Hometown Financial, Inc. v. United States

United States Court of Appeals for the Federal Circuit

04-5116

HOMETOWN FINANCIAL, INC., and
CONTINENTAL FINANCIAL HOLDINGS, INC.,

Plaintiffs-Appellees,

v.

UNITED STATES,

Defendant-Appellant.

James H. Falk, Jr., Epstein Becker & Green, P.C., of Washington, DC, argued for
claimants-appellees. With him on the brief was James H. Falk, Sr.

Jeffrey T. Infelise, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney
General, and David M. Cohen, Director, Jeanne E. Davidson, Deputy Director, and
Richard B. Evans, Attorney.

Appealed from: United States Court of Federal Claims

Judge Nancy B. Firestone
 United States Court of Appeals for the Federal Circuit

04-5116

HOMETOWN FINANCIAL, INC., and
CONTINENTAL FINANCIAL HOLDINGS, INC.,

Plaintiffs-Appellees,

v.

UNITED STATES,

Defendant-Appellant.

___________________________

DECIDED: May 27, 2005
___________________________

Before LOURIE, CLEVENGER, and LINN, Circuit Judges.

CLEVENGER, Circuit Judge.

The United States appeals from the decision of the Court of Federal Claims

awarding Hometown Financial, Inc., and Continental Financial Holdings, Inc.,

(collectively "Hometown") $2,050,000 for breach of contract. Because there is a

contract between the plaintiffs and the government, because the contract does not shift

the risk of regulatory change to the plaintiffs, and because the government cannot

demonstrate clear error in the trial court's conclusion that there was no prior material

breach on the part of the plaintiffs, we affirm.
 I

This is a Winstar-type case. See United States v. Winstar Corp., 518 U.S. 839

(1996). The judgment and underlying findings and decisions from which the United

States appeals can be found in three Court of Federal Claims opinions. See Hometown

Fin., Inc. v. United States, 60 Fed. Cl. 513 (2004) ("Hometown III"); Hometown Fin.,

Inc. v. United States, 56 Fed. Cl. 477 (2003) ("Hometown II"); Hometown Fin., Inc. v.

United States, 53 Fed. Cl. 326 (2002) ("Hometown I"). As set forth in more detail in

Hometown I, the transaction at issue involved the voluntary supervisory conversion of

Hometown Federal Savings and Loan into Hometown Federal Savings Bank. See

53 Fed. Cl. at 328-33. The conversion was based on two business plans, which

generally called for the formation of a holding company and interim thrift, which would

merge with the Savings and Loan to leave a single surviving institution controlled by the

investors. Id. The plans contained a list of regulatory forbearances, which the investors

requested from regulators before agreeing to provide the required capital. In particular,

the investors sought to use the goodwill created by the conversion to meet regulatory

capital requirements. Id.

The Federal Home Loan Bank Board ("FHLBB") approved the conversion on

June 28, 1988. See FHLBB Resolution No. 88-513. Approval was made contingent on

the execution by the holding company of a Regulatory Capital Maintenance Agreement

("RCMA") and the execution by the holding company's major shareholder (Continental

Financial) of a Regulatory Capital Maintenance/Dividend Agreement ("RCMDA"). Id.

The documents were executed, and the conversion completed.

04-5116 2
 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.

L. No. 101-73, 103 Stat. 183 ("FIRREA"), was passed on August 9, 1989.

Consequently, as reflected in an Office of Thrift Supervision Report of Examination: "As

a result of the new FIRREA legislation, all forbearances have been eliminated, and the

Institution now fails all three capital requirements." See Hometown FSB OTS Report of

Examination, January 16, 1990 (emphasis added). Thus, due to the passage of

FIRREA, the Office of Thrift Supervision deemed Hometown Federal Savings Bank

"insolvent." Id. When Hometown (the plaintiffs) refused to infuse more capital to meet

the post-FIRREA capital requirements, Hometown Federal Savings Bank was placed in

receivership. 53 Fed. Cl. at 331-32.

Hometown sued and, relevant to this appeal, asserted that by the passage of

FIRREA, the elimination of forbearances, and the seizure of Hometown Federal Savings

Bank, the government was liable for damages under a theory of breach of contract.

In Hometown I, addressing cross-motions for partial summary judgment on

liability, the Court of Federal Claims held that a contract was formed between the

plaintiffs and the government. Id. at 335-36. The court determined that the plaintiffs'

fulfilled promise to infuse $2,050,000 into the converted institution was made in

exchange for the forbearances and the treatment of goodwill offered by the FHLBB. Id.

