United States v. Neustadt

PETITIONER:United States
RESPONDENT:Neustadt
LOCATION:John H. Kerr Dam and Reservoir

DOCKET NO.: 533
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Fourth Circuit

CITATION: 366 US 696 (1961)
ARGUED: May 02, 1961
DECIDED: May 29, 1961

Facts of the case

Question

Audio Transcription for Oral Argument – May 02, 1961 in United States v. Neustadt

Earl Warren:

— United States, Petitioner, versus Stanley S. Neustadt et al.

Mr. Orrick.

William H. Orrick, Jr.:

Mr. Chief Justice, may it please the Court.

In this case, the respondent’s attempt to establish a principle which could subject the United States to an enormous liability, this principle is based on the theory that the insurer of a mortgage who has appraised for insurance purposes the property constituting the security for the mortgage, is liable to a purchaser of that property, unknown at the time of the appraisal, for the difference between the purchase price and the fair market value of the property.

The cases here on writ of certiorari to the Fourth Circuit, which is in effect to establish that principle by affirming the trial court.

Now, the facts in the case are simply stated under the — to take advantage of the National Housing Act, one who intends to sell a house that is eligible for FHA mortgage insurance, they generally do some work quickly, if he knows the amount for which the FHA would appraise his house in the maximum amount, up to which, it will insure any mortgage on the house.

To obtain this information, he must have a financial institution approved by the FHA as a mortgagee.

Make an application to the FHA for a so-called, “conditional commitment.”

When the FHA receives such an application, it sends an appraiser to appraise the property to determine whether it meets the standards of eligibility and to fix evaluation for insurance purposes.

If the property is found eligible, the Commissioner in this so-called, conditional commitment, to insure mortgage on the house, is bound to insure it an amount computed on the appraised value of the property, subject to the condition that the mortgagor when he comes along is found financially able to carry the mortgage.

Now, upon issuing the conditional commitment to a proposed mortgagee, the Commissioner also issues a separate document entitled, Statement of FHA Appraisal, which sets forth the written — the appraised value of the property as determined by the Commissioner.

And under the statute, the seller is bound to deliver a copy of this appraisal to the buyer prior to the sale.

In the case at bar, Colonel Almquist in March of 1957, followed the procedure I have mentioned above and had an approved institution, make application for a conditional commitment.

In following the procedure, an appraiser was sent out to his house, by some time prior to March 14th of that year.

Now, on March 14th, Mr. Stanley Neustadt, the respondent here, the plaintiff below, was a Washington lawyer, was looking for a house and he and his wife looked at Colonel Almquist’s house, after the appraiser had made his inspection.

Mr. Neustadt, the — the house suited Mr. and Mrs. Neustadt and they considered the possibility of hiring someone to inspect the house, but it was his understanding that the FHA appraisal would disclose any matters of structural defects or matters as to which he had any concern.

He was informed as to that, by his real estate agent and that was his understanding.

William J. Brennan, Jr.:

Is he possible a veteran?

William H. Orrick, Jr.:

Sir?

William J. Brennan, Jr.:

Is he a veteran?

William H. Orrick, Jr.:

No, sir.

The record didn’t show whether he was.

It — he doesn’t have to be a veteran.

He is the prospective buyer of the house.

Charles E. Whittaker:

Isn’t that (Inaudible)

William H. Orrick, Jr.:

That’s correct.

Yes, sir.

Earl Warren:

Was he correct in that assumption Mr —

William H. Orrick, Jr.:

That the appraisal would reveal a — a structural defect?

Earl Warren:

Yes.

William H. Orrick, Jr.:

Yes, sir.

He was.

If the — under their rules and regulations, if the appraiser notes a serious structural defect, he will make his appraisal subject to this defect and note it.

Earl Warren:

Yes.

William H. Orrick, Jr.:

The — Mr. Neustadt then made an offer on this house for the sum of $24,500.

The offer was conditioned, expressly conditioned on receiving an appraisal in that same amount, an FHA appraisal of $24,500.

The appraiser who had been out there and now made his report and he reported that the house was worth only $22,750.

So the condition of the contract was not met and this backed the fact that the house was appraised and a lower figure caused Mr. Neustadt — that he testified grave concern.

He then satisfied himself that the reason the house was appraised at a lesser value was not because there was no structural defect in the house.

That was his major concern.

He was relying in short on that appraisal.

Now, having the information that the house is appraised for $22,750, he then made another offer in a contract dated April 9th, 1957.

And this time, the offer was conditioned upon receiving an appraisal for the property at $22,750.

The condition was met.

The — the closing and the — and the transaction took place on July 2nd.

He moved into the property on July 10th and on July 11th, he noted some — the house began to settle, cracks began to appear in the plaster.

He had the damage investigated by drilling a hole in the — through the cement floor in the basement.

It was discovered that some water had collected under there.

And he then — six months later, brought the instant case.

Now, the position of the United States is first that there is no duty running from the FHA to an unknown purchaser of the property to appraise that separately.

Second, that even if such a duty is found that the United States is not liable for negligent misrepresentation which is the essence of this case whether — and third that the term misrepresentation as it is set forth in the Federal Tort Claims Act and is the section from which the United States excludes itself form liability for then the torts set forth in Section 2880 (h) of that Act includes negligent misrepresentation.

And on this point, I am not going to take the time of the Court to argue because on eight different occasions, in six different circuits, including the Fourth Circuit in the case at bar, it has been held unanimously each time that the word misrepresentation included in Section 2680 (h) of the statute means and includes negligent misrepresentation.

But if the Court please, I would like to consider our second point very briefly which is that the gravamen of this action is the communication by an agent of the Federal Government to the — Mr. Neustadt of a fact upon which he relied, which turned out to be untrue, namely that this house which he purchased had — contains structural defects.

