Opposition Brief — California Federal Bank v. United States

~ Supreme Court, US. |

ILED '

i) ne JUL ? 6 2005 a

No. 04-1709

IN THE

Supreme Court of the United States

UNITED STATES,

Petitioner,

v.

CALIFORNIA FEDERAL BANK, FSB,

Respondent.

On Cross-Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Federal Circuit

BRIEF FOR RESPONDENT IN OPPOSITION

MARK A. PERRY

Counsel of Record

ANDREW S. TULUMELLO

PAUL BLANKENSTEIN

GIBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Respondent

QUESTION PRESENTED

Based upon this Court’s decision in United States v.

Winstar Corp., 518 U.S. 839 (1996), both courts below

found that the undisputed facts established that the gov-

ernment had entered into valid and binding contracts

with respondent California Federal Bank. The sole

question presented by the government’s cross-petition is

whether this Court should revisit those concurring de-

terminations.

1

PARTIES TO THE PROCEEDINGS

AND RULE 29.6 STATEMENT

All of the parties to the proceedings in the court of

appeals are listed in the caption of this petition.

Pursuant to this Court’s Rule 29.6, undersigned

counsel state that Citibank (West), FSB is the parent

corporation of CalFed. CalFed merged into Citibank

(West), FSB on November 13, 2002. Citibank (West),

FSB is a wholly owned subsidiary of Citibank (West)

Holdings, Inc., which is a wholly owned subsidiary of

Citibank (West) Bancorp, Inc. _ Citibank (West) Ban-

corp, Inc. is a wholly owned subsidiary of Citicorp

Banking Corporation, which is a wholly owned subsidi-

ary of Citicorp. Citicorp is a wholly owned subsidiary

of Citigroup Holdings Company, which is a wholly

owned subsidiary of Citigroup Inc., a publicly traded

company. No other pubiicly traded company owns 10

percent or more of CalFed’s stock.

ill

TABLE OF CONTENTS

Page

QUESTION PRESENTED..u.....scsssssccsssssesessueesssssessesssse

PARTIES TO THE PROCEEDINGS AND

RULE 29.6 STATEMENT ...0...csssssccsssssssccssscssssecesessssees ii

TABLE OF AUTHORITIES .......cscssscsssssssscssececsssesesessee iv

CPINIONS BELOW cca accscsscncneccconnszoccccnvecccnceseceensecs 1

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I sccovssanccescarsacsnnnsdcasansnincrsicustdansnosgpa 1

isch ssn soaisistnsssentdnoncenconntonicalnemaciane 9

NN cc icenesnnscosanscisanennconocincabancnmashn 20

1V

TABLE OF AUTHORITIES

Page

Cases

Anderson v. United States,

344 F. 3d 1343 (Fed Cir. 2003)..........coccsssscrrnsasseess 14

Bailey v. Railroad Co.,

ee) Lf | en en ee eee 16

Charter Fed. Sav. Bank v. OTS,

FIG FAG DUS COG CO. TIF 2) sncecscecsssereatensososesnn 16, 17

Cienega Gardens v. United States,

162 F.3d 1123, superseded by 194 F.3d

ee a ee acess aiiadcespinecanccomecacaes 14

D&N Bank v. United States,

Bae ie 0a es I iictitsinicsntnenianeiinnts 14

Exxon Co., U.S.A. v. Sofec, Inc.,

FET Ce iam nnibankammnigien 10

Fifth Third Bank v. United States,

MOE FOG TE2E CG, Ce, FD) ccsceicetiscesintinciersccons 14

Goodman v. Lukens Steel Co.,

I i ee CE velba sci chaicaicienniaanilcthadieeiccebieiinidin 11

Mobil Oil Exploration & Producing

Southeast, Inc. v. United States,

Pa ae. Se CE bidtdanis Desaisadehitakercaosiaanamineds 19

National R.R. Passenger Corp. v. Atchison,

Topeka, & Santa Fe Ry., 470 U.S. 451

ESPN T scishsccdescaitsvslaiike calcd dpalenenivacieibiemosdalaacheacneiiaidiouiias 17

Ryan v. United States,

EEE Fe: ie Ge ctsoaiessicatesadatesnnns arama 16

Vv

Steinke v. Sungard Fin. Sys., Inc.,

Sal F356 POS Chat Cie, WOOT isirsis ides 16

United States v. Johnston,

MO ASD: RA wicistsincslicecdin aninsclindtcadictuaee eal 11

United States v. Winstar Corp.,

FED CFs BOP CN siscsisacdsmenciticinvcmaions passim

Statutes

in UAL. | TS coiitecak cient ee ]

Other Authorities

1 A. Corbin, Corbin on Contracts § 2.10

CURIA DY sicconnsansniinucetiasbenieict tae cmeeie ene ale 16

3 A. Corbin, Corbin on Contracts § 573

(RID ss ssctinenaidinscaiapicguicceadaaamca taser ea nie 16

Financial Institutions Reform, Recovery, and

Enforcement Act, Pub. L. No. 101-73,

WORD TU BR cisivcocacessocionesiicecumeae bie oe 3

I E. Farnsworth, Farnsworth on Contracts

© BF CGE vesicinisainsintacncnicuibetenme eee cae 16

Restatement (Second) of Contracts § 209

(TIED) a isissosinrsincceanhiatindsltadipsipesibialaaatiae een enn 16

Stern et al., Supreme Court Practice § 4.14

(FG0 OG. FGF) vic cccennsssmasinnsaccneeie ease 11

BRIEF FOR RESPONDENT IN OPPOSITION

California Federal Bank (“CalFed”) respectfully

submits this brief in opposition to the government’s

conditional cross-petition for a writ of certiorari.!

OPINIONS BELOW

There are two opinions of the court of appeals. The

first (04-1557 Pet. App. 1a-17a) is reported at 245 F.3d

1342 (2001). The underlying opinion of the trial court

regarding remedies (04-1557 Pet. App. 18a-52a) is re-

ported at 43 Fed. Cl. 445 (1999), and the opinion of the

trial court regarding liability (04-1557 Pet. App. 57a-

121a) is reported at 39 Fed. Cl. 753 (1997). The second

opinion of the court of appeals (04-1557 Pet. App. 122a-

143a) is reported at 395 F.3d 1263 (2005). The underly-

ing opinion of the trial court (04-1557 Pet. App. 144a-

173a) is reported at 54 Fed. Cl. 704 (2002).

