 United States Court of Appeals for the Federal Circuit

                                      04-5009


                      FIFTH THIRD BANK OF WESTERN OHIO,

                                                    Plaintiff-Appellant,

                                          v.


                                 UNITED STATES,

                                                    Defendant-Appellee.


       Jerrold J. Ganzfried, Howrey Simon Arnold & White, LLP, of Washington, DC,
argued for plaintiff-appellant. With him on the brief were Alan M. Grimaldi, Robert M.
Bruskin, Robert M. Cox, Timothy K. Armstrong, Alexander B. Berger, and Jennifer R.
Bagosy. Of counsel on the brief was James Hubbard, Fifth Third Bank of Western
Ohio, of Cincinnati, Ohio.

       David A. Levitt, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney
General; David M. Cohen, Director; Jeanne E. Davidson, Deputy Director; Gregory R.
Firehock and Brian A. Mizoguchi, Jr., Trial Attorneys. Of counsel was Jonathan S.
Lawlor, Trial Attorney.

      Edwin L. Fountain, Jones Day, of Washington, DC, for amici curiae Anchor
Savings Bank, FSB, et al.


Appealed from: United States Court of Federal Claims

Judge Christine O.C. Miller
 United States Court of Appeals for the Federal Circuit

                                        04-5009

                      FIFTH THIRD BANK OF WESTERN OHIO,

                                                      Plaintiff-Appellant,

                                           v.

                                   UNITED STATES,

                                                      Defendant-Appellee.

                            __________________________

                              DECIDED: March 31, 2005
                            __________________________


Before NEWMAN, Circuit Judge, PLAGER, Senior Circuit Judge, and CLEVENGER,
Circuit Judge.

PLAGER, Senior Circuit Judge.

       In this Winstar-related case, the issue is whether the Government is liable for

breach of contract resulting in alleged losses sustained by plaintiff Fifth Third Bank of

Western Ohio (“Fifth Third”). The transactions at issue are familiar, arising out of the

thrift industry problems in the 1980s. The United States Court of Federal Claims held a

trial on the issue. After plaintiff presented its case-in-chief, the Government moved for

judgment on the theory that the evidence did not establish the existence of the alleged

contractual obligations. The trial court granted the Government’s motion; Fifth Third

appeals the trial court’s judgment that the United States was not liable for breach of

contract.
       Earlier in the proceedings the Government had moved for partial summary

judgment with respect to plaintiff’s damages claims. The court granted the motion in

part, thereby precluding plaintiff from presenting certain damages theories at trial. Fifth

Third appeals one aspect of this ruling—the trial court’s rejection of Fifth Third’s

expectation damages model based on a hypothetical cost of replacing, or “covering,”

goodwill lost as a result of breach.

       With regard to liability, the trial court erred in concluding that contracts did not

exist between the United States and Fifth Third’s predecessor-in-interest, Citizens

Federal Bank FSB (“Citizens”) regarding Citizens’ acquisition of four failing thrifts;1 the

contractual terms included permission for Citizens to use the purchase method of

accounting to amortize supervisory goodwill over an extended period of time and to

count supervisory goodwill toward capital reserve requirements. As has been explained

in other Winstar-related cases, subsequent government activity caused these contracts

to be breached.

       With regard to damages, the trial court correctly ruled that plaintiff’s hypothetical

cost of cover is not a proper measure of damages. Accordingly, the judgment of the

Court of Federal Claims is affirmed-in-part and reversed-in-part. The case is remanded

for further proceedings consistent with this opinion.

                                       BACKGROUND

                                  A. Regulatory Setting

       It has been more than twenty years since the critical events in the thrift industry

crisis of the 1980s occurred, and almost a decade since the law that governs these

       1
               Fifth Third acquired Citizens in 1998 and became the successor-in-interest
to Citizens’ claims in this case.


04-5009                                      2
cases was first established. During that time the history and circumstances surrounding

the thrift crisis and the ensuing events, including enactment of the Financial Institutions

Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183

(“FIRREA”), have been extensively discussed in opinions of the Supreme Court, see

United States v. Winstar Corp., 518 U.S. 839 (1996), and this court, see, e.g., Winstar

Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995) (en banc); Glendale Fed. Bank,

FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001). We need provide only a brief

overview here to serve as backdrop for our decision in this case.

       Rising interest rates and inflation during the late 1970s and early 1980s

precipitated a crisis in the savings and loan industry.      More than 400 thrifts failed

between 1981 and 1983, and many additional thrifts were on the verge of insolvency.

This situation threatened to exhaust the insurance fund of the Federal Savings and

Loan Insurance Corporation (“FSLIC”).

       To deal with this crisis, the Federal Home Loan Bank Board (“FHLBB”), the

agency responsible for regulating federally chartered savings and loan associations,

sought out healthy financial institutions and outside investors for the purpose of having

them purchase troubled thrifts through the use of “supervisory mergers.” The FHLBB

offered financial incentives to induce such mergers and to prevent an acquiring thrift

from becoming insolvent upon completion of the transaction.           The incentive most

pertinent to this case was the accounting treatment of what was called “supervisory

goodwill,” basically the difference between the fair market value of the failing thrift’s

liabilities assumed by an acquiring thrift and the fair market value of the failing thrift’s

assets.




04-5009                                      3
       In a merger utilizing supervisory goodwill, the FHLBB would permit the acquiring

institution to count supervisory goodwill toward its reserve capital requirements and to

use the purchase method of accounting to amortize this supervisory goodwill over an

extended period of time, up to forty years. Additional incentives provided by the FHLBB

in some supervisory mergers included cash contributions in the form of permanent

credits to regulatory capital and forbearance agreements by the FHLBB not to enforce

regulatory capital requirements for a specified period of time.

