Bluebonnet Savings Bank, f.s.b. v. United States , 466 F.3d 1349 ( 2006 )

United States Court of Appeals for the Federal Circuit
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BLUEBONNET SAVINGS BANK, F.S.B.,
CFSB CORPORATION,
and STONE CAPITAL, INC.,
Plaintiffs-Cross Appellants,
and
JAMES M. FAIL,
Plaintiff-Cross Appellant,
v.
UNITED STATES,
Defendant-Appellant.
Mitchell R. Berger, Patton Boggs LLP, of Washington, DC, argued for plaintiffs-
cross appellants, and James M. Fail. With him on the brief were Michael J. Schaengold
and Ugo Colella. Of counsel on the brief was I. Thomas Bieging, Bieging, Shapiro &
Burrus LLP, of Denver, Colorado.
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, Kenneth M. Dintzer, Senior Trial Attorney, Elizabeth M.
Hosford and Richard B. Evans, Trial Attorneys. Of counsel was F. Jefferson Hughes,
Trial Attorney.
Appealed from: United States Court of Federal Claims
Senior Judge Bohdan A. Futey
United States Court of Appeals for the Federal Circuit
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BLUEBONNET SAVINGS BANK, F.S.B.,
CFSB CORPORATION,
and STONE CAPITAL, INC.,
Plaintiffs-Cross Appellants,
and
JAMES M. FAIL,
Plaintiff-Cross Appellant,
v.
UNITED STATES,
Defendant-Appellant.
__________________________
DECIDED: October 11, 2006
___________________________
Before NEWMAN, RADER, and BRYSON, Circuit Judges.
BRYSON, Circuit Judge.
In this long-running dispute, the Court of Federal Claims has awarded damages
of $96,798,842 to plaintiff James M. Fail for the government’s breach of contract. The
government has appealed from that judgment, and the plaintiffs have filed a conditional
cross-appeal. We affirm the damages award appealed by the government and
therefore do not reach the cross-appeal.
I
This is one in a stream of cases arising out of the savings and loan crisis of the
late 1980s. See generally United States v. Winstar Corp., 518 U.S. 839 (1996). At that
time, hundreds of savings and loan institutions, or “thrifts,” were either insolvent or on
the verge of insolvency, and the Federal Savings and Loan Insurance Corporation
(“FSLIC”) lacked sufficient funds to liquidate them and pay the claims of insured
depositors. The Federal Home Loan Bank Board therefore developed a plan to induce
private investors to bail out the troubled thrifts. Under that program, the Board grouped
insolvent thrifts into packages for sale and offered a variety of incentives, including
guaranteed assistance payments, regulatory forbearances, and shared tax benefits, to
induce private investors to purchase the thrifts.
In 1988, CFSB Corporation, a company owned entirely by James M. Fail,
acquired the assets and liabilities of 15 insolvent thrifts, which were merged into a single
thrift. The newly created thrift was later renamed Bluebonnet Savings Bank, F.S.B.
Pursuant to a series of agreements entered into with the FSLIC, Mr. Fail and CFSB
agreed to invest $120 million in cash in Bluebonnet, with an initial infusion of $70 million
due in December 1988. Two additional installments of $25 million each would be due in
1989 and 1990. In return for that capital infusion, the government promised to provide
$3 billion of assistance to Bluebonnet and agreed to several “forbearances,” i.e., relief
from otherwise-applicable regulatory requirements. The forbearances included allowing
Bluebonnet (1) to maintain lower capital levels than would otherwise be required, (2) to
pay dividends of up to 50% of its income as long as the designated capital levels were
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maintained, and (3) to include certain subordinated debt in the calculation of its capital
maintenance requirements.
The agreements required that half of the total cash infusion derive from the sale
of Bluebonnet stock and half from the issuance of Bluebonnet capital notes. Pursuant
to the agreements, Mr. Fail purchased $35 million of Bluebonnet common stock. He
made that purchase with funds borrowed from Bankers Life and Casualty Company, an
insurance company affiliated with Robert T. Shaw. In addition, Mr. Fail purchased $35
million of subordinated debt issued by Bluebonnet.
On August 9, 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act (“FIRREA”) was signed into law. FIRREA and its implementing
regulations changed the capital requirements applicable to thrifts and altered the
existing regulatory regime. Of particular relevance, FIRREA and its regulations
prohibited thrifts from treating subordinated debt as regulatory capital. As a result,
Bluebonnet’s regulatory capital level decreased by $35 million (the amount of the
subordinated debt note that had been issued to Mr. Fail). That decrease meant that
Bluebonnet was unable to comply with FIRREA’s new capital requirements.
Mr. Fail found it difficult to find capital sources that were willing either to invest in
Bluebonnet or to provide financing. Consequently, when the second installment of
capital infusion came due in December 1989, Mr. Fail borrowed an additional $25
million from Consolidated National Successor Corporation (“CNC”), a holding company
owned in part by Mr. Shaw. In exchange, CNC received a right to a contingent interest
amounting to 9% of the profits of CFSB as well as the right to acquire Bluebonnet or,
alternatively, 50% of the net proceeds of any potential sale of Bluebonnet.
