Southern Cal. Federal Sav. V. U.S.
| Decision Date | 22 August 2005 |
| Docket Number | No. 04-5036.,No. 04-5038.,04-5036.,04-5038. |
| Citation | 422 F.3d 1319 |
| Parties | SOUTHERN CALIFORNIA FEDERAL SAVINGS & LOAN ASSOCIATION and SoCal Holdings, Inc., Plaintiffs-Appellees, and Arbur, Inc., William E. Simon, Jr., J. Peter Simon, and George J. Gillespie, III (Executors of the Estate of William E. Simon, Sr.), Plaintiffs-Appellees, and Roy Doumani, Preston Martin, and Beverly W. Thrall (Successor to the Claims of Larry B. Thrall), Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Federal Circuit |
Rosemary Stewart, Spriggs & Hollingsworth, of Washington, DC, argued for plaintiffs-appellees Southern California Federal Savings & Loan Association and SoCal Holdings, Inc. With her on the brief was Monica A. Freas. Of counsel was Lesley A. Benn, Milbank Tweed Hadley & McCloy LLP, of Washington, DC.
David S. Cohen, Milbank, Tweed, Hadley & McCloy LLP, of Washington, DC, argued for plaintiffs-appellees Arbur, Inc., William E. Simon, Jr., J. Peter Simon, and George J. Gillespie, III. Of counsel on the brief were Richard C. Tufaro and Lesley A. Benn.
David B. Bergman, Arnold & Porter, LLP, of Washington, DC, argued for plaintiffs-cross appellants. Of counsel on the brief were Melvin C. Garbow, Howard N. Cayne, Michael A. Johnson, and Ida L. Bostian.
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, and David M. Cohen, Director. Of counsel on the brief were Kenneth M. Dintzer, Senior Trial Counsel, Colleen A. Conry, David C. Hoffman, John N. Kane, and Tonia J. Tomatore, Trial Attorneys.
Before NEWMAN, MAYER and GAJARSA, Circuit Judges.
Opinion for the court filed by Circuit Judge GAJARSA. Dissenting opinion filed by Circuit Judge MAYER.
The United States appeals two decisions made by the Court of Federal Claims in this Winstar-related case. First, it challenges the court's grant of summary judgment finding the government liable for breach of contract to Arbur, Inc., the Estate of William E. Simon, Sr. (collectively, the "Simon Plaintiffs") and Roy Doumani, Preston Martin, and Beverly W. Thrall (collectively, the "DMT Plaintiffs"). Southern Calif. Fed. Savings & Loan Assoc. v. United States, 52 Fed.Cl. 531 (2002) ("SoCal I"). Second, the government challenges the amount and propriety of damages awarded after trial to Southern California Federal Savings & Loan Association and SoCal Holdings, Inc. (collectively, "the Institutional Plaintiffs") as well as the damages awarded to the Simon Plaintiffs and the DMT Plaintiffs (collectively, the "Individual Plaintiffs"). Southern Calif. Fed. Savings & Loan Assoc. v. United States, 57 Fed.Cl. 598 (2003) ("SoCal II"). The DMT Plaintiffs cross-appeal the court's refusal to award them additional damages based on the government's proposed cost of mitigation. Id. at 641. Because the Court of Federal Claims erred in holding that the Individual Plaintiffs have standing to sue for breach of contract, we vacate the court's judgment finding the government liable to them and awarding them damages based on that liability. Although we agree that the Institutional Plaintiffs are entitled to the categories of damages awarded to them, there are issues with the calculation of those damages that require further fact-finding to fully resolve. Accordingly, we affirm in part and reverse in part the court's award of damages to the Institutional Plaintiffs and remand for further proceedings.
This is a Winstar-related case involving claims against the government stemming from Congress' enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. 101-73. FIRREA was passed as part of the government's response to the savings and loan crisis of the 1980s. Castle v. United States, 301 F.3d 1328, 1332 (Fed.Cir.2002). The circumstances surrounding the crisis in the savings and loan industry are well-documented elsewhere, United States v. Winstar Corp., 518 U.S. 839, 843-58, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), and therefore we need not recount them in detail here. An understanding of the government's response to that crisis and the resulting litigation is, however, helpful to appreciating the issues raised by this case, so we begin with a brief overview.
