Home Savings of America, Fsb v. United States

Error: Bad annotation destination
United States Court of Appeals for the Federal Circuit

04-5020, -5032

HOME SAVINGS OF AMERICA, FSB,
and H.F. AHMANSON & COMPANY,

Plaintiffs-Cross Appellants,

v.

UNITED STATES,

Defendant-Appellant.

Michael Carvin, Jones Day, of Washington, DC, argued for plaintiffs-cross
appellants. With on the brief was Debra L. Satinoff. Of counsel on the brief were
Steven S. Rosenthal, Jeffery A. Tomasevich, and Douglas A. Tucker, Kaye Scholer
LLP, of Washington, DC.

David M. Cohen, Director, Commercial Litigation Branch, Civil Division, United
States Department of Justice, of Washington, DC, argued for defendant-appellant. With
him on the brief was Stuart E. Schiffer, Deputy Assistant Attorney General. Of counsel
on the brief were Jeanne E. Davidson, Deputy Director, Lee M. Straus, Attorney, and
John N. Kane, Jr., Attorney.

Appealed from: United States Court of Federal Claims

Senior Judge Eric Bruggink
 United States Court of Appeals for the Federal Circuit

04-5020, -5032

HOME SAVINGS OF AMERICA, FSB,
and H.F. AHMANSON & COMPANY,

Plaintiffs-Cross Appellants,

v.

UNITED STATES,

Defendant-Appellant.

__________________________

DECIDED: March 7, 2005
__________________________

Before MICHEL, Chief Judge,∗ NEWMAN and PROST, Circuit Judges.

PROST, Circuit Judge.

Home Savings of America, FSB (“Home”) is a wholly-owned subsidiary of H.F.

Ahmanson & Co. (“Ahmanson”). Home was engaged in the savings and loan business

at the time of the transactions involved in this appeal. In these transactions, Home

purchased a number of failing thrifts between 1981 and 1985. The parties and the

United States Court of Federal Claims refer to these transactions as the

Florida/Missouri transaction, the Illinois/Texas transaction, the Century transaction, and

the Ohio transaction, and we adopt this terminology as well. In the Ohio transaction,

Home acquired one federally insured thrift, as well as several thrifts that were insured

∗
Paul R. Michel assumed the position of Chief Judge on December 25,
2004.
by the state of Ohio (the “Ohio-insured thrifts”). In the other transactions, all acquired

thrifts were federally insured.

Home and Ahmanson sued the government for breach of a contractual

agreement to accord them favorable accounting treatment with respect to all of these

acquisitions. Specifically, Home and Ahmanson claimed that the government had

promised to allow Home to count supervisory goodwill from those acquisitions toward its

federally mandated minimum level of capitalization. The government denied that it had

made a binding promise and that Ahmanson had standing to seek damages for breach

of an alleged promise made solely to Home.

The Court of Federal Claims issued three published opinions in this matter. In

the first decision, the court granted summary judgment to the plaintiffs that the

government breached its promise to count supervisory goodwill. Home Sav. of Am.,

F.S.B. v. United States, 50 Fed. Cl. 427, 439, 442 (2001) (“Home I”). At the same time,

the court also granted summary judgment to the government regarding the Ohio-insured

thrifts, reasoning that the Federal Home Loan Bank Board (“FHLBB”) did not have

statutory authority to promise that Home could count supervisory goodwill from its

purchase of the Ohio-insured thrifts. Id. at 441-42. In the second opinion, the Court of

Federal Claims denied the government’s motion for summary judgment based on

Ahmanson’s alleged lack of standing. Home Sav. of Am., F.S.B. v. United States, 51

Fed. Cl. 487, 497-500 (2002) (“Home II”). Finally, the Court of Federal Claims

conducted a bench trial on damages and awarded $134,045,000 to the plaintiffs. Home

Sav. of Am., F.S.B. v. United States, 57 Fed. Cl. 694 (2003) (“Home III”).

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 The government appeals the rulings on standing, breach, and damages. Home

and Ahmanson cross-appeal the court’s grant of summary judgment relating to the

government’s authority to promise supervisory goodwill for the Ohio-insured thrifts. We

affirm each of the directly appealed rulings. With respect to the cross-appeal, we

vacate the summary judgment and remand to the Court of Federal Claims for further

proceedings regarding the Ohio-insured thrifts.

I. BACKGROUND

A. The Savings and Loan Crisis

The series of events generally known as the “Savings and Loan Crisis” began to

unfold in the late 1970s and early 1980s. Squeezed by the dual pressures of inflation

and high interest rates, many savings and loan institutions, or thrifts, failed during that

period of time. The Federal Savings and Loan Insurance Corporation (“FSLIC”),

although legally committed to compensating depositors whose savings were lost, lacked

sufficient funds to bail out all of the failing thrifts. To mitigate FSLIC’s insurance liability,

FHLBB began to encourage healthy thrifts to take over troubled ones by offering them

special accounting treatment, according to which they would be permitted to count

supervisory goodwill1 toward meeting their reserve capital requirements. Allowing the

acquiring thrifts to count supervisory goodwill functioned as a substitute for a cash

inducement from FSLIC to acquire a failing thrift and assume its liabilities.2

1
Supervisory goodwill is the excess of the purchase price paid for a thrift
over the fair value of all identifiable assets acquired. United States v. Winstar Corp.,
518 U.S. 839, 848-49 (1996).
2
These background facts are discussed in considerably more detail in
Winstar, 518 U.S. at 844-58.

