BANK UNITED OF TEXAS FSB v. U.S. 645 Cite as 50 Fed.Cl. 645 (2001) CONCLUSION to damages of $8,826,783 for the proven For the foregoing reasons, the court finds costs incurred to mitigate the breach. that plaintiffs have not met the requirements So ordered. for class certification as set forth in RCFC 23 and Quinault. Plaintiffs have not demon- strated that certification in this action will United States O74(13, 15) serve the interests of justice or is otherwise Plaintiffs who prevailed in liability phase appropriate.10 Therefore, the court DE- of Winstar action were not entitled to recov- NIES plaintiffs’ September 21, 1999 motion ery of lost profits from the contract breach, for class certification. since they could and did mitigate the signifi- cant loss of borrowing capacity caused by the IT IS SO ORDERED. passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA); rather, plaintiffs were entitled to damages of , $8,826,783 for the proven costs incurred to mitigate the breach. Federal Deposit Insur- ance Act, § 2[1] et seq., 12 U.S.C.A. § 1811 et seq.

BANK UNITED OF TEXAS FSB, USAT Walter B. Stuart, IV, Houston, TX, for Holdings Inc., Hyperion Holdings Inc. plaintiffs. David T. Hedges, Jr., John D. and Hyperion Partners L.P., Plaintiffs, Taurman, Karen Jewell, James A. Reeder, v. Jr., Tegan Flynn, Joseph E. Hunsader, Fred Williams and Michael Holmes, of counsel. UNITED STATES of America, Defendant. John J. Hoffman, with whom were Acting No. 95–473 C. Assistant Attorney General David W. Ogden, David M. Cohen and Jeanne E. Davidson, United States Court of Federal Claims. Washington, DC, for defendant. Colleen Oct. 29, 2001. Conry, Teresa Kolb, Luke Levasseur, Je- rome A. Madden and Marc Sacks, of counsel.

Financial entities brought Winstar ac- OPINION and ORDER tion alleging that the passage of the Finan- cial Institutions Reform, Recovery, and En- TURNER, Judge. forcement Act (FIRREA) breached various This suit arises from the impact of the promises made by the government in con- Financial Institutions Reform, Recovery and nection with acquisition of failed thrift. Af- Enforcement Act of 1989 (FIRREA), Pub.L. ter summary judgment was entered for No. 101–73 (Aug. 9, 1989), on the savings and plaintiffs on the issue of liability, 49 Fed.Cl. loan industry. Following the Supreme 1, damages trial was held. The Court of Court’s decision in United States v. Winstar Federal Claims, Turner, J., held that plain- Corp., 518 U.S. 839, 116 S.Ct. 2432, 135 tiffs were not entitled to recovery of lost L.Ed.2d 964 (1996), holding that FIRREA profits from the contract breach, since they breached the government’s contracts with could and did mitigate the significant loss of three thrift institutions, this court—finding borrowing capacity caused by the passage of breach of a similar contract—granted sum- the FIRREA, and (2) plaintiffs were entitled mary judgment for plaintiffs on the issue of

10. The fact that class certification is not appro- parties to coordinate discovery or briefing on priate in this instance does not, however, fore- related issues found in separate cases, where the close the possibility that if other actions are later cases share common legal issues but the individ- filed by other project owners, other case manage- ual claims for damages are predicated on very ment techniques may be deemed appropriate. different factual questions. The court has, on other occasions, worked with 646 50 FEDERAL CLAIMS REPORTER liability. Bank United of Texas v. United The Board, well aware that thrift prob- States, 49 Fed.Cl. 1 (1999) (Smith, C.J.). lems were concentrated in Texas, devel- The case was then transferred to this judge oped the Southwest Plan to deal with the for resolution of damages. A damages trial situation while also proceeding to resolve was held over a six-week period in Septem- the worst cases elsewhere. The Southwest ber and October 1999, and final arguments Plan, formally introduced in February were heard on February 7, 2000. 1988, combined consolidation of an over- built thrift industry with attracting acquir- The sole basis for damages sought by ers who would bring in strong manage- plaintiffs is alleged lost profits, although ment, new capital, and carry out a business plaintiffs presented evidence concerning the plan aimed at cutting operating costs and cost of substitute capital in the event the ultimately reducing the high interest rates court determined that law requiring mitiga- being paid on deposits. tion of damages precluded recovery of lost profits. Pl. Br. (12/15/99) at 8; PX 460 at 2. To attract outside investors, FSLIC made We conclude that plaintiffs are not entitled regulatory commitments to potential acquir- to lost-profit damages resulting from the con- ers. Many of the deals had common features tract breach but that they are entitled to including (1) FSLIC providing cash or a damages of $8,826,783 for the proven costs promissory note in an amount equal to the incurred to mitigate the breach. difference between the book value of the institution’s assets and its liabilities; (2) I FSLIC agreeing to provide capital-loss cov- During the 1980’s, there was widespread erage and yield maintenance payments for financial deterioration of the thrift industry non-performing assets the acquirer agreed to leading to the insolvency of the Federal Sav- liquidate on FSLIC’s behalf, and (3) FSLIC ings and Loan Insurance Corporation agreeing to forbear from enforcing certain (FSLIC) fund insuring deposits held by thrift regulations against the acquirer or to other- institutions. In 1987, the thrift industry re- wise liberalize the application of regulations. ported a net loss from operations of over $8 PX 391 at BU942216–17. billion, and the reserves in the insurance Such assisted transactions had advantages fund had decreased to a negative $13.7 bil- to the FDIC when compared with liquidation lion. Pl. Mem. (7/15/99) at 5. By the end of such as (1) maintaining goodwill, (2) requir- 1987, over 500 savings institutions were insol- ing payment only for an insolvent thrift’s vent, including 117 in Texas. Pl. Br. deficit rather than the full amount of insured (12/15/99) at 8; PX 460 at 24; PX 391 at deposits, and (3) reducing immediate cash BU942215. In 1988, the FSLIC insurance payment by substituting a variety of other fund had a loss of $66 billion, bringing its benefits including notes, capital-loss cover- total deficit to $75 billion. Pl. Br. (12/15/99) age, tax benefits, regulatory forebearances at 8. and interstate branching rights. These ar- The FSLIC lacked the funds necessary to rangements allowed FSLIC to resolve a liquidate the insolvent thrifts. As an alterna- greater number of thrifts with its limited tive, the FSLIC sought to merge failing resources than it could have through liqui- thrifts with healthy thrifts or to attract pri- dation. Pl. Br. 12/15/99 at 9–10. vate investors to purchase failed thrifts in An assisted transaction having a number of exchange for regulatory forebearances. features attractive to plaintiffs and to thrift regulators was negotiated and completed in In February 1988, the Federal Home Loan late 1988. Bank Board (FHLBB) and FSLIC promul- gated the Southwest Plan to deal with prob- lems faced by thrifts in the Southwest, espe- II cially in Texas. Pl. Mem. (7/15/99) at 5. In A brief history of the plaintiffs and a de- its 1988 Annual Report, the FHLBB wrote: scription of the agreement between plaintiff BANK UNITED OF TEXAS FSB v. U.S. 647 Cite as 50 Fed.Cl. 645 (2001) Hyperion Partners L.P.1 and the government B will assist in understanding the damages res- In the fall of 1988, Hyperion Partners L.P. olution. bid on a number of savings and loan pack- ages offered by the FSLIC and the FHLBB. Plaintiffs are Hyperion Partners L.P., Hy- Def. Mem. (7/28/99) at 6. Eventually, Hyper- perion Holdings Inc., USAT Holdings Inc. ion Partners L.P. entered into negotiations to and Bank United of Texas FSB. purchase a failed thrift named United Sav- ings Association of Texas (Old United). Id. A The parties wanted to complete the trans- action by the end of 1988. There was a flurry In 1988, Lewis Ranieri resigned his posi- of negotiations and document exchanges be- tion as Vice Chairman at Salomon Brothers tween Hyperion Partners L.P. and the regu- and with his associates Scott Shay 2 and Sal- lators in December 1988. vatore Ranieri 3 formed Hyperion Partners L.P. to make investments in the financial On December 13, 1988, Hyperion Partners L.P. submitted a draft regulatory forbear- services, real estate and housing markets. ance letter to the FHLBB. PX 369. On Def. Br. (12/15/99) at 4; Def. Mem. (7/28/99) December 16, 1988, Linda Plye, Director of at 5; Pl. Br. (12/15/99) at 4, 10. The partner- the FHLBB Office of Regulatory Activities ship was initially capitalized with $4.3 million (ORA), informed Hyperion Partners L.P. from the general partner, Hyperion Ventures that it needed to submit (1) an acceptable L.P., and obtained pledges for up to $430 business plan (pro forma financial statements million from the limited partners. JX 20 at and a detailed narrative) and (2) a complete, BU603431–32. acceptable statement of need for each of the Prior to his involvement with Bank United, forbearances requested in connection with L. Ranieri had assisted the government in the proposed transaction (Justification Let- resolving problems with other thrifts. Tr. ter). Tr. 4097–98 (Plye); DX 824 at 235–39 (L. Ranieri). Between 1987 and 1990, BU610152–53. L. Ranieri acted as an informal advisor to On December 20, 1988, Hyperion Partners regulators of the thrift industry. Tr. 239 (L. L.P. submitted its holding company applica- Ranieri). tion (HCA) for the acquisition of Old United, together with its business plan narrative and L. Ranieri first became aware of the financial projections (pro formas) detailing Southwest Plan in late 1987 or early 1988 the intended operating strategy for the when Danny Wall, Chairman of the FHLBB, thrift. DX 794A. Hyperion Partners L.P. made a presentation about the plan at an submitted its second letter requesting for- industry conference. Tr. 239–41 (L. Rani- bearances also on December 20, 1988. DX eri). Initially, L. Ranieri was not interested 828. On December 21, 1988, Hyperion Part- in participating because Hyperion Partners ners L.P. submitted its justification for the L.P. preferred to invest in healthy thrifts. forbearances. Tr. 243 (L. Ranieri); Tr. 691–92 (Shay). Hyperion Partners L.P. had created the Over the summer of 1988, however, Hyperion holding company Hyperion Holdings Inc., Partners L.P. began to consider investing in wholly owned by Hyperion Partners L.P., to insolvent thrifts. Tr. 692–93 (Shay). facilitate the acquisition of Old United. Hy-

