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

Case 1:92-cv-00550-MCW

Document 186

Filed 02/29/2008

Page 1 of 33

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

No. 92-550C (Judge Williams)

DEFENDANT'S MOTION FOR LEAVE TO NOTIFY THE COURT OF SUPPLEMENTAL AUTHORITY Defendant, the United States, respectfully requests leave to notify the Court of a newly decided case from the United States Court of Federal Claims that is directly relevant to the damage claims presented in this case. On February 19, 2008, this Court issued its opinion in Sterling Savings Association. v. United States, Fed. Cl. , 2008 WL 465962 (February 19, 2008) ("Sterling"). This Court

rejected plaintiff's lost profits claim in its entirety. In Sterling, this Court held that "Sterling could not have added incremental assets at the same rate of return as Sterling's actual assets." 2008 WL 465962 at *26. The Court noted initially that plaintiff's model assumed that its incremental assets would have "achieved the same profitability as Sterling's actual asset[s] . . . ." 2008 WL 465962 at *25. The Court rejected this assumption because it ignores "the law of diminishing returns." Id. As this Court explained, "thrifts will borrow their least expensive funds first, and when that source of funds is exhausted, they will move to a more expensive source, and when the more expensive source is exhausted they will move to an even more expensive source." Id. The Court further explained that, "[w]ith regard to assets, thrifts will invest in the most profitable assets first, and then move to the less

Case 1:92-cv-00550-MCW

Document 186

Filed 02/29/2008

Page 2 of 33

profitable assets." Id. Consequently, the Court concluded, incremental assets cannot earn as high a rate of return as the actual assets of a thrift. Id. at 25-26. The Court's reasoning and analysis are fatal to Northeast's claim in this case. During the time period for which Northeast claims lost profits, its actual assets and liabilities resulted in a negative return. Tr. 877 (Baxter); DX 3001; DX 4026; DX 5016; Tr.1786-87 (Fischel). Northeast is asking the Court to assume that Northeast's incremental assets and liabilities would have achieved far higher, indeed, infinitely higher returns than its actual assets. This, of course, makes no sense and conflicts with the holding in Sterling. As our experts demonstrated in this case, and as this Court held in Sterling, "banks like all of the firms exploit their best opportunities first." Tr. 2491-92 (Thakor). Gov. Br. at 45-46. As Northeast's actual returns were negative, any incremental investments would presumably fair even worse. Accordingly, Northeast is not entitled to any lost profits.

2

Case 1:92-cv-00550-MCW

Document 186

Filed 02/29/2008

Page 3 of 33

Respectfully submitted, MICHAEL F. HERTZ Deputy Assistant Attorney General

/s/ Jeanne E. Davidson JEANNE E. DAVIDSON Director

/s/ Kenneth M. Dintzer KENNETH M. DINTZER Assistant Director

OF COUNSEL: SCOTT AUSTIN Senior Trial Counsel ELIZABETH HOSFORD SAMEER YERAWADEKAR Trial Attorneys

/s/ Tarek Sawi TAREK SAWI Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Telephone: (202) 616-0323 Facsimile: (202) 307-0972 Attorneys for Defendant

February 29, 2008

3

Case 1:92-cv-00550-MCW

Document 186

Filed 02/29/2008

Page 4 of 33

CERTIFICATE OF FILING I hereby certify that on the 29th day of February, 2008, a copy of the foregoing "DEFENDANT'S MOTION FOR LEAVE TO NOTIFY THE COURT OF SUPPLEMENTAL AUTHORITY" was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

/s/Scott D. Austin

4

Case 1:92-cv-00550-MCW

Document 186

Filed 02/29/2008

Page 5 of 33

ATTACHMENT

Case 1:92-cv-00550-MCW
--- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

Document 186

Filed 02/29/2008

Page 6 of 33
Page 1

Sterlling Savings Ass'n v. U.S. Fed.Cl.,2008. Only the Westlaw citation is currently available. United States Court of Federal Claims. STERLING SAVINGS ASSOCIATION, Plaintiff, v. The UNITED STATES, Defendant. No. 95-829C. Feb. 19, 2008. Background: Thrift and its parent filed suit against the United States alleging that passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) breached promises made by the government in connection with plaintiff's supervisory acquisition of three ailing thrifts. Government was found liable for breach in two of the transactions, 53 Fed.Cl. 599. Trial was held on damages. Holdings: The United States Court of Federal Claims, Wheeler, J., held that: (1) thrift did not meet its burden on lost profits claim; (2) thrift was entitled to recover "wounded bank" damages of $154,646 in additional regulatory supervision costs it incurred due to government's post-breach treatment of it as a troubled thrift owing to its inability to meet regulatory capital requirements; and (3) thrift was entitled to recover $900,204 in transaction costs that it incurred in connection with public stock offering to replace lost supervisory goodwill. So ordered. [1] Damages 115 0

115 Damages Breach of contract damages for lost profits are recoverable where a plaintiff demonstrates that: (1) the loss was the proximate result of the breach; (2) the loss of profits resulting from the breach was foreseeable; and (3) the damages can be proven with reasonable certainty. [2] Damages 115 0

115 Damages The non-breaching party has a duty to mitigate breach of contract damages. [3] Damages 115 0

115 Damages The elements of a "lost volume seller" claim for breach of contract damages are: (1) the injured party possessed the capacity to make additional sales; (2) the injured party would have realized profit in making the additional sales; and (3) the injured party probably would have made additional sales absent the breach. [4] Damages 115 0

115 Damages To prevail on a "lost volume seller" claim for breach of contract damages, the injured party must show that the profits on the additional sales would have been at least equivalent to the profits earned on actual sales. [5] United States 393 0

393 United States "Lost volume seller" doctrine typically applied to breach of contract damages suffered by a seller of goods was not applicable to establish thrift's lost profits arising from government's breach of supervisory merger contract which allowed it to treat supervisory goodwill as regulatory capital. [6] United States 393 0

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

Document 186

Filed 02/29/2008

Page 7 of 33 2 Page

393 United States Thrift which prevailed in suit against the government for breach of supervisory merger contracts which allowed it to treat supervisory goodwill as regulatory capital did not meet its burden of showing that its lost profits were foreseeable from the loss of $15.5 million in goodwill, that they were the proximate cause of the government's breach, or that there was reasonable certainty as to their amount. [7] United States 393 0

Thrift which prevailed in suit against the government for breach of supervisory merger contracts which allowed it to treat supervisory goodwill as regulatory capital was entitled to "wounded bank" damages of $154,646 in additional regulatory supervision costs it incurred due to government's post-breach treatment of it as a troubled thrift owing to its inability to meet regulatory capital requirements. [10] United States 393 0

393 United States Thrift which prevailed in suit against the government for breach of supervisory merger contracts which allowed it to treat supervisory goodwill as regulatory capital was not entitled to "wounded bank" damages in form of costs thrift incurred in connection with post-breach public stock offering to raise capital which was cancelled because of regulators' disapproval of thrift's request to pay dividends on the stock; although public offering would likely have gone forward absent the government's breach because thrift would have had ample capital to justify payment of dividends, thrift did not present its $1,004,383 claim with reasonable certainty. [8] United States 393 0