       However well-intended these various measures were, the problems in the

savings and loan industry persisted. In 1989 Congress stepped in with the enactment

of FIRREA.     FIRREA abolished the FHLBB and FSLIC, transferred thrift insurance

activities to the Federal Deposit Insurance Corporation (“FDIC”), established the Office

of Thrift Supervision (“OTS”) as the new thrift regulatory agency, created the Resolution

Trust Company (“RTC”) to liquidate failed thrifts, and made substantial changes in the

regulation of the savings and loan industry.

       Directly to the point for purposes of this case, FIRREA also created a minimum

capital requirement for thrifts, phased out the thrifts’ ability to count supervisory goodwill

toward capital requirements, and limited the amortization period of supervisory goodwill.

The impact of FIRREA, in particular the supervisory goodwill provisions, was swift and

severe, and many thrifts quickly fell out of compliance with regulatory capital

requirements, making them subject to seizure by thrift regulators.

       This course of events gave rise to hundreds of lawsuits filed by formerly healthy

thrifts that had been acquirers of failing thrifts. The plaintiffs sought damages from the

Government under several theories, including breach of contract. The thrifts alleged




04-5009                                        4
that Congress’s enactment of FIRREA breached the Government’s obligation to allow

special accounting treatment of supervisory goodwill. In due course the matter reached

the Supreme Court in United States v. Winstar Corp., 518 U.S. 839 (1996). The appeal

involved the cases of three acquiring thrifts taken as test cases; the cases had been

consolidated for appeal.       The Supreme Court affirmed this court’s en banc

determination that the thrifts had indeed entered into enforceable contracts with the

Government, and that the Government was liable for breach of contract as a result of

the enactment and enforcement of FIRREA.

      In the years since the Supreme Court’s Winstar decision, appeals in numerous

Winstar-related cases have come before this court. Because the background and the

fact pattern of the Government’s involvement with the thrifts are well-known, in many

cases the existence between the Government and the acquiring thrift of an agreement

to allow supervisory goodwill is clear. The Government concedes liability, and the issue

of contention between the parties has been the amount of damages.2 In a relatively few

cases, because of particular circumstances in the transactions at issue, the Government

has contested whether the FHLBB and the thrift understood that supervisory goodwill

would be part of the transaction.

      In assessing the issue of contractual obligation and breach, there is a difference

between the issue of contract formation and the issue, once it is determined that the

relationship is one of contract, of interpreting the dimension of particular contractual

obligations. In this case, the parties do not dispute basic issues of offer, acceptance,

and consideration, the essentials of contract formation. What is in dispute is whether a

      2
             The Court of Federal Claims has a special procedures order for Winstar-
related cases utilizing a short form motion for summary judgment on liability.


04-5009                                    5
particular term is part of whatever contract existed between the parties, i.e., did the

parties intend to bind themselves to long-term amortization of the regulatory goodwill

created by the transactions in which they engaged. Often in cases such as this, with

the facts of record and generally agreed, the matter is decided on summary judgment;

this case is unusual in having the facts and the trial court’s conclusions determined only

after a full trial.

                                        B. Factual History

        Citizens,     a   federally   chartered   mutual     savings   and   loan   association

headquartered in Dayton, Ohio, acquired or merged with four failing thrifts between

1982 and 1985. As found by the trial court, each transaction at issue in this case

followed the same general pattern. The Federal Home Loan Bank of Cincinnati (“FHLB-

Cincinnati”) had identified Citizens as a healthy thrift and therefore a candidate for

acquiring or merging with failed thrifts. In each of the four transactions, FHLB-Cincinnati

contacted Citizens to propose a supervisory merger with the failing thrift. In each case

Citizens and the failing thrift entered into a Purchase Agreement or a Merger Agreement

expressly conditioned upon obtaining approval of the agreement by FHLBB. Citizens

and the failing thrift then submitted an application for merger to FHLB-Cincinnati.

        FHLB-Cincinnati conditionally approved each transaction by issuing a Bank

Board Resolution specifying the additional steps necessary for obtaining final approval.

Each resolution required Citizens to furnish an opinion from its independent accountant

justifying the use of the purchase method of accounting, describing any goodwill arising

from the purchase, and substantiating the reasonableness and amounts of the goodwill

and the related amortization period. Citizens complied with the requirements set forth in




04-5009                                           6
each resolution, including submission of an opinion letter from its accountant. FHLB-

Cincinnati then submitted each proposed acquisition or merger to FHLBB headquarters

for final approval. FHLBB approved each transaction, and Citizens accounted for each,

including the use of the purchase method, the amortizing of goodwill over an extended

period, and the counting of goodwill toward its regulatory capital requirements.

        At trial, plaintiff presented extensive testimony by Jerry Kirby, President and

Chief Executive Officer of Citizens, and Lawrence Muldoon, FHLB-Cincinnati’s chief

supervisory agent, describing the negotiations between Citizens and FHLB-Cincinnati

with respect to the four transactions. The first transaction was Citizens’ acquisition of

thirteen branches of Cardinal Federal Savings and Loan Association (“Cardinal”) in

1982.     Mr. Kirby testified that the Cardinal transaction was initiated when Mr.

McElheney, at the time a supervisory agent at FHLB-Cincinnati and Mr. Muldoon’s

subordinate, contacted Citizens to propose that Citizens acquire the Cardinal branches.

He explained that the FHLBB would permit Citizens to book Cardinal’s negative net

worth as goodwill, which would count as an asset for regulatory capital purposes and

could be amortized over an extended period of time.

