Court Opinion

ID: 989369
Source: CourtListenerOpinion
Date Created: 2013-07-03 23:06:13.007579+00
Date Added: 2024-06-11T15:12:14.354988
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

C. W. HAYNES AND COMPANY,
INCORPORATED; FIRST CITIZENS
BANK AND TRUST COMPANY OF
SOUTH CAROLINA,
Plaintiffs-Appellants,

v.

MIDFIRST BANK, SSB, an Oklahoma
savings and loan association, as
assignee for collection and as agent
for the Government National
                                       No. 95-2515
Mortgage Association,
Plaintiff-Appellee,

and

UNITED STATES OF AMERICA,
Defendant-Appellee,

and

GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION,
Defendant.
MIDFIRST BANK, SSB, an Oklahoma
savings and loan association, as
assignee for collection and as agent
for the Government National
Mortgage Association,
Plaintiff-Appellant,

v.

C. W. HAYNES AND COMPANY,
INCORPORATED; FIRST CITIZENS                                         No. 95-2516
BANK AND TRUST COMPANY OF
SOUTH CAROLINA,
Defendants-Appellees,

and

UNITED STATES OF AMERICA;
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION,
Defendants.

Appeals from the United States District Court
for the District of South Carolina, at Columbia.
Joseph F. Anderson, Jr., District Judge;
J. Frederick Motz, Chief District Judge, sitting by designation.
(CA-93-1418-3-17, CA-93-1862-3-17)

Argued: April 4, 1996

Decided: May 31, 1996

Before MURNAGHAN and LUTTIG, Circuit Judges, and LAY,
Senior Circuit Judge of the United States Court of Appeals for the
Eighth Circuit, sitting by designation.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.

_________________________________________________________________

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COUNSEL

ARGUED: Michael Wallace Tighe, CALLISON, TIGHE, ROBIN-
SON & HAWKINS, L.L.P., Columbia, South Carolina, for Appel-
lants. Richard B. Noulles, GABLE & GOTWALS, Tulsa, Oklahoma,
for Appellee Midfirst Bank; Lisa Sheri Goldfuss, Trial Attorney,
Torts Branch, Civil Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee United States. ON
BRIEF: Louis H. Lang, CALLISON, TIGHE, ROBINSON & HAW-
KINS, L.L.P., Columbia, South Carolina, for Appellants. Charles E.
Carpenter, Jr., RICHARDSON, PLOWDEN, GRIER & HOWSER,
Columbia, South Carolina, for Appellee Midfirst Bank. Frank W.
Hunger, Assistant Attorney General, Paul F. Figley, Deputy Director,
Torts Branch, Civil Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee United States.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Two consolidated cases have been brought to ascertain whether
C. W. Haynes & Co. (Haynes) had rights superior to those of Mid-
first Bank (Midfirst) and the Government National Mortgage Associa-
tion (GNMA) in seventeen mortgage notes and the mortgages
securing them, and whether the United States and GNMA were liable
to Haynes in negligence under the Federal Tort Claims Act (FTCA).
The district court held that GNMA, the principal of Midfirst, had
become the notes' holder in due course and that the United States and
GNMA were entitled to sovereign immunity. We affirm.

I.

Haynes, having agreed to sell twenty-one mortgages and related
mortgage notes to the Inland Mortgage Corporation (Inland), deliv-

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ered to Inland, before receiving payment therefor, the original mort-
gage notes and copies of unrecorded mortgage assignments for
Inland's underwriting review. The notes were endorsed to Inland
"without recourse." Each of the copies of the assignments was dated
October 15, 1990, and bore a stamp, which stated:"Certified True
Copy of Original to be Filed for Recording Upon Funding. C. W.
Haynes and Company, Incorporated." In its cover letter to Inland,
Haynes wrote:

          These documents are delivered to you for your examination
          and determination as to their compliance with relevant
          underwriting requirements and your decision as to their pur-
          chase.

          It is expressly understood that ownership of these docu-
          ments, and the loans which they represent, will remain
          unchanged and will not pass to you until such time as these
          documents are approved by you for purchase, and funds for
          that purchase are received by us.

Inland rejected four of the twenty-one mortgages and returned the
corresponding documents to Haynes. Without having paid Haynes for
the remaining seventeen notes and mortgages, Inland placed them into
a GNMA pool approximately two weeks after receiving them, and
then delivered them, endorsed in blank, to Bank of America, one of
GNMA's document custodians. A GNMA-guaranteed security
backed by the notes and mortgages was then delivered to Inland for
issuance. GNMA subsequently terminated Inland's status as an eligi-
ble issuer of GNMA-guaranteed securities and designated Midfirst as
its agent to collect on and enforce the seventeen mortgages.

