BLOCK v. NEAL

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ORAL ARGUMENT OF CARTER G. PHILLIPS, ESQ., ON BEHALF OF THE PETITIONERS

Chief Justice Burger: We will hear arguments first this morning in Block against Neal.

Mr. Phillips.

Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court, this is a suit arising under the Federal Tort Claims Act, and specifically the issue is whether a suit against the United States alleging that a federal employee negligently inspected a home purchased from a private developer but with federal moneys is a claim arising out of a misrepresentation and therefore barred under the Federal Tort Claims Act, specifically, Section 2680(h) of the Act.

The Farmers Home Administration is an agency of the Department of Agriculture which, among other services, provides loans to low income rural housing residents to assist them in purchasing safe and decent housing.

In 1977, the Farmers Home Administration granted Respondent's application for a loan, and Respondent then entered into a contract with a private developer... the name of the company is Home Marketing Associates, Inc.... to purchase a prefabricated house.

The purchase price of the house was approximately $21,000.

During the construction of the house, and in accordance with Farmers Home Administration regulations, a county employee of the Administration inspected the house when it was 2 percent completed, 99 percent completed, and 100 percent completed.

On each occasion, she signed an inspection report indicating that there were no major deviations from the housing plan and specifications that she discovered in her inspection.

Each inspection lasted between 10 and 30 minutes.

Ms. Wells and Respondent both participated in the final inspection, and Respondent signed the final inspection.

Two months after Respondent moved into her house, she notified the Farmers Home Administration that she was having difficulties with the heat pump that had been installed.

Mr. Phillips: It really wasn't much of an inspection, was it?

Mr. Phillips: No, sir, it was not the best inspection that one could have hoped for.

A second inspector went out to the house and discovered that the heat pump that had been installed was not the same heat pump that had been provided in the plans and specifications, that it was indeed a significantly smaller heat pump than they had anticipated, made by a different manufacturer.

In addition, that inspector discovered other defects in the house that are listed in the Respondent's brief.

Efforts by the Farmers Home Administration to convince the Home Marketing Associates company to correct these defects proved unsuccessful for reasons that do not appear in the record.

When Respondent failed to get satisfaction or to receive satisfaction from the company, she filed suit in state court against the Secretary of Agriculture, the head of the Farmers Home Administration, various employees of the Farmers Home Administration, and the United States.

That suit was removed to federal court, and the district court dismissed the... or, excuse me, granted the government's motion to dismiss the complaint for failure to state a claim.

The theory of the district court was essentially that the statute and regulations created no basis... created no duty running to the Respondent to guarantee the quality of the house based on the inspections that had been undertaken.

The Sixth Circuit on appeal agreed with the district court with regard to the contract theory.

It found nothing in the statute, regulations, or conduct of the Farmers Home Administration that would create any kind of a contractual duty to warrant the quality of the house.

The court of appeals, however, reversed under the... on the tort issue, and held that the government's inspection could legitimately be regarded or could potentially, at least, be regarded as having violated the good Samaritan doctrine.

The good Samaritan doctrine requires someone who acts on behalf of another and engenders reliance from that other person to exercise due care and to be responsible for any injuries caused by the failure to exercise due care.

In addition, the court held that the Respondent's claim regarding negligent inspection was not barred by the misrepresentation exception.

Mr. Phillips: Mr. Phillips, you referred two or three times to the claim as one claiming a negligent inspection.

Actually, the claim involved a breach of the duty to supervise as well as to inspect, didn't it?

Mr. Phillips: Well, the problem with that is that there is nothing specific in the complaint with regard to exactly what they meant by supervision.

The only supervision of the construction, Justice Rehnquist, was in the inspection of the house.

Mr. Phillips: Well, but the complaint never went to trial, and under the federal rules you presumably are entitled to adduce any number of facts in support of even a generally pled allegation.

The court of appeals certainly referred to it.

It says, failure to provide technical assistance, including inspection and supervision of construction.

Mr. Phillips: But that is only if there is something in the statute that would provide for supervision in addition to the inspection--

Mr. Phillips: I realize--

Mr. Phillips: --and there is nothing in the statute to that effect, so that at issue... the only thing that could potentially be alleged and be consistent with the statute is the negligent inspection.

Mr. Phillips: --Well, you say that even the 1949 Act doesn't authorize or require the government to supervise as opposed to inspect.

Mr. Phillips: That's correct, Your Honor.

I mean, the only supervision that is discussed is supervised loans and the provision of information to the Respondent, so that even to the extent that supervision is alleged here, it is all... it is still all based on the exchange of information, and that exchange of information is what this Court held in Neustadt as barred under the misrepresentation exception.