        Mr. Kirby testified that he followed up with Mr. Muldoon to more fully understand

how such an arrangement would work. Mr. Kirby asked Mr. Muldoon if Citizens could

receive cash assistance.     Mr. Muldoon replied that there was no cash assistance

available, but Citizens could book supervisory goodwill as an asset and amortize it over

an extended period of time. Mr. Muldoon’s testimony confirmed that he offered goodwill

as a substitute for cash assistance. According to Mr. Kirby, he viewed the goodwill

accounting treatment as the sine qua non of the Cardinal acquisition because without it




04-5009                                     7
Citizens would have immediately fallen out of capital compliance. Mr. Kirby testified that

he discussed the proposed arrangement with his board of directors, although no written

records of any meetings exist.

      Citizens and Cardinal entered into a formal Purchase Agreement expressly

conditioned upon receiving FHLBB approval. Citizens submitted a merger application to

FHLB-Cincinnati. The application included a pro forma financial statement based on the

assumption of a thirty-year amortization period for goodwill.            FHLB-Cincinnati

conditionally approved the transaction in Board Resolution V-O-M-82-7. As a condition

for final approval, the Resolution required Citizens to submit an opinion from its

independent accountant that:

      (a) indicates the justification under generally accepted accounting
      principles [GAAP] for use of the purchase method of accounting, (b)
      specifically describes any goodwill arising from the purchase to be
      recorded on Citizens’ books, and (c) substantiates the reasonableness
      and amounts of such goodwill and related 30 year amortization period and
      method.

      FHLB-Cincinnati sent a letter to the FHLBB recommending approval of the

Cardinal acquisition. The letter stated that approximately $35 million of goodwill would

result from the transaction and would be amortized over thirty years. Citizens submitted

the required accountant’s letter, which indicated that goodwill would be amortized over

forty years, not thirty years.   The FHLBB thereafter approved the transaction, and

Citizens booked $37 million of goodwill using a 30-year amortization period.

      Citizens entered into three subsequent supervisory transactions—with Gateway

Federal Savings and Loan Association (“Gateway”) in 1983, with Homestead Federal

Savings and Loan Association (“Homestead”) in 1984, and with First Federal Savings

and Loan Association (“First Federal”) in 1985. In each case, FHLB-Cincinnati identified



04-5009                                     8
the failing thrift, and Mr. Muldoon of FHLB-Cincinnati contacted Mr. Kirby to propose

that Citizens acquire or merge with the failing thrift. According to trial testimony, the

discussions between Mr. Kirby and Mr. Muldoon leading up to each transaction followed

a similar pattern. When considering whether to acquire each thrift, Mr. Kirby requested

FSLIC cash assistance. Mr. Muldoon responded each time that no cash assistance

was available, but that instead he could offer the same regulatory and accounting

treatment of supervisory goodwill that had been used in the Cardinal transaction, i.e.,

use of the purchase method of accounting to book supervisory goodwill as an asset that

would count toward regulatory capital requirements and be amortized over an extended

period of time.

       Following the negotiations between Mr. Kirby and Mr. Muldoon regarding each

potential transaction, Citizens and the FHLBB exchanged documents similar to those in

the Cardinal transaction, as noted above. The documents, however, lacked some of the

detail provided in the Cardinal documents. For example, the Board Resolutions for the

Gateway, Homestead, and First Federal transactions required Citizens to provide an

opinion from its independent accountant justifying the use of the purchase method of

accounting, describing any goodwill arising from the transaction to be recorded on

Citizens’ books, and substantiating the reasonableness and amounts of such goodwill

and related amortization period and method.      These Resolutions, however, did not

specify the length of the amortization period. Nevertheless, it is undisputed that for

each transaction Citizens booked supervisory goodwill as an asset and amortized it

over a period of twenty years (for Homestead and First Federal) or ten years (for

Gateway).




04-5009                                    9
                                        C. The Trial

       After discovery in this case, both parties filed motions for summary judgment on

liability. The trial court denied both motions. Fifth Third Bank of W. Ohio v. United

States, 52 Fed. Cl. 264 (2002) (“Fifth Third I”). The court granted the Government’s

motion for reconsideration in order to address whether FHLB-Cincinnati had actual

authority to bind the Government to a contract, an issue the trial court had erroneously

deemed abandoned in its prior ruling.         The court concluded that FHLB-Cincinnati

possessed implied actual authority to bind the FHLBB to promises regarding the

accounting treatment of supervisory goodwill. Fifth Third Bank of W. Ohio v. United

States, 52 Fed. Cl. 637 (2002) (“Fifth Third II”).

       Meanwhile, the Government moved for summary judgment with respect to

Plaintiff’s damages claims. The trial court granted this motion in part, concluding that

Plaintiff was not entitled to pursue various damages theories at trial, including its

calculation of expectancy damages based on the doctrine of cover. Fifth Third Bank of

W. Ohio v. United States, 55 Fed. Cl. 223, 242-44 (2003) (“Fifth Third III”).

       The case proceeded to trial on the issues of liability and the remaining damages

theories. At the close of Plaintiff’s case-in-chief, the Government moved for judgment

on partial findings pursuant to Court of Federal Claims Rule 52(c). The trial judge orally

granted the motion with respect to liability and denied it with respect to damages, and

thereafter issued a written opinion. Fifth Third Bank of W. Ohio v. United States, 56 Fed

Cl. 668 (2003) (“Fifth Third IV”).

       As discussed, Plaintiff’s case included substantial oral and deposition testimony

describing the communications between Citizens and FHLB-Cincinnati. The trial judge




04-5009                                      10
specifically found that “Mr. Kirby [Citizens’ President] thought that Citizens had contracts

with the Government. Messrs. Muldoon, McElheney, and Thiemann [the Government

officials] all thought that FHLBB had entered into contracts and that FHLBB had made a

commitment to recognize goodwill for regulatory purposes that could not be withdrawn.”

