Free Post Trial Brief - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

STERLING SAVINGS ASSOCIATION, a state chartered savings association, STERLING FINANCIAL CORPORATION, a Washington corporation, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

) ) ) ) ) ) ) ) ) ) ) )

No. 95-829C (Judge Wheeler)

DEFENDANT'S POST-TRIAL PROPOSED FINDINGS OF FACT AND LAW

Respectfully submitted, MICHAEL F. HERTZ Deputy Assistant Attorney General

JEANNE E. DAVIDSON Director KENNETH M. DINTZER Assistant Director

Of counsel: TAREK SAWI Senior Trial Counsel MELINDA HART DELISA SANCHEZ WILLIAM KANELLIS ELIZABETH HOLT

ELIZABETH M. HOSFORD Trial Attorney Commercial Litigation Branch Department of Justice Attn: Classification Unit 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 616-0332 Attorneys for Defendant

September 21, 2007

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi SUMMARY OF ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ISSUES PRESENTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PROPOSED FINDINGS OF FACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 I. STERLING'S ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 A. B. C. II. The 1985 Lewis Federal Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The 1988 Tri-Cities Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The Central Evergreen Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

POST-FIRREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 A. Sterling's Application To Acquire Branches Of Great American Savings Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 The "CJ-4" Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 The Terminated 1989 Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Post-FIRREA Supervision Of Sterling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

B. C. D. III.

STERLING'S POST-FIRREA INJUNCTION AND RECAPITALIZATION. . . . . . . . . 22 A. B. Post-FIRREA Restrictions Upon Sterling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Sterling Obtained A Temporary Restraining Order And Preliminary Injunction Prohibiting Enforcement Of FIRREA-Related Restrictions.. . . . . . . . 24 OTS Complied With The TRO And Preliminary Injunction. . . . . . . . . . . . . . . . . 25 Sterling Profited From A Shrink In Assets While The Injunction Was Pending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. D.

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E.

Sterling Replaced The Contractual Goodwill When It Recapitalized in 1991.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

IV.

STERLING'S POST-1991 CAPITAL RAISING AND GROWTH. . . . . . . . . . . . . . . . . 32 A. Sterling And Its Holding Company, SFC, Have Raised More Capital Than Needed To Replace The Contractual Goodwill Eliminated By FIRREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Since 1992, Sterling Has Continuously Held Excess Capital. . . . . . . . . . . . . . . . 36 Sterling Has Been Unable To Meet Its Budgeted Growth Targets. . . . . . . . . . . . 37 Sterling Has Frequently Faced Competition And Other Market Obstacles To The Acquisition Of Loans And Deposits.. . . . . . . . . . . . . . . . . . . . 38

B. C. D.

V.

STERLING'S LITIGATION IN THE COURT OF FEDERAL CLAIMS. . . . . . . . . . . . 40

CONTENTIONS OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 I. II. THE APPLICABLE LEGAL STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 THE COURT SHOULD REJECT STERLING'S LOST PROFITS MODEL BECAUSE IT IS SPECULATIVE AND HAS NO BASIS IN FACT. . . . . . . . . . . . . . . 44 A. B. Dr. Horvitz's Flawed Lost Profits Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Sterling's Lost Profits Claim Is Invalid As A Matter Of Fact And Law Because Dr. Horvitz's Model Ignores Sterling's Mitigation Of Damages Through Recapitalization In 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The Allegedly Forgone Profits In Dr. Horvitz's Model Were Not Foreseeable When Sterling Acquired Lewis Federal And Tri-Cities. . . . . . . . . . 50 Sterling Failed To Prove That The Breach Caused The Lost Profits Alleged In Dr. Horvitz's Model.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 1. Dr. Horvitz's Lost Profits Model Is Invalid As A Matter Of Law Because The Breach Did Not Cause Sterling's Failure To Meet FIRREA's Minimum Capital Requirements. . . . . . . . . . . . . . . . 52 a. Sterling Would Have Failed FIRREA's Tangible Capital Requirement Absent The Breach.. . . . . . . . . . . . . . . . . . . 54 ii

C.

D.

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b.

Sterling Would Have Failed FIRREA's Core Capital Requirement Even Absent The Breach. . . . . . . . . . . . . . . 55

c.

Dr. Horvitz's New Opinion Regarding The Lewis Federal And Tri-Cities Forbearance Letters Is Incorrect And Does Not Render "But-For" Sterling Compliant With FIRREA's Core Capital Requirement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Sterling Did Not Prove That It Would Have Complied With FIRREA's Risk-Based Capital Requirement Absent The Breach. . . . . . . . . . . . . . . . . . . . . . . . . . 65

d.

2.

Dr. Horvitz's Model Is Invalid As A Matter Of Law Because He Incorrectly Assumes That The Breach Caused Sterling To Cease The Pursuit Of Profitable Opportunities Even Though The Government Was Enjoined From Enforcing FIRREA's Breaching Provisions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 The Breach Did Not Cause Sterling To Forgo Profitable Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

3.

E.

The Damages Arising From Dr. Horvitz's Lost Profits Model Are Not Reasonably Certain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 1. Dr. Horvitz's Model Is Invalid As A Matter Of Law Because He Fails To Identify Profitable Opportunities That Would Have Been Obtained Absent The Breach.. . . . . . . . . . . . . . . . . . . 76 Dr. Horvitz's Model Is Invalid Because He Assumes That Sterling Would Have Earned The Same Return On Incremental Assets As It Earned On Actual Assets. . . . . . . . . . . . . . . . . . 78 Sterling's Profitability In The Actual World Does Not Render Dr. Horvitz's Model Reasonably Certain. . . . . . . . . . . . . . . . . . . 82 Sterling's Failure To Meet Its Budgeted Growth Targets Renders Dr. Horvitz's Assumption That Profitable Incremental Assets Would Have Been Available Speculative.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.

3.

4.

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5.

Dr. Horvitz's Model Ignores The Fact That Sterling Has Maintained Excess Regulatory Capital Since 1992. . . . . . . . . . . . . . . . . . 83 Dr. Horvitz Incorrectly Assumes That Growth Equates With Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 The Assumed Capital Ratios In Dr. Horvitz's Model Are Speculative.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Dr. Horvitz's Model Is Not Reasonably Certain And Is Invalid As A Matter Of Law Because It Relies Upon Unproven Wounded Bank Damages To Create Lost Profits. . . . . . . . . . . 89

6.

