United States Court of Appeals for the Federal Circuit
04-5009
FIFTH THIRD BANK OF WESTERN OHIO,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Jerrold J. Ganzfried, Howrey Simon Arnold & White, LLP, of Washington, DC,
argued for plaintiff-appellant. With him on the brief were Alan M. Grimaldi, Robert M.
Bruskin, Robert M. Cox, Timothy K. Armstrong, Alexander B. Berger, and Jennifer R.
Bagosy. Of counsel on the brief was James Hubbard, Fifth Third Bank of Western
Ohio, of Cincinnati, Ohio.
David A. Levitt, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney
General; David M. Cohen, Director; Jeanne E. Davidson, Deputy Director; Gregory R.
Firehock and Brian A. Mizoguchi, Jr., Trial Attorneys. Of counsel was Jonathan S.
Lawlor, Trial Attorney.
Edwin L. Fountain, Jones Day, of Washington, DC, for amici curiae Anchor
Savings Bank, FSB, et al.
Appealed from: United States Court of Federal Claims
Judge Christine O.C. Miller
United States Court of Appeals for the Federal Circuit
04-5009
FIFTH THIRD BANK OF WESTERN OHIO,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
__________________________
DECIDED: March 31, 2005
__________________________
Before NEWMAN, Circuit Judge, PLAGER, Senior Circuit Judge, and CLEVENGER,
Circuit Judge.
PLAGER, Senior Circuit Judge.
In this Winstar-related case, the issue is whether the Government is liable for
breach of contract resulting in alleged losses sustained by plaintiff Fifth Third Bank of
Western Ohio (“Fifth Third”). The transactions at issue are familiar, arising out of the
thrift industry problems in the 1980s. The United States Court of Federal Claims held a
trial on the issue. After plaintiff presented its case-in-chief, the Government moved for
judgment on the theory that the evidence did not establish the existence of the alleged
contractual obligations. The trial court granted the Government’s motion; Fifth Third
appeals the trial court’s judgment that the United States was not liable for breach of
contract.
Earlier in the proceedings the Government had moved for partial summary
judgment with respect to plaintiff’s damages claims. The court granted the motion in
part, thereby precluding plaintiff from presenting certain damages theories at trial. Fifth
Third appeals one aspect of this ruling—the trial court’s rejection of Fifth Third’s
expectation damages model based on a hypothetical cost of replacing, or “covering,”
goodwill lost as a result of breach.
With regard to liability, the trial court erred in concluding that contracts did not
exist between the United States and Fifth Third’s predecessor-in-interest, Citizens
Federal Bank FSB (“Citizens”) regarding Citizens’ acquisition of four failing thrifts;1 the
contractual terms included permission for Citizens to use the purchase method of
accounting to amortize supervisory goodwill over an extended period of time and to
count supervisory goodwill toward capital reserve requirements. As has been explained
in other Winstar-related cases, subsequent government activity caused these contracts
to be breached.
With regard to damages, the trial court correctly ruled that plaintiff’s hypothetical
cost of cover is not a proper measure of damages. Accordingly, the judgment of the
Court of Federal Claims is affirmed-in-part and reversed-in-part. The case is remanded
for further proceedings consistent with this opinion.
BACKGROUND
A. Regulatory Setting
It has been more than twenty years since the critical events in the thrift industry
crisis of the 1980s occurred, and almost a decade since the law that governs these
1
Fifth Third acquired Citizens in 1998 and became the successor-in-interest
to Citizens’ claims in this case.
04-5009 2
cases was first established. During that time the history and circumstances surrounding
the thrift crisis and the ensuing events, including enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183
(“FIRREA”), have been extensively discussed in opinions of the Supreme Court, see
United States v. Winstar Corp., 518 U.S. 839 (1996), and this court, see, e.g., Winstar
Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995) (en banc); Glendale Fed. Bank,
FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001). We need provide only a brief
overview here to serve as backdrop for our decision in this case.
Rising interest rates and inflation during the late 1970s and early 1980s
precipitated a crisis in the savings and loan industry. More than 400 thrifts failed
between 1981 and 1983, and many additional thrifts were on the verge of insolvency.
This situation threatened to exhaust the insurance fund of the Federal Savings and
Loan Insurance Corporation (“FSLIC”).
To deal with this crisis, the Federal Home Loan Bank Board (“FHLBB”), the
agency responsible for regulating federally chartered savings and loan associations,
sought out healthy financial institutions and outside investors for the purpose of having
them purchase troubled thrifts through the use of “supervisory mergers.” The FHLBB
offered financial incentives to induce such mergers and to prevent an acquiring thrift
from becoming insolvent upon completion of the transaction. The incentive most
pertinent to this case was the accounting treatment of what was called “supervisory
goodwill,” basically the difference between the fair market value of the failing thrift’s
liabilities assumed by an acquiring thrift and the fair market value of the failing thrift’s
assets.
04-5009 3
In a merger utilizing supervisory goodwill, the FHLBB would permit the acquiring
institution to count supervisory goodwill toward its reserve capital requirements and to
use the purchase method of accounting to amortize this supervisory goodwill over an
extended period of time, up to forty years. Additional incentives provided by the FHLBB
in some supervisory mergers included cash contributions in the form of permanent
credits to regulatory capital and forbearance agreements by the FHLBB not to enforce
regulatory capital requirements for a specified period of time.
However well-intended these various measures were, the problems in the
savings and loan industry persisted. In 1989 Congress stepped in with the enactment
of FIRREA. FIRREA abolished the FHLBB and FSLIC, transferred thrift insurance
activities to the Federal Deposit Insurance Corporation (“FDIC”), established the Office
of Thrift Supervision (“OTS”) as the new thrift regulatory agency, created the Resolution
Trust Company (“RTC”) to liquidate failed thrifts, and made substantial changes in the
regulation of the savings and loan industry.
