Opposition Brief — California Federal Bank v. United States

7

The trial court entered summary judgment against

CalFed with respect to its lost-profits claim, ruling that

the claim was too speculative as a matter of law. Pet.

App. 22a-23a. The remaining claims proceeded to trial. «|

5. The court held a six-week trial on CalFed's re-

maining claims for recovery. In April 1999, the court

awarded CalFed approximately $23 million in damages.

Pet. App. 18a-52a. That award reflected the actual

transaction costs incurred by CalFed in obtaining eapi-

tal to replace the phased-out goodwill. /d. at 49a-5la.

The court rejected petitioner's other claims for recovery,

finding that “|t]he facts of this particular case do not

establish that [CalFed]| suffered monetary loss beyond

its expenses of raising new capital.” /d. at 52a.

a. Restitution. In denying CalFed's claim for resti-

tution, the trial court rejected CalFed’s theory that it

had conferred a benefit on the government equal to the

acquired thrifts’ net liabilities by “assuming” those lia-

bilities at the time of the acquisitions. The court pointed

out that the government “remained responsible for

those liabilities as if the contract/[s] never had been exe-

cuted” and found that, “{[wJere it not for falling interest

rates, the United States probably would have had to

make {the net] liabilities in the form of deposits good.”

Pet. App. 52a. The trial court found that the only bene-

fit that CalFed had conferred upon the government was

“buying time” until interest rates declined from their

historic heights. /bid.

b. Replacement cost. At trial, CalFed’s

replacement-cost model purported to show the costs to

CalFed associated with three separate capital market

transactions between 1992 and 1994. CalFed's expert

theorized a hypothetical repurchase in 1998 of the stock

CalkFed issued between 1992 and 1994, claiming as a cost

S

the total value, in 199&, of the shares hypothetically re-

purchased to extinguish these claims. Pet. App. 50a; 2

C.A. App. A3000409-A3000419. Thus, the better CalFed

performed and the more its market value increased after

the capital market transactions, the more CalFed

claimed it was damaged by these transactions. 1 C.A.

App. A1003480. In addition, CalFed hypothesized what

it would have cost to replace goodwill from 1998 forward

had it raised capital at that point. In total, CalFed's

expert opined that it cost $955 million in cash to replace

$390 million in remaining goodwill, 2 C.A. App.

A3000405.

In response, Dr. Merton Miller, winner of the Nobel

Prize in Economic Science, and Daniel Fischel, Profes-

sor of Law and Business at the University of Chicago,

explained to the trial court that tae promise to pay divi-

dends to new investors was indeed a cost of capital. 1

C.A. App. A1003470; 2 C.A. App. A3000407. However,

they further explained that CalFed received cash in re-

turn for this promise to make dividend payments, and

that the cash received equaled the expected discounted

cost of future dividends, such that the “net costs” of rais-

ing capital to CalFed were transaction costs. 1 CLA.

App. A10003431-A10003-141, A1003470; 2 CLA. App.

A3000407-A3000408. When it received cash upon the

issuance of stock, CalFed not only replaced goodwill as

a Capital asset, it gained what goodwill did not provide:

the ability to earn a return directly with the cash re-

ceived. Because CalFed conceded that it received fair

market value for the securities it issued, the experts

concluded that the value of the income stream it re-

ceived with the cash it raised equaled the expected dis-

counted cost of the dividends CalFed promised. 2 CLA.

App. A3000407-A3000408 & n.5.

9

The court found that CalFed suffered approximately

$23 million in damages, relecting the actual transaction

costs incurred by CalFed in obtaining capital to replace

the phased-out goodwill. Pet. App. 4&a-5la. Relying

upon the testimony of Dr. Miller, the trial court found

that, “[o]n the day stock is issued, the amount vou re-

ceive for the stock is equivalent to its worth and the only

costs are transaction, or flotation costs.” /d. at 50a. dn

contrast, the trial court found that the testimony of

CalFed’s expert regarding hypothetical replacement

costs was not credible, particularly because CalFed's

expert assumed that the cash value of CalFed’s goodwill,

a non-earning asset, Was approximately two and one-half

times the amount of the goodwill. /bid. The trial court

concluded that any award in excess of transaction costs

“would be more than necessa")’ to make CalFed whole.”

Id. at 49a.

6. CalFed appealed the trial court's rejection of its

‘lost profits, restitution, and cost of replacement claims.

The Federal Circuit vacated the trial court's summary

judgment ruling with respect to CalFed's lost profits

claim and remanded for a trial. The court affirmed the

judgment in all other respects. Pet. App. la-17a.

The court of appeals specifically affirmed the trial

court's finding that the net cost of replacing CalFed's

phased-out goodwill was the transaction cost incurred in

obtaining the new capital. The court acknowledged that

dividends and interest paid on capital to new investors

are a “cost of capital.” Pet. App. l4a. But the court

noted that “the government's expert, Merton Miller, a

Nobel Laureate in Economie Science, testified that the

cost of replacing goodwill was floatation costs because

the value of the cash proceeds of Cal Fed's newly-raised

capital equaled the cost of future dividends.” /bid. The

10

court of appeals recognized that the trial court “found

Cal Fed's experts not credible” on the issue of replace-

ment costs, due, in part, to “their testimony that the cost

of replacing $390 million of goodwill was nearly a billion

dollars.” /bid. Applying a deferential standard of re-

view, the court of appeals affirmed the trial court’s

award, “seel[ing| no clear error in the court's factual

finding that the floatation costs provided an appropriate

measure of Cal Fed's damages incurred in replacing the

supervisory goodwill with tangible capital.” bid.