393 United States Thrift which prevailed in suit against the government for breach of supervisory merger contracts which allowed it to treat supervisory goodwill as regulatory capital was entitled to damages in form of $900,204 in transaction costs that it incurred in connection with public stock offering to replace lost supervisory goodwill. William D. Symmes, with whom were Leslie R. Weatherhead and William M. Symmes, Witherspoon, Kelley, Davenport & Toole, P.S., Spokane, Washington, for Plaintiff. Elizabeth M. Hosford, with whom were Michael F. Hertz, Deputy Assistant Attorney General, Jeanne E. Davidson, Director, Kenneth M. Dintzer, Assistant Director, United States Department of Justice, Commercial Litigation Branch, Civil Division, Washington, D.C., Tarek Sawi, Timothy J. Abraham, Melinda H. Hart, Elizabeth A. Holt, William G. Kanellis, and Delisa Sanchez, Of Counsel, for Defendant. OPINION AND ORDER FN1 WHEELER, Judge. *1 In this Winstar case, the Court must determine the damages due Plaintiff from Congress's passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"). The legal theory in these cases is that FIRREA's restrictions on the inclusion of goodwill in regulatory capital constitute a breach of the Government's assist-

393 United States Thrift which prevailed in suit against the government for breach of supervisory merger contracts which allowed it to treat supervisory goodwill as regulatory capital was not entitled to "wounded bank" damages in form of losses relating to commercial loan which it could not fund further because of post-breach regulatory restriction on loans to one borrower, as thrift's loan committee authorized commencement of foreclosure proceedings against loan prior to effective date of post-breach regulations. [9] United States 393 393 United States 0

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

Document 186

Filed 02/29/2008

Page 8 of 33 3 Page

ance agreement created when one thrift institution acquired another during the savings and loan industry crisis in the 1980s. See United States v. Winstar Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996). The present case arises from the acquisitions by Sterling Savings Association ("Sterling") of three troubled thrifts in the State of Washington: (1) Lewis Federal Savings & Loan Association of Chehalis, WA ("Lewis Federal") in 1985; (2) Tri-Cities Savings & Loan Association of Kennewick, WA ("TriCities") in 1988; and (3) Central Evergreen Federal Savings & Loan Association of Chehalis, WA ("Central Evergreen") in 1988. In prior rulings on liability, our Court held that the Government breached its agreements with Sterling in the Lewis Federal and Tri-Cities transactions, Sterling Savings et al. v. United States, 53 Fed.Cl. 599 (2002), but that Sterling assumed the risk of regulatory change in its acquisition of Central Evergreen. Sterling Sav. Ass'n v. United States, 72 Fed.Cl. 404 (2006). The Court based its 2006 ruling on the Federal Circuit's decision in Admiral Financial Corp. v. United States, 378 F.3d 1336, 1341 (Fed.Cir.2004). The Court's task, therefore, is to determine the damages due Sterling from the Government's breach of the Lewis Federal and TriCities agreements. Sterling claims $63.3 million in lost profits and "wounded bank" damages between 1989 and 2006. Sterling also presented an alternative claim for capital replacement costs. Defendant opposes these claims, but acknowledges liability for $900,204 in transaction costs that Sterling incurred in 1991 to replace the goodwill eliminated by FIRREA. The Court conducted a 14-day trial in Spokane, Washington from June 25 to July 13, 2007. The Court's evidentiary record consists of the testimony of twenty-three witnesses, 672 exhibits, and 4,356 transcript pages. The parties filed post-trial briefs on September 21, 2007, and reply briefs on November 19, 2007. The Court heard closing arguments in Washington, D.C. on January 9, 2008.

The fact witnesses at trial in order of appearance were: Harold Gilkey, Sterling's Chief Executive Officer; James Faulstich, former President of the Federal Home Loan Bank of Seattle; John Harlow, President of Intervest Mortgage Investment Company, a Sterling subsidiary; former Sterling loan officers Cajer Neely and Gary Crithfield; Stephen Page, a Sterling vice president and chief loan officer; Rodney Barnett, a Sterling board member; Heidi Stanley, a Sterling senior vice president; Thomas Beil, a former Sterling loan officer; Daniel Byrne, Sterling's Chief Financial Officer; David Welch, a financial consultant; Carol Friend, a former Office of Thrift Supervision ("OTS") Assistant Director in the Seattle District; William Zuppe, Sterling's President and Chief Operating Officer; John Potthast, an OTS regulator from the Seattle District; and Edwin Hedlund, former OTS Assistant Regional Director in the Seattle District. *2 Each party also presented expert testimony. Plaintiff's experts were Dr. William Conerly, Dr. Paul Horvitz, Paul Schott, and Dr. Christopher James. Defendant's experts were Barefoot Bankhead, Joe Hargett, Dr. William Hamm, and Dr. Mukesh Bajaj. In brief summary, the Court finds that Sterling has been a superbly managed institution since its founding in 1983, and that Sterling saved the Government significant expense when it acquired the failing thrifts, Lewis Federal in 1985, and Tri-Cities in 1988. Sterling made these acquisitions with the Government's encouragement, and in reliance upon the Government's promises and assistance. Sterling likely would not have acquired Lewis Federal and Tri-Cities if it had known that Congress would enact FIRREA in 1989. Further, with the Court's advantage of perfect hindsight, federal regulators at the OTS and the Federal Deposit Insurance Corporation ("FDIC") over-supervised Sterling after FIRREA's passage, imposing harsh and unnecessary restrictions on a model thrift. If the regulators simply had left Sterling alone to address the new capital requirements, the Court is confident that Sterling

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

Document 186

Filed 02/29/2008

Page 9 of 33 4 Page

would have rebounded from FIRREA's effects in short order. Indeed, Sterling had planned to raise capital in a 1989 public offering, but the offering had to be cancelled due to regulators' concern that Sterling should not pay dividends on preferred stock. If this offering had gone forward, and if the regulators had exercised reasonable restraint, Sterling largely would have been unscathed by FIRREA. As it turned out, the zealous regulators made Sterling's journey more difficult, but not surprisingly, Sterling's superior management enabled the thrift to survive and prosper. When faced with potential extinction in May 1990, Sterling obtained injunctive relief against the OTS and the FDIC that allowed Sterling to remain in business. Sterling Sav. Ass'n v. Ryan, 751 F.Supp. 871, 881-82 (E.D.Wash.1990), rev'd,959 F.2d 241 (9th Cir.1992) (unpublished table decision). Thereafter, Sterling moved forward despite regulator conduct that, if not in violation of the District Court's injunction, at least bordered on impermissible activity. Confronted with such regulator conduct, Sterling could have sought further relief from the District Court, but it did not. Instead, Sterling pressed ahead until, in November 1991, it replaced the capital lost through FIRREA. Sterling today is a thriving regional bank with 3,000 employees and more than $11 billion in assets. The $15.5 million in supervisory goodwill that Sterling lost due to the Government's breach of the Lewis Federal and Tri-Cities assistance agreements proved to be little more than a "speed bump" in an unqualified success story. In dealing with the breach, Sterling obtained its injunction, replaced the lost capital, and continued on with its history of growth and profitability. While there might have been a damages theory to capture the impacts of the Government's breach and the regulators' conduct during 1990 and 1991, Sterling has not made a persuasive showing of what those damages may be. Defendant is closer to the mark in asserting that, if Sterling suffered any damages, they surely are

