Wash. Mut. Inc. v. U.S., 09–36109.

Decision Date03 March 2011
Docket NumberNo. 09–36109.,09–36109.
Citation636 F.3d 1207
PartiesWASHINGTON MUTUAL INC., as successor in interest to H.F. Ahmanson & Co. and Subsidiaries, Plaintiff–Appellant,v.UNITED STATES of America, Defendant–Appellee.
CourtU.S. Court of Appeals — Ninth Circuit


Alan I. Horowitz, Steven R. Dixon, and Maria O'Toole Jones, Miller & Chevalier, Chartered, Washington, D.C., Thomas D. Johnston, Shearman & Sterling, Washington, D.C., for the plaintiff-appellant.Arthur Thomas Catterall, Henry C. Darmstadter, David N. Geier, Teresa E. McLaughlin, and James E. Weaver, U.S. Department of Justice, Washington, D.C., Helen J. Brunner, Office of the U.S. Attorney, Seattle, WA, for the defendant-appellee.Appeal from the United States District Court for the Western District of Washington, John C. Coughenour, District Judge, Presiding. D.C. No. 2:06–cv–01550–JCC.Before: BETTY B. FLETCHER, FERDINAND F. FERNANDEZ, and JAY S. BYBEE, Circuit Judges.Opinion by Judge B. FLETCHER; Concurrence by Judge FERNANDEZ.


B. FLETCHER, Circuit Judge:

This is yet another case arising in the aftermath of the Government's efforts to contain the savings and loan crisis of the late 1970's and the early 1980's. In 1981, Home Savings of America, FSB (“Home Savings”), agreed to acquire three failing savings and loan associations, or thrifts. In exchange, the Federal Savings and Loan Insurance Corporation gave Home Savings a generous package of incentives that included, among other items, the right to maintain branches in other states (the “branching rights”) and the right to use the purchase method of accounting for regulatory capital reserve purposes (the “RAP rights”) (together, “the Rights.”).

Washington Mutual, Inc. (Washington Mutual), as successor in interest to Home Savings and its parent company, H.F. Ahmanson & Co. (Ahmanson), filed amended tax returns with the Internal Revenue Service (IRS), seeking refunds for 1990, 1992, and 1993 based on the amortization of the RAP rights and the abandonment of the branching rights. After the IRS denied the claims, Washington Mutual sued in district court. The district court ruled on summary judgment that Home Savings did not have a cost basis or a fair market value basis in the RAP rights and the branching rights and rejected Washington Mutual's amortization and loss deduction-related refund requests.

Washington Mutual appeals. We hold that Home Savings had a cost basis in the RAP rights and the branching rights equal to some part of the excess of the three acquired thrifts' liabilities over the value of their assets. In light of our ruling, we do not address Washington Mutual's alternative theory, that Home Savings had a fair market value basis in the Rights pursuant to 26 U.S.C. § 597 (Supp. V 1981) and 12 U.S.C. § 1729(f) (Supp. V 1981). Accordingly, we reverse and remand.

A. The Savings and Loan Crisis

The savings and loan crisis of the late 1970's and early 1980's has been chronicled in detail in United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996).

The savings and loan, or thrift, industry is one of the businesses most highly regulated by the Government. 518 U.S. at 844, 116 S.Ct. 2432. The modern regulatory regime emerged after the Great Depression, when Congress created the Federal Home Loan Bank Board (“the Bank Board), vested with authority to charter and regulate federal thrifts, and the Federal Savings and Loan Insurance Corporation (“FSLIC”), under the Bank Board's authority, which was given responsibility to insure thrift deposits and regulate all federally-insured thrifts. See id.

In the late 1970's and early 1980's, high interest rates and inflation left many thrifts in distress. See id. at 845, 116 S.Ct. 2432. Many thrifts found themselves holding long-term, fixed-rate mortgages created when interest rates were low; when market rates rose, the thrifts had to raise the rates they paid to depositors in order to attract funds. See id. When the costs of short-term deposits overtook the revenues from long-term mortgages, hundreds of thrifts became insolvent. See id.

The crisis was exacerbated by initial efforts to resolve it, especially by thrift deregulation, weakening the capital reserve requirement, and replacing generally accepted accounting principles with new “regulatory accounting principles” for the purpose of determining thrifts' compliance with their capital requirements. See id. at 845–46, 116 S.Ct. 2432. Combined, these measures encouraged expansion by thrifts into new and riskier fields of investment without a corresponding increase in their capital base, and, in many cases, resulting in weaker institutions. See id.

