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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 Thomas C. Wheeler)
DEFENDANT'S MOTION FOR JUDGMENT BASED UPON PARTIAL FINDINGS 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 TIMOTHY ABRAHAM WILLIAM KANELLIS ELIZABETH A. HOLT July 9, 2007
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
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TABLE OF CONTENTS Page TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 I. II. STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STERLING'S LOST PROFITS MODEL FAILS BECAUSE IT HAS NO BASIS IN THE FACTS INTRODUCED AT TRIAL AND IS SPECULATIVE AS A MATTER OF LAW . . . . . . . . . . . . . . . . . . . . . . 3 A. B. C. Legal Standards For Expectancy Damages . . . . . . . . . . . . . . . . . . . . . . . . 4 Dr. Horvitz's Flawed Lost Profits Model . . . . . . . . . . . . . . . . . . . . . . . . . 7 Dr. Horvitz's Lost Profits Model Does Not Measure Harm Attributable To Sterling's Alleged Loss Of Employees, Loans, Customers, And Reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Dr. Horvitz's Lost Profits Model Ignores Sterling's Conversion To A Commercial Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Sterling's Lost Profits Claim Is Invalid As A Matter Of Fact Because Dr. Horvitz's Model Ignores Sterling's Concerns About Its Risk-Based Capital . . . . . . . . . . . . . . . . . 11 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Dr. Horvitz's Lost Profits Model Fails For Lack Of Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
D.
E.
F.
G.
i
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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 . . . . . . . . . . . . . . . . 14 a. Sterling Would Have Failed FIRREA's Tangible Capital Requirement Absent The Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Sterling Would Have Failed FIRREA's Core Capital Requirement Absent The Breach . . . . . . . . . . . . . 16 Dr. Horvitz's New Opinion Regarding The Lewis Federal And Tri-Cities Forbearance Letters Is Incorrect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
b.
c.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 The Breach Did Not Cause Sterling To Forgo Profitable Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.
H.
Dr. Horvitz's Lost Profits Model Fails For Lack Of Foreseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 The Damages Arising From Dr. Horvitz's Lost Profits Model Are Not Reasonably Certain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Dr. Horvitz's Growth Rate Is At Odds With Sterling's Underusage Of Its Leverage Capacity In The Actual World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Dr. Horvitz Incorrectly Assumes That Growth Equates With Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ii
I.
2.
3.
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4.
The Assumed Capital Ratios In Dr. Horvitz's Model Are Speculative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Dr. Horvtiz'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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.
III.
THE COURT SHOULD REJECT STERLING'S "MITIGATION" DAMAGES CLAIM BECAUSE PROFESSOR JAMES'S MODEL REFLECTS HYPOTHETICAL, RATHER THAN ACTUAL, COSTS TO RAISE REPLACEMENT CAPITAL . . . . . . . . . . . . . . 34 THE COURT SHOULD REJECT STERLING'S ALLEGED WOUNDED BANK CLAIMS AS A MATTER OF LAW . . . . . . . . . . . . . . . . . 39 A. The Breach Did Not Cause Sterling To Incur Increased Costs In Acquiring A Branch Of Great American Savings Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 The Breach Did Not Cause Sterling To Incur Losses Associated With The CJ-4 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 The Breach Did Not Cause Sterling To Incur Excess Supervision Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Breach Did Not Cause Sterling's Inability To Guarantee The Payment Of Preferred Stock Dividends In Connection With The 1989 Offering . . . . . . . . . . . . . . . . . 44 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
IV.
B.
C.
D.
E.
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
iii
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TABLE OF AUTHORITIES Page(s) CASES Am. Fed. Bank, FSB v. United States, 68 Fed. Cl. 346 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 29 Am-Pro Protective Agency v. United States, 281 F.3d 1234 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Bank of Am., FSB v. United States, 67 Fed. Cl. 577 (2005), appeals argued, Nos. 2006-5088, -5089, -5090 (Fed. Cir. Apr. 4, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Bank United of Tex,, FSB v. United States, 50 Fed. Cl. 645 (2001), aff'd, 80 Fed. Appx. 663 (Fed. Cir. Sept. 22, 2003) . . . . . . . . . . . passim Berg's Estate v. United States, 687 F.2d 377 (Ct. Cl. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Bohac v. Dep't of Agric., 239 F.3d 1334 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 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, 43 Fed. Cl. 445 (1999), aff'd in part, 245 F.3d 1342 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . 35 Capitol Elec. Co. v. United States, 729 F.2d 743 (Fed. Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Citizens Fed. Bank, FSB v. United States, 474 F.3d 1314 (Fed. Cir. 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Citizens Fin. Servs., FSB v. United States, 64 Fed. Cl. 498 (2005), aff'd, 170 Fed. Appx. 129 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . passim Citizens Fin. Servs., FSB v. United States, 57 Fed. Cl. 64 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Coast Fed. Bank, FSB v. United States, 48 Fed. Cl. 402 (2000), aff'd, 323 F.3d 1035 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . 39 iv
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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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Cooper v. United States, 37 Fed. Cl. 28 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 District of Columbia v. United States, 67 Fed. Cl. 292 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Dolphin Tours, Inc. v. Pacifico Creative Serv., Inc., 773 F.2d 1506 (9th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Fifth Third Bank v. United States, 402 F.3d 1221 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Fifth Third Bank v. United States, 55 Fed. Cl. 223 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Franklin Fed. Sav. Bank v. United States, 55 Fed. Cl. 108 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37, 45, 46 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Glendale Fed. Bank, FSB v. United States, 43 Fed. Cl. 390 (1999), aff'd in part, vacated in part, 239 F.3d 1374 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Granite Mgmt. Corp. v. United States, 58 Fed. Cl. 766 (2003), aff'd in part, and remanded on other grounds, 416 F.3d 1373 (Fed Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . 36, 37 Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 v
