Free Reply to Response to Motion - District Court of Federal Claims - federal

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IN THE U.S. COURT OF FEDERAL CLAIMS STERLING SAVINGS ASS'N, a state chartered savings Ass'n, STERLING FINANCIAL CORPORATION, a Washington corporation. Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. REPLY TO THE GOVERNMENT'S OPPOSITION TO STERLING'S MOTION TO STRIKE THE GOVERNMENT'S UNDISCLOSED WITNESSES I. ISSUES PRESENTED AND RELIEF SOUGHT

Court No. 95-829-C (Judge Wheeler)

The Government seeks to impermissibly take advantage of this Court's ruling that requires damages based on the Central Evergreen acquisition to be excised from Plaintiff's expert reports. Based on this very limited order to modify existing reports, the government seeks to roll a Trojan horse into the trial. The Government admits that, after 17 years of litigation and five years after the close of discovery, it seeks to put into evidence: (1) one newly identified and designated expert witness (Bankhead); (2) two newly re-designated experts to opine as to matters for which they were never previously designated (Hargett and Hamm); and (3) two new fact witnesses to support the newly designated theories (Kroeger and Stone). The Government's desperate and impermissible attempt to reopen fact and expert discovery is five years late and should be denied. The Government's sole factual justification for reopening both expert and fact discovery, without leave of the Court and in derogation of the Court's orders, is the deletion of the Central Evergreen damages from Sterling's experts' reports. No new damages or theories are contained in the very modest changes to Sterling's expert reports. The Government's sole legal justification set -1-

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forth in its response brief is Appendix A to the Rules of the Court of Federal Claims ("RCFC"), which allows witnesses to be identified up to 63 days before trial. Absent the numerous scheduling Orders, requested and strictly enforced by the Government's counsel, the Government may be right. However, where there is a conflict between the Court's Orders and the RCFC, the RCFC are supplanted. Sterling's right to a fair trial would be denied if the Court were to allow the Trojan horse and permit the Government to add these new witnesses and reports, where Sterling has strictly complied with the Court's proscribed limitations. The Government disregards the very Winstar discovery orders entered by this Court, at the Government's insistence, to ensure a fair trial with no late ambushes. Messrs. Bankhead, Kroeger and Stone should be struck as well as the newly designated opinions of Hargett and Hamm. II. STATEMENT OF FACTS

In an effort to efficiently and uniformly manage discovery for the more than 120 pending Winstar suits, then Chief Judge Smith issued three orders to govern all Winstar cases: (1) Omnibus Case Management Order ("CMO"); (2) Procedural Order No. 1, Master Litigation Plan (the "Master Litigation Plan"); and (3) Procedural Order No. 2 (collectively, "Orders"). Pl's App. 184-193; 194202 and 1-10.1 Combined, the Orders established a comprehensive scheme for the parties to conduct discovery and disclose witnesses in phases (Fact and Expert Discovery). In particular, these Orders set specific timelines for the disclosure of fact witnesses and the designation of experts. Contrary to the Government's arguments, the Orders expressly govern over the RCFC. Pl's App. 184, 194-95 and 1-2. Unless upon leave of Court, the parties were to adhere to the discovery deadlines set forth in the Orders. Id. _______________________
1

The Appendix attached to Sterling's Reply to the Government's Opposition to Sterling's Motion to Strike the Government's Undisclosed Witnesses is a continuation of the Appendix Sterling filed with its original Motion to Strike the Government's Undisclosed Witnesses. As such, the page numbers cited within this brief will refer to the original Appendix and any other pages attached hereto.

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Pursuant to Procedural Order No. 2, fact discovery was to be completed by August, 2000. The Court extended this date to July 22, 2002. Pl's App. 24. Fact discovery has been closed since that date. Likewise, designation and disclosure of experts was originally to terminate on July 22, 2002, but, pursuant to series of Court-sanctioned extensions, instead closed on November 8, 2002. Pl's App. 26. Indeed, after conducting significant expert discovery, the parties stipulated in a Joint Status Report to the Court that expert discovery had finally closed. Pl's App. 218. Since that date, expert discovery was not to be permitted absent leave of court. In 2003, the Court required Sterling to update its expert reports to reflect the reduction to Sterling's damages claims because of the decision rendered in Coast Federal Bank, FSB v. United States, 323 F.3d 1035 (Fed. Cir. 2003), which required Sterling's experts to amortize the RAP goodwill created by virtue of the Lewis Federal and Tri-Cities agreements. Pl's App. 203-217. The Court also permitted Sterling to amend the Report of Christopher James to opine as to the actual cost of the capital it raised in 1991. Id. The Court then permitted the Government to respond to these updated reports and disclose any rebuttal experts by February 9, 2004. Pl's App. 27. In response, the Government listed Dr. Mukesh Bajaj, a previously disclosed expert, as its rebuttal expert. Pl's App. 29-30. Depositions were limited to these two issues. No expert discovery has been permitted since that time. Most recently, this Court's reconsideration of liability in the Central Evergreen acquisition [Doc. 204] necessitated Sterling's experts to adjust their damage calculations to reflect the Court's decision. Pl's App. 31-32. The Government likewise was permitted to adjust their expert reports. Id. Though the parties and the Court questioned the need for additional depositions, the Court permitted depositions, but only over "material not addressed in prior depositions." Id. The Court's Order did not permit the Government to designate new expert witnesses; the deadline for doing so

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had expired by November 8, 2002 pursuant to Procedural Order 2 and the Court's October 1, 2002 Order and has never been re-opened since that date. Pl's App. 26. Despite the prescribed limitations on expert discovery, the Government has designated Mr. Bankhead as a new expert, and re-designated Messrs. Hamm and Hargett to opine on matters over which they were not previously designated. Pl's App. 57-155. III. A. ARGUMENT

THE GOVERNMENT CANNOT DESIGNATE WHOLLY NEW EXPERTS OR RE-DESIGNATE PREVIOUSLY DISCLOSED EXPERTS. 1. W. Barefoot Bankhead Was Not Timely Disclosed To Sterling.