slight. It is not plausible to conclude that the elimination of $15.5 million in regulatory capital caused more than $58 million in lost profits between 1989 and 2006, where Sterling replaced the lost capital in 1991, and softened FIRREA's blow by obtaining an injunction in 1990. *3 Some of the harms that Sterling asserts, such as lost customers, employee turnover, and poor morale, are matters of conjecture, and Sterling's experts did not attempt to quantify them. As the Court will explain, Sterling's lost profits model contains many major flaws. The Court therefore must conclude that Sterling has not met its burden of proof of showing that its lost profits were foreseeable from the loss of $15.5 million in goodwill, that the damages were the proximate cause of the Government's breach, or that the damages were established with any reasonable certainty. See Globe Sav. Bank, FSB v. United States, 65 Fed.Cl. 330, 345 (2005), and cases cited therein. Simply stated, notwithstanding regulator conduct that deserves to be reprimanded, the Court finds that the lost goodwill from the Government's breach was relatively insignificant, and that Sterling successfully mitigated the damages caused by the breach. A complication in this case arises from the differing legal treatment of the three transactions. The Government breached the Lewis Federal and TriCities agreements, and thus the supervisory goodwill from those transactions is "contractual." However, the Government did not breach the Central Evergreen agreement, a larger transaction than the other two combined, and therefore the Central Evergreen goodwill is "non-contractual." Due to the differing legal treatment, the parties sharply contested at trial whether Sterling would have been capital compliant after FIRREA absent the breach. The Court rules for Sterling on this issue, and thereby rejects the views of Defendant's experts, Mr. Bankhead and Mr. Hargett. Even with this favorable ruling, however, Sterling's lost profits claim still must fail. Sterling claims "wounded bank" damages relat-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 10 of 33 5 Page

ing to: (1) the cancelled 1989 public offering; (2) additional regulatory supervision costs due to the Government's treatment of Sterling as a troubled thrift; (3) losses relating to a "CJ-4" loan; (4) losses resulting from the potential acquisition of Great American Savings Bank branches; and (5) additional litigation and accounting costs. These claims will be addressed individually below, but the additional regulatory supervision claim is granted in part in the amount of $154,646. When added to Defendant's acknowledged liability of $900,204, the total damages awarded to Sterling are $1,054,850. The other claims are denied. With this decision, the Court has disposed of all of Sterling's contract claims, and the Court therefore dismisses with prejudice the taking of property claims asserted by Sterling and Sterling Financial Corporation. See Sterling, 53 Fed.Cl. at 615 n. 4. Findings of Fact A. Sterling's Background Sterling began its business in April 1983 as a federally insured savings and loan association, headquartered in Spokane, Washington. (Gilkey, FN3 Tr. 68-69; Stip. 1). Two of Sterling's founders, Harold Gilkey and William Zuppe, sold Sterling stock to raise an initial $2.1 million in capital. (Gilkey, Tr. 69-70). The founders knew of the difficulties in the thrift industry in the early 1980s, and believed they would experience reduced competition by starting a new thrift when they did. (Gilkey, Tr. 70-71). *4 From the beginning of its existence, Sterling benefitted from a positive economy in the Pacific Northwest, with growth in population, personal income, employment, and agriculture. (Gilkey, Tr. 284; Faulstich, Tr. 343-44; Conerly, Tr. 885). From 1985 through 2000, the economy in Washington, Idaho, and Oregon performed much more favorably than in other parts of the United States. (Conerly, FN2

Tr. 888-959; PDX 514-18, 519A, 521). Sterling established two subsidiaries to expand the scope of its services. Sterling opened Intervest Mortgage Investment ("Intervest") in 1987, based in Lake Oswego, Oregon (near Portland), to engage in commercial real estate lending. (Gilkey, Tr. 72, 124). Sterling started Action Mortgage Company in 1988, a residential mortgage company based in Spokane. (Gilkey, Tr. 123-24). Sterling also created a holding company called Sterling Financial Corporation in 1992. (Gilkey, Tr. 73-74). Sterling always has been a profitable and growth oriented business. Sterling has reported a profit in every year of its operations, from 1983 to the present. (Gilkey, Tr. 153; Horvitz, Tr.2036, 2528-29). In its entire history, Sterling showed a loss only in one quarter in 1996, due to an extraordinary Savings Association Insurance Fund ("SAIF") premium that the FDIC imposed upon Sterling. (Byrne, Tr. 684-87). Sterling's strategy has been to grow internally and to add assets through acquisitions, in equal proportions. (Gilkey, Tr. 83). Sterling has acquired approximately twenty other thrifts since 1983. (Gilkey, Tr. 398-99; PDX 503). In its 25-year history, Sterling has grown from its initial $2.1 million to an asset size of over $11 billion in 2007, with 3,000 employees. (Barnett, Tr. 1180; Gilkey, Tr. 153-54). B. Sterling's Acquisitions 1. The 1985 Lewis Federal Acquisition In early 1984, Ed Hedlund of the Federal Home Loan Bank ("FHLB") of Seattle asked Sterling to consider acquiring Lewis Federal, a failing thrift located in Chehalis, Washington. (Gilkey, Tr. 89-91). After examining Lewis Federal's condition, Sterling attempted to acquire Lewis Federal on an unassisted basis. (Gilkey, Tr. 91-92). Sterling's board of directors approved of the acquisition at first, but later withdrew its approval. Sterling con-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 11 of 33 6 Page

cluded that, due to Lewis Federal's lack of capital, it could not participate in this acquisition on an unassisted basis. (Gilkey, Tr. 92). In November 1985, with the FHLB-Seattle offering assistance, Sterling successfully bid for and acquired Lewis Federal. (Stip.2). Lewis Federal was insolvent and had assets of approximately $52.5 million. (PX 8). The Federal Savings & Loan Insurance Corporation ("FSLIC") entered into an assistance agreement with Sterling. (PX 18). Sterling did not invest any money in this acquisition. Instead, FSLIC provided a cash contribution of $1.75 million to Sterling. (PX 19 at 0098-99). In addition, the Federal Home Loan Bank Board ("FHLBB") issued a forbearance letter permitting Sterling to amortize intangible assets over a period of 40 years. (PX 20 at 0601). The Lewis Federal acquisition created approximately $3.6 million in supervisory goodwill recorded on Sterling's books. (PX 72 at 5264; Stip. 3). 2. The 1988 Tri-Cities Acquisition *5 After Sterling acquired Lewis Federal, Hilton Hewitt of the FHLB-Seattle asked Mr. Gilkey if he wanted to become the "King of Chehalis" by acquiring Central Evergreen. (Gilkey, Tr. 126-27). Mr. Gilkey declined on behalf of Sterling, explaining that Central Evergreen was too big, had too many problems, and did not have enough capital. (Gilkey, Tr. 127). Two days later, Mr. Hewitt again contacted Mr. Gilkey, and stated that if Sterling acquired Tri-Cities, it would then have enough capital to acquire Central Evergreen. Id. Sterling conducted due diligence on both Central Evergreen and Tri-Cities, and in February 1988, submitted a bid for the assisted acquisition of TriCities. (Gilkey, Tr. 127, 158-59). Sterling was not the low bidder for Tri-Cities, but became the low bidder after another bidder, Old Stone, advised the FHLBB that it intended to withdraw its bid. (PX 374 at 0012; PX 377 at 1223).