7. CalFed filed a petition for a writ of certiorari.

CalFed challenged a number of rulings, including the

court of appeals’ judgment concerning the award of re-

placement costs and the judgment rejecting its claim for

restitution, On January 22, 2002, this Court denied

CalFed's petition. 534 U.S. 1113.

&. A second six-week trial was held in this case, ad-

dressing solely CalFed’s lost profits claim upon remand.

After reviewing voluminous documents and hearing

from numerous fact and expert Witnesses, the trial court

found that CalFed’s “lost profits model was not credi-

ble.” Pet. App. 145a. The court found that CalFed had

failed to establish any of the prerequisites for an expec-

tancy recovery--foreseeability, causation, or reasonable

certainty. /d. at 144a-146a.

CalFed challenged the trial court's rejection of its

lost profits claim, as well as a claim for prejudgment

interest, during a second appeal. CalFed did not at-

tempt on that second appeal to raise any issue concern-

ing the trial court’s finding in the earlier proceedings

that its costs of replacing capital were S$ 23 million. The

court of appeals affirmed the trial court's denial of

CalFed's lost profits claim, Pet. App. 122a-143a, and its

1]

claim for prejudgment interest, id. at 138a-139a.

CalFed did not seek en banc review.

ARGUMENT

The decision of the court of appeals is correct, and it

does not conflict with any decision of this Court or any

other court of appeals. Petitioner's argument that there

is an intra-circuit conflict Is mistaken and was waived

heeause it was not advanced in the court of appeals. In

any event, although petitioner does not seek plenary

review by this Court but only a remand to the court of

appeals, further review of any kind would not be war-

ranted to address a claim of an intra-cireuit conflict.

1. On this petition, CalFed does not seek plenary

review by this Court of its claim that the courts below

incorrectly calculated the damages on its replacement-

cost theory. Instead, CalFed argues that the Federal

Circuit's decision in this case “is flatly inconsistent” with

that court’s later decision in Home Savings of America

v. United States, 399 F.5d 1541 (2005). CalFed argues

that this Court should assume that the Home Savings

decision is correct, grant the petition for a writ of certio-

rari, Vacate the decision of the court of appeals in this

case, and remand for further consideration by that court

in light of Home Savings. Even if there were an intra-

circuit conflict on the replacement-cost issue and the

decision in Home Savings (rather than in this case) were

correct aud the existence of such a conflict warranted

this Court's exercise of jurisdiction, the petition should

be denied because petitioner never presented its claim

of an intra-circuit conflict to the Federal Circuit.

Petitioner's contention is that its costs for replacing

the intangible supervisory capital that was eliminated

from its balance sheet by FIRREA were much more

12

than the $23 million awarded by the Court of Federal

Claims and affirmed by the court of appeals. In particu- -

lar, petitioner asserts (Pet. 8) that the net costs of re-

placing the supervisory goodwill were not just the trans-

action costs it incurred in issuing new stock, but also the

dividends it had to pay to its new shareholders.

Although petitioner now frames its request in terms

of the Federal Circuit's decision in /Zome Saciiigs, peti-

tioner contends (Pet. 9) that the Federal Cireuit had

already concluded in Lasalle Talman Bank, FASB. v.

United States, 317 F.3d 1363, 1374-1375 (Fed. Cir.

2003), that such dividend and interest costs can consti-

tute damages for a Wiustar-type claim, and that the

Federal Circuit merely reiterated that proposition in

Home Savings. Indeed, the portion of the Home Sav-

ings decision that CalFed cites for the proposition that

dividend and interest payments are always recoverable

as “costs of capital” expressly relies upon LaSalle

Talman, 399 F.3d at 1354 (citing LaSalle Talman for

the proposition that “capital is not costless,” and that

the trial court had diseretion to reject the government's

transaction-cost analysis). Accordingly, petitioner's

current claim that the Federal Circuit's decisions are

internally inconsistent was available to it no later than

the time that LaSalle Talnrau was decided.

The Federal Circuit decided LaSalle Talivan on

March 133, 2003. At no time between that date and Janu-

ary 19, 2005, when the Federal Circuit decided this ap-

peal, did petitioner take any step to call the alleged in-

ternal conflict to the attention of the court of appeals.

Although petitioner in its second appeal challenged the

district court’s conclusions that petitioner was not enti-

tled to expectation damages and prejudgment interest,

petitioner did not raise any issue in its second appeal

13

regarding the earlier cost-of-replacement damages

award. To the contrary, in the Statement of Related

Cases in its opening brief on its second appeal, peti-

tioner stated that “the | court of appeals’] decision in this

ease might affect or be affected by, the resolution of

other Winstar-type cases pending in the Court of Fed-

eral Claims or [the court of appeals] in which the plain-

tiffs seek lost profits or prejudgment interest.” Pet.

C.A. Br. ix (emphasis added).” Petitioner did wot ad-

vance any claim that this case would be affected by

Home Savings, which was then pending. Nor did peti-

tioner assert more generally that this case would be af-

fected by any Winstar-related cases in the trial court or

court of appeals in which the plaintiffs seek the cost of

replacement capital.”

Moreover, although petitioner now contends that the

Federal Cireuit’s decisions are internally inconsistent,

petitioner did not seek initial en banc hearing of its sec-

»

~ Rule 47.5 of the Federal Circuit's rules provides:

Rach principal brief must contain a statement of related cases

indicating (a) whether [the same case has ever been on appeal |; or

(b) the title and number of any case Known to counsel to be pending

in this or any other court that will directly affect or be directly

affected by this court's decision in the pending appeal. If there are

many related cases, they may be described generally, but the title

and casenumber must be given for any case known to be pending

in the Supreme Court, this court. or any other circuit court of

appeals.