Directly to the point for purposes of this case, FIRREA also created a minimum
capital requirement for thrifts, phased out the thrifts’ ability to count supervisory goodwill
toward capital requirements, and limited the amortization period of supervisory goodwill.
The impact of FIRREA, in particular the supervisory goodwill provisions, was swift and
severe, and many thrifts quickly fell out of compliance with regulatory capital
requirements, making them subject to seizure by thrift regulators.
This course of events gave rise to hundreds of lawsuits filed by formerly healthy
thrifts that had been acquirers of failing thrifts. The plaintiffs sought damages from the
Government under several theories, including breach of contract. The thrifts alleged
04-5009 4
that Congress’s enactment of FIRREA breached the Government’s obligation to allow
special accounting treatment of supervisory goodwill. In due course the matter reached
the Supreme Court in United States v. Winstar Corp., 518 U.S. 839 (1996). The appeal
involved the cases of three acquiring thrifts taken as test cases; the cases had been
consolidated for appeal. The Supreme Court affirmed this court’s en banc
determination that the thrifts had indeed entered into enforceable contracts with the
Government, and that the Government was liable for breach of contract as a result of
the enactment and enforcement of FIRREA.
In the years since the Supreme Court’s Winstar decision, appeals in numerous
Winstar-related cases have come before this court. Because the background and the
fact pattern of the Government’s involvement with the thrifts are well-known, in many
cases the existence between the Government and the acquiring thrift of an agreement
to allow supervisory goodwill is clear. The Government concedes liability, and the issue
of contention between the parties has been the amount of damages.2 In a relatively few
cases, because of particular circumstances in the transactions at issue, the Government
has contested whether the FHLBB and the thrift understood that supervisory goodwill
would be part of the transaction.
In assessing the issue of contractual obligation and breach, there is a difference
between the issue of contract formation and the issue, once it is determined that the
relationship is one of contract, of interpreting the dimension of particular contractual
obligations. In this case, the parties do not dispute basic issues of offer, acceptance,
and consideration, the essentials of contract formation. What is in dispute is whether a
2
The Court of Federal Claims has a special procedures order for Winstar-
related cases utilizing a short form motion for summary judgment on liability.
04-5009 5
particular term is part of whatever contract existed between the parties, i.e., did the
parties intend to bind themselves to long-term amortization of the regulatory goodwill
created by the transactions in which they engaged. Often in cases such as this, with
the facts of record and generally agreed, the matter is decided on summary judgment;
this case is unusual in having the facts and the trial court’s conclusions determined only
after a full trial.
B. Factual History
Citizens, a federally chartered mutual savings and loan association
headquartered in Dayton, Ohio, acquired or merged with four failing thrifts between
1982 and 1985. As found by the trial court, each transaction at issue in this case
followed the same general pattern. The Federal Home Loan Bank of Cincinnati (“FHLB-
Cincinnati”) had identified Citizens as a healthy thrift and therefore a candidate for
acquiring or merging with failed thrifts. In each of the four transactions, FHLB-Cincinnati
contacted Citizens to propose a supervisory merger with the failing thrift. In each case
Citizens and the failing thrift entered into a Purchase Agreement or a Merger Agreement
expressly conditioned upon obtaining approval of the agreement by FHLBB. Citizens
and the failing thrift then submitted an application for merger to FHLB-Cincinnati.
FHLB-Cincinnati conditionally approved each transaction by issuing a Bank
Board Resolution specifying the additional steps necessary for obtaining final approval.
Each resolution required Citizens to furnish an opinion from its independent accountant
justifying the use of the purchase method of accounting, describing any goodwill arising
from the purchase, and substantiating the reasonableness and amounts of the goodwill
and the related amortization period. Citizens complied with the requirements set forth in
04-5009 6
each resolution, including submission of an opinion letter from its accountant. FHLB-
Cincinnati then submitted each proposed acquisition or merger to FHLBB headquarters
for final approval. FHLBB approved each transaction, and Citizens accounted for each,
including the use of the purchase method, the amortizing of goodwill over an extended
period, and the counting of goodwill toward its regulatory capital requirements.
At trial, plaintiff presented extensive testimony by Jerry Kirby, President and
Chief Executive Officer of Citizens, and Lawrence Muldoon, FHLB-Cincinnati’s chief
supervisory agent, describing the negotiations between Citizens and FHLB-Cincinnati
with respect to the four transactions. The first transaction was Citizens’ acquisition of
thirteen branches of Cardinal Federal Savings and Loan Association (“Cardinal”) in
1982. Mr. Kirby testified that the Cardinal transaction was initiated when Mr.
McElheney, at the time a supervisory agent at FHLB-Cincinnati and Mr. Muldoon’s
subordinate, contacted Citizens to propose that Citizens acquire the Cardinal branches.
He explained that the FHLBB would permit Citizens to book Cardinal’s negative net
worth as goodwill, which would count as an asset for regulatory capital purposes and
could be amortized over an extended period of time.
Mr. Kirby testified that he followed up with Mr. Muldoon to more fully understand
how such an arrangement would work. Mr. Kirby asked Mr. Muldoon if Citizens could
receive cash assistance. Mr. Muldoon replied that there was no cash assistance
available, but Citizens could book supervisory goodwill as an asset and amortize it over
an extended period of time. Mr. Muldoon’s testimony confirmed that he offered goodwill
as a substitute for cash assistance. According to Mr. Kirby, he viewed the goodwill
accounting treatment as the sine qua non of the Cardinal acquisition because without it
04-5009 7
Citizens would have immediately fallen out of capital compliance. Mr. Kirby testified that
he discussed the proposed arrangement with his board of directors, although no written
records of any meetings exist.
