NOTE: This disposition is nonprecedential. 

United States Court of Appeals for the Federal Circuit 

 

2007-5161 

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER, 

 

 Plaintiff-Appellee, 

v. 

UNITED STATES, 

Defendant-Appellant. 

David T. Case, Kirkpatrick & Lockhart Preston Gates Ellis LLP, of Washington, 

DC, argued for plaintiff-appellee. 

Elizabeth M. Hosford, Senior Trial Counsel, Commercial Litigation Branch, Civil 

Division, United States Department of Justice, of Washington, DC, argued for 

defendant-appellant. On the brief were Michael F. Hertz, Deputy Assistant Attorney 

General, Jeanne E. Davidson, Director, Kenneth M. Dintzer, Assistant Director, and 

Arlene Pianko Groner, Delisa M. Sanchez, and William G. Kanellis, Trial Attorneys. 

Appealed from: United States Court of Federal Claims 

Judge George W. Miller 
NOTE: This disposition is nonprecedential. 

United States Court of Appeals for the Federal Circuit 

2007-5161 

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER, 

 Plaintiff-Appellee, 

v. 

UNITED STATES, 

 Defendant-Appellant. 

Appeal from the United States Court of Federal Claims in 95-CV-517, Judge George W. 

Miller. 

 __________________________ 

 DECIDED: August 13, 2008 

 __________________________ 

Before LINN, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and PROST, Circuit

Judge. 

Opinion for the court filed by Circuit Judge PROST. Opinion dissenting-in-part filed by 

Senior Circuit Judge FRIEDMAN. 

PROST, Circuit Judge. 

 This is a Winstar-related case arising out of the savings and loan crisis of the 

1980s. The government appeals the decision by the United States Court of Federal 

Claims finding the government liable for breach of contract and awarding damages to 

First Federal Savings and Loan Association of Rochester (“First Federal”). First Fed. 

Sav. & Loan Ass’n of Rochester v. United States, 76 Fed. Cl. 106 (2007) (“First Federal 

II”). We affirm. 
I 

A 

 First Federal was a mutual savings and loan association whose accounts were 

insured by the Federal Savings and Loan Insurance Corporation (“FSLIC”). The FSLIC 

devised the “Phoenix” program to consolidate large insolvent thrifts, appoint good 

management, and reduce operating costs so that the thrifts could be recapitalized or 

sold at a lower cost. In September 1981, First Federal became the first thrift placed in 

the Phoenix program when it agreed to four mergers with severely undercapitalized 

institutions. After First Federal underwent controlled growth as a Phoenix, the FSLIC 

began to look for a more permanent solution. 

On August 8, 1986, the FSLIC released First Federal from the Phoenix program 

by executing the Financing Agreement. A key element of the Financing Agreement was 

the conversion of First Federal from a mutual association to a publicly-held stock 

association. Under the Financing Agreement, FSLIC forgave $158.5 million in debt 

owed to it by First Federal and infused $200 million into First Federal. The following 

sections of the Financing Agreement are relevant to this dispute: 

Section 6.04. Conversion Covenant. First Federal shall use its 

best efforts in good faith to complete the Common Stock Offering and to 

consummate the Conversion as soon as practicable, provided that the 

Board of Directors shall have reasonably determined that it is in the best 

interests of First Federal to proceed with the Conversion. First Federal 

shall furnish to the Supervisory Agent a semi-annual report, within 30 days 

after each June 30 and December 31 commencing December 31, 1986, 

as to its progress toward making the Common Stock Offering. . . . 

 . . . 

Section 6.09. Compliance with Laws. During the term of this 

Agreement, First Federal will comply with any and all applicable statutes, 

regulations, or orders of, or any restriction imposed by, the United States 

of America or any state, municipality, or other political subdivision, or any 

2007-5161 2
agency thereof, relating to the conduct of its business or the ownership of 

its properties. . . . 

