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First Hartford Corporation Pension Plan & Trust v. United States

October 19, 1999

FIRST HARTFORD CORPORATION PENSION PLAN & TRUST, ON BEHALF OF ITSELF, DOLLAR DRY DOCK BANK OF NEW YORK, AND ALL OTHER SIMILARLY SITUATED SHAREHOLDERS OF DOLLAR DRY DOCK BANK OF NEW YORK, PLAINTIFF-APPELLANT,
V.
UNITED STATES, DEFENDANT-APPELLEE



Before Mayer, Chief Judge, Michel and Plager, Circuit Judges.

The opinion of the court was delivered by: Michel, Circuit Judge

Appealed from: United States Court of Federal Claims

Senior Judge Robert J. Yock

Opinion for the court filed by Circuit Judge MICHEL. Chief Judge MAYER Dissents-in-part.

First Hartford Corporation Pension Plan & Trust ("First Hartford") is a shareholder of Dollar Dry Dock Bank of New York ("Dollar"), a state-chartered mutual savings bank that resulted from the merger of two financially troubled savings banks. As a condition of the merger, the two banks entered into an agreement with the Federal Deposit Insurance Corporation ("FDIC") requiring Dollar to maintain certain minimum levels of total capital, but permitting Dollar to amortize the intangible asset of supervisory goodwill over fifteen years in its accounting treatment of the merger. First Hartford filed suit in the Court of Federal Claims alleging breach of contract and unconstitutional taking and seeking rescission as a result of the FDIC's promulgation of a rule prohibiting the inclusion of supervisory goodwill in the calculation of regulatory capital despite the contractual language to the contrary. First Hartford purported to file suit on behalf of itself, derivatively as a shareholder on behalf of Dollar, and on behalf of a putative class of similarly situated Dollar shareholders. First Hartford now appeals from the judgment of the Court of Federal Claims granting the motion of the United States to dismiss First Hartford's complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. See First Hartford Corp. Pension Plan & Trust v. United States, 42 Fed. Cl. 599 (1998). In particular, the court held that First Hartford lacked privity of contract with the United States, that shareholder derivative suits in the Court of Federal Claims were barred by binding precedent, that First Hartford failed to identify a property interest subject to a taking, and that First Hartford failed to plead mutual mistake or fraud with sufficient particularity in its rescission count.

We reverse the judgment of the Court of Federal Claims with respect to its dismissal of First Hartford's takings claims because we have previously held that a shareholder's direct interest in a liquidation surplus is a cognizable property interest the taking of which by the federal government gives rise to standing to sue. We also reverse the judgment with regard to the dismissal of First Hartford's breach of contract claims on the ground that the Court of Federal Claims does not lack jurisdiction to hear contract suits filed derivatively by shareholders. We hold, however, that standing to sue is only found here because of the FDIC's conflict of interest by which it is both alleged to have caused the breach and controls the depository institution. Finally, we affirm the judgment with respect to the rescission claims because the United States was not a party to the contracts under which the shareholders invested their capital in Dollar.

BACKGROUND

Dollar was formed in 1983 as a result of the merger of Dollar Savings Bank of New York and Dry Dock Savings Bank. The financially troubled merging banks entered into an Assistance Agreement with the FDIC as a condition of the merger and Dollar, the resultant merged bank, consequently became an FDIC-insured, New York State-chartered mutual savings bank. Dollar nonetheless continued to suffer losses and thus, in order to enhance its ability to raise capital, sought approval from the FDIC to convert from a mutually-held institution into a stock-form institution. In approving the conversion, the FDIC agreed to the cancellation of the Assistance Agreement to be replaced by an Amended and Restated Assistance Agreement (the "Amended Agreement"), dated July 18, 1986, under which the FDIC continued to provide financial assistance. The Amended Agreement required Dollar to maintain certain levels of minimum total capital, as defined by regulation, and permitted the FDIC to increase those minimum total capital requirements if changed conditions warranted such an increase. Paragraph 1.22 of the Amended Agreement provided:

Total Capital shall not be reduced by goodwill or any other intangible asset arising from the accounting treatment of the Conversion; provided however, that goodwill or any other intangible asset arising from any other sources shall constitute a reduction from Total Capital to the extent required by any rule, regulation, policy of general application, or order of the FDIC.

