Mola Dev. Corp. v. United States - Opposition

No. 08-138

In the Supreme Court of the United States

MOLA DEVELOPMENT CORPORATION, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

GREGORY G. GARRE
Solicitor General
Counsel of Record
GREGORY G. KATSAS
Assistant Attorney General
JEANNE E. DAVIDSON
KENNETH M. DINTZER
BRIAN A. MIZOGUCHI
VINCENT D. PHILLIPS
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

QUESTION PRESENTED

Petitioner owned a controlling interest in a savings and loan that was allowed to merge with another insti tution in 1988. The regulatory approval of the merger contained no provision or forbearance regarding treat ment of goodwill. The question presented is as follows:

Whether the government's approval of the proposed merger resulted in the formation of a contract between the United States and petitioner regarding the future regulatory treatment of goodwill with respect to the merged entity.

In the Supreme Court of the United States

No. 08-138

MOLA DEVELOPMENT CORPORATION, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1a-33a) is reported at 516 F.3d 1370. The opinion of the Court of Federal Claims (Pet. App. 34a-85a) is reported at 74 Fed. Cl. 528.

JURISDICTION

The judgment of the court of appeals was entered on February 25, 2008. A petition for rehearing was denied on May 5, 2008 (Pet. App. 86a-88a). The petition for a writ of certiorari was filed on August 1, 2008. The juris diction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

This is one of the breach-of-contract cases that were filed after the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 183. See Uni ted States v. Winstar Corp., 518 U.S. 839 (1996) (Win star). Of the approximately 122 Winstar-related cases that were originally filed, approximately 15 remain pen ding. Most of those cases, like this one, have nearly completed the litigation process.

1. In 1984, petitioner entered the financial services business by acquiring a financially troubled California savings and loan, which it renamed Charter Savings Bank (Charter). After that acquisition, petitioner hired consultants to find another troubled financial institution for it to acquire and merge into Charter. Pet. App. 2a- 3a, 38a-39a.

In November 1987, petitioner's consultants selected Merit Savings Bank (Merit) as a merger target. On De cember 15, 1987, the Federal Home Loan Bank Board (FHLBB) proposed that Merit be placed on a bidding schedule for sale in June 1988. In late December 1987, petitioner and Charter informed Merit of their interest in merging Merit into Charter. Petitioner notified the government about the proposed transaction the next day. On January 15, 1988, petitioner and Merit entered into a formal agreement regarding the terms of a mer ger between Charter and Merit. The government was not a party to that agreement. Pet. App. 3a-4a, 38a-39a.

On January 28, 1988-13 days after reaching a mer ger agreement with Merit-petitioner approached the FHLBB to discuss the terms for regulatory approval of the proposed merger. During those discussions, peti tioner asked the government to allow it to make a non- cash contribution in order to bring the merged entity in to compliance with capital requirements. FHLBB of ficials denied that request and stated their opposition to permitting petitioner to fund the merged entity through a non-cash contribution. Pet. App. 4a, 39a-40a.

On April 19, 1988, petitioner and Charter filed a for mal application for regulatory approval of the proposed merger. The application described the planned use of the purchase method of accounting and the amortization of any resulting goodwill over a period not to exceed 25 years. Those provisions were consistent with Generally Accepted Accounting Principles and standard FHLBB policy at the time, and thus required no regulatory for bearance. The merger application also requested six specific regulatory forbearances, none of which con cerned the regulatory treatment of goodwill. Pet. App. 4a.

Discussions between petitioner and the government continued following the filing of the April 19, 1988, mer ger application. On May 20, 1998, FHLBB officials in formed petitioner that they would not grant any of the requested forbearances and that the merger would be approved only if petitioner made a cash contribu tion that was sufficient to meet the regulatory minimum capital levels. On May 24, 1988, petitioner asked the FHLBB to designate the merger as "supervisory" in or der to facilitate "use of net operating losses for tax pur poses." Pet. App. 5a (citation omitted).

