UNITED STATES OF AMERICA, PETITIONER V. THOMAS M. GAUBERT No. 89-1793 In The Supreme Court Of The United States October Term, 1989 The Acting Solicitor General, on behalf of the United States of America, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Fifth Circuit in this case. Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Fifth Circuit TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statutory provision involved Statement 1. Regulatory background 2. Factual background 3. Proceedings below Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-20a) is reported at 885 F.2d 1284. The opinion of the district court (App., infra, 21a-26a) is unreported. JURISDICTION The judgment of the court of appeals was entered on October 17, 1989. A petition for rehearing was denied on January 5, 1990. App., infra. 30a. On March 23 and April 27, 1990, Justice White extended the time for filing a petition for a writ of certiorari to and including May 17, 1990. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTORY PROVISION INVOLVED The Federal Tort Claims Act, 28 U.S.C. 2680, provides in relevant part: The provisions of this chapter and section 1346(b) of this title shall not apply to -- (a) Any claim based upon an act or omission of an employee of the Government, exercising due care, in the execution of a statute or regulation, whether or not such statute or regulation be valid, or based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused. QUESTION PRESENTED Whether supervisory actions that are taken by federal regulators of financial institutions and that require the exercise of policy discretion fall within the "discretionary function" exception to the Federal Tort Claims Act, 28 U.S.C. 2680(a), regardless of whether those actions may be categorized as "operational in nature. STATEMENT This tort action arises out of regulatory activities undertaken by officials of the Federal Home Loan Bank Board (FHLBB or the Board) and the Federal Home Loan Bank-Dallas (FHLB-D), with respect to Independent American Savings Association (IASA), a now-failed Texas thrift institution. Respondent Thomas Gaubert, a major shareholder and former officer of IASA, brought this action under the Federal Tort Claims Act (FTCA), 28 U.S.C. 1346(b), 2671-2680. Respondent contends that he suffered personal financial losses because of IASA's failure, and he alleges that this failure was caused by negligence of federal regulators in their supervision of IASA. The sole issue presented for review is whether the court of appeals correctly interpreted the FTCA's discretionary function exception. 28 U.S.C. 2680(a). 1. Regulatory Background The context within which the actions at issue took place is the extensive statutory scheme for the federal regulation of financial institutions. As a state-chartered thrift institution whose accounts were insured by the Federal Savings and Loan Insurance Corporation (FSLIC), IASA was subject to federal regulation pursuant to Title IV of the National Housing Act, 12 U.S.C. 1724-1730i (1988). /1/ These statutory powers were entrusted to a number of related federal bodies, all under the overall supervision of the Board. The Board itself was an independent agency of the federal government, with broad responsibilities for the regulation of both federally chartered and state-chartered thrift institutions. See 12 U.S.C. 1437 (1988). FSLIC was a corporation that was established by Congress to provide insurance for deposits in both state and federally chartered thrift institutions and that operated under the direction of the Board. 12 U.S.C. 1725(a) (1988). FSLIC operated in two separate and legally distinct capacities -- as a federal regulator (charged with protecting the insurance fund against undue risk by examining and regulating insured institutions), and as a receiver of failed institutions. The Federal Home Loan Banks, including FHLB-D, were regional banks established by the Board for the purpose of assisting member institutions. 12 U.S.C. 1423 (1988). The Board supervised the activities of the various FHLBs, and was specifically empowered to assign to the personnel of any FHLB most of the regulatory functions of the Board itself, or of FSLIC. 12 U.S.C. 1437(a) (1988). The regulatory powers of greatest relevance here are those provided in 12 U.S.C. 1729 and 1730 (1988). Section 1729(c), for example, empowered the Board, under certain circumstances, to appoint FSLIC as the conservator or receiver of an insured institution. Section 1730 conferred a wide range of enforcement authority on FSLIC, in its regulatory capacity, over state-chartered thrift institutions. /2/ For example, Section 1730(b) provided for formal proceedings that could result in the termination of FSLIC insurance. Section 1730(e) provided for proceedings in which FSLIC could issue orders requiring an insured institution to cease and desist from engaging in any practices found either to be in violation of a pertinent statute or regulation, or to constitute an unsafe or unsound banking practice. Section 1730(f) provided for expedited, temporary cease-and-desist orders under certain circumstances. Section 1730(g) provided for the suspension or removal of any officer or director of an insured institution on a number of grounds, including violations of a statute or regulation, or actions in violation of fiduciary duties. Pursuant to 12 U.S.C. 1730(m)(2) (1988), FSLIC also had broad investigatory powers in aid of its regulatory functions. Not all instances of misconduct or regulatory concern have been handled by institutions of such formal proceedings. Like other federal regulators, the Board and FSLIC have often relied on more informal methods of ensuring compliance with regulatory standards. Regulators may, for example, forbear from initiating formal enforcement proceedings in exchange for assurances that regulated parties will refrain from certain conduct or take specified corrective steps. Federal agencies involved in the regulation of financial institutions have turned to such approaches frequently, especially in light of the growing case load confronting these agencies. See generally Vartanian & Schley, Bank Officer and Director Liability -- Regulatory Actions, 39 Bus. Law. 1021, 1027-1028 (1984). In a policy statement, FHLB specifically addressed the use of such procedures, noting the appropriateness in many instances of "informal supervisory guidance" or negotiated "supervisory agreement(s)" in lieu of formal regulatory steps. See FHLBB Res. No. 82-381 (May 26, 1982). 