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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 95-524C (Judge George W. Miller) _______________________________________________________________________________ HOMER J. HOLLAND, STEVEN BANGERT, Co-Executor of the Estate of HOWARD R. ROSS, and FIRST BANK, Plaintiffs, v. THE UNITED STATES, Defendant. _______________________________________________________________________________ DEFENDANT'S CONTENTIONS OF FACT AND LAW _______________________________________________________________________________
MICHAEL HERTZ Deputy Assistant Attorney General JEANNE E. DAVIDSON Director KENNETH M. DINTZER Assistant Director JOHN H. ROBERSON Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 8th Floor, 1100 L Street Washington, D.C. 20530 Tele: (202) 353-7972 Fax: (202) 514-8640 Attorneys for Defendant
OF COUNSEL: SCOTT D. AUSTIN ELIZABETH A. HOLT WILLIAM G. KANELLIS BRIAN A. MIZOGUCHI AMANDA L. TANTUM JOHN J. TODOR October 26, 2007
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TABLE OF CONTENTS Page TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CONTENTIONS OF FACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 I. THE THRIFT INDUSTRY GENERALLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 A. B. C. The FHLBB And The FSLIC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Statutory Restrictions On Thrift Mergers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Use Of GAAP Accounting In Regulatory Accounting And Certain Specified Exceptions To GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
II. III.
FIRREA'S ENACTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 THRIFTS WERE EXPERIENCING A DOWNWARD TREND IN ASSETS BEFORE 1989, AND THAT TREND CONTINUED UNTIL 1996.. . . . . . . . . . . . . . . . 14 THE SUPERVISORY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. B. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The River Valley I Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1. The River Valley I Assistance Agreement.. . . . . . . . . . . . . . . . . . . . . . . . 17 a. b. c. The FSLIC Cash Contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 The FSLIC's $5 Million Preferred Stock Assistance.. . . . . . . . . . 18 The Use Of $4.6 Million Of Subordinated Debt Toward Regulatory Capital Computations. . . . . . . . . . . . . . . . . . 21 The Restrictions On Transfer To Third Parties. . . . . . . . . . . . . . . 22
IV.
d. 2.
Resolution 88-638. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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3. 4. C.
Forbearance Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Accounting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The River Valley II Transaction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1. 2. 3. 4. 5. 6. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 The River Valley II Assistance Agreement. . . . . . . . . . . . . . . . . . . . . . . . 25 Resolution 88-612. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Forbearance Letters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Issuance Of Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Accounting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
D.
The Peoria Savings Acquisition.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1. 2. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The Assistance Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
E. F. V.
Post Acquisition Payments From The Government.. . . . . . . . . . . . . . . . . . . . . . . 29 Summary Of Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
OPERATION OF THE THRIFTS AFTER THE ACQUISITIONS AT ISSUE. . . . . . . . 31 A. Operations And Projections Before The Enactment Of FIRREA: A Retail Emphasis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Prior To The Passage Of FIRREA, The River Valley Thrifts Made Numerous Errors In Reporting Their Derivative Instruments. . . . . . . . . . . . . . . . 34 Operations And Projections Post-FIRREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1. River Valley Thrifts Had Excess Regulatory Capital Following The Passage Of FIRREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 River Valley I's Return On Assets In 1989. . . . . . . . . . . . . . . . . . . . . . . . 36
B.
C.
2.
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3.
Bonus And Deferred Compensation Payments To Messrs. Holland, Ross, And Bangert. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 The Lending Relationship Between ANB And The River Valley Thrifts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.
D.
The Thrifts' Continued Focus Upon Traditional Banking In The Post-FIRREA Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 The Investment And Sale Activity Of The River Valley Thrifts In The Late 1980s And Early 1990s.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 1. The River Valley Thrifts Increase Their High-Risk Derivative Instruments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Borrowing Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
E.
2. F.
Regulatory Criticisms Of The River Valley Thrifts' Capital Market Investments In The Post-FIRREA Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1. The FDIC's Criticisms Of River Valley I's Capital Market Instruments In August 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Although The OTS Also Had Concerns With River Valley I's Residual Instruments In 1990, It Did Not Classify These Instruments In The Same Manner As Did The FDIC. . . . . . . . . . . . . . . . 45 a. The OTS's August 1990 Examination Of River Valley I.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The OTS's November 1990 Examination Of River Valley I.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.
b.
3.
As With River Valley I, The FDIC Found Problems With River Valley II's Derivative Mortgage Products In August 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 The OTS's Assessment Of River Valley II's Condition In 1990.. . . . . . . 48
4. G.
Other Post-FIRREA Actions Undertaken By The River Valley Thrifts. . . . . . . . 49 1. The Runoff And Readjustment Of The River Valley Thrifts' Assets And Liabilities After July 1990.. . . . . . . . . . . . . . . . . . . . 49
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2. 3. 4.
1991 Redemption Of Class A Preferred Stock. . . . . . . . . . . . . . . . . . . . . 51 Certain Other Capital Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 The Valuation Of The Preferred Stock Provided To The FDIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 River Valley III Chose To Sell the Republic Branches In 1991, And Thereby Eliminated The Republic Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.
H.
Operations Following Supervisory Agreement Of March 25, 1991. . . . . . . . . . . 57 1. 2. 3. 4. The Supervisory Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 The Merger Of River Valley I And River Valley II. . . . . . . . . . . . . . . . . . 58 The Settlement Agreement Between The FDIC And Plaintiffs.. . . . . . . . 59 Regulatory Criticism Of The Thrift's Capital Markets Investments Continued In 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 The FDIC's Criticisms Of The Thrift's High-Risk Investments Continued Into 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 The OTS's View Of River Valley III In 1992 Contrasted With That Of The FDIC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 The FDIC's Criticisms Continued Into 1993. . . . . . . . . . . . . . . . . . . . . . . 65 The Termination Of The Supervisory Agreement In 1993 Following The Thrift's Reduction Of Capital Market Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.
6.
7. 8.
I. J. K. L.
The Formation Of RV Holdings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 The SAFSB Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 The Operation Of SAFSB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 The Value Of The River Valley Thrifts Increased Dramatically Between 1988 And 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 The Sale Of RV Holdings To First Banks, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . 79 -iv-
M.
