United States v. Neustadt/Opinion of the Court

Pursuant to the provisions of the National Housing Act of 1934, as amended, the Federal Housing Administration (FHA) is authorized, in certain instances, to insure the partial repayment of loans secured by mortgages executed to finance the purchase of private residential properties. When duly requested to do so by a qualified lender, the FHA, through its appraisal staff, makes an inspection of property offered for sale in order to determine whether the property is eligible for FHA mortgage insurance, and to assign an appraised value establishing the maximum amount of mortgage insurance obtainable.

The question for decision in this case is whether the United States may be held liable, under the Federal Tort Claims Act, 28 U.S.C. § 1346(b), 28 U.S.C.A. § 1346(b), to a purchaser of residential property who has been furnished a statement reporting the results of an inaccurate FHA inspection and appraisal, and who, in reliance thereon, has been induced by the seller to pay a purchase price in excess of the property's fair market value. The answer turns upon the correct interpretation of 28 U.S.C. § 2680(h), 28 U.S.C.A. § 2680(h), which precludes recovery under the Tort Claims Act upon ( a)ny claim arising out of * *  * misrepresentation.' The material facts giving rise to the controversy are not in dispute, and may be summarized as follows.

Early in 1957, the property in question, consisting of a 16-year-old singlefamily brick house and lot located in Alexandria, Virginia, was offered for sale by its owners. To assure that FHA mortgage insurance would be available to secure a loan in the event that the purchaser, when ascertained, might desire to finance the purchase by that method, the owners requested a qualified lending institution to take the necessary steps to have the property inspected and appraised by the FHA; and pursuant to the lending agent's application, an FHA appraiser visited and inspected the premises. On the basis of that inspection, which disclosed no defects that would disqualify the property for mortgage insurance, the FHA issued to the lending agency a 'conditional commitment,' stating that the property had been approved for mortgage insurance and, for that purpose, had been assigned an appraised value of $22,750. Under § 203(b)(2) of the National Housing Act, the maximum amount of mortgage insurance obtainable on an appraised value of $22,750 was $18,800.

Shortly thereafter, the respondents, Mr. and Mrs. Stanley S. Neustadt, examined the property and became interested in buying it. After negotiations extending over the period of a month, in the course of which respondents were advised by the sellers that the property had been appraised by the FHA at a value of $22,750 for mortgage insurance purposes, respondents entered into a conditional contract to purchase the property at a price of $24,000. The contract was conditioned upon the respondents' obtaining a loan secured by an FHA-insured mortgage in the amount of $18,000. In accordance with § 226 of the National Housing Act, the contract also provided that the sellers would deliver to respondents, prior to the sale of the property, a written statement setting forth the FHA-appraised value. Both conditions were fulfilled, and on the settlement date, July 2, 1957, respondents took title to the property, and acknowledged by their signatures that they had been furnished with a written 'Statement of FHA Appraisal.' This was an official FHA document, stating that the FHA 'has appraised the property identified * *  * and for mortgage insurance purposes has placed an FHA-appraised value of $22,750 on such property as of the date of this statement. (The FHA appraised value does not establish sales price.)' (Emphasis in original.)

Respondents moved into the house on July 10, 1957. According to their testimony, they had previously inspected the house 'quite carefully,' and had found 'absolutely nothing which would indicate the necessity for any redecoration at all.' The house was 'immaculately clean' and the walls and ceilings 'looked fine.' However, within a month after respondents moved in, substantial cracks developed in the ceilings and in the interior and exterior walls throughout the house. When building repair contractors were unable to ascertain the cause of the cracks, the original builder of the house and four FHA field inspectors were summoned, and a thorough investigation was made by them. By drilling a hole through the concrete floor of the basement, it was discovered that the subsoil was composed of a type of clay which becomes pliable when moist. Due to poor drainage conditions on the surface, water had seeped into the clay, causing it to shift beneath the foundations of the house and to produce the cracks which had appeared in the walls and ceilings.

Ten months thereafter, respondents commenced this action against the Government, under the Federal Tort Claims Act, in the United States District Court for the Eastern District of Virginia, seeking recovery of the difference between the fair market value of the property and the purchase price of $24,000. The complaint alleged that the FHA's inspection and appraisal of the property for mortgage insurance purposes had been conducted negligently; that respondents were justified in relying upon the results of that inspection and appraisal; and that they 'would not have purchased the property for $24,000 but for the carelessness and negligence of (FHA).'

After trial, the District Court found that respondents 'in good faith relied upon the (FHA's) appraisal in consummating their contract of purchase,' and that 'reasonable care by a qualified appraiser would have warned' respondents of the 'serious structural defects' in the house which had been 'preponderantly proved.' On that basis, the court adjudged the Government liable in the amount of $8,000, which it found to be the difference between the property's fair market value at the time of sale ($16,000) and the purchase price (24,000).

