[00:00:35] Speaker 04:
HSH Nordbank, BUS?

[00:00:53] Speaker 01:
Yes, Your Honor.

[00:01:03] Speaker 01:
Mr. Hoff?

[00:01:04] Speaker 04:
Yes.

[00:01:06] Speaker 04:
Is yours a Section 101 case?

[00:01:08] Speaker 04:
No, it's not, Your Honor.

[00:01:10] Speaker 04:
Oh, good.

[00:01:11] Speaker 03:
Equitable subrogation.

[00:01:14] Speaker 03:
Good morning, and may it please the Court.

[00:01:15] Speaker 03:
My name is Chris Hoff, and I represent the appellant HSH Nordbank AG.

[00:01:21] Speaker 03:
Nordbank raises two errors on appeal.

[00:01:23] Speaker 03:
First, the Court of Federal Claims erred in holding that Nordbank was not equitable.

[00:01:27] Speaker 01:
Let me ask you a big picture question, OK?

[00:01:30] Speaker 01:
From 22 to 26 of the blue brief,

[00:01:34] Speaker 01:
You say that the claims court abuses discretion when it treated the motion to dismiss as a summary judgment.

[00:01:41] Speaker 03:
Yes, Your Honor.

[00:01:42] Speaker 01:
Now that's an alleged procedural error, right?

[00:01:48] Speaker 03:
Yes, Your Honor.

[00:01:48] Speaker 01:
But you don't appear to contest the claims court's substantive conclusions of law as to count three about the debt owed exceeding any refund.

[00:01:59] Speaker 03:
Our position is that it was premature for the Court of Federal Claims to have addressed count three on summary judgment on an incomplete record.

[00:02:09] Speaker 03:
Nordbank had no opportunity to make a discovery of documents from either CEP, the government contractor.

[00:02:16] Speaker 01:
Let's say we find that the claims court didn't abuse its discretion.

[00:02:20] Speaker 01:
Yes.

[00:02:22] Speaker 01:
Would that moot your arguments as to counts one and two?

[00:02:25] Speaker 03:
No, Your Honor.

[00:02:27] Speaker 03:
The contract claims and the assignment of claims act claim are really alternative claims to get at what's the same relief to get the CEP's deposits, the deposits that the contractor made with BPA back.

[00:02:44] Speaker 01:
Even if the amounts exceeded any refund?

[00:02:51] Speaker 03:
The analysis is different.

[00:02:53] Speaker 03:
On the breach of contract claims, it's a contract-based analysis, which the court did not engage in.

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And if this court reverses the Court of Federal Claims and finds that Nordbank was indeed equitably subrogated to the rights of CEP, such that it can bring contract claims against the government, then the case should be remanded to the Court of Federal Claims to allow the parties to engage in discovery, and then for an analysis of whether a contract analysis of

[00:03:21] Speaker 03:
what damages there might have been.

[00:03:24] Speaker 03:
Under the Assignment of Claims Act, it's an entirely different analysis.

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And the fact that the court granted summary judgment in favor of the government on that claim has no bearing on the contract analysis that the court didn't reach because it granted summary judgment prematurely, in our view, on that issue.

[00:03:47] Speaker 03:
On the equitable subrogation issue, the government argues that only sureties may qualify for equitable subrogation.

[00:03:58] Speaker 03:
Quoting from the government's brief, this court has recognized that equitable subrogation applies only into circumstances when the surety takes over contract performance or when it finances completion of the defaulted contract.

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And the second part of that quotation is a quotation from this court's decision in insurance company of the West

[00:04:18] Speaker 03:
But that's not what this court said in Insurance Company of the West.

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What this court said is we have specified two circumstances in which a surety may succeed to the contractual rights of a contractor against the government, and then specified those two circumstances, which is the same quote from the government's brief.

[00:04:35] Speaker 02:
Let me ask you this.

[00:04:36] Speaker 02:
If we accept your argument, doesn't it mean that any bank or any financial institution that provides funds for a government contractor to perform a contract

[00:04:46] Speaker 02:
step in and sue the government if the original contractor goes bankrupt?

[00:04:52] Speaker 03:
No, Your Honor.

[00:04:52] Speaker 03:
That's not the case.

[00:04:55] Speaker 02:
So what did you do here to distinguish yourself from that general lender?

[00:05:01] Speaker 03:
So as you could tell from the breach... You didn't step in and perform the contract, right?

[00:05:07] Speaker 02:
We did not perform the contract.