Sterling acquired Tri-Cities on April 8, 1988. (PX 27; Stip. 4). On April 7, 1988, the FHLBB approved of the acquisition, authorized an assistance agreement, and directed FSLIC to send a forbearance letter to Sterling. (PX 27). The assistance agreement obligated FSLIC to make a cash contribution of $11.7 million to Sterling. (Stip.5). As with the Lewis Federal acquisition, Sterling did not invest any money in the Tri-Cities acquisition. (PX 38 at 5656-59). The Tri-Cities acquisition created approximately $14 million in supervisory goodwill recorded on Sterling's books, to be amortized over 25 years. (PX 28 at 1397; Stip. 5). 3. The 1988 Central Evergreen Acquisition After acquiring Tri-Cities, Sterling had enough capital to acquire Central Evergreen. (Gilkey, Tr. 733-34; Barnett, Tr. 1207). Sterling acquired Central Evergreen in December 1988 pursuant to an FHLBB resolution approving the acquisition. (Stip.6). Unlike the Lewis Federal and Tri-Cities acquisitions, FSLIC did not provide any assistance in the Central Evergreen transaction. The FHLBB did not issue a forbearance letter or enter into an assistance agreement, and FSLIC did not provide any cash assistance. (PX 47; DX 338; Stip. 6). The Central Evergreen acquisition created $22.8 million in supervisory goodwill recorded on Sterling's books, to be amortized in accordance with Generally Accepted Accounting Principles ("GAAP"). (PX 78 at 0425; Stip. 7). Sterling considered each of its acquisitions as beneficial to its operations. In an OTS filing submitted in 1989, after the enactment of FIRREA, Sterling described the advantages of its acquisitions: These acquisitions have enabled [Sterling] to expand its deposit and mortgage delivery systems considerably in a relatively short period and have added significant assets, a more geographically diversified loan portfolio, and potential future tax benefits.... Through consolidation, [Sterling] has reduced the cost of performing administrative func-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 12 of 33 7 Page

tions and increased the operating efficiencies of these acquired institutions. Management of [Sterling] believes that continued disciplined supervision of the assets acquired from Lewis Federal, Tri-Cities, and Central Evergreen will result in increased profitability to [Sterling]. *6 (DX 908 at 1776). Prior to the passage of FIRREA, federal regulators had confidence in Sterling's management and understood Sterling's desire to grow. (Faulstich, Tr. 340, 344-45). From 1983 to 1988, Sterling's ratings following federal examination were "exceptionally positive" and reflected good management. (Faulstich, Tr. 352-53; PX 45 at 6-7). As of November 7, 1988, the FHLB-Seattle reported that Sterling had "a proven success record in demonstrating it can successfully integrate acquired institutions and/or offices into its operations while maintaining profitability and meeting minimum regulatory capital requirements."(PX 45 at 6). The regulators did not regard Sterling as a troubled thrift, but looked upon Sterling as an entity that potentially could acquire other troubled thrifts and thereby benefit the FHLBB. (Faulstich, Tr. 320-21). As of June 30, 1989, the quarter prior to the enactment of FIRREA, Sterling had total assets of $731 million, and deposits of $519 million. (Stip.8). C. Enactment of FIRREA Congress enacted FIRREA on August 9, 1989. (Stip.9). Among other things, FIRREA established new capital requirements. FIRREA and its implementing regulations required thrifts to comply with three separate regulatory capital standards: (1) a leverage (or "core capital") standard; (2) a tangible capital standard; and (3) a risk-based capital standard. 12 U.S.C. § 1464(t) (1989); 12 C.F.R. §§ 567.1, 567.2, 567.5 (1990). "Qualifying supervisory goodwill" could no longer be counted as regulatory capital, and was to be phased out between 1990 and

1995. 12 U.S.C. § 1464(t); 12 C.F.R. § 567.2. The OTS issued FIRREA's implementing regulations on November 8, 1989 and they became effective on December 7, 1989. 54 Fed.Reg. 46,845 (Nov. 8, 1989). In July 1989, in anticipation of FIRREA, the regulators reduced Sterling's composite rating to a "3" because of likely capital deficiencies under the new legislation: The unassisted acquisition of Central Evergreen ... at year-end 1988 has resulted in an increase in Sterling's overall level of risk. The primary concern is a currently low level of capital adequacy and increasing future capital requirements due to proposed legislative action increasing capital requirements and precluding, over a period of time, the inclusion of goodwill as capital. (PX 407 at 1). The federal regulators (now OTS) recognized that Sterling's capital deficiency was a direct result of FIRREA and was not as a result of poor management or operations: "[t]he lack of capital compliance is due to the implementation of FIRREA versus unsafe and unsound operating procedures."(PX 268 at 8). The regulators formally instructed Sterling that it would no longer permit Sterling to treat supervisory goodwill as regulatory capital. In Thrift Bulletin 38-2, dated January 9, 1990, the OTS stated: The Office of Thrift Supervision is applying the new capital standards to all savings associations, including those associations that have been operating under previously granted capital and accounting forbearances. Section 5(t) of [the Home Owners Loan Act] as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) eliminates these forbearances. All savings associations presently operating with these forbearances, therefore, should eliminate them in determining whether or not they comply with the new minimum regulatory capital standards. (Any FSLIC capital contribution that resulted in the creation of goodwill will be subject to the require-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 13 of 33 8 Page

ments for goodwill established in the capital regulation). *7 Thrift Bulletin No. 38-2 (Jan. 9, 1990), 1990 WL 309397.

268 at 6; Stip. 10). Sterling incurred costs paid to Dain Bosworth, printing costs, and marketing costs in publicizing the offering. (Gilkey, Tr. 208-09). E. Restrictions Imposed Upon Sterling

D. Sterling Attempted to Raise Capital In July 1989, Sterling intended to raise capital of up to $20 million through a public stock offering. (Gilkey, Tr. 177-78; PX 246A at 2; PX 407 at 2). Sterling entered into an agreement with its investment banker, Dain Bosworth, to proceed with a public offering of $18 million. (PX 408 at 1). In October 1989, Sterling reduced the offering amount to $10 million to preserve a net operating loss tax benefit. (Gilkey, Tr. 190-92; Friend, Tr. 2220; PX 306; PX 411). Sterling had strong investor support for the 1989 offering, which was oversubscribed. (Gilkey, Tr. 195-96; Byrne, Tr. 1433). On the advice of its investment bankers, since Sterling would not be in compliance with FIRREA's new capital requirements, Sterling requested the OTS's approval to pay dividends on preferred stock issued in the public offering. (Gilkey, Tr. 196-97; Welch, Tr. 1575-78; PX 268 at 6; PX 342). On December 12, 1989, Mr. Gilkey and Mr. Byrne met with the OTS's Donald Dochow in Washington, D.C. to discuss the dividend issue. (Gilkey, Tr. 198-99; PX 253). Mr. Dochow indicated that, if any institution was worthy of an exemption from FIRREA's capital requirements, Sterling appeared to qualify. (Gilkey, Tr. 203; PX 253). The OTS, however, did not grant Sterling any exemption. The OTS did not approve Sterling's request to pay dividends on preferred stock, because Sterling did not comply with FIRREA's capital requirements. (Friend, Tr. 2309, 2413; PX 254). The OTS did not grant any exemptions to FIRREA's capital requirements.Id. Sterling cancelled the public offering in November 1989 because of the OTS's disapproval of the dividend payments. (Byrne, Tr. 1445; PX