* Because petitioner did not mention the issue, the court of appeals’

decision in the second appeal did not address the issue of the proper

measure of petitioner's cost of replacin,* capital, and it did not explain

its view of petitioner's claim of an inter>-al conflict in the circuit. The

issue petilioner now seeks to raise—the alleged internal conflict in the

court of appeals’ decisions—was neither pressed nor passed on below,

See, e.g. United States v. Williams, 504 ULS. 36, 41-42 (1992).

14

ond appeal, or any part of it. so that the court of appeals

would have the oppurtunity itself to address, in the first

instance, the alleged inconsistency. See Fed. R. App. P.

35(a)(1) (“An en banc hearing or rehearing” of a case “is

not favored and ordinarily will not be ordered ainless

** * en bane consideration is necessary to secure or

maintain uniformity of the court's decisious.”) (empha-

sis added). Seeking en banc hearing would have been

another way that petitioner could have brought its claim

of an internal circuit conflict to the attention of the court

of appeals. Petitioner, however, did not do so.

Finally, even after the Federal Circuit decided peti-

tioner’s second appeal on January 19, 2005, petitioner

could have filed a petition for en banc rehearing, seeking

to raise any issues concerning replacement Costs and

informing the court of appeals of petitioner's assertion

that the court's decisions were in conflict. Although

Home Savings was not decided until March 7, 2005, it

was fully briefed and argued long before the Federal

Circuit decided petitioner's second appeal.’ Petitioner

accordingly Was in a position to be aware of the issues in

Home Savings, and petitioner could have sought rehear-

ing en bane in this case in light of the claimed conflict

with LaSalle Talman and the pendency of Home Sav-

ings. Yet petitioner continued to take no step to bring

any claim of an internal conflict in the circuit to the at-

tention of the court of appeals.

Petitioner now asks this Court to analyze the court

of appeals’ decisions, determine whether they are in con-

flict, and to grant relief in this case on the ground that

there is a conflict and the decisions favored by petitioner

1 ow . aa eae ee ° . °

The reply brief for the plaintiff in /Zome Sarrvgs in the court of

appeals was filed on May 5. 2004, and cral argument was held on

September s, 2004.

15

were the correct ones. The time to address the question

whether the Federal Circuit’s decisions are in conflict,

however, would have been when petitioner was before

that court. E.g., Youakiin v. Miller, 425 U.S. 231, 234

(1976) (“Ordinarily, this Court does not decide questions

not raised or resolved in the lower court.”). Because

petitioner failed to clo so, or even to raise any issue con-

cerning replacement costs on its second appeal, it is now

too late to obtain relief from this Court.’

2. In any event, petitioner’s sole claim is that there

is an internal conflict within the Federal Circuit regard-

ing the proper calculation of the cost of replacement

capital in Winstar-related cases. Even if that claim had

been preserved and were correct, however, this Court

has accepted as a fundamental premise of its certiorari

jurisdiction that further review is not warranted to ad-

dress a claim of an intra-cireuit conflict. Wisniewski v.

United States, 353 U.S. 901, 902 (1957) (per curiam); see

Davis v. United States, 417 U.S. 333, 340 (1974) (certio-

” As petitioner points out (Pet. 6-7), the government's brief in

opposition to petitioner’s earlier petition for certiorari generally

opposed further review on all of the questions petitioner presented—

including the question concerning the adequacy of the award for cost of

replacement capital—on the ground that further review of the court of

appeals’ interlocutory decision was unwarranted. See 01-592 Br. in

Opp. 12-15. The government also, however, specifically argued that

petitioner's claim regarding the cost of replacement capital did not

warrant further review in any event. The government explained,

relying on the testimony of Prof. Miller and other evidence, that the

trial court's findings regarding the costs of replacement capital were

correct on the facts of this case, that those findings were properly

affirmed by the court of appeals, and that the issue did not warrant

further review. 01-592 Br..in Opp. 26-28. This Court denied review.

534 U.S. 1113.

16

rari not warranted despite conceded intra-circuit con-

flict on meaning of criminal statute). |

a. Petitioner does not refer to any case in which this

Court has granted certiorari, vacated a decision of the

lower court, and remanded a case so that the lower court

could address a claim of conflict with one of its own deci-

sions. Petitioner cites (Pet. 12) United States ev rel.

Robinson v. Johuston, 316 U.S. 649 (1942). In that case,

the Court issued a grant, vacate, and remand (GVR)

order, “ijn view of the conflict of views which has arisen

amony the judges of the Ninth Circuit with respect to

the decision in this case, avd in view of this Court's [in-

tervening| decision.” /bid. (emphasis added and cita-

tions omitted). There is no reason to believe that the

internal disagreement in the Ninth Circuit would alone

have been sufficient to warrant a GVR order.

Petitioner also cites (Pet. 12) Alabama v. Ritter, 454

ULS. 885 (1981). In that ease. the Court issued a GVR

order and remanded the case to the Alabama Supreme

Court. The remand, however, had nothing to do with a

concern for the consistency of that court's decisions, but

rather was based on the need to determine if the state

court had decided the case on the basis of federal or

state law.

This Court initially issued a GVR order in Riffer in

light of Beck v. Alabama, 447 US. 625 1980). See

Ritter v. Alabama, AAS US. 903 (1980). On remand, the

Alabama Supreme Court held that the capital defendant

in Ritter was entitled to a new trial. 405 So. 2d 154

(1981). The State filed a petition for certiorari, and re-

spondent’s sole argument in opposition was that the

state court’s decision rested on an independent and ade-

quate state ground. 81-247 Br. in Opp. 1-6. This Court

then issued the GVR order that petitioner cites, in which

17

this Court remanded for further consideration by the

Alabama Supreme Court in light of Reed v. State, 407

So. 2d 162 (Ala. 1981)—a decision that respondent had

characterized as “particularly instructive” in showing

that the state court rested its decision on an independ-

ent and adequate state ground. 81-247 Br. in Opp. 4-5.

