the government's recovery based upon a "sufficient identity of
transaction", but affirmative recovery against the United
States requires an independent waiver of immunity. Id.
The National Housing Act, 12 U.S.C. § 1702, does not
constitute a waiver of sovereign immunity for tort claims for
damages under the Federal Tort Claims Act ("FTCA"), 28 U.S.C. § 1346(b)
and 2671. Waylyn, 231 F.2d at 544;
Donohue v. United States, 437 F. Supp. 836, 842
(E.D.Mich. 1977). A claim for damages in tort must proceed
under the FTCA.
A limited waiver of sovereign immunity exists for breach of
contract actions in the Tucker Act, 28 U.S.C. § 1346(a),
for damage claims under $10,000. The United States Claims Court
has exclusive jurisdiction over claims in excess of $10,000.
Thus, this court lacks jurisdiction over Berk's claims to the
extent that they are based on breach of contract. However, as
discussed infra, the court construes Berk's claim as
arising in tort.
Count one. In the first count of its counterclaim,
Berk requests that the court reform the mortgage and turn over
funds in an escrow account, based upon mutual mistake. In
particular, Berk asserts that DRG (the original lender)
provided worksheets, estimates, repair schedules, cash flow
analysis, and projections which demonstrated the feasibility of
the project. Berk states that it relied upon DRG's
documentation to invest in the project. Berk alleges that the
projections and estimates of costs were incorrect, and it was
forced to invest millions of dollars above the mortgage
commitment to "acquire title" to the project. Berk alleges that
DRG recommended that Berk obtain a "refunder", which in effect,
would correct the errors in the projections which induced Berk
to accept the DRG financing.
Berk also alleges that York, as HUD's agent, deliberately
destroyed its ability to obtain a refunder, repudiated HUD's
obligations to Berk and refused to consummate certain
agreed-upon sales of land. Berk asserts that as a result of the
"mutual mistakes" which induced Berk to execute the mortgage
documents, it has been irreparably damaged. As noted
supra, Berk requests reformation of the mortgage, a
turnover of all funds held by HUD, and attorney fees and costs
of the suit.
Reformation is appropriate where a valid contract exists
between the parties but for some reason the instrument that
memorializes the agreement does not reflect the agreement of
the parties. Erie Telecommunications, Inc. v. Erie,
853 F.2d 1084, 1091 (3d Cir. 1988), citing H. Prang
Trucking Co., Inc. v. Local Union No. 469, 613 F.2d 1235,
1239 (3d Cir. 1980) (New Jersey law). In this case, although
Berk attempts to characterize the situation as a mutual
mistake, the facts alleged in Berk's counterclaim indicate that
Berk's claim arises from projections provided by DRG which were
proven incorrect after closing. Reformation of a contract is
granted to correct a mutual mistake. Lord v. Municipal
Utilities Authority of Tp. of Lower Cape May, 133 N.J. Super. 503,
507, 337 A.2d 621 (App. Div. 1975). Berk points to
no facts to support its claim that the mortgage was the result
of a mutual mistake. Berk merely alleges that it relied to its
detriment on DRG's projections, which turned out to be
erroneous. These facts support a claim for the tort of
misrepresentation, not mutual mistake.
Waiver of immunity for tort claims is evaluated under the
Federal Tort Claims Act §§ 1346(b), 2671-2680. These
provisions govern tort claims against federal agencies
notwithstanding authority which permits those agencies to sue
and be sued. 28 U.S.C. § 2679; Gregory Park, 373
F. Supp. at 352; Edelman v. Federal Housing Admin.,
382 F.2d 594 (2d Cir. 1967); Northridge Bank v. Community Eye
Care Center Inc., 655 F.2d 832, 835 (7th Cir. 1981). In
Gregory Park,the court found a sufficient identity of
transaction based upon the mortgage agreements executed by the
parties to permit recoupment of the defendant's lost profits.
373 F. Supp. at 351. However, the court noted that the request
to enjoin the foreclosure and for an affirmative recovery of
damages required a specific waiver of sovereign
immunity. Waiver, if any, could not be found under the Tucker
Act, but only under the FTCA, since the defendant's claim
sought affirmative relief in tort based upon its claim that HUD
caused the default by failing to require escrow amounts
sufficient to meet the service charges.Id. at 352. The
Gregory court found that the FTCA claims were barred,
since they involved discretionary conduct which is exempt from
the waiver of sovereign immunity under the FTCA. Id.
As noted supra, the first count of Berk's
counterclaim against HUD alleges the tort of misrepresentation.