Mr. Neustadt in his complaint which is reprinted in the printed record on page 2 in paragraph 6, states that he relied upon that provision of the contract of sale that the — any defect in the property would be disclosed in the appraisal.

He testified and his testimony is contained on page 15 that he understood the FHA appraisal would disclose matters of the kind about which he had any concern, so he wouldn’t have to hire an expert to look at the property.

He testified that on page 17 of the printed record that he established to his satisfaction that the lower appraisal did not and could not in fact represent the difference in an appraisal — represent the existence of a defect.

And on page 18, he testified that once he and his wife were convinced that the appraisal did not indicate any unsoundness in the home, he made another offer for the property.

Now, this was the — a communication made to him through this appraisal, which as it turned out, was erroneous and upon which he relied to purchase this property and it was this communication that’s the very essence of the common law tort of misrepresentation.

Mr. Neustadt also wrote a letter to the FHA which is in the record on file before this Court.

It’s not reprinted in the record, but stating in effect that he — the same terms of reliance.

William H. Orrick, Jr.:

Now, the position of the respondents with which we take issue, is that the appraisers, they’re not — they say they’re complaining that the appraiser’s negligence resulted in the issuance of mortgage insurance and consequently, in their purchase of a defective structure and that it was the availability of this insurance and not the receipt of the appraisal report, which in — in effect that caused them to purchase the house.

And it’s our position that this house — that that is simply begging the question.

It’s an — an attempt to escape this misrepresent — an attempt to escape liability on the ground that there was no communication to them.

Once the house was appraised at $22,750, all the parties concerned knew what the FHA would — the amount for which it would insure the mortgage.

And thus of the time this contract was complete, the damage had in effect be done — been done.

The only way that Mr. Neustadt could then have gotten out of his bargain was if he were deemed a poor credit risk, not if he were — if the house were found to be structurally defective.

John M. Harlan II:

His appraisal was a statutory obligation of the FHA.

William H. Orrick, Jr.:

Yes, sir.

John M. Harlan II:

He had no choice whether it would appraise or not appraise.

William H. Orrick, Jr.:

No, sir.

The FHA appraises the properties, which it is going to insure to determine the amount of the mortgage which it will insure.

And this is all in — within the structure of the basic philosophy of the National Housing Act, which is to encourage private capital to lend money so that much needed housing can be constructed.

Earl Warren:

Was that requirement in any way, for the benefit of the purchaser or is it just for the Government’s own information?

William H. Orrick, Jr.:

Under Section 226 and 1954, Mr. Chief Justice, the Congress imposed upon the seller, the duty of transmitting to the perspective purchaser a written copy, a written statement of the amount of the FHA appraisal.

And the form of that statement is set forth in the record at page 53, it’s Government’s Exhibit No. 2.

Now, the purpose of the Congress in making that condition was to put the purchaser on an equal footing with the seller.

The seller already had that information.

And it was not as — has been claimed to make the United States liable to the purchaser for the amount of the difference between the amount of the appraisal and his purchase price.

And if the Court please, if there was — any doubt on that, I would refer to an exert from the hearings that the — held by the Congress at that time which appears on page 28 of the Government’s brief in which Senator Bennett asks the Nuestadt case that in effect, he send and a question whereto Mr. Cole then the Commissioner.

But in the last analysis, the property owner cannot say to the Federal Government, well, your inspector inspected my house and now look what’s happened therefore, you’re responsible, therefore, you must come down here and fix it up.

Isn’t that a correct statement of the limitation, Mr. Cole?

I think so.

The —

Hugo L. Black:

May I ask you of there’s —

William H. Orrick, Jr.:

Yes, sir.

Hugo L. Black:

— any suits of this kind filed against insurance companies that appraised the properties for the purpose of insurance.

William H. Orrick, Jr.:

I am not familiar —

Hugo L. Black:

By the insurance companies.

William H. Orrick, Jr.:

Justice Black, of a case where an insurance company has appraised property to determine whether or not, it should insure and then was held liable to a perspective purchaser of the property, it’s — to me, it is a novel —

Hugo L. Black:

Where was this — where did this case arise?

William H. Orrick, Jr.:

This case arose in Eastern District of Virginia.

Hugo L. Black:

In Virginia?

William H. Orrick, Jr.:

Yes, sir, in Alexandria.

Hugo L. Black:

Is there any such cases of that kind in Virginia?

William H. Orrick, Jr.:

I have not — I just don’t know of any.

Now, Mr. Latto cites a Virginia case in his brief, which goes on the question of fraud, but I don’t think that that is apropos here.

John M. Harlan II:

Mr. Orrick, if the statute didn’t have this misrepresentation exemption from a case, would the Government be liable?

William H. Orrick, Jr.:

No, sir.

It would not because I think first, it is necessary to find a duty running from the Federal Housing Administration.

Two, the perspective purchaser to appraise that property carefully and here, the —

Charles E. Whittaker:

Well, not only that.

Not only appraise it carefully, but to show that the duty was owing to the purchaser.

William H. Orrick, Jr.:

Yes, sir.

Charles E. Whittaker:

And that’s all?

William H. Orrick, Jr.:

Yes, sir.

I think it is, Justice Whittaker.

Charles E. Whittaker:

Isn’t that fundamental?

First of all, there must be a right that the prospective purchaser whoever he is, has against this appraiser.

William H. Orrick, Jr.:

Yes, sir.

John M. Harlan II:

To whom does the duty run under the statute?

William H. Orrick, Jr.:

The statute Mr. Justice Harlan was enacted for an entirely different purpose.

The — and the — in the Government’s reply brief on page 7, the purposes step is set out.

It’s to help protect the buyer from artificially inflated prices, perhaps beyond the replacement cost and caused by these easy mortgage terms which then became available.

