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Case 1:94-cv-00522-MCW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

No.94-522C (Judge Williams) ______________________________________________________________________________ FIRST ANNAPOLIS BANCORP, INC. Plaintiff

v. THE UNITED STATES, Defendant

DEFENDANT'S RESPONSE TO PLAINTIFF'S POST-TRIAL BRIEF

MICHAEL HERTZ Deputy Assistant Attorney General JEANNE E. DAVIDSON Director KENNETH M. DINTZER Assistant Director Of Counsel: SCOTT AUSTIN MELINDA HART MARK PITTMAN DELISA M. SANCHEZ Trial Attorneys July 23, 2007 TIMOTHY J. ABRAHAM Trial Attorney Commercial Litigation Branch Department of Justice 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 616-0477 Fax: (202) 353-7988 Attorneys for Defendant

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 I. Bancorp Failed To Establish A Total Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. First Annapolis's Viability Is An Essential Element Of Bancorp's Restitution Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Bancorp Has The Burden Of Proving Its Viability At The Time Of The Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Even Assuming It Was the Government's Burden To Demonstrate The Non-Viability Of First Annapolis, We Satisfied That Burden . . . . . . . . . . . 11 1. Bancorp Erroneously Downplays The Regulators' Assessment Of First Annapolis's Condition In December 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Bancorp Erroneously Claims That The Court Can Ignore First Annapolis's GAAP Financial Statements . . . . . . . . . . . . . . . . . . . . 15 Bancorp Erroneously Claims That Our Demonstration Of First Annapolis's Failure Is Premised Upon "Paper" Losses Rather Than Economic Realities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Bancorp Erroneously Claims That Our Analysis Concerning First Annapolis's Viability Fails To "Back-out The FIRREA Factor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 The Contract Required That First Annapolis Meet The Capital Benchmarks Continuously . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

B.

C.

2.

3.

4.

5.

D.

Bancorp Failed To Demonstrate First Annapolis's Viability At The Time Of The Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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1.

Bancorp Places Unwarranted Reliance Upon The Government's Finding, At The Time Of The Conversion, That First Annapolis Could Potentially Be A Viable Thrift . . . . . . . . . . 27 Bancorp Erroneously Relies Upon Mr. Parran's Unsupported, Conclusory Testimony That First Annapolis Would Have Survived . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Bancorp Improperly Relies Upon The Irrelevant Fact That First Annapolis's Service Corporation Projects "Have Value Today" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Bancorp Incorrectly Relies Upon The Purported Satisfaction Of Its June 1989 Benchmark And The Purported Growth In Its Initial Investment As Of September 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Dr. Heiden's Testimony Does Not Demonstrate That First Annapolis Was Viable At The Time Of The Breach . . . . . . . . . . . . . . . . 33

2.

3.

4.

5.

E.

Bancorp's Attempts To Factually Distinguish Admiral And Southwest Are Unavailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 The Breach Was Not The Entire FIRREA Legislation, The Announcement Of The FIRREA Legislation, Or The Enactment Of FIRREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1. 2. 3. The Earliest Date Of The Breach Is December 7, 1989 . . . . . . . . . . . . . . 43 The Breach Is Not The Entire FIRREA Legislation . . . . . . . . . . . . . . . . 45 FIRREA Did Not Breach The Service Corporation Forbearance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Bancorp Did Not Prove That FIRREA's "Shadow" Harmed First Annapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

F.

4.

II. III. IV.

The Contract Cannot Be Unwound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Awarding Bancorp Restitution Would Be An Unfair Windfall . . . . . . . . . . . . . . . . . . . . 56 Bancorp Is Not Entitled To A Tax "Gross-Up" Of Any Damages Award . . . . . . . . . . . 59

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A.

Bancorp Failed To Show The Taxability Of A Damages Award For Restitution With Reasonable Certainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 1. There Is No Evidence Demonstrating That Bancorp's Capital Contribution To First Annapolis "Changed" To Income After The Thrift's Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Bancorp's Damages Are Not Taxable Under The Tax Benefit Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

2.

B.

Even If Bancorp Incorrectly Reports The Award As Taxable Income, Bancorp Will Not Likely Be Taxed On That Award . . . . . . . . . . . . . . . 64 A Tax "Gross-Up" Award Is Speculative And Would Result In A Windfall To Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

C.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

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TABLE OF AUTHORITIES Page(s) FEDERAL CASES Admiral Fin. Corp. v. United States, 378 F.3d 1336 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Admiral Fin. Corp. v. United States, ("Admiral I") 57 Fed. Cl. 418 (2003), aff'd, 378 F.3d 1336 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . 38, 39, 40 Amber Resources v. United States, ("Amber II") 73 Fed. Cl. 738 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 Amber Resources v. United States, ("Amber I") 68 Fed. Cl. 535 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7, 8 American Capital Corp. v. United States, 472 F.3d 859 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Ankenbauer v. Sec'y of Dept. of Health & Human Servs., 31 Fed. Cl. 637 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Argus, Inc. v. Eastman Kodak Co., 801 F.2d 38 (2d Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Bank of America, FSB v. United States, 70 Fed. Cl. 246 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Bank of America, FSB v. United States, 51 Fed. Cl. 500 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Barron Bancshares, Inc. v. United States, 53 Fed. Cl. 310 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Canfield v. Reynolds, 631 F.2d 169 (2d Cir. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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Citizens Fed. Bank v. United States, 59 Fed. Cl. 507 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 65 Comm'r v. Glenshaw Glass Co., 348 U.S. 426 (1955) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Exxon Corp v. United States, 45 Fed. Cl. 581 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 First Annapolis Bancorp, Inc. v. United States, 75 Fed. Cl. 263 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim First Nationwide Bank v. United States, 51 Fed. Cl. 762 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Freeman v. Comm'r, 33 T.C. 323 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Hansen Bancorp, Inc. v. United States, ("Hansen III") 67 Fed. Cl. 411 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Hansen Bancorp, Inc. v. United States, ("Hansen II") 367 F.3d 1297 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Hansen Bancorp, Inc. v. United States, ("Hansen I") 53 Fed. Cl. 92 (2002), rev'd on other grounds, 367 F.3d 1297 (Fed. Cir. 2004) . . . . . . . . . . . . . 42 Hi-Shear Tech. Corp. v. United States, 356 F.3d 1372 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Hughes v. United States, 71 Fed. Cl. 284 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 65 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 LaSalle Talman Bank, FSB v. United States, 45 Fed. Cl. 64 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

