Citizens Federal Bank v. United States

1989), significant changes which made in FRIEDMAN, Circuit Judge. Senior governmental regulation savings of the This is a related Winstar case in which and loan business. These prohib- included the Court of Federal Claims held that the iting using good- thrifts “regulatory from government agreement had breached an will” a capital regulatory pur- as asset for with a savings company and loan that the poses requiring and them to phase out latter could use a of method practice five-year In period. over a the accounting determining its capital for Act, Congress prohibited also thrifts from regulatory purposes, and awarded dam- using subordinated debt as their part of ages $18,600,000. approximately of In its regulatory capital. appeal the challenged only has FIRREA, As a result of damages. many the award of It thrifts contends that the breach of agreement regulators liqui- did not became insolvent and the cause injury plaintiffs for which the dated them. awarded damages. We affirm. A number thrifts filed suit Court of seeking damages Federal Claims I on a variety of theories. In States United A. relating The facts to the financial 839, v. Corp., Winstar 518 U.S. S.Ct. 116 problems savings industry and loan (1996), Supreme 135 964 L.Ed.2d early in the 1980s and the federal govern- upheld Court this court’s decision that the ment’s attempts to alleviate the situation United States liable for breach of are well only briefly known and need to be agreed contract to thrifts with which it had summarized here. At that time a large permit as regulatory capital the use number savings and loan companies “regulatory goodwill” had been creat- thrifts) (also known as were in serious ed in acquisi- with the connection thrifts’ facing financial straits insolvency. Winstar, tion In failing of a thrift. Federal regulators program devised a un- Supreme did ap- not address “the economically der which healthy thrifts propriate damages” measure amount of acquire financially-distressed would ones. for such breach. Id. at S.Ct. action, encourage To regulators such 2432. In a of subsequent number deci- offered acquiring various benefits to the sions, this has addressed various thrifts, usually were incorporated in damages questions arising in such cases. agreements written with them. in- These See, Bank, e.g., Heights v. Unit- First FSB treating cluded the excess the amount States, (Fed.Cir.2005); ed 422 F.3d 1311 acquired for the thrift paid over that enti- (known Mgmt. Corp. Granite United ty’s “regulatory goodwill”) value as (Fed.Cir.2005); Hold- an acquiring as asset Westfed ings, Inc. v. compliance regula- thrift’s with the thrift’s (Fed.Cir.2005). tory capital requirements. agree- which, in reduced its assets Citizens also The basic facts in this found B. Claims, pre- the substitution of conjunction are by the Court of Federal debt, en- largely undisputed. for subordinated ferred stock fully regu- with the new comply abled to 1980s, appellee In mid Citizens FIRREA latory capital requirements that (“Citizens”) prede- Bank and its mandated. were a successful and cessor affiliates request well-managed thrift. At the then filed suit Citizens regulators thrift federal of the indus- Claims, dam- seeking the Court of Federal (“the try Regulators”), alleged breach ages acquired financially-troubled two Agree- provisions Assistance acquisi- thrifts. connection with those permitting regulatory ments to use them, the encourage Regu- and to tions regulatory capital of its goodwill part as Acceptance lators entered into written The years. and to it over amortize with under Agreements Citizens which government first that the had held treat was authorized to the ex- Citizens Agreements—a breached the Assistance acquired the thrift’s liabilities cess of over indicated, which, ruling the government as price purchase “regulatory good- the as challenge. does not here will,” would amortized which be over 25 damages case to proceeded The then the satisfy and could be to years used Citizens initially sought phase, which Citizens regulatory-capital requirements. Citizens million, damages exceeding on based $350 “regulatory good- obtained million of $35.9 damages: profits, of various theories lost in connection the 1986 acquisi- will” with restitution, reliance, capital of cost million in tion connection with the $17 replacement. After three rounds of sum- acquisition. Fed. Citizens Bank v. motions, mary judgment of which most (2004) 507, Fed.Cl. rejected, Citizens’ were a trial was theories (“Liab.Op.”); Bank v. Citizens Fed. Unit- held to what dam- mitigation determine (2002) ed 51 Fed.Cl. ages to costs Citizens was entitled for the (“Breach Op.”). replacing regulatory cap- it incurred in the FIRREA, Following the enactment of ital it had a result FIRREA. lost as of compliance 1989 Citizens still was in damages court awarded Citizens’ regulatory-capital requirements, the al- $18,683,901 consisting following ele- coverage greatly its though margins (1) transaction ments: its costs reduced. $3,802,901 exchange preferred for FIRREA, to the Prior enactment of Cit- (2) $266,000 debt; stock for for the differ- large had a amount of subordinated izens ence the dividend rate on the between debt, depositors its held. FIRREA and the rate on preferred stock interest part the use debt as a prohibited of such notes; subordinated regulatory capital. thrift’s To deal -with $14,615,000 compensation the dimin- as for problem, issued non-cumula- Citizens resulting ished cash from the adverse flow exchange preferred tive stock for the consequences exchange. tax exchange subordinated notes. While trial holding, so court ruled improved regulatory-capital Citizens situa- proper determining for standard tion, consequence it had an tax for adverse whether of con- breach although because the interest damages tract was wheth- deductible, caused Citizens’ on the notes was paid had factor in er the breach was substantial paid preferred on the stock that dividends than, causing damages for not. rather substituted them were government urged, whether the damages ries. We discern a among common thread were attributable to and entirely them, resulted appro- however: the selection of an from the breach. priate causation depends upon standard the facts of the case and lies

