Opinion
Civil Action No. 15-cv-01883-MSK-KLM
05-03-2016
Affiniti Colorado, LLC, Plaintiff, v. Eagle-Net Alliance, Defendant and Third-Party Plaintiff, v. U.S. Department of Commerce, Third-Party Defendant.
Frederick J. Baumann, Hermine Kallman, Kenneth F. Rossman, IV, Lewis Roca Rothgerber Christie LLP, Zeyen Julian Wu, Elizabeth Serio, U.S. Attorney's Office, Denver, CO, for Third-Party Defendant. Kenneth S. Fellman, Paul David Godec, Kissinger & Fellman, P.C., Denver, CO, for Defendant and Third-Party Plaintiff.
Frederick J. Baumann, Hermine Kallman, Kenneth F. Rossman, IV, Lewis Roca Rothgerber Christie LLP, Zeyen Julian Wu, Elizabeth Serio, U.S. Attorney's Office, Denver, CO, for Third-Party Defendant.
Kenneth S. Fellman, Paul David Godec, Kissinger & Fellman, P.C., Denver, CO, for Defendant and Third-Party Plaintiff.
OPINION AND ORDER GRANTING MOTION TO DISMISS AND REMANDING ACTION
Marcia S. Krieger, Chief United States District Judge
THIS MATTER comes before the Court pursuant to Third Party Defendant United States Department of Commerce's ("DOC") Motion to Dismiss (# 21) , Third–Party Plaintiff Eagle–Net Alliance's ("Eagle") response (# 38) , and DOC's reply (# 39) . Also pending is the Plaintiff's ("Affiniti") Motion for Preliminary Injunction (# 48) .
FACTS
The parties' pleadings are highly-detailed, but when the allegations in Affiniti's Amended Complaint (# 26–1) and Eagle's Answer and Counterclaims (# 5) are combined and simplified, a fairly straightforward dispute emerges. In or about 2013, an agency of the DOC issued a federal grant of more than $100 million for the purpose of building a broadband network that would reach rural schools in Colorado. Eagle was the ultimate recipient of that grant. According to Eagle, the terms of that grant provided that the DOC would retain a lien against the property, materials, and equipment obtained with grant funds.
For purposes of the issues here, the Court need not differentiate between the agency and the DOC itself.
In October 2013, Eagle entered into a contract (the "Management Agreement") with Affiniti, under which Affiniti would provide various network management services to Eagle in conjunction with the project. Eagle and Affiniti also executed a Security Agreement that granted Affiniti a security interest—subject to the reversionary interests of the federal government—in Eagle's assets to secure any debts that Eagle might come to owe Affiniti. Relations soured between Eagle and Affiniti, each accusing the other of breaching the terms of the Management Agreement. Those allegations, which the Court need not recite in detail here, underlie the claims of breach of contract between Eagle and Affiniti.
The instant motion involves third-party claims by Eagle against the DOC. Eagle alleges in its Answer and Counterclaims that it has been placed at risk of defaulting on its obligations under the grant because Affiniti "has improperly retained possession of various materials, equipment, and supplies purchased using [grant funds], and Affiniti has not allowed [Eagle] to have possession of those materials, equipment, and supplies". Eagle asserts three claims against both Affiniti and the DOC: (i) a claim for "interpleader," in that "the allegations in the Complaint and in the Counterclaims raise the possibility of competing claims," as "the [DOC] has interests and rights arising in the disputes between Affiniti and Eagle" and that "non-joinder of [the DOC] threatens [Eagle] and/or Affiniti with double, multiple, or inconsistent obligations"; (ii) a claim for "partition," apparently under C.R.S. § 38–28–101 et seq. , in that "Affiniti and [Eagle] each seek an order for the proper division and partition of real and personal property interests for [Eagle's] assets" and that the DOC "has a perfected lien interest in some of [Eagle's] assets obtained using funds from the [grant], which gives [the DOC] an interest in the division and partition of real and personal property interests," requiring the DOC to be named as a party herein; and (iii) a claim for "quiet title" in certain real and personal property, apparently under C.R.C.P. 105(a), in which Eagle asserts that it "has superior and dominant title to all of the real and personal property at issue in this litigation [and that] Affiniti and [the DOC] have simultaneous interests in the same property in which [Eagle] has superior and dominant title."