As noted by the Government, "The Discovery Plan set forth in Procedural Order No. 2 provides for a single round of expert discovery. There is no opportunity under these rules to submit new theories or damages after the cut-off dates." Pl's App. 243. More recently, the Government stated that "the only thing that's left to do is to make the changes to the numbers to reflect the fact that the goodwill associated with Central Evergreen was not the subject of a breach of contract." Pl's App. 42-43. The Court's September 27, 2006 Scheduling Order contemplated Sterling's experts updating their reports and the Government's experts responding to Sterling's new damage calculations. The Order did not contemplate an entirely new expert being added who was not disclosed before the close of expert discovery in November, 2002 or in the initial supplemental responses in February, 2004. Without leave of the Court, the Government was not permitted to designate a wholly new expert in derogation of the previous scheduling orders. The September 27, 2006 Order states that "the scope of the depositions [following receipt of the updated reports] shall be limited to any new material not addressed in prior depositions," the clear implication being that these experts had already filed reports and had already been deposed. Pl's App. 31 (emphasis added). W. Barefoot Bankhead had never been disclosed, deposed or filed an expert report prior to February 17, 2007. -4-

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Disclosure of W. Barefoot Bankhead and his opinions just four months prior to trial was in clear violation of the spirit of this Court's Scheduling Order and his opinions should be stricken. 2. Joe Hargett and William Hamm's Expert Reports Cortain Opinions Over That For Which They Were Never Designated.

In its July, 2003 response to Sterling's suggestion that expert reports be updated to reflect changes in governing Federal Circuit law, the Government vehemently argued this point: [Sterling's] proposal is unacceptable because the deadline for filing of expert reports by Sterling in this case occurred in 2001, and the Government has expended considerable time, expense and resources in formulating comprehensive responses to Sterling's damage theories. To date, all expert reports have been filed by both parties, and each expert has been deposed. Further, the Government would be prejudiced if Sterling, upon reviewing the Government's comprehensive responses to its damages claims and deposing our experts, is permitted "another bite of the apple" to cure any deficiencies in its approach. Sterling first filed a complaint in this case in 1990, and has had ample time, nearly 10 years, to develop its damage theories. Consequently, Sterling's proposal to amend its expert reports, apparently without limit, is inappropriate. Pl's App. 224. The same position the Government so strongly opposed in 2003 is the exact same one it advocates for today: it wants a 'second bite of the apple' to cure deficiencies in its initial reports. But the Government's attempt comes without leave of court and only 127 days before a trial that Sterling has waited 17 years to commence. Following this Court's decision on August 31, 2006, with respect to the Government's liability on the Central Evergreen acquisition, both parties' properly disclosed witnesses were allowed to update their already existing reports to reflect their damage calculations with the Central Evergreen damages withdrawn. Pl's App. 31. The parties were not permitted to generate entirely new reports, disclose brand new experts, or re-designate other experts to render new opinions. Id. Sterling's experts scrupulously complied with this Court's September 27, 2006 Order: Dr. Paul Horvitz submitted a six page update and Professor Chris James filed a ten page update. Pl's App. 245-250 and 251-261. In derogation of this Court's order and under the guise of "responding" to -5-

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Sterling's genuine updates, the Government attempted to disclose a wholly new expert and proffered a 57-page "supplement" to Dr. Paul Hamm's initial expert report. Pl's App. 57-74 and 88155. These actions cannot be reconciled with this Court's mandate that the expert reports were to do no more than "respond" to Sterling's timely updates. a. Dr. Horvitz's Damages Methodology Was Disclosed Prior To 2006.

The contention that Mr. Hargett and Dr. Hamm are responding to a new methodology disclosed for the first time in Dr. Horvitz's December, 2006 report is facially incorrect (Def's Opp., p. 8). Dr. Horvitz simply extricated the effect of the Central Evergreen acquisition from his damage calculation. Pl's App. 245-250. Dr. Horvitz's methodology was originally elucidated in his initial report in 2001, reaffirmed in his supplemental report of 2004, and utilized again in 2006. Although the Government challenges the application of Dr. Horvitz's methodology to Sterling's damages in this case, the method by which he arrived at his conclusions is no surprise. Therefore, Dr. Hamm's 57-page response cannot reasonably be considered a mere "response" to Dr. Horvitz's 2006 update. Consequently, the Court should strike the expert reports of Mr. Hargett and Dr. Hamm to the extent they exceed the scope of Professor James and Dr. Horvitz's 2006 supplements. b. The Government's Position Would Open An Untenable Pandora's Box Of Discovery And Would Impermissibly Delay The Trial.

If the Government's position is allowed to stand, fact and expert discovery will be re-opened beyond the scope and control of the Court. Both parties would have the opportunity to offer brand new witnesses, in unlimited number and scope, at a date not more than 63 days before trial, without prejudice because they would be able to depose these new witnesses (Def's Opp., p. 5). That cannot possibly be the conclusion of the Court, as it renders almost ten years of procedural orders completely moot. With trial set in less than three months, allowing discovery to remain open until some 63 days before trial would be incredibly prejudicial to both parties. This is not a reasonable interpretation of the history of the case, and the argument cannot be made in good faith today. -6-

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3.

W. Barefoot Bankhead and Joe Hargett's Reports Contain Inadmissible Legal Conclusions And Statements Contrary To Sterling's Established Contracts.

The supplemental reports of W. Barefoot Bankhead and Joe Hargett are inadmissible in any event because they contain legal opinions concerning the meaning and application of FIRREA and are contrary to the express terms of Sterling's recognized contracts.2 Mr. Bankhead offers his legal conclusion as to how, in the but for world, FIRREA would apply to Sterling's contracts with the Government; in particular he opines as to how FIRREA supposedly required Sterling's RAP capital, or, as what he refers to as contractual capital, to be re-categorized (and given lesser weight) as "qualifying supervisory goodwill" under 12 CFR 567.1(w), an inferior classification of regulatory capital that did not exist at the time Sterling contracted with the Government. Pl's App. 237. In addition, Mr. Bankhead offers opinions that directly contradict the terms of the Lewis Federal and Tri-Cities Acquisition Agreements with regards to treatment of the Government's agreed upon cashassistance (Lewis Federal) and amortization of RAP goodwill (Tri-Cities). These are legal

conclusions which could have been made years ago. As Chief Judge Damich previously held, Sterling's contracts with the Government gave it the express right to count the capital credits towards the regulatory capital requirement as it then existed, not as later restricted by FIRREA and 12 CFR 567.1(w). Sterling Sav. v. United States, 53 Fed. Cl. 599, 610-11 (2002), vac., in part, on other grounds, 72 Fed. Cl. 404 (2006). Pl's App. 239-240. These opinions are inadmissible legal conclusions and run contrary to Sterling's established contracts. To the extent Mr. Hargett's report relies upon Mr. Bankhead's assertions (Pl's App. 78, ¶ 10), it must be struck as well.

