Frillz, Inc. v. Lader

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 96-1785

FRILLZ, INC.,

Plaintiff, Appellant,

v.

PHILIP LADER, AS ADMINISTRATOR OF THE
UNITED STATES SMALL BUSINESS ADMINISTRATION,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Reginald C. Lindsay, U.S. District Judge]

Before

Selya and Stahl, Circuit Judges,

and Woodlock,* District Judge.

Evans J. Carter, with whom Hargraves, Karb, Wilcox & Galvani

were on brief, for appellant.
Susan M. Poswistilo, Assistant United States Attorney, with

whom Donald K. Stern, United States Attorney, and Glenn P.

Harris, Office of General Counsel, Small Business Administration,

were on brief, for appellee.

January 21, 1997

*Of the District of Massachusetts, sitting by designation.

SELYA, Circuit Judge. Plaintiff-appellant Frillz,
SELYA, Circuit Judge.

Inc., a Massachusetts corporation, seeks damages for breach of

contract against Philip Lader, in his capacity as administrator

of the federal Small Business Administration (SBA). The

plaintiff bases its suit on the SBA's alleged refusal to honor a

loan guaranty commitment. The district court granted summary

judgment for the SBA. We affirm.

I.
I.

Background
Background

In February 1993, Frillz asked the SBA to guaranty a

proposed loan. Frillz contemplated that the loan would be made

by Eastern Bank (the Lender) in the principal amount of $612,000.

Of this amount approximately $240,000 would be used to retire

indebtedness owed to Fleet Bank, and the balance would be used to

expand Frillz's retail operations from fourteen to seventeen

stores.

In due course, the SBA approved Frillz's application

for an 80% guaranty of the loan. The SBA's loan guaranty

authorization contained a clause requiring receipt by the Lender

of "evidence satisfactory to it in its sole discretion, that

there has been no unremedied adverse change since the date of the

Application . . . in the financial or any other conditions of

[Frillz], which would warrant withholding or not making any such

disbursement."

Frillz struggled in the third quarter of fiscal 1993

(February through April), losing $189,000. In the next quarter,

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however, its operations returned to profitability. The Lender

subsequently concluded that the adverse change in Frillz's

financial picture had been remedied. Notwithstanding the

Lender's satisfaction, the SBA balked; it informed the Lender

that it did not believe that the adverse change had been

sufficiently ameliorated. And, it announced that any

disbursement of the loan must have the approval of both the SBA

and the Lender.

Frillz filed suit claiming that the SBA had reneged on

its agreement that the Lender would have sole discretion to

determine whether there had been an uncorrected adverse change in

Frillz's financial condition. On cross-motions for summary

judgment, the district court concluded that, under 15 U.S.C.

636(a)(6) (1994), the SBA could not delegate the authority to

determine the financial security of a loan to any outsider. See

Frillz, Inc. v. Lader, 925 F. Supp. 83, 88 (D. Mass. 1996).

Hence, the court entered judgment in the defendant's favor. See

id. This appeal followed.

II.
II.

Analysis
Analysis

Summary judgment is appropriate when "there is no

genuine issue as to any material fact and . . . the moving party

is entitled to judgment as a matter of law." Fed. R. Civ. P.

56(c). Our review of the district court's grant of summary

judgment is plenary, and in canvassing the record we indulge all

reasonable inferences in favor of the party opposing the motion.

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See Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990).

We are not bound by the rationale of the lower court but may

instead affirm an entry of summary judgment on any alternative

ground made manifest by the record. See Hachikian v. FDIC, 96

F.3d 502, 504 (1st Cir. 1996). We follow that avenue here.

Frillz challenges the district court's holding that 15

U.S.C. 636(a)(6) precludes the SBA from delegating to other

than in-house personnel on several grounds. It argues that

Congress in 1981 repealed the language in section 636(a)(6) that

restricts the SBA's power to delegate, and thus that there is no

statutory impediment to the SBA's delegation of authority to the

Lender.1 Alternatively, it asserts that even if Congress did not

repeal the disputed portion of section 636(a)(6), that statute

should not be interpreted to bar delegation of the SBA's

authority. These questions are not without complication; indeed,

the district court aptly described the task of answering them as

"somewhat pedantic and unavoidably ponderous." Frillz, 925 F.

1We set out in the Appendix the text of 15 U.S.C.
636(a)(6) as it appeared before Congress amended it by enacting
the Omnibus Budget Reconciliation Act of 1981 (OBRA), Pub. L. 97-
35, 1910, 95 Stat. 778 (stating inter alia that section

636(a)(6)(C), which Congress described as "[s]ection[] 7(a)(6)(C)
. . . of the Small Business Act [is] repealed [as of] October 1,
1985"). Frillz claims that Congress thereby intended to repeal
not only section 636(a)(6)(C) proper but also the last sentence
of 15 U.S.C. 636(a)(6) (which states in part that "any
authority conferred by this subparagraph on the Administration
shall be exercised solely by the Administration and shall not be
delegated to other than Administration personnel"). This
sentence appears below section 636(a)(6)(C) without any further
letter or numerical reference, yet without indentation. The
compilers of the code apparently determined that this sentence
did not comprise part of section 636(a)(6)(C), but Frillz
disagrees.