The court found that Hometown had not, like the plaintiffs in Guaranty Financial

Services, Inc. v. Ryan, 928 F.2d 994 (11th Cir. 1991), contractually assumed the risk of

the effect of regulatory change. 53 Fed. Cl. at 336-37. Rather, the court held that by

contract the parties had for a five-year period reserved to the government the risk of

regulatory change affecting goodwill and forbearances. Id. Observing that FIRREA

04-5116 3
was passed within the five-year period and "unquestionably took away those

forbearances and the promised use of goodwill," the court concluded that the

government had breached the agreement. Id. at 337.

In Hometown II, the Court of Federal Claims addressed the government's

summary judgment motion with respect to Hometown's damages claims. The court

denied the government's motion as it related to restitution damages, determining that

restitution in the amount of $2,050,000 was appropriate because that amount reflected

the benefit conferred by Hometown on the government. 56 Fed. Cl. at 484-85. The

court granted the government's motion as it related to expectancy damages, or lost

profits, because such damages arose from an injury to the corporation and not to the

shareholders directly. Id. at 486-87.

After conducting a trial, the Court of Federal Claims held in Hometown III that

Hometown had not materially breached its contract with the government, and

accordingly, the government was not absolved from liability for its breach. 60 Fed. Cl.

at 517-22.

The government appeals, and we review a decision of the Court of Federal

Claims pursuant to 28 U.S.C. § 1295(a)(3) (2000).

II

We review the grant of summary judgment de novo, viewing all factual inferences

in favor of the nonmovant. See Anderson v. United States, 344 F.3d 1343, 1349 (Fed.

Cir. 2003). We otherwise review conclusions of law of the Court of Federal Claims de

novo, while reviewing findings of fact made by the Court of Federal Claims for clear

04-5116 4
error. See Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1379 (Fed. Cir.

2001).

III

The first issue we must decide is whether a contract came into existence

between the government and the plaintiffs. The existence of a contract is a mixed

question of law and fact. See Anderson, 344 F.3d at 1349. To prove the existence of a

contract with the government, a plaintiff must prove four basic elements: (1) mutuality

of intent to contract; (2) offer and acceptance; (3) consideration; and (4) a government

representative having actual authority to bind the United States. See Cal. Fed. Bank,

FSB v. United States, 245 F.3d 1342, 1346 (Fed. Cir. 2001).

In this case, the government challenges the findings of the Court of Federal

Claims concerning elements (1) and (4). In particular, the government contends that no

contract was formed because government regulators had no authority to make a

promise to Hometown concerning the treatment of goodwill, and, alternatively, because

the parties did not have the shared intent to contract for the treatment of goodwill.

Hometown disagrees, asserting that authority existed for the government to make a

promise concerning the treatment of goodwill, and that there is ample objective

evidence that the parties did have a shared intent concerning the treatment of goodwill.

We discern no reversible error in the decision of the Court of Federal Claims, and

therefore agree with Hometown.

A

As we previously set forth in California Federal, government regulators, and in

terms of this case, particularly the FHLBB and Federal Savings and Loan Insurance

04-5116 5
Corporation ("FSLIC"), have authority to bargain for and enter into contracts in which

the government promises the favorable regulatory treatment of goodwill in exchange for

the assumption of the net liabilities of a failing thrift:

We have already answered the question of whether the FHLBB and the
FSLIC have the authority to enter into contracts like these in the
affirmative. [Winstar Corp. v. United States, 64 F.3d 1531, 1548 (Fed. Cir.
1995) (Winstar II)] Since its inception, the FSLIC has had the authority
under 12 U.S.C. § 1725(c)(3) to make contracts. Id. Further, both the
FSLIC and its supervisory agency, the FHLBB, have had the authority
both to extend assistance to acquirers of insolvent FSLIC-insured thrifts,
12 U.S.C. § 1729(f)(2)(A) (repealed), and to set minimum capital limits on
a case-by-case basis, 12 U.S.C. § 1730(t)(2) (repealed).

Cal. Fed., 245 F.3d at 1347 (internal quotes omitted).

This holding was recently reaffirmed following a government challenge that it was

erroneous in light of our decision in Schism v. United States, 316 F.3d 1259 (Fed. Cir.

