UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

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No. 96-30943

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FIRST NATIONAL BANK, ST. MARY PARISH,

Plaintiff,

versus

GENINA MARINE SERVICES, INC.; AGATHA RIZZO KORNEGAY; THOMAS

WILSON BRIGHTMAN KORNEGAY, JR., also known as Wilson B.

Kornegay, on behalf of Thomas Wilson Brightman Kornegay, Sr.,

Defendants/Third-Party Plaintiffs/Appellants,

versus

FARMERS HOME ADMINISTRATION,

Third-Party Defendant/Appellee.

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Appeal from the United States District Court for the

Western District of Louisiana, Lafayette

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February 27, 1998

Before POLITZ, Chief Judge, BENAVIDES and PARKER, Circuit Judges.

BENAVIDES, Circuit Judge:

The principal issue presented in this appeal is whether the

Farmers Home Administration (“FmHA”) has waived its sovereign

immunity with respect to the claims of a defendant in a suit on a

note brought by a bank to which the FmHA endorsed a promissory note

that the FmHA purchased under the terms of a guaranty agreement. 
 

1

 At that time, the company was called “Genina, Inc.” The loan

documents were modified on June 8, 1987, to reflect that the

corporation had been renamed “Genina Marine Services, Inc.”

 

2 When Congress reorganized the Department of Agriculture

in 1994, see Federal Crop Insurance Reform and Department of

Agriculture Reorganization Act of 1994, Pub. L. No. 103-354, 108

Stat. 3178 (1994), the FmHA was dissolved, and the Rural Economic

and Community Development Service assumed the responsibilities of

the FmHA’s Business and Industry Division. For ease of

reference, we refer to the agency as “the FmHA” throughout this

opinion.

 

3 Under Department of Agriculture regulations, a debt like

Genina’s that is divided into guaranteed and unguaranteed notes

at the loan closing is governed by the “multi-note system.” 7

C.F.R. § 1980.119(c)(1). 

2

The appeal also raises a threshold question regarding this court’s

jurisdiction to entertain an appeal of the order dismissing

appellants’ claims against the FmHA. We conclude that this court

has jurisdiction and affirm the district court’s dismissal of

Genina’s claims against the FmHA.

I.

Factual Background

Genina Marine Services, Inc. (“Genina”) was a family business

owned by Wilson B. (“Bright”) and Agatha Kornegay. In 1978,

Genina1 borrowed $985,000 from First National Bank in St. Mary

Parish (“FNB” or “the bank”). Genina’s obligation to FNB was

evidenced by two promissory notes. One note, representing 90% of

the amount borrowed ($886,500), was guaranteed by the FmHA under

the Consolidated Farm and Rural Development Act, 7 U.S.C. §§ 1921-

2006.2 The second note, representing the remaining 10% of Genina’s

indebtedness ($98,500), was not guaranteed.3 Both notes were
3

secured by a fleet mortgage on three of Genina’s vessels, a chattel

mortgage on two of Genina’s vehicles, and a mortgage on the

Kornegay family home. Two agreements, a Loan Note Guarantee and a

Lender’s Agreement, governed the relationship between the bank and

the FmHA.

On March 1, 1979, FNB sold the FmHA-guaranteed note to Pequot

Partners. Genina defaulted on both notes in 1983. After the

default, Pequot Partners made a written demand on FNB to repurchase

the note. When the bank declined, FmHA purchased the note as it

was obligated to do under the Loan Note Guarantee and the Lender’s

Agreement. FNB remained the holder of the unguaranteed note and

continued to act as servicing agent on the guaranteed note after

the FmHA purchased the note. 

Wilson Kornegay died in 1988. According to appellants, the

FmHA then entered into negotiations with Genina during which Genina

agreed to sell, at its own expense, the three vessels securing the

loan under the fleet mortgage in return for the FmHA’s agreement

not to foreclose on the Kornegay home. Genina alleges that it sold

the vessels in reliance on this agreement. The proceeds from those

sales were applied to Genina’s indebtedness on the guaranteed and

the unguaranteed notes. Genina alleges that the FmHA then demanded

an additional cash payment if Genina wished to avoid foreclosure on

the home. The FmHA denies that it agreed not to pursue foreclosure

if Genina sold the vessels.

On or about August 30, 1991, the FmHA assigned the note to FNB

without recourse.
4

II.