"Goodwill" is defined as the excess of the cost to the acquirer of purchasing the financial institution (including the liabilities assumed by the acquirer) and the fair market value of the acquired financial institution's assets at the time of the acquisition.*fn1 See Winstar Corp. v. United States, 64 F.3d 1531, 1535-36 (Fed. Cir. 1995) (en banc), aff'd, 518 U.S. 839 (1996). This intangible asset termed "goodwill" could be recorded as an asset on the acquirer's books and, in accordance with Paragraph 1.12 of the Amended Agreement, amortized over fifteen years ending June 30, 2001, on a straight-line basis. The use of goodwill thus essentially permitted Dollar to treat what was a deficit in capital as an asset, including for purposes of satisfying minimum total capital requirements. According to First Hartford, Dollar amortized approximately $96 million of goodwill between the effective date of the Amended Agreement and December 21, 1990, and met its mandated capital requirements during that period. See Compl., ¶ 29 (Dec. 20, 1996).

On December 21, 1990, Dollar, the FDIC, and the Superintendent of Banks for the State of New York ("Superintendent") executed a Memorandum of Understanding (the "MOU"), which prohibited Dollar from paying cash dividends or other such payments until it attained a total capital ratio of six percent, some two percentage points higher than the ratio required by the Amended Agreement.

On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236 (1991) ("FDICIA"), was enacted. This set forth new capital requirements for federally insured banks. The FDIC subsequently interpreted FDICIA, by rule effective December 19, 1992, to prohibit the inclusion of supervisory goodwill in calculating regulatory capital, notwithstanding the contractual language here to the contrary. Following this change, Dollar was unable to meet its capital requirements. Consequently, on February 21, 1992, the Superintendent seized Dollar and appointed the FDIC as receiver. That same day, the FDIC sold Dollar's branches to various third parties.

First Hartford, a pension plan for First Hartford Corporation, has continuously owned 20,750 shares of Dollar Class A Convertible Junior Preference Stock from July 1986 through the present. On December 20, 1996, First Hartford filed suit in the Court of Federal Claims. First Hartford purported to bring suit for itself, on behalf of similarly situated Dollar shareholders, and derivatively on behalf of Dollar. First Hartford's complaint alleged six counts against the United States: (I) breach of contract due to the FDIC's raising of Dollar's capital ratio requirement in the MOU in alleged violation of the Amended Agreement; (II) breach of contract because the FDIC directed, recommended, or caused the Superintendent to seize Dollar in breach of the Amended Agreement; (III) unconstitutional taking under the Fifth Amendment resulting from the FDIC taking Dollar's contractual right to amortize its goodwill and the FDIC's direction or recommendation that the Superintendent seize Dollar; (IV) unconstitutional regulatory taking under the Fifth Amendment of the contractual right to treat goodwill as an amortizable asset, contrary to the reasonable investment-backed expectations of First Hartford and other shareholders; (V) a claim for rescission of the shareholders' investments due to the change in the FDIC's treatment of goodwill; and (VI) breach of contract based upon First Hartford and the other Dollar shareholders being the intended third-party beneficiaries of the Amended Agreement.

Based upon the above six counts, First Hartford requested as relief:

(i) that the action be certified a class action on behalf of all the shareholders of Dollar; (ii) that Dollar, First Hartford, and other Dollar shareholders be awarded damages; (iii) that Dollar, First Hartford, and other Dollar shareholders be awarded the return of their investments; (iv) that damages awarded derivatively be awarded to Dollar in trust for the shareholders; and (v) that attorney fees, costs, interest, and any other just relief be awarded.

On November 20, 1998, the court granted the government's motion to dismiss the Complaint pursuant to Court of Federal Claims Rule ("RCFC") 12(b)(1) for lack of subject matter jurisdiction and RCFC 12(b)(4) for failure to state a claim upon which relief can be granted. The breach of contract counts

The court first examined the breach of contract claims set forth in Counts I, II, and VI, and concluded that First Hartford had failed to establish jurisdiction to maintain the action on its own behalf, as a third party-beneficiary, or derivatively on behalf of Dollar. See First Hartford, 42 Fed. Cl. at 604-16.