Section 6.10. Net Worth of First Federal. The amount of net worth 

required under 12 C.F.R. § 563.13 (1986) or any successor regulation 

shall not be required of First Federal. Instead, First Federal will be 

required to have a net worth/total liabilities ratio, computed in accordance 

with generally accepted accounting standards, greater than or equal to the 

following: 

Years After Minimum Net Worth/ 

Initial Closing Total Liabilities 

1-5 1.09 

6-7 1.41 

8-10 3.56 

However, if the net worth ratio should at any time fall materially below the 

required percentages then First Federal shall be in breach of this 

Agreement. In addition to any other remedies available, FSLIC shall have 

all the rights granted it under 12 C.F.R. § 563.13 (1986) or any successor 

regulation. 

 Section 6.11. Capital Plan of First Federal. First Federal 

covenants that it will use its best efforts to implement its Capital Plan, as 

described in Exhibit E attached hereto. 

(Emphases added). The Capital Plan, attached to the Financing Agreement as Exhibit 

E, called for a conversion within eighteen to thirty-six months and characterized a 

successful conversion as one that would raise approximately $150 million in capital. 

The Capital Plan also set forth annual earning (net worth) projections prior to and 

following the expected $150 million stock conversion. 

 In the fall of 1988, Canada Trust Company (“Canada Trust”) raised with First 

Federal the possibility of a transaction in which First Federal would convert from a 

mutual to a stock institution and Canada Trust would acquire a majority share of its 

common stock. First Federal subsequently ended the discussions. 

 Thereafter, First Federal and Monroe Savings Bank (“Monroe”) executed a 

merger agreement, and First Federal sought approval for the merger. FDIC approved 

$33 million in assistance for the merger. On November 22, 1998, the Federal Home 

2007-5161 3
Loan Bank of New York (“FHLB-NY”) evaluated First Federal’s proposed acquisition of 

Monroe and recommended that the bid be accepted. On March 17, 1989, the Federal 

Home Loan Bank Board (“FHLBB”) also recommended approval of the merger. 

 On August 9, 1989, Congress enacted the Financial Institutions Reform, 

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

(“FIRREA”), which imposed stricter standards for the calculation of the regulatory 

capital. The FHLBB and the FSLIC were abolished and replaced by the Office of Thrift 

Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”), 

respectively. First Federal II, 76 Fed. Cl. at 110. 

 On September 14, 1989, the Acting Deputy Director of OTS, recommended to 

the Director of OTS that the Monroe acquisition be disapproved because the resulting 

institution would not be in compliance with the tangible capital requirements mandated 

under FIRREA. After regulatory officials told First Federal that the merger would not be 

approved First Federal withdrew the Monroe merger application on November 14, 1989. 

Two years later, First Federal converted from a mutual to a stock association and was 

acquired by Canada Trust. 

B 

 First Federal sued the government for breach of the Financing Agreement. On 

October 14, 2003, the Court of Federal Claims granted First Federal’s motion for partial 

summary judgment on liability, holding that the government breached the Financing 

Agreement by imposing regulatory capital requirements contrary to those specified in 

Section 6.10. First Fed. Sav. & Loan Ass’n of Rochester v. United States, 58 Fed. Cl. 

139, 160, 167 (2003) (“First Federal I”). The court concluded, however, that there was a 

2007-5161 4
genuine issue of material fact as to whether the government’s failure to approve the 

Monroe merger application was a breach of the Financing Agreement. Id. at 163. The 

court then held a trial on the remaining liability issues and damages. 

On April 13, 2007, the court issued an opinion and order holding that the 

government’s breach of Section 6.10 of the Financing Agreement caused First Federal 

to incur damages in the amount of $96,581 million, including: (1) $26.061 million in lost 

profits because First Federal had to curtail its growth of profitable assets between 1990 

and 1997, (2) $56.137 million because First Federal was prevented from acquiring 

Monroe, and (3) $14.383 million because First Federal was forced to be acquired by 

Canada Trust. First Federal II, 76 Fed. Cl. at 112-143, 152. Thereafter, the court 

adjusted the total damages to $85.459 million—reflecting an $11.122 million offset—and 

entered judgment against the government. First Fed. Sav. & Loan Ass’n of Rochester 

v. United States, 76 Fed. Cl. 765, 767 (2007). 

The government appeals. We have jurisdiction pursuant to 28 U.S.C. 

§ 1295(a)(3). 

