Free Motion for Leave to File - District Court of Federal Claims - federal

Case 1:92-cv-00550-MCW

Document 192

Filed 04/24/2008

Page 1 of 5

IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________________________________________ ) ) ) Plaintiff, ) ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. ) _________________________________________ ) NORTHEAST SAVINGS, F.A.,

Civil Action No. 92-550C Judge Williams

PLAINTIFF'S MOTION FOR LEAVE TO NOTIFY THE COURT OF SUPPLEMENTAL AUTHORITY Plaintiff Northeast Savings, F.A. ("Northeast") respectfully requests leave to notify the Court of a newly decided Winstar case from the United States Court of Federal Claims that is directly relevant to several aspects of Northeast's damage claim. On March 14, 2008, this Court issued its opinion in Anchor Savings Bank, F.S.B. v. United States, 2008 WL 725518 (Ct. Fed. Cl. Mar. 14, 2008) (copy enclosed), where Judge Block awarded the bank $382 million in damages for the government's breaches of contract. The award included: lost profit damages of over $137 million; expectation damages (reduced stock proceeds) of $42 million; mitigation costs of nearly $186 million; "wounded bank" damages of over $4.1 million; and damages for increased FDIC insurance premiums of over $4.6 million. The Court also concluded that Anchor was entitled to a gross-up amount (to be determined). Dr. Nevins Baxter, Northeast's expert here, was also the expert witness for Anchor, and the Court found Dr. Baxter to be "a very informed, knowledgeable and credible witness." 2008 WL 725518 at *135 n.48. Anchor Savings is relevant to this case in several important respects:

1

Case 1:92-cv-00550-MCW

Document 192

Filed 04/24/2008

Page 2 of 5

Lost Profits. Judge Block reaffirmed that lost profits are appropriate in Winstar cases, if proven by "the unique circumstances of [the bank's] particular case." 2008 WL 725518 at *63. Ultimately, the Court awarded Anchor over $137 million in lost profits, despite that the bank had experienced negative core earnings for the four years preceding the government's breach. Id. at *60. In other words, while the government continues to maintain (including in this case) that no lost profits are recoverable as a matter of law if the bank experienced actual negative core earnings, this Court found that "`the quantum of plaintiff's actual earnings are irrelevant in a lost profits analysis.'" Id., quoting LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 64, 90 (1999) (emphasis added). Rather, notwithstanding negative core earnings, a fact-specific analysis of the bank's damages claim still must be made before determining whether lost profits can be recovered. The Court further recognized in Anchor Savings that an "actual, historical accounting of profits garnered by some other party" can be the appropriate yardstick for evaluating the bank's own damages. Id. at *103 (emphasis added). Anchor sought to recover lost profits associated with the forced sale of a subsidiary (Residential Funding Corporation, "RFC"). Anchor used the actual profits RFC earned under General Motors Acceptance Corp (RFC's new owner) as a proxy for Anchor's own lost profits. Id. at *121-22. The Court embraced this model as "compelling." Id. at *122. Here, by analogy, Northeast is seeking to recover lost profits associated with the forced divestiture of its wholesale assets. The uncontested facts show that, after March 31, 1990, those assets earned a positive net interest spread throughout the damages period. See, e.g., PX 2028, PX 2059, PX 2028. The government's assertion in the face of this evidence that Northeast's lost profits claim "makes no sense" ignores the applicable legal authority ­ of which Anchor Savings is but the most recent example.

