Free Motion for Reconsideration - District Court of Federal Claims - federal

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No. 96-408C (Senior Judge Smith) IN THE UNITED STATES COURT OF FEDERAL CLAIMS

INNOVAIR AVIATION LIMITED, Plaintiff, v. UNITED STATES, Defendant.

DEFENDANT'S MOTION FOR RECONSIDERATION OF COURT ORDER DATED AUGUST 22, 2008

GREGORY G. KATSAS Assistant Attorney General JEANNE E. DAVIDSON Director SHERYL L. FLOYD 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 Tele: (202) 616-8278 Facsimile: (202) 514-8624 SEPTEMBER 8, 2008 Attorneys for Defendant

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TABLE OF CONTENTS ARGUMENT ................................................................................................................................. 2 I. II. The Applicable Legal Standard ............................................................................. 2 The Court Erred In Applying A 10 Percent Discount Rate ................................... 3 A. No Evidence In The Record Supports The Finding Of A 10 Percent Discount Rate .......................................................................... 3 The Court Erred In Applying A 10 Percent Discount Rate ....................... 7 The Court Erred In Applying A Real, After-Tax Discount Rate .......................................................................................... 10 The Court's Reliance Upon The Whitney 10 Percent Discount Rate Fails To Account For The Risks Associated With The BT-67 Conversion Project ...................................................................... 12

B. C.

D.

III.

The Court Should Utilize The One Year Treasury Bill Rate Of Interest For The Pre-Judgment Interest Rate ................................................................... 15

CONCLUSION ............................................................................................................................ 16

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TABLE OF AUTHORITIES CASES

American Federal Bank, FSB, v. United States, 74 Fed. Cl. 208 (2006) ...................................................................................................... 2 Culver v. Slater Boat Co., 688 F.2d 280 (5th Cir. 1982) .......................................................................................... 11 Eastern Minerals Int'l, Inc. v. United States, 39 Fed. Cl. 621 (1997), rev'd on other grounds, Wyatt v. United States, 271 F.3d 1090 (Fed. Cir. 2001) ............................................................................ 8, 11, 12 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) .................................................................................... 8, 9 First Federal Savings and Loan Assoc. of Rochester v. United States, 76 Fed. Cl. 765 (2007) ...................................................................................................... 3 Florida Power and Light Co. v. United States, 66 Fed. Cl. 93 (2005) .................................................................................................... 2, 3 Gargoyles, Inc. v. United States, 37 Fed. Cl. 95 (1997) ................................................................................................ 15, 16 Innovair Aviation Ltd. v. United States, No. 96-408C (Fed. Cl. Aug. 22, 2008) .................................................................... passim Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983) ........................................................................................................ 11 King v. United States, 205 Ct. Cl. 512, 504 F.2d 1138 (1974) ...................................................................................................... 15 Kirby Forest Indus., Inc. v. United States, 467 U.S. 1 (1984) ....................................................................................................... 15,16 NRG Co. v. United States, 31 Fed. Cl. 659 (1994) .................................................................................................... 16

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O'Shea v. Riverway Towing Co., 677 F.2d 1194 (7th Cir. 1982) ........................................................................................ 11 Rose Acre Farms, Inc. v. United States, 55 Fed. Cl. 643 (2003), vacated on other grounds, 373 F.3d 1177 (Fed. Cir. 2004) ............................................ 16 Strictland v. United States, 36 Fed. Cl. 651 (1996) ...................................................................................................... 2 United States v. Blankinship, 543 F.2d 1272 (9th Cir. 1976) ........................................................................................ 15 Vaizburd v. United States, 67 Fed. Cl. 499 (2005) ..................................................................................................... 16 Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394 (1989) ............................................................................................... passim Whitney Benefits, Inc. v. United States, 30 Fed. Cl. 411 (1994) ............................................................................................. passim Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577 (Fed. Cir. 1990) ........................................................................................ 2

STATUTES Financial Institutions Reform, Recovery, and Enforcement Act in August 1989, Pub. L. No. 101-73, § 1101, 103 Stat. 183 ...................................................................... 13

