Free Response - District Court of Federal Claims - federal

Case 1:95-cv-00517-GWM

Document 183

Filed 06/12/2007

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER, Plaintiff, ) ) ) ) ) ) ) ) ) ) )

v. UNITED STATES, Defendant.

No. 95-517 (Judge George Miller)

DEFENDANT'S RESPONSE TO THE MAY 15, 2007 SUBMISSION OF PLAINTIFF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER Pursuant to the Court's Opinion and Order dated April 13, 2007 ("Order"), defendant, the United States, respectfully submits its response to the May 15, 2007 Submission Of Plaintiff First Federal Savings And Loan Association Of Rochester Pursuant To The Court's Opinion And Order Of April 13, 2007. Defendant submits the attached Report Of Dr. David P. Rochester In Response To The Revised Damage Calculation By Dr. Donald M. Kaplan. As explained in Dr. Rochester's Report, in his revised damage calculation, Dr. Kaplan went beyond the request of the Court in its Order by offering a set of calculations that reflects the impact of including net operating loss ("NOL") tax savings in his calculation of conversion proceeds. Dr. Kaplan stated that "[s]ince the loss of those tax savings caused First Federal's pre-conversion capital to be lower (like the lost revenue from the restructuring transactions), it seems reasonable to account for them in any new calculation of conversion proceeds." Kaplan Revised Report at 2. Dr. Kaplan further explained "... that tax benefit would have increased First Federal's pre-conversion capital by $7.4 million, and, therefore, would have enhanced the Bank's value correspondingly. Kaplan

Case 1:95-cv-00517-GWM

Document 183

Filed 06/12/2007

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Revised Report at 3. He concluded that "...it seems appropriate to account for that additional capital in reevaluating First Federal's conversion proceeds." Kaplan Revised Report at 5. Dr. Kaplan's new damage calculation is inappropriate for at least two reasons. First, his new damage calculation went beyond the Court's directive to the parties in its Order. The Court requested only that the offset calculation be redone to reflect the Court's findings with regard to First Federal's restructuring damage claim. Second, Dr. Kaplan's conclusions are based upon the unsupported assumption that the realization of the tax benefits would have increased First Federal's pre-conversion capital. The impact that the utilization of NOL carryforwards has on a thrift's capital depends on the source from which those NOLs originated. Pursuant to Financial Accounting Standard 96, ¶ 23, the relevant accounting literature applicable during the period in question states: If not recognized at the acquisition date, the tax benefits of an acquired operating loss or tax credit carryforward for financial reporting that are recognized in financial statements after the acquisition date shall a) first be applied to reduce to zero any goodwill and other noncurrent intangible assets related to the acquisition and b) next to be recognized as a reduction of income tax expense. (Emphasis added). If the NOLs in question did, in fact, arise from a business combination, their utilization would have resulted in a reduction of goodwill, and therefore, the thrift's capital. Dr. Kaplan's calculation of the standard conversion proceeds is based upon an assumed price-tobook ratio applied to the thrift's pro-forma net worth. Thus, a decrease in net worth, caused by a reduction of its goodwill balance, would reduce his valuation. At trial Dr. Kaplan did not testify concerning the proper financial statement treatment of the NOLs which the Court has found the thrift would have utilized. In fact, Dr. Kaplan

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Case 1:95-cv-00517-GWM

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specifically testified that he is not a tax expert. Tr. 2822-23. Plaintiff did not introduce any evidence or testimony through any witness addressing the nature of the NOLs or the appropriate treatment applicable to the NOLs. Therefore, Dr. Kaplan cannot offer any opinion addressing how the utilization of the NOLs would have affected the thrift's pre-conversion capital or its value. Dr. Kaplan's revised calculations suffer from the same methodological flaws that we brought to the Court's attention during trial. For the purpose fo complying with the Court's April 13, 2007 Order, and without waiving our right to appeal the Court's opinion of April 13, 2007, we have prepared the following chart to compare Dr. Rochester's results, in the attached responsive report, to those reached by Dr. Kaplan in plaintiff's May 15, 2007 filing:
Comparison of 2007 Recalculations ($000s) Without $7.4 Million Tax Benefit Dr. Kaplan Calculated Proceeds from Standard Conversion Calculated Offset (Reduction to Damages) $211,750 ($11,122) Dr. Rochester $190,000 ($14,381) With $7.4 Million Tax Benefit Dr. Kaplan $220,000 ($8,061) Dr. Rochester $195,000 ($11,830)

As this chart makes clear, Dr. Kaplan's overestimates the valuations under both scenarios. The recalculated offset, pursuant to the Court's Order, should be $14.381 Million.

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Case 1:95-cv-00517-GWM

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Respectfully submitted, MICHAEL HERTZ Deputy Assistant Attorney General JEANNE E. DAVIDSON Director s/ Kenneth M. Dintzer KENNETH M. DINTZER Assistant Director

Of Counsel: WILLIAM G. KANELLIS DELISA M. SANCHEZ

June 12, 2007

s/ Arlene Pianko Groner ARLENE PIANKO GRONER Trial Attorney Commercial Litigation Branch Civil Division Department of Justice 1100 L Street, N.W. Room 11026 Washington, D.C. 2000 Tel: (202) 307-0162 Fax: (202) 305-7643 Attorneys for Defendant

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Case 1:95-cv-00517-GWM

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CERTIFICATE OF FILING

I hereby certify that on June 12, 2007, a copy of foregoing "DEFENDANT'S RESPONSE TO THE MAY 15, 2007 SUBMISSION OF PLAINTIFF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCHESTER," was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

/s/ Arlene Pianko Groner ARLENE PIANKO GRONER

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