Old Stone Corp. v. United States

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

05-5059

OLD STONE CORPORATION,

Plaintiff-Appellee,
v.

UNITED STATES,

Defendant-Appellant.

Marvin C. Garbow, Arnold & Porter LLP, of Washington, DC, argued for plaintiff-
appellee. Of counsel on the brief were Howard N. Cayne, David B. Bergman, Joshua P.
Wilson of Washington, DC; and Kent A. Yalowitz and Allen Wong, of New York, New
York.

William F. Ryan, Assistant Director, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellant. On the brief were Stuart E. Schiffer, Deputy Assistant Attorney General, and
David M. Cohen, Director. Of counsel on the brief were Jeanne E. Davidson, Deputy
Director, and Jeffery T. Infelise, Trial Attorney.

Appealed from: United States Court of Federal Claims

Senior Judge Robert H. Hodges, Jr.
 United States Court of Appeals for the Federal Circuit

05-5059

OLD STONE CORPORATION,

Plaintiff-Appellee,

v.

UNITED STATES,

Defendant-Appellant.

___________________________

DECIDED: May 25, 2006
___________________________

Before LINN, DYK, and PROST, Circuit Judges.

DYK, Circuit Judge.

This is a Winstar damages case. See United States v. Winstar Corp., 518 U.S.

839 (1996). The United States appeals the decision of the United States Court of

Federal Claims, which awarded to Old Stone Corporation (“OSC”) $192.5 million in

damages for the government’s breach of contract. Old Stone Corp. v. United States, 63

Fed. Cl. 65 (2004) (“Old Stone II”). The breach was the elimination of regulatory capital

by the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of

1989 (“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183. We affirm the award of $74.5

million of post-breach mitigation payments, but reverse the award of $118 million of

initial contributions. We conclude that the $118 million amount is not recoverable under

a restitution theory because the appellant elected to continue performance under the
contract to the benefit of the appellant and to the detriment of the government, and is

not recoverable under a reliance theory because the damages were not foreseeable as

a matter of law.

BACKGROUND

I

Before the transactions that are the focus of this lawsuit, Old Stone Corporation

(“OSC”) was a bank holding company headquartered in Rhode Island. Its primary

subsidiary was a commercial bank, Old Stone Bank (“Old OSB” or “OOSB”), which was

insured by the Federal Deposit Insurance Corporation (“FDIC”). This dispute had its

genesis in the acquisition of two thrifts by OSC.

The first transaction was an acquisition of a small thrift, Rhode Island Federal

(“RIF”). In June 1984, OSC submitted a proposal to the Federal Savings and Loan

Insurance Corporation (“FSLIC”) to acquire RIF with cash assistance from FSLIC. As a

result of the acquisition, OSC would become a “thrift holding company” owning all of the

stock of RIF. OSC would also obtain a federal savings bank charter which would permit

it to engage in commercial lending while allowing it to expand into other geographical

areas.

FSLIC accepted OSC’s offer and approved the transaction in August 1984. The

transaction involved the following steps: (1) RIF converted from a mutual savings

institution to a Federal stock savings bank (or “thrift”), “New” Old Stone Bank (“OSB”);

(2) OSB formed a subsidiary, NEWCO, to which OSC transferred all of its stock in

OOSB, valued at $103.2 million; (3) NEWCO caused OOSB to distribute its assets and

liabilities to OSB; (4) OSC acquired all of OSB’s stock for a nominal amount ($100).

05-5059 2
 Under an “Assistance Agreement” executed by OSC, FSLIC and OSB, FSLIC

contributed $9.55 million cash to OSB, and OSC contributed $13.8 million cash. RIF’s

deficit net worth on the date of the acquisition, after the cash contributions, was $4.4

million, which was recorded as so-called “supervisory goodwill.” The Assistance

Agreement incorporated a Forbearance Letter, which obligated the government to

permit OSB to count FSLIC’s $9.55 million cash contribution (known as a “capital

credit”), and the $4.4 million of goodwill as regulatory capital. Thus the RIF transaction

generated approximately $13.95 million in regulatory capital--$4.4 million in goodwill,

and $9.5 million in the form of a capital credit. The Forbearance Letter permitted OSB

to amortize this regulatory capital over a thirty year period. Because the Forbearance

Letter was incorporated into the Assistance Agreement signed by OSC, FSLIC and

OSB, the government’s promise of regulatory forbearance ran to both OSC and OSB.

OSC and FSLIC also executed a Net Worth Maintenance Stipulation (“NWMS”)

under which OSC agreed to downstream (contribute) additional funds needed to

maintain OSB in compliance with regulatory requirements.

The second transaction (the “Citizens transaction”) occurred on December 27,

1985. OSC acquired Citizens Federal, a FSLIC-insured, federally-chartered mutual

association located in Seattle, Washington. As part of the transaction, Citizens Federal

converted to a federal stock savings bank and was renamed Old Stone Bank of

Washington (“OSBW”). Under an Assistance Agreement between FSLIC, OSC and

OSBW, FSLIC contributed $78.5 million of cash assistance to OSBW, and OSC

contributed $14.8 million. Taking into account the cash contributions, the bank had a

net worth deficit of $2.76 million. This amount was recorded as supervisory goodwill.

05-5059 3
The Assistance Agreement incorporated a Forbearance Letter, which permitted OSBW

to count FSLIC’s $78.5 million contribution, and the $2.76 million of supervisory goodwill

as regulatory capital. Thus the Citizens transaction generated a total of $81.26 million

in regulatory capital--$2.76 million in goodwill, and $78.5 million in capital credits. The

Forbearance Letter permitted OSBW to amortize that regulatory capital over twenty five

years. As in the RIF agreement, the government’s promise of regulatory forbearance

ran to both the thrift and to OSC.

On December 31, 1986, OSBW (formerly Citizens Federal) merged with and into

OSB. Thereafter the combined OSB-OSBW entity made regulatory filings on a

consolidated basis and was regulated on the basis of its combined regulatory capital.

