Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Anchor Savings Bank, FSB v. United States

March 10, 2010


Appeal from the United States Court of Federal Claims in 95-CV-039, Judge Lawrence J. Block.

The opinion of the court was delivered by: Bryson, Circuit Judge

Published opinion

Before NEWMAN, RADER, and BRYSON, Circuit Judges.

This is one of the last of the "Winstar" cases arising out of the savings and loan crisis of the late 1970s and early 1980s. See United States v. Winstar Corp., 518 U.S. 839 (1996). During those years, high interest rates and inflation placed hundreds of savings and loan institutions, or "thrifts," in severe financial distress. In order to prevent the thrifts' collapse and the resulting burden on the federal government, which insured many of the thrifts' depositors, the government developed a plan to induce healthy financial institutions to take over the failing thrifts through so-called "supervisory mergers." Because the troubled thrifts were unattractive investments on their own, the government offered significant incentives to the acquiring institutions. Those incentives included cash and cash substitutes in the form of what was called "supervisory goodwill." Supervisory goodwill was an accounting credit equal to the negative net worth of the thrift. Pursuant to the supervisory merger agreements, the acquiring institution was permitted to treat supervisory goodwill as an asset and to amortize the goodwill over a period of many years. That arrangement enabled the acquiring institution to satisfy its regulatory capital requirements while working to integrate and rehabilitate the failing thrift.

Anchor Savings Bank was among the institutions that contracted with the government in the 1980s to acquire several failing thrifts. Anchor was a relatively strong institution that had already engaged in significant expansion of its business and was positioning itself to become a major player in the mortgage banking industry. Between 1982 and 1985, Anchor acquired the assets and assumed the liabilities of four failing thrifts in a series of supervisory mergers arranged by the government. As part of the transactions, the government promised Anchor that it could use more than $550 million in supervisory goodwill in calculating its regulatory capital and that it could amortize that supervisory goodwill over a period of 25 to 40 years. As the government understood, the major attraction of the acquisition agreements to Anchor was the favorable regulatory treatment of supervisory goodwill. Without those forbearances, Anchor would have failed to satisfy its regulatory requirements as a result of acquiring so much liability.

In June 1988, Anchor purchased Residential Funding Corporation ("RFC"), a mortgage banking company. That purchase was consistent with Anchor's long-term business plan to become more involved in mortgage banking as a way to insulate itself from operating deficits created by the "interest rate spread"-the difference between the high interest rates it had to pay on deposits at the time and the low interest rates it was receiving on the fixed-rate mortgages in its loan portfolio. Anchor had already begun to implement its plan through its 1983 supervisory merger with mortgage-banking enterprise Suburban, which became Anchor Mortgage Services ("AMS"). AMS acquired and sold whole mortgage loans, but it retained the servicing rights on those loans so as to generate regular fees for the bank independent of interest rates.

Like AMS, RFC specialized in acquiring whole mortgage loans and reselling them in the secondary market. However, RFC served a niche market as a "conduit" specializing in wholesale originations of jumbo mortgages for resale as "private-label" mortgage-backed securities ("MBS").*fn1 RFC performed "master servicing" for the MBS, generating steady servicing fees.

RFC was an industry leader at the time Anchor purchased it. In the first quarter of 1988, RFC was the largest issuer of private MBS in the nation. RFC generated over $10.5 million in net profit in its first year under Anchor and $7.8 million in net profit during the first seven months of the following year. The business was highly successful and fit well with Anchor's long-term business plans-so well, in fact, that Anchor largely discontinued its operation of AMS in favor of RFC. In mid-1989, Anchor's CEO wrote that RFC "continues to fly" and was "authorized to double its volume in 1990." At about the same time, Anchor and RFC developed a business plan designed to expand RFC's business into other areas.

On August 9, 1989, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"). The new statute-and particularly its implementing regulations, which were announced in October 1989-effectively terminated the favorable treatment of supervisory goodwill that had been promised to Anchor at the time of the supervisory mergers. The sudden eradication of more than half a billion dollars of regulatory capital caused Anchor to fall out of capital compliance by more than $300 million. Facing the threat of seizure and liquidation by the government, Anchor scrambled to raise the necessary capital through a swift series of asset sales. Those sales resulted in the divestiture of RFC and a majority of Anchor's branch offices. Anchor sold RFC in March 1990 to General Motors Acceptance Corporation ("GMAC") for $64.4 million. Under GMAC's ownership, RFC continued to operate with largely the same management, and it continued to implement the Anchor-developed plan to expand its business.

