Free Post Trial Brief - 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, LTD., Plaintiff, v. THE UNITED STATES, Defendant.

DEFENDANT'S POST-TRIAL BRIEF

JEFFREY S. BUCHOLTZ Acting Assistant Attorney General JEANNE E. DAVIDSON Director SHERYL L. FLOYD Senior Trial Counsel BRIAN T. EDMUNDS 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 Attorneys for Defendant MARCH 3, 2008

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TABLE OF CONTENTS

INTRODUCTION ......................................................................................................................... 1 DEFENDANT'S BRIEF ................................................................................................................ 2 QUESTION 1: What is the proper legal standard for determining damages? ............................... 2 QUESTION 2: What is the most appropriate economic measure of damages? ............................ 2 I. The Best Measure Of Just Compensation Is The Comparable Sales Method ....... 2 A. "Just Compensation" Is The Fair Market Value Of The Property At The Time Of The Taking ..................................................................... 2 Courts Generally Favor The Use Of A Comparable Sales Method To Calculate Fair Market Value ..................................................................... 3 Consequential Damages Are Not Permitted In Takings Cases .................. 4 Speculative Damages Are Not Recoverable In Takings Cases ................. 5

B.

C. D. II.

The Most Appropriate Measure Of Fair Market Value Of The Technology License Agreement Is Based Upon The Comparable Sales Method Utilized By Dr. Daniel Kaplan ............................................................................. 6 A. The Fair Market Value Of The TLA Is The $1.375 Million That BTC Posted To Secure The Release Of The TLA .................................... 6 The Record Establishes That No Investors Were Willing To Pay More For The TLA Than $1.375 Million ................................................. 7 Dr. Kaplan's Method Of Calculating The Fair Market Value For The TLA Approximates The Comparable Sales Method ......................... 8 The Actions Of Potential Market Participants Support The Government's Position That The TLA Was Worth No More Than $1.375 Million ............................................................................... 10

B.

C.

D.

III.

The Income Capitalization Approach Is Not Appropriate Here Because No Reasonable Basis Exists To Estimate Projected Sales .................................. 11 A. Innovair's Method Of Calculating Damages Is Not A Fair Market Value Computation ................................................................................. 11 -i-

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B.

Innovair's Lost Expectancy Interest Value Approach Is A Disguised Lost Profits Calculation, Which Is Highly Speculative .......... 12 No Acceptable Projection Of Future Income For The TLA Exists, So The Capitalization Of Income Approach Cannot Be Used To Calculate The Fair Market Value Of The TLA ...................................... 13 1. The Capitalization Of Income Approach Is Used To Calculate Fair Market Value Only In Circumstances In Which The Assumptions Are Corroborated By Demonstrable Facts ............ 13 Cobb Does Not Provide An Acceptable Projection Of Future Income For The TLA To Use The Capitalization Of Income Approach In This Case ............................................................... 14 a. b. Cobb's Sales Projections Are Not Reasonable ................ 15 Cobb's Estimate Of Expenses Is Unreliable .................... 16 (i). Cobb's Business Model Is Unsupported By The Underlying Documents ................................ 16 Cobb's Model Ignores Start-Up Costs ................. 19

C.

2.

(ii). 3.

Mr. Cobb's Approach Is Incorrect Because It Fails To Account For Substantial Risks Associated With Innovair's Start-Up Effort ............................................................................. 19

D.

Mr. Cobb's Lost Expectancy Interest Value Calculation Is Not Supported By The Contemporaneous Record ......................................... 22 1. 2. 3. The Deloitte & Touche Sales Projections .................................... 22 The Madison Valuation Associates Report ................................ 24 The Warwick Confidential Memorandum ................................... 25

E.

Mr. Cobb's Lost Expectancy Interest Value Calculation Fails To Accurately Predict The Market For The BT-67 ...................................... 27

IV.

Interest Should Not Be Compounded .................................................................. 29

QUESTION 3: What are the dates of the relevant damages period? ........................................... 30 QUESTION 4: How many total kits would Innovair have sold? ............................................... 34 - ii -

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QUESTION 5: What is the profitability of each sale? ................................................................ 40 QUESTION 6: Did UTC and Innovair have an enforceable contract? If so, what were UTC's purchase obligations under the contract? ............................................................. 44 QUESTION 7: What value would an investor have placed on the TLA with the UTC contract? ........................................................................................................................... 47 QUESTION 8: Would Innovair have been profitable without access to the technology owned by BTC and BFS? ................................................................................................ 50 QUESTION 9: Would it have been more probable than not that Innovair could have obtained the various optional parts, such as the long range fuel tank, without cooperation from BTC and BFS? .................................................................................... 50 CONCLUSION ............................................................................................................................ 55 EXHIBIT A: Summary Of Innovair's Alleged Sales Opportunities EXHIBIT B: Valuation Of The TLA Assuming UTC Contract Is Enforceable And Is Take Or Pay Using Plaintiff's Damage Model

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TABLE OF AUTHORITIES CASES Alde, S.A. v. United States, 28 Fed. Cl. 26 (1993) ...................................................................................................... 30 Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973) .................................................................................................... 2, 12 Branning v. United States, 784 F.2d 361 (Fed. Cir. 1986) ........................................................................................ 29 C3 Media & Marketing Group v. Firstgate Internet, Inc., 419 F. Supp.2d 419 (S.D.N.Y. 2005) .............................................................................. 46 Carmichael v. Basler Turbo Conversions, Inc., 952 F.2d 1398, 1992 WL 9867 (7th Cir. 1992) ....................................................................................... 33 Cloverport Sand & Gravel Co. v. United States, 6 Cl. Ct. 178 (1984) .................................................................................................. 12, 27 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) ...................................................................................... 20 First Citizens Bank and Trust Co. of Utica v. Sherman, 250 A.D. 339, 294 N.Y.S. 131 (4th Dept. 1937) .................................................................................... 44 Foster v. United States, 2 Fed. Cl. Ct. 426 (1983) ......................................................................................... passim Franconia Assoc. v. United States, 61 Fed. Cl. 718 (2004) .............................................................................................. 27, 28 Gargoyles, Inc. v. United States, 37 Fed. Cl. 95 (1997) (52-week Treasury bills) ............................................................. 29 Georgia-Pacific Corp. v. United States, 226 Ct. Cl. 95, 640 F.2d 328 (1980) ................................................................................................. passim Innovair Aviation, Ltd. v. United States, 72 Fed. Cl. 415 (2006) .............................................................................................. 32, 42 - iv -