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Howard Indus. v. United States, 115 F. Supp. 481 (Ct. Cl. 1953) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Kaiser Alum. & Chem. Corp. v. Ill. Cent. Gulf, 615 F.2d 470 (8th Cir. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Krauss v. Greenbarg, 137 F.2d 569 (3d Cir. 1943) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 LaSalle Talman Bank, FSB v. United States, 64 Fed. Cl. 90 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaSalle Talman Bank, FSB v. United States, 45 Fed. Cl. 64 (1999), aff'd in part, vacated in part, 317 F.3d 1363 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Landmark Land Co. v. United States, 256 F.3d 1365 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 6 Library of Congress v. Shaw, 478 U.S. 310 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Midwest Indus. Painting v. United States, 4 Cl. Ct. 124 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 N. Helex Co. v. United States, 524 F.2d 707 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Old Stone Corp. v. United States, 450 F.3d 1360 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Piggly Wiggly Corp. v. United States, 81 F. Supp. 819 (1949) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Prudential Ins. Co. of Am. v. United States, 801 F.2d 1295 (Fed. Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Quiman v. United States, 39 Fed. Cl. 171 (1997), aff'd, 178 F.3d 1313 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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R.S.E., Inc. v. Pennsy Supply, Inc., 523 F. Supp. 954 (M.D. Pa. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Ramsey v. United States, 101 F. Supp. 353 (1951) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Reynolds v. Roberts, 207 F.3d 1288 (11th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Robinson v. United States, 305 F.3d 1330 (Fed. Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Roseburg Lumber Co. v. Madigan, 978 F.2d 660 (Fed. Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Ross-Simons of Warwick, Inc. v. Baccarat, 182 F.R.D. 386 (D.R.I. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Rumsfeld v. Applied Cos., Inc., 325 F.3d 1328 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Shyface v. Sec'y of Health & Human Servs., 165 F.3d 1344 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 S. Cal. Fed. Sav. & Loan v. United States, 57 Fed. Cl. 598 (2003), aff'd in part, rev'd in part, and remanded on other grounds, 422 F.3d 1319 (Fed Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . 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 Sav. Ass'n v. Ryan, 959 F.2d 241 (9th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Sterling Sav. Ass'n v. Ryan, 751 F. Supp. 871 (E.D. Wash. 1990), rev'd, 959 F.2d 241 (9th Cir. 1992) . . . . . . . . . . . . . . 18, 19
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Sterling Sav. Ass'n v. United States, 72 Fed. Cl. 404 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Sterling Sav. Ass'n v. United States, No. 95-829C, slip op. at 3-4 (Nov. 15, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Sterling Sav. Ass'n v. United States, 53 Fed. Cl. 599 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Sun Cal, Inc. v. United States, 25 Cl. Ct. 426 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Wells Fargo Bank v. United States, 88 F.3d 1012 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 WestFed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 STATUTES, RULES, AND REGULATIONS 12 C.F.R. § 567.8 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12 C.F.R. § 567.9 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12 C.F.R. Pt. 3, App. A § 2(c)(1)(I). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 28 U.S.C. § 2516 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Fed. R. Evid. 803(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101 -73, 103 Stat. 183 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim RCFC 52(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 3 MISCELLANEOUS Restatement (Second) of Contracts § 347 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 12 Restatement (Second) of Contracts § 350 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 13 Restatement (Second) of Contracts § 351 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 25 Restatement (Second) of Contracts § 352 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 viii
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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 MOTION FOR JUDGMENT BASED UPON PARTIAL FINDINGS Defendant, the United States, respectfully requests the Court to enter judgment pursuant to Rule 52(c) of the Rules of the United States Court of Federal Claims ("RCFC") against plaintiff, Sterling Savings Association ("Sterling"). Based upon the applicable precedent and the record Sterling has presented, Sterling cannot prevail upon any of its claims. Accordingly, we are entitled to judgment as a matter of law with respect to Sterling's lost profits, "mitigation," and wounded bank damages claims. In support of our motion, we rely upon the record established at trial and the following brief. INTRODUCTION Rule 52(c) allows for the entry of judgment upon partial findings at the close of a party's case if that party has been fully heard and the Court finds that the party is not entitled to judgment as a matter of law. Here, Sterling has made a detailed presentation of its claims and has been fully heard. First, although the Court has heard from some of Sterling's current and former employees, officers, and directors whom allege that Sterling suffered harm as a result of "the