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In December 1990, with the final installment of capital infusion coming due and
the amount of the outstanding debt already up to approximately $80 million, Mr. Fail
again turned to Mr. Shaw for assistance. Mr. Fail borrowed another $25 million and
refinanced the loans from 1988 and 1989. That loan agreement included a provision
that gave one of Mr. Shaw’s companies the right to seek regulatory approval to
purchase Bluebonnet from Mr. Fail.
By September 1992, however, Mr. Shaw had abandoned his efforts to acquire
Bluebonnet, and Mr. Fail began negotiating for the repayment of the outstanding loans.
At that time, the loan balance was approximately $140 million, and payment was due in
December 1992. Mr. Fail, CFSB, and Mr. Shaw ultimately entered into a contract
referred to as the Economic Benefits Agreement (“EBA”) in which Mr. Shaw, through
CNC, agreed to reduce the amount of Mr. Fail’s debt and to provide long-term financing
for the debt. In exchange, Mr. Fail gave CNC a 49% interest in the future profits of
CFSB and the right to receive a percentage of the proceeds from any sale of
Bluebonnet.
In 1995, Mr. Fail, CFSB, and Bluebonnet filed suit in the Court of Federal Claims,
alleging that the enactment of FIRREA effected a breach of the government’s
obligations under the 1988 agreements. In 1999, the court granted the plaintiffs’ motion
for a partial summary judgment as to liability. Bluebonnet Sav. Bank, F.S.B. v. United
States, 43 Fed. Cl. 69, 80 (1999) (“Bluebonnet I”). Following a trial on damages, the
court held that the government’s breach of the dividend forbearance, the regulatory
capital level forbearance, and the subordinated debt forbearance increased the
plaintiffs’ credit risk, resulted in the plaintiffs’ inability to obtain financing from sources
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other than Mr. Shaw and his companies, and was a substantial factor in causing the
plaintiffs to incur increased financing costs. Bluebonnet Sav. Bank, F.S.B. v. United
States, 47 Fed. Cl. 156, 176-78 (2000) (“Bluebonnet II”). The court further found that it
was objectively foreseeable at the time of contract formation that the breaches would
cause the plaintiffs to incur increased financing costs. Id. at 173. Notwithstanding
those findings, the court ruled that the plaintiffs had failed to prove the amount of their
damages with reasonable certainty, and it therefore denied them any recovery on their
claim.
On appeal, this court reversed and remanded with instructions to formulate an
appropriate award of damages. Bluebonnet Sav. Bank, F.S.B. v. United States, 266
F.3d 1348, 1358 (Fed. Cir. 2001) (“Bluebonnet III”). First, we upheld the trial court’s
findings with respect to the issues of foreseeability and causation. We held that the trial
court had “properly determined that the breach of the forbearances was a substantial
factor in Bluebonnet’s increased financing costs because it forced Bluebonnet to raise
capital at a time when FIRREA had made investments in thrifts riskier and considerably
less attractive.” Id. at 1356. With respect to the proof of damages, we upheld the trial
court’s finding that the plaintiffs had not proved their claim for damages other than those
associated with the EBA. Id. at 1358. As to the EBA-related damages, however, we
held that the plaintiffs had adequately substantiated the losses they suffered as a result
of being forced to enter into the EBA. Id. at 1356-58. We explained that in the absence
of the breach, “Fail and CFSB would not have agreed to the EBA because dividend
financing would have been available and it would have been unnecessary to give up a
significant equity stake in CFSB to obtain financing.” Id. at 1356. We therefore
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remanded with instructions to formulate an appropriate award of EBA-related damages.
Id. at 1358.
On remand, the Court of Federal Claims held that it was “constrained by the
mandate” of this court and awarded $132,398,200 in damages. Bluebonnet Sav. Bank,
F.S.B. v. United States, 52 Fed. Cl. 75 (2002) (“Bluebonnet IV”). That amount
represented the payments already made by Mr. Fail under the EBA as well as the entire
value of the EBA debt. Id.The government appealed from that award of damages, and we again remanded
the case for further proceedings. Bluebonnet Sav. Bank, F.S.B. v. United States, 339
F.3d 1341 (Fed. Cir. 2003) (“Bluebonnet V”). We held that rather than award the
plaintiffs all the costs associated with the EBA, it was necessary to determine what
costs the plaintiffs would have incurred in the absence of a breach. Id. at 1346. We
explained that the fact that the plaintiffs “would not have needed to give up a significant
equity interest in the absence of a breach does not mean that the amount of the EBA-
related damages should necessarily be the full amount of the value of the equity interest
transferred to Mr. Shaw.” Id. at 1345. Because the surrender of equity as part of the
EBA constituted a substantial conveyance of value to Mr. Shaw, we explained that “it
may be that the other terms of the EBA through which the plaintiffs obtained long-term
loans from Mr. Shaw were more favorable than the financing arrangement they would
have been able to achieve absent a breach.” Id. In that case, the proper damages
award would be less than the full value of the transferred equity interest. Accordingly,
the case was remanded to allow the Court of Federal Claims to conduct an inquiry into
the “but-for financing costs” and to “use whatever means it deems appropriate, including
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reopening the record if necessary, to assess the net effects of the breach.” Id. at 1346.
