BLUEBONNET SAYINGS BANK, FSB, Stone Capital, Inc., and James M. Fail, Plaintiffs, v. The UNITED STATES, Defendant, 47 Fed. Cl. 156

OPINION FUTEY, Judge. This case is before the court following a trial on the merits on the issue of damages. In a previous decision on the issue of liability, Chief Judge Smith held that the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub.L. No. 101-73, 103 Stat. 183 (FIRREA), and its implementing regulations and related agency actions, breached the capital plan, subordinated debenture (subordinated debt) and dividend forbearances granted to plaintiffs James M.

Fail, Stone Capital, Inc., and Bluebonnet Savings Bank (Bluebonnet) in an Assistance Agreement entered with the Federal Savings and Loan Insurance Corporation (FSLIC). Bluebonnet Sav. Bank v. United States, 43 Fed.Cl. 69, 80 (1999). Plaintiffs claim that defendant’s breach of these three forbearances caused them to incur $175,882,000 in damages. Defendant counters that plaintiffs’ alleged damages were not foreseeable, that the breaches did not cause their alleged damages, and that plaintiffs failed to prove their alleged damages with reasonable certainty.

Factual Background The savings and loan industry in the southwestern United States in the late 1980’s was in a state of crisis. By the middle of that decade the real estate industry rapidly deteriorated, inflicting severe financial losses on thrifts that owned, or loaned money for the purchase of, real estate.

In addition, the savings and loan industry in the Southwest contained more thrift branches “than was necessary to serve the people ... and still provide competition within the respective communities ....” Hundreds of thrifts at the time were either insolvent or on the verge of insolvency, and FSLIC lacked sufficient funds to liquidate all the troubled thrifts. In an effort to address this multibillion dollar problem, the Federal Home Loan Bank Board (FHLBB) approved the “Southwest Plan” on February 3,1988.

The Southwest Plan was a program “to provide government assistance to induce private capital investors to bail out failed [savings and loans] in the southwestern United States.” Bluebonnet Sav. Bank v. Fed. Deposit Ins. Corp., 891 F.Supp. 332, 333-34 (N.D.Tex. 1995). Under this program, FHLBB grouped insolvent thrifts into packages for sale to investors, which theoretically would save FSLIC the cost of liquidating all of the insolvent thrifts in the region.

In order to attract private investors, FHLBB offered a wide variety of incentives, including guaranteed assistance payments, regulatory forbearances, and shared tax benefits. The goal of the Southwest Plan was to attract new capital and management to the thrift industry, eliminate branch redundancies, and reduce the operating expenses of failing thrifts. Mr. Fail first became interested in purchasing a Southwest Plan thrift package in November 1988. Mr. Harry T. Carneal, Executive Vice President of the Lifeshares Group, Inc. (Lifeshares), an insurance company owned by Mr.

Fail, met with FSLIC personnel on behalf of Mr. Fail to discuss Mr. Fail’s desire to purchase a Southwest Plan thrift package. In early November 1988, Mr. Carneal was introduced to Sidney Steiner, the principal shareholder of the S/D Acquisition Group. Mr. Steiner, together with Mr. John Kirchhofer, one of his business representatives, had been attempting throughout 1988 to acquire the “Pard/Rose” package, a Southwest Plan package comprised of fifteen insolvent thrifts that eventually became Bluebonnet. Mr. Steiner and Mr.

Kirchhofer had been unsuccessful in their attempts due to a lack of capital needed to complete the acquisition. In mid-November 1988, Mr. Fail, on behalf of Lifeshares, and Mr. Steiner, on behalf of the S/D Acquisition Group, entered a partnership (the Fail Group) to join efforts to acquire the Pard/ Rose package. During that month the Fail Group met with FSLIC personnel to discuss their desire to acquire the Pard/Rose package. The Fail Group submitted a bid of $96 million for the Pard/Rose package, in which Mr.

Fail planned to infuse this amount over one year, in which Lifeshares would serve as the holding company for the new thrift. After submitting this bid, Mr. Fail, Mr. Steiner and Mr. Carneal met with Mr. Angelo Vigna, Assistant Principal Supervisor of the Federal Home Loan Bank of New York, to discuss the terms of their bid. During this meeting, Mr. Fail told Mr. Vigna that he planned to use assets held by two companies he owned, Mutual Security Life Insurance Company (MSL) and Farm & Home Life Insurance Company (Farm & Home) to fund the acquisition. Mr.

Vigna also held negotiations with the Weston Edwards Group, another prospective bidder for the Pard/Rose package. FSLIC ultimately chose to pursue a bid received from the Weston Edwards Group. FHLBB, however, did not accept that bid because the proposed holding company structure was unsatisfactory and that it did not believe Mr. Edwards could obtain the financing he needed to acquire the package. Consequently, in early December 1988, FSLIC personnel informed Mr. Fail that FHLBB rejected the Weston Edwards Group’s bid, and asked him if he would submit a new bid for the Pard/Rose package.

On December 12, 1988, the Fail Group submitted a new bid for the Pard/Rose package to FSLIC. The bid included a business plan in which Mr. Fail and CFSB, a newly created holding company owned by Mr. Fail, agreed to infuse $120 million into the resulting thrift over a two year period, in exchange for a specified amount of assistance from FSLIC. This proposed assistance included the grant of a number of regulatory forbearances. The bid also listed the closing date as December 28 of that year, but FSLIC moved the date to December 22.

Over a period of approximately three weeks, the Fail Group engaged in negotiations with personnel from FSLIC’s Southwest Plan Office, along with personnel from the Federal Home Loan Bank of Dallas. The majority of the negotiations, however, were conducted by Mr. Carneal and Mr. Robert Roe, an employee of the Southwest Plan Office and FSLIC’s main negotiator for the Pard/Rose package. FSLIC, along with the Corporate and Securities Division of Office of General Counsel (CASD), reviewed the Fail Group’s bid. Late in the negotiations process FSLIC requested that Mr.

Fail identify the source for a portion of his funding for the acquisition. In a letter to Mr. Stuart Root, Executive Director of FSLIC, dated December 21, 1988, Mr. Fail discussed his bid and reiterated his commitment to infuse $120 million into the resulting thrift (Fail letter). He also described a number of different means by which he planned to capitalize a portion of the infusion. In a letter to Mr. Root dated December 22, 1988, Mr. Carneal (Carneal letter) discussed the capitalization of the same portion of the infusion addressed in the Fail letter. On December 22, 1988, Mr.

Root provided FHLBB with a memorandum recommending that it accept the Fail Group’s bid and approve the acquisition. Apparently on the same day, Ms. Jamie Brown, Assistant Deputy Director of CASD, provided FHLBB with a legal memorandum regarding the proposed acquisition (CASD Memo). Ms. Brown ultimately determined that FHLBB’s approval of the acquisition would comply with the existing law. She noted, howmver, that plaintiffs had not yet identified a source for a portion of the acquisition funding. Ms. Brown thus recommended that FHLBB condition its approval based upon Mr.

Fail’s and CFSB’s satisfactory identification to FSLIC of the source of funding for these infusions. At a meeting held on December 22, 1988, FHLBB issued resolution number 88-1384P, which approved the Fail Group’s bid to acquire the Pard/Rose package. It determined that the Fail Group’s bid presented the best economic value to the government. FHLBB, however, conditioned its approval based upon plaintiffs’ identification of a portion of the funding as recommended by Ms. Brown in the CASD Memo.

On that same date, Consolidated Federal Savings and Loan Association (later renamed Bluebonnet Savings Bank), was created as successor to certain assets and liabilities of the fifteen insolvent Texas thrifts comprising the Pard/Rose package. Mr. Fail, through CFSB, acquired Bluebonnet from FSLIC. Also on December 22, Bluebonnet, CFSB, and FSLIC entered into an Assistance Agreement, which formalized the terms of the bid. Pursuant to the Assistance Agreement, Mr.

Fail and CFSB agreed to recapitalize Bluebonnet by infusing $120 million over a two year period, with $70 million due that day, and an additional $25 million due on the first and second anniversary dates. The Assistance Agreement required that one-half of the total infusion be raised through the sale of Bluebonnet-issued capital notes and one-half consist of equity. With respect to the initial $70 million, CFSB agreed to infuse $35 million into Bluebonnet through the purchase of Bluebonnet common stock.

The remaining $35 million would be infused in the form of subordinated debt issued by Bluebonnet and to be purchased by Lifeshares or one of its affiliates. The Assistance Agreement also required that CFSB purchase $12.5 million of Bluebonnet’s common stock on each of the two successive anniversaries of the effective date, while Lifeshares would either purchase or place with an unaffiliated third party $12.5 million of subordinated debt each year.

In exchange, FSLIC agreed to provide assistance to Bluebonnet that exceeded $3 billion, which equaled the difference between the liabilities Bluebonnet assumed and the tangible assets it acquired. The assistance included, among other things, FSLIC promissory notes, asset coverage and yield maintenance. The FSLIC promissory notes together amounted to $760,200,-000, and equaled the combined negative net worth of the fifteen thrifts that comprised Bluebonnet.