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breach" through the loss of employees, loans, customers, and reputation, Sterling has put forth no evidence to quantify any of these alleged losses. Nor are any of these alleged losses captured in any of Sterling's damages models. Therefore, even if the Court were to agree with Sterling's witnesses' testimony, such alleged harm is irrelevant to the damages claims Sterling has put forth in this case, thus precluding the award of damages upon this testimony. Second, Sterling has admitted that it both tried, and succeeded, to mitigate the breach. As such, Sterling is only entitled to the transaction costs incurred in mitigating. Third, Sterling has asserted three damages claims, each of which independently fail. Sterling's lost profits claim fails because it has no basis in the facts introduced at trial and is speculative as a matter of law. Sterling's "mitigation" damages claim fails because it does not calculate the actual costs to Sterling to replace the regulatory capital eliminated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 ("FIRREA"), but instead calculates damages based upon a dividend rate for a hypothetical preferred stock offering. The hypothetical premise of Sterling's "mitigation" damages claim fails as a matter of law under binding precedent. Finally, Sterling asserts various so-called "wounded bank" damages claims. Specifically, it seeks: (1) increased costs allegedly incurred to acquire a branch of Great American Savings and Loan; (2) losses upon the CJ-4 loan; (3) excess supervision costs purportedly based upon its status as a "troubled thrift;" (4) transaction costs attributable to an unsuccessful 1989 public offering; and (5) legal, accounting, and insurance costs allegedly incurred in defending against regulatory interference. Sterling's wounded bank claims fail because the evidence introduced at trial shows that these alleged damages were not related to the breach, are foreclosed by prior 2
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rulings of this Court, and/or encompass fees incurred in litigation that are foreclosed by statute. ARGUMENT I. STANDARD OF REVIEW Pursuant to RCFC 52(c), the Court should enter judgment against Sterling after the conclusion of its case-in-chief if, under controlling law, Sterling has failed to present sufficient evidence to prevail and the relevant damages issues must be decided against it. See Columbia First Bank, FSB v. United States, 60 Fed. Cl. 97, 101-02 (2004). At this time, the question is not whether the plaintiff has made a prima facie case, as it would be for a directed verdict motion in a jury trial. Cooper v. United States, 37 Fed. Cl. 28, 35 (1996). Instead, "[a] plaintiff who has a full opportunity to put on his own case and has failed to convince the Judge, as trier of the facts, of a right to relief, has no legal right . . . to hear the defendant's case." Howard Indus. v. United States, 115 F. Supp. 481, 484-85 (Ct. Cl. 1953). Because this Court serves "as both the trier of fact and the trier of law," RCFC 52(c) permits weighing the evidence and, in contrast to a summary judgment motion, does not require that credibility determinations be resolved in favor of the plaintiff. Howard Indus., 115 F. Supp. at 484-85. II. STERLING'S LOST PROFITS MODEL FAILS BECAUSE IT HAS NO BASIS IN THE FACTS INTRODUCED AT TRIAL AND IS SPECULATIVE AS A MATTER OF LAW Dr. Paul Horvitz presented Sterling's lost profits claim. The Court should conclude that Dr. Horvitz's lost profits model is invalid because the evidence introduced at trial shows that the breach did not harm Sterling. In addition, among other flaws, Dr. Horvitz's model assumes that Sterling made no attempt to mitigate by replacing the $15.557 million in contractual goodwill remaining as of December 31, 1989, notwithstanding: (1) Sterling's raising of over $900 million 3
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in new capital after that date, Tr. 290:13-19; Tr. 408:24-424:6; and (2) Sterling's acknowledgment that it did mitigate the breach through its 1991 recapitalization, Tr 583:11585:25; Tr. 1575:10-23; Tr. 1611:14-1612:17; see also Tr. 18:22-25 ("Sterling had a duty in law, and as a practical proposition, an obligation to its shareholders to try to mitigate the breach. And it did try to mitigate."); Tr. 20:25-21:1 ("There's no question, Your Honor, that this raising of capital mitigated Sterling's harm."). Finally, Dr. Horvitz's lost profits model is speculative because it does not meet the legal standards required for expectancy damages. A. Legal Standards For Expectancy Damages
To recover expectancy damages, Sterling must prove three elements: (1) the lost profits were within the contemplation of the parties because the loss was foreseeable; (2) there would have been a profit but for the breach; and (3) the measure of damages must be reasonably certain. See Cal. Fed. Bank v. United States, 395 F.3d 1263, 1266 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 344 (2005) ("CalFed"). With respect to causation, Sterling must prove that "profits would have been made but for the breach," id. at 1268, "the causal connection between the breach and the loss of profits must be `definitely established[,]'" id., and the lost profits must have "inevitably and naturally, not possibly or even probably, flow[ed] from the defendant's breach." Id. at 1267 (citation omitted).1
1
We respectfully disagree with the Court of Appeals for the Federal Circuit's decision in Citizens Federal Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007), which indicated that the trial court possessed discretion to impose a "substantial factor" test for causation, rather than a "but for" test. Regardless, the panel decision in Citizens Federal cannot be understood to overrule the previous panel decision in CalFed. Capitol Elec. Co. v. United States, 729 F.2d 743 (Fed. Cir. 1984) (only Court sitting en banc can overrule earlier panel decision). In addition, Sterling relied upon CalFed in its memorandum of contentions of fact and law, indicating its agreement that the "but for" test applies to this case. 4
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Under Federal Circuit precedent, because a lost profits award should not place the plaintiff in a better position than it would have occupied absent the breach, costs that were caused by factors other than the breach must be subtracted from damages. See Hansen Bancorp, Inc. v. United States, 367 F.3d 1297, 1315 (Fed. Cir. 2004); Restatement (Second) of Contracts § 347, cmt. b (1981). With respect to foreseeability, the Court examines whether the alleged loss was foreseeable at the time of contracting. Bohac v. Dep't of Agric., 239 F.3d 1334, 1340 (Fed. Cir. 2001). "Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know." Landmark Land Co. v. United States, 256 F.3d 1365, 1378 (Fed. Cir. 2001) (citation omitted). The loss for which damages are claimed "must have been foreseeable to the party in breach at the time of contract formation." Id. (citing Restatement (Second) of Contracts § 351(1)). Moreover, "[t]he mere circumstance that some loss was foreseeable, or even that some loss of the same general kind was foreseeable, will not suffice if the loss that actually occurred was not foreseeable." Id. (emphasis added); see Restatement (Second) of Contracts § 351 cmt a. Sterling must prove "both the
