COAST FEDERAL BANK, FSB, Plaintiff, v. The UNITED STATES, Defendant, 48 Fed. Cl. 402

OPINION AND ORDER HEWITT, Judge. Plaintiff in this action seeks damages arising out of the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989 and the resulting breach of its Assistance Agreement with the Federal Home Loan Bank Board (defendant or FHLBB). Plaintiff filed its original Complaint in this court on July 9, 1992, and moved for

summary judgment as to liability on April 2, 1993. On June 3, 1993, the court stayed this and a number of related cases pending the resolution of Winstar Corp. v. United States, No. 90-8C, then on appeal before the Court of Appeals for the Federal Circuit. 979 F.2d 216 (1992). Winstar ultimately was appealed to the Supreme Court and was decided on July 1, 1996. 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996). Plaintiff renewed its Motion for

Summary Judgment on October 29, 1996, and, in response, defendant conceded the existence of a contract between the parties and the breach of that contract. Defendant’s Response to Plaintiffs Motion for Partial

Summary Judgment Concerning Contract Issues, filed January 10, 1997, at 1-2. The court then granted

summary judgment to plaintiff on liability. Order of March 23, 1998. Fact discovery and expert discovery on the issue of damages closed in April 2000. The matter is now before the court on cross-motions for

summary judgment on damages and on defendant’s Motion to Dismiss Counts II and III of the Complaint. The motions have been comprehensively briefed and argued. Defendant contends that plaintiff sustained no damages as a result of the passage of FIRREA because the benefits of that legislation for plaintiff outweighed the added burdens on plaintiff. Defendant also argues that any damages claimed to have resulted from the breach are too speculative to recover or were not foreseeable at the time of contracting, and that, even if the damages claimed were foreseeable, defendant’s breach was not a substantial causal factor in plaintiffs losses. Defendant’s Motion for

Summary Judgment (Def.Mot.). Plaintiff argues that its damages were foreseeable to defendant at the time of contracting. Plaintiff defends its experts’ approach to the calculation of damages and argues that its damages were caused by defendant’s breach. Plaintiff contends that it did not benefit from the breaching act, and therefore that the damages it sustained as a result of the breach are not outweighed by the benefits it obtained. Plaintiff also argues that its damages can be shown with sufficient certainty to justify a ruling in its favor. Plaintiffs Corrected Opposition to Defendant’s Motion for

Summary Judgment on Damages and Motion to Dismiss, and Plaintiffs Cross-Motion for Partial

Summary Judgment (Pl.Response). The cross-motions for

summary judgment also raise contract

interpretation issues. Defendant argues that plaintiff has overstated its damages due to its assumptions about the accounting procedures required by the Assistance Agreement. Specifically, defendant argues that the amount of the cash contribution provided to plaintiff by the Federal Savings and Loan Insurance Corporation (FSLIC) was required to amortize for purposes of regulatory reporting requirements. Plaintiff disputes this

interpretation and responds that the contract in fact permitted it to include the entire contribution as a permanent and nonamortizing credit for purposes of regulatory reporting. Defendant’s Motion to Dismiss (Def.Mot.Dism.) addresses plaintiffs claims for taking and violation of due process. Defendant argues that the takings claim must be dismissed for failure to state a claim, since rights created by a contract are not subject to takings claims, and that the due process claim is outside this court’s jurisdiction.

Plaintiff contends that contractually created rights may be the subject of takings claims, but acknowledges that its due process claim may not be brought in this court. Plaintiff has also filed two Motions to Strike various documents from the Appendices to Defendant’s Motion for

Summary Judgment. Appendix A to this opinion addresses those Motions. For the following reasons, defendant’s Motion for

Summary Judgment is GRANTED in part and DENIED in part, and plaintiffs Motion for Partial

Summary Judgment is GRANTED in part and DENIED in part. Defendant’s Motion to Dismiss is GRANTED. 1. Background Prior to 1989, federally chartered thrift institutions were regulated by FHLBB and insured by FSLIC, an arm of FHLBB. Plaintiffs Proposed Findings of Uncontro-verted Fact (PPFUF) HH2-3. FHLBB was responsible for insuring that thrift institutions had sufficient capital to meet depositors’ ordinary demands. See Complaint H 4. FSLIC oversaw closures, mergers, and acquisitions of institutions that could not meet the capitalization requirements. Id.

When Central Savings and Loan (Central), a California-based thrift, appeared to be in danger of failure in the mid-1980s, FSLIC seized its assets and began encouraging other institutions to acquire Central. Defendant’s Proposed Findings of Uncontroverted Facts (DPFUF) H1. FSLIC proposed a substantial cash contribution to any thrift that was willing to acquire Central. Id. HH 3-4. Plaintiff was one of several thrifts that submitted offers. Id. 115. FSLIC approved plaintiffs bid in March 1987. Id. 1113. FSLIC agreed to give plaintiff $299 million in cash. Id. H17. Plaintiff made no payment from its own funds. Id.

H17. The parties signed an Assistance Agreement permitting plaintiff to credit FSLIC’s cash contribution to its net worth and to count the contribution as regulatory capital. Appendix to Defendant’s Motion for

Summary Judgment (Def.App.) v.l at 512. In August of 1989, FIRREA was enacted. Complaint H 59. FIRREA revised the regulatory reporting requirements applicable to thrifts. Complaint HH 59-60. Specifically, it replaced FHLBB with a new agency, the Office of Thrift Supervision (OTS), abolished FSLIC and assigned its functions to the Federal Deposit Insurance Corporation (FDIC), and required OTS to issue regulations establishing new capital ratios governing thrifts’ reporting requirements. Complaint H113, 4, 59.

FIRREA created three categories of regulatory capital — tangible, core, and risk-based — and defined tangible and core capital as excluding “intangible” assets. 12 U.S.C. §§ 1464(t)(2)(A,C). Thrift institutions were required to maintain tangible capital at a ratio of at least 1.5 percent of total assets, and were required to maintain core capital at a ratio of at least 3 percent of total assets. Id. §§ 1464(t)(2)(A,B).

FIRREA also provided, however, that certain institutions (those that were in compliance with all applicable statutes and regulations) could continue to include “qualifying supervisory goodwill” in core capital notwithstanding the exclusion of goodwill from core capital under

section 1464(t)(9)(A), and permitted those institutions to phase out their inclusion of supervisory goodwill in core capital over a period of five years. Id. § 1464(t)(3)(A). FIRREA defined “qualifying supervisory goodwill” as “supervisory goodwill existing on April 12,1989, amortized on a straightline basis” over 20 years or the remaining amortization period, whichever was shorter. 12 U.S.C. § 1464(t)(9)(B). Regulations subsequently promulgated by OTS on December 7, 1989 explicitly included FSLIC capital contributions within the definition of supervisory goodwill. 12 C.F.R. § 567.l(w) (1990). The regulations incorporated FIRREA’s five year phaseout

schedule for core capital, and applied the same

schedule to risk-based capital, since the calculation of the latter depended on what was included in the former. 12 C.F.R. § 567.2(a). FIRREA’s treatment of qualifying supervisory goodwill, insofar as it negated the provision in the Assistance Agreement permitting plaintiff to report the difference between Central’s assets and liabilities as regulatory capital, breached plaintiffs contract with the government. PPFUF H12.

Plaintiff initially complied with the new capital requirements, in part by exchanging convertible subordinated debentures for approximately $39 million in common stock in 1989, but it fell out of compliance with the risk-based capital requirement in the fourth quarter of 1990. DPFUF HH 63, 69. OTS conducted an examination of plaintiff in 1990 and gave it a composite rating of 4 (on a scale of 1-5, with 1 as the best rating and 5 as the worst), indicating “[mjajor and serious problems or unsafe and unsound conditions ... which are not being satisfactorily resolved.” Def.App. v.3 at 2209-10.

OTS identified problems including inadequate capital, poor asset quality, a lack of an effective internal asset review function, and overcompensated management. Id. at 2209. Plaintiff entered into a supervisory agreement with OTS on January 23, 1991. DPFUF f 70. The supervisory agreement imposed growth restrictions on plaintiff and required it to file a capital plan with the OTS showing how plaintiff planned to return to regulatory compliance. Id. 1171. Plaintiff returned to capital compliance in the first quarter of 1991 and remained in compliance thereafter. Id. H 73.

The supervisory agreement was rescinded in March of 1993. Id. 1174. II. Discussion A.