Mr. Phillips: Mr. Phillips, doesn't it... Excuse me.

Well, following up on this point, then, if I may, what does Section 1476(a) mean, then, when it says,

"Buildings and repairs constructed with funds advanced pursuant to this subchapter shall be supervised and inspected as required by the Secretary? "

Mr. Phillips: Well, I mean, as required by the Secretary.

Nothing that we have specifically requires us to do more supervision of the construction.

We do supervise to the extent that we provide plans and general architectural information to contractors that we hope... that we expect that they will follow, and we follow that up by inspecting the house to try to see that there is some conformity between the plans and the way the house is developed.

Mr. Phillips: And it is your position that the Secretary has never authorized any supervision of construction?

Mr. Phillips: Not in the way that would be anything other than by... that would be covered... not in any way that is not covered under the misrepresentation exception to the Tort Claims Act.

Mr. Phillips: And Section 1822.7, which says,

"Supervision will be provided borrowers to the extent necessary to achieve the objectives of the loan and to protect the interests of the government? "

Mr. Phillips: Sure, because that doesn't... that still is supervision of the borrowers.

It is not... We don't supervise construction.

It is not as though the government assumes a position of foreman for Home Marketing Associates.

We go out and we inspect it.

That is the primary method by which we supervise.

There is additional supervision in that we supervise the loan to make sure that the moneys are spent properly, and there is additional information, and the provision of architectural services is a form of supervision.

But all of that, I submit, is supervision that would be barred under the misrepresentation exception if there is a basis for it.

Mr. Phillips: Are you arguing that the government has under the laws established here no duty to the owner of the home, that the law creates no duty in this area?

Mr. Phillips: Well, I mean, that is what the district court held, and the court of--

Mr. Phillips: Was that your position?

Mr. Phillips: --We did not argue that in this... It would be my position, that we owe no specific duty to this... to the Respondent in this case.

That's correct.

Mr. Phillips: Under the law.

Mr. Phillips: Under the law.

That while we do... I mean, there is no... The regulations provide general obligations to act, but the only duty that would ever occur would have to come out of state law, and that, we say, is... and to the extent a duty would have existed--

Mr. Phillips: Well, how about the federal law?

Do you think that the federal law indicates that there is no intention by Congress to benefit the homeowner--

Mr. Phillips: --Well, no--

Mr. Phillips: --by these services?

Mr. Phillips: --No, I... no, that is not our submission.

We recognize, just as in Neustadt, that this statute is designed to provide some benefits.

I mean, almost all federal statutes are designed to benefit individual citizens.

This is one of them.

The primary purpose of this statute, we have submitted, is to protect the government's security interest.

In doing that, we will in most instances also protect the homeowner, but that is only incidental to what I submit is our primary mission, at least as interpreted by the Farmers Home Administration, which is a reasonable interpretation of the statute and the regulations.

Mr. Phillips: And there is no secondary duty?

Mr. Phillips: No secondary duty that would give rise to any kind of tort liability.

Mr. Phillips: If the government is responsible or assumes responsibility for anything like architectural supervision, that certainly is... the thrust of that sort of a liability, if they fail to perform it, isn't misrepresentation at all.

If you are an owner and hire an architect, and the architect defaults on his obligation to supervise, the gist of your claim against him isn't that he didn't tell you that a lot of things were bad in the place, it is that he didn't have them fixed.

Mr. Phillips: We recognize that there is a difference between misrepresentation and various forms of malpractice.

But all we are saying here, I mean, we didn't hire an architect of any sort.

What we did was, we had an architect draw up plans that would be usable for all rural residents, and we have a variety of those plans that exist, and we just hoped that they would be followed.

That's all.

Mr. Phillips: I thought you identified the question in the case as whether the United States has waived sovereign immunity for this kind of a tort action.

Mr. Phillips: Yes, Your Honor.

Mr. Phillips: So whether you owed a duty or not or whether you broke it is irrelevant to that question.

Mr. Phillips: Well, that is correct, except that under this Court's decision in United States versus Neustadt, the way the analysis should run is, first, whether the basic activities of the government are within the misrepresentation exception which we submit means an inspection which may be negligently performed followed by certification of some facts followed by injury.

That is what the misrepresentation exception is designed to deal with.

This Court went further and said it could well be that even though this is within the misrepresentation exception, there could be some... there may have been indication in the '34 Act at issue there that for some reason Congress intended to supersede the misrepresentation exception, and Respondents have seized on differences between the '34 Act and the '49 Act to suggest that that secondary analysis in Neustadt is satisfied in this case.

