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United States Court of Federal Claims. AMERICAN SAVINGS BANK, F.A., et al., Plaintiffs, v. THE UNITED STATES, Defendant. No. 92-872C. Aug. 31, 2004. William F. Ryan, with whom were David M. Cohen, Director, Stuart E. Schiffer, Deputy Assistant Attorney General, and Jeanne E. Davidson, Deputy Director, Commercial Litigation Branch, Civil Division, United States Department of Justice. Marc S. Sacks, Trial Attorney, Commercial Litigation Branch, of counsel. Melvin C. Garbow, Arnold & Porter, Washington, D.C. Howard N. Cayne, Edward H. Sisson, Kwame A. Clement, and Todd A. Wynkoop, Arnold & Porter, of counsel.

distinct motions, each based on different aspects of the transaction and different theories of recovery. [FN1] This opinion will therefore follow that same structure, and as Plaintiff's arguments are addressed the relevant arguments included in the Defendant's Motion for Summary Judgment will be addressed at that time. For the reasons stated herein, Plaintiff's Motions for Summary Judgment are GRANTED, IN PART, and DENIED, IN PART, and Defendant's Motion for Summary Judgment is likewise GRANTED, IN PART, and DENIED, IN PART. FN1. Plaintiffs filed a fifth Motion for Summary Judgment on February 20, 2004, on an issue which it claimed was newly raised by the Government's briefing. As is described in further detail in Section VI of this opinion, the outcome of this motion is wholly subsumed by the discussion of the second Motion for Summary Judgment (regarding the breach of the "Warrant Forbearance"), and thus the fifth Motion for Summary Judgment is DENIED AS MOOT. BACKGROUND In 1988, American Savings and Loan Association of Stockton, California ("Old American"), was the largest failed thrift in the United States. It owed more than $30 billion to its depositors and other lenders and creditors, and its market value was several billion dollars below that of its liabilities. The Federal Savings and Loan Insurance Corporation ("FSLIC") assumed responsibility for the bank's liabilities, and estimated that the liquidation of Old American would cost the FSLIC more than $3 billion. Earlier, in the mid-1980s, investor Robert Bass and his associates ("the Bass Investors") perceived that turmoil in the savings and loan industry had created attractive opportunities for outside investors. The Bass Investors initially took an interest in a subsidiary of Old American, the American Real Estate Group. In the process of these negotiations, the Bass Investors began to take an interest in acquiring the entire thrift, and entered into serious acquisition negotiations in early 1988. [FN2] By this time, Old American was insolvent, so the Bass Group negotiated directly with Old American's federal

OPINION SMITH, Senior J. *1 This case arises out of the Winstar line of cases, the background of which is well described in Winstar Corp. v. United States, 518 U.S. 839 (1996), and the cases leading to it. In a previous opinion, this Court found the Government liable for breach of contract as a result of the passage of the Financial Institution Reform, Recovery and Enforcement Act of 1989 (hereinafter "FIRREA"), Pub.L. No. 101-73, 103 Stat. 183, and its implementing regulations. Am. Savings Bank v. United States, 52 Fed. Cl. 509 (2002) ("American Savings I "). This Court noted that the Plaintiffs had presented "one of the strongest prima facie demonstrations of the existence of a Winstartype contract." Id. at 510 (citing Am. Savings Bank v. United States, 50 Fed. Cl. 586 (2001)). The present case is now before the Court on cross-motions for summary judgment on damages. The Plaintiffs have presented their motion for summary judgment as four

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regulator, the Federal Home Loan Bank Board ("FHLBB"), and FSLIC, Old American's deposit insurer. The Bass Investors proposed a plan to FHLBB and FSLIC whereby Old American would be divided into two new thrifts, one of which would be operational and one of which would be liquidated. The FSLIC and FHLBB accepted the Bass Investors' proposal and chartered the two new thrifts. The operating thrift was known as American Savings Bank, F.A. ("New American," the "good bank") and the liquidating thrift was called New West Federal Savings and Loan Association ("New West," the "bad bank"). FN2. The parties dispute whether additional investors, including a subsidiary of Ford Motor Company, had also presented viable offers for Old American at or around this time. While there is evidence that some negotiations occurred, it is disputed whether any other investors were prepared to make an offer to acquire the failed thrift. Nevertheless, the Bass Investors did make an offer, which was accepted. Thus this dispute is not material to the Court's decision, and does not affect the decision on summary judgment. *2 The Bass Investors formed Keystone Partners, L.P. (the "Partnership"), Keystone Holdings, Inc. ("Keystone"), New American Capital, Inc. ("NA Capital") and other subordinate holding companies, all ultimately wholly owned by the Partnership for the purpose of acquiring the assets and liabilities of Old American. These holding companies are all plaintiffs in this action. Through NA Capital, the Plaintiffs raised $400 million in cash to fund the new enterprise: $30 million from common stock investors, $80 million from preferred stock investors, $40 million from subordinated debt lenders, and $250 million from senior debt lenders. NA Capital then downstreamed $350 million of that cash into New American. The Acquisition Agreement described how New American would acquire and value certain assets and liabilities that Plaintiffs would select from Old American. Old American held approximately $22 billion in assets, from which The Bass Investors, in agreement with the Government, selected for New American approximately $7 billion. $15 billion in assets (primarily mortgages) remained on the books of New West, the liquidating thrift. New West also

retained $7 billion in liabilities. New American assumed nearly $15 billion in existing FSLIC-insured liabilities owed to depositors from Old American. The result was that New West had a surplus of assets over liabilities of approximately $8 billion and New American was left with an $8 billion surplus of liabilities over assets. To balance the books of the two banks, New West issued an $8 billion dollar note to New American (the "FSLIC Note"), which was guaranteed by FSLIC. The FSLIC Note was then recorded as an asset on the books of New American and as a liability on the books of New West. The Note had a ten-year term, with interest payments made regularly by the FSLIC to New American. Had the Note not balanced the books of both banks, New American would have begun with an $8 billion deficit, making the transaction unworkable. As part of the transaction, the FSLIC received warrants for the potential purchase of stock in American Saving's holding company. The final agreement effectively gave FSLIC a thirty percent ownership interest in American Savings, which FSLIC found attractive as it might potentially enable FSLIC to recoup the assistance that it was giving to American Savings. In April 1988, when the FHLBB first entered into an exclusive negotiating agreement with the Bass Investors, the FSLIC valued the warrant aspect of the deal at $543 million. In 1988, thrifts were generally required to maintain regulatory capital in an amount at least equal to 3 percent of their liabilities. FSLIC provided Plaintiffs with a "Note Forbearance" which was written down as capital in an amount equal to the amount of regulatory capital required as a result of having the $8 billion Note recorded as an asset. It was also agreed that the value of the warrants issued to FSLIC would be included as regulatory capital, pursuant to which FSLIC issued a "Warrant Forbearance" for the first ten years after the Transaction (which was the expected term of the FSLIC Note). This forbearance was similar to arrangements made with acquirers of other thrifts. (Bass Group List of Pending Issues, dated July 26, 1988, submitted as part of the negotiations with FSLIC, Def.'s App. to Mot. for Summ. J. at 238.) The final agreement permitted American Savings to count the "fair value" of the warrants as regulatory capital for "certain limited purposes," and granted FSLIC a $214 million "second preference" upon the sale of the bank. This gave FSLIC priority in the distribution of the proceeds of any sale of New American. While the Bass Investors would still receive 100 percent of the proceeds from a sale up to the amount of cash that

