March 12, 1993 UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
No. 92-1542
BRUCE A. HOWELL, ET AL.,
Plaintiffs, Appellants,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR ELIOT SAVINGS BANK,
Defendant, Appellee
ERRATA SHEET
The opinion of this court issued on February 17, 1993 is amended as follows:
On page 4, third line of footnote 1, replace "charges" with "changes".
February 17, 1993 UNITED STATES COURT OF APPEALS For The First Circuit
No. 92-1542
BRUCE A. HOWELL, ET AL.,
Plaintiffs, Appellants,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR ELIOT SAVINGS BANK,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Breyer, Chief Judge,
Higginbotham, Senior Circuit Judge,*
and Boudin, Circuit Judge.
Edwin A. McCabe with whom Karen Chinn Lyons, Joseph P. Davis,
III, The McCabe Group, and Lawrence Sager were on brief for appellant.
Lawrence H. Richmond, Counsel, Federal Deposit Insurance
Corporation, with whom Ann S. DuRoss, Assistant General Counsel,
Federal Deposit Insurance Corporation, Colleen B. Bombardier, Senior
Counsel, Federal Deposit Insurance Corporation, John C. Foskett,
Michael P. Ridulfo and Deutsch Williams Brooks DeRensis Holland &
Drachman, P.C. were on brief for appellee.
February 17, 1993
*of the Third Circuit, sitting by designation.
BOUDIN, Circuit Judge. Appellants in this case are
former officers of a failed bank. They sued the FDIC as the
bank's receiver when the FDIC disallowed their claims for
severance pay under their contracts with the bank. The
district court sustained the FDIC, reasoning that Congress
had restricted such claims. Although the statute in question
is not easily construed and the result is a severe one, we
believe that the officers' claims fail, and we sustain the
district court.
The facts, shorn of flourishes added by the parties, are
simple. In 1988 and 1989, the four appellants in this case
were officers of Eliot Savings Bank ("Eliot") in
Massachusetts. In November 1988, when Eliot was undergoing
financial strain, Eliot made an agreement with Charles Noble,
its executive vice president, committing the bank to make
severance payments (computed under a formula but apparently
equivalent to three years' salary) if his employment were
terminated. In August 1989, the bank entered into letter
agreements with three other officers--appellants Bruce
Howell, Patricia McSweeney, and Laurence Richard--promising
them each a year's salary as severance in the event of
termination. Finally, in December 1989 a further letter
agreement was made with Noble, reaffirming the earlier
agreement with him while modifying it in certain respects.
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The agreements make clear that they were not intended to
alter the "at will" employment relationship between Eliot and
the officers. The bank remained free to terminate the
officers, subject to severance payments, and (so far as
appears) the officers were not bound to remain for any fixed
term. The letter agreements with the three officers other
than Noble state that the severance payments were promised in
consideration of the officers' "willingness to remain" in the
bank's employ; and the same intent can be gleaned from the
two agreements with Noble. The weakened financial condition
of the bank is adverted to in each of the four 1989
agreements.
At some point in 1989 the FDIC began to scrutinize
closely Eliot's affairs. The officers allege, on information
and belief, that the FDIC and the bank agreed that Eliot
would take steps to retain its qualified management; and the
complaint states that the FDIC "knew and approved" of the
four letter agreements made in 1989. The officers also
contend that they were advised by experienced counsel at a
respected law firm that the severance agreements were valid
and would withstand an FDIC receivership if one ensued. It
is further alleged that, in December 1989, the FDIC and the
bank entered into a consent order that provided that the bank
would continue to retain qualified management.
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Eliot failed and was closed on June 29, 1990. The FDIC
was appointed its receiver. Within two months, the officers
were terminated. The officers then made administrative
claims for their severance benefits pursuant to applicable
provisions of FIRREA, 12 U.S.C. 1821(d)(3), (5), the
statute enacted in 1989 to cope with the torrent of bank
failures.1 In October 1990, the FDIC disallowed the claims,
stating that the claims violated public policy. Although
the FDIC letter is not before us, it apparently is based upon
the FDIC's general opposition to what are sometimes called
"golden parachute payments," a subject to which we will
return. Following the disallowance, the officers pursued
their option, expressly provided by FIRREA, to bring an
original action in federal district court. 12 U.S.C.
1821(d)(6).
In their district court complaint, the officers asserted
claims against the FDIC for breach of contract, for breach of
the contracts' implied covenant of fair dealing, and for
detrimental reliance. The FDIC moved to dismiss or for
summary judgment. Thereafter, the officers sought to amend
their complaint by adding a promissory estoppel claim and by
1FIRREA is the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 103 Stat. 183, codified in various sections of 12 and 18 U.S.C. Among other changes, FIRREA amended pre-existing provisions specifying the FDIC's powers as receiver and the claims provisions governing claims against failed banks.