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 B. Relevant Transactions

Home acquired a total of seventeen thrifts in the four transactions at issue in this

appeal. An “Assistance Agreement” signed by FSLIC and Home accompanied each

transaction. Home I, 50 Fed. Cl. at 430-33. The Florida/Missouri and Illinois/Texas

Assistance Agreements contained clauses that integrated FHLBB resolutions and

letters issued contemporaneously with the agreements. Id. at 430-32. The Century and

Ohio Assistance Agreements also integrated specific FHLBB resolutions addressed to

the respective transactions.3 Id. at 432-33.

For each transaction, Ahmanson sought federal assistance to mitigate the

liabilities its subsidiary, Home, was assuming by taking over these thrifts. In response,

FHLBB stated in the Florida/Missouri and Illinois/Texas Resolutions that Home could

count supervisory goodwill from each transaction toward its reserve capital requirement.

Id. at 431-32. FHLBB also issued net worth deficiency forbearances

contemporaneously with the Century and Ohio transactions stating that FSLIC would

not take action against Home for failing to meet reserve capital requirements as a result

of Home’s assumption of liabilities in those transactions. Id. at 432-34. Later the

government enacted the Financial Institutions Reform, Recovery, and Enforcement Act

of 1989 (“FIRREA”), which breached various agreements by the government to allow

thrifts to count supervisory goodwill. See Winstar, 518 U.S. at 856-68.

Alleging such a breach, Home and Ahmanson brought suit in the Court of

Federal Claims. The court found the government liable with respect to all the

transactions except the acquisition of four state-insured thrifts that were included in the

3
For additional detail on these transactions, see Home I, 50 Fed. Cl. at
429-34, and Home II, 51 Fed. Cl. at 488-94.

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Ohio transaction. For those acquisitions, the Court of Federal Claims held that FHLBB

was not authorized to promise to allow Home and Ahmanson to count supervisory

goodwill because these institutions were not insured by FSLIC. In particular, the Court

of Federal Claims held, 12 U.S.C. § 1725(c)’s general authorization to make contracts

does not apply to contracts regarding supervisory goodwill because such contracts are

specifically covered under 12 U.S.C. § 1729(f). Home I, 50 Fed. Cl. at 441-42.

In ruling on the government’s motion for summary judgment on the standing

issue, the Court of Federal Claims rejected the government’s contention that Ahmanson

did not have standing to sue because it was not in privity of contract. The government

had argued that only Home was a party to the contract, and that Home did not suffer

any damages because only Ahmanson had to raise capital as a result of the breach.

The court acknowledged that only Home, and not Ahmanson, signed the Assistance

Agreements, which had a “sole benefit” clause limiting their applicability to third parties.

The court concluded, however, that in each merger the Assistance Agreement was a

part of a larger transaction to which Ahmanson was a party. It based this conclusion on

Ahmanson’s initiation of the negotiation process by seeking FHLBB approval of Home’s

acquisitions and its promise to maintain the net worth of Home above regulatory

minimums. Home II, 51 Fed. Cl. at 497-99. Thus, according to the Court of Federal

Claims, Ahmanson and the government had made a mutual agreement to support

Home in its takeover of failing thrifts. Id. at 499.

At the damages stage, the government argued that Generally Accepted

Accounting Principles (“GAAP”), requiring a shortened amortization period, applied with

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respect to the Century and Ohio transactions,4 but the Court of Federal Claims found

that FHLBB promised to allow a forty-year supervisory goodwill amortization period.

Home III, 57 Fed. Cl. at 702-06. In calculating damages, the Court of Federal Claims

awarded Ahmanson the costs of replacing the lost supervisory goodwill with cash

through various financings and retention of earnings. Id. at 709-28. However, to offset

the incidental benefit the plaintiffs derived from obtaining “tangible capital” to replace

intangible supervisory goodwill, the court discounted the damages by the rate paid on

an intermediate-term Treasury bond. Id. at 722-24. The resulting award of $80,936,000

was “grossed up” to $134,045,000 to compensate for the taxes Ahmanson’s present

parent company, Washington Mutual, would pay on the award. Id. at 730-31.

II. DISCUSSION

A. Standard Of Review

We review a trial court’s decisions on summary judgment and conclusions of law

without deference. Comtrol, Inc. v. United States, 294 F.3d 1357, 1362 (Fed. Cir.

2002); Alger v. United States, 741 F.2d 391, 393 (Fed. Cir. 1984). Summary judgment

is appropriate when “there is no genuine issue as to any material fact and . . . the

moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). We

review the court’s findings of fact under the deferential clearly erroneous standard.

Anderson v. City of Bessemer City, 470 U.S. 564, 573-76 (1985); Landmark Land Co. v.

FDIC, 256 F.3d 1365, 1373 (Fed. Cir. 2001).

Different standards of review are applicable to different aspects of a damages

award. This court has held that “the amount of a prevailing party’s damages is a finding

4
It was undisputed that a 40-year amortization period applied to the
Florida/Missouri and Illinois/Texas transactions. Home III, 57 Fed. Cl. at 702.

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of fact . . . . Thus, where the amount is fixed by the court, review is in accordance with

the clearly erroneous standard of Fed. R. Civ. P. 52(a).” SmithKline Diagnostics, Inc. v.

Helena Labs. Corp., 926 F.2d 1161, 1164 (Fed. Cir. 1991). “However, certain

subsidiary decisions underlying a damage theory are discretionary with the court . . . .

Such decisions are, of course, reviewed under the abuse of discretion standard.” Id.

It is not always easy to tell where the dividing line between these two types of

issues lies. In patent cases, the overall amount of damages and the elements of

entitlement to “lost profit” damages are factual issues subject to review for clear error.