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N. O. VI.
First Bank Was Well Capitalized And Had Little Use For Goodwill. . . . . . . . . . 80 SAFSB's Liquidation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
THE NATURE OF RETAINED EARNINGS AND TANGIBLE CAPITAL. . . . . . . . . 83
CONTENTIONS OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 I. PLAINTIFFS' SAFSB-RELATED DAMAGE CLAIMS ARE MERITLESS. . . . . . . . . 85 A. First Bank's Purported Damages Resulting From WCHI's Acquisition Of SAFSB Were Not Caused By The Government's Purported Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 1. The Purported Injury Must Have A Close, Direct, And Inevitable Nexus Between The Breach And The Harm Alleged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 River Valley Mitigated Any Effect Of The Breach With Respect To The SAFSB Opportunity By Facilitating The Acquisition Of SAFSB Through WCHI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 First Bank's SAFSB Claim Should Be Denied Because Any Award Would Result In An Improper Windfall Recovery Of Double Profits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 First Bank Cannot Show That The Purported Inability Of River Valley III To Obtain SAFSB Was Caused By The Government's Breach Of The Purported Contract.. . . . . . . . . . . . . . . . . . 94 a. The SAFSB Transaction Was An Independent, Collateral, And Remote Undertaking.. . . . . . . . . . . . . . . . . . . . . . 94 The Inability Of River Valley To Consummate The SAFSB Transaction Was The Result Of Intervening Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 i. ANB Refused To Loan More Funds To River Valley Due To FIRREA's Cross-Guaranty Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 River Valley Made Little Attempt To Find Other Lending Sources. . . . . . . . . . . . . . . . . . . . . . . 96 -v-
2.
3.
4.
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c.
The SAFSB-Related Damages Claimed Were Not Caused By The Government's Breach, But By An Increase In The Market Value Of SAFSB's Assets. . . . . . . . . . . . 96 Regulators Would Not Have Approved The Acquisition Of SAFSB By River Valley Irrespective Of The Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
d.
B.
First Bank's Purported Damages Resulting From The Acquisition Of SAFSB Were Not Foreseeable By The Government. . . . . . . . . . . . . . . . . . . . 99 No Expert Opinion Is Permitted With Respect To Three Of The Four Versions Of SAFSB-Related Damage Claims.. . . . . . . . . . . . . . . . . . . . . . . . . . 101 All Of First Bank's SAFSB-Related Damage Claims Are Speculative And Unreliable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 1. First Bank's New Claim For $45 Million In SAFSB-Related Damages Is Speculative And Unreliable. . . . . . . . . . . . . . . . . . . . . . . . . 102 First Bank's New Claim For $35 Million In SAFSBRelated Damages Should Be Denied Because It Is Speculative And Unreliable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 First Bank's New $29.963 Million SAFSB-Related Damage Claim, And Its Prior $28.6 Million Claim Are Speculative And Unreliable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
C.
D.
2.
3.
II.
FIRST BANK'S CLAIM FOR DIMINISHED ECONOMIC VALUE IS MERITLESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 A. B. Dr. Murphy's Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Dr. Murphy's Methodology Produces Unreliable Results. . . . . . . . . . . . . . . . . . 111 1. First Bank's Lost Value Calculation Is At Odds With Several Contemporaneous Direct Valuations. . . . . . . . . . . . . . . . . 111 Dr. Murphy's Lost Value Model Is Based Upon FSLIC And FDIC Valuations That Do Not Reflect The Market Value Of The Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . 112
2.
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3.
Dr. Murphy's Extrapolation To River Valley II Of The Purported Lost Value To River Valley I Is Unreliable.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
C.
The Alleged Diminished Value Was Not Caused By The Government's Purported Breach .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 1. Many Other Factors Besides A Loss Of Goodwill Affected The River Valley Thrifts, Which Remained In Capital Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 The Thrifts' High-Risk MBS And Other Mortgage-Related Assets Caused The Regulatory Criticisms Of The Thrift. . . . . . . . . . . . 117 The Shrinkage Was Caused By Numerous Non-Breach Factors. . . . . . . 118 The Purported Diminished Value In The River Valley Thrifts Was Not Foreseeable By The Government. . . . . . . . . . . . . . . . . . . . . . . 119
2.
3. 4.
III.
PLAINTIFFS' RETAINED EARNINGS MITIGATION THEORY IS MERITLESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 A. Mr. Holland's Retained Earnings Mitigation Theory. . . . . . . . . . . . . . . . . . . . . 120 1. 2. B. Mr. Holland's Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Mr. Holland's Damages Are Unreasonable On Their Face. . . . . . . . . . . 121
Mr. Holland's Retained Earnings Theory Fails As A Matter Of Law. . . . . . . . . 122 1. Retaining Earnings Did Not Cause Any Harm To River Valley. . . . . . . 122 a. b. Retained Earnings Are Not Harmful To A Thrift. . . . . . . . . . . . 122 Plaintiffs Admit That, But For The Breach, They Would Have Retained Even More Earnings. . . . . . . . . . . . . . . . . . . . . . 123 Mr. Holland Has Not Identified A But-For World. . . . . . . . . . . 125 The River Valley Thrifts' Contractual Capital Could Not Have Been Transferred To First Bank, Precluding Retained Earnings Damages After First Bank's Acquisition.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
c. d.
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e.
First Bank's Retained Earnings Damages Were Not Reasonably Foreseeable At The Time Of Contracting. . . . . . . . 129
2.
First Bank's Measure Of Damages For Retained Earnings Is Not Reasonably Certain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 a. River Valley's Ex Post Cost Of Capital Should Be Measured By The Actual Dividends Paid. . . . . . . . . . . . . . . . . . 131 An Award Based Upon Mr. Holland's Retained Earnings Theory Would Result In A Double Recovery To River Valley's Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 i. ii. c. Double Recovery With First Bank Purchase Price. . . . . 135 Double Recovery With SAFSB Acquisition. . . . . . . . . . 136
b.