The government contends that on December 31, 1987, the parties agreed to

terminate the Citizens Assistance Agreement, pursuant to a termination provision of the

Assistance Agreement that provided that “this Agreement shall terminate five years

following the Effective Date or on such other date to which the parties or their

successors agree in writing . . . .” J.A. at 200185 (emphasis added). The parties

dispute the effect of this termination on the government’s regulatory capital promise, but

agree that it terminated the government’s obligation to make assistance payments

under the agreement.

II

In August of 1989, Congress enacted the Financial Institutions Reform, Recovery

and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183. (“FIRREA”), which

limited the ability of thrift institutions to count supervisory goodwill and capital credits

towards their regulatory capital requirements. Winstar, 518 U.S. at 856-60.

05-5059 4
 At the time of the enactment of FIRREA, approximately $80 million of regulatory

capital from the Citizens and RIF transactions had not yet been amortized pursuant to

the 30-year and 25-year amortization provisions of the assistance agreements.

Approximately $11.7 million of this capital was attributable to the RIF transaction, and

the remainder to the Citizens transaction. FIRREA prevented OSB from recognizing

these amounts as regulatory capital. As a result, OSB failed one of the government’s

regulatory capital requirements--the so-called “risk-based” capital requirement--by $36

million.1 OSB was thus “undercapitalized” and subject to seizure. However, neither

OSC nor OSB repudiated the assistance agreements or at the time filed suit against the

government for breach of the contracts. Rather, OSC and OSB sought to achieve

compliance with FIRREA, and to otherwise continue performance under the contract.

A thrift could address the problem of regulatory compliance created by FIRREA

in one of two ways--either by shrinking the thrift (selling assets and using the proceeds

to pay off liabilities) or by infusing additional capital into the thrift. Initially the thrift chose
2
the former route. It sold assets in December of 1989--a residential lending unit

(“OsCal”) and a tuition budget company (“Academic Management Services” or “AMS”).

1
Thrifts are regulated under FIRREA by reference to capital ratios -- i.e.,
the ratio of capital to assets. The “risk-based” capital ratio “is obtained by dividing [the
thrift’s] capital base . . . [which includes, inter alia, “common stockholders’ equity”] by its
risk-weighted assets . . . .” 12 C.F.R. Pt. 3, App. A (1990). Two other capital
requirements are “tangible capital” and “core capital.” The thrift here was in compliance
with these latter two requirements.
It appears that the Court of Federal Claims erroneously referred to the
unamortized amount of regulatory capital remaining on the date of seizure as $75
million. Old Stone II, 63 Fed. Cl. at 89.
2
A bank may improve its capital ratio either by increasing capital (as by
receiving an infusion of cash) or by shrinking its asset base. Old Stone II, 63 Fed. Cl. at

05-5059 5
 Thereafter OSB submitted a “Capital Plan,” which required OSB to “maintain . . .

compliance with the tangible and core capital requirements” and to meet the risk-based

capital requirement of FIRREA by December 31, 1990. J.A. at 200935. Under the

Plan, the government granted an “exemption from any penalties or sanctions that may

be imposed on the [thrift] for failing to meet its capital requirements.” J.A. at 200930.

The Capital Plan called for further shrinkage of the thrift through the sale by OSB of the

assets that were owned by Citizens before the merger of Citizens into OSB. On

January 25, 1990, OSB entered into a definitive agreement to sell all of the branches of

OSBW (formerly Citizens). It sold the assets in May 1990, for a gain of $9.2 million.

The Plan also required OSC to contribute additional capital under the NWMS,

pursuant to a revised schedule. The government approved the Plan in March 1990.

Pursuant to the Plan, OSC downstreamed $74.5 million of capital to OSB in three

allotments: $45.463 million in 1990, $27.5 million in 1991 and $1.6 million in 1992. In

order to fund these downstream payments, OSC sold assets including two of its

subsidiaries, Old Stone Credit Corp and Old Stone Bank of North Carolina. OSC refers

to these subsidiaries as its “crown jewels.” The record does not reflect the exact

relationships between the 1990, 1991 and 1992 payments and the amount of

unamortized regulatory capital at the time of each payment, but the parties agree that

73. The asset base is shrunk by selling off assets and using the cash proceeds to
repay liabilities.

05-5059 6
these payments were even greater than the amount of unamortized regulatory capital

($65 million)3 when the thrift was later seized in 1993.

It is undisputed that after the breach caused by the enactment of FIRREA, OSC

was suffering from significant problems unrelated to the lost regulatory capital. As the

Court of Federal Claims found, “Old Stone acknowledges that factors other than the

breach affected the bank’s operations during the period after the breach.” 63 Fed. Cl. at

88. The court also found that “[t]hese problems resulted in part because of general

economic conditions at the time.” Id. However, OSC contended, as its expert stated,

that “[w]hat the breach did was [take] away our ability to weather the storm, to solve the

[other] problems.” Id. at 89 (emphasis added).

III

Three years after the enactment of FIRREA, OSC and OSB filed a complaint in

the Court of Federal Claims against the United States on September 16, 1992, alleging

that the passage of FIRREA resulted in the breach by the government of contracts

embodied in the RIF and Citizens assistance agreements, under which the government

was obligated to permit the thrift to count capital credits and goodwill as regulatory

capital. The complaint requested, inter alia, recovery of damages OSB had allegedly

suffered in attempting to maintain regulatory compliance, and $15 million OSC had

invested when it acquired Citizens.

On January 29, 1993, the government seized OSB and placed it in receivership.

OSB was at that time “critically undercapitalized” under the statute because it had less

3
OSC stated that the amount of unamortized regulatory capital
“approximately $65 million.” Pl’s Supp. Br. at 9. There was some testimony that might
support a finding of $68.5 million.

05-5059 7
than two percent tangible equity. As noted above, absent the enactment of FIRREA, on

the 1993 date of seizure the unamortized balance of regulatory capital would have been

approximately $65 million.

The Court of Federal Claims action was stayed pending the Supreme Court’s

decision in Winstar, 518 U.S. 839, and pursuant to a pretrial agreement concerning

many of the Winstar actions.

Eventually, after discovery, on April 10, 2003, the Court of Federal Claims

granted summary judgment in favor of OSC on the issue of liability, finding that the

enactment of FIRREA had breached the Assistance Agreements. Old Stone Corp. v.