2002) (en banc). See Cal. Fed. Bank v. United States, 395 F.3d 1263, 1274-75 (Fed.

Cir. 2005). In reevaluating and rejecting for a second time the government's argument

that the FHLBB did not have authority to enter contracts regarding treatment of goodwill

that were binding on the government, we relied on the Supreme Court's analysis in

Winstar, which, as set forth at 395 F.3d at 1274, states:

There is no question . . . that the Bank Board and FSLIC had ample
statutory authority to do what the Court of Federal Claims and the Federal
Circuit found they did do, that is, promise to permit respondents to count
supervisory goodwill and capital credits toward regulatory capital and to
pay respondents' damages if that performance became impossible.

The remainder of our analysis of the Winstar opinion makes unequivocally clear that we

are bound by the holding that the FHLBB had statutory authority to enter into contracts

involving the treatment of regulatory capital and that Congress "specifically

04-5116 6
acknowledged" the FHLBB's authority to permit thrifts to count goodwill toward capital

requirements. Id. at 1274-75.

The government would distinguish the California Federal decisions from the case

at bar because in its view, the authority for the contracts in California Federal flowed not

from 12 U.S.C. § 1725(c), which, again according to the government, merely generally

empowers the FHLBB to enter contracts, but from a more specific subsection of the

statute, namely, 12 U.S.C. § 1729(f)(2). In the government's view, section 1725(c) is

statutorily insufficient to support actual authority for an FHLBB promise of favorable

accounting treatment of goodwill. This contention was disposed of in our recent

decision in Home Savings of America, FSB v. United States, 399 F.3d 1341, 1356-57

(Fed. Cir. 2005). In Home Savings, as in California Federal, we analyzed the Supreme

Court's Winstar opinion, holding that "the Supreme Court necessarily relied on the

general grant of authority under [section] 1725(c)," and not the authority granted in

section 1729(f)(2) "as authorization for two of the three transactions in Winstar."

399 F.3d at 1357. Thus, the authority of section 1725(c) is sufficient. In any event,

because we are bound to follow our own precedent as set forth by prior panels, see

Kimberly-Clark Corp. v. Fort Howard Paper Co., 772 F.2d 860, 863 (Fed. Cir. 1985);

Mother's Restaurant, Inc. v. Mama's Pizza, Inc., 723 F.2d 1566, 1573 (Fed. Cir. 1983);

accord South Corp. v. United States, 690 F.2d 1368 (Fed. Cir. 1982) (en banc), we

reject the government's argument that the FHLBB had no authority to enter into a

contract with the plaintiffs regarding the regulatory treatment of goodwill.

04-5116 7
 B

The government contends that even if authority to contract exists, the trial court

erroneously concluded that the government intended a contract with terms addressing

the treatment of goodwill. As postured, the government's argument appears more

directed to interpretation than formation. However, to the extent the government is

arguing a failure of formation due to a lack of objective evidence of the government's

intent because "no promise regarding goodwill was ever made to [Plaintiffs]," we

disagree.

Whether a bargained-for exchange occurred depends on the surrounding factual

circumstances. See Cal. Fed., 245 F.3d at 1347. In this case, the government has

shown no error in the holding of the Court of Federal Claims that the correspondence,

memoranda, forbearance letters, and regulatory maintenance and dividend agreements

gave rise to a contract which included provisions addressing goodwill. We note in

particular four documents as evidence of the government's intent to contract for the

treatment of goodwill, FHLBB Resolution No. 88-513, the RCMA, the RCMDA, and the

forbearance letter of December 22, 1987.

FHLBB Resolution No. 88-513, dated June 28, 1988, makes approval conditional

on, inter alia, the execution of the RCMA, and provides that "the Regulatory Capital

Maintenance and Dividend Condition shall be deemed met if the Acquiror signs the

attached [RCMDA]." (Jt. App. at 300662-63.) Both the RCMA and the RCMDA were

executed on June 30, 1988, by the plaintiffs and the Supervisory Agent for the FSLIC.

Both agreements extensively discuss the treatment of regulatory capital, and both

agreements also contain the following language:

04-5116 8
 "Regulatory Capital Requirement" means the Institution's regulatory
capital requirement at a given time computed in accordance with
12 C.F.R. § 561.13(b), or any successor regulation thereto, except that
during the five-year period following consummation of the acquisition of
the Institution, the Regulatory Capital Requirement of the Institution shall
take into account forbearances granted by the FHLBB by letter dated
December 22, 1987 and those granted by the Principal Supervisory Agent
of the Federal Home Loan Bank of Indianapolis by letter dated April 1,
1988.