Our position is that there is nothing different in the '49 Act and the '34 Act.

It is clear that Congress did not intend for the government to warrant the quality of the Respondent's house in this case.

As we have... I may be going over some ground, but Section 1346 obviously provides a general waiver for... of the government's sovereign immunity.

The exception that we are concerned with here is for misrepresentations.

Our submission is that the decision of the Sixth Circuit is fundamentally inconsistent with the decision of this Court in United States versus Neustadt.

Mr. Phillips: Mr. Phillips, let's assume for a minute that the complaint did allege something beyond misrepresentation, alleged that there was a duty on the part of the agency to force the builder to fix the home by some means, and the complaint alleges that.

Now, is that obligation of the government in your position a discretionary act by the government?

Mr. Phillips: You mean, within the meaning of Section 2680(a)?

Mr. Phillips: The government has discretion?

Yes.

Mr. Phillips: Well, I would guess... I mean, it seems fairly clear... it depends on how the regulation would be stated, I guess.

If there were a regulation in this case that said that the government must discover every defect and must make every defect corrected before any moneys will be released, then it would seem to me we would be hard pressed to argue that that is a discretionary decision, because the regulation will have essentially taken away all of our discretion.

But if the regulation merely suggests that we should have inspections, and there is some general possibility that we might withhold money depending on the circumstances, then it would seem clearly to be within the discretionary function exception.

Mr. Phillips: Well, then, what is it... what do they require?

Is it discretionary or not?

Mr. Phillips: Well, I think it is clear... it would clearly be discretionary.

There is nothing in the regulations... I mean, I think it is important to realize in this case that the Respondent has received reimbursement for the heat pump and other major structural defects in this house under an administrative program, and the only defects we are talking about now are essentially cosmetic defects.

It is inconceivable, and there is nothing in the regulations that would provide to the contrary, that Congress anticipated that we would hold up all loan moneys for the correction of all potential cosmetic defects in a house.

As we suggest in our brief, and I don't believe Respondents deny it, there is no new house that I have ever known and that anyone has known and that the contractor even in this case in his testimony had ever seen that doesn't have some problems in it.

And it can't be that the government will be responsible to correct all of those.

And that is why there is nothing in the regs.

So, clearly, there is some discretion.

You would release money and expect that the contractor would make good on it.

Mr. Phillips: Well, but Mr. Phillips, Mr. Phillips, you are not suggesting there is discretion to make a negligent inspection, are you?

Mr. Phillips: Well--

Mr. Phillips: Assuming there were a duty to inspect.

I understand you deny there is such duty running to the borrower, but assuming there were a duty to inspect, would it not be a duty to inspect with due care?

Mr. Phillips: --If there were... if this were a private person who undertook... we don't... although there is no development factually of what went on here, we don't deny that it is certainly possible that a private inspector could be held to a duty to exercise due care under the good Samaritan doctrine.

Mr. Phillips: All right, and if we accept the allegations... if we accept the allegation in the complaint, must we not assume... maybe it's not true... that the inspection was conducted negligently?

Mr. Phillips: Well, that's right, and we don't dispute that.

Mr. Phillips: And had the inspection been conducted properly, they would have discovered the defect and they wouldn't have paid for the heat pump.

Mr. Phillips: Well, but I mean, that is just as true under United States versus Neustadt.

In that case--

Mr. Phillips: Well, but that goes to the issue of misrepresentation.

We are now talking about--

Mr. Phillips: --You just want to ignore the misrepresentation--

Mr. Phillips: --For this very narrow purpose.

Mr. Phillips: --I would be prepared to concede for purposes of this argument that that is right.

There would be a duty, and that would have been a violation of the duty.

We don't have any quarrel with the Court at least here now with the Sixth Circuit's holding that this might well violate the good Samaritan doctrine.

Our submission is obviously that it is also a misrepresentation, and therefore--

Mr. Phillips: Prior to 1946, would there have been any action sustainable against the government, prior to the Tort Claims Act?

Mr. Phillips: --No, Your Honor.

Mr. Phillips: The Tort Claims Act, did it waive all sovereign immunity, or did it have some exceptions?

Mr. Phillips: It has a very lengthy set of exceptions.

Mr. Phillips: For governmental functions, primarily discretionary governmental functions.

Mr. Phillips: That's correct, Section 2680(h).

Mr. Phillips: But again, you are not relying on that in this case.

Mr. Phillips: No, we don't rely on the discretionary functions.

Mr. Phillips: You are just relying on the misrepresentation exception.

Mr. Phillips: That's correct, Your Honor.