All assistance payments received were exempt from federal taxation, and thus Bluebonnet’s earnings would not be taxable during the first ten years of operation. The asset coverage guaranteed that FSLIC would cover any losses resulting from the sale or disposition of certain “covered assets” described in the Assistance Agreement. The yield maintenance guaranteed Bluebonnet a yield on all covered assets. This assistance was essential to ensure the financial viability of Bluebonnet. FSLIC also received benefits from the acquisition.

For example, FSLIC obtained a warrant for the purchase of Bluebonnet common stock at .01 per share, which could be exercised anytime after December 22, 1994. FSLIC also was entitled to a $10 million payment upon expiration of the Assistance Agreement. FSLIC further obtained a 25% share of all the tax benefits received by Bluebonnet on a consolidated basis. FSLIC also could reduce its assistance obligation by its share of the tax benefits. Mr.

Fail, on his own behalf and on behalf of CFSB and Bluebonnet, entered into the Capital Maintenance Agreement (CMA) with FSLIC on December 22, 1988, which imposed a number of conditions upon CFSB and Bluebonnet concerning certain ownership and operation issues. Additionally, CFSB agreed to purchase and at all times own 100% of the voting stock (common stock) of Bluebonnet. FSLIC obtained the right to seize Bluebonnet in the event CFSB failed to timely make the capital infusions or to maintain capital compliance. In connection with the acquisition, FHLBB simultaneously sent a letter to Mr.

Fail, which granted Bluebonnet a number of regulatory forbearances, two of which are material to this dispute. First, FHLBB granted Bluebonnet a ten-year capital forbearance (capital plan forbearance) that allowed Bluebonnet to maintain capital levels lower than those required by regulation. This forbearance, however, required that Bluebonnet’s capital requirement would increase each year. For example, Bluebonnet was required to maintain a ratio of regulatory capital to liabilities of 1.75% during its first year of operation. This ratio would increase to 2.0% the following year.

The letter also included a dividend forbearance, which permitted Bluebonnet to pay cash dividends of up to 50% of its net retained earnings beginning December 23,1989. Significantly, this forbearance contained two important qualifications. First, Bluebonnet could only declare common stock dividends provided that it met the capital levels contained within the capital plan forbearance. Second, Bluebonnet could not declare common stock dividends if doing so would cause it to fall below these capital levels.

Plaintiffs were able to infuse nearly all of the capital required by the Assistance Agreement by its entry date. On December 22, 1988, MSL purchased $35 million of subordinated debt issued by Bluebonnet. In addition, CFSB purchased $25 million in Bluebonnet common stock by obtaining a loan in that amount from Bankers Life and Casualty Company (Bankers Life), an insurance company affiliated with Robert T. Shaw. The collateral for the Bankers Life Loan was Mr. Fail’s common stock shares in Lifeshares and CFSB. Mr. Fail infused this money into CFSB, which then purchased $25 million of Bluebonnet common stock.

Plaintiffs, however, still needed to infuse an additional $10 million. On December 30,1988, Mr. Fail and CFSB entered a loan agreement with Bankers Life, in which Bankers Life agreed to loan Mr. Fail $10 million to purchase Bluebonnet common stock. On February 28, 1989, Bankers Life and Beta Financial Corporation (Beta Financial) entered into a “Loan Participation Agreement,” which granted Beta Financial a $10 million participation interest in the Bankers Life loan. Bankers Life forwarded the funds to plaintiffs, and CFSB purchased $10 million of Bluebonnet common stock.

Although the date is not clear in the record, after the parties entered the acquisition agreement, Bluebonnet submitted an application to treat subordinated debt as regulatory capital. On March 8, 1989, FHLBB issued Technical Amendment number 768, which approved Bluebonnet’s application (subordinated debt forbearance). Immediately following the acquisition, a new management team took over operation of Bluebonnet. One of management’s first objectives was to consolidate the fifteen thrifts into a single institution, which initially held $2.8 billion in insured deposits and $1.8 billion in covered assets.

To accomplish this goal, management took a series of steps to consolidate the fifteen thrifts, including auditing all the existing books from each institution, evaluating and documenting nearly 20,000 covered assets, creating new balance sheets and integrating 170 different computer systems. Approximately six months passed before management was able to operate the thrifts as a single institution. Mr. Fail spent a significant portion of 1989 searching for capital sources that either were willing to invest in Bluebonnet or to provide financing. Mr. Fail sent Mr. Kirehhofer and Mr.

Carneal to meet with potential capital sources. Mr. Kirehhofer focused on finding what plaintiffs refer to as a “tax-advantaged partner.” A tax-advantaged partner is an investor with substantial net earnings capable of utilizing the net operating losses generated by Bluebonnet. Between February and August 1989, Mr. Kirehhofer met with three potential tax-advantaged partners and two investment banking firms. For reasons which will be discussed, plaintiffs were unable to obtain financing. Mr. Carneal, however, searched for investors willing to provide either equity or debt financing. In early 1989, Mr.

Carneal met with several New York investment banking firms, but also was unable to obtain financing. Mr. Fail also utilized accounting firms, consultants and law firms to help search for the candidates willing to provide financing or to be a tax-advantaged partner. On August 9, 1989, FIRREA was signed into law. FIRREA and its implementing regulations changed the capital requirements applicable to thrifts, imposing core capital, tangible capital, and risk-based capital requirements.

The most important of these changes for Bluebonnet was the new core capital requirement, under which thrifts were required to maintain core capital equal to at least 3% of assets. 12 U.S.C. § 1464(t)(2)(A) (Supp. I 1989). FIRREA also altered the regulatory regime that currently existed, replacing FHLBB and FSLIC with a new agency, the Office of Thrift Supervision (OTS). FIRREA also created a thrift deposit insurance fund which the Federal Deposit Insurance Corporation (FDIC) would oversee.

On September 30, 1989, the end of the fiscal year, Bluebonnet’s regulatory capital amounted to $99,157,000, which exceeded the capital requirements contained in the capital plan forbearance. A little over one-third of this regulatory capital was subordinated debt. Bluebonnet also generated over $29 million in net retained earnings, half of which could have been distributed on December 23, 1989, pursuant to the terms of the dividend forbearance.

FIRREA, together with OTS’s implementing regulations, breached Bluebonnet’s capital plan and subordinated debt forbearances, which “fundamentally altered the nature of the transaction .... ” Bluebonnet Sav. Bank, 43 Fed.Cl. at 78, 80. FIRREA eliminated Bluebonnet’s capital plan forbearance by implementing a higher core capital ratio. FIRREA also eliminated the subordinated debt forbearance because it prohibited Bluebonnet from treating subordinated debt as regulatory capital. Consequently, Bluebonnet’s regulatory capital level decreased by $35 million, the amount of the subordinated debt note issued to MSL.

In addition, the breach required Bluebonnet to alter its original capital structure to allow for the infusion of qualifying forms of capital. Together, the breach of the capital plan and subordinated debt forbearances caused Bluebonnet’s core capital ratio to drop to 2.06% of assets, thus failing to comply with FIRREA’s core capital requirement. Concerned with a threat of seizure, the Board of Directors of Bluebonnet (Board of Directors) intensified its efforts to comply with FIRREA’s capital standards. Neither Mr. Fail nor CFSB had sufficient funding to infuse capital into Bluebonnet.

By letter dated December 7, 1989, Mr. Howard Neff, CEO of Bluebonnet, informed Mr. Robert Brick, Caseload Manager of OTS, of FIR-REA’s impact on Bluebonnet’s existing capital structure, and requested that OTS approve one of three alternative financing proposals included within his letter. The first proposal involved Bluebonnet issuing $25 million of perpetual preferred noncumulative stock to be purchased by CFSB that would qualify as tangible and core capital.

The second proposal sought to convert Bluebonnet’s $35 million subordinated note into perpetual preferred stock to be purchased by CFSB, which would qualify as tangible and core capital. The third proposal attempted to convert $25 million of Bluebonnet’s net retained earnings to common stock equity in lieu of the $25 million infusion from CFSB due on December 22, 1990. OTS denied these requests. OTS nevertheless approved a different plan submitted by the Board of Directors, which called for Bluebonnet to issue, and CFSB to purchase, $12.5 million of perpetual preferred stock in place of the subordinated debt.

On December 21, 1989, CFSB infused $25 million into Bluebonnet. The source of funding for the 1989 infusion came from Consolidated National Successor Corporation (CNC), a holding company owned in part by Mr. Shaw. CNC loaned $25 million to Prime Financial, Inc. (Prime Financial), a company owned by Mr. Fail. Prime Financial subsequently purchased a $25 million subordinated debt note from CFSB, and CFSB infused $25 million into Bluebonnet. CNC also agreed to refinance the Bankers Life loan.