1. Hyperion Partners L.P. included a general 2. Scott Shay was formerly in charge of Salomon partner, Hyperion Ventures L.P., organized by Brothers’ savings and loan merger-acquisition Lewis Ranieri, Salvatore Ranieri (Lewis’ brother) practice, as well as its mortgage banking corpo- and Scott Shay. The limited partners included rate finance practice. Tr. 211–12 (L. Ranieri); various institutional and individual investors. Tr. 662 (Shay). The general partner contributed $4.3 million and the limited partners pledged total contributions 3. Salvatore Ranieri is a lawyer and investor and of $430 million to the partnership. JX 20 at is the brother of Lewis Ranieri. Tr. 212 (L. BU603431–32. Ranieri). 648 50 FEDERAL CLAIMS REPORTER perion Holdings Inc. owned all of the stock of ‘‘coverage’’ on approximately 70 percent of another holding company, USAT Holdings the $5 billion of assets acquired from Old Inc., which acquired the assets and assumed United. This coverage was provided in two the liabilities of Old United on December 30, ways. First, FSLIC guaranteed that Bank 1988. On that date, a new thrift institution, United would recover a guaranteed yield on United Savings Association of Texas, FSB specific covered assets for a certain time. (USAT), was created to receive the assets Tr. 2494–95, 2497–98 (Viitala); DX 1198; JX and liabilities of Old United and to operate as 10. Second, FSLIC protected Bank United a solvent bank. (USAT’s name was changed from any capital losses on the sale or regu- to Bank United of Texas FSB in 1992, after a lator-directed write down of the covered as- 1991 merger with a related institution creat- sets. Tr. 2492–94 (Viitala); JX 10. ed to facilitate acquisition of other thrifts). DX 1017, ¶ 7; Pl.Br. (12/15/99) at 13 n. 2. For Under the forbearance arrangement, the convenience, the terms USAT and Bank government agreed that it would not enforce United are hereafter used interchangeably to its minimum capital-ratio regulations against designate the plaintiff bank. Bank United for ten years so long as Bank United was in compliance with a ‘‘Capital C Plan,’’ JX 11 at 1–2; Pl. Br. (12/15/99) at 14 The negotiations and document exchanges n. 4, which had the following relevant provi- resulted in numerous agreements including sions: Bank United’s minimum capital-ratio (1) an acquisition agreement between FSLIC requirement was to be 1.5 percent until the and Bank United, JX 9; (2) an assistance $110 million of subordinated debt was issued. agreement between FSLIC and all plaintiffs, After placement of the subordinated debt, JX 10; (3) a warrant agreement between the minimum capital-ratio requirement would FSLIC and Bank United, JX 12; (4) a regu- increase to 2.0 percent. The required capital latory, capital-maintenance agreement be- ratio would then ‘‘stair step’’ up by 0.5 per- tween FSLIC and all plaintiffs, JX 13, and cent at the end of each of the years two (5) an agreement for operating policies be- through ten until it reached the level re- tween FSLIC and Bank United, JX 14. Pl. quired under then-current regulations. Pl. Br. (12/15/99) at 13. In addition, the Br. (12/15/99) at 15; JX 11 at 2; PX 588; PX FHLBB approved the acquisition pursuant to a set of resolutions, JX 15, which included 600. a forbearance letter to Hyperion Partners The FHLBB’s forbearance letter explicitly L.P. finalized on February 15, 1989, JX 11. provided that the proceeds of the subordinat- As part of the December 1988 transaction, ed debt would be treated as equity in com- plaintiffs agreed to capitalize the new bank puting the bank’s capital ratio (i.e., although by infusing $200 million, including $90 million the bank would incur real debt to obtain the as traditional equity 4 and $110 million as $110 million, for the purpose of calculating subordinated debt. the required capital ratio, such obligation Under the assistance agreement, FSLIC would not be counted as a liability). JX 11, eliminated the ‘‘book value’’ and ‘‘market val- ¶ 1. The FHLBB resolution approving the ue’’ insolvency of Old United. JX 10; Tr. merger also stated that the subordinated 2487–92 (Viitala). FSLIC also provided debt would be included in regulatory capital

4. Sixty million dollars came from a Hyperion on December 21, 1989. The BONY loan was Partners L.P. capital call sent down through Hy- repaid from proceeds of a sale of common stock perion Holdings Inc. to USAT Holdings Inc. and of USAT Holdings Inc. to Prudential Insurance, then into Bank United as equity. DX 1017. Ameritech Pension and affiliates of Equitable Thirty million dollars came from a loan from Life.) Thus, after Bank United was initially capi- Westinghouse Credit which was sent down talized, $370 million remained of the $430 mil- through a series of loans to Hyperion Holdings lion committed by the limited partners when Inc. and USAT Holdings Inc. which then infused Hyperion Partners L.P. was formed. DX 883. the $30 million as equity into Bank United. DX The $110 million raised by the bank as subordi- 1017. (The Westinghouse Credit loan was repaid nated debt was not part of the capital commit- with a loan from the Bank of New York (BONY) ment. DX 883. BANK UNITED OF TEXAS FSB v. U.S. 649 Cite as 50 Fed.Cl. 645 (2001) under then-existing regulations or successor million of goodwill created by the transac- regulations. JX 15 at 39–40; PX 600. tion—later adjusted by agreement to $30 Finally, the forbearance letter provided million—would count as capital (i.e., an asset that the supervisory goodwill created by the without an off-setting liability) to be amor- transaction would count as regulatory capital tized over 25 years, and (4) that government to be amortized over 25 years. Tr. 262–63 regulators would forbear enforcement of reg- 5 requirements for ten (L. Ranieri); JX 11, ¶ 7(a). FSLIC agreed ulatory capital-ratio years so long as the bank maintained an to pay Bank United the difference between agreed, lesser capital ratio. the market value and the higher book value of certain assets which was calculated to be over $170 million and was to be paid to Bank E United over several years. Pl. Br. (12/15/99) FSLIC estimated that it would have cost at 15. In order for the value of that FDIC the government $2.2 billion to $2.5 billion to commitment to be properly reflected on liquidate Old United. JX 29. The cost of Bank United’s books, the commitment had to the financial assistance in selling to Hyperion be discounted to present value. Id. The dif- Partners L.P. was estimated to be $1.8 to ference between the discounted present value $2.0 billion.6 JX 29; Tr. 702–06 (Shay). of payments from FSLIC and the face amount of the receivable constituted supervi- F sory goodwill. Id. at 16. It was agreed that Promptly after the terms of the transac- $34.9 million (later restated to $30 million), tion were agreed upon and approved, plain- or the unamortized balance at a given time, tiffs accomplished the stipulated infusion of would be counted as supervisory goodwill $200 million into the new bank, consisting of (i .e., as an asset with no off-setting liability) $90 million of equity capital and $110 million in the computation of the regulatory capital of subordinated-debt proceeds. ratio. Id. at 16. Early in 1989, shortly after conclusion of On December 30, 1988, the acquisition of the transaction, legislation was proposed in Old United, newly chartered as United Sav- Congress which, if enacted, would undermine ings Association of Texas, FSB, was complet- the agreement. This legislation ultimately ed. Pl. Br. (12/15/99) at 12. became FIRREA and, as indicated above, breached several provisions of the contract D between plaintiffs and the government hav- In summary of its principal, relevant ing an impact on calculation of required mini- terms, the transaction among FSLIC, mum capital ratios. FHLBB and plaintiffs provided (1) that plaintiffs would accomplish infusion of $200 III million into the new bank ($90 million as FIRREA became law on August 9, 1989. equity and $110 million as subordinated PX 383; PX 648, tab 7. Passage of FIRREA debt), (2) that the subordinated debt could be was followed by implementing regulations es- counted as equity for the purpose of calculat- tablishing new minimum-capital ratios pub- ing the required capital ratio, (3) that $34 lished by the Office of Thrift Supervision

5. The minimum capital ratio required under capital ratio than dividing net worth by total FIRREA was 3.0 percent derived from dividing assets and thus would provide slightly more core capital (net worth) by adjusted total assets. leverage capacity. Such change in the method FIRREA called this ratio a ‘‘leverage ratio.’’ See for computing capital ratio has not been treated 12 C.F.R. § 567.8. In this opinion, ‘‘capital ra- as material in this litigation. tio,’’ ‘‘minimum capital ratio’’ and ‘‘regulatory capital ratio’’ are used interchangeably. 6. This does not include tax benefits in the form of Prior to FIRREA, the required capital ratio for thrifts was derived from dividing net worth by net operating loss carry-forwards (NOLs) that total liabilities (but some subordinated debt was Bank United was permitted to assume from Old permitted to be counted as capital rather than as United, which had totalled $125 million in tax a liability for this purpose). Dividing net worth savings as of the time of trial. Def. Br. by total liabilities results in a slightly higher (12/15/99) at 9. 650 50 FEDERAL CLAIMS REPORTER (OTS) on November 8, 1989, effective on B December 7, 1989. 54 Fed.Reg. 46845 (Nov. Plaintiffs treat the impact which prohibited 8, 1989). On January 9, 1990, the OTS is- counting the subordinated debt as capital as sued Thrift Bulletin 38–2 which eliminated effective by September 30, 1989. For other previously-granted capital-ratio and account- purposes, the parties treat the period of pri- ing forebearances. OTS, Thrift Bulletin 38–2 mary impact of FIRREA—the ‘‘damages (Jan. 9, 1990). window’’—as beginning on December 31, FIRREA and its implementing regulations 1989 and ending on December 31, 1992 (when constituted an egregious breach of the three the required capital ratio under FIRREA significant, bargained-for provisions of the equaled the minimum permitted under the contract between plaintiffs and government capital forebearance agreement and by which regulators which directly impacted calcula- time Bank United had raised $85.5 million tion of capital ratio and, hence, leverage ca- through issuance of preferred stock). Given pacity, i.e., the provisions concerning forbear- the resolution of damages issues (i.e., that ance of capital-ratio enforcement, counting mitigation principles preclude lost-profits subordinated debt as equity and long-term damages), the precise effective date for each amortization of supervisory goodwill. impact of FIRREA is not critical.