United States, No. 92-647C (Fed. Cl. Apr. 10, 2003) (“Old Stone I”). In that connection

the court rejected the government’s argument that the regulatory capital promises had

been terminated by the parties pursuant to Section 15 of the Citizens Assistance

Agreement before the enactment of FIRREA. Id., slip op. at 6-7. The court appeared

not to address the government’s contention that the promise of regulatory forbearance

under the Citizens Assistance Agreement should not be considered because that

promise would have ceased upon the sale of the OSBW assets in May 1990 without

regard to the enactment of FIRREA.

A trial on damages was held beginning in May 2004. Old Stone II, 63 Fed. Cl. at

68. Following the trial, the Court of Federal Claims awarded OSC the following

amounts in damages: (a) $74.5 million for the “post-breach” contributions OSC made to

OSB after the enactment of FIREEA, under mitigation and reliance theories; (b) $103.2

million for the value of stock OSC transferred to the thrift in the RIF acquisition, under

restitution and reliance theories; and (c) $14.8 million for the cash contribution OSC

05-5059 8
made to Citizens in the Citizens acquisition, under restitution and reliance theories.

These damages totaled $192.5 million.4 In awarding these amounts, the court reasoned

that the government’s breach caused all of OSC’s losses, because absent FIRREA,

OSB would have had an additional $65 million in regulatory capital and would not have

been seized. The court held that the requirements of restitution had been met because

the contributions conferred a benefit on the government, and because the enactment of

FIRREA constituted a total breach. The court rejected the government’s argument that

continued performance by OSC constituted an election that barred voiding the contract

and seeking restitution. In finding that the $192.5 million should be awarded as reliance

damages, the court found that the losses were foreseeable. The court also rejected the

government’s argument that returning the initial investments would result in a “windfall”

to OSC.

The government timely appealed. Following oral argument, we ordered

supplemental briefing on a variety of questions. We have jurisdiction pursuant to 28

U.S.C. § 1295(a)(3).

DISCUSSION

We review the Court of Federal Claims’ 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). We

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

4
OSC abandoned a claim to an additional $13.8 million that it allegedly
contributed to the RIF transaction.

05-5059 9
Anderson v. City of Bessemer City, 470 U.S. 564, 573-76 (1985); Home Savings of Am.

v. United States, 399 F.3d 1341, 1347 (Fed. Cir. 2005).

I

We first address the Court of Federal Claims’ holding that under a mitigation

theory OSC is entitled to recover the $74.5 million in downstream payments that it made

to OSB in order to replace the regulatory capital eliminated by FIRREA. When FIRREA

was enacted in August of 1989 it eliminated $80 million of regulatory capital that was

available to OSB under the assistance agreements. By the time of seizure of the thrift

in January 1993 the unamortized regulatory capital deficiency would only have been

$65 million. Between the enactment of FIRREA and the seizure, OSC downstreamed

$74.5 million to OSB to replace the regulatory capital lost by FIRREA. That amount is

claimed and was allowed by the Court of Federal Claims on a theory of mitigation.

Neither party disputes that the downstreamed amounts exceeded the unamortized

regulatory capital which remained at the time of the seizure.

A non-breaching party may generally recover its mitigation costs incurred in a

reasonable effort to avoid loss caused by a breach, even if its efforts prove

unsuccessful. Restatement (Second) of Contracts §§ 350 cmt. h; id. at § 347 cmt. c

(1981) (“[T]he injured party is [generally] entitled to recover for all loss actually

suffered.”). Consistent with this rule, we have upheld awards of the actual costs of

generating replacement capital resulting from the elimination of regulatory capital by

FIRREA. See, e.g., Home Savings, 399 F.3d at 1353; Cal. Fed. Bank, FSB v. United

States, 245 F.3d 1342, 1350 (Fed. Cir. 2001) (affirming award of transaction costs as

05-5059 10
measure of cost of replacing capital) (“Cal Fed”); see also Hughes Commc’ns Galaxy,

Inc. v. United States, 271 F.3d 1060, 1066 (Fed. Cir. 2001).

In Home Savings, for example, we affirmed an award of the cost incurred by

shareholders in replacing supervisory goodwill eliminated by FIRREA. 399 F.3d at

1354. Likewise, in LaSalle Talman Bank v. United States, 317 F.3d 1363 (Fed. Cir.

2003), we affirmed an award of the cost of raising replacement capital “because it

provides a measure of compensation based on the cost of substituting real capital for

the intangible capital held by plaintiff in the form of supervisory goodwill.” Id. at 1374.

In our prior “cost of replacement” cases, the thrift was not seized and the replacement

capital was not lost, so the cost of replacing the capital was limited to the cost of raising

additional capital and did not include the replacement capital itself. Here, the Court of

Federal Claims held that OSC’s cost of replacing OSB’s supervisory goodwill with

tangible capital was not just the transaction costs incurred in raising the $74.5 million,

but rather the $74.5 million itself.

We understand the government to contend that the Court of Federal Claims

made several errors in allowing the $74.5 million as mitigation costs.

First, the government contends that the regulatory capital promise with respect to

the Citizen’s acquisition was eliminated by agreement in December 1987, before the

enactment of FIRREA, and that FIRREA thus did not cause a breach of the

government’s promise. Since there was no breach of the Citizens agreement, there can

be no recovery of mitigation payments that replaced the Citizens capital. Because only

$11.7 million of RIF capital remained on the date of FIRREA, any mitigation payments in

excess of $11.7 million are attributable to Citizens and are not recoverable.

05-5059 11
 There is no dispute that the Citizens agreement was terminated. The question is

whether the termination applied to both executory (i.e., financial assistance) and non-

executory (i.e., regulatory forbearance) provisions. The government asserts that the

termination applied to both obligations and eliminated its obligation of regulatory

forbearance before the enactment of FIRREA. The government agrees that the

termination is described in a December 31, 1987, letter FHLBB sent to OSB stating that

“[t]his letter serves as notification that the Assistance Agreement . . . has terminated as

of December 31, 1987, pursuant to Section 15 of the Agreement.” J.A. at 400003.