7.

8.

III.

THE COURT SHOULD REJECT PLAINTIFFS' "MITIGATION" DAMAGES BECAUSE DR. JAMES'S MODEL REFLECTS HYPOTHETICAL, RATHER THAN ACTUAL, COSTS TO RAISE REPLACEMENT CAPITAL. . . . . . . . . . . . . . . 90 A. The Court Should Reject Dr. James's Mitigation Theory Because The Only Costs Associated With Raising Capital Are Transactions Costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 The Court Should Reject Dr. James's Mitigation Damages Theory Because It Is Based Upon A Hypothetical Regulatory Capital Replacement Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Dr. James's Lost Profits Suffers From A Series Of Errors That Render It Speculative And Unreliable As A Matter Of Law. . . . . . . . . . . . . . . . 100 Sterling Is Not Entitled To A Tax "Gross-Up". . . . . . . . . . . . . . . . . . . . . . . . . . 101 1. Sterling's Tax Gross Up Claim Is Speculative And Unfounded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Sterling's Tax "Gross Up" Claim Is Barred As A Matter Of Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Any Tax "Gross-Up" Here Would Constitute An Improper Windfall. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

B.

C.

D.

2.

3.

IV.

THE COURT SHOULD REJECT STERLING'S ALLEGED WOUNDED BANK CLAIMS AS A MATTER OF LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 A. The Breach Did Not Cause Sterling To Incur Increased Costs In iv

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Acquiring A Branch Of Great American Savings Bank . . . . . . . . . . . . . . . . . . . 106 B. The Breach Did Not Cause Sterling To Incur Losses Associated With The CJ-4 Loan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 The Breach Did Not Cause Sterling To Incur Excess Supervision Costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Increased Legal Fees To Litigate The Alleged Breach Of Contract Are Barred As A Matter Of Law, And Sterling Has Not Established That The Breach Caused Its Other Legal And Accounting Fees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 The Breach Did Not Cause Sterling's Inability To Guarantee The Payment Of Preferred Stock Dividends In Connection With The 1989 Offering.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

C.

D.

E.

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

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TABLE OF AUTHORITIES

CASES

Page(s)

Admiral Fin. Corp. v. United States, 378 F.3d 1336 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Advanced Med., Inc. v. Arden Med. Sys. Inc., 955 F.2d 188 (3rd Cir. 1992).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Am. Fed. Bank, FSB v. United States, 68 Fed. Cl. 346 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Bank of America, FSB v. United States, 67 Fed. Cl. 577 (2005), aff'd ___ F.3d ___, 2007 WL 2137774 (Fed. Cir. Jul. 26, 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Bank United FSB v. United States, 50 Fed. Cl. 645 (2001), aff'd in part, 80 Fed. Appx. 663 (Fed. Cir. Sept. 21 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Berg's Estate v. United States, 231 Ct.Cl. 466, 687 F.2d 377 (1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Bluebonnet Sav. Bank v. United States, 266 F.3d 1348 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Bohac v. Dep't of Agric., 239 F.3d 1334 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Cal. Fed. Bank, FSB v. United States, 395 F.3d 1263 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 344 (2005). . . . . . . . . . . . . . . . . . passim Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342 (Fed. Cir. 2001), cert. denied, 534 U.S. 1113 (2002). . . . . . . . . . . . . . . . . . passim Cal. Fed. Bank, FSB v. United States, 43 Fed. Cl. 445 (1999), aff'd in part, 245 F.3d 1342 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 Carabetta Enters., Inc. v. United States, 482 F.3d 1360 (Fed Cir. 2007).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 vi

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Castle v. United States, 48 Fed. Cl. 187 (2000), aff'd 301 F.3d 1328 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 85 Citizens Fin. Servs., FSB v. United States, 64 Fed. Cl. 498 (2005), aff'd, 170 Fed. Appx. 129, 2006 WL 618792 (Fed. Cir. Mar. 9, 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Citizens Fin. Servs., FSB v. United States, 57 Fed. Cl. 64 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Coast Fed. Bank, FSB v. United States, 48 Fed. Cl. 402 (2000), aff'd, 323 F.3d 1035 (Fed. Cir. 2003) (en banc). . . . . . . . . . . . . . . . . . 105 Columbia First Bank, FSB v. United States, 60 Fed. Cl. 97 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Columbia First Bank, FSB v. United States, 54 Fed. Cl. 693 (2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 95 Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 107 District of Columbia v. United States, 67 Fed. Cl. 292 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 89 Dolphin Tours, Inc. v. Pacifico Creative Serv., Inc., 773 F.2d 1506 (9th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Far West Federal Bank v. OTS, 951 F.2d 1093 (9th Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Fawick Corp. v. United States, 149 Ct. Cl. 623 (1960). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

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Fifth Third Bank of W. Ohio v. United States, 402 F.3d 1221 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 94

Fifth Third Bank v. United States, 55 Fed. Cl. 223 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Franklin Fed. Savings Bank v. United States, 55 Fed. Cl. 108 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Glendale Fed. Bank, F.S.B., v. United States, 378 F.3d 1308 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 94 Glendale Fed. Bank, FSB v. United States, 43 Fed. Cl. 390 (1999), aff'd in part, vacated in part, & remanded, 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 93 Granite Management Corp. v. United States, 58 Fed. Cl. 766 aff'd in partand remanded in part on other grounds, 416 F.3d 1373 (Fed. Cir. 2005).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Home Sav. of Am., FSB. v. United States, 399 F.3d 1341 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101, 103 Kaiser Aluminum & Chem. Corp. v. Ill. Cent. Gulf R.R., 615 F.2d 470 (8th Cir. 1980). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Landmark Land Co. v. United States, 256 F.3d 1365 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaSalle Talman Bank, F.S.B. v. United States, 462 F.3d 1331 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102, 103 LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

