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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ASTORIA FEDERAL SAVINGS & LOAN ASSOCIATION, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) )

No. 95-468C (Judge Thomas C. Wheeler)

DEFENDANT'S POST TRIAL MEMORANDUM OF FACTS AND LAW

Respectfully submitted, MICHAEL F. 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 1100 L Street, N.W. Attn: Classification Unit, 8th Floor Washington, D.C. 20530 Tel. (202) 353-7972 Fax (202) 514-8640 Attorneys for Defendant

OF COUNSEL: ARLENE PIANKO GRONER ELIZABETH M. HOSFORD BRIAN A. MIZOGUCHI JOHN J. TODOR SAMEER YERAWADEKAR

August 6, 2007

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TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x DEFENDANT'S POST TRIAL MEMORANDUM OF FACTS AND LAW . . . . . . . . . . . . . . . . 1 SUMMARY OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ISSUES PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 DEFENDANT'S PROPOSED FINDINGS OF FACTS .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. II. III. IV. V. VI. VII. VIII. 18

WITNESSES WHO TESTIFIED AT TRIAL .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 HISTORY OF THRIFT RESOLUTION OPTIONS AND LIQUIDATIONS . . . . . . . . . 23 FIDELITY'S ACQUISITION OF DOLLAR FEDERAL .. . . . . . . . . . . . . . . . . . . . . . . . 30 SUBURBIA FACED INTEREST RATE SPREAD PROBLEMS .. . . . . . . . . . . . . . . . . 31 THE BENEFITS OF THE FIDELITY AND SUBURBIA MERGER . . . . . . . . . . . . . . . 39 REGULATORY ASSESSMENT OF THE PROPOSED MERGER .. . . . . . . . . . . . . . . 46 FIDELITY MERGES WITH SUBURBIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 FIDELITY INVESTED IN RISKY ASSETS THAT RESULTED IN SIGNIFICANT LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 A. Fidelity Sold Suburbia Assets And Invested In Risky Commercial Real Estate Development Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Regulators Warned Fidelity About Its High Concentrations Of Condominium And Cooperative Lending .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 By 1986 Fidelity Had One-Fourth Of Its Assets In Highly Risky Commercial Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Fidelity's Concentrations Of Commercial Loans Began Collapsing In 1987 And, Facing Catastrophic Losses, Fidelity Belatedly Resolved To Exit That Risky Arena . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 i

B.

C.

D.

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E.

Due To Its Collapsing Loans, Fidelity Projects Minimal Growth In Its 1988 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Fidelity's Problems Continued Into 1988 And In Late 1988 Fidelity Prepared A Three-Year Business Plan That Was Based Upon Unrealistic Assumptions Concerning Its Loan Losses And The Condition Of The General Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 By The Fall Of 1988, Fidelity Recognized The Numerous Proposals Being Considered To Ensure That Thrifts Were Adequately Capitalized . . . . . . 86 During 1989 Fidelity's Classified Assets Increased In Size And Severity . . . . . . 88

F.

G.

H. IX.

FIRREA WAS ENACTED AND FIDELITY FELL OUT OF CAPITAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 A. Fidelity Did Not Have Prior Knowledge Of The Content Of FIRREA . . . . . . . . 91

X.

FIDELITY'S CAPITAL PLAN PROJECTED A CONTINUATION OF THE SAME BUSINESS PLAN IT HAD FOLLOWED SINCE 1987 .. . . . . . . . . . . 95 A. Fidelity's Capital Plan Was A Continuation Of What The Thrift Had Been Doing Since 1987 Due To Its Loan Problems . . . . . . . . . . . . . . . . . . . 95 Fidelity's Business Problems and High Level Of Classified Assets Continued Through 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 1. Fidelity Experienced Business Problems Due To The Slowing Economy in 1990 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Fidelity's Reports Of Examination Found Problems With Its Bad Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Fidelity Faced Further Economic Weakness In 1991 and 1992 . . . . . . . 110

B.

2.

3. C.

Following The 1991 Report Of Examination, Fidelity Was Placed Under A Supervisory Agreement Due To Its Failure To Correct Its Deficiencies In Dealing With Its Problem Loans . . . . . . . . . . . . . . . . . . . . . . . . 111 Fidelity's Bad Loans Were Reduced Only Slightly In 1992 . . . . . . . . . . . . . . . . 112

D.

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XI.

FIDELITY UNDERWENT A SUCCESSFUL CONVERSION AND REGAINED CAPITAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

XII.

ASTORIA, LIKE FIDELITY, CONVERTED TO A STOCK INSTITUTION IN 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 A. B. Pre-FIRREA Astoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 The Real Estate Recession In The Early 1990s Affected Astoria .. . . . . . . . . . . 117 1. 2. Astoria Operated Conservatively Following FIRREA . . . . . . . . . . . . . . 117 Conservative Operations Did Not Shield Astoria From The Recession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Astoria Chose Not to Grow To Handle Non-Performing Loan Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 a. b. c. d. 4. Astoria's Statements Respecting The Economy in 1990 . . . . . . 120 Astoria's Statements Respecting The Economy in 1991 . . . . . . 121 Astoria's Statements Respecting The Economy in 1992 . . . . . 122 Astoria's Statements Respecting The Economy in 1993 . . . . . . 123

3.

FIRREA Did Not Affect Astoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

C.

Astoria Converted In 1993 For Reasons Wholly Apart From A Need To Meet Regulatory Capital Requirements .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 1. 2. 3. Astoria's Capital Position Immediately Prior To Conversion . . . . . . . . 124 The Conversion Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Astoria's Post-Conversion Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 125 a. b. Capital Position .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

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c. d. e. f. XIII.

Measurement Of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Dividends to AFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Conservative Retail Business Strategy . . . . . . . . . . . . . . . . . . . . 128 Decision Not To Grow By Investment . . . . . . . . . . . . . . . . . . . . 128

POST-CONVERSION FIDELITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

XIV. FIDELITY AND ASTORIA AGREED TO MERGE IN A PURCHASE ACCOUNTING MERGER .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 A. B. C. D. E. F. Negotiations And Structure Of Transaction . . . . . . . . . . . . . . . . . . . . . . 133 Astoria Deals With Fidelity's Problem Loans During Merger . . . . . . . . 134 Treatment of Fidelity's Goodwill In Merger .. . . . . . . . . . . . . . . . . . . . . 136 Astoria Placed No Value On Fidelity's Goodwill Plan . . . . . . . . . . . . . 137 Effect of Fidelity Merger on Astoria .. . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Astoria's Capital Position Following Fidelity Merger . . . . . . . . . . . . . . 141

DEFENDANT'S CONTENTIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 I. ASTORIA HAS FAILED TO PROVE ENTITLEMENT TO AN AWARD OF RESTITUTION .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 A. B. Description Of Astoria's Restitution Claim . . . . . . . . . . . . . . . . . . . . . . 142 Precedent Has Rejected Restitution Claims Premised Upon Avoided Liquidation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 No Record Evidence Renders Astoria's Restitution Claim Viable .. . . . 144 1. There Was Nothing In The Record To Distinguish The Economic Or Regulatory Environment Under Which Suburbia Was Operating From That Of The Thrifts In The Other Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

C.