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Julius Goldman's Egg City v. United States, 697 F.2d 1051 (Fed. Cir. 1983) ........................................................................................ 3 Kearney & Trecker Corp. v. United States, 231 Ct. Cl. 571, 688 F.2d 780 (1982) ................................................................................................. passim Kimball Laundry Co. v. United States, 338 U.S. 1 (1949) ............................................................................................................ 12 King v. United States, 205 Ct. Cl. 512, 504 F.2d 1138 (1974) ............................................................................................... passim Kirby Forest Industries, Inc. v. United States, 467 U.S. 1 (1984) .............................................................................................................. 3 Klein v. United States, 179 Ct. Cl. 910, 375 F.2d 825 (1967), cert. denied, 389 U.S. 1037 (1968) .......................................................................... passim Knox v. Lee, 79 U.S. (12 Wall.) 457 (1870) .......................................................................................... 5 McGregor v. Dimou, 101 Misc.2d 765, 414 N.Y.S.2d 200 (N.Y. Civ. Ct. 1979) .......................................................................... 44 Mitchell v. United States, 267 U.S. 341 (1925) .......................................................................................................... 5 Monongahelia Navigation Co. v. United States, 148 U.S. 312 (1893) ........................................................................................................ 47 Olson v. United States, 292 U.S. 246 (1934) .......................................................................................................... 2 Omnia Corp. v. United States, 261 U.S. 502 (1923) .................................................................................................... 4, 46 Perry v. United States, 28 Fed. Cl. 82 (1993) ...................................................................................................... 29

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R.J. Widen Co. v. United States, 174 Ct. Cl. 1020, 357 F.2d 988 (1966) .......................................................................................................... 4 Rose Acre Farms, Inc. v. United States, 55 Fed. Cl. 643 (2003), vacated and remanded on other grounds, 373 F.3d 1177 (Fed. Cir. 2004) ..................... 29 Seravalli v. United States, 845 F.2d 1571 (Fed. Cir. 1988) ........................................................................................ 4 Sinclair Refining Co. v. Jenkins Petroleum P. Co., 289 U.S. 689 (1933) .................................................................................................. 27, 28 Snowbank Enterprises, Inc. v. United States, 6 Cl. Ct. 476 (1984) ...................................................................................................... 3, 6 United States ex rel. Tennessee Valley Authority v. Powelson, 319 U.S. 226 (1943) .......................................................................................... 2, 5, 14, 47 United States v. 15.00 Acres of Land, 468 F. Supp. 310 (E.D. Ark. 1979) ................................................................................... 5 United States v. 564.54 Acres of Land, 441 U.S. 506 (1979) ........................................................................................................ 12 United States v. Basler Turbo-67 Conversion DC-3 Aircraft, No. 94-16876, 1996 WL 88075 (9th Cir. Feb. 29, 1996) ........................................................................ 32 United States v. Blankinship, 543 F.2d 1272 (9th Cir. 1976) ........................................................................................ 29 United States v. Commodities Trading Corp., 339 U.S. 121 (1950) ...................................................................................................... 3, 4 United States v. General Motors Corp., 323 U.S. 373 (1945) ................................................................................................ 2, 4, 13 United States v. Miller, 317 U.S. 369 (1943) .......................................................................................................... 9 United States v. One (1),1979 Cadillac Coupe de Ville Vin 6D4799266999, 833 F.2d 994 (Fed. Cir. 1987) ......................................................................................... 30

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United States v. Sowards, 370 F.2d 87 (10th Cir. 1966) ............................................................................................ 4 W.W.W. Associates v. Giancontieri, Inc., 77 N.Y.2d 157, 566 N.E.2d 639 (1990) .................................................................................................... 45 Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394 (1989) .................................................................................................... 3, 4 Yaist v. United States, 17 Cl. Ct. 246 (1989) ...................................................................................................... 29 Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990) ........................................................................................ 4 Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577 (Fed. Cir. 1990) ........................................................................................ 2 MISCELLANEOUS 11-59 Corbin On Contracts (2007) .............................................................................................. 46 Nichols' Eminent Domain, The Law Of Eminent Domain (3ed. J. Sachman 1981) ..................... 4 4-12 B. Nichols On Eminent Domain §12B.09 (2007) ............................................................... 13

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS INNOVAIR AVIATION, LTD., ) ) ) ) ) ) ) ) ) )

Plaintiff, v. THE UNITED STATES, Defendant.

No. 96-408C (Senior Judge Smith)

DEFENDANT'S POST-TRIAL BRIEF Defendant, the United States, respectfully submits this post-trial brief in compliance with the Court's November 2, 2007, and February 2, 2008 scheduling orders. INTRODUCTION Just compensation in this case is best determined by using of a variation of the comparable sales method in which the value of the Technology License Agreement ("TLA") is based upon what the willing buyer, Basler Turbo Conversions, Inc. ("BTC"), would have paid to purchase the TLA that was effectively offered for sale by the United States in late 1991. Innovair Aviation, Ltd.'s ("Innovair") method for valuing the TLA, its "lost expectancy interest value" methodology, is based upon sales projections of hither-to unsold Basler Turbo-67 ("BT67") kits which are highly speculative, unfounded, and unreliable. Innovair's reliance upon the Distributor Agreement with United Technologies Corporation ("UTC") as a basis for projecting sales is precluded under takings law which declines compensation for frustrated contracts. Innovair provides no basis for recovering any additional damages as a result of the Government's seizure and unsuccessful forfeiture of the TLA.

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DEFENDANT'S BRIEF QUESTION 1: What is the proper legal standard for determining damages? QUESTION 2: What is the most appropriate economic measure of damages? THE MOST APPROPRIATE MEASURE OF THE FAIR MARKET VALUE OF THE TECHNOLOGY LICENSING AGREEMENT IS BASED UPON THE COMPARABLE SALES METHOD. I. The Best Measure Of Just Compensation Is The Comparable Sales Method A. "Just Compensation" Is The Fair Market Value Of The Property At The Time Of The Taking

The proper measure of just compensation for the Government's taking of private property is "the fair market value of [the] property at the time of the taking." Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 474 (1973). The owner is "entitled to be put in as good a position pecuniarily as if his property had not been taken. He must be made whole but is not entitled to more." Olson v. United States, 292 U.S. 246, 255 (1934); Foster v. United States, 2 Cl. Ct. 426, 445 (1983). The fair market value may be more or less than what the owner invested in the property. Olson, 292 U.S. at 255. "He may have acquired the property for less than its worth or he may have paid a speculative and exorbitant price. Its value may have changed substantially while held by him. . . . The public may not by any means confiscate the benefits, or be required to bear the burden of the owner's bargain." Id. Just compensation does not include lost profits. Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577, 1583 (Fed. Cir. 1990); United States v. General Motors Corp.. 323 U.S. 373, 379-80 (1945). "It is a well settled rule that while it is the owner's loss, not the taker's gain, which is the measure of compensation for the property taken, . . . not all losses suffered by the owner are compensable under the Fifth Amendment." United States ex rel. Tennessee Valley Authority v. Powelson, 319 U.S. 226, 281 (1943) (citations omitted).