Id. at 1164-66 & n.2. However, the “choice of an accounting method for determining

profit margin” and “the methodology for arriving at a reasonable royalty” are

discretionary. Id. at 1164. In contract cases, causation, foreseeability, and certainty are

questions of fact reviewed for clear error, as is the discount rate applied to reduce an

award of future lost profits to present value. Energy Capital Corp. v. United States, 302

F.3d 1314, 1332 (Fed. Cir. 2002). Yet, this court has also stated that “[d]amages

determinations by the Court of Federal Claims are reviewed under an abuse of

discretion standard.” Massie v. United States, 226 F.3d 1318, 1320 (Fed. Cir. 2000).

Earlier, and therefore controlling, precedent leads us not to read Massie as

creating a per se rule that abuse of discretion applies to all damages issues on appeal

from the Court of Federal Claims. See Hughes Aircraft Co. v. United States, 86 F.3d

1566, 1573 (Fed. Cir. 1996), vacated and remanded on other grounds, 520 U.S. 1183

(1997), remanded to 140 F.3d 1470, 1477 (Fed. Cir. 1998) (reviewing the Court of

Federal Claims’ eminent domain valuation and determination of a reasonable royalty for

clear error and its selection of a method to arrive at a reasonable royalty for abuse of

04-5020, -5032 7
discretion). Rather, the clear error standard governs a trial court’s findings about the

general type of damages to be awarded (e.g., lost profits), their appropriateness (e.g.,

foreseeability), and rates used to calculate them (e.g., discount rate, reasonable

royalty). The abuse of discretion standard applies to decisions about methodology for

calculating rates and amounts. See Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d 512,

517 n.8 (Fed. Cir. 1995) (characterizing a case that applied abuse of discretion to

damages in general as “not intended to overrule the distinction made in SmithKline . . .

between the clearly erroneous review of the amount of damages and abuse of

discretion review of methodology”).

As applied to the present case, we review for clear error the trial court’s

conclusions (described in more detail below) that the plaintiffs were entitled to the cost

of replacement capital, that Ahmanson reasonably mitigated damages, that the

damages were foreseeable, and that the damages would be taxed at a particular rate.

We review the court’s methodology for assessing the cost of replacement capital,

including its use of a “safe rate” of return to account for the inherent benefits of the

replacement capital, for abuse of discretion.

B. The Appealed Rulings

First, the government appeals the Court of Federal Claims’ denial of its motion

for summary judgment on standing, in which the court held that Ahmanson was in privity

of contract with the government and could therefore recover damages. Second, the

government challenges that court’s finding at trial that GAAP, as interpreted by the

Financial Accounting Standards Board (“FASB”), did not apply to the amortization of

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goodwill from the Century and Ohio transactions,5 having been superseded by the

government’s promise to Home that it could amortize the supervisory goodwill over a

forty-year period. Third, the government challenges the Court of Federal Claims’

damages model and resulting award for a variety of reasons, including the court’s

finding that Ahmanson had reasonably mitigated its damages, its award of

“hypothetical” replacement costs, its determination that the damages it awarded were

foreseeable, and the gross-up of the damages award for tax purposes.

Home cross-appeals the court’s summary judgment determination that FSLIC

and FHLBB did not have authority to promise to allow supervisory goodwill from the

Ohio-insured thrifts.

C. Analysis

We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1295(a)(3). As

discussed below, we first affirm the judgment of the Court of Federal Claims that

Ahmanson was in privity of contract and therefore had standing to sue. Second, we

affirm the court’s determination that the parties agreed to a forty-year amortization

period for supervisory goodwill, and that GAAP did not shorten this amortization period.

Third, we affirm the court’s holding that GAAP did not require Home to write off

supervisory goodwill when it sold its branches between 1993 and 1995. Fourth, we

affirm the court’s damages award. Finally, with regard to the cross-appeal, we vacate

the court’s grant of summary judgment to the government on the issue of statutory

authority to promise to count supervisory goodwill for the Ohio-insured thrifts.

5
In ruling on the issue of the applicability of GAAP to the Ohio transaction,
the Court of Federal Claims did not distinguish between the state-insured and federally
insured thrifts, but rather treated the transaction as a whole. See Home III, 57 Fed. Cl.
at 702-06.

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 1. Privity

The government asserts that the court erred in holding that Ahmanson was in

privity of contract with the government. The centerpiece of the government’s argument

is that Ahmanson was not a signatory to the Assistance Agreements. The government

points out that an express contract precludes finding an implied-in-fact contract dealing

with the same subject matter. Additionally, the government argues, the “sole benefit”

clause in the Assistance Agreements excludes Ahmanson from claiming privity. The

government rejects the view that Ahmanson’s negotiations with FHLBB, whereby

Ahmanson promised to maintain Home’s net worth to gain regulatory approval, could

demonstrate contractual intent because Ahmanson’s commitment to maintain Home’s

net worth was statutorily required. Finally, the government asserts that shareholders do

not have standing to assert Winstar claims under Glass v. United States, 258 F.3d 1349

(Fed. Cir. 2001); Cain v. United States, 350 F.3d 1304 (Fed. Cir. 2003); and FDIC

(Karnes County) v. United States, 342 F.3d 1313 (Fed. Cir. 2003).

The plaintiffs reply with a three-part argument as to why Ahmanson was in privity

of contract with the government. First, they assert, it is irrelevant whether the parent or

the subsidiary suffered the loss due to the increased cost of capital resulting from the

government’s breach of contract, because Home’s earnings were diminished when

Home was forced to use privately raised capital in place of supervisory goodwill.

