[00:00:00] Speaker 03:
United States.

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May it please the court, Alan Horwitz for the plaintiff's appellants.

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This dispute has a long and complex history.

[00:00:56] Speaker 05:
Let's try to cut to the chase here.

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I understand your argument to be that we've got a pot of money here, which is agreed to an amount.

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And the only question is how to allocate the deductions between

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the abandonment issue in the wrap right.

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Correct?

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Also for some of the transactions there were two branching rights so they also have to be allocated for example between the Illinois branching right and the Texas branching right and the wrap right.

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But basically your argument is there's a pot of money here and even if we didn't do a good job in giving the value of one or the other

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we at least ought to get the benefit of the minimum deduction that would exist under those circumstances because everything is either attributable to the wrap right or the branching right.

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Correct?

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Correct.

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Is that undisputed that there's one pot and we all agree that it is attributable to either of those two?

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So you're entitled

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It's just a matter of whether we allocate it and maybe the amount is higher or lower if it's a branch right or a wraparound.

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That was the issue before the trial court.

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The trial court made findings as to what the amount was that was paid for fisclic assistance.

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Now, I think what you're referring to is that in this court, the government has tried to make a new argument that some of that amount should also be allocated to something called goodwill, which they don't really define.

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And there are a lot of problems with that argument.

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It wasn't really made by the government below.

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It's inconsistent with the court's findings because the court found that this amount is to be allocated to the physical assistance.

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If there was the kind of goodwill they're talking about.

[00:02:50] Speaker 05:
I think you're mistaken.

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There's an agreement that it's allocable to the physical assistance, but there was physical assistance that went beyond these two things.

[00:03:00] Speaker 05:
That's your problem.

[00:03:01] Speaker 05:
And this chart that you have on page eight of your blue brief, the citations don't support the chart.

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And you do have testimony from your expert witness that said that some of the physical assistance that he attributed to minimus value to, the forbearance.

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They attributed minimum value to the forbearance.

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And that's, of course, the only way that you can get to this

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two-item pot is to say that the other physical assistance doesn't have any value.

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Or that I've established what the value is and made the deductions that are reflected in this table on page eight.

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Right.

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That's correct.

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The second statement that you made is correct.

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I mean, the amounts of the

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Values of the physical assistance of the other physical assistance of some of these transactions, it's not indisputable.

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You said the forbearance is valueless, so I'm not going to attribute anything to it.

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No one disputed that the values attributed to those.

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No one admitted it, right?

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Excuse me?

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No one admitted that this table is correct.

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have to disagree.

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I think that when you put together all these values... Could you show me where the government admitted that this table is correct?

[00:04:28] Speaker 02:
Well, we've cited it to the pages in the Court of Appeals opinion order.

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I looked at those pages.

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They don't say that.

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Well, let me say this, Judge Dyke.

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Rather than get down in the weeds of that, I believe those things are established.

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But let's take the Missouri-Florida transaction, which is one of the transactions,

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at stake.

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There is no other physical assistance in that transaction.

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And there are no deductions that are made.

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So this is the exact number that comes from the same table in the trial court's opinion.

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So as to that transaction, your objection is not pertinent to that particular transaction.

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So you can't affirm based on that because of that transaction.

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The problem that I see is that we really don't have any findings of facts.

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by the trial court that this table is correct, that the amount listed here is attributable to these two items.

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The trial court found what the purchase price was for the physical assistance.

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Yeah, but the physical assistance, that's the problem.

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Not the two things, but the physical assistance.

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And there were other items of physical assistance aside from the two, right?

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Not in the Missouri-Florida transaction.

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Not in the Missouri-Florida?

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What about the others?

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The others?

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There was other physical assistance, like below-cost financing, and that was valued.

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And it's not disputed, I don't think.

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I don't see anywhere in the government's brief where they're disputing that.

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What they are trying to dispute, as far as the point about the two different rights, is the point that I thought Chief Judge Gross was alluding to, which is this idea of goodwill.

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And that, I think... And are you saying they never raised that before the lower court, the goodwill?

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They made an argument, a different argument.

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I mean, in the trial court, they said there's no traditional goodwill.

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They admitted that.

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They made an argument that there was something out there relating to two lines in one of their expert reports.

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And the expert report basically said, you know, we don't think

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that the branching rights were worth as much as homes as they were, so they must have been paying for something else, and let's call it goodwill.

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That, I would say, was rejected by the court in attaching these amounts to the physical assistance.

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What the government is trying to argue here is that

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You always have some kind of residual goodwill.

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The way you should do this calculation is to just figure out what the values are of the actual assets that we know about and then just attribute all the rest of it to goodwill, even if it turns out to be $200 million or something like that.

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Is the goodwill physical assistance?

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No.

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Goodwill is not physical assistance.

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These are three-corner transactions.

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Home got some things from the

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from the institutions that it was acquiring.

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You know, all the obvious assets and these things that are more goodwill-like.

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Those were things that came from the institutions.

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And then they got some things from FISLIC, which is what they were after.

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That was like the branching rights and the wrap right, which is kind of, you know, a tail, but it was required in order to advance with these.

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Because that was the incentive to take over institutions that had more liabilities than assets, right?

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They were taking over institutions and more liabilities than assets.

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That's what Fislik needed.

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They needed to get rid of these institutions.

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And as a carrot to get these larger banks to take them over, they offered them the right to branch into other states.

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It was not permitted under current law at the time.

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And that's resolved already from the collateralist thoughtful from the Ninth Circuit that this was the price that home pay for the branching rights was the excess of the liabilities over the assets.

[00:08:24] Speaker 05:
But your problem with the Ninth Circuit decision is also that, recall that it said that the branching rights hadn't ripened into a deduction because they hadn't been abandoned.

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And the government, I guess, made that same argument in this case, but it wasn't resolved by the Court of Federal Claims.

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Isn't that correct?

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That's correct.

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There's an argument by the government that the rights were not abandoned in a taxable gear, and that was not reached by the Court of Federal Claims, so that would be open on remand.

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But if the Court of Federal Claims were to say, well, no, there wasn't an abandonment deduction because it hadn't ripened, then your two-item box theory, if I can call it that, wouldn't work.

