United States Court of Appeals for the Federal Circuit 

03-5131,-5145 

WESTFED HOLDINGS, INC., 

 Plaintiff-Cross Appellant, 

v. 

UNITED STATES, 

Defendant-Appellant.

Rowan D. Wilson, Cravath, Swaine & Moore LLP, of New York, New York, 

argued for plaintiff-cross appellant. With him on the brief was Thomas G. Rafferty. 

Jeanne E. Davidson, Deputy Director, Commercial Litigation Branch, Civil 

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

defendant-appellant. With her on the brief were Stuart E. Schiffer, Deputy Assistant 

Attorney General; David M. Cohen, Director; and Ashley N. Bailey, Jane M.E. Peterson, 

Delisa M. Sanchez, Edward P. Sullivan, and Tonia J. Tornatore, Trial Attorneys. Of 

counsel was Maureen A. Delaney. 

Appealed from: United States Court of Federal Claims 

Judge Emily C. Hewitt 
United States Court of Appeals for the Federal Circuit 

03-5131, -5145 

WESTFED HOLDINGS, INC., 

 Plaintiff-Cross Appellant, 

v. 

UNITED STATES, 

 Defendant-Appellant. 

 __________________________ 

DECIDED: May 12, 2005 

 __________________________ 

Before RADER, GAJARSA, and PROST, Circuit Judges. 

PROST, Circuit Judge. 

This appeal is another in a series of Winstar-related cases. Westfed Holdings, 

Inc. (“Westfed”) commenced a lawsuit on its behalf and derivatively on behalf of the 

insolvent thrift, Western Federal Savings and Loan Association (“New Western” or 

“Western”), alleging that the federal government’s passage and imposition of the 

Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) breached the 

government’s agreement to forbear from imposing certain regulatory capital 

maintenance requirements on the thrift. Following a bench trial, the Court of Federal 

Claims determined that the government breached its contract and that Westfed is 

entitled to approximately $305 million in reliance damages. The government appeals 

both of the trial court’s determinations. Westfed cross-appeals the trial court’s decision 
to reject its claim for unpaid obligations allegedly owed to holders of debentures and 

preferred shares, now amounting to over $800 million. For the reasons set forth below, 

we affirm-in-part and reverse-in-part. 

I. BACKGROUND 

Two prior Court of Federal Claims decisions in this case discuss at length the 

facts of this case. Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544 (2003) 

(“Westfed II”); Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) 

(”Westfed I”). We set forth here only the essential facts necessary to understand this 

case. 

Westfed is a thrift holding company. In 1985, the Federal Savings and Loan 

Insurance Corporation (“FSLIC”) seized Bell Federal Savings & Loan (“Bell”), a failing 

savings and loan institution, and placed its assets into receivership. Id. at 139. 

Subsequently, in 1985 and 1986, the FSLIC solicited offers to purchase the assets and 

liabilities of Bell. Id. Each time, the FSLIC rejected the submitted offers. Id. When the 

FSLIC again solicited offers in 1987, Bell Holdings, an affiliate organized by Westfed for 

the purpose of acquiring Bell, submitted a proposal to convert Bell from a mutual 

company to a stock company and to merge Bell with Western Federal Savings & Loan 

(“Old Western”). Id. At the time of this proposal, Westfed had a pending bid to acquire 

Old Western, id., which was subject to regulatory approval. In 1988, the Federal Home 

Loan Bank Board (“FHLBB”) approved the proposal to convert Bell from mutual to stock 

form and to have Westfed acquire and merge Bell with Old Western. Id. The merged 

entity was to be called New Western. In a letter dated September 21, 1988 (“the 

Forbearance Letter”), the FHLBB informed Westfed that it would not enforce the 

03-5131, -5145 2
regulatory capital requirements of 12 C.F.R. § 563.13 as long as New Western met the 

net worth requirement set out in the Regulatory Capital Maintenance Agreement 

(“RCMA”), an agreement that the parties executed two days later on September 21. Id.

at 40. In the RCMA, Westfed and New Western, among other things, agreed to 

maintain New Western’s net worth at the greater of $110 million or 2% of New 

Western’s liabilities for five years after the execution of the RCMA. Id. at 140. In 

addition to executing the RCMA, the FSLIC, Westfed, and New Western executed an 

Assistance Agreement, in which the FSLIC agreed to contribute to New Western an 

amount equal to the capital shortfall of Bell. Id. at 139-40. 

After its creation in 1988, New Western began implementing a business plan that 

called for aggressive growth over the next five years. Westfed II, 55 Fed. Cl. at 554. By 

the end of 1989, New Western just fell short of reaching the target asset size of $4.831 

billion. Id. Moreover, New Western produced earnings of $28.96 million and paid 

dividends of $5.552 million in the first half of 1989. Id. On August 9, 1989, Congress 

enacted FIRREA, which abolished FHLBB and the FSLIC, and transferred their 

regulatory functions to the Office of Thrift Supervision (“OTS”). Nine days later, on 

August 18, 1989, OTS denied New Western permission to pay further dividends 

because it was found to be out of compliance with the capital requirements of FIRREA. 

Id. Despite the modifications to the capital requirements in the RCMA, OTS required 

New Western to file a capital restoration plan to meet the new capital maintenance 

requirement imposed by FIRREA. Id. By December 1992, OTS informed New Western 

that it was still undercapitalized, and imposed additional restrictions on capital 

distributions New Western could make until it complied with FIRREA. Id. In March 

03-5131, -5145 3
1993, OTS informed New Western that it was “significantly undercapitalized” and that it 

intended to impose further restrictions on New Western’s operations. Id. Finally, on 

June 3, 1993, OTS seized New Western and placed it into receivership. Id. Throughout 

the period after the parties executed the Assistance Agreement, the government met its 

obligation to provide assistance payments to New Western, which totaled at least $780 

million by the time OTS placed New Western into receivership. 

Westfed brought suit against the government for breach of contract. After a 

fourteen-day trial, the Court of Federal Claims awarded Westfed reliance damages in 

the amount of about $305 million, but denied Westfed’s request for alleged damages 

related to unpaid obligations to holders of Westfed’s debentures and preferred shares, 

then exceeding $800 million. The government timely appeals the awarded reliance 

damages, while Westfed timely appeals the denial by the court to award money for the 

unpaid obligations. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3). 