Citizens and Cardinal entered into a formal Purchase Agreement expressly
conditioned upon receiving FHLBB approval. Citizens submitted a merger application to
FHLB-Cincinnati. The application included a pro forma financial statement based on the
assumption of a thirty-year amortization period for goodwill. FHLB-Cincinnati
conditionally approved the transaction in Board Resolution V-O-M-82-7. As a condition
for final approval, the Resolution required Citizens to submit an opinion from its
independent accountant that:
(a) indicates the justification under generally accepted accounting
principles [GAAP] for use of the purchase method of accounting, (b)
specifically describes any goodwill arising from the purchase to be
recorded on Citizens’ books, and (c) substantiates the reasonableness
and amounts of such goodwill and related 30 year amortization period and
method.
FHLB-Cincinnati sent a letter to the FHLBB recommending approval of the
Cardinal acquisition. The letter stated that approximately $35 million of goodwill would
result from the transaction and would be amortized over thirty years. Citizens submitted
the required accountant’s letter, which indicated that goodwill would be amortized over
forty years, not thirty years. The FHLBB thereafter approved the transaction, and
Citizens booked $37 million of goodwill using a 30-year amortization period.
Citizens entered into three subsequent supervisory transactions—with Gateway
Federal Savings and Loan Association (“Gateway”) in 1983, with Homestead Federal
Savings and Loan Association (“Homestead”) in 1984, and with First Federal Savings
and Loan Association (“First Federal”) in 1985. In each case, FHLB-Cincinnati identified
04-5009 8
the failing thrift, and Mr. Muldoon of FHLB-Cincinnati contacted Mr. Kirby to propose
that Citizens acquire or merge with the failing thrift. According to trial testimony, the
discussions between Mr. Kirby and Mr. Muldoon leading up to each transaction followed
a similar pattern. When considering whether to acquire each thrift, Mr. Kirby requested
FSLIC cash assistance. Mr. Muldoon responded each time that no cash assistance
was available, but that instead he could offer the same regulatory and accounting
treatment of supervisory goodwill that had been used in the Cardinal transaction, i.e.,
use of the purchase method of accounting to book supervisory goodwill as an asset that
would count toward regulatory capital requirements and be amortized over an extended
period of time.
Following the negotiations between Mr. Kirby and Mr. Muldoon regarding each
potential transaction, Citizens and the FHLBB exchanged documents similar to those in
the Cardinal transaction, as noted above. The documents, however, lacked some of the
detail provided in the Cardinal documents. For example, the Board Resolutions for the
Gateway, Homestead, and First Federal transactions required Citizens to provide an
opinion from its independent accountant justifying the use of the purchase method of
accounting, describing any goodwill arising from the transaction to be recorded on
Citizens’ books, and substantiating the reasonableness and amounts of such goodwill
and related amortization period and method. These Resolutions, however, did not
specify the length of the amortization period. Nevertheless, it is undisputed that for
each transaction Citizens booked supervisory goodwill as an asset and amortized it
over a period of twenty years (for Homestead and First Federal) or ten years (for
Gateway).
04-5009 9
C. The Trial
After discovery in this case, both parties filed motions for summary judgment on
liability. The trial court denied both motions. Fifth Third Bank of W. Ohio v. United
States, 52 Fed. Cl. 264 (2002) (“Fifth Third I”). The court granted the Government’s
motion for reconsideration in order to address whether FHLB-Cincinnati had actual
authority to bind the Government to a contract, an issue the trial court had erroneously
deemed abandoned in its prior ruling. The court concluded that FHLB-Cincinnati
possessed implied actual authority to bind the FHLBB to promises regarding the
accounting treatment of supervisory goodwill. Fifth Third Bank of W. Ohio v. United
States, 52 Fed. Cl. 637 (2002) (“Fifth Third II”).
Meanwhile, the Government moved for summary judgment with respect to
Plaintiff’s damages claims. The trial court granted this motion in part, concluding that
Plaintiff was not entitled to pursue various damages theories at trial, including its
calculation of expectancy damages based on the doctrine of cover. Fifth Third Bank of
W. Ohio v. United States, 55 Fed. Cl. 223, 242-44 (2003) (“Fifth Third III”).
The case proceeded to trial on the issues of liability and the remaining damages
theories. At the close of Plaintiff’s case-in-chief, the Government moved for judgment
on partial findings pursuant to Court of Federal Claims Rule 52(c). The trial judge orally
granted the motion with respect to liability and denied it with respect to damages, and
thereafter issued a written opinion. Fifth Third Bank of W. Ohio v. United States, 56 Fed
Cl. 668 (2003) (“Fifth Third IV”).
As discussed, Plaintiff’s case included substantial oral and deposition testimony
describing the communications between Citizens and FHLB-Cincinnati. The trial judge
04-5009 10
specifically found that “Mr. Kirby [Citizens’ President] thought that Citizens had contracts
with the Government. Messrs. Muldoon, McElheney, and Thiemann [the Government
officials] all thought that FHLBB had entered into contracts and that FHLBB had made a
commitment to recognize goodwill for regulatory purposes that could not be withdrawn.”
