Free Response - District Court of Federal Claims - federal

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No. 93-531C (Senior Judge Loren Smith) ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS _____________________________________________________________________________
AMBASE CORPORATION AND CARTERET BANCORP, Inc. Plaintiffs, and FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervenor, v. UNITED STATES OF AMERICA

______________________________________________________________________________ GOVERNMENT RESPONSE TO AMBASE'S STATEMENT OF ISSUES ______________________________________________________________________________ STUART E. SCHIFFER Deputy Assistant Attorney General DAVID M. COHEN Director JEANNE E. DAVIDSON Deputy Director OF COUNSEL: TIMOTHY ABRAHAM ARLENE PIANKO GRONER MELINDA HART F. JEFFERSON HUGHES Trial Attorneys Commercial Litigation Branch Civil Division Department of Justice

DAVID A. LEVITT Trial Attorney Commercial Litigation Branch Civil Division Department of Justice 1100 L Street, N.W. Washington, D.C. 20005 Tel: (202) 307-0309 Fax: (202) 514-7969

Date: August 30, 2006

Attorneys for Defendant

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TABLE OF CONTENTS TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 I. THIS COURT LACKS JURISDICTION OVER CLAIMS IN THE SOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 BAILEY PRECLUDES AMBASE'S CLAIMS RELATING TO THE PAYMENT OF INTEREST ON THE DEBT AND THE LIABILITY TO THE IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 THE RTC'S/FDIC'S MANAGEMENT OF CARTERET WAS CONSISTENT WITH LAW AND REGULATION . . . . . . . . . . . . . . . . . . . . . . . 15 A. NEITHER THE ALLEGED DELAY IN FUNDING NOR THE MINORITY PREFERENCE PROGRAM CONTRIBUTED TO ANY REDUCTION IN PREMIUM RECEIVED FOR CARTERET'S BRANCH DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 THE ENACTMENT OF FIRREA DID NOT ENLARGE THE RECEIVERSHIP DEFICIT BY ELIMINATING THE VALUE OF SUPERVISORY GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1. PROFESSOR CALOMIRIS'S ASSUMPTION THAT THE GOODWILL ACCOUNT SURVIVED CARTERET'S SEIZURE IS INVALID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 EVEN ASSUMING THE GOODWILL COULD HAVE BEEN TRANSFERRED, PROFESSOR CALOMIRIS'S VALUATION MODELS ARE FLAWED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

II.

III.

B.

2.

C.

THE MINORITY PREFERENCE PROGRAM DID NOT INCREASE THE RECEIVERSHIP DEFICIT . . . . . . . . . . . . . . . . . . . . . . . . . . 31

i

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1.

CARTERET WAS NOT PRECLUDED BY AN "ASSET FREEZE" FROM SELLING ASSETS TO FUND THE TRANSFERS OF THE DEPOSITS . . . . . . . . . . . . . . . . . . 33 CARTERET'S PERFORMING MORTGAGES WERE SOLD AT MARKET PRICES TO MINORITY BIDDERS AND THE DEPOSIT PREMIUM WAS ENHANCED AS A RESULT OF THE MINORITY PREFERENCE PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 BIDS WOULD NOT HAVE BEEN HIGHER IN THE ABSENCE OF THE MINORITY PREFERENCE PROGRAM . . . . . . 43

2.

3.

D.

THE RTC PROPERLY SHUT DOWN THE MORTGAGE ORIGINATION UNIT TO REDUCE THE RISK OF LOSS TO THE RECEIVERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 THE FDIC PROPERLY APPLIED THE FEDERAL JUDGMENT INTEREST RATE TO ITS LOANS TO CARTERET . . . . . . . . . . . . . . . . . . . . 52 1. THE FDIC WAS LEGALLY REQUIRED TO CHARGE PII AND THE RATES WERE NOT "EXCESSIVE" . . . . . . . . . . . . . . 53 THE FDIC DID NOT SELECT THE FEDERAL JUDGMENT RATE TO INCREASE RECEIVERSHIP COSTS . . . . . . . . . . . . . . . . . 58 THE FEDERAL JUDGMENT RATE WAS ECONOMICALLY APPROPRIATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

E.

2.

3.

F.

AMBASE HAS PRESENTED NO PERSUASIVE EVIDENCE THAT THE FEDERAL INCOME TAX LIABILITY IS LESS THAN $93.7 MILLION AS OF DECEMBER 31, 2005 . . . . . . . . . . . . . . . . . . 68 1. A FIRM CAN REPORT FINANCIAL LOSSES WHILE AT THE SAME TIME REPORTING TAXABLE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 THERE IS NO EVIDENCE FFA WAS IMPROPERLY CALCULATED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 THE 1995 TAX RETURN SHOULD NOT HAVE AND COULD NOT HAVE REFLECTED POST-INSOLVENCY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 ii

2.

3.

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4.

THE EVIDENCE DOES NOT DEMONSTRATE THE AVAILABILITY OF A $73.9 MILLION TAX LOSS CARRYFORWARD FOR 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 THERE IS NO EVIDENCE OF OTHER ERRORS IN THE 1995 RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 THERE IS NO EVIDENCE THAT MISCELLANEOUS TAX-RELATED CLAIMS SHOULD REDUCE THE RECEIVERSHIP DEFICIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 THE TAX RECALCULATION ADVANCED BY AMBASE IS INCONSISTENT WITH PROFESSOR CALOMIRIS'S ANALYSIS OF THE RECEIVERSHIP DEFICIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

5.

6.

7.

G.

THERE IS NO EVIDENCE THE FDIC HAS MISALLOCATED CORPORATE COSTS TO CARTERET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

IV.

THIS COURT LACKS JURISDICTION TO ENTERTAIN THE CONSTITUTIONAL CHALLENGES AND THEY ARE INVALID . . . . . . . . . . . . . . 92 A. THIS COURT LACKS JURISDICTION OVER THE DUE PROCESS CHALLENGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 AMBASE LACKS CONSTITUTIONAL STANDING . . . . . . . . . . . . . . . . . . . 94 THE ALLEGED FAILURE OF FUNDING WAS NOT A "TAKING" AND THE MINORITY PREFERENCE PROGRAM DID NOT VIOLATE DUE PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