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B.

Courts Generally Favor The Use Of A Comparable Sales Method To Calculate Fair Market Value

"`Just compensation' . . . means in most cases the fair market value of the property on the date it is appropriated." Kirby Forest Industries, Inc. v. United States, 467 U.S. 1, 10 (1984). Fair market value is defined as the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both being reasonably informed as to all relevant facts. Julius Goldman's Egg City v. United States, 697 F.2d 1051, 1054, n.3 (Fed. Cir. 1983). "Since the concept of fair market value is intimately related to the anticipated selling price of a particular piece of property, courts have generally recognized that sales of comparable properties provide the best evidence of market value." Snowbank Enterprises, Inc. v. United States, 6 Cl. Ct. 476, 485 (1984). The validity of the comparable sales approach to valuation depends upon the "degree of comparability between the subject property and the properties to be used for comparison." Id. Other measures of "just compensation" are employed only "when market value [is] too difficult to find, or when its application would result in manifest injustice to owner or public." United States v. Commodities Trading Corp., 339 U.S. 121, 123 (1950). "[T]he method selected cannot be so removed from economic reality that it is mere speculation or conjecture." Foster, 2 Cl. Ct. at 446. Under the income capitalization approach, "valuing the property [is] based on the discounted stream of income the property is capable of producing over its useful economic life." Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394, 408 (1989). Courts must distinguish between the property itself which has been taken and business losses which might result from the taking of the property. Id. at 409. The latter cannot be awarded because they are seen to be uncertain and speculative as a result of the fact that they "depend to a greater extent upon the

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amount of capital invested and the good fortune, business skill and management with which the business is conducted." Id. Even though "`the law is not wedded to any particular formula or method for determining the fair market value as the measure of just compensation,'" the method chosen must take into account all of the relevant factors which affect the fair market value determination of the property at issue. Seravalli v. United States, 845 F.2d 1571, 1575 (Fed. Cir. 1988) (citations omitted). "[W]hatever method is employed, the evidence offered must have a bearing upon what a willing buyer would pay a willing seller for the property on the date of the taking." United States v. Sowards, 370 F.2d 87, 90 (10th Cir. 1966). "[T]he dominant consideration always remains the same: What compensation is `just' both to an owner whose property is taken and to the public that must pay the bill?" Commodities Trading, 339 U.S. at 123. C. Consequential Damages Are Not Permitted In Takings Cases

Consequential damages are not recoverable in takings cases. General Motors, 323 U.S. at 379; Yancey v. United States, 915 F.2d 1534, 1542 (Fed. Cir. 1990); Georgia-Pacific Corp. v. United States, 226 Ct. Cl. 95, 147, 640 F.2d 328, 360 (1980); Foster, 2 Cl. Ct. at 445. "As a general rule, there is no compensation for frustrated contracts or for loss of future income. The sovereign must pay only for what it takes, not for opportunities the owner loses." Foster, 2 Cl. Ct. at 445 (emphasis added). "The frustration of plaintiff's `expectations' is not compensable." Kearney & Trecker Corp. v. United States, 231 Ct. Cl. 571, 576, 688 F.2d 780, 782 (1982); see also, R.J. Widen Co. v. United States, 174 Ct. Cl. 1020, 1029, 357 F.2d 988, 994 (1966); 4 Nichols' Eminent Domain, The Law of Eminent Domain § 12.22(2) at p. 12-111 (3d ed. J. Sachman 1981). Not all exercises of Governmental power that interferes with, or frustrates performance of a contract results in a compensable taking. See, e.g., Omnia Corp. v. United States, 261 U.S. -4-

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502, 510-11 (1923); Knox v. Lee, 79 U.S. (12 Wall.) 457 (1870); Kearney, 231 Ct. Cl. at 576, 688 F.2d at 783; Klein v. United States, 179 Ct. Cl. 910, 914-16, 375 F.2d 825, 828-29 (1967), cert. denied, 389 U.S. 1037 (1968). There are numerous consequential damages for which compensation is not required. For example, courts have concluded that, under a takings theory, costs are not recoverable for the frustration of a contract or business venture, the reduction in loss of goodwill and profits, or the loss of a business. See, e.g., Mitchell v. United States, 267 U.S. 341, 345 (1925); Georgia Pacific, 226 Ct. Cl. at 147, .44, 640 F.2d at 361, n.44; Kearney, 231 Ct. Cl. at 575-78, 688 F.2d at 782-84; Klein, 179 Ct. Cl. at 915, 375 F.2d at 829. D. Speculative Damages Are Not Recoverable In Takings Cases

"[T]he method selected [for determining fair market value] cannot be so removed from economic reality that it is mere speculation or conjecture." Foster, 2 Cl. Ct. at 446. "Elements affecting value that depend on events or combinations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable, should be excluded from consideration." Id. Under the Fifth Amendment, "the owner can recover only the fair market value of his property; it does not guarantee him a return of his investment." Powelson, 319 U.S. at 285. An owner cannot recover the amount of future profits it lost through the foreclosure of an anticipated or prospective business opportunity. Id.; United States v. 15.00 Acres of Land, 468 F. Supp. 310, 315 (E.D. Ark. 1979). Where an owner's "project was only a speculative venture ­ a promotional scheme wholly in futuro," he has "no interest under his unexercised power of eminent domain which rises to the estate of `private property' within the meaning of the Fifth Amendment." Powelson, 319 U.S. at 281.

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II.

The Most Appropriate Measure Of Fair Market Value Of The Technology License Agreement Is Based Upon The Comparable Sales Method Utilized By Dr. Daniel Kaplan A. The Fair Market Value Of The TLA Is The $1.375 Million That BTC Posted To Secure The Release Of The TLA

The comparable sales approach is regarded as the best method for determining the fair market value for a property that has been taken because "sales of comparable properties provide the best evidence of market value." Snowbank, 6 Cl. Ct. at 485. Of course, the comparable sales evidence "has probative value only if the subject and comparison properties have similar characteristics and if the comparison sales are not too remote in time or place from the applicable date of valuation and the site of the subject property." Id. Therefore, the best evidence of the fair market value of the property is based upon sales that are closest in time and in characteristics to the property that was taken. In this case, although the TLA was a one-of-a-kind asset, Tr. 1330:25-1331:2, A1165-66, not freely exchanged in the marketplace, the evidence in the record does establish what the fair market value was for the TLA at the time of the taking. Tr. 1331:16-1332:2, A1166-67.1 Dr. Daniel Kaplan testified that the best evidence of the market value for the TLA was what people were willing to invest in the TLA. Tr. 1275:10-16; A1141. Thus, the best estimate of the value of the TLA is the $1,375,000 bond that BTC posted to secure the release of the TLA. Tr. 1273:25-1274:8; DX323/34-3; A1139-40, A0709-10.