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Supp. at 86. We spare ourselves that difficulty, for the record

allows us to reach the same destination by an easier, less

labyrinthine path: the SBA official who approved Frillz's loan

guaranty lacked power under existing SBA regulations to delegate

his authority further.2

A suit against a federal official in his official

capacity is in effect a suit against the government. See

American Policyholders Ins. Co. v. Nyacol Prods., Inc., 989 F.2d

2The question of whether Congress repealed the final
sentence of section 636(a)(6) is freighted with uncertainty.
When one examines the content of section 636(a)(6) as it appeared
before Congress amended it in 1981 through the OBRA, the final
sentence fits comfortably, in structural terms, with subsection
(C). At that time, section 636(a)(6) began by stating that SBA
loans must be "of such sound value or so secured as reasonably to
assure repayment," and subsections (A), (B), and (C) each limited
this requirement: subsection (A) with respect to loans to assist
any handicapped individual; subsection (B) with respect to loans
for energy measures; and subsection (C) with respect to loans
used to refinance indebtedness. The first clause of the final
undesignated sentence also dealt with loans used to refinance
existing indebtedness. It is thus reasonable to suggest that the
final sentence of section 636(a)(6) comprises a part of
subsection (C).
On the other hand, when Congress passed the OBRA, the final
sentence of section 636(a)(6) appeared as it does now: below the
three subsections, unindented. It did not appear from the form
of the statute to have been part of subsection (C); and, since
Congress specified only that subsection (C) was repealed, to hold
now that the final undesignated sentence comprised part of that
subsection would violate the principle that implied repeals of
federal statutes are disfavored. See Passamaquoddy Tribe v.

Maine, 75 F.3d 784, 790 (1st Cir. 1996). Moreover, subsequent

Congresses assumed that the final sentence survived the repeal,
see, e.g., H.R. Rep. No. 101-667, at 15 (1990), reprinted in 1990

U.S.C.C.A.N. 3990, 3992; H.R. Rep. No. 102-492, at 3 (1992),
reprinted in 1992 U.S.C.C.A.N. 891, 892, and a court for that

reason would be hard-pressed to find that the sentence had been
deleted in 1981. Although we need not solve this riddle today,
we hope that Congress will spare future courts and litigants from
choosing between these two disagreeable interpretations of this
damaged statute and clarify whether it intends that the final
sentence of section 636(a)(6) be preserved.

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1256, 1259 (1st Cir. 1993). We recently observed that "parties

seeking to recover against the United States in an action ex

contractu have the burden of demonstrating affirmatively that the

agent who purported to bind the government had actual authority

to do so." Hachikian, 96 F.3d at 505. The statutes governing

the SBA permit the head of the agency the Administrator to

authorize officers and employees of the SBA to exercise powers

granted to the agency by Congress. See 15 U.S.C. 634(a). Such

delegations are made through agency regulations. See Chevron

U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S.

837, 843-44 (1984).

The regulations in effect when the SBA signed the loan

authorization agreement at issue here (February of 1993)

stipulated that various individuals in the SBA's employ had power

to approve or reject loans up to $750,000. See 13 C.F.R.

101.3-2, Pt. I A(1)(b) (1993). This group included Gordon J.

Ryan, as Chief of the Finance Division, who approved the loan

authorization in this case. See id. Ryan also had the power to

extend disbursement periods and to cancel, reinstate, and modify

loan authorizations. See id. at (B). But the regulations did

not grant Ryan any power to transfer his authority: to the

precise contrary, the regulations explicitly admonished that

"[t]he authority delegated herein may not be redelegated." Id.

at Pt. XI, A(1).

Frillz does not dispute that any delegation of the

SBA's authority must be made pursuant to agency regulations.

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Instead, it argues that because the Chief of the Finance Division

was authorized to approve loans up to $750,000, he was also

empowered to set the terms and conditions of such loans, and that

a determination by the Lender of whether Frillz had suffered an

unremedied adverse financial change was merely a loan term or

condition to which Ryan could (and did) assent. This is no more

than a play on words. Granting the Lender the right to determine

the soundness of a loan guaranty constitutes a significant

relinquishment of power. Frillz cannot circumvent the lack of

any regulatory authority sufficient to permit this delegation

simply by describing it as a term or condition of the loan.

