First Fed. Savings and Loan Assoc. Of Rochester v. United States , 290 F. App'x 349 ( 2008 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2007-5161
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
David T. Case, Kirkpatrick & Lockhart Preston Gates Ellis LLP, of Washington,
DC, argued for plaintiff-appellee.
Elizabeth M. Hosford, Senior Trial Counsel, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for
defendant-appellant. On the brief were Michael F. Hertz, Deputy Assistant Attorney
General, Jeanne E. Davidson, Director, Kenneth M. Dintzer, Assistant Director, and
Arlene Pianko Groner, Delisa M. Sanchez, and William G. Kanellis, Trial Attorneys.
Appealed from: United States Court of Federal Claims
Judge George W. Miller
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2007-5161
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
Appeal from the United States Court of Federal Claims in 95-CV-517, Judge George W.
Miller.
__________________________
DECIDED: August 13, 2008
__________________________
Before LINN, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and PROST, Circuit
Judge.
Opinion for the court filed by Circuit Judge PROST. Opinion dissenting-in-part filed by
Senior Circuit Judge FRIEDMAN.
PROST, Circuit Judge.
This is a Winstar-related case arising out of the savings and loan crisis of the
1980s. The government appeals the decision by the United States Court of Federal
Claims finding the government liable for breach of contract and awarding damages to
First Federal Savings and Loan Association of Rochester (“First Federal”). First Fed.
Sav. & Loan Ass’n of Rochester v. United States, 76 Fed. Cl. 106 (2007) (“First Federal
II”). We affirm.
I
A
First Federal was a mutual savings and loan association whose accounts were
insured by the Federal Savings and Loan Insurance Corporation (“FSLIC”). The FSLIC
devised the “Phoenix” program to consolidate large insolvent thrifts, appoint good
management, and reduce operating costs so that the thrifts could be recapitalized or
sold at a lower cost. In September 1981, First Federal became the first thrift placed in
the Phoenix program when it agreed to four mergers with severely undercapitalized
institutions. After First Federal underwent controlled growth as a Phoenix, the FSLIC
began to look for a more permanent solution.
On August 8, 1986, the FSLIC released First Federal from the Phoenix program
by executing the Financing Agreement. A key element of the Financing Agreement was
the conversion of First Federal from a mutual association to a publicly-held stock
association. Under the Financing Agreement, FSLIC forgave $158.5 million in debt
owed to it by First Federal and infused $200 million into First Federal. The following
sections of the Financing Agreement are relevant to this dispute:
Section 6.04. Conversion Covenant. First Federal shall use its
best efforts in good faith to complete the Common Stock Offering and to
consummate the Conversion as soon as practicable, provided that the
Board of Directors shall have reasonably determined that it is in the best
interests of First Federal to proceed with the Conversion. First Federal
shall furnish to the Supervisory Agent a semi-annual report, within 30 days
after each June 30 and December 31 commencing December 31, 1986,
as to its progress toward making the Common Stock Offering. . . .
...
Section 6.09. Compliance with Laws. During the term of this
Agreement, First Federal will comply with any and all applicable statutes,
regulations, or orders of, or any restriction imposed by, the United States
of America or any state, municipality, or other political subdivision, or any
2007-5161 2
agency thereof, relating to the conduct of its business or the ownership of
its properties. . . .
Section 6.10. Net Worth of First Federal. The amount of net worth
required under 12 C.F.R. § 563.13 (1986) or any successor regulation
shall not be required of First Federal. Instead, First Federal will be
required to have a net worth/total liabilities ratio, computed in accordance
with generally accepted accounting standards, greater than or equal to the
following:
Years After Minimum Net Worth/
Initial Closing Total Liabilities
1-5 1.09
6-7 1.41
8-10 3.56
However, if the net worth ratio should at any time fall materially below the
required percentages then First Federal shall be in breach of this
Agreement. In addition to any other remedies available, FSLIC shall have
all the rights granted it under 12 C.F.R. § 563.13 (1986) or any successor
regulation.
