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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 92-550C (Judge Williams) ______________________________________________________________________________ NORTHEAST SAVINGS, F.A., Plaintiff, v. THE UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S POST TRIAL REPLY BRIEF ______________________________________________________________________________ STUART E. SCHIFFER Deputy Assistant Attorney General JEANNE E. DAVIDSON Acting Director KENNETH M. DINTZER Assistant Director Of Counsel: SCOTT AUSTIN MELINDA HART ELIZABETH HOSFORD SAMEER YERAWADEKAR Trial Attorneys Department of Justice

TAREK SAWI Senior Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street, N.W. Washington, D.C. 20530 Tele: (202) 616-0320 Fax: (202) 305-7643 Attorneys for Defendant

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -ivDEFENDANT'S POST TRIAL REPLY BRIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 I. Northeast's Lost Profits Claim Is Utterly Without Merit . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. B. Neither The Breach Nor Shrinkage Constitute Proof Of Damage . . . . . . . . . . . . . 7 The Courts Have Not Ever Awarded Lost Profits To A Firm With A Record Of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1. Lost Profits Are Not Available To Unprofitable Firms Such As Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Northeast Did Not Have A Record Of Profitability . . . . . . . . . . . . . . . . 12

2.

C.

3. Lost Profits Awards Are The Exception Not The Rule . . . . . . . . . . . . . 13 Northeast Did Not Want To Engage In Risk Controlled Arbitrage And Its Regulators Would Not Have Permitted Such A Strategy . . . . . . . . . . . . . . . 15 Northeast's Claim About The Size Of The Forgone Portfolio Is Demonstrably False . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Northeast's Claim Regarding The Size Of The Divested Assets Is Demonstrably False . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Northeast's Assumptions About The Credit Risk Of The Forgone Assets Is Demonstrably Wrong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Northeast's Assumptions About The Interest Rate Risk Of The Forgone Assets Is Demonstrably Wrong . . . . . . . . . . . . . . . . . . . . . . . . . 32 The Phase Out Of Goodwill Benefitted Northeast . . . . . . . . . . . . . . . . . . . . . . . 38 1. 2. Reduction Of Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Termination Of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

D.

E.

F.

G.

H.

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3. I.

Reducing General And Administrative Expenses . . . . . . . . . . . . . . . . . . 42

Northeast's Lost Profits Claim Does Not Meet Any Of The Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 1. 2. 3. Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Foreseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Reasonable Certainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

II.

Northeast Is Not Entitled To Recover As Damages Any Costs Associated With Its Acquisition Of Rhode Island Credit Unions In 1992 . . . . . . . . . . . . . . . . . . . . 54 A. B. C. Northeast's DEPCO Claim Is Based On Counterfactual Assumptions . . . . . . . . 55 Dr. Baxter's Model For Measuring The Alleged Costs Is Wrong . . . . . . . . . . . 57 Any Costs Associated With The Issuance Of Preferred Stock When It Acquired Rhode Island Credit Unions In 1992 Are Not Recoverable Because They Are The Result Of Remote Consequences . . . . . . . . . . . . . . . . . 61 Northeast Is Not Entitled To Recover Hypothetical Costs Associated With The Acquisition Of The Rhode Island Credit Unions . . . . . . . . . . . . . . . . 63 Northeast Is Not Entitled To Recover Costs Incurred By Its Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Northeast Is Not Entitled To A Tax Gross-Up . . . . . . . . . . . . . . . . . . . . . . . . . . 65

D.

E.

F. III.

Northeast's Alleged "Wounded Bank Damages" Are Premised Upon Its Flawed Lost Profits Model And Are Factually And Legally Infirm . . . . . . . . . . . . . . . . 70 Northeast Is Not Entitled To A Jury Verdict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Northeast Wrote Off Its Goodwill For Non-Breach Reasons . . . . . . . . . . . . . . . . . . . . . 74

IV. V.

Response To Northeast's Proposed Factual Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 I. II. III. How Thrifts Make Money (PFF 1-34) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 FIRREA (PFF 35-39) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Northeast Prior To FIRREA (PFF 40-193) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 -ii-

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A.