On March 29, 2007, Sterling filed Plaintiff's Brief re: Plaintiff's Motion to Strike the Expert Report of W. Barefoot Bankhead, which Sterling incorporates herein by reference. Pl's App. 235-241. For the reasons stated in the brief in support of the motion, the Court should strike both Mr.. Bankhead's and Mr. Hargett's opinions because they comprise legal conclusions that are in contravention of Sterling's contracts and Winstar precedent.

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_______________________

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B.

DAVID KROEGER AND JOHN STONE WERE UNTIMELY DISCLOSED AND SHOULD BE STRICKEN. 1. Procedural Order No. 2 Governs over The Appendix To The Rules of the Court.

The Court's Orders expressly govern discovery and trial procedure in Winstar cases where they are inconsistent with the RCFC. In the present case, conflict exists between the discovery deadlines created by the Court's scheduling orders and the RCFC: the Orders established a cut-off for fact discovery in July, 2002, almost five years ago, whereas Appendix A to the RCFC would allow additional witness disclosures, both fact and expert, to occur no less than 63 days before trial. The CMO, Master Litigation Plan and Procedural Order No. 2 all make clear that to the extent the RCFC conflict with the Court's Orders, the Orders supersede the RCFC. Therefore, the parties must follow the deadlines established by the Orders and disregard Appendix A to the Rules. 2. The Government Acknowledged That Case-Specific Fact Discovery Closed In 2002.

The Court's February 26, 2002, Order stated that "all outstanding fact and expert discovery shall be concluded no later than July 22, 2002." Pl's App. 24. Upon direct questioning from the

Court, counsel for the Government agreed that fact discovery was closed: The Court: Government Counsel: All right. And then fact discovery, of course, is closed. Is that correct? That's correct, except for those outstanding depositions that we spoke about earlier that will go to the capital credit issue, which we've agreed to defer until damages. * The Court: * *

Government Counsel:

What in effect is happening is fact discovery is being extended and presumably we can make it contemporaneous with the close of expert discovery on July 22, 2002. Does that meet with your agreement? That sounds reasonable, Your Honor.

Pl's App. 229. Some four years later, in a June 21, 2006 status conference, Government's counsel strongly reiterated her position on discovery being closed: -8-

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The Court: Government Counsel:

What is the status of discovery in this case? Discovery has been concluded since, I believe, early 2004 with respect to damages. As I mentioned before, Your Honor, when I filed my motion for summary judgment, Plaintiffs indicated that they might want to put in more evidence from their experts and fact witnesses, which I indicated at the time in an opposition to a motion for enlargement of time, would spur additional discovery, but so far since they haven't responded, I don't know whether they're going to do that. But as far as I'm concerned, discovery is closed.

Pl's App. 232-233, emphasis added. Therefore, discovery is closed and without a showing of significant prejudice and obtaining leave of court, the Government should be precluded from identifying witnesses who were never disclosed throughout this protracted litigation. 3. David Kroeger and John W. Stone Were Not Disclosed Within The Timeline Established By The Orders And They Must Be Struck.

It is undisputed that neither David Kroeger nor John W. Stone were disclosed before the Court's July 22, 2002 deadline. They were disclosed for the first time on December 5, 2006, by which time Sterling's right to take discovery depositions was long past. Def's Opp. p. 4. Because Appendix A of the RCFC conflicts with this Court's Orders, the Orders must control. Their testimony, by the Government's own admission, concerns events that took place, and were known to all parties, nearly 17 years ago and which has been the subject to two motions for summary judgment and one order of the court. (Def's Opp., p. 4) Therefore, Mr. Kroeger and Mr. Stone were untimely disclosed and they should be stricken from the witness list. IV. CONCLUSION

For these reasons, the Court should strike Joe A. Hargett and William G. Hamm's Supplemental Expert Reports, and prohibit in the entirety any testimony by Mr. W. Barefoot Bankhead, Mr. David Kroeger and Mr. John W. Stone.

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DATED this 2nd day of April, 2007. WITHERSPOON, KELLEY, DAVENPORT & TOOLE, P.S. By:_/s/ William D. Symmes William D. Symmes, Counsel of Record And Member of the Bar of the U.S. Court of Federal Claims 1100 U.S. Bank Building 422 West Riverside Avenue Spokane, WA 99201-0300 Telephone No. (509) 624-5265 Facsimile No. (509) 458-2717 Attorneys for Plaintiffs

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CERTIFICATE OF SERVICE
THE GOVERNMENT'S OPPOSITION TO STERLING'S UNDISCLOSED WITNESSES was filed electronically.

I certify under penalty of perjury that on April 2, 2007, a copy of the foregoing REPLY TO MOTION TO STRIKE THE GOVERNMENT'S I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system. /s/ William D. Symmes William D. Symmes Attorney for Plaintiff

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APP. 184

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APP. 185

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APP. 204

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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.

Court No. 95-829-C (Judge Wheeler)

PLAINTIFFS' BRIEF RE: PLAINTIFFS' OTION TO STRIKE THE EXPERT REPORT OF M W. BAREFOOT BANKHEAD I. RELIEF SOUGHT/SUMMARY OF ARGUMENT Pursuant to RCFC 56(e), Plaintiff Sterling moves for an order striking the Expert Report of W. Barefoot Bankhead (the "Report"). The Government submitted the Report as evidentiary support for its Revised Motion for Summary Judgment Regarding Damages. See Def's Rev. Brief, p. 15-16 [and Def's App. Vol. II, pp. 805-15 [Doc. 222]. The Report does not comply with RCFC 56(e) and should be stricken because: (1) the Report is an unsworn statement, rendering it inadmissible hearsay; (2) the opinions within the Report consist of legal conclusions as to the meaning and application of FIRREA and regulations passed thereunder; and (3) the Report consists of opinions that contradict the express terms of Sterling' contracts with the Government.1 s

As also set forth in Sterling's Motion to Strike the Government' Undisclosed Witnesses, the Report also should s be stricken also because the Government did not timely designate Mr. Bankhead as an expert witness. Likewise, though not submitted in support of the Government's motion for summary judgment, the Updated Report of Mr. Hargett and his opinions should be excluded from trial upon the same grounds set forth herein.