Relying on our decision in Winstar, the Court of Federal Claims interpreted the parties’

agreement to apply only to the executory provisions. Old Stone I, slip op. at 6-8. We

agree with the Court of Federal Claims.

In Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995) (en banc),

affirmed, 518 U.S. 839 (1996), we held that a termination clause applied only to

executory provisions. 64 F.3d at 1542. That termination clause stated in part, “[t]his

agreement shall terminate and the obligations of the FSLIC to make any payments

hereunder shall cease upon the expiration of 10 years . . . .” Glendale Federal

Supervisory Action Agreement, § 9 (available in Old Stone II Supplemental Appendix

(filed May 31, 2002)). The government claimed that after the passage of 10 years the

regulatory forbearance expired. We rejected that construction and held that the

“expiration provision . . . relat[ed only] to executory provisions set out in the SAA, which

obligated the FSLIC to make certain payments to the merged thrift for a limited period of

time.” Winstar, 64 F.3d at 1542.

05-5059 12
 Section 15 of the Citizens Assistance Agreement is similar to the termination

clause in the Winstar case. It provides that “this Agreement shall terminate five years

following the Effective Date or on such other date to which the parties or their

successors agree in writing . . . .” J.A. at 200185 (emphasis added). The emphasized

language does not appear in the agreement involved in Winstar. However, this

language merely allows the parties to accelerate the natural termination that would

otherwise take place upon the passage of five years. That is exactly what the

termination agreement did. It refers specifically to Section 15. J.A. at 400003 (“This

letter serves as notification that the Assistance Agreement . . . has terminated as of

December 31, 1987, pursuant to Section 15 of the Agreement.”) (emphasis added).

Thus the termination agreement did no more than accelerate a termination provision

that was not designed to eliminate the promises of regulatory forbearance. The

termination only applied to executory provisions, and the regulatory forbearance

remained in force on the date of the enactment of FIRREA.

Second, the government argues that, even if the Citizens contract were not

voluntarily terminated in 1987, any contractual right to count the Citizens capital credits

and goodwill as regulatory capital would have ceased with the sale of Citizens/OSBW in

May 1990. Again the government argues the amount of mitigation recovery should be

reduced by eliminating payments that replaced the regulatory capital under the Citizens

agreement and thus should be confined to $11.7 million (the amount under the RIF

agreement).

After the execution of the two assistance agreements in 1984 and 1985, the two

thrifts merged into OSB on December 31, 1986. The government admits that the

05-5059 13
merged entity could claim the benefit of both assistance agreements. However, the

government contends that the merged entity lost the right to enforce the Citizens

Assistance Agreement when the Citizens assets were sold in May 1990. The

government contends that Section 13 of the Citizens Assistance Agreement provides

that generally accepted accounting principles (“GAAP”) govern accounting

computations made under the Agreement. It asserts that GAAP rules required that the

goodwill attributable to the Citizens transaction be written off upon the sale of the

Citizens assets. At that point, says the government, the Citizens agreement would no

longer be enforceable.

Again we do not agree. The sale of the OSBW assets occurred after the

enactment of FIRREA, and the Court of Federal Claims found that FIRREA caused the

sale of the Citizens assets. Old Stone II, 63 Fed. Cl. at 72 (“Old Stone’s Capital Plan

also represented . . . that management would ‘mitigate the capital reduction [by] . . .

sell[ing] certain subsidiaries [including] . . . the Seattle, Washington-based thrift that was

a division of Old Stone Bank [i.e., Citizens].”). On this point, the Court of Federal

Claims’ finding is supported by the record.

Finally, the government contends that the amount of mitigation recovery should

be limited to $36 million rather than the $74.5 million awarded by the Court of Federal

Claims because OSB needed only $36 million to bring it into capital compliance

immediately after the enactment of FIRREA.

In Home Savings, we recognized that “[w]hen mitigating damages from a breach,

a party ‘must only make those efforts that are fair and reasonable under the

circumstances.’” 399 F.3d at 1353 (quoting Robinson v. United States, 305 F.3d 1330,

05-5059 14
1333 (Fed. Cir. 2002)); see also 11 Corbin on Contracts § 57.11, at 311 (2005 ed.)

(“The doctrine of avoidable consequences merely requires reasonable efforts to mitigate

damages.”); 3 Dobbs: Law of Remedies § 12.6(1), at 127 (2d ed. 1993) (“[T]he damage

recovery is reduced to the extent that the plaintiff could reasonably have avoided

damages he claims and is otherwise entitled to.”). The government has not shown that

it was unreasonable for OSC to replace the entire amount of regulatory capital that was

eliminated by FIRREA.

In Home Savings, we allowed a mitigation award that exceeded the minimum

amount required to achieve regulatory compliance. 399 F.3d at 1352-53. The Home

Savings court held that the full cost was recoverable because the holding company

“was entitled to raise funds to replace the supervisory goodwill [the thrift] lost as a result

of the government’s breach,” including the “excess” capital beyond that needed to

achieve regulatory compliance. Id. Likewise, OSC was entitled to replace the entire

amount of regulatory capital eliminated by FIRREA so that the thrift had a cushion

against future losses. We agree with the Court of Federal Claims conclusion here that

OSC’s mitigation efforts were reasonable under the circumstances.

For the forgoing reasons, we conclude that the Court of Federal Claims correctly

held that OSC is entitled to recover its mitigation payments of $74.5 million.

II

We next address the Court of Federal Claims’ holding, and OSC’s argument, that

OSC is entitled to recover its $103.2 million stock contribution to the RIF transaction,

and its $14.8 million cash contribution to the Citizens transaction. OSC claims these

amounts under restitution and reliance theories. We first consider its restitution theory.

05-5059 15
 When one party to a contract commits a total breach, the other party “is entitled

to restitution for any benefit that he has conferred on” the breaching party “by way of

part performance or reliance.” Mobil Oil Exploration, Prod. Southeast, Inc. v. United

States, 530 U.S. 604, 608 (2000) (citing Restatement (Second) of Contracts § 373

(1979)); see also Landmark Land Co., Inc. v. F.D.I.C., 256 F.3d 1365, 1372 (Fed. Cir.

