Glass v. United States

• Decision Date: 24 July 2001
• Docket Number: PLAINTIFF-APPELLEE,DEFENDANT-APPELLANT,AND,PLAINTIFFS-APPELLEE,No. 00-5137,00-5137
• Citation: 258 F.3d 1349
• Parties: (Fed. Cir. 2001) BOBBY J. GLASS, CAROL ROSE (INDIVIDUALLY AND AS TRUSTEE OF THE WALTER LEWIS ROSE, III ESTATE TRUST), GARY D. STILLWELL, AND STEPHEN D. STRICKLANDFEDERAL DEPOSIT INSURANCE CORPORATION,, v. UNITED STATES,
• Court: U.S. Court of Appeals — Federal Circuit

Page 1349

258 F.3d 1349 (Fed. Cir. 2001)

BOBBY J. GLASS, CAROL ROSE (INDIVIDUALLY AND AS TRUSTEE OF THE WALTER LEWIS ROSE, III ESTATE TRUST), GARY D. STILLWELL, AND STEPHEN D. STRICKLAND PLAINTIFFS-APPELLEES, AND FEDERAL DEPOSIT INSURANCE CORPORATION, PLAINTIFF-APPELLEE, v. UNITED STATES, DEFENDANT-APPELLANT.

No. 00-5137

United States Court of Appeals for the Federal Circuit

July 24, 2001

Amended August 17, 2001

Appealed from: United States Court of Federal Claims

Peter J. Broullire, III, of Albuquerque, New Mexico, argued for plaintiffs-appellees.

John V. Thomas, Associate General Counsel, Federal Deposit Insurance Corporation, of Washington, Dc, argued for plaintiff-appellee. With him on the brief were David L. Creskoff, Tina A. Lamoreaux, Stephen C. Zachary, and John F. Elmore, Attorneys.

Jeanne E. Davidson, Deputy Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, Dc, argued for defendant-appellant. With her on the brief were David M. Cohen, Director; Katherine M. Kelly, Kenneth M. Dintzer, Michael M. Duclos, William G. Kanellis, and Kenneth Kulak, Trial Attorneys. Of counsel was Mark A. Melnick, Assistant Director.

Before Michel, Circuit Judge, Archer, Senior Circuit Judge, and Schall, Circuit Judge.

Archer, Senior Circuit Judge.

Senior Judge Lawrence S. Margolis

The United States appeals from the judgment of the United States Court of Federal Claims finding it liable for breach of contract and awarding damages of $3.972 million to plaintiff shareholders Bobby J. Glass et al. ("shareholders") and $2.1 million to plaintiff intervenor Federal Deposit Insurance Corporation ("FDIC"). Glass v. United States, 47 Fed. Cl. 316 (2000). We conclude that the court erred in holding that the shareholders were third party beneficiaries of an implied-in-fact contract and erred in holding under the facts of this case that the FDIC had standing to intervene. Accordingly, the judgment of the Court of Federal Claims is reversed-in-part and vacated-in-part and remanded for proceedings consistent with this opinion.

BACKGROUND

This case is one of more than 120 Winstar-related cases, see United States v Winstar Corp., 518 U.S. 839 (1996), and is one of the five test cases that the Court of Federal Claims selected to consider the common issues in these numerous related cases. We have previously reviewed two of these test cases, Glendale Federal Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001), and California Federal Bank, FSB v. United States, 245 F.3d 1342 (Fed. Cir. 2001).

The Winstar-related cases have their origin in the thrift crisis of the early 1980's. The history behind this crisis and the subsequent enactment of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), Pub. L. 101-73, 103 Stat. 183, in 1989 have been thoroughly discussed in our opinions in Glendale and California Federal, supra, and in the original Winstar cases. Winstar Corp., 518 U.S. at 843-58. This background will be discussed below only as it specifically relates to the facts of this case.

The shareholders were the principal stockholders in Sentry Mortgage Corporation, a company engaged in the manufactured home (mobile home) lending business. On December 16, 1985, the shareholders caused Sentry to enter into a "reverse-purchase" agreement with Security Savings Bank whereby Sentry was to contribute all of its non-cash assets to Security Savings in exchange for a controlling interest in Security Savings' stock. Under this agreement, Sentry would dissolve following the contribution of its assets and the Security Savings stock would be transferred to Sentry's shareholders. The agreement was also conditioned on obtaining certain regulatory forbearances from the Federal Savings and Loan Insurance Corporation ("FSLIC") and the Federal Home Loan Bank Board ("FHLBB").¹

At the time of this proposed transaction, there was a widespread crisis in the savings and loan industry, and many thrifts were in financial trouble and subject to seizure and liquidation by government regulators. The government insurance fund, however, lacked sufficient funds to liquidate even a small percentage of the insolvent thrifts. Security Savings was one such insolvent thrift, and the FHLBB and FSLIC, which considered Security Savings a supervisory case, were seeking a solution to Security Savings' dire financial situation. Sentry's proposed purchase of Security Savings, and the resulting recapitalization and infusion of Sentry's non-liquid assets into Security Savings, provided the solution.