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II. ARGUMENT A. THE REPORT IS AN INADMISSIBLE UNSWORN STATEMENT. To establish facts in support of summary judgment, a party must submit evidence that would be admissible at trial. RCFC 56(e). Unsworn statements are inadmissible on summary judgment and cannot establish either undisputed facts for the moving party or a triable issue for the non-moving party. See RCFC 56(e); Adarbe v. United States, 58 Fed. Cl. 707, 711 n.1 (2003); Argo v. Blue Cross and Blue Shield of Kansas, Inc., 452 F.3d 1193, 1199 (10th Cir. 2006); United States v. Dibble, 429 F.2d 598, 601-02 (9th Cir. 1970). The requirements of RCFC 56(e) therefore apply to exclude on summary judgment any unsworn statements in expert reports. See Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544, 569 (2003), affirmed in part, rev'd in part, 407 F.3d 1352 (2005) (FRE 703 does not permit expert reports to be considered as evidence). Because the Report is nothing more than an unsworn statement, it may not be considered under RCFC 56(e) and should be stricken. B. THE REPORT COMPRISES INADMISSIBLE LEGAL CONCLUSIONS. Assuming for the sake of the argument that the Report was a sworn affidavit or declaration, it should be stricken regardless because it consists of legal conclusions over the meaning of FIRREA and its application to Sterling'contracts in the but for world. Such legal conclusions may not be considered s on summary judgment. Adarbe, 58 Fed. Cl. at 711 n.1; Montgomery v. Aetna Casualty & Surety Co., 898 F.2d 1537, 1540-41 (11th Cir. 1990); Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1258-59 (2nd Cir. 1987); Marx & Co., Inc. v. Diners' Club, Inc., 550 F.2d 505, 509-10 (2nd Cir.), cert denied, 434 U.S. 861, 98 S.Ct. 188 (1977) (the meaning and application of contract terms are questions of law for the court about which an expert may not opine); CFM Comm., LLC v. Mitts Telecasting Co., 424 F. Supp. 2d 1229, 1233-34 (E.D. Cal. 2005) (the meaning and application of federal statutes and regulations are questions of law for the court).

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In the Report, Mr. Bankhead opines how, in the but for world, FIRREA would apply to Sterling' contracts with the Government; in particular he opines as to how FIRREA supposedly s required Sterling' RAP capital, or, as what he refers to as contractual capital, to be re-categorized as s "qualifying supervisory goodwill" under 12 CFR 567.1(w), a classification of regulatory capital that did not exist at the time Sterling contracted with the Government. These opinions constitute inadmissible legal conclusions over the meaning of FIRREA and its application to Sterling' contracts and should s be stricken. Moreover, Mr. Bankhead' opinions should be stricken not only because they comprise legal s conclusions, but because they are contrary to Winstar precedent. This Court, as well the United States Supreme Court and Federal Circuit, has held that the passage of FIRREA breached the agreements because, through the statute, Congress eliminated the right to count intangible assets toward what FIRREA refers to as "core" and "tangible" capital. United States v. Winstar Corp., 518 U.S. 839, 870, 116 S.Ct. 2432, 2452-53 (1996); Winstar Corp. v. United States, 64 F.3d 1531, 1538, 1544-45 (Fed. Cir. 1995); Coast Fed. Bank FSB v. United States, 48 Fed. Cl. 402, 427-29 (2000); Statesman v. United States, 26 Cl. Ct. 904, 913 (1992); Winstar Corp. v. United States, 25 Cl. Ct. 541, 549 -50 (1992). The courts have additionally held that the FIRREA regulations relied upon by Mr. Bankhead furthered the breach by interpreting FIRREA'restrictions on the regulatory use of intangible assets as applying both s to contractual and non-contractual capital, requiring them to be classified as "qualifying supervisory goodwill" subject to the FIRREA cap and phase-out.2 See Winstar, 64 F.3d at 1545 ("The OTS by regulation treated capital credits in the same manner as supervisory goodwill, see 12 CFR 567.1(w), thereby restricting the use of such credits for regulatory capital purposes."). Accordingly, when
Prior to FIRREA, the Savings and Loan Industry did not classify regulatory capital into different categories of core, tangible, or risk based capital. 12 CFR 561.13 (1985) (App. 1298-99); 12 CFR 561.13 (1987) (App. 1307-09); Instructions to the Thrift Financial Reports ("TFRs") of 1987 (App. 1303-06). RAP capital stood on equal footing with stock or cash. Winstar, 518 U.S. at 849-50, 116 S.Ct. at 2443.
2

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Mr. Bankhead, in his report, applies FIRREA'definition of qualifying supervisory goodwill under 12 s CFR 567.1(w) to Sterling' capital credits in the but-for world, he did that which the various Winstar s courts have held to constitute a breach.3 Stated differently, Mr. Bankhead'opinions contravene the courts' s holdings that, as a matter of law, Sterling' so-called contractual capital in the but for world would have counted fully towards its s regulatory capital requirement without restriction and on par with other recognized tangible and core assets, such as cash: Because the FSLIC had insufficient funds to make up the difference between a failed thrift' liabilities and assets, the Bank Board had to s offer a ' cash substitute' induce a healthy thrift to assume a failed to thrift' obligations. s Winstar, 518 U.S. at 849-50, 116 S.Ct. at 2443 (emphasis added). Therefore, in the but for world, Sterling is entitled to count as regulatory capital both the capital credits from its contracts with the Government and the so-called lessor class of non-contractual, supervisory goodwill from the Central Evergreen acquisition, though the Central Evergreen capital would be subject to the cap and phase-out requirements of FIRREA. In sum, Mr. Bankhead'opinions in the Report not only should be stricken as legal conclusions, s but as conclusions that would lead to a different sort of breach under well-established Winstar case law.4

Mr. Bankhead'Report suggests that he is not applying FIRREA to the capital credits insofar as he credits Sterling s for the full amount of regulatory capital required by the contracts. This suggestion is disingenuous. Though Mr. Bankhead gives full credit to Sterling' contractual capital in the but for world, he still nonetheless classifies the capital as the more s restricted form of qualifying supervisory goodwill under 12 CFR 567.1(w). As discussed in Section C, this classification of Sterling's RAP capital under the contracts is in violation of the express terms of Sterling'contracts that causes harm by s restricting the amount of capital to which Sterling would be entitled in the but for world under both the contracts and FIRREA. Sterling notes that the Government' arguments concerning Mr. Bankhead mirror those presented by the s Government and rejected by the Court in Fifth Third Bank v. United States, 71 Fed. Cl. 56, 70 (2006).
4

3

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C.

