CalFed v. United States - Opposition

Docket number: 
No. 04-1557
Supreme Court Term: 
2005 Term
Court Level: 
Supreme Court

No. 04-1557

In the Supreme Court of the United States

California Federal Bank, FSB, petitioner


United States of America



Paul D. Clement
Solicitor General
Counsel of Record
Stuart E. Schiffer
Acting Assistant Attorney
David M. Cohen
Jeanne E. Davidson
John N. Kane, Jr.
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217


1. Whether petitioner properly preserved the issue of whether there is a conflict within the Federal Circuit concerning the calculation of damages in cases like this one.

2. Whether this Court's review is warranted to determine whether there is an internal conflict within the Federal Circuit between the decision in this case and that court's decision in a subsequent case.

3. Whether the Federal Circuit correctly affirmed the trial court's findings on replacement-cost damages in this case.

In the Supreme Court of the United States

No. 04-1557

California Federal Bank, FSB, petitioner


United States of America




The opinion of the court of appeals (Pet. App. 1a-17a) regarding the award of capital replacement costs, liabil ity, and other matters is reported at 245 F.3d 1342. The opinion of the court of appeals after remand proceedings on certain remedial issues (Pet. App. 122a-143a) is re ported at 395 F.3d 1263. The initial opinion of the Court of Federal Claims regarding the award of petitioner's capital replacement costs and other remedial issues (Pet. App. 18a-56a) is reported at 43 Fed. Cl. 445. The opinion of the Court of Federal Claims regarding liabil ity (Pet. App. 57a-121a) is reported at 39 Fed. Cl. 753. The opinion of the Court of Federal Claims on remand regarding remedies (Pet. App. 144a-173a) is reported at 54 Fed. Cl. 704.


The judgment of the court of appeals was entered on January 19, 2005. On April 7, 2005, the Chief Justice extended the time within which to file a petition for a writ of certiorari to and including May 19, 2005. The petition for a writ of certiorari was filed on May 19, 2005. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).


This is one of approximately 39 remaining (out of an original total of approximately 120) Winstar-related cases (see United States v. Winstar Corp., 518 U.S. 839 (1996)) that were filed after the enactment of the Finan cial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 183, and that are still pending in the Court of Federal Claims and the Federal Circuit. In this case, the court of appeals affirmed the trial court's ruling that the United States was liable for breach of contract with peti tioner; the government has filed a conditional cross-peti tion challenging that ruling. See United States v. Cali fornia Federal Bank, No. 04-1709. With respect to dam ages, the Court of Federal Claims awarded petitioner approximately $23 million in damages for costs incurred in mitigation of the breach. On petitioner's initial appeal in this case, the court of appeals affirmed that award, but remanded for further proceedings on other damages theories. This Court denied petitioner's first petition for certiorari. On remand, the trial court concluded that no further damages should be awarded. On petitioner's second appeal, the court of appeals affirmed.

Petitioner does not now seek this Court's review of any ruling of the court of appeals' on petitioner's second appeal, nor does petitioner seek plenary review of any aspect of the court of appeals' ruling on petitioner's first appeal. Instead, petitioner contends that the court of appeals' decision on petitioner's first appeal conflicts with later decisions of that court, and that this Court should summarily grant the petition, vacate the decision of the court of appeals, and remand, based on peti tioner's claim that there is an internal conflict within the Federal Circuit.

1.a.During the early 1980s, rising interest rates threatened the survival of the thrift industry by forcing thrifts to pay higher rates to depositors than they were earning from their existing portfolios of long-term, fixed-rate mortgages. Winstar, 518 U.S. at 845. Peti tioner California Federal Bank (CalFed) was among the thrifts whose existence was jeopardized by the interest rate squeeze. Indeed, as the trial court found, "Cal Fed would not have survived had interest rates stayed at the high levels of the early 1980s." Pet. App. 30a.; see id. at 52a ("Credible expert testimony established that plain tiff would not have survived further increases in interest rates during those years."). By 1982, CalFed was eco nomically insolvent by anywhere from $1.1 to $1.6 bil lion. Id. at 32a.1

Economically insolvent thrifts such as CalFed found it attractive to acquire other troubled thrift institutions. The acquiring thrift did not risk its own capital in the acquisition of additional customers and market share, because it had little or no capital left to lose. 2 C.A. App. A3000709-A3000712. Indeed, ultimate liability for both its own deposits and those of the acquired thrift re mained with the federal insurance fund. Glendale Fed. Bank v. United States, 239 F.3d 1374, 1381-1382 (Fed. Cir. 2001) (recognizing that government remained con tingently liable for net liabilities even after merger). Yet, if interest rates fell and restored the industry to profitability, the net liabilities of both the acquiring and acquired thrift would disappear, leaving the acquiring thrift with ownership of an additional valuable thrift franchise. 2 C.A. App. A3000722. The acquisition also could lead to a variety of accounting and regulatory ben efits for the acquiror, including an increase in reported "accretion" income and the treatment of the acquired thrift's net liabilities as regulatory capital in the form of "goodwill." See, e.g., Winstar, 518 U.S. at 851-853 (not ing the favorable accounting and regulatory treatment of goodwill); 12 C.F.R. 556.5 (a)(3) (1985); 2 C.A. App. A3000704.

b.CalFed made three acquisitions during the early 1980s that are relevant to its petition. In each instance, the acquired thrift institutions had significant net tangi ble liabilities on a market value basis, which were re corded on CalFed's balance sheet as goodwill and treated as regulatory capital pursuant to then-existing regulations. See generally Winstar, 518 U.S. at 848-851 (discussing regulatory treatment of goodwill).