Id. at 694. Regarding the credibility of this testimony, the trial court noted that some of
the testimony seemed to be rote, perhaps because of the long time since the events,
but that the court “credits fully the integrity of these gentlemen.” Id. Despite these
findings, the trial court concluded that the agreements between the parties were not
contractual relationships, at least in part because the only written evidence
corroborating the witness testimony was contained in what the court described as
routine agency documents. Id. at 694-96.
The Court of Federal Claims entered final judgment in favor of the United States.
In this appeal, Fifth Third challenges the trial court’s Rule 52(c) judgment on liability and
the trial court’s partial summary judgment precluding Fifth Third from presenting its
cover damages theory at trial. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).
DISCUSSION
A. Liability
The trial court cast the issue of liability in terms of contract formation—offer and
acceptance, consideration, actual authority, and mutuality of intent. She posed the
question as: “What evidence should be required to establish a commitment to provide
something of value within the regulatory framework, along with the concomitant
commitment not to regulate in contravention of that agreement?” Fifth Third IV, 56 Fed.
Cl. at 692. On appeal plaintiff contends that the trial court erred by failing to accord
04-5009 11
proper weight to trial testimony regarding negotiations between Citizens and FHLB-
Cincinnati officials. Plaintiff further argues that the trial court erred when it dismissed
the documentary evidence relating to Citizens’ supervisory mergers as merely reflecting
regulatory approval of the transactions rather than contractual commitments between
the parties. The Government responds that the documents in evidence were indeed
regulatory in nature and that the testimony was too general and vague to show that the
written documents actually demonstrated the existence of contractual obligations.
It is helpful to consider this case within the larger context of the earlier Winstar
cases. In this court’s Winstar en banc decision, this court concluded that the
Government formed contractual agreements regarding the treatment of supervisory
goodwill with Winstar and two other institutions, Statesman Savings Holdings Corp.
(“Statesman”) and Glendale Federal Bank (“Glendale”). Winstar, 64 F.3d at 1540-44.
Analyzing not only the contemporaneous documents but also the circumstances
surrounding the transactions, this court determined that the Government was
contractually obligated to recognize supervisory goodwill resulting from the transactions
as a capital asset and to permit such goodwill to be amortized over an extended period
of time. Id. The Supreme Court considered the evidence and found no reason to
question this court’s conclusion in that regard. Winstar, 518 U.S. at 861-68. The Court
also confirmed there were no constitutional or statutory obstacles to enforcing the
agreements under ordinary contract principles. Id. at 871-911.
In each of the three transactions in Winstar, the relevant documents included
either an Assistance Agreement or a Supervisory Action Agreement, each containing an
integration clause incorporating contemporaneous documents such as the Bank Board
04-5009 12
Resolutions issued prior to each transaction. But such documents are not legal
prerequisites to a contractual obligation. In California Federal Bank, FSB v. United
States, 245 F.3d 1342 (Fed. Cir. 2001), this court determined that contractual
obligations existed even though there was no single document incorporating all the
contract terms. Id. at 1346-47. We noted that our Winstar decision “did not rely
exclusively on the assistance agreements to find a contract.” Id. at 1346. Instead, we
agreed with the Court of Federal Claims that “[i]f the factual records of individual cases
show intent to contract with the government for specified treatment of goodwill, and
documents such as correspondence, memoranda and [FHLBB] resolutions confirm that
intent, the absence of an [assistance agreement] or [supervisory action agreement]
should be irrelevant to the finding that a contract existed.” Id. at 1347 (citation omitted)
(alteration in original).
This court has determined Government liability in other cases in which the
Government has contested the issue. In Barron Bancshares, Inc. v. United States, 366
F.3d 1360 (Fed. Cir. 2004), goodwill and capital credit provisions in the documents were
“virtually identical” to those in the Winstar transactions. Id. at 1376. Nevertheless, the
Court of Federal Claims had determined those provisions were not contractual
obligations because there was no evidence they were the subject of any pre-contract
negotiations between the parties, whereas other terms had been negotiated. Id. at
1372. We reversed, holding that the clear and unambiguous language of the integrated
contract document was binding and precluded resort to parol evidence to alter its terms.
Id. at 1375-76.
04-5009 13
In LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363 (Fed. Cir. 2003),
we affirmed the trial court’s conclusion that agreements between Talman and the
Government for specialized treatment of goodwill were contractual, although the terms
were recorded in agency documents, such as Bank Board Resolutions, rather than
executed contracts. The Bank Board Resolutions in that case indicated that Talman
could use the purchase method of accounting for goodwill so long as it submitted a
stipulation that goodwill would be determined and amortized in accordance with Bank
Board Memorandum R-31b, which provided for amortization of supervisory goodwill
over a period up to forty years.3 Id. at 1370.
More recently, this court decided LaVan v. United States, 382 F.3d 1340 (Fed.
Cir. 2004). In that case, FHLBB approval of a 35-year amortization period was reflected
in both a Bank Board Resolution and an internal memorandum. Id. at 1346-47. We
rejected the Government’s argument that the FHLBB was merely performing a
regulatory function when it approved the transaction and agreed with the trial court that
the parties had contracted for special goodwill treatment. Id.
These cases reflect the relationships formed between the FHLBB and the thrifts
as the FHLBB sought help from these institutions to solve the national savings and loan
crisis. The cases are not identical, yet all arose in the same regulatory and economic
environment, a backdrop against which these cases can be viewed. Despite different
circumstances and variations in the documents containing the contract terms, in each of
3
Bank Board Memorandum R-31b, issued in September 1981, set forth the
FHLBB’s guidelines on how the acquiring institution could count supervisory goodwill as
an intangible asset using the purchase method of accounting. The Memorandum
limited the amortization period of supervisory goodwill to forty years or less. See
Winstar, 64 F.3d at 1541 & n.4.
