Southwest Inv. Co. v. United States - Opposition
No. 05-1087
In the Supreme Court of the United States
SOUTHWEST INVESTMENT COMPANY, INC., ON BEHALF OF ITSELF AND ON BEHALF OF FIRST LOUISIANA FEDERAL SAVINGS BANK, 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
PAUL D. CLEMENT
Solicitor General
Counsel of Record
STUART E. SCHIFFER
Assistant Attorney General
DAVID M. COHEN
JEANNE E. DAVIDSON
WILLIAM F. RYAN
JEFFERY T. INFELISE
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Whether, assuming the existence of an agreement between the government and a savings and loan holding company, the trial court correctly held that the holding company was not entitled to restitution because any breach of that agreement was not material, the holding company was not harmed by the breach, and any award of restitution would constitute a windfall.
In the Supreme Court of the United States
No. 05-1087
SOUTHWEST INVESTMENT COMPANY, INC., ON BEHALF OF ITSELF AND ON BEHALF OF FIRST LOUISIANA FEDERAL SAVINGS BANK, 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 judgment of the court of appeals (Pet. App. 1) is not published in the Federal Reporter, but is reprinted in 158 Fed. Appx. 283. The opinion of the Court of Fed eral Claims (Pet. App. 2-44) is reported at 63 Fed. Cl. 182.
JURISDICTION
The judgment of the court of appeals was entered on November 21, 2005. The petition for a writ of certiorari was filed on February 17, 2006. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).1
STATEMENT
This is one of approximately 33 remaining (out of an original total of approximately 122) 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 remain pending in this Court, the Court of Appeals for the Federal Circuit, or the Court of Federal Claims. In this case, the court of appeals summarily affirmed the trial court's judgment that any breach of contract was not material and that any award of restitu tion would confer a windfall.
1. In early 1984, several local businessmen in the area of Lafayette, Louisiana, formed First Louisiana Holding Company (FLHC).2 In June 1984, FLHC sub mitted an application to the Federal Home Loan Bank (FHLBB) of Dallas for permission to form a new savings institution, First Louisiana Federal Savings Bank (First Louisiana). Pet. App. 5.
In January 1985, the Federal Home Loan Bank Board (FHLBB) conditionally approved FLHC's appli cation for permission to form First Louisiana. Among the conditions of the approval was a requirement that FLHC (and each individual director) execute a Net Worth Maintenance Agreement, which provided a lim ited guarantee that the investors would maintain the net worth of First Louisiana. Pet. App. 6-7. The approval also required FLHC to infuse "at least" $3 million in capital into First Louisiana. Id. at 7. The trial court assumed that, ultimately, FLHC infused $4 million into First Louisiana. Ibid.
In November 1984, FLHC and Union Federal Sav ings and Loan (Union), a troubled thrift, entered into an "Agreement, Plan of Conversion and Merger." Pet. App. 7-8. In December 1984-one month after it had signed an agreement to merge with Union-FLHC sub mitted an application to acquire Union and to merge Union into First Louisiana. That application included a request for several forbearances from regulatory re quirements. Id. at 8.
In June 1985, the FHLBB conditionally approved FLHC's application to acquire Union and to merge Un ion into First Louisiana. Pet. App. 8. Among the condi tions for approval was a requirement that FLHC stipu late that it would maintain the net worth of First Louisi ana to satisfy regulatory capital requirements following its merger with Union. Id. at 8-9. FLHC sent a letter to FHLBB making that stipulation. Id.at 9.
In the same month, the FHLBB granted certain reg ulatory forbearances to First Louisiana, including that: (1) the regulators would forbear, for a period of five years, from taking certain regulatory actions for any failure of First Louisiana to meet its net worth require ments arising solely from certain acquired Union Fed eral assets and liabilities, and from certain losses gener ated from those assets and liabilities; and (2) any good will resulting from the Union acquisition could be amor tized over a period of 40 years for regulatory accounting purposes, rather than over a period of 20 years as re quired by generally accepted accounting principles. Pet. App. 9.
FLHC acquired Union and merged it into First Loui siana in July 1985. The Federal Savings and Loan In surance Corporation (FSLIC) provided no direct finan cial assistance to either FLHC or First Louisiana. The acquisition was accounted for by the purchase method, and, using the purchase method, First Louisiana re corded $5.8 million in goodwill. Pet. App. 9.