[00:09:06] Speaker 02:
No, no, it doesn't change the allocation.

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I mean, the allocation is how much of the cost basis, how much was paid.

[00:09:12] Speaker 02:
Yeah, but the point is... We would not get the abandonment deduction.

[00:09:16] Speaker 05:
No, no, no.

[00:09:17] Speaker 05:
No, your problem is this, that your argument, and it seems to me it has some potential merit to,

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is that if the amount of the pot is agreed to, and if it's agreed that the amount of the pot reflects only these two deductions, then however badly we did in presenting expert testimony as to the value of the individual items, we at least ought to get the minimum deduction that would occur if you attributed all of the rights to one thing or the other, right?

[00:09:52] Speaker 05:
No.

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Our main argument is that the trial court made a finding that it could not find a value for the WRAP right and then it said that because of that I wouldn't even have to look at the branching rights.

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You're not going to get anything for the branching rights no matter what.

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And then it went on to look at the branching rights.

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And we said that that part of it was wrong, that a failure to prove the value of the wrap right would not automatically bar us from the branching rights deductions.

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But that's a very subsidiary point.

[00:10:29] Speaker 05:
When we started out in your argument, I asked you whether your argument, or at least one of your arguments, was that it's agreed that a certain amount of money is attributable to these two rights.

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And even if we didn't

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show how much value should be attributed to one or the other, we should at least get the minimum deduction as a result of that.

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That's one of your arguments, right?

[00:10:55] Speaker 02:
That would be a fallback argument, but that is not the primary argument.

[00:10:59] Speaker 05:
I'm trying to deal with that argument.

[00:11:01] Speaker 05:
So if, in fact, you weren't entitled to the abandonment deduction, then that argument wouldn't work, right?

[00:11:11] Speaker 02:
To me, you're conflating two things, which is whether there's a cost basis in these rights, and then whether we get a deduction for it.

[00:11:20] Speaker 05:
But under the two-item box theory, it could be that all the value is attributable to the branching rights, and if the branching rights weren't abandoned, then there couldn't be a deduction for the branching rights.

[00:11:33] Speaker 02:
There couldn't be a deduction, but there would be cost basis in the branching rights.

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This case was about allocating the cost basis.

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And I know it's a little confusing because the assets are so unusual.

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That's why we tried to give the example.

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This kind of allocation issue comes up all the time in a lot of contexts.

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That's why we tried to give the example of someone who buys a house and a lot together, and you have to allocate the purchase price between the two assets or hang air and spat and cap, none of which the government has responded to.

[00:12:01] Speaker 04:
But you can see, though, that it's your burden to establish what value goes to which rights, right?

[00:12:08] Speaker 04:
That's right.

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What the court said was that Mr. Grabowski's methodology wasn't sufficient to do that.

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And is it your position?

[00:12:17] Speaker 02:
I disagree.

[00:12:17] Speaker 02:
I'm sorry.

[00:12:18] Speaker 04:
I mean, you disagree that the court said that, or you disagree that... I disagree that the court said that.

[00:12:24] Speaker 02:
What the court said repeatedly was that plaintiff's fair market value determinations are not reliable.

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The way that Mr. Grabowski, his conclusions on how the cost basis should be allocated, the court's not

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excuse me, did not agree with.

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And the main reason for that court gave was that the court thought that the deposit growth projections that he used in his model were too optimistic.

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But the court did not find that his model was unsound or couldn't be adjusted to produce a different allocation.

[00:13:01] Speaker 04:
Well, from a basic economic perspective, if you use the wrong assumptions, then the end result

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is flawed.

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And that's what the court said.

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The assumptions that were made were based on a totally different time frame, a totally different set of circumstances.

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And so those assumptions were no good.

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So is it your position that the court then has an obligation to readjust the assumptions and do the economic valuation?

[00:13:31] Speaker 02:
Yes, absolutely.

[00:13:33] Speaker 04:
Even if you don't, when it's your burden.

[00:13:36] Speaker 02:
Excuse me?

[00:13:36] Speaker 04:
Even if you didn't.

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adjust the assumptions and it's your burden.

[00:13:40] Speaker 04:
I mean, what I'm trying to understand is it's one thing to come in and say, these are our assumptions and this is what we really think the answer should be.

[00:13:48] Speaker 04:
But you didn't say, but even if you think that that assumption is too aggressive, then we have an alternative valuation that we could offer.

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You didn't do that.

[00:13:59] Speaker 02:
Of course we did that.

[00:14:01] Speaker 02:
Mr. Grabowski

[00:14:03] Speaker 02:
showed these sensitivity analyses, which showed how the results were different if you make different assumptions.

[00:14:08] Speaker 02:
But only relating to a two-year time frame.

[00:14:10] Speaker 02:
Right.

[00:14:12] Speaker 02:
How could he guess every single thing that the court might possibly choose to change?

[00:14:16] Speaker 02:
I mean, these economic models, which is considered the best way to value these kind of intangible assets, they have a lot of inputs.

[00:14:23] Speaker 02:
There's a lot of assumptions.

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No one's going to agree exactly on how every one should be done.

[00:14:27] Speaker 02:
But there was a ton of evidence in the record.

[00:14:30] Speaker 02:
Even if you disagreed, even if you thought they were too optimistic,

[00:14:33] Speaker 02:
There were plenty of other numbers in the record.

[00:14:35] Speaker 04:
You already knew at this point that at least one district court thought that those assumptions were too optimistic.

[00:14:42] Speaker 02:
Well, the Western District of Washington, I mean, facts were different there as a different model, but yes.

[00:14:48] Speaker 04:
You said that his analyses and model changed from one court to the next, but I don't really see you pointing to what those changes were.

[00:14:58] Speaker 02:
Well, he did some things differently, but, you know, I would say the general approach was similar.

[00:15:05] Speaker 04:
Right.

[00:15:05] Speaker 04:
I mean, that's, that's what your brave said.

[00:15:07] Speaker 04:
He did some things differently, but you didn't say what?

[00:15:09] Speaker 02:
Right.

[00:15:10] Speaker 04:
So they have to be material differences, right?