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Local Okla. Bank, N.A. v. United States, 59 Fed. Cl. 713 (2004), aff'd, 452 F.3d 1371 (Fed. Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Loesch v. United States, 227 Ct. Cl. 34, 645 F.2d 905 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Michelin Tires (Canada) Ltd. v. First Nat'l Bank of Boston, 666 F.2d 673 (1st Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Mola Dev. Corp. v. United States, 74 Fed. Cl. 528 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Murrey v. United States, 73 F.3d 1448 (7th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Plaintiffs in Winstar-Related Cases v. United States, 37 Fed. Cl. 174 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Raytheon Prod. Corp. v. Comm'r, 144 F.2d 110 (1st Cir. 1944) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 272 F.3d 1335 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Rydzewski v. Sec'y of Dept. of Health & Human Servs., 2007 WL 949759 (Fed. Cl. 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Senza-Gel Corp. v. Seiffhart, 803 F.2d 661 (Fed. Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Slattery v. United States, 73 Fed. Cl. 527 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Southwest Inv. Co., Inc. v. United States, 63 Fed. Cl. 182 (2004), aff'd, 158 Fed. Appx. 283 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 2321 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim State of Washington v. United States, 214 F.2d 33 (9th Cir. 1954) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

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United States v. Gotcher, 401 F.2d 118 (5th Cir. 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 United States v. Johnson Controls, Inc., 713 F.2d 1541 (Fed. Cir. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 48 United States v. Winstar Corp., 518 U.S. 839 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 45 Watt v. Sec'y of Dept. of Health & Human Servs., 2001 WL 166636 (Fed. Cl. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Yoakum v. Comm'r, 2004 WL 1902974 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

STATE CASES Fisher v. Jones, 816 S.W.2d 865 (Ark. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

FEDERAL STATUTES AND REGULATIONS 12 C.F.R. 545.74(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 12 C.F.R. 561.16c(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 17, 32 12 C.F.R. 563.23-3(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 12 C.F.R. 563b.26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 12 C.F.R. 563b.26(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 25 26 U.S.C. 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 26 U.S.C. 111(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 26 U.S.C. 118(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

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54 Fed. Reg. 46,845 (11/8/89) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") of 1989, Pub. L. No. 101-73, 103 Stat. 183 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Rev. Rul. 81-277, 1981 WL 165965 (IRS RRU) (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 61

MISCELLANEOUS 3 Dan B. Dobbs, Law of Remedies 12.7(5) (2d ed. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3 E. Allen Farnsworth, Farnsworth on Contracts 193 (2d ed. 1998) . . . . . . . . . . . . . . . . . . . . . . 59 5 A. Corbin, Corbin on Contracts 1104 (1964) ....................................9

George E. Palmer, The Law of Restitution, 4.5 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Henry Mather, Restitution as a Remedy for Breach of Contract: The Case of the Partially Performing Seller, 92 Yale L.J. 14 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Restatement (Second) of Contracts 243 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Restatement (Second) of Contracts 373 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 9 Restatement (Second) of Contracts 384 cmt. a (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Restatement (Second) of Contracts 384(1)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS FIRST ANNAPOLIS BANCORP, INC., Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 94-522C (Judge Williams)

DEFENDANT'S RESPONSE TO PLAINTIFF'S POST-TRIAL BRIEF Pursuant to this Court's Order of March 30, 2007, defendant, the United States of America, respectfully submits this response to the post-trial brief filed by plaintiff, First Annapolis Bancorp, Inc. ("Bancorp"). For the reasons stated in our opening brief and below, the Court should enter judgment for the Government. INTRODUCTION Bancorp contends that it is entitled to a restitution award of its $13,665,907 investment in First Annapolis Savings Bank, FSB ("First Annapolis"), plus a tax gross-up to compensate Bancorp for its total loss, for a $22,609,959 total award. The evidence, however, demonstrates that Bancorp is not entitled to restitution, or a tax gross-up of that award. In order to be entitled to restitution, the Federal Circuit in Admiral Fin. Corp. v. United States, 378 F.3d 1336, 1345 (Fed. Cir. 2004), mandates that a thrift be viable at the time of the breach. The contemporaneous evidence demonstrates that First Annapolis was not viable at the time of the Government's breach, and, thus, Bancorp is not entitled to restitution. In the face of the overwhelming evidence of non-viability presented at trial, Bancorp now contends that the Government's breach really began in late 1988 or early 1989 because the "shadow" or anticipation of the Financial Institutions Reform, Recovery, and Enforcement Act of

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1989 ("FIRREA") caused First Annapolis's non-viability. Bancorp errs because the Government's breach, by definition, arises only when the Government took actions inconsistent with Bancorp's contract. Here, the alleged breach is the loss of the regulatory forbearance related to First Annapolis's regulatory capital requirements, not the entire FIRREA legislation, nor that legislation's "shadow." Moreover, the contemporaneous evidence demonstrated that First Annapolis's losses upon its loans and other investments were not caused by FIRREA's announcement, enactment, or enforcement. Bancorp also contends that some of First Annapolis's losses were merely "paper losses," and thus should not count towards viability. These losses, however, were economic realities that were required to be recognized by law and by First Annapolis's own internal accounting policies. First Annapolis's refusal to recognize those losses in its reporting to regulatory authorities did not make those losses any less real, nor did it make First Annapolis more viable. Even assuming First Annapolis was viable at the time of the breach, Bancorp has failed to show this contract could be unwound. The Court should not award Bancorp "restitution" of $13,665,907 because Bancorp did not pay this or any amount to the Government, but instead infused the money into First Annapolis, which the thrift then used to enter into various investments with third parties. Awarding Bancorp its investment in this case would not return the parties to the status quo ante. Moreover, because First Annapolis lost Bancorp's investment before the breach and for reasons unrelated to the breach, returning this investment would be a "windfall," placing Bancorp in a better position than it would have been in absent the breach. Finally, even assuming Bancorp was entitled to restitution, it is not entitled to a tax gross-

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up because Mr. Daugherty's testimony failed to prove its award would be taxable.1 ARGUMENT I. Bancorp Failed To Establish A Total Breach In our opening brief, we demonstrated that (1) Bancorp is not entitled to restitution unless the Government's breach was a "total breach," and (2) the breach here was not a "total breach" because First Annapolis was not viable at the time of the breach. Gov't Br. 27-41. In its brief, Bancorp presents numerous arguments, some legal and some factual, challenging the correctness of our demonstration. All of Bancorp's arguments are meritless. A. First Annapolis's Viability Is An Essential Element Of Bancorp's Restitution Claim