II 

 Contract interpretation is a question of law, which we review de novo. St. 

Christopher Assocs., L.P. v. United States, 511 F.3d 1376, 1380 (Fed. Cir. 2008). In 

the context of Winstar litigation, whether a breach of contract caused certain damages 

is a question of fact, which we review for clear error. Fifth Third Bank v. United States, 

518 F.3d 1368, 1375 (Fed. Cir. 2008). Similarly, foreseeability and proof of damages to 

a reasonable certainty are issues of fact. Id. A finding of fact will be overturned only 

when “the reviewing court on the entire evidence is left with the definite and firm 

2007-5161 5
conviction that a mistake has been committed.” Id. (quoting United States v. U.S. 

Gypsum Co., 333 U.S. 364, 395 (1948)). Whether a breach of contract was material is 

a mixed question of fact and law. Hometown Fin., Inc. v. United States, 409 F.3d 1360, 

1369 (Fed. Cir. 2005). 

III 

 The government asserts that the Court of Federal Claims erred: (1) by finding 

that there was not a prior material breach by First Federal, (2) by finding that the 

government breached the Financing Agreement by not approving the Monroe merger 

because First Federal did not meet the regulatory capital requirements under FIRREA, 

and (3) by not relying on the growth projections in the Capital Plan in calculating lost 

profits. We take each argument in turn. 

A 

 In defending against First Federal’s allegation that the government breached 

Section 6.10 of the Financing Agreement, the government alleged that First Federal 

committed a prior material breach by not complying with the notice requirements set 

forth in Section 6.04. Specifically, the government alleged that First Federal failed to 

report the overtures made by Canada Trust. The government contends that the court’s 

analysis improperly conflates two separate requirements in Section 6.04, the conversion 

requirement and the notice requirement. According to the government, it is clear from 

the language of Section 6.04—“progress toward making the Common Stock Offering”—

that the notice requirement did not apply only to a standard conversion (i.e., public stock 

offering) or a depositor offering. The government notes that Section 1.01.12 defines 

“Common Stock Offering” to mean “the offering of Common Stock (and possibly 

2007-5161 6
Convertible Securities and/or Public Warrants) which will be made by First Federal 

when and if the Conversion occurs.” Section 1.01.14, in turn, defines “Conversion” to 

mean “the conversion of First Federal from a federal mutual savings and loan 

association to a federal stock savings and loan association.” In addition, the 

government asserts that it is clear from the language that First Federal was required not 

just to give notice of completed transactions, but to give notice of any “progress” toward 

a transaction. 

In support of its argument, the government contends that trial testimony shows 

that the regulators understood Section 6.04 to require First Federal to give notice of all 

prospects and developments related to its obligation to convert. Further, the 

government contends that, with the exception of the Canada Trust overtures, First 

Federal was diligent in reporting about any alternatives to a standard conversion. Thus, 

its failure to report the overtures by Canada Trust constituted a breach of Section 6.04. 

The government avers that the breach by First Federal was “material” because it 

deprived the regulators of their right to be informed about First Federal’s progress 

toward conversion, and because the FSLIC had a right to purchase up to 25% of First 

Federal’s stock once it converted. Therefore, the government contends that First 

Federal committed a prior material breach of the Financing Agreement. 

A party sued for breach of contract may defend on the ground that the other party 

committed a prior material breach. Long Island Sav. Bank, FSB v. United States, 503 

F.3d 1234, 1251 (Fed. Cir. 2007); Barron Bancshares, Inc. v. United States, 366 F.3d 

1360, 1380 (Fed. Cir. 2004). “Faced with two parties to a contract, each of whom 

claims breach by the other, courts will often impose liability on the party that committed 

2007-5161 7
the first material breach.” Barron Bancshares, 366 F.3d at 1380 (citations and internal 

quotations omitted). A material breach is one that “relates to a matter of vital 

importance, or goes to the essence of the contract.” Hometown Fin., 409 F.3d at 1370 

(quoting Thomas v. HUD, 124 F.3d 1439, 1442 (Fed. Cir. 1997)). 

