Suter v. United States , 441 F.3d 306 ( 2006 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
FRED SUTER; TERRY D. SUTER; GREEN 
MEADOWS, LLC; PAULA TOTHEROW;
DONNA L. HELMS; STEPHEN MILLER;
HILDA A. TOTHEROW; GINNY
BLANKENSHIP; ARTHUR HELMS, III;
WILLIAM E. FOWLER; CAROLYN
FOWLER; SIDNEY A. LIVINGSTON;
EUGENE ROYALS; DENNIS GRUBAUGH;
DEBORAH GRUBAUGH; JAMES KOENIG;
MICHELLE KOENIG; DAN E. HOLMAN;
FRANKIE EDMUNDSON; FRANK  No. 05-1521
GOODMAN; ANGELO ANTONUCCI;
MARSHALL S. REDDING, Dr.; G.
DOUGLAS HAYDEN, JR.; CLAUDE G.
CRISP; STEPHEN M. SCHWARTZ; DALE
C. PETERS; ALMA B. SCHWARTZ,
Plaintiffs-Appellants,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.

Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Graham C. Mullen, Chief District Judge.
(CA-04-358-3)
Argued: February 2, 2006
Decided: March 28, 2006
Before WILKINS, Chief Judge, and NIEMEYER and
WILLIAMS, Circuit Judges.
2 SUTER v. UNITED STATES
Affirmed by published opinion. Chief Judge Wilkins wrote the opin-
ion, in which Judge Niemeyer and Judge Williams joined.
COUNSEL
ARGUED: Emerson R. Marks, Jr., Charlottesville, Virginia, for
Appellants. Joshua Paul Waldman, UNITED STATES DEPART-
MENT OF JUSTICE, Civil Division, Appellate Section, Washington,
D.C., for Appellee. ON BRIEF: Peter D. Keisler, Assistant Attorney
General, Gretchen C. F. Shappert, United States Attorney, Mark B.
Stern, UNITED STATES DEPARTMENT OF JUSTICE, Civil Divi-
sion, Appellate Section, Washington, D.C., for Appellee.
OPINION
WILKINS, Chief Judge:
Appellants, victims of a fraudulent investment scheme, appeal a
district court order dismissing, for lack of subject matter jurisdiction,
their action against the United States alleging that an undercover fed-
eral agent improperly participated in the scheme. We affirm, albeit on
a basis different from that relied on by the district court.
I.
Appellants are victims of a large-scale Ponzi and money laundering
scheme that was perpetrated between 1998 and 2001. As the result of
an undercover investigation by an FBI agent using the fictitious name
"John Vega," a number of the participants in the scheme were suc-
cessfully prosecuted.1
Appellants brought this action against the United States under the
Federal Tort Claims Act (FTCA), see 28 U.S.C.A. §§ 1346(b), 2671-
1
Appellants have brought a separate civil action against the perpetra-
tors of the scheme. That action, which is currently pending, is not at issue
here.
SUTER v. UNITED STATES 3
2680 (West 1994 & Supp. 2005), alleging that the FBI, in connection
with its investigation of the fraudulent scheme, "participated in the
very frauds which it was investigating." J.A. 15. In particular, Appel-
lants claim that Vega—with the full knowledge of the FBI—"assisted
the criminals by helping them to conceal and perpetuate their frauds,
which actions drastically extended the scope of the injury inflicted
and the number of victims injured." Id. According to Appellants, dur-
ing the course of Vega’s undercover investigation, he assisted in the
formation and operation of business entities used in furtherance of the
scheme. Appellants further claim that Vega and the FBI "profited
financially from [Vega’s] participation in the crimes which he was
investigating," including by acquiring an ownership interest in one of
the entities used in the scheme. Id.Count One of Appellants’ complaint asserts claims for fraud based
on misrepresentations Vega allegedly made to Appellants during his
involvement in the scheme and on Vega’s assistance in forming and
operating entities used in the scheme. Count Two of the complaint
alleges that Vega negligently failed to avoid unnecessary harm to
Appellants and that the FBI negligently hired and supervised Vega.
