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United States Court of Appealsfor the Federal Circuit
05-5059 OLD STONE CORPORATION, Plaintiff-Appellee,
V.

U N ITED STATES, Defendant-Appellant.

MarvinC. Garbow, Arnold & Porter LLP, of Washington, arguedfor plaintiffDC, appellee. Of counselon the brief wereHoward Cayne,DavidB. Berqman, N. Jos_~hua P. Wilson of Washington,DC; and Kent A. Yalowitz and Allen Wonq,of NewYork, New York. William F. Ryan,Assistant Director, Commercial Litigation Branch,Civil Division, United States Departmentof Justice, of Washington, DC, argued for defendantappellant. Onthe brief wereStuart E. Schiffer, DeputyAssistant Attorney General,and David M Cohen,Director. Of counsel on the brief were JeanneE. Davidson, Deputy Director, andJeffery T. tnfelise, Trial Attorney. Appealed from: United States Court of Federal Claims Senior JudgeRobertH. Hodges, Jr.

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United States Court of Appealsfor the Federal Circuit
05-5059 OLD STONE CORPORATION, Plaintiff-Appellee,

UNITEDSTATES, Defendant-Appellant.

DECIDED: May 25, 2006

Before LINN, DYK,and PROST, Circuit Judqes. DYK, Circuit Jud.qe. This is a Winstar damages case. See United States v. Winstar Corp., 518 U.S. 839 (1996). The United States appeals the decision of the United States Court Federal Claims, which awardedto Old Stone Corporation ("OSC") $192.5 million damages the government's for breachof contract. Old StoneCorp. v. United States, 63 Fed. CI. 65 (2004)("Old StoneIt"). Thebreachwasthe elimination of regulatory capital by the enactment the Financial Institutions Reform,Recovery Enforcement of of and Act 1989("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183. Weaffirm the awardof $74.5 million of post-breachmitigation payments, reverse the awardof $118million of but initial contributions. We conclude that the $118million amount not recoverable is under

a restitution theory because appellant elected to continue performance the under the

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contract to the benefit of the appellant andto the detrimentof the government, is and not recoverableunder a reliance theory because damages the werenot foreseeableas a matterof law. BACKGROUND I Beforethe transactionsthat are the focus of this lawsuit, Old StoneCorporation ("OSC") was a bank holding company headquartered in RhodeIsland. Its primary subsidiary was a commercialbank, Old Stone Bank("Old OSB"or "OOSB"),which was insured by the Federal Deposit InsuranceCorporation ("FDIC"). This dispute had its genesis the acquisitionof twothrifts by OSC. in Thefirst transaction wasan acquisition of a small thrift, Rhode Island Federal

("RIF"). In June 1984, QSC submitted a proposal to the Federal Savings and Loan InsuranceCorporation("FSLIC") to acquire RIF with cash assistance from FSLIC.As result of the acquisition, QSC wouldbecome "thrift a holding company" owning of the all

stock of RIF. OSC wouldalso obtain a federal savingsbankcharter whichwouldpermit it to engage commercial in lending while allowing it to expand into other geographical areas. FSLICacceptedOSC's offer and approvedthe transaction in August 1984. The transaction involved the following steps: (1) RIF converted from a mutual savings institution to a Federalstock savingsbank(or "thrift"), "New" StoneBank("OSB"); Old

(2) QSB formed a subsidiary, NEWCO, which OSC to transferred all of its stock QOSB, valued at $103.2million; (3) NEWCO causedOOSB distribute its assets and to liabilities to OSB; OSC (4) acquiredall of OSB's stock for a nominal amount ($100).

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Under an "Assistance Agreement" executed by OSC, FSLIC and OSB,FSLIC contributed $9.55 million cash to OSB,andQSC contributed $13.8 million cash. RIF's deficit net worth on the date of the acquisition, after the cashcontributions, was$4.4 million, which was recorded as so-called "supervisory goodwill." The Assistance

Agreement incorporated a ForbearanceLetter, which obligated the governmentto permit OSB count FSLIC's $9.55 million cash contribution (knownas a "capital to credit"), andthe $4.4 million of goodwill as regulatory capital. Thus RIF transaction the generated approximately $13.95million in regulatory capital--S4.4 million in goodwill, and $9.5 million in the form of a capital credit. TheForbearance Letter permitted OSB to amortize this regulatory capital over a thirty year period. Because Forbearance the Letter was incorporated into the Assistance Agreement signed by OSC,FSLICand OSB,the government'spromiseof regulatory forbearanceran to both OSC OSB. and OSC and FSLICalso executed a Net Worth MaintenanceStipulation ("NWMS") under which OSC agreed to downstream(contribute) additional funds needed

maintain OSB compliance in with regulatory requirements. Thesecondtransaction (the "Citizens transaction") occurred on December 27, 1985. QSC acquired Citizens Federal, a FSLiC-insured, federally-chartered mutual associationlocated in Seattle, Washington. part of the transaction, Citizens Federal As converted to a federal stock savings bank and was renamedOld Stone Bank of Washington ("OSBW"). Under an Assistance Agreement between FSLIC, OSCand OSBW, FSLIC contributed $78.5 million of cash assistance to OSBW, and OSC

contributed $14.8 million. Takinginto accountthe cash contributions, the bankhad a net worth deficit of $2.76 million. This amount recordedas supervisory goodwill. was

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The Assistance Agreement incorporated a ForbearanceLetter, which permitted OSBW to countFSLIC's $78.5million contribution, andthe $2.76million of supervisory goodwill as regulatory capital. Thusthe Citizens transaction generated total of $81.26million a in regulatorycapital--S2.76million in goodwill, and$78.5million in capital credits. The Forbearance Letter permitted OSBW amortizethat regulatory capital over twenty five to years. As in the RIF agreement,the government'spromiseof regulatory forbearance ran to both the thrift andto OSC. OnDecember 1986, OSBW 31, (formerly Citizens Federal) merged with and into OSB. Thereafter the combined QSB-OSBW entity maderegulatory filings on a

consolidatedbasis andwasregulatedon the basis of its combined regulatory capital. The governmentcontends that on December 31, 1987, the parties agreed to terminate the Citizens AssistanceAgreement, pursuantto a termination provision of the Assistance Agreement that provided that "this Agreement shall terminate five years following the Effective Date or on such other date to which the parties or their successors a~qreein writinc~ .... " J.A. at 200185(emphasis added). The parties disputethe effect of this terminationon the government's regulatorycapital promise,but agree that it terminated the government'sobligation to makeassistance payments under the agreement. II In Augustof 1989, Congress enactedthe Financial Institutions Reform,Recovery and Enforcement Act of 1989, Pub. L. Nol 101-73, 103 Stat. 183. ("FIRREA"), which limited the ability of thrift institutions to countsupervisory goodwillandcapital credits towardstheir regulatory capital requirements. Winstar, 518U.S. at 856-60.