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LaSalle Talman Bank, F.S.B. v. United States, 64 Fed. Cl. 90 (2005), appeal argued, No. 05-5164 (Fed. Cir. July 13, 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaSalle Talman Bank, FSB v. United States, 45 Fed. Cl. 64, 97 (1999), aff'd in part, vacated in part, 317 F.3d 1363 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113, 115 Library of Congress v. Shaw, 478 U.S. 310 (1986).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 103 Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Midwest Indus. Painting of Fl., Inc. v. United States, 4 Cl. Ct. 124 (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 48 Myerle v. United States, 33 Ct. Cl. 1 (1897). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim N. Helex Co. v. United States, 207 Ct. Cl. 862, 524 F.2d 707 (1975). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Old Stone Corp. v. United States, 450 F.3d 1360 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 107 Piggly Wiggly Corp. v. United States, 112 Ct. Cl. 391, 81 F. Supp. 819 (1949). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113, 115 Precision Pine & Timber, Inc. v. United States, 72 Fed. Cl. 460 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Prudential Ins. Co. of Am. v. United States, 801 F.2d 1295 (Fed. Cir. 1986). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Quiman, S.A. v. United States, 39 Fed. Cl. 171 (1997), aff'd, 178 F.3d 1313 (Fed. Cir. 1999). . . . . . . . . . . . . . . . . . . . . . . . . . . 44 R.S.E., Inc. v. Pennsy Supply, Inc., 523 F.Supp. 954 (M.D. Pa. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Ramsey v. United States, 121 Ct. Cl. 426, 101 F. Supp. 353 (1951). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

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Reynolds v. Roberts, 207 F.3d 1288 (11th Cir. 2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Robinson v. United States, 305 F.3d 1330 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Roseburg Lumber Co. v. Madigan, 978 F.2d 660 (Fed. Cir. 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 182 F.R.D. 386 (D.R.I. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Rumsfeld v. Applied Cos., Inc., 325 F.3d 1328 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Shore v. United States, 9 F.3d 1524 (Fed. Cir. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 57 Fed. Cl. 598 (2003), aff'd in part, rev'd in part, & remanded, 422 F.3d 1319 (Fed. Cir. 2005), cert. denied, __ S. Ct. __, 2006 WL 1725639, 74 U.S.L.W. 3715, 74 U.S.L.W. 3720 (U.S. June 26, 2006) (No. 05-1221). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim S. Nat'l Corp. v. United States, 57 Fed. Cl. 294 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Standard Fed. Bank v. United States, 62 Fed. Cl. 265 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Sterling Savings Assoc. v. Ryan, 959 F.2d 241, 1992 WL 73884 (9th Cir. 1992).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 68 Sterling Sav. Assn. v. Ryan, 751 F. Supp. 871 (E.D. Wash. 1990), rev'd, 959 F.2d 241 (9th Cir. 1992). . . . . . . . . . . . . . passim

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Sterling Sav. Assn. v. United States, 72 Fed. Cl. 404 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

Sterling Sav. Assn. v. United States, 57 Fed. Cl. 445 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Sterling Savings v. United States, 53 Fed. Cl. 599 (2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Sterling Sav. Ass'n v. United States, No. 95-829C, slip op. (Nov. 15, 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Sun Cal, Inc. v. United States, 25 Cl. Ct. 426 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Toledo Peoria & W. Ry. v. Metro Waste Sys., Inc., 59 F.3d 637 (7th Cir. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 United States v. Gotcher, 401 F.2d 118 (5th Cir. 1968). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Wells Fargo Bank v. United States, 88 F.3d 1012 (Fed. Cir. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002), aff'd, 407 F.3d 1352 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . 107 Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995), aff'd, 518 U.S. 839 (1996). . . . . . . . . . . . . . . . . . . . . . . . . . passim

STATUTES 12 C.F.R. § 563.13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 16 12 C.F.R. § 565.4 (1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37, 83 12 C.F.R. § 567.1 (1990). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 56 12 C.F.R. § 567.2 (1990). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

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12 C.F.R. § 567.5 (1990). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 56 12 C.F.R. § 567.8 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 12 C.F.R. § 567.9(a) (1989).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 12 U.S.C.A. § 1464(s)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12 U.S.C. §1464(t) (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 26 U.S.C. § 61. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 28 U.S.C. § 2412(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 28 U.S.C. § 2412(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 28 U.S.C. § 2516(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 26 U.S.C. § 6103. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236 (1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Financial Institutions Recovery, Reform and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA") . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

MISCELLANEOUS Fed. R. Evid. 803(7).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Fed. R. P. 702.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 104 Rev. Ruling 81-277. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Restatement (Second) of Contracts § 347 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Restatement (Second) of Contracts § 347, cmt. b (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Restatement (Second) of Contracts § 347, cmt. e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Restatement (Second) on Contracts § 350. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 xii

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Restatement (Second) of Contracts § 350 cmt. a (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Restatement (Second) of Contracts § 350 cmt. b.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Restatement (Second) of Contracts § 350(1) (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Restatement (Second) of Contracts § 351 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Restatement (Second) of Contracts § 351 cmt a. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Restatement (Second) of Contracts, § 351 cmt. e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 51 Restatement (Second) of Contracts § 351(1) (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Restatement (Second) of Contracts § 352 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41, 42

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS STERLING SAVINGS ASSOCIATION, a state chartered savings association, STERLING FINANCIAL CORPORATION, a Washington corporation, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) ) )

No. 95-829C (Judge Wheeler)

DEFENDANT'S POST-TRIAL PROPOSED FINDINGS OF FACT AND LAW Pursuant to Paragraph 11, Appendix A of the Rules of the United States Court of Federal Claims, and this Court's Order dated July 24, 2007, defendant, the United States, respectfully submits the following Post-trial Proposed Findings of Fact and Law. SUMMARY OF ARGUMENT At trial, Plaintiff Sterling Savings Association ("Sterling") attempted to prove that it suffered lost profits, or, in the alternative, "mitigation" damages, as well as wounded bank damages, that were purportedly incurred as a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 ("FIRREA"). The Court should reject Sterling's lost profits model because it is speculative and has no basis in fact. As a preliminary matter, Sterling's lost profits model is premised upon the counterfactual assumption that, between 1989 and 2006, Sterling never replaced a single dollar of the $15.557 in contractual goodwill eliminated by FIRREA, notwithstanding a legal duty to mitigate and actual mitigation. In 1991, Sterling raised $23 million in capital, achieving full

