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No. 93-531C (Senior Judge Loren Smith) ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS _____________________________________________________________________________
AMBASE CORPORATION AND CARTERET BANCORP, INC. Plaintiffs, and FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervenor, v. UNITED STATES OF AMERICA

______________________________________________________________________________ POST-TRIAL BRIEF OF THE UNITED STATES ______________________________________________________________________________ MICHAEL F. HERTZ Deputy Assistant Attorney General JEANNE E. DAVIDSON Director KENNETH M. DINTZER Deputy Director OF COUNSEL: ELIZABETH M. HOSFORD Senior Trial Counsel VINCENT D. PHILLIPS DELISA SANCHEZ AMANDA L. TANTUM Trial Attorneys

DAVID A. LEVITT Trial Attorney Commercial Litigation Branch Civil Division Department of Justice 1100 L Street, N.W. Washington, D.C. 20005 Tel: (202) 307-0309 Fax: (202) 514-7969

Date: September 12, 2008

Attorneys for Defendant

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix POST TRIAL BRIEF OF THE UNITED STATES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. B. C. D. Ambase's Claimed Damages Did Not Result From The Breach.. . . . . . . . 3 Professor Calomiris's "But-For" Model Is Unsupported.. . . . . . . . . . . . . . 4 Professor Calomiris's Damages Estimates Are Invalid. . . . . . . . . . . . . . . . 5 The RTC/FDIC's Management of Carteret's Receivership Has Been Consistent With Law And Regulation, And Any Delays Alleged By Ambase Benefitted Carteret, Rather Than Harmed It. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARGUMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 I. II. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 CARTERET COULD NOT HAVE SURVIVED EVEN IF GOODWILL WAS COUNTED AS REGULATORY CAPITAL. . . . . . . . . . . . . 9 A. B. "But For" Causation Is The Appropriate Standard In This Case. . . . . . . . . 9 The Undisputed Contemporaneous Evidence Demonstrates That Carteret Would Not Have Survived In A No Breach World. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1. Carteret's Financial Performance Deteriorated Significantly Before The Breach. . . . . . . . . . . . . . . . . . . . . . . . . . 12 FIRREA Had No Material Impact On Carteret's Regulatory Capital Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 -i-

2.

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a. b. c. 3.

The Period Prior To The Injunction.. . . . . . . . . . . . . . . . . 15 Carteret Secures An Injunction. . . . . . . . . . . . . . . . . . . . . 16 The Injunction's Aftermath. . . . . . . . . . . . . . . . . . . . . . . . 17

Carteret's Pre-Breach Financial Weakness Would Have Caused Carteret To Fail Regardless Of Goodwill. . . . . . . . . . . . . 19 a. Carteret's Poor Financial Health Resulted From Its Pre-FIRREA Risky Business Strategy. . . . . . . . . . . . . 19 In 1991, Ambase Realized That Carteret Was On The Brink Of Failure, Even Including Goodwill As Regulatory Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 The OTS Recognized That Carteret Was Severely Undercapitalized Due To Its Risky Corporate And Commercial Lending, But Gave The Thrift Time To Pursue An External Capital Infusion. . . . . . . . . . . . . . 21 (1) (2) (3) Kohlberg and Co. Letter Of Intent. . . . . . . . . . . . . 22 The Carlyle Group Letter Of Intent. . . . . . . . . . . . 22 OTS's Renewal Of Its Recommendation To Transfer Carteret To The RTC. . . . . . . . . . . . . 23 OTS's Decision To Delay Transfer And Ultimate Transfer Of Carteret To The RTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

b.

c.

(4)

C.

Because Carteret Would Not Have Survived In A No-Breach World, It's Damages Claims Are Precluded As A Matter Of Law. . . . . . 25 The Regulators' Testimony Does Not Suggest That Carteret Would Not Have Been Seized In The Absence Of The Breach. . . . . . . . 27 1. 2. 3. Mr. Vigna's Testimony. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Mr. Albanese's Testimony.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Other Regulator's Testimony.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 -ii-

D.

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4. 5. E.

The Testimony Of Government Experts. . . . . . . . . . . . . . . . . . . . 31 The Contemporaneous Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 32

The Regulators Acted Reasonably In Transferring Carteret to the RTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Professor Calomiris's Proposed "Adjustments" To Carteret's Regulatory Capital Are Baseless And Fail To Demonstrate Carteret Would Have Survived In The Absence Of The Breach. . . . . . . . 35 1. Professor Calomiris Overstates The Amount Of Goodwill On Carteret's Balance Sheet In The "But For" World.. . . . . . . . . 36 "But For" Carteret Would Have Been In A Worse Position If It Had Retained The Branches Absent The Breach. . . . . . . . . . 40 The Breach Did Not Cause Carteret To Pay $17 Million More For Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 "But For" Carteret Could Not Have Reduced Its Risk-Based Capital Requirement By Securitizing $1.5 Billion In Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The Breach Did Not Cause Carteret's Shrinkage And Additional Assets Would Not Have Rectified Carteret's Regulatory Capital Deficiencies. . . . . . . . . . . . . . . . . . . . . . . . . . 47 Ambase Could Not Have Made Up Carteret's Capital Shortfall Absent The Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Carteret Would Not Have Reserved $20-$50 Million Less In A "But For" World. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 a. Carteret's Board Of Directors And Outside Auditor Concluded, As Did The OTS, That The $150 Million Addition To Reserves Was Appropriate And Adequate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

F.

2.

3.

4.

5.

6.

7.

b.

An Independent Evaluation Concluded That Mr. Moor's Analysis And Reserve Recommendation Were Fully Supported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 -iii-

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c.

The Evidence Refutes Ambases's Claim That Mr. Moor's Reserve Recommendation Was Based Upon Liquidation Values of Assets. . . . . . . . . . . . 54 The Evidence Does Not Support Ambase's Assertion That Carteret Could Not Provide Seller Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Ambase's Claim That, In A "But-For" World, Carteret Would Have Sold The Assets Later Is Unsupported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Carteret Would Have Incurred Substantial Additional Costs Had It Held Non-Performing Assets Longer. . . . . . . . . . . 56

d.

e.

f.

8.