MISCELLANEOUS Eugene F. Brigham, Financial Management Theory And Practice, (3rd ed. 1982) ................................................................................................................... 10 Federal Rules of Civil Procedure 54(b) ........................................................................................ 3 RCFC 59(a)(1) ........................................................................................................................ 1, 2 RCFC 54(b) ........................................................................................................................... 1, 2

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS INNOVAIR AVIATION LIMITED, Plaintiff, v. UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 96-408C (Senior Judge Smith)

DEFENDANT'S MOTION FOR RECONSIDERATION OF COURT ORDER DATED AUGUST 22, 2008 Pursuant to Rules 54(b) and 59(a)(1), we, the United States, respectfully request the Court to reconsider its August 22, 2008 damages decision in this case, Innovair Aviation, Ltd. v. United States, No. 96-408C, with respect to two issues: (1) its determination that a 10 percent discount rate should apply to discount the projected income of Innovair Aviation Ltd. ("Innovair") during the period of 1992 to 1998 to determine the value of the Technology License Agreement ("TLA"); and (2) its failure to decide that the one-year Treasury bill rate of interest should be used for the prejudgment interest rate. The Court should reconsider its August 22, 2008 order with respect to the use of the 10 percent discount rate because no basis exists in the record for the use of such a low rate. The factual evidence, buttressed by the testimony of both Innovair's and our expert witnesses, leads to the conclusion that the discount rate should be in the 35 to 50 percent range, not at 10 percent. The Court also should reconsider its August 22, 2008 order because it reached no decision as to which interest rate should be used in the prejudgment interest calculation.

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ARGUMENT I. The Applicable Legal Standard

The decision whether to grant a motion for reconsideration is at the sound discretion of the Court. Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577, 1583 (Fed. Cir. 1990). Rule 59(a)(1) of the Rules of the Court of Federal Claims ("RCFC") provides that "reconsideration may be granted to all or any of the parties and on all or part of the issues, for any of the reasons established by the rules of common law or equity applicable as between private parties in the courts of the United States." RCFC 59(a)(1); American Federal Bank, FSB, v. United States, 74 Fed. Cl. 208, 213 (2006). RCFC 59(a)(1) provides four basic grounds to reconsider a judgment: "(1) to correct manifest errors of law or fact upon which the judgment is based; (2) so that a party may present newly discovered evidence or previously unavailable evidence; (3) to prevent manifest injustice; or (4) when there is an intervening change in the controlling law." Florida Power and Light Co. v. United States, 66 Fed. Cl. 93, 96 (2005). "For a movant to prevail, he must point to a `manifest error of law, or mistake of fact' and demonstrate that the motion `is not intended to give an unhappy litigant an additional chance to sway the court.'" Strictland v. United States, 36 Fed. Cl. 651, 657 (1996) (citation omitted). In addition, "[a]t an interlocutory stage, the common law provides that the court has power to reconsider its prior decision on any ground consonant with application of the law of the case doctrine." American Federal, 74 Fed. Cl. at 213. "The general rule is that a judgment which is merely interlocutory may be set aside or modified even at a term subsequent to that at which it was rendered, and that until the rendition of a final judgment the interlocutory judgment remains within the control of the court." Florida Power, 66 Fed. Cl. at 96 (quoting 132 A.L.R. 14). -2-

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Moreover, RCFC 54(b) provides that, [i]n the absence of [a] determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all of the parties shall not terminate the action as to any of the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties. Florida Power, 66 Fed. Cl. at 97 (emphasis in original), (citing RCFC 54(b); Federal Rules of Civil Procedure 54(b)). The Court should not apply final order review standards to non-final orders, which may be revisited at any time. Id. The Court's August 22, 2008 was not a final order from which the Government could take an appeal. Therefore, we respectfully request that the Court reconsider its order applying a 10 percent discount rate under the law of the case doctrine. See First Federal Savings and Loan Assoc. of Rochester v. United States, 76 Fed. Cl. 765, 767, n.2 (2007); Florida Power, 66 Fed. Cl. at 95. In the alternative, we respectfully request that the Court reconsider its determination to apply a 10 percent discount rate to correct manifest errors of law or fact. In addition, we request the Court to supplement its August 22, 2008 order by directing the parties to calculate the prejudgment interest, compounded annually, utilizing the one-year Treasury bill rate. II. The Court Erred In Applying A 10 Percent Discount Rate A. No Evidence In The Record Supports The Finding Of A 10 Percent Discount Rate

