Old Stone Corporation v. United States

• Decision Date: 25 May 2006
• Docket Number: No. 05-5059.,05-5059.
• Citation: 450 F.3d 1360
• Parties: OLD STONE CORPORATION, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

450 F.3d 1360

OLD STONE CORPORATION, Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.

No. 05-5059.

United States Court of Appeals, Federal Circuit.

May 25, 2006.

COPYRIGHT MATERIAL OMITTED

Marvin C. Garbow, Arnold & Porter LLP, of Washington, DC, argued for plaintiff-appellee. Of counsel on the brief were Howard N. Cayne, David B. Bergman, Joshua P. Wilson of Washington, DC; and Kent A. Yalowitz and Allen Wong, of New York, New York.

William F. Ryan, Assistant Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. On the brief were Stuart E. Schiffer, Deputy Assistant Attorney General, and David M. Cohen, Director. Of counsel on the brief were Jeanne E. Davidson, Deputy Director, and Jeffery T. Infelise, Trial Attorney.

Before LINN, DYK, and PROST, Circuit Judges.

DYK, Circuit Judge.

This is a Winstar damages case. See United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996). The United States appeals the decision of the United States Court of Federal Claims, which awarded to Old Stone Corporation ("OSC") $192.5 million in damages for the government's breach of contract. Old Stone Corp. v. United States, 63 Fed.Cl. 65 (2004) ("Old Stone II"). The breach was the elimination of regulatory capital by the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183. We affirm the award of $74.5 million of post-breach mitigation payments, but reverse the award of $118 million of initial contributions. We conclude that the $118 million amount is not recoverable under a restitution theory because the appellant elected to continue performance under the contract to the benefit of the appellant and to the detriment of the government, and is not recoverable under a reliance theory because the damages were not foreseeable as a matter of law.

BACKGROUND

I

Before the transactions that are the focus of this lawsuit, Old Stone Corporation ("OSC") was a bank holding company headquartered in Rhode Island. Its primary subsidiary was a commercial bank, Old Stone Bank ("Old OSB" or "OOSB"), which was insured by the Federal Deposit Insurance Corporation ("FDIC"). This dispute had its genesis in the acquisition of two thrifts by OSC.

The first transaction was an acquisition of a small thrift, Rhode Island Federal ("RIF"). In June 1984, OSC submitted a proposal to the Federal Savings and Loan Insurance Corporation ("FSLIC") to acquire RIF with cash assistance from FSLIC. As a result of the acquisition, OSC would become a "thrift holding company" owning all of the stock of RIF. OSC would also obtain a federal savings bank charter which would permit it to engage in commercial lending while allowing it to expand into other geographical areas.

FSLIC accepted OSC's offer and approved the transaction in August 1984. The transaction involved the following steps: (1) RIF converted from a mutual savings institution to a Federal stock savings bank (or "thrift"), "New" Old Stone Bank ("OSB"); (2) OSB formed a subsidiary, NEWCO, to which OSC transferred all of its stock in OOSB, valued at $103.2 million; (3) NEWCO caused OOSB to distribute its assets and liabilities to OSB; (4) OSC acquired all of OSB's stock for a nominal amount ($100).

Under an "Assistance Agreement" executed by OSC, FSLIC and OSB, FSLIC contributed $9.55 million cash to OSB, and OSC contributed $13.8 million cash. RIF's deficit net worth on the date of the acquisition, after the cash contributions, was $4.4 million, which was recorded as so-called "supervisory goodwill." The Assistance Agreement incorporated a Forbearance Letter, which obligated the government to permit OSB to count FSLIC's $9.55 million cash contribution (known as a "capital credit"), and the $4.4 million of goodwill as regulatory capital. Thus the RIF transaction generated approximately $13.95 million in regulatory capital—$4.4 million in goodwill, and $9.5 million in the form of a capital credit. The Forbearance Letter permitted OSB to amortize this regulatory capital over a thirty year period. Because the Forbearance Letter was incorporated into the Assistance Agreement signed by OSC, FSLIC and OSB, the government's promise of regulatory forbearance ran to both OSC and OSB.

OSC and FSLIC also executed a Net Worth Maintenance Stipulation ("NWMS") under which OSC agreed to downstream (contribute) additional funds needed to maintain OSB in compliance with regulatory requirements.