A C One adverse impact of FIRREA on Bank The damages window, agreed upon by the United was to rescind the Capital Plan and parties, was the three-year period between establish a minimum required capital ratio of the end of 1989 and the end of 1992. In 3.0 percent of assets. Pl. Br. (12/15/99) at 23; January 1992, the capital ratios, which stair- Tr. 744 (Shay). Under the Capital Plan, stepped up under the forebearance agree- Bank United’s capital-ratio requirement had ment, nominally converged with FIRREA’s been 2.0 percent of liabilities (it was raised requirements. However, since the pre-FIR- from 1.5 percent to 2.0 percent when the REA ratio was a percentage of qualifying subordinated debt was placed prior to FIR- liabilities and the post-FIRREA ratio was a REA) or 1.8 percent of assets. percentage of qualifying assets, the damages window was extended to the end of 1992 to Another adverse effect of FIRREA was take into account the potential loss of lever- that subordinated debt could no longer be age through 1992. counted as regulatory capital. This change reduced Bank United’s capital ratio from 6.23 The significance of this damages window is percent on June 30, 1989 to 3.12 percent on that it was the period during which the con- September 30, 1989 (a level dangerously low tract breach resulting from FIRREA ad- for an operating bank, though not out of versely impacted Bank United’s calculation of capital compliance, and less than required for capital ratios. Thus, the damages issue be- a prudent capital cushion). Pl. Br. (12/15/99) comes the extent to which plaintiffs were at 23; PX 592; Tr. 747–49 (Shay); PX 302 at adversely affected by loss of leverage capaci- 4. ty during the damages window. Finally, FIRREA required that superviso- ry goodwill be amortized over 5 years rather D than 25 years. 103 Stat. 183 (1989); PX 383. In addition to changes which directly im- This had the effect, beginning in 1990, of pacted Bank United’s calculation of capital- requiring Bank United to reduce the $30 ratio, FIRREA changed the identity of thrift million of goodwill on its books (which, for regulatory agencies. The independent the purpose of calculating capital ratio, could FHLBB was eliminated and replaced with be counted as an asset without offsetting the Office of Thrift Supervision (OTS), an liability) at the rate of $6 million per year agency within the Treasury Department. rather than $1.2 million per year, all in viola- PX 460 at 12. Also, FIRREA dissolved tion of the 1988 contract. See JX 11. FSLIC, established a new thrift deposit in- BANK UNITED OF TEXAS FSB v. U.S. 651 Cite as 50 Fed.Cl. 645 (2001) surance fund under the Federal Deposit In- (rather than as a liability); plaintiffs assert surance Corporation (FDIC) and created the $96 million in lost profits from this single Resolution Trust Corporation (RTC) charged impact of FIRREA. (A third model, dis- with liquidating or disposing of closed thrifts. cussed below, was furnished by plaintiffs to PX 460 at 23. demonstrate the full cost of substitute capi- FIRREA directed the RTC to review and tal, i.e., mitigation costs, in the event of a analyze all insolvent institution cases re- ruling that lost profits are not awardable.) solved between January 1, 1988 and the date of enactment of FIRREA, and to exercise B any and all legal rights to modify, renegoti- The ‘‘three-breach’’ model compares Bank ate or restructure those agreements. PX United’s actual profits over a ten-year period 383 at 190 (FIRREA § 501). Bank United’s with the profits it allegedly would have made agreement with defendant was reviewed by if FIRREA had not been enacted. Plaintiffs the RTC in 1990. PX 387 at BU942068; PX claim that the ‘‘three-breach’’ model is con- 389 at BU943202–03; Tr. 1602–04 (Wood); servative, match-funded and based on the Tr. 1880–84 (S. Ranieri). While this review activities of the actual bank. undoubtedly placed a cloud of uncertainty In order to create the ‘‘three-breach’’ over Bank United’s planning until it was model, plaintiffs’ damages expert collected completed, no specific damages impact re- all of Bank United’s quarterly thrift financial sulting from such review is asserted by plain- reports (TFR), which included complete bal- tiffs. ance sheets, income statements and support- ing documentation, as well as additional fi- IV nancial data. Tr. 2682–83 (Myers); Pl. Br. Much of the trial was devoted to presenta- (12/15/99) at 40. The ‘‘three-breach’’ model tions by plaintiffs, with ultra-detailed expla- posits a ‘‘but for’’ bank hypothetically oper- nations, of voluminous ‘‘models’’ purporting ating as if the breach impacts had not oc- to demonstrate lost profits. Much of defen- curred. The ‘‘three-breach’’ model supposes dant’s case-in-chief was devoted to demon- the same management team, a capital ratio strating inappropriate assumptions and flaws cushion similar to that of the actual bank in plaintiffs’ models. Four highly-credent- and discounts for the use of net operating ialed experts gave extensive testimony in losses (NOLs). The ‘‘three-breach’’ model support of or undermining plaintiffs’ lost also hypothesizes that the ‘‘but for’’ bank profits models. Other witnesses testified on had unlimited access to worthy wholesale discrete aspects of relevant background (e.g., investments during the damages window. existence and magnitude of the securitized- From this data, and from conversations with loan market, prudent capital cushions, im- Bank United’s investors and managers, pacts of taxation) intended to support or plaintiffs’ damages expert concluded that discredit assumptions in the models. Bank United would have operated on a larg- er scale absent the breaches. Tr. 2633–34, A 2666–69 (Myers); PX 653; PX 664; Pl. Br. Plaintiffs submitted two alternative models (12/15/99) at 41. In addition, the model pro- at trial intended to demonstrate with reason- jects that the ‘‘but for’’ bank would have able certainty that Bank United suffered lost expanded primarily through wholesale profits. The first model (the ‘‘three-breach’’ growth. Tr. 2671, 2688–92. model) purports to measure profits lost as The added regulatory capital and resulting result of the three specific adverse impacts of leveraging capacity afforded by the forebear- FIRREA and concludes that the impacts ances (eliminated by FIRREA) are used to caused $558 million in lost profits. The sec- augment a ‘‘wholesale strategy.’’ (‘‘Whole- ond model (the ‘‘one-breach’’ model) purports sale’’ means the purchase of mortgage-loan to measure profits lost solely as a result of packages (‘‘whole loans’’) and mortgage- plaintiffs’ post-FIRREA inability to count backed securities (MBS), in contrast to mort- subordinated debt as regulatory capital gage-loan assets originated by Bank United’s 652 50 FEDERAL CLAIMS REPORTER making direct loans.) The funding of such In support of the ‘‘three-breach’’ model wholesale purchases in the ‘‘three-breach’’ and its conclusions, plaintiffs presented con- model is accomplished through advances vincing testimony that (1) plaintiffs were ex- from the FHLB and by reverse repurchase perts in the wholesale mortgage markets; (2) agreements and not by additional retail de- wholesale activities were a natural way to posits.7 According to plaintiffs, the ‘‘three- take advantage of the three-year window of breach’’ model adds the additional wholesale opportunity provided by the Capital Plan; (3) assets that Bank United would have acquired even with the breach, Bank United’s whole- with the forebearances in place in the same sale activities were ‘‘extensive,’’ and (4) the proportion that Bank United was actually wholesale markets were ‘‘gigantic.’’ Pl. Br. purchasing at the time. (12/15/99) at 42–43. Plaintiffs clearly had significant expertise The assumed profits generated from these in the wholesale mortgage markets. L. Ra- additional purchases are calculated using ac- nieri helped to create the secondary mort- tual historical yields on Bank United’s con- gage market while at Salomon Brothers. Tr. temporaneous wholesale purchases, reduced 181–203 (L. Ranieri). Shay and Anthony by 0.15 percent as to whole loans. The add- Nocella 8 also had years of experience in ed operating costs and other charges such as these markets. Tr. 662–665 (Shay); Tr. taxes incurred in conducting the additional 1181–84 (Nocella). Bank United had the wholesale activity are then deducted from the necessary infrastructure in place to pursue spread between the yields and funding costs wholesale acquisitions by the summer of associated with the additional purchases. 1989. Tr. 1195–97 (Nocella); Tr. 2690 Lost profits are calculated by taking the (Myers). There was testimony by witnesses difference between Bank United’s actual for both parties that expanding wholesale earnings and its estimated earnings if the activities would have been a natural way to breach and its resulting impacts had not take advantage of the three-year window of occurred. Tr. 2669–70, 2753–54 (Myers); PX opportunity provided by the Capital Plan. Tr. 665; PX 666; PX 687. According to plain- 2689, 2756–58 (Myers); Tr. 2191–92 (Ford); tiffs, Bank United would have increased its Tr. 4773–74 (Bankhead). net holdings of MBS and whole-loan pack- Plaintiffs demonstrate that Bank United’s ages by approximately $4 billion by late 1992 actual whole loan purchases exceeded $11 and $11 billion by early 1997. Tr. 1233 (No- billion and MBS purchases were in the bil- cella); PX 323; PX 302 at 87–91; Pl. Br. lions over the ten-year period covered by the (12/15/99) at 43 n. 23. During the damages model. PX 605; PX 606. Further, plaintiffs window, Bank United would have a net incre- show that the bank’s volume wholesale assets mental balance of MBS in the amount of as a percentage of total assets grew rapidly approximately $1 billion and a net incremen- during the 1990s reaching 50 percent of total tal balance of residential mortgages (whole assets by the mid 1990s. Tr. 2678–79 loan packages) of approximately $3 billion. (Myers); PX 323; PX 302 at 87–91; PX 669; Pl. Mem. (7/15/99) at 33. PX 307.9 (However, these facts are not in-

