Slattery v. U.S.

• Decision Date: 29 September 2009
• Docket Number: No. 2007-5064.,No. 2007-5089.,No. 2007-5063.,2007-5063.,2007-5064.,2007-5089.
• Citation: 583 F.3d 800
• Parties: Frank P. SLATTERY, Jr., (on behalf of himself and on behalf of all other similarly situated shareholders of Meritor Savings Bank), Plaintiff-Cross Appellant, and Steven Roth, and Interstate Properties, Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

583 F.3d 800

Frank P. SLATTERY, Jr., (on behalf of himself and on behalf of all other similarly situated shareholders of Meritor Savings Bank), Plaintiff-Cross Appellant, and Steven Roth, and Interstate Properties, Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant.

No. 2007-5063.

No. 2007-5064.

No. 2007-5089.

United States Court of Appeals, Federal Circuit.

September 29, 2009.

Thomas M. Buchanan, Winston & Strawn, LLP, of Washington, DC, argued for plaintiff-cross appellant Frank P. Slattery, Jr., (on behalf of themselves and on behalf of all other similarly situated shareholders of Meritor Savings Bank). With him on the brief were Peter Kryn Dykema, and Eric W. Bloom.

Bradley P. Smith, Sullivan & Cromwell LLP, of New York, NY, argued for plaintiffs-cross appellants Steven Roth, and Interstate Properties. With him on the brief were Richard J. Urowsky and Jennifer L. Murray.

Jeanne E. Davidson, Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With her on the brief was Michael W. Hertz, Deputy Assistant Attorney General, Kenneth M. Dintzer, Assistant Director, F. Jefferson Hughes and William G. Kanellis, Trial Attorneys.

Dorothy Ashley Doherty, Federal Deposit Insurance Corporation, of Washington, DC, for amicus curiae Federal Deposit Insurance Corporation.

Before NEWMAN and GAJARSA, Circuit Judges, and WARD, District Judge.^*

Opinion for the court filed by Circuit Judge NEWMAN. Dissenting opinion filed by Circuit Judge GAJARSA.

NEWMAN, Circuit Judge.

The United States Court of Federal Claims held that the United States, acting through the Federal Deposit Insurance Corporation ("FDIC"), breached a contract with the Meritor Savings Bank ("Meritor") and is liable in damages.¹ The government challenges the jurisdiction of the Court of Federal Claims to review contracts with the FDIC, and also appeals the ruling of breach of contract and the award and measure of damages. On cross-appeal the plaintiff shareholders (collectively "Slattery"), pursuing this action derivatively on behalf of Meritor and in the interest of its shareholders, challenge the sufficiency of the damages award. In addition, former shareholders Roth and Interstate Properties (collectively "Roth" or "Intervenors") challenge the dismissal of their claims in intervention. The FDIC filed a brief as amicus curiae, seeking to modify certain aspects of the judgment.

The decision of the Court of Federal Claims as to jurisdiction and liability for breach of contract is affirmed. With respect to damages, we affirm the award of lost value damages of $276 million, reverse the award of $67 million in non-overlapping restitution damages, and by agreement of the parties reverse as cumulative the award of wounded bank damages of $28 million. We affirm the denial of additional damages measured by the FDIC's savings of $696 million due to the merger that was implemented by the breached contract. We reverse the dismissal of the Intervenors' claims on jurisdictional grounds, and remand for consideration of any remaining aspects of the final disposition of this sixteen-year proceeding.

BACKGROUND

Federal authority for regulation of state-chartered savings banks derives from the federal deposit insurance administered by the FDIC. In the late 1970s and early 1980s an economic recession accompanied by high interest rates placed extreme pressure on banking institutions, and the FDIC encouraged and assisted solvent banks to merge with failing banks, to avert bank failures and to avoid call on the FDIC insurance fund. Thus the FDIC sought to salvage a failing Pennsylvania bank, the Western Savings Fund Society ("Western"), through merger with a solidly solvent bank.

In April 1982 Meritor² and the FDIC agreed that Meritor would merge with Western, with various incentives and accounting expedients provided by the FDIC to enable the merged institution to comply with federal capital requirements despite Western's weak assets. The merger was implemented by several agreements. By a Merger Assistance Agreement ("the Assistance Agreement") the FDIC agreed to provide notes, cash, and other monetary assistance in exchange for Meritor's assumption of Western's obligations. By a Memorandum of Understanding ("the 1982 MOU") the FDIC and Meritor further agreed to the following accounting procedure:

Regarding the use by Bank of certain accounting methods, the FDIC would not object to the following:

....

3. The difference between the liabilities assumed and the total of the market value of the Western assets, less reserves, may be treated as goodwill and amortized on a straight-line basis up to fifteen (15) years.