Even if the "substantial factor" test was applicable, however, Sterling failed to establish that, absent the breach, it would not have incurred the costs that it is seeking. A plaintiff attempting to establish that a breach was a "substantial factor" in causing its damages must establish that the claimed damages were "primarily the result of the breach," WestFed Holdings, Inc. v. United States, 52 Fed. Cl. 135, 160 (2002), and that the alleged breach was the predominating or primary factor that led to the claimed damages. Shyface v. Sec'y of Health and Human Servs., 165 F.3d 1344, 1353 (Fed. Cir. 1999); Krauss v. Greenbarg, 137 F.2d 569, 572 (3d Cir. 1943). 5
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magnitude and the type of damages were foreseeable." Landmark, 256 F.3d at 1378 (emphasis added). In addition, Sterling must establish the fact of lost profits and prove the amount with reasonable certainty. See Rumsfeld v. Applied Cos., Inc., 325 F.3d 1328, 1340 (Fed. Cir. 2003) (citation omitted); Energy Capital Corp. v. United States, 302 F.3d 1314, 1325 (Fed. Cir. 2002); Restatement (Second) of Contracts § 352. Unreliable lost profits models cannot give rise to recovery. See San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557, 1563 (Fed. Cir. 1997); Roseburg Lumber Co. v. Madigan, 978 F.2d 660, 667 (Fed. Cir. 1992). Because the courts have rejected nearly every lost profits claim in Winstar-related cases, the Federal Circuit has noted that these claims are often "inherently unreliable" and that lost profits models are largely a "waste of time and effort." Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308, 1313 (Fed. Cir. 2004); accord Old Stone Corp. v. United States, 450 F.3d 1360, 1377 (Fed. Cir. 2006); CalFed, 395 F.3d at 1270-71; Fifth Third Bank v. United States, 402 F.3d 1221, 1237 (Fed. Cir. 2005). Finally, Sterling had a duty to mitigate potential damages. The duty to mitigate potential damages by raising replacement capital applies to claims for lost profits in the Winstar-related cases. Bank United v. United States, 50 Fed. Cl. 645, 662 (2001), aff'd, 80 Fed. Appx. 663 (Fed. Cir. Sept. 22, 2003). Black-letter law requires a non-breaching party to attempt to mitigate its damages following another party's breach of contract. See, e.g., Sun Cal, Inc. v. United States, 25 Cl. Ct. 426, 432 n.10 (1992); Midwest Indus. Painting v. United States, 4 Cl. Ct. 124, 133 (1983). Accordingly, Sterling "may not recover those damages which could have been avoided by reasonable precautionary action on its part." Midwest Indus., 4 Cl. Ct. at 133. Here, however, 6
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Sterling raised over $900 million in capital between 1991 and 2007, Tr. 290:13-19; Tr. 408:24424:6, and admits that it mitigated its damages through its 1991 capital raising. Tr 583:11585:25; Tr. 1575:10-23; Tr. 1611:14-1612:17; see also Tr. 18:22-25 ("Sterling had a duty in law, and as a practical proposition, an obligation to its shareholders to try to mitigate the breach. And it did try to mitigate."); Tr. 20:25-21:1 ("There's no question, Your Honor, that this raising of capital mitigated Sterling's harm.").2 Under these standards, Sterling's expectancy claim for lost profits fails. B. Dr. Horvitz's Flawed Lost Profits Model
Dr. Horvitz estimates damages by creating a hypothetical "but for" bank in which all contractual supervisory goodwill counts as capital after 1989.3 The hypothetical "but for" bank is based in its entirety upon a series of unrealistic assumptions. For instance, Dr. Horvitz assumes that, but for the alleged breach, Sterling would have had a much larger balance sheet and would have earned profits upon the balance sheet at the same rate as the actual Sterling. Tr. 2039:8-16; Tr. 2129:3-2130:22. Dr. Horvitz also assumes that Sterling suffered damage during the pendency
If, however, this Court believes that Sterling did not mitigate, Sterling nonetheless cannot recover expectancy damages because it "failed to take action to mitigate such damages." Quiman v. United States, 39 Fed. Cl. 171, 185-86 (1997), aff'd, 178 F.3d 1313 (Fed. Cir. 1999); Restatement (Second) on Contracts § 350. Dr. Horvitz's model assumes that Sterling would be free from FIRREA's breaching provisions while other institutions with alleged goodwill contracts would nevertheless be subject to FIRREA's breaching provisions. Under the case law, however, all similarly situated institutions must be treated the same way in a "but for" world. See, e.g. Dolphin Tours, Inc. v. Pacifico Creative Serv. Inc., 773 F.2d 1506, 1510-12 (9th Cir. 1985) (a valid damage model must account for the fact that if one market participant becomes free of anti-competitive behavior, other similarly situated market participants become free as well); R.S.E., Inc. v. Pennsy Supply, Inc., 523 F.Supp. 954, 966 (M.D. Pa. 1981) (same). Putting aside other flaws in Dr. Horvitz's model, the incorrect assumption concerning other market participants, in and of itself, renders the model invalid. 7
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of the temporary injunction, notwithstanding the fact that the issuance of the injunction prohibited the Government from enforcing any breach-related growth restrictions. See generally P-454. Indeed, that was the reason Sterling bothered to seek the injunction. In addition, Dr. Horvitz assumes that the "but for" Sterling would have raised $10.5 million in new capital in December 1989. Tr. 2091:9-18; Tr. 2092:20-2094:19; P-548. Absent that capital, his model yields zero damages. Tr: 2757:8-18. Moreover, Dr. Horvitz ignores the fact that, according to Sterling's own witnesses, Sterling replaced its goodwill in 1991. See, e.g., Tr. 583:11-585:25; Tr. 1575:10-23; Tr. 1611:14-1612:17. Using this invalid methodology, Dr. Horvitz incorrectly opines that the addition of $15.557 million in contractual goodwill to regulatory capital would have enabled the "but for" bank to acquire up to $427 million more in assets than those of the actual bank between 1989 and 2006. P-454, Ex. 6, Tables 1, 4a. Dr. Horvitz estimates that the earnings upon these "foregone assets" would have been approximately $58.164 million as of September 30, 2006. Tr. 2123:1024; P-454. He also claims that the value of the goodwill remaining at that date would have been approximately $600,000, based upon the replacement model of Professor Christopher James, another of Sterling's expert witnesses. Tr. 2541:15-2543:4. C. Dr. Horvitz's Lost Profits Model Does Not Measure Harm Attributable To Sterling's Alleged Loss Of Employees, Loans, Customers, And Reputation
Some of Sterling's current and former employees, directors, and officers testified about post-FIRREA harm Sterling suffered by the alleged loss of employees, loans, customers, and reputation. The evidence does not support such allegations and, even if true, the claims are irrelevant to this case.