And also set out on page 6 is the report of the Conference Committee of the — at which time the bill was passed.

Earl Warren:

But wouldn’t that indicate that in passing this bill, Congress had some concern about the buyer and was trying to protect the buyer in some way?

William H. Orrick, Jr.:

Oh, I don’t — I’m quite sure that it did Mr. Chief Justice and they said so in so many words that they wanted to put the buyer on an equal footing with the seller.

They said that they wanted to protect the buyer from this artificially inflated prices and — but this it’s secondary purpose of the Act.

I do not think that the — as Senator Bennett’s statement there and it’s borne out in the balance of the hearings at that time.

I do not think that the Congress intended to impose a primary duty on the FHA running to a purchaser unknown at the time that it appraised the house, to appraise the house that carefully for that purchaser’s benefit.

Felix Frankfurter:

Mr. Orrick —

William H. Orrick, Jr.:

Yes.

Felix Frankfurter:

I understood you or did you ascent to Justice Whittaker’s question that the crucial question is whether the duty of correct or reliable appraisal where at the question was to whom did that duty run?

Certainly, the appraiser had a duty of making the —

William H. Orrick, Jr.:

And it ran to his employer —

Felix Frankfurter:

A non — a non-negligent or a non-negligibly — negligence protect him correctly, didn’t he?

William H. Orrick, Jr.:

Yes, sir.

Felix Frankfurter:

And you — I understood do you agree that the question is a crucial question as to whom did the duty to run, is that right?

William H. Orrick, Jr.:

But —

Felix Frankfurter:

Did you agree to that?

William H. Orrick, Jr.:

Well, I’m not — I don’t recall the full —

Felix Frankfurter:

Or whatever the (Voice Overlap) —

William H. Orrick, Jr.:

— the context of the question Mr. Justice Frankfurter, but the duty here is for of the — the appraiser is to determine for the United States what the value of that property is so that the FHA will know to what extent the — it should approve mortgage insurance and —

Felix Frankfurter:

No doubt that the FHA — that he had a duty — an appraiser had a duty to FHA, is that correct?

William H. Orrick, Jr.:

Yes, sir.

Felix Frankfurter:

But the question recently put or just put by Chief Justice, wasn’t it reasonably to be expected that — that there wouldn’t be a buyer or buyers or candidate for purchase.

Would — that to be expected, is that right?

William H. Orrick, Jr.:

Yes, sir, Your Honor.

Felix Frankfurter:

What would reasonably do you expected that the buyer would make real — would — would look, to take into account, whether conclusively or not, the appraisal made for FHA?

William H. Orrick, Jr.:

Oh, certainly that —

Felix Frankfurter:

Then — I — I ask you this question?

It’s whether to whom the duty runs?

That legal question, this is a tort problem is problem, isn’t it?

William H. Orrick, Jr.:

This is a tort problem.

Felix Frankfurter:

It’s a tort problem.

William H. Orrick, Jr.:

I said —

Felix Frankfurter:

Therefore, the question to whom a duty of care non-negligence runs isn’t something that — that is mathematically determinable or that you find expressed in the statute.

William H. Orrick, Jr.:

No that’s —

Felix Frankfurter:

But if the reasonable likelihood is that there would be a purchaser and that he would rely, why isn’t this come within the Buick against MacPherson doctrine?

William H. Orrick, Jr.:

Well —

Felix Frankfurter:

If the reasonable expectation is, why is that any different from the Buick doctrine, Mr. Orrick?

William H. Orrick, Jr.:

Well, Mr. Justice Frankfurter, the — the tort and you — they’re quite correct that the — this is — this is a tort case and we’re now trying to establish to whom that duty run.

But first, we have to establish exactly what the duty is and what — what the liability was that the Congress intended to impose.

Now, I —

Felix Frankfurter:

But that the Congress didn’t tell us in terms, did it?

William H. Orrick, Jr.:

Well I — that’s —

Felix Frankfurter:

It couldn’t (Voice Overlap) —

William H. Orrick, Jr.:

You’ll — to term that in my opinion it was quite clear —

Felix Frankfurter:

But I mean to statute —

William H. Orrick, Jr.:

What they wanted to do and what they intended to do.

Felix Frankfurter:

Statute do it in terms?

William H. Orrick, Jr.:

Yes — pardon me?

Felix Frankfurter:

Did the statute in terms say that they restrict the obligations for violation of the duty of care to the FHA, if this is —

William H. Orrick, Jr.:

No, sir — no, sir.

I did know it.

Felix Frankfurter:

So then we asked to argue from analogy as reasonableness of things, etcetera.

William H. Orrick, Jr.:

That’s right.

Felix Frankfurter:

And my — my problem is why isn’t this a Buick situation?

William H. Orrick, Jr.:

Well, I think if the Court please, that this is a — this is an incidental purpose to this — to the federal — the National Housing Act, I don’t think that the —

Felix Frankfurter:

(Voice Overlap) — incidental than — than the manufacturer of a Buick car to the wholesaler or then sells (Inaudible) to the sixth fellow on the line.

Why anymore incidentally in one case than the other?

William H. Orrick, Jr.:

In this —

Felix Frankfurter:

Part of was dealing here was taking of conventional concept of the law to applicability.

William H. Orrick, Jr.:

The thrust of this case if the Court please, is to indentify the tort that it’s — that has occurred, it’s the tort of the misrepresentation.

Felix Frankfurter:

The reaching —

William H. Orrick, Jr.:

Now, assuming —

Felix Frankfurter:

— the reaching the tort, not the tort, the tort is perfectly fine, merely the fellow is careless.

William H. Orrick, Jr.:

The fellow is careless, but the — to identify the tort is the duty — it’s the task that we ask the Court to do.

To identify it as the tort of misrepresentation, because it was the communication of this — the fact that there was a structural — the — the house was free from structural defects which caused the damage to the plaintiff.