"But For" Carteret Could Not Have Raised Capital By Selling CMC Or Mortgage Servicing Rights.. . . . . . . . . . . . . . . . 58 a. b. CMC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Mortgage Servicing Rights. . . . . . . . . . . . . . . . . . . . . . . . 60

9.

"But For" Carteret Would Not Have Been Able To Raise Outside Capital To Satisfy Minimum Regulatory Capital Requirements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 a. In 1992, Carteret Continued To Fail Regulatory Capital Requirements And Experience Problems With Its Corporate And Commercial Loan Portfolios. . . . 61 Ambase's Claim That Regulators Impeded Carteret's Capital- Raising Effort Is Unfounded. . . . . . . . . . . . . . . . 62 The Exclusion Of Goodwill From Regulatory Capital Had No Effect On Investors' Views Of Carteret. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

b.

c.

III.

THE DAMAGES PLAINTIFFS SEEK WERE NOT REASONABLY FORESEEABLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 A. The Regulators Could Not Have Reasonably Foreseen Ambase's Alleged Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 -iv-

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B.

Ambase's Foreseeability Arguments Lack Economic Logic And Are Inconsistent With The Case Law . . . . . . . . . . . . . . . . . . . . . . . . 67

IV.

THE ALLEGED DAMAGES ARE NOT REASONABLY CERTAIN. . . . . . . . 69 A. The Evidence Does Not Support Professor Calomiris's $251.4 Estimate For "Market Value" At The Time Of Breach. . . . . . . . . . . . . . . 69 1. 2. Ambase Paid Too Much For Carteret In 1988. . . . . . . . . . . . . . . . 70 Carteret's Value Dropped Precipitously Between Its Acquisition By Ambase And The Breach. . . . . . . . . . . . . . . . . . . 71 The Sample Upon Which Professor Calomiris Relies To Estimate Carteret's Market Value Does Not Represent The Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 The Evidence Does Not Support Ambase's Claim That The Value Of Carteret's Stock Was Depressed By The Inability To Pay Dividends And FIRREA's Announcement. . . . . 73 The Evidence Refutes Professor Calomiris's Assertion That Former Carteret Directors Made A Bid To Purchase The Thrift. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

3.

4.

5.

B.

The "Current Market Value" And "Terminal Value" Damage Estimates Are Invalid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 1. The "Current Market Value" and "Terminal Value" Measures Incorrectly Assume Carteret Is Entitled To Its Value In 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Professor Calomiris Has Failed To Provide A "But For" Model Of Alleged Future Cash Flows. . . . . . . . . . . . . . . . . . . . . . 79

2.

3.

Even If A "But For" Model Was Not Required As A Matter Of Law, Carteret's "But For" Earnings Cannot Be Estimated By The Gordon Growth Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Even If "But For" Carteret's Growth Could Be Estimated By The Gordon Growth Model, Professor Calomiris Uses Incorrect Inputs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 -v-

4.

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a.

Professor Calomiris Overestates Carteret's Market Value At The Time Of Breach. . . . . . . . . . . . . . . 83 The Model Improperly Excludes Carteret's 1990 and 1991 Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Professor Calomiris Improperly Measured Carteret's Cost Of Capital. . . . . . . . . . . . . . . . . . . . . . . . . 85

b.

c.

5.

The Current Market Value and "Terminal Value" Measures Present Other Fatal Flaws. . . . . . . . . . . . . . . . . . . . . . . 86 a. Defects In Estimation of "But For" Carteret's Current Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Professor Calomiris's "Terminal Value" Analysis is Invalid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

b.

C.

The Alleged "Wounded Bank" Damages Are Invalid. . . . . . . . . . . . . . . . 89 1. Ambase Cannot Recover Costs That Were Not Incurred By Carteret.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Even If Carteret Had Incurred The Costs, They Resulted From Independent Business Decisions, Not The Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

2.

D. E. V.

There Is No Basis For A Tax Gross-Up.. . . . . . . . . . . . . . . . . . . . . . . . . . 93 Professor Saunders Was A Credible Witness. . . . . . . . . . . . . . . . . . . . . . 94

THIS COURT LACKS JURISDICTION TO REVIEW THE RECEIVERSHIP DEFICIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 A. B. The Prior Ruling Concerning Jurisdiction Should Be Revisited. . . . . . . . 98 The Tucker Act Does Not Accord This Court Jurisdiction To Review The Receivership Deficit.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

C.

The FDIC Act Also Precludes Judicial Review Of The Receivership Deficit In This Court. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 -vi-

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VI.

THE RTC'S/FDIC'S MANAGEMENT OF THE RECEIVERSHIP HAS BEEN CONSISTENT WITH LAW AND REGULATION. . . . . . . . . . . . 103 A. The Alleged Delay In Funding And Minority Preference Program Benefitted Rather Than Harmed Carteret. . . . . . . . . . . . . . . . . 103 1. If Carteret Had Been Resolved In 1993, The "But-For" Deposit Premiums Would Have Been Lower, Not Higher. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 The Duration Of The Receivership Did Not Result In Lower Deposit Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 The Minority Preference Program Did Not Result In Lower Proceeds Or Other Injury To Carteret. . . . . . . . . . . . . 108 The "Freeze" On Assets Did Not Require Carteret To Borrow From The FDIC/RTC. . . . . . . . . . . . . . . . . . . . . . . . 109

2.

3.

4.

B.

The Enactment Of FIRREA Did Not Enlarge The Receivership Deficit By Eliminating Supervisory Goodwill. . . . . . . . . 111 1. The Goodwill Could Have Not Have Been Transferred To An Acquiring Institution.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Even If The Goodwill Could Have Been Transferred To An Acquirer, Professor Calomiris's Valuation Models Are Flawed.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

2.

C.

The RTC Properly Shut Down The Mortgage Origination Unit To Reduce The Risk Of Loss To The Receivership. . . . . . . . . . . . . . . . 114

D.

The FDIC Properly Applied The Federal Judgment Interest Rate To Its Loans To Carteret. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 1. The FDIC Was Legally Required To Charge PII And The Rates Were Not "Excessive". . . . . . . . . . . . . . . . . . . . 116 The FDIC Selected The Federal Judgment Rate To Comply With Regulatory Policy.. . . . . . . . . . . . . . . . . . . . . . 118 -vii-

2.

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3.

The Federal Judgment Rate Was Economically Appropriate And The Administration Of The Loans Was Consistent With Normal Banking Practice. . . . . . . . . . . . . 122

E.

