Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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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. THE UNITED STATES OF AMERICA, Defendant.

No. 95-524 C (Judge G. Miller)

PLAINTIFFS' MEMORANDUM OF CONTENTIONS OF FACT AND LAW

David B. Bergman ARNOLD & PORTER, LLP 555 Twelfth Street, N.W. Washington, D.C. 20004-1206 (202) 942-5000 (tel.) (202) 942-5999 (fax) Counsel for Plaintiffs Of Counsel: Melvin C. Garbow Howard N. Cayne Michael A. Johnson Joshua P. Wilson ARNOLD & PORTER, LLP 555 Twelfth Street, N.W. Washington, D.C. 20004-1206 Co-counsel for First Bank: Donald J. Gunn, Jr., Esq. Sharon R. Wice, Esq. Gunn and Gunn First Bank Building Creve Coeur 11901 Olive Blvd., Suite 312 P.O. Box 419002 St. Louis, MO 63141 (314) 432-4550 (tel.) (314) 432-4489 (fax)

September 25, 2007

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TABLE OF CONTENTS Page INTRODUCTION .......................................................................................................................... 1 ISSUE TO BE DECIDED BY THE COURT................................................................................. 5 CONTENTIONS OF FACT ........................................................................................................... 6 I. THE SAVINGS & LOAN CRISIS AND THE VALUE OF THE GOVERNMENT'S REGULATORY CAPITAL PROMISES ....................................................................................................... 6 PRIOR TO THE GOVERNMENT'S BREACH, BOTH BEFORE AND AFTER CONTRACTING WITH THE GOVERNMENT, RIVER VALLEY WAS HIGHLY SUCCESSFUL AND WELL MANAGED ........................................................ 8 THE HOME AND REPUBLIC ACQUISITIONS SAVED THE GOVERNMENT MILLIONS, AND WERE STRUCTURED TO PROVIDE FOR RIVER VALLEY'S GROWTH AND PROFITABILITY............................................................................................................. 12 A. B. IV. V. The Galva/Home/Mutual Transaction .................................................................. 14 The Republic Transaction ..................................................................................... 19

II.

III.

PRIOR TO THE BREACH, RIVER VALLEY OUTPACED ITS PROJECTIONS AND PROSPERED .......................................................................................................... 23 THE GOVERNMENT BREACHED ITS CONTRACTS WITH RIVER VALLEY BY ENFORCING THE NEW FIRREA CAPITAL STANDARD AGAINST RIVER VALLEY ................ 29 THE BREACH RUINED RIVER VALLEY'S PLANS FOR GROWTH AND COST RIVER VALLEY MILLIONS IN LOST PROFITS ................................... 31 THE BREACH PREVENTED RIVER VALLEY FROM ACQUIRING SAFSB .......... 34 IN ADDITION, THE BREACH IMPOSED ON RIVER VALLEY THE MITIGATION COSTS OF RETAINING EARNINGS TO REPLACE SOME OF THE BREACHED REGULATORY CAPITAL............................................ 39 THE GOVERNMENT'S OWN ANALYSES OF THE VALUE OF THE RIVER VALLEY PREFERRED STOCK FSLIC BOUGHT AND SOLD ESTABLISH THAT THE BREACH CAUSED RIVER VALLEY'S OVERALL ECONOMIC VALUE TO DECLINE BY AT LEAST $21.846 MILLION .......................................... 47

VI. VII. VIII.

IX.

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CONTENTIONS OF LAW .......................................................................................................... 51 I. STANDARDS GOVERNING FIRST BANK'S EXPECTATION DAMAGES CLAIMS....................................................................................................... 53 A. B. C. D. Foreseeability........................................................................................................ 53 Causation............................................................................................................... 55 Reasonable Certainty ............................................................................................ 58 Benefit of the Bargain........................................................................................... 60

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TABLE OF AUTHORITIES Page(s) CASES Bank of America v. United States, 70 Fed. Cl. 246 (2006) ...........................................................................................64, 65, 66 Bank of America v. United States, __ F.3d __, 2007 WL 2137774 (Fed. Cir. July 26, 2007)............................................62, 63 Bluebonnet Sav. Bank v. United States, 339 F.3d 1341 (Fed. Cir 2003)...........................................................................................59 Bluebonnet Savings Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001).................................................................................. passim Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342 (2001).....................................................................................................7, 58 Cal Fed Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005)........................................................................51, 52, 53, 59 Chain Belt Co. v. United States, 115 F. Supp. 701 (Ct. Cl. 1953)...................................................................................53, 58 Citizens Fed. Bank, FSB v. United States, 64 Fed. Cl. 498 (2005) .......................................................................................................55 Citizens Fed. Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007).................................................................................. passim Citizens Federal, 374 F.3d at 1317-19 ...............................................................................................53, 55, 56 Coast Fed. Bank, FSB v. United States, 48 Fed. Cl. 402 (2000) .......................................................................................................54 Confederated Tribes v. United States, 248 F.3d 1365 (Fed. Cir. 2001)..........................................................................................58 Dale Constr. Co. v. United States, 168 Ct. Cl. 692 (1964) .......................................................................................................66

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Energy Capital Corp., 302 F.3d 1314 (Fed. Cir. 2002)....................................................................................55, 56 Energy Capital Corp. v. United States, 47 Fed. Cl. 382 (2000) .......................................................................................................56 Estate of Berg v. United States, 687 F.2d 377 (Ct. Cl. 1982) ...............................................................................................61 Gardner Displays Co. v. United States, 346 F.2d 585 (Ct. Cl. 1965) ...............................................................................................54 George H. Whike Constr. Co. v. United States, 140 F. Supp. 560 (Ct. Cl. 1956).........................................................................................66 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001)......................................................................................7, 51 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004)....................................................................................52, 53 Glendale Fed. Bank v. United States, 43 Fed. Cl. 390 (1999) .......................................................................................................54 Guerini Stone Co. v. P.J. Carlin Constr. Co., 248 U.S. 334 (1919)...........................................................................................................66 Holland v. United States, 57 Fed. Cl. 540 (2003) ............................................................................................... passim Holland v. United States, 59 Fed. Cl. 735 (2004) .........................................................................................................4 Holland v. United States, 62 Fed. Cl. 395 (2004) .........................................................................................................4 Holland v. United States, 74 Fed Cl. 225 (2006) ................................................................................................ passim Holland v. United States, 75 Fed. Cl. 483 (2007) ...........................................................................................51, 52, 55 Home Savings of Am. v. United States, 399 F.3d 1341 (Fed. Cir. 2005).................................................................................. passim Hughes Communications Galaxy, Inc. v. United States,