Procedural History

FNB brought suit on both notes in Louisiana state court

against Genina, Agatha Kornegay, and Thomas Kornegay, Jr., as

administrator of Wilson Kornegay's estate (collectively “Genina”),

seeking to foreclose on the Kornegay home. Appellants filed a

third-party petition against the FmHA, alleging that Genina had

reached an accord and satisfaction with the FmHA, that FNB’s suit

breached that accord (and in doing so negligently and intentionally

inflicted emotional distress on Mrs. Kornegay), and that the FmHA

remains the true owner of the note.

The FmHA removed the suit to federal district court and moved

to dismiss Genina’s claims against it based on sovereign immunity

and defective service of process. The district court granted the

FmHA’s motion to dismiss without specifying grounds and remanded

the remaining claims to state court. Genina timely filed a notice

of appeal. This court vacated and remanded, instructing the

district court to state its reasons for dismissal. On remand, the

district court stated that it had dismissed the claims against the

FmHA because it “is an unincorporated department of the federal

government and, as such, is not a legal entity and may not be

sued.” Genina appealed from this clarified judgment.

III.

The threshold issue in this appeal is whether this court has

jurisdiction to review the dismissal order, which was contained in
 

4 We generally lack jurisdiction to review remand orders

based on lack of subject matter jurisdiction or procedural

defects. Bogle v. Phillips Petroleum Co., 24 F.3d 758, 761 (5th

Cir. 1994).

5

the same order remanding the remaining claims to state court.

Although this court lacks jurisdiction to review a remand order

that is based on 28 U.S.C. § 1447(c), see 28 U.S.C. § 1447(d),4.

Courts of appeals may, however, review a remand order that is

based on substantive decision on the merits of a collateral issue

rather than matters of jurisdiction. Regis Assocs. v. Rank Hotels

(Management) Ltd., 894 F.2d 193, 194 (6th Cir. 1990). 5 we may

review any aspect of a judgment containing a remand order that is

“distinct and separable from the remand proper.” John G. & Marie

Stella Kenedy Mem. Found. v. Mauro, 21 F.3d 667, 670 (5th Cir.

1994) (citing City of Waco v. United States Fidelity & Guar. Co.,

293 U.S. 140, 142-43, 55 S. Ct. 6, 6-7 (1934)). An order is

“separable” if it precedes the remand order “in logic and fact” and

is “conclusive.” Linton v. Airbus Industrie, 30 F.3d 592, 597 (5th

Cir. 1994) (citing City of Waco). In this context, a district

court action is conclusive if “it will have the preclusive effect

of being functionally unreviewable in state court.” Id. at 597.

For example, in City of Waco, the Supreme Court held that the court

of appeals had jurisdiction to review the dismissal of a diverse

third-party defendant whose dismissal destroyed diversity

jurisdiction even though the rest of the case was remanded to state

court in the same judgment. 293 U.S. at 143-44, 55 S. Ct. at 7. 
6

Like the order in City of Waco, the dismissal of Genina’s

third-party claims against the FmHA is distinct and separable from

the remand itself. The dismissal will have preclusive effect in

the state-court litigation and will not be subject to review there.

We conclude, therefore, that, under City of Waco and its progeny,

we have jurisdiction to review the district court’s dismissal of

Genina’s claims against the FmHA. 

Accordingly, we turn to the issue of the FmHA’s sovereign

immunity.

IV.

We start with the basic premise that the federal government

is immune from suit unless it consents to be sued. EEOC v. First

National Bank, 614 F.2d 1004, 1007 (5th Cir. 1980). The United

States can consent to be sued “either by specific statutory consent

or by instituting a suit as to which a defendant may plead matters

in recoupment.” Id. (citations omitted). Genina argues that its

claims against the FmHA fall within the latter category of consent

to suit. 

In Frederick v. United States, 386 F.2d 481, 488 (5th Cir.