There Is No Basis Upon Which To Recalculate The FDIC's Estimate Of Carteret's Federal Income Tax Liability. . . . . . . . . . . . . . . 123

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

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TABLE OF AUTHORITIES Page(s) CASES Admiral Fin. Corp. v. United States, 57 Fed. Cl. 418 (2003), aff'd, 378 F.3d 1336 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Admiral Fin. Corp. v. United States, 378 F.3d 1336 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 26 Ambase Corporation v. United States, 58 Fed. Cl. 32 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Ambase Corporation v. United States, 61 Fed. Cl. 794 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim American Capital Corp. v. FDIC, 472 F.3d 859 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Bailey v. United States, 341 F.3d 1342 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 98 Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Bluebonnet Sav. Bank v. United States, 67 Fed. Cl. 231 (2005), aff'd, 466 F.3d 1349 (Fed. Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . 36 California Fed. Bank, FSB v. United States, 245 F.3d 1342 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 California Fed. Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 69 Canfield v. Reynolds, 631 F.2d 169 (2d Cir. 1980).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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Carteret Sav. Bank v. Office of Thrift Supervision, 762 F.Supp. 1159 (D.N.J. 1991), rev'd, 963 F.2d 567 (3rd Cir. 1992).. . . . . . . . . . . . . . . . . 20, 100 Carruth v. United States, 627 F.2d 1068, 224 Ct. Cl. 422 (1980). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Castle v. United States, 301 F.3d 1328 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003). . . . . . . . . . . . . . . . . 26, 27, 90 Cienega Gardens v. United States, 503 F.3d 1266 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Citizens Federal Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10 Coast Fed. Bank, FSB v. United States, 48 Fed. Cl. 402 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Commercial Fed. Bank v. United States, 59 Fed. Cl. 338 (2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 De Bazan v. Sec'y of Health and Human Servs., 2008 WL 3927499 (Fed. Cir. Aug. 28, 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 El-Shifa Pharmaceutical Industries Co. v. United States, 378 F.3d 1346 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 FDIC v. Citizens State Bank of Niangua, 130 F.2d 102 (8th Cir. 1942).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Fifth Third Bank of W. Ohio v. United States, 55 Fed. Cl. 223 (2003), aff'd in part and rev'd in part, 402 F.3d 1221 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 80 Fifth Third Bank v. United States, 518 F.3d 1368 (Fed. Cir. 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97, 98 First Federal Lincoln Bank v. United States, 518 F.3d 1308 (Fed.Cir. 2008).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 77, 78

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First Fed. Sav. and Loan Ass'n of Rochester v. United States, 76 Fed. Cl. 765 (2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 First Hartford Corp. Pension Plan and Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Freeman v. FDIC, 56 F.3d 1394 (D.C.Cir. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Genmoora Corp. v. Moore Bus. Forms, Inc., 939 F.2d 1149 (5th Cir. 1991).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Glendale Federal Bank v. United States, 43 Fed. Cl. 390 (1999), aff'd in part, vac. in part, and remanded, 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Glendale Fed. Bank v. United States, 239 F.3d 1374 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 80 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Golden Pac. Bancorp v. FDIC, 1997 WL 626374 (S.D.N.Y. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Golden Pac. Bancorp v. Federal Deposit Ins. Corp., 2002 WL 31875395 (S.D.N.Y. 2002), aff'd, 375 F.3d 196 (2nd Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Granite Mgmt. Corp. v United States, 416 F.3d 1373 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69, 90 Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155 (2006), aff'd, 511 F.3d 1360 (Fed. Cir. 2008). . . . . . . . . . . . . . . . . . . . . . . passim Hall v. United States, 69 Fed. Cl. 51 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 ( Fed. Cir. 2004).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Holland v. United States, 2008 WL 4053227 (Fed. Cl. 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 xi

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Home Sav. of Am., FSB v. United States, 399 F.3d 1341 (Fed. Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 90, 92 In Re Receivership Of First Nat'l Bank in Humboldt, 523 N.W.2d 591 (Iowa 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Kidder Peabody & Co., Inc. v. IAG Int'l Acceptance Group, 28 F.Supp.2d 126 (S.D.N.Y. 1998), aff'd, 205 F.3d 1323 (2nd Cir. 1999). . . . . . . . . . . . . . . . . . 36 Landmark Land Co. v. FDIC, 256 F.3d 1365 (Fed. Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37, 90 LaVan v. United States, 382 F.3d 1340 (Fed Cir. 2004).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 LeBlanc v. United States, 50 F.3d 1025 (Fed. Cir. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Locke v. United States, 283 F.2d 521 (1960).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Martinez v. United States, 333 F.3d 1295 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387 (Fed. Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Myerle v. United States, 33 Ct. Cl. 1 (1897). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 92 Nat'l Controls Corp. v. Nat'l Semiconductor Corp., 833 F.2d 491 (3rd Cir. 1987).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

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Plaintiffs In All Winstar-Related Cases At The Court v. United States, 44 Fed. Cl. 3 (1999). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Precision Pine & Timber, Inc. v. United States, 81 Fed. Cl. 235 (2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Ramsey v. United States, 101 F.Supp. 353 (1951). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Seldovia Native Ass'n, Inc. v United States, 144 F.3d 769 (Fed. Cir. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Slattery v. United States, 69 Fed. Cl. 573 (2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 65 Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 57 Fed. Cl. 598 (2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Southwest Inv. Co., Inc. v. United States, 63 Fed. Cl. 182 (2004), aff'd, 158 Fed. Appx. 283 (Fed. Cir. 2005).. . . . . . . . . . . . . . . . . . . 25, 26 Suess v. United States, 52 Fed. Cl. 221 (2002), aff'd, 535 F.3d 1348 (Fed. Cir. 2008). . . . . . . . . . . . . . . . . . . . . . . . 39, 85 Suess v. United States, 74 Fed. Cl. 510 (2006), rev'd on other grounds, 535 F.3d 1348 (Fed. Cir. 2008).. . . . . 93, 94, 125 Tecon Engineers, Inc. v United States, 343 F.2d 943 (1965).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101, 102 Three Crown Ltds., P'Ship v. Salomon Bros, Inc., 906 F.Supp. 876 (S.D.N.Y. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Tyger Constr. Co. v. Pensacola Constr. Co., 29 F.3d 137 (4th Cir. 1994).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 United States v. Mitchell, 463 U.S. 206 (1983).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 United States v. Testan, 424 U.S. 392 (1976).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