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2.

To The Extent Any Facts Distinguish Suburbia From Other Troubled Thrifts, They Show FSLIC Was Less Likely To Liquidate Suburbia . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 a. The Record Does Not Support Dr. Kaplan's Assumption That FSLIC Would Have Liquidated Suburbia Had Fidelity Not Acquired It .. . . . . . . . . . . . . 148 (1) FSLIC Did Not Liquidate Thrifts At The Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Interest Rates Declined After The Suburbia Acquisition . . . . . . . . . . . . . . . . . . . . . 150 Suburbia Would Not Have Been Liquidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

(2)

(3)

b.

Fidelity Lacked The Economic Capacity To Provide A Benefit In The Amount Claimed By Astoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Dr. Kaplan Errs By Ignoring Easily Identifiable Offsetting Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 (1) Dr. Kaplan's Had No Basis To Ignore Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Dr. Kaplan Ignored Many Of Fidelity's Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Suburbia's Franchise Was Valuable . . . . . . . . . . 161

c.

(2)

(3) D.

Astoria's Restitution Claim Also Fails To Meet Other Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

II.

ASTORIA'S RELIANCE CLAIM FAILS AS A MATTER OF LAW AND FACT .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 A. B. Description Of Astoria's Reliance Damages Claim . . . . . . . . . . . . . . . . . . . . . . 166 Precedent Has Rejected Reliance Claims Premised Upon Net Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

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C.

The Record Evidence Does Not Support Astoria's Claim That The Net Liabilities Assumed Represented A Cost To Fidelity. . . . . . . . . . . . . . 171 1. Same General Factual Scenario Applied To Suburbia Acquisition As The Other Cases Rejecting Identical Reliance Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 The Facts Demonstrate That Dr. Kaplan Ignores Significant Benefits That Constitute An Offset To His Claimed Reliance Damages .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 a. Dr. Kaplan Errs By Ignoring Substantial Direct Benefits Attributable To Suburbia Before The Breach .. . . . . . 178 Dr. Kaplan Improperly Ignores Economic Benefits That Fidelity And Astoria Received After The Breach .. . . . . . . . . . 183

2.

b.

IV.

ASTORIA'S EXPECTANCY CLAIMS FAIL AS A MATTER OF LAW AND FACT .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 A. B. C. Overview Of Astoria's Expectancy Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 Legal Standards For Expectancy Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 Astoria's Lost Profits Claims Fail .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 1. Description Of Astoria's Lost Profits Claims . . . . . . . . . . . . . . . . . . . . . 192 a. b. 2. Fidelity's Lost Profits From 1989 To 1994 .. . . . . . . . . . . . . . . . 192 Astoria's Lost Profits From 1995 To 2014. . . . . . . . . . . . . . . . . 193

Dr. Kaplan's Post-Astoria Damages Are Speculative .. . . . . . . . . . . . . . 194 a. Fidelity's Goodwill Would Not Have Survived The Astoria Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 Astoria Would Have Had No Use For Additional Leverage Capacity From Fidelity's Goodwill .. . . . . . . . . . . . . . 197 Dr. Kaplan's Methodology Is Unreliable . . . . . . . . . . . . . . . . . . 200

b.

c. 3.

Dr. Kaplan's Pre-1994 Lost Profits Are Unsupported . . . . . . . . . . . . . . 207 vi

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4.

Dr. Kaplan's Pre-1994 Lost Profits Fail For Lack Of Causation . . . . . . 214 a. b. No Causation For Pre-FIRREA Damages .. . . . . . . . . . . . . . . . . 214 Regulators Would Have Barred Any Growth In Fidelity's Assets Pursuant to RB3a-1 Irrespective Of The Breach . . . . . . . 217 Regulatory Concern With Fidelity's Very High Interest Rate Risk Would Have Existed Irrespective Of The Breach .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Regulators Would Have Barred The Growth In The Wholesale Strategy Envisioned By Dr. Kaplan Irrespective Of The Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 No Causation Before Or After The Conversion . . . . . . . . . . . . . 225 Fidelity Would Not Have Grown Absent The Breach In The Manner Dr. Kaplan Presumes . . . . . . . . . . . . . . . . . . . . . 228 Economic Constraints Barred Dr. Kaplan's Growth . . . . . . . . . 229 Other NonBreach Factors Would Have Caused Fidelity To Restrict Its Growth .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Dr. Kaplan Omits Costs Fidelity Would Have Borne In A Non-Breach World . . . . . . . . . . . . . . . . . . . . . . . . . . 234

c.

d.

e. f.

g. h.

i.

5.

Dr. Kaplan's Lost Profits Claims Fail For Lack Of Foreseeability .. . . . 236 a. Precedent Indicates Damages Nearing The Goodwill Amount Are Unforeseeable . . . . . . . . . . . . . . . . . 236 Fidelity's Operations Gave Regulators No Reason To Foresee The Scale Or The Source Of The Damages Dr. Kaplan Posits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

b.

6.

Dr. Kaplan's Lost Profits Claims Are Not Reasonably Certain . . . . . . . 239 a. Fidelity's 1989-1994 Lost Profits Are Speculative .. . . . . . . . . . 239 i. The Composition Of Dr. Kaplan's Non-Breach Bank's Assets And Liabilities Are Uncertain . . . . . . . . . 240 vii

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ii.

Dr. Kaplan's Assumed Growth Rate Is Unsupportable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 A). Dr. Kaplan's Reliance Upon Astoria's Growth Rate Is Unsupported . . . . . . . . . . . . . . . 246 Dr. Kaplan's Reliance Upon The October 1988 Business Plan Is Unsupported . . . . . . . . . . 249 Dr. Kaplan's Use Of Fidelity's Pre-FIRREA Growth Rate Is Unsupported .. . . . . . . . . . . . . . . 258 Dr. Kaplan's Use Of Fidelity's Post-FIRREA Growth Rate Is Unsupported .. . . . . . . . . . . . . . . 261

.

