Court Opinion

ID: 2961782
Source: CourtListenerOpinion
Date Created: 2015-09-21 20:47:46.753104+00
Date Added: 2024-06-11T11:32:45.650082
License: Public Domain

USCA1 Opinion

	

          March 12, 1993    UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                _____________________          No. 92-1542                               BRUCE A. HOWELL, ET AL.,                               Plaintiffs, Appellants,                                          v.          FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR ELIOT                                          SAVINGS BANK,                                 Defendant, Appellee                                _____________________                                     ERRATA SHEET               The opinion of  this court  issued on February  17, 1993  is          amended as follows:               On  page 4, third line of footnote 1, replace "charges" with          "changes".          February 17, 1993                            UNITED STATES COURT OF APPEALS                                For The First Circuit                                 ____________________        No. 92-1542                               BRUCE A. HOWELL, ET AL.,                               Plaintiffs, Appellants,                                          v.                        FEDERAL DEPOSIT INSURANCE CORPORATION                         AS RECEIVER FOR ELIOT SAVINGS BANK,                                 Defendant, Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. William G. Young, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                                 Breyer, Chief Judge,                                         ___________                         Higginbotham, Senior Circuit Judge,*                                       ____________________                              and Boudin, Circuit Judge.                                          _____________                                 ____________________            Edwin A.  McCabe with  whom Karen  Chinn Lyons,  Joseph P.  Davis,            ________________            __________________   _________________        III, The McCabe Group, and Lawrence Sager were on brief for appellant.        ___  ________________      ______________            Lawrence   H.  Richmond,   Counsel,  Federal   Deposit   Insurance            _______________________        Corporation,  with  whom Ann  S.  DuRoss,  Assistant General  Counsel,                                 _______________        Federal Deposit  Insurance Corporation, Colleen B.  Bombardier, Senior                                                ______________________        Counsel,  Federal  Deposit  Insurance  Corporation,  John  C. Foskett,                                                             ________________        Michael P.  Ridulfo  and Deutsch  Williams Brooks  DeRensis Holland  &        _________ _________      _____________________________________________        Drachman, P.C.  were on brief for appellee.        _____________                                 ____________________                                  February 17, 1993                                 ____________________        _____________________        *of the Third Circuit, sitting by designation.                 BOUDIN,  Circuit Judge.    Appellants in  this case  are                          _____________            former officers  of a failed bank.  They sued the FDIC as the            bank's  receiver when  the FDIC  disallowed their  claims for            severance  pay  under their  contracts  with the  bank.   The            district court  sustained the  FDIC, reasoning that  Congress            had restricted such claims.  Although the statute in question            is not easily construed  and the result  is a severe one,  we            believe  that the officers'  claims fail, and  we sustain the            district court.                 The facts, shorn of flourishes added by the parties, are            simple.  In  1988 and 1989, the four appellants  in this case            were   officers  of   Eliot   Savings   Bank   ("Eliot")   in            Massachusetts.   In November 1988, when  Eliot was undergoing            financial strain, Eliot made an agreement with Charles Noble,            its  executive vice  president, committing  the bank  to make            severance  payments (computed under  a formula but apparently            equivalent  to three  years' salary)  if his  employment were            terminated.   In  August 1989,  the bank entered  into letter            agreements  with  three   other  officers--appellants   Bruce            Howell, Patricia McSweeney,  and Laurence  Richard--promising            them  each a  year's  salary as  severance  in the  event  of            termination.   Finally,  in  December 1989  a further  letter            agreement  was  made  with  Noble,  reaffirming  the  earlier            agreement with him while modifying it in certain respects.                                         -2-                                         -2-                 The agreements make clear that they were not intended to            alter the "at will" employment relationship between Eliot and            the  officers.   The  bank  remained  free to  terminate  the            officers,  subject  to severance  payments,  and  (so far  as            appears)  the officers were not bound to remain for any fixed            term.   