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First, Sterling's witnesses have not provided evidence that "the breach" caused the thrift to lose employees, loans, customers, and reputation. See, e.g., Tr. 762:15-21 (witness was not shown any documents demonstrating that Sterling lost a specific customer because of a lack of capital); Tr. 807:18-23 (Intervest was allowed to honor existing loan contracts); Tr. 853:9-15 (witness claims customers were unable to come to Intervest, but could point to no paperwork showing that these customers would qualify for a loan); Tr. 1037:16-1039:18 (after leaving Sterling, loan officer became a competitor of Sterling and was motivated to move customers to his new employer); Tr. 1041:5-16 (witness does not remember actually turning away any specific customer who wanted loan or deposit products); Tr. 1041:17-20 (witness does not recall turning away any new customer that wanted loans for business purposes); Tr. 1042:3-1043:19 (discussing various reasons why customers may choose to leave a financial institution); Tr. 1068:24-1069:4 (witness does not recall any existing customers leaving Sterling or taking their business loans elsewhere); Tr. 1286:25-1287:13 (despite testifying that documents indicated why employees left Sterling, witness was shown no documents). Second, "the breach" that was discussed by these witnesses was a breach of the Lewis Federal Savings and Loan Association ("Lewis Federal"), Tri-Cities Savings and Loan Association ("Tri-Cities"), and Central Evergreen Savings & Loan Association ("Central Evergreen") contracts. See, e.g., Tr. 874:20-24 (witness claims Intervest lost loan originations because of "FIRREA," but does not know how many); Tr. 1017:19-1019:16 (former loan officer discussing impact of "FIRREA"); Tr. 1202:6-22 (witness's testimony of alleged harm based upon the loss of goodwill from all three transactions); Tr. 1208:4-1209:20 (same); Tr. 1256:131257:25 (addressing consequences of "FIRREA" upon human resources, including employee 9
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turnover). This Court, however, has ruled that the Government is only liable to Sterling for the breach of the Lewis Federal and Tri-Cities contracts. Sterling Sav. Ass'n v. United States, 72 Fed. Cl. 404, 411 (2006). Sterling's witnesses have offered no evidence of whether the alleged loss of employees, loans, customers, and reputation would have occurred based upon the breach of only the Lewis Federal and Tri-Cities contracts. Third, Sterling's witnesses have not quantified the harm to Sterling upon the alleged loss of these employees, loans, customers, and reputation, regardless of their definition of "the breach." See, e.g., Tr. 874:20-24 (witness claims Intervest lost loan originations because of "FIRREA," but does not know how many); Tr. 848:25-850:7 (witness does not know how Intervest would have specifically grown absent the Government's breach); Tr. 850:17-21 (witness does not know how big Intervest would have been absent the Government's breach); Tr. 1067:16-1068:14 (former loan officer testified he could not make commercial real estate loans to certain customers, but customers never filed loan applications); Tr. 1287:23-1288:5 (witness never attempted to quantify amount of damages to Sterling's reputation that were allegedly caused by the breach). Finally, even accepting the testimony of these witnesses as true, such testimony is irrelevant because Dr. Horvitz does not rely upon it in his damages model. See generally P-454. Dr. Horvitz's model measures profits that allegedly would have been earned upon incremental assets, rather than measuring the income that would have been earned on specific loans that Sterling divested or was unable to make. Nor do any of Sterling's other damages claims rely upon such testimony. Therefore, the Court should not award any damages based upon the alleged loss of employees, loans, customers, and reputation. 10
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D.
Dr. Horvitz's Lost Profits Model Ignores Sterling's Conversion To A Commercial Bank
Sterling converted to a commercial bank in July 2005. Tr. 582:17-583:4. Sterling does not contend that it would have converted to a commercial bank at a different time absent the breach. Once Sterling converted to a commercial bank, regulations prohibited it from counting supervisory goodwill as regulatory capital. 12 C.F.R. Part 3, Appx. A, § 2(c)(1)(I). As a result, even absent the breach, upon Sterling's conversion in July 2005, it would no longer have been able to count supervisory goodwill towards regulatory capital. Therefore, Sterling should not be awarded lost profits or any other damages after July of 2005. E. Sterling's Lost Profits Claim Is Invalid As A Matter Of Fact Because Dr. Horvitz's Model Ignores Sterling's Concerns About Its Risk-Based Capital
Mr. Daniel Byrne, the Chief Financial Officer and Executive Vice President, Finance, for Sterling Financial Corporation, Tr. 1311:11-20, and formerly Sterling's Chief Financial Officer, Tr. 1316:10-17, testified that "for Sterling, the constraining capital has really been risk-based capital," Tr. 1347:18-19, and that as a result, "we did not have [] excess capital," Tr. 1349:1-4, because Sterling's risk-based capital was "just barely above the 10 percent well-capitalized threshold," Tr. 1348:16-25, and Sterling wanted to ensure it was well-capitalized with respect to risk-based capital, Tr. 1347:8-1349:4. This testimony renders Dr. Horvitz's lost profits model invalid because Dr. Horvitz testified that, by applying the core capital ratios in his lost profits model to the "but for" bank, Sterling would have failed to meet the well-capitalized requirement for risk-based capital. Tr. 2768:22-2769:11.
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F.
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
