Opinion ID: 211884
Heading Depth: 2
Heading Rank: 3

Heading: Causation and Foreseeability

Text: 21 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, 197 Ct.Cl. 782, 456 F.2d 1315 (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 replace the hull with one of ordinary strength, and thus, the court declined to award any costs associated with the new boat. Id. 22 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 23 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. 24 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. 25 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. 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. 26 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 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 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 v. United States, 395 F.3d 1263, 1268 (Fed.Cir.2005). 27 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 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. 28 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 [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: 29 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. 30 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.
31 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 RCMA and the forbearance letter would be New Western's failure to meet regulatory capital requirements.' 32 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. 33 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 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. 34 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. 35 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.