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At the time of the enactment FIRREA, of approximately$80million of regulatory capital from the Citizens and RIF transactions had not yet beenamortizedpursuantto the 30-year and 25-year amortization provisions of the assistance agreements. Approximately $11.7million of this capital wasattributable to the RIF transaction, and the remainder to the Citizens transaction. FIRREA prevented OSB from recognizing these amounts regulatory capital. As a result, OSB as failed one of the government's regulatory capital requirements--the so-called "risk-based" capital requirement--by $36 million. ~ OSB thus "undercapitalized" and subject to seizure. However,neither was OSC OSB nor repudiatedthe assistanceagreements at the time filed suit against the or governmentfor breach of the contracts. Rather, OSC and OSBsought to achieve compliance with FIRREA, to otherwise continue performance and underthe contract. A thrift could addressthe problemof regulatory compliancecreated by FIRREA

in oneof two ways--eitherby shrinking the thrift (selling assetsandusingthe proceeds to payoff liabilities) or byinfusingadditional capitalinto thethrift. Initially thethrift chose the former route. 2 It sold assets in December 1989--a residential lending unit of ("OsCal") and a tuition budgetcompany ("AcademicManagement Services" or "AMS").

Thrifts are regulatedunderFIRREA referenceto capital ratios -- i.e., by the ratio of capital to assets.The"risk-based"capital ratio "is obtained dividing [the by "] thrift's] capital base... [whichincludes, inter alia, "common stockholders' equity by its risk-weighted assets .... " 12 C.F.R. Pt. 3, App. A (1990). Twoother capital requirements "tangible capital" and"core capital." Thethrift here wasin compliance are with these latter tworequirements. It appears that the Court of Federal Claims erroneously referred to the unamortizedamountof regulatory capital remaining on the date of seizure as $75 million. OldStone 63 Fed.Ct. at 89. II, 2 A bankmayimproveits capital ratio either by increasing capital (as by receivingan infusion of cash)or by shrinkingits assetbase.OldStoneII, 63 Fed.Cl. at 05-5059 5

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Thereafter OSB submitted a "Capital Plan," which required OSB "maintain... to compliance with the tangible andcore capital requirements"andto meetthe risk-based capital requirement of FIRREA December by 31, 1990. J.A. at 200935. Under the Plan, the government granted an "exemptionfrom any penalties or sanctions that may be imposed the [thrift] on for failing to meetits capital requirements." J.A. at 200930.

TheCapital Plan called for further shrinkage the thrift throughthe sale by OSB the of of assets that were ownedby Citizens before the merger of Citizens into OSB.On January25, 1990,OSB enteredinto a definitive agreement sell all of the branches to of OSBW (formerly Citizens). It sold the assetsin May 1990,for a gain of $9.2 million. The Plan also required OSC contribute additional capital under the NWMS, to pursuant to a revised schedule. The governmentapprovedthe Plan in March 1990. Pursuant to the Plan, OSC downstreamed $74.5 million of capital to OSB three in allotments: $45.463 million in 1990,$27.5million in 1991and $1.6 million in 1992.In order to fund these downstreampayments, OSC sold assets including two of its subsidiaries, Old Stone Credit Corp and Old StoneBankof North Carolina. OSC refers to these subsidiaries as its "crown jewels." Therecord does not reflect the exact relationships between the 1990, 1991 and 1992 payments and the amount of

unamortized regulatory capital at the time of eachpayment, the parties agreethat but

73. The asset base is shrunk by selling off assets and using the cash proceedsto repay liabilities.

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these payments were evengreater than the amount unamortizedregulatory capital of ($65million)3 when thrift waslater seizedin 1993. the It is undisputedthat after the breachcausedby the enactment FIRREA, of OSC wassuffering from significant problems unrelatedto the lost regulatory capital. As the Court of Federal Claims found, "Old Stone acknowledges that factors other than the breachaffected the bank'soperationsduring the period after the breach."63 Fed. Cl. at 88. Thecourt also found that "[t]hese problemsresulted in part because general of economic conditions at the time." Id_.=. However, contended,as its expert stated, OSC that "[w]hat the breach was[take] away ability to weather storm, to solve the did our the [other] problems." Id_=. at 89 (emphasis added). III Three years after the enactmentof FIRREA, and OSB OSC filed a complaint in the Court of FederalClaimsagainst the United States on September 1992, alleging 16, that the passageof FIRREA resulted in the breach by the governmentof contracts embodied the RIF and Citizens assistance agreements,under which the government in wasobligated to permit the thrift to count capital credits andgoodwill as regulatory

capital. Thecomplaint requested,inter all__a, recoveryof damages had allegedly OSB suffered in attempting to maintain regulatory compliance, and $15 million OSC had investedwhen acquiredCitizens. it OnJanuary29, 1993, the government seized OSB placed it in receivership. and OSB at that time "critically was undercapitalized"underthe statute because hadless it

3 OSCstated that the amount of unamortized regulatory capital "approximately million," Pl's Supp.Br. at 9. There was sometestimony that might $65 supporta finding of $68.5million. 05-5059 7

