Court Opinion

ID: 6643988
Source: CourtListenerOpinion
Date Created: 2022-07-20 20:47:51.966212+00
Date Added: 2024-06-11T15:59:15.907816
License: Public Domain

PAULINE NEWMAN, Circuit Judge,
dissenting.
There has been a good deal of litigation engendered by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), including litigation arising out of arrangements similar to those of the three cases here consolidated, wherein solvent banks and other investors were encouraged by the government to enter into merger arrangements for the purpose of salvaging failing or failed thrift institutions. Such salvage operations included the infusion of substantial sums of private as well as governmental money. The solvent banks contributed their resources on the promise by the government that the capital requirements of the merged banks could be met, inter alia, by capitalization of “supervisory goodwill” and the long-term amortization of the capital account. These promises were memorialized in lengthy contracts that set forth the details and integrated the arrangements, including the implementing forbearance letters and Bank Board resolutions. These documents were explicit as to the financial and other obligations of all parties, the conditions and mutual promises by which these commitments involving many millions of dollars were made. It is not disputed that these arrangements would not have been entered *814into but for the conditions that were agreed to by the government, after extensive negotiation. These conditions, which enabled these arrangements, were made illegal by FIR-REA or by the regulations implementing FIRREA.
In the three cases at bar the merger agreements were made in 1981, 1984, and 1988. After enactment of FIRREA in 1989 the government required these merged thrift institutions to conform with the new accounting standards and capital requirements. In two of the three cases these changed requirements immediately placed the merged banks into non-compliance, and these institutions were promptly placed in receivership.
The panel majority, in a lengthy analysis, determines that these banks are not entitled to specific performance of their preexisting arrangements. That question, although stressed in the government’s briefs, is not at issue in this case. That question was extensively litigated in the regional district and circuit courts, in connection with various other banks’ requests for relief in the form of specific performance of the particular arrangements between such banks and the relevant government agency. However, that remedy is not within the Court of Federal Claims’ Tucker Act authority, and the issue of specific performance is not before the Federal Circuit. Nor are any contracts other than those of these three sets of plaintiffs.
Although litigation has been extensive, the regional circuits did not reach the question of the financial consequences of the enactment of FIRREA and of the resultant impossibility of performance of the various arrangements. The regional circuits uniformly held that these questions of money damages are excluded from their purview. The issues and remedies of financial recompense are decided for the first time in these suits in the Court of Federal Claims.
In these three appeals the plaintiff banks do not dispute that Congress has the power to enact FIRREA and to foreclose continued performance of these contracts. The issue, as the Court of Federal Claims made clear, is whether the government is liable for the financial consequences of these acts, not whether the government had the authority to act.
The panel majority, rejecting the reasoning and conclusions of the Court of Federal Claims, holds that there is no governmental liability because there were no contracts between the government and these thrift institutions. The panel majority also holds that if there were contracts, the entire risk of impossibility of performance must be borne by the nongovernmental party. The rationale for this latter ruling appears to be that the government may abrogate contracts without liability, under the “sovereign acts doctrine”.
Since there are indeed contracts as to all three of these thrift groups, and immunity under the sovereign acts doctrine is not warranted in these cases, the Court of Federal Claims correctly decided that the government is liable for the financial consequences of its acts. Indeed, governmental responsibility is not a new idea in this nation’s law, and the reasoning of the Court of Federal Claims is solidly supported in contract law and in the application of the sovereign acts doctrine to this case.
A
The sovereign acts doctrine appeared in Court of Claims jurisprudence early in that court’s existence, in Deming v. United States, 1 Ct.Cl. 190, 1865 WL 2004 (1865). It relates to acts of government in exercise of the responsibility to make and administer laws for the general welfare. As a “doctrine” it is an apothegm for the principle that there is a distinction between governmental acts for general and public benefit, and acts of government when dealing with specific persons and businesses. When the government acts as a contractor with a specific private entity, this doctrine provides no immunity:
The United States are as much bound by their contracts as are individuals. If they repudiate their obligations, it is as much repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator had been a State or a municipality or a citizen.
