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U.S. Tobacco Cooperative Inc. v. Big South Wholesale of Virginia, LLC

United States Court of Appeals, Fourth Circuit

August 3, 2018

U.S. TOBACCO COOPERATIVE INC.; U.S. FLUE-CURED TOBACCO GROWERS, INC.; BIG SOUTH DISTRIBUTION, LLC, Plaintiffs-Appellees,
v.
BIG SOUTH WHOLESALE OF VIRGINIA, LLC, d/b/a Big Sky International; BIG SOUTH WHOLESALE, LLC; JASON CARPENTER; CHRISTOPHER SMALL, Defendants-Appellants, and UNITED STATES OF AMERICA, Intervenor-Appellee, and UNIVERSAL SERVICES FIRST CONSULTING, a/k/a Universal Services Consulting Group; EMORY STEPHEN DANIEL; ALBERT M. JOHNSON, Defendants.

          Argued: May 9, 2018

          Appeal from the United States District Court for the Eastern District of North Carolina, at Raleigh. Terrence W. Boyle, District Judge. (5:13-cv-00527-BO)

         ARGUED:

          Gary S. Parsons, BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P., Raleigh, North Carolina, for Appellants.

          Patrick George Nemeroff, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee United States.

          Richard P. Bress, LATHAM & WATKINS LLP, Washington, D.C., for Appellees U.S. Tobacco Cooperative Inc., U.S. Flue-Cured Tobacco Growers, Inc., and Big South Distribution, LLC.

         ON BRIEF:

          Julia C. Ambrose, W. Michael Dowling, BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P., Raleigh, North Carolina; Alan D. Mathis, BUTLER SNOW, LLP, Birmingham, Alabama, for Appellants.

          A. Tevis Marshall, Richmond, Virginia, Kimberly J. Lehman, OGLETREE DEAKINS NASH SMOAK & STEWART, PC, Raleigh, North Carolina; Kathryn H. Ruemmler, Elana Nightingale Dawson, Genevieve P. Hoffman, LATHAM & WATKINS LLP, Washington, D.C., for Appellees U.S. Tobacco Cooperative Inc., U.S. Flue-Cured Tobacco Growers, Inc., and Big South Distribution, LLC.

          Chad A. Readler, Acting Assistant Attorney General, Jessie K. Liu, United States Attorney, Mark B. Stern, Patrick G. Nemeroff, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee United States.

          Before TRAXLER, AGEE, and WYNN, Circuit Judges.

         Vacated and remanded by published opinion. Judge Traxler wrote the opinion, in which Judge Agee and Judge Wynn joined.

          TRAXLER, Circuit Judge.

         Defendants Jason Carpenter, Christopher Small, Big South Wholesale, LLC, and Big South Wholesale of Virginia, LLC, d/b/a Big Sky International, appeal the district judge's order granting a motion to reconsider a predecessor district judge's order which had granted Defendants' petition to substitute the United States as a party defendant under the Westfall Act. See 28 U.S.C. § 2679(b). The Westfall Act provides "federal employees absolute immunity from common-law tort claims arising out of acts they undertake in the course of their official duties." Osborn v. Haley, 549 U.S. 225, 229 (2007). We hold that the district judge abused his discretion in granting the motion to reconsider. Therefore, we vacate the district court's order granting reconsideration under Rule 54(b) and remand with instructions to reinstate the prior order granting Defendants' petition to substitute.

         I.

         The Plaintiffs in this action are a tobacco growers cooperative, its manufacturing arm, and its distribution arm. Plaintiff U.S. Tobacco Cooperative, Inc. ("USTC") "is a cooperative of flue-cured tobacco growers which processes and markets its members' tobacco to domestic and international customers." J.A. 452-53. Plaintiff U.S. Flue-Cured Tobacco Growers Inc. ("USFC") "manufactures cigarettes and other tobacco products." J.A. 453. It is a wholly owned subsidiary of USTC and shares the same Board of Directors.