Now, if the Court please —

Felix Frankfurter:

Suppose this were — if you — can you give me, put the case leaving out the United States, no doubt at all that introduced a new principle of liability in the sense that it was truly immunity of the sovereign from suit.

William H. Orrick, Jr.:

Yes, sir.

Felix Frankfurter:

But it didn’t create a new — a new conception of liability, did it?

Quite the contrary —

William H. Orrick, Jr.:

No.

Felix Frankfurter:

— in passing down, took over the liability for this same situation, if done between private people, is that correct?

William H. Orrick, Jr.:

That’s correct.

Yes, sir.

But specifically excluding the tort of misrepresentation and this, the tort in the case at bar, was the tort of negligent misrepresentation.

Felix Frankfurter:

Then the answer of your answer, if I may suggest, by Mr. Justice Whittaker is that that to whom the liability runs, that is not the question.

What you say, there is a far out exception of the scope of fraud liability which the Congress created.

William H. Orrick, Jr.:

That’s right, the — the tort of misrepresentation —

Felix Frankfurter:

Oh that’s a very (Voice Overlap) —

William H. Orrick, Jr.:

And therefore this being a tort of misrepresentation, the United States is not liable.

John M. Harlan II:

Well, I should think you’d have to deal with discussion, I should think the answer to my question would be that if you didn’t have the exclusionary clause in the statute, there wouldn’t be liability in the part of the United States.

William H. Orrick, Jr.:

I’d — Mr. Justice Harlan, we — the United States does not — this is our position, is that —

John M. Harlan II:

You’re relying on the —

William H. Orrick, Jr.:

— there is no lied — no duty running from the FHA to the perspective purchaser that that is incidental to the main purpose of that section.

John M. Harlan II:

You don’t think — you don’t think this is the immigration case.

William H. Orrick, Jr.:

I do not know, sir.

Earl Warren:

Is it different materially Mr. Orrick, from the Indian Towing case, leaving out the exclusionary cause of the — of your statute.

William H. Orrick, Jr.:

Yes, it does.

Mr. Chief Justice in the Indian Towing case and in the Somerset food case, the damage would have occurred there without any misrepresentation.

The — at the lighthouse not been working, the ship with the (Inaudible) would’ve gone to ground had the — it didn’t make any difference that the communication wasn’t the sine qua non of the injury.

In this case, the communication — he was injured solely by the communication and that is the very essence of the tort of misrepresentation, as it’s set out in Glanzer against Shepard and the Erie Railroad case and the other cases cited in our brief.

It’s a very different situation from of the situation as in the (Inaudible) case where the United States undertook a duty to clear the channel and failed to clear it properly and then told people that it had cleared it properly.

And then the ship runs a ground.

That is not the concept of the tort of misrepresentation.

It’s the communication here that caused the damage.

Earl Warren:

Does communication or lack of communication make any difference?

I suppose the Indian Towing case, you could say that the Government having represented that it would — that it would maintain this lighthouse and having failed to do so, it — it misrepresented to — to the shippers going by that — that there were no dangers there.

William H. Orrick, Jr.:

The — that argument Mr. Chief Justice, has been made and there are elements of misrepresentation and made negligence cases just as in this case, there are elements of negligence.

But in this case, if the negligent appraisal had not been that fact, had not been communicated to Mr. Nuestadt and if he had not relied on that, that he would not been damaged at all.

This is the classic misrepresentation case.

Felix Frankfurter:

But where is, may I trouble you just one more question?

William H. Orrick, Jr.:

Yes.

Felix Frankfurter:

If don’t set forth a full text of the exception in age, where is that?

Have you tried to (Inaudible) in front of you Mr. Orrick?

William H. Orrick, Jr.:

Yes, sir.

Felix Frankfurter:

If you have trouble —

William H. Orrick, Jr.:

It’s Section 26 (Voice Overlap)

Felix Frankfurter:

— within those exceptions, we don’t have to worry about anything else do we?

William H. Orrick, Jr.:

No, sir.

You did —

Felix Frankfurter:

Now, what are they?

William H. Orrick, Jr.:

They — they are —

Felix Frankfurter:

I notice the tendency of the problem of Government if you just ask there is, with the immediate problem with statute not involved.

I don’t think that’s a very good idea, I may say so, because when one wants to see a — concept at its context.–

William H. Orrick, Jr.:

Yes, sir.

Down reading from 28 U.S.C. 2688, and it begins, The provisions of this chapter and Section 1346 (b) of this title shall not apply to and then in (h) any claim arising out of assault, battery, false imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander, misrepresentation, deceit or interference with contract rights.

Felix Frankfurter:

Well now, most of those things only involve element of dishonesty, do they?

William H. Orrick, Jr.:

No, sir, they’d — they don’t.

Felix Frankfurter:

Assault, doesn’t it slander and libel doesn’t it — it appears in the contract where (Inaudible) doesn’t, you are arguing that — what happen to the rulings as to whether misrepresentation must be merely a representation that’s inactivate or representation that’s falsely based?

William H. Orrick, Jr.:

The — the eight times, six different circuits have held that that term misrepresentation means negligent misrepresentation.

Felix Frankfurter:

We have to have an element of conscious forces.

William H. Orrick, Jr.:

No, sir.

Definitely not and as Judge Frank pointed out in the Jones case that the statute includes deceit which — and where you do have to have that element.

Earl Warren:

Mr. Latto.

Lawrence J. Latto:

Mr. Chief Justice, may it please the Court.

As Mr. Orrick has pointed out, there are three issues in this case, two of which I think it’s fair to say or not of the con which ordinarily reached this Court, when it’s the ordinary question of whether there was a duty of care, whether there’s an action and negligence.

Another is what is the nature of this case?