Id. at 694. Regarding the credibility of this testimony, the trial court noted that some of

the testimony seemed to be rote, perhaps because of the long time since the events,

but that the court “credits fully the integrity of these gentlemen.” Id. Despite these

findings, the trial court concluded that the agreements between the parties were not

contractual relationships, at least in part because the only written evidence

corroborating the witness testimony was contained in what the court described as

routine agency documents. Id. at 694-96.

       The Court of Federal Claims entered final judgment in favor of the United States.

In this appeal, Fifth Third challenges the trial court’s Rule 52(c) judgment on liability and

the trial court’s partial summary judgment precluding Fifth Third from presenting its

cover damages theory at trial. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).

                                       DISCUSSION

                                        A. Liability

       The trial court cast the issue of liability in terms of contract formation—offer and

acceptance, consideration, actual authority, and mutuality of intent.       She posed the

question as: “What evidence should be required to establish a commitment to provide

something of value within the regulatory framework, along with the concomitant

commitment not to regulate in contravention of that agreement?” Fifth Third IV, 56 Fed.

Cl. at 692. On appeal plaintiff contends that the trial court erred by failing to accord




04-5009                                      11
proper weight to trial testimony regarding negotiations between Citizens and FHLB-

Cincinnati officials. Plaintiff further argues that the trial court erred when it dismissed

the documentary evidence relating to Citizens’ supervisory mergers as merely reflecting

regulatory approval of the transactions rather than contractual commitments between

the parties. The Government responds that the documents in evidence were indeed

regulatory in nature and that the testimony was too general and vague to show that the

written documents actually demonstrated the existence of contractual obligations.

         It is helpful to consider this case within the larger context of the earlier Winstar

cases.     In this court’s Winstar en banc decision, this court concluded that the

Government formed contractual agreements regarding the treatment of supervisory

goodwill with Winstar and two other institutions, Statesman Savings Holdings Corp.

(“Statesman”) and Glendale Federal Bank (“Glendale”). Winstar, 64 F.3d at 1540-44.

Analyzing not only the contemporaneous documents but also the circumstances

surrounding the transactions, this court determined that the Government was

contractually obligated to recognize supervisory goodwill resulting from the transactions

as a capital asset and to permit such goodwill to be amortized over an extended period

of time. Id. The Supreme Court considered the evidence and found no reason to

question this court’s conclusion in that regard. Winstar, 518 U.S. at 861-68. The Court

also confirmed there were no constitutional or statutory obstacles to enforcing the

agreements under ordinary contract principles. Id. at 871-911.

         In each of the three transactions in Winstar, the relevant documents included

either an Assistance Agreement or a Supervisory Action Agreement, each containing an

integration clause incorporating contemporaneous documents such as the Bank Board




04-5009                                       12
Resolutions issued prior to each transaction.        But such documents are not legal

prerequisites to a contractual obligation. In California Federal Bank, FSB v. United

States, 245 F.3d 1342 (Fed. Cir. 2001), this court determined that contractual

obligations existed even though there was no single document incorporating all the

contract terms.     Id. at 1346-47.   We noted that our Winstar decision “did not rely

exclusively on the assistance agreements to find a contract.” Id. at 1346. Instead, we

agreed with the Court of Federal Claims that “[i]f the factual records of individual cases

show intent to contract with the government for specified treatment of goodwill, and

documents such as correspondence, memoranda and [FHLBB] resolutions confirm that

intent, the absence of an [assistance agreement] or [supervisory action agreement]

should be irrelevant to the finding that a contract existed.” Id. at 1347 (citation omitted)

(alteration in original).

       This court has determined Government liability in other cases in which the

Government has contested the issue. In Barron Bancshares, Inc. v. United States, 366

F.3d 1360 (Fed. Cir. 2004), goodwill and capital credit provisions in the documents were

“virtually identical” to those in the Winstar transactions. Id. at 1376. Nevertheless, the

Court of Federal Claims had determined those provisions were not contractual

obligations because there was no evidence they were the subject of any pre-contract

negotiations between the parties, whereas other terms had been negotiated. Id. at

1372. We reversed, holding that the clear and unambiguous language of the integrated

contract document was binding and precluded resort to parol evidence to alter its terms.

Id. at 1375-76.




04-5009                                     13
       In LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363 (Fed. Cir. 2003),

we affirmed the trial court’s conclusion that agreements between Talman and the

Government for specialized treatment of goodwill were contractual, although the terms

were recorded in agency documents, such as Bank Board Resolutions, rather than

executed contracts. The Bank Board Resolutions in that case indicated that Talman

could use the purchase method of accounting for goodwill so long as it submitted a

stipulation that goodwill would be determined and amortized in accordance with Bank

Board Memorandum R-31b, which provided for amortization of supervisory goodwill

over a period up to forty years.3 Id. at 1370.

       More recently, this court decided LaVan v. United States, 382 F.3d 1340 (Fed.

Cir. 2004). In that case, FHLBB approval of a 35-year amortization period was reflected

in both a Bank Board Resolution and an internal memorandum. Id. at 1346-47. We

rejected the Government’s argument that the FHLBB was merely performing a

regulatory function when it approved the transaction and agreed with the trial court that

the parties had contracted for special goodwill treatment. Id.

       These cases reflect the relationships formed between the FHLBB and the thrifts

as the FHLBB sought help from these institutions to solve the national savings and loan

crisis. The cases are not identical, yet all arose in the same regulatory and economic

environment, a backdrop against which these cases can be viewed. Despite different

circumstances and variations in the documents containing the contract terms, in each of



       3
             Bank Board Memorandum R-31b, issued in September 1981, set forth the
FHLBB’s guidelines on how the acquiring institution could count supervisory goodwill as
an intangible asset using the purchase method of accounting. The Memorandum
limited the amortization period of supervisory goodwill to forty years or less. See
Winstar, 64 F.3d at 1541 & n.4.