B).

C).

D).

iii.

Dr. Kaplan's Assumed Spread Is Unsupported .. . . . . . . 263 A). Dr. Kaplan's Spread Assumption Contradicts Fidelity's Actual Experience And Is Methodologically Unsound . . . . . . . . . . . . . . . . 263 Dr. Kaplan's 153 Basis-Point Spread Between Wholesale Yields And FHLB Advances Does Not Support His Spread Assumption . . . . . . . . 266 Fidelity's Actual Wholesale Spreads Do Not Support Dr. Kaplan's Spread Assumption .. . . . 270 Fidelity's Whole Bank Return Does Not Support Dr. Kaplan's Spread Assumption .. . . . 272 The 80 Basis-Point Spread Was Not "Generally Available In The Marketplace" . . . . . . . . . . . . . 273 Other Alleged Support For Dr. Kaplan's Spread Is Undermined By Competition . . . . . . . 274

B).

C).

D).

E).

F).

b.

Dr. Kaplan's Post-Astoria Merger Damages Are Speculative .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Dr. Kaplan's Post-Astoria Damages Fail To Adjust For A Non-Breach World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 viii

c.

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7.

Other Winstar Cases Offer No Support For Dr. Kaplan's Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

V.

DR. KAPLAN'S "WOUNDED BANK" CLAIMS FAIL . . . . . . . . . . . . . . . . . . . . . . . 279 A. B. OTS Assessment Claim Is Speculative .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 FDIC Insurance Premium Claim Is Speculative . . . . . . . . . . . . . . . . . . . . . . . . . 285

CONCLUSION .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

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TABLE OF AUTHORITIES Page(s) CASES Aktieselskabet Dampskibsselskabet Svenborg v. United States, 131 Ct. Cl. 399, 130 F. Supp. 363 (1955). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 American Capital Corp. v. United States, 59 Fed. Cl. 563 (2004), aff'd in part, rev'd in part, 472 F.3d 859 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 American Fed. Bank, FSB v. United States, 62 Fed. Cl. 185 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Ariadne Fin. Servs. Pty. Ltd. v. United States, 133 F.3d 874 (Fed. Cir. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Astoria Fed. Sav. & Loan Ass'n v. United States, 72 Fed. Cl. 712 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Aurigemma v. Arco Petroleum Prods. Co., 734 F. Supp. 1025 (D. Conn. 1990).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Bank of America, FSB v. United States, Nos. 2006-5088, -5089, -5090, 2007 WL 2137774 (Fed. Cir. July 26, 2007).. . . . . . . . . . . . 9, 214 Bank United of Texas, FSB v. United States, 50 Fed. Cl. 645 (2001), rev'd in part, 80 Fed. Appx. 663, 2003 WL 22177282 (Fed. Cir. Sept. 22, 2003), cert. denied, 543 U.S. 916 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189, 190 Bohac v. Dep't of Agriculture, 239 F.3d 1334 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 California Fed. Bank v. United States, 43 Fed. Cl. 445 (1999), vacated in part on other grounds, 245 F.3d 1342 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim California Fed. Bank, FSB. v. United States, 54 Fed. Cl. 704 (2002), aff'd, 395 F.3d 1263 (Fed. Cir. 2005), cert. denied, 546 U.S. 817 (2005).. . . . . . . . . . . . . . passim

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Carley Capital Group v. City of Newport News, 709 F. Supp. 1387 (E.D. Va. 1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Caroline Hunt Trust Estate v. United States, 65 Fed. Cl. 271 (2005), aff'd in part rev'd in part and remanded, 470 F.3d 1044 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Castle v. United States, 48 Fed. Cl. 187 (2000), aff'd in part & rev'd in part, 301 F.3d 1328 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Citizens Fed. Bank, FSB v. United States, 52 Fed. Cl. 561 (2002), aff'd, 474 F.3d 1314 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144, 187 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). . . . . . . . . . . . . . . . . . . . 188, 189 Columbia First Bank, FSB v. United States, 60 Fed. Cl. 97 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 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) (unpublished table decision). . . . . . . . . . . . . . . passim Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Fifth Third Bank of Western Ohio v. United States, 55 Fed. Cl. 223 (2003), appeals docketed 2006-5128, -5129 (Fed. Cir. Sept. 1, 2006).. . . . . . . . . . . . . . . . . . . . . . . passim Fifth Third Bank of Western Ohio v. United States, 402 F.3d 1221 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 First Fed. Lincoln Bank v. United States, 73 Fed. Cl. 633 (2006), appeals docketed, No. 07-5044 (Fed. Cir. 2007).. . . . . . . . . . . . . . 11, 276 First Fed. Sav. & Loan Ass'n of Rochester v. United States, 76 Fed. Cl. 106 (2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

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Franklin Fed. Bank v. United States, 55 Fed. Cl. 108 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144, 169 Franklin Fed. Sav. Bank v. United States, 431 F.3d 1360 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Glendale Fed. Bank, FSB v. United States, 43 Fed. Cl. 390 (1999), aff'd in part, vacated in part, & remanded, 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Glendale Fed. Bank, FSB v. United States, 54 Fed. Cl. 8 (2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim 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). . . . . . . . . . . . . . . . . . . . . . . 189 Granite Mgmt. Corp. v. United States, 58 Fed. Cl. 766 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155, 161-64 (2006) appeal docketed, No. 2007-5054 (Fed Cir. Feb. 6, 2007) .. . . . . . . . . . . . . . . . . . . . . . . . . . passim Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170, 187 Herman Schwabe, Inc. v. United Shoe Mach. Corp., 297 F.2d 906 (2d Cir. 1962).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Landmark Land Co. v. United States, 46 Fed. Cl. 261 (2000), aff'd in part, vacated and remanded, 256 F.3d 1365 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

