## United States Court of Appeals for the Federal Circuit

04-5116

HOMETOWN FINANCIAL, INC., and CONTINENTAL FINANCIAL HOLDINGS, INC., Plaintiffs-Appellees,

v. UNITED STATES, Defendant-Appellant.

James H. Falk, Jr. , Epstein Becker & Green, P.C., of Washington, DC, argued for claimants-appellees. Wi th him on the brief was James H. Falk, Sr

. Jeffrey T. Infelise , Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendantappellant. With him on the brief were Stuart E. Schiffer , Deputy Assistant Attorney General, and David M. Cohen , Director, Jeanne E. Davidson , Deputy Director, and Richard B. Evans , Attorney. Appealed from: United States Court of Federal Claims Judge Nancy B. Firestone

## United States Court of Appeals for the Federal Circuit

04-5116

HOMETOWN FINANCIAL, INC., and CONTINE N TAL FINA NCIAL HO LDINGS, INC., Plaintiffs-Appellees,

v. UNITED S T ATE S , Defendant- A ppellant.

_________ __________________ DECIDED: May 27, 2005

_________ __________________ Before LOURIE, CLEVENGER, and LINN, Circuit Jud ges

. CLEVENG E R, Circuit Judge

. The United States appeals fr om the decision of the C ourt of Federal Claims awarding Hometown Financ ia l, Inc., and Continental Fin a ncial Holdings, Inc., (collectively "Hometown") $2,050,000 for br each of contract. Because t here is a contract between the plaintiffs and the government, because the c ontract doe s not shift the risk of regulatory change to the pl aintiffs, and because the governm ent cannot demonstrate clear error in the tr ial c ourt's c onclus i on that there was no pr ior material breach on the part of the plaintiffs, we affir m

.I This is a Winstar -typ e case. See United States v. Winstar Corp. , 518 U.S. 839 (1996). The judgment and under lying findings and decisi ons from which the United States appeals c an be found in thr ee Court of Federal Cla ims opinions. See Hometown Fin., Inc. v. United States , 60 Fed. Cl. 513 (2004) (" Hometown III "); Hometown Fin., Inc. v. United States , 56 Fed. Cl. 477 (2003) (" Hometown II "); Hometown Fin., Inc. v. United States , 53 Fed. Cl. 326 (2002) (" Ho metown I "). As set forth in more detail i n Hometown I , the transaction at issue involv ed the v o luntary supervisory conversion of Hometown Federal Savings and Loan into Hometown Federal Savings Bank. See
53 Fed. Cl. at 328-33. The conversion was based on two business plans, which generally c a lled for the formation of a holdi ng company and interim thrift, which would merge with the Savings and Loan to leave a singl e surviving institution controlled by the investors. Id. The plans contained a list of regul atory forbearances, which the investors requested from regulators before agreeing to provide the required capital. In particular, the investors sought t o use the goodwill cr eated by the conv ersion to meet regulatory capital requirements. Id. The Feder al Home Loan Bank Board (" FHLBB") approved the conversion on June 28, 1988. See FHLBB Resolution No. 88-513. Approval was made contingent on the execution by the holdi ng com pany of a Regulatory Capital M a intenanc e Agreement ("RCMA") and the execution by the holding company' s ma jor shareholder ( C ontinental Financ ial) of a Regulatory Capit a l Ma intenance/Div idend Agreement ("RCMDA"). Id. The documents were exec uted, and the conversion completed.

