Slattery v. United States
Full Opinion (html_with_citations)
The United States Court of Federal Claims held that the United States, acting through the Federal Deposit Insurance Corporation (âFDICâ), breached a contract with the Meritor Savings Bank (âMeritorâ) and is liable in damages.
The decision of the Court of Federal Claims as to jurisdiction and liability for breach of contract is affirmed. With respect to damages, we affirm the award of lost value damages of $276 million, reverse the award of $67 million in non-overlapping restitution damages, and by agreement of the parties reverse as cumulative the award of wounded bank damages of $28 million. We affirm the denial of additional damages measured by the FDICâs savings of $696 million due to the merger that was implemented by the breached contract. We reverse the dismissal of the
BACKGROUND
Federal authority for regulation of state-chartered savings banks derives from the federal deposit insurance administered by the FDIC. In the late 1970s and early 1980s an economic recession accompanied by high interest rates placed extreme pressure on banking institutions, and the FDIC encouraged and assisted solvent banks to merge with failing banks, to avert bank failures and to avoid call on the FDIC insurance fund. Thus the FDIC sought to salvage a failing Pennsylvania bank, the Western Savings Fund Society (âWesternâ), through merger with a solidly solvent bank.
In April 1982 Meritor
Regarding the use by Bank of certain accounting methods, the FDIC would not object to the following:
3. The difference between the liabilities assumed and the total of the market value of the Western assets, less reserves, may be treated as goodwill and amortized on a straight-line basis up to fifteen (15) years.
This accounting procedure treats âgoodwillâ as a form of capital. It is measured as the excess of the acquired bankâs liabilities over the value of its assets and, as the Supreme Court explained in United States v. Winstar, 518 U.S. 839, 848-49, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), in effect treats liabilities as capital assets for regulatory compliance purposes.
The Court of Federal Claims found, as undisputed fact, that the 1982 MOU authorizing this accounting procedure was critical to the merger with Western, for otherwise the merged bank would have immediately failed in capital compliance. The Pennsylvania Secretary of Banking, having regulatory oversight of Pennsylvania savings banks, agreed to this procedure. The Court of Federal Claims found that the cost to the FDICâs insurance fund would have been at least $696 million if Western had been liquidated, in contrast to the financial incentives the FDIC provided in connection with the merger with Meritor, which at that time were estimated at $294 million.
With the infusions of cash and with goodwill counted as regulatory capital pursuant to the 1982 MOU, the merged Meritor bank was in compliance with the feder
In 1985, as the nationâs banking problems continued, the FDIC adopted new regulations raising the primary capital ratio for all FDIC-insured savings banks to a minimum of 5.5%. See FDIC Capital Maintenance Rule, 50 Fed.Reg. 11,128 (Mar. 19, 1985) (12 C.F.R. pt. 325).
Any intangible asset which was booked in accordance with generally acceptable accounting principles when acquired and which was approved by the FDIC for inclusion in equity capital prior to the effective date of this regulation shall be counted in full as a component of primary capital and shall not be deducted from total assets if it is being amortized over a period not to exceed 15 years or its estimated useful life, whichever is shorter.
Nonetheless, in late 1985 the FDIC asked Meritor to enter into a new MOU and agree to increase its minimum capital requirement beyond the regulatory minimum of 5.5%. Evidence at trial showed the FDICâs concern that although goodwill accounting allowed Meritor to meet the regulatory capital requirement of 5.5%, protection of the FDIC insurance fund was not thereby assured, for goodwill was an inadequate substitute for hard capital. Meritor objected to the proposed increase, pointing out that the goodwill accounting method was authorized in the 1982 MOU and preserved in the grandfather clause of the 1985 regulations; the FDIC withdrew the request.
In 1987 and 1988 the FDIC again pressed Meritor to accept an increased capital requirement, for the pressures on banking institutions had not abated, and Meritorâs situation was deteriorating. The FDIC requested that Meritor enter into a new Memorandum of Understanding (âthe 1988 MOUâ) which would increase Meritorâs minimum capital requirement to 6.5% of primary capital. The Court of Federal Claims found that Meritor then had no
The 1988 MOU also provided, inter alia, that if Meritor failed to achieve the 6.5% capital level by the end of 1988, Meritor must submit a capital plan to the FDIC that would increase its tangible capital by $200 million, and must present a five-year strategic plan to improve its financial health. At the end of 1988 the FDIC determined that Meritor had not met the 6.5% capital level and had not provided a satisfactory capital plan, although various other provisions of the 1988 MOU were met. Under pressure of an immediate Cease and Desist Order from the FDIC, Meritor proposed a capital plan that included selling many of its most valuable bank branches. The FDIC agreed and, pursuant to this plan, in 1989 Meritor sold 54 branch offices and matching assets to Mellon Bank, which paid a $331 million deposit premium. These proceeds enabled Meritor to meet the 1988 MOUâs requirements.
However, the FDIC remained concerned about Meritorâs viability even after the sale of the 54 branches, and in January 1990 the FDIC placed Meritor on a list of âprojected bank failures.â Discussions and negotiations about securing additional tangible capital continued, and in April 1991 the FDIC and Meritor signed a new agreement (the â1991 Written Agreementâ) that replaced the 1988 MOU. The 1991 Written Agreement raised Meritorâs minimum capital requirement to a total ratio of 8.5% primary capital and 10.5% ârisk-based capital.â The 1991 Written Agreement continued to permit including goodwill in the capital calculation for each of these ratios.
On December 19, 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991 (âFDICIAâ), Pub.L. No. 102-242, 105 Stat. 2236, became law. Section 131 of the FDICIA, titled âPrompt Corrective Action,â set new standards for FDIC regulation of federally insured savings banks, requiring among other things that the FDIC establish a ratio of tangible capital to total assets below which a bank would be âcritically undercapitalized,â with that ratio to be no lower than 2%. See id. § 131(a) (codified at 12 U.S.C. § 18310(c)(3)). On July 6, 1992, the FDIC announced a proposed rule implementing § 131 of the FDICIA, Proposed Rule: Prompt Corrective Action, 57 Fed.Reg. 29662. After a period for comment, the FDIC announced the final rule, Final Rules: Prompt Corrective Action; Rules of Practice for Hearings, 57 Fed.Reg. 44,866, 44,897-44,903 (September 29, 1992), to take effect on December 19, 1992. The new rule interpreted the FDICIA as prohibiting the inclusion in regulatory capital of goodwill associated with acquisitions of failing institutions, regardless of any contrary prior agreement. See 12 C.F.R. § 325.2(s) (1993) (defining âtangible equityâ to exclude âall intangible assetsâ except for certain purchased mortgage servicing rights); see also 12 C.F.R. app. A to pt. 325 (Statement of Policy on Risk-Based Capital).
The 1991 Written Agreement was entered with knowledge of the proposed FDICIA legislation, but before the FDIC
On November 1992 the FDIC prepared an internal memo in preparation for revoking Meritorâs insurance, stating that the reason for its action was that the bank had been âunable to formulate an acceptable capital plan that does not involve FDIC assistance. Due to inadequate capital relative to the bankâs risk exposure, continued operating losses, and the poor quality of assets, the bank is not considered a viable institution.â Liability Ruling, 53 Fed.Cl. at 269 (quoting FDIC memo dated November 3, 1992). On December 9, 1992, the FDIC informed Meritor that when the new regulation took effect on December 19, 1992, Meritor would be âcritically undercapitalized.â
On December 11, 1992 the FDIC revoked Meritorâs federal deposit insurance, which prompted the Pennsylvania Secretary of Banking to seize the bank on the same day. The FDIC was appointed receiver. The Court of Federal Claims cited a letter from the FDIC to Meritor, delivered on the day the FDIC revoked Meritorâs insurance, which explained the FDICâs view that âthe goodwill on the books of Meritor Savings Bank relating to the assisted acquisition of Western Savings Fund Society, Philadelphia, Pennsylvania, and any other intangible assets which do not meet the parameters enumerated in Section 325.2(s), will be excluded in measuring âtangible equity.â â Id. at 286 (quoting letter from FDIC Director Stanley J. Poling to Meritor CEO Roger Hillas (Dec. 11,1992)).
