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

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

DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW

Respectfully submitted, MICHAEL F. HERTZ Deputy Assistant Attorney General JEANNE E. DAVIDSON Acting 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

March 15, 2007

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TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 DEFENDANT'S CONTENTIONS OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. HISTORY OF THRIFT RESOLUTION OPTIONS AND LIQUIDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 FIDELITY'S ACQUISITION OF DOLLAR FEDERAL . . . . . . . . . . . . . . . . . . . . . . . . . 9 SUBURBIA FACED INTEREST RATE SPREAD PROBLEMS . . . . . . . . . . . . . . . . . 10 THE BENEFITS OF THE FIDELITY AND SUBURBIA MERGER . . . . . . . . . . . . . . 16 REGULATORY ASSESSMENT OF THE PROPOSED MERGER . . . . . . . . . . . . . . . 18 FIDELITY MERGES WITH SUBURBIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 FIDELITY INVESTED IN RISKY ASSETS THAT RESULTED IN SIGNIFICANT LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. Fidelity Sold Suburbia Assets And Invested In Risky Commercial Real Estate Development Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Regulators Warned Fidelity About Its High Concentrations Of Condominium And Cooperative Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 By 1986 Fidelity Had One-Fourth Of Its Assets In Highly Risky Commercial Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Fidelity's Concentrations Of Commercial Loans Began Collapsing In 1987 And, Facing Catastrophic Losses, Fidelity Belatedly Resolved To Exit That Risky Arena . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

II. III. IV. V. VI. VII.

B.

C.

D.

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E.

Given The Condition Of Its Assets, Fidelity Faced Growth Restrictions, Increased Examination Assessment Fees, and Increased Deposit Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Given Its Collapsing Loans And The Time Constraints These Imposed On Management, Fidelity Projects Minimal Growth In Its Budget For 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Fidelity's Problems Continued Into 1988 And In Late 1988 Fidelity Prepared A Three-Year Business Plan That Was Based On Unrealistic Assumptions Concerning Its Loan Losses And The Condition Of The General Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Fidelity Planed To Sell Its Freddie Mac Stock For Capital Gains Due To A Planned Reduction To Realize Profits And A Correction In The Price Of The Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 By The Fall Of 1988, Fidelity Recognized The Numerous Proposals Being Considered To Ensure That Thrifts Were Adequately Capitalized . . . . . 39 During 1989 Fidelity's Classified Assets Increased In Size and Severity . . . . . 40

F.

G.

H.

I.

J. VIII.

FIRREA WAS ENACTED AND FIDELITY FELL OUT OF CAPITAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 A. The Initial FIRREA Legislation Is Proposed And Amendments Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 The Final FIRREA Bill Is Passed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

B. IX.

FIDELITY'S CAPITAL PLAN PROJECTED A CONTINUATION OF THE SAME BUSINESS PLAN IT HAD FOLLOWED SINCE 1987 . . . . . . . . . . . . . . 44 A. Fidelity's Capital Plan Was A Continuation Of What The Thrift Had Been Doing Since 1987 As A Result Of Its Disastrous Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Fidelity's High Level Of Classified Assets Continued Through 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

B.

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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 . . . . . . . . . . . . . . . . . . . . . . . . . 50 Fidelity's Bad Loans Were Reduced Only Slightly In 1992 . . . . . . . . . . . . . . . . 51

D. X.

FIDELITY UNDERWENT A SUCCESSFUL CONVERSION, REGAINED CAPITAL COMPLIANCE, AND WAS BOUGHT BY ASTORIA FOR CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ASTORIA, LIKE FIDELITY, CONVERTED TO A STOCK INSTITUTION IN 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 A. B. C. Pre-FIRREA Astoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The Real Estate Recession In The Early 1990s Affected Astoria . . . . . . . . . . . . 55 Astoria Converted In 1993 For Reasons Wholly Apart From A Need To Meet Regulatory Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . 56

XI.

XII. XIII.

POST-CONVERSION FIDELITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 FIDELITY AND ASTORIA AGREED TO MERGE IN A PURCHASE ACCOUNTING MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

DEFENDANT'S CONTENTIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 I. ASTORIA'S RELIANCE DAMAGES CLAIM IS FORECLOSED BY BINDING PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 A. B. C. D. An Overview Of Astoria's Reliance Damages Claim . . . . . . . . . . . . . . . . . . . . . 64 The Legal Standards For Proving Reliance Damages . . . . . . . . . . . . . . . . . . . . . 65 Astoria Has Failed To Identify Any "Cost" Incurred By Fidelity . . . . . . . . . . . . 67 Dr. Kaplan Ignores The Significant Benefits That Fidelity And Astoria Received From Suburbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 1. Astoria Improperly Ignores Economic Benefits That Fidelity And Astoria Received At The Time Of The Breach . . . . . . . . . . . . . . . . 71

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2.

Astoria Errs By Ignoring Substantial Direct Benefits Attributable To Suburbia Before The Breach . . . . . . . . . . . . . . . . . . . . . 73

II.

ASTORIA'S RESTITUTION CLAIMS ARE DIRECTLY FORECLOSED BY BINDING PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 A. B. An Overview Of Astoria's Restitution Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Functionally Identical Restitution Claims Already Have Been Rejected By The Court of Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Dr. Kaplan Incorrectly Assumes That The FSLIC Would Have Liquidated Suburbia If Fidelity Had Not Acquired It . . . . . . . . . . . . . . . . . . . . . 80 Fidelity Lacked The Economic Capacity To Provide A Benefit In The Amount Claimed By Astoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Any Award Of Restitution Is Inappropriate In This Case, But Astoria Also Ignores Easily Identifiable, Offsetting Benefits . . . . . . . . . . . . 82

C.

D.

E.

III.