JURISDICTION

The judgment of the court of appeals was entered on

January 19, 2005. On April 7, 2005, the Chief Justice

extended the time for filing a petition for a writ of cer-

tiorari to and including May 19, 2005;. the petition in

No. 04-1557 was filed on that date and docketed on

May 20, 2005. The government’s conditional cross-

petition in No. 04-1709 was docketed on June 20, 2005.

The jurisdiction of this Court is invoked under 28

U.S.C. § 1254(1).

STATEMENT

On summary judgment, the Court of Federal Claims

found that the undisputed evidence in this case estab-

1 CalFed’s separate petition for a writ of certiorari is

pending in this Court as No. 04-1557.

2

lished that the government had entered into a Winstar-

type contract with CalFed to allow CalFed to include

goodwill resulting from three supervisory mergers as

regulatory capital for specified periods. See generally

United States v. Winstar Corp., 518 U.S. 839 (1996)

(holding that United States is liable for breach of good-

will contracts). The Federal Circuit, which reviewed the

trial court’s liability determination de novo, affirmed.

The government now concedes that a contract was

formed in one of the transactions, but disputes contract

formation in the other two even though they were sub-

stantively identical to the first.

1. During the early 1980s, in the midst of the worst

savings and loan crisis since the Great Depression, the

federal government found itself facing deposit insurance

liabilities that threatened to bankrupt the government’s

insurance fund. Winstar, 518 U.S. at 846-47. Asa

means of avoiding its insurance liability, and as an al-

ternative to government takeovers of failing thrifts, the

government encouraged healthier thrifts, such as Cal-

Fed, to take over the failing thrifts through so-called

“supervisory mergers.” Jd. at 847.

As this Court stated in Winstar, “the principal in-

ducement for these supervisory mergers was an under-

standing that the acquisitions would be subject to a par-

ticular accounting treatment that would help the acquir-

ing institutions meet their reserve capital requirements

imposed by federal regulations.” 518 U.S. at 848. This

special regulatory accounting treatment was essential

because it permitted the acquiring institutions to count

the liabilities of the acquired failing thrifts as “supervi-

sory goodwill,” i.e., as an asset for purposes of regula-

tory capital requirements. /d. at 849-50; id. at 921

(Scalia, J., concurring in | judgment) (goodwill promises

were the “sine qua non” of the sunervisory mergers).

This use of supervisory goodwill allowed the acquiring

thrifts to meet their regulatory obligations and “‘to lever-

age more loans (and [they] hoped, make more profits).”

_—"

Dee. acinus:

3

Id. at 851. The acquiring thrifts were allowed to amor-

tize the supervisory goodwill obtained in the acquisi-

tions over extended periods (up to 40 years), which fur-

ther allowed the thrifts to satisfy regulatory capital re-

quirements. Jd. at 852-53.

In 1989, Congress passed the Financial Institutions

Reform, Recovery, and Enforcement Act (“FIRREA”),

Pub. L. No. 101-73, 103 Stat. 183, which made enor-

mous changes in the structure of federal thrift regula-

tion. Winstar, 518 U.S. at 856. Most important for pre-

sent purposes, FIRREA mandated the promulgation of

regulations requiring thrifts to maintain levels of regula-

tory capital that could not include supervisory goodwill

(either immediately or after a 5-year phase-out). Jd. at

857. In effect, the FIRREA-mandated regulations

eliminated the favorable treatment of goodwill promised

by the government as the principal inducement to hun-

dreds of thrifts involved in supervisory mergers.

In Winstar, which involved three “test” cases, this

Court held that the new regulatory capital requirements

imposed by FIRREA breached the goodwill contracts

arising out of the supervisory mergers. 518 U.S. at 870.

Rejecting any notion that the government was entitled to

“special rules” when contracting, the Court reaffirmed

“the general principle that, ‘[w]hen the United States en-

ters into contract relations, its rights and duties therein

are governed generally by the law applicable to con-

tracts between private individuals.’” Jd. at 895 (citation

omitted). The Court explained that the goodwill con-

tracts, which were based upon the acquiring thrifts’ as-

sumption of the failing thrifts’ liabilities, involved the

transfer of valuable consideration designed to prevent or

mitigate an impending crisis in the thrift industry and

thereby save the government’s insurance fund from fi-

nancial collapse. Jd. at 886-87, 869, 906, 908; id. at 918

(Breyer, J., concurring); id. at 919 (Scalia, J., concurring

in judgment). Accordingly, the Court affirmed the Fed-

4

eral Circuit’s finding of liability and remanded the cases

for a determination of remedies. /d. at 910.

2. In the early 1980s, CalFed entered into supervi-

sory merger agreements with the government in connec-

tion with three separate transactions: the “Southeast”

transaction, the “Brentwood” transaction, and the “Fam.

ily” transaction. In each instance, the government’s

goodwill promises induced CalFed, which “was a rela-

tively healthy thrift” (04-1557 Pet. App. 19a), to acquire

thrifts on the verge of failure. The government now

concedes that the Southeast transaction resulted in a

goodwill contract that the government breached (U.S.

Pet. 4), but nonetheless asserts that no contract arose

from the Brentwood and Family transactions. Those

two transactions were identical to the Southeast transac-

tion in all material respects, except that neither included

an “Assistance Agreement” because, unlike in South-

east, the government provided no financial assistance as

part of the transactions.

a. In 1981, CalFed agreed to merge with three

Georgia thrifts and one Florida thrift (“the Southeast in-

stitutions”). This agreement was conditioned on the

Federal Savings and Loan Insurance Corporation

(FSLiC) and the Federal Home Loan Bank Board

(FHLBB) granting “regulatory forbearances including

net worth compliance waivers satisfactory to California

Federal” and “an indemnity agreement for unknown ma-

terial events and other contingencies.” A5002175.2

CalFed proceeded to negotiate with the government,

offering to acquire the Southeast institutions in ex-

change for $9 million in assistance, a forbearance by the

FHLBB and the FSLIC from “any action against Cali-

fornia Federal . . . for failure to comply with reserve and

2 As in the cross-petition (U.S. Pet. 5 n.1), record ref-

erences are to the Joint Apnendix filed with the court of ap-

peals in the first appeal.

