7781 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR 11-19-97 22 7782 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire (Not present) Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 7783 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 7784 1 2 EXAMINATION INDEX 3 4 Page 5 CHARLES WHITE 6 Cont'd Cross-Examination by Mr. Dueffert.7785 7 Cross-Examination by Mr. Keeton..........7852 8 Redirect-Examination by Mr. Schwartz.....7869 9 Recross-Examination by Mr. Dueffert......7873 10 11 DOUGLAS LOVELL 12 Cross-Examination by Mr. Dueffert........7887 13 14 15 16 17 18 19 20 21 22 7785 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Good morning. Be seated, 4 please. 5 6 (Discussion off the record.) 7 8 THE COURT: We'll be on the record. 9 Mr. Dueffert, you may proceed. 10 MR. DUEFFERT: Thank you, Your Honor. 11 12 CONT'D CROSS-EXAMINATION 13 14 15 MR. DUEFFERT: Could we have 16 Exhibit T7335, please? For the record, because 17 there is a carry-over witness today, I'm going to 18 need Mr. Farley's assistance to get some of the 19 documents out of the boxes behind the witness, and 20 I'll have to ask Mr. Langdon to pull some of the 21 exhibits. This is located at Tab 818, for the 22 record. 7786 1 Q. (BY MR. DUEFFERT) Welcome back, 2 Mr. White. Good morning. 3 A. Good morning. 4 Q. I'd like to return, as we begin, to 5 March 31st, 1986. Could you turn to Page 4 of 6 this exhibit? And I guess, for the record, would 7 you first identify the exhibit? 8 A. This is -- appears to be a quarterly -- 9 project quarterly reports as of 30 June 1985. 10 Q. All right. Would you have been at all 11 involved in the preparation of this document? 12 A. Yeah. You can see on Page 1, 13 originated by Noel Simpson and Charles White. 14 Q. Okay. Could you turn to Page 4 of 15 the -- 16 A. Yes. 17 MR. SCHWARTZ: Could you -- 18 Mr. Dueffert, could you identify the Bates number 19 because there is a two-page cover? 20 MR. DUEFFERT: The Bates number is 21 CN085969. 22 Q. (BY MR. DUEFFERT) Do you see 7787 1 Paragraph 4.1.1? 2 A. Yes, sir. 3 Q. It refers to closing letters of credit. 4 A. Yes. 5 Q. Do I understand correctly that while 6 the Alamo note on the Park 410 property was a 7 non-recourse note, the joint venturers had also 8 pledged some $4 million in letters of credit as 9 collateral? 10 A. Yes, that's true. 11 Q. If the joint venturers didn't make the 12 interest payment on March 31st, 1985, would they 13 be in default under the note? 14 MR. SCHWARTZ: Objection, Your Honor. 15 Calls for a legal conclusion from the witness. 16 THE COURT: All right. Denied. Do you 17 know? Denied. 18 THE WITNESS: Well, to be certain, I'd 19 have to look at the -- that loan document. I 20 mean, I could speculate on it; but I mean, I'd 21 have to look at the loan document to say with 22 certainty if that would make us under default and 7788 1 have to look at the various remedies and those 2 kinds of things to give you a real clear answer. 3 Q. (BY MR. DUEFFERT) If the joint 4 venturers -- looking at March 31st, 1986, would 5 you dispute that if the joint venturers didn't 6 agree or didn't elect to infuse more than 7 $3 million into interest, they would face the 8 prospect of having the $4 million in letters of 9 credit drawn on? 10 MR. SCHWARTZ: Same objection, Your 11 Honor. 12 THE COURT: Denied. 13 A. Well, I'm not -- let's see. That loan 14 was about 35 million. I'm not quite sure of the 15 interest number. You said there was $3 million of 16 interest due at that time? 17 Q. (BY MR. DUEFFERT) Could we have 18 Exhibit A10294, please? Mr. White, do you 19 recognize this as a 3.4-million-dollar cash call 20 to, as it says in the first line, open quote, 21 "Funded the annual interest payment due March 29, 22 1986," close quote? 7789 1 A. Yes, this appears to be a capital call. 2 Q. Does that appear to be the signature of 3 Mr. Simpson on the second page? 4 A. Yes. 5 MR. DUEFFERT: Move the introduction of 6 Exhibit A10294. 7 MR. SCHWARTZ: No objection, Your 8 Honor. 9 THE COURT: Received. 10 Q. (BY MR. DUEFFERT) Mr. White, does 11 this document and the prior document and the 12 documents we looked at yesterday refresh your 13 recollection of the circumstances the joint 14 venturers faced if they didn't refinance the 15 property by March 31st, 1986? 16 A. Does it refresh my memory? 17 Q. Yes. 18 A. I guess I can say yes to that. 19 Q. And did the interest payment and the 20 prospect of losing those letters of credit present 21 a substantial reason for the venturers to 22 refinance the project by March 31st, 1986? 7790 1 A. Well, it was certainly a reason 2 certainly. 3 Q. You wouldn't call it substantial? 