Glendale Federal Bank v. U.S.

• Decision Date: 16 February 2001
• Citation: 239 F.3d 1374
• Parties: (Fed. Cir. 2001) GLENDALE FEDERAL BANK, FSB, Plaintiff-Cross Appellant, v. UNITED STATES, Defendant-Appellant. 99-5103, -5113 DECIDED:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1374

239 F.3d 1374 (Fed. Cir. 2001)

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

99-5103, -5113

United States Court of Appeals for the Federal Circuit

DECIDED: February 16, 2001

Appealed from: United States Court of Federal Claims Senior Judge Loren A. Smith

Carter G. Phillips, Sidley & Austin, of Washington, DC, argued for plaintiff-cross appellant. With him on the brief were Richard D. Bernstein, Jacqueline G. Cooper, andKatherine L. Adams. Of counsel on the brief were Ronald W. Stevens, Joseph J. Brigati, and Gilbert C. Miller, Kirkpatrick & Lockhart L.L.P., of Washington, DC. Of counsel were Bruce H. Nielson, Richard L. Thornburgh, and John F. Bartos, Jr., of Kirkpatrick & Lockhart L.L.P., of Washington, DC.

David M. Cohen, Director, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Jeanne E. Davidson, Deputy Director; Rodger D. Citron, Colleen Conry, Tarek Sawi, Trial Attorneys; and Thomas M. Bondy, Scott R. McIntosh, andSusan Pacholski, Appellate Staff. Of counsel was William F. Ryan, Attorney, Commercial Litigation Branch.

Steven S. Rosenthal, Cooper, Carvin, & Rosenthal, PLLC, of Washington, DC, for amicus curiae Plaintiffs Coordinating Committee. With him on the brief were Charles J. Cooper. Of counsel on the brief were Jerry Stouck, Spriggs & Hollingsworth, of Washington, DC; and Melvin A. Garbow, Arnold & Porter, of Washington, DC.

John V. Thomas, Associate General Counsel, Federal Deposit Insurance Corporation, of Washington, DC, for amicus curiae Federal Deposit Insurance Corporation. With him on the brief were John M. Dorsey III and Richard Gill, Counsel.

Before MAYER, Chief Judge, PLAGER, Senior Circuit Judge, ^* and LINN, Circuit Judge.

PLAGER, Senior Circuit Judge.

The issue in this case is how to measure the damages sustained by savings and loan institutions as a result of the breach by the United States of contracts it made with these organizations during the savings and loan crisis of the late 1970s and early 1980s. In Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995), this court upheld the judgment of the Court of Federal Claims holding the United States liable for breach of contract as a consequence of the enactment of the Financial Institutions Recovery, Reform and Enforcement Act. The judgment of this court was affirmed by the Supreme Court, Winstar Corp. v. United States, 518 U.S. 839 (1996), and the matter was remanded to the Court of Federal Claims for a trial on damages.

The trial in this case, the first of more than 120 Winstar-related cases, ultimately took more than 150 days conducted over a period of fourteen months, and produced more than 20,000 pages of trial transcript. The trial court made a conscious decision that the trial in this case would serve to air and test many of the models and theories at issue in most of the other cases. We have the benefit of a carefully reasoned and extensive opinion from the trial judge.

Though we decide only the case before us, we too are sensitive to the precedential value of the decision in this case. For that reason we have considered carefully the arguments of both parties, as well as those of the several amici. Though factual differences may require some fine-tuning of results, we expect that the guidance given to the trial court in this opinion will assist the court, and the parties, in disposing of the remaining cases as well.

On April 12, 1999, the trial court entered a judgment awarding plaintiff Glendale Federal Bank, FSB ("Glendale") $908,948,000 in restitution and non-overlapping reliance damages for the breach of contract, and denying the Government's motion for summary judgment based on a special plea of fraud. The Government appeals the trial court's judgment. Glendale cross-appeals, stating that, should we reverse the award of restitution damages, it is entitled to additional reliance damages which were denied it because they overlapped the trial court's grant of restitution.

We conclude that the trial court properly resolved the issue regarding the fraud plea. However, because we see the question of the proper damages theory somewhat differently, we vacate the trial court's damages award and remand the case with instructions for further proceedings consistent with this opinion.