Sinking-Fund Cases, 99 U.S. (9 Otto) 700, 719, 25 L.Ed. 496 and 504 (1879). However, when the government acts as legislator/regulator in furtherance of the general welfare, an incidental and unintended impact on specific preexisting contracts to which the government is a party does not thereby increase *815the responsibility or liability of the government as contractor. As the Supreme Court explained, public and general acts of government that are not directed to particular contracts do not impose liability upon the government beyond that which it has as a party to the contract:
It has long been held by the Court of Claims that the United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign---- “The two characters which the government possesses as a contractor and as a sovereign cannot be thus fused; nor can the United States while sued in the one character be made liable in damages for their acts done in the other. Whatever acts the government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct or violate the particular contracts into which it has entered with private persons.”
Horowitz v. United States, 267 U.S. 458, 461, 45 S.Ct. 344, 344-45, 69 L.Ed. 736 (1925) (quoting Jones v. United States, 1 Ct.Cl. 383, 384-85, 1865 WL 1976 (1865)). Illustrations are seen, e.g., in Amino Bros. Co. v. United States, 178 Ct.Cl. 515, 372 F.2d 485, 491, cert. denied, 389 U.S. 846, 88 S.Ct. 98, 19 L.Ed.2d 112 (1967) (action by the Army Corps of Engineers in flood control on the Smoky Hill River held a sovereign act for public benefit; there was no express or implied promise to contractor working downriver that the flood control power would not be exercised); Piggly Wiggly Corp. v. United States, 112 Ct.Cl. 391, 419-433, 81 F.Supp. 819, 823 (1949) (price control and allocation of plywood by the Office of Price Administration was a sovereign act; it was proper for Quartermaster Corps of War Department to terminate contract for convenience with appropriate recompense to contractor.)
It is quite clear that the sovereign acts doctrine does not mean that the government can walk away from any contract to which it is a party, avoiding all contractual liability, whenever there is intervening legislative or regulatory action. The sovereign acts doctrine “is not a boundless justification for governmental non-liability.” Peter S. La-tham, The Sovereign Act Doctrine in the Law of Government Contracts: A Critique and Analysis, 7 U.Tol.L.Rev. 29, 41 (1975). In Perry v. United States, 294 U.S. 330, 55 S.Ct. 432, 79 L.Ed. 912 (1935) the Supreme Court considered the application of the sovereign acts doctrine to a congressional resolution that declared that payment in gold was “against public policy” and that all past and future governmental obligations would be paid with then legal tender. The Court held that persons holding Treasury bonds that provided for payment in gold coin had a binding and enforceable contract, and that:
Congress can [not] disregard the obligations of the Government at its discretion .... We do not so read the Constitution.
Perry, 294 U.S. at 350, 55 S.Ct. at 434. In Freedman v. United States, 162 Ct.Cl. 390, 320 F.2d 359 (1963) the Court of Claims explained that the sovereign acts doctrine
does not relieve the government from liability where it has specifically undertaken to perform the very act from which it later seeks to be excused.
Id at 402, 320 F.2d 359. According to these precepts, acts of government that directly abrogate existing contractual obligations, even if undertaken for reasons of general welfare, are not immune from liability. E.g., Everett Plywood Corp. v. United States, 227 Ct.Cl. 415, 651 F.2d 723, 731-32 (1981) (cancellation of timber contract due to government’s concern for environment is not immune from liability as a sovereign act); Sun Oil Co. v. United States, 215 Ct.Cl. 716, 572 F.2d 786, 817 (1978) (government’s denial of drilling permit and consequent breach of drilling lease due to government’s environmental concerns is not immune as a sovereign act).
Applying precedent, the Court of Federal Claims held that the abrogation of the arrangements the government had entered into with these banks was not immune from liability as a sovereign act. As further discussed, no error in this analysis or conclusion has been shown.
B
It can not be seriously disputed that in its arrangements with these banks the govern*816ment acted as a contractor. These were commercial arrangements, entered into after extensive arms-length negotiations and upon mutual exchanges of consideration. They are embodied in lengthy documents, with all requisite governmental approvals, signed by authorized persons, and including the specific accounting and amortization terms that were essential conditions. Pertinent documents were integrated and cross-referenced, in textbook compliance with the rules of contract. There is no asserted ambiguity.1 Indeed, it will come as a surprise to the many lawyers involved in these multi-million dollar transactions that they did not, after all, succeed in making a contract. The government’s disavowal of having made binding contracts comes with poor grace, not only in view of the government’s encouragement of these arrangements when they were made, but also because performance was accepted by the government for several years.
