Centex Corp. v. U.S.

• Decision Date: 19 January 2005
• Docket Number: No. 03-5087.,No. 03-5095.,03-5087.,03-5095.
• Citation: 395 F.3d 1283
• Parties: CENTEX CORPORATION and CTX Holding Company, Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

395 F.3d 1283

CENTEX CORPORATION and CTX Holding Company, Plaintiffs-Cross Appellants, v. UNITED STATES, Defendant-Appellant.

No. 03-5087.

No. 03-5095.

United States Court of Appeals, Federal Circuit.

January 19, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Kent A. Yalowitz, Arnold & Porter, of New York, New York, argued for plaintiffs-cross appellants. With him on the brief were Melvin C. Garbow, Howard N. Cayne, Arnold & Porter, of Washington, DC. Of counsel on the brief was Thomas R. Dwyer, of Arlington, Virginia.

David M. Cohen, 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 General; Jeanne E. Davidson, Deputy Director; and Paul G. Freeborne, Trial Attorney.

Before MICHEL, Chief Judge,^* BRYSON, and LINN, Circuit Judges.

BRYSON, Circuit Judge.

This case requires us to decide whether the government breached a contract with plaintiffs Centex Corporation and CTX Holding Company when Congress enacted certain tax legislation in 1993. The plaintiffs argue that the 1993 legislation breached the contract because it changed the tax laws to abrogate tax benefits to which they were entitled at the time the contract was executed and because the legislation specifically targeted the benefits they enjoyed under the contract.

The Court of Federal Claims agreed with the plaintiffs as to liability, holding that under the pre-1993 tax laws they were entitled to the tax benefits in question and that the legislative abrogation of those benefits breached the government's implied covenant of good faith and fair dealing under the contract. Although the court ruled for the plaintiffs on liability, it limited the damages to the amount available under the original contract, holding that a later agreement among the parties did not entitle the plaintiffs to increased damages. The government has appealed from the finding of liability and the entry of a judgment for damages. The plaintiffs have cross-appealed from the court's denial of their request for additional damages. We affirm the judgment in all respects.

I

The savings and loan crisis that led to the events at issue in this case has been chronicled in detail elsewhere. See United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996); Landmark Land Co. v. Fed. Deposit Ins. Corp., 256 F.3d 1365 (Fed.Cir.2001). In brief, high interest rates and inflation in the late 1970s and early 1980s left many savings and loan associations (or "thrifts") in distress. Many of the thrifts' assets consisted of long-term, fixed-rate mortgages created when interest rates were low, yet the thrifts had to pay high interest rates during that period to attract deposits. As a result, many thrifts failed and others found themselves in precarious financial condition. The government sought to mitigate the effects of the crisis in the industry by inducing healthy financial institutions to take over troubled thrifts in order to avert their collapse and the consequent burden on the government as the insurer of many of the thrifts' depositors.

One of the takeover arrangements involved the Centex Consolidated Group, a group of affiliated corporations consisting of Centex Corporation and its direct and indirect subsidiaries: Centex International, Inc.; Centex Real Estate Corporation; CTX Holding Company ("CTX"); and Texas Trust Savings Bank FSB ("Texas Trust"). In late December 1988, representatives of the Centex Consolidated Group acquired four thrifts in receivership, whose liabilities far exceeded their assets. Following negotiations with representatives of the Federal Home Loan Bank Board ("the FHLBB") and its constituent deposit insurance agency, the Federal Savings and Loan Insurance Corporation ("FSLIC"), the Centex Consolidated Group representatives agreed to acquire the four thrifts in exchange for various considerations offered by FSLIC. The acquisition was effected through a contract between FSLIC, as receiver for the four thrifts, and two of the Centex Consolidated Group companies — CTX and its wholly owned subsidiary, Texas Trust. Under the contract, referred to as the Assistance Agreement, Texas Trust agreed to acquire the four thrifts, succeeding to all of their assets and assuming all of their liabilities. In return, FSLIC agreed to provide payments to Texas Trust to offset some of the liabilities of the acquired thrifts. In particular, the Assistance Agreement defined certain assets of the acquired institutions, including outstanding loans, as "covered assets." Under the agreement, FSLIC bound itself to make assistance payments to Texas Trust in an amount equal to the difference between the book basis of the covered assets and the value of those assets when they were sold or written down.