In addition, we reiterated a point made in our previous opinion, that “at a minimum, jury
verdict damages would be appropriate in this case.” Id.On remand, the parties presented competing models in an effort to approximate
the quantum of EBA-related damages. The plaintiffs submitted a model created by
Professor Charles Calomiris, and the government submitted a model created by
Professor Alan Shapiro. Professor Calomiris testified that under his model the plaintiffs
were entitled to $129,827,388 in damages. Professor Shapiro testified that under his
model the plaintiffs were due only $545,219. Under alternative versions of his analysis,
Professor Shapiro calculated the damages to be $10,086,565 or, at most, $20,692,620.
The trial court found Professor Calomiris’s model to be speculative, and it
concluded that his evidence failed to establish with reasonable certainty that the
plaintiffs were entitled to his full estimate of $129,827,388 in damages. Bluebonnet
Sav. Bank, F.S.B. v. United States, 67 Fed. Cl. 231, 240 (2005) (“Bluebonnet VI”). The
court reached that conclusion after rejecting two critical assumptions on which the
Calomiris model was constructed: (1) that the plaintiffs would not have surrendered
equity in order to obtain funding in the absence of a breach; and (2) that the damages
analysis should focus on the 1992 time frame. Id. at 240-41. First, the court noted that
Professor Calomiris had interpreted this court’s prior statement—that it would have
been unnecessary for the plaintiffs to give up a significant equity stake in CFSB to
obtain financing—to mean that but for the breach the plaintiffs would not have had to
surrender any equity interest in CFSB at all. The trial court ruled that this court’s
statement did not exclude the possibility of some equity surrender. The court explained
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that there is “an entire range of percentages” that would “not constitute a ‘significant
equity’ surrender.” Id. at 241. Second, the trial court found that the Calomiris model
incorrectly focused only on the 1992 time frame. Following this court’s instruction to
consider the alternatives to the EBA equity arrangement that the plaintiffs would have
faced had there been no breach, the trial court explained that it is “entirely conceivable
that the alternatives faced by plaintiffs could have come to fruition prior to 1992.” Id.
Based on this court’s prior statements that jury verdict damages would be
appropriate in this case, the trial court decided to employ the jury verdict approach and
explained that to facilitate the analysis it would adopt Professor Shapiro’s damages
model, with one adjustment. 67 Fed. Cl. at 242. Professor Shapiro found that in the
absence of a breach, financing all three infusions of cash (the infusions of March 1989,
December 1989, and December 1990) would have required CFSB to relinquish 47.1%
of its equity. Id. at 242-44. The Shapiro model incorporated a combination of debt and
equity financing and contained four basic assumptions: (1) that equity financing was
likely in the “but-for” world; (2) that long-term financing would have been more attractive
and more available in the absence of a breach; (3) that the model should examine the
non-breach financing costs the plaintiffs would have faced beginning in March 1989;
and (4) that the model should rely upon audited financial statements, as opposed to
thrift financial reports. Id. at 244-50.
On the issue of equity financing, the trial court concluded that some equity
financing would have been unavoidable even in the non-breach world. 67 Fed. Cl. at
246. The court stated that “it is reasonably certain that Mr. Fail would have accepted an
offer for equity financing should it have been available . . . in the non-breach world,”
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because Mr. Fail sought “financing prior to the breach that included equity financing,
and [decided] to concede equity as part of the December 1989 financing.” Id. at 244.
The court also explained that the Shapiro model’s “conclusion of a required equity
surrender is further supported by the risk/return principle and the matching principle”
because the higher risk associated with Bluebonnet would warrant equity financing and
because investors typically do not use short-term loans to finance long-term liabilities.
Id. at 245. The court further noted that the evidence showed that similarly structured
bank holding companies were financed with equity and that all-debt financing options
would have been limited in the plaintiffs’ marketplace. Id.
The court also concluded that Professor Shapiro was correct to assume that, in
the non-breach world, long-term financing “would have been more attractive and more
available due to less lingering doubt over the passage of FIRREA.” 67 Fed. Cl. at 248.
The court explained that Mr. Fail’s actions “display a preference for long-term financing”
and that investors would have preferred long-term financing, in part because CFSB,
short on capital, “would . . . have to roll over the loan . . . or find a different lender to
assume another loan.” Id. at 246. The court also found that “[a]bsent the breach,
plaintiffs would have had access to a stream of dividends attracting more long-term
financing suitors at more attractable terms.” Id. at 247. Furthermore, the court noted
that Professor Calomiris admitted that the plaintiffs “were hoping to get long-term
financing but the breach put them in a position where they don’t get the financing that
they were hoping for.” Id. at 248. In response to the plaintiffs’ assertion that they would
have chosen short-term financing so as to wait for the more favorable long-term rates
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that arose in 1992, the court concluded that it was unlikely Mr. Fail could so accurately
forecast short-term and long-term financing rates. Id. at 247.