5

net worth requirements and scheduled item limitations

insofar as such noncompliance is due to the acquisition

of’ the Southeast institutions, and the amortization over

thirty to forty years of any goodwill resulting from the

acquisition, as well as the right to include the unamor-

tized goodwill in regulatory capital. A5002171-73.

The FSLIC accepted CalFed’s offer. In February

1982, the FSLIC and CalFed entered into an “Assistance

Agreement” providing that in partial exchange for as-

suming the Southeast institutions’ $305.67 million in

net liabilities, CalFed would receive a $9 million capital

credit from the FSLIC. 04-1557 Pet. App. 3a. CalFed

also received a forbearance letter permitting the excess

liabilities to be recorded as supervisory goodwill to be

includable as regulatory capital and amortized over 35

to 40 years. Ibid. The Assistance Agreement included a

provision incorporating the forbearance letter. Jd. at 4a.

b. In 1982, CalFed agreed to acquire the Brentwood

Savings and Loan Association and assume $314.63 mil-

lion in net liabilities from the failing thrift. 04-1557 Pet.

App. 4a. As in the Southeast transaction, the Brent-

wood agreement was conditioned on CalFed’s securing

from the FSLIC and the FHLBB certain regulatory for-

bearances, as well as an agreement to include the super-

visory goodwill resulting from the acquisition in calcu-

lating regulatory capital. A5002254-64; A5002329-31.

Once it had entered into a conditional agreement

with the thrift, CalFed, as it had in the Southeast trans-

action, proceeded to negotiate with the government.

CalFed proposed to acquire Brentwood in exchange for

receiving the same sort of forbearances and waivers the

government had agreed to in the Southeast transaction.

A5002332-33. In particular, CalFed requested the

FHLBB’s approval of “the amortization [over 35 years]

of any goodwill created.” A5002325; 04-1557 Pet.

App. 4a. CalFed noted that its acquisition of the failing ©

thrift would “avoid great expenditures of resources of

the FSLIC” and emphasized that “[t]he types of waivers

6

and forbearance requested are important to CalFed in

providing an adequate basis for CalFed’s management

and directors to finalize the proposed transaction.”

A5002331, 5002334.

The government concluded that “FSLIC assistance”

would be “necessary” without the CalFed merger.

A2000242, A200249. Consequently, on September 30,

1982, the FHLBB approved the Brentwood acquisition,

recommending in an internal memorandum that amorti-

zation of supervisory goodwill “be granted” and stating

that the “association should be allowed to use regulatory

accounting procedures in reports to the Board.”

A5002595. The next day, the FHLBB issued a forbear-

ance letter stipulating, per CalFed’s request, that the re-

sulting association could amortize over 35 years any

goodwill created by the acquisition and count that

goodwill for regulatory capital purposes. 04-1557 Pet.

App. 3a. The FHLBB also agreed not to enforce its net

worth requirements for a period of five years to the ex-

tent that CalFed’s failure to meet the requirements was

attributable to the assets or liabilities acquired from

Brentwood. Jbid.

Unlike CalFed’s offer in the Southeast transaction,

its Brentwood offer did not request a cash payment.

Consequently, the Brentwood transaction did not in-

volve an Assistance Agreement. 04-1557 Pet. App. 4a.

c. The next year, 1983, CalFed entered into a con-

tract with Family Savings and Loan Association to ac-

quire that Nevada thrift. As in the Southeast and

Brentwood transactions, CalFed conditioned the merger

agreement on the FHLBB’s approving the amortization

over 40 years of any goodwill created, and on the gov-

ernment’s granting certain regulatory forbearances.

A52002340-44.

Just as in the Southeast and Brentwood transactions,

CalFed then submitted its merger application to the

government, again conditioning its proposal to acquire

;

7

Family upon the regulators’ approval of the now-

familiar forbearances and waivers, including the nght to

amortize the goodwill produced by the acquisitions over

40 years and to include the unamortized goodwill in

regulatory capital. 04-1557 Pet. App. 4a. The FHLBB

characterized CalFed’s submission as an “offer submit-

ted” and a “proposal .. . acceptable to the FSLIC” that

would “present the lowest expense to the Corporation.”

A5002557. In a resolution dated January 5, 1983 and a

forbearance letter of the same date, the government ac-

cepted CalFed’s offer. A5002559-60, A5002624-26;

04-1557 Pet. App. 5a. CalFed assumed $17.74 million

in net liabilities through the acquisition. Jbid.

As in the Brentwood transaction, because CalFed

did not request a cash payment, its agreement with the

government did not involve an Assistance Agreement.

04-1557 Pet. App. 4a.

3. Relying on Winstar and black-letter contract law,

then-Chief Judge Smith of the Court of Federal Claims

; granted summary judgment in favor of CalFed on the is-

sue of liability in all three transactions. 04-1557 Pet.

: App. 103a. He began by observing that “[bJecause the

dollars at stake appear to be so large the government has

raised legal and factual arguments that have little or no

basis in law, fact or logic,” and specifically castigated

the government for its efforts “to relitigate the core Win-

star liability issues in every case.” Jd. at 60a.

it hk PR TE lh 5 We me lw oe

a. After reviewing the extensive documentary re-

cord surrounding each of the three CalFed transactions,

Judge Smith held that in each case, the government

made binding contractual promiscs regarding the use of

goodwill in order to induce CalFed into acquiring the

net liabilities of the failing thrifts. He expressly rejected

the government’s contention that an Assistance Agree-

ment is a necessary element of a Winstar-type contract:

“{Tjhe factual record[ ] ... show[s] intent to contract

with the government for specified treatment of good-

will, and documents such as correspondence, memo-

8

randa, and Bank Board resolutions confirm that intent

[T]he absence of an [Assistance Agreement]

should be irrelevant to the finding that a contract ex-

isted.” 04-1557 Pet. App. 105a. Based on the undis-

puted evidence, the court “conclude[d] that contracts ex-

isted between CalFed and the government as to the

Brentwood and Family transactions,” and that “purchase

accounting and amortization of goodwill were essential

_terms of the negotiated transactions.” Jd. at 107a & n.22.

b. The court of appeals, which reviewed the ques-

tion of contract formation de novo, affirmed Judge

Smith’s liability determinations. 04-1557 Pet. App. 6a-

10a. Citing the “contemporaneous documents and sur-

rounding circumstances that included forbearance let-

ters,” the Federal Circuit held that the government en-

tered into legally binding goodwill contracts in each of

the three CalFed transactions. Jd. at 7a. The court ex-

plained that the absence of an Assistance Agreement in

the Brentwood and Family transactions “is not disposi-

tive of the issue of contract formation between the gov-

ernment and CalFed,” and agreed with the lower court

that “the factual record” surrounding the transactions es-

tablished the existence of legally binding contracts.

