Court Opinion

ID: 9495525
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:04:48.42326+00
Date Added: 2024-06-11T17:57:03.938147
License: Public Domain

GAJARSA, Circuit Judge,
dissenting.
I respectfully dissent. The majority characterizes this case as a simple interpretation of an ambiguous contract; however, it is not so. The contract at issue is unambiguous when it is read in proper context. Interpreting the contract in context requires an understanding of the relevant accounting principles. This is an understanding the majority opinion lacks. As a result, the majority misconstrues § 6(a)(1)(C) of the Agreement and misapprehends basic principles of purchase method accounting.
To resolve questions of contract interpretation, the court should look first to the plain language of the entire agreement. Foley Co. v. United States, 11 F.3d 1032, 1034 (Fed.Cir.1993). The intention of the parties is gleaned from all the contract clauses interpreted as a whole, that is, from the four corners of the agreement. Dewey Electronics Corp. v. United States, 803 F.2d 650, 660 (Fed.Cir.1986). Where a contract does not define a particular — and potentially ambiguous — term, an established custom or widespread usage fills in the gaps left by the drafters. See, e.g., Robinson v. United States, 80 U.S. (13 Wall.) 363, 366, 20 L.Ed. 653 (1871) (“Parties who contract on a subject-matter concerning which known usages prevail, by implication incorporate them into their agreements, if nothing is said to the contrary.”). When interpreting a contract, therefore, an established definition provided by industry usage will serve as a default rule, and that definition will control unless the parties explicitly indicate, on the face of their agreement, that the term is to have some other meaning. By looking to these sources for guidance, a putative ambiguity may ultimately prove to be illusory.
Such is the case here. Section 6(a)(1)(C) of the Agreement provides: “the cash contribution [the $299 million dollars] made *1362under [section] 6(a)(1) shall be credited to [Coast’s] net worth account and shall constitute regulatory capital." Ante at 1355. The majority’s interpretation that GAAP and its amortization requirement are inapplicable to the $299 million of goodwill is an exercise in the interpretation of § 6(a)(1)(C) that strays far from the text of that section. With the help of subjective testimonial evidence, the majority reaches this conclusion by construing that “regulatory capital” in § 6(a)(1)(C) “require[s] permanence, which precludes GAAP treatment [for the corresponding goodwill].” Ante at 1359. However, nothing in the language, “shall constitute regulatory capital,” implies permanence. Although § 6(a)(1)(C) provides that the $299 million “shall constitute regulatory capital,” it fails to mention anything regarding the treatment of the corresponding $299 million of goodwill. Although the majority characterizes the $299 million of goodwill as “RAP or regulatory goodwill,” ante at 1355, the majority’s distinction between goodwill, which is amortized under GAAP, and “regulatory goodwill,” which is not amortized under the majority’s analysis, is completely unfounded either in law or in accounting practice, ante at 1357.
The meaning of the term “regulatory capital” in § 6(a)(1)(C) is not ambiguous when viewed in conjunction with § 20, which provides:
Except as otherwise provided, any computations made for purposes of this Agreement shall be governed by generally accepted accounting principles as applied in the savings and loan industry, except that where such principles conflict with the terms of the Agreement, applicable regulations of the Bank Board or the CORPORATION, or any resolution or action of the Bank Board ...
Ante at 1360 (emphasis added). Section 20 cannot be read as a default provision as identified by the majority opinion. Id. at 1360. It is a critical section of the basic understanding of the parties. It requires that the computation and filings made pursuant to the Agreement be prepared in accordance with GAAP, unless provisions elsewhere in the Agreement authorize a departure from GAAP. The sophisticated parties in this case operated against the backdrop of GAAP. GAAP are those principles that have substantial authoritative support, such as FASB Standards and Interpretations, Accounting Principles Board Opinions, and American Institute of Certified Public Accountants Accounting Research Bulletins. Particularly germane to this ease, FASB No. 72, entitled “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” requires that if, and to the extent that, the fair value of liabilities assumed exceeds the fair value of identifiable assets acquired in the acquisition of a banking or thrift institution, the unidentifiable intangible asset (commonly referred to as goodwill) generally shall be amortized. FASB Statement of Financial Standards No. 72 (February 1983).
When GAAP concepts are employed— such as FASB No. 72, which is relevant to the amortization of goodwill — the parties may be read as having incorporated established meanings and definitions forged in the relevant GAAP. To be sure, the parties are empowered to define particular contractual terms in ways that diverge from the definitions that control under GAAP. But, where contracting parties use terms and concepts that are firmly rooted in GAAP, and where there are no explicit signals to the contrary, we can presume that the prevailing GAAP govern. Moreover — and significantly, for purposes of this case- — § 20 of the Agreement plainly *1363provided that “GAAP was applied to all entries on the balance sheet reports to the Board and neither the SM-1 letter nor § 6(a)(1)(C) the relevant portion of the Agreement expressly stated that regulatory goodwill would not be governed by GAAP.” Ante at 1356. ■
This case turns on the proper accounting treatment of goodwill, not, as the majority states, on the perceived intent of the contractual language premised upon biased testimony of Coast’s witnesses. Without being cognizant of the relevant accounting principles, it may be difficult to determine that the regulatory capital referred to in § 6(a)(1)(C) is not permanent. However, the fact that regulatory capital under § 6(a)(1)(C) is not permanent can be seen if one remembers that GAAP requires goodwill to be amortized under § 20. Goodwill is the excess of cost over fair value of the identifiable net assets acquired. In this case, the goodwill amounted to $347 million, that is, the difference between the zero dollars Coast contributed to the transaction and the $347 million by which Central’s liabilities exceeded its assets. Thus, the acquisition of Central by Coast generated $347 million in goodwill on the left hand side of the balance sheet. Under § 6(a)(1)(C), the cash contribution of $299 million generated $299 million in regulatory capital on the right hand side of the balance sheet. Because it is a fundamental principle of purchase method accounting that a balance sheet must balance, the amortization of goodwill as required by FASB No. 72 on the left hand side of the balance sheet requires a corresponding decrease in regulatory capital on the right hand side of the balance sheet. Thus, regulatory capital is not permanent.