Both Northeast And Its RCA Portfolio Were Unprofitable . . . . . . . . . . . . . . . . . 81

B.

Northeast Wanted To Divest Its RCA Portfolio As Soon As It Could Do So Without Taking A Major Loss To Its Capital . . . . . . . . . . . . . . 82 The Phase-Out Caused The Cessation Of Higher Credit Risk Lending . . . . . . . 84

C. IV.

Northeast's Response To FIRREA (Pl. PFF 194-292) . . . . . . . . . . . . . . . . . . . . . . . . . . 86 A. The Breach Did Not Cause Shrinkage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 1. 2. 3. 4. The Pre-FIRREA Capital Requirements Mandated Shrinkage . . . . . . . . 86 Northeast's Desire To Exit RCA Would Have Mandated Shrinkage . . . 87 Dr. Baxter's Asset Size Assumption Posits A Clairvoyant Northeast . . . 88 Dr. Baxter Counterfactually Assumes That Northeast Would Prefer Having An RCA Portfolio To Being Well Capitalized . . . . . . . . . 90 Dr. Baxter Counterfactually Assumes No Dividend Payments . . . . . . . . 92

5. B.

The Breach Caused The Admittedly Beneficial Securitization And Recourse Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 The Breach Had No Negative Impact On the DEPCO Transaction Or Northeast's SAIF Assessments Or Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

C.

V.

Measuring The Impact Of The Breach (PFF ¶¶ 293-543) . . . . . . . . . . . . . . . . . . . . . . . 94 1. Northeast's erroneously Contends That Its Incremental Retail Retail Business Would Have Been Profitable . . . . . . . . . . . . . . . . . . . . . 95 Northeast's erroneously Contends That Its California Retail Lending Was Profitable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

2.

VI. VII.

The Testimony Of Mr. O'Keefe And Mr. Brenner Are Fatal To Northeast's Claim . . 100 Northeast's Attack On Our Experts' Credibility Is Unavailing . . . . . . . . . . . . . . . . . . . 102

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

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TABLE OF AUTHORITIES Page(s) CASES American Federal Bank, FSB v. United States, 68 Fed. Cl. 346 (2005) ................................................................................................................. 61 Bank of America, F.S.B. v. United States, 67 Fed. Cl. 577 (2005) ........................................................................................................... 66, 67 Bank of America, F.S.B. v. United States, 70 Fed. Cl. 246 (2006) ................................................................................................................. 68 Bank United v. United States, 80 Fed. Appx. 663, 2003 WL 22177282 (Fed. Cir. 2003), cert. denied, 543 U.S. 916 (2004) ................................................................................................ 15 Bank United of Texas v. United States, 50 Fed. Cl. 645 (2001), aff'd in part & rev'd in part, 80 Fed. Appx. 663, 2003 WL 22177282 (Fed. Cir. 2003), cert. denied, 543 U.S. 916 (2004) ................................... 58 Barron Bancshares, Inc. v. United States, No. 90-830 (Fed. Cl.) ................................................................................................................... 15 Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed. Cir. 2001) ............................................................................................. 44, 73 Calderon v. Thompson, 523 U.S. 538 (1998) ..................................................................................................................... 68 California Fed. Bank, FSB v. United States, 395 F.3d 1263 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 344 (2005) .................................... 14, 45 California Fed. Bank, FSB v. United States, 245 F.3d 1342 (Fed. Cir. 2001), cert. denied, 534 U.S. 1113 (2002) .......................................... 58 California Fed. Bank, FSB v. United States, 54 Fed. Cl. 704 (2002), aff'd, 395 F.3d 1263 (Fed. Cir. 2005) ............................................ passim Caroline Hunt Trust Estate v. United States, 470 F.3d 1044 (Fed. Cir. 2006) ................................................................................................... 64

