William H. Rehnquist: We'll hear argument first this morning in No. 89-1793, United States v. Thomas Gaubert. Mr. Gerson.
Stuart M. Gerson: Mr. Chief Justice, and may it please the Court: Congress has given the regulators of the Nation's financial institutions an extremely broad range of discretionary authority to achieve the specific policy ends of safeguarding the accounts of depositors and protecting the taxpayer-funded system of depository insurance. This is precisely the sort of discretion that Congress chose to protect against attack when, as a safeguard to the limited waiver of sovereign immunity embodied in the Federal Tort Claims Act, it added the discretionary function exception of 28 U.S.C. Section 2680. There are two questions here. First, whether the Fifth Circuit erred in applying an operational distinction to exclude coverage of the exception to the discretionary acts of supervisory regulators under the aegis of the Federal Home Loan Bank Board, who, consistent with their regulatory charge, provided managerial guidance to the leadership of the independent American Savings Association, a federally insured, State-chartered thrift in which Respondent was an investor. Assuming the Fifth Circuit did so err, the second question for this Court is whether the policy relationship of the challenged regulatory act is so clear as to allow this Court to hold as a matter of law that the discretionary function exception applies to them.
William H. Rehnquist: Well, Mr. Gerson, you say there are two questions presented. In your Petition for Certiorari you only have one question. Are the two questions you stated both comprised within that question?
Stuart M. Gerson: Yes, they are, Mr. Chief Justice. Although the Fifth Circuit held that the discretionary function exception covered the board's decision to merge IASA with another company, obtain a so-called neutralization agreement from the respondent, and replace the IASA board of directors, it held that the board's agents lost the protection of section 2680 when they began to advise management and participate in management decisions; when they hired a consultant regarding finance and asset management to advise them and the board members; when they directed IASA to convert to a Federal charter, so that it would become the only governmental entity with power to control IASA; when they supervised the filing of litigation on behalf of IASA and consulted with the Federal Home Loan Bank Board in Washington about it; and when they advised and recommended which of the institution subsidiaries should be placed in bankruptcy and how, if at all, that should be done; and lastly when they intervened with State authorities who had attempted to install their own supervisory agent. Seizing upon a footnote in this Court's opinion in Berkovitz against United States adverting to the earlier Indian Towing decision, which was not a discretionary function case, the Fifth Circuit held that the board's officials "were only protected by the discretionary function exception until their actions became operational. " Inasmuch as the court recognized that the board officials were acting within their authority, saying that that was unchallenged, and also recognized that since there were no regulations guiding them at every turn, their acts were discretionary. And hence the operational criterion imposed by the court, we suggest, represented an erroneous understanding of both this Court's decisions in Berkovitz and Indian Towing. The discretionary function exception, which is categorical and makes no distinction as to operational activities, has meaning and antecedents which go back at least as far in this Court as Marbury against Madison in 1803. The Congress had that in mind when it crafted the discretionary function exception as a safeguard, it not appearing in earlier versions considered in several Congresses. But of course this Court recognized that every act has some element of choice in it. And hence, culminating with Berkovitz, this Court has adopted a two-part test for evaluating whether or not the discretionary function exception should be given application. The first of those aspects of that two-part test is the question was there a discretionary act? Absent that, the Court has not recognized any uniquely governmental function--
William H. Rehnquist: What is the case authority for this two-part test?
Stuart M. Gerson: --Berkovitz, Your Honor.
William H. Rehnquist: Berkovitz?
Stuart M. Gerson: I think that that bifurcation is set forth clearly. I think also that the first tine is rather easily met, that the court of appeals agreed that the actions were discretionary but held applying this operational distinction as a starting point, which was kind of an ending point in Indian Towing, that the second, or didn't get to the second test, which is was the discretion based upon policy considerations. The court of appeals didn't engage in this inquiry at all. That, under Dalehite, Varig, and Berkovitz, we suggest, alone requires reversal of the judgment below. We believe that all of the acts that I described earlier were indeed based upon policy considerations for two reasons. First, each of them was part of the judgmental process of enforcing the regulatory program. They were literally in compliance with the regulatory scheme set out in the statute and ultimately refined in a resolution of the Federal Home Loan Bank Board.
Antonin Scalia: Mr. Gerson, what if the Federal officials undertook to actually supervise the granting of particular loans, deciding loan by loan whether this particular real estate is likely to be valuable enough to be sound collateral, and so forth? Does that meet your test?
Stuart M. Gerson: It might.
Antonin Scalia: I know it might. It also might not. [Laughter]
Stuart M. Gerson: I don't think one can say as an absolute. The Court has made clear that the discretionary function exception is not inherently categorical. If it could be said in the facts of a particular case that the survival of the institution, that the monitoring was close enough to require, with respect to the regulated person, like respondent here, that there was activity that closely involved in day-to-day operations, I suggest that it would be protected.
Antonin Scalia: That is what makes it a policy decision?
Stuart M. Gerson: I think there are two things that make it a policy decision. One, as I said, is it being consistent with the regulatory scheme and involving judgmental process and furtherance of it. The second, which I believe is reflected in this Court's opinion in Boyle against United Technologies, is that it's action derived from essentially or uniquely Federal interest. What is different about these supervisory regulators from a normal director of the bank is their focus. The normal director is going to have as his primary activity, or her primary activity, maximizing the profit of investors. The supervisory regulator--
Antonin Scalia: Let me get those two. Those two things that make it policy are, number one, it has to be in pursuance of a Federal purpose?
Stuart M. Gerson: --Judgmental. It has to involve judgment in pursuance of the regulatory purpose.
Antonin Scalia: And secondly?
Stuart M. Gerson: And second, it has to be derived from what is a unique Federal interest.
John Paul Stevens: Does that answer the loan example? That's what I don't follow.
Stuart M. Gerson: Well, under the regulations in effect at the time, and indeed in a different place today but still in effect, the supervisory regulators were responsible for going into the institution, and rather than exercising ultimate authority, putting it into receivership, their goal was to work very closely with management, making a number of suggestions, to see whether management could eliminate unsafe or unsound practices.
John Paul Stevens: I don't mean to interrupt you, but just to focus on Justice Scalia's hypothetical. A particular judgment on whether to approve a particular loan or not, without the Federal regulators, they want to be sure they had good collateral and that the loan would be paid off. Would those same factors bring it within the discretionary function if a Federal official made the decision?