II largely within trial court’s discretion. just noted, As in assessing dam comparable The standard is gov- to that ages applied the trial court the “substan erning selection of an appropriate method- causation, i.e., tial theory factor” that a ology damages, which lies defendant that has breached a contract is within trial court’s discretion. Cy- See liable for those party the other Techs., Inc., Corp. ber v. FAS the contract suffered for which the breach (Fed.Cir.1998) (en banc) (“The was a substantial in causing factor amount of determined a dis- damages. government contends that trict court is a question of fact that the court wrong used the standard. The reviewed for clear error appeal, while standard, proper argues, the method used a district court in causation, is “but-for” under which the reaching that determination is reviewed breaching party is only liable for those discretion.”) (citation for an abuse of omit- damages that it directly entirely and ted). caused. In its most recent dealing case with the According government, to the prop- issue, Indiana Michigan Power Co. v. er governing standard causation in breach States, (Fed.Cir. United 422 F.3d 1369 of contract claims that by announced our 2005), this court stated that predecessor, Claims, the Court of more Damages for breach of contract are re- years than ago Myerle 100 in v. United (1) coverable where: damages States, (1897). There, 33 1 Ct.Cl. reasonably by foreseeable breaching Court of Claims that “plaintiff held a can (2) party at the of contracting; time only recover those damage items of breach is a substantial causal factor in proximate are the result of the acts of the damages; are Government____ damage For a to be di- shown with certainty. reasonable appear rect there must to be no interven- Id. at (citing Energy Capital Corp. v. (not ing incident caused the defaulting States, (Fed. United party) complicate or confuse the certain- Cir.2002)). ty of the result between the cause and the damage; the cause produce must the ef- Energy Capital, the Court of Federal inevitably fect naturally, possibly not applied Claims the “substantial factor” probably.... or even There must not be theory. explained: causation It steps two between the and damage.” cause Analyzing Ramsey [Ramsey v. United 27. The contends that States, 101 F.Supp. Ct.Cl. standard, under this which it urges this (1951) and other distinguishes ] cases followed, consistently court has it should profits between cases where the lost have been summary judgment awarded were claimed under other contracts and and Citizens not should have recovered profits cases where lost were claimed anything. directly under the contract with the United States. Because in case En this dealing proper Our cases with the ergy Capital profits flowing seeks lost may appear standard of causation superfi cially somewhat inconsistent in from the breach of the contract with the applying States, Ramsey impose “substantial factor” and “but for” theo- United does not always, or causation must theory of for” regard to causa- high a burden tion____ reasons, be used generally, this Court even For these pro- based cases argument, Defendant’s rejects the Winstar-related using Plaintiff must Ramsey, that court from hibiting on the trial caused its appropriate [sic] breached prove factor” test “substantial Instead, the Court “inevitably.” losses cases. prove Plaintiff to require the will Bank California factor” was a “substantial the breach (Fed.Cir.2005), is not 395 F.3d 1263 losses, majori- the test causing its conclu- analysis and with this inconsistent ty jurisdictions. Federal Claims sion. There omitted). (citation This at 395