In exchange for relieving the FHLBB and FSLIC of this supervisory case, Sentry sought favorable regulatory treatment. During this time period, the FHLBB and FSLIC were encouraging mergers between healthy banks and failing thrifts, and would typically offer certain regulatory forbearances in order to encourage such mergers. One such forebearance was called "supervisory goodwill." Supervisory goodwill was an accounting device that permitted the acquired thrift to record as an asset on its books a certain dollar amount for goodwill.² This intangible asset, which assisted in satisfying regulatory capital requirements, was gradually written off as a business expense over a period of 25-40 years. Typically, this amount would be the difference between the value of the acquired thrift's net liabilities and the acquired thrift's net assets. Among other requested forbearances, Sentry sought approval of supervisory goodwill by the FHLBB and FSLIC in connection with its proposed purchase of Security Savings.

After an extended period of negotiation, the FHLBB and FSLIC approved Sentry's acquisition of Security Savings in the manner described, and allowed the recapitalized Security Savings to record approximately $6 million in supervisory goodwill capital. Security Savings proceeded to amortize this goodwill on a 25-year, straight-line basis, as outlined in its business plan.

In August 1989, Congress enacted the Financial Institutions Recovery, Reform and Enforcement Act ("FIRREA"). Pub. L. No. 101-73, 103 Stat. 183 (1989). FIRREA imposed new regulatory capital requirements on thrifts and, as a result, Security Savings was severely restricted in its use of goodwill capital to meet capital requirements. Security Savings immediately fell out of regulatory compliance and was thereafter, in May 1990, seized by the Office of Thrift Supervision ("OTS") and placed into a receivership directed by the Resolution Trust Corporation ("RTC").³ Security Savings was eventually liquidated and all its remaining assets, including its breach of contract claims, now reside in the FSLIC Resolution Fund-RTC ("FRF-RTC"), which is managed by the FDIC. See Glass, 44 Fed. Cl. at 81.

On June 25, 1992, the shareholders filed suit against the United States in the Court of Federal Claims, asserting breach of contract and 5th Amendment takings claims. The shareholders contended that FIRREA breached a contract with the government allowing Security Savings to record goodwill capital and to use this intangible asset to meet its regulatory capital requirements. On March 14, 1997, the FDIC filed a complaint in intervention, asserting claims as successor in interest to Security Savings.

On June 15, 1999, Chief Judge Smith of the Court of Federal Claims issued an opinion deciding the parties' cross motions for summary judgment and the United States' motion to dismiss. Glass v. United States, 44 Fed. Cl. 73 (1999). He applied Chief Judge Smith's holding that the documentary evidence and the conduct of the parties established that Sentry and Security Savings had entered into a contract implied-in-fact with the FSLIC and FHLBB to amortize goodwill over a 25-year period and to use this goodwill for meeting regulatory capital requirements. He further held that FIRREA breached this contract.

Chief Judge Smith then considered the United States' motion to dismiss the FDIC for lack of standing. The United States asserted that any recovery by the FDIC would only be used to satisfy outstanding liabilities of the federal government incurred in liquidating Security Savings. Thus, any recovery would actually flow from the United States Treasury to the United States Treasury. The United States argued that this situation rendered the controversy non-justiciable. Chief Judge Smith denied this motion. He determined that the FDIC was acting as a receiver in this case and was bringing its claim on behalf of the failed thrift, Security Savings, not on behalf of the United States. He concluded that this distinction rendered the FDIC's claim justiciable.

Chief Judge Smith then referred the case to Senior Judge Margolis for a determination of damages. Judge Margolis, after an eight-day trial, issued final judgment assessing damages against the United States and in favor of the shareholders and the FDIC. Glass v. United States, 47 Fed. Cl. 316 (2000). Judge Margolis held that the shareholders were not parties to the contract between Sentry and Security Savings and the FHLBB, but that they were third party beneficiaries of the contract. He awarded the shareholders their initial investment of the assets in Sentry, which he valued at $3.9 million. He also awarded costs associated with the transaction. He also awarded damages to the FDIC, finding that it was entitled to damages equivalent to the value of the goodwill capital destroyed by the United States' breach of the contract. He valued the approximately $6 million in goodwill capital recorded on Security Savings' books at $2.1 million and awarded this amount to the FDIC.

DISCUSSION

The United States raises numerous arguments contesting the decisions of the Court of Federal Claims. Among these arguments, the United States challenges the standing of the shareholders as third party beneficiaries of the contract and the standing of the FDIC to bring what the United States argues is a non-justiciable claim. These issues are...