No evidence in the record supports the Court's finding of a 10 percent discount rate. Plaintiff's and defendant's witnesses testified that although they considered discount rates as low as the 20 to 25 percent range, they concluded that the discount rate should be in the 35 to 50 -3-

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percent range. None of the witnesses, neither the Government's, nor the plaintiff's, testified that the discount rate should be as low as 10 percent. Mr. Thomas Fraker, who had been hired by Mr. Bryan Carmichael and Mr. Barry Wilson to raise capital on behalf of Innovair and distributed a solicitation to interested investors, testified that an interested investor would have expected to receive a 35 to 50 percent return on his investment, because the investment was risky, given that "it was more, esoteric, more unusual than what would be commonplace in the marketplace." Tr. 749:5-20, 752:23-753:25; A0977, A0979-80.1 Although Mr. Fraker considered using a 20 percent discount rate (Tr. 773:6774:10, DX 262; A0995-96, A0597A-E), he testified that he selected a discount rate in the "range from 35 to 40, [or maybe] 50 percent" because that was "the discount rate associated with the risk of the investment." Tr. 771:21-772:10; DX 254/3; A0993-94, A0555. This 35 to 50 percent return on investment is equivalent to calculating the net present value with a discount rate of 35 to 50 percent. Tr. 753:10-25, Tr. 771:21-772:10; A0980, A0993-94 Moreover, Madison Valuation Associates ("Madison"), which prepared a report of Innovair and Basler Turbo Conversions, Inc. ("BTC") ( the "Madison Report") for the purpose of assisting the Baslers determine whether they should purchase Innovair, sell BTC, or merge the businesses, also expressed an opinion regarding the appropriate discount rate that the Baslers

"Tr. ___" is a citation to the trial transcript, dated October 17-26, 2007. "JX ___" is a citation to the parties' joint exhibits admitted into evidence. "DX ___" is a citation to the defendant's exhibits admitted into evidence. "PX ___" is a citation to the plaintiff's exhibits admitted into evidence. "A__" is a citation to the appendix, filed on March 3, 2008, and supplemented by motion on April 22, 2008, and on May 19, 2008; A1265-A1319 consists of filings and orders issued by the district courts in Arizona and Wisconsin; A1320-A1334 consists of additional trial testimony and exhibits that are either part of the trial record or were cited as support for the Government's arguments in this brief. "Pl. Post-Trial Br. ___" refers to plaintiff's post-trial brief, dated December 17, 2007. -4-

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should use in valuing the businesses. DX 105 (partial), DX 105/3-7, DX 105/14; A0471-86, A0473-77, A0484. Madison concluded that, during the first five years, the Baslers should use a 35 percent discount rate to value Innovair-generated non-United Technology Corporation ("UTC") sales and conversions, and that they should use a 30 percent discount rate to value Innovair-generated kit sales to UTC's joint venture company in Taiwan ("U.P.A.C."). DX 105/14, A0484. Furthermore, Madison concluded that, for sales occurring six years or later, i.e., 1996 through 1998, Innovair's annual income from projected sales to non-UTC customers should be discounted at a rate of 50 percent and its annual income from projected sales to UTC (identified as "U.P.A.C.") should be discounted at a rate of 45 percent. DX 105/16, A0486. Madison reasoned that these high discount rates were justified because of the inherent risks associated with each company, including the new untested nature of the venture, lack of a business plan and lack, therefore, of a historical "track record" of accomplishing conversion sales goals, managing a much larger more complex operation, working together as a team, age of the key participants and proving the marketing projections. . . . DX 105/14-15, A0484-85. In addition, Madison noted that "all new ventures have these and other similar risks which an investor must ­ and will ­ consider when evaluating a business." DX 105/15, A0485. Dr. Daniel Kaplan, an economist and the Government's expert witness, agreed with the discount rates that Mr. Fraker used in preparing the Warwick offering documents, for the purpose of valuing the TLA. Tr. 1319:11-23, Tr. 1320:16-1321:19; A1160-62. Dr. Kaplan testified that, even though he did not believe that the Court should adopt discounted cash flow model to determine the value of the TLA (Tr. 1274:13-1275:22, A1140-41), if the Court chose to do so, it "should use the relatively high discount rates that Mr. Fraker talked about [(35 to 50 -5-