2001). A party may recover damages as restitution to the extent that party has

conferred a benefit on the breaching party. Hansen Bancorp, Inc. v. United States, 367

F.3d 1297, 1314 (Fed. Cir. 2004) (citing Restatement (Second) of Contracts § 373); see

also Cal Fed, 245 F.3d at 1350-51 (“The idea behind restitution is to restore the non-

breaching party to the position it would have been in had there never been a contract to

breach.”) (citing Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1380 (Fed.

Cir. 2001) (“Glendale”).5

We have suggested that restitution of initial contributions of both stock and cash

in Winstar transactions may be allowable because both forms of contribution confer a

benefit on the government. See, e.g., Landmark, 256 F.3d at 1372-73; Hansen, 367

F.3d at 1317. In Landmark, we held that restitution of an initial cash contribution to a

supervisory merger was appropriate when the contribution was expressly required by

the assistance contract. 256 F.3d at 1372-73. In Hansen, we indicated that it might be

5
In Hansen, we stated that where there has been a benefit to the breaching
party “restitution may be measured by either ‘the value of the benefits received by the
defendant due to the plaintiff’s performance’ or ‘the cost of the plaintiff’s performance,
which includes both the value of the benefits provided to the defendant and the
plaintiff’s other costs incurred as a result of its performance under the contract.’”
Hansen, 367 F.3d at 1314 (quoting Landmark, 256 F.3d at 1372).

05-5059 16
possible to consider a stock transfer as a “benefit conferred” in a Winstar case that

would be subject to restitution. 367 F.3d at 1316-17.

Nonetheless, restitution is subject to an important limitation. Restitution is

“available only if the breach gives rise to a claim for damages for total breach and not

merely to a claim for damages for partial breach.” Id. at 1309 (quoting Restatement

(Second) of Contracts § 373 cmt. a). When a non-breaching party elects to continue

performance, that party is said to elect to treat the breach as partial rather than total. 13

Williston on Contracts § 39:32 (4th ed. 2000). The consequence is that restitution is not

available, and the non-breaching party must pursue a claim for damages instead. See

12 Corbin on Contracts, § 1223 at 514-16 (“Damages and restitution will not be given as

concurrent remedies for the same injury.”). Our Winstar precedent has not yet

considered the effect of the election doctrine on damages arising from the enactment of

FIRREA.6

In describing the election doctrine, Williston states

When one party commits a material breach of contract, the other party has
a choice between two inconsistent rights—he or she can either elect to
allege a total breach, terminate the contract and bring an action [for

6
However, our decisions have addressed the related doctrine of waiver,
holding that continuing to receive payments under an assistance agreement is not a
waiver of the right to recover damages for a breach (other than restitution). Westfed
Holdings, Inc. v. United States, 407 F.3d 1352, 1360-61 (Fed. Cir. 2005). In Westfed,
we rejected the argument that the holding company had waived the breach (and
forfeited its right to recover reliance damages) by continuing to receive assistance
payments from the government. As Williston makes clear, “[t]he doctrine of election and
that of waiver should not be confused; an election is not a waiver of any rights under the
contract but rather a choice between two inconsistent rights following a breach of the
contract.” Williston § 39:32; see also id. at n.56 (citing case precluding waiver of breach
but applying election doctrine); cf. Barron Bancshares, Inc. v. United States 366 F.3d
1360, 1383 (Fed. Cir. 2004) (holding government waived right to assert prior material
breach by performing under contract by making assistance payments to thrift).

05-5059 17
 restitution], or, instead, elect to keep the contract in force, declare the
default only a partial breach, and recover those damages caused by that
partial breach . . . .

13 Williston § 39:32 (4th ed. 2000).7 In Mobil Oil v. United States, the Supreme Court

recognized that the election doctrine applies when the breach is the enactment of a

statute. 530 U.S. 604 (2000).

The authorities differ on what conduct is required to establish an election. The

Williston view appears to be that mere continued performance can result in an election.

13 Williston § 39:32 (“[A] party’s actions are sometimes characterized as an election

where that party continues to perform or to accept performance under a contract even

though he or she knows that a contract provision has been breached.”). Other

authorities take a stricter position--that the mere failure to elect restitution at the time of

the breach and the continuation of performance is not sufficient to result in an election.

Rather, there must be either (1) detrimental reliance by the breaching party (here an

injury to the government as the result of the delay), see 12 Corbin § 1220 (1993 ed.);

Restatement (Second) of Contracts § 378; or (2) a benefit to the non-breaching party as

a result of the delay (here a benefit to OSC), see Mobil Oil, 530 U.S. at 621-23.

The Supreme Court’s decision in Mobil, in which the Court allowed a restitution

remedy under a government contract, is ambiguous as to which standard applies. In

that case the Court concluded that “[T]he Government [has not] convinced us that the

companies’ continued actions under the contracts amount to anything more than [the]

urging of performance . . . . Consequently the Government's waiver claim must come

7
Joseph M. Perillo, Calamari & Perillo on Contracts § 11.32-11.33 at 462-
66 (5th ed. 2003); see also Barron Bancshares, 366 F.3d at 1383; Cities Service Helex,
Inc. v. United States 543 F.2d 1306, 1313-15 (Ct. Cl. 1976).

05-5059 18
down to a claim that the companies received at least partial performance.” Id. at 622

(internal citations omitted) (emphasis in original). The Court concluded the plaintiff

companies had not received partial performance from the government under the

contracts after the breach. Id. at 623. While the decision is clear that the receipt of

partial performance by the plaintiff will bar restitution (and the authorities cited make

equally clear that detrimental reliance by the government would also be a bar),8 it is

unclear as to whether a plaintiff’s continued performance without the receipt of benefits

or detrimental reliance would be sufficient to bar restitution.

