with representations, later memorialized in letters written to the Barracks. The Barracks maintain that two letters of solicitation written by Torkelsen, both dated March 24, 1998 granted the waiver to them as the essential incentive to cause their investment. The first of such letters reads, in pertinent part, as follows:
Under the SBA regulations, there are two things that I can do to make it easier for you to subscribe.
First, I can give you a subscription agreement that calls for 25% on signing (the SBA's minimum) and 25% for each of three more years.
Second, the penalties for not fulfilling the subscription agreement are dictated by the SBA, but on an individual basis can be waived by the manager. Therefore, I will waive penalties in advance. . . .
If you can help me with this project, I will be forever grateful. A subscription of four or more units under these conditions would be invaluable. . . .
(Barracks' Mem. Supp. Lifting Receivership Stay at Ex. B.) In the second letter, also dated March 24, 1998, John Torkelsen writes:
In connection with your subscription to the Acorn Technology Fund, L.P., Acorn Technology Partners, L.L.C., the General partner, hereby agrees that should you choose not to invest additional funds at any time that your capital is called after your initial subscription remittance, you may elect to apply Section 3.4.1 or 3.4.2 of the Limited Partnership Agreement to your investment. That is you may choose to make later investments with interest or you may choose to discontinue investing while maintaining your existing position without penalty. . . .
(Barracks' Mem. Supp. Lifting Receivership Stay at Ex. C.)
The Barracks contend that the letters of waiver, coupled with Section 3.4.2 of ATF's Partnership Agreement release them from their original obligation to ATF. (Barracks' Mem. Supp. Lifting Receivership Stay at Ex. B and C.) The Barracks also assert that a like waiver was instrumental in their decision to enter into the second investor's agreement in September 2000. They contend that they were unaware of any improprieties in the operation of ATF and that they unwittingly continued to make payments under the original April subscription agreement. (Barracks' Mem. Supp. Lifting Receivership Stay at ¶¶ 21-22.) They also claim that their belief that ATF was being operated in compliance with SBA regulations induced them into committing additional investment dollars under a second subscription agreement. (Id.) However, they do not allege that they ever advised ATF, or for that matter ATP, of their intent to stop paying under the agreements.
Section 3.4.2 of the Agreement reads as follows:
Termination of Right to make Further Capital Contributions. In the event that any Private Limited Partner fails to make a contribution required under the Agreement within thirty (30) days after the date such contribution is due, the General partner may, in its sole discretion (and with the consent of SBA given as provided in Section 5.2 of this Agreement), elect to declare, by notice to such Private Limited Partner, that:
(a) Such Private Limited Partner's Commitment shall be deemed to be reduced to the amount of any contribution of capital timely made pursuant to this Agreement; and
(b) Upon such notice (i) such Private Limited Partner shall have no right to make any capital contribution there after (including the contribution as to which the default occurred and any contribution otherwise required to be made thereafter pursuant to the terms of this Agreement and (ii) this Agreement shall be deemed amended to reflect such reduced Commitment. (Barracks' Mem of Law in Supp. Ex. D at 16.)
In addition, the Barracks claim that the SBA, as a "preferred partner" of ATF should be held responsible for the current state of the SBIC. They assert that the SBA, as the government regulator, was in the superior position, compared to ordinary limited partners, to prevent or limit the damage done to ATF. The Barracks allege that the SBA knew as early as November 2000 of prohibited transactions involving ATF and yet failed to report these discovered irregularities to the Barracks. Specifically, the Barracks allege that they were unaware, until the commencement of the SBA's suit, of ATP's failure to disclose to the SBA ATF's pre-licensing financing to Semi Systems, Inc., ATF's misapplication of SBA funds, and ATF's payment of unauthorized and/or excessive management fees, as well as improper cash advances, all in violation of SBA rules and regulations. The Barracks allege that during the period from March 1998 through and including June 3, 2003, ATF management periodically issued operating reports to investors and that none of these reports included any information regarding these improper practices. (Barracks' Mem of Law in Supp of Lifting Receivership Stay at ¶ 28.)
Therefore, the Barracks contend that it is they who suffered harm and are entitled to relief and that, to obtain appropriate relief, they must be allowed to pursue claims against ATF, ATP, and the SBA, for, inter alia, fraud, breach of fiduciary duty and breach of contract.