[00:15:12] Speaker 02:
No, they're not material differences.

[00:15:14] Speaker 02:
And the question is a burden of proof here.

[00:15:16] Speaker 02:
And there's no collateralist bubble effect, if that's what you're suggesting.

[00:15:20] Speaker 02:
I'm not suggesting that.

[00:15:21] Speaker 04:
I'm saying you already knew that at least one finder effect, but that your methodology was flawed.

[00:15:27] Speaker 04:
So why not come in to the second finder of fact and say, even if you, like that other district court judge, would not accept this methodology, there are alternative ways to approach the calculation.

[00:15:40] Speaker 02:
I have to strongly disagree with the premise of that question, Judge O'Malley.

[00:15:44] Speaker 02:
There was not a problem with the methodology.

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There was a problem with a particular input, a particular assumption that Mr. Grabowski made about what the deposit growth projections would be.

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there in Western Washington and the court here, and by the way, we didn't have the Western Washington opinion when this report was submitted here.

[00:16:06] Speaker 02:
They thought the deposit growth projections were too optimistic, although in fact the deposit growth projections were quite consistent with the other evidence in the record, from the SEC letter, from Holmes' own projections at the time, from what other things were going on in the industry.

[00:16:24] Speaker 02:
I think the court didn't really understand that the growth

[00:16:27] Speaker 02:
that the court observed here was attributable to inflation and that in fact deposits, even under Mr. Grabowski's view, went down during this period in inflation adjusted terms.

[00:16:39] Speaker 02:
But in any case, that's not what the appeal is about, about whether those projections are right or not.

[00:16:46] Speaker 02:
The trial court should have approached this issue the way this court's predecessor did in the Meredith Broadcasting case, the way the Capital Blue Cross court did in a case that involved an economic model.

[00:16:57] Speaker 02:
You don't have to accept the expert's opinion.

[00:16:59] Speaker 02:
These cases are different.

[00:17:00] Speaker 05:
I mean, you have the Court of Federal Claims finding a fundamental problem with your expert's testimony.

[00:17:10] Speaker 05:
And you're saying that the Court of Federal Claims had an obligation to cobble together an alternative theory for you.

[00:17:17] Speaker 05:
I don't see the cases that support that.

[00:17:20] Speaker 02:
Again, I'm sorry.

[00:17:21] Speaker 02:
I have to disagree with the premise of that question.

[00:17:23] Speaker 02:
The Court of Federal Claims found no fundamental problem with what was done here.

[00:17:27] Speaker 02:
with the modeling, where federal claims said that the input you put in here for deposit growth is too high, in my opinion, because I think the market conditions call for a lower deposit growth projection.

[00:17:42] Speaker 02:
So what you do is you substitute a different input, a lower deposit growth projection, which he even showed how that could be done in his testimony.

[00:17:51] Speaker 02:
And there is nothing in the court of federal claims opinion that suggested that the court ever considered doing these things.

[00:17:56] Speaker 05:
Did he present an alternative approach?

[00:17:58] Speaker 02:
He presented all kinds of ranges.

[00:18:00] Speaker 05:
No, no, no, no.

[00:18:02] Speaker 05:
Did he say, okay, if my numbers are wrong here, as the government says they are, then this is the adjustment you should make and this is the number you come out with?

[00:18:12] Speaker 02:
He said if my numbers... Did he say that?

[00:18:15] Speaker 02:
That this is the number you should come out with?

[00:18:17] Speaker 02:
How could he possibly say that?

[00:18:19] Speaker 05:
Did he present a specific alternative approach?

[00:18:22] Speaker 02:
Alternative approach?

[00:18:23] Speaker 02:
No.

[00:18:24] Speaker 02:
Alternative numbers.

[00:18:25] Speaker 02:
He has all kinds of explanations of how you can put it in alternative numbers.

[00:18:30] Speaker 02:
That's the only way to do it.

[00:18:31] Speaker 02:
How could he possibly guess what exact number the Court of Federal Claims would think is a better deposit growth projection?

[00:18:40] Speaker 02:
33.7% of what he used, it's impossible for him to do that.

[00:18:46] Speaker 02:
It's very easy for him to do that if the Court of Federal Claims had done what it should have done and made findings.

[00:18:51] Speaker 02:
I find that the positive growth projections are too optimistic.

[00:18:55] Speaker 02:
I find that they should be 40% lower.

[00:18:57] Speaker 02:
That's almost exactly what the Court did in the Meredith case, which is controlling precedent here.

[00:19:03] Speaker 02:
So I'm half way done.

[00:19:05] Speaker 03:
Will we store some of this by the way on the other side?

[00:19:07] Speaker 03:
Thank you.

[00:19:17] Speaker 01:
Morning.

[00:19:18] Speaker 01:
May I praise the court, Andy Weiner, for the United States?

[00:19:22] Speaker 05:
Suppose you had a situation where there's a great amount of cost and it should be allocated to one deduction or the other and the taxpayer does a terrible job in presenting the allocation between the two.

[00:19:42] Speaker 05:
Shouldn't the court, under those circumstances, at least say, well, since you

[00:19:48] Speaker 05:
done a bad job in describing the allocation will assume the least favorable allocation to the taxpayer and will allow a deduction on that basis, if that were the case.

[00:20:01] Speaker 05:
Shouldn't that happen?

[00:20:02] Speaker 01:
Your Honor, respectfully, I would say no.

[00:20:05] Speaker 01:
But that comes back to the fundamental burden it has to the fact that the taxpayer has to come with sufficient evidence for a reasonable allocation.

[00:20:15] Speaker 01:
Why should the answer to my hypothetical be no?

[00:20:18] Speaker 05:
Why should the answer to my hypothetical be no?

[00:20:21] Speaker 01:
The answer because the well if you look to be like for example this case the allocation has to do with two different types of deductions that happen both they have Hugely different impact as to the amount of the deductions and for what you write So I'm saying why not I guess the wrap deduction would be less valuable than the abandonment deduction

[00:20:43] Speaker 05:
So if they can't allocate between the two, why shouldn't the court say, OK, there's no basis for an allocation here, but I'm going to give the taxpayer the least favorable outcome here, which is to attribute everything to the RAP deduction and allow the deduction on that basis.