04-5116 2The Financ ial Institutions Reform, Reco very, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 ("FIRREA" ), was passed on August 9, 1989. Consequently, as reflected in an Office of T h rift Supervision Report of Ex amination: " A s a result of the new FI RREA legislation, all forbearances have be en eliminat ed, and the Institution now fails all th ree capital requirements." See Hometown FSB OTS Report of Examination, January 16, 1990 (emphasis added). Thus, due to the passage of FIRREA, the Office of Thrift Supervision deemed Hometown Federal Savings Bank "insolv ent." Id. When Hometown (the plai ntiffs) re fused to infuse more capital to meet the post-FIRREA capital require ments, Hometown Federal Sa v i ngs Bank was placed in receivership. 53 Fed. Cl. at 331-32. Hometown sued and, relevant to this appeal, asserted that by the passage of FIRREA, the elimination of fo rbearances, and the seiz ure of Hometown Feder al Sav i ngs Bank, the government was liabl e for damages under a theory of breach of contract.
In Hometown I , addressing cross-motions for partial summary judgment on liability, the Court of Federal Claims hel d that a contract was formed between the plaintiffs and the government. Id. at 335-36. The court determi ned that the plaintiffs' fulfille d promise to infuse $2,050,000 int o the con v erted institution was made in exchange for the forbearances and the treatment of goodwill offered by the F H LBB. Id. The court found that Hometown had not, like the plaintiffs in Guaranty Financ ial Services, Inc. v. Ryan , 928 F.2d 994 (11th Cir. 1991), contractually assumed the risk of the effect of regulatory change. 53 Fed. Cl. at 336-37. Rat her, the court held that by contract the parties had for a five-year per iod reserved to the government the risk of regulatory change affecting goodwill and forbearances. Id. Observing that FIRREA

04-5116 3was pass ed within the five-year perio d and " u nquestionably took away thos e forbearances and the promised use of goodw ill," the court co ncluded that the government had breached the agreement. Id. at 337.
In Hometown II , the Court of Federal Claims addressed the government's summary judgment motion wit h respect to Ho metown's damages claims. The cou r t denied the government's motion as it relat ed to restitution damages, determining that restitution in the amount of $2,050,000 was appr opriate because that amount reflected the benefit conferred by Home town on the government. 56 Fed. Cl. at 484-85. The court granted the government's motion as it related to ex pectancy damages, or lost profits, because such damages ar ose from an injury to the corporation and not to the shareholders directly. Id. at 486-87. After conducting a trial, the Cour t of Federal Claim s held in Hometown III that Hometown had not materially breached its contract with the government, and accordingly , the government was not absolv ed fr om liability for its breach. 6 0 Fed. Cl.
at 517-22. The gov ernment appeals, and we review a dec ision of the Court of Federa l Claims pursuant to 28 U.S.C. § 1295(a)(3) (2000).
II We review the grant of summary judgment de novo , vie wing all factual inferences in favor of t he nonmov ant. See Anderson v. United States , 344 F.3 d 1343, 1349 (Fed. Cir. 2003). We otherwise review conclus i ons of law of the Cour t of Federal Claims de

novo , while reviewing findings of fact made by the Court of Federal Claims for clear

04-5116 4error. See Glendale Fed. Bank, F SB v. United States , 239 F.3d 1374, 1379 (Fed. Cir. 2001).
III The first issue we must decide is whet her a contract came into e x ist enc e between the government and the pl aintiffs. The exis tence of a contract i s a mixed question of law and fact. See Anderson , 344 F.3d at 1349. To pr ove the existence of a contract with the government, a plaintiff must prove four basic elements: (1) mutuality of intent to contract; (2) offer and acceptan ce; (3) consideration; and (4) a government representative having actual authori ty to bind the United States. See Ca l. Fed. Bank, FSB v. United States , 245 F.3d 1342, 1346 (Fed. Cir. 2001). In this case, the government challenges the findings of the Court of Feder a l Claims concerning elements (1) a nd (4). In particular, the government contends that no contract was formed because government regulators had no author ity to make a promise to Hometown concerni ng the treatment of goodwill, and, alternatively, becaus e the parties did not have the shared intent to contract for the treat ment of goodwill. Hometown disagrees, asserting that authorit y existed for the gov ernment to make a promise concerning the treatm ent of goodwill, and that there is ample objectiv e evidenc e that the parties did have a shared in tent concerning the treatment of goodwill. We discern no reversible error in the decis ion of the Court of Federal Claims, and therefore agree with Hometown.
A As we previously set forth in California Federal , government regulators, and in terms of this case, particularly t he F H LBB and Federal Sav i ngs and Loan Insurance