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than two percent tangible equity. As noted above, absentthe enactment FIRREA, of on the 1993date of seizure the unamortized balanceof regulatory capital wouldhavebeen approximately million. $65 The Court of Federal Claims action was stayed pending the Supreme Court's decision in Winstar, 518 U.S. 839, and pursuant to a pretrial agreement concerning many the Winstaractions. of Eventually, after discovery, on April 10, 2003, the Court of Federal Claims granted summary judgmentin favor of OSC the issue of liability, on finding that the

enactment of FIRREA breached the Assistance Agreements.Old Stone Corp. v. had .United State~, No. 92-647C (Fed. Ct. Apr. 10, 2003)("Old Stoner'). In that connection the court rejected the government's argument that the regulatory capital promiseshad been terminated by the parties pursuant to Section 15 of the Citizens Assistance Agreement before the enactmentof FIRREA. Id., slip op. at 6-7. The court appeared . not to addressthe government's contention that the promiseof regulatory forbearance under the Citizens Assistance Agreementshould not be considered because that promise would have ceasedupon the sale of the OSBW assets in May1990 without regard to the enactment FIRREA. of A trial on damages held beginningin May2004. Old StoneII, 63 Fed. Cl. at was 68. Following the trial, the Court of Federal Claims awardedOSC the following

amounts damages: $74.5 million for the "post-breach"contributions OSC in (a) made OSB after the enactment FIREEA, of undermitigation and reliance theories; (b) $103.2 million for the valueof stock QSC transferred to the thrift in the RIF acquisition, under restitution and reliance theories; and (c) $14.8 million for the cashcontribution OSC

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made Citizens in the Citizens acquisition, underrestitution and reliance theories. to Thesedamages totaled $192.5million. 4 In awardingthese amounts,the court reasoned that the government'sbreach causedall of OSC'slosses, becauseabsent FIRREA, OSB would havehad an additional $65million in regulatory capital and wouldnot have beenseized. Thecourt held that the requirements restitution had beenmet because of the contributions conferred a benefit on the government, because enactment and the of FIRREA constituted a total breach. Thecourt rejected the government's argument that continuedperformance OSC by constituted an election that barred voiding the contract andseekingrestitution. In finding that the $192.5million shouldbe awarded reliance as damages, court found that the losses wereforeseeable.Thecourt also rejected the the government's argument that returning the initial to OSC. The government timely appealed. Following oral argument, we ordered supplementalbriefing on a variety of questions. Wehavejurisdiction 3ursuant to 28 U.S.C.§ 1295(a)(3). DISCUSSION Wereview the Court of Federal Claims' decisions on summary judgment and conclusionsof law without deference. Comtrol, Inc. v. United States, 294 F.3d 1357, 1362(Fed. Cir. 2002); Alger v. United States, 741 F.2d 391,393(Fed. Cir. 1984). reviewthe court's findings of fact following trial underthe clearly erroneous standard. investments wouldresult in a "windfall"

4 OSC abandoned claim to an additional $13.8 million that it allegedly a contributedto the RIF transaction.

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Anderson City of Bessemer v. City, 470 U.S. 564, 573-76(1985); Home Savingsof Am. v. UnitedStates, 399F.3d 1341,1347(Fed. Cir. 2005). I Wefirst addressthe Court of Federal Claims' holding that under a mitigation

theory OSC entitled to recover the $74.5 million in downstream is payments that it made to OSB order to replace the regulatory capital eliminated by FIRREA. in When FIRREA wasenactedin Augustof 1989it eliminated $80million of regulatory capital that was available to OSB underthe assistanceagreements. the time of seizure of the thdft By in January1993the unamortizedregulatory capital deficiency would only have been $65 million. Betweenthe enactmentof FIRREA the seizure, OSC and downstreamed

$74.5 million to OSB replace the regulatory capital lost by FIRREA. to That amount is claimed and was allowed by the Court of Federal Claims on a theory of mitigation. Neither party disputes that the downstreamed amountsexceededthe unamortized regulatory capital whichremained the time of the seizure. at A non-breaching party maygenerally recover its mitigation costs incurred in a reasonable effort to avoid loss caused by a breach, even if its efforts prove

unsuccessful. Restatement (Second)of Contracts §§ 350 cmt. h; id. at § 347 cmt. c (1981) ("IT]he injured party is [generally] entitled to recover for all loss actually suffered."). Consistent with this rule, we haveupheld awardsof the actual costs of generatingreplacement capital resulting from the elimination of regulatory capital by FIRREA. See, e.~., Home Savings, 399 F.3d at 1353; Cal. Fed. Bank, FSBv. United States, 245 F.3d 1342, 1350(Fed. Cir. 2001)(affirming awardof transaction costs

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measure cost of replacing capital) ("Cal Fed"); see also Huqhes of Commc'ns Galaxy, Inc. v. UnitedStates, 271F.3d 1060,1066(Fed. Cir. 2001). In Home Savings, for example, we affirmed an awardof the cost incurred by shareholders in replacing supervisory goodwill eliminated by FIRREA. 399 F.3d at 1354. Likewise, in LaSalle TalmanBankv. United States, 317 F.3d 1363(Fed. Cir. 2003), we affirmed an awardof the cost of raising replacementcapital "becauseit provides a measure compensation of basedon the cost of substituting real capital for the intangiblecapital heldby plaintiff in the formof supervisory goodwill."Id__.~.at 1374. In our prior "cost of replacement" cases, the thrift wasnot seized andthe replacement

capital wasnot lost, so the cost of replacingthe capital waslimited to the cost of raising additional capital anddid not include the replacement capital itself. Here, the Court of Federal Claims held that OSC'scost of replacing OSB'ssupervisory goodwill with tangible capital wasnot just the transactioncosts incurred in raising the $74.5million, but rather the $74.5 million itself. Weunderstand the governmentto contend that the Court of Federal Claims made severalerrors in allowing the $74.5million as mitigation costs. First, the government contends that the regulatory capital promise with respect to the Citizen's acquisition waseliminated by agreement December in 1987, before the enactment of FIRREA, and that FIRREAthus did not cause a breach of the government's promise. Since there wasno breachof the Citizens agreement, there can be no recoveryof mitigation payments that replacedthe Citizens capital. Because only $11.7million of RIF capital remained the date of FIRREA, mitigation payments on any in excess $11.7million are attributable to Citizens andare not recoverable. of