This conclusion is bolstered by the language of 15

U.S.C. 634(b)(7), a statute that grants the Administrator the

power to "authorize participating lending institutions, in his

discretion pursuant to regulations promulgated by him, to take

such actions on his behalf, including, but not limited to the

determination of . . . creditworthiness." The Administrator

exercised this authority in promulgating regulations creating the

so-called Preferred Lenders Program (PLP). See 13 C.F.R.

120.400 et seq. (1993). Although section 634(b)(7) does not

apply here Eastern Bank was not a member of the PLP it

strongly suggests that any delegation of the right to determine a

prospective borrower's financial stability must be made pursuant

to agency regulations. Otherwise, the cited portion of section

634(b)(7) would be superfluous.

We hold, then, that because the Chief of the Finance

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Division had no authority to delegate to the Lender the

determination of whether Frillz had suffered an unremedied

adverse change in its financial condition, the government cannot

be bound by that stipulation in the loan guaranty authorization.

Frillz has a fallback position: it invites us to

remand this case to the district court so that it may pursue an

equitable estoppel claim against the SBA. We decline the

invitation. The doctrine of equitable estoppel in its

traditional incarnation does not apply against the federal

government. See, e.g., OPM v. Richmond, 496 U.S. 414, 419

(1990); United States v. Ven-Fuel, Inc., 758 F.2d 741, 761 (1st

Cir. 1985); see also Heckler v. Community Health Servs., 467 U.S.

51, 67 (1984) (Rehnquist, J., concurring) (noting that the

Supreme Court has never upheld an estoppel claim against the

government). A party seeking to invoke equitable estoppel

against the federal government at a minimum "must have reasonably

relied on some `affirmative misconduct' attributable to the

sovereign." Ven-Fuel, 758 F.2d at 761. Passing the point that

even such reliance may be insufficient, see id. at 761 n.14,

there is absolutely no evidence of affirmative misconduct by the

SBA which might arguably be sufficient to support an estoppel

claim against the government in this case. See Hachikian, 96

F.3d at 506 n.3 (noting that equitable estoppel is generally

inapplicable to the federal government when its employees induce

reliance by their unauthorized actions).

III.
III.

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Conclusion
Conclusion

We need go no further. The Chief of the Finance

Division lacked authority to delegate the determination of

whether Frillz continued to suffer from the effects of an adverse

financial change. Consequently, Frillz cannot rely on that

portion of the loan authorization agreement as the basis for a

breach of contract claim against the government. It follows

inexorably, as night follows day, that the district court did not

err in granting summary judgment in the defendant's favor.

Affirmed.

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APPENDIX
APPENDIX

"The Administration is empowered . . . to make loans for
plant acquisition, construction, conversion, or expansion,
including the acquisition of land, material, supplies, equipment,
and working capital, and to make loans to any qualified small
business concern . . . for purposes of this Act. Such financings
may be made either directly or in cooperation with banks or other
financial institutions through agreements to participate on an
immediate or deferred (guaranteed) basis. These powers shall be
subject, however, to the following restrictions, limitations, and
provisions:

* * *

(6) All loans made under this subsection shall be of
such sound value or so secured as reasonably to assure
repayment: Provided, however, That

(A) for loans to assist any public or private
organization or to assist any handicapped individual as
provided in paragraph (10) of this subsection any
reasonable doubt shall be resolved in favor of the
applicant;
(B) recognizing that greater risk may be
associated with loans for energy measures as provided
in paragraph (12) of this subsection, factors in
determining `sound value' shall include, but not be
limited to, quality of the product or service;
technical qualifications of the applicant or his
employees; sales projections; and the financial status
of the business concern: Provided further, That such

status need not be as sound as that required for
general loans under this subsection; and
(C) the Administration shall not decline to
participate in a loan on a deferred basis under this
subsection solely because such loan will be used to
refinance all or any part of the existing indebtedness
of a small business concern, unless the Administration
determines that
(i) the holder of such existing indebtedness
is in a position likely to sustain a loss if such
refinancing is not provided, and
(ii) if the Administration provides such
refinancing through an agreement to participate on
a deferred basis, it will be in a position likely
to sustain part or all of any loss which would
have otherwise been sustained by the holder of the
original indebtedness: Provided further, That the

Administration may decline to approve such
refinancing if it determines that the loan will
not benefit the small business concern.

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On that portion of the loan used to refinance existing
indebtedness held by a bank or other lending institution,
the Administration shall limit the amount of deferred
participation to 80 per centum of the amount of the loan at
the time of disbursement: Provided further, That any

authority conferred by this subparagraph on the
Administration shall be exercised solely by the
Administration and shall not be delegated to other than
Administration personnel."

15 U.S.C.S. 636(a)(6) (Law. Co-op. 1984).

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