"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 which contains all of the documents referred to in this brief; A1265-A1319 consists of filings and orders issued by the district courts in Arizona and Wisconsin. "Pl. Br. ___" refers to plaintiff's post-trial brief, dated December 17, 2007. "Def. Br. __" is a citation to this brief. -6-

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Dr. Kaplan explained that the price in the marketplace is not established by the person who values the property the most. Tr. 1345:1-18, A1171. The market price is the price at which the second highest person values the property; it is the price that he had to pay to purchase the property. Id.; DX325/35; A1171, A0710. Because no one other than BTC attached much value to the TLA, no one else would be willing to pay much more than zero for the TLA, and that is why BTC's valuation of the TLA was so low. Id.; Tr. 1345:19-1346:13; A1171-72. B. The Record Establishes That No Investors Were Willing To Pay More For The TLA Than $1.375 Million

Prior to the seizure of the TLA, Innovair made efforts to secure investors to assist Innovair in sustaining and expanding the business. In early 1990, Mr. Bryan Carmichael, president of Innovair, prepared a five-year business plan to attract outside investors "interested in taking an equity position in the companies." JX67/3; A0330.2 In January 1990, Mr. Carmichael met with Mr. Thompson in connection with Mr. Carmichael's efforts to find an investor to purchase either Mr. Carmichael's interest in Innovair and BTC or to purchase the two companies. see DX319, 15:7-12; 58:25-59:10, 59:21-25; DX268/1-3; DX269; JX68/3, 39; A0609, A0615-16, A0598-600, A0604-05; A0402; A0438. In September 1990, Mr. Harry Eastlick, working on behalf of Innovair, met with Mr. Thomas Fraker from Warwick Consulting Group, Inc. ("War-wick") to solicit his help in trying to find potential investors for Innovair. JX24; Tr. 746:5-11; A0117-20, A0974. Later, in March 1991, Mr. Carmichael and Mr. Barry Wilson engaged Warwick, to try to secure additional capital for Innovair and to buy out the Baslers. JX34; Tr. 747:20-748:17, 749:8-20; A0180-90, A0975-77. Despite this significant

Mr. David T. Thompson, the partner of Deloitte & Touche ("D&T") who supervised the preparation of the Innovair and BTC projected financial statements, JX68, A0400-64, testified that the five year business plan was prepared by Mr. Carmichael, his client. See DX319, 83:4-11; A0626. -7-

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solicitation effort, DX173; Tr. 764:11-768:21, A0533-34, A0988-92, Warwick was unable to attract any potential investors. Tr. 765:22-767:9, A0989-91; see DX323/10, 32; A0685, A0707. In addition, as of November 1990, UTC tried to find investors for its joint effort with Innovair to establish a BT-67 conversion facility in Taiwan. Tr. 596:24-598:11, A0940-42. As of June 27, 1991, some of these investors decided against proceeding with the joint venture "due to insufficient evidence of TURBO-67 marketability." JX42/1, A0251; see Tr. 688:3-23, A0966A. In October 1991, UTC learned that Young Brothers Development Co., Ltd. ("Young"), which marketed Pratt & Whitney3 airline engines in the commercial market in the Far East, were unwilling to invest in UTC's conversion effort. DX218; Tr. 624:2-626:16; DX323/26; A0535, A0953, A0701. In fact, UTC never found any investors and never established a BT-67 conversion facility in Taiwan or anywhere else. Tr. 620:4-621:8; DX323/10; A0950-51, A0685; see DX323/25-27; A0700-02. Even Mr. Arthur Cobb, Innovair's financial expert, testified that he would not have expected any financial investors to have been interested in the BT-67 conversion project in late 1991 or early 1992. Tr. 524:21-526:19; A0920-22. Moreover, in examining whether synergistic investors, such as another aircraft converter, would have invested in the BT-67 conversion project, he concluded that there would not be a strong market for the TLA. Tr. 524:21-526:19, A0920-22. BTC was the only realistic purchaser of the TLA. Tr. 1322; A1163. C. Dr. Kaplan's Method Of Calculating The Fair Market Value For The TLA Approximates The Comparable Sales Method

To determine just compensation, the comparable sales method uses sales and purchases of other property that reasonably resemble the property at issue with respect to time, place, and

Pratt & Whitney, a subsidiary of UTC, manufactures airplane engines, including the PT-67 engine that was installed in the converted BT-67s. Tr. 569:12-570:3; A0932-33. -8-

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circumstances. Foster, 2 Cl. Ct. at 447. In examining the comparability of the transactions, courts consider the nature of the property sold and the primary interests of the parties, for example, whether the seller and purchaser are willing parties. Id.; United States v. Miller, 317 U.S. 369 (1943). The Government's disposal of the TLA in its negotiations with Innovair and BTC approximates a comparable sale of the TLA because the property being disposed of is, in fact, the same property of which this Court is determining the fair market value. Moreover, the Government negotiated with the parties and reach a price for the posting of the substitute res bond within the same time frame as the taking. Finally, the parties involved in the negotiations were a willing seller and a willing buyer. BTC, as the willing buyer, was not under any compulsion to purchase the TLA. BTC was motivated to post the substitute res bond to acquire the TLA so that it could use its facilities in Oshkosh, Wisconsin, and to use its technology and knowledge base more fully. Tr. 1313:714; A1154. Moreover, BTC was motivated to post the bond in order to eliminate potentially conflicting goals and incentives that another owner might have if it had acquired the TLA and had to work with BTC. Tr. 1322:5-1323:10; A1163-64. The Government seized the TLA on July 16, 1991, as proceeds from illicit Air Colombia operations. A1279, A1283-84. The Government sought to dispose of the TLA by entering into negotiations with Innovair for the posting of the substitute res bond and, subsequently, with BTC when Innovair withdrew from negotiations. A1284-87. The Government functioned as a willing seller. Having seized the TLA, the Government's only interest in the TLA was in its cash equivalent; it was not interested in converting DC-3 aircraft to BT-67s. The Government agreed with Innovair and BTC that the Arizona district court should release the TLA from its

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jurisdiction as soon as possible because it knew that the value of the TLA would decline if its marketing rights remained unused. A1297-99. D. The Actions Of Potential Market Participants Support The Government's Position That The TLA Was Worth No More Than $1.375 Million

The lack of interest on the part of Messrs. Carmichael and Wilson to post a bond to secure the release of the TLA demonstrates that they did not see a significant profit potential from the TLA. Mr. Carmichael, operating through Innovair's counsel, Ms. Katherine Lunsford, offered two different proposals to secure the release of the TLA. JX64/6; A0316, A1285-86. In the first, on September 6, 1991, Innovair offered to post Innovair's assignment of a $1.25 million account receivable owed by BTC for sale of the conversion prototype.4 A1285. In the second, on November 15, 1991, Innovair offered to assign its portion of the interlocutory sales proceeds (approximately, $698,140), plus the right to receive any of the proceeds from the sale of two planes (up to $1,375,000) to the Government in exchange for the release of the TLA. JX64/6; A0316, A1286. Despite the claims by Innovair's expert, Mr. Cobb, that the TLA would generate profits of between $13 million and $57.9 million, PX9/53-55, A0778-80, Messrs. Carmichael and Wilson did not post a cash bond. Tr. 1314:14-24; A1155. Neither Mr. Carmichael, nor Mr. Wilson offered any evidence that the lack of resources was a constraint in posting a cash bond. In fact, Mr. Cobb, testified that they "stood ready to make substantial cash infusions" into Innovair, yet they did not do so when the Government asked Innovair to post a bond to secure the release of the TLA. See Tr. 1527:4-13; A1206.

