Free Supplemental Brief - District Court of Federal Claims - federal

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

Civil Action No. 92-550C Judge Williams

PLAINTIFF'S SUPPLEMENTAL BRIEF IN RESPONSE TO THE COURT'S OCTOBER 24 ORDER

Charles J. Cooper COOPER & KIRK, PLLC 1523 New Hampshire Ave., NW Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record Of Counsel: Michael W. Kirk Vincent J. Colatriano David H. Thompson COOPER & KIRK, PLLC 1523 New Hampshire Ave., NW Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax)

December 3, 2007

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES .......................................................................................................... ii RESPONSE TO PARAGRAPH ONE ­ CAUSATION STANDARD ...........................................1 A. B. This Court Should Apply the "Substantial Factor" Standard. .................................1 This Court Should Find That Northeast Has Established Causation under Both the Substantial Factor and But-for Standards..................................................8

RESPONSE TO PARAGRAPH TWO ­ PROFITABILITY PROJECTIONS .............................14 RESPONSE TO PARAGRAPH THREE ­ PX1065 .....................................................................15

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TABLE OF AUTHORITIES Cases Page/s Anchor Savings Bank, FSB v. United States, 59 Fed. Cl. 126 (2003)..............................................3 Bluebonnet Savings Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001)..........................6 California Federal Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005) ..........................5, 9, 10 California Federal Bank v. United States, 54 Fed. Cl. 704 (2002), aff'd, 395 F.3d 1263 (2005) .......................................................................................................7 California Federal Bank FSB v. United States, 245 F.3d 1342 (Fed. Cir. 2001) ..........................10 Citizens Federal Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007).............................. Passim Citizens Federal Bank, FSB v. United States, 59 Fed. Cl. 507 (2004) ....................................3, 4, 5 Citizens Financial Services v. United States, 64 Fed. Cl. 498 (2005) .............................................6 Coast Federal Bank, FSB v. United States, 48 Fed. Cl. 402 (2000) ........................................3, 4, 6 Commercial Federal Bank, FSB v. United States, 59 Fed. Cl. 338 (2004), aff'd, 125 Fed. Appx. 1013 (Fed. Cir. 2005) .........................................................................3, 4 Energy Capital Corp. v. United States, 47 Fed. Cl. 382 (2000), aff'd in part and rev'd in part, 302 F.3d 1314 (Fed. Cir. 2002) ........................................2, 3, 9 Fifth Third Bank v. United States, 71 Fed. Cl. 56 (2006) ................................................................6 First Federal Savings & Loan Association v. United States, 76 Fed. Cl. 106 (2007) ...............5, 11 Holland v. United States, 75 Fed. Cl. 483 (2007) ............................................................................5 Home Savings of America, FSB v. United States, 399 F.3d 1341 (Fed. Cir. 2005) .........................4 Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000) ........10 Myerle v. United States, 33 Ct. Cl. 1 (1897) ............................................................................7, 8, 9 Northern Helex Co. v. United States, 524 F.2d 707 (Ct. Cl. 1975) ...........................................9, 10 Olin Jones Sand Co., 225 Ct. Cl. 741 (1980) ................................................................................10 Prudential Insurance Co. v. United States, 801 F.2d 1295 (Fed. Cir. 1986).................................10 Ramsey v. United States, 101 F. Supp. 353 (Ct. Cl. 1951) ........................................................9, 10 Southern California Federal Savings & Loan Association v. United States, 422 F.3d 1319 (Fed. Cir. 2005) ..........................................................................................................................6 Suess v. United States, 74 Fed. Cl. 510 (2006) ..............................................................................11 Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996) .......................................2 Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544 (2003), aff'd in part and rev'd in part, 407 F.3d 1352 (Fed. Cir. 2005) ..........................................5, 11 Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) ....................................................9

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Other E. ALLAN FARNSWORTH, CONTRACTS § 12.14 (3d ed. 1999) ........................................................10 RESTATEMENT (SECOND) OF CONTRACTS § 351 ............................................................................10

