Westfed Holdings, Inc. v. United States
| Decision Date | 12 May 2005 |
| Docket Number | No. 03-5131.,No. 03-5145.,03-5131.,03-5145. |
| Parties | WESTFED HOLDINGS, INC., Plaintiff-Cross Appellant, v. UNITED STATES, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Federal Circuit |
Rowan D. Wilson, Cravath, Swaine & Moore LLP, of New York, New York, argued for plaintiff-cross appellant. With him on the brief was Thomas G. Rafferty.
Jeanne E. Davidson, Deputy Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With her on the brief were Stuart E. Schiffer, Deputy Assistant Attorney General; David M. Cohen, Director; and Ashley N. Bailey, Jane M.E. Peterson, Delisa M. Sanchez, Edward P. Sullivan, and Tonia J. Tornatore, Trial Attorneys. Of counsel was Maureen A. Delaney.
Before RADER, GAJARSA, and PROST, Circuit Judges.
This appeal is another in a series of Winstar-related cases. Westfed Holdings, Inc. ("Westfed") commenced a lawsuit on its behalf and derivatively on behalf of the insolvent thrift, Western Federal Savings and Loan Association ("New Western" or "Western"), alleging that the federal government's passage and imposition of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") breached the government's agreement to forbear from imposing certain regulatory capital maintenance requirements on the thrift. Following a bench trial, the Court of Federal Claims determined that the government breached its contract and that Westfed is entitled to approximately $305 million in reliance damages. The government appeals both of the trial court's determinations. Westfed cross-appeals the trial court's decision to reject its claim for unpaid obligations allegedly owed to holders of debentures and preferred shares, now amounting to over $800 million. For the reasons set forth below, we affirm-in-part and reverse-in-part.
Two prior Court of Federal Claims decisions in this case discuss at length the facts of this case. Westfed Holdings, Inc. v. United States, 55 Fed.Cl. 544 (2003) ("Westfed II"); Westfed Holdings, Inc. v. United States, 52 Fed.Cl. 135 (2002) ("Westfed I"). We set forth here only the essential facts necessary to understand this case.
Westfed is a thrift holding company. In 1985, the Federal Savings and Loan Insurance Corporation ("FSLIC") seized Bell Federal Savings & Loan ("Bell"), a failing savings and loan institution, and placed its assets into receivership. Id. at 139. Subsequently, in 1985 and 1986, the FSLIC solicited offers to purchase the assets and liabilities of Bell. Id. Each time, the FSLIC rejected the submitted offers. Id. When the FSLIC again solicited offers in 1987, Bell Holdings, an affiliate organized by Westfed for the purpose of acquiring Bell, submitted a proposal to convert Bell from a mutual company to a stock company and to merge Bell with Western Federal Savings & Loan ("Old Western"). Id. At the time of this proposal, Westfed had a pending bid to acquire Old Western, id., which was subject to regulatory approval. In 1988, the Federal Home Loan Bank Board ("FHLBB") approved the proposal to convert Bell from mutual to stock form and to have Westfed acquire and merge Bell with Old Western. Id. The merged entity was to be called New Western. In a letter dated September 21, 1988 ("the Forbearance Letter"), the FHLBB informed Westfed that it would not enforce the regulatory capital requirements of 12 C.F.R. § 563.13 as long as New Western met the net worth requirement set out in the Regulatory Capital Maintenance Agreement ("RCMA"), an agreement that the parties executed two days later on September 21. Id. at 140. In the RCMA, Westfed and New Western, among other things, agreed to maintain New Western's net worth at the greater of $110 million or 2% of New Western's liabilities for five years after the execution of the RCMA. Id. at 140. In addition to executing the RCMA, the FSLIC, Westfed, and New Western executed an Assistance Agreement, in which the FSLIC agreed to contribute to New Western an amount equal to the capital shortfall of Bell. Id. at 139-40.
