EXHIBIT 99.2
No. 03-1410
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IN THE
SUPREME COURT OF THE UNITED STATES
---------------
BANK UNITED, BANK UNITED CORP.,
AND HYPERION PARTNERS L.P.,
PETITIONERS,
v.
UNITED STATES,
Respondent.
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ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
---------------
REPLY BRIEF FOR PETITIONERS
---------------
XXXXXX X. XXXXXXX
COUNSEL OF RECORD
XXXX X. XXXXX
XXXXXXX X. XXXXX
XXXXXX, XXXX & XXXXXXXX LLP
0000 Xxxxxxxxxxx Xxxxxx, X.X.
Xxxxxxxxxx, X.X. 00000-0000
(000) 000-0000
COUNSEL FOR PETITIONERS
================================================================================
i
PARTIES TO THE PROCEEDING
AND RULE 29.6 STATEMENT
The corporate disclosure statement included in the petition for a writ
of certiorari remains accurate.
ii
TABLE OF CONTENTS
PAGE
PARTIES TO THE PROCEEDING AND RULE 29.6 STATEMENT..............................i
TABLE OF AUTHORITIES.........................................................iii
REPLY BRIEF FOR PETITIONERS....................................................1
I. Contrary To WINSTAR, The Federal Circuit Held That Regulatory Capital
Has No Independent Value...............................................1
A. Awarding No Damages For The $35 Million Cash Infusion Is Contrary
To WINSTAR........................................................2
B. Awarding No Damages For The Preferred Stock Issuance Is Contrary
To WINSTAR........................................................4
II. The Federal Circuit's Misunderstanding Of Contractual Capital Is A
Recurring And Important Issue..........................................5
CONCLUSION.....................................................................6
iii
TABLE OF AUTHORITIES
PAGE(S)
CASES
BLUEBONNET SAV. BANK v. UNITED STATES,
266 F.3d 1348 (Fed. Cir. 2001).............................................5
CALIFORNIA FED. BANK v. XXXXXX XXXXXX,
000 F.3d 1342 (Fed. Cir. 2001)...................... ......................4
FAR WEST FED. BANK v. OTS,
119 F.3d 1358 (9th Cir. 1994)..............................................2
LASALLE TALMAN BANK v. UNITED STATES, 317 F.3D 1363
(Fed. Cir. 2003)...........................................................5
MOBIL OIL EXPLORATION & PRODUCING SOUTHEAST, INC. V. XXXXXX XXXXXX,
000 X.X. 000 (2000)...............................................1, 4, 5, 6
UNITED STATES v. WINSTAR CORP.,
000 X.X. 000 (1996)...................................................passim
OTHER AUTHORITIES
RESTATEMENT (SECOND) OF CONTRACTSSS.347.............. .........................4
REPLY BRIEF FOR PETITIONERS
---------------
The government does not dispute that the contractual capital at issue
functioned like a license that allowed petitioners'thrift to hold a certain
amount of assets with a limited amount of cash capital. SEE Opp. 14-15. Nor does
the government dispute that FIRREA, by breaching the contractual capital
promises, effectively revoked that license. IBID. And the government does not
dispute that petitioners invested $35 million in additional cash capital after
the breach, which they were thereby unable to invest elsewhere, or that they
paid approximately $70 million in dividends to new investors in what the trial
court found to be a mitigating transaction. SEE ID. at 6-7; Pet. App. 59a-60a.
In all, the government's breach left petitioners out-of-pocket more than $160
million--a sum they would not have been forced to expend had the government kept
its contractual capital promises. Pet. 7-8. In these circumstances, the
government's assertion that "the economic consequences" of the government's
adjudicated breach amounted to no more than $5 million (Opp. 15) is simply
untenable.
In attempting to defend the decision below, the government, like the
Federal Circuit, persistently refuses to address the foundation for this Court's
decision in UNITED STATES V. WINSTAR CORP., 518 U.S. 839 (1996). By denying
petitioners any meaningful mitigation damages, the Federal Circuit necessarily
held that the contractual capital that petitioners were forced to "replace" had
no independent value and was meaningless. This is the premise behind the Federal
Circuit's decision that petitioners could not recover the $35 million in cash
infused into the bank, the return those funds would have earned absent the
breach, or the dividends paid to support the preferred stock issuance. The basis
for each of these determinations--and the government's attempted defense of them
in this Court--is that these mitigation transactions replaced nothing. That
position cannot be squared with WINSTAR.
