Castle v. U.S.

Citation301 F.3d 1328
Decision Date19 August 2002
Docket NumberNo. 01-5050.,No. 01-5047.,01-5047.,01-5050.
PartiesJohn K. CASTLE, Leonard M. Harlan, Donald C. Carter, Double S & M Partnership, Grace & Green Arbitrage Partners, Hudson Valley Partners, L.P., Dan W. Lufkin, MCI Two Investment Limited Partnership, Robert Marston, MCD Merger Arbitrage Fund, Ltd., L.T. Foster, Northern Trust Co., Trust # 2-67917 (Kate T. Foster Trust FBO), R.C. Foster, Northern Trust Co., Trust # 2-67918 (Kate T. Foster Trust FBO), J.R. Foster, Northern Trust Co., Trust # 2-67919 (Kate S. Thompson Trust FBO), Public Service Resources, Society Bank & Trust-trustee, Zane Tankel Partners, Robert V. Dolan, M.D., Leo W. Kwan, M.D. Pension and Profit Sharing Trusts, Robert B. Lyons, Robert Margolis, Fosven Associates Partnership, Stanley E. Roberts, M.D., Sanwa Bank of California, Trustee, Yorba Linda Medical Group FBO Russell E. Ewing, Castle Harlan, Inc., and Cenwick Fund, Plaintiffs-Cross Appellants, and Federal Deposit Insurance Corporation, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals for the Federal Circuit

John C. Millian, Gibson, Dunn & Crutcher LLP, of Washington, DC, argued for plaintiffs-cross-appellants. With him on the brief were Mark A. Perry, and Paul Blankenstein.

John V. Thomas, Associate General Counsel, FDIC, of Washington, DC, for plaintiff-appellee. With him on the brief were Thelma Diaz, Stephen Kessler, and Ellis Merritt, Counsels, FDIC.

David M. Cohen, Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Stuart E. Schiffer, Acting Assistant Attorney General; Jeanne E. Davidson, Deputy Director; Paul G. Freeborne, Michael M. Duclos, Katherine M. Kelly, Kenneth M. Kulak, and Jane M.E. Peterson, Trial Attorneys.

Before LOURIE, RADER, and GAJARSA, Circuit Judges.

GAJARSA, Circuit Judge.

This is a Winstar-related case. On cross-motions for summary judgment, the United States Court of Federal Claims ("Court of Federal Claims," or "trial court") held that two of the plaintiffs, John K. Castle ("Castle") and Leonard M. Harlan ("Harlan"), were parties to a contract that the government breached by enacting the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. 101-73, 103 Stat. 183, and its implementing regulations. Castle v. United States, 42 Fed. Cl. 859, 861-64 (1999) (Smith, C.J.). Also on these motions, the Court of Federal Claims determined that the remaining named plaintiffs other than the Federal Deposit Insurance Corporation (the "FDIC") were third-party beneficiaries to the breached contract, and that their third-party beneficiary status afforded them proper standing. Id. at 866. After rejecting the argument that Castle and Harlan had committed a prior material breach, the Court of Federal Claims granted summary judgment of liability against the United States for breach of contract. Id. at 867.

Following the grant of summary judgment of liability, then-Chief Judge Smith transferred the case to Judge Wiese, who held a trial on damages. See Castle v. United States, 48 Fed. Cl. 187, 191 (2000) (Wiese, J.). After a four-month trial, the court awarded the plaintiffs other than the FDIC $15.1 million in damages under a theory of restitution. Id. at 220. The trial court held, however, that the passage of FIRREA and its implementing regulations did not effect a taking of the plaintiffs' property pursuant to the Fifth Amendment of the United States Constitution. Id. Finally, the Court of Federal Claims determined that the FDIC lacked standing to assert a claim to money damages against the government. Id. Accordingly, on November 9, 2000, the court entered final judgment dismissing the FDIC from the case and awarding the remaining plaintiffs $15.1 million in damages. Castle v. United States, No. 90-1291 C (Fed.Cl. Nov. 9, 2000) (order entering final judgment).

The United States appeals. It contends that the Court of Federal Claims erred in granting summary judgment of liability for breach of contract as well as in awarding the plaintiffs other than the FDIC $15.1 million in damages on a theory of restitution. The named plaintiffs other than the FDIC cross-appeal, contending that the Court of Federal Claims erred in holding that the passage and implementation of FIRREA did not effect a taking under the Fifth Amendment, for which they are entitled to just compensation. The FDIC chose not to appeal its dismissal, and is therefore no longer a party to this case.