Here we need not decide which standard governs, because even the stricter

election rule is satisfied. OSC plainly continued to treat the assistance agreements as

in place by deciding not to terminate the contracts or to file suit for restitution after the

enactment of FIRREA. Indeed, OSC’s claim for restitution was not asserted until three

years later. Instead of electing to terminate the agreement after the enactment of

FIRREA, OSC on March 13, 1990, some seven months after FIRREA, agreed to a new

Capital Plan with the Office of Thrift Supervision (“OTS”), under which it once again

agreed to comply with the Net Worth Maintenance Stipulations of the original contracts

and to make payments to the thrift to bring it into compliance with the requirements of

8
The authorities cited by the Supreme Court (see Mobil, 530 U.S. at 622)
make this clear. Restatement (Second) of Contracts § 373 (“An injured party’s right to
restitution may be barred by election under the rules stated in §§ 378 and 379”)
(emphasis added); Id. at § 378 (“If a party has more than one remedy under the rules
stated in this Chapter, his manifestation of a choice of one of them by bringing suit or
otherwise is not a bar to another remedy unless the remedies are inconsistent and the
other party materially changes his position in reliance on the manifestation.”) (emphasis
added).

05-5059 19
FIRREA.9 See Old Stone II, 63 Fed. Cl. at 72 (“[OTS] approved the bank’s Capital Plan

conditioned on [OSC’s] agreement that it would maintain the bank’s capital position

pursuant to the Net Worth Maintenance Stipulation.”).

The government detrimentally relied on OSC’s conduct. If OSC had elected to

terminate the contract and seek restitution at the time of the enactment of FIRREA, the

government could not have, and would not have, demanded that OSC make

subsequent contributions to the thrift pursuant to the new Capital Plan and Net Worth

Maintenance Stipulations of the terminated contracts10 which resulted in the

government’s liability for $74.5 million in mitigation payments. And it is certain that the

government would have seized the bank earlier, with the likely result that additional

losses to the insurance fund would have been avoided.11 There were also continued

benefits to OSC received under the earlier agreements with the government--its ability

to continue to operate the thrift; the government’s willingness to defer enforcement of

the obligation of OSC to contribute additional capital pursuant to the NWMS under the

9
While the government could use regulatory mechanisms to force OSC to
comply with its contractual obligation to infuse additional capital, see, e.g., CityFed
Financial Corp. v. Office of Thrift Supervision, 58 F.3d 738, 741 (D.C. Cir. 1995), there
is no claim that the government could have compelled OSC to infuse additional capital
absent a continuing contractual obligation.
10
Old Stone II, 63 Fed. Cl. at 82 (“[OSC] downstreamed $75 million to [OSB]
pursuant to the Net Worth Maintenance Stipulation after breach.”).
11
As noted above, on the date of FIRREA, OSB failed the risk-based capital
requirement by approximately $36 million. On the date of seizure, the risk-based capital
shortfall had more than doubled, to $77.6 million.

05-5059 20
earlier agreements; the non-seizure of the thrift before 1993 (despite its non-compliance

with FIRREA standards); and continued federal deposit insurance.12

The election doctrine is designed to avoid the very kind of moral hazard that

would result here if the thrift could postpone repudiation of the contract for several

years, bet that it could make the thrift profitable, but secure restitution if the thrift failed.

Our predecessor court, the Court of Claims, has recognized (in the waiver context), that

“[a]s a general proposition, one side cannot continue after a material beach by the

other . . . act as if the contract remains fully in force . . . , run up damages, and then go

suddenly to court.” Northern Helex Co. v. United States, 455 F.2d 546, 551 (Ct. Cl.

1972).13

Despite the clear applicability of the election doctrine, OSC argues that a

provision in the assistance agreements here bars the argument that OSC’s election

12
An FHLBB Memorandum recommending approval of RIF Assisted
Acquisition confirms that OSC was to receive deposit insurance. It stated:

The OFSLIC recommends that the Bank Board approve the proposal,
which will result in [OSC] acquiring the stock of [RIF], upon [RIF’s]
conversion to a federal stock savings bank [RIF-FSB], and the transfer of
OSB’s charter and trust operations to a subsidiary [Newco] of [RIF-FSB].
The remaining assets and liabilities of [OSB] will be transferred to [RIF-
FSB], so [OSB’s] deposit accounts will become FSLIC insured.

J.A. at 200052 (emphasis added).
13
Our decision in First Nationwide Bank v. United States, 431 F.3d 1342,
1352 (Fed. Cir. 2005), does not foreclose an election theory. Although the First
Nationwide court rejected an election argument and characterized the claim as one for
“partial restitution,” the plaintiff in that case claimed amounts that it was promised by the
government, not amounts that it actually expended under the contract. Thus the claim
in First Nationwide was not a true restitution claim. In any event, the plaintiff in First
Nationwide “promptly protested the [breach], filing suit first against the FDIC and then
against the United States” Id. at 1352.

05-5059 21
prevents it from claiming restitution. Section 13 of the RIF assistance agreement, and

Section 16 of the Citizens assistance agreement, entitled “Rights and Forbearances,”

provide:

The rights, powers, and remedies given to the parties by this Agreement
shall be in addition to all rights, powers, and remedies, given by any
applicable statute or rule of law. Any forbearance, failure, or delay by any
party in exercising or partially exercising any such right, power, or remedy
shall not preclude its further exercise.

J.A. at 200109-10. In light of this provision, OSC’s failure to promptly assert a breach of

contract did not, of course, result in a waiver of its right to assert a breach at a later time

and recover damages. See Westfed, 407 F.3d at 1360-61 (holding plaintiff did not

waive its right to assert breach by continuing to receive assistance payments from the

government). But here the restitution remedy is not precluded by inaction--

“forbearance, failure or delay” in exercising the right to restitution--but rather by OSC’s

taking an action--election among inconsistent remedies by continuing to perform. The

quoted provision does not restore a remedy forfeited by continued performance. In

other words, the “Rights and Forbearances” clause of the RIF and Citizens agreements

does not preclude the application of the common law election of remedies doctrine.

For the foregoing reasons, we conclude that OSC’s initial contributions are not

recoverable under a restitution theory.

III

Nor are the initial contract payments of $118 million recoverable under a reliance

theory.

The purpose of reliance damages is to compensate the plaintiff “for loss caused

by reliance on the contract.” Restatement (Second) of Contracts § 344(b). We have

05-5059 22
previously upheld awards of reliance damages in Winstar cases. See, e.g., Westfed,

407 F.3d at 1368, 1371. We have also held that reliance damages can be recovered for

losses of pre-breach investments pursuant to the contract. See id.; Glendale, 239 F.3d

at 1383.