Mr. Holland's Retained Earnings Theory Is Tantamount To An Improperly Asserted Lost Profits Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Mr. Holland's Retained Earnings Methodology Is Flawed And Unreliable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 i. Mr. Holland's Retained Earnings Theory Is Not Based Upon Actual Dividends Paid Or An Actual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Mr. Holland's Analysis Is Neither A Proper Ex Ante Nor Ex Post Analysis .. . . . . . . . . . . . . . . . . . . . 140 Mr. Holland Overstates The Amount Of Contractual Capital To Be Replaced .. . . . . . . . . . . . . . . 142 Mr. Holland's Analysis Ignores The Differences Between Tangible Capital And Intangible Capital.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Mr. Holland Effectively Imposes Prejudgment Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
d.
ii.
iii.
iv.
v.
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TABLE OF AUTHORITIES Page(s) FEDERAL CASES Abbott Labs. v. Brennan, 952 F.2d 1346 (Fed. Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Am. Fed. Sav. Bank, FSB v. United States, 72 Fed. Cl. 586 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Am. Fed. Sav. Bank, FSB v. United States, 68 Fed. Cl. 346 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Bank of Am., FSB v. Doumani, 495 F.3d 1366 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Bank of Am., FSB v. United States, 67 Fed. Cl. 577 (2005), aff'd sub nom. Bank of Am., FSB v. Doumani, 495 F.3d 1366 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 131, 134 ,135 Bank United of Texas, FSB v. United States, 50 Fed. Cl. 645 (2001), aff'd in part & rev'd in part, 80 Fed. Appx. 663 (Fed. Cir. 2003).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 130 Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 91, 93, 109 Bohac v. Dep't. of Agric., 239 F.3d 1334 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Branch v. United States, 69 F.3d 1571 (Fed. Cir. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69, 70 Cal Fed Bank, FSB v. United States, 395 F.3d 1263 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 88 Cal. Fed. Bank, FSB v. United States ("Cal Fed"), 54 Fed. Cl. 704 (2002), aff'd, 395 F.3d 1263 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . 87, 119 Castle v. United States, 48 Fed. Cl. 187 (2000), aff'd in part & rev'd in part, 301 F.3d 1328 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 130 -ix-
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Chain Belt Co. v. United States, 127 Ct. Cl. 38, 115 F. Supp. 701 (1953). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 100, 123 Cienega Gardens v. United States, No. 06-5051, __ F.3d __, 2007 WL 2778687 (Fed. Cir. Sept. 29, 2007). . . . . . . . . . . . . . . . . . . . 4 Citizens Fed. Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87, 88, 122, 133 Citizens Fed. Bank v. United States, 66 Fed. Cl. 179 (2005), aff'd 474 F.3d 1314 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . 133, 136 Citizens Fin. Serv., FSB. v. United States, 64 Fed. Cl. 498 (2005), aff'd, 170 Fed. Appx. 129, 2006 WL 618792 (Fed. Cir. Mar. 9, 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Columbia First Bank, FSB v. United States, 60 Fed. Cl. 97 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Comm. Fed. Bank, FSB v. United States, 59 Fed. Cl. 338 (2004), aff'd, 125 Fed. Appx. 1013, 2005 WL 857772 (Fed. Cir. Apr. 8, 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Dodson Livestock Co. v. United States, 48 Fed. Cl. 551 (2001), rev'd on other grounds, 30 Fed. Appx. 989 (Fed. Cir. 2002).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Estate of Berg v. United States, 231 Ct. Cl. 466, 687 F.2d 377 (1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97, 99 Fifth Third Bank of W. Ohio v. United States, 402 F.3d 1221 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 86, 139 Fifth Third Bank of W. Ohio v. United States ("Fifth Third"), 55 Fed. Cl. 223 (2003), aff'd in part, rev'd in part, 402 F.3d 1221 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 87 First Fed. Lincoln Bank v. United States, 73 Fed. Cl. 633 (2006), appeals docketed, No. 07-5044, -5048 (Fed. Cir. 2007). . . . . . . . . . . . . 86
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First Fed. Sav. & Loan Ass'n of Rochester v. United States, 76 Fed. Cl. 106 (2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Glendale Fed. Bank, FSB v. United States ("Glendale II"), 378 F.3d 1308 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 86 Glendale Fed. Bank, FSB v. United States ("Glendale I"), 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 106, 130 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). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 130 Globe Savings Bank, FSB v. United States, 65 Fed. Cl. 330 (2005), aff'd in part, vacated in part, 189 Fed. Appx. 964, 2006 WL 2045776 (Fed. Cir. Jul. 20, 2006). . . . . . . . . . . . . . . . . . . . . . . . 86 Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155 (2006), appeal docketed, No. 2007-5054 (Fed. Cir. 2007). . . . . . . . . . . . . 85, 142 Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 139 Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 92, 93, 109 Holland v. United States, 74 Fed. Cl. 225 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 90 Home Sav. of Am., FSB v. United States, 399 F.3d 1341 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122, 132, 133 Kidder, Peabody & Co. v. IAG Int'l Acceptance Group N.V., 28 F. Supp. 2d 126 (S.D.N.Y. 1998), aff'd 205 F.3d 1323 (2d Cir. 1999). . . . . . . . . . . . . . . . . . 95 LaSalle Talman Bank, FSB v. United States, 462 F.3d 1331 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 122 LaSalle Talman Bank, FSB v. United States, 64 Fed. Cl. 90 (2005), aff'd, 462 F.3d 1331 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed Cir. 2003).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim -xi-