After its creation in 1988, New Western began implementing a business plan that called for aggressive growth over the next five years. Westfed II, 55 Fed.Cl. at 554. By the end of 1989, New Western just fell short of reaching the target asset size of $4.831 billion. Id. Moreover, New Western produced earnings of $28.96 million and paid dividends of $5.552 million in the first half of 1989. Id. On August 9, 1989, Congress enacted FIRREA, which abolished FHLBB and the FSLIC, and transferred their regulatory functions to the Office of Thrift Supervision ("OTS"). Nine days later, on August 18, 1989, OTS denied New Western permission to pay further dividends because it was found to be out of compliance with the capital requirements of FIRREA. Id. Despite the modifications to the capital requirements in the RCMA, OTS required New Western to file a capital restoration plan to meet the new capital maintenance requirement imposed by FIRREA. Id. By December 1992, OTS informed New Western that it was still undercapitalized, and imposed additional restrictions on capital distributions New Western could make until it complied with FIRREA. Id. In March 1993, OTS informed New Western that it was "significantly undercapitalized" and that it intended to impose further restrictions on New Western's operations. Id. Finally, on June 3, 1993, OTS seized New Western and placed it into receivership. Id. Throughout the period after the parties executed the Assistance Agreement, the government met its obligation to provide assistance payments to New Western, which totaled at least $780 million by the time OTS placed New Western into receivership.
Westfed brought suit against the government for breach of contract. After a fourteen-day trial, the Court of Federal Claims awarded Westfed reliance damages in the amount of about $305 million, but denied Westfed's request for alleged damages related to unpaid obligations to holders of Westfed's debentures and preferred shares, then exceeding $800 million. The government timely appeals the awarded reliance damages, while Westfed timely appeals the denial by the court to award money for the unpaid obligations. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).
We review interpretations of contracts by the Court of Federal Claims de novo and its findings of fact for clear error. E.I. Du Pont de Nemours and Co. v. United States, 365 F.3d 1367, 1372 (Fed.Cir.2004). "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).
The government argues that the trial court erred because (1) Westfed assumed the risk of a change in the law; (2) Westfed waived the breach by continuing to accept assistance from the government; (3) the trial court adopted the incorrect causation standard for reliance damages and, moreover, applied the adopted standard incorrectly; and lastly, (4) the trial court failed to deduct from Westfed's gross damages claim the financial benefits reaped from the government's performance. In Westfed's cross-appeal, it contends that the trial court incorrectly held that Westfed may recover only "amounts actually expended," which the court used as the basis to deny Westfed's claim for debts arising from the securities it issued allegedly to make the acquisition and merger of Old Western and Bell possible. We address each argument in turn.
The government argues that terms of the Forbearance Letter, which was integrated into the contract, indicate that Westfed assumed the risk of regulatory change to the capital maintenance requirement. The trial court interpreted the language found in paragraph 1 of the Forbearance Letter to mean that the government "unconditionally promised to take no action pursuant to § 563.13 of the Insurance Regulations so long as New Western maintained a net worth of approximately $95 million calculated in accordance with GAAP." Westfed I, 52 Fed. Cl. at 147. Paragraph 1 is set forth below:
The FSLIC will forbear from taking action pursuant to Section 563.13 of the Rules and Regulations for Insurance of Accounts ("Insurance Regulations") for any failure by New Western to comply with its regulatory capital requirement provided for in Section 563.13 as long as New Western satisfies either (1) the regulatory capital maintenance requirement or (2) the net worth maintenance requirement set forth in Section 2 of the Regulatory Capital Maintenance Agreement (either of which may be referred to herein as the "Modified Capital Requirement.")
The government argues that paragraph 8 of the Forbearance Letter, as set forth below, limited the bargained-for forbearance in paragraph 1:
So long as New Western is in compliance with its Modified Capital Requirement ["MCR"] it will be deemed in compliance with any form of minimum capital test or calculation to which it is or becomes subject pursuant to the Insurance Regulations, to the extent, in the opinion of the [Principal Supervisory Agent ("PSA")], not inconsistent [sic] with the purposes of any such regulation.
The trial court interpreted paragraph 8 to mean that "Westfed received the additional benefit of being deemed in compliance with any form of minimum capital test or calculation `to the extent, in the opinion of the Board ... [it is] not inconsistant [sic] with the purposes of the regulation in question.'" Id.
The government contends the trial court wrongly held "that, in paragraph 1, the parties implicitly addressed regulations which succeeded section 563.13(b)." In other words,...
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