B. C.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

iii

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TABLE OF AUTHORITIES CASES Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995) .......................................................................................................... 5, 94, 98 Alfa Laval Separation, Inc. v. United States, 175 F.3d 1365 (Fed. Cir. 1999) ................................................................................................... 95 Am. Fed'n of Gov't Employees v. United States, 258 F.3d 1294 (Fed. Cir. 2001) ................................................................................................... 95 Ambase Corporation v. United States, 58 Fed. Cl. 32 (2003) ............................................................................................................ 10, 14 Ambase Corporation v. United States, 61 Fed. Cl. 794 (2004) ......................................................................................................... passim Atlas Corp. v. United States, 895 F.2d 745 (Fed. Cir. 1990) ..................................................................................................... 97 Bailey v. United States, 341 F.3d 1342 (Fed. Cir. 2003) ......................................................................................... 6, 13, 14 Bannum, Inc. v. United States, 56 Fed. Cl. 453 (2003) ................................................................................................................ 61 Berkovitz v. United States, 486 U.S. 531 (1988) .............................................................................................................. 70, 71 Branch v. United States, 69 F.3d 1571 (Fed. Cir. 1995) .................................................................................................... 97 Carteret v. Office of Thrift Supervision, 963 F.2d 567 (3d Cir. 1992) .................................................................................................... 3, 24 Citibank v. Nyland, 1990 WL 138958 (SDNY 1990) ................................................................................................ 92 Collins v. United States, 67 F.3d 284 (Fed. Cir. 1995) ....................................................................................................... 94

iv

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Corbin v. Federal Reserve Bank of New York, 475 F. Supp. 1060 (S.D.N.Y. 1979), aff'd 629 F.2d 233 (2d Cir. 1980) ................................................................................... 55, 56, 57 Eastport S.S. Corp. v. United States, 372 F.2d 1002 (Ct. Cl. 1967) ...................................................................................................... 93 FDIC v. Citizens State Bank of Niangua, 130 F.2d 102 (8th Cir. 1942) ...................................................................................................... 55 First Hartford Corporation Pension Plan & Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999) ................................................................................................... 94 Fleischer v. Resolution Trust Corporation, 882 F. Supp. 999 (D.Kan. 1995) ................................................................................................. 12 Gladstone Realtors v. Village of Bellwood, 441 U.S. 91 (1979) ................................................................................................................ 94, 96 Glass v. United States, 47 Fed. Cl. 316 (2000), vacated on other grounds and remanded, 258 F.3d 1349 (Fed. Cir.), amended on reh'g, 273 F.3d 1072 (Fed. Cir. 2001) ...................................................................... 3 Golden Pac. Bancorp v. Federal Deposit Insurance Corporation, 1997 WL 626374 (S.D.N.Y. 1997) ...................................................................................... passim Golden Pac. Bancorp v. Federal Deposit Insurance Corporation, 2002 WL 31875395 (S.D.N.Y. 2002), aff'd 375 F.3d 196 (2nd Cir. 2004) ................................................................................... 2, 55, 57 Hanford v. United States, 63 Fed. Cl. 111 (2004), aff'd, 154 Fed.Appx. 216 (Fed. Cir. 2005) ................................................................................. 93 In re Hartsdale Associates, 452 F. Supp. 67 (S.D.N.Y. 1978) ................................................................................................ 56 Home Savings of America, FSB v. United States, 399 F.3d 1341 (Fed. Cir.), on remand, 69 Fed. Cl. 187 (2005), on remand, 70 Fed. Cl. 303 (Feb 21, 2006) ................................................................................ 24 Impressa Construgioni Geom. Domenico Garufi v. United States, 238 F.3d 1324 (Fed. Cir. 2001) ................................................................................................... 61 v

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Longshore v. United States, 77 F.3d 440 (Fed. Cir. 1996) ............................................................................................. 6, 95, 98 Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) .................................................................................................................... 94 Maher v. United States, 314 F.3d 600 (Fed. Cir. 2002) .................................................................................................... 12 Meriden Trust & Safe Deposit Co., v. Federal Deposit Ins. Corp., 62 F.3d 449 (2nd Cir. 1995) ........................................................................................................ 96 Mid Jersey National Bank v. Fidelity-Mortgage Investors, 518 F.2d 640 (3rd Cir. 1975) ..................................................................................................... 56 National Bank of Commonwealth v. Mechanics' National Bank, 94 U.S. U.S. 437 (1876) .............................................................................................................. 67 O'Melveny & Myers v. United States, 512 U.S. 79 (1994) ...................................................................................................................... 12 Plaintiffs in All Winstar-Related Cases at the Court v. United States, 44 Fed. Cl. 3 (1999) .................................................................................................................... 11 Ralston Steel Corp. v. United States, 340 F.2d 663 (Ct. Cl. 1965) ........................................................................................................ 92 In Re Receivership Of First Nat'l Bank in Humboldt, 523 N.W.2d 591 (Iowa 1994) ..................................................................................................... 55 Rothe Dev. Corp. v. United States Department of Defense, 262 F.3d 1306 (Fed. Cir. 2001) ................................................................................................... 98 Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26 (1976) ...................................................................................................................... 94 Stephenson v. United States, 58 Fed. Cl. 186 (2003) ................................................................................................................ 93 Sumter v. United States, 61 Fed. Cl. 517 (2004) ................................................................................................................ 94 United States v. King, 395 U.S. 1 (1969) ........................................................................................................................ 93 vi

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United States v. Sperry Corp., 493 U.S. 52 (1989) ...................................................................................................................... 97 W. McAllister, III v. Resolution Trust Corporation, 201 F.3d 570 (5th Cir. 2000) ...................................................................................................... 12 Walter E. Heller & Co. v. Cox, 343 F. Supp. 519 (S.D.N.Y. 1972), aff'd mem. sub nom. Walter E. Heller & Co. v. Ocean Air Tradeways, 486 F.2d 1398 (2d Cir.), cert. denied, 414 U.S. 827 (1973) ............................................................................................... 56

STATUTES 12 C.F.R. § 360.3(d) (2005 ed) .................................................................................................. 59 12 C.F.R. § 360.3 (1988) ................................................................................................ 58, 59, 60 12 C.F.R. § 360.7 ........................................................................................................................ 67 5 U.S.C. § 701(a)(2) .................................................................................................................... 70 12 U.S.C. § 144a(w)(17)(A) ....................................................................................................... 15 12 U.S.C. § 1821(d)(6) ............................................................................................................... 13 12 U.S.C. § 1821(d)(11) ....................................................................................................... 13, 58 12 U.S.C. § 1821(d)(11)(A)(v) ................................................................................................... 13 12 U.S.C. § 1821(d)(13)(D) ........................................................................................................ 13 12 U.S.C. § 1831o(a) .................................................................................................................. 66 12 U.S.C. § 1831o( c) ................................................................................................................. 66 28 U.S.C. § 1346(b) .................................................................................................................... 70 28 U.S.C. § 1491 ........................................................................................................................ 94 28 U.S.C. § 1961 ......................................................................................................................... 66 40 U.S.C. § 258e-1 ...................................................................................................................... 66 vii

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139 Cong. Rec. H10897-02, 1993 WL 48936 .......................................................................................................................... 99 Revenue Ruling 70-367, 1970-2 C.B. 37 (1970) ................................................................................................................ 77 Financial Institution Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ................................................................................... 33 Resolution Trust Completion Act, Pub. L. No. 103-204, § 3(a), 107 Stat. 2369, 2375-76 (1993) .................................................................................................... 4