04-5009 14
these cases we recognized there was a contractual agreement regarding the treatment
of goodwill and its amortization period.
Not surprisingly, considering the number of transactions nationally, there have
been cases in which this court concluded based on the evidence presented that a
contractual agreement with respect to goodwill did not exist. In D & N Bank v. United
States, 331 F.3d 1374 (Fed. Cir. 2003), this court found that D & N provided no
evidence demonstrating that the parties intended to contract to permit special
accounting treatment of goodwill. Notably, none of the documents proffered by D & N
mentioned goodwill or the accounting treatment thereof. Id. at 1378. Furthermore, the
FHLBB supervisory agent testified in his deposition that he could not recall any
discussions with D & N about goodwill. Id. at 1379. The complete absence of evidence
that the parties even contemplated an agreement regarding goodwill led us to find for
the Government on the issue of liability.
In another case, First Commerce Corp. v. United States, 335 F.3d 1373 (Fed.
Cir. 2003), the plaintiff institution began the process of acquiring a troubled thrift by
submitting a bid letter to FHLB-Indianapolis in which it requested permission to use the
purchase method of accounting and amortize supervisory goodwill over a 25-year
period. But in its formal merger application, First Commerce requested conventional
GAAP treatment of goodwill rather than an extended amortization period. Id. at 1377.
This evidence that First Commerce intended to go forward with the transaction without
any agreement as to goodwill treatment caused this court to look closely at the
documents in search of “mirror image” terms. Id. at 1381.
04-5009 15
The record showed that the FHLBB had approved the merger and issued a
forbearance letter providing that First Commerce could amortize goodwill over a 25-year
period. We determined that this qualified as a counteroffer and remanded for the trial
court to consider whether First Commerce had accepted the counteroffer. Id. at 1381-
82. On remand, the trial court readily found that First Commerce’s later conduct—its
actual use of a 25-year amortization period—constituted an unambiguous acceptance of
the Government’s counteroffer, and the court granted summary judgment of liability in
favor of First Commerce. First Commerce Corp. v. United States, 60 Fed. Cl. 570, 581-
82 (2004).
Anderson v. United States, 344 F.3d 1343 (Fed. Cir. 2003), is another case in
which evidence that parties had not contracted for special goodwill treatment prompted
us to examine carefully the specific documents involved in the transaction. Westport,
the acquiring institution, submitted an application in which it requested a 40-year
amortization period for goodwill. Id. at 1347. In an internal FHLBB memorandum, the
FHLBB staff recommended against granting the request for extended amortization of
goodwill but recommended approval of other forbearance requests. Id. According to
the memorandum, Westport’s CEO indicated that a goodwill forbearance was not
necessary for completion of the transaction. Id. Consistent with the staff
recommendation, the FHLBB issued a Forbearance Letter with no mention of goodwill
amortization. Id. at 1348. The FHLBB also issued a Resolution, which mentioned
goodwill only in the standard clause requiring an accountant’s letter; it made no
reference to the use of the purchase method of accounting or to an extended period of
amortization for goodwill. Id. at 1355. We found that the Forbearance Letter and the
04-5009 16
Resolution confirmed what the internal memorandum indicated, i.e., that the FHLBB had
not agreed to extended amortization of goodwill as part of the transaction. Id. at 1358.
Although in any given case it would be improper to presume the existence or
non-existence of a contract, or the terms of a contract, it is true that, viewing the
Winstar-related cases as a whole, the pattern of arrangements between the FHLBB and
the acquiring financial institutions often had contractual dimensions; the Supreme Court
and this court recognized that in the original Winstar cases. The FHLBB was dealing
with the worsening crisis in the savings and loan industry by seeking healthy institutions
to merge with or acquire failing thrifts and by offering incentives such as the use of
supervisory goodwill. The healthy thrifts sought permission from and agreement with
the FHLBB in order to safely undertake the salvage efforts the Government so eagerly
desired.
Since one of the main incentives offered by the FHLBB was the recognition of
supervisory goodwill with an extended amortization period—the thread that runs through
many of these cases—the question becomes what to believe regarding the parties’
understanding of special treatment of goodwill as a term of the contract. As shown by
the cases just discussed, this court has ultimately found the Government liable for
breach of contract in these Winstar-related cases when the evidence demonstrates that,
in light of the discussions between the Government and the acquiring thrift with regard
to protections affecting capital requirements, including supervisory goodwill, the parties
agreed that the acquiring thrift was to be given the favorable accounting treatment of
supervisory goodwill and its amortization.
04-5009 17
Turning to the case before us, Citizens completed four transactions over the
course of four years. With respect to the initial transaction, the acquisition of the
Cardinal branches in 1982, the record supports plaintiff’s contention that there was a
contractual agreement between Citizens and the FHLBB regarding special treatment of
supervisory goodwill. According to testimony presented at trial, the parties negotiated
the terms of the agreement—Mr. Kirby asked for cash assistance, and Mr. Muldoon
offered instead that Citizens could book supervisory goodwill as an asset, which would
count toward regulatory capital requirements, and Citizens could amortize the goodwill
over an extended period of time. The documents of record—Citizens’ merger
application, the Bank Board Resolution, and the conditional approval letter from FHLB-
Cincinnati to the FHLBB—confirm this agreement. Although the record is less than
clear as to whether the parties agreed to a specific amortization period, it is clear
enough that they agreed to an extended amortization period. The need to specify the
exact length of the amortization period never became a relevant consideration; it got
resolved by default in the later paperwork.