MR. BANKHEAD ' OPINIONS CONTRADICT THE EXPRESS TERMS OF STERLING ' S S CONTRACTS WITH THE GOVERNMENT. Mr. Bankhead'opinions concerning the meaning and application of Sterling'contracts in the s s

but for world also should be stricken because they are contrary to the contracts' express terms. The Lewis Federal Assistance Agreement expressly stated that the cash assistance shall constitute regulatory net worth as then defined, not as later defined by FIRREA. The Assistance Agreement and the Forbearance Letter made this clear by stating that, for regulatory accounting purposes, the cash assistance was to be credited directly to Sterling'net worth account. (App. 566, 592) The terms "net s worth" and "net worth account" referred to "Regulatory Net Worth" as then defined in 12 CFR §

561.13 (1985) (App. 1298-99) and the TFRs. (App. 1301) The November 4, 1985 FHLBB Resolution consummating the transaction reiterated that the capital to be acquired was regulatory capital as then defined by 12 CFR § 561.13 (1985): RESOLVED FURTHER, That the FSLIC hereby approves, pursuant to § 561.13 of the Insurance Regulations, Sterling' inclusion of the s FSLIC'$1,750,000 cash contribution to Sterling, pursuant to the terms s of the Assistance Agreement, as net worth, . . . (App. 519) (emphasis added). Indeed, contrary to what Mr. Bankhead suggests, Sterling and the Government could not have agreed to a classification of regulatory capital that did not exist at the time of the agreements. The same holds true for the RAP capital acquired as part of the Tri-Cities acquisition. The Assistance Agreement in that transaction expressly stated: "the cash contribution . . . shall be credited to [Sterling' regulatory s] capital account and shall constitute regulatory capital as defined in § 561.13 of the Insurance Regulations, 12 CFR § 561.13 (1987)." s (App. 683).5 Thus, as with Lewis Federal, Sterling' contract for Tri-Cities made clear that the
5

By 1987, 12 CFR 561.13 no longer referred to "Regulatory Net Worth", but to "Regulatory Capital." See 12 CFR § 561.13 (1987) (App.1307-09).

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regulatory capital obtained by Sterling was regulatory capital as contemporaneously defined and not as defined later by the regulators. As Chief Judge Damich previously held, Sterling'contracts with the s Government gave it the express right to count the capital credits towards the regulatory capital requirement as it then existed, not as later restricted by FIRREA and 12 CFR 567.1(w). Sterling Sav. v. United States, 53 Fed. Cl. 599, 610-11 (2002), vac., in part, on other grounds, 72 Fed. Cl. 404 (2006). In short, Mr. Bankhead' application of FIRREA' restricted definition of regulatory capital to s s Sterling' capital in the but for world violates its bargained-for rights and, consequently, would be a s breach in the but for world. In the but for world, Sterling is entitled under the contracts to count its RAP capital as equivalent to, for example, common stock capital of equal dollar value or any other recognized tangible or core capital and, under FIRREA, to count the supervisory goodwill from Central Evergreen as qualifying supervisory goodwill under FIRREA subject to FIRREA' cap and phase-out s rules. Mr. Bankhead' Report should be stricken on these grounds alone. s III. CONCLUSION Based upon the foregoing, Sterling requests that the Court strike the Report in its entirety. Respectfully submitted this 29th day of March, 2007. WITHERSPOON, KELLEY, DAVENPORT & TOOLE, P.S. By: /s/ William D. Symmes William D. Symmes, Counsel of Record And Member Of the Bar of the United States Court of Federal Claims 1100 U.S. Bank Building 422 West Riverside Avenue Spokane, WA 99201-0300 Telephone No. (509) 624-5265 Facsimile No. (509) 458-2717 Attorneys for Plaintiffs

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CERTIFICATE OF SERVICE I certify under penalty of perjury that on March 29, 2007, a copy of the foregoing PLAINTIFFS' BRIEF RE: PLAINTIFFS' OTION TO STRIKE THE EXPERT REPORT OF W. BAREFOOT BANKHEAD M was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court' electronic filing system. Parties may access this filing through the Court' system. s s /s/ William D. Symmes William D. Symmes Attorney for Plaintiff

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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. ) __________________________________________)

Court No. 95-829-C Judge Wheeler

UPDATE TO THE EXPERT REPORT OF PAUL HORVITZ DECEMBER 11, 2006 I. Assignment and Conclusion

This Report (including the Exhibits) is an update to a report that I previously prepared in this case in February 2004. I was asked by Sterling's counsel to update my expectation damages calculation to incorporate findings by Judge Wheeler and to account for the passage of time. In an opinion dated August 30, 2006, Judge Wheeler ruled that the "...Agreement relating to Central Evergreen shifted to Sterling the risk of regulatory changes, such as FIRREA. Therefore, the Government did not breach the Agreement with Sterling through the enactment of FIRREA." 1 For purposes of my Report and damages calculation I have therefore assumed that the supervisory capital created in the Central Evergreen acquisition will be subject to any limitations imposed by FIRREA.

1

Opinion of Judge Wheeler, Sterling Savings Association v. The United States, August 30, 2006, p. 12.