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percent)]2 which reflect the inherent riskiness of this endeavor" to calculate the net present value of the TLA. Tr. 1321:6-12, A1162. Mr. Arthur Cobb, Innovair's expert, testified that, under his lost expectancy interest value calculation, he did not apply a discount rate to determine the fair market value of the TLA. Tr. 521:21-524:1, Tr. 726:3-12; A0917-20, A0969. But, when asked by the Court to identify what discount rates he would use, Mr. Cobb testified to a 25 to 40 percent discount rate. He stated: In this kind of investment, I would expect investors to look, and the Government identifies this range as well, for returns of 25 to 40 percent. There would be a discounting back to present value of that flow. Then there's some considerations to be made, Your Honor, about that number[,] kind of in the environment. . . . Tr. 522:21-523:3, A0918-19. Later, Mr. Cobb stated: The 24 to 40 percent rates that Ms. Floyd has, and I assume she got in consultation with her experts, are the kinds of rates that I, too, would expect in valuing that kind of business. Those kind of rates often are achieved in a riskier investment; say, a technology-sort of investment or not quite a venture capital, but near some venture capital in the 35 to 40 percent range. Tr. 527:1-19, A0923; see Tr. 521:21-522:25, Tr. 528:1-12; A0917-18, A0924. Further on, Mr. Cobb testified that the 25 percent range did not include all of the risks. Tr. 527:7-25, A0923; see also Tr. 731:6-732:22, A0970-71. Mr. Cobb stated: "If I'm at [a] 25 [percent discount rate], I [may] wrestle very hard and very long with kinds of additional discounts I may have because of the unique circumstances with [the] TLA. If I'm at the 40 percent [discount rate], I may have considered some of those risks." Tr. 528:8-12, A0924. On

Tr. 753:18-25, Tr. 771:21-772:10, Tr. 773:6-774:4; DX 254/3; A0980, A0993, A099596, A0555, A0597A-E. -6-

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cross-examination, Mr. Cobb testified that other risk factors that he would have had to consider include: the lack of employees other than Mr. Carmichael, Innovair's limited operating history, the competitive marketplace, and the fact that Innovair's customer based included underdeveloped countries. Tr. 731:6-732:22, A0970-71. Mr. Cobb never testified that it would be appropriate to utilize a 10 percent discount rate. Recognizing that Mr. Cobb's damages calculation was vulnerable to attack because Mr. Cobb did not utilize a discount rate to determine the net present value of the TLA, Innovair contended in its post-trial brief that, if the Court decided to use the discounted cash flow method for determining the fair market value of the TLA, it should use a 25 percent to 40 percent discount rate. Pl. Post-Trial Br. 49-53. Without citing any supporting law, testimony, or documents, Innovair argued that the Court should utilize a 25 percent discount rate if the Court determined that Innovair could have sold either 90 or 35 units from 1991 through 1998. Pl. PostTrial Br. 52-53, 53 n. 22. Nowhere in its brief does Innovair state that it would be appropriate for the Court to utilize a 10 percent discount rate.3 B. The Court Erred In Applying A 10 Percent Discount Rate

In determining the net income during the damages period, the Court essentially adopted Mr. Cobb's 50-unit scenario calculations, with the exception of the fact that it excluded damages for the first year, from 1991 through 1992. PX 9/50-52, A0783-85; Pl. Post-Trial Br. 43-44; Innovair Aviation Ltd. v. United States, No. 96-408C (Fed. Cl. Aug. 22, 2008) ("Innovair, slip op. __"), at 10-11. The Court selected a 10 percent discount rate, compounded annually, to discount the cash flow to 1992. Innovair, slip op. 11. The Court's rationale is as follows: "The

