Error: Bad annotation destination
United States Court of Appeals for the Federal Circuit
03-5131,-5145
WESTFED HOLDINGS, INC.,
Plaintiff-Cross Appellant,
v.
UNITED STATES,
Defendant-Appellant.
Rowan D. Wilson, Cravath, Swaine & Moore LLP, of New York, New York,
argued for plaintiff-cross appellant. With him on the brief was Thomas G. Rafferty.
Jeanne E. Davidson, Deputy Director, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for
defendant-appellant. With her on the brief were Stuart E. Schiffer, Deputy Assistant
Attorney General; David M. Cohen, Director; and Ashley N. Bailey, Jane M.E. Peterson,
Delisa M. Sanchez, Edward P. Sullivan, and Tonia J. Tornatore, Trial Attorneys. Of
counsel was Maureen A. Delaney.
Appealed from: United States Court of Federal Claims
Judge Emily C. Hewitt
United States Court of Appeals for the Federal Circuit
03-5131, -5145
WESTFED HOLDINGS, INC.,
Plaintiff-Cross Appellant,
v.
UNITED STATES,
Defendant-Appellant.
__________________________
DECIDED: May 12, 2005
__________________________
Before RADER, GAJARSA, and PROST, Circuit Judges.
PROST, Circuit Judge.
This appeal is another in a series of Winstar-related cases. Westfed Holdings,
Inc. (“Westfed”) commenced a lawsuit on its behalf and derivatively on behalf of the
insolvent thrift, Western Federal Savings and Loan Association (“New Western” or
“Western”), alleging that the federal government’s passage and imposition of the
Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) breached the
government’s agreement to forbear from imposing certain regulatory capital
maintenance requirements on the thrift. Following a bench trial, the Court of Federal
Claims determined that the government breached its contract and that Westfed is
entitled to approximately $305 million in reliance damages. The government appeals
both of the trial court’s determinations. Westfed cross-appeals the trial court’s decision
to reject its claim for unpaid obligations allegedly owed to holders of debentures and
preferred shares, now amounting to over $800 million. For the reasons set forth below,
we affirm-in-part and reverse-in-part.
I. BACKGROUND
Two prior Court of Federal Claims decisions in this case discuss at length the
facts of this case. Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544 (2003)
(“Westfed II”); Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002)
(”Westfed I”). We set forth here only the essential facts necessary to understand this
case.
Westfed is a thrift holding company. In 1985, the Federal Savings and Loan
Insurance Corporation (“FSLIC”) seized Bell Federal Savings & Loan (“Bell”), a failing
savings and loan institution, and placed its assets into receivership. Id. at 139.
Subsequently, in 1985 and 1986, the FSLIC solicited offers to purchase the assets and
liabilities of Bell. Id. Each time, the FSLIC rejected the submitted offers. Id. When the
FSLIC again solicited offers in 1987, Bell Holdings, an affiliate organized by Westfed for
the purpose of acquiring Bell, submitted a proposal to convert Bell from a mutual
company to a stock company and to merge Bell with Western Federal Savings & Loan
(“Old Western”). Id. At the time of this proposal, Westfed had a pending bid to acquire
Old Western, id., which was subject to regulatory approval. In 1988, the Federal Home
Loan Bank Board (“FHLBB”) approved the proposal to convert Bell from mutual to stock
form and to have Westfed acquire and merge Bell with Old Western. Id. The merged
entity was to be called New Western. In a letter dated September 21, 1988 (“the
Forbearance Letter”), the FHLBB informed Westfed that it would not enforce the
03-5131, -5145 2
regulatory capital requirements of 12 C.F.R. § 563.13 as long as New Western met the
net worth requirement set out in the Regulatory Capital Maintenance Agreement
(“RCMA”), an agreement that the parties executed two days later on September 21. Id.
at 40. In the RCMA, Westfed and New Western, among other things, agreed to
maintain New Western’s net worth at the greater of $110 million or 2% of New
Western’s liabilities for five years after the execution of the RCMA. Id. at 140. In
addition to executing the RCMA, the FSLIC, Westfed, and New Western executed an
Assistance Agreement, in which the FSLIC agreed to contribute to New Western an
amount equal to the capital shortfall of Bell. Id. at 139-40.
After its creation in 1988, New Western began implementing a business plan that
called for aggressive growth over the next five years. Westfed II, 55 Fed. Cl. at 554. By
the end of 1989, New Western just fell short of reaching the target asset size of $4.831
billion. Id. Moreover, New Western produced earnings of $28.96 million and paid
dividends of $5.552 million in the first half of 1989. Id. On August 9, 1989, Congress
enacted FIRREA, which abolished FHLBB and the FSLIC, and transferred their
regulatory functions to the Office of Thrift Supervision (“OTS”). Nine days later, on
August 18, 1989, OTS denied New Western permission to pay further dividends
because it was found to be out of compliance with the capital requirements of FIRREA.
Id. Despite the modifications to the capital requirements in the RCMA, OTS required
New Western to file a capital restoration plan to meet the new capital maintenance
requirement imposed by FIRREA. Id. By December 1992, OTS informed New Western
that it was still undercapitalized, and imposed additional restrictions on capital
distributions New Western could make until it complied with FIRREA. Id. In March
03-5131, -5145 3
1993, OTS informed New Western that it was “significantly undercapitalized” and that it
intended to impose further restrictions on New Western’s operations. Id. Finally, on
June 3, 1993, OTS seized New Western and placed it into receivership. Id. Throughout
the period after the parties executed the Assistance Agreement, the government met its
obligation to provide assistance payments to New Western, which totaled at least $780
million by the time OTS placed New Western into receivership.
Westfed brought suit against the government for breach of contract. After a
fourteen-day trial, the Court of Federal Claims awarded Westfed reliance damages in
the amount of about $305 million, but denied Westfed’s request for alleged damages
related to unpaid obligations to holders of Westfed’s debentures and preferred shares,
then exceeding $800 million. The government timely appeals the awarded reliance
damages, while Westfed timely appeals the denial by the court to award money for the
unpaid obligations. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).