The rise of interest rates in the 1980s caused a number of savings and loan institutions, or thrifts, to become insolvent when the interest rates they were required to pay on new deposits exceeded the income generated from existing mortgages entered into at lower rates. Castle, 301 F.3d at 1332. In response, the agency that insured thrift deposits, the Federal Savings and Loan Insurance Corporation ("FSLIC"), and the regulator of all federally insured thrifts, the Federal Home Loan Bank Board ("FHLBB"), sought private investors and healthy thrifts to take over ailing thrifts. Id. As an incentive to engage in such mergers, the FSLIC and the FHLBB routinely agreed to afford the acquiring thrifts particular regulatory treatment. Id. at 1333.
A commonly contracted for benefit involved the treatment of "supervisory goodwill." Supervisory goodwill was generated by the excess between an ailing thrift's liabilities assumed by an acquirer and the fair value of its identifiable assets. Winstar Corp. v. United States, 64 F.3d 1531, 1536 (Fed.Cir.1995) (en banc). The FHLBB permitted the acquiring thrifts to count supervisory goodwill toward the thrift's regulatory capital requirements, despite contrary teachings under generally accepted accounting principles ("GAAP"). Castle, 301 F.3d at 1333. This treatment of supervisory goodwill facilitated satisfaction of the regulatory capital requirements by minimizing or eliminating the need for the acquiring thrifts to obtain additional capital infusions. Id.
The FHLBB and the FSLIC also used a capital credits incentive to encourage mergers with failing thrifts. The capital credits incentive involved FSLIC making a cash contribution to the merged thrift, which contribution could then be accounted for in partial satisfaction of the merged thrift's regulatory capital requirements. Winstar Corp., 64 F.3d at 1536.
FIRREA, which was enacted in 1989, required, among other things, that thrifts maintain core capital of at least three percent of their total assets, and prohibited counting unidentifiable intangible assets, such as supervisory goodwill, toward this capital maintenance requirement. Id. Although the statute did not directly address the treatment of capital credits, concomitant regulations required that capital credits be treated in the same manner as supervisory goodwill. Winstar, 64 F.3d at 1538. As a result of the passage of FIRREA and the promulgation of related regulations, many thrifts that were previously in full compliance with the regulations on capital requirements failed to satisfy the new capital standards and immediately became subject to seizure. Id. Thus, the Winstar litigation was spawned whereby acquirers of the failing thrifts alleged that the government's enactment and implementation of FIRREA constituted a breach of the contracts promising thrifts particular regulatory treatment. Castle, 301 F.3d at 1333.
In 1986, the Individual Plaintiffs1 responded to the government's solicitation of purchasers for the failing Southern California Savings and Loan Association ("Old Southern"). SoCal I, 52 Fed.Cl. at 545. The Individual Plaintiffs proposed to form and personally capitalize a holding company to be named SoCal Holdings, Inc. ("SCH"). Id. SCH would in turn purchase Old Southern and form a new savings and loan association. Id. Upon government approval, the new association, a wholly-owned subsidiary of SCH named Southern California Federal Savings and Loan Association ("SoCal"), would acquire all the assets and liabilities of Old Southern. Id. at 546. The government approved the acquisition proposal and, on April 30, 1987, a series of agreements were entered into to complete the transaction.
Three of those agreements/documents are most relevant to the current litigation. The Assistance Agreement was the primary document governing the transaction and it was entered into by SCH, as the acquirer of Old Southern, SoCal, and FSLIC. In conjunction with the execution of the Assistance Agreement, the FHLBB issued a Forbearance Letter addressed to Preston Martin as Chairman of the Board and Chief Executive Officer of SCH. The Forbearance Letter included the FHLBB's promise that SoCal could depart from GAAP in accounting for its capital credits and its supervisory goodwill. Finally, the Regulatory Capital Maintenance Agreement ("RCMA") was entered into by SCH, the Individual Plaintiffs, SoCal, and the FSLIC. Section 1 of the RCMA required SCH to maintain the regulatory capital of SoCal at the level specified by the applicable regulations and stated that the FSLIC capital credit would be includable as capital in order to meet that requirement. The RCMA also obligated the Individual Plaintiffs to "guarantee the performance of [SHC] and [SoCal] under § 1, provided that ... the personal obligations of the [Individual Plaintiffs] under said guarantees shall not exceed $5,000,000 in the aggregate." Execution of the RCMA was an express condition to FSLIC's obligations under the Assistance Agreement.
By 1989, SoCal's financial situation had improved greatly. SoCal II, 57 Fed.Cl. at 607. Its MACRO/CAMEL rating2 had moved from a 4 to a 3. Id. Despite a tightening of the market, a decline in mortgage originations, and increased competition from other California thrifts, SoCal had grown from approximately $900 million at the time of the acquisition by SCH...
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