The Barracks allege that ATF breached the terms of the Subscription and Partnership Agreements by failing to honor the terms of the waivers granted to them. The Barracks claim that ATF committed negligent misrepresentation and/or fraud by inducing them to invest in ATF with the promise of a subscription waiver that it had no intention of honoring, or ability to honor, and by concealing from them its noncompliance with applicable law including SBA regulations. They claim that ATF similarly violated state and federal securities law by committing fraud in the sale of ATF limited partnership interests. The Barracks urge this court to permit them to seek redress by allowing the following counterclaims to be brought against ATF: (i) common-law fraud, fraudulent inducement, and negligent misrepresentation; (ii) breach of Subscription Agreement and Agreement of Limited Partnership; and (iii) violation of state and/or federal securities laws.
The Barracks claim that ATP breached the Subscription Agreement and the Partnership Agreement by failing to honor the terms of the waivers by failing to act in good faith toward them as "private" limited partners, and by failing to operate in compliance with applicable law, including SBA regulations. The Barracks specifically allege that ATP engaged in the following wrongful acts: 1) negligent misrepresentation and/or fraud by inducing them to subscribe with the promise of a waiver that it had no intention of honoring; 2) violation of state and federal securities laws by committing a fraud in the sale of partnership interests in ATF; and 3) breach of fiduciary duties to the Barracks by failing to disclose its own misconduct, ATF's noncompliance with SBA regulations, and by failing to act in good faith and in ATF's best interest. Based on the foregoing allegations, they urge that they should be permitted to file suit against ATP for: (i) common law fraud, fraudulent inducement, and negligent misrepresentation; (ii) breach of subscription agreements and Agreements of Limited Partnership, (iii) violation of state and/or federal securities laws; and (iv) breach of its fiduciary duties to the Barracks as Private Limited Partners.
The Barracks claim that the SBA breached its statutory, regulatory, and fiduciary duties to the Barracks by failing to disclose its findings regarding ATP's misconduct and ATF's noncompliance with SBA rules and regulations and by failing to take corrective action. The Barracks seek permission to sue the SBA for: (i) breach of its fiduciary duties to them as limited partners; and (ii) breach of its statutory and regulatory duties as regulator of an SBIC.
The Barracks maintain that they cannot vindicate their rights against ATF, ATP, or the SBA unless the receivership stay is lifted and they are given leave to assert their rights in a court of law. In addition, they urge that considerations of judicial economy and efficiency militate in favor of lifting the stay order.
III. DISCUSSION
The SBA argues that the Barracks' motion to lift the stay should be denied because their claims fail as a matter of law and because the assertion of those claims would, therefore, be futile. The court agrees. The court addresses each of the Barracks' intended claims.
A. The Barracks' Intended Claims as Pled Against ATF Are Derivative in Nature
The SBA asserts that the Barracks' claims are derivative in nature and therefore should not be allowed to proceed. Because the court finds merit to the argument that the claims are derivative, it will not reach the SBA's other contentions.
Remarkably, the SBA has not advanced any further argument on this proposition. Rather, it has invited the court to rule on the applicability of the parol evidence rule and the doctrine of laches. (SBA's Mem. Opp. Lifting Receivership Stay at 8-17.)
The Barracks maintain that in 2001, after years of incurring, and perhaps using, significant losses from their investment, and after committing $750,000, they exercised a contractual right to cease contributing to the partnership. Their decision was rooted in their belief that their prior cash contributions were worthless, and that, to continue investing in a losing enterprise would have been a waste of their personal assets. (Barracks' Mem. Supp. Lifting Receivership Stay at 2.) The Barracks seek the consent of this court to proceed with claims against ATF for individual harms suffered, which they assert are direct claims and are not the type that can be fairly characterized as derivative. The Barracks argue that their claims are distinguishable from derivative claims because they have suffered special injury. (Barracks' Reply Brief Supp. Lifting Receivership Stay at 29.) The uniqueness of their injury, according to the Barracks, arises from their inability to exercise an allegedly valid subscription waiver incorporated in the Subscription and Partnership Agreements.
ATF is a New Jersey limited partnership. Therefore, the law of the State of New Jersey controls the litigation. There are only a few New Jersey cases that have considered the issue of a limited partner's authority to sue the partnership. Like New Jersey courts, this court will use cases from other jurisdictions that have adopted the Uniform Limited Partnership Act ("ULPA") as legal authority in the resolution of this question. See Seventy-Three Land, Inc., v. Maxlar Partners, 637 A.2d 202, 203 (N.J.Super.Ct. App. Div. 1994) (explaining that issues not treated in any reported New Jersey opinion but have been treated by other jurisdictions that have adopted the Uniform Partnership Act are cases that must be regarded as authority).