The Court of Federal Claims found that the breach caused the seizure of OSB

and the loss of OSC’s investment. Old Stone II, 63 Fed. Cl. at 98 (“Defendant’s breach

was the cause of plaintiff’s damages.”); id. at 88 (“We think it highly unlikely that the

regulators would have seized the bank in 1993, absent the breach.”); id. (“[OSB’s

problems] would have been eased by the bank’s having had a capital cushion.”).

However, the Court of Federal Claims did not explain how the breach--the refusal

to recognize the regulatory capital as promised in the assistance agreements--caused

the seizure when that regulatory capital had been replaced by the mitigation payments

before the seizure occurred. On this critical question the Court of Federal Claims’

opinion is unfortunately entirely silent. Despite the absence of findings by the Court of

Federal Claims, OSC urges that the causation finding is supportable on two theories--

that the breach caused the shrinkage of the thrift and on the alternative (and primary)

theory that the breach caused the depletion of the assets of the holding company, and

that these events caused the seizure of the thrift and the loss of the OSC investment.

But even assuming that FIRREA caused the seizure by putting in motion this

chain of events, reliance damages are subject to two pertinent limitations--the damages

must have been both proximately caused by the breach, and foreseeable. Hughes, 271

F.3d at 1066.

05-5059 23
 As we have repeatedly held, “[i]n 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.” Westfed, 407 F.3d at 1365 (quoting Landmark, 256 F.3d at

1378); see Hadley v. Baxendale 156 Eng. Rep. 145 (1854) (contract damages only

recoverable if in “contemplation of both parties” at the time of contract formation); see

also Restatement (Second) of Contracts § 351(1) (“Damages are not recoverable for

loss that the party in breach did not have reason to foresee as a probable result of the

breach when the contract was made.”) (emphasis added).

Losses must also satisfy a closely related requirement--they must be proximately

caused by the breach. Hughes, 271 F.3d at 1066; see also Nat’l Controls Corp. v. Nat’l

Semiconductor Corp., 833 F.2d 491, 496 (3d Cir. 1987) (noting that lost profits, to be

recoverable, must be a “proximate consequence,” and not a “merely remote or possible”

result of the breach) (internal citations and quotations omitted); Lewis Jorge Constr.

Mgmt, Inc. v. Pomona Unified Sch. Dist., 102 P.3d 257, 265 (Cal. 2004) (holding breach

did not “directly or necessarily cause [contractor’s] loss,” where contractor alleged

breach caused contractor’s surety to reduce contractor’s “bonding” rating, and that

reduction in bonding rating caused loss of other prospective contracts); Williston §

64:12.14 Because these two doctrines are not meaningfully distinct, at least in the

context of the case before us, we analyze them under the rubric of foreseeability.

14
See Exxon Co., U.S.A. v. Sofec, Inc., 517 U.S. 830, 839-40 (1996)
(“Although the principles of legal causation sometimes receive labels in contract
analysis different from the “proximate causation” label most frequently employed in tort
analysis, these principles nevertheless exist to restrict liability in contract as well”).

05-5059 24
 Understanding foreseeability requires a more detailed description of OSC’s

theories. As we have noted, OSC theorizes that the initial shrinkage of the thrift (the

sale of the Citizens/OSBW assets and of the stock of the two subsidiaries) caused

damage because the thrift itself was made less profitable (by some $12 million per

year), leading to its ultimate demise. OSC argues alternatively and primarily that the

breach required OSC to sell its crown jewels in order to infuse additional capital into the

thrift and that the sale of the crown jewels caused long-term adverse consequences.

The Court of Federal Claims here did not find that the forced shrinkage of the

thrift had a foreseeable relationship to the seizure, indeed concluding that the shrinkage

was not “a major issue in determining damages.” Old Stone II, 63 Fed. Cl. at 85. OSC

in its briefs has not called our attention to any testimony that would suggest that the

seizure of the thrift by itself was a foreseeable result of the shrinkage. Indeed, the

linkage was particularly speculative given the fact that the shrinkage is only alleged to

have deprived the thrift of $12 million a year in profits when the total capital deficit at the

time of seizure was $77 million. In any event, the foreseeability theory with respect to

the sale of the thrift’s own assets is subject to the same deficiencies that exist with

respect to the primary OSC theory (concerning the forced sale of OSC’s own assets)

which we now discuss.

We turn then to OSC’s primary theory -- that the forced sale of the OSC crown

jewels had the foreseeable result of bringing about the seizure. Here the Court of

Federal Claims did find that the loss was foreseeable both because the capital shortfall

as a result of the breach was foreseeable and because “[i]t was also foreseeable that

regulators subsequently would demand that [OSC] prop up its failing subsidiary with

05-5059 25
infusions of capital once [OSB] fell short of its capital requirements.” Old Stone II, 63

Fed. Cl. at 89-90. In other words the Court of Federal Claims found that the need for

additional replacement capital infusions from OSC to the thrift as a result of the breach

was foreseeable. But, even if the need for replacement capital was foreseeable, that

hardly establishes that the adverse consequences alleged to flow from the need to

make infusions were foreseeable. As the Restatement of Contracts explains, “[t]he

mere circumstance that some loss was foreseeable, or even that some loss of the same

general kind was foreseeable, will not suffice if the loss that actually occurred was not

foreseeable.” Restatement (Second) of Contracts § 351 cmt a. (1981) (emphasis

added).

For the damages from the sale of the crown jewels to be foreseeable, the parties,

at the time of contract formation, would have had to foresee: (1) that the thrift would

have other problems that would require additional infusions of regulatory capital; (2) that

the crown jewels would be the only source of additional capital because neither the

holding company nor the thrift would have access to alternative capital; (3) that the

thrift’s other problems would be so severe that the thrift would be seized; and (4) that

the availability of the crown jewels would have been sufficient to avoid the seizure.

OSC has not called our attention to any testimony in the record that will support the

foreseeability of any of these assumptions, and we have been unable to locate any.

