United States Court of Appeals for the Federal Circuit 

05-5164 

LASALLE TALMAN BANK, F.S.B., 

 

 Plaintiff-Appellee, 

v. 

UNITED STATES, 

Defendant-Appellant. 

Wilber H. Boies, McDermott, Will & Emery, of Chicago, Illinois, argued for 

plaintiff-appellee. With him on the brief were Marie A. Halpin and Suzanne M. Wallman. 

Also on the brief was Thomas P. Steindler, of Washington, DC. 

William F. Ryan, Assistant Director, Commercial Litigation Branch, Civil Division, 

United States Department of Justice, of Washington, DC, argued for defendantappellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney 

General, David M. Cohen, Director, Jeanne E. Davidson, Deputy Director, Tarek Sawi

and John J. Todor, Trial Attorneys. 

Appealed from: United States Court of Federal Claims 

Senior Judge Eric G. Bruggink 
United States Court of Appeals for the Federal Circuit 

05-5164 

LASALLE TALMAN BANK, F.S.B., 

 Plaintiff-Appellee, 

v. 

UNITED STATES, 

 Defendant-Appellant. 

_______________________ 

DECIDED: August 25, 2006 

_______________________ 

Before NEWMAN, LOURIE, and LINN, Circuit Judges. 

LOURIE, Circuit Judge. 

The government appeals from the decision of the United States Court of Federal 

Claims (the “Claims Court”) awarding LaSalle Talman Bank, F.S.B. (“LaSalle”) $146.7 

million in “cost-of-replacement-capital” damages. Because the Claims Court did not 

clearly err in awarding those damages, we affirm. Moreover, because the Claims Court 

did not clearly err in determining that the cost-of-replacement-capital damages award 

will most likely be subject to income taxation, we affirm its decision to upwardly adjust 

the damages award to reflect LaSalle’s effective tax rate of 39.5%. 
BACKGROUND 

Talman Home Federal Savings and Loan Association of Illinois (“Talman”), 

Appellee LaSalle’s predecessor, was formerly a stockholder-owned association. In 

1982, Talman and several other Illinois thrifts were failing or had failed due to an 

extreme rise in interest rates. LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 

1363, 1366 (Fed. Cir. 2003) (“LaSalle I”). To sustain the savings and loan industry and 

to avoid exhaustion of the Federal Savings and Loan Insurance Corporation (“FSLIC”) 

insurance fund, federal authorities consolidated failing or failed thrifts into associations 

that were more efficient, received closer regulatory oversight, and received significant 

assistance from the government. This assistance included direct monetary 

contributions, regulatory forbearances, and, of particular interest to this case, 

authorization to use a purchase accounting system whereby assets and liabilities would 

be revalued at market price and the ensuing net liability would be recorded as an asset 

called “supervisory goodwill.” Id. at 1367. A more detailed discussion of the savings 

and loan crisis of the early 1980’s is provided in United States v. Winstar Corp., 518 

U.S. 839 (1996). 

By utilizing supervisory goodwill and making a series of sound business 

decisions, Talman reached a state of profitability in 1986. Id. at 1368. In 1988 and 

1989, Talman distributed to its shareholders a total of $1.9 million and $2.4 million, 

respectively, in dividends that were purportedly based on the thrift’s past and projected 

future earnings. Id. After the enactment and implementation of the Financial 

Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), Pub. L. No. 

101-73, 103 Stat. 183 (Aug. 9, 1989), however, Talman’s entitlement to account for 

05-5164 -2-
supervisory goodwill was phased out, and the thrift failed to meet that statute’s new 

stringent capital requirements. On the brink of federal receivership, in February 1992, 

ABN AMRO, the North American subsidiary of a Netherlands bank, bailed out Talman 

by purchasing all of its outstanding common stock for $97 million. Id. At that time, ABN 

AMRO also infused Talman with $300 million in cash so that it could meet FIRREA’s 

capital requirements. Id. Some years after the acquisition, ABN AMRO merged Talman 

with LaSalle Cragin Bank and named the merged thrift LaSalle Talman Bank, F.S.B. A 

more detailed discussion of the financial and regulatory arrangements made between 

Talman and the government is provided in LaSalle I. 