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PLAINTIFF'S SUPPLEMENTAL BRIEF IN RESPONSE TO THE COURT'S OCTOBER 24 ORDER Plaintiff Northeast Savings, F.A. ("Northeast") respectfully submits this supplemental brief pursuant to, and addressing the topics identified in, the Court's October 24, 2007 "Order Directing Supplemental Briefing" ("Order"). RESPONSE TO PARAGRAPH ONE ­ CAUSATION STANDARD The Court first asked the parties to address whether, in light of the Federal Circuit's recent decision in Citizens Federal Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007), the "but-for" or the "substantial factor" causation standard "is the appropriate causation standard to apply, based upon the facts of this particular case." Order ¶ (1). For the reasons discussed below, Northeast submits that the Court should apply the "substantial factor" standard for determining causation in this case. Ultimately, however, the question of whether the substantial factor or the but-for standard applies is not of dispositive significance here, since Northeast has proven causation under either standard. A. This Court Should Apply the "Substantial Factor" Standard.

In Citizens, the Federal Circuit affirmed the trial court's award of damages, specifically holding that "the Court of Federal Claims did not abuse its discretion in using the `substantial factor' theory of causation." 474 F.3d 1314, 1319 (Fed. Cir. 2007). The Federal Circuit acknowledged that its prior "cases dealing with the proper standard of causation may appear superficially somewhat inconsistent in applying the `substantial factor' and `but for' theories." Id. at 1318. It made clear, however, that "the selection of an appropriate causation standard depends upon the facts of the particular case and lies largely within the trial court's discretion." Id. Unfortunately, the Federal Circuit in Citizens did not definitively identify or exhaustively discuss the types of factors that should guide the exercise of the trial court's discretion in choos-

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ing among the different causation standards. Notwithstanding this absence of clear direction from the Federal Circuit, however, we believe that guidance drawn from the trial court decisions cited favorably in Citizens, as well as other considerations discussed below, strongly support application of the substantial factor standard here. In Citizens, the Federal Circuit cited approvingly to the analysis of two decisions of this Court applying the substantial factor standard--Energy Capital Corp. v. United States, 47 Fed. Cl. 382 (2000), aff'd in part and rev'd in part, 302 F.3d 1314 (Fed. Cir. 2002), and Citizens itself. With respect to Energy Capital, the Federal Circuit noted this Court's holding that where a plaintiff "seeks lost profits flowing from the breach of the contract with the United States"--as opposed to claiming lost profits under other collateral undertakings--the plaintiff need not satisfy "a high burden with regard to causation" but need only "prove that the breach was a `substantial factor' in causing its losses." Citizens, 494 F.3d at 1318-19 (quoting Energy Capital, 47 Fed. Cl. at 395). This distinction--between lost profits that "would have grown out of the contract itself" and lost profits that "would have been realized by the party from other independent and collateral undertakings"--is firmly established in the case law. E.g., Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012, 1023 (Fed. Cir. 1996) (internal quotations omitted); see also id. at 1022-23 (collecting cases). And it is well settled that in the Winstar context, profits flowing from the use of "supervisory goodwill as regulatory capital" are considered profits that "would have grown out of the contract itself." See, e.g., Commercial Federal Bank, FSB v. United States, 59 Fed. Cl. 338, 345-46 (2004), aff'd, 125 Fed. Appx. 1013 (Fed. Cir. 2005); Anchor Savings Bank, FSB v. United States, 59 Fed. Cl. 126, 146 (2003); Coast Federal Bank, FSB v. United States, 48 Fed.

