Free Motion to Dismiss - Rule 12(b)(1) - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

AMBASE CORPORATION and CARTERET BANCORP, INC. Plaintiffs, FEDERAL DEPOSIT INSURANCE CORPORATION, Civil Action No. 93-531C Plaintiff-Intervenor, Senior Judge Loren A. Smith v. UNITED STATES OF AMERICA, Defendant.

PLAINTIFF-INTERVENOR FDIC'S MOTION TO DISMISS SHAREHOLDER PLAINTIFFS' CLAIM THAT DAMAGES SHOULD BE BASED ON THEIR ALLEGED LOSSES Plaintiff-Intervenor Federal Deposit Insurance Corporation ("FDIC") is the successor to the rights of Carteret Savings Bank, FA ("Carteret" or the "thrift"), and manager of the FSLIC Resolution Fund, which succeeded by operation of law to the assets and liabilities of the Resolution Trust Corporation ("RTC"). The FDIC filed a Complaint in Intervention in this action. 1 FDIC hereby moves to dismiss Shareholder Plaintiffs' claim that the Court should award the losses allegedly suffered by the Shareholder Plaintiffs, in the past or in the future, as damages on the derivative claim asserted by Carteret Bancorp, on behalf of Carteret, for breach of contract. FDIC also moves to dismiss Shareholder Plaintiffs' theory that the "exact value of the

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Complaint in Intervention of Plaintiff Federal Deposit Insurance Corporation, AmBase Corp. v. United States, No. 93-531C (Ct. Fed. Cl.)("AmBase")(Mar. 28, 1997).

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Carteret receivership," AmBase Corp. v. United States, 61 Fed. Cl. 794 (2004)("AmBase II"), is relevant to the calculation of damages on that derivative claim. STATEMENT OF THE CASE Plaintiffs AmBase Corporation ("AmBase") and Carteret Bancorp, Inc. ("Carteret Bancorp")(collectively, the "Shareholder Plaintiffs") filed a First Amended Complaint ("FAC") in this action. That complaint asserted six claims for relief: five direct (FAC Counts I-V) and one derivative. FAC Count V. Four of the direct claims (FAC, Counts I-IV) have been dismissed. 2 The FDIC has moved for dismissal of the fifth direct claim. Plaintiff-Intervenor FDIC's Motion to Dismiss Carteret Bancorp's Claim for A Surplus (Dec. 21, 2007). The derivative claim, pled by Carteret Bancorp alone, seeks damages from the Government for Carteret. FAC, Count VI, ¶ 87. The damages it seeks are for Carteret's losses. Id. Since filing their FAC, however, Shareholder Plaintiffs have argued to the Court that it must "determine the size of the deficit or surplus in order to determine the just amount which puts them in `as good a position as [they] would have been in,' had the breaching party fully performed its obligation."AmBase II, 61 Fed. Cl. at 794 (alteration in original)(emphasis added). In other words, Shareholder Plaintiffs argue that the measure of Carteret's damages is not the Thrift's loss but their own. This theory does not state a claim for relief under applicable contract law and must therefore be dismissed. RCFC 12(b)(6). STANDARD OF REVIEW When the issue of subject matter jurisdiction has been raised, "[p]laintiffs must establish jurisdictional facts to survive a motion to dismiss." American Red Ball Internat'l, Inc. v. United States, -- Fed. Cl. ­ , 2007 WL 4238993 (Nov. 28, 2007); citing RCFC 12(b)(1), Reynolds v.

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AmBase Corp. v. United States, 58 Fed. Cl. 32 (2003)("AmBase I"). FAC Counts I-III asserted direct breach of contract claims; Count IV asserted a "takings" claim.