Our position here is that there is no... that this Court cannot affirm the holding of the Sixth Circuit without overruling its prior decision in United States versus Neustadt, and that it would be wholly inappropriate to do that.

Neustadt involved simply an interpretation of Section 2680(h), a provision that Congress enacted in 1946 and has allowed to remain in effect since 1961, when this Court decided Neustadt.

If its feeling was that the interpretation of this Court was improper or unduly restricted the rights of recovery of individuals in Respondent's position, we can only presume that it would have changed it.

Instead, what Congress has done is, one, passed additional legislation providing for inspections relying upon this Court's decision in Neustadt, and more fundamentally, has passed 42 USC Section 1797(c), and this case--

Mr. Phillips: You find no difference in the two Acts, the one involved--

Mr. Phillips: --No difference that would make any kind of a difference to take the case out of the misrepresentation exception.

I don't believe that anything in the 1949 Act provides any stronger basis for arguing that the government has warranted the quality of the house, and that is the only thing that I can understand the Court to have meant in the second part of its holding in Neustadt, because otherwise... I mean, it is within the misrepresentation exception, but it may be that the government went ahead and warrants the house, but the '49 Act makes clear that that was not the intention, and no other court has ever held that it was the intention.

You know, no court in reviewing the legislative history has indicated that Congress intended to warrant the quality of all of these houses.

Mr. Phillips: --Isn't there a difference that in Neustadt the misrepresentation was made before the purchase, and here it was made after the purchase?

Mr. Phillips: Well, there is some dispute about that.

Nothing in the record indicates precisely when the check was delivered to the Respondent in this case.

The employees of the Farmers Home Administration have informed us that while the check was formally dispersed from the Farmers Home Administration's central office on the date listed in the record in the Joint Appendix--

Mr. Phillips: That is not in the record.

Mr. Phillips: --I am sorry?

Mr. Phillips: That is not in the record.

Mr. Phillips: No, Your Honor, that is not in the record.

To the extent you are interested in the extra record facts, a check was handed over--

Mr. Phillips: I didn't say... I didn't say I was interested in facts outside the record.

Mr. Phillips: --Okay, Your Honor.

What we can say, I think, is that it is inconceivable that the Farmers Home Administration would hand over a check without having made its final inspection, and therefore we believe it is a fair inference from all of the circumstances to conclude that we didn't actually send the check away until after we had engaged in the final inspection.

At least that is the standard practice, and there is no reason to think that it was deviated from in this case.

Mr. Phillips: Suppose the inspection had not been made at all.

What would be your position?

Mr. Phillips: Well, the regulations don't actually require us... I don't... my recollection is that the regulations suggest that we make inspections at various times.

I would guess that if it turned out that the Farmers Home Administration had good reason that it couldn't... simply was not in a position to inspect a house at the times that it had to, that that would not violate the regulations.

The most we would do is tell her that we are having some difficulty, but I don't see that that would create any cause of action.

Again, all this... all tort liability--

Mr. Phillips: That is essentially this case, isn't it?

Mr. Phillips: --I'm sorry?

Mr. Phillips: That is essentially this case.

It is true she went out, but her testimony on the stand is rather devastating.

She wasn't trained.

She didn't know what to do on an inspection, and didn't inspect, and filled out the papers.

Mr. Phillips: Well, she looked through the house.

I don't know what... I mean, presumably any kind of obvious defects in the house could have been discovered, even on the... even with that kind of an inspection.

It is not likely she would have been able to discover whether the proper manufacturer's name appeared on the heat pump based on the kind of inspection we are talking about here.

Mr. Phillips: Well, someone else went out later and discovered all kinds of things.

Mr. Phillips: But, see, there is an inherent advantage, if somebody has been living in the house for two months, and has started to use the house and the dwelling.

You find out things as you go along.

It is simply not reasonable to expect the government... even if we had the best inspectors in the world and took time, it is most unlikely we would discover every conceivable defect in a house prior to the moving in of the... or prior to the final settlement of the house.

The Court in... This Court in United States versus Neustadt made plain what I think is the proper approach in these cases.

The question is... It recognized that the traditional common law rule of misrepresentation recognized tort in the situation where there is an inspection followed by certification of a fact followed by injury in reliance on that fact.

And that is precisely what is involved in this case, and a misrepresentation exception should be applied in this case, just as it was in Neustadt.

I think it is important to realize that this is not an overreaching use of the sovereign immunity doctrine.

Respondent has received recovery.

The Congress provided for her under an administrative relief program that was adopted in clear recognition that she would not have recovery under the Federal Tort Claims Act because of this Court's decision in Neustadt, and unless... and in order to hold as the Sixth Circuit did, it would have to be in absolute disregard of that enactment.