Using the Cardinal transaction as a model, and at the suggestion of FHLB-
Cincinnati, Citizens proceeded to complete three more transactions with failing thrifts.
Although the written documents are not as detailed as those in the Cardinal transaction,
it is evident from the pattern and circumstances of these transactions that the special
treatment of supervisory goodwill was a central part of the agreements, just as it was for
the Cardinal transaction. Trial testimony shows that before each transaction Mr. Kirby
requested cash assistance, as he had done during the Cardinal negotiation, and Mr.
Muldoon instead offered the same goodwill treatment used in the Cardinal transaction—
04-5009 18
use of the purchase method of accounting to book supervisory goodwill as an asset that
would count toward capital reserve requirements and an extended amortization for
goodwill. Both Mr. Kirby and Mr. Muldoon understood that the parties were agreeing to
the same terms as those in the Cardinal acquisition, and there is no evidence that they
intended to alter the arrangement.
The clincher is the consequences, as the trial court explained, attendant on the
execution of these transactions had supervisory goodwill not been a part.4 At the time
of the Cardinal acquisition, the regulatory capital requirement was four percent. Before
the acquisition, Citizens’ regulatory capital was at 5.68 percent of its total capital
reserve. After the transaction, with about $38 million in goodwill counting toward
Citizens’ capital requirement, the ratio was 4.14 percent. Without the special goodwill
treatment, however, Citizens’ post-transaction ratio would have been 0.06 percent, well
below the required minimum.
The other transactions were the same. Before the Gateway acquisition, Citizens
was at 4.17 percent. After the acquisition the ratio was 3.74, still above the minimum
three percent required at the time. Without the supervisory goodwill adjustment, the
ratio would have been 0.18 percent. Before the Homestead transaction, Citizens’
regulatory ratio was 3.73; after it was 3.18, again above the minimum three percent
required. Without the additional $35 million in supervisory goodwill on the books,
however, the ratio would have been a negative 2.15 percent, which would not only have
rendered Citizens out of capital compliance, but also insolvent. Finally, with the
4
The following data are taken from the trial court’s factual findings, Fifth
Third IV, 56 Fed. Cl. at 677 (Cardinal); id. at 679 (Gateway); id. at 681 (Homestead); id.
at 682 (First Federal).
04-5009 19
supervisory goodwill allowance provided by the First Federal transaction, Citizens was
left with a comfortable 3.4 percent ratio; without it, the ratio was another negative 1.27
percent, out of compliance and insolvent.
Messrs. Kirby and Muldoon testified that the transactions would have not
occurred without an agreement for special treatment of goodwill because Citizens would
have fallen out of capital compliance immediately after each transaction. Citizens would
not have decided to complete transactions with such dire consequences; FHLB-
Cincinnati would not have approved a transaction if the resulting thrift would not have
been in capital compliance. As Justice Souter in Winstar observed, “[i]t would, indeed,
have been madness for respondents to have engaged in these transactions with no
more protection than the Government’s reading would have given them, for the very
existence of their institutions would then have been in jeopardy from the moment their
agreements were signed.” Winstar, 518 U.S. at 910; see also Barron Bancshares, 366
F.3d at 1378 (finding additional support for existence of a contract in evidence that
recapitalized thrift would have been out of compliance from its inception without special
goodwill treatment); LaSalle Talman, 317 F.2d at 1370 (“[T]here would be little reason
for any thrift to assume added liabilities if that assumption would place it in immediate
danger of receivership and dissolution.”).
Based on trial testimony regarding the parties’ negotiations, contemporaneous
documents, and the circumstances surrounding the transactions at issue, it is apparent
that Citizens and the Government intended to enter into a binding agreement governing
the transactions at issue. It is further apparent that the agreement was understood to
include Citizens’ use of the purchase method of accounting, amortizing of supervisory
04-5009 20
goodwill over an extended period of time, and counting of supervisory goodwill as an
asset for purposes of meeting capital reserve requirements. Those issues were clearly
on the table and available as far as the FHLBB was concerned, and were clearly key
considerations in the decisions of the Citizens Bank management.
The Government asserts that “Fifth Third’s allegation that it would have been
‘irrational,’ even ‘suicidal,’ for it to enter into these transactions without a long-term
contract is questionable . . . . In any event, economic irrationality cannot create
contracts.” Appellee’s Br. at 20-21. The latter is of course true, but not the point. More
to the point is the fact that there is evidence in this case sufficient to show a contract for
long-term amortization of regulatory capital binding on the Government, and, unlike the
situation in Anderson, no evidence that Citizens failed to protect itself with enforceable
contract rights.
The Government further argues that the purpose of these transactions was to
buy time until interest rates decreased, and the Government had no need to enter into
long-term contracts in order to achieve this goal. That may be true, but it does not
define the legal consequences of what the Government actually did. The argument that
contract-based transactions were not necessary to the Government’s purpose was
made in the original Winstar cases. It was not persuasive then, and the argument has
not gained strength by repetition.
The trial court reached the conclusion that there were no contractual obligations
regarding supervisory goodwill in part because it failed to fully appreciate the context in
which these agreements were reached and to give proper weight to the circumstances
as well as the evidence, and in part because it misapprehended certain aspects of the
04-5009 21
relationship between the parties. In terms of context, these are not contracts for goods
or services that the Government needs from time to time, and that stand on their own.
They are part of a larger context in which the Government enlisted the aid of a major
sector of the banking industry by initiating and conducting a nationwide program for
protecting the Government’s position as a guarantor of the industry. Though as noted
context alone does not create a presumption in favor of any particular outcome, context
is relevant to the problem of contract interpretation.