Slattery, as an owner of Meritor stock, filed suit in the Court of Federal Claims in 1993, stating that the FDIC breached the contract it had entered in 1982 in connection with Meritorâs merger with the insolvent Western Savings Bank. Slattery styled the complaint both as a shareholder derivative suit and as a class action, reporting that the FDIC, as receiver for Meritor, had refused to act to enforce Meritorâs contractual rights against the FDIC. The court ultimately dismissed the class action count, but accepted the shareholder derivative suit. Slattery v. United States, 35 Fed.Cl. 180, 183-84 (1996) (âMotion to Dismiss Rulingâ) (rejecting governmentâs motion to dismiss and ruling that Slattery had standing to bring derivative claims); Dismissal of Intervenorsâ Complaint, 73 Fed.Cl. at 531 (dismissing Slatteryâs class action claims).
The trial as to liability consumed five months, from October 1999 through February 2000, with extensive testimonial and documentary evidence. After completion of the trial, but before the courtâs decision, the government moved to dismiss the case for lack of jurisdiction. The court denied the motion, Liability Ruling, 53 Fed.Cl. at 274, and the issue of jurisdiction is pressed by the government on this appeal. We start with this issue.
I. JURISDICTION
The government moved for dismissal on the ground that the FDIC is a
The government states that since the FDIC is funded by insurance premiums paid by its member banks, and not by federal appropriation, any monetary claim against the FDIC is outside the jurisdiction of the Court of Federal Claims, for judgments in the Court of Federal Claims are paid from appropriated funds. See 28 U.S.C. § 2517(a) (âExcept as provided by the Contract Disputes Act of 1978, every final judgment rendered by the United States Court of Federal Claims against the United States shall be paid out of any general appropriation therefor, on presentation to the General Accounting Office of a certificate of the judgment by the clerk and chief judge of the court.â); Kyer v. United States, 177 Ct.Cl. 747, 369 F.2d 714 (1966) (all judgments under the Tucker Act are paid from appropriated funds).
The Court of Federal Claims found no support for the proposed status of the FDIC as a NAFI, for neither its authorizing statute nor any judicial ruling negates the congressional intent, frequently reiterated, that the full faith and credit of the United States stands behind the FDICâs obligations. The Court of Federal Claims found that these expressions of congressional intent, rather than whether there are continuing federal appropriations, guide the inquiry into NAFI status. The court observed that Congress did appropriate start-up funds to the FDIC upon its creation in 1933, and pointed to the frequent congressional affirmations that federally insured deposits are backed by the full faith and credit of the United States, stating that âCongress has passed several resolutions which clearly articulate that Congress would appropriate funds in the future if the [insurance fund] ran out.â Liability Ruling, 53 Fed.Cl. at 274. The court cited 12 U.S.C. § 1824(a), which authorizes the FDIC to borrow from the Treasury, up to $30 billion if needed, to meet FDIC obligations.
The government argues that it is irrelevant that the FDIC was provided with an initial appropriation in 1933, for it has since been self-supporting. The government states that the Federal Circuit confirmed in Core Concepts of Florida, Inc. v. United States, 327 F.3d 1331 (Fed.Cir. 2003), that an initial congressional appropriation to fund an entity established by the United States does not negate its NAFI status, because initial funding does not establish a continuing congressional obligation to fund the entity or meet its obligations. In Core Concepts the entity found to have NAFI status was the Federal Prison Industries (âFPIâ), a âgovernment-owned corporation that was created in 1934 to provide work simulation pro
The government argues that Core Concepts is controlling precedent for the FDIC, in that Congress showed an intent that the FDIC would be independent of Treasury funds by requiring the FDICâs insurance funds to be âinvested in obligations of the United States or in obligations guaranteed as to principal and interest by the United States,â 12 U.S.C. § 1823(a)(1), and by requiring that FDIC funds be kept in separate depository accounts, rather than in the Treasuryâs general fund, id. § 1823(b). The government states that although by statute the FDIC may borrow from the Treasury, the FDIC must establish a repayment schedule, and that other restraints on FDIC obligations establish congressional intent to limit the FDICâs recourse to federal funds and thus exclude the FDIC from suit under the Tucker Act.
The government also draws analogy to Furash & Co. v. United States, 252 F.3d 1336 (Fed.Cir.2001), in which this court found that the Federal Housing Finance Boardâs expenses âare not expected to be defrayed by appropriated funds,â and concluded that the Board is a NAFI. Id. at 1341. This court explained that â[t]he Court of Federal Claims must exercise jurisdiction absent a clear expression by Congress that it intended to separate the agency from general federal revenues,â id. at 1339, and held that such a âclear expressionâ was present for the Federal Housing Finance Board in light of its enabling legislation, despite the absence of any âexpress! ] prohibition of congressional appropriation of funds,â because the statute provided for complete funding through assessments against federal home loan banks, including a mechanism for using assessments to make up deficiencies, and provided for the separation of the Boardâs funds from the general fund of the Treasury. Id. at 1340.
In contrast, in LâEnfant Plaza Properties the Court of Claims held that that the Office of the Comptroller of the Currency is not a NAFI, finding no âclear expressionâ of congressional intent to wall the Comptroller off from appropriated funds. The court observed that âCongress is not statutorily prohibited from appropriating funds to the Comptroller if a deficiency should occur,â 668 F.2d at 1212, and remarked that the Comptroller had in fact received such appropriations through 1947, id. Thus the Court of Claims held that the Comptroller is subject to suit under the Tucker Act.
While these cases differ on their facts, precedent consistently illustrates that an entity doing the work of the government will be deemed a NAFI only where there is a âclear expressionâ that Congress intended to exclude the entity from access to appropriated funds. See LâEnfant Plaza Properties, 668 F.2d at 1212 (âJurisdiction under the Tucker Act must be exercised absent a firm indication by Congress that it intended to absolve the appropriated funds of the United States from liability for acts of the Comptroller.â).
The government argues that the four factors in AINS are met as to the FDIC, stating that âCongress has consistently shielded appropriated funds from all FDIC functions before 1989, and since then from the FDICâs activity as insurer of state-chartered savings banks.â Govât Br. 35. Slattery disagrees, arguing that the Court of Federal Claims correctly held that the determinative factor is not whether the FDICâs insurance fund has been adequate to meet its obligations, but whether the Congress intended that the United States cannot be called upon if needed to meet the obligations of the FDIC.
The Court of Federal Claims, examining congressional intent, found many expressions that Congress intended to back the FDIC with the full faith and credit of the United States. For example, Senate Concurrent Resolution 72, 97th Cong., 128 Cong. Rec. 1530 (Mar. 17,1982), which was adopted in the period of economic recession that gave rise to this ease, provided:
Resolved by the Senate (the House of Representatives concurring), That the Congress reaffirms that deposits, up to the statutorily prescribed amount, in federally insured depository institutions are backed by the Full Faith and Credit of the United States.
Another example is the Competitive Equality Banking Act of 1987, Pub.L. No. 100-86, § 901,101 Stat. 552:
SEC. 901. REAFFIRMATION OF SECURITY OF FUNDS DEPOSITED IN FEDERALLY INSURED DEPOSITORY INSTITUTIONS.
(a) FINDINGS. â The Congress finds and declares thatâ
(1) since the 1930âs, the American people have relied upon Federal deposit insurance to ensure the safety and security of their funds in federally insured depository institutions; and
(2) the safety and security of such funds is an essential element of the American financial system.
(b) SENSE OF CONGRESS. â In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States.
