MCI Communications Services, Inc. v. Federal Deposit Insurance Corporation ( 2011 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
MCI COMMUNICATIONS )
SERVICES, INC., )
for itself and certain of its affiliates doing
)
business as Verizon Business Services,
)
)
Plaintiff, )
)
v. ) Civil Action No. 10-0579 (ABJ)
)
FEDERAL DEPOSIT INSURANCE )
CORPORATION, )
in its capacity as Receiver for )
Washington Mutual Bank, )
)
Defendant. )
____________________________________)
MEMORANDUM OPINION
Plaintiff MCI Communications Services, Inc., d/b/a Verizon Business Services
(“Verizon”), brings this action against the Federal Deposit Insurance Corporation (“FDIC”), in
its capacity as the receiver for Washington Mutual Bank. The complaint seeks judicial review of
the FDIC’s denial of Verizon’s claims for compensatory damages stemming from the FDIC’s
repudiation of a telecommunications services contract between Verizon and Washington Mutual
Bank. FDIC moved for judgment on the pleadings under Fed. R. Civ. P. 12(c). For the reasons
stated below, the Court will grant defendant’s motion in part and deny it in part.
I. Background
Washington Mutual Bank (“WaMu”) was a federal savings and loan with banking
branches located throughout the United States. Compl. ¶ 6. On December 5, 2006, WaMu and
Verizon entered into the Second Amended and Restated Master Service Agreement (the
“SARA”), under which Verizon was to provide communications and related support and
management services to WaMu for an initial five-year term. Id. ¶ 7. The parties began
performing their obligations under the SARA, but on September 25, 2008, the United States
Office of Thrift Supervision closed WaMu and appointed the FDIC as its receiver. Id. ¶¶ 8–9.
At the same time, the FDIC sold substantially all of WaMu’s assets to JP Morgan Chase Bank,
N.A. (“JPMC”) through a Purchase and Assumption Agreement, which gave JMPC the option to
assume certain WaMu service contracts. Id. ¶ 9; see also Def.’s Mem. in Support of the Mot. for
J. on the Pleadings (“Def.’s Mem.”) at 2.
The SARA was one of the contracts transferred to JPMC, and JPMC continued to
perform under the SARA for the first nine months of the receivership. Compl. ¶ 10. JPMC paid
Verizon for all of the post-receivership services it received during that nine month period. Id. ¶
11.
JPMC then exercised its right not to assume the SARA and transferred it back to the
FDIC, which then repudiated the contract effective as of July 1, 2009, pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), 18 U.S.C §
1821(e)(1). Id. ¶ 12. Although the FDIC is authorized to repudiate an insolvent bank’s
contracts, FIRREA provides that the injured party may sue the FDIC, as the receiver, for breach
of contract. Under the terms of the statute, the receiver’s liability for any breach is “limited to
actual direct compensatory damages.” 12 U.S.C. § 1821(e)(3)(A)(i).
On August 26, 2009, Verizon filed a claim for what it characterized as actual direct
compensatory damages sustained as a result of the early repudiation of the SARA. Compl.¶ 15.
The FDIC disallowed the claim in its entirety on February 11, 2010. Id. ¶ 16. Verizon then filed
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this action on April 12, 2010, pursuant to 12 U.S.C. § 1821(d)(6), to obtain judicial review and
reversal of the FDIC’s determination. Id. ¶ 17.
In its complaint, Verizon asserts claims for several categories of alleged direct
compensatory damages. In Count I, Verizon seeks approximately $21.4 million in damages
comprised of three categories: (1) $19.3 million in “loyalty, service and other credits” that
Verizon allegedly granted to WaMu against sums owed under a prior contract as a material
inducement to enter into the SARA and commit to performance over the five-year term; (2)
material and labor costs incurred by Verizon in connection with facilities build-out, data
conversion, and the migration of WaMu to Verizon’s network; and (3) “other out-of-pocket
costs, capital expenditures, and financial concessions” that Verizon incurred. Id. ¶ 20–23.
