Prologue — Martin v. United States (No. 05-1221)

—No-5-—0 51 2¢ 1H. 21 200

OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

PRESTON MARTIN, ROY DOUMANI, BEVERLY W. THRALL

(Successor to the Claims of Larry B. Thrall), ARBUR, INC..,

WILLIAM E, SIMON, JR., J. PETER SIMON, AND GEORGE J.

GILLESPIE, Ill (Executors of the Estate of William E.

Simon, Sr.),

Petitioners,

¥.

UNITED STATES, et ai.,

Respondents,

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

PETITION FOR A WRIT OF CERTIORARI.

DAVID B. BERGMAN RICHARD G. TARANTO

MELVIN C. GARBOW (Counsel of Record)

HOWARD N. CAYNE H. BARTOW FARR III

MICHAEL A. JOHNSON FARR & TARANTO

ARNOLD & PORTER, LLP 1220 19th Street, NW, Suite.800

555 Twelfth Street, NW Washington, DC 20036

Washington, DC 20004-1202 (202) 775-0184

(202) 942-5000

DAVID S. COHEN

MILBANK, TWEED, HADLEY,

& MCCLOY

1850 K Street, NW, Suite 1100

Washington, DC 20006

(202) 835-7517

WiLSON-EPES PRINTING Co., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001

a

2

.

QUESTIONS PRESENTED

1. Whether recovery for losses caused by breach of a

Government contract, even when the losses are foreseeable as

a factual matter, is barred as a legal matter unless the contract

itself specifically obliged the harmed party to incur those

losses upon breach or the loss is of property the contract

obliged the harmed party to acquire.

2. Whether Government resolutions that approve a finan-

cial transaction with the Government, address particular per-

sons who made the offer to the Government, and impose

obligations on such persons as a condition of approval create

a contract enforceable by those persons.

(1)

ii

PARTIES TO THE PROCEEDING AND

RULE 29.6 STATEMENT

Besides the named petitioners and respondent, two cor-

porations were parties to the proceedings below: Southern

California Federal Savings Loan Association (“SoCal”) and

SoCal Holdings, Inc. (“SCH”), which in 1997 changed their

names to People’s Bank of California and PBOC Holdings,

Inc., respectively. In 2001, the People’s Bank of California

merged into California National Bank, which became the

successor in interest to SoCal. The foregoing institutions,

whose rights are not at issue in this petition, have settled their

claims in this case.

Of the named petitioners, only one is a corporation,

namely, Arbur, Inc. It is a closely held Simon-family corpo-

ration with no parent corporations and no publicly held com-

pany holding 10% or more of its stock. See S. Ct. Rule 29.6.

TABLE OF CONTENTS

CORFEe EERE Wee CUR ESINSE ES LIED wasiccsnessvevicanssesisoccsnsseciionnores

PARTIES TO THE PROCEEDING AND RULE 29.6

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C. The Court of Appeals Decision ................:000

REASONS FOR GRANTING THE PETITION...........

1. THE FEDERAL CIRCUIT’S RESTRICTION

OF CONTRACT REMEDIES TO DENY

RECOVERY FOR FOGRESEEABLE LOSS

CAUSED BY BREACH SHOULD BE

(po + Ras eb ets aac ae

A. The Decision Is Inconsistent With The

Governing Law Of Contract Remedies .......

B. The Decision Creates Lower Court Doc-

I Te vaniiancerninie ated cee caicounss

C. It Is Important To Correct This Decision

By The Appellate Court With Special

Authority Over Government Contracts .......

ll. THE FEDERAL CIRCUIT’S REJECTION

OF CONTRACT RIGHTS BASED ON THE

BANK BOARD’S APPROVAL RESOLU-

TIONS SHOULD BE REVIEWED ..................