After weathering the difficult financial circumstances that lasted from the 1980’s 

to the early 1990’s, Talman, and now LaSalle, has remained a viable business. From 

1993 to 1998, the Claims Court determined that ABN AMRO provided $800 million in 

cash beyond the initial $300 million in 1992 so that LaSalle could continue to expand 

and be profitable. Id. at 1369. During that time, LaSalle distributed dividends to ABN 

AMRO totaling $417.8 million. Id. Those dividends were classified as either 

“mandatory” or “special.” Mandatory dividends were payments equal to one-third of 

LaSalle’s budgeted net income that ABN AMRO, the parent corporation, required 

LaSalle to make. Special dividends were supplemental payments that LaSalle made to 

ABN AMRO if it had excess capital and the financial wherewithal.1

 Special dividends 

were discretionary in that, before they could be declared, LaSalle had to obtain approval 

from ABN AMRO. 

 1 ABN AMRO required a capital level for its subsidiary banks of 50 basis 

points above well-capitalized minimums. 

05-5164 -3-
In LaSalle I, we affirmed the Claims Court’s decision that the government, 

through its enactment and implementation of FIRREA, breached its contract with 

Talman that allowed Talman to account for supervisory goodwill. Id. at 1370. We 

determined that, “[a]s discussed in Winstar, the right to account for goodwill as a capital 

asset to meet regulatory requirements, and to amortize it over an extended period, was 

abrogated by FIRREA.” Id. We vacated and remanded, however, that portion of the 

Claims Court’s decision rejecting LaSalle’s claim for damages, except for the award of 

$5,008,700 for expenses that Talman incurred in connection with its FIRREA-induced 

sale to ABN AMRO. Id. at 1366. We noted that the Claims Court correctly recognized 

that LaSalle could recover “cost of replacement capital” that it incurred due to the 

breach, viz., the cost of substituting real capital (ABN AMRO’s $300 million cash 

infusion) for supervisory goodwill that was no longer available. Id. at 1374. 

Nonetheless, we concluded that the court erred in ruling that because LaSalle did not 

incur a legally enforceable cost for the $300 million in replacement capital that it had 

received, there were no damages under the cost-of-replacement-capital theory. Id. at 

1373. We determined that “the cost of capital does not depend on whether payment is 

made as debt, or out of anticipated future earnings.” Id. at 1375 (citations omitted). We 

further noted that “[a]ll capital raised by a corporation has a cost, and it is well 

established that the payment of dividends is a capital cost.” Id. (citations omitted). 

Thus, we instructed the Claims Court to calculate on remand the cost of replacement 

capital for ABN AMRO’s $300 million cash infusion attributable to the dividends that 

were paid out of Talman’s and LaSalle’s earnings.2

 Id. 

 2

 In LaSalle I, we also vacated and remanded the Claims Court’s finding 

05-5164 -4-
The Claims Court conducted a second trial in February 2004. In February 2005, 

the court instructed the parties to calculate the cost-of-replacement-capital damages 

based on certain modifications that it had made to LaSalle’s proffered model for 

calculating those damages. LaSalle Talman Bank, F.S.B. v. United States, 64 Fed. Cl. 

90, 107 (2005) (“LaSalle II”). The court’s modified damages model counted all 

dividends that could be considered a return on ABN AMRO’s initial $300 million 

investment, and identified that sum of dividends as the cost of replacement capital. Id. 

In doing so, the court did not distinguish between mandatory and special dividends. Id.

at 111. As a factor mitigating the damages award, the court then required the parties to 

subtract from the sum of dividends constituting a return on capital the benefits that 

LaSalle derived from having $300 million in cash rather than $300 million worth of 

supervisory goodwill. Id. at 107, 111-12. The court’s modified damages model further 

reduced the cost-of-replacement-capital award by the amount of dividends that Talman 

would have distributed to its stockholders had there been no FIRREA-induced breach. 

Id. at 108, 112. According to the court, that adjustment was necessary to reflect a cost 

avoided by LaSalle. Id. at 110. After applying the court’s modifications to LaSalle’s 

damages model, the parties stipulated to $146.7 million in cost-of-replacement-capital 

damages, which the court then entered as a final judgment. 

In addition, the Claims Court agreed with LaSalle that the cost-of-replacementcapital damages award would most likely be subject to income taxation. Id. at 116. 

 

that there were no lost profits. Id. at 1374. In making this finding, the court considered 

post-breach profits that were attributable to ABN AMRO’s $800 million cash infusion, 

which we determined to be unrelated to the government’s FIRREA-induced breach. On 

remand, only considering profits attributable to ABN AMRO’s initial $300 million cash 

infusion, the Claims Court awarded LaSalle $3.28 million in lost profits. The 

government has not appealed that lost profits award and thus we will not address it. 