04-5116 5Corporation ("FSLIC" ), have aut hority to bargain for and enter into contracts in which the government promises the favorable regulatory treatm ent of goodwill in exchange for the assumption of the net liabili ties of a failing thrift: We have already ans w ered the question of whether t he F H LBB and the FSLIC have the authorit y to enter into contracts like thes e in the affirmative. [ Winstar Corp. v. United States , 64 F.3d 1531, 1548 ( F ed. Cir. 1995) ( Winstar II )] Since its inc eption, the FSLIC has had the authority under 12 U.S.C. § 1725 (c)(3) to make contracts. Id

. Further, both the FSLIC and its supervisory agency, the FH LBB, have had the authority both to ext end assist ance to acquirers of insolvent F S LIC-insur ed thrifts, 12 U.S.C. § 1729 (f)(2)(A) (repealed), and to set minim u m capital limits on a case-by-case basis, 12 U.S.C. § 1730 (t)(2 ) (repealed). Cal. Fed. , 245 F.3d at 1347 (internal quotes omitted). This h o ld in g was rece ntly reaffirmed follo wing a government challenge that it was erroneous in light of our decision in Schism v. United States , 316 F.3d 1259 (Fed. Cir. 2002) (en banc). Se e Cal. Fed. Bank v. United States , 395 F.3d 1263, 1274-75 (Fed. Cir. 2005). In reevaluating and rejecting fo r a second time the government's argument that the FHLBB did not have authority to ent er contracts regarding treatment of goodwill that were binding on the gover nment, we relied on t he Supreme Court's analys is in Winstar , w h ich, as set forth at 395 F.3d at 1274, states: There is no question . . . that t he Bank Board and FSLIC had ample statutory authority to do what the Court of Feder al Claims and the Federa l Circuit found they did do, that is, promise to permit respondents to count supervisory goodwill and capital credits toward regulat ory capital and to pay respondents' damages if that performance became impossible. The remainder of our analys is of the Winstar opinion makes un equivocally c l ear that we are bound by the holding that the FHLBB had statutory authority to enter into contracts involv ing t he treatment of regulatory c apital and that Congress "s pecifica lly

04-5116 6acknowled ged" the FHLBB's authority to permi t thrifts to count g oodwill toward capita l requirements. Id. at 1274-75. The government woul d distinguis h the California Feder al decis ions from the case at bar because in its view, t he aut hority for the contracts in California Federal flowed not from 12 U.S.C. § 1725(c), wh ich, again acc o rding to the government, merely generally empowers the FHLBB to enter contracts, but from a more specific subsection of the statute, namely, 12 U.S.C. § 1729(f)(2). In the government 's view, section 1725(c) is statutorily insufficient to support actual authority for an FHLBB pr omise of favorable accounting treatment of good will. T h is c ontention was d i spo s ed of in our recent decision in Home Savings of Americ a, FSB v. United States , 399 F.3d 1341, 1356-57 (Fed. Cir. 2005). In Home Savings , as in California Federal , we analyzed the Supreme Court's Winstar opinion, holding that "the Suprem e Court necessarily relied on the general grant of author ity under [section] 1725(c)," and not the authority granted in section 1729(f)(2) "as authoriz ation fo r two of the three transactions in Winstar ."
399 F.3d at 1357. T hus, the authority of sect ion 1725(c) is sufficient. In any ev ent, because we are bound to follow our own pr ecedent as set forth by prior panels, see Kimberly-Clark Corp. v. Fort Howard Paper Co. , 772 F.2d 860, 863 (Fed. Cir. 1985); Mother's Restaurant, Inc. v. Mama's Pizz a, Inc. , 723 F.2d 1566, 1573 (Fed. Cir. 1983); accord South Corp. v. United States , 690 F.2d 1368 (Fed. Cir. 1982) (en banc), we reject the government's argum ent that the FHL BB had no aut hority to enter into a contract with the plaintiffs regarding the regulat ory treatment of goodwill.