The trial court also found merit in Professor Shapiro’s decision to construct his
model with a starting date of March 1989. The court explained that it had been the
plaintiffs’ “previous position . . . that the model should be constructed prior to 1992” and
that the court had rejected that model not because of the start date, but because there
was insufficient evidence to support the assumed interest rate. 67 Fed. Cl. at 248.
Furthermore, one of the plaintiffs’ experts had previously testified that the “pre-breach”
chill caused by the impending enactment of FIRREA unfavorably impacted the plaintiffs’
financing costs. Id. at 249. Consequently, the court held that the “harm in this case
extended to a pre-FIRREA time-frame.” Id.
The court further found that the Shapiro model properly relied on audited
financial statements, as opposed to thrift financial reports. The court explained that the
audited financial statements were more reliable and were consistent with both the
projected earnings in the plaintiffs’ business plan and a Report of Examination by the
Office of Thrift Supervision. 67 Fed. Cl. at 250. In contrast, the court noted, federal
regulators had characterized the thrift financial reports as “not accurate [and not]
prepared in a timely manner.” Id.
The trial court, however, did not adopt the Shapiro model in its entirety; the court
found that Professor Shapiro erred in assuming that CFSB would have retired Mr. Fail’s
debt for free. 67 Fed. Cl. at 250. To the contrary, the court accepted the plaintiffs’
argument that it was reasonable to conclude that CFSB would have obtained “a note
payable from Mr. Fail in return for assuming his debt.” Id. at 251. Moreover, the court
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ruled that under one of the governing regulations, 12 C.F.R. § 584.6 (1989), CFSB
would have been prevented “from ‘assum[ing] any debt’ without prior approval from
[regulators].” 67 Fed. Cl. at 251. The court then determined that it was reasonable to
suppose, as the plaintiffs suggested, that CFSB would have assumed Mr. Fail’s debt in
exchange for a note payable and that such an arrangement would have been approved
by regulators.
The court thus adopted the correction to the Shapiro model that had been
proposed by the plaintiffs’ expert, Professor Calomiris. With that correction, the court
determined that the percentage equity interest in CFSB that the plaintiffs would have
had to surrender in order to obtain financing would decrease from 47.1% to 16.1%. 67
Fed. Cl. at 251. The court observed that this “drastic reduction of equity surrendered”
would have occurred because a note payable from Mr. Fail to CFSB would have
increased the total value of CFSB. Id. Such an increase in value would, in turn, lower
the percentage of equity that would have to be relinquished to obtain financing in the
“but-for” world, and thus diminish the but-for costs that would be applied in assessing
the net financial effect of the breach. The court therefore concluded that the appropriate
award of damages, using Professor Calomiris’s corrected version of the Shapiro model,
was $96,798,842.
The government filed a motion for reconsideration, contending that the court had
erred in finding that it was “highly unlikely” that the FSLIC would have approved CFSB’s
assumption of Mr. Fail’s debt. The government argued that subsection (e) of 12 C.F.R.
§ 584.6 required the FSLIC to approve any transaction conducted for the purpose of
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making a capital contribution that would not impose an unreasonable or imprudent
financial burden on CFSB.
The trial court denied the motion for reconsideration. The court first criticized the
government for having “belatedly respond[ed] to plaintiffs’ argument” regarding the
issue of regulatory approval of CFSB’s assumption of Mr. Fail’s debt. The court further
explained that the “figures and percentages employed in the court’s analysis, including
the equity surrender portion, independently originated from a jury’s assessment of the
evidence presented,” and that the court’s ruling “serves as a proxy for what a jury would
have determined to constitute the true extent of the harm.” Bluebonnet Sav. Bank,
F.S.B. v. United States, No. 95-532C (Ct. Fed. Cl. Sept. 7, 2005) (order denying motion
for reconsideration).
The government now appeals, challenging (1) the trial court’s use of the jury
verdict method of assessing damages, (2) the court’s finding that federal regulators
would not have approved CFSB’s gratuitous assumption of Mr. Fail’s debt, and (3) the
overall reasonableness of the damages award. The plaintiffs have filed a conditional
cross-appeal, in which they challenge the trial court’s analysis of the competing
Calomiris and Shapiro models, and urge an increase in the damages award in the event
this court does not affirm the trial court’s award of $96,798,842.
II
A
The government first argues that the trial court committed legal error by
employing the jury verdict method, because the court “failed to find that plaintiffs
demonstrated a justifiable inability to substantiate their damages.” In the government’s
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view, the plaintiffs have “never asserted that they were unable to substantiate their ‘but-
for’ costs” and have “simply been unable to present a credible model.”