Summary Judgment

Summary judgment is warranted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Rules of the United States Court of Federal Claims (RCFC) 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact that might significantly affect the outcome of the litigation is material. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. The movant is entitled to

summary judgment if the nonmovant fails to make a showing sufficient to establish an element of its case on which it will bear the burden of proof at trial. Celotex Carp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court must draw all reasonable inferences in favor of the nonmovant. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. When the case is before the court on cross-motions for

summary judgment, each motion is evaluated under the same standard. Cubic Defense Sys., Inc. v. United States, 45 Fed.Cl. 450, 457 (1999). B. Duration of Plaintiffs Capital Credit Plaintiff seeks expectancy damages. Def-App. v.l at 164. Expectancy damages are available as a remedy for a breach of contract when the damages are reasonably foreseeable to the breaching party at the time of contracting, the breach is a substantial causal factor in the damages, and the damages are shown with reasonable certainty. Wells Fargo Bank, N.A. v.

United States, 88 F.3d 1012, 1021-24 (Fed.Cir.1996); Bluebonnet Savings Bank, FSB v. United States, 47 Fed.Cl. 156, 167 (2000), appeal docketed, No. 00-5128 (Fed.Cir. Sept. 7, 2000). Plaintiff has proposed a scenario in which the breach is assumed not to have happened in order to measure those damages. Def.App. v.l at 164. Specifically, plaintiff has calculated its damages as the difference between its actual performance and its anticipated performance. Id. The accuracy of the “no breach” scenario determines whether this court may accept the plaintiffs damages figure as reasonable.

Whether plaintiffs “no breach” model represents an accurate account of what would have happened absent the breach depends on whether the assumptions on which the model is based are valid. One assumption — based on an

interpretation of the Assistance Agreement — that plaintiffs experts made in crafting their “no breach” model is that the capital contribution FSLIC made to plaintiff in connection with the acquisition of Central, and the associated forbearance, was permanent and nonamortizing. Id. at 221. Plaintiff contends that the contract gave plaintiff not only the right to credit the contribution toward regulatory capital but also the right to include it in regulatory capital in perpetuity without amortization. PL Response at 21-22.

Defendant argues that the Assistance Agreement did not contemplate a permanent, nonamortizing capital credit but rather contemplated amortization in accordance with customary accounting practices. Def. Mot. at 87. Both parties have moved for

summary judgment on this issue. 1. Background When plaintiff acquired Central, Central’s liabilities exceeded its assets by approximately $347 million. DPFUF H15. The then accepted practice in thrift accounting for an acquisition reported a negative gap between liabilities and assets as “goodwill.” Def.App. v.2 at 1165. Absent a cash infusion of the type made by FSLIC in this case, the customary practice for the acquiring institution upon the acquisition would have been to report approximately $347 million in goodwill. Def.App. v.2 at 1165-66; id. at 1100.

To help plug the hole between assets and liabilities, however, FSLIC gave plaintiff approximately $299 million in cash at the time of its acquisition of Central. DPFUF Hf 10, 15. The cash infusion was itself also subject to a specific customary accounting treatment. The Financial Accounting Standards Board (FASB) had issued a policy statement in 1982, known as Financial Accounting Standards Board Statement No. 72 (FASB 72), stating that goodwill created by an acquisition in which FSLIC makes a direct contribution to the acquiror is offset by the amount of such assistance. Def.App. v. 2 at 1101.

Ordinarily, then, under FASB 72, plaintiff would have reported just $48 million in regulatory goodwill as an asset after its acquisition of Central. DPFUF II36. Plaintiff requested and received special treatment, however, in its treatment of the cash contribution and the goodwill. Id. 1132. Specifically, plaintiff was granted the so-called SM-1 regulatory forbearance, which permitted it to book as a credit to net worth the entire gap between Central’s assets and liabilities — $347 million — notwithstanding the $299 million in cash. Id. UK 32, 37, 41; see also LaSalle Taiman, 45 Fed.Cl. at 70.

The forbearance was set out in

section 6(a)(1)(

C) of the Assistance Agreement, which provided: For purposes of reports to the Bank Board other than reports or financial statements that are required to be governed by generally accepted accounting principles, the cash contribution made under this § 6(a)(1) shall be credited to the [plaintiff’s] net worth account and shall constitute regulatory capital.

It is understood by the parties that the preceding sentence is not intended to address in any way the accounting treatment of contributions from [FSLIC] that must be reflected in any filing that [plaintiff] may make, whether to the Bank Board or otherwise, that requires the submission of financial statements prepared in accordance with generally accepted accounting principles. DefApp. v.l at 512-13.

At the time, there were two separate systems of accounting that governed thrifts’ reporting requirements: the Generally Accepted Accounting Principles system (GAAP), and the Regulatory Accounting Principles system (RAP). United States v. Winstar Corp., 518 U.S. 839, 845-46, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996). Thrifts were ordinarily required to report their assets, liabilities, and regulatory capital to FHLBB under GAAP, but the SM-1 forbearance created an exception. Def.App. v.l at 399. Under the SM-1 forbearance, plaintiff could report an additional $299 million in regulatory capital under RAP.

DPFUF 111140-41.

Section 20 of the Assistance Agreement provided, however, that GAAP would otherwise govern plaintiffs reporting requirements: Accounting Principles. Except as otherwise provided, any computations made for purposes of this Agreement shall be governed by generally accepted accounting principles as applied in the savings and loan industry, except that where such principles conflict with the terms of the Agreement, applicable regulations of the Bank Board or [FSLIC], or any resolution or action of the Bank Board approving or relating to the Acquisition or to this Agreement, then this Agreement, such regulations, or such resolution or action shall govern. Id. v.l at

Section 20 also determined what authority governs in the case of ambiguous contract terms: In the case of any ambiguity in the

interpretation or construction of any provision of this Agreement, such ambiguity shall be resolved in a manner consistent with [applicable FHLBB or FSLIC] regulations and the Bank Board’s resolution or action relating to the Acquisition or to this Agreement. If there is a conflict between such regulations and the Bank Board’s resolution or action relating to the Acquisition or to this Agreement, the Bank Board’s resolution or action shall govern. Id. Finally, § 20 also clarified that ambiguities in the governing systems of accounting principles are subject to the

interpretation of FHLBB: For purposes of this section, the accounting principles and governing regulations shall be those in effect on the Effective Date or as subsequently clarified or interpreted by the Bank Board or the Financial Accounting Standards Board (“FASB”), or any successor organization of the American Institute of Certified Public Accountants. Where there is a conflict between what is required by the FASB and the Bank Board, the

interpretation of the Bank Board’s accountants shall govern. Notwithstanding the foregoing, nothing in this § 20 shall affect the first sentence of the second paragraph in § 6(a)(1) of this Agreement. Id. The foregoing provisions of the Assistance Agreement are the contract terms which bear on the question of what, if any, amortization period applies to the goodwill created by the SM-1 forbearance.

The amortization period for goodwill, the intangible asset created by a merger or acquisition under GAAP, was at one time governed by a document known as Accounting Principles Board Opinion No. 17 (APB 17), issued in August 1970, which set the amortization period at 40 years. Appendix to Coast’s Response to the Government’s Surre-ply (Pl.App.) v.7 at 3424-30. Securities and Exchange Commission (SEC) Accounting Bulletin No. 42A, issued in December 1985, limited the amortization of intangibles generally to 25 years. Id. at 3581-82.

At the time of plaintiffs acquisition of Central it was FHLBB policy to follow the 25-year rule unless FASB 72 applied. Id.; Def.App. v.l at 574-75; Plaintiffs Reply Brief in Support of its Cross-Motion for Partial

Summary Judgment and Response to the Court’s Request for Discussion of the Nature of the Government’s Breach of Contract (PI. Reply) at 54. FASB 72 provided that goodwill created by an acquisition amortizes over a period no greater than the estimated remaining life of the long-term interest-bearing assets acquired. Def.App. v.2 at 1100. Applying FASB 72 to plaintiffs assets would result in an amortization period of approximately 12.7 years. DPFUF K 54. 2. Contract

Interpretation Plaintiff and defendant offer competing

interpretations of the Assistance Agreement. In plaintiffs view, FSLIC’s $299 million capital contribution was outside the purview of FASB 72 altogether because FASB 72 deals only with GAAP, and the SM-1 forbearance was outside GAAP. PI. Reply at 10-11. That the Assistance Agreement, under § 20, established that GAAP covered all accounting issues (except for the SM-1 forbearance) is irrelevant, in plaintiffs view, because the forbearance was itself outside GAAP. Id. at 11.

The credit to plaintiffs regulatory capital cannot, under this view, be subject to GAAP’s rules because GAAP “does not recognize” the creation of such a credit. Id. Plaintiff notes as well that it did not, in fact, amortize RAP goodwill in the two years between the acquisition of Central and the enactment of FIRREA, and argues that that history of nonamortization shows that the parties did not intend the amortization of RAP goodwill. PL Response at 27-29.

Defendant argues that “baseline regulatory policy compelled the filing of all financial statements with the FHLBB in accordance with GAAP unless a specific departure from GAAP was permitted.” Def. Mot. at 22 (emphasis in original). Defendant contends that the effect of the SM-1 forbearance was solely to permit plaintiff to record more regulatory capital than it could have otherwise, not to exempt goodwill from amortization. Id. at 23.