Stuart M. Gerson: It might. And why I say--
John Paul Stevens: You say it might, but what other facts do you need?
Stuart M. Gerson: --Well, what is the unsafe or unsound practice that the regulators are looking at and attempting to remedy? If indeed it involved the loan practice of the bank, if that is something that they're looking at specifically, I would answer the question yes. I don't--
John Paul Stevens: No, they decide what the standards are for all the loans, and then they're applying those standards in a particular application, to a particular loan application. And they can either approve it or not, depending on whether they think the collateral is good. Is that covered by the discretionary--
Stuart M. Gerson: --Well, the way that that would be done under this regime is to suggest it to the board that was in place. If the board refused to go along with those suggestions, if it didn't comply with what the regulators thought was a sound policy, the regulators would then move to another step, a cease and desist order or a conservatorship or receivership. I don't know that... we don't have it here, and I don't know that we would ever have a realistic situation in which the regulators actually were making the loans.
John Paul Stevens: --Well, here you have an allegation that the defendants arranged for the hiring of a particular consultant on operational and financial matters. And supposing you had two qualified... consultants and they chose... I mean two that met the same standards, but they chose one rather than the other because they didn't really check their background and find out they were a bunch of thieves, or something. Is that covered?
Stuart M. Gerson: Yes, I suggest that it would be. The discretionary function exception protects a negligent act. So the fact, if the exception applies, it isn't going to matter whether or not the regulator exercised due care. So that's a secondary question. So the only relevant consideration is was there an act of discretion, and was it in furtherance of policy. Here the regulators were concerned about the quality of the bank's portfolio or the institution's portfolio and where it was going, and I suggest that on the face of it hiring an advisor to look at transactions is both a reasonable and proper exercise of discretionary authority that ought to be protected.
Anthony M. Kennedy: Suppose the advisor was absolutely unqualified, had no experience in banking whatsoever?
Stuart M. Gerson: Again, the discretionary function exception ought to protect that.
Anthony M. Kennedy: How is that any different than, say, in the Varig case? You'll recall that was the spot-inspection policy. But not involved in that case was an instance, a hypothetical instance where an inspector might have made an inspection and missed a structural defect in the aircraft. I take it you would concede that in Varig that if the inspector had made an inspection of a specific aircraft and had done it negligently, there would be liability?
Stuart M. Gerson: I would, because there there would be no discretion. That would be very much the same as the Berkovitz decision, where there would be a Federal regulation program or directive which preempts--
Anthony M. Kennedy: You say there's discretion to hire a totally unqualified, incompetent consultant?
Stuart M. Gerson: --The issue is whether or not there is discretion to hire a consultant. Again, if there is discretion to do that, the act ought to be protected.
Anthony M. Kennedy: Well, then it depends on how you phrase the issue. The issue is whether or not you have to inspect an aircraft.
Stuart M. Gerson: Well, I agree, there is no regulation that requires a particular method of hiring or a particular evaluation. There is... there was a regulation and resolution in effect at the time that allowed these regulators to tailor supervision depending upon the changing facts of any... of any individual case. Within that, and indeed both courts below found that this hiring was a discretionary act, so that the question is, under Berkovitz, was it an act that was derived from policy. There was nothing that set forth a particular method of hiring a consultant, that set forth particular criteria for the hiring of a consultant, or particular acts that the regulators had to perform. And so that's the reason that I suggest (a) that they had discretion, (b) that that discretion related to policy, hence if they were negligent in that decision it would be protected by the literal terms of the discretionary function exception.
Antonin Scalia: Excuse me. It relates to policy if there is no regulation that governs it? Is that the test of whether it relates to policy?
Stuart M. Gerson: No. No, sir.
Antonin Scalia: What is the test of whether it relates to policy?
Stuart M. Gerson: The... as I suggested earlier, is it... under Berkovitz the Court reflected on the activity being part of the judgmental process of enforcing the regulatory program. In Boyle the Court looked to what it found to be a uniquely Federal interest, essentially a governmental function different from what would--
Antonin Scalia: I don't care what all the cases say. What is your test of whether it relates to policy? Just, you know--
Stuart M. Gerson: --That it's part of the judgmental process--
Antonin Scalia: --Part of the judgmental process--
Stuart M. Gerson: --of enforcing the regulatory program.
Antonin Scalia: --of enforcing the regulatory program.
Stuart M. Gerson: I suggest also in this case that there is involved a uniquely Federal interest, and that that is useful language derived from the statute to describe the applicability or not of the discretionary function exception.
Antonin Scalia: So, so I assume that if one of the problems with these banks was they were getting sued too often for automobile accidents by negligent... because of their negligent employees driving the bank's cars, and if the Federal examiners should prescribe how to drive the car, you know, don't take a left turn, or something like that, and if that should cause an accident, that would be a policy judgment then? Right? Because it was in furtherance... judgmental in furtherance of the Federal program.
Stuart M. Gerson: Well, I would suggest that that did not involve a uniquely Federal interest, given the legislative history which preserves almost above anything else the automobile accident as the common law tort--
Antonin Scalia: Oh, I see.
Stuart M. Gerson: --reserved. And I would suggest that in that instance, where, for example if hypothetically this respondent were involved in a traffic accident with the regulator who was performing his duties, that there would be Federal... the potential for Federal liability because there is no regulatory discretion. Similarly, if the regulator insisted upon the directors hiring the regulator's brother-in-law, to the extent that that would violate Federal conflict of interest law, there would be no discretion to violate a particular law which sets forth something, a Federal duty. If the regulator decided, consistent with his discretion, to take his papers home at night that he was working on in pursuit of the regulatory supervision, and he lost them, that negligent act of losing the papers wouldn't be part of the judgmental process of enforcing the regulatory policy, and so it wouldn't be protected. I can think of some cases that bring to mind Indian Towing. If it's part of their... if they had greater authority than what they exercised in this case, and actually decided to shut down the lights on top of a tall building that had a lightning rod and a plane crashed in it. Or if they negligently maintained machinery. There is no Federal policy interest involved there, and so, under Indian Towing, Rayonier, other cases like that, there would be the potential for liability.
Antonin Scalia: Even if that was done to save money?
Stuart M. Gerson: Yes. I think that that's right.
John Paul Stevens: Well, you're saying, for example, that the Federal policy to have the institution not make any bad loans would be enough to justify discretion on selecting which loans are acceptable and which are not.