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Cl. 402, 431 (2000).1 Thus, under the Energy Capital analysis endorsed in Citizens, the fact that Northeast seeks compensation for profits that would have flowed from using supervisory goodwill as regulatory capital strongly supports application of the substantial factor standard here. Although not explicitly quoted by the Federal Circuit, other portions of the trial court's analysis in Energy Capital, as well as the trial court's analysis in Citizens, strongly suggest that the substantial factor standard is properly invoked when the parties assert multiple possible causes for the claimed damages. As this Court explained in Energy Capital, "[b]ecause often many factors combine to produce the result complained of, the causation prong requires the injured party to demonstrate that the defendant's breach was a substantial factor in causing the injury." 47 Fed. Cl. at 395 (internal quotations omitted); accord Citizens Federal Bank, FSB v. United States, 59 Fed. Cl. 507, 514-15 (2004) (quoting Energy Capital); id. at 515-16 (discussing the multiple causes asserted for plaintiff's injury). In such cases, the substantial factor test seems particularly well suited to addressing causation, as it avoids any necessity for engaging in a highly counterfactual attempt to isolate the precise effects of each of the causes that may have contributed to the claimed damages. The Government's arguments that various non-breach causes, such as the adverse economic environment in the early 1990s, could have contributed to Northeast's damages thus counsel strongly in favor of applying the substantial factor standard in this case. This is especially the case since one of the purposes and values of regulatory capital is to help cushion financial institutions from the effects of recessions and many of the other nonbreach factors cited by the Government. See, e.g., Home Savings of America, FSB v. United

See also Energy Capital, 302 F.3d at 1329 (lost profits from breach of contract with government agency flowed directly from that contract even though such profits were dependent on income from separate loans that plaintiffs might have been able to make to third parties). 3

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States, 399 F.3d 1341, 1353 (Fed. Cir. 2005); Commercial Federal, 59 Fed. Cl. at 347; Coast, 48 Fed. Cl. at 425-26. The Federal Circuit's approval of this Court's analysis in Citizens also suggests, more broadly, that the substantial factor standard is generally appropriate in most Winstar cases as a class. Indeed, the Federal Circuit quoted the following language from the trial court's opinion: The "substantial factor" standard has been reviewed with approval by the Federal Circuit in both Bluebonnet [Savings Bank v. United States, 266 F.3d 1348 (Fed. Cir. 2001),] and Energy Capital even though Myerle [v. United States, 33 Ct. Cl. 1 (1897),] has not been explicitly overruled. Because the Federal Circuit has accepted this standard, it is consistent with this Court's analysis in Energy Capital, and because the standard has been adopted in numerous Winstar-related cases before other judges on this Court, this Court concludes that it is the appropriate standard to be applied in the present case. Citizens, 474 F.3d at 1319-20 (quoting Citizens, 59 Fed. Cl. at 515). Referring to this quotation--which did not discuss any particular facts present in Citizens but rather emphasized the widespread use of the standard in the Winstar context as a whole--the Federal Circuit held that the trial court had "adequately explained the reasons for its action" and therefore "did not abuse its discretion in using the `substantial factor' theory of causation." 474 F.3d at 1319. Consistent with this broader understanding of Citizens, this Court has repeatedly applied the substantial factor standard in Winstar cases decided subsequent to the Federal Circuit's decision. Thus, in First Federal Savings & Loan Association v. United States, the trial court held that the plaintiff was "not required to meet the more stringent but-for standard" to recover lost profits. 76 Fed. Cl. 106, 113 (2007). Rather, it required plaintiff to establish only "that FIRREA was a substantial factor in causing" the claimed losses. Id. at 129; see also id. ("It is unnecessary, however, for the Government's breach to have been the but-for cause" of the damages alleged.) Similarly, in Holland v. United States, this Court held that "[i]n order to establish expectancy damages," the plaintiff could satisfy the causation requirement by demonstrating that the

