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Pennbank and First Seneca Bank v. United States

December 20, 1985


Appeal from the United States District Court for the Western District of Pennsylvania (Erie)

Author: Mansmann

Before: Weis, Mansmann, Circuit Judges and Re, Chief Judge*fn*


MANSMANN, Circuit Judge.

In this appeal from an order granting summary judgement in favor of the defendant government agencies, we must decide whether this action based upon alleged negligence in failing to inspect and discover defects in the construction of a municipal sewer project is barred by an exception to the Federal Tort Claims Act. Because we find that the "discretionary function exception" set forth in 28 U.S.C. § 2680(a) bars the instant action. we affirm.


In 1974, the Crawford County Townships of North and South Shenango, Pennsylvania created the North and South Shenango Joint Municipal Authority ("Authority") to provide sanitary sewer service to the residents of those townships and to prevent, reduce or eliminate pollution of the navigable waters of the United States in compliance with the Clean Water Act, 33 U.S.C. §§ 1251 et. seq.

Because the project was expected to cost millions of dollars, the Authority turned to various federal and state agencies in order to finance the sanitary sewer system. The Authority submitted plans and specifications to the Environmental Protection Agency ("EPA"), The Farmers Home Administration ("FmHA") and the Pennsylvania Department of Environmental Resources ("DER"). The EPA awarded a grant of $8,600,000 and the FmHA approved a long term loan in the amount of $3,200,000 which was contingent upon satisfactory completion of the project. The DER also awarded a grant.

During the construction phase it became necessary for the Authority to secure interim financing due to restrictions contained in FmHA regulations which prohibited the agency from disbursing federal loan funds before project completion. To that end, the Authority obtained a three-year loan from Pennbank in the amount of $6,000,000. First Seneca later entered into an agreement with Pennbank to secure an interest in the loan. The banks subsequently agreed to a one year extension for repayment.

In 1979 a citizens group brought an action against the Authority for violation of the Clean Water Act, alleging that the newly constructed sewage system was faulty. The district court entered judgment in favor of the citizens, granting their request for injunctive relief to enforce compliance with the provisions of the Clean Water Act. Pymatuning Water Shed Citizens for a Hygienic Environment v. Eaton, 506 F. Supp. 902 (W.D. Pa. - Erie 1980).

As a predicate, the district court found that the new sewer system was discharging wastewater into Lake Pymatuning and into the Shenango River; the court ultimately directed the Authority to propose a schedule for the abatement of the discharge of the untreated sewage. The court also found that the system was poorly constructed. On appeal, we affirmed.644 F.2d 995 (3d Cir. 1981).

As a result of the citizens' suit, its appeal to this court, an investigation by the FmHA and a DER order restricting the use of the sewage system, the FmHA refused to close the loans or obligate additional funds for the project. By letter dated April 3, 1981 the FmHA notified the Authority of this decision, indicating that it was not permitted to aid in the pollution of the environment.*fn1 After this notification, the banks were successful in seizing the Authority's operating funds, but this amount ($259,000) fell short of the outstanding loans.

In subsequent meetings between the Authority, the banks and the agencies, the FmHA adhered to its position of refusing to close the loan and the EPA ultimately refused to make its final grant payment.

In February of 1983, the banks filed administrative claims against the agencies pursuant to the 28 U.S.C. §§ 2671-80. After the denial of these claims, the banks commenced the instant action, alleging that the agencies were negligent in failing to discover the defects in the construction of the sewage system during agency inspections to insure the continued eligibility for federal funding. The banks seek repayment of the entire unpaid principal ($3,674,129.49), plus accrued interest.

After the filing of their answer, defendants interposed a motion to dismiss or for summary judgment in the alternative based upon the following grounds: (1) expiration of the statute of limitations,*fn2 (2) sovereign immunity, (3) the "discretionary function exception" to the FTCA, (4) the "misrepresentation exception" to the FTCA, (5) the "interference with contract exception" to the FTCA, (6) the ...

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