Based primarily upon extraordinary gains it recog nized on the sale of loans it acquired from Union, First Louisiana reported a net profit of $445,000 in 1985. Pet. App. 10. However, 1985 was the only year in which First Louisiana ever realized a profit. Ibid. First Louisiana's losses in subsequent years resulted from a severe eco nomic downturn in the oil-dependent community that First Louisiana serviced, which created a "near-depres sion economy," ibid., and from deficiencies in the man agement of the savings institution. See id. at 10-17. Among the many management deficiencies were viola tions of "restrictions on dealing with insiders," id. at 11- 12, "deficiencies in internal control procedures," id. at 12, "deep" involvement in "volatile" transactions, ibid., "improper loans" to "affiliated persons," id. at 15-16, transactions that gave the "appearance of a conflict of interest," id. at 16, "high operating expenses," including "compensation" that "was 55% more than the peer group average" in one year, id. at 17, and "high fixed asset ex pense," ibid.
Based upon First Louisiana's problems, in July 1987, the Federal Home Loan Bank of Dallas concluded that First Louisiana was not in compliance with its capital requirements, even with the benefit of the forbearances granted in connection with the Union merger. Pet. App. 14-15.
In October 1988, the Federal Home Loan Bank of Dallas notified First Louisiana that it was designated as a "Troubled Institution" under existing regulations. Pet. App. 19. That designation required First Louisiana to submit a capital restoration plan to the FHLBB. Ibid. In February 1989, First Louisiana submitted a capital restoration plan in response to the order of the Federal Home Loan Bank of Dallas, in which it con ceded that, even taking into account the forbearances it had been granted in conjunction with the Union acquisi tion, First Louisiana is "nearing insolvency." Ibid. First Louisiana also stated that it could not raise addi tional capital to meet its minimum regulatory net worth requirements unless FSLIC agreed to provide assis tance. First Louisiana proposed three scenarios for its recapitalization, each of which involved the provision by FSLIC of substantial assistance. Id. at 20-22.
In March 1989, First Louisiana's comptroller con cluded that, even taking into account the forbearances granted as part of the Union transaction, First Louisi ana was insolvent under both Generally Accepted Ac counting Principles and Regulatory Accounting Princi ples, which at the time allowed goodwill to count as reg ulatory capital. Pet. App. 22-23. During the same month, First Louisiana's independent auditors con cluded that, because of the thrift's recurring losses and its net capital deficiency, there was "substantial doubt about First Louisiana's ability to continue as a going concern." Id. at 22.
As the result of a regulatory examination that con cluded in June 1989, the Federal Home Loan Bank of Dallas concluded that, after giving full effect to the for bearances granted as part of the Union transaction, First Louisiana was insolvent by $460,000. Pet. App. 24. As a result of their computations, the examiners con cluded that "had the Union Federal merger never oc curred, [First Louisiana] would still be insolvent." Ibid.
In July 1989, the Federal Home Loan Bank of Dallas invoked the Net Worth Maintenance Agreement and directed that, within 60 days, FLHC infuse additional capital into First Louisiana to bring it into capital com pliance. Pet. App. 25.
2. In August 1989, Congress enacted FIRREA to address widespread problems in the savings and loan industry. FIRREA and its implementing regulations phased out reliance upon goodwill and other intangible assets as regulatory net worth, beginning in December 1989. As part of FIRREA, Congress created the Office of Thrift Supervision (OTS) and charged it with respon sibility for examining, supervising, and regulating feder ally insured thrifts. 12 U.S.C. 1462a, 1463. FIRREA gave the Director of OTS the authority to appoint a con servator or receiver for any insured savings institution if the Director determined, in the exercise of his discre tion, that one or more bases for the seizure of the thrift existed. 12 U.S.C. 1464(d)(2)(A), 1821(c)(5).
On August 15, 1989, the Federal Home Loan Bank of Dallas requested that First Louisiana's board of direc tors sign a "consent agreement," which stated that there were grounds for the OTS to assign a conservator or receiver for First Louisiana and, therefore, the institu tion should agree to certain operating restrictions. First Louisiana's board of directors declined to sign the con sent agreement, and on November 1, 1989, the OTS placed First Louisiana in receivership. The implement ing regulations of FIRREA became effective one month later, on December 7, 1989. Pet. App. 26.
3. In August 1995, petitioner filed suit in the Court of Federal Claims on its own behalf and on behalf of FLHC. Pet. App. 3.3 In October 2003, the trial court concluded, with the consent of the parties, that the most expeditious means to resolve the case was to address petitioner's claim for damages before addressing the issues concerning liability. The court directed the par ties to file cross-motions for summary judgment on dam ages. Pet. App. 3-4.