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"defendant's breach was a substantial factor in causing plaintiff's damages." 75 Fed. Cl. 483, 489 (2007). This Court likewise repeatedly applied the substantial factor standard in numerous Winstar decisions, analyzing the full range of contract remedies, issued prior to the Federal Circuit's decision in California Federal Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005) ("Cal Fed II"). For example, this Court in Citizens applied the substantial factor standard to a request for capital-replacement costs, relying on earlier cases applying that standard to requests for wounded bank damages and expectancy damages. See, e.g., Citizens, 59 Fed. Cl. at 514-15 (collecting cases). Similarly, this Court in Westfed Holdings, Inc. v. United States held that "the `substantial factor' test of causation governs the recovery of reliance damages in the context of Winstarrelated cases," noting that "[t]he `substantial factor' test has governed the recovery of lost profits damages in numerous Winstar-related cases in this court," and "discern[ing] no rationale for applying a more stringent or different standard to the recovery of reliance damages." 55 Fed. Cl. 544, 553 (2003) (collecting cases), aff'd in part and rev'd in part, 407 F.3d 1352 (Fed. Cir. 2005); see also Westfed, 407 F.3d at 1363 (explaining that "[t]he trial court reviewed the previous decisions by the Court of Federal Claims that have decided reliance damages in Winstarrelated cases, and found that they have generally applied the substantial factor test"). And in Coast, the trial court applied the substantial factor test to both expectancy and wounded bank damages. 48 Fed. Cl. at 408, 435; see also id. at 435 n.29 (2000) (collecting cases). The Federal Circuit, moreover, has indicated its approval of trial courts' use of the substantial factor standard not only in Citizens, but also in other Winstar cases, including Southern California Federal Savings & Loan Association v. United States, 422 F.3d 1319 (Fed. Cir. 2005), and Bluebonnet Savings Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001). In South-

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ern California, the court affirmed the trial court's finding that "the passage of FIRREA lead to specific and quantifiable increases in the thrift's cost of doing business," reasoning that the trial court had found that FIRREA "was the substantial factor in SoCal's incurring higher costs of funds after the breach." 422 F.3d at 1337; see also id. ("the government is not persuasive in arguing that because of [the thrift's prior] weakness FIRREA had no effect on the thrift's operations"). And in Bluebonnet, the Federal Circuit squarely held that the trial court had "properly determined that the breach of the forbearances was a substantial factor in Bluebonnet's increased financing costs." 266 F.3d at 1356. Furthermore, although in Cal Fed II the Federal Circuit approved the trial court's decision not to employ the substantial factor standard, we are unaware of any Winstar case in which the Federal Circuit has disapproved the trial court's choice of the substantial factor standard. It is true that this Court applied the but-for standard of causation in a handful of Winstar cases decided between the Federal Circuit's decisions in Cal Fed II and Citizens. But those decisions appear to have been based on the mistaken understanding -- since corrected by the Federal Circuit in Citizens -- that Cal Fed II required the but-for standard in all Winstar cases. See, e.g., Fifth Third Bank v. United States, 71 Fed. Cl. 56, 86 (2006) (citing Cal Fed II) ("The breach may not constitute simply a `substantial factor' in causing the damages"); Citizens Financial Services v. United States, 64 Fed. Cl. 498, 509-10 & n.11 (2005) ("The plaintiff's reliance on several earlier cases in this court that applied a `less exacting' `substantial factor' test is misplaced following the Federal Circuit's decision in Cal. Fed."). We have not, however, located any Winstar decisions in which this Court rejected the substantial factor standard where (1) the appropriate

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standard of causation was contested by the parties and considered by the court and (2) the court did not mistakenly believe it was bound by Cal Fed II to apply the but-for standard.2 It is thus plain that the weight of authority--and the great weight of considered authority--supports application of the substantial factor standard to the full range of Winstar cases, without detailed analysis of the nuances of the particular facts of each case and regardless of the type of damages sought. Especially in light of the Federal Circuit's express approval of this Court's reliance on this preponderance of authority, see Citizens, 474 F.3d at 1319-20, it would appear that the substantial factor standard is especially well suited to Winstar litigation generally. Moreover, the particular factual context in which this case arises, as well as certain features of the damages claims Northeast has advanced, provide additional compelling support for application of the substantial factor standard here. In this regard, Northeast submits that the fact that its damages claims are in important respects quite limited, and even conservative, counsels in favor of the application of the substantial factor test. Northeast's lost profits claim, for example, is premised not on assumptions of continued substantial asset growth, or even on the assumption that Northeast would have maintained its pre-breach asset size of $8 billion, but instead on the very reasonable and conservative proposition that Northeast would have held approximately $6.7 billion in tangible assets. See, e.g., Plaintiff's Post-Trial Brief ("NE Brief") at 2324 (filed Jan. 22, 2007); Plaintiff's Post-Trial Reply Brief ("NE Reply") at 26-31 (filed Feb. 20.
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Significantly, in California Federal, the trial court applied the standard of causation set forth in Myerle v. United States, 33 Ct. Cl. 1, 27 (1897), rather than the substantial factor test because plaintiff's counsel conceded the applicability of the Myerle standard. See California Federal Bank v. United States, 54 Fed. Cl. 704, 712 n.18 (2002), aff'd, 395 F.3d 1263 (2005). Even there, however, the trial court observed that "[t]he trial court in Energy Capital, a case affirmed and apparently well-regarded by the Federal Circuit, suggests that Myerle has been supplanted by a less strict test of whether defendant's breach was a `substantial factor' in causing the injury." See also id. (explaining that the trial court in Energy Capital "required only that the plaintiff `prove that the breach was a "substantial factor" in causing its losses, the test in the majority of jurisdictions' "). 7