4 A. Well, $3 and a half million is 5 substantial. I'll say substantial. 6 Q. Could we have Exhibit T7079, please? 7 For the record, sir, what is this exhibit? 8 A. This is a management summary. Well, 9 it's part of a quarterly report. 10 Q. Is this a document that you would have 11 been involved in preparing? 12 A. Yes. 13 MR. DUEFFERT: Your Honor, I'd move the 14 admission of Exhibit T7079. 15 MR. SCHWARTZ: No objection, Your 16 Honor. 17 THE COURT: Received. 18 A. I think it's already in there. I think 19 we've looked at this before. 20 Q. (BY MR. DUEFFERT) Do you recall your 21 testimony yesterday that as part of the 1986 22 Park 410 loan, not the joint venture but the loan, 7791 1 the borrowers were required to pledge as 2 collateral $10 million in letters of credit which 3 were held as -- and these are your words -- "cash 4 at various lending institutions that had to be 5 there and be on deposit and you couldn't touch 6 it"? 7 Do you recall that? 8 A. Yes. 9 Q. Take a look at Page 3 of this document. 10 A. Okay. 11 Q. Point 9 at the bottom is captioned 12 "priorities," and the second bullet point says, 13 "Syndicate the cash equity required by lenders, 14 (estimated IPIC share $4.37 million)." 15 Do you see that? 16 A. Yes. 17 Q. Is that a reference to your firm's 18 contribution to those $10 million in letters of 19 credit? 20 A. This -- well, this is before the 21 money's in place and is an estimate of the amount 22 of money that would need to be syndicated on 7792 1 IPIC's side. 2 Q. Once again, is that referring to the 3 letters of credit that would be in place after the 4 loan was extended? 5 A. No. We're talking about the 6 development loan? 7 Q. Yes. 8 A. With United? 9 Q. Yes. 10 A. Well, I don't think it ended up being 11 4.375 million. I think it was only 4 million, but 12 it may have been this total amount. But this 13 refers to the funds that would need to be 14 syndicated in order to establish the letters of 15 credit that we anticipated at this time we'd need 16 in order to close the loan with United. 17 Q. And that money would be at risk in the 18 project. Right? 19 A. Yes. 20 Q. And you viewed that money as equity, 21 cash equity. Right? 22 A. Yes. 7793 1 Q. As we concluded the testimony 2 yesterday, I asked you about the closing date of 3 the Park 410 loan, and I -- perhaps because your 4 voice trailed off, the court reporter didn't get 5 it on the record. 6 Could we have Exhibit B3863, please? 7 You, I think, suggested that the version of the 8 closing statement that you were looking at was a 9 little fuzzy and you couldn't read the date. 10 Does this help to refresh your 11 recollection as to the closing date of the 12 Park 410 transaction? 13 A. This looks like April 17th. The money 14 was wired on April 17th. 15 Q. Could we have Exhibit B3864? Are your 16 initials, CW, at the bottom of this document? 17 A. Yes. 18 Q. And does it reference a closing as of 19 April 17, 1986? 20 A. Yes. 21 Q. Does that confirm in your mind that 22 that was the date of the closing? 7794 1 A. That's the effective date of the 2 closing. 3 Q. Why do you say "effective date"? 4 A. Well, because -- well, we paid interest 5 from the beginning of April as if the closing was 6 on March 31st. I mean, the documents at United or 7 whatever were backdated in order to establish the 8 loan as actually beginning on the 1st of April. 9 Q. So, is that why when Mr. Schwartz asked 10 you yesterday, open quote, "This loan closed in 11 the first week of April 1986," close quote, you 12 answered, unequivocally, "correct"? 13 A. Yes. 14 Q. Is that because the loan -- 15 A. And that would be why my recollection 16 is that the closing was on the 31st, because even 17 though these statements say the 17th, effectively 18 from all the work I was doing, the loan really 19 began on the 1st of April. 20 Q. Did you ever meet with Mr. Schwartz or 21 Mr. Leiman prior to testifying yesterday? 22 A. Yes. 7795 1 Q. When did that happen? 2 A. There was a meeting in San Antonio 3 several weeks ago. 4 Q. How long did the meeting last? 5 A. A couple of hours. 6 Q. Who was there? 7 A. Mr. Leiman and Mr. Schwartz. 8 Q. And did they bring any documents to the 9 meeting? 10 A. Yes. 11 Q. How many documents? 12 A. Oh, there was a stack about that tall. 13 Q. And what did they do with those 14 documents? 15 A. Well, we didn't make it through all of 16 them; but we went through some of them to see if I 17 recognized them. 18 Q. Did you talk about the significance of 19 various passages in the documents? 20 A. Yes. 21 Q. Refreshed your memory on what some of 22 the documents meant? 