47 Fed.Cl. “definitively established” stan- a applied award affirmed the Court Claims’ contended The thrift dard of causation. commenting specifi- profits of lost without applied the should have that the trial court cally the use of the substantial-factor In affirm- factor” standard. “substantial Corp., 302 F.3d Energy Capital standard. court, stated that the trial this court ing (“We agree [with do not at 1328-29 correctly of Federal Claims “the Court Energy Capital’s lost government] advo- factor’ test rejected the ‘substantial overly speculative remote and profits were Although Id. at 1268. cated CalFed.” law.”). a matter of broad, dowe this statement is somewhat decision in Bluebonnet In its earlier that in all announcing it as rule not read Savings Bank v. United of cau- cases the standard Winstar-related (Fed.Cir.2001), upheld this court also always is the “but for” one. We sation approved the Court of apparently another instance which view as Federal Claim’s use of the “substantial- standard upheld the causation court has in case. factor” test a Winstar-related the court’s case as within for “s[ought] thrift to recover the There the Indeed, months less than 8 discretion. financing in costs caused increase in opinion after the California of FIRREA which breached the passage issued, Michigan in Power the Indiana debt, capital, subordinated and dividend discussed, already this court stated opinion rejecting In forbearances.” Id. at 1355. damages are recoverable that contract damages, to the trial court’s failure award ... breach is a substantial “where “The Court of Federal this court stated: at damages.” causal factor properly determined Claims 1373. a substan- breach of the forbearances was case, Feder- In the Court of present fi- tial factor in Bluebonnet’s increased in its discretion al Claims did not abuse at nancing costs....” 1356. theory of using the “substantial factor” There have been a number Winstar- adequately explained causation. The court court, in sus- related cases which this the court the reasons for its action. As award taining the of Federal Claims’ stated: profits damages, ap- of lost rejection has “substantial factor” standard of the “but-for” that court’s use proved by the approval been reviewed See, First e.g., theory of causation. Bluebonnet and Federal Circuit both Bank, Heights FSB v. United though Myerle has Energy Capital even (Fed.Cir.2005); La Van Unit- F.3d 1311 overruled. Because (Fed.Cir.2004). explicitly not been F.3d 1340 ed this accepted has cases, however, the Federal Circuit not read those We do standard, with this it is consistent the “but- any broad rule that announcing analysis in Energy Capital, preferred argument Court’s stock. Neither can because the standard has been adopted prevail. in numerous Winstar-related cases be- A. upheld We have the Court of Feder- Court, judges fore other on the this al Claims’ use here of the “substantial Court concludes that it is appropri- factor” test for whether the ate standard to applied be breach of contract caused Citizens’ dam- result, case. As a the Court finds that ages. Here the trial court found that “the may Plaintiffs proceed attempt to to es- exchange preferred stock for [of subordi- tablish that exchange offer was nated in part mitigate debt] was due to breaching provisions caused goodwill capital effects of lost credit” FIRREA. and that the support record did not “the Op.,