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271 F.3d 1060 (Fed. Cir. 2001)..........................................................................................63 Indiana Michigan Power Co. v. United States, 422 F.3d 1369 (Fed. Cir. 2005)...................................................................................53, 55 Int'l Harvester Co. of Am. v. United States, 72 Ct. Cl. 707 (1931) .........................................................................................................66 J.D. Hedin Constr. Co. v. United States, 456 F.2d 1315 (Ct. Cl. 1972) .............................................................................................65 Kennedy v. United States, 24 Ct. Cl. 122 (1889) .........................................................................................................66 LaSalle Talman Bank, F.S.B., 317 F.3d 1363 (Fed. Cir. 2003)..............................................................................52, 58, 62 LaSalle Talman v. United States, 462 F.3d 1331 (Fed. Cir. 2006)....................................................................................52, 61 La Van v. United States, 382 F.3d 1340 (Fed. Cir. 2004)..........................................................................................59 Landmark Land Co., Inc. v. FDIC, 256 F.3d 1365 (Fed. Cir. 2001)............................................................................................6 Locke v. United States, 151 Ct. Cl. 283 F.2d 521 (1960) ............................................................................52, 58, 59 N. Helex Co. v. United States, 634 F.2d 557 (Ct. Cl. 1980) ...............................................................................................51 National Australia Bank v. United States, 452 F.3d 1321 (Fed. Cir. 2006)....................................................................................58, 60 Neely v. United States, 285 F.2d 438 (Ct. Cl. 1961) ...............................................................................................59 S.S. Mullen, Inc. v. United States, 389 F.2d 390 (Ct. Cl. 1968) ...............................................................................................65 Seaboard Lumber Co. v. United States, 308 F.3d 1283 (Fed. Cir. 2002)..........................................................................................58 Sir Speedy, Inc. v. L & P Graphics, Inc., 957 F.2d 1033 (2d Cir. 1992).......................................................................................60, 65

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Staples v. United States, 511 U.S. 600 (1994)...........................................................................................................53 Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931)...........................................................................................................58 Suburban Contracting Co. v. United States, 76 Ct. Cl. 533, 544 (1932) .................................................................................................66 Suess v. United States, 52 Fed. Cl. 221...................................................................................................................59 Super Valu Stores, Inc. v. Peterson, 506 So. 2d 317 (Ala. 1987)..........................................................................................60, 65 Thompson v. Haynes, 305 F.3d 1369 (Fed. Cir. 2002)..........................................................................................58 United States v. Buffalo Pitts Co., 234 U.S. 228 (1914)...........................................................................................................66 United States v. Winstar, 518 U.S. 839 (1996)................................................................................................... passim Wells Fargo Bank, NA v. United States, 88 F.3d 1012 (Fed. Cir. 1996)......................................................................................54, 61 William Cramp & Sons Ship & Engine Bldg. Co. v. United States, 50 Ct. Cl. 179 (1915) .........................................................................................................66 STATUTES 12 C.F.R. § 561 ..............................................................................................................................29 12 C.F.R. § 561.13 ...................................................................................................................20, 29 12 C.F.R. § 561.13(b) ....................................................................................................................44 12 C.F.R. § 563 (1990) ..................................................................................................................29 12 C.F.R. § 567 ..............................................................................................................................29 12 U.S.C. §§ 1464(t)(2)(A)-(B), 1464(t)3, 1464(t)(9)(A)-(B) (1989) ...........................................30

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MISCELLANEOUS 11 Corbin on Contracts § 56.7 (2005 rev. ed.)...............................................................................54 Restatement (Second) of Contracts § 344(a) .................................................................................51 Restatement (Second) of Contracts § 347................................................................................52, 61 Restatement (Second) of Contracts § 350......................................................................................52 Restatement (Second) of Contracts § 351 & cmt. a.................................................................53, 54

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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. THE UNITED STATES OF AMERICA, Defendant.

No. 95-524 C (Judge G. Miller)

PLAINTIFFS' MEMORANDUM OF CONTENTIONS OF FACT AND LAW INTRODUCTION Plaintiff First Bank, as successor-in-interest and real-party-in-interest to the claims of the federally chartered River Valley Savings Bank, FSB ("River Valley I") and the Illinois-chartered River Valley Savings Bank ("River Valley II") (collectively, "the River Valley thrifts" or "River Valley") seeks monetary damages for the breach of two Winstar-type contracts formed between the government and the River Valley thrifts. Pursuant to each of these contracts, River Valley acquired insolvent thrifts for which the government bore insurance liability. In exchange, the government promised the River Valley thrifts certain favorable regulatory treatment. The government subsequently breached, depriving River Valley of the benefit of its bargains, diminishing River Valley's economic value, and forcing River Valley to undertake costly measures to mitigate as best it could the harm of the breach.

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In the first transaction, River Valley acquired three failing institutions -- Galva, Home, and Mutual -- in exchange for, among other things, the government's promises to treat an $8 million "capital credit" and $4.6 million of subordinated debt as regulatory capital. 1 In the second transaction, River Valley acquired a fourth failing institution -- Republic -- in exchange for, among other things, the government's promises to treat a $5 million "capital credit," $2 million of subordinated debt, and $1.31 million in goodwill amortizing over a period of twentyfive years as regulatory capital. The government knew and expected that the River Valley thrifts would rely on the contract capital not only to meet the thrifts' regulatory requirements but also to support further growth by acquisitions and internal expansion. The track record of growth and success at Rock Falls -- the River Valley predecessor thrift owned and managed by plaintiff Homer Holland and the late Howard Ross -- was well known to government regulators, and the business plans River Valley submitted in connection with each acquisition reflected steady growth and profits. The government sought and acquired an economic stake in River Valley, acquiring an equity interest in River Valley I by purchasing $5 million of preferred stock. Prior to FIRREA, River Valley grew profitably, just as its government-approved business plans anticipated. In the first two years following the Home and Republic acquisitions, River Valley skillfully leveraged its regulatory capital, growing by more than 22% in the two-year period of July 31, 1988 through July 31, 1990, while earning $4.35 million of profits. Thus,

The government also agreed to the regulatory capital treatment of $5 million in FSLIC-owned preferred stock in River Valley. Plaintiffs reserve their right to appeal the Court's ruling that the parties' understanding concerning the regulatory capital treatment of the preferred stock was not contractual.

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River Valley's pre-breach performance met or exceeded every projection presented to government regulators. River Valley planned to grow in large part by acquisition, and aggressively pursued opportunities to acquire other thrifts. River Valley identified as potential acquisition targets between 20 and 50 other thrifts, and by early 1989 had gone so far as to perform due diligence on three thrifts located in Grand Junction, Colorado. Indeed, in December 1988 River Valley acquired an additional thrift, Peoria Savings, from FSLIC. With the enactment and enforcement of FIRREA's capitals standards against River Valley, the government repudiated and materially breached the Home and Republic contracts. The breach excluded $4.6 million in sub debt and $7.547 million of capital credits from River Valley I's regulatory capital; it wiped out $2 million in sub debt, $4.717 million of capital credits, and $1.236 million of supervisory goodwill from River Valley II's regulatory capital. In all, the breach eliminated $20.100 million in contract capital -- slashing River Valley's total regulatory capital by half. The government's breach harmed River Valley, and immediately diminished its value -- as reflected by the government's decision to sell its preferred stock back to River Valley at a substantially reduced price. The government's breach foreclosed River Valley's expansion plans and forced drastic changes in its operations; its managers struggled simply to keep the institution in regulatory compliance, let alone to grow the thrift as planned. In March 1991, because the breach had so weakened River Valley's capital levels, the government imposed harsh regulatory sanctions -- requiring River Valley to meet an increased, individualized capital requirement under the terms of an OTS "Supervisory Agreement" -- that exacerbated the breach's harm, and forced River Valley to shrink even more. River Valley sold assets, paid down borrowings, retained earnings,

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and forwent profitable acquisitions. In 1992, the breach forced River Valley to abandon the opportunity to acquire San Antonio Federal Savings Bank ("SAFSB"), a profitable, solvent subsidiary of a failed thrift that has since generated more than $44.930 million of profits for another acquirer. In addition, the breach forced River Valley to use retained earnings (its accumulated and accumulating profits) that should have been available for other business purposes to substitute for the breach-eliminated regulatory capital. Following the several years during which this case was stayed by the Winstar casemanagement orders, this Court on summary judgment held the government liable to Plaintiffs Holland and Ross for breach of the Home and Republic contracts.2 The Court then ruled that Holland and Ross could not recover damages derivative of River Valley's corporate injuries, but permitted the joinder of River Valley's successor-in-interest First Bank to pursue River Valley's expectation damages.3 In a second summary judgment ruling, the Court held the government liable directly to First Bank, as River Valley's successor, for breach of the Home and Republic contracts, and reserved for trial the determination of the quantum of damages the government owes First Bank in that capacity.4 Accordingly, First Bank now seeks damages based on River Valley's expectation interest -- its right under contract law to be placed in the same financial position it would have occupied had the government not dishonored its promises. First Bank will demonstrate that the government's breach (1) foreseeably caused River Valley to forgo profitable growth

2 3

See Holland v. United States, 57 Fed. Cl. 540 (2003) ("Holland I").