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Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed.Cir.1988). "The court assumes that all well-pled allegations in the Complaint are true and draws all reasonable inferences in plaintiffs' favor. Rule 12(b)(6) states that `[a] motion to dismiss for failure to state a claim upon which relief can be granted is appropriate when the facts asserted by the claimant do not, under the law, entitle him to a remedy.' " Id., quoting Perez v. United States, 156 F.3d 1366, 1370 (Fed.Cir.1998), citing RCFC 12(b)(6). ARGUMENT I. DAMAGES ARE MEASURED BY CARTERET'S LOSS ALONE

The underlying fatal flaw in Shareholder Plaintiffs' argument is that Shareholder Plaintiffs have no direct claims based on the Government's breach of Carteret's goodwill contracts. Because Shareholder Plaintiffs lack direct claims, no attempt to measure their past or future "losses" has any legal significance in this action. In an early opinion in this case, while dismissing Shareholder Plaintiffs' "takings" claim, the Court stated that The government's breach of contract creates in the corporation, here Carteret, a cause of action against the government. If Carteret prevailed in the breach of contract action, the corporation would be restored to the position it would have been in and the shareholder would have lost nothing by the government's action. AmBase Corp. v. United States, 58 Fed. Cl. 32, 51 (2003)(emphasis added)("AmBase I"); see also id. (compensation "due to Carteret"). This seemed to make it clear that any damages awarded on Carteret Bancorp's derivative contract claim would be paid to Carteret, to which the FDIC is now successor. This statement also seemed to make it clear that damages on the breach of contract claim would be measured by the loss to Carteret alone. 3

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Indeed, Shareholder Plaintiffs' First Amended Complaint ("FAC") specifically asserted that the Government's breach of the goodwill contracts at issue here caused harm to Carteret and entitled Carteret to damages from the Government. FAC Count VI.

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In another opinion, however, the Court expressed the apparently contrary view that since the Ambase Plaintiffs are to have their recovery reduced by the size of the receivership deficit, the Court must determine the size of the deficit or surplus in order to determine the just amount which puts them in `as good a position as [they] would have been in,' had the breaching party fully performed its obligation. AmBase Corp. v. United States, 61 Fed. Cl. 794, 802 (2004)("AmBase II")(alteration in original)(emphasis added), quoting Bluebonnet Savings Bank, FSB v. United States, 339 F.3d 1341 (Fed. Cir. 2003). This seemed to say that the measure of damages award in a shareholder derivative suit involving a goodwill contract is the loss to the shareholder plaintiffs, rather than to the corporation on whose behalf they sue. If so, the statement is not correct. As the Court correctly stated earlier, "the purpose of a damages award for the breach of a contract is to restore the victim of the breach to the position in which he would have been in were the contract not breached." AmBase II, 61 Fed. Cl. at 801, citing Dobbs, Law of Remedies, § 1.1, at 3 (2nd ed. 1995)(emphasis added). That victim is, as the Bluebonnet case made clear, the nonbreaching contract party. Bluebonnet Savings Bank, F.S.B. v. United States, 266 F.3d 1349, 1356 (2001), quoting Restatement (Second) of Contracts, § 344(a)(1981), citing Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1380 (Fed. Cir. 2001). As recognized in the Court's early opinion, that non-breaching contract party is Carteret, not the Shareholder Plaintiffs. AmBase I, 58 Fed. Cl. at 51. Carteret alone is to be restored "to as good a position as [it] would have been in" had the goodwill contracts not been breached. Because Shareholder Plaintiffs have no direct contract claims, and thus are not victims of the breach, the Court has no reason to determine what amount would put them in "as good a position as [they] would have been in" had the Government fully performed its obligations.

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AmBase II, 61 Fed. Cl. at 802 They do not risk having "their recovery" reduced, whether by the receivership deficit or anything else, because the recovery on the derivative contract claim--the only contract claim remaining in this case--is Carteret's, not theirs. 4 Nor does the Court have any reason to determine the "exact value" of the Carteret receivership deficit: that sum is irrelevant to a determination of Carteret's losses. 5 II. CARTERET'S RECEIVERSHIP DEFICIT IS NOT RELEVANT TO ITS DAMAGES