II. STANDARD OF REVIEW 

We review interpretations of contracts by the Court of Federal Claims de novo 

and its findings of fact for clear error. E.I. Du Pont de Nemours and Co. v. United 

States, 365 F.3d 1367, 1372 (Fed. Cir. 2004). “A finding is ‘clearly erroneous’ when 

although there is evidence to support it, the reviewing court on the entire evidence is left 

with the definite and firm conviction that a mistake has been committed.” United States 

v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). 

III. DISCUSSION 

The government argues that the trial court erred because (1) Westfed assumed 

the risk of a change in the law; (2) Westfed waived the breach by continuing to accept 

03-5131, -5145 4
assistance from the government; (3) the trial court adopted the incorrect causation 

standard for reliance damages and, moreover, applied the adopted standard incorrectly; 

and lastly, (4) the trial court failed to deduct from Westfed’s gross damages claim the 

financial benefits reaped from the government’s performance. In Westfed’s crossappeal, it contends that the trial court incorrectly held that Westfed may recover only 

“amounts actually expended,” which the court used as the basis to deny Westfed’s 

claim for debts arising from the securities it issued allegedly to make the acquisition and 

merger of Old Western and Bell possible. We address each argument in turn. 

A. Assumption of the Risk 

The government argues that terms of the Forbearance Letter, which was 

integrated into the contract, indicate that Westfed assumed the risk of regulatory change 

to the capital maintenance requirement. The trial court interpreted the language found 

in paragraph 1 of the Forbearance Letter to mean that the government “unconditionally 

promised to take no action pursuant to § 563.13 of the Insurance Regulations so long 

as New Western maintained a net worth of approximately $95 million calculated in 

accordance with GAAP.” Westfed I, 52 Fed. Cl. at 147. Paragraph 1 is set forth below: 

The FSLIC will forbear from taking action pursuant to Section 563.13 of 

the Rules and Regulations for Insurance of Accounts (“Insurance 

Regulations”) for any failure by New Western to comply with its regulatory 

capital requirement provided for in Section 563.13 as long as New 

Western satisfies either (1) the regulatory capital maintenance 

requirement or (2) the net worth maintenance requirement set forth in 

Section 2 of the Regulatory Capital Maintenance Agreement (either of 

which may be referred to herein as the “Modified Capital Requirement.” 

The government argues that paragraph 8 of the Forbearance Letter, as set forth below, 

limited the bargained-for forbearance in paragraph 1: 

03-5131, -5145 5
So long as New Western is in compliance with its Modified Capital 

Requirement [“MCR”] it will be deemed in compliance with any form of 

minimum capital test or calculation to which it is or becomes subject

pursuant to the Insurance Regulations, to the extent, in the opinion of the 

[Principal Supervisory Agent (“PSA”)], not inconsistent [sic] with the 

purposes of any such regulation. 

The trial court interpreted paragraph 8 to mean that “Westfed received the additional 

benefit of being deemed in compliance with any form of minimum capital test or 

calculation ‘to the extent, in the opinion of the Board . . . [it is] not inconsistant [sic] with 

the purposes of the regulation in question.’” Id. 

The government contends the trial court wrongly held “that, in paragraph 1, the 

parties implicitly addressed regulations which succeeded section 563.13(b).” In other 

words, according to the government, paragraph 1 “does not encompass the future.” 

Unlike paragraph 1, the government asserts that paragraph 8 addresses both the 

present regulation and the effect of future regulations. Furthermore, paragraph 8 

allegedly demonstrates that the regulators retained discretion to determine whether 

New Western’s compliance with the MCR is inconsistent with any insurance regulations. 

We agree with the trial court that a plain reading of paragraph 8 shows that it 

protects New Western “from adverse consequences beyond the compass of Section 

563.13 of the Insurance Regulations.” Id. While paragraph 1 unconditionally exempts 

New Western from the consequences of § 563.13 should it fail to meet the capital 

requirement provided under that section, the paragraph does not forebear regulators 

from taking other actions should it be deemed out of compliance with any other 

provision of the Insurance Regulations. As the trial court correctly observed, if 

paragraph 1 were subject to the same discretionary proviso as paragraph 8 (“subject 

pursuant to the Insurance Regulations, to the extent, in the opinion of the [PSA]”), 

03-5131, -5145 6
paragraph 1 would have added nothing to the agreement. It is of course firmly 

established as a general rule of contract interpretation that the “interpretation that gives 

a reasonable meaning to all parts of the contract will be preferred to one that leaves 

portions of the contract meaningless.” United States v. Johnson Controls, Inc., 713 

F.2d 1541, 1555 (Fed. Cir. 1983). 

Despite this general rule of contract interpretation, which appears to militate that 

we affirm the trial court’s interpretation of paragraphs 1 and 8, the government argues 

that such an interpretation conflicts with other provisions of the contract. See id. (“nor 

should any provision be construed as being in conflict with another unless no other 

reasonable interpretation is possible”). Specifically, according to the government, the 

trial court’s interpretation conflicts with (1) the language in the Assistance Agreement, 

which acknowledges the possibility that New Western could be placed in receivership if 

required for safety and soundness reasons, and (2) the language in the RCMA, which 

established that the rights reserved to the regulators by the RCMA “shall be in addition 

to the all rights, powers, and remedies given by applicable statute or rule of law.” We 

disagree that there is a conflict. As the government acknowledged earlier before the 

trial court, New Western was placed in receivership not because of insufficient capital 

under § 563.13, but rather because it was found “unsafe and unsound.” The regulators’ 

seizure and placement of New Western in receivership under the Assistance Agreement 

is not barred by paragraph 1. Moreover, the seizure is fully consistent with the trial 

court’s construction of paragraph 8, which expands, with qualifications, the 

circumstances under which New Western may be deemed in compliance with the 

capital requirements that are imposed by any other provision of the Insurance 

03-5131, -5145 7
Regulations. As for the second ground raised to challenge the trial court’s 

interpretation, it speaks to the rights reserved by the regulators by the contract terms 

and those given by any applicable statute or rule of law. As construed above, the 

regulators contractually promised to forebear action under § 563.13 should New 

Western fail to meet the capital requirement of that section. While it is true that the 

government cannot be contractually bound from exercising a sovereign power, if the 

government, through its regulators, exercises that power and breaches a particular 

contractual obligation, the injured party will have redress for the breach. Centex Corp. 

v. United States, 395 F.3d 1283, 1309 (Fed. Cir. 2005). The government does not cite 

any applicable statute or rule of law that bars redress for its breach. We are 

unpersuaded by the government that the trial court’s interpretation creates a conflict 

with any other provision of the contract that would preclude us from affirming the trial 

court and that would compel us to conclude that Westfed assumed the risk of a change 

in the law. 