In exchange, CNC obtained, among other things, a right to contingent interest amounting to 9% of the profits of CFSB, together with the right to acquire Bluebonnet, or, alternatively, 50% of the net proceeds of a potential sale of Bluebonnet. This infusion, however, was not enough to help Bluebonnet achieve capital compliance. Thus, Bluebonnet’s management took additional steps to adequately capitalize the thrift. First, Bluebonnet shrank in size by selling approximately $150 million in assets. Second, Bluebonnet was forced to retain all of its net earnings to date ($35,221,000) for use as regulatory capital.

Under the Dividend Forbearance, however, Bluebonnet would have been able to distribute 50% of its net retained earnings on December 23, 1989. The FIRREA-imposed capital levels altered Bluebonnet’s right to declare dividends and breached that provision. Id. at 78, 80. Nevertheless, as a result of management’s efforts, Bluebonnet was able to achieve capital compliance by December 31,1989. In the spring of 1990, the United States Senate Subcommittee on Antitrust, Monopolies and Business Rights held hearings on the restructuring of the savings and loan industry.

The hearings included case studies on particular transactions, one of which focused on the Bluebonnet transaction. The Bluebonnet healings were held to “determine whether th[e] transaction was pursued with due regard for the benefits of fair and open competition.” Many senators believed FHLBB and FSLIC had been too generous in using taxpayer money to help fund the purchase of insolvent savings and loan institutions by private investors.

Several senators questioned FHLBB and FSLIC officials at length, often criticizing them for approving a transaction that the senators believed amounted to a “sweetheart deal.” In response to these hearings, OTS launched an internal investigation into the circumstances surrounding Mr. Fail’s acquisition of Bluebonnet. Bluebonnet Sav. Bank, 891 F.Supp. at 335. At approximately the same time, Mr. Fail and CFSB began searching for capital sources to fund the 1990 infusion. Plaintiffs conducted their search over a period of several months,' in which Mr. Carneal and Mr.

Kirchhofer individually met with several potential capital sources. Although some of these investors expressed interest, none chose to finance the 1990 infusion. Throughout May 1990, the Board of Directors sought to declare dividends. By letters dated May 2 and May 16, 1990, Mr. Howard Neff, Chief Executive Officer of Bluebonnet, informed Mr. Brick of the Board of Director’s intent to declare preferred stock dividends.

OTS denied these requests, reasoning that Bluebonnet was only marginally compliant with its capital requirements and that there was insufficient evidence to ascertain whether Bluebonnet would remain compliant. On September 12,1990, Mr. Neff submitted to OTS a letter outlining a plan to finance the 1990 infusion. The plan sought approval to declare a common stock dividend of $25 million to CFSB, which CFSB would then use to purchase $12.5 million in common stock and $12.5 million in subordinated debt. OTS denied this request.

On October 30, 1990, the Board of Directors again sought regulatory approval to declare a dividend. In a letter sent to Mr. Fail dated November 6, 1990, Mr. Brick directed Bluebonnet not to pay any dividends until it provided FDIC with a “satisfactory commitment to infuse the remainder of the $120 million in capital and subordinated debt.” Three days later Mr. Billy Wood, District Director of OTS, notified Mr. Neff by letter that OTS officially objected to the Board of Director’s notice to declare dividends, and informed Mr. Neff that Bluebonnet could not declare dividends until it adhered to the directive in Mr.

Brick’s letter. By the end of November 1990, plaintiffs still were unable to find financing for the 1990 infusion, and thus could not provide FDIC with a satisfactory commitment as discussed in Mr. Brick’s letter. Consequently, on November 28, 1990, Mr. Brick informed Mr. Neff that OTS now deemed Bluebonnet to be an institution requiring “more than normal supervision,” pursuant to OTS Regulatory Bulletin 3a-l (RB 3a-l). This designation prohibited Bluebonnet from engaging in certain business activities, which included declaring dividends, without first receiving approval from OTS.

OTS imposed these restrictions because it believed CFSB demonstrated financial instability by incurring a large amount of debt and feared this condition might have a deleterious impact upon Bluebonnet. With less than one month remaining before the 1990 infusion was due, and with approximately $80 million in outstanding debt to Bankers Life and CNC, plaintiffs returned to Mr. Shaw for help. On December 12, 1990, Mr. Fail and CFSB entered separate loan agreements with Marquette National Life Insurance Company (Marquette), a company owned by Mr.

Shaw, under which Marquette loaned CFSB $25 million for the final infusion and refinanced the 1988 and 1989 loans from Bankers Life and CNC. On that same date, Mr. Fail entered the “Stock Acquisition Agreement” with Bluebonnet Interests, Inc. (BBI), another company owned by Mr. Shaw, which gave BBI the right to seek and obtain regulatory approval to purchase CFSB from Mr. Fail by December 11, 1992. The loan agreement with Marquette included a provision that gave it the right to accelerate the due date on the loans to thirty days after it determined BBI would not acquire Bluebonnet.

Soon after BBI entered this agreement, Mr. Shaw undertook efforts to acquire Bluebonnet. Following CFSB’s infusion of the final $25 million, OTS took a series of actions against Bluebonnet. First, on December 26, 1990, Mr. Wood sent a letter to Mr. Fail which directed him to sign an attached document entitled “Supervisory Agreement” (SA). This document would have required, among other things, the immediate resignation of Mr. Fail and other members of the Board of Directors.

In addition, the SA would have placed restrictions on Bluebonnet’s business operations, including the declaration of common and preferred stock dividends. Mr. Fail did not sign this document. Next, on March 19, 1991, OTS issued a supervisory directive, in which it ordered the Board of Directors “to act in the best interest of Bluebonnet in avoiding any detrimental effect CFSB Corporation may have on Bluebonnet.” This directive attempted to achieve the same goals as the SA, imposing constraints and restrictions on dividend declarations, mergers and consolidations and new professional service contracts.

By letter dated March 28, 1991, Mr. Wood informed Mr. Neff that OTS was changing Bluebonnet’s classification from a Tier 1 to Tier 3 institution, particularly because of CFSB’s current level of debt, lack of income, and ability to affect the financial stability of Bluebonnet. Pursuant to existing regulations, a Tier 3 association could not make capital distributions without receiving OTS’ approval. See 12 C.F.R. § 563.134 (1991). In that same letter Mr. Wood relayed to Mr. Neff OTS’s denial of Bluebonnet’s pending dividend requests filed on February 25 and March 1,1991. Mr.

Wood cited Bluebonnet’s failure to meet the proposed capital standards, as well as CFSB’s financial condition, as reasons for its denials of the Board of Director’s requests. The basis for this denial was the financial condition of CFSB and OTS’s belief that a payment of dividends would prohibit Bluebonnet from meeting capital requirements OTS would soon implement. Furthermore, OTS denied all of the Board of Director’s requests in 1991 to declare common stock dividends, and approved only one request to declare a preferred stock dividend of $375,000.

During this time Bluebonnet encountered a number of disputes with FDIC concerning its rights under the Assistance Agreement. On June 5, 1991, plaintiffs filed suit against the FDIC in the District Court for the Northern District of Texas, seeking a declaratory judgment as to the proper application of the Assistance Agreement. Plaintiffs also requested damages and other relief, claiming that “FDIC failed to furnish material consideration required by the contract.” Id. In September 1992, Mr. Shaw abandoned his efforts to acquire Bluebonnet.

Plaintiffs thus began negotiations with him concerning the repayment of their outstanding loans, which amounted to approximately $140 million and were due on December 31, 1992. Mr. Shaw and Mr. Fail eventually reached a verbal agreement, which they memorialized in an exchange of letters dated October 7, 1992. Mr. Shaw, through CNC, agreed that upon Mr. Fail and CFSB’s reduction of their existing debt to $81 million, CNC would execute long-term loans of not more than that amount to them. In exchange, Mr. Fail agreed to give CNC a 50% economic interest in CFSB. At the time of the letter exchange, however, Mr.

Fail and CFSB did not have sufficient funds to reduce their debt. Consequently, on November 24, 1992, plaintiffs sought an injunction in the District Court for the Northern District of Texas to force OTS to permit, among other things, Bluebonnet to distribute common stock dividends. On December 1, 1992, OTS rated Bluebonnet as a Tier 1 institution and directed the Board of Directors to pass a resolution affirming its intent to maintain Bluebonnet’s current regulatory capital level.

OTS also approved outstanding requests to declare dividends, but required that the funds be used solely to pay down acquisition debt held by Mr. Fail and CFSB. On January 25, 1993, Mr. Fail, CFSB, and CNC executed the “Economic Benefits Agreement,” (EBA) which further detailed the agreement discussed by Mr. Fail and Mr. Shaw in their October 7, 1992 letters. Pursuant to the agreement, CNC reduced the amount of debt held by Mr. Fail and CFSB and provided long-term financing for that debt, in exchange for Mr. Fail essentially giving CNC a 49% interest in the future profits of CFSB.