The Court of Federal Claims also observed that the 1991 FDICIA legislation which tightened savings bank capitalization recognized that the government is liable for possible shortfalls in the FDIC insurance fund. See H. Rep. No. 102-293, at 33 (1991) (âThe primary purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 are to provide additional resources to the [insurance fund].... â). The FDICIA increased the amount the FDIC may borrow from the
Further, as this appeal was proceeding, the FDIC announced its final rule in the Temporary Liquidity Guarantee Program, 73 Fed.Reg. 72244 (Nov. 26, 2008), in response to the current crisis in the nationâs banking sector. The FDIC stated that the FDIC program âis subject to the full faith and credit of the United States pursuant to section 15(d) of the FDI Act, 12 U.S.C. § 1825(d).â 73 Fed.Reg. at 72252; see also 12 C.F.R. § 370.5(h)(2) (codification of final rule). After Slattery brought this action to the courtâs attention, the government responded by post-argument letter dated January. 16, 2009, stating that â[t]he FDICâs representation is, however, far different than a congressional appropriation of funds or a congressional guarantee that funds will be appropriated.... [Notwithstanding the backing of the full faith and credit of the United States for the FDICâs activities, Congress has not agreed to pay any amount guaranteed by the FDIC, and has neither authorized nor appropriated funds to satisfy any such guarantee.â (Emphasis in original). The government points to the various caveats and safeguards and limitations in the cited final rule, and the absence of any reference to appropriated funds. Id.
Thus the government argues that these various resolutions and promises cannot be relied upon, and that assurances of the full faith and credit of the United States do not assure congressional fulfillment of the FDIC obligations. The government maintains that the lack of explicit provision of appropriated funds, and the segregation of the FDICâs insurance fund from the general fund of the Treasury for accounting purposes, provide sufficient evidence that Congress intended to exclude the FDIC from access to appropriated funds.
The Court of Federal Claims did not accept the governmentâs position, reasoning that the government had failed to show clear congressional intent that the FDIC was to be barred from access to appropriated funds. The question of congressional intent with respect to the FDIC was not present in the cases on which the government primarily relies, including Furash (for the Federal Housing Finance Board), and Core Concepts, (for the Federal Prison Industries).
The FDIC was formed in 1933 to provide government insurance and thus reassurance to bank depositors at a time of national emergency, and its funding was established initially by appropriation and thereafter by premiums paid by member banks, with authority for the FDIC to borrow from the Treasury. No provision of the enacting legislation bars the FDIC from access to appropriated funds. The Court of Federal Claims correctly held that this funding structure did not negate the governmentâs strong commitment to
In the context in which the FDIC was formed, and the continuing governmental affirmations of monetary support, the only reasonable interpretation is that the legislative intent was to assure payment of the FDICâs obligations. The Court of Federal Claims correctly ruled that the FDIC does not meet the fourth factor of the AINS test, and that the FDIC is not a NAFI. We affirm the ruling of the Court of Federal Claims that contract claims against the FDIC are subject to suit under the Tucker Act. The denial of the governmentâs motion to dismiss for lack of jurisdiction is affirmed.
II. LIABILITY
The trial on the issue of liability consumed five months, with many witnesses and extensive documentary evidence. In a full and detailed opinion, the Court of Federal Claims ruled that the 1982 MOU was part of a legally binding agreement between Meritor and the FDIC, that the provision allowing supervisory goodwill from the Western merger to be treated as capital for regulatory purposes was an enforceable term of that agreement, and that the FDIC had breached the agreement on three separate occasions: first in imposing the 1988 MOU which raised Meritorâs minimum capital requirement to 6.5%; again in raising the capital requirement to 8.5% pursuant to the 1991 Written Agreement; and again in 1992 when it revoked Meritorâs federal deposit insurance and forced seizure of the bank. The factual and legal premises are set forth in the trial courtâs opinion, see Liability Ruling, 53 Fed.Cl. 258, and will be repeated only as needed to explain our affirmance of the courtâs ruling that the FDIC breached its contract with Meritor.
The basic contract found to be breached is the 1982 MOU, which permitted Meritor to rely on supervisory goodwill for regulatory capital purposes. The Court of Federal Claims noted the âvoluminous testimony,â which established âa clear record of the intent of the parties,â with respect to this accounting procedure. Id. at 275. Witnesses for both sides explained that the purpose of the goodwill accounting procedure, as set forth in the 1982 MOU, was to enable Meritor to meet the statutory and regulatory capital requirements for savings banks, thereby providing time for the merged entity to absorb the deficits that had pushed Western into insolvency. Four of the key negotiators of the 1982 merger so testified at the trial: William Isaac, chairman of the FDIC at the time of the merger; Robert Gough, Deputy Director of the FDIC Division of Bank Supervision; Anthony Norcella, Executive Vice President for Finance at Meritor; and Robert S. Ryan of Brinker, Biddle & Reath, outside counsel to Meritor. All acknowledged that the merger would not have been feasible without this authorization to treat goodwill as regulatory capital. The government does not dispute that but for the goodwill accounting procedures the merged bank would have been in immediate noncompliance, and that the merger could not have been approved. The Court of Federal Claims also discussed the situation confronted by the FDIC at that time, with the possible failure of hundreds of banks on the horizon. Id. at 276. FDIC witnesses testified that the merger served to reduce the threat of an immediate large draw on the insurance fund. See id. at 263, 276. On this evidence, the trial court found that the goodwill accounting was the âkey FDIC concession.â Id. at 263.
The Court of Federal Claims found that the FDIC first breached the 1982 contract in 1988 when it effectively ignored Meri
The Court of Federal Claims found that the 1988 MOU led directly to the downward spiral of the Meritor bank, based on the forced sale of the bankâs most productive assets in response to the FDICâs pressures for increased capital. The court referred to Meritorâs attempts to comply with the FDICâs capital requirements beyond those of statute and regulation, under threat of seizure, including the bankâs shrinking of its assets from $19 billion to $5.9 billion in less than five years. The court found:
[AJbsent the increased capital levels in the 1988 MOU, Meritor would not have sold the 54 branches as it did. Further, the court finds that the sale of those branches [led] to the rapid decline in Meritorâs capital ratios because the remaining assets earned less income and were riskier than those Meritor had sold.
Id. at 283. The court found that the forced sale of the 54 branches effectively âdoomed the bank,â id. at 283, and led to the 1991 Written Agreement, which in turn caused a âdownward death spiral for Meritor,â id. at 285.
Central to the Court of Federal Claimsâ ruling was its finding that Meritor was entitled to rely on the FDICâs promises made in inducement for the merger, as set forth in the 1982 MOU, and that the FDIC was bound by this contract to respect this structure and not to circumvent it by raising the total capital ratio, even when the merged bank was in compliance with the regulatory limits. Although the government states that in 1989 Meritor fell below the total capital requirement of the 1988 MOU, and slightly below the prevailing 5.5% limit then set by regulation, even including its goodwill, the Court of Federal Claims determined that Meritor had been so significantly weakened by the FDICâs demands, that its deterioration and destruction naturally followed.
It is undisputed that the FDIC subjected Meritor to heightening capital requirements. However, the government argues that the FDIC never actually prevented Meritor from counting goodwill as capital, noting that both the 1988 MOU and the 1991 Written Agreement expressly allowed Meritorâs goodwill capital to continue to be counted against the regulatory minima they imposed. The government argues that the FDIC simply exercised its âsafety and soundnessâ powers to raise Meritorâs total capital requirements in 1988 and 1991. The government states that Meritor had grown too rapidly in the mid-1980s and had taken on additional risky assets that sustained heavy losses, placing the bank at risk for failure, and that the FDIC
The government also states that while Meritor may have felt pressure from the FDIC to enter the 1988 MOU, it nonetheless did so voluntarily to avoid enforcement proceedings, including seizure, that the FDIC would have validly pursued under its statutory authority, 12 U.S.C. § 1818(b). Had Meritor instead allowed enforcement proceedings to go forward, the government points out, it could have challenged the action through the administrative procedure provided by 12 U.S.C. § 1818(h), which includes judicial review. Meritor did not take this step, instead agreeing to the new capital requirements (albeit after the FDIC had inserted its choice of CEO to manage the bank).