04-5009                                     14
these cases we recognized there was a contractual agreement regarding the treatment

of goodwill and its amortization period.

       Not surprisingly, considering the number of transactions nationally, there have

been cases in which this court concluded based on the evidence presented that a

contractual agreement with respect to goodwill did not exist. In D & N Bank v. United

States, 331 F.3d 1374 (Fed. Cir. 2003), this court found that D & N provided no

evidence demonstrating that the parties intended to contract to permit special

accounting treatment of goodwill. Notably, none of the documents proffered by D & N

mentioned goodwill or the accounting treatment thereof. Id. at 1378. Furthermore, the

FHLBB supervisory agent testified in his deposition that he could not recall any

discussions with D & N about goodwill. Id. at 1379. The complete absence of evidence

that the parties even contemplated an agreement regarding goodwill led us to find for

the Government on the issue of liability.

       In another case, First Commerce Corp. v. United States, 335 F.3d 1373 (Fed.

Cir. 2003), the plaintiff institution began the process of acquiring a troubled thrift by

submitting a bid letter to FHLB-Indianapolis in which it requested permission to use the

purchase method of accounting and amortize supervisory goodwill over a 25-year

period. But in its formal merger application, First Commerce requested conventional

GAAP treatment of goodwill rather than an extended amortization period. Id. at 1377.

This evidence that First Commerce intended to go forward with the transaction without

any agreement as to goodwill treatment caused this court to look closely at the

documents in search of “mirror image” terms. Id. at 1381.




04-5009                                     15
      The record showed that the FHLBB had approved the merger and issued a

forbearance letter providing that First Commerce could amortize goodwill over a 25-year

period. We determined that this qualified as a counteroffer and remanded for the trial

court to consider whether First Commerce had accepted the counteroffer. Id. at 1381-

82. On remand, the trial court readily found that First Commerce’s later conduct—its

actual use of a 25-year amortization period—constituted an unambiguous acceptance of

the Government’s counteroffer, and the court granted summary judgment of liability in

favor of First Commerce. First Commerce Corp. v. United States, 60 Fed. Cl. 570, 581-

82 (2004).

      Anderson v. United States, 344 F.3d 1343 (Fed. Cir. 2003), is another case in

which evidence that parties had not contracted for special goodwill treatment prompted

us to examine carefully the specific documents involved in the transaction. Westport,

the acquiring institution, submitted an application in which it requested a 40-year

amortization period for goodwill. Id. at 1347. In an internal FHLBB memorandum, the

FHLBB staff recommended against granting the request for extended amortization of

goodwill but recommended approval of other forbearance requests. Id. According to

the memorandum, Westport’s CEO indicated that a goodwill forbearance was not

necessary for completion of the transaction.         Id.   Consistent with the staff

recommendation, the FHLBB issued a Forbearance Letter with no mention of goodwill

amortization. Id. at 1348. The FHLBB also issued a Resolution, which mentioned

goodwill only in the standard clause requiring an accountant’s letter; it made no

reference to the use of the purchase method of accounting or to an extended period of

amortization for goodwill. Id. at 1355. We found that the Forbearance Letter and the




04-5009                                   16
Resolution confirmed what the internal memorandum indicated, i.e., that the FHLBB had

not agreed to extended amortization of goodwill as part of the transaction. Id. at 1358.

      Although in any given case it would be improper to presume the existence or

non-existence of a contract, or the terms of a contract, it is true that, viewing the

Winstar-related cases as a whole, the pattern of arrangements between the FHLBB and

the acquiring financial institutions often had contractual dimensions; the Supreme Court

and this court recognized that in the original Winstar cases. The FHLBB was dealing

with the worsening crisis in the savings and loan industry by seeking healthy institutions

to merge with or acquire failing thrifts and by offering incentives such as the use of

supervisory goodwill. The healthy thrifts sought permission from and agreement with

the FHLBB in order to safely undertake the salvage efforts the Government so eagerly

desired.

      Since one of the main incentives offered by the FHLBB was the recognition of

supervisory goodwill with an extended amortization period—the thread that runs through

many of these cases—the question becomes what to believe regarding the parties’

understanding of special treatment of goodwill as a term of the contract. As shown by

the cases just discussed, this court has ultimately found the Government liable for

breach of contract in these Winstar-related cases when the evidence demonstrates that,

in light of the discussions between the Government and the acquiring thrift with regard

to protections affecting capital requirements, including supervisory goodwill, the parties

agreed that the acquiring thrift was to be given the favorable accounting treatment of

supervisory goodwill and its amortization.




04-5009                                      17
      Turning to the case before us, Citizens completed four transactions over the

course of four years.    With respect to the initial transaction, the acquisition of the

Cardinal branches in 1982, the record supports plaintiff’s contention that there was a

contractual agreement between Citizens and the FHLBB regarding special treatment of

supervisory goodwill. According to testimony presented at trial, the parties negotiated

the terms of the agreement—Mr. Kirby asked for cash assistance, and Mr. Muldoon

offered instead that Citizens could book supervisory goodwill as an asset, which would

count toward regulatory capital requirements, and Citizens could amortize the goodwill

over an extended period of time.         The documents of record—Citizens’ merger

application, the Bank Board Resolution, and the conditional approval letter from FHLB-

Cincinnati to the FHLBB—confirm this agreement. Although the record is less than

clear as to whether the parties agreed to a specific amortization period, it is clear

enough that they agreed to an extended amortization period. The need to specify the

exact length of the amortization period never became a relevant consideration; it got

resolved by default in the later paperwork.