In Count II, Verizon seeks over $2.8 million for severance payments, outplacement costs,
and the cost of continuing health benefits that Verizon incurred or will incur in connection with
employees who were hired in reliance upon WaMu’s execution of the five-year contract and
were terminated early as a result of the repudiation. Id. ¶ 25–26.
In Count III, Verizon alleged that it incurred liabilities with a third-party vendor to
deliver services to WaMu as a result of the repudiation of the SARA.
On September 10, 2010, FDIC moved for judgment on the pleadings pursuant to Fed. R.
Civ. P. 12(c). In its opposition to that motion, Verizon conceded to entry of judgment on the
pleadings in favor of FDIC with respect to Count III because those expenses “are considered as a
legal matter to be indirect or consequential damages, as opposed to direct compensatory
damages.” Pl.’s Opp. at 21. 1 Accordingly, only Counts I and II remain.
1 Verizon originally brought this action for itself and certain of its affiliates, but FDIC
argued in its motion that Verizon does not have standing to assert claims on behalf of unnamed
affiliates. Def.’s Mem. at 4 n.1 Verizon stated in its opposition that the damages it sought in
3
II. Legal Background
A. Standard of Review
Although Verizon styles its complaint as a request for “judicial review” of the FDIC’s
denial of its claims, judicial review of FDIC’s determination to disallow a claim is not permitted.
12 U.S.C. § 1821(d)(5)(E). Rather, this Court has jurisdiction to decide Verizon’s claims de
novo. Office & Prof’l Employees Int’l Union, Local 2 v. FDIC, 962 F.2d 63, 65 (D.C. Cir. 1992)
(“OPEIU I”).
A motion for judgment on the pleadings pursuant to Rule 12(c) may be granted “only if it
is clear that no relief could be granted under any set of facts that could be proved consistent with
the allegations.” Longwood Vill. Rest., Ltd. v. Ashcroft, 157 F. Supp. 2d 61, 66 (D.D.C. 2001),
citing Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). Put another way, “[i]f there are
allegations in the complaint which, if proved, would provide a basis for recovery, the Court
cannot grant judgment on the pleadings.” Nat’l Shopmen Pension Fund v. Disa, 583 F. Supp. 2d
95, 99 (D.D.C. 2008) (internal quotations and citations omitted). “The standard of review for
such a motion is essentially the same as the standard for a motion to dismiss brought pursuant to
Federal Rule of Civil Procedure 12(b)(6).” Longwood, 157 F. Supp. 2d at 66–67 (citations
omitted).
“To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v.
Iqbal, --- U.S. ---, 129 S. Ct. 1937, 1949 (2009) (internal quotation marks omitted); see also Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In Iqbal, the Supreme Court reiterated the two
Count III were the only ones “not incurred entirely by the named Plaintiff in this action, MCI
Communications Services, Inc., d/b/a Verizon Business Services,” so Verizon no longer seeks to
bring this action on behalf of certain of its affiliates. Pl.’s Opp. at 21 n.6.
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principles underlying its decision in Twombly: “First, the tenet that a court must accept as true all
of the allegations contained in a complaint is inapplicable to legal conclusions.”129 S. Ct. at
1949. And “[s]econd, only a complaint that states a plausible claim for relief survives a motion
to dismiss.” Id. at 1950.
A claim is facially plausible when the pleaded factual content “allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949.
“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a
sheer possibility that a defendant has acted unlawfully.” Id. A pleading must offer more than
“labels and conclusions” or a “formulaic recitation of the elements of a cause of action,” id. at
1949, quoting Twombly, 550 U.S. at 555, and “[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice.” Id. The complaint is
construed liberally in plaintiff’s favor, and the Court should grant plaintiff “the benefit of all
inferences that can be derived from the facts alleged.” Kowal v. MCI Commc’ns Corp., 16 F.3d
1271, 1276 (D.C. Cir. 1994). Nevertheless, the Court need not accept inferences drawn by the
plaintiff if those inferences are unsupported by facts alleged in the complaint, nor must the Court
accept plaintiff’s legal conclusions. See id.; Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir.