B. Waiver of Breach 

Next, the government contends that Westfed waived its right to bring a claim for 

the government’s material breach of their contract by accepting hundreds of millions of 

dollars from the government. The trial court found that Westfed had reserved its rights 

to bring a claim for the breach despite its alleged continued acceptance of the 

government’s payments. Westfed I, 52 Fed. Cl. at 158. The government responds that 

only New Western, but not its holding company, Westfed, preserved its legal rights, and 

the trial court erred by assuming that having substantially identical interests between the 

holding company and the held corporation suffices to preserve the holding company’s 

03-5131, -5145 8
right to claim breach of contract. In support of its position, the government notes that: 

(1) when New Western failed, Westfed hid behind the corporate form to shield itself 

from New Western’s liabilities; and (2) the trial court’s holding allegedly conflicts with 

rulings it made during trial, in which it found that there was no showing that Westfed had 

ever authorized New Western to speak on its behalf. Westfed II, 55 Fed. Cl. at 564. 

A party to a contract may waive the breach of an agreement by the continued 

acceptance of performance by the breaching party without reservation of rights. LingTemco-Vought, Inc. v. United States, 474 F.2d 630, 637-38 (Ct. Cl. 1973). Waiver is an 

affirmative defense, as to which the breaching party bears the burden of proof. See

Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1299 (Fed. Cir. 2002). When 

the government knows of the non-breaching party’s timely reservation of rights in 

protest to the breach, the acceptance of payments from the government does not waive 

the party’s rights arising from the breach. N. Helex Co. v. United States, 455 F.2d 546, 

555 (Ct. Cl. 1972). The reservation of rights may be express or implied. Id. 

The government takes issue with the trial court’s conclusion that New Western’s 

reservation of rights sufficed to preserve Westfed’s rights to remedies from the 

government’s breach, particularly when the trial court found that no agency relationship 

existed to allow attributing New Western’s statements to Westfed as party-opponent 

admissions under Federal Rules of Evidence (“FRE”) 801(d)(2)(D). See Westfed II, 55 

Fed. Cl. at 564. The court noted that FRE 801(d)(2)(D) “expressly provides that the 

statement be made by the ‘party’s agent.’” Id. Because it found insufficient evidence to 

conclude that Westfed established an agency relationship with New Western, it declined 

to attribute statements by New Western to Westfed. Id. Nevertheless, in view of the 

03-5131, -5145 9
substantial identity of legal interest between New Western and Westfed, the trial court 

found that New Western’s repeated statements of its intent to preserve its rights and 

remedies negated any inference of waiver by Westfed. Westfed I, 52 Fed. Cl. at 159 

n.21. 

As the party claiming waiver, the government bears the burden of proof to show 

by a preponderance of evidence that Westfed waived its rights to assert its breach of 

contract claim. The government does not dispute that it never received an express 

statement of intent to waive the breach. Rather, it contends that we should find that 

Westfed impliedly expressed an intent to waive the breach from its acceptance of the 

government’s monetary assistance. Implied waiver may be inferred by conduct or 

actions that mislead the breaching party into reasonably believing that the rights to a 

claim arising from the breach was waived. See N. Helex, 455 F.2d at 551 (“As a 

general proposition, one side cannot continue after a material breach by the other, . . . 

act as if the contract remains fully in force . . . , run up damages, and then go suddenly 

to court.”). Although in some instances, silence by the non-breaching party in response 

to the breaching party’s conduct might be evidence of a waiver, Ling-Temco-Vought, 

475 F.2d at 637, we find Westfed’s alleged failure to object does not amount to 

evidence of a waiver in view of the non-waiver clauses at section 22 of the Assistance 

Agreement and section 11 of the RCMA. Coast Fed. Bank, FSB v. United States, 48 

Fed. Cl. 402, 417-18 (2000). 

Like the non-waiver clause in Coastal Federal, id. at 417, section 22 of the 

Assistance Agreement provides that “[n]o forbearance, failure, or delay by any party in 

exercising or partially exercising . . . right [given by the Agreement], power, or remedy 

03-5131, -5145 10
shall operate as a waiver thereof or preclude its further exercise.” Similarly, section 11 

of the RCMA contains language that is virtually identical to the non-waiver clause in 

Coastal Federal. Id. The government cites no controlling federal contract law to 

demonstrate that a non-waiver clause in a Winstar-related case is unenforceable. 

According to the choice of law provision in the contract, “[t]o the extent that Federal law 

does not control, [the Assistance Agreement and RCMA] and the parties’ rights and 

obligations under it shall be governed by the law of the state of California.” Again, the 

government cites no laws or cases from the state of California that preclude application 

of the non-waiver clause. We find no persuasive reason supplied by the government to 

justify ignoring the terms of the parties’ contract, so as to find Westfed’s alleged failure 

to object to the government’s breach to be a waiver of its right to assert a claim. 

Moreover, the government cites no other record evidence from which we might 

otherwise infer that Westfed intended in fact to waive the government’s breach.1

 We

agree with the trial court that the government has failed to meet its burden to support its 

affirmative defense that Westfed waived its right to assert its claim. 

C. Causation and Foreseeability 

1. Causation 

 1 Although the government feigns ignorance of Westfed’s reservation of 

rights, multiple witnesses at trial provided uncontroverted testimony that Westfed had in 

fact made known to federal regulators its dispute in regard to whether it was subject to 

the capital requirement imposed by FIRREA. Although the government dismisses the 

testimony as self-serving, it cites no evidence or testimony to rebut Westfed’s 

witnesses. 

03-5131, -5145 11
The government contends that to recover the cost of acquiring Old Western, 

Westfed must show it incurred the cost solely in order to perform the contract. The 

government asserts that the trial court applied the wrong legal standard, and contends 

that had it properly applied the “but-for” standard of causation, it would have held that 

Westfed failed to meet its burden to show that it is entitled to reliance damages. White 

River Levee District v. McWilliams Dredging Co., 40 F.2d 873 (8th Cir. 1930) and J. D. 