 We find no error by the Court of Federal Claims in its interpretation of Section 

6.04 of the Financing Agreement. In construing the conversion and notice provisions in 

Section 6.04, the court looked to the entire clause to understand the provisions in 

context. The court noted that the first part of Section 6.04 required First Federal to 

“complete the Common Stock Offering and to consummate the Conversion as soon as 

practicable, provided that the Board of Directors shall have reasonably determined that 

it is in the best interests of First Federal to proceed with the Conversion.” First Federal 

II, 76 Fed. Cl. at 149. The court found that the evidence showed that the Board of 

Directors had determined that pursuing a standard conversion, not a modified 

conversion, was in the best interests of First Federal because it could maintain its 

Generally Accepted Accounting Principles (“GAAP”) net worth, continue deriving the full 

benefit of its net operating loss carryforwards (“NOLs”), and ensure that depositors 

would be able to purchase stock. Id. Thus, a proposed acquisition by another bank 

was not in the best interests of First Federal, and the overtures by Canada Trust did not 

contemplate a “common stock offering” as required by Section 6.04. Id. The court 

further found that the evidence showed that First Federal informed Canada Trust that it 

was not interested in a modified conversion and immediately cut off conversations. Id.

at 149-50. Therefore, the court concluded that the overtures did not constitute 

2007-5161 8
“progress” toward making such an offering. Id. at 150. We find the analysis by the 

Court of Federal Claims to be sound. 

B 

 The government next argues that the Court of Federal Claims erred in holding 

that the government breached the Financing Agreement by relying on the more 

restrictive capital requirements of FIRREA, rather than those set forth in Section 6.10, in 

failing to approve the Monroe merger application. In particular, the government avers 

that the court erred in its conclusion that Section 6.10 of the Financing Agreement 

replaced the usual regulatory standards for the purposes of a merger application. 

According to the government, the court’s construction of Section 6.10 conflicts with 

Section 6.09. Section 6.09 expressly provided that all FSLIC and FHLBB regulations, 

except 12 C.F.R. § 563.13, remained applicable. Thus, the government asserts, 

Section 6.10 applied only to First Federal’s obligation to maintain its capital ratio at the 

percentages applicable in the forbearance, and did not grant a forbearance from 

regulations relating to mergers and acquisitions. The net worth standards in Section 

6.10 and the growth projections in the Capital Plan reflected an understanding by the 

parties to the Financing Agreement that First Federal would grow internally, not by 

merging with another thrift. The government contends that the Court of Federal Claims 

erred by construing Section 6.10 as providing First Federal with cart blanche preapproval to merge with other institutions. Instead, the government avers, both before 

and after enactment of FIRREA, the standards for approval of a merger were the 

same—whether the merging institutions had adequate financial and managerial 

resources to meet the applicable regulations and laws. 

2007-5161 9
 We find no error in the Court of Federal Claims’ construction of Section 6.10. 

The court appreciated that the Financing Agreement was conceived and executed in the 

context of the regulatory environment existing in 1986, and that, at that time, 12 C.F.R. 

§ 563.13 was the standard for measuring the capital adequacy of a potential merger 

between two mutual savings associations. First Federal II, 76 Fed. Cl. at 124. Thus, 

the court reasonably concluded that the parties were aware of the broad applicability of 

12 C.F.R. § 563.13. Id. Because Section 6.10 substituted its net worth ratios for those 

in 12 C.F.R. § 563.13, the court further concluded that the parties understood that no 

capital requirements other than those of Section 6.10 needed to be satisfied in order to 

be eligible to merge with another institution. Id. We agree that Section 6.10 should 

reasonably be construed to apply to First Federal’s state of affairs both before and after 

a merger. As the Court of Federal Claims observed, the other provisions of the 

Financing Agreement indicated that the agreement was equally applicable to 

successors of First Federal, and thus that the parties contemplated the possibility of a 

merger. Id. at 125. The court further noted that the government’s own treatment of the 

Monroe application prior to the enactment of FIRREA demonstrated that it viewed 

Section 6.10 as the standard by which First Federal’s capital adequacy would be 

measured for purposes of a merger. Id. at 125. Accordingly, we find no error by the 

court in its determination that Section 6.10 of the Financing Agreement replaced the 

usual regulatory standards for the purposes of a merger application and that the 

government breached the Financing Agreement by applying the more onerous 

capitalization requirements of FIRREA. 