Liab. at Fed.Cl. 515. Government’s contention that the ex- change solely response offer was to the Ill non-breaching provisions of FIRREA.” trial court awarded Citizens Op., Liab. Compare Fed.Cl. 516. approximately million what are $18.6 Bluebonnet, where this court ruled “mitigation damages.” called These are properly Court of Federal Claims “[t]he intended to reimburse a non-breaching determined that the breach of the forbear- party to a contract expenses for the ances was a substantial factor in Bluebon- in attempting rectify injury incurred financing net’s increased costs because the breach caused it. See Restatement capital forced Bluebonnet to raise at a time (Second) § Contracts 347 cmt. c when FIRREA had made investments in (“[T]he injured party is entitled to recover considerably thrifts riskier and less attrac- for all actually loss suffered.... [I]n tive.” 266 F.3d at 1656. clud[ing] in a costs incurred reasonable however, The government argues, effort, not, whether successful or to avoid improper award was because loss.”). were the trial court require did not Citizens to compensate awarded to prove which preferred shares of stock expenses it incurred in replacing regu its replace “regulatory goodwill” used to latory capital preclud after FIRREA had and, further, that whatever costs Citizens using regulatory goodwill ed thrifts from replace “regulatory goodwill” incurred to or subordinated as regulatory capital. debt separated should be from its cost of re- challenges The the placing the subordinated debt. (A) damages award on grounds. two Since Savings This court’s decision in Home of Agreements the Assistance did explic not America, FSB v. United 399 F.3d itly using authorize Citizens to continue its (Fed.Cir.2005), requires rejection of regulatory capital, subordinated debt as thrift, following this contention. There a refinancing Citizen’s of that debt cannot be FIRREA, the enactment of to issued stock government’s attributed to the breach of replace “regulatory goodwill” the it had agreements; those to the extent that the preserve large capital lost and to the cush- damages gov reflected those expenses, conservatively- ion it had maintained as a (B) ernment is not liable for them. It was Sav., at run institution. Home 399 F.3d not foreseeable that government argued that the 1352-53. Agreements breach of the Assistance awarding Court of Federal Claims erred would result the adverse tax conse damages covering the costs associated with quences that Citizens had suffered as a thrift replacing result of the unsecured debt with the sale of stock because the “raised should not breaching party that a variety principle reasons not capital for a of and did “it did not at portion capital liable for that specify which be supervisory goodwill.” replace contracting raised of have reason to to the time upholding damages, at 1353-54. as a result of such a probable foresee “strategy that the thrift’s (Second) this court stated Con- breach.” Restatement of capital through types of various of raising (1981). § If it was fore- tracts 351 cmt. a commercially financing was a reasonable cause the seeable that the breach would ratio, debt-to-equity effort to its maintain capital, party other to obtain additional to mitigate and fair reasonable efforts and particular that the there is no requirement id. requires,” are all that the law at capital or method used to raise that its approach and that the trial “court’s to consequences foreseeable. See Jo- also be cash ... the benefits of was calculating Perillo, seph M. 11 Corbin Contracts within sound even the court’s discretion” ed.) (“What (2005 § at 108 is 56.7 rev. though require did not thrift the court injury required merely actually is that the specify portion capital to a kind that suffered must be one of “regulatory good- to the lost replace used and of an defendant had reason to foresee will,” id. at 1354-55. beyond amount that the bounds is not Here, Savings, in Home trial prediction.”). reasonable awarding did not err reflect The decisions of this court stock, issuing preferred Citizens’ cost of In the apply principle. because that was a reasonable effort to relied on the Court Federal Claims our mitigate “regulatory goodwill” the loss finding decision Bluebonnet even had not though Citizens shown which to consequences “tax here are similar oth- particular used to replace shares were er costs that been found to be fore- have Indeed, regulatory it is goodwill. difficult seeable caused the breach.” Liab. to see could have how Citizens allocated Bluebonnet, this court Op. 520. In af- preferred portions stock firmed the of Federal Claims’ find- replacement. such that a ing was foreseeable thrift “Foreseeability B. question capital would be seek even more “forced to of fact for clear error.” reviewed Blue require- heightened regulatory to meet bonnet, (citing at 1355 Landmark ments” and that it was also foreseeable Deposit Land Ins. Corp., Co. v. Fed. 256 that associated costs and risks (Fed.Cir.2001)). trial meeting would have requirements these court found that “it was foreseeable at the consequences negative other economic time of contract that Citizens would “increasing] securing such as the costs capital have to credit replace good equity financing.” 266 F.3d at debt will in to continue to order be a self- 1356; Sav., F.3d see also Home 399 government if the sufficient institution” (Fed.Cir.2005); Fed. S. Cal. Sav. cf. goodwill” “regulatory provi breached the States, v. United 1336-37 Agreements. sions the Assistance Liab. (Fed.Cir.2005). That Op., finding, Fed.Cl. at 520. Corp. Stone Old supports, the record sufficient (Fed.Cir.2006), on which the damage sustain award. Citizens was that government establishing relies required that it not also to show was fore foreseeability trial court’s that, finding of replacing seeable such capital, erroneous, clearly compel does not negative would tax consequences. incur Stone, foreseeability requirement The conclusion. In ruled reflects Old of Federal profits. Claims had the loss of existence erred a when found that thrift’s seizure other operating factors confluence by was foreseeable at the necessarily pre- the breach will not contracting. time of Id. court pointed This recovery clude based the breach. government’s out that for the seizure to be However, profits lost are “a measure- foreseeable, parties, at the time of party ment of what a would have re- formation, contract would have had to breaching party’s ceived absent the ac- foresee four factual It situations. was the tion,” i.e., those losses that would not lack of evidence to support any of these have occurred but for the breach. The assumptions that led this court to reverse inability to prove by preponderance the trial finding foreseeability. court’s profits the evidence that have would Id. The situation in that quite case was been made but for the breach will there- case, unlike that and Old preclude recovery fore profits on a lost support Stone does not theory. contention. (citations omitted). principles These CONCLUSION govern this case as well. judgment of the Court of Federal In this the Court of Federal awarding Claims Claims forthrightly stated that the choice

