Free Proposed Findings of Fact and Conclusions of Law - District Court of Federal Claims - federal

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 1 of 50

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 CONTENTIONS OF FACT AND LAW Defendant, the United States, respectfully submits this Memorandum of Contentions of Fact and Law in compliance with the Court's March 12, 2007 and September 27, 2007 Scheduling Orders and Appendix A, ¶ 14 of the Rules of the United States Court of Federal Claims.1 INTRODUCTION Plaintiff, Innovair Aviation, Ltd. (Innovair), contends that, as of the time the Technology License Agreement (TLA) to manufacture and sell DC-3 converted aircraft and kits in a limited, overseas market was transferred to Basler Turbo Conversions, Inc. (BTC) by court order, the TLA was worth $36 million. Innovair is unable to establish under any of its methodologies that the TLA was worth more than $1.375 million at the time BTC acquired the rights to manufacture and sell converted DC-3s overseas. At trial, we will establish that Innovair's projected sales figures are pure speculation, which are unsupported and unreliable. Although there is a small, niche market for converted DC-3s, Innovair would have sold at most two or three BT-67 aircrafts or conversion kits per year for the period from 1991 to 1998, but for the transfer of the

1

Defendant has attached its objections to plaintiff's trial exhibits as Attachment 1 to this

brief.

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 2 of 50

TLA to BTC. For these reasons, Innovair is not entitled to recover any damages as a result of the taking of the TLA. DEFENDANT'S CONTENTIONS OF FACT I. The DC-3 Aircraft A. The History Of The DC-3

The Douglas DC-3 aircraft was introduced in 1936. When first introduced, it was a passenger aircraft powered by Wright Cyclone piston engines and later by Pratt and Whitney Twin Wasp piston engines. It is a twin-engined, low wing aircraft with conventional ­ as opposed to tricyclic ­ landing gear, meaning that it sits, at an incline, on its tail, rather than at even-level. The aircraft is unpressurized and must fly at low altitudes. For commercial operations, the FAA requires that it be flown by two pilots. Prior to World War II, Douglas manufactured about 430 DC-3 passenger aircraft. With the outbreak of World War II, civilian production ceased and the Army Air Corp placed production orders for military C-47 aircrafts. By the end of World War II, Douglas had manufactured approximately 10,650 DC-3s and C-47s. After World War II, the military models of the DC-3 were converted to civilian use and became the workhorses of the passenger airlines from 1945 through the mid-1950s. At the same time, cargo operators converted military models of the DC-3 for cargo operations. Regional passenger carriers and cargo operators continued to fly the airplanes into the early to mid-1960s. Beginning as early as the mid-1950s, however, and continuing into the mid-1960s, DC-3s were replaced as passenger aircraft by pressurized aircraft and jet aircraft. Soon after, by around the mid-1960s, DC-3s were replaced in cargo markets by larger DC-4, DC-6, and DC-7 propellor-

-2-

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 3 of 50

driven aircraft that became obsolete for airline service with the introduction of jet aircraft. In the 1960s and 1970s, the now-obsolete DC-3s were relegated to smaller airlines, cargo operations, and Third World carriers and specialty missions. For example, during the Vietnam War, the DC-3s slow speed and configuration made it possible to equip it with 50-caliber guns, enabling it to circle and shoot at stationary ground targets and giving it the nickname, "Puff the Magic Dragon." Over time, the price of the DC-3s dropped dramatically. By 1991, the price of a used DC-3 was approximately $100,000 to $150,000, compared with $6 to $8 million for a new turboprop or $20 million for a small commercial jet. By 1991, all but a handful of militaries worldwide had retired their DC-3 fleet, with Thailand, which retired its fleet in 1991, as a prime example. Turkey, the last country to actively operate the DC-3, retired its fleet in 1996, after using the aircraft in the first Gulf War for logistics support. B. The Uses Of The DC-3

As a pre-World War II airplane, built only 33 years after the Wright brothers' famous first flight at Kitty Hawk, the DC-3, by modern standards, is "conventional" in design. For one, it has a conventional landing gear which means that it sits at an angle.2 This has a number of implications for both passenger and cargo use. Because it sits at an angle, cargo must be loaded through the side door at the rear of the aircraft and pushed forward up an incline. Although the DC-3 was considered a trunk liner in its day, its small capacity of 28 passengers is the size of a regional airliner today.

It is often called a "taildragger," which has the aircraft fuselage sitting on its tail rather than on its nose. -3-

2

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 4 of 50

By the 1990s, the DC-3 was rarely used as a passenger airliner because it was technologically obsolete. During that period, Richard Branson, founder of Virgin Airlines, operated Vintage Airlines, which provided passengers an opportunity to fly from Miami to Key West in an antique aircraft. The cabin of a DC-3 is not pressurized, which means that it must fly at lower altitudes potentially subjecting the passengers to turbulent weather and pressure changes that can cause the passengers' ears to pop. The aircraft's conventional landing gear makes it more difficult to land in cross-winds than a modern, tricycle gear aircraft. Indeed, since 1938, all commercial aircraft have used the more modern tricycle configuration rather than the conventional landing gear. C. Efforts To Convert The DC-3 To A Turbo-Prop Plane Met With Modest Success

Manufacture of the original DC-3 engines ceased in the early 1950s. Spare parts and engine inventories were adequate for an additional 10 to 15 years, but by the 1970s, new spare engines or new engine parts were no longer available, so owners were forced to continue to overhaul existing engines to operate their planes. Metal fatigue in the engines caused frequent engine failures. New parts were not available, and old parts were often expensive and unreliable. Because of the age of the engine, owners considered themselves lucky if they could operate their planes for 1000 hours without breaking down. In addition, the old DC-3s operated on aviation gasoline which, although easy to find in the United States, was more difficult to find internationally. The problem with the engines and the lack of availability of aviation gas internationally, as well as the lack of life limiting factors of the airframe itself led some DC-3 owners to consider converting their DC-3s to turbo-prop aircraft that operate on readily available jet fuel. -4-

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 5 of 50

In 1987, the Federal Aviation Administration issued a multiple Supplemental Type Certificate (STC)3 to Aero Modifications International (AMI) that allowed AMI to convert the DC-3 to a turbojet which utilized Pratt and Whitney, PT6A-67R engines. AMI developed a conversion kit which was to be used by others to manufacture the modified DC-3 turbojet. As of 1990, AMI had converted five aircraft. A company located in Van Nuys, California, U.S. Aircraft Corporation (USAC), was granted a "one-off" modification approval by the FAA in 1983 which allowed USAC to fly only that aircraft. The USAC design utilized the PT-6A-45AR engines manufactured by Pratt & Whitney, which were the most powerful turboprop engines manufactured at the time. At about the time USAC obtained its "one-off" approval, it ran out of money and was forced to stop work before it could obtain an STC to convert DC-3s to turboprops and sell them in the Far East. II. BTC Obtained A Supplemental Type Certificate To Produce A DC-3 Converted To A Turboprop Plane, And BTC And Innovair Enter A License Agreement To Sell The Plane Outside The United States A. Bryan Carmichael And Barry Wilson Decided To Convert The DC-3 To A Turbojet