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compliance with FIRREA's regulatory capital requirements and replacing all of the contractual goodwill attributable to its acquisitions of Lewis Federal Savings and Loan Association ("Lewis Federal") and Tri-Cities Savings and Loan Association ("Tri-Cities"). Since then, Sterling has raised over $515 million in new capital. Thus, Sterling's lost profits model projects damages through 2006 on the plainly incorrect assumption that Sterling never replaced the regulatory capital eliminated by FIRREA. Because Sterling mitigated, it is entitled to only $900,204.00 in transaction costs incurred in replacing the contractual goodwill eliminated by FIRREA. Further, Sterling failed to prove that it met any of the three prerequisites to establishment of a lost profits claim: foreseeability, causation, and reasonable certainty. Cal. Fed. Bank v. United States, 395 F.3d 1263, 1266 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 344 (2005) ("CalFed"). Sterling's expert, Dr. Paul Horvitz, conceded at trial that the lost profits projected in his model were not foreseeable. Tr. 2694:7-13 (Horvitz). This concession was unavoidable. If, in fact, replacement of the $15.557 million in contractual goodwill eliminated by FIRREA would have foreseeably resulted in $58 million in additional profits for the company, then Sterling, which acknowledges that it has raised more than $515 in capital since the enactment of FIRREA, should have experienced no difficulty in raising an additional $15 million in order to realize these profits. For that reason alone, the model should be rejected on foreseeability grounds. More specifically, Dr. Horvitz admitted that if a firm had profitable opportunities, in efficient markets, it "would always be able to get the capital to pursue those profitable opportunities." Tr. 2678:10-14. (Horvitz). Dr. Horvitz admitted that if any potential lender could foresee the profits in his model, they would have lent the $15.557 million money to Sterling financial, which in turn would have infused it as capital into the bank, and no profits 2

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would have been lost. Tr. 2693:11-2694:13. (Horvitz). Dr. Horvitz, however, admitted that the profits in his model were not foreseeable to "any potential investor at the time." Tr. 2694:7-13. Thus, Sterling's damages claim is admittedly not foreseeable. Indeed, according to the Restatement of Contracts, Sterling's theory is the classic textbook example of an unforeseeable claim. In analogous breach of contract cases where defendants guarantee loans to businesses, courts limit damages to the cost of replacement because it is not foreseeable in the usual course of business that the non-breaching party would be unable to find replacement credit: The limitation of foreseeability is often applied in actions for damages for breach of contracts to lend money. Because credit is so widely available, a lender often has no reason to foresee at the time the contract is made that the borrower will be unable to make substitute arrangements in the event of the breach. In most cases, then, the lender's liability will be limited to the relatively small additional amount that it would ordinarily cost to get a similar loan from another lender. Restatement (Second) of Contracts § 351 cmt. e. Thus, Sterling's claim that it had profitable opportunities and the thrift's simultaneous allegation that it could not convince its own shareholders or any other prospective investors to infuse an additional $15.557 million to pursue these profits is the classic example of an unforeseeable claim. Furthermore, Sterling's own documents mandate a finding that the lost profits claim is unforeseeable. In 1992, Sterling expressly stated, in its 1993 business plan, that it expected to maintain its capital in excess of fully-phased in capital requirements, and did "not foresee limitations on its ability to increase total assets." DX 228, p. WON884 1563. Thus, it could not

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have been foreseeable that Sterling would suffer damages due to an inability to increase its asset size, as assumed by Dr. Horvitz. Sterling also failed to prove that its alleged lost profits were caused by the breach. At trial, we demonstrated, and Sterling did not refute, that it was out of compliance with FIRREA's minimum capital requirements in 1989, even if the contractual goodwill attributable to the Lewis Federal and Tri-Cities acquisitions had been permitted to count as regulatory capital. Tr. 2215:18-2218:18 (Friend); DX 1080 (Friend demo); Tr. 2744:2-2748:14 (Horvitz); DX 422, p. 1631; P-454, table 4a. In addition, Sterling's model ignores the fact that Sterling successfully sought, in May 1990, a temporary restraining order (which was converted to a preliminary injunction in August 1990) prohibiting the Government from taking action inconsistent with its contracts. While the injunction was pending, Sterling has no basis for alleging that Government action caused any of its alleged damages. Finally, with respect to the reasonable certainty test, the "forgone assets" lost profits model advanced by Dr. Horvitz (and endorsed by Dr. Christopher James), suffers from the same flaws that resulted in its rejection by this Court in eight separate cases, including two cases in which Dr. Horvitz presented the model. Am. Fed. Bank, FSB v. United States, 68 Fed. Cl. 346, 358 (2005) ("AmFed"); Citizens Fin. Servs. v. United States, 64 Fed. Cl. 498, 514, aff'd, 170 Fed. Appx. 129 (Fed. Cir. 2006) (model presented by Dr. Horvitz); LaSalle Talman Bank, FSB v. United States, 64 Fed. Cl. 90, 101-04 (2005)(model presented by Dr. James); Standard Fed. Bank v. United States, 62 Fed. Cl. 265, 279-81 (2004); Columbia First Bank, FSB v. United States, 60 Fed. Cl. 97, 115 (2004); S. Cal. Fed. Sav. & Loan v. United States, 57 Fed. Cl. 598, 625-27 (2003), aff'd in part, rev'd in part, and remanded on other grounds, 422 F.3d 1319 (Fed. Cir. 4