Beyond that, the trial court misapprehended the law with regard to certain
specific issues. First, the trial court emphasized the need to memorialize any contract
terms in an express written agreement. Fifth Third IV, 56 Fed. Cl. at 691-92. The trial
court understood that a single integrated writing is not required in order to establish the
existence of a contract in Winstar-related cases, see Cal. Fed., 245 F.3d at 1346-47, yet
language in the trial court’s opinion suggests that the trial court believed that all
contractual terms must be found in the written documents alone. See, e.g., Fifth Third
IV, 56 Fed. Cl. at 692 (“[T]he Federal Circuit has not dispensed with the requirement
that the parties produce a written memorialization of their commitment.”). To the extent
the trial court applied that understanding of the law in this case, that was error.
Evidence other than written documents, such as the testimony in this case that contract
terms were orally negotiated, may not be disregarded.
Second, the trial court erred in characterizing the written documents in this case
as “truly routine” and as “unadorned, non-customized agency documents.” Id. at 694-
95. In some of the cases before this court, plaintiffs have argued that the FHLBB’s
mere approval of a transaction demonstrated intent to contract regarding supervisory
04-5009 22
goodwill, even though there was specific evidence supporting the Government’s claim
that it did not intend to agree contractually to special goodwill treatment. See Anderson,
344 F.3d at 1355; D & N Bank, 331 F.3d at 1378. In rejecting that argument, this court
described the FHLBB documents approving the transactions as regulatory rather than
contractual; we judged that mere approval of a merger by the FHLBB, acting solely in its
regulatory capacity, did not create contractual obligations as such. Anderson, 344 F.3d
at 1355-56; D & N Bank, 331 F.3d at 1378-79.
Those cases, however, do not stand for the proposition that contractual terms
cannot be found in agency regulatory documents. As the Government itself has noted,
“[a] regulatory action rarely involves a simple affirmative or negative vote.” Appellee’s
Br. at 19. In this case, for example, the Resolution approving the Cardinal acquisition
was customized to include an extended amortization period for goodwill, a term the
parties had negotiated previously. Since standardized agency documents are the way
in which regulatory agencies typically memorialize their actions, the FHLBB can
memorialize a contractual commitment in agency documents.
Thirdly, the trial court was concerned that none of Plaintiff’s witnesses “testified
that commitments were made on behalf of the Government that the Government would
not change the policy of allowing goodwill to count as regulatory capital.” Fifth Third IV,
56 Fed. Cl. at 694. The Supreme Court held, however, that such commitments are not
required. The contracts in the Winstar, Glendale, and Statesman transactions did not
purport[] to bar the Government from changing the way in which it
regulated the thrift industry. Rather, . . . the Bank Board and the FSLIC
were contractually bound to recognize amortization periods reflected in the
agreements between the parties. . . . We read this promise as the law of
contracts has always treated promises to provide something beyond the
04-5009 23
promisor’s absolute control, that is, as a promise to insure the promisee
against loss arising from the promised condition’s nonoccurrence.
Winstar, 518 U.S. at 868-69. Thus, contractual liability does not require a promise by
the Government not to change the regulations; it only requires a promise to recognize
the extended amortization period agreed to by the parties. When the Government
changed the regulations, it could no longer make good on its promise and was therefore
in breach of the contract.
Finally, the trial court discounted the testimony of the participants due to the “rote
constancy” of Mr. Kirby’s explanation of the four deals. The “rote” character of the
testimony is due to the fact that Mr. Muldoon set the pattern for each deal: on the key
contract term, each was to be the same. How could the testimony, otherwise fully
credited by the trial court, have been otherwise than by “rote”? By testifying honestly
that each deal was exactly the same with regard to long-term amortization of regulatory
capital, the evidence was repetitive, not “rote.”
Ultimately, the trial court found the testimony of Messrs. Kirby and Muldoon and
other FHLB-Cincinnati personnel to be truthful, but, giving their testimony little weight,
concluded as a matter of legal interpretation of the transactions that no obligation
existed on the part of the Government regarding supervisory goodwill, and therefore no
breach of contract occurred. We conclude to the contrary. The totality of the evidence
and the circumstances demonstrate that the parties intended to and did create
contractual obligations which included the utilization of supervisory goodwill as an
accounting treatment for capital compliance. The subsequent events surrounding the
enactment and enforcement of FIRREA resulted in a breach of that promise. The trial
court erred in concluding otherwise.
04-5009 24
B. Actual Authority
As an alternative argument for affirmance, the Government posits that FHLB-
Cincinnati did not have authority to bind the FHLBB to a contract involving supervisory
goodwill, an issue the trial court decided against the Government on summary
judgment. See Fifth Third II, 52 Fed. Cl. at 640-43. The trial court determined that
FHLB-Cincinnati possessed implied actual authority to enter into contracts for treatment
of goodwill because such authority was “integral to fulfilling [FHLB-Cincinnati’s] role in
FHLBB’s policy to encourage the private acquisition of failing thrifts.” Fifth Third II, 52
Fed. Cl. at 643; see also H. Landau & Co. v. United States, 886 F.2d 322, 324 (Fed. Cir.
1989) (“Authority to bind the Government is generally implied when such authority is
considered to be an integral part of the duties assigned to a Government employee.”
(citation and internal quotation marks omitted)). The Government disputes the trial
court’s conclusion, arguing in effect that because some of these acquisition transactions
did not include supervisory goodwill, citing D & N Bank and Anderson, permission to
offer supervisory goodwill must have been specially required.
