California Federal Bank v. U.S., 03-5070.

• Citation: 395 F.3d 1263
• Decision Date: 19 January 2005
• Docket Number: No. 03-5070.,No. 03-5082.,03-5070.,03-5082.
• Parties: CALIFORNIA FEDERAL BANK, Plaintiff-Appellant, v. UNITED STATES, Defendant-Cross Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

395 F.3d 1263

CALIFORNIA FEDERAL BANK, Plaintiff-Appellant, v. UNITED STATES, Defendant-Cross Appellant.

No. 03-5070.

No. 03-5082.

United States Court of Appeals, Federal Circuit.

DECIDED: January 19, 2005.

COPYRIGHT MATERIAL OMITTED

Mark A. Perry, Gibson, Dunn & Crutcher LLP, of Washington, DC, argued for plaintiff-appellant. With him on the brief were John C. Millian, Theodore J. Boutrous, Jr., Paul Blankenstein, and Andrew S. Tulumello. Of counsel was Thomas G. Hungar.

Lee M. Straus, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-cross-appellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney General; David M. Cohen, Director; Jeanne E. Davidson, Deputy Director; and Tarek Sawi, Trial Attorney.

Before MAYER,^* BRYSON, and LINN, Circuit Judges.

BRYSON, Circuit Judge.

This case, like others that have reached this court in the wake of the Supreme Court's decision in United States v. Winstar, 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), involves a claim of breach of contract based on the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183 (1989). In the 1980s, in the midst of the savings and loan crisis, the Federal Savings and Loan Insurance Corporation ("FSLIC") arranged for various healthy financial institutions to acquire failing savings and loan associations (or "thrifts"). FSLIC settled on the acquisition strategy to minimize the number of outright failures among savings and loan associations and the consequent financial burden on FSLIC, as insurer of the deposits of many of those thrifts. Because the failing thrifts were unattractive investment prospects on their own, FSLIC had to offer substantial incentives to the acquiring institutions to induce them to acquire the failing thrifts and take on their liabilities. The inducements frequently consisted of promises regarding the manner in which the acquiring institutions would be permitted to treat the acquired thrifts' assets and liabilities for accounting purposes. In many instances, FSLIC promised the acquiring institutions that they would be allowed to include the acquired thrifts' net liabilities as "supervisory goodwill" in their calculation of regulatory capital and to amortize the supervisory goodwill over a lengthy period of time.

In 1981 and 1982, appellant California Federal Bank ("CalFed") acquired the assets and assumed the liabilities of six failing thrifts in acquisitions supervised or approved by FSLIC or its parent, the Federal Home Loan Bank Board ("the FHLBB"). As part of the acquisition transactions, FSLIC and the FHLBB promised CalFed that it could include more than $600 million in "supervisory goodwill" in calculating its regulatory capital and that it could amortize that supervisory goodwill over an extended period. After the enactment of FIRREA in 1989 and the promulgation of conforming regulations, however, acquiring institutions such as CalFed were no longer permitted to include supervisory goodwill as part of their regulatory capital, and they were required to write down their supervisory goodwill over a five-year period.

Based on the new restrictions on the use and amortization of supervisory goodwill, many acquiring institutions sued the government in the Court of Federal Claims contending that the new requirements resulted in a breach of the acquisition contracts. In the Winstar case, the Supreme Court held that the breach of the promises regarding the maintenance of regulatory capital and the depreciation of supervisory goodwill could constitute a breach of contract by the government for which acquiring institutions could recover damages.

CalFed was one of the institutions that filed a breach of contract action based on the FIRREA provisions regarding supervisory goodwill. The trial court granted summary judgment for CalFed on the issue of liability. Cal. Fed. Bank v. United States, 39 Fed.Cl. 753 (1997). CalFed then sought to recover damages on several theories, including a "lost profits" theory. With regard to that theory, CalFed contended that the statutory and regulatory changes associated with the enactment of FIRREA forced it to sell certain assets, including a large number of adjustable rate mortgages ("ARMs") in order to meet the new regulatory capital requirements. Those ARMs, according to CalFed, would have produced substantial profits if CalFed had been able to retain them. The trial court, however, granted summary judgment for the government on that theory of recovery. Cal. Fed. Bank v. United States, 43 Fed.Cl. 445 (1999). After a trial on the remaining claims, the court denied reliance damages and restitution, but it awarded CalFed $23 million to compensate CalFed for the cost of replacing the regulatory capital lost because of the accelerated phase-out of supervisory goodwill under FIRREA.