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Thereis no dispute that the Citizens agreement terminated. Thequestion is was whetherthe termination applied to both executory(i.e., financial assistance)andnonexecutory (i.e., regulatory forbearance)provisions. Thegovernment asserts that the

termination applied to both obligations and eliminated its obligation of regulatory forbearance before the enactment of FIRREA. The government agrees that the termination is describedin a December 1987, letter FHLBB to OSB 31, sent stating that "[t]his letter servesas notification that the Assistance Agreement... terminatedas has of December 1987, pursuant to Section 15 of the Agreement."J.A. at 400003. 31, Relyingon our decision in Winstar, the Court of FederalClaimsinterpreted the parties' agreement apply only to the executoryprovisions. Old StoneI, slip op. at 6-8. We to agreewith the Court of FederalClaims. In Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995) (en banq), affirmed, 518 U.S. 839 (1996), we held that a termination clause applied only executoryprovisions. 64 F.3d at 1542.That termination clause stated in part, "[t]his agreementshall terminate and the obligations of the FSLICto makeany payments hereunder shall cease upon the expiration of 10 years .... " Glendale Federal Supervisory Action Agreement, 9 (available in Old Stone II Supplemental § Appendix (filed May31, 2002)). Thegovernment claimed that after the passage 10 years of regulatory forbearance expired. Werejected that construction and held that the "expiration provision.., relat[ed only] to executoryprovisionsset out in the SAA,which obligatedthe FSLIC make to certain payments the merged to thrift for a limited period of time." Winsta[, 64 F.3d at 1542.

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Section 15 of the Citizens AssistanceAgreement similar to the termination is clausein the Winstarcase. It providesthat "this Agreement shall terminate five years following the Effective Date or on such other date to which the parties or their successors aqreein writinq .... " J.A. at 200185(emphasis added). The emphasized language does not appear in the agreement involved in Winstar. However, this languagemerely allows the parties to accelerate the natural termination that would otherwise take place upon the passage of five years. That is exactly what the termination agreement did. It refers specifically to Section 15. J.A. at 400003 ("This letter serves as notification that the AssistanceAgreement... has terminated as of December 1987, pursuant to Section 15 of the A.qreement.") (emphasisadded). 31, Thusthe termination agreement no morethan accelerate a termination provision did that was not designed to eliminate the promises of regulatory forbearance. The termination only applied to executory provisions, and the regulatory forbearance remained force on the date of the enactment FIRREA. in of Second,the governmentargues that, even if the Citizens contract were not voluntarily terminated 1987,any contractualright to countthe Citizenscapital credits in andgoodwill as regulatory capital wouldhaveceased with the sale of Citizens/OSBW in May1990. Again the government argues the amountof mitigation recovery should be reduced eliminating payments by that replacedthe regulatory capital underthe Citizens agreementand thus should be confined to $11.7 million (the amountunder the RIF agreement). After the execution of the two assistanceagreements 1984and1985, the two in thrifts mergedinto OSBon December 31, 1986. The governmentadmits that the

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merged entity could claim the benefit of both assistance agreements.However,the government contendsthat the merged entity lost the right to enforce the Citizens Assistance Agreement when the Citizens assets were sold in May 1990. The

government contendsthat Section 13 of the Citizens Assistance Agreement provides that generally accepted accounting principles ("GAAP") govern accounting

computationsmade under the Agreement. asserts that GAAP It rules required that the goodwill attributable to the Citizens transaction be written off uponthe sale of the Citizens assets. At that point, says the government, Citizens agreement the wouldno longer be enforceable. Again we do not agree. The sale of the OSBW assets occurred after the enactmentof FIRREA, the Court of Federal Claims found that FIRREA and causedthe sale of the Citizens assets. Old StoneII, 63 Fed. CI. at 72 ("Old Stone'sCapital Plan also represented . . that management 'mitigate the capital reduction [by] . . . . would sell[ing] certain subsidiaries[including]... the Seattle, Washington-based that was thrift a division of Old StoneBank[i.e., Citizens]."). Onthis point, the Court of Federal

Claims'finding is supported the record. by Finally, the government contendsthat the amount mitigation recovery should of be limited to $36million rather than the $74.5 million awarded the Court of Federal by Claims because OSB neededonly $36 million to bring it into capital compliance immediatelyafter the enactment FIRREA. of In Home Savinqs, we recognizedthat "[w]hen mitigating damages from a breach, a party 'must only makethose efforts that are fair and reasonable under the

circumstances.'" 399 F.3d at 1353(quoting Robinson United States, 305 F.3d 1330, v.

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1333(Fed. Cir. 2002)); see also Cor in on Con b tracts § 57.11, at 311 (2005 ed.) ("The doctrine of avoidableconsequences merelyrequires reasonable efforts to mitigate damages.");3 Dobbs:Lawof Remedies 12.6(1), at 127 (2d ed. 1993) ("[T]he damage § recovery is reducedto the extent that the plaintiff could reasonablyhave avoided

damages claims and is otherwise entitled to."). Thegovernment not shown he has that it wasunreasonable OSC replace the entire amount regulatory capital that was for to of eliminated by FIRREA. In Home Savinqs, we allowed a mitigation award that exceededthe minimum amountrequired to achieve regulatory compliance. 399 F.3d at 1352-53. The Home Savinq_~court held that the full cost was recoverable becausethe holding company "was entitled to raise fundsto replacethe supervisory goodwill[the thrift] lost as a result of the government'sbreach," including the "excess" capital beyondthat neededto achieveregulatory compliance. Id__~. Likewise, OSC entitled to replace the entire was amountof regulatory capital eliminated by FIRREA that the thrift so had a cushion

against future losses. We agreewith the Court of FederalClaimsconclusionhere that OSC's mitigation efforts werereasonable underthe circumstances. For the forgoing reasons,weconcludethat the Court of FederalClaimscorrectly held that OSC entitled to recoverits mitigation payments $74.5million. is of II Wenext addressthe Court of Federal Claims' holding, andOSC's argument,that OSC entitled to recoverits $103.2million stock contribution to the RIF transaction, is and its $14.8 million cash contribution to the Citizens transaction. OSC claims these amounts underrestitution andreliance theories. We first considerits restitution theory.