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they contributed, FSLIC was given a preference distribution of 100 percent of the next $214 million of sales proceeds. Only after these preferential distributions would the remainder be distributed proportional to the ownership interests that the parties held in the bank (30% for FSLIC and 70% for the Plaintiffs). *3 Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183, on August 9, 1989. As discussed in American Savings I, the result of this legislation in part was that American Savings could no longer rely on the Note Forbearance and the Warrant Forbearance when calculating the required amount of regulatory capital, and thus had to increase its regulatory capital from other sources. One response was to "reverse" its push-down accounting for the warrants. The warrants provided FSLIC with an ownership interest in American Savings' holding company, rather than a direct interest in American Savings. Prior to FIRREA, the holding company had to "push down" the value of the warrants to American Savings in order for the warrants to have been recorded as regulatory capital. As long as the Warrant entry remained on the books of American Savings, the bank had to maintain $167 million of balancing assets on the books. These assets would depreciate and amortize over time, which would reduce capital. To avoid these expenses on the remaining capital, American Savings received approval from the newlycreated Office of Thrift Supervision ("OTS") to reverse this push-down accounting. Even in the face of a California economy that was experiencing deep recession, American Savings became profitable, recording net income of $247.6 million in 1990, and describing itself in 1991 as "one of the most profitable depository institutions in the nation." (Private Placement Memorandum, dated October 1991, Def.'s App. to Mot. for Summ. J. at 294.) Despite this, Plaintiffs claim that they were damaged as a result of the Government's breach of contract, and bring four distinct claims for compensation. The Court will address each of these in turn. Summary Judgment Standard Rule 56(c) of the Rules of the Court of Federal Claims states that "[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Summary judgment may not be granted if "the dispute about a material fact is 'genuine,' that is, if the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). See also Eli Lilly & Co. v. Barr Labs., Inc., 251 F.3d 955, 971 (Fed.Cir.2001); Gen. Elec. Co. v. Nintendo Co., 179 F.3d 1350, 1353 (Fed.Cir.1999). In other words, if the nonmoving party produces sufficient evidence to raise a question as to the outcome of the case, then the motion for summary judgment should be denied. Any doubt over factual issues must be resolved in favor of the party opposing summary judgment, to whom the benefit of all presumptions and inferences runs. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986); Wanlass v. Fedders Corp., 145 F.3d 1461, 1463 (Fed.Cir1998). II. Plaintiff's Motion for Damages as a Result of the Government's Breach of the Note Forbearance. *4 New American Capital raised the following amounts of capital by issuing coupons for interest or dividends: 1) $250 million in senior debt, 2) $40 million in subordinated debt, 3) $80 million in preferred stock, and 4) $30 million in common stock. Each of these sources of capital produced different costs to New American Capital, as the rates at which interest and dividends were paid varied. For purposes of this motion, the plaintiffs have agreed to simplify matters by assuming that there was no cost associated with the maintenance of common stock. The Government does not dispute this estimation (which serves to reduce the Plaintiff's potential damage award). In addition to this capital raised by the Plaintiffs, New American assumed responsibility for $8 billion of Old American's liabilities balanced on the asset side of the ledger by the "FSLIC Note." The interest rate to be paid on the FSLIC Note was negotiated and set by the parties prior to the issuance of the Note Forbearance. The plaintiffs argue that the interest rate needed to be set high enough to generate sufficient income to cover three types of potential costs associated with the excess liabilities assumed from Old American. The first of these was the interest that New American would have to pay on the $8 billion of Old American's FSLIC-insured liabilities to depositors, which New American had assumed. The second category of costs was the actual general and administrative operating costs of New American, which would be considerable given the

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size of excess liabilities the bank had assumed from Old American. Finally, plaintiffs argue that they were required by the FSLIC regulations at the time to maintain three percent of total liabilities as regulatory capital. Three percent of eight billion amounted to $240 million in capital, and this in turn would generate interest and dividends that would have to be paid to lenders who provided that capital. FSLIC agreed to a Note Forbearance, waiving the requirement that New American maintain this amount of capital against their $8 billion in assumed liabilities, thereby reducing the bank's expenses. After the passage of FIRREA, the regulatory forbearance was voided and Plaintiffs were required to substitute real capital for the forbearance in order to support the billions of dollars in excess liabilities. The Note was repaid periodically by FSLIC (and then the FDIC, after the passage of FIRREA eliminated the FSLIC and the FHLBB), which reduced the amount of capital necessary to support it. At the same time, OTS periodically raised the regulatory capital percentage, which of course raised the amount of capital required to support the Note. The balance between the two changed, causing the amount required of New American to increase or decrease depending on the term in question. For instance, in the fourth quarter of 1990, the balance of the Note had been reduced to $7.42 billion as a result of principal payments made by the FSLIC. However, the regulatory capital requirement was raised from 3% to 4% of the total outstanding liabilities, requiring New American to maintain an even greater amount of capital ($297 million, an increase of $57 million) to support the smaller balance of outstanding liabilities. *5 Capital is critical to operating a thrift. Under the federal deposit insurance regulations in place at the time of the Transaction, Plaintiffs were authorized to hold up to $100 of deposits for every $3 of capital the thrift possessed, but they could not fall below this ratio without losing the backing of FSLIC and the ability to attract deposits. $167 million in capital would have allowed New American to obtain upwards of $5 billion in deposits to use for growth and buying assets that would generate income for interest payments to depositors. Naturally, this growth potential made New American more attractive to investors than a similarly-sized bank without that kind of leverage. The parties do not dispute that New American was able to comply with the regulatory capital requirements. The primary conflict between the parties on this issue stems from the Plaintiffs'