Second, even though Ahmanson was not a party to the Assistance Agreements—and

here the plaintiffs point out that FHLBB was not a party to the Assistance Agreements

either—Ahmanson was a party to the contractual arrangement as a whole by way of

FHLBB’s Resolutions. The Resolutions recognized that the “offer” that led to the

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contract was Ahmanson’s application for regulatory approval of Home’s purchases;

those Resolutions required Ahmanson to maintain Home’s net worth in compliance with

applicable regulations; and the Resolutions were “unified” with the Assistance

Agreements because the integration clauses defined the “Entire Agreement” as

including not just the Assistance Agreements themselves but also the related

resolutions issued by FHLBB.

We affirm the Court of Federal Claims’ conclusion that Ahmanson was in privity

of contract with the government and could therefore recover damages as a result of the

government’s breach. The Assistance Agreements, regardless of their “sole benefit”

clause, do not preclude Ahmanson from having any contractual rights. See Winstar,

518 U.S. at 907-09; Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342, 1346 (Fed.

Cir. 2001). Although Ahmanson did not itself sign the Assistance Agreements, the

Court of Federal Claims properly focused on a set of “larger transaction[s]” involving

Ahmanson, FSLIC, FHLBB, and Home. See Home II, 51 Fed. Cl. at 497-99. In each

transaction, the Assistance Agreement is not the entire contract; the Resolutions

contain reciprocal promises that were part of the overall bargains between the plaintiffs

and the government. Ahmanson promised it would maintain Home’s net worth; in

exchange, the government promised to provide financial assistance by promising

certain accounting treatment for goodwill. As the court found, “The resolutions . . .

reflect mutual, reciprocal obligations by both Ahmanson and the United States to

support Home Savings.” Id. at 499. Ahmanson was party to the larger transactions in

which those obligations were incurred; the government’s promise therefore runs directly

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to Ahmanson. Accordingly, Ahmanson is in privity of contract and consequently has

standing to seek damages in this case.

Similarly, we are not convinced by the government’s counter-arguments. The

government’s challenge to the Court of Federal Claims’ finding of an “implied-in-fact

agreement” is correct, as far as it goes, but it focuses narrowly on the court’s solitary

slip in terminology, and not on the substance of what the court actually did. See id. at

498. Rather than finding what is technically known in the law as an implied-in-fact

agreement, the Court of Federal Claims held that Ahmanson was a party to the overall

agreement between the plaintiffs and the government. As the court recognized, the

Assistance Agreements were not the sum total of what the parties had agreed to. See

id. at 497-98. The court also recognized Ahmanson as the offeror that initiated the

negotiations that ultimately led to the agreement, Ahmanson as having promised to

maintain Home’s net worth, and Ahmanson as having “contracted with the

government[.]” Id. at 498-99. The court further found that both Ahmanson and the

government had assumed “mutual, reciprocal obligations” to support Home. Id. at 499.

This reasoning uniformly suggests that the court considered the contract at issue in this

case to be an agreement among not only Home and the government, but also

Ahmanson. To the extent the trial court’s application of the label “implied-in-fact

agreement” to the contract at issue is inconsistent with this rationale, it is harmless

error.

Moreover, the Glass, Cain, and FDIC cases, although they address the standing

of investors to assert Winstar claims, are not directly on point. In these cases, this court

denied standing to shareholders. Glass, 258 F.3d at 1355; Cain, 350 F.3d at 1310;

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FDIC, 342 F.3d at 1314. In the present case, Ahmanson was not only a shareholder,

but an essential participant as a contracting party in each of the acquisitions at issue.

Ahmanson negotiated for approval of Home’s acquisitions, and “it was Ahmanson that

FHLBB recognized as obligating itself, as part of that acquisition, to maintain Home

Savings’ net worth.” Home II, 51 Fed. Cl. at 499.

For these reasons, we uphold the trial court’s determination that Ahmanson was

in privity of contract with the government and therefore has standing to assert claims for

breach.

2. Application of GAAP Accounting Principles

The government contends that the Court of Federal Claims erred in finding that

GAAP did not control the computation of supervisory goodwill in the Century and Ohio

transactions. The Assistance Agreements for these transactions contained clauses

stating that “any computations made for purposes of the Agreement” would be governed

by GAAP. The Assistance Agreements did not otherwise address the period over which

goodwill would be amortized. Thus, the government reasons, there was no promise to

permit “extended amortization” of supervisory goodwill over forty years. The

government therefore concludes that, under our precedent, it is not bound to the

extended amortization schedule. See Anderson v. United States, 344 F.3d 1343 (Fed.

Cir. 2003); D&N Bank v. United States, 331 F.3d 1374 (Fed. Cir. 2003). The

government further asserts that its application of the initial baseline regulatory policy of

forty years did not change the contractual term requiring GAAP or suggest a

commitment to protect Home from changes in regulatory policy. (The FASB later

changed the GAAP supervisory goodwill amortization period from forty years to

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between eight and twelve years.) Moreover, the government argues, the Century and

Ohio Resolutions, like the Assistance Agreements, required Home to adhere to GAAP.

The plaintiffs argue that the government promised that the Century and Ohio

supervisory goodwill would amortize over forty years. The plaintiffs rely on the

Assistance Agreements’ lack of an indication that goodwill specifically (as opposed to

accounting generally) would be governed by GAAP, coupled with the Resolutions’

statement that goodwill and its amortization period are required to conform with

“regulatory requirements,” to support their entitlement to a forty-year amortization

period, which was FHLBB’s applicable regulatory policy when the contract was formed.

Moreover, the plaintiffs point out, the government’s Supervisory Agent did not object

when Home filed regulatory documents describing how it treated supervisory goodwill

stemming from the Century and Ohio transactions.