See Holland v. United States, 59 Fed. Cl. 735 (2004) ("Holland II"); Holland v. United States, 62 Fed. Cl. 395 (2004) ("Holland III"); Opinion and Order of May 12, 2005 ("Holland IV"). 4 See Holland v. United States, 74 Fed Cl 225 (2006) ("Holland V").

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opportunities, including the opportunity to acquire SAFSB, (2) foreseeably caused River Valley to incur costs in partially mitigating the government's breach by allocating retained earnings to do the job the contracted-for regulatory capital would have done but for the breach, and (3) foreseeably caused River Valley's overall economic value to decline. First Bank has calculated these elements of River Valley's damages with reasonable certainty. Plaintiffs base the SAFSB lost profits claim on actual, verifiable, historical cash flows -- SAFSB's actual annual earnings, which, because of the breach, accrued to a third-party acquirer rather than River Valley. Plaintiffs base the cost of partial mitigation claim on the actual amount of retained earnings that functioned as replacement for the contracted-for regulatory capital, and the actual amount the government computed as River Valley's cost of equity capital. Likewise, Plaintiffs base their lost-value claim on the government's own actual pre- and post-breach valuations of River Valley preferred stock. Moreover, where, as here, "a reasonable probability of damages can be clearly established, uncertainty as to the amount will not preclude recovery, and the court's duty is to make a fair and reasonable approximation of the damages." 5 Accordingly, the Court's duty is to award First Bank damages that fairly and reasonably reflect the magnitude of the harm the government's breach visited upon River Valley. ISSUE TO BE DECIDED BY THE COURT The Court must decide only a single issue -- the quantum of damages to which Plaintiffs are entitled. In doing so, the Court must determine whether Plaintiffs have established that the damages were reasonably foreseeable, whether the breach was a substantial factor in causing the
5

Bluebonnet Savings Bank, FSB v. United States, 266 F.3d 1348, 1356-57 (Fed. Cir. 2001) (internal quotations omitted) (citing Locke v. United States, 283 F.2d 521, 524 (Ct. Cl. 1960)).

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damages, and whether the damages have been measured with reasonable certainty. The Court must apply these requirements separately to Plaintiffs' lost-profits (SAFSB) claim, their cost-ofpartial-mitigation claim, and their lost-economic-value claim. CONTENTIONS OF FACT I. THE SAVINGS & LOAN CRISIS AND THE VALUE OF THE GOVERNMENT'S REGULATORY CAPITAL PROMISES 1. By 1988, when River Valley acquired Home and Republic, literally hundreds of

savings and loans throughout the country had failed. The "Federal Savings and Loan Insurance Corporation ("FSLIC") was itself insolvent by over $50 billion." United States v. Winstar, 518 U.S. 839, 845-47 (1996). 2. In response to the crisis, "FSLIC encouraged private investors . . . to purchase

struggling thrifts so that it would not be necessary to liquidate the thrifts using FSLIC funds to reimburse depositors. The primary inducement that the FSLIC offered potential purchasers was a partial forbearance from regulatory capital requirements. . . . This made the thrift far more attractive to potential purchasers, at no cost to the FSLIC." Landmark Land Co., Inc. v. FDIC, 256 F.3d 1365, 1370 (Fed. Cir. 2001). In many instances, FSLIC promised to treat the difference between the acquired institution's liabilities and assets -- goodwill -- as an element of the resulting institution's regulatory capital. Id. 3. 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. By failing to require the thrift to subtract this FSLIC contribution from the amount of supervisory goodwill generated by the merger, regulators effectively permitted double counting of the cash as both a

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tangible and intangible asset. Capital credits thus inflated the acquiring thrift's regulatory capital and permitted leveraging of more and more loans." United States v. Winstar Corp., 518 U.S. 839, 853 (1996) (citations omitted). 4. FSLIC also negotiated arrangements with acquirers of troubled thrifts to allow for

regulatory capital credit treatment of funds other than FSLIC cash contributions, such as the proceeds of subordinated debt issuances. See Holland I, 57 Fed. Cl. at 566. 5. FSLIC's regulatory capital promises had "substantial value" to acquirers. See

Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374, 1381-82 (Fed. Cir. 2001); Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342, 1350 (2001). 6. Given the choice between two otherwise identical assets selling at the same price

that differ only in the amount of capital required (by government regulation) to support them, a rational purchaser would always select the asset with the lower capital requirement because it would leave you capital left over to buy something else. Joint Stipulation of Facts, dated Dec. 31, 2003 ("JSF") ¶ 10. 7. One reason FSLIC's regulatory capital promises had "substantial value" to

acquirers is that lower effective capital requirements increase the value of the deposit insurance the government provided. The regulatory capital promises increase the value of the acquirer's deposit insurance because the promises allocate to the government certain financial risks that would otherwise have been borne by the acquirer; this effect is often described by economists as an increase in the value of an implicit "put option" associated with deposit insurance. U.S. Dep't of Treasury, Modernizing the Financial System (February 1991) at 35 (PX 508); Def.'s Resp. to Plaintiffs' Proposed Statement of Facts dated Dec. 31, 2003 ("Def.'s Resp. to PPSF") ¶ 3 (agreeing that deposit insurance shares characteristics of a put option).

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II.

PRIOR TO THE GOVERNMENT'S BREACH, BOTH BEFORE AND AFTER CONTRACTING WITH THE GOVERNMENT, RIVER VALLEY WAS HIGHLY SUCCESSFUL AND WELL MANAGED 8. River Valley brought a history of success in the banking and savings and loan

industries to the Home and Republic acquisitions. 9. From 1971 to 1979, Dr. Holland held several positions at the First National Bank

of Chicago, from Loan Officer to Senior Vice President. His responsibilities included: Head of Ship Financing; Head of the Information Systems Division; Head of the Retail Banking Department; and Head of the Administrative Department (all of the bank's back office functions). See JSF ¶ 48; Corrected Expert Report of Dr. Homer J. Holland dated July 27, 2001 ("Holland Report") at 1-2 ¶¶ 1-3 (PX 601); September 1989 River Valley Savings Bank Acquisition and Capital Plan, H&R-B44-1392-1407 at 1403, 1405 (PX 351); Holland Dep. I at 10-12 (JA 1947A); Bank Vet Plots Ambitious S&L Empire, Crain's Chicago Business, August 15, 1988, H&R-B44-1290-91 (PX 217). 10. Howard Ross and other investors recapitalized the Exchange International