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United States v. Winstar Corp., 518 U.S. 839 (1996).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 95 Village of Oakwood v. State Bank and Trust Company, 2008 WL 3876324 (6th Cir. 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996), cert denied, 520 U.S. 1116 (1997). . . . . . . . . . . . . . . . . . . . . 90, 92 Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Whitney Benefits, Inc. v. United States, 25 Cl. Ct. 232 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 STATUTES, RULES, AND REGULATIONS 12 C.F.R. § 360.3 (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118, 119, 120 12 C.F.R. § 360.3(d) (2005).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 12 U.S.C. § 1818. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 99 12 U.S.C. § 1821(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 101 12 U.S.C. § 1821(d)(6)(A)(ii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 101, 102 12 U.S.C. § 1821(d)(11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 12 U.S.C. § 1821(d)(13)(D)(ii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 12 U.S.C. § 1842. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 28 U.S.C. § 1491. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Financial Institutions Reform, Recovery, and Enforcement Act, Pub.L.No. 101-73, 103 Stat. 183 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Riegle-Neal Interstate Banking Act, Pub. L. 103-325, Title III, ¶ 319(a), 108 Stat. 2160 (1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Section 8(a) of the FDIC Act, Publ. L. 89-695, 64 Stat. 879 (1950). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 xiv

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MISCELLANEOUS 1 Dobbs Law of Remedies, ¶ 38(2) (2nd ed. 1993).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Restatement (Second) of Contracts § 347 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Restatement (Second) of Contracts § 351 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 65 Restatement (Second) of Contracts § 352 (1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 U.S. Constitution, amend. V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 U.S. Constitution, amend. XIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS AMBASE CORPORATION AND CARTERET BANCORP, INC., Plaintiffs, and FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervenor, v. THE UNITED STATES Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

No. 93-531C Senior Judge Loren Smith

POST-TRIAL BRIEF OF THE UNITED STATES INTRODUCTION I. Background In this Winstar-related case, Ambase Corporation ("Ambase") and Carteret Bancorp, Inc. ("Carteret") (hereafter sometimes collectively referred to as "Ambase"),1 as derivative plaintiffs, seek damages relating to the alleged breach of goodwill contracts.2 Intervening plaintiff the Federal Deposit Insurance Corporation ("FDIC") also seeks damages for breach of these alleged

Ambase and Carteret Bancorp are first and second tier shareholders of Carteret Savings Bank ("Carteret"), respectively. The alleged contracts involve Carteret's 1982 acquisition of Barton Savings & Loan Association of Newark, New Jersey ("Barton") and First Federal Savings and Loan Association of Delray Beach, Florida ("Delray") and 1986 acquisition of First Federal Savings and Loan Association of Montgomery County, Blacksburg, Virginia ("First Federal") and Mountain Security Savings Bank of Wytheville, Virginia ("Mountain Security").
2

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agreements as successor to the rights of Carteret and manager of the Federal Savings and Loan Insurance Corporation Resolution Fund ("FRF"). Complaint In Intervention dated March 28, 1997. This long-running dispute involves a number of prior decisions. In 2003, the parties filed cross-motions for summary judgment on contract liability. Ambase Corporation v. United States, 58 Fed. Cl. 32, 41-49 (Fed. Cl. 2003) ("Ambase I").3 This Court held that Carteret's 1982 and 1986 acquisitions involved contracts that were breached by the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (1989). Ambase I, 58 Fed. Cl. at 41-49. Because Carteret reported a substantial regulatory capital deficiency that it was unable to remedy by the time OTS seized the thrift, even counting goodwill as regulatory capital, the Court questioned whether the breach could cause damage to Carteret. Ambase I, 58 Fed. Cl. at 39-40. The Court noted that it would review, in the damages stage of the proceeding, Ambase's claim that Carteret would have remedied the deficiency in a "but-for" world. Id. In 2003, following the Federal Circuit's holding in Bailey v. United States, 341 F.3d 1342, 1346 (Fed. Cir. 2003), Ambase filed a "Motion To Define The Measure Of Carteret's Contract Damages." Ambase asserted that the Government caused Carteret's deficit and, therefore, any award for the Government's breach should be paid directly to Ambase. Motion To Define Measure of Carteret's Contract Damages at 20-25. The Court held that it could review
3

Ambase also sought summary judgment on its claims that: (1) FIRREA effected a taking; (2) the Government illegally exacted $50 million pursuant to the Capital Maintenance Agreement ("CMA"), and $12.5 million pursuant to the settlement of a cease and desist proceeding. The Court awarded summary judgment to the Government on these issues. Ambase I, 58 Fed. Cl. at 52-54. 2

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the administration of the receivership because Ambase had a right to recover any surplus from Carteret's resolution. Ambase Corp. v. United States, 61 Fed. Cl. 794, 796-98 (2004) ("Ambase II"). The Court later ruled that this review would be consolidated with the trial on damages. See Amended Order dated April 13, 2007. The Court tried the issues relating to damages and the receivership deficit between February 11, 2008 and April 4, 2008. II. Summary Of The Argument A. Ambase's Claimed Damages Did Not Result From The Breach

The overwhelming evidence at trial proved that FIRREA's elimination of goodwill from Carteret's regulatory capital did not cause the damages alleged by Ambase. Due to operating problems and massive losses in its corporate and commercial real estate portfolios, Carteret fell out of regulatory capital compliance as of June 1991, even counting goodwill as regulatory capital, and, thus, would have been seized in the absence of the breach. See, e.g., PFF at ¶¶ 111113.4 In addition, our experts in capital markets, the operation of financial institutions, and damages, Professors Anthony Saunders and Roy C. Smith, established that Carteret's massive operating problems and commercial real estate losses would have prevented Carteret from raising sufficient capital to comply with FIRREA's minimum regulatory capital requirements even if goodwill had been counted as regulatory capital. See DX 5038A; DX 8000A; and DX 7000A.5

4

"PFF" refers to "Defendant's Proposed Findings Of Fact" filed on September 12, 2008.