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My updated determination of Sterling's expectation damages is that they total $63.361 million. II. Elements of Expectation Damages A. Lost Earnings on Foregone Assets

To update my calculations I have relied on additional documents and data provided to me by the attorneys and Sterling since the filing of my last Report. These are primarily financial statements from 2003 though 2006. I have created an addendum to Exhibit 2 of my previous Report listing the additional materials supplied to me. Exhibit 3 is unchanged from my previous Report. Exhibit 4 and Exhibit 5 present financial information for Sterling and have been extended through September 2006 ­ the latest period for which I have financial statements. Exhibit 6 incorporates the ruling of Judge Wheeler. Tables 4a, 4b, and 4c of Exhibit 6 have been restructured or added to present the amount of supervisory intangibles that could have been included in Sterling's core capital but-for the breach. Table 4a is a summary of the goodwill and intangibles of Sterling but-for the breach of the Lewis Federal and Tri-Cities contracts. Table 4b presents the goodwill amounts related to the Central Evergreen acquisition.2 Since the Central Evergreen acquisition was supervisory in nature, the goodwill from the acquisition is subject to the supervisory goodwill phaseout limitations of FIRREA. The phase-out provisions of FIRREA allowed supervisory goodwill to count to a limited degree toward core-capital until January 1, 1995. This table calculates how much of the supervisory goodwill from Central Evergreen could count in Sterling's core capital over time. Table 4c presents the identified intangibles related to the Central Evergreen acquisition. These intangibles were allowed under provisions of FIRREA to also count toward core capital to a limited degree. 3

In documents from Sterling upon which I have relied, in the context of the Central Evergreen acquisition the term "unidentified intangibles" is used synonymously with goodwill. 3 In my previous report I noted that changes in the accounting rules related to goodwill no longer require that goodwill be amortized, rather it is subject to impairment tests. For the contractual goodwill associated with Lewis Federal and Tri-Cities I assume that for regulatory capital purposes it would amortize. The change in the accounting rules did not affect goodwill from the Central Evergreen transaction because it was fully-amortized in 2000 ­ before the new rules took effect. Table 7 in Exhibit 6 presents an estimate of the amounts of non-supervisory goodwill given the new accounting rules.

2

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My estimate of expectation damages is based on a model that is similarly structured to that presented in previous versions of my Report. I believe it is appropriate at this time to reconsider some of the assumptions used in modeling the "but for" bank for two reasons: first, Judge Wheeler's recent ruling removes significant amounts of regulatory capital from Sterling Savings, and so the world is quite different from the one modeled in earlier versions of my Report; second, we know a great deal more about the capabilities and attitudes of Sterling's management and organization than we did at the time the model was originally developed. I have therefore revisited a number of assumptions used in the previous modeling, and have made modest adjustments to take account of the changes required by Judge Wheeler's ruling. Under the belief that the "but for" bank could include all of the intangibles resulting from the Central Evergreen merger in core capital, my previous Report assumed that until June 1991 Sterling would maintain the capital ratios specified in the Business Plan developed in 1988 (before FIRREA). Obviously, this is a conservative assumption, but plausible because the Central Evergreen goodwill made that a feasible strategy. Without the ability to use the Central Evergreen intangibles as anticipated at the time of the contract, it is not reasonable to assume that Sterling would strictly adhere to the capital ratios specified in the Business Plan. 4 We know from the business plans and testimony of bank management that Sterling desired to grow and would have been very reluctant to shrink in asset size. My modeling of the "but for" bank assumes that Sterling will remain in compliance with the core capital requirement imposed by FIRREA and will maintain its asset size. Consequently I have estimated that the but-for bank will operate with a core capital ratio of 4% from December 31, 1989 to June 30, 1991, which is only marginally less than the ratios in the Business Plan (4.15%-4.24%), and well above the 3% ratio specified by FIRREA.

In my original modeling I assumed that Sterling had a permanent (nonamortizing) capital credit and all of the intangibles from Central Evergreen to include in capital. This provided enough capital for a very large increase in assets if the capital were leveraged fully. In view of the uncertainty about the ability of Sterling to manage such substantial growth, and whether profits could be maintained through a period of very rapid growth, I imposed a restrictive growth constraint on the "but for" bank. In the "but for" world resulting from Judge Wheeler's ruling (i.e., with less core capital for Sterling), and with the evidence that Sterling is capable of managing substantial growth with good profitability, it may well be more appropriate to model the "but for" bank on the basis of a leveraging of all regulatory capital to the capital ratio maintained by the actual bank.

4

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Additionally, a few data errors in the previous calculations have been found and corrected. 5 In addition to adapting my calculation of Sterling's lost earnings to Judge Wheeler's ruling, I have updated my calculations through the present based on Sterling's recent financial performance. For the fourth quarter of 2003 through 2006 I have followed the same approach to modeling the but-for bank's performance as I did for 1990 through 2003. 6 Since 2003 Sterling has continued to grow both by internal growth and by acquisition. It has remained profitable while achieving this growth. Additionally in 2005 Sterling converted to a bank charter. B. Future Damages

As in my previous Reports, I understand that Professor James has prepared an analysis of the value of the remaining goodwill and capital credits from the Lewis Federal and Tri-Cities acquisitions. His determination of the value is $0.641 million. III. Summary

In summary, my determination of Sterling's expectation damages is $63.361 million. Exhibit 8 presents a summary of the amounts. The lost earnings from 1990 through 2006 are $58.164 million, the wounded bank damages are $4.556 million, and the future damages are $0.641 million. IV. Index of Exhibits 2. Addendum - Additional Documents Reviewed in Conjunction with Updated Report ­ December 11, 2006 3. Sterling Savings Association, Key Financial Data, 1983 ­ 1989
5

The first involved the treatment of the tax benefits from net operating loss carryforwards ("NOLs"). A second involved a recalculation of the December 1989 core capital. The TFR form in use in 1989 did not include information on core capital as defined by FIRREA, and previous Reports have used a figure based on the June 1990 TFR. I have concluded that core capital in December 1989 was about $1 million lower than the figure used previously. A third involved the amount of intangibles and assets resulting from the acquisition of Empire Savings. Each of these corrections would, other things being equal, lower the expectations damage calculation. 6 My methodology and rationale were described in my previous reports of September 2001 and February 2004.

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4. 5. 6. 7.