The trial court granted the government's motion for summary judgment with respect to all of petitioner's claims for damages and entered judgment for the gov ernment. Pet. App. 2-44. The trial court assumed, with out deciding, that a contract existed between petitioner and the government and that the enactment of FIRREA breached the assumed agreement. Id. at 4. The trial court further assumed that petitioner did not commit a prior material breach of the contract. Ibid. The trial court concluded, however, that FIRREA did not harm First Louisiana and, therefore, held that all of peti tioner's damage claims failed. Ibid.
The trial court held that petitioner's claim for "money-back restitution," based upon its initial contri bution as part of the Union transaction, failed for sev eral reasons. Pet. App. 33.
First, the court held that the enactment of FIRREA did not constitute a material breach of the agreement, because First Louisiana failed to satisfy net worth re quirements even prior to the enactment of FIRREA, at a time when First Louisiana was allowed to count its goodwill as regulatory capital. Pet. App. 33-37. As the court explained, the government's promises were "worth nothing" and "irrelevant" by the time of the seizure. Id. at 34, 37. FIRREA "caused First Louisiana no harm at all either at enactment or at seizure," which in any event occurred "slightly over a month before FIRREA's imple menting regulations came into effect." Id. at 37 (empha sis added).
Second, the trial court rejected petitioner's claim that the enactment of FIRREA frustrated its attempt to recapitalize First Louisiana with funds from two outside investors and an infusion of its own funds. Pet. App. 37- 39. The trial court found, based upon the undisputed facts, that all plans to recapitalize First Louisiana pre dated the enactment of FIRREA and depended upon the government's agreement to provide substantial addi tional assistance to the failing thrift. Id. at 37-38. The government, cognizant of First Louisiana's many opera tional deficiencies since its inception, declined to enter into such an agreement. Id. at 38. The court also found that, even as a factual matter, petitioner's argument would fail, because, although petitioner "named the two would-be investors," it provided "no affidavits from those individuals." Ibid.
Third, the trial court held that because petitioner would have lost its entire investment in First Louisiana even in the absence of a breach, returning that invest ment under a restitution theory would result in a wind fall, "transform[ing] the government into the insurer against First Louisiana's poor business decisions." Pet. App. 39-40. The trial court concluded that such a wind fall damages award would contravene the holdings of the Federal Circuit in Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 1315 (2004), and Admiral Finan cial Corp. v. United States, 378 F.3d 1336, 1345 (2004). Pet. App. 39. In those cases, the court of appeals, rely ing upon this Court's decision in Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 608 (2000), held that, while restitution provides an alternative measure of relief when a plaintiff has in curred, but cannot prove, expectancy damages, restitu tion is available only in cases of "total breach"-which did not occur here-and is not an appropriate remedy when it would result in a windfall to the plaintiff.
Finally, the trial court rejected petitioner's claim for restitution based upon the "benefit of time" conferred upon the government, because that claim was too specu lative and indeterminate to be recoverable, as a matter of law. Pet. App. 41-43.
3. The court of appeals summarily affirmed the deci sion of the trial court without opinion. Pet. App. 1.
ARGUMENT
The judgment of the court of appeals is correct and does not conflict with any decision of this Court or any other court of appeals. Further review is therefore un warranted.
1. The court of appeals issued no opinion in this case, but instead summarily affirmed in a one-sentence judgment. Pet. App. 1. That judgment has no precedential value in future cases. See Fed. Cir. R. 36 ("The court may enter a judgment of affirmance without opinion, citing this rule, when it determines that any of the following conditions exist and an opinion would have no precedential value."). Because the court of appeals' summary disposition thus has an effect solely on the outcome of this particular case, further review is unwar ranted.
Indeed, although petitioner contends (Pet. 13) that this case presents a question of exceptional importance to other Winstar plaintiffs and to "any party that con tracts or wishes to contract with the government," peti tioner has failed to show that even a published decision by the court of appeals repeating the conclusions reached by the trial court would have had any general importance. Petitioner cites no other case in which a court has decided the questions it presents, even in the Winstar context. Moreover, there is a progressively smaller and steadily dwindling number of Winstar-re lated cases. Of the approximately 122 Winstar-related cases that were originally filed, only 33 remain pending, and most of those cases are nearly through the litigation and appellate process. The government and petitioner disagree over whether the trial court erred in conclud ing that, based upon the facts of this case, restitution would be an appropriate remedy. That kind of case-spe cific disagreement, however, does not warrant further review by this Court.