2002). In evaluating a motion for judgment on the pleadings under Rule 12(c), the Court may
consider facts alleged in the complaint as well as documents attached to or incorporated by
reference in the complaint. Qi v. FDIC, 755 F. Supp. 2d 195, 199–200 (D.D.C. 2010). 2
2 Throughout the complaint plaintiff repeatedly references the SARA, the contract upon
which this case is based. The Court will therefore consider the SARA in deciding defendant’s
Rule 12(c) motion.
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B. The FIRREA Framework
As the receiver of an insolvent financial institution, the FDIC may repudiate the bank’s
contracts under FIRREA. 18 U.S.C § 1821(e)(1). Repudiation is treated as a breach of contract
giving rise to an ordinary contract claim for damages. ALLTEL Info. Svcs. v. FDIC, 194 F.3d
1036, 1039 (9th Cir. 1999). But damages are not assessed according to ordinary contract
principles – rather, they must be determined in accordance with the terms of the statute.
FIRREA explicitly limits damages for repudiation to “actual direct compensatory
damages,” 12 U.S.C. § 1821(e)(3)(A), and it bars recovery for “punitive or exemplary damages;
damages for lost profits or opportunities; or damages for pain and suffering.” Id. §
1821(e)(3)(B). 3 The statute itself does not define “actual direct compensatory damage,” nor does
the statute’s legislative history shed light on its meaning. 4 But the D.C. Circuit and other courts
have considered what would qualify as direct compensatory damages under FIRREA.
3 12 U.S.C. § 1821(e) provides:
(3) Claims for damages for repudiation
(A) In general
Except as otherwise provided in subparagraph (C) and paragraphs (4), (5), and (6),
the liability of the conservator or receiver for the disaffirmance or repudiation of any
contract pursuant to paragraph (1) shall be –
(i) limited to actual direct compensatory damages; and
(ii) determined as of –
(I) the date of the appointment of the conservator or receiver; or
(II)in the case of any contract or agreement referred to in paragraph (8), the date
of the disaffirmance or repudiation of such contract or agreement.
(B) No liability for other damages
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 opportunity; or
(iii)damages for pain and suffering.
4 McMillan v. FDIC, 81 F.3d 1041, 1054 (11th Cir. 1996) (“We note that there is no
relevant legislative history [to help interpret the statutory term ‘actual direct compensatory
damages’]; the parties have cited none, and we have been able to find none.”).
6
In Office & Prof’l Employees Int’l Union, Local 2 v. FDIC, 27 F.3d 598, 604 (D.C. Cir.
1994) (“OPEIU II”), the D.C. Circuit explained it this way:
Congress appears to us to have wished to distinguish between those
damages which can be thought to make one whole and those that are
designed to go somewhat further and put a plaintiff securely in a
financial position he or she would have occupied but for the breach.
See also ALLTEL, 194 F.3d at 1040 (same). The court noted in OPEIU II that Congress
expressly prohibited any recovery for lost profits and opportunities, and it observed that such
amounts “have a speculative nature,” not just as to the amount that might be earned, but whether
they will be realized at all. 27 F.3d at 604. While “Congress did not eliminate all claims
founded on repudiated contracts,” id., it did deny the right to recover what the plaintiff would
have been in a position to earn in the future had the contract been performed. 5 So even though
lost profits are a form of actual damages, ALLTEL, 194 F.3d at 1040, they are a subset of
compensatory damages that are specifically excluded under the statute in order to limit allowable
claims for repudiated contracts. 12 U.S.C. § 1821(e)(3)(B)(ii).
In OPEIU II, the union representing employees of the closed bank made a claim for
severance payments to which the employees were entitled under the terms of their collective
bargaining agreement. The FDIC, as receiver, had repudiated the agreement. The court held that
the severance payments qualified as direct compensatory damages under FIRREA because they
were “consideration for entering into (or continuing under) the employment contract.” Id. at
604. The court distinguished the payments from the types of damages not permitted under the
statute; it explained that under the agreement at issue, severance pay “has already vested and
5 The Court observed that this differentiation is also recognized in the section of the statute
which precludes a lessor’s recovery of lost future rent. Id. at 604, citing 12 U.S.C. §1821(e)(4).