Unlike some other thrifts at the time, Anchor survived FIRREA, and by July 1993 it received a "well capitalized" rating. At that point, it was able to resume its long-term business plans. In January 1995, Anchor merged with Dime Savings Bank of New York. Like post-FIRREA Anchor, Dime lacked a sophisticated mortgage banking operation. Accordingly, in October 1997 the Anchor/Dime entity acquired the North American Mortgage Company ("NAMCO") for $351 million. Like RFC, NAMCO engaged mostly in wholesale mortgage origination and was a major player in the secondary mortgage market. NAMCO also provided and serviced individual mortgages, generating regular fees. Unlike RFC, however, NAMCO operated primarily in the market for mortgages that met the underwriting criteria of government-sponsored entities (the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association).

Meanwhile, on January 13, 1995, Anchor filed suit in the Court of Federal Claims, alleging that the adoption of FIRREA and its implementing regulations breached the government's obligations under the supervisory merger contracts. In accordance with the Supreme Court's decision in Winstar, which had held that those actions could constitute a breach of contract by the government, the trial court concluded that the United States had breached its supervisory merger contracts with Anchor.

The trial court then conducted a five-week trial on damages. Following the trial, the court entered an award of $356,454,910.91 in damages to Anchor and issued a detailed opinion explaining its decision. The damages award consisted of lost profits from RFC's operations after Anchor sold RFC to GMAC; mitigation costs for Anchor's purchase of NAMCO to replace RFC; expectancy damages for stock proceeds Anchor would have received from a post-FIRREA stock offering if it had retained RFC; damages from the sale of portions of Anchor's branch network; increased FDIC insurance premiums; and "wounded bank" damages. Anchor Sav. Bank, FSB v. United States, 81 Fed. Cl. 1, 153 (2008). More than 90 percent of the award was attributable to Anchor's sale of RFC.

On appeal, the government challenges the trial court's award of damages related to the sale of RFC. The government argues that the trial court erred in four principal respects: (1) it improperly applied the law of foreseeability and erred in finding that the type and magnitude of damages from Anchor's sale of RFC were reasonably foreseeable; (2) it erred in finding that the government's breach caused Anchor to sell RFC; (3) it erred by measuring damages based on RFC's profits after it was sold to GMAC, rather than RFC's market value at the time of the breach or the sale; and (4) it erred in finding that the NAMCO purchase constituted mitigation for the loss of RFC. In its cross-appeal, Anchor argues that the trial court made a calculation error that erroneously reduced Anchor's damages by more than $63 million. Anchor has also filed a conditional cross-appeal in which it contends that if this court does not affirm the award of expectancy damages, it should reverse the trial court's decision denying Anchor's alternative claim for reliance damages.


Damages for breach of contract are designed to make the non-breaching party whole. One way to accomplish that objective is to award "expectancy damages," i.e., the benefits the non-breaching party would have expected to receive had the breach not occurred. Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1380 (Fed. Cir. 2001). Expectancy damages "are often equated with lost profits, although they can include other damage elements as well." Id. To recover lost profits for breach of contract, the plaintiff must establish by a preponderance of the evidence that (1) the lost profits were reasonably foreseeable or actually foreseen by the breaching party at the time of contracting; (2) the loss of profits was caused by the breach; and (3) the amount of the lost profits has been established with reasonable certainty. Cal. Fed. Bank v. United States, 395 F.3d 1263, 1267 (Fed. Cir. 2005); Energy Capital Corp. v. United States, 302 F.3d 1314, 1324-25 (Fed. Cir. 2002). Each of those inquiries presents a question of fact as to which we exercise "clear error" review. Landmark Land Co. v. FDIC, 256 F.3d 1365, 1379 (Fed. Cir. 2001); Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 1348, 1356-58 (Fed. Cir. 2001). Although we have noted that the lost profits theory of damages in Winstar cases often fails because it is too speculative, "[w]e have not . . . barred as a matter of law the use of expectancy/lost profits theory." Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308, 1313 (Fed. Cir. 2004). In its appeal of the lost profits award relating to Anchor's sale of RFC, the government challenges the trial court's conclusions as to each of the three elements of a lost profits claim set forth above.