The United States moved to dismiss Appellants’ complaint for lack
of subject matter jurisdiction. See Fed. R. Civ. P. 12(b)(1). The
United States argued that Appellants’ claims were barred by the dis-
cretionary function and misrepresentation exceptions to the general
waiver of sovereign immunity under the FTCA, see 28 U.S.C.A.
§ 2680(a), (h), and that Appellants had failed to allege conduct by the
United States that would create liability under state law if committed
by a private person, see 28 U.S.C.A. § 1346(b)(1). In support of its
dismissal motion, the United States submitted the Declaration of John
A. Johnson, a Supervisory Special Agent of the FBI and Unit Chief
of the Undercover and Sensitive Operations Unit at FBI Headquarters
in Washington, D.C. Attached to that declaration was a copy of the
Attorney General’s Guidelines on FBI Undercover Operations
("Undercover Guidelines"), which were in effect at the time of Vega’s
investigation.2
2
We have held that "[i]n ruling on a Rule 12(b)(1) motion, the court
may consider exhibits outside the pleadings." Williams v. United States,
50 F.3d 299, 304 (4th Cir. 1995).
4 SUTER v. UNITED STATES
The district court granted the United States’ motion to dismiss.
First, focusing on the misrepresentations that Vega allegedly made to
Appellants, the district court held that Appellants’ fraud claims were
barred by the misrepresentation exception under the FTCA. Second,
the district court held that Appellants’ negligence claims failed
because "under North Carolina law, a private person could not be lia-
ble for negligently conducting or supervising an undercover criminal
investigation." J.A. 52. The district court did not address the United
States’ argument that all of Appellants’ claims were barred by the dis-
cretionary function exception.
II.
We review the dismissal of an action for lack of subject matter
jurisdiction de novo. See Welch v. United States, 409 F.3d 646, 650
(4th Cir. 2005), cert. denied, 2006 WL 452483 (U.S. Feb. 27, 2006)
(No. 05-529). In so doing, "[w]e are not limited to evaluation of the
grounds offered by the district court to support its decision, but may
affirm on any grounds apparent from the record." United States v.
Smith, 395 F.3d 516, 519 (4th Cir. 2005). Here, we decline to con-
sider whether the grounds for dismissal relied on by the district court
were proper because the record presents a more straightforward basis
for affirmance, namely, that Appellants’ claims are barred by the dis-
cretionary function exception.3
The FTCA creates a limited waiver of the United States’ sovereign
immunity by authorizing damages actions for injuries caused by the
tortious conduct of federal employees acting within the scope of their
employment, when a private person would be liable for such conduct
under state law. See 28 U.S.C.A. § 1346(b)(1). This waiver of sover-
eign immunity, however, is subject to several exceptions. "The most
important of these . . . is the discretionary function exception,"
McMellon v. United States, 387 F.3d 329, 335 (4th Cir. 2004) (en
banc), cert. denied, 125 S. Ct. 1828 (2005), which provides that the
United States is not liable for "[a]ny claim . . . based upon the exer-
3
Although Appellants contend that the discretionary function exception
does not apply to the conduct alleged here, they recognize that the appli-
cability of this exception is "the core issue in this case." Br. of Appellants
at 6.
SUTER v. UNITED STATES 5
cise or performance or the failure to exercise or perform a discretion-
ary function or duty on the part of a federal agency or an employee
of the Government, whether or not the discretion involved be
abused," 28 U.S.C.A. § 2680(a). The discretionary function exception
"marks the boundary between Congress’ willingness to impose tort
liability upon the United States and its desire to protect certain gov-
ernmental activities from exposure to suit by private individuals."