Stuart M. Gerson: Well, it could, Justice Stevens. That's not the case that we're facing here, where the role of the regulators was to evaluate the portfolio and to use an advisor in making that evaluation. But I suggest that if that were the focus of the regulation, if the cited practice were the making of bad loans, that, consistent with the regulatory purpose, and exercising the judgment with respect to that, it would be a protected act for the regulators to involve themselves at that level in that way.
John Paul Stevens: And if there's a Federal policy to favor good management, then hiring the consultant, of course, you get discretion on which managers to pick.
Stuart M. Gerson: I don't disagree with that. In this case--
John Paul Stevens: I mean, that would be... I think that's your position. The Federal policy is to run the company efficiently and effectively, and so anything that relates to choices on the effectiveness or efficiency of the business would be implementing Federal policy.
Stuart M. Gerson: --I don't disagree with that. The Federal policy... the direct Federal policy at play here is to try to restore this institution to what the regulators consider to be safer, sounder financial practices, and returning it to management and leaving. That didn't occur. But that is not an unknown function. It's one that this Court recognized in terms of its cousin, the banking industry, back in the Philadelphia National Bank case, where it noted that the Federal supervision of banking has been called probably the outstanding example of the Federal Government of regulation of entire industry through methods of supervision, also noting, as in this case, that the, because of the way that the system works, that the regulators are likely to follow the suggestions that the supervisory... that the directors are likely to follow the suggestions that the supervisory regulators make.
Antonin Scalia: Mr. Gerson, I... it doesn't seem to me that it's fair play to simply make an automobile-driving exception to your principle because the legislative history makes that clear. I mean, it seems to me automobile driving is excluded because it's not a discretionary function, and whatever your definition of discretionary function is, it has to exclude automobile driving. And I don't see how... let's say the post office, if the post office were still a full dress Federal agency, and you have a post office driver who's delivering the mail. I mean, that's certainly a Federal policy, and in the act of it he gets into an automobile accident. It seems to me that that would meet your definition of being in performance of a Federal function.
Stuart M. Gerson: I respectfully disagree, Justice Scalia. The distinction that I would draw is that the driver is not exercising regulatory discretion. Of course he's deciding whether to turn left or turn right or speed up or slow down, but what he is not doing is making any evaluation of the matter at hand, of the health of the institution, the policies that the institution ought to undertake to return itself to what the regulators consider to be healthy. There is no regulatory discretion.
Antonin Scalia: Well, the post office doesn't regulate. It gets mail from here to there. He is performing that function in getting the mail from here to there. Are you saying the function only applies to regulatory agencies?
Stuart M. Gerson: No, I'm saying that the discretionary function exception doesn't apply to the driver. It doesn't apply to the Federal Government with respect to the action of the driver, because the driver is not exercising regulatory discretion. That's the distinction that I would draw.
Antonin Scalia: Regulatory discretion.
Stuart M. Gerson: Yes. Acting with judgment in furtherance of the particular regulatory policy. I suggest that that's what the Congress intended to--
Antonin Scalia: So, if it's a Federal Government that does not regulate, but that just provides Federal services, there is no regulation of private activity involved, it gives out money or it does things of that sort, there is no possibility of having a discretionary function exception at all?
Stuart M. Gerson: --I think there's a possibility in as much as in Berkovitz the Court described the second fork of the test as being in furtherance of policy. I am sure--
Antonin Scalia: So it doesn't have to be regulatory policy.
Stuart M. Gerson: --I am sure that some... I think it's most likely to come up in a regulatory sense, but one can envision activities that are not purely regulatory but that further policy.
Antonin Scalia: A whole lot of activities.
Stuart M. Gerson: Of course, the individual who commits the particular act in question has got to be charged with carrying out that particular policy or creating it, or doing something along those lines.
Antonin Scalia: 0 [inaudible].
Stuart M. Gerson: Except that that is an activity which I think is likely spelled out in regulations as to how one performs it and what one does. There is very little choice that relates to policy that is left to the driver of the wagon or car.
Antonin Scalia: That depends on how you define policy.
Stuart M. Gerson: I think that that is correct, and I'm trying to define it in terms of what this Court has had to say in cases on the subject, and what the Congress had to say when it created the exception and the limitation to the exception with particular reference to automobile accidents. I agree one ought to have a consistent, a theoretical view that supports the exception to the exception, and I think that there is one, which is that that driver is not exercising any policy judgment. All he is doing is driving the car.
Anthony M. Kennedy: Does your exception apply whenever policy considerations might influence the judgment, or when they do influence the judgment?
Stuart M. Gerson: I think that the answer has to be the former rather than the latter. If, if it's not the case, what we would end up with is a full-scale trial in every case that involves the raising of the defense of discretionary function. Even in this case, while the respondent suggests that his case is unique and there is no flood gates, we now have in the Justice Department 321 tort cases involving the savings and loan system. And I would suggest that what the Court had to say in Dalehite, which was that one only need read the discretionary function exception in its entirety to conclude that Congress exercised care to protect the Government from claims, however negligently caused, that affected the governmental function, that you would be acting contrary to that if we had to have a full-scale hearing to decide in each and every case what the regulator did rely on. So the test ought to be susceptibility.
Anthony M. Kennedy: Well, it seems to me your test necessarily is fact specific in many cases.
Stuart M. Gerson: I agree that it's fact specific in many, if not most cases, because you need to look at the facts to see whether there is an activity that requires the exercise of discretion. But if you reach that plateau, and if it's susceptible, if the activity is susceptible to the exercise of discretion and the furtherance of policy, that that ought to end the inquiry. I would like to reserve the remainder of my time, if I might, for rebuttal.
William H. Rehnquist: Very well, Mr. Gerson. Mr. Lowell, we'll hear now from you.
Abbe David Lowell: Mr. Chief Justice, and may it please the Court: Using the current savings and loan crisis as its cover, the United States mischaracterizes the Fifth Circuit's holding and the factual setting of this case to raise the stakes for your review. As to the facts, the Court is being asked to make what amounts to initial findings of fact from extra-record materials not relied on or even mentioned by the district court, and not submitted to nor even used by the court of appeals. For example, that Independent American was an unhealthy thrift in 1985 and 1986 when those regulators acted. What the motives of the regulators were when they took action. That the respondent was not the intended beneficiary of the regulator's actions. Or what reports were available to the regulators in 1986. This is not the appropriate place for that kind of fact finding, and where there was a similar need for record development in Berkovitz, this Court required a remand. As Justice Kennedy just pointed out, these are very fact-specific decisions that have to be made. Indeed, of the Joint Appendix before this Court, 15 of the 21 pages are the complaint in this case. And that indicates all the lower courts had before them. And it is the lower courts opinion, based on these facts, that is on review before this Court.