Hedin Const. Co. v. United States, 456 F.2d 1315 (Ct. Cl. 1972) are the only authorities 

the government cites to support its view that the costs incurred must be solely for 

performing the contract. White River is not controlling, much less applicable to the facts 

of our case here. The United States Court of Appeals for the Eighth Circuit in White 

River denied the contractor’s claim for costs associated with building a new boat to 

perform dredging under the contract. 40 F.2d at 877-78. The court first acknowledged 

that recoverable “expenditures . . . must not be extravagant, and unnecessary for the 

purpose of carrying out the contract.” In White River, nothing in the contract required 

the plaintiff to build the new boat. Indeed, the old boat that began the work was the only 

one that ever did any excavation. Id. at 877. The court observed that there was 

substantial evidence indicating that the new boat was built for purposes other than to 

just perform the contract. Id. In particular, the hull was made stronger than ordinary 

hulls. Id. at 878. According to the court, “the only effect, if any, which this work had on 

the building of this new hull was to make it more expensive.” Id. Evidently, the court 

found the added expense for the stronger hull unnecessary to complete the work under 

the contract. Assuming the old boat did need a new hull, the court found no showing as 

to what amount, if any, was expended over and above what would have been paid to 

03-5131, -5145 12
replace the hull with one of ordinary strength, and thus, the court declined to award any 

costs associated with the new boat. Id. 

The facts of White River are distinguishable from the instant case. In Paragraph 

A of the Recitals to the Assistance Agreement, it required, among other things, that DP 

Holdings (the predecessor to Westfed) merge Bell with Old Western. DP Holdings 

would have needed, among other things, to acquire Old Western to consummate this 

transaction. In the government’s view, “nothing in the assistance agreement logically 

leads to the conclusion that the parties intended the recitals to be incorporated as 

obligations under the contract.” The government’s view is meritless. The Assistance 

Agreement is replete with references incorporating the obligations arising from the 

transactions described in the Recitals. The Agreement states, for instance, that the 

“obligations of the parties are subject to the Transaction becoming effective no later 

than October 1, 1988.” The contract clearly defines “Transaction” to encompass “the 

consummation of all of the transactions set forth . . . in Paragraph A of the Recitals” and 

all transactions related thereto. Moreover, the parties explicitly agreed in the Assistance 

Agreement that the FSLIC’s obligations would be conditioned on the acquisition and 

merger of Bell with Old Western “in the manner set forth . . . in Paragraph A of the 

Recitals of this Agreement.” The government cannot claim, unlike White River, that the 

cost incurred by the non-breaching party, at least in regard to purchasing Old Western, 

was gratuitous.2

 

 2 Although the government notes that Westfed originally had intentions to 

acquire Old Western on a stand-alone basis, the facts, as found by the trial court, 

indicate that the approval required to undertake the acquisition would likely have not 

been given had Westfed not agreed to also acquire and merge Bell with Old Western in 

accordance with the Assistance Agreement. See infra. We find no persuasive basis to 

03-5131, -5145 13
In regard to J. D. Hedin, the Court of Claims held, in view of the numerous other 

obligations assumed by the plaintiff, that it could not conclude the reason the plaintiff 

“was required to borrow the $480,000 was attributable solely to defendant’s termination 

breach on the instant project, and that, but for such breach, it would not have had to 

borrow such funds.” 456 F.2d at 1330. The government contends in the case before us 

that it was reversible error for the trial court to have relied on the substantial factor test 

in connection with proof of reliance damages, and suggests that a different conclusion 

would have been reached had the trial court properly applied the “but-for” test. 

The trial court reviewed the previous decisions by the Court of Federal Claims 

that have decided reliance damages in Winstar-related cases, and found that they have 

generally applied the substantial factor test. Westfed II, 55 Fed. Cl. at 553. The trial 

court found no rational basis to depart from past decisions and apply a different 

standard to the recovery of reliance damages. Id. Assuming, arguendo, that the 

government was correct in asserting that the but-for standard should apply, the trial 

court found “credible evidence presented in this case also supports a finding of 

causation under the ‘but for’ test urged by defendant.” Id.

Specifically, the trial court found “[p]rior to the imposition of FIRREA, New 

Western was successfully implementing the 1988 Business Plan (the Plan).” Id. at 554. 

Under the 1988 Plan, Westfed had “negotiated for and gained approval to grow at a rate 

that would double the size of the institution.” Id. The court found that the Office of Thrift 

Supervision (“OTS”) required New Western to scrap that plan in favor of a new business 

plan to place it in compliance with the capital requirement called for by FIRREA. Id. 

 

conclude, as the government does, that Westfed did not acquire Old Western in reliance 

03-5131, -5145 14
While the proposed capital restoration plan (“CRP”) was under consideration, OTS 

imposed various limitations that limited growth of New Western to “net interest credit,” 

which according to witness testimony, meant “essentially no growth” at all. Id. Even

after the CRP was approved on March 7, 1990, OTS maintained a cap on New 

Western’s growth to “an amount equal to net interest credited on deposit liabilities.” Id.

at 554-555. In addition to limiting New Western growth in an attempt to force it into 

compliance with FIRREA, the trial court found that OTS placed other operating 

restrictions on institutions, including New Western, that were found to be 

undercapitalized by FIRREA standards. Id. at 555. Namely, “New Western . . . could 

not accept, renew, or roll over broker deposits, nor could they make types of loans or 

investments that were not specified in their [CRP] or approved in writing by the OTS 

assistant director.” Id. In summary, the court found the restrictions imposed by OTS to 

put New Western in compliance with FIRREA stymied New Western’s growth, and in 

fact, caused the company to contract. Id. 

The trial court then examined at length the evidence the government presented 

to show the existence of other factors that allegedly contributed to New Western failing, 

including the uneven management of New Western, the poor asset quality it held, and 

the weak economy. Id. at 556-58. Despite early complaints about management, by 

1993, the assistant regional director of OTS found the management in place to be a 

“highly capable, efficient, and committed senior management team that had already 

achieved remarkable progress.” Id. at 556. Moreover, the examiner-in-charge for the 

1993 OTS examination testified that New Western’s executives were doing a “good job” 

 

on the agreement negotiated with the government. 