Conscious of this Court's doubts concerning Carteret's ability to survive in the absence of the breach, Ambase I, 58 Fed. Cl. at 39-40, Ambase has focused its post-trial brief on testimony it contends establishes that regulators believed "but-for" Carteret would have survived. 3

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B.

Professor Calomiris's "But-For" Model Is Unsupported

Ambase did not contest the fact that, as of June 30, 1991, Carteret was unable to comply with FIRREA's minimum regulatory capital requirements even counting goodwill as regulatory capital. Former Carteret Chief Executive Officer ("CEO"), Richard A. Bianco, and Columbia Business School Professor, Charles W. Calomiris, the only witnesses presented by Ambase at trial,6 testified that, in a "but-for" world, Carteret would not have fallen out of regulatory capital compliance, or would have remedied the deficit by selling assets or raising outside capital. Professor Calomiris presented a "but-for" model quantifying alleged changes in Carteret's balance sheet that would have allowed Carteret to satisfy FIRREA's minimum regulatory capital requirements absent the breach. PX 9053A. Although he acknowledged that the changes quantified in the model did not allow Carteret to satisfy the risk-based or core minimum regulatory capital requirements, he opined that changes he could not quantify, including lost profits from asset shrinkage and deposit runoff, would have made up the deficit. PX 9053A. He also opined that Carteret could have made up the deficits in risk-based and core regulatory capital by raising outside capital, selling branches, or selling Carteret Mortgage Company ("CMC") or mortgage servicing rights. PX 9054. At trial, we demonstrated that virtually all of the operational and regulatory capital

Ambase Brief at 1-5 and 13-36. As we demonstrated, however, these claims are false. Rather than believing Carteret would have survived in a "but-for" world, these regulators testified that "but-for" Carteret could not have survived without a significant contribution of outside capital which it was unable to secure. Ambase also designated deposition testimony from a number of regulators and Carteret officials. Although we opposed Ambase's motion to designate deposition testimony, the Court ultimately granted the motion. Def. Opp'n To Pl.'s Mot. To Designate Dep. Testimony For Trial, at 1-2 (Jan. 7, 2008). 4
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"adjustments" to "but-for" Carteret hypothesized in Professor Calomiris's model could not have occurred or would have resulted in Carteret reporting a greater deficiency in minimum regulatory capital in the "but-for" world than it reported in the actual world. Furthermore, even if all the "adjustments" to "but-for" Carteret's regulatory capital balance were achieved, as Professor Calomiris and Mr. Bianco concede, "but-for" Carteret still would not have been able to satisfy FIRREA's minimum regulatory capital requirements without raising approximately $100 million from outside investors. DX 9760. Carteret was unable to raise any amount in the actual world; investors care about the potential of the firm to earn profits: because goodwill is irrelevant to a firm's ability to earn profits, investors would not have put their money in Carteret even if goodwill had continued to count as regulatory capital. Tr. 2217:16-2218:16 (Vigna); Tr. 2953:819; 3768:1-6; 3814:24-3815:10 (R. Smith); PFF at ¶ 180-183. C. Professor Calomiris's Damages Estimates Are Invalid

On damages, Professor Calomiris argued alternatively that Carteret was entitled to its market value at the time of breach ($251.4 million, PX 9013), its "terminal value" as of 2008 ($782.2 million, PX 9024), or, based upon his "preferred approach," Carteret's market value as of 2008 ($904 million including "but-for" dividends" of $183.9 million, PX 9031 and 9041, and "wounded bank damages of $16.8 million, PX 9043).7 With respect to Carteret's alleged market
7

The market value at the time of breach model applied Carteret's estimated market-tobook-ratio at the time of breach to Carteret's book value at the time of the breach ($251.4 million, PX 9013). The "terminal value" model added Carteret's alleged lost profits between the breach and 2008 ($595.6 million) to Carteret's book value and estimated franchise value at the time of the breach net of goodwill amortization between the time of the breach and 2008 ($782.2 million, PX 9024). The third model estimated Carteret's current market value by adding alleged lost profits ($595.6 million) to Carteret's book value at the time of the breach net of goodwill amortization. Professor Calomiris then capitalized Carteret's alleged 2008 book value by a market-to-book ratio derived from the growth of nine stand-alone thrifts between the breach and 5

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value at the time of the breach, the evidence demonstrated that Professor Calomiris grossly exaggerated the value a willing buyer would have paid for Carteret at the time of the breach. Because Carteret's stock was wholly owned by Ambase, Carteret's value could not be determined by the market price of its stock. Instead, Professor Calomiris constructed a model which purported to derive Carteret's market value at the time of the breach by multiplying its market-to-book ratio at the time of the Ambase acquisition by the change in the market-to-book ratio of a sample of thrifts between the time of the Ambase acquisition and the breach. Because Ambase overpaid for Carteret, estimating Carteret's market value at the time of breach by reference to the price Ambase paid one year prior to the breach is invalid. PFF at ¶¶ 205-208. Indeed, Professor Calomiris concurred in the view that "the value of a thrift can change very significantly within a 12 month period." Tr. 1371:10-13 (Calomiris). Further, between 1988 and 1989, Carteret suffered massive losses, and neither its performance nor its balance sheet resembled the sample of thrifts Professor Calomiris used to estimate Carteret's market value at the time of the breach. Therefore, the growth of the market-to-book ratio of the sample of thrifts is not reflective of Carteret's condition, and cannot be used to estimate Carteret's market value at the breach. PFF at ¶¶ 209-217. With respect to Professor Calomiris's current market value and terminal value measures of damage, Professor Calomiris assumes that Carteret is entitled to its alleged value in 2008. This is contrary to controlling authority, which provides that damages from the loss of an income-producing property, such as a thrift, must be calculated as of the time of the breach, not some future time. First Fed. Lincoln Bank v. United States, 518 F.3d 1308, 1316 (Fed. Cir.

