Opinion ID: 212039
Heading Depth: 4
Heading Rank: 2

Heading: Replacement Costs

Text: 43 The government next argues that the Court of Federal Claims erred in awarding hypothetical replacement costs. The government insists that economic principles prove that capital has no cost other than transaction costs because raising capital represents a zero-sum exchange. Pursuant to these principles, Ahmanson got what it paid for, namely, the right to use capital temporarily, so the fair price it paid for that capital did not represent a harm to Ahmanson. Further, because Ahmanson raised capital for a variety of reasons and did not specify which portion of the capital it raised to replace supervisory goodwill, the government contends that there was no way of determining the actual cost of the capital that replaced the lost supervisory goodwill. Finally, according to the government, although the court recognized a tangential benefit from the replacement of supervisory goodwill with cash, the way in which the court did so — deducting the safe rate of return on this cash from the cost of raising the capital — fails to reflect the full range of benefits Home received from its possession of tangible capital. In the government's view, using a safe rate of return as a proxy for the benefits of tangible capital is unfounded and speculative. 44 The plaintiffs argue that the replacement cost damages reflect the precise economic benefit of the supervisory goodwill lost due to the government's breach. According to the plaintiffs, although Ahmanson's private capital raisings were fair deals insofar as Ahmanson received something of equal value to what it gave up, that fact is irrelevant because Ahmanson was harmed by having to seek such deals in the first place; all such financings required the company to pay a higher rate for funds than it could have obtained from depositors had it been allowed to rely on supervisory goodwill. In addition, the plaintiffs argue, the government's assertion that Home received an additional risk-reduction benefit rests on false premises: Home was no safer a thrift for depositors merely because it had additional tangible capital, because its customers' deposits were already guaranteed by the government. 45 We see no abuse of discretion in the trial court's methodology for calculating the cost of replacement capital. The court correctly discounted the argument made by the government's expert that capital has no cost other than transaction costs, as this court had already rejected the same argument. See LaSalle Talman, 317 F.3d at 1374-75. Instead, the Court of Federal Claims properly noted that capital is not costless; its cost is the required rate of return on various terms of financing. See id. at 1375. Consequently, we hold that the court did not abuse its discretion in setting up its model. 46 To account for the inherent benefits of cash over intangible capital, the trial court also correctly discounted the award by the safe rate of return Ahmanson could earn by investing that cash. A plaintiff's damages in a cover situation are discounted by expenses saved as a result of [defendant's] breach. 14 Williston on Contracts § 40:34 (4th ed.2000). The plaintiffs were able to save expenses as a result of the government's breach because the cash Ahmanson raised was more valuable than an equal amount of supervisory goodwill. Supervisory goodwill is an intangible asset that cannot by itself fund loans. Supervisory goodwill merely provides a thrift with leverage, or legal permission to obtain additional deposits, whereas cash is tangible capital that can both provide leverage and fund loans. Thus, the cash Ahmanson raised not only contributed to Home's regulatory capital, it substituted for cash that Home would otherwise have had to raise through deposits. Home and Ahmanson reaped an incidental benefit from this cash equal to the cost of the deposits they no longer had to obtain. Because deposits were guaranteed by the government, the court estimated their cost using the rate paid for a comparable government-backed asset, the intermediate-term Treasury bond. We agree with the Court of Federal Claims that this safe rate offset account[s] for the difference between what was lost and what was substituted. Home III, 57 Fed.Cl. at 723. The court's approach to calculating the benefits of cash was therefore within the court's sound discretion. 8 47 Contrary to the government's assertion, Ahmanson did not obtain a greater incidental benefit than the one approximated by the safe rate of return. The rate it paid for deposits would not have been changed by the increased tangible capitalization of Home, because deposits were insured by the government and therefore did not become safer simply because Home possessed more tangible capital. 48