First Hartford Corp v. U.S.

• Decision Date: 19 October 1999
• Citation: 194 F.3d 1279
• Parties: (Fed. Cir. 1999) FIRST HARTFORD CORPORATION PENSION PLAN & TRUST, on behalf of itself, Dollar Dry Dock Bank of New York, and all other similarly situated shareholders of Dollar Dry Dock Bank of New York, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. 99-5032 Decided:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1279

194 F.3d 1279 (Fed. Cir. 1999)

FIRST HARTFORD CORPORATION PENSION PLAN & TRUST, on behalf of itself, Dollar Dry Dock Bank of New York, and all other similarly situated shareholders of Dollar Dry Dock Bank of New York, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

99-5032

United States Court of Appeals for the Federal Circuit

Decided: October 19, 1999

Appealed from: United States Court of Federal Claims Senior Judge Robert J. Yock

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Eric W. Bloom, Winston & Strawn, of Washington, DC, argued for plaintiff-appellant. With him on the brief were Thomas M. Buchanan and Charles B. Klein. Of counsel on the brief was Ralph E. Frable, Attorney at Law, of Washington, DC.

Shalom Brilliant, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were David W. Ogden, Acting Assistant Attorney General, and David M. Cohen, Director.

John V. Thomas, Associate General Counsel, Federal Deposit Insurance Corporation, of Washington, DC, amicus curiae for Federal Deposit Insurance Corporation. With him on the brief were Dorothy Ashley Doherty, Counsel, and John M. Dorsey, III, Counsel.

Before MAYER, Chief Judge, MICHEL and PLAGER, Circuit Judges.

Opinion for the court filed by Circuit Judge MICHEL. Chief Judge MAYER dissents-in-part.

MICHEL, Circuit Judge.

First Hartford Corporation Pension Plan & Trust ("First Hartford") is a shareholder of Dollar Dry Dock Bank of New York ("Dollar"), a state-chartered mutual savings bank that resulted from the merger of two financially troubled savings banks. As a condition of the merger, the two banks entered into an agreement with the Federal Deposit Insurance Corporation ("FDIC") requiring Dollar to maintain certain minimum levels of total capital, but permitting Dollar to amortize the intangible asset of supervisory goodwill over fifteen years in its accounting treatment of the merger. First Hartford filed suit in the Court of Federal Claims alleging breach of contract and unconstitutional taking and seeking rescission as a result of the FDIC's promulgation of a rule prohibiting the inclusion of supervisory goodwill in the calculation of regulatory capital despite the contractual language to the contrary. First Hartford purported to file suit on behalf of itself, derivatively as a shareholder on behalf of Dollar, and on behalf of a putative class of similarly situated Dollar shareholders. First Hartford now appeals from the judgment of the Court of Federal Claims granting the motion of the United States to dismiss First Hartford's complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. See First Hartford Corp. Pension Plan & Trust v. United States, 42 Fed. Cl. 599 (1998). In particular, the court held that First Hartford lacked privity of contract with the United States, that shareholder derivative suits in the Court of Federal Claims were barred by binding precedent, that First Hartford failed to identify a property interest subject to a taking, and that First Hartford failed to plead mutual mistake or fraud with sufficient particularity in its rescission count.

We reverse the judgment of the Court of Federal Claims with respect to its dismissal of First Hartford's takings claims because we have previously held that a shareholder's direct interest in a liquidation surplus is a cognizable property interest the taking of which by the federal government gives rise to standing to sue. We also reverse the judgment with regard to the dismissal of First Hartford's breach of contract claims on the ground that the Court of Federal Claims does not lack jurisdiction to hear contract suits filed derivatively by shareholders. We hold, however, that standing to sue is only found here because of the FDIC's conflict of interest by which it is both alleged to have caused the breach and controls the depository institution. Finally, we affirm the judgment with respect to the rescission claims because the United States was not a party to the contracts under which the shareholders invested their capital in Dollar.