This accounting procedure treats "goodwill" as a form of capital. It is measured as the excess of the acquired bank's liabilities over the value of its assets and, as the Supreme Court explained in United States v. Winstar, 518 U.S. 839, 848-49, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), in effect treats liabilities as capital assets for regulatory compliance purposes.³

The Court of Federal Claims found, as undisputed fact, that the 1982 MOU authorizing this accounting procedure was critical to the merger with Western, for otherwise the merged bank would have immediately failed in capital compliance. The Pennsylvania Secretary of Banking, having regulatory oversight of Pennsylvania savings banks, agreed to this procedure. The Court of Federal Claims found that the cost to the FDIC's insurance fund would have been at least $696 million if Western had been liquidated, in contrast to the financial incentives the FDIC provided in connection with the merger with Meritor, which at that time were estimated at $294 million.

With the infusions of cash and with goodwill counted as regulatory capital pursuant to the 1982 MOU, the merged Meritor bank was in compliance with the federal equity capital requirement for savings banks, which at that time was a minimum of 5% of adjusted total assets. See FDIC Statement of Policy on Capital Adequacy, 46 Fed.Reg. 62,693, 62,694 (Dec. 17, 1981) (establishing 5% capital requirement).⁴ In 1983 Meritor converted to a stock savings bank pursuant to a public offering, and thereafter expanded its banking activities. By September 1984, Meritor's capital ratio was 6.49% including the goodwill, but only 0.49% was tangible capital. Although FDIC inspectors raised concerns about the role of goodwill capital as protection for the FDIC insurance fund, the FDIC assured Meritor that the 1982 MOU "remains unchanged and in place," and that Meritor could "continue to amortize the goodwill arising from the Western acquisition over the agreed upon period." Liability Ruling, 53 Fed.Cl. at 265 & n. 5 (quoting 1984 letter from FDIC to Meritor).

In 1985, as the nation's banking problems continued, the FDIC adopted new regulations raising the primary capital ratio for all FDIC-insured savings banks to a minimum of 5.5%. See FDIC Capital Maintenance Rule, 50 Fed.Reg. 11,128 (Mar. 19, 1985) (12 C.F.R. pt. 325).⁵ However, the new regulations "grandfathered" the FDIC's previously approved recognition of intangible capital that included goodwill. Thus 12 C.F.R. § 325.5(b) (1985) provided that:

Any intangible asset which was booked in accordance with generally acceptable accounting principles when acquired and which was approved by the FDIC for inclusion in equity capital prior to the effective date of this regulation shall be counted in full as a component of primary capital and shall not be deducted from total assets if it is being amortized over a period not to exceed 15 years or its estimated useful life, whichever is shorter.

Nonetheless, in late 1985 the FDIC asked Meritor to enter into a new MOU and agree to increase its minimum capital requirement beyond the regulatory minimum of 5.5%. Evidence at trial showed the FDIC's concern that although goodwill accounting allowed Meritor to meet the regulatory capital requirement of 5.5%, protection of the FDIC insurance fund was not thereby assured, for goodwill was an inadequate substitute for hard capital. Meritor objected to the proposed increase, pointing out that the goodwill accounting method was authorized in the 1982 MOU and preserved in the grandfather clause of the 1985 regulations; the FDIC withdrew the request.

In 1987 and 1988 the FDIC again pressed Meritor to accept an increased capital requirement, for the pressures on banking institutions had not abated, and Meritor's situation was deteriorating. The FDIC requested that Meritor enter into a new Memorandum of Understanding ("the 1988 MOU") which would increase Meritor's minimum capital requirement to 6.5% of primary capital. The Court of Federal Claims found that Meritor then had no choice but to agree to the 1988 MOU, because Meritor was threatened with more extreme FDIC action if it refused. These events were the subject of extensive testimony at trial. For example, there was testimony concerning the FDIC's requirement that Meritor's Board of Directors appoint a new CEO of the FDIC's selection, following which the Meritor Board accepted the 1988 MOU. The 1988 MOU continued to allow Meritor to count goodwill as capital, but Meritor's new 6.5% capital requirement exceeded the existing regulatory minimum of 5.5% for savings banks.

The 1988 MOU also provided, inter alia, that if Meritor failed to achieve the 6.5% capital level by the end of 1988, Meritor must submit a capital plan to the FDIC that would increase its tangible capital by $200 million, and must present a five-year strategic plan to improve its financial health. At the end of 1988 the FDIC determined that Meritor had not met the 6.5% capital level and had not provided a satisfactory capital plan, although various other provisions of the 1988 MOU were met. Under pressure of an immediate Cease and Desist Order from the FDIC, Meritor proposed a capital plan that included...