7. A reverse repurchase agreement is one by (Nocella). Prior to joining Bank United, Nocella which a bank uses its high quality liquid assets as had been employed at Philadelphia Savings Bank collateral and borrows against them a percent- where he ran the wholesale operation and was age of their face value. Tr. 1208 (Nocella). chief financial officer. Id. at 1181. In 1987, he The spread that can be earned between FHLB formed Nocella Management Company, an asset- advances and reverse repurchases, on the one liability management consulting firm. Id. He hand, and wholesale assets, on the other, is joined Bank United in 1990. Id. smaller than if the funding were done with retail deposits. Plaintiffs argue that this reflects the 9. Bank United’s actual MBS purchases during its overall conservative nature of the model. Pl. first ten years of operation were as follows: Mem. (7/15/99) at 20. $155.2 million in 1989; $46.4 million in 1990; $190 million in 1991; $147.9 million in 1992; 8. At the time of trial, Nocella was Vice Chair- $778.2 million in 1993; $497.1 million in 1994; man, chief financial officer and a member of the $39.5 million in 1995; $299 .8 million in 1997, board of directors of Bank United. Tr. 1179 and $356.8 million in 1998. PX 302 at 87–88; BANK UNITED OF TEXAS FSB v. U.S. 653 Cite as 50 Fed.Cl. 645 (2001) consistent with the proposition that initially $110 million in subordinated debt as regula- Bank United focused on retail growth supple- tory capital, the resulting increase in lever- mented by wholesale purchases and turned age capacity would have permitted it to in- to a wholesale-growth strategy only after vest in an additional $3.5 billion of assets disintermediation significantly slowed acqui- even with the higher capital ratio required by sition and retention of retail deposits.) FIRREA. This model estimates that the In addition to the wholesale assets pur- additional wholesale assets which would have chased by the actual bank, the ‘‘but for’’ bank been purchased during the nine-month peri- purchased $1 billion in additional wholesale od between breach and mitigation by replace- assets per year. PX 609; PX 302 at 14–17. ment of the subordinated debt with an equity Plaintiffs showed that the market for one-to- infusion would have garnered the same rate four family mortgages outstanding increased of return on capital which the actual bank from $2.4 trillion in 1989 to $4.3 trillion in earned. 1998 with upwards of $800 billion available Plaintiffs assert that while the exchange of for sale annually. Tr. 2198, 2203–04 (Ford); the subordinated debt for equity permitted PX 607. Plaintiffs thus conclude that their the $110 million to qualify as regulatory capi- assumed additional $1 billion in annual pur- tal, it did not end lost-profit damages. In chases would have been minuscule in light of order to capture alleged continuing damages, the depth of the market. PX 609; PX 302 at the ‘‘one-breach’’ model applies the actual 14–17; Tr. 2250–51, 2196–98 (Ford). The bank’s rate of return on capital in subsequent MBS market was also large, increasing to years to the additional capital Bank United $2.274 trillion in 1998. PX 608. One of would have had absent the breach and counts defendant’s experts confirmed that these sec- the resulting lost revenue as recoverable lost uritized-loan markets were ‘‘gigantic.’’ Tr. profits. Tr. 2906–07 (Myers); PX 716; PX 3515–16 (Fischel). 302 Table 4–1 at BU950689. C Plaintiffs alternative ‘‘one-breach’’ model D purports to demonstrate that Bank United In broad summary of both lost-profits suffered $96.085 million of lost profits solely models, plaintiffs posit that Bank United, from the subordinated-debt impact of the from its inception, would have used all pru- breach. Tr. 2908; PX 717. dently available leverage capacity to pursue a As a result of the breach impact on subor- massive wholesale strategy, investing pri- dinated debt, Bank United’s capital ratio marily in wholesale assets, that its matched- dropped from 6.0 percent to barely above 3.0 funding techniques would never fail to pro- percent, resulting in lost leverage capacity duce a positive rate spread and that it would exceeding $3.6 billion.10 JX 253 at at all times find wholesale assets (whole-loan BU901184; JX 254 at BU896686; Pl. Br. packages or MBS’s) which met the invest- (12/15/99) at 88–89. Plaintiffs argue that if ment criteria of its unquestionably astute, Bank United had been able to count the experienced management. subordinated debt as regulatory core capital, it would have been a bigger and more profit- V able thrift. Tr. 2899 (Myers). Defendant elected to counter plaintiffs’ The ‘‘one-breach’’ model attempts to show case on all fronts, both attacking on the that if Bank United had been able to count merits their claim of entitlement to lost prof-

PX 606. Bank United’s whole loan purchases 10. Leverage capacity provided by the subordinat- during its first ten years of operation were as ed-debt forbearance alone was $5.5 billion based follows: $499.2 million in 1990; $1.9 billion in on the 2.0 percent minimum capital ratio permit- 1991; $1.2 billion in 1992; $763.7 million in ted by the Capital Plan. Pl. Br. (12/15/99) at 89 n. 1993; $1.29 billion in 1994; $2.7 billion in 1995; 53. This capacity was obliterated by FIRREA. $377.9 million in 1996; $418.5 million in 1997, and $1.7 billion in 1998. PX 302 at 89–91; PX 605. 654 50 FEDERAL CLAIMS REPORTER its and asserting that any such claim is good a position as he would have been in had barred by the doctrine of mitigation of dam- the contract been performed.’’ Restatement ages. (Second) of Contracts § 344(a) (1981). Ex- With respect to the lost-profits models, pectation damages are generally measured defendant presented evidence in support of by the ‘‘loss in the value to [the injured its assertion that both models were riddled party] of the other party’s performance with inaccurate assumptions and other flaws. caused by its failure or deficiency, plus TTT In briefing and oral argument, much effort any other loss, including incidental or conse- was devoted to undermining plaintiffs’ essen- quential loss, caused by the breach TTTT’’ tial assertions that the lost profits shown by Restatement (Second) of Contracts § 347 the models were both reasonably foreseeable (1981). and established with reasonable certainty. The rule for mitigation is found in section Because we conclude that plaintiffs could 350 of the Restatement (Second) of Con- have and, in fact, did mitigate damages po- tracts, entitled ‘‘Avoidability as a Limitation tentially flowing from the enactment of on Damages,’’ which provides: FIRREA, we do not dwell on defendant’s (1) Except as stated in Subsection (2), evidence and argument concerning foresee- damages are not recoverable for loss that ability or reasonableness of lost profits. the injured party could have avoided with- Since actual mitigation or a failure to take out undue risk, burden or humiliation. reasonable steps to avoid damages would (2) The injured party is not precluded preclude recovery of damages even if from recovery by the rule stated in Sub- shown to be foreseeable and (if not avoid- section (1) to the extent that he has made ed) reasonably certain, there is no occasion reasonable but unsuccessful efforts to to analyze at length the parties’ evidence avoid loss. and arguments concerning foreseeability and certainty. Comment a to section 350, concerning the rationale for the section, states that it en- (Notwithstanding, we observe in passing courages a potential plaintiff ‘‘to make such the following. Concerning foreseeability, see efforts as he can to avoid loss by barring him generally Restatement (Second) of Contracts from recovery for loss that he could have § 351 (1981), we conclude that although lost avoided if he had done so.’’ Comment b to profits from the FIRREA impacts were fore- the section provides: ‘‘As a general rule, a seeable as a general matter, the magnitude party cannot recover damages for loss that of damages which the lost-profit models pur- he could have avoided by reasonable efforts.’’ port to show was not reasonably foreseeable. See Landmark Land Co. v. United States, VII 256 F.3d 1365, 1378 (Fed.Cir.2001); Restate- ment (Second) of Contracts § 351, comment At the outset of any discussion of plaintiffs’ a. Concerning reasonable certainty, see gen- entitlement to damages for the breach result- erally Restatement (Second) of Contracts ing from the enactment and implementation § 352 (1981), (1) we conclude that the models of FIRREA, it is essential to identify pre- are based upon inaccurate assumptions about cisely the harm which resulted from the plaintiffs’ plans for growth of Bank United breach. and management’s selectivity in using its The clear, direct and immediate harmful leveraging capacity, and (2) we further con- impact of FIRREA upon implementation was clude that the models are filled with specula- significant loss of borrowing capacity. This tion upon speculation and thus do not estab- was the only clear and direct loss suffered by lish lost profits with reasonable certainty.) plaintiffs. Stated in balance-sheet terms, this immediate loss may be stated as a signif- VI icant reduction in capital ratio. But such Concerning damages, a contracting party’s reduction in borrowing capacity, standing expectancy interest is the ‘‘interest in having alone, did not result in immediate economic the benefit of his bargain by being put in as harm. BANK UNITED OF TEXAS FSB v. U.S. 655 Cite as 50 Fed.Cl. 645 (2001) An important point is that FIRREA did (As a matter of arithmetic, capital ratio can not cause Bank United to lose or lose the use be restored by a reduction in assets, using of any investable asset which it had at time the proceeds of such reduction to corre- of breach. Every dollar which Bank United spondingly reduce liabilities, or by acquiring had upon implementation of FIRREA for capital, i.e., assets without offsetting liabili- investment or for use as collateral was unaf- ties. For a bank seeking growth, the desir- fected by FIRREA. No actual investable able way to restore lost capital ratio is acqui- assets were taken or rendered unusable. sition of capital, and this path was chosen by The loss to plaintiffs, to Bank United in Bank United.) particular, was reduction of the bank’s bor- rowing capacity. VIII A reduction in capital ratio has the poten- tial to cause economic harm only because it ipso facto reduces borrowing capacity. (Of A course, a reduction in capital ratio sufficient- Plaintiffs assert that if they are not enti- ly severe to cause a bank to fall out of capital tled to lost profits because they could have compliance could result in closure by bank mitigated the impacts of the breach, they regulators and resulting adverse financial are at least entitled to the hypothetical consequences, but the breach did not cause costs which would have been incurred to ac- Bank United to fall out of capital compli- complish complete mitigation. Plaintiffs ance.) submitted a cost-of-substitute-capital model The reduction in capital ratio did not im- to calculate the costs to infuse the substi- mediately and directly result in lost profits. tute capital necessary to mitigate the lost Even under plaintiffs’ theory and models, no leverage caused by the breach. Plaintiffs profits could have been lost unless and until claim $117 million in damages to recover Bank United would have—but was unable to the alleged costs of raising the hypothetical as a result of lost leverage capacity—actually replacement capital. Pl. Br. (12/15/99) at used the leverage capacity by borrowing, re- 87–88. See generally, 3 Dan B. Dobbs, Law investing and achieving a positive rate of Remedies § 12.6(2), at 141 (2d ed.1993); spread.11 Restatement (Second) of Contracts § 350 il- We do not mean to suggest that the reduc- lus. 5–8 (1981). tion in capital ratio was not a serious harm The cost-of-substitute-capital model posits which had the potential for adversely affect- that Bank United would have needed to raise ing plaintiffs’ growth plans, but the reduction approximately $228 million in substitute capi- did not immediately cause any loss of ‘‘tangi- tal in December 1989 to offset the deficiency ble’’ assets. created by the breach. Tr. 2930 (Myers). Thus, at the time of FIRREA’s impacts, The model first calculates the maximum as- plaintiffs became entitled to the cost of re- sets that could have been supported with the storing the borrowing capacity (capital ratio) three forebearances in place. Next, it calcu- eliminated by FIRREA in a way that would lates the maximum assets that Bank United allow Bank United to pursue its intended could support after FIRREA passed and the growth and profit-making plans. In a case of forebearances were eliminated. The differ- this nature, such damages are the same as ence between these two numbers is then the costs of mitigation. This is the ‘‘make considered to be the lost leverage caused by whole’’ remedy to which plaintiffs were sure- the breach. The model next determines the ly entitled. amount of additional capital that Bank Unit-