03-5131, -5145 15
and “had much improved.” Id. Despite the poor quality of the assets held, OTS 

determined that New Western’s management had “made some progress in addressing 

significant on and off balance sheet risks.” Id. at 557. Further, despite the economic 

difficulties it encountered, “there was uncontroverted evidence that, in addition to 

meeting its contractual capital requirements, New Western had sufficient liquidity to 

readily meet all the anticipated cash out-flow needs of the institution without any 

difficulty at all.” Id. (internal quotes omitted). The trial court found that “it was apparent 

from testimony of the various examiner-in-charge [sic] that capital inadequacy [under 

FIRREA] was the primary reason for the downgrading of New Western’s composite 

ratings.” Id. Although the government offered the testimony of several witnesses who 

testified that New Western would have incurred millions of dollars in losses and failed, 

irrespective of the government’s breach, the trial court did not give credit to their 

testimony because none of the witnesses developed a model to support their opinion of 

what losses New Western would have incurred in the “but-for” world of no breach.3

 Id.

at 558. In conclusion, the trial court found that the defendant’s breach was a substantial 

 3 The government does not dispute the trial court’s statement that no model 

from its experts was put into evidence of New Western’s losses in a but-for world, but 

instead complains that the trial court appeared to improperly shift the burden of proof to 

the government, requiring that it show “in the absence of breach, [New] Western would 

have incurred losses that would have resulted in its seizure.” We find no merit to the 

government’s complaint. The trial court expressly stated that “[p]laintiff must . . . prove 

that its damages were lost as a result of the breach” and acknowledged the dispute in 

regard to which standard the “plaintiff must satisfy.” Westfed II, 55 Fed. Cl. at 553. In 

view of the lack of foundation in the record evidence to support the government’s 

experts, we discern no error in the trial court’s discredit of the claims made by them that 

New Western would have failed regardless of the breach by the government. 

03-5131, -5145 16
factor in causing Westfed’s downfall. Id. The trial court further determined, after 

weighing all of the credible evidence presented, “that but for defendant’s breach, New 

Western would not have been seized.” Westfed II, 55 Fed. Cl. at 559. Thus, the trial 

court expressly found that Westfed had met its burden of showing causation under the 

but-for standard, the standard that the government urged the trial court to adopt. The 

government criticizes the trial court largely on grounds that certain evidence allegedly 

contradicts the trial court’s factual determinations. Causation is a question of fact, 

which we review for clear error. Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 

1348, 1356 (Fed. Cir. 2001). We are unpersuaded that the trial court was clearly 

erroneous in concluding that a causal connection had been definitely established 

between the breach and the loss claimed by Westfed. See Cal. Fed. Bank, FSB v. 

United States, 395 F.3d 1263, 1268 (Fed. Cir. 2005). 

Alternatively, the government argues that if the contract to merge Bell with Old 

Western had not been formed Westfed would have nonetheless “possibly” acquired Old 

Western on a stand-alone basis because of the business benefits arising from its 

purchase. Because the trial court could not with absolute certainty rule out the 

“possibility” that Westfed would purchase Old Western irrespective of the formation of 

the breached contract, the government contends the trial court wrongly “placed the 

burden on the Government to prove to a certainty that Westfed would not have acquired 

Old Western on a stand-alone basis.” Accordingly, the government suggests that the 

trial court erroneously ruled that Westfed is not barred from recovering the costs it 

incurred in reliance on the contract that the government approved. Bearing in mind that 

reliance damages seeks to put the non-breaching party in “as good a position as he 

03-5131, -5145 17
would have been in had the contract not been made,” Restatement (Second) of 

Contracts § 344(b), the government contends that awarding Westfed the cost of 

acquiring Old Western impermissibly places Westfed in a better position than it would 

have been had there been no contract. 

The government ignores evidence that supposing the merger agreement had not 

been approved, the purchase of Old Western by Westfed would likely have not been 

approved. Had Westfed not agreed to acquire and merge Old Western and Bell, the 

regulators would have likely never permitted Westfed to acquire Old Western in the first 

place. The trial court’s finding is supported by evidence from Sidney Mar, a Supervisory 

Agent for the Federal Home Loan Bank Board (“FHLBB”) and later assistant district 

director of OTS, that “Westfed could not acquire Old Western without regulatory 

approval.” Mar had met with Westfed in connection with the application to buy Old 

Western on a stand-alone basis and commented that he had a “number of financial 

concerns with the proposed transaction.” Given the current structure of the proposed 

transaction, Mar stated that “there is a reasonable likelihood that we will recommend 

denial” of the application. Other than the delayed withdrawal of the application to 

acquire Old Western on a stand alone basis, the government cites little evidence that 

Westfed would have agreed to “provide and maintain a substantially higher projected 

GAAP and tangible net worth for [Old] Western,” than would have been needed to allay 

Mar’s concerns. In a memorandum from David Wall, the head of the FHLBB, to Jay 

Jupiter, the deputy director for the Mergers and Acquisition Department at the FSLIC, 

he acknowledged that Mar was “likely to recommend against the Western acquisition on 

a ‘stand-alone’ basis, but is much more likely to recommend favorably the combined 

03-5131, -5145 18
[acquisition of Bell and Old Western].” Wall added that “[w]e seem to be moving 

towards a position that Western and Bell must be considered jointly.” (Emphasis 

added). In brief, the trial court found: 

The evidence presented at trial clearly establishes that Westfed acquired 

Old Western in reliance on the contract between the parties. The FHLBB 

approved plaintiff’s acquisition of Bell as a multi-step transaction . . . . The 

testimony of principals and executives of plaintiff is consistent on this point 

and is supported by the documentary evidence. Mr. John Harding, a 

negotiator for Westfed in preparation for the merger and later a director of 

New Western . . . testified that Westfed viewed the acquisition and merger 

of Bell and Old Western as “a single transaction.” Ms. Joan Manning, the 

chief financial officer of Westfed . . . confirmed that all of the documents 

involved in the merger and acquisition were considered part of a single 

transaction. See Tr. at 623-24. As a result, the acquisition of Bell could 

not have been completed without the additional acquisition of Old Western 

by Westfed and, therefore, the purchase of Old Western was in reliance 

on the contract between the parties. 