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2007). Similarly, rather than positing a but-for bank investing in new and non-traditional types of high-return assets, Northeast's damages calculations are based almost entirely on the spread generated by the types of assets and liabilities that Northeast actually had on its books and that it actually divested as a result of the breach. See NE Brief at 12. Because in these and other ways, discussed in our post-trial briefs, Northeast is advancing a very straightforward and modest damages claim, there is no reason for the Court to insist on the satisfaction of a more stringent causation standard than the substantial factor standard. B. This Court Should Find That Northeast Has Established Causation under Both the Substantial Factor and But-for Standards.

Although, for the reasons stated above, this Court should apply the substantial factor standard, we freely admit, as discussed above, that the Federal Circuit has not provided incredibly clear or exhaustive guidance on the factors that should inform the exercise of the Court's discretion regarding the choice of the proper causation standard. Fortunately, however, the result in this case should not turn on the choice between the substantial factor and but-for standards. As a legal matter, the but-for test approved by the Federal Circuit in Cal Fed II is not nearly so stringent as suggested by the Government in this and other Winstar cases. More importantly, as a factual matter, Northeast has amply established that the Government's breach of contract was not only a substantial factor but also a but-for cause of the damages it seeks to recover, and this Court should so find. 1. The Government has consistently attempted to equate the but-for standard of cau-

sation with the standard enunciated more than one hundred years ago in Myerle v. United States: "For a damage to be direct there must appear no intervening incident (not caused by the defaulting party) to complicate or confuse the certainty of the result between the cause and the damage; the cause must produce the effect inevitably and naturally, not possibly nor even probably." 33

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Ct. Cl. 1, 26 (1897); see also Citizens, 474 F.3d at 1318 (describing Government's argument that under but-for standard, "the breaching party is liable only for those damages that it directly and entirely caused") (emphasis added). As demonstrated below, however, the Government's preferred formulation is not the same as the but-for test discussed in Cal Fed II and has no application here. On the contrary, the standard discussed in Cal Fed II is much closer to the substantial factor standard than to the formulation urged by the Government. Although in Cal Fed II the Federal Circuit noted the trial court's reliance on Myerle, it did not itself endorse or apply the Myerle standard. See 395 F.3d at 1267. Moreover, Myerle itself recognized a distinction between claims for lost profits that "would have accrued and grown out of the contract itself, as the direct and immediate results of its fulfillment" and profits that "would have been realized by the party from other independent and collateral undertakings, although entered into in consequence and on faith of the principal contract." Myerle, 33 Ct. Cl. at 26. Subsequent decisions--including binding en banc decisions of the Court of Claims--have generally understood the Myerle causation formulation as a proxy for this distinction or as limited to the context of lost profits claimed from independent and collateral undertakings. See, e.g., Ramsey v. United States, 101 F. Supp. 353, 357-58 (Ct. Cl. 1951) (applying Myerle in this manner); Northern Helex Co. v. United States, 524 F.2d 707, 720-21 (Ct. Cl. 1975) (en banc) (same; quoting Ramsey and Myerle); Energy Capital, 47 Fed. Cl. at 395 (holding that requirement that "the cause must produce the effect inevitably and naturally, not possibly nor even probably" "restricts damages only in those cases where the Plaintiff seeks lost profits on `independent and collateral undertakings' "); Citizens, 474 F.3d at 1318-19 (quoting Energy Capital's analysis on this point with approval); Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135, 159 (2002) ("This Court has applied the `inevitably and naturally' standard to distinguish cases