Bancorp (Pl. Br. 35-36) does not dispute our demonstration that a breach must constitute a "total breach" for restitution to be available as a remedy. Gov't Br. 27; Hansen Bancorp, Inc. v. United States ("Hansen II"), 367 F.3d 1297, 1309 (Fed. Cir. 2004) ("Significantly, relief in

Bancorp's post-trial brief has 110 post-trial findings of "fact" which contain numerous misstatements and errors regarding the evidence introduced at trial. Pl. Br. 1-35. For example, Bancorp alleges that other than the forbearance, the "Government did not give any other consideration or anything of value" for the formation of the contract. Pl. Br. 6, 6. In support of this, Bancorp cites the testimony of our expert, David Kennedy. At trial, however, Mr. Kennedy actually testified that in addition to the three forbearances, the Government allowed Bancorp to acquire the thrift. Tr. 2330 (Kennedy). Alan Shapiro, our other expert, also testified on this point when he explained that through its initial investment in First Annapolis, Bancorp was "getting the opportunity to own and operate First Annapolis, as long as they met their regulatory capital benchmarks. And effectively, what this means is they got to keep the upside, namely, realize all the profits associated with First Annapolis, while their downside was limited to the loss of their initial investment." Tr. 2465 (Shapiro). In the interest of judicial economy, we do not address every misstatement in Bancorp's post-trial brief, but only those relevant to controlling legal issues in this case.

1

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restitution is `available only if the breach gives rise to a claim for damages for total breach and not merely a claim for damages for partial breach.'") (quoting Restatement (Second) of Contracts 373 (1981)) ("Restatement"). Bancorp also does not dispute (Pl. Br. 35-36) our demonstration that, in order to constitute a "total breach," a breach must "so substantially impair[] the value of the contract to the injured party at the time of the breach that it is just under the circumstances to allow him to recover damages based on all his remaining rights to performance." Gov't Br. 28; Admiral, 378 F.3d at 1345 (citing Mobil Oil Exploration & Producing Southeast, Inc. v. United States ("Mobil"), 530 U.S. 604 (2000)); Restatement 243. As Bancorp correctly notes, the Hansen II court explained that, to be a "total breach," the breach "must be of a relatively high degree of importance." Hansen II, 367 F.3d at 1312 (quoting George E. Palmer, The Law of Restitution, 4.5 (1978)); Pl. Br. 48; see also Hansen Bancorp, Inc. v. United States ("Hansen III"), 67 Fed. Cl. 411, 422 (2005). Bancorp does adamantly dispute, however, our explanation (Gov't Br. 28) that, if First Annapolis was not viable at the time of the breach, the Government's breach, as a matter of law, was not a "total breach." Bancorp erroneously claims that "[w]hether or not First Annapolis may ultimately have succeed [sic] is irrelevant to determining whether Bancorp is entitled to restitution." Pl. Br. 51. Contrary to Bancorp's claim, First Annapolis's viability at the time of the breach is essential to Bancorp's restitution claim. If First Annapolis was not viable at the time of the breach, the breach would not "substantially impair[] the value of the contract" to Bancorp as a matter of law and thus would not constitute a "total breach" because the breach would have no impact on the value of the contract to Bancorp. Similarly, if First Annapolis was not viable at 4

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the time of the breach, the breach was not "of a relatively high degree of importance" (Hansen II, 367 F.3d at 1312), because, in such circumstances, the breach would be of no import to Bancorp. The Federal Circuit in Admiral could not have been more clear, that for purposes of a restitution award, in the Winstar context, the viability of a thrift at the time of breach is an essential element of "total breach." The Federal Circuit approved the trial court's finding that "at the time of the breach Admiral was in such dire straits that it would not have been able to recover, even absent a breach." 378 F.3d at 1345. As a result of this factual finding, the Federal Circuit agreed with the trial court that the breach "had no practical effect on Admiral's ability to find the necessary additional funding for the thrift" and that the breach "`did not substantially impair[] the value of the contract to the injured party at the time of the breach.'" Admiral, 378 F.3d at 1345 (quoting Mobil, 530 U.S. at 608). Accordingly, the appellate court determined that restitution was not an appropriate remedy. Id. at 1345. Following the Federal Circuit's decision in Admiral, this Court has reaffirmed the rule that a thrift's non-viability at the time of the breach precludes an award of restitution. In Southwest Inv. Co., Inc. v. United States, 63 Fed. Cl. 182, 195 (2004), aff'd, 158 Fed. Appx. 283 (Fed. Cir. 2005), cert. denied, 126 S.Ct. 2321 (2006), this Court noted that, in Admiral, the Federal Circuit affirmed the trial court's holding that "[b]ecause Admiral was not harmed by FIRREA, restitution damages were inappropriate." Finding the facts before it analogous to Admiral, the Court concluded that the thrift's condition at the time of breach precluded an award of restitution because the thrift was "insolvent notwithstanding the promises." Id. at 196. Similarly, this Court, in Hansen III, upon remand from the Federal Circuit, concluded that an award of restitution was inappropriate because the thrift was not viable at the time of the breach. 5

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67 Fed. Cl. at 434. In Hansen III, the Court agreed with the Government's contention that, at the time of the breach, the thrift would have failed to meet its capital requirements, even had there been no breach, and that, therefore, no "total breach" had occurred. Id. To support its claim, that First Annapolis's viability is irrelevant, Bancorp (Pl. Br. 49-50) erroneously relies upon Mobil and two decisions of this Court in Amber Resources v. United States ("Amber I"), 68 Fed. Cl. 535 (2005), and Amber Resources v. United States ("Amber II"), 73 Fed. Cl. 738 (2006). Bancorp claims these cases "found immaterial any inquiry to how the injured party may have ultimately fared had the contract been fully performed." Pl. Br. 50. Bancorp incorrectly ignores that: (1) Admiral construed Mobil in a completely contrary manner to its preferred interpretation; and (2) this Court is bound by Admiral and cannot rely upon statements in Amber I and Amber II that conflict with Admiral. Although Bancorp recognizes that Admiral cited to Mobil (Pl. Br. 44), it fails to reconcile its (erroneous) interpretation of Mobil with the holding in Admiral. Bancorp does not dispute nor could it that, in Admiral, the Federal Circuit affirmed the trial court's finding that the breach "had no practical effect on Admiral's ability to find the necessary additional funding for the thrift" and that, therefore, the breach was not a "total breach" as it "`did not substantially impair[] the value of the contract to the injured party at the time of the breach.'" Id. at 1345 (quoting Mobil, 530 U.S. at 608). Yet, Bancorp does not, and cannot, explain how its position that, under Mobil, it is irrelevant, for purposes of determining the existence of a "total breach," how the non-breaching party would have fared absent the breach can be reconciled with Admiral. Indeed, Admiral rejected Bancorp's interpretation of Mobil, and the Admiral court's rejection was followed by this Court in Southwest and Hansen III. Certainly, this Court cannot 6