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When party to a contract commits total breach,the other party "is entitled one a to restitution for any benefit that he has conferredon" the breachingparty "by wayof part performance reliance." Mobil Oil Exploration, Prod. Southeast,Inc. v. United or States., 530 U.S. 604, 608 (2000) (citing Restatement (Second)of Contracts § 373 (1979)); see also Landmark LandCo., Inc. v. F.D.I.C., 256 F.3d 1365, 1372(Fed. Cir. 2001). A party mayrecover damages restitution as to the extent that party has

conferreda benefit on the breachingparty. Hansen Bancorp,Inc. v. UnitedStates, 367 F.3d 1297, 1314(Fed. Cir. 2004)(citing Restatement (Second) Contracts§ 373); see of also Cal Fed, 245 F.3d at 1350-51 ("The idea behindrestitution is to restore the nonbreachingparty to the position it wouldhavebeenin hadthere neverbeena contract to breach.") (citing GlendaleFed. Bank,FSBv. United States, 239 F.3d 1374, 1380(Fed. 5 Cir. 2001) ("Glendale"). We havesuggested that restitution of initial contributions of both stock andcash

in Winstar transactions maybe allowable because both forms of contribution confer a benefit on the government. ~, Landmark., 256 F.3d at 1372-73; Hanseq, 367 F.3d at 1317.In Landmark, held that restitution of an initial we cashcontribution to a

supervisory mergerwasappropriate when the contribution wasexpressly required by the assistancecontract. 256F.3d at 1372-73.In Hansen, indicated that it might be we

In Hansen, stated that where we there has beena benefit to the breaching party "restitution maybe measured either 'the value of the benefits receivedby the by defendant to the plaintiff's performance' 'the cost of the plaintiff's performance, due or which includes both the value of the benefits provided to the defendant and the plaintiff's other costs incurred as a result of its performance underthe contract.'" Hansen, 367 F.3d at 1314(quoting Landmark, F.3d at 1372). 256

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possible to consider a stock transfer as a "benefit conferred" in a Winstar case that wouldbe subject to restitution. 367F.3dat 1316-17. Nonetheless, restitution is subject to an important limitation. Restitution is "available only if the breachgives rise to a claim for damages total breachandnot for merelyto a claim for damages partial breach." Id_.~. at 1309(quoting Restatement for (Second)of Contracts § 373 cmt. a). When non-breachingparty elects to continue a performance, party is said to elect to treat the breach partial rather than total. 13 that as Williston on Contracts§ 39:32(4th ed. 2000). Theconsequence that restitution is not is available, and the non-breaching party mustpursue a claim for damages instead. See 12 Corbinon Contracts, § 1223at 514-16("Damages restitution will not be given as and concurrent remedies for the sameinjury."). Our Winstar precedent has not yet

considered effect of the election doctrine on damages the arising from the enactment of 6 FIRREA. In describing election doctrine, Williston states the When party commits material breachof contract, the other party has one a a choice between inconsistent rights--he or she can either elect to two allege a total breach, terminate the contract and bring an action [for However, our decisions haveaddressedthe related doctrine of waiver, holding that continuing to receive payments under an assistance agreement not a is waiver of the right to recover damages a breach(other than restitution). Westfed for Holdinqs, Inc. v. United States, 407 F.3d 1352, 1360-61 (Fed. Cir. 2005). In Westfed, we rejected the argument that the holding companyhad waived the breach (and forfeited its right to recover reliance damages) continuing to receive assistance by payments the government. Williston makes from As clear, "[t]he doctrine of election and that of waivershouldnot be confused; election is not a waiverof anyrights underthe an contract but rather a choice between inconsistent rights following a breachof the two contract." Williston § 39:32; seealso id. at n.56 (citing caseprecludingwaiverof breach but applying election doctrine); cf. BarronBancshares, Inc. v. United States 366F.3d 1360, 1383(Fed. Cir. 2004)(holding government waivedright to assert prior material breachby performingundercontract by making assistancepayments thrift). to

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restitution], or, instead, elect to keepthe contract in force, declare the default only a partial breach, and recover those damages causedby that partial breach 7 13 W~lliston § 39:32 (4th ed. 2000). In Mobil Oil v. United States, the Supreme Court recognizedthat the election doctrine applies whenthe breachis the enactment a of statute. 530U.S. 604(2000). Theauthorities differ on whatconductis required to establish an election. The Williston view appears be that merecontinuedperformance result in an election. to can 13 Williston § 39:32 ("[A] party's actions are sometimes characterized as an election wherethat party continues to perform or to accept performance under a contract even though he or she knows that a contract provision has been breached."). Other authorities takea stricter position--that the mere failure to elect restitution at the timeof the breach the continuationof performance not sufficient to result in an election. and is Rather, there mustbe either (1) detrimental reliance by the breachingparty (here injury to the government the result of the delay), see 12 Corbin § 1220(1993ed.); as Restatement (Second) Contracts§ 378; or (2) a benefit to the non-breaching of party a result of the delay (here a benefit to OSC), MobilOil, 530U.S. at 621-23. see TheSupreme Court's decision in Mobil, in whichthe Court alloweda restitution remedyunder a government contract, is ambiguous to which standard applies. In as that case the Court concluded that "[T]he Government not] convincedus that the [has companies' continued actions underthe contracts amount anything morethan [the] to urging of performance.... 7 JosephMPerillo, Consequentlythe Government'swaiver claim must come Calamari& Perillo on Contracts § 11.32-11.33at 462-

66 (5th ed. 2003); see also BarronBancshares., F.3d at 1383; Cities Service Helex, 366 Inc. v. UnitedStates 543F.2d 1306,1313-15 (Ct. CI. 1976).

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down a claim that the companies to received at least partial performance."Id~ at 622 (internal citations omitted) (emphasis original). TheCourt concluded plaintiff in the companieshad not received partial performance from the government under the

contractsafter the breach.Id._~. at 623. Whilethe decisionis clear that the receipt of partial performance the plaintiff will bar restitution (and the authorities cited make by equally clear that detrimental reliance by the government wouldalso be a bar), 8 it is unclear as to whether plaintiffs continuedperformance a without the receipt of benefits or detrimental reliancewould sufficient to bar restitution. be Here we need not decide which standard governs, becauseeven the stricter election rule is satisfied. OSC plainly continuedto treat the assistanceagreements as in placeby decidingnot to terminate contractsor to file suit for restitution after the the enactment FIRREA. of Indeed, OSC's claim for restitution wasnot asserted until three years later. Instead of electing to terminate the agreement after the enactmentof FIRREA,OSC March 13, 1990, someseven monthsafter FIRREA,agreed to a new on Capital Plan with the Office of Thrift Supervision("OTS"), underwhichit onceagain agreedto comply with the Net WorthMaintenance Stipulations of the original contracts and to make payments the thrift to bring it into compliance to with the requirements of

Theauthorities cited by the Supreme Court (see Mobi[, 530 U.S. at 622) make this clear. Restatement (Second) Contracts§ 373 ("An injured party's right to of restitution maybe barred by election underthe rules stated in §§ 37___~8 379") and (emphasis added);Id._~. at § 378("If a party has morethan oneremedy underthe rules stated in this Chapter,his manifestationof a choiceof one of themby bringing suit or otherwiseis not a bar to anotherremedy unless the remedies inconsistent and thee are other party materially changes position in reliance on the manifestation.") (emphasis his added).