[00:05:09] Speaker 02:
You didn't provide funds to continue performance of the contract after the contractor's bankruptcy.

[00:05:15] Speaker 03:
That's correct, but we did step in when the contract in 2010, BPA sent a loan modification of the engineering and procurement agreement.

[00:05:28] Speaker 03:
And this was unexpected, but it was permitted under the engineering and procurement agreement.

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Sent a modification to CEP requiring that CEP deposit an additional $3.7 million with BPA

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within $500,000 within a month and an additional $3.2 million within the following three to four months.

[00:05:49] Speaker 03:
But they didn't send it to you.

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They sent it to CEP.

[00:05:53] Speaker 03:
CEP and BPA said that if they did not deposit the... So you provided them additional funding.

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We provided additional funding at that point just as the lending bank... But the government had no idea who was providing the funding.

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The government had every idea who was providing the funding because we submitted an irrevocable letter of credit

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to be directly from Nordbank to BPA in June of 2008.

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So you provided funding.

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We provided an irrevocable letter of credit to.

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This is not helping me distinguish your case from any other bank that provides funding to a government contractor.

[00:06:31] Speaker 02:
You provided additional funding when the government said to the contractor, you need to show proof of additional money.

[00:06:40] Speaker 03:
We provided additional funding and we stepped in just as the bank in First National did.

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We stepped in to provide the additional funding, which is what the bank in First National, the en banc decision of the Court of Claims, which is what the lender did in that case.

[00:06:58] Speaker 02:
No, the lender there did something much more, didn't it?

[00:07:00] Speaker 02:
Didn't it pay off debts owed by the contractor in that case?

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It stepped in and continued performance of that contract.

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Only in a limited sense, it stepped in on a one-time basis.

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It didn't guarantee performance.

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It wasn't a surety.

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The bank in First National was not a surety.

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It stepped in on a one-time basis, refinanced some debt, and did so.

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And the Court of Claims in that case held that the general rule is that subrogation applies when a party, not acting voluntarily but under a compulsion,

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discharges a debt or a contractual obligation of another.

[00:07:37] Speaker 02:
And where did you act under compulsion of the government to provide additional funding?

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You voluntarily provided them additional funding, didn't you?

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We did not because we were faced with the same prospect as the bank and First National that all of our underlying collateral, all of the underlying collateral for $25 million in loans would have been rendered valueless.

[00:07:57] Speaker 02:
I still don't see how this is going to distinguish it from any other situation where a bank

[00:08:01] Speaker 02:
provides additional funding, and the contractor comes back and says, I need more money.

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And your position is, well, if we don't, we're going to lose our initial debt.

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Does that mean in every circumstance that bank is going to be equitably subrogated?

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Well, I think the additional point here, as I mentioned, is that there was an irrevocable letter of credit that Nordbank submitted to BPA.

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BPA was well aware, and the government.

[00:08:28] Speaker 01:
If it had been a check, would that have been sufficient?

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If it had been a check drawn on your bank, the government would be on notice that you were providing money.

[00:08:40] Speaker 03:
My point is that the Court of Federal Claims distinguished this case from First National on the basis, and this is a quote from the court's decision, the government had no dealings with Nordbank prior to this lawsuit.

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And that's simply incorrect.

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From 2008 to 2012, throughout the course of... I think the court was using dealings, and I

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very specific sense.

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There were no negotiations going on between the government and the bank.

[00:09:09] Speaker 04:
Isn't that true?

[00:09:11] Speaker 03:
There were no negotiations, that's correct.

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The government didn't demand a letter of credit directly from you.

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It didn't demand a letter of credit specifically from Nordbank.

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In fact, the contractor could have gone out and gotten money from anybody if it wanted to.

[00:09:27] Speaker 03:
Pursuant to BPA's creditworthiness requirements,

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CEP had to provide an irrevocable letter of credit from a financial institution.

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It didn't have to specifically be Nordbank, but it was Nordbank in this case.

[00:09:40] Speaker 03:
Nordbank provided the letter of credit, and so I'm not sure exactly what the court of federal claims meant by the word dealings, but there were dealings.

[00:09:50] Speaker 03:
The BPA was

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presumably meant that it had to be something more than providing general financing for a contract to get you into an equitable subrogation role.

[00:10:02] Speaker 03:
Well, and that's what, as the Nordbank stepped in here and provided $3.7 million of additional funding when it was faced with the potential, CEP was faced with the... If another bank had provided that letter of credit, would they, would your position be that they were subrogated?