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reject Admiral's holding and adopt Bancorp's preferred but contradictory interpretation of Mobil. Mobil is different from Admiral and the instant case because, in Mobil, the Government received $156 million in cash from the plaintiffs. In contrast, in Admiral and here, the plaintiffs never provided the Government with the money sought in restitution. Tr. 1080-81 (Parran). In this case, Bancorp infused the $13.6 million it seeks in restitution into its own thrift subsidiary. See Gov't Br. 42-43; Tr. 1082-83 (Parran). Additionally, unlike Mobil, where the Government never conducted any performance, in Admiral and here, the Government allowed the thrift to convert and then performed the contract for a significant period. See Gov't Br. 44; Tr. 1101-02, 1106 (Parran). Bancorp improperly requests this Court to rely upon a discussion of restitution principles from Amber II, which conflicts with Admiral and other Federal Circuit law. See Amber II, 73 Fed. Cl. at 746 n.6; Amber I, 68 Fed. Cl. at 553. Bancorp (Pl. Br. 50) highlights that portion of the Amber II restitution discussion stating that, in rescission (restitution): (1) there is "room for the possibility that the injured party will benefit from the breach" and (2) "the government has no standing to make a `windfall' argument." 73 Fed. Cl. at 747. The Amber II Court explicitly acknowledged that the Federal Circuit has held directly contrary to this portion of the discussion. Amber II, 73 Fed. Cl. at 746 n. 6 ("The Federal Circuit has held that restitution may be inappropriate if `relief would result in an `unfair windfall' to the non-breaching party . . . . [T]he non-breaching party should not be placed in a better position through the award . . . than if there had been no breach.' [Hansen II], 367 F.3d at 1315.') (quoting Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003); see also 7

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Admiral, 378 F.3d at 1345 ("this court has noted restitution should not be awarded if it would result in a windfall to the nonbreaching party . . . . Allowing Admiral to rescind the contract and obtain full restitution would afford it a windfall, contrary to the equitable principles on which the remedy of restitution is based."). Similarly, in Amber I, the Court explicitly recognized that, under Admiral, there is no repudiation or "total breach" and therefore the plaintiff is not entitled to the remedy of restitution when a breach "does not place the private party in a worse position than it was in prior to the breach:" The Admiral court stated that a government breach does not repudiate a contract if the breach does not place the private party in a worse position than it was in prior to the breach. [378 F.3d at 1343]. Admiral, a failing thrift, was unable to comply with financial regulations. Id. at 1337. Admiral entered into an agreement with the government that improved its chance for regulatory compliance. Id. at 1338. The government subsequently breached this agreement with the enactment of new legislation. Id. at 1338-39. The court concluded that the government's violation of the agreement was not a repudiation because it did not leave the thrift in a worse position and was therefore immaterial. Id. at 1343. The thrift was not harmed by the violation merely because the thrift was already traveling down a self-induced road to failure and seizure, independent of the government's breach. Id. Admiral did not have the capital to revive its investment, irrespective of the legislation that happened to be enacted briefly before its failure. Id. Amber I, 68 Fed. Cl. at 553 (emphasis added). The Amber Court's subsequent efforts to distinguish Admiral, are difficult to understand and certainly do not affect, Admiral's direct applicability in this case. Thus, there is no basis whatsoever for this Court to follow the Amber decisions in their departure from established and binding Federal Circuit caselaw.

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B.

Bancorp Has The Burden Of Proving Its Viability At The Time Of The Breach

Bancorp, relying upon inapplicable authority, erroneously claims that the Government has the burden of proving that First Annapolis was not viable. Pl. Br. 56-62. Contrary to Bancorp's contention, it must demonstrate the viability of First Annapolis in order to set forth a prima facie case for restitution. Bancorp (Pl. Br. 35-36) does not dispute that "[a]bsent a total breach, there can be no [restitution] damages." Hansen II, 367 F.3d at 1309; see Restatement 373. Thus, to demonstrate entitlement to an award in restitution, plaintiffs must not only prove that the Government breached the contract, but that the Government's breach was a "total breach;" rather than a partial breach. See Hansen II, 367 F.3d at 1309; Michelin Tires (Canada) Ltd. v. First Nat'l Bank of Boston, 666 F.2d 673, 677 n. 1 (1st Cir. 1981) (citing 5 A. Corbin, Corbin on Contracts 1104 (1964)). As we demonstrated in the preceding section and in our opening brief (Gov't Br. 27-29), a breach does not constitute a "total breach" if First Annapolis was not viable at the time of the breach. E.g., Admiral, 378 F.3d at 1345. Accordingly, Bancorp must prove First Annapolis was viable at the time of the breach or it has not demonstrated a prima facie case for restitution. This Court's analysis in Hansen III illustrates that it is the plaintiff's burden to prove a thrift's viability in the Winstar context when seeking restitution. In Hansen III, on remand from the Federal Circuit to determine whether a "total breach" occurred. This Court noted that "FIRREA's law on restitution imposes the requirement on the non-breaching party to demonstrate that the breach was material . . . ." 67 Fed. Cl. at 429. After concluding that the

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thrift would not have satisfied capital requirements even if the breach had not eliminated or phased-out the thrift's goodwill, the Court concluded that "plaintiffs have not proved by a preponderance of evidence that the Government's breach of contract by dishonoring its commitment to allow HSB to count goodwill toward regulatory capital requirements constituted a material breach of contract." Id. at 434 (emphasis added). Thus, the Court in Hansen III held that the plaintiffs failed to meet their burden of demonstrating that the thrift was viable even absent the breach and, thus, were not entitled to an award of restitution. Bancorp (Pl. Br. 57-58) improperly relies upon American Capital Corp. v. United States, 472 F.3d 859 (Fed. Cir. 2006) to support its claim that it does not have the burden to demonstrate First Annapolis's viability. American Capital is inapposite. There was no claim for restitution in American Capital; instead, American Capital involved a claim for "reliance damages." 472 F.3d at 862. As a result, because "total breach" is not an element of a claim for reliance damages, the entire analysis in American Capital has no applicability here. E.g., Hansen III, 67 Fed. Cl. at 429 ("material [total] breach is a bar to recovery for restitution, but not reliance"). It obviously makes no sense to rely upon a case involving a cause of action that does not require a "total breach" for the proposition that a party seeking restitution does not have the burden to demonstrate a critical element of "total breach," i.e., whether the thrift was viable at the time of the breach. In a similar vein, Bancorp makes the curious argument that the Government "failed to prove there should be an offset to Plaintiff's award." Pl. Br. 53. Although unclear, this argument appears to be an additional effort by plaintiff to place the burden of proof upon the Government to show the non-viability of First Annapolis, this time upon the theory that although "[a] 10

