BANK ONE, STEVENS POINT, NA, PETITIONER V. UNITED STATES DEPARTMENT
OF COMMERCE, ET AL.

   No. 88-940

   In the Supreme Court of the United States

   October Term, 1988

   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

            TABLE OF CONTENTS
   QUESTION PRESENTED
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. A1-A12) is reported
at 854 F.2d 223.  The opinions of the district court (Pet. App.
A13-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).

                          QUESTION PRESENTED

   Whether the government is required to honor loan guarantees made
pursuant to provisions of the Trade Act of 1974, 19 U.S.C. 2341 et
seq., when the lending bank materially breached the terms of the loan
guaranty agreements and the government neither directed nor encouraged
those breaches.

                               STATEMENT

   1. Petitioner, a bank in Stevens Point, Wisconsin, had for several
years made loans to Weber Plastics' and Weber Tackle, Inc. (Weber or
Weber Companies) that Weber did not repay.  Pet. App. A1, A13.  In
1979, Weber approached petitioner for new loans to finance its fishing
tackle operations and plastics manufacturing facility and to purchase
new and modernize existing equipment.  Pet. App. A14.  Because of
Weber's unsatisfactory credit history and large debt, petitioner and
other local banks refused to make the requested loans.  Ibid.

   In October 1980, Weber sought financial assistance in the form of a
loan guaranty from the United States Department of Commerce's Economic
Development Administration (EDA) pursuant to provisions of the Trade
Act of 1974, 19 U.S.C. 2341 et seq.  Pet. App. A2, A14.  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);  /1/ 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. A14.  Weber presented an initial draft of the plan to
the EDA and to petitioner for review.  After revisions (based upon
petitioner's comment) 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. A14-A16.

   Under the terms of the guaranty agreements, petitioner agreed to
certain terms and conditions, including the requirement 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 guaranty also
provided that "if the bank 'failed to comply with all of the material
provisions' of the agreement(,) the government could terminate the
guaranty." Ibid.

   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 projected in the recovery plan.  Pet. App. A8, A87, A88.
 Petitioner received a copy of the report and, on December 7, 1981,
forwarded it to the EDA along with other materials.  Pet. App. A87.
/2/

   The Weber loans were closed on December 17, 1981.  Pet. App. A15.
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 petitioner,
there had been "no unremedied adverse changes in the financial
condition of Weber Tackle Company sufficiently 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, A16.  Petitioner timely notified EDA
of the default.  Pet. App. A16.  Later, on June 15, 1984, petitioner
demanded that EDA honor its guarantees and repurchase the
EDA-guaranteed portion of the loans.  Ibid.  On February 20, 1986,
after the matter had been investigated by the Inspector General of the
Department of Commerce, the EDA refused to acknowledge 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 Secretary of Commerce in his
official capacity, /3/ Weber, and the individual respondents Remer and
Elaine Hutchinson.  /4/ Pet. App. A3, A4, A13.

   3. The district court conducted a one-day bench trial on the loan
guaranty issues.  After examining those of petitioner'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. A17.

   Similarly, the district court was "distressed" at the petitioner's
practice of allowing Weber to acquire additional fixed assets before
having them approved, and of disbursing 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 disbursement, Pet. App. A17-A18.

   Finally, the district court found that petitioner's disbursement 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
negative covenants in the guaranty agreements was likewise harmless.
Pet. App. A19.

   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. A11.  Observing 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 government 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)
disagreement 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 cancelled by the
government's." Pet. App. A10.  The court of appeals held that "nothing
in the guaranty agreement enjoins the guarantor to vigilance." Ibid.
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 Administration'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 provision." 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. A11.

                               ARGUMENT

   1. Petitioner's main contention is that the court of appeals 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 standard 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 estoppel 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. A11.
Petitioner's objection is thus simply to the application of that
standard to the facts of this case, and specifically to the court's
conclusion that "there was no reliance by the bank." Ibid.; see
Community Health Services, 467 U.S. at 61, 66 (requiring "reasonable
reliance" as element of estoppel).  /5/

   The court of appeals' holding in this case that there was
insufficient evidence to support a finding of reasonable reliance 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 commercial bank' in dealing with a loan that had not been
guaranteed by the United States Government." Pet. App. A7-A8.  That
is, the bank was not supposed to look to the government 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." /6/ Petitioner cannot demonstrate how it otherwise
might reasonably have relied on the government;  the court of appeals
did not err in concluding that the district court's unexplained
conclusion to the contrary was mistaken.

   Petitioner observes (Pet. 20-22), as did the court of appeals (Pet.
App. A11), 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 (5th 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/

   Under any of these approaches, however, the government would not
have been estopped here.  Petitioner failed to demonstrate even that
the traditional elements of estoppel, 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 exists among the courts of appeals in their treatments
of estoppel cases is not presented by the decision in this case.  /8/

   2. Petitioner also claims that the court of appeals engaged in
improper factfinding.  See Icicle Seafoods, Inc. v. Worthington, 475
U.S. 709, 714 (1986).  Although the court of appeals arguably engaged
in commentary unrelated to the issues developed before the district
court and unnecessary to the disposition of the case, /9/ there was no
disagreement as to the key factual finding.  The district court found
(Pet. App. A17-A20), and the court of appeals agreed (Pet. App. A10),
that petitioner had acted imprudently 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 consequences 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 imprudence 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, /10/ the conclusion that the district court had 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 pendent party
jurisdiction over petitioner's state law claim against the individual
respondents, the Hutchinsons.  The federal respondent is not affected
by that ruling.  /11/ We note, however, that the issue raised by the
petitioner does not require this Court to hold the petition pending
disposition 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 party jurisdiction are
based on the premise that the threshold requirements making pendent
jurisdiction appropriate have been met.  See United Mine Workers v.
Gibbs, 383 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 ordinarily 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.

                              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 General

   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

   /1/ 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, Section 13006(a)(1) and (b), 100 Stat. 304.

   /2/ 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. A17.

   /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
petitioner 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. A5), 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
priority 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 subordinated its own interest in the collateral.  Pet.
App. A61-A69.  Ultimately, 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 petitioner and the federal respondent on
the individual respondents' counter- and cross-claims.  Pet. 12.

   /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 (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 traditional 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 entity might be estopped.  Although petitioner cites
those cases to support 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.

   /6/ 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.

   /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
exhaust 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 failed to raise the
defense sufficiently below.

   /8/ 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 commercial" judgment.  There was no corresponding requirement
placed on the federal respondent to evaluate and verify whether
petitioner's actions were those of a "reasonable and prudent
commercial bank." See Pet. App. A10.  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.

   /9/ For example, petitioner objects (Pet. 24 n.16) to the court of
appeals' 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 Ibid.

   /10/ 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
apply to it from the beginning of the transaction by failing to make
the argument below.  Ibid.  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 entitled to expect prudent action from a bank.  It
does not assert that it 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).

   /11/ 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
respondent, had subordinated its interest in certain collateral to
that of the individual 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 individual respondents have not sought
review of the court of appeals' decision.  Rather, only the petitioner
seeks to have the disposition relevant to its claim reviewed.  The
pendent party claim therefore does not concern the federal government.