[00:10:20] Speaker 03:
No, I think it's the combination of all these things that, that makes Nordbank fit into the exception to the privity rule that the court of claims set forth in First National.

[00:10:32] Speaker 03:
Why?

[00:10:33] Speaker 03:
Because you provided initial funding?

[00:10:36] Speaker 03:
Because one, we had dealings with the government.

[00:10:39] Speaker 02:
And if you look at the dealings... Let me, let's put that aside.

[00:10:42] Speaker 02:
Is it your view that because you provided initial funding and you are at risk for loss of that investment,

[00:10:48] Speaker 02:
and then provided more funding to protect that investment, that that's what gets you here.

[00:10:53] Speaker 02:
That's right.

[00:10:54] Speaker 02:
And that's the general rule.

[00:10:57] Speaker 02:
Why would you need to provide more funding then?

[00:11:00] Speaker 02:
If you provide general funding and are at risk for the loss of that investment, why can't you be subaggraded just based upon that principle?

[00:11:10] Speaker 03:
Because in that case, a bank financial institution would not fall into the exception that the Court of Claims set forth in First National.

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which was that subrogation applies when a party acting under a compulsion discharges a contractual obligation to protect its own interest.

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And the interest in First National and the interest here that Nordbank, that the bank was protecting, was the threat that its underlying collateral was going to be rendered valueless if it didn't take this action.

[00:11:38] Speaker 03:
The bank had not authorized CEP to borrow $3.7 million in additional funding.

[00:11:43] Speaker 03:
In September 2010, it frankly

[00:11:46] Speaker 03:
was not inclined to provide the additional funding, but faced with the prospect that all of the underlying collateral that it had for its $25 million in loans that it provided.

[00:11:59] Speaker 02:
Isn't that just a business decision?

[00:12:01] Speaker 02:
I mean, you recognize this company is potentially going bankrupt unless it has this additional funding.

[00:12:07] Speaker 02:
you make the decision to provide more funding so you don't lose your initial funding, but you're taking the risk that you're sending good money after bad.

[00:12:16] Speaker 02:
It's no different than when you funded the project in the first place, that you knew this was a startup.

[00:12:22] Speaker 02:
It might have been a risk of losing the investment.

[00:12:24] Speaker 02:
I don't understand why providing additional funding in itself equitably subrogates you.

[00:12:31] Speaker 03:
The Bank and First National made a business decision to refinance the loans

[00:12:36] Speaker 01:
But it also stepped into the shoes of a general contractor.

[00:12:45] Speaker 03:
The Court of Claims in that case found that the First National was subrogated to the rights of the primary lender because that's who the First National had refinanced the debt of the primary lender.

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And here we provided initial funding and then

[00:13:04] Speaker 04:
You're making the argument, if I understand you, that after providing general funding, there was compulsion on your bank to provide the additional funding.

[00:13:17] Speaker 03:
Yes, Your Honor.

[00:13:18] Speaker 04:
Let's look at the compulsion, the nature of that compulsion.

[00:13:23] Speaker 04:
Were you compelled to do this for the government's benefit?

[00:13:30] Speaker 04:
Did the government benefit from your

[00:13:33] Speaker 04:
bank feeling compulsion?

[00:13:36] Speaker 03:
To the extent that, and I don't know what the government's interest in continuing with the wind farm project was, but to the extent that the government, that the Bonneville Power Administration had an interest in proceeding with the interconnection and with the project, then yes, it was to the government's benefit.

[00:13:53] Speaker 04:
I understand why you felt compulsion to protect your interest.

[00:13:57] Speaker 04:
Yes.

[00:13:57] Speaker 04:
You being the banker.

[00:13:58] Speaker 04:
Sure.

[00:14:00] Speaker 04:
But I'm trying to

[00:14:01] Speaker 04:
find a linkage between your second round of funding and the interests of the government?

[00:14:12] Speaker 03:
Well, I'm not sure that there is an interest beyond what I've just described, that the government had an interest in continuing with the project.

[00:14:21] Speaker 03:
But it was the same interest that the bank had in First National, as I've mentioned, which was to protect the value of its underlying collateral.

[00:14:27] Speaker 03:
And I see that I'm into my rebuttal time.

[00:14:29] Speaker 03:
Thank you.

[00:14:32] Speaker 00:
David Levitt for the government.