The majority is simply wrong and misconstrues basic accounting concepts in stating that “the $347 million in ‘Goodwill and Other’ corresponds to the amount of Central’s liability, $299 million would have been regulatory goodwill and, therefore, non-amortizing.” Ante at 1357. This reasoning is predicated on the unwarranted assumptions that Coast would have had no incentive to acquire Central unless the credit to regulatory capital was permanent, and that the credit to capital would not be permanent unless the corresponding goodwill was non-amortizing. Both assumptions are incorrect, and unsupported by the Agreement.
First, Coast had ample incentive to acquire Central despite the fact that amortizing the corresponding goodwill would incrementally reduce its regulatory capital, all else being equal. The whole point of the regulatory forbearances extinguished by FIRREA was to afford thrifts the opportunity to become profitable, capital-surplus-generating institutions again. Absent the forbearance granted to Coast, GAAP would not have permitted treating any of the $299 million as regulatory capital. Thus, the credit to regulatory capital was a substantial incentive even if the corresponding intangible asset diminished in value over time.1 Over time, the plan was that these institutions would, regain financial health. They were to be weaned off government assistance, not permanently dependent upon it. Consequently, the one-time, non-permanent credit to regulatory capital is the more realistic of the interpretations because it conforms to the appropriate accounting principles.
*1364Second, there is no language in the Agreement that supports the treatment of regulatory capital as “permanent.” Ante at 1359. Nothing in the language “shall constitute regulatory capital” implies permanence. Had the contract stated, “shall constitute cash,” the majority would no doubt recognize the fallacy in concluding otherwise. Of course, had the contract so stated, it would be beyond the pale to conclude that the bank could continue to record $299 million in its regulatory submissions regardless of the amount of cash it had expended, and therefore no longer actually possessed. The “shall constitute” language — although it refers to an accounting entry to be made only once — does not alter the fundamental nature of the asset to which it refers. Thus, the contract provided that the $299 million cash contribution also “shall constitute regulatory capital,” but it remained ordinary regulatory capital, which is not guaranteed to remain at any given amount. If it were guaranteed to remain at that amount, no doubt the contract would have contained express language to that effect, viz., “Coast’s regulatory capital shall always remain at $299 million more than it would report absent this acquisition of Central.” Moreover, as the majority recognized, these were sophisticated parties represented by competent counsel who would have known how to identify any such permanent capital as an equity contribution, if they intended it to operate as such, which they did not. The majority considers the Coast acquisition of Central as “not typical” of the normal acquisition of one thrift by another. The only abnormality of the transaction was the fact that FSLIC contributed $299 million and Coast did not contribute one dollar of cash to the transaction.
Likewise, nothing in the “shall constitute” language changed the nature of the corresponding $299 million intangible asset. It was “true goodwill.” Like all other goodwill recorded as the result of the acquisition of a failing thrift at an amount greater than that thrift’s tangible'assets, this goodwill diminished in value over time. GAAP required amortization of such goodwill, and the contract authorized no departure from GAAP.
Any remaining doubt about the interpretation of this contract should have been resolved as the Court of Federal Claims did: by resorting to the Board’s interpretation, not by construing the contract against the government as the drafter of the agreement. Section 20 of the contract requires as much. I disagree with the majority’s statement that § 20 “is only a default that controls if nothing else does,” ante at 1360, because § 20 provides, in pertinent part, that “in the case of any ambiguity in the interpretation or construction of any provision of this Agreement,” the ambiguity must be resolved consistently with Bank Board or FSLIC regulations, or the Bank Board’s resolution where it conflicts with such regulations.
The majority inconsistently argues that § 6(a)(1)(C) “suggests what accounting is to be used” and because of this suggestion it claims that there is no need to “resort to any default and § 20 is therefore not applicable.” Ante at 1360. This is circular logic. The accounting clause of § 20 clearly required that the computation and filings made pursuant to the Agreement be prepared in accordance with GAAP, unless provisions elsewhere in the Agreement authorize a departure from GAAP. Section 6(a)(1)(C) allowed the only departure from GAAP premised upon the SM-1 forbearance which allowed the cash contributed by FSLIC to be credited to Coast’s net worth but did not eliminate the require*1365ment to amortize the $347 million of goodwill generated by the acquisition.
In short, the majority’s substitution of its interpretative beliefs for those of the parties without reference to relevant accounting principles- is an inappropriate and unnecessary guessing game. Such guesses are not the enterprise of this court. The express language of the Agreement requires the application of GAAP absent a contractually authorized departure, and the application of the Board’s interpretation where there is any ambiguity. There is neither ambiguity in the contract nor a contractually authorized departure, thus we cannot dismiss the application of GAAP as Coast successfully urges the majority to do. Such selective application of accounting principles to engender a desired result invites the havoc in the capital markets that we see today.
I would therefore have affirmed the Court of Federal Claims’ judgment of no damages. I respectfully dissent from the majority’s decision to reverse that judgment.

. The $299 million FSLIC contribution credited to “Contributed Capital” under "Regulatory Net Worth” even though GAAP prohibited this "credit” because Coast contributed no cash to the merger.