((Section I.E.) Jt. App. at A300665 and A3006671.) These sections of the agreements

reference forbearances granted by an FHLBB "letter dated December 22, 1987." The

December 22, 1987, letter "issued in connection" with the transaction, states that: "For

purposes of reporting to the Bank Board, the value of any intangible asset resulting from

the application of push-down accounting may be amortized by Hometown Federal over

a period of 25 years by the straight-line method." (Jt. App. A300375-76.)

On balance, these documents, together with the other documents, facts, and

circumstances relied on by the Court of Federal Claims separate this case from D&N

Bank v. United States, 331 F.3d 1374 (Fed. Cir. 2003), on which the government

heavily relies. In D&N Bank, we noted the complete absence of any documentary proof

that the parties mutually intended to lock in by contract any provision for long-term

amortization of goodwill. 331 F.3d at 1378-79. In this case, there is abundant

documentary proof of mutual intent for such a contract provision.

IV

Even assuming a contract was formed, argues the government, the contract

reflects that the parties intended to place the risk of regulatory change squarely on

Hometown. This presents a question of contract interpretation, a question of law that

04-5116 9
we review de novo. See Cienega Gardens v. United States, 194 F.3d 1231, 1239 (Fed.

Cir. 1998).

In its Winstar opinion, the Supreme Court explained that in like contracts the

parties had the power to promise to insure against the risk of loss associated with

regulatory change. 518 U.S. at 869. In this regard, the Court noted with approval the

example set in an Eleventh Circuit opinion on the issue:

To be sure, each side could have eliminated any serious contest about the
correctness of their interpretive positions by using clearer language. See,
e.g., Guaranty Financial Services, Inc. v. Ryan, 928 F.2d 994, 999-1000
(C.A.11 1991) (finding, based on very different contract language, that the
Government had expressly reserved the right to change the capital
requirements without any responsibility to the acquiring thrift).

Id. at 869 n.15.

The similarity in contract language between the present case and Guaranty, as

well as our opinion in Admiral Financial Corp. v. United States, 378 F.3d 1336 (Fed. Cir.

2004), underlie the government's contention that the parties shifted the risk of regulatory

change to Hometown.

Like the present case, the transactions in both Admiral and Guaranty involved

the rescue of failing thrifts with the infusion of capital from investors. Also like the

present case, the transactions involved RCMDAs, see Admiral, 378 F.3d at 1338;

Guaranty, 928 F.2d at 996. The agreements all contain a provision that states:

All references to regulations of the Board or the FSLIC used in this
Agreement shall include any successor regulation thereto, it being
expressly understood that subsequent amendments to such regulations
may be made and that such amendments may increase or decrease the
Acquirors' obligation under this Agreement.

04-5116 10
Admiral, 378 F.3d at 1339 (citing "clause VI(D)", "Miscellaneous Provisions"); Guaranty,

928 F.2d at 999 (citing "article VI(D)") (emphasis removed); (Jt. App. A300668;

A300673 (clause V(D), "Miscellaneous Provisions")).

The agreements in Admiral, Guaranty, and the present case are not, however,

identical. The Admiral agreement contained a section of "Definitions" containing a

clause I.E., which states:

'Regulatory Capital Requirement' means the Institution's regulatory capital
requirement at a given time computed in accordance with 12 C.F.R.
§ 563.13, or any successor regulation thereto.

See Admiral Fin. Corp. v. United States, Appeal No. 03-5168, at Jt. App. A400035,

decided at Admiral, 378 F.3d 1336.

Article I(E) of the Guaranty RCMDA states as follows:

'Regulatory Capital Requirement' means the Institution's Regulatory
capital requirement at a given time computed in accordance with 12
C.F.R. § 563.13(b), or any successor regulation thereto.*

See Guaranty, 928 F.2d at 999. As set forth in the Eleventh Circuit's opinion, the

asterisk "directs the reader to a note . . . that reads, 'See Exhibit A, FHLBB forbearance

letter, dated December 29, 1987.'"1 Id.

As noted above, the RCMA and RCMDA of the present case also contain a

"Definitions" section I.E., which states:

1
The third forbearance set forth in the letter "concerns the treatment of
supervisory goodwill." Id. It states:

For purposes of reporting to the Board, the value of any intangible asset
resulting from the application of push-down accounting in accounting for
the purchase may be amortized . . . for a period not to exceed (25) years
by the straight line method.