The Court of Federal Claims, considering the question of the relationship of these arrangements to the enactment and administration of FIRREA, found that the various banks that had merged with failed or failing thrifts, and the terms of the mergers whereby the existing capital requirements were met, were well known to the legislators. Recognition of these arrangements pervades the legislative record. E.g., H.R.Rep. No. 54, 101st Cong., 1st Sess., pt. 1, at 498 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 293-94 (additional views of Mr. Annunzio, Mr. Kanjorski and Mr. Flake):
Simply put, [FIRREA] has reneged on the agreements that the government entered into concerning supervisory goodwill.... Clearly, the agreements concerning the treatment of goodwill were part of what the institutions had bargained for. Just as clearly, [FIRREA] is abrogating those agreements.
H. R.Rep. No. 54, 101st Cong., 1st Sess., pt. 5, at 27-28 (1989), reprinted in 1989 U.S.C.C.A.N. 397, 410-11 (additional views of Mr. Hyde):
Overnight, as the accounting standards are re-legislated, [institutions with supervisory goodwill agreements] will become ‘unsafe and unsound’ for purposes of federal banking law---- [T]he current terms of [FIR-REA] could end up punishing the very institutions that came to the aid of taxpayers in the early part of this decade---- I believe that many of these institutions have a case based in law, in equity, and in fundamental fairness.
135 Cong.Rec. H2706 (daily ed. June 15, 1989) (Statement of Rep. Crane):
In the early 1980’s a number of savings and loans were asked by our government to acquire ailing thrifts in order to help the government and the taxpayers avert paying billions of dollars in bailout funds---How many institutions will trust the government after seeing Congress abrogate these deals?
135 Cong.Rec. H2783 (daily ed. June 15, 1989) (Statement of Rep. Ackerman):
In its present form, [FIRREA] would abrogate written agreements made by the U.S. government to thrifts that acquired failing institutions by changing the rules in the middle of the game----
Criticisms such as the following reinforce the view that these contracts were targeted, and not an incidental side-effect of a general and public law. 135 Cong.Rec. H2705 (daily ed. June 15, 1989) (statement of Rep. Gonzalez):
In blunt terms, the bank Board and FSLIC Insurance fund managers entered into bad deals — I might even call them steals.
Recognizing that it was abrogating these agreements, Congress sought advice on the consequences of enactment of FIRREA; the record shows that it received inconsistent advice. Compare Letter from the Comptroller General of the United States to the Senate Committee on Banking, Housing and Urban Affairs (August 27, 1990), advising that there could be liability for breach of contract and unconstitutional taking of property, with the statement of Rep. Gonzalez, at 135 Cong. Rec. H2705 (daily ed. June 15, 1989) that the Department of Justice advised that FIRREA would result in no contractual or constitutional claims. This record is pertinent today because it shows that Congress knew of these arrangements, and knew that their performance would be affected by the new requirements set by FIRREA. There is no error in the ruling of the Court of Federal *817Claims that the effect on these banks was a foreseen and intended consequence of the legislation and its regulatory implementation, thus negating immunity as a sovereign act.
It is an unwarranted criticism of the Court of Federal Claims to state that it improperly mixed the sovereign and contracting functions of government, for it is clear that the Court understood and correctly applied the distinction. The sovereign act doctrine does not mean that the legislative branch is somehow a different “government” than the executive branch, and that the United States is not liable for contract-affecting actions of the executive in administering legislation. To the contrary, the protection of persons who contract with the government through its agencies is essential to the nation’s operations. The Court of Federal Claims correctly concluded that the government could not, without liability, abrogate the specific contracts that the government had made with thrift institutions. The court stressed that the issue under the Tucker Act is solely of financial liability.