Defendant acknowledges that plaintiff did not amortize RAP goodwill after the acquisition, but contends that the government’s failure to draw attention to or correct the nonamortization represented an oversight rather than an agreement with plaintiffs position. Defendant’s Reply Memorandum in Support of its Motions for

Summary Judgment on Damages and to Dismiss, and in Opposition to Plaintiffs Cross-Motion for Partial

Summary Judgment (Def.Reply) at 36. The starting point in contract

interpretation is “the plain language of the agreement.” Foley Co. v. United States, 11 F.3d 1032, 1034 (Fed.Cir.1993). When the court construes a contract, it gives the words their “ordinary meaning unless the parties mutually intended and agreed to an alternative meaning.” Harris v. Dep’t of Veterans Affairs, 142 F.3d 1463, 1467 (Fed.Cir.1998). Contract

interpretations which do not give “reasonable meaning” to the entirety of the contract are disfavored. Arizona v. United States, 216 Ct.Cl. 221, 575 F.2d 855, 863 (1978). The text of the Assistance Agreement favors defendant’s

interpretation. Plaintiff relies on the statement in § 6(a)(1)(

C) that FSLIC’s contribution “shall be credited to [plaintiffs] net worth account and shall constitute regulatory capital,” arguing that the use of the phrases “‘shall be credited to’” and “ ‘shall constitute’ ” indicates permanence and nonamortization. Pl. Response at 22-23 (quoting Def.App. v.l at 512). The phrase “shall be credited to” is certainly instructive as to the initial treatment of the FSLIC contribution, but, in the court’s view, the phrase suggests nothing about the proper subsequent treatment of the amount initially credited.

The phrase appears to the court to refer to an accounting entry to be made on a discrete occasion. Moreover, the phrase “shall constitute,” while not on its face inconsistent with plaintiffs view of permanence, is fully consistent as well with amortization. It appears to the court more likely, indeed, that the phrase “shall constitute” conveys the agreement of defendant to an override of FASB 72’s language directing that the amount of the assistance offset the goodwill created by the acquisition. Def. App. v.2 at 1101.

Plaintiff can at most show that plaintiff itself viewed the agreement as precluding amortization. The plain language of the contract does not preclude amortization. Moreover, the next sentence of the Assistance Agreement states unambiguously that GAAP governs the reporting of the contributions, which makes plaintiffs view that the contributions were unknown to GAAP implausible. Def.App. v.l at 512-13.

The text of the Assistance Agreement therefore immediately and directly contradicts the view that the phrases “shall be credited” and “shall constitute” indicate an agreement by defendant to special accounting treatment: [T]he preceding sentence is not intended to address in any way the accounting treatment of contributions from [FSLIC] that must be reflected in any filing that [plaintiff] may make, whether to the Bank Board or otherwise, that requires the submission of financial statements prepared in accordance with generally accepted accounting principles. Id. Plaintiffs reports to FHLBB were governed by GAAP.

DPFUF 1144. The apparent purpose of this sentence in conjunction with the previous sentence, in the court’s view, is to apply GAAP to the subsequent reporting of the capital contribution, as distinct from the initial “crediting” of the contribution to regulatory capital. To read the phrases “shall be credited” and “shall constitute” as affecting the subsequent accounting treatment of the capital contribution contradicts the plain language of the Assistance Agreement in the sentence immediately following. In addition, the Assistance Agreement provides elsewhere that the government’s

interpretation will prevail in the event of an ambiguity or conflict.

Section 20 of the Assistance Agreement states that it is governed by “the accounting principles and governing regulations ... in effect on the Effective Date or as subsequently clarified or interpreted by the Bank Board or the Financial Accounting Standards Board.” Def.App. v.l at 556. The Assistance Agreement therefore contemplates that, when reporting requirements are unclear, FHLBB is entitled to issue clarifications or

interpretations, and that plaintiff will be bound by FHLBB’s views. The Assistance Agreement then states that “[w]here there is a conflict between what is required by the FASB and the Bank Board, the

interpretation of the Bank Board’s accountants shall govern,” indicating that, even if FASB 72 could be read as inconsistent with FHLBB’s position, an inconsistency which the court does not find, FHLBB’s

interpretation of the contract would still prevail. Id. Since FHLBB was never requested to issue a statement to plaintiff explaining FHLBB’s

interpretation of GAAP on this issue, the court looks to other contemporaneous statements and actions by FHLBB to determine its

interpretation. 3. FHLBB’s

Interpretation of GAAP a. FHLBB’s Statements The evidence strongly supports the view that FHLBB consistently took the position that RAP goodwill must amortize. Two other institutions, Transohio Savings Bank and Statesman Bank for Savings, raised concerns about the amortization of RAP goodwill in correspondence with FHLBB in the period between the execution of plaintiffs Assistance Agreement and the passage of FIR-REA. Def.App. v.2 at 1109-14, 1125-29. FHLBB stated unequivocally to both of those institutions that goodwill created by FSLIC contributions must be amortized.

Id. at 1108, 1115-16, 1124, 1130-31, 1149-51. Supervisory Agent Kurt Kreinbring wrote to Transohio on May 15, 1987, stating that Transohio had been “permitted ... to book the ... cash contribution from FSLIC as a direct credit to net worth,” but that “[t]his ... departure from GAAP does not change the GAAP requirement that the amortization of goodwill must be charged to expense.” Id. at 1115-16. Supervisory Agent Steven L. Opsal wrote to Statesman on March 10,1989, rejecting an argument that goodwill resulting from a FSLIC contribution should not amortize. Id. at 1124. Mr.

Opsal quoted § 6 of the Assistance Agreement executed by FHLBB and Statesman, which provided that the forbearance permitting Statesman to credit the forbearance toward regulatory capital was “ ‘not intended to address in any way the accounting treatment’ of FSLIC assistance.” Id. (quoting id. at 1630). The same language appears in § 6 of plaintiff’s Assistance Agreement. Def.App. v.l at 512-13. Mr.

Opsal stated in a letter to Statesman on April 11, 1989, that “[i]f there was to be any further departure from GAAP, such as relief from the necessity of amortizing the goodwill resulting from the FSLIC contribution, it would have to have been specifically stated in the forbearance. Since it was not, the amount of capital must be calculated by the usual standards.” Id. v.2 at 1130. A third letter from Mr. Opsal to Statesman, written on June 9, 1989, stated that “RAP requires amortization of the $21,000,000 in goodwill created from the FSLIC capital contribution.” Id. at 1151.

Transohio and Statesman, like plaintiff, received FSLIC cash assistance and were granted the SM-1 forbearance, and nothing in their Assistance Agreements distinguished the treatment of their RAP goodwill from plaintiffs. Other contemporaneous statements likewise suggested that FHLBB policy on goodwill created by FSLIC assistance was that such goodwill must amortize.

An internal letter from Jerry Benham, Supervisory Agent, to FHLBB Chief Accountant Thomas Bloom, after explaining that Transohio had RAP goodwill in the amount of $152,931,000, expressed the view that, since “nothing in the forbearance authorizes a departure from this GAAP requirement ... Transohio should be amortizing all of the goodwill of $152,931,000 to expense.” Id. at 1119. An internal FHLBB memo stated that goodwill created by an acquisition must be amortized. Id. at 1314. Mr.

Bloom endorsed that approach in a subsequent letter to Transohio, stating that Transohio should “write off all goodwill [resulting from FSLIC assistance] to expense.” Id. at 1123. FHLBB’s Case Processing Manual, apparently a statement of FHLBB policy, stated that when FSLIC assistance is included in regulatory capital, “the goodwill created will remain on the books of the institution and should be amortized over a period no greater than the estimated remaining life of the long-term interest-bearing assets acquired.” Id. at 1033.

Plaintiff has offered no contemporaneous evidence to support the view that FHLBB regulators negotiating the Assistance Agreement with plaintiff understood that the Assistance Agreement deviated from FHLBB policy regarding the duration of RAP goodwill. Indeed, Alvin Smuzynski, the regulator who approved plaintiffs forbearance and who advised the Bank Board chairman on the merger, testified that he believed that RAP goodwill created by the Assistance Agreement would be subject to amortization. Def.App. v.6 at 5000-01, 5010. A June 1989

article by Robert Pomeranz, a former employee of FHLBB and liaison between FHLBB and FASB, also stated that RAP goodwill amortizes. Def.App. v.2 at 1164-69; Def. Reply at 31-32. b. Thrift Financial Reports The Thrift Financial Reports (TFRs) and accompanying instructions then used for thrift reporting also support the view that defendant interpreted GAAP as requiring the amortization of FSLIC contributions.