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LaSalle Talman Bank, FSB v. United States, 45 Fed. Cl. 64 (1999), aff'd in part, vacated in part, & remanded, 317 F.3d 1363 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim LaSalle Talman Bank, FSB v. United States, 64 Fed. Cl. 90 (2005), aff'd, 462 F.3d 1331 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Long Island Sav. Bank, FSB v. United States, 60 Fed. Cl. 80 (2004), rev'd on other grounds, 476 F.3d 917 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144, 169 Martin v. United States, 126 S.Ct. 2967 (2006).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Resolution Trust Corp. v. FSLIC, 25 F.3d 1493 (10th Cir. 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Roseburg Lumber Co. v. Madigan, 978 F.2d 660 (Fed. Cir. 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Rumsfeld v. Applied Cos., 325 F.3d 1328 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 S. Nat'l Corp. v. United States, 57 Fed. Cl. 294 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . passim S. Pac. Comm. Co. v. AT&T, 556 F. Supp. 825 (D.D.C. 1982). . . . . . . . . . . . . . . . . . . . . . . . . 188 Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 57 Fed. Cl. 598 (2003), aff'd in part, rev'd in part, & remanded, 422 F.3d 1319 (Fed. Cir.2005).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189, 190 Standard Fed. Bank v. United States, 62 Fed. Cl. 265 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Suess v. United States, 52 Fed. Cl. 221 (2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 United States v. Winstar Corp., 518 U.S. 839 (1996).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim xiii

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Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188, 190 Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168, 178 STATUTES, RULES AND REGULATIONS Financial Institutions Reform, Recovery and Enforcement Act, Pub. L. 101-73, 103 Stat. 183 (1989).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 12 C.F.R. § 567.5(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 12 C.F.R. § 567.5(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 12 U.S.C. § 1464(t)(3)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 12 U.S.C. § 1464(t)(9)(c).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 MISCELLANEOUS 3 Daniel B. Dobbs, Law of Remedies § 12.3(1), at 51-52 (2d ed. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Charles T. McCormick, Damages § 142, at 584 (1935). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Restatement (Second) of Contracts § 347, cmt. b (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 Restatement (Second) of Contracts § 352 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Restatement (Second) of Contracts § 384(1), cmt. a. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ) ASTORIA FEDERAL SAVINGS & ) LOAN ASSOCIATION, ) ) Plaintiff, ) ) v. ) No. 95-468C ) (Judge Thomas C. Wheeler) THE UNITED STATES, ) ) Defendant. ) ) ____________________________________) DEFENDANT'S POST TRIAL MEMORANDUM OF FACTS AND LAW SUMMARY OF ARGUMENT In October 1984, Fidelity New York, F.S.B. ("Fidelity"), a thrift located in Long Island, New York, acquired Suburbia Federal Savings and Loan Association ("Suburbia"), another Long Island thrift. Like most thrifts at that time, Suburbia was struggling with interest-rate spread problems. Fidelity's acquisition of Suburbia was voluntary, as both thrifts anticipated enormous benefits from the transaction. Fidelity paid nothing to acquire Suburbia and obtained millions of dollars in assistance from the Federal Savings and Loan Insurance Corporation ("FSLIC"), tens of millions of dollars in tax benefits, a valuable banking franchise, savings from economies of scale, and increased banking capabilities -- and almost tripled in size. Furthermore, pursuant to the Assistance Agreement between Fidelity and the FSLIC, Fidelity was permitted to utilize the unamortized goodwill created at the time of the acquisition toward its regulatory capital levels. After acquiring Suburbia, however, Fidelity squandered the opportunities given to it by the Suburbia acquisition. Fidelity, led by Thomas Lovely and Bruno Greco, pursued a deliberate

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policy of making high-risk commercial loans, concentrating these loans with just a handful of large developers. In pursuit of this high-risk policy, Fidelity sold off a large amount of the assets it acquired from Suburbia, traditional one-to-four-family mortgages, and it reinvested the proceeds in the risky concentrations. Despite repeated warnings from thrift regulators, by 1986, fully one-fourth of Fidelity's assets were high-risk commercial loans; yet, Fidelity continued underwriting more loans to the same large developers. In 1987, the bottom fell out of the commercial real estate development market in New York, the result of an overextended market and the repeal of tax laws favorable to real estate investments. Within a year-and-a-half period, from June 1986 to September 1987, Fidelity's classified loans increased exponentially, from $16 to $84 million, with $46 million of these loans constituting nonearning assets. Fidelity's decision to pursue concentrations in high-risk loans had more than backfired; it had placed the institution in a position where regulators felt that the "future viability" of the thrift was at risk. The extent of Fidelity's problems was revealed in the 1987 examination of the thrift by the Federal Home Loan Bank Board ("FHLBB"), the predecessor to the Office of Thrift Supervision ("OTS"). At the conclusion of the examination, the FHLBB assigned Fidelity a "4," the second lowest rating a thrift can receive and just one numeral above a "5" rating, which signifies that a thrift has an "extremely high immediate probability of failure." At that time -almost two years before the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA") -- Fidelity was rated highly for its "capital," which included the entire unamortized balance of the goodwill arising from the Suburbia acquisition. Thus, before FIRREA's enactment and wholly apart from 2

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its capital level, regulators found Fidelity to be in a highly unsatisfactory condition with "major and serious problems." During 1986, Fidelity retained additional upper level management, including Thomas Powderly and William Wesp, and they, too, soon discovered the severity of Fidelity's asset problems. After a period of managerial infighting and turmoil, these new officers finally persuaded Messrs. Lovely and Greco to cease making additional high-risk loans. Unfortunately for Fidelity, however, stopping the issuance of new high-risk loans did not stop the existing loans from getting worse. Between October 1987 and November 1989, Fidelity's classified loans increased by another 20 percent, as the economy in New York continued to decline. In August 1989, Congress passed FIRREA, an act that we have acknowledged breached plaintiff's contract with the Government. Unrelated to FIRREA, however, Fidelity's bad loans continued deteriorating through the early nineties. Ultimately, Fidelity had to set aside more than $80 million in loss allowances for losses incurred between January 1986 and December 1994. In May 1993, Fidelity converted from a mutual to a stock institution, raising enough capital so that all regulatory restrictions on the thrift's growth were immediately terminated. In January 1995, Fidelity was acquired by Astoria Federal Savings and Loan Association ("Astoria"), an institution that has always maintained large amounts of excess capital. At trial, Astoria presented four damage theories. First, Astoria claimed restitution damages of $128 million based upon a benefit allegedly conferred by Fidelity to the Government in the form of the avoided costs of liquidating Suburbia. Second, and alternatively, Astoria claimed it is entitled to reliance damages of $141 million based upon Fidelity's alleged assumption of $160 million of Suburbia's net liabilities, calculated by a purchase accounting 3