Ibid.

The court of appeals’ ruling, like Judge Smith’s,

rested on a close review of the documentary evidence:

“Based on all of the contemporaneous documents in

each of the three transactions, the FHLBB and the

FSLIC were contractually bound to recognize the super-

visory goodwill and the amortization periods reflected

in the forbearance letters.” 04-1557 Pet. App. 8a. The

Federal Circuit concluded that “[iJt is clear from the

documents” that the parties manifested an intent to enter

into a legally binding contract, and further observed that

“{t]he documentary evidence for both the Brentwood

and Family transactions” was “precisely the type of evi-

dence relied upon by the Winstar courts to establish the

existence of contracts between acquiring thrifts and the

9

government.” Jd. at 10a. Consequently, “[jJust as in

Winstar ... all of the necessary elements of contract

formation are here, and the parties are bound by the

terms of that contract.” Jd. at 9a.3

ARGUMENT

After an extensive review of the contemporaneous

documentary record and the surrounding factual circum-

stances, the Court of Federal Claims and the United

States Court of Appeals for the Federal Circuit both

concluded that the government made contractual good-

will promises in exchange for CalFed’s acquisition of

Brentwood and Family. Further review of those deter-

minations, which do not conflict with any decision of

this Court or any other court, are amply supported by

the undisputed evidence in the summary judgment re-

cord, and necessarily follow from a straightforward ap-

plication of this Court’s decision in Winstar, is unwar-

ranted.

1. The government invites this Court to undertake

a third review of the documentary evidence surrounding

the Brentwood and Family transactions, and render a

decision reversing the determinations of the two lower

courts that contracts were formed in connection with

those transactions (just as a contract was concededly

formed in the substantively identical Southeast transac-

tions). The government concedes that the lower courts’

3 Interlocutory petitions were filed by both CalFed

(No. 01-592) and the government (No. 01-698); they were

denied by this Court. In a subsequent appeal, the Federal

Circuit rejected the government’s attempt to relitigate the li-

ability determinations as inconsistent with both the previous

decision in this case and this Court’s decision in Winstar.

04-1557 Pet. App. 139a-142a. The court of appeals also af-

firmed the trial court’s determinations on remedies, one of

which—replacement costs (see id. at 14a}—is the subject of

CalFed’s petition in No. 04-1557. See note 8, infra.

10

determinations rest “on undisputed facts” (U.S. Pet. 4),

but contends that there is no “evidence of a mutual in-

tent to contract” (id. at 20) and insists that “there was

nothing present in the record that would perinit . . . the

conclusion that there were contracts” (id. at 23 (empha-

sis omitted)). Indeed, the government devotes several

paves of its cross-petition to a discussion of its interpre-

tai.on of the record evidence and whether “the docu-

ments suggest[ ] an exchange of contractual commit-

ments.” Jd. at 17; see also id. at 16-19 (requesting this

Court’s review of, inter alia, various merger applica-

tions, correspondence between CalFed and Bank Board,

resolutions adopted by Bank Board, forbearance letters,

and internal CalFed documents).

The government thus asks this Court to undertake

precisely the kind of case-specific factual review that

this Court expressly declined to perform in Winstar it-

self. In Winstar, as here, the Federal Circuit had af-

firmed the trial court’s summary judgments as to con-

tract liability. See 64 F.3d 1531, 1540-44 (Fed. Cir.

1995) (en banc). While this Court granted the govern-

ment’s petition to consider (and, ultimately, reject) the

availability of certain defenses asserted by the govern-

ment, the Court left undisturbed the lower courts’ de-

terminations that the goodwill contracts at issue had

been formed: “/W/Je are in no better position than the

Federal Circuit and the Court of Federal Claims to

evaluate the documentary records of the transactions at

issue.”’ 518 U.S. at 860-61 (emphasis added).4

4 The Winstar Court’s acceptance of the lower courts’

determinations regarding contract formation was simply a

particularized application of the “two-court rule,” which

provides that when two lower courts agree on the facts, this

Court will not conduct its own independent review of the

evidentiary record absent extraordinary circumstances. See,

e.g., Exxon Co. U.S.A. v. Sofec, Inc., 517 U.S. 830, 840-41

(1996) (declining to reconsider factual conclusion of lower

11

The government has not even attempted to explain

why, in the circumstances of this case, this Court is in

any better position than the courts below to resolve the

question whether the contemporaneous evidence estab-

lishes the existence of goodwill contracts. That ss un-

doubtedly because, as in Winstar itself, the question of

contract formation in this case reflects the applicatson of

settled legal principles to undisputed facts—an imade-

quate basis for plenary review by this Court. See, e.g.,

United States v. Johnston, 268 U.S. 220, 227 (1925)

(“We do not grant a certiorari to review evidence and

discuss specific facts”).

In any event, both courts below conducted a careful

and thorough review of the evidentiary record in con-

cluding that the government and CalFed manifested a

mutual intention to contract. The courts below faith-

fully applied the teaching of Winstar in focusing on “the

realities of the transaction” and scrutinizing the contem-

poraneous documents surrounding each acquisition.

Both lower courts analyzed each element of contract

formation—offer, acceptance, and consideration—and

determined, based on the undisputed facts and a careful

comparison between the documentary evidence in this

case and the original Winstar cases, that the government

entered into binding contracts with CalFed. That the

government interprets the evidence differently can

hardly justify disturbing the considered judgment of the

two lower courts that have reviewed the documents in

question and reached identical conclusions.

courts when petitioner failed to make an “obvious and excep-

tional showing of error’) (citation omitted); Goodman v.