II. STANDARD OF REVIEW
We review interpretations of contracts by the Court of Federal Claims de novo
and its findings of fact for clear error. E.I. Du Pont de Nemours and Co. v. United
States, 365 F.3d 1367, 1372 (Fed. Cir. 2004). “A finding is ‘clearly erroneous’ when
although there is evidence to support it, the reviewing court on the entire evidence is left
with the definite and firm conviction that a mistake has been committed.” United States
v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).
III. DISCUSSION
The government argues that the trial court erred because (1) Westfed assumed
the risk of a change in the law; (2) Westfed waived the breach by continuing to accept
03-5131, -5145 4
assistance from the government; (3) the trial court adopted the incorrect causation
standard for reliance damages and, moreover, applied the adopted standard incorrectly;
and lastly, (4) the trial court failed to deduct from Westfed’s gross damages claim the
financial benefits reaped from the government’s performance. In Westfed’s cross-
appeal, it contends that the trial court incorrectly held that Westfed may recover only
“amounts actually expended,” which the court used as the basis to deny Westfed’s
claim for debts arising from the securities it issued allegedly to make the acquisition and
merger of Old Western and Bell possible. We address each argument in turn.
A. Assumption of the Risk
The government argues that terms of the Forbearance Letter, which was
integrated into the contract, indicate that Westfed assumed the risk of regulatory change
to the capital maintenance requirement. The trial court interpreted the language found
in paragraph 1 of the Forbearance Letter to mean that the government “unconditionally
promised to take no action pursuant to § 563.13 of the Insurance Regulations so long
as New Western maintained a net worth of approximately $95 million calculated in
accordance with GAAP.” Westfed I, 52 Fed. Cl. at 147. Paragraph 1 is set forth below:
The FSLIC will forbear from taking action pursuant to Section 563.13 of
the Rules and Regulations for Insurance of Accounts (“Insurance
Regulations”) for any failure by New Western to comply with its regulatory
capital requirement provided for in Section 563.13 as long as New
Western satisfies either (1) the regulatory capital maintenance
requirement or (2) the net worth maintenance requirement set forth in
Section 2 of the Regulatory Capital Maintenance Agreement (either of
which may be referred to herein as the “Modified Capital Requirement.”
The government argues that paragraph 8 of the Forbearance Letter, as set forth below,
limited the bargained-for forbearance in paragraph 1:
03-5131, -5145 5
So long as New Western is in compliance with its Modified Capital
Requirement [“MCR”] it will be deemed in compliance with any form of
minimum capital test or calculation to which it is or becomes subject
pursuant to the Insurance Regulations, to the extent, in the opinion of the
[Principal Supervisory Agent (“PSA”)], not inconsistent [sic] with the
purposes of any such regulation.
The trial court interpreted paragraph 8 to mean that “Westfed received the additional
benefit of being deemed in compliance with any form of minimum capital test or
calculation ‘to the extent, in the opinion of the Board . . . [it is] not inconsistant [sic] with
the purposes of the regulation in question.’” Id.
The government contends the trial court wrongly held “that, in paragraph 1, the
parties implicitly addressed regulations which succeeded section 563.13(b).” In other
words, according to the government, paragraph 1 “does not encompass the future.”
Unlike paragraph 1, the government asserts that paragraph 8 addresses both the
present regulation and the effect of future regulations. Furthermore, paragraph 8
allegedly demonstrates that the regulators retained discretion to determine whether
New Western’s compliance with the MCR is inconsistent with any insurance regulations.
We agree with the trial court that a plain reading of paragraph 8 shows that it
protects New Western “from adverse consequences beyond the compass of Section
563.13 of the Insurance Regulations.” Id. While paragraph 1 unconditionally exempts
New Western from the consequences of § 563.13 should it fail to meet the capital
requirement provided under that section, the paragraph does not forebear regulators
from taking other actions should it be deemed out of compliance with any other
provision of the Insurance Regulations. As the trial court correctly observed, if
paragraph 1 were subject to the same discretionary proviso as paragraph 8 (“subject
pursuant to the Insurance Regulations, to the extent, in the opinion of the [PSA]”),
03-5131, -5145 6
paragraph 1 would have added nothing to the agreement. It is of course firmly
established as a general rule of contract interpretation that the “interpretation that gives
a reasonable meaning to all parts of the contract will be preferred to one that leaves
portions of the contract meaningless.” United States v. Johnson Controls, Inc., 713
F.2d 1541, 1555 (Fed. Cir. 1983).
Despite this general rule of contract interpretation, which appears to militate that
we affirm the trial court’s interpretation of paragraphs 1 and 8, the government argues
that such an interpretation conflicts with other provisions of the contract. See id. (“nor
should any provision be construed as being in conflict with another unless no other
reasonable interpretation is possible”). Specifically, according to the government, the
trial court’s interpretation conflicts with (1) the language in the Assistance Agreement,
which acknowledges the possibility that New Western could be placed in receivership if
required for safety and soundness reasons, and (2) the language in the RCMA, which
established that the rights reserved to the regulators by the RCMA “shall be in addition
to the all rights, powers, and remedies given by applicable statute or rule of law.” We
disagree that there is a conflict. As the government acknowledged earlier before the
trial court, New Western was placed in receivership not because of insufficient capital
under § 563.13, but rather because it was found “unsafe and unsound.” The regulators’
seizure and placement of New Western in receivership under the Assistance Agreement
is not barred by paragraph 1. Moreover, the seizure is fully consistent with the trial
court’s construction of paragraph 8, which expands, with qualifications, the
circumstances under which New Western may be deemed in compliance with the
capital requirements that are imposed by any other provision of the Insurance
03-5131, -5145 7
Regulations. As for the second ground raised to challenge the trial court’s
interpretation, it speaks to the rights reserved by the regulators by the contract terms
and those given by any applicable statute or rule of law. As construed above, the
regulators contractually promised to forebear action under § 563.13 should New
Western fail to meet the capital requirement of that section. While it is true that the
government cannot be contractually bound from exercising a sovereign power, if the
government, through its regulators, exercises that power and breaches a particular
contractual obligation, the injured party will have redress for the breach. Centex Corp.
v. United States, 395 F.3d 1283, 1309 (Fed. Cir. 2005). The government does not cite
any applicable statute or rule of law that bars redress for its breach. We are
unpersuaded by the government that the trial court’s interpretation creates a conflict
with any other provision of the contract that would preclude us from affirming the trial
court and that would compel us to conclude that Westfed assumed the risk of a change
in the law.