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mark-to-market of Suburbia's assets and liabilities prior to its acquisition by Fidelity. Third, and also alternatively, Astoria sought $115 million in lost profits that it alleges Fidelity and Astoria would have earned but for the breach. Fourth, and in addition to each of the three theories above, Astoria alleged $1.4 million in "wounded bank" damages, based upon increased examination and insurance premium costs that it alleges Fidelity would not have paid, but for the breach. Based upon the evidence presented at trial and guided by the authority of this Court and the Court of Appeals for the Federal Circuit, it is apparent that Astoria's damage claims are unfounded. Addressing first Astoria's restitution claim, there is nothing distinguishing this case from any number of restitution claims brought by other plaintiffs in the Winstar litigation, which have all been dismissed, either by this Court, or, upon appeal, by the Federal Circuit. Astoria's restitution claim is premised upon the notion that, if Fidelity did not acquire Suburbia, Suburbia would have been liquidated by the Government. At trial, however, we established that there was essentially no chance that, if Fidelity did not acquire Suburbia, FSLIC would have liquidated Suburbia. The testimony was unanimous that, as of 1984, FSLIC lacked the funds and would not have liquidated a nearly $700 million institution, especially one such as Suburbia, whose difficulties were caused merely by interest rate spread problems. Rather than liquidate Suburbia, FSLIC would have done any number of things to deal with Suburbia's problems, including extending the grant of regulatory capital certificates and rebidding Suburbia to obtain another acquirer. In fact, plaintiff's expert, Dr. Donald M. Kaplan, admitted that he had no idea what FSLIC would have done if Fidelity's acquisition had not gone forward:

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I can't answer that. FSLIC would have made it a determination on how it felt best for it to proceed. They may have proceeded to liquidate. They may have done, as you suggest, and rebid it. I really don't know what decision they would have made in that instance. Tr. 3363:5-9 (Kaplan). As we established at trial, the policy of the regulators was to buy time for the savings and loan industry until interest rates fell. Interest rates did fall, and the interest rate spread problems of thrifts were largely solved. Further, Fidelity, which itself had little or no real equity on a mark-to-market basis at that time, lacked the capacity to provide the Government with the "restitution" benefit claimed by Astoria. Therefore, under no scenario could Fidelity have provided the Government with the avoided liquidation cost benefit claimed by Astoria. The fact of the matter is that Astoria's restitution claim ploughs through ground previously addressed in a dispositive fashion by the Federal Circuit. As the Federal Circuit stated in Glendale Federal Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001), "the action taken by the purchasing S&L in acquiring the failing thrift did not result in the Government, specifically the FSLIC, saving the dollar value of the net obligations of the thrift." Id. at 1382. This is because, again, the FSLIC "lacked sufficient funds to liquidate even a small percentage of the thrifts that became insolvent." Id. at 1377; see also United States v. Winstar Corp., 518 U.S. 839, 847 (1996) (recognizing that "FSLIC lacked the funds to liquidate all of the failing thrifts"). Furthermore, the Glendale Court correctly recognized that regulators did, indeed, have a policy of buying time until interest rates fell. Glendale, 239 F.3d at 1382. As the Glendale Court explained (in a manner consistent with the evidence we presented at trial here), there was no scenario in which acquiring thrifts would confer a significant benefit upon the Government. If 5

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rates declined, then the acquired thrifts' major problem would be solved. If rates did not decline, the entire industry would have failed and the Government would have been responsible for dealing with all of the net liabilities. See Glendale, 239 F.3d at 1382. In short, Astoria's restitution damage claim based upon an avoided liquidation cost is simply not cognizable, having no foundation in either fact or law. Astoria's reliance damage claim fares no better. Just as with its restitution claim, Astoria's reliance claim is barred by binding Federal Circuit precedent. The fundamental premise to Astoria's reliance claim is that the net liabilities of Suburbia -- an accounting mark-to-market calculation of Suburbia's assets versus its liabilities under the interest rates prevailing at the time of Fidelity's acquisition -- represents the amount of the actual cost to Fidelity in acquiring Suburbia. The Federal Circuit instructs, however, that "[a]lthough the assumed liabilities are indeed an accounting cost, . . . they are not a usable measure of either cost to the thrift or benefit to the government[.]" LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363, 1376 (Fed. Cir. 2003). Moreover, the Federal Circuit instructs that, even if net liabilities assumed could be construed to be a cost by an acquirer, that "cost of performance," which stemmed from the poor quality of the thrift's acquired loans, was unrelated to the breach. Thus, a net liabilities assumed "cost" cannot be the source from which a damage award can be constructed. See Granite Mgmt. Corp. v. United States, 416 F.3d 1373, 1380 (Fed. Cir. 2005). Thus, Astoria's assertion that Fidelity's assumption of net liabilities constitutes a cost undertaken by Fidelity in reliance upon the contract is incorrect, as a matter of law. Nor does Astoria's reliance claim make any sense as a matter of fact. Astoria has not identified any actual cash "cost" in paying off any of the net liabilities assumed; and, of course, it 6

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cannot. For one thing, as we demonstrated at trial, Fidelity never generated enough cash earnings to pay off the $160 million of net liabilities assumed. More fundamentally, however, the net liabilities assumed figure, based upon the $160 million of goodwill created at the time of the acquisition, is divorced from reality. With every change in interest rates, the mark-to-market "costs" change; and they change dramatically with a downturn in interest rates (which is precisely what occurred after Fidelity's acquisition of Suburbia). Given that Suburbia's net liabilities were not paid off by Fidelity at the time of its acquisition, but, if at all, years later as the (repriced to market) deposit liabilities came due, any actual costs have little or no correlation to the "net liabilities" figure proposed as damages. Indeed, this is precisely the point made by this Court in Granite Management Corp. v. United States, 58 Fed. Cl. 766 (2003): It is inappropriate, however, to argue that the liabilities were paid as they came due and yet include the entire amount of net liabilities assumed on the date of acquisitions in the cost of performance calculation. Id. at 775. Finally, in an error duplicated in its restitution claim, plaintiff fails to take into consideration all of the offsetting benefits that Fidelity and Astoria obtained from Fidelity's acquisition of Suburbia. Astoria's reliance claim ignores the tremendous benefits that Fidelity and Astoria received from the contract, including an extensive branch network, and millions of dollars in tax saving benefits, economies of scale, and accretion income. These benefits overwhelm the purported cost of the net liabilities assumed, precluding, even if it were not otherwise barred by binding precedent, Astoria's claim for $140 million in reliance damages -- as well as its claim for restitution damages.