Corporation and its subsidiary, the Exchange National Bank of Chicago, and hired Dr. Holland as their President in 1979. See JSF ¶ 49; Holland Report at 24 ¶ 58 (PX 601); June 17, 1988 FHLBB "Issues" Memorandum from Root to FHLBB, WOT013 0818-26 at 0823 (PX 172); Bank Vet Plots Ambitious S&L Empire, Crain's Chicago Business, August 15, 1988, H&R-B441290-91 (PX 217); September 1989 River Valley Savings Bank Acquisition and Capital Plan, H&R-B44-1392-1407 at 1403 (PX 351). 11. From 1979 to 1983, Dr. Holland served as President and Director of the Exchange

International Corporation and its subsidiary, the Exchange National Bank of Chicago. In that capacity, he directed the turnaround of that previously troubled bank and successfully negotiated

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the acquisition and turnaround of another troubled bank, the Central National Bank in Chicago. See JSF ¶50; Holland Report at 2 ¶ 4 (PX 601); May 4, 1988 Addendum to the "S" Memorandum, WON436 2326-31 at 2330 (PX 154); June 17, 1988 FHLBB "Issues" Memorandum from Root to FHLBB, WOT013 0818-26 at 0823 (PX 172); Holland Dep. I at 8, 11-32 (JA 1947-1947F); Bank Vet Plots Ambitious S&L Empire, Crain's Chicago Business, August 15, 1988, H&R-B44-1290-91 (PX 217); September 1989 River Valley Savings Bank Acquisition and Capital Plan, H&R-B44-1392-1407 at 1403 (PX 351). 12. From 1983 to 1986, Dr. Holland provided executive management and consulting

services to financial institutions including 1st Interstate Bank, First Federal Savings and Loan Association of Chicago, United Services Automobile Association ("USAA"), and Gilldorn Savings, where he also served as CEO and Director. See JSF ¶51; Holland Report at 2 ¶ 5 (PX 601); March 14, 1991 USAA Memorandum, H&R-B07-00726-32 (PX 518); Bank Vet Plots Ambitious S&L Empire, Crain's Chicago Business, August 15, 1988, H&R-B44-1290-91 (PX 217); September 1989 River Valley Savings Bank Acquisition and Capital Plan, H&R-B441392-1407 at 1403 (PX 351); May 4, 1988 Addendum to the "S" Memorandum, WON436 232631 at 2330 (PX 154); June 17, 1988 FHLBB "Issues" Memorandum from Root to FHLBB, WOT013 0818-26 at 0823 (PX 172). 13. Beginning in 1985, Dr. Holland began a ten-year tenure on the Board of Directors

of USAA, an insurance and diversified financial services company owning and operating, among other things, a federal savings bank with nationwide credit card operations and serving the military community. See JSF ¶52; Holland Report at 2-3 ¶ 7 (PX 601); March 14, 1991 USAA Memorandum, H&R-B07-00726-32 (PX 518); January 23, 1991 Memorandum from USAA Corporate Counsel, H&R-B07-00659-690 (PX 505).

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14.

Dr. Holland and Mr. Ross, along with two additional investors completed the

acquisition of Rock Falls Savings & Loan Association, Rock Falls, Illinois ("Rock Falls"), a state chartered stock savings and loan association, in April 1985. JSF ¶53; Acquisition Proposal for Republic dated March 18, 1988, WON534 0417-0430, 0430 (PX 129); FHLBB Memorandum Re: Notice of Intent to Acquire Control of Rock Falls S&LA, Rock Falls, IL dated March 21, 1985, WON394 0077-0080 (PX 12); Memorandum Re: Notice of Intent to Acquire Control of Rock Falls Savings and Loan Association, Rock Falls, Illinois, from Norman J. Kost to FHLBB dated April 5, 1985, WON394 0067 (PX 14). 15. Dr. Holland became Rock Falls' CEO on November 25, 1986. JSF ¶53; Holland

Report at 2 ¶ 6 (PX 601), at 24 ¶¶ 59-60 (PX 601); August 1987 Rock Falls Savings and Loan Business Plan, H&R-B44-687-700 at 689-90 (PX 77); Bank Vet Plots Ambitious S&L Empire, Crain's Chicago Business, August 15, 1988, H&R-B44-1290-91 (PX 217); Memorandum to FHLBB dated November 25, 1986, WON394 0068-0069 (PX 47); Acquisition Proposal for Republic dated March 18, 1988, WON534 0417-0430, 0430 (PX 129). 16. As managed by Holland and Ross, Rock Falls established a track record of strong

growth and profit. Net income for the year ending July 31, 1985 was $128,345, which increased to $957,395 for the year ending July 31, 1986, and was $596,195 for the next year. Rock Falls' net worth increased from $3,346,973 as of April 30, 1985 to $4,449,114 as of July 31, 1987. See JSF ¶56; Rock Falls FHLBB Monthly Report dated April 30, 1985 at PHO050 0856 (PX 16); Rock Falls Consolidated Financial Report, July 31, 1987, WOT645 1044, 1047 (PX 76); March 18, 1988 Acquisition Proposal for Republic, WOT645 1024-1037, 1027 (JA 416); The June 15, 1987 State of Illinois and FHLB of Chicago examination of Rock Falls at p. 2 (H&R-B4300591-97) (PX 69).

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17.

Rock Falls also established a successful mortgage-backed securities operation,

growing its portfolio of collateralized mortgage obligations from zero to more than $18 million over the fiscal year ending July 31, 1987. Rock Falls Consolidated Financial Statement (July 31, 1987) WOT645 1044, 1047 (PX 76) at 2. 18. By 1988, before contracting with the government, Rock Falls carried assets of

$120 million, a net worth of almost $5 million, and a market value of $6.72 million. June 28, 1988 FHLBB Issues Memorandum, WON534 0346-0365, 0351 (PX 177); River Valley II March 1988 Thrift Financial Report ("TFR"), CHO001 0839-0848 (PX 124); see also Holland Report at 34 ¶ 80 (PX 601). 19. Thus, by the time of the Home and Republic acquisitions, River Valley's

managers had earned a reputation among thrift regulators as excellent bankers.6 As the Bank Board staff noted: Messrs. Ross and Holland appear to be of the utmost integrity. They are well known and respected . . . not only for their current involvement at River Valley, but also for Mr. Holland's assistance in the successful turnaround of Enterprise Savings Bank . . . as well as the Exchange National Bank of Chicago. Their involvement at these institutions has demonstrated to us their ability to operate profitably in the financial services industry. 7

6

See, e.g., JSF ¶ 72; Blaber Dep. at JA 1845-46, 1857, 1873; Ferries Dep. at JA 1903, 1909-10, 1918, 1931-32, 1937, 1940; Kenny Dep. at 171-74, 199-200, 221-23, 329-31 (Plaintiffs' Supplemental Appendix ("PSA" at Tab 8); "S" Mem. (4/22/88) (PX 146); "Issues" Mem. (6/17/88) (PX 172); FHLBB Mem. from Blaber to Buckley (6/28/88) (PX 183); "S" Mem. (6/28/88) (PX 182); "S" Mem. Supp. (7/6/88) (PX 191); FHLBB Mem. (7/8/88), CHO023 0396-0418 at 0399 (PX 192). 7 FHLBB "S" Mem., Addendum (5/4/88) (PX 154).

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III.