$18,683,901million is of causation standards controls the out- come of the case. 59 Fed.Cl. AFFIRMED. (2004) (“The legal question answer to this RADER, Judge, dissenting. Circuit depends on the standard used to deter- year ago, Just a this court confronted mine if link there was a causal between the the question proper test causa- exchange.”). breach and the Because the tion contract cases. Cal. Fed. rejected trial court chose the “substantial Bank v. United 395 F.3d 1263 factor” test Myerle instead of the test for (Fed.Cir.2005). This court chose between causation, would application remand for the “inevitably naturally” standard of the correct standard for causation. U.S., Myerle v. 33 Ct.Cl. and the “substantial factor” standard. Id. at 1267. Opinion by for the court filed Senior The Court of Federal had adopted Claims FRIEDMAN, Judge in which Circuit Myerle standard. Cal Fed advocated joins. Judge Dissenting NEWMAN the “substantial factor” standard for causa- opinion Judge filed Circuit RADER. profits. tion of lost acknowledging After some dissonance in the case law on this

question, “Thus, this court ruled: correctly rejected

Court of Federal Claims ‘substantial factor’ test advocated ” Thus, CalFed. Id. at 1268. I would fol- ruling

low this court’s recent 2005

Myerle proper set forth the test for causa-

tion. Fed,

In Cal. this court clarified the role

of other causative factors: say

That is not to the breach

must be the sole factor or sole cause

Case Details

Case Name: Citizens Federal Bank v. United States

Court Name: Court of Appeals for the Federal Circuit

Date Published: Jan 24, 2007

Citation: 474 F.3d 1314

Docket Number: 2005-5173

Court Abbreviation: Fed. Cir.