description of having "posted" a certain amount of capital in order to replace the FSLIC's Note Forbearance. Plaintiffs repeat this terminology throughout their briefs on this motion, but it is not clear precisely what they mean by this. The capital in question had already been raised by the Plaintiffs prior to the breach of the Note Forbearance; Plaintiffs do not request the cost of "replacement capital." The question for the Court here is whether this preexisting capital somehow lost value as a result of the breach. Plaintiffs claim that this is exactly what happened, as the capital which had previously been available for investment had to be "sterilized" and "rendered ... useless" in order to meet the regulatory capital requirements. See, e.g., Pls.' Mot. For Summ. J. I, at 14-15. Capital held by a bank must be leveraged to create investments which generate income for capital growth and dividends for investors and interest for depositors. This can only be done with capital that is unencumbered, and Plaintiffs' argument is that the $350 million that they had to earmark for "regulatory capital" could not therefore be leveraged anymore. While this argument is simple enough, neither the briefing nor the oral argument sufficiently explained the details of what did happen to this capital in this case. Despite Plaintiff's description of the $350 million in capital as "useless," they admit that it was "invested in short-term instruments" in March of 1989, approximately three months after the acquisition. (Private Placement Memorandum, dated March 20, 1989, Def.'s App. to Mot. for Summ. J. at 77.) Plaintiffs' own expert, when asked "How does one allocate capital?" responded "Well, I'm not suggesting they put it in a particular box labeled capital. Money is fungible." (Dep. Of Nevins D. Baxter, dated February 23, 2000, Def.'s App. to Mot. for Summ. J. at 579) (punctuation added for clarity). The Court acknowledges that these short-term investments may not have been nearly as profitable as other uses which might have been envisioned by the Plaintiffs prior to the breach. However, they may have been profitable in at least some amount, and the Court is not in a position on summary judgment to make a factual finding as to what the capital earned while it was serving as regulatory capital. *6 As a legal matter, Plaintiffs have put forth a sound argument for damages in this motion. A plaintiff who has been injured by a breach of contract may request damages if it can show that: "(1) its losses were reasonably foreseeable at the time of the contract; (2) the breach was a substantial factor in causing its losses; and (3) it has proven its losses with

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reasonable certainty." Westfed Holdings v. United States, 55 Fed. Cl. 544, 549 (2003) (citations omitted). The loss of regulatory capital sustained by New American when the Note Forbearance was reneged on by the Government was perfectly foreseeable. The Note Forbearance provided New American with the accounting equivalent of $240 million in capital, or three percent of the value of the FSLIC Note, and this capital was taken away from the bank upon the passage of FIRREA. The parties do not seriously dispute that the Note and its accompanying Forbearance were negotiated for and were an essential part of the contract, of which both sides were aware. Similarly, the losses caused by Plaintiffs were a direct result of the Forbearance being eliminated, and therefore were not only a "substantial factor" in causing Plaintiff's injury but such losses would not have occurred "but for" the Government's breach. Cf. California Federal Bank v. United States, 54 Fed.Cl. 704, 713 (2002) (applying the "but for" test to determine the measure of lost profits damages in a Winstar suit). The Court's difficulty comes on the third prong of the test, which requires the Plaintiffs to prove their losses with "reasonable certainty." The claim of the Plaintiffs includes a claim for the dividend and interest payments made to the capital providers. In order to recover these costs, the Plaintiffs must first prove that these are not costs that they would have incurred in the absence of the breach. The obligations to pay dividends and interest payments to their capital providers predated the breach of the Note Forbearance. Mr. Barnum, who was Chief Financial Officer and then Chief Operating Officer of New American, admitted in his deposition that these payments would certainly have gone on regardless of the breach of the Note Forbearance, because that is the cost of raising capital. Nevertheless, Plaintiffs argue these payments are a viable way to measure the continuing "cost" of maintaining capital for purposes of damages recovery. As a matter of law, this motion comes down to two competing theories of how the Plaintiffs intend to recover damages. The Government perceives this motion as one for "replacement capital." They understand the Plaintiffs to either be requesting 1) the cost of raising an additional $240 million to meet the new regulatory capital obligation that arose postbreach, or 2) the costs Plaintiffs would have incurred replacing the lost forbearance capital with real capital. (Def.'s Opp. to Pls.' Mot. for Summ. J. I at 4.) The first request must of course be denied because

the Plaintiffs did not actually raise new capital to meet their new regulatory capital obligation. The Government therefore focuses on the second possibility, that of prospective replacement capital costs, and points the Court to cases that state that Plaintiffs may only recover the transaction costs involved. See, e.g., Cal. Fed. Bank v. United States, 245 F.3d 1342, 1350 (Fed.Cir.2001) (affirming trial court's award of transaction costs alone as the cost of replacement capital when supervisory goodwill agreement was breached). *7 Plaintiff's argument in this case, however, differs from that presented by the plaintiffs in cases such as Cal. Fed. The Plaintiffs in this case attempt to step out of the Winstar context and analogize their loss to more general government contracts cases, describing their argument as follows: Whenever the government has induced a contractor to accept a lower contract price by promising that the government will provide at no cost to the contractor something the contractor needs to perform the contract (e.g., equipment), and the government then fails to provide the promised item, requiring instead that the contractor use his own property to perform the contract, the government must pay the contractor's rental costs. (Pls.' Reply to Def.'s Opp. to Mot. for Summ. J. I, at 2.) The premise of Plaintiffs' argument, that the Government induced them to accept a lower price, is based on Plaintiffs' assertion that the interest rate paid on the FSLIC Note was set lower than it otherwise would have been had there been no Note Forbearance included in the deal. The Government responds by claiming that this wasn't a consideration, but the only evidence they put forth for this explanation is the fact that the interest rate was pegged to a specific cost index. [FN3] This is nonresponsive to Plaintiff's allegations as to why the particular rate was chosen-the parties could just as well have agreed on a set rate that was 350 basis points above the index, or only 50 points above the index. Certainly there was some reason why this particular rate was chosen, and Defendant offers no explanation that counters Plaintiff's characterization of the negotiations. The Note Forbearance reduced the costs for Plaintiffs, and the Government correspondingly reduced the amount they paid to Plaintiffs in interest payments on the Note itself. This case is unlike the cases cited by Defendant in which Winstar Plaintiffs have asked for compensation for the cost of replacing capital. The Court accepts Plaintiff's methodology for determining the cost of capital maintenance in this particular situation.