The letter agreements  with the three  officers other            than Noble state that the severance payments were promised in            consideration of the officers' "willingness to remain" in the            bank's  employ; and the same  intent can be  gleaned from the            two agreements with Noble.   The weakened financial condition            of  the  bank  is  adverted  to in  each  of  the  four  1989            agreements.                 At  some  point in  1989  the FDIC  began  to scrutinize            closely Eliot's affairs.  The officers allege, on information            and  belief, that  the FDIC  and the  bank agreed  that Eliot            would take steps  to retain its qualified management; and the            complaint  states that the  FDIC "knew  and approved"  of the            four  letter agreements  made  in 1989.    The officers  also            contend that they  were advised by  experienced counsel at  a            respected law  firm that the severance  agreements were valid            and would withstand an  FDIC receivership if one ensued.   It            is further alleged that,  in December 1989, the FDIC  and the            bank entered into a consent order that provided that the bank            would continue to retain qualified management.                                         -3-                                         -3-                 Eliot failed and was closed on June 29, 1990.   The FDIC            was  appointed its receiver.  Within two months, the officers            were  terminated.    The  officers  then  made administrative            claims  for their  severance benefits pursuant  to applicable            provisions  of  FIRREA, 12  U.S.C.      1821(d)(3), (5),  the            statute  enacted in  1989 to  cope with  the torrent  of bank            failures.1  In  October 1990, the FDIC disallowed the claims,            stating  that the claims  violated public policy.    Although            the FDIC letter is not before us, it apparently is based upon            the FDIC's  general opposition  to what are  sometimes called            "golden  parachute  payments," a  subject  to  which we  will            return.   Following  the disallowance,  the  officers pursued            their  option,  expressly provided  by  FIRREA,  to bring  an            original  action in  federal  district court.    12 U.S.C.               1821(d)(6).                   In their district court complaint, the officers asserted            claims against the FDIC for breach of contract, for breach of            the  contracts' implied  covenant  of fair  dealing, and  for            detrimental  reliance.   The  FDIC  moved to  dismiss  or for            summary judgment.  Thereafter, the  officers sought  to amend            their complaint by adding a  promissory estoppel claim and by                                            ____________________                 1FIRREA is the  Financial Institutions Reform, Recovery,            and  Enforcement Act  of  1989, 103  Stat.  183, codified  in            various sections of 12 and  18 U.S.C.   Among other  changes,            FIRREA amended pre-existing  provisions specifying the FDIC's            powers as receiver and the claims provisions governing claims            against failed banks.                                           -4-                                         -4-            explicitly  naming the  FDIC in  its "corporate  capacity" as            well as  in its capacity as  receiver.  In  a bench decision,            the  district   judge  ruled  that  the   FDIC  had  lawfully            repudiated the  contracts between Eliot and  the officers and            that under FIRREA  there were no compensable  damages for the            resulting breach.  As for the promissory estoppel  claim, the            court deemed it  "futile" and refused to allow the amendment;            the  court referred  to the  general principle  that estoppel            does  not operate  against the  government and to  the FDIC's            broad grant of  authority under  FIRREA.   The officers  then            sought review in this court.                 The first claim made on appeal, taken in order of logic,            is that  the FDIC's  repudiation of the  severance agreements            was itself invalid.  At this point we need to explain briefly            the structure  of the statute.   Section 1821  governs, among            other  matters, the powers of the FDIC as receiver, 12 U.S.C.              1821(d),  the procedure  for processing claims  against the            failed bank,  12 U.S.C.     1821(d)(3), (5),  and substantive            rules for  contracts entered into prior  to the receivership.            12 U.S.C.    1821(e).  Section 1821(e)(1) gives  the receiver            the right  to disaffirm  or repudiate  any contract  that the            bank may have  made before receivership  if the FDIC  decides            "in its discretion" that performance will be "burdensome" and            that disavowal  will "promote the  orderly administration" of            the failed bank's affairs.  12 U.S.C.   821(e)(1).                                           -5-                                         -5-                 The  power of  a receiver  to repudiate  prior executory            contracts  made  by  the   debtor,  a  familiar  incident  of            bankruptcy law, see 11 U.S.C.    365 (executory contracts and            unexpired  leases), means  something less than  might appear.            By repudiating the contract the receiver is freed from having            to comply  with the contract, e.g.,  American Medical Supply,                                          ___    ________________________            Inc.  v. FTC,  1990  U.S. Dist.  LEXIS  5355 (D.  Kan.  1990)            ___      ___            (specific enforcement),  but the repudiation is  treated as a            breach of  contract that gives  rise to an  ordinary contract            claim  for damages,  if  any.   Whether  that claim  is  then            "allowed"  by the receiver and if so whether there are assets            to satisfy it, are  distinct questions; at this point  we are            concerned  only with  the receiver's  authority to  affirm or            disaffirm.  In this case the officers do not dispute that the            FDIC  did repudiate  the  severance agreements.   Rather  the            officers argue  that the repudiation is  ineffective, and the            agreements remain enforceable, because  the FDIC did not make            the statutory findings, or abused its discretion, or both.                 Interesting questions are posed by such a challenge, but            the questions need not be  resolved in this case.  The  claim            was  not made in the  district court and,  accordingly, it is            waived.  Clauson v. Smith, 823 F.2d 660, 666 (1st Cir. 1987).                     _______    _____            The complaint  makes only  the barest  reference to  abuse of            discretion by the FDIC, mentioning it not as a separate claim            but  in the prefatory description  of facts; and  there is no                                         -6-                                         -6-            reference  whatever to this line  of argument, or  to lack of            required  FDIC  findings,  in  the opposition  filed  by  the            officers to the FDIC's  motion to dismiss.  A  litigant would            normally have an uphill battle in overturning an FDIC finding            of  "burden," if  the FDIC  made one,  but in all  events the            issue has not been preserved in this case.                 The second ground of  appeal raises the central question            before  us,  namely,  whether  a  damage  claim  based  on  a            repudiated  severance contract  is allowed  under FIRREA.   A            stranger to FIRREA might  think it apparent that breach  of a            contract  to make  severance payments  inflicts damages  on a            discharged employee  in the amount of  the promised payments.            The  hitch is  that  in FIRREA  Congress adopted  restrictive            rules  that  limit  the   damages  permitted  for  repudiated            contracts.   12  U.S.C.    1821(e).   In a  general provision            subject  to certain exceptions,  12 U.S.C.   1821(e)(3)(A)(i)            provides  that  the  receiver's  liability  for  a repudiated            contract is "limited to  actual direct compensatory damages .            . . ."  Additionally,  section 1821(e)(3)(B) provides:                 For  purposes  of  subparagraph (A),  the  term  `actual                 direct compensatory damages' does not include--                      (i) punitive or exemplary damages;                      (ii) damages for lost profits or opportunities; or                      (iii) damages for pain and suffering.                 The question thus framed is  whether, or to what extent,            the  statute's  limitation  to  "actual  direct  compensatory            damages" bars  the contractual severance claims  made in this                                         -7-                                         -7-            case.2   The  question  is easy  to  state but  less easy  to            answer.   Although  FIRREA's concept  of  limiting  allowable            claims  for  contract  damages  echoes the  approach  of  the            Bankruptcy Code, 11 U.S.C. 502, that statute is more specific            and  informative.   In particular,  section  502(b)(7) limits            claims by  a terminated  employee for future  compensation to            one year's pay.  So far as appears from the parties'  briefs,            FIRREA's   broad   exclusionary   language  ("actual   direct            compensatory  damages") has  been plucked  out of the  air by            Congress, although  the general  purpose is obvious  enough.             If   there  is   any  illuminating  legislative   history  or            precedent, it has  not been  called to our  attention by  the            parties  and  we have  been  unable to  locate  anything very            helpful.                 It  is   fair  to   guess  that  Congress,   faced  with            mountainous bank  failures,  determined to  pare back  damage            claims founded  on repudiated contracts.   