04-5116 7B The gover nment contends that even if authori ty to contract exists, the trial court erroneously concluded that the government intended a contract wit h terms addressing the treatment of goodwill. As postured, the governm ent's argument appears more directed to interpretation than formation. Ho wev e r, to the extent the government is arguing a failure of formation due to a lack of objective evidence of the government's intent bec ause "no promise regarding goodwill was ever made to [Plaintiffs]," we disagree. Whether a bargained-for exchange occu rred depends on the surrounding factual circumstances. See Cal. Fed. , 245 F.3d at 1347. In this case, the government has shown no error in the holding of the Court of Federal Claims that the correspondenc e, memoranda, forbearance letters, and regulatory maintenance and divi dend a g reements gave rise to a contract which in cluded pro v isions ad dressing g oodwill. We note in particular four documents as evidence of the government's intent to contract for the treatment of goodwill, FHLBB Resolution No. 88-513, the RCMA, the RCMDA, and the forbearance letter of Dece mber 22, 1987. FHLBB Resolution No. 88-513, dated June 28, 1988, makes approval conditional on, inter alia , the execution of the RCMA, and prov ides that "the Regulat o ry Capital Maintenance and Dividend Condi tion s h all be deem ed met if the Acquiror signs the attached [RCMDA]." (Jt. App. at 300662-63.) Both the RCMA and the RCMDA were

exec uted on June 30, 1988, by the plaintiffs and the Supervisor y Agent for the FSLIC. Both agreements extensively discuss the tr eatment of regulatory capital, and both agreements also contain t he following language:

04-5116 8"Regulatory Capital Requirement" m eans the Institution's regulator y capital requirement at a given ti me computed in accordan ce wit h 12 C.F.R. § 561.13(b), or any s u ccessor regulation t hereto, except that during the five-year period following co nsummation of the acquisition of the Institution, the Regul atory Capital Requirement of the Institution shall take into account forbearances gr anted by the FHLBB by letter dated December 22, 1987 and thos e granted by the Principal Supervisor y Agent of the Federal Home Loan Bank of I ndianapolis by letter dated April 1, 1988. ((Section I.E.) Jt. App. at A300665 and A30 06671.) T hese sections of the agreements reference forbearances granted by an FHL BB "letter dated Dec e mber 22, 1987." Th e December 22, 1987, letter "issued in connection" with the transaction, states that: "For purposes of reporting to the Bank Board, the value of any in tangible asset resulting from the application of pus h-down ac counting m a y be amortized by Hometown F ederal ov er a period of 25 years by the straight- line method." (Jt. App. A300375-76.) On balanc e , these documents, together with the other documents, facts, and circumstances relied on by the Court of F ederal Claims separate this case from D&N Bank v. United States , 331 F.3d 1374 (F ed. Cir. 2 003), on which the government heavily relies. In D&N Bank , we noted the complete absence of any documentary proof that the parties mutually intended to loc k in by contract any provision f o r long-term amortization of goodwill. 331 F.3d at 1378-79. In this c a se, there is a bundant documentary proof of mutual intent for such a cont ract provision.
IV Even assuming a contract was formed, argues the governmen t, the contract reflects that the parties intended to pl ac e the risk of regulatory change squarely on Hometown. This pres ents a question of contra ct interpretation, a question o f law that