2. Factual Background /3/ In 1983 respondent acquired a controlling interest in Citizens Savings and Loan Association, a federally insured thrift institution chartered by the State of Texas. A new board of directors (of which respondent was the chairman) changed the name of the institution to Independent American Savings Association and embarked upn a course of substantial expansion. The actions on which respondent's complaint is based began with two interrelated events in early 1984. In May 1984, the FHLB-Des Moines requested that the institution of an investigation, pursuant to 12 U.S.C. 1730(m)(2) (1988), of certain operations of Capitol Savings and Loan Association, an Iowa institution in which respondent had had substantial dealings. /4/ During that period, IASA proposed to enter into two transactions that would greatly increase the scope of its operations: the purchase of Investex Savings Association, a troubled Texas thrift institution, and the purchase of 22 branch offices from United Savings Association, another Texas thrift. See Amended Compl. paeas. 16-19; Exh. J at 60-63. Completion of these transactions required approval by federal regulators. See 12 U.S.C. 1730(q) (1988); 12 C.F.R. Pt. 574. In part because of concerns of possible misconduct by respondent relating to the Iowa institution, federal officials had misgivings about permitting substantial expansion of IASA under respondent's control. See Exh. J at 68. Some officials also expressed concern as to whether IASA, with the greatly expanded assets and liabilities it would have following the proposed transactions, would be adequately capitalized. Id. at 69. In late 1984, FHLB-D and FHLBB staff recommended the institution of formal proceedings to remove respondent as an officer or director of IASA and prohibit his further involvement with its management (pursuant to 12 U.S.C. 1730(g)(2) (1988)), and the institution of a formal examination of IASA (pursuant to 12 U.S.C. 1730(m)(2) (1988)). /5/ Meanwhile, federal regulators were engaged in negotiations with IASA and respondent concerning possible ways of allaying these concerns and allowing the transactions to go forward. See Exh. J at 69-74. These negotiations resulted in the execution in December 1984 of a written "neutralization agreement" between respondent and the federal regulators. See Amended Compl. paras. 12-15; Exh. J at 77-78. The agreement provided that respondent would resign from management positions at IASA and refrain from any participation in the management of the institution, and imposed limits on respondent's ability to vote or transfer his IASA stock. Ibid. The agreement also included a guarantee by respondent of IASA's net worth, backed by his pledge of personal assets. See Amended Compl. para. 14; Exh. J at 78. /6/ Federal regulators approved the proposed acquisitions noted above, Exh. J at 78, and offered advice and assistance to IASA in carrying out these transactions. Amended Compl. para. 19. During 1985, investigations continued, and in August 1985 the FHLBB staff recommended the institution of proceedings, pursuant to 12 U.S.C. 1730(g)(2) (1988), permanently to bar respondent from involvement with FSLIC-insured institutins. See Exh. J at 95-105; Exh. C at 31-32. Discussions continued between respondent and federal regulators in late 1985, resulting in a second agreement set forth in a letter from respondent to the FHLBB dated December 17, 1985. Exh. D. Under the terms of that agreement, respondent agreed to remove himself permanently from IASA's management and not to serve as an officer or director of any FSLIC-insured institution without prior approval. In return, FHLBB agreed to discontinue the investigation it was conducting under 12 U.S.C. 1730(m)(2) (1988) and to forbear from the institution of removal proceedings under 12 U.S.C. 1730(g)(2) (1988). Early in 1986, additional matters came to light that increased the federal regulators' concerns regarding IASA's soundness. In February and March 1986, IASA received reports from a management consulting firm indicating that IASA was in a precarious financial situation due to numerous possible regulatory violations, including unsafe and unsound practices. See Exh. C at 39. FHLBB personnel commenced an examination of IASA on March 3, 1986, which also revealed unsafe and unsound financial practices and other regulatory violations. Id. at 39-41. In lieu of instituting formal proceedings against IASA, the federal regulators entered into discussions with IASA, as a result of which IASA officers and directors resigned and were replaced by individuals approved by FHLB-D personnel. See Amended Compl. paras. 