This legislation extended the sunset of the FSLIC-specific tax provisions to December 31, 1989. These memoranda specifically highlighted the covered asset loss deduction. In October and November 1988, several FSLIC and FHLBB advisors Bincluding Donald Susswein and Bobby Hughes, the Director of the Financial Division Bprepared memoranda describing the tax benefits available to acquirers. But, with the prospect of a Congressional allocation of funds looming more likely, we need to place limits on the effective loss of government revenues.. This link between covered assets and the covered asset loss deductions was, from Centex's standpoint, a critical part of the bargain. Thereafter, Centex repriced its bid so that the FSLIC would receive a greater share of the tax benefits. White was satisfied with the new share.**************** Defendant argues that Mr. Wall said that Board Member White had voted against the deal, and (3) that Mr. Section 3(a)(1) allowed plaintiffs to Acharge as debits" to Special Reserve Account I Aamounts equal to . In their memorandum, however, Spirtas and Hughes recognized that AFSLIC policy ha[d] been to maximize tax benefits, even though they were shared with acquirers" and that A[a]cquirers [we]re expecting such treatment to continue." The memorandum went on to state, There can be no question that at the time the 1988 transactions were negotiated, FSLIC looked at the potential to receive tax benefits as a means to reduce its cost of assistance. almost insured that the full amount of tax benefits (except for [net operating losses]) would be realized. Because the implied covenant is an independent obligation, although admittedly limited in scope, A[a] party may be in breach of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations." Chase Manhattan Bank, N. In the 1980s, Congress had adopted legislation enabling regulators to attract healthy corporations to assist in the bailout of the FSLIC. There would be, then, good reason in such circumstance to find the regulatory and contractual characters of the Government fused together . at 883.**************** Our finding of targeting also distinguishes this case from Merrion v. When the Government enters into a contract, it Aimpliedly promises to act in good faith and invoke its great power of a sovereign act when and only when and to the extent necessary to carry out its essential governmental functions.'" Hughes , 26 Cl. Centex priced the transaction and constructed its bid higher than it otherwise would have in reliance on the link between the assets the FSLIC offered for sale and their associated tax benefits. Since the ability to realize the tax benefits of FSLIC assistance is dependent upon the acquirer having taxable income, the acquisitions of problem thrifts by pre-existing corporate entities with demonstrated profits . In fact, estimates of the potential for realizing such benefits were calculated in certain instances to determine the net cost of the transaction to the FSLIC. We did not address the question of whether the contract was illusory in the absence of an implied promise that the Government would not target the legitimate expectations of its contracting partner.****************When the parties to the contract here agreed to a fifty-fifty split of the benefits derived from the covered asset loss deduction, that ratio, as a matter of contract, was fixed. Tax benefits were essential to the success of this plan, and the assistance agreements were built around those benefits. Defendant argues that, in this statement, the Winstar plurality Arecognized that the area of taxation implicates a sovereign power in its most basic form" and that this recognition forecloses a finding of targeting here. White); Carryover of Net Operating Losses and Other Tax Attributes of Corporations: Hearing Before the Subcomm. Furthermore, in and around 1988, tax experts concluded that one of these tax benefits was a deduction for covered asset losses. Donald Susswein, the FHLBB's outside tax counsel, was involved in this effort. In general, the Internal Revenue Code of 1986 presently contains three provisions that provide favorable Federal income tax consequences to a taxpayer that acquires a savings and loan institution in an FSLIC-assisted transaction. 173-77 (1985); Letter from FHLBB Members to Senator Garn (Feb. The tax benefits flowing from the FSLIC-specific tax provisions were, in effect, additional assets that the FSLIC and the FHLBB could market when approaching potential acquirers. However, TAMRA also cut by fifty percent the tax benefits for FSLIC-assisted acquisitions occurring after December 31, 1988. Furthermore, a written Request for Proposals provided to prospective acquirers, including the plaintiffs in this case, Centex Corp. (collectively ACentex"), stated, in pertinent part, as follows:**************** Defendant disputes that these documents were widely circulated. Defendant has not identified a genuine dispute.****************10. Consequently, defendant has failed to identify a genuine issue of material fact.