First Heights Bank, Fsb v. U.S., 04-5021.
| Decision Date | 17 August 2005 |
| Docket Number | No. 04-5022.,No. 04-5021.,04-5021.,04-5022. |
| Parties | FIRST HEIGHTS BANK, FSB, Pulte Diversified Companies, Inc., and Pulte Homes, Inc., Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Federal Circuit |
Robert K. Huffman, Miller and Chevalier Chartered, of Washington, DC, argued for plaintiffs-cross appellants. With him on the brief were Alan I. Horowitz and Lisanne E.S. Cottington.
David M. Cohen, Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney General, Jeanne E. Davidson, Deputy Director, and Jeffery T. Infelise, Trial Attorney.
Before MICHEL, Chief Judge, NEWMAN, and LOURIE, Circuit Judges.
The United States appeals from the judgment of the United States Court of Federal Claims, awarding $48.7 million in damages to First Heights Bank, FSB, Pulte Diversified Companies, Inc., and Pulte Homes, Inc. (collectively, "plaintiffs"). The appeal was submitted after oral argument on July 6, 2005. Because the trial court properly determined liability and damages in this breach of contract action, we affirm.
This case is one of many arising out of the savings and loan crisis of the 1970s and 1980s. See United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996) (). At the heart of these "Winstar" cases are government actions that were taken to induce otherwise healthy businesses and financial institutions to acquire troubled savings and loan associations ("thrifts").
This case is based on the "Assistance Agreement" involving two of the three plaintiffs and the government. The details of the Assistance Agreement and the negotiations leading up to it are explained in several of the trial court's opinions and will not be repeated here. See First Heights Bank, FSB v. United States, 51 Fed.Cl. 659 (2001); First Heights Bank, FSB v. United States, 53 Fed.Cl. 195 (2002); First Heights Bank, FSB v. United States, 57 Fed.Cl. 162 (2003). In short, after extended negotiations with representatives of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation ("FSLIC"), plaintiffs acquired five failing thrifts in exchange for various considerations detailed in the Assistance Agreement. A primary benefit of the Assistance
Agreement from plaintiffs' perspective was the expected ability to claim the net liabilities of the failing thrifts as tax deductions, even if the net liabilities were offset by payments from the government ("reimbursed net liabilities").
Several years after plaintiffs acquired the failing thrifts, Congress enacted section 13224 of the Omnibus Budget Reconciliation Act of 1993, Pub.L. No. 103-66, § 13224, 107 Stat. 312, 485-86, which is also known as the Guarini Amendment. The Guarini Amendment had the effect of disallowing the acquiring firms from claiming reimbursed net liabilities as tax deductions.
Plaintiffs brought suit in the Court of Federal Claims in 1996, alleging that the Guarini Amendment breached the Assistance Agreement. The trial court entered summary judgment in favor of plaintiffs, concluding, inter alia, that the Guarini Amendment breached the implied covenant of good faith and fair dealing and awarding damages of $48.7 million in favor of plaintiffs. The government appeals the trial court's summary judgment as to liability and damages, and plaintiffs cross-appeal the trial court's rejection of its claim for lost profits. We have jurisdiction under 28 U.S.C. § 1295(a)(3).
The facts of this case are closely connected to a subset of Winstar cases in which the primary allegation is that the Guarini Amendment breached agreements between the government and various private entities that acquired failing thrifts. The first case in which we considered this subset of Winstar cases was Centex Corp. v. United States, 395 F.3d 1283 (Fed.Cir.2005). In that case, we concluded that prior to the Guarini Amendment the law allowed the acquiring firm to deduct reimbursed net liabilities. Id. at 1291-1304. We also concluded that the enactment of the Guarini Amendment breached the implied covenant of good faith and fair dealing by retroactively eliminating the ability to claim those deductions. Id. at 1304-11.
The liability issues in this case are largely governed by the decision in Centex. Because the briefing in this case closed before Centex was decided, the government's briefs contained many legal arguments that were rejected in Centex. To determine which arguments remained at issue after Centex, we issued an order before oral argument directing the parties to file supplemental briefing addressing the impact of Centex on this case. In its supplemental briefing, the government argued only that Centex was wrongly decided. Such an argument is misplaced because we must follow Centex, regardless whether we or the government think it was incorrectly decided. Failing to distinguish Centex in its supplemental briefing, the government, nevertheless, raised two points during oral argument to explain why it cannot be held liable for damages.