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e FIRREA.SeeOld StoneII, 63 Fed. CI. at 72 ("[OTS] approved bank's Capital Plan the conditioned on [OSC's] agreement that it would maintain the bank's capital position pursuantto the Net WorthMaintenance Stipulation."). The government detrimentally relied on OSC's conduct. If OSC elected to had terminate the contract andseekrestitution at the time of the enactment FIRREA, of the government could not have, and would not have, demandedthat OSCmake subsequent contributions to the thrift MaintenanceStipulations government's liability pursuantto the newCapital Plan and Net Worth

of the terminated contracts 1° which resulted in the

for $74.5million in mitigation payments. it is certain that the And

government wouldhaveseized the bankearlier, with the likely result that additional losses to the insurance fund would have beenavoided.11 There were also continued benefits to OSC received underthe earlier agreements with the government--itsability to continueto operatethe thrift; the government's willingness to defer enforcement of

the obligation of OSC contribute additional capital pursuantto the NWMS to underthe

9 While the governmentcould use regulatory mechanisms force OSC to to comply with its contractual obligation to infuse additional capital, see, e.g., C_Q~Fed Financial Corp. v. Office of Thrift Supervision,58 F.3d 738, 741(D.C. Cir. 1995), there is no claim that the government could havecompelled OSC infuse additional capital to absenta continuingcontractualobligation. 10 Old StoneII, 63 Fed. CI. at 82 ("[OSC]downstreamed million to [OSB] $75 pursuantto the Net WorthMaintenance Stipulation after breach."). As noted above,on the date of FIRREA, failed the risk-based capital OSB requirement approximately million. Onthe date of seizure, the risk-basedcapital by $36 shortfall hadmore than doubled,to $77.6million.

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earlier agreements; non-seizure the thrift before1993(despite its non-compliance the of 12 FIRREA with standards); and continuedfederal deposit insurance. Theelection doctrine is designedto avoid the very kind of moral hazardthat wouldresult here if the thrift could postpone repudiation of the contract for several

years,bet that it couldmake thrift profitable, but secure the restitution if the thrift failed. Our predecessor court, the Court of Claims,has recognized the waivercontext), that (in "[a]s a general proposition, one side cannot continue after a material beachby the other.., act as if the contract remainsfully in force..., run up damages, then go and suddenlyto court." Northern Helex Co. v. United States, 455 F.2d 546, 551 (Ct. Cl. 13 1972). Despite the clear applicability of the election doctrine, OSC argues that a

provision in the assistance agreements here bars the argumentthat OSC'selection

12 An FHLBBMemorandum recommending approval of RIF Assisted Acquisition confirmsthat OSC to receive deposit insurance.It stated: was The OFSLICrecommends that the Bank Board approve the proposal, which will result in [OSC]acquiring the stock of [RIF], upon[RIF's] conversionto a federal stock sayingsbank[RIF-FSB],and the transfer of OSB's charter and trust operations to a subsidiary [Newco]of [RIF-FSB]. Theremainingassetsand liabilities of [OSB]will be transferred to [RIFFSB], so [OSB's] deposit accountswill become FSLICinsured. J.A. at 200052 (emphasisadded). Our decision in First NationwideBankv. United State~, 431 F.3d 1342, 1352(Fed. Cir. 2005), does not foreclose an election theory. Although the First Nationwidecourt rejected an election argument characterizedthe claim as onefor and "partial restitution," the plaintiff in that caseclaimed amounts it waspromised the that by government, amounts not that it actually expended under the contract. Thusthe claim in First Nationwide not a true restitution claim. In any event, the plaintiff in First was Nationwide "promptlyprotestedthe [breach], filing suit first against the FDIC then and against the UnitedStates" Id~ at 1352.

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preventsit from claiming restitution. Section 13 of the RIF assistanceagreement, and Section 16 of the Citizens assistance agreement, entitled "Rights and Forbearances," provide: Therights, powers,and remediesgiven to the parties by this Agreement shall be in addition to all rights, powers,and remedies,given by any applicablestatute or rule of law. Anyforbearance, failure, or delay by any party in exercisingor partially exercisingany suchright, power,or remedy shall not preclude further exercise. its J.A. at 200109-10. light of this provision, OSC's In failure to promptlyassert a breach of contractdid not, of course,result in a waiverof its right to asserta breach a later time at and recover damages. See Westfed, 407 F.3d at 1360-61(holding plaintiff did not

waiveits right to assert breachby continuing to receive assistancepayments from the government). But here the restitution remedy is not precluded by inaction--

"forbearance, failure or delay" in exercisingthe right to restitution--but rather by OSC's taking an action--election among inconsistent remediesby continuing to perform. The quoted provision does not restore a remedyforfeited by continued performance.In other words, the "Rights and Forbearances" clause of the RIF and Citizens agreements doesnot precludethe application of the common election of remedies law doctrine. For the foregoing reasons,weconcludethat OSC's initial recoverable undera restitution theory. III Nor are the initial theory. Thepurposeof reliance damages to compensate plaintiff is the "for loss caused contract payments $118million recoverable of undera reliance contributions are not

by reliance on the contract." Restatement (Second') of Contracts § 344(b). Wehave

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previously upheld awards of reliance damagesin Winstar cases. ~, Westfed., 407 F.3d at 1368, 1371. Wehavealso held that reliance damages be recoveredfor can losses of pre-breachinvestments pursuantto the contract. Seeid.; Glendale_, F.3d 239 at 1383. TheCourt of Federal Claims found that the breach causedthe seizure of OSB and the loss of OSC's investment.Old StoneII, 63 Fed. CI. at 98 ("Defendant'sbreach wasthe causeof plaintiff's damages."); at 88 ("Wethink it highly unlikely that the id.