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Menne v Celotex Corp., 861 F.2d 1453 (10th Cir. 1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88, 89 Myerle v. United States, 33 Ct. Cl. 1 (1897). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim N. Helex Co. v. United States, 207 Ct. Cl. 862, 524 F.2d 707 (1975). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Neely v. United States, 285 F.2d 438 (Ct. Cl. 1961). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Point Prods. A.G. v. Sony Music Entm't, 215 F. Supp. 2d 336 (S.D.N.Y. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88, 89 Ramsey v. United States, 121 Ct. Cl. 426, 101 F. Supp. 353 (Ct. Cl. 1951). . . . . . . . . . . . . . . . . . . . . . . . . . . 87, 95, 98, 129 San Carlos Irrigation and Drainage Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Shyface v. Sec'y of Health and Human Servs., 165 F.3d 1344 (Fed. Cir. 1999). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88, 89 S. Cal. Fed. Sav. & Loan Ass'n v. United States, 57 Fed. Cl. 598, 622 (2003) aff'd in part, rev'd in part, 422 F.3d 1319 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 S. Nat'l Corp. v. United States, 57 Fed. Cl. 294 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 87, 89 Suess v. United States, 52 Fed. Cl. 221 (2002), appeals docketed, Nos. 07-5070, -5071 (Fed. Cir. 2007). . . . . . . . 86, 130 Three Crown Ltd. P'ship v. Salomon Bros., Inc., 906 F. Supp. 876 (S.D.N.Y. 1995).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Trustmark Corp. v. Comm'r of Internal Revenue, 1994 WL 159116 (U.S. Tax Court). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 United States v. Winstar Corp., 518 U.S. 839 (1996).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 117
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Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim FEDERAL RULES AND REGULATIONS 47 Fed. Reg. 8152-53 (1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 47 Fed. Reg. 8152 (1982).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 47 Fed. Reg. 8152, 8152-54 (1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Regulatory Capital, OTS, 54 FR 46845, 46848 (Nov. 8, 1989). . . . . . . . . . . . . . . . . . . . . . . . . . 14 57 Fed. Reg. at 44,866 (September 29, 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Code of Federal Regulations (Jan. 1, 2007), Chapter 3, § 325.103. . . . . . . . . . . . . . . . . . . . . . . . 81 Federal Deposit Insurance Corp. Improvement Act of 1991 ("FDICIA"), Publ. L. No. 102-242, 105 Stat. 2236 (1991) § 38.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (Aug. 9, 1989) §§ 211, 401(a)(1). . . . . . . . . . . . . . . . . . . . . . 14 Pub. L. No. 101-73 (HR 1278) at § 206(e)(I). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 RCFC 26(a)(2)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 RCFC 37(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 RCFC 37(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 FEDERAL STATUTES 12 C.F.R. § 552.6-1(g). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 12 C.F.R. §§ 561, 563 and 567 (1990).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12 C.F.R. § 561.13(d) (1988).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20 12 C.F.R. § 563.13 (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12 C.F.R. § 563.13(b)(2) (1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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12 C.F.R. § 563.13(b)(2) (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12 C.F.R. § 563.22 (a) (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 C.F.R. § 563.23-3 (c) (1988).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12 C.F.R. § 567. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12 C.F.R. § 567.2 (Jan. 1, 1990 ed.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12 C.F.R. § 571.5(e) (1988).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 U.S.C. § 1464 (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12 U.S.C. § 1464(d)(3)(A) (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 U.S.C. § 1464(t) (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12 U.S.C. §§ l464(t)(2)(A)-(B), 1464(t)3, 1464(t)(9)(A)-(B) (1989). . . . . . . . . . . . . . . . . . . . . . 13 12 U.S.C. § 1726 (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12 U.S.C. § 1730(q) (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 U.S.C. § 1815(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 69, 95 12 U.S.C. § 1815(e)(1)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 MISCELLANEOUS 1 Dobbs Law of Remedies, § 3.8(2) (2d ed. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 W. Page Keeton et al., Prosser and Keeton On Torts, 266-68 (5th ed. 1984). . . . . . . . . . . . . . . . 88 Restatement (Second) of Contracts § 347 cmt b (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Restatement (Second) of Contracts § 351 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Restatement (Second) of Contracts § 351 cmt. d.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Restatement (Second) of Contracts § 351 cmt. e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101, 129
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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ) HOMER J. HOLLAND, ) STEVEN BANGERT, co-executor of the ) ESTATE OF HOWARD R. ROSS, and ) FIRST BANK, ) ) Plaintiffs, ) ) v. ) No. 95-524C ) ) (Judge George W. Miller) THE UNITED STATES, ) ) Defendant. ) ____________________________________) DEFENDANT'S CONTENTIONS OF FACT AND LAW Pursuant to Rule 14(b) of the Rules of the Court of Federal Claims ("RCFC"), and this Court's Order dated March 20, 2007, defendant, the United States, respectfully submits its contentions of fact and law. INTRODUCTION In July and December 1988, five small but troubled Illinois thrifts were acquired from the Government by the plaintiffs in three separate transactions. In connection with the acquisitions, the Federal Savings and Loan Insurance Corporation ("FSLIC") contributed $83 million in cash to the plaintiffs. In addition, in accord with the Assistance Agreements executed between the River Valley thrifts and the FSLIC, regulatory forbearances allowing the inclusion of paper regulatory accounting "capital credits" were permitted to be included toward regulatory capital levels, as was subordinated debt issued by the thrifts.1 These paper accounting forbearances
Definitions of the various entities related to plaintiffs in this case are set forth in the Joint Stipulation of Facts ("JSF") filed on December 31, 2003 at pages 2-3. Those definitions are incorporated by reference here.