We agree with the trial court that by April 1982, when FHLB-Cincinnati approved
the first transaction in this case, FHLB-Cincinnati had at least implied actual authority to
bind FHLBB to promises made to Citizens regarding the use of supervisory goodwill. In
February 1982, the FHLBB delegated authority to its regional board principal
supervisory agents5 (“PSAs”) to “approve merger applications in which goodwill is
included in assets” and to allow the PSAs “to agree to certain forbearances in approving
supervisory mergers which are currently granted by the Board.” Delegation of Authority
5
A ‘Principal Supervisory Agent’ was the president of the regional Federal
Home Loan Bank in which the resulting institution in a proposed merger is a member.
04-5009 25
Regarding Merger Approvals, 47 Fed. Reg. 8152 (Feb. 25, 1982) (the “1982
delegation”). The 1982 delegation noted that the FHLBB had provided the PSAs with
Memorandum R-31b, which established guidelines for allowing the use of supervisory
goodwill and an extended amortization period. Id. The 1982 delegation further
indicated that merger applications raising significant policy issues for which the FHLBB
had not established a formal position should be referred to the FHLBB. Id. at 8153.
Like the trial court, see Fifth Third II, 52 Fed. Cl. at 642 & n.3, we read the 1982
delegation as evidence of the FHLBB’s intention not to review individual mergers
involving supervisory goodwill; the FHLBB gave the PSAs authority to follow the
established policy regarding supervisory goodwill set forth in Memorandum R-31b.
The trial court further noted that the Supreme Court’s Winstar decision
recognized that the ability to offer supervisory goodwill as an asset for regulatory capital
purposes and to allow extended amortization of goodwill was an essential tool for
encouraging acquisition of failing thrifts. Id. at 642-43 (citing Winstar, 518 U.S. at 849-
50, 863-64). Considering all of the circumstances, we agree with the trial court that the
authority to offer special treatment of goodwill as a contractual incentive was integral to
the PSAs’ ability to encourage supervisory mergers, notwithstanding the few instances
in which plaintiff institutions have been unable to prove the existence of such a
contract.6
6
The trial court interpreted the 1982 delegation as giving the PSAs express
authority to enter into certain enumerated forbearance agreements, but not goodwill
agreements. Fifth Third II, 54 Fed. Cl. at 642. Accordingly, the trial court went on to
address whether the PSAs had implied actual authority. Because we accept the trial
court’s implied authority analysis, we need not consider Plaintiff’s alternative argument
that the 1982 delegation gave the PSAs express actual authority or its theory that actual
authority was established by ratification.
04-5009 26
C. Damages
Fifth Third challenges one aspect of the trial court’s partial summary judgment on
damages—the rejection of Fifth Third’s cover damages model. See Fifth Third III, 55
Fed. Cl. at 242-44. Fifth Third presented other damages theories at trial; on remand
those claims will still be alive because the trial court denied the Government’s motion for
judgment on partial findings with respect to damages. The issue of cover damages,
however, is properly before us on appeal. The earlier order granting partial summary
judgment as to some damages claims was not an appealable judgment when entered,
but when the trial court entered final judgment after granting the Government’s Rule
52(c) motion on liability, the earlier disposition merged into the final judgment and is
reviewable. See Glaros v. H.H. Robertson Co., 797 F.2d 1564, 1573 (Fed. Cir. 1986);
15B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3914.28
(2d ed. 1992).
Plaintiff proposed its cover damages theory as an alternative to lost profits. The
lost profits theory, though not absolutely barred in Winstar-related cases as a matter of
law, has not been susceptible of proof due to its speculative nature. See Cal. Fed.
Bank v. United States, 395 F.3d 1263, 1270-73 (Fed. Cir. 2005); Glendale Fed. Bank,
FSB v. United States, 378 F.3d 1308, 1313 (Fed. Cir. 2004). Plaintiff’s cover damages
theory suffers from the same problem.
A cover damages claim measures the value of the goodwill destroyed when
enactment of FIRREA caused the Government’s breach by determining the cost of
substituting a different form of capital for the lost goodwill. Cover damages are thus a
form of expectancy damages, restoring the plaintiff to the position it would have been in
04-5009 27
but for the breach by replacing, or covering, the value of an asset taken away by the
breach.
Plaintiff’s proposed claim calculates the hypothetical cost of replacing goodwill
capital with tangible capital in the form of preferred stock. According to the model, the
replacement-of-capital cost includes transaction costs Citizens would have incurred in
issuing preferred stock, and dividends Citizens would have been required to pay to
investors who bought preferred stock.
There are two problems with Plaintiff’s particular cover damages theory. First,
Citizens was a mutual organization at the time of the breach and therefore could not
have issued preferred stock without first converting to stock form. Second, even if
Citizens had been able to issue preferred stock as set forth in Plaintiff’s model, Citizens
did not actually do so. Plaintiff’s cover damages theory is based entirely on hypothetical
costs that were never actually incurred. In that regard, this case is distinguishable from
Home Savings of America v. United States, 399 F.3d 1341, 1353-55 (Fed. Cir. 2005), in
which we affirmed the trial court’s cover damages award based on costs incurred when
the plaintiff thrift actually raised new capital to replace lost supervisory goodwill. In
contrast, Plaintiff’s cover damages claim, like lost profits claims, is highly speculative,
and we cannot fault the trial court’s decision to preclude Fifth Third from presenting its
cover damages claim at trial.
CONCLUSION
The judgment of no liability is reversed. The trial court’s rejection of Fifth Third’s
cover damages theory is affirmed. The matter is remanded to the trial court for
determination of damages, if any, to be awarded.
04-5009 28
AFFIRMED-IN-PART, REVERSED-IN-PART, and REMANDED
04-5009 29