Westfed II, 55 Fed. Cl. at 550. We perceive no clear error in the trial court’s 

determination that Westfed would not have been permitted to acquire Old Western had 

it not agreed to acquire and merge Old Western with Bell, and that Westfed did indeed 

purchase Old Western in reliance upon the contract eventually breached by the 

government. 

2. Foreseeability 

“In order to be recoverable as reliance damages, . . . plaintiff’s loss must have 

been foreseeable to the party in breach at the time of contract formation.” Landmark 

Land Co. v. FDIC, 256 F.3d 1365, 1378 (Fed. Cir. 2001). The government contends 

that it was not foreseeable that substituting the MCR with FIRREA’s capital requirement 

would cause the claimed reliance costs. More specifically, the government claims that 

the “trial court erred in finding it foreseeable that a ‘likely result of the removal of the 

03-5131, -5145 19
RCMA and the forbearance letter would be New Western’s failure to meet regulatory 

capital requirements.’” 

We find no merit to the government’s contention. The deputy director for the 

Mergers and Acquisitions Department of the FSLIC during the acquisition negotiations 

admitted that without the MCR, New Western would have been in immediate regulatory 

difficulty because it would have been out of regulatory capital compliance. Westfed II, 

55 Fed. Cl. at 553. Moreover, based on Westfed’s 1988 Business Plan, which the 

government scrutinized before contracting with Westfed, the government knew that New 

Western was projected to have a declining capital ratio for several years. Thus, the 

government was well aware that New Western’s capital standard would not improve, 

even with the MCR in place, for several years to meet the regulatory capital minimum. 

Furthermore, both parties’ witnesses testified that the forbearance against future 

changes in the regulatory capital requirement was “continuously negotiated by both 

parties,” and that the government understood it was important to preserve the MCR so 

that Westfed could put into effect its proposed 1988 Business Plan, and thus enable or 

help it to service its interest and dividend obligations arising from debts incurred to 

undertake the merger of Old Western with Bell. Id. at 553. “Foreseeability is a question 

of fact reviewed for clear error.” Bluebonnet, 266 F.3d at 1355. We are not convinced 

that the trial court clearly erred in finding it foreseeable that New Western would likely 

fail to meet regulatory capital requirements if the terms of the MCR and the 

Forbearance Letter were not honored by the government. 

Alternatively, the government argues that even if it were foreseeable that New 

Western would to be found out of capital compliance, it was unforeseeable that “it would 

03-5131, -5145 20
be seized.” For instance, the government points out that New Western was permitted to 

remain open for nearly four years after the MCR was lifted, even though it was not in full 

compliance with the capital requirements of FIRREA. Further, the government 

contends that the blame for the seizure lies with Westfed because it “refused to restore 

any of [New] Western’s lost real capital, and . . . failed to produce any acceptable plan 

for recovery.” Additionally, the government cites to post-contractual statements made 

by Westfed in its 1989 Business Plan, suggesting that New Western could survive 

imposition of the FIRREA capital requirement. 

It is undisputed that the government, in the absence of a contract, would have 

been entitled to seize New Western if it failed for an extended to period to meet the 

regulatory capital requirements in effect at the time. As discussed above, the 

government knew that the MCR and the terms of the Forbearance Letter were 

important, because without it, New Western would have been immediately out of 

regulatory capital compliance. Moreover, it was aware that Westfed projected that it 

would be several years, even with the aggressive growth plan outlined by the 1988 

Business Plan and the reprieve offered by the MCR, before it could meet the regulatory 

capital minimum. The government enlists no persuasive evidence to demonstrate that it 

was unforeseeable that a seizure would probably take place if the government ignored 

its promise not to impose the regulatory capital maintenance requirements. We find 

none of the government’s allegations to be sufficiently persuasive to leave us with a 

“definite and firm conviction” that the trial court erred in concluding that the seizure of 

New Western would be a foreseeable consequence of the breach. Landmark, 256 F.3d 

at 1378.

03-5131, -5145 21
Lastly, the government attempts to argue that non-breach factors worsened the 

harm endured by Westfed beyond what would have been foreseeable with the breach 

alone. For example, the government asserts that the parties could not have foreseen 

the effects of the recession in the early 1990’s or the impact of Old Western’s assets on 

the merged entity. Thus, according to the government, the magnitude and kind of injury 

suffered was not a foreseeable consequence of its breach. Again, the government’s 

arguments come short of persuading us that the trial court clearly erred with respect to 

this factual question of foreseeability. 

D. Calculation of Damages4

 4 Westfed suggests that all of the damages awarded and the damages it 

now seeks in its cross-appeal may be awarded alternatively under a theory of 

restitution. “We have allowed restitution for the limited purpose of returning the 

acquiring thrift to the status quo ante when specific initial contributions to an acquired 

thrift have been established.” Glendale Fed. Bank, FSB v. United States, 378 F.3d 

1308, 1312 (Fed. Cir. 2004). This type of restitution is sometimes said to be “more 

properly viewed as a form of reliance damages[,]” as distinguished from restitution 

based on the breaching party’s return of the value of benefits conferred by the nonbreaching party’s performance. Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 

1314 & n.13 (Fed. Cir. 2004). Reliance-like restitution is only “supportable when based 

on actual losses that are fully proven.” Glendale, 378 F.3d at 1312. In the instances 

below where we reverse the portions of the judgment awarding damages under a 

reliance theory, we find that Westfed’s attempt to resort to a restitution theory does not 

alter our conclusion, because in those instances such damages were erroneously 

03-5131, -5145 22
1. Pre-contract costs 

The government contends, at the very least, that the trial court erred in 

determining the compensable damages. First, the government asserts that the trial 

court erroneously awarded $10 million in pre-contract costs to acquire Old Western. 