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FN3. The base rate for the Note was set at 225 basis points above the 11 District Cost of Funds Index ("COFI") for the first 18 months of the Note's term, then 200 basis points above COFI for the second 18 months, and thereafter 175 basis points above COFI. The 11th District COFI was a weighted average of the cost of funds of all of the thrifts within California, Nevada, and Arizona. Nevertheless, the Court finds that a material dispute of fact remains as to the amount by which the value of the capital in question was diminished. While the Court understands that the $240 million used to meet regulatory capital requirements was greatly restricted as a result, and could not be leveraged as Plaintiffs would have liked, the Court is not convinced that its value was reduced to zero. Therefore, the Plaintiff's damages should still be offset by the amount of value, however small, Plaintiffs were able to benefit from the capital while it was considered "regulatory." The Court does not know with "reasonable certainty" by what amount Plaintiff's requested damages should be offset and cannot award damages on summary judgment without additional factual inquiry. Should Plaintiffs be able to provide this proof at trial, Plaintiffs are legally entitled to the relief they request here. Plaintiff's Motion for Summary Judgment I, with respect to the FSLIC Note, is therefore GRANTED, IN PART, and DENIED, IN PART. III. Plaintiffs' Claim for Damages as a Result of the Government's Breach of the Warrant Forbearance *8 At the time that New American received the Note for $8 billion from New West, this would have balanced the bank's assets and liabilities, and would have made the bank regulatorily solvent, but for the Government's requirements that banks maintain a certain amount of regulatory capital. As part of the transaction, the Plaintiffs and the FSLIC both agreed to provide regulatory capital to New American. Both received a proportionate ownership interest in the new venture. The Plaintiffs contributed $350 million in cash in exchange for common stock in New American. The FSLIC, rather than contributing cash, authorized New American to credit its regulatory capital account with $167 million. This was considered to be the amount of the "deposit premium" on the Old American deposits which had been assumed by New American. [FN4] For purposes

of the cross-motions for summary judgment, the parties do not dispute that this value properly represents the value of the Old American deposit base. (Pls.' Mot. for Summ. J. II at 7.) Plaintiffs also issued warrants to the FSLIC for the purchase of thirty percent of the common stock in the new bank (referred to collectively as "the Warrant"). The Warrant was convertible into 3,000 Class B common shares of New American Capital Holdings, the parent of American Savings Bank. The Warrant represented a 30 percent ownership interest in New American Capital Holdings based on total number of shares outstanding. This arrangement gave Plaintiffs ownership of seventy percent of the bank and the Defendant ownership of the other thirty percent. FN4. The deposit premium reflects the value of a depositor base to a bank. Even though deposits are a liability, not an asset, they have value to a bank because they represent a relatively inexpensive source of cash that may then be invested by a bank. A typical transaction reflecting this deposit premium would be as follows. Bank One sells its deposits to Bank Two. Unlike the more common sale transaction where the buyer pays the seller, here the seller provides assets to the buyer to back up the deposit liability. However, to the extent that a deposit base is valuable to the buyer, the seller delivers less assets than the face amount of the deposit liability. This difference is the deposit premium which the buyer is willing to "pay" because of the economic value of having these depositors in its bank. For example, suppose that Bank One sells Bank Two $1 billion in deposits. Bank One delivers $900 million in assets so that Bank Two can support the liability represented by those deposits. The deposit premium is the $100 million difference. This transaction was concluded in 1988, following the enactment of the Competitive Equality Banking Act of 1987 ("CEBA"), Pub.L. No. 100-86, sec. 405, 12 U.S.C. § 1729(f)(6)(C), 101 Stat. 552, 613 (1987). CEBA required that if FSLIC contributed capital to a thrift, they must obtain a warrant in exchange. The statute read in part: "In the case of an insured institution with capital stock, the Corporation [FSLIC] shall require such institution to negotiate with the Corporation warrants for the purchase of stock as a condition for the purchase of capital

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instruments by the Corporation, on such terms and conditions as the Corporation may prescribe." 12 U.S.C. § 1729(f)(6)(A) (1987). Generally Accepted Accounting Principles ("GAAP") at the time of the transaction related to the issuance of equity instruments would have prevented the transaction from working the way that parties intended, because only instruments issued for cash or readily marketable securities could create additional tangible capital that could be recognized as equity in the financial statements. Emerging Issues Task Force, Issue No. 88-19 (Financial Accounting Stds Bd.1988). Accordingly, the Government granted the Plaintiffs an accounting forbearance, similar to that granted for purposes of the FSLIC Note discussed in Section II, which allowed the Warrants to be included in capital, notwithstanding the offset required by GAAP. Thus New American recorded $167 million in regulatory capital as part of the transaction in which FSLIC received the Warrant. *9 This forbearance of the regulatory capital requirement in relation to the Warrant was nullified by Office of Thrift Supervision Regulatory directives (Thrift Bulletins 38-2 and 38-2A) issued after FIRREA was enacted in August 1989. Am. Savings I, 52 Fed. Cl. at 510. These bulletins advised the Plaintiffs that FIRREA made the Government's performance on the Warrant Forbearance impossible, stating that "[t]he Office of Thrift Supervision is applying the new capital standards to all savings associations, including those associations that have been operating under previously granted capital and accounting forbearances. [FIRREA] eliminates those forbearances." (Thrift Bulletin 38-2, dated January 9, 1990, P.App. to Mot. for Summ. J. on Liability at Tab Z.) This breached the contract between Plaintiffs and Defendant. In 1996, Washington Mutual, an unaffiliated banking entity ("Acquiring Bank"), acquired New American. As a result of the merger, the Government received 14 million shares of the Acquiring Bank's stock. The Government then sold the Acquiring Bank's shares for $651.7 million in cash, net of sales costs. The Plaintiffs move for the return of this money on a "partial restitution" theory. The Government challenges this motion on three grounds. First, the Government asserts the Plaintiffs may not, after a breach, continue to receive benefits under a contract and then subsequently seek restitution. Second, the Government asserts the Plaintiffs may not obtain partial restitution, and may