ASTORIA'S EXPECTANCY CLAIMS ARE UNSUPPORTED . . . . . . . . . . . . . . . . . . 83 A. Astoria's Lost Profits Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 1. 2. B. Fidelity "Lost Profits" From 1989 To 1994 . . . . . . . . . . . . . . . . . . . . . . . 84 Astoria "Lost Profits" From 1995 to 2014 . . . . . . . . . . . . . . . . . . . . . . . . 86

Astoria's Hypothetical "Lost Profits" Were Not An Immediate And Proximate Result Of The Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Astoria's Hypothetical Lost Profits Were Not Reasonably Foreseeable . . . . . . . 95 Astoria's Hypothetical "Lost Profits" Are Not Reasonably Certain . . . . . . . . . . . 97 1. Fidelity's 1989-94 Lost Profits Are Speculative . . . . . . . . . . . . . . . . . . . 99 a. b. 2. Dr. Kaplan's Growth Rate Assumption Is Unsupported . . . . . . 100 Dr. Kaplan's Spread Assumption Is Unsupported . . . . . . . . . . . 102

C. D.

Astoria's 1995-2014 Lost Profits Are Speculative . . . . . . . . . . . . . . . . . 104

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3.

Dr. Kaplan's "Lost Profits" Calculations Erroneously Fail To Adjust For A Non-Breach World . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Astoria's Attempts To Distinguish Prior Cases Are Unavailing . . . . . . 107

4. G.

Astoria's Claim Of An Alleged Forced Sale Of Freddie Mac Stock Is Without Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 1. 2. An Overview of Astoria's Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Astoria's Claim Of Forced Freddie Mac Stock Claim Is Without Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

H.

Astoria's Claims For Allegedly Excessive FDIC And OTS Assessments Are Speculative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 1. Astoria Is Not Entitled To An Award Based Upon Speculation About What Fidelity's OTS Examination Assessments Might Have Been Absent The Phase-Out Of Goodwill . . . . . . . . . . . . . 115 Astoria Is Not Entitled To An Award Based Upon Speculation About What Fidelity's Deposit Insurance Premiums Might Have Been Absent The Phase-Out Of Goodwill . . . . . . . . . . . . . 116

2.

XX.

PLAINTIFF'S TAKINGS CLAIM IS BARRED AS A MATTER OF LAW AND NO EXPERT TESTIMONY CAN BE GIVEN CONCERNING THE VALUATION OF ITS TAKINGS CLAIM AT TRIAL . . . . . . . . . . . . . . . . . . . . . . . . 118

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TABLE OF AUTHORITIES FEDERAL CASES

A.G. Route Seen P'ship v. United States, 57 Fed. Cl. 521 (2003) .............................................................................................................. 121 Admiral Fin. Corp. v. United States, 378 F.3d 1336 (Fed. Cir. 2004) ......................................................................................... 120, 121 Albert & Son v. Armstrong Rubber Co., 178 F.2d 182 (2d Cir. 1949) ........................................................................................................ 66 American Fed. Bank, F.S.B. v. United States, 62 Fed. Cl. 185 (2004) ................................................................................................................ 98 Ariadne Fin. Servs., Pty. Ltd. v. United States, 133 F.3d 874 (Fed. Cir. 1998) ..................................................................................................... 90 Aurigemma v. Arco Petroleum Prods. Co., 734 F. Supp. 1025 (D. Conn. 1990) ............................................................................................ 82 Bailey v. United States, 341 F.3d 1342 (Fed. Cir. 2003) .......................................................................................... 120, 121 Bank United of Texas, F.S.B. v. United States, 50 Fed. Cl. 645 (2001), rev'd in part, 80 Fed. Appx. 663, 2003 WL 22177282 (Fed. Cir. 2003), cert. denied, 543 U.S. 916 (2004) ..................................................................................... 98 Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed. Cir. 2001) ................................................................................................... 84 Bluebonnet Sav. Bank, F.S.B. v. United States, 339 F.3d 1341 (Fed. Cir. 2003) ............................................................................................ passim Bohac v. Dep't of Agriculture, 239 F.3d 1334 (Fed. Cir. 2001) ................................................................................................... 95 California Fed. Bank, FSB v. United States, 43 Fed. Cl. 445 (1999), rev'd on other grounds, 245 F.3d 1342 (Fed. Cir. 2001 .............................................................................................. 23, 96

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California Fed. Bank, F.S.B. v. United States, 54 Fed. Cl. 704 (2002), aff'd, 395 F.3d 1263 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 344 (2005) ....................................................................................................................... 98, 99 California Fed. Bank, F.S.B. v. United States, 245 F.3d 1342 (Fed. Cir. 2001) .................................................................................................... 78 California Fed. Bank, F.S.B. v. United States, 395 F.3d 1263 (Fed. Cir. 2005) ................................................................................................... 84 Carley Capital Group v. City of Newport News, 709 F. Supp. 1387 (E.D. Va. 1989) ............................................................................................ 66 Caroline Hunt Trust Estate v. United States, 65 Fed. Cl. 271 (2005) ................................................................................................................ 79 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) ........................................... 98 Castle v. United States, 301 F.3d 1328 (Fed. Cir. 2002) ............................................................................................ passim Chain Belt Co.v. United States, 115 F. Supp. 701 (Ct. Cl. 1953) ................................................................................................ 111 Citizens Fed. Bank v. United States, 52 Fed. Cl. 561 (2002) aff'd, 474 F.3d 1314 (Fed. Cir. 2007) .......................................................................................... 79 Citizens Fed. Bank v. United States, 474 F.3d 1314, 2007 WL 162820 (Fed. Cir. 2007) ............................................................... 88, 89 Citizens Fin. Serv., F.S.B. v. United States, 64 Fed. Cl. 498 (2005), aff'd, 170 Fed.Appx. 129, 2006 WL 618792 (Fed. Cir. 2006) (aff'd pursuant to Fed. Cir. Rule 36) .......................................................................................... 98 Columbia First Bank, F.S.B. v. United States, 60 Fed. Cl. 97 (2004) ........................................................................................................... passim