Between the enactment of FIRREA in August 1989 and November 1991, the Government prevented Sterling from achieving any growth. (Byrne, Tr. 1125, 1538). During this period, Sterling reduced its assets from $730 million to approximately $590 million. (Gilkey, Tr. 278-79; Stip. 11). Specific restrictions imposed by the Government are described below. Viewing Sterling as an undercapitalized troubled thrift following FIRREA, the OTS ordered Sterling on November 9, 1989 to cease growing its assets beyond the growth incidental to interest credited to existing deposit accounts. (PX 247). The Government prevented Sterling from growing through acquisitions. On November 17, 1989, the OTS refused to allow Sterling to purchase two branches of Great American Bank ("Great American") until Sterling was in compliance with FIRREA's new capital requirements. (Gilkey, Tr. 212-15; Friend, Tr. 2307-08; PX 413; DX 388). The OTS discouraged Sterling from accepting or renewing uninsured deposits, or deposits that exceeded the $100,000 level insured by the Federal Deposit Insurance Corporation ("FDIC"). (Gilkey, Tr. 231-32; PX 256). Large deposits were the most valuable to Sterling, since the cost to manage an account is the same for all, regardless of the value. (Gilkey, Tr. 232-33). Sterling lost some large deposits, one exceeding $1.8 million, because of the OTS restriction. (Gilkey, Tr. 234-35). Sterling also had commercial contractors, as well as cities and counties, who maintained large deposit balances to meet payroll. Sterling lost these relationships. (Gilkey, Tr. 235-36). *8 On January 26, 1990, the Government imposed a $500,000 lending limitation, forcing Ster-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 14 of 33 9 Page

ling to discontinue its commercial real estate lending. (Gilkey, Tr. 237-39; PX 258). This restriction had the effect of shutting down Sterling's subsidiary, Intervest, because nearly all of Intervest's commercial loans exceeded $500,000. (Gilkey, Tr. 237-38). Another restriction in the Government's January 26, 1990 letter required Sterling to obtain the written approval of the District Director for any new loan or investment activity. (Gilkey, Tr. 238-39; PX 258). F. Sterling's Injunctive Relief On April 11, 1990, the Government began the process of closing Sterling by sending a letter to the board of directors for consent to the appointment of a conservator. (PX 269). Sterling's board refused to provide consent, asserting that any capital deficiency was caused by the Government's breach of the acquisition assistance agreements and forbearance letters. (PX 270). OTS regulators appeared at a Sterling board meeting to state that the directors were obligated to agree to the appointment of a conservator. (Friend, Tr. 2335-38). At a May 10, 1990 meeting in Seattle, OTS regulators stated that, regardless of the acquisition agreements with Sterling, "the FIRREA legislation has made these contracts null and void."(PX 274 at 6). One day following this meeting, on May 11, 1990, the OTS sent a letter to Mr. Gilkey insisting that Sterling agree to the appointment of a conservator. (PX 271). Sterling appealed to the Director of the OTS, requesting again that the agreements with FSLIC and the FHLBB be honored. (PX 272). The OTS District Director in Seattle sent another letter, on May 11, 1990, to each Sterling board member stating that, since Sterling had not signed the consent agreement to the appointment of a conservator or receiver, additional restrictions upon Sterling would apply immediately. (Gilkey, Tr. 247; PX 273). The restrictions were: (1) Sterling could only engage in activities specified in the amended February 28, 1990 Capital Plan, and any variation therefrom must be approved by OTS; (2)

Sterling could not enter into any agreement to purchase or sell any asset or group of assets greater than $500,000 without OTS approval; (3) Sterling could not increase the compensation (salary, benefits, or other remuneration) for any executive officer or director without OTS approval; (4) Sterling could not accept any uninsured deposits; and (5) all previously communicated growth, lending and investment restrictions imposed upon Sterling "continue to be in force." (PX 273). The OTS letter concluded by stating that "[u]ntil such time that the required agreements are fully executed, Sterling Savings Association is deemed to be operating without an approved capital plan."Id. On May 22, 1990, the OTS District Director denied Sterling's amended Capital Plan "[i]n light of the Board of Director's unwillingness to comply with the conditions of approval...." (PX 275A at 1). The OTS ordered Sterling to execute an attached Capital Directive. Id. This 15-page document imposed even more severe restrictions upon Sterling. Id. In a strident May 28, 1990 response letter, Sterling expressed concern that executing the Capital Directive might waive or impair Sterling's right to seek judicial review of whether the acquisition agreements are enforceable. (PX 275B). Sterling observed: *9 We are mystified as to why the OTS and the FDIC apparently want to spend taxpayers' dollars and increase the cost of the thrift bailout debacle in attempting to shut down a well-managed, profitable institution like Sterling. This is particularly true in light of the many logical alternatives that are available to the OTS. **** We believe that there is more than mere irony in the fact that you are protecting institutions which received forbearances because they were troubled while simultaneously imposing regulatory sanctions and enforcement proceedings against institutions, like Sterling, which received forbearances in contracts with the government. It should be obvious that, in enacting FIRREA, Congress recognized the continued validity and enforceability of pre-

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 15 ofPage 10 33

FIRREA contractual agreements such as the supervisory acquisition agreements to which Sterling was a party. Id. at 2-4 (emphasis in original). Sterling met again with OTS representatives on May 29, 1990, a date that OTS had set as a deadline for Sterling to execute the Stipulation and Consent to the Capital Directive. (PX 276). Sterling offered alternative plans to raise the necessary capital, such as shrinking the company, selling branches, returning Tri-Cities and Central Evergreen to the Government, and reviving the public stock offering that had been cancelled in November 1989. (Byrne, Tr. 1474-76). The OTS maintained, however, that the only option was to sell Sterling Savings Bank. (Byrne, Tr. 1476). On May 29, 1990, seeing no other choices, Sterling sought judicial relief by filing an application for a temporary restraining order ("TRO") against the OTS and FDIC in the United States District Court for the Eastern District of Washington. (Gilkey, Tr. 249; Stip. 12). The District Court issued a TRO on May 29, 1990, and a written opinion granting a preliminary injunction on August 8, 1990. (Stip.13). The District Court previously had issued the preliminary injunction in a bench ruling on July 3, 1990. In the August 8, 1990 opinion, the District Court restricted OTS's and FDIC's authority to regulate Sterling because the Court determined that FIRREA did not preclude the agencies from honoring the agreements with Sterling. Sterling Sav. Ass'n v. Ryan, 751 F.Supp. 871, 881-82 (E.D.Wash.1990), rev'd,959 F.2d 241 (9th Cir.1992) (unpublished table decision). Under the injunction, the Court enjoined the Government from: a. imposing or enforcing any regulatory restriction or taking other regulatory action against Sterling that is inconsistent with the provisions of the November 1985, April 1988, and December 1988 supervisory acquisition agreements between Sterling and FHLBB and the FSLIC; b. enforcing or attempting to enforce the oper-