New Jersey's version of the revised ULPA, N.J.S.A. 42: 2A-1 to 42:2A-73, specifies when and if a limited partner is permitted to bring suit on behalf of or against the limited partnership of which one is a member. On its face, the statue permits a limited partner to bring suit on behalf of the limited partnership if the limited partner seeks to assert a right of the limited partnership. Sections 1001 and 1002 of the Uniform Limited Partnership Act serve as the model for the New Jersey statute authorizing such derivative suits. Despite the restrictive language of the ULPA, courts have held that limited partners may bring derivative suits on grounds other than to recover a judgment in favor of the limited partnership. See, e.g., Partnership Equities Inc., v. Marten, 443 N.E. 2d 134, 138 (Mass.App.Ct. 1982) (recognizing that derivative suit brought by limited partners is proper where the acts complained of are mismanagement, negligence, diversion of assets, action beyond authority, or failure to perform certain elements of limited partnership agreement); Abeloff v. Barth, 119 F.R.D. 332, 334 (D. Mass. 1988) (construing claims brought by limited partners for failure of general partners to perform their duties as derivative). Further, a limited partner's direct action against a general partner may be permitted to proceed if plaintiff alleges an injury that is separate from any harm suffered by the partnership. Lenz v. Associated Inns and Rest., Co., of America, 833 F. Supp. 362, 379 (S.D.N.Y. 1993).
Section 1001 as adopted by New Jersey reads:
A limited partner may bring an action in the right of a limited partnership to recover a judgment in its favor against one or more general partners, former general partners, limited partners, or third parties, if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed. N.J.S.A. § 42:2A-62.
Section 1002 as adopted by New Jersey reads:
In order to bring a derivative action, the limited partner shall be a limited partner at the time of bringing the action and either a. Have been a limited partner at the time of the transaction of which he complains; or b. Have had the status as a limited partner devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction. N.J.S.A. § 42:2A-63.
"The determination of whether a claim is a derivative claim or a direct claim is made by reference to the nature of the wrongs alleged. . . ." HB Gen., Corp., v. Manchester Partners, L.P., CIV.A. No. 94-5160, 1995 WL 311351, *6 (D.N.J. May 15, 1995);Lenz, 833 F. Supp. at 379, ("[I]n determining whether a claim is derivative or direct, the court must look to the nature of the wrongs alleged . . . and is not limited by plaintiff's characterization or stated intention.").
Here, the alleged wrongs are mismanagement which led to the diminution in value of the partnership, as well as breaches of the partnership and subscription agreements, all acts allegedly committed by John Torkelsen, the individual responsible for the management and control of ATF. Suits alleging such wrongdoing are more appropriately brought as derivative suits against the general partner than as an action against the limited partnership.
Derivative actions brought by limited partners alleging malfeasance of a general partner in the management of the limited partnership are required to name the partnership as a defendant.Wallner v. Parry Prof'l Bldg., Ltd., 27 Cal. Rptr. 2d. 834, 836 (Cal.Ct.App. 1994) ("[A] limited partner's derivative suit is filed in the name of a limited partner, and the partnership is named as a defendant. Although a limited partner is named as the plaintiff, it is the limited partnership which derives the benefits of the action."). Here, the intended action as pled by the Barracks would be directly against ATF for the alleged wrongdoing of its general partner, John Torkelsen. A limited partnership can act only through its general partners. Under such circumstances, the Barracks cannot subject the coffers of the partnership to payment of a judgment granted in their favor, personally. Therefore, a suit against ATF directly cannot be allowed for the misdeeds of John Torkelsen. Such an action has to be brought derivatively for the benefit of the partnership. Allegations of "mismanagement of funds, embezzlement or breach of fiduciary resulting in the diminution of the value of the corporate stock or assets [or partnership], [are] claim[s] . . . held by the corporation [or partnership] itself, and is thus derivative if brought by an investor." Blasberg v. Oxbow Power Corp., 934 F. Supp. 21, 26 (D. Mass. 1996). "Indeed, any judgment on such a claim would be paid to the corporation [or partnership] so that the corporation's [or partnership's] financial status would be restored." Id.