On June 24, 1988, the FHLBB granted preliminary approval to the Charter/Merit merger. As petitioner had requested, the government classified the merger as "supervisory." The approval letter said nothing about the regulatory treatment of goodwill. The only regula tory forbearance mentioned in the approval letter stated that "the calculation for the cash contribution shall ex clude scheduled items of Merit as of September 30, 1987." Pet. App. 6a (citation omitted). That forbearance allowed petitioner to exclude certain of Merit's problem loans in calculating the required cash contribution. Id. at 5a-6a.

The merger between Charter and Merit closed on July 29, 1988. The FHLBB did not adopt a formal reso lution approving the merger. Pet. App. 5a.

2. In August 1989, Congress enacted FIRREA to address widespread problems in the savings and loan industry. FIRREA created the Office of Thrift Supervi sion (OTS) and charged it with examining, supervis ing, and regulating federally insured thrifts. 12 U.S.C. 1462a, 1463. On December 7, 1989, regulations imple menting FIRREA became effective. Pet. App. 6a. Char ter was not in compliance with the new regulations. Ibid. OTS seized the thrift on June 15, 1990, and regula tors ultimately liquidated Charter. Ibid.

3. Petitioner filed suit in the Court of Federal Claims, alleging that FIRREA's enactment breached a contract between petitioner and the government regard ing the regulatory treatment of goodwill. Pet. App. 7a. The court granted summary judgment in favor of the government. Id. at 34a-85a. The court determined that "[t]here [was] nothing in [petitioner's] application or the history of negotiations asking for extended amortization of goodwill or the continued ability to count goodwill as capital in the face of regulatory change," and it stated that "[t]he alleged negotiations and documents cited by [petitioner] show nothing more than regulatory approval of an acquisition." Id. at 82a-83a. As a result, the court held that petitioner "ha[d] failed to show the 'something more' [that is] necessary to remove the transaction from the realm of regulatory approval." Id. at 83a.

4. The court of appeals affirmed. Pet. App. 1a-20a.

a. The court of appeals stated that, "[i]n order to prevail in a Winstar case[,] a plaintiff . . . must estab lish that a contract existed with the government where by the government was 'contractually bound to recog nize the supervisory goodwill and [particular] amortiza tion periods.'" Pet. App. 13a-14a (quoting Franklin Fed. Sav. Bank v. United States, 431 F.3d 1360, 1365 (Fed. Cir. 2005), and Winstar v. United States, 64 F.3d 1531, 1541 (Fed. Cir.), aff'd, 518 U.S. 839 (1996)). The court further observed that, in order to demonstrate the existence of a Winstar contract, the plaintiff must estab lish four elements, including "mutuality of intent to con tract." Id. at 14a (quoting Anderson v. United States, 344 F.3d 1343, 1353 (Fed. Cir. 2003)).

The court of appeals reiterated its previous state ments that "a formal written agreement is not necessary to prove the existence of a Winstar contract where there is other adequate evidence of the government's intent to form a contract." Pet. App. 15a (citing Fifth Third Bank v. United States, 402 F.3d 1221, 1231-1232 (Fed. Cir. 2005)). The court emphasized, however, that "[a]n agency's performance of its regulatory or sovereign functions does not create contractual obligations," id. at 14a (quoting D&N Bank v. United States, 331 F.3d 1374, 1378-1379 (Fed. Cir. 2003)), and that "[m]ere approval of the merger does not amount to [an] intent to con tract." Ibid. (quoting Anderson, 344 F.3d at 1353, and D&N Bank, 331 F.3d at 1378). The court of appeals ex plained that, in order for a plaintiff to demonstrate the existence of a Winstar contract, "there must . . . be a clear indication of intent to contract" and the plaintiff must raise "more than a cloud of evidence that could be consistent with a contract." Ibid. (quoting D&N Bank, 331 F.3d at 1377-1378).

