Bluebonnet Savings Bank v. U.S.

• Decision Date: 21 September 2001
• Docket Number: No. 00-5128,00-5128
• Citation: 266 F.3d 1348
• Parties: (Fed. Cir. 2001) BLUEBONNET SAVINGS BANK, F.S.B., STONE CAPITAL, INC. (formerly known as CFSB Corporation), and JAMES M. FAIL, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

Page 1348

266 F.3d 1348 (Fed. Cir. 2001)

BLUEBONNET SAVINGS BANK, F.S.B., STONE CAPITAL, INC. (formerly known as CFSB Corporation), and JAMES M. FAIL, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 00-5128

United States Court of Appeals for the Federal Circuit

September 21, 2001

Appealed from:United States Court of Federal Claims Judge Bohdan A. Futey

Mitchell R. Berger, Patton Boggs LLP, of Washington, DC, argued for plaintiffs-- appellants. With him on the brief were Michael J. Schaengold, and Ugo Colella. Of counsel on the brief were I. Thomas Bieging, and Catherine M. Grainger, McKenna & Cueno LLP, of Denver, Colorado.

David M. Cohen, Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Jeanne E. Davidson, Deputy Director; Elizabeth M. Hosford, Craig Gottlieb, and Kenneth Dintzer, Trial Attorneys.

Before MAYER, Chief Judge, RADER and LINN, Circuit Judges.

MAYER, Chief Judge.

Bluebonnet Savings Bank, FSB, Stone Capital, Inc. (formerly known as CFSB Corporation), and James M. Fail (collectively "Bluebonnet") appeal the judgments of the United States Court of Federal Claims (1) holding on summary judgment that the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Pub. L. 101-73, 103 Stat. 183 (1989), and its implementing regulations and related agency actions, breached a contract between Bluebonnet and the government, Bluebonnet Savings Bank v. United States, 43 Fed. Cl. 69, 72, 80 (1999) ("Bluebonnet I"), but (2) awarding no damages, Bluebonnet Savings Bank v. United States, 47 Fed. Cl. 156 (2000) ("Bluebonnet II"). We reverse and remand.

Background

The history and circumstances surrounding the thrift crisis of the early 1980's and the enactment of FIRREA, have been extensively discussed in the original Winstar cases and will be revisited only as necessary to the present case. See Winstar Corp. v. United States, 518 U.S. 839, 843-858 (1996) ("Winstar III"). The savings and loan industry in the southwestern United States in the late 1980's was in a state of crisis; hundreds of thrifts were either insolvent or on the verge of insolvency, and the Federal Savings and Loan Insurance Corporation ("FSLIC") lacked sufficient funds to liquidate all the troubled thrifts. In response, the Federal Home Loan Bank Board ("FHLBB") approved the "Southwest Plan" on February 3, 1988, to provide government assistance to induce private capital investors to bail out failed savings and loans in the southwestern United States. Under this program, FHLBB grouped insolvent thrifts into packages for sale to investors, and offered a wide variety of incentives, including guaranteed assistance payments, regulatory forbearances, and shared tax benefits. The goal of the Southwest Plan was to attract new capital and management to the thrift industry, eliminate branch redundancies, and reduce the operating expenses of failing thrifts.

James Fail, on behalf of Lifeshares Group, Inc. ("Lifeshares"), an insurance company he owned, and Sidney Steiner, on behalf of the S/D Acquisition Group, entered into a partnership ("the Fail Group") to acquire a group of fifteen insolvent thrifts that eventually became Bluebonnet Savings Bank. The majority of the negotiations between the Fail Group and FSLIC were conducted by Harry T. Carneal, Executive Vice President of Lifeshares, and Robert Roe, an employee of the Southwest Plan Office and FSLIC's main negotiator for the Bluebonnet thrifts. In response to a request by FSLIC that Fail identify the source for a portion of his funding for the acquisition, Fail and Carneal each wrote letters to Stuart Root, Executive Director of FSLIC discussing the plans for capitalization and Fail's commitment to infuse $120 million into the newly formed thrift. The Fail letter was dated December 21 1988, and the Carneal letter was dated December 22, 1988. Root provided a memorandum to FHLBB recommending that it accept the Fail Group's bid and approve the acquisition on December 22, 1988. That same day, FHLBB approved the Fail Group's bid to acquire Bluebonnet, but conditioned its approval on Fail and CFSB identifying the source of a portion of the funding for the acquisition as recommended by the Corporate and Securities Division ("CASD") of the Office of General Counsel in its review of the proposed bid ("CASD Memo").