1967), this court first recognized that by filing suit the

government effects a limited waiver of sovereign immunity as to the

defendant’s recoupment claims: 

Our conclusion is that when the sovereign sues it waives

immunity as to claims of the defendant which assert

matters in recoupment — arising out of the same

transaction or occurrence which is the subject matter of

the government’s suit, and to the extent of defeating the

government’s claims but not the extent of a judgment in
 

6 Although the government provides extensive briefing as to

why Genina cannot bring suit against it under the Federal Tort

Claims Act, 28 U.S.C. §§ 1346, 2671-2680, or the Tucker Act, 28

U.S.C. § 1491, Genina specifically disclaims any attempt to use

these avenues for bringing suit against the government and

instead relies exclusively on Frederick. A recoupment claim

within the scope of Frederick need not also fall within another

statutory waiver of sovereign immunity. See Frederick, 386 F.2d

at 488 (noting that waiver of sovereign immunity can be by

statute or by institution of suit); United States v. Johnson, 853

F.2d 619, 621 (8th Cir. 1988)(holding that when the government

waives sovereign immunity as to matters in recoupment, “it does

so even as to those claims that ordinarily are barred by the

FTCA”).

7

the government which is affirmative in the sense of

involving relief different in kind or nature to that

sought by the government or . . . exceeding the amount of

the government’s claims. . . .

386 F.2d at 488. Genina argues that, under Frederick, the FmHA

waived its sovereign immunity as to Genina’s claims when the bank

brought suit against Genina because the FmHA’s endorsement of the

guaranteed note to the bank was a sham.6 Genina urges that its

third-party claims against the FmHA should be allowed under

Frederick, even though the FmHA has not actually filed suit against

it. Genina has not cited and our research has not uncovered any

decision in which a court has applied the recoupment exception

under these or similar circumstances. We decline to do so under

the facts presented in this case.

Viewed as an isolated transaction, the FmHA’s endorsement of

the note to the bank is arguably suspect. Genina presented

evidence that FNB informed the FmHA that it had either to join a

foreclosure suit against the Kornegays or to endorse the note over

to FNB so that FNB could proceed with foreclosure. Indeed,

Theodore Panchalk, the chief of the FmHA’s Business and Industry
 

7 Although the FmHA’s endorsement to the bank does not

appear in the record, there is no dispute that Panchalk endorsed

the note as follows:

Without recourse, pay to the order of The First National

Bank in St. Mary Parish.

FARMERS HOME ADMINISTRATION

BY: /s/Theodore Panchalk

Theodore Panchalk

Chief, Business & Industry Division

8

Division in Louisiana, testified in his deposition that he had

endorsed the note to the bank for “litigation purposes.”7 But the

endorsement must not be viewed in isolation. Rather, it must be

considered in the context of the pre-existing agreements between

the lender and the FmHA as well as the statutory and regulatory

framework within which they were operating. 

Genina’s guaranteed loan was made under the Consolidated Farm

and Rural Development Act, which enables the Secretary of

Agriculture, acting through the FmHA, see 7 U.S.C. § 1981, to make

or guarantee loans for the purpose of “improving, developing, or

financing business, industry, and employment and improving the

economic and environmental climate in rural communities . . . .”

Id. § 1932(a). The Act authorizes the Secretary of Agriculture “to

make such rules and regulations, [and] prescribe the terms and

conditions for making or insuring loans, security instruments and

agreements . . . .” Id. § 1989. Under this authority, the

Secretary of Agriculture has promulgated extensive regulations to

govern the FmHA’s loan guarantee programs and has mandated the form

of the Loan Note Guarantee and the Lender’s Agreement. See 7

C.F.R. pt. 1980, subpt. A, app. A. 
 

8 The Lender’s Agreement also provides that “all rights

under the security instruments (including personal and/or

corporate guarantees) will remain with the Lender and in all

cases inure to its and the Government’s benefit notwithstanding

any contrary provisions of state law.” This provision does not

9

Under the Loan Note Guarantee, the FmHA undertook three basic

guaranty obligations. First, the FmHA guaranteed the borrower’s

obligations to the lender by agreeing to indemnify the lender for

any loss sustained on the guaranteed note or the guaranteed

principal plus interest due, whichever sum was less. Second, the

FmHA agreed to indemnify a holder of an FmHA-guaranteed note for

any loss sustained as well as interest due on the guaranteed note.

Third, the FmHA agreed to purchase the guaranteed note from a

subsequent holder in the event of default. Under the Loan Note

Guarantee and the Lender’s Agreement, a subsequent holder of the

note may make a written demand on the bank to repurchase the note;

if the bank chooses not to repurchase the note, the FmHA is

obligated to do so. In this case, the FmHA honored its Loan Note

Guarantee by purchasing the guaranteed note from Pequot Partners

after Genina defaulted and after the bank declined to repurchase

the note. 