We submit that is incorrect, and we ask this Court to reverse that judgment.

If there are no other questions, I would reserve the balance of my time.

Chief Justice Burger: Very well.

Mr. Croce.

ORAL ARGUMENT OF LENNY L. CROCE, ESQ., ON BEHALF OF THE RESPONDENT

Mr. Croce: Chief Justice, and may it please the Court, despite the government's attempt to torture the allegations in the complaint in this case to fit the misrepresentation exception to the Tort Claims Act, this case was not, is not, and cannot be a case that arises out of misrepresentation.

First, I will state the bases of Ms. Neal's claim, and then secondly, I will show that the relationship and conduct of the parties created a duty of care running from Farmers Home to Ms. Neal.

Ms. Neal asserts in her complaint that Farmers Home employees negligently planned and supervised the construction of her home.

This claim included the following omissions and commissions.

Mr. Phillips: Mr. Croce, are you reading from the complaint now, or summarizing it?

Mr. Croce: I am not reading from the complaint.

The complaint alleged negligent planning and supervision of her home, and that they breached a duty of care to her in exercising those activities.

Mr. Phillips: And then you are about to go into a list of the omissions.

Mr. Croce: Yes.

Mr. Phillips: Are those contained in the complaint?

Mr. Croce: Those are contained in the factual allegations of the complaint, which preceded the cause of action, the statement of a cause of action.

First, that Farmers Home failed to recommend and approve a reputable and competent builder.

The complaint alleges that the builder was disbarred subsequently, and the depositions had attached a letter which showed that builder had nine other complaints against it, not just Ms. Neal.

Secondly, that the officials failed to obtain accurate and complete plans for Ms. Neal's home.

In the complaint we allege they received a totally different set of plans that what they were supposed to be for Ms. Neal, and that those plans didn't have any plans for the heating and cooling duct system.

Third, that the Farmers Home did not properly review the plans and specifications of Ms. Neal's home.

Ms. Wells admitted she didn't look at the plans.

Fourth, that the Farmers Home did not properly supervise the expenditure of Ms. Neal's loan proceeds.

There was money paid out before the first inspection was made.

Farmers Home failed to detect defects in Ms. Neal's home.

That is quite evident.

They failed to reject defective working materials or to require their correction.

Finally, they failed to carefully inspect her home.

Out of this extensive negligent conduct, which lasted over a period of months and involved several Farmers Home employees, the government extracts out one single inspection report and seeks to rely upon it to deny Ms. Neal her day in court.

An examination of the facts alleged in the claim and gleaned from the record here shows that the graveman of Ms. Neal's complaint is negligence, not misrepresentation.

We must review the conduct in relationship in the transaction between the parties.

When we do, that shows that a duty... that Farmers Home undertook activities which they had a duty to perform with due care.

In 1976, Ms. Neal was a 48-year-old cafeteria worker in a local elementary school.

The home she was living in was falling down around her, literally.

She didn't make much money, a little over $3,000 a year.

When she couldn't find housing she could afford herself, she went to the lender of last resort, her local Farmers Home Administration office.

Ms. Neal filled out an application.

She was certified eligible.

Ms. Neal was referred by the county supervisor to a local builder of prefabricated homes.

They reviewed plans which purported to be for her home.

They supplied a form construction contract which had a special clause in it which gave Farmers Home the right to inspect, test, and examine materials, and to reject defective materials and require correction.

Before construction began, she executed a promissory note to pay back the loan.

She executed a deed of trust to secure the note.

And then the proceeds were put in a supervised account which required not only her signature but an official from Farmers Home's signature to release the funds.

Three dispersements were made.

The last one that we know of was made on September 30th, and then they made three on-site inspections, the last one occurring on October 3rd.

Now, after she moved into the house, she discovered things weren't right.

She didn't have any heat.

The ducts were falling apart.

The plumbing had 90-degree bends in it.

She couldn't find her water heater.

The concrete block foundation had blocks missing.

Mr. Phillips: What time of year did she move in?

Does the complaint say?

Mr. Croce: What time did she move?

Mr. Phillips: What time of year did she move in?

Mr. Croce: She moved in some time in October, Justice Rehnquist.

Mr. Phillips: Well, couldn't she figure out the minute she moved in that she didn't have any heat?

Mr. Croce: Your Honor, that was not in the record, and I can answer your question.

Whenever the confusion came up, when the exact payment was made, I said, we never did find out when you moved in, Ms. Neal.

I called her up.