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restitution award may be offset by benefits already received from the defendant, . . . [i]t is not the plaintiff's burden to disprove the government's claimed offset." Id. Bancorp's argument is misplaced because we are not claiming any offset. Instead, we contend that Bancorp did not demonstrate a prima facie case for entitlement to restitution because it did not prove "total breach." Whether our breach is "total" is unrelated to which party bears the burden of proof in a hypothetical scenario in which we claim offset. C. Even Assuming It Was The Government's Burden To Demonstrate The NonViability Of First Annapolis, We Satisfied That Burden

Assuming arguendo the law places upon us the burden to demonstrate the non-viability of First Annapolis, a position with which we disagree, the evidence we proffered at trial more than establishes that First Annapolis was, in fact, not viable at the time of the breach. See Gov't Br. at 32-40. As we demonstrated: In stark contrast to its business plans, which projected that it would make money every quarter, First Annapolis lost money. Gov't Br. 8-11; JX 134 at I-5; Tr. 1170 (Parran); JX 135 at 0882; Tr. 1174-75 (Parran); JX 136 at 0556; Tr. 2246 (Kennedy); DX 4011 (Demonstrative); DX 4012 (Demonstrative); DX 4017 (Demonstrative); Tr. 2249-51 (Kennedy); DX 4018 (Demonstrative); Tr. 2254-55 (Kennedy); DX 4019 (Demonstrative); Tr. 2257-58 (Kennedy). First Annapolis was not able to generate profits from its core banking operations. Gov't Br. 8-10; Tr. 2258-65 (Kennedy). First Annapolis's viability depended upon profits from its service corporation investments which never materialized. Gov't Br. at 6, 9; DX 634 at 5; Tr. 1150, 1170-71 (Parran); Tr. 2248 (Kennedy); DX 4014 (Demonstrative); Tr. 2247-48, 2258 (Kennedy). First Annapolis's asset quality significantly deteriorated after the conversion. Gov't Br. 13-16; Tr. 2265 (Kennedy). Economic conditions and the real estate market significantly deteriorated after the conversion. Gov't Br. 9; Tr. 2234-44 (Kennedy).









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First Annapolis lost money on its real estate portfolio because of the deterioration in asset quality and economic conditions. Gov't Br. 34-36; Tr. 2188-216 (Kennedy). First Annapolis could not raise capital without establishing a "twelve to twenty-four month period of positive earnings . . ." DX 2471 at 1486; Tr. 1191 (Parran); see Gov't Br. 39-40. Prior to the conversion, First Annapolis's predecessor had not been profitable since fiscal 1981, JX 89 at 0070; Tr. 1192 (Parran), and after the conversion First Annapolis remained unprofitable. Gov't Br. 8-11. Even if First Annapolis could have raised capital, it would have needed to raise nearly $17 million to meet its June 30, 1990, 2.1 percent benchmark requirement, even absent the breach, DX 4029 (Demonstrative); Tr. 2278 (Kennedy), and nearly $100 million "to just break even." Tr. 2278-79 (Kennedy); see Gov't Br. 39-40. Based on First Annapolis's own records, it fell below the 1.8 percent benchmark requirement in October 1989 even including all of the goodwill, JX 58 at 1545; Tr. 122124 (Parran), and excluding the loan losses that it had incurred but failed to record in violation of its own policies and the regulations. Gov't Br. 11-13, 16-26, 36-38; Tr. 218992, 2272-76 (Kennedy); DX 397 at 0140, 0150 and 0162; Tr. 1925-26, 1958, 1964 and 1975-76 (Crompton); DX 439 at 1301; Tr. 1788-89 (Jones); 12 C.F.R. 561.16c(d)(3). If First Annapolis had recorded the loan losses when they were actually incurred as required by the regulations and classified its assets in accordance with its own policies, First Annapolis would have fallen below the 1.8 percent benchmark requirement even before October 1989. Gov't Br. 37-39; Tr. 2191-92, 2275-76 (Kennedy).2 Bancorp claims, nonetheless, that, for five separate reasons, our evidence is inadequate to







demonstrate First Annapolis's non-viability at the time of the breach. Pl. Br. 56-62. None of its arguments have merit.

The regulators directed First Annapolis to remove all shareholder related loans from its books, including loans that had been swapped for other loans. DX 439 at 1301; Tr. 1790 (Jones). Mr. Kennedy testified that including shareholder loans in capital was a violation of the accounting rules and the regulations and that if the thrift excluded the $1.6 million in shareholder related loans from its capital, First Annapolis would have failed to meet the June 30, 1989, 1.8 percent benchmark requirement. Tr. 2184-85 (Kennedy). 12

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1.

Bancorp Erroneously Downplays The Regulators' Assessment Of First Annapolis's Condition In December 1988

Bancorp criticizes our reliance upon the December 28, 1988 letter from Supervisory Agent Greg Jones to First Annapolis's Board of Directors (DX 267) in which Mr. Jones transmitted the July 11, 1988 report of examination (DX 118). Pl. Br. 58-59. Bancorp claims that Mr. Jones' letter is not probative of whether First Annapolis would have failed absent the breach because the letter: (1) only "made suggestions" and did not require "any specific action" on First Annapolis's part; and (2) did not advise the bank it was "troubled" or in default. Id. Bancorp improperly dismisses the significance of Mr. Jones' letter. It is significant both because of its content and the regulators' follow-up to the letter. As Mr. Jones explained in his letter: (1) First Annapolis needed to correct the regulatory violations noted in the July 1988 examination; and (2) management needed to be strengthened because the "current team that was in there didn't seem to be doing the job that was necessary to run the institution in a profitable manner." Tr. 1748-49 (Jones). Mr. Jones also advised First Annapolis that "[t]he volume and nature of supervisory concerns reflect unfavorably upon the overall administration of the institution and pose a risk to First Annapolis' long-term viability." DX 267 at 0112 (emphasis added). Finally, Mr. Jones further advised in his letter that, as a result of the July 1988 examination, the regulators took the "very rare" step of asking First Annapolis's Board to "perform an internal assessment of itself, the institution's management team and the current organizational structure, and determine the capability of existing resources to successfully implement the recapitalization plan and restore the institution to a satisfactory condition." DX 267 at 0112; Tr. 1749 (Jones).