ating restrictions imposed by the January 26, 1990, March 9, 1990, and the May 11, 1990, letters from the Office of Thrift Supervision to Sterling that treat Sterling as a troubled thrift; *10 c. placing Sterling in receivership or conservatorship; and d. interfering with Sterling's proposed public offering contemplated in the 1988 Central Evergreen acquisition agreement. Id. The OTS and FDIC filed a motion for reconsideration, which the District Court granted in part and denied in part in November 1990.Sterling, 751 F.Supp. at 884. The Court determined that the prohibition against placing Sterling into conservatorship or receivership was overly broad, and narrowed that portion of the injunction to clarify that the "Government need only be enjoined from appointing a receiver or conservator to the extent that such action would not be appropriate when the contracts are honored and given effect."Id. at 884.On December 27, 1990, the Government filed an appeal from the District Court's injunction. On April 14, 1992, the U.S. Court of Appeals for the Ninth Circuit reversed the District Court's decision, and vacated the preliminary injunction.Sterling, 959 F.2d 241. The Court ruled that a thrift's remedy was not to enjoin the enforcement of FIRREA, but to seek damages for breach of contract or for a taking of property. Id. Thus, the District Court's TRO and preliminary injunction were in effect for nearly two years, from May 29, 1990 until April 14, 1992. G. Post-Injunction Events On June 5, 1990, one week after the District Court had issued a TRO, the OTS directed Sterling to begin providing weekly reports "of any actions that are not in keeping with the restrictions imposed by our letters of January 26, 1990, March 9, 1990 and May 11, 1990."(PX 277). On June 18, 1990, Sterling objected to this new requirement, stating that the weekly reports were in violation of the

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 16 ofPage 11 33

TRO. (PX 278). The OTS reply of the same date stated that the regulators had "significant [s]upervisory concerns about the condition of Sterling and the soundness of some aspects of its operations."(PX 279). The OTS intended "to strictly obey the court's order," but stated that the reports would provide "early and adequate warning of any significant risk to Sterling's condition ."Id. The reference to the "soundness" of Sterling was of great concern to Mr. Gilkey, who testified that "safety and soundness" are words used by bank regulators "to open the doors for regulatory activity."(Gilkey, Tr. 252). He added, "[t]o me, it meant big trouble."Id. In order to establish an agreed format for the required weekly reports, Sterling's Mr. Byrne sent a letter to the OTS listing the operating restrictions that the OTS had imposed in its November 9, 1989, January 26, 1990, March 9, 1990 and May 11, 1990 letters. (PX 280). One day later, on June 20, 1990, the OTS responded that Mr. Byrne's letter "does not correctly reflect the asset growth restrictions that Sterling is subject to."(PX 281 at 1). The OTS letter reiterated, among other things, that "[b]y virtue of the denied capital plan, no growth is permitted. (12 CFR 567.10)."Id.The OTS letter did not acknowledge the existence or effect of the District Court's TRO. *11 Sterling began reporting to the OTS as requested in an attempt to minimize continued controversy with the regulators. (Gilkey, Tr. 254-56; PX 282). On June 25, 1990, the OTS asked Sterling to submit eight additional items of information. (PX 283). Sterling concluded that the TRO prevented the OTS from terminating Sterling's business, provided that Sterling did not violate some other restriction not covered by the TRO. (Gilkey, Tr. 258-59). In apparent disregard of the District Court's preliminary injunction, the OTS on July 20, 1990 assigned a composite examination rating of "5" to Sterling, which is the lowest possible rating and indicative of a troubled thrift. (PX 284; PX 287). This rating purportedly was based upon the

fact "that the capital plan has been denied and the institution has no acceptable plan towards achieving capital compliance...." (PX 284). Although the OTS assigned the rating in furtherance of its regulatory oversight of Sterling, the lowest possible rating rested upon findings seemingly prohibited by the Court's injunction. Nevertheless, Sterling did not return to the District Court to seek further relief. (Byrne, Tr. 1830-31). In September 1990, Sterling invested $35 million in mortgage-backed securities, using borrowings from the FHLB-Seattle. The OTS demanded documentation showing that the transaction complied "with the Business Plan included with the Central Evergreen Agreement, 1991 budget and Regulatory Bulletin RB 3a-1."(PX 289; Gilkey, Tr. 263-64). In further response on October 1, 1990, the OTS sent a letter to each Sterling board member stating that Sterling's evaluation of this $35 million investment "was so materially deficient as to be unsafe and unsound."(PX 290). The OTS asserted that "the transaction contains significant interest rate risk and needlessly exposes the FDIC insurance fund to additional risk of loss."Id. The OTS mandated that Sterling refrain from purchasing any securities or loans in excess of $1 million, and promised that an investigation would be forthcoming. Id. Mr. Gilkey in response noted the existence of the District Court's preliminary injunction and the need for legal review of the OTS's position, but expressed a desire for constructive dialogue. (PX 291; Gilkey, Tr. 267-69). By letter dated October 16, 1990, Sterling's counsel wrote to the OTS's counsel in Washington, D.C., noting among other things that "[d]espite the Court's Preliminary Injunction, OTS Seattle still treats Sterling as a capital deficient institution," and that "I am hopeful ... you will remind your client of the nature and extent of the Preliminary Injunction."(PX 293 at 1-2). The parties continued on in the same fashion in 1991, recognizing that the replacement of Sterling's lost capital ultimately would be the only acceptable resolution. Sterling knew

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 17 ofPage 12 33

that the OTS would not honor the Lewis Federal and Tri-Cities assistance agreements, and that Sterling would not be exempt from FIRREA's capital requirements. H. Sterling Raised Capital in November 1991 *12 In November 1991, Sterling raised approximately $23 million in capital through a public stock offering, and the conversion of $2.1 million in preferred stock to common stock. (Stip.16). The addition of $23 million placed Sterling in compliance with FIRREA's capital requirements. (Gilkey, Tr. 274, 583; Bajaj, Tr. 4139-41; DX 3508; PX 84 at 18, 28, 39; PX 310 at 14). After the offering, Sterling had $12.3 million in excess tangible capital, $16.4 million in excess core capital, and $12.3 million in excess risk-based capital. (Bajaj, Tr. 4141; DX 3509). On April 8, 1992, the Government lifted the operating restrictions that had been imposed upon Sterling prior to and during the term of the injunction. (PX 299A; PX 299B). The prospectus for the offering set forth the purpose for raising the capital: The primary purpose of this Offering is to increase Sterling's regulatory capital levels. The net proceeds from this Offering will be used to support the growth of Sterling's business, including the origination of loans. (DX 913 at 4). Sterling raised the capital to comply with the applicable capital requirements. (Gilkey, Tr. 583). Absent the Government's breach, Sterling would not have needed the additional capital in 1991. (Gilkey, Tr. 583-85). Defendant acknowledges liability for Sterling's transaction costs of $900,204 in raising this capital. This $23 million in new capital replaced the Lewis Federal and Tri-Cities supervisory goodwill that Sterling lost when Congress enacted FIRREA. I. Harm Suffered By Sterling