We affirm the conclusion of the Court of Federal Claims that the contracts

provided for a forty-year amortization period for supervisory goodwill. The Century and

Ohio Resolutions did not specify an amortization period, but they did set out the process

by which the amortization period would be determined. Home III, 57 Fed. Cl. at 704

(“Home Savings was to provide regulators with an analysis, supported by independent

auditors, [that] included the proposed amortization period for supervisory goodwill

arising from those transactions.”). The Court of Federal Claims found that Ahmanson

had provided circumstantial evidence that “such an analysis was furnished at the time

and that the schedule adopted by the bank and regulators called for 40 year

amortization.” Id. This circumstantial evidence of an agreement to amortize

supervisory goodwill over forty years included frequent thrift financial reports to

04-5020, -5032 14
regulators and routine regulatory audits, and in none of those instances did the

regulators object to Home’s use of a forty-year amortization schedule. Id. at 704-05. As

the Court of Federal Claims found, “it is unreasonable to believe that regulators would

have allowed Home Savings to amortize supervisory goodwill over a 40 year period

absent an understanding that this was the implementation of the process agreed upon

in the Century and Ohio Assistance Agreements.” Id. at 705.

These factual findings are not clearly erroneous, and we agree with the inference

that the Court of Federal Claims drew from them in the trial on damages: that the

parties had agreed to an amortization period other than the one provided by GAAP for

the supervisory goodwill amortization period for all of Home’s acquisitions at issue in

this case, including the Century and Ohio transactions. See id. at 703-05. The Court of

Federal Claims correctly concluded that the contracts provided for a forty-year

amortization period for supervisory goodwill.6

6
The present case is distinguishable from Anderson and D&N Bank, in
which this court held that the government had not manifested assent to the plaintiffs’
requests for extended amortization of goodwill. In each of those cases, there was no
document analogous to the Assistance Agreements between Home and the
government referring to the accounting treatment to be employed. In the absence of
any such memorialization of an actual agreement between the parties, we determined
that the mere issuance of FHLBB resolutions approving the mergers did not
demonstrate that the government intended to be contractually bound. See Anderson,
344 F.3d at 1353, 1356; D&N Bank, 331 F.3d at 1378, 1381. The present case, like
Winstar, presents us with not only a resolution approving the merger, but documentary
evidence of a contractual agreement, which incorporated resolutions by reference. (We
do not address here whether a resolution may be sufficient to show a contract in some
circumstances. See Anderson, 344 F.3d at 1356-57.) Having determined that the
Assistance Agreements demonstrated the parties’ intent to contract, the Court of
Federal Claims permissibly looked to other evidence to determine that contract’s terms.
See D&N Bank, 331 F.3d at 1381.

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 3. Branch Sales

The government asserts that GAAP also required Home to write off supervisory

goodwill when it sold savings and loan branches after the passage of FIRREA.

According to this argument, the Court of Federal Claims should have accounted for this

mandatory write-off in its damages award. Because the court did not do this, the

government argues that the court’s figures for supervisory goodwill that remained after

the branch sales were too high.

The plaintiffs respond that the branch sales occurred after the government’s

breach, so they are irrelevant for purposes of calculating damages. Also, the plaintiffs

contend that the Illinois/Texas and Florida/Missouri transactions were precluded from

being subjected to a write-off requirement for the additional reason that the Resolutions

covering those transactions specified a forty-year goodwill amortization period.

We affirm the Court of Federal Claims’ conclusion that Home was not required by

GAAP to write off supervisory goodwill when it sold the branches acquired in the

supervisory mergers between 1993 and 1995. As the court found, the contract, not

GAAP, controlled the amortization period for Home’s supervisory goodwill and set that

period at forty years. See Home III, 57 Fed. Cl. at 707. Thus, Home was not required

by GAAP to write off supervisory goodwill related to branch sales prematurely.

Furthermore, the Court of Federal Claims correctly determined that Home’s post-

FIRREA branch sales did not affect the damages. FIRREA had breached the

government’s promise to count supervisory goodwill in 1989—over four years before

Home started selling the branches it had acquired in the supervisory mergers in

question. Id. at 707. These sales were “[u]nrelated events and remote consequences”

04-5020, -5032 16
that are not appropriate to incorporate into damages for breach of contract. See

LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363, 1373 (Fed. Cir. 2003).

Additionally, FIRREA had already been phasing out Home’s ability to count supervisory

goodwill when it began selling the branches, and by the time Home sold the Florida and

Century branches, Home had already fully written off the supervisory goodwill from

these purchases. Thus, neither the Florida nor the Century branch sales had any effect

on Home’s recording of supervisory goodwill. See Home III, 57 Fed. Cl. at 705-06.

4. Damages

The Court of Federal Claims largely adopted the plaintiffs’ proposed model for

calculating damages. The court acknowledged that this model was “based on a critical

factual assumption, namely, that supervisory goodwill disallowed by FIRREA was

replaced by an equal amount of tangible capital.” Home III, 57 Fed. Cl. at 709. The

court calculated the damages as the difference between what it cost Ahmanson to raise

that tangible capital and the benefit Ahmanson derived from possessing that capital

instead of an equal amount of supervisory goodwill. The cost to Ahmanson was

measured by a weighted average of the rates paid on Ahmanson’s stock and debt

issuances between November 1989 and August 1994, and the rates Ahmanson’s

investors would expect on retained earnings to replace the supervisory goodwill that

would have remained after 2004, when the last of Ahmanson’s capital raisings would

have been paid off.7

The government alleges four errors in the trial court’s damages analysis.

According to the government, the court erred by not requiring the mitigation of damages

7
The complete details of the damages model are contained in the Court of
Federal Claims’ opinion. See Home III, 57 Fed. Cl. at 709-21.