MISCELLANEOUS Lon Fuller, The Morality of Law 60 (1964) ................................................................................ 98

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IN THE UNITED STATES COURT OF Federal CLAIMS

AMBASE CORPORATION AND CARTERET BANCORP, INC. Plaintiffs, and Federal DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervenor, v. UNITED STATES OF AMERICA, Defendant.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 93-531 (Judge Loren Smith)

GOVERNMENT RESPONSE TO AMBASE'S STATEMENT OF ISSUES INTRODUCTION Pursuant to this Court's order dated May 23, 2005, defendant, the United States, respectfully submits this response to the Corrected Statement of Issues ("SOI"), filed by Ambase Corporation ("Ambase"). While Ambase levies a broad based attack upon the estimation of the receivership deficit ($278 million as of December 31, 2005) by the Federal Deposit Insurance Corporation ("FDIC"), it primarily argues that this Court should "recalculate" the deficit by deducting from the balance asserted by the FDIC the amount of post insolvency interest ("PII") ($156.6 million), taxes ($93.7 million),, supervisory goodwill ($40.7 million), the alleged value of Carteret Mortgage Company ("CMC") ($18.4 million), and FDIC/Resolution Trust Corporation ("RTC") corporate overhead allegedly misallocated to Carteret (undefined amount).

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Although the SOI is long on rhetoric and hyperbole, it is short on citation to authority and substance. After completing the SOI and digesting the highly rhetorical accusations, one is moved to inquire "Where's the beef?" As we demonstrate in detail in this response, the SOI rests upon a misinterpretation of evidence and relevant legal authority. For example, with respect to PII, while Ambase's spirited opposition contends the RTC/FDIC was not authorized to charge PII against the loans to Carteret in 1994 and 1995, SOI at 48-71, Ambase neither cites nor discusses the plethora of authority which establishes that PII was required by the FDIC Act and RTC/FDIC policy which applied at the time of the loans. See e.g., Golden Pac. Bancorp v. FDIC, 2002 WL 31875395 (S.D.N.Y. 2002), aff'd 375 F.3d 196 (2d Cir. 2004) (PII must be charged to preserve the fiscal integrity of the insurance fund). Ambase's contention that the receivership deficit should be "recalculated" by deducting the PII is unsupported and contrary to the relevant authority. Likewise, with respect to taxes, Ambase contends PII should have been taken as a deduction on Carteret's 1995 tax return and the failure to do so constituted a tort and breach of fiduciary duty by the RTC/FDIC. However, as Ambase concedes in the SOI, the RTC/FDIC did not take a deduction for PII against income in 1995 because of a policy to accrue PII on the receivership's books only after 95 percent of the principal claims had been paid. SOI at 37-43. This policy was applied to all receiverships and was based upon the relevant provisions of the Internal Revenue Code ("IRC") and regulations as interpreted at the time. While Ambase contends fourteen years after the fact that the policy "artificially created" a tax liability because the RTC/FDIC could have taken the deduction without a challenge from the Internal Revenue Service ("IRS"), there is no evidence that Carteret was singled out or that the policy did not apply 2

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to all receiverships. There is also no evidence that the IRS would not have challenged the deduction or that it was consistent with law. The fact that Ambase now believes Carteret would have been better off if a different policy had been applied is irrelevant because, in the absence of animus against Carteret, of which Ambase concedes there was none, the RTC/FDIC policy on how to interpret the IRC for operating receiverships is simply not subject to judicial review. See, e.g., Golden Pac. Bancorp v. FDIC, 1997 WL 626374, *2 (S.D.N.Y. 1997) ("permissible exercises of policy judgments" are not amenable to judicial review). Ambase argues, again without citation to authority, that, in the absence of the Financial Institution Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"), the receivership would have been able to sell supervisory goodwill in 1993 when, according to its expert, it would have sold Carteret as a whole bank if the RTC had funding to resolve insolvent thrifts. Again, Ambase's contention simply misunderstands receivership accounting and the transferability of goodwill. Under RTC policy, goodwill had to be written off and was written off when the conservatorship was created. March 1993 Revised Manual, at 62, App. 490. Furthermore, even if it had not been written off in 1992, the goodwill was not transferable to a buyer. See Carteret v, Office of Thrift Supervision, 963 F.2d 567, 585 n.8 (3d Cir. 1992) (goodwill did not transfer to a buyer but had to be written off the seller's books); Glass v. United States, 47 Fed. Cl. 316, 327-28 (2000) ("because goodwill is not negotiable or transferable, it cannot be invested and has no potential to increase"), vacated on other grounds and remanded, 258 F.3d 1349 (Fed. Cir.), amended on reh'g, 273 F.3d 1072 (Fed. Cir. 2001). There is simply no merit to the claim that the receivership deficit should be reduced by the alleged value of supervisory goodwill. 3

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With respect to CMC, overwhelming contemporaneous evidence demonstrates that the decision to close the mortgage origination function was fully consistent with the RTC's policy to maximize the value of the receivership. Closing down the origination unit advanced the objective because the pipeline of new loan applications had shut down and expenses were mounting. In the absence of self-dealing, which Ambase does not allege, the RTC decision to close down the origination unit constituted a completely discretionary act that cannot be overturned or second-guessed fourteen years after the fact by this Court. Golden Pac., 1997 WL 626374 at *2 . Finally, with respect to the alleged misallocation of corporate overhead, the RTC/FDIC attributed direct costs to the receiverships that caused the costs, and allocated indirect costs upon the basis of direct costs or in proportion to recoveries upon outstanding claims such as goodwill contract claims against the United States. There is no evidence that the method used by the RTC/FDIC to allocate corporate overhead and indirect costs related to the litigation of Winstarrelated claims prejudiced Carteret or was inconsistent with any relevant principle of accounting. Accordingly, there is no merit to Ambase's challenge to the allocation of RTC/FDIC expenses to the beneficiary receiverships, including Carteret. At the outset of the SOI, Ambase revisits the jurisdictional issue and argues, as it has in the past, that this Court possesses jurisdiction to "recalculate" the receivership deficit because "the bulk of the receivership deficit is a direct result of Congress's own actions" and, therefore, does not involve tortious acts or claims against private parties. SOI at 24. According to Ambase two Congressional actions, namely the alleged failure to provide adequate funding to the RTC and the passage of the minority preference statute, Resolution Trust Completion Act, Pub. L. No. 4