This court, however, has twice stated that the jury verdict method would be an
appropriate means of determining damages in this case. In Bluebonnet III, we
explained that jury verdict damages are allowed where there is “clear proof of injury and
. . . no more reliable method for computing damages.” In particular, we noted that it
“would have been appropriate for the court to award jury verdict damages as a fair and
reasonable approximation of EBA damages,” even if Bluebonnet had not “adequately
substantiated the damages it suffered as a result of entering into the EBA.” 266 F.3d at
1357-58. And in Bluebonnet V, we again rejected the government’s argument that it
should pay no damages at all. In remanding for an inquiry into the but-for financing
costs, we explicitly “reiterate[d] the point made in our prior opinion that, at a minimum,
jury verdict damages would be appropriate in this case.” 339 F.3d at 1346.
Notwithstanding our prior decisions approving the use of the jury verdict method
in this case, the government contends that the plaintiffs failed to meet their burden of
demonstrating a justifiable inability to substantiate their damages. In support of that
contention, the government cites Dawco Construction, Inc. v. United States, 930 F.2d
872 (Fed. Cir. 1991). Dawco, however, is readily distinguishable. The pertinent issue in
that construction contract case was the amount of the equitable adjustment due to the
contractor for changes in the contract and for differing site conditions encountered
during performance. This court disapproved the trial court’s use of the jury verdict
method of determining damages both because it concluded that Dawco could have
identified its actual costs to an acceptable degree of certainty and because Dawco
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offered no justification for not keeping track of the additional costs associated with the
change order and with the differing site conditions. In this case, by contrast, the “but-
for” costs at issue in the remand proceedings are not actual costs and can be
determined only by using hypothetical modeling. Moreover, the government’s argument
is inconsistent with one of the underlying purposes of jury verdict damages; namely, to
offer a “means for achieving a result that is fair and just to both parties when neither
party has been able to present an independently complete or acceptable measure of
damages.” White Mountain Apache Tribe v. United States, 11 Cl. Ct. 614, 663 (1987)
(“The fact finder is not required to choose between swallowing an expert’s report whole,
or rejecting it utterly, and usually, neither course is right.”).
Finally, the record makes clear that the trial court’s judgment was not simply an
unguided estimate of what the court felt would be a reasonable approximation of a fair
award. Rather, the damages award was based on the court’s analysis of the competing
economic models, and its conclusion that damages would be best represented by
adopting Professor Shapiro’s model with the correction discussed in Professor
Calomiris’s testimony. After completing those two steps, the court arrived at an award
that was directly supported by evidence in the record—the amount corresponding to a
hypothetical surrender of 16.1% equity in CFSB, which was provided by Professor
Calomiris in his correction to the Shapiro model. While the court characterized its
award as ultimately based on the jury verdict method, the court’s reasoning closely
mapped the presentations of the parties, with the court expressly adopting portions of
the analysis proffered by each party. Therefore, even disregarding our previous
statements that the jury verdict method would be appropriate in this case, we hold that
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the method the trial court used to determine the quantum of damages did not violate
any limitations this court has established for the use of the jury verdict method to
calculate damages in contract cases.
B
The government next argues that the trial court erred in adopting Professor
Calomiris’s correction to Professor Shapiro’s model. According to the government, the
court adopted the modified version of the Shapiro model because the court concluded
that, under the regulations governing savings and loan holding companies, and in
particular 12 C.F.R. § 584.6, federal regulators would not have approved CFSB’s
gratuitous assumption of Mr. Fail’s debt. There are two problems with the government’s
argument.
1. The first problem with the government’s argument is that it is predicated on an
unduly narrow reading of the trial court’s opinion. The government interprets the trial
court’s opinion as modifying the Shapiro model based solely on the court’s conclusion
that federal regulators would not have approved CFSB’s assumption of Mr. Fail’s debt
under the pertinent regulations. The trial court’s opinion, however, indicates that the
reasoning underlying the modification was not so narrowly focused. In addition to
finding that section 584.6 of the thrift holding company regulations would have “kept
CFSB from ‘assum[ing] any debt’ without prior approval” from federal regulators, the
court also accepted the plaintiffs’ broader argument that it was unreasonable for
Professor Shapiro to assume that CFSB would have retired Mr. Fail’s debt for free.
Bluebonnet VI, 67 Fed. Cl. at 250-51. In particular, the court rejected Professor
Shapiro’s contention that “as a matter of economics,” CFSB was simply the “alter ego”
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of Mr. Fail, id. at 251, and that for purposes of the damages analysis it was irrelevant
whether particular assets or obligations were attributed to CFSB or to Mr. Fail. The
court’s conclusion was supported by Professor Calomiris’s observations that “if the
corporation that you are the stockholder in assumes your debt for free, effectively it paid
you a dividend” and that “from a tax standpoint . . . [you] would have had to pay tax on
the dividend.” Trial Tr. at 365.