A party that breaches a contract would owe these types of damages – lost profits and future rents
– not because the plaintiff has already accrued or earned that amount under the contract, but
because, absent the breach, the plaintiff would have been in a position to earn those sums. Id.7
only its amount is subject to contingencies, whereas whether future profits and opportunities will
be realized at all is a matter of speculation, since they have not accrued at the time of the
repudiation.” Id.The Ninth Circuit has also held that “the statute limits damages to those ‘flowing directly
from the repudiation, which make one whole, as opposed to those which go farther by including
future contingencies such as lost profits and opportunities or damages based on speculation.’”
ALLTEL, 194 F.3d at 1041, quoting McMillian, 81 F.3d at 1055. See also Westberg v. FDIC,
759 F. Supp. 2d 38, 47 (D.D.C. 2011) (same). In ALLTEL, the plaintiff sought damages for
breaches by FDIC, as receiver, of two separate contracts. The plaintiff filed claims on both the
accounts receivable balance, as well for a monthly fee on the remaining 54 months of the
contract. FDIC allowed the former but disallowed the latter because they were not direct
compensatory damages under FIRREA. Id. at 1038. The court agreed:
[T]he ascertainable nature of ALLTEL’s future profits does not render
them recoverable because, rather than making ALLTEL whole, they
would put ALLTEL in the financial position it would have occupied
but for the breach. By contrast, the claim for the outstanding accounts
receivable balance, allowed by the FDIC, constituted compensation
already earned and thus is recoverable.
Id. at 1041. The court further explained that even if the contracts provided that the monthly
payments were to be paid for the duration of the term of the agreement, such payments “would
best be characterized as liquidated damages, for the minimum monthly payments would
constitute an estimate of what ALLTEL would have received had the Agreements been
performed.” Id. at 1043. The court found that such damages would not constitute “actual direct
compensatory damages” and thus would not be compensable under FIRREA. Id. See also
OPEIU II, 27 F.3d at 602 (noting that liquidated damages are not recoverable because they are,
“by definition, not actual” damages.); RTC v. Management, Inc., 25 F.3d 627, 632 (8th Cir.
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1994) (finding that a liquidated damage clause for future lost profits was not compensable under
FIRREA).
The D.C. Circuit has also held that “reliance damages,” which are intended to make a
contracting party whole after a breach, are recoverable under FIRREA. Nashville Lodging Co. v.
Resolution Trust Corp., 59 F.3d 236, 249 (D.C. Cir. 1995). These damages give the plaintiff
“the repayment of his expenditures in preparing to perform and in part performance,” and put
him “in as good a position as he was in before the promise was made.” Id. In Nashville
Lodging, the appellant sought to recover fees it had paid to secure a refinancing agreement that
was later repudiated by the receiver. The receiver argued that restitution damages are not
recoverable because the “actual direct compensatory damages” in the statute are meant to be a
forward-looking remedy, the purpose of which is to put the party in as good of a position as he
would have been had the contract been completed. Id. at 245. The court rejected this argument,
reasoning that the retrospective nature of the damages did not render them non-compensatory,
even though “the ordinary measure of damages for breach of contract is forward looking and
seeks to protect the non-breaching party’s ‘expectation interest.’” Id. “The fact that reliance
damages are backward-looking does not destroy their pedigree as a species of compensatory
relief,” and such damages are “presumptively recoverable under FIRREA.” Id. at 246, citing
DPJ Co. Ltd. Partnership v. FDIC, 30 F.3d 247 (1st Cir. 1994). 6 This holding makes sense in
6 The court in Nashville Lodging stated in dicta that damages aimed to put the injured party
“where he would have been if the contract had been fulfilled” are also presumptively recoverable
under FIRREA. 59 F.3d at 246. But the court was not addressing a situation where the plaintiff
sought this type of expectation damages, and the D.C. Circuit has separately explained – in a
lengthy discussion – why those damages are not recoverable under FIRREA. OPEIU II, 27 F.3d
at 604. So this Court does not read Nashville Lodging to hold that FIRREA allows recovery for
damages to put a plaintiff in the same position he would have occupied but for the breach. See
ALLTEL, 194 F.3d 1042 (explaining that “Nashville Lodging does not hold that FIRREA
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light of FIRREA’s prohibition against recovery of the ordinary, forward-looking measures of
damages: lost profits and liquidated damages.