It is somewhat unclear what real property is at issue in this action; at best, it would appear that Eagle and/or Affiniti obtained certain easements over real property to facilitate the installation of networking equipment. Assuming that these are property interests whose ownership can be disputed and resolved herein, the Court merely notes that arguments premised upon Security Agreements (which apply to chattels) would not be meaningful in disputes about ownership of real property interests (which would be memorialized in real estate records).
The DOC moves (# 21) to dismiss Eagle's third-party claims against it for lack of subject-matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1). The DOC argues that, as relevant here, the federal government has only waived sovereign immunity for civil actions that seek to interplead, partition, or quiet title to property "on which the United States has or claims a mortgage or other lien," but not for suits involving property to which the U.S. claims outright title. See 28 U.S.C. § 2410(a). It goes on to argue that, as a matter of law, title to property purchased with federal grant funds vests in the government itself, with the grant recipient holding nothing more than a possessory interest (or what is sometimes described as "bare legal title"). Accordingly, the DOC alleges that the government has not waived its sovereign immunity to suit for purposes of the third-party claims herein, requiring their dismissal for lack of subject-matter jurisdiction.
ANALYSIS
A. Standard of review
Rule 12(b)(1) motions generally take one of two forms: (1) a facial attack on the sufficiency of the pleading's allegations as to subject matter jurisdiction; or (2) a challenge to the actual facts upon which subject matter jurisdiction is based. Ruiz v. McDonnell, 299 F.3d 1173, 1180 (10th Cir.2002), citing Holt v. United States, 46 F.3d 1000, 1002–03 (10th Cir.1995). Here, Eagle's Counterclaims expressly assert that the DOC's interest in the property is that of a lienholder, and the DOC's motion challenges the accuracy of that factual allegation. In such circumstances, the Court may not presume the truthfulness of Eagle's factual allegations; rather, the Court has wide discretion to allow affidavits, other documents, and even a limited evidentiary hearing to resolve disputed jurisdictional facts. Sizova v. National Institute of Standards and Technology, 282 F.3d 1320,1324 (10th Cir.2002).
B. Merits
The question presented is whether the federal government's interest in property purchased by recipients of federal grant funds takes the form of a title interest or whether the federal government simply holds a lien or other contingent interest in the property. This Court would have subject-matter jurisdiction over the latter pursuant to 28 U.S.C. § 2410(a), but not the former. Bertie's Apple Valley Farms v. U.S., 476 F.2d 291, 292 (9th Cir.1973) ("Congress in § 2410 did not consent to suits against the United States where the United States claims a title interest as distinguished from a lien interest"); see also Hussain v. Boston Old Colony Ins. Co., 311 F.3d 623, 629–30 (5th Cir.2002).
At the outset, the Court expresses some doubt as to whether it need to even address the question of title vs. lien in order to resolve the issue presented here. In order for the Government to be a proper party to a suit of this type, whether sounding in quiet title or otherwise, there must be "a private party assert[ing] an ownership which is superior to the claimed lien of the United States Government." Hussain, 311 F.3d at 630. Assuming, for the moment, that the DOC's claims to the property and equipment in question is nothing more than a lien interest, nothing in Eagle's Counterclaims suggests that either Eagle or Affiniti is claiming an interest in the property that is superior to the DOC's lien. Certainly, there is a dispute between Affiniti and Eagle over which rights in the property and equipment are superior, but there is no indication whatsoever that either purport to also claim a right to possess the property and equipment senior to that held by the federal government. Indeed, it is abundantly clear that Affiniti's claim to possession of the property and equipment derives from the Security Agreement that, by its terms, recognizes the DOC's superior "reversionary interest" in the property and equipment. Docket # 5, ¶ 7. Furthermore, nothing in the Counterclaim suggests that the DOC has ever sought to take possession of grant-related property or equipment in Eagle's possession, such that Eagle would have a colorable basis to seek clarification of its rights in the property or equipment vis-a-vis the DOC, nor has Eagle alleged that it has possessory rights in grant-related property or equipment that would trump the interest of the DOC. In such circumstances, the Court is not necessarily convinced that Eagle's Counterclaims even state a colorable claim—in quiet title, partition, or otherwise—against the DOC, much less a claim that falls within 28 U.S.C. § 2410(a)'s waiver of sovereign immunity.