Understanding that the purpose of the remand was to .

determine the federal or state basis for its decision, the

Alabama Supreme Court issued a brief opinion on re-

mand stating that it now would “unequivocally hold that

our previous opinion in this case was based upon federal

constitutional grounds, not state law grounds.” Ritter v.

State, 414 So. 2d 452 (1981)."

The purpose of the Ritter GVR order petitioner cites

was thus to clarify whether the Alabama Supreme

Court’s earlier decision was based on federal or state

grounds, a matter that went to this Court’s jurisdiction

to decide the case.’ The GVR order was certainly not

based on any internal conflict in the Alabama Supreme

Court, since that Court’s decisions in both Ritter and

Reed had reached the identical conclusion—that a capi-

tal defendant was entitled to a new trial.

h. Petitioner also cites cases in which this Court has

granted plenary review, contending that “this Court has

” This Court then issued another GVR order in Ritter in light of its

own later decision in Jlopper vo Evans, 456 U.S. 605 (1982). See

Alabama v. Ritter, 4657 USS. 1114 1982).

‘ This Court's decision in Michigan v. Long, 468 ULS. 1032, 1087-1044

(1983), came after the GVR in Rifter and clarified the bases on which

this Court would find an independent and adequate state ground for a

state-court decision. See id. at 1038-1059 (noting that the Court had on

occasion “vacated * * * a case in order to obtain clarification about the

[federal-law or state-law] nature of a state court decision”) (citations

omitted).

18

granted review to resolve the apparent conflicts within

a circuit when it has deemed the question important.”

Pet. 13. In support of that contention, petitioner cites

three cases in which this Court granted plenary review,

the most recent of which dates from almost forty vears

ago. Commissioner Vv. Estate of Bosch. 387 US. 456, 457

(1967); Maggio v. Zeitz, 333 US. 56, 59-60 (1948); John

Hancock Mut. Life Luis. Co. v. Bartels, 308 U.S. 180, 181

(1939). None of those cases supports petitioner's argu-

ment that an internal conflict within a circuit would war-

rant further review here.

In Bosch and Johu Haucock, there were indeed

claims that the court of appeals had reached conflicting

decisions on the question presented. But this Court did

not rest its decision to grant certivrari in either case on

such a claim of conflict. In Bosch, the Court explained

that “|wlhether these cases [from the court of appeals|

conflict in principle or not, which is disputed here, there

does exist a widespread conflict among the civenits over

the question and we granted certiorari to resolve it

387 U.S. at 457 (emphasis added). In John Hancock, the

Court stated that it granted certiorari “due to the differ-

ing views of the judges composing the court * * * aad

because of the importance of the question” presented.

308 ULS. at 181 (emphasis added).

In Maggio v. Zeitz, 333 ULS. 56 (9S), the court of

appeals had wrestled with a complex tangle in bank-

ruptcy law and concluded that it had to affirm a con-

tempt order against the bankrupt individual. The court

of appeals had stated that, “[aflthough we know that [the

bankrupt] cannot comply with the order, we must keep

a straight face and pretend that he can, and must thus

affirm orders which first direct [the bankrupt] ‘to do an

impossibility, and then punish him for refusal to perform

19

it.’” Id. at 59 (quoting court of appeals’ opinion). This

Court explained that “the declaration [quoted above| is

one which this Court, in view of its supervisory power

over courts of bankruptcy, cannot ignore.” Jbid. The

Court also noted that the issues in the case “are impor-

tant to successful bankruptcy administration.” /d. at 61.

Thus, though there may have also been an internal cir-

cuit disagreement, see id. at 59-60, this court granted

review to address issues of continuing and more general

importance in bankruptcy administration.

ce. Because cases in the courts of appeals are ordi-

narily decided by shifting combinations of judges from

multi-member courts, internal conflicts no doubt do oc-

cur with some frequency. Nonetheless, if this Court

were to take the step of issuing GVR orders to address

intra-circuit conflicts in cases like this, the same logic

would invite numerous other litigants to bring similar

claims before the Court to obtain similar relief. This

Court has wisely viewed the en bane process, not this

Court’s certiorari jurisdiction and not the GVR proce-

dure, as the means for the courts of appeals to address

any lack of uniformity in their own decisions. The

Court’s traditional practice of not exercising its certio-

rari jurisdiction based on a claim of an intra-circuit con-

flict is a sound one. Adherence to that traditional prac-

tice is especially warranted in this case, because peti-

tioner did not renew or preserve any issue concerning

the cost of replacement capital on its second appeal,

much less seek to have the Federal Circuit resolve the

asserted inconsistency that petitioner now contends had

already developed with that court's 2003 decision in

LaSalle Talman. See pp. 11-15, supra.

3. The decision in this case was in any event correct.

Moreover, because the Federal Circuit reviews trial

au :

court decisions concerning the calculation of the value of

replacement capital in Winstar-related cases under a

deferential standard, petitioner errs in contending that

the Federal Circuit's decision in this case conflicts with

its decision in Home Savings.

a. In this case—on the first appeal—the court of

appeals noted that the government’s expert at trial, No-

bel Laureate Professor Merton Miller, had “testified

that the cost of replacing goodwill was floatation costs

because the value of the cash proceeds of Cal Fed's

newly-raised capital equaled the cost of future divi-

dends.” Pet. App. I4a. The court of appeals found that

the trial court properly “discounted” CalFed’s experts’

testimony that “the cost of replacing $390 million of

goodwill was nearly a billion dollars, based in part on the

cost of repurchasing all outstanding stock by Cal Fed to

eliminate the cost of paving dividends.” /bid. The court

coneluded that it “slaw] no clear error in the court's fac-

tual finding that the floatation costs provided an appro-

priate measure of Cal Fed's damayes incurred in replac-

ing the supervisory goodwill with tangible capital.”

