474 F.3d 1314 (Fed. Cir. 2007), 05-5173, Citizens Federal Bank v. United States

Docket Nº:05-5173.
Citation:474 F.3d 1314
Party Name:CITIZENS FEDERAL BANK and CSF Holdings, Inc., Plaintiffs-Appellees, v. UNITED STATES, Defendant-Appellant.
Case Date:January 24, 2007
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit
 
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Page 1314

474 F.3d 1314 (Fed. Cir. 2007)

CITIZENS FEDERAL BANK and CSF Holdings, Inc., Plaintiffs-Appellees,

v.

UNITED STATES, Defendant-Appellant.

No. 05-5173.

United States Court of Appeals, Federal Circuit.

January 24, 2007

Appealed from: United States Court of Federal Claims, George W. Miller, Judge.

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David H. Thompson, Cooper & Kirk, PLLC, of Washington, DC, argued for plaintiffs-appellees. With him on the brief were Charles J. Cooper and David M. Lehn. Of counsel was Nicole Jo Moss.

William F. Ryan, Assistant 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

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General, David M. Cohen, Director, Jeanne E. Davidson, Deputy Director, Delfa Castillo, Elizabeth M. Hosford, Delisa M. Sanchez, and John J. Todor, Trial Attorneys.

Before NEWMAN, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and RADER, Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

This is a Winstar related case in which the Court of Federal Claims held that the government had breached an agreement with a savings and loan company that the latter could use a particular method of accounting in determining its capital for regulatory purposes, and awarded damages of approximately $18,600,000. In its appeal the government has challenged only the award of damages. It contends that the breach of the agreement did not cause the injury for which the plaintiffs were awarded damages. We affirm.

I

A. The facts relating to the financial problems of the savings and loan industry in the early 1980s and the federal government's attempts to alleviate the situation are well known and need only to be briefly summarized here. At that time a large number of savings and loan companies (also known as thrifts) were in serious financial straits and facing insolvency. Federal regulators devised a program under which economically healthy thrifts would acquire financially-distressed ones. To encourage such action, the regulators offered various benefits to the acquiring thrifts, which usually were incorporated in written agreements with them. These included treating the excess of the amount paid for the acquired thrift over that entity's value (known as "regulatory goodwill") as an asset in determining the acquiring thrift's compliance with the thrift's regulatory capital requirements. The agreements also permitted the acquiring thrifts to amortize their "regulatory goodwill" over a substantial period, generally 25 years.

In 1989 Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (August 9, 1989), which made significant changes in governmental regulation of the savings and loan business. These included prohibiting thrifts from using "regulatory goodwill" as a capital asset for regulatory purposes and requiring them to phase out that practice over a five-year period. In the Act, Congress also prohibited thrifts from using subordinated debt as part of their regulatory capital.

As a result of FIRREA, many thrifts became insolvent and the regulators liquidated them.

A number of thrifts filed suit in the Court of Federal Claims seeking damages on a variety of theories. In United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), the Supreme Court upheld this court's decision that the United States was liable for breach of contract to thrifts with which it had agreed to permit the use as regulatory capital of "regulatory goodwill" that had been created in connection with the thrifts' acquisition of a failing thrift. In Winstar, the Supreme Court did not address "the appropriate measure or amount of damages" for such breach. Id. at 910, 116 S.Ct. 2432. In a number of subsequent decisions, this court has addressed various damages questions arising in such cases. See, e.g., First Heights Bank, FSB v. United States, 422 F.3d 1311 (Fed.Cir.2005); Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed.Cir.2005); Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed.Cir.2005).

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B. The basic facts in this case, as found by the Court of Federal Claims, are largely undisputed.

In the mid 1980s, the appellee Citizens Federal Bank ("Citizens") and its predecessor and affiliates were a successful and well-managed thrift. At the request of the federal regulators of the thrift industry ("the Regulators"), in 1986 and 1988 Citizens acquired two financially-troubled thrifts. In connection with those acquisitions and to encourage them, the Regulators entered into written Acceptance Agreements with Citizens under which Citizens was authorized to treat the excess of the acquired thrift's liabilities over the purchase price as "regulatory goodwill," which would be amortized over 25 years and could be used to satisfy Citizens regulatory-capital requirements. Citizens obtained $35.9 million of "regulatory goodwill" in connection with the 1986 acquisition and $17 million in connection with the 1988 acquisition. Citizens Fed. Bank v. United States, 59 Fed. Cl. 507, 510 (2004) ("Liab. Op."); Citizens Fed. Bank v. United States, 51 Fed. Cl. 682, 685 (2002) ("Breach Op.").

Following the enactment of FIRREA, in 1989 Citizens still was in compliance with the regulatory-capital requirements, although its coverage margins were greatly reduced.

Prior to the enactment of FIRREA, Citizens had a large amount of subordinated debt, which its depositors held. FIRREA prohibited the use of such debt as part of a thrift's regulatory capital. To deal with that problem, Citizens issued non-cumulative preferred stock in exchange for the subordinated notes. While this exchange improved Citizens regulatory-capital situation, it had an adverse tax consequence for Citizens because although the interest it had paid on the notes was deductible, the dividends paid on the preferred stock that was substituted for them were not.

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