Bryan Carmichael, a businessman who had been employed as an executive at two pharmaceutical manufacturing companies, the Pfizer Company and Warner-Lambert, from 1956 until he retired in 1979, became interested in converting DC-3s to turboprop aircraft after his retirement as a result of his World War II experience. Barry Wilson, who had worked at Pfizer

In order to obtain an STC that enables a modification to be made to multiple aircraft, the airplane manufacturer was required to satisfy regulatory requirements through the submission of specifications, engineering analysis, engineering drawings, flight test data and modification processes flows that its modifications were safe and reproducible. Requirements for an STC are similar to those for initial certification of an aircraft. -5-

3

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 6 of 50

and later at Medtronics, the maker of pacemakers, also became interest in converting the DC-3 aircraft from a piston engine plane to a turbo-prop engine. In 1983, they decided to look into converting the DC-3 into a turboprop plane and to market the converted plane in the Far East. They became aware of the USAC conversion process which had resulted in the "one-off" approval. However, USAC was in poor financial condition and was unable to raise capital to manufacture and sell converted DC-3s. Mssrs. Carmichael and Wilson did not know anything about converting aircraft. However, in 1987, they learned of Warren Basler, who since 1957 had owned Basler Flight Service, Inc. (BFS), in Oshkosh, WI. BFS operated a cargo charter airline located at the S.J. Wittman Field, with 14 DC-3s/C-47s, three Beech 18s, and two Convair 440s. At the Wittman Field site, BFS also undertook aircraft maintenance, airframe modifications, and aircraft sales. It operated two King Air 300s as corporate aircraft and served as a fixed based operator at Wittman Field. From 1957 through the early 1990s, BFS modified or made major structural alternations to 85 DC-3/C-47 aircraft. Basler then employed 47 permanent employees and 20 additional temporary line service employees. It was because of Mr. Basler's large fleet of DC-3s/C-47s, his available, experienced staff, and his extensive experience in modifying and maintaining aircraft that Mssrs. Carmichael and Wilson became interested in working with Mr. Basler on a DC-3 conversion project. B. Carmichael And Basler Form Basler Turbo Conversions, Inc. And Innovair Aviation Ltd. And Obtain A Supplemental Type Certificate

In the first half of 1988, Mssrs. Carmichael and Wilson collaborated with Mr. Warren Basler and his wife to form two separate companies, Basler Turbo Conversions, Inc. (BTC), a

-6-

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 7 of 50

Wisconsin corporation, and Innovair Aviation, Ltd. (Innovair), a Hong Kong corporation. Mr. and Mrs. Basler owned 51 percent of BTC and Mr. Carmichael's wife, Elsa Carmichael, and Mr. Wilson owned 49 percent of BTC. Mr. Wilson and Mr. Carmichael owned 51 percent of Innovair and Mr. Basler owned 49 percent of Innovair.4 BTC obtained the conversion technology from USAC and BFS purchased the "one-off" prototype. To convert DC-3/C-47s from piston-engine planes to turbo-prop planes, a 40-inch plug is installed in the fuselage forward of the wing in order to maintain center of gravity parameters and to increase cabin volume and payload . A new Pratt & Whitney PT6A-67R engine and new Hartzell five-blade propellers are installed. The wings are reinforced to increase payload and are modified on the leading edge and wing tip to improve flight characteristics. A new control pedestal for turbine power controls is also installed along with a new electrical system and an upgraded hydraulic system is also installed. The fuel system is also modified to adapt to jet fuel. On June 24, 1988, Mr. Carmichael and Mr. Basler executed the Technology License Agreement (TLA), which granted Innovair the right to market, manufacture, sell, and use the Multiple Supplemental Type Certificate 4840 to sell conversion kits in the worldwide market, with the exception of sales that were financed by the United States Government or any of its agencies. DX 3, ¶¶ 3.021, 3.022, 3.023, 3.024. The TLA also gave Innovair the right to purchase from Basler, the converted aircraft and parts "at the full cost to Basler . . ., including applicable general and administrative costs, plus twenty percent (20%)." DX 3, ¶ 3.06. The license had a 10-year term and provided for termination under certain enumerated circumstances.

The "Carmichael group" consisted of Mr. and Mrs. Bryan Carmichael and Mr. Barry Wilson. The "Basler group" consisted of Mr. and Mrs. Warren Basler. -7-

4

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 8 of 50

DX 3, ¶¶ 3.13, 3.14; Innovair Aviation, Ltd. v. United States, 72 Fed. Cl. 415, 417 (2006). In return, Innovair paid BTC an initial $300,000 and obligated itself to pay an additional $1,375,000 for a total payment of $1,675,000. Id.; DX 3, ¶¶ 3.041, 3.042. In order to obtain the Multiple Supplemental Type Certificate, BTC was required to manufacture a prototype and prepare related drawings and instructions to the satisfaction of the FAA. The prototype conversion was accomplished in Van Nuys, California, because USAC, from which BTC had purchased the technology, had constructed its prototype in that facility and obtained its "one-off" approval from the Long Beach FAA Flight Standards District Office. BTC arranged to have several BFS employees transferred to California for that effort and it hired other skilled technicians in California, who became BTC employees. Mr. Carmichael supervised the prototype conversion effort, which took a total of 20 months, including one year to build the prototype and six months to pass the requisite flight tests. The FAA issued STC SA4840NM to BTC for the "Installation of Pratt & Whitney PT6A-67R Engines on a McDonnell Douglas Corp DC3C" on February 27, 1990 (STC 4840). The cost for obtaining the STC was between $5.8 million and $7 million, depending upon how the research and production costs are accounted. C. Innovair Was Dependent Upon BFS And BTC To Produce Converted DC-3s

The process of converting a DC-3 to a Basler Turbo-67 (or BT-67) requires an extensive a three-step process. In the first step, the DC-3 airframe is stripped and refurbished. In the second step, the fuselage is extended and new engines are installed. In the third step, the cockpit, modern avionics, and optional equipment are installed. The STC 4840 applied only to -8-