Lukens Steel Co., 482 U.S. 656, 665 (1987) (when “both

courts below hav[e] agreed on the facts, we are not inclined

to examine the record for ourselves absent some extraordi-

nary reason for undertaking this task”); see generally Stern et

al., Supreme Court Practice § 4.14 at 249-50 (8th ed. 2002).

12

The Federal Circuit agreed with the trial court that

“the factual record[ | .. . show[s] intent to contract with

the government for specified treatment of goodwill, and

documents such as correspondence, memoranda and

[FHLBB] resolutions confirm that intent.’” 04-1557

Pet. App. 7a (quoting id. at 105a). The court of appeals

stated that, “[b]ased on all of the contemporaneous

documents in each of the three transactions,” it had “no

doubt that both the government and Cal Fed provided

consideration for the agreements,” and that “the FHLBB

and the FSLIC were contractually bound to recognize

the supervisory goodwill and the amortization periods

reflected in the forbearance letters.” Jd. at 8a. Accord-

ingly, the court properly concluded that “[jJust as in

[Winstar], all of the necessary elements of contract for-

mation are present here, and the parties are bound by the

terms of that contract.” Jd. at 9a.

The conclusion of both lower courts that goodwill

contracts were formed is plainly correct. In each of the

three transactions, CalFed made an offer to contract

with the government, promising to acquire one or more

failing thrifts in exchange for the night to include super-

visory goodwill in calculating its regulatory capital. See

A5002171-73, A5002174-83 (Southeast offer);

A5002254-64, A5002329-31 (Brentwood offer);

A5002335-46, A5002557 (Family offer). The govern-

ment accepted each of these offers. See A5002162 (ac-

ceptance of Southeast offer by FHLBB resolution);

A5002319-24 (acceptance of Brentwood offer by

FHLBB resolution and forbearance letter); A5002548-

61 (acceptance of Family offer by FHLBB resolution

and forbearance letter). And each side provided consid-

eration: CalFed assumed the assets and liabilities of the

acquiring institutions (which converted the govern-

ment’s obligations into obligations of CalFed), whereas

the government pledged favorable regulatory treatment

(and in the case of Southeast, cash assistance).

13

2. The government renews its contention, rejected

once already by this Court in Winstar, that the lower

court confused regulatory action with contractual unde:-

takings. U.S. Pet. 15. This theme permeates the gov-

ernment’s cross-petition. In the government’s view, the

lower courts’ misreading of regulatory approvals as con-

tractual commitments “conflicts with long-standing

principles of administrative law” and “threatens ... to

replace ordinary review of agency action under the Ad-

ministrative Procedure Act with entirely different stan-

dards applicable to contractual commitments.” Jd. at 24,

28-29.

The government’s attempt to distinguish between

the FHLBB’s and FSLIC’s “contractual” undertakings

and their “regulatory” undertakings is nothing less than

an attempt to reargue Winstar, where the Court held that

“(t]he inescapable conclusion ... is that the Govern-

ment’s ‘regulatory’ and ‘nonregulatory’ capacities were

fused in the instances under consideration.” 518 U.S. at

893-94. Contrary to the government’s position (see

U.S. Reply Br. in No. 01-698 at 10), the “instances un-

der consideration” in Winstar were not limited to trans-

actions involving Assistance Agreements, but rather en-

compassed all transactions in which the United States

made goodwill promises to induce healthy thrifts to ac-

quire failing institutions in order to avoid governmental

liabilities. Indeed, the Court dismissed as “fundamen-

tally implausible” the government’s theory that good-

will promises were simply matters of regulatory gracé,

and noted that the government was protecting its own

financial interests by “convert[ing] some of its financial

insurance obligations into responsibilities of private en-

trepreneurs.” 518 U.S. at 862-63, 894. Winstar thus

makes clear that the government acted as both a regula-

tor and a contractor in making the goodwill promises,

nn aggre RT Se ~ weer eo

14

and it is liable to the injured parties for breaching those

contractual commitments.»

3. In Winstar, this Court recognized that the gov-

ernment’s goodwill promises induced numerous acquisi-

tions of failing thrifts and constituted binding contracts.

The government’s sole basis for distinguishing Winstar

is that the transactions at issue in Winstar involved As-

sistance Agreements that included integration clauses,

whereas the Brentwood and Family transactions did not.

U.S. Pet. 19-20. The absence of an Assistance Agree-

ment also serves as the government’s sole basis for dis-

tinguishing the Brentwood and Family transactions from

the Southeast transaction, which served as the model for

the subsequent Brentwood and Family transactions, and

which the government concedes resulted in a contract.

Id. at 5.

As the lower courts correctly recognized, the ab-

sence of an Assistance Agreement containing an inte-

gration clause is not a material failing where, as here,

there is a record of contemporaneous documents evi-

dencing a mutual intent to contract. In its Winstar rul-

> The Federal Circuit’s post-Winstar decisions amply

demonstrate that, contrary to the government’s unfounded

concerns, the lower courts have declined to read Winstar as

authorizing a departure from established law. See, e.g., Cie-

nega Gardens v. United States, 162 F.3d 1123, superseded

by 194 F.3d 1231 (Fed. Cir. 1998). Rather, the Federal Cir-

cuit has undertaken a case-by-case analysis, finding contract

liability on facts similar to those in Winstar and this case

(e.g., Fifth Third Bank v. United States, 402 F.3d 1221 (Fed.

Cir. 2005)), and denying liability where the facts do not es-

tablish all necessary elements of contract formation (e.g.,

D&N Bank v. United States, 331 F.3d 1374 (Fed. Cir. 2003);

Anderson v. United States, 344 F. 3d 1343 (Fed Cir. 2003)).

See U.S. Pet. 27-28 & n.6. The very cases cited by the gov-

ernment point up the fact-specific nature of the liability de-

termination.