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2005) ("SoCal") (model presented by Dr. Horvitz); S. Nat'l Corp. v. United States, 57 Fed. Cl. 294, 304-06 (2003); Fifth Third Bank v. United States, 55 Fed. Cl. 223, 241-42 (2003). In each of these cases, the plaintiff estimated lost profits by merely assuming that, absent a breach, goodwill eliminated by FIRREA would have been utilized to obtain unidentified assets and liabilities that would result in profits equal to that realized by the thrift on its actual assets. At trial, Dr. Horvitz conceded that his model is virtually indistinguishable from the model he presented in Citizens Fin. Tr. 2627:5-2628:4 (Horvitz). In both cases, Dr. Horvitz failed to identify the assets and liabilities that Sterling would have acquired absent a breach, ignored competition, and incorrectly assumed that incremental assets earn profit at the same rate as actual assets. Further, Dr. Horvitz's model in this case, like the models previously rejected, assumes that the addition of a dollar of regulatory capital into a thrift automatically results in profits, contrary to basic principles of finance and economics. These errors, in addition to others discussed below, render it impossible for Sterling's lost profits model, like the virtually identical models rejected in the eight cases listed above, to meet the reasonable certainty standard. Moreover, Sterling's profitability in the actual world does not provide a basis to distinguish Sterling's model from the models previously rejected by the Court. In at least five of the eight cases in which the forgone assets methodology has been rejected, the model projected profitability at the same rate, or a lesser rate, than that actually attained by the plaintiff thrift. See Fifth Third, 55 Fed. Cl. at 240-42; Southern National, 57 Fed. Cl. at 303-04; and Standard Federal, 62 Fed. Cl. at 276-77; LaSalle, 64 Fed. Cl. at 101-04; Columbia First, 60 Fed. Cl. at 115-118.

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Sterling's lost profits model suffers from an additional fatal flaw not present in the eight cases in which the model has already been rejected. In calculating lost profits, Dr. Horvitz does not simply add the contractual goodwill eliminated by FIRREA back to Sterling's regulatory capital, and estimate lost profits based upon the loss of the goodwill. In order to generate lost profits, he also inputs Sterling's wounded bank, or consequential damages, into the lost profits model. As a preliminary matter, this is invalid as a matter of law because the resulting profits constitute an extreme form of prejudgment interest, which Sterling is barred from seeking. District of Columbia v. United States, 67 Fed. Cl. 292, 341 (2003). If Dr. Horvitz had included only the contractual goodwill in his calculation, lost profits would be zero. Tr. 4166:224167:4(Bajaj). Thus, Sterling's lost profits claim must be rejected. At trial, Sterling also proffered a "mitigation" damages theory that purported to calculate the actual costs of replacing regulatory capital eliminated by FIRREA. With the exception of the estimated transaction costs incurred in replacing the Lewis Federal and Tri-Cities goodwill, the Court should reject Sterling's mitigation theory because its hypothetical premise has been repeatedly rejected by the Federal Circuit and this Court. Fifth Third, 402 F.3d at 1237; LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363, 1375 (Fed. Cir. 2003); Cal. Fed. Bank v. United States ("CalFed"), 43 Fed. Cl. 445, 460-61 (1999), aff'd in part, 245 F.3d 1342, 1350 (Fed. Cir. 2001); Franklin Fed. Savings Bank v. United States, 55 Fed. Cl. 108, 134-39 (2003); Columbia First Bank, FSB v. United States, 54 Fed. Cl. 693, 697-98 (2002); Bank United v. United States, 50 Fed. Cl. 645, 655-56 (2001), aff'd in part, 80 Fed. Appx. 663 (Fed. Cir. Sept. 22, 2003).

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In 1991, Sterling replaced all of the goodwill attributable to its acquisition of Lewis Federal and Tri-Cities through a common stock offering and a conversion of preferred stock to common stock. Through this offering, Sterling achieved compliance with FIRREA's new capital standards. Sterling's expert, Dr. Christopher James, however, did not attempt to quantify the actual costs of issuing those securities in 1991. To the contrary, he conceded that he did not measure actual, out-of-pocket costs incurred by Sterling in raising common stock in 1991. Tr. 3054:4-7 (James). Instead, he assumes that, in 1991, Sterling sold preferred stock, and uses the dividend rate for that hypothetical preferred stock offering as a "proxy" for estimating damages. Virtually the same methodology was rejected by this Court when Dr. James offered it in Granite Management Corp. v. United States, 58 Fed. Cl. 766, 778-79, aff'd in part and remanded in part on other grounds, 416 F.3d 1373 (Fed. Cir. 2005). The Federal Circuit affirmed that holding. The only true measure of Sterling's cost to replace its capital is its transaction costs. CalFed, 43 Fed. Cl. at 460-61 ("[o]n the day stock is issued, the amount you receive for the stock is equivalent to its worth and the only costs are transaction, or flotation costs."). Therefore, Sterling is entitled to no more than $900,204.00 in mitigation damages. Sterling also offers an assortment of so-called "wounded bank" damage claims, pursuant to which it seeks: 1) increased costs allegedly incurred to acquire a branch of another thrift known as Great American Savings and Loan; 2) losses on a loan, known as the CJ-4 Loan, claimed to result from FIRREA's requirements; 3) excess supervision costs purportedly based upon its status as a "troubled thrift," 4) legal, accounting, and insurance costs allegedly incurred in defending against regulatory interference; and 5) transaction costs attributable to an unsuccessful 1989 public offering. 7

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With respect to the Great American acquisition, Sterling failed to provide the minimum evidence needed to assess the validity of the claim pursuant to Rule 702 of the Federal Rules of Procedure and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 592 (1993). Further, Sterling provided no evidence that the breach caused it to purchase the branch at an increased price. The Court should also reject Sterling's claim for costs associated with the CJ-4 Loan because Sterling failed to prove that the loan's losses were breach-related. Similarly, the Court should not award Sterling's increased supervision costs because Sterling did not prove that the costs were caused by a breach. Also, the evidence presented at trial revealed that the legal, accounting, and insurance costs allegedly incurred in defending against regulatory interference were virtually all litigationrelated or based upon work that Sterling could not establish was breach-related. Sterling is barred from recovering such costs as a matter of law. Finally, Sterling claims that the increased costs allegedly incurred in connection with the 1989 public offering resulted from its inability to pay preferred stock dividends. This claim is foreclosed because the Court has previously ruled that Sterling was not contractually entitled to pay dividends. Sterling Savings v. United States, 53 Fed. Cl. 599, 614-15 (2002). Further, we demonstrated that the denial of Sterling's request for preapproval to pay preferred stock dividends was not caused by the breach, but was based upon well-reasoned, longstanding agency policy precluding such preapproval. For these reasons, the Court should award a judgment of $900,204 to Sterling as compensation for the transaction costs incurred in replacing the goodwill attributable to its acquisition of Lewis Federal and Tri-Cities. 8