20-32. FHLB-D provided indemnification of the new officers and directors in order to induce them to take on these responsibilities. Id. para. 32; Exh. C at 46. According to the reports mentioned above and others prepared by accounting and consulting firms, IASA at this time faced substantial difficulties -- including books that were not in condition to permit a reliable audit -- and the prospect of continuing financial losses. See Exh. C at 47-48. The new IASA officers and directors took various steps aimed at dealing with this situation, such as making major adjustments to IASA's financial statements and placing an IASA subsidiary into bankruptcy. Id. at 48-49. During this time, federal regulators continued to forbear from taking formal regulatory actions against IASA, but consulted regularly with IASA personnel about their efforts to deal with the situation. See Amended Compl. paras. 33-37. As alleged in the Amended Complaint, FHLB-D officials frequently gave advise to IASA managers on a variety of topics. Id. para. 33. Specifically, the Amended Complaint charges that FHLB-D personnel "arranged for" the hiring of a particular consultant by IASA, urged IASA to convert to federally chartered status, gave advice concerning the placement of subsidiaries into bankruptcy, mediated salary disputes involving IASA officers, reviewed draft litigation papers, and "intervened" in dealings between IASA and a state regulatory body. Id. para. 34. Whether in spite or or (as respondent alleges) because of these efforts, IASA's condition continued to decline. In January 1987, FHLBB began consideration of a recommendation that IASA be put into receivership. See Exh. C. In May 1987, the Texas Savings and Loan Department closed IASA, and FHLBB promptly exercised its authority, pursuant to 12 U.S.C. 1729(c)(2) (1988), to appoint FSLIC as the receiver. See Gaubert v. Hendricks, 679 F. Supp. 622, 623 (N.D. Tex. 1988). 3. Proceedings Below a. Following the denial of an administrative claim made under 28 U.S.C. 2675, respondent brought this FTCA action in April 1988. The amended complaint contained allegations regarding most of the matters discussed above, including the neutralization agreement, Amended Compl. paras. 12-15 (filed Apr. 11, 1988), the actions surrounding the approval of the Investex merger, id. paras. 16-19, the replacement of IASA's management, id. paras. 20-26, the installation of a new board of directors, id. paras. 27-32, and the subsequent involvement of federal regulators in IASA's "day-to-day operations," id. paras. 33-37. The complaint further alleged that federal officials acted negligently in carrying out these activities, id. paras. 44-58, and that IASA's insolvency and other problems were caused by such negligence, id. paras. 38-39, 49, 59. The United States moved to dismiss on the ground that the challenged actions were immune from suit under the discretionary function exception to the FTCA, 28 U.S.C. 2680(a). The district court granted the motion, holding that all of respondent's claims were barred by that exception. App., infra, 21a-26a. The court recognized that the amended complaint focused on actions suggested to IASA by federal regulators, in which IASA was induced to acquiesce by the threat of receivership or other formal regulatory action. Id. at 23a-24a. Concluding that a decision to seek receivership would unquestionably fall within the discretionary function exception, the court determined that a decision to exert informal persuasion in lieu of such formal enforcement is likewise discretionary in nature and therefore also within the exception. Id. at 24a-25a. Accordingly, the court concluded that the present action fell outside the FTCA's limited waiver of sovereign immunity. Id. at 25a-26a. b. The court of appeals reversed in part, holding that as a matter of law certain actions taken by the federal regulators were not subject to the discretionary function exception. App., infra, 1a-20a. The court began its analysis of the discretionary function exception with a discussion of this Court's ruling in Indian Towing Co. v. United States, 350 U.S. 61 (1955). App., infra, 6a-7a. While acknowledging that the government had not invoked the discretionary function exception in that case, the court of appeals referred to the case as having established a "principled distinction between policy decisions and operational actions" that "still retains its force today and is dispositive of this case." Id. at 7a. The court of appeals then discussed this Court's recent discretionary function cases, United States v. Varig Airlines, 467 U.S. 797 (1984), and Berkovitz v. United States, 486 U.S. 531 (1988). App., infra, 7a-11a. With respect to Varig, the court noted this Court's central holding that the discretionary function exception is aimed at "prevent(ing) judicial 'second guessing' of legislative and administrative decisions grounded in social, economic, and political policy through the medium of an action in tort." Id. at 9a (quoting Varig, 467 U.S. at 814). And in Berkovitz, the court of appeals observed, the discretionary function exemption had been ruled unavailable where government officials violate express statutory or regulatory requirements. App., infra, 10a. The court then stated that the holding in Berkovitz was "(u)nfortunately" not dispositive of this case, since FHLBB and FHLB-D officials did not violate any express statutory or regulatory provisions. Id. at 11a. The court found guidance, however, in a footnote in Berkovitz, which cited Indian Towing as an example of a case not involving the sort of policy discretion covered by the discretionary function exception. Ibid. (quoting Berkovitz, 486 U.S. at 538 n.3). In the court of appeals' view, "(a)ny doubts about the sustained viability of th(e ("discretionary function/operational activity") distinction were put to rest" by that footnote. Ibid. Thus, the court concluded, any activity that is "operational in nature" necessarily falls outside the scope of the exception. Id. at 12a. As the court summarized, "the FHLBB and FHLB-Dallas officials were only protected by