B. Waiver of Breach
Next, the government contends that Westfed waived its right to bring a claim for
the government’s material breach of their contract by accepting hundreds of millions of
dollars from the government. The trial court found that Westfed had reserved its rights
to bring a claim for the breach despite its alleged continued acceptance of the
government’s payments. Westfed I, 52 Fed. Cl. at 158. The government responds that
only New Western, but not its holding company, Westfed, preserved its legal rights, and
the trial court erred by assuming that having substantially identical interests between the
holding company and the held corporation suffices to preserve the holding company’s
03-5131, -5145 8
right to claim breach of contract. In support of its position, the government notes that:
(1) when New Western failed, Westfed hid behind the corporate form to shield itself
from New Western’s liabilities; and (2) the trial court’s holding allegedly conflicts with
rulings it made during trial, in which it found that there was no showing that Westfed had
ever authorized New Western to speak on its behalf. Westfed II, 55 Fed. Cl. at 564.
A party to a contract may waive the breach of an agreement by the continued
acceptance of performance by the breaching party without reservation of rights. Ling-
Temco-Vought, Inc. v. United States, 474 F.2d 630, 637-38 (Ct. Cl. 1973). Waiver is an
affirmative defense, as to which the breaching party bears the burden of proof. See
Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1299 (Fed. Cir. 2002). When
the government knows of the non-breaching party’s timely reservation of rights in
protest to the breach, the acceptance of payments from the government does not waive
the party’s rights arising from the breach. N. Helex Co. v. United States, 455 F.2d 546,
555 (Ct. Cl. 1972). The reservation of rights may be express or implied. Id.
The government takes issue with the trial court’s conclusion that New Western’s
reservation of rights sufficed to preserve Westfed’s rights to remedies from the
government’s breach, particularly when the trial court found that no agency relationship
existed to allow attributing New Western’s statements to Westfed as party-opponent
admissions under Federal Rules of Evidence (“FRE”) 801(d)(2)(D). See Westfed II, 55
Fed. Cl. at 564. The court noted that FRE 801(d)(2)(D) “expressly provides that the
statement be made by the ‘party’s agent.’” Id. Because it found insufficient evidence to
conclude that Westfed established an agency relationship with New Western, it declined
to attribute statements by New Western to Westfed. Id. Nevertheless, in view of the
03-5131, -5145 9
substantial identity of legal interest between New Western and Westfed, the trial court
found that New Western’s repeated statements of its intent to preserve its rights and
remedies negated any inference of waiver by Westfed. Westfed I, 52 Fed. Cl. at 159
n.21.
As the party claiming waiver, the government bears the burden of proof to show
by a preponderance of evidence that Westfed waived its rights to assert its breach of
contract claim. The government does not dispute that it never received an express
statement of intent to waive the breach. Rather, it contends that we should find that
Westfed impliedly expressed an intent to waive the breach from its acceptance of the
government’s monetary assistance. Implied waiver may be inferred by conduct or
actions that mislead the breaching party into reasonably believing that the rights to a
claim arising from the breach was waived. See N. Helex, 455 F.2d at 551 (“As a
general proposition, one side cannot continue after a material breach by the other, . . .
act as if the contract remains fully in force . . . , run up damages, and then go suddenly
to court.”). Although in some instances, silence by the non-breaching party in response
to the breaching party’s conduct might be evidence of a waiver, Ling-Temco-Vought,
475 F.2d at 637, we find Westfed’s alleged failure to object does not amount to
evidence of a waiver in view of the non-waiver clauses at section 22 of the Assistance
Agreement and section 11 of the RCMA. Coast Fed. Bank, FSB v. United States, 48
Fed. Cl. 402, 417-18 (2000).
Like the non-waiver clause in Coastal Federal, id. at 417, section 22 of the
Assistance Agreement provides that “[n]o forbearance, failure, or delay by any party in
exercising or partially exercising . . . right [given by the Agreement], power, or remedy
03-5131, -5145 10
shall operate as a waiver thereof or preclude its further exercise.” Similarly, section 11
of the RCMA contains language that is virtually identical to the non-waiver clause in
Coastal Federal. Id. The government cites no controlling federal contract law to
demonstrate that a non-waiver clause in a Winstar-related case is unenforceable.
According to the choice of law provision in the contract, “[t]o the extent that Federal law
does not control, [the Assistance Agreement and RCMA] and the parties’ rights and
obligations under it shall be governed by the law of the state of California.” Again, the
government cites no laws or cases from the state of California that preclude application
of the non-waiver clause. We find no persuasive reason supplied by the government to
justify ignoring the terms of the parties’ contract, so as to find Westfed’s alleged failure
to object to the government’s breach to be a waiver of its right to assert a claim.
Moreover, the government cites no other record evidence from which we might
otherwise infer that Westfed intended in fact to waive the government’s breach.1 We
agree with the trial court that the government has failed to meet its burden to support its
affirmative defense that Westfed waived its right to assert its claim.
C. Causation and Foreseeability
1. Causation
1
Although the government feigns ignorance of Westfed’s reservation of
rights, multiple witnesses at trial provided uncontroverted testimony that Westfed had in
fact made known to federal regulators its dispute in regard to whether it was subject to
the capital requirement imposed by FIRREA. Although the government dismisses the
testimony as self-serving, it cites no evidence or testimony to rebut Westfed’s
witnesses.
03-5131, -5145 11
The government contends that to recover the cost of acquiring Old Western,
Westfed must show it incurred the cost solely in order to perform the contract. The
government asserts that the trial court applied the wrong legal standard, and contends
that had it properly applied the “but-for” standard of causation, it would have held that
Westfed failed to meet its burden to show that it is entitled to reliance damages. White
River Levee District v. McWilliams Dredging Co., 40 F.2d 873 (8th Cir. 1930) and J. D.