[00:21:05] Speaker 01:
Well, to address your example first, and then I'll back up to the concept.

[00:21:11] Speaker 01:
You had pointed out, I believe, in my colleague's opening argument that the answer could be he gets nothing, that home should get nothing, or planet should get nothing, because as you said, not only do you have to prove that there's some allocation of cost basis to the branching right, but

[00:21:29] Speaker 01:
You also have to say that the branching rate has been abandoned.

[00:21:32] Speaker 05:
I understand that.

[00:21:34] Speaker 01:
I'm putting that aside in my hypothetical.

[00:21:37] Speaker 05:
I'm saying it's admitted that there are two deductions available here and the only question is how much goes to one and how much goes to the other.

[00:21:45] Speaker 05:
Under those circumstances, if the taxpayer doesn't prove the right allocation, shouldn't the court say,

[00:21:52] Speaker 05:
You didn't prove the right allocation, so we're going to put it in the least favorable box.

[00:21:57] Speaker 05:
And we'll attribute it all to the ramp deduction.

[00:22:00] Speaker 05:
And you get the deduction on that basis.

[00:22:03] Speaker 05:
On that hypothetical, isn't that what the court should do?

[00:22:06] Speaker 01:
Again, I respectfully say no.

[00:22:10] Speaker 01:
And I believe that the Ninth Circuit addressed this.

[00:22:12] Speaker 01:
They said that, look, this is not about what

[00:22:17] Speaker 01:
equitably should be done.

[00:22:19] Speaker 01:
The standard is very well established and has been established for a century, that the idea is you have to prove that you're entitled to a refund and you have to prove in what amount.

[00:22:28] Speaker 01:
You don't have to prove the valuation to the dollar.

[00:22:32] Speaker 01:
You do have to come up with reasonable evidence for which a court could make a reasonable allocation between two items, whether it's two items or three.

[00:22:40] Speaker 04:
But do you agree there was value to these rights, correct?

[00:22:44] Speaker 04:
There was some cost basis value.

[00:22:46] Speaker 01:
There was something.

[00:22:47] Speaker 04:
Yes.

[00:22:47] Speaker 04:
Right.

[00:22:47] Speaker 04:
So there's something.

[00:22:49] Speaker 04:
So normally what you would see or what you would expect to see is the taxpayer comes in and says, this is the way we think they should be valued.

[00:22:59] Speaker 04:
And the government would say, that's not a reasonable valuation because we think other factors need to be taken into consideration.

[00:23:05] Speaker 04:
And we would propose an alternative valuation.

[00:23:09] Speaker 04:
Instead, you've got a situation where your argument is the government can just stand quietly.

[00:23:15] Speaker 04:
and never offer anything and say, haha, what you got wasn't quite right, so therefore you get zero.

[00:23:25] Speaker 01:
Your honor, this is an example in which the government, as again my colleague said during the opening argument, these are very unusual intangible property.

[00:23:41] Speaker 01:
They are a property that are specific to the

[00:23:45] Speaker 01:
to homes business and business model, they obviously have a much better insight as to what that value is.

[00:23:53] Speaker 01:
What they tried to do in this case was to hit an absolute home run and to say notwithstanding the realities that interest rates are at 16%, that the fact that the industry was collectively in a massive crisis and that Congress was passing legislation and agencies were conducting massive triage through these

[00:24:12] Speaker 04:
And the government was begging entities like this to come in and help solve the problem.

[00:24:19] Speaker 01:
Right.

[00:24:22] Speaker 01:
But the reality of it is, is that notwithstanding the crisis that the industry was in, they decided they were going to put on an expert evaluation that assumed the rosiest of rosy projections, projections that exceeded, well exceeded

[00:24:40] Speaker 01:
even what they at home had said to the SEC, which was in fact not an actual, that was not evaluation.

[00:24:46] Speaker 01:
That was just trying to justify how they were going to allocate goodwill.

[00:24:49] Speaker 01:
But even those projections were 40% less than what their expert came in and did four years later.

[00:24:56] Speaker 01:
We now know what the benefit of hindsight, looking at what they actually did in these other states, they had over, they had, Grabowski had projected

[00:25:05] Speaker 01:
$5 billion more deposits than what they actually received.

[00:25:09] Speaker 01:
It was fanciful.

[00:25:11] Speaker 04:
Why couldn't the calculation have been done based on what they actually received?

[00:25:16] Speaker 01:
Well, to that point, because they came in and they said, look, we're going to assume that interest rates are going to stay sky high and yet we're going to assume that home is going to flourish in these various other states and that they're going to capture a lot of market share, that they're going to

[00:25:34] Speaker 01:
basically reproduce what they did under ideal situations and circumstances.

[00:25:39] Speaker 04:
I agree with the fact that the ideal circumstances were, as I said, it was the garbage in input.

[00:25:48] Speaker 04:
If your assumptions are wrong, then your ultimate result is usually wrong.

[00:25:53] Speaker 04:
But why couldn't there have been other assumptions, even assumptions based on the actual facts, as you just pointed out?

[00:26:00] Speaker 01:
Because the valuation

[00:26:04] Speaker 01:
Because plaintiff's valuation kind of put the court in a... They didn't present an alternative scenario, right?

[00:26:11] Speaker 01:
Right.

[00:26:11] Speaker 01:
They put the court in a box.

[00:26:12] Speaker 01:
It would be one thing to say, look, if we assume the Treasury that the interest rates are going to stay sky high, this is what our evaluation is.

[00:26:22] Speaker 01:
If it goes higher, this is what our evaluation is.

[00:26:24] Speaker 01:
If it goes lower, this would be our evaluation.

[00:26:26] Speaker 01:
That would be at least a step in the right direction.

[00:26:29] Speaker 03:
What they did is they said- Your argument acts like it's sort of this ring of being punitive.

[00:26:37] Speaker 03:
I mean, you said here, you gave us some details.

[00:26:40] Speaker 03:
The 16 was a bad number because.