7796 1 A. Yes. Well, I mean, they aren't 2 refreshing my memory. I was saying -- they would 3 say, "Have you seen this document?" I'd say yes. 4 They would reference me to a particular paragraph. 5 Q. They selected the documents. Right? 6 A. Yes. 7 Q. Did you ask them to look at anything 8 else? 9 A. You mean any other documents that 10 weren't in the stack? 11 Q. Yeah. 12 A. Well, I may have, yes. 13 Q. Do you recall? 14 A. Well, as you can see, there are lots of 15 documents. There are lots of cross-references. 16 You ask one question, you may need another 17 document in order to answer it properly. So, I 18 may have asked for -- if there was another 19 document. 20 Q. But do you recall doing so? 21 A. Yeah, a couple times. 22 Q. And did they ever send you any 7797 1 documents after the meeting? 2 A. No. 3 Q. You said at the beginning of 4 yesterday's testimony that we'd never met before 5 your testimony in this courtroom commenced. 6 Right? 7 A. That's correct. 8 Q. Had I ever phoned you up and asked for 9 an interview? 10 A. You hadn't. 11 Q. Who did? 12 A. I'm sorry. I'm terrible on names. 13 Q. Was it Ms. Kopp? 14 A. Yes. 15 Q. Did you ever meet with us? 16 A. No. You never asked. 17 Q. Did you promptly return all of the 18 messages we left? 19 A. The only phone call, to my knowledge, 20 was the one that I answered. 21 Q. You talked to Ms. Kopp for about half 22 an hour on the phone? 7798 1 A. As long as she wanted to talk. 2 Q. Would you answer my question? 3 A. It was on my back porch. It could have 4 been half an hour, could have been 45 minutes, 5 somewhere in that range. 6 Q. Did Mr. Schwartz and Mr. Leiman show 7 you any documents concerning the financial 8 condition of United in 1986? 9 A. No. 10 Q. Let's move on. 1986. Did Mr. Noel 11 Simpson or anyone else at GMR wind up with an 12 equity stake in the Park 410 project as a result 13 of the refinancing? 14 A. Did Mister -- I'm sorry. Ask the 15 question again. 16 Q. Did Mr. Simpson wind up with an equity 17 stake in the Park 41O project? 18 A. No. 19 Q. Did anyone else at GMR personally wind 20 up with any equity stake in the project? 21 A. Anybody else in the management section 22 of GMR or -- I mean, IPIC or the investors? 7799 1 Q. To your knowledge -- 2 A. IPIC is the investor. So, of course, 3 they had money in it. In terms of the managers, 4 in terms of Mr. Simpson or any of the other 5 managers in the company, to my knowledge, they had 6 no equity stake in the venture. 7 Q. And you didn't either. Right? 8 A. No. 9 Q. Could we have Exhibit T7261, please, 10 which is at Tab 835? 11 THE WITNESS: Could I have some more 12 water, please? 13 A. Mr. Jeffrey Seidman. 14 Q. (BY MR. DUEFFERT) Sir, do you 15 recognize the document that's been marked Exhibit 16 T7261? 17 A. Yes. 18 Q. What is it? 19 A. This is a presentation to United 20 Savings requesting a change in the conditions and 21 terms of the loan. 22 Q. Who was Mr. Jeffrey Seidman? 7800 1 A. Mr. Seidman is the loan officer that 2 replaced Mr. Graham. 3 Q. Are you sure about that? 4 A. I'm pretty sure. I mean, he -- 5 Mr. Graham was certainly out of the deal from my 6 end of the -- I no longer talked to Mr. Graham. I 7 talked to Mr. Seidman, and I believe Mr. Graham 8 left. I mean, he had left this loan. 9 Q. And what was the subject matter of your 10 discussions with Mr. Seidman? 11 A. Well, as laid out here, this now is 6 12 January 1988. It was real clear, by that time, 13 that the interest that was figured into the loan 14 was going to run out before we could establish 15 repayment. So, this was a proposal of how we 16 could work out the loan and hopefully wait out the 17 downturn in the market. 18 Q. And you negotiated with Mr. Seidman 19 about such things as release prices. Right? 20 A. Yes. 21 Q. And what was the purpose of those 22 negotiations? 7801 1 A. Well, we needed a lost leader. We 2 needed to establish from a marketing perspective 3 that -- get something building on the property so 4 that it would look like a real development and get 5 things going. 6 Q. When did you first start thinking about 7 the need for a lost leader? 8 A. When did -- well, it would have been 9 later in the year, probably 1986, when we first 10 started talking about it as we encountered the 11 difficulties in the marketplace. 12 Q. Could you explain further? 13 A. Well, as we moved from closing the loan 14 into an aggressive marketing campaign and brokers 15 went out to knock on doors and generate interest 16 in the property, the -- it became clearer and 17 clearer that we were between a rock and a hard 18 place, that on the one hand, we had property that 19 was overpriced and, on the other, couldn't sell it 20 for anything less. 21 Q. And is that the reference in this 22 document to 1.3, "The unprecedented economic and 7802 1 market conditions that existed in Texas since the 2 loan was entered into, anticipated tract sales 3 have not yet been achieved"? 