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Comm. Fed. Bank, F.S.B. v. United States, 59 Fed. Cl. 338 (2004), aff'd, 125 Fed. Appx. 1013 (Fed. Cir. 2005) (aff'd pursuant to Fed. Cir. Rule 36) ........................................................ passim Danzig v. AEC Corp., 224 F.3d 1333 (Fed. Cir. 2000) ................................................................................................... 90 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) ............................................................................................ passim Fed. Deposit Ins. Corp. v. United States, 342 F.3d 1313 (Fed. Cir. 2003) ................................................................................................. 120 Fifth Third Bank v. United States, 55 Fed. Cl. 223 (2003) ......................................................................................................... passim Finley v. Marathon Oil, 75 F.3d 1225 (7th Cir. 1996) ...................................................................................................... 76 First Fed. Lincoln Bank v. United States, 73 Fed. Cl. 633 (2006), appeals docketed No.07-5044 (Fed. Cir. 2007) ............................. passim First Fed. Savings Bank of Hegewisch v. United States, 57 Fed. Cl. 316 (2003) .............................................................................................................. 121 Franklin Fed. v. United States, 55 Fed. Cl. 108 (2003) ......................................................................................................... passim Frazier v. United States, 67 Fed. Cl. 56 (2005) .................................................................................................................. 90 Glendale Fed. Bank, F.S.B. v. United States, 43 Fed. Cl. 390 (1999) aff'd in part, vacated in part, & remanded, 239 F.3d 1374 (Fed. Cir. 2001) ............................................................................. 98 Glendale Fed. Bank, FSB v. United States, 54 Fed. Cl. 8 (2002) .................................................................................................................... 69 Glendale Fed. Bank F.S.B. v. United States, 378 F.3d 1308 (Fed. Cir. 2004) ............................................................................................ passim

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Globe Savings Bank, F.S.B. v. United States, 65 Fed. Cl. 330 (2005) aff'd in part, vacated in part, No. 06-5001, 189 Fed.Appx. 964, 2006 WL 2045776 (Fed. Cir. 2006). .......................................................... 98 Granite Mgmt. Corp. v. United States, 55 Fed. Cl. 164 (2003) ............................................................................................................... 121 Granite Mgmt. Corp. v. United States, 58 Fed. Cl. 766 (2003) .......................................................................................................... 67, 69 Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005) ................................................................................................... 78 Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155 (2006) ......................................................................................................... passim Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004) ............................................................................................. 74, 89 Herman Schwabe, Inc. v. United Shoe Mach. Corp., 297 F.2d 906 (2d Cir. 1962) ........................................................................................................ 97 Hughes Commc'n Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001) ......................................................................................... 112, 119 LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 101 (1999) .......................................................................................................... 67, 98 LaSalle Talman Bank, F.S.B. v. United States, 64 Fed. Cl. 90 (2005), aff'd, 462 F.3d 1331 (Fed. Cir. 2006) ............................................... 98, 99 LaSalle Talman Bank, F.S.B v. United States, 317 F.3d 1363 (Fed. Cir. 2003) ............................................................................................ passim LaVan v. United States, 382 F.3d 1340 (Fed. Cir. 2004) ............................................................................................ passim Landmark Land Co. v. United States, 46 Fed. Cl. 261 (2000), aff'd in part, rev'd in part, 256 F.3d 1365 (Fed. Cir. 2001) ................................................................................................... 22

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Landmark Land Co. v. United States, 256 F.3d 1365 (Fed. Cir. 2001) ............................................................................................ passim 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) ............................................................................................... 69, 79 Mobil Oil Exploration & Producing Southeast, Inc., 503 U.S. 604 (2000) .................................................................................................................... 82 Mola Dev. Corp. v. United States, 74 Fed. Cl. 528 (Fed. Cl. 2006) ................................................................................................ 121 Myerle v. United States, 33 Ct. Cl. 1 (1897) ....................................................................... passim N. Helex Co. v. United States, 225 Ct. Cl. 194, 634 F.2d 557 (1980) ....................................... 66 Nat'l. Australia Bank v. United States, 55 Fed. Cl. 782 (2003) .............................................................................................................. 121 Resolution Trust Corp. v. FSLIC, 25 F.3d 1493 (10th Cir. 1994) .................................................................................................... 43 Roseburg Lumber Co. v. Madigan, 978 F.2d 660 (Fed. Cir. 1992) ..................................................................................................... 97 Rumsfeld v. Applied Cos., 325 F.3d 1328 (Fed. Cir. 2003) ................................................................................................... 97 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) ................................................................................................. 97 San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557 (Fed. Cir. 1997) ................................................................................................... 97 S. 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), petition for cert. filed, 74 U.S.L.W. 3560 (U.S. Mar 21, 2006) (No. 05-1221) .............................................................. 98 Standard Fed. Bank v. United States, 62 Fed. Cl. 285 (2004) ......................................................................................................... passim -x-

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Suess v. United States, 52 Fed. Cl. 221 (2002) reconsideration denied, 54 Fed. Cl. 606 (2002) ..................................... 98 Sun Oil Co. v. United States, 215 Fed. Cl. 716, 572 F.2d 786 (1978) ...................................... 120 Svendborg v. United States, 131 Ct. Cl. 130 F. Supp. 363 (Ct. Cl. 1955) ............................................................................... 81 Trilogy Comm. v. Times Fiber Comm., 109 F.3d 739 (Fed. Cir. 1997) ..................................................................................................... 76 United States v. Winstar Corp., 518 U.S. 839 (1996) .................................................................................................................... 10 Wells Fargo Bank v. United States, 88 F.3d 1012 (Fed. Cir. 1996) .............................................................................................. passim Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005) ................................................................................................... 67

STATUTES 12 U.S.C. § 1464 (t)(9)(c) ............................................................................................................ 42 FDIC Improvement Act of 1991, 12 U. S. C.§ 1464 ................................................................... 54 Financial Institutions Reform, Recovery and Enforcement Act of 1989, 103 Stat. 183 (1989) ............................................................................ 3 Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 .................................................... 27

RULES & REGULATIONS 12 C.F.R. § 567.5(a)(1-2) ............................................................................................................ 42 OTS Thrift Bulletin 38-2 ............................................................................................................. 42 Procedural Order No. 2: Discovery Plan (Aug. 7, 1997), § V(A)(1-4) ........................................ 76 Regulatory Bulletin 3a-1 .............................................................................................................. 91 RCFC Rule 37c)(1) ...................................................................................................................... 76 -xi-