William H. Rehnquist: Did the district court dispose of this as a motion to dismiss or a motion for summary judgment, Mr. Lowell?
Abbe David Lowell: Justice Rehnquist, as a motion to dismiss on the pleadings, excepting, theoretically, the respondent's allegations as being true, but developing such a broad exception under the Federal Tort Claims Act that no balancing, no policy, nothing was considered. The Government's argument is essentially that the Fifth Circuit applied some mechanical policy versus operational test to decide this case. However, to posture it that way the United States mischaracterizes the Fifth Circuit as stating that anything labeled as operational necessarily falls out of the discretionary function exception. Challenge the Government when it rises in rebuttal to point to the Fifth Circuit saying that anything that could be labelled operation necessarily falls out of the function.
William H. Rehnquist: But, Mr. Lowell, the Fifth Circuit opinion, as I read it, did rely on some sort of distinction which I don't find in our cases between operational on the one hand as the counterpart of discretionary.
Abbe David Lowell: Justice Rehnquist, I think the Fifth Circuit followed--
William H. Rehnquist: I'm the Chief Justice.
Abbe David Lowell: --your precedents to a letter. They start with--
William H. Rehnquist: I'm the Chief Justice.
Abbe David Lowell: --Sorry. Mr. Chief Justice, I do suggest that the Fifth Circuit followed your precedents to the letter. What they did was start with the phrase operational, as used in Indian Towing.
William H. Rehnquist: Which, which was not a discretionary function case.
Abbe David Lowell: Only because the Government conceded it. Clearly the--
William H. Rehnquist: Mr. Lowell, the Court said in Indian function, we're not dealing with discretionary function because the Government didn't make that argument.
Abbe David Lowell: --But what the Fifth Circuit did was not... look at the appendix to the Government's petition for cert. at 7a. If the Government were correct and all that was done here was a mechanical application of Indian Towing, the court of appeals would not have said, as it precisely says, that Indian Towing is not dispositive of this case. And look what the Fifth Circuit did thereafter. It went right into the analysis of Dalehite, right into the analysis of Varig, and right into the analysis of Berkovitz. What better could they do to pay ligeance to your precedents than doing the balancing that you set out?
William H. Rehnquist: So, if... your answer to the question where does the word operational come from in our discretionary function cases, you say it comes from Indian Towing.
Abbe David Lowell: No. I think the--
William H. Rehnquist: Well, where does... what case does the word operational come from?
Abbe David Lowell: --Go back to this Court's holding in Dalehite, where the Court said that the negligence in that case was on the planning rather than the operational level. But what's interesting is that many courts and the Government think that that's all the Supreme Court said in that case. But, you know, Justice Reed's opinion went on, and it had a very important conjunctive. Justice Reed's opinion states that it was at the planning rather than operational level, and, and it's a very important and, involved considerations more or less important to the practicability of the program. You start with a decision about how you characterize it, as planning or operation, but that's not enough. You go on to see how it fits into the regulatory scheme. That's exactly what the Fifth Circuit did in this case. It calls it operational on the first part, but then it does that same kind of balancing as Justice Reed suggested in Dalehite to get to the determination of how important that decision was to, in the words of Dalehite, the program or the practicability of the program. Under the proper analysis that this Court has set out--
Antonin Scalia: Excuse me, if you go on to that second step anyway, what's the use of the first step? I mean, what's the use of deciding whether it's planning or operational?
Abbe David Lowell: --I think it is an aid, and only an aid, to look back at some antecedent policy to determine whether or not the act, as later this Court determined in Berkovitz or in Dalehite, is the kind of act that is so governed by regulation... for example, in Dalehite. I mean, down to the level of what bags to be used in fertilizer, what coating to be used, how the temperature should be, were all governed by regulation. I think when you use a handy phrase as planning or operational or policy, it just means that it's a way to characterize the activity. But it's not all it does--
Antonin Scalia: What's the use of characterizing it is what I want to know. It could be at the planning level and not be so important to the furtherance of the program, or it could be at the operational level and be important.
Abbe David Lowell: --Justice Scalia, I think it's--
Antonin Scalia: So why take that first step?
Abbe David Lowell: --I think it just helps in determining the scrutiny a court gives. I mean, I think there's an extra warning, if you will, for decisions that courts concede are on the planning level. I think therefore... I guess the Government has a better presumption, if you will, that it affects some kind of regulatory policy than when it can be characterized... and many words have been used by the courts: operational, proprietary, and ministerial. I think it's just a kind of a careful way that you can determine what kind of presumption. The Government would stretch that to be a total presumption. I think it's just a handy phrase. I think what's important, though, and what the Government mischaracterizes, is that the Fifth Circuit did not simply do this mechanical operation versus policy. If that was the case, the Fifth Circuit's decision could have been as short as the district court and be three pages long. Instead it went on to the kind of balancing that you talked about... the Court talked about just 2 years ago. Under that proper analysis, Justice Scalia, what happened was that the Fifth Circuit looked at two things. They looked at Varig's quotation of the nature of the conduct, not the level, to determine that only 10 of the 31 initial paragraphs in the amended complaint could survive. Interestingly, all those occurred at the same operational level. They then looked at Berkovitz to see if there was any choice involved, and then, if there was a choice involved, whether it was the kind Congress intended to protect, in sifting through the normal regulatory acts, of whether to merge Independent American, what kind of people to send into Independent American, versus the extraordinary acts of setting salaries, picking consultants, handing collateral, dealing with loans. As much as they may try to disguise it, the petitioner--
William H. Rehnquist: Mr. Lowell, does the fact that the things the Government did in a particular case were extraordinary, does that bear on operational versus policy?
Abbe David Lowell: --No, not necessarily at all. I think the fact that they are extraordinary here points out... it's not so much, you know, again--
William H. Rehnquist: Well, but... you say it doesn't make any difference?
Abbe David Lowell: --I think it's... it's not outcome determinative. It's not that because it's--
William H. Rehnquist: Well, why does the Fifth Circuit mention it, then, if it has nothing to do with it?