The government, and the panel majority, rely heavily on Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986) (“POSSE”) wherein the Court held that Congress could remove the right of state government to withdraw from the Social Security system. However, POSSE did not hold that Congress could simply abrogate any contract right. In POSSE the Court held that there was no bargained-for consideration, and therefore no contract right to start with. 477 U.S. at 55-56, 106 S.Ct. at 2398. The Court stressed that the provision of Social Security benefits to state employees was a gratuitous benefit bestowed upon the states by Congress. Although the government here presses a far broader interpretation, POSSE does not hold that Congress may without liability abrogate contracts between the United States and others except for situations where the government made an “unmistakable” promise not to do so.
The Court of Federal Claims did not make the mistake of confusing the government’s right to legislate in the public interest with the government’s obligations in specific contractual commitments. This distinction is a necessary implementation of the principles by which our government does business with its citizens. These principles are fundamental to our history. In Murray v. Charleston, 96 U.S. (6 Otto) 432, 24 L.Ed. 760 (1878) the Court rejected the theory, offered then as it is now, that a contractual promise can be abrogated through the exercise of inherent sovereign authority. In Perry v. United States, discussed supra, the Court quoted Alexander Hamilton as follows:
[W]hen a government enters into a contract with an individual, it deposes, as to the matter of the contract, its constitutional authority, and exchanges the character of legislator for that of a moral agent, with the same rights and obligations as an individual. Its promises may be justly considered as excepted out of its power to legislate unless in aid of them. It is in theory impossible to reconcile the idea of a promise which obliges, with the power to make a law which can vary the effect of it.
294 U.S. at 351 n. 2, 55 S.Ct. at 435 n. 2 (citing 3 Hamilton’s Works, 518, 519). As the Court in Perry reaffirmed, although the government can not agree not to exercise its sovereign power in the future, “the right to make binding obligations is a competence attaching to sovereignty.” 294 U.S. at 353, 55 S.Ct. at 436.
C
The contracts here at issue were entered into after extensive negotiation, with concessions and commitments by both sides. The contracts in the three suits differ in their terms, for each is specific to the circumstances of the acquired and acquiring banks.
The Court of Federal Claims correctly held that these elaborate, lengthy, detailed contemporaneous documents, including documents incorporated by reference, are contracts. Both the government and the banks so treated them during the years of performance in accordance with their terms. Both the government and the banks transferred many millions of dollars on the basis of these arrangements. On the “mere signing”, as the panel majority puts it, Winstar and United Federal together contributed two million dollars and assumed additional millions in liabilities; Statesman Savings and American Life and Casualty together contributed twen*818ty-one million dollars and assumed additional millions in liabilities; and Glendale Federal assumed $734 million in liabilities. All of these commitments were conditioned on the specific accounting procedures and amortization requirements that were negotiated and agreed to in order to enable these thrifts to survive while new funds and new management sought to resuscitate them. Further, the government does not dispute that it has retained the funds contributed by the private banks.
I will not repeat the careful analysis by the Court of Federal Claims of these three sets of documents. I take note of the panel majority’s apparent belief that documents incorporated by reference, or conditions subsequent, or integration clauses, do not a contract make. Indeed, it is curious to see the panel majority treat as meaningless the negotiated amortization periods on the reasoning that these periods “complied with the Bank Board’s then-existing regulations.” These amortization terms were essential to the viability of each bank’s investment. That they were not illegal when adopted is not surprising. To hold that their legality when adopted means that they “do not commit the Bank Board”, despite their explicit incorporation in contract documents with and by the Bank Board, is a strange view of contract law.
The government argues that the banks simply gambled that the law governing these mergers would not change, and thus are not entitled to redress when the law did change. The contracts show that the parties indeed recognized this possibility, and provided for it in various ways. Thus the “Accounting Principles” clauses in the Winstar and the Statesman agreements reflect the parties’ recognition that the accounting principles might in the future be “subject to clarification, interpretation or amendment”, and provide that “[i]f there is a conflict between such regulations and the Bank Board’s resolution or action [adopted concurrently with this agreement], the resolution or action shall govern.” 2
The government thus expressly agreed that in the event of regulatory change, the negotiated forbearances and accounting procedures would govern. This is surely not an assumption of risk by the contractor, an acceptance of the “vagaries and uncertainties of future legislation”, quoting the panel majority. It is a negotiated contract provision that removed this foreseen risk by dealing specifically with an aspect that was critical to the viability of the venture.