As an alternative basis for reviewing the receivership deficit, Shareholder Plaintiffs assert that the FDIC has mismanaged the Carteret receivership and that, as a result, either this case will become moot (because the projected receivership deficit will come to exceed the damages award), or, if the case remains justiciable, Shareholder Plaintiffs will ultimately receive less, in payment on their receivership claim, than they believe that they should. AmBase II, 61 Fed. Cl. at 796, 802. They assert that an inquiry into the "exact value" of the Carteret receivership deficit should be conducted in order to prevent this hypothetical future result. Shareholder Plaintiffs are mistaken, as to the facts and the law. First, the FDIC has complied fully and reasonably with its statutory duties in managing the Carteret receivership. Second, Shareholder Plaintiffs' claims of future underpayment are premature. As the FDIC has consistently stated, its projections of the Carteret deficit are highly contingent. 6 Moreover,

Shareholder Plaintiffs have only a "contingent interest in a liquidation surplus" arising from the fact that "if funds remain after all depositors, creditors, and other claimants have been paid, the

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Shareholder Plaintiffs' claim for a direct award of derivative damages must be dismissed. Plaintiff-Intervenor FDIC's Motion to Dismiss Carteret Bancorp's Claim for a Direct Award of Derivative Damages (Sept. 21, 2007). 5 Perhaps the Court's remark was addressed not to the derivative contract claim but rather to Carteret Bancorp's direct claim for a surplus.. Due to developments in goodwill contract law, that claim is no longer viable and must be dismissed. Plaintiff-Intervenor FDIC's Motion to Dismiss Carteret Bancorp's Claim for A Surplus (Dec. 21, 2007). 6 FDIC, Goodwill Financial Reporting Package--Carteret Federal Savings Bank, Report 3 (Mar. 23, 2007)(FX 1A)(Ex. 1 hereto).

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receiver is to distribute such funds to the depository institution's shareholders" and thus a favorable judgment could "potentially enlarge any liquidation surplus to be distributed among the shareholders." First Hartford Corp. Pension Plan & Trust v. FDIC, 194 F.3d at 1288, citing 12 U.S.C. §
1821 (d)(11). Until this case, along with all claims against the Carteret receivership, is resolved, the deficit in that receivership has no "exact value."

Most importantly, FDIC's management of the Carteret receivership is, like the projected receivership deficit, irrelevant for purposes of calculating damages from breach of Carteret's goodwill contracts. Neither the FDIC's management nor the projected receivership deficit has anything to do with the amount of damages owed by the Government to Carteret. That amount is measured exclusively by the loss suffered by the Thrift. As far as this case is concerned, the projected receivership deficit may become relevant, if at all, only to the issue of justiciability, which may arise again after damages are determined. As in other cases, the Court here may have to "wrestle" with "finding a viable damages theory that fits the complex fact patterns of these cases, and that is fair to the damaged thrift[], but is based on real losses sustained so as not to overcompensate for the breach." Glendale Fed. Bank F.S.B. v. United States, 378 F.3d 1308, 1312 (2004)(emphasis added). But fairness to Carteret is the only fairness that is relevant to determining damages on Carteret's derivative contract claim. CONCLUSION Shareholder Plaintiffs's claim that losses allegedly suffered by them, in the past or in the future, are relevant to the calculation of damages on the derivative claim, asserted by Carteret Bancorp on behalf of Carteret, for breach of contract, should be dismissed. Shareholder Plaintiffs's related claim, that the "exact value of the Carteret receivership" is relevant to the calculation of damages on that derivative claim, should also be dismissed. See Fifth Third Bank

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of Western Ohio v. United States, 402 F.3d 1221, 1223, 1236-37 (2005)(upholding trial court's pre-trial decision to preclude goodwill contract plaintiff from presenting "cover damages" theory). Respectfully submitted, Federal Deposit Insurance Corporation Legal Division s/ Andrew C. Gilbert Andrew C. Gilbert Counsel of Record for Plaintiff-Intervenor 550 Seventeenth Street, NW, MB-3060 Washington, DC 20429 (202) 898-3871

Of Counsel: John V. Thomas Deputy General Counsel D. Ashley Doherty Counsel December 21, 2007

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CERTIFICATE OF FILING I hereby certify this 21st day of December 2007, that I caused a copy of the foregoing to be filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system, and that parties may access this filing through the Court's electronic filing system. s/ Andrew C. Gilbert

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