THE HOME AND REPUBLIC ACQUISITIONS SAVED THE GOVERNMENT MILLIONS, AND WERE STRUCTURED TO PROVIDE FOR RIVER VALLEY'S GROWTH AND PROFITABILITY 20. By no later than July 1988, each of the four 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"); and Republic Savings of South Beloit, Illinois ("Republic" -- had become insolvent and was operating at a loss. Collectively, the five thrifts had multimillion-dollar net-worth deficits. JSF ¶ 57; Holland I, 57 Fed. Cl. at 543-48 (JA 25594); April 14, 1987 Memorandum from Biedron to Smuzynski (Mutual), WON074 1190-92 at 1190 (PX 62); June 17, 1988 "Issues" Memorandum from FSLIC to FHLBB at 2-3, WOT013 0819-20 (PX 172); Ferries Dep. at 39-44 (JA 1897-1944); FHLBB Bid Package for Home Federal S&L at 3.1 (PX 79); Blaber Dep. at 66, 215 (JA 1843-1877); June 1987 Mutual Bid Package, WOT646 0528-71 (PX 68); June 28, 1988 "Issues" Memorandum (Rep.), WON534 0346-0365 (PX 177); July 28, 1988 FHLBB Resolution No. 88-638 (Home, Mutual and Galva), WOT013 0775-92 at 0778, 0782 (PX 199); December 20, 1988 FHLB Chicago "L" Memorandum, WOB026 0006-17 at 0007 (PX 272). 21. As of March 31, 1988, FSLIC reported that on a combined basis, Galva, Mutual,

and Home had a tangible net worth deficit of $28.3 million, and a net operating income deficit of $3.47 million for the preceding twelve months. JSF ¶ 63; JA 4780-4782, 4781, Issues Memorandum from FSLIC to FHLBB dated June 17, 1988, WON534 0346-0365, 0346 (PX 177). 22. Republic began reporting operating losses in March 1985, and it first reported

insolvency in June 1986. The Government placed the thrift into receivership in October 1986,

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and by March 31, 1988, Republic was reporting a net worth deficit of almost $17 million (more than 43 percent of assets). JSF ¶ 65; "S" Memorandum by Leo Blaber dated June 28, 1988, WOT013 0194-0203, 0195, 0198-0199 (PX 182). 23. FSLIC tried to attract potential acquirers for these failing thrifts. Its efforts

notwithstanding, FSLIC had attracted few if any prospective acquirers other than Rock Falls. JSF ¶ 66; See Holland I, 57 Fed. Cl. at 547 (JA 255-94); January 27, 1988 Recommendation Memorandum, WOT685 1015-20 at 1016 (PX 111); June 28, 1988 "S" Memorandum from Blaber to Buckley, WOT013 0194-204 at 0199 (PX 182); June 17, 1988 FHLBB "Issues" Memorandum from Root to FHLBB, WOT013 0818-26 at 0820 (PX 172); Ferries Dep. at 39-41 (JA 1897-1944); July 26, 1988 "L" Memorandum, WOF016 2391-2402 at 2399 (PX 197); July 17, 1987 Letter from Mirza to Batties, WON397 0286 (PX 75). 24. Consistent with its growth strategy, Rock Falls responded to FHLB Chicago's

invitation to consider acquiring troubled Illinois thrifts. JSF ¶ 66; Holland Report at 25 ¶¶ 60-61 (PX 601). 25. The government recognized that Rock Falls, as well as Holland and Ross, had a

proven track record of success in the savings and loan industry. JSF ¶ 71; Holland I, 57 Fed. Cl. at 545, 548, 558-59 (JA 255-94); Ferries Dep. 49-51, 52, 53, 85-86, 123-24, 273 (JA 18971944); Blaber Dep. at 30, 127, 182, 196-97, 254-55, 273 (JA 1843-1877); June 17, 1988 FHLBB "Issues" Memorandum from Root to FHLB, WOT013 0819-26 at 0824, 0825 (PX 172); June 28, 1988 Addendum to the "S" Memorandum, WOT645 1515-20 at 1516 (PX 183); May 4, 1988 Addendum to the "S" Memorandum (PX 154). 26. Government regulators who worked on the acquisitions maintained a high regard

for the character and management abilities of Messrs. Holland and Ross. For example, when

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recommending that the government go forward with the Peoria transaction, Leo Blaber, the Principal Supervisory Agent ("PSA") of FHLB Chicago, wrote that "Messrs. Ross and Holland . . . take [a] very active part in the day to day operations of [River Valley,] . . . appear to be of the utmost integrity . . . and are well known and respected within the seventh district . . . for their performance [in the banking industry]." Blaber testified that he "was very satisfied" with the management abilities and character of Mr. Holland, and that "a major influence" in his recommendation of the transactions was "the financial integrity and managerial competence of Messrs. Holland and Ross." Mr. Blaber also confirmed that, based on its owners and managers' history of success, he believed that River Valley's growth projections "were likely achievable." JSF ¶ 72; December 16, 1988 Applications Digest from Blaber to Buckley, WON424 0026-29 at 0028 (PX 271); accord April 22, 1988 "S" Memorandum, WOL604 0285-0300 at 0285 (PX 146) (Home transaction); May 4, 1988 Addendum to the "S" Memorandum (PX 154) (Home transaction); June 28, 1988 Addendum to the "S" Memorandum, WOT645 1515-20 at 1516 (PX 183) (Republic transaction). Blaber Dep. at 30-31, 127, 196-97 (JA 1843-1877). 27. Similarly, government regulator Larry Ferries regarded Mr. Holla nd as a "very

capable, competent individual," and that was one reason Mr. Ferries recommended approval of the Home acquisition. JSF ¶ 72; Ferries Dep. at 52, 53 (JA 1897-1944). A. 28. The Galva/Home/Mutual Transaction In the fall of 1987, Holland and Ross submitted a bid proposal to acquire Home

Federal of Peoria, Peoria, IL ("Home"); Mutual Savings of Canton, Canton, IL ("Mutual"); and Galva Federal Savings and Loan Association, Galva, IL ("Galva"). JSF ¶ 73; Holland Report at 27-28 ¶ 66 (PX 601); Holland I, 57 Fed. Cl. at 545 (JA Tab 5).

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29.

On July 28, 1988, FHLBB issued Resolution 88-638, and on July 29, 1988 the

parties entered into an Assistance Agreement. JSF ¶ 78; FHLBB Resolution 88-638 dated July 28, 1988, WOT013 0775-0792 (PX 199). 30. The combination of Galva, Mutual, and Home became known as River Valley

Savings Bank, FSB of Peoria, Illinois ("River Valley I"), a federal stock savings bank. JA 47984800, 4799, River Valley I Consolidated Financial Statements as of December 31, 1988, H&RB08-00331-00361 at 00341 (PX 285). 31. FHLBB Resolution 88-638 authorized River Valley I to issue preferred stock to

FSLIC, and FSLIC to purchase preferred stock, "in an amount not to exceed $5,000,000[,]" subject to certain terms and conditions. FHLBB Resolution No. 88-638 dated July 28, 1988, WOT013 0775-0792, 0784 (PX 199). FSLIC purchased 50,000 shares of Series A preferred stock at par value of $10,000 per share, for a total investment of $5,000,000. In connection with making that investment, FSLIC analyzed the value of the preferred stock based on the cash flows expected to flow to the holder of the shares, and determined that the value of the 50,000 shares FSLIC was to purchase exceeded $5,000,000. JSF ¶ 86; Letter from Richard Weiss (Financial Analyst, FHLBB) to David Adkins (Financial Analyst, FHLBB) dated June 22, 1988, WOF016 2577-2578, 2578 (PX 174); Letter from Richard Weiss (Financial Analyst, FHLBB) to David Atkins (Financial Analyst, FHLBB) dated April 28, 1988, WOF016 2572-2575, 2573 (PX 148). 32. FHLBB Resolution 88-638 approved the issuance of a $4,600,000 subordinated

debenture by River Valley I to ANB, "and the inclusion in [River Valley I's] regulatory capital of such subordinated debenture in accordance with § 561.13 of the Insurance Regulations," subject to certain conditions. JSF ¶ 87; JA 4987-5004, 4996-4997, FHLBB Resolution No. 88638 dated July 28, 1988, WOT013 0775-0792, 0784-0785 (PX 199).