****************On December 15, FHLBB and FSLIC representatives presented Centex a draft assistance agreement. if the Tax Benefit Items described in ╖ 9(a) had not been taken into account . Defendant disputes this proposed finding and characterizes the finding as proposed that ACentex management and advisors did not believe that their contract risks included a law change . ." Plaintiffs do not contend that their contract risks did not include the possibility of any law change but rather contend that their risks did not include the possibility of a targeted law change. However, this repeal was effective only with respect to transactions completed on or after May 10, 1989. ═ The extensive negotiations concerning the allocation of tax benefits would have led to a useless, unenforceable agreement. Consequently, even though Congress did not breach any express provision of the contract, passage of the Guarini legislation constituted a breach of the implied good faith promise that attached to the contract's express provisions. 1994) (citation omitted).****************Defendant contends that no breach of the implied covenant of good faith could have occurred here because the benefits were derived from a tax deduction and plaintiffs understood that the tax laws could change.
During the second round of briefing, the parties cross-moved for summary judgment. The parties discussed the availability of tax benefits, Centex's ability to utilize them, and the split of tax benefits between Centex and the FSLIC in any potential deal. Quinn's handwritten quantification of the tax benefits to the Director for the Southwest Plan. Blaber reported that Centex--unlike other potential acquirers--believed that it would be able to "utilize the existing tax benefits," and that Blaber's "major concern" was Awhether or not the tax sharing provision [was] satisfactory."In a document dated December 12, 1988, Centex again quantified for the FSLIC the FSLIC's share of tax benefits, specifically including an estimation of the covered asset loss deductions. The Assistance Agreement's execution date of December 29, 1998, was two days before the tax benefits available under the Internal Revenue Code were to be reduced by fifty percent. Throughout its statement of genuine issues, defendant disputes plaintiffs' contention that the covered asset loss deduction was generally understood to be a tax benefit under the FSLIC-specific tax provisions. Plaintiffs do not claim that any of these entities or persons had the authority to bind the Government on tax matters. Because of this the tax basis of the assets of the acquired institution will carry over to the acquiror and permit the acquiror to recognize a tax loss upon the disposition of an acquired asset which has a tax basis greater than its fair market value. As we have stated, however, Congress could have eliminated the deduction without becoming liable for contract damages. Furthermore, Hercules is inapposite because that case concerned the question of whether an implied indemnification term or agreement even existed. These experts included (a) the FSLIC and the FHLBB in formal statements; (b) the FHLBB'S outside law firms in privileged and non-privileged communications; (c) the technical staff of the Internal Revenue Service (AIRS"); (d) the Treasury Department's Tax Legislative Counsel and the Treasury Department's experts responsible for estimating the costs of tax legislation; (e) tax experts on the FSLIC's and the FHLBB's staffs; (f) tax experts within the Congressional Budget Office and the Comptroller General; (g) the staff of Congress's Joint Committee on Taxation; (h) Centex's own tax experts; and (i) tax experts unaffiliated with either party to the transaction. ═ In response to this proposed finding defendant states that A[n]either FHLBB, FSLIC, nor the outside counsel of such entities had authority to speak on behalf of the Government on the subject of the allowability of the covered asset loss deduction." This statement is non-responsive to the proposed finding. In November 1988, Congress enacted the Technical and Miscellaneous Revenue Act of 1988, Pub. First, most FSLIC-assisted acquisitions will qualify as a tax-free reorganization under section 368(a)(1)(G) of the Code. The targeted nature of the Guarini legislation is therefore critical to our finding of breach. The Hopkins & Sutter memorandum stated: There can be no question that at the time deals were negotiated, FSLIC looked at the potential to receive tax benefits as a reduction in its cost of assistance. The only institutions capable of taking the deduction and taking advantage of the so-called loophole were those institutions that had entered into assistance agreements with the FSLIC.****************During the spring of 1991, Bush administration staff held multiple meetings with congressional staff and sent letters to Congress. " to discover illegal gambling at Rick's that, in the past, he has tolerated.****************The instant case is unlike United States v. This conclusion rested, in part, on the Court's finding that there was Ano plausible contention that Congress acted with an improper motive, as by targeting estate representatives such as Carlton after deliberately inducing them to engage in [employee stock-ownership plan] transactions." Carlton , 512 U. Defendant insists that Congress targeted the deduction and not the contracts. Given this view, it would logically seek to maximize such benefits. Staff of the Joint Committee on Taxation sought Adeal-by-deal" information from FDIC staff and thanked the RTC for its cooperation. In this case, however, that is a distinction without a difference because the deduction had already been uniquely linked to the contracts.