15

ing, the Federal Circuit held that “all of the contempo-

raneous documents”—including, as here, FHLBB reso-

lutions and correspondence between the Bank Board

and acquiring institutions—established that the govern-

ment had entered into goodwill contracts. 64 F.3d at

1540-44. This Court agreed that “the realities of the

transaction” demonstrated that the contemporaneous

documents were “contractual commitments, not mere

statements of policy.” 518 U.S. at 863.

Indeed, the government concedes that a contract

was formed in the Southeast transaction (U.S. Pet. 4),

and the sole difference between that transaction and the

Brentwood and Family transactions is the existence of

an Assistance Agreement that happened to include an

integration clause. But the undisputed, contemporane-

ous evidence established that the regulators did not view

the presence or absence of an Assistance Agreement as

having any bearing on the government’s obligations.

Assistance Agreements were included only in transac-

tions that involved substantial cash payments by the

government, and were never intended to distinguish be-

tween contractual and regulatory actions. As D. James

Croft, the government’s senior regulator at the time,

who was ultimately responsible for recommending that

the FHLBB approve all three transactions at issue, has

averred: “An acquiring institution, such as CalFed,

would have had the same level of assurance as to the

treatment of goodwill in both types of transactions, and

the FHLBB certainly did not draw a distinction nor in-

tend that acquiring institutions draw any distinctions as

to the treatment of goodwill between assisted and unas-

sisted transactions.” A5002914-15; see also ibid. (ac-

cording to Dr. Croft, Assistance Agreements “had no ef-

fect on the nature or extent to which the FHLBB be-

lieved itself bound by its agreement”).©

6 The government’s belated attempt to disavow the

sworn statement of the official responsible for reviewing

16

The government’s assertion that Winstar “does not

suggest that Bank Board approvals were contractual in

nature” (U.S. Pet. 20) is refuted by Winstar itself, which

agreed with the Federal Circuit that “the realities of the

transactions favored reading those documents”—#.e.,

documents other than the Assistance Agreements, such

as FHLBB resolutions and forbearances—“as contrac-

tual commitments.” 518 U.S. at 863. Contrary to the

government’s position (U.S. Pet. 21; see also U.S. Re-

ply Br. in No. 01-698 at 9), no separate document la-

beled “contract” or “agreement” was required to “con-

tractualize” the government’s express promises. Indeed,

the government’s assertion that “a separate contract”

containing an integration clause was necessary to give

Bank Board resolutions “a [contractual] significance in

addition to their status as regulatory documents” (U.S.

Pet. 20-21) defies black-letter contract law, for “it is

well-settled law that several writings executed between

the same parties ... may be read together as forming

parts of one transaction.” Bailey v. Railroad Co., 84

U.S. 96, 108 (1873). See also Ryan v. United States,

136 U.S. 68, 83. (1890) (“a complete contract ... may

be gathered from letters, writings and telegrams be-

tween the parties”); 1 A. Corbin, Corbin on Contracts

§ 2.10 at 165, 171 (1993); I E. Farnsworth, Farnsworth

on Contracts § 3.3 at 187 (1998). Thus, contracts need

not have an integration clause to be binding (or even in-

tegrated), regardless of how many documents are in-

volved. Restatement (Second) of Contracts § 209 &

cmt. 5 (1983); 3 A. Corbin, Corbin on Contracts § 573

at 359 n.3 (1960); Steinke v. Sungard Fin. Sys., Inc., 121

F.3d 763, 771 n.5 (1st Cir. 1997).?

these transactions (see U.S. Pet. 17-18 n.3) merely points up

the revisionism that pervades the government’s Winstar-

related briefing.

7 The government’s reliance on Charter Federal Sav-

ings Bank v. OTS, 976 F.2d 203 (4th Cir. 1992), for the

17

The government’s argument ultimately amounts to a

claim that, in determining whether a contract existed,

the court below gave inadequate weight to the absence

of “documents [that] identified themselves as ‘agree-

ments,’ and [that] included standard contractual clauses,

such as integration clauses.” U.S. Pet. 19; see also id. at

22-24. But the government fails to cite even a single

authority for the proposition that either of these is a nec-

essary prerequisite to contract formation, for the simple

reason that they are not. Thus, while the government

strives to cast its argument in terms of “legal error,” its

real complaint is that the courts below drew the wrong

inferences from the undisputed facts. That factbound

issue does not warrant plenary review.

4. The government also argues that the decision be-

low is inconsistent with the principle set forth in Na-

tional Railroad Passenger Corp. v. Atchison, Topeka &

Santa Fe Railway Co., 470 U.S. 451, 466-67 (1985),

that “absent ‘an adequate expression of an actual intent’

of the State to bind itself, this Court simply will not

lightly construe that which is undoubtedly a scheme of

public regulation to be, in addition, a private contract to

which the State is a party” (citation omitted). The gov-

ernment claims the lower courts erred because the

FHLBB and the FSLIC did not provide an “adequate

expression” of the government’s intent to be bound.

US. Pet. 26.

proposition that “regulatory” documents cannot manifest the

government’s intent to form a contract (U.S. Pet. 24 n.5), is

misplaced. The Charter court acknowledged that the for-

bearance letter at issue “may constitute an express agree-

ment, [but] its terms have expired and it is now moot.” 976

F.2d at 210 n.11. Moreover, the Charter court based its de-

cision on the government’s broad reading of the “unmistak-

ability” doctrine (id. at 212), a reading that was emphatically

rejected by this Court in Winstar.

18

This argument is a transparent attempt to revive the

“unmistakability” doctrine the government unsuccess-

fully urged upon this Court in Winstar. In Winstar, the

government, as here, argued that the thrifts needed to

show that the government had made a clear and un-

equivocal statement of intent to be bound before it could

be deemed to have entered into a contract. Specifically,

the government contended that “contracts that limit the

government’s future exercises of regulatory authority

... will be recognized only rarely, and then only when

the limitation on future regulatory authority is expressed

in unmistakable terms.” 518 U.S. at 871 (quoting Bnef

for United States at 16). The plurality opinion rejected

this “rgument, explaining that “[s]Jince the facts of the

present case demonstrate that the Government may wish

to further its regulatory goals through contract, we are

unwilling to adopt any rule of construction that would

weaken the Government’s capacity to do business by

converting every contract it makes into an arena for un-

mistakability litigation.” Jd. at 886. As Justice Souter

explained for the plurality, there was “no need for an

unmistakably clear ‘second promise’ not to change the

capital requirements,” adding that “it is sufficient that

the Government undertook an obligation that it subse-

quently found itself unable to perform.” Jd. at 887.