First, in February 1982, CalFed acquired several thrift institutions in Georgia and Florida, known collec tively as "Southeast." Pet. App. 20a & n.1. The Federal Savings and Loan Insurance Corporation (FSLIC) pro vided $9 million in cash assistance for the transaction, and CalFed recorded on its balance sheet the acquired thrifts' assets and liabilities, and approximately $306 million in goodwill to be amortized over a period of 35 to 40 years. Id. at 3a, 20a.

Second, in October 1982, CalFed acquired the parent company of Brentwood Savings and Loan Association. In connection with the transaction, CalFed recorded Brentwood's assets and liabilities on its balance sheet, as well as approximately $315 million in goodwill to be amortized over a 35-year period. Pet. App. 4a; see 3 C.A. App. A5002325.

Finally, in January 1983, CalFed acquired Family Savings and Loan Association. CalFed recorded Fam ily's assets and liabilities on its balance sheet, as well as approximately $18 million in goodwill to be amortized over a 40-year period. Pet. App. 5a.

2.Congress enacted FIRREA in 1989. Among other things, FIRREA required the phase-out of good will from regulatory capital over a five-year period. See Winstar, 518 U.S. at 856-857. This phase-out required CalFed to operate with the same ratio of tangible capital to assets as all other thrifts. 1 C.A. App. A1002170- A1002172, A1002178-A1002180. To the extent that CalFed had relied upon goodwill to meet its capital re quirements, the phase-out required it either to shrink or to infuse more money into the thrift to replace the phased-out goodwill, thereby operating with more tangi ble capital and less debt. Id. at A1002170-A1002172. Between 1992 and 1994, CalFed raised more than $400 million in capital in a series of stock transactions, an amount greater than the $390 million in remaining, un amortized goodwill associated with the Southeast, Brentwood, and Family transactions. See Pet. App. 49a & n.13. Unlike goodwill, which is a non-earning asset, CalFed could invest the additional capital to earn a re turn, just as firms do when they voluntarily raise capital to fund new investments. 1 C.A. App. A1002179, A1002169-A1002170; 2 C.A. App. A3000407-A3000408.

3.In 1992, CalFed filed a complaint in the Court of Federal Claims, alleging that the government had en tered into contracts with CalFed when regulators ap proved each of the three acquisitions at issue, and that Congress had breached those contracts through the en actment of FIRREA. Pet. App. 3a-5a. In response, the government acknowledged that the Southeast acquisi tion involved a regulatory agreement, but denied that the regulatory approval of the Brentwood and Family acquisitions had resulted in contracts. In 1997, the Court of Federal Claims granted CalFed's motion for summary judgment on liability, concluding that the reg ulatory approval of all three acquisitions resulted in con tracts and that the government was liable for damages for the breach of those contracts that resulted from FIRREA. Id. at 57a-121a.

4.CalFed pursued several theories of recovery. First, CalFed asserted a claim for over $600 million in lost profits, based on business opportunities with third parties that allegedly were forgone due to the phase-out of goodwill. Pet. App. 10a-14a. Second, CalFed sought $409 million in restitution, a figure corresponding to the amount of net liabilities assumed by CalFed in connec tion with the acquisitions of Southeast and Brentwood ($620 million) minus CalFed's calculation of its earnings from the acquired thrifts. Id. at 15a. Third, CalFed presented a hypothetical "cost of replacement" claim, based upon a model purporting to show that it would cost almost $1 billion in cash to replace the $390 million in goodwill that was excluded from CalFed's regulatory capital as a result of FIRREA.

The trial court entered summary judgment against CalFed with respect to its lost-profits claim, ruling that the claim was too speculative as a matter of law. Pet. App. 22a-23a. The remaining claims proceeded to trial.

5.The court held a six-week trial on CalFed's re maining claims for recovery. In April 1999, the court awarded CalFed approximately $23 million in damages. Pet. App. 18a-52a. That award reflected the actual transaction costs incurred by CalFed in obtaining capi tal to replace the phased-out goodwill. Id. at 49a-51a. The court rejected petitioner's other claims for recovery, finding that "[t]he facts of this particular case do not establish that [CalFed] suffered monetary loss beyond its expenses of raising new capital." Id. at 52a.

a. Restitution. In denying CalFed's claim for resti tution, the trial court rejected CalFed's theory that it had conferred a benefit on the government equal to the acquired thrifts' net liabilities by "assuming" those lia bilities at the time of the acquisitions. The court pointed out that the government "remained responsible for those liabilities as if the contract[s] never had been exe cuted" and found that, "[w]ere it not for falling interest rates, the United States probably would have had to make [the net] liabilities in the form of deposits good." Pet. App. 52a. The trial court found that the only bene fit that CalFed had conferred upon the government was "buying time" until interest rates declined from their historic heights. Ibid.

b. Replacement cost. At trial, CalFed's replacement-cost model purported to show the costs to CalFed associated with three separate capital market transactions between 1992 and 1994. CalFed's expert theorized a hypothetical repurchase in 1998 of the stock CalFed issued between 1992 and 1994, claiming as a cost the total value, in 1998, of the shares hypothetically re purchased to extinguish these claims. Pet. App. 50a; 2 C.A. App. A3000409-A3000419. Thus, the better CalFed performed and the more its market value increased after the capital market transactions, the more CalFed claimed it was damaged by these transactions. 1 C.A. App. A1003480. In addition, CalFed hypothesized what it would have cost to replace goodwill from 1998 forward had it raised capital at that point. In total, CalFed's expert opined that it cost $955 million in cash to replace $390 million in remaining goodwill. 2 C.A. App. A3000405.