4 A. Yes. 5 Q. Why is the reference to the market 6 conditions and economic conditions as being 7 unprecedented? 8 A. Because they were. 9 Q. Could you explain? 10 A. I mean, we have a history in Texas of a 11 boom and bust cycle. But the bust on this one 12 was, you know, unprecedented. The market came to 13 a standstill. There were no sales. There were 14 no -- not only on this property, but throughout 15 Texas. 16 Q. This was not the only struggling 17 project in Texas? 18 A. Certainly not. 19 Q. When did you first consider putting -- 20 trying to market the tracts for use as warehouses? 21 A. Well, the -- I don't know if I can tell 22 you a specific date. But certainly by the end of 7803 1 1986 and leading into '87, we were looking for any 2 and all prospects for marketing the property. And 3 warehousing in a mixed-use development is a 4 compatible use and one of the market segments that 5 we felt we needed to pursue. 6 Q. Could we have Exhibit T7379, which is 7 located at Tab 836? Is this a document that's 8 familiar to you? 9 A. Yes. 10 Q. What is it? 11 A. This is a memo to the -- to 12 Mr. Rosenberg, Ken Gindy, and John Grieshaber from 13 Mr. Simpson. It references another memo from Mr. 14 Simpson to United Savings of January 29. And the 15 discussion here -- well, it says "The application 16 of LC proceeds by -- in any way is something the 17 joint venture will ferociously resist." 18 Q. Why does it say that? 19 A. I believe at this time, the -- United 20 had had proposed that in order to pay the 21 interest, that the venture apply the LCs to the 22 interest. 7804 1 Q. That proposal wasn't well-received by 2 the borrowers? 3 A. No. 4 Q. Did the borrowers ever contemplate in 5 1987 or 1988 putting equity into the project in 6 order to get the release prices lowered? 7 A. Did we ever consider it? 8 Q. Yeah. 9 A. It was probably considered. 10 Q. Do you recall? 11 A. Not specifically. 12 Q. It was never done. Right? 13 A. No. 14 MR. DUEFFERT: Move T7379 into 15 evidence, as well as the prior exhibits, B3863 and 16 B3864. 17 MR. EISENHART: Your Honor, I think the 18 record should reflect that in answer to that last 19 question, the witness shook his head "no," but I 20 don't think he gave an oral answer. 21 THE COURT: I believe 7379 is in 22 evidence. 7805 1 MR. SCHWARTZ: It is. 2 THE WITNESS: It should be. I saw it 3 yesterday. 4 THE COURT: And B3864 is received. 5 MR. SCHWARTZ: Your Honor, for point of 6 clarification, if we could get the last question 7 read and a verbal response from Mr. White. 8 MR. EISENHART: Sorry, Your Honor. He 9 must have said it very softly. 10 THE WITNESS: I'm sorry. I've caught 11 whatever disease is going around this courtroom, 12 Your Honor. 13 MR. SCHWARTZ: In this case, I move to 14 strike Mr. Eisenhart's comments. 15 MR. EISENHART: I'll withdraw it. 16 MR. SCHWARTZ: Thank you. 17 THE COURT: Is 7079 in evidence? It's 18 been received. 19 MR. DUEFFERT: And is A10294 in 20 evidence? 21 THE COURT: Yes. 22 MR. DUEFFERT: Thank you, Your Honor. 7806 1 Q. (BY MR. DUEFFERT) Mr. White, what 2 eventually happened to those $10 million in 3 letters of credit? 4 A. Well, eventually, they were called. 5 Different reasons, but they were called. I think 6 IPIC's share was called on a failure to renew the 7 LCs, and then the subsequent LCs were called by 8 United sometime later. 9 Q. Do you recall the date? 10 A. No. 11 Q. And so, the borrowers lost the entirety 12 of that $10 million in equity. Right? 13 A. I believe they -- I believe all that -- 14 all that was eventually forfeited, I believe. 15 Q. And GMR and IPIC's share of that was 16 roughly $4 million? 17 A. Yes. 18 Q. I'd like to clear up a few points in 19 the time line from yesterday. Could we have 20 A10289? It's located at Tab 770. 21 A. I have it. 22 Q. Could you turn to Page OW013376? 7807 1 A. Okay. I have it. 2 Q. And for the record, is this document 3 GMR's October 7, 1985 loan application to USAT for 4 a development loan? 5 A. Yes, that's correct. 6 Q. This -- what is this chart on OW013376? 7 A. Well, this was prepared by our 8 engineers, Pape-Dawson, to show the -- what an 9 anticipated schedule of construction of the 10 infrastructure would be on the project. 11 Q. And this document is dated 12 September 1985, correct? 13 A. Where do you see that? 14 Q. The upper left-hand corner, right above 15 Pape-Dawson's logo. 16 A. Okay. Yes. 17 Q. Did this time line reflect the joint 18 venture's best information at that point as to 19 what events would happen in which time periods? 