Professor Calomiris testified that even if Mr. Fail could have obtained regulatory
approval of “what Dr. Shapiro models, of having CFSB assume his personal debt,” he
would not have engaged in that transaction because he would have been forced to pay
tax on what would have been a constructive dividend from CFSB. Trial Tr. at 364-65;
see also Plaintiffs’ Exhibit 4081 (asserting that Professor Shapiro’s “informal
consolidation” is “fundamentally flawed” because it ignores both “regulators” and
“taxes”). As revealed in the cross-examination of Professor Shapiro, the taxes that
would be due on that constructive dividend (arguably between $9 million and $15
million) would be significant because they would require a larger distribution by CFSB,
and “there wasn’t enough equity . . . to . . . support that kind of borrowing.” Trial Tr. at
916-18 (Professor Shapiro). Professor Shapiro acknowledged that his model failed to
take into account the potential tax implications of particular transactions; he simply
assumed that the transaction “could be done in a tax efficient manner” because
“[w]ealthy people have pretty good tax attorneys to figure this stuff out.” Id. at 917.
Consequently, the trial court accepted Professor Calomiris’s testimony that the Shapiro
model should be corrected so that the transaction would not be deemed a taxable
dividend distribution (by taking something of value along with the debt). See Trial Tr. at
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366-67 (in which Professor Calomiris discussed the creation in 1989 of a separate
holding company, Stone Holdings, in order to correct the error in Professor Shapiro’s
model); see also Bluebonnet VI, 67 Fed. Cl. at 251 n.83.
The government’s argument that the legal implications of transactions between
Mr. Fail and CFSB can be ignored because they “were the same entity” for economic
purposes is unpersuasive in light of the record before the trial court. In particular, the
government asserts that the “offsetting compensation in the form of a note payable from
Mr. Fail to CFSB would have had no effect upon CFSB’s equity value because the
overall assets would not increase, and Mr. Fail would be effectively writing a check from
himself to himself.” The trial court, however, properly rejected that argument, finding
that it “must acknowledge the legal walls erected between Mr. Fail and CFSB” and
noting that even “Professor Shapiro acknowledges that CFSB is a ‘legally separate
entity.’” Bluebonnet VI, 67 Fed. Cl. at 251. As the trial court explained, “the court is
concerned with the law and not merely an economic view.” Id.; cf. Trial Tr. at 737-38
(Professor Shapiro’s testimony on the availability of “informal consolidations” as a
“matter of economics”).
In sum, the government’s argument does not fully address the trial court’s
analysis, because it focuses almost entirely on the single issue of regulatory approval
and fails to confront the question whether the transactional model envisaged by
Professor Shapiro would have been unrealistic for other reasons.
2. With respect to whether federal regulators would have approved CFSB’s
gratuitous assumption of Mr. Fail’s debt, the plaintiffs contend at the outset that the
government has waived its challenge to the trial court’s interpretation of the thrift holding
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company regulations. Although the government makes an elaborate argument in its
brief as to why federal regulators would have approved CFSB’s assumption of Mr. Fail’s
debt notwithstanding the cited regulations, the government never made that argument
to the trial court until its motion for reconsideration following the trial court’s issuance of
its decision. As the trial court noted in denying the motion, an argument made for the
first time in a motion for reconsideration comes too late, and is ordinarily deemed
waived and not preserved for appeal. See Lamle v. Mattel, Inc., 394 F.3d 1355, 1359
n.1 (Fed. Cir. 2005); Caldwell v. United States, 391 F.3d 1226, 1235 (Fed. Cir. 2004);
Mungo v. Taylor, 355 F.3d 969, 978 (7th Cir. 2004); Am. Meat Inst. v. Pridgeon, 724
F.2d 45, 47 (6th Cir. 1984).
While the government contends that it addressed the meaning of the regulations
both at trial and in its post-trial brief, an examination of the record shows otherwise. At
trial, the government objected to Professor Calomiris’s testimony that federal regulators
would not have approved the hypothesized CFSB–Fail transaction. The government’s
objection, however, was based solely on its assertion that Professor Calomiris was not
qualified as an expert on savings and loan regulation and thus was not competent to
testify on that subject. The government reiterated its objection, on the same ground, in
its post-trial brief. It did not, however, make the argument that it made in its
reconsideration motion, and that it has made at length in this court—that the text of the
regulations does not support the trial court’s ruling. The government failed to make that
argument even though the plaintiffs, in their post-trial briefing, plainly asserted that
under the governing regulations federal regulators would not have approved CFSB’s
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gratuitous assumption of Mr. Fail’s debt.1 Thus, the only issue that the government
preserved in the trial court and for appeal is whether Professor Calomiris was
competent to testify that the CFSB–Fail transaction would not have been approved and,
if not, whether there was a fatal lack of evidence on that issue.
The government has not pressed that evidentiary objection vigorously on appeal.
The government argues briefly that “there was no competent evidence to support the
court’s conclusion that [federal regulations would have barred the CFSB–Fail
transaction],” because neither Professor Calomiris nor Professor Shapiro “purport[ed] to
be an expert on thrift regulation.” The government’s argument about the incompetence
of the evidence on this issue fails for two reasons. First, the trial court did not abuse its
discretion in admitting Professor Calomiris’s testimony on this issue. The government
objected that Professor Calomiris had never been a federal regulator, that he had been
involved in the thrift industry only since 2000, and thus that he did not have expertise in
the regulation of thrift holding companies or personal experience relevant to the 1989-
1992 time period. However, in light of Professor Calomiris’s experience as the
chairman of the board of a regulated thrift holding company and his experience as a
consultant to federal banking regulators since 1988, it was within the court’s discretion
to admit his testimony about the regulation of thrift holding companies. Second, on
cross-examination the plaintiffs elicited testimony from Professor Shapiro in which he
1
The government hints that it was taken by surprise by the plaintiffs’ argument
that federal regulators would not have approved CFSB’s gratuitous assumption of Mr.