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MISCELLANEOUS 2 David B. Dobbs, Law of Remedies (2d ed. 1993) § 12.3(1), at 51-52 ........................................................................................................................ 66 3 David B. Dobbs, Law of Remedies (2d ed. 1993) § 12.3(2) ................................................................................................................................. 66, 72 5 Arthur Corbin. Corbin on Contracts, §1012 at 88 (1964) ......................................................... 95 Charles T. McCormick, Damages,§ 142, at 584 (1935) .............................................................. 66 John D. Calamari & Joseph M. Perillo, The Law of Contracts, § 14-9 (3d ed 1987) ...................................................................................................................... 65 Restatement (Second) of Contracts § 344(a) (1981) ................................................................... 82 Restatement (Second) of Contracts § (1) (1981) ......................................................................... 82 Restatement (Second) of Contracts § 344(b) ............................................................................... 65 Restatement (Second) of Contracts § 347 (1981) ....................................................................... 84 Restatement (Second) of Contracts § 347 cmt. b (1981) ............................................................. 89 Restatement (Second) of Contracts § 349(b) (1979) ................................................................... 65 Restatement (Second) of Contracts § 350 .................................................................................... 94 Restatement (Second) of Contracts § 351(2) .............................................................................. 95 Restatement (Second) of Contracts § 351, cmt.a ......................................................................... 95 Restatement (Second) of Contracts § 352 (1981) ....................................................................... 97 Restatement (Second) of Contracts § 371, cmt. a ........................................................................ 82 Restatement (Second) of Contracts § 384 (1), cmt. a .................................................................. 82

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

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

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

DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW INTRODUCTION 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. While Suburbia required and was receiving regulatory assistance in 1984, its health was expected to improve dramatically with a decrease from the high level of interest rates prevailing at that time. Fidelity's merger with Suburbia was voluntarily undertaken, as both thrifts anticipated enormous benefits from the transaction. Fidelity paid nothing to acquire Suburbia and obtained millions in assistance from the Federal Savings and Loan Insurance Corporation ("FSLIC"), tens of millions 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 contract entered into between Fidelity and the FSLIC in connection with the merger, Fidelity was -1-

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permitted to utilize the unamortized balance of the goodwill created at the time of the acquisition toward its regulatory capital levels. After acquiring Suburbia, however, Fidelity squandered the opportunities given to it with the Suburbia acquisition. Fidelity pursued a deliberate policy, begun with its earlier acquisition of another thrift, Dollar Federal Savings & Loan Association ("Dollar Federal"), of making highrisk commercial loans, concentrating its loans with just a handful of large developers. In pursuit of its high-risk loan policy, Fidelity sold off a large amount of the assets it acquired from Suburbia, traditional one to four family loans, 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. As late as April 1987, Fidelity continued making large-concentration loans, including, for example, a $24.5 million loan to Glick Development, which defaulted on its loan, requiring foreclosure and substantial losses by Fidelity. Another developer. Mr. Gerald Guterman, improperly provided Fidelity's two top officers and directors, Thomas D. Lovely and Bruno Greco with insider deals on condominium units. Mr. Guterman later defaulted on nearly $30 million in loans, requiring foreclosure, and more losses, by Fidelity. Years later when these insider deals were discovered by regulators, Messrs. Lovely and Greco were banned from the banking industry for life. 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 nonearning assets. Fidelity's decision to pursue concentrations in high-risk loans had more than -2-

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backfired; it had placed the institution in a position where regulators felt that, unless prompt action was taken, 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, (which devoted nearly one hundred pages to Fidelity's criticized assets), the FHLBB assigned Fidelity the second lowest rating a thrift can receive, a "4," just one rating 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 had a high rating for its "capital," possessing the entire unamortized balance of goodwill created with the Suburbia acquisition. Thus, before FIRREA and wholly apart from 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, but they, too, soon discovered the severity of Fidelity's asset problems. After a period of "pulling teeth," these new officers finally persuaded Messrs. Lovely and Greco to cease making additional high-risk loans. Unfortunately for Fidelity, however, things only got worse. Between October 1987 and November 1989, Fidelity's classified loans increase by another 20 percent, as the economy in New York continued to worsen. 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.

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In August 1989, FIRREA was passed by Congress, an act that breached plaintiff's contract with the Government. Plaintiff claims it was injured by the breach because it lost the opportunity to grow the thrift, was required to sell certain securities (beginning in early 1989), and was required to pay higher examination assessments and insurance premiums. Yet in presenting its contentions of fact and law, plaintiff completely ignores -- literally -- the findings of the FHLBB's 1987 report of examination. These findings with respect to Fidelity's asset quality, and the continuation of these problems through the OTS's 1993 examination of the thrift, are fatal to plaintiff's "lost profits" claims. Given the problems uncovered in the 1987 examination, which resulted in a "4" rating at a time when the thrift had a high capital rating -- and given the continuation and exacerbation of those problems as the New York and national economies fell into recession through the end of 1991 -- Fidelity would have been a "4" rated institution regardless of the breach. As such, pursuant to a thrift regulation 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 toward its regulatory capital levels. Furthermore, OTS guidelines specifically prohibited "4" rated institutions from engaging in risk-controlled arbitrage transactions, the very type of growth Dr. Kaplan purports to have modeled for the "but-for Fidelity." Moreover, given its "4" rating prior to FIRREA and the certain continuation of that rating into the post-FIRREA period, even in a non-breach world, Fidelity would have been subject to the same level of examination assessments and insurance fees, and it would have presented the same risks to the insurance fund and same interest rate risk problems that concerned regulators.