Lawrence J. Latto:

We assert that it is the common law action of negligence.

The Government asserts that it’s a cause of action for negligent misrepresentation.

The third question as the one just averted to and that is I think an important question of interpretation of a provision of the Tort Claims Act.

Does the exception for misrepresentation in 28 U.S.C. 2680 (h) cover deliberate misrepresentation or does it include negligent misrepresentation as well?

I should point out briefly in respond to Justice Frankfurter’s question that the common element of all of the torts accepted in 2680 (h) is deliberateness.

There’s no element of conscious false in assault and in libel and in slander and then the other torts included in that section.

But there is a common element of deliberateness and I hope to return to this question at the latter part of my argument.

I would like to return to the question raised by Justice Whittaker and Justice Frankfurter and that is the question whether there was a duty of care owed to these respondents by the Government, in connection with the inspection and appraisal functions under the National Housing Act.

We are in agreement with the Government that the purpose or the purposes of the National Housing Act in — in particular of these functions under the National Housing Act, is a matter of critical importance.

We don’t think it is the only relevant factor, but certainly it is one that’s entitled to very great weight.

And Mr. Orrick said in the course of his argument that this — there was a secondary purpose to protect the prospective purchaser of a home.

My difficulty with the argument is that Congress said otherwise and said so quite unmistakably.

Now, I go back to the initial enactment of the National Housing Act when this procedure for inspection and appraisal was first instituted.

And in the very first report of the Federal Housing Administration, it was explained that the existence of this function provided a purchaser of a home with the benefit which was not available to the purchaser of a home which would be financed through a conventional mortgage.

They wanted to say that the purchaser will have what probably only a small percentage of home buyers have ever had in the past.

The benefit of knowing that the appraised value set upon the property, which he intends to buy or build by a trained evaluator acting in accordance with the procedure designed to reduce to a minimum errors that might result in casual or hasty conclusions.

And in the subsequent year, the FHA explained that the valuation and inspections made by trained staff members of the administration tends to ensure that the dwelling is in a good physical condition.

Similarly a few years later, the FHA explains, tends to ensure that the dwelling is in good physical condition.

Now, this will become less equivocal as I go on.

Two or three years later, the 5th Annual Report explained, The Administration aims that no homeowner or home seeker should through ignorance of the insured mortgage plan, enter into a transaction without having the benefit of a careful disinterested examination of the property, which is the examination that is made by the FHA inspector.”

We now move over to 1954 when the rather thorough going revision and amendment of the National Housing Act was made.

And in the course of that revision, attention was given to the program under which homes or mortgages insuring single family homes are issued by the Federal Housing Administration.

The Congress indicated a — a considerable dissatisfaction with an attitude that had developed within the FHA.

The agency had been regarding itself more or less, as the hand making of the mortgage lending industry and of the construction industry.

And Congress took some paying to ensure that this would not be the approach that it brought to the performance of its functions under the Act.

Congress provided that for the first time in 1954, that a written statement of the appraised value would have to be furnished to a perspective purchaser of the property.

And the legislative history is very clear as to what Congress had in mind.

Congress explained that well, to be sure, the FHA should be concerned with protecting its insurance fund, the builder and the mortgagee against loss.

It said that it feel that there is a need for change in the approach or philosophy of — of administration that the Federal Housing Administration appears to have manifested that thus far.

Your Committee fully appreciates the importance of maintaining a high level of housing production.

Lawrence J. Latto:

But these objectives should not obscure the fact the that first responsibility of Congress and they emphasized first and that of any agency administrating — administering part or all of the housing program, is to protect and preserve the public interest in general and the rights of homeowners in particular, then the report went on.

It is your Commit — Committee’s considered opinion and unless contrary views are expressed or amendments are offered and there were no contrary views expressed and no amendments offered, it is the intent of Congress that the HHFA and its constituent agencies one of which is the FHA, in their administration of the program which they are authorized to carry out, shall at all times regard as a primary responsibility — as a primary responsibility, their duty to act in the interest of the individual home purchaser.

Now, this same Act provided an additional protection to home buyers, those persons who were buying new homes, this was not a new home, this home had been built some time in the past before it would have been purchased.

In connection with the new home program, Congress provided that the builder was required to issue a certification to the purchaser that his home had been built in accordance with the plans and specifications upon which the FHA based its appraisal.

Congress went onto explain, however, this is still in the Senate Report, While this affords a measure of protection to the purchaser, it does not protect him against all structural defects, poor materials or poor workmanship.

Basically, the homeowner is dependent upon sound underwriting by the FHA and VA and — and effective inspection on compliance program and your Committee would like to direct the attention of the FHA to the importance that attaches to them.

And a later point in the same report, the Committee said, It should be noted as was discussed earlier in the report that the requirement of certification is only supplemental to the compliance and inspection systems of the FHA and VA which are the primary means of insuring the construction of sound homes.

Charles E. Whittaker:

I understand you it would not contend, however, that FHA insures anything more than mortgage, which it approves.

Lawrence J. Latto:

Under the National Housing Act, the FHA issues insurance to the mortgage lender.Our claim is not based on the National Housing Act.

Our claim is brought under the Tort Claims Act.

The Tort Claims Act provides that were a governmental function is carried out there is an obligation to carry out this function with care.

And if it’s carried out negligently and an individual is damaged, he recovers not because he has been given a right of action under the National Housing Act, but only because the Congress has waived sovereign immunity under the Tort Claims Act.

Felix Frankfurter:

What was — what was the date of the Tort Claims, (Inaudible)

Lawrence J. Latto:

1946, I believe.

Felix Frankfurter:

What was the Act in which is — what was the holding act under which this transaction took place?

Lawrence J. Latto:

1934 with the Housing Act and the amendment that I have been discussing — legislative history that I’ve been reading to the Court is in connection with the 1954 amendment.