In sum, reading Nashville Lodging in conjunction with OPEIU II, the case law of other
circuits, and the statute itself, the Court concludes that a party seeking damages under FIRREA
is entitled to the actual compensatory damages that will make it whole – which would include
out-of-pocket costs incurred in preparing to perform, as well as what the plaintiff has earned for
its past performance. 7 To the extent that a plaintiff is seeking to recover its lost profits or
opportunities, or it is proffering what is in essence a liquidated damages claim, those claims must
be denied.
ANALYSIS
III. Certain Claims May Be Permitted Under FIRREA
The FDIC argues that none of damages alleged in the complaint are direct, compensatory
damages, and they are therefore not recoverable under the terms of the statute. Assessing each
category of claimed damages separately, the Court agrees with the FDIC only in part. The Court
disagrees with the FDIC with respect to the damages in Count I, finding that some of those
damages may be recoverable. At the same time, the Court agrees with the FDIC that Counts II
and III seek indirect damages that are barred under the statute. Therefore, judgment on the
pleadings is appropriate for Counts II and III of the complaint.
authorizes ordinary contract damages, nor that ‘actual direct compensatory damages’ is a ‘benefit
of the bargain’ standard.”).
7 In this case, there is no issue regarding sums due Verizon for its past performance since
those were fully paid by JPMC.
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A. Count I: Credits
Verizon seeks $19,300,000 in “loyalty, service and other credits” that it alleges it granted
WaMu “against sums that were due and payable to Verizon” under a prior contract to induce
WaMu to enter into the SARA and commit to performance over the entire five-year term.
Compl. ¶ 21. The parties’ briefs – as opposed to the pleadings – shed a little more light on how
each type of credit differs from the others, and it may be that when the factual record is fully
developed not all of the $19 million is recoverable. But because the Court cannot conclude
based on the pleadings that there is no set of facts under which plaintiff could prevail on its claim
with respect to any of these credits, it will deny the motion for judgment on the pleadings with
respect to Count I.
1. Loyalty credits
In its brief, Verizon explains that the amount involved was “due and payable to Verizon
under the prior agreement between the parties (i.e., the predecessor contract to the SARA), the
First Amended and Restated Master Services Agreement (“FARA”).” Pl.’s Opp. at 6. It argues
that the WaMu receivable was, in essence, an asset, and that its willingness to forgive the debt
“was an actual financial concession, no less than an out-of-pocket expenditure in that amount,
that Verizon incurred as an express condition to entry into the SARA with WaMu.” Id. Since
under some set of facts, the plaintiff could prevail on this claim, the Court cannot dismiss this
portion of Count I under Rule 12(c).
The FDIC argues that the amounts owed were due under a prior contract, and therefore,
they cannot be claimed as damages for a breach of the SARA. But the fact that the amounts
owed to Verizon were due under a contract that predated the repudiated contract does not
necessarily bar recovery under FIRREA. In DPJ Co. Ltd. Partnership v. FDIC, 30 F.3d 247,
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248 (1st Cir. 1994), the plaintiffs had entered into a commitment letter agreement with a bank
under which the plaintiffs had to meet certain conditions to obtain a line of credit. The plaintiffs
incurred about $180,000 in costs to meet those conditions, at which point the bank provided the
line of credit and the plaintiff began borrowing on it. Id. After the bank failed and the FDIC, as
receiver, repudiated the line of credit agreement, the plaintiff sought to recover the costs it
incurred pursuant to the original commitment letter. The court held that such expenditures
qualified as direct compensatory damages – even though they were made pursuant to a separate
agreement that was not repudiated – because it was the plaintiff’s satisfaction of the conditions in
the commitment letter that gave rise to the bank’s obligation to establish the line of credit. Id. at
250. In other words, under a reliance theory, the plaintiff was entitled to recover the expenses it
incurred as a condition to entry into the repudiated contract. Id. at 249. The court rejected
arguments by the receiver that these out of pocket expenditures were simply compensation for a
lost opportunity, and it permitted the plaintiff to recover money “actually spent under the
commitment letter agreement” to obtain the line of credit. Id. at 249.