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During 1993, Fidelity converted from a mutual to stock institution, raising $57 million in the process. Moreover, by 1993, Fidelity's asset quality improved, in large part due through the write-offs of large portions of its loans. Accordingly, within days of the thrift's conversion, (an action Fidelity's expert admits it would have taken at about the same time irrespective of the breach), restrictions on its growth were lifted by regulators and it was free to grow as it saw fit. Less than two years after it converted, Fidelity agreed to be purchased by Astoria, at great profit to Fidelity's shareholders and management. Astoria is an institution with a long history of being over-capitalized. Following Astoria's acquisition of Fidelity, it returned billions of capital to its shareholders through stock repurchases and dividends. These facts demonstrate that Astoria would have had no use for the hypothetical leverage that additional goodwill could have provided it -- assuming it could have been transferred from Fidelity to Astoria, which it could not, both as a matter of its contract with the FSLIC and generally accepted accounting principles. Thus, any purported lost profits damages calculated after Fidelity's conversion or Astoria's acquisition of Fidelity fail the tests of causation. Fidelity faced no regulatory restriction on its growth after its conversion, and Astoria certainly never had any restriction on its growth due to the lack of leverage capacity based upon additional goodwill. 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 bases for any lost profits award. For example, plaintiff's expert, Dr. Kaplan, calculates damages beginning in January 1989, almost a year before FIRREA's implementing regulations took effect. Furthermore, he proposes a wholly speculative but-for thrift whose growth rates and rates of return do not correspond to the actual whole bank's assets or liabilities. Nor does the -5-

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type of growth proposed by Dr. Kaplan correspond to the thrift's business plans, which indicated the type of assets the thrift would have pursued but for the downturn in the economy and the thrift's preoccupation with its huge portfolio of failing loans. Instead, Dr. Kaplan purports to model, for the period 1989 through 1994, a portfolio of a vaguely defined class of mortgagebacked securities ("MBS"), funded by similarly vaguely identified wholesale liabilities. Even here, however, Dr. Kaplan hypothesizes holdings of MBS that disregard the full array of MBS actually held by Fidelity. For the period 1995 through 2014, Dr. Kaplan makes no representation concerning the assets or liabilities he purports to model, making his model wholly speculative. Indeed, Dr. Kaplan's modeling of lost profits has been rejected before by this Court in another Winstar-related case -- where Dr. Kaplan also projected hypothetical leveraging of goodwill into purchases of MBS -- precisely because he proposed a but-for thrift that deviated from the actual thrift's performance and plans and because, as here, his damage claim amounted to nothing more than an unsupported assumption that increased leverage capacity results, necessarily, in profits. In addition to its lost profits claims, Fidelity asserts three other theories of damages: restitution, calculated as costs of liquidation purportedly avoided by the Government; reliance calculated in relation to the net liabilities assumed by Fidelity at the time of its acquisition of Suburbia; and takings damages. All three theories are precluded by repeated binding decisions of the Court of Appeals for the Federal Circuit.

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DEFENDANT'S CONTENTIONS OF FACTS I. HISTORY OF THRIFT RESOLUTION OPTIONS AND LIQUIDATIONS 1. Traditionally, the FSLIC used three primary mechanisms to prevent the default of

institutions: the purchase of problem assets; assisted mergers; and capital contributions from the Government. DX 195 at FGC 016 1248. 2. By 1981, however, the FSLIC understood that its capital reserves were not

adequate to deal with the magnitude of problem thrifts with these methods alone. Accordingly, it introduced new alternatives to avoid the default of thrifts: various forms of mergers, including interstate and inter-industry mergers and the use of income capital certificates. Id. 3. In March 24, 1983, the FHLBB and FSLIC issued a memorandum (revising a

similar memorandum issued in 1982) to facilitate the most efficient resolution of supervisory cases. DX 312 at D3-0006238. Those guidelines, which remained in place until 1986, set forth the mechanisms by which the FSLIC and FHLBB intended to resolve thrifts whose problems required regulatory supervision. The resolution solutions were arranged in order of desirability. The preferred method of resolving thrifts was the introduction of new capital into the thrift from outside the Government. Following that were methods involving various forms of mergers, whereby weak institutions would merge into stronger institutions; the introduction of new capital assistance from the Government; mergers involving Government assistance; and inclusion in the so-called Phoenix program, where several troubled thrifts were combined into a new thrift. The last option considered to resolve a troubled thrift was a liquidation. DX 312 at D3-0006238-42.1/
1

The revised guidelines issued in 1986 maintained the basic preference order for resolving troubled institutions, again placing liquidation as the least preferable method for resolving a supervisory case. PX 370 at 1-6. -7-

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4.

In the early 1980s (and for all relevant time periods with respect to the

FSLIC's resolution of Suburbia), it was well known that FSLIC had very little capital available to liquidate thrifts. [Eggleston Tr. 181]. For example, in 1983, FSLIC noted that it had 53 cases requiring supervisory resolution with total assets of $17.6 billion, while it had a primary reserve of only $5.7 billion. DX 195 at FGC 016 1248, 1308.2/ Given its outstanding assistance commitments at that time, and given the continuing decline of the health of a large number of thrifts, the FSLIC was effectively near-insolvent. DX 195 at FGC016 1308. Government policy in the early 1980s operated on the assumption that market interest rates would decline and alleviate, at least partially, the problems of the thrift industry. DX 1147 at 25 [Carron]. 5. In fact, in 1983, at a time when Suburbia had $700 million in assets, the FSLIC

liquidated only six small institutions in the entire United States, whose assets cumulatively totaled $295 million, with the average asset size totaling only $49 million. DX 195 at FGC016 1250. None of these institutions were located in the Northeast United States, and the problems that predominated were asset quality problems (e.g., loans that were not being repaid), not interest rate differential or interest "spread" problems.3/ Id.; DX 197 at FGC016 1353. 6. In 1984, for the entire United States, the FSLIC liquidated only nine institutions,

with combined deposits of $829 million, with the size of the average thrift totaling $92 million. DX 197 at FGC016 1356. As the FSLIC noted, "severe asset quality problems, which are much

In a paper published in February 1992, Dr. Carron, one of the Government's experts in this case, predicted that the liquidation costs of the thrift industry would be $44.1 billion, whereas assistance costs would be just $6.14 billion. DX 1147 at 26. "Spread" problems were caused by the high price of short-duration funding sources (e.g., deposits), relative to the low returns on long-term assets (e.g., fixed rate mortgage loans). -83