1
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totaled just over $20 million. Setting this case apart from numerous other Winstar-related cases, the cash contributions from the FSLIC covered almost all of the accounting shortfall in the purchase transactions, i.e., the net liabilities assumed by the resulting institutions. Given the large amount of cash contributed to the thrifts, the River Valley thrifts were in compliance with general regulatory capital levels, both before and after the passage of FIRREA. Thus, unlike many other Winstar-related cases, this is not a case where, upon the passage of FIRREA, a thrift was required to enter into a capital plan or where regulators were concerned about the thrift's capacity to meet FIRREA's regulatory capital levels. Indeed, plaintiffs do not even purport to have experienced any effect from FIRREA until almost a year after its passage. To be sure, the River Valley thrifts had difficulties both before and after FIRREA. For example, prior to FIRREA, deposit runoffs were significant. This was a result of several factors, including: (1) the thrifts were newly formed and had significant difficulties merging their operations, (2) there was intense competition for deposits, and (3) there was widespread shifting of funds by customers out of thrifts and into other depository institutions. After FIRREA, a severe national recession and continued movement of funds out of savings and loans negatively affected the River Valley thrifts. Despite these operational difficulties, the River Valley thrifts were able to dramatically increase their market value following the acquisitions. For example, based upon the thrifts' own valuations, between July 1988 and January 1991 the thrifts' common stock value increased by more than $21.5 million. By August 1993, the value of the common stock had increased by an additional $16 million. The River Valley thrifts did, however, encounter regulatory oversight critical of the thrifts' operations. Regulators, particularly the FDIC, criticized the thrifts' investments in a -2-
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variety of high-risk mortgage security derivatives or residuals. Indeed, the River Valley thrifts received numerous critical reports of examination ("RoE") by regulators, severely criticizing the volume of these risky instruments. The River Valley thrifts chose to ignore these criticisms, and instead of reducing their holding of these instruments, they increased them. As a result, in March 1991, regulators required the thrifts to enter into a Supervisory Agreement whereby the thrifts became formally obligated to reduce the volume of their residual investments. Furthermore, to protect the thrifts and the insurance fund from actual losses that might result from the thrifts' risky investment strategies, the Supervisory Agreement set forth specific tangible capital requirements well above those set by FIRREA. Eventually, by 1993, through actual losses in these investments, planned runoffs, and River Valley III's belated recognition that the regulators' safety and soundness concerns would remain until the thrift reduced its level of its high-risk mortgage derivatives, River Valley III reduced the size of that portfolio to acceptable levels. Soon thereafter, regulators lifted the restrictions imposed by the Supervisory Agreement. River Valley enjoyed positive ratings from that point forward. In January 1995, the River Valley thrifts were sold to First Bank for $37.4 million. With the sale, River Valley's shareholders obtained the benefit of the steady increase in the value of the thrifts over the four-and-a-half years of their ownership. Indeed, River Valley's two key shareholders, Messrs. Holland and Ross, realized an annual rate of return on their investment of almost 30 percent. Plaintiffs now argue, in large part through the self-interested opinions of plaintiff, Mr. Holland, that, as a result of FIRREA's phase-out of the $20 million in paper regulatory accounting "capital," the River Valley thrift's successor in interest is due more than $65 million. -3-
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That is, he claims more than $3 dollars in damages for each dollar of regulatory capital phased out as a result of FIRREA. Mr. Holland's claim for damages is unprecedented in the history of the Winstar cases. We know of no case where a damage award for lost goodwill has exceeded the face dollar amount of intangible regulatory capital, much less exceeded it by more than three times. Plaintiffs' damage claims are unreliable on their face as a matter of both common sense and law. Cf., e.g., Cienega Gardens v. United States, No. 06-5051; __ F.3d __; 2007 WL 2778687 at * 11 n.13 (Fed. Cir. September 25, 2007) ("A determination that damages exceed the value of the property should be indicative that the method of computing damages is flawed."). Closer scrutiny of plaintiffs' damage claims only further underscores that plaintiffs' damages theories are meritless. Plaintiffs set forth three categories of purported damages: (a) up to $45 million as a result of a purported inability to acquire a Texas thrift, San Antonio Federal Savings Bank ("SAFSB") in 1992, (b) $21 million in purported diminution in value claims, and (c) $21 million in retained earnings damages. The SAFSB-related damage claims fail the requisite tests of causation, foreseeability and reasonable certainty. Moreover, even if the breach affected the capacity of River Valley to acquire SAFSB in 1992, a premise with which we disagree, River Valley fully mitigated the breach. River Valley facilitated the transfer of the SAFSB opportunity to an entity, Western Capital Holdings, Inc. ("WCHI"), created by River Valley's shareholders. All of the profits River Valley now claims were lost as a result of the breach, were obtained by WCHI and its successor entity. Thus, Mr. Holland unabashedly admits that, if River Valley were to be awarded any of the damages plaintiffs now seeks, he and the Estate of Mr. Ross would obtain a double recovery. Such a claim betrays common sense and the law. As a matter of law, all -4-
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benefits of mitigation must taken into account as well as costs. The $45 million in profits received by River Valley's shareholders through River Valley's mitigation must be offset against the purported lost profit costs now asserted by River Valley. Moreover, plaintiffs cannot be placed in a better position than if the breach had not occurred. As a matter of law, there are no SAFSB-related damages. Apart from these dispositive considerations, plaintiffs' SAFSB claims fail for other reasons. First, three of four iterations of SAFSB-related damages are made by argument of counsel alone, without any expert report or expert opinion. This Court and the rules governing the Winstar-related cases preclude expert opinion without prior expert reports and disclosure. Thus, plaintiffs' claims (in the alternative) for $45 million, $34 million, and $29 million in SAFSB-related damages cannot properly now be heard. Furthermore, the SAFSB claim fails because the 1992 SAFSB transaction was an independent, collateral and remote undertaking relative to the 1988 FSLIC Assistance Agreements at issue in this case. River Valley III would have been able to obtain a loan from its favored lender to finance the SAFSB acquisition directly, irrespective of the breach, were it not for the non-breaching cross-guaranty provisions of FIRREA. Those provisions, which held related corporate banking entities mutually liable for capital failures, caused River Valley III's favored lender to decide that it would not lend funds for the SAFSB acquisition directly to the River Valley III, but only to a newly created Texas entity that would not share its liabilities with the Illinois thrifts. Other causal factors preclude plaintiffs's SAFSB claim. First, all of the damages claimed are based upon SAFSB's increased market value after the date of its acquisition. The increased value was not caused by the Government, and accordingly, the damages based upon the -5-