In response, Dr. Merton Miller, winner of the Nobel Prize in Economic Science, and Daniel Fischel, Profes sor of Law and Business at the University of Chicago, explained to the trial court that the promise to pay divi dends to new investors was indeed a cost of capital. 1 C.A. App. A1003470; 2 C.A. App. A3000407. However, they further explained that CalFed received cash in re turn for this promise to make dividend payments, and that the cash received equaled the expected discounted cost of future dividends, such that the "net costs" of rais ing capital to CalFed were transaction costs. 1 C.A. App. A10003431-A10003441, A1003470; 2 C.A. App. A3000407-A3000408. When it received cash upon the issuance of stock, CalFed not only replaced goodwill as a capital asset, it gained what goodwill did not provide: the ability to earn a return directly with the cash re ceived. Because CalFed conceded that it received fair market value for the securities it issued, the experts concluded that the value of the income stream it re ceived with the cash it raised equaled the expected dis counted cost of the dividends CalFed promised. 2 C.A. App. A3000407-A3000408 & n.5.

The court found that CalFed suffered approximately $23 million in damages, relecting the actual transaction costs incurred by CalFed in obtaining capital to replace the phased-out goodwill. Pet. App. 48a-51a. Relying upon the testimony of Dr. Miller, the trial court found that, "[o]n the day stock is issued, the amount you re ceive for the stock is equivalent to its worth and the only costs are transaction, or flotation costs." Id. at 50a. In contrast, the trial court found that the testimony of CalFed's expert regarding hypothetical replacement costs was not credible, particularly because CalFed's expert assumed that the cash value of CalFed's goodwill, a non-earning asset, was approximately two and one-half times the amount of the goodwill. Ibid. The trial court concluded that any award in excess of transaction costs "would be more than necessary to make CalFed whole." Id. at 49a.

6.CalFed appealed the trial court's rejection of its lost profits, restitution, and cost of replacement claims. The Federal Circuit vacated the trial court's summary judgment ruling with respect to CalFed's lost profits claim and remanded for a trial. The court affirmed the judgment in all other respects. Pet. App. 1a-17a.

The court of appeals specifically affirmed the trial court's finding that the net cost of replacing CalFed's phased-out goodwill was the transaction cost incurred in obtaining the new capital. The court acknowledged that dividends and interest paid on capital to new investors are a "cost of capital." Pet. App. 14a. But the court noted that "the government's expert, Merton Miller, a Nobel Laureate in Economic Science, testified that the cost of replacing goodwill was floatation costs because the value of the cash proceeds of Cal Fed's newly-raised capital equaled the cost of future dividends." Ibid. The court of appeals recognized that the trial court "found Cal Fed's experts not credible" on the issue of replace ment costs, due, in part, to "their testimony that the cost of replacing $390 million of goodwill was nearly a billion dollars." Ibid. Applying a deferential standard of re view, the court of appeals affirmed the trial court's award, "see[ing] no clear error in the court's factual finding that the floatation costs provided an appropriate measure of Cal Fed's damages incurred in replacing the supervisory goodwill with tangible capital." Ibid.

7.CalFed filed a petition for a writ of certiorari. CalFed challenged a number of rulings, including the court of appeals' judgment concerning the award of re placement costs and the judgment rejecting its claim for restitution. On January 22, 2002, this Court denied CalFed's petition. 534 U.S. 1113.

8.A second six-week trial was held in this case, ad dressing solely CalFed's lost profits claim upon remand. After reviewing voluminous documents and hearing from numerous fact and expert witnesses, the trial court found that CalFed's "lost profits model was not credi ble." Pet. App. 145a. The court found that CalFed had failed to establish any of the prerequisites for an expec tancy recovery-foreseeability, causation, or reasonable certainty. Id. at 145a-146a.

CalFed challenged the trial court's rejection of its lost profits claim, as well as a claim for prejudgment interest, during a second appeal. CalFed did not at tempt on that second appeal to raise any issue concern ing the trial court's finding in the earlier proceedings that its costs of replacing capital were $ 23 million. The court of appeals affirmed the trial court's denial of CalFed's lost profits claim, Pet. App. 122a-143a, and its claim for prejudgment interest, id. at 138a-139a. CalFed did not seek en banc review.


The decision of the court of appeals is correct, and it does not conflict with any decision of this Court or any other court of appeals. Petitioner's argument that there is an intra-circuit conflict is mistaken and was waived because it was not advanced in the court of appeals. In any event, although petitioner does not seek plenary review by this Court but only a remand to the court of appeals, further review of any kind would not be war ranted to address a claim of an intra-circuit conflict.