Abbe David Lowell: --I think when you can label something... because it points out that there was no antecedent policy. The fact that it's extraordinary gives you warning and gives you insight to determine whether there was any policy that governed, dictated, or in any way blessed the acts that were taken below. When it--
William H. Rehnquist: Does the fact that it was extraordinary, you think that militates against the exercise of the discretionary exemption or for it?
Abbe David Lowell: --I think the fact that it's extraordinary means that there is no policy that is implicated--
William H. Rehnquist: Can you answer my question? I asked you do you think, does the presence of something that's extraordinary militate in favor of the discretionary exemption or against it?
Abbe David Lowell: --I think, in the way you've asked it, the fact that it's extraordinary militates against the--
William H. Rehnquist: Against it?
Abbe David Lowell: --application of the discretionary function exemption. That's not... it's not impossible to hypothesize some facts that have never been done by a regulatory agency, but would still be somehow caught up in a policy or dictated. For example, I guess in Dalehite, I think it was rather extraordinary in Dalehite that there was all these activities... bagging, coating, fertilizer at certain temperatures. Up until that point, that was fairly extraordinary. However, there were very precise regulations antecedent to those actions that protected it under the discretionary function exemption. Here there are no such regulations of any kind. I think as much as they may try to disguise it, petitioner is seeking immunity for any act taken by the Federal Home Loan Bank Board, and by extension, to other regulatory agencies, as long as some choice had to be made, without an inquiry into what kind of choice or why the choice was made. That is, whether the choice was part of or not part of a real regulatory scheme. In the district court the Government asked for and got this very broad exception which encompasses the rule so that any act taken "in extension of the discretionary function. " is itself discretionary and protected. In the court of appeals, with victory in its hands, the Government asked and said there is simply no such thing in a thrift regulatory context as a decision to regulate on one hand and a decision to take over the management on the other. And just in oral argument, Mr. Gerson stated that now what they were doing was looking for any act protection which was, quote, "consistent with regulatory scheme" or, in answer to Justice Scalia's point, quote, "part of the judgmental process of enforcement. " This is just the next in a line of cases in which the United States is asking this Court for a broader exemption from liability than Congress ever intended, or, as the Court has stated repeatedly, when it says the Federal Tort Claims Act is a broad waiver of immunity. In Varig they asked for an exception for what they then called core governmental activities. In Rayonier they asked for what they then wanted, which was uniquely governmental capacity. In Indian Towing they asked for what was then called uniquely governmental function. In Berkovitz they asked for an exemption in the same words they use on page 2 of their brief before this Court, for acts "arising out of regulatory programs". And just 6 minutes or 10 minutes ago, the Government asked for acts which "are derived from uniquely Federal interests. " In each of these cases the Court has rejected the Government's attempt for such broad exemption in words almost remarkably similar to that Mr. Gerson stated just a few minutes ago. In the district court the Government got its broad rule, that is, it got protection for any act which is an extension of a discretionary function. And so the district court did not carefully analyze the conduct alleged or allow any discovery to develop the kind of record this Court had before it in Dalehite, in Varig, in Indian Towing, in Rayonier, and the kind of record the Court stated it needed to deal with the second part of its recent Berkovitz decision. The United States seems to acknowledge this scanty record by feeling compelled to add so many facts of their own from so-called background materials, which dispute the facts as they are alleged to be. For determining the issues in this case as required by looking at conduct, as spoken to in Varig, and the method and manner of the choices made, as spoken in Berkovitz, there are only a handful of facts that are necessary. First, respondent left his thrift, Independent American, in 1984, for reasons having nothing to do with Independent American. Second, at the time Independent American was a healthy thrift with a positive net worth. Third, the Federal Home Loan Bank Board, through individuals on the scene, took over the day-to-day management of that thrift, including picking employees, setting salaries, resolving--
William H. Rehnquist: When you say took over, Mr. Lowell, do you mean against, without the consent of the respondent or with the consent?
Abbe David Lowell: --With the consent, Justice Rehnquist... Mr. Chief Justice. The issue of whether there's consent--
Anthony M. Kennedy: And their action--
Abbe David Lowell: --is not dispositive of whether or not the discretionary function exemption applies.
Anthony M. Kennedy: --Their actions constituted more than simply giving advice?
Abbe David Lowell: Yes. I like that the Government even recently in oral argument characterizes this as giving, quote, "managerial guidance". As the court of appeals rightly noted, out of the mouths of the regulators on the scene came the actions of the people in the thrift. This wasn't advice; this was direction. This was actually doing. They may try to characterize this as advice, but--
Anthony M. Kennedy: Well, did the regulators purport to be exercising legal control over the actions and the policies of the thrift?
Abbe David Lowell: --I don't think that there was a predicate. Well, there was no predicate that would traditionally be in place, for example, a conservatorship or receivership, cease and desist order, no supervisory agreement of any kind. So if you say to me were they exerting some legal authority, they weren't predicating their acts on any piece of paper or decision by the Bank Board to justify their intrusion into this thrift.
Anthony M. Kennedy: Well, are there any specific acts that they took in the name of the savings and loan on their own initiative?
Abbe David Lowell: Oh, yes, they took many acts in the names of the savings and loan. They hired a new consulting firm. They set the salary of the chief operating officer, who used to be an employee of the Federal Home Loan Bank of Dallas.
Anthony M. Kennedy: I thought that was... was that mediation or did they set the salary? Did they order--
Abbe David Lowell: They... not only did they set the salary, the man who got the money was the man who set the salary. Your... this is one of the problems with a record that is in the state that it's in right now, which is on a motion to dismiss when you have notice pleading. If we were developing the record you would find many of these acts were not even remotely taken in the name of any regulatory agency. They were all taken in the name of Independent American.
Antonin Scalia: --When you say they set the salary, you mean they told the person who set the salary what salary he would set?
Abbe David Lowell: I mean that this man, who was an employee of the Federal Home Loan Bank of Dallas and was moved from the Federal Home Loan Bank of Dallas into Independent American, set his own salary, and did so in this mode of--
Antonin Scalia: What do you mean by he set his own salary? Did he sign a piece of paper that had the legal effect of setting his salary? Or rather, did he tell the person who had that power?
Abbe David Lowell: --He went to the place where--
Antonin Scalia: The latter.