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in which a plaintiff seeks to recover lost profits flowing directly from transactions unrelated to the contract and flowing only indirectly from the contract itself. When the lost transactions are `independent and collateral,' they do not result `inevitably and naturally' from the breach.").3 As demonstrated above, it is well settled that in the Winstar context, profits on the use of supervisory goodwill as regulatory capital arise directly from the contract itself, not from independent and collateral undertakings. See also California Federal Bank FSB v. United States, 245 F.3d 1342, 1349 (Fed. Cir. 2001). Accordingly, the Myerle standard has no application in this context regardless of whether the Court applies the but-for or substantial factor standard. Moreover, in Cal Fed II the Federal Circuit expressly rejected any suggestion that the but-for standard requires "that the breach must be the sole factor or sole cause in the loss of profits." 395 F.3d at 1268. On the contrary, as that court explained, "[t]he existence of other factors operating in confluence with the breach will not necessarily preclude recovery based on the breach." Id. In this crucial respect, the but-for standard resembles the substantial factor test far more closely than it does the stringent standard repeatedly urged by the Government in Winstar litigation. Indeed, the similarity between the substantial factor and but-for standards led this
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Subsequent decisions have also made clear that the Myerle test is not as demanding as might appear at first blush. See, e.g., Ramsey, 101 F. Supp. at 357 (equating Myerle's statement that "the cause must produce the effect inevitably and naturally, not possibly nor even probably" with the principle that contract damages "are ordinarily limited to the natural and probable consequences of the breach complained of"); Northern Helex, 524 F.2d at 720 ("natural and probable consequences") (quoting Ramsey); Olin Jones Sand Co., 225 Ct. Cl. 741, 742 (1980) (same); Prudential Insurance Co. v. United States, 801 F.2d 1295, 1301 (Fed. Cir. 1986) (same). This clarification of Myerle is consistent with general principles of contract law -- which principles, the Supreme Court has made clear, apply equally to government contracts. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 351 cmt. a ("It is enough, however, that the loss was foreseeable as a probable, as distinguished from a necessary, result of his breach."); E. ALLAN FARNSWORTH, CONTRACTS § 12.14 (3d ed. 1999) ("[T]he loss need only have been foreseeable as a probable, as opposed to a necessary or certain, result of the breach."); Mobil Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 607 (2000) (The RESTATEMENT is the primary source of "basic contract law principles" applicable to contracts with the United States). 10

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Court in Suess to conclude, in the aftermath of the Federal Circuit's decision in Cal Fed II, that its previous analysis under the substantial factor test "satisfie[d] the California Federal standard." Suess v. United States, 74 Fed. Cl. 510, 517 (2006). 2. Ultimately, however, the choice among any of the causation standards discussed

in the relevant decisions is not of dispositive significance in this case. As we demonstrated at trial and in our post-trial briefing, Northeast has established a causal connection between the Government's breach of contract and the damages it claims that plainly satisfies not only the substantial factor standard but also the but-for standard (whether as defined by the Federal Circuit in Cal Fed II or as caricatured by the Government in its arguments). Although this Court should decide that the substantial factor standard applies, it should also expressly find that Northeast has established but-for causation as well. This approach was recently taken by Judge Miller in First Federal. In that case, Judge Miller found that "[a]lthough not required to meet the more stringent but-for standard, First Federal has established that it would have earned the profits it seeks to recover but for the Government's breach." 76 Fed. Cl. at 113; see also id. at 129 (finding "both that the Government's breach was a but-for cause and that the Government's breach was a substantial factor in" causing the alleged damages). See also Westfed, 407 F.3d at 1364 (affirming trial court's conclusion "that a causal connection had been definitely established between the breach and the loss claimed by Westfed" where "the trial court found that the defendants' breach was a substantial factor in causing Westfed's downfall" and also "expressly found that Westfed had met its burden under the but-for standard"). Northeast's causation case is quite straightforward and rests on the simple proposition that the government's breach of its promise to recognize over $200 million of regulatory capital forced Northeast to jettison billions of dollars of wholesale assets and liabilities on which it was