On appeal, the judgment was affirmed by the Court of Appeals for the Fourth Circuit, 281 F.2d 596, over the Government's sedulous objection that recovery was barred by 28 U.S.C. § 2680(h), 28 U.S.C.A. § 2680(h), which excepts from the coverage of the Tort Claims Act '(a)ny claim arising out of * *  * misrepresentation.' Because of the importance of the question, and the resolve an apparent conflict between the Fourth Circuit's decision and the holdings of other Circuits uniformly construing the 'misrepresentation' exception of s 2680(h) to preclude recovery on closely analogous facts, we granted certiorari. 364 U.S. 926, 81 S.Ct. 354, 5 L.Ed.2d 265. We have concluded that the interpretation adopted by the Fourth Circuit is erroneous, and that the Government must be absolved from liability.

In its complete form, § 2680(h) excludes recovery under the Federal Tort Claims Act upon '(a)ny claim arising out of assault, battery, false imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander, misrepe sentation, deceit, or interference with contract rights.' (Emphasis added.) The Government's position is that, since Congress employed both the terms 'misrepresentation' and 'deceit' in § 2680(h), it clearly meant to exclude claims arising out of negligent, as well as deliberate, misrepresentation; and therefore, even assuming that the District Court correctly found that the inaccurate FHA appraisal in this case resulted from a negligent inspection, and that respondents relied upon that appraisal to their detriment, the claim must nevertheless fail as one 'arising out of * *  * (negligent) misrepresentation.'

We are in accord with the view urged by the Government, and unanimously adopted by all Circuits which have previously had occasion to pass on the question, that § 2680(h) comprehends claims arising out of negligent, as well as willful, misrepresentation.

The leading precedent has been the Second Circuit's decision in Jones v. United States, 207 F.2d 563, which involved a statement issued to the plaintiffs by the United States Geological Survey erroneously estimating the oil-producing capacity of certain land. In reliance upon that statement, plaintiffs sold securities representing oil and gas rights in the land for less than their actual value, and later sought to recoup their loss from the Government under the Tort Claims Act on a complaint alleging negligent misrepresentation. Affirming a dismissal of the complaint, the Second Circuit tersely pointed out that § 2680(h) applies to both 'misrepresentation' and 'deceit,' and, '(a)s 'deceit' means fraudulent misrepresentation, 'misrepresentation' must have been meant to include negligent misrepresentation, since otherwise the word 'misrepresentation' would be duplicative.' 207 F.2d at page 564. Following this interpretation, in an unbroken line, are the cases of National Mfg. Co. v. United States, 8 Cir., 210 F.2d 263; Clark v. United States, 9 Cir., 218 F.2d 446; Miller Harness Co. v. United States, 2 Cir., 241 F.2d 781; Anglo-American & Overseas Corp. v. United States, 2 Cir., 242 F.2d 236; Hall v. United States, 10 Cir., 274 F.2d 69. In accord also are Social Security Administration Baltimore Federal Credit Union v. United States, D.C.D.Md., 138 F.Supp. 639, and United States v. Van Meter, D.C.N.D.Cal., 149 F.Supp. 493.

Throughout this line of decisions, the argument has been made by plaintiffs, and consistently rejected by the courts, until this case, that the bar of § 2680(h) does not apply when the gist of the claim lies in negligence underlying the inaccurate representation, i.e., when the claim is phrased as one 'arising out of' negligence rather than 'misrepresentation.' But this argument, as was forcefully demonstrated by the Tenth Circuit in Hall v. United States, supra, is nothing more than an attempt to circumvent § 2680(h) by denying that it applies to negligent misrepresentation. In the Hall case, it was alleged that agents of the Department of Agriculture had negligently inspected the plaintiff's cattle and, as a result, mistakenly reported that the cattle were diseased. Relying upon that report, plaintiff sold the cattle at less than their fair value, and sought recovery from the Government of his loss on the ground that it had been caused by the negligent inspection underlying the agents' report, rather than by the report itself. The Tenth Circuit rejected the claim, stating:

'We must then look beyond the literal meaning of the language     to ascertain the real cause of complaint. * *  * Plaintiff's      loss came about when the Government agents misrepresented the      condition of the cattle, telling him they were diseased when,      in fact, they were free from disease. * *  * This stated a      cause of action predicated on a misrepresentation.

Misrepresentation as used in the exclusionary provision (of §     2680(h)) was meant to include negligent misrer esentation.'      274 F.2d at page 71.

In the instant case, the Fourth Circuit took the opposite view, and held that respondents could recover on the sole basis of the underlying negligence. Although it agreed that § 2680(h) embraces both 'negligent' and 'willful' misrepresentation, and that respondents' claim 'might form the basis of an action for misrepresentation under general common-law principles,' 281 F.2d at page 601, it deemed § 2680(h) inapplicable here for the reason that the misrepresentation was 'merely incidental' to the 'gravamen' of the claim, i.e., 'the careless making of an excessive appraisal so that (respondents were) * *  * deceived and suffered substantial loss.' Id., at page 602. Since § 226 of the National Housing Act requires that a seller of property approved for FHA mortgage insurance 'shall agree to deliver, prior to the sale of the property, to the person purchasing such (property), a written statement setting forth the amount of the (FHA) appraised value * *  * ,' the Fourth Circuit reasoned that the FHA appraisal procedure was designed to protect prospective home purchasers; that the Government (through the FHA) therefore 'owed a specific duty' to respondents to make a careful appraisal; and that 'if the government assumes a duty and negligently performs it, a party injured thereby may recover damages from the United States even though the careless performance of the duty may have been accompanied by some misrepresentation of fact.' Id., at page 599.