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ISSUES PRESENTED 1. Whether Sterling's mitigation through replacement of the contractual goodwill

eliminated by FIRREA precludes a claim for lost profits. 2. 3. Whether Sterling's alleged failure to mitigate precludes an award of lost profits. Whether Sterling failed to prove that its alleged lost profits damages were

foreseeable, were caused by a breach, or can be ascertained with reasonable certainty. 4. Whether Sterling failed to demonstrate that it is entitled, as a matter of law, to

replacement costs over and above transaction costs incurred in replacing goodwill with tangible capital. 5. Whether Sterling failed to demonstrate that its purported "actual mitigation"

damages reflect out-of-pocket costs incurred to replace regulatory capital eliminated by FIRREA. 6. Whether Sterling failed to prove that its alleged wounded bank damages were

foreseeable, were caused by a breach, or can be ascertained with reasonable certainty. PROPOSED FINDINGS OF FACT I. STERLING'S ACQUISITIONS 1. Sterling is a commercial bank. Tr. 4166:22-4167:4 (Gilkey); P-103, p. SG1003465. Prior to July 8, 2005, it was a state-chartered, federally-insured stock savings association headquartered in Spokane, Washington. Compl. ¶ 1.1; P-103, p. SG1003465. Sterling commenced operations in 1983. Compl. ¶ 1.1. 2. Sterling's damages claims arise from the thrift's acquisition of two failing savings and loan institutions in the 1980s: Lewis Federal and Tri-Cities.

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3. While Sterling acquired another thrift in 1988, Central Evergreen Savings & Loan Association ("Central Evergreen"), the Court has held that the Government did not commit a breach of contract in connection with the acquisition. Sterling Sav. Assn. v. United States, 72 Fed. Cl. 404, 411 (2006). A. The 1985 Lewis Federal Acquisition

4. In November 1985, Sterling successfully bid for and acquired Lewis Federal, an insolvent institution with assets of approximately $52.5 million, pursuant to an acquisition agreement with the Federal Savings and Loan Insurance Corporation ("FSLIC"). P-18. Sterling did not invest any money in the acquisition. Instead, FSLIC, in its corporate capacity, executed an Assistance Agreement with Sterling in which FSLIC contributed $1.75 million to the acquisition, as well as other financial consideration. P-19, pp. XXX105 0098-99. In addition, the Federal Home Loan Bank Board ("FHLBB") issued a forbearance letter permitting Sterling to amortize intangible assets over a period of 40 years. P-20, p. WOF014 0601. The Lewis Federal acquisition resulted in the creation of $3,606,389 in goodwill. P-72, p. SG1005264.1 5. The forbearance letter issued in connection with the Lewis Federal acquisition included a provision requiring FSLIC to forbear, for five years, from exercising its authority, under 12 C.F.R. § 563.13, for any failure of Sterling to meet its capital requirements arising solely from two sets of circumstances. P-20, ¶2, p. WOF014 0600. The forbearance stated: 2. Section 563.13 (Reserve Accounts) of the Rules and Regulations for the Federal Savings and Loan Insurance

For purposes of this memorandum, the goodwill associated with the Lewis Federal and Tri-Cities acquisitions will be referred to as the "contractual goodwill," while the goodwill associated with the Central Evergreen acquisition will be referred to as the "noncontractual goodwill." 10

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Corporation ("Insurance Regulations") provides no exceptions permitting the exclusion of scheduled items or liabilities acquired from another institution in computing the net-worth requirements of this section. However, in view of the fact that the Acquisition was instituted for supervisory reasons, the Federal Savings and Loan Insurance Corporation ("FSLIC") will forbear, for a period of five years following consummation of the acquisition, from exercising its authority, under Section 563.13 of the Insurance Regulations, for any failure of Sterling to meet the net-worth requirements of Section 563.13 arising solely from (1)(a) scheduled items attributable to the assets of Lewis' existing at the Effective Date, (b) any reduction in net wroth resulting from losses on assets or losses on continuing operations acquired in connection with the Acquisition, and (c) any increase in liabilities of Sterling as of the Effective Date by reason of Sterling's assumption of liabilities; or (2) Sterling's assumption of the net worth deficiency of Lewis as of the Effective Date. Id. (emphasis in original). The forbearance was based upon standard language utilized in supervisory acquisitions. Tr. 3479:23-3482:4 (Hargett). Subsections (1) and (2) of the forbearance are provided in the alternative, and their applicability is dependent upon the method of accounting utilized in structuring the acquisition. Subsection two, which refers to "assumption of net worth deficiency," applies to acquisitions achieved pursuant to the pooling method of accounting, while subsection one applies to acquisitions accomplished pursuant to the purchase method of accounting. Tr. 3436:23-3437:16, 3432:21-3433:20 (Hargett). The provisions are provided in the alternative because, at the time the forbearance letter is drafted, the accounting methodology to be applied may not be known. Tr. 3435:9-25 (Hargett). 6. Subsection two of the forbearance letter is not applicable to the Lewis Federal acquisition because Sterling did not assume a net worth deficit. Instead, pursuant to the purchase method of accounting, the gap between liabilities and assets was filled by goodwill. Tr. 3435:2511

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3436:22, 3437:17-3438:1 (Hargett); Tr. 1873:17-1874:20 (Byrne); see also Tr. 2780:6-21 (Horvitz). B. The 1988 Tri-Cities Acquisition

7. In February 1988, FSLIC selected Sterling as the low bidder for Tri-Cities after another bidder, Old Stone, advised the FHLBB that it intended to withdraw its bid. P-374, p. CSG0180013; P-377, p. WOB005 1223. Upon Old Stone's withdrawal, FSLIC determined that Sterling was the low bidder. P-374: Tr. 335:11-23 (Faulstich). James Faulstich, the president of the Federal Home Loan Bank of Seattle and principal supervisory agent for Sterling, has no reason to doubt that Old Stone voluntarily withdrew from the bidding process, and no knowledge about a purported effort by his staff to eliminate Old Stone from the bidding process. Tr. 371:1015, 374:17-23, 383:9-18 (Faulstich). 8. In April 1988, Sterling acquired Tri-Cities. P-27. On April 7, 1988, the FHLBB, pursuant to Resolution No. 88-250, approved the acquisition, authorized an Assistance Agreement, and authorized and directed that FSLIC send a forbearance letter to Sterling. Id. The Assistance Agreement required a FSLIC cash contribution of $11,730,128.00. Again, Sterling did not invest any money in the acquisition. P-38, p. SG100 5656-59. The Tri-Cities acquisition resulted in the creation of approximately $14 million in goodwill, to be amortized over 25 years. P-28, p. WOF014 1397; Joint Stipulations of Fact, dated June 6, 2007, ¶ 5. 9. The forbearance letter issued in connection with the Tri-Cities acquisition, like the Lewis Federal forbearance letter, included a provision requiring FSLIC to forbear, for five years, from exercising its authority under 12 C.F.R. 563.13, for any failure of Sterling to meet its capital