Hedin Const. Co. v. United States, 456 F.2d 1315 (Ct. Cl. 1972) are the only authorities
the government cites to support its view that the costs incurred must be solely for
performing the contract. White River is not controlling, much less applicable to the facts
of our case here. The United States Court of Appeals for the Eighth Circuit in White
River denied the contractor’s claim for costs associated with building a new boat to
perform dredging under the contract. 40 F.2d at 877-78. The court first acknowledged
that recoverable “expenditures . . . must not be extravagant, and unnecessary for the
purpose of carrying out the contract.” In White River, nothing in the contract required
the plaintiff to build the new boat. Indeed, the old boat that began the work was the only
one that ever did any excavation. Id. at 877. The court observed that there was
substantial evidence indicating that the new boat was built for purposes other than to
just perform the contract. Id. In particular, the hull was made stronger than ordinary
hulls. Id. at 878. According to the court, “the only effect, if any, which this work had on
the building of this new hull was to make it more expensive.” Id. Evidently, the court
found the added expense for the stronger hull unnecessary to complete the work under
the contract. Assuming the old boat did need a new hull, the court found no showing as
to what amount, if any, was expended over and above what would have been paid to
03-5131, -5145 12
replace the hull with one of ordinary strength, and thus, the court declined to award any
costs associated with the new boat. Id.
The facts of White River are distinguishable from the instant case. In Paragraph
A of the Recitals to the Assistance Agreement, it required, among other things, that DP
Holdings (the predecessor to Westfed) merge Bell with Old Western. DP Holdings
would have needed, among other things, to acquire Old Western to consummate this
transaction. In the government’s view, “nothing in the assistance agreement logically
leads to the conclusion that the parties intended the recitals to be incorporated as
obligations under the contract.” The government’s view is meritless. The Assistance
Agreement is replete with references incorporating the obligations arising from the
transactions described in the Recitals. The Agreement states, for instance, that the
“obligations of the parties are subject to the Transaction becoming effective no later
than October 1, 1988.” The contract clearly defines “Transaction” to encompass “the
consummation of all of the transactions set forth . . . in Paragraph A of the Recitals” and
all transactions related thereto. Moreover, the parties explicitly agreed in the Assistance
Agreement that the FSLIC’s obligations would be conditioned on the acquisition and
merger of Bell with Old Western “in the manner set forth . . . in Paragraph A of the
Recitals of this Agreement.” The government cannot claim, unlike White River, that the
cost incurred by the non-breaching party, at least in regard to purchasing Old Western,
was gratuitous.2
2
Although the government notes that Westfed originally had intentions to
acquire Old Western on a stand-alone basis, the facts, as found by the trial court,
indicate that the approval required to undertake the acquisition would likely have not
been given had Westfed not agreed to also acquire and merge Bell with Old Western in
accordance with the Assistance Agreement. See infra. We find no persuasive basis to
03-5131, -5145 13
In regard to J. D. Hedin, the Court of Claims held, in view of the numerous other
obligations assumed by the plaintiff, that it could not conclude the reason the plaintiff
“was required to borrow the $480,000 was attributable solely to defendant’s termination
breach on the instant project, and that, but for such breach, it would not have had to
borrow such funds.” 456 F.2d at 1330. The government contends in the case before us
that it was reversible error for the trial court to have relied on the substantial factor test
in connection with proof of reliance damages, and suggests that a different conclusion
would have been reached had the trial court properly applied the “but-for” test.
The trial court reviewed the previous decisions by the Court of Federal Claims
that have decided reliance damages in Winstar-related cases, and found that they have
generally applied the substantial factor test. Westfed II, 55 Fed. Cl. at 553. The trial
court found no rational basis to depart from past decisions and apply a different
standard to the recovery of reliance damages. Id. Assuming, arguendo, that the
government was correct in asserting that the but-for standard should apply, the trial
court found “credible evidence presented in this case also supports a finding of
causation under the ‘but for’ test urged by defendant.” Id.
Specifically, the trial court found “[p]rior to the imposition of FIRREA, New
Western was successfully implementing the 1988 Business Plan (the Plan).” Id. at 554.
Under the 1988 Plan, Westfed had “negotiated for and gained approval to grow at a rate
that would double the size of the institution.” Id. The court found that the Office of Thrift
Supervision (“OTS”) required New Western to scrap that plan in favor of a new business
plan to place it in compliance with the capital requirement called for by FIRREA. Id.
conclude, as the government does, that Westfed did not acquire Old Western in reliance
03-5131, -5145 14
While the proposed capital restoration plan (“CRP”) was under consideration, OTS
imposed various limitations that limited growth of New Western to “net interest credit,”
which according to witness testimony, meant “essentially no growth” at all. Id. Even
after the CRP was approved on March 7, 1990, OTS maintained a cap on New
Western’s growth to “an amount equal to net interest credited on deposit liabilities.” Id.
at 554-555. In addition to limiting New Western growth in an attempt to force it into
compliance with FIRREA, the trial court found that OTS placed other operating
restrictions on institutions, including New Western, that were found to be
undercapitalized by FIRREA standards. Id. at 555. Namely, “New Western . . . could
not accept, renew, or roll over broker deposits, nor could they make types of loans or
investments that were not specified in their [CRP] or approved in writing by the OTS
assistant director.” Id. In summary, the court found the restrictions imposed by OTS to
put New Western in compliance with FIRREA stymied New Western’s growth, and in
fact, caused the company to contract. Id.
The trial court then examined at length the evidence the government presented
to show the existence of other factors that allegedly contributed to New Western failing,
including the uneven management of New Western, the poor asset quality it held, and
the weak economy. Id. at 556-58. Despite early complaints about management, by
1993, the assistant regional director of OTS found the management in place to be a
“highly capable, efficient, and committed senior management team that had already
achieved remarkable progress.” Id. at 556. Moreover, the examiner-in-charge for the
1993 OTS examination testified that New Western’s executives were doing a “good job”
on the agreement negotiated with the government.