04-5116 11
 'Regulatory Capital Requirement' means the Institution's regulatory capital
requirement at a given time computed in accordance with 12 C.F.R.
§ 561.13(b), or any successor regulation thereto, except that during the
five-year period following consummation of the acquisition of the
Institution, the Regulatory Capital Requirement of the Institution shall take
into account forbearances granted by the FHLBB by letter dated
December 22, 1987 and those granted by the Principal Supervisory Agent
of the Federal Home Loan Bank of Indianapolis by letter dated April 1,
1988.

(Jt. App. at A300665 and A300671 (emphasis added).) The forbearance letter of

December 22, 1987, contains five forbearances, at least two of which appear to be

relevant here. The first forbearance states:

[T]he FSLIC will forbear, for a period of five years following consummation
of the acquisition, from exercising its authority, under Section 563.13 of
the Insurance Regulations for any failure of Hometown Federal to meet
the net worth requirement of Section 563.13 arising solely from [inter alia,
assets attributable to the Savings and Loan].

(Jt. App. at A300375.) The fifth forbearance is very similar to the third forbearance of

Guaranty, see supra note 1. It states:

For purposes of reporting to the Bank Board, the value of any intangible
asset resulting from the application of push-down accounting may be
amortized . . . over a period of 25 years by the straight-line method.

(Jt. App. at A300376.)

As a matter of contract interpretation, we agree with the trial court that the

"except that" clause, section I.E., "specifically identified how the forbearances should be

treated." 53 Fed. Cl. at 337. In particular, section I.E. clearly sets forth the

understanding of the parties that regulatory change was possible because it refers to

calculating the requirement in accordance with "any successor regulation." This part of

the definition places the risk of regulatory change on Hometown. However, what follows

expressly excepts Hometown from that risk for a period of five years with the language:

04-5116 12
"except that during the five-year period following consummation of the acquisition of the

Institution, the Regulatory Capital Requirement of the Institution shall take into account

forbearances granted by the FHLBB by letter." The agreement then expressly identifies

the letters containing the relevant forbearances. As set forth above, one of the

forbearances expressly addresses long-term amortization, and the other reflects the

government's promise to forbear from enforcing the net worth requirements for "any

failure" generally relating to the assets of the Savings and Loan. Thus, as the Court of

Federal Claims correctly held, "the plaintiffs did not assume the risk of a regulatory

capital requirement change during the five-year period in which the forbearances were

in effect." 53 Fed. Cl. at 337. For that five-year period, Hometown was contractually

entitled to use long-term amortization applying a 25-year straight line method, with the

risk of regulatory change falling to the government. There is simply no other reasonable

way to read this language, and indeed, the government points to none, arguing instead

that Admiral and Guaranty require us to read the "except that" clause as either servient

to the Miscellaneous Provisions, or out of the agreement altogether.

We disagree with the government's reading of Admiral and Guaranty. The court

in Admiral was not faced with the "except that" clause present in the Hometown

agreement. Rather, in Admiral, the court was faced with a contract that uniformly

placed the risk of regulatory change on Admiral. 378 F.3d at 1339-43. Accordingly, the

topography of Admiral is in sharp contrast to the case at bar. Thus, the discussion in

Admiral on which the government relies, noting the Supreme Court's surprise at the lack

of "clearer language" in the Winstar-type agreements, see 518 U.S. at 869 n.15, cannot

be so rigidly superimposed on this case. It was not only necessary but easy for the

04-5116 13
Admiral court to find the "risk-shifting language" of Miscellaneous Provision VI(D) clear

and in alignment with the Supreme Court's note because there was no other contract

language capable of limiting the effect or impact of that general provision. Having not

considered the question, Admiral cannot make the specific "except that" clause servient

to the general "risk-shifting" clause of the Miscellaneous Provisions.

In Admiral we stated that "we accord great weight" to the decision in Guaranty,

378 F.3d at 1340, and expressly considered the application of Guaranty in that case.

Our view of the worth of Guaranty has not diminished. However, as with Admiral, we do

not believe that the topography of Guaranty so aligns with that of the matter at hand that

we should impose the result of Guaranty on this case.

