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November 4, 1982

MICHAEL CARDENAS, Administrator, Small Business Administration, et al., Defendants

The opinion of the court was delivered by: FLANNERY

 I. Introduction

 This matter is before the court on the motion of defendants Small Business Administration ("SBA") and its administrator Sanders to dismiss or, in the alternative, for summary judgment, and on the motion of defendant Federal Railroad Administration ("FRA") to dismiss. Plaintiffs Inner City Broadcasting Corporation ("Inner City") and its subsidiary, Amistad DOT Venture Capital, Inc. ("Amistad") seek a declaratory judgment to require the SBA to consider $3 million Amistad has received in aid from the FRA as "private" capital for the purposes of calculating the amount of financial aid Amistad may be eligible to receive from the SBA. The SBA has filed a counterclaim for interest due it on $1 million in Amistad debentures it purchased in January, 1981. For the reasons set forth below, the court grants FRA's motion to dismiss and grants SBA's motion for summary judgment on its counterclaim, but denies the motion of the SBA for summary judgment on the issue of SBA leveraging of FRA funds. Instead, on that issue, the court shall enter summary judgment for the plaintiffs. *fn1"


 In March 1978 Inner City representatives met with officials of the Minority Business Resource Center ("MBRC") of the FRA to inquire about obtaining MBRC financial assistance in setting up a venture capital company to invest in minority-controlled businesses in railroad-related businesses. *fn2" After fruitful initial discussions, the FRA in mid-April 1978 invited Inner City to submit a formal proposal to participate in the MBRC program. Inner City did so in May, offering to set up a minority enterprise small business investment company ("MESBIC") with $500,000 of Inner City capital. In early November 1978 the FRA accepted Inner City's proposal and agreed to provide funds to the MESBIC through the purchase of $3 million of its preferred stock. The FRA acceptance was subject to the condition that the MESBIC be promptly established and that it obtain within four months a license from the SBA under section 301(d) of the Small Business Investment Act of 1958, as amended, 15 U.S.C. § 681(d) (1976 & Supp. IV 1980). Sutton Affidavit, Exhibit J. *fn3"

 Under provisions of the Small Business Investment Act of 1958 the SBA gives financial assistance to small business investment companies meeting certain requirements. One way a company may qualify for SBA assistance is to fall within section 301(d) of the Act, which provides:

[A] small business investment company, the investment policy of which is that its investments will be made solely in small business concerns which will contribute to a well-balanced national economy by facilitating ownership in such concerns by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages, may be organized and chartered under State business or non-profit corporation statutes, or formed as a limited partnership, and may be licensed by the Administration to operate under the provisions of this chapter.

 15 U.S.C. § 681(d) (1976 & Supp. IV 1980). A section 301(d) licensee is eligible to receive financial aid in the form of the purchase by the SBA of non-voting stock of the company up to an amount equal to 200 per cent of the company's private paid-in capital and surplus or in the form of the purchase or guarantee by the SBA of debentures of the company up to an amount equal to 400 per cent of the company's private paid-in capital and surplus. 15 U.S.C. § 683(c). Such SBA aid is referred to as "leveraging" due to its multiplier effect.

 To meet the conditions of the FRA, Inner City on November 16, 1978 incorporated Amistad. On November 21 Amistad submitted an application to the SBA for a section 301(d) license. On February 20, 1979 Inner City made a capital contribution to Amistad of $500,000 in its own funds. A week later the SBA granted Amistad the license.

 Once Amistad met all of the FRA conditions, the FRA and Amistad began negotiations with respect to the FRA purchase of Amistad stock. The negotiations ended successfully with the signing on May 23, 1979 of a 58-page financing agreement. SBA Administrative Record ("Record") at 35. *fn4" The FRA paid over $3 million to Amistad in September 1979.

 The financing agreement by its terms had to be approved by the SBA before the FRA would transfer the money. It also required Amistad to obtain at least $3 million in additional financing from the SBA based on leveraging of the FRA funds. Failure to do so would be an event of default giving the FRA the right to force Amistad to redeem the shares and pay back the $3 million in FRA funds. Consequently, Amistad in late May 1979 submitted the agreement to the SBA for its approval and at about the same time wrote to the SBA asking informally for its commitment to leverage the $3 million from the FRA. The SBA had already given Amistad $500,000 in exchange for preferred shares following an earlier request to leverage the $500,000 capital contribution of Inner City. On June 6, 1979 the SBA formally approved the FRA-Amistad financing agreement, but noted that "this approval is not intended to commit the agency to the provision of matching funds or leverage on the basis of investments by DOT (Department of Transportation)." Record at 99. Two days later the SBA refused Amistad's informal request citing "a severe shortfall in funds." Record at 32. Undaunted, Amistad on October 3, 1979 submitted a formal application. The SBA in April 1980 again refused, this time citing as its reason the high percentage of funds held by Amistad which lay idle and uninvested. Record at 143; 15-16.

 Throughout the two years following Inner City's initial contacts with the FRA in March 1978 until April 1980, neither the FRA nor the SBA questioned the legality of SBA leveraging of FRA funds. The record in fact contains numerous representations to the contrary. At the outset, the FRA attached to its invitation to Inner City in April 1978 to apply for MBRC aid a pamphlet entitled, "Investment Company for Railroad Venders: A Synopsis of the Implementation." It stated:

The MESBIC would be a section 301 (d) licensee able to obtain matching funds at a low rate of interest from the SBA, in an amount up to four (4) times the capital which it possess (sic) including funds invested by the MBRC."

 Sutton Affidavit, Exhibit E (emphasis added). Moreover, the FRA-Amistad financing agreement reflects the expectation of SBA leveraging. It refers to the proceeds "from the subsequent sale of preferred shares and debentures to the SBA by reason of FRA's purchase of Shares." Record at 56 (Emphasis added). It requires Amistad to keep FRA funds separate from its general accounts "until the SBA (i) purchases an aggregate of three million ($3,000,000) of preferred shares of (Amistad) by reason of FRA's purchase of shares or (ii) commits in writing to do so." Record at 43. Finally, it provides as an event of default the

failure of [Amistad] to either (i) sell to SBA an aggregate of three million ($3,000,000) of preferred shares of (Amistad) by reason of the [FRA's] purchase of the Shares or (ii) obtain a written commitment by SBA to purchase such amount of preferred shares within three (3) months after the closing under Section 2.01(c) of this agreement.

 Record at 88.

 For its part, the SBA, though always careful to avoid giving any formal commitment to leverage FRA funds held by Amistad, never claimed illegality as a basis for its refusal, but pointed instead to budget constraints or irregularities in Amistad's application. In fact, the SBA often clearly stated it had the power to leverage FRA money. For example, in a letter dated April 2, 1980 to Rep. Charles B. Rangel, who had contacted the SBA on Amistad's behalf, the SBA said it was

aware that the terms of FRA's investment oblige Amistad to seek matching funds from SBA. SBA has no consequent legal obligation toward FRA, or towards Amistad, other than to regard the proceeds of the FRA financing as private capital for leverage purposes.

 Record at 15 (emphasis added). The same letter elsewhere states "there is no doubt that funds supplied by FRA qualify as private capital for matching purposes." Id.

 Indeed, the SBA's own regulations at the time provided that FRA funds could be leveraged:

Nonprivate funds for licensees. (i) A licensee may include nonprivate funds . . . in its Private Capital for purposes of sections ...

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