The second transaction (the "Citizens transaction") occurred on December 27, 1985. OSC acquired Citizens Federal, a FSLIC-insured, federally-chartered mutual association located in Seattle, Washington. As part of the transaction, Citizens Federal converted to a federal stock savings bank and was renamed Old Stone Bank of Washington ("OSBW"). Under an Assistance Agreement between FSLIC, OSC and OSBW, FSLIC contributed $78.5 million of cash assistance to OSBW, and OSC contributed $14.8 million. Taking into account the cash contributions, the bank had a net worth deficit of $2.76 million. This amount was recorded as supervisory goodwill. The Assistance Agreement incorporated a Forbearance Letter, which permitted OSBW to count FSLIC's $78.5 million contribution, and the $2.76 million of supervisory goodwill as regulatory capital. Thus the Citizens transaction generated a total of $81.26 million in regulatory capital—$2.76 million in goodwill, and $78.5 million in capital credits. The Forbearance Letter permitted OSBW to amortize that regulatory capital over twenty five years. As in the RIF agreement, the government's promise of regulatory forbearance ran to both the thrift and to OSC.

On December 31, 1986, OSBW (formerly Citizens Federal) merged with and into OSB. Thereafter the combined OSB-OSBW entity made regulatory filings on a consolidated basis and was regulated on the basis of its combined regulatory capital.

The government contends that on December 31, 1987, the parties agreed to terminate the Citizens Assistance Agreement, pursuant to a termination provision of the Assistance Agreement that provided that "this Agreement shall terminate five years following the Effective Date or on such other date to which the parties or their successors agree in writing . . . ." J.A. at 200185 (emphasis added). The parties dispute the effect of this termination on the government's regulatory capital promise, but agree that it terminated the government's obligation to make assistance payments under the agreement.

II

In August of 1989, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub.L. No. 101-73, 103 Stat. 183. ("FIRREA"), which limited the ability of thrift institutions to count supervisory goodwill and capital credits towards their regulatory capital requirements. Winstar, 518 U.S. at 856-60, 116 S.Ct. 2432.

At the time of the enactment of FIRREA, approximately $80 million of regulatory capital from the Citizens and RIF transactions had not yet been amortized pursuant to the 30-year and 25-year amortization provisions of the assistance agreements. Approximately $11.7 million of this capital was attributable to the RIF transaction, and the remainder to the Citizens transaction. FIRREA prevented OSB from recognizing these amounts as regulatory capital. As a result, OSB failed one of the government's regulatory capital requirements—the so-called "risk-based" capital requirement—by $36 million.¹ OSB was thus "undercapitalized" and subject to seizure. However, neither OSC nor OSB repudiated the assistance agreements or at the time filed suit against the government for breach of the contracts. Rather, OSC and OSB sought to achieve compliance with FIRREA, and to otherwise continue performance under the contract.

A thrift could address the problem of regulatory compliance created by FIRREA in one of two ways—either by shrinking the thrift (selling assets and using the proceeds to pay off liabilities) or by infusing additional capital into the thrift. Initially the thrift chose the former route.² It sold assets in December of 1989—a residential lending unit ("OsCal") and a tuition budget company ("Academic Management Services" or "AMS").

Thereafter OSB submitted a "Capital Plan," which required OSB to "maintain. . . compliance with the tangible and core capital requirements" and to meet the risk-based capital requirement of FIRREA by December 31, 1990. J.A. at 200935. Under the Plan, the government granted an "exemption from any penalties or sanctions that may be imposed on the [thrift] for failing to meet its capital requirements." J.A. at 200930. The Capital Plan called for further shrinkage of the thrift through the sale by OSB of the assets that were owned by Citizens before the merger of Citizens into OSB. On January 25, 1990, OSB entered into a definitive agreement to sell all of the branches of OSBW (formerly Citizens). It sold the assets in May 1990, for a gain of $9.2 million.

The Plan also required OSC to contribute additional capital under the NWMS, pursuant to a revised schedule. The government approved the Plan in March 1990. Pursuant to the Plan, OSC downstreamed $74.5 million of capital to OSB in three allotments: $45.463 million in 1990, $27.5 million in 1991 and $1.6 million in 1992. In order to fund these downstream payments, OSC sold assets including two of its subsidiaries Old Stone Credit Corp and Old Stone Bank of North Carolina. OSC refers to these subsidiaries as its "crown jewels." The record does not reflect the exact relationships between the 1990, 1991 and 1992 payments and the amount of unamortized regulatory capital at the time of each payment, but the parties agree that these payments were even greater than the amount of unamortized regulatory capital ($65 million)³ when the thrift was later seized in 1993.

It is undisputed that after the breach caused by ...