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Astoria's lost profits claims are similarly unfounded as a matter of fact and law. To prove lost profits a plaintiff must prove three necessary elements: causation, foreseeability, and reasonable certainty. Astoria failed to prove any of these elements. To begin with, Astoria failed to prove causation. Specifically, Astoria failed to prove that, but for the breach, Fidelity would have grown at the 8.25 percent annual rate assumed by Dr. Kaplan, and that it would have obtained an 80 basis point return on its incremental growth. Uncontroverted testimony from Government regulators established that, irrespective of the breach, Fidelity's growth would have been restricted -- as it was under the thrift's FIRREArelated capital plan -- because Fidelity was a troubled thrift prior to the breach and would have remained so through the early 1990s irrespective of FIRREA. Regulators testified without contradiction that, under the direction of Messrs. Lovely and Greco,1 Fidelity had been rated a "4" in 1987, two years before the breach -- i.e., at a time when it had all of the regulatory capital to which it was entitled under the contract -- and that Fidelity would have been rated a "4" rated institution until at least the second half of 1992, even if FIRREA had not been passed. As such, pursuant to a thrift regulatory bulletin that required all thrifts rated a "4" to cease their growth, Fidelity would have been required to restrict its growth with or without the inclusion of goodwill in its regulatory capital. For identical reasons, regulatory restrictions on wholesale leveraging strategies would have also barred Fidelity's pursuit of the wholesale leverage strategy proposed

At trial, witnesses employed by both Fidelity and the Government expressed universal disdain, if not contempt, for the leadership qualities and capabilities of Messrs. Lovely and Greco. Yet, Astoria's claim for lost profits is, essentially, a request that the Government now insure Fidelity for their numerous catastrophic business and underwriting decisions. 8

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by Dr. Kaplan in his "modeling" of lost profits. This regulatory bar, too, would have existed irrespective of the breach. Fidelity's lost profits claim fails the test of causation for numerous other reasons. First, plaintiff claims lost profits damages beginning January 1989, i.e., before even the initial draft of FIRREA, and eight months before FIRREA was passed. As the Federal Circuit has very recently instructed, there could not have been a breach of a Winstar-related contract until after the passage of FIRREA in August 1989 and either the effective date of implementing regulations or demands made upon thrifts to comply with the new regulatory capital regime before those regulations took effect. See Bank of America, FSB v. United States, --- F.3d -- , 2007 WL 2137774, at *4 (Fed. Cir. July 26, 2007).2 Second, following Fidelity's conversion from a mutual to a stock institution in May 1993 and the corresponding infusion of $57 million into Fidelity, all growth restrictions Fidelity faced relating to its regulatory capital levels under FIRREA were lifted and it was free to grow as it saw fit. Regulators, Fidelity employees, and even Dr. Kaplan admitted this fact. Thus, even if the breach can be said to have cost Fidelity any lost profits, these damages ceased with Fidelity's conversion and, which in effect, mitigated the breach. Third, wholly apart from the fact of the conversion's mitigative effects, Astoria failed to prove the causation of any damages following Astoria's acquisition of Fidelity. Pursuant to Fidelity's Assistance Agreement with FSLIC, contractual regulatory capital could not transfer to Astoria. Morever, pursuant to generally accepted accounting principles ("GAAP"), all of

We disagree with the position that FIRREA's enactment did not breach the contract, and the decision in Bank of America remains appealable. 9

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Fidelity's goodwill had to be written off with Astoria's purchase. Furthermore, we established that Astoria never would have valued or utilized the goodwill to increase its leverage as Dr. Kaplan hypothesizes. Indeed, Astoria is an institution with a long history of being overcapitalized, and thus, would have had no use for additional regulatory capital from Fidelity. Not only do Fidelity's lost profits claims fail the test of causation (and, accordingly, foreseeability), the methodology presented by plaintiff's expert is grossly speculative and cannot form the basis for any lost profits award. For example, Dr. Kaplan proposes a hypothetical nonbreach thrift whose growth rates and rates of return do not correspond to the actual whole bank's assets or liabilities. Instead, Dr. Kaplan purports to model, for the period 1989 through 1994, a portfolio of a vaguely defined class of shorter-duration adjustable rate mortgage ("ARM") mortgage-backed securities ("MBS"), funded by vaguely identified wholesale borrowings. With little justification other than the conventions of his model, Dr. Kaplan ignores the full array of MBS actually held by Fidelity, including fixed-rate and longer-duration MBS. Furthermore, for the period 1995 through 2014, Dr. Kaplan makes no representation concerning the assets or liabilities he purports to model, merely stating that they could be anything Astoria chose them to be, thus, making his model wholly speculative. In fact, Dr. Kaplan's lost profits methodology amounts to little more than a black box within which every real world factor affecting growth or profitability is claimed to have been implicitly considered and found to be consistent -- without further analysis -- with the unwavering results of steady growth and certain profitability propounded by Dr. Kaplan. As such, Dr. Kaplan's lost profits methodology amounts to little more than the unsupported assumption that, for thrifts, increased leverage results, necessarily and invariably, in profits. 10

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Dr. Kaplan's modeling of lost profits has been rejected before by this Court in another Winstar-related case -- where Dr. Kaplan appeared as an expert and similarly projected hypothetical leveraging of goodwill into purchases of vaguely identified MBS -- precisely because Dr. Kaplan proposed a but-for thrift that deviated from the actual thrift's performance and plans. See First Fed. Lincoln Bank v. United States, 73 Fed. Cl. 633, 643-45 (2006), appeals docketed, No. 07-5044 (Fed. Cir. 2007). The same result should follow here. ISSUES PRESENTED 1. Are Winstar-related restitution damages measured in relation to purported

liquidation costs avoided by the Government precluded by binding precedent of the Federal Circuit? 2. Did FSLIC have any choices, other than liquidation or the approval of Fidelity's

acquisition, to address the financial difficulties Suburbia faced in 1984? 3. Given the state of FSLIC's financial condition and the overall condition of the

thrift industry in 1984, would Suburbia have been liquidated by FSLIC in the absence of Suburbia's acquisition by Fidelity? 4. Did Fidelity's acquisition of Suburbia relieve FSLIC of its potential liabilities

with respect to the deposits of Suburbia? 5. Given the testimony of Mr. Beesley, a former director of FSLIC, that no

liquidations involving cash payouts were undertaken by FSLIC after 1981, are Astoria's restitution damages, calculated based upon a cash payout liquidation of Suburbia in 1984, unfounded as a matter of fact?