         Defendants Carpenter and Small have been established businessmen in the wholesale tobacco distribution business for many years. They operated two wholesale tobacco distribution companies-Defendants Big South Wholesale, LLC ("BSW") and Big South Wholesale of Virginia, LLC ("BSV"). As discussed in more detail below, in early 2011, USFC negotiated the purchase of BSW's and BSV's assets, and formed Plaintiff Big South Distribution, LLC ("BSD") to close the purchase and thereafter act as the distribution arm for Plaintiffs. This lawsuit arises out of that contract to purchase and the actions taken by Carpenter and Small thereafter as a consultant and employee, respectively, for BSD, while simultaneously operating as confidential informants for the United States Bureau of Alcohol, Tobacco, Firearms and Explosives ("ATF").

         A.

         Prior to the events at issue in this lawsuit, the ATF was investigating numerous complex tobacco-trafficking cases and the illicit tobacco trade. Among other things, such tobacco trafficking served "as a means of funding organized crime." J.A. 617. However, due to the "close-knit subculture of groups and individuals who operated in the same circles and, often times, employed the same fraud schemes," the ATF realized that "it was impossible to simply appear on scene as a new distributor or buyer, as ATF's initial efforts attempted to do. The subculture was too wise and the effort failed." J.A. 618. It needed the help of an established tobacco distributor to gain the trust of tobacco industry participants. Defendant Carpenter fit the bill, and he agreed to help.

         "Over time, Carpenter's cooperation became significant and on November 9, 2006, he agreed to become a documented ATF confidential informant." J.A. 617. In connection with his duties, Carpenter signed an "Informant Agreement," in which he agreed to "[m]ake controlled purchases of evidence, wear a transmitter/recorder, provide testimony in Grand Jury, testify in court, and [render] other assistance as required." J.A. 437. The agreement provided that he would "be working closely with ATF for purposes of th[e] investigation," but that he was "not a law enforcement officer, an employee, or agent of ATF" and would "not hold [himself] out to be such." J.A. 437. ATF was required to "reimburse [Carpenter] for expenses incurred that [were] deemed by ATF to be reasonable and in furtherance of th[e] investigation," and Carpenter "underst[ood] that any monetary or other type of reward given to [him] by ATF, either for services rendered or information provided, must be declared as other income on any income tax return [that he] may be required to file." J.A. 437. Defendant Small "was eventually provided knowledge of the [undercover] ATF operation" as well, and he became a cooperating witness for ATF. J.A. 617.[1] Although there were a number of ATF offices and ATF agents involved in the undercover operation with Carpenter and Small, their primary ATF handler was Senior Special Agent Thomas Lesnak.

         Over the next several years, Carpenter and Small worked with ATF and several other federal law enforcement agencies. Unlike many confidential or undercover informants, Carpenter and Small at all times worked voluntarily and as result of their status in the tobacco industry. They were never under threat of criminal prosecution. The undercover operations were conducted under the legitimate cloak of BSW/BSV, which served "as somewhat of a 'Trojan Horse.'" J.A. 618. "Th[e] operation, and the others that followed, targeted corrupt cigarette retailers, wholesalers, brokers, distributors and manufacturers. Some of the targets were very specific in nature while others were unknown until they proposed corrupt deals to Carpenter, other [confidential informants], or ATF undercover [special agents] acting as employees of Carpenter's company." J.A. 617. Both Carpenter and Small "placed themselves in precarious, as well as dangerous situations, in support of ATF and other federal agency investigations." J.A. 617.

         During the ATF investigations, proceeds from the tobacco sales were deposited in one of two different accounts-a "churning account" or a "management account." Churning accounts are seeded with funds appropriated by Congress "up front to purchase cigarettes and then sell them to targets for a markup." J.A. 618. "Additionally, some cigarettes used in these transactions . . . may have been transacted in furtherance of another violation of federal law, such as mail/wire fraud, structuring, or even traded for controlled substances or firearms." J.A. 618. "In a typical churning operation involving the investigation of contraband cigarette trafficking activity," the proceeds were "deposited into an undercover bank account"-the churning account-"and re-invested into the operation as a means to fund the investigation." J.A. 618. The ATF "churning investigations utilizing Carpenter and Small were duly authorized and closely monitored by case agents and ATF Headquarters. Additionally, these same investigations have been audited several times by ATF and the Department of Justice Office of the Inspector General." J.A. 619.