From 1989 through 1991, Sterling experienced various harms, but they are difficult to quantify. For example, Sterling experienced greater than normal employee turnover due to the uncertainty caused by FIRREA, and the restrictions placed upon Sterling's business operations. (Stanley, Tr. 1256-59, 1264). However, the extent of the employee turnover and the actual reason that each employee departed are matters of conjecture. The Court accepts that the OTS restrictions affected staff morale, but in ways that are difficult to measure. (Stanley, Tr. 1264-65; Neely, Tr. 1020-21). Sterling's loan officers testified that they departed Sterling for new employment because of the restrictions placed upon Sterling. (Neely, Tr. 1024-25, 1029-30; Crithfield, Tr. 1064). Some customers followed loan officers when they joined new institutions. Id. Sterling did not have the ability to replace lost business. (Neely, Tr. 1024-25). The Government barred Sterling from issuing letters of credit. (Gilkey, Tr. 240-41). Sterling lost the fee income from issuing such letters, and had to introduce its customers to competitors, "effectively ... saying to the customers [that] we can no longer manage your business."Id. Again, the names of lost customers, the number of lost customers, and the amount of lost business, are matters of conjecture. Sterling's subsidiary, Intervest, virtually was prohibited from making new commercial loans because of the OTS's "loans to one borrower" restriction. (Gilkey, Tr. 216-17). Intervest was forced to stop lending and ceased to grow. (Harlow, Tr. 805). Intervest could honor existing contracts, but reduced its loan officer staff from 11 to one, and total staff to only three. (Harlow, Tr. 807-08). Intervest did not need loan officers if there was no new business. (Harlow, Tr. 783-84; Crithfield, Tr. 1062-64). After the OTS lifted its restrictions in 1992, Intervest's business turned dramatically positive. (Harlow, Tr. 822). By 1994, Intervest's loan production had rebounded to $104 million, and by 2006, it reached $1.5 billion. (Harlow, Tr. 817, 822).

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 18 ofPage 13 33

*13 The OTS's restrictions also impacted Action Mortgage Company, another Sterling subsidiary. (Gilkey, Tr. 217-18). Sterling lost its residential construction lenders, because customers could not be serviced under the OTS restrictions. (Gilkey, Tr. 218). Action lost 35-40 loan officers. (Stanley, Tr. 1269-70). J. Sterling's Recovery After Raising Capital In 1992, the year after replacing the capital lost by the Government's breach, Sterling's Annual Report to shareholders stated: Fiscal 1992 was an outstanding year for Sterling Savings. Your company, profitable every year since its inception, reported record earnings this fiscal year. We also completed a $21 million equity offering, making Sterling one of the only thrifts in the nation to have met all applicable capital requirements after having been deemed to be in noncompliance with such requirements. Our primary regulator, OTS, had taken the position that FIRREA eliminated most of the capital regulatory provisions of acquisition agreements entered into in the late 80's. Our compliance with capital standards is a victory for us all-our shareholders, customers, employees, and the communities we serve across the Pacific Northwest. (PX 84 at 2). Sterling stated in its 1992 business plan that it expected to maintain its capital in excess of fully-phased in capital requirements, and did "not foresee limitations on its ability to increase total assets."(DX 228 at 1563). Following the November 1991 public stock offering, Sterling at all times possessed sufficient capital to support its operations. (Gilkey, Tr. 759; Page, Tr. 1155-56). Sterling Financial Corporation ("SFC") has provided capital to Sterling whenever required. (Gilkey, Tr. 614-15; PX 432). Frequently, when SFC raised capital, it distributed less than the full amount to Sterling Savings. For example, in 1993, SFC raised $17.25 million in new debt securities, but it distributed only $12.9 million to Ster-

ling in the form of preferred stock. (PX 86 at 3142). For the fiscal year ended June 30, 1994, SFC raised $24.6 million in new capital, but distributed only $20 million to Sterling. (PX 88 at 2740; PX 159 at 7330). SFC also elected not to draw upon a $5 million line of credit. (PX 89 at 5727). SFC followed a similar pattern in most other years up to the present, indicating that additional capital always was available if Sterling needed it. (PX 89 at 5727; PX 93 at 3061, 3104, 3138; PX 95 at 2878, 2955; PX 96 at 3220-21; PX 97 at 6434-35; PX 98 at 0022, 0088-89; PX 99 at 0134, 0205; PX 100 at 3300; PX 102 at 3219, 3242). From 1993 through 2000, Sterling had access to additional capital that it did not use. (Byrne, Tr. 1783-92). On July 9, 2005, Sterling converted to a commercial bank, and the OTS no longer regulated Sterling. (PX 103 at 3465). SFC obtained a $40 million line of credit in 2005, but it remained unused at year's end. (PX 103 at 3480). Between 1992 and 2006, SFC added a total of $633.3 million in new debt and capital, and distributed $492.4 million to Sterling. *14 Since 1991, despite the availability of capital, Sterling has not always achieved its budgeted growth targets, or acquired all the assets it projected to be available. (Gilkey, Tr. 467, 759; Harlow, Tr. 840; Page, Tr. 1155-56). In five of six years between 1995 and 2000, Sterling fell short of its budgeted asset target by amounts ranging from $55.8 million to $155 million. (DX 186 at 1345; DX 196 at 3242; DX 205 at 3155; DX 208 at 0919; PX 92 at 2283). Throughout its post-FIRREA history, Sterling has faced formidable competition and other market obstacles in acquiring loans and deposits. (Gilkey, Tr. 512; Harlow, Tr. 846). In 1992, after raising new capital, Sterling had difficulty meeting its new deposit targets due to the interest rate climate and competition from large banks, such as Seafirst, Washington Mutual, and U.S. Bank. (Gilkey, Tr. 500-02; DX 704 at 0843). Mr. Gilkey acknowledged this competition, observing that "when big

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 19 ofPage 14 33

banks want it, they get it."(Gilkey, Tr. 502). Sterling's Investment Committee minutes at year-end 1992 reflect that new applications for mortgages had "dropped markedly," and that pricing was "very competitive" due to national banks moving to the Pacific Northwest and attempting to "maintain volumes." (DX 723). New retail deposits were described as "dismal" due to low interest rates and depositor access to alternate investments. (Gilkey, Tr. 535; DX 725 at 2585). In 1993, Sterling's Asset and Liability Committee and its Investment Committee reported heavy competition from large banks that were able to price aggressively. This competition hampered Sterling's ability to meet budgeted loan production. (Gilkey, Tr. 504-06, 525-26; DX 737 at 1870; DX 740 at 2370; DX 741 at 2331; DX 743 at 2309). In 1994 and 1995, Sterling's new loan production again remained below budget. Sterling was reluctant to reduce prices as aggressively as its large competitors. (Gilkey, Tr. 507-08, 528-30, 532-33; Page Tr. 1153-55; DX 752 at 2024; DX 762 at 1681; DX 764 at 1632; DX 780 at 1369). These trends continued during 1996-1998. (DX 799 at 0287; DX 801 at 0232; DX 839 at 0585). While remaining profitable, Sterling's ability to grow was subject to competition and market restraints. K. Expert Testimony Each party called four expert witnesses during the trial. The Court found all of the experts to be helpful in varying degrees in its analysis of this case. A summary of each expert's background and credentials is described below. 1. Sterling's Experts Dr. Paul M. Horvitz is a Professor Emeritus of Finance at the University of Houston. (Horvitz, Tr.1978; PX 490). He is an economist who has specialized in the banking and financial markets during his 50-year career. (Horvitz, Tr.1979-93). He received a Ph .D. in economics from the Massachu-