Likewise, in its reply brief, Innovair does not ever mention that the Court should use a discount rate less than 25 percent. -7-

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Court arrives at this figure based upon a determination of the risk factors in this case, including the risk of selling. [Whitney Benefits, Inc. v. United States, 30 Fed. Cl. 411, 416 (1994).]" The Court fails to cite any testimony or exhibits that were introduced during trial to support its conclusion that the discount rate should be 10 percent. Moreover, as we demonstrate below, the Whitney decision, which the Court does cite, fails to justify the Court's 10 percent discount rate because the property, the industries, the time periods at issue here are substantially different from those in Whitney. In addition, the 10 percent discount rate utilized in Whitney was a real, after-tax discount rate in which the Court explicitly accounted for inflation and taxes in both the cash flows and the discount rate, whereas, here, the Court does not fully take into account the effect of inflation or taxes. In short, the Court should reconsider the 10 percent discount rate it intends to utilize to calculate the fair market value of the TLA because that discount rate is unsupported. When utilizing a discounted cash flow method to determine the fair market value as of the property that was taken, the Court must discount the lost profits back to the date of the taking. Energy Capital Corp. v. United States 302 F.3d 1314, 1332-33 (Fed. Cir. 2002). The purpose of discounting is to: (1) account for the time value of money; and (2) adjust the value of the cash flow stream to account for risk. Id. "The discount rate represents the rate of return an investor would require in order to risk capital on the project." Eastern Minerals Int'l, Inc. v. United States, 39 Fed. Cl. 621, 626-27 (1997), rev'd on other grounds, Wyatt v. United States, 271 F.3d 1090 (Fed. Cir. 2001). "The higher the risk, the higher rate of return an investor would require." Energy Capital, 302 F.3d at 1331, n.6.

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In Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394 (1989),4 the Court applied a 10 percent discount rate to calculate the fair market value of real property, the value of which was based upon the amount of coal that could be extracted from the property. Id. at 409-12. In Innovair, the property at issue is personal property in the form of a technology license agreement to manufacture conversion parts for a 1930s aircraft, to convert that aircraft from a piston engine plane to a turbo-prop plane, and to sell the converted aircraft. No evidence was introduced at trial in this case to suggest that a discount rate for valuing real property in the coal industry is a valid benchmark for valuing personal property in the aircraft industry. Moreover, the two industries in Whitney and this case are vastly different. Coal is a commodity that is widely consumed and has a proven demand. The value of coal will depend upon its quality, and a well-established market exists for coal of various grades.5 In this case, the TLA gave Innovair the right to produce a product for which no certain market existed. Although there is a market for aircraft in general, the BT-67 was a new entry into the market, and demand for the product was not proven. As of the date of the taking in May 1992, Innovair and BTC had been able to sell only two aircraft in Innovair's territory, despite three years of marketing efforts. DX 321 (Aerial Surveys, delivered on 6/29/92, and Guatemala Air Force, # 1, delivered on 9/5/92), A0631; see JX 2/5, JX 7, JX 8; Tr. 152:3-20, Tr. 154:11-155:5; A1324, A011-16, A0017-20, A1329, A0884-85. Given these differences in the property and the industries in

The Court cited Whitney, 30 Fed. Cl. at 416, in its decision. Innovair, slip op. at 11. However, that decision does not explain the basis for the Court's decision to use a 10 percent discount rate. With respect to the discount rate, it simply explains why the property should be discounted using a compound rate of interest. Whitney, 30 Fed. Cl. at 416. The fact that the Court considered published prices in Coal Week for a determination of the fair market value of the coal indicates that there is a well-established market for coal. See Whitney Benefits, 30 Fed. Cl. at 411, n.15. -95

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question, there is no basis to conclude that the 10 percent discount rate applicable in Whitney is applicable here. In addition, the Court in Whitney concluded that the taking occurred on August 3, 1977, the date that Congress enacted the Surface Mining Control and Reclamation Act, and it applied a 1977 discount rate. Whitney, 18 Cl. Ct. at 397, 407, 412-13. Here, the Court ruled that the taking occurred on May 21, 1992, the date that Arizona district court approved the substitute res bond agreement. Innovair, slip op. at 6. No evidence was introduced at trial in this case to suggest that 1977 discount rates are valid measures of discount rates 15 years later in 1992. Given that interest rate and stock market (equity) returns change constantly, there is no reason to conclude that a discount rate applicable in 1977 would still be a valid measure in 1992. C. The Court Erred In Applying A Real, After-Tax Discount Rate