Assuming without deciding that HUD has a duty to Berk based
upon the conduct of HUD's servicer, this claim is nonetheless
barred. A tort claim based upon misrepresentation, deceit or
interference with contract rights is excluded from the waiver
of sovereign immunity under the FTCA. 28 U.S.C. § 2680(h);
Gregory Park, 373 F. Supp. at 352; Ortiz v. United
States, 661 F.2d 826, 829 n. 3 (10th Cir. 1981);
United States v. Chelsea Towers, Inc., 295 F. Supp. 1242,
1247 (D.N.J. 1967). Therefore, the first count of Berk's
counterclaim is barred and will be dismissed.
Count 2. In the second count of the counterclaim
against HUD, Berk asserts that it will be permanently injured
unless the court enjoins HUD from proceeding with the
foreclosure action. As noted supra, a similar argument
was rejected in Gregory Park, absent a specific waiver
permitting such affirmative relief. 373 F. Supp. at 351. As in
Gregory Park, where the defendant's counterclaims are
based on the tort of negligence or misrepresentation, the court
has no jurisdiction to grant such affirmative relief. 373
F. Supp. at 352. The court has jurisdiction over the claim only
to the extent that Berk seeks recoupment of money held by HUD.
Therefore, the second count of Berk's counterclaim must be
Count 3. In the third count of counterclaim, Berk
request equitable recoupment, an order enjoining HUD from
proceeding with the foreclosure action, and an order rescinding
the notice of default and acceleration of the mortgage. Count
three is not a proper assertion of a counterclaim, but only
sets forth the desired relief. As noted supra,
affirmative relief against the United States is limited to
possible equitable recoupment, absent a specific waiver of
sovereign immunity. Gregory Park, 373 F. Supp. at 351.
Therefore, count three of the counterclaim will be dismissed
except for the recoupment claim.
Count 4. In count four of the counterclaim, Berk
alleges that HUD rejected its proposals for a workout of the
mortgage, "nullified" its ability to restructure the project by
unilaterally paying off bonds and destroying the project's
tax-exempt status, and refused to assume responsibility for the
current financial status of the project attributable to York's
refusal to release the escrow funds to Berk. Finally, Berk
asserts that HUD and York committed waste by refusing to
release funds to rebuild units damaged by a fire and by
refusing to consider a workout proposal. In summary, Berk
alleges that HUD's conduct impaired its ability to operate the
project and restructure the loan. Berk requests the following
relief: general, compensatory and punitive damages, an order
directing HUD to enter into a workout agreement with Berk, and
an order enjoining HUD from proceeding with the foreclosure
Berk's claims are based on HUD's allegedly improper conduct
in relation to the mortgage. This claim arises in tort and the
FTCA operates as a limited waiver of sovereign immunity with
respect to some tort claims. However, § 2680(a) of the FTCA
provides that the Act does not apply to:
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.
Berk argues that HUD is responsible for refusing to accept its
workout proposal. HUD has no obligation to accept or even
consider a workout proposal, and thus this claim involves a
discretionary function under § 2680(a) of the FTCA.
Beacon Terrace, 594 F. Supp. at 58; Victory Highway
Village, Inc., 662 F.2d at 497; American National Bank
& Trust, 595 F. Supp. 324 (court rejected defense that HUD
failed to pursue workout or other alternatives to foreclosure);
United States v. 1300 Lafayette East, 455 F. Supp. 988,
992 (E.D.Mich. 1978).
HUD's decision not to release the fire insurance proceeds or
to apply the escrow funds is likewise a discretionary function
exempt from the waiver of sovereign immunity. Queens Court
Apartments, 296 F.2d at 538 (government did not have duty
to release funds held in reserve to cover deficiencies, and
could hold funds as set-off against amounts due from
Even if the discretionary conduct asserted in Berk's
counterclaims were not exempt from the waiver of sovereign
immunity in the FTCA, the court could not order HUD to enter
into a workout proposal, since mandamus cannot be invoked to
compel performance of a discretionary duty. Ortiz, 661
F.2d at 831. Nor does the court have the power to order
specific performance by the United States of its contractual
obligations. Florida Dept. of State v. Treasure Salvors,
Inc., 458 U.S. 670, 689, 102 S.Ct. 3304, 3317, 73 L.Ed.2d
In the alternative, Berk claims that HUD's refusal to approve
a workout agreement and to release the fire insurance proceeds
and the escrow funds may be construed as HUD's interference
with Berk's contractual rights under the mortgage. These claims
are barred by § 2680(h) of the FTCA, which exempts claims
of interference with contractual rights from the limited waiver
of sovereign immunity under the Act. This exemption includes
interference with prospective advantage. Art Metal-USA,
Inc. v. United States, 753 F.2d 1151, 1154-55 (D.C. Cir.