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33.

The "Accounting" section of FHLBB Resolution 88-638 provided, in part, that

River Valley I was to report to the FHLBB and FSLIC in accordance with GAAP, as accepted, modified, clarified, or interpreted by applicable regulations of the Bank Board and the FSLIC, except to the extent of the following departures: (a) Eight million dollars of the initial contribution by the FSLIC to River Valley I, and four million six hundred thousand dollars of the principal amount of the Subordinated Debenture... shall be credited to the regulatory capital account of River Valley I in accordance with the forbearance letter authorized pursuant to this Resolution; (b) The value of any unidentifiable intangible assets resulting from the application of push-down accounting in accounting for the Mergers and Stock Acquisition may be amortized by River Valley I over a period not in excess of twenty-five (25) years by the straight line method.... JSF ¶ 88; JA 4987-5004, 5000-5001, FHLBB Resolution No. 88-638 dated July 28, 1988, WOT013 0775- 0792, 0788-0789 (PX 199). 34. On July 28, 1988, FHLBB sent a letter to Dr. Holland, as President and Chief

Executive Officer of River Valley I, granting certain regulatory forbearances with respect to the Galva, Mutual, and Home transaction. JSF ¶ 90; FHLBB forbearance letter dated July 28, 1988, WOT013 0583-0585 (PX 200). 35. The forbearance letter provided, among other things, that (1) "[a] portion of the

[FSLIC] cash contribution not to exceed $8.0 million may be credited to River Valley I's regulatory capital; therefore, for regulatory accounting purposes, River Valley I may book such contribution as a direct addition to its regulatory capital..." subject to certain limitations; and (2) for purposes of reporting to the FHLBB, "the value of any intangible asset resulting from the application of push-down accounting in accounting for the purchases, may be amortized by River

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Valley I over a period not to exceed 25 years by the straight line method." JSF ¶ 91; FHLBB forbearance letter dated July 28, 1988, WOT013 0583-0585, 0584 (PX 200). 36. With respect to the Galva, Mutual, and Home acquisition, River Valley I initially

recorded $1.136 million of GAAP goodwill; however, this GAAP goodwill was retroactively eliminated during the fourth quarter of 1989 due to a revaluation of the tangible assets acquired. JSF ¶ 97; River Valley I Audited Financial Statements as of December 31, 1989, WON240 0238-0272, 0250-0253 (PX 393); TFR for River Valley I dated December 31, 1989, H&RBX70-2510-2522 at 2510 (PX 392); Sheshunoff Information Services, Inc. (PX 288). 37. The $4.6 million of subordinated debt issued by River Valley I to ANB had a

stated "Maturity Date" of March 31, 1998 (approximately 10 years from the date of the execution of the subordinated debenture agreement), but the maturity date would be extended according to the following provision of the agreement: [T]he Maturity Date shall be automatically extended for successive one year periods unless [River Valley FSB] mails written notice to [ANB] not less than ninety (90) days prior to the anniversary date of the issuance of this debenture stating that the Maturity Date of this debenture and/or any portion thereof held by any other person shall no longer be automatically extended and fixing the eleventh succeeding March 31 following the aforementioned notice as the date on or before which all accrued interest and principal due and payable under this debenture shall be paid in full. JSF ¶ 98; Subordinated Debenture Agreement dated June 1988, WOF016 1613-1624 (PX 204). 38. The purchase agreement for the subordinated debt authorized River Valley I to

acquire "any other business" without ANB's consent, as long as the effect of the action was not to diminish River Valley I's net worth below the level existing at the date of the Agreement. Purchase Agreement between American National Bank and River Valley I dated July 29, 1988, WOF016 1625-1643 at 1631 (PX 209).

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39.

On July 29, 1988 River Valley I entered into a Stock Purchase Agreement with

the FSLIC. Homer J. Holland signed the agreement on behalf of River Valley I. JSF ¶ 102; Stock Purchase Agreement between River Valley I and the FSLIC dated July 29, 1988, CHO023 0106-0208, 0106, 0165 (PX 202). 40. The Series A preferred stock River Valley I issued and sold to FSLIC paid a fixed

rate dividend of 8 percent that was scheduled to remain flat until July 1999 but then to increase steadily to 12 percent in five annual steps. The Series A Preferred also contained a profit participation component in the form of a supplemental dividend equal to 25 percent of "Adjusted Net Income." Adjusted Net Income was determined as the amount of reported net income (pursuant to GAAP), after deducting the fixed rate dividend, that exceeded 0.4 percent of average assets for the first 10 years, declining five basis points a year until it leveled off at 0.15 percent thereafter. See JSF ¶ 103; Stock Purchase Agreement between River Valley I and the FSLIC dated July 29, 1988, CHO023 0106-0208, 0167-0174 (PX 202). 41. The Series A preferred stock was redeemable at the option of River Valley I, in

whole or in part, within 30 days of the completion of any fiscal quarter at a redemption price of $100 per share ­ i.e., at par value ­ plus accrued and unpaid fixed dividends and supplemental dividends thereon to the date fixed for redemption. See JSF ¶ 104; River Valley Stock Purchase Agreement between River Valley I and the FSLIC dated July 29, 1988, CHO023 0106-0208, 0171-0172 (PX 202). 42. In an April 28, 1988 letter, the FHLBB provided an estimate of $3.371 million for

the income-sharing component of the preferred stock (using a 16% discount rate), and a range of values from $2.6 million (20 percent discount rate) to $3.85 million (13.91 percent discount

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rate). JSF ¶ 108; Letter from Richard Weiss (Financial Analyst, FHLBB) to David Atkins (Financial Analyst, FHLBB) dated April 28, 1988, WOF016 2572-2575, 2573 (PX 148). 43. In its letter of June 22, 1988, FSLIC updated the present value of the fixed rate

feature of the preferred stock to $3.145 million. With the same $3.371 million value for the supplemental dividend feature from the April 28, 1988 analysis, the aggregate value of the preferred stock was $6.52 million, according to the FSLIC analysis of June 22, 1988. See JSF ¶ 109; Letter from Richard Weiss (Financial Analyst, FHLBB) to David Adkins (Financial Analyst, FHLBB) dated June 22, 1988, WOF016 2577-2578, 2578 (PX 174). B. 44. The Republic Transaction On December 24, 1987 River Valley II (i.e., Rock Falls) also submitted a bid to

acquire Republic. JSF ¶ 111. 45. In exchange for River Valley II's acquisition of Republic the government

promised to treat the following as regulatory capital: a $5 million "capital credit," the $2 million subordinated debenture, and supervisory goodwill created by the use of the purchase method of accounting. In addition, the goodwill was to be amortized over twenty-five years, using the straight-line method. See JSF ¶¶ 125-127; Holland I, 57 Fed. Cl. at 566 (JA Tab 5); see also Holland Report at 32 ¶ 76 (PX 601); March 1988 Republic Acquisition Proposal, WON534 0417-0430 at 0420 (PX 129); March 22, 1988 Jaski-Januska Memorandum, WOT645 1007-1011 at 1010 (PX 134) ($2 million sub debt); June 28, 1988 "S" Memorandum Addendum, WOT645 1515-1520 at 1517-19 (PX 183) ($2 million sub debt); July 29, 1988 Republic Forbearance Letter, WOT645 0847-0849 at 0847 (PX 754) ($2 million sub debt); Republic Assistance Agreement, WOT013 0051-0119 at 0074 (PX 205) ($5 million capital credits); April 28, 1988 Holland-Mirza Letter, WOT685 0902-0908 at 0902 (PX 150) ($5 million capital credits); June