[00:14:42] Speaker 00:
I want to make just a couple of points, because I think the questions and the answers amply elucidate what this case is about.

[00:14:50] Speaker 02:
Can you explain the difference between this case and the first national case?

[00:14:54] Speaker 02:
I mean, it seems to me that there are arguments to be made both ways.

[00:15:00] Speaker 02:
the bank specifically paid off a loan to the Small Business Administration.

[00:15:05] Speaker 02:
So they specifically took over at least part of the contract and paid for something.

[00:15:11] Speaker 02:
Here, they gave an additional letter of credit, which the company could draw on.

[00:15:15] Speaker 02:
I mean, money is somewhat fungible.

[00:15:17] Speaker 02:
Why isn't providing a letter of credit comparable to paying off a loan?

[00:15:22] Speaker 00:
The letter of credit related to an entirely different contract that's not an issue in this case.

[00:15:27] Speaker 00:
It was called a transmission agreement.

[00:15:29] Speaker 00:
by which BPA dedicated transmission services to CEP funding, but required a letter of credit to ensure that CEP funding paid for that dedicated service.

[00:15:42] Speaker 00:
But this case is not about that.

[00:15:44] Speaker 00:
This case is about an engineering agreement and an environmental agreement pursuant to which deposits were placed with BPA by CEP funding.

[00:15:55] Speaker 00:
Nordbank, which was simply a bank that lent money to CEP funding,

[00:15:59] Speaker 00:
totally outside any purview of the government, is now claiming it's equitably subrogated to the right to sue for those deposits.

[00:16:08] Speaker 00:
I think, Your Honor's first point, which is that if you disagree with your procedural objection, the case is over, because that means that debt was higher than the deposit is correct.

[00:16:18] Speaker 00:
So that if you find that I disagree with my esteemed opponent, that the case goes on, it doesn't.

[00:16:25] Speaker 00:
It would mean that

[00:16:26] Speaker 00:
there's no challenge to the Court of Claims decision that that was outweighed the deposits and there was an offset that was legitimate and took the debt away.

[00:16:39] Speaker 01:
Well, that wasn't exactly my question.

[00:16:41] Speaker 01:
My question was if we agree with the court's determination to convert and treat the motion to dismiss as a motion for summary judgment, then

[00:16:56] Speaker 01:
which is an alleged procedural error, they didn't have anything else about Count 3.

[00:17:04] Speaker 00:
That's right.

[00:17:04] Speaker 00:
And the Court of Claims upheld the government's position on Count 3, which means yours upholds the Court of Claims, which means the case is over.

[00:17:11] Speaker 00:
That's our position.

[00:17:13] Speaker 00:
On the question of First National, the basic distinction is the one you made from the bench, which is that the refinancing bank paid off the debt of the contractor to the original bank.

[00:17:26] Speaker 00:
and thereby stepped into the shoes, you pointed out, of the original lender, it's a little bit ambiguous whose shoes this court said the refinance lender stepped into.

[00:17:38] Speaker 00:
It could have been both sets of shoes, and I think it probably was both sets of shoes, but the distinction between that case and this case is that, admittedly, all Nordbank did was lend money to CEP funding the contractor.

[00:17:53] Speaker 00:
It didn't step into...

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undertake an obligation that CEP funding had to BPA, which is what the refinance bank did with respect to the obligation the contractor had to the initial lender in First National.

[00:18:09] Speaker 00:
This court very recently addressed a different claim about equitable subrogation, which was an attempt to reduce sovereign immunity, to allow lenders to come in and be equitably subrogated under all circumstances.

[00:18:24] Speaker 00:
the slippery slope you pointed out, I see no principled way to limit.

[00:18:29] Speaker 00:
So it would be opening the flood plate gates and thereby reducing sovereign immunity almost to nothing when there's a lender that applies, I mean, that qualifies under the Assignment of Claims Act.

[00:18:39] Speaker 00:
But the case you decided just a month ago is 805 Federal Third 1082, Fidelity and Guarantee Insurance Underwriters.

[00:18:47] Speaker 00:
And in that case, an insurance company that

[00:18:52] Speaker 00:
stepped into the shoes of the government contractor to protect the government contractor against an asbestos liability claim by a worker on a postal service which the government contractor was renovating.

[00:19:07] Speaker 00:
What do you mean by government contractor?

[00:19:09] Speaker 00:
A company that was hired by the postal service to renovate the postal facility where there was asbestos.