      Using the Cardinal transaction as a model, and at the suggestion of FHLB-

Cincinnati, Citizens proceeded to complete three more transactions with failing thrifts.

Although the written documents are not as detailed as those in the Cardinal transaction,

it is evident from the pattern and circumstances of these transactions that the special

treatment of supervisory goodwill was a central part of the agreements, just as it was for

the Cardinal transaction. Trial testimony shows that before each transaction Mr. Kirby

requested cash assistance, as he had done during the Cardinal negotiation, and Mr.

Muldoon instead offered the same goodwill treatment used in the Cardinal transaction—




04-5009                                       18
use of the purchase method of accounting to book supervisory goodwill as an asset that

would count toward capital reserve requirements and an extended amortization for

goodwill. Both Mr. Kirby and Mr. Muldoon understood that the parties were agreeing to

the same terms as those in the Cardinal acquisition, and there is no evidence that they

intended to alter the arrangement.

      The clincher is the consequences, as the trial court explained, attendant on the

execution of these transactions had supervisory goodwill not been a part.4 At the time

of the Cardinal acquisition, the regulatory capital requirement was four percent. Before

the acquisition, Citizens’ regulatory capital was at 5.68 percent of its total capital

reserve.    After the transaction, with about $38 million in goodwill counting toward

Citizens’ capital requirement, the ratio was 4.14 percent. Without the special goodwill

treatment, however, Citizens’ post-transaction ratio would have been 0.06 percent, well

below the required minimum.

      The other transactions were the same. Before the Gateway acquisition, Citizens

was at 4.17 percent. After the acquisition the ratio was 3.74, still above the minimum

three percent required at the time. Without the supervisory goodwill adjustment, the

ratio would have been 0.18 percent.       Before the Homestead transaction, Citizens’

regulatory ratio was 3.73; after it was 3.18, again above the minimum three percent

required.   Without the additional $35 million in supervisory goodwill on the books,

however, the ratio would have been a negative 2.15 percent, which would not only have

rendered Citizens out of capital compliance, but also insolvent.        Finally, with the



      4
               The following data are taken from the trial court’s factual findings, Fifth
Third IV, 56 Fed. Cl. at 677 (Cardinal); id. at 679 (Gateway); id. at 681 (Homestead); id.
at 682 (First Federal).


04-5009                                    19
supervisory goodwill allowance provided by the First Federal transaction, Citizens was

left with a comfortable 3.4 percent ratio; without it, the ratio was another negative 1.27

percent, out of compliance and insolvent.

      Messrs. Kirby and Muldoon testified that the transactions would have not

occurred without an agreement for special treatment of goodwill because Citizens would

have fallen out of capital compliance immediately after each transaction. Citizens would

not have decided to complete transactions with such dire consequences; FHLB-

Cincinnati would not have approved a transaction if the resulting thrift would not have

been in capital compliance. As Justice Souter in Winstar observed, “[i]t would, indeed,

have been madness for respondents to have engaged in these transactions with no

more protection than the Government’s reading would have given them, for the very

existence of their institutions would then have been in jeopardy from the moment their

agreements were signed.” Winstar, 518 U.S. at 910; see also Barron Bancshares, 366

F.3d at 1378 (finding additional support for existence of a contract in evidence that

recapitalized thrift would have been out of compliance from its inception without special

goodwill treatment); LaSalle Talman, 317 F.2d at 1370 (“[T]here would be little reason

for any thrift to assume added liabilities if that assumption would place it in immediate

danger of receivership and dissolution.”).

      Based on trial testimony regarding the parties’ negotiations, contemporaneous

documents, and the circumstances surrounding the transactions at issue, it is apparent

that Citizens and the Government intended to enter into a binding agreement governing

the transactions at issue. It is further apparent that the agreement was understood to

include Citizens’ use of the purchase method of accounting, amortizing of supervisory




04-5009                                      20
goodwill over an extended period of time, and counting of supervisory goodwill as an

asset for purposes of meeting capital reserve requirements. Those issues were clearly

on the table and available as far as the FHLBB was concerned, and were clearly key

considerations in the decisions of the Citizens Bank management.

       The Government asserts that “Fifth Third’s allegation that it would have been

‘irrational,’ even ‘suicidal,’ for it to enter into these transactions without a long-term

contract is questionable . . . .     In any event, economic irrationality cannot create

contracts.” Appellee’s Br. at 20-21. The latter is of course true, but not the point. More

to the point is the fact that there is evidence in this case sufficient to show a contract for

long-term amortization of regulatory capital binding on the Government, and, unlike the

situation in Anderson, no evidence that Citizens failed to protect itself with enforceable

contract rights.

       The Government further argues that the purpose of these transactions was to

buy time until interest rates decreased, and the Government had no need to enter into

long-term contracts in order to achieve this goal. That may be true, but it does not

define the legal consequences of what the Government actually did. The argument that

contract-based transactions were not necessary to the Government’s purpose was

made in the original Winstar cases. It was not persuasive then, and the argument has

not gained strength by repetition.

       The trial court reached the conclusion that there were no contractual obligations

regarding supervisory goodwill in part because it failed to fully appreciate the context in

which these agreements were reached and to give proper weight to the circumstances

as well as the evidence, and in part because it misapprehended certain aspects of the




04-5009                                      21
relationship between the parties. In terms of context, these are not contracts for goods

or services that the Government needs from time to time, and that stand on their own.

They are part of a larger context in which the Government enlisted the aid of a major

sector of the banking industry by initiating and conducting a nationwide program for

protecting the Government’s position as a guarantor of the industry. Though as noted

context alone does not create a presumption in favor of any particular outcome, context

is relevant to the problem of contract interpretation.