We conclude that the Court of Federal Claims erred in determining that the plaintiffs other than the FDIC and Castle and Harlan had standing to sue as third-party beneficiaries of the alleged contract. With respect to those plaintiffs, we vacate the Court of Federal Claims' grant of summary judgment of liability, and remand with instructions to dismiss them from the case. With respect to the remaining plaintiffs, Castle and Harlan, we conclude that the Court of Federal Claims correctly determined that the passage and implementation of FIRREA effected no Fifth Amendment taking. We therefore affirm the court's determination in this respect. We conclude, however, that the court erred in awarding the plaintiffs damages for breach of contract. The documents comprising the alleged contract did not require Castle and Harlan to contribute to the recapitalization of Western Empire. Castle and Harlan cannot recover in restitution the amounts they voluntarily contributed, nor do the circumstances of this case entitle them to damages on a theory of reliance. Consequently, we reverse the damages award. We do not decide whether the Court of Federal Claims correctly granted summary judgment of liability.

I. BACKGROUND

As with the other Winstar-related cases, this case involves claims against the government stemming from Congress' enactment of FIRREA in response to the savings and loan crisis of the 1980s. The circumstances surrounding this crisis in the thrift industry are by now familiar; as they are well-documented elsewhere, we do not fully recount them here. See United States v. Winstar Corp., 518 U.S. 839, 843-58, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996); Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1376-78 (Fed.Cir.2001). Instead, we echo the Court of Federal Claims' succinct explanation of the pertinent facts.

In the 1980s, interest rates rose. This caused a number of savings and loan institutions, or thrifts, to become insolvent when the interest rates they were forced to pay in order to attract new deposits exceeded the income generated from mortgages entered previously at lower rates. Castle, 48 Fed. Cl. at 191. The agency that insured thrift deposits, the Federal Savings and Loan Insurance Corporation ("FSLIC"), was threatened with the exhaustion of its insurance funds. Id. The agency therefore sought private investors and healthy thrifts to take over ailing thrifts before they failed. Id. at 191-92. This was accomplished in a series of "supervisory mergers." Winstar, 518 U.S. at 847, 116 S.Ct. 2432.

As an incentive to engage in supervisory mergers, government regulators routinely agreed to afford the thrifts particular regulatory treatment. Advantageous accounting treatment of goodwill was foremost among these incentives. Id. at 848, 116 S.Ct. 2432. Supervisory mergers generated "supervisory goodwill," an amount determined by the difference between an ailing thrift's purchase price and the fair value of its identifiable assets. Although generally accepted accounting principles ("GAAP") do not permit treating goodwill as such, regulators encouraged supervisory mergers by allowing the acquirors of ailing thrifts to count supervisory goodwill toward the thrift's regulatory capital requirements, and to amortize it over an extended period of time. Such amortization allowed the acquiring institutions to report larger amounts in their regulatory capital reserve accounts than they would have been able to report had they been required to amortize the goodwill over a shorter time period. This allowed the acquiring institutions to satisfy the regulatory capital requirements without obtaining additional capital infusions.

When this approach exacerbated the crisis rather than alleviating it, Congress, on August 9, 1989, enacted FIRREA. Pub.L. 101-73, 103 Stat. 183. FIRREA overhauled the structure of federal thrift regulation. Winstar, 518 U.S. at 856, 116 S.Ct. 2432. Among other things, it required thrifts to maintain core capital of at least three percent of their total assets, and prohibited counting unidentifiable intangible assets, such as goodwill, toward this capital maintenance requirement. Id. (citing 12 U.S.C. §§ 1464(t)(2)(A), 1464(t)(9)(A)).

A number of thrifts that had engaged in supervisory mergers became unable to meet the stricter standards imposed by FIRREA, and were subsequently seized. This spawned the Winstar litigation, in which the acquirors of ailing thrifts alleged that by enacting and implementing FIRREA, the government breached contracts promising thrifts particular regulatory treatment and took property without just compensation in violation of the Fifth Amendment. In Winstar, the Supreme Court upheld this court's en banc determination that the documents executed between government regulators and the acquiring thrifts in connection with the supervisory mergers there at issue constituted enforceable agreements. Id. at 859-60, 116 S.Ct. 2432.

Hundreds of Winstar-related cases were initiated in the wake of FIRREA. In addition to Winstar itself, this court has reviewed appeals in several other Winstar-related cases. See, e.g., Frazer v. United States, 288 F.3d 1347 (Fed.Cir.2002); Bluebonnet Savs. Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed.Cir.2001); Glass v. United States, 258 F.3d 1349 (Fed.Cir.2001), amended on reh'g 273 F.3d at 1072 (Fed.Cir.2001); Landmark Land Co., v....

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