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103-204, § 3(a), 107 Stat. 2369, 2375-76 (1993), deprived Ambase of property without due process of law by inflating the receivership deficit. Ambase argues that, if this Court reviews the receivership deficit in this proceeding as it previously understood it had the jurisdiction to do, it will, in large part, be exercising classic Tucker Act jurisdiction to review takings claims against the United States. As with its misguided and unsupported claims relating to a "recalculation" of the receivership deficit, Ambase's jurisdictional arguments are false and seriously off the mark. Indeed, the discussion in the SOI, rather than advancing the argument that a "recalculation" of the receivership deficit involves a classic exercise of Tucker Act jurisdiction demonstrates precisely the opposite. There is simply no jurisdiction in this Court to "recalculate" the receivership deficit. Contrary to Ambase's jurisdictional contention, the vast majority of Ambase's argument alleges that the RTC/FDIC committed tortious acts or breaches of fiduciary duty against Carteret, and, therefore, the receivership deficit must be "recalculated."1 The argument relating to a "taking" or denial of due process is at most tangential to the claims in the SOI and, as we demonstrate below, Ambase lacks standing to assert these claims in any event (as we demonstrate, they also lack merit). See, e.g., Adarand Constructors, Inc. v. Pena, 515 U.S. 200, 211 (1995) (no standing in the absence of an identifiable injury to a particularized protected
1

For example, Ambase calls the RTC's first managing agent "a crook who was fired after he was caught stealing from Carteret." SOI at 5. The succeeding managing agent emphasized at his deposition that the alleged "offense" was simply that the previous agent allegedly filled his car with gas supplied by Carteret and hired people whom the RTC believed were not qualified or overpaid and that these acts immediately were remediated by the succeeding managing agent. Deposition of Edward Griffin ("Griffin Dep.") at 20, App. 258. Ambase does not seek a "recalculation" of the receivership deficit based upon these alleged acts. Nevertheless the rhetoric in the SOI demonstrates that the predominant claims attacking the receivership deficit relate to alleged wrongdoing by the RTC/FDIC. 5

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legal interest); Longshore v. United States, 77 F.3d 440, 444 (Fed. Cir. 1996) (the judicial branch may not second guess Congressional funding decisions). Therefore, as we demonstrated previously and as is now validated by the discussion in the SOI, the SOI advances tort and breach of fiduciary claims against a non-Government entity, the FDIC as receiver, and this Court lacks subject matter jurisdiction In short, while Ambase presents 117 pages of hyperbole attacking the RTC/FDIC administration of the receivership estate, none of it remotely justifies disturbing the balance on the books as calculated by the RTC/FDIC. Further, as Ambase conceded, as of December 31, 2005, the receivership deficit was $278 million or more than $12 million more than the amount even Ambase calculates as the value of Carteret as of the date of the breach ($266 million). Ambase Corp. v. United States, 61 Fed. Cl. 794, 795 (2004) (Ambase II). Therefore, any recovery upon Carteret's contract claim will flow to the United States and the case is moot. Bailey v. United States, 341 F.3d 1342 (Fed. Cir. 2003). In short, because the receivership deficit is not overstated and the case is moot, the amended complaint should be dismissed. STATEMENT OF ISSUES 1. 2. Whether This Court Has Jurisdiction To Entertain Ambase's Claims. Whether The Receivership Deficit Should Include The Alleged Value of Supervisory Goodwill. 3. 4. 5. Whether PII Is Required By Law And Calculated Properly. Whether Taxes Are Required By Law And Calculated Properly. Whether The Receivership Deficit Should Include The Alleged Value Of CMC.

6

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6 7.

Whether The RTC/FDIC Wrongly Charged Corporate Expenses To Carteret. Whether Ambase Has Standing To Assert Takings and Due Process Claims And Whether They Have Merit. STATEMENT OF FACTS

While Ambase's expert, Professor Charles W. Calomiris, contends that Carteret was "one of the healthier institutions resolved [between 1980 and 2004]," July 14, 2006 Corrected Calomiris Declaration, at ¶ 69, App. 160, in fact, Carteret was far from "healthy" at the time it was taken over by the RTC. Due to massive credit losses in its high-risk real estate investment portfolio, Carteret posted a net loss of $131.8 million for 1990 and a net loss of $154.9 million for the first six months of 1991. June 17, 1991 Report Of Examination at 2, App. 344. Carteret acknowledged insolvency in the second quarter of 1991 and was seized by the Government on December 4, 1992. While Ambase emphasizes that Carteret was modestly profitable in the eleven months prior to the seizure, this indicates little if anything about the financial condition of the thirft. As noted by Professor Anthony Saunders, two years prior to seizure, the Federal Home Loan Bank of New York ("FHLB") agreed to lend Carteret approximately $1 billion to replace 40 percent of its deposits, which resulted in a dramatic reduction in the cost of funds. Declaration of Anthony Saunders dated August 7, 2006 at ¶¶ 46-49, App. 22-24.2 These loans both precluded a commercial bank merger or acquisition of Carteret and provided an indirect subsidy to Carteret.

Professor Saunders' Declaration is set forth in the Government's Appendix In Support Of Response To Ambase's Statement of Issues ("Government Appendix"). All documents referenced in this Response and not included in Ambase's Appendix In Support Of Statement Of Issues are provided in the Government Appendix. 7

2

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These funds were replaced by approximately $2 billion in RTC advances after the seizure, and these advances were priced below the FHLB advances with the benefit accruing to Carteret for some time. Saunders Decl. ¶ 47, App. 22-23. These Government subsidies "declined slowly and still exceeded $1 billion in the first quarter of 1994." But for this Government assistance, the receivership deficit would have been larger than it currently is (approximately 5.8 percent of assets as of the time of seizure), and demonstrates the modest income prior to seizure was not sustainable. Conservatorship Strategic Plan, at 2, App. 457; see Saunders Decl. at ¶ 49 , App. 23-24 ("1992 low interest expense ratio and positive ROA were due to funding support and subsidies provided by bank regulatory bodies such as the FHLB and RTC"). Further, while Ambase claims that "congressional actions . . . systematically destroyed Carteret's franchise value," as the financial ratios of Carteret prior to the seizure and the efforts to recapitalize the institution demonstrate, Carteret had no franchise value to destroy. As Professor Saunders observes, Carteret and other thrifts exploited the moral hazard implicit in underpriced deposit insurance by undertaking "excessive levels of risk in their asset portfolios . . . with knowledge that if their asset investments paid off, they would reap windfall gains, and if their investments failed, the FSLIC deposit insurance system (or ultimately the U.S. taxpayer) would pay their losses." Saunders Decl. at ¶ 19, App. 7-8. Any franchise value Carteret might have had prior to this excessive risk-taking by management was long gone by the time OTS seized the thrift in 1992. The lack of franchise value is demonstrated by the relevant financial ratios at the time of seizure. For example, following an examination in June 1992, OTS gave Carteret a composite examination rating of "5," indicating an institution "with an extremely high immediate or near8