We agree in part with the government. While acknowledging that pre-contract damages 

have often been denied, the trial court noted that courts have in special circumstances 

permitted recovery of foreseeable damages arising from preparation to perform under 

the to-be-formed contract. Westfed I, 52 Fed. Cl. at 161-12. In this case, about $3.1 

million was paid to acquire Old Western stock on the open market in October 1987, a 

month after it had submitted its application to acquire Old Western on a stand-alone 

basis and a year before Westfed submitted its application for the acquisition and merger 

of Bell with Old Western. Another $6.9 million was incurred to purchase Old Western 

before formation of the breached contract. The trial court does not identify any 

persuasive reasons based on the record evidence to demonstrate that the expenditures 

in 1987 were in fact made pursuant to a binding agreement with the government in 

preparation for the performance under the breached contract, rather than pursuant to an 

attempt to acquire Old Western on a stand-alone basis. The evidence does not 

demonstrate that the October 1987 pre-contract expenditures were in fact made in 

reliance on the contract to be formed in connection with the acquisition and merger. 

Given the dearth of evidence proffered, we must conclude that the trial court’s finding in 

 

awarded when the actual loss sustained by Westfed was not fully proven or 

demonstrated. 

03-5131, -5145 23
regard to the alleged preparatory pre-contract costs is clearly erroneous. Accordingly, 

we reverse the trial court’s award of $3.1 million in pre-contract damages. 

However, there is evidence, such as a Letter of Intent dated June 22, 1988, 

suggesting that the FSLIC knew by that point in time that Westfed was incurring 

expenses in preparation for and reliance upon the contract. The appellate record does 

not indicate the timing of the $6.9 million in pre-contractual expenditures. Without 

evidence that these expenses were incurred before the FSLIC issued its Letter of Intent, 

we cannot find clear error in the trial court’s decision that these damages were 

foreseeable and were suffered in reliance on the contract. We therefore affirm the 

remainder of the award of pre-contract damages, which amounts to $6.9 million. 

2. Out-of-pocket expenses to acquire Old Western 

The government insists that the trial court erred in awarding Westfed $148 

million, which is the total amount Westfed had spent to acquire Old Western’s stock. 

According to the government, Westfed issued subordinated debentures and preferred 

stock to raise the necessary cash to acquire Old Western, but the securities to this day 

remain unredeemed or paid off by Westfed. In the government’s view, the $148 million 

Westfed spent is not an “out-of-pocket expense,” and it is therefore not an “actually 

sustained loss.” 

“The underlying principle in reliance damages is that a party who relies on 

another party's promise made binding through contract is entitled to damages for any 

losses actually sustained as a result of the breach of that promise.” Glendale Fed. 

Bank, FSB v. United States, 239 F.3d 1374, 1382 (Fed. Cir. 2001). As the government 

acknowledges, Westfed spent the proceeds from its sale of debentures and stock in 

03-5131, -5145 24
order to purchase Old Western’s stock. Except for the $10 million spent in the precontract stage, it is clear that the remainder of the expenditure was made in reliance on 

the terms set forth in the Assistance Agreement that the government breached. See

supra Section III.A. It is inconsequential that Westfed chose to borrow the funds from 

investors to acquire Old Western’s shares rather than use its own money. The 

government cites no legal authority to support distinguishing the “losses actually 

sustained” based on whether Westfed used its own funds or the funds of investors to 

whom it is indebted. Westfed is entitled to that amount it actually expended to acquire 

Old Western in reliance on the forbearance promise, which the government repudiated. 

Id.; see also DPJ Co. v. FDIC, 30 F.3d 247, 250 (1st Cir. 1994) (reliance damages aim 

to “restore to the claimant what he or she spent before the opportunity was withdrawn.”). 

3. Payments-in-kind costs 

The government contends that the $71.3 million made for payments-in-kind is not 

recoverable because it “constitute[s] potential future obligations, not current, out-ofpocket costs.” Westfed responds by arguing that the losses incurred in foreseeable 

reliance on a breached promise are not limited to only cash losses. Further, Westfed 

frames its actions as mitigation, to comply with the regulators’ demands that Westfed 

raise additional capital for Western. 

As the trial court recognized, “payments-in-kind” (“PIKs”) represent the issuance 

of additional paper securities to existing debt or equity holders. Westfed II, 55 Fed. Cl. 

at 552. Over a series of years, Westfed provided PIKs, instead of cash, as interest 

payments came due on existing debentures. Thus, although Westfed assumed 

additional obligations on paper, it never actually made any payments from its account, 

03-5131, -5145 25
from which it could be said that Westfed sustained an actual loss as a result of the 

government’s breach. Glendale, 239 F.3d at 1382. Westfed merely agreed through the 

PIKs to prospectively to take on future payment obligations, which may or may not 

come due in the future. Because PIKs are only potential future obligations, they do not 

count yet as an actually sustained loss, and therefore the trial court was in error to 

award Westfed $71.3 million for these alleged “expenditures.” 

4. Acquisition and financing cost from Ariadne 

The trial court awarded Westfed $22.1 million in transaction costs associated 

with the issuance of debentures and preferred stock to finance the acquisition of Old 

Western. The government contends that Westfed did not pay $17.5 million of that 

amount because a foreign investor group, Ariadne, was the actual source of those 

funds. Ariadne had advanced $14 million to help finance Westfed’s acquisition of Old 

Western, but then failed to honor its commitment to pay the remaining amount owed. 

After Westfed refused to return the monies advanced, the parties reached a settlement 

agreement in which Westfed retained the advance plus interest, totaling $17.5 million, 

which Westfed then applied to the purchase of Old Western. 

The trial court acknowledged that Ariadne had agreed to finance Westfed’s 

acquisition of Old Western but had to withdraw because of its financial problems. 

Westfed II, 55 Fed. Cl. at 559. The trial court stated that “[t]he evidence presented at 

trial supports [Westfed’s] contention that the $17.5 million from Ariadne is not 

appropriate as an offset against plaintiff’s reliance damages” because the money was 

given to Westfed as part of a separate transaction, in consideration for Ariadne’s 

release from Westfed’s breach of contract claim. Id. The government points to no 

03-5131, -5145 26
persuasive evidence to undercut the trial court’s factual determination here, and 

therefore we find insufficient reason to conclude it was clearly erroneous. The trial 

court’s judgment refusing to deduct $17.5 million from the award to Westfed is affirmed. 