CNC also obtained the right to receive a percentage of the proceeds from a sale of Bluebonnet. On June 25, 1993, FDIC filed a counterclaim against plaintiffs in the district court litigation, seeking recission of the Transaction Agreement on the ground of fraud in the inducement. Specifically, FDIC claimed that Mr. Fail did not disclose to FHLBB and FSLIC before entering the transaction information concerning his prior indictment and his entering a plea bargain on behalf of one of his companies. Id. at 336. In an opinion issued on June 28, 1995, the court granted plaintiffs’ motion for

summary judgment on FDIC’s counterclaim, finding it to be “without merit, and pushing the envelope of Rule 11.” Id. at 341. On August 2, 1995, the parties entered a settlement agreement in which they were able to resolve a number of issues raised in litigation and to agree upon a mutual release of a number of plaintiffs’ claims.

In addition, the parties agreed to except from the mutual release and dismiss without prejudice plaintiffs’ claims that defendant breached the capital plan, subordinated debt, and dividend forbearances, or that defendant committed a taking of these rights under the Fifth Amendment of the Constitution. On August 8, 1995, plaintiffs filed a complaint in this court, claiming that the passage of FIRREA breached the capital plan, subordinated debt, and dividend forbearances, which caused them damage.

Plaintiffs alternatively claimed that the passage of FIR-REA resulted in an uncompensated taking under the Fifth Amendment. In an opinion dated March 2, 1999, the court determined that the passage of the FIRREA and its implementing regulations breached the capital plan, subordinated debt and dividend forbearances. Bluebonnet Sav. Bank, 43 Fed. Cl. at 78, 80. Beginning June 21, 1999, the court held approximately six weeks of trial on the issue of damages. Due to the unavailability of one of defendant’s expert witnesses, the proceedings did not recommence until November 1, 1999.

The court held closing arguments on December 16, 1999. Discussion I.

Summary of plaintiffs’ damage claim. Plaintiffs seek expectancy damages in the amount of $175,882,000. Plaintiffs aver that they have met the standard for awarding expectancy damages, asserting: (1) their damages were reasonably foreseeable at the time the parties entered the contract; (2) the breach was a substantial factor in causing their damages; and (3) they have proven them damages with reasonable certainty. Plaintiffs assert that at the time the contract was entered defendant knew or should have known that Mr.

Fail and CFSB lacked adequate capital to acquire Bluebonnet and intended to rely upon dividends distributed from Bluebonnet to CFSB to help finance the cost of the acquisition through various alternative financing methods. Plaintiffs aver that defendant’s breach of the three forbearances destroyed them original financing plan and caused the financing of the Bluebonnet acquisition to become riskier, more difficult to obtain, and ultimately more expensive for Mr. Fail and CFSB.

Plaintiffs’ damages consist of additional interest on indebtedness, higher fees paid to lenders, and the cost of the EBA and its successor agreements. Conversely, defendant claims that plaintiffs failed to meet their burden of proving them alleged damages. Specifically, defendant asserts that it was unforeseeable at the time the contract was entered that a breach of the three forbearances would cause plaintiffs to incur increased financing costs.

Defendant posits that plaintiffs offered no evidence to establish the breaches caused their damages, and maintains that plaintiffs failed to refute non-breach factors would have shaped the financing arrangement despite the enactment of FIRREA. Defendant also contends that plaintiffs failed to prove their damages with reasonable certainty. A party’s expectation interest is the “interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.” Restatement (Second) Of Contracts § 344(a) (1981).

Expectancy damages are recoverable provided “they are either actually foreseen or reasonably foreseeable, are caused by the breach of the promisor and are proved with reasonable certainty.” Glendale Fed. Bank v. United States, 43 Fed.Cl. 390, 398 (1999) (discussing Wells Fargo Bank, v. United States, 88 F.3d 1012 (Fed.Cir.1996) (Wells Fargo)). Plaintiffs must satisfy each of these tests in order to prevail. Accordingly, the court must determine whether plaintiffs’ damage claim satisfies these three tests. II. Foreseeability A.

Breach of the Dividend Forbearance Plaintiffs contend that their damages were foreseeable at the time the parties entered the contract. Plaintiffs assert that the terms of the contract best demonstrate the foreseeable importance of the three forbearances. In addition, plaintiffs contend that FHLBB and FSLIC knew that Mr. Fail and CFSB would borrow acquisition funds because they did not have sufficient capital to cover the cost of acquiring Bluebonnet. Plaintiffs posit that FHLBB and FSLIC should have known that CFSB and Mr.

Fail would need dividends distributed from Bluebonnet to CFSB either to obtain financing from commercial lenders or to attract a tax-advantaged partner to put forth capital for the acquisition. Plaintiffs aver that defendant should have known that in order to repay them debt, Mr. Fail and CFSB would need cash, in the form of dividends, to service their acquisition loans. Defendant counters that plaintiffs’ alleged damages were unforeseeable at the time the parties entered the contract.

Defendant argues that plaintiffs agreed in the Fail and Carneal letters not to rely upon dividends distributed by Bluebonnet to help fund its acquisition by CFSB. Additionally, defendant asserts that FHLBB and FSLIC did not know that plaintiffs intended to rely upon dividends to help finance the Bluebonnet acquisition. Defendant further points to the CASD memorandum, the minutes of the FHLBB meeting, and the FHLBB resolution as proof that it did not know plaintiffs would rely upon dividends.

It is well-established that the breaching party will be liable only for damages that were foreseeable at the time the parties enter the contract. See Northern Helex Co. v. United States, 207 Ct.Cl. 862, 524 F.2d 707, 714 (1975); Estate of Berg v. United States, 231 Ct.Cl. 466, 687 F.2d 377, 382 (1982). In other words, foreseeability is based upon what the parties contemplated at the time of contract formation. Prudential Ins. Co. of Am. v. United States, 801 F.2d 1295, 1300 (Fed.Cir.1986); Wm. T. Thompson Co. v. United States, 26 Cl.Ct. 17, 27 (1992), affd sub. nom. Hercules Inc. v.

United States, 24 F.3d 188 (Fed.Cir.1994), aff'd, 516 U.S. 417, 116 S.Ct. 981, 134 L.Ed.2d 47 (1996). The test of foreseeability is an objective one. Salsbury Ind. v. United States, 17 Cl.Ct. 47, 58 (1989), aff'd, 905 F.2d 1518 (Fed.Cir.1990); Restatement (Second) Of Contracts § 351 cmt. a (1981). A plaintiff may establish foreseeability by either demonstrating that the damages were actually foreseen or reasonably foreseeable by defendant at the time of contract formation. Glendale Fed. Bank, 43 Fed.Cl. at 398; Cal. Fed. Bank v. United States, 43 Fed.Cl. 445, 451 (1999).

The court must decide whether it was reasonably foreseeable at the time the parties entered the contract that a breach of the dividend forbearance would cause plaintiffs to incur increased costs to support debt financing of the acquisition. That determination, however, first requires the court to ascertain whether it was reasonably foreseeable that plaintiffs would rely upon dividends to help finance the Bluebonnet acquisition.

The court begins its analysis by examining the dividend forbearance and the Fail and Carneal letters, primarily because these documents relate to the distribution of dividends and/or plaintiffs’ plans to finance the acquisition. The court must construe the contract by its plain and unambiguous language. Summerfield Housing Ltd. Partnership v. United States, 42 Fed.Cl. 160, 166 (1998), aff'd, 217 F.3d 860, 1999 WL 1111478 (Fed.Cir.1999)(Table), cert. denied, - — - U.S. -, 120 S.Ct. 2691, 147 L.Ed.2d 963 (2000). In interpreting a contract, the court seeks to “effectuate its spirit and purpose.” Gould, Inc. v.

United States, 935 F.2d 1271, 1274 (Fed.Cir.1991) (citing Arizona v. United States, 216 Ct.Cl. 221, 575 F.2d 855, 863 (1978) ). A court must give reasonable meaning to all parts of the contract “so as to harmonize and give meaning to all its provisions”, and not render portions of the contract meaningless. Thanet Corp. v. United States, 219 Ct.Cl. 75, 591 F.2d 629, 633 (1979) ; see also Fortec Constructors v. United States, 760 F.2d 1288,1292 (Fed.Cir.1985). Furthermore, “an

interpretation which gives a reasonable meaning to all parts will be preferred to one which leaves a portion of it useless, inexplicable, inoperative, void, insignificant, meaningless, superfluous, or achieves a weird and whimsical result.” Arizona, 575 F.2d at 863.

The dividend forbearance provides: Beginning one year following the Effective Date, Consolidated FSB shall be permitted to pay cash dividends in an amount up to 50% of net income for a fiscal year, provided that its level of regulatory capital is in compliance with the Capital Plan, as outlined in the preceding paragraph, to the extent that such payment would not cause regulatory capital to fall below the level specified in the Capital Plan. The dividend forbearance was “designed to ensure that Mr. Fail and CFSB could receive dividends notwithstanding the capital problems of the new institution.” Bluebonnet Sav.