Innovair withdrew its offer because the Wisconsin district court denied Innovair's motion for preliminary injunction to require BTC to transfer the technology owed to Innovair under the TLA. JX56/1, JX64/6; A0273, A0316. -10-

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BTC's and Innovair's lack of competitors in converting the DC-3 to the BT-67 also reflects the lack of profitability of such a venture and indicates that the TLA was not valuable. In December 1983, United States Aircraft Corp. ("USAC") obtained a Supplemental Type Certificate ("STC") to convert DC-3s to turbine engine aircraft by expanding the fuselage by 40 inches. JX12/7; A0027. However, by 1987, USAC was out of business. Tr. 51:7-25; PX313A I, 36:11-16; A0871, A1221. In August 1987, Aero Modifications International ("AMI") obtained an STC to convert DC-3 aircraft and it sold converted DC-3s in South Africa, but it was otherwise unsuccessful in manufacturing and selling converted aircraft in the United States market and overseas. JX12/8; Tr. 147:15-149:2; A0028, A0879-81. Innovair's projections of potential sales, as presented in Innovair's business plan, the D&T projected financial statements, and the Warwick Confidential memorandum suggest that the DC-3 conversion effort would have been a very profitable endeavor. Tr. 1315:19-1316:2; A1156-57. However, since the seizure of the TLA, no has come forward to claim these supposedly significant profit opportunities. Tr. 1316:3-23; A1157. The failure of other enterprises to develop the technology to convert the DC-3s and to sell the converted aircraft leads to the conclusion that Innovair's projections were wildly overstated and the TLA was not worth more than the $1.375 million that BTC posted to secure the release of the TLA. Tr. 1314:25-1317:8; DX323/30; A1155-58, A0705. III. The Income Capitalization Approach Is Not Appropriate Here Because No Reasonable Basis Exists To Estimate Projected Sales A. Innovair's Method Of Calculating Damages Is Not A Fair Market Value Computation

Mr. Cobb's "lost expectancy interest value" approach to calculating damages is not one of the three recognized methods ­ comparable sales method, income capitalization, and the cost approach -- for calculating fair market value under takings law. See Cloverport Sand & Gravel -11-

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Co. v. United States, 6 Cl. Ct. 178, 189 (1984). Mr. Cobb did not purport to calculate the fair market value of the TLA at the time it was taken. Tr. 413:6-23, 726:3-7; A0914, A0969. This lost expectancy interest value of the TLA is not measured in the marketplace in terms of a willing buyer and a willing seller. Rather, it is measured from the perspective of the owner. Tr. 529:17-22; 725:15-726:12; A0925, A0968-69. Mr. Cobb tried to calculate the value of what Innovair lost by no longer owning the TLA. Id. "[F]air market value does not include the special value of property to the owner arising from its adaptability to his particular use." United States v. 564.54 Acres of Land, 441 U.S. 506, 511 (1979). "The value compensable under the Fifth Amendment, therefore, is only that value which is capable of transfer from owner to owner and thus of exchange for some equivalent." Kimball Laundry Co. v. United States, 338 U.S. 1, 5 (1949). "[An owner] whose property is taken often receives less for his [property] than whatever special value [it] had to him before the taking." Cloverport, 6 Cl. Ct. at 187. For these reasons, Mr. Cobb's method of calculating damages does not reflect the damages to which Innovair is entitled under the Fifth Amendment. See 564.54 Acres of Land, 441 U.S. at 511; Almota Farmers, 409 U.S. at 474. Because his approach does not purport to determine the value the TLA in terms of the value that can be transferred from owner to owner, Mr. Cobb's damages calculation is irrelevant to the Court's determination of fair market value of the TLA. See Kimball Laundry, 338 U.S. at 5. B. Innovair's Lost Expectancy Interest Value Approach Is A Disguised Lost Profits Calculation, Which Is Highly Speculative

Mr. Cobb characterizes lost expectancy interest value calculation as being similar to a lost profits approach, yet, he notes, his approach excludes any lost profits Innovair would have received for the sale of spare parts and any damages beyond 1998. Tr. 412:20-413:5, 413:18-23; 519:23-521:4; PX9/5; A0913-14, A0915-17, A0769. Mr. Cobb would have us believe that, by

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excluding these particular lost profits, he has avoided all of the problems associated with a lost profits calculation in the takings context. That is not the case. Using a lost profit methodology to calculate fair market value is highly speculative. "Future profits depend on so many contingencies that an accurate valuation cannot be based on them. Experience and observation both show that profits projected on paper for the future are more often illusory than real." 4-12B Nichols on Eminent Domain § 12B.09, ¶ 2 (2007). Thus, "compensation for the interest does not include future loss of profits." General Motors, 323 U.S. at 379. C. No Acceptable Projection Of Future Income For The TLA Exists, So The Capitalization Of Income Approach Cannot Be Used To Calculate The Fair Market Value Of The TLA

Innovair contends that because Mr. Cobb's lost expectancy value approach is similar to the capitalization of income approach, which has been accepted as a method for calculating fair market value by this Court, his approach should accepted here. See Pl. Br. 8-11. Contrary to Innovair's contention, the acceptability of the capitalization of income approach in other contexts does not justify using Cobb's lost expectancy value approach for determining Innovair's damages here. First, courts employ the capitalization of income approach only in limited circumstances in which projections are reliable and reasonable, circumstances which are not present here. Second, Innovair's lost expectancy value methodology differs significantly from the capitalization of income approach because it fails to discount for risks, uncertainties, and other variables to arrive at the present value of the TLA. 1. The Capitalization Of Income Approach Is Used To Calculate Fair Market Value Only In Circumstances In Which The Assumptions Are Corroborated By Demonstrable Facts