****************Contrary to defendant's fears, our finding of targeting does not render the legislation Ainvalid." Def.'s Mot. Susswein opined that the IRS position on the availability of the covered asset loss deduction was clear under the law." Defendant has not, however, disputed the fact that the memorandum contained the words plaintiffs have quoted. The Treasury Department has concluded that assisted institutions should not be allowed to deduct losses and expenses that are reimbursed by the FDIC. Defendant has failed to identify a genuine dispute.****************As a way of removing this Asubstantial doubt," the Susswein and Buckley memorandum suggested that ACongress or the IRS might wish to review this area and consider clarifying the law." The memorandum concluded by noting that A[w]here the tax benefits from purported losses on covered assets are not expressly shared, acquirers may argue that the anticipated enjoyment of this tax benefit was part of their overall bargain, and that clarifying or modifying the law in this regard is unfair."An FDIC memorandum dated August 31, 1990, discussed the possibility of Congressional action regarding the covered asset loss deduction: It is generally known that acquirers, as well as the FSLIC, held the opinion that the excess of tax basis over fair market value on Covered Assets (ACovered Asset Losses") was a proper loss deduction on the tax returns of the acquiring association. Some of these institutions will argue that the decision is contrary to their expectations regarding the 1988/89 transactions. Defendant disputes this proposed finding by pointing out that there was other consideration flowing to Centex besides the covered asset loss deduction and that Centex recognized at the time that the tax laws could change. Acquirers understood this and assumed in negotiations that FSLIC's objectives in this respect was [sic] to maximize these benefits. It is indisputable that neither party was then at liberty to alter the ratio unilaterally without becoming liable for damages. It is remarkable, therefore, that the ink was barely dry on the agreements before Congress announced its surprise that Centex and others were profiting from the tax aspects of the deals. The Government can still close so-called tax loopholes just as it did in the legislation at issue in Carlton . In discussing the application of the unmistakability doctrine, the plurality stated: The application of the doctrine will therefore differ according to the different kinds of obligation the Government may assume and the consequences of enforcing them. However, neither of these facts raises a genuine issue regarding plaintiffs' proposed finding, i.e. Therefore, the only matter to be negotiated was the extent to which these benefits would be shared. In our earlier ruling, we merely held that the mechanism whereby tax benefits were shared was not rendered meaningless even in the absence of a promise that the deduction for covered asset losses would continue to exist. Here, however, the essence of defendant's argument is that it cannot be held liable in contract for targeting and retroactively eliminating plaintiffs' opportunity to utilize those tax benefits because (1) the Guarini legislation did not technically alter the ratio prescribed by the contract and (2) the Government made no express promise that a deduction for covered asset losses would continue to exist. Of course Centex was in a position to make money from the transaction. The difference between Carlton and this case is that the plaintiff in Carlton did not have a contract with the Government that was linked to tax benefits. At one end of the wide spectrum are claims for enforcement of contractual obligations that could not be recognized without effectively limiting sovereign authority, such as a claim for rebate under an agreement for a tax exemption. I realize that the Congress has approved these tax provisions so as to benefit the FSLIC. Following these principles, I am reluctant to proceed with the LAMB package on its current terms, as presented by Leo Blaber. On December 22, Centex held a telephonic board meeting to approve the acquisition of the LAMB package. Hirsch's statements to the limited purposes of showing (1) that Mr. We do not use the statements as evidence (1) that the Bank Board had actually disapproved the deal, (2) that Mr. Consequently, because the statements are not being utilized to prove the truth of the matters they assert, they are not hearsay. Also on December 29, the FSLIC and Centex executed an assistance agreement ("Assistance Agreement"). in immediately available funds an amount equal to the net Debit balance" or (2) with certain restrictions not relevant here, Ato direct the net Debit balance . Section 9(a)(3) defined this tax benefit item: Fifty percent (50%) of the amount of any cost, expense or loss (i) which is incurred by the ACQUIRING ASSOCIATION, (ii) for which the CORPORATION has made or is obligated to make assistance payments to the ACQUIRING ASSOCIATION pursuant to ╖ 3(a) of this Agreement that is not includible in gross income by virtue of the provisions of ╖ 597 of the Code (or, with respect to tax liability, any state income tax law), and (iii) which is either deductible on the ACQUIRING ASSOCIATIONS's Federal or state income tax return or reduces the bad debt reserve balance of the ACQUIRING ASSOCIATION . Board Member White testified at this hearing regarding the taxability of capital losses: AWhat we have got are tax benefits stretched over 10 years of the contract. Defendant has not identified a genuine dispute in regard to this proposed finding.