The government first argues that the trial court erred in finding that the damages relating to the RFC sale were reasonably foreseeable. The government contends that the court should have found those damages to be available only if the government could have foreseen that Anchor would purchase and then sell RFC or an asset like RFC.

In the trial court's view, the proper question was whether a reasonable person in the government's position could have foreseen the general type of use Anchor made of its supervisory goodwill and that a profitable enterprise would be sacrificed if Anchor lost that supervisory goodwill. It was enough, the court found, that the government could reasonably have foreseen that its breach would force Anchor to divest itself of profitable assets purchased in reliance on the benefits conferred by the contracts.*fn2 Anchor, 81 Fed. Cl. at 80-81.

According to the government, the breaching party must be able to foresee the particular asset or type of asset to be purchased and sold in order to appreciate the risk of loss flowing from a breach. The government argues that when the contract was formed neither Anchor nor any other thrift had entered into RFC's line of business, which was novel and considered risky at that time. Therefore, the government contends that it could not have foreseen: (1) that Anchor would purchase that type of asset, let alone that it would later sell that asset to attain capital compliance in the wake of FIRREA; and (2) that RFC would be so profitable, thus substantially increasing the magnitude of the damages flowing from a contract breach.

The test that the government proposes is too narrow. In previous Winstar cases we have recognized that the particular details of a loss need not be foreseeable, as long as the plaintiff bank's "need to raise capital in the event of a breach was foreseeable." See Fifth Third Bank v. United States, 518 F.3d 1368, 1376 (Fed. Cir. 2008) (plaintiff was entitled to compensation for damages incurred in generating regulatory capital, through branch sales, to replace lost goodwill and was not required to establish the foreseeability of the poor economic conditions that created difficulties in raising capital).

"If it was foreseeable that the breach would cause the other party to obtain additional capital, there is no requirement that the particular method used to raise that capital or its consequences also be foreseeable." Citizens Fed. Bank v. United States, 474 F.3d 1314, 1321 (Fed. Cir. 2007) (plaintiff was entitled to compensation for negative tax consequences incurred in raising capital to replace lost goodwill; it did not need to prove that the specific tax consequences were foreseeable).

The government contends that the loss at issue in this case was not foreseeable because Anchor did not own RFC at the time it entered into the relevant contracts. It is logical, however, to apply the reasoning of Fifth Third Bank and Citizens Federal Bank to situations in which the government's breach causes a bank to sell an asset that was purchased prior to FIRREA in reliance on the supervisory goodwill obtained in the mergers. First, the importance of supervisory goodwill to the merger agreements is undeniable. Goodwill was critical to the government's ability to induce banks to enter into the supervisory mergers; without that inducement, the banks would have had little incentive to purchase failing thrifts with substantial net liabilities. See, e.g., Winstar, 518 U.S. at 921 (Scalia, J., concurring) (characterizing favorable regulatory treatment as "an essential part of the quid pro quo" of the merger contracts with the government); Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342, 1349 (Fed. Cir. 2001) ("The continued use of supervisory goodwill as regulatory capital for the entire 35-40 year amortization period initially promised was . . . a central focus of the contract and the subject of the government's breach."). Second, the government expected the infusion of regulatory capital in the form of supervisory goodwill to allow the acquiring institutions to make profitable investments that could rehabilitate the failing thrifts. As the trial court found, "the government needed and expected an acquiring thrift to leverage its goodwill into profitable investments because retained earnings were essential to replace the regulatory capital that a thrift lost each year when its goodwill was amortized." Anchor, 81 Fed. Cl. at 78. By providing that supervisory goodwill would be amortized over time, the government's contracts encouraged institutions such as Anchor to invest early and aggressively so as to take advantage of the supervisory goodwill before it was gone.

Under these circumstances, it was reasonable for the trial court to apply the foreseeability rule in a manner that encompassed both the purchase and the ultimate sale of assets. The trial court thus properly required only a general showing that (1) the government could reasonably have foreseen that the influx of supervisory goodwill under the contracts would cause the acquiring institution to make investments in order to generate profit and rehabilitate the failing acquired thrifts; and (2) the government could reasonably have foreseen that a breach of ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.