the discretionary function exception until their actions became operational in nature and thus crossed the line established in Indian Towing." App., infra, 12a-13a. Applying what it called "the Indian Towing test," App., infra, 13a, to the activities at issue in this case, the court of appeals agreed with the district court about the initial actions taken by the federal regulators. "Clearly, the decision to merge IASA with Investex and seek a neutralization agreement from (respondent) was a policy oriented decision protected by Section 2680(a)." App., infra, 13a-14a. "Similarly," the court went on, "the decision to replace the IASA Board of Directors with FHLBB approved persons, and the actions taken to effectuate that decision, are protected under the discretionary function exception." Id. at 14a. The court held, however, that the federal regulators ceased to perform "discretionary functions" when they began to advise IASA management and participate in management decisions, including hiring a consultant, directing that IASA convert to a federally-chartered entity, supervising the filing of litigation on behalf of IASA, and other allegations contained in Paragraphs 33-43 of (respondent's) Amended Complaint. Ibid. On the basis of this holding, the court remanded the case to the district court for further proceedings. Id. at 19a-20a. /7/ REASONS FOR GRANTING THE PETITION The court of appeals' ruling reflects a serious misreading of the discretionary function exception -- an exception that has long been a pivotal limitation on governmental liability under the FTCA. By setting up what it saw as a bright-line distinction based on the "operational" nature of certain activities, the court ignored the fact that many actions that can fairly be characterized as "operational" are nevertheless highly discretionary in nature and are "grounded in social, economic, and political policy." Varig, 467 U.S. at 814. Other courts of appeals have recognized that a distinction based on the "operational" nature of government actions is inconsistent with this Court's holding in Varig. But the Fifth Circuit's ruling in the present case, which revives this spurious distinction, reflects continuing confusion and division in the circuits. Thus, we believe the time is ripe for the Court to address this recurring issue and make clear that the application of the exception turns on the nature of the discretion exercised, not on such artificial distinctions as that between "planning" or "policy" and "operational" activities. 1. a. As this Court explained in Varig, the discretionary function exception is a particularly important limitation on FTCA liability, and was designed principally "to preclude application of the act to a claim based upon an alleged abuse of discretionary authority by a regulatory or licensing agency." 467 U.S. at 809 (quoting Hearings on H.R. 5373 and H.R. 6463 Before the House Committee on the Judiciary, 77th Cong., 2d Sess. 28 (1942) (statement of Assistant Attorney General Francis M. Shea)). The exception has its roots in the constitutional doctrine of separation of powers, since without it the courts would repeatedly be called upon to second-guess political and economic judgments properly entrusted to the Executive Branch. See, e.g., Laird v. Nelms, 406 U.S. 797, 811-812 n.11 (1972) (Stewart, J., dissenting); In re Joint Eastern & Southern Districts Asbestos Litigation, 891 F.2d 31, 35 (2d Cir. 1989); Kennewick Irrigation District v. United States, 880 F.2d 1018, 1021-1022 (9th Cir. 1989). The decisions of this Court applying the discretionary function exception have consistently stressed that it is the nature of the discretion exercised, not the level at which action is taken, that defines "discretionary functions" under the exception. Thus, in the seminal case of Dalehite v. United States, 346 U.S. 15 (1953), involving an explosion on a ship containing fertilizer for a federal export program, the complaint alleged negligence at several levels, from broad policy decisions to the alleged failure "to police the shipboard loading" of the fertilizer. Id. at 23-24. In holding that all of these activities fell within the discretionary function exception, the Court stated that the exception includes more than the initiation of programs and activities. It also includes determinations made by executives or administrators in establishing plans, specifications or schedules of operations. Where there is room for policy judgment and decision there is discretion. It necessarily follows that acts of subordinates in carrying out the operations of government in accordance with official directions cannot be actionable. Id. at 35-36 (footnote omitted). In Varig, the Court reiterated that principle, 467 U.S. at 811, and applied it to another multi-level complaint, this time involving the conduct of airplane safety inspections. The Court first upheld the overall decision of the Federal Aviation Administration (FAA) to employ a "spot-check" system to review aircraft designs by manufacturers. Id. at 816-820. The Court next recognized that "the acts of FAA employees in executing the 'spot-check' program" were also discretionary in nature because they necessarily involved policy judgments regarding the degree of inspection in particular instances and the taking of "calculated risks" in furtherance of FAA's overall regulatorhy policies. Id. at 820. The Court's most recent discretionary function decision, Berkowitz v. United States, supra, reaffirms those principles. As the court below recognized, Berkovitz dealt principally with a particular problem that is not presented here -- i.e., governmental activities subject to a "specifically prescribe(d) course of action" set forth in a statute or regulation. 