Bank, 43 Fed.Cl. at 73. “Indeed, the only plausible way to understand the provision is as a cash flow guaranty (provided, of course, other conditions are met) to CFSB and Mr. Fail.” Id. It is clear that the plain language of the dividend forbearance placed no restrictions on Mr. Fail’s and CFSB’s use of common stock dividends after distribution by Bluebonnet to CFSB.

Regulations in effect at that time permitted regulators to approve applications whereby the holding company would service debt with dividends so long as the company was limited to receiving no more than 50% of the thrift’s net income per year as dividends. See 12 C.F.R. § 574.8(a)(1)(iii)(A) (1989) (effective November 28, 1988, as stated in 53 Fed.Reg. 47941, 47942 (1988)). Mr. M. Danny Wall, former Chairman of FHLBB, admitted on cross-examination that he was aware of this regulation when he voted to approve the acquisition. In addition, Mr.

Eric Berg, an attorney with CASD at the time of the acquisition, conceded on cross-examination that FHLBB had the authority to restrict how CFSB used dividends once they were distributed by Bluebonnet. FHLBB, however, never restricted CFSB’s use of dividends. Therefore, the court can infer that defendant should have known that plaintiffs could use dividends to help finance the acquisition under the contract. The court agrees that the purpose of the dividend forbearance was “to ensure a source of cash flow for CFSB and Mr. Fail in order to cover the costs of financing the transaction going forward.” Id. at 78.

Defendant, however, claims that plaintiffs agreed in the Fail and Carneal letters not to rely upon dividends to help finance the Bluebonnet acquisition. First, defendant maintains that Mr. Fail’s reference to the term “my own resources” excluded his ownership of CFSB stock. Second, defendant avers that plaintiffs’ agreement not to distribute dividends until finding a source of funding for the 1990 infusion implies plaintiffs would not rely upon dividends.

The Fail letter, which discussed in detail plaintiffs’ plan to fund $120 million infusion, provides, in pertinent part: I understand your legitimate interest in the form of capital infusion, and that you are determined (as am

I) to not unduly burden the resulting thrift____ My specific commitment in this letter is to fund out of my own resources $107.5 million (34% of liabilities) of that total. Under our business plan, we will fund the remaining $12.5 million through a tax[-] advantaged partner. Mr. Fail also discussed alternatives for funding the 1989 and 1990 common stock infusions: Farm and Home Life Insurance Company, a wholly-owned subsidiary of Lifeshares, would commit to a loan of $12.5 million to satisfy at least one tranche.

Another alternative would be for me to pledge certain portions of my stock in the thrift holding company. Such a structure would merely create a contingent interest in my stock in the holding company rather than a debt service burden on the thrift. The Carneal letter addressed the distribution of dividends, stating: The purpose of this letter is to confirm my telephone conversation with your associate, Rob Roe, regarding the capital infusion to be made by the investors in this package. As discussed with Mr.

Roe, the investors agree that the resulting thrift will make no distribution of dividends until such time as a commitment with regard to the remaining $12.5 million capital infusion (as described in the letter from James Fail to you of this date) is secured and submitted to the satisfaction of FSLIC. The purpose of the Fail and Carneal letters was to respond to the FHLBB resolution.

This resolution required plaintiffs to “provide satisfactory evidence to the OGC and the Office of Regulatory Activities as to the source of funds to he used for [CFSB’s] $50,000,000 of subsequent capital contributions to [Bluebonnet].” Mr. Wall testified that the letters satisfied that condition. The court finds that plaintiffs did not agree in the Fail and Carneal letters to forgo reliance upon dividends for financing purposes. Neither letter contains an express agreement not to rely upon dividends.

Although the Fail letter does not define the term “my own resources,” it is undisputed that at the time the parties entered the contract Mr. Fail purchased 100% of the outstanding common stock of CFSB. Thus, Mr.

Fail’s ownership of CFSB stock, which included the right to receive common stock dividends distributed by Bluebonnet to CFSB, was one of his “own resources.” Moreover, although plaintiffs agreed in the Carneal letter not to distribute dividends until having provided FSLIC with satisfactory evidence of a source of financing for the 1990 equity infusion, that did not prohibit plaintiffs from seeking financing based upon a future expectation of dividend distributions. Bankers Life agreed to loan Mr. Fail $35 million with knowledge that Bluebonnet could not distribute dividends until December 23, 1989. Mr.

Robert Beisenherz, a consulting actuary for the firm Lewis and Ellis in 1988 who was involved in the loan negotiations process, explained that there was an anticipation that there would be distributable earnings from Bluebonnet. Additionally, Mr. Root stated that if a borrower could demonstrate to a lender that dividends ultimately would be available from the borrower’s subsidiary, dividends would not need to be distributed immediately to attract financing.

Based upon this testimony, the court finds that the language of the letter does not foreclose the possibility of obtaining a source for the 1989 and 1990 infusions without actually distributing dividends before the infusions became due. In reading the contract as a whole, the court finds the contract did not prohibit plaintiffs from using dividends for financing the acquisition. In fact, Mr. Wall conceded on cross-examination that a thrift owner could use “income derived appropriately from a financial institution” to service his debt. Mr. Root testified for plaintiffs that there was nothing wrong with Mr.

Fail using dividends to help capitalize the acquisition of Bluebonnet. The court finds this testimony persuasive and convincing. Additionally, the court finds that evidence presented at trial also establishes that defendant should have known that plaintiffs would seek to rely upon dividends to help finance the Bluebonnet acquisition. Defendant knew that the dividend forbearance was an important component of the contract to plaintiffs. Mr. Carneal testified that he and Mr. Roe discussed the dividend forbearance, in which he told Mr.

Roe that exclusion of the dividend forbearance from Assistance Agreement would be a “deal killer.” Mr. Carneal testified that he and Mr. Roe discussed plaintiffs’ pro forma projections, which were included within their business plan, and told him that based upon these projections plaintiffs expected to receive dividends at the maximum 50% rate within its first year of operations. At the time the parties entered the Assistance Agreement, FHLBB knew that Mr. Fail and CFSB did not have sufficient funds to cover the entire $120 million acquisition. For example, Mr.

Wall testified on cross-examination that prior to closing he knew that the $120 million capital investment exceeded Mr. Fail’s net worth. Mr. Fail testified that he informed FHLBB that his net worth was approximately $30 — $40 million. This testimony was corroborated by a memorandum drafted by Neal Moran, a financial analyst for the Federal Home Loan Bank of New York, which stated that “[t]he capital investment exceeds Mr. Fail’s net worth.

He reports [a] net worth of $40 million.” Defendant also knew that CFSB was formed solely to acquire Bluebonnet, and its assets would consist of its common stock ownership in Bluebonnet and any other assets Mr. Fail would infuse. FHLBB further knew that Mr. Fail was borrowing money to finance the $35 million common stock infusion due on December 22, 1988. In a letter sent to Mr. Berg dated December 21, 1988, Mr. Carneal stated that Mr. Fail would borrow $35 million from ICH corporation, or one of its affiliates, to purchase the initial installment of Bluebonnet common stock. The letter informed Mr.

Berg that the loan would be collateralized by Mr. Fail’s common stock holding in Lifeshares. Additionally, the CASD Memo acknowledged that the loan would come from Bankers Life and that Mr. Fail would pledge his common stock in Lifeshares as collateral. Mr. Carneal provided to Mr. Roe via facsimile a copy of the commitment letter from Bankers Life concerning the $35 million loan on December 22, 1988.

Significantly, the commitment letter stated that collateral for the loan would include a security interest in 100% of the common stock of Lifeshares, 100% of the common stock of Bluebonnet, and other collateral that Bankers Life chose. Mr. Beisenherz testified that Bankers Life sought additional collateral beyond Lifeshares stock because Lifeshares had a net worth of approximately $20 million at the time, and he never anticipated that Lifeshares could fully service debt from the loan.

FHLBB had access to Lifeshares’ financial statements and thus should have known that the value of Lifeshares common stock could not completely support the 1988 loan. Mr. Beisenherz testified that Bankers Life looked to Bluebonnet common stock (which later was substituted with CFSB stock) as a source of collateral because it offered income to service debt and held Bankers Life’s money. The fact that Bankers Life required CFSB stock as collateral above and beyond Mr. Fail’s pledge of his Lifeshares common stock demonstrates that neither this stock nor his personal wealth could cover the $35 million loan.

Additionally, the Fail letter informed FHLBB that plaintiffs might fund the 1989 and 1990 infusions by obtaining loans collateralized by CFSB common stock. Mr. Root testified that if Bluebonnet generated earnings, the dividend forbearance would demonstrate that Mr. Fail and CFSB were good credit risks and would assist in attracting financing. Therefore, based upon all of the evidence discussed, the court finds that it was foreseeable that Mr. Fail would need to rely upon dividends not only to repay the 1988 loan, but also to help obtain financing for the 1989 and 1990 common stock infusions.