I. CONTRARY TO WINSTAR, THE FEDERAL CIRCUIT HELD THAT REGULATORY CAPITAL
HAS NO INDEPENDENT VALUE
According to the government, WINSTAR was a ruling only on the question
of liability under regulatory capital contracts and, therefore, has no bearing
on the calculation of damages for breach of those contracts. Opp. 13-14. But the
Court's "liability" determination involved a legal interpretation of the
contract at issue to decide whether the regulatory forbearances were enforceable
promises. That is also the inquiry at the foundation of the damages
determination. The Court has since explained that the principles on which
WINSTAR was decided require the Federal Circuit also to apply the common law of
contract remedies in government contract actions. MOBIL OIL EXPLORATION &
PRODUCING SOUTHEAST, INC. V. XXXXXX XXXXXX, 000 X.X. 000 (2000). It is thus no
answer to say, as the government does (Opp. 13), that "WINSTAR resolved only
liability issues." Rather, a damages calculation necessarily involves a
determination of the benefit promised.
And the benefit promised is precisely what the Court determined in
WINSTAR. The Court recognized that the government was facing a substantial
crisis: hundreds of failed thrifts with billions of dollars in net liabilities
were suddenly the government's responsibility. 518 U.S. at 846-47. Lacking the
cash necessary to liquidate the thrifts directly, the government arranged
2
supervisory mergers of the failed thrifts with healthy banks or private
investors. ID. at 847. The government also lacked the cash necessary to make
these failed thrifts attractive to potential acquirers. The government,
therefore, provided a "cash substitute"--with a value comparable to the enormous
net liabilities of these failed thrifts--in the form of regulatory forbearances.
ID. at 850; SEE ALSO ID. at 924 (Xxxxxx, J., concurring).
As this Court explained in WINSTAR, these contractual capital promises
"inflated the institution's reserves, thereby allowing the thrift to leverage
more loans." 518 U.S. at 851. This is the business of banking: capturing the
spread between the cost of borrowing and the higher yield on assets purchased
with those borrowed funds. The more regulatory capital a bank had, the more
assets it could leverage, and the more the bank would be worth. When the breach
eliminated the promised regulatory capital, it eliminated a substantial part of
the bank's value.
A. AWARDING NO DAMAGES FOR THE $35 MILLION CASH INFUSION IS
CONTRARY TO WINSTAR
After the breach, petitioners infused $35 million in cash into the
bank. In the absence of the breach, they would have retained this cash and the
ability to invest it elsewhere. Yet the Federal Circuit awarded no damages for
the $35 million cash infusion that indisputably constituted a mitigating
transaction following the breach. This is a clear departure from the common law
of contract remedies and is explicable only by the Federal Circuit's erroneous
view that contractual capital has no value.
1. As explained in the petition (at 16-20), the court of appeals set
forth three reasons for denying petitioners any return of their $35 million
capital infusion: (a) the infusion was tangible, whereas the contractual capital
was intangible; (b) the infusion could be used to retire liabilities; and (c)
petitioners still owned the infusion, albeit in the bank. SEE Pet. App. 10a-12a.
Tellingly, the government does not even attempt to defend the Federal Circuit's
first two rationales. SEE Opp. 18 nn.5-6. That is because they are obviously
wrong. And so, too, is the third.