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explicitly naming the FDIC in its "corporate capacity" as
well as in its capacity as receiver. In a bench decision,
the district judge ruled that the FDIC had lawfully
repudiated the contracts between Eliot and the officers and
that under FIRREA there were no compensable damages for the
resulting breach. As for the promissory estoppel claim, the
court deemed it "futile" and refused to allow the amendment;
the court referred to the general principle that estoppel
does not operate against the government and to the FDIC's
broad grant of authority under FIRREA. The officers then
sought review in this court.
The first claim made on appeal, taken in order of logic,
is that the FDIC's repudiation of the severance agreements
was itself invalid. At this point we need to explain briefly
the structure of the statute. Section 1821 governs, among
other matters, the powers of the FDIC as receiver, 12 U.S.C.
1821(d), the procedure for processing claims against the
failed bank, 12 U.S.C. 1821(d)(3), (5), and substantive
rules for contracts entered into prior to the receivership.
12 U.S.C. 1821(e). Section 1821(e)(1) gives the receiver
the right to disaffirm or repudiate any contract that the
bank may have made before receivership if the FDIC decides
"in its discretion" that performance will be "burdensome" and
that disavowal will "promote the orderly administration" of
the failed bank's affairs. 12 U.S.C. 821(e)(1).
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The power of a receiver to repudiate prior executory
contracts made by the debtor, a familiar incident of
bankruptcy law, see 11 U.S.C. 365 (executory contracts and
unexpired leases), means something less than might appear.
By repudiating the contract the receiver is freed from having
to comply with the contract, e.g., American Medical Supply,
Inc. v. FTC, 1990 U.S. Dist. LEXIS 5355 (D. Kan. 1990)
(specific enforcement), but the repudiation is treated as a
breach of contract that gives rise to an ordinary contract
claim for damages, if any. Whether that claim is then
"allowed" by the receiver and if so whether there are assets
to satisfy it, are distinct questions; at this point we are
concerned only with the receiver's authority to affirm or
disaffirm. In this case the officers do not dispute that the
FDIC did repudiate the severance agreements. Rather the
officers argue that the repudiation is ineffective, and the
agreements remain enforceable, because the FDIC did not make
the statutory findings, or abused its discretion, or both.
Interesting questions are posed by such a challenge, but
the questions need not be resolved in this case. The claim
was not made in the district court and, accordingly, it is
waived. Clauson v. Smith, 823 F.2d 660, 666 (1st Cir. 1987).
The complaint makes only the barest reference to abuse of
discretion by the FDIC, mentioning it not as a separate claim
but in the prefatory description of facts; and there is no
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reference whatever to this line of argument, or to lack of
required FDIC findings, in the opposition filed by the
officers to the FDIC's motion to dismiss. A litigant would
normally have an uphill battle in overturning an FDIC finding
of "burden," if the FDIC made one, but in all events the
issue has not been preserved in this case.
The second ground of appeal raises the central question
before us, namely, whether a damage claim based on a
repudiated severance contract is allowed under FIRREA. A
stranger to FIRREA might think it apparent that breach of a
contract to make severance payments inflicts damages on a
discharged employee in the amount of the promised payments.
The hitch is that in FIRREA Congress adopted restrictive
rules that limit the damages permitted for repudiated
contracts. 12 U.S.C. 1821(e). In a general provision
subject to certain exceptions, 12 U.S.C. 1821(e)(3)(A)(i)
provides that the receiver's liability for a repudiated
contract is "limited to actual direct compensatory damages .
. . ." Additionally, section 1821(e)(3)(B) provides:
For purposes of subparagraph (A), the term `actual direct compensatory damages' does not include-- (i) punitive or exemplary damages; (ii) damages for lost profits or opportunities; or (iii) damages for pain and suffering.
The question thus framed is whether, or to what extent,
the statute's limitation to "actual direct compensatory
damages" bars the contractual severance claims made in this
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case.2 The question is easy to state but less easy to
answer. Although FIRREA's concept of limiting allowable
claims for contract damages echoes the approach of the
Bankruptcy Code, 11 U.S.C. 502, that statute is more specific
and informative. In particular, section 502(b)(7) limits
claims by a terminated employee for future compensation to
one year's pay. So far as appears from the parties' briefs,
FIRREA's broad exclusionary language ("actual direct
compensatory damages") has been plucked out of the air by
Congress, although the general purpose is obvious enough.
If there is any illuminating legislative history or
precedent, it has not been called to our attention by the
parties and we have been unable to locate anything very
helpful.