05-5164 -5-
Thus, in order to put LaSalle in the same position that it would have been in had there 

been no breach, the court “grossed-up” the damages award by LaSalle’s anticipated 

effective tax rate. Id. According to the trial court, LaSalle sought “the cost of 

replacement capital as part of a claim for expectancy damages. The dividend costs 

were an expense incurred in order to put [LaSalle] back into a pre-breach position with 

respect to its earning capacity. . . . [The trial court has] no reason to believe that the 

Internal Revenue Service would treat the reimbursement of this cost item as a 

replacement of a capital asset [, which is not taxable].” Id. The court further noted that, 

“as a general proposition, amounts received as damages in litigation are taxable as 

income.” Id. The court also found, relying on the testimony of Martin Eisenberg, tax 

director for both ABN AMRO and LaSalle, that LaSalle’s effective tax rate for the 

damages award would be 39.5%. Id. at 118. 

The government timely appealed to this court. We have jurisdiction pursuant to 

28 U.S.C. § 1295(a)(1). 

DISCUSSION 

We review the Claims Court’s legal determinations without deference and its 

findings of fact for clear error. Home Sav. of Am. v. United States, 399 F.3d 1341, 1346 

(Fed. Cir. 2005). We review the trial court’s methodology for calculating the cost-ofreplacement-capital damages for an abuse of discretion. Id. at 1347. 

On appeal, the government argues that the trial court erred by not considering 

dividends that Talman would have continued to pay but for the FIRREA-induced breach 

(“but-for dividends”). According to the government, the trial court erred in accepting 

LaSalle’s contention that but-for dividends were irrelevant to the damages analysis. 

05-5164 -6-
Had the court properly considered but-for dividends, the government asserts, there 

would have been no net damages because the but-for dividends would have been 

greater than the dividends that Talman, and later LaSalle, actually paid ABN AMRO as 

a return on its $300 million cash infusion. 

We disagree with the government that the Claims Court failed to properly 

consider dividends that the bank would have paid but for the FIRREA-induced breach. 

By instructing the parties to calculate damages by prorating the total sum of the 

dividends using the percentage of infused capital that the $97 million stock purchase 

represented, the Claims Court did take into account but-for dividends.3

 LaSalle II, 64 

Fed. Cl. at 108, 112. Moreover, the trial court did not fail to account for Talman’s past 

history of dividend distribution in its analysis. Based on trial testimony, the court did not 

clearly err in determining that the dividends that Talman distributed in 1988 and 1989 

were not an accurate indicator of how Talman would have continued to distribute 

dividends in the future had there been no FIRREA-induced breach. Id. at 110. 

We also conclude that the Claims Court’s methodology of accounting for but-for 

dividends was not an abuse of discretion. The trial court’s methodology presumed that, 

regardless of Talman’s past history of dividend distribution, some portion of the 

dividends that were distributed after ABN AMRO provided the $300 million cash infusion 

was necessarily a return on capital. That presumption is consistent with LaSalle I, in 

which we stated that “[a]ll capital raised by a corporation has a cost.” 317 F.3d at 1375. 

 3

 For example, in 1992, prior to any cash infusion by ABN AMRO aside from 

the initial $300 million, if LaSalle had distributed a $10 dividend the court would have 

considered approximately $2.44 of that dividend to be the but-for dividend (97/397)—an 

avoided cost—and $7.56 of that dividend to be the cost of replacement capital 

(300/397). 

05-5164 -7-
Moreover, given that Talman and LaSalle did not specify what portion of its dividends 

was a return on the $97 million stock purchase rather than the $300 million cash 

infusion, it was reasonable for the trial court to prorate the applicable dividends using 

the ratio of those investment amounts. 

The government next contends that the Claims Court erred in not requiring 

LaSalle to prove proximate causation between ABN AMRO’s $300 million cash infusion 

and certain dividends that LaSalle claimed were a cost of replacement capital. 

According to the government, the trial court improperly assumed that a portion of every 

dividend that LaSalle distributed, no matter how unrelated to and remote from the $300 

million cash infusion, was a return on capital. To support its position, the government 

points to LaSalle’s payment of special and mandatory dividends. The government 

argues that mandatory dividends were predetermined scheduled payments that ABN 

AMRO required of LaSalle, and thus that they “could be justified” as a cost of 

replacement capital. Special dividends, however, the government asserts, should not 

have been counted as a cost of replacement capital. Citing LaSalle’s internal policy for 

distribution of special dividends, the government contends that those dividends were 

discretionary and that they were distributed for reasons unrelated to ABN AMRO’s $300 

million cash infusion; e.g., in one instance, a special dividend was distributed because 

another ABN AMRO subsidiary bank needed capital. 