Felix Frankfurter:

Now, what you’re saying is — what you’re saying is that — that taking — calling the statements from the Housing Act is an implied repeal of the exclusion of misrepresentation acts from the Tort Act (Voice Overlap) —

Lawrence J. Latto:

That — that is not my position, sir.

I do —

Felix Frankfurter:

I do not in turn, but that’s when it gets down to.

Lawrence J. Latto:

Certainly not.

I agree that if this is held to be the tort of negligent misrepresentation and if the Court aggressed with the Courts of Appeals that the term misrepresentation in 2680 (h) is to be read to include negligent misrepresentation, then we lose our case.

I argue first that this is not the tort of negligent misrepresentation, but the tort of negligence, so that 2680 (h) is not applicable at all.

I argue second, that if this is considered to be the tort of negligent misrepresentation, then 2680 (h) is inapplicable because it was not intended to include negligent misrepresentations, the claims arising out of negligent misrepresentations, but only claims arising out of deliberate misrepresentation.

Felix Frankfurter:

Now, these purposes of Congress in the two acts referring to it, are wholly unrelated.

Lawrence J. Latto:

They’re wholly unrelated, I agree —

Felix Frankfurter:

Wholly unrelated and Congress in the — in the Federal Tort Act sought it in its own vibe in the capricious way, more capricious (Inaudible) and to exclude certain categories of misconduct or conduct which has between man and man, would give rise to assume, that’s correct isn’t it?

Lawrence J. Latto:

There are certain exceptions in the Tort Claims Act, which I agree are capricious.

Felix Frankfurter:

And assume (Inaudible) even to the court of these two problems.

One, misrepresentation contrary wise to what the various Courts of Appeals have held means a deceitful conduct, is that right?

Lawrence J. Latto:

Yes, a deliberate misrepresentation.

Felix Frankfurter:

Deliberate — deliberate falsification.

And secondly that what was said in the Housing Act must be joined to and the — the — in case you will go against your — negligent on misrepresentation then in any event, it is an implied repeal.

Lawrence J. Latto:

No.

I — I don’t honestly feel like —

Felix Frankfurter:

Even the word, that’s what it gets down to.

Lawrence J. Latto:

I don’t think so Justice Frankfurter, for this reason.

I — I’m really adopting the position taken by the court below which says that there are many claims known to our law in which there is an element of misrepresentation.

Despite this fact, the courts have applied the rules of law of negligence, of libel, of slander and so on.

They said that in each case, you have to examine the facts and see what the gravamen of the action is.

What is the essential element of the tort?

If the essential element is the negligence in the performance of the act and if — and it happens to have been embodied in a report, this does not deprive the plaintiff from being entitled to sue on the basis of his cause of action in negligence.

Felix Frankfurter:

(Voice Overlap) — evade myself.

You’re arguing that misrepresentation, one of the selective excluded class or strange reasons (Inaudible)

Lawrence J. Latto:

Well, I — I hope to show in a moment that it’s not strange, but I — I beg your pardon.

Felix Frankfurter:

It all depends without (Inaudible) that the exception in age, including misrepresentation followed by deceit, misrepresentation does not to include the time of age that the other Courts of Appeals have included.

Lawrence J. Latto:

Yes, I make that argument.

I — I certainly do and I — I would like to proceed to that argument if (Voice Overlap) —

John M. Harlan II:

May I ask you preliminary question —

Lawrence J. Latto:

Certainly, Justice Harlan.

John M. Harlan II:

— (Voice Overlap) address yourself to it.

Is this — the character of this cause of action whether negligent misrepresentation, presentation to be determined by reference of the federal law or state law?

Lawrence J. Latto:

I think it must be federal law.

John M. Harlan II:

You do?

Lawrence J. Latto:

Well —

Felix Frankfurter:

The whole —

John M. Harlan II:

Why do you (Voice Overlap) —

Felix Frankfurter:

— whole actually states on state conception of tort.

Lawrence J. Latto:

No, let me withdraw that, if I may.

The — the issue of federal law is how the term misrepresentation in 2680 (h) is to be interpreted.

Lawrence J. Latto:

That seems to me clearly a federal law question.

The question of what’s your cause of action is, I mean this — this brings back again, this area that we have thought, we put behind us many years ago, I think is — is essentially a common law question.

John M. Harlan II:

Supposing, you had a flat Virginia case — this is a Virginia current —

Lawrence J. Latto:

Yes, this case is —

John M. Harlan II:

Supposing how the flat case and Virginia is saying this, under our law, is not misrepresentation, it’s negligence.

Lawrence J. Latto:

I — I — as I say, I — I misspoke before and I think that’s — that the correct answer to Your Honor’s question is that it would be decided by state law.

Unfortunately, this is the problem that we have here with the introduction of fact and notice pleading in this century.

The courts have been little concerned with this particular issue.

They haven’t attempted to decide whether your cause of action is negligence or whether your cause of action is negligent misrepresentation.

Indeed, there are some question in my mind as to whether there is a tort of negligent misrepresentation, because recovery on these set of facts only began within the last 50 or 60 years and this parallel, the situation in which the causes of action were at the same time being abandoned.

So that there’s very little authority on this point that can be gleaned that’s helpful, certainly, there’s nothing in Virginia.

Charles E. Whittaker:

Mr. Latto, does the Government concede negligence at all here?

Lawrence J. Latto:

Oh, yes.

The Government concedes that the inspection was negligently performed

Charles E. Whittaker:

It does?

Lawrence J. Latto:

Yes.

This issue was not in the case and that the respondents were damaged and the amount of the recovery, all this is conceded.

Charles E. Whittaker:

Would you mind telling me what is the distinction so far as liability for negligence is concerned between the Fulger Mortgage Company here in Washington, which makes appraisals or money lenders and issue certificates of appraisal.