She said, well, I had to move in October 1st because the owner of the house I was in was tearing it down and said I had to be out before October 1st--

The house presently is not even now fastened to the foundation, and there is no exterior sheathing which provides any moisture barrier, which subjects the house to weather conditions.

To say that these activities undertaken by Farmers Home engendered no reliance and created no duty of care simply defies common sense.

She couldn't find housing.

She couldn't afford it.

She didn't have much education.

She went to Farmers Home for a house.

They took her application.

They checked her credit.

They determined what amount she could pay back.

They determined how much of a house she could get.

They set the minimum standards.

They set the maximum payments.

They engendered total reliance upon them to supply the means, the know-how, the supervision and inspections needed to provide Ms. Neal safe and decent housing.

This relationship between Farmers Home and Onilea Neal and the extent of the supervision and control of the exercise necessarily engendered reliance by Ms. Neal upon Farmers Home.

Mr. Phillips: Mr. Croce, under your theory, do you suppose that when the federal government through its agencies inspects a toy or a drug, for example, to determine whether the product is safe, and then declares it safe, that someone later injured because in fact it is unsafe has a cause of action under your theory against the government?

Mr. Croce: First, I want to make one thing clear, Justice O'Connor.

This is not an inspection case.

It is a negligence case.

And in order to establish a claim for negligence, you must determine whether or not there is a duty of care running from the government to the injured party.

That depends upon the relationship of the parties, the conduct and control exercised by the government to prevent the injury, and the foreseeability of it.

It is certainly foreseeable in the fact situation you gave that a purchaser of a defective toy would be harmed, and if the government had control over that process, it may very well.

I think the weakness in that case is the first criteria, and that is the relationship.

In this case, Farmers Home and Ms. Neal had a direct one-to-one relationship which was clearly dependent.

The question becomes whether or not that particular factor in the fact situation you suggest is strong enough to impose a duty.

Mr. Phillips: Is it your position that Ms. Neal had no responsibility at all?

Mr. Croce: No, Your Honor, but the actions by the Farmers Home Administration and the extensiveness of it barred her or precluded her from seeking outside help.

She assumed that Farmers Home was going to take care of everything.

Mr. Phillips: You said barred her from seeking--

Mr. Croce: I think it prevented her.

I mean--

Mr. Phillips: --How?

Mr. Croce: --Because they gave her, by their conduct--

Mr. Phillips: But she could have gone--

Mr. Croce: --and activities, that she was--

Mr. Phillips: --She could have gotten a good inspection made and paid for it, couldn't she?

Could she?

Mr. Croce: --Yes.

Yes, assuming she had the money, but--

Mr. Phillips: Well, then, you do say that the whole basis is, she had no responsibility.

Mr. Croce: --I don't say that.

I think her responsibility would be conditioned upon what Farmers Home undertook or didn't undertake.

Mr. Phillips: And?

Mr. Croce: In that they undertook what they did, she necessarily relied upon them to exercise due care.

Mr. Phillips: And she had no responsibility.

Mr. Croce: That's correct.

This case does not violate or conflict with any of the holdings in Neustadt or Indian Towing.

In Indian Towing... This case is like Indian Towing, because a duty of care was running from... ran from Farmers Home to Onilea Neal, and that duty of care arises out of Farmers Home undertaking of services.

If a private party had undertaken to provide Ms. Neal the services which Farmers Home undertook, and engendered the kind of reliance which Farmers Home engendered, that person would be obligated to use due care.

If that party failed in its duty of care and damages resulted, liability would be found.

Unlike Neustadt, the inspection report relied upon by the government is not an essential element to sustain Ms. Neal's cause of action.

You could take away... You could take away this inspection report and delete it from the record, and Ms. Neal would still have a cause of action.

If you took away the appraisal report in the Neustadt case, Mr. Neustadt simply does not have a cause of action.

In conclusion, and I am going to be brief here, it is important to keep in mind three considerations.

First, Ms. Neal is not asking this Court to hold Farmers Home liable.

What she is asking is that she have an opportunity to prove her claim in court.

Given a colorable claim of negligence, which she has clearly demonstrated, she should be entitled to pursue her claim before a trier of fact.

If she had been given this opportunity--

Mr. Phillips: Mr. Croce, do you think either the Sixth Circuit or the district court in this case passed on the question of whether her allegations apart from the inspection theory stated a claim against the government?

Mr. Croce: --Yes, I think the court of appeals clearly saw that we were talking more than just merely an inspection report.

We were talking about all the activities that Farmers Home undertook.

Mr. Phillips: Well, I don't read in the Sixth Circuit's opinion any specific pronouncement one way or the other about whether if you prove these facts, the government under either the '34 Act or the '49 Act did have an obligation imposed by statute to perform these services.