Section 6.11. Capital Plan of First Federal. First Federal
covenants that it will use its best efforts to implement its Capital Plan, as
described in Exhibit E attached hereto.
(Emphases added). The Capital Plan, attached to the Financing Agreement as Exhibit
E, called for a conversion within eighteen to thirty-six months and characterized a
successful conversion as one that would raise approximately $150 million in capital.
The Capital Plan also set forth annual earning (net worth) projections prior to and
following the expected $150 million stock conversion.
In the fall of 1988, Canada Trust Company (“Canada Trust”) raised with First
Federal the possibility of a transaction in which First Federal would convert from a
mutual to a stock institution and Canada Trust would acquire a majority share of its
common stock. First Federal subsequently ended the discussions.
Thereafter, First Federal and Monroe Savings Bank (“Monroe”) executed a
merger agreement, and First Federal sought approval for the merger. FDIC approved
$33 million in assistance for the merger. On November 22, 1998, the Federal Home
2007-5161 3
Loan Bank of New York (“FHLB-NY”) evaluated First Federal’s proposed acquisition of
Monroe and recommended that the bid be accepted. On March 17, 1989, the Federal
Home Loan Bank Board (“FHLBB”) also recommended approval of the merger.
On August 9, 1989, Congress enacted the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989)
(“FIRREA”), which imposed stricter standards for the calculation of the regulatory
capital. The FHLBB and the FSLIC were abolished and replaced by the Office of Thrift
Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”),
respectively. First Federal II, 76 Fed. Cl. at 110.
On September 14, 1989, the Acting Deputy Director of OTS, recommended to
the Director of OTS that the Monroe acquisition be disapproved because the resulting
institution would not be in compliance with the tangible capital requirements mandated
under FIRREA. After regulatory officials told First Federal that the merger would not be
approved First Federal withdrew the Monroe merger application on November 14, 1989.
Two years later, First Federal converted from a mutual to a stock association and was
acquired by Canada Trust.
B
First Federal sued the government for breach of the Financing Agreement. On
October 14, 2003, the Court of Federal Claims granted First Federal’s motion for partial
summary judgment on liability, holding that the government breached the Financing
Agreement by imposing regulatory capital requirements contrary to those specified in
Section 6.10. First Fed. Sav. & Loan Ass’n of Rochester v. United States, 58 Fed. Cl.
139, 160, 167 (2003) (“First Federal I”). The court concluded, however, that there was a
2007-5161 4
genuine issue of material fact as to whether the government’s failure to approve the
Monroe merger application was a breach of the Financing Agreement. Id. at 163. The
court then held a trial on the remaining liability issues and damages.
On April 13, 2007, the court issued an opinion and order holding that the
government’s breach of Section 6.10 of the Financing Agreement caused First Federal
to incur damages in the amount of $96,581 million, including: (1) $26.061 million in lost
profits because First Federal had to curtail its growth of profitable assets between 1990
and 1997, (2) $56.137 million because First Federal was prevented from acquiring
Monroe, and (3) $14.383 million because First Federal was forced to be acquired by
Canada Trust. First Federal II, 76 Fed. Cl. at 112-143, 152. Thereafter, the court
adjusted the total damages to $85.459 million—reflecting an $11.122 million offset—and
entered judgment against the government. First Fed. Sav. & Loan Ass’n of Rochester
v. United States, 76 Fed. Cl. 765, 767 (2007).
The government appeals. We have jurisdiction pursuant to 28 U.S.C.
§ 1295(a)(3).
II
Contract interpretation is a question of law, which we review de novo. St.