However, because the DOC has not sought dismissal on that basis, the Court will proceed to address the issue briefed by the parties: namely, whether the DOC's interest in the grant-related property and equipment is a title or a lien interest. The nature of the government's interest in property of this type is determined by the terms under which the grant of federal funds is made. In re Joliet–Will County Community Action Agency, 847 F.2d 430, 432 (7th Cir.1988). Joliet–Will primarily involved certain funds, issued pursuant to a federal grant, in the possession of a debtor who filed for bankruptcy. Private creditors sought to obtain those funds as assets of the bankruptcy estate, and the federal government sought to retrieve the funds, arguing that the debtor never actually had title to them. As the 7thCircuit explained:
"[t]he answer depends on the terms under which the grants were made. Did they constitute Joliet–Will a trustee, custodian, or other intermediary, who lacks beneficial title and is merely an agent for the disbursal of funds belonging to another? If so, the funds (and the personal property bought with them) were not assets of the bankrupt estate. Or were the grants more like payment under a contract for promised performance not actually performed? The promisee would have a contractual claim for the return of the money he had paid, but he would not have a property right in the money."
Id. (citations omitted). The court went on to conclude that, in the particular circumstances presented, several factors suggested that the debtor's possession of the funds was essentially that of a trustee or custodian, not a title-holder—namely, the fact that "the grants impose minute controls on the use of the funds, such that the recipient has very little discretion," and that the weight of authority establishes that "federal funds in the hands of a grantee remain the property of the federal government unless and until they are expended in accordance with the terms of the grant," among others. Id. at 432–34.
Here, the grant documents contain specific terms. The grant award refers to 15 C.F.R. Part 24, entitled "Uniform Administrative Requirements for Grants and Agreements to State and Local Governments." As applicable here, 15 C.F.R. § 24.32(a) provide that "title to equipment acquired under a grant ... will vest upon acquisition in the grantee." This language strongly suggests that title to the equipment vests in the grantee, that is, Eagle. This is reinforced by 15 C.F.R. § 24.32(g), which states that "[t]he Federal awarding agency may reserve the right to transfer title to the Federal Government or a third party" according to certain procedures. (Emphasis added.) If the DOC is correct and title to property purchased with grant funds vested in the federal government automatically, then the reference in subsection (g) to the government's ability to transfer title to the property to itself would be superfluous.
The cited provisions were superseded in 2014 as part of a comprehensive revision of DOC regulations. 79 Fed.Reg. 75871 (Dec. 19, 2014). However, because the property interests at issue here were created at the time of the grant in 2013, and because neither party asserts that the 2014 revision of the regulations materially changes the analysis, the Court will apply the prior version of the regulations.
Curiously, the DOC's motion avoids all mention of these subsections, pointing instead to provisions in 15 C.F.R. § 24.32(c), (d), and (e), each of which give the government considerable control over how grant-funded property is used and disposed of. Undoubtedly, the DOC has extensive control over what uses Eagle can make of the grant-funded equipment and what it can do with that equipment. For example, the equipment must be used for the particular federal program for which it was acquired, and when the program ceases, Eagle may only re-purpose the equipment for other federally-funded programs, not for its own use. 15 C.F.R. § 24.32(c)(1). The DOC's approval is required if Eagle wishes to trade-in or sell the grant-funded equipment during the life of the project. 15 C.F.R. § 24.32(c)(4). The regulation grants Eagle unfettered discretion to dispose of un-needed equipment that is worth less than $ 5,000, but Eagle must obtain the DOC's permission to sell equipment worth more than that and must reimburse the DOC for a certain portion of the value of such sales. 15 C.F.R. § 24.32(e)(1), (2). These restrictions are consonant with the type of "minute controls" that the federal agency exercised over the grant funds in Joliet–Will that led the court to conclude that the debtor there did not hold title to the funds. Accord Neukirchen v. Wood County Head Start, Inc., 53 F.3d 809, 811–13 (7th Cir.1995).