The government thus argues that the Court of Federal Claims did not fully understand the FDICâs regulatory authority, for even if the FDIC were bound by the 1982 contract to recognize goodwill as capital for accounting purposes, that asset, like all bank capital, was subject to continuing evaluation based on its quality and characteristics. The government states that goodwill capital was properly treated by the FDIC as an âamortizing, non-earning asset,â and that Meritorâs overall poor rating justified the imposition of higher total capital levels despite the agreement at the time of the merger and despite Meritorâs technical compliance with existing regulatory capital requirements. The government contends that the evidence that various FDIC officials regarded goodwill capital as âfictitiousâ was insufficient to establish that the FDICâs actions breached its contract, citing this courtâs own reference to goodwill capital (in the savings and loan context) as âfictitious assetsâ and an âaccounting fiction,â in Granite Management Corp. v. United States, 511 F.3d 1360, 1363-64 (Fed.Cir.2008). Thus the government argues that nothing in the 1982 MOU barred the FDIC from increasing Meritorâs capital requirements if its financial condition declined, and that these aspects of the banking systemâs safety and soundness policies were not understood by the Court of Federal Claims.
This issue was fully explored at trial, with witnesses on both sides of the question. The Court of Federal Claims rejected the governmentâs argument that the FDICâs regulatory actions were in keeping
Nor are we persuaded that the trial court failed to understand the nature of the FDICâs regulatory authority in the context of this case. There was extensive testimony, by witnesses from both sides, showing that both sides had the same understanding of the accounting role and the purpose of supervisory goodwill, as essential to meet the regulatory capital requirements due to the poor quality and high risk of the assets acquired from Western. The evidence showed that all concerned understood the heavy burden of Meritorâs absorption of Westernâs losses, and that both sides understood the need for long-term forbearance to enable the merger, for, as the Court of Federal Claims stated, otherwise âMeritor would have been operating in an unsound condition the moment it signed the merger documents.â Liability Ruling, 53 Fed.Cl. at 275. The court stressed the inducement offered by the FDIC to encourage Meritor to take on the liabilities of Western. At the same time, the court acknowledged the FDICâs continuing regulatory powers, as exemplified by its 1985 increase in the minimum capital requirement, whose propriety has not been challenged. The issue before the court was not whether the FDIC had authority to raise Meritorâs primary capital requirement above the minimum regulatory figure; the question was whether, in so doing in the circumstances of this case, the FDIC breached the agreement it made in 1982 to induce Meritor to salvage the Western bankâs insolvency.
Viewing the circumstances at the time of contracting, see Winstar, 518 U.S. at 868-69, 116 S.Ct. 2432, the governmentâs obligation to recognize supervisory goodwill to meet capital regulatory requirements included the obligation not to subvert that expectation by increases in âhardâ capital requirements. The Court of Federal Claims interpreted the 1982 MOU in accordance with its clearly stated terms that supervisory goodwill could be accounted as capital and would be available to meet the regulatory capital requirements. The trial courtâs interpretation of the contractual terms and purpose, and its findings of breach by subsequent FDIC actions, are supported by the evidence. Reversible error has not been shown in these findings and conclusions. The FDICâs responsibility for the âsafety and soundnessâ of the banks it regulates does not insulate it from the consequences of breach of contract.
We affirm the ruling that the FDIC breached the 1982 MOU when it required and continued to require Meritor to in
III. DAMAGES
The court held a further trial to determine damages, receiving expert testimony and other evidence from both sides relating to several different damages theories. The court awarded damages in the total amount of $871,733,059. On motion for clarification, the court explained that the damages were to be paid net of any receivership claims and outside the statutory distribution scheme for proceeds held by the FDIC as receiver as provided by 12 U.S.C. § 1821(d)(ll), and that any federal corporate income tax liability that might be imposed on the damages award would be grossed-up. Damages Ruling, 69 Fed. Cl. at 587; Dismissal of Intervenorsâ Complaint, 73 Fed.Cl. at 531; Amended Final Order, 98 A.F.T.R.2d 2006-8303, 2006 WL 3930812. The government appeals several aspects of the damages award. Slattery, by cross-appeal, argues that the trial court should have accepted its alternative damages theory based on the FDICâs avoided liquidation costs of $696 million. We discuss the various aspects of the damages ruling in turn, applying the standard of review developed for Winstar cases. See, e.g., Fifth Third Bank v. United States, 518 F.3d 1368, 1375 (Fed.Cir.2008) (âIn the Winstar context, foreseeability, causation, and proof of damages to a reasonable certainty are all issues of fact that we review for clear error.â).
A. Lost Value Damages
Among the several damages theories presented at trial, the Court of Federal Claims awarded âlost valueâ damages of $276 million based on Meritorâs market valuation on August 1, 1988, immediately before the governmentâs first breach, on the theory that all of this value was lost by the chain of consequences initiated by the FDICâs first breach. All parties agree that the shareholder value after seizure was zero. In reaching the $276 million, Slatteryâs damages expert, Dr. Finnerty, calculated the actual stock market valuation of the bank on August 1, 1988 to be $171 million. He also calculated an âadjusted market capitalizationâ to correct the negative effect of publicity on the pending regulatory action against Meritor, totaling $196 million. He then applied a 50% control premium to each amount, yielding $256 million and $296 million, and averaged these two numbers to arrive at $276
The court referred to this award as a form of âexpectancy damages.â The basic principle of expectancy damages for breach of contract is to place the non-breaching party in as good a position as it would have occupied had the contract been performed. See Restatement (Second) of Contracts §§ 344(a), 347. As stated in Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 496 (2d Cir.1995), âwhen the breach of contract results in the complete destruction of a business enterprise and the business is susceptible to valuation methods, such an approach provides the best method of calculating damages.â
The government has not challenged the viability of this basic theory of damages based on lost value. However, the government does dispute when and how to determine the lost value that was causally related to the FDICâs breach. The government argues that the trial court erred in selecting August 1, 1988 as the date from which to measure Meritorâs loss in value, stating that the bankâs Board of Directors, and therefore its shareholders, continued to control its operations after the FDICâs first breach in 1988 and continuously until December 11, 1992 when the bank was seized. The government argues that it cannot be assumed that all of the losses in bank value over that four-year period were due to the breach that occurred in 1988. The government cites the testimony of Slatteryâs expert, Dr. Goldstein, who stated that even without the FDICâs breach Meritor would have had to shrink during the period from 1987-1992 by at least $10 billion in assets in order to satisfy the prevailing 5.5% capital requirements, with hypothetical losses of $650.9 million for the years 1988-1991. This testimony was cited by the trial court in explaining its decision not to award reliance/cost-of-performance damages under Slatteryâs alternative damages theory. See Damages Ruling, 69 Fed.Cl. at 577-78.
The government argues that these hypothetical losses after 1988 should be set off against the actual market value in 1988, reducing the damages award to zero. The Court of Federal Claims deemed this argument âunpersuasive,â finding that the series of events whereby the bank was seized would not have occurred at all, but for the 1988 breach and the ensuing FDIC actions and pressures based on the FDICâs distaste for goodwill capital. The court observed that while Dr. Goldsteinâs model predicted losses, his model also predicted an ultimate return to profitability â a goal that was never realized because of FDICâs breaches that led to seizure of the bank. Hence, after considering testimony by Slatteryâs damages experts about the hypothetical ânon-breachâ world and other evidence, the court found it unlikely that Meritor would have failed in the relevant time period had the FDIC not breached the contract it entered in 1982. The government has not shown clear error in these findings.
The government also argues that, at a minimum, the damages must be offset by any benefits the shareholders realized from the bankâs operations during the period after the 1988 breach, citing LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363, 1366 (Fed.Cir.2003) (âdamages due to the breach are subject to offset or mitigation by the benefits of the actions taken after the breachâ). We agree with the proposition, but observe that it is qualified by the next sentence in LaSalle, which states, âHowever, the mitigation is limited to actions reasonably directly related to the breach and its proximate consequences.â Id. The trial court found that the breach was the âbut forâ cause of the
We discern no error in the courtâs determination that the government did not establish any offsetting benefits, and in any event Slattery correctly observes that any benefits that may have accrued were subsequently appropriated by the government when it seized the bank and liquidated its remaining assets, for the parties state that none of the liquidation proceeds, reported to be $181 million, has been returned to the shareholders. The lost value measure of damages is affirmed.