11. The value of leverage is in the potential for invest) at a higher rate. Glendale Federal Bank, profits. Leverage, of course, also has the poten- FSB v. United States, 239 F.3d 1374, 1382 (Fed. tial for loss if rate spreads are negative, but when Cir.2001). If leverage did not have value, plain- a bank loses even the opportunity to take that tiffs would not have bargained for the capital risk, something of value has been lost, especially forbearance, subordinated debt and supervisory for an institution whose reason for being is to goodwill provisions. See id. at 1382. borrow at one rate and to lend (or otherwise 656 50 FEDERAL CLAIMS REPORTER ed would have required to support the same the breach did not occur at once but was to amount of assets after the breach as before be phased in over several years, the fact that the breach. It concludes that $228 million in the plaintiffs were perhaps uniquely capable additional capital was needed to regain the of calling in capital commitments in large leverage capacity lost as a result of FIR- amounts on short notice, and the fact that REA. the plaintiffs did mitigate at a cost vastly less The model then calculates the cost that than that projected by the model. Bank United would have incurred to fund a hypothetical December 1989 issuance of pre- IX ferred stock, positing a minimum dividend rate of 20 percent to attract investors. The A detailed discussion of the breach impacts model assumes that the proceeds of the will assist in understanding precisely what hypothetical issuance would either be used to needed to be mitigated, whether it was rea- pay down borrowings or be invested in risk- sonable to mitigate the impacts and the tim- free government bonds earning approximate- ing of mitigation necessary to avoid economic ly 7.0 percent after tax. PX 728. The model harm. assumes that Bank United would have paid the 20 percent dividend on the preferred The mitigation-cost model assumes the stock each year and would have earned need for full capital replacement as of De- roughly 7.0 percent on the risk-free bonds. cember 1989, i.e., the immediate and ‘‘perma- PX 728. The model calculates the resulting nent’’ replacement of $228 million which the negative ‘‘dollar spread’’ on a quarterly basis, model calculates as the new equity needed to PX 302, table 2–5, which, accumulated over a compensate for (1) the additional 1.0 percent period of years, yields damages of $117 mil- of capital ratio required upon implementation lion. Such alleged damages consist of $74 of FIRREA’s 3.0 percent capital-ratio re- million in net loss, including $10.7 million in quirement, (2) inability to count the $110 transaction costs, which are then grossed-up million of subordinated debt as capital and by $43 million to account for taxation of the (3) loss of ability to count $30 million of award. supervisory goodwill as regulatory capital.

B Plaintiffs certainly are entitled to recover A the costs they incurred in actually mitigating The capital forbearance agreement, al- and the proven costs of what would reason- though potentially providing regulatory for- ably have been incurred to mitigate, but such bearance for ten years, would have permitted costs are grossly exaggerated by this model. enforcement of a minimum capital ratio of 2.5 There are several defects in the model. At percent during 1991 and 3.0 percent (the the outset, the suggestion that it would cost level required by FIRREA) as of the begin- $117 million to raise $228 of capital is absurd ning of 1992, expressed as a percentage of on its face. The most serious flaw in this liabilities (and consequently slightly lower model is its assumption that all of the lost than if expressed as a percentage of assets as ratio would have to be restored immediately required under FIRREA). Consequently, in December 1989 to forestall economic with respect to the capital forebearance harm. But an immediate infusion was not agreement, the significant impact of the required to mitigate and could have been breach was the requirement of a minimum accomplished, as it was, on a piecemeal basis capital ratio of 3.0 percent during 1990 and as and when it appeared to be desirable to 1991 instead of 2.0 percent during 1990 and take advantage of investment opportunities. 2.5 percent during 1991. By the end of 1992, See JX 39; DX 1017. the ratio level the capital forebearance agree- The model fails to consider the nature and ment would have permitted (3.5 percent of limited extent of the breach impacts upon liabilities) was above that required under Bank United, the fact that the full impact of FIRREA (3.0 percent of assets). See JX 11. BANK UNITED OF TEXAS FSB v. U.S. 657 Cite as 50 Fed.Cl. 645 (2001) B only way the holding company could pay Concerning the subordinated-debt impact, interest or principal was by receiving divi- although Bank United suffered a severe re- dends from the bank, which were subject to duction in capital ratio upon implementation regulatory approval and other restrictions. of FIRREA’s prohibition of counting such Pl. Br. (12/15/99) at 27; PX 604. Conse- debt as regulatory capital, the plaintiffs had quently, the Senior Notes carried an interest the capacity to cure the problem by making a rate of 15.75 percent, JX 6; DX 1017, a rate swap of subordinated debt for equity among higher than the bank would have paid on the themselves. Plaintiffs accomplished such an subordinated debt. exchange at a cost less than $5 million, yet this swap alone accounted for approximately C half of the amount of new equity assumed to Concerning FIRREA’s alteration of the be needed in December 1989. amortization period for supervisory goodwill, As part of the December 1988 transaction, the full amount of supervisory goodwill per- plaintiffs were required to invest $200 million mitted to be counted as capital was not lost in the new thrift, of which $110 million would upon passage or implementation of FIRREA. constitute a subordinated-debt obligation of Rather, elimination of goodwill as regulatory the bank but could nonetheless count as reg- capital was to be phased in over five years ulatory capital. JX 10; JX 11 at ¶ 1; see instead of over twenty-five years as plaintiffs also JX 15 at 341; PX 600. Bank United had been promised. This meant that instead issued the subordinated debt on May 24, of being permitted to amortize the $30 mil- 1989 with an interest rate of 15 percent. DX lion of goodwill at a rate of $1.2 million per 1017. year over 25 years, the bank was required to In order to compensate for the capital amortize $6 million a year over five years. depletion caused by FIRREA’s elimination of Thus, the first-year impact of FIRREA upon the ability to count the subordinated debt as the supervisory goodwill agreement was to regulatory capital (rather than as a liability), require amortization of $4.8 million more plaintiffs promptly initiated action to ex- than had been agreed, and the model’s full change the bank’s subordinated-debt obli- replacement of $30 million in December 1989 gation for ‘‘Senior Notes’’ issued by USAT overstates the loss. Holdings Inc. USAT Holdings assumed the Further, Bank United wrote off the bank’s obligation to repay and deemed the FIRREA-impaired supervisory goodwill on proceeds of the subordinated debt to be ‘‘in- September 30, 1993, 15 months earlier than fused’’ as equity into Bank United. The required by FIRREA, as a result of the exchange transaction was completed in Sep- Financial Accounting Standards Board’s 12 tember 1990. (FASB) adoption of Statement of Financial For plaintiffs to exchange the subordinat- Account Standards No. 109 (SFAS 109). ed-debt obligation for Senior Notes, the note- SFAS 109 required that Bank United write holders had to be convinced to move the debt off all supervisory goodwill on its GAAP fi- obligation from the bank to the holding com- nancial statements in order to use net op- pany. Having debt at the holding company erating loss carry-forwards to reduce taxes. level was more risky for investors since the PX 627.13 Bank United wrote off the su-