The government claims that the $35 million was nothing more than an
investment in the bank, and that "a plaintiff would not ordinarily be harmed by
investing in its own business." Opp. 16. But whether a harm occurred turns on
the nature of the promise breached. Even if the government's characterization of
the transaction were correct, before the breach petitioners had $35 million AND
THE REGULATORY CAPITAL PROVIDED BY THE CONTRACT; after the breach, petitioners
had only the $35 million. The government's argument that "[a] damages award to
petitioners based on the investments whose value they retain would put
petitioners in a substantially better position than they would have occupied
absent the breach" (Opp. 16-17) is exactly backwards. The Federal Circuit's
failure to make such an award puts the GOVERNMENT in a substantially better
position, because it forces petitioners to pay for the government's breach and
to make exactly the choice between dedicating cash to the bank and shrinking it
that the contract entitled petitioners to avoid.1
--------------------------------------
1 Contrary to the government's argument (Opp. 17-18), the Ninth
Circuit has held that the retention of such investments in the bank is not
enough to make its owners whole. FAR WEST FED. BANK V. OTS, 119 F.3d 1358, 1366
(9th Cir. 1994). At the time the plaintiff in FAR WEST asserted its claim, the
bank had not been seized by the
3
In an ultimately futile attempt to deny the undeniable proposition
that, in the absence of the government's breach, petitioners would have had BOTH
their $35 million and a more valuable bank (due to the contractual capital), the
government advances an argument that was not accepted by either of the courts
below. The government argues that the no-breach bank "would have been worth
less, because it would have had $35 million less in tangible equity capital."
Opp. 18. But unless the government can show that the $35 million infusion was an
unreasonable effort to mitigate--an issue on which the government bore a burden
of proof that it made no effort to carry--then the value of the no-breach bank
is irrelevant to calculating the costs of mitigation.2 In any event, had the
government not breached, the bank would have had the contractual capital, and
petitioners could have ADDITIONALLY infused the cash capital to support more
assets and higher income yields and to grow the bank even further.3
2. The Federal Circuit's fundamental misunderstanding of regulatory
capital is even more apparent in its refusal to award the returns that would
have been earned had the $35 million been deployed elsewhere. The government
persists in its argument that petitioners were still able to earn a return from
the $35 million infused into the bank and, therefore, are not entitled to
recovery. Opp. 19. But this return would have been earned by deploying the
contractual capital alone. Absent the breach, petitioners would have had the
return from the contractual capital in the bank in addition to the return on the
$35 million in cash capital invested elsewhere. To deny recovery of the return
on the $35 million is to hold that the contractual capital would have yielded no
return; but that is also to contradict this Court's decision in WINSTAR. SEE,
E.G., 518 U.S. at 851.
Recognizing this insoluble tension with WINSTAR, the government
asserts that there was no evidence that petitioners would have invested the $35
million elsewhere had they not infused the funds into the bank. Xxx. 00-00, 00.
Xx rational investor in comparable circumstances would leave the $35 million
idle if he had not infused it into the bank. Not surprisingly, petitioners
introduced evidence that, had the $35 million remained at their disposal, they
would have earned
--------------------------------------
government, and no such seizure was the basis of the Ninth Circuit's holding.
Instead, plaintiff sought to rescind the contract and to take its investment
with it. ID. at 1363. That plaintiff still had the bank and the invested funds
was not sufficient relief, according to the Ninth Circuit. ID. at 1366.
2 Alternatively, the government seeks to establish a measure of value
that has no support in law or finance. Having a smaller amount of "tangible
equity capital" does not necessarily make the bank worth less. Opp. 18. The
marketplace undoubtedly would have incorporated the profits that the regulatory
capital would generate into its valuation of the bank. Indeed, over time, the
regulatory capital would have generated the "tangible equity capital"--in the
form of profits--that the government finds so important.
3 In this regard, the government never meaningfully contests that
whether regulatory capital was cash or contractual did not materially affect
"borrowing costs." Opp. 18 n.6; 19. As this Court recognized, regulatory capital
is leveraged many times over to run the bank's business, I.E., capturing the
spread between borrowing costs and asset yields. WINSTAR, 518 U.S. at 851.
Because of these high multiples, holding the regulatory capital in the form of
cash, instead of forbearances, has only the most marginal impact on borrowing
costs. The government's failure to respond on this point is an implicit
concession of the error of the Federal Circuit's reasoning. SEE Pet. App. 11a.
4
at least $57 million on it. SEE A5000016. The government presented no
competent evidence to the contrary.4
The government also mischaracterizes the RESTATEMENT. According to the
government, the RESTATEMENT does not apply here because it is restricted to
transactions that are "not a substitute for the broken contract." Opp. 20. The
RESTATEMENT'S principle, however, is that the non-breaching party is entitled to
recovery that would restore the benefit of two transactions if, in the event
"the contract had not been broken, [it] could have had the benefit of both."