On the one hand and the FHA on the other hand, to an eventual buyer of the house subject to a mortgage, what’s the distinction —

Lawrence J. Latto:

Well —

Charles E. Whittaker:

— in liability?

Lawrence J. Latto:

— the distinction I — I suppose rest upon this.

I said before that the question of a purpose in making the inspection was something that had considerable weight.

There are other factors involved that decide — that determine whether or not, there is to be liability — the foreseeability — foreseeability of harm Mr. Justice Frankfurter mentioned, the nature of the relationship between the parties, the extent to which a single negligent act will cause very large damage.

Charles E. Whittaker:

Wouldn’t that apply as well to this private appraiser?

Lawrence J. Latto:

Well, it — it would depend upon the purpose for which he was pertained.

Here, we have this very strong expression of congressional purpose to protect the buyer.

If in fact, this private appraiser understood that the function of his job was to protect the purchaser of a home, then I say he would be liable.

Charles E. Whittaker:

Well, but now —

Lawrence J. Latto:

In that connection, may I — may I just read a — an illustration from the restatement of a — the law of torts, which bears on this.

Lawrence J. Latto:

It’s not in my brief, but it presents a — a very similar situation.

A, wishing to sell his car to B, rights to C, an expert mechanic, asking him to inspect the car and forward to him, A, a letter stating its condition in order that he may give it to B, who as he tells C, is a perspective purchaser.

In such case, C may properly be regarded.

That’s the expert who did the inspection, as supplying information for the guidance of either B or any other purchaser, whom A may find.

Charles E. Whittaker:

Well, that’s MacPherson against Buick, isn’t it?

Lawrence J. Latto:

Well, no.

That’s much closer to this case it seems to me than MacPherson against Buick.

This is where a man is retained to make an inspection and a restatement editors least, insist that he would be liable to any person to whom that property may be sold, if this inspection was negligent.

Felix Frankfurter:

I myself, that this were pure man to man issue, I would have no trouble at all if this case coming within the general — the conference of the general area of Buick against MacPherson.

I have difficulties in finding — in finding any — in being able to jump, no matter what quotation you can find on quotations, as to the extent in which the costumed — or eventually purchase is to be protected in jumping from that fact to construing what misrepresentation mean anything at all.

Lawrence J. Latto:

Oh, I think this is an entirely separate question, one that I’m anxious to get to.

Felix Frankfurter:

Alright.

Lawrence J. Latto:

And if I may, I will turn that now.

Felix Frankfurter:

I apologize to how to this (Inaudible)

Lawrence J. Latto:

You have not, sir.

I — I’m content that I think to rest upon the line of inquiries suggested by the Government in its brief.

In its summary of argument, it says, “It is clear that this exception from misrepresentation bars negligent as well as willful misrepresentation.”

They point out that Five Circuits have so held and then say, “This interpretation is supported by the structure of the Tort Claims Act, by its history and by the general principles of tort law.”

I think the Government is wrong on all three counts.

If I can turn first to the structure of the Tort Claims Act, the Government’s argument essentially, is the 2680 (h) excludes misrepresentation and deceit and they rely essentially on the cannon of construction that says that you must strive to give meaning to every word in a statute and since deceit already covers false — knowingly false misrepresentations — misrepresentation must be read to mean negligent misrepresentations as well.

I certainly don’t deny that there are times when the cannons of construction are usual.

If the hazard has enterprise even in this case, I should point out that if you give misrepresentation, the meaning urged by the Government or indeed the meaning which we urge that be no need for the word deceit in the statute, so that one or the other word is going to be superfluous here.

We also rely on an equally vulnerable cannon of construction and that is that words should be given meaning in accordance with the context in which they’re found.

And if 2680 (h) is read in its entirety rather than just selecting these two words from the statute, you find that it represents an intention on the part of Congress to exclude virtually all of the deliberate torts known to the common law, assault, battery, false imprisonment and the like.

And at least one can start with the assumption that it may will be that deliberate torts were intended to be excluded and nothing more.

If we turn to the legislative history and I’ll come back —

Felix Frankfurter:

Before you move on, may I ask you this question?

Lawrence J. Latto:

Yes, you may.

Felix Frankfurter:

Suppose this appraisal as for reason for its own, purposefully put in a line of appraisal, will that be excluded on the Tort Act?

Lawrence J. Latto:

It certainly would and there is some sense in this, if Your Honor please.

Lawrence J. Latto:

And this involves the structure of the Tort Claims Act which I’ll come [Laughs] back to before going to the legislative history.

As this Court well knows, this Act took about 30 years of congressional consideration before it was adopted.

And Congress was plagued throughout this period by private acts and they were concerned about the kind of (Inaudible) of justice that was rendered by this group.

When the Act was adopted, the underlying premise involved the recognition of the fact that with the Government increasingly involved in large scale enterprises, mistakes were going to be made.

People are going to be injured because of the negligence of Government employees.

The feeling was that the damage when it occurred ought not to be visited upon the individuals who happened to be concerned, but ought to be shared by the country generally.

And so essentially, what we have is an act which makes the Government liable for the negligence of its service.

Now —

Charles E. Whittaker:

(Inaudible) I’m having trouble getting to my mind, doesn’t (Inaudible) right that when a person files an FHA insures a house, not only gets and insured mortgage, but he gets an insurance against defect.

Lawrence J. Latto:

He gets no insurance at all, because if the inspection has been properly conducted.

But the man is in error, he even makes a — the mistake of judgment.

There’s no cause of action here at all.

It’s — it’s necessary that you prove that he was negligent when he made the appraisal.

(Voice Overlap) — this is not a guarantee or an insurance to the purchaser at all.

Charles E. Whittaker:

The negligence here seems to be established on the mere existence of the facts that the house did crack.