Christopher Assocs., L.P. v. United States, 511 F.3d 1376, 1380 (Fed. Cir. 2008). In
the context of Winstar litigation, whether a breach of contract caused certain damages
is a question of fact, which we review for clear error. Fifth Third Bank v. United States,
518 F.3d 1368, 1375 (Fed. Cir. 2008). Similarly, foreseeability and proof of damages to
a reasonable certainty are issues of fact. Id. A finding of fact will be overturned only
when “the reviewing court on the entire evidence is left with the definite and firm
2007-5161 5
conviction that a mistake has been committed.” Id. (quoting United States v. U.S.
Gypsum Co., 333 U.S. 364, 395 (1948)). Whether a breach of contract was material is
a mixed question of fact and law. Hometown Fin., Inc. v. United States, 409 F.3d 1360,
1369 (Fed. Cir. 2005).
III
The government asserts that the Court of Federal Claims erred: (1) by finding
that there was not a prior material breach by First Federal, (2) by finding that the
government breached the Financing Agreement by not approving the Monroe merger
because First Federal did not meet the regulatory capital requirements under FIRREA,
and (3) by not relying on the growth projections in the Capital Plan in calculating lost
profits. We take each argument in turn.
A
In defending against First Federal’s allegation that the government breached
Section 6.10 of the Financing Agreement, the government alleged that First Federal
committed a prior material breach by not complying with the notice requirements set
forth in Section 6.04. Specifically, the government alleged that First Federal failed to
report the overtures made by Canada Trust. The government contends that the court’s
analysis improperly conflates two separate requirements in Section 6.04, the conversion
requirement and the notice requirement. According to the government, it is clear from
the language of Section 6.04—“progress toward making the Common Stock Offering”—
that the notice requirement did not apply only to a standard conversion (i.e., public stock
offering) or a depositor offering. The government notes that Section 1.01.12 defines
“Common Stock Offering” to mean “the offering of Common Stock (and possibly
2007-5161 6
Convertible Securities and/or Public Warrants) which will be made by First Federal
when and if the Conversion occurs.” Section 1.01.14, in turn, defines “Conversion” to
mean “the conversion of First Federal from a federal mutual savings and loan
association to a federal stock savings and loan association.” In addition, the
government asserts that it is clear from the language that First Federal was required not
just to give notice of completed transactions, but to give notice of any “progress” toward
a transaction.
In support of its argument, the government contends that trial testimony shows
that the regulators understood Section 6.04 to require First Federal to give notice of all
prospects and developments related to its obligation to convert. Further, the
government contends that, with the exception of the Canada Trust overtures, First
Federal was diligent in reporting about any alternatives to a standard conversion. Thus,
its failure to report the overtures by Canada Trust constituted a breach of Section 6.04.
The government avers that the breach by First Federal was “material” because it
deprived the regulators of their right to be informed about First Federal’s progress
toward conversion, and because the FSLIC had a right to purchase up to 25% of First
Federal’s stock once it converted. Therefore, the government contends that First
Federal committed a prior material breach of the Financing Agreement.
A party sued for breach of contract may defend on the ground that the other party
committed a prior material breach. Long Island Sav. Bank, FSB v. United States, 503
F.3d 1234, 1251 (Fed. Cir. 2007); Barron Bancshares, Inc. v. United States, 366 F.3d
1360, 1380 (Fed. Cir. 2004). “Faced with two parties to a contract, each of whom
claims breach by the other, courts will often impose liability on the party that committed
2007-5161 7
the first material breach.” Barron Bancshares, 366 F.3d at 1380 (citations and internal
quotations omitted). A material breach is one that “relates to a matter of vital
importance, or goes to the essence of the contract.” Hometown Fin., 409 F.3d at 1370(quoting Thomas v. HUD, 124 F.3d 1439, 1442 (Fed. Cir. 1997)).