While the regulators tried to mitigate the crisis generally through deregulation, the liabilities of the numerous already-failed thrifts threatened to exhaust FSLIC's insurance reserves. See id. at 846, 116 S.Ct. 2432. To avoid further insurance liability, the Bank Board decided to induce healthy financial institutions to take over troubled thrifts in a series of “supervisory mergers.” See id. at 847–48, 116 S.Ct. 2432. Such transactions, in which the acquiring parties assumed the obligations of thrifts with liabilities that far outstripped their assets, were not intrinsically attractive to healthy institutions; nor did FSLIC have sufficient cash to promote such acquisitions through direct subsidies alone. See id. at 848, 116 S.Ct. 2432. Instead, the principal inducement for these supervisory mergers was an understanding that the acquisitions would be subject to a particular accounting treatment—the “purchase method”—that would help the acquiring institutions meet their capital reserve requirements imposed by federal regulations. See id.

The critically appealing aspect of the purchase method of accounting is that it permits the acquiring entity to designate the excess of the purchase price over the fair value of all identifiable assets acquired as an intangible asset called “goodwill.” 518 U.S. at 848–49, 116 S.Ct. 2432. Goodwill recognized under the purchase method as the result of an FSLIC-sponsored supervisory merger was generally referred to as “supervisory goodwill.” Id. at 849, 116 S.Ct. 2432. Supervisory goodwill was attractive to healthy thrifts, and thus an essential element in FSLIC's efforts to promote supervisory mergers, because thrift regulators let the acquiring thrifts count supervisory goodwill toward their regulatory reserve requirements and, consequently, enabled the thrift to leverage more loans. Id. at 850–51, 116 S.Ct. 2432. Supervisory goodwill was also attractive because the regulators allowed acquiring thrifts to amortize it over long periods, up to the 40–year maximum permitted by the generally accepted accounting practices. Id. at 851, 116 S.Ct. 2432. In conjunction with increases in the value of the thrift's loans over the life of the loans (as redemption of the loan approaches), amortization of goodwill resulted in net profits during the initial years following the acquisition, thus allowing acquiring thrifts to seem more profitable than they in fact were. Id. at 851–53, 116 S.Ct. 2432.

B. The Savings and Loan Crisis—Further Developments

In 1989, unsatisfied with the results of the regulatory response to the thrift industry crisis and in an effort to prevent the collapse of the industry, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101–73, 103 Stat. 183 (“FIRREA”). Among other significant changes, FIRREA required thrifts to “maintain core capital in an amount not less than 3 percent of the savings association's total assets” and defined “core capital” to exclude “unidentifiable intangible assets” such as supervisory goodwill. Winstar, 518 U.S. at 857, 116 S.Ct. 2432 (quoting 12 U.S.C. §§ 1464(t)(2)(A), (9)(A)). These new capital requirements had swift and severe impact upon institutions that had acquired failed thrifts, as they had relied on supervisory goodwill and capital forbearance granted them at acquisition. See id.

Three thrift institutions created by way of supervisory mergers sued for damages on both contractual and constitutional theories. Id. at 858, 116 S.Ct. 2432. They argued that the Bank Board and FSLIC had promised them that the supervisory goodwill created in their merger transactions could be counted toward regulatory capital reserve requirements. Id.

After reviewing the transactions, the Court agreed with the lower courts that “the realities of the transaction favored reading those documents as contractual commitments, not mere statements of policy....” Id. at 863, 116 S.Ct. 2432. The Court therefore had “no reason to question the Court of Appeals's conclusion that the government had an express contractual obligation to permit [the plaintiff thrifts] to count supervisory goodwill generated as a result of [their supervisory] merger[s] ... as a capital asset for regulatory capital purposes.” Id. at 864, 116 S.Ct. 2432 (internal quotation marks omitted). The Court also “accept[ed] the Federal Circuit's conclusion that the Government breached these contracts when, pursuant to the new regulatory capital requirements imposed by FIRREA, 12 U.S.C. § 1464(t), the federal regulatory agencies limited the use of supervisory goodwill and capital credits” as acceptable regulatory capital. Id. at 870, 116 S.Ct. 2432.

The Court rejected all special defenses advanced by the Government in its effort to prevent enforcement of the contracts at issue, see id. at 860, 116 S.Ct. 2432, and affirmed the Federal Circuit's ruling that the United States was liable to the thrifts for breach of contract. Id. at 910, 116 S.Ct. 2432.

C. Home Savings' Acquisition of Security Federal Savings and Loan Association, Hamiltonian Federal Savings and Loan Association, and ...

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