2008 (i.e., $904 million, PX 9031 and 9041). 6

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2008) ("First Fed. Lincoln"). Further, Professor Calomiris estimated Carteret's alleged current market value and terminal value by increasing Carteret's book value at the time of the breach by lost profits between the breach and 2008 ($595.6 million, PX 9022). He estimates the lost profits by applying a mathematical construct, the Gordon Growth Model, to Carteret's condition at the time of the breach rather than by constructing a "but-for" world and demonstrating profits Carteret earned in that "but-for" world. Assuming the existence of profits based upon the application of the Gordon Growth Model is contrary to the case law which requires that lost profits be demonstrated by the application of a model demonstrating the assets, liabilities, funding sources, interest rate risk, and other attributes of the "but-for" thrift. See, e.g., Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155, 170 (2006), aff'd, 511 F.3d 1360 (Fed. Cir. 2008); Fifth Third Bank of W. Ohio v. United States, 55 Fed. Cl. 223, 241 (2003), aff'd in part and rev'd in part, 402 F.3d 1221 (Fed. Cir. 2005). Finally, even if lost profits could be calculated by the Gordon Growth Model, Professor Saunders demonstrated that Professor Calomiris misapplied the model to Carteret. PFF at ¶¶ 221-230. In particular, Professor Calomiris failed to include Carteret's losses in 1990 and 1991 ($291.2 million, DX 8000A, Exh. 3, Table 1) in calculating alleged future earnings. Further, the Gordon Growth Model applies only to companies that demonstrate a steady growth in earnings. Carteret consistently lost money. DX 9726. Nonetheless, Professor Calomiris's application of the Gordon Growth Model predicted a 4.2 percent annual growth in earnings for Carteret absent the breach. As Professor Saunders demonstrated, given Carteret's lack of earnings and extremely weak tangible capital position, the Gordon Growth Model is simply inapplicable to Carteret. Tr. 7

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3443:11-25 (Saunders); PX 9022. D. The RTC/FDIC's Management Of Carteret's Receivership Has Been Consistent With Law And Regulation, And Any Delays Alleged By Ambase Benefitted Carteret, Rather Than Harmed It

Finally, with respect to the receivership deficit, Professor Calomiris argued that, if Carteret had been resolved as a whole bank in 1993, as would have been the case if the resolution had not allegedly been delayed by the absence of Congressional funding, there would have been a surplus rather than a deficit. PX 2703A. Ambase argued, therefore, that it was entitled to be directly credited with any damage award in favor of Carteret. To the contrary, Professor Saunders demonstrated that, absent the delay, Carteret would have received approximately $100 million less for its deposits than it received in the actual resolution, DX 9790. Further, as to Professor Calomiris's contention that the receivership deficit was artificially inflated because of interest charged on loans by the Resolution Trust Corporation ("RTC") to the receivership, Professor Saunders demonstrated that the RTC simply passed on the costs it had incurred in raising funds, and did so without charging a risk premium to reflect the risk the loans to the receivership would not be repaid. Tr. 3620:25-3621:4 (Saunders). Rather than inflating the receivership deficit, the RTC subsidized the receivership. Id. As to the contention that the FDIC/RTC did not receive market returns on the receivership's assets, Professor Saunders concluded that Carteret's resolution was achieved on a least cost basis. DX 9778. In short, the evidence demonstrated that Carteret would have failed absent the breach and Ambase failed to prove damages even if Carteret would have survived. Likewise, Ambase failed to prove any adjustments to the receivership deficit. As of December 31, 2007, the receivership deficit was $321.4 million. DX 9174, Report 3. Accordingly, Ambase's failure to 8

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prove damages means the case is non-justiciable and must be dismissed. ARGUMENT I. INTRODUCTION Plaintiffs seek expectation damages resulting from the seizure of Carteret on December 4, 1992. Expectation damages are only recoverable "provided they are actually foreseen or reasonably foreseeable, are caused by the breach of the promisor, and are proved with reasonable certainty."8 As we demonstrate, plaintiffs have failed to demonstrate reasonable foreseeability, causation, or reasonably certain quantification. II. CARTERET COULD NOT HAVE SURVIVED EVEN IF GOODWILL WAS COUNTED AS REGULATORY CAPITAL A. "But-for" Causation Is The Appropriate Standard In This Case

The Federal Circuit has noted that "the standard applied by this court and our predecessor court in numerous cases . . . [requires] that the causal connection between the breach and the loss of profits must be `definitely established.' The standard set forth in those cases ensures that the nonbreaching party will not be awarded more than it would have received if the contract had been performed." California Fed. Bank v. United States, 395 F.3d 1263, 1267-68 (Fed. Cir. 2005) ("CalFed"). This standard was clarified in Citizens Federal Bank v. United States, 474 F.3d 1314, 1320-22 (Fed. Cir. 2007) ("Citizens"), in which the Federal Circuit noted that it did not read its prior decisions "as announcing any broad rule that the `but-for' theory of causation must always, or even generally, be used in determining damages in Winstar-related cases." Rather, the Court
8

Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 1348, 1355 (Fed. Cir. 2001) ("Bluebonnet"); see Restatement (Second) of Contracts §§ 347, 351, 352 (1981). 9

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noted that "the selection of an appropriate causation standard depends upon the facts of the particular case and lies largely within the trial court's discretion. Id. at 1318. The "substantial factor" standard requires a greater showing than "but for" causation. De Bazan v. Sec'y of Health and Human Servs., No. 2008-5013, 2008 WL 3927499, at *2 (Fed. Cir. Aug. 28, 2008). The facts of this case suggest that "but-for" causation should determine whether or not Carteret is entitled to damages. It is undisputed that the mere addition of supervisory goodwill to "but-for" Carteret's balance sheet would not have enabled the thrift to satisfy the minimum regulatory capital requirements of FIRREA.9 Ambase's rebuttal is that "but-for" Carteret would have reported additional regulatory capital beyond the goodwill because of changes in operations. Thus, in this case, the parties have not framed the issue as whether the breach was a "substantial factor" in the thrift's failure. The causation issue, therefore, is whether "but-for" Carteret's balance sheet would have reported sufficient regulatory capital over and above the goodwill balance to enable the thrift to satisfy FIRREA's minimum regulatory capital requirements. Therefore, the "but-for" standard of causation is appropriate. Regardless of the test applied, however, the evidence demonstrates that the cause of Carteret's failure was the losses in its corporate and commercial real estate portfolios. Ambase