[00:26:42] Speaker 03:
That begs the question, and if you had a better number, why can't you just plug in different numbers?

[00:26:49] Speaker 01:
Because, Your Honor, I understand that plaintiffs here are trying to say, why don't you just plug in different numbers?

[00:26:57] Speaker 01:
saying that the assumptions of the model that the model operates on are in fact incorrect, then just plugging in different numbers is not actually doing anything to improve the accuracy of that model.

[00:27:15] Speaker 04:
Well, if you change the assumptions, I mean, this is the problem.

[00:27:18] Speaker 04:
You're saying that the plaintiff had an obligation to sort of, or the taxpayer had an obligation to argue against itself.

[00:27:25] Speaker 04:
to say, well, this is what we really think we'd be entitled to, but if you don't like that, we'll try this one.

[00:27:30] Speaker 04:
And if you don't like that, we'll try this one.

[00:27:33] Speaker 04:
I mean, that puts the taxpayer in a very difficult posture, does it not?

[00:27:40] Speaker 01:
Respectfully, no.

[00:27:41] Speaker 01:
It requires that they come in with evaluation that bears reasonable resemblance to accuracy and to the realities that were on the ground.

[00:27:52] Speaker 01:
If you are trying to come up with a number,

[00:27:54] Speaker 01:
that is as high as possible, and so therefore you make all these unreasonable assumptions, then your model is not going to withstand scrutiny.

[00:28:02] Speaker 04:
But why couldn't the government have had some obligation to say the more reasonable assumptions are X, Y, or Z?

[00:28:10] Speaker 01:
Because, Your Honor, well, this does get back to the fundamental point that taxpayers come in with the burden of being able to prove a reasonable valuation.

[00:28:22] Speaker 01:
And the government can't be

[00:28:25] Speaker 01:
put on that burden to come in with a competing valuation on all cases, because it doesn't know what the value of these things are.

[00:28:31] Speaker 01:
And those values can be remarkably low.

[00:28:33] Speaker 04:
Well, the government put these packages together and begged people to take them, right?

[00:28:38] Speaker 04:
Correct.

[00:28:39] Speaker 04:
So wouldn't the government have some sense of how it put the package together in order to make it sweet enough for people to be willing to take them?

[00:28:50] Speaker 01:
Well, I think the reality is

[00:28:54] Speaker 01:
is that HOME was in a situation that they were looking, they were staring into the abyss as well, as was everybody in that industry at that time.

[00:29:04] Speaker 01:
And HOME decided that they were going to make a bet because they were playing with house money.

[00:29:07] Speaker 05:
FISLA didn't make the kind of analysis that we're talking about now here, right?

[00:29:12] Speaker 05:
I'm sorry?

[00:29:13] Speaker 05:
FISLA didn't make this kind of analysis when they gave the regulatory assistance?

[00:29:18] Speaker 05:
Well, certainly they announced the regulatory assistance with the idea that they had to come up... They didn't try to value the abandonment right or the rap right.

[00:29:29] Speaker 01:
Right.

[00:29:29] Speaker 01:
That wasn't... Yeah.

[00:29:31] Speaker 01:
No.

[00:29:32] Speaker 01:
Excuse me, Your Honor.

[00:29:33] Speaker 01:
That was obviously not what Physic was doing.

[00:29:35] Speaker 01:
Physic was trying to figure out, well, what's an inducement for these people for healthy thrifts to come in and acquire thrifts that are insolvent?

[00:29:45] Speaker 01:
And the other thing was, what are the hurdles?

[00:29:48] Speaker 01:
The wrap right, for example, addresses our hurdle.

[00:29:51] Speaker 01:
The healthy thrifts couldn't take on the insolvent ones because that would, for almost across the board, that would have meant that through the merger that they would have failed meeting their capital requirements.

[00:30:04] Speaker 01:
So they would have been technically under physics domain if that had happened.

[00:30:10] Speaker 01:
So you have this wrap right where you get to basically count the portion at which the acquired thrift is insolvent

[00:30:17] Speaker 01:
towards the capital requirements so they don't blow their capital requirements by engaging in these mergers.

[00:30:22] Speaker 01:
So that's really what FISLIC was interested in doing was to facilitate this triage in the industry.

[00:30:31] Speaker 05:
Okay, could I bring you back to this table on page 8 and let's assume for the moment that

[00:30:39] Speaker 05:
under my hypothetical that if you only had two items and all the costs were attributable to the two items, that the taxpayer would get at least the minimum amount that would be yielded by putting the deduction into one box or the other.

[00:30:53] Speaker 05:
And let's put aside the idea that the abandonment deduction wasn't available at all, which would destroy my hypothetical.

[00:31:01] Speaker 05:
But let's assume I have to.

[00:31:04] Speaker 05:
Do you agree that the numbers in this table on page 8 are correct?

[00:31:09] Speaker 05:
Or do you disagree with that?

[00:31:12] Speaker 01:
To be honest, Your Honor, I would have to go back and look.

[00:31:17] Speaker 01:
That was not our focus.

[00:31:19] Speaker 01:
We agree with your basic approach that, look, this isn't just a binary allocation.

[00:31:23] Speaker 01:
We, of course, focused on this idea that they were acquiring businesses and they could have had a significant residual.

[00:31:31] Speaker 01:
And so therefore, they would only be entitled to

[00:31:34] Speaker 01:
the fair market value of each right, not an allocation of a pot of money as between two.

[00:31:41] Speaker 01:
But you're right, the additional assistance would reduce that pot of money that they would then allocate to the two.

[00:31:51] Speaker 01:
But there's an important point here.

[00:31:54] Speaker 01:
The important point is this, is that they're saying, look, we've got $200 million.

[00:31:59] Speaker 01:
in which these risks were insolvent.

[00:32:01] Speaker 01:
And we say that that should go to either the branching rights or the RAP rights.

[00:32:06] Speaker 01:
If they are saying that there can be no residual, which is what the government had argued pull out, then that means if the fair market value of the branching rights was $100 and the fair market value of the RAP rights was $200.

[00:32:21] Speaker 01:
That's only $300.

[00:32:22] Speaker 01:
That's not close to $200 million.