Ibid.

The court's decision was correct. Contrary to peti-

tioner’s characterizations, see Pet. 6, the Federal Circuit

expressly recognized that divider.d payments reflect a

eost of capital. See Pet. App. l4ac"|T]he cost of replac-

ing goodwill was floatation costs because the value of the

cash proceeds of Cal Fed's newly-raised capital equaled

the cost of future dividends.”) (emphasis added). The

court simply affirmed the trial court's finding that, al-

though the future dividends Cal Fed promised to pay

when it issued stock had a “cost,” that cost was equal to

the value of the cash proceeds that CalFed received for

the stock, leaving the floatation costs as the wet dam-

21

ages. That was consistent with Dr. Miller’s testimony at

trial. 1 C.A. App. A1003468-A1003472; see 1 id. at

A1002461-1002462; 2 C.A. App. A3000400, A3000407-

A3000409. Because there was no clear error in the trial

court’s finding that tangible, investable cash raised by

CalFed gave CalFed a benefit, as well as imposing an

approximately equal cost, the Federal Circuit properly

affirmed the trial court’s conclusion that the transaction

costs reflected the true net cost of raising capital.

Contrary to CalFed’s assertions (Pet. 7), the court of

appeals did not hold on the first appeal in this case that

the cost of new capital was “zero,” and did not “exclude”

dividends and interest payments from consideration as

a cost of capital. Instead, the Federal Cireuit affirmed

the trial court’s finding that the benefits of CalFed’s

capital raising (/.e., the cash available for profitable in-

vestment by CalFed) offset the costs (7.e., the claim on

future dividends), except for transaction costs. That

decision was fully supported by the only testimony the

trial court, affirmed by the court of appeals, found to be

credible.

A recent decision of this Court supports the reason-

ableness of the trial court’s determination that when

public companies such as CalF ed raise capital by issuing

securities such as stock in a market-based transaction,

the cost to the firm of selling the stock is offset by the

cash received by the firm. In Dura Pharmaceuticals,

Tne. v. Broudo, 125 8. Ct. 1627 (2005), the plaintiff inves-

tor brought a securities fraud claim based upon false

information the company disseminated, upon which the

plaintiff relied when he purchased the company’s stock.

Public disclosure of the claimed fraud came several

months after the plaintiff purchased the stock. The is-

sue presented to this Court was whether the plaintiff

2»

had properly pled damages by asserting that the pur-

chase of the stock alone was sufficient to show dam-

ages—without_ asserting, as an element of causation.

that the company’s stock price dropped months later as

a result of the disclosure of the fraud.

This Court held that the purchase of the stock, stand-

ing alone, Was not sufficient to show damages. The

Court explained that the cost to the plaintiff of purchas-

ing a share of stock “is offset by ownership of a share

that af that dustant possesses equivalent value.” 1258.

Ct. at 1651. [f the fraud had never been disclosed, or if

the ultimate disclosure of the fraud had no effect upon

~ the value of the security, the plaintiff could have re-sold

the stock and received back precisely what he paid in

the first place. Jbid. More fundamentally, the price

paid for any security purchased in the market, reflecting

the present value of the future cash flows one expects to

receive, results In no economic cost or damage at point

of purchase. See ‘bid.

In this case, the same economic principle is at stake,

although from the firm's perspective. When CalFed

issued securities and obtained cash to replace a non-

_ earning asset such as goodwill, the price received in cash

for issuing the securities was of “equivalent value” to the

securities. The securities represented claims on

CalFed's future earnings, and the cash CalFed received

Vas available for it to invest in its business to produce

those earnings. In other words, as the government's

experts explained to the trial court in this case, “the cost

of replacing goodwill was floatation costs because the

value of the cash proceeds of Cal Fed's newly-raised

capital equaled the cost of future dividends.” Pet. App.

Ifa. At the very least. the trial court did not make a

23

clearly erroneous factual finding, or abuse its discretion,

when it credited that evidence.

b. In Home Savings, the court of appeals affirmed

an award of damages for replacement capital that ex-

ceeded the transaction costs the plaintiff incurred in

raising that capital. 399 F.3d at 1353-1355. As in this

case, however, the court's affirmance was not based on

a de novo review of the trial court reeord. Instead, the

court used a deferential, abuse-of-diseretion standard.

The court concluded that it “s[aw] no abuse of discretion

in the trial court’s methodology for calculating the cost

of replacement capital,” and it “h{ejld that the [trial]

eourt did not abuse its discretion in setting up its

model.” Jd. at 1354.

In particular, the court of appeals recognized in

_ Home Savings, as it had in this case, that raising capital

has a cost, which is “the required rate of return on vari-

ous terms of financing.” 399 F.3d at 1354. But the court

of appeals also recognized, as it did in this case, that the

cash raised by issuing stock had a benefit as well, and

“In Bank United v. United States, 80 Fed. Appx. 663 (Fed. Cir.

2003), the Federal Circuit again affirmed a trial court finding that the

net cost of replacing goodwill with tangible capital did not exceed

transactions costs. Relying upon its decision in this case, the Federal

Circuit reasoned:

The trial court's finding that Appellants’ mitigation costs associated

with the 1992 preferred stock offering were restricted to transac-

tion costs is consistent with testimony offered by the government's

lead expert at trial that, because the value of the cash proceeds of

a capital offering equal the expected expense of future dividends,

the true costs of such a transaction are limited to floatation costs.

We have previously declined to hold such a finding clearly errone-

ous, and we do so ayrain here.

fd. at 72.