The incongruity between 15 C.F.R. § 24.32(a), which purports to vest title in grant-funded equipment in the grantee, and 15 C.F.R. § 24.32(c)–(e), which retains broad federal control over that equipment, requires some examination. Certainly one party's extensive rights to control another party's use of property or equipment suggests that the latter possesses something less than outright title to it. Indeed, courts have often recognized that the dispositive issue is not the simple question of who holds title to the property, but rather, the degree to which the federal government controls how that property is employed. Thus, in In re Community Associates, Inc., 173 B.R. 824, 829 (D.Conn.1994), the court considered whether automobiles, titled in the name of debtor but purchased with federal grant funds to be used in administering a federal program, were property of the debtor's estate and available to private creditors. Relying on Joliet–Will, the court looked past the mere fact that the autos were titled in the name of the debtor, finding that the extensive control that the federal government exercised over their use created a situation in which "the grantee's ownership is nominal, like a trustee's," and that the autos were the beneficial property of the government. Id. The court made clear that evidence of federal control over the use and disposition of the property was more persuasive than a simple showing of title alone: "While Community Associates held legal title to the vans purchased with the cash grants, it could exercise little discretion in using either the cash grants or the vans purchased with the cash grants." Id. ; see also Centerpoint Properties Trust v. Norberg, 14 F.Supp.3d 11, 21 (D.Me.2014) ("It would violate [longstanding principles] to permit a judgment creditor to attach funds (1) over which a federal agency has detailed, pervasive control; (2) in which the government possesses a formal security interest; and (3) the purpose of which is to serve an important federal interest. This is so even if the funds are several steps removed from their federal origin").
Applying these factors, the Court finds that Eagle's interest in the property at issue here is, at best, a nominal title or trusteeship for the benefit of the DOC, and that the DOC retains beneficial title and interest in the grant-funded equipment and property. Under cases like Joliet–Will, this is dispositive of the question, and the Court need not address the other items that Eagle points to for the proposition that the DOC's interest is something more akin to a lien. Those items—the fact that the DOC has filed various Financing Statements it has filed with the Colorado Secretary of State, or statements in DOC publications, do not undercut the Court's conclusion herein. Indeed, if anything, the Financing Statements support the Court's conclusion that the DOC's interest in the nature of beneficial title, as those Financing Statements indicate that Eagle "holds the [property] in trust for the benefit of the [DOC]. The Federal Government retains an undivided equitable reversionary interest in the [property] for the useful life thereof." As Joliet–Will notes, a party's possession of government-funded property in a trustee-like status does not undercut the government's claim to full beneficial title in the property.
Thus, the Court rejects Eagle's argument that the DOC's interest in the property and equipment here is akin to a lien for purposes of 28 U.S.C. § 2410(a). Accordingly, the Court grants the DOC's motion to dismiss.
In addition to the reasons set forth above, the Court agrees with the DOC that there is a fundamental problem with terminology in Eagle's position. A "lien" is an "a hold or a claim which one person has upon the property of another as a security for some debt or charge. But it never imports more than security. It confers no right of property." Reeves v. U.S., 217 F.Supp. 939, 940 (D.Or.1963). Here, the DOC's interest in the grant-funded property or equipment might arguably be said to constitute a "lien"—that is, security for Eagle's payment of a debt or performance of a charge—if Eagle could obtained unrestricted rights in the property upon its full performance of its obligations under the grant. Because 15 C.F.R. § 24.32(c)(4) and (e)(2) grant the DOC extensive rights in the property (or its proceeds) even after the equipment is no longer needed for the program or the program has concluded, it is difficult to characterize the DOC's rights in the property as a dischargeable "lien" as that word is commonly used.
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C. Jurisdiction
The dismissal of Eagle's Counterclaims against the DOC has a follow-on effect that implicates this Court's continuing jurisdiction. Affiniti initially commenced this suit in the Colorado District Court. By all appearances, this Court would lack subject-matter jurisdiction over the claims in that action because those claims arise only under state law and are asserted between two citizens of the State of Colorado, depriving this Court of subject-matter jurisdiction under either 28 U.S.C. § 1331 or 1332. It was not until Eagle asserted its Counterclaims against the DOC that the DOC was able to remove (# 1) the action to this pursuant to 28 U.S.C. § 1444 (United States as a party). The dismissal of those Counterclaims as against the DOC leaves only Affiniti's direct claims against Eagle, and Eagle's Counterclaims against Affiniti, which, again, sound only in state law. Accordingly, the Court finds that upon the dismissal of the Counterclaims against the DOC, it lacks any subject-matter jurisdiction over the remainder of the action. Accordingly, the action is remanded pursuant to 28 U.S.C. § 1447(c).
CONCLUSION
For the foregoing reasons, the DOC's Motion to Dismiss (# 21) is GRANTED , and Eagle's claims against the DOC are DISMISSED for lack of subject matter jurisdiction. Upon that dismissal, the Court lacks continuing subject-matter jurisdiction over the remainder of the action, and thus the Court REMANDS the action to the Colorado District Court from whence it was removed. The Clerk of the Court shall transmit the record of this case to the Clerk for the Colorado District Court for Broomfield County and shall thereafter close this case.
Dated this 3d day of May, 2016.