RESTATEMENT (SECOND) OF CONTRACTS ss. 347, cmt. f. Had the contract not been
broken here, petitioners would have earned profits from the contractual capital
and the $35 million invested elsewhere. Because infusing the $35 million into
the bank replaced the contractual capital, the RESTATEMENT'S principle would
entitle petitioners to damages in the amount of what they would have earned on
the $35 million invested elsewhere in the absence of the breach.5 Instead, the
Federal Circuit ignored the RESTATEMENT in violation of MOBIL OIL and
categorically refused to award that return.
B. AWARDING NO DAMAGES FOR THE PREFERRED STOCK ISSUANCE IS
CONTRARY TO WINSTAR
The Federal Circuit held that only "transaction costs" are available
for stock issuances that replace the regulatory capital destroyed by the breach
of WINSTAR-type contracts. That categorical legal holding cannot be reconciled
with WINSTAR or with the common law of contractual remedies.
And it is clear, despite the government's revisionist history of the
evidence presented at trial (Opp. 22-23), that the Federal Circuit's ruling was
a categorical legal holding, and not a fact-bound credibility assessment. The
Federal Circuit, as a matter of first resort, cited its prior decision in
CALIFORNIA FEDERAL BANK V. UNITED STATES, 245 F.3d 1342 (Fed. Cir. 2001). Pet.
App. 14a. Importantly, the government identifies no factual variation that could
affect this legal conclusion.6
In support of this legal rule, the government restates its theory that
awarding dividends is never appropriate because, in exchange for the dividends,
the issuer receives the offering price of
--------------------------------------
4 The government also asserts, without any support, that the capital
infusion is not recoverable because it originated with the individual limited
partners of Hyperion Partners L.P. Opp. 17. Where the recovery would be directed
is a matter between Hyperion Partners, L.P. and its individual partners. It is
black letter law that a partnership can pursue the claims that its partners
incurred in their capacity as partners.
5 Through the misuse of ellipses, the government attempts to obscure
this well-established legal principle. Opp. 20-21 n.7. It is not the law "that a
party that successfully mitigates could be entitled to LESS relief (FROM BOTH
ITS MITIGATION AND DAMAGES AWARDED TO REIMBURSE THE COSTS OF THAT MITIGATION)
than a party that is unable to do so." Pet. 21-22 (underlining added). Of
course, mitigation reduces the amount of damages recovered through the judicial
system. But mitigation damages, COMBINED WITH THE PRIVATE BENEFITS GAINED FROM
THE MITIGATION, are to put the plaintiff in the SAME position that it would have
enjoyed absent the breach.
6 Merely parroting the Federal Circuit's inexplicable reversal of the
trial court's decision that the stock issuance was a mitigating transaction is
not a meaningful response to the petition's demonstration of the Federal
Circuit's error. Pet. 26-27.
5
the stock and that attorney and brokerage fees are the only residual cost. Opp.
23-25. The government's argument, again, ignores the benefit promised by the
government's contract with petitioners. The revenue that was generated by the
issuance replaced capital already promised by the government's contract. In this
context, it is the government that "ignores half of the transaction" (Opp. 24)
and refuses to recognize, as this Court did in WINSTAR, that cash was a
"substitute" for the regulatory capital promised by the contract. 518 U.S. at
850. As with the $35 million infusion, the necessary premise of the Federal
Circuit's holding and the government's arguments is that the promised regulatory
capital had no independent value.
When contractual capital is properly understood, as this Court took
pains to do in WINSTAR, it becomes clear that the Federal Circuit applied
"special rules" of contractual remedies to the government in violation of MOBIL
OIL. Specifically, the Federal Circuit treated the costs of debt and equity
financing differently. The government attempts to navigate the contrary
precedent by claiming that those cases involved the increased costs of financing
on "pre-existing" transactions. Opp. 26. But in BLUEBONNET SAVINGS BANK V.
UNITED STATES, 266 F.3d 1348 (Fed. Cir. 2001), for example, the financing
transaction had yet to occur by the time of the breach--plaintiffs there argued
that they were exposed to increased costs for financing transactions after the
breach, and the court ruled that plaintiffs were entitled to those costs,
without distinction between debt and equity financing. ID. at 1355, 1356.