486 U.S. at 536. Where such a prescribed course exists, a federal official must follow it and does not have any "discretion" of the sort that the discretionary function exception was designed to protect. Ibid. At the same time, Berkovitz reiterated the essential teaching of Varig -- that the exception applies to all "legislative and administrative decisions grounded in social, economic, and political policy." Id. at 537 (quoting Varig, 467 U.S. at 814). b. The analysis of the court of appeals is flatly inconsistent with Dalehite and Varig. The clear lesson of those cases is that the level at which an action is taken -- whether characterized as planning, policy, or operational -- is unimportant; what matters is whether a particular decision is "grounded in social, economic, (or) political policy." Varig, 467 U.S. at 814. If a particular action meets this test, it is subject to the discretionary function exception, even if it implements some higher-level decision and thus could be characterized as "operational" in nature. This is especially clear from the Court's treatment of allegations regarding the actions of federal employees in policing the loading of ships in Dalehite and in inspecting airplanes in Varig. The court of appeals made no effort to compare the "operational" activities in the present case with the implementing activities at issue in Dalehite or Varig. Nor did it pause to consider whether the actions in question involved discretionary judgments grounded in economic regulatory policy. Had it done so -- instead of relying on a talismanic distinction between "operational" and other activities -- the court would have been confronted with the discretionary nature of these activities. In the statutory and regulatory context of the present case, the supervisory actions taken by federal officers and employees were part and parcel of the regulatory process, and were designed to serve the same policies as more formal measures such as cease-and-desist orders, removal of bank officers, and receivership. In either case, the federal regulators act to protect the interest of the public at large in preserving depositor confidence in savings institutions and in safeguarding the fiscal integrity of the federal deposit insurance fund. See generally Woods v. Federal Home Loan Bank Bd., 826 F.2d 1400, 1411 (5th Cir. 1987), cert. denied, 485 U.S. 959 (1988). As the court of appeals expressly recognized in this case, the authority of federal regulators to pursue these goals by seeking informal cooperation by private institutions -- instead of taking more drastic, formal regulatory actions -- is "unchallenged." App., infra, 12a; see also Miami Beach Federal Savings & Loan Ass'n v. Callander, 256 F.2d 410, 414-415 (5th Cir. 1958) ("When a governmental agency holds such great powers over its offspring, even to the point of appointing a conservator or receiver to replace management, * * * it is difficult to hold that an informal request, even demand, to clean house wuold amount to an abuse of the statutory powers and discretion of the agency."). The court of appeals also recognized that the federal regulators "did not have regulations telling them, at every turn, how to accomplish their goals for IASA." App., infra, 12a. The court failed, however, to draw the logical conclusion that, in advising IASA and recommending courses of action to it, federal regulators were engaged in the same kinds if discretionary judgments that they engage in when deciding whether and at what point to take more formal actions against an institution. For example, in advising IASA managers to engage a consultant, close a particular subsidiary, or even file a lawsuit, the federal regulators were making judgments concerning the best way to further the regulatory goals of preserving the institution's soundness in order to safeguard federal deposit insurance funds. Such decisions are unquestionably "grounded in * * * economic * * * policy," Varig, 467 U.S. at 814, and should not be subject to judicial second-guessing under the FTCA. Nor can it be doubted that a federal regulator's advice to an institution to convert to federally chartered status is a judgment grounded in regulatory policy. Furthermore, because all of these actions were expressly taken in lieu of more formal regulatory actions, including receivership, federal regulators also had to consider at every juncture whether the particular actions they were advising were likely to produce beneficial results that would justify the agency's continued forbearance from formal proceedings. Whether the particular actions taken turn out to be beneficial or harmful, they constitute precisely the sort of regulatory choices that lie at the heart of the discretionary function exception. See Varig, 467 U.S. at 813-814. c. Neither this Court's decision in Indian Towing, supra, nor the footnote reference to Indian Towing in the Berkovitz opinion, provides any justification for the court of appeals' departure from the principles established in Dalehite and Varig. Indian Towing did not even address the discretionary function exception, the inapplicability of which had been conceded by the government. See Varig, 467 U.S. at 812 (noting the significance of this fact). Moreover, the court of appeals misread the footnote in the Berkovitz opinion discussing Indian Towing. 