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term probability of failure." June 15, 1992 OTS ROE at 3, App. 421. OTS concluded that the primary responsibility for Carteret's unsafe and unsound condition was the inability or unwillingness of prior management to "fulfill its fiduciary responsibility." Id. at App. 419. Moreover, the deterioration of Carteret occurred well prior to the enactment of FIRREA. Saunders Decl. at ¶ 112, App. 47. As reflected in the May 22, 1989 OTS Report of Examination ("1989 ROE"), poor underwriting caused Carteret to experience a tremendous increase in the amount of criticized assets which, at the time of the examination, represented 6.7 percent of assets and 154.2 percent of regulatory capital. 1989 ROE, App. 339; Saunders Decl. at ¶ 108, App. 45-46. Further, between December 31, 1987 and December 31, 1989, the level of Carteret's classified assets increased from $9.9 million to $307.0 million. As Professor Saunders notes, this was "a phenomenal increase in just a two-year period." Saunders Decl. at ¶ 108, App. 45-46. By the end of 1989, Carteret's problem assets had reached a level of close to 11 percent of its total assets. At the same time, Carteret experienced precipitous declines in capital. As Professor Saunders observes, operating ratios and trends depicted in the 1989 ROE show that the regulatory capital/total assets ratio for Carteret declined from 5.7 percent to 4.4 percent from December 31, 1987 to June 30, 1989. Saunders Decl. at ¶ 109, App. 46. Similarly, the estimated GAAP capital/total assets ratio for Carteret declined from 5.1 percent to 3.7 percent. Id. Although some of these declines may have been attributable to a slow down in national and regional economic performance, the declines in Carteret's financial ratios far exceeded those of peer institutions. Saunders Decl. at ¶ 109, App. 46.

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Carteret became economically insolvent in 1991 when its tangible capital turned negative, declining from $49.6 million in June 1989 to a negative $72.8 million in June 1992. Saunders Decl. at ¶ 110, App. 46. Indeed, by June 30, 1991, despite counting all supervisory goodwill as regulatory capital, Carteret fell out of regulatory capital compliance. Ambase Corp. v. United States , 58 Fed. Cl. 32 (2003) ("Ambase I") at 29; See Ambase, Form 10-Q, June 30, 1991 at 12, App. 357. As of June 30, 1991, Carteret's tangible, core and risk-based capital measures were $78 million, $81 million and $130 million, respectively, while the required levels of tangible, core and risk-based capital were $82 million, $164 million and $233 million, respectively. Id. In other words, even counting the goodwill as regulatory capital, Carteret failed all three of its capital requirements by approximately $4 million (tangible), $83 million (core), and $103 million (risk based). Id. As this Court has observed, the fact that Carteret was economically insolvent as of June 1991 even considering all goodwill as a form of tangible capital, indicates that Carteret could not have "suffered [any] damage from the alleged breach of contract." Ambase I, 58 Fed. Cl. at 39. In April 1991, Carteret installed new management to clean up its asset portfolio and seek to recapitalize. However, its efforts to raise capital failed. While Carteret/Ambase submitted a plan to Office of Thrift Supervision ("OTS") on March 2, 1992 to raise $200 million in new equity, it was unable to do so. See Saunders Decl., App. 56 at ¶ 126, App. 56; Ambase I, 58 Fed. Cl. at 39 (investors withdrew their offers to invest upon examining the institution). A year later, on December 4, 1992, OTS "placed Carteret into conservatorship" because it was unable to satisfy regulatory requirements for capital. Id. As Ambase acknowledges, "[o]n that day, Carteret's assets and liabilities were placed into a `pass-through receivership,' which in turn 10

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[transferred them] . . . to Carteret Federal Savings Bank [a mutual thrift managed in conservatorship by the RTC]." SOI at 7.3 ARGUMENT I. THIS COURT LACKS JURISDICTION OVER CLAIMS IN THE SOI In Ambase II, this Court rejected our contention that Ambase had presented tort claims against the FDIC that this Court lacked jurisdiction to entertain. It concluded, instead, that it possessed equitable jurisdiction to review the receivership deficit incidental to the power to award damages for breach of contract by the Government. 61 Fed. Cl. at 796-798. Although the Court conceded that "the Tucker Act does not grant this Court jurisdiction over tortious claims, nor does it permit this Court to hear claims between private parties," Id. at 796, it believed that Ambase's claims were neither tort claims nor claims between private parties. Id. at 796-98. Now that Ambase has fully disclosed its claims in the SOI, this decision should be revisited. The SOI unabashedly argues that the RTC/FDIC committed torts and breaches of fiduciary duty against Carteret. The claims are tort claims and involve private parties. See, e.g., Plaintiffs in All Winstar-Related Cases at the Court v. United Staes, 44 Fed. Cl. 3, 7 (1999) ("when acting as receiver, the FDIC is not the United States"); See also O'Melveny & Myers v. United States, 512 U.S. 79, 85 (1994) (same). For example, Ambase asserts that the RTC/FDIC
3

The "pass-through receivership," was the normal procedure used by the RTC to resolve insolvent thrifts. According to the Office of Research and Statistics of the RTC, upon the creation of a pass-through receivership, "[a] separate Federal mutual association (de novo) is then created and all of the assets and substantially all of the liabilities pass-through the initial receivership into the de novo." Policy and Procedures for Computation of Dividend Payments of Pass Through Receiverships, at 1-2, App. 387-388. The purchase and assumption agreement between the "pass-through" receivership and the de novo thrift guarantees that, if there is a surplus from the resolution, the stockholders receive the surplus as their share of the equity of the thrift. 11

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engaged in self-dealing by charging high interest rates on the receivership debt. SOI at 1-7. Likewise, Ambase asserts that the RTC/FDIC violated its fiduciary duty to Carteret by miscalculating Carteret's Federal tax liability, closing CMC, and mis-allocating corporate overhead expenses to Carteret. Id. These claims are not against the United States and do not involve alleged property seizures or breaches of contracts. See, e.g., Maher v. United States, 314 F.3d 600, 607 n.2 (Fed. Cir. 2002) ("To the extent Maher and Gravee have a claim for breach of their employment contracts, including a claim for payment of the proceeds of the deferred compensation trust established for them by Horizon, such a claim would be directly against Horizon, through its receiver, not indirectly through the government"); W. McAllister, III v. RTC, 201 F.3d 570 (5th Cir. 2000) (action by former officers and directors of failed thrift seeking retirement funds sounded in tort); Fleischer v. RTC, 882 F. Supp. 999 (D. Kan. 1995) (same). Further, while the remedy sought is a reduction in the receivership deficit, this is tantamount to having the FDIC add funds to the receivership. Cf. Ambase II, 61 Fed. Cl. at 797 ("A deficit, of course, is the flip side of a surplus"). This is a classic remedy in tort. Finally, while this Court believed Ambase's claims were incident to the damage action because they could be "kep[t] . . . within judicially manageable bounds," Id. at 802, this is belied by the complexity of the claims set forth in the SOI. In light of the SOI, we respectfully urge that the Court reconsider its decision to assert jurisdiction over the receivership deficit. As we have pointed out, these detailed claims regarding the administration of the receivership relate to alleged breaches of fiduciary duty by the FDIC. While the Tucker Act authorizes suits against the United States, claims against the FDIC 12