Consequently, the court finds it was foreseeable under the circumstances that Mr. Fail and CFSB would incur the increased financing costs they now claim without dividends to assist in obtaining additional loans and repaying existing debt. Defendant, however, argues that plaintiffs’ damages allegedly incurred from refinancing the 1988 Bankers Life loan were not foreseeable because plaintiffs told defendant they would obtain a long-term loan and not a three-month bridge loan. The court finds defendant’s argument unpersuasive. An attachment to Mr. Carneal’s December 21, 1988 letter to Mr.

Berg stated that the proposed loan would be long-term, but the details of the loan were still being negotiated. This language does not foreclose the possibility of a short-term loan. Moreover, Mr. Roe received the loan commitment letter from Mr. Carneal, which states that the term of the loan was being negotiated. Accordingly, the court holds that defendant should have foreseen the possibility that the loan could be short-term. B. Breach of capital plan and subordinated debt forbearances. Plaintiffs claim that the capital plan and subordinated debt forbearances were critical to their financing plans.

Plaintiffs contend that it was an economic advantage for Mr. Fail and CFSB to provide one-half of the $120 million infusion in the form of subordinated debt notes issued by Bluebonnet and purchased by third parties. Plaintiffs assert that it was foreseeable that a breach of the subordinated debt forbearance would cause Mr. Fail and CFSB to borrow more money, and in different forms, than originally planned, thus increasing their cost of financing.

Conversely, defendant asserts that it was not foreseeable that a breach of the capital plan and subordinated debt forbearances would cause plaintiffs to incur increased financing costs. Defendant claims that plaintiffs would have been required to infuse $120 million into Bluebonnet even if defendant had not raised the minimum regulatory capital requirement and eliminated the use of subordinated debt as regulatory capital. Defendant knew that MSL purchased a $35 million subordinated debt note from Bluebonnet the date the parties entered the contract.

Defendant also knew that Lifeshares would purchase subordinated debt or place it with unaffiliated third parties. Subordinated debt was a direct borrowing by Bluebonnet, not Mr. Fail or CFSB, and thus Bluebonnet was responsible for its repayment. Clearly, the subordinated debt forbearance reduced the amount of acquisition funds Mr. Fail and CFSB would need to raise. Based upon these facts, the court finds that a foreseeable consequence of the breach of the subordinated debt forbearance would be a drop in Bluebonnet’s regulatory capital level by $35 million.

FHLBB could foresee that the elimination of subordinated debt as regulatory capital would cause Mr. Fail and CFSB to borrow more capital than they would have absent the breach. After its initial capitalization, Bluebonnet’s regulatory capital level was compliant with the 1.75% capital requirement contained within the capital plan forbearance. Defendant projected that Bluebonnet would be viable over a five year period. These projections included a net income of $5.3 million after one year of operation.

The court finds that FHLBB could foresee that a breach of the capital plan forbearance would have caused Bluebonnet to fall out of capital compliance. Clearly, Bluebonnet would need to raise its core capital level, either by shrinking or infusing more capital. It was foreseeable that these breaches, together with the breach of the dividend forbearance, would cause Bluebonnet to retain dividends otherwise distributable under the dividend forbearance. Consequently, plaintiffs would be unable to use these dividends for financing purposes, and thus could incur higher financing costs.

Accordingly, the court finds it was objectively foreseeable at the time the parties entered the contract that a breach of the capital plan and subordinated debt forbearances would cause plaintiffs to incur increased financing costs. III. Causation It is well-established that damages in an action for a breach of contract are generally limited to the “natural and probable consequences of the breach complained of ...” Ramsey v. United States, 121 Ct.Cl. 426, 101 F.Supp. 353, 357 (1951).

Stated more particularly, “ ‘the cause must produce the effect inevitably and naturally, not possibly nor even probably.’ ” Id. (quoting Myerle v. United States, 33 Ct.Cl. 1 (1897)). Plaintiffs must prove defendant’s breach was a substantial factor in causing their damages. Cal. Fed. Bank, 43 Fed.Cl. at 451; Arthur L. Corbin, 5 Corbin on Contracts § 999, at 25 (1964); accord LaSalle Talman Bank v. United States, 45 Fed.Cl. 64, 97 (1999) (finding “sufficient evidence to establish that FIRREA was at least a substantial factor in plaintiffs increased costs”).

Plaintiffs claim that defendant’s breach of the three forbearances was a substantial factor in causing them to incur increased financing costs for the Bluebonnet acquisition. Plaintiffs aver that the three breaches destroyed the original capital structure of Bluebonnet and their financing plan. Plaintiffs assert that the breaches increased the riskiness of CFSB stock as collateral for a loan and prevented them from obtaining financing in the traditional capital markets. Plaintiffs allege that this increase in credit risk increased their cost of raising capital from Mr. Shaw in 1989, 1990 and 1992.

Plaintiffs also posit that factors unrelated to the breach did not cause their damages. Defendant argues that plaintiffs failed to prove that but-for the breach they would not have been damaged. Defendant asserts that plaintiffs’ damage claim fails because no potential investors with whom they met testified that the breaches dissuaded them from investing in Bluebonnet. Defendant maintains that the breaches did not make Bluebonnet or CFSB riskier and contends that plaintiffs could have raised capital despite the breaches.

Defendant also contends that plaintiffs failed to prove that non-breach factors would have caused them to enter the same financing terms absent the breach. In support of their claim, plaintiffs provided expert testimony from James G. Valeo, owner of Montana Mortgage Company. Mr. Valeo spent the majority of his career as an investment banker and financial consultant, which included assisting savings and loan institutions raise capital in the 1980’s and early 1990’s. Mr. Valeo was admitted as an expert in investment banking. Mr.

Valeo expressed an opinion concerning the effect the breaches had upon plaintiffs and their attempts to procure financing. Mr. Valeo testified that FIRREA caused a great deal of uncertainty in the capital markets which significantly reduced interest in thrift equity and debt securities. In discussing the dividend forbearance, Mr. Valeo opined that “the primary focus of an institutional investor in a debt instrument is cash flow,” and the ability to service debt. Mr.

Valeo asserted that the breaches, by prohibiting the distribution of common stock dividends by Bluebonnet, made CFSB a riskier investment to potential investors. Mr. Valeo testified that potential investors would not invest in CFSB because it was dependent upon Bluebonnet for income, it lacked sufficient income to service debt undertaken, and there was no certainty that defendant would ever permit Bluebonnet to distribute common stock dividends. Mr.

Valeo opined that although plaintiffs’ capital raising efforts were thorough and comprehensive, CFSB’s increased credit risk, together with the deteriorating capital markets, caused plaintiffs’ failure to raise capital. According to Mr. Valeo, Mr. Fail’s and CFSB’s financing costs increased because they could not obtain financing from anyone besides Mr. Shaw and his affiliated companies. Plaintiffs also offered the expert testimony of Mr. E. Gareth Plank, a retired securities analyst and employee of Lehman Brothers at the time of the breach. Mr.

Plank was admitted over objection as an expert on the effect of the breaches upon Bluebonnet. Mr. Plank testified that FIRREA created a wave of uncertainty which caused a drop in issuances of common and preferred stock by thrifts. Mr. Plank conceded that some companies with good prospects, such as income and asset protection, were able to raise capital. He opined, however, that the breaches destroyed Mr. Fail’s opportunity to raise capital, particularly because CFSB lacked cash flow from Bluebonnet. Mr. Plank testified that plaintiffs had no other option but to seek financing from Mr.

Shaw, and consequently paid higher financing costs. Plaintiffs also provided the expert testimony of Professor Roman Weil to address the issue of risk and plaintiffs’ financing costs. Professor Weil is a certified public accountant and certified management accountant. He teaches accounting and economies at the University of Chicago Graduate School of Business. Professor Weil testified that defendant’s breaches increased the risk and uncertainty that surrounded Bluebonnet and CFSB, which increased plaintiffs’ financing costs.

He opined that the prohibition of common stock dividend declarations to CFSB caused plaintiffs’ acquisition lenders to charge more to lend capital to Mr. Fail and CFSB. At trial, defendant produced two experts to rebut plaintiffs’ experts’ testimony regarding credit risk and plaintiffs’ inability to obtain financing in the capital markets. Defendant provided expert testimony from Professor Merton Miller, economist and joint recipient of the Nobel Memorial Prize in Economic Science in 1990.

Professor Miller was admitted as an expert in the area of financial economics, financial institutions, and corporate finance, including the areas of leverage, capital structure, dividend policy, cost of capital, valuation and corporate investment decisions. The court admitted Professor Miller as an expert over plaintiffs’ objection. Professor Miller expressed the opinion that the breaches did not increase CFSB’s credit risk or its cost of raising capital.