Because Inland never paid it for the notes and mortgages, Haynes
has sought to invalidate their transfer to GNMA and Midfirst. Haynes
also has claimed that GNMA behaved negligently by failing to revoke
Inland's eligible-issuer status at an earlier date and by allowing a
GNMA-guaranteed security backed by the seventeen mortgages to be
issued.

II.

With respect to Haynes's claim to the notes and mortgages, the dis-
trict court granted Midfirst's motion for summary judgment. The

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court held that Haynes's claim was invalid because GNMA had
become the notes' holder in due course when Inland delivered the
mortgage documents to Bank of America and the security was deliv-
ered to Inland. Having reviewed the matter de novo, see Henson v.
Liggett Group, Inc., 61 F.3d 270, 274 (4th Cir. 1995), we agree.

Under South Carolina law, which is controlling here, an instru-
ment's holder in due course "takes the instrument free from all claims
to it on the part of any person." S.C. Code Ann.§ 36-3-305(1) (Law.
Co-op. 1977). "A holder in due course is a holder who takes the
instrument (a) for value; and (b) in good faith; and (c) without notice
that it is overdue or has been dishonored or of any defense against or
claim to it on the part of any person." Id . § 36-3-302(1).

GNMA became the mortgage notes' holder when Inland delivered
the notes to Bank of America to hold on GNMA's behalf. GNMA
gave value for the mortgage notes when it delivered a GNMA-
guaranteed security to Inland. GNMA took the mortgage notes in
good faith: while GNMA might have been careless or negligent in its
handling of Inland's submission, no evidence has been presented that
suggests that GNMA or its agents behaved dishonestly. See id. § 36-
1-201(19) (defining "good faith" as "honesty in fact in the conduct or
transaction concerned").1

The question of notice is somewhat closer, though we find that
GNMA did not have notice of Haynes's claim to the mortgage notes
until well after it had become the notes' holder. Under South Carolina
law, "[a] person has `notice' of a fact when (a) he has actual knowl-
edge of it; or (b) he has received a notice or notification of it; or
(c) from all the facts and circumstances known to him at the time in
question he has reason to know that it exists." Id. § 36-1-201(25).
Contrary to Haynes's suggestion, the fact that an employee at the Fed-
eral Housing Administration had learned that Inland officials might
be falsifying payment histories in documents being prepared concern-
ing FHA insurance in no way put GNMA, a separate entity, on notice
of Inland's misconduct in connection with GNMA pools.
_________________________________________________________________
1 Haynes has contended that GNMA failed to comply with its own reg-
ulations. Standing alone, though, such failure would reflect only upon the
degree of care that GNMA exercised, and not upon its"honesty in fact."

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Nor did the documents submitted by Inland put GNMA on such
notice. The copies of the unrecorded mortgage assignments did indi-
cate that they were indeed copies, and that the originals would be
filed when payment had been received. GNMA was not inescapably
led to conclude from those facts, though, that Haynes had never been
paid. Indeed, as the district court found, GNMA could have con-
cluded that, between the time Haynes placed the stamp on the docu-
ments and the time those documents were submitted to Bank of
America, Inland had paid Haynes for the mortgages. The fact that
GNMA did not conclude otherwise based upon Inland's failure to
submit original copies of the assignments suggests that GNMA may
have been careless in carrying out its duties; it does not suggest,
though, that GNMA had notice of Haynes's claims. See 4 William D.
Hawkland & Lary Lawrence, Uniform Commercial Code Series § 3-
304:05, at 482, 484 (1994) (stating that, under the"preferable" and
likely intended understanding of the phrase "reason to know" in § 1-
201(25), a person "only has reason to know of a claim or defense
where, from the facts of which he has knowledge, the only reasonable
conclusion is that a claim or defense exists") (emphasis added).