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6.

Must all benefits obtained by an acquiring thrift be considered as offsets in

computing Winstar-related restitution and reliance damages? 7. Does binding Federal Circuit precedent preclude Winstar-related reliance damages

measured in relation to a mark-to-market accounting of the net liabilities, or goodwill, assumed by an acquiring thrift? 8. Does the mark-to-market accounting of an acquired thrift that results in the

computation of the net liabilities, or goodwill, assumed by an acquiring thrift, set forth a figure that represents an actual cost to the acquiring institution? 9. Are Winstar-related damages calculated prior to the passage of FIRREA

permissible given the precedent of the Federal Circuit concerning the effective date of the FIRREA breach? 10. Did draft legislation and Congressional debate concerning the various provisions

of what ultimately became FIRREA constitute an unequivocal repudiation or breach of Fidelity's contract? 11. Given the two alternative dates to begin computing damages presented by

plaintiff's expert, January 1, 1989, and January 1, 1990, and given the precedent of the Federal Circuit concerning the effective date of the FIRREA breach, are any lost profits damages permissible in this case prior to January 1, 1990? 12. Given that Fidelity was given a "4" composite MACRO rating nearly two years

before the passage of FIRREA based upon its bad loans, which only got worse with time, and given the uncontroverted testimony of regulators on the matter, would Fidelity have been rated a

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"4" irrespective of the breach, through at least the mailing of the OTS's 1992 report of examination ("RoE") of the institution? 13. Given the regulatory restrictions in Regulatory Bulletin 3a-1 ("RB3a-1")

concerning troubled institutions with a "4" composite MACRO rating or worse, the troubled state in which Fidelity found itself as a result of its large holdings of poor and nonperforming commercial and development loans, and the testimony of OTS regulators concerning Fidelity's likely composite MACRO rating of "4" or worse irrespective of the breach, would the OTS have permitted Fidelity to grow at the 8.25 percent growth rate Dr. Kaplan posits if Fidelity's contract had not been breached? 14. Given the thrift's loss of over $80 million in loans between 1986 and 1994, and

the likely loss of many tens of millions of dollars in lost interest income on those loans, what effect would those losses have had upon Fidelity and the regulatory oversight of Fidelity if Fidelity's contract had not been breached? 15. Given regulatory restrictions on the use of wholesale leverage strategies by

troubled institutions (with a "4" composite MACRO rating or worse), the testimony of OTS regulators concerning Fidelity's likely composite MACRO rating as "4" or worse irrespective of the breach, and Fidelity's severe interest rate risk, would regulators have permitted Fidelity to grow solely through the wholesale strategy hypothesized by Dr. Kaplan if Fidelity's contract had not been breached? 16. Did Fidelity's conversion in May 1993 mitigate the effect of the breach, such that

Fidelity met all of its FIRREA-related capital requirements and was free to pursue the growth and profitability strategies it desired? 13

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17.

Given the mitigating effects of Fidelity's conversion in May 1993, are any lost

profits damages permissible after that point in time? 18. Is Dr. Kaplan's lost profits methodology, in which he assumes a given result with

respect to the growth and profitability of Fidelity and Astoria, and merely assumes that these results take into consideration all nonbreach factors that could have affected that growth and profitability, a speculative method of determining lost profits, which, therefore, presents damage computations that fail the test of reasonable certainty? 19. Given the collapse of the New York real estate market and the further worsening

of Fidelity's own commercial and development loans, the economic recession, the upheaval in the capital markets caused by the Gulf War, volatile and inverted yield interest rates, and the change in overall banking regulations set forth in the nonbreaching portions of FIRREA, is Fidelity's October 1988 business plan a useful guide with respect to the growth rates and profitability that Fidelity would have enjoyed if its contract with the Government had not been breached? 20. Given the fact that Fidelity's peers shrank between 1989 and 1991, was it

speculative for Dr. Kaplan to posit an annual growth rate of 8.25 percent for his nonbreach Fidelity during this same period of time? 21. Given the fact that Astoria, which always had excess tangible capital and was

never constrained by its regulatory capital position, engaged in limited growth between 1989 and 1992, was it speculative for Dr. Kaplan to posit an annual growth rate for his nonbreach Fidelity of 8.25 percent, a rate that far exceeded that of Astoria over this same period of time?

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22.

Given Dr. Kaplan's pronouncements that the nonbreach incremental wholesale

assets Fidelity would have obtained could have been composed of various types of ARM MBS, in numerous, loosely-defined, and at times, contradictory proportions, does Dr. Kaplan's methodology fail for lack of reasonable certainty? 23. Given Fidelity's actual experience before FIRREA, whereby it increased the size

of its wholesale portfolio, yet obtained a reduction in net interest margin, is Dr. Kaplan's assumed spread of 80 basis points speculative? 24. What effects on Fidelity's operations and the regulatory rating of Fidelity's capital

would have resulted from Fidelity's loss of over $34 million of non-contractual capital, which would have occurred irrespective of the breach, and did Dr. Kaplan's lost profits and wounded bank damage computations fail to take proper consideration of the effects of losing $34 million in non-contractual capital? 25. Given that Fidelity implemented a limited wholesale strategy in reaction to the

breach and in accordance with its capital restoration plan, would Fidelity have pursued a greatly expanded version of that strategy in a nonbreach setting, increasing wholesale assets by up to $737 million through 1994? 26. Are Winstar-related damages in almost the same amount as the amount of lost

contractual capital unforeseeable and speculative as a matter of law, given the discrepancies in value between an actual dollar (e.g., as presented in a damage claim) and a dollar of goodwill? 27. Given the magnitude and type of lost profits modeled by Dr. Kaplan, which are

based solely upon a wholesale strategy, do the lost profits claimed by Astoria fail the test of foreseeability, especially given that, at the time of contracting, Fidelity did not pursue a 15

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wholesale strategy, and, indeed, had no managerial or technical capacity to pursue such a strategy? 28. Are Dr. Kaplan's lost profits calculations for Fidelity speculative given his

modeling of only a portion of the whole bank's operations, especially since he only focused upon the thrift's wholesale investments, and even then only the subset that includes just shorterduration ARM MBS (disregarding Fidelity's longer-term, fixed-rate MBS and other investment instruments), and further given that Fidelity never pursued growth solely in that manner, either before or after the breach? 29. Given Dr. Kaplan's failure to offset his lost profits calculation by increased costs

that would have been borne by Fidelity if the contract had not been breached (e.g., increased employment and advertising costs), does his lost profits claim fail the test of reasonable certainty? 30. Given the legal requirements of causation, foreseeability, and reasonable certainty

for lost profits claims, are lost profits calculated after Astoria's acquisition of Fidelity too remote from the breach as a matter of law? 31. Could any contractual regulatory capital held by Fidelity in a nonbreach world

transfer to Astoria given the prohibition on such transfer in the Assistance Agreement, and the requirement of GAAP that all goodwill in connection with a purchase accounting acquisition be written off? 32. Given Astoria's stated need to deploy its capital in order to increase its earnings

ratios, would Astoria have acquired Fidelity in a non-purchase method acquisition in a nonbreach world? 16

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33.