Fail’s debt. In fact, however, that contention was a central focus of several of the
plaintiffs’ demonstrative exhibits, which were provided to the government in advance of
the trial proceedings on remand.
06-5016,-5024 19
acknowledged that the thrift holding company regulations would have applied to CFSB’s
assumption of Mr. Fail’s debt. With respect to that evidence, there was no objection
from the government. Furthermore, because the meaning of the regulations is a legal
issue, it would have been proper for the trial court to address the scope of the
regulations in the absence of opinion testimony from the expert witnesses. Accordingly,
to the extent that the government now contests the trial court’s interpretation of the thrift
holding company regulations, it has waived that argument, and to the extent that it
contests the trial court’s decision on the ground that it was not supported by testimony
from a competent witness, we reject that argument.
The government argues that in any event the waiver rule is prudential and should
not be invoked where it would result in “a manifest error of law” or “manifest injustice.”
In the government’s view, the trial court’s interpretation of the 1989 thrift holding
company regulations was plainly erroneous and caused a clear injustice, and thus this
court should not permit the judgment in this case to rest on the trial court’s analysis of
those regulations. While there is ground for debate as to how regulators would interpret
the regulations, we disagree that the regulations plainly support the government’s
contention that the CFSB–Fail debt assumption transaction was permissible under the
regulations and thus clearly would have been approved.
The 1989 version of the thrift holding company regulations provides in part that
“no savings and loan holding company [may] assume any debt, without the prior written
approval” of FSLIC. 12 C.F.R. § 584.6(a). The regulations further provide that FSLIC
will approve any such transaction if the proceeds of the transaction will be used for
“making a capital contribution to a subsidiary insured institution,” or “refunding,
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extending, exchanging, or discharging an outstanding debt security, or for other
necessary or urgent corporate needs, and would not impose an unreasonable or
imprudent financial burden on the applicant.” Id. § 584.6(e)(1).
The government first argues that the purpose of section 584.6 was “to prevent
holding companies from assuming a debt that would cause the holding company to put
pressure upon its subsidiary to pay dividends,” thus forcing the subsidiaries to engage
in riskier loans in order to build up greater dividends. Because that concern was not at
issue in the CFSB–Fail transaction, the government argues, the regulations would not
have been applicable to that transaction.
That argument is not a sufficient basis for holding the regulations inapplicable to
the CFSB–Fail transaction. While a central concern motivating the regulations may
have been to prevent holding companies from forcing subsidiaries to pay excessive
dividends, the text of the regulations makes clear that they are broader than that in
scope. By its terms, section 584.6(a) applies to a wide variety of transactions (“no
savings and loan holding company . . . may issue, sell, renew, or guarantee any debt
security . . . or assume any debt, without the prior written approval” of the FSLIC). It
would disregard the plain language of the regulation to limit its scope to preventing
holding companies from forcing subsidiary institutions to issue dividends.
The government also argues that section 584.6(e) of the regulations, which sets
forth the transactions that the FSLIC will approve, would clearly apply to the CFSB–Fail
transaction. We think it is far from clear, based on the language of the regulation alone,
that the hypothesized CFSB–Fail transaction would qualify for approval under that
subsection. The first portion of the subsection invoked by the government is section
06-5016,-5024 21
584.6(e)(1)(i), which authorizes transactions such as the assumption of a debt if the
transaction is for “the purpose of making a capital contribution to a subsidiary insured
institution.” According to the government, that provision applies to the assumption of
Mr. Fail’s debt because “the purpose of CFSB’s assumption of the $35 million bridge
loan to Mr. Fail, as posited by Professor Shapiro, was to facilitate the long-term
financing of their capital infusion.” That argument treats the regulation as if it provided
for the approval of any debt assumption transaction that was part of an overall plan to
finance the capitalization of a thrift. By its plain terms, however, the regulation is not
that broad; instead, it applies only if the purpose of the transaction is “making a capital
contribution” to the thrift. Here, the CFSB–Fail transaction would not have produced an
additional capital contribution, and therefore it does not plainly fall within the scope of
the provision for automatic regulatory approval.
The second portion of section 584.6(e) on which the government relies is section
584.6(e)(1)(ii). The government argues that federal regulators would automatically have
authorized the approval of the CFSB–Fail debt assumption pursuant to that provision
because that transaction was “required for discharging an outstanding debt security”
and would “not impose an unreasonable or imprudent financial burden on the applicant.”
Section 584.6(e)(1)(ii) applies to transactions that serve “necessary or urgent corporate
needs.” It does not cover transactions that would discharge the indebtedness of a
shareholder or owner of the holding company, such as Mr. Fail. As in the case of
section 584.6(e)(1)(i), it is thus far from clear that section 584.6(e)(1)(ii) would have
applied to the CFSB–Fail transaction about which Professor Shapiro testified.