2007-5161 10
 The government further contends that the Court of Federal Claims erred in 

finding that the government’s refusal to approve the merger of First Federal and 

Monroe, not First Federal’s voluntary withdrawal of its application, is what caused the 

merger to fail. The government avers that First Federal withdrew its application before 

the regulators acted upon it because First Federal was experiencing income losses and 

deposit outflows. Thus, the government asserts that First Federal is not entitled to lost 

profits based on the failure of the Monroe merger. 

In order to be entitled to expectancy damages, including lost profits, three 

requirements must be satisfied: (1) the loss must be foreseeable; (2) the breach must 

have caused the plaintiff’s failure to earn the lost profits; and (3) the measure of 

damages must be reasonably certain. Cal. Fed. Bank v. United States, 395 F.3d 1263, 

1267 (Fed. Cir. 2005). In determining whether the government’s breach of the 

Financing Agreement caused the failure of the Monroe merger, the court correctly 

recognized that the government’s breach need not be the “but-for cause” of the demise 

of the merger. Although this court has rejected the “substantial factor” test in 

establishing a causal connection between a contract breach and lost profits, we have 

held that the breach need not be “the sole factor or sole cause in the loss of profits.” Id.

at 1268. However, since lost profits are a measurement of what a party would have 

received in the absence of the breach, a preponderance of the evidence must show that 

the “profits would have been made but for the breach.” Id. 

The Court of Federal Claims determined that the government’s breach was both 

a substantial factor and the but-for cause preventing the merger. First Federal II, 76 

Fed. Cl. at 129. The court found that First Federal had been interested in a merger with 

2007-5161 11
Monroe since 1987 because a merger offered the prospect of branch consolidation, 

immediate asset growth, and the second-highest market share in Rochester, and that 

both the FHLB-NY and the FDIC indicated a willingness to approve the merger. Id. at 

127. After enactment of FIRREA, however, the regulatory authorities recommended 

against approving the Monroe merger application because First Federal did not meet 

the tangible capital requirements of FIRREA. Id. at 129. The court found that the 

evidence showed that First Federal withdrew its application because it was going to be 

rejected based on FIRREA’s capitalization requirements. Id. at 130. We find no clear 

error by the court in its factual determinations. Accordingly, we agree that the 

government breached the Financing Agreement by imposing the more onerous capital 

requirements in FIRREA, and that the failure of the Monroe merger would not have 

occurred but for the government’s breach. 

C 

Finally, the government contends that the lost profits awarded by the Court of 

Federal Claims were excessive because they were based on an assumption that, at the 

time of the Financing Agreement, it was foreseeable to the government that First 

Federal would grow at an annual rate of more than 13% beginning in 1989. The 

government asserts that the court erred by setting aside the growth projections in the 

Financing Agreement itself and substituting growth projections that were more than four 

times greater, and that were made either before or after contract formation. According 

to the government, the Capital Plan contained projections of annual asset growth 

between approximately 3.25% and 3.50%, and serves as the best evidence of the 

expectations of First Federal and the regulators at the time the Financing Agreement 

2007-5161 12
was executed; yet, the court relied on evidence of expected growth created either 

during First Federal’s Phoenix phase before the Financing Agreement, or well after 

contract performance had commenced. Moreover, the government asserts, the court 

applied the wrong foreseeability standard by not requiring that both the type and 

magnitude of damages be foreseeable at the time of contracting. 

In order to be entitled to lost profits, the plaintiff must establish that the damages 

were foreseeable to the breaching party at the time of contract formation. Old Stone 

Corp. v. United States, 450 F.3d 1360, 1375 (Fed. Cir. 2006). “[T]hat some loss was 

foreseeable, or even that some loss of the same general kind was foreseeable, will not 

suffice if the loss that actually occurred was not foreseeable.” Id. at 1376 (emphasis 

added) (quoting Restatement (Second) of Contracts § 351 cmt a. (1981)). While it is 

true that “a plaintiff must prove that both the magnitude and type of damages were 

foreseeable,” Landmark Land Co. v. FDIC, 256 F.3d 1365, 1378 (Fed. Cir. 2001), the 

plaintiff need only prove the amount of damages with reasonable certainty. Cal. Fed. 