BACKGROUND

We provide a brief background of the case for completeness and to provide the setting for the decision to follow. Much may already be familiar to the reader; the facts regarding the crisis that generally affected the savings and loan industry, and that led up to the formation and breach of the contract between Glendale and the Government, are covered extensively in prior opinions of this court, the Court of Federal Claims, and the United States Supreme Court. ¹

The Federal Savings and Loan Insurance Corporation ("FSLIC") ² was established by Congress to insure the deposits of savings and loan institutions (also known as "S&Ls" or "thrifts"), and the Federal Home Loan Bank Board ("FHLBB") ³ was established to safeguard the soundness of those institutions. Pursuant to this regulatory scheme, thrifts that desired to provide depositors with the insurance guaranteed under the program were required to maintain a certain level of capital.

Interest rates soared during the late 1970s and early 1980s, causing the savings and loan industry serious economic problems. At that time, thrifts' liabilities were principally short-term deposits, while their assets were primarily long-term fixed-rate mortgages. When interest rates soared, the value of the long-term fixed-rate assets plummeted, and the thrifts had to pay higher rates on their liabilities. As a result, many thrifts experienced difficulty remaining solvent and many became insolvent.

The Government's insurance fund lacked sufficient funds to liquidate even a small percentage of the thrifts that became insolvent. Consequently, the FSLIC and the FHLBB began to consider proposals for outside investors and thrifts to acquire other thrifts through mergers to prevent an exhaustion of the insurance fund.

Mergers were attractive to solvent thrifts because they enabled the thrifts to acquire previously prohibited interstate branches, to acquire high-quality assets that suffered only from the current interest rate squeeze, and to transform an insolvent thrift's net liabilities into an intangible asset called "supervisory goodwill." "Supervisory goodwill" was the accounting term for the difference between the market value of the acquired entity's liabilities and the market value of the acquired entity's assets. This difference was conceived of as part of the cost to the acquiring thrift. The accounting device was important to the acquiring thrift because the FHLBB allowed thrifts to include supervisory goodwill in the calculation of its regulatory capital requirements. Further, regulators in some instances would permit the goodwill to be amortized over a period of forty years.

In 1981, the Government and Glendale, an S&L institution primarily doing business in California, entered into negotiations concerning Glendale's possible acquisition of First Federal Savings and Loan Association of Broward County, Florida ("Broward"). The FHLBB found that Broward's financial condition was deteriorating and projected that Broward's regulatory capital would fall to zero by June 1982. Although Glendale was also losing money, the federal regulators determined that Glendale was nevertheless a financially strong institution, had no material management problems, and had the strength to absorb Broward and remain viable for some years.

In November 1981, the FHLBB approved Glendale's acquisition of Broward in a voluntary merger, and the Government and Glendale entered into a contract memorializing the arrangement. At the time of the merger, the market value of the liabilities of Broward exceeded the market value of its assets by $734 million. Pursuant to its contract with the Government, Glendale was permitted to book Broward's resulting market value deficit or net excess liabilities (negative net worth) as supervisory goodwill, an asset for purposes of meeting regulatory capital requirements. This supervisory goodwill was to be amortized over forty years, or until 2021.

Not long after the merger, interest rates declined, and the asset squeeze experienced by the industry eased. For a variety of reasons, some in the Government began to doubt the wisdom of the contracts that had been made with the salvaging S&Ls. In August of 1989, Congress enacted the Financial Institutions Recovery, Reform and Enforcement Act ("FIRREA"). FIRREA, among other things, greatly restricted the use of goodwill and other intangible assets in the calculation of regulatory capital.

Beyond that, FIRREA and its implementing regulations repudiated the Government's obligation to recognize Glendale's goodwill as an asset for purposes of regulatory capital over the contract's forty-year amortization period by requiring Glendale to deduct goodwill in determining its regulatory capital on a greatly accelerated schedule. In addition to mandating the phase-out of goodwill as an asset includable in calculating a thrift's regulatory capital ratios, FIRREA and its implementing regulations also changed the minimum requirements for capital.

A thrift, such as Glendale, that depended on supervisory goodwill to meet the new capital requirement could either: 1) increase its capital-to-assets ratio through retained earnings; or 2) increase its capital-to-assets ratio by reducing the size of the institution or by raising capital. When FIRREA was enacted, Glendale carried $536 million on its books in supervisory goodwill from its acquisition of Broward. In response to the phase-out of goodwill, Glendale reduced its size from $25.6 billion in total assets to $14.4 billion and, in 1990,...