03-5131, -5145 15
and “had much improved.” Id. Despite the poor quality of the assets held, OTS
determined that New Western’s management had “made some progress in addressing
significant on and off balance sheet risks.” Id. at 557. Further, despite the economic
difficulties it encountered, “there was uncontroverted evidence that, in addition to
meeting its contractual capital requirements, New Western had sufficient liquidity to
readily meet all the anticipated cash out-flow needs of the institution without any
difficulty at all.” Id. (internal quotes omitted). The trial court found that “it was apparent
from testimony of the various examiner-in-charge [sic] that capital inadequacy [under
FIRREA] was the primary reason for the downgrading of New Western’s composite
ratings.” Id. Although the government offered the testimony of several witnesses who
testified that New Western would have incurred millions of dollars in losses and failed,
irrespective of the government’s breach, the trial court did not give credit to their
testimony because none of the witnesses developed a model to support their opinion of
what losses New Western would have incurred in the “but-for” world of no breach.3 Id.
at 558. In conclusion, the trial court found that the defendant’s breach was a substantial
3
The government does not dispute the trial court’s statement that no model
from its experts was put into evidence of New Western’s losses in a but-for world, but
instead complains that the trial court appeared to improperly shift the burden of proof to
the government, requiring that it show “in the absence of breach, [New] Western would
have incurred losses that would have resulted in its seizure.” We find no merit to the
government’s complaint. The trial court expressly stated that “[p]laintiff must . . . prove
that its damages were lost as a result of the breach” and acknowledged the dispute in
regard to which standard the “plaintiff must satisfy.” Westfed II, 55 Fed. Cl. at 553. In
view of the lack of foundation in the record evidence to support the government’s
experts, we discern no error in the trial court’s discredit of the claims made by them that
New Western would have failed regardless of the breach by the government.
03-5131, -5145 16
factor in causing Westfed’s downfall. Id. The trial court further determined, after
weighing all of the credible evidence presented, “that but for defendant’s breach, New
Western would not have been seized.” Westfed II, 55 Fed. Cl. at 559. Thus, the trial
court expressly found that Westfed had met its burden of showing causation under the
but-for standard, the standard that the government urged the trial court to adopt. The
government criticizes the trial court largely on grounds that certain evidence allegedly
contradicts the trial court’s factual determinations. Causation is a question of fact,
which we review for clear error. Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d
1348, 1356 (Fed. Cir. 2001). We are unpersuaded that the trial court was clearly
erroneous in concluding that a causal connection had been definitely established
between the breach and the loss claimed by Westfed. See Cal. Fed. Bank, FSB v.
United States, 395 F.3d 1263, 1268 (Fed. Cir. 2005).
Alternatively, the government argues that if the contract to merge Bell with Old
Western had not been formed Westfed would have nonetheless “possibly” acquired Old
Western on a stand-alone basis because of the business benefits arising from its
purchase. Because the trial court could not with absolute certainty rule out the
“possibility” that Westfed would purchase Old Western irrespective of the formation of
the breached contract, the government contends the trial court wrongly “placed the
burden on the Government to prove to a certainty that Westfed would not have acquired
Old Western on a stand-alone basis.” Accordingly, the government suggests that the
trial court erroneously ruled that Westfed is not barred from recovering the costs it
incurred in reliance on the contract that the government approved. Bearing in mind that
reliance damages seeks to put the non-breaching party in “as good a position as he
03-5131, -5145 17
would have been in had the contract not been made,” Restatement (Second) of
Contracts § 344(b), the government contends that awarding Westfed the cost of
acquiring Old Western impermissibly places Westfed in a better position than it would
have been had there been no contract.
The government ignores evidence that supposing the merger agreement had not
been approved, the purchase of Old Western by Westfed would likely have not been
approved. Had Westfed not agreed to acquire and merge Old Western and Bell, the
regulators would have likely never permitted Westfed to acquire Old Western in the first
place. The trial court’s finding is supported by evidence from Sidney Mar, a Supervisory
Agent for the Federal Home Loan Bank Board (“FHLBB”) and later assistant district
director of OTS, that “Westfed could not acquire Old Western without regulatory
approval.” Mar had met with Westfed in connection with the application to buy Old
Western on a stand-alone basis and commented that he had a “number of financial
concerns with the proposed transaction.” Given the current structure of the proposed
transaction, Mar stated that “there is a reasonable likelihood that we will recommend
denial” of the application. Other than the delayed withdrawal of the application to
acquire Old Western on a stand alone basis, the government cites little evidence that
Westfed would have agreed to “provide and maintain a substantially higher projected
GAAP and tangible net worth for [Old] Western,” than would have been needed to allay
Mar’s concerns. In a memorandum from David Wall, the head of the FHLBB, to Jay
Jupiter, the deputy director for the Mergers and Acquisition Department at the FSLIC,
he acknowledged that Mar was “likely to recommend against the Western acquisition on
a ‘stand-alone’ basis, but is much more likely to recommend favorably the combined
03-5131, -5145 18
[acquisition of Bell and Old Western].” Wall added that “[w]e seem to be moving
towards a position that Western and Bell must be considered jointly.” (Emphasis
added). In brief, the trial court found:
The evidence presented at trial clearly establishes that Westfed acquired
Old Western in reliance on the contract between the parties. The FHLBB
approved plaintiff’s acquisition of Bell as a multi-step transaction . . . . The
testimony of principals and executives of plaintiff is consistent on this point
and is supported by the documentary evidence. Mr. John Harding, a
negotiator for Westfed in preparation for the merger and later a director of
New Western . . . testified that Westfed viewed the acquisition and merger
of Bell and Old Western as “a single transaction.” Ms. Joan Manning, the
chief financial officer of Westfed . . . confirmed that all of the documents
involved in the merger and acquisition were considered part of a single
transaction. See Tr. at 623-24. As a result, the acquisition of Bell could
not have been completed without the additional acquisition of Old Western
by Westfed and, therefore, the purchase of Old Western was in reliance
on the contract between the parties.