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requirements arising solely from two sets of circumstances. P-28, ¶1, p. WOF014 1397. The forbearance stated: 1. Capital Requirements. The Federal Savings and Loan Insurance Corporation ("FSLIC") will forbear, for a period of five years following consummation of the acquisition, from exercising its authority, under Section 563.13 of the Rules and Regulations for FSLIC-insured institutions, for any failure of Sterling to meet the capital requirements of Section 563.13 arising solely from (1)(a) any increase in the contingency component attributable to the assets of TriCities existing at the effective date, and (b) any increase in the net growth of Sterling as of the Effective Date by reason of Sterling's assumption of Tri-Cities' liabilities; or (2) Sterling's assumption of the capital deficiency of the disappearing institution as of the Effective Date.

Id. Like the five-year forbearance in the Lewis Federal forbearance letter, the Tri-Cities forbearance was based upon standard language utilized in supervisory acquisitions. Tr. 3479:233482:4 (Hargett). Because the accounting methodology to be utilized may not have been known when the forbearance letter was drafted, the standard language provides for two scenarios: subsection two applies to acquisitions achieved pursuant to the pooling method of accounting, while subsection one applies to acquisitions accomplished pursuant to the purchase method of accounting. Tr. 3432:21-3433:20, 3435:9-25 (Hargett). 10. Subsection two of the forbearance letter is not applicable to the Tri-Cities acquisition because, as was the case with the Lewis Federal acquisition, Sterling did not acquire a net worth deficit. As was the case in the Lewis Federal acquisition, pursuant to the purchase method of accounting, the gap between liabilities and assets was filled by goodwill. Tr. 3435:25-3436:22, 3437:17-3438:1 (Hargett); Tr. 1873:17-1874:20 (Byrne); see also Tr. 2780:6-21 (Horvitz).

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C.

The Central Evergreen Acquisition

11. In December 1988, Sterling acquired Central Evergreen. Although the Bank Board issued a resolution, No. 88-1273, approving the acquisition, and entered into an agreement with Sterling governing the maintenance of regulatory capital by Sterling, the Bank Board did not issue a forbearance letter or enter into an assistance agreement, and FSLIC did not provide cash assistance. Joint Stipulations of Fact, dated June 6, 2007, ¶6. The Central Evergreen acquisition resulted in the creation of $22,0833,000 million in noncontractual goodwill. P-78, p. PSG0270425. 12. Sterling submitted its 1988 Business Plan with its application to acquire Central Evergreen in August 1988. P-196. The business plan required Sterling to maintain minimum capital ratios of 4.16, 4.15, and 4.24 for the years ending in December 1989, June 1990, and June 1991, respectively. Sterling was contractually bound to maintain these ratios. Id. at PSG029 1135, 1137; Tr. 2773:13-23; 2774:4-18 (Horvitz); DX 1081. 13. There was no agreement between Sterling and the Government obligating Sterling to acquire Central Evergreen after the acquisition of Tri-Cities. Tr. 3664:1-11 (Hedlund). Indeed, Sterling could have withdrawn its application to acquire Central Evergreen at any point prior to November 30, 1988 (well after the April 1988 acquisition of Tri-Cities). Indeed, Sterling threatened to just that when FHLBB's approval of the acquisition was delayed. P-401, ¶3; Tr. 3666:16-3668:6, 3668:7-9 (Hedlund). 14. Mr. Harold Gilkey, Chairman of the Board and Chief Executive Officer of Sterling Financial Corporation (SFC), and former Chairman of the Board and Chief Executive Officer of Sterling, Tr. 55:22-56:9 (Gilkey), understood that the Central Evergreen acquisition was risky 14

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due to the asset size of the acquired institution and its troubled status. 3668:10-3669:5 (Hedlund). 15. Sterling considered each of its acquisitions to be a success. In an OTS filing submitted in 1989, subsequent to the enactment of FIRREA, Sterling detailed the advantages of its acquisitions: These acquisitions have enabled [Sterling] to expand its deposit and mortgage delivery systems considerably in a relatively short period and have added significant assets, a more geographically diversified loan portfolio, and potential future tax benefits. . . . Through consolidation, the Association has reduced the cost of performing administrative functions and increased the operating efficiencies of these acquired institutions. Management of the Association believes that continued disciplined supervision of the assets acquired from Lewis Federal, Tri-Cities, and Central Evergreen will result in increased profitability to [Sterling.] DX 908. 16. Prior to FIRREA's enactment, Sterling considered shrinking its asset base to $650 million in an attempt to improve the negative tangible capital position that resulted from its acquisition of Central Evergreen. 3671:16-22 (Hedlund); P-404, WON889 0474. Further, on August 3, 1989, when Mr. Daniel Byrne, Sterling' chief financial officer, believed that Sterling's goodwill would be grandfathered by FIRREA, he submitted a business plan for 1990 that was a "no-growth plan in terms of total assets." DX 358, p. WON879 0180; Tr. 1794:10-25, 1797:1420 (Byrne). 17. OTS examined Sterling in 1989, prior to FIRREA's enactment. P-178. The findings of the examination, dated June 19, 1989, "did not reflect the new standards promulgated by FIRREA." Tr. 2186:16-18 (Friend). The examination, however, did reference FIRREA purely