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Castle v. United States, 301 F.3d 1328 (Fed. Cir. 2002), cert. denied, 539 U.S. 925 (2003) ........................................ 8, 22 Centex Corp. v. United States, 55 Fed. Cl. 381 (2003), aff'd, 395 F.3d 1283 (Fed. Cir. 2005) .............................................. 67, 68 Charter Fed. Bank v. United States, No. 95-513 (Fed. Cl.) ................................................................................................................... 15 Citizens Fed. Bank, F.S.B. v. United States, 59 Fed. Cl. 507 (2004) ........................................................................................................... 66, 68 Commercial Federal Bank, F.S.B. v. United States, 59 Fed. Cl. 338 (2004), aff'd, 125 Fed. Appx. 1013 (Fed. Cir. Apr. 8, 2005) ................. 10, 66, 68 DPJ Co. v. FDIC, 30 F.3d 247 (1st Cir. 1994) .......................................................................................................... 60 Dawco Constr., Inc. v. United States, 930 F.2d 872 (Fed. Cir. 1991) ..................................................................................................... 74 Diesel Systems, LTD. v. Yip Shing Diesel Eng'g Co., 861 F. Supp. 179 (E.D.N.Y. 1994) .............................................................................................. 65 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) ..................................................................................................................... 58 Eleven Line, Inc. v. North Texas State Soccer Assn., Inc., 213 F.3d 198 (5th Cir. 2000) ......................................................................................................... 9 Erickson Air Crane Co. of Wash., Inc. v. United States, 731 F.2d 810 (Fed. Cir. 1984) ..................................................................................................... 65 Fifth Third Bank v. United States, 402 F.3d 1221 (Fed. Cir. 2005) ............................................................................................. 14, 63 First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999) ................................................................................................... 65 First Heights Bank, F.S.B. v. United States, 57 Fed. Cl. 162 (2003), aff'd, 422 F.3d 1311 (Fed. Cir. 2005) ........................................ 66, 67, 68 Glendale Fed. Bank, F.S.B. v. United States, 378 F.3d 1308 (Fed. Cir. 2004), cert. denied, 544 U.S. 904 (2005) ............................................ 14 -vi-

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Glendale Fed. Bank, F.S.B. v. United States, 43 Fed. Cl. 390 (1999) ......................................................................................................... passim Glendale Fed. Bank, F.S.B. v. United States, 239 F.3d 1374 (Fed. Cir. 2001) ............................................................................................... 8, 46 Globe Sav. Bank, F.S.B. v. United States, 65 Fed. Cl. 330 (2005), aff'd, in part, remanded 189 Fed. Appx. 964 (Fed. Cir. Jul. 20, 2006) ....................................................................................................... passim Granite Mgmt. Corp. v. United States, 74 Fed. Cl. 155 (2006) ................................................................................................................... 7 Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005) ......................................................................................... 7, 63, 65 Hansen Bancorp, Inc. v. United States, No. 92-828 (Fed. Cl.) ................................................................................................................... 15 Hercules Inc. v. United States, 24 F.3d 188 (Fed. Cir. 1994) ....................................................................................................... 61 Home Savings of America, F.S.B. v. United States, 399 F.3d 1341 (Fed. Cir. 2005) ................................................................................................... 66 Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001) ................................................................................................... 62 Landmark Land Co. v. United States, 256 F.3d 1365 (Fed. Cir. 2001) ....................................................................................... 47, 64, 65 LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 64 (1999) ................................................................................................................... 11 LaSalle Talman Bank, F.S.B. v. United States, 64 Fed. Cl. 90 (2005), aff'd, 462 F.3d 1331 (Fed. Cir. 2006) ................................................ 10, 11 LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363 (Fed. Cir. 2003) ....................................................................................... 58, 59, 61 LaSalle Talman Bank, F.S.B. v. United States, 468 F.3d 1331 (Fed. Cir. 2006) ................................................................................................... 66