Finally, contrary to Haynes's belief, GNMA and Inland were not
sufficiently closely related to warrant application of the so-called
close-connection doctrine.2
_________________________________________________________________

2 Professors White and Summers explain the origin of the close-
connection doctrine as follows:

         In the days before the Federal Trade Commission abolished
         holder in due course status for consumer notes, courts often
         looked for ways to protect consumers from parties who appar-
         ently conformed to all of the requirements for a holder in due
         course. One particularly offensive problem was that presented by
         a parent and subsidiary corporation in which the subsidiary
         might sell shoddy goods to a consumer and then sell the negotia-
         ble paper to the parent. Technically, the parent was a holder in
         due course . . . . Under the "close connection" doctrine, the
         courts attributed the subsidiary's knowledge to the parent if the
         two were sufficiently closely connected.

2 James J. White & Robert S. Summers, Uniform Commercial Code
§ 17-7, at 172 (1995).

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We therefore hold that the district court did not err when it granted
summary judgment to Midfirst.3

III.

The district court held that, with respect to Haynes's negligence
action, the United States and GNMA were entitled to sovereign
immunity. We agree.

Congress has created numerous exceptions to the FTCA's conferral
of subject matter jurisdiction in negligence actions against the federal
government, one of which is the "discretionary function" exception:
the FTCA does not confer subject matter jurisdiction over claims
"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 discre-
tion involved be abused." 28 U.S.C. § 2680(a). To determine whether
the discretionary function exception applies, we must first ask
"whether the challenged conduct `involves an element of judgment or
choice.'" Piechowicz v. United States, 885 F.2d 1207, 1211 (4th Cir.
1989) (quoting Berkovitz v. United States, 486 U.S. 531, 536 (1988)).
"[T]he discretionary function exception will not apply when a federal
statute, regulation, or policy specifically prescribes a course of action
for an employee to follow." Berkovitz, 486 U.S. at 536. Second, if the
challenged conduct does indeed involve an element of judgment or
choice, we must determine whether that conduct was grounded in
"`considerations of public policy.'" Piechowicz, 885 F.2d at 1212
(quoting Berkovitz, 486 U.S. at 537). Moreover, "[w]hen established
governmental policy, as expressed or implied by statute, regulation,
or agency guidelines, allows a Government agent to exercise discre-
tion, it must be presumed that the agent's acts are grounded in policy
when exercising that discretion." United States v. Gaubert, 499 U.S.
315, 324 (1991).

Congress has conferred upon GNMA broad discretionary authority
to administer the mortgage-backed security program. GNMA, for
_________________________________________________________________
3 Having so concluded, we need not consider Midfirst's contention on
cross-appeal that we should adopt a uniform federal rule that would lead
to a result favorable to Midfirst.

                    7
example, possesses the authority, "upon such terms and conditions as
it may deem appropriate, to guarantee the timely payment of principal
of and interest on such trust certificates or other securities as shall"
be issued by a GNMA-approved mortgage lender. 12 U.S.C.
§ 1721(g)(1) (Supp. 1996) (emphasis added). The implementing regu-
lations make clear that, if an eligible mortgage lender fails to meet
any of the eligibility requirements, then GNMA " may withhold fur-
ther commitments to guarantee securities until such time as the Asso-
ciation is satisfied that the mortgage lender has resumed business
operations in compliance with such requirements." 24 C.F.R.
§ 390.3(g) (emphasis added). The regulations further state that
GNMA "may . . . audit the books and examine the records of any
issuer . . . bearing on compliance with the requirements of the
Mortgage-Backed Securities Program." Id.§ 390.60 (emphasis
added).

In light of that statutory and regulatory language, we find that
GNMA's actions in the instant case involved "an element of judgment
or choice." That is, we find that whether Inland continued to be eligi-
ble to issue GNMA-guaranteed securities was a matter committed
largely to GNMA's discretion and that GNMA had the discretionary
authority to decide what procedures to employ when determining
whether Inland should be permitted to issue a security backed by the
seventeen notes and mortgages. Moreover, GNMA's decisions con-
cerning those matters involved the "exercise of policy judgment."
Compare United States v. Varig Airlines, 467 U.S. 797, 819-20
(1984) ("When an agency determines the extent to which it will
supervise the safety procedures of private individuals, it is exercising
discretionary regulatory authority of the most basic kind. Decisions as
to the manner of enforcing regulations directly affect the feasibility
and practicality of the Government's regulatory program; such deci-
sions require the agency to establish priorities for the accomplishment
of its policy objectives by balancing the objectives sought to be
obtained against such practical considerations as staffing and fund-
ing.").

We therefore hold that the discretionary function exception applies
in the instant case and that the district court properly dismissed
Haynes's negligence claim against the United States and GNMA.

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IV.

The judgment of the district court is accordingly

AFFIRMED.

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