04-5116 9we revie w de novo

. See Cienega Gardens v. United States , 194 F.3d 1231, 1239 (Fed. Cir. 1998). In its Winstar opinion, the Supreme Court explai ned that in lik e contracts the parties had the power to promise to insu re against the risk of loss associated with regulatory change. 518 U.S. at 869. In this regard, the Co urt noted with approval the example set in an Eleventh Circuit opinion on the issue: To be sure, each side could have elim inated any serious contest about the correctness of their interpretive pos itions by using c l ear er language. See, e.g. , Guaranty Financial Servic es, Inc. v. Ryan , 928 F.2d 994, 999-1000 (C.A.11 1991) (finding, based on very different contract langu age, that the Government had expressly reserved the right to change the capital requirements without any responsibil ity to the acquiring thrift). Id. at 869 n.15. The similar i ty in c ontract lang uage between the pr es ent case and Guaranty , as well as our opinion in Admiral F i n ancia l Corp . v. United States , 378 F.3d 1336 (Fed. Cir. 2004), underlie the government's c ontention that the parties sh ifted the risk of regulatory change to Hometown. Like the present case, the transactions in both Admiral and Guaranty involve d the rescue of failing thrifts wit h the infusion of capital from investors. Also like the present case, the transactions involved RCMDAs, see Admiral , 378 F.3d at 1338; Guaranty , 928 F.2d at 996. The agr eements all contain a prov ision that states: All references to regulations of t he Board or the FSLIC us ed in this Agreement shall include any successo r regulation thereto, it being express l y understood that subsequent amendments to such regulations may be m ade and that such am endment s may increase or decr ease the Acquirors' obligation under this Agreement.

04-5116 10Admiral , 378 F.3d at 1339 (citin g "clause VI(D)", "Miscellan eous Provisions"); Guaranty , 928 F.2d at 999 (citing "article VI(D)") (e mphasis removed); (Jt. App. A300668; A300673 (clause V(D), "Miscellaneous Provisions")). The agreements in Admiral , Guaranty , and the pres ent case are not, however, identical. The Admir a l agreem ent contained a section of "Definitions" c ontaining a clause I.E., which states: 'Regulatory Capital Require ment' means the Institut ion's regulatory capital requirement at a giv en time c o mput ed in accordance with 12 C.F.R. § 563.13, or any successor regulation thereto. See Admir a l Fin. Cor p . v. United States , Appeal No. 03-5168, at Jt. App. A400035, decided at Admiral , 378 F.3d 1336. Article I(E) of the Guaranty RCMDA states as follows: 'Regulatory Capital R equirement' means the In stitution's Regulatory capital requirement at a giv en ti me computed in ac cordance with 12 C.F.R. § 563.13(b), or any su ccessor regulation thereto.* See Guaranty , 928 F.2d at 999. As set forth in t he Eleventh Circuit's opinion, the asterisk "directs the reader to a note . . . that reads, 'See Exhibit A, FHLBB forbearance letter, dated December 29, 1987.'" 1 Id. As noted above, the RCMA an d RCMDA of the present case also cont ain a "Definitions " section I.E., which states:

1 The third f o rbearance set forth in the letter "concerns the treatment of supervisory goodwill." Id. It state s : For purposes of reporting to the Board, the value of any intangible asset resulting from the application of push-down accounting in accounting for the purchase may be amortized . . . for a period not to exceed (25) years by the strai ght line method.

04-5116 11'Regulatory Capital Require ment' means the Institut ion's regulatory capital requirement at a giv en time c o mput ed in accordance with 12 C.F.R. § 561.13(b), or any successo r regulation thereto, except that during the five-year period following consumma tion of the acquis i tion of the Institution, the Regulatory Capital Requ irement of the Inst itution shall tak e into account forbearances granted by the FHLBB by letter dated December 22, 1987 and thos e granted by the Principal Supervisor y Agent of the Federal Home Loan Bank of Indianapolis by letter dated April 1, 1988.
(Jt. App. at A300665 and A300671 (emphasis added).) The forbearance letter of December 22, 1987, contains five forbear ances, at least two of which appear to be relevant here. The firs t forbearance states: [T]he FSLIC will forbear, for a peri od of five years following consummation of the acquisition, from exerc i sing its authority , under Section 563.13 of the Insurance Regulations for any fail ure of Homet o wn F eder a l to meet the net wor t h requirement of Sect ion 563.13 arising solely from [ inter alia , assets attri butable to the Savings and Loan]. (Jt. App. at A300375.) The fifth forbearance is very si milar to the third forbearance of Guaranty , see supra note 1. It states: For purpos es of repor ting to the Bank Boar d, the value of any intangible asset resulting from the applic ati on of push-down accounting may be amortized . . . over a period of 25 y ears by the straight-line method. (Jt. App. at A300376.) As a matter of contract interpretation, we agree wit h the tr ial court that the "except that" clause, section I.E., " specifica l ly identified how the forbearances should be treated." 53 Fed. Cl. at 337 . In particular, section I.E. clearly sets forth the understanding of the parties t hat regulatory change was possible because it refers to calculating the requirem ent in accordance with "any successo r regulation." This part of the definition places the risk of regulatory change on Hometown . Howev e r, what follows
express l y excepts Hometown from that risk for a perio d of fi ve years with the language:

04-5116 12"except that during the five-year period follow ing consummation of the acquisition of the Institution, the Regulatory C apital Requirem ent of the Instit ution s hall take into account forbearances granted by the F H L BB by letter." The agreement then expressl y identifies the letters containing the relevant for bearances. As set forth above, one of the forbearances express l y address e s long-term am ortization, and the other reflects the government's promise to for bear from enforcing the net wo rth requirements for "any failure" generally relating to the assets of the Savings and Loan. Thus, as the Court of Federal Claims correctly held, " t he plaintiffs did not assume the risk of a regulatory capital requirement change duri ng the five- y ear period in whic h t he forbearances wer e in effect." 53 Fed. Cl. at 337. F o r that five-year period, Hometown was contractually entitled to use long-term amortization apply i ng a 25-y ear straight line metho d , with the risk of regulatory change falling to the government. There is simply no other reasonable way to read this language, and indeed, the government points to none, arguing instead that Admiral and Guaranty require us to read the "except that" clause as either servient to the Miscellaneous Provisions, or out of the agreement altogether. We disagree with the government's reading of Admiral and Guaranty . The court
in Admiral was not faced with the "except that " clause pres ent in the Hometown agreement. Rather, in Admiral , the court was faced with a c ontract that uniformly placed the risk of regulatory change on Admiral. 378 F.3d at 1339-43. Accordingly, the topography of Admiral is in sharp contrast to the ca se at bar. Thus, the discussion in Admiral on which the government re lies, noting the Supreme Cour t's surprise at the lack of "clearer language" in the Winst a r -type agreements, see 518 U.S. at 869 n.15, cannot be so rigidly superim posed on t h is case. It was not only neces sary but easy for the

04-5116 13Admiral court to find the "risk-shifting language" of Miscellaneous Provision VI(D) clear and in alignment with the Supr eme Court's note because there was no other contract language c apable of limiti ng the effect or impact of that general provision. Hav i ng not considered the question, Admiral cannot make the specific "except that" clau se servient to the general "risk-shifting" clause of the Miscella neous Provisions.
In Admiral we stated that "we ac cord gr eat weig ht" to the decis ion in Guara n ty , 378 F.3d at 1340, and expressly c onsider ed the application of Guaranty in that case. Our view of the worth of Guaranty has not diminished. Howev e r, as with Admiral , we do not believe that the topography of Guaranty so aligns with that of the matter at hand that we should impose the result of Guaranty on this case. Guaranty is a c l oser case. Although, like Admiral , Guaranty has no " e xcept that" clause, the Guaranty court concluded that the footnote associated with t he definition of Regulatory Capital Requirem ent "incorporated" the forbearance letter. As noted above, the forbearance in Guaranty pertaining to long-term amortiza tion is similar in substanc e to the forbearance in Hometown's Decem ber 22, 1987, letter. In that case, Guaranty argued "that [the letter] confer [red] upon it an irrevocable right to treat supervisory goodwill as regulatory capital for twenty-five years." 928 F.2d at 999. In the context of that position, the Elev enth Circuit viewed G uaranty's forbearance letter as in conflict with the general contract prov isions prov iding that regul ations may be changed. Id. The Guaranty court applied the principle of cont ract interpretation that possibly conflicting contract provisions should be read harmoniously. Id. In so doing, the court interpreted the long-term amortization pe rmitted in the forbearance letter as an