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compensation for the loss of prospective or anticipated business opportunities." Foster, 2 Fed. Cl. at 448. The capitalization of income approach has become acceptable in situations "where [the] income producing potential is a key element for both buyer and seller in many negotiations in arriving at a fair price." Id. However, "[this] method [is appropriate] only when actual income from the property can be established in a continuing on-going business. It is of little value where the realization of an opportunity for income was not even begun as of the date of taking." Id.; see Powelson, 319 U.S. at 281. For these reasons, the income capitalization approach should not be used to award damages based upon speculative assumptions that are not corroborated by demonstrable facts. Foster, 2 Cl. Ct. at 451. The evidence must establish that informed buyers would be willing to pay for the items produced by the property that has been taken. See id. at 446. Innovair had not produced or sold in the international market any BT-67 kits5 as of the time of the taking. See 1472:24-1473:15; JX46/1; A1196-97, A0257. Given that Mr. Cobb's projections are based upon hypothetical sales of BT-67 kits, which are unsubstantiated and unsupported by any actual sales, Cobb's methodology cannot serve as a basis for the capitalization of income approach for the fair market value of the TLA. 2. Cobb Does Not Provide An Acceptable Projection Of Future Income For The TLA To Use The Capitalization Of Income Approach In This Case

Mr. Cobb's approach is not reasonable because it provides "no basis to come up with reasonable estimates about what the sales would be . . . looking forward at the time of the . . . taking." Tr. 1275:10-22; A1141. In addition, it relies upon Innovair's estimated costs and

The BT-67 kit included all of the component parts that were required to build an aircraft that would comply with BTC's base STC 4840, but did not include any of options. Tr. 916:21-917:1; A1064-65. UTC agreed to purchase a kit, continent upon its finding a buyer for the aircraft, JX46, A0257-58, but no buyer was found. -14-

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revenues which "were developed as part of an attempt by [Innovair] to attract investors and are not, by definition, objective. As a result Cobb's projections are not based on any recognizable methodology." DX323/29-30, A0704-05; see DX324/9-13, A0732-36. a. Cobb's Sales Projections Are Not Reasonable

Under takings law, the value of the property must not be based upon speculation. The evidence must demonstrate that an informed buyer would be willing to pay such a price. Foster, 2 Cl. Ct. at 446. There must be a showing that there is a market for the property that has been taken. Id. A plaintiff's "failure to anchor [its] assumptions to information corroborated by demonstrable facts renders the computations mathematical exercises unrelated to reality." Id. at 451. "Mr. Cobb failed to account for the mission requirements for specific markets, and overstated the market in his projections." Tr. 1178:3-8; A1135. As we explain in greater detail in our response to Question # 4, there were no sales, nor would there have been any B-67 sales into the passenger aviation market. Tr. 1106:5-1107:11,1109:3-112:3; A1089-90, A1091-94. No sales have occurred or would have occurred in either the general cargo market or the package-express feeder market. Tr. 1122:24-1124:17, 1125:22-1126:19, 1129:15-1130:22, 1133:21-1138:8; A1097-99, A1100-01, A1102-03, A1106-11. Although the BT-67 would have been competitive in the special missions market, that market is quite limited. Tr. 1155:231169:6; A1114-28. There is no basis to conclude that, had Innovair been selling BT-67 aircraft, it would have sold more than two or three planes per year in special missions market. DX322/15-18; A0648-51. Even if two to three BT-67 aircraft per year could have been sold in the international market from 1991 through 1998, Mr. Cobb's representation of Innovair's market opportunities is fundamentally irrelevant because Innovair's market was the BT-67 kits, not BT-67 aircraft. Mr. -15-

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Cobb did not demonstrate that Innovair's kit strategy was a viable business strategy.6 No evidence was provided that there was a market for conversion kits. DX324/8-9; Tr. 1171:181172:4, 1413:12-1415:3; A0731-32, A1129-30, A1185-87; see DX322/22-24; Tr. 1061:14-25; A0655-57, A1084. Mr. Arvai explained that Innovair's kit strategy was flawed for a number of reasons: (1) airlines want to buy planes, not kits, because taking planes out of service to convert DC-3s to BT-67s via kits interferes with an airline's customer base; (2) Innovair had no financing or leasing programs available to assist Third World countries purchase the conversion kits; (3) customers want warranty and technical support from a single responsible party; and (4) the sales volume of two to three kit sales per year would not support multiple conversion centers which Innovair proposed to establish. Tr. 1172:5-18, 1173:16-1176:8, 926:16-928:5; A1130, A1131-34, A1069-71; see DX322/22-24; A0655-57. Buyers are interested in purchasing a completed aircraft; they are not looking for a project. Tr. 927:12-928:5; DX322/23-24; A107071; A0656-57.7 b. Cobb's Estimate Of Expenses Is Unreliable (i). Cobb's Business Model Is Unsupported By The Underlying Documents

In developing his model, Mr. Cobb relied upon the BTC/Innovair business plan and the D&T report as well as the Warwick report. PX9/46; A0774. However, each of these approaches represents a different business strategy. The three inconsistent business models cannot possibly Mr. Carmichael never planned to develop an overseas facility to manufacture conversion kits. PX313A II, 160:8-20, 164:4-166:7, 166:18-168:1, 173:4-174:16; A1225-26, A1227. Mr. Thomas Weigt, president of BTC, also testified that Innovair's kit strategy was flawed because of the significant labor and expertise involved in bringing a used DC-3 airframe back to its original condition in order to install the BT-67 components. Tr. 927:12-928:5; A1070-71. He noted that the after sales service which BTC provides is an important part of making a sale, especially in Third World countries. Tr. 926:16-927:11; A1069-70. All of BTC's customers have visited the Oshkosh conversion facility before purchasing a plane. Tr. 881:21882:5; A1033-34. -167 6

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support Mr. Cobb's financial model. His reliance upon the three inconsistent approaches leads to an unreliable financial model of Innovair's business strategy and the lost profits Innovair would have achieved as a result of the loss of the TLA. With respect to the 1990 BTC/Innovair business plan, JX67 (A0328-99), the companies contemplated that selling an equity interest in the project to outside investor(s) would assist them in getting ready for rapid expansion. JX67/3; A0330. At this time, Innovair contemplated that it would continue in business with BTC and that Basler Flight Service ("BFS"), a company wholly owned by Mr. and Mrs. Basler ("the Baslers"), would continue to convert DC-3s to BT-67s for sale in the United States, and Innovair would have either BFS convert DC-3s on behalf of Innovair or Innovair would set up its own conversion facilities outside the United States. Tr. 1582:18-20, 1583:1-1584:20; A1209-11; see JX67/10; A0337. With respect to the Innovair/BTC projected financial statements prepared during the first half of 1990, Mr. Carmichael indicated that he was no longer interested in taking the combined companies, BTC and Innovair, "through the next stage of growth," so he requested D&T to assist him in selling off his interest. Tr. 1585:2-1587:4; DX268/1-2; A1211a-13, A0598; see DX319, 52:21-56:9, 58:25-68:18; A0610-14, A0615-25. Thus, the D&T financial statements were designed to assist prospective sophisticated investors to develop their own conclusions about the value of the business. Id.; JX68/4, A0403. Under this plan, during the projection period, which extends from 1990 through December 1994, "all kits are projected to be manufactured by BTC and shipped directly to the customers," and sales were projected to be made primarily through five distributors to be appointed around the world.8 JX68/18; A0417. It was anticipated that