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more complex and expensive to resolve [than thrifts with spread problems]" predominated as the FSLIC undertook resolution actions in 1984. DX 197 at FGC016 1353. None of the thrifts that were liquidated were located in the Northeast United States. DX 197 at FGC016 1356. 7. In 1985, for the entire United States, the FSLIC liquidated only ten institutions,

with the average institution liquidated holding $189 million in deposits. PX 375 at 27. None of these institutions were located in the Northeast. Id. 8. Indeed, in the ten years from 1980 to 1989, there were no savings and loan

associations in the states of Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont that were disposed of via "payoffs" or liquidations. DX 3063 at 1-4. 9. Where the FSLIC did liquidate thrifts during this time period, it did so primarily

where a thrift had bad assets, rather than a mere interest spread problem, which affected the majority of thrifts in the United States at that time. II. FIDELITY'S ACQUISITION OF DOLLAR FEDERAL 10. Fidelity acquired Dollar Federal Savings & Loan Association ("Dollar Federal")

on June 30, 1982. The acquisition of Dollar Federal consisted of a takeover of assets and the assumption of existing liabilities outstanding at the date of acquisition. Fidelity paid no cash or other consideration in connection with the acquisition. PX 1283 at AST060064. 11. Fidelity acquired approximately $105 million in assets from Dollar Federal; it

increased its branches from 4 to 8; and it increased its deposits by almost $70 million, to a total of $273.4 million. PX 1283 at AST060064; PX 985 at AST064173.

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12.

Fidelity accounted for the acquisition of Dollar Federal as a purchase. The

goodwill, or excess cost over fair market value of the net assets acquired was $25.8 million. This amount was being amortized to expense over thirty years using the straight-line method. PX 1283 at AST060064. Regulations existing at the time of the Dollar acquisition permitted Fidelity to utilize this goodwill toward its regulatory capital computations. United States v. Winstar Corp., 518 U.S. 839, 850 (1996). 13. Fidelity recorded $28 million in discounts on the mortgage loans acquired from

Dollar Federal. These discounts were to be accreted into income over ten years using the sum-ofthe-months digit method. PX 1283 at AST060064. Accordingly, when Fidelity undertook its acquisition of Dollar, it understood that -- at the latest -- ten years after its acquisition, or by 1992, it would face as an expense the continued amortization of the Dollar goodwill without any corresponding accretion of income from the loan discounts to offset that expense. 14. With the implementation of FIRREA's capital rules, Fidelity was required to

phase out the remaining Dollar goodwill on its books as a component of regulatory capital, or approximately $19.3 million by the end of 1994. DX 79 at PAA012 1965. At that time, the Dollar goodwill, for which plaintiff has no contractual claim, constituted 13.5 percent of the total goodwill set forth on Fidelity's books. PX 1314 at Ex. 15. III. SUBURBIA FACED INTEREST RATE SPREAD PROBLEMS 15. Like Fidelity, Suburbia was a Long Island thrift, but, with almost $700 million in

assets, was substantially larger than Fidelity in terms of asset size, deposits and branches. DX 3148 at PAA090 0102.

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16.

Suburbia was not a thrift with bad assets. As plaintiff admits: "Suburbia's

asset portfolio was mainly thirty-year single family mortgage loans." Pl. Mem. (Feb. 15, 2007) at 11. Suburbia had been profitable until around 1979 or 1980, when a negative trend in operating profitability developed due to the high cost of funds, or short term liabilities, relative to the low interest income received on its long-term loans, or assets. This caused an interest spread problem. As a result, Suburbia's net worth had gradually declined since 1982. Other than its spread problems, Suburbia had no other problem that significantly affected its performance. [Kane Tr. at 15-19, 24-25]. 4/ 17. Suburbia had operated relatively free of supervisory concern prior to the Mr. Kane,

precipitous upturn in market interest rates in 1979-1980. PX 235 at AA 0000198.

Suburbia's CEO and chairman of its board, testified that, if interest rates had come down in the early 1980s, Suburbia would no longer have faced an operating deficit and would have started to return to favorable operating results. [Kane Tr. at 22]. 18. Lower and stable interest rates in 1983 provided a more favorable operating

environment for the savings and loan industry. Approximately two-thirds of District II FSLICinsured institutions operated profitably in the second half of 1983 and the first quarter of 1984, compared to 25% or less in late 1981 to early 1982. The proportion of institutions reporting profits increased during the second quarter of 1984. PX 235 at AA 0000196. 19. Despite these improved operating prospects, the Federal Home Loan Bank of

New York ("FHLB of NY") found that many institutions remained vulnerable to fluctuations in short-term interest rates. This exposure was expected to continue until institutions were able to
4

All cites to transcripts herein are in reference to depositions taken in this case. -11-

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add additional adjustable rate assets to their portfolios and reduce the disparity between rate sensitive assets and liabilities. 20. Suburbia was confident that, given a stabilized economic environment, a

restructuring of the asset side of its balance sheet and an enactment of a prudent but aggressive capital acquisition program, it could return to profitability within one and a half to two years. DX 3126. Indeed, Suburbia projected in its Business Plan dated January 1, 1984, that Suburbia would again have positive net income by 1985. PX 148 at OAA005 2781. 21. In short, Suburbia's problem "wasn't a credit problem," but was an "interest rate"

problem. Accordingly, regulators did not feel that there was a crisis with respect to Suburbia but they realized some FSLIC assistance would be needed for the thrift. [Spaid Tr. at 7, 74]; PX 237 at AA 0000177; DX 3113 at OAA005 2534. 22. As of July 1982, the FSLIC was reviewing a proposal to consolidate four Long

Island associations, including Suburbia, with assistance. At the same time, the supervisory agent planned to continue to search for merger partners for Suburbia. The FHLBB stated, however, that if an acceptable bid was not received, or if the FSLIC did not approve the consolidation proposal, Suburbia would likely be merged into the Suffolk County FS&LA, the Long Island "Phoenix." DX 3113 at OAA005 2533-34; DX 3114 at OAA005 2525. 23. By the end of July 1982, Suburbia had submitted a proposal, along with three

other Long Island based associations, for a FSLIC-assisted consolidation. PX 44 at AST0301912; DX 3114 at OAA005 2525.

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24.

In December 1982, the FSLIC held a bidder's conference to solicit proposals for

an assisted acquisition of Suburbia. PX 235. Bidders' packages for Suburbia were distributed to 25 potential acquirers. PX 235 at AA 0000198; PX 102 at OAA005 0463; PX 237 at AA 0000178. 25. Four thrift institutions from New York submitted bids to acquire Suburbia.