1.On this petition, CalFed does not seek plenary review by this Court of its claim that the courts below incorrectly calculated the damages on its replacement- cost theory. Instead, CalFed argues that the Federal Circuit's decision in this case "is flatly inconsistent" with that court's later decision in Home Savings of America v. United States, 399 F.3d 1341 (2005). CalFed argues that this Court should assume that the Home Savings decision is correct, grant the petition for a writ of certio rari, vacate the decision of the court of appeals in this case, and remand for further consideration by that court in light of Home Savings. Even if there were an intra- circuit conflict on the replacement-cost issue and the decision in Home Savings (rather than in this case) were correct and the existence of such a conflict warranted this Court's exercise of jurisdiction, the petition should be denied because petitioner never presented its claim of an intra-circuit conflict to the Federal Circuit.

Petitioner's contention is that its costs for replacing the intangible supervisory capital that was eliminated from its balance sheet by FIRREA were much more than the $23 million awarded by the Court of Federal Claims and affirmed by the court of appeals. In particu lar, petitioner asserts (Pet. 8) that the net costs of re placing the supervisory goodwill were not just the trans action costs it incurred in issuing new stock, but also the dividends it had to pay to its new shareholders.

Although petitioner now frames its request in terms of the Federal Circuit's decision in Home Savings, peti tioner contends (Pet. 9) that the Federal Circuit had already concluded in Lasalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363, 1374-1375 (Fed. Cir. 2003), that such dividend and interest costs can consti tute damages for a Winstar-type claim, and that the Federal Circuit merely reiterated that proposition in Home Savings. Indeed, the portion of the Home Sav ings decision that CalFed cites for the proposition that dividend and interest payments are always recoverable as "costs of capital" expressly relies upon LaSalle Talman. 399 F.3d at 1354 (citing LaSalle Talman for the proposition that "capital is not costless," and that the trial court had discretion to reject the government's transaction-cost analysis). Accordingly, petitioner's current claim that the Federal Circuit's decisions are internally inconsistent was available to it no later than the time that LaSalle Talman was decided.

The Federal Circuit decided LaSalle Talman on March 13, 2003. At no time between that date and Janu ary 19, 2005, when the Federal Circuit decided this ap peal, did petitioner take any step to call the alleged in ternal conflict to the attention of the court of appeals. Although petitioner in its second appeal challenged the district court's conclusions that petitioner was not enti tled to expectation damages and prejudgment interest, petitioner did not raise any issue in its second appeal regarding the earlier cost-of-replacement damages award. To the contrary, in the Statement of Related Cases in its opening brief on its second appeal, peti tioner stated that "the [court of appeals'] decision in this case might affect or be affected by, the resolution of other Winstar-type cases pending in the Court of Fed eral Claims or [the court of appeals] in which the plain tiffs seek lost profits or prejudgment interest." Pet. C.A. Br. ix (emphasis added).2 Petitioner did not ad vance any claim that this case would be affected by Home Savings, which was then pending. Nor did peti tioner assert more generally that this case would be af fected by any Winstar-related cases in the trial court or court of appeals in which the plaintiffs seek the cost of replacement capital.3

Moreover, although petitioner now contends that the Federal Circuit's decisions are internally inconsistent, petitioner did not seek initial en banc hearing of its sec ond appeal, or any part of it, so that the court of appeals would have the opportunity itself to address, in the first instance, the alleged inconsistency. See Fed. R. App. P. 35(a)(1) ("An en banc hearing or rehearing" of a case "is not favored and ordinarily will not be ordered unless * * * en banc consideration is necessary to secure or maintain uniformity of the court's decisions.") (empha sis added). Seeking en banc hearing would have been another way that petitioner could have brought its claim of an internal circuit conflict to the attention of the court of appeals. Petitioner, however, did not do so.

Finally, even after the Federal Circuit decided peti tioner's second appeal on January 19, 2005, petitioner could have filed a petition for en banc rehearing, seeking to raise any issues concerning replacement costs and informing the court of appeals of petitioner's assertion that the court's decisions were in conflict. Although Home Savings was not decided until March 7, 2005, it was fully briefed and argued long before the Federal Circuit decided petitioner's second appeal.4 Petitioner accordingly was in a position to be aware of the issues in Home Savings, and petitioner could have sought rehear ing en banc in this case in light of the claimed conflict with LaSalle Talman and the pendency of Home Sav ings. Yet petitioner continued to take no step to bring any claim of an internal conflict in the circuit to the at tention of the court of appeals.