While Justice Scalia’s concurring opinion did not reject

the applicability of the unmistakability doctrine per se,

he declared that “the doctrine has little if any independ-

ent legal force beyond what would be dictated by nor-

mal principles of contract interpretation.” Jd. at 920

(Scalia, J., concurring in judgment).

Significantly, the government does not maintain that

application of these “normal principles of contract inter-

pretation” commands a result different than that reached

by the two lower courts in this case. In fact, the gov-

ernment’s position is quite to the contrary: It insists that

it is entitled to special rules when contracting. Thus,

while conceding that this Court has dispensed with the

unmistakability doctrine as a matter of contract interpre-

19

tation, the government continues to invoke the identical

doctrine as a matter of contract formation. See U.S. Re-

ply Br. in No. 01-698 at 6 n.4. But this plea for special

treatment conflicts with this Court’s recognition that

“fw]hen the United States enters into contract relations,

its rights and duties therein are governed generally by

the law applicable to contracts between private indi-

viduals.” Mobil Oil Exploration & Producing South-

east, Inc. v. United States, 530 U.S. 604, 607 (2000)

(quoting Winstar, 518 U.S. at 895).

The courts below did not err by refusing to create a

special rule for the government. Rather, they faithfully

applied Winstar in examining the “the realities of the

transaction” (518 U.S. at 863), and concluding that the

documentary record evidenced the government’s intent

to be bound. The government has put forth no persua-

sive reason for this Court to revisit that case-specific de-

termination.®

8 Unlike the government’s conditional cross-petition,

CalFed’s petition (in No. 04-1557) presents a substantial

question regarding the appropriate remedy for the govern-

ment’s breach of Winstar-type contracts. The government

asserts, however, that if the Court decides to address the re-

medial issue presented by CalFed, “it should also consider

the antecedent liability issue raised” in the government’s

cross-petition. U.S. Pet. 15. Contrary to the government’s

suggestion, resolution of this remedial issue would in no way

be advanced by a predicate determination that the govern-

ment had in fact entered into goodwill contracts with CalFed.

The government has conceded that a contract was formed in

the Southeast transaction, and “dofes] not dispute that the

United States is liable for breach of that contract after en-

actment of FIRREA” (id. at 6); thus, the remedial issue

would remain open even if this Court were somehow to re-

verse the liability determinations as to the Brentwood and

Family transactions. Moreover, CalFed’s petition in No. 04-

1557 seeks a GVR order in light of an intervening Federal

Circuit decision on the remedial issue; as the government

20

CONCLUSION

The conditional cross-petition for a writ of certiorari

should be denied.

Respectfully submitted.

MARK A. PERRY

Counsel of Record

ANDREW S. TULUMELLO

PAUL BLANKENSTEIN

GIBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Respondent

July 20, 2005

appears to acknowledge (U.S. Pet. 3), to afford such relief

the Court need not revisit determinations on contract forma

tion in which both lower courts concurred, and that, in any

event, are correct.

No. 04-1709 AUG 1 7 206

Ju the Supreme Court of the Unites stares |

UNITED STATES OF AMERICA, PETITIONER

Ge

CALIFORNIA FEDERAL BANK, FSB

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

PAUL D. CLEMENT

Solicitor General

Counsel of Record

Department of Justice

Washington, D.C. 20580-0001

— (202) 514-2217

TABLE OF AUTHORITIES

Cases:

United States v. Winstar, 518 U.S. 839

CODE). vat hsaca vances nccdas phan cease ckasns

Mobil Oil Exploration & Producing

Southeast, Inc. v. United States, 530 U.S.

GR oo kts

Statute:

12 UBL. TIS) GSR) cae cer ai ve veces tecsas

~ Wd)

In the Supreme Court of the Anited States

No. 04-1709

UNITED STATES OF AMERICA, PETITIONER

Vv.

CALIFORNIA FEDERAL BANK, FSB

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

As explained in the government’s brief in opposition

in No. 04-1557, the Court should deny CalFed’s petition

for a writ of certiorari in this case. If the Court were to

grant CalFed’s petition, however, it should also grant

the government’s cross-petition. The cross-petition

challenges the court of appeals’ antecedent holding that,

despite the absence of any assistance agreement or

other document of a contractual nature in connection

with CalFed’s acquisition of the Brentwood and Family

thrifts, FSLIC must be held to have undertaken a con-

tractual commitment to guarantee CalFed against loss

resulting from a statutory change in regulatory policy.

The court of appeals seriously erred in failing to

recognize that, in a regulatory context in which govern-

ment approval is necessary before a private transaction

can go forward, the application for and grant of such

(1)

2

approval does not result in a contractual relationship—

at least in the absence of concrete and independent

documentation, entirely lacking here, that the parties

intended to form such a relationship. That issue is of

substantially greater significance than the question

presented in CalFed’s petition for certiorari. Unlike the

question presented in that petition, which appears to be

limited in its significance to some of the remaining 39

Winstar-related cases, the question presented in the

cross-petition could be of more general significance not

only to a number of the remaining Winstar-related

cases, but also to other cases in which regulated entities

seek to convert grants of regulatory approval for

transactions between private parties into contractual

commitments by the regulatory agency, resulting in the

potential for substantial and wholly unwarranted mone-

tary liability on the part of the United States.

1. CalFed’s primary contention (Br. in Opp. 11) is

that the court of appeals and trial court “conducted a

careful and thorough review of the evidentiary record in

concluding that the government and CalFed manifested

a mutual intent to contract,” and that review by this

Court is therefore unnecessary.

It is true that the courts below found all of the ele-

ments of contract formation—indeed, the court of ap-

peals (although not the trial court) found all of the ele-

ments of an express contract—in the transactions at

issue here. But the courts made those findings because

_ they felt free to construe an application for regulatory

approval as an “offer,” a discussion between regulator

and regulated entity of the terms of the private trans-

action and its impact on the public interest as “negotia-

tions,” and an ultimate grant of regulatory approval as

an “acceptance.” Under the same rationale, courts

3

could, contrary to settled principles of sovereign

authority and administrative law, find the facts of a

great many regulatory approvals to result in contracts

between the regulated entity and the regulatory agency.