The government first argues that damages cannot be awarded in this case because Pulte Homes, Inc. ("Pulte"), the parent corporation of Pulte Diversified Companies, Inc. ("PDCI"), is the only plaintiff that could be entitled to damages, but Pulte lacks standing to assert a claim for damages as it was not a party to the Assistance Agreement. In Centex, we rejected an indistinguishable contention that the parent corporation in that case, Centex Corporation, was the only party that could be entitled to damages but could not assert a damages claim. Specifically, we held:
As a member of the Centex Consolidated Group, CTX [Centex's subsidiary] was eligible to share its tax benefits with the Group, and it was severally liable for the Group's tax liabilities. While it is
true that CTX retained its status as a separate taxable entity, CTX was nonetheless a member of the Centex Consolidated Group that consented to the filing of a consolidated tax return. As a consequence, it enjoyed the benefits and was subject to the liabilities flowing from the consolidation of the tax accounts of the various affiliated entities. CTX was therefore in a position to benefit, through the reduction of the Consolidated Group's tax liability, from deductions that would reduce the Consolidated Group's taxable income. For that reason, CTX has a legal stake in the question whether the Consolidated Group was entitled to the tax benefits that were assertedly revoked by the Guarini amendment. We therefore reject the government's argument that neither [Centex nor CTX] has standing to sue for breach of contract.
Centex, 395 F.3d at 1291 (citations omitted).
Similarly in this case, Pulte and PDCI filed consolidated tax returns. PDCI, therefore, "enjoyed the benefits and was subject to the liabilities flowing from the consolidation of the tax accounts." Id. Because PDCI thus has standing to assert the damages claimed in this case, the first premise of the government's argument — that Pulte is the only plaintiff that could be entitled to damages — fails. Accordingly, we reject this argument that damages cannot be awarded.1
The government next contends that damages cannot be awarded because the Assistance Agreement in this case includes a provision, not at issue in Centex, that supplies the exclusive remedy for the breach, and plaintiffs cannot prove damages under that remedy. The provision to which the government refers is section 9(i) of the Assistance Agreement, which provides in pertinent part:
Disallowed Deductions. In the event and to the extent Net Tax Benefits are credited to Special Reserve Account I or paid to the CORPORATION with respect to Tax Benefit Items that are subsequently disallowed or that are subsequently determined not to be excludible, or that cease to be Tax Benefit items because it is determined that payments with respect to such Tax Benefit Items are not to be excludible from gross income, such Net Tax Benefits shall be debited to Special Reserve Account I or, if this Agreement has terminated, paid to the PARENT ACQUIRING CORPORATION.
The effect of section 9(i) is to allow plaintiffs to seek reimbursement from the government of payments made to FSLIC related to deductions that were subsequently disallowed. Because plaintiffs did not make any such prepayments, the government argues that plaintiffs are not entitled to any damages.
We find the government's argument unpersuasive. Although reimbursement of prepayments on subsequently disallowed deductions is undoubtedly one remedy under the Assistance Agreement, there is no evidence that such reimbursement was intended to be the sole remedy. Indeed, section 25 of the Assistance Agreement provides to the contrary. It states that "[t]he rights, powers, and remedies given to the parties by this Agreement shall be in addition to all rights, powers, and remedies
given by any applicable statute or rule of law." Because that remedy is not exclusive, section 9(i) does not preclude plaintiffs from seeking damages other than mere reimbursement of such prepayments. Hence, we conclude that section 9(i) does not limit the remedies available to plaintiffs and, therefore, does not provide a basis for the government to avoid liability.
Accordingly, the government has failed to demonstrate that the trial court erred in holding it liable for breach of contract.
The government also raises three arguments regarding the amount of damages awarded by the trial court. First, the government claims that $32.7 million in additional tax "charge-offs" should not be included in the damages calculation. The government bases its contention on what it...
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