Although Pequot Partners succeeded to FNB’s rights under the

Loan Note Guarantee when it purchased the note from FNB, FNB

retained all of its obligations to the FmHA under the Lender’s

Agreement and the Loan Note Guarantee. Under the Lender’s

Agreement, when Genina defaulted on the guaranteed note and

liquidation became necessary, FNB was obligated to conduct the

liquidation unless the FmHA chose to do so itself.8 In this case,
affect our analysis in this case; the mortgage belonged to the

bank when it brought suit, either under this provision or under

Louisiana law. See La. Civ. Code Ann. art. 2645 (West 1996)

(“The assignment of a right includes its accessories such as

security rights.”). 

 

9 The regulation states:

If the loan was closed with the multi-note option, the

lender may need to possess all notes to take some

servicing actions. In these situations when FmHA or its

successor agency under Public Law 103-354 is holder of

some of the notes, the State Director may endorse the

notes back to the lender after the State Director has

sought the advice and guidance of OGC [Office of General

Counsel], provided a proper receipt is received from the

lender which defines the reason for the transfer.

7 C.F.R. § 1980.470(D), administrative. Although Genina complains

that the chief of the Business and Industry Division in Louisiana

rather than the State FmHA Director endorsed the note, the

regulations allow the State Director to delegate responsibilities

to the state’s chief of the Business and Industry Division. 7

C.F.R. §§ 1900.2, 1900.5, and Theodore Panchalk testified in his

deposition that he had authority to endorse the note to the bank.

10

the FmHA did not choose to conduct the liquidation. Instead, the

FmHA endorsed to FNB the note that the FmHA held as a result of its

purchase under the guarantee agreement. Department of Agriculture

regulations allow the FmHA to endorse to the lender a promissory

note held by the FmHA to facilitate “servicing actions.” 7 C.F.R.

§ 1980.470(D), administrative.9 The FmHA endorsed the note to FNB

under the authority of this provision.

Genina makes much of the fact that correspondence between the

FmHA and the lender indicates that the FmHA expects to receive

proceeds from the bank’s suit against Genina. According to Genina,

this shows that the FmHA is the true owner of the note. The note,

however, is not the source of the bank’s obligation to the FmHA;

the Lender’s Agreement is. The Lender’s Agreement gives the FmHA
 

10 Although we have held against Genina on the sovereign

immunity issue, the facts and circumstances Genina relied upon to

argue against sovereign immunity here may work to Genina’s

advantage in the state court proceeding. If, as Genina alleges,

the bank was aware of Genina’s potential recoupment claims

against the FmHA, that may affect the bank’s ability to establish

that it was a holder in due course. See Act of 1974, No. 92, §

1, reprinted in La. Rev. Stat. Ann. tit. 10 app. § 3-302 (West

1993). Under the Louisiana law applicable when the note was

endorsed, if the bank was not a holder in due course, it may have

taken the note subject to some defenses that Genina could have

asserted against the FmHA had the FmHA brought the suit. See Act

of 1974, No. 92, § 1, reprinted in La. Rev. Stat. Ann. tit. 10

app. § 3-306 (West 1993).

 

11 The parties disagree regarding whether this court’s

prior decision, which vacated the district court’s first order,

affected the portion of that order remanding the remaining claims

to state court. We conclude that it did not. We have

jurisdiction to review an order of remand only if the district

court affirmatively states a non-§ 1447(c) ground for remand. 

11

the right to recover any losses it has paid under the guarantee. 

In this case, the loss that the FmHA paid under the guarantee was

the amount for which it purchased the note from Pequot Partners

after Genina’s default. Thus, the FmHA will receive a portion of

the proceeds, if any, from the bank’s suit against Genina, not

because the endorsement of the note to the bank was a sham, but

because the FmHA is entitled to reimbursement under the Lender’s

Agreement for any losses it has paid under the Loan Note Guarantee.

Under these circumstances, we conclude that Frederick does not

permit Genina to assert third-party claims against the FmHA in the

suit brought FNB. The mere fact that the note passed through the

FmHA’s hands does not give rise to a waiver of sovereign immunity.10

V.

For the foregoing reasons, we AFFIRM the judgment of the

district court.11
Soley v. First Nat’l Bank of Commerce, 923 F.2d 406, 409 (5th

Cir. 1991). The district court did not do so in this case. 

Thus, we will not construe this court’s prior decision, which did

not explicitly purport to vacate the remand order, to have

implicitly undertaken an extrajurisdictional review.

12