In this case, the court of appeals determined that there was "no evidence of any negotiation about the reg ulatory treatment of goodwill that could serve as evi dence that the government agreed to a goodwill con tract." Pet. App. 15a; see id. at 6a (observing that "[n]o document purports to be a written agreement between the FHLBB and either [petitioner] or Charter"). The court rejected petitioner's contention "that its negotia tions for the FHLBB's designation of the merger as 'su pervisory' is sufficient evidence of the government's in tent to form a contract with respect to regulatory treat ment of goodwill." Id. at 15a. The court explained that it had "rejected a similar argument in D&N Bank," and had stated that "labeling a merger 'supervisory' alone, . . . tell[s] us nothing about the government's intent to contract." Id. at 15a-16a (quoting D&N Bank, 331 F.3d at 1380) (brackets in original).

The court of appeals also rejected petitioner's con tention "that the negotiation over the supervisory desig nation" in this particular case "was in effect a negotia tion over the treatment of goodwill." Pet. App. 16a. The basis of that argument was petitioner's claim that a "su pervisory" "designation was necessary, under the pre vailing regulations, to allow use of the purchase method of accounting," which was, in turn, "the only accounting method that would recognize goodwill as an asset for regulatory purposes." Ibid. The court of appeals "dis agree[d] with [petitioner's] construction of the regula tions," ibid., concluding that neither the regulations themselves nor an internal FHLBB memorandum sup ported petitioner's "assertion that the supervisory des ignation was necessary to utilize the purchase method of accounting." Id. at 18a.

Finally, the court of appeals rejected petitioner's argument "that the government must have intended to form a contract with respect to regulatory treatment of goodwill because Charter would not have had sufficient capital to meet regulatory requirements absent the in clusion of goodwill in its regulatory capital calculation." Pet. App. 19a. The court acknowledged that "imminent regulatory noncompliance may help to establish that negotiated forbearances were contractual." Ibid. (citing Fifth Third Bank, 402 F.3d at 1232). The court of ap peals stated, however, that "the mere risk of regulatory noncompliance absent use of the purchase method of accounting does nothing to establish the existence of a goodwill contract." Ibid. (citing D&N Bank, 331 F.3d at 1380). The court concluded that, "[i]n the absence of other evidence indicating the government's intent to con tract," the FHLBB's approval of "a merger that, without the inclusion of goodwill in Charter's regulatory capital calculation, would have left Charter's capital level below the regulatory minimum does not establish any contract to maintain this treatment of goodwill." Ibid. The court of appeals therefore declined to "reach the government's contention that [petitioner] lacks standing to assert a Winstar breach of contract claim because [petitioner] was not a party to any agreement with the government regarding regulatory treatment of goodwill, even if Charter was a party to such a contract." Id. at 19a n.9.

b. Judge Newman dissented in relevant part. Pet. App. 21a-33a. In her view, "[t]he circumstances and documents [in this case] left no doubt that a con tract including supervisory goodwill was intended and formed." Id. at 22a.

ARGUMENT

The court of appeals correctly held that no contract was formed between petitioner and the government re garding the future regulatory treatment of goodwill with respect to the merged Charter/Merit entity. The court of appeals' decision in this case is consistent with this Court's decision in Winstar and does not conflict with any decision of this Court or any other court of appeals. This Court's review is therefore unwarranted.

1. No conflict exists between the court of appeals' ruling here and this Court's decision in Winstar. As petitioner acknowledges (Pet. 9), "[t]he issue of contract formation was not squarely before this Court in Winstar." Accord Winstar, 518 U.S. at 860 (opinion of Souter, J.) (stating that "[t]he anterior question whether there were contracts at all between the Government and respondents dealing with regulatory treatment of super visory goodwill and capital credit * * * is not strictly before us"). And although the issues before the Court in Winstar "require[d] some consideration of the nature of the underlying transactions," id. at 861, petitioner iden tifies no language supporting its assertion (Pet. 8) that Winstar announced a single "standard" for determining whether a contract was formed in the first instance. There is likewise no basis for petitioner's assertion (ibid.) that, under Winstar, "regulatory documents pa pering the transactions [are] to be construed as part of a contractual commitment and not as mere statements of regulatory policy."