(111)

25

iV

TABLE OF CONTENTS—Continued

Page

CIF RNY -cenpensietintiordeininiitnsainrcinuennetneaasoaianit 30

APPENDICES

APPENDIX A: Federal Circuit Opinion .................. la

APPENDIX B: Court of Federal_Claims Damages

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APPENDIX C: Court of Federal Claims Liability

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APPENDIX D: Federal Circuit Rehearing Denial... 176a

APPENDIX E: Regulatory Capital Maintenance

PIII 5 cictaciiassavitvinangunsaibcaaicaakion weedeat 178a

APPENDIX F: FHLBB Resolutions and Forbear-

OT TE in ae ee 197a

\ a

Vv

TABLE OF AUTHORITIES

CASES Pages

Bluebonnet Savings Bank, F.S.B. vy. United

States, 266 F.3d 1348 (Fed. Cir. 2001).......... 10, 22-23

Cain v. United States, 350 F.3d 1309 (Fed. Cir.

PRD actinsucstniekibiaisicisasanalsesiadelapipacancubantadbabtacessis 29

California Fed. Bank, FSB vy. United States, 245

Pe TG CEOs AR. BED asrcenscccesissvehinpaneescenes 29

Data Enters. of the Northwest v. GSA, 2004 WL

SOURS CIS BCA PHO, ESGET) ccsccscscsssesesssscceseces 24

Fidelity & Deposit Co. v. Krebs Engineers, 859

cde ee CH as 8 OED sissintiseanbndacnceninasnasata 20

Home Savings of America v. United States, 399

Be Te CER. SCRE, BUDD snticcrcsndsericavsaresnecs’ 24, 28-29

Indiana Michigan Power Co. v. United States,

REE Tae 1IP OG. CU, DARDS) sesckcessisersinvensnins 24

Landmark Land Co. v. FDIC, 256 F.3d 1365

FRR sts EA FP sahacsdnsvocsiisansanhibaangceaisationantunnnsess 24

La Van v. United States, 382 F.3d 1340 (Fed. Cir.

MRED isius canicehaounn cong iad penidicidinadencaseasanted santhbe 10, 23-24, 29

Lynch v. United States, 292 U.S. 571 (1934) ....... 18

Massie v. United States, 166 F.3d 1184 (Fed. Cir.

FS aT Asx iesduidnnins sg deeRansobaapenieadeiesaeriviaiaceatanieaaaaains 29

Mobil Oil Exploration & Producing Southeast,

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

Northern Helex Co. v. United States, 524 F.2d

FE GAGE, A Ee chia ibekbisicakehihads tmlahedeihciekanns 24

Perry v. United States, 294 U.S. 330 (1935)......... 18

Prudential Ins. Co. of America v. United States,

ead: PR: C29 CR, Cir. FRBB) vo sscncanssssossnonsssann 24

Strougo v. Bassini, 282 F.3d 162 (2d Cir. 2002)... 10

Trauma Serv. Group v. United States, 104 F. ctl

Pa ee oso OPE <instavdicosncconicachvbsntaiin Ghaahins 29

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

Pa cisaicscascsisiolensi ahead ches teins ame cbaiuaodiekes passim

vi

TABLE OF AUTHORITIES

STATUTES : Pages

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OTHER AUTHORITIES

Restatement (Second) of Contracts (1979)

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PETITION FOR A WRIT OF CERTIORARI

The parties referred to below as the “Individual Plaintiffs”

petition this Court for a writ of certiorari to review the judg-

ment of the United States Court of Appeals for the Federal

Circuit in this case.

OPINIONS BELOW

The Federal Circuit’s opinion (App. 1a-30a) is reported at

422 F.3d 1319. The damages opinion of the Court of Federal

Claims (App. 3la-124a) is reported at 57 Fed. Cl. 598. The

liability opinion of the Court of Federal Claims (App. 125a-

75a) is reported at 52 Fed. Cl. 531.

JURISDICTION

The corrected judgment of the court of appeals was entered

on August 30, 2005. App. la. A timely petition for panel

and en banc rehearing was denied on December 27, 2005.

App. 176a-77a. This Court has jurisdiction under 28 U.S.C.

§ 1254(1).