486 U.S. at 538 n.3. As the Court there noted, Indian Towing "illuminates" the scope of the discretionary function exception by providing examples of both discretionary and non-discretionary government activity -- i.e., the unquestionably discretionary decision to construct and maintain a lighthouse in a particular location, and the non-discretionary activity of keeping the lighthouse in working order. This useful illustration does not purport to provide a comprehensive definition of activities that fall within the discretionary function exception. Still less does it purport to establish a rule that any activity that may be classified as "operational" is, by that fact alone, outside the scope of the exception. The present case involves a situation that was simply not addressed in either Indian Towing or Berkovitz -- that of governmental activity that is "operational" in the sense that it implements a higher-level regulatory decision, but that nevertheless calls for the exercise of policy discretion. This Court has dealt with such situations, however, in Dalehite and Varig, and the court of appeals erred in failing to follow the guidance of those cases. 2. The court of appeals' simplistic reliance on the "operational" nature of the actions at issue here was not merely an aberrational ruling. On the contrary, the notion that the discretionary function exception is inapplicable to "operational" activities is a misconception that has cropped up in decisions of the courts of appeals for many years. See, e.g., United States v. Hunsucker, 314 F.2d 98, 103-104 (9th Cir. 1962) (using distinction between "planning" and "operational" activities); Fleishour v. United States, 365 F.2d 126, 128 (7th Cir.) (same), cert. denied, 385 U.S. 987 (1966). /8/ But see Smith v. United States, 375 F.2d 243, 246 (5th Cir.) (recognizing that not all "operational activities fall outside the scope of the exception), cert. denied, 389 U.S. 841 (1967). In our view, this Court's decision in Varig squarely rejected that limitation by applying the exception to activities that were operational but that nevertheless entailed significant policy discretion. At least one court of appeals so read the Varig opinion, expressly overruling its prior use of the planning/operational distinction as inconsistent with the teachings of Varig. See Begay v. United States, 768 F.2d 1059, 1062-1063 n.2 (9th Cir. 1985). A review of cases decided since Varig (including some decided after Berkovitz), however, shows a continuing split of circuit authority on this issue. On the one hand, the Ninth Circuit expressly considered and rejected the notion -- crucial to the analysis of the court below in this case -- that Berkovitz somehow revived the "operational" rule: The Berkovitz reference to Indian Towing must be read in the context of Dalehite and Varig. A matter does not fall outside the discretionary function exception merely because the decision to embark on an activity has already been made. Were that the case, Dalehite and Varig would be eviscerated. Kennewick Irrigation District v. United States, 880 F.2d at 1024-1025. The Third, Fourth, Tenth, and District of Columbia Circuits also appear to reject the operational limitation. /9/ On the other hand, the Eighth and Eleventh Circuits, in addition to the court below, appear to continue to embrace it. /10/ This division is not merely a matter of semantics; it reflects a substantial inconsistency in the application of the FTCA. For example, in U.S. Fidelity & Guaranty Co. v. United States, 837 F.2d 116, 121 (3d Cir.), cert. denied, 487 U.S. 1235 (1988), an insurer based an FTCA claim on the alleged negligence of an EPA official in directing a toxic waste cleanup. The decisions at issue, such as the timing of operations in light of weather conditions and other considerations, could readily be characterized as "operational" under the test used in the present case, yet the Third Circuit recognized the discretionary nature of such actions. See 837 F.2d at 121-122. Similarly, in Kennewick Irrigation District, supra, which involved claims of negligence in the Bureau of Reclamation's design and choice of materials following its initial decision to build a canal, the Ninth Circuit recognized a broad range of design decisions (those involving significant "economic" judgments) as being discretionary. See 880 F.2d at 1028-1030. These rulings, in sharp contrast to the decision below, are altogether consistent with the teachings of this Court in Dalehite and Varig. 3. While this important split in circuit authority would itself be reason enough to warrant this Court's attention, the need for review is underscored by the practical ramifications of the decision below. That decision came at a critical juncture for federal efforts to regulate financial institutions, particularly thrift institutions. Only a year ago, Congress, responding to what it termed a "crisis" in the thrift industry, enacted major changes in the statutory scheme of thrift regulation. H.R. Rep. No. 54, 101st Cong., 1st Sess., Pt. 1, at 294, 302-305 (1989). This crisis, in Congress's view, was brought about by a combination of factors including precipitous growth by many thrift institutions -- often accompanied by poor management and fraudulent practices -- and the lack of resources for sufficiently vigorous enforcement efforts. Id. at 298-301. Congress sought to address these problems by seeking to foster "stronger supervisory oversight." Id. at 307-308. The legislation enacted to address this crisis -- the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (FIRREA) -- made major changes in the federal regulatory structure and created new federal agencies to deal with the affairs of failed thrift institutions. At the same time, that law has not altered the basic regulatory tools available to deal with the problems of troubled institutions. For example, while the Act abolished FHLBB and FSLIC and repealed the specific statutory enforcement provisions invoked in this case, see FIRREA Sections 401, 407, 103 Stat. 354-357, 363, that law assigned substantially similar authority for examinations, cease-and-desist orders, and the imposition of receiverships to the Federal