PX 237 at AA 0000178. The present value cost estimate of the lowest cost bidder at that time, Anchor Savings Bank, was $17.9 million. PX 237 at AA 0000178. The present value cost estimate of the proposal of the second lowest bidder at that time, Albany Savings Bank, was $20.6 million. PX 237 at AA 0000178. 26. After the bidder's conference, new legislation became effective in early 1983 (the

Garn-St Germain Net Worth Capital Assistance Program) providing FSLIC with additional mechanisms to assist thrifts without the expenditure of FSLIC's limited cash resources. Following from the new legislation, Suburbia applied for and began receiving millions in capital in the form of promissory notes from the FSLIC. In return, Suburbia issued Net Worth Certificates ("NWCs") to the FSLIC. PX 237. These net worth certificates were issued during 1983 and continued throughout 1984 pursuant to the FSLIC's ready grant of NWCs in response to Suburbia's applications. Through the NWC program, the FSLIC provide Suburbia with $9.2 million in regulatory capital during 1983 and 1984. Given this new assistance from the FSLIC, Suburbia chose to continue operating independently, thus rendering a merger with another thrift in 1982 unnecessary. As a result, efforts to merge the association by the FSLIC were discontinued. PX 235 at AA 0000198.

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27.

Suburbia, however, continued to search for voluntary merger partners on its own.

Thus, three months after the bidders conference in December 1982, Suburbia was exploring a voluntary merger with another institution, Heritage Federal Savings & Loan Association ("Heritage"), which was eventually unsuccessful. PX 102 at OAA005 0462; DX 518 at PAA050 0940; PX 125 at OAA005 2603. 28. At the end of 1983, Suburbia was in discussion with another entity, Coronet

Properties Company "Coronet"), concerning a proposed conversion of Suburbia to a stock form and a purchase by Coronet Properties. DX 517 at PAA050 1243. After discussions, however, Chairman Kane broke off further discussions with Coronet. DX 119 at PAA050 1277. 29. Suburbia continued to seek out potential merger partners. DX 521 at

PAA050 0211. Indeed, as Mr. Lovely admitted, at the time of Suburbia's merger with Fidelity, "West Coast and other institutions [] were interested in acquiring Suburbia." [Lovely Tr. at 14]. 30. In April 1984, Fidelity resolved to pursue a merger with Suburbia under the

FSLIC's Voluntary Assisted Merger Program ("VAMP") and Suburbia approached regulators concerning the possibility of a voluntary merger with Fidelity. PX 164 at AST110570. Mr. Kane testified that he did not fear that Suburbia would be liquidated if it did not merge with Fidelity. [Kane Tr. at 40]. Indeed, Mr. Kane never seriously thought that Suburbia would be liquidated. Id. Instead, Mr. Kane explained, "maybe we would have an unfriendly merger set up by the efforts of the FSLIC, [and] have no control over any of our destinies." [Kane Tr. at 98]. Indeed, since Suburbia's problems were primarily due to an interest rate mismatch, Mr. Kane explained, once interest rates declined, Suburbia's operating results were expected to turn positive. [Kane Tr. at 24-25]. -14-

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31.

Mr. Kane viewed a merger with Fidelity as a "friendly merger," in which "we

were going to have some of our directors on a combined board" and "all our management would stay in place." Id. Furthermore, Mr. Lovely was "very good friends" with Suburbia's Bob Miller. [Lovely Tr. at 13-14]. 32. Mr. Vigna believed that Suburbia would be eligible for the FSLIC's VAMP, and

he recommended a maximum assistance allocation of $16 million or 2.5% Suburbia's assets, which he felt would be sufficient to interest one or more potential acquirers and reasonably assure the resultant institution's long-term viability. PX 169 at OAA005 2713-14. Given the FHLBB's recommendation, Fidelity and Suburbia submitted a VAMP proposal in May 1984. PX 186 at OAA005 1793; PX 235 at AA 0000198. 33. After further consideration, the FHLBB decided that Fidelity could not acquire

Suburbia under the VAMP because, by regulation, where certain FSLIC assistance (e.g., permission to amortize the value of any intangible assets resulting from the merger over 30 years) would be given in connection with the acquisition, the VAMP was not permitted. PX 237 at AA0000178-79; DX 406A at WOL315 0368-69. 34. In July 1984, Fidelity submitted another proposal to merge with Suburbia.

PX 185 at OAA005 0820. This second proposal was based upon the earlier VAMP proposal and the related business plan which had been reviewed previously by the FHLBB. Id.; PX 186 at OAA005 1793; PX 193 at AST069476. 35. In connection with this second proposal, Fidelity requested the same amount of

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36.

The Agreement of Merger between Fidelity and Suburbia was signed and dated

August 24, 1984. PX 204 at AST068956, AST068968. 37. No cash or other consideration was paid by Fidelity in connection with its

acquisition of Suburbia. PX 1283 at AST060063. 38. According to Fidelity's July 5, 1985 Report of Examination, Fidelity's total

regulatory net worth as of September 30, 1984 was $22.429 million. PX 335 at AST002387. It had less than $23 million in book capital. Id. On a mark-to-market basis, there can be little doubt that its value was far lower than $22 million. DX 1147 at 27; [Carron]. Thus, Fidelity lacked the capacity to relieve the FSLIC of the burden of protecting insured depositors. Id. IV. THE BENEFITS OF THE FIDELITY AND SUBURBIA MERGER 39. Fidelity and Suburbia felt that there were a number of benefits to be obtained

through the merger. For example, according to the "Proposed Merger Plan" between Fidelity and Suburbia, the thrifts believed that, by combining the two institutions, services to depositors would be expanded and increased by introducing new services of both institutions to each other's depositors such as: discount brokerage, life insurance, debit cards, statement savings, mortgage banking, consumer loans, business loans, various plans of home improvement loans, student loans, and I.R.A. loans. DX 3148 at PAA090 0101. By offering these additional services, Fidelity felt it could better compete with commercial banks and money market funds and therefore, attract more capital into the thrift. Id.; DX 3195 at OAA005 0514. Thus, acquiring Suburbia benefitted Fidelity by permitting it to grow as it desired in its market. [Greco Tr. at 42].

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40.