[00:19:16] Speaker 00:
So the government contractor

[00:19:18] Speaker 00:
was concerned that when it did the work, if one of its workers stated that there was cancer or some other disease based on the asbestos, he would be liable.

[00:19:30] Speaker 00:
So he took out insurance against that by virtue of a general insurance policy.

[00:19:37] Speaker 00:
But in addition, he and the Postal Service modified the contract that said that if there was such an asbestos-related claim and the contractor was found liable,

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the Postal Service would indemnify the contractor for all damages.

[00:19:53] Speaker 00:
When that happened and a postal worker sued the contractor for whatever reason, the Postal Service refused to abide by what the contractor believed was an indemnity provision of the contract.

[00:20:05] Speaker 00:
So instead, the general insurance company stepped in and protected the contractor.

[00:20:11] Speaker 00:
So the general insurance company said, okay, we've really

[00:20:15] Speaker 00:
satisfied an obligation the Postal Service had under the contract by us stepping in and doing it, so we should be subrogated to the rights of the contractor to sue the Postal Service for indemnity for the sums that we pay.

[00:20:26] Speaker 00:
And this court rejected that in this underwriters case stating that, yes, the general insurance company might be subrogated to the claim of the contractor to sue, let's say, the manufacturer of the asbestos, that is,

[00:20:42] Speaker 00:
Yes, in the shoes related to that issue.

[00:20:46] Speaker 00:
But it had nothing to do with reconstructing the postal facility.

[00:20:49] Speaker 00:
And therefore, it was not stepping into the shoes of the contractor with respect to the contract between the contractor and the postal service.

[00:20:55] Speaker 00:
Therefore, there was no right of the general insurance company to sue the postal service under the inequitable subrogation theory.

[00:21:06] Speaker 00:
And it threw that out.

[00:21:07] Speaker 00:
That case was a lot easier than this case.

[00:21:09] Speaker 00:
In this case, there's no allegation of anybody stepping into anybody's shoes.

[00:21:14] Speaker 00:
So if you threw out that case, our position is off.

[00:21:16] Speaker 00:
For sure, you have to throw out this case.

[00:21:19] Speaker 00:
That's all I have, Your Honors.

[00:21:20] Speaker 00:
Thank you.

[00:21:31] Speaker 03:
Just a couple of quick points.

[00:21:33] Speaker 03:
On the compulsion issue, the compulsion went

[00:21:37] Speaker 03:
Not only to the loss of collateral, but if we didn't, if Nordbank hadn't stepped in and provided the additional loan funding in 2010, the BPA would have almost certainly ended up drawing on the letter of credit.

[00:21:51] Speaker 03:
So we were compelled in losing the value of the collateral and being forced to provide additional funding.

[00:21:59] Speaker 03:
And Mr. Levitt's correct that the letter of credit did pertain to the transmission and services agreements.

[00:22:06] Speaker 03:
But all of these contracts were interrelated.

[00:22:10] Speaker 03:
And to the extent that CEP defaulted on any of them, they would have almost by definition defaulted on all of them.

[00:22:20] Speaker 03:
And on the abuse of discretion question and whether this court's affirmance on the abuse of discretion issue on the procedural issue would necessarily result in the resolution of the case, that issue wasn't briefed.

[00:22:34] Speaker 03:
The court below didn't address it.

[00:22:36] Speaker 03:
The government doesn't cite any authority for the proposition that the courts, the Court of Federal Claims findings would, on the Assignment of Claims Act, would resolve the breach of contract issue.

[00:22:52] Speaker 01:
So I just, I don't agree with the... Well, on count three, you didn't argue anything other than the procedural.

[00:23:03] Speaker 03:
Right, that's right.

[00:23:04] Speaker 03:
We don't, and as I... So if you lose it,

[00:23:06] Speaker 01:
You lose on count three.

[00:23:09] Speaker 03:
Well, we felt that it was premature for the court to address it.

[00:23:12] Speaker 02:
But if we disagree, you didn't challenge the propriety on the merits of the summary judgment determination.

[00:23:18] Speaker 03:
That's right, because we felt that it was an incomplete record.

[00:23:21] Speaker 03:
Thank you, Your Honor.

[00:23:22] Speaker 01:
Thank you, counsel.

[00:23:24] Speaker 01:
These matters stand submitted for adjournment.

[00:23:28] Speaker 00:
All rise.

[00:23:31] Speaker 00:
The Honorable Court is adjourned until tomorrow morning at 10 o'clock AM.