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Bancorp also ignores the extensive follow-up to Mr. Jones' letter and the ominous findings of the attached July 1988 examination. In early 1989, First Annapolis responded to the regulators' criticism of its management by hiring, among others, David Cook and David Vorel in early 1989. Tr. 1753 (Jones). Mr. Cook studied First Annapolis's condition and, in February 1989, contacted Mr. Jones "to give him his take on where things stood and some things that he expected to see [First Annapolis] do." Tr. 1759 (Jones). Mr. Cook explained to Mr. Jones that he was "fully aware of the volume and severity of problems facing First Annapolis and spoke rather candidly about them." DX 294 at 1540; Tr. 1758-60 (Jones). On March 8, 1989, Mr. Cook, Mr. Jones, and Supervisory Analyst Leslie E. Hoover met to "discuss some of the recent organization and operational changes which have been effected at First Annapolis in response to the institution's July 11, 1988 report of examination." DX 301 at 1467. Mr. Cook told regulators that "[b]ased on [his] analysis of the organization/operational structure of First Annapolis since joining the staff, he concluded that the institution may have serious problems with several of its loans and management which does not have support or expertise to handle some of the institution's problems." DX 301 at 1467; Tr. 1762-63 (Jones). Furthermore, Mr. Cook told regulators that it was "his belief that President, Douglas Parran, does not realize the seriousness of First Annapolis' problems." DX 301 at 1467; Tr. 1763 (Jones). In March 1989, Mr. Jones also met with the First Annapolis Board and explained that First Annapolis was facing problems with regard to its management structure, low capital, earnings performance, regulatory violations, and problem assets. Tr. 1755 (Jones). First Annapolis's Board and management recognized "the need to improve upon the current weaknesses of a low capital ratio; low interest earning assets/interest bearing liability ratio; and 14

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[its] limited borrowing capacity." DX 291 at 1188; Tr. 1754 (Jones). In follow-up to that March meeting, the regulators sent a letter to First Annapolis's Board, dated March 27, 1989, stressing that it was "essential that each board member individually assess his/her involvement and dedication to First Annapolis, along with that of senior management, in attempting to resolve regulatory violations and operating deficiencies throughout the organization and returning the institution to satisfactory long-term viability." DX 302 at 1424 (emphasis added). Similarly, after Paul Jones and Patrick Cole joined First Annapolis's Board in April 1989, Mr. Cook spoke with them about First Annapolis's financial condition. Messrs. Jones and Cole were "shocked at the condition of" First Annapolis. Tr. 1017-18 (Cook); JX 46 at 1016; see also DX 263; DX 313; DX 2214; DX 2470. 2. Bancorp Erroneously Claims That The Court Can Ignore First Annapolis's GAAP Financial Statements

Bancorp next argues that our reliance upon Bancorp's generally accepted accounting principle ("GAAP") financial statements to demonstrate First Annapolis's non-viability is erroneous because: (1) "the thrift was not required to report to the [Federal Home Loan Bank Board (`FHLBB')] on a GAAP basis; it was only required to report to the Board on a [regulatory accounting principle (`RAP')] basis;" and (2) "a GAAP statement showing a loss did not mean that there would be an equivalent loss on a RAP statement." Pl. Br. 59-60. Both of Bancorp's arguments are incorrect. First, the regulators required thrifts, including First Annapolis, to prepare their financial statements in accordance with GAAP. 12 C.F.R. 563.23-3(c). Moreover, as Mr. Parran

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ultimately admitted, First Annapolis, as required, did report its financial results to the regulators on a GAAP basis. Tr. 1343-45 (Parran). Any contrary testimony from Mr. Parran was simply in error. Second, even if it were true that First Annapolis "was only required to report to the Board on a RAP basis" (i.e., a 25-year amortization period instead of a 15-year amortization period for goodwill), and it is not, the results would not have changed First Annapolis still would have lost money. During fiscal 1989 (the period August 12, 1988, through June 30, 1989), First Annapolis lost $1,019,420 on a RAP basis. JX 58 at 1545. During the period July 1989 through October 1989, First Annapolis lost another $1,281,731 on a RAP basis.3 JX 58 at 1545. During the month of November 1989, First Annapolis lost an additional $1,046,845 ($2,328,576 $1,281,731) on a RAP basis. DX 2294 at 1612; JX 58 at 1545. Thus, whether calculated upon a GAAP or RAP basis, First Annapolis still significant amounts of money, and those losses demonstrate its non-viability. 3. Bancorp Erroneously Claims That Our Demonstration Of First Annapolis's Failure Is Premised Upon "Paper" Losses Rather Than Economic Realities

Citing purported testimony from Greg Jones, Bancorp erroneously claims that our evidence demonstrating the non-viability of First Annapolis is inadequate because "a conclusion of failure based on a `paper' loss ignores the economic realities of a bank's operations." Pl. Br. at 60. As an initial matter, there is no evidence in the record supporting Bancorp's claim.
3

During the four month period ending October 1989, First Annapolis improperly recorded negative loan losses of $600,000, which incorrectly reduced its loss during this period by a similar amount. JX 58 at 1543; DX 4027 (Demonstrative); Tr. 2271 (Kennedy). 16