Given Astoria's longstanding history of de-leveraging its balance sheet through

stock repurchases and dividends, would Astoria have placed any value upon, or utilized Fidelity's goodwill to increase its leverage, assuming such goodwill could be transferred to it in a nonbreach world? 34. Given Astoria's own limited profitability from its wholesale investments relative

to its wholesale fundings, where it enjoyed only a 38 basis point spread between 2001 and 2005, does Dr. Kaplan's methodology, which assumes a steady 80 basis point spread during this period, fail the legal requirement of reasonable certainty? 35. Given Astoria's sale of over $520 million of the wholesale assets it obtained from

Fidelity soon after the acquisition in the actual world, does Dr. Kaplan's modeling of $963 million in incremental assets held by Astoria during the same period render his lost profits methodology speculative as a matter of law? 36. Given that Dr. Kaplan posits a jump of over $226 million in incremental assets

between December 1994 and January 1995, explicable only as the result of Dr. Kaplan's use of differing modeling conventions, does his lost profits methodology fail the requirement of reasonable certainty? 37. Given Dr. Kaplan's statement that the foregone assets held by Astoria in his

nonbreach model could be anything Astoria wanted them to be, does Dr. Kaplan's methodology fail the requirement of reasonable certainty? 38. Does increased leverage for a bank result, on average, in steady and certain

profitability, as modeled by Dr. Kaplan?

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39.

Given that Fidelity's large portfolio of poor commercial and development loans

would have existed irrespective of the breach, and given the uncontroverted testimony of OTS regulators concerning Fidelity's likely composite MACRO rating as "4" or worse irrespective of the breach, would Fidelity have been charged OTS examination and Federal Deposit Insurance Corporation ("FDIC") insurance fees in amounts similar to the fees Fidelity paid in the actual world? 40. Given that insurance premiums were not risk-based at the time of the contract,

was it foreseeable that, if the contract was breached, one consequence of that would be that the thrift might be faced with increased deposit insurance premiums? DEFENDANT'S PROPOSED FINDINGS OF FACT I. THE WITNESSES WHO TESTIFIED AT TRIAL Robert Albanese. Mr. Albanese is currently the Regional Director for the Northeast Region for the Office of Thrift Supervision ("OTS"); over the course of his career beginning in the early 1970s, Mr. Albanese has held various positions with the OTS, its predecessor, the Federal Home Loan Bank Board ("FHLBB"), and the Federal Home Loan Bank of New York ("FHLB-NY"). Tr. 4113:15-4115:10 (Albanese). Mr. Albanese was Suburbia's and Fidelity's supervisory agent in the early 80s. Tr. 4116:2-12 (Albanese). Walter Amend. Mr. Amend has been a regulator with the FHLB-NY, and after FIRREA, with the OTS since 1972, and is currently an OTS field manager. Tr. 4224:5-4225:7 (Amend). Over the course of his career, he participated in examinations of Fidelity and Astoria, and also had supervisory responsibilities with respect to them. Tr. 4228:18-4230:5 (Amend).

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H. Brent Beesley. Mr. Beesley was the director of the Federal Savings and Loan Insurance Corporation ("FSLIC") from spring of 1981 to early 1983. Tr. 1142:3-13 (Beesley). Vito Caporusso. Mr. Caporusso was hired by Fidelity as an officer to head the bank's small consumer lending department in September 1986. Tr. 3845:18-19, 3846:19-21, 3847:15-19, 3890:23-3891:2 (Caporusso). Four or five years after he was hired, or around 1991 or 1992, he became a senior vice president responsible for all credit lending. Tr. 3893:11-13 (Caporusso). Dr. Andrew Carron. Dr. Carron was qualified as an expert in the following subject matters: Financial economics, thrift industry structure and performance, mortgage and capital markets and products, thrift industry asset and liability management, economic damages and Government policy toward and regulation of the thrift industry. Tr. 5653:22-5654:3, 5656:11-12 (Carron).3 Henry Drewitz. Mr. Drewitz was Astoria's president starting in 1974, DX 3491 at 22:19-22 (Drewitz), and its chairman of the board starting in 1975, positions he held until April 1989. DX 3491 at 23:7- 24:1. (Drewitz). Mr. Drewitz remained on Astoria's board as a director until May 1997. Id. George Engelke. Mr. Engelke was Astoria's president, chief executive officer, and chairman of the board of directors of both Astoria and its holding company, Astoria Financial Corporation ("AFC"), Tr. 4336:23-4337:3 (Engelke), and an officer of Astoria from June of DX 1147 is Dr. Carron's initial expert report, Tr. 5658:11-17 (Carron), and DX 3453 is Dr. Carron's supplemental expert report, Tr. 5659:11-15 (Carron). DX 6001 summarizes Dr. Carron's opinions with respect to Dr. Kaplan's lost profits model, restitution award, reliance damages, and wounded bank damages, and why Astoria was not harmed by the breach. Tr. 5660:11-5663:1 (Carron). 19
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1971, Tr. 4337:8-21 (Engelke), and was trained as a certified public accountant. Tr. 4338:7-11 (Engelke). Peter Finn. Mr. Finn was a vice president of Astoria, and, at the time of Astoria's acquisition of Fidelity, was in charge of mergers and acquisitions at Astoria. Tr. 3984:13-3985:7 (Finn). He did the due diligence review of Fidelity's assets, becoming familiar with Fidelity's condition and history for the period of the last few years prior to its acquisition by Astoria. Tr. 3986:4-3988:9 (Finn). He was also responsible for managing Astoria's relationship with the OTS with respect to safety and soundness examinations. Tr. 3985:8-16 (Finn). Carlos Fiol. Mr. Fiol