B. Control Premium
The court received expert testimony from both sides on the question of a âcontrol premiumâ in valuation of the entire bank as a unit. The trial court found that a 50% premium was needed to accurately account for the value of control on August 1, 1988, the date from which the lost value award was calculated. Slatteryâs expert Dr. Finnerty testified that a control premium is not included in the bankâs normal stock market capitalization, and that acquirers of a majority interest of the entire corporation are generally willing to pay a premium for control of the enterprise. The government argues that a control premium is only relevant in an acquisition context, not in a suit for breach of contract resulting in a bankâs demise. The government contends that a control premium represents additional value to a shareholder who acquires enough shares to control the bank, rather than an inherent aspect of the bankâs market value, and that because this is a derivative action on behalf of the bank itself, shareholder value based on control is irrelevant.
The government cites tax cases, such as Philip Morris, Inc. v. Commissioner, 96 T.C. 606, 1991 WL 51559 (1991), aff'd, 970 F.2d 897 (2d Cir.1992), where the Tax Court held that the purchase premium paid for control was distinct from the value of the acquired business. Id. at 632. The government also argues that even when a control premium might be appropriate, the courts will look to the particular facts of the acquisition, citing Estate of Newhouse v. Commissioner, 94 T.C. 193, 231, 1990 WL 17251 (1990) (âThe focus of a valuation inquiry ... is on the existing facts, circumstances, and factors at the valuation date that influence a hypothetical willing buyer and willing seller in determining a selling price.â), and Estate of Andrews v. Commissioner, 79 T.C. 938, 940-41, 1982 WL 11197 (1982) (âFair market value has long been defined as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.â). Because Slattery did not present evidence of a willing buyer at the valuation date applied by the Court of Federal Claims, the government argues that the court clearly erred in applying a control premium to the valuation.
Slattery cites Indu Craft, 47 F.3d at 496, where the Second Circuit held that total franchise value is the best measure of damages âwhen the breach of contract results in the complete destruction of a business enterprise and the business is
Slattery also cites C.A. May Marine Supply Co. v. Brunswick Corp., 649 F.2d 1049, 1053 (5th Cir.1981), in support of the total franchise value theory, while the government points out that the juryâs award of damages was based on an alternative lost profits theory. Slattery also refers to the Fourth Circuitâs statement that a discount or premium for control can be appropriate in determining fair market value, in Estate of Godley v. Commissioner, 286 F.3d 210, 214 (4th Cir.2002), in the context of valuing for estate tax purposes a closely held corporation that âhas no ready market for its shares,â the court acknowledging that for publicly traded companies â[t]he fair market value of a business interest can often be determined simply by examining its market price,â id.
The authorities cited by both sides provide general valuation guidance, but are not sufficiently on point to provide controlling reasoning with respect to the facts of this case. The trial courtâs application of a control premium to determine Meritorâs fair market value was a fact determination based on extensive and detailed expert testimony and lawyer argument. Slatteryâs expert, Dr. Finnerty, provided testimony in support of this theory, and the trial court deemed his analysis persuasive. The evidence supported Dr. Finnertyâs contention that even an underperforming bank, if it has strong franchise value based on depositor loyalty, such as Meritor, commands a high control premium. The governmentâs damages expert criticized Dr. Finnertyâs analysis, and presented an alternative analysis that the Court of Federal Claims found less persuasive.
We have not been shown clear error in the courtâs resolution of competing expert testimony to rule that lost value is reasonably measured by the value of the entire franchise including a control premium. Nor has clear error been shown in the courtâs findings concerning the amount of the premium, for it was supported by evidence of control premiums that have been paid for weakly performing entities. The award of $276 million for lost value, including the control premium, is affirmed.
C. Non-Overlapping Restitution
The Court of Federal Claims rejected Slatteryâs alternative theory of damages measured by ârestitutionâ of the benefit conferred on the government in 1982 by the Meritor merger and the resultant avoidance of immediate, liquidation of Western. However, the court awarded an additional $67,340,000 as damages based on ânon-overlapping restitution.â This sum represented the ânet costsâ incurred by Meritor in entering into the merger, calculated as the difference between the total costs Meritor incurred upon entering into the merger, and the cash value of the benefits conferred on Meritor by the FDIC in connection with the merger. The court held that â[t]his amount, along with the value of the bank that the breach destroyed, put the bank in a position it could reasonably expect if the contract had been performed and not breached.â Damages Ruling, 69 Fed.Cl. at 587.
The government argues that the court committed legal error in augmenting its lost value âexpectancyâ damages award by this amount, stating that it is incorrect to view these net costs as ânon-overlapping.â The government argues that restitution
The government argues that the courtâs statement that its addition of a restitution remedy would âput the bank in a position it could reasonably expect if the contract had been performed and not breachedâ is incorrect, for if the contract had been performed the bank would not have received reimbursement of the net costs it incurred at the time of entering the merger. The government contends that it is improper both to âunwindâ the contract by returning Meritor to its pre-contract status while also affording Meritor the expected benefits of the contract by awarding lost value damages; and that the result is duplicative payment of damages and a âwindfall to the non-breaching party,â quoting American Capital Corp. v. United States, 472 F.3d 859, 870 (Fed.Cir.2006).
In response, Slattery acknowledges some inconsistency in the trial courtâs description of the damages awards, but argues that the problem is one of semantics rather than logic, stating that the awards do not overlap and are independently supported. Slattery describes the âlost valueâ damages award as âthe essence of restitution,â arguing that it is intended to ârestor[e] to the non-breaching party the net loss that [it] suffered as a result of [its] performance under the contract,â Landmark Land Co. v. FDIC, 256 F.3d 1365, 1372 (Fed.Cir.2001). Slattery also describes the award as âreliance-type restitution damages,â arguing that the guiding principle is that âa party who relies on another partyâs promise made binding through contract is entitled to damages for any losses actually sustained as a result of the breach of that promise,â Glendale, 239 F.3d at 1382. Slattery contends that Meritorâs net payments on entering the contract in 1982, and its loss of the 1988 value of the bank, are distinct measures, and are both proper components of a unitary âreliance-type restitutionâ award.
We conclude that the government is correct, and that the trial court erred in awarding both the net cost of entering the contract, and the value lost due to the breach. While the two sums are measured by different transactions that do not technically âoverlap,â they are incompatible as measures of damages for breach. This is not merely a matter of nomenclature, for even on Slatteryâs position that the âlost valueâ award is more accurately described as reliance damages, the awards are economically incompatible. See American Capital, 472 F.3d at 870 (â[R]estitution is not recoverable in addition to reliance damages for the same injury.â). Upon entering the contract, the costs of entry, at least for contracts that are performed for a reasonable period prior to breach, are subsumed in the value when the contract is breached.
This addition of $67 million in restitution is incompatible with the lost value award, and is reversed.
D. âWounded Bankâ Damages
The Court of Federal Claims also awarded Slattery $28,393,059 in âwounded bankâ damages, measured by the costs that Meritor incurred in trying to sell major assets in its effort to comply with the breaching increases in its capital require
E. Cross-Appeal on Restitution
Slattery states by cross-appeal that the Court of Federal Claims improperly denied the alternative request for restitution damages measured by the financial benefits realized when the FDIC induced Meritor to merge with Western and thereby avoided liquidating Western at a cost that the FDIC estimated at $696 million. A restitution award focuses on âtaking from the breaching party any benefits he received from the contract and returning them to the non-breaching party.â Glendale, 239 F.3d at 1380-81 (citing Restatement § 344(c)); see also 3 E. Allan Farnsworth, Farnsworth on Contracts § 12.19 (2d ed. 1998) (âThe objective is not to put the injured party in as good a position as that party would have been in if the contract had been performed, nor even to put the injured party back in the position that party would have been in if the contract had not been made. It is, rather, to put the party in breach back in the position that party would have been in if the contract had not been made.â). The Court of Federal Claims denied the request for lack of support in this courtâs Winstar-related precedents, stating that the parties could brief and argue the matter before this court, as they have done. We have considered the matter, and affirm the denial.
