Opinion ID: 577150
Heading Depth: 2
Heading Rank: 2

Heading: Estoppel and the Merrill Doctrine

Text: 25 The district court held that the FHLMC could not be bound by the unauthorized conduct of Crown because estoppel generally cannot be applied against the government, relying on Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947). On this ground it resolved the remaining issues in favor of the FHLMC, granting summary judgment on Counts I and III and on the FHLMC's counterclaim for foreclosure (to which the Mendralas' only defense was the alleged misconduct of Crown). The court dismissed the Mendralas' counterclaim and denied the Mendralas' cross-motion for declaratory judgment. We review issues decided on summary judgment de novo, resolving all reasonable inferences in favor of the non-moving party. New Burnham Prairie Homes, Inc. v. Burnham, 910 F.2d 1474, 1477 (7th Cir.1990). 10 26 There is no dispute that the note assigned by Crown to the FHLMC contained a typewritten lockout provision prohibiting prepayment. In addition, the FHLMC's Sellers' and Servicers' Guide clearly prohibits acceptance of prepayment except in accordance with the terms of the note. There is no question, then, that Crown's initial acceptance of the Mendralas' prepayment was unauthorized. The Mendralas argue, however, that the FHLMC is bound by Crown's issuance of the pay-off statement, initial acceptance of the Mendralas' attempted prepayment and alleged fraudulent alteration of the note. They contend that the protections of sovereign immunity and the Merrill doctrine do not apply to the FHLMC in this case. 27 Initially we note that much of the Mendralas' argument on appeal assumes that the district court found the FHLMC protected by the general doctrine of sovereign immunity. In fact, the district court based its decision on the narrower principle that estoppel does not lie against the government. See 1990 WL 129602, at  4, 1990 U.S.Dist. LEXIS 11250, at  10 (Aug. 27, 1990); 1991 WL 3322, at  3, 4, 5, 6 n. 1, 1991 U.S.Dist. LEXIS 40, at  8-9, 11-12 (Jan. 3, 1991); 1991 WL 18176, at  1, 1991 U.S.Dist. LEXIS 1550, at  3 (Feb. 8, 1991). While it is true that this principle once rested largely on considerations of sovereign immunity, it is distinct from that doctrine and is supported by its own independent rationales. See generally Portmann v. United States, 674 F.2d 1155, 1158-60 (7th Cir.1982). The district court's conclusion that estoppel should not be applied in this case did not require a determination that the FHLMC is clothed with sovereign immunity as a general matter. 28 Our conclusion that the FHLMC is not a federal agency for purposes of the FTCA does not preclude a determination that it is a federal instrumentality for other purposes, including purposes of estoppel and the Merrill doctrine. As the courts have made clear, the test for finding an entity to be a federal agency under the FTCA is a relatively narrow one. Thus after finding that a Federal Reserve Bank is not a federal agency under the FTCA, the court in Lewis noted that the Bank was nonetheless a federal instrumentality for purposes of immunity from state taxation and that Bank employees were public officials under the federal bribery statute. 11 Similarly, the principle that estoppel does not lie against the government rests on the broader rationales of separation of powers and public policy considerations. See Portmann, 674 F.2d at 1159-60. In fact, courts have specifically held the FHLMC to qualify for the protection of the no-estoppel rule. McCauley v. Thygerson, 732 F.2d 978, 982 (D.C.Cir.1984); FHLMC v. Freedlander, Inc., No. 87-265-A (E.D.Va. June 12, 1987) (unpublished order). Unlike the factors applied under the FTCA, classification as a government entity in this context turns on whether estoppel would thwart congressional intent: 29 When a court applies broad notions of promissory estoppel to bind a congressionally created entity to the unauthorized words or deeds of an official of that entity, the court may thwart the congressional intent embodied in the prescribed nature of, and limitations on, that entity's authority.... A decision to treat FHLMC as if it were a private employer for purposes of promissory estoppel would undermine this congressional intent [that FHLMC be considered a federal entity for employment relations purposes]. 30 McCauley, 732 F.2d at 982; see also United States v. Medico Industries, Inc., 784 F.2d 840, 845 (7th Cir.1986) (As with other claims of estoppel against the government, the question is: 'Who is in charge here, Congress and the President or subordinate officials?' ). The court in McCauley held that estoppel could not be applied against the FHLMC to make it liable for breach of an employment contract on the basis of certain unauthorized representations by FHLMC officials. 31 In Merrill the Supreme Court stated that anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority. 332 U.S. at 384-85, 68 S.Ct. at 3-4. Agents of the Federal Crop Insurance Corporation in that case had erroneously informed plaintiffs that their wheat crop was insurable. The Court held that the FCIC was a federal instrumentality, and as such, it could not be bound by its agents' misrepresentations beyond the scope of their authority, nor estopped from enforcing its crop insurance requirements. The Supreme Court has consistently upheld the general principle that federal instrumentalities cannot be estopped by persons acting beyond their authority, though it has declined to declare explicitly that the no-estoppel rule is without exception. See, e.g., Heckler v. Community Health Services, Inc., 467 U.S. 51, 63, 104 S.Ct. 2218, 2225, 81 L.Ed.2d 42 (1984) ([T]hose who deal with the Government ... may not rely on the conduct of Government agents contrary to law.); Schweiker v. Hansen, 450 U.S. 785, 788-91, 101 S.Ct. 1468, 1470-72, 67 L.Ed.2d 685 (1981). 