Glendale Federal Bank, Fsb v. United States

Facts

(This first paragraph of facts was put here for reference for the general common sense comments in the Legal Analysis. The actual facts that you need to know are in the second paragraph). Interest rates soared during the late 1970s and early 1980s, causing the savings and loan industry serious economic problems. At that time, thrifts' liabilities were principally short-term deposits, while their assets were primarily long-term fixed-rate mortgages. When interest rates soared, the value of the long-term fixed-rate assets plummeted, and the thrifts had to pay higher rates on their liabilities. As a result, many thrifts experienced difficulty remaining solvent, and many became insolvent. The Government's insurance fund lacked sufficient funds to liquidate even a small percentage of the thrifts that became insolvent. Consequently, the FSLIC and the FHLBB began to consider proposals for outside investors and thrifts to acquire other thrifts through mergers to prevent an exhaustion of the insurance fund. Mergers were attractive to solvent thrifts because they enabled the thrifts to acquire previously prohibited interstate branches, to acquire high-quality assets that suffered only from the current interest rate squeeze, and to transform an insolvent thrift's net liabilities into an intangible asset called 'supervisory goodwill.' 'Supervisory goodwill' was the accounting term for the difference between the market value of the acquired entity's liabilities and the market value of the acquired entity's assets. This difference was conceived of as part of the cost to the acquiring thrift. The accounting device was important to the acquiring thrift because the FHLBB allowed thrifts to include supervisory goodwill in the calculation of its regulatory capital requirements. Further, regulators in some instances would permit the goodwill to be amortized over a period of forty years. 

In 1981, the Government (D) and Glendale (P), an S&L, entered into negotiations concerning P's possible acquisition of First Federal Savings and Loan Association of Broward County, Florida ('Broward'). FHLBB approved P's acquisition of Broward in a voluntary merger, and D and P entered into a contract memorializing the arrangement. The market value of the liabilities of Broward exceeded the market value of its assets by $734 million. Pursuant to its contract with D, P was permitted to book Broward's resulting market value deficit or net excess liabilities (negative net worth) as supervisory goodwill, an asset for purposes of meeting regulatory capital requirements. This supervisory goodwill was to be amortized over forty years, or until 2021. Almost as soon as the merger was finished interest rates declined, and the asset squeeze experienced by the industry eased. In August of 1989, Congress enacted the Financial Institutions Recovery, Reform and Enforcement Act ('FIRREA'). FIRREA, among other things, greatly restricted the use of goodwill and other intangible assets in the calculation of regulatory capital. The new laws repudiated D’s obligation to recognize P's goodwill as an asset for purposes of regulatory capital over the contract's forty-year amortization period by requiring P to deduct goodwill in determining its regulatory capital on a greatly accelerated schedule. FIRREA and its implementing regulations also changed the minimum requirements for capital. P could meet the new capital requirement by either: 1) increasing its capital-to-assets ratio through retained earnings; or 2) increasing its capital-to-assets ratio by reducing the size of the institution or by raising capital. When FIRREA was enacted, P carried $536 million on its books in supervisory goodwill from its acquisition of Broward. In response to the phase-out of goodwill, P reduced its size from $25.6 billion in total assets to $14.4 billion and, in 1990, ceased most high credit-risk lending. Although shrinking reduced its losses, Glendale failed the risk-based capital requirement in March of 1992 and the core capital requirement in December 1992. P raised $451 million from new investors. P incurred $24.2 million in transaction costs in this recapitalization. In 1994, P sold its Florida Division, including Broward. In 1995, Glendale sold University Savings, its Washington subsidiary. In 1998, Glendale merged with California Federal Bank. P sued D claiming the enactment of FIRREA breached an agreement by D to give P favorable regulatory treatment in connection with its merger with Broward. The trial court: 1) denied D’s motion for summary judgment which raised a special plea in fraud, based on 28 U.S.C. § 2514 (1994); 2) denied P's claim for expectancy damages because it was speculative and not proven to a reasonable certainty; 3) awarded P $509,921,000 in restitution damages, which was the amount by which Broward's liabilities exceeded its assets on the date of the merger, less the value of the benefits P received from the contract; 4) awarded P $18,400,000 in restitution damages, which was the amount that P paid to the Government under the interest shifting provision of the contract; 5) denied P's restitution claim for interest earned on the assets of the FSLIC fund in the amount of $1.11 billion; 6) found that P was entitled to $380,787,000 in non-overlapping (post-breach) reliance damages; and 7) denied P's claim for reliance damages which overlapped with its restitution award. D appealed the trial court's denial of its summary judgment motion based on a special plea in fraud, the trial court's award of restitution damages, and its award of non-overlapping reliance damages. P cross-appealed the trial court's denial of reliance damages which overlap with the restitution award; should this Court reverse the trial court's award of restitution damages, P claims the benefit of the denied damages. P has not appealed the trial court's denial of P's claim for expectancy damages and restitution damages for the interest earned on the assets of the FSLIC fund in the amount of $1.11 billion. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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