Here, Verizon alleges in the complaint that it granted the credits “as a material
inducement to enter into the SARA and commit to performance over its entire five-year term.”
Compl.¶ 20. Until the facts are further developed, the Court cannot ascertain whether Verizon’s
agreement to forego the debt was simply an offer made by Verizon to encourage WaMu to
purchase more services in the future, or whether it was – like the pre-loan expenditures in DPJ –
a condition imposed by the bank as a pre-requisite to its entry into the SARA. Verizon states in
its brief that the loyalty credits were “an express condition to entry into the SARA with WaMu.”
Pl.’s Opp. at 6. So the Court cannot say, under Rule 12(c), that it is clear that relief could not be
granted under any set of facts consistent with the allegations in the complaint. The Court will
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therefore deny defendant’s motion for judgment on the pleadings with respect to the “loyalty
credits” that Verizon seeks to recover.
It is important to note that the Court is not ruling at this time that the credits are
recoverable – only that it cannot determine as a matter of law that they are not. Verizon offered
more than one theory for why it is entitled to relief, and its suggestion that it should be able to
obtain “the benefit of its bargain,” Pl.’s Opp. at 13, raises concerns that the claim may ultimately
be deemed to be improper expectation damages. But since, under DPJ and Nashville Lodging,
there are some circumstances under which the relinquishing of a debt could constitute
recoverable reliance damages, this aspect of Count I will not be dismissed.
2. Service and other credits
Verizon also seeks to recover $15 million in “service and other credits” which Verizon
allegedly extended in exchange for WaMu’s commitment to certain levels of service over the
term of the SARA. Compl.¶ 21; Pl.’s Opp. at 8. Like the loyalty credits, because Verizon
alleges that the “service and other credits” were granted to WaMu “against sums that were due
and payable to Verizon under the prior contract between the parties,” the Court cannot say that
under no set of facts could provide a basis for recovery. Accordingly, on the face of the
pleadings, the Court cannot grant judgment under Rule 12(c) with respect to the “service and
other credits” that Verizon seeks to recover.
But as with the loyalty credits, it is important to note that the Court is not ruling at this
time that the service and other credits are recoverable – only that it cannot determine as a matter
of law that they are not. Indeed, as FDIC argues, it appears to the Court that the service credits
are akin to promotional price discounts that accrued over time as WaMu utilized certain levels of
Verizon’s service, and they were deducted from WaMu’s bills as WaMu earned the discount. If
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that turns out to be the case – contrary to Verizon’s assertion in the complaint that they are
credits for sums already payable – then such damages may not be recoverable because WaMu
already earned them under the terms of the contract. But at this stage, judgment on the pleadings
is inappropriate because it is possible that Verizon could present evidence to demonstrate that it
is entitled to such credits.
B. Count I: Labor costs, out-of-pocket expenses, and financial concessions
1. Labor costs and out-of-pocket expenses
Verizon also seeks material and labor costs it incurred as part of the facilities build-out,
conversion and migration of WaMu to Verizon’s network, as well as “other out-of-pocket costs”
and “capital expenditures.” Compl. ¶ 20. These types of costs, which Verizon paid in reliance
on the contract, are compensatory damages under FIRREA. Nashville Lodging, 59 F.3d at 240.
Thus, Verizon may be entitled to relief if it can prove facts consistent with these allegations, and
the Court will allow the claims to proceed with respect to material and labor costs, capital
expenditures, and out-of-pocket costs that would put it back in the position that it occupied
before making the repudiated agreement. Id.However, Verizon also seeks damages remaining on the final two and a half years of the
repudiated contract. See Pl.’s Opp. at 16 (“Verizon never received ‘its contracted-for benefit’ in
exchange for these outlays because the SARA was repudiated, denying Verizon the benefit of
any performance by WaMu over the final two-and-half-years [sic] of that term.”). The D.C.