12. Precise details of the exchange transaction are counted towards capital notwithstanding SFAS set forth in DX 1017, ¶ 5. 109 and could have continued to leverage the supervisory goodwill to acquire more assets. PX 13. On January 20, 1993, the OTS issued Thrift 627. In support of their assertion, plaintiffs cite Bulletin No. 56 requiring that supervisory good- the forbearance agreement which states in para- will written off for GAAP also be written off graph 7 subpart E: ‘‘Amortization of goodwill, under regulatory accounting principles (RAP). whether or not resulting from the acquisition of OTS Thrift Bulletin 56, 1993 WL 22198 (Jan. 20, 1993). the Acquired Institutions, shall not be accelerat- ed as a result of the utilization of net operating Plaintiffs assert that if defendant had not al- loss carry-forwards for tax purposes or other tax ready breached, Bank United could have kept the supervisory goodwill on its books as an asset that allocations.’’ JX 11, ¶ 7; PX 627. 658 50 FEDERAL CLAIMS REPORTER pervisory goodwill in order to comply with included a business plan for the thrift it FSAS 109 and to gain the benefit of using intended to operate and financial projections its NOLs to reduce its taxes. detailing the intended operating strategy. During the entire damages window be- DX 794A. Thereafter, Bank United was sub- tween 1989 and 1992, plaintiffs had use of ject to significant reporting requirements some of the goodwill forbearance, although in from its inception. Tr. 289, 293–95 (L. Rani- 1990, 1991 and 1992, the goodwill had to be eri). reduced at the rate of $6 million a year Business plans submitted pursuant to reg- instead of $1.2 million. Thus, as of the end ulatory requirements are evidence of a of 1990, the goodwill was reduced to $24 bank’s intended operating strategy. Bank- million, as of the end of 1991 to $18 million, ing is one of the most highly regulated indus- and as of the end of 1992 to $12 million. tries, and business plans are an important part of the regulatory review process. Tr. D 4489 (Bankhead). Regulators rely on the in- To summarize the significant capital-ratio formation in business plans as part of the impacts of FIRREA upon Bank United, (1) ‘‘off-site’’ monitoring of a thrift. Id. Business for 1990 and 1991, the bank was required to plans also assist bank regulators in conduct- maintain a ratio or 3.0 percent, rather than ing ‘‘on-site’’ monitoring. Tr. 4489–90 (Bank- 2.0 percent in 1990 and 2.5 percent in 1991 as head). would have been permitted under the capital forbearance agreement, (2) between the im- The business plans discussed below show plementation of FIRREA and September that plaintiffs intended to operate Bank Unit- 1990, the bank lost the ability to count a $110 ed as a traditional retail savings institution. million debt obligation as regulatory capital, DX 794A. The actual performance of Bank and (3) for 1990 and continuing through Sep- United was consistent with the stated inten- tember 1993 (when the asset was voluntarily tions in the business plans. eliminated), the bank was required to amor- tize the initial supervisory-goodwill asset of B $30 million at the rate of $6 million per year The HCA was submitted by Hyperion instead of $1.2 million. Partners L.P. prior to acquisition of what would become Bank United. DX 794A. The X HCA proposed that Bank United would be a It is appropriate in a discussion of plain- well-capitalized thrift growing through a re- tiffs’ mitigation to examine what plaintiffs tail strategy supplemented by wholesale pur- intended to achieve for Bank United with the chases. DX 794A. This business plan was bargained-for provisions concerning capital submitted prior to introduction of the legisla- forbearance, subordinated debt and supervi- tion that eventually became FIRREA. It sory goodwill and to then compare what also was prepared before the managers of Bank United actually achieved after the what would become Bank United had the breach which adversely impacted the bank’s opportunity to fully examine the books and borrowing capacity. records of the failed thrift. Thus, the HCA provides insights into the general strategy A foreseen by the investors and testified to at As part of the December 1988 acquisition trial. This general strategy is consistent process, Hyperion Partners L.P. submitted a with business plans and operations after the holding company application (HCA) which introduction of the breaching legislation.

However, Thrift Bulletin No. 56, which quire writing off the supervisory goodwill. Bank adopted SFAS 109, merely made OTS regula- United’s decision to comply with an accounting tions consistent with FASB requirements. Bank standard that had no connection with FIRREA United was not required to comply with SFAS cannot be transformed into damages from a loss 109, but chose to in order to take advantage of its of the ability to leverage supervisory goodwill. NOLs, knowing that such compliance would re- BANK UNITED OF TEXAS FSB v. U.S. 659 Cite as 50 Fed.Cl. 645 (2001) Throughout 1989, Bank United created opportunities to make money, not simply as a several business plans projecting the thrift’s function of cost of funds.’’ Id. Shay testified growth strategy. Each of these plans pro- that the plan was to ‘‘really grow the retail jected a well-capitalized thrift primarily fo- deposit network,’’ that ‘‘we thought there was cusing on retail growth supplemented by an opportunity TTT to build a strong deposit wholesale purchases. See DX 799; JX 46; franchise in Texas,’’ and that ‘‘we also want- DX 800; DX 801. ed to build the asset side of the balance sheet The first business plan drafted after the using traditional one-to-four family loans, acquisition was completed in January 1989, mortgage-backed securities and the like DX 799, projected Bank United’s capital ra- TTTT’’ Tr. 753 (Shay). tio to be approximately 4.4 percent of liabili- ties (approximately 4.2 percent of assets) and C projected average annual growth of approxi- There was convincing evidence that Bank mately $800 million in various types of as- United began pursuing wholesale purchases sets. DX 799 at BU506785–87. The growth only after disintermediation in the retail mar- was to be funded with fixed-maturity depos- ket at the end of 1992. Nocella testified that its. Def. Br. (12/15/99) at 12. On March 28, ‘‘what happened is deposits throughout the 1989, Bank United prepared a second busi- United States, including Texas, have not ness plan substantially similar to the January grown.’’ Tr. 1385 (Nocella). Nocella attrib- plan. JX 46 at BU201365–66, 201369, uted this lack of growth to industry-wide 201374. disintermediation: Bank United prepared a five-year projec- [W]e made an assumption that deposits tion dated April 7, 1989 either in conjunction would grow. This world of deposits with the placement of the subordinated debt stopped growing 10 years ago. Through- or in response to the regulators. DX 800; out the United States, just like mortgages Tr. 1001 (Shay). This business plan, like the were securitized, deposits were securitized. two before it, proposed to maintain a well- They were called mutual funds and all the capitalized thrift with a capital ratio between 401(k)s were taken out. Everybody had a 5.11 to 7.69 percent over five years and to CD and a 401(k). That’s all gone away. grow the deposit side of the institution. DX They’re in mutual funds. And deposits 800 at BU506800; Def. Br. (12/15/99) at 12. declined. We thought deposits were going to grow over time. Every year, we hoped Subsequent to enactment of FIRREA, deposits would grow by 2 percent, 3 per- Bank United closed wholesale-asset pur- cent, 4 percent. They never grow. chases on December 7, 1989 for a $65 million Tr. 1444 (Nocella). In its 1993 10–K Bank package of mortgages sold by Prudential and United stated: for a $70 million purchase from Bear Stearns three weeks later. This activity shows that The Bank increased the amount of FHLB Bank United intended to and did grow advances and securities sold under agree- through wholesale purchases when manage- ments to repurchase [up] to $2.5 billion at ment thought it desirable.14 PX 323. How- September 30, 1993, from $632.3 million at ever, management testified that building a September 30, 1992. The Bank’s utiliza- retail franchise was a goal for Bank United. tion of FHLB advances as a funding Tr. 331 (L. Ranieri). L. Ranieri testified source reflects the difficulties the institu- that after the breach ‘‘[w]e wound up with 18 tions are having in attracting and main- branches and that wasn’t enough TTT[;] [t]he taining deposits resulting from a low inter- house was half built.’’ Tr. 331 (L. Ranieri). est rate environment. Bank United’s 18–branch franchise was ‘‘not JX 65 at BU139595. a business to build anything [upon].’’ Tr. 332 Bank United began focusing on wholesale (L. Ranieri). ‘‘[C]ustomers give you lots of borrowing only after the RTC stopped selling

14. At the time of these purchases in December cent. PX 302 at BU950538. 1989, Bank United’s capital ratio was 3.60 per- 660 50 FEDERAL CLAIMS REPORTER thrifts and depositors began leaving thrifts A for more lucrative returns in mutual funds As a result of FIRREA and the anticipat- and other investments. Def. Br. (12/15/99) at ed impacts of the contract breach, Bank 25. United sought to raise capital, and plaintiffs undertook a conversion of the subordinated debt into equity. D In late 1989, Bank United tried to raise The contemporaneous evidence indicates $50 million in additional capital through a that Bank United pursued a plan, first ex- private placement of noncumulative pre- pressed in the HCA and never contradicted ferred stock (which would count as equity). in any subsequent business plan, nor by the JX 5; Tr. 802–04 (Shay). To that end, Shay actual bank, to first grow its retail base and hired Salomon Brothers, retained a law firm to supplement its growth with wholesale pur- and had a prospectus prepared. JX 5; Tr. chases. Only after disintermediation in the 802–05 (Shay). Bank United hoped to be retail market occurred, did Bank United sig- able to place the offering at a 14 percent nificantly increase its wholesale purchases. dividend rate. Pl. Br. (12/15/99) at 25. Pro- spective buyers shown the prospectus re- sponded that they would require a 20–25 XI percent rate. Tr. 805–06 (Shay); Pl. Br. As stated above, the three breach impacts (12/15/99) at 25. Plaintiffs claim that they were unable to issue preferred stock before of FIRREA were (1) elimination of the ten- December 1992. Tr. 810–12 (Shay).15 year capital forbearance agreement, (2) elim- ination of the authorization to count subordi- In December 1992, Bank United raised nated debt as regulatory capital and (3) sig- $85.5 million of equity capital through the nificant shortening of the amortization period issuance of 3,420,000 shares of noncumulative preferred stock at a rate of 10.12 percent. for supervisory goodwill. JX 7 at 1; JX 39 at 1. This stock issuance Soon after enactment of FIRREA, before resulted in a net capital acquisition of $82.5 the effective date of implementing regula- million after deduction of $2,992,500 in com- tions, plaintiffs initiated steps to mitigate missions; the bank incurred $950,000 in oth- potential damage from the resulting lost er expenses related to the issuance. JX 7 at leverage. Actions to mitigate continued 1 & n. 3; JX 39; DX 1240A. throughout the damages window. After the breach, plaintiffs restructured the bank’s subordinated debt as debt (‘‘Sen- Plaintiffs were able to raise capital to pur- ior Notes’’) of USAT Holdings Inc. The con- sue opportunities they thought worthy de- verted $110 million was then downstreamed spite FIRREA and other obstacles which to Bank United as equity and thus counted made raising capital from public offerings towards fulfilling the regulatory capital-ratio difficult for Bank United. requirement. PX 603; Tr. 762–64 (Shay).