Guaranty is a closer case. Although, like Admiral, Guaranty has no "except that"

clause, the Guaranty court concluded that the footnote associated with the definition of

Regulatory Capital Requirement "incorporated" the forbearance letter. As noted above,

the forbearance in Guaranty pertaining to long-term amortization is similar in substance

to the forbearance in Hometown's December 22, 1987, letter. In that case, Guaranty

argued "that [the letter] confer[red] upon it an irrevocable right to treat supervisory

goodwill as regulatory capital for twenty-five years." 928 F.2d at 999. In the context of

that position, the Eleventh Circuit viewed Guaranty's forbearance letter as in conflict

with the general contract provisions providing that regulations may be changed. Id.

The Guaranty court applied the principle of contract interpretation that possibly

conflicting contract provisions should be read harmoniously. Id. In so doing, the court

interpreted the long-term amortization permitted in the forbearance letter as an

04-5116 14
exception good for as long as the regulatory environment did not change, but servient to

the "risk-shifting" article. In the words of the Guaranty court:

We interpret the forbearance provision to mean that the agencies would
allow Guaranty to treat supervisory goodwill as regulatory capital so long
as the regulatory [sic] remained as it was when the contract was signed.
The agencies, in other words, granted Guaranty an exception to the rules
of the game, and promised that the exception would be valid so long as
the rules stayed the same. But the agencies, at the same time they made
that promise, also unambiguously warned Guaranty that the rules might
later change to Guaranty's detriment. By signing the contract, Guaranty
took that chance, in effect wagering the chance that the rules would be
changed against the potential return if they were not.

Id.

What distinguishes the present case is that there is language addressing the

length of time during which the promised exception would last. As set forth in the

RCMDA, the promises in the forbearance letter were to last five years. This stands in

contrast to the Guaranty contract, which has no language in the RCMDA establishing

the length of time for which the forbearances will apply to the Regulatory Capital

Requirement. In the present case, rather than unreservedly "wagering the chance that

the rules would be changed against the potential return if they were not," Hometown

limited its wager to a period of time starting five years after consummation of the

acquisition. It is no departure from Guaranty to recognize this distinction, and we do not

read the general "risk-shifting" provisions as unexcepted.

Neither Admiral nor Guaranty requires a holding that the parties in this case

shifted the risk of regulatory change to Hometown. We think harmony is found in

reading the Hometown agreement by understanding that the parties generally agreed

that the risk of regulatory change would be borne by Hometown but agreed to a specific

five-year exception. Our precedent establishes as a principle of contract interpretation

04-5116 15
that a specific contract provision will control over a general contract provision. See Hol-

Gar Mfg. v. United States, 351 F.2d 972, 980 (Ct. Cl. 1965). We find that principle

appropriate here, and hold that Hometown did not assume the risk of regulatory change

for the five-year period defined in section I.E.

V

The government finally argues that even if a contract was formed, and even if

that contract assigned to the government the burden of the effect of regulatory change,

the government cannot be held liable in this case as a consequence of Hometown's

prior material breach. Whether a breach is material is a mixed question of law and fact.

See Gilbert v. Dep't of Justice, 334 F.3d 1065, 1071-72 (Fed. Cir. 2003). The legal

aspect of the question flows from the proper interpretation of the contract, while the

factual aspects of the question flow from the parties' conduct—what they did, or did not,

do. Id.

"A breach is material when it relates to a matter of vital importance, or goes to

the essence of the contract." See Thomas v. Dep't of Hous. and Urban Dev., 124 F.3d

1439, 1442 (Fed. Cir. 1997) (citing 5 Arthur L. Corbin, Corbin on Contracts § 1104

(1964)). Under general contract principles, a party sued for breach of contract may

defend on a theory that its nonperformance is excused because the other contracting

party committed the first material breach. See Barron Bancshares, Inc. v. United

States, 366 F.3d 1360, 1380-81 (Fed. Cir. 2004); see also Christopher Village, L.P. v.

United States, 360 F.3d 1319, 1333-34 (Fed. Cir. 2004).

Notwithstanding the government's accurate assessment of the law, namely that

there is a legal component to the question of whether a prior material breach occurred,

04-5116 16
it is the facts of this case which dictate the outcome. The trial court engaged in a

detailed and thorough analysis of the facts, which after careful consideration are not

shown to be clearly erroneous. Accordingly, we affirm the trial court's judgment that

there was no prior material breach.

CONCLUSION

For the reasons stated above, the government's challenge to the final decision of

the Court of Federal Claims fails.

AFFIRMED

04-5116 17