The TFR forms on which plaintiff reported its goodwill in 1987 and 1988 listed RAP goodwill and other kinds of goodwill together on a single line, line A544, “goodwill and other.” See, e.g., Def.App. v.2 at 1173 (June 30, 1987 TFR). The instructions required the thrift to report “the total amount of unamortized goodwill and intangibles” on that line. PI. Reply at 23; Def.App. v.2 at 1378.

As defendant explains, the initial contribution was recorded on line C030, “Contributed Capital,” and never decreases, while the amortization of the goodwill on line A544 was reported as an expense on line E110, “Amortization of Goodwill” and thereby caused line C115, “Retained Earnings,” to decrease. Def. Reply at 15-16; see also Def.App. v.2 at 1172. The decrease on line Cl 15, when amortization is complete, offsets the credit on line C030. Def. Reply at 15. Plaintiff has not disputed this explanation of the pre-1989 TFRs’ approach to the amortization of goodwill.

The 1989 TFRs adopted a different format, under which the $299 million was removed from both line A544 and line C030, and reported only once, on line C978, outside the assets-liabilities balance. Def. Reply at 37. The instructions make clear that the amount on the new line C978 decreased as goodwill amortized: “GAAP requires that goodwill be reduced by the amount of FSLIC assistance in a merger accounted for under the purchase method of accounting. The amount reported on this line represents the unamor-tized amount of the assistance that previously would have been reported on line A544.” Def.App. v.2 at 1472.

Rather than reporting the FSLIC contribution as an unchanging amount but offsetting it with another line, the 1989 TFR directs that the thrift report the amortization by reducing the amount of FSLIC assistance recorded, since the “FSLIC Capital Contribution” line now represents “the unamortized amount of the assistance.” Id. The reference to “the unamor-tized amount of the assistance” indicates that FHLBB intended that the amount reported on line C978 amortize. The analysis is complicated somewhat because plaintiff did not, in fact, calculate and enter the amortization, as discussed in subsection (

c) just below, but the instructions are clear that amortization was, in fact, required. c. Reporting History Plaintiff cites the nonamortization of the credit in the time between the execution of the Assistance Agreement and the passage of FIRREA, along with deposition testimony by plaintiffs employees, as evidence that plaintiff understood its RAP goodwill to be nonamortizing, and that the absence of explicit discussions on this issue suggests that plaintiffs belief was in good faith. PI. Response at 24-25, 27-29.

The nonamortization in plaintiffs reporting (and the government’s failure to challenge it) does not persuade the court, however, that FHLBB shared plaintiffs view of the permanence of RAP goodwill. The good faith in which plaintiff held its view is not at issue here. The TFR forms on which plaintiff reported its goodwill in 1987 and 1988 listed RAP goodwill and other kinds of goodwill together on a single line, line A544, “goodwill and other.” See, e.g., Def.App. v.2 at 1173 (June 30, 1987 TFR).

Plaintiff reported the increase in goodwill on this line at the time of the acquisition, and the amount reported there fluctuated rather than simply decreasing (due to other transactions, the court assumes) over the next several reporting periods.

Compare DefApp. v.2 at 1173 (June 30, 1987 TFR reporting $566,422,000 on line A544) with id. at 1189 (December 31, 1987 TFR reporting $573,344,000 on line A544); with id. at 1196 (March 31,1988 TFR reporting $576,865,000 on line A544); with id. at 1199 (June 30, 1988 TFR reporting $573,207,000 on line A544); with id. at 1209 (September 30, 1988 TFR reporting $552,121,000 on line A544); with id. at 1222 (December 31, 1988 TFR reporting $542,323,000 on line A544).

Since the various assets whose aggregate value appears on line A544 are not reported individually, an examiner reviewing these TFRs would have to be familiar with unreported aspects of plaintiffs finances to know that plaintiff was not amortizing RAP goodwill. FHLBB conducted an examination of plaintiff in the fall of 1988 that, among other things, broke the goodwill reported at line A544 into its component parts. Pl.App. v.6 at 3131. That examination did not note that plaintiff was not amortizing RAP goodwill.

As defendant’s expert has stated, however, verifying compliance with regulatory capital reporting standards was not the primary mission of the examination; rather, the examination focused on consumer protection issues. Id. at 2906-08. Regulators’ failure to call attention to the nonamortization of RAP goodwill (which arose from a transaction with which the regulators were not necessarily familiar) does not in itself signify that the nonamortization was acceptable to FHLBB, especially since the examination was not, according to defendant’s expert, a “full scope” examination. Id. at 2907.

Moreover, defendant’s expert testified that, in his knowledge of such examinations, the review of the TFRs would likely be limited to ensuring that the numbers add up properly, and would not extend to verifying that the accounting was done in compliance with the Central acquisition. Id. at 2910-11. Such a review would not necessarily catch plaintiffs failure to amortize RAP goodwill. Indeed, the accounting books would balance with or without the amortization.

The examiners stated that “[n]o verifications to the original transaction documents or to the ledger account contents were made for any line item,” suggesting that the examiners verified only that the reporting was internally consistent. Id. at 3106.

While the results of the 1988 examination certainly support the bona fides of plaintiffs belief that its treatment of RAP goodwill was proper, the legally relevant view of that treatment, under § 20 of the Assistance Agreement, is GAAP and, in the absence of any agreement by defendant to forbear from enforcing what GAAP requires, GAAP “as subsequently clarified or interpreted” by FHLBB. Def.App. v.l at 556. Plaintiffs argument that the regulators conducting the 1988 examination must have reviewed and approved the nonamortization of RAP goodwill is unpersuasive. PI. Surre-ply at 8-9.

Plaintiff contends that the examiners devoted 70 hours of time to the verification of plaintiffs capital compliance. Id. at 8. As an initial matter, the court notes that the 70 hours refers to time spent on “Financial Analysis,” which may or may not encompass review of plaintiffs TFRs, and may include many other aspects of the examination as well. See Pl.App. v.6 at 3367. Plaintiff has offered no evidence other than its own assertion that “Financial Analysis” refers specifically to TFR review.

The manual that governed the administration of the examination did, as plaintiff claims, direct the examiners to “[determine whether the institution is in compliance with ... agreements with FSLIC.” Id. v.7 at 3552; PI. Surreply at 9. But the examiners’ statement that “no verifications to the original transaction documents ... were made for any line item” indicates that, for whatever reason, they did not follow the manual’s directions in that regard. PI. App. v.6 at 3106.

Even if the examiners did spend 70 hours in close review of the lines that bear on amortization, it appears that they were not in a position to evaluate compliance, since they were not informed of the terms of the Assistance Agreement. There was nothing inherently remarkable about the reporting figures themselves that would have directed defendant’s attention to the issue of amortization in the absence of reference to the contract documents.

A large amount of goodwill that reduces only slightly may reflect a long amortization period for all of it or, alternatively, a shorter amortization period for some of it and no amortization for the rest. Plaintiffs reports for the first two quarters of 1989 reflect more clearly the nonamortization of RAP goodwill, since the TFR format had changed. See Def.App. v.2 at 1238 (March 31, 1989 TFR, listing line item C978, “FSLIC Capital Contributions,” and reporting $299,883,000 on that line); id. at 1249 (June 30, 1989 TFR, with same listing).

The instructions appended to the 1989 TFRs suggest, however, that plaintiff was to report on line C978 “the unamortized amount of the assistance that previously would have been reported on line A544,” meaning that plaintiff should have understood that the amount of the FSLIC contribution that could be reported on line C978 was amortizing. Id. at 1472. The failure by defendant to require the correction of plaintiffs eri’or in two quarterly reports does not show that FHLBB believed that RAP goodwill could be nonamortizing, particularly in light of the evidence that FHLBB’s policy was to amortize RAP goodwill.

Moreover, the Assistance Agreement included a nonwaiver clause that foreclosed the possibility that FHLBB could, by mere failure to object to the nonamortization, be held to have conceded that plaintiffs treatment of RAP goodwill was proper.

Section 24 of the Assistance Agreement provides that “[a]ny forbearance, failure, or delay by any party in exercising or partially exercising any ... right, power, or remedy [conferred by the contract or by applicable law] shall not preclude its further exercise.” Def.App. v.l at 559. Nonwaiver clauses have been found by federal courts to be enforceable in certain contexts. See United States v. Epstein, 27 F.Supp.2d 404, 408-09 (S.D.N.Y.1998) (enforcing nonwaiver clause in lease agreement in which federal government was landlord). Because plaintiff has sued under the Tucker Act, 28 U.S.C. § 1491, the

interpretation of the contract is ordinarily governed by federal law. See Keydata Corp. v. United States, 205 Ct.Cl. 467, 504 F.2d 1115, 1123 (1974) (“[I]t is settled that the contracts of the Federal Government are normally governed, not by the particular law of the states where they are made or performed, but by a uniform federal law.”); Quintan, S.A. v. United States, 39 Fed.Cl. 171, 177 (1997) (invoking federal law of contracts in suit brought under Tucker Act), aff'd, 178 F.3d 1313 (Fed.Cir.1999); Sun Cal. Inc. v.