This case is like CalFed and LaVan v. United States, 382 F.3d 1340 (Fed Cir. 2004) ("LaVan"), where the question was whether the event would have occurred in the absence of the breach. In Citizens, by contrast, the Court had to determine whether the evidence demonstrated that the conversion of subdebt into preferred stock resulted because subdebt was no longer considered regulatory capital (a non-breach event) and or because the thrift desired to increase its regulatory capital following the breach. Citizens, 474 F.3d at 1320-22. The Federal Circuit affirmed the trial court's finding that the breach was a substantial factor in the decision to convert even though non-breach causes played a part as well. Id. 10

9

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Brief at 13. These losses, which were charged against capital, exceeded $292 million in 1990 and 1991, DX 9754, while Carteret's supervisory goodwill balance was only $139 million when the thrift failed in 1992. DX 9754; PX 9053A. As of September 30, 1992, Carteret failed to meet its minimum tangible, core and riskbased requirements by $133.2 million, $157 million, and $235.4 million, respectively. DX 8124 at FAM002 0538. The addition of $139 million in goodwill would not have remedied the core and risk-based deficiencies. Thus, because the loan losses in 1990 and 1991 had depleted its capital, Carteret could not have satisfied two of the three regulatory capital requirements even if all the goodwill had counted as capital. "These facts would indicate that Carteret suffered no damage from the alleged breach of contract . . . ." Ambase I, 58 Fed. Cl. at 39. Thus, the Court should not assess any damages regardless of the causation standard applied.10

Although this Court applied the "substantial factor" test in Slattery v. United States, 69 Fed. Cl. 573, 583-84 (2006), there the thrift would have been in regulatory capital compliance for most or all of the period prior to the seizure if the goodwill had counted toward the minimum regulatory capital requirements of FIRREA. Thus, there was no dispute that the thrift would have exceeded the minimum regulatory capital requirement if the goodwill could have been counted toward the minimum requirement. In this case, by contrast, it is undisputed that the thrift was out of minimum regulatory capital compliance even counting all the supervisory goodwill as regulatory capital at the time of failure, and the only question is whether "but-for" Carteret would have had additional regulatory capital beyond the goodwill due to changed operating conditions between the time of the breach and the time of failure. As we have demonstrated, the "proximate cause" rather than "substantial factor" test is appropriate given the parties' acknowledgment that the addition of goodwill alone to "but-for" Carteret's balance sheet would not have enabled the thrift to satisfy the minimum regulatory capital requirements of FIRREA. Accordingly, Ambase's reliance on Slattery is misplaced, and the sole question for decision on causation is whether Carteret would have survived in the absence of the breach. 11

10

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B.

The Undisputed Contemporaneous Evidence Demonstrates That Carteret Would Not Have Survived In A No Breach World 1. Carteret's Financial Performance Deteriorated Significantly Before The Breach

From December 1987 to June 1989, prior to the breach, OTS required Carteret to increase its level of criticized assets from $274.6 million to nearly $479 million, an unheard of increase of almost 75 percent in eighteen months. DX 7000A at 16, § 3.2.1. The result was that, as of 1989, before the breach, Carteret's classified assets equaled 5.6 percent of its total assets, whereas its peer group's average of classified assets to total assets was only 3.3 percent. Id. at 16. In its 1989 report of examination ("ROE"), OTS noted that: "[t]his problem [in] . . . considerable part . . . is . . . caused by poor underwriting." PX 2106 at WOQ6750010. Professor Calomiris conceded that, in 1988 and 1989, Carteret continued "to have poor underwriting practices for its commercial loan practices - commercial loan portfolio." Tr. 2713:6-10 (Calomiris). When asked whether "these problems were due, in large part, to underwriting deficiencies," he acknowledged that "[t]he documents I've read suggest that." Tr. 2713:21-25 (Calomiris). Professor Saunders agreed, stating: [Carteret] [b]asically had to stop making new commercial loans and commercial real estate loans by the time FIRREA was passed. So clearly, these are directly linked to the pre-89 situation, but the realization that occurred as the outcome of the bad underwriting and also the recession. So this is actually what's happening in the real world, and its completely independent of the breach. Tr. 3463:3-11 (Saunders). Carteret began recognizing losses from its corporate and commercial real estate portfolios long before the enactment of FIRREA. For example, Carteret added $14 million to loan loss

12

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reserves in 1988, and $28 million to reserves in 1989. OTS required an additional $77.2 million to be added to reserves as of June 1989. DX 7000A at 17.11 The losses in its commercial and corporate real estate portfolios also adversely affected Carteret's operating performance. At the end of 1988, eight months before the enactment of FIRREA, Carteret's pre-tax income from lending became negative. PFF at ¶ 83. Between June 1988 and June 1989, Carteret suffered four quarters of core operating losses. PFF at ¶ 83. In 1989, Carteret suffered a net operating loss of $63.9 million. PFF at ¶ 87. To maintain the appearance of steady earnings in the face of these losses, Carteret began to cannibalize its balance sheet of good assets and to report increasingly large non-recurring gains from the sales of loans and securities. PFF at ¶ 84. For example, from 1987 to 1989, Carteret reported $128.3 million in net gains on sales of loans and securities. Id. FDIC examiners noted that "[w]hat income the bank has been able to generate has come entirely from gains on asset sales." DX 8054 at WOQ 699 0501 (FDIC 1989 Report of Examination ("ROE")). One of the reasons for Carteret's pre-breach net operating losses was its extremely high overhead expenses. PFF at ¶ 91. William Day, Chief Examiner for the Federal Deposit Insurance Corporation ("FDIC"), was concerned that Carteret's overhead expenses exceeded its net interest income. Tr. 1446:2-9; Tr. 1451:8-19 (Day). Indeed, as of September 30, 1988, Carteret's overhead expense represented 165 percent of its net interest margin. Mr. Day had never seen percentages in that range before. Tr. 1451:20-1452:23 (Day).
11

Due to "continued shrinkage from asset sales by Carteret," DX 781A; Tr. 2001:14 (S. Smith), OTS eventually permitted Carteret to add $49.8 million in additional reserves, rather than the $77.2 million recommended in the 1989 examination. 13