BFS would also be available to perform conversions for Innovair customers who wanted the conversion to be performed in the United States. JX68/45; A0444. -17-

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Innovair would have a sales and head office in Hong Kong, with only limited general and administrative personnel and overhead. Id. Mr. Carmichael requested Warwick to develop a solicitation to attract potential outside investors in connection with the Carmichael group efforts to acquire control of both BTC and Innovair. JX34/1-2, 7; A0180-81, A0186; see Tr. 749:8-20, 1587:3-1588:10; A0977, A1213-14. Under this plan, it was envisaged that the Baslers would play no role in the use of the BT-67 technology. See JX41/48-49; A0238-39. Innovair anticipated that it would move its kit manufacturing out of Oshkosh, Wisconsin, and that its primary conversion facility for international sales would be in Taiwan. JX41/54; A0244. Given that the three plans represent vastly different conceptions of who would control and operate the companies, whether Mr. Carmichael or the Baslers would be involved in operating the companies, where the conversions would take place, and what the sources of financing would be, there is no coherent business model. Tr. 1415:4-1416:12; A1187-88. Moreover, these business models are not consistent with Mr. Cobb's picture of the financial model, upon which he based his lost expectancy interest value calculation. Tr. 1415:18-1416:12; A1187-88. Mr. Cobb bases his analysis of projected expenses in large part upon the D&T calculations. See PX9/59-63; A0784-88. However, under the D&T plan, Innovair was going to work with the Baslers in supplying conversion kits and in converting the DC-3s to BT-67s, whereas, under the business plan about which Messrs. Wilson and Clark testified, Innovair did not anticipate that it would continue to work with the Baslers. Tr. 1415:18-1416:12, 1448:11-24; A1187-88, A1191. Because there is a disconnect between the actual business model and the financial presentation, a good basis for Innovair's calculation of damages does not exist. Id.

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(ii).

Cobb's Model Ignores Start-Up Costs

Mr. Cobb's business model is also unreliable because he ignores start-up costs associated with Innovair's taking over all of the operations that the Baslers had previously performed. Innovair would have had to incur certain start-up costs associated with buying out the Baslers and establishing its own conversion. Tr. 1448:25-1449:24; A1191-92. Mr. Whalen testified that he based his estimate of Innovair's need for $5 to $10 million in start-up costs upon the estimates Warwick realized were necessary for Innovair to raise capital. Tr. 1449:10-18; DX324/17; A1192; A0740. Some of the $5 to $10 million in costs were ex-pressly for start-up and operations oriented activities. JX34/9; A0188; see Tr. 1486:121488:9, 1510:22-1511:15; A1199-201, A1204-05. Other costs were associated with buying out the Bas-lers and recovering from debt so that Innovair could control the technology and operate without having to deal with the Baslers. JX34/9; A0188.9 Messrs. Carmichael and Wilson determined that between $5 and $10 million was necessary for them to start up their business independently from the Baslers. see generally, Tr. 754:7-756:7; A0981-83. Mr. Cobb's business model is unreliable because it ignores all of these start-up costs. Tr. 1448:25-1449:24; A119192. 3. Mr. Cobb's Approach Is Incorrect Because It Fails To Account For Substantial Risks Associated With Innovair's Start-Up Effort

As Mr. Cobb admits, his lost expectancy interest value calculation is essentially a lost profits approach. Tr. 412:20-413:5, 519:24-521:4; A0913-14, A0915-17. He further admits that his approach does not attempt to capture the fair market value for the TLA. Tr. 726:3-12;

In the alternative, Innovair wold have to continue to compete with the Baslers and also to litigate against them in an effort to obtain the documentation underlying STC 4840 and to resolve other matters at issue between the Carmichael and Basler groups. Management time and legal fees costs are not in Mr. Cobb's model. See generally, Tr. 974:11-977:24; A1073-76. -19-

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A0969. Moreover, Mr. Cobb acknowledges that his lost expectancy interest value approach differs from the capitalization of income approach in that it does not utilize a discount rate to determine the net present value of the TLA. Tr. 521:21-524:1; A0917-20; see Foster, 2 Cl. Ct. at 447 ("the capitalization of income approach (sometimes referred to as `discounted cash flow' or the `present worth of future income') . . . relates to earnings that reasonably could be expected to be derived from the property, discounted for risks and other variables, to arrive at a present value). Thus, Cobb's failure to apply a discount rate renders his lost expectancy interest calculation useless for the determination of just compensation of the TLA. Tr. 1318:5-20; A1159. Under a method which relies upon projected lost profits to determine the value of what was lost, the lost profits must be discounted back to the date of the taking. Energy Capital Corp. v. United States, 302 F.3d 1314, 1333 (Fed. Cir. 2002). "When calculating the value of an anticipated cash flow stream pursuant to the [discounted cash flow], the discount rate performs two functions: (i) it accounts for the time value of money; and (ii) it adjusts the value of the cash flow stream to account for risk." Id. The appropriate discount rate is a question of fact. Id. In May 1991, Mr. Fraker determined that "the discount rate associated with the risk of the investment" would be in "[a] range from 35 to 40, [or maybe] 50 percent." Tr. 771:8-772:7; DX254/3; A0993-94, A0555. In addition, Warwick reduced Innovair's projected sales forecast by 50 to 75 percent to reflect the impact of sales upon the value of the business. Tr. 773:6774:10; DX 262/2-4; A0995-96, A0597B-D. The discount rates in the range of 35 to 40 percent were based upon the substantial risks inherent in Innovair's projected DC-3 conversion project. For example, the Madison Valuation Associates ("Madison") report ("Madison Report"), which was prepared to assist the Baslers to decide how to structure the business and operate in the future of BTC, concluded that the discount rate associated with Innovair's conversion effort was 35 to 50 percent. DX105/3, 14; -20-

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A0473, A0484. The factors that contributed to this discount rate included: "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." DX105/14-15; A0484-85. Mr. Cobb recognized that there were risks associated with Innovair's conversion effort, including the fact that Innovair operation was similar to that of a start-up company, the lack of management depth at Innovair, the lack of employees other than Mr. Carmichael, Innovair's limited operating history, the competitive marketplace, and the fact that Innovair's customer base included underdeveloped countries. Tr. 731:6-732:22; A0970-71. Mr. Fraker characterized the technology as a "very unique, unusual, more esoteric type of investment." Tr. 767:6-13, 767:21-768:12; A0991-92. Mr. Cobb acknowledged that, if a discount rate were applied, it would be from 25 to 40 percent. Tr. 526:20-528:12; A0922-24.10 However, disinterested third parties, Warwick and Madison, who estimated the appropriate discount rate at the time in question, and not in the heat of litigation, evaluated the discount rates to be in the 35 to 40 percent range.11 Tr. 753:18-25,