Westfed II, 55 Fed. Cl. at 550. We perceive no clear error in the trial court’s
determination that Westfed would not have been permitted to acquire Old Western had
it not agreed to acquire and merge Old Western with Bell, and that Westfed did indeed
purchase Old Western in reliance upon the contract eventually breached by the
government.
2. Foreseeability
“In order to be recoverable as reliance damages, . . . plaintiff’s loss must have
been foreseeable to the party in breach at the time of contract formation.” Landmark
Land Co. v. FDIC, 256 F.3d 1365, 1378 (Fed. Cir. 2001). The government contends
that it was not foreseeable that substituting the MCR with FIRREA’s capital requirement
would cause the claimed reliance costs. More specifically, the government claims that
the “trial court erred in finding it foreseeable that a ‘likely result of the removal of the
03-5131, -5145 19
RCMA and the forbearance letter would be New Western’s failure to meet regulatory
capital requirements.’”
We find no merit to the government’s contention. The deputy director for the
Mergers and Acquisitions Department of the FSLIC during the acquisition negotiations
admitted that without the MCR, New Western would have been in immediate regulatory
difficulty because it would have been out of regulatory capital compliance. Westfed II,
55 Fed. Cl. at 553. Moreover, based on Westfed’s 1988 Business Plan, which the
government scrutinized before contracting with Westfed, the government knew that New
Western was projected to have a declining capital ratio for several years. Thus, the
government was well aware that New Western’s capital standard would not improve,
even with the MCR in place, for several years to meet the regulatory capital minimum.
Furthermore, both parties’ witnesses testified that the forbearance against future
changes in the regulatory capital requirement was “continuously negotiated by both
parties,” and that the government understood it was important to preserve the MCR so
that Westfed could put into effect its proposed 1988 Business Plan, and thus enable or
help it to service its interest and dividend obligations arising from debts incurred to
undertake the merger of Old Western with Bell. Id. at 553. “Foreseeability is a question
of fact reviewed for clear error.” Bluebonnet, 266 F.3d at 1355. We are not convinced
that the trial court clearly erred in finding it foreseeable that New Western would likely
fail to meet regulatory capital requirements if the terms of the MCR and the
Forbearance Letter were not honored by the government.
Alternatively, the government argues that even if it were foreseeable that New
Western would to be found out of capital compliance, it was unforeseeable that “it would
03-5131, -5145 20
be seized.” For instance, the government points out that New Western was permitted to
remain open for nearly four years after the MCR was lifted, even though it was not in full
compliance with the capital requirements of FIRREA. Further, the government
contends that the blame for the seizure lies with Westfed because it “refused to restore
any of [New] Western’s lost real capital, and . . . failed to produce any acceptable plan
for recovery.” Additionally, the government cites to post-contractual statements made
by Westfed in its 1989 Business Plan, suggesting that New Western could survive
imposition of the FIRREA capital requirement.
It is undisputed that the government, in the absence of a contract, would have
been entitled to seize New Western if it failed for an extended to period to meet the
regulatory capital requirements in effect at the time. As discussed above, the
government knew that the MCR and the terms of the Forbearance Letter were
important, because without it, New Western would have been immediately out of
regulatory capital compliance. Moreover, it was aware that Westfed projected that it
would be several years, even with the aggressive growth plan outlined by the 1988
Business Plan and the reprieve offered by the MCR, before it could meet the regulatory
capital minimum. The government enlists no persuasive evidence to demonstrate that it
was unforeseeable that a seizure would probably take place if the government ignored
its promise not to impose the regulatory capital maintenance requirements. We find
none of the government’s allegations to be sufficiently persuasive to leave us with a
“definite and firm conviction” that the trial court erred in concluding that the seizure of
New Western would be a foreseeable consequence of the breach. Landmark, 256 F.3d
at 1378.
03-5131, -5145 21
Lastly, the government attempts to argue that non-breach factors worsened the
harm endured by Westfed beyond what would have been foreseeable with the breach
alone. For example, the government asserts that the parties could not have foreseen
the effects of the recession in the early 1990’s or the impact of Old Western’s assets on
the merged entity. Thus, according to the government, the magnitude and kind of injury
suffered was not a foreseeable consequence of its breach. Again, the government’s
arguments come short of persuading us that the trial court clearly erred with respect to
this factual question of foreseeability.
D. Calculation of Damages4
4
Westfed suggests that all of the damages awarded and the damages it
now seeks in its cross-appeal may be awarded alternatively under a theory of
restitution. “We have allowed restitution for the limited purpose of returning the
acquiring thrift to the status quo ante when specific initial contributions to an acquired
thrift have been established.” Glendale Fed. Bank, FSB v. United States, 378 F.3d
1308, 1312 (Fed. Cir. 2004). This type of restitution is sometimes said to be “more
properly viewed as a form of reliance damages[,]” as distinguished from restitution
based on the breaching party’s return of the value of benefits conferred by the non-
breaching party’s performance. Hansen Bancorp, Inc. v. United States, 367 F.3d 1297,
1314 & n.13 (Fed. Cir. 2004). Reliance-like restitution is only “supportable when based
on actual losses that are fully proven.” Glendale, 378 F.3d at 1312. In the instances
below where we reverse the portions of the judgment awarding damages under a
reliance theory, we find that Westfed’s attempt to resort to a restitution theory does not
alter our conclusion, because in those instances such damages were erroneously
03-5131, -5145 22
1. Pre-contract costs
The government contends, at the very least, that the trial court erred in
determining the compensable damages. First, the government asserts that the trial
court erroneously awarded $10 million in pre-contract costs to acquire Old Western.
We agree in part with the government. While acknowledging that pre-contract damages
have often been denied, the trial court noted that courts have in special circumstances
permitted recovery of foreseeable damages arising from preparation to perform under
the to-be-formed contract. Westfed I, 52 Fed. Cl. at 161-12. In this case, about $3.1
million was paid to acquire Old Western stock on the open market in October 1987, a
month after it had submitted its application to acquire Old Western on a stand-alone
basis and a year before Westfed submitted its application for the acquisition and merger
of Bell with Old Western. Another $6.9 million was incurred to purchase Old Western
before formation of the breached contract. The trial court does not identify any
persuasive reasons based on the record evidence to demonstrate that the expenditures
in 1987 were in fact made pursuant to a binding agreement with the government in
preparation for the performance under the breached contract, rather than pursuant to an
attempt to acquire Old Western on a stand-alone basis. The evidence does not
demonstrate that the October 1987 pre-contract expenditures were in fact made in
reliance on the contract to be formed in connection with the acquisition and merger.