Similarly, the Barracks' intended suit for fraud against John Torkelsen must be brought against the alleged wrongdoer, John Torkelsen. The complained of acts could not have been executed by the partnership entity itself. Accordingly, the Barracks' request to lift the injunction to press claims against ATF must be denied.
B. Equity Demands Preclusion of Intended Claims of Malfeasance Against ATF's General Partner, ATP
The Barracks argue the action it seeks against ATP is not derivative in nature. They maintain they suffered a separate and distinct injury that is not incidental to damages suffered by the limited partnership. (Barracks' Reply Brief Supp. Lifting Receivership Stay at 27.) The special injury alleged to have been suffered by the Barracks is their inability to exercise a subscription waiver alleged to have been granted by ATP and a diminution in value of their partnership interest. (Id.; Barracks' Mem. Supp. Lifting Receivership Stay at 2.) However, these claims can only be construed as derivative. The factual allegations supporting these claims do not demonstrate that the Barracks suffered an injury independent of the partnership.Lenz, 833 F. Supp. at 379, (explaining that in order to bring a direct action against a general partner, a limited partner must demonstrate either direct injury or an injury that exists independently of the partnership.)
The SBA urges that any claims that an ATF limited partner like the Barracks may have against ATP, as general partner of ATF, may only be asserted by ATF on behalf of all Acorn partners who have suffered identical derivative injuries to their equity interests in ATF. The court agrees. Further, equity considerations require giving the Receiver exclusive authority to bring a representative action on behalf of the partnership against John Torkelsen for all the harms alleged to have been caused to ATF. The Receiver was authorized to pursue and preserve all of ATF's claims and continues to recover assets allegedly wrongfully diverted. The Receiver is the only proper party to bring a derivative suit aimed at recovering all losses incurred by the partnership because it stands in the shoes derivatively of all limited partners who would seek recovery for the benefit of the partnership.
To permit the Barracks to file a representative action to vindicate a wrong done to the limited partnership would thwart the efforts of the Receiver to pursue and preserve all claims pertaining to the partnership. A criminal investigation is underway by the United States Department of Justice regarding the alleged illegal activities in the management of ATF. The Barracks claims would only impede the progress of that investigation as well as the purposes of the stay order of this court empowering the Receiver to take all necessary legal steps to recover ATF's assets to the fullest extent possible for the benefit of ATF. Accordingly, this court will not authorize the modification of the receivership stay to allow the Barracks to press claims of malfeasance.
C. The Barracks' Lack Capacity to Sue on Intended Claims of Fraud
Throughout their pleadings the Barracks assert that their decision to invest in ATF was improperly induced by fraudulent statements made by ATF's general partner. "Fraud is a cause of action that may be brought individually or as a derivative suit, depending on the allegations; if the plaintiff alleges fraud in the inducement to enter into the partnership agreement, the claim is generally individual in nature. . . ." Golden Tee, Inc. v. Venture Golf Schools, Inc., 969 S.W. 2d 625, 632 (Ark. 1998). The Barracks fail to allege any damages other than a diminution in value of their investment. Claims for loss of value of partnership interest must be brought as derivative suits. Mallia v. Paine-Webber, Inc., 889 F. Supp. 277, 282 (S.D. Tex. 1995) (holding that when limited partner alleges wrong to limited partnership that indirectly damages limited partner, by rendering his or her interest in partnership of lesser value, partner is required to bring claim derivatively); Kenworthy v. Hargrove, 855 F. Supp.101, 106 (E.D. Pa. 1994) ("When [a] limited partner alleges wrongs to [the] limited partnership that indirectly damaged [a] limited partner by rendering his contribution or interest in [the] limited partnership valueless, [the] limited partner is required to bring [his] claim derivatively on behalf of the partnership."); Whalen v. Carter, 954 F.2d 1087, 1093 (5th Cir. 1992) (holding that limited partners lacked standing to pursue RICO claims because defendants' activity was directed against partnership, and limited partners' injuries were derived from injuries to partnership); Cf., Blasberg v. Oxbow Power Corp., 934 F. Supp. 21, 26-27 (D. Mass. 1996) (explaining that in a derivative suit against a general partner the partnership must have the right to recover and must have sustained injury alleged; fact that limited partner may also have suffered injury from diminution of value of partnership does not convert claim into direct claim).