regulators would have seized the bank in 1993, absent the breach."); id. ("[OSB's problems]wouldhavebeeneasedby the bank's having had a capital cushion."). However, Court of FederalClaimsdid not explain howthe breach--therefusal the to recognize the regulatory capital as promisedin the assistance agreements--caused the seizure when that regulatory capital had beenreplaced by the mitigation payments before the seizure occurred. Onthis critical question the Court of Federal Claims'

opinionis unfortunately entirely silent. Despitethe absence findings by the Courtof of FederalClaims, OSC urges that the causation finding is supportableon two theories-that the breachcaused the shrinkageof the thrift and on the alternative (and pdmary) theory that the breachcausedthe depletion of the assets of the holding company, and that theseeventscaused seizure of the thrift andthe loss of the OSC the investment. But even assumingthat FIRREA causedthe seizure by putting in motion this chain of events, reliance damages subject to two pertinent limitations--the damages are musthavebeenboth proximatelycaused the breach, andforeseeable.Hu_~g_b_e~, by 271 F.3dat 1066.

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As we have repeatedly held, "[i]n damages ....

order to be recoverable as reliance

plaintiffs toss musthavebeenforeseeableto the party in breachat the

time of contract formation." Westfec[, 407F.3d at 1365(quoting Landmark, F.3d at 256 1378); see Hadley v. Baxendale156 Eng. Rep. 145 (1854) (contract damages only recoverable in "contemplation both parties" at the time of contract formation); see if of also Restatement (Second)of Contracts § 351(1) ("Damages not recoverable are loss that the party in breachdid not havereasonto foreseeas a probableresult of the breachwhenthe contract wasmade.") (emphasisadded). Lossesmustalso satisfy a closely related requirement--they mustbe proximately caused the breach.I-lu~hes, 271F.3d at 1066;see also Nat'l ControlsCorp. v. Nat'l by Semiconductor Corp., 833F.2d 491,496(3d Cir. 1987)(noting that lost profits, to recoverable, mustbe a "proximateconsequence," not a "merely remoteor possible" and result of the breach)(internal citations andquotations omitted); LewisJorqe Constr. Mqmt, Inc. v. Pomona Unified Sch. Dist., 102P.3d 257, 265 (Cal. 2004)(holding breach did not "directly or necessarily cause[contractor's] loss," wherecontractor alleged breachcausedcontractor's surety to reduce contractor's "bonding" rating, and that reduction in bondingrating causedtoss of other prospective contracts); W~ttiston 64:12.TM Because these two doctrines are not meaningfully distinct, at least in the

contextof the casebefore us, weanalyzethem underthe rubric of foreseeability.

14 See Exxon Co., U.S.A.v. Sofec, Inc., 517 U.S. 830, 839-40 (1996) ("Although the principles of legal causation sometimes receive labels in contract analysis different from the "proximatecausation"label mostfrequently employed tort in analysis,theseprinciplesnevertheless to restrict liability in contractaswell"). exist

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Understandingforeseeability

requires a moredetailed description of OSC's shrinkageof the thrift (the

theories. As wehavenoted, OSC theorizes that the initial

sale of the Citizens/OSBW assets and of the stock of the two subsidiaries) caused damage becausethe thrift itself was made less profitable (by some$12 million per

year), leading to its ultimate demise.OSC arguesalternatively andprimarily that the breach requiredOSC sell its crown to jewels in order to infuse additional capital into the thrift and that the sale of the crownjewels caused long-termadverseconsequences. TheCourt of FederalClaimshere did not find that the forced shrinkageof the thrift hada foreseeable relationship to the seizure, indeedconcluding that the shrinkage wasnot "a major issue in determiningdamages." Stone II, 63 Fed. CI. at 85. OSC Old in its briefs has not called our attention to any testimonythat wouldsuggestthat the seizure of the thrift by itself wasa foreseeableresult of the shrinkage. Indeed, the

linkage wasparticularly speculativegiven the fact that the shrinkage only allegedto is have deprived thrift of $12million a year in profits when total capital deficit at the the the time of seizure was$77million. In any event, the foreseeability theory with respect to the sale of the thrift's ownassets is subject to the same deficiencies that exist with

respect to the primary OSC theory (concerning the forced sale of OSC's ownassets) which we nowdiscuss. Weturn then to OSC's primary theory -- that the forced sale of the OSC crown jewels had the foreseeable result of bringing about the seizure. Here the Court of FederalClaimsdid find that the loss wasforeseeable both because capital shortfall the as a result of the breachwasforeseeableand because "[i]t wasalso foreseeablethat

regulators subsequentlywould demand that [OSC]prop up its failing subsidiary with

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infusions of capital once[OSB]fell short of its capital requirements." StoneII, 63 Old Fed. CI. at 89-90. In other wordsthe Court of Federal Claimsfound that the needfor additional replacement capital infusions from OSC the thrift as a result of the breach to wasforeseeable. But, evenif the needfor replacement capital wasforeseeable, that hardly establishes that the adverseconsequences alleged to flow from the needto makeinfusions were foreseeable. As the Restatementof Contracts explains, "[t]he merecircumstance that someloss wasforeseeable, or eventhat some loss of the same generalkind wasforeseeable,will not suffice if the loss that actually occurredwasnot foreseeable." Restatement(Second) of Contracts § 351 cmt a. (1981) (emphasis added). For the damages the sale of the crownjewels to be foreseeable,the parties, from at the time of contract formation, wouldhavehadto foresee: (1) that the thrift would

haveother problems that wouldrequire additional infusions of regulatory capital; (2) that the crownjewels would be the only source of additional capital because neither the holding company the thrift nor thrift's wouldhaveaccessto alternative capital; (3) that the

other problems wouldbe so severethat the thrift wouldbe seized; and(4) that of the crownjewels wouldhavebeensufficient to avoid the seizure.

the availability

OSC not called our attention to any testimony in the record that will support the has foreseeability of any of these assumptions,and we have beenunable to locate any. Herewe think that under established principles of foreseeability OSC completely has failed to establish that this extended chainof causationwasforeseeable tl3e time of at 1~ contract formation.