STATEMENT

This case is one of roughly 120 cases that have arisen out

of conduct addressed in United States v. Winstar Corp., 518

U.S. 839 (1996), which affirmed breach-of-contract judg-

ments against the United States. Petitioners were investors

who successfully rescued a savings and loan (thrift) in 1987,

saving the Government, as insurer, from the consequences of

the thrift’s collapse. They did so under a Government

contract that guaranteed permission to count certain capital

toward satisfying regulatory requirements. When the Govern-

ment breached the contract by withdrawing that permission,

the thrift had to raise new capital, and part of the price for that

capital was the obliteration of petitioners’ 1987 equity stake,

so that the contributors of the new capital would benefit if the

thrift’s fortunes turned around, which they did.

2

This petition seeks review of the Federal Circuit’s holding

that, allhough the Government had a contract with petitioners

and breached it, petitioners could not recover for the loss of

their 1987 equity stake as a matter of law. The Federal Cir-

cuit denied petitioners their due by adopting an unprece-

dented and unjustified narrowing of the fundamental contract-

damages principle that an injured party should be placed in

the position it would have occupied had the contract been

performed rather than breached. The court also strayed from

familiar contract law on formation of contracts, ignoring the

full scope of petitioners’ contract rights. This Court should

review the decision in this case, as it reviewed the Federal

Cireuit’s comparable departure from ordinary commercial

contract law in Mobil Oil Exploration & Producing South-

east, Inc. v. United States, 530 U.S. 604 (2000), in order to

enforce and re-establish the bedrock rights of parties to Gov-

ernment contracts, as recognized in this very_context by

Winstar.

A. Background

1. In 1985, an insolvent thrift in California, insured by the

Federal Savings and Loan Insurance Corporation (FSLIC),

was placed in FSLIC’s receivership by FSLIC’s governing

board, the Federal Home Loan Bank Board (FHLBB, or Bank

Board). To avoid liquidating the thrift and incurring the high

insurance costs, the FHLBB spent well over a year seeking

buyers of the thrift. In late 1986, petitioners (or their prede-

cessors)—a group called the “Individual Plaintiffs” below,

which included Preston Martin, former Federal Reserve Vice-

Chairman and former FHLBB Chairman, and William E.

Simon, Sr., former Secretary of the Treasury—responded

with a bid, which the FHLBB approved. App. 4a-Sa, 33a-

34a, 126a-274.' The deal was one of many “‘supervisory

' One of the petitioners, Arbur, Inc., is a Simon-family-owned corpora-

tion treated as one of the “Individual Piaintiffs.” Arbur and Secretary

3

mergers’” in which “the Bank Board chose to avoid the

insurance liability by encouraging healthy thrifts and outside

investors to take over ailing institutions.” Winstar, 518 U.S.

at 847 (principal opinion). -

The transaction in this case, with its multiple related parts,

was consummated in April 1987. On the same day, the

FHLBB approved the conversion of the old (mutual) thrift

into a common-stock thrift, Southern California Federal Sav-

ings and Loan Association (SoCal), and the acquisition of all

its stock by a holding company, SoCal Holdings, Inc. (SCH),

which petitioners had just formed for the sole purpose of

buying SoCal. App. 5a, 127a, 197a, 202a-04a (FHLBB Res.

~ 87-511).? As expressed in the FHLBB resolutions and “key”

agreement, App. 41a, 133a, petitioners themselves, not only

SoCal and SCH, had a bargain with the Government in taking

on this role of saving the thrift from liquidation at the

Government’s expense.

The Government's principal commitment, as far as this

case (like other Winstar cases) is concerned, was the promise

that the thrift could account in a certain way for “regulatory

Simon’s estate are the “Simon Plaintiffs.” and Roy Doumani, Preston

Martin, and Beverly W. Thrall (successor to her late husband, original in-

vestor Larry B. Thrall) are the “DMT Plaintiffs.” Together, the two groups

constitute the Individual Plaintiffs—as distinguished from the thrift and its

holding company, the “Institutional Plaintiffs.” See App. 2a, 127a. For

simplicity, this petition hereafter refers to “petitioners” to include their

predecessors (Secretary Simon, in the case of-his estate; Larry B. Thrall,

in the case of Beverly W. Thrall).