Deposit Insurance Corporation (FDIC) and to the newly-created Office of Thrift Supervision (OTS). Id. Sections 201, 301, 103 Stat. 187-188, 277-343. Despite other provisions of the Act that enhance enforcement authority in various ways, see id. Sections 901-968, 103 Stat. 446-506, these agencies will continue to use the sort of informal, supervisory techniques used in the present case, in an effort to assist regulated institutions without invoking formal regulatory procedures. Indeed, the regulatory workload engendered by the large number of troubled thrift institutions across the Nation will undoubtedly require federal regulators to employ such techniques in order to provide the "vigilant and responsive" regulatory action mandated by Congress. H.R. Rep. No. 54, supra, at 291. While Congress has recognized a heightened need for decisive and flexible regulatory efforts in this area, the decision below can only hobble and confine such efforts. By exposing the federal fisc to potentially massive liability whenever federal thrift regulators cross an ill-defined line into the "operational" sphere, the court of appeals' ruling will promote frequent judicial second-guessing of regulators' efforts to deal with troubled institutions. Perhaps even more significantly, the spectre of such liability will necessarily discourage regulatory vigor. /11/ Moreover, although the court of appeals purported to acknowledge the propriety of using informal supervision and advise in lieu of formal regulatory action, App., infra, 12a, the rule it announced will inevitably skew regulatory intervention toward more formal -- and more intrusive -- actions. As the courts have repeatedly recognized, decisions to invoke formal regulatory powers, such as declaring a financial institution insolvent and appointing a receiver, are clearly within the scope of the discretionary function exception. See Golden Pacific Bancorp v. Clarke, 837 F.2d 509, 512 (D.C. Cir.), cert. denied, 488 U.S. 890 (1988); /12/ Huntington Towers, Ltd. v. Franklin National Bank, 559 F.2d 863, 869-870 (2d Cir. 1977), cert. denied, 434 U.S. 1012 (1978); see also Emch v. United States, supra (failure to take regulatory action is a decision within discretionary function exception). Indeed, the court of appeals in the present case appears to recognize this principle by holding that several of the regulators' actions fall within the exception. App., infra, 13a-14a. By labeling as "operational" the actions of regulators in advising IASA management of ways to avoid the need for such formal intervention, the court of appeals has created a strong incentive to bypass such advice and instead proceed directly to formal steps. The ruling below thus has the effect of restricting regulatory options at a time of urgent need for swift and flexible intervention. /13/ That is precisely the result Congress sought to avoid by enacting the discretionary function exception: The decision below permits the courts, at the behest of private parties, to dictate "policy through the medium of an action in tort." Varig, 467 U.S. at 814. Moreover, the problems created by the court of appeals' ruling will not be limited to federal efforts to deal with the crisis in the thrift industry. As the cases cited above reflect, the discretionary function exception arises in cases involving a wide variety of regulatory and other governmental conduct. Because the court of appeals' ruling purports to rest on a bright-line test of the "operational" nature of governmental conduct, it will promote incorrect analysis, and incorrect results, in a broad range of FTCA cases. Only plenary review by this Court can correct this error and secure the consistent application of the FTCA among the circuits. /14/ CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. JOHN G. ROBERTS, JR. /15/ Acting Solicitor General STUART M. GERSON Assistant Attorney General DAVID L. SHAPIRO Deputy Solicitor General PAUL J. LARKIN, JR. Assistant to the Solicitor General ANTHONY J. STEINMEYER JOHN F. DALY Attorneys MAY 1990 /1/ The regulatory scheme as here described is that in place at the time of the actions at issue, in 1984 through 1986. As discussed below, many of the regulatory functions have been altered or shifted by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 -- but not in ways that affect the significance of the ruling below or the need for review. See pp. 20-21, infra. /2/ The Board itself directly exercised such authority over federally chartered thrifts, under the analogous provisions of the Home Owners' Loan Act of 1933, 12 U.S.C. 1464 (1988). /3/ In granting the motion of the United States to dismiss, the district court did not resolve any disputed factual issues. The background stated here is drawn either from the complaint or from certain exhibits to to the motion of the United States to dismiss the complaint that were provided to the district court "for background only." Memorandum in Support of Motion of the United States of America to Dismiss the Complaint 32 n.22 (dated Mar. 17, 1988) (Memorandum to Dismiss). These exhibits included various written agreements between federal regulators and respondent or IASA, a January 1987 FHLBB memorandum recommending the appointment of a receiver for IASA, and an April 1987 report by an independent counsel engaged by FHLBB to look into allegations by respondent of misconduct by personnel of FHLB-D, FSLIC, and FHLBB. (These materials are cited below as "Exh. . . . .") Exhibits C through J were contained in the administrative record before the Board when the Board decided to place IASA in receivership. Memorandum to Dismiss 5 n.3. Since the government's dismissal motion based on the discretionary function exception went to subject matter jurisdiction, such