20 A. Yeah, given a start date in May, I 21 guess. 22 Q. So, some of the information is 7808 1 retrospective and some of it is an expectation of 2 future events? 3 A. This is in September of '85 or in 4 September of '86? 5 Q. Well, it's part of the 1985 loan 6 application. Right? 7 A. So, it must be '85. 8 Q. Could you answer my question? 9 A. Well, I'm trying to figure it out, sir. 10 Well, no. We can't start construction on Phase 1 11 in June of '85. We don't have the development 12 funds. So, this has to -- this can't be 13 retrospective, I wouldn't think. This has to be a 14 time line that would go into effect after we had 15 the funds. 16 Q. That's your testimony? 17 A. Yes. Yes, sir. 18 Q. Would you look down toward the bottom 19 of the chart? There is a second grouping of time 20 lines. The top one says "financing," and it 21 begins in mid-September and ends December 31st, 22 nineteen -- whenever. And then under that, it 7809 1 says "loan closing," and that's also in December. 2 Does that change your view about the 3 nature of the document? 4 A. Oh, okay. Up here, we're talking about 5 design and not construction. Okay. I'm sorry. I 6 guess this is not a schedule of the actual 7 construction, but a schedule to reflect the design 8 phase of the project. So, yes, it appears that we 9 were anticipating the loan closing in December. 10 Q. Would you turn to Bates No. OW013431 in 11 that document? 12 A. I'm sorry. What number again? 13 Q. 3431 are the last four numbers. 14 A. Okay. 15 Q. Do you recall that yesterday I pointed 16 out various categories of legal fees and expenses 17 attendant to Notes 1 -- I'm sorry -- 8, 9, 10, and 18 11 on that page? 19 A. Yes. 20 Q. And then I think you responded, "Well, 21 this is all just a projection," something along 22 those lines. I don't mean to be pejorative, but 7810 1 you were saying this is a projection, correct? 2 A. Yes. These are notes to the financial 3 schedule, which is anticipating cost. 4 Q. But my question, I realize, had been 5 simply this: Did the joint venture incur legal 6 fees in connection with all of the things 7 referenced in Notes 8, 9, 10, and 11, conveyance 8 of land to development venture, formation of 9 development venture, general contractor contract, 10 easement, zoning matters, dedesignation and 11 annexation procedures, development venture 12 administration, tax counsel, owner's association, 13 loan agreement? 14 Did the joint venturers incur legal 15 fees and expenses in connection with all of those 16 activities? 17 MR. SCHWARTZ: Your Honor, I'd ask for 18 a time reference. 19 A. The question is did we -- had we or 20 were we going to? 21 Q. (BY MR. DUEFFERT) Did you? 22 THE COURT: Can you give us a time? 7811 1 MR. DUEFFERT: I was -- 2 Q. (BY MR. DUEFFERT) Did the joint 3 venturers which implies during the joint 4 venture -- during the existence of the joint -- 5 A. Certainly, we had to have legal 6 expenses during the joint venture, absolutely. 7 MR. SCHWARTZ: Are you now referring to 8 the 1985 time period? 9 MR. DUEFFERT: During the joint venture 10 is the question. 11 MR. SCHWARTZ: Well, I think one of the 12 questions is that was an issue concerning whether 13 the 1986 loan was, in fact, a loan versus an 14 investment. So, if you clarify the year that 15 you're speaking of, then it would make for a 16 clearer record. 17 MR. DUEFFERT: I think my question -- 18 A. The joint venture did incur legal 19 expenses, certainly. 20 Q. (BY MR. DUEFFERT) Thank you. And do 21 you remember how substantial those expenses were? 22 A. Well, I'll have to look at my budget 7812 1 monitor which would tell me when those expenses 2 were anticipated and then when they actually 3 occurred. 4 Q. You don't recall the aggregate number? 5 A. I mean, we're talking about a joint 6 venture that -- I mean, no. I don't recall the 7 aggregate number. And it's difficult to give you 8 an aggregate number unless you give me a time 9 frame during which those legal costs would have 10 been obligated and then subsequently paid. 11 Q. Exhibit T7075, please, which has been 12 admitted at Tab 826. At the bottom paragraph on 13 the first page of this letter which, for the 14 record, is a January 31st, 1986 letter from Noel 15 Simpson to David Graham, there is a question to 16 Mr. Graham regarding a commitment letter. 17 Do you see that? 18 A. Yes. 19 Q. Do you have any understanding as to the 20 significance of that question? 