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increased value cannot be attributed to the Government. Second, even if River Valley III had kept all of its regulatory capital, that capital could not have been used toward the fully-phased in capital level required before thrifts were permitted to bid on RTC thrifts such as SAFSB. In addition, regulators would not have permitted River Valley III to bid on another institution while it was under a Supervisory Agreement, which it likely would have been irrespective of the breach because of regulatory criticisms of River Valley III's large portfolio of high-risk mortgage derivatives. Thus, irrespective of the breach, River Valley could not have acquired SAFSB. Given the foregoing, there can be no foreseeability. Indeed, because plaintiffs' SAFSB claim is for consequential damages whereby they seek $45 million in damages for the loss of $20 million in regulatory capital, their SAFSB claim is unforeseeable as a matter of law. Finally, plaintiffs' SAFSB- related claim faces insurmountable hurdles with respect to the reasonable certainty of the damages claimed. Plaintiffs' assumption is that, in a nonbreach world, River Valley would have acquired SAFSB, sold it to First Bank in 1995, and yet, once held by First Bank, SAFSB would have been operated in the same fashion, obtaining exactly the same profits, as the actual Texas thrift. On its face this is an implausible assumption. Plaintiffs' claim for diminished economic value fares no better. Plaintiffs assert that the loss of intangible regulatory capital caused a diminution in the value of the River Valley thrifts relative to their value at the time of contracting in an amount of approximately $21 million. This fundamental premise to plaintiffs' damage claim is incorrect. River Valley's value increased dramatically following the 1988 acquisitions. Indeed, River Valley's own mark-to-market of its balance sheet demonstrates this. Moreover, a third-party investment bank performed an
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independent valuation of River Valley's stock and determined that the stock's value increased significantly between 1988 and 1991. In addition to the dispositive lack of a factual basis for plaintiffs' diminution in value claim, plaintiffs' claim fails because the methodology employed by plaintiffs' expert is flatly unreliable. To begin with, by invoking an improper substantial-factor test for causation, plaintiffs' attempt to obtain damages for the loss of the $5 million in preferred that this Court has found to be non-contractual capital. The test of causation is not that loose. Second, plaintiffs' valuation methodology is based upon a claim that preferred stock issued by the River Valley I to the FSLIC reflected the true market value of both River Valley I and River Valley II. It did not. Indeed, the FSLIC offered to purchase the preferred stock as a form of assistance in connection with the Assistance Agreement (because, as a matter of then existing regulation, the preferred stock could count toward regulatory capital levels). It was not a true market-based transaction, and it was not meant to serve as a proxy for an extrapolated value of the entire thrift (River Valley I), much less the value of River Valley II. Even if one were to ignore the factually incorrect premise that the River Valley thrifts' value declined, to the degree there was any decline in those values following the passage of FIRREA, plaintiffs have not shown that the diminution was not caused by the numerous negative factors affecting River Valley's performance, including local and national economic recession, a negative perception of savings and loans, movement of deposits from savings and loans into other depository institutions, an upheaval in the capital markets, and regulatory criticisms of the thrifts' high-risk mortgage backed security ("MBS") derivatives. Plaintiffs cannot show any diminution in value damages.
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Plaintiffs third category of damages, a so called retained earnings theory, is likewise without foundation as a matter of fact or law. Plaintiffs argue that, to mitigate the effect of the loss of the intangible regulatory capital, the thrift retained its earnings to replace that lost capital. Plaintiffs' expert, again Mr. Holland, argues that the retained earnings had a cost to the thrift that can be calculated based on a hypothetical 20 percent annual expected cost of capital, resulting in damages of $21 million from 1990 to 2013. Mr. Holland's retained earnings theory does not withstand scrutiny. First, his $21 million in damages for retaining the $20 million of lost regulatory capital is $1 million more than the face value of the intangible regulatory capital. Actual tangible capital, however, is worth far more, not less, than intangible accounting capital. Further, Mr. Holland claims that this is merely a partial mitigation and that, for full recognition of the purported harm from the loss of goodwill, the SAFSB-related damages must be added. As noted above, this results in an implausible $65 million in damages for the loss of the $20 million of regulatory capital. Furthermore, a retained earnings theory calculated in the same way that Mr. Holland calculates damages here has been rejected both by this Court and the Court of Appeals for the Federal Circuit. See Bank of America, FSB v. United States, 67 Fed. Cl. 577 (2005), aff'd sub nom., Bank of America, FSB v. Doumani, 495 F.3d 1366 (Fed. Cir. 2007). Here, as in Bank of America, River Valley's shareholders received their "return" upon earnings retained by the thrift (purportedly due to the breach) in the form of the purchase price River Valley obtained upon its sale to First Bank. See Bank of Am., 495 F.3d at 1373. There were no damages resulting from River Valley's retaining of its earnings. Furthermore, Bank of America instructs that, if the cost of retained earnings were to be calculated, actual dividends paid by a thrift is the proper measure of the cost of retained -8-
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earnings. Id. Mr. Holland ignores River Valley's actual dividend payments as a cost of capital, and instead relies upon a hypothetical construct through which he claims a 20 percent cost of capital for River Valley. Thus, just as the plaintiffs' hypothetical retained earnings failed in Bank of America, Mr. Holland's retained earnings theory fails here as a matter of law. Moreover, given that Mr. Holland's methodology is based upon a hypothetical cost of capital and not River Valley's capital raising costs, his theory is precluded by precedent from the Federal Circuit instructing that replacement of capital damage claims that are hypothetical and do not reflect the thrift's actual experience are barred. See LaSalle Talman Bank v. United States, 462 F.3d 1331, 1375 (Fed. Cir. 2006); see also Granite Mgmt. Corp. v. United States, 416 F.3d 1373, 1381-82 (Fed. Cir. 2005); Fifth Third Bank of W. Ohio v. United States, 402 F.3d 1221, 1236-37 (Fed. Cir. 2005). Apart from the precedent that bars plaintiffs' retained earnings theory, plaintiffs are internally inconsistent with what it is they claim to be Mr. Holland's retained earnings theory. On one hand, plaintiffs claim that their retained earnings is a mitigation theory, that earnings were retained to replace the lost regulatory capital. On the other hand, they claim that, but for the breach, River Valley would have had even more retained earnings. If the thrift would have retained earnings irrespective of the breach, however, the breach cannot be held to have caused the retained earnings. Moreover, this admission only proves the point that retained earnings do not harm a thrift. Mr. Holland's retained earnings theory fails the test of causation. Mr. Holland's methodology suffers additional flaws. For example, it is neither a proper ex ante or ex post theory of damages. Furthermore, it calculates most of the damages for the period following First Bank's acquisition in 1995, despite the fact that, as a matter of contract, regulatory policy, and accounting, River Valley's regulatory capital could not have transferred to -9-
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First Bank, irrespective of the breach. Finally, given that River Valley's shareholders actually realized the return from the retained earnings with the sale of the thrift to First Bank in the form of the share appreciation, to award them the "cost" of retained earnings now would amount to a double recovery. Accordingly, there is no basis for any award of damages based upon the three damage theories propounded by the plaintiffs. CONTENTIONS OF FACT I. THE THRIFT INDUSTRY GENERALLY A. 1. The FHLBB And The FSLIC Prior to the enactment of the Financial Institutions Reform Recovery, and
Enforcement Act ("FIRREA"), Federal regulation of the thrift industry was the primary responsibility of the Federal Home Loan Bank Board ("FHLBB" or "Board"). Joint Stipulation of Facts (Dec. 31, 2003) ("JSF") ¶ 11. See generally 12 U.S.C. § 1464 (1988). 2. The Federal Savings and Loan Insurance Corporation ("FSLIC") administered a
fund that insured deposits held by thrift institutions. JSF ¶ 12; 12 U.S.C. § 1726 (1988). 3. To enable the Board and FSLIC to assess and limit the risk institutions posed to
the insurance fund, and to protect the stability of the thrift industry, the Board established an elaborate system of regulations governing the financial standards and activities of thrifts. Among other things, the Board promulgated regulations that required thrifts to maintain specified levels of net worth, usually expressed as a ratio of capital against liabilities. JSF ¶ 15; 12 C.F.R. § 563.13(b)(2)(1982); 12 C.F.R. § 563.13(b)(2) (1983).