United States, 25 Cl.Ct. 426, 428 (1992) (“Federal government contracts generally are governed by federal law rather than by the law of the particular states in which the contracts are executed or performed.”). The parties have cited no federal contract law, and the court has found none, regarding the enforceability of the nonwaiver clauses in an agreement in a Wmstor-related case.

Section 25 of the Assistance Agreement directs, however, that “[t]o the extent that Federal law does not control, this Agreement and the parties’ rights and obligations under it shall be governed by the law of the State of California.” Def-App. v.l at 560. California courts have upheld and applied nonwaiver clauses. See, e.g., Southern Calif. Edison Co. v. Superior Court, 37 Cal.App.4th 839, 44 Cal.Rptr.2d 227, 233-34 (1995) (discussing application of nonwaiver clause); Posey v. Leavitt, 229 Cal.App.3d 1236, 280 Cal.Rptr. 568, 575 n. 11 (1991) (rejecting “course of dealing” argument in light of nonwaiver clause).

Absent controlling federal contract law deeming the nonwaiver clause unenforceable, the court follows the express terms of the parties’ contract and, consistent with California law, applies the clause. Under the nonwaiver clause, a failure on multiple occasions to correct plaintiffs nonamortization did not deprive FHLBB of the right to insist on such amortization at a later time. See Walt v. Superior Court, 8 Cal.App.4th 1667, 11 Cal.Rptr.2d 278, 282-83 (1992) (applying nonwaiver clause and finding lease agreement enforceable despite acceptance of monthly rent for period of 18 months).

Plaintiffs argument that “the parties’ course of dealing confirms Coast’s construction of the contract,” PI. Surreply at 2, is unpersuasive. d. Other Evidence Plaintiff points to the instruction appended to the pre-1989 TFRs, which called the capital contributions to be recorded on line C030 “permanent capital contributions,” and argues that the designation “permanent” signifies that the assistance did not amortize. Transcript of September 19, 2000 Conference (Conf. Tr.) at 30-31.

Plaintiff relies on deposition testimony by Edwin Gray, former FHLBB chairman, to the effect that the contribution was “permanent,” in support of the same argument. PI. Reply at 36-37. As defendant has observed, however, in an argument uncontradicted by plaintiff, FSLIC could have made capital contributions to plaintiff in the form of loans rather than cash, and plaintiff eventually would have had to repay FSLIC when the loan instruments matured. Def. Reply at 38 n. 14.

The TFR instructions explicitly draw a distinction between assistance made without a capital instrument, which was to be reported on line C030, with assistance made in the form of a capital instrument, which was to be reported on various other lines. Def.App. v.2 at 1398. The amendment to the TFR instructions issued in April 1988 is even clearer.

It refers to “[permanent FSLIC cash infusions (i.e., no capital instrument has been (or will be) issued).” Def.App. v.7 at 5063. “Net Worth Certificates,” “Accrued Net Worth Certificates,” and “Income Capital Certificates” were to be reported on lines C070, C080, and C090, respectively. Id. v.2 at 1398-99. The deposition testimony of Mr. Gray that plaintiff cites indicates considerable confusion about whether the deposing attorney’s references to a “capital credit” referred to the cash itself or to the accounting treatment of it.

For example, in response to a question about why he believed that “the capital credit would last in perpetuity,” Mr. Gray testified as follows: Well, because — because there is no — there no [sic] basis to think otherwise. I mean there’s — if you say, for example, [that a] cash contribution made under this provision shall be credited to the acquiring association’s net worth account and shall constitute regulatory capital, particularly because it’s cash, it’s a credit, it’s cash, how do you — how do you put a time frame on cash? Def.App. v.l at 846. Mr.

Gray subsequently qualified the statement about “perpetuity,” saying that the credit would be perpetual “[ujnless there is something else in this agreement that would modify the crediting of cash to the acquiring institution.” Id. Mr. Gray’s discussions of the nature of cash indicate that he was using the term “capital credit” to refer to the cash itself, rather than to the accounting treatment of the SM-1 forbearance. Cash is not inherently nonamortizing, but a grant of cash — as opposed to a loan or a capital instrument — is “perpetual” simply because it does not have to be repaid. Mr.

Gray did not mention amortization in his discussion of perpetuity, but he did refer to “something that would modify the crediting of cash,” id. at 846, which would not affect the accounting treatment (since the initial “crediting” is not related to amortization) but might affect whether the credit had to be repaid. The court thinks it likely that Mr. Gray was referring to “perpetuity” as meaning that the acquiring institution did not need to repay the credit, not describing the credit as nonamortizing. Neither the TFR instructions’ references to “permanence” nor Mr.

Gray’s ambiguous references to “perpetuity” require the court to ignore the text of the contract. The court notes that the en banc Federal Circuit and the Supreme Court’s plurality opinion in Winstar mentioned the “permanence” of FSLIC contributions.

Specifically, the Federal Circuit, in addressing the case of Statesman Bank (one of the three institutions then at issue in the consolidated Winstar proceedings), stated: Under the Assistance Agreement and the Bank Board resolution approving the merger, $26 million of this cash contribution (including $5 million represented by a debenture that Statesman was required to pay back) was to be permanently credited to Statesman’s regulatory capital (i.e., as a capital credit) for purposes of meeting minimum regulatory capital requirements. 64 F.3d at 1537.

The Supreme Court plurality observed that FSLIC “contributed cash ... and permitted the acquiring institution to count the FSLIC contribution as a permanent credit to regulatory capital.” 518 U.S. at 853, 116 S.Ct. 2432. The court does not understand those comments to be inconsistent with the court’s view of the Assistance Agreement here.

The treatment of capital contributions at the time of the execution of Statesman’s Assistance Agreement permanently credited the entire amount of the contribution to regulatory capital on one line, line C030, while gradually amortizing it on another line, so “permanence” in this context was entirely compatible with amortization. Statesman and the government did not litigate the issue in dispute between the parties in this ease.

Indeed, neither the Federal Circuit nor the Supreme Court made more than single references to the issue of “permanence.” The main issue in those appeals was liability for breach of contract, not the viability of one or another system of accounting. That FSLIC capital contributions were “permanent” cash contributions rather than loans does not require that they be nonamortizing. The distinction between the permanence of a capital contribution and the permanence of its accounting treatment remains. The court also finds plaintiffs reliance on the example of Citizens Federal Bank misplaced.

Plaintiff quotes language from the Bank Board resolution accompanying Citizens’s assistance agreement: “[F]or regulatory accounting purposes, Citizens may credit $86 million of the FSLIC’s initial cash contribution pursuant to the Assistance Agreement to its regulatory capital account at the Effective Date, provided that Citizens shall amortize such amount over a period of twenty-five years.” Pl.App. v.6 at 3025 (emphasis in original).

Plaintiff contends that the silence of its Assistance Agreement on the amortization question, contrasted with the explicit statement in Citizens’s Agreement, indicates that FSLIC’s contribution to it was not intended to amortize. PI. Reply at 47. The court does not believe that this is the correct inference. It is much more likely that the clause setting a time period for Citizens’s amortization implemented the SM-2 forbearance giving Citizens an extended goodwill amortization period. Compare Def.

App. v.l at 399 (SM-2 forbearance, stating that “[f]or purposes of reporting to the Board, the value of any unidentifiable intangible assets resulting from accounting for the merger in accordance with the purchase method may be amortized by (resulting institution) over a period not to exceed () years by the straight line method”) with Pl.App. v.6 at 3027 (Citizens’s forbearance letter, stating that “[f]or purposes of reporting to the Board, the value of any unidentifiable intangible assets resulting from accounting for the merger in accordance with the purchase method may be amortized by Citizens over a period not to exceed 25 years by the straight line method”).

Plaintiff requested, but was not granted, the SM-2 forbearance. Compare Def.App. v.l at 352 (letter requesting permission to amortize intangibles over 40 years) with Pl.App. v.3 at 2196-97 (FHLBB resolution approving plaintiffs acquisition with no reference to amortization period).

Plaintiff also argues that FHLBB’s statement of the amortization language in both its resolutions approving Citizens’s merger (in the context of a reference to the capital credit) and its forbearance letter (referring directly to SM-2) indicates that SM-2 applies to GAAP goodwill alone since, theoretically, FHLBB could have stated the SM-2 only once if it refers to both GAAP and RAP goodwill. PL Reply at 19-20; compare PL App. v.6 at 3025 with id. at 3027.