24

that the costs must be “discounted” by the value of the

benefit. /bid. See ‘bid. (“Supervisory goodwill merely

provides a thrift with ‘leverage, or legal permission to

obtain additional deposits, whereas cash is ‘tangible capi-

tal’ that can both provide leverage and fund loans.”). In

Home Savings, the trial court had calculated the “inei-

dental benefits” of the goodwill as equal to the cost of

the deposits the thrift no longer had to obtain in order

tu raise cash. Because deposits are insured by the gov-

ernment (although they are also direct claims on the

thrift’s own assets and attracting more deposits may

require paving higher interest rates on existing deposits

as well), the trial court had (mistakenly, in our view)

estimated that cost using the rate paid for a comparable

government-backed asset, the intermediate-term Trea-

sury bond. The trial court had then deducted that

amount from the value of the dividends that the bank

promised to pay on its new capital instruments. bid.

The court of appeals in Home Sacings held that. in

reaching that conclusion, “(t]he [trial] court's approach

to calculating the benefits of cash was * * * within the

court's sound dliseretion.” Jd. at 1354-1355.

¢. Because the court of appeals emploved a deferen-

tial standard of review both in this case and in one

Savings, the court’s conclusions in the two cases do not

eonflict. The court of appeals did not hold in either case

that there is only one way to calculate the various values

involved in the particular case of a thrift that, in a

Wirstar-related case, raised capital to replace the intan-

gible capital lost when the use of goodwill was phased

out. The court of appeals in this case affirmed the trial

court's finding that the value of the cash the thrift re-

ceived here was roughly equal to the value of the future

stream of dividends the thrift was promising to pay.

naa

25)

The court of appeals in Home Savings affirmed the trial

court's finding in that case that the value of the cash was

less than the rate of return on the financing. Because

the court of appeals was applying a deferential standard

of review in both cases—and the records and conten-

tions of the parties in the two cases differed"—the deci-

sions affirming the trial court’s findings in each case are

not inconsistent.

Petitioner argues that the court of appeals in Home

Savings recognized that the question of how to calculate

the cost of replacement capital in a Wivstar-related case

is a “legal issue,” Pet. 10, and that “the measire of dam-

ages is always a question of law to be reviewed de novo,”

Pet. 11." The court of appeals, however, made quite

%

For example, when CalFed in its first appeal did claim that the

trial court had erred in calculating the cost of replacement capital,

CalFed did not advance the theory that the court of appeals affirmed in

Home Savings—that the benefit of the cash the firm obtains by selling

stock is to be measured by the relatively low interest rate on deposits

that the thrift would otherwise have had to obtain. See Pet. C_A. Br. 60-

62; Pet. CLA. Reply Br. 28-30.

The cases CalFed cites (Pet. 11) for the proposition that the

“measure of damages is always a question of law to be reviewed de

nove” are inapposite. The standard of review discussed in those cases

did not address a question like the one here—the comparison between

the value of the benefits a thrift receives from cash raised in a financing

transaction, as opposed to the cost tothe thrift of the promised dividend

stream. Instead, they addressed much more general theories of what

types of damages recovery are permitted, given the particular liability

theory pursued. For example, in Boston Old Colony Ins. Co. v. Tiner

Assoc, Lue., 288 F.3d 222, 230 (th Cir. 2002), the court reviewed de

novo the district court's determination that the governing state law

recognized the cust of replacing tortiously damaged property as the

cost of restoration, without depreciation. The court did not hold that

the cost of replacing tortiously damaged property itself should be

reviewed de novo. See Scully v. US. Wats, Lic., 238 F.3d 497, 509, 512

26)

clear in Home Savings that it Was vot engaging in de

novo review of the pertinent trial court findings. In-

stead, it stated in Home Savings that it would “review

the [trial] court’s methodology for assessing the cost of

replacement capital, including its use of a ‘safe rate’ of

return to account for the inherent benefits of the re-

placement capital, for abuse of discretion.” 399 F.3d at

1347 (emphasis added). The court derived that standard

from its prior decision in SmithAline Diagnostics, Ine.

v. Helena Labs. Corp, 926 F.2d 1161, 1164 (Fed. Cir.

1991), where it held that, while factual findings are ordi-

narily subject to the clearly erroneous standard of re-

view, “certain subsidiary decisions” involved in a trial

court’s actual finding of the precise dollar amount of

damages “are discretionary with the court” and “are, of

course, reviewed under the abuse of discretion stan-

dard.” See Howe Savings, 399. F.3d at 1346-1347. The

court's conclusions in Howe Savings that the trial court

“did not abuse its discretion in setting up its model,” and

that “[t]he court's approach to calculating the benefits of

cash was * * * within the [trial] court’s sound discre-

tion,” ?d. at 1554-1355, are inconsistent with petitioner's

(id Cir, 2001) (comparing “conversion” versus “breach of contract”

theories on the facts of the case, concluding that “given the myriad

factors that might arise in cach case, we doubt that any single universal

damage theory could properly value stock options in all situations,” and

“agreeling| with the District Court's damage calculation because it

properly weighed and balanced the strengths and weaknesses of

competing damage calculation methods"); Deleli Carcier, SpA v.

Rotores Corp, 71 F.3d 1024, 1028-1051 (2d Cir, 1995) (general princi-

ples of “lost profits” calculation and availability of incidental or

consequential damages); Galindo vy. Stoody Co., 743 F.2d 1502, 1516

(9th Cir. 1986) (damages for union's duty of fair representation do not

terminate upon emplovee’s obtaining interim employment and should

include value of lost fringe benefits).

27

claim that the Federal Circuit passed on the damages

issue in Home Savings as a matter of law.