Given the dearth of evidence proffered, we must conclude that the trial court’s finding in
awarded when the actual loss sustained by Westfed was not fully proven or
demonstrated.
03-5131, -5145 23
regard to the alleged preparatory pre-contract costs is clearly erroneous. Accordingly,
we reverse the trial court’s award of $3.1 million in pre-contract damages.
However, there is evidence, such as a Letter of Intent dated June 22, 1988,
suggesting that the FSLIC knew by that point in time that Westfed was incurring
expenses in preparation for and reliance upon the contract. The appellate record does
not indicate the timing of the $6.9 million in pre-contractual expenditures. Without
evidence that these expenses were incurred before the FSLIC issued its Letter of Intent,
we cannot find clear error in the trial court’s decision that these damages were
foreseeable and were suffered in reliance on the contract. We therefore affirm the
remainder of the award of pre-contract damages, which amounts to $6.9 million.
2. Out-of-pocket expenses to acquire Old Western
The government insists that the trial court erred in awarding Westfed $148
million, which is the total amount Westfed had spent to acquire Old Western’s stock.
According to the government, Westfed issued subordinated debentures and preferred
stock to raise the necessary cash to acquire Old Western, but the securities to this day
remain unredeemed or paid off by Westfed. In the government’s view, the $148 million
Westfed spent is not an “out-of-pocket expense,” and it is therefore not an “actually
sustained loss.”
“The underlying principle in reliance damages is that a party who relies on
another party's promise made binding through contract is entitled to damages for any
losses actually sustained as a result of the breach of that promise.” Glendale Fed.
Bank, FSB v. United States, 239 F.3d 1374, 1382 (Fed. Cir. 2001). As the government
acknowledges, Westfed spent the proceeds from its sale of debentures and stock in
03-5131, -5145 24
order to purchase Old Western’s stock. Except for the $10 million spent in the pre-
contract stage, it is clear that the remainder of the expenditure was made in reliance on
the terms set forth in the Assistance Agreement that the government breached. See
supra Section III.A. It is inconsequential that Westfed chose to borrow the funds from
investors to acquire Old Western’s shares rather than use its own money. The
government cites no legal authority to support distinguishing the “losses actually
sustained” based on whether Westfed used its own funds or the funds of investors to
whom it is indebted. Westfed is entitled to that amount it actually expended to acquire
Old Western in reliance on the forbearance promise, which the government repudiated.
Id.; see also DPJ Co. v. FDIC, 30 F.3d 247, 250 (1st Cir. 1994) (reliance damages aim
to “restore to the claimant what he or she spent before the opportunity was withdrawn.”).
3. Payments-in-kind costs
The government contends that the $71.3 million made for payments-in-kind is not
recoverable because it “constitute[s] potential future obligations, not current, out-of-
pocket costs.” Westfed responds by arguing that the losses incurred in foreseeable
reliance on a breached promise are not limited to only cash losses. Further, Westfed
frames its actions as mitigation, to comply with the regulators’ demands that Westfed
raise additional capital for Western.
As the trial court recognized, “payments-in-kind” (“PIKs”) represent the issuance
of additional paper securities to existing debt or equity holders. Westfed II, 55 Fed. Cl.
at 552. Over a series of years, Westfed provided PIKs, instead of cash, as interest
payments came due on existing debentures. Thus, although Westfed assumed
additional obligations on paper, it never actually made any payments from its account,
03-5131, -5145 25
from which it could be said that Westfed sustained an actual loss as a result of the
government’s breach. Glendale, 239 F.3d at 1382. Westfed merely agreed through the
PIKs to prospectively to take on future payment obligations, which may or may not
come due in the future. Because PIKs are only potential future obligations, they do not
count yet as an actually sustained loss, and therefore the trial court was in error to
award Westfed $71.3 million for these alleged “expenditures.”
4. Acquisition and financing cost from Ariadne
The trial court awarded Westfed $22.1 million in transaction costs associated
with the issuance of debentures and preferred stock to finance the acquisition of Old
Western. The government contends that Westfed did not pay $17.5 million of that
amount because a foreign investor group, Ariadne, was the actual source of those
funds. Ariadne had advanced $14 million to help finance Westfed’s acquisition of Old
Western, but then failed to honor its commitment to pay the remaining amount owed.
After Westfed refused to return the monies advanced, the parties reached a settlement
agreement in which Westfed retained the advance plus interest, totaling $17.5 million,
which Westfed then applied to the purchase of Old Western.
The trial court acknowledged that Ariadne had agreed to finance Westfed’s
acquisition of Old Western but had to withdraw because of its financial problems.
Westfed II, 55 Fed. Cl. at 559. The trial court stated that “[t]he evidence presented at
trial supports [Westfed’s] contention that the $17.5 million from Ariadne is not
appropriate as an offset against plaintiff’s reliance damages” because the money was
given to Westfed as part of a separate transaction, in consideration for Ariadne’s
release from Westfed’s breach of contract claim. Id. The government points to no
03-5131, -5145 26
persuasive evidence to undercut the trial court’s factual determination here, and
therefore we find insufficient reason to conclude it was clearly erroneous. The trial
court’s judgment refusing to deduct $17.5 million from the award to Westfed is affirmed.