It is fair to guess that Congress, faced with
mountainous bank failures, determined to pare back damage
claims founded on repudiated contracts. In all likelihood,
the legislators knew that many uninsured depositors and other
unsecured creditors would recover little from failed banks;
and the government's own liability (to insured depositors)
would be effectively increased to the extent that remaining
assets went to contract-claim creditors of the bank rather
than to the government (as the subrogee for the insured
2We do not reach the FDIC's alternative argument that the severance pay would be barred as representing "lost profits or opportunity."
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depositors whom the FDIC compensated directly). It is thus
not surprising that Congress might wish to disallow certain
damage claims deemed less worthy than other claims. This
assessment casts some light on Congress' approach and
provides a predicate for considering the severance contract
claims posed in this case.
We conclude, not without some misgivings, that the
officers' claims do not comprise allowable claims under
FIRREA. The amounts stipulated by the Eliot contracts are
easily determined--a formula payment for Noble and a year's
pay for the others. But the statute calls upon the courts to
determine the nature of the damages stipulated by the
contract or sought by the claimant in order to rule out any
but those permitted by Congress. In this case, analysis
persuades us that the damages provided by Eliot's repudiated
severance contracts with its officers, and sought by the
appellants for their breach in this case, are not "actual
direct compensatory damages" under 12 U.S.C.
1821(e)(1)(A)(i).
Severance payments, stipulated in advance, are at best
an estimate of likely harm made at a time when only
prediction is possible. When discharge actually occurs, the
employee may have no way to prove the loss from alternative
employments foregone, not to mention possible disputes about
the discharged employee's ability to mitigate damages by
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finding new employment. A severance agreement properly
protects against these uncertainties by liquidating the
liability. Such payments comprise or are analogous to
"liquidated damages," at least when the amount is not so
large as to constitute an unenforceable penalty. See
generally E. Allan Farnsworth, Contracts 12.18 (2d ed.
1990); Charles McCormick, Damages 146 (1935).3
Unfortunately for the appellants, the statutory
language--"actual direct compensatory damages"--does not
quite embrace the payments promised by the officers'
severance agreements. Eliot's officers may, or may not, have
suffered injury by remaining at the bank, depending on what
options they had in the past that are not available now.
Conceivably, they suffered no damage at all; conceivably,
their actual damages from staying at Eliot exceed the amounts
stipulated in the agreements. The point is that severance
payments of this class do not comprise actual damages. Thus,
based on statutory language alone, the starting point for
3Of course, the other office of a severance agreement may be to provide a cause of action for an at will employee who otherwise has no contractual claim at all. E.g., Pearson
v. John Hancock Mutual Life Ins. Co., 979 F.2d 254, 258 (1st
Cir. 1992). In this case, the at will status of the appellants is not decisive; they did have contracts and our task is to see whether the promised payments fit into FIRREA's compensable-damage pigeonhole.
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statutory construction, the FDIC appears to have the better
case.
One might argue that, although the severance payments
are not actual damages, they are often a good-faith effort to
estimate such damages and should in such cases be permitted
as consistent with the spirit of the statute, if not its
language. But the spirit of the statute is quite otherwise.
The statute actually excludes (see 12 U.S.C. 1821(e)(3)(B))
two less-favored categories of what are indisputably actual
damages (lost profits, pain and suffering), reinforcing the
impression that Congress intended strictly to limit allowable
claims for repudiated contracts. The treatment of leases in
the next subsection is yet further evidence of Congress'
temper. 12 U.S.C. 1821(e)(4) provides that, if the
receiver disaffirms a lease to which the bank was lessee, the
lessor's damages are limited to past rent and loss of future
rent is not compensable. Yet the lessor may have accepted a
lower monthly rent in exchange for a long-term lease and
protection against the risk of an empty building. As with
severance pay, the lessor may have foregone other
opportunities but the loss is not to be recompensed.
Each side has offered in its favor still broader policy
arguments. The officers claim that the disallowance of
promised severance pay will mean that a troubled bank cannot
effectively contract to retain able officers who may rescue
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it. The FDIC, by contrast, implies that the present
arrangements may be "golden parachutes" by which insiders
take advantage of the crisis to assure themselves of a
handsome farewell gift from a failing bank. The FDIC also
points to regulations it has proposed, but not yet adopted,
to curtail severely such arrangements; its new rules would
disallow severance contracts for bank officials except in
narrowly defined conditions, such as where an officer is
induced to leave another post to help a troubled thrift.4
The FDIC claims that the regulations and their authorizing
statute reflect public policy.
The policy arguments of the officers and the FDIC may
each have some force, to some extent they offset each other,
and neither set is decisive in this case. In answer to the
officers, it may be said that their argument presents a fact
and policy question best left to Congress and to expert bank
regulators; those bodies in turn have ample incentives to
make the right adjustment in delimiting severance agreements.