Moreover, this nuance regarding "increased" finance costs of "pre-existing"
equity issuances was not the basis of the decision by the courts below. Instead,
the courts below categorically held that no more than "transaction costs" were
available for equity financing taken in mitigation.7
In any event, the breach did "increase" the costs of "pre-existing"
regulatory capital. Before the breach, petitioners had regulatory capital for
the significant costs of assuming the government's responsibility to manage a
failed thrift. After the breach, petitioners bore not only those costs, but also
the stream of dividends for the equity that replaced the regulatory capital
eliminated by the breach. Again, the government's suggestion that there was no
"pre-existing" asset here turns on the proposition that the promised regulatory
capital was worthless. That proposition, like the rest of the decision below,
cannot be squared with WINSTAR.
II. THE FEDERAL CIRCUIT'S MISUNDERSTANDING OF CONTRACTUAL CAPITAL IS A
RECURRING AND IMPORTANT ISSUE
The Federal Circuit has created special rules limiting the economic
consequences of the government's breach to the transaction costs of raising
replacement capital and deeming the government's regulatory capital promises to
be worthless. These special rules cannot be reconciled with WINSTAR, and violate
this Court's mandate to apply the common law of contracts, including contract
remedies, to the government.
The government claims that the issues presented in this Petition are
neither "important" nor "recurring." Opp. 21. The Federal Circuit holding that
regulatory capital has no independent
--------------------------------------
7 The court in LASALLE TALMAN BANK V. UNITED STATES, 317 F.3d 1363
(Fed. Cir. 2003), rejected the categorical refusal to award more than
transaction costs for a stock issuance. ID. at 1374-75. But it is that
categorical holding that drove the decision here, not, as the government claims,
that the savings in borrowing costs swallowed all of the dividends. Opp. 25
n.11; BUT SEE Pet. 18-19 n.3 (explaining the error of the borrowing cost claim).
6
value, however, will ripple throughout the numerous remaining WINSTAR cases and
is in need of immediate review by this Court. Indeed, the Federal Circuit's
misunderstanding of the government's regulatory capital promises and its
application of special rules to protect the government from standard contract
remedies already have staggeringly impacted the recovery of WINSTAR contracting
parties. Pet. 11 n.1. Remarkably, the government suggests that this Court should
take comfort because the Federal Circuit actually has permitted a handful of
WINSTAR contractors some nominal recovery. Opp. 12 n.2. But this recovery pales
in comparison to the enormous costs that these plaintiffs incurred in lifting
the crushing burden of failing thrifts from the government's shoulders. WINSTAR,
518 U.S. at 883.8
The government's argument necessarily reduces to the proposition that
petitioners would have traded the heavily negotiated contractual capital
promises for a mere $4.9 million in cash. If that were true, one might
reasonably ask why petitioners have spent the past 15 years, and millions of
dollars, litigating the economic consequences of the government's breach. The
answer is that the government is wrong. Contrary to its blithe submission,
FIRREA caused great financial harm to petitioners and others similarly situated.
The Federal Circuit has become complicit in allowing the government to avoid the
consequences of its own actions. In so doing, the court of appeals is flouting
this Court's mandate in both WINSTAR AND MOBIL OIL; its disregard for precedent,
law, history, and economics warrants this Court's attention--in this case at
this time.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully submitted.
XXXXXX X. XXXXXXX
COUNSEL OF RECORD
XXXX X. XXXXX
XXXXXXX X. XXXXX
XXXXXX, XXXX & XXXXXXXX LLP
0000 Xxxxxxxxxxx Xxxxxx, X.X.
Xxxxxxxxxx, X.X. 00000-0000
(000) 000-0000
COUNSEL FOR PETITIONERS
July 22, 2004.
-----------------------------------
8 The government pretends that the situation is not as dire as it
appears because a few cases were remanded and plaintiffs are pursuing remedies
in the Court of Federal Claims. Opp. 12-13 n.3. That the Federal Circuit has not
yet had the chance to strike down remedies awarded on remand in those cases
should not reassure this Court that the Federal Circuit is making WINSTAR
contractors whole.