Lawrence J. Latto:

Oh, that’s — that is not the case at all.

I mean, I — I — this has not been an issue in this case.

Charles E. Whittaker:

I understood him to say, counsel, Mr. Orrick, to say that the time amount was appraised at a perfectly (Inaudible)

The petitioner himself, says that after he moved in —

Lawrence J. Latto:

The petitioner does not say that and the record does not say that.

There was overwhelming proof in this case that any competent appraiser would have found very serious structural defects that existed in this house at the time his inspection was made.

This is a very difficult matter to establish and it will be established in very few cases I may say, but it happened to be established in this case.

Negligence was not inferred from the fact the damage at all.

There was a specific proof on this Court.

If I may return to this question of the meaning of misrepresentation in 2680 (h), if — if in truth that the — the broad and just purpose of the Tort Claims Act is to make the Government liable for the negligence of its employees and this Court in Indian Towing said that this was a purpose of the Act.

I see no reason for this very grudging and niggardly interpretation that the Government seeks to give to the word in this representation.

It detracts from rather than further, is the central purpose of the Act.

It results in denying recovery in many cases where there plainly should be recovery, in some of the cases in the Courts of Appeals that Government relies upon, were such cases.

It has almost nothing to commend it, except for these cannon of construction upon which they rely.

And if I have sometime, I’d like to turn to the legislative history.

Lawrence J. Latto:

Here, we’re something of a disadvantage.

Felix Frankfurter:

I hope I don’t reduce your time that you’ve left if I ask you whether there’s any explicit reference in the legislative history to the meaning that was in the mind with the draft which they explicitly in words as to what misrepresentation of purposes of age was intended to cover.

Is there any explicit — I don’t — I — await your argumentation.

But is there anything which tells me that Congressman Jones said misrepresentation means thus himself?

Lawrence J. Latto:

The reference is to 2680 (h), the explicit reference is where to the statute — where through that section as a whole, not 2680, but 2680 (h) and to the exception of assault and battery.

There were no explicit references to misrepresentation and deceit.

There were several references I should say, to 2680 (h), the section which had all 11 torts.

And these references are perfectly clear.

The Department of Justice which had hand in drafting the bill, sent a formal memorandum to the Congress and it explained that these were deliberate torts.

The Assistant Attorney General testified in connection with the legislation and he informed the Committee that these were deliberate torts.

The Senate reports on —

Felix Frankfurter:

That couldn’t be slander and libel and not deliberate torts?

Lawrence J. Latto:

Well, they are certainly commonly thought of as deliberate torts.

Felix Frankfurter:

But really, well, the most of the (Inaudible) and slander and libel, except when it purposefully done and (Inaudible) non-deliberative forms.

Lawrence J. Latto:

Well, it is true and the Government has relied very heavily on this that there are occasions on which these torts can be committed negligently.

But I think in trying to ascertain the intent of Congress, it’s fair to assume that we’re dealing with a number of lawyers and other laymen and the common understanding of these torts is that they are deliberate.

For example, there were several law review articles written shortly after the enactment of the Tort Claims Act by scholars in the law, Professor Gilhorn at Columbia, Professor Davis who’s written so much in the administration of law field, and Mr. Gately who was in the Tort Claim Section of the Department of Justice at the time.

All of these men referred naturally and without further consideration to the exception for deliberate torts included in 2680 (h).

Now, it maybe their refined analysis will find in occasional case in which these torts are not committed deliberately.

But certainly, the common understanding, the explanation by the framers of the bill to the Congress was that 2680 (h) included deliberate torts alone.

I’d like to say a word about the question suggested by Justice Whittaker, which related to the fact that if this — if a — if a deliberate misstatement had been made by an inspector, I agree that there would be no liability and it seems initially odd that there should be liability for a — in effect, a lesser tort.

But if one looks to the structure of the Act, it seems fairly plain that libel, slander, conscious misrepresentation, this is the kind of activity which is not ordinarily engaged in by a government employee as part of his governmental functions.

If a man slanders someone, perhaps in law, he would be regarded as acting within the scope of his employment, but as a practical matter, he’s not engaged in carrying out a governmental function.

On the other hand, if he is carrying out this inspection function and negligently performs it to someone’s injury, then we have a case which falls within the classic pattern of the Tort Claims Act.

So that isn’t at least bit hard that Congress might have decided that were a government employee strays off the reservation as it were and access an individual that there should be no governmental liability, except for the unusual case where they would still be the private bill available.

This seems to me a perfectly sensible reason for 2680 (h).

Now finally, Mr. Orrick opened his argument by pointing out that if this case were affirmed, there would be vast liability visited upon the United States.

I think I have two brief answers to this.

First if it were true, his argument would be addressed to the Congress and not to this Court as this Court pointed out in (Inaudible).

More important perhaps is the fact that it is not true.

Lawrence J. Latto:

Under the Tort Claims Act, the United States is liable only in circumstances were a private person would be liable in like circumstances to a private individual.

Under the common law, as it has been generally recognized throughout the United States, they had been limitations imposed upon the kind of widespread liability that Mr. Orrick is talking about, where a single negligent act is likely to give rise to very widespread liability.

Courts have uniformly held that there is no duty of care, the classic case in this area is the Cardozo — Judge Cardozo’s opinion in Ultramares against Touche where an accountant’s certificate which might be sent very widely abroad, was held not to give — not to give rise to a duty of care in favor to anyone that might read and rely upon it.

This is to be compared with his same opinion in Glanzer against Shepard, where a public weigher was held liable to a third party who relied upon his certificate of weight, because he had reason to expect that such reliance will be given and where the extent of the liability would be limited.

So long as — as in this case, the total damage which could be inflicted upon the United States is the value of this house, the damage contented for the Government simply would not result.