In discussing the dividend forbearance, Professor Miller testified that an assurance of cash flow from Bluebonnet to CFSB would not make CFSB a better credit risk because Bluebonnet still held its earnings and eventually would be able to distribute them. With respect to dividend distributions, Professor Miller discussed the “dividend irrelevance proposition,” one of the Miller and Modigliani (M &

M) propositions: All a dividend policy does is determine whether the shareholders get their money in cash or in the form of increase in the value of the shares. It’s the question of— as I often say — taking money out of one pocket and putting it in the other. It doesn’t determine the total value. Professor Miller testified that a company’s ability to raise capital depends upon its future prospects and not its current cash flow.

He opined that the breach of the dividend forbearance did not have any effect upon the future prospects of Bluebonnet, and he did not think investors would ever be concerned with a restriction upon dividend payments. He expressed the opinion that CFSB did not need dividends to obtain financing; rather, it could have raised capital by issuing securities or by using deferred interest debt instruments, such as payment-in-kind notes (PIKs). Defendant also provided the expert testimony of Dr. Kenneth Cone, an employee of Lexecon, an economics consulting firm. Dr. Cone was admitted as an expert in financial economies.

Dr. Cone opined that following FIRREA, thrifts and thrift holding companies could raise money for any purpose. He testified that thrifts raised approximately $1.3 billion in the months immediately following the enactment of FIRREA. Dr. Cone further stated that despite a restriction upon dividend payments to CFSB, Mr. Fail and CFSB could have raised capital through deferred interest debt instruments. Dr. Cone testified that in 1989 alone there were over $50 billion in deferred interest debt securities outstanding. In support of his opinion, Dr.

Cone discussed Amazon.eom’s success in raising approximately $300 million in deferred interest debt in 1998 despite a lack of cash flow or assurance the company would be able to improve its earnings or meet its debt service obligations. Dr. Cone also expressed the opinion that the breaches did not increase CFSB’s credit risk or plaintiffs’ cost of raising capital. Dr. Cone asserted that uncertainty about whether a company will earn profits affects its value and risk.

In the present case, however, where Bluebonnet earned profits but uncertainty only existed over when it would be permitted to pay those profits, such uncertainty would not impact the cost of raising capital. A. Credit Risk Professor Miller’s and Dr. Cone’s testimony concerning credit risk was contradicted by fact testimony and exhibits provided at trial. A manual generated by FSLIC, entitled “Purchasing an Insolvent Savings Institution through the Federal Savings & Loan Insurance Corporation,” stated that capital forbearances aided in reducing an acquirer’s risk.

According to the manual, FHLBB granted forbearances in order to give the new institution time to correct inherited problems without causing an undue risk to the investors or FSLIC. Mr. Root testified that based upon his experience at FSLIC and as President of Bowery Savings Bank, the dividend forbearance would reduce the credit risk of CFSB and Mr. Fail. In addition, Mr. Shaw testified that he perceived the 1989 loan to be riskier than the 1988 loan due to the breaches. In addition, Mr. Beisenherz, who negotiated the loans for Mr.

Shaw, testified that this increased credit risk was reflected in the terms of the 1989 loan to CFSB. Professor Miller also conceded that the breaches could cause a lender to view a loan as riskier. This testimony corroborates the opinions expressed by plaintiffs’ experts. The court holds that the forbearances would aid in reducing CFSB’s credit risk, and agrees with plaintiffs’ experts that the breaches increased the credit risk of CFSB and Mr. Fail. B. Capital Markets The court did not find Dr. Cone’s testimony concerning the abundance of thrift financing following FIRREA convincing. Dr.

Cone acknowledged that an exhibit underlying his opinion included offerings by thrifts after FIRREA of investment grade securities, conversions and public offerings. He admitted that these types of transactions were unrelated to the type of financing sought by plaintiffs following FIRREA. Dr. Cone, however, was unable to quantify the amount of capital raised in the last quarter of 1989 by thrift holding companies for infusion purposes. The court believes such information would more adequately represent the receptivity of the capital markets to the types of capital sought by Bluebonnet. Conversely, Mr.

Valeo and Mr. Plank focused on the availability in the market of the types of capital plaintiffs were seeking. For example, Mr. Valeo explained that all of the major equity transactions completed in the last quarter of 1989 and the first quarter of 1990 were mutual-to-stock conversions, which were not reflective of the conditions of the general equity markets at the time. Mr. Valeo also testified that between 1989 and 1991 only one issuance of high-yield debt occurred. This was the type of debt which plaintiffs were seeking. The court finds the testimony of Mr. Valeo and Mr.

Plank credible and persuasive, in part because of their experience in thrift financing during the time of FIRREA’s enactment. Dr. Cone and Professor Miller conceded they never assisted thrifts in raising capital. The court accepts Mr. Valeo’s and Mr. Plank’s opinion that the breaches caused plaintiffs’ inability to obtain financing outside of Mr. Shaw and his companies. Accord Glendale Fed. Bank, 43 Fed.Cl. at 402 (finding that after the passage of FIRREA the capital markets generally were closed to thrifts). C. Common Stock Dividends Professor Miller’s and Dr.

Cone’s testimony regarding the dividend irrelevance proposition and investors’ concern over current cash flow was contradicted by probative evidence received at trial. For example, the 1990 loan from Marquette to CFSB required CFSB to request that “[Bluebonnet] request in writing (with a copy to Lender) approval from OTS and all other necessary Governmental Authorities for the payment of dividends in accordance with the [CMA].” It is clear that Mr. Shaw was concerned with OTS’s restriction on the distribution of dividends to CFSB. In 1990, Mr. Shaw and Mr. Beisenherz met with OTS to discuss Mr.

Shaw’s desire to foreclose on Mr. Fail’s shares of CFSB common stock because Mr. Fail and CFSB were in default on them interest payments. Mr. Shaw also told Mr. Fail by letter that the most important element to his providing Mr. Fail and CFSB with permanent financing was “the demonstration of a predictable dividend flow” from Bluebonnet. Moreover, Mr. Shaw testified that he experienced pressure from his regulators in 1992 concerning the nonperformance on plaintiffs’ loans. Mr.

Franco testified on cross-examination that ICH weighed the effect of the breaches as part of a risk-based analysis in considering whether to loan additional capital to plaintiffs in 1989. On cross-examination, Professor Miller acknowledged that CFSB’s balance sheet was very similar to a typical bank holding company as described in an FDIC examination manual. He also conceded that dividends were relevant to a typical bank holding company in making it creditworthy. The court accepts Mr. Valeo’s and Mr. Plank’s position concerning the importance of dividends to CFSB and investors.

The court simply cannot agree with Professor Miller and Dr. Cone that CFSB would not care whether dividends remained within Bluebonnet. CFSB was created for the purpose of acquiring Bluebonnet, its sole asset. Common stock dividends from Bluebonnet were CFSB’s main source of income. Mr. Fail and CFSB had time-sensitive, capital contribution requirements and were dependent upon Bluebonnet to assist in financing the acquisition. Accordingly, the court holds that the dividend irrelevance proposition does not apply in this case.

As mentioned, the three breaches required plaintiffs to meet higher capital levels and eliminated the use of subordinated debt. The breaches, particularly the breach of the subordinated debt forbearance, destroyed the existing capital structure of Bluebonnet, thus requiring a new capital structure and a new plan for completing the capitalization.

In order to meet its higher capital standards under FIRREA, Bluebonnet had to replace the $35 million in subordinated debt, sell approximately $150 million in assets, retain all earnings generated at that time ($29,157,-000 as of September 30, 1989), and raise $25 million for the 1989 infusion. The evidence demonstrates that the breaches, and particularly the breach of the dividend forbearance, were a substantial factor in causing Mr. Fail and CFSB to incur increased financing costs. With respect to the 1989 loan, Mr.

Beisenherz testified it included contingent interest equal to 9% of CFSB’s profits, together with an equity kicker, to reflect the increased credit risk of Mr. Fail and CFSB. This was not the result of conventional financing, as Mr. Shaw conceded he was in a better bargaining position and took advantage of Mr. Fail’s breach-imposed condition. Mr. Shaw testified that he knew Mr. Fail had no other option than to risk default. The breaches also impacted plaintiffs’ financing terms in 1990. After unsuccessfully attempting to raise capital, plaintiffs sought permanent financing from Mr.

Shaw to cover the 1990 infusion and refinance the 1988 and 1989 loans. In a letter dated April 16, 1990, Mr. Shaw informed Mr. Fail that “the demonstration of a predictable dividend flow” from Bluebonnet was the most important element in providing permanent financing to plaintiffs. As of May 1990, Bluebonnet established a history of compliance with its new capital standards, and in August of that year had sufficient earnings to support a $25 million common stock dividend. OTS, however, denied all of plaintiffs’ requests between 1990 and December 1,1992, to distribute common stock dividends.