****************With the passage of FIRREA in August 1989, the FSLIC and the FHLBB were abolished and their functions transferred to the FDIC and three new Government agencies: the Resolution Trust Corporation (ARTC"), the Office of Thrift Supervision (AOTS"), and the Federal Housing Finance Board. Many former employees of the FHLBB were transferred to the new agencies. As we discuss below, the classification of the Guarini legislation as tax legislation does not shelter defendant from contractual liability. the implied covenant of good faith and fair dealing, that was contained in the contract from the moment of execution. The impact of the Guarini legislation, however, was quite different from that of our hypothetical. Such an object is not necessarily inconsistent with a public purpose, of course, and when we speak of governmental A self-interest," we simply mean to identify instances in which the Government seeks to shift the costs of meeting its legitimate public responsibilities to private parties. Hence, governmental action will not be held against the Government for purposes of the impossibility defense so long as the action's impact upon public contracts is . The greater the Government's self-interest, however, the more suspect becomes the claim that its private contracting partners ought to bear the financial burden of the Government's own improvidence, and where a substantial part of the impact of the Government's action rendering performance impossible falls on its own contractual obligations, the defense will be unavailable.. To find that tax legislation is immune from the Winstar plurality's general rule regarding the sovereign acts doctrine would be to place every government contract at the mercy of targeted taxation. And they were worth fighting to preserve, because they do allow us to stretch our limited resources farther. The board package prepared for this meeting discussed the Asignificant tax benefits available to the Centex consolidated group from this acquisition." The package also included a spreadsheet quantifying the tax benefits Centex expected to receive, including the estimated value of the covered asset loss deductions. White explained that, unless Centex agreed to accept a smaller portion of the tax benefits, the deal would not be approved. Wall said that the Bank Board had disapproved the deal, (2) that Mr. White had actually voted against the deal, or (3) that Mr. The Assistance Agreement contained several provisions that are relevant to the issues currently before the court. [t]he amount of Covered Asset Losses." Under ╖ 6(a)(2), upon the submission by Centex of each Quarterly Report required by the contract, the FSLIC was required either (1) "to wire transfer to the [Special Reserve Account I] of the ACQUIRING ASSOCIATION . FIRREA required the RTC to Areview all means by which it [could] reduce costs under existing [FSLIC] agreements" and to Aevaluate costs under existing [FSLIC] agreements" with regard to Acapital loss coverage," Atax consequences," and Aany other relevant cost consideration." 12 U. In an October 1989 memorandum, Joan Spirtas and Bobby Hughes, both FDIC employees, recommended that the FDIC change its approach to tax benefits in regard to the filing of final receivership returns in connection with FSLIC-assisted transactions. This explains why defendant's reliance on our statement that A[i]f no promise is found, the plaintiff's claim fails[,]" Coast-to-Coast Fin. To acknowledge the presence of this implied covenant in the contract is not to create a new obligation. The uncontroverted evidence here demonstrates that the Guarini legislation was specifically intended to strip those taxpayers who had entered into contracts with the FSLIC and the FHLBB of the fruits of those contracts. Hence, while the Government might legitimately conclude that a given contractual commitment was no longer in the public interest, a government seeking relief from such commitments through legislation would obviously not be in a position comparable to that of the private contractor who willy-nilly was barred by law from performance. so that the Government should not have the benefit of the [sovereign acts] defense.. This would endanger, not only the Government's contracting partners, but also Athe Government's own long-run interest as a reliable contracting partner." Id. 130 (1982), in which there was no suggestion that the tax at issue in that case was targeted at the tribe's contracting partners.****************Contract law does not require government contractors to anticipate blatantly targeted legislation.