21 A. Well, here we are in -- at the end of 22 January, anticipating the closing by the end of 7813 1 March. We still don't have a formal commitment 2 letter from United, and we would like to get out 3 and start beating the bushes for marketing. But 4 without a commitment letter, our hands were really 5 tied. 6 Q. Were the terms of the loan still being 7 negotiated as of January 31st, 1986? 8 A. Any loan's continuously negotiated up 9 till the closing. 10 Q. Why does that happen? 11 A. Things are a moving target, and 12 attorneys always have another document they need. 13 Q. You talked about David Graham 14 yesterday. Is it your recollection that 15 Mr. Graham was fairly diligent in having the 16 necessary documentation in place? 17 A. Was it my impression that he was 18 diligent in getting the necessary documentation in 19 place? We sure would have liked United to move a 20 lot quicker than they did. 21 Q. Could you explain? 22 A. It took us -- well, the loan -- the 7814 1 actual application to United was October 7. We 2 would have liked to have had everything in order 3 by the end of the year. It took us till the end 4 of March or the beginning of April. I mean, you 5 have to understand that Mr. Graham was in this 6 deal, as well. United was already in the deal. 7 He was already -- we were already partners. 8 Q. GMR was a partner of United? 9 A. Well, United was already in the deal 10 through Stanley. They were part of the land loan. 11 Q. Turn to Page 8 of this attachment to 12 this exhibit, which is a January 29, 1986 13 memorandum from Noel Simpson and yourself to the 14 joint venturers of Park 410 West? 15 MR. SCHWARTZ: I'm sorry, Counsel. 16 What page? 17 MR. DUEFFERT: The final page of the 18 exhibit actually, Page 8. 19 Q. (BY MR. DUEFFERT) Paragraph or 20 Section 8.2.2 states that GMR was requesting or 21 trying to arrange to push back the March 31st 22 interest payment. 7815 1 Do you see that? 2 A. Yes. I mean, you asked me if I see it. 3 Right? Yeah. 4 Q. And was the interest payment postponed 5 from March 31st to April 30, 1986? 6 A. Well, we're not talking about the 7 interest payment. We're talking about the bump. 8 In Paragraph 8.2.3? 9 Q. 8.2.2. 10 A. Yeah. Talking about a bump here in 11 8.2.2. We're talking about the bump or the 12 discounts, however you want to look at it, in that 13 paragraph. 14 Q. What about the reference in 15 Subsection B to the March 31st, 1986 interest 16 payment date? 17 A. Where are we at now? 18 Q. We're still in 8.2.2. 19 A. Oh, okay. Under B. "And push back the 20 March 31st, '86 interest payment date to April 30, 21 '86." Okay. I see that. 22 Q. Does that refresh your recollection as 7816 1 to whether or not interest payment date was, in 2 fact, postponed one month? 3 A. It may have been. I'm not -- I can't 4 say categorically if it actually was without 5 reviewing some more documents somewhere. 6 Q. Could we have Exhibit T7143, please? 7 It was admitted at Tab 711. Yesterday, I was 8 struggling with a morass of black binders over 9 here, and I think I gave you a wrong exhibit and 10 asked a question that seemed a little misleading 11 and I apologize for that. 12 Is this document familiar to you? 13 A. Yes. This is a Love & Dugger 14 appraisal. 15 Q. And what is the date on this appraisal? 16 A. The date on the cover letter is 17 February 12. There's probably an "as at" date 18 here somewhere. 19 Q. Take a look at -- 20 A. As a date of our appraisal as 21 December 31, '85. 22 Q. And what page are you reading from 7817 1 there? 2 A. That's III LD000151. 3 Q. Look on the next page at the bottom. 4 A. Yes. 5 Q. Do you see a value conclusion for the 6 as-is value of the Park 410 property? 7 A. Yes. 8 Q. What was that value conclusion? 9 A. 46,560,000. 10 Q. Did you agree with it at the time? 11 A. Did I agree with it? It probably 12 didn't even occur to me whether or not to agree 13 with it or not. I mean, these are professional 14 folks. I think the one that -- I think this is 15 the one subsequent to the one that we voided and 16 sent back. So, certainly we felt more comfortable 17 with that number than the previous one. 18 Q. Who told you to write the word "void" 19 on that earlier appraisal report? 20 A. That was -- well, the instruction had 21 to finally come from Mr. Simpson. 22 Q. What was the purchase price of the land 7818 1 in March of '85? 2 A. Considering the discounts or -- if you 3 recall, we have a moving target on the purchase 4 price, depending on when you're talking about. I 5 think we started at -- again, I'd have to look at 6 particular documents. But we started somewhere in 7 the range of 35, 36 million for the land, I would 8 believe. I'd have to look at documents to give 9 you the actual numbers. 