In each of the transactions before the Court in Win star, the Federal Savings and Loan Insurance Corpora tion (FSLIC) and a thrift institution had formally signed a document entitled "Assistance Agreement" or "Super visory Action Agreement." See 518 U.S. at 861-868 (opinion of Souter, J.). Those documents on their face constituted "agreements" between the government and private parties, and they included standard contractual clauses, such as integration clauses. See ibid. The issue before the Court in Winstar was not whether contracts had been formed between FSLIC and the thrifts, but whether those contracts contained terms regarding the treatment of supervisory goodwill that subjected the United States to liability when Congress passed a law affecting that treatment. The decision in Winstar does not support the proposition, essential to petitioner's claim here, that the mere act of regulatory approval can be regarded as an implicit contractual promise by the government that the existing legal framework will not change. To find a contract on the basis of actions by a federal agency in executing a regulatory law would not only violate ordinary principles of contract formation and administrative law, but would also violate the prohi bition under the Tucker Act against recognizing con tracts implied in law. See Hatzlachh Supply Co. v. Uni ted States, 444 U.S. 460, 465 n.5 (1980) (per curiam); United States v. Algoma Lumber Co., 305 U.S. 415, 421 (1939).

Petitioner is correct that, during the 12 years since Winstar was decided, the Federal Circuit has fleshed out the standards for determining whether a Winstar contract was formed in a particular case. Petitioner is also correct (Pet. 9) that some of the precise details of the doctrine that the Federal Circuit has developed in this area are not, in a strong sense, "mandate[d]" by this Court's decision in Winstar. But that does not mean that those decisions conflict with Winstar. It simply means that the Federal Circuit has been required, like any other lower court, to apply the general principles stated in this Court's decisions to situations that the Court did not specifically address. Cf. Pet. 10 (urging that this Court should "step in and define the parame ters of a Winstar contract for the treatment of supervi sory goodwill" (emphasis added)).

2. Petitioner also suggests (Pet. 9) that this Court's review is warranted because the court of appeals' deci sion in this case conflicts with its own prior decisions. An intra-circuit conflict would not be a reason for this Court to grant a writ of certiorari. See Wisniewski v. United States, 353 U.S. 901, 902 (1957) (per curiam).1

In any event, there is no conflict between prior Fed eral Circuit decisions and the court of appeals' decision in this case. The court of appeals quoted (see Pet. App. 14a) the same four requirements for the formation of a Winstar contract that it had set out in Anderson v. United States, 344 F.3d 1343, 1353 (Fed. Cir. 2003) (see Pet. 18). The court also acknowledged (Pet. App. 15a) that its decision in Fifth Third Bank v. United States, 402 F.3d 1221, 1234 (Fed. Cir. 2005) (see Pet. 11, 24-25, 30), had established that "a formal written agreement is not necessary to prove the existence of a Winstar con tract when there is other adequate evidence of the gov ernment's intent to form a contract." The court of ap peals simply found that, in this case, there was "no evi dence of any negotiations about the regulatory treat ment of goodwill that could serve as evidence that the government agreed to a goodwill contract." Pet. App. 15a (emphases added). And petitioner does not even attempt to explain how the court of appeals' decision in this case conflicts with Hometown Financial, Inc. v. United States, 409 F.3d 1360 (Fed. Cir. 2005) (see Pet. 15-16), Admiral Financial Corp. v. United States, 678 F.3d 1336 (Fed. Cir. 2004) (see Pet. 16), or the "other" unspecified "precedent of the Federal Circuit" that petitioner invokes. Pet. 30.