04-5020, -5032 17
at least cost, by awarding hypothetical replacement costs that lacked sufficient certainty,

by determining that the damages were foreseeable, and by grossing up the award for

tax purposes.

The plaintiffs contend that the court correctly calculated damages. The loss

here, according to the plaintiffs, is the net cost of raising capital, analogous to “cover.”

The plaintiffs emphasize that the disallowance of supervisory goodwill forced them to

substitute more expensive private capital, which counted toward the regulatory capital

requirement, for government-backed deposits, which did not. On this reasoning, the

economic harm to a thrift is the difference between the “safe rate” it would have paid for

government-backed deposits and the higher rate it actually paid for private market

capital that had to be raised to replace intangible supervisory goodwill.

We discuss each of the government’s arguments in turn.

a. Mitigation

According to the government, the district court incorrectly ruled that Home was

entitled to maintain its desired margin between its actual regulatory capital and the

minimum required by the government—its “cushion”—instead of just reducing the size

of the cushion, which would have been less costly. In the alternative, the government

argues, even if Home did need to replace supervisory goodwill to keep its higher

cushion, the district court erred in using a “weighted average” of issuance costs for the

preferred stock and subordinated debt. The government contends that the replacement

cost should have been based purely on the cost of debt, which was less expensive than

stock.

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 The plaintiffs contend that Ahmanson reasonably mitigated its damages. The

plaintiffs emphasize that the law only required Ahmanson to make fair and reasonable

efforts under the circumstances, and that the government has the burden of proving that

Ahmanson’s efforts were anything other than fair and reasonable. According to the

plaintiffs, all of the evidence shows that Ahmanson needed to replace supervisory

goodwill with equity capital, especially given FIRREA’s new capital requirements. That

is, the loss could not have been avoided by operating with a lower cushion (such as the

$1 billion cushion suggested by the government in this litigation) because even reaching

that lower level would have required raising more capital than Home lost in supervisory

goodwill. Finally, the plaintiffs contend, Ahmanson was not required to raise all the

capital by issuing debt; such mitigation efforts, in the plaintiffs’ view, would have been

unreasonable, and Ahmanson reasonably issued stock from time to time in the exercise

of its business judgment.

We see no clear error in the trial court’s factual conclusion that Ahmanson

reasonably mitigated. When mitigating damages from a breach, a party “must only

make those efforts that are fair and reasonable under the circumstances.” Robinson v.

United States, 305 F.3d 1330, 1333 (Fed. Cir. 2002). Here, Ahmanson was entitled to

raise funds to replace the supervisory goodwill Home lost as a result of the

government’s breach. The duty of reasonable mitigation did not require Ahmanson

simply to operate Home with a smaller capital cushion. As a conservatively run thrift,

Home relied on a substantial cushion, and this prudence both appealed to Ahmanson’s

investors and helped Home gain regulatory approval to acquire failing thrifts. Home III,

57 Fed. Cl. at 727. Home was not required to abandon this successful business

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strategy merely to reduce the government’s exposure. Rather, Ahmanson was entitled

to cover the loss of supervisory goodwill by private capital financing in order to maintain

its conservative approach. Moreover, contrary to the government’s second argument,

Ahmanson did not have to raise all of the replacement capital by issuing short-term

debt, which was the cheapest form of financing. Ahmanson’s strategy of raising capital

through various types of financing was a commercially reasonable effort to maintain its

debt-to-equity ratio, and fair and reasonable efforts to mitigate are all that the law

requires. Accordingly, the Court of Federal Claims justifiably used a weighted average

of Ahmanson’s various types of financing to calculate the replacement cost Ahmanson

incurred.

b. Replacement Costs

The government next argues that the Court of Federal Claims erred in awarding

hypothetical replacement costs. The government insists that economic principles prove

that capital has no cost other than transaction costs because raising capital represents

a zero-sum exchange. Pursuant to these principles, Ahmanson got what it paid for,

namely, the right to use capital temporarily, so the fair price it paid for that capital did not

represent a harm to Ahmanson. Further, because Ahmanson raised capital for a variety

of reasons and did not specify which portion of the capital it raised to replace

supervisory goodwill, the government contends that there was no way of determining

the actual cost of the capital that replaced the lost supervisory goodwill. Finally,

according to the government, although the court recognized a tangential benefit from

the replacement of supervisory goodwill with cash, the way in which the court did so—

deducting the safe rate of return on this cash from the cost of raising the capital—fails to

04-5020, -5032 20
reflect the full range of benefits Home received from its possession of tangible capital.

In the government’s view, using a “safe rate” of return as a proxy for the benefits of

tangible capital is unfounded and speculative.

The plaintiffs argue that the replacement cost damages “reflect the precise

economic benefit” of the supervisory goodwill lost due to the government’s breach.

According to the plaintiffs, although Ahmanson’s private capital raisings were fair deals

insofar as Ahmanson received something of equal value to what it gave up, that fact is

irrelevant because Ahmanson was harmed by having to seek such deals in the first

place; all such financings required the company to pay a higher rate for funds than it

could have obtained from depositors had it been allowed to rely on supervisory goodwill.

In addition, the plaintiffs argue, the government’s assertion that Home received an

additional risk-reduction benefit rests on false premises: Home was no “safer” a thrift for

depositors merely because it had additional tangible capital, because its customers’

deposits were already guaranteed by the government.

We see no abuse of discretion in the trial court’s methodology for calculating the

cost of replacement capital. The court correctly discounted the argument made by the

government’s expert that capital has no cost other than transaction costs, as this court

had already rejected the same argument. See LaSalle Talman, 317 F.3d at 1374-75.

Instead, the Court of Federal Claims properly noted that capital is not costless; its cost

is the required rate of return on various terms of financing. See id. at 1375.