Circuit has held that this type of expectation damages is not recoverable under FIRREA. So
although Verizon may recover damages to put it in the position it occupied before making the
agreement, it cannot recover damages to put it in the same position it would have occupied but
for the breach. OPEIU II, 27 F.3d at 604.
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2. Financial concessions
Verizon also seeks to recover “financial concessions,” Compl. ¶ 20, but does not explain
what those concessions are and whether they differ in any way from the “credits” it seeks to
recover. Without any factual allegations to support Verizon’s claim, the Court finds that Verizon
has failed to state a claim upon which can be granted. Iqbal, 129 S. Ct. at 1949. The Court will
therefore dismiss Count I of the complaint with respect to “financial concessions” to the extent
they differ from the “loyalty, service and other credits” previously discussed.
C. Count II: Employee Costs
In Count II, Verizon seeks damages from severance liability, outplacement costs, and the
continuation of benefits that Verizon incurred in connection with the employees it hired to
service the SARA but later terminated as a result of the repudiation. Compl.¶ 24. Verizon
argues that the Verizon employees at issue in Count II were “Verizon’s agents, retained
specifically in order to perform Verizon’s obligations under the SARA and constituting a
component of Verizon’s overhead and other out-of-pocket expenses actually incurred in direct
reliance upon WaMu’s five-year commitment under that agreement.” Pl.’s Opp. at 19.
Although these costs qualify as compensatory damages, as opposed to lost profits,
FIRREA further limits permissible damages to direct compensatory damages. As FDIC
correctly points out, Verizon’s liability for those costs arises from its contractual relationships
with its employees, not from its contractual relationship with WaMu. Similar to the costs
incurred with the third-party vendor in Count III that Verizon has conceded are not recoverable,
the costs for employee severance, outplacement costs, and the continuation of benefits arise out
of obligations that Verizon undertook with third-parties hired as employees. See Petroleo
Brasileiro, S.A., Petrobas v. Ameropan Oil Corp.,372 F. Supp. 503, 508 (E.D.N.Y. 1974)
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(“[C]onsequential damages do not arise within the scope of the immediate buyer-seller
transaction, but rather stem from losses incurred by the non-breaching party in its dealings, often
with third parties, which were a proximate result of the breach, and which were reasonably
foreseeable by the breaching party at the time of contracting.”). So the damages do not flow
directly from the breach of the SARA, but from transactions that are collateral to the repudiated
contract. The Court therefore concludes that they are indirect damages and are not recoverable
under FIRREA. Accordingly, the Court will grant defendant’s motion for judgment on the
pleadings with respect to Count II.
IV. The SARA Cannot Bar Recovery of Certain Damages
A. The Liquidated Damages Provision
The FDIC argues that Verizon is not entitled to the damages it seeks under the terms of
the SARA. 8 Indeed, the FDIC asserts:
To recover repudiation damages under section 1821(e), Verizon ‘must show, first,
that it is contractually entitled to [such recovery] under the terms of the
agreement.’” RTC v. Management, Inc., 25 F. 3d 627, 632 (8th Cir. 1994); see
e.g., Alltel, 194 F. 3d at 1043 (plaintiff “not entitled to damages for minimum
monthly payments . . . because such payments are not provided for in the Data
and Item Agreements.”).
Def.’s Mot. at 13. While the FDIC purports to cite the RTC and ALLTEL cases for this
proposition, neither of those cases actually states that in order “to recover repudiation damages
8 In the event of WaMu’s breach, the SARA bars certain damages, including “reliance
damages.” SARA § 33.1. But the SARA does allow Verizon to recover liquidated damages for
lost profits in the form of a termination fee. SARA § 34.5. The termination fee is the “sole
liability” in connection with a termination of the SARA “provided WaMu satisfies its associated
obligations to pay a Termination Fee, as applicable.” SARA § 34.5(d). Verizon does not seek to
recover under the liquidated damages clause of the agreement because it recognizes such
damages are not allowed under FIRREA. Pl.’s Opp. at 1, 10. But even though FIRREA
displaces FDIC’s obligation to pay the termination fee, FDIC also argues that the Court should
look to the SARA in denying reliance damages, the same type of damages the D.C. Circuit has
held are “presumptively recoverable” under FIRREA. Nashville Lodging, 59 F.3d at 246.