15

TheRestatement Contracts provides an instructive example: of 26

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Our prior Winstar cases do not support a contrary conclusion. Some cases have held that the needto replace regulatory capital, 16 or the failure of a thrift dueto

deficiency in regulatory capital, 17 is a foreseeable result of the government's breachof its promiseof regulatory forbearance. But today we are allowing the recovery of the replacement capital, and this is not a case in whichthe thrift wasseized because it

lacked regulatory capital eliminated by FIRREA. OSC claiming that the seizure is

A a carrier; contractSwith B, a miller, t0 carry B'Sbrhkencrankshafttoit~ m~faCt~r~ B te S A whenthey makethe contract that t~e crankShaftis part of B's milling machine that it mustbe sent at once; and but not that the mill is stoppedbecauseB has no replacement. BecauseA delaysin carryingthe crankshaft,B loses profit during an additi6nai peri6d whiie t~e ~ili is stbp~db~Cause th~ d~lay: A is not liable for B'Sloss Of ~f profit. That loss was not foreseeable by A as a probable result of the breachat the time the contract wasmade because did not khowthat the A brokencrankshaft wa~neh~sa~ the 0perati0n 0f the ~iii for Restatement (Second) Contracts§ 351cmt a., ill. 1 (1981). As in the illustration, the of government not havereasonto knowthat the replacement did capital wasnecessary to savethe thrift fromits other problems. also id. at § 351, cmtd. (inability of injured See party to make substitute arrangements be foreseeable). must 1~ ~, LaSalle., 317 F.3d at 1374 (holding cost of replacement capital is recoverableby thrift andcan be measured dividendspaid to issuer of investment by capital; remanding a calculation of cost of replacement for capital); Home Savinqs,399 F.3d at 1353-55(holding cost of replacement capital is recoverableand can be based on cost of substituting expensiveprivate capital, which countedtowardsregulatory requirements,for less expensivegovernment-backed deposits, whichdid not); see also S. Cal. Fed. Say. & LoanAss'n. v. United States 422 F.3d 1319, 1336-37(Fed. Cir. 2005) (rejecting government'sargumentthat it was unforeseeablethat the loss regulatory capital forbearances wouldimpactthe health of a thrift andthus increaseits costs of doing business); cf. Bluebonnet,266 F.3d at 1355-56(whereholding company hadagreed--priorto FIRREA--to infuse capital into the thrift, rejecting argument that it wasunforeseeable that FIRREA wouldincreasethe cost of raising that capital). West-fed,407F.3d at 1366-67.

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resulted from the fact that the replacement capital wasunavailable to resolve other problems not causedby FIRREA. OSC's foreseeability argument analogous a Winstarclaim for lost profits, tn is to numerous caseswehaverejected claims for lost profits on the groundthat lost profits are too speculative to be recovered. See Cat. Fed. Bankv. United States, 395 F.3d 1263, 1272-73 (Fe& Cir. 2005)("Cal FedI_1"); Glendale., 239 F.3d at 1380; Glendale Fed. Bank,FSBv. United States, 378 F.3d 1308(Fed. Cir. 2004)("Glendale I1"). In Glendale weobserved II, that [G]iven the speculativenatureof [a lost profits] claim, onethat has yet to be successfully established in any Winstar case . . . [and] experience suggests that it is largely a wasteof time and effort to attemptto prove such damages. _Glendale I_1, 378 F.3d at 1313.18OSC's claim is evenmorespeculative. A lost profits claim in a VVinstar case typically assumes that it wasforeseeable the breachwould force the plaintiff to sell assetsthat otherwisewouldhavegenerated profits andseeksto recover the profits. ~, Cal Fe~d, 245 F.3d at 1349-50. OSCdoes not seek to

recover lost profits. Se.__~e Pt's Br. at 27 ("OSC not seek expectancy did damages [at trial]"). Nonetheless, OSC's theory doesnot merelyassume that the loss of profits was

foreseeable;it also assumes wasforeseeable it that those profits (or the revenues from asset sales) would have resolved problems not causedby FIRREA, and that neither

In onecase, Cal Fed, werequired a trial on the issue. Thereweheld that lost profits, based the theory that FIRREA on forced the thrift to sell profitable assets, are not unforeseeable as a matter of law. 245 F.3d at 1349-50. After remand, we affirmed the Court of Federal Claimsconclusion that the profits wereunforeseeable. Cat FedII at 1272-73;Cal. Fed. Bankv. United States. 54 Fed. Cl. 704, 713 (2002). We reasoned the thrift's lost profits theory was"impractical," and"not susceptibleto that reasonableproof," and"ha[d] yet to be successfully establishedin any Winstarcase." Cal FedII, 395F.3d at 1270(quoting Glendale II). 05-5059 28

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OSC nor OSB would be able to resolve those problems by raising funds from other sources. There was no proof that the attenuated claim of causation on which OSC relies wasforeseeable. Accordingly, we hold that the toss of OSC's initial contributions were not a

foreseeable result of the enactment of FIRREA and cannot be recovered under a reliance theory. In light of our conclusionweneednot addressthe government's other arguments concerning these restitution andreliance claims. IV Finally we note that OSC's restitution claim is barred for another reason.

Restitution or reliance damages inappropriatewhere are relief wouldresult in an "unfair windfall" to the non-breaching party. As we explained in Bluebonnet, "the non-

breachingparty should not be placed in a better position throughthe awardof damages than if there had beenno breach." 339 F.3d at 1345; see also Hansen,367 F.3d at 1315(quoting Bluebonnet.,339 F.3d at 1345); LaSalte., 317 F.3d at 1371(noting that "the non-breaching party is [generally] not entitled, throughthe awardof damages, to achieve a position superior to the one it would reasonably have occupied had the breachnot occurred."). Herethe $74.5 million payments replaced the capital that the breacheliminated, andthe awardof the additional amounts restitution or reliance as damages would be duplicative. CONCLUSION For the foregoing reasons,we affirm the Court of FederalClaims' award $74.5 of million in damages OSC's for post-breach mitigation payments.Wereverse the award of $103.2 million in damages OSC'sstock contribution under the RIF assistance for

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agreement. Wealso reverse the award of $14.8 million in damages OSC'scash for contributions underthe Citizens assistanceagreement. REVERSED-IN-PART AND AFFIRMED-IN-PART COSTS Nocosts.

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