Mr. Croce: It is our contention that the statute, 506, and the regulations under that statute clearly impose upon Farmers Home an obligation to supervise and inspect.

Mr. Phillips: I realize that.

Mr. Croce: I don't think that is really material, because whether or not Farmers Home performed those services under its statutory obligation or regulatory obligation or voluntarily undertook them, the fact is that they did.

The crucial--

Mr. Phillips: So part of your complaint is not only that there was a duty to supervise that was breached, but that the duty of supervision was undertaken whether required by law or not, and that on the good Samaritan theory it was negligently performed.

Mr. Croce: --That's correct.

The crucial thing for the negligence claim is whether or not there was a duty of care, and the duty of care only arises under principles of common law, and in this case the principle of common law applied is the voluntary undertaking doctrine.

If Ms. Neal had been given her opportunity to present her claim before a trier of fact, this Court and the parties could have avoided some of the confusion which has arisen regarding some of the facts.

This confusion in this statement is probably inevitable in light of the fact that there was no trial, finding of fact, or record, complete record produced.

We feel it would be inappropriate for this Court to issue an opinion which may have important consequences to tort law and federal housing policy on the basis of an incomplete record.

Secondly, the government's assertion that Ms. Neal's claim is really a misrepresentation is a red herring.

The facts alleged in the complaint and which are contained in the record cannot support the government's contentions.

If the Farmers Home interpretation of the misrepresentation exception prevails, the Tort Claims Act itself will be emasculated.

What was intended by Congress to be a narrow exception would in fact swallow the Act, and it would block legitimate claims by aggrieved citizens whenever there was communication in any form, and this is the precise opinion which this Court rejected in Indian Towing.

Mr. Phillips: Neustadt began swallowing the Act, didn't it?

Mr. Croce: We believe it did to a certain extent, insofar as courts have had difficulty drawing a line in the continuum between negligence and negligent misrepresentation.

It is our position that there are three factors, and they are all factual findings which must be made.

You have to look at the relationship of the parties, the conduct of the parties, and the foreseeability in those three areas.

You have to look to see whether or not this is in fact misrepresentation or negligence.

Finally, the government and Congress under the Title V of the 1949 Housing Act created a program to assist low-income residents in the country to obtain decent and safe housing.

This purpose of the Act is being frustrated by the negligent acts of the agency charged with this responsibility.

We contend that if Farmers Home is permitted to deny Ms. Neal her day in court in this case, she and borrowers like her would be denied any opportunity to complain that Farmers Home by the negligence of its own employees has violated a fundamental purpose of the rural housing program.

Farmers Home would be able to finance construction of the very unsafe, substandard homes which it is supposed to replace.

It is important to note that the government has made a contention that the administrative relief under the 509(c) program creates some kind of exclusive remedy.

First of all, the 509(c) program created the remedy in order to get the program back on track.

In other words, Congress perceived there were problems primarily because adequate inspections weren't being made.

However, there is nothing in the statute, nothing in the legislative history which suggests that Congress intended to cut off or substitute a remedy in lieu of the one provided under the FTCA.

In essence, Congress didn't contemplate whether or not there was the existence or non-existence of any remedy under the Federal Torts Claim Act.

Finally, the fear of vast financial liability is more properly addressed to Congress.

Secondly, there has been no factual support of this vast fear.

Farmers Home can exercise greater care in approving builders.

It can require construction bonds.

It can conduct more careful inspections.

It can be more rigorous in requiring contractors to correct shoddy construction, and in fact, the claims paid out under the 509 program have declined between 1981 and 1982 from 292 claims to 106.

It doesn't look to me that there is this vast financial liability lurking out there.

Ms. Neal has sufficiently alleged negligence by Farmers Home employees.

She is entitled to pursue her claim by trial.

And we ask that the judgment of the court of appeals be affirmed.

Mr. Phillips: Let me ask you just one additional question.

Did the parties in the proceedings below have any occasion to discuss the application of Section 2680(a) of the Tort Claims Act, that possible exclusion?

Mr. Croce: No, Justice O'Connor.

Mr. Phillips: Oh, thank you.

Mr. Croce: It wasn't raised in any of the courts below.

Chief Justice Burger: Do you have anything further, Mr. Phillips?

ORAL ARGUMENT OF CARTER G. PHILLIPS, ESQ., ON BEHALF OF THE PETITIONERS -- REBUTTAL

Mr. Phillips: Yes, Mr. Chief Justice, just briefly.