United States v. S.A. Empresa de Viacao Aerea Rio Grandense (Varig
Airlines), 467 U.S. 797, 808 (1984). Congress enacted this exception
"to prevent judicial second-guessing of legislative and administrative
decisions grounded in social, economic, and political policy through
the medium of an action in tort . . . [and] to protect the Government
from liability that would seriously handicap efficient government
operations." Id. at 814 (internal quotation marks omitted).
To determine whether conduct by a federal agency or employee fits
within the discretionary function exception, we must first decide
whether the challenged conduct "involves an element of judgment or
choice." Berkovitz v. United States, 486 U.S. 531, 536 (1988); see id.(explaining that "the discretionary function exception will not apply
when a federal statute, regulation, or policy specifically prescribes a
course of action for an employee to follow" because "the employee
has no rightful option but to adhere to the directive"). If the conduct
does involve such discretionary judgment, then we must determine
"whether that judgment is of the kind that the discretionary function
exception was designed to shield," i.e., whether the challenged action
is "based on considerations of public policy." Id. at 536-37. This
inquiry focuses "not on the agent’s subjective intent in exercising the
discretion . . . , but on the nature of the actions taken and on whether
they are susceptible to policy analysis." United States v. Gaubert, 499
U.S. 315, 325 (1991). Thus, "a reviewing court in the usual case is
to look to the nature of the challenged decision in an objective, or
general sense, and ask whether that decision is one which we would
expect inherently to be grounded in considerations of policy." Baum
v. United States, 986 F.2d 716, 720-21 (4th Cir. 1993). Moreover,
when a statute, regulation, or agency guideline permits a government
agent to exercise discretion, "it must be presumed that the agent’s acts
are grounded in policy when exercising that discretion." Gaubert, 499
U.S. at 324.
6 SUTER v. UNITED STATES
Applying these principles here, we first conclude that Vega’s par-
ticipation in, and the FBI’s approval of, criminal activity during the
undercover investigation involved an element of judgment or choice.
Agent Johnson’s declaration notes that "[t]here is no statute, regula-
tion, or policy directive that mandates that the FBI choose to
employ[ ] any particular investigative technique in carrying out [fraud
and money laundering] investigations"; rather, "the FBI is vested with
broad discretionary power to determine whether a particular investi-
gative technique, such [as] an undercover operation, is an appropriate
means by which to conduct these types of investigations." J.A. 23.
Indeed, Appellants concede that, in general, "undercover operations
are necessarily discretionary in nature and hence immune from civil
liability." Br. of Appellants at 6; see id. at 13 (recognizing that "the
nature of undercover operations demands the exercise of discretion").
They contend, however, that the FBI exceeded its discretionary
authority by participating in the crimes it was investigating. We dis-
agree.
The Undercover Guidelines grant the FBI broad discretion in con-
ducting undercover operations. They generally authorize the FBI to
conduct undercover operations "that are appropriate to carry out its
law enforcement responsibilities." J.A. 30. More specifically, the
guidelines permit FBI officials to authorize, and agents to engage in,
a wide range of activities in connection with undercover
investigations—including "[a]ctivity that is proscribed by Federal,
state, or local law as a felony or that is otherwise a serious crime,"
or that presents "a significant risk of financial loss." Id. at 34-35. It
is therefore clear that the conduct alleged by Appellants falls within
the scope of the discretionary authority conferred on the FBI by the
Undercover Guidelines.4
We further conclude that the challenged conduct was "based on
considerations of public policy." Berkovitz, 486 U.S. at 537. The
4
Agent Johnson’s declaration confirms that the undercover operation
at issue here received all necessary review and approval by FBI officials
and that the conduct alleged by Appellants "fall[s] within the wide range
of conduct, activities, and undercover scenarios which the FBI has dis-
cretion to utilize in furtherance of an undercover operation, pursuant to
the authority of the Guidelines." Id. at 25.