Sterling Savings Association, Consolidated Key Financial Data, 1990 ­ 2006 Sterling Savings Association, Asset Composition, 1990 ­ 2006 Calculation of Lost Earnings on Foregone Assets Through 2006 List of actual acquisitions in Sterling's region (WA, OR, No. Idaho) through the RTC in 1990 ­ 1991. List of specific branch deals/ acquisitions that Sterling considered both before and after the breach. 8. Summary of Expectation Damages

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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. ) __________________________________________)

Court No. 95-829-C (Judge Wheeler)

Updated Expert Report of Professor Christopher M. James December 11, 2006

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TABLE OF EXHIBITS Exhibit A: Curriculum Vitae Exhibit B: Prior Testimony of Dr. Christopher M. James in the Previous Four Years Exhibit C: Additional Documents Considered Exhibit D: Summary of Lost Profits and Actual Cost of Mitigation for Lewis Federal and TriCities Exhibit E: Calculation of Lost Earnings on Foregone Assets Through 1993 Exhibit F: Actual Cost of Mitigation, Raised Capital to Mitigate Lewis Federal and Tri-Cities Intangibles, 1991 through 2006 Exhibit G: Capital Raised Assumed to Mitigate Lewis Federal and Tri-Cities Intangibles Exhibit H: Calculation of Cash Benefit Yield Exhibit I: Actual Cost of Mitigation, Raised Capital to Mitigate Lewis Federal and Tri-Cities Intangibles, 2006 through 2025 Exhibit J: Transaction Costs of Mitigation Capital for Lewis Federal and Tri-Cities Exhibit K: Summary of Wounded Bank Damages Exhibit L: Cost of Replicating Preferred Stock on September 30, 2006 with Terms Equivalent to Lewis Federal and Tri-Cities Intangibles, 2006 through 2025

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I.

Qualifications I am the William H. Dial/SunBank Eminent Scholar and Professor of Finance at the

University of Florida. Before joining the faculty of the University of Florida, I taught at the University of Oregon and the University of Michigan. I have also held positions at several Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the Treasury Department. I currently serve on the Advisory Board of SunTrust Bank. My academic research has been in the areas of securities pricing, corporate finance, and financial institutions. I have published numerous articles on economic and financial topics including the regulation of financial institutions, failure resolution policies, and capital raising by depository institutions. I also serve on the editorial boards of four scholarly journals including the Journal of Financial Economics. I served as an associate editor of the Journal of Finance and as editor of the Journal of Financial Intermediation from 1988 through 1999. A copy of my curriculum vitae is attached as Exhibit A. A list of my testimony over the last four years is included in Exhibit B. I am being compensated at my usual hourly rate of $650.

II.

Assignment I have been retained in this matter by counsel for the plaintiffs, Sterling Savings

Association ("Sterling") and Sterling Financial Corporation ("Sterling Financial"). I have been asked by the counsel for the plaintiffs to update my February 2004 report taking into account the Court ruling dated August 30, 2006. 1 Specifically, I was asked to: a. Assume that the contract related to the acquisition of Central Evergreen was not subsequently breached by the government, hence did not result in damages to the plaintiffs. b. Update my calculations through September 30, 2006.

1

Opinion and Order, Judge Wheeler, filed August 30, 2006.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 IV. Cost of Mitigation The calculation of the cost of mitigation in my current report follows the same methodology as in my February 2004 Expert Report albeit with updated inputs to account for the III. Summary of Opinions Based on the Court ruling dated August 30, 2006, I was asked to assume that the contract related to the acquisition of Central Evergreen was not breached by the government. Hence, damages stem from the breach related to the acquisitions of Lewis Federal and Tri-Cities ("LF & TC") only. When calculating total damages, I followed the same methodology as in my February 2004 Expert Report, however, the calculated damages relate only to the LF & TC acquisitions. Following similar steps as in my February 2004 Expert Report, I summed the damages resulting from the net cost of mitigation capital pertaining to LF & TC, transaction costs associated with the issuance of mitigation capital related to LF & TC, lost profits attributable to the breach of the LF & TC contracts, and wounded bank damages related to the breach. Under the assumption of no damages pertaining to the acquisition contract for Central Evergreen, total damages are $18.708 million (see Exhibit D). As part of my analysis, I have reviewed various documents including reports issued by experts retained by the Department of Justice, deposition testimony, court opinions, legal filings, financial statements for Sterling, and other selected documents for Sterling. A list of the additional documents I have considered is contained in Exhibit C. This list supplements the document lists that I previously produced.

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Court's August 30, 2006 ruling. 2 Furthermore, I have updated my calculations through September 30, 2006. In these calculations only the costs of mitigating the contractual supervisory capital promises for LF & TC are considered damages. To determine these costs, in the context of my model, it is first necessary to assess which capital was raised as a substitute for LF & TC's supervisory capital as opposed to being raised for other purposes. These other purposes include raising capital to substitute for the 1989 unit offering which had been planned prior to the breach and to substitute for the supervisory capital from the Central Evergreen acquisition that was lost after the passage of FIRREA. Only capital raised as a substitute for LF & TC's supervisory capital mitigates the effect of the breach ("mitigation capital") and results in mitigation damages. Capital that Sterling raised in the 1991 and 1993 offerings was not traceable to any specific purpose, but was generally used to support the growth of the business. In the 1991 offering prospectus Sterling stated: "The primary purpose of this Offering is to increase Sterling's regulatory capital levels. Net proceeds will be used to support the growth of Sterling's business, including the origination of loans." 3 In the 1993 offering prospectus the intended purpose of the capital contributed to Sterling was to "...improve further the Sterling Savings' capital ratios. Sterling Savings intends to use such additional capital to support the growth of the business, including funding loans and investments and expanding its branch network." 4 Neither of the offerings indicated that the purpose was to mitigate the effects of the breach or other non-breach aspects of FIRREA. 5

As I noted in my February 2004 Expert Report, I am not rendering an opinion on whether Sterling actually replaced the supervisory capital that was generated in the contracts with the government. For purposes of these calculations I have been asked to assume that it did. 3 Sterling Savings Offering Circular, November 20, 1991, p. 13. 4 Sterling Financial Corporation Subordinated Notes Prospectus, February 4, 1993, pp. 4, 12. 5 As I noted in my February 2004 report, I have been asked to assume for purposes of these calculations that the offerings were used to mitigate the breach of Lewis Federal and Tri-Cities' contracts. I believe this premise is counterfactual based on my review of the documents and the testimony of fact witnesses but I make the assumption as the necessary basis for calculating damages at or near the time of the breach, and on the belief that it is conservative in the sense that it minimizes damages awardable against the government.