In all likelihood,            the legislators knew that many uninsured depositors and other            unsecured creditors would recover  little from failed  banks;            and the  government's own  liability (to  insured depositors)            would be  effectively increased to the  extent that remaining            assets went  to contract-claim  creditors of the  bank rather            than  to the  government  (as the  subrogee  for the  insured                                            ____________________                 2We do  not reach  the FDIC's alternative  argument that            the  severance  pay would  be  barred  as representing  "lost            profits or opportunity."                                         -8-                                         -8-            depositors whom the FDIC  compensated directly).  It  is thus            not surprising  that Congress might wish  to disallow certain            damage claims  deemed less  worthy than  other claims.   This            assessment   casts  some  light  on  Congress'  approach  and            provides a predicate for  considering the severance  contract            claims posed in this case.                 We  conclude,  not  without some  misgivings,  that  the            officers'  claims  do  not  comprise allowable  claims  under            FIRREA.   The amounts stipulated  by the Eliot  contracts are            easily determined--a  formula payment for Noble  and a year's            pay for the others.  But the statute calls upon the courts to            determine  the  nature  of  the  damages  stipulated  by  the                            ______            contract or sought by the  claimant in order to rule  out any            but  those permitted  by Congress.   In  this case,  analysis            persuades us that the  damages provided by Eliot's repudiated            severance  contracts with  its  officers, and  sought by  the            appellants  for their breach  in this  case, are  not "actual            direct    compensatory   damages"    under   12    U.S.C.                1821(e)(1)(A)(i).                 Severance payments,  stipulated in advance, are  at best            an  estimate  of  likely  harm  made  at  a  time  when  only            prediction is possible.   When discharge actually occurs, the            employee may have no  way to prove the loss  from alternative            employments foregone, not to mention possible disputes  about            the  discharged  employee's ability  to  mitigate damages  by                                         -9-                                         -9-            finding  new  employment.    A severance  agreement  properly            protects  against  these  uncertainties  by  liquidating  the            liability.    Such  payments  comprise or  are  analogous  to            "liquidated damages,"  at least  when  the amount  is not  so            large  as  to  constitute  an  unenforceable  penalty.    See                                                                      ___            generally  E. Allan  Farnsworth,  Contracts    12.18 (2d  ed.            _________                         _________            1990); Charles McCormick, Damages   146 (1935).3                                      _______                 Unfortunately   for   the   appellants,  the   statutory            language--"actual  direct   compensatory  damages"--does  not            quite  embrace  the  payments  promised  by  the    officers'            severance agreements.  Eliot's officers may, or may not, have            suffered injury  by remaining at the bank,  depending on what            options  they had  in the  past that  are not  available now.            Conceivably,  they  suffered no  damage at  all; conceivably,            their actual damages from staying at Eliot exceed the amounts            stipulated  in the agreements.   The point  is that severance            payments of this class do not comprise actual damages.  Thus,            based  on statutory  language alone,  the starting  point for                                            ____________________                 3Of course,  the other  office of a  severance agreement            may  be to provide a cause of  action for an at will employee            who otherwise has no contractual claim at all.  E.g., Pearson                                                            ____  _______            v. John Hancock Mutual Life Ins.  Co., 979 F.2d 254, 258 (1st               __________________________________            Cir.  1992).    In  this case,  the  at  will  status  of the            appellants  is not decisive; they did  have contracts and our            task is  to  see  whether  the  promised  payments  fit  into            FIRREA's compensable-damage pigeonhole.                                         -10-                                         -10-            statutory construction,  the FDIC appears to  have the better            case.                 One might  argue that, although  the severance  payments            are not actual damages, they are often a good-faith effort to            estimate such damages  and should in such  cases be permitted            as  consistent with  the spirit  of the  statute, if  not its            language.   But the spirit of the statute is quite otherwise.            The statute actually excludes (see 12 U.S.C.   1821(e)(3)(B))            two  less-favored categories of  what are indisputably actual            damages (lost  profits, pain and  suffering), reinforcing the            impression that Congress intended strictly to limit allowable            claims for repudiated contracts.   