A major attraction of the Assistance Agreement for the Centex Consolidated Group consisted of the tax benefits that the Consolidated Group expected to receive as a result of the transaction. In particular, the owners of the Consolidated Group expected that the net liabilities of the acquired thrifts would give rise to tax deductions, which the Consolidated Group could use to shelter other income on its consolidated tax return. In light of certain provisions of the Internal Revenue Code then in effect, the Consolidated Group expected to be able to take deductions for the built-in losses on the covered assets as those assets were liquidated or written down, even though the losses would be offset by the assistance payments from FSLIC.

That expectation was not unilateral. In the request for proposals for the acquisition of failing thrifts, the FHLBB and FSLIC advised prospective acquiring institutions that among the tax benefits of acquiring such thrifts would be that the "tax basis of the assets of the acquired institution will carry over to the acquirer and permit the acquirer to recognize a tax loss upon the disposition of the acquired asset which has a tax basis greater than its fair market value." The request for proposals further explained that the pertinent tax provisions

have the effect of permitting an acquiring institution to realize tax benefits attributable to a particular item even though FSLIC assistance is received with respect to such item. For example, if the acquirer receives coverage for capital losses incurred on the disposition of identified assets of the acquired institution, the acquirer is entitled to deduct such loss for federal income tax purposes, notwithstanding that it is reimbursed for the loss by the FSLIC, and that the FSLIC payment is tax free.

Under the Assistance Agreement, CTX and Texas Trust agreed to share the resulting tax benefits with FSLIC. The FHLBB approved the acquisitions after CTX and Texas Trust agreed to increase FSLIC's share of the tax benefits that CTX and Texas Trust obtained as a result of the transaction to 50 percent. The Assistance Agreement specifically identified the shared tax benefits as including deductions for losses on covered assets, deductions for worthless or partially worthless debts, or deductions for increases in bad debt reserves.

Following the acquisitions, Texas Trust began receiving assistance payments from FSLIC as the acquired thrifts' covered assets were liquidated, written off, or written down in value. The Consolidated Group then claimed deductions for the built-in losses on the liquidated, written off, or written down assets. Although the Internal Revenue Service investigated those deductions, the Consolidated Group was permitted to take the deductions, either in whole or in part, until 1991, and it continued claiming the deductions until 1993.

In that year, Congress enacted section 13224 of the Omnibus Budget Reconciliation Act, Pub.L. No. 103-66, § 13224, 107 Stat. 312, 485-86, which is known as the Guarini amendment. The Guarini amendment purported to "clarif [y]" the tax treatment of FSLIC assistance payments to institutions that were acquiring failed thrifts, but it had the effect of disallowing such institutions from claiming deductions for the built-in losses on assets covered by the FSLIC assistance agreements. The Guarini amendment had that effect because it required FSLIC assistance payments to be taken into account in determining whether the taxpayer suffered a deductible loss under sections 165, 166, 585, or 593 of the Internal Revenue Code, 26 U.S.C. §§ 165, 166, 585, 593 (1988). For purposes of section 165, the Guarini amendment provided that any FSLIC assistance payments "with respect to any loss of principal, capital, or similar amount upon the disposition of any asset" had to be "taken into account as compensation for such loss for purposes of section 165" in determining whether the disposition of a covered asset gave rise to a deductible loss. Pub.L. No. 103-66, § 13224(a)(1), 107 Stat. 312, 485 (1993). And for purposes of sections 166, 585, and 593, the Guarini amendment required that FSLIC assistance payments with respect to any debt had to be taken into account "in determining whether such debt is worthless (or the extent to which such debt is worthless), and in determining the amount of any addition to a reserve for bad debts arising from the worthlessness or partial worthlessness of such debts." Id. § 13224(a)(2), 107 Stat. at 485. The Guarini amendment was made retroactive to taxable years ending on or after March 4, 1991. Id. § 13224(c), 107 Stat. at 485.

In 1994, CTX and Texas Trust entered into an agreement with the Federal Deposit Insurance Corporation ("FDIC"), as successor to FSLIC. The agreement, referred to as the Termination Agreement, transferred the acquired thrifts back to the government and ended the assistance payments. In addition, the Termination Agreement released the FDIC from any claims related to the Assistance Agreement, but it reserved to CTX and Texas Trust the...