American Federal Bank, FSB v. United States, 090106 uscc, 95-498C

Docket Nº95-498C
Opinion JudgeThe opinion of the court was delivered by: Lettow, Judge.
Party NameAMERICAN FEDERAL BANK, FSB, PLAINTIFF, v. UNITED STATES, DEFENDANT.
AttorneyHoward N. Cayne, Arnold & Porter, Llp, Washington, D.C., for plaintiff. With him at trial and on the briefs were David B. Bergman, Michael A. Johnson, and Michael A. Sackey, Arnold & Porter Llp, Washington, D.C.
Case DateSeptember 01, 2006

AMERICAN FEDERAL BANK, FSB, PLAINTIFF,

v.

UNITED STATES, DEFENDANT.

No. 95-498C

In the United States Court of Federal Claims

September 1, 2006

Howard N. Cayne, Arnold & Porter, Llp, Washington, D.C., for plaintiff. With him at trial and on the briefs were David B. Bergman, Michael A. Johnson, and Michael A. Sackey, Arnold & Porter Llp, Washington, D.C.

The opinion of the court was delivered by: Lettow, Judge.

The opinion of the court was delivered by: Lettow, Judge. [9] Trial on damages in Winstar- related case; expectancy damages; cost of replacement capital; incidental losses; tax gross-up; motion for costs under RCFC 37 [10] OPINION AND ORDER [11] This Winstar-related case*fn1 is before the court after a sixteen-day trial on damages that commenced on April 3, 2006 and ended on May 17, 2006. Liability previously was established following a nine-day trial, after which the court found that the government had entered into and breached two contracts with American Federal Bank, FSB ("American Federal"), one consisting of a substituted contract to treat goodwill as regulatory capital and the other to treat subordinated debt as regulatory capital. See American Fed. Bank, FSB v. United States, 62 Fed. Cl. 185, 186 (2004) ("AmFed II").*fn2 Thereafter, the court considered cross-motions for summary judgment regarding selected aspects of plaintiff's claims for damages, granting the government's motion respecting plaintiff's claims for lost profits, reliance damages, and certain incidental losses, and otherwise remitting plaintiff's damages claims for trial. See American Fed. Bank, FSB v. United States, 68 Fed. Cl. 346, 349 (2005) ("AmFed III"). As a result, trial was held to resolve genuine issues of material fact with respect to expectancy damages based upon the cost of replacement capital, four categories of incidental losses, and a tax "gross-up." Id. at 348-49. Following post-trial briefing, closing arguments were heard on July 28, 2006. The case is now ready for disposition. [12] For the reasons stated below, the court concludes that plaintiff is entitled to damages for the government's breach of the two contracts. As explained, further calculations must be made by the parties to derive the specific quantum of damages due. Instructions for those calculations are provided in this opinion for use by the parties in that connection. [13] FACTS*fn3 [14] Based in Greenville, South Carolina, American Federal was a federally chartered savings and loan association. AmFed II, 62 Fed. Cl. at 186. Over the course of a thirty-seven day period in the spring of 1982, American Federal received approval from the Federal Home Loan Bank Board ("FHLBB" or "Bank Board") to acquire four troubled thrifts: (1) United Federal Savings & Loan Association of Fountain Inn, South Carolina, (2) Home Savings & Loan Association of Easley, South Carolina, (3) Family Federal Savings & Loan Association of Greer, South Carolina, and (4) Bell Federal Savings & Loan Association of Inman, South Carolina. Id. at 186-87. As part of its agreements with the Bank Board, American Federal was permitted to use the purchase method of accounting to count as regulatory capital the intangible goodwill that was generated as a result of the mergers, and to amortize that goodwill over a forty-year period. AmFed II, 62 Fed. Cl. at 187.*fn4 The four acquisitions that American Federal completed generated $61,158,176 in amortizing supervisory goodwill. AmFed III, 68 Fed. Cl. at 349 (citing American Federal's Consolidated Financial Statements (1983 & 1982) at 6-7). Based upon the evidentiary record established by the trial on liability, this court held that agreements were reached between the Bank Board and American Federal respecting treatment of goodwill as regulatory capital, which, in conjunction with actions by the parties, resulted in the creation of implied-in-fact contracts between American Federal and the government. AmFed II, 62 Fed. Cl. at 199. [15] From the time the acquisitions were completed until 1988, American Federal amortized this goodwill according to the schedule agreed upon with the Bank Board. AmFed II, 62 Fed. Cl. at 199. By the end of 1988, American Federal could count $50,916,000 in goodwill as regulatory capital. PX 2000 at 29 (Annual Report (1988)).*fn5 Despite this use of goodwill as regulatory capital, the bank did not satisfy its then-minimum regulatory capital requirements for any year between 1984 through 1988; it also reported a net loss of income from 1984 through 1986. Id. at 12. [16] On September 6, 1988, American Federal sought approval from the Bank Board to execute a modified conversion from a mutual to stock ownership. AmFed II, 62 Fed. Cl. at 193.