3. Petitioner suggests that this Court should grant certiorari because the court of appeals reached the wrong result in this particular case. See e.g., Pet. 10, 12- 16, 18-23, 26-30. But the "determination of whether the government has shown assent to a contract guarantee ing a particular treatment of goodwill is a fact-intensive inquiry," Suess v. United States, 535 F.3d 1348, 1360 (Fed. Cir. 2008), and petitioner's request for case-spe cific error-correction does not warrant this Court's re view.

In any event, the court of appeals correctly con cluded that there was no contract regarding the regula tory treatment of goodwill in this case. The court did not require petitioner to demonstrate the existence of any "magic language" (Pet. 9, 19, 30), "key words" (Pet. 23), or a "single integrated contract document" (Pet. 23). Rather, the court of appeals ruled against petitioner be cause it concluded that there was "no evidence of any negotiations about the regulatory treatment of goodwill that could serve as evidence that the government agreed to a goodwill contract." Pet. App. 15a (emphases added).

The court of appeals likewise did not rely on any "magic language" test in rejecting petitioner's conten tion that its negotiations with the FHLBB about treat ing the merger as "supervisory" was, in effect, a negoti ation for a goodwill contract. Instead, the court rejected the underlying premise of petitioner's argument, i.e., that a supervisory designation was "necessary, under the prevailing regulations, to allow use of * * * the only accounting method that would recognize goodwill as an asset for regulatory purposes." Pet. App. 16a (em phasis added). Petitioner does not contend that the court of appeals' conclusion on that point was erroneous. Nor does petitioner acknowledge the undisputed evi dence-cited by both the Court of Federal Claims (see id. at 48a-50a) and the court of appeals (see id. at 5a)-that the FHLBB understood petitioner's request for a "supervisory" designation as being for the purpose of permitting the merged entity "to utilize the benefits of a tax free reorganization and the net operating loss carryforwards of Merit." Id. at 5a (citation omitted).

Contrary to petitioner's repeated suggestions (Pet. 9, 11), the court of appeals did not hold that there can never be a Winstar contract where the terms of a given merger agreement were "consistent with the FHLBB's regulatory policy at the time." Pet. 11. The court sim ply reaffirmed that "[m]ere approval of the merger does not amount to [an] intent to contract," and that a Winstar plaintiff must show "'something more' than mere regulatory approval" or performance of other sov ereign or regulatory functions. Pet. App. 14a-15a (cita tion omitted); see p. 9, supra.

Petitioner further contends (Pet. 13) that it would have been "madness" for Charter to have acquired Merit in the absence of a contractual agreement with the gov ernment regarding the future treatment of goodwill. Petitioner argues (Pet. 13-14) that the purported irratio nality of that course of conduct "is strong evidence that [both petitioner and the government] intended to be bound by the accounting treatment of goodwill arising in the merger." Those arguments reflect a misconception of the regulatory framework that existed when the merger occurred. As the court of appeals explained (Pet. App. 18a), the regulations in effect at the time of the merger permitted Charter to count goodwill as regu latory capital without securing any forbearances or other approvals from the government. Accordingly, the merged institution would not "have been insolvent im mediately upon the merger" (Pet. 13), regardless of the existence or lack of existence of a Winstar contract.

Nor is there anything inherently irrational about a private actor's entry into a commercial relationship whose prospects for success depend on the maintenance of an existing regulatory scheme. Even without a con tractual commitment from the government that applica ble statutes and regulations will not change, private par ties frequently pursue that course, assuming the risk that the existing legal framework may change. As the court of appeals explained, "[i]n the absence of other evidence indicating the government's intent to contract," the fact that the success of petitioner's venture de pended on the continued effectiveness of particular reg ulatory provisions does not establish that the govern ment made a binding pledge to continue its existing reg ulatory approach. Pet. App. 19a.