Petitioner now asks this Court to analyze the court of appeals' decisions, determine whether they are in con flict, and to grant relief in this case on the ground that there is a conflict and the decisions favored by petitioner were the correct ones. The time to address the question whether the Federal Circuit's decisions are in conflict, however, would have been when petitioner was before that court. E.g., Youakim v. Miller, 425 U.S. 231, 234 (1976) ("Ordinarily, this Court does not decide questions not raised or resolved in the lower court."). Because petitioner failed to do so, or even to raise any issue con cerning replacement costs on its second appeal, it is now too late to obtain relief from this Court.5

2.In any event, petitioner's sole claim is that there is an internal conflict within the Federal Circuit regard ing the proper calculation of the cost of replacement capital in Winstar-related cases. Even if that claim had been preserved and were correct, however, this Court has accepted as a fundamental premise of its certiorari jurisdiction that further review is not warranted to ad dress a claim of an intra-circuit conflict. Wisniewski v. United States, 353 U.S. 901, 902 (1957) (per curiam); see Davis v. United States, 417 U.S. 333, 340 (1974) (certio rari not warranted despite conceded intra-circuit con flict on meaning of criminal statute).

a.Petitioner does not refer to any case in which this Court has granted certiorari, vacated a decision of the lower court, and remanded a case so that the lower court could address a claim of conflict with one of its own deci sions. Petitioner cites (Pet. 12) United States ex rel. Robinson v. Johnston, 316 U.S. 649 (1942). In that case, the Court issued a grant, vacate, and remand (GVR) order, "[i]n view of the conflict of views which has arisen among the judges of the Ninth Circuit with respect to the decision in this case, and in view of this Court's [in tervening] decision." Ibid. (emphasis added and cita tions omitted). There is no reason to believe that the internal disagreement in the Ninth Circuit would alone have been sufficient to warrant a GVR order.

Petitioner also cites (Pet. 12) Alabama v. Ritter, 454 U.S. 885 (1981). In that case, the Court issued a GVR order and remanded the case to the Alabama Supreme Court. The remand, however, had nothing to do with a concern for the consistency of that court's decisions, but rather was based on the need to determine if the state court had decided the case on the basis of federal or state law.

This Court initially issued a GVR order in Ritter in light of Beck v. Alabama, 447 U.S. 625 (1980). See Ritter v. Alabama, 448 U.S. 903 (1980). On remand, the Alabama Supreme Court held that the capital defendant in Ritter was entitled to a new trial. 403 So. 2d 154 (1981). The State filed a petition for certiorari, and re spondent's sole argument in opposition was that the state court's decision rested on an independent and ade quate state ground. 81-247 Br. in Opp. 1-6. This Court then issued the GVR order that petitioner cites, in which this Court remanded for further consideration by the Alabama Supreme Court in light of Reed v. State, 407 So. 2d 162 (Ala. 1981)-a decision that respondent had characterized as "particularly instructive" in showing that the state court rested its decision on an independ ent and adequate state ground. 81-247 Br. in Opp. 4-5. Understanding that the purpose of the remand was to determine the federal or state basis for its decision, the Alabama Supreme Court issued a brief opinion on re mand stating that it now would "unequivocally hold that our previous opinion in this case was based upon federal constitutional grounds, not state law grounds." Ritter v. State, 414 So. 2d 452 (1981).6

The purpose of the Ritter GVR order petitioner cites was thus to clarify whether the Alabama Supreme Court's earlier decision was based on federal or state grounds, a matter that went to this Court's jurisdiction to decide the case.7 The GVR order was certainly not based on any internal conflict in the Alabama Supreme Court, since that Court's decisions in both Ritter and Reed had reached the identical conclusion-that a capi tal defendant was entitled to a new trial.

b.Petitioner also cites cases in which this Court has granted plenary review, contending that "this Court has granted review to resolve the apparent conflicts within a circuit when it has deemed the question important." Pet. 13. In support of that contention, petitioner cites three cases in which this Court granted plenary review, the most recent of which dates from almost forty years ago. Commissioner v. Estate of Bosch, 387 U.S. 456, 457 (1967); Maggio v. Zeitz, 333 U.S. 56, 59-60 (1948); John Hancock Mut. Life Ins. Co. v. Bartels, 308 U.S. 180, 181 (1939). None of those cases supports petitioner's argu ment that an internal conflict within a circuit would war rant further review here.

In Bosch and John Hancock, there were indeed claims that the court of appeals had reached conflicting decisions on the question presented. But this Court did not rest its decision to grant certiorari in either case on such a claim of conflict. In Bosch, the Court explained that "[w]hether these cases [from the court of appeals] conflict in principle or not, which is disputed here, there does exist a widespread conflict among the circuits over the question and we granted certiorari to resolve it." 387 U.S. at 457 (emphasis added). In John Hancock, the Court stated that it granted certiorari "due to the differ ing views of the judges composing the court * * * and because of the importance of the question" presented. 308 U.S. at 181 (emphasis added).

In Maggio v. Zeitz, 333 U.S. 56 (1948), the court of appeals had wrestled with a complex tangle in bank ruptcy law and concluded that it had to affirm a con tempt order against the bankrupt individual. The court of appeals had stated that, "[a]lthough we know that [the bankrupt] cannot comply with the order, we must keep a straight face and pretend that he can, and must thus affirm orders which first direct [the bankrupt] 'to do an impossibility, and then punish him for refusal to perform it.'" Id. at 59 (quoting court of appeals' opinion). This Court explained that "the declaration [quoted above] is one which this Court, in view of its supervisory power over courts of bankruptcy, cannot ignore." Ibid. The Court also noted that the issues in the case "are impor tant to successful bankruptcy administration." Id. at 61. Thus, though there may have also been an internal cir cuit disagreement, see id. at 59-60, this court granted review to address issues of continuing and more general importance in bankruptcy administration.