We conclude that the Claims Court did properly require LaSalle to establish the 

requisite proximate causation between the dividends counted in the court’s cost-ofreplacement-capital damages award and the government’s FIRREA-induced breach. 

The trial court determined that it was foreseeable that the government’s breach would 

05-5164 -8-
require LaSalle to replace supervisory goodwill with tangible capital, and we noted that 

“[a]ll capital has a cost.” LaSalle II, 64 Fed. Cl. at 106-07 (citing LaSalle I, 317 F.3d at 

1375). We further recognized that dividends can be a form of payment for cost of 

replacement capital. LaSalle I, 317 F.3d at 1375. Thus, LaSalle established proximate 

causation. 

Nor did the trial court abuse its discretion in counting special dividends in the 

cost-of-replacement-capital damages award. The court relied on Professor Christopher 

James, LaSalle’s damages expert witness, who calculated the cost-of-replacementcapital damages based on dividends that reflected a return on capital, regardless 

whether the dividends were called special or mandatory. We implicitly approved of this 

approach in LaSalle I, in which we stated that “[i]n general, payment of a return on 

capital reflects the cost of capital.” Id. Tellingly, in LaSalle I, we did not distinguish 

between special and mandatory dividends. Thus, we conclude that the trial court did 

not abuse its discretion in employing a methodology that counted all dividends, including 

special dividends, that were a return on capital as part of the cost-of-replacementcapital damages award. 

Furthermore, we reject the government’s argument that special dividends were 

distributed for reasons other than as a return on capital, and thus should not count as a 

cost of replacement capital. As the trial court recognized, just because ABN AMRO had 

a particular reason for declaring dividends, e.g., that another ABN AMRO subsidiary 

bank needed additional capital, it does not mean that those dividends cannot also be 

considered a return on capital. LaSalle II, 64 Fed. Cl. at 111. On the contrary, there 

was testimony in the record from LaSalle’s executives that as long as dividends were 

05-5164 -9-
paid out of LaSalle’s retained earnings, regardless whether they were called special or 

mandatory dividends, they were considered a return on investment. The trial court did 

not clearly err in crediting that testimony. Id. (stating that “the relevant criteria is the 

source of the funds, not the name given to the dividend”). Moreover, the court did not 

clearly err in crediting the testimony of Professor James, who conducted a “careful 

review” of LaSalle’s financial record to discern both special and mandatory dividends 

that were a return on capital. Id. Thus, we conclude that there was no clear error in the 

court’s finding that certain special dividends were a return on ABN AMRO’s $300 million 

cash infusion. 

Lastly, the government assigns error to the Claims Court’s gross-up of the 

damages award based on the expectation that the award would be subject to income 

taxation. The government makes three arguments to support its position: (1) LaSalle 

does not pay its own taxes, but rather its parent, ABN AMRO, files a consolidated 

return; (2) because the cost-of-replacement-capital damages award is not intended to 

increase LaSalle’s wealth, the IRS is unlikely to treat it as taxable income; and (3) the 

court’s gross-up of the award does not conform to LaSalle’s historical tax rate. 

We affirm the Claims Court’s decision to gross up the damages award to reflect a 

39.5% tax rate. We addressed a similar issue in Home Savings, viz., whether a grossup of the cost-of-replacement-capital damages award was appropriate given that it was 

the parent company that would pay taxes on the subsidiary thrift’s damages award. 399 

F.3d at 1356. In Home Savings, we concluded that such a gross-up was appropriate. 

Id. Similarly here, we discern no clear error in the court’s finding that, because the cost 

of replacement capital represented a return on capital, the IRS would treat the damages 

05-5164 -10-
award as a taxable item even though LaSalle’s taxes would be paid as part of a 

consolidated tax return filed by ABN AMRO. In view of testimony offered at trial, we 

also conclude that the Claims Court did not clearly err in determining LaSalle’s effective 

tax rate to be 39.5% for the damages award. 

We have considered the government’s remaining arguments, including the 

argument supporting its request that we verify whether LaSalle does indeed pay taxes 

on the cost-of-replacement-capital damages award, and we find them to be 

unpersuasive. 

CONCLUSION 

We affirm the Claims Court’s decision awarding LaSalle $146.7 million in cost-ofreplacement-capital damages. We also affirm the court’s decision to increase the 

damages award to account for anticipated income tax payments at a rate of 39.5%. 

AFFIRMED

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