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 9 of 50

the second phase, which is the installation of the kit. BFS had been working with the DC-3 aircraft for years and had extensive experience reengining the DC-3 as well as maintaining and modernizing DC-3s. Accordingly, it was envisioned that BFS would play a major role in stripping and refurbishing the airframe and installing the necessary components itself or in training others to perform the work. As Innovair and BTC described it, the Turbo-67 could be made available in one of two ways: (1) in conversion kit form for shipment to conversion facilities "anywhere in the world;" or (2) as a completely converted aircraft ready to commence operations. Airframes for the conversion process could be purchased directly from Innovair/BTC or from DC-3/C47 operators themselves. Notably, the companies intended to market to existing DC-owners. The kit would consist of approximately 3,500 parts, 1,500 of which were unique to the BT-67 and had to be specially manufactured. In the United States, BTC would produce the kits and BFS would install the conversion kit. Internationally, Innovair intended to purchase kits from BTC or manufacture them itself. However, Innovair needed the cooperation of BTC and BFS for a variety of reasons. BFS personnel has substantial experience in working with DC-3s, including performing a number of conversions. The TLA itself required BTC to help train personnel to perform conversions either at the BTC facility or overseas. DX 3, ¶ 3.07. It was anticipated that Innovair and BTC would coordinate in the areas of marketing, sales, and after sales support. Innovair and BTC offered a number of optional equipment items to equip the converted aircraft for specific operating functions. The optional equipment included: (1) cargo door, cargo liner and cargo floors to accept LD3 containers; (2) complete avionics package; (3) long range

-9-

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 10 of 50

wing tanks (to hold 800 gallons of jet fuel); (4) winger de-icer boots; (5) one-piece heated windshield; (6) flight data, voice recorder and ground proximity warning; (7) auto pilot; and (8) an oxygen system.5 However, the TLA did not give Innovair the right to use this optional equipment, which were the subject of separate STCs that had been obtained by BFS. DX 3, ¶¶ 2.02, 3.021, 3.022, 3.024; see PX 37, pp. 11-12, ¶ 5.17, App. B (Option list). Thus, if Innovair wanted to sell a BT-67 with any of these options on it, it would require the approval and cooperation of BFS. IV. In Late 1990 And Early 1991, Differences Between Business BTC's And Innovair's Business Plans Created Tensions Between The Partners A. Innovair And BTC Optimistically Predicted That They Could Sell 259 Kits Or Converted BT-67s In Five Years

Innovair and BTC and their principals were all committed to selling the BT-67. Innovair and Basler anticipated selling the converted DC-3s at a low capital cost to third world countries. They believed that they could sell the converted DC-3s at a no frills cost of $2.4 million and with minimal upgrades of between $2.8 and $3 million. Because most new aircraft were selling for between $8 and $12 million, they believed that they had sufficient room to increase their prices to cover costs and to improve profit once the reputation of the plane had been established in mid1991. Innovair's and BTC's sales projections were overly optimistic. Early sales projections forecasted potential sales of over 500 aircraft. For the period from 1990 through 1994, they projected 12 airplane sales in 1990, 50 sales in 1991, 65 sales in 1992, and 66 sales in 1993 and

These STCs were listed in an early BT-67 pamphlet, but other options included metal flight control surfaces, which replaced the old fabric material on ailerons, horizontal stabilizer, and rudders. - 10 -

5

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 11 of 50

1994, for a total of 259 sales in the five years from 1990 through 1994. In total, they projected 85 military and civilian sales in North America, 34 sales in Central America, 68 sales in South America, 70 sales in Europe, 18 sales in the Middle East, 68 sales in Africa, and 101 sales in Asia, and 86 in selected communist countries for a total of 530 sales overall. With these kinds of projections, Innovair and BTC recognized that they would be required to have an active sales force. They anticipated that they would need to enter into six distribution agreements with distributors throughout the world to be responsible for handling sales and marketing, the installation of conversions, product support and maintenance, warranty programs, spares support, and training. BFS owned a 10,000 square foot building within which BTC anticipated that it would manufacture kits, with a capacity of up to 100 kits annually from 1991. Given the parties' sales projections, BTC decided that he needed to build a larger facility within which to rebuild the DC-3s and install the kits. In late 1989 or early 1990, BTC completed the construction of a 65,000 square foot facility that was capable of handling 12 conversions at a time. The installation of a basic conversion kit required six months. Thus, the new facility could handle 24 installations annually using one shift. B. Innovair And BTC Enter Into A Purchase Agreement With United Technologies Corp. In July 1990

In early 1990, Innovair and United Technologies Corporation (UTC), proposed that Innovair, BTC, and UTC enter into a relationship in which UTC would assist Innovair and BTC by setting up a conversion facility in Southeast Asia in which they would arrange for local workers to overhaul available DC-3s, install the BT-67 kits, and convert the DC-3s to BT-67s. In return, UTC anticipated receiving offset credits totaling $35 million from the Taiwan - 11 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 12 of 50

Government.6 In order to carry out this program, UTC anticipated investing 20 percent of the amount required to establish the joint venture but it required local Taiwanese investors to invest the remaining 80 percent. As of July 1990, when UTC prepared its proposal, UTC recognized that BTC was under-capitalized in the amount of $2 to $3 million, had significant financing difficulties, and serious cash flow problems and was projecting a $1.4 million shortfall. UTC offered to purchase a converted DC-3 aircraft for $3 million and to grant BTC a $3 million line of credit to permit BTC to purchase its Pratt & Whitney PT6A-67R engines. The parties entered into negotiations and, on July 13, 1990, all three entities ­ BTC, Innovair and UTC ­ signed a purchase agreement. In that agreement, UTC agreed to purchase a converted DC-3 from Innovair at a price of $2,279,753 and establish a revolving line of credit under which BTC could purchase the PT6A-67R engines. In exchange, Innovair agreed to give UTC the exclusive right to market and sell the BT-67 in Southeast Asia, grant UTC the offset credits for sales made in that territory, and provide technical training in the maintenance of the converted DC-3.7 BTC agreed to abide by the terms of the purchase agreement between Innovair and UTC with regard to sales in Southeast Asia, with the exception of sales negotiated through the United States Government or its agencies. In addition, as part of the agreement, BTC and

UTC, a leading aircraft engine manufacturer, has significant sales overseas, including Third World countries. In making purchases from companies not domiciled in its country, some governments (such as Taiwan) required that such companies making sales to it make commitments to make offsetting purchases or investments in their countries. UTC had significant amounts of these offset commitments. An offset credit is generated by a sale to a foreign government and obligates the seller to buy goods and services in that foreign country, or, failing that, obligates the seller to refund a portion of the purchase price to the foreign government. The final terms of UTC's marketing rights and obligations were to be negotiated in a subsequent document, later known as, the Distribution Agreement. (See Section IV.G.) - 12 7

6

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 13 of 50

Innovair agreed to merge by January 31, 1991. C. Innovair And BTC Experience Financial Difficulties