not seek solely to unwind the warrant aspect of the transaction. And third, the Government asserts the Plaintiffs may not obtain restitution if they have received more benefits from a contract than the breaching party. Restitution, of course, is one of the principal remedial doctrines in contract law, along with expectancy damages and reliance costs. "An injured party usually seeks, through protection of either his expectation or his reliance interest, to enforce the other party's broken promise ... However, he may, as an alternative, seek through protection of his restitution interest, to prevent the unjust enrichment of the other party." Restatement (Second) of Contracts § 373 cmt. a (1981). When proof of expectancy damages fails because they are speculative or indeterminate due to the complexities of the transaction, "the law provides a fall-back position for the injured party--he can sue for restitution." Glendale Fed. Bank v. United States, 239 F.3d 1374, 1380 (Fed.Cir.2001). The same fall-back position may be taken when reliance damages are indeterminate, because expectation damages without lost profits are reliance damages. Parties in that situation may also sue for restitution. See Restatement (Second) of Contracts § 344 cmt. a (1981). The objective of restitution "is to return the parties, as nearly as is practicable, to the situation in which they found themselves before they made the contract." Glendale, 239 F.3d at 1380. This approach seeks to remedy unjust enrichment of either party to a contract and requires that the entirety of the context surrounding the contractual agreement be taken into account, especially when both parties perform at least partially before and after the breach of contract. "Restitution is sometimes described in terms of taking from the breaching party any benefits he received from the contract and returning them to the non-breaching party ... [T]hat requires determining what benefit from the contract the breaching party has received, and restoring that to the non-breaching party." Id. at 1380-1381. *10 Typically, Plaintiffs waive their right to restitution when they continue to accept performance under a once-repudiated contract. Mobil Oil Exploration and Producing Southeast, Inc. v. United States, 530 U.S. 604, 621- 622 (2000). The Government argues that Plaintiffs continued to receive partial performance under the contract knowing the warrant accounting forbearance was no longer available for computing regulatory capital.

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The Government argues that Plaintiffs continued to benefit from billions of dollars in assistance after the breach, and that this acceptance waived their right to restitution by affirming the contract. However, any benefits Plaintiffs continued to receive under the contract were derived from the Plaintiffs' attempts to preserve their remaining investment. "[O]rdinarily, if a person continues to perform a contract after knowing facts which make it voidable, it would be inferred that he affirms the contract and hence he would not be entitled subsequently to avoid it and to obtain restitution. This, however, is not true where he continues to perform only for the purpose of preserving what he has already invested in the performance." Restatement (First) of Restitution § 68 cmt. b (1937) (emphasis added). While Plaintiffs continued to operate the bank, they did not do so with the benefit of the Warrant Forbearance, the specific benefit relevant to the divisible contract in question. Furthermore, the Plaintiffs did make a concerted effort to unwind the contract and recover the Warrants by purchasing them back from the FDIC, but to no avail. The Government chose instead to keep the benefits it had received under the contract, in the form of the Warrant. (Pls.' Mot. for Summ. J. II at 25.) Under these narrow circumstances, the Plaintiffs may, after the Government's breach, continue to receive benefits under the Agreement and seek restitution for the breach. Plaintiffs are not legally barred from seeking restitution damages as a result of their continued performance. Restitution is generally awarded with respect to the contract as a whole. However, in the present case, Plaintiffs seek only partial restitution to recover damages because of the difficulty inherent in determining expectation and reliance damages within a complex bank holding company structure and transaction scheme as is present in this case. "There is very little law in this circuit on whether restitution can also be employed to return only some part of the [benefit] received." First Nationwide Bank v. United States, 51 Fed. Cl. 762, 766 (2002). There is a considerable dearth of law on this matter in other Circuits as well. Nevertheless, this Court has in at least one instance previously awarded partial restitution in the Winstar context. See id. at 769. In order to grant restitution for some part of the contract, that aspect of the contract for which restitution is requested must be sufficiently distinct from the rest of the contract as to make the value of that aspect clear. It is often said that the contract must be found "meaningfully divisible." Id. The Government asserts that restitution is not available to the Plaintiffs because the warrant transaction cannot

be unwound from the Agreement. The Court disagrees. *11 Both Plaintiffs and the Government rely on Stone Forest Industries. v. United States, 973 F.2d 1548 (Fed.Cir.1992) to support their assertions. In Stone Forest the issue was whether the Government's refusal to allow access to four of fourteen timber tracts negated the contractor's obligation to proceed with the rest of the contract. The court held that it did, because the contract was not divisible, and ordered the return of the contractor's advance deposits. Id. at 1553. Stone Forest is distinguishable from the present case. The court in Stone Forest was primarily concerned that severing the contract would "favor the breaching party." Id. In the present case, it is the non-breaching party that demands restitution from the breaching party, not the breaching party seeking a claim for non-performance or repudiation of a contract as was the issue presented in Stone Forest. Here the Court is not asked to sever the contract to favor the breaching party. Rather, the refusal of this Court to sever the contract would unjustly enrich the breaching party. [T]here are situations in which a fair solution requires partial rescission or equivalent relief, and a failure to recognize this can result in manifest injustice ... Rescission of an entire contract is a process of reopening the whole transaction; there are times when this is not a sensible thing to do, because more limited form of relief can be formulated to fit the needs of the case at hand. Courts have not hesitated to give such relief even though it amounts to partial rescission. George E. Palmer, The Law of Restitution § 12.6(D) (1978). For the Court to find the contract meaningfully divisible, the Plaintiffs must overcome the "presumption that when parties enter into a contract, each and every term and condition is in consideration of all the others, unless otherwise stated." Stone Forest, 973 F.2d at 1552. The parties characterize the transaction quite differently. Plaintiffs argue that the Warrant was given to FSLIC in exchange for two aspects of the transaction: the receipt of the value of Old American's deposit base, and the agreement from FSLIC and FHLBB that the value could be treated as regulatory capital. Defendant argues that there was no quid pro quo exchange of the Warrant Forbearance for the Warrants, and thus the contract is indivisible. Defendant argues that the "warrants were an integral part of the plaintiffs' proposed acquisition of American Savings from the beginning." (Def. Opp.