We find no error by the Court of Federal Claims in its interpretation of Section
6.04 of the Financing Agreement. In construing the conversion and notice provisions in
Section 6.04, the court looked to the entire clause to understand the provisions in
context. The court noted that the first part of Section 6.04 required First Federal to
“complete the Common Stock Offering and to consummate the Conversion as soon as
practicable, provided that the Board of Directors shall have reasonably determined that
it is in the best interests of First Federal to proceed with the Conversion.” First Federal
II, 76 Fed. Cl. at 149. The court found that the evidence showed that the Board of
Directors had determined that pursuing a standard conversion, not a modified
conversion, was in the best interests of First Federal because it could maintain its
Generally Accepted Accounting Principles (“GAAP”) net worth, continue deriving the full
benefit of its net operating loss carryforwards (“NOLs”), and ensure that depositors
would be able to purchase stock. Id. Thus, a proposed acquisition by another bank
was not in the best interests of First Federal, and the overtures by Canada Trust did not
contemplate a “common stock offering” as required by Section 6.04. Id. The court
further found that the evidence showed that First Federal informed Canada Trust that it
was not interested in a modified conversion and immediately cut off conversations. Id.
at 149-50. Therefore, the court concluded that the overtures did not constitute
2007-5161 8
“progress” toward making such an offering. Id. at 150. We find the analysis by the
Court of Federal Claims to be sound.
B
The government next argues that the Court of Federal Claims erred in holding
that the government breached the Financing Agreement by relying on the more
restrictive capital requirements of FIRREA, rather than those set forth in Section 6.10, in
failing to approve the Monroe merger application. In particular, the government avers
that the court erred in its conclusion that Section 6.10 of the Financing Agreement
replaced the usual regulatory standards for the purposes of a merger application.
According to the government, the court’s construction of Section 6.10 conflicts with
Section 6.09. Section 6.09 expressly provided that all FSLIC and FHLBB regulations,
except 12 C.F.R. § 563.13, remained applicable. Thus, the government asserts,
Section 6.10 applied only to First Federal’s obligation to maintain its capital ratio at the
percentages applicable in the forbearance, and did not grant a forbearance from
regulations relating to mergers and acquisitions. The net worth standards in Section
6.10 and the growth projections in the Capital Plan reflected an understanding by the
parties to the Financing Agreement that First Federal would grow internally, not by
merging with another thrift. The government contends that the Court of Federal Claims
erred by construing Section 6.10 as providing First Federal with cart blanche pre-
approval to merge with other institutions. Instead, the government avers, both before
and after enactment of FIRREA, the standards for approval of a merger were the
same—whether the merging institutions had adequate financial and managerial
resources to meet the applicable regulations and laws.
2007-5161 9
We find no error in the Court of Federal Claims’ construction of Section 6.10.
The court appreciated that the Financing Agreement was conceived and executed in the
context of the regulatory environment existing in 1986, and that, at that time, 12 C.F.R.
§ 563.13 was the standard for measuring the capital adequacy of a potential merger
between two mutual savings associations. First Federal II, 76 Fed. Cl. at 124. Thus,
the court reasonably concluded that the parties were aware of the broad applicability of
12 C.F.R. § 563.13. Id. Because Section 6.10 substituted its net worth ratios for those
in 12 C.F.R. § 563.13, the court further concluded that the parties understood that no
capital requirements other than those of Section 6.10 needed to be satisfied in order to
be eligible to merge with another institution. Id. We agree that Section 6.10 should
reasonably be construed to apply to First Federal’s state of affairs both before and after
a merger. As the Court of Federal Claims observed, the other provisions of the
Financing Agreement indicated that the agreement was equally applicable to
successors of First Federal, and thus that the parties contemplated the possibility of a
merger. Id. at 125. The court further noted that the government’s own treatment of the
Monroe application prior to the enactment of FIRREA demonstrated that it viewed
Section 6.10 as the standard by which First Federal’s capital adequacy would be
measured for purposes of a merger. Id. at 125. Accordingly, we find no error by the
court in its determination that Section 6.10 of the Financing Agreement replaced the
usual regulatory standards for the purposes of a merger application and that the
government breached the Financing Agreement by applying the more onerous
capitalization requirements of FIRREA.