The Respondent's submission goes... details a long series of problems with this house, and we don't deny that there are problems with her house, but what that submission does not indicate is what was the role of the government and what was its responsibility under this Act, and at bottom the responsibility of the government remains to inspect the house.

The responsibility for the defects in the house must remain in the first instance on the private contractor.

That is the person who builds the house, who supervises its construction and its placement into the--

Mr. Phillips: Mr. Phillips, as I understand from Mr. Croce, the allegation... one of the allegations in the complaint is that the government undertook to supervise, and did so negligently.

Mr. Phillips: --All that the complaint says is that the government negligently supervised.

It doesn't in any way indicate anything other than through the inspection process how that supervision could take place.

Mr. Phillips: But you don't indicate that in a complaint under the federal rules.

You can produce all sorts of evidence that will support simply conclusionary allegations in a complaint.

You can't try the case in a complaint.

Mr. Phillips: I appreciate that, Justice Rehnquist, but if the only supervision provided for in the regulations and provided for in any of the factual statements is the inspection of that house, then to say that there has been negligent supervision is to say no more than that there was a negligent inspection of the house, and that is all the complaint states.

It doesn't say that we did anything in any way other than our inspection of the house.

Mr. Phillips: Well, but if they say... the allegations they could introduce in support of an allegation of negligent supervision go much further, I would think, than just negligent inspection.

Mr. Phillips: Well, they couldn't... I mean, unless you are going to assume that there is something outside of the regulations, and there is no indication that anyone acted in addition to what the regulations provide.

Mr. Phillips: Well, but the case has never gone to trial.

Mr. Phillips: I understand that, but there has never been any claim anywhere that--

Mr. Phillips: There is an allegation of negligent supervision in the complaint.

Is there any allegation in the complaint that there was an obligation by contract or by statute or by regulation to supervise?

Mr. Phillips: --No, Your Honor.

There is nothing in there to that effect and the district court expressly found that there is no such obligation--

Mr. Phillips: Yes Mr. Phillips but is it not true that there is a distinction between an obligation to supervise and the authority to supervise?

And is it not true that the statute authorized the government to supervise?

It authorized the secretary to provide for supervision.

Right.

The statute specifically says in addition to the financial association, this is in Section 506--

--the secretary is authorized to furnish various things including construction supervision.

And then the regulations say--

--supervision will be provided borrowers to the extent necessary to achieve the objective of the loan.

Doesn't that in words authorize the supervision... period?

Authorize even if it isn't required.

Mr. Phillips: Thats correct but--

Mr. Phillips: Then if it is performed, then doesn't the Good Samaritan Doctrine come in to play?

Mr. Phillips: --Only to the extent that the only way the supervision is performed is through the inspection process.

As I said earlier--

Mr. Phillips: Well, but the statute says--

Mr. Phillips: --we don't serve as the foreman for the construction company.

Mr. Phillips: --The statute says, authorized to provide construction supervision and inspection.

Mr. Phillips: Yes, I appreciate what the statute says.

All I am saying is that under the regulations--

Mr. Phillips: So you do have authority to supervise.

Mr. Phillips: --Our regulations say that we will inspect, and that is done as our burden of supervision.

Mr. Phillips: Your regulations say you will supervise.

Mr. Phillips: I am sorry?

Mr. Phillips: Your regulations say you will supervise.

Mr. Phillips: To the extent necessary to help the borrower, which in this case means to undertake an inspection.

That is the way I read them and understand the way the regulations work.

Respondent at the end of his remarks mentioned the administrative remedy one last time and suggested that it is not intended as an exclusive remedy.

Recognize that this case turns exclusively on what Congress has intended, and Congress has made clear what its understanding and intent under the Rural Home Loan Program would be, that is, that the program is designed to look just like the situation under the 1934 Act that was at issue in Neustadt, and it was because of Neustadt that Congress first enacted administrative relief for the FHA, extended it to the VA, and extended it to this statute.

It was Congress's understanding that that is what the 1949 Act would lead to in terms of claims such as Respondent's in this case, and since it is this Court's interpretation of Congress's intent that controls, and the Sixth Circuit has disregarded that intent completely, we ask that its judgment be reversed.

Mr. Phillips: Mr. Phillips, what is the specific provision in the agreement on which the claimant relied for the duty undertaken by the government?

Is it the inspection of work section in the construction contract, Exhibit B to the complaint?

Mr. Phillips: You mean in her cause of action for--

Mr. Phillips: Yes, is that the section?

Mr. Phillips: --Yes, ma'am.

I believe that is the one that is--

Mr. Phillips: All right.

Chief Justice Burger: Thank you, gentlemen.

The case is submitted.