15. Defendant argues that there are no contempo- subordinated debt exchange, interest payments raneous documents confirming that Bank United on the Senior Notes were paid directly by USAT tried to issue the stock or that investors were Holdings Inc. PX 604. Dividends from Bank demanding a 20–25% dividend rate. We find United to fund such interest payments had to be Shay’s testimony on this issue credible and sup- approved by OTS and were subject to capital ported by the facts that investment bankers were regulations and income tests. Id. This preexist- hired, a prospectus was prepared and a place- ing need for dividends would likely concern in- ment did not occur until December 1992. In vestors. addition, there was testimony by several wit- nesses, including a defense witness, that during Defendant counters that three other Southwest the renegotiation period it was difficult for any Plan thrifts raised capital during this period. thrift to raise capital. Tr. 1603–06 (Wood); see Def. Br. (12/15/99) at 34; DX 1250; Tr. 3527–28 also PX 421 at BU949608; PX 424 at BU946326; (Fischel). While this is apparently true, it does PX 426 at BU949601 (government officials testi- not undermine our acceptance of Shay’s testimo- fying before Congress as to the declining value of ny concerning the 1989 effort to raise capital thrifts as a result of FIRREA). Further, after the through an offering of preferred stock. BANK UNITED OF TEXAS FSB v. U.S. 661 Cite as 50 Fed.Cl. 645 (2001) This conversion was completed on September The purchases of Murray Savings and 27, 1990. DX 1017, ¶ 5. Plaintiffs incurred Metropolitan Savings were funded by a $40.1 $4,884,283 in various costs to accomplish con- million capital call from Hyperion Partners, version of the bank’s subordinated debt into L.P. and a $47.8 million bridge loan from equity. PX 302, table AD–1; PX 718. BONY to Hyperion Partners L.P. and lent down the chain to USAT Holdings Inc. DX B 936; DX 1017; DX 1240A. It would not In May 1990, while the subordinated debt have been necessary for Hyperion Partners exchange was being implemented, United to borrow this money and flow it down the Savings Association of the Southwest (USAS) chain and into USAS as equity had FIRREA was formed by plaintiffs under a ‘‘hold sepa- not breached the subordinated debt forbear- rate’’ agreement when regulators from the ance and the capital forbearance. RTC informed Bank United that it could not bid on failed thrifts while plaintiffs’ contract C with defendant was under review pursuant to In December 1990, the OTS required Bank § 501 of FIRREA. Tr. 1801–03 (Nocella); United to take a reserve of $43 million JX 17; DX 902; DX 911; DX 914. After 16 against its junk bond portfolio until the months, during which capital infusions were FDIC determined whether the junk bonds made into USAS and the entity acquired were covered assets under the Assistance three thrifts, USAS was merged into Bank Agreement.16 PX 447; DX 948; Tr. 823–25 United on September 30, 1991. JX 39 at 8– (Shay). Discounting for this reserve put 10 (BU114804–09); DX 1017, ¶ 7. Thus, for Bank United temporarily out of capital-ratio purposes of evaluating plaintiffs’ mitigation compliance and (if, as a result, the bank could of damages and execution of business plans, not pay stock dividends) could have caused it is appropriate to consider the capital infu- USAT Holdings Inc. to default on the Senior sions into USAS and the activities of that Notes for which the subordinated debt had entity as if USAS and Bank United were a recently been swapped. Tr. 823–25 (Shay); single institution. See id. Tr. 1610–13 (Wood); Tr. 1904 (S. Ranieri); Three thrifts were purchased through Tr. 4047–49 (Jones); PX 616. USAS: Ameriway Savings on May 14, 1990, In order for the bank to remain in capital- Murray Federal Savings on June 8, 1990 and ratio compliance while the junk bond dispute Metropolitan Financial Savings on June 22, was being resolved, plaintiffs infused $15 mil- 1990. lion of new capital into the bank on Decem- USAS was initially capitalized with $4.2 ber 31, 1990. JX 39; DX 1017. million from USAT Holdings Inc. to finance the purchase of Ameriway Savings. DX 936; D DX 1017; JX 39. Hyperion Partners L.P. On another occasion, a capital infusion was borrowed these funds from Bank of New made when Bank United purchased two York (BONY) and lent them down the chain failed thrifts from the RTC in order to grow to USAT Holdings which infused the funds its retail franchise. On December 19, 1991, into USAS as equity. DX 1017. The BONY $16.1 million was infused for the purchase of loan was repaid with a Hyperion Partners San Jacinto Savings and Banc Plus Savings. L.P. capital call on June 30, 1990. DX 936; Tr. 827 (Shay); PX 632; DX 1017; DX DX 1017. 1240A.

16. Bank United received a Management Assets stantial unrecognized credit risk in the junk bond Capital Risk Management and Operating Results portfolio TTT are the driving factors warranting rating of 3 (MACRO 3) in a regulators’ Report of this conclusion.’’ PX 618; Tr. 1143–45; JX 122. Examination (ROE) commenced in August and On February 20, 1991, the FDIC determined that completed in November 1990. PX 618 (MACRO the junk bonds were covered assets. However, ratings range from 1 to 5, 1 being the highest OTS regulators did not remove the low rating. rating); Tr. 1145 (Shay). The ROE indicated Tr. 1619–21, 1704–05 (Wood); PX 392; PX 449; that ‘‘[s]erious deficiencies TTT in the overall PX 450. management of assets’’ combined with ‘‘the sub- 662 50 FEDERAL CLAIMS REPORTER E The fact that the bank performed consis- The above-described capital infusions dur- tently with the projections in the business ing the damages window, not including the plans demonstrates that Bank United suc- conversion of $110 million of subordinated cessfully pursued its intentions to build a debt into equity, amounted to $208.739 mil- retail franchise in the early years. Tr. 4497 lion. (Bankhead). This is consistent with plain- tiffs’ testimony that they planned initially to The capacity of these plaintiffs to mitigate develop the retail franchise. Plaintiffs’ tes- quickly and effectively at minimum cost may timony that Bank United had a wholesale be unique among Winstar plaintiffs. The department and made some wholesale acqui- Hyperion Partners L.P. partnership agree- sitions between 1989 and 1992 is not incon- ment allowed for up to one third of the initial sistent with the retail strategy outlined in total of $434 million in capital commitments the business plans. Using deposits from the (approximately $145 million) to be invested in retail acquisitions to acquire wholesale as- Bank United. Actual use of capital commit- sets was consistent with a retail growth ments during the damages window to expand strategy. Tr. 4517 (Bankhead). the retail franchise is demonstrated in the above descriptions of equity infusions into Bank United. XII During the damages window, the breach F impacts did not prevent Bank United from Plaintiffs were in a position such that it successfully pursuing its forecasted business was not necessary, to avoid suffering harm operations, including retail growth supple- from the lost leverage, to immediately re- mented by wholesale purchases. Further, place all the lost leverage by a single mass Bank United had the financial ability to in- infusion of capital. They were in a position, crease its wholesale assets during the dam- because of capacity to make capital calls on ages window but determined that appropri- short notice, to wait until there was a reason ate wholesale purchases were not available. to commit new capital to the bank before This is demonstrated by the fact that dur- doing so. In all instances, when there was a ing significant periods of the damages win- reason to commit new capital to pursue a dow, instead of being constrained by the good opportunity, plaintiffs did it. They fully FIRREA-imposed capital ratio, Bank United mitigated to the extent that they deemed it operated from an under-leveraged position desirable to do so. and chose not to take full advantage of ex- cess liquidity. G In sum, plaintiffs had a duty to mitigate the lost leverage and they did mitigate. We A find that not only could plaintiffs have easily Two factors demonstrate that FIRREA mitigated the loss of leverage capacity by did not prevent plaintiffs from pursuing any infusions of capital, they actually did so. JX growth or investment strategy which they 39; DX 1017; DX 1240A. The plaintiffs’ wanted Bank United to pursue. First, there actual mitigation enabled them to pursue is significant evidence that during the dam- their planned retail strategy and to pursue a ages window, Bank United frequently operat- wholesale strategy to the extent that assets ed from an underleveraged position and had could be found meeting the plaintiffs’ criteria. difficulty deploying excess liquidity. Thus, See Part XII below. When there were prof- even though Bank United had the ability to itable opportunities available in the retail pursue more investments, including whole- market, plaintiffs mitigated by infusing capi- sale investments, than it actually did, there tal into Bank United or operating the bank at were frequently no assets in the market that a lower capital ratio, but argue now that satisfied its risk and yield criteria. Second, mitigation to pursue a wholesale strategy when profitable retail opportunities arose, was too risky. Bank United pursued them even if it re- BANK UNITED OF TEXAS FSB v. U.S. 663 Cite as 50 Fed.Cl. 645 (2001) quired borrowing or infusing capital (see Thorn added that the Corporation has not Part XII above), or operating at a lower- relaxed its high credit standards and that a than-planned capital ratio. large number of prospective whole loan purchases which are reviewed are rejected. B JX 141 at 4. Between 1989 and 1992, Bank United was Except for the testimony of Bank United’s often underleveraged, had excess liquidity, managers, there is no evidence in the record and could not find appropriate assets to pur- supporting the proposition that Bank United chase with excess cash, all as demonstrated would have lowered its credit or return re- by board-of-directors minutes, asset/liability quirements.19 These were excellent manag- management committee (ALCO) minutes and ers who negotiated Bank United through a 17 other contemporaneous documents. See difficult time for the thrift industry when DX 1159 (total cash received from covered many less well-managed thrifts failed. assets and the RTC). During this same period, Bank United was Even though Bank United needed to de- not constrained by the breaches in pursuing ploy excess liquidity to maximize income, it its retail strategy. Bank United pursued its was often unable to do so because there was goal of growing its retail base just as fore- a ‘‘lack of high quality assets’’ available in the casted in its business plans. Bank United market. JX 143 at BU143206–07 (balance bid on ‘‘every [RTC] acquisition that came up sheet footings less than planned ‘‘due to the in Houston or Dallas/Fort Worth, and some nonavailability of high quality assets in the we won and some we lost but we bid on market’’). everything there was.’’ Tr. 633–34 (L. Rani- The difficulty in finding high quality assets eri); see also Tr. 1393–94 (Nocella) (Bank was exacerbated by Bank United’s strict United was ‘‘eager to bid on the sale of RTC credit and performance standards. L. Rani- deposit liabilities from failed thrifts in Tex- eri testified that ‘‘one of the reasons that the as’’). L. Ranieri testified that he did go to bank was periodically underlevered was be- the partners for additional capital after the cause it could not find assets TTT that met its breaches ‘‘where it was necessary to either investment criteria.’’ Tr. 492 (L. Ranieri). protect the 200 [million dollar investment] or Bank United ‘‘set very high objective stan- finish building the [retail] platform.’’ Tr. dards for both credit and the yield that we 353. Although L. Ranieri also testified that want to obtain on the assets we buy.’’ Tr. he did not go back to the partners for capital 618 (L. Ranieri). The aim of Hyperion Part- to replace leverage lost as a result of the ners L.P. was to have an internal rate-of- breach impacts because there were concerns return of 30 percent per year.18 Tr. 585–86 about the ultimate survival of Bank United (L. Ranieri). and he would consider it ‘‘throwing good The April 5, 1990, board meeting minutes money after bad,’’ Tr. 357–58 (L. Ranieri), confirm the difficulty Bank United had in the plaintiffs’ contemporaneous conduct is in- locating assets and the fact that it would not consistent with such concern. reduce its credit standards: Shay testified that Bank United ‘‘constant- The Chairman added that the Corporation ly’’ considered calling additional capital to is being very careful in the acquisition of acquire institutions in the fall of 1989 and whole loan packages even though the cor- into 1990. Tr. 839 (Shay); DX 895 (internal poration is currently underlevered. Mr. memorandum listing banks that Bank United