2

Case 1:92-cv-00550-MCW

Document 192

Filed 04/24/2008

Page 3 of 5

Foreseeability. Judge Block also rejected the government's circumscribed view (which it repeats again in this case) of what damages were "foreseeable" at the time of the breach. As the Court observed: "the government seems to equate `foreseeability' with `prediction.' The foreseeability standard, however, is not so wooden." Id. at *90. The government argued in Anchor Savings that it could not reasonably have foreseen that enacting FIRREA's capital requirements would have caused the thrift to divest RFC. The Court disagreed, finding instead that: (a) the contracts for the use of supervisory goodwill were entered into because the thrift was expected to use that goodwill to generate profits (through investment opportunities) that eventually would fill the gap between the assets and liabilities of the failed thrifts it had acquired; (b) the government could have "certainly" foreseen that depriving the thrift of its regulatory capital would force it to adjust its capital ratio by selling assets; and (c) the government "had reason to foresee" that a divestiture of assets would "cause lost profits." Id. at *92. As the Court thus aptly noted: "That is enough. There was no attendant need for [the government] to also have reason to foresee how those lost profits would materialize . . . ." Id. (emphasis in original). Here, the government frames the question of foreseeability just as narrowly as it did in Anchor Savings ­ namely, whether it was foreseeable that Northeast would "plac[e] a bet on falling rates, the bet [would be] consistently successful over a period of five years, and . . . a wholesale portfolio [would be used] as the mechanism for such a bet." Doc. 161, Govt.'s PostTrial Brf. p. 52. However, as Anchor Savings makes clear (as do the other cases cited in Northeast's post-trial briefs), the test is not whether a reasonable person would have been able to foresee the precise movements of interest rates or the precise characteristics of Northeast's assets. And, under the applicable, less "wooden" view, the record shows that (just like in Anchor Savings): (a) Northeast made a predictable response to the elimination of its regulatory capital

3

Case 1:92-cv-00550-MCW

Document 192

Filed 04/24/2008

Page 4 of 5

(it divested assets); and (b) its divesture of those assets resulted in lost profits. This Court therefore should reject the government's position on the lack of foreseeability in this case for the same reasons Judge Block did so in Anchor Savings. Tax Gross-Up. Judge Block likewise noted that the Federal Circuit has held that "`a tax gross-up is appropriate when a taxable award compensates a plaintiff for lost monies that would not have been taxable.'" Anchor Savings, 2008 WL 725518 at *154, quoting Home Savings of America F.S.B. v. United States, 399 F.3d 1341, 1356 (Fed. Cir. 2005). The Court found Dr. Baxter's calculations concerning the gross-up (based on historic tax rates) to be credible, and plans to conduct further proceedings to determine the appropriate gross-up for tax year 2008. Anchor Savings, 2008 WL 725518 at *155. Dr. Baxter made a similar calculation here. Wounded Bank Damages. Just as Northeast does in this case, Anchor maintained that the government's breach caused Anchor to incur higher FDIC insurance costs than it would have incurred as a well-capitalized institution. In response, the government argued ­ just as it does here ­ that "`goodwill is an accounting entry that does nothing to reduce the risk of loss to the FDIC. Thus, the presence of goodwill would not have altered the deposit premiums Anchor was required to pay.'" Anchor Savings, 2008 WL 725518 at *174, quoting Govt's Proposed Findings of Fact. See Doc. 161, Govt's Post-Trial Brf. p. 73 (making the identical argument). Yet, the Court in Anchor Savings summarily rejected the government's position for reasons that could be written for this case as well: Defendant's argument, however, neglects the salient fact that although FDICIA brought a thrift's deposit insurance premiums more in line with the "risk" the institution posed to the insurance fund, a thrift's risk was measured largely by its regulatory capital position. In other words, while there may be several ways to quantify the risk of failure that any one thrift posed, the predominant indicia of risk that the FDICIA regulations relied on in that quantification was capital. Therefore, while defendant perhaps correctly points out that supervisory goodwill ­ the kind of regulatory capital that the breach in this case excluded from capital ­

4

Case 1:92-cv-00550-MCW

Document 192

Filed 04/24/2008

Page 5 of 5

may do very little to improve the relative risk an institution poses to the insurance fund, the fact remains that absent the breach Anchor would have continued to count its supervisory goodwill as regulatory capital. In that scenario, Anchor would have been well-capitalized. Anchor Savings, 2008 WL 725518 at *174 (emphasis added). In short, the reasoning in Anchor Savings supports Northeast's claims for lost profits, a tax gross-up, and reimbursement of the additional FDIC insurance premiums it was required to pay as the result of the government's breaches of its contracts. Dated: April 24, 2008. Respectfully submitted, /s/ James C. Martin James C. Martin REED SMITH LLP 435 Sixth Avenue Pittsburgh, PA 15219 412.288.3131 (phone) 412.288.3063 (fax) (Counsel of Record for Northeast Savings, F.A.) Of Counsel: Donna M. Doblick REED SMITH LLP 435 Sixth Avenue Pittsburgh, PA 15219 412.288.3131 (phone) 412.288.3063 (fax)

5