4. Finally, as explained above, the question pre-

sented in this case concerns the proper valuation of the

cash a thrift receives when it issues securities to replace

the capital it lost as a result of a breach of contract. Pe-

titioner cites no case outside the Winstar context in

which a court has decided that issue. Indeed, of the ap-

proximately 120 Winstar-related cases that were origi-

nally filed, petitioner cites only a few in which the thrift

engaged in capital-raising transactions to replace good- -

will and in which the cost of raising capital was of signif-

icant importance. Moreover, because only approxi-

mately 39 Winstar-related cases of any sort are still

pending, the issue now affects a progressively smaller

and steadily dwindling number of cases.

: CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

PAUL D. CLEMENT

Solicitor General

STUART E. SCHIFFER

Acting Assistant Attorney

General

DAVID M. COHEN

JEANNE FE. DAVIDSON

JOHN N. KANE, JR.

Attorneys

JULY 2005

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Supreme Court, U.S.

FILED Sst

AUG 1 6 2005

@ OFFICE OF THE CLERK

No. 04-1557

IN THE

Supreme Court of the United States

CALIFORNIA FEDERAL BANK,

Petitioner,

UNITED STATES,

Respondent.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Federal Circuit

REPLY BRIEF FOR PETITIONER

MARK. A. PERRY

Counsel of Record

PAUL BLANKENSTEIN

GIBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036-5306

(202) 955-8500

Counsel for Petitioner

i

TABLE OF CONTENTS

Page

TABLE OF CONTENTS... i

TABLE OF AUTHORITIES... i

SeCCMENY ee 1

ii

TABLE OF AUTHORITIES

CASES

Bank United v. United States,

80 Fed. Appx. 663 (Fed. Cir. 2003) ........ccsescecsssees

Home Savings of America, F.S.B. v. United States,

399 F.3d 1341 (Fed. Cir. 2005).....cssccsscssecccsssscson

Koon v. United States,

518 US. $111990). =

LaSalle Talman Bank v. United States,

317 F.3d 1363 ed: Cir. 2003) ooo coco cscccsccc cede

Lawrence v. Chater,

$16 US. 163 (1996)... ee eee

Wisniewski v. United States,

353 US. SOREL Fy CE CRTIRINY osc cncesiossrnisseuns

..+-PQSSIM

REPLY BRIEF FOR PETITIONER

Petitioner California Federal Bank (“CalFed”) respect-

fully submits this reply in support of its petition for a writ of

certiorari to review the judgment of the United States Court

of Appeals for the Federal Circuit.

ARGUMENT

In this case, the lower courts accepted the government’s

theory that “the only costs” of raising replacement capital

“are transaction, or flotation costs.” Pet. App. 50a (emphasis

added); see id. at 14a. In Home Savings of America, F.S.B. v.

United States, 399 F.3d 1341 (Fed. Cir. 2005), the Federal

Circuit squarely rejected “the argument made by the gov-

ernment’s expert that capital has no cost other than transac-

tion costs.” Jd. at 1354. In light of the flatly inconsistent po-

sitions on this issue adopted by the Federal Circuit, CalFed

has asked this Court to grant review, vacate the decision be-

low, and remand for further consideration. in light of Home

Savings. The government’s arguments against issuance of a

GVR order are unavailing.

1. The government’s principal argument is that CalFed

waived its nght to invoke Home Savings by not presenting

this argument in the first instance to the court of appeals.

Opp. 11-15. But Home Savings was issued after the decision

in this case (and after the time for a petition for rehearing had

run); the government’s position is thus baseless.

The government maintains that CalFed should have

raised the replacement cost issue in the second appeal in light

of LaSalle Talman Bank v. United States, 317 F.3d 1363

(Fed. Cir. 2003). Opp. 12-13. Although LaSalle Talman did

allow recovery of certain payments in excess of transaction

costs, the court viewed the issue as a factual one, as it had in

this case. See 317 F.3d at 1374-75. LaSalle Talman thus

gave no basis for revisiting the Federal Circuit’s ruling in the

2

first appeal that “[w]e see no clear error in the court’s factual

finding that the flotation costs provided an appropriate meas-

ure of CalFed’s damages ....” Pet. App. 14a (emphasis

added). Indeed, after LaSalle Talman, the Federal Circuit

cited its first decision in this case in affirming, on factual

grounds, a trial court’s refusal to award costs in excess of

transaction costs. Bank United v. United States, 80 Fed.

Appx. 663, 672 (Fe?. Cir. 2003) (“We have previously de-

clined to hold such a finding cleariy erroneous, and we do so

again here”’).

It was not until Home Savings that the Federal Circuit

decided that the appropnate measure of replacement cost

damages is a /egal, not factual, question. Moreover, Home

Savings resolved that question by deciding, as a matter of

law, that the costs of raising replacement capital are not lim-

ited to transaction costs. Both aspects of the Home Savings

decision flatly contradict the Federal Circuit’s decision in this

case. The government’s contention that “[t]he time to ad-

dress the question whether the Federal Circuit’s decisions are

in conflict .. . would have been when [CalFed] was before

that court” (Opp. 15) simply ignores the reality that Home

Savings was decided after CalFed’s time to petition for re-

hearing had expired.

2. The government points out that this Court ordinarily

does not grant plenary review to resolve intra-circuit con-

flicts. Opp. 15. But the Federal Circuit’s decision in this

case conflicts not only with Home Savings, but also with nu-

merous decisions of other courts of appeals (none of which is

addressed by the government). See Pet. 11. If not for the

corrective ruling in Home Savings, plenary review would be

warranted in this case. In light of Home Savings, however, a

GVR order would be a more efficient use of this Court’s re-

sources than a grant of plenary review.

The government does not dispute that this case meets all

of the traditional criteria for issuing a GVR order. See Pet.