Consequently, we hold that the court did not abuse its discretion in setting up its model.

To account for the inherent benefits of cash over intangible capital, the trial court

also correctly discounted the award by the “safe rate” of return Ahmanson could earn by

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investing that cash. A plaintiff’s damages in a “cover” situation are discounted by

“expenses saved as a result of [defendant’s] breach.” 14 Williston on Contracts § 40:34

(4th ed. 2000). The plaintiffs were able to save expenses as a result of the

government’s breach because the cash Ahmanson raised was more valuable than an

equal amount of supervisory goodwill. Supervisory goodwill is an intangible asset that

cannot by itself fund loans. Supervisory goodwill merely provides a thrift with

“leverage,” or legal permission to obtain additional deposits, whereas cash is “tangible

capital” that can both provide leverage and fund loans. Thus, the cash Ahmanson

raised not only contributed to Home’s regulatory capital, it substituted for cash that

Home would otherwise have had to raise through deposits. Home and Ahmanson

reaped an incidental benefit from this cash equal to the cost of the deposits they no

longer had to obtain. Because deposits were guaranteed by the government, the court

estimated their cost using the rate paid for a comparable government-backed asset, the

intermediate-term Treasury bond. We agree with the Court of Federal Claims that this

safe rate offset “account[s] for the difference between what was lost and what was

substituted.” Home III, 57 Fed. Cl. at 23. The court’s approach to calculating the

04-5020, -5032 22
benefits of cash was therefore within the court’s sound discretion.8

Contrary to the government’s assertion, Ahmanson did not obtain a greater

incidental benefit than the one approximated by the safe rate of return. The rate it paid

for deposits would not have been changed by the increased tangible capitalization of

Home, because deposits were insured by the government and therefore did not become

safer simply because Home possessed more tangible capital.

c. Foreseeability

Third, the government argues that the Court of Federal Claims erred in

determining that the damages it awarded were foreseeable. Given Home’s large capital

cushion, the government contends that it was unforeseeable that Ahmanson would

incur expenses to replace the lost supervisory goodwill, particularly at a cost of $81

million, when it could simply have operated Home with a smaller capital cushion. The

government further claims that the size of the award and the piecemeal nature of

Ahmanson’s efforts to raise replacement capital were unforeseeable.

The plaintiffs deny the government’s contention that the damages were

unforeseeable, suggesting that raising replacement capital on a commercially

reasonable basis was a more foreseeable consequence than essentially waiving the

8
The government argues that this court has deemed the notion that
“leverage creates wealth” a “fallacy.” Cal. Fed. Bank v. United States, Nos. 03-5070,
03-5082, 2005 WL 95171 at *6 (Fed. Cir. Jan. 19, 2005). The court was merely quoting
the government’s expert witness in that case. But, even assuming this quotation
accurately represents the court’s holding, it does not control the present case because
the bank in California Federal merely failed to prove that its alleged lost profits were
caused by the government’s breach of a supervisory goodwill promise. Id. at *6-8.
Thus, although California Federal may be read as holding that a bank is not certain to
make profits from supervisory goodwill, and therefore that leverage does not “create[]
wealth” in that sense, the case does not stand for the proposition that goodwill has no
value. Here, the plaintiffs do not seek profits they believe they would have made from
leverage; they seek the cost of replacing goodwill with tangible capital.

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breach by operating with a reduced capital cushion or cutting back on loans, as the

government proposes they should have done.

The Court of Federal Claims did not clearly err by finding that the damages

claimed by Home were foreseeable. Supervisory goodwill functioned at the time of the

acquisitions as an inducement for Home to take over ailing thrifts. To take on the

assets of the thrifts it acquired, Home would have had to raise additional regulatory

capital if it had not had the opportunity to rely on supervisory goodwill. Consequently,

as the Court of Federal Claims found, the regulators undoubtedly would have

understood when they promised to allow supervisory goodwill that taking away this

inducement would cause Home to “re-evaluate [its] capital ratio[]” and “take on

replacement capital.” Home III, 57 Fed. Cl. at 726. As the government’s regulators

were aware of Home’s practice of maintaining a conservative capitalization ratio, the

government in this case should have expected Home to seek to restore that ratio after

the passage of FIRREA. See id. at 727.

d. Tax Gross-up

Fourth, the government challenges the trial court’s action in grossing up the

damages award to account for taxes. According to the government, Ahmanson is

unlikely to pay taxes on this award given its ability to draw on tax planning resources.

Moreover, the government says, future tax rates are unknown, so adjusting damages

based on projected rates of taxation is speculative.

The plaintiffs defend the tax adjustment to the award. Because the damages

must reflect after-tax harm, the plaintiffs say, Ahmanson would not be made whole

without a tax gross-up. The plaintiffs also characterize uncertainty over future tax rates

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as minor and argue that such concerns should not preclude recovery because the

burden of imprecision falls on the breaching party, the government.

The Court Federal of Claims properly adjusted the damages award to reflect tax

consequences. The parties cite no Federal Circuit authority that deals specifically with

this issue, and we have found none. We adopt the rule of other courts that a tax gross-

up is appropriate when a taxable award compensates a plaintiff for lost monies that

would not have been taxable. See Oddi v. Ayco Corp., 947 F.2d 257, 267 (7th Cir.