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to Pls.' Mot. for Summ. J. II at 33.) The Warrant Forbearance, however, was negotiated several months later. The initial structure of the proposed deal was laid out in a March 1988 Term Sheet submitted by the Plaintiffs, and which specified the warrants to be given to the FSLIC. (App. to Def.'s Mot. for Summ. J. at 57.) The Term Sheet also specifies that "the amount of warrants is tied to American's retail deposit base." This Term Sheet does not mention the possibility of a Warrant Forbearance. The regulators initially rejected the proposed forbearance, noting among other things that "[t]his was not specified in the March 28, 1988 Term Sheet which describes the deal." (Memorandum from Darrel Cochow to Chairman Wall, App. to Def .'s Mot. for Summ. J. at 223.) *12 Plaintiffs explain, however, that this Term Sheet was merely an initial summary of the transaction, and did not include the details of the regulatory treatment of any capital. This term sheet was submitted on March 28, 1988, approximately nine months before the close of the deal, and the parties had at that point not yet negotiated the value to assign to the franchise (and thus to the Warrant, the corresponding capital entry for the acquired asset). While the Government is correct that at that stage the parties had not yet arranged an exchange for the Warrant Forbearance, that is not the appropriate place for the Court to focus its attention. Parties to a complex contract like the one at issue in this case will commonly go through several rounds of negotiations, proposals and counter-proposals, before coming to a final agreement. It is that final agreement, the final contract, that the Court must focus upon. Thus, the Government's objections on the grounds of divisibility are somewhat off the mark. While it is certainly true that the Warrant and the Warrant Forbearance were given as part of the larger contract, that does not necessarily mean that those aspects of the agreement cannot be severed from the remaining elements. The Court must look to the facts of the transaction to determine mutual intent with respect to those promises. The Government's Opposition brief explains at length that the purpose of the warrants was to "defray the enormous assistance that FSLIC would be paying in connection with plaintiffs' acquisition." (Def. Opp. to Pls.' Mot. for Summ. J. II at 2; see also id. at 3, 1618). This may well be so, but it is not necessarily determinative of whether the Warrant was given in consideration of some other aspect of the overall transaction. The Plaintiffs must establish a quid pro quo exchange of the Warrant for the $167 million in

regulatory capital as well as the value of the deposit base. It is clear that the value of the Warrant was intended by the parties to be counted as regulatory capital. FSLIC Executive Director Stuart Root was advised by James Meyer, the Assistant Director of FSLIC's Financial Assistance Division (who was himself actively engaged in negotiations with the Bass investors), that the value of the Warrant was to count as regulatory capital. "[T]he term 'capital instrument' under this section of CEBA means any instrument created by the FSLIC that counts as capital for the insured institution pursuant to applicable capital requirements." (App. to Pls.' Mot. for Summ. J. II at 20.) FSLIC Executive Director Root advised FHLBB Chairman Wall that "the issue of critical importance" was the extent to which the new bank could count as regulatory capital the "bargained for" amount "deemed to be contributed by FSLIC." (Root Memorandum, dated July 18, 1988, App. to Pls.' Mot. for Summ. J. on Liability at Tab Q.) Chairman Wall testified to Congress that under the terms of the Agreement, New American could include the "fair value" of the Warrant issued to FSLIC in its regulatory capital. (Wall-Gonzalez Letter, App. to Pls.' Mot. for Summ. J. on Liability at Tab R.) The parties did some negotiating over the actual value of the deposit base, and thus of the Warrant, but there was never any serious dispute over the ability to record that value as regulatory capital. *13 Critical to the divisibility of this aspect of the contract is the repeated statement made by Plaintiffs during the negotiation of the contract that the Warrant would be revocable should FSLIC be "unable to perform its assistance obligations." (1988 Term Sheet, App. to Pls.' Mot. for Summ. J. II at Tab 1, p. 8.) "Assistance obligations" included forbearances to provide assistance in the form of regulatory capital. For example FSLIC reported to Congress that a "Forbearance" was one of the "Types of FSLIC Assistance" provided to thrifts. (Second Annual Report of the Fed. Savings and Loan Ins. Corp. Industry Advisory Comm. to the Comm. on Banking, Finance and Urban Affairs of the United States House of Representatives and the United States Senate, dated Jan. 10, 1989, App. to Pls.' Mot. for Summ. J. II at Tab 15, p. 203.) FSLIC was fully aware of this connection between the Forbearance and the Warrant. An internal memorandum from the FHLBB general counsel to the Board warned that "In the unlikely event FSLIC (or its successor in interest) was unable or unwilling to perform its assistance obligations to New American or New West, New

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American would have a right to ... cancel FSLIC's warrant." (Memorandum from Office of General Counsel, dated Dec. 27, 1988, App. to Pls.' Mot. for Summ. J. II at Tab 16, p. 234.) The acquisition transaction was approved on the next day. The Court finds that the Warrant and the Warrant Forbearance were linked as a part of this transaction, and can be unwound from the acquisition transaction as a whole as a matter of law. The Plaintiffs are legally entitled to pursue a claim for partial restitution on the grounds stated in their motion, assuming that they are able to prove the necessary factual predicate. When a contract is breached, restitution requires the parties to return the benefit each received from the other during performance of the contract to prevent an unjust enrichment to one of the parties. Accordingly, restitution may be had to the extent that the Plaintiffs' claim for restitution does not include the benefit resulting from the warrant forbearance they received from the Government. The Government opposes Plaintiffs' motion on the grounds that Plaintiffs have received more benefits from the contract than the breaching party. This argument assumes the benefit of billions of dollars in assistance from the FSLIC Note and other aspects of the transaction unrelated to the Warrant and Warrant Forbearance. In other words, the Government would have the Court offset an award of partial restitution by an amount that considers the contract as a whole. The requirement of an offer to return is not so strict; it "has been relaxed in view of the merger of law and equity and modern procedural reforms." Restatement (Second) Contracts § 384, Reporters' Notes. The general principle that a party seeking restitution must return the benefits he has received does not apply when "the contract apportions the price if that part of the price is not included in the claim for restitution." Restatement (Second) of Contracts § 384(2)( c) (1981). "[I]f the contract apportions the price among various pieces of property, restitution of the price as to part of the property may be had on a return of only that part if the price as to the unreturned property is not included in the claim for restitution." Id. at § 384 cmt. c. See also 5 Corbin, Contracts § § 1114, 1116 (1964 & Supp.1980); 12 Williston, Contracts § 1460A (3d ed.1970); Dobbs, Remedies § 4.8 (1973); 1 Palmer, Law of Restitution § § 3.11, 3.12 (1978). In the uncommon circumstance of a motion for partial restitution, the benefits and injuries to both sides that the Court must consider in making the parties whole involve only those that were part of the divisible, unwound aspects of the overall contract.