2007-5161 10
The government further contends that the Court of Federal Claims erred in
finding that the government’s refusal to approve the merger of First Federal and
Monroe, not First Federal’s voluntary withdrawal of its application, is what caused the
merger to fail. The government avers that First Federal withdrew its application before
the regulators acted upon it because First Federal was experiencing income losses and
deposit outflows. Thus, the government asserts that First Federal is not entitled to lost
profits based on the failure of the Monroe merger.
In order to be entitled to expectancy damages, including lost profits, three
requirements must be satisfied: (1) the loss must be foreseeable; (2) the breach must
have caused the plaintiff’s failure to earn the lost profits; and (3) the measure of
damages must be reasonably certain. Cal. Fed. Bank v. United States, 395 F.3d 1263,
1267 (Fed. Cir. 2005). In determining whether the government’s breach of the
Financing Agreement caused the failure of the Monroe merger, the court correctly
recognized that the government’s breach need not be the “but-for cause” of the demise
of the merger. Although this court has rejected the “substantial factor” test in
establishing a causal connection between a contract breach and lost profits, we have
held that the breach need not be “the sole factor or sole cause in the loss of profits.” Id.
at 1268. However, since lost profits are a measurement of what a party would have
received in the absence of the breach, a preponderance of the evidence must show that
the “profits would have been made but for the breach.” Id.The Court of Federal Claims determined that the government’s breach was both
a substantial factor and the but-for cause preventing the merger. First Federal II, 76
Fed. Cl. at 129. The court found that First Federal had been interested in a merger with
2007-5161 11
Monroe since 1987 because a merger offered the prospect of branch consolidation,
immediate asset growth, and the second-highest market share in Rochester, and that
both the FHLB-NY and the FDIC indicated a willingness to approve the merger. Id. at
127. After enactment of FIRREA, however, the regulatory authorities recommended
against approving the Monroe merger application because First Federal did not meet
the tangible capital requirements of FIRREA. Id. at 129. The court found that the
evidence showed that First Federal withdrew its application because it was going to be
rejected based on FIRREA’s capitalization requirements. Id. at 130. We find no clear
error by the court in its factual determinations. Accordingly, we agree that the
government breached the Financing Agreement by imposing the more onerous capital
requirements in FIRREA, and that the failure of the Monroe merger would not have
occurred but for the government’s breach.
C
Finally, the government contends that the lost profits awarded by the Court of
Federal Claims were excessive because they were based on an assumption that, at the
time of the Financing Agreement, it was foreseeable to the government that First
Federal would grow at an annual rate of more than 13% beginning in 1989. The
government asserts that the court erred by setting aside the growth projections in the
Financing Agreement itself and substituting growth projections that were more than four
times greater, and that were made either before or after contract formation. According
to the government, the Capital Plan contained projections of annual asset growth
between approximately 3.25% and 3.50%, and serves as the best evidence of the
expectations of First Federal and the regulators at the time the Financing Agreement
2007-5161 12
was executed; yet, the court relied on evidence of expected growth created either
during First Federal’s Phoenix phase before the Financing Agreement, or well after
contract performance had commenced. Moreover, the government asserts, the court
applied the wrong foreseeability standard by not requiring that both the type and
magnitude of damages be foreseeable at the time of contracting.
In order to be entitled to lost profits, the plaintiff must establish that the damages
were foreseeable to the breaching party at the time of contract formation. Old Stone
Corp. v. United States, 450 F.3d 1360, 1375 (Fed. Cir. 2006). “[T]hat some loss was
foreseeable, or even that some loss of the same general kind was foreseeable, will not
suffice if the loss that actually occurred was not foreseeable.” Id. at 1376 (emphasis
added) (quoting Restatement (Second) of Contracts § 351 cmt a. (1981)). While it is
true that “a plaintiff must prove that both the magnitude and type of damages were
foreseeable,” Landmark Land Co. v. FDIC, 256 F.3d 1365, 1378 (Fed. Cir. 2001), the
plaintiff need only prove the amount of damages with reasonable certainty. Cal. Fed.