c.Because cases in the courts of appeals are ordi narily decided by shifting combinations of judges from multi-member courts, internal conflicts no doubt do oc cur with some frequency. Nonetheless, if this Court were to take the step of issuing GVR orders to address intra-circuit conflicts in cases like this, the same logic would invite numerous other litigants to bring similar claims before the Court to obtain similar relief. This Court has wisely viewed the en banc process, not this Court's certiorari jurisdiction and not the GVR proce dure, as the means for the courts of appeals to address any lack of uniformity in their own decisions. The Court's traditional practice of not exercising its certio rari jurisdiction based on a claim of an intra-circuit con flict is a sound one. Adherence to that traditional prac tice is especially warranted in this case, because peti tioner did not renew or preserve any issue concerning the cost of replacement capital on its second appeal, much less seek to have the Federal Circuit resolve the asserted inconsistency that petitioner now contends had already developed with that court's 2003 decision in LaSalle Talman. See pp. 11-15, supra.

3.The decision in this case was in any event correct. Moreover, because the Federal Circuit reviews trial court decisions concerning the calculation of the value of replacement capital in Winstar-related cases under a deferential standard, petitioner errs in contending that the Federal Circuit's decision in this case conflicts with its decision in Home Savings.

a.In this case-on the first appeal-the court of appeals noted that the government's expert at trial, No bel Laureate Professor Merton Miller, had "testified that the cost of replacing goodwill was floatation costs because the value of the cash proceeds of Cal Fed's newly-raised capital equaled the cost of future divi dends." Pet. App. 14a. The court of appeals found that the trial court properly "discounted" CalFed's experts' testimony that "the cost of replacing $390 million of goodwill was nearly a billion dollars, based in part on the cost of repurchasing all outstanding stock by Cal Fed to eliminate the cost of paying dividends." Ibid. The court concluded that it "s[aw] no clear error in the court's fac tual finding that the floatation costs provided an appro priate measure of Cal Fed's damages incurred in replac ing the supervisory goodwill with tangible capital." Ibid.

The court's decision was correct. Contrary to peti tioner's characterizations, see Pet. 6, the Federal Circuit expressly recognized that dividend payments reflect a cost of capital. See Pet. App. 14a ("[T]he cost of replac ing goodwill was floatation costs because the value of the cash proceeds of Cal Fed's newly-raised capital equaled the cost of future dividends.") (emphasis added). The court simply affirmed the trial court's finding that, al though the future dividends Cal Fed promised to pay when it issued stock had a "cost," that cost was equal to the value of the cash proceeds that CalFed received for the stock, leaving the floatation costs as the net dam ages. That was consistent with Dr. Miller's testimony at trial. 1 C.A. App. A1003468-A1003472; see 1 id. at A1002461-1002462; 2 C.A. App. A3000400, A3000407- A3000409. Because there was no clear error in the trial court's finding that tangible, investable cash raised by CalFed gave CalFed a benefit, as well as imposing an approximately equal cost, the Federal Circuit properly affirmed the trial court's conclusion that the transaction costs reflected the true net cost of raising capital.

Contrary to CalFed's assertions (Pet. 7), the court of appeals did not hold on the first appeal in this case that the cost of new capital was "zero," and did not "exclude" dividends and interest payments from consideration as a cost of capital. Instead, the Federal Circuit affirmed the trial court's finding that the benefits of CalFed's capital raising (i.e., the cash available for profitable in vestment by CalFed) offset the costs (i.e., the claim on future dividends), except for transaction costs. That decision was fully supported by the only testimony the trial court, affirmed by the court of appeals, found to be credible.

A recent decision of this Court supports the reason ableness of the trial court's determination that when public companies such as CalFed raise capital by issuing securities such as stock in a market-based transaction, the cost to the firm of selling the stock is offset by the cash received by the firm. In Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 (2005), the plaintiff inves tor brought a securities fraud claim based upon false information the company disseminated, upon which the plaintiff relied when he purchased the company's stock. Public disclosure of the claimed fraud came several months after the plaintiff purchased the stock. The is sue presented to this Court was whether the plaintiff had properly pled damages by asserting that the pur chase of the stock alone was sufficient to show dam ages-without asserting, as an element of causation, that the company's stock price dropped months later as a result of the disclosure of the fraud.

This Court held that the purchase of the stock, stand ing alone, was not sufficient to show damages. The Court explained that the cost to the plaintiff of purchas ing a share of stock "is offset by ownership of a share that at that instant possesses equivalent value." 125 S. Ct. at 1631. If the fraud had never been disclosed, or if the ultimate disclosure of the fraud had no effect upon the value of the security, the plaintiff could have re-sold the stock and received back precisely what he paid in the first place. Ibid. More fundamentally, the price paid for any security purchased in the market, reflecting the present value of the future cash flows one expects to receive, results in no economic cost or damage at point of purchase. See ibid.