In addition, the Court erred as a matter of finance and economics when it relied upon the Whitney 10 percent discount rate to determine the discount rate that is appropriate here. By relying upon Whitney, the Court erroneously created an "apples-to-oranges" comparison, because the 10 percent discount rate in Whitney was a real,6 after-tax discount rate. See Whitney, 18 Cl. Ct. at 412, 413, n.17. The Court should have used a discount rate that took into consideration the fact that Mr. Cobb's cash flow projections were adjusted for inflation and were pre-tax figures. In determining a discount rate, courts should apply a real rate of return to discount cash flows that have not been adjusted for inflation. Eugene F. Brigham, Financial Management

A "real" discount rate is one for which inflation has been removed. For example, if the rate of return on treasury securities is five percent, when the inflation rate is three percent, the "real" rate of return is two percent. -10-

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Theory And Practice, 425-27 (3rd ed. 1982); see Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 544 (1983) (citing Culver v. Slater Boat Co., 688 F.2d 280, 308-10 (5th Cir. 1982) (en banc); O'Shea v. Riverway Towing Co., 677 F.2d 1194, 1200 (7th Cir. 1982)); Eastern Minerals, 39 Fed. Cl. at 39 ("Both experts used constant dollars in their calculations, so no inflation factor is included in our discount rate.") In Whitney, the Court utilized a "real,"10 percent discount rate to apply to projected cash flows from the mining operations which had not been adjusted for inflation. However, here, as the Court explained, Mr. Cobb's projections expressly included inflation adjustments. Innovair, slip op. 10.7 Thus, because Mr. Cobb's cash flow projections contained an inflation factor, the Court, in this case, should have utilized a discount rate that accounts for inflation, instead of the real, 10 percent discount rate that it obtained from Whitney. The Court has also erred in creating an "apples-to-oranges" comparison by relying upon Whitney's 10 percent discount rate, because it is an after-tax rate. Mr. Cobb's cash flow projections, upon which the Court relies to determine the fair market value of the TLA, Innovair, slip op. 10-11, were based upon pre-tax income,8 not after-tax income.9 As the discussion in

The Court stated: "Mr. Cobb set the initial price as $2,025,000 per unit, based on the UTC distributor agreement. He estimated that Innovair would apply an annual 3% increase to the pricing for non-UTC customers, and that UTC and Innovair had negotiated annual price increases to offset cost inflation." Innovair, slip op. 10. Mr. Cobb testified that Innovair was not subject to income tax because it was a Hong Kong company. Tr. 523:7-10, A0919; see PX 9/50-52; A0783-85 (no line item for taxes). Even though Innovair was a Hong Kong company and paid no income taxes, Innovair's tax status has no bearing upon a third party's valuation of the TLA. It is important to utilize an after-tax discount rate with after-tax projections because not doing so results in an overstatement of the value of the property. By way of explanation, interest on debt is tax-deductible and, thus, the net cost to the borrow is less that the stated interest rate. We can illustrate this. For example, interest on a $1,000 loan at an 8 percent rate is $80 per year. But, because the interest amount is tax-deductible, the loan-holder receives a tax savings of $24, at a tax rate of 30 percent ($80 x 30% = $24). Thus, the net after-tax cost of this debt is 5.4 -119 8

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footnote 9 illustrates, by relying upon the 10 percent, after-tax discount rate from Whitney to apply to pre-tax cash flows, the Court has, in effect, provided a method for overstating the value of the TLA, because the income has not been reduced for taxes, whereas the 10-percent Whitney discount rate has been reduced for taxes. D. The Court's Reliance Upon The Whitney 10 Percent Discount Rate Fails To Account For The Risks Associated With The BT-67 Conversion Project