ATF's Agreement of Partnership did extend a contribution waiver to all investors, but conditioned on SBA consent. Such consent was required before any lapses in investor contributions could be permitted. See Section 3.4.2 Acorn Partnership Agreement. Here, it is clear that SBA consent was never obtained by or for the benefit of the Barracks.
Pursuant to these terms of the partnership agreement, terms known to, or knowable by, the Barracks, the general partner did not have unilateral authority to grant a waiver of the agreed capital contribution. Indeed, in a letter dated September 3, 1999, John Torkelsen advised the Barracks that he could no longer forestall the SBA and had to submit a report that identified unfunded commitments originally recorded as capital. This would include the Barracks' first subscription. The letter reads, in relevant part:
The regulations of the SBA require that the General partner, if he does not receive a contribution, either penalizes a Limited partner by forfeiture or, at the General partner's discretion, reduces the Limited Partner's total commitment by the amount that was not forthcoming on the "call date." Naturally, we have agreed on the most liberal treatment applicable under SBA regulations.
We have not needed the cash so I have held off dealing with this issue until the summer is over. However, I do not think I can hold off much longer since I will have to file very detailed reports with the SBA on September 30, 1999.
(Barracks' Reply Brief Supp. Lifting Receivership Stay Ex. H.)
The Barracks knew, or should have known of, the SBA's regulations regarding treatment of investors who default on subscription agreements. They were obligated, by contract, to pay the agreed upon sums, in the absence of SBA's waiver. Failure to pay could result in a reduction of ATF limited partner ownership.
Therefore, John Torkelsen's alleged misconduct damaged the Barracks only to the extent of their proportionate interest in ATF. Thus, their injury is indirect. Lenz, 833 F. Supp. at 380. The alleged harm inflicted by John Torkelsen was to the partnership entity itself. Consequently, the Barracks lack standing to bring a direct claim for fraud against ATF's general partner. On the other hand the SBA, in its capacity as Receiver, could seek recovery through a derivative action against the general partner for harm suffered by the partnership. Id. at 379; Strain v. Seven Hills Assoc., 429 N.Y.S.2d 424, 431-432 (N.Y.App.Div. 1980); Blattberg v. Weiss, 306 N.Y.S.2d 88, 91 (N.Y.App.Div. 1969).
D. Barracks' intended claims of breach of fiduciary duty against the SBA are barred by the Federal Tort Claims Act, 28 U.S.C. § 2680
The Barracks seek authorization from this court to sue the SBA based on its alleged negligent acts or omissions. Specifically, the Barracks allege that the SBA discovered certain irregularities at ATF including ATF's payment of prohibited or excessive management fees and improper cash advances totaling as much as $3.3 million and that during the relevant time period the SBA did not disclose to the Barracks the occurrence of such transactions or any of ATF's noncompliance with SBA regulations. The Barracks further allege that, instead of taking the appropriate corrective action, the SBA negotiated with ATF's general partner the return of $1 million previously paid out in management fees. The Barracks maintain that the SBA failed to impose sanctions against ATP and erroneously accepted ATP's assurances that in the future it would charge management fees in accordance with SBA guidelines. The Barracks claim they suffered damages that justify the relief sought.
The court concludes that the Barracks' intended claim of breach of fiduciary duty against the SBA is barred by the "discretionary function" exception of the FTCA, 28 U.S.C. § 2680.
Pursuant to the "sue or be sued" clause of 15 U.S.C. § 634(b)(1), the Small Business Act waived sovereign immunity, in certain circumstances, to claims brought against it. Claims for monetary damages initiated against an administrative agency which sound in tort are cognizable exclusively under the Federal Tort Claims Act. See 28 U.S.C. 2679(a); Taylor v. Adm'r of the SBA, 722 F.2d 105, 109 (5th Cir. 1983) (holding that plaintiff's claims against the SBA, if had to be brought, must be under the Federal Claims Tort Act); DiFillipo v. Quaker State Certified Dev., Co., Inc., v. Beck, CIV.A. No. 87-0074, 1987 WL 11221, at *2 (E.D. Pa. May 19, 1987) (concluding that the "sue and be sued" provision of the Small Business Act, 15 U.S.C. § 634(b)(1), was not applicable to tort claims against the SBA).