In this case, the same economic principle is at stake, although from the firm's perspective. When CalFed issued securities and obtained cash to replace a non- earning asset such as goodwill, the price received in cash for issuing the securities was of "equivalent value" to the securities. The securities represented claims on CalFed's future earnings, and the cash CalFed received was available for it to invest in its business to produce those earnings. In other words, as the government's experts explained to the trial court in this case, "the cost of replacing goodwill was floatation costs because the value of the cash proceeds of Cal Fed's newly-raised capital equaled the cost of future dividends." Pet. App. 14a. At the very least, the trial court did not make a clearly erroneous factual finding, or abuse its discretion, when it credited that evidence.8

b.In Home Savings, the court of appeals affirmed an award of damages for replacement capital that ex ceeded the transaction costs the plaintiff incurred in raising that capital. 399 F.3d at 1353-1355. As in this case, however, the court's affirmance was not based on a de novo review of the trial court record. Instead, the court used a deferential, abuse-of-discretion standard. The court concluded that it "s[aw] no abuse of discretion in the trial court's methodology for calculating the cost of replacement capital," and it "h[e]ld that the [trial] court did not abuse its discretion in setting up its model." Id. at 1354.

In particular, the court of appeals recognized in Home Savings, as it had in this case, that raising capital has a cost, which is "the required rate of return on vari ous terms of financing." 399 F.3d at 1354. But the court of appeals also recognized, as it did in this case, that the cash raised by issuing stock had a benefit as well, and that the costs must be "discounted" by the value of the benefit. Ibid. See ibid. ("Supervisory goodwill merely provides a thrift with 'leverage,' or legal permission to obtain additional deposits, whereas cash is 'tangible capi tal' that can both provide leverage and fund loans."). In Home Savings, the trial court had calculated the "inci dental benefits" of the goodwill as equal to the cost of the deposits the thrift no longer had to obtain in order to raise cash. Because deposits are insured by the gov ernment (although they are also direct claims on the thrift's own assets and attracting more deposits may require paying higher interest rates on existing deposits as well), the trial court had (mistakenly, in our view) estimated that cost using the rate paid for a comparable government-backed asset, the intermediate-term Trea sury bond. The trial court had then deducted that amount from the value of the dividends that the bank promised to pay on its new capital instruments. Ibid. The court of appeals in Home Savings held that, in reaching that conclusion, "[t]he [trial] court's approach to calculating the benefits of cash was * * * within the court's sound discretion." Id. at 1354-1355.

c.Because the court of appeals employed a deferen tial standard of review both in this case and in Home Savings, the court's conclusions in the two cases do not conflict. The court of appeals did not hold in either case that there is only one way to calculate the various values involved in the particular case of a thrift that, in a Winstar-related case, raised capital to replace the intan gible capital lost when the use of goodwill was phased out. The court of appeals in this case affirmed the trial court's finding that the value of the cash the thrift re ceived here was roughly equal to the value of the future stream of dividends the thrift was promising to pay. The court of appeals in Home Savings affirmed the trial court's finding in that case that the value of the cash was less than the rate of return on the financing. Because the court of appeals was applying a deferential standard of review in both cases-and the records and conten tions of the parties in the two cases differed9-the deci sions affirming the trial court's findings in each case are not inconsistent.

Petitioner argues that the court of appeals in Home Savings recognized that the question of how to calculate the cost of replacement capital in a Winstar-related case is a "legal issue," Pet. 10, and that "the measure of dam ages is always a question of law to be reviewed de novo," Pet. 11.10 The court of appeals, however, made quite clear in Home Savings that it was not engaging in de novo review of the pertinent trial court findings. In stead, it stated in Home Savings that it would "review the [trial] court's methodology for assessing the cost of replacement capital, including its use of a 'safe rate' of return to account for the inherent benefits of the re placement capital, for abuse of discretion." 399 F.3d at 1347 (emphasis added). The court derived that standard from its prior decision in SmithKline Diagnostics, Inc. v. Helena Labs. Corp, 926 F.2d 1161, 1164 (Fed. Cir. 1991), where it held that, while factual findings are ordi narily subject to the clearly erroneous standard of re view, "certain subsidiary decisions" involved in a trial court's actual finding of the precise dollar amount of damages "are discretionary with the court" and "are, of course, reviewed under the abuse of discretion stan dard." See Home Savings, 399 F.3d at 1346-1347. The court's conclusions in Home Savings that the trial court "did not abuse its discretion in setting up its model," and that "[t]he court's approach to calculating the benefits of cash was * * * within the [trial] court's sound discre tion," id. at 1354-1355, are inconsistent with petitioner's claim that the Federal Circuit passed on the damages issue in Home Savings as a matter of law.

4.Finally, as explained above, the question pre sented in this case concerns the proper valuation of the cash a thrift receives when it issues securities to replace the capital it lost as a result of a breach of contract. Pe titioner cites no case outside the Winstar context in which a court has decided that issue. Indeed, of the ap proximately 120 Winstar-related cases that were origi nally filed, petitioner cites only a few in which the thrift engaged in capital-raising transactions to replace good will and in which the cost of raising capital was of signif icant importance. Moreover, because only approxi mately 39 Winstar-related cases of any sort are still pending, the issue now affects a progressively smaller and steadily dwindling number of cases.


The petition for a writ of certiorari should be denied. Respectfully submitted.

Paul D. Clement
Solicitor General
Stuart E. Schiffer
Acting Assistant Attorney
David M. Cohen
Jeanne E. Davidson
John N. Kane, Jr.

JULY 2005

1 See 1 C.A. App. A1000231-A1000234, A1000250-A1000254, A1002226-A1002230, A1002202-A1002203, A1005015-A1005016, A1005031-A1005034, A1005041-A1005043; 2 C.A. App. A3000283- A3000289, A3000304-A3000305, A3000692, A3000708-A3000716, A3000789-A3000790, A3000791-A3000793, A3000794-A3000798.