Abbe David Lowell: --checks are written in Independent American, and he said write me $108,000 check as a signing bonus. That's about as close to setting your salary as you could possibly get in a factual context. And that's what he did.
Antonin Scalia: The person to whom he said that was the person who had the authority to pay that amount or not.
Abbe David Lowell: Some person in the bursar's--
Antonin Scalia: Correct? That person could have said no.
Abbe David Lowell: --That person could have said no. Justice Scalia, I don't think that any of the discretionary function cases will turn on whether or not the acts of the Government are taken kicking and screaming or taken by the fact that the people go along. It is the actions themselves that--
Antonin Scalia: I just want to know what you mean by the fact that he set his salary, and that he did it.
Abbe David Lowell: --I mean that he... I don't mean that in the dead of night he came and wrote himself a check.
Antonin Scalia: Somebody else had the power to do it, and he had power over that person.
Abbe David Lowell: Correct.
Antonin Scalia: Okay.
Abbe David Lowell: That's exactly what happened. In addition to these various acts which cannot be deemed just--
Anthony M. Kennedy: Well, what power did he have over that person?
Abbe David Lowell: --He was put into Independent American as the chief operating officer. He had the power to hire and fire everybody else in the thrift. And not only was he the chief operating--
Anthony M. Kennedy: Where is this alleged in the complaint?
Abbe David Lowell: --This is not alleged in the complaint. This is the problem I have with answering questions that are factually based, as Justice Scalia did, from what I know to be the facts, rather than the state of the record which--
Anthony M. Kennedy: Well, what is there in the complaint that indicates that the Government and its regulators took active control as opposed to simply offering advice?
Abbe David Lowell: --I think that the paragraphs of the complaint to set out the appendix say that they actually set the salaries.
Anthony M. Kennedy: No, it says it mediated the salary dispute, if that's the one you're referring to. That's at (d) at page 15.
Abbe David Lowell: On 15.
Anthony M. Kennedy: That's all that it says.
Abbe David Lowell: That reference covers the fact that we are talking about, Justice Kennedy. Again, one of the issues that I have to address with the Court is the fact that in the complaint, which was written 3-1/2 years ago at a time that the Government had all the documents in this case and the Government had all the witnesses in this case, the notice pleading required gave adequate notice to the Government that this wasn't a failure to warn case. This wasn't a Varig case where you were concerned about whether or not to assert regulatory authority. I think that neither the district court nor the court of appeals had any problem discussing these facts and determining, especially in the court of appeals level, which of the 31 paragraphs went to things which could be called discretionary, and which are the ones that deal with a kind of involvement that go beyond the discretionary function exemption. In light of all these active, not just advice, activities taken by the Federal Home Loan Bank Board, the fourth important fact was that there was no supervisory agreement in place and no regulation, or no guideline dictating any of the conduct that we challenge. And the last important fact--
John Paul Stevens: May I go back to your salary example for a minute? Supposing the Government agency had a policy that whenever they got in this position with a financial institution, that they would set the management salary at the prevailing level in the business community right there, and this is exactly what they did. Would that be covered by the discretionary--
Abbe David Lowell: --In the way you asked me the question--
John Paul Stevens: --Yeah.
Abbe David Lowell: --yes, it would be, because you started your question by saying let's say they had a policy of setting--
John Paul Stevens: Right.
Abbe David Lowell: --the Government, the salary with the prevailing rate. The interesting thing in this case is that the Government in all the litigation thus far, even in the facts which they put into footnotes in the briefs before this Court, can't point to a single policy antecedent to the acts of--
John Paul Stevens: So we should read your complaint as saying that they did these things without any policy preceding the specific acts that would have called for these things being done?
Abbe David Lowell: --That's right, Justice Stevens.
John Paul Stevens: I see.
Abbe David Lowell: The last fact was that these actions taken when the Federal Home Loan Bank Board was making decisions caused Independent American to lose what they estimate at some $400 million when the respondent left his thrift in a positive net worth situation. In addition to adding facts--
Antonin Scalia: Mr. Lowell, you know, just as agencies sometimes make policy by regulation, they sometimes make it by adjudication on a case-by-case basis. So you can't say simply because they chose to do it this way that that wasn't an expression of the agency policy. They might have been doing it the same way elsewhere.
Abbe David Lowell: --That is--
Antonin Scalia: The mere fact that there's no regulation governing it does not mean it's not a policy decision. You often make policy case by case. We make policy case by case.
Abbe David Lowell: --Your question would assume that these people at the time actually... it depends on whether policy is the result of any action taken by a regulator or the motive of the regulator. It seems to me that if anything a regulator does ergo makes policy, then you are right. On a case-by-case basis, everything is policy, therefore you don't need a policy qualification to the discretionary function exemption. But your hypothetical strikes me as at least indicating that there was some balancing involved before the act was committed. Policy is not the result of a regulator's action. It should be the reason for a regulator's action. And in this case there is no evidence that there was, and we allege that there was not. In addition to adding facts, the United States urges this Court to look at its case in context, first in context of the savings and loan crisis, and then in context of its entire regulatory framework. Well, the real context are the facts of this solvent thrift in 1984 and 1985, not what the Government wants to allege the crisis to be in 1990, and the entire regulatory framework is an issue before this Court only as the United States wants to raise the stakes to have it so. In addition to mischaracterizing the Fifth Circuit, the United States asserts the wrong Supreme Court precedents. This case arises in a torts setting similar to that suggested by this Court in its recent Berkovitz decision, that is a case where Federal officials act without there being regulations governing their action. It is not governed by Varig, despite the United States' attempt to make it so. It is true that neither the FAA in Varig, nor the Federal Home Loan Bank Board here, had extensive regulations. But that is where the similarity ends. Varig dealt with the regulation of third parties, and here it is their own conduct in dispute. That contrasts the traditional regulatory law enforcement role of agencies versus what some courts have called proprietary or ministerial. The challenge in Varig was in effect to the decision about the degree of supervision, whether to include all planes, some planes, whether to do spot checks or not. The United States tries to make this case such a similar challenge by raising what is in effect a red herring that what we are challenging is the decision to do informally that which they could do formally. First, we are not challenging that decision. It makes no difference to our analysis of the law whether or not they took these actions in the most formal setting or not. Second of all, the suasion that they talk about occurred after the takeover. There was no individual balancing for each of the acts that we alleged to have been done negligently.