Both parties appealed to this court. We affirmed the grant of summary judgment on the issue of liability, but reversed the grant of summary judgment on CalFed's lost profits theory, holding that there were genuine issues of material fact with respect to foreseeability, causation, and the measurement of damages. Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342 (Fed.Cir.2001). Accordingly, we remanded for trial on damages based on CalFed's lost profits theory.

Following a six-week trial, the Court of Federal Claims declined to award CalFed lost profits damages. Cal. Fed. Bank v. United States, 54 Fed.Cl. 704 (2002). The court based its ruling on three general findings: (1) that CalFed had failed to prove its loss of profits from the sale of the assets, including the ARMs, was foreseeable; (2) that CalFed had failed to prove that the ARMs and other assets were sold because of the breach; and (3) that the method of calculating damages advocated by CalFed was too speculative to serve as the basis for a damages award.

CalFed has appealed from the trial court's denial of damages on a lost profits theory. The government has cross-appealed with respect to the issue of liability, contending that FSLIC did not have the authority to bind the United States contractually with respect to the acquisition transactions.

I

A

Contract remedies are designed to make the nonbreaching party whole. One way to achieve that end is to give the nonbreaching party "expectancy damages," i.e., the benefits the nonbreaching party expected to receive in the absence of a breach. Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1379 (Fed.Cir.2001), citing Restatement (Second) of Contracts § 344(a) (1981). In order to be entitled to expectancy damages, which include lost profits, the plaintiff must satisfy three requirements. First, the plaintiff must show that the lost profits were within the contemplation of the parties because the loss was foreseeable or because the defaulting party had knowledge of special circumstances at the time of contracting. La Van v. United States, 382 F.3d 1340, 1351 (Fed.Cir.2004); Energy Capital Corp. v. United States, 302 F.3d 1314, 1325 (Fed.Cir.2002), citing Restatement (Second) of Contracts § 351(1) (1981). Second, the plaintiff must establish that there would have been a profit but for the breach. Rumsfeld v. Applied Cos., 325 F.3d 1328, 1339 (Fed.Cir.2003). Third, the measure of damages must be reasonably certain, although if "a reasonable probability of damage can be clearly established, uncertainty as to the amount will not preclude recovery." Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308, 1313 (Fed.Cir.2004), quoting Locke v. United States, 151 Ct.Cl. 262, 283 F.2d 521, 524 (1960).

For the reasons set forth below, we uphold the trial court's judgment based on its ruling on the issue of causation. Because that issue is dispositive of CalFed's appeal, we need not address the issues of foreseeability and the measurement of damages on which the trial court also ruled against CalFed.

B

CalFed first argues that the trial court used the wrong standard in determining whether CalFed proved that the government's breach caused the bank to sell the ARMs. The court relied on Myerle v. United States, 33 Ct.Cl. 1, 27 (1897), for the standard of causation that lost profits must "inevitably and naturally, not possibly nor even probably" flow from the defendant's breach. Citing Bluebonnet Savings Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed.Cir.2001), CalFed argues for a less exacting standard; it contends that the breach need only be a "substantial factor" contributing to the loss. The Court of Federal Claims stated that it would reach the same conclusion regardless of which of the two standards is applied.

The passage from the Bluebonnet case on which CalFed relies does not state or imply that the causation requirement is satisfied any time the breach is a "substantial factor" in causing the claimed lost profits. The court in Bluebonnet noted that the trial court had found that the breach "was a substantial factor in Bluebonnet's increased financing costs," 266 F.3d at 1356, reflecting the way the trial court characterized its finding. See Bluebonnet Sav. Bank, FSB v. United States, 47 Fed.Cl. 156, 173, 180 (2000). Importantly, however, the court upheld the trial court's ruling on causation only after concluding that "[t]he government's various arguments regarding alternative causes for the damages lack merit." 266 F.3d at 1356. That statement is consistent with the standard applied by this court and our predecessor court in numerous cases, including the previous appeal in this case that the causal connection between the breach and the loss of profits must be "definitely established." La Van v. United States, 382 F.3d at 1351; Hi-Shear Tech. Corp. v. United States, 356 F.3d 1372, 1379 n. 2 (Fed.Cir.2004); Energy Capital Corp. v. United States, 302 F.3d 1314, 1325 (Fed.Cir.2002); Cal. Fed. Bank,...