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LaVan v. United States, 56 Fed. Cl. 580 (2003), aff'd in part, remanded 382 F.3d 1340 (Fed. Cir. 2004), reh'g denied (Nov. 15, 2004) ....................................................................................................... 15 Local Oklahoma Bank, N.A. v. United States, 59 Fed. Cl. 713 (2005), aff'd, 452 F.3d 1371 (Fed. Cir. 2006) .............................................. 66, 68 Maco Bankcorp, Inc. v. United States, No. 94-625 (Fed. Cl.) ................................................................................................................... 15 Mutual Fed. Sav. Bank v. United States, No. 95-514 (Fed. Cl.) ................................................................................................................... 15 Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001) ........................................................................................................ 64 Old Stone Corp. v. United States, 450 F.3d 1360 (Fed. Cir. 2006), petition for reh'g & reh'g en banc filed, (Fed. Cir. July 7, 2006) ............................................................................................... passim Picture Lake Campground, Inc. v. Holiday Inns, Inc., 497 F. Supp. 858 (E.D. Va. 1980) ............................................................................................... 65 Rumsfeld v. Applied Cos., 325 F.3d 1328 (Fed. Cir. 2003) ................................................................................................... 13 Southern Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005), cert. denied, 126 S. Ct. 2967 (2006) ........................................ 64 Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531 (1918) ..................................................................................................................... 61 TCF Bank of Minnesota, FSB v. United States, No. 93-672 ................................................................................................................................... 15 United States v. Johnson Controls, Inc., 713 F.2d 1541 (Fed. Cir. 1983) ................................................................................................... 65 Vermont Fed. Bank, F.S.B. v. United States, No. 95-536 (Fed. Cl.) ................................................................................................................... 15 Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996) ....................................................................................... 14, 51, 103

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Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005) ................................................................................................... 63 STATUTES, RULES & REGULATIONS 26 U.S.C. § 61 ............................................................................................................................. 69 26 U.S.C. § 6103 .......................................................................................................................... 68 Financial Institutions Reform, Recovery and Enforcement Act, of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ............................................................................................ 16 RCFC 60(b) ...................................................................................................................... 66, 67, 68 MISCELLANEOUS 11 Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, Federal Practice and Procedure, § 2864 (2d ed. 1995) ................................................................ 68 Dunn, Recovery of Damages For Lost Profits § 5.5 (4th ed. 1992) .............................................. 9 11 William Meade Fletcher, Cyclopedia of the Law of Private Corporations § 5096 (Perm. Ed. 2003) .............................................................................................................. 64 Restatement (Second) of Contracts § 347 (1981) ........................................................................ 44 Restatement (Second) of Contracts § 351 (1981) ........................................................................ 44 Restatement (Second) of Contracts § 351(2) ............................................................................... 47 Restatement (Second) of Contracts § 351 cmt a (1981) .............................................................. 47 Restatement (Second) of Contracts § 351 cmt e .......................................................................... 50 Restatement (Second) of Contracts § 352 (1981) ........................................................................ 44

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Respectfully submitted, STUART E. SCHIFFER Deputy Assistant Attorney General /s/ Jeanne E. Davidson JEANNE E. DAVIDSON Acting Director /s/ Kenneth M. Dintzer KENNETH M. DINTZER Assistant Director /s/ Tarek Sawi TAREK SAWI Senior Trial Attorney 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

OF COUNSEL: SCOTT AUSTIN MELINDA HART ELIZABETH HOSFORD SAMEER YERAWADEKAR Trial Attorneys

February 20, 2007

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CERTIFICATE OF FILING

I hereby certify under penalty of perjury that on this 20th day of February, 2007, a copy of the foregoing "DEFENDANT'S POST TRIAL REPLY BRIEF " 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/ Tarek Sawi Tarek Sawi