By citing to Whitney, the Court in this case appears to have relied upon the Whitney rationale for its use of a 10 percent discount rate, yet the Court states that the discount rate was "based upon a determination of the risk factors in this case, including a risk of selling. Id." [Whitney, 30 Fed Cl. at 416]. Innovair, slip op. at 11. If, as the quoted language suggests, the Court included the risk factors in its computation of the 10 percent rate, then its reliance upon Whitney is misplaced, because in Whitney, the Court determined the risk factor separately from its determination of the discount rate. In Whitney, the Court justified its use of the low, 10 percent discount rate contained in the Boyd Plan by undertaking a separate sensitivity analysis which was designed to account for the risks that a potential buyer would consider in making an offer to purchase the property.10 Whitney, 18 Cl. Ct. at 412-15; see Eastern Minerals, 39 Fed. Cl. at 628-29. The Court in Whitney began with the 10 percent discount rate and its estimate of sales and production.11 It,

percent, not 8 percent
10

(= $80 - $24 ÷ $1,000).

The Court adopted the plaintiff's approach of using a lower discount rate, plus a "sensitivity analysis which incorporates all the risks a potential [] buyer would consider when making an offer to making an offer to purchase the property." Whitney, 18 Cl. Ct. at 412. If, in citing Whitney, the Court is relying upon the Bureau of Land Management ("BLM") Guide to Federal Property Appraisal (the "BLM appraisal guide") utilized in Whitney -1211

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then, compared a sensitivity analysis prepared as part of the mining plan to the base plan to calculate an 11 percent risk adjustment. Id. at 412-13. Using this 11 percent figure, it calculated the reduced value of the property. Id. at 412-13, 415 (in section "a. Assigned Reserves"). Thus, in the method utilized in Whitney, the Court estimated the property's own sales and profits; then, it discounted them to present value; and, finally, it further reduced the present value by 11 percent. Id. The Court, in this case, has not made any risk adjustment beyond the discount rate even though it noted obvious risks associated with its sales forecast of seven BT-67 sales per year, upon which it relied for its determination of damages. For example, the Court found "that Innovair would have made two sales per year in either the special missions or military market" and it found that "Innovair would have made [five] sales per year to UTC through the Distribution Agreement," yet it fails to identify to whom UTC would have made its five additional sales per year. Innovair, slip op. 9. Moreover, the Court did not determine whether the UTC contract was a "take or pay" contract, as Innovair contended, or whether Innovair would have had to litigate with UTC to force UTC to pay lost profits to Innovair if UTC did not purchase five kits per year from Innovair. Id. at 9. Clearly, these are significant risks associated Innovair's effort to sell seven planes per year from 1992 through 1998, particularly when it

to justify its use a 10 percent discount rate here, such reliance is erroneous for several reasons. See Innovair, slip op. at 11. First, the Whitney case did not state that the BLM appraisal guide was an authoritative source of finance and economics, nor did anyone in this case testify that it was. Second, it was an appraisal guide for appraising real property, not personal property. Third, the appraisal standards in effect in 1977, when the BLM appraisal guide was published, were significantly different in 1992 as a consequence of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act in August 1989, Pub. L. No. 101-73, § 1101 ("Purpose"), 103 Stat. 183 (codified in scattered sections of Title 12 of the U.S. Code). -13-

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recognized that, "by the end of 1991[, more than two years after it had commenced its sales efforts,] only nine BT-67s had been delivered, all of them outside of Innovair's territory." Id. at 8-9. Both Mr. Cobb and Mr. Fraker testified about the risk factors that justified considerably higher discount rates than the 10 percent discount rate that the Court utilized here. In suggesting that the discount rate was between 25 to 40 percent, Mr. Cobb acknowledged that an investment in a "technology-sort of investment," like the BT-67 project, would be risky. Tr. 527:7-528:12; A0923-24. He recognized that his 25 percent rate would have to be further adjusted to account for risks due to the small number of management personnel, the "upheavals between Innovair and Basler," the limited operation history, the competition, and the customer base in underdeveloped countries. Tr. 527:7-25, Tr. 528:8-12, Tr. 731:6-732:22; A0923-94, A0970-71. . Mr. Fraker testified that he utilized a 35 to 50 percent discount rate because it was "a