The treatment of leases in            the  next subsection  is  yet further  evidence of  Congress'            temper.    12  U.S.C.    1821(e)(4)  provides  that,  if  the            receiver disaffirms a lease to which the bank was lessee, the            lessor's  damages are limited to past rent and loss of future            rent is not compensable.  Yet the  lessor may have accepted a            lower monthly  rent in  exchange for  a  long-term lease  and            protection  against the risk of  an empty building.   As with            severance   pay,  the   lessor   may   have  foregone   other            opportunities but the loss is not to be recompensed.                 Each side has offered in its favor still broader  policy            arguments.    The officers  claim  that  the disallowance  of            promised severance pay will mean that a troubled  bank cannot            effectively contract  to retain able officers  who may rescue                                         -11-                                         -11-            it.    The  FDIC,  by  contrast,  implies  that  the  present            arrangements may  be  "golden parachutes"  by which  insiders            take  advantage  of the  crisis  to  assure themselves  of  a            handsome  farewell gift from a  failing bank.   The FDIC also            points to regulations  it has proposed, but  not yet adopted,            to curtail  severely such  arrangements; its new  rules would            disallow  severance contracts  for bank  officials except  in            narrowly  defined conditions,  such  as where  an officer  is            induced  to leave  another post  to help a  troubled thrift.4                        _____            The FDIC  claims that  the regulations and  their authorizing            statute reflect public policy.                 The policy  arguments of the  officers and the  FDIC may            each  have some force, to some extent they offset each other,            and neither set is decisive  in this case.  In answer  to the            officers,  it may be said that their argument presents a fact            and  policy question best left to Congress and to expert bank            regulators;  those bodies  in turn  have ample  incentives to            make the right adjustment in delimiting severance agreements.            As  to  the  FDIC's   argument,  Congress  has  not  declared            severance payments unlawful but merely authorized the FDIC to            do so, and the  latter's proposed regulations are not  yet in                                            ____________________                 4The regulations  were proposed  on October 7,  1991, 56            Fed.  Reg. 50529,  pursuant to  the Comprehensive  Thrift and            Bank Fraud Prosection and Taxpayer Recovery  Act of 1990, 104            Stat. 4859, adding 12 U.S.C.   1828(k) (FDIC "may prohibit or            limit, by regulation or order, any golden parachute payment .            . . .").                                         -12-                                         -12-            force.  Further, this case arises on a motion  to dismiss, so            there  is no basis whatever for considering any imputation of            bad motive or misconduct on the part of Eliot's officers.                 The officers' last argument in support of their contract            claims is  that the "actual  damage" restriction, if  read as            the    FDIC   urges,    is   an    unconstitutional   taking.            Alternatively, they say that  the statute is so close  to the            line that  it should  be read  favorably to  them to avoid  a            constitutional question.   These  arguments were not  made in            the  district   court  and  we  decline   to  consider  them.            Litigation  is a  winnowing process  and, except  in criminal            cases where  the stakes are different,  only in extraordinary            circumstances  will we take up a contention that has not been            made in the district court.   We note that arguments that the            FDIC might itself have made, but did not, have been similarly            ignored,  including   a   possible  claim   that  its   order                                                                    _____            disallowing  the severance  claims  is a  currently effective            "order"  under  the golden  parachute  statute,  12 U.S.C.               1828(k).                 What  remains  to  be  considered  are  the  detrimental            reliance  claim in  the  original complaint  and the  related            promissory   estoppel   claim  advanced   by   the  attempted            amendment.  In  substance, the officers argue  that the FDIC,            acting in  its supervisory  or "corporate" capacity  prior to            Eliot's failure,  was so  closely associated with  the bank's                                         -13-                                         -13-            severance  promises that  their  repudiation by  the FDIC  as            receiver  violates estoppel doctrine  or gives rise  to a new            claim  against the  FDIC.   