As to the FDIC's argument, Congress has not declared
severance payments unlawful but merely authorized the FDIC to
do so, and the latter's proposed regulations are not yet in
4The regulations were proposed on October 7, 1991, 56 Fed. Reg. 50529, pursuant to the Comprehensive Thrift and Bank Fraud Prosection and Taxpayer Recovery Act of 1990, 104 Stat. 4859, adding 12 U.S.C. 1828(k) (FDIC "may prohibit or limit, by regulation or order, any golden parachute payment . . . .").
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force. Further, this case arises on a motion to dismiss, so
there is no basis whatever for considering any imputation of
bad motive or misconduct on the part of Eliot's officers.
The officers' last argument in support of their contract
claims is that the "actual damage" restriction, if read as
the FDIC urges, is an unconstitutional taking.
Alternatively, they say that the statute is so close to the
line that it should be read favorably to them to avoid a
constitutional question. These arguments were not made in
the district court and we decline to consider them.
Litigation is a winnowing process and, except in criminal
cases where the stakes are different, only in extraordinary
circumstances will we take up a contention that has not been
made in the district court. We note that arguments that the
FDIC might itself have made, but did not, have been similarly
ignored, including a possible claim that its order
disallowing the severance claims is a currently effective
"order" under the golden parachute statute, 12 U.S.C.
1828(k).
What remains to be considered are the detrimental
reliance claim in the original complaint and the related
promissory estoppel claim advanced by the attempted
amendment. In substance, the officers argue that the FDIC,
acting in its supervisory or "corporate" capacity prior to
Eliot's failure, was so closely associated with the bank's
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severance promises that their repudiation by the FDIC as
receiver violates estoppel doctrine or gives rise to a new
claim against the FDIC. That the FDIC was implicated in
forming the severance contracts is a factual proposition,
apparently denied by the FDIC, but we must accept the
proposition as true for purposes of reviewing the motion to
dismiss.
The FDIC seeks to answer the officers' estoppel and
reliance argument by citing to cases that say that the FDIC
is treated as two separate persons when acting in its
"corporate" capacity as a regulator and when acting in its
capacity as receiver. E.g., FDIC v. Roldon Fonseca, 795 F.2d
1102, 1109 (1st Cir. 1986). On this theory, the FDIC is not
liable in this case as regulator, even if it affiliated
itself with the promise of severance pay, since "it" (the
FDIC as regulator) did not break the promise; and as
receiver, the FDIC was free to disavow the contracts because
"it" (the FDIC as receiver) made no promises.
The officers argue that this "separate capacities"
doctrine was designed for a different purpose and should not
be applied in the present context to produce an unjust
result. But the Eighth Circuit applied this doctrine without
much hesitation to a case in which the FDIC as receiver
sought to repudiate a lease it had previously accepted in its
capacity as "conservator," conservator being yet another
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incarnation in which the FDIC sometimes appears. RTC v.
CedarMinn Building Limited Partnership, 956 F.2d 1446 (8th
Cir.), cert. denied, 113 S. Ct. 94 (1992). As for the
claimed injustice, it is not clear that any apparent inequity
worked in this case is greater than occurs in the usual case
in which the separate-capacities doctrine is invoked. FDIC
v. Roldon Fonseca, 795 F.2d at 1109.
There is another answer to the officers' claim that
rests more solidly on visible policy. Putting to one side
the separate capacities defense, courts are for obvious
reasons reluctant to permit estoppels against the United
States, e.g., Heckler v. Services of Crawford County, 467
U.S. 51, 60 (1984), although exceptions may be found. United
States v. Pennsylvania Industrial Chemical Corp., 411 U.S.
655, 670-675 (1973). There are many reasons for the
reluctance, including a concern for the public purse and a
recognition that the government--unlike the normal actor--is
an enterprise so vast and complex as to preclude perfect
consistency. See generally Hansen v. Harris, 619 F.2d 942,
649-58 (2d Cir. 1980) (Friendly, J., dissenting), rev'd sub
nom. Schweiker v. Hansen, 450 U.S. 785 (1981). While leaving
many questions unanswered, the Supreme Court has made clear
that an estoppel against the United States is not measured by
the rules used for ordinary litigants. Heckler, 467 U.S. at
62.
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In the present case, even the most liberal reading of
the reliance and estoppel counts leaves the FDIC in the
position of one who encouraged or invited the bank's promise
of severance pay. Yet (as we construe the actual damages
clause), Congress has decided that, in parceling out fairly
the limited assets of a failed bank, contract damages
reflecting severance pay are not permitted. "[T]o permit
[the claim] . . . would be judicially to admit at the back
door that which has been legislatively turned away at the
front door." FDIC v. Cobblestone Corp., 1992 U.S. Dist.
LEXIS 17024 (D. Mass. 1992). It is hard to imagine a less
attractive case for creating a new judicial exception to the
general rule against estoppel of the government.
The judgment of the district court is affirmed.
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