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28, 1988 Addendum to the "S" Memorandum, WOT645 1515-1520 at 1517 (PX 183) ($5 million capital credits); March 18, 1988 Republic Acquisition Proposal, WON534 0417-0430 at 0420 (PX 129) (25-year amortization); July 6, 1988 "S" Memorandum Supplement, WOT645 1521-1526 at 1521 (PX 191) (25-year amortization); July 29, 1988 Memorandum to H. Holland from FHLBB (permission to include sub debt), WOT645 1256-1257 (PX 206). 46. On July 29, 1988, FSLIC and Rock Falls (i.e., River Valley II) entered into an

assistance agreement relating to the merger of Republic into Rock Falls. JSF ¶ 113; Republic Assistance Agreement dated July 29, 1988, WOT013 0051-0119 (PX 205). 47. On July 27, 1988, FHLBB issued Resolution 88-612. JSF ¶ 122; FHLBB

Resolution No. 88-612 dated July 27, 1988, WOT645 1171-1179 (PX 198). 48.. The "Accounting" section of FHLBB Resolution 88-612 provided, in part, that, in

accounting for the merger, River Valley II was to use generally accepted accounting principles, as accepted, modified, clarified, or interpreted by applicable regulations of the Bank Board and the FSLIC except that $5,000,000 of the initial cash contribution by the FSLIC to [River Valley II], pursuant to § 6(a) of the Assistance Agreement, shall be credited to the regulatory capital account of [River Valley II] and shall constitute regulatory capital as defined in § 561.13 of the Insurance Regulation. JSF ¶ 125; FHLBB Resolution No. 88-612 dated July 27, 1988, WOT645 1171-1179, 1175 (PX 198). 49. On July 29, 1988, FHLBB sent a letter to River Valley II, approving the issuance

and inclusion in its regulatory capital of "a subordinated debenture in the aggregate principal amount not to exceed $2,000,000 as calculated in accordance with 12 C.F.R. §561.13 [,]" subject to certain conditions. JSF ¶ 127; Letter from Leo Blaber to River Valley II dated July 29, 1988, WOT645 1256-1257 (PX 206).

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50.

On May 18, 1989, FHLBB sent a letter to River Valley II granting certain

regulatory forbearances with respect to the acquisition of Republic. JSF ¶ 129; FHLBB forbearance letter dated May 18, 1989, WOT645 0847-0849 (PX 754). 51. The forbearance letter dated May 18, 1989, provided, among other things, that (1)

"[a] portion of the [FSLIC] cash contribution not to exceed $5.0 million may be credited to [River Valley II's] regulatory capital; therefore, for regulatory accounting purposes, [River Valley II] may book such contribution as a direct addition to its regulatory capital..." subject to certain limitations; and (2) for purposes of reporting to the FHLBB, "the value of any intangible asset resulting from the application of push-down accounting in accounting for the purchase, may be amortized by [River Valley II] over a period not to exceed 25 years by the straight line method." JSF ¶ 130; FHLBB forbearance letter dated May 18, 1989, WOT645 0847-0849, 0848 (PX 754); FHLBB Memorandum SP-24 at p. 6, OGC049 0378-0404, 0383 (PX 3). 52. The fiscal year 1989 audited consolidated financial statements for River Valley II

show that the application of purchase accounting to the Republic acquisition produced $1.3 million in GAAP goodwill. JSF ¶ 133; River Valley II Consolidated Financial Statements as of March 31, 1989, PHO042 0689-0715, 0703 (PX 325). 53. The $2.0 million of subordinated debt issued by River Valley II to ANB had a

stated "Maturity Date" of March 31, 1998 (approximately 10 years from the date of the execution of the subordinated debenture agreement), but the maturity date would be extended according to the following provision of the agreement: [T]he Maturity Date shall be automatically extended for successive one year periods unless [River Valley II] mails written notice to [ANB] not less than ninety (90) days prior to the anniversary date of the issuance of this debenture stating that the Maturity Date of this debenture and/or any portion thereof held by any other person

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shall no longer be automatically extended and fixing the eleventh succeeding March 31, following the aforementioned notice as the date on or before which all accrued interest and principal due and payable under this debenture shall be paid in full. JSF ¶ 139; Subordinated Debenture Agreement dated July 29, 1988, H&R-B37-00038-00049 at 00040-41 (PX 208). 54. The purchase agreement for the subordinated debt authorized River Valley II to

acquire "any other business" without ANB's consent, as long as the effect of the action was not to diminish the net worth below the level existing at the date of the Agreement. See JSF ¶ 100; Purchase Agreement between ANB and River Valley II dated July 29, 1988, WOF016 16251643 at 1631-33 (PX 209). 55. In all, the government promised to treat as capital for all regulatory purposes the

$20.91 million in capital credits, subordinated debt, and supervisory goodwill created in connection with Plaintiffs' acquisition of the Home, Mutual, Galva, and Republic thrifts. See Holland v. United States, 74 Fed. Cl. 225, 230-33 (2006); Holland Report at 35 ¶ 83 & n.67 (PX 601); July 29, 1988 Memorandum to H. Holland from FHLBB (permission to include sub debt), WOT645 1256-1257 (PX 206).] 56. Following the acquisitions, River Valley reasonably expected to achieve increased

returns because it could leverage the government-promised regulatory capital in the same manner that it could leverage cash capital. See Holland Report at 35 ¶ 84 (PX 601); Ferries Dep. at 188190 (JA 1897-1944). 57. In connection with both the Home and Republic acquisitions, River Valley

negotiated to retain the acquired institutions' net operating losses ("NOLs"). See JSF ¶ 58; Def.'s Response to PPSF ¶29.

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IV.

PRIOR TO THE BREACH, RIVER VALLEY OUTPACED ITS PROJECTIONS AND PROSPERED 58. At the beginning of 1988, before contracting with the government, River Valley II

had assets of approximately $120 million, a net worth of almost $5 million and a market value estimated at about $6.72 million (based on a premium of 40% over book value, which is the approximate acquisition premium that generally prevailed in 1988). June 28, 1988 FHLBB Issues Memorandum, WON534 0346-0365 (PX 177); River Valley II March 1988 Thrift Financial Report ("TFR"), CHO001 0839-0848 (PX 124); see also Holland Report at 34 ¶ 80 (PX 601). 59. institution. 60. After acquiring Home, Mutual, Galva, Republic and Peoria, River Valley I and II Prior to the Home/Mutual/Galva transaction, there was no River Valley I