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B. 4.
Statutory Restrictions On Thrift Mergers By statute, no insured thrift institution could acquire or merge with another
insured institution without the Board's approval. JSF ¶ 13; 12 U.S.C. § 1730(q) (1988). 5. In addition, no insured institution could increase its insurable accounts as part of
any merger or consolidation without the Board's approval. JSF ¶ 14; see, e.g., 12 C.F.R. § 563.22 (a) (1988). 6. The Board's regulations required that applications for a merger or acquisition
describe the accounting method used to record the merger and that the applicants obtain certification from an independent accountant that the method was appropriate in the circumstances. JSF ¶ 17; see, e.g., 12 C.F.R. § 571.5(e) (1988). 7. These disclosures and certifications were necessary so that the Board could assess
the true financial condition of the entities involved, consistent with its statutory duty to ensure the safety and soundness of the institutions. JSF ¶ 18; 12 U.S.C. § 1464(d)(3)(A) (1988). 8. When an acquired thrift was experiencing financial difficulties, including asset
quality problems, a merger might affect the ability of the resulting institution to satisfy the Board's net worth or other regulatory requirements. To address this situation during the turbulent economic conditions of the 1980s, the Board adopted a policy of "forbear[ing] from taking supervisory action, for a specified period, with respect to certain regulatory requirements that a resulting association might not be able to fulfill" as a result of the acquisition. JSF ¶ 19; 47 Fed. Reg 8152 (1982).
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9.
Forbearances permitted thrifts to, among other things, exclude, for certain periods
of time as set forth in the forbearance instrument, the net worth deficiency of the acquired thrift for purposes of determining compliance with the Board's net worth requirements. JSF ¶ 20; 47 Fed. Reg. 8152-53 (1982). C. The Use Of GAAP Accounting In Regulatory Accounting And Certain Specified Exceptions To GAAP For purposes of determining compliance with net worth requirements and other
10.
financial regulations, the Board generally required thrifts to adhere to Generally Accepted Accounting Principles ("GAAP") unless otherwise specified. JSF ¶ 21; see 12 C.F.R. § 563.23-3 (c) (1988). 11. The Board did, however, permit certain forbearances from GAAP for supervisory
mergers. JSF ¶ 21. Such forbearances did not, and could not, waive the Board's statutory obligation to take action to ensure an institution's safety and soundness. See 47 Fed. Reg. 8152, 8152-54 (1982). 12. In addition, "a further inducement, described as a 'capital credit' . . . arose when
FSLIC itself contributed cash to further a supervisory merger and permitted the acquiring institution to count the FSLIC contribution as a permanent credit to regulatory capital. United States v. Winstar Corp., 518 U.S. 839, 853 (1996) (citations omitted); JSF ¶ 30. 13. The "capital credit" goodwill at issue in this case was to be amortized over no
more than 25 years. PX 754 WOT645 0847-0849; PX 200 WOT013 0583-0585; JSF ¶ 31. 14. Mergers and acquisitions were frequently accounted for using the purchase
method, and goodwill was created as a result of using that method of accounting. Over time, goodwill would decrease through a charge to earnings. Similarly, the market value of the assets -12-
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would be accreted through the income statement to the face amount. The charge to earnings would, however, create a drag on future earnings that was more than offset in the short run by the accretions. Under then-existing regulations, this goodwill could be treated as an asset in the calculation of equity capital, an indicator used by the thrift regulatory authorities to evaluate the financial soundness of the thrift. JSF ¶ 36; PX 2 at 425-66; PX 1 at 223-39; PX 552 at 1231-32; PX 7 at 4779-4796; 12 C.F.R. § 561.13 (1988). II. FIRREA'S ENACTMENT 15. Congress responded to the thrift crisis by enacting FIRREA, a comprehensive
thrift reform package, which was signed into law on August 9, 1989. JSF ¶ 39; see generally FIRREA. 16. FIRREA strengthened the regulatory capital requirements for thrifts. JSF ¶ 40;
12 U.S.C. § 1464(t) (1989). 17. In general, FIRREA and its implementing regulations limited the amount of
goodwill, including "capital credit" goodwill, that could be included in core and risk-based capital and required such qualifying goodwill to be phased out over a five-year period. JSF ¶ 40(a); 12 U.S.C. §§ l464(t)(2)(A)-(B), 1464(t)3, 1464(t)(9)(A)-(B) (1989). 18. The relevant portions of the FIRREA legislation required, among other things,
three different measures of capital for thrift institutions: (1) "core capital;" (2) "tangible capital;" and (3) "risk-based capital." 12 C.F.R. §§ 561, 563 and 567 (1990). JSF ¶ 41; 12 C.F.R. § 567. 19. The amount of supervisory goodwill that could be used to meet core capital
requirements was gradually phased out over a five-year period, and eliminated as of January 1, 1995. JSF ¶ 42.
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20.