With respect to First Hartford's breach of contract claims on its own behalf, the court ruled that the statutory waiver of sovereign immunity in the Tucker Act, 28 U.S.C. § 1491(a)(1) (1994), did not provide it with jurisdiction to hear such claims because First Hartford was not a party to the Amended Agreement and thus not in privity of contract with the government. See First Hartford, 42 Fed. Cl. at 604. The Court of Federal Claims also held that it lacked jurisdiction to hear First Hartford's breach of contract claims as a third-party beneficiary. The court reasoned that Paragraph 10.1 of the Amended Agreement expressly precluded there being any third-party beneficiaries. See id. at 605-06.

The Court of Federal Claims then concluded that it lacked jurisdiction to hear First Hartford's claims for breach of contract in the form of a shareholder derivative action. The court first noted that there is no counterpart in the RCFC to Federal Rule of Civil Procedure 23.1, which governs shareholder derivative suits. In addition, the court reasoned that it was bound by Court of Claims precedent in the Whited cases, which "clearly hold that this Court does not have jurisdiction to adjudicate shareholder derivative claims." Id. at 607-08; see also Whited Co. v. United States, 229 Ct. Cl. 623 (1982); Whited v. United States, 230 Ct. Cl. 911 (1982); Whited v. United States, 230 Ct. Cl. 963 (1982). The Court of Federal Claims explained that the Whited cases were distinguished by Suess v. United States, 33 Fed. Cl. 89 (1995), on the ground that the absence of a specific rule permitting shareholder derivative suits was not a bar to jurisdiction. See First Hartford, 42 Fed. Cl. at 608. However, the Court of Federal Claims rejected Suess, reasoning that it "should not be followed" because the Whited cases were binding precedent precluding such jurisdiction. Id. The court also explained that the Suess court had misinterpreted Quinault Allottee Ass'n v. United States, 453 F.2d 1272 (Ct. Cl. 1972), a case in which the claims of over a thousand American Indians were permitted to proceed against the government in a class action form. The First Hartford court reasoned that these plaintiffs had already established jurisdiction individually, whereas here no shareholder had established that it could bring suit on its own. See First Hartford, 42 Fed. Cl. at 608-10. Although in a derivative suit the shareholder brings suit on behalf of the corporation, the court maintained that this would not vest the court with jurisdiction because that derivative procedure relates only to standing, not jurisdiction. See id. at 610.

Furthermore, the Court of Federal Claims rejected the argument that the shareholders had a status similar to that of sureties who have been permitted to sue despite not being a party to the contract. See id. at 610-12. The court reasoned that claims may not be brought by those with an interest in government contracts, nor even general liability insurers, unless that party has a direct responsibility for contract performance. See id. at 611. Thus, because First Hartford was not obliged with respect to Dollar's obligations to the government, the court reasoned it did not have jurisdiction to hear its claim as a surety. See id. at 612. The Court of Federal Claims further declared that, as a policy matter, derivative suits would not be advisable because they would likely "clog the Court with meritless claims and duplicative suits unrelated to the determination of contract claims against the Government," as well as "force this Court into the role of a receiver." Id. at 612.

Even if derivative suits were allowed, the court ruled that First Hartford had failed to state a claim. In particular, the court declared, the right to bring a derivative suit was vested in the FDIC, as receiver, and a shareholder could only bring a derivative suit after joining the receiver. See id. at 613-14. In addition, the court stated that shareholders such as First Hartford could not be granted a judgment and awarded damages because the claim belonged to the FDIC. See id. The court rejected the argument that the shareholders had a vested interest in obtaining the funds due to the bank being in receivership, on the ground that the legislative scheme specifically set forth that the FDIC was to act as the receiver and thus to determine what actions to take on behalf of the stockholders. See id. at 614-15. The Court of Federal Claims further rejected the argument that this created a conflict of interest in which the government (i.e., the FDIC) was being asked whether it wished to sue itself, reasoning that the FDIC was sufficiently independent as demonstrated by the Winstar litigation, that the FDIC would be subject to the duties imposed on receivers under New York law, and that Congress intended the FDIC to act in this role. See id. at 615-16. The rescission count

The court then examined the rescission claim in Count V and concluded that because First Hartford could not bring a claim for itself, with the other shareholders, or derivatively, the court lacked jurisdiction to hear the rescission claim. See id. at 616. Moreover, even if it could hear the claim, the court held that First Hartford ...


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