BACKGROUND

Dollar was formed in 1983 as a result of the merger of Dollar Savings Bank of New York and Dry Dock Savings Bank. The financially troubled merging banks entered into an Assistance Agreement with the FDIC as a condition of the merger and Dollar, the resultant merged bank, consequently became an FDIC-insured, New York State-chartered mutual savings bank. Dollar nonetheless continued to suffer losses and thus, in order to enhance its ability to raise capital, sought approval from the FDIC to convert from a mutually-held institution into a stock-form institution. In approving the conversion, the FDIC agreed to the cancellation of the Assistance Agreement to be replaced by an Amended and Restated Assistance Agreement (the "Amended Agreement"), dated July 18, 1986, under which the FDIC continued to provide financial assistance. The Amended Agreement required Dollar to maintain certain levels of minimum total capital, as defined by regulation, and permitted the FDIC to increase those minimum total capital requirements if changed conditions warranted such an increase. Paragraph 1.22 of the Amended Agreement provided:

Total Capital shall not be reduced by goodwill or any other intangible asset arising from the accounting treatment of the Conversion; provided however, that goodwill or any other intangible asset arising from any other sources shall constitute a reduction from Total Capital to the extent required by any rule, regulation, policy of general application, or order of the FDIC.

"Goodwill" is defined as the excess of the cost to the acquirer of purchasing the financial institution (including the liabilities assumed by the acquirer) and the fair market value of the acquired financial institution's assets at the time of the acquisition.¹ See Winstar Corp. v. United States, 64 F.3d 1531, 1535-36 (Fed. Cir. 1995) (en banc), aff'd, 518 U.S. 839 (1996). This intangible asset termed "goodwill" could be recorded as an asset on the acquirer's books and, in accordance with Paragraph 1.12 of the Amended Agreement, amortized over fifteen years ending June 30, 2001, on a straight-line basis. The use of goodwill thus essentially permitted Dollar to treat what was a deficit in capital as an asset, including for purposes of satisfying minimum total capital requirements. According to First Hartford, Dollar amortized approximately $96 million of goodwill between the effective date of the Amended Agreement and December 21, 1990, and met its mandated capital requirements during that period. See Compl., ¶ 29 (Dec. 20, 1996).

On December 21, 1990, Dollar, the FDIC, and the Superintendent of Banks for the State of New York ("Superintendent") executed a Memorandum of Understanding (the "MOU"), which prohibited Dollar from paying cash dividends or other such payments until it attained a total capital ratio of six percent, some two percentage points higher than the ratio required by the Amended Agreement.

On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236 (1991) ("FDICIA"), was enacted. This set forth new capital requirements for federally insured banks. The FDIC subsequently interpreted FDICIA, by rule effective December 19, 1992, to prohibit the inclusion of supervisory goodwill in calculating regulatory capital, notwithstanding the contractual language here to the contrary. Following this change, Dollar was unable to meet its capital requirements. Consequently, on February 21, 1992, the Superintendent seized Dollar and appointed the FDIC as receiver. That same day, the FDIC sold Dollar's branches to various third parties.

First Hartford, a pension plan for First Hartford Corporation, has continuously owned 20,750 shares of Dollar Class A Convertible Junior Preference Stock from July 1986 through the present. On December 20, 1996, First Hartford filed suit in the Court of Federal Claims. First Hartford purported to bring suit for itself, on behalf of similarly situated Dollar shareholders, and derivatively on behalf of Dollar. First Hartford's complaint alleged six counts against the United States:

(I) breach of contract due to the FDIC's raising of Dollar's capital ratio requirement in the MOU in alleged violation of the Amended Agreement;

(II) breach of contract because the FDIC directed, recommended, or caused the Superintendent to seize Dollar in breach of the Amended Agreement;

(III) unconstitutional taking under the Fifth Amendment resulting from the FDIC taking Dollar's contractual right to amortize its goodwill and the FDIC's direction or recommendation that the Superintendent seize Dollar;

(IV) unconstitutional regulatory taking under the Fifth Amendment of the contractual right to treat goodwill as an amortizable asset, contrary to the reasonable investment-backed expectations of First Hartford and other shareholders;

(V) a claim for rescission of the shareholders' investments due to the change in the FDIC's treatment of goodwill; and

(VI) breach of contract based upon First Hartford and the other Dollar shareholders being the intended third-party beneficiaries of the Amended Agreement.

Based upon the above six counts, First Hartford requested as relief:

(i) that the action be certified a class action on behalf of all the shareholders of Dollar;

(ii) that Dollar, First Hartford, and other Dollar shareholders be awarded damages;

(iii) that Dollar, First Hartford, and other Dollar shareholders be awarded the return of their investments;

(iv) that damages awarded derivatively be awarded to Dollar in trust for the shareholders; and

(v) that attorney fees, costs, interest, and any other just relief be awarded.

On November 20, 1998, the court granted the...