That the  FDIC was  implicated in            forming the  severance contracts  is  a factual  proposition,            apparently  denied  by  the  FDIC, but  we  must  accept  the            proposition  as true for purposes of  reviewing the motion to            dismiss.                 The  FDIC seeks  to  answer the  officers' estoppel  and            reliance argument by citing  to cases that say that  the FDIC            is  treated  as  two  separate  persons when  acting  in  its            "corporate"  capacity as a  regulator and when  acting in its            capacity as receiver.  E.g., FDIC v. Roldon Fonseca, 795 F.2d                                   ___   ____    ______________            1102, 1109 (1st Cir. 1986).  On this theory, the  FDIC is not            liable  in this  case  as regulator,  even  if it  affiliated            itself with  the promise of  severance pay,  since "it"  (the            FDIC  as  regulator)  did  not  break  the  promise;  and  as            receiver, the FDIC was free to disavow  the contracts because            "it" (the FDIC as receiver) made no promises.                   The  officers  argue  that  this  "separate  capacities"            doctrine  was designed for a different purpose and should not            be  applied  in the  present  context  to produce  an  unjust            result.  But the Eighth Circuit applied this doctrine without            much  hesitation  to a  case in  which  the FDIC  as receiver            sought to repudiate a lease it had previously accepted in its            capacity as  "conservator,"   conservator  being yet  another                                         -14-                                         -14-            incarnation  in  which the  FDIC sometimes  appears.   RTC v.                                                                   ___            CedarMinn  Building Limited Partnership,  956 F.2d  1446 (8th            _______________________________________            Cir.),  cert. denied,  113  S. Ct.  94 (1992).    As for  the                    ____  ______            claimed injustice, it is not clear that any apparent inequity            worked in this  case is greater than occurs in the usual case            in which  the separate-capacities doctrine is  invoked.  FDIC                                                                     ____            v. Roldon Fonseca, 795 F.2d at 1109.               ______________                 There  is another  answer  to the  officers' claim  that            rests more solidly on visible  policy.   Putting to one  side            the  separate  capacities  defense,  courts  are  for obvious            reasons  reluctant  to permit  estoppels  against the  United            States,  e.g., Heckler  v. Services  of Crawford  County, 467                     ___   _______     _____________________________            U.S. 51, 60 (1984), although exceptions may be found.  United                                                                   ______            States v.  Pennsylvania Industrial  Chemical Corp.,  411 U.S.            ______     ______________________________________            655,  670-675  (1973).    There  are  many  reasons  for  the            reluctance, including a  concern for the  public purse and  a            recognition that the government--unlike the  normal actor--is            an enterprise  so vast  and complex  as  to preclude  perfect            consistency.  See generally  Hansen v. Harris, 619  F.2d 942,                          _____________  ______    ______            649-58 (2d  Cir. 1980) (Friendly, J.,  dissenting), rev'd sub                                                                _____ ___            nom. Schweiker v. Hansen, 450 U.S. 785 (1981).  While leaving            ___  _________    ______            many questions  unanswered, the Supreme Court  has made clear            that an estoppel against the United States is not measured by            the  rules used for ordinary litigants.  Heckler, 467 U.S. at                                                     _______            62.                                         -15-                                         -15-                 In the present  case, even the  most liberal reading  of            the reliance  and  estoppel counts  leaves  the FDIC  in  the            position of one who encouraged  or invited the bank's promise            of severance pay.   Yet  (as we construe  the actual  damages            clause), Congress  has decided that, in  parceling out fairly            the  limited  assets  of  a  failed  bank,  contract  damages            reflecting  severance pay  are not  permitted.   "[T]o permit            [the claim]  . . . would  be judicially to admit  at the back            door  that which  has been  legislatively turned away  at the            front  door."   FDIC  v. Cobblestone  Corp., 1992  U.S. Dist.                            ____     _________________            LEXIS 17024  (D. Mass. 1992).   It is hard to  imagine a less            attractive case for creating a  new judicial exception to the            general rule against estoppel of the government.                 The judgment of the district court is affirmed.                                                       ________                                         -16-                                         -16-