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earning a positive spread. Consistent with the business strategy it adopted in December 1988 to hold the size of its asset base constant provided it complied with applicable capital requirements, Northeast would have maintained at least $6.7 billion in tangible assets had it been able to count all of its supervisory goodwill toward FIRREA's capital requirements. NE Brief at 20, 22-24. As the regulators themselves candidly acknowledged, the breach pulled "the proverbial rug" out from under Northeast and disrupted virtually every facet of its business plans. NE Brief at 21. The breach forced Northeast to shrink down, ultimately, to about $4 billion in assets, and this massive breach-caused shrinkage in turn caused Northeast to lose tens of millions of dollars in income.4 The government contends that Northeast's massive asset shrinkage between 1989 and 1991 was undertaken for non-breach reasons and therefore would have occurred even absent the breach. While this argument suffers from multiple problems, not the least of which is the complete absence of any reliable evidence that supports it, at its essence, it simply fails to reckon with the basic facts that (1) all of the contemporaneous evidence, from both Northeast documents and regulatory documents, makes clear that Northeast's asset shrinkage was driven by Northeast's regulatory capital profile; and (2) absent the breach, Northeast would have had hundreds of millions of dollars in additional regulatory capital. Although the government has pointed to several draft business plans and other documents from 1989 ­ i.e., after the impending
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In addition to depriving Northeast of substantial incremental income, the breach also caused Northeast to incur significant additional expenses. Thus, in connection with its acquisition of certain Rhode Island deposit franchises in 1992, Northeast was required to raise, at a cost of about $15.3 million, approximately $35 million in additional capital. Absent the government's breach, Northeast would not have needed to raise this capital in order to support these acquisitions. See NE Brief at 49-50. Similarly, because of the precarious position in which it found itself as a result of the breach, Northeast was required to pay approximately $1.3 million more in premiums for deposit insurance than it otherwise would have paid, and approximately $0.3 million in expenses related to other efforts to raise capital that it needed as a direct result of the government's breach. See id. at 57-59. 12

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breach became apparent to Northeast ­ in an attempt to show that Northeast would have shrunk to below $6.7 billion in tangible assets even absent the breach, the calculations reflected in those documents reveal that any shrinkage contemplated therein was driven either by the expected loss of supervisory goodwill ­ i.e., the breach ­ or by potential alternative capital requirements that would not have applied even absent the breach because FIRREA's capital requirements superseded them. See NE Brief at 24-26, 113-17, 121-27. The asset shrinkage that Northeast incurred because of the breach in 1989­90 and in 1991 reduced Northeast's earnings significantly, as the documents and testimony uniformly establish. See NE Brief at 28-29, 154-60. This conclusion follows directly from the fact that the breach had a disproportionately large impact on Northeast's net interest income. After March 31, 1990, the net interest spread on the assets that Northeast divested remained positive throughout the damages period. Therefore, removing those assets necessarily reduced Northeast's net interest income. Moreover, because the assets that Northeast divested were almost exclusively wholesale, they had little or no credit risk and generated minimal operating expenses. Consequently, the substantial lost net interest income was not offset by an equivalent reduction in credit losses and expenses. As we noted in post-trial briefing, the causation evidence admitted at trial is compelling, and it establishes that but for the Government's breach, Northeast would have earned at least $129.3 million in additional net income. Because Northeast has proven causation under the more rigorous but-for standard, it necessarily follows that Northeast has also proven that the Government's breach constituted a substantial factor in causing Northeast's claimed damages. Although Northeast believes that under the Federal Circuit's decision in Citizens, the appropriate