William H. Rehnquist: Mr. Lowell, does the board have authority in some circumstances to appoint a conservator?
Abbe David Lowell: Yes, it does.
William H. Rehnquist: Well, what if it had gone ahead and appointed a conservator. Would you have any action against the board if you found that the conservator, that they appointed someone who was just a lousy conservator, and by doing some research they could have gotten a much better conservator?
Abbe David Lowell: No.
William H. Rehnquist: Why not?
Abbe David Lowell: I think that their decision of who to put into the thrift would be protected as a discretionary function... as the Fifth Circuit, by the way, held that we had no cause of action left as to who was sent to Independent American. But if you then say that this conservator, on the scene, decides not to collect on loans and destroys collateral, and then hires employees in a poor way, and then doesn't take the day-to-day functionary activities, I think the people left at the thrift after the conservator was done would have a cause of action if--
William H. Rehnquist: Against the conservator or against the Government?
Abbe David Lowell: --Against the United States, whoever put in the conservator. If, but only if, the conservator's actions on not collection on the loans, setting the salaries, taking those kind of management decisions, did not have an antecedent policy that either disctated or blessed what he or she did on the scene. It is simply not the act, but you must go back and determine what the reason or what the nature of the choice was.
William H. Rehnquist: And then the question that would be, what was the Government's policy with respect to what kind of a conservator to appoint?
Abbe David Lowell: No, not what kind of a conservator to appoint. I think that that decision, as you pose it, that question as you pose it to me would be immune. I think if they decide that John Doe ought to be their, as opposed to Sally Roe, I think that decision, as the Fifth Circuit rightly held, would be immune under the Federal Tort Claims Act. I think--
William H. Rehnquist: Then what is the... what is the genesis, the nature of the claim against the Government in this case, in that--
Abbe David Lowell: --They did not appoint a conservator, number one--
William H. Rehnquist: --I mean in the hypothetical case. You say there would be a claim against the Government.
Abbe David Lowell: --If the conservator is an employee, official of the United States, acting under the authority of the regulations. Now, I don't know in our hypothetical whether the conservator plays that role, but I am assuming that he does, or she does, then the answer is yes. Their duty would be, because they were still in the clothing of the United States. The cases, and there are very few of them that have raised this, all say unanimously that such a fact hypothetical that you and I are positing raises liability. That's the Emch case of the Seventh Circuit, the Carter case of the District of California, the Hartford decision in Franklin National Bank. Now, they all say that under certain circumstances... few of which were found in the facts of those cases, by the way, after discovery, after they had a chance to prove their case... rose to the level of being actionable, but all of them say that the FDIC or the FSLIC can be held liable for those kinds of negligent acts on the scene.
Antonin Scalia: Mr. Lowell, in your response to the Chief Justice you insisted that there had to be... that there must have been an antecedent policy. That is really what you're urging, that there has to be an antecedent policy?
Abbe David Lowell: I mean antecedent, not counting out the possibility that you stated, that policy is made at that time. It doesn't have... I am not saying that you cannot--
Antonin Scalia: Oh, so there has to be antecedent, not excluding the possibility that it doesn't have to be antecedent?
Abbe David Lowell: --No, it has to be antecedent either already existing, or the act has to take place on the basis of some policy-oriented decision being made right then and there. But it can't be after the fact they go back and say by the way, everything a regulator does is policy.
Antonin Scalia: Well, but isn't it in a sense? I mean, if... you can have a policy that says no, no loans on real estate worth less than $500,000, or you can have a conservator in possession who then, who... when the first thing comes up to him, says I'm not going to make a loan on property worth less than $500,000. Why is one a policy decision and the other one not?
Abbe David Lowell: This Court has stated that in order to be protected there has to be economic, social, or political policy considerations. Now, I think that means that either they have to preexist the decision, or the decision has to be seen as being made pursuant to them. But if what that means is that after the fact the Government can say that it was policy by result, I don't think you have an exception. I think that therefore all you need to decide is was the Federal Home Loan Bank Board wearing its Federal Home Loan Bank Board jacket, did they go in that day, and did they take action. And I don't think that's what the precedents of this Court mean is the way that you apply the discretionary function exemption. At least that's not what they have said, and you have said as recently as 2 years ago in Berkovitz. One thread throughout all the cases, no matter if they are expressed as policy or discretion or planning, has been that actions are protected if their challenge threatens or jeopardizes the feasibility or practicability of the program. So stated in Dalehite, when it said that it must be on the planning level and be important to the practicability. So stated in Varig when they said that decisions are covered only if they directly affect the feasibility and practicability of the Government regulatory program. The Fifth Circuit distinguished carefully between those acts that could affect the program: the merger of Independent American, which kind of person to put into Independent American, versus those that could not: mediating actual salaries, hiring their own contacts as consultants, deciding which litigation to bring, and disposing of collateral through putting it into bankruptcy. Those acts that are left hardly threaten the feasibility of any program or existing policy. Indeed the only policy pointed to in the Government's brief runs directly contrary, pointing to informal suasion as being appropriate only in cases of small problems, not cases, as they allege Independent American to be, in desperate need of regulatory oversight. There is no policy threatened here except if the United States is able to persuade the Court that immunity is co-terminus with any regulatory choice that they make, so that any choice they make, as second-guessed by any court, goes to their regulatory authority.
John Paul Stevens: Mr. Lowell, can I ask you one question? Maybe it's too elementary, but the... did the Fifth Circuit hold that, as a matter of Texas law, the portions of the complaint that are, do, that are not within the discretionary function exemption actually state a cause of action for a tort?
Abbe David Lowell: They say that it does state a cause of action for a tort and leaves the question of whether or not Mr. Gaubert, the respondent, has standing to bring them under Texas law. But that standing question, as the discretionary function, is very fact laden, and I suspect it would depend on what Texas law holds on those issues. But they do say it goes back for that purpose.
John Paul Stevens: Thank you.