The Court of Federal Claims found that Slattery had established a factual predicate for the restitution claim, stating that âthere does seem to be adequate support, by a preponderance of the evidence, that, but for Meritorâs acquisition, the Government (here the [FDICâs insurance fund]) would have had to pay out $696 million.â Damages Ruling, 69 Fed.Cl. at 586. Subtracting the cost of the merger to the government of $294 million (as estimated contemporaneously with the merger), the court found that â[t]he assumption of Westernâs liabilities by Meritor clearly produced this $402 million saving.â Id. The court observed that the award of such restitution is supported by traditional contract damages theory, but found inadequate support for such an award in the Winstar line of precedents, stating that âthe Federal Circuit has rejected some in-kind benefits provided to the Government, and affirmed restitution of only direct monetary payments by the plaintiffs as part of contractual performance.â Id.
Slattery contends that the Court of Federal Claims erred in denying restitution, in that the facts of this case are fundamentally distinguishable from those cases in which this court has denied restitution in the Winstar context. In particular, Slattery points out that there was strong evidence that immediate liquidation of Western was the only avenue open to the FDIC had Meritor not merged with Western, and that the cost of liquidation was established with reasonable certainty using the FDICâs own estimate, whereas such proof was lacking in other cases where restitution was denied. See, e.g., Glendale, 239 F.3d at 1382 (holding that savings realized by the government upon Glendaleâs acquisition of a failing thrift were too speculative because Glendale was only one of several potential acquirers and because the government had other options, including hiring new and better management); California Fed. Bank, FSB v. United States, 245 F.3d 1342, 1351 (Fed.Cir.2001) (affirming trial courtâs denial of restitution remedy as too speculative in light of contingent liability the regulator assumed in connection with the merger); LaSalle Talman Bank, 317 F.3d at 1376 (stating that the
Slattery relies especially on the governmentâs response during this litigation to Plaintiffsâ Request for Admission No. 6, which asked the government to admit that â[i]f the FDIC was unable to find a merger partner for Western in or about the Spring of 1982, the agency recognized that either it or the State of Pennsylvania would have to seize and/or liquidate the institution.â The government responded: âAdmits that the FDIC, in the hypothetical circumstances stated, would have terminated Westernâs deposit insurance and that the State of Pennsylvania would have appointed a receiver to liquidate the institution.â Slattery also points to abundant record evidence that, at the time of the Meritor deal, the FDIC was only days away from taking action to liquidate Western, and that no viable alternative to the Meritor merger was available. Slattery points out that the estimate of $696 million that it would have cost the FDIC to liquidate Western came from the FDIC itself, using the methodology it has consistently applied. Slattery asserts that this direct evidence of the liquidation costs the FDIC would have incurred, and the admitted fact of imminent action but for the Meritor merger, sufficiently distinguish this case from the more speculative restitution claims discussed in other cases.
Slattery also takes issue with the Court of Federal Claimsâ finding that the $294 million that the government incurred in assisting the merger should be subtracted from the saving of $696 million. Slattery states that the shareholders are entitled to the full amount it would have cost the FDIC to liquidate Western, citing Dr. Finnertyâs analysis that the support the FDIC provided in connection with the merger actually resulted in a net gain to the government in the amount of $67,341 million (the amount awarded as non-overlapping restitution), rather than a cost of $294 million as originally estimated by the FDIC.
Slattery also requests that, in awarding restitution damages, the award should include the investment gains the government realized on the monies it avoided expending when Meritor agreed to merge with Western, on the theory that âif you take my money and make money with it, your profit belongs to me.â Nickel v. Bank of Am. Natâl Trust & Savings, 290 F.3d 1134, 1138 (9th Cir.2002).
The government disputes the trial courtâs finding that but for the Meritor deal, liquidation would have immediately followed, minimizing its own Admission to this effect. The government cites the FDICâs policy to avoid liquidating mutual savings banks, and states that despite Slatteryâs evidence to the contrary, other options remained available to the FDIC. However, the government has not shown clear error in the trial courtâs finding that but for the Meritor merger, liquidation would have resulted, for this finding was supported by abundant evidence at trial.
The government argues that this case is not meaningfully different from Glendale and other cases in which this court rejected restitution theories based on âliquidation savingsâ in various factual situations. The government stresses that the FDIC remained contingently hable for insuring the merged bankâs deposits even after the merger. The government contends that a simple calculation of foregone costs at the moment of the merger, based on contemporaneous estimates, does not accurately reflect an actual âbenefitâ conferred on the breaching party by the non-breaching party; rather it represents a mere âspeculative assessment of what might have been,â Glendale, 239 F.3d at 1382. The government argues that restitution is only appropriate where a transaction can be âunwound,â whereas here both parties performed the contract for several years before the first alleged breach in 1988. The government argues that various financial incentives of the Merger Agreement were fully performed before any asserted breach, and that the transaction simply cannot be unwound to return the parties to their ex ante positions. The government states that since it is impossible to return the parties to the position they would have occupied absent the contract, as discussed in LaSalle Talman Bank, FSB v. United States, 45 Fed.Cl. 64 (1999), aff'd in relevant part, 317 F.3d 1363 (Fed.Cir.2003), awarding as ârestitutionâ the governmentâs purported immediate savings would be an inappropriate attempt to âunscramble the egg,â id. at 77. Slattery responds that the amount of the liquidation costs the FDIC avoided by enticing Meritor to merge with Western was established with far more certainty than in the cited Winstar-related cases.
On reviewing the arguments in light of precedent and the undisputed and found facts, we agree with the government that restitution measured by the governmentâs saved liquidation cost is not appropriate in this case. The benefits to the FDIC, in avoiding liquidation and saving the cost of liquidation, reflect the motivation of the FDIC to encourage and facilitate the merger. However, these savings were not obtained at expense to Meritor, and the FDIC continued to bear risk against its insurance fund after the merger, for it continued to insure deposits in the merged bank. Moreover, the positions of both parties changed during the six years of performance without allegation of breach, with Meritor experiencing profits and growth as well as losses and retrenchment. By analogy to the various cases that have discussed this question in the context of savings and loan institutions, the subsequent breach of the agreement to recognize goodwill as regulatory capital was too far removed, in damages theory, from the initial savings to the government in entering into the salvage arrangement. In the judicial search for just remedy for economic situations sought by neither party, the damages awards have generally been based on reliance and lost value. We affirm the denial of the requested award of damages measured by the savings achieved by the FDIC upon averting liqui
F. Clarification of the Judgment
The judgment of the Court of Federal Claims awards the damages to âthe plaintiffs.â The government argues that the judgment is incorrect, if taken to mean that the damages are to be paid directly to the plaintiff shareholders, because this case proceeded as a derivative action on behalf of Meritor. See Motion to Dismiss Ruling, 35 Fed.Cl. at 183 (stating derivative nature of the suit). The FDIC had repeatedly refused shareholder requests to bring this action on behalf of Meritor, although the FDIC was appointed receiver immediately upon the bankâs seizure.
The FDIC filed a brief on this appeal as amicus curiae, pressing the position that because of the derivative nature of the suit, the damages award must be paid to the FDIC in its capacity as receiver for Meritor. Cf. First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1293 (Fed.Cir.1999) (âthe only claim that can be heard is the corporationâs contract claims against the government and the only beneficiary of any relief will similarly be the corporationâ). The FDIC points out that at post-trial argument in the Court of Federal Claims the court recognized that all parties had agreed that the award would be paid through the receivership. The FDIC also states that although it refused to bring or join in this action, it could have been added as an involuntary necessary party, pursuant to Court of Federal Claims Rule 19(a). See, e.g., Suess v. United States, 535 F.3d 1348, 1357 (Fed.Cir.2008) (noting the trial courtâs joinder of the FDIC as a party).