Bank, 395 F.3d at 1267. Indeed, as long as “a reasonable probability of damage can be
clearly established, uncertainty as to the amount will not preclude recovery.” Id.The Court of Federal Claims went through a lengthy analysis of the evidence
presented by First Federal regarding the additional assets—and earnings on those
assets—which it would have realized in the absence of the government’s breach of the
Financing Agreement. Crediting the testimony of First Federal’s expert witness, Dr.
Donald Kaplan, and its former chief financial officer, Mr. Mark Chaplin, the court found
that, but for the breach, First Federal would have added approximately $400 million in
profitable assets by the end of 1989. First Federal II, 76 Fed. Cl. at 116-19. It further
2007-5161 13
found that First Federal would have earned profits of approximately $26.061 million on
those foregone assets between 1990 and 1997. Id. at 122. In considering whether the
government had a reason to foresee lost profits as a result of its breach of Section 6.10,
the court concluded that it was foreseeable that requiring First Federal to comply with
FIRREA’s stricter capital standards would cause First Federal to curtail growth and lose
profits. Id. We agree. The government’s argument that the court erred by not relying
on the asset growth rate projections in the Capital Plan is unpersuasive. As the court
determined, the growth projections set forth in the Capital Plan were not limitations on
growth. Moreover, First Federal’s primary business strategy had long been to increase
its assets, even during its years as a Phoenix. Thus, the court properly concluded that
the government should have reasonably foreseen that First Federal might significantly
exceed those projections. We find no error by the Court of Federal Claims in its award
of lost profits.
IV
For the foregoing reasons, we affirm the Court of Federal Claims’ holding that the
government breached the Financing Agreement by not approving the Monroe merger
because First Federal did not meet the regulatory capital requirements under FIRREA,
and its holding that First Federal did not commit a prior material breach by not reporting
the overtures by Canada Trust. We further affirm the court’s award of lost profits.
2007-5161 14
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2007-5161
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
Appeal from the United States Court of Federal Claims in 95-CV-517, Judge George W.
Miller.
FRIEDMAN, Senior Circuit Judge, dissenting in part.
I agree with the court that First Federal did not breach the Financing Agreement
by failing to inform the government about Canada Trust’s proposal that it acquire First
Federal. I also agree that the Court of Federal Claims properly concluded that First
Federal’s lost profits were foreseeable when the Financing Agreement was executed.
Where I part company from the court is its holding that the government breached the
Financing Agreement by failing to approve First Federal’s proposed acquisition of
Monroe Savings Bank.
The court’s reasoning on the Monroe issue is as follows: In section 6.10 of the
Financing Agreement, the parties agreed that the net worth ratios there stated (lower
than those in the governing regulation) would be the only ones First Federal would have
to satisfy. The government breached this commitment by refusing to approve the
Monroe acquisition because the merged institution would not meet the higher capital
ratios required under the recently enacted FIRREA.
Section 6.10, however, deals only with First Federal’s net worth. It does not deal
with the standards the regulators would apply in evaluating First Federal’s proposed
acquisition of another banking institution. Nothing in the Financing Agreement explicitly
deals with government approval of mergers or acquisitions, or purports to specify the
standard’s the government would apply in performing that function. It does not follow
that because First Federal generally would have to meet only those lower capital ratios,
the government could not require that a merger of First Federal would result in the new
higher capital ratios that FIRREA required. Before I could conclude that the Financing
Agreement imposed such a significant limitation on the government’s broad regulatory
authority over savings-and-loan mergers and acquisitions, I would require a far stronger
showing that the parties so intended than I can discern in the Financing Agreement.
2007-5161 2