background materials were properly submitted to the district court. See Land v. Dollar, 330 U.S. 731, 735 n.4 (1947); 5 C. Wright & A. Miller, Federal Practice and Procedure Section 1350, at 549 (1969) ("When the movant's purpose is to challenge the substance of the jurisdictional allegations, he may use affidavits and other matter to support his motion."). /4/ See Report of Independent Counsel Aubrey B. Hardwell, Jr., to Chairman Edwin J. Gray, Federal Home Loan Bank Board, at 64-65 (Apr. 21, 1987) (Exh. J.); Amended Compl. para. 12. /5/ See Recommendation for Appointment of a Reciver for Independent American Savings Association at 27-28 (Jan. 21, 1987) (Exh. C). /6/ Although the complaint characterized the net worth guarantee as "unprecedented," the independent counsel report noted that, while such provisions had not been used frequently, they were "not totally new to the FHLBB" and that there was "mention of imposing such a requirement on new purchasers" in a congressional oversight report. Exh. J at 76. /7/ Because the court of appeals reversed a portion of the district court's judgment on the discretionary function exception, it addressed certain issues pretermitted by the district court. App., infra, 14a-20a. The held that, under Texas law regarding injuries suffered by corporations, respondent could not sue for the alleged diminution of the value of his IASA stock. Id. at 19a. But with respect to the personal property respondent posted as a guarantee as part of the neutralization agreement -- alleged to be worth $25 million -- the court ruled that respondent might be able to maintain a cause of action. Ibid. The court remanded the case to the district court for resolution of that issue. Id. at 19a-20a. /8/ In drawing this distinction, some cases have relied on this Court's reference to "operational" matters in Dalehite, 346 U.S. at 42. See, e.g., Hunsucker, 314 F.2d at 103-104; Emch v. United States, 630 F.2d 523, 527 (7th Cir. 1980), cert. denied, 450 U.S. 966 (1981). As the discussion above shows, however, the Dalehite Court did not intend by that term to exclude from the scope of the exception -- as the court of appeals did in the present case -- actions that implement policy made at a higher level but which themselves involve the exercise of policy discretion. Indeed, the evident ambiguity of the term "operational" provides all the more reason to reject it as a dispositive test. /9/ U.S. Fidelity & Guaranty Co. v. United States, 837 F.2d 116, 121 (3d Cir.), cert. denied, 487 U.S. 1235 (1988); Patterson v. United States, 856 F.2d 670, 673-674 (1988), modified, 881 F.2d 127 (4th Cir. 1989) (en banc); Allen v. United States, 816 F.2d 1417, 1420-1421 (10th Cir. 1987), cert. denied, 484 U.S. 1004 (1988); Red Lake Band of Chippewa Indians v. United States, 800 F.2d 1187, 1195-1196 (D.C. Cir. 1986). See MacArthur Area Citizens Ass'n v. Republic of Peru, 809 F.2d 918, 923 (D.C. Cir. 1987) (applying analogous provision of Foreign Sovereign Immunities Act). /10/ E. Ritter & Co. v. United States, 874 F.2d 1236, 1241 (8th Cir. 1989); United States Fire Insurance Co. v. United States, 806 F.2d 1529, 1535-1536 (11th Cir. 1986) (applying discretionary function exception under Public Vessels Act, but relying on FTCA case law). See also Caplan v. United States, 877 F.2d 1314, 1319 (6th Cir. 1989) (Martin, J., concurring). /11/ Although respondent has alleged (inaccurately, in our view) that some of the specific actions taken in this case were "unprecedented" (Amended Compl. paras. 13, 14), the court of appeals' reasoning was not tied to any extraordinary feature of this case, but instead was based simply on the "operational" nature of certain activities. It thus states a sweeping rule that will seemingly subject thrift regulators to second-guessing any time they give practical advice to an institution's management in an effort to assist the institution in improving its circumstances in order to obviate more formal regulatory measures. /12/ "The Comptroller, incident to his responsibilities, must make innumerable subtle judgments in describing the content of safe and sound bank practices -- judgments that draw upon a mix of law, accounting, bank custom, and policy. Sometimes, as here, those determinations must be made under grave pressure and expeditiously. The government is not liable in damages merely because in a particular case the Comptroller's conclusion or some aspect of it turns out to be legally vulnerable." Golden Pacific Bancorp., 837 F.2d at 512. /13/ While the decision below will have its most direct impact within the Fifth Circuit -- an area of the Nation that has experienced a disproportionate number of thrift failures in recent years -- it will also cloud the proper application of the discretionary function exception in those other circuits that have not expressly rejected the Fifth Circuit's "operational" limitation on the scope of the exception. /14/ While the court of appeals' decision is interlocutory in that it remands to the district court for further proceedings, that decision conclusively resolves the critical issue of the application of the discretinary function exception in this case, by holding that the government's actions do not fit within that exception as a matter of law. This Court has frequently granted certiorari in cases in this posture -- involving a court of appeals' ruling reversing an order of dismissal -- where an important issue of law has been presented. See Land v. Dollar, 330 U.S. at 734 n.2; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 727 (1975). Indeed, in at least one such case the questions involved FTCA exceptions. See United States v. Shearer, 473 U.S. 52, 54 (1985). /15/ The Solicitor General is disqualified in this case. APPENDIX