*14 Of course, the Court must still determine the value of the benefit received by Plaintiffs within the confines of the divisible aspect of the contract. In the present case, the Plaintiffs benefitted by the $167 million deposit premium which supported the regulatory capital they received from the Government in the form of the Warrant Forbearance. This is the asset that FIRREA disallowed which caused the regulatory capital to become useless. This capital would have created additional opportunities for the Plaintiffs to grow the bank using its deposit base to fund loans, purchase additional financial assets, or borrow funds. This value should be used to offset "the value of the benefits received by the defendant due to the plaintiff's performance." Landmark Land Co. v. FDIC, 256 F.3d 1365, 1372 (Fed.Cir.2001). The "traditional measure of restitution" is the "benefit conferred on the breaching party or by the market value of the goods or services rendered" LaSalle Talman Bank v. United States, 45 Fed. Cl. 64, 116 (1999). The benefit of the Warrants conferred to the Government was the $651.7 million received (net of sales costs) when it converted the Warrants and subsequently sold the stock for cash. Thus, the benefit to the Plaintiffs must offset the benefit to the Government, with the difference to be awarded to the Plaintiff. However, the exact amount of damages remains a factual dispute to be resolved. Plaintiffs have proposed to simply offset the value of the common stock in Washington Mutual, the Acquiring Bank, sold by the FSLIC in 1996 by subtracting the value of the original warrants as represented by the $167 million in regulatory capital placed on the books of American Savings in 1988. This does not account for the change in value of those monies over time, and so the parties must provide the Court with some mechanism for valuing the $167 million in 1996 dollars to account for the eight-year gap between the Plaintiffs' benefit and the Defendant's benefit from the contract. Without further fact-finding, the Court cannot award a specific dollar amount, and therefore the Plaintiffs' Motion for Summary Judgment II, with respect to the Warrant Forbearance, is GRANTED in part, and DENIED in part. IV. Plaintiff's Motion for Damages from the Sale of "Junk Bonds" As discussed above, the breach of both the Note Forbearance and the Warrant Forbearance imposed an increased obligation on American Savings to maintain capital. The Plaintiffs argue that in order to

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meet this obligation, they were required to sell off a portfolio of highly volatile high-yield bonds (or "junk bonds") at a loss of approximately $111 million. Plaintiffs seek reliance damages in this sum as compensation for this loss. New American began operations with approximately $380 million in excess of the required amount of regulatory capital, giving New American a regulatory capital base of 8.25%. (App. to Pls.' Mot. for Summ. J. at Tab 20, pp. 393-94.) See also Private Placement Memorandum for New American Capital, Inc., dated Mar. 20, 1989, Id . at Tab 21, p. 496. As part of the overall transaction, the Bass Investors had submitted for FHLBB approval a Proposed Business Plan that described a projected portfolio "comprised primarily of corporate debt instruments which are unrated or rated at less than investment grade." (Proposed Business Plan, dated Dec. 20, 1988, App. to Pls. Mot. for Summ. J. at Tab 20, pp. 400-01.) This portfolio was projected to have a principal amount of $1.5 billion, "or slightly less than 10% of American's assets." Id. The Proposed Business Plan outlined two forecast "cases" covering the first three years of New American's operations. Case One projected monthly investments of $75M in bonds that would provide a return of 13 1/2 % net of management fees, up to a total investment of 5% of total assets. Case Two envisioned the same type of investment, only with a cap of $1.5 billion rather than a percentage-based cap. *15 This Proposed Business Plan, as part of the larger Holding Company Application submitted by the Bass Investors, had to be approved by the FHLBB and FSLIC before the acquisition of New American could be completed. After considerable review, the Proposed Business Plan was approved. The internal memoranda evaluating the Proposed Business Plan and given to the FHLBB negotiators indicate that the approval was made with full awareness of New American's plan to invest up to $1.5 billion in high-yield, volatile bonds. (Memorandum from Caton to Brewer, et al., dated Dec. 22, 1988, App. to Pls. Mot. for Summ. J. at Tab 28; Memorandum from Wright to Smuzynski, dated Dec. 23, 1988, Id. at Tab 27, pp. 755-56.) In order to effect its purchase of junk bonds, American Savings entered into an Advisory Agreement with Rosecliff, Inc., an investment advisor that also served as an advisor to Acadia Partners, L.P. (App. to Pls. Mot. for Summ. J. at Tab 29, pp. 767-78, Tab 16 at 237-39.) Acadia Partners was an affiliate of American Savings, creating a

potential conflict. To resolve this, the Advisory Agreement required both Acadia and American Savings to direct to Rosecliff all potential junk bond investments, which would then allocate the opportunities between the two in proportion to the amount of funds committed by each. (Id. at 769, 77474.) American Savings began to purchase volatile highyield bonds in May 1989, when they made an investment of $77 million. They increased their holdings through the end of June to a total portfolio of $164 million. Some of these were sold in July 1989, and others were purchased; the total portfolio balance at the end of July was $254 million. During the same week that the House Conference Report on FIRREA was published, which clearly stated that after the law's enactment thrifts could no longer purchase junk bonds, American Savings purchased an additional $239 million of these bonds. The market in which American Savings purchased these bonds was not a buyers' market. Indeed, a subsequent report to American Savings's board of directors described it as a "a seller's market in which dealers could quote high prices, particularly for the better quality high-yield securities." (App. to Def.'s Mot. for Summ. J. at 24.) As soon as Congress passed FIRREA, thus preventing the purchase of such securities by thrifts, the bond prices went down and by the end of 1989 American Savings had suffered a loss on their junk bond portfolio of $59 million. Of course, one expects volatile investments to behave in a volatile manner. Plaintiffs argue that they simply intended to ride out the downturn until they could later sell these bonds at a profit. "The purpose of reliance damages is to compensate the plaintiff 'for loss caused by reliance on the contract." ' Westfed, 55 Fed. Cl. at 549 (quoting Castle v. United States, 301 F.3d 1328, 1341 (Fed.Cir.2002)). "Because reliance damages (like lost profits) are contract damages, to recover a plaintiff must also show that: (1) its losses were reasonably foreseeable at the time of the contract; (2) the breach was a substantial factor in causing its losses; and (3) it has proven its losses with reasonable certainty." Id. Plaintiffs attempt to characterize their purchase of the junk bonds as one of classic reliance. For instance, in their brief they state that "the government understood that New American would invest in high-yield bonds in reliance on the government's promises of surplus regulatory capital." (Pl.'s Mot. for Summ. J. III at 12 (emphasis in original).) Yet this is a mischaracterization of the contract at issue. While it