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for informational purposes. Tr. 2379:11-2382:17 (Friend). At the time of the examination, Sterling was experiencing problems with capital, criticized assets, earnings, and interest rate risk. Tr. 2187:22-2191:21 (Friend). Further, its earnings were below the peer group average and insufficient for the amount of growth Sterling had experienced. Tr. 2188:8-11 (Friend). While Sterling was in compliance with regulatory requirements applicable at the time, its tangible capital was negative and a source of concern for regulators. P-178, p. SG0052263. 18. On August 9, 1989, Congress enacted FIRREA. Among other things, FIRREA established new capital requirements. In particular, FIRREA, and the regulations promulgated to implement it, required thrifts to comply with three separate regulatory capital standards: a leverage (or "core capital") standard, a tangible capital standard, and a risk-based capital standard. 12 U.S.C. §1464(t) (1989); 12 C.F.R. §§ 567.1, 567.2, 567.5 (1990). "Qualifying supervisory goodwill" was to be phased-out gradually between 1990 and 1995. 12 U.S.C. §1464(t); 12 C.F.R. §563.13. In the intervening years, eligible savings associations were permitted to include qualifying supervisory goodwill in satisfying the core and risk-based capital standards. Id. II. POST-FIRREA A. Sterling's Application To Acquire Branches Of Great American Savings Bank

19. On October 12, 1989, OTS approved Sterling's application to acquire two branches of Great American Savings Bank. P-344. The approval was conditioned upon compliance with the FIRREA's minimum tangible capital requirements. Id. at p. 3.

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20. At the time of the approval, Sterling would not have complied with the tangible and core capital ratios that would be applied pursuant to FIRREA, even including the "contractual" goodwill attributable to the Tri-Cities and Lewis Federal acquisitions. Tr. 2215:18-2218:18 (Friend); DX 1080 (Friend demo); Tr. 2744:2-2748:14 (Horvitz); DX 422, p. 1631; P-454, table 4a. With respect to tangible capital, Sterling fell short of the minimum by $7.26 million. DX 422; Tr. 2743:16-2745:21 (Horvitz); P-454, table 4a. 21. Sterling had negative tangible capital prior to the enactment of FIRREA. P-178, p. SG0052263. Sterling's regulators considered tangible capital levels in evaluating applications to acquire branches before enactment of the minimum tangible capital requirement. Tr. 3724:2-11, 3727:7-13 (Hedlund). When it requested approval of the acquisition of the Great American branches, Sterling's capital condition was poor due to its recent acquisition of Central Evergreen. Tr. 3724:20-3725:3 (Hedlund). B. The "CJ-4" Loan

22. One of Sterling's assets, known as the "CJ-4" Loan, was troubled as of the fall of 1989. Sterling placed the loan, which was initially approved on or about June 27, 1988, into nonjudicial foreclosure in November 1989, before the effective date of the regulations implementing FIRREA. DX 943; Tr. 3399:1-7, 3399:16-3400:6 (Hargett). Payments on the loan were current only through June 1989. DX 943; Tr. 3399:1-7 (Hargett). By August 1989, the project had experienced numerous problems related to cost overruns, construction delays, and an ineffective marketing effort. DX 943. Among other things, the property subject to the loan, which was to house an office park, contained a natural spring that Sterling was unaware of when it made the loan. Tr. 3098:23-3099:17 (Zuppe). The natural water spring did not add any value 17

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to the office park, and there were unanticipated costs in connection with the spring's removal. Tr. 3099:6-17 (Zuppe). 23. Before Sterling placed the $2.4 million loan into foreclosure, the loan had already been funded in the amount of $2.384 million, although tenant improvements had not yet begun. DX 389; Tr. 3402:2-20 (Hargett). Further, the property's appraised value had dropped from $3.45 million as of March 15, 1988, to $2.95 million a of November 15, 1989. DX 943. 24. In December of 1989, Sterling placed the property into judicial foreclosure "due to the apparent substantial deficiency to be realized upon the sale of the real estate and [Sterling's] indication that the Borrowers possessed additional assets." Id. The estimated cost to complete the improvements was $541,000. DX 389; Tr. 3402:21-3403:18 (Hargett). After Sterling's commencement of judicial foreclosure proceedings, the borrowers filed a countersuit. DX 943. 25. When FIRREA's regulations became effective in December 1989, Sterling needed, under loan-to-one-borrower limitations, $19.6 million in unimpaired (i.e., tangible) capital in order to support the monies already lent as well as an additional $541,000, the estimated cost to complete improvements to the buildings that were the subject of the loan. Tr. 3405:14-3407:6 (Hargett). As of late 1989, even assuming that the Tri-Cities and Lewis Federal goodwill counted as regulatory capital, Sterling had only $3 million in tangible capital. DX 422, p. WON952 1631; P-454, table 4a. 26. Nonetheless, as of September 1990, thrift examiners knew that Sterling was considering the advance of additional funds to the borrower, and did not object. P-181, p. 2-A-3. 27. Sterling never formally requested permission to make a new loan to the CJ-4 borrowers. Tr. 3099:18-3100:6; 3100:15-3101:9 (Zuppe). 18

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C.

The Terminated 1989 Public Offering

28. Pursuant to a business plan adopted in connection with its acquisition of Central Evergreen, Sterling was required to raise $5 million in capital between 1989 and 1990. P-196, p. PSG029 1124. In late September of 1989, Sterling and its investment bankers structured a public "units" offering that would include both preferred and common stock. P-342, p. WON889 0397; P-345, p. SG0600050. Ultimately, the public offering was expected to yield approximately $12.5 million in new capital. DX 910. 29. In September 1989, Sterling met with OTS to request an "exemption" in the form of preapproval of the payment of future dividends upon preferred stock. P-345, p. 1. At the meeting, Mr. Ron Karr advised Mr. Byrne and Mr. Gilkey that policies for the payment of dividends by thrifts, whether "capitalized or under capitalized," were being developed. P-345, p. 1. At the time, Sterling believed that it possessed a contractual right to the payment of dividends. Tr. 1819:13-17 (Byrne). In August 2006, the Court ruled that Sterling did not possess such a right. Sterling, 53 Fed. Cl. at 615. 30. Following the meeting, Mr. Byrne requested, in an October 3, 1989 letter to OTS, "nonobjection" to the payment of such dividends. P-342. On October 12, 1989, Ms. Carol Friend, Sterling's supervisory agent, advised Mr. Byrne that OTS could