(collectively, "River Valley") had aggregate assets of $620.9 million and regulatory net worth of $34.9 million. JSF ¶ 167; River Valley Savings Bank, Rock Falls January 26, 1989 Internal Financial Statements, H&R-BX70-0256-0341 (JA 1237-1322) (PX 1173); RVSB, FSB Audit Report: KPMG (Home-Mutual-Galva-Peoria Savings), December 31, 1988, H&R-B08-0033100361 (PX 199) See also Holland Report at 34 ¶ 81 (PX 601). 61. River Valley did substantial due diligence before contracting with the

government, and the government also performed detailed analyses to confirm that River Valley's plans for operating the acquired thrifts would succeed. October 26, 1987 Acquisition Proposal for Home, Mutual and Galva, H&R-B44-449-68 at 455-57 (PX 89); March 18, 1988 Acquisition Proposal for Republic, WON534 0417-0430, 0420 (PX 129); July 7, 1987 Liquidation Costing, Run #4, WON074 1095-1101 (PX 71); June 28, 1988 Republic Liquidation Analysis, WON534 0732-0733 (PX 180); March 2, 1987 Mutual Liquidation Analysis, Run #1, WON074 1209-11

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(PX 57); March 27, 1987 Mutual Liquidation Analysis, Run #2, WON074 1202-1206 (PX 59); April 13, 1987 Galva Liquidation Costing, Run #2, WON397 0301-05 (PX 61); December 4, 1987 Republic Costing Run #5, WOT685 1056, 1058 (PX 97); October 13, 1988 Peoria Liquidation Analysis, WOT613 0032-48 (PX 231). 62. The River Valley thrifts were required to submit business plans prior to each of

the government-assisted transactions and, in the case of River Valley I, regularly after the acquisitions. See JSF ¶ 170; July 6, 1988 "S" Memorandum, WOT645 1521-1526 at 1521 (PX 191); Holland Report at 36 ¶ 86 (PX 601); see also March 23, 1988 Projections for RVSB, FSB, (PX 136); November 21, 1989 Plan to S. Mooney from R. Pikus, WOT288 0020-0026 at 0024 (PX 249); December 9, 1988 Plan to H. Lucherini from R. Pikus, WON339 0092-0113 at 0099 (PX 262); July 31, 1989 Plan to S. Mooney from R. Pikus, WOL275 0154-0166 at 0155 (PX 345); October 30, 1989 Plan to S. Mooney from R. Pikus, WOL275 0087-0099 (PX 363). 63. The government approved River Valley's plans, which called for growth in assets

and earnings for River Valley. See March 23, 1988 Projections for RVSB, FSB, (PX 136); November 21, 1988 Plan to Susan Mooney, FHLB-Chicago from Ron Pikus, RVSB, FSB, WOT288 0020-0026, at 0024 (PX 249); December 9, 1988 Plan to Henry Lucherini of FHLBChicago from Ron Pikus, RVSB, FSB, WON339 0092-0113 at 0099 (PX 262); July 31, 1989 Plan to Susan Mooney, FHLB-Chicago from Ron Pikus, RVSB, FSB, WOL275 0154-0166, at 0155 (PX 345); October 30, 1989 Plan to Susan Mooney, OTS-Chicago from Ron Pikus, RVSB, FSB, WOL275 0087-0099 at 0092 (PX 363). 64. These business plans were based on the same business strategy that had yielded a

history of growth and profitable operations for Rock Falls, the predecessor to River Valley II.

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See, e.g., Rock Falls Balance Sheet, H&R-B43-00966-00971 (PX 54); Rock Falls Savings and Loan Association 1987 Business Plan, H&R-B44-687-700 (PX 77). 65. The government agreed that the growth strategy reflected in the business plans

was appropriate and sound. See Holland I, 57 Fed. Cl. at 545, 548, 557 (JA Tab 5); Ferries Dep. at 44-45, 51-55, 58-59, 83-88 (JA 1903, 1905-06, 1907, 1909-10); Blaber Dep. at 196-97, 253-56 (JA 1864, 1872-73); June 28, 1988 "S" Memorandum, WOT013 0194-0204 at 0194 (PX 182); July 12, 1988 "S" Memorandum Supplement, WOF016 2430-34 at 2433 (PX 193); April 22, 1988 "S" Memorandum, WOl604 0285-0300 at 0285 (PX 146). 66. As set forth in the business plans, River Valley expected to leverage the

contracted-for regulatory capital by purchasing capital market assets (e.g., securitized adjustable rate mortgages (ARMs) or collateralized mortgage obligations (CMOs)). The business plans also envisioned modest growth in the manner traditional to thrifts--increasing retail loans and deposits. Holland Report at 36 ¶ 86(a) (PX 601), 41-43 ¶¶ 98-99 (PX 601); December 9, 1988 Business Plan to H. Lucherini from R. Pikus, WON339 0092-0113 at 0093 (PX 262); see, e.g., July 12, 1988 "S" Memorandum Supplement, WOF016 2430-34 at 2430 (PX 193); July 31, 1989 Business Plan to S. Mooney, WOL275 0154-67 at 0163 (PX 345). 67. As the government has stipulated, River Valley also intended to grow through the

acquisition of other thrifts or branches of other thrifts. JSF ¶ 168; Rock Falls Savings and Loan 1987 Business Plan, H&R-B44-687-700 at 693 (PX 77); see Holland Report at 40-41 ¶ 97 (PX 601). 68. And, indeed, in December 1988 River Valley acquired from the government

another insolvent thrift, Peoria Savings and Loan Association ("Peoria"), located in central Illinois. Holland I, 57 Fed. Cl. at 567-69; JSF ¶¶142-45.

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69.

The pre-acquisition business plan approved by FHLB Chicago for River Valley II

called for 15% annual growth after acquisition. See July 6, 1988 "S" Memorandum, WOT645 1521-1526, at 1521 (PX 191); see also Holland Report at 36 ¶ 86(a) (PX 601). 70. In October 1989, River Valley I submitted the last business plan prepared with the

expectation that the government would honor its regulatory capital promises. All subsequent plans were drafted with full knowledge of the breach. The October 1989 business plan, which was approved prior to the government's breach, proposed 27% growth in assets over three years (8.3% per year, compounded). See October 30, 1989 Plan to Susan Mooney from R. Pikus, RVSB, FSB, WOL275 0087-0099 at 0092 (PX 363); see also Holland Report at 36 ¶ 86(a) (PX 601). 71. River Valley's business plans, which were submitted to and approved by the

government prior to 1990, envisioned that River Valley would leverage its contract capital and grow the thrift with acquisitions. In River Valley I's post-closing plan for the Home agreement (dated November 21, 1988), net worth-to-liabilities ratios were projected in the 9.0% range. 72. In the plans submitted after the acquisition of Peoria Savings at the end of 1988,

River Valley I's projected capital ratios declined to roughly 5.5%, reflecting the growth and leverage from the Peoria acquisition. See November 21, 1988 Plan to Susan Mooney, FHLB Chicago, from Ron Pikus, RVSB, FSB, WOT288 0020-0026, 0026 (PX 249); July 31, 1989 Plan to Susan Mooney, FHLB-Chicago from Ron Pikus, RVSB, FSB, WOL275 0154-0166, at 0155 (PX 345); October 30, 1989 Plan to Susan Mooney, OTS-Chicago from Ron Pikus, RVSB, FSB, WOL275 0087-0099 (PX 363); see also Holland Report at 36 ¶ 86(b) (PX 601). 73. The pre-acquisition business plan for River Valley II and the December 9, 1988

plan for River Valley I, which were both approved by the government, projected an aggregate

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Case 1:95-cv-00524-GWM

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Page 35 of 76

net income of $3.83 million in the first two years (July 31, 1988 through July 31, 1990), with annual returns on assets of approximately 0.4%. See July 6, 1988 "S" M