This continual denial of requests to distribute common stock dividends had direct consequences upon CFSB and Mr. Fail. First, CFSB’s lack of income from Bluebonnet common stock distributions left plaintiffs without a means in 1990 to repay debt or attract financing, placing them at risk of default to Mr. Shaw and ICH on their acquisition loans. In fact, in the Fall of 1990,' Mr. Shaw and Mr. Beisenherz met with OTS officials to discuss the possibility of Mr. Shaw, through CNC, foreclosing on CFSB stock due to plaintiffs’, nonperformance on their loan obligations.

Additionally, plaintiffs’ failure to attract financing also placed them at risk of default to defendant by failing to meet their capital' contribution obligations. Plaintiffs returned to Mr. Shaw in December 1990 to seek refinancing of their outstanding loans and for a loan for the 1990 infusion. Mr. Shaw, through Marquette, agreed to finance the 1990 infusion in return for the right to purchase CFSB stock by December 11, 1992, and Mr. Fail’s receiving less compensation through a sale of CFSB stock than agreed to in the 1989 agreement.

The agreement also required plaintiffs to take out PIK notes to cover the interest on the new loan. Defendant’s denial of dividend requests also affected the terms of the 1992 loan. After deciding in 1992 not to purchase Bluebonnet, Mr. Shaw demanded that plaintiffs address the outstanding loans due in December 1992. At that time plaintiffs owed the Shaw affiliated companies approximately $140 million. In addition, insurance regulators expressed concerns to Mr. Shaw over plaintiffs’ nonperformance on their loans. In an agreement reached on October 7,1992, Mr.

Shaw agreed to provide long-term financing in return for additional interest, fees and 50% of the ongoing net profits of CFSB. OTS did not decide to approve dividends until after plaintiffs filed suit in federal district court. Although OTS approved a number of Bluebonnet’s long-pending dividend requests on December 1, 1992, it nevertheless restricted dividend payments to pay down acquisition debt to Shaw and prohibited plaintiffs from using dividends for other purposes.

The court finds that plaintiffs could not have obtained financing from another lender prior to December 31,1992, in light of the fact of the amount of indebtedness to Mr. Shaw and OTS’s restriction upon the use of the common stock dividends. The court finds it was reasonable for Mr. Fail to enter this agreement with Mr. Shaw. D. Factors unrelated to the breach did not cause plaintiffs’ alleged damages. Defendant alleges that the financial condition of Mr. Fail’s insurance companies, including their involvement in litigation, contributed to plaintiffs’ inability to obtain financing.

Plaintiffs argue that the condition of Lifeshares or its affiliates did not cause their damages. In order to address these arguments, a brief discussion concerning Mr. Fail’s insurance companies is necessary. As mentioned, Mr. Fail owned MSL, which was located in Indiana, and Farm & Home, which was located in Arizona. During the time FIRREA was enacted, two of Mr. Fail’s insurance companies, MSL and Farm & Home, began to experience financial difficulties. In mid-1989, the Indiana Insurance Commissioner expressed some concern over the Bluebonnet subordinated debt note held by MSL.

Nevertheless, the State and MSL always treated the note as an “admitted” asset under Indiana insurance law, as found by the District Court for the Southern District of Indiana. On July 3,1990, Farm & Home was placed under supervision by the State of Arizona for failure to comply with state regulations regarding asset ownership. Three days later the State of Indiana placed MSL under supervision due to its financial condition. Later that year, both companies were seized by state insurance regulators. In March 1992, the State of Arizona filed suit against Mr. Fail concerning his alleged mismanagement of Farm & Home.

In April 1992, the State of Indiana similarly filed suit against Mr. Fail for his alleged mismanagement of MSL. Mr. Fail eventually entered settlement agreements in these lawsuits. The court finds that the condition of Lifeshares and the litigation involving Farm & Home and MSL did not cause plaintiffs’ damages. Credible testimony established that Lifeshares did not purchase subordinated debt in 1989 because it no longer qualified as regulatory capital and would not have satisfied the new capital requirement if plaintiffs used subordinated debt for any portion of the 1989 infusion.

In addition, plaintiffs proved that the $85 million in subordinated debt purchased by MSL did not affect the terms under which plaintiffs borrowed from CNC. The terms of the agreement which address subordinated debt were not performed and were intended to improve the collateral position of CNC and ICH. With respect to the 1990 infusion, plaintiffs presented testimony that MSL and Farm & Home did not purchase subordinated debt because plaintiffs already owed approximately $80 million to Mr. Shaw and there would have been no material impact if one of Mr.

Fail’s insurance companies, or an unaffiliated third party, purchased subordinated debt. The court found this testimony reasonable and persuasive. Defendant also alleges that Mr. Fail’s reputation caused his inability to obtain financing. The court finds this allegation to be without merit. On cross-examination, Mr. Dirk Adams, head of the corporate development department of World Savings, testified that Mr. Fail’s reputation had no impact on his company’s decision not to purchase Bluebonnet. In addition, Mr. Kurt Bolin, an operations manager for G.E. Capital, Inc., who met with Mr.

Fail and one of his representatives in 1989, proved that Mr. Fail’s reputation could not have played a role in G.E. Capital’s decision not to invest in Bluebonnet. Although Mr. Bolin testified that an

article concerning Mr. Fail that appeared in the New York Times in 1989 formed the basis of G.E. Capital’s decision not to invest, Mr. Bolin conceded on cross-examination that the

article upon which he relied was not published until 1990, well-after G.E. Capital made its decision. Accordingly, the court finds that defendant’s breaches were a substantial factor in causing plaintiffs’ alleged damages. IV. Reasonable Certainty The law of this circuit requires plaintiffs to prove the amount of their damages with reasonable certainty. See Wells Fargo, 88 F.3d at 1023. “[W]here responsibility for damage is clear, it is not essential that the amount thereof be ascertainable with absolute exactness or mathematical precision ____” Electronic & Missile Facilities, Inc. v.

United States, 189 Ct.Cl. 237, 416 F.2d 1345, 1358 (1969). “Certainty is sufficient if the evidence adduced enables the court to make a fair and reasonable approximation of the damages.” Locke v. United States, 151 Ct.Cl. 262, 283 F.2d 521, 524 (1960). Nevertheless, contract law precludes recovery for speculative damages. San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557, 1563 (Fed.Cir.1997); Roseburg Lumber Co. v. Madigan, 978 F.2d 660, 667 (Fed.Cir.1992). Plaintiffs claim they have proven with reasonable certainty that the breaches caused them to incur $175,882,000 in damages.

As mentioned, this number is comprised of: (1) additional interest; (2) additional loan fees paid to lenders; and (3) the cost of the EBA and its successor agreements. A. Professor Well’s Model Professor Weil’s model measures damages by calculating the difference between the actual net financing costs of Mr. Fail and CFSB and the net financing costs they would have incurred in the absence of the breach (but-for costs).

In calculating plaintiffs’ actual costs, Professor Weil relied upon corporate financial records of CFSB and Bluebonnet, plaintiffs’ financial statements, consolidated statements, dividend declarations, loan agreements and payment records. Professor Weil determined CFSB’s actual net financing costs were $26,346,000, while Mr. Fail’s actual net financing costs amounted to $54,375,-000. Professor Weil concluded that the amount due to CNC from Mr. Fail under the EBA is $126,997,808 as of September 30, 1998.

Professor Weil, however, did not calculate the value of CNC’s economic benefits, but instead relied upon a one-page document referred to as the “Memorandum Account” (Memo Account), which was calculated by accountants for CFSB, as well as the SAREBA. Professor Weil opined that the EBA was a cost of financing. Dr. Cone conceded this point. A portion of the EBA-related damage included Mr. Fail’s payment of $5,400,392 to CNC. Assuming the court grants CFSB’s alleged damages, plaintiffs contend Mr. Fail is entitled to 49% of that amount. Professor Weil included this figure, which amounts to $11,957,000, in his model.

Professor Weil determined CFSB’s but-for financing costs are $1,944,000 and Mr. Fail’s but-for financing costs are $47,250,000. In making these calculations, Professor Weil made certain assumptions concerning the actions of Bluebonnet, CFSB and Mr. Fail in the but-for world. These assumptions are:

(1) Bluebonnet performs as it did in the actual world except that it distributes common stock dividends equal to 50% of the fiscal year net income to CFSB;

(2) CFSB pays dividends to Mr. Fail sufficient to pay his debt service and other expenditures made in the actual world;

(3) CFSB makes the same expenditures and investments as in the actual world;

(4) CFSB borrows at 13.5%, the market rate at the time the contract was entered, and pays down its debt as quickly as possible;

(5) Mr. Fail borrows $35 million from Bankers Life at 13.5% and repays his debt as in the actual world; (6) if CFSB has additional cash, it invests it at a 5% rate;

(7) Mr. Fail is not required to enter the EBA. Professor Weil next measured CFSB’s damages by calculating the difference between its actual financing costs, which are $26,346,000, and its but-for financing costs ($1,944,000), w

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