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in its receivership capacity must be brought in district courts pursuant to the FDIC's power to sue-and-be-sued. 12 U.S.C. §§ 1821(d)(6). This jurisdiction is exclusive and precludes the exercise of jurisdiction by this Court. See 12 U.S.C. § 1821(d)(13)(D); 1821(j). If the Court continues to assert jurisdiction, we respectfully request that the prior decision be certified and the proceeding stayed so we can seek a ruling by the Federal Circuit upon our request for interlocutory review. II. BAILEY PRECLUDES AMBASE'S CLAIMS RELATING TO THE PAYMENT OF INTEREST ON THE DEBT AND THE LIABILITY TO THE IRS Ambase incorrectly contends Bailey does not foreclose claims based upon alleged malfeasances by the RTC/FDIC. Although this Court stated that it did not believe Bailey required that the Government "be compensated for [opportunity costs lost in the administration of the receivership]," Ambase II, 61 Fed. Cl. at 74, this is simply untrue. The receivership in Bailey, as in this case, primarily resulted from the accrual of interest on loans from the FDIC to the receiver and the liability for taxes. See Bailey, 341 F.3d at 134445. Yet, the Federal Circuit rejected the stockholder's claim to recover the receivership deficit and determined that the order of priority in 12 U.S.C. § 1821(d)(11), which foreclosed the recovery, did not constitute a "taking." See Bailey, 341 F.3d at 1347. While Ambase argues that the enactment of the minority preference statute and the alleged failure to fund the RTC resulted in a taking of its property in a potential liquidation surplus, the stockholder in Bailey made a similar argument and was unable to carry the day. In Bailey, the stockholder contended that "his inability to recover the receivership deficit in combination with the statutory depositor preference priority scheme takes his contractual

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remedy to any surplus recovery." Bailey, 341 F.3d at 1347. The Court of Appeals for the Federal Circuit ruled, however, that "the application of the statutory priority scheme does not take his property interest in the surplus or his right to pursue the remedy. To the contrary, the statute preserved the right of the shareholders to a potential recovery, 12 U.S.C. § 1821(d)(11)(A)(v), and the FDIC has avidly pursued contract damages on behalf of Security Savings." Id. The reasoning of Bailey applies with equal force to this case. Indeed, as this Court has observed: There is bitter truth in this logic [i.e., that there is no regulatory taking of a contract if there is a potential for legal redress for breach of contract]. Very few if any legal judgments put the party injured in the same position as if the injury had never occurred. A man who has lost his leg in an auto accident will never be the same no matter how much money he receives in compensation. An opportunity lost can never be regained years later. A money judgment years later is always speculative. And yet that is all that legal redress is about. Ambase Corp. v. United States, 58 Fed. Cl. 32, 52 (2003). The argument that a failure to achieve reimbursement of the receivership deficit "takes" a property interest is simply false. It was rejected in Bailey and must be rejected in this case as well. Contrary to Ambase, there is simply no authority that the Government may not collect taxes, interest, or other expenses related to administering a receivership. Even assuming Bailey permits a stockholder to recover portions of the deficit relating to unconstitutional actions or breaches of fiduciary duty, as we demonstrate below, Ambase has failed to provide any evidence of unconstitutional actions or breaches of fiduciary duty which inflated the receivership deficit. As for the alleged unconstitutional act of failing to fund the

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RTC, there has been no showing of a connection between congressional funding decisions for the RTC and the level of Carteret's receivership deficit. Further, Ambase has cited no authority that a stockholder of an insolvent thrift has standing to challenge a failure of congressional funding and we are aware of none. Likewise, there is no authority for the contention that the minority preference statute, 12 U.S.C. § 144a(w)(17)(A), violated Ambase's right to equal protection. Even if the premiums would have been greater if minority bidders had not been allowed to match the highest nonminority bid, because Ambase was not a bidder and, therefore, was not subject to the minority bidding rules, its right to equal protection could not have been and was not affected by the minority bidding rules. In short, the takings and equal protection claims are precluded by Bailey and, as discussed more fully below, lack merit in any event.

III.

THE RTC'S/FDIC'S MANAGEMENT OF CARTERET WAS CONSISTENT WITH LAW AND REGULATION While Ambase contends the RTC/FDIC mismanaged Carteret's resolution in part because

of congressional funding and the minority bidding rules, and in part because of self-dealing, there is no legal or factual merit to these claims. In the discussion that follows, we examine Ambase's claims on a point-by-point basis and demonstrate that the RTC/FDIC followed all relevant accounting conventions and policies in resolving Carteret and realized the highest values possible from the resolution of Carteret. We also demonstrate that Ambase's analysis, which depends upon Professor Calomiris's hypothetical "but for" world and selective peer data analysis, fails to

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demonstrate any deficiencies in the resolution of Carteret. Therefore, there is no basis for reducing the receivership deficit. A. NEITHER THE ALLEGED DELAY IN FUNDING NOR THE MINORITY PREFERENCE PROGRAM CONTRIBUTED TO ANY REDUCTION IN PREMIUM RECEIVED FOR CARTERET'S BRANCH DEPOSITS

Ambase contends that, in the absence of an alleged delay in RTC funding and the minority preference statute, Carteret could have realized approximately $43 million in additional premiums from the sale of its deposits. SOI at 8. As Professor Saunders demonstrates, however, there is no credible evidence to support this claim. Indeed, even accounting for the deposit runoff that occurred between the time Professor Calomiris alleges the deposits would have been sold in the but-for world (i.e., December 1993) and the actual sale of the branches, Carteret realized a higher premium by selling the branches in late 1994 and early 1995 than it could possibly have achieved by selling them in 1993 (when Professor Calomiris presumed the sale would have occurred). Saunders Decl. at ¶ 57, App. 29. Therefore, Carteret was not injured by the alleged delay in funding or the minority preference statute. According to Professor Calomiris, "[a]s of December 31, 1993, Carteret had $1.787 billion in deposits. I assume that, but-for the delay, Carteret would have sold its branches at the same 10.5 percent deposit premium as it actually sold its deposits for in the second resolution (the first 14 New Jersey branches sold subject to the minority preference program)." July 14, 2006 Calomiris Dec. at ¶ 83, App. 42-42A. In other words, Professor Calomiris's claim is that Carteret would have realized an additional $43 million in premiums because the deposit premium in December 1993 would have been the same as it was in January 1995.