       Beyond that, the trial court misapprehended the law with regard to certain

specific issues. First, the trial court emphasized the need to memorialize any contract

terms in an express written agreement. Fifth Third IV, 56 Fed. Cl. at 691-92. The trial

court understood that a single integrated writing is not required in order to establish the

existence of a contract in Winstar-related cases, see Cal. Fed., 245 F.3d at 1346-47, yet

language in the trial court’s opinion suggests that the trial court believed that all

contractual terms must be found in the written documents alone. See, e.g., Fifth Third

IV, 56 Fed. Cl. at 692 (“[T]he Federal Circuit has not dispensed with the requirement

that the parties produce a written memorialization of their commitment.”). To the extent

the trial court applied that understanding of the law in this case, that was error.

Evidence other than written documents, such as the testimony in this case that contract

terms were orally negotiated, may not be disregarded.

       Second, the trial court erred in characterizing the written documents in this case

as “truly routine” and as “unadorned, non-customized agency documents.” Id. at 694-

95. In some of the cases before this court, plaintiffs have argued that the FHLBB’s

mere approval of a transaction demonstrated intent to contract regarding supervisory




04-5009                                      22
goodwill, even though there was specific evidence supporting the Government’s claim

that it did not intend to agree contractually to special goodwill treatment. See Anderson,

344 F.3d at 1355; D & N Bank, 331 F.3d at 1378. In rejecting that argument, this court

described the FHLBB documents approving the transactions as regulatory rather than

contractual; we judged that mere approval of a merger by the FHLBB, acting solely in its

regulatory capacity, did not create contractual obligations as such. Anderson, 344 F.3d

at 1355-56; D & N Bank, 331 F.3d at 1378-79.

       Those cases, however, do not stand for the proposition that contractual terms

cannot be found in agency regulatory documents. As the Government itself has noted,

“[a] regulatory action rarely involves a simple affirmative or negative vote.” Appellee’s

Br. at 19. In this case, for example, the Resolution approving the Cardinal acquisition

was customized to include an extended amortization period for goodwill, a term the

parties had negotiated previously. Since standardized agency documents are the way

in which regulatory agencies typically memorialize their actions, the FHLBB can

memorialize a contractual commitment in agency documents.

       Thirdly, the trial court was concerned that none of Plaintiff’s witnesses “testified

that commitments were made on behalf of the Government that the Government would

not change the policy of allowing goodwill to count as regulatory capital.” Fifth Third IV,

56 Fed. Cl. at 694. The Supreme Court held, however, that such commitments are not

required. The contracts in the Winstar, Glendale, and Statesman transactions did not

       purport[] to bar the Government from changing the way in which it
       regulated the thrift industry. Rather, . . . the Bank Board and the FSLIC
       were contractually bound to recognize amortization periods reflected in the
       agreements between the parties. . . . We read this promise as the law of
       contracts has always treated promises to provide something beyond the




04-5009                                     23
       promisor’s absolute control, that is, as a promise to insure the promisee
       against loss arising from the promised condition’s nonoccurrence.

Winstar, 518 U.S. at 868-69. Thus, contractual liability does not require a promise by

the Government not to change the regulations; it only requires a promise to recognize

the extended amortization period agreed to by the parties.         When the Government

changed the regulations, it could no longer make good on its promise and was therefore

in breach of the contract.

       Finally, the trial court discounted the testimony of the participants due to the “rote

constancy” of Mr. Kirby’s explanation of the four deals. The “rote” character of the

testimony is due to the fact that Mr. Muldoon set the pattern for each deal: on the key

contract term, each was to be the same. How could the testimony, otherwise fully

credited by the trial court, have been otherwise than by “rote”? By testifying honestly

that each deal was exactly the same with regard to long-term amortization of regulatory

capital, the evidence was repetitive, not “rote.”

       Ultimately, the trial court found the testimony of Messrs. Kirby and Muldoon and

other FHLB-Cincinnati personnel to be truthful, but, giving their testimony little weight,

concluded as a matter of legal interpretation of the transactions that no obligation

existed on the part of the Government regarding supervisory goodwill, and therefore no

breach of contract occurred. We conclude to the contrary. The totality of the evidence

and the circumstances demonstrate that the parties intended to and did create

contractual obligations which included the utilization of supervisory goodwill as an

accounting treatment for capital compliance. The subsequent events surrounding the

enactment and enforcement of FIRREA resulted in a breach of that promise. The trial

court erred in concluding otherwise.



04-5009                                      24
                                   B. Actual Authority

       As an alternative argument for affirmance, the Government posits that FHLB-

Cincinnati did not have authority to bind the FHLBB to a contract involving supervisory

goodwill, an issue the trial court decided against the Government on summary

judgment. See Fifth Third II, 52 Fed. Cl. at 640-43. The trial court determined that

FHLB-Cincinnati possessed implied actual authority to enter into contracts for treatment

of goodwill because such authority was “integral to fulfilling [FHLB-Cincinnati’s] role in

FHLBB’s policy to encourage the private acquisition of failing thrifts.” Fifth Third II, 52

Fed. Cl. at 643; see also H. Landau & Co. v. United States, 886 F.2d 322, 324 (Fed. Cir.

1989) (“Authority to bind the Government is generally implied when such authority is

considered to be an integral part of the duties assigned to a Government employee.”

(citation and internal quotation marks omitted)).     The Government disputes the trial

court’s conclusion, arguing in effect that because some of these acquisition transactions

did not include supervisory goodwill, citing D & N Bank and Anderson, permission to

offer supervisory goodwill must have been specially required.