Plaintiff has not shown, however, that FHLBB regarded its approving resolutions and its forbearance letter as mutually exclusive or took any pains to eliminate redundancy; indeed, plaintiffs own approval resolutions and forbearance letter are redundant, since both documents include provisions for the crediting of the FSLIC contribution toward regulatory capital.

Compare Pl.App. v.3 at 2196 (“[T]he initial cash contribution by the FSLIC pursuant to the Assistance Agreement may be credited to the capital account of [plaintiff]”) with Def.App. v.l at 568 (“[T]he initial cash contribution to be made to Coast Savings pursuant to an assistance agreement ... is to be a credit to Coast Savings’ regulatory capital”). Likewise, in the case of Statesman, the approval resolutions and the forbearance letter contain virtually identical language regarding Statesman’s capital credit. Compare Def.App. v.2 at 1686-87 with id. at 1689.

Plaintiffs argument that RAP goodwill did not arise from application of the purchase method, and that SM-2 (which refers specifically to the purchase method) therefore did not apply to RAP goodwill, is likewise unpersuasive. Pl. Reply at 19-20; Def.App. v.l at 399. As defendant’s expert has pointed out, uncontradicted by plaintiff, purchase method accounting marked Central’s assets and liabilities to market, rather than incorporating them into plaintiffs balance sheet without conducting an independent valuation. PL App. v.6 at 2928.

Only the purchase method creates goodwill, and it creates RAP goodwill (when the SM-1 forbearance is applied to an acquisition involving FSLIC assistance) as well as GAAP goodwill. Id. Applying the SM-1 forbearance in a merger reported under purchase method accounting does not make the purchase method inapplicable; it merely permits the acquiring association to record more capital than would otherwise be recognized under GAAP. 4. Reasonableness of FHLBB’s

Interpretation The court finds that FHLBB’s

interpretation of GAAP was that capital contributions from FSLIC were required to amortize. The court now considers whether FHLBB’s

interpretation of the contract was reasonable, a. Standard of Review It is well established that the government may, in negotiating contracts, insist that its own

interpretation of particular contract terms govern. See United States v. Wunderlich, 342 U.S. 98, 99-100, 72 S.Ct. 154, 96 L.Ed. 113 (1951); United States v. Moorman, 338 U.S. 457, 460, 70 S.Ct. 288, 94 L.Ed. 256 (1950); Seaboard Lumber Co. v. United States, 903 F.2d 1560, 1564 (Fed.Cir. 1990). In Moorman, the Supreme Court upheld a contract provision providing that the Secretary of War’s ruling on contract disputes “shall be final and binding.” 338 U.S. at 458 n. 1, 460, 70 S.Ct. 288.

The Wunderlich Court upheld Moorman in upholding a clause vesting authority in a contracting officer to decide questions of fact, subject to appeal to the head of the department, and the Federal Circuit in Seaboard followed Wunderlich and Moorman in holding that a contractor may waive its right to a judicial determination of its contract rights. 342 U.S. at 99, 72 S.Ct. 154, 903 F.2d at 1563. The Seaboard court observed that the contractor “voluntarily and knowingly waived any right to dispute resolution except in accordance with the contract.” 903 F.2d at 1565.

The Seaboard court also held that the contracting officer’s decision may not be overturned absent a showing of fraud or bad faith. Id. at 1564. The Assistance Agreement in this case made no provision for formal dispute resolution, either within or outside FHLBB, but it did not need to; in Moorman the Supreme Court upheld a dispute resolution mechanism that consisted of a single written appeal to an agency head. 338 U.S. at 463, 70 S.Ct. 288.

Two other thrifts, Transohio and Statesman, disputing the same question and faced with virtually identical contract provisions vesting interpretive authority in FHLBB, argued the question with FHLBB representatives through correspondence, and the FHLBB explained its position at some length. See Def. App v.2 at 1559,1676 (“Accounting Principles” clauses of Assistance Agreements for Transohio and Statesman); id. at 1109-16, 1125-63 (correspondence between Transohio and FHLBB, and Statesman and FHLBB).

To the extent that the Moorman line of cases can be read as requiring even a minimal amount of procedure, the correspondence history from the Transohio and Statesman eases indicates that the procedure was available. It is unclear what, if any, standard of review this court should apply to FHLBB’s

interpretation of GAAP, which governs this contract under § 20 of the Assistance Agreement. See Def.App. v.l at 556 (“[T]he accounting principles ... shall be those in effect on the Effective Date or as subsequently clarified or interpreted by the Bank Board”). In Seaboard, the Federal Circuit held that a court could disturb an agency’s decision on contract disputes only on a showing of fraud, but that criterion is more applicable to review of proceedings before an administrative tribunal, where the contracting officer makes representations to a third party. 903 F.2d at 1564.

It is difficult to imagine how the court could find fraud (since Seaboard appears to be referring to fraud on a court or tribunal) when the issue was never raised by plaintiff in a way that triggered any sort of proceedings prior to this one. The court need not decide the point, however, because the two statements of policy governing FHLBB’s

interpretation strongly suggest that its

interpretation of GAAP as requiring the amortization of FSLIC assistance was reasonable. Memorandum SP-37a, which detailed the SM-1 forbearance, permitted plaintiff to disregard FASB 72’s instruction to reduce the amount of the intangible asset reported by the amount of cash assistance, but nothing in the forbearance suggests that the rest of FASB 72 should also be ignored. Def.App. v.l at 399. FASB 72 makes no distinction between GAAP goodwill and RAP goodwill in setting out the required amortization period.

FASB 72 merely states in paragraph 5 that the excess of liabilities assumed over assets acquired “constitutes an unidentifiable intangible asset,” and goes on to require that the asset be amortized. Def.App. v.2 at 1100. b. Memorandum SP-37a and FASB 72 Plaintiff argues that the SM-1 forbearance as set out in Memorandum SP-37a exempts the goodwill in question from amortization since, unlike the SM-2 forbearance (which, plaintiff claims, does not apply to RAP goodwill), it does not set a specific amortization period. PI. Reply at 18.

That argument overlooks the respective purposes of the two forbearances and does not, the court believes, accurately describe their respective effects on accounting. SM-1 exempts goodwill from the offsetting reduction required by FASB 72, whereas SM-2 changes the amortization period for the goodwill from the FASB 72 requirement (specifically, the estimated remaining life of the long-term interest-bearing assets). Def.App. v.1 at 399; id. v.2 at 1100-01. SM-2 makes no distinction between GAAP and RAP goodwill.

The thrifts that were granted the SM-2 forbearance, including Transohio and Statesman, were instructed to apply it equally to the two kinds of goodwill. Def.App. v.2 at 1115-16, 1130-31 (FHLBB correspondence with Transohio and Statesman directing each of them to amortize RAP goodwill over a 25-year period); id. at 1577, 1687 (FHLBB Resolutions approving Transohio and Statesman mergers, certifying that thrifts may depart from GAAP in amortizing intangible assets over 25 years). Plaintiffs argument that RAP goodwill is outside the purview of FASB 72 altogether is unpersuasive. PL Reply at 15.

In its discussion of the treatment of FSLIC-assisted mergers, FASB 72 makes a distinction between mergers where “receipt of the assistance is probable and the amount is reasonably estimable” and those where the existence and amount of the assistance are not clear at the time of the merger. Def.App. v.2 at 1100-01.

In the case where the terms of assistance are unclear, FASB 72 directs that “any assistance subsequently recognized in the financial statements shall be reported as a reduction of [goodwill]”; when the terms are clear, FASB 72 directs that “that portion of the cost of the acquired enterprise shall be assigned to such assistance.” Id. at 1101. The difference underlying the distinction appears to be in the subsequent accounting treatment. If the assistance is reported as a “reduction” of goodwill, then the amount reported on line A544 would be reduced by the amount of the assistance.

If the “cost of the acquired enterprise” is “assigned” to the contribution, however, then the reported liabilities are reduced. Plaintiffs forbearance permitted it to take a third accounting route. Plaintiff preserved both the liabilities and the goodwill asset, and reported an additional $299 million as “contributed capital.” An alternative accounting treatment of RAP goodwill does not indicate that the acquisition is outside FASB 72 altogether, however. Nothing in the

section of FASB 72 governing the reporting of FSLIC assistance states that exemption from the requirements of that

section waives all the requirements of FASB 72 for that thrift. Nor does the Assistance Agreement say or imply that GAAP is entirely inapplicable to plaintiff.

Section 6 of the Agreement, as the court has discussed, in fact states that the “shall be credited” and “shall constitute” language “is not intended to address in any way the accounting treatment” of the capital contribution. Id. v.l at 512. Plaintiff emphasizes the difference between the two accounting treatments provided for in FASB 72, noting particularly that FASB 72 does not use the word “reduction” in addressing the treatment of FSLIC assistance when the amount of the assistance is clear. Pl. Reply at 12.