Abbe David Lowell: There can be no policy threatened here unless the Court accepts the Government's proposition that anything taken in a Government context by a regulatory agency is policy laden. When the facts or law are weak, the United States again raises the specter of the flood gates of litigation or stopping the governments in its tracks. So is the message of amicus in this case. They did so in Varig, they did so in Rayonier, they did so in Muniz, and they do so again here. While they point to many cases in the Justice Department, they have only been able to point to one in the courts, notwithstanding that there is a year and a half since this decision has been made, and that one is an Independent American case just brought by a different plaintiff. The United States wants this Court to consider the context, but we would submit that the immunity they seek takes one important player, the Federal Home Loan Bank Board, out of the context of the checks and balances that now exists. Directors and officers are liable civilly for their actions. Congressmen can be voted out of office or disciplined for their actions in the savings and loan crisis. Only the Federal Home Loan Bank Board would be taken out of the loop if the Government gets the extent of immunity they want. Mr. Gaubert is stuck in the middle of a struggle between Congress, the Court, and the Executive, where the Executive keeps seeking a broader immunity, says it doesn't want absolute immunity, but only posits an automobile accident again and again as the only kind of act which arises under the Federal Tort Claims Act. They seek a rule not so much that the king can do no wrong, but that the king can do wrong only when he is driving his royal carriage. One issue before the lower courts and the court of appeals was whether or not the regulatory takeover of day-to-day management of a healthy thrift can ever be actionable. Not that it is actionable, but what it can be. If the Government finds in the record that is developed below that they have grounds to show discretionary function, they can move again for summary judgment, the correct vehicle for testing these very fact-laden decisions. Therefore, for the reasons set out in our briefs, and in its decision, the Court should affirm the Fifth Circuit's case and decision, give Respondent his day in court to prove, as those in Dalehite and Varig and Indian Towing and in Berkovitz were able to prove, that the Government has done him wrong, and that he has an apt remedy.
William H. Rehnquist: Thank you, Mr. Lowell. Mr. Gerson, do you have rebuttal?
Stuart M. Gerson: Yes, Mr. Chief Justice. Let us see what it is that the Fifth Circuit actually did hold with respect to the operational distinction. At 885 Fed. 2d, at 1287, the court specifically held, relying upon... that Indian Towing, quote, "did however establish a principal distinction between policy decisions and operational actions. " This distinction still retains its force today and is dispositive of this case... of these cases. At page 1289 the court of appeals held, quote, "Thus 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. " The Fifth Circuit's reference to Berkovitz cannot represent any shorthand for the appropriate test. Any such suggestion must be undone by the court's reference to Indian Towing as the source of the operational distinction. In terms of Indian Towing, which, as the Chief Justice pointed out, was not a discretionary function case, operational means no discretion at all, as well as no Federal policy countervailing the statute... the State, in that case good samaritan law. This complaint was amended after some period of time, and the particular acts set forth are the ones that the court of appeals relied on. However, it is very clear, I suggest, that there is indeed an antecedent policy here. There is a statute, two statutes, which are cited, a regulation in furtherance of that, and in particular a resolution, all designed to further the antecedent... the twin antecedent policies of protecting depositor accounts and safeguarding the taxpayer supported Federal Savings and Loan Insurance Fund. Those policies long predate this case, as does the resolution statute and regulation which premise the regulatory activity here. As to the particular acts in question, I would note that at least some courts of appeals, including the Fifth Circuit in a case we cite in the brief, Williamson against Department of Agriculture, has recognized that decisions regarding the credit worthiness of individual loan applicants are discretionary functions in the context of a Federal loan program.
Antonin Scalia: Mr. Gerson, could you give us an example of an act that these regulators could have taken that they thought was in furtherance of their mission to salvage these S&L's, which would not come within the discretionary function exemption? Anything at all other than driving a car?
Stuart M. Gerson: I suppose that they... I set forth more than just driving the car. I talked about the decision to hire in violation of conflict of interest standard, taking the papers home and losing them, the failure to adequately maintain machinery that causes damages. I don't think... I can't think of anything with respect to Mr. Gaubert as the regulated person or entity in this case, on these facts, that would fall without the exception. But I do suggest that there are any number of things where, where the... you can hypothesize that the regulators here... as in Berkovitz, I assume that the regulators in Berkovitz did not intentionally violate the policies and procedures that stripped them of discretion. And if something... if there was something like that here and the regulators violated those policies, albeit unknowingly, then, I think, under Berkovitz that the... that negligence would be actionable.
Antonin Scalia: Just, just tell me again why failure to maintain the machines or closing down the lights, the other example that you gave, why that would not come within the discretion... I mean, it's all done to save money to this institution that is losing money.
Stuart M. Gerson: Well, I would--
Antonin Scalia: Why would it not come within the exemption?
Stuart M. Gerson: --I think it's unlikely that such activities would involve directly the Federal regulatory policy interest here and the exercise of judgment with respect to those things. I would countenance that under some circumstances where the life and death of the institution was at issue, that perhaps there was a policy interest that transcended the... this activity. But I would also suggest that in virtually every such case, and we have nothing like it here, there is a specific Federal policy mandate to obey the traffic laws, to maintain equipment, to precheck vaccines before they're cleared.
Antonin Scalia: Well, I would suppose-- --In your brief it sounds as though... in some places it sounds as though you're saying that because advice, rather, is all that is involved, not any orders or anything like that, that that's a separate defense wholly aside from discretionary function.
Stuart M. Gerson: No, I don't think that it... I don't think that... I mean, if we're saying that, we shouldn't be saying that.
Byron R. White: Well, the Government--
Stuart M. Gerson: That's not our--
Byron R. White: --So, just giving advice can, which happens to be followed, could impose liability on the Government, even though this is a private corporation that has no... is not compelled to follow the advice?
Stuart M. Gerson: --Well, the issue of suasion and the fact that the advice could be avoided relates to what I suggest is a different point, which is that what the respondent here, we suggest, is trying to litigate is what he calls in his brief the extra-regulatory takeover of the institution. And I would suggest, in the sense that... at which point this individual felt that that had occurred, there are other kinds of causes of action and other places to litigate such a claim, that it's clearly within congressional intendment that a tort activity... a tort action is not one of them. I suggest, though, that there is no operative... there is no inherently operative, inherent distinction related to the use of moral suasion. This Court has noted, as I say, in Philadelphia Bank, in Philadelphia National Bank in 1963, that moral suasion was commonly used, and that that's the, that's the backbone of--
Byron R. White: Moral suasion? Economic suasion--
Stuart M. Gerson: --Well, economic suasion I guess you would call it.
Byron R. White: --I guess so.
Stuart M. Gerson: That's a fair point. And that that sort of advice is generally followed, and that's what makes for a successful system, a system which is described in the regulation here. I see my time has expired.
William H. Rehnquist: Thank you, Mr. Gerson. The case is submitted.