Accordingly, we are not persuaded that the trial court’s interpretation of the thrift holding
06-5016,-5024 22
company regulations was so plainly erroneous that it would result in manifest injustice to
hold the government to the consequences of its failure to timely challenge the
application of those regulations.
C
The government next argues that the trial court’s award of $96,798,842 should
be vacated because the court did not adequately explain why that amount represented
a fair and reasonable approximation of the plaintiffs’ damages. That argument is largely
based on the government’s assertion that the trial court was wrong to conclude that
federal regulators would have required a personal note from Mr. Fail before approving
CFSB’s assumption of Mr. Fail’s $35 million debt. The government further challenges
the trial court’s conclusion that Mr. Fail would have provided such a note, and that
providing a note would have reduced CFSB’s required equity surrender to only 16.1%.
We have already addressed the first point—that the trial court was wrong to
conclude that federal regulators would not have approved a gratuitous assumption by
CFSB of Mr. Fail’s $35 million debt in March 1989. As to the second point—that Mr.
Fail would have provided such a note—the government contends that there would have
been essentially no difference between the note-supported transaction and the issuance
of dividends to Mr. Fail with which he would pay off the $35 million loan. The answer to
that argument, however, can be found in the government’s own brief, where the
government admits that a consequence of CFSB’s issuance of dividends to Mr. Fail
would be that “Mr. Fail would be required to pay taxes on the dividends he received
from CFSB.” In light of the large financial burden that would be entailed by the tax
liability associated with the issuance of such dividends, it was reasonable for the trial
06-5016,-5024 23
court to conclude that the parties would instead elect a note-supported assumption of
debt by CFSB.
The government further contends that the trial court lacked a basis for holding
that Mr. Fail’s provision of a note would have reduced the required equity surrender to
16.1% of the equity value of CFSB. Yet the demonstrative exhibits accompanying
Professor Calomiris’s testimony explicitly show that correction of “Error 1” in the Shapiro
model results in a “Total Cumulative Equity Surrender” of 16.1% and “Total Damages”
of $96,798,842. See Plaintiffs’ Exhibits 4080, 4089; Trial Tr. at 357, 379. Moreover, the
government does not provide any calculation of its own, but simply dismisses Professor
Calomiris’s testimony in favor of Professor Shapiro’s competing statements. As we
explained in our previous opinion, the trial court is “in the best position to make the
factual determinations necessary to establish an appropriate damages award,”
Bluebonnet V, 339 F.3d at 1346, and we defer to the conclusions of the trial court on
factual questions such as the specific percentage of equity that would have been
surrendered in the non-breach world.
Finally, the government contends that even if Mr. Fail had given a note to CFSB,
the true value of the note would not have offset the $35 million assumed debt, because
Mr. Fail did not have sufficient assets to cover a note of that size. As a consequence,
the government argues, investors would not have regarded the note as lowering the risk
of investing in CFSB, and thus would have required a larger share of equity in CFSB as
an inducement to invest in the company. As the plaintiffs point out, however, the
investors who lent $35 million to Mr. Fail in December 1988 and March 1989 were
satisfied that he had sufficient collateral to support those loans. Moreover, the evidence
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of record does not establish that Mr. Fail’s assets would have been insufficient to
support a $35 million note in March 1989. Evidence before the court at a prior stage in
this case showed that Mr. Fail’s net worth in December 1988 was estimated to be
between $30 million and $40 million, and that Mr. Fail reported to federal regulators that
his net worth was approximately $40 million during that time period. The trial court
therefore did not commit clear error in concluding that Mr. Fail’s personal note would
have been sufficient to support the full value of CFSB’s assumption of his $35 million
debt. Accordingly, we reject the government’s contention that the trial court erred in
finding that the 16.1% equity interest in CFSB would have been sufficient to attract
investors had there been no breach.
While the award in this case is large, the evidence brought out in the several
evidentiary proceedings showed that the government’s breach had a substantial impact
on the plaintiffs’ ability to obtain financing for their investment on attractive terms. As
we have ruled before, the trial judge who has supervised the proceedings in this case
for years is intimately familiar with the circumstances of the breach and the parties’
competing presentations as to its financial consequences. Because determining the
amount of the plaintiffs’ loss depends on sophisticated analysis of a hypothetical state of
affairs, the task of assessing damages in this case has been a demanding one,
necessarily involving an exercise of judgment informed by immersion in a complex web
of facts and projections as to how the facts would have unfolded in the hypothetical non-
breach world. We are confident that the trial court exercised that judgment based on a
full understanding and synthesis of those facts in light of the parties’ presentations at
trial. Accordingly, we uphold the trial court’s award of $96,798,842 to plaintiffs as
06-5016,-5024 25
damages for the government’s breach of contract. Because the plaintiffs’ cross-appeal
is conditional on our rejection of the trial court’s damages award, we do not address the
cross-appeal.
AFFIRMED.
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