Whether or not this analysis accords with the law of States which have seen fit to allow recovery under analogous circumstances, it does not meet the question of whether this claim is outside the intended scope of the Federal Tort Claims Act, which depends solely upon what Congress meant by the language it used in § 2680(h).

To say, as the Fourth Circuit did, that a claim arises out of 'negligence,' rather than 'misrepresentation,' when the loss suffered by the injured party is caused by the breach of a 'specific duty' owed by the Government to him, i.e., the duty to use due care in obtaining and communicating information upon which that party may reasonably be expected to rely in the conduct of his economic affairs, is only to state the traditional and commonly understood legal definition of the tort of 'negligent misrepresentation,' as is clearly, if not conclusively, shown by the authorities set forth in the margin, and which there is every reason to believe Congress had in mind when it placed the word 'misrepresentation' before the word 'deceit' in § 2680(h). As the Second Circuit observed in Jones v. United States, supra, 'deceit' alone would have been sufficient had Congress intended only to except deliberately false representations. Certainly there is no warrant for assuming that Congress was unaware of established tort definitions when it enacted the Tort Claims Act in 1946, after spending 'some twenty-eight years of congressional drafting and redrafting, amendment and counter-amendment.' United States v. Spelar, 338 U.S. 217, 219-220, 70 S.Ct. 10, 11, 94 L.Ed. 3. Moreover, as we have said in considering other aspects of the Act: 'There is nothing in the Tort Claims Act which shows that Congress intended to draw distinctions so finespun and capricious as to be almost incapable of being held in the mind for adequate formulation.' Indian Towing Co. v. United States, 350 U.S. 61, 68, 76 S.Ct. 122, 126, 100 L.Ed. 48.

Regarding the Court of Appeals' assertion that the Government owed respondents a 'specific duty' to make and communicate and accurate appraisal of the property, by virtue of the provisions of the National Housing Act, we have carefully examined the rather extensive legislative history of that statute, giving particular attention to § 226 thereof, and have found nothing from which we may reasonably infer that Congress intended, in a case such as this, to limit or suspend the application of the 'misrepresentation' exception of the Tort Claims Act. Long before § 226 was added to the National Housing Act, in 1954, requiring sellers to inform prospective buyers of FHA-appraised value, it had been recognized in Congress that FHA appraisals would be a matter of public record, and would thus inure, incidentally, to the benefit of prospective home purchasers, by affording them the 'benefit of knowing the appraised value set upon the property * *  * by a trained valuator acting in accordance with a procedure designed to reduce to a minimum, errors that might result from casual or hasty conclusions.' But at the same time, it was repeatedly emphasized that the primary and predominant objective of the appraisal system was the 'protection of the Government and its insurance funds'; that the mortgage insurance program was not designed to insure anything other than the repayment of loans made by lender-mortgagees; and that 'there is no legal relationship between the FHA and the individual mortgagor.' Never once was it even intimated that, by an FHA appraisal, the Government would, in any sense, represent or guarantee to the purchaser that he was receiving a certain value for his money.

Nor is there any indication that Congress intended, by its 1954 addition of § 226, to modify the legislation's fundamental design from a system of mortgage repayment insurance to one of guaranty or warranty to the purchaser of value received. On its face, § 226 goes no further than to require that a seller of property approved for FHA mortgage insurance shall furnish to the buyer, prior to sale, a written statement disclosing the FHA-appraised value. That Congress did not thereby intend to convert the FHA appraisal into a warranty of value, or otherwise to extend to the purchaser any actionable right of redress against the Government in the event of a faulty appraisal, was made irrefutably clear in the Committee Hearings in both Houses of Congress, the pertinent excerpts from which are set forth in the margin. Moreover, it is not unreasonable to suppose that, at the time § 226 was adopted, Congress was aware of the 'misrepresentation' exception in the Tort Claims Act, and that it had been construed by the courts to inl ude 'negligent misrepresentation.'

The compulsory disclosure provision of § 226 is but one of numerous instances in which Congress has relegated to a governmental agency the duty either to disclose directly, or to require private persons to disclose, information for the assistance and guidance of other persons in the conduct of their economic and commercial affairs. In practically all such instances, it may be said that the Government owes a 'specific duty' to obtain and communicate information carefully, less the intended recipient be misled to his financial harm. While we do not condone carelessness by government employees in gathering and promulgating such information, neither can we justifiably ignore the plain words Congress has used in limiting the scope of the Government's tort liability.

It follows that respondents' claim is one 'arising out of * *  * misrepresentation,' within the meaning of § 2680(h), and hence is not actionable against the Government under the Tort Claims Act. Accordingly, the judgment below must be reversed.

Reversed.

Mr. Justice DOUGLAS dissents.

Mr. Justice STEWART took no part in the consideration or decision of this case.