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Although Bancorp relies solely upon Mr. Jones' testimony, Mr. Jones never testified that "paper" losses are unrelated to economic losses; that First Annapolis incurred only "paper" losses; or that the Government's conclusions regarding the causes of First Annapolis's failure are based upon these alleged "paper" losses. In fact, nowhere in Mr. Jones's entire testimony does he even mention so-called "paper" losses. Although unclear, Bancorp apparently is referring to the loan losses that First Annapolis incurred as "paper" losses. See Pl. Br. 60. If so, Bancorp incorrectly ignores the fact that the regulations required First Annapolis to maintain adequate loan loss reserves in accordance with GAAP (12 C.F.R. 561.16c(d)(3)), and that those reserves reduced First Annapolis's regulatory capital and its profitability. Tr. 2155 (Kennedy). There is no forbearance that allowed First Annapolis to record only those losses that, in its view, reflected the "economic realities of a bank's operations" and enabled it to ignore applicable regulations and accounting rules. See Tr. 1865 (Jones). In addition, regulators assessed a thrift's safety and soundness based upon the regulations and the thrift's accounting profits and losses, not a thrift's subjective belief as to "economic realities of a bank's operations." See Tr. 1884-85 (Crompton). In any event, the loan losses that First Annapolis recorded were not merely "paper" losses, but instead constituted First Annapolis's "economic realities" in 1989. For example, the nearly $1 million loss on the Dennis Blaeuer loan was based upon the sales price of the underlying collateral, Tr. 2213-14 (Kennedy); DX 2289 at 0760, while the nearly $1.5 million loss on the Northampton loan and the $3.2 million loss on the Bayside loan were both based upon the appraised value of the underlying collateral. Tr. 2208-09, 2204-05 (Kennedy).

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4.

Bancorp Erroneously Claims That Our Analysis Concerning First Annapolis's Viability Fails To "Back-out The FIRREA Factor"

Bancorp's argument that our witnesses "wholly failed to back-out the FIRREA factor," Pl. Br. 60-61, fails for two reasons. First, the analysis of First Annapolis's viability, absent the breach, requires only that, the Court "back out" FIRREA's breaching provisions, not the entirety of the statute. Second, Bancorp is simply incorrect that our proffered analysis and testimony failed to account for the breach's effects. As we have demonstrated, all of FIRREA did not breach Bancorp's contract. See, e.g., Tr. 2513 (Shapiro); see also United States v. Winstar Corp., 518 U.S. 839, 846-47 (1996). The only provision of FIRREA which constituted a breach under the Court's analysis is the phase-out of First Annapolis's goodwill. First Annapolis Bancorp, Inc. v. United States, 75 Fed. Cl. 263, 278-79 (2007). Thus, the question is not whether FIRREA impacted First Annapolis, but whether FIRREA's breaching provisions. Our expert Mr. Kennedy, testified that First Annapolis was no longer viable by the third quarter of 1989. Tr. 2150 (Kennedy). Bancorp's claim that Mr. Kennedy "failed to back-out the FIRREA factor" is completely wrong. Mr. Kennedy carefully explained the causes of First Annapolis's operating losses. The breach was not one of them. Indeed, there is simply no evidence and Bancorp cites to none that suggests that the breach caused First Annapolis's higher than expected operating expenses and lower than expected interest income (the primary factors causing its operating losses). Mr. Kennedy traced First Annapolis's operating losses from the October 1988 through June 1989, to $1.6 million in

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additional overhead expenses that had not been budgeted for and a $2.2 million shortfall in interest income due to declining asset quality. DX 4017 (Demonstrative); Tr. 2250-51 (Kennedy). Mr. Kennedy explained that First Annapolis's operating losses during the quarter ending September 1989 were due to higher than expected operating expenses and a shortfall in interest income. Id. The sale of interest earning assets (in order to book gains to offset losses) and the continuing deterioration in asset quality caused this shortfall. DX 4018 (Demonstrative); Tr. 2256 (Kennedy). Further, First Annapolis's operating losses for the quarter ending December 1989 were due, once again, to higher than expected operating expenses and lower than projected interest income (because of First Annapolis's asset quality problems). Id. Finally, First Annapolis's loss during the fourth quarter of 1989 was further due to the fact that, while First Annapolis projected nearly $1.5 million in service corporation income for the quarter, the thrift only earned $38,832. DX 4019 (Demonstrative); Tr. 2257-58 (Kennedy).4 Likewise, Mr. Kennedy testified that the breach did not cause First Annapolis's loan losses, including the losses incurred on the Bayside Marina, Northampton, and Dennis Blaeuer loans. DX 4005-4008 (Demonstrative); Tr. 2192-93, 2199-2216 (Kennedy). Mr. Kennedy based this opinion on a detailed study of the facts related to each loan. Id. Mr. Kennedy also identified the amount of loan losses that First Annapolis should have

As we have noted (Gov't Br. at 33-35), it is undisputed that First Annapolis's viability depended upon its ability to realize the projected service corporation profits. DX 634 at 5; Tr. 1150, 1170-71 (Parran); Tr. 2237-38 (Kennedy). As the service corporation's profitability depended upon market conditions, DX 118 at 0035; Tr. 1915-16 (Crompton); Tr. 1187 (Parran); Tr. 2243 (Kennedy), the deterioration in economic conditions in 1989 was sufficient, in itself, to cause First Annapolis to fail. Gov't Br. 9; Tr. 2343-46 (Kennedy). 19

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recorded based upon either a contemporaneous valuation of the underlying collateral or an agreed upon sales price for the collateral. Tr. 2204-05, 2208-09; 2213-14 (Kennedy). The loan losses were due to a deterioration in the value of the loans as manifested by the contemporaneous valuations or agreed upon sales price. Tr. 2205-06, 2208-09, 2283-84 (Kennedy). First Annapolis offered no evidence that the breach, the loss of the regulatory forbearances, caused the value of the underlying collateral to deteriorate. Indeed, Mr. Kennedy testified that many of the losses on the collateral should have been recorded prior to the breach. Certainly, First Annapolis's lost forbearances did not cause the loan losses that should have been recorded prior to the breach. Mr. Kennedy also testified that the loan losses recorded after the breach had nothing to do with the loss of the regulatory forbearances. Tr. 2199-2216 (Kennedy). Mr. Kennedy based his opinions upon the accounting rules, the regulations, and First Annapolis's own policies. Tr. 2155, 2205-06, 2210, 2214, 2276 (Kennedy). First Annapolis did not have a forbearance that allowed it to disregard the accounting rules or regulations as to when a loan loss had to be recognized. See Tr. 1865 (Jones). Bancorp argues that Mr. Kennedy failed to consider the impact of the breach upon First Annapolis. Pl. Br. 61. First, Bancorp cites to testimony from Mr. Kennedy that reflects nothing more than his agreement that his analysis incorporates post-FIRREA data. Id. (citing Tr. 2310 (Kennedy)). Second, Bancorp relies upon testimony in which Mr. Kennedy merely explains that he did not pinpoint the precise day within the third quarter of 1989 in which First Annapolis became non-viable. Id. (citing Tr. 2322 (Kennedy)). As Mr. Kennedy explained, in order to pinpoint the exact day in the third quarter of 1989 that First Annapolis became non-viable, one would have to perform a very expensive line-by-line by liquidation analysis of First Annapolis's 20