setts Institute of Technology in 1958. (Horvitz, Tr.1979). Dr. Horvitz has worked for and consulted with federal regulatory agencies such as the Federal Reserve Bank, the Comptroller of the Currency, and the FDIC. (Horvitz, Tr.1980-84, 1990-93). He has conducted research and published extensively in the field of banking and finance, including publications relating to the 1980s thrift crisis, the threat to the FSLIC insurance fund, and the FIRREA legislation enacted in 1989. (Horvitz, Tr.1985, 1989-90; PX 490). He has testified in Congress before the Senate and House Banking Committees, and the House Small Business Committee. (Horvitz, Tr.1993-94; PX 490). Dr. Horvitz has testified previously as an expert witness, including appearances before this Court in other Winstar cases. (Horvitz, Tr.1998-99, 2004; PX 490). In this case, Dr. Horvitz constructed Sterling's lost profits model. *15 Dr. Christopher James is a Professor of Finance at the University of Florida. (James, Tr. 2811; PX 491). He received a Ph.D. in economics from the University of Michigan in 1978. (James, Tr. 2813; PX 491). He has taught finance at the University of Oregon and the University of Michigan. (James, Tr. 2813-14). He served on the Board of Directors at Sun Trust Bank of Florida for approximately fifteen years. (James, Tr. 2812). Prior to his current position at the University of Florida, Dr. James worked for the U.S. Treasury Department as a Senior Economic Advisor to the Comptroller of the Currency, advising on bank regulatory policy issues. (James, Tr. 2814-15). He also consulted with the FDIC, developing a model that evaluates the cost to the FDIC of a failed institution. Id. He has published many articles on banking and thrift institutions. (James, Tr. 2818-19; PX 491). He has been qualified as an expert in fifteen cases, including five Winstar cases. (James, Tr. 2818; PX 491). In this case, Dr. James addressed the reasonableness of Dr. Horvitz's lost profits model, and he presented an alternate theory of recovery concerning Sterling's mitigation costs of replacing capital. He also calculated the present value

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 20 ofPage 15 33

of Sterling's future damages from 2006 through 2025. Dr. William B. Conerly is an economist from Lake Oswego, Oregon. (Conerly, Tr. 862-63). He received a master's degree and a Ph.D. in economics from Duke University in 1976 and 1980 respectively. (Conerly, Tr. 867). He is a specialist in regional economics, applying economic principles to business issues. (Conerly, Tr. 863). He has done consulting work for both financial institutions and non-financial entities. (Conerly, Tr. 865-66). In this case, Dr. Conerly testified regarding the economy of the Pacific Northwest during the relevant years. Paul Schott is an attorney in private practice from Washington, D .C. (Schott, Tr. 2415). He received his law degree in 1973 from Boston University, and a masters degree in law in 1975 from Georgetown University Law School. (Schott, Tr. 2419). He was an Assistant General Counsel for the U.S. Treasury Department from 1979 to 1985. (Schott, Tr. 2421; PX 493). He served as Chief Counsel of the Office of Comptroller of the Currency from 1987 to 1991. (Schott, Tr. 2427; PX 493). From 1994 to 2002, Mr. Schott was a partner at PricewaterhouseCoopers LLP, and its predecessor, Coopers & Lybrand, serving as National Director for Bank Regulatory Services. (Schott, Tr. 2440; PX 493). Mr. Schott testified as an expert in regulatory capital standards applicable to the thrift industry. 2. Defendant's Experts Barefoot Bankhead is a certified public accountant who works for Navigant Consulting in Dallas, Texas. (Bankhead, Tr. 3265-67). Navigant Consulting provides accounting, financial, and economic analysis for companies involved in disputes, investigations, or litigation. (Bankhead, Tr. 3265). Mr. Bankhead graduated from the University of Texas in 1976, and became a CPA in 1978. (Bankhead, Tr. 3266-67). He worked in public accounting for Coopers & Lybrand for nine or ten

years, developing a specialty in financial institutions and real estate companies. (Bankhead, Tr. 3267). While at Coopers & Lybrand, one of his clients was the Federal Home Loan Bank of Dallas. (Bankhead, Tr. 3269). Before going to Navigant, Mr. Bankhead worked for various banks in the Chicago area, focusing on mergers and acquisitions, regulatory matters, and compliance with the capital requirements of FIRREA. (Bankhead, Tr. 3276-80). He has testified in eight Winstar cases in this Court. (Bankhead, Tr. 3282-83). *16 Joe Hargett is retired, but worked for Navigant Consulting until September 2006. (Hargett, Tr. 3375). He graduated with honors from the University of Alabama in 1983, majoring in accounting. Id. He began working in the audit department of Peat Marwick in 1984. (Hargett, Tr. 3376). In March 1989, pursuant to a fellowship offer, Mr. Hargett began working for the Federal Home Loan Bank system, and then as an employee of OTS. (Hargett, Tr. 3378). He was part of an OTS working group that promulgated capital regulations implementing FIRREA. (Hargett, Tr. 3379). Mr. Hargett assisted in the preparation of FIRREA's regulations, including the definition of "qualifying supervisory goodwill." (Hargett, Tr. 3380-81; DX 968 at 6858). Mr. Hargett left the OTS in 1991 to join Peterson Consulting, a firm that Navigant Consulting later acquired. (Hargett, Tr. 3383-84). He specialized in the banking industry. (Hargett, Tr. 3385). He has testified in other Winstar cases before this Court. (Hargett, Tr. 3385-86). Dr. William G. Hamm is a managing director of a consulting firm known as LECG in Emeryville, California. (Hamm, Tr. 3496). LECG is an international consulting firm with offices throughout the United States, Europe, Canada, South America, and Asia. Id. Dr. Hamm received his undergraduate degree from Dartmouth College in 1964, and a Ph.D. in economics from the University of Michigan in 1969. (Hamm, Tr. 3497-98). From 1986 to 1991, Dr. Hamm worked as an executive for World Savings, one of the largest thrift institutions in the

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.

Case 1:92-cv-00550-MCW Document --- Fed.Cl. ------ Fed.Cl. ----, 2008 WL 465962 (Fed.Cl.) (Cite as: --- Fed.Cl. ----)

186

Filed 02/29/2008

Page 21 ofPage 16 33

United States. (Hamm, Tr. 3498-3510). Later, he became a senior vice president of the Federal Home Loan Bank of San Francisco. (Hamm, Tr. 3510). The bank soon promoted him to chief operating officer, a newly created position. (Hamm, Tr. 3515-16). He began with LECG in 1996, where he has worked for eleven years. (Hamm, Tr. 3523). He has testified in other Winstar cases. (Hamm, Tr. 3530-31). Dr. Mukesh Bajaj also is a managing director with LECG. (Bajaj, Tr. 3989-90). He attended college at the Indian Institute in New Delhi, India. (Bajaj, Tr. 3979). He received his masters degree in business from the University of Texas, and a Ph.D. in business administration (finance) from the University of California at Berkeley ("Berkeley"). (Bajaj, Tr. 3979-83). He has taught courses in financial economics at the graduate and undergraduate