       We agree with the trial court that by April 1982, when FHLB-Cincinnati approved

the first transaction in this case, FHLB-Cincinnati had at least implied actual authority to

bind FHLBB to promises made to Citizens regarding the use of supervisory goodwill. In

February 1982, the FHLBB delegated authority to its regional board principal

supervisory agents5 (“PSAs”) to “approve merger applications in which goodwill is

included in assets” and to allow the PSAs “to agree to certain forbearances in approving

supervisory mergers which are currently granted by the Board.” Delegation of Authority

       5
           A ‘Principal Supervisory Agent’ was the president of the regional Federal
Home Loan Bank in which the resulting institution in a proposed merger is a member.


04-5009                                     25
Regarding Merger Approvals, 47 Fed. Reg. 8152 (Feb. 25, 1982) (the “1982

delegation”). The 1982 delegation noted that the FHLBB had provided the PSAs with

Memorandum R-31b, which established guidelines for allowing the use of supervisory

goodwill and an extended amortization period.          Id.   The 1982 delegation further

indicated that merger applications raising significant policy issues for which the FHLBB

had not established a formal position should be referred to the FHLBB. Id. at 8153.

Like the trial court, see Fifth Third II, 52 Fed. Cl. at 642 & n.3, we read the 1982

delegation as evidence of the FHLBB’s intention not to review individual mergers

involving supervisory goodwill; the FHLBB gave the PSAs authority to follow the

established policy regarding supervisory goodwill set forth in Memorandum R-31b.

       The trial court further noted that the Supreme Court’s Winstar decision

recognized that the ability to offer supervisory goodwill as an asset for regulatory capital

purposes and to allow extended amortization of goodwill was an essential tool for

encouraging acquisition of failing thrifts. Id. at 642-43 (citing Winstar, 518 U.S. at 849-

50, 863-64). Considering all of the circumstances, we agree with the trial court that the

authority to offer special treatment of goodwill as a contractual incentive was integral to

the PSAs’ ability to encourage supervisory mergers, notwithstanding the few instances

in which plaintiff institutions have been unable to prove the existence of such a

contract.6


       6
              The trial court interpreted the 1982 delegation as giving the PSAs express
authority to enter into certain enumerated forbearance agreements, but not goodwill
agreements. Fifth Third II, 54 Fed. Cl. at 642. Accordingly, the trial court went on to
address whether the PSAs had implied actual authority. Because we accept the trial
court’s implied authority analysis, we need not consider Plaintiff’s alternative argument
that the 1982 delegation gave the PSAs express actual authority or its theory that actual
authority was established by ratification.



04-5009                                     26
                                      C. Damages

      Fifth Third challenges one aspect of the trial court’s partial summary judgment on

damages—the rejection of Fifth Third’s cover damages model. See Fifth Third III, 55

Fed. Cl. at 242-44. Fifth Third presented other damages theories at trial; on remand

those claims will still be alive because the trial court denied the Government’s motion for

judgment on partial findings with respect to damages. The issue of cover damages,

however, is properly before us on appeal. The earlier order granting partial summary

judgment as to some damages claims was not an appealable judgment when entered,

but when the trial court entered final judgment after granting the Government’s Rule

52(c) motion on liability, the earlier disposition merged into the final judgment and is

reviewable. See Glaros v. H.H. Robertson Co., 797 F.2d 1564, 1573 (Fed. Cir. 1986);

15B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3914.28

(2d ed. 1992).

      Plaintiff proposed its cover damages theory as an alternative to lost profits. The

lost profits theory, though not absolutely barred in Winstar-related cases as a matter of

law, has not been susceptible of proof due to its speculative nature. See Cal. Fed.

Bank v. United States, 395 F.3d 1263, 1270-73 (Fed. Cir. 2005); Glendale Fed. Bank,

FSB v. United States, 378 F.3d 1308, 1313 (Fed. Cir. 2004). Plaintiff’s cover damages

theory suffers from the same problem.

      A cover damages claim measures the value of the goodwill destroyed when

enactment of FIRREA caused the Government’s breach by determining the cost of

substituting a different form of capital for the lost goodwill. Cover damages are thus a

form of expectancy damages, restoring the plaintiff to the position it would have been in




04-5009                                     27
but for the breach by replacing, or covering, the value of an asset taken away by the

breach.

      Plaintiff’s proposed claim calculates the hypothetical cost of replacing goodwill

capital with tangible capital in the form of preferred stock. According to the model, the

replacement-of-capital cost includes transaction costs Citizens would have incurred in

issuing preferred stock, and dividends Citizens would have been required to pay to

investors who bought preferred stock.

      There are two problems with Plaintiff’s particular cover damages theory. First,

Citizens was a mutual organization at the time of the breach and therefore could not

have issued preferred stock without first converting to stock form. Second, even if

Citizens had been able to issue preferred stock as set forth in Plaintiff’s model, Citizens

did not actually do so. Plaintiff’s cover damages theory is based entirely on hypothetical

costs that were never actually incurred. In that regard, this case is distinguishable from

Home Savings of America v. United States, 399 F.3d 1341, 1353-55 (Fed. Cir. 2005), in

which we affirmed the trial court’s cover damages award based on costs incurred when

the plaintiff thrift actually raised new capital to replace lost supervisory goodwill. In

contrast, Plaintiff’s cover damages claim, like lost profits claims, is highly speculative,

and we cannot fault the trial court’s decision to preclude Fifth Third from presenting its

cover damages claim at trial.

                                     CONCLUSION

      The judgment of no liability is reversed. The trial court’s rejection of Fifth Third’s

cover damages theory is affirmed.       The matter is remanded to the trial court for

determination of damages, if any, to be awarded.




04-5009                                     28
          AFFIRMED-IN-PART, REVERSED-IN-PART, and REMANDED




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