Petitioner suggests (Pet. 15) that "other Winstar cases evidence" the government's objective intentions with respect to the merger at issue here. Petitioner's argument appears to be that, because the government included express risk-shifting language in certain agree ments that courts later determined created binding con tractual obligations on the government, the absence of any clear statement by the FHLBB here that petitioner would be required to bear such risk of regulatory change is itself evidence of an intent to contract. But that puts the cart before the horse. In order to make its argu ment work, petitioner must posit (Pet. 16-17) that the FHLBB had a binding "agreement with [petitioner]," and thus assume away the central issue in this case.

4. Petitioner also contends (Pet. 8-10, 25, 31-32) that this Court's review is warranted because the Federal Circuit's decisions in Winstar cases have undermined this Court's Winstar decision and will discourage citi zens from entering into commercial contracts with the government. That contention is incorrect.

As the Federal Circuit has correctly observed, Win star claims frequently turn on their particular facts and circumstances, and each case must be considered on its individual merits. See, e.g., California Fed. Bank, FSB v. United States, 245 F.3d 1342, 1347 (2001), cert. de nied, 534 U.S. 1113 (2002). The Federal Circuit's deci sions have not "increasingly chipped away at this Court's ruling in Winstar for the benefit of the govern ment." Pet. 31. Some Winstar plaintiffs have been suc cessful, while others have not. Cumulatively to date, plaintiffs in Winstar-related cases have been awarded more than $1 billion, and the awards in individual cases have ranged from $2.05 million to $381 million. See Hometown Fin., Inc., 409 F.3d at 1362; Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308, 1312 (Fed. Cir. 2004), cert. denied, 544 U.S. 904 (2005).

In other Federal Circuit decisions, relief has been denied based on findings of no contract (as in this case), lack of standing, forfeiture, fraud, or prior material breach. See Long Island Sav. Bank, FSB v. United States, 503 F.3d 1234, 1251, 1253 (Fed. Cir. 2007), cert. denied, No. 07-1234 (Oct. 6, 2008); Hughes v. United States, 498 F.3d 1334, 1339 (Fed. Cir. 2007), cert. de nied, 128 S. Ct. 1869 (2008); Anderson, 344 F.3d at 1359; D&N Bank, 331 F.3d at 1382; Castle v. United States, 301 F.3d 1328, 1337 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003). Cf. Pet. App. 19 n.9 (stating the court of appeals' conclusion that there was no Winstar con tract in this case made it unnecessary to reach the gov ernment's contention that petitioner lacked standing because any alleged Winstar contract was between Charter and the government rather than between peti tioner and the government). In the Winstar-related cases where it has rejected the plaintiffs' claims, the Federal Circuit has simply respected this Court's admo nition that ordinary principles of contract construction and breach should be applied to government contracts. Winstar, 518 U.S. at 870-871, 895 (opinion of Souter, J.). Contrary to petitioners' apparent belief, this Court's decision in Winstar did not suggest that all persons who acquired savings and loans during the 1980s thereby became contractually entitled to receive compensation from the government for any subsequent business losses that could potentially be attributed to changes in the applicable regulatory framework.

In any event, the Winstar set of cases is nearing its end. Of the original 122 Winstar-related cases, only 15 remain. The issues raised by petitioner will thus have little, if any, future impact.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

GREGORY G. GARRE
Solicitor General
GREGORY G. KATSAS
Assistant Attorney General
JEANNE E. DAVIDSON
KENNETH M. DINTZER
BRIAN A. MIZOGUCHI
VINCENT D. PHILLIPS
Attorneys

OCTOBER 2008

1 Nor would any "conflict" between the court of appeals' decision in this case and the "Court of Federal Claims' own prior law" (Pet. 9) mer it this Court's review. The Federal Circuit has exclusive appellate jur isdiction over the Court of Federal Claims, see 28 U.S.C. 1295(a)(3), and its decisions are binding on that court. See Crowley v. United States, 398 F.3d 1329, 1335 (Fed. Cir.), cert. denied, 546 U.S. 1031 (2005).