04-5116 14exception good for as long as the regulatory environment did not change, but servient to the "risk-shifting" article. In the w o rds of the Guaranty c ourt: We interpret the forbearance provisio n to mean that the agencies would allow Guaranty to treat supervis o ry goodwill as regulatory capital so long as the regulatory [sic] remained as it was when the c ontract was signed. The agencies, in other words, grant ed Guaranty an exc eption to the rules of the gam e, and promised that the ex ception would be valid s o long as the rules stayed the same. But the agencie s, at the same time they made that promise, also unambiguous ly wa rned Guaranty that the rules might later change to Guaranty's detrimen t. By signing the contract, Guaranty took that chance, in e ffect wagering the chance that the rules would be changed against the potential re turn if they were not. Id. What distinguishes the present case is that there is language addressing the length of time during which the promised exce ption would last. As set forth in the RCMDA, t he promises in the forbearance letter we re to last five years. This stands in contrast to the Guaranty contract, which has no langu age in the RCMDA establishing the length of time for which the forbearanc es will apply to the Regulatory Capital Requirement. In the present case, rather than unrese r vedl y "wagering the chance that the rules would be c hanged against the potential return if they were not," Hometown limited its wager to a period of time starting five y ear s after consummation of the acquis i tion. It is no departure from Guaranty to recognize this distinction, and we do not read the general "risk-shifting" provisions as unexcepted. Neither Admiral nor Guaranty requires a holding that the parti e s in this case shifted the risk of regulatory c hange to Home town. We think harmony is found in reading the Hometown agreement by underst anding that the parties generally agreed that the risk of regulatory change would be borne by Hometown but agreed to a specific five-year exception. Our prec edent establishes as a principle of contract interpretation

04-5116 15that a specific contract pr ovision will control over a gen eral contract provision. See Ho lGar Mfg. v. United States , 351 F.2d 972, 980 (Ct. Cl. 1965). We find that principle appropriate here, and hol d that Hometown did not assume the risk of regulatory change for the five-year period defi ned in section I.E.
V The government finally argues that even if a contract was formed, and ev en if that contract assigned to the gov e rnment t he burden of the effect of regulator y change, the government cannot be held liable in this case as a cons equence of Hometown' s prior material breach. Whether a breach is material is a mi xed question of law and fact. See Gilber t v. Dep't of Justice , 334 F.3d 1065, 1071-72 (Fed. Cir. 2003). The lega l aspect of the question flows from the proper interpretation of the contract, while the factual aspects of the question flow from the parties' c onduct—w hat they did, or did not, do. Id. "A breach is material when it relates to a matter of vita l importance, or goes to the essenc e of the c o ntract." See Thomas v. Dep't of Hous. and Urban Dev. , 124 F.3d 1439, 1442 (Fed. Cir. 1997) (cit ing 5 Arthur L. Corbin, Corbin on Contracts § 1104 (1964)). Under general contract principles , a party sued for breach of contract may defend on a theory that its nonperformance is excus e d becaus e the other contracting party com m itted the firs t material breach. See Barron Bancshares, Inc. v. United States , 366 F.3d 1360, 1380-81 (Fed. Cir. 2004); see also Chris t opher Village, L.P. v. United States , 360 F.3d 1319, 1333-34 (Fed. Cir. 2004). Notwithstanding the gov ernment's accurate assessment of the law, namely that there is a legal c o mponent to the question of whether a prio r material breac h occurred,

04-5116 16it is the facts of this case whic h dict ate the outcome. The trial court engaged in a detailed and thorough analysis of the facts, which after care ful consideration are not shown to be clearly erroneous. Accordingly, we affirm the trial c ourt's judgment that there was no prior material breach. CONCLUS ION For the reasons stated above, the governm ent 's challenge to the final dec isio n of the Court of Federal Claims fails.

AFFIRMED

04-5116 17