Mr. Cobb erroneously suggested that there was no need to apply a discount rate because prejudgment interest would also be applied and they would essentially cancel out one another. See Tr. 558:22-560:16; A0928-30. Dr. Kaplan demonstrated that Mr. Cobb's assumption that no discounting is required was wrong because the discount rate would be much higher than the prejudgment interest rate. Tr. 1318:5-1319:13, 1320:20-1321:19; A1159-60, A1161-62. Madison used discount rates that differed depending upon how many years into the future the sales were projected to be made. For sales in the first five years, Innovair's annual income from projected sales to UTC ("U.P.A.C.," United Pacific Aircraft Corp., UTC's joint venture company in Taiwan) was discounted at 30 percent and all other sales were discounted at a rate of 35 percent. DX105/14; A0484. For sales occurring six years or later, from 1996 through 1998, Innovair's annual income from projected sales to UTC (U.P.A.C.) was discounted at 45 percent and all other sales were discounted at a rate of 50 percent. DX105/16; A0486. Given that Innovair has valued the TLA based upon a mix of sales, both UTC and non-UTC sales, over a seven-year period, Madison's analysis demonstrates that using a net present value rate of 35 to 40 percent is reasonable. -2111

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771:21-772:10, DX254/3, DX105/14,; A0980, A0993-94, A0555, A0484; see Tr. 751:12753:25; JX34/8; Tr. 1320:20-1321:19; A0978-80, A0187, A1161-62. Mr. Fraker testified that the market discount rate for Innovair and the TLA was in the range of 35 to 40 percent, if not higher. Tr. 753:18-25, 771:21-772:10; DX254/3; A0980, A0993, A0555. Therefore, if damages in this case were calculated using the capitalization of income approach, the discount rates that Mr. Fraker used -- 35 or 40 percent ­ reflect the inherent riskiness of this endeavor. Tr. 1320:20-1321:19; A1161-62. This clearly demonstrates that, for the 90-unit scenario, the discount rate should be 35 to 40 percent, not 25 percent, as Innovair contends, Pl. Br. 52. Tr. 753:18-25, 771:21-772:10, DX254/3; DX105/14, 16; A0980, A099394, A0555, A0484. Moreover, the 90-unit scenario has substantially more risk than Cobb's alternative 50-unit scenario, see PX305, A0842-50, given that sales for the 90-unit scenario are 80 percent higher than for the 50-unit scenario. Therefore, it is erroneous to use the lowest discount rate from the range of acceptable discount rates. D. Mr. Cobb's Lost Expectancy Interest Value Calculation Is Not Supported By The Contemporaneous Record

The determination of value "embraces all the facts and circumstances a reasonable, fullyinformed and knowledgeable willing seller and willing buyer would consider at the time of a hypothetical transaction on the date of the taking." Georgia-Pacific, 226 Ct. Cl. at 107, 640 F.2d at 337. Taking into account all of the circumstances reasonably available that a prospective buyer would have had available and considered, it is clear that Mr. Cobb's sales projections are unsupported and that the TLA was worth no more than $1.375 million when it was transferred to BTC. 1. The Deloitte & Touche Sales Projections

As of November 1991 or May 1992, whichever date the Court determines the taking occurred, a fully informed and knowledgeable buyer would not rely upon the sales projections

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contained in the D&T financial statements. These projected financial statements contain significant disclaimers. First, D&T states that the projections were prepared to assist certain stockholders "to sell all or part of their interests in the Company to sophisticated investors who will be able to question management of the Company directly about any or all assumptions, and should not be used for any other purpose." JX68/3; A0402. Moreover, the financial statements are characterized as a compilation report, not as an audit. As such, the compilation is limited to presenting, in the form of a projection, information that is the representation of management of [Innovair] and does not include evaluation of the support for the assumptions underlying the projections. Id. It expressly states that D&T did not examine the projection and, thus, "[did] not express an opinion or any other form of assurance on the accompanying statements or assumptions." Id. Accordingly, D&T did not state that the projections were "realistic" or "achievable;" rather, it warned Carmichael that the projections could not be used in a selling document to raise capital even though they could be used in discussions with sophisticated buyers. DX319, 127:8-128:11; DX268/4-5; DX269; A0629-30, A0601-02, A0604-05. The D&T report projected that 38 units would have been sold by the end of 1991. JX68/9; A0408. As of December 1991, only nine BT-67 units had been delivered and none of them were non-FMS international sales, with which Innovair would have been credited. DX321; JX1/2-3, ¶ 3.023; A0631; A0001A-B.12 If the date of the taking is determined to be May 1992, the D&T report projected that a total of 83 sales would have occurred by the end of 1992. JX68/9; A0408. Given that only 10 BT-67 aircraft had been delivered by May 5, 1992, and none

Mr. Weigt testified that production lead time from contract signing to delivery is approximately six months, so, if the date of the taking is November 1991, for Innovair to have met its projected deliveries by the end of 1991, it would have had to entered into 29 additional contracts and be in the process of producing those 29 kits/aircraft by November 1991. Tr. 882:6883:8, 912:2-913:8; A1034-35, A1060-61. -23-

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of them to non-FMS international customers, Innovair would have had to have contracted for the sale of 73 BT-67 additional kits or aircraft to have met that projection. Clearly, a sophisticated investor could not possibly rely upon the projections contained in the D&T report for the purposes of valuing the TLA. In his January 22, 1990 letter, Mr. Thompson of D&T advised Mr. Carmichael against performing a valuation of Innovair because it would, "of necessity, [have to] be a very conservative estimate weighted heavily towards the historical costs of acquiring the assets owned by the Company," i.e., the TLA for which Innovair had paid $1,675,000. DX268/3; Tr. 1432:9-1433:5; A0600; A1189-90. As for areas of concern, Mr. Thompson noted that Innovair and BTC were "at the start-up stage and lack[ed] operational, material management, cost accounting and other procedural systems," "[were] short on operational management expertise and anticipate[d] growing from nothing to $50 million in sales in 1990." DX268/2; A0599. None of Mr. Thompson's concerns had been cured as of the date of the taking. 2. The Madison Valuation Associates Report

The Madison Report, issued in March 1991, assigned a value of $1.9 million to Innovair. DX105/4; A0474. However, this value is based upon the assumption that "the contractual and functional business relationships between BFS, BTC, and [Innovair would] be maintained and that the current stockholders and managers of each of the entities will work together for the overall success of the venture." DX105/3; Tr. 1281:1282:8; A0473, A1142-43. Moreover, [f]ailure of the current stockholders and managers to