3

12-13 (discussing Lawrence v. Chater, 516 U.S. 163 (1996),

which is not addressed in the government’s opposition). Al-

though the government contends that the Court has not pre-

viously GVR’d in these precise circumstances (Opp. 16-18),

the government was unable to locate even a single case in

which the Court has declined a GVR request in these circum- —

stances. This is undoubtedly because it will only rarely occur

that a federal court of appeals will make a 180-degree change

of course during the narrow window of time between the ex-

piration of the rehearing deadline and the time for filing a

petition for a writ of certiorari. For this reason, the govern-

ment’s concern that granting a GVR order in this case

“would invite numerous other litigants to bring similar

claims before the Court to obtain similar relief” (Opp. 19) is

unfounded. The government has not shown that any other

litigants have ever been in the unusual position faced by Cal-

Fed.

3. The government maintains that the Federal Circuit’s

decision in this case was correct and can somehow be recon-

ciled with Home Savings. Opp. 20-26. The government is

wrong.

a. In this case, the government’s expert testified that

“{o}n the day stock is issued, the amount you receive for the

stock is equivalent to its worth and the only costs are transac-

tion, or flotation costs.” Pet. App. 50a. In other words, “the

cost of replacing goodwill was flotation costs because the

value of the cash proceeds of CalFed’s newly-raised capital

equaled the cost of future dividends.” Jd. at 14a. The Fed-

eral Circuit affirmed the trial court’s “factual finding that the

flotation costs provided an appropriate measure of CalFed’s

damages.” Ibid.

In Home Savings, the government “insist[ed] that eco-

nomic principles prove that capital has no cost other than

transaction costs because raising capital represents a zero-

sum exchange.” 399 F.3d at 1353. This argument was based

4

on trial testimony that was substantially identical to that pre-

sented by the government in this case. In sharp contrast to its

decision in this case, the Federal Circuit ruled that the trial

court had “correctly discounted the argument made by the

government’s expert that capital has no cost other than trans-

action costs.” Jd. at 1354. The court went on to hold, as a

matter of law, that “capital is not costless; its cost is the re-

quired rate of return on various terms of financing.” Jbid.

In both this case and Home Savings, a thrift raised capi-

tal in the external markets to replace goodwill that the gov-

ernment, in breach of its contractual commitments, had abro-

gated. In this case, the lower courts held that the damages for

raising replacement capital were limited to transaction costs.

In Home Savings, the lower courts held that the damages for

raising replacement capital were not limited to transaction

costs. The two cases cannot be reconciled.

b. Without denying that the results reached in the two

cases are diametrically opposed, the government contends

that “[bJecause the court of appeals employed a deferential

standard of review both in this case and in Home Savings, the

court’s conclusions in the two cases do not conflict.” Opp.

24. This is mere sophistry.

The standard of review applied in this case was the

“clearly erroneous” standard applicable to factual findings.

The Federal Circuit found “no clear error” in the trial court’s

“finding” that the costs in excess of transaction costs incurred

by CalFed were not recoverable as damages. Pet. App. 14a.

In Home Savings, the Federal Circuit expressly ruled that

the measure of damages is mot reviewed for clear error. 399

F.3d at 1346-47. Rather, the court “review[ed] the court’s

methodology for assessing the cost of replacement capital . . .

for abuse of discretion.” Jd. at 1347. Of course, a trial court

“by definition abuses its discretion when it makes an error of

law.” Koon v. United States, 518 U.S. 81, 100 (1996). After

Home Savings, it would be an abuse of discretion for a court

5

to conclide that capital is costless, such that damages for

raising replacement capital would be limited to transaction

costs. But that is precisely what the courts below concluded

in this case.

The Home Savings court held that the precise theory ad-

vanced by the government and relied on by the court of ap-

peals in this case to deny CalFed an award of damages is le-

gally erroneous. The Federal Circuit further held in Home

Savings the cost of capital “is the required rate of return on

various terms of financing” (399 F.3d at 1354}, which ts

what CalFed sought to recover but the courts below refused

to award. This refusai was based on the now legally discred-

ited notion that the cost of dividends is recovered in the pro-

ceeds of the stock issuance; although the government clings

to this notion (see Opp. 20), it was rejected as a matter of law

in Home Savings.

Apparently recognizing that CalFed would be entitled to

additional relief if the rule of Home Savings were applied to

its circumstances, the government maintains that Home Sav-

ings is “mistaken[]” and contends that CalFed is asking the

Court “to grant relief in this case on the ground that . . . the

decisions favored by [CalFed] were the correct ones.” Opp.

24, 14-15. But a GVR order does not require this Court to

determine whether the Federal Circuit got it right in this case

or in Home Savings—although it is significant that the gov-

ernment did not challenge this aspect of Home Savings in its

petition for rehearing to the Federal Circuit, and thus should

not be heard to contend that the decision is wrongly decided.

The salient point is that the two decisions cannot be recon-

ciled; and the court of appeals should have the opportunity to

resolve that conflict within its decisional law. Wisniewski v.

United States, 353 U.S. 901, 902 (1957) (per curiam). A

GVR order is warranted to allow the Federal Circuit to re-

consider CalFed’s claim for replacement cost damages in

light of the intervening Home Savings decision.

6

CONCLUSION

The Court should grant the petition for a writ of certio-

rari, vacate the Federal Circuit’s judgment, and remand for

further consideration in light of Home Savings of America,

F.S.B. v. United States, 399 F.3d 1341 (Fed. Cir. 2005).

Respectfully submitted.

MARK A. PERRY

Counsel of Record

PAUL BLANKENSTEIN

GIBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036-5306

(202) 955-8500

Counsel for Petitioner

August 16, 2005.

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