[00:32:25] Speaker 01:
What they want to do is they want to basically just

[00:32:30] Speaker 01:
gross it up.

[00:32:30] Speaker 01:
They want to say, well, if it's 100, 200.

[00:32:32] Speaker 05:
They want to allocate all the value to the two things that are deductible.

[00:32:36] Speaker 05:
And you stipulated to the value of the physical assistance, as I understand it.

[00:32:41] Speaker 05:
But that's not necessarily a stipulation that the physical assistance was limited to these two items.

[00:32:46] Speaker 05:
There were other items.

[00:32:47] Speaker 05:
And the question is, if value is attributable to those other items, which is in dispute,

[00:32:55] Speaker 05:
then we don't have a situation where we have a number and we know it's attributable to these two things.

[00:33:04] Speaker 01:
No, Your Honor.

[00:33:05] Speaker 01:
We did not stipulate to the value of the physical assistance.

[00:33:08] Speaker 01:
We said that the value of the physical assistance is basically the purchase price, which is the liabilities assumed, minus the assets that they assumed.

[00:33:20] Speaker 01:
And that delta

[00:33:22] Speaker 01:
would be the physical assistance.

[00:33:23] Speaker 01:
But we didn't actually stipulate the hard numbers.

[00:33:26] Speaker 05:
Was there a dispute as to the liabilities and assets and what that yielded?

[00:33:35] Speaker 01:
No dispute as to the liabilities.

[00:33:37] Speaker 01:
The assets, we say, would include intangible goodwill or whatever.

[00:33:44] Speaker 04:
How much goodwill, though, did these entities that were effectively insolvent have?

[00:33:50] Speaker 01:
Well, I mean, certainly you have, again, you have, there's no dispute that they were insolvent.

[00:33:55] Speaker 01:
There is, however, the fact that they have thousands, if not tens of thousands of customers.

[00:34:01] Speaker 01:
They've got lots of deposits.

[00:34:02] Speaker 01:
They've got reputations within the state.

[00:34:05] Speaker 04:
But did the government proffer a number that should be attached to that goodwill?

[00:34:09] Speaker 01:
No.

[00:34:09] Speaker 01:
Well, I mean, that's the unique quality of goodwill and going concern value is that it's the residual.

[00:34:16] Speaker 01:
It's not an independent valuation from the business.

[00:34:19] Speaker 04:
It comes along with the business and therefore it is what you cannot... It's the purchase price that you can't ascribe to other... Do you agree that in the Missouri-Florida transaction that the only physical benefit other than perhaps this residual goodwill were the wrap rights and the branching rights?

[00:34:41] Speaker 01:
Honestly, Your Honor, I'd have to go back and check the record because

[00:34:44] Speaker 01:
There was, again, there was some guaranteed support.

[00:34:49] Speaker 01:
There was some below, as my colleague had said, there was some below market financing that also added as part of the assistance package.

[00:34:57] Speaker 01:
And I'm not entirely positive off the top of my head.

[00:35:02] Speaker 01:
I'd have to go back and check to see whether there was anything.

[00:35:05] Speaker 01:
But again, here the court said, even assuming all of that stuff, I'm sorry, my time is over.

[00:35:14] Speaker 01:
Even assuming all that stuff, the court said, look, we're going to take all your assumptions with respect to the idea that you've got this pot that needs to be allocated between two things.

[00:35:25] Speaker 01:
But the thing is that you haven't met your burden as to establish even a reasonable, you haven't come up with enough evidence to support any reliable evaluation with respect to those two things.

[00:35:38] Speaker 01:
And that has a huge consequence as to what benefit you have.

[00:35:41] Speaker 01:
It could be zero, again, if they did not, as they found in the Ninth Circuit.

[00:35:46] Speaker 01:
If the branching rights weren't abandoned, they would get nothing for that, regardless of the value.

[00:35:50] Speaker 01:
So if you allocated all the money in the branching rights.

[00:35:53] Speaker 04:
OK, just two quick questions.

[00:35:54] Speaker 04:
Do you agree with your friend on the other side that this issue of goodwill was not pressed before the lower court?

[00:36:01] Speaker 01:
No, I disagree with that.

[00:36:02] Speaker 04:
That it's a new issue here?

[00:36:03] Speaker 01:
I disagree with that.

[00:36:04] Speaker 01:
And in fact, in their reply brief,

[00:36:07] Speaker 01:
do a reasonable job.

[00:36:09] Speaker 01:
They missed one additional place in which we'd argued it.

[00:36:12] Speaker 01:
But they do a reasonable job of laying out exactly, in our pretrial brief with respect to their burden of proof, we had said, look, there is a goodwill residual here that you're not factoring into your analysis.

[00:36:24] Speaker 05:
I want to be clear about this goodwill.

[00:36:27] Speaker 05:
If I understand correctly, the goodwill is not physical assistance, but you say it bears on the value of the assets.

[00:36:35] Speaker 05:
Yes.

[00:36:36] Speaker 05:
in order to determine the cost that we're dealing with here, you have to take into account goodwill and valuing the assets, and that they have not done that, right?

[00:36:46] Speaker 01:
Yeah, so there is a nomenclature confusion here.

[00:36:50] Speaker 01:
There is supervisory goodwill, which is that component that the wraparight says that you're allowed to attribute that to your regulatory capital requirements.

[00:37:02] Speaker 01:
And then there's this idea of part of their purchase of these thrifts

[00:37:06] Speaker 01:
was this residual goodwill that they had in their communities.

[00:37:11] Speaker 01:
Which is an asset.

[00:37:12] Speaker 01:
Which is an asset.

[00:37:14] Speaker 01:
And anytime you acquire a business, you're not just acquiring a bunch of property, you're acquiring... But at that point in time, everybody was running away from these savings.

[00:37:23] Speaker 04:
True.

[00:37:24] Speaker 04:
The notion that there's much goodwill is kind of hard for me to stomach.

[00:37:27] Speaker 01:
True.

[00:37:29] Speaker 01:
Again, this is a bit of a sideshow based on how the court addressed it, but the idea being that, look, it's a component

[00:37:36] Speaker 01:
There are other components.