1985). Thus, Berk's claims based upon HUD's interference with
its rights to restructure the mortgage and obtain the funds to
operate the project are barred by § 2680(h).
Tort claims against the United States must be presented to
the appropriate federal agency pursuant to § 2675(a) of the
FTCA, notwithstanding the "sue and be sued" language of the
National Housing Act, 12 U.S.C. § 1702. Northridge
Bank, 655 F.2d at 835 (exhaustion required under Federal
Tort Claims Act despite waiver of sovereign immunity against
the Small Business Administration). Berk has failed to present
its claims to HUD for adjudication as required by § 2675.
This section is a jurisdictional prerequisite to bringing a
claim against the government. Keene Corp. v. United
States, 700 F.2d 836, 841 (2d Cir.), cert.
denied, 464 U.S. 864, 104 S.Ct. 195, 78 L.Ed.2d 171
3. Punitive Damages
Punitive damages are not available under the FTCA. 28 U.S.C. § 2674.
For the aforementioned reasons, the court will dismiss Berk's
counterclaim except for its claim of equitable recoupment.
B. JURY DEMAND
HUD moves to strike Berk's jury demand. Berk argues that
pursuant to Fed.R.Civ.P. 39(a), the court has
discretion to order some of the issues in the case tried to a
jury. Berk bases this argument on its claims for damages.
Mortgage foreclosure issues are equitable in nature and do
not afford the right to a jury trial. Rozelle v.
Connecticut General Life Ins. Co., 471 F.2d 29 (10th Cir.
1972), cert. denied, 411 U.S. 921, 93 S.Ct. 1549, 36
L.Ed.2d 314 (1973); Gefen v. United States,
400 F.2d 476, 478 (5th Cir. 1968), cert. denied, 393 U.S. 1119,
89 S.Ct. 990, 22 L.Ed.2d 123 (1969); Vieser v. Harvey Estes
Constr. Co., 69 F.R.D. 370, 375 (W.D.Okla. 1975).
Berk's only counterclaim not barred by sovereign immunity is
its equitable recoupment claim, on which Berk is not entitled
to a jury trial. The court will grant HUD's motion to strike
Berk's jury demand.
III. MOTION BY THIRD-PARTY DEFENDANT YORK TO DISMISS THE
York moves to dismiss Berk's third-party complaint on the
following grounds: Berk fails to allege that York is liable for
the Government's claims against Berk; York is entitled to
sovereign immunity as an agent of the Government; Counts I and
III fail to state a claim against York; and Counts IV and V
fail to state a claim for interference with Berk's economic
interests since York is not a third party with respect to the
A. SOVEREIGN IMMUNITY
York argues that it is entitled to sovereign immunity for its
actions as HUD's agent. Yearsley v. W.A. Ross Constr.
Co., 309 U.S. 18, 21-22, 60 S.Ct. 413, 415, 84 L.Ed. 554
(1940); Myers v. United States, 323 F.2d 580, 583 (9th
Cir. 1963); Central Claims Service, Inc. v. Computer
Science Corp., 706 F. Supp. 463, 466 (E.D.La. 1989). An
agent working under the direction of a federal agency and
within the parameters of its official duties is entitled to
immunity. Yearsley, 309 U.S. at 21, 60 S.Ct. at 415.
However, an agent may be sued in his individual capacity where
he has exceeded the scope of his authority. Id.; Central
Claims Services, 706 F. Supp. at 466. The court cannot
determine from the record whether York acts under the direction
and/or supervision of HUD in servicing its mortgages. However,
assuming arguendo that York acts as an agent of HUD,
the court concludes that a liberal reading of the third-party
complaint shows that Berk alleges that York's conduct was
outside of the scope of its authority. Therefore, at this stage
of the proceedings the court cannot conclude that York is
entitled to sovereign immunity against Berk's third-party
complaint. Coggeshall, 884 F.2d at 3.
B. RULE 14(a)
In the alternative, York argues that Berk's third-party
complaint is improper, since it fails to allege that York is
liable to Berk for the United States' claims against Berk.
Fed.R.Civ.P. 14(a) provides:
[A] defending party, as a third-party plaintiff,
may cause a summons and complaint to be served
upon a person not a party to the action who is or
may be liable to the third-party plaintiff for all
or part of the plaintiff's claim against the
A third-party claim is not proper where it is separate and
independent from the claim alleged in the complaint, even where
it arises out of the same facts as the plaintiff's action.
United States v. Munroe Towers, Inc., 286 F. Supp. 92
(D.N.J. 1968); Wright, Miller and Kane, Federal Practice
and Procedure, 6 § 1446 at 355-63. A district court,
in its discretion, may dismiss third-party claims which do not
satisfy Rule 14(a). Livera v. First Natl' State Bank,