32 We think that the FHLMC is a federal instrumentality for estoppel purposes, and that it is protected by the Merrill doctrine in this case. The FHLMC has a public statutory mission: to maintain the secondary mortgage market and assist in meeting low- and moderate-income housing goals. 12 Holding the FHLMC responsible for the unauthorized actions of an entity such as Crown would thwart its congressional purpose. 33 Indeed, to the extent that this case differs from Merrill, McCauley and numerous others in the same line, it presents a stronger case for refusing to apply estoppel against the government, for the unauthorized conduct here was committed not by an employee of the federal instrumentality, but by a separate entity with which the FHLMC had contracted. Further, under the FHLMC's Sellers' and Servicers' Guide (pursuant to which Crown serviced the mortgage), Crown was an independent contractor and not [FHLMC's] agent or assignee. Record, Vol. 1, Doc. 77, Ex. 2. Given the degree of attenuation here between the unauthorized actor and the government, the FHLMC should be less securely bound by Crown's conduct. Since the Mendralas have not shown that the FHLMC misrepresented anything to them, their case for applying estoppel against the FHLMC simply fails to get off the ground. 34 The Mendralas attempt to use this attenuation to their advantage. They argue that this case is distinguishable from Merrill because here they were not actually dealing with the FHLMC and were not on notice that the government was involved. This argument fails for several reasons. First, the Mendralas admit that when they applied for the loan from Crown they were told that the FHLMC would be assigned the loan and had to approve it. Additionally, at the closing they signed an Estoppel Certificate to induce the Federal Home Loan Mortgage Corporation to accept an assignment of [the] Note and Mortgage. The Mendralas thus evidently had notice that they were dealing with some entity known as the FHLMC. Even if the Mendralas were unaware of the FHLMC's governmental status, this sort of innocent ignorance would not allow them to hold the government responsible for Crown's alleged unauthorized actions. Merrill, 332 U.S. at 385, 68 S.Ct. at 3. 35 The Mendralas correctly point out that this circuit and other courts have allowed estoppel to be applied against the government in certain circumstances. These exceptional cases have not established crystal-clear standards as to when government entities may be estopped; to the extent that they have established standards, those standards simply do not warrant estoppel against the FHLMC in this case. For example, courts have stated in several cases that affirmative misconduct on the part of the government would justify an exception to the no-estoppel rule. E.g., Portmann, 674 F.2d at 1167; TRW, Inc. v. Federal Trade Comm'n, 647 F.2d 942, 951 (9th Cir.1981); see also INS v. Hibi, 414 U.S. 5, 8, 94 S.Ct. 19, 21, 38 L.Ed.2d 7 (1973) (finding no affirmative misconduct but leaving open question whether such finding would permit estoppel against government). Affirmative misconduct has been defined as something more than mere negligence. TRW, 647 F.2d at 951. Similarly, this circuit has allowed estoppel in situations in which the Government specifically encouraged a mistake of which it then took advantage. Strauch v. United States, 637 F.2d 477, 482 (7th Cir.1980). 36 There was no such affirmative misconduct on the part of the FHLMC in the present case. Under the clear terms of the note, the FHLMC's Sellers' and Servicers' Guide and the applicable regulations, Crown simply had no authority to issue the pay-off statement to the Mendralas when it did and to accept prepayment (and of course Crown had no authority to fraudulently alter the note). But the Mendralas fail to show how the FHLMC affirmatively encouraged any of Crown's mistakes or misconduct. The most they can say is that the FHLMC failed to take some action that might have prevented Crown's unauthorized conduct. But this would establish nothing beyond ordinary negligence--and certainly not affirmative misconduct. Further, even establishing negligence appears difficult on this record, given the clear prohibition of prepayment in the note and Guide, and the FHLMC's prompt notification of Crown as to the invalidity of the Mendralas' prepayment. 37 The Mendralas also refer to Azar v. United States Postal Service, 777 F.2d 1265 (7th Cir.1985), and Portmann, 674 F.2d at 1155, in which this circuit allowed estoppel on the basis of misrepresentations by Postal Service employees regarding insurance coverage for its Express Mail Service. In each case the court narrowly confined its holding to the specific facts, relying in part on the Postal Service's direct competition in a private consumer market as simply another nongovernmental competitor. While the FHLMC may also compete in private markets, this case does not come close to any circumstances justifying an exception to the no-estoppel rule, if only because, in contrast to Azar and Portmann, the Mendralas allege no misrepresentation by an employee of the FHLMC. 13