Furthermore, Fidelity stated that the management team resulting from the merger

of the two associations would be "significantly strengthened." DX 3148 at PAA090 0102. Mr. Kane, for one, believed that Fidelity had weak management, a concern that regulators later shared with respect to Messrs. Lovely and Greco, and the Fidelity management team then underneath them. [Kane Tr. at 98-99]. 41. The merger of Fidelity and Suburbia was a good fit because there was no overlap

of markets. [Lovely Tr. at 81, 111]. Further, Suburbia "had a terrific branch network" [Lovely Tr. at 77], which gave Fidelity a foothold in a new market that Fidelity hoped would make it "a premier institution in the Long Island area." [Lovely Tr. at 81-82, 111-12] 42. Moreover, the combined institution stood to benefit because economies to be

achieved by the merger were planned at a minimum of $1.0 million annually in overhead, including the attrition of personnel. DX 3148 at PAA090 0102; [Greco Tr. at 59]; DX 3195 at OAA005 0515. 43. At the time of its merger, Fidelity intended to pursue mortgage banking, increased

joint venture activity, commercial and consumer lending, discount brokerage, and equipment leasing. DX 3148 at PAA090 0109. It did not have a plan to increase its holdings of mortgagebacked securities ("MBS"), which totaled only $67.8 million out of total assets of $521.6 million as of February 1984. DX 3148 at PAA090 0118. Nor did it plan to increase its wholesale borrowings, which totaled only about $54 million at that time. Id. 44. In addition to the operational and management benefits from the merger, Fidelity

stood to gain by the merger through its use of Suburbia's significant amount of net operating loss carryovers ("NOLs"). DX 3148 at PAA090 0196. Fidelity inherited more than $74.8 million in -17-

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NOLs from Suburbia. These NOLs could be (and were) used to shield future profits of Fidelity from taxes. DX 3204 at PAA048 0216; DX 3201 at PAA048 0001; DX 3153 at PAA 112 1202; PX 277 at AST068399-400; DX 3202. In fact, between 1987 and 1993 alone, Fidelity used $18.5 million of its NOLs. PX 1283 at AST060064; PX 476 at AST058804; PX 887 at AST59673; PX 1323 at KPMG 012429. 45. Fidelity also stood to benefit through the accretion into income of the loan

discounts recognized with the mark-to-market of Suburbia's loans. DX 3148 at PAA090 0197. 46. In its proposed merger plan, Fidelity informed regulators that it intended to

"completely restructure" its assets and liabilities following the merger. DX 3148 at PAA090 0109. Fidelity described its "overall investment plan" for the new institution as emphasizing "mortgage banking, increased joint venture activity, commercial and consumer lending, discount brokerage, and equipment leasing." Id. V. REGULATORY ASSESSMENT OF THE PROPOSED MERGER 47. The present value cost to the FSLIC resulting from the proposed Suburbia and

Fidelity merger was $15.9 million. PX210 at WFZ009 0022. In contrast, it was estimated that the present value cost of liquidating Suburbia would have totaled approximately $150 million. 48. Regulators were required to assess resolution mechanisms against the cost of

liquidation. Thus, it is unsurprising that the FSLIC's assistance costs in connection with the Suburbia/Fidelity merger were put in comparison to liquidation costs. That did not mean, however, that the FSLIC's liquidation of Suburbia was either contemplated or a realistic possibility.

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49.

The most plausible alternative to the Fidelity acquisition of Suburbia was for the

FSLIC to solicit bids from other potential acquirors; i.e. to "rebid" the institution. Indeed, in listing the disadvantages of approving Fidelity's request to acquire Suburbia, regulators noted that there was a chance that it would have received a bid with a lower cost to the FSLIC than that connected with Fidelity's request. PX 237 at AA 0000180-81. With the sharp decline in short term interest rates, beginning in November 1984, the chance that a lower cost bidder would have been found was not an unrealistic possibility. 50. In assessing the advantages of Fidelity's request to merge with Suburbia,

regulators noted that it was the low cost solution (relative to the bids received in 1982); that it was projected to be a viable solution for Suburbia; that the acquisition would involve two mutual form institutions, located in the same state; that Suburbia had been previously shopped and there was a possibility of losing the Fidelity deal if not acted upon, and; that it avoided the disruptive effect of liquidation. PX 237 at AA 0000180-81. These disruptive effects included the likely loss of Suburbia's franchise value. Moreover, if FSLIC had pursued the implausible alternative of liquidating Suburbia, a $700 million institution which suffered from mere spread problems, the signal to the thrift industry and its customers concerning the type of institutions the FSLIC would liquidate would have been highly negative. 51. In short, the FHLBB stated that liquidation of Suburbia was not a "viable or

realistic option" and that liquidation was always "the option of last resort." DX 192 at 446-47. VI. FIDELITY MERGES WITH SUBURBIA 52. Fidelity acquired Suburbia on October 31, 1984. PX 985 at AST064173.

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Case 1:95-cv-00468-TCW

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53.

As part of the regulatory approval of the merger, the FHLBB approved the

assumption by Fidelity of Suburbia's NWCs, which survived the merger and were included in Fidelity's regulatory capital computations. PX 246 at WOF003 0482, PX 235 at AA0000204. 54. In addition, FSLIC provided Fidelity a cash contribution of $16 million. PX 253

at AST000039; PX 1283 at AST060052; DX 61 at PAA047 0826. 55. In a forbearance letter sent by the FHLBB to Fidelity after the merger had been

approved, the FHLBB notified Fidelity that it could report the value of any intangible assets resulting from the accounting for the merger pursuant to the purchase method. This value could be amortized by Fidelity over a period not to exceed 30 years. DX 61 at PAA047 0826. 56. The Assistance Agreement, however, also provided that no right under it could be

transferred or vested to any other party "through merger, consolidation or otherwise," without the prior written consent of the FSLIC. PX 253 at AST000059. Moreover, it expressly stated that all of the provisions of the Assistance Agreement were for the sole benefit of Fidelity and the FSLIC, and that no other entity or person would have "any legal or equitable right, remedy, or claim under, or in respect to this Agreement or any of its provisions." PX 253 at AST000059-60. Thus, the goodwill created in the Suburbia acquisition could not be sold