[00:37:38] Speaker 01:
The idea that this is just a binary allocation is, I think, an inaccurate representation as to what this trial was really about.

[00:37:47] Speaker 01:
But in addition to that, Desmet management does say that, look, a company does not have to be profitable.

[00:37:53] Speaker 01:
A business does not have to be profitable to have goodwill.

[00:37:55] Speaker 01:
In fact, lots of them don't.

[00:37:57] Speaker 01:
The idea is that you're purchasing an expectation.

[00:38:00] Speaker 01:
I mean, startups, you could acquire

[00:38:02] Speaker 04:
You're saying we should have really looked at the circumstances on the ground and what I'm saying is you're not looking at the circumstances on the ground.

[00:38:11] Speaker 04:
It's one thing to buy a startup, it's quite another to buy a failing company in a failing industry that everyone was running away from.

[00:38:19] Speaker 01:
Correct.

[00:38:24] Speaker 01:
You know, it's possible that then if, you know, your expectation then would be that there would be a relatively small amount that would be allocated to goodwill.

[00:38:32] Speaker 01:
But my point is only this.

[00:38:34] Speaker 01:
My point is, is that it does mean that you still have to take it into account and their assumption, their argument that this, we should get something for the equities.

[00:38:45] Speaker 01:
We've identified a number that can be attributed to the cost basis of two things.

[00:38:49] Speaker 01:
So we should get something.

[00:38:51] Speaker 01:
Our response to that is, look, it's not just two things.

[00:38:56] Speaker 04:
Let me just, the last thing, and this is the one point that I, the second point I wanted to get to, which is the Bowery transaction.

[00:39:04] Speaker 04:
Now you've got the 1985 where you agree that there's a set cost basis, right?

[00:39:09] Speaker 01:
Yes.

[00:39:10] Speaker 04:
And that you argue that the 1988 transaction meant that it was an entirely new transaction.

[00:39:19] Speaker 04:
And you cite cases that are, I think, materially different, because there you're talking about a totally different asset.

[00:39:26] Speaker 04:
And I look at this bucket of incentives from Fislik in 85, and all they do is move around a little in 88.

[00:39:36] Speaker 04:
In other words, some of the incentives go away, but then some of them get sweeter.

[00:39:43] Speaker 04:
I have a very hard time saying that those two transactions were sufficiently materially different that the 1985 package and its cost basis isn't reflective of the 1988 cost basis.

[00:40:00] Speaker 01:
So I think the proper way to analyze this, Your Honor, is to say, look, there is absolutely no question that there was an exchange here because the fact of the matter is it's not just the

[00:40:13] Speaker 01:
amortization period of the one wrap right compared to the other wrap right that changed, which in and of itself would probably be sufficient.

[00:40:20] Speaker 01:
But the entire methodology of how you determine what the goodwill component that is subject to the wrap right is completely different because the situations on the ground have changed.

[00:40:29] Speaker 01:
Holm decided, or Amundsen really, Holm's parent, wanted to change, wanted to exchange the wrap rights because they knew that under the old methodology they would probably get nothing.

[00:40:42] Speaker 01:
So they negotiated a different methodology so that they would be able to book some goodwill, which ended up being $183 million, as opposed to like $600 million.

[00:40:52] Speaker 04:
These weren't materially different assets like they were in the Supreme Court case, upon which you belong.

[00:40:58] Speaker 01:
Well, no.

[00:40:58] Speaker 01:
Potentiary savings said, look, even if you had exchanged shares in a company that had reincorporated in a different state

[00:41:10] Speaker 01:
And you would, so you would change your old shares in the old state for the new shares in the new state.

[00:41:15] Speaker 01:
That's an exchange.

[00:41:18] Speaker 01:
Then the question becomes whether it's a like kind exchange.

[00:41:21] Speaker 01:
And then you have to look to, well, is there, is there economic situation equivalent both before and after the exchange?

[00:41:27] Speaker 04:
And did the court do an analysis on that like kind?

[00:41:30] Speaker 04:
I mean, the court said it's not a like kind, but just simply because the assets were different.

[00:41:35] Speaker 04:
Rather than saying, let's look at the package and does the package

[00:41:40] Speaker 04:
essentially put them in the same place, but just with different types of incentives?

[00:41:46] Speaker 01:
Well, I think that the court, again, it was a divergence.

[00:41:53] Speaker 01:
It is, again, I think the last paragraph of the opinion.

[00:41:57] Speaker 01:
But I think the court did enough to say that,

[00:42:00] Speaker 01:
I know they lay out the standard of, or the court lays out the standard of like-kind exchange, says that it has to be, you know, there has to be some material difference in kind or in nature or in nature, kind is not the right word, but they lays out the standard and says, look, in my determination that, and I think this is entirely correct, not just because of the amortization period, but because they completely changed, remember, the wraparight from 1985,

[00:42:30] Speaker 01:
was about reversing a mark-to-market purchase accounting adjustment.

[00:42:35] Speaker 01:
And the wrap-write in 1988 is just looking at the asset, the liabilities acquired over the identifiable assets and booking that difference as goodwill.

[00:42:45] Speaker 01:
That's a completely different methodology by which you define goodwill, which is the value of that right.

[00:42:50] Speaker 01:
And so there is no reasonable way, I think, that you could get to the fact that this is of late kind.

[00:42:56] Speaker 01:
in being that their economic situation was equivalent both before and after.

[00:43:02] Speaker 01:
Unless there are any other questions, we would ask the court to affirm.

[00:43:06] Speaker 02:
Thank you.

[00:43:15] Speaker 02:
On the residual goodwill,

[00:43:17] Speaker 02:
Let me just say, I think we should at this point rely on the reply brief, which addresses this in detail.

[00:43:22] Speaker 02:
And as well, I would ask the court, this was briefed at great length in the special burden of proof briefing in the trial court where we showed that the law does not support any idea of residual goodwill here because A, you have to have some extrinsic evidence that there actually is goodwill.

[00:43:38] Speaker 02:
And as Judge O'Malley pointed out, and as the record here shows, there wasn't any such thing.