10 Q. Was it your understanding in 1985 that 11 the property was appreciating in any way? 12 A. Well, hopefully, all property 13 appreciates in value. In terms of what's 14 happening in that section of the westplex area in 15 San Antonio, there was a lot of good news 16 happening with reference to the property, both 17 freeway construction and Sea World. I think there 18 was also at that time discussion of VSLI locating 19 a microchip factory up there. So, there was 20 certainly some good news. The reason why you're 21 in real estate and taking these risks is you're 22 assuming the property is going to appreciate in 7819 1 value. That's part of making the money. 2 Q. This Love & Dugger appraisal report is 3 addressed to the Park 410 West Joint Venture, 4 correct? 5 A. Yes. 6 Q. Your company was putting some 7 $4 million on the line in the 1986 loan. Right? 8 A. Yes. 9 Q. And it had guaranties on top of the 10 letters of credit, correct? 11 A. Yes. 12 Q. Since you were working on the loan, why 13 wouldn't you have studied this appraisal report 14 more carefully? 15 A. Why wouldn't I have studied it -- 16 Q. I think you suggested to me -- did you 17 study it carefully? 18 A. Certainly. 19 Q. And you were aware of the information 20 in it? 21 A. Certainly. 22 Q. Would you turn to Bates No. LD000277? 7820 1 A. 277? 2 Q. LD000277. 3 A. Okay. I have it. 4 Q. Is this a discounted cash flow model 5 for the sales proceeds and eventual cash flows on 6 the Park 410 property? 7 A. Yes. This is a cash -- discounted cash 8 flow analysis. 9 Q. And did Love & Dugger prepare this 10 analysis? 11 A. Yes. 12 Q. I note at the bottom or actually 13 second-to-last line on the table, there is a 14 discounting factor of 13 percent applied to the 15 cash flow. 16 Do you see that? 17 A. Yes. 18 Q. Does that indicate to you that the 19 numbers above that line are undiscounted? 20 A. Yes. 21 Q. And so, according to Love & Dugger, 22 what is the undiscounted gross sales proceeds on 7821 1 this property? 2 A. 123,691,975. 3 Q. And is it your testimony that that is 4 the number that Mr. Graham was suggesting you 5 could arrive at? 6 A. Yes, or a number close to that. 7 Q. Are you sure the number wasn't the 8 120-million-dollar number in your loan 9 application? 10 A. I don't understand the question. I 11 mean, this number is 123,691,975. 12 Q. And if you recall, when we looked at 13 Mr. Schulz' appraisal yesterday and I asked you 14 about the 110-million-dollar number and there was 15 an objection and then you said it was a discounted 16 number, do you recall that the undiscounted 17 numbers totaled up to roughly $123 million? 18 A. Yes. When you added that line across, 19 correct. Gross sales proceeds were approximately 20 in the same neighborhood. 21 MR. DUEFFERT: Your Honor, I'm about 22 halfway through. In light of the court 7822 1 reporter -- 2 THE COURT: All right. We'll take a 3 recess. 4 5 (A short break was taken 6 at 10:04 a.m.) 7 : 8 THE COURT: Be seated, please. I 9 understand the record may not be clear as to 10 whether Exhibit B3863 was received. 11 MR. DUEFFERT: Yeah. I think I moved 12 it and then there was some discussion about 13 something. And I don't know if it was ever put 14 in. We move the introduction of Exhibits B3863 15 and, if it's not been admitted, B3864. 16 MR. SCHWARTZ: Your Honor, we have no 17 objection to Exhibit B3864. 18 THE COURT: Received. 19 MR. SCHWARTZ: As to Exhibit B3863, 20 there is some handwriting there that if 21 Mr. Dueffert would ask some questions about the 22 handwriting, perhaps there will be no objection to 7823 1 it. As to the typed information, printed 2 information, we have no objection to that. 3 MR. DUEFFERT: Your Honor, the 4 handwriting on the bottom, I understand -- and I 5 know is the markings of auditors. It says 2231/31 6 of 132. That is taken from Peat Marwick's files 7 as well as all of the check numbers, my guess 8 would be, coming from the auditors. The purpose 9 of the exhibit was to show the clearest possible 10 date for April 17th, 1986. I'll have no objection 11 to its introduction for the printed and 12 typewritten text on it. 13 THE COURT: Received. 14 MR. SCHWARTZ: Is that to exclude the 15 handwriting? 16 THE COURT: Yes. 17 MR. SCHWARTZ: Okay. Thank you. 18 (10:24 a.m.) 19 Q. (BY MR. DUEFFERT) Mr. Graham -- I'm 20 sorry. I apologize. Mr. White -- 21 A. I've been called -- excuse me. I'd 22 better not say it. 7824 1 Q. Mr. White, yesterday you used the 2 phrase "mission creep." 3 Do you recall that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. Could you say "yes"? 