But the omission of the word “reduction” from the relevant sentence in FASB 72 (“[i]f receipt of the assistance is probable and the amount is reasonably estimable, that portion of the cost of the acquired enterprise shall be assigned to such assistance”) does not compel the conclusion that the goodwill resulting from the forbearance is wholly unknown to FASB 72, or to its amortization requirements, as plaintiff suggests. Def.App. v.2 at 1100-01. Confirming this view are statements in the correspondence between FHLBB and Transohio in which FHLBB referred to FASB 72 as requiring the amortization of RAP goodwill.

Id. at 1115, 1119. The court finds this

interpretation reasonable. 5. Amortization Period Finally, plaintiffs argument that RAP goodwill should be subject to a 25-year amortization period rather than a 12.7-year period also fails. PI. Reply at 52-53. The excess of liabilities over assets in this case was $347 million, and FASB 72 clearly requires that such excess is subject to amortization over a period no greater than the life of the long-term interest-bearing assets — in this case, 12.7 years. Def.App. v.2 at 1100.

Plaintiff argues that the FSLIC assistance should be treated as an asset, thereby reducing the excess of liabilities over assets to $48 million. PI. Reply at 54. But the accounting treatment of such assistance under FASB 72 contradicts that view. Whether the assistance reduced the amount of goodwill recorded or reduced the amount of liabilities recorded, in neither case is it credited to the institution as an asset. PI. Reply at 12-13; Def.App. v.2 at 1101.

If it were appropriate to treat the FSLIC assistance in this case as a reduction of liabilities, then the gap between assets and liabilities would be properly treated as $48 million, but such assistance is only treated as a reduction of liabilities when its existence or amount is uncertain, as plaintiff has itself explained. PI. Reply at 12-13. FASB 72 governs all aspects of plaintiffs acquisition of Central other than the forbearance, and requires that plaintiff amortize its goodwill over a period of 12.7 years. 6. Conclusion For the foregoing reasons, defendant’s Motion for

Summary Judgment is GRANTED with respect to the duration of the capital credit, and plaintiffs Cross-Motion for

Summary Judgment on the same issue is DENIED. C. Foreseeability In a contract case, a plaintiff is entitled only to those damages that the breaching party could reasonably have contemplated at the time of contract formation. Prudential Ins. Co. v. United States, 801 F.2d 1295, 1300 (Fed.Cir.1986). The breaching party must be able to foresee the type of damages, but the precise amount need not be foreseeable. Gardner Displays Co. v. United States, 171 Ct.Cl. 497, 346 F.2d 585, 589 (1965).

A plaintiff may show either that the defendant actually did foresee the type of damages pleaded or that it should, in the ordinary course of events, have foreseen such damages. See Chain Belt Co. v. United States, 127 Ct.Cl. 38, 115 F.Supp. 701, 714 (1953); Restatement (Second) of the Law of Contracts § 351(2) (1981). Plaintiff contends that the types of damages it seeks in this case — lost profits, capital replacement costs, and “wounded bank” damages — were foreseeable to the government at the time of contracting, while defendant argues that it could not have foreseen those damages. PI. Response at 32-34; Def.

Mot. at 73-74. Both parties have moved for

summary judgment on the element of foreseeability of damages as a result of defendant’s breach. 1. Actually Foreseen Plaintiff argues that the government actually did foresee plaintiffs damages, and cites the testimony of various FHLBB officials in support of that argument. PI. Response at 34-38. The questions posed to those officials, however, related to the abstract question of whether depriving plaintiff of a capital credit would produce those damages, rather than to the officials’ expectations at the time this particular contract was executed.

See, e.g., DefApp. v.l at 850-51 (deponent acknowledging that damages were foreseeable but denying that he actually fore-saw them); Pl.App. v.2 at 1028 (asking generally about cases where capital was treated as capital credit); PLApp. v.l at 739 (asking generally about whether an institution granted a capital credit could use it as leverage); PLApp. v.2 at 792-93 (asking about deponent’s specific expectations, but deponent answering only that he would not have permitted plaintiff to leverage its capital to an extent that would endanger the bank, and that he expected plaintiff to leverage its capital to the extent indicated by its business plan).

The testimony of these officials is probative of what the regulators responsible for negotiating this particular contract should have foreseen, but it does not demonstrate that they actually did foresee plaintiffs pleaded damages. For purposes of demonstrating that its damages were reasonably foreseeable, plaintiff has not shown that they actually were foreseen. 2. Should Have Been Foreseen Plaintiff argues persuasively, however, that the government should have foreseen plaintiffs damages, whether or not it actually did foresee them. Pl. Response at 38-41.

Damages that are ‘“natural and inevitable upon the breach so that the defaulting party may be presumed from all the circumstances to have reasonably foreseen’ ” them are foreseeable. LaSalle Talman, 45 Fed.Cl. at 87 (quoting Chain Belt, 115 F.Supp. at 714). To this end, evidence that a knowledgeable person in defendant’s position should have anticipated plaintiffs damages indicates that those damages were foreseeable. The question of foreseeability is related to the purpose of the contract.

In Wells Fargo, the Court of Appeals for the Federal Circuit rejected lost profits damages but upheld damages based on a writeoff of indebtedness due to the government’s failure to issue a guarantee. 88 F.3d at 1023-24. The court reasoned that the missing guarantee and the resulting writeoff were the subject of the principal contract, whereas the lost profits claims were the subject of “ ‘independent and collateral undertakings.’” Id. at 1023 (quoting Ramsey v. United States, 121 Ct.Cl. 426, 101 F.Supp. 353, 357-58 (1951)). In Glendale Federal Bank, FSB v.

United States, 43 Fed.Cl. 390 (1999), appeal docketed, No. 99-5113 (Fed.Cir. Jun. 21, 1999), this court addressed a foreseeability question similar to the dispute at issue here and, relying on Wells Fargo, concluded that the purpose of the SM-1 forbearance was to give the plaintiff the ability to leverage its capital and gain profits thereby. Id. at 398-99. Plaintiff has offered substantial evidence in support of its position. Plaintiff relies most heavily on the testimony of Mr.

Gray who stated, when asked about “any other problems [he] might foresee which would result from a taking away of the capital credit,” that he thought a variety of damages could result: When there’s this huge chunk that is taken out from your regulatory capital, you have to report it, and you either have to reduce your assets to come back into regulatory compliance — and, by the way, it’s hard to do that quickly without taking further losses.

So everyone comes to know that you are an institution that may be hovering around a net worth that they were never used to before, and shareholders know that you can have problems with the regulators at that time, and also, this gets you publicity which causes you to have to pay more for your deposits and probably more for your advances from the Federal Home Loan Banks. DefiApp. v.l at 850-51. Defendant argues that Mr. Gray’s understanding of the term “capital credit” is unclear, since it is possible that Mr.

Gray understood the deposing attorney to mean the cash assistance itself rather than FHLBB’s forbearance, which granted permission to count the cash infusion as goodwill for regulatory capital purposes. Def. Reply at 92-94. While Mr. Gray appeared to be assuming at an earlier point in his deposition that “capital credit” referred to the cash itself rather than the accounting treatment of the forbearance, see Def.App. v.l at 846, here he appears to be talking about the accounting treatment rather than the cash.

His deposition testimony identified the foreseeable damages as arising from a sudden change in a thrift’s capital/asset ratio and the need to return to compli-anee quickly, which supports plaintiffs proffered damages model. Def.App. v.l at 850-51. That Mr. Gray identifies the loss of regulatory capital as the source of damages is significant, moreover, because the capital credit that was the subject of the breach was valuable solely as regulatory capital; cash, by contrast, is includible in assets, not in regulatory capital.

See, e.g., id. v.2 at 1170 (pre-1989 TFR with line item for “Cash and Demand Deposits” in the

section entitled “Assets,” but no line item mentioning cash in the

section entitled “Regulatory Net Worth”); id. at 1248^49 (1989 TFR with line item for “Cash and NoninteresUEarning Deposits” in the

section entitled “Assets,” but no line item mentioning cash in the

section entitled “Calculation of Regulatory Capital”). Had Mr. Gray been referring to the cash in this discussion of the “capital credit,” he would not have stated that “a huge chunk is taken out from your regulatory capital.” Id v.l at 850. Mr. Gray’s testimony, then, supports the view that the government could have foreseen plaintiffs damages at the time of contracting, had it also foreseen the breach. Other government officials confirmed this view.

Thurman Connell, former Director of FSLIC, testified that he “would have expected” an acquiring institution given a capital credit forbearance to leverage against that credit and, further, that depriving an institution of a capital credit would force it to shrink its asset base. Pl.App. v.2 at 1028. Since plaintiffs lost profits and replacement cost theories of damages both rely on its reduced ability to leverage its regulatory capital and consequent forced shrinkage, Mr. Connell’s testimony is probative of foreseeability. Mr. Connell’s testimony was not controverted by defendant.