Dr. Horvitz's lost profits model is premised upon his assumption that, between 1989 and 2006, Sterling never replaced a single dollar of the $15.557 million in contractual goodwill eliminated by FIRREA. Tr. 2546:7-24. This assumption: (1) ignores Sterling's duty to mitigate, as well as its actual mitigation in 1991 by raising $21 million in new capital and converting $2.1 million of preferred stock to common stock, see, e.g., Tr 583:11-585:25; Tr. 1575:10-23; Tr. 1611:14-1612:17; and (2) renders Dr. Horvitz's entire model invalid.4 In fact, Mr. Byrne testified that the breach period was only from "late 1989 through 1991." Tr. 1665:16-19. The Federal Circuit requires this Court to account for any mitigation a plaintiff undertakes as a result of a breach. LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363, 1371-72 (Fed. Cir. 2003) (citing Restatement (Second) of Contracts §347(c) cmt. e). In LaSalle, the Federal Circuit held that the thrift's recapitalization replaced the lost goodwill and mitigated damages. Id. Here, Sterling mitigated its damages by its 1991 recapitalization, which it admits was for purposes of reaching capital compliance and would not have occurred absent the breach. Tr 583:11-585:25; Tr. 1575:10-23; Tr. 1611:14-1612:17. Sterling's acknowledgment that it mitigated is reflected not only in its witnesses' testimony, but also in its 1992 Annual Report to shareholders, which stated: Fiscal 1992 was an outstanding year for Sterling Savings. Your company, profitable every year since its inception, reported record earnings this fiscal year. We also completed a $21 million equity offering, making Sterling one of the only thrifts in the nation to Professor James's estimate of lost profits is consistent with Dr. Horvitz's model and invalid for the same reasons. 12
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have met all applicable capital requirements after having been deemed to be in non-compliance with such requirements. Our primary regulator, OTS, had taken the position that FIRREA eliminated most of the capital regulatory provisions of acquisition agreements entered into during the late 80's. Our compliance with capital standards is a victory for us all our shareholders, customers, employees, and the communities we serve across the Pacific Northwest. P-84, p.2 (emphasis added). The Annual Report also stated that as a result of raising capital, this litigation was "not expected to have a material adverse effect on Sterling regardless of the ultimate outcome of the case." P-85, p. 31; see also Tr. 635:23-637:2. In addition, during opening statements, Sterling's counsel acknowledged that the 1991 capital raising was mitigation. Tr. 18:22-25; Tr. 20:25-21:1. Consequently, Sterling mitigated its damages.5 Therefore, Dr. Horvitz's assumption that, between 1989 and September 30, 2006, Sterling never replaced a penny of the goodwill associated with the Lewis Federal and Tri-Cities acquisitions undermines his model. Indeed, Dr. Horvitz's assumption that Sterling has never mitigated its damages also invalidates his model as a matter of law,6 because if Sterling did not mitigate, it nonetheless possessed both a duty and opportunity to do so and "cannot recover damages for loss that [ ] could have [been] avoided by reasonable efforts." Robinson v. United States, 305 F.3d 1330, 1333 (Fed. Cir. 2002) (emphasis in original) (quoting Restatement (Second) of Contracts, § 350, cmt. b). Further, Dr. Horvitz's failure to acknowledge Sterling's 1991 capital raising, as well as
Thus, at most, Sterling would be entitled to the transaction costs incurred during the recapitalization. As we explain below, the lost profits that allegedly arose before the 1991 recapitalization are not recoverable for other reasons. 13
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over $900 million in additional capital raised after 1991, emphasizes another flaw in his model. Specifically, the model posits that it is reasonably certain that replacement of the $15 million in contractual goodwill would have resulted in over $58 million in additional profits for Sterling. P-454, Ex. 6, Table 1. If, in fact, replacement of the $15 million in goodwill would have foreseeably resulted in $58 million in additional profits for the company, then Sterling, which acknowledges that it has raised over $900 million in capital since the enactment of FIRREA, Tr. 290:13-19; Tr. 408:24-424:6, should have experienced no difficulty in raising an additional $15 million in order to realize these profits. Thus, Dr. Horvitz's insistence that Sterling never mitigated renders Dr. Horvitz's model invalid as a matter of fact and law, as well as inherently speculative. Accordingly, the Court should reject this model and the damages claimed therein. G. Dr. Horvitz's Lost Profits Model Fails For Lack Of Causation
Dr. Horvitz's model does not meet the causation requirement because Sterling has not proven that, absent the breach, Sterling would have met FIRREA's capital requirements. Moreover, Sterling cannot establish causation because Dr. Horvitz's model incorrectly assumes that Sterling had to forego profitable opportunities, despite (1) receiving an injunction, (2) replacing every dollar of contractual goodwill eliminated by FIRREA, and (3) not having profitable opportunities. Indeed, Dr. Horvitz calculates lost profits upon the wounded bank damages, contrary to law. 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
Dr. Horvitz assumes that, absent the breach, Sterling would have been in compliance with FIRREA's minimum capital requirements and would not have been subject to any restrictions or 14
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limitations upon its asset growth. Tr. 2089:14-21; P-548. Consequently, he also assumes that, absent the breach, Sterling would have been in a position to leverage the goodwill attributable to the Lewis Federal and Tri-Cities acquisitions after FIRREA's enactment. The Court should reject these assumptions as erroneous. First, Dr. Horvitz assumes that Sterling would have been in capital compliance but for the breach. This, however, admittedly only holds true based upon his further assumptions that: (1) absent the breach, Sterling would have raised $10.5 million in new regulatory capital in December 1989, Tr. 2089:14-21; P-548; and (2) a portion of the Central Evergreen supervisory goodwill would have counted towards core capital. Tr. 2089:14-2090:1. Dr. Horvitz's inclusion of the $10.5 million in his model is improper. This Court has already rejected Sterling's assertion that the $10.5 million capital raising effort failed because the Government breached its contractual obligation to permit Sterling to pay preferred stock dividends. Sterling Sav. Ass'n v. United States, 53 Fed. Cl. 599, 615 (2002). In addition, Dr. Horvitz's inclusion of a portion of the Central Evergreen goodwill is improper. Second, Dr. Horvitz's assumption that Sterling would have been in capital compliance but for the breach is contrary to the evidence Sterling introduced at trial. Mr. Byrne admitted that, even assuming the Lewis Federal and Tri-Cities goodwill continued to count as regulatory capital after FIRREA, elimination of Central Evergreen's goodwill may have rendered Sterling non-compliant with FIRREA's minimum capital requirements. Tr. 1816:12-18. As discussed below, Sterling's own documents support Mr. Byrne's testimony. Third, Dr. Horvitz improperly introduced a new opinion and calculations at trial related to Sterling's Lewis Federal and Tri-Cities forbearance letters. Tr. 2071:11-2081:2. Nonetheless, 15