The FDIC argues that while the wording of the judgment lacks clarity, it can reasonably be construed as ordering that the damages be paid to the Meritor receivership because this action was pursued derivatively on behalf of Meritor. Both Slattery and the government agree that the judgment should be paid to and distributed by the receivership.
The FDIC also asks this court to order that the judgment be paid from general appropriated funds in the Judgment Fund of the United States, and not from the FDICâs deposit insurance fund. The FDIC points out that 28 U.S.C. § 2517(a) provides that âevery final judgment rendered by the United States Court of Federal Claims against the United States shall be paid out of any general appropriation thereforeâ with an exception that is not here applicable. The FDIC states that language in the governmentâs brief might be construed differently. Any difference of opinion within government entities is not the concern of these claimants or this court.
G. Distribution Net of Receivership Deficit
The government argues that the Court of Federal Claims exceeded its authority in ordering that the damages be
The court explained: âThe Government caused Meritor to be forced into receivership which it would otherwise not have been forced into and it is well settled that a breaching party has to put the party in the same position as it would have been but for the breach. Therefore, the Government is liable for any receivership deficit.â Amended Final Order, 98 A.F.T.R.2d at 2006-8303, 2006 WL 3930812. It is noteworthy that the damages award was obtained in litigation brought by the bankâs shareholders when the FDIC refused to act. The court concluded that the receivership deficit, insofar as accrued by the FDIC as breaching party, is not to be charged against the damages awarded for the breach. We agree that the trial court acted within its discretion, in declining to impose on the shareholders the costs incurred by the breaching party.
We affirm the ruling of the Court of Federal Claims that the FDICâs asserted charges for administering the bank after its seizure shall not be charged to the damages award, for these charges were the consequence of the FDICâs breach. This ruling did not ârestrain or affect the exercise of powers or functions of the [FDIC] as a conservator or a receiver,â 12 U.S.C. § 1821(j), but is directed at assuring the integrity of the judgment for breach of contract. The FDIC, having refused to act or participate in this action on behalf of Meritor, does not have standing to object to the judgment of the Court of Federal Claims on this appeal.
IV. INTERVENORSâAPPEAL
Slatteryâs initial complaint included a class action count, and listed all sharehold
Rothâs complaint in intervention concentrated on the FDICâs actions as receiver, and its failure to distribute the liquidation surplus of $181.3 million. As the Court of Federal Claims summarized:
Intervenors advance four claims for relief based on several theories in connection with the breach of the [Merger Agreement], Count one alleges the taking of their property by the FDIC as receiver in violation of the fifth amendment. Count two alleges that FDIC, as receiver, retained for itself Intervenorsâ proportionate share of a surplus remaining from the $181.3 million received from Mellon Bank after satisfaction of claims as set forth in 12 U.S.C. § 1821(d)(ll)(A) causing injury to Intervenors. Count three seeks declaratory judgment that 12 U.S.C. § 1821(d)(ll)(A) created an entitlement in Intervenors to a portion of any surplus from the Meritor receivership at the time of Meritorâs seizure on December 11, 1992, and further seeks the creation of a constructive trust of their proportionate share of any such surplus. Count four asserts a third party beneficiary claim.
Dismissal of Intervenorsâ Complaint, 73 Fed.Cl. at 529 (footnotes omitted). Apart from the third-party beneficiary claim, which is no longer in issue, these claims all relate to actions the FDIC took in its role as receiver for Meritor. After finding liability and assessing damages on Slatteryâs breach of contract action, the Court of Federal Claims dismissed the Intervenorsâ complaint, ruling that the court lacked jurisdiction over these claims because the FDIC, in its capacity as receiver, is not âthe United Statesâ and cannot be sued under the Tucker Act. The Intervenors challenge this ruling with respect to the disposition of the liquidation surplus resulting from the breach of contract.
In dismissing the Intervenorsâ claims, the Court of Federal Claims relied solely on the ground that they were directed at actions of the FDIC in its capacity as receiver. The court referred to Ambase Corp. v. United States, 61 Fed.Cl. 794, 796-97 (2004), where the Court of Federal Claims stated that the FDIC as receiver generally is not considered the United States for the Tucker Act purposes. Roth states that this ruling is in conflict with this courtâs decision in First Hartford, 194 F.3d at 1287-88. In First Hartford this court held that a shareholder of a bank that had been seized by the FDIC had a property interest in the liquidation surplus from the sale of the seized bankâs assets. This court concluded both that Court of Federal Claims had jurisdiction to hear claims directed to this property interest, and that the shareholder had standing to
The government argues that First Hartford is not controlling because the takings counts in that case were directed to the FDICâs actions before seizure but after breaching the contract, whereas here Rothâs claims are directed to the FDICâs actions after the seizure. That is not a jurisdictional distinction, for the jurisdictional question in First Hartford, as here, turned not on the timing of the FDICâs retention of the surplus, but on the claimantâs right to these funds. The Court of Federal Claims in this case did not explore the larger issue of entitlement to the liquidation surplus, but simply held that the question was outside the courtâs jurisdiction because the failure to distribute the $181 million to the shareholders was an act of the FDIC in its role as receiver.
The record has not been developed on this specific issue, although this court has recognized the FDICâs dual role as regulator and as receiver. See, e.g., American Capital, 472 F.3d at 870 (affirming dismissal of complaint for breach of contract filed by the FDIC as receiver of a failed thrift association, because the thrift institution itself could not have sued, on the specified facts, for breach of contract); Frazer v. United States, 288 F.3d 1347, 1354 (Fed.Cir.2002) (holding that actions of the FDIC as receiver did not toll the statute of limitations running against the seized institution); Landmark Land, 256 F.3d at 1382 (dismissing the FDIC as receiverâs claim for lack of actual controversy because the receivership owed more to another arm of the government than it could recover with its claim, but stating âwe are not holding that all claims by the FDIC against the government will fail to satisfy the case-or-controversy requirementâ).
The courts have also recognized that the FDIC does not automatically lose its governmental status when it acts as receiver for a bank that it has seized in its governmental role. In Auction Co. v. FDIC, 132 F.3d 746 (D.C.Cir.1997) (âAuction I â), the District of Columbia Circuit discussed the proposed distinction between the FDIC in its regulator capacity and in its role as receiver when regulated banks fail, and noted that there was âno persuasive reason why the distinction makes a differenceâ for the statute of limitations issue in that case. Id. at 750 n. 1. And in FDIC v. Hartford Insurance Co. of Illinois, 877 F.2d 590 (7th Cir.1989), which involved determination of the proper venue for tort claims brought by an insurer against the FDIC in its role as receiver, the Seventh Circuit stated, âWhat is âthe Federal Deposit Corporation as receiverâ other than part of the United States? To sue FDIC-Receiver is to sue those officials of the federal government who happen to be responsible for winding up the affairs of failed banks.â Id. at 592. In First Hartford, supra, this court similarly recognized that whether the FDIC as receiver is âthe governmentâ depends on the context of the claim.
Here, as in First Hartford, the claims are asserted against the government, seeking return of the monetary surplus obtained for the seized bank. This is unlike the standard receivership situation in
The government argues that even if the FDIC is considered the United States for the purposes of the Intervenorsâ claims, the dismissal of these claims must be upheld on a different, statutory ground. The government cites 12 U.S.C. § 1821(d)(13)(D), titled âLimitation on judicial review,â which states:
Except as otherwise provided in this subsection, no court shall have jurisdiction overâ
(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver, including assets which the [FDIC] may acquire from itself as such receiver, or
(ii) any claim relating to any act or omission of such institution or the [FDIC] as receiver.