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is clear that Plaintiffs certainly "relied" on the presence of regulatory capital created by the Note and Warrant Forbearance when they made their decisions to invest in junk bonds, the actual decision to invest was not a bargained-for part of the contract. Its performance does not therefore necessarily earn Plaintiffs the right to reliance damages as they are traditionally understood. *16 Reliance damages are awarded for the cost of performance on a required part of a contract. To say that the Plaintiffs bought the high-yield bonds "in reliance on the capital" is not to say that they bought the bonds in order to receive the capital promised by the contract. Rather, it is simply that they contracted for an arrangement which they anticipated would give them money, and then they spent that money. Consequential damages, not reliance damages, would seem the appropriate remedial theory if a remedy is required. The Plaintiffs themselves point to "alternative strategies" that were available to them for investing their capital. For instance, they might have used this capital (including the surplus regulatory capital resulting from the Note and Warrant Forbearances) to purchase adjustable-rate mortgages, a much less volatile investment than the junk bonds which they chose to purchase. FIRREA required thrifts to dispose of their junk bond portfolios "as quickly as can be prudently done, and in any event not later than July 1, 1994." 12 U.S.C. § 1831e(d)(3)(A) (2003). After its passage, the Plaintiffs began to do just this. In its required filing explaining its compliance with FIRREA, American Savings acknowledged its plan to comply by tracking this language: "This strategy is to divest its portfolio as quickly as prudently possible and in no event later than July 1, 1994." (App. to Def.'s Mot. for Summ. J. at 590.) Defendant's position is that this divestment was legally required, and thus cannot be the subject of a suit for damages. Defendant argues that if the Plaintiffs had held on to these securities, they would necessarily have been in violation of the law. Defendant is correct in stating the principle that a request for damages may not be premised on the assumption that the Plaintiffs would have been permitted to violate the law. However, it is not the case that Plaintiffs' only alternative to selling the junk bonds when they did would have been to break the law. Plaintiffs sold these bonds in 1990, leaving them nearly four years to sell within the time allotted by

FIRREA. This is less time than Plaintiffs may have liked, but they have already conceded that this requirement of FIRREA, while an unwelcome change, was not a breach of any contract that the Government had with the Plaintiffs. Plaintiffs claimed at oral argument that they intended to hold the bonds until maturity, and that being "required" to sell them at any point before that caused them damage. This may well be true economically, but this does not make those damages legally recoverable contract damages. Also, factually inconsistent with Plaintiffs' claims is the fact that on February 2, 1989, American Savings provided potential investors with"Investment Policies and Procedures" for the management of its junk bond portfolio. The policies were introduced with the statement that "In general, High Yield Securities will be held for variable anticipated investment horizons." (App. to Pls.' Mot. for Summ. J. at Tab 34, p. 895.) *17 American Savings started liquidating its junk bond portfolio as early as September 1989, and notified the Office of Thrift Supervision on May 1, 1990, that it planned to completely divest its junk bond portfolio by the end of June, 1990. This was in keeping with the general practices of the thrift industry at the time. Acadia, American Saving's affiliate, reported that the industry as a whole had sold seventy percent of its junk bond portfolio by the end of June, 1990. Plaintiffs argue that despite the four years provided by the OTS regulations for the selling of their highyield bonds, they were forced by regulators to sell more quickly than they would have liked and thus sold out at much lower prices than they had intended when they were purchased (in other words, these sales were prior to the "variable anticipated investment horizons"). Indeed, in granting American Savings' application to divest its junk bond portfolio, the FDIC conditioned its approval on a complete divestiture "no later than June 30, 1990"--only 30 days after issuance of its edict. (Stone Memorandum, dated May 1, 1990, App. to. Def.'s Mot. for Summ. J. at 595.) Certainly it appears that regulators required American Savings to sell its junk bonds in a shorter time-frame than FIRREA would have allowed. Yet this still does not constitute a contractual breach on behalf of the Government. Quite simply, Plaintiffs did not contract with the Defendant for the purchase of these bonds. Plaintiffs have put forth evidence demonstrating that the FSLIC was aware that these bonds were going to be purchased, but that, in and of itself, does not make

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the purchases "bargained for." In order for the Court to award consequential damages to the Plaintiffs for the losses suffered from the sale of these bonds, the Plaintiffs would have to prove that such losses were a foreseeable consequence of the breach of contract by the Defendant. Such proof is a factual matter that may not be resolved on summary judgment, and there is nothing the Court has seen supporting the likelihood of such proof. A further bar to the Plaintiffs' being able to prove causation on this matter is the discretion which FIRREA granted to the FDIC for setting conditions and timetables for the divestitures of these "junk bond" portfolios. 12 C.F.R. § 303.13(e) (1990) ("the FDIC may impose such conditions and requirements as it deems appropriate in its sole discretion with regard to the divestiture of the debt securities, including requiring completion of divestiture in advance of July 1, 1994.") (emphasis added). Cf. San Carlos Irrigation & Drainage Dist. V. United States, 111 F3d. 1557, 1563 (Fed.Cir.1997) ("Too many contingencies-including, most importantly, the discretion of the agency [to command plaintiffs] exist in the causal chain from the government's breach to the asserted [harm to plaintiffs]."). Plaintiffs are not entitled to reliance damages on the theory presented, and therefore Plaintiff's Motion for Summary Judgment III, requesting reliance damages for the sales of their junk bond portfolio, is DENIED. Defendant's Motion for Summary Judgment as to Damages and Restitution, to the extent that it addresses the specific claim for reliance damages stemming from the sale of the "junk bond" portfolio, is GRANTED, IN PART. V. Plaintiff's Motion for Damages Resulting from the Sale of Mortgage Loans *18 As discussed above, New American began operation with a surplus of capital above that required by regulatory capital requirements, owing largely to the forbearances granted with respect to the amount of the FSLIC Note and the Warrant. This surplus was approximately $383 million, which at a 3% leverage ratio meant that New American could call on FSLIC to insure an additional $12.8 billion in deposits which could then be invested. The Proposed Business Plan submitted by the Bass Investors for FHLBB approval described how New American intended to emphasize adjustable-rate mortgage lending. New American expected to acquire from Old American approximately $7.7 billion in sound assets, which included $3.4 billion in performing fixed-rate mortgage loans and $2.8 billion in performing

adjustable-rate mortgages. (Proposed Business Plan, Plaintiff's Damages Appendix Tab 20 at 393.) The appeal of adjustable-rate mortgages was that changes in interest expense to the bank on the bank's borrowing would generally correspond to changes in interest income to the bank on the bank's lending. The investors proposed that this would reduce interest-rate risk to the bank. However, the bank intended to retain most of the $3.4 billion in fixedrate mortgages that it acquired from Old Am