17. For examples—beyond those discussed in the annual IRR’s had been approximately 24 to text—of instances when Bank United was under- 25 percent. Tr. 586 (L. Ranieri). leveraged and had excess liquidity, see the board- minute summaries provided in DX 1167. 19. Bank United had the capacity to buy addition- al assets but would not reduce its credit stan- 18. The venture capital internal rate-of-return dards and, thus, lost bids or was unable to find (IRR) target of 30 percent per annum was not suitable assets to purchase. Tr. 4505 (Bank- achieved. At the time Bank United went public, head); see also JX 141. 664 50 FEDERAL CLAIMS REPORTER was interested in acquiring). Bank United and purchase wholesale assets. Tr. 501 (L. bid upon large institutions that, had it won Ranieri). the bids, would have required infusions of In 1991, Bank United purchased three between $50 and $100 million. Tr. 4704–05 more thrifts from the RTC, BancPLUS Fed- (Bankhead) (explaining University Savings eral Savings on September 20, 1991; San bid); see also Tr. 463 (L. Ranieri) (‘‘If we Jacinto Savings on September 27, 1991; and made a bid, we would obviously honor the the San Antonio branch of Victoria Savings bid.’’); accord DX 881. on October 25, 1991, acquiring more than $2 billion in cash and expanding its retail fran- C chise. JX 65 at BU139533. These acquisi- tions (and their resulting acquired deposits) Bank United’s purchase of thrifts from the required Bank United to deploy its excess RTC added to the problem of excess liquidity cash through purchases of wholesale assets. (as a result of the acquired deposits). In May and June 1990, three thrifts were pur- As shown above, Bank United’s operation chased through USAS, Ameriway Savings, during the damages window demonstrates Murray Savings and Metropolitan Savings. that when a profitable retail opportunity Initially, this precipitated a drop in Bank arose, it was pursued. The fact that addi- United’s capital ratio, but a run-off of ac- tional wholesale assets were not purchased quired deposits pushed the capital ratio back even though Bank United had the capacity to up. DX 1164. By December 1990, Bank acquire them, indicates that Bank United did United’s capital ratio began to increase and not find any wholesale investments which the thrift had excess liquidity and was under- met its criteria. leveraged. JX 226 at BU143518, BU143520; D JX 227 at BU143549. The evidence shows, and witnesses con- At a September 1990 board meeting, ap- cede, that they pursued every retail opportu- proximately one year into the damages peri- nity available and would be willing to infuse od, Nocella explained that the thrift contin- money to guarantee the survival of Bank ued to be plagued with excess liquidity. JX United, at least through retail purchases. 224 at BU143477 (Bank United ‘‘had invested On the other hand, management testified this excess liquidity in quality assets as pru- that infusing money to pursue the wholesale dently and quickly as the market would al- strategy, which according to one of the lost- low, but a large balance remained’’); see also profits models would result in hundreds of JX 225 at BU 143500 (in October 1990, No- millions of dollars of foreseeable profits, was cella stated that ‘‘the biggest problem’’ facing considered too risky. Tr. 357–58 (L. Rani- Bank United was the ‘‘excess liquidity’’ creat- eri). Further, even when there was capital ed by the acquisition of the three thrifts). or leverage available in the bank, so that it Even by March 1991, almost half way would not be necessary to turn to the part- through the damages period, Bank United ners, Bank United did not use it to purchase had not been able to deploy its excess cash. wholesale assets. Nocella reported to the board that ‘‘earnings The evidence also shows that Bank United were $2 million under budget and this was was unable, for significant periods of time, to caused by excess liquidity which was expect- locate satisfactory wholesale assets. Fur- ed to have been invested two months earlier ther, there is no contemporaneous evidence than it was.’’ JX 229 at BU143582. that it ever lacked funds or leveraging ability Bank United’s underleveraged position to purchase assets that it did wish to pursue. continued through May and July 1991. DX Plaintiffs’ assertion that the breach impacts 778; see DX 988. L. Ranieri testified that if prevented Bank United from using leverage ‘‘appropriate’’ assets had been available, capacity to purchase wholesale assets for Bank United could have remedied its under- growth is undercut by the fact that Bank leveraged position by leveraging its unused United declined to buy such assets with the capital to borrow on the wholesale markets excess cash it had. MIENTS v. U.S. 665 Cite as 50 Fed.Cl. 665 (2001) XIII Pursuant to RCFC 54(d), costs shall be Plaintiffs are entitled to recover their actu- awarded to plaintiffs (‘‘the prevailing party’’). al costs incurred in mitigation of the lost Notwithstanding plaintiffs’ entitlements, leverage capacity caused by FIRREA. The entry of judgment shall be withheld pending proven mitigation costs are those incurred in notification from the parties concerning the connection with the conversion of Bank Unit- precise entity or entities in whose favor judg- ed’s subordinated debt into equity in 1990 ment should be entered. In 1996 (subsequent and the issuance of preferred stock in 1992. to filing the complaint initiating this case), The total amount plaintiffs claim for con- the two holding-company plaintiffs were con- version of the subordinated debt is solidated and renamed ‘‘Bank United Corp.,’’ $4,884,283, comprised of $181,000 in legal and the name of the plaintiff bank was fees, $1,693,283 in interest paid on a BONY changed to ‘‘Bank United.’’ (The designation bridge loan and $3,010,000 in additional inter- of Hyperion Partners L.P. remained un- est paid on the Senior Notes. PX 301 at changed.) Pl.Br. (12/15/99) at 1, 13 n. 2. See BU950522; PX 390; PX 718. We find that Bank United of Texas v. United States, 49 plaintiffs would not have incurred such added Fed.Cl. 1, 2 n. 1. Further, we note in the interest cost had defendant not breached. attachment to Defendant’s Motion to Notify We conclude that plaintiffs are entitled to the Court of Subsequent Factual Develop- recover the total costs claimed for mitigating ments filed on September 1, 2000 that Bank the subordinated-debt impact of the breach. United Corp. was then engaged in a merger transaction with Washington Mutual, Inc., The December 1992 issuance of 3,420,000 Def.Mot. (9/1/00), App. passim, and that shares of noncumulative, preferred stock ‘‘[u]pon consummation of the merger, the which raised $85.5 million of equity capital, separate corporate existence of Bank United JX 39 at 1, 15, caused Bank United to incur Corp. shall terminate,’’ Def.Mot. (9/1/00), $2,992,500 in commissions; the bank incurred App. at 14. $950,000 in other expenses related to the issuance. JX 7 at 1 & n. 3. See generally The parties are requested to confer con- Bluebonnet Savings Bank v. United States, cerning the precise names of the entities in 266 F.3d 1348, 1357–58 (Fed.Cir.2001). whose favor judgment should be entered and Thus, plaintiffs are entitled to recover a total to advise the court accordingly. Thereupon, of $3,942,500 in connection with this mitiga- judgment will be entered in favor of such tion. designated entities. Plaintiffs further mitigated throughout the Based on the foregoing disposition, all cur- damages window by various other infusions rently outstanding, unresolved motions are of capital into Bank United. See JX 39; DX DECLARED TO BE MOOT. 1017; DX 1240A. Plaintiffs would have been entitled to any proven costs incurred in con- nection with these mitigation infusions of , capital and in connection with its aborted efforts to issue preferred stock in late 1989, but no evidence of costs related to such Laverne MIENTS, pro se, Plaintiff, additional infusions and efforts was present- v. ed. Thus, there is no record on which to base an award for those mitigation activities. THE UNITED STATES, Defendant. In sum, we conclude that plaintiffs are No. 01–367C. entitled to damages totaling $8,826,783 for United States Court of Federal Claims. the cost of mitigating the breach. Oct. 30, 2001. XIV Based on the foregoing, plaintiffs are enti- Farmer brought suit alleging, inter alia, tled to judgment in the amount of $8,826,783. discrimination by the United States Depart-