unique, unusual, more esoteric type of investment." Tr. 753:18-25, 767:6-768:12; A0980, A0991-92. Other factors that also made it a risky type of investment included the fact that (1) while some of the responsible parties had expertise in the business, others did not; and (2) the companies did not have a proven record of sales. Tr. 767:10-13, Tr. 767:21-768:12; A0991-92. Nowhere in its determination that the discount rate is 10 percent does the Court take into account the risk factors presented by Mr. Cobb, Innovair's expert, or by Mr. Fraker, who actually calculated the appropriate discount rate in the course of trying to raise capital on behalf of Innovair. The evidence introduced at trial by both Innovair and the Government leads to the conclusion that the discount rate should be 35 to 40 percent, not 10 percent, as the Court has concluded. For these reasons, we respectfully request that the Court reconsider its determination that

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a 10 percent rate should apply to discount the projected income of Innovair to find the value of the TLA. III. The Court Should Utilize The One-Year Treasury Bill Rate Of Interest For The Pre-Judgment Interest Rate

The Court has determined that Innovair is entitled to receive prejudgment interest, compounded annually. Innovair, slip op. 11-12. However, the Court has failed to identify what rate of interest should be applied. The Court should utilize the one-year Treasury bill rate, since the one-year Treasury bill rate is typically applicable to an obligation of the United States. United States v. Blankinship, 543 F.2d 1272, 1276 (9th Cir. 1976). A lower rate is particularly relevant in takings cases because "the obligation to pay the deficiency is an obligation of the United States, a creditor whose obligation embodies no risk of default." Id.; see also King v. United States, 205 Ct. Cl. 512, 520, 504 F.2d 1138, 1143 (1974) (Government bonds); Gargoyles, Inc. v. United States, 37 Fed. Cl. 95, 109 (1997) (52-week Treasury bills). Innovair has not undertaken any business risk in association with this award; litigation risk associated with the award is nonexistent because liability has already been determined; no collection risk exits because the [G]overnment never defaults on adverse judgments; and market risk is inapplicable because delay damages are calculated based on a market that has already acted. Id. at 109. Contract Disputes Act ("CDA") interest rates should not be applied across the board in calculating the delay component for just compensation because "the CDA interest rates typically are not a reasonable measure of property owner's economic loss resulting from a delay between the [G]overnment's appropriation of the property and its payment of the value of the property to the property owner." NRG Co. v. United States, 31 Fed. Cl. 659, 665 (1994). CDA interest rates -15-

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are based upon "'unique' circumstances [which are] part of the CDA's comprehensive revision of government contract law . . . [which] does not mean that these same rates would make economic sense in measuring the delay component of just compensation in takings cases." Id. at 666-67. "It would be generally inappropriate in takings cases to employ the dual fictions [upon which the CDA interest rates rely] that the property owner borrowed the entire value of the property at the five-year private commercial rate and that the loan was outstanding from the date of the taking to the date of payment." Id. The Court should utilize the one-year Treasury bill rate to calculate Innovair's interest award to place Innovair in as good a position as he would have occupied had the payment coincided with the appropriation. Rose Acre Farms, Inc. v. United States, 55 Fed. Cl. 643, 665 (2003), vacated on other grounds, 373 F.3d 1177 (Fed. Cir. 2004) (quoting Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 (1984)); accord, Vaizburd v. United States, 67 Fed. Cl. 499, 504 (2005). CONCLUSION For the foregoing reasons, we respectfully request that the Court grant the Government's motion for reconsideration. Respectfully submitted,

GREGORY G. KATSAS Assistant Attorney General

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

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/s/ Sheryl L. Floyd SHERYL L. FLOYD 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 Tele: (202) 616-8278 Facsimile: (202) 514-8624 Attorneys for Defendant SEPTEMBER 8, 2008

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CERTIFICATE OF FILING I hereby certify that on this 8th day of SEPTEMBER, 2008, a copy of this "DEFENDANT'S MOTION FOR RECONSIDERATION OF COURT ORDER DATED AUGUST 22, 2008" 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/ Sheryl L. Floyd