As of December 31, 1989, both BTC and Innovair were in a fairly precarious financial condition. BTC had current liabilities of $11.360 million exceeding its current assets of $8.128 million and a stockholders' equity deficiency of $2.963 million, while Innovair had current liabilities of $1.583 million exceeding its current assets of $578,500. At the same time, BFS was not in much better condition, with current assets of $7.059 million barely covering $7.015 million of current liabilities and with stockholders' equity of no more than $1.129 million as of February 1990. BTC's and Innovair's shareholders had loaned $1.5 million to the two companies. They had a $3 million line of credit from the Valley Bank in Oshkosh. However, BTC's and BFS's continuing serious cash flow problems caused them to lay off personnel in May 1990 and to shut down the BTC operation in Van Nuys, California, in June 1990. In December 1988, Innovair/BTC had entered into contracts with Air Columbia to deliver six converted DC-3s to serve as cargo carriers. However, there were delays in delivering the aircraft due to a delay in obtaining the STC and delayed progress payments from Air Columbia, so Air Columbia cancelled two of the conversion contracts. D. Differences In Business Strategy And Style Cause Carmichael To Try To Sell His Interest In BTC And Innovair In 1990 And 1991

Differences between the Basler and Carmichael groups emerged in 1990. Each group had a different philosophy about how the businesses would operate. The Carmichael group, which had developed the kit strategy, was simply interested in selling BT-67 conversion kits internationally, without involving itself in the conversion process or after-sale technical support effort. The Basler group, which had invested a substantial sum of money in building the 65,000 - 13 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 14 of 50

square-foot facility to overhaul and convert the DC-3s and had invested in training its personnel to perform the work was interested selling complete converted aircraft. The Carmichael group believed that all it needed to do was to identify and locate distributors to undertake the task of finding interested buyers and establishing conversion and maintenance facilities in lesserdeveloped countries. The Basler group, believing that the customer wanted an airplane, not a project, was committed to seeing the conversion project through from overhauling the DC-3 hull to providing technical support to the buyer after the sale. A significant dispute arose between the Carmichael group and the Basler group about inter-company accounting for converted aircraft sales. Carmichael vehemently objected to the accounting entries that potentially shifted income to BFS. Later, in the fall of 1990, Carmichael objected to BFS's decision to reprice kits it manufactured in order to make them profitable. Basler complained that Carmichael had done little to generate kit sales. In January 1990, Mr. Carmichael approached Mr. David T. Thompson, a Deloitte & Touche (D&T) partner located in Los Angeles, California, to request him to assist Mr. Carmichael in preparing certain documentation to identify potential investors for the sale of his interest in BTC and Innovair. Mr. Thompson indicated a willingness to compile for Mr. Carmichael "a five-year projection accompanied by a suitably prepared business plan which could be used by a potential investor to develop his own conclusions about the value of the business." Mr. Thompson reported that a compilation of a financial projection involves the assembling of a projection based upon the management's assumptions and accounting policies and certain other procedures, without expressing an opinion upon the underlying assumptions of the projections.

- 14 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 15 of 50

On March 2, 1990, Mr. Thompson and Messrs. Carmichael and Wilson signed an engagement letter in which D&T agreed to compile financial projections for the companies based upon these assumptions and upon the condition that Messrs. Carmichael and Wilson would sign a representation letter in which they confirmed their responsibility for the underlying the Carmichael group's assumptions and appropriateness of the financial projection and its presentation. Messrs. Carmichael and Wilson executed this representation letter on May 16, 1990. On May 16, 1990, Deloitte & Touche issued its compilation of the projected financial statements for the period January 1, 1990 to December 31, 1994, confirming in their accompanying report that the statements were prepared to assist certain stockholders sell all or part of their interests to sophisticated investors who would be able to question management directly about the underlying assumptions. D&T also stated clearly therein that it was expressing no opinion or providing any other form of assurance on the accompanying projections. In August or September 1990, Mr. Harry Eastlick, owner of USAC and from whom Mr. Basler had purchased the converted DC-3 and received a license to use USAC's "one-off" STC, discussed with Bryan Carmichael the possibility of identifying potential outside investors to provide much needed cash to Innovair/BTC. As of early October 1990, Mr. Carmichael determined that BTC and Innovair needed between $6 and $8 million "to provide working capital to aggressively develop the business; to pay down (partially) bank loans; eliminate shareholder's personal guarantees and mortgages on shareholders' personal property; and to pay down shareholders' loans of approximately $1.8 million." In late 1990, Mr. Eastlick offered his services to Mr. Carmichael to help him find

- 15 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 16 of 50

potential outside investors. Mr. Eastlick identified the Warwick Consulting Group, Inc. (Warwick), as a firm that could help raise capital. However, Mr. Carmichael did not sign an agreement with Warwick, to prepare a Confidential Memorandum to seek outside investors financing until March 1991. Warwick issued its Confidential Memorandum on May 18, 1991. The Warwick projections were made by Innovair's management, and Warwick disclaimed responsibility for the projected financial statements. E. Efforts To Merge Failed

BTC and Innovair believed that, by entering into a distribution agreement with UTC, the partners would received some much-needed cash and a steady request for orders of BT-67 kits. Thus, to satisfy UTC, BTC and Innovair continued to explore ways in which they could merge the two companies to remove redundancies in management and to provide more focus on the organization. In late November 1990, BTC requested Madison Valuation Associates, T.F. Gunkel & Co. (Gunkel) to prepare a valuation of the various business interests in order to provide them with sufficient information to base further discussions of value, ownership, business merger and future operating plans. The Gunkel report was issued on March 6, 1991. The report indicated that BFS was worth $5,473,000, that BTC was work $1,850,000, and that Innovair was worth $1,911,000. The valuation was based upon the assumption that the parties would continue to work together and continue with a commonality for purpose for the next five years. It was the opinion of Gunkel that the companies would fail without the ongoing support of the Basler's collateral, specifically the BFS assets. As part of its effort to try to satisfy its offset credits in Taiwan, UTC, in October 1990, developed a plan to use an Air Asia facility located in Taiwan to serve as a location to convert