The cross-petition does not seek further review of

any factual determination by the courts below. Indeed,

although CalFed argues that all that is at issue here is

a factual dispute, CalFed does not cite or quote any

document or any other piece of contemporaneous evi-

dence in which either CalFed or the federal regulatory

agency characterized their relationship as contractual in

nature or manifested a mutual intent to form a contract.”

The only item CalF ed cites as evidence that the parties had an

intent to form a contract is the declaration of D. James Croft, a former

Bank Board employee. See Br. in Opp. 15. That declaration however,

is not a document of FSLIC itself, and it was submitted by Dr. Croft in

a personal capacity more than 14 years after the transaction at issue.

Moreover, although CalFed quotes Dr. Croft’s declaration for the

proposition that CalFed had a certain level of “assurance” regarding

the treatment of goodwill, Dr. Croft’s declaration does not state—and

it cites no document or other evidence supporting the quite different

proposition—that FSLIC actually entered into a contract guaranteeing

to make CalF ed whole for any monetary losses resulting from a change

in regulatory policy.

In any event, as the cross-petition notes (at 17-18 n.3), Dr. Croft’s

testimony was disputed by a declaration of former General Counsel

Lawrence Hayes of the Bank Board, and it therefore could not have

supported the grant of summary judgment on liability to petitioner.

Although CalFed argues that this is merely a “belated attempt to

disavow the sworn statement” of Dr. Croft and “revisionism” by the

government, Br. in Opp. 15 n.6, the government has argued from the

beginning of this case that no contract was formed. Moreover, CalFed

does not take issue with the government’s contention that Dr. Croft’s

statement was in fact contravened by Mr. Hayes’s declaration. It is not

“revisionism,” but black-letter law, that disputed statements—even

sworn statements— cannot support a grant of summary judgment. Dr.

Croft’s statement is at most a years-after-the-fact revisiting of events

4

Rather, the cross-petition seeks review of the court of

appeals’ underlying legal determination that, even in a

situation in which regulatory approval is needed for a

private transaction, and even when official documents

and other factual circumstances of a case show nothing

beyond such regulatory approval, and even when the

parties themselves never manifested any intent in any

document to enter into a contractual (as opposed to

regulatory) relationship, a court is nonetheless free to

recharacterize the facts in contractual terms

As the cross-petition notes (Cross-Pet. 24-25), such

recharacterization is inconsistent with longstanding

principles of sovereign authority and administrative

law, which necessarily reserve to the government the

authority to modify regulatory regimes in light of the

need to serve the public interest in the face of changing

circumstances and governmental policies.

2. CalFed asserts (Br. in Opp. 14) that “the govern-

ment’s sole basis for distinguishing [United States v.

Winstar, 518 U.S. 839 (1996)] is that the transactions at

issue in Winstar involved Assistance Agreements that

included integration clauses, whereas the Brentwood

and Family transactions did not.” That, however, is no

mere technical distinction, as CalFed would have it.

That difference goes to the very heart of this case. The

Assistance Agreement, with its attendant formalities,

was the recognized vehicle employed by FSLIC when it

chose to make a contractual commitment to the ac-

quiring thrift. For example, as pointed out in the cross-

petition (at 21-22) and as required by statute (see 12

at the time of the regulatory approval. It does not suggest that the

parties manifested any contemporaneous intent to form a contract,

rather than merely to seek and grant, respectively, the necessary

regulatory approval for a private transaction.

; 5

U.S.C. 1729(f) (1982)), no guarantee against losses or

other financial assistance could be extended as part of

such an assistance agreement unless FSLIC specifically

found that the amount of the assistance was reasonably

necessary to save the cost of liquidating the failing

insured institution. FSLIC in fact made that determi-

ration in connection with its formal assistance agree-

ments for the acquisitions in Winstar and the Southeast

acquisition in this case, but it did not make any such de-

termination with respect to the Brentwood and Family

acquisitions in this case. See Cross-Pet. 21-22. The

absence of any such determination, which is a statutorily

prescribed precondition to the extending of guarantees

or other contractual assistance by FSLIC, powerfully

confirms what is in any event evident from the absence

of assistance agreements covering the Brentwood and

Family acquisitions: there was simply no contract

between FSLIC and CalF ed as to those acquisitions.

We may assume for present purposes, however, that,

although the presence of an assistance agreement may

make manifest the intent of the parties to enter into a

contractual—as opposed to a regulatory—transaction,

the absence of a formal assistance agreement is not

decisive. For even on that assumption, what is decisive

in this case is the absence of any indication, in the form

of any contemporaneous document or statement, that

the parties intended anything in addition to seeking, and

granting, t’ 2 legally necessary, see Cross-Pet. 3-4, regu-

latory approval of a private transaction.

CalFed contends (Br. in Opp. 19) that our cross-

petition is a “plea for special treatment” that conflicts

with the principle that “[wJhen the United States enters

into contract relations, its rights and duties therein are

governed generally by the law applicable to contracts

6

between private individuals.” Mobil Oil Exploration &

_ Producing Southeast, Inc. v. United States, 580 U.S.

604,. 607 (2000) (quoting Winstar, 518 U.S. at. 895

(plurality opinion)). The question in this case, however,

is precisely whether the government has “enter[ed] into

contract relations” with a private party. Private parties

do not find themselves in a posture analogous to that of

regulated entity and regulatory agency. For that

reason, the legal “rights and duties” that attach to such

a regulatory—as opposed to contractual—relationship

are indeed inapplicable to dealings between private

parties. That is merely a recognition of well-settled

principles of sovereign authority and administrative law,

and it does not conflict in any way with the recognition

that, when the government does enter into a contract, its

rights and duties are generally the same as those of

private parties. .

* * ok * ae

For the foregoing reasons, and those stated in the

cross-petition, the petition for a writ of certiorari should

be denied. If the Court decides to grant the petition,

however, the government’s cross-petition for a writ of

certiorari should also be granted.

Respectfully submitted.

PAUL D.CLEMENT

Solicitor General

AUGUST 2005