5. Costs incurred to acquire Bell 

The government contends that the tax benefits arising from Westfed’s ownership 

of Bell negated the cost to acquire the company. As evidence, the government notes 

that Westfed’s 1991 audited consolidated financial statement reported “[i]n connection 

with the acquisition of Bell, the purchase price was zero.” In answer, Westfed points to 

testimony credited by the court and other documentary evidence suggesting it outlaid 

$20 million to acquire Bell’s shares. See Westfed II, 55 Fed. Cl. at 551 & n.10. This 

evidence, however, neither refutes nor addresses the government’s contention. Neither 

the trial court nor Westfed explains why the tax benefit accruing to Westfed as a result 

of acquiring Bell should not offset the acquisition cost. Given that no one disputes that 

as a consequence of tax benefits from acquiring Bell, Bell’s “purchase price was zero,” 

we conclude that the trial court clearly erred in finding that Westfed actually sustained a 

loss of $20 million in connection with the purchase of Bell, for which it should be 

compensated. See Glendale, 239 F.3d at 1382; Dan B. Dobbs, Law of Remedies, 

§ 12.3(1) at 51-52 (2d ed. 1993) (“The reliance damages recovery is a recovery for net 

reliance loss, so the defendant is credited with any benefit the plaintiff receives from the 

expenditure in reliance.”). 

6. Offset by financial benefits 

Damages based on the injured party’s reliance interest may be reduced by “any 

loss that the party in breach can prove with reasonable certainty the injured party would 

03-5131, -5145 27
have suffered had the contract been performed.” Restatement (Second) of Contracts 

§ 349. Further, the defendant may be credited with any benefit the plaintiff retained 

from its expenditure in reliance of the breached agreement. Dan B. Dobbs, Law of 

Remedies, § 12.3(1) at 51-52 (2d ed. 1993). Here, the government argues that the 

assistance payments it made should offset any reliance costs incurred by Westfed. 

According to the government, it committed only a partial breach and that it is entitled to 

a dollar-for-dollar credit of its partial performance from the assistance payments it made. 

Thus, because the government paid about $780 million, which exceeds the amount 

awarded in reliance costs, the government suggests it owes Westfed nothing for its 

breach. 

The trial court determined that the government seized New Western before 

Westfed had the opportunity sell the company or to recoup its losses, and that the 

government failed to prove with reasonable certainty that Westfed would have incurred 

the losses it sustained absent the breach. Westfed II, 55 Fed. Cl. at 560. Westfed 

notes, in addition, that the payments were made to New Western, which the 

government seized. Thus, whatever value the government put into assets held by 

Westfed, it was taken when the government seized New Western. Further, by 1989, the 

government barred Western from paying any dividends to Westfed, preventing Westfed 

from tapping into the benefit arising from the payments by the government. Most 

importantly, Westfed notes that it was the government’s burden to prove with 

reasonable certainty the amount of offsetting benefit retained by Westfed, which, in the 

trial court’s opinion, the government failed to do. Westfed II, 55 Fed. Cl. at 560; see

03-5131, -5145 28
Restatement (Second) of Contracts § 349 (placing burden on breaching party to prove 

the amount by which the reliance damages award should be reduced). 

The government articulates no persuasive rationale, much less cites any legal 

authority, for its assertion that it is the aggrieved party, not the breaching party, that 

“bears the burden of proving the value . . . of [the breaching party’s] undisputed 

performance.” If the government wanted an offset, it was the government’s burden to 

prove with reasonable certainty the quantum of benefit retained by Westfed despite the 

government’s breach. According to the government, “Westfed received the benefit of 

the use of the Government’s assistance payments for its own purposes during the fiveyear period that Westfed owned and operated Western.” In particular, the government 

highlights the assistance payments and other reimbursements it made to New Western. 

The government provides no analysis, however, of how its expenditures translate into 

any retained quantifiable benefit by Westfed. Instead, the government relies on largely 

conclusory claims that its entire expenditure should be effectively treated as a benefit 

retained by Westfed. The government ignores the fact that it put most of its money into 

New Western, which it eventually seized from Westfed, and that it prevented Westfed 

from reaping any dividends from New Western during most of the period that Westfed 

held New Western. Stripped of New Western and the opportunity for benefits that 

Westfed hoped to achieve under the agreed upon RCMA, the government cannot, 

based on the evidence and arguments presented, claim its breach on the whole was 

harmless. We find no clear error in the trial court’s factual determination that the 

government failed to sustain its burden in showing that any offset from the damage 

award is appropriate. 

03-5131, -5145 29
E. Westfed’s Cross-Appeal 

Westfed contends that the trial court incorrectly held that it may recover for only 

“amounts actually expended” and challenges whether the indebtedness incurred from 

the issued securities, which now allegedly exceeds $800 million (excluding principal), is 

an amount that should be treated as a loss that has been actually sustained. Westfed 

observes that reliance damages are meant to put the nonbreaching party “in as good a 

position as he would have been had the contract not been made” (quoting Restatement 

(Second) of Contracts §344(b) (1981)), and asserts it is by no means in as good a 

position as it would have been had no contract been made. For much the same 

reasons we expressed in rejecting the trial court’s award of PIK costs, we must reject 

Westfed’s attempt to claim the more than $800 million it allegedly owes on its financing 

obligations. Because the amount claimed is not an actual loss because Westfed has 

not paid anything out of its pocket, see Glendale, 378 F.3d at 1312, we agree that 

Westfed is not entitled to the amount it seeks in its cross-appeal. 

IV. CONCLUSION 

The judgment of the trial court is affirmed-in-part and reversed-in-part. We affirm 

the trial court judgment rejecting the government’s argument that: (1) Westfed assumed 

the risk of regulatory changes; (2) Westfed waived its right to claims damages from the 

government’s breach; (3) Westfed failed to adduce sufficient proof of causation and 

foreseeability of the damage claimed under the appropriate legal standard; (4) the funds 

spent to acquire Old Western in reliance upon the breached contract (including $6.9 

million of pre-contract expenditures) is not a legally compensable loss; (5) the 

03-5131, -5145 30
settlement fee from Ariadne should be deducted from the damage award; and (6) the 

government is entitled to a reduction in the damages awarded because of its partial 

performance under the contract. Further, we affirm the trial court’s judgment denying 

Westfed the sum sought in its cross-appeal arising from its debts to finance the 

acquisition and merger of Old Western with Bell. We reverse the trial court judgment 

awarding Westfed: (1) $3.1 million of pre-contract costs to purchase Old Western; (2) 

the costs to acquire Bell; and (3) PIK costs. 

AFFIRMED-IN-PART AND REVERSED-IN-PART

03-5131, -5145 31