*fn6 Subsequent to discussions between the Bank Board and American Federal, on November 10, 1988, the Bank Board conditionally approved American Federal's application for a modified stock conversion. Id. As part of a negotiated agreement between American Federal and the Bank Board, the overall amortization period for the goodwill arising from the bank's acquisitions in 1982 was shortened from 40 years to 29.5 years. Id. Thus, the remaining amortization period for this goodwill became 23.25 years effective October 1, 1988. PX 2000 at 29. This court held that the Bank Board and American Federal entered into a substituted contract to count goodwill as regulatory capital in connection with the government's approval of the modified stock conversion, superseding the four contracts respecting goodwill that the parties had entered into in connection with the approval of the 1982 acquisitions. AmFed II, 62 Fed. Cl. at 205. [17] Concurrently with its conversion application, American Federal sought approval from the Bank Board to include two issues of subordinated debentures totaling approximately $13.6 § 563.13 (1981)). Under its agreements with the Bank Board, American Federal could count this goodwill toward its regulatory capital requirements, subject to amortization of the goodwill over a forty-year period. million as regulatory capital. AmFed II, 62 Fed. Cl. at 193. After negotiations, on December 23, 1988, the Bank Board approved this application as well. PX 2003 (Letter from Robert E. Showfety, Principal Supervisory Agent, Bank Board, to William L. Abercrombie, Jr., President and CEO, American Federal (Dec. 23, 1988)). At that time, the government and American Federal entered into a second contract "for recognition of newly issued subordinated debt as regulatory capital." AmFed II, 62 Fed. Cl. at 205. [18] American Federal completed its conversion on January 26, 1989. PX 233 (Annual Report (1989)) at 35. In all, the bank issued three different securities -- common stock, Series A subordinated debentures with attendant mandatory purchase contracts, and Series B subordinated debentures with detachable warrants. Id. First, two million shares of common stock were sold at a purchase price of $5.00 per share. PX 233 at 35. "From the proceeds [of the sale], $2.0 million was allocated to common stock and $6.3 million, which is net of [c]onversion costs of $1.7 million, was allocated to additional paid-in capital." Id. at 35. [19] Second, for a price of $12.5 million, American Federal sold Series A noninterest-bearing subordinated debentures with a stated aggregate principal amount of $100,000, due January 15, 2004, with attendant nondetachable mandatory purchase contracts ("MPCs"). PX 233 at 35; PX 2017 (Series A Debenture Agreement (Jan. 15, 1989)). The differential between the price of $12.5 million and the principal amount of subordinated debentures of $100,000, resulted in a premium of $12.4 million that was allocated to paid-in capital. PX 233 at 35. The Series A subordinated debentures could be converted into common stock at a conversion ratio that took account of the full price of $12.5 million, but under the MPC agreement, to convert, the debenture holders would be required to provide an additional $12.65 million to purchase common stock at a price of $5.75 per share. PX 2017 at 20. The unusual characteristics of the Series A subordinated debt meant that it in significant measure reflected an option to purchase common stock at a fixed price. All of the Series A issue was purchased by sophisticated institutional investors.*fn7 [20] Third, American Federal sold $15.0 million of Series B subordinated debentures, due to mature on January 15, 1999, along with detachable warrants. PX 233 at 33, 35. The warrants were valued in 1989 at $1.361 million, and enabled holders to purchase 600,000 shares of common stock. PX 233 at 33, 35; PX 2016 (Series B Debenture Agreement (Jan. 15, 1989)). The debentures themselves consequently were valued at $13.639 million. PX 233 at 33, 35. All of this issue was also purchased by sophisticated institutional investors, some of whom also were purchasers of the Series A subordinated debentures.*fn8 The Series B debentures had an interest rate of 11.25%, paid on a semiannual basis. PX 2016 at 11. Series B debenture holders had an option to redeem the debentures beginning January 15, 1996, seven years after the date of the initial sale, based upon a redemption price schedule. Id. at 16. Holders were also given until January 15, 1999 to exercise the detachable warrants at an initial purchase price of $5.00 per share, which price could be reduced if certain conditions set out in the debenture agreement were satisfied. Id. at 19, 21, B-1. [21] In total, in January 1989, the bank raised $35,557,242 in capital from the sale of common stock and the Series A and Series B debentures. PX 2096 at 13. Immediately prior to the modified conversion, on December 31, 1988, the bank was required to have a minimum of approximately $31.996 million in regulatory capital, yet the bank possessed only $23.459 million in...

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