5. Costs incurred to acquire Bell
The government contends that the tax benefits arising from Westfed’s ownership
of Bell negated the cost to acquire the company. As evidence, the government notes
that Westfed’s 1991 audited consolidated financial statement reported “[i]n connection
with the acquisition of Bell, the purchase price was zero.” In answer, Westfed points to
testimony credited by the court and other documentary evidence suggesting it outlaid
$20 million to acquire Bell’s shares. See Westfed II, 55 Fed. Cl. at 551 & n.10. This
evidence, however, neither refutes nor addresses the government’s contention. Neither
the trial court nor Westfed explains why the tax benefit accruing to Westfed as a result
of acquiring Bell should not offset the acquisition cost. Given that no one disputes that
as a consequence of tax benefits from acquiring Bell, Bell’s “purchase price was zero,”
we conclude that the trial court clearly erred in finding that Westfed actually sustained a
loss of $20 million in connection with the purchase of Bell, for which it should be
compensated. See Glendale, 239 F.3d at 1382; Dan B. Dobbs, Law of Remedies,
§ 12.3(1) at 51-52 (2d ed. 1993) (“The reliance damages recovery is a recovery for net
reliance loss, so the defendant is credited with any benefit the plaintiff receives from the
expenditure in reliance.”).
6. Offset by financial benefits
Damages based on the injured party’s reliance interest may be reduced by “any
loss that the party in breach can prove with reasonable certainty the injured party would
03-5131, -5145 27
have suffered had the contract been performed.” Restatement (Second) of Contracts
§ 349. Further, the defendant may be credited with any benefit the plaintiff retained
from its expenditure in reliance of the breached agreement. Dan B. Dobbs, Law of
Remedies, § 12.3(1) at 51-52 (2d ed. 1993). Here, the government argues that the
assistance payments it made should offset any reliance costs incurred by Westfed.
According to the government, it committed only a partial breach and that it is entitled to
a dollar-for-dollar credit of its partial performance from the assistance payments it made.
Thus, because the government paid about $780 million, which exceeds the amount
awarded in reliance costs, the government suggests it owes Westfed nothing for its
breach.
The trial court determined that the government seized New Western before
Westfed had the opportunity sell the company or to recoup its losses, and that the
government failed to prove with reasonable certainty that Westfed would have incurred
the losses it sustained absent the breach. Westfed II, 55 Fed. Cl. at 560. Westfed
notes, in addition, that the payments were made to New Western, which the
government seized. Thus, whatever value the government put into assets held by
Westfed, it was taken when the government seized New Western. Further, by 1989, the
government barred Western from paying any dividends to Westfed, preventing Westfed
from tapping into the benefit arising from the payments by the government. Most
importantly, Westfed notes that it was the government’s burden to prove with
reasonable certainty the amount of offsetting benefit retained by Westfed, which, in the
trial court’s opinion, the government failed to do. Westfed II, 55 Fed. Cl. at 560; see
03-5131, -5145 28
Restatement (Second) of Contracts § 349 (placing burden on breaching party to prove
the amount by which the reliance damages award should be reduced).
The government articulates no persuasive rationale, much less cites any legal
authority, for its assertion that it is the aggrieved party, not the breaching party, that
“bears the burden of proving the value . . . of [the breaching party’s] undisputed
performance.” If the government wanted an offset, it was the government’s burden to
prove with reasonable certainty the quantum of benefit retained by Westfed despite the
government’s breach. According to the government, “Westfed received the benefit of
the use of the Government’s assistance payments for its own purposes during the five-
year period that Westfed owned and operated Western.” In particular, the government
highlights the assistance payments and other reimbursements it made to New Western.
The government provides no analysis, however, of how its expenditures translate into
any retained quantifiable benefit by Westfed. Instead, the government relies on largely
conclusory claims that its entire expenditure should be effectively treated as a benefit
retained by Westfed. The government ignores the fact that it put most of its money into
New Western, which it eventually seized from Westfed, and that it prevented Westfed
from reaping any dividends from New Western during most of the period that Westfed
held New Western. Stripped of New Western and the opportunity for benefits that
Westfed hoped to achieve under the agreed upon RCMA, the government cannot,
based on the evidence and arguments presented, claim its breach on the whole was
harmless. We find no clear error in the trial court’s factual determination that the
government failed to sustain its burden in showing that any offset from the damage
award is appropriate.
03-5131, -5145 29
E. Westfed’s Cross-Appeal
Westfed contends that the trial court incorrectly held that it may recover for only
“amounts actually expended” and challenges whether the indebtedness incurred from
the issued securities, which now allegedly exceeds $800 million (excluding principal), is
an amount that should be treated as a loss that has been actually sustained. Westfed
observes that reliance damages are meant to put the nonbreaching party “in as good a
position as he would have been had the contract not been made” (quoting Restatement
(Second) of Contracts §344(b) (1981)), and asserts it is by no means in as good a
position as it would have been had no contract been made. For much the same
reasons we expressed in rejecting the trial court’s award of PIK costs, we must reject
Westfed’s attempt to claim the more than $800 million it allegedly owes on its financing
obligations. Because the amount claimed is not an actual loss because Westfed has
not paid anything out of its pocket, see Glendale, 378 F.3d at 1312, we agree that
Westfed is not entitled to the amount it seeks in its cross-appeal.
IV. CONCLUSION
The judgment of the trial court is affirmed-in-part and reversed-in-part. We affirm
the trial court judgment rejecting the government’s argument that: (1) Westfed assumed
the risk of regulatory changes; (2) Westfed waived its right to claims damages from the
government’s breach; (3) Westfed failed to adduce sufficient proof of causation and
foreseeability of the damage claimed under the appropriate legal standard; (4) the funds
spent to acquire Old Western in reliance upon the breached contract (including $6.9
million of pre-contract expenditures) is not a legally compensable loss; (5) the
03-5131, -5145 30
settlement fee from Ariadne should be deducted from the damage award; and (6) the
government is entitled to a reduction in the damages awarded because of its partial
performance under the contract. Further, we affirm the trial court’s judgment denying
Westfed the sum sought in its cross-appeal arising from its debts to finance the
acquisition and merger of Old Western with Bell. We reverse the trial court judgment
awarding Westfed: (1) $3.1 million of pre-contract costs to purchase Old Western; (2)
the costs to acquire Bell; and (3) PIK costs.
AFFIRMED-IN-PART AND REVERSED-IN-PART
03-5131, -5145 31
Westfed Holdings, Inc. v. United States
Court: Court of Appeals for the Federal Circuit
Date filed: 2005-05-12
Citations: 407 F.3d 1352
Copy Citations