Bluebonnet and FSLIC entered into the following agreements: (1) an Assistance Agreement, pursuant to which, Fail and CFSB agreed to recapitalize Bluebonnet by infusing $120 million over a two year period and FSLIC agreed to provide assistance to Bluebonnet that exceeded $3 billion, including FSLIC promissory notes, asset coverage and yield maintenance; (2) a Capital Maintenance Agreement ("CMA") which imposed a number of conditions upon CFSB and Bluebonnet concerning certain ownership and operation issues; (3) a ten-year capital forbearance that allowed Bluebonnet to maintain capital levels lower than those required by regulation but at levels which would increase each year; and (4) a dividend forbearance, which permitted Bluebonnet to pay cash dividends of up to 50% of its net retained earnings beginning December 23, 1989, if it met the capital levels contained within the CMA and if declaring common stock dividends would not cause it to fall below these capital levels. In connection with the CMA, CFSB agreed to purchase and at all times own 100% of the common stock of Bluebonnet, and FSLIC obtained the right to seize Bluebonnet in the event CFSB failed to timely make the capital infusions or to maintain capital compliance.

Pursuant to the Assistance Agreement, Fail and CFSB agreed to recapitalize Bluebonnet by infusing $120 million over a two-year period, with $70 million due the day the Assistance Agreement was signed, and an additional $25 million due on the first and second anniversary dates. The Assistance Agreement required that one-half of the total infusion be raised through the sale of Bluebonnet-issued capital notes and one-half consist of equity. With respect to the initial $70 million, CFSB agreed to infuse $35 million into Bluebonnet through the purchase of Bluebonnet common stock. The remaining $35 million would be infused in the form of subordinated debt issued by Bluebonnet and to be purchased by Lifeshares or one of its affiliates. The Assistance Agreement also required that CFSB purchase $12.5 million of Bluebonnet's common stock on each of the two successive anniversaries of the effective date, while Lifeshares would either purchase or place with an unaffiliated third party $12.5 million of subordinated debt each year.

To meet the initial capital infusions required under the Assistance Agreement, Mutual Security Life Insurance Company ("MSL"), a company owned by Fail, purchased $35 million of subordinated debt issued by Bluebonnet and CFSB purchased $25 million in Bluebonnet common stock funded by a loan in that amount from Bankers Life and Casualty Company ("Bankers Life"), an insurance company affiliated with Robert T. Shaw. Fail's common stock shares in Lifeshares and CFSB were used as collateral for the Bankers Life Loan. The final $10 million was raised on December 30, 1988, when Fail and CFSB entered into a loan agreement with Bankers Life to allow Fail to purchase the remaining $10 million of Bluebonnet common stock. On March 8, 1989, FHLBB issued a technical amendment to its initial approval of the acquisition, which permitted Bluebonnet to treat certain subordinated debt as regulatory capital ("subordinated debt forbearance").

During 1989, considerable efforts were made by Fail to secure capital sources that either were willing to invest in Bluebonnet or to provide financing. He sent John Kirchhofer, a business representative of Steiner, and Carneal to meet with potential capital sources. Kirchhofer focused on finding a "tax-advantaged partner." A tax-advantaged partner is an investor with substantial net earnings capable of utilizing the net operating losses generated by Bluebonnet. Between February and August 1989, Kirchhofer met with three potential tax-advantaged partners and two investment banking firms, but was unable to obtain financing. In early 1989, Carneal met with several New York investment banking firms, in an effort to find investors willing to provide either equity or debt financing, but also was unsuccessful. Fail also utilized accounting firms, consultants, and law firms to help search for candidates willing to provide financing or to be a tax-advantaged partner.

On August 9, 1989, FIRREA was signed into law. FIRREA and its implementing regulations changed the capital requirements applicable to thrifts, imposing core capital, tangible capital, and risk-based capital requirements. The most important of these changes for Bluebonnet was the new requirement to maintain core capital equal to at least 3% of assets. 12 U.S.C. 1464(t)(2)(A) (Supp. I 1989). FIRREA also altered the then existing regulatory regime, replacing FHLBB and FSLIC with a new agency, the Office of Thrift Supervision ("OTS"). A thrift deposit insurance fund was also created which the Federal Deposit Insurance Corporation ("FDIC") would oversee. Finally, FIRREA prohibited Bluebonnet from treating subordinated debt as regulatory capital, which decreased Bluebonnet's regulatory capital level by $35 million, the amount of the subordinated debt note issued to MSL. As a result, Bluebonnet's core capital ratio dropped to 2.06% of assets, which failed to comply with FIRREA's new core capital requirement.

Concerned with a threat of seizure and because neither Fail nor CFSB had sufficient funds to infuse capital into Bluebonnet, the Board of Directors of Bluebonnet ("Board of Directors") informed Robert Brick, Caseload Manager of OTS, of FIRREA's impact on Bluebonnet's existing capital structure. After rejecting a series of...