1991); First Nationwide Bank v. United States, 56 Fed. Cl. 438, 449 (2003); see also

LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 64, 110 (1999), aff’d in part

and vacated in part, 317 F.3d 1363 (Fed. Cir. 2003) (acknowledging the possibility of

adjusting an award for tax purposes but finding plaintiff’s tax figures too speculative on

the particular facts of the case). The Court of Federal Claims found that Ahmanson’s

award compensated it for lost monies that would not have been taxable. The court

further determined that the award would be taxed as gross income of Washington

Mutual, the current parent company of Home and Ahmanson. Home III, 57 Fed. Cl. at

730-31. These conclusions are not clearly erroneous. In view of the expert testimony

offered at trial, the court also did not clearly err in determining the rate at which

Washington Mutual would pay taxes on the award. See id. at 730-31. We therefore

affirm the court’s tax gross-up of the award.

5. Cross-Appeal—Authority to Enter into Contracts

The plaintiffs contest the Court of Federal Claims’ holding that the contracts

involving the four Ohio-insured thrifts were invalid because FSLIC and FHLBB had no

authority to allow supervisory goodwill with respect to acquisitions of state-insured

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thrifts. According to the plaintiffs, the Court of Federal Claims misconstrued the reach

of 12 U.S.C. § 1729(f) by concluding that it limited the government’s general § 1725(c)

authority to promise to allow supervisory goodwill. The plaintiffs assert that the result

reached in the present case by the Court of Federal Claims is inconsistent with the

Supreme Court’s decision in Winstar, because the Winstar Court upheld supervisory

goodwill promises to acquiring institutions uninsured by the federal government, even

though § 1729(f)(2) only grants such authority for the merger of one insured institution

with another. See Winstar, 518 U.S. at 890-91 (citing § 1729(f)(2)); Winstar v. United

States, 64 F.3d 1531, 1537-38 (Fed. Cir. 1995) (describing the acquiring institutions).

The Supreme Court did so, the plaintiffs say, because the grant of a specific regulatory

power does not limit a general grant of authority.

The government advocates for affirmance on this issue by contending that

FHLBB did not have authority to promise supervisory goodwill for Home’s acquisition of

four Ohio-insured thrifts. In the government’s view, 12 U.S.C. § 1729(f) precluded

FHLBB’s contracting authority with respect to those thrifts that were not federally

insured. The government maintains that the Winstar Court relied on both § 1725(c) and

§ 1729(f) to find a contract for supervisory goodwill for the acquisition of federally

insured institutions, and that reasoning is inapplicable to Home because not all the

thrifts Home acquired were federally insured. This is so, the government asserts,

because the Supreme Court relied not on § 1729(f)(2), but on § 1729(f)(3), which

authorized FSLIC to provide acquirers “with such financial assistance as it could provide

an insured institution” where they were “acquiring the assets of an insured institution.”

The government contends that Home’s position would impermissibly use a general

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statute to control or limit a specific one, because § 1729(f)(3) only enables the

government to promise assistance to acquirers of federally insured thrifts.

We vacate the Court of Federal Claims’ summary judgment ruling that disallowed

Ahmanson’s claim for damages related to the four Ohio-insured thrifts. FSLIC and

FHLBB did have authority to promise supervisory goodwill with respect to these

acquisitions. The statutory grants of authority—one general and one specific—overlap

rather than conflict, and here FSLIC and FHLBB had the authority to enter into these

contractual arrangements under the general provision, § 1725(c). The specific grant of

authority in § 1729(f) does not implicitly limit § 1725(c)’s general grant of authority.

Accordingly, both can and should be given effect. Morton v. Mancari, 417 U.S. 535, 551

(1974). To do otherwise would essentially nullify the grant of general authority in

§ 1725(c). That general provision was enacted prior to § 1729(f)(2), and there is no

indication that Congress intended to nullify it by passing § 1729(f)(2). See id. at 549-51.

Additionally, the Supreme Court necessarily relied on the general grant of

authority under § 1725(c) as authorization for two of the three transactions in Winstar.

See 518 U.S. at 890. These transactions were not otherwise authorized under

§ 1729(f)(2) because that provision applies only when both parties to a merger are

federally insured institutions. See 12 U.S.C. § 1729(f)(2) (repealed 1989) (authorizing

the government to guarantee one “insured institution against loss by reason of its

merging or consolidating with or assuming the liabilities and purchasing the assets of

[another] insured institution” (emphases added)). The government’s argument that the

Supreme Court was actually relying on § 1729(f)(3) is unpersuasive, because the Court

directly quoted §1729(f)(2), not § 1729(f)(3), in holding that FSLIC was authorized to

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allow supervisory goodwill. See Winstar, 518 U.S. at 890-91. In fact, the Court did not

cite § 1729(f)(3) even once in Winstar. Thus, Winstar unequivocally demonstrates that

transactions authorized by § 1725(c) need not also be authorized under § 1729(f)(2).

The Court of Federal Claims found that the government made a promise to allow

supervisory goodwill with respect to the entire Ohio transaction, even though it held the

promise was not binding with respect to the state-insured thrifts because the

government lacked authority to make that promise. Home I, 50 Fed. Cl. at 440-41. We

have rejected that basis for finding the promise non-binding. However, the government

also argued that the agreement over the Ohio-insured thrifts was not binding due to lack

of consideration, and the court did not address this argument. Id. at 441. Therefore,

the issue of whether there is a binding promise regarding the Ohio-insured thrifts

remains pending. We remand the matter to the Court of Federal Claims for further

proceedings to determine liability and, if applicable, damages related to the Ohio-

insured thrifts.

III. CONCLUSION

For the reasons stated above, we affirm the Court of Federal Claims’ decisions

on privity, liability with respect to the federally insured thrifts, and damages, and we

vacate its ruling on liability with respect to the Ohio-insured thrifts. The case is

remanded for further proceedings consistent with this opinion.

No costs.

AFFIRMED-IN-PART, VACATED-IN-PART, AND REMANDED

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