SUTER v. UNITED STATES 7
FBI’s decision whether, as part of its investigation, to participate in
criminal activity likely to result in financial loss to third parties "is
one which we would expect inherently to be grounded in consider-
ations of policy." Baum, 986 F.2d at 721. Indeed, the Undercover
Guidelines expressly confirm this understanding, requiring FBI offi-
cials to "weigh the risks and benefits" of a proposed undercover oper-
ation, "giving careful consideration" to several policy-based factors,
including "[t]he risk of . . . financial loss to persons or businesses"
and "[t]he risk that individuals engaged in undercover operations may
become involved in illegal conduct." J.A. 30. As Agent Johnson
explains, FBI officials consider these factors in "mak[ing] discretion-
ary judgments and authoriz[ing] the operations that advance an inves-
tigation while minimizing the risks."5 Id. at 25.
We thus conclude that the conduct alleged by Appellants falls
within the discretionary function exception, thereby barring their suit
against the United States.6 We note that our holding is consistent with
the decisions of two other circuits that have applied the discretionary
function exception in similar cases. See Ga. Cas. & Sur. Co. v. United
States, 823 F.2d 260, 263 (8th Cir. 1987) (holding that a claim for
financial losses arising from the FBI’s undercover investigation of an
automobile theft ring was barred because "[t]he FBI’s decision to
maintain secrecy . . . involved the balancing of policy considerations
5
The Undercover Guidelines impose various restrictions on agents’
participation in otherwise illegal activity. For example, involvement in
such activity may be authorized only for limited purposes, such as to
obtain critical evidence not otherwise available or to establish credibility
of a cover identity. Agents also may not participate in acts of violence
except in self-defense. Further, FBI officials contemplating proposed
undercover operations involving "sensitive circumstances"—such as par-
ticipation in otherwise criminal activity—must "determine whether ade-
quate measures have been taken to minimize the incidence of sensitive
circumstances and reduce the risks of harm and intrusion that are created
by such circumstances." Id. at 35-36.
6
We also conclude that Appellants’ claim that the FBI negligently
hired and supervised Vega is barred by the discretionary function excep-
tion. Courts have repeatedly held that government employers’ hiring and
supervisory decisions are discretionary functions. See, e.g., Nurse v.
United States, 226 F.3d 996, 1001-02 (9th Cir. 2000); Burkhart v. Wash-
ington Metro. Area Transit Auth., 112 F.3d 1207, 1217 (D.C. Cir. 1997).
8 SUTER v. UNITED STATES
protected by the discretionary function exception"); see also Frigard
v. United States, 862 F.2d 201, 203 (9th Cir. 1988) (per curiam)
(holding that a suit alleging financial fraud by an investment company
used by the CIA as a cover for its operations was barred by the discre-
tionary function exception because "the alleged decisions by the CIA
to use [the company] and to keep its use of the company secret are
administrative decisions grounded in social and economic policy").
We agree with the core principle articulated by the Eighth and Ninth
Circuits—that discretionary, policy-based decisions concerning
undercover operations are protected from civil liability by the discre-
tionary function exception, even when those decisions result in harm
to innocent third parties. Imposing liability for such decisions "would
seriously handicap" the FBI and other federal law enforcement agen-
cies in carrying out the important duties assigned to them by Con-
gress. Varig Airlines, 467 U.S. at 814 (internal quotation marks
omitted). "Were we to permit this suit to succeed, we would stymie
the very purpose of the discretionary function exception by permitting
the second-guessing of policy through a tort action." Williams v.
United States, 50 F.3d 299, 310 (4th Cir. 1995). While we are not
unsympathetic to the financial losses suffered by Appellants, we must
apply the discretionary function exception as we believe Congress
intended it. See Ga. Cas. & Sur., 823 F.2d at 263 ("While we
acknowledge the harm to innocent [third parties] in this case, we can-
not ignore congressional intent to protect the Government from suit
through the discretionary function exception.").
III.
For the reasons set forth above, we affirm the district court order
dismissing Appellants’ action for lack of subject matter jurisdiction.
AFFIRMED