2. Petitioner concedes (Pet. 8) that "[t]he trial court correctly held * * * that a party to a contract is only en titled to restitution if it demonstrates a total or material breach of contract." Petitioner also concedes that "[a] total breach is one that 'so substantially impairs the value of the contract at the time of breach that it is just in the circumstances to allow him to recover damages based on all his remaining rights to performance.'" Id. at 9 (quoting Mobil Oil Exploration & Producing Se., Inc. v. United States, 530 U.S. 604, 608 (2000)). But pe titioner argues (Pet. 9-11) that the trial court erred in applying those principles to the facts of this case when it concluded that there was no total or material breach.
Petitioner's contention is without merit. Citing, inter alia, this Court's decision in Mobil Oil, the Federal Cir cuit has held that, in order for a breach to be considered material, "the breach 'must be of a relatively high de gree of importance.'" Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 1312 (Fed. Cir. 2004) (quoting 1 George E. Palmer, The Law of Restitution § 4.5 (1978)). As the court of appeals has observed, determining whether a breach is of a "high degree of importance" requires consideration of "the nature and effect of the violation in light of how the particular contract was viewed, bargained for, entered into, and performed by the parties." Stone Forest Indus., Inc. v. United States, 973 F.2d 1548, 1550 (Fed. Cir. 1992). Whether a breach is total is assessed "in light of the totality of events and circumstances." Id. at 1552 (citing 2 Restatement (Sec ond) of Contracts (Restatement) § 241, cmt. a (1981)).
The trial court here correctly focused upon the time of the alleged breach in determining whether it was total or material. At that time, the court concluded, the alleg edly breached promises were "worth nothing," Pet. App. 34, and were "irrelevant," id. at 37, to petitioner, be cause First Louisiana was insolvent and subject to im mediate seizure, regardless of whether the government continued to let it count goodwill as capital for regula tory purposes. See ibid. ("First Louisiana was insolvent notwithstanding the promises."). The court reached that conclusion after a careful and exhaustive review of the record in this case. See id. at 9-30, 33-39. As the court explained:
In the end, [petitioner] may quibble with the precise net worth numbers related by the various sources. But there can be no doubt that as of mid-1989 [i.e., prior to both the enactment of FIRREA and the pro mulgation of its implementing regulations], First Louisiana was sustaining losses of ever-greater amounts, that it was far below its required regula tory capital level, that it had in fact a negative net worth, and that this was true even giving full recog nition to the forbearances granted in the Union merger.
Id. at 30.
3. Petitioner contends that the trial court erred in considering the effect of the breach upon the plaintiff in determining if the breach was total or material. Peti tioner argues (Pet. 11) that this Court did not consider such an effect in Mobil Oil, but instead established that the only relevant consideration is whether the breach deprived First Louisiana of "the benefit of the bargain or a material condition of the contract." Petitioner's argument is mistaken.
In Mobil Oil, this Court held that the oil company plaintiffs were not required to establish that the con tract ultimately would have resulted in a financial gain, or that they would have succeeded in obtaining the right to explore for oil, in order to be entitled to restitution. 530 U.S. at 623-624. The Court found, however, that the breach was "material" at the time of breach because the change in the law denied them the benefit for which they paid the government $156 million and which remained available at the time of breach-the "opportunity to try to obtain exploration and development rights in accor dance with the procedures and under the standards specified in the cross-referenced statutes and regula tions." Id. at 620. Regardless of whether the plaintiffs would ever have been successful in obtaining approval to explore for and develop oil, the change in the law "sig nificantly narrow[ed]" their "gateway" to the enjoyment of all their other rights under the contract. Id. at 621. That was the harm suffered by the plaintiff in Mobil Oil on the date of the breach, and it was central to this Court's holding that the breach was material.
In contrast to the plaintiffs in Mobil Oil, First Loui siana received the benefit of its bargain with respect to the Union forbearances right up until the date it was seized. First Louisiana became subject to seizure-and lost the opportunity to continue to operate-because of market conditions and its own serious deficiencies in management. Those reasons were entirely unrelated to and independent of any breach resulting from the enact ment of FIRREA. First Louisiana would have been seized even if the government had been fully prepared to continue performance of the contract. Unlike Mobil Oil, there was no chance that petitioner could have con tinued to receive the benefits of the contract had the government not breached.
4. Petitioner contends (Pet. 12-13) that the trial court's decision is contrary to Mobil Oil for another rea son as well. As an alternative basis for its decision, the trial court concluded that an award of restitution to peti tioner would have placed it in a better position than it would have occupied absent the breach, thereby result ing in an improper windfall. Petitioner argues (Pet. 12) that this Court's decision in Mobil Oil bars consider ation of any "windfall" resulting from an award. Peti tioner asserts that the fact that First Louisiana would be better off with an award of damages than if the breach had not occurred at all is entirely irrelevant to a determination of its entitlement to restitution.