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Carteret itself recognized that it had invested too large a percentage of its assets in highrisk, commercial real estate loans to remain stable in a difficult economic environment. Thus, in a May 1989 draft strategic plan, management presented pie charts comparing the percentage of assets classes held by itself, healthy thrifts, and insolvent thrifts. DX 8098 at WOQ 6251634-36. The pie charts showed that Carteret held about the same percentage of single family mortgages as insolvent thrifts, even less cash investments than insolvent thrifts, and twice the land and commercial assets as insolvent thrifts (these are the riskiest asset classes). Id.; Tr. 3416:1-3 (Saunders). Thus, before the breach, Carteret acknowledged that its balance sheet resembled an insolvent thrift rather than a healthy thrift. PFF at ¶ 30. Although Carteret did not recognize the majority of the losses from the pre-breach lending until 1990 and 1991, as Professor Smith noted, these were "bad loans or weak loans that were time bombs, in a sense, and which were ignited by the economic conditions prevailing in 1990 and `91." Tr. 2924:23-2925:1 (R. Smith); PFF at ¶44. In 1990 and 1991, Carteret recognized negative net income of $292 million for reasons totally unrelated to the breach. DX 8000A, Exh. 3, Table 1. The losses Carteret reported in 1990 and 1991 dwarfed Carteret's goodwill balances at the time of the breach ($169 million) and one quarter prior to failure ($139 million). DX 9760; PX 9056. Thus, Carteret's cumulative loan losses in 1990 and 1991 far exceeded the goodwill affected by the breach and meant that Carteret could not have continued as a going concern even if goodwill had been counted as regulatory capital. PX 4867a at WOP 3440545; DX 8124 at FAM002 0533.

14

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2.

FIRREA Had No Material Impact On Carteret's Regulatory Capital Compliance a. The Period Prior To The Injunction

Although FIRREA required a phase out of goodwill from risk-based and core regulatory capital, at the end of 1989 Carteret reported a regulatory capital shortfall of only $19.6 million. Ambase I, 58 Fed. Cl. at 38. Ambase made up this shortfall at the end of 1989 by investing $20 million in Carteret pursuant to the CMA it executed at the time it acquired the bank. Id. Thus, when FIRREA became effective, Carteret complied fully with minimum regulatory capital requirements. Carteret continued to remain in compliance with FIRREA's minimum regulatory capital requirements through June 30, 1990, despite the elimination of goodwill from tangible capital and the phase-out of goodwill from risk-based and core capital. As of June 30, 1990, Carteret calculated that, under FIRREA requirements, it had excess tangible capital of $24.4 million, excess core capital of $29.3 million, and excess risk-based capital of $13.1 million. PX 2109 at KH 054217. As a result of the continuing deterioration of the commercial and corporate real estate portfolios, however, OTS required Carteret to book an additional $77 million in losses in June 1990. With these added reserves, Carteret fell out of regulatory capital compliance by October 1990. Id. at KH054216-054220.12 Although OTS ordered Ambase to provide the additional $30 million it was obligated to invest under the CMA, this investment only partially made up the capital shortfall resulting from the required valuation allowances. PX 2109 at KH 054219; PX 4837.
12

Carteret was deficient by $76 million in tangible capital, $71 million in core capital, and $86 million in risk-based capital. PX 4867a at WOP 3440536. 15

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Thus, Ambase's contention that "[t]he breach's negation of this valuable asset [goodwill] devastated Carteret's regulatory posture," Ambase Brief at 16, is incorrect. As we have demonstrated, the catastrophic losses in Carteret's commercial and corporate real estate portfolios, rather than the phaseout of goodwill, caused Carteret's inability to satisfy FIRREA's minimum regulatory capital requirements. As Mr. Day noted, even if goodwill had been added back to Carteret's tangible capital as of June 1989, its "very severe" asset quality, level of loan loss reserves, lack of core earnings and high overhead expenses would have made its survival extremely problematical. Tr. 1433:14-1434:10 (Day). As Mr. Day testified: "Well, my, you know, perception was, the primary problem was asset quality. The supervisory goodwill I was precluded by instructions from using in my analysis. But even if it had been, the asset quality problems were very severe." Tr. 1433:18-23 (Day); see Vigna Dep. Tr. 158:2-5 (JX 1 at 599) ("[R]ealistically, it's the same institution financially and economically whether you allow the goodwill or don't allow the goodwill"). b. Carteret Secures An Injunction

By the end of 1990, Carteret failed to comply with FIRREA's minimum regulatory capital requirements as a result of write-downs in the commercial and corporate loan portfolios. Accordingly, on January 17, 1991, OTS required Carteret's consent to a capital directive requiring the submission of a capital plan by February 28, 1991.13 Carteret did not file its capital
13

OTS also requested that Ambase invest $30 million under the CMA to partially alleviate Carteret's regulatory capital shortfall. PX 2109 at KH 054219; PX 4837. Because Ambase had suffered extensive losses in its insurance operations, as well as in Carteret, it lacked the money to comply with the CMA. In February 1991, OTS issued a cease and desist order against Ambase requiring payment of the $30 million. Ambase was finally able to invest the $30 million in Carteret after selling its primary subsidiary, Home Insurance Company ("Home"), in February 1991. Id. 16

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plan. Instead, Carteret filed suit in United States District Court for the District of New Jersey seeking to require OTS to count supervisory goodwill as regulatory capital. On February 18, 1991, the district court issued a temporary restraining order and, on April 17, 1991, a preliminary injunction. DX 8124 at FAM 002. Thus, by February 18, 1991, the breach was mitigated and OTS withdrew the capital directive.14 c. The Injunction's Aftermath

During the quarter ended June 30, 1991, as a result of a change of control of Ambase, Ambase appointed a new Board of Directors and management team for Carteret. Mr. Bianco, who was part of a controlling shareholder group at Ambase ("Caribe Investment Group"), was appointed CEO of Carteret. He brought in a new team to operate Carteret and remedy the regulatory capital deficiencies flowing from the real estate and corporate loan losses. Mr. Bianco appointed J. Wayne Moor, a former executive of Amerifirst Savings Bank in Miami, Florida to the position of Executive Vice-President For Commercial Assets. PFF at ¶ 33. Mr. Moor had extensive experience in evaluating problem portfolios. Mr. Bianco asked Mr. Moor to review and evaluate the entire real estate portfolio and recommend a course of action to stem the losses and improve Carteret's balance sheet. Id. Mr. Moor concluded that the

Ambase contends the injunction did not fully mitigate the breach because OTS imposed a supervisory agreement which restricted Carteret's activities while the injunction was in place. Ambase Brief at pp. 34-35. It