         Management accounts were used to hold funds that were generated from sales to non-targets. Carpenter's and Small's "undercover roles required them to sell tobacco products in four distinct scenarios." J.A. 449. In addition to sales of tobacco products to the "known investigative targets" (which generated the "churning income"), they sold tobacco products to (1) persons "suspected of engaging in illegal cigarette trafficking prior to designation of those suspects as investigative targets;" (2) "persons other than investigative targets in transactions in which the government set the price, for purposes of establishing and maintaining the undercover role;" and (3) "legitimate customers in nongovernment directed transactions." J.A. 449.

         "ATF Headquarters officials, including the Program Office responsible for tobacco investigations, and the Deputy Assistant Director (Field Operations-East) with oversight responsibility for the Washington Field Division ("WFD"), were aware of the [management] accounts." J.A. 449. "The WFD and Special Agent Lesnak initially established and utilized the management accounts" following "verbal directives from the ATF Program Office and other Headquarters officials [which] flowed from an opinion [the] ATF Chief Counsel provided in approximately 2009 that no funds other than churning proceeds could be deposited into [a] 'churning bank account.'" J.A. 449. "This was done for several reasons, including operational security, and to limit ATF's involvement with the legitimate business activities of the cooperating individuals. Although [the management] accounts were under the control of Carpenter and Small, the case agent, [Special Agent] Lesnak, periodically monitored the accounts." J.A. 450. In addition, "WFD personnel, including [Special Agent Lesnak] and [the ATF Assistant Director] periodically briefed ATF Headquarters personnel on the investigations at issue in this litigation, including the usage of the management accounts." J.A. 450.

         During the ongoing ATF investigations, these management account funds were used to fund other undercover investigations for a myriad of federal law enforcement agencies-a practice referred to as "backstopping." Backstopping allows undercover agents to conceal their identities and undercover activities. For example, backstopping may include providing vehicles and leasing property for use by undercover agents, procuring insurance on vehicles and buildings, funding travel for undercover agents, providing credit cards for undercover agents to cover their expenses, and purchasing product from targets and non-targets. At the conclusion of an operation, ATF would reconcile the funds that had been deposited into the management accounts. Expenses that Carpenter and Small had advanced to or incurred on behalf of law enforcement and proceeds from sales that were determined to be wholly legitimate (after accounting for any ATF-authorized interim distributions to Carpenter and Small) remained in the accounts and the balance of the funds-from target and non-target transactions that were determined to be illicit-were forfeited to the government.

         B.

         Around December 2010, Carpenter and Small decided to sell the assets of BSW and BSV, but planned to continue their undercover work for the ATF. The Vice President of USFC at the time, Stephen Daniel, approached Carpenter and Small about buying the assets in order to expand USTC and USFC into the tobacco wholesale market, and an Asset Purchase Agreement ("APA") was negotiated. Plaintiff BSD was formed as a wholly owned subsidiary of USFC to acquire the assets and inventory of BSW/BSV and thereafter operate the tobacco distribution arm for USTC and USFC. The managers of BSD were USTC and USFC board members. Under the arrangement, BSD would also acquire the name "Big South" and all goodwill associated with the name. As a result of their expertise and experience, Small would be hired to be BSD's executive director, and Carpenter would act as a BSD consultant. Carpenter's and Small's consulting and employment agreements would contain non-compete covenants which prohibited them from engaging in the wholesale acquisition and distribution of tobacco products in Alabama, North Carolina, Virginia, Tennessee, South Carolina, and Georgia.

         ATF agents were aware of the APA at the time, but made it clear to Carpenter and Small that ATF's undercover activities would remain exclusively with them. Also, the BSW/BSV assets included tobacco products that had been purchased in connection with Carpenter's and Small's undercover work for the ATF. Special Agent Lesnak dictated the purchase price for ATF's share of the BSW/BSV assets.

         On March 23, 2011, ATF Special Agent Dan Whittemore, along with Carpenter and Small, held a confidential meeting with representatives of USFC and USTC to discuss the APA and Carpenter's and Small's ongoing activities on behalf of federal law enforcement. Plaintiffs' representatives included USFC Vice President Daniel and Albert Johnson, who was then the Chairman of the Board of USTC/USFC. The specifics of the meeting, including the information that Agent Whittemore shared with Plaintiffs' representatives about the scope of Carpenter's and Small's future undercover activities, are the subject of some factual dispute. However, Agent Whittemore at a minimum advised Plaintiffs' representatives at that meeting that Carpenter and Small were confidential ATF informants, that their law enforcement activities on behalf of the ATF would continue after the sale of the assets, and that their undercover activities placed them at great personal risk which necessitated confidentiality. After some back and forth as to how to deal with Carpenter's and Small's post-sale undercover activities, USFC's legal counsel proposed that "we all recognize that the 'special' activities will not violate the non-compete, but not document that fact, for obvious reasons." J.A. 1128. Carpenter and Small accepted the proposal and the APA was signed on May 1, 2011. Carpenter and Small also signed their consulting and employment agreements.