Here we think that under established principles of foreseeability OSC has completely

failed to establish that this extended chain of causation was foreseeable at the time of

contract formation.15

15
The Restatement of Contracts provides an instructive example:

05-5059 26
 Our prior Winstar cases do not support a contrary conclusion. Some cases have

held that the need to replace regulatory capital,16 or the failure of a thrift due to

deficiency in regulatory capital,17 is a foreseeable result of the government’s breach of

its promise of regulatory forbearance. But today we are allowing the recovery of the

replacement capital, and this is not a case in which the thrift was seized because it

lacked regulatory capital eliminated by FIRREA. OSC is claiming that the seizure

A, a carrier, contracts with B, a miller, to carry B’s broken crankshaft to its
manufacturer for repair. B tells A when they make the contract that the
crankshaft is part of B’s milling machine and that it must be sent at once,
but not that the mill is stopped because B has no replacement. Because A
delays in carrying the crankshaft, B loses profit during an additional period
while the mill is stopped because of the delay. A is not liable for B's loss of
profit.
That loss was not foreseeable by A as a probable result of the
breach at the time the contract was made because A did not know that the
broken crankshaft was necessary for the operation of the mill.

Restatement (Second) of Contracts § 351 cmt a., ill. 1 (1981). As in the illustration, the
government did not have reason to know that the replacement capital was necessary to
save the thrift from its other problems. See also id. at § 351, cmt d. (inability of injured
party to make substitute arrangements must be foreseeable).
16
See, e.g., LaSalle, 317 F.3d at 1374 (holding cost of replacement capital
is recoverable by thrift and can be measured by dividends paid to issuer of investment
capital; remanding for a calculation of cost of replacement capital); Home Savings, 399
F.3d at 1353-55 (holding cost of replacement capital is recoverable and can be based
on cost of substituting expensive private capital, which counted towards regulatory
requirements, for less expensive government-backed deposits, which did not); see also
S. Cal. Fed. Sav. & Loan Ass'n. v. United States 422 F.3d 1319, 1336-37 (Fed. Cir.
2005) (rejecting government’s argument that it was unforeseeable that the loss of
regulatory capital forbearances would impact the health of a thrift and thus increase its
costs of doing business); cf. Bluebonnet, 266 F.3d at 1355-56 (where holding company
had agreed--prior to FIRREA--to infuse capital into the thrift, rejecting argument that it
was unforeseeable that FIRREA would increase the cost of raising that capital).
17
See, e.g., Westfed, 407 F.3d at 1366-67.

05-5059 27
resulted from the fact that the replacement capital was unavailable to resolve other

problems not caused by FIRREA.

OSC’s foreseeability argument is analogous to a Winstar claim for lost profits. In

numerous cases we have rejected claims for lost profits on the ground that lost profits

are too speculative to be recovered. See Cal. Fed. Bank v. United States, 395 F.3d

1263, 1272-73 (Fed. Cir. 2005) (“Cal Fed II”); Glendale, 239 F.3d at 1380; Glendale

Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004) (“Glendale II”). In

Glendale II, we observed that

[G]iven the speculative nature of [a lost profits] claim, one that has yet to
be successfully established in any Winstar case . . . [and] experience
suggests that it is largely a waste of time and effort to attempt to prove
such damages.

Glendale II, 378 F.3d at 1313.18 OSC’s claim is even more speculative. A lost profits

claim in a Winstar case typically assumes that it was foreseeable the breach would

force the plaintiff to sell assets that otherwise would have generated profits and seeks to

recover the profits. See, e.g., Cal Fed, 245 F.3d at 1349-50. OSC does not seek to

recover lost profits. See Pl’s Br. at 27 (“OSC did not seek expectancy damages [at

trial]”). Nonetheless, OSC’s theory does not merely assume that the loss of profits was

foreseeable; it also assumes it was foreseeable that those profits (or the revenues from

asset sales) would have resolved problems not caused by FIRREA, and that neither

18
In one case, Cal Fed, we required a trial on the issue. There we held that
lost profits, based on the theory that FIRREA forced the thrift to sell profitable assets,
are not unforeseeable as a matter of law. 245 F.3d at 1349-50. After remand, we
affirmed the Court of Federal Claims conclusion that the profits were unforeseeable.
Cal Fed II at 1272-73; Cal. Fed. Bank v. United States. 54 Fed. Cl. 704, 713 (2002).
We reasoned that the thrift’s lost profits theory was “impractical,” and “not susceptible to
reasonable proof,” and “ha[d] yet to be successfully established in any Winstar case.”
Cal Fed II, 395 F.3d at 1270 (quoting Glendale II).

05-5059 28
OSC nor OSB would be able to resolve those problems by raising funds from other

sources. There was no proof that the attenuated claim of causation on which OSC

relies was foreseeable.

Accordingly, we hold that the loss of OSC’s initial contributions were not a

foreseeable result of the enactment of FIRREA and cannot be recovered under a

reliance theory. In light of our conclusion we need not address the government’s other

arguments concerning these restitution and reliance claims.

IV

Finally we note that OSC’s restitution claim is barred for another reason.

Restitution or reliance damages are inappropriate where relief would result in an “unfair

windfall” to the non-breaching party. As we explained in Bluebonnet, “the non-

breaching party should not be placed in a better position through the award of damages

than if there had been no breach.” 339 F.3d at 1345; see also Hansen, 367 F.3d at

1315 (quoting Bluebonnet, 339 F.3d at 1345); LaSalle, 317 F.3d at 1371 (noting that

“the non-breaching party is [generally] not entitled, through the award of damages, to

achieve a position superior to the one it would reasonably have occupied had the

breach not occurred.”). Here the $74.5 million payments replaced the capital that the

breach eliminated, and the award of the additional amounts as restitution or reliance

damages would be duplicative.

CONCLUSION

For the foregoing reasons, we affirm the Court of Federal Claims’ award of $74.5

million in damages for OSC’s post-breach mitigation payments. We reverse the award

of $103.2 million in damages for OSC’s stock contribution under the RIF assistance

05-5059 29
agreement. We also reverse the award of $14.8 million in damages for OSC’s cash

contributions under the Citizens assistance agreement.

REVERSED-IN-PART AND AFFIRMED-IN-PART

COSTS

No costs.

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