> The FHLBB initially called the new thrift “New Association,” using

“SoCal” for the old thrift. Because the thrift’s name remained essentially

unchanged, however, throughout this litigation “SoCal” has been used to

name the new thrift, and this petition follows suit.

SCH was formed two months earlier—after the FHLBB had accepted

petitioners’ bid in principle—for the sole purpose of acquiring SoCal, as

stated in its application to the FHLBB (JX 1381 p. 2) and the main

FHLBB approval resolution (App. 197a). App. 130a.

4

capital,” the amount of capital that the thrift is legally re-

quired to have in its possession, App. Sa. In this case, the

Government’s approval resolutions themselves promised to

allow the counting of almost $300 million in “capital credits”

($217.5 million) and “supervisory goodwill” ($79 million) as

regulatory capital, without which the thrift would have been

severely undercapitalized. App. 132a, 133a, 210a, 217a;

App. 224a-26a (“Forbearance Letter” to petitioner Martin,

chairman and CEO of SCH); see Winstar, 518 U.S. at 847-56

(principal opinion). In return, the Government, relying on the

personal credentials of petitioners, secured various personal

promises from petitioners as part of the bargain, again re-

flected in the approval resolutions. App. 5a; App. 42a (“The

experience and reputation of Secretary Simon’s investment

group was considered an important intangible asset in the

rejuvenation of the thrift.”’).

The contract between the Government and petitioners had

two components that are at issue here. One is a Regulatory

Capital Maintenance Agreement (RCMA), App. 178a-96a,

which the Government entered into with petitioners, as well

as with SoCal and SCH, as signatory parties. App. 5a, 132a;

see App. 19a (“the Individual Plaintiffs . . . were in con-

tractual privity with the government under the RCMA”). The

other is the FHLBB approval resolutions themselves. The

RCMA, the FHLBB approval, and SCH’s purchase of SoCal

all occurred on April 30, 1987. App. 180a (“Stock Purchase

Agreement of even date herewith”). The overall transaction

thus had several simultaneous, interdependent parts.”

* The Government also entered into an Assistance Agreement that was

signed only by SoCal, SCH, and FSLIC, under which the FHLBB fur-

nished certain financial assistance to the new thrift. See App. Sa. This

petition does not rely on that agreement.

5

The RCMA shows the Government’s reliance on petition-

ers personally and the key regulatory-capital guarantee:

e “First, Recital A indicates that ‘the [Individual Plain-

tiffs] collectively own 97.5 percent of the outstanding

voting securities of [SCH] and control [SCH].’” App.

19a, quoting App. 180a.

* “Second, Recital G and § | include the government’s

promise that SCH and SoCal will be able to account

for $217.5 million in capital credits as part of its

regulatory capital.” App. 19a. (The separate good-

will guarantee, set out in the main FHLBB approval

resolution, was not mentioned in the RCMA.) Section

1 also requires the thrift and its holding company to

meet prescribed regulatory-capital levels. See App.

Sa, 181a-83a.

¢ “Third, the RCMA states that ‘so long as [SCH] shall

be obligated pursuant to § 1, the [Individual Plain-

tiffs], severally in proportion to their initial ownership

of the common stock of [SCH] . . ., hereby guarantee

the performance of [SCH] and [SoCal] under § 1,’” up

to an aggregate limit of $5 million. App. 19a; see

Arp. 5a-6a, 41a, 132a, 183a-84a.

¢ Fourth, “the RCMA requires that the Individual Plain-

tiffs, or their successors who have assumed their

shares of the guarantee and have not been objected to

by the FSLIC, shall ‘collectively own not less than a

majority of the outstanding voting power of [SCH].”

App. 19a-20a; see App. 184a-85a. The RCMA also

details the remedy for violation of that promise: peti-

tioners forfeit their stock to the Government, which

repossesses the thrift and its holding company. See

App. 186a-89a.

¢ Finally, the RCMA specifies that the just-described

provision for forfeiture and repossession applies also

if SoCal’s regulatory capital falls below 3% of its

Total Liabilities. App. 187a-89a; see App. 42a, 132a;