- 16 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 17 of 50

DC-3 aircraft and install BT-67 kits. UTC proposed forming a joint venture with an Taiwanese company to finance the project. Under the plan, UTC intended to invest $2 million in the plan with a local Taiwanese company, such as First Taiwan Group or China Development Corporation, to provide the remaining $8 million for a total $10 million investment. Seven representatives from Air Asia came to Oshkosh, Wisconsin, for [two weeks] to receive training from BTC and BFS representatives concerning the conversion process. Despite the start-up effort with UTC in the fall of 1990, on December 3, 1990, Mr. Thomas Weigt, president of BTC, wrote to Mr. Johnson expressing frustration that there had been delays in the establishment of the joint venture in Taiwan and that UTC had not started ordering BT-67 conversion kits. As of early January 1991, Mr. Barry Wilson was receiving communications that some of UTC's potential business partners in Taiwan were not interested in the BT-67 conversion effort. Prior to delivering the BT-67 to UTC in April 1991, representatives from Innovair and BTC undertook a demonstration tour in February and March 1991 to elicit the interest of potential purchasers of the aircraft. The demonstration plane traveled from the BTC facilities where it was manufactured to Hartford, Connecticut, where UTC's headquarters were located, and then to Canada, England, Switzerland, Turkey, India, Thailand, and China. Although the demonstration tour generated interest, it did not generate any sales. Under the direction of Mr. Fred Johnson of UTC, UTC representatives made business calls to representatives from various companies and governments in the Far East to generate interest in the BT-67. Negotiations with BTC and Innovair relating to a distribution agreement with UTC began in February 1991 and continued through April 1991. In the meantime, in February 1991,

- 17 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 18 of 50

Warwick, in anticipation of issuing its Confidential Memorandum began to identify potential investors to determine whether there was any interest in investing in Innovair. F. Innovair Files A Minority Shareholder's Suit Against BTC In April 1991

On April 11, 1991, Mr. Carmichael sent a letter to Mr. Basler in which he formally expressed concern about "irregular accounting practices and fund transfers between BTC and BFS." Mr. Carmichael charged BFS with using BTC for the advantage of BFS, "contrary to the best interests of BTC and [Mr. Basler's] minority shareholders and creditors." Mr. Carmichael also charged BFS with dealing for its own account. Concerned about this situation, Mr. Carmichael suggested that the parties undertake a corporate divorce and proposed that he buy out Mr. Basler's interest in BTC and Innovair. Mr. Carmichael proposed that the parties meet in late April 1991 to attempt to work out their differences. The shareholders of BTC and Innovair and their representatives met on April 26 and 27, 1991. They exchanged offers and counter-offers to buy out one another. However, they were unable to reach agreement. As a result of these charges, on April 30, 1991, BTC filed suit in the State of Wisconsin Circuit Court in Winnebago County, No. 91 CV 552, against the minority stockholders of BTC, Mrs. Elsa Carmichael, and Mr. Wilson to preclude efforts by Mrs. Carmichael and Mr. Wilson to dissolve BTC. On May 8, 1991, Mrs. Carmichael and Mr. Wilson filed an answer and counterclaim in that action and, on May 13, 1991, Mr. and Mrs. Carmichael, Mr. Wilson, and Innovair filed its own lawsuit against BTC and Mr. and Mrs. Basler in the United States District Court for the District of Wisconsin, No. 91-C-49C. In its counterclaim filed in state court, Innovair filed a shareholder derivative suit and requested the court to dissolve BTC. The Carmichaels, Mr. Wilson, and Innovair requested the same relief in its district court action as it

- 18 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 19 of 50

had requested in its state court action and also charged breach of fiduciary duty, breach of contract, conspiracy and fraud. G. Warwick Was Unable To Identify Potential Investors, But Innovair Entered Into A Distribution Agreement With UTC In July 1991

In May 1991, after Warwick issued the Confidential Memorandum, Mr. Fraker contacted a number of investors to try to generate interest in investing in Innovair. Fraker was initially seeking $2 million and an additional $3 million over the next three years for a demonstration aircraft and research and development for a new conversion. In a June 13, 1991 memorandum to Mr. Carmichael, Mr. Fraker reported that he had sent out letters to 39 venture funds and had heard from all but nine of the venture funds. The 30 venture funds from which Mr. Fraker had heard all declined to contribute to the development of the BT-67. Mr. Fraker also reported that he had sent out approximately 43 letters to selective industry potential partners and was awaiting a response from them. None responded with an expression of interest in the BT-67 program. On June 25, 1991, Mr. Carmichael met with Messrs. Fred Johnson, Herbert Hayes, and UTC's counsel, Ray Stone in New York to work on the final matters that needed to be clarified prior to the time the parties signed the distribution agreement. On July 3, 1991, Mr. Donald H. Lang, Vice President of UTC's Group Business Development and Planning, sent Mr. Carmichael letter that had been drafted by Mr. Johnson in which Mr. Lang expressed concern that Innovair and BTC would not be able to provide kits on a timely basis or perform the necessary conversions in their territory. In a showing of good faith, UTC sent to Innovair $80,000 toward the purchase of a DC-3 conversion kit, less the cost of two P&W engines. The kit purchase was contingent upon a number of conditions, including Innovair's and BTC's providing adequate

- 19 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 20 of 50

assurances that a kit would be delivered on a timely basis, successful completion of the negotiations between UTC and its customer, final agreement on the details of the kit pricing for the Distributor Agreement, and approval of UTC management. On July 9, 1991, UTC's Mr. Marshall sent a letter to Mssrs. Carmichael and Weigt urging the parties to set aside their differences and seeking assurances from BTC and Innovair that they would comply with the terms of the June 1990 Purchase Agreement. Despite these concerns, on July 23, 1991, UTC entered into a Distributorship Agreement with Innovair. The agreement gave UTC the exclusive right to convert or have converted the DC-3 and/or C-47 aircraft under the STC and BTC proprietary data, including establishing and overseeing the operation of certified conversion facilities within South East Asia, and selling converted aircraft or aircraft kits. PX 37, ¶ 4.1. Under the terms of the agreement, Innovair promised to provide reasonable technical support and provide updated technical data and it promised to use its best efforts to provide UTC with two sets of drafting and conversion technical information and to use its best efforts to provide UTC with various conversion options, including those relating to the cargo floor, metal control surfaces, long range outer wing modifications for 800 gallon tank configurations, etc. The term of the agreement was for seven years. PX 37, ¶ 3. Under the terms of the Distributorship Agreement, UTC agreed to establish mutually agreeable sales targets. The Agreement provides that, if either party elected to terminate the Agreement at any time only for causes set forth in ¶¶ 13.1 A through D of the Agreement, which included the "[f]ailure to meet the minimum annual sales requirement and to pay Seller its lost profit, as set forth in ¶ 6.7." PX 37, ¶ 13.1. In addition, the Agreement provides that, if the