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causation test in this case is the substantial factor test,5 in order to remove any doubt on this issue, Northeast urges the Court to make factual findings under both standards, and to find that Northeast has proved causation under both standards. RESPONSE TO PARAGRAPH TWO ­ PROFITABILITY PROJECTIONS The Court next asked the parties to "identify those portions of the record which document profitability projections for Northeast from the time of the merger negotiations until the breach." Order ¶ (2). Northeast's business plans typically included income projections for the thrift under various assumed scenarios. Northeast's December 1988 business plan was admitted into evidence as PX146/DX178. In addition to business plan documents, the regulators typically prepared "viability" analyses in connection with their assessment of proposed supervisory acquisitions. Such analyses typically included estimates of the resulting institution's profitability after the acquisition. A discussion of the results of the viability analysis that the regulators conducted in connection with the Freedom Federal/First Federal acquisition can be found on page 14 of PX1065, the October 1982 FHLBB memorandum concerning that transaction. Finally, PX67, a September 1988 report prepared by Kaplan Smith, includes some income projections based upon various alternative assumed scenarios. While the above documents are the only admitted exhibits which contain income projections that were not affected in any way by the breach, there were admitted several other business plans and related documents (including draft business plan documents6) that were prepared be-

It is true that in our post-trial brief, we addressed causation under the assumption that the but-for standard applied. See NE Brief at 17-19. That brief was filed before the Federal Circuit clarified in Citizens that its earlier decision in Cal Fed II did not require but-for causation in all Winstar cases and that the substantial factor test remained an appropriate causation standard in such cases. As the Court is aware, it is our view that such draft business plan documents and other projections not approved by Northeast's board are not reliable indicators of what Northeast's 14
6

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fore December of 1989, which was when the OTS capital regulations implementing the breaching provisions of FIRREA became effective. As we established at trial and discussed in our post-trial briefs, these projections were prepared under the expectation or at least the assumption that Northeast's contractual right to count supervisory goodwill for regulatory capital purposes would likely be abrogated or limited by the legislation that ultimately became FIRREA. See NE Brief at 24-25. Such 1989 projections were therefore breach-affected. Such 1989 projections can be found in the following admitted exhibits: PX148A/DX179 (May 1989 draft business plan7); PX151 (July 1989 revised business plan); PX154 (July 1989 revised business plan); DX 181 (1989 draft revised business plan); PX211/DX257 (Response to June 1989 report of examination); DX509 (March 1989 Financial Management Committee minutes); and DX510 (April 1989 Financial Management Committee minutes). RESPONSE TO PARAGRAPH THREE ­ PX1065 Finally, the Court asked Northeast to confirm whether PX1065, as submitted for the record, contained any attachments. Order ¶ (3). Northeast has confirmed that PX1065 does not contain any attachments. Northeast has been able, however, to confirm that another version of the same memorandum, DX650, which was not admitted, contains a list of attachments to the memorandum (although it does not include the attachments themselves). A copy of DX650 is attached hereto. Northeast has compared this list of attachments to the exhibits admitted at trial, and has confirmed that Exhibit 3 on the list of attachments ­ the "Forbearance Letters" for the Freedom Federal/First Federal transaction ­ were admitted as PX235 and PX236. In addition,

business plans would have been absent the breach. See NE Brief at 25, 113-14. We include such drafts in an attempt to provide an exhaustive response to the Court's directive.
7

The projections found in PX148A are a subset of the business plan found in DX179. 15

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page 2 of PX1065 refers to attached "resolutions" approving the transaction; the final versions of those resolutions were admitted as PX231 and PX232.

Respectfully submitted, /s/ Charles J. Cooper Charles J. Cooper COOPER & KIRK, PLLC 1523 New Hampshire Avenue, NW Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record Of Counsel: Michael W. Kirk Vincent J. Colatriano David H. Thompson COOPER & KIRK, PLLC 1523 New Hampshire Avenue, NW Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) December 3, 2007

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CERTIFICATE OF SERVICE I hereby certify that on this 3d day of December 2007, copies of the foregoing were filed electronically. Notice of this filing will be sent by operation of the Court's electronic filing system to all parties indicated on the electronic filing receipt. Parties may access this through the Court's system.

/s/ Charles J. Cooper Charles J. Cooper COOPER & KIRK, PLLC 1523 New Hampshire Ave., NW Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) [email protected]

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