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assets at different points in time. Tr. 2321-22 (Kennedy). Finally, in the third portion of Mr. Kennedy's testimony upon which Bancorp relies, Mr. Kennedy was responding to a crossexamination question concerning the cause of First Annapolis's post-FIRREA losses. Tr. 2380 (Kennedy). Mr. Kennedy responded, correctly, that one cannot determine the causes of these losses absent a study of the cause of the losses. Id. Of course, Mr. Kennedy performed exactly such a study and identified various factors that caused the failure of First Annapolis none of which had anything to do with the breach. In an effort to discredit Mr. Kennedy (and Dr. Shapiro), Bancorp relies upon purported "facts" that First Annapolis's regulatory capital increased from September 1988 through March 1989; that the thrift was in capital compliance through the end of the third quarter of 1989; and that capital significantly dropped at the end of 1989. Pl. Br. 61-62. Bancorp's reliance is misplaced. The only reason First Annapolis's regulatory capital "increased" from September 1988 through March 1989 was because of First Annapolis's acknowledged error in making its regulatory capital calculations. Specifically, during the quarter ended March 1989, First Annapolis established a $1.75 million general valuation allowance on the Bayside loan. Tr. 1349-50 (Parran); DX 2474. This had the effect of erroneously increasing First Annapolis's regulatory capital. DX 2474; Tr. 1350 (Parran). First Annapolis has since admitted that it should have classified the $1.75 million as a specific valuation allowance, not a general valuation allowance. Tr. 1350-51 (Parran); DX 2474. Properly accounting for this loss would have actually decreased First Annapolis's regulatory capital by $1.75 million, instead of increasing it. DX 2474; Tr. 2171 (Kennedy); see also Tr. 1787-88 (Jones). Thus, with proper accounting, First 21

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Annapolis's regulatory capital decreased between September 1988 and March 1989. Similarly, Bancorp's claim that First Annapolis was in capital compliance through the third quarter of 1989 improperly depends upon First Annapolis's failure to record loan losses and classify problem assets. Tr. 2189-90, 2276 (Kennedy); DX 397 at 0150 and 0162; Tr 1958, 1975-76 (Crompton); see also Tr. 1787-88 (Jones). Had First Annapolis properly recorded its loan losses and classified its problem assets, as required by GAAP and the regulations, it would have been out of compliance by the third quarter of 1989. Tr. 2191, 2276 (Kennedy). To support its claim that our expert did not consider the breach's impact on First Annapolis's viability, Bancorp attempts to make much of the fact that "most of the losses which impacted Mr. Kennedy's report were in late 1989 or early 1990." Pl. Br. 62. While technically correct, Bancorp's argument misses the point. The reason that most of the losses occurred in late 1989 or early 1990 is because a significant portion of those losses were related to First Annapolis's loan portfolio, and, as Mr. Kennedy testified, these losses should have been recorded by at least the third quarter of 1989. Tr. 2189-92 (Kennedy). In addition, while First Annapolis was able to reduce its losses during the fiscal year ended June 1989 by $4.4 million due to gains from asset sales, it could not do the same thing after June 1989, because it did not have assets remaining that it could sell for a profit. Tr. 2251-54 (Kennedy). In other words, after June 1989, First Annapolis was no longer able to mask its true operating deficits. Tr. 2450-52 (Shapiro).

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5.

The Contract Required That First Annapolis Meet The Capital Benchmarks Continuously

As we demonstrated, under the contract, First Annapolis was required to increase its regulatory capital to at least 1.8 percent of liabilities by June 30, 1989, and 2.1 percent by June 30, 1990. Gov't Br. 36; JX 134 at 0521. Even by its own inaccurate reporting, First Annapolis failed this capital requirement (including all of the goodwill) on or before October 31, 1989. Gov't Br. 36; JX 58 at 1545; Tr. 1772-74 (Jones). By December 31, 1989, First Annapolis's reported capital ratio was 1.55 percent, $1.9 million less than the benchmark requirement. JX 61 at 1645. In addition, we further demonstrated that, if First Annapolis had correctly classified losses on loans, it would have fallen out of capital compliance far earlier than its reported October 31, 1989 failure and would have been non-viable by June 1989. Gov't Br. at 38-39; Tr. 2189-91, 2276 (Kennedy); see also Tr. 1797 (Jones) (even absent FIRREA, First Annapolis "clearly was not a viable institution"). Unable to demonstrate it was in capital compliance as of October 31, 1989, Bancorp claims that it was not required to satisfy any capital requirement as of that date. Specifically, Bancorp contends that "First Annapolis's compliance with the regulatory capital benchmarks [1.8 percent, 2.1 percent, 2.4, 2.7 percent, and 3.0 percent of liabilities] was to be measured on specific dates [June 30, 1989, June 30, 1990, June 30, 1991, June 30, 1992, and June 30, 1993], and there was no term of the contract which required ongoing or increasing compliance in between periods." Pl. Br. 25 (emphasis added). Thus, according to Bancorp, the contract only required First Annapolis to meet the five annual regulatory capital benchmarks for one day a year, on June 30th. Id. Bancorp's claim lacks merit for several reasons.

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First, Bancorp's claim is nonsensical. Bancorp's "one day out of the year" interpretation of the capital benchmarks would essentially require no maintenance of a regulatory capital to cushion First Annapolis, its depositors, or the Federal Savings and Loan Insurance Corporation ("FSLIC") from any risk of loss, and would eliminate any requirement upon Bancorp to operate First Annapolis in a safe and sound manner. For example, Bancorp's preferred interpretation would be akin to saying that the contract allowed Bancorp to infuse $11 million into the thrift on day one of the conversion, and then to pay a "dividend" of $11 million back to Bancorp on the next day. Of course, this would not be permissible. Capital is so important to the health of thrift that the regulators would not have and could not have agreed to forbear from any requirement at all for all but five days out of a five year period, as they would have been derelict in their duty to ensure that the thrift was operated in a safe and sound manner. See Tr. 2178-80 (Kennedy). Mr. Kennedy testified that he had never seen a thrift with a "one day a year" capital requirement. Tr. 2118-2119, 2179-80 (Kennedy). Similarly, Mr. Jones testified that Bancorp's claim that a thrift can meet its one-day-a-year capital requirement by "managing its balance sheet" (Pl