Tangible capital was required to be one-and-a-half percent of adjusted total
assets. Tangible capital generally included items that could be included as core capital. Tangible capital did not include qualifying supervisory goodwill, subordinated debt, or cumulative preferred stock. JSF ¶ 43; 12 CFR § 567.2 (Jan. 1, 1990 ed.). 21. Goodwill, both before and after FIRREA, was an intangible asset. Goodwill
earns no income, amortizes over time, and cannot be spent or transferred other than via mergers qualifying as a pooling. Defendant's Proposed Statement of Facts (Dec. 31, 2003) ("DPSF") ¶3; PX 2 at 425-466; PX 1 at 223-229; PX 552 at 1231-32; PX 7 at 4779-4796; DX 1376 at 63. 22. Risk-based capital was required to be eight percent of risk-weighted assets,
subject to a phase-in period. Risk-weighted assets were generally determined by multiplying the nominal balance of each asset by the appropriate risk-weight as set forth in the regulations. JSF ¶ 44; Regulatory Capital, OTS, 54 FR 46845, 46848 (Nov. 8, 1989). 23. Following the 1988 acquisitions until the passage of FIRREA, the FSLIC
continued to insure the acquired deposits. Subsequent to FIRREA, the FDIC, as successor to FSLIC, insured the acquired deposits. JSF ¶ 45; FIRREA §§ 211, 401(a)(1). III. THRIFTS WERE EXPERIENCING A DOWNWARD TREND IN ASSETS BEFORE 1989, AND THAT TREND CONTINUED UNTIL 1996 24. During the late 1980s, the average annual asset growth rate for the savings and
loan industry as a whole fell from 9.6 percent in 1985 to 6.2 percent in 1988, the last full year prior to the passage of FIRREA. DX 1414 at Ex. 5; DX 1338 at 21. The general downward trend was driven by several factors such as disintermediation, competition from commercial banks, the emergence of mortgage banking companies, thrift failures, and finite opportunities for profitable investment. JSF ¶ 46. -14-
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25.
The thrift industry's asset base contracted throughout the period between 1989
and 1996, with the most dramatic declines -- of 13 percent per year -- occurring between 1989 and 1991. DX 1414 at Ex. 5. As in the period prior to FIRREA, the contraction in the thrift industry's asset base was driven by disintermediation, competition from commercial banks, thrifts converting charters, thrift failures, and finite opportunities for profitable investment, among other factors. JSF ¶ 47. 26. Part of the slowdown in the growth of assets for thrifts in the early 1990s can be
attributed to the fact that there were lower interest rates in the early 1990s relative to the late 1980s. As part of the asset growth in the savings and loan industry comes from the crediting of accrued interest, periods of higher interest rates tend to affect positively a thrift institution's asset growth rate. DPSF ¶ 28; DX 1414 at 16, Ex. 3. IV. THE SUPERVISORY TRANSACTIONS A. 27. Background First Bank's claims revolve around two assisted acquisitions that took place on
July 29, 1988: (1) the Galva/Home/Mutual merger into River Valley Savings Bank, F.S.B. (with the resulting entity referred to as River Valley I) (JSF ¶ 74); and (2) the merger of Republic into Rock Falls Savings and Loan Association ("Rock Falls") (with the resulting entity referred to as River Valley II). JSF ¶ 112. According to plaintiffs, the basis of the River Valley thrifts' express contracts are a "series of integrated documents" that "comprise a unitary agreement." Third Am. Compl. ¶¶ 25, 44. Plaintiffs assert that these documents, all of which are dated on or around July 29, 1988, include corresponding assistance agreements with the FSLIC, resolutions issued by the FHLBB, and certain forbearance letters from the FHLBB. Id. Plaintiffs allege that the relevant terms of the alleged express contracts are set forth in these documents. Id. -15-
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28.
By no later than July 1988, each of the five acquired thrifts involved in this case
(Galva Federal Savings and Loan Association of Galva, Illinois ("Galva"); Mutual Savings and Loan Association of Canton, Illinois ("Mutual"); Home Federal Savings and Loan Association of Peoria, Illinois ("Home"); Republic Savings of South Beloit, Illinois ("Republic"); and Peoria Savings and Loan Association, Peoria, IL ("Peoria")) had become insolvent and was operating at a loss. Collectively, the five thrifts had multimillion-dollar net-worth deficits. JSF ¶ 57; PX 62 WON074 1190-92, 1190; PX 172 WOT013 0818-26, 0819-20; DX 1383 at 39-44; PX 79 at JA 208; PX 68 WOT646 0528-0571; DX 128 WOB026 0644-0651; PX 199 WOT013 0775-0792, 0778, 0782; PX 272 WOB026 0006-0017, 0007. B. 29. The River Valley I Transaction FSLIC sought an acquiror for Home, Mutual, and Galva. "In an attempt to
achieve some operating economies of scale and to assemble a more attractive commodity from a marketing standpoint, FSLIC senior staff, in consultation with the Federal Home Loan Bank ("FHLB") of Chicago, decided that Galva, Mutual and Home would be offered as a package to interested acquirers." JSF ¶ 59; PX 172 WOT013 0818-0826, 0820. 30. Messrs. Holland and Ross submitted a bid proposal to the FSLIC to acquire
Home, Mutual, and Galva, and to merge them into Rock Falls, the thrift they owned. JSF ¶ 73; See PX 601 at 27-28 ¶ 66; DX 1373 at 111. 31. Messrs. Holland and Ross acquired 100 percent of the common stock of the
resulting institution (River Valley I) for $1,000 cash. PX 207 WOF016 1512-1603, 1519. This constituted the lone cash investment by Messrs. Holland and Ross at the time of the acquisition.
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1. 32.
The River Valley I Assistance Agreement
On July 29, 1988, an Assistance Agreement was entered into by and among
plaintiffs, River Valley I and FSLIC relating to the acquisition of Galva, Mutual, and Home. JSF ¶¶ 75-76; PX 207 WOF016 1512-1603, 1598. a. 33. The FSLIC Cash Contributions
Pursuant to the Assistance Agreement, FSLIC contributed $34,215,888 to River
Valley I, plus $13,000 per diem from April 1, 1988, to, and including, the Agreement's effective date. These payments contributed to the elimination of the thrift's existing net worth deficit. PX 207 WOF016 1512-1603, 1546; PX 393 WOF240 0238-0272, 0250-0252. 34. The Assist