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his interpretation of these letters is incorrect, because Sterling would not be in capital compliance but for the breach, and is yet another attempt to avoid the Court's liability decision. See Sterling, 72 Fed. Cl. at 411. Consequently, the Court should reject Dr. Horvitz's model because Sterling cannot prove that the breach caused the thrift's failure to comply with FIRREA's capital standards. a) Sterling Would Have Failed FIRREA's Tangible Capital Requirement Absent The Breach
Dr. Horvitz's model is invalid because he fails to take into account that Sterling would have failed FIRREA's tangible capital requirements even absent the breach. Sterling's own documents demonstrate that inclusion of the contractual Lewis Federal and Tri-Cities goodwill in calculating tangible capital would only improve its tangible capital deficit from negative $22.833 million to negative $7.276 million. DX 422; Tr. 2743:16-2745:21; P-454, Table 4a. That tangible capital deficit would have rendered Sterling non-compliant with FIRREA's 1.5 percent minimum tangible capital requirement, 12 C.F.R. § 567.9(a) (1989), and subjected the thrift to the restrictions that were imposed in the actual world. b) Sterling Would Have Failed FIRREA's Core Capital Requirement Absent The Breach
As demonstrated above, Dr. Horvitz's assumption that absent the breach, Sterling would have raised $10.5 million in December 1989, renders his model invalid. Even assuming, however, that Dr. Horvitz is correct about the 1989 capital raising, Sterling nonetheless cannot prove that the breach caused its damage. This is because, as of March 30, 1990, Sterling would not have met FIRREA's minimum core capital requirement, even assuming that: (1) absent the breach, Sterling would have raised $10.5 million in regulatory capital in December 1989; and (2) 16
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the contractual Lewis Federal and Tri-Cities goodwill would have counted as regulatory capital after FIRREA. Tr. 2745:22-2748:22; P-454, p. 8; 12 C.F.R. § 567.8 (1989). In addition, if core capital were calculated properly, Dr. Horvitz's model would result in zero damages. See Tr.2495:17-2497:7; Tr. 2745:22-2753:12; P-454. c) Dr. Horvitz's New Opinion Regarding The Lewis Federal And Tri-Cities Forbearance Letters Is Incorrect
In a new opinion and calculations, Dr. Horvitz relies upon the Lewis Federal and TriCities forbearance letters for the proposition that, because Sterling was out of capital compliance based solely upon the Lewis Federal and Tri-Cities acquisitions, the forbearance letters given Sterling as part of the Lewis Federal an Tri-Cities acquisitions would apply, thus forbearing the OTS from taking any action against Sterling. Tr. 2082:1-2088:21; P-551; P-552. In supporting his opinion, Dr. Horvitz relies upon the following language in Sterling's forbearance letters: FSLIC "will forbear . . . from exercising its authority. . . for any failure of Sterling to meet the net worth requirements of Section 563.13 arising solely from . . . (2) Sterling's assumption of the net worth deficiency of Lewis as of the Effective Date." P-20 (Lewis Federal forbearance letter); Tr. 2082:1-2088:21; see also P-28 (Tri-Cities forbearance letter states: FSLIC "will forbear . . . for any failure of Sterling to meet the capital requirements of Section 563.13 arising solely from . . . (2) Sterling's assumption of the capital deficiency of the disappearing institution as of the Effective Date."). Dr. Horvitz opines that the Lewis Federal and Tri-Cities acquisitions created a "net worth" or "capital" deficiency, thus allowing for a forbearance if Sterling fell out of capital compliance because of one or both of these acquisitions. Tr. 2082:1-2088:21.
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During the course of his cross-examination, Dr. Horvitz acknowledged that he is not an expert in accounting, Tr. 2002:1-16, is not qualified to give a legal interpretation of the acquisition contracts in this case, Tr. 2721:13-23; Tr. 2003:4-7, of which the forbearance letters are necessarily a part; and readily agreed that his interpretation of the forbearance letter would lead to a "double counting" of the supervisory goodwill associated with the Lewis Federal and Tri-Cities contracts. Tr. 2782:1-2783:12. He also admitted that he has never seen this approach used by any other thrift or regulators and that he has never seen any Sterling document that contains these types of calculations. Tr. 2783:24-2784:24. In fact, Sterling's own exhibits show that Dr. Horvitz's calculations are incorrect and would not serve as the basis for any type of net worth forbearance. The language Dr. Horvitz is relying upon in the forbearance letters expressly applies only to situations where the transaction creates a "net worth" or "capital" deficiency. P20; P-28. As noted by Sterling's own CFO (Mr. Byrne), the Lewis Federal and Tri-Cities acquisitions did not create a "net worth" or "capital" deficiency. Tr. 1873:17-1874:20. As such, the forbearance letters do not apply and Dr. Horvitz's new opinion is incorrect; thus, Sterling was out of capital compliance even with the inclusion of the Lewis Federal and Tri-Cities goodwill. 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
The speculative nature of Dr. Horvitz's lost profits model is amply demonstrated by the fact that he did not account for a temporary restraining order ("TRO"), issued in May 1990, that prevented the Government from enforcing any of FIRREA's provisions related to Sterling's alleged contracts. Sterling Sav. Ass'n v. Ryan, 751 F. Supp. 871, 875 (E.D. Wash. 1990), rev'd,
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959 F.2d 241 (9th Cir. 1992). The TRO was followed by a preliminary injunction, whereby, in an opinion dated August 8, 1990, the United States District Court for the Eastern District of Washington enjoined and restrained the Government from: a. imposing or enforcing any regulatory restriction or taking other regulatory action against Sterling that is inconsistent with the provisions of the [Lewis Federal, Tri-Cities and Central Evergreen] supervisory acquisition agreements between Sterling and the FHLBB and the FSLIC; enforcing or attempting to enforce the operating restrictions imposed by the January 26, 1990, March 9, 1990, and the May 11, 1990, letters from the Office of Thrift Supervision to Sterling that treat Sterling as a troubled thrift; placing Sterling in a receivership or conservatorship; and interfering with Sterling's proposed public stock offering contemplated in the 1988 Central Evergreen acquisition agreement.
b.
c. d.