D
These contract terms, and the bargained-for consideration on both sides, illuminate a basic flaw in the panel majority’s reasoning with respect to the sovereign acts doctrine. For if the enactment of FIRREA is viewed as a sovereign act for the general welfare, unencumbered by specific contractual arrangements, then the relationship between the government as contractor, on the one hand, and these banks on the other hand, would be the same as for any other set of contracting parties. In such case, when the contract is no longer capable of performance on its agreed terms, (whether because of legislative or agency action or Act of God) the laws of contract do not automatically place the burden of accommodation on one side only. See Restatement (Second) of Contracts § 272 (discussing forms of available relief such as rescission when contract performance has become impracticable), § 264 (governmental regulation can render performance impracticable and be subject to relief), and § 377 (remedy of restitution in cases of impracticability and frustration of contractual purpose). The government is not simply excused from further obligations without liability. Thus even if the enactment of FIRREA were treated as a sovereign act it would be incorrect to place on these banks the entire burden of impossibility of performance of their contracts, as has here been done.
However, if the enactment or administration of FIRREA is not viewed as a sovereign act with respect to these contracts, in that it was known and expected that this law would interfere with or make impossible the contin*819ued performance of specific contracts by changing the rules of capital compliance, then the government has made performance of its own contracts impossible: not by force maj-eure, as the majority suggests, but by governmental act. That the government may be empowered to legislate in this way, and that a desired public policy is served, does not mean that it can be done without liability to those with whom the government had made a different commitment. The government is not exonerated of responsibility with respect to specific commercial contracts to which it is a party, whether the breach is by executive or legislative action.
Thus, on any application of the sovereign acts doctrine, these plaintiffs have a remedy for breach of contract. I would affirm the decisions of the Court of Federal Claims in these three cases.
ORDER
Aug. 18, 1993.
The appellees, Glendale Federal Bank, FSB, and Statesman Savings Holding Corp., The Statesman Group, Inc., and American Life and Casualty Insurance Co., filed separate petitions for rehearing and suggestions for rehearing in banc. Upon consideration by the panel of the petitions for rehearing and of the responses filed by the appellant at the request of the panel, and the supplemental submissions, it is:
ORDERED that the petitions for rehearing are GRANTED, but only to make the following changes in the text of the opinion:
Page 20:
fines 16-17: Delete “agreed to” and insert therefor — understood respecting how goodwill would be treated—
line 17: Delete “further”
Page 32:
fines 2-3: Delete “quarrel is with” and insert — arguments focus on—
line 4: After “periods” insert — not on the regulations—
lines 4-5: Delete “the regulations merely ... statute.”
Judge Newman’s comments on the changes are attached hereto.
Upon consideration of the suggestions for rehearing in banc thereafter by the circuit judges who are in regular active service, the suggestions are ACCEPTED.
It is FURTHER ORDERED that the judgment of the court entered on May 25, 1993, is vacated and that the opinion of the court, as amended, accompanying the said judgment is withdrawn.
The parties will be advised in due course if additional briefing is needed and of the date of hearing in banc.
NEWMAN, Circuit Judge,
commenting on the Order amending the text of the majority opinion.
The reasons for the panel majority’s changes are not stated. Thus I write separately to point out that:
(1) These cases do not turn on whether the written arrangements between these banks and the government are designated as “understandings” instead of “agreements”. Such semantics do not control the fundamental issues raised.
(2) The now-deleted sentence that “The regulations merely conform to the statute” was indeed incorrect. However, the further statement that the regulations were not placed at issue is also incorrect, for this litigation unambiguously relates to the statute as implemented by the regulations.

. The panel majority appears to misapprehend my position, for there is no issue of ambiguity.

. Although the panel majority states that this language is "lifted” out of context, the context in the Accounting Clause reinforces the intent that the contract terms shall prevail in case of future conflict This clause states a straightforward commercial understanding of what the parties intended should a foreseeable event occur. This is simply good contract draftsmanship, for it was fundamental that it was the accounting princi-that made the viable.