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Despite the importance of this assumption to his opinion and the ready availability of transaction based premium data, Professor Calomiris made no attempt to ascertain whether deposit premiums that buyers were willing to pay had changed between December 1993 and January 1995. Saunders Decl. at ¶ 57, App. 29. Professor Calomiris ignored the market data for good reason. As Professor Saunders points out, the evidence demonstrates that Carteret would not have and could not have received a higher deposit premium if it had sold its deposits and branches in December 1993 than it received by selling the deposits in November 1994 and January and March 1995. Saunders Decl. at ¶¶ 57, 80-81, App. 29, 41-42. In 1993, when Professor Calomiris claims Carteret would have sold its deposits in a "but for" world at a 10.5 percent premium, on a national level, the mean, median, and weighted mean deposit premiums from sale transactions were 3.45 percent, 2.55 percent, and 4.46 percent, respectively. Saunders Decl. at ¶ 73, App. 37-38. In 1994, however, when Carteret sold the Florida branch deposits, the three premiums (mean, median and weighted mean) had risen to 6.33 percent, 6.31 percent and 6.99 percent, respectively. Id. These premiums were 1.5 times greater than 1993 and more than 2 times greater than 1992. Id. In 1995, moreover, when Carteret sold the bulk of its deposits, the three premiums were even higher at 7.94 percent, 9.18 percent, and 8.35 percent, respectively. Id. Comparing 1995, when the bulk of the deposits were sold, to 1993 when Professor Calomiris claims they would have been sold in the "but for" world, the mean percentage premium was 2.3 times higher, the median percentage premium was 3.6 times higher, and the deposit (size) weighted mean premium was 1.9 times higher. Id. Further, as Professor Saunders demonstrates, the same dramatic increase in the market for premiums exists if one compares the 17

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data for RTC branch sales in the New Jersey and Florida markets individually over the relevant years and if one compares the premiums received by Carteret with the premiums received in other branch sales by size of deposits over the relevant period (1992-1995). Saunders Decl. at ¶¶ 74-79, App. 38-41. Ambase further contends that "`[t]he piecemeal sale [of] Carteret necessitated by the MPP prevented the RTC from resolving Carteret in the more economically beneficial form of a whole institution.'" SOI at 97 (quoting Calomiris Dec. ¶ 90). Based upon Professor Calomiris's analysis, Ambase argues that "the average expected premium value of a whole-institution purchase and assumption of assets and liabilities was 20 percent, and the average expected premium value for a purchase and assumption of assets and liabilities with branch sale was 14 percent." SOI at 97-98. According to Ambase, since Carteret was resolved as a purchase and assumption with branch sales rather than a whole-institution transaction, the "MPP reduced the premium value that Carteret would recover. Indeed, the actual premiums obtained through Carteret's three resolutions ranged from 6 percent to 11 percent." Id. The plaintiff's assertion that the so-called "expected premium" calculated by Professor Calomiris suggests that Carteret would have received a higher deposit premium if it had been resolved as a whole-bank instead of on a piecemeal basis is grossly misleading and, quite simply, incorrect. First and foremost, both the academic and empirical evidence, discussed by Professor Saunders, suggest that a whole bank sale of Carteret would not have resulted in a higher premium as Professor Calomiris alleges. A 1997 academic study by Sudhir Nanda, James Owers and Ronald Rogers, for example, found negative returns for whole bank transfers while branch acquisitions were insignificantly different from zero. This caused the authors to conclude that 18

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"`branch P & As are typically more focused acquisitions than whole institution P & As and, therefore, generated greater proceeds for the RTC, not lower proceeds as contended by Professor Calomiris.'" Saunders Decl. at ¶ 82, App. 42, (quoting Sudhir Nanda, et al., "An Analysis of Resolution Trust Corporation Transactions: Auction Market Process and Pricing," Real Estate Economics, vol. 25, no. 2, App. 566-588). Consistent with the findings of the 1997 study, Managing the Crisis: The FDIC and RTC Experience, a document frequently cited by Professor Calomiris, the FDIC concluded that "[b]ecause a whole bank bid constitutes a one-time payment from the FDIC, bidders tend to be very conservative to cover all potential losses. Conservative whole bank bids could not compete with other transactions on a least cost basis." Managing the Crisis: The FDIC and RTC Experience , App. 591; Saunders Decl. at ¶ 67, App. 34-35. In other words, whole bank bids did not result in higher premiums as Professor Calomiris alleges. Further, the empirical evidence from actual whole bank sales in 1993 shows that the weighted mean deposit premium in 1993 was 2.29 percent nationally, 5.25 percent in New Jersey, and 4.48 percent in Florida. Saunders Decl. at ¶ 83, App. 42-42A. If the national average of 2.29 percent is applied to Professor Calomiris's calculation of Carteret's deposits in December 1993 ($1.787 billion), this would result in a premium of only $40.9 million, which is considerably less than the receivership actually achieved ($143.8 million). Even taking the highest of the three premiums, the 5.25 percent in New Jersey, the Carteret receiver still would have commanded a premium of only $93.8 million which is still considerably less than the $143.8 million premium actually received. Thus, both the academic literature and empirical evidence belie Professor Calomiris's speculative and unsupported claim that Carteret would have 19

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received a greater premium had it been resolved in a whole bank transaction in December 1993. As succinctly stated by Professor Saunders: "There is simply no evidence to support Professor Calomiris' assertion that the receivership would have received more in proceeds if Carteret had been sold as a whole bank in December 1993." Saunders Decl. at ¶ 84, App. 42A. Given that neither the academic nor the empirical evidence supports the plaintiff's assertion that the receivership would have realized a higher premium if Carteret had been resolved in a whole-bank transaction, Professor Calomiris had to construct an analysis that would support such a conclusion. That analysis, however, is deeply flawed and misleading. As Professor Saunders explains, comparing Professor Calomiris's so-called "expected premium" to the market-determined deposit premium the receivership actually realized "is like comparing apples to oranges simply because they measure two different things." Professor Calomiris's "expected premium" is equal to the difference between the estimated deposit payout cost and the resolution cost divided by the resolution cost. In other words, his so-called expected premium "reflects the costs to a not-for-profit government agency with the mandate to resolve a failed bank at the lowest possible cost." The deposit premium Carteret actually realized, which Professor Calomiris attempts to compare to his "expected premium," "reflects a buyer's evaluation, from a profit-maximizing perspective, of the value of the selling bank's or thrift's deposits." Saunders Decl. at ¶ 61, App. 31-32. Professor Calomiris's conclusion that the so-

called "expected premium" for whole bank transactions was higher than his "expected premium" for branch sales is of no relevance to the question of whether or not the market-determined deposit premium that Carteret actually received would have been higher if it had been resolved in