- 20 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 21 of 50

Distributor, UTC, elects to pay the Seller, Innovair, its lost profits, the Seller must allow an independent auditor to audit its records and report that amount of the Seller's lost profit to the Distributor and that the Distributor was required to bear the costs of such an audit. PX 37, ¶ 6.7.1. However, the Agreement further provides that, "[i]f [the] Distributor does not order the minimum sales requirement of five kits per year, and if [the] Distributor does not pay Seller a sum equal to Seller's net profit on five kits less the number actually ordered by [the] Distributor during such year, [then] the Seller may elect to terminate this Agreement." PX 37, ¶ 6.7. This allowed Innovair to cancel its distribution agreement with UTC if UTC did not order the minimum sales and UTC did not agree to pay Innovair's net profit on the sale of five kits less the number actually ordered. Shortly after Innovair signed the Distributorship Agreement with UTC, Mr. Carmichael informed Mr. Fraker of Warwick that he did not want to renew his three-month, $4,000 per month, contract with Warwick because cash flow requirements precluded Innovair from making any additional monthly retainer payments in excess of their agreement. Mr. Carmichael invited Mr. Fraker to follow up with possible financing sources that Warwick had contacted up to that point in time, but he noted that "several events . . . have caused [Innovair] to revise [its] shortterm plans," noting that it was "no longer appropriate to continue [their] arrangement wherein Warwick and US Holdings exclusively represented [them] as [their] financial advisors." V. Selling The BT-67 Proved To Be More Difficult Than Anticipated

Although Mssrs. Carmichael, Wilson and Basler saw great potential for the converted DC-3, sales of the BT-67 of kits to manufacture the BT-67 did not live up to their expectations. There was limited interest in the BT-67 because there were numerous alternatives in the

- 21 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 22 of 50

passenger, package express, and general cargo segments of the market. A. Numerous Affordable Aircraft Were Available In The Traditional Passenger And Cargo Markets

It is well-established in the airline industry that passengers prefer newer aircraft to older aircraft and jets over turboprops. The BT-67 looks like an aircraft from the era before World War II, which passengers would shun due to the perception that it was an old style aircraft and less safe than newer models. Moreover, the BT-67 was technologically obsolete when compared with more modern regional aircraft. As a regional passenger aircraft, the fact that it was not pressurized and had a conventional landing gear, which would cause passengers to sit at an angle while on the ground and require the aircraft to fly into ­ not above ­ the weather, was problematic. In the 1980s, pressurized 30-seat turboprops from Embraer, Saab, Bombadier, and ATR began to replace older aircraft in regional operations. New turboprop models were available that were pressurized and available in the 30-40 seat range that would compete directly with the BT-67. As these new models entered service, older turboprops, such as the Shorts 360, became available on the used market as an alternative to the BT-67 in third world countries. These planes were more modern looking and more acceptable to passengers than the BT-67. As a result, even in Innovair's target third-world market, there was simply no demand for the BT-67 as a passenger airline during the period from 1990 through 1998. In terms of the cargo industry, although passenger preference is not an issue, fleet planning must take into consideration capital costs, maintenance costs, operating costs, fuel burn, dimensional capacity, useful load, speed and other factors. For package express carriers, such as Federal Express and Airborne Express, the BT-67 was not competitive with respect to the smaller airports because it required two pilots to fly the plane and its cargo capacity was too - 22 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 23 of 50

large for the volume of cargo that needed to be transported from place to place on feeder routes. With respect to the feeder markets, there were more economical alternatives than the BT-67. For example, the Cessna Caravans were far superior to the BT-67 for the feeder markets because they had a single turboprop engine with single pilot capability, with adequate capacity for the smaller market, and a modern image, and they were sold as a new aircraft for less than half the price of a converted BT-67. In fact, Federal Express contracted for more than 250 Cessna Caravans for their use in operations, rather than purchase the BT-67. In terms of the general cargo market, it is common for retired passenger aircraft to be converted to freighters as their useful passenger life expires. As a result, when newer airplanes retire from passenger service, they replace the older planes that carry less freight at lower speeds. Although each new generation of aircraft tends to be larger and more expensive to operate than earlier generations, the cost per ton-mile is lower because higher speeds and larger capacities grow proportionally faster than incremental costs. Given that the BT-67 is an airplane with a conventional landing gear rather than a tricycle gear, cargo must be loaded through the side door at an incline rather than through a rear door or side cargo door parallel to the ground, which tends to be easier without an incline. Air cargo operators who were in the market for a new plane would prefer to choose from the many newer and more modern used aircraft readily available in the market than the DC-3. The price of the BT-67 conversion, which started at $2.9 million, was more than 20 times higher than the market value of a DC-3, which sold for between $100,00 and $150,000. Those who flew the DC-3s typically did so because they could not afford more modern aircraft. Although the BT-67 conversion increased the performance of the DC-3, the converted plane cost

- 23 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 24 of 50

three time as much as three times the used price of the more popular Lockheed Electra turboprop freighters and the Convair 580s turboprop freighters. These models were equipped with different turboprop engines than the BT-67, but they were readily available in the used market and significantly cheaper to acquire than the BT-67s. B. The BT-67 Is A Suitable Aircraft In The Smaller Special Mission Or Niche Markets

Despite the failure of the BT-67 to attract attention in the larger, more conventional passenger and cargo markets, BTC was able to sell some BT-67s in the both the civilian and military special missions markets. Since 1991, BT-67s have been sold in the civilian special mission market for special purposes, such as fire suppression, oil spill surveillance, and mapping and geophysical research. Since that time, the BT-67s have been sold for military-type missions, such as military cargo and troop missions, surveillance and intelligence-gathering missions, drug interdiction, and gunship operations. Each of these special purpose missions requires the installation of specialized equipment, and the number of sales is quite limited. Even though the converted BT-67s are well-suited to these special missions, the BT-67 is not unique. For example, in the fire-suppression market, the BT-67 must compete with the Lockheed C-130 four engine turboprop, larger DC-6 piston powered airliners, and a newer, specialized aircraft, the Canadair Cl-415 water bomber, an amphibious turboprop designed to land on water, fill its tanks, and quickly return to firefighting duty. In terms of aircraft used to support fire fighting operations, the deHavilland Twin Otter and the Dornier 228 are smaller, less expensive to operate and provide much better downward visibility than the BT-67 for parachute fire-jumper operations. In terms of aerial surveillance operations such as pipeline patrol, operators prefer to use the Cessna Caravan turboprop or even smaller high wing Cessna piston - 24 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 25 of 50

aircraft, which are cheaper, have lower operating costs, and provide better visibility. In terms of mapping and geophysical research operations, the BT-67, which can operate on skis, is wellsuited to operate in remote regions, such as in the Arctic and Antarctic, where takeoffs and landings must be made on ice. However, demand for these missions is quite limited. A significant number of DC-3s remained in service until 1991 for Third World military operations. However, given the low market value of the DC-3/C-47s and the relatively significant cost associated with converting these planes to BT-67s, these poor countries that owned the DC-3 fleets could not afford to upgrade their fleet without significant financing. BTC converted several DC-3s into BT-67s for El Salvador and Mali, but this was financed by the United States Government through Foreign Military Sales grants. The BT-67 can be modified to provide radar platforms, forward looking infrared radar installations, and weaponry, but the market for these special purpose missions tends to be quite small and the BT-67 experiences competition from a number of different aircraft. Optional equipment is essential to satisfying customers in the special mission market. Although the conversion cured some of the most serious mechanical problems of an aging DC-3 aircraft, other shortcomings in the plane remained that were addressed by STCs other than STC 4840. Additionally, the conversion greatly reduced the range of the aircraft because the new engines consumed significantly more fuel per hour than the original piston engines. BFS and BTC together controlled 10 STCs, including the long-range fuel tanks STCs that made the plane a more modern and useful aircraft. Without the use of these STCs, Innovair would find it difficult, if not impossible to sell the aircraft. Because of the poisonous relationship between the Baslers and Carmichael, to obtain these STCs, Innovair would be forced to pay either extremely