Bank, 395 F.3d at 1267. Indeed, as long as “a reasonable probability of damage can be 

clearly established, uncertainty as to the amount will not preclude recovery.” Id.

 The Court of Federal Claims went through a lengthy analysis of the evidence 

presented by First Federal regarding the additional assets—and earnings on those 

assets—which it would have realized in the absence of the government’s breach of the 

Financing Agreement. Crediting the testimony of First Federal’s expert witness, Dr. 

Donald Kaplan, and its former chief financial officer, Mr. Mark Chaplin, the court found 

that, but for the breach, First Federal would have added approximately $400 million in 

profitable assets by the end of 1989. First Federal II, 76 Fed. Cl. at 116-19. It further 

2007-5161 13
2007-5161 14

found that First Federal would have earned profits of approximately $26.061 million on 

those foregone assets between 1990 and 1997. Id. at 122. In considering whether the 

government had a reason to foresee lost profits as a result of its breach of Section 6.10, 

the court concluded that it was foreseeable that requiring First Federal to comply with 

FIRREA’s stricter capital standards would cause First Federal to curtail growth and lose 

profits. Id. We agree. The government’s argument that the court erred by not relying 

on the asset growth rate projections in the Capital Plan is unpersuasive. As the court 

determined, the growth projections set forth in the Capital Plan were not limitations on 

growth. Moreover, First Federal’s primary business strategy had long been to increase 

its assets, even during its years as a Phoenix. Thus, the court properly concluded that 

the government should have reasonably foreseen that First Federal might significantly 

exceed those projections. We find no error by the Court of Federal Claims in its award 

of lost profits. 

IV 

For the foregoing reasons, we affirm the Court of Federal Claims’ holding that the 

government breached the Financing Agreement by not approving the Monroe merger 

because First Federal did not meet the regulatory capital requirements under FIRREA, 

and its holding that First Federal did not commit a prior material breach by not reporting 

the overtures by Canada Trust. We further affirm the court’s award of lost profits. 
NOTE: This disposition is nonprecedential. 

United States Court of Appeals for the Federal Circuit 

2007-5161 

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER, 

Plaintiff-Appellee, 

v. 

UNITED STATES, 

 Defendant-Appellant. 

Appeal from the United States Court of Federal Claims in 95-CV-517, Judge George W. 

Miller. 

FRIEDMAN, Senior Circuit Judge, dissenting in part. 

 I agree with the court that First Federal did not breach the Financing Agreement 

by failing to inform the government about Canada Trust’s proposal that it acquire First 

Federal. I also agree that the Court of Federal Claims properly concluded that First 

Federal’s lost profits were foreseeable when the Financing Agreement was executed. 

Where I part company from the court is its holding that the government breached the 

Financing Agreement by failing to approve First Federal’s proposed acquisition of 

Monroe Savings Bank. 

 The court’s reasoning on the Monroe issue is as follows: In section 6.10 of the 

Financing Agreement, the parties agreed that the net worth ratios there stated (lower 

than those in the governing regulation) would be the only ones First Federal would have 

to satisfy. The government breached this commitment by refusing to approve the 
2007-5161 2

Monroe acquisition because the merged institution would not meet the higher capital 

ratios required under the recently enacted FIRREA. 

 Section 6.10, however, deals only with First Federal’s net worth. It does not deal 

with the standards the regulators would apply in evaluating First Federal’s proposed 

acquisition of another banking institution. Nothing in the Financing Agreement explicitly 

deals with government approval of mergers or acquisitions, or purports to specify the 

standard’s the government would apply in performing that function. It does not follow 

that because First Federal generally would have to meet only those lower capital ratios, 

the government could not require that a merger of First Federal would result in the new 

higher capital ratios that FIRREA required. Before I could conclude that the Financing 

Agreement imposed such a significant limitation on the government’s broad regulatory 

authority over savings-and-loan mergers and acquisitions, I would require a far stronger 

showing that the parties so intended than I can discern in the Financing Agreement.