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a whole bank transaction and, in fact, both the academic and empirical evidence suggest the exact opposite is true. Saunders Decl. at ¶¶ 58-62, App. 29-32. Ambase further asserts that, while "[t]he best method of resolution would have been a merger or reprivatization, which has an average expected premium value of 48 percent . . . [b]y the time Congress adequately funded the RTC a year after Carteret was seized, its financial health had declined such that it was no longer a viable candidate for a merger or reprivatization." SOI at 98, n. 31. The conclusion that Carteret would have been resolved as a merger or reprivatization is based upon a deeply flawed and grossly misleading analysis prepared by Professor Calomiris. Professor Calomiris reached this conclusion by simply analyzing bank and thrift failures between 1980 and 2004 without making any allowance for regulatory or economic changes that may have occurred over that 25-year period. Saunders Decl. at ¶ 63, App. 32-33. By only analyzing the bank and thrift failure data in the aggregate, Professor Calomiris missed the obvious fact that nearly all of his co-called "merger or reprivatizations" occurred prior to FIRREA and the establishment of the RTC. Id., App. 33-34 at ¶ 64.4 More specifically, there were a total of 1,506 bank and thrift failures that were resolved between 1980 and 2004 that had a so-called "expected premium," 973 of which occurred after 1988. Professor Calomiris's so-called "mergers or reprivatizations" accounted for 450 of the 1,506 total bank and thrift failures between 1980 and 2004. However, only three of the 450 were

In addition to failing to differentiate between pre-FIRREA and post-FIRREA resolutions in his analysis, Professor Calomiris did not interpret the data in the Failure Transaction Database consistently. In fact, over the course of three iterations of his expert report, he interpreted the data in varying ways which casts doubt upon the credibility of the analysis. We provide a detailed analysis of Professor Calomiris's manipulation of the Failure Transaction Database in Exhibit I to this response. 21

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resolved after 1988 and only one after 1989. Id. In other words, 970 of the 973 thrifts and banks resolved after 1988 (with a so-called "expected premium") were resolved as either a purchase and assumption or an insured deposit transfer. Professor Calomiris's opinion that Carteret would have been resolved as a so-called "merger or reprivatization" absent the delay in funding is just not supported by the evidence regarding the method by which banks and thrifts were resolved after FIRREA. Id. B. THE ENACTMENT OF FIRREA DID NOT ENLARGE THE RECEIVERSHIP DEFICIT BY ELIMINATING THE VALUE OF SUPERVISORY GOODWILL 1. PROFESSOR CALOMIRIS'S ASSUMPTION THAT THE GOODWILL ACCOUNT SURVIVED CARTERET'S SEIZURE IS INVALID

In his assessment of the value of Carteret assuming the assets and liabilities had been sold in a whole bank resolution in December 1993, Professor Calomiris assumes that (1) the receivership's books would have included the goodwill; (2) the goodwill would have been transferable to an acquiring institution; and, (3) the buyer's regulators (whether it be the OTS, Office of Comptroller of the Currencey ("OCC"), Federal Reserve, FDIC, or the state banking agencies) would allow the goodwill to count as regulatory capital. Calomiris Dec. at ¶¶ 103-106, App. 184-187; SOI at 72. Because none of these assumptions is correct, Ambase's claim that goodwill would have reduced the receivership deficit lacks merit. First, the goodwill on Carteret's books did not survive the seizure. As reflected on the balance sheet of the pass-through receivership, the good will was written off by the RTC when Carteret was seized by OTS and placed in a "pass-through" receivership. See SOI App. at 01082. As noted in the Conservatorship Strategic Plan, at 13, App. 468, "The goodwill of the 22

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bank [was] . . . written off [at the commencement of the receivership]." This was consistent with policy which recognized that, under GAAP, when a firm no longer functioned as a continuing business, assets such as goodwill must be written off. Revised RTC Manual at 62, App. 490. Because, by definition, Carteret was no longer a going concern following the seizure, GAAP required that the goodwill be written off and it was. See Accounting Principles Board Opinion 17, App. 316-322. "Estimation of value and future benefits of an intangible asset may indicate that the unamortized cost should be reduced significantly by a deduction in determining net income." Id. at ¶ 31, App. 321. Given that the goodwill was written-off at the time of seizure, it follows that goodwill could only have remained on Carteret's books in December 1993 if Carteret had not been placed in receivership absent the breach. Ambase, however, has offered no evidence that Carteret would not have been seized by the Government absent the breach. In fact, Professor Calomiris did not study that issue and has not offered an opinion on it. July 14, 2006 Calomiris Dec. at ¶¶ 51-52, 102 , App. 147-148, 184. Therefore, the only evidence available to the Court is that Carteret was placed in receivership and would have been placed in receivership absent the breach and that its goodwill was written off when it was placed in receivership. Notwithstanding these facts, Ambase contends that Carteret, in a "but for" world, would have been able to transfer goodwill to an acquiring institution for cash. Even assuming, contrary to fact, that goodwill existed on the balance sheet of the receivership, there is no legal authority supporting the contention that the receiver was entitled to transfer the goodwill. Although in Home Savings of America, FSB v. United States, 399 F.3d 1341, 1351-53 (Fed. Cir. 2005), on remand, 69 Fed Cl. 187 (2005), on remand, 70 Fed. Cl. 303 (Feb. 21, 2006), the Court of 23

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Appeals for the Federal Circuit affirmed this Court's ruling that the thrift's balance sheet was not required to reflect a goodwill write-off related to the transfer of branches, the Court of Appeals for the Third Circuit ruled that the goodwill related to branch transfers of Carteret in 1991 was not available as regulatory capital. Carteret v. Office of Thrift Supervision, 963 F.2d 567, 585 n. 8 (3d Cir. 1992). Although neither Home Savings nor the previous decision in Carteret addressed whether goodwill associated with prior acquisitions survived the imposition of a receivership and could be amortized thereafter, because the contracts between Carteret and the Federal Savings and Loan Insurance Corporation ("FSLIC") did not preserve goodwill following the transfer of branches, a fortiori they did not preserve goodwill after the imposition of the receivership. Moreover, even if the goodwill had survived the seizure and had been reported on the books of the receivership, it could not have been transferred to an acquiring company in the course of resolving Carteret. Because Professor Calomiris assumes Carteret would have been resolved in a whole bank resolution, the transaction would have had to be accounted for under the purchase accounting method.5 Under GAAP, none of the costs of an acquisition by an entity that might acquire Carteret as a whole bank or in branch clusters from the receiver could be allocated to goodwill because once Carteret was no longer an independent entity, the goodwill had no value. See Saunders Decl., App. 42K-42L at ¶ 100 ("the value of the goodwill of a failed

"The combination of existing voting common stock interests by the exchange of stock is the essence of a business combination accounted for by the pooling of interests method." APB 16 at ¶ 47, App. 302-305. See also APB 16 at ¶¶