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under section 1821(e),” the parties must first show that that they are contractually entitled to
those damages.
In RTC, the party seeking to withhold funds from the receiver claimed that it was
specifically entitled to a particular fee under Article 3 of the contract. The Resolution Trust
Corporation (“RTC”) argued both that the contract did not actually call for the payment of that
fee and that the fee would not qualify as “actual, compensatory damages.” So the Court started
the analysis this way: “We turn now to Management’s claim for the $200,000 Article 3 Fee. To
prevail on this claim, Management must show, first, that it is contractually entitled to the Article
3 Fee under the terms of the Agreement and, second, that loss of the Article 3 Fee constitutes
compensable damages under FIRREA. We address each of these issues separately.” 25 F. 3d
631. FDIC’s introduction and bracketed quotation from the case takes the quote out of its proper
context and changes the meaning of the court’s holding.
FDIC’s representation with respect to ALLTEL is similarly disingenuous. In that case,
the plaintiffs were making the specific argument that they were contractually entitled to a certain
kind of damages, but the court rejected that argument. The court did not hold that in order to
recover damages under FIRREA in the first place, the contract has to call for those particular
damages.
Indeed, the court in ALLTEL, and the opinion in OPEIU II on which the ALLTEL court
relied, addressed the inverse situation: both courts were grappling with the fact that under
FIRREA, parties injured by a receiver’s breach of contract may not be entitled to certain
damages, even if they are provided for in the contract. In particular, they are not entitled to any
liquidated damages that would have been available under the terms of the repudiated contract
because, while liquidated damages are “compensatory” in nature – i.e., they were occasioned by
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the breach – they are not “actual.” So, according to the D.C. Circuit and the Ninth Circuit, and
under the FIRREA scheme, a party’s rights and obligations under the contract are not co-
extensive with, or determinative of, its rights and obligations under FIRREA.
For those reasons, the Court is not persuaded by FDIC’s contract-based arguments. An
injured party often cannot recover the specific forms of compensatory damages to which it would
have been entitled in the event of an ordinary breach of the contract: lost profits and liquidated
damages. Since Congress has substituted its own damage allocation scheme for whatever
scheme was bargained for by the parties, this Court finds that it would be inappropriate to deny
plaintiff reliance damages on the grounds that they are barred by the terms of the contract, when
it cannot grant them the liquidated or future profit damages the contract provided for instead.
And the cases cited by the FDIC do not require this Court to do so.
B. The Rates and Charges Provision
Finally, the FDIC also argues that the out-of-pocket and labor costs are included in the
rates and charges that it fully paid, and therefore, they cannot be included in Verizon’s damage
claim. Section 10.2(a) of the SARA provides:
All costs associated with providing the Services, including the support
required to fulfill Supplier’s obligations under this Agreement relating to
all Services and the normal foreseeable growth of WaMu Group
Companies’ business during the Term in relation to such Services are
included as part of the Rates and Charges. Furthermore, it is understood
and agreed by the Parties that all of Supplier’s activities necessary or
customary in connection with providing the Services are included in such
Rates and Charges.
Section 10.2(b) further provides: “Supplier acknowledges that, consistent with Subsection (a),
incidental and overhead expenses that Supplier incurs in performing the Services . . . are
included in the Rates and Charges.” Verizon readily acknowledges that the parties began
performing their respective obligations under the SARA, and that it was paid for services
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rendered after FDIC assumed the contract. But these provisions only entitle FDIC to offset the
amounts that WaMu paid in partial performance of its obligations under the SARA before the
repudiation. See Westfed Holdings v. United States, 407 F.3d 1352, 1370 (Fed. Cir. 2005). They
do not bar recovery of all of the out-of-pocket costs that Verizon paid in preparing to perform on
the contract.
V. Conclusion
For the reasons stated above, the Court will grant in part and deny in part defendant
FDIC’s motion for judgment on the pleadings. A separate order will issue.
AMY BERMAN JACKSON
United States District Judge
DATE: August 22, 2011
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