2 Rule 47.5 of the Federal Circuit's rules provides:

Each principal brief must contain a statement of related cases indicating (a) whether [the same case has ever been on appeal]; or (b) the title and number of any case known to counsel to be pending in this or any other court that will directly affect or be directly affected by this court's decision in the pending appeal. If there are many related cases, they may be described generally, but the title and case number must be given for any case known to be pending in the Supreme Court, this court, or any other circuit court of appeals.

3 Because petitioner did not mention the issue, the court of appeals' decision in the second appeal did not address the issue of the proper measure of petitioner's cost of replacing capital, and it did not explain its view of petitioner's claim of an internal conflict in the circuit. The issue petitioner now seeks to raise-the alleged internal conflict in the court of appeals' decisions-was neither pressed nor passed on below. See, e.g., United States v. Williams, 504 U.S. 36, 41-42 (1992).

4 The reply brief for the plaintiff in Home Savings in the court of appeals was filed on May 3, 2004, and oral argument was held on September 8, 2004.

5 As petitioner points out (Pet. 6-7), the government's brief in opposition to petitioner's earlier petition for certiorari generally opposed further review on all of the questions petitioner presented- including the question concerning the adequacy of the award for cost of replacement capital-on the ground that further review of the court of appeals' interlocutory decision was unwarranted. See 01-592 Br. in Opp. 12-15. The government also, however, specifically argued that petitioner's claim regarding the cost of replacement capital did not warrant further review in any event. The government explained, relying on the testimony of Prof. Miller and other evidence, that the trial court's findings regarding the costs of replacement capital were correct on the facts of this case, that those findings were properly affirmed by the court of appeals, and that the issue did not warrant further review. 01-592 Br. in Opp. 26-28. This Court denied review. 534 U.S. 1113.

6 This Court then issued another GVR order in Ritter in light of its own later decision in Hopper v. Evans, 456 U.S. 605 (1982). See Alabama v. Ritter, 457 U.S. 1114 (1982).

7 This Court's decision in Michigan v. Long, 463 U.S. 1032, 1037-1044 (1983), came after the GVR in Ritter and clarified the bases on which this Court would find an independent and adequate state ground for a state-court decision. See id. at 1038-1039 (noting that the Court had on occasion "vacated * * * a case in order to obtain clarification about the [federal-law or state-law] nature of a state court decision") (citations omitted).

8 In Bank United v. United States, 80 Fed. Appx. 663 (Fed. Cir. 2003), the Federal Circuit again affirmed a trial court finding that the net cost of replacing goodwill with tangible capital did not exceed transactions costs. Relying upon its decision in this case, the Federal Circuit reasoned:

The trial court's finding that Appellants' mitigation costs associated with the 1992 preferred stock offering were restricted to transac tion costs is consistent with testimony offered by the government's lead expert at trial that, because the value of the cash proceeds of a capital offering equal the expected expense of future dividends, the true costs of such a transaction are limited to floatation costs. We have previously declined to hold such a finding clearly errone ous, and we do so again here.

Id. at 672.

9 For example, when CalFed in its first appeal did claim that the trial court had erred in calculating the cost of replacement capital, CalFed did not advance the theory that the court of appeals affirmed in Home Savings-that the benefit of the cash the firm obtains by selling stock is to be measured by the relatively low interest rate on deposits that the thrift would otherwise have had to obtain. See Pet. C.A. Br. 60- 62; Pet. C.A. Reply Br. 28-30.

10 The cases CalFed cites (Pet. 11) for the proposition that the "measure of damages is always a question of law to be reviewed de novo" are inapposite. The standard of review discussed in those cases did not address a question like the one here-the comparison between the value of the benefits a thrift receives from cash raised in a financing transaction, as opposed to the cost to the thrift of the promised dividend stream. Instead, they addressed much more general theories of what types of damages recovery are permitted, given the particular liability theory pursued. For example, in Boston Old Colony Ins. Co. v. Tiner Assoc., Inc., 288 F.3d 222, 230 (5th Cir. 2002), the court reviewed de novo the district court's determination that the governing state law recognized the cost of replacing tortiously damaged property as the cost of restoration, without depreciation. The court did not hold that the cost of replacing tortiously damaged property itself should be reviewed de novo. See Scully v. U.S. Wats, Inc., 238 F.3d 497, 509, 512 (3d Cir. 2001) (comparing "conversion" versus "breach of contract" theories on the facts of the case, concluding that "given the myriad factors that might arise in each case, we doubt that any single universal damage theory could properly value stock options in all situations," and "agree[ing] with the District Court's damage calculation because it properly weighed and balanced the strengths and weaknesses of competing damage calculation methods"); Delchi Carrier, SpA v. Rotorex Corp., 71 F.3d 1024, 1028-1031 (2d Cir. 1995) (general princi ples of "lost profits" calculation and availability of incidental or consequential damages); Galindo v. Stoody Co., 793 F.2d 1502, 1516 (9th Cir. 1986) (damages for union's duty of fair representation do not terminate upon employee's obtaining interim employment and should include value of lost fringe benefits).

Petition Stage Response
Updated October 21, 2014