Petitioner's suggestion that the trial court's "wind fall" analysis conflicts with this Court's decision in Mobil Oil is incorrect. See Mobil Oil, 530 U.S. at 608 (restitu tion is appropriate where "it is just in the circumstances to allow [the non-breaching party] to recover damages based on all his remaining rights to performance.") (em phasis added) (quoting 2 Restatement § 243(4)). Resti tution, as a remedy for breach of contract, is most ap propriate in the classic case in which the parties' perfor mance can be easily unwound, as in Mobil Oil. In such a case, the non-breaching party paid money for contract performance which, as a result of a breach, it never re ceived. The simplest remedy in that situation consists of an award to the non-breaching party of an amount equal to the amount it paid to the breaching party. That result is appropriate because, in entering into the contract, the nonperforming party implicitly agreed not to keep the money if it failed to perform at all. Henry Mather, Res titution as a Remedy for Breach of Contract: The Case of the Partially Performing Seller, 92 Yale L.J. 14, 36- 37 (1982). An award of restitution in that situation re stores both parties to their pre-contract positions. Mobil Oil follows that approach, because this Court con cluded that the plaintiffs in that case had not received any significant performance and that the government's breach had a material effect upon their contract rights by depriving them of a "gateway to the companies' en joyment of all other rights"-a "gateway" that this Court concluded was the essence of their bargain. 530 U.S. at 621.
It does not follow from such simple "money-back" restitution cases, however, that a non-breaching party is always entitled to restitution, regardless of the circum stances. See, e.g., Bernstein v. Nemeyer, 570 A.2d 164, 169 (Conn. 1990). This case differs from the "money- back" cases upon which petitioner relies and from Mobil Oil because, as the undisputed facts establish, there was substantial performance on the part of the government here and the alleged breach did not affect First Louisi ana's right to receive the benefits of the contract in the future. An award of restitution in this case therefore would be contrary to the well-established principles that restitution should only be awarded when "it is just in the circumstances," 2 Restatement § 243(4); see Mobil Oil, 530 U.S. at 608, and that restitution is precluded when the non-breaching party cannot return "any interest in property that he has received in exchange in substan tially as good condition as when it was received by him." Hansen, 367 F.3d at 1315 (quoting 3 Restatement § 384 (1)(a)). An award of restitution equal to the full amount of petitioner's investment would impermissibly place petitioner in a position of receiving both the full amount it paid under the alleged contract (because it would get a restitution judgment in that amount) and all the bene fits of the government's performance (because it had already enjoyed, and used up, the benefits of that per formance, prior to its seizure).
As the trial court correctly concluded, an award of petitioner's investment in First Louisiana also would reallocate the risks that the parties had allocated for themselves. See 3 Dan B. Dobbs, Law of Remedies § 12.7(5) (2d ed. 1993). The alleged contract placed the risk of First Louisiana's profitability upon petitioner. Petitioner is not entitled to use restitution as an excuse to shift to the government the risk, which it agreed to assume, of the loss of its investment due to its failure to operate First Louisiana in a profitable manner. See Admiral Fin. Corp. v. United States, 378 F.3d 1336, 1345 (Fed. Cir. 2004); Canfield v. Reynolds, 631 F.2d 169, 178 (2d Cir. 1908); see also Bernstein, 570 A.2d at 169.
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
PAUL D. CLEMENT
Solicitor General
STUART E. SCHIFFER
Assistant Attorney General
DAVID M. COHEN
JEANNE E. DAVIDSON
WILLIAM F. RYAN
JEFFERY T. INFELISE
Attorneys
APRIL 2006
1 Petitioner invokes jurisdiction under 28 U.S.C. 2101(c), which does not confer subject matter jurisdiction upon the Court to review the judgment in this case.
2 Petitioner, Southwest Investment Company, Inc., is the successor in interest to FLHC. Pet. App. 3.
3 In 1997, the Federal Deposit Insurance Corporation (FDIC) filed a complaint in intervention as successor to the rights of First Louisiana and as manager of the FSLIC Resolution Fund, which had succeeded to the assets and liabilities of the Resolution Trust Corporation that had been acquired in winding up the affairs of thrifts closed between January 1989 and July 1995. 12 U.S.C. 1441a(b)(3). In August 2002, the trial court dismissed the FDIC's complaint because it did not present a case or controversy. In September 2002, the FDIC filed a notice of appeal with the United States Court of Appeals for the Federal Circuit. In October 2003, however, the FDIC voluntarily dismissed its appeal.