Id. In response to a motion for reconsideration, the district court determined that the restriction upon placement of Sterling in receivership or conservatorship was overly broad. Id. at 884. Consequently, the district court amended subsection "a" of its order to prevent "any attempt by the defendants to appoint a receiver or conservator based upon a reason that, either directly or indirectly, is inconsistent with the contracts." Id. Thereafter, the Government was precluded from enforcing any provision of FIRREA that was contrary to the contracts found by the district court, including the Central Evergreen contract, which this Court has subsequently ruled was not breached. Sterling, 53 Fed. Cl. at 614. The injunction remained effective until April 14, 1992, when the United States Court of Appeals for the Ninth Circuit dissolved it. Sterling, 959 F.2d 241. At that point, however,
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Sterling had replaced the contractual goodwill and was in full capital compliance. P-316, p. 10. Therefore, the injunction permitted Sterling to implement any growth plans that were in place pre-breach, and prohibited the Government from restricting Sterling's ability to implement the plans. Notwithstanding this prohibition, Dr. Horvitz's lost profits model assumes that Sterling suffered damage between July 1, 1990, after the temporary restraining order had been issued, and 1992, the year the court of appeals lifted the injunction. Dr. Horvitz's assumption is not only baseless, but affirmatively inconsistent with undisputed facts. Testimony shows that Sterling was not, in fact, injured while the Government was prohibited from enforcing any of FIRREA's restrictions to the extent that the restrictions were inconsistent with any contract provision. See, e.g., DX 700 ("because of the Court order, there never were operating restrictions on Sterling, so there is no need to remove such restrictions"); Tr. 1189:6-14 ("[W]e received a temporary restraining order which then was advanced or moved to injunction. So we got injunctive relief, which then gave us time over that period of time to work within the restrictions of the OTS and to eventually, with that time that we had with that injunction, raise the capital necessary to be compliant under the eyes of the OTS at that time."); Tr. 1827:13-16; Tr. 1832:19-1834:19; Tr. 1849:8-15; P-288; DX 700; DX 533. Nonetheless, based upon his counterfactual assumption that Sterling was unable to grow its assets while the injunction was in place, Dr. Horvitz concludes that the breach caused Sterling to earn less than it would have otherwise earned in 1990 and 1991. P-454, Ex. 6, Table 1. Further, the error extends beyond 1991, because Dr. Horvitz assumes that Sterling would have used the earnings allegedly forgone in 1990 and 1991, to acquire more assets in later years, resulting in additional lost profits. Id. 20
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Further, Sterling did not suffer significant damage prior to the issuance of the TRO. Dr. Horvitz estimates that, prior to June 30, 1990, Sterling was forced to forgo $28,000 in earnings as a result of the breach. Id. Sterling also claims that the Government violated the injunction and improperly forced Sterling to comply with the enjoined restrictions. Mr. Byrne testified that "the OTS was trying to circumvent the [injunction]." Tr. 1516:2-7. Thus, Sterling claims that the OTS operated in bad faith. In order to show that the OTS operated in bad faith, however, Sterling must meet the higher evidentiary standard of "clear and convincing" evidence. Am-Pro Protective Agency v. United States, 281 F.3d 1234, 1239-40 (Fed. Cir. 2002). The evidence Sterling introduced does not show that the OTS was operating in bad faith, but was merely regulating Sterling as permitted by the district court. See, e.g., P-277; P-279; P-285; P-288; DX 496. For example, Mr. Byrne admitted that the OTS was allowed to regulate Sterling for the purposes of safety and soundness. Tr. 1827:13-16. In addition, while the injunction was in place, Sterling never alleged that the Government had failed to comply with the injunction. Sterling's decision not to challenge the Government's conduct while the injunction was pending demonstrates that Sterling either believed the Government was acting within the parameters of the injunction, or that any transgressions were not material. Alternatively, Sterling's choice not to go to court to enforce its injunction was its own independent business choice. Sterling had the right to enforce its injunction, if, in fact, the Government was violating the injunction. Sterling made the choice not to enforce the injunction. DX 1078. It cannot now be heard to complain that its own decision to fail to enforce the injunction caused it harm for which it should now be compensated. See Reynolds v. Roberts, 21
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207 F.3d 1288, 1298 (11th Cir. 2000) ("If the plaintiff . . . believes that the defendant . . . is failing to comply with the [injunction's] mandate, the plaintiff moves the court to issue an order to show cause why the defendant should not be adjusted in civil contempt and sanctioned."); Ross-Simons of Warwick, Inc. v. Baccarat, 182 F.R.D. 386, 399 (D.R.I. 1998) (noting that a plaintiff seeking to enforce an injunction must bring an action for civil contempt rather than a separate action for damages). The result of Dr. Horvitz's incorrect assumptions and the evidence introduced at trial is that Sterling cannot prove that the lost profits projected by Dr. Horvitz were caused by the breach, rendering his model inherently speculative. 3. The Breach Did Not Cause Sterling To Forgo Profitable Opportunities
Sterling also has not shown that it was prevented from pursuing profitable opportunities. In fact, Sterling provided testimony so utterly inconsistent with the premises of Dr. Horvitz's lost profits model that the testimony alone should be sufficient to defeat Sterling's claim. First, with respect to potential acquisitions, while Sterling considered many potential acquisitions, Harold Gilkey, Chairman of the Board and Chief Executive Officer of Sterling Financial Corporation, and former Chairman of the Board and Chief Executive Officer of Sterling, Tr. 55:22-56:9, testified that he did not know whether the breach was a factor in the decision by Sterling or the acquisition target to move forward in all potential acquisitions that were unsuccessful. Tr. 541:7-552:25; see also Citizens Fin. Servs., FSB v. United States, 64 Fed. Cl. 498, 508 (2005) (rejecting lost profits model proffered by Dr. Horvitz notwithstanding evidence of potential acquisitions due to absence of evidence establishing that breach prevented
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acquisitions from occurring), aff'd 170 Fed. Appx. 129 (Fed. Cir. 2006). Specifically, Mr. Gilkey could not say which acquisitions would or would not have been completed absent the breach, in part because Sterling did not control the entire negotiations, as the negotiations involved two sides. Tr. 551:3-19. In addition, he testified that Sterling had to compete with other institutions upon a bid basis to make RTC acquisitions, and that he could not say which RTC deals would have happened absent the breach because RTC could sell to whomever they wanted. Tr. 543:18-546:2.7 In addition, Mr. Rodney Barnett, a member of Sterling's Board of Directors since Sterling's inception, Tr. 1179:4-8, testified that as a regular practice, Sterling's Board would have reviewed data and analyses to determine whether a potential acquisition was in Sterling's best interest. Tr. 1217:16-1219:3. Notwithstanding 17 years of litigation, however, beginning as early as May 1990, Mr. Barnett could point to no documents demonstrating that Sterling contemplated an acquisition, but was unable to consummate a transaction because of a lack of capital. Tr. 1220:15-1224:15. Nor did Sterling offer such documentation into evidence through any witness. The absence of documents which plaintiff admits would have been created in the regular course of its business practice is proof that Sterling did not lose acquisitions to the breach. Fed. R. Evid. 803(7); See Kaiser Aluminum & Chem. Corp. v. Ill. Cent. Gulf, 615 F.2d 470, 476 (8th Cir. 1980) ("Although the ICG introduced evidence that its normal business practice was to inspect and clean its cars and retain a record of this information, no such records were introduced into evidence. [T]he nonoccurrence or nonexistence of any cleaning or
In addition, Dr. Horvitz admitted that the RTC sales were made in a competitive manner and sold for full market value. Tr. 2729:25-2730:9. 23