         Upon the close of the APA, Stephen Daniel became President of BSD. BSD operated its tobacco wholesale business from the same warehouse in Bristol, Virginia that had housed the BSW/BSV tobacco assets, and Carpenter and Small assumed their duties with BSD. Carpenter and Small also continued their work on behalf of ATF, but did so using the name "Big Sky International" ("Big Sky"), which had been set up as a d/b/a entity of BSV with the approval of BSD President Daniel-provided that they not use the name "Big South."

         Thereafter, Carpenter and Small continued their ATF undercover investigations under the legitimate cloak of Big Sky, buying and selling tobacco products purchased with government funds to known investigative targets and suspects, and to persons other than investigative targets for the purpose of maintaining the legitimacy of the business and moving the inventory. Special Agent Lesnak testified that he was at the Bristol warehouse virtually every day and that it was his understanding that 100 percent of the operations of Big Sky after the APA was executed was related to the law enforcement operations. As before, the proceeds from the Big Sky transactions were deposited into either a churning account or management account, based upon the nature of the transaction. Non-churning monies were deposited into management accounts, used to continue to fund backstopping activities for law enforcement agencies, and were ultimately reviewed and reconciled by ATF. Carpenter and Small were allowed to keep a per-carton share of the profit from the operation as monetary compensation for their law enforcement activities, and the remaining account balance was transferred to ATF's forfeiture fund.

         Prior to and after the APA, Carpenter and Small also made a number of monetary payments to Daniel and/or his private company, Universal Services First Consulting a/k/a Universal Services Consulting Group ("Universal"). Carpenter and Small testified that these payments were for Daniel's assistance with IRS matters that required specialized knowledge of the undercover operations and expertise in accounting. Agent Lesnak, who at times interacted with Daniel in connection with his work at the warehouse, "asked if Mr. Carpenter and Mr. Small were paying Mr. Daniel for the work that he was doing . . . to help Small and Carpenter with an IRS audit, as well as his activities with law enforcement," and was assured that he was being paid. J.A. 450. Although ATF did not make direct payments to Daniel, or direct Carpenter and Small to do so, ATF acknowledges that Agent Lesnak was aware of the payments.

         No one disputes the extent and value of Carpenter's and Small's undercover activities over this seven-year period to ATF and to numerous other international, federal and state agencies, or the dangers that the two men subjected themselves and their families to when they conducted these ongoing investigations. ATF Supervisory Special Agent Ryan S. Kaye (who was assigned to the Bristol Field Office until 2008, and thereafter assigned as a Branch Chief to ATF's Operations Division) summarized these activities as follows:

Over the course of several years, Carpenter and Small interacted with dozens of targets of criminal investigations. Carpenter's and Small's cooperation was integral to the prosecution of over 100 criminal defendants and forfeiture of tens of millions of dollars. At the same time, both men came to know the identities of other cooperating individuals, many of whom were cooperating for different reasons. Both men came to know targets of highly sensitive investigations, as well as the identities of [undercover] officers and [Special Agents]. Carpenter and Small traveled extensively, both domestically and abroad, to support law enforcement operations. In several instances, both Carpenter and Small were in the same room with friends and business associates, knowing full well they were the target of an investigation. In some instances, these targets were providing to Carpenter and Small information that would eventually help to put them in prison.
Carpenter's and Small's knowledge of previous and ongoing investigations, informants and [undercover] personnel can be described as vast. While many of the investigations supported by Carpenter and Small targeted white-collar frauds with no history of violent crime, a small but significant group of targets have violent criminal histories, are members of domestic and/or international organized criminal groups, or have ties to corrupt political figures overseas.

J.A. 619. Other ATF witnesses confirmed the same, including ATF Special Agent William C. Duke who offered his "official recognition that Christopher Small and Jason Carpenter acted in a covert yet official capacity to assist the Government . . . in numerous investigations/operations within ...


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