[00:43:43] Speaker 02:
And second, you can't have this idea of a residual

[00:43:46] Speaker 02:
unless the other assets that are involved can be valued pretty accurately.

[00:43:51] Speaker 02:
Did our witness testify that there was no residual goodwill?

[00:43:55] Speaker 02:
Did our witness testify?

[00:43:56] Speaker 02:
Yes, our witness went through at great length all the different things that could be goodwill here.

[00:44:01] Speaker 02:
He valued some of them, like the core deposit intangible and what he called assemblage and the fact that there was already a workforce.

[00:44:08] Speaker 02:
Those are things that are called goodwill.

[00:44:09] Speaker 02:
And then he said things like going concern value.

[00:44:12] Speaker 02:
They don't exist here because, you know,

[00:44:15] Speaker 02:
the southern federal trademark wasn't worth anything.

[00:44:17] Speaker 02:
They came in and they ripped down those signs and nobody was going because of these old failed savings and loans.

[00:44:22] Speaker 02:
They were going, they put up home signs.

[00:44:25] Speaker 02:
So this is addressed in detail in the record.

[00:44:27] Speaker 02:
And anyway, the court's findings I think are to the contrary.

[00:44:32] Speaker 02:
But what I really want to talk about is this idea that our witness, we tried to do a home run with these valuations.

[00:44:40] Speaker 02:
It's completely not true.

[00:44:44] Speaker 02:
There's no dispute that home paid these hundreds of millions of dollars for these assets.

[00:44:48] Speaker 02:
That gives them a cost basis.

[00:44:50] Speaker 02:
I mean, the fair market valuation that was done here only makes marginal difference in what the deductions are going to be.

[00:44:56] Speaker 02:
It really doesn't make the sensitivity analysis show this.

[00:44:58] Speaker 02:
It doesn't really make that much difference whether the branching rates valuations are pushed up or not.

[00:45:05] Speaker 02:
It does make some difference at the margin, but there was no effort to do that.

[00:45:08] Speaker 02:
And you can see that

[00:45:10] Speaker 02:
I think in two areas.

[00:45:12] Speaker 02:
One is the government's expert testified about what he thought were reasonable ranges for these inputs, the deposit growth projections as well.

[00:45:20] Speaker 02:
And for the most part, Mr. Grabowski's estimates came right within the range of the government experts.

[00:45:28] Speaker 02:
They were in line, and they were in line with the things that were thought contemporaneously in the SEC letter.

[00:45:33] Speaker 02:
The second thing I'd point to is that the court also found that Mr. Grabowski had overvalued the RAP rate.

[00:45:38] Speaker 02:
Well, that actually redounded to our detriment over valuing the wraparight.

[00:45:43] Speaker 02:
I mean, we had the cost basis.

[00:45:46] Speaker 02:
The cost basis is what was actually paid.

[00:45:48] Speaker 02:
There was no dispute about that.

[00:45:49] Speaker 02:
And we just came in with this economic model and tried to give the court the best assistance that we could in coming up with an allocation.

[00:45:58] Speaker 02:
And in a way, it's an example of this idea that no good deed goes unpunished, because you don't need an economic model to actually do valuing or to do an allocation.

[00:46:08] Speaker 02:
We were just looking at relative values here.

[00:46:10] Speaker 02:
I mean, the court could have allocated just by looking, say, between the states, just by looking at the... You lost this argument in the Ninth Circuit, right?

[00:46:18] Speaker 05:
You lost this argument in the Ninth Circuit.

[00:46:22] Speaker 05:
Which argument?

[00:46:27] Speaker 05:
You lost the argument that you're just making in the Ninth Circuit.

[00:46:32] Speaker 05:
That we were trying to make a home run?

[00:46:33] Speaker 05:
I don't understand.

[00:46:34] Speaker 05:
Your argument that the Court of Federal Claims here and the District Court there should have come up with an alternative valuation.

[00:46:46] Speaker 02:
Well, in the Ninth Circuit, the Court found that there were fundamental flaws in the model.

[00:46:50] Speaker 02:
It recognized that certain, that the model could be cured there, that some of these

[00:46:56] Speaker 02:
Things like the deposit growth projections could be cured by coming up with different inputs, and that's what this court has said in Meredith and at Capital Blue Cross, but they said there wasn't other problems.

[00:47:06] Speaker 02:
There were fundamental flaws in the model by pointing to other difficulties.

[00:47:09] Speaker 02:
The district court in Washington found a lot of difficulties with the model there that were not found by the court of federal claims here.

[00:47:18] Speaker 05:
I don't think you're responding to my question.

[00:47:19] Speaker 05:
You argued in the Ninth Circuit that even if the model we presented was flawed,

[00:47:25] Speaker 05:
that the district court had an obligation to come up with a number anyway, right?

[00:47:31] Speaker 05:
Yes.

[00:47:32] Speaker 05:
You lost that, right?

[00:47:33] Speaker 02:
The Ninth Circuit held that the model was based on the district court's findings in that case, that the model was too flawed to be able to do that.

[00:47:41] Speaker 02:
That is not holding this transferable to this case.

[00:47:45] Speaker 02:
And I don't think there's any, the Ninth Circuit, I don't think disagreed that there's generally an obligation to come up with an alternative valuation.

[00:47:51] Speaker 02:
It's the task of the fact finder to come up with the valuation, not to try to kick the case out on a burden of proof.

[00:48:00] Speaker 02:
I do think it's important for the court to think about the breadth of this issue and not confine it to the particular facts of situation here.

[00:48:10] Speaker 02:
I mean, this case and the case from the Ninth Circuit is an invitation to the government

[00:48:15] Speaker 02:
not to submit its own valuation, an invitation not to settle these disputes, which normally don't end up in court, and it's going to be a tremendous burden on courts.

[00:48:24] Speaker 02:
Well, I guess you could look at it as an invitation that you should present a model that works.

[00:48:28] Speaker 02:
Yes, well, we presented a model that worked, and there was no dispute about that, I don't think, that the model was sound, and that if you put in different inputs, you would get a different answer.

[00:48:38] Speaker 02:
Thank you.

[00:48:39] Speaker 02:
We thank both sides, and the case is submitted.