2

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Furthermore, once capital is raised, the proceeds from such an offering are fungible. Given that Sterling did not specify whether the raised capital was attributable to either substituting for the 1989 offering, mitigating the loss of the supervisory capital of LF & TC, or substituting for supervisory capital of Central Evergreen, it is therefore necessary to allocate the proceeds to Sterling's needs when calculating the cost of mitigation. In the next paragraphs I outline the assumptions that I made in order to assess which capital was raised as a substitute for LF & TC's supervisory capital. Consistent with my February 2004 report, I assumed that $12 million of the capital raised in the 1991 offering served as a substitute for the proceeds which Sterling would have raised in the 1989 withdrawn offering, an offering that had been planned prior to the breach. The balance of the capital raised at the time of the 1991 offering was then allocated between capital needs that arose after the passage of FIRREA. I allocated the balance proportionally between the need to substitute for the supervisory capital from the Central Evergreen acquisition and the need to mitigate the breach of LF & TC's contracts. I have continued to allocate a portion of the offering to Central Evergreen because post-FIRREA Central Evergreen's supervisory capital could no longer be counted as tangible capital. As a consequence, Sterling would have needed to find a substitute for it. Therefore, the balance of capital raised at the time of the 1991 offering (both the proceeds from the 1991 offering and capital raised due to the Preferred Stock Series B conversion) is prorated based on the respective supervisory capital balances of LF & TC (54.8%) and Central Evergreen (45.2% = 100% - 54.8%). 6 The sum of the allocated proceeds of the 1991 offering of $11.719 million and the capital resulting from the Preferred Stock Series B conversion of $2.1 million is less than the sum of the balances of supervisory capital of LF & TC and Central Evergreen (see Exhibit G). The capital

6

The amount of LF & TC and Central Evergreen supervisory capital as of the time of the 1991 offering is $13.346 million and $11.022 million, respectively (see Exhibit G). $13.346 million / ($13.346 million + $11.022 million) = 54.8%.
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raised in 1993 is therefore necessary to fully-mitigate the loss of LF & TC's supervisory capital. In 1993, the preferred stock issued by Sterling fully-mitigated the supervisory capital of LF & TC, as well as fully-replaced Central Evergreen's.

1. Cost of Mitigation ­ 1991 Through 2006 The net cost of mitigation capital for LF & TC from 1991 through September 2006 is $7.729 million (see Exhibit F). The following updates were implemented: 1. As discussed above, I did not include in the calculated mitigation damages any costs associated with the substitution of Central Evergreen's supervisory capital. This results in a smaller average amount of capital assumed to mitigate the breach (presented in Exhibit G) and in turn lowers the net cost of capital (presented in Exhibit F). 2. I updated the calculation of the past mitigation costs to include years 2004, 2005, through September 2006.

2. Cost of Mitigation ­ 2006 Through 2025 The net future cost of mitigation for LF & TC is $1.386 million (see Exhibit I). The following updates were implemented: 1. I updated the cash benefit rate of mitigation capital and the discount rate to reflect the current yield on 30-year U.S. Treasury bonds. 2. I updated the analysis to include only the period starting on September 30, 2006 through December 31, 2025. 7

7

I have also made one correction to the calculation of the Weighted Average Capital Raised Balance in Exhibit I.
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V.

Transaction Costs of Mitigation Capital I updated my calculation of the transaction costs of mitigation capital taking into account

the Court's ruling dated August 30, 2006. As discussed above, only capital mitigating the breach related to LF & TC contracts leads to mitigation damages. Therefore, only the portion of the transaction costs related to the capital which mitigated LF & TC's supervisory capital is included in mitigation damages. The transaction costs attributed to mitigation capital for LF & TC are $0.900 million (see Exhibit J).

VI.

Lost Profits from Un-Mitigated Supervisory Capital My approach to lost profits follows the approach I outlined in my February 2004 report.

As a result of the Court's ruling dated August 30, 2006, I calculate lost profits damages on LF & TC's supervisory capital prior to its full mitigation. As I noted in my February 2004 report, leverage is valuable to thrifts. The lost profits from the un-mitigated LF & TC supervisory capital can be measured with the model developed by Dr. Horvitz which I have adopted. 8 My calculation of lost profits starts at the time of the breach (as does Dr. Horvitz's) and continues through February 1993 ­ the time when the LF & TC supervisory capital would have been fullymitigated. As before, I have made several adjustments to Dr. Horvitz' model to account for the capital raises that I have been asked to assume mitigated the breach. The first adjustment is to the amount of capital Sterling would have raised but-for the breach. The implication of a possible ruling by the Court that Sterling's capital raises subsequent to the breach were initiated to mitigate the breach would mean that the capital would not have been raised. However not all of the capital raised in 1991 and 1993 was needed to mitigate the loss of LF & TC's supervisory capital ­ clearly some of the capital was raised for other purposes. Capital raised for purposes other than to

8

Updated Expert Report of Professor Paul Horvitz, December 11, 2006.
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mitigate the breach would still have been raised but-for the breach. My lost profits calculation therefore includes capital raised in 1991 that was a substitute for Central Evergreen's supervisory capital. As Exhibit E, Table 3a shows, $5.678 million of the 1991 offering and conversion of Series B Preferred is a substitute for Central Evergreen's supervisory capital. The second adjustment I made to Dr. Horvitz's model is that in light of the changed capital structure I reevaluated the leverage ratio of the but-for bank at the end of fiscal year 1992. I have made the same adjustment as in my February 2004 report. The final adjustment relates to dividend payments on the Series B Preferred Stock that was converted into common stock at the time of the 1991 offering. To the extent that the Series B Preferred Stock was not converted , Sterling would have continued to pay dividends on the portion that was not converted. The updated lost profits damages resulting from the un-mitigated supervisory capital from LF & TC are $4.137 million (see Exhibit E).

VII.

Wounded Bank Damages The wounded bank damages of $4.556 million have not changed since my February 2004

report (see Exhibit K).

VIII. Summary - Total Mitigation Damages Total damages are the sum of the net cost of mitigation capital pertaining to LF & TC, transaction costs associated with issuing the mit