Guy Schlaseman, another former FSLIC official, testified that a capital contribution “could be converted to interest-bearing assets,” and that losing the contribution could require an institution to reduce its assets. PLApp. v.l at 739, 756-57. Defendant contends that Mr. Schlaseman’s use of “could” rather than “would” argues against foreseeability. Def. Reply at 95-96. The use of “could” suggests that Mr. Schlaseman did not actually foresee plaintiffs damages, but it also indicates that he viewed them as damages that should have been foreseen. Mr. Schlaseman’s testimony therefore supports plaintiffs argument.

As plaintiff has argued, the forbearance had no purpose other than permitting leverage (either directly or by enabling plaintiff to leverage other assets), so FHLBB could not reasonably have expected that plaintiff would not use it for that purpose. PI. Response at 39-41. Under Wells Fargo and Glendale, a showing that the claimed damages were closely related to the purpose of the contract is strong evidence that the damages were reasonably foreseeable. 88 F.3d at 1023, 43 Fed.Cl. at 398.

Likewise, the LaSalle Talman court held, relying on Glendale, that lost goodwill could foreseeably result in lost profits, and rejected an argument that a highly troubled thrift’s survival was too uncertain to make its continuing need for the forbearance foreseeable. 45 Fed.Cl. at 88-89. In this case, where the record does not indicate any doubt that plaintiff would remain a going concern, plaintiffs continuing need for regulatory capital should have been obvious.

Defendant points to contemporaneous statements in plaintiffs business plans disavowing an intent to leverage all of plaintiffs capital as evidence that the damages plaintiff alleges were not reasonably foreseeable. Def. Reply at 97-99. Since plaintiff intended to maintain a capital/asset ratio that was significantly greater than the regulatory requirement, defendant argues, it was not reasonably foreseeable that depriving plaintiff of some capital would cause it to fall out of regulatory compliance (thereby forcing plaintiff to raise capital quickly and sell assets). Id.

The significance of plaintiffs $299 million capital contribution, however, was that it provided a cushion for plaintiff in the event that other problems put pressure on its eapital/as-set ratio. PI. Response at 43. If those other events were entirely unforeseeable, that would argue against the foreseeability of plaintiffs damages as well. However, the court finds that a circumstance such as an economic downturn which made it difficult for plaintiff to raise capital was foreseeable to defendant.

Indeed, an OTS official, Mi-ehael Buting, testified that having more capital than the regulatory minimum was desirable for thrifts in the event of a recession, since loan defaults would put a strain on capital. Pl.App. v.4 at 2719. It was also foreseeable that capital requirements would change. As the Supreme Court plurality in Winstar recognized, regulatory capital requirements in this period changed frequently enough that regulators were aware of the possibility that plaintiff would have to meet a higher capital/asset ratio with its existing capital. 518 U.S. at 906-07, 116 S.Ct. 2432.

The value of maintaining a “capital cushion” is unquestioned by defendant, and plaintiff has shown that it was foreseeable that subtracting the capital contribution from regulatory capital could cause plaintiff to fall out of regulatory compliance, even if plaintiff was not fully leveraged at the time of contracting. Defendant cites the testimony of Mr. Smuzynski as evidence that defendant could not have been expected to foresee that plaintiff would try to leverage its regulatory capital. Def. Reply at 94-95. Mr.

Smuzynski, when asked about whether he expected that plaintiff would leverage its capital contribution, stated that FHLBB would not be inclined to permit an institution to leverage its capital significantly when a substantial percentage of that capital consisted of goodwill since it would be “difficult” to do so safely. Pl.App. v.2 at 792-93. Mr. Smuzynski also acknowledged, however, that government regulators approved plaintiff’s business plans, and that he expected plaintiff to leverage its regulatory capital to the extent indicated by its business plans. Id.

Plaintiffs business plan for 1988 projected an increase in assets and a decrease in the ratio of regulatory capital to assets. See Def.App. v.4 at 2726 (plaintiffs December 1987 business plan, planning increase in total assets from $11,663,461 in 1987 to $12,511,005 in 1988); id. at 2727 (same business plan, planning decrease in regulatory capital ratio from 8.97% to 8.65%).

The only way that plaintiff could have attained the growth projected in its business plan without leveraging the capital credit was to add more regulatory capital to its balance sheet — enough to maintain or increase its regulatory capital ratio. Since plaintiff clearly did not intend any such thing, a regulator reviewing plaintiffs business plan for 1988 should have concluded that plaintiff intended to leverage the capital credit.

The important question is not whether it was desirable for a thrift to approach the limits of, or violate, capital ratios, but whether it was foreseeable that circumstances could force a thrift to do so. In this case, the circumstances that could lead to that result were all foreseeable. Several of defendant’s arguments on foreseeability in fact relate more closely to causation. For example, defendant argues that because a recession began shortly after FIR-REA passed, it is difficult to say whether plaintiffs problems arose more from the recession or from the breach. Def. Mot. at 75.

Defendant also argues that the loan losses that plaintiff sustained as a result of the recession contributed to plaintiffs difficulties in meeting regulatory requirements after the breach. Id. Defendant argues as well that non-breaching parts of FIRREA — specifically, the changed capital requirements, which would have pushed plaintiff toward a regulatory violation even if the breach had not happened — contributed to the pressure on plaintiffs capital/asset ratio. Id.

Whether the breach did in fact cause plaintiffs damages — that is, whether it was a sufficiently “substantial factor” in the claimed damages to be considered the cause of those damages, see California Federal Bank v. United States, 43 Fed.Cl. 445, 450 (1999) (quoting 5 Arthur L. Corbin, Corbin on Contracts § 999 at 25 (1964)) — is a separate question addressed below. Defendant also argues that, in light of plaintiffs 1987 and 1988 business plans, it is unreasonable to assume that, had there been no breach, plaintiff would have leveraged its capital as extensively as it now claims. Def. Mot. at 77-79.

That argument, however, relates more to the accuracy of plaintiffs lost profits model (since that model relies on plaintiffs “but for” scenario) than to whether plaintiffs damages were foreseeable. 3. Conclusion Because the possibility of damages and the circumstances that could give rise to them were demonstrably foreseeable to FHLBB at the time of contracting, there is no genuine issue of material fact remaining on foreseeability. See Concept Automation, Inc. v. United States, 41 Fed.Cl. 361, 370 (1998) (granting plaintiff

summary judgment based in part on finding that its damages were foreseeable). For the foregoing reasons, plaintiffs Cross-Motion for

Summary Judgment is GRANTED with respect to foreseeability, and defendant’s Motion for

Summary Judgment is DENIED with respect to foreseeability. This judgment does not address any other aspect of plaintiffs damages model, including proof of causation or the accuracy of plaintiffs projections. D. Nature and Scope of Breach The parties also dispute what exactly constituted the breaching act. Specifically, defendant argues that FIRREA itself was the breach, and that plaintiff must therefore subtract any benefits conferred by FIRREA from its calculation of damages. Def. Mot. at 70-73; see Erwin v.

United States, 19 Cl.Ct. 47, 56 (1989) (plaintiff must account for expenses avoided in calculating damages for breach of contract); Charles T. McCormick, Handbook on the Law of Damages 146 (1935) (“[I]f any benefit or opportunity for benefit appears to have accrued to the plaintiff by reason of defendant’s breach of duty, a balance must be struck between benefit and loss, and the defendant should be charged only with the difference.”).

Plaintiff responds that the OTS regulations implementing FIRREA constituted the breach, not FIRREA itself, so any benefits to plaintiff attributable to the passage of FIRREA are irrelevant to this court’s inquiry. PI. Reply at 60. Alternatively, plaintiff argues that only the provisions of FIRREA that actually breached the contract can be considered the breaching act, and that it derived no benefit from those provisions. PI. Response at 84. Defendant has moved for

summary judgment on this issue. The court agrees with defendant that FIR-REA breached the contract, and with plaintiff that only the provisions of FIRREA that actually breached the contract are properly included within the scope of the breach. For purposes of this motion, the court does not decide whether and to what extent plaintiff derived any benefits from the breach.

Summary judgment is appropriate when, on the matter that is the subject of the motion, there is “no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” RCFC 56(e). The question of the nature and scope of the breach is purely a question of law. Northern Helex Co. v.

United States, 225 Ct.Cl. 194, 634 F.2d 557, 563 (1980) (stating that damages should be reduced by “the extent that the breach itself made [the plaintiffs property] more valuable to the plaintiff,” but that damages should not be reduced by “increases in the value of [the plaintiffs property] that either resulted from the performance of the contract or occurred after the breach but not because of it”). The l

[…]