Section 634(b)(1) provides that:
(b) In the performance of, and with respect to, the functions, powers, and duties vested in him by this chapter the Administrator may —
(1) sue and be sued in any court of record of a State having general jurisdiction, or in any United States district court, and jurisdiction is conferred upon such district court to determine such controversies without regard to the amount in controversy; but no attachment, injunction, garnishment, or other similar process, mesne or final, shall be issued against the Administrator or his property. . . .
The FTCA requires that all plaintiffs file an administrative claim with the appropriate agency with that agency making a final disposition of plaintiff's claims before commencing an action in the district courts. See 28 U.S.C. § 2675(a). This jurisdictional requirement is satisfied with "proof of timely written notice of the claim to the appropriate agency, which appears of record," Employees Welfare Committee v. Daws, 599 F.2d 1375, 1378 n. 6 (5th Cir. 1979), and the administrative claim must have been for a "sum certain," Molinar v. United States, 515 F.2d 246, 248 (5th Cir. 1975), or a "dollar amount,"Adams v. United States, 615 F.2d 284, 292 n. 15 (5th Cir. 1980). This jurisdictional requirement, however, is waived when redress is sought through a third-party complaint, cross-claims, or counter-claim. See 28 U.S.C.A. § 2675; DiFillipo, 1987 WL 11221, at *2, (ruling that plaintiff was not required to present administrative claim to the appropriate federal agency because his third-party complaint met exception to procedural requirement of section 2675(a)). Given that the Barracks seek authorization to file its intended claims against the SBA as a counter claim in the Receiver's action for breach of contract, the requirement to file an administrative claim prior to seeking relief from this court is not applicable.
Section 2675 provides that:
(a) An action shall not be instituted upon a claim 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, unless the claimant shall have first presented the claim to the appropriate Federal agency. . . . The provisions of this subsection shall not apply to such claims as may be asserted under the Federal Rules of Civil Procedure by third party complaint, cross-claim, or counterclaim. 28 U.S.C. § 2675.
Nevertheless, the court lacks jurisdiction because the discretionary function exception of the FTCA applies to the Barracks' intended claims. The discretionary function exception provides that the Federal Tort Claims Act shall not apply to:
(a) Any claim based upon an act or omission of an employee of the Government, exercising due care, in the execution of a statute or regulation, whether or not such statute or regulation be valid, or based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.28 U.S.C.A. § 2680. "The exception covers only acts that are discretionary in nature, acts that `involve an element of judgment of choice,'" United States v. Gaubert, 499 U.S. 315, 323 (1991) (quoting Berkovitz v. United States, 486 U.S. 531 (1988)), and "`it is the nature of the conduct, rather than the status of the actor' that governs whether the exception applies." Gaubert, 499 U.S. at 323, (quoting United States v. Varig Airlines, 467 U.S. 797, 814 (1984)). Moreover, the challenged conduct must relate to judgments involving social, economic, and political policy. Id.
Here, the complained of acts involve the SBA's administrative decisions regarding discovered irregularities at ATF. The SBA's determination that severe penalties were not warranted, after an investigation of ATF revealed that certain fiscal irregularities had occurred, was a decision committed to the sound discretion of the agency. See, e.g., DiFillippo, 1987 WL 11221 at *4, (holding that SBA employee's act of reviewing and approving loan applications was a function not limited to a routine ministerial procedure but was a task that required the exercise of discretion and judgment in determining the appropriateness of a particular loan, which required the consideration of all information in their possession.) The decision of the SBA to negotiate the return of $1 million dollars in management fees rested on qualitative evaluations regarding whether or not the licensee engaged in acts that violated SBA regulations and warranted severe sanctions such as a court ordered injunction pursuant to 15 U.S.C. § 687c(a). See, e.g., Baez v. United States of America, 976 F. Supp. 102, 106-07 (D.P.R. 1997) (holding the SBA's decision regarding whether or not to accept plaintiff's offer of $7,000 for property was a discretionary act that fell within the ambit of 28 U.S.C. § 2680, the discretionary function exception, because the SBA's determination rested on subjective qualitative evaluations regarding whether the property could command a higher price.) Necessarily, the complained of acts of the SBA involved the exercise of judgment. Araujo v. Welch, 742 F.2d 802, 804 (3d Cir. 1984). Accordingly, this court will not engage in judicial second-guessing of the SBA's administrative decisions. See United States v. Gaubert, 499 U.S. 315, 323 (1991). IV. CONCLUSION
Based on the foregoing, the Barracks' motion must be, and is, denied. An appropriate Order follows.