- 25 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 26 of 50

high prices to the Baslers or invest substantial sums of money to develop their own STCs. All of these factors contributed significantly to the fact that BTC and Innovair were not able to sell anywhere near the number of BT-67 aircraft that Mr. Carmichael predicted in his five-year business plan. C. Interest In The BT-67 Was Tepid

After achieving some success in negotiating the sale of six converted DC-3s to Air Columbia, Innovair and BTC were optimistic that they could generate sufficient interest in their DC-3/C-47 conversion effort to achieve that kind of success elsewhere. However, they were mistaken. The BT-67, although significantly upgraded, was old and remained a relatively slow, unpressurized aircraft with conventional landing gear that did not compare well to contemporary turboprops. Third World countries, in which a significant number of old DC-3s operated, could not afford to upgrade their planes without financial support from the United States Government or some other outside source. Numerous and, oftentimes, lower cost alternatives to the BT-67 existed in the market. Innovair and BTC hired sales agents to sell BT-67s outside the United States, primarily in South America, Latin America, Africa, and some European countries. UTC, as a distributor for Innovair, was responsible for marketing the BT-67 in Southeast Asia. UTC's, BTC's and Innovair's efforts resulted in significantly fewer sales than anticipated, and many of the foreign sales that did occur were financed by the United States Government, so they were credited to BTC's account, not Innovair's account. Aside from the fact that the plane itself had limited appeal in the cargo and passenger markets, the significant sales shortfall was caused by a number

- 26 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 27 of 50

of factors, including the fact that it was difficult for the poorer countries, which were the ones primarily interested in the BT-67, to find the money to purchase the plane or to obtain the financing to support their acquisition efforts. In addition, BTC and Innovair learned that, even though the might ultimately be successful in selling one or more planes, it often took two to three years to complete a sale. This was particularly true with sales to a foreign government or sales through a United States Government financed program. It would often take two or three annual budget cycles to complete a sale. D. The United States Attorneys Office Seized The TLA And Then Opened Negotiations With Innovair For It To Post A Substitute Res Bond

On July 16, 1991, the United States Attorney's Office (USAO) in Phoenix, Arizona, seized the TLA because funds from the $1.375 million (of the total $1.675 million) Innovair paid for the TLA were traced to a Colombian drug cartel, in violation of the Drug Enforcement Act. The Government wanted Innovair to post a substitute res bond because it was concerned that, if the TLA went unused, BTC could terminate it. Innovair, through its counsel, Ms. Katherine Lunsford, expressed an interest in posting the bond, and negotiations began. Ms. Lunsford tried to convince Mr. Reid Pixler, of the USAO, that the value of the bond should be significantly less than the $1.675 million that Innovair had previously paid to Basler to license the conversion technology. On September 6, 1991, Ms. Lunsford proposed to secure the release of the TLA through assignment of Innovair's right to collect $1,247,432.50, which reflected Innovair's interest from the sale of one of the converted aircraft. Mr. Pixler contacted Mr. Michael Hintze of BTC in effort to determine whether the accounts receivable was worth the $1.2 million that Ms. Lunsford had offered. In a letter dated September 9, 1991, Mr. Hintze told him that it was - 27 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 28 of 50

worthless. On September 9, 1991, Mr. Pixler notified both Ms. Lunsford and counsel for BTC, Mr. Tim Atkinson, that he was authorized to negotiate for the release of the TLA in exchange for the posting of a substitute res bond, but that he required time to evaluate the information received and could not make a decision before September 11, 1991, the date of hearing in Elas I. Carmichael, et al. v. Basler Turbo Conversions, et al., No. 91-CV-496. Shortly thereafter, on September 17, 1991, Innovair's counsel informed the AUSA that Innovair was no longer interested in posting a substitute res bond to secure the release of the TLA. With Innovair no longer interested in posting a substitute res bond, the AUSA asked BTC if it would be interested in posting a bond to obtain the TLA. BTC and the Government executed the substitute res bond on November 14, 1991, and amended it on December 9, 1991. Paragraph 10 of the amended substitute res bond provides in part: Upon the payment of a sum not less that $1,375,000 to the United States Marshals Service, and full compliance with the terms of the Interlocutory Sale Order regarding the sale of N95BF, and upon approval by the Court of the terms of this Stipulation for Substitute Res Bond, the United States shall release any further claim to the Technology License Agreement, and the Agreement shall be released from the above described litigation. On January 29, 1992, Innovair filed its objections to the release of the TLA to BTC, alleging among other things that the $1.375 million bond that BTC had posted "has been miscalculated and artificially inflated." On May 21, 1992, the Arizona district court granted the Government's request to allow the substitution of the bond for the release of the TLA, and, with the payment of the bond, the TLA was released to BTC. The litigation in the Wisconsin courts between the Carmichael and the Basler groups continued through September 1993, when they entered into settlement negotiations. On

- 28 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 29 of 50

September 22, 1993, the parties executed a settlement agreement. In that agreement, they exchanged shares of one another's corporations and dropped all claims against each other. BTC agreed to relinquish all rights it would have to recover the $1.375 million substitute res bond it posted to secure the release of the TLA. BTC assigned any rights that it had in the substitute res to Innovair and allowed Innovair to assert a claim against the Government in the approximate amount of $1.375 million, relating to the Government's seizure of the TLA. BTC also agreed to pay Innovair a total of $2.750 million over a period of one year. E. UTC Was Unable To Generate Sufficient Interest To Establish A Conversion Facility In Asia