7 A. Yes. Excuse me. 8 Q. And for the record, could you explain 9 exactly what that means as far as who did what, 10 when, who was involved? Tell me what you mean. 11 A. Well, in a loan of this size, the deal 12 takes on its own character and life. You have a 13 lot of people involved in the deal, from the 14 investors who are out there putting their money 15 together, the managers who are doing their due 16 diligence, creating budgets, the lender and their 17 commitments and involvement. The venturers 18 themselves, of course, are all working very hard 19 and focusing on "What does it take to get this 20 deal done?" 21 As you move through time, all of these 22 things get distilled -- well, in financial terms, 7825 1 into the pro forma. In legal terms, into closing 2 documents. And as is in this particular case, you 3 start with some preliminary assumptions, your 4 initial due diligence, your initial estimates, and 5 then you have to go out and make sure these 6 numbers are real. You have your original 7 estimates regarding infrastructure costs, for 8 example. You go then to hire your engineer. They 9 have a real hard look at it, prepare their 10 estimates. On the policy side, you're trying to 11 determine "Are we going to do a development loan 12 in one phase, in two phases, in three phases?" Is 13 that development loan going to go for the whole 14 phase development, or are you going to do a 15 partial development, the Phase 2 and 3 to come 16 later? Those factors are all being distilled out 17 in terms of what those represent in terms of cost, 18 et cetera. You've got a lender who, at first, 19 seemed to indicate that 1 point would be enough 20 and then it went to 2 points and then it went to 2 21 and a half points and then it ended up to 3 22 points. So, on an 80-million-dollar global 7826 1 number, that gets to $2 and a half million. Well, 2 each time you go through that iteration, it has 3 consequences in terms of how much money you have 4 to borrow. It impacts all aspects of the deal. 5 So, you've got -- the deal kept creeping larger 6 and larger and larger from your initial estimates 7 as those are proved up and as these other costs 8 begin to come from the lender, et cetera, your -- 9 that's why I called it mission creep. You can 10 call it other things, as well, but the deal itself 11 takes a life and character of its own. And in 12 this case, got bigger and bigger. 13 Q. Is one of the reasons the cost would 14 get bigger is if infrastructure costs for the 15 development rise? 16 A. Well, there is two aspects to that. 17 One, which is what you need to do and what you 18 need to accomplish. So, you've got both costs 19 that you anticipated and additional costs, 20 additional things you have to do so that those two 21 factors together, in this case, the infrastructure 22 costs did rise. You also have your landscaping, 7827 1 design aspects of those. All of those things have 2 to come together in terms of a number. 3 Q. Do you recall that infrastructure costs 4 rose by roughly $6 million from your February 1986 5 estimates to the time of the loan application? 6 A. Yes. 7 Q. Do you -- 8 A. In round numbers, yes. 9 Q. And that makes an impact on the size of 10 the loan and the size of the interest reserve, 11 correct? 12 MR. SCHWARTZ: Just so the record is 13 clear, I think you said February of '86? 14 MR. DUEFFERT: I apologize. February 15 of '85. 16 Q. (BY MR. DUEFFERT) Is that your 17 understanding of my question, that -- 18 A. That was my understanding, yes. 19 Q. And when that happens, the size of the 20 loan increases, as well. Right? 21 A. Yes. 22 Q. Now, throughout this process, was it 7828 1 your perception that the parties involved were 2 acting in what they perceived to be in their own 3 economic self interest? 4 A. Yeah. You always have to assume that 5 folks are operating in their own economic 6 self-interest, yes. 7 Q. Did you ever feel in 1985 or 1986 that 8 the people you were working with, whether the 9 partners in the joint venture or at United or 10 anywhere else, were not working in their own 11 economic self-interest? 12 A. In 1985, did I ever -- ask the question 13 again. I'm sorry. 14 Q. As you were working on this loan during 15 the joint venture, the applications and the pro 16 formas, during that time period, was it ever your 17 feeling or perception that any of the parties 18 involved in the process were not acting in what 19 they perceived to be their own economic 20 self-interest? 21 MR. SCHWARTZ: Once again, Your Honor, 22 Mr. Dueffert refers to the joint venture, period. 7829 1 And there were several joint ventures involved in 2 this transaction. I would like a clarification as 3 to what time period he's referring to so that it's 4 clear for the record. 5 THE COURT: I think he can answer the 6 question generally