Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:92-cv-00550-MCW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS NORTHEAST SAVINGS, F.A., Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

No. 92-550C (Judge Williams)

DEFENDANT'S REPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTION FOR LEAVE TO NOTIFY THE COURT OF SUPPLEMENTAL AUTHORITY In our motion, we quoted plaintiff's argument in its brief in this case arguing that it is unreasonable to contend that the loss "of more than one fifth of a billion dollars" in goodwill caused no damage. Pl. Br. at 10-11. We noted that the Federal Circuit quoted this very language from a brief written by the same counsel and explicitly rejected it. Granite Mgmt. Co. v. United States, 416 F.3d 1373, 1383 (Fed. Cir. 2005). In Granite this Court found that, in the context of that case, goodwill was "an unnecessary and likely useless asset that amortized and would therefore, be an expense." Granite, 74 Fed. Cl. at 166. In Granite, plaintiff appealed arguing that the loss of over a quarter of a billion dollars in goodwill must have caused some damage. The Federal Circuit again explicitly rejected plaintiff's argument holding that: (1) supervisory goodwill is a "fictitious asset," and (2) the elimination of this "accounting fiction" is not in and of itself proof of any damage. Granite Management Corp. v. United States, No. 075054; __ F.3d __; 2008 WL -------- (Fed. Cir. January 8, 2008) Slip Op. 6-8. Plaintiff's response does not, and cannot, deny any of that. Instead, plaintiff makes the hardly surprising observation that Granite had different facts and damages theories from this case. We never contended otherwise. Our uncontested point is that plaintiff's argument here

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was cut and pasted from the Granite brief, and that argument was explicitly, entirely, and repeatedly rejected be the Federal Circuit. Plaintiff erroneously castigates us for arguing that the breach caused a benefit. See Response at 3. Plaintiff admitted that exiting commercial lending and securitizing their mortgages and ceasing dividend payments to the Government were in fact beneficial to it. Pl. Br. 61; Tr. 978, 991; 1020-21 (Baxter). Although plaintiff now claims it would have taken such actions regardless of the breach, plaintiff's own treasurer, admitted that the breach was "the major reason" such things were in fact done and that the business plans he wrote so state. Brenner Dep. at 164; DX 181 at 1433, 1438. Dr. Baxter testified that his model is irreconcilable with Mr Brenner's testimony. "I disagree with his interpretation of the document he wrote, yes." Tr. 1010 (Baxter). Indeed, we pointed out that plaintiff's own complaint, as well as Mr. Rutland's affidavit, detailed the costs plaintiffs incurred in securitizing their loans and removing recourse. Complaint at ¶¶ 105, 106; Gov. Reply Br. 39-43. Plaintiff never even attempted to explain why these now admittedly beneficial steps were detailed in its complaint and affidavit, if in fact these actions were taken and their costs incurred for none-breach reasons. Plaintiff claims that it is relying upon the evidence and was never suggesting that the phase out of goodwill itself should be considered proof of any damage. Response at 3. Plaintiff's only fact witness however, when asked to describe the credit risk or interest rate risk of the forgone assets, replied "that's speculation. I don't know." Tr. 488 (Walters). Dr. Baxter, when asked whether his own model would have been even permissible in the no-breach world replied: "I don't know." Tr. 893 (Baxter) (emphasis added); Tr. 908-09 (Baxter). Gov. Br. 7-10. In truth, plaintiff relied heavily and repeatedly on the notion that with the elimination of so much 2

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goodwill there must be harm. Granite explicitly, unequivocally, and firmly rejects this argument. In another attempt to distract the Court from the impact of Granite on plaintiff's present arguments, plaintiff castigates us for not notifying the Court of Astoria Federal Savings & Loan v. United States, No. 95-468C, -- Fed. Cl. -- (Jan. 8, 2008). Of course, if plaintiff believed that the Court of Federal Claims case was relevant, it was free to notify the Court at the time. Although we respectfully disagree with this Court's decision in Astoria, and are currently considering appeal, even a cursory look at the decision shows that it cannot aid Northeast. The Court in Astoria pointed out that the bank was profitable, and the rate of return the Court awarded on the assumed incremental or forgone assets and liabilities was lower than the rate of return that the bank actually achieved on the assets it really had. Slip Op. at 35. Thus, the Court compared the bank's actual track record from 1990 to 1994, and it awarded a lower return on the alleged incremental portfolio than the bank was actually earning at the time. Of course, a similar approach here would result in negative damages for Northeast, as its track record from 1990 to 1994 was negative, by any measurement. Gov. Reply Br. at 12-13; Gov. Br. 2-6. In fact, no Court has ever awarded lost profits on an alleged incremental portfolio, when the assets and liabilities the bank actually had were losing money. No Court has ever found that, at the same time a bank was producing losses by leveraging the capital it actually had, it would have produced profits leveraging the "accounting fiction" that it did not have. Indeed, such a result would be nonsensical. As this Court has held, incremental assets would produce a lower return than actual assets because all firms make their best investments first, and borrow their cheapest funds first. Citizens Fin. Servs., FSB v. United States, 64 Fed. Cl. 498, 511-514 (2005) aff'd 170 Fed. Appx. 129 (Fed. Cir. 2006). "Banks like all of the firms exploit their best 3

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opportunities first." Tr. 2491-92 (Thakor). Thus, the incremental borrowing and investing of any firm would yield lower returns than its average borrowing and investing. Gov. Br. at 4. Finally, plaintiff erroneously accuses the Government of taking unreasonable positions in Winstar cases. See Response at 3. Of the 122 Winstar cases filed, 103 cases have been fully resolved. Of those 74, have been resolved with no damages or restitution awarded or paid. This figure does not include Granite, because possibilities for further review have not been exhausted. In addition to the 74 cases resolved at zero, another 12 cases have been resolved at an amount that approximated transaction costs for replacing the goodwill with real capital. Thus, well over 80 percent of the fully resolved cases have been resolved in a manner perfectly consistent with the Government's position. Again Granite is instructive. Granite advanced several damages theories seeking over $400 million in damages. Like Northeast, Granite claimed that all of its theories were conservative estimates of its various damages. Like Northeast, Granite argued that even if none of its theories were availing, the Court should award it a "jury verdict" because the amount of goodwill phased out must have caused some damage. Both this Court and the Federal Circuit rejected all of Granite's theories and rendered judgment for the Government. Thus, plaintiff's assertion that the Government takes unreasonable positions is belied by the facts.

Respectfully submitted, MICHAEL F. HERTZ Deputy Assistant Attorney General

/s/ Jeanne E. Davidson JEANNE E. DAVIDSON Director 4

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/s/ Kenneth M. Dintzer KENNETH M. DINTZER Assistant Director

OF COUNSEL: SCOTT AUSTIN Senior Trial Counsel ELIZABETH HOSFORD SAMEER YERAWADEKAR Trial Attorneys

/s/ Tarek Sawi TAREK SAWI Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Telephone: (202) 616-0323 Facsimile: (202) 307-0972 Attorneys for Defendant

February 8, 2008

Case 1:92-cv-00550-MCW

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CERTIFICATE OF FILING

I hereby certify that on February 8, 2008, a copy of the foregoing "DEFENDANT'S REPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTION FOR LEAVE TO NOTIFY THE COURT OF SUPPLEMENTAL AUTHORITY" was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

s/ Tarek Sawi Tarek S. Sawi