Although UTC was initially enthusiastic about its anticipated collaboration with Innovair and BTC, there were significant hurdles to overcome in order for the program to be successful. Primarily, UTC required one or more Taiwanese investors to be willing to contribute $8 million in order to open a conversion facility. In September 1991, the Carmichael group met with representatives from UTC to discuss the implication for Innovair of the Government's seizure of the TLA and the litigation between the Carmichael group and the Basler group. In an October 1991 letter confirming those discussions, Mr. Carmichael indicated that Innovair would not interfere with UTC's effort to secure BT-67 kits manufactured by BTC until the other matters could be resolved. For technical support, Mr. Carmichael also suggested that UTC contact Mr. Bob Clark, who was considering forming his own company, Star Aviation, after leaving BTC in August 1991. Star Aviation never proceeded beyond the concept stage. In October 1991, UTC learned that the agent it had relied upon to market the BT-67 conversion project in Taiwan was unable to identify any potential customers or investors. BTC and UTC continued to explore other ways in which they could support one another through - 29 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 30 of 50

1992. However, by the fall of 1992, it became clear that sales in Southeast Asia would not be as promising as UTC, Innovair, and BTC had hoped because there were few interested customers in the converted BT-67. After years of marketing the BT-67, UTC had been unable to sign an agreement with any other entity for the sale of BT-67. DEFENDANT'S CONTENTIONS OF LAW I. The Proper Measure Of Damages Is The Monetary Equivalent Of What Was Taken

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). "Just compensation" is the full monetary equivalent of the property taken. Under this approach, the owner is to be put in the same financial position as if there had been no taking. United States v. Reynolds, 397 U.S. 14, 15-16 (1970); Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394, 407 (1989), aff'd 926 F.2d 1169 (1991). However, just compensation does not include lost profits. "[T]he value of the property taken is not the value to the owner for his particular purposes. The sovereign must pay for what it takes, not for opportunities the owner loses." Whitney, 18 Cl. Ct. at 407. Therefore, as the Supreme Court has stated, "[t]he 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 Sand & Gravel Co. v. United States, 6 Cl. Ct. 178, 187 (1984), citing United States v. Petty Motor Co., 327 U.S. 372, 377 (1946). - 30 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 31 of 50

A.

Consequential Damages Are Not Recoverable

Consequential damages are not recoverable in takings cases. United States v. General Motors Corp., 323 U.S. 373, 379 (1945); 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 v. United States, 2 Cl. Ct. 426, 445 (1983). It is a well settled principle of Fifth Amendment taking law, however, that the measure of just compensation is the fair value of what was taken, and not the consequential damages the owner suffers as a result of the taking. Kimball Laundry [Co. v. United States, 338 U.S. 1, 7, 69 S. Ct. 1434, 1438 (1949)] (Rejecting argument that just compensation for a temporary taking should be measured by "the difference between the market value of the fee on the date of the taking and its market value on the date of its return."); General Motors, 323 U.S. at 380, 65 S. Ct. at 360 ("[T]hat which is taken or damaged is the group of rights which the so-called owner exercises in his dominion of the physical thing, and that damage to those rights of ownership does not include losses to his business or other consequential damage." (footnote omitted)) Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577, 1581 (Fed. Cir. 1990). Courts have concluded that certain costs are not recoverable under a takings analysis, such as the destruction of a business as an unintended consequence of a taking, frustration of contract or business, the cost of compliance with the regulations, the losses sustained by the owner because of the difficulty of finding other premises, moving costs, and expenses incurred in having to readjust manufacturing operations. Mitchell v. United States, 267 U.S. 341, 345 (1925) (no compensation where the destruction of the business was the unintended consequence of the taking of land); Atlas Corp. v. United States, 15 Cl. Ct. 681, 688 (1988), aff'd 895 F.2d 745, 755-56 (Fed. Cir.), cert. denied, 498 U.S. 811 (1990) (cost of compliance); see Joslin Mfg. Co. v. City of Providence, 262 U.S. 668, 676 (1923) (losses due to difficulty of finding other - 31 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 32 of 50

premises, moving costs); Klein v. United States, 179 Ct. Cl. 910, 915, 375 F.2d 825, 829 (1967), cert. denied, 389 U.S. 1037 (1968) (no recovery for frustration of contract or business). B. The Comparable Sales Method Is Generally Used To Calculate Fair Market Value

"Just compensation" is generally measured as the fair market value of the property at the time of the taking. Whitney, 18 Cl. Ct. 407-08. "It is usually said that market value is what a willing buyer would pay in cash to a willing seller." United States v. Miller, 317 U.S. 369 (1943). Thus, "[i]f exchanges of similar property have been frequent, the inference is strong that the equivalent arrived at by the haggling of the market would probably have been offered and accepted, and it is thus that the `market price' becomes so important a standard of reference." Kimball, 338 U.S. at 6. Under this method, the courts use sales and purchases of reasonably similar property and compare those sales with respect to time, place, and circumstances. Whitney, 18 Cl. Ct. at 408. C. The "Income Capitalization Approach" Must Be Used With Caution

If the property in question is seldom exchanged on the market place, the courts must resort to some other method of valuation. Another method that courts have used is called the "income capitalization approach." Under this method, "valuing the property [is] based on the discounted stream of income the property is capable of producing over its useful economic life." Id. (emphasis added). Using the capitalization of income approach to calculate damages in a takings case present a special challenge because 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 because they "depend to a greater extent upon the amount of capital invested and the - 32 -

Case 1:96-cv-00408-LAS

Document 140

Filed 10/05/2007

Page 33 of 50

good fortune, business skill and management with which the business is conducted." Id. II. The Court Should Consider The Highly Speculative Nature Of Plaintiff's Claim In Deciding Whether To Award Damages A. Innovair's Approach To Calculating Its Damages Is Highly Speculative

In assessing damages, the Court must take into consideration the speculative nature of a plaintiff's damages claims in determining whether to award damages and in selecting the theory in terms of which the Court should award damages. In Cloverport, the Court declined to adopt plaintiff's method of calculating the income capitalization approach to measure the fair market value of what was taken because the plaintiff was unable to prove both that the property was capable of producing a certain amount of material annually and that plaintiff's estimate of the market for the material was correct. Cloverport, 6 Cl. Ct. at 198-99.8 Moreover, in King v. United States, 292 F. Supp. 767 (D. Colo. 1968), in considering the measure of just compensation under a statute which permitted the United States to acquire and pay for any property associated with the assassination of President John Kennedy, the court noted that "market value" does not apply to every fact situation where, the property is peculiar or unique, is not an object of commerce, and has no value." Id. at 775. In that case, as with all takings cases, the plaintiff has the burden of proof and cannot rely upon mere speculation. Id. The court concluded that the determination of value must be based upon objective criteria that are capable of proof. The courts' admonitions in Cloverport and King apply here, as well. In order to recover

The Court concluded that plaintiff failed to meet its burden of establishing the existence of a market capable of absorbing 160,000 tons of sand and gravel annually. Id. at 199. The Court concluded that a "projected rate of production of 100,000