The government states that the only exception to this bar to judicial review appears at 12 U.S.C. § 1821(d)(6), which provides for an administrative determination of âany claim against a depository institution for which the [FDIC] is receiver,â followed by adjudication in district court. The government contends that these provisions prohibit the Court of Federal Claims from hearing the Intervenorsâ claims, which are described as relating to the FDICâs conduct as receiver. The government cites a decision of the District of Columbia Circuit on rehearing of Auction I, in which that court discussed but did not decide the question of judicial review under § 1821(d)(13)(D). Auction Co. v. FDIC, 141 F.3d 1198, 1199 (D.C.Cir.1998) (âAuction II â). The D.C. Circuit in Auction II discussed that § 1821(d)(13)(D), read together with § 1821(d)(6), appears to impose a standard exhaustion requirement, but that such a reading would leave some claims unreviewable, and concluded that such a result appears to be contrary to the intention of the enactment of these provisions as part of FIRREA. 141 F.3d at 1200. The government does not resolve these points of statutory interpretation, instead citing parts of the Auction II courtâs discussion of the potential bar to judicial review presented by § 1821(d)(13)(D), but ignoring the parts of Auction II discussing Congressâs intent in enacting these provisions as part of FIRREA.
Other courts have considered the scope of § 1821(d)(13)(D). For example, in Homeland Stores, Inc. v. Resolution Trust Corp., 17 F.3d 1269, 1274 (10th Cir.1994), the court stated that in adopting the administrative review regime codified at § 1821(d), âCongress had in mind creditor and related claims arising before an institution enters receivership,â id. at 1274, and concluded that âthe term âclaimâ as used in § 1821(d)(13)(D) should be interpreted to exclude claims such as Homelandâs arising from management actions of the [receiver] after taking over a depository institution.â Id. The analysis in Homeland Stores supports the conclusion that § 1821(d)(13)(D) cannot have been intended to foreclose review of all claims arising after seizure. That is, review may be foreclosed of the FDICâs resolution of existing claims against the seized bank, but the statute is not directed to the FDICâs actions in liquidating the bank. The Intervenors challenge the FDICâs apparent retention of the
This conclusion is in harmony with the Ambase decision of the Court of Federal Claims. In Ambase the court ruled that § 1821(d)(13)(D) did not bar it from hearing claims that included actions of the FDIC as receiver. 61 Fed.Cl. at 799. The case arose upon a motion requesting review by the Court of Federal Claims of the FDICâs management of the receivership of a failed thrift in order to determine the proper measure of damages, for the court had determined that the damages award would in that case be reduced by the costs of the receivership. Id. at 795. The court held that it had jurisdiction over this aspect of the case. The remark now quoted by the trial court, that the âFDIC is not generally considered to be the government for jurisdictional purposes in Winstar litigation,â id. at 797, does not reflect the courtâs actual holding, for the Court of Federal Claims ruled in Ambase that it did have jurisdiction to review this action of the FDIC as receiver. Discussing § 1281(d)(13)(D), the court looked to the entirety of the FDIC Act to understand the meaning of this provision, and concluded that it could not mean that the plaintiffs could challenge this aspect of the FDICâs acts only in district court, for that would create an absurd situation in which the plaintiffs could only seek money damages of the disputed action in the Court of Federal Claims, but could only determine the amount of damages for that action in the district court, which can not provide relief. Id. at 798-99.
CONCLUSION
The judgment of the Court of Federal Claims is affirmed as to jurisdiction, liability, and the assessment of damages for lost value in the amount of $276 million, net of the receivership deficit, and with an appropriate tax gross-up. The judgments as to certain additional damages are reversed as discussed herein. We reverse the dismissal of the Intervenorsâ claims relating to the liquidation surplus, and remand for consideration of these claims to the extent that they remain at issue, and for any further proceedings as may be warranted to implement of the courtâs judgment.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
. Slattery v. United States, 53 Fed.Cl. 258 (2002) ("Liability Ruling"); 69 Fed.Cl. 573 (2006) (âDamages Ruling "); 73 Fed.Cl. 527 (2006) (âDismissal of Intervenorsâ Complaint â); 98 A.F.T.R.2d 2006-8303, 2006 WL 3930812 (Ct.Fed.Cl. Dec. 18, 2006) ("Amended Final Order ").
. Until 1986 Meritor was named the Philadelphia Savings Fund Society. For simplicity, the name "Meritorâ is used throughout.
. During the trial, William Isaac, Chairman of the FDIC at the time of the merger, testified that in 1980 he organized a task force that proposed merging failing savings banks with healthier ones and using goodwill accounting as a temporary expedient for achieving capital compliance until financial conditions improved.
. The FDIC at the time defined "equity capitalâ to include âcommon stock, perpetual preferred stock, capital surplus, undivided profits, contingency reserves, other capital reserves, mandatory convertible instruments, and reserves for loan losses.â 46 Fed.Reg. 62,694.
. The regulation defines "primary capitalâ as "the sum of common stock, perpetual preferred stock, capital surplus, undivided profits, capital reserves, mandatory convertible debt (to the extent of 20 percent of primary capital exclusive of such debt), minority interests in consolidated subsidiaries, net worth certificates issued pursuant to 12 U.S.C. 823(i) and the allowance for loan and lease losses and minus intangible assets other than mortgage servicing rights and assets classified loss.â 12 C.F.R. § 325.2(h) (1985).
. Section 1491(a)(1) states: âFor the purpose of this paragraph, an express or implied contract with the Army and Air Force Exchange Service, Navy Exchanges, Marine Corps Exchanges, Coast Guard Exchanges, or Exchange Councils of the National Aeronautics and Space Administration shall be considered an express or implied contract with the United States.â That is, these entities are subject to Tucker Act jurisdiction.
. This case exhibits similarities to the Winstar line of cases involving savings and loan institutions in that each involves a contract requiring accounting treatment of "goodwillâ as capital. In Winstar the breaching event was enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Slat. 183, which did not recognize goodwill capital. The Court held that "[w]hen the law as to capital requirements changed in the present instance, the Government was unable to perform its promise and, therefore, became liable for breach.â 518 U.S. at 870, 116 S.Ct. 2432. For savings banks, the 1991 enactment of the FDICIA was followed by an FDIC regulation that barred reliance on goodwill as capital. Meritor was seized ten days before the effective date of that regulation.
. The Nickel case was an action for breach of fiduciary duties, where disgorgement awards are more common. See, e.g., E. Allan Farnsworth, Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract, 94 Yale L.J. 1339, 1356 (1985) ("The more significant distinction between fiduciary obligations and contractual ones is remedial â the disgorgement principle applies to breach of a fiduciary obligation while the expectation principle applies to a breach of contractual obligation.â).
. The only disagreement is from the Intervenors, who were shareholders at the time of Meritorâs seizure but are no longer shareholders, as discussed post. The Intervenors argue that the judgment should be construed to award the damages directly to those who owned shares at the time of Meritorâs seizure. However, this issue of distribution is not before us.
. Subparagraph (11)(A) states:
Subject to section 1815(e)(2)(C) of this title, amounts realized from the liquidation or other resolution of any insured depository institution by any receiver appointed for such institution shall be distributed to pay claims (other than secured claims to the extent of any such security) in the following order of priority:
(i) Administrative expenses of the receiver.
(ii) Any deposit liability of the institution.
(iii) Any other general or senior liability of the institution (which is not a liability described in clause (iv) or (v)).
(iv) Any obligation subordinated to depositors or general creditors (which is not an obligation described in clause (v)).
(v) Any obligation to shareholders or members arising as a result of their status as shareholders or members (including any depository institution holding company or any shareholder or creditor of such company).
. The Court of Federal Claims also ruled that a "tax gross-upâ is appropriate, in light of our ruling in Home Savings of America, FSB v. United States, 399 F.3d 1341 (Fed.Cir. 2005). This aspect of the judgment is not appealed.
. The Ambase court also rejected the government's argument that the anti-injunction provision 12 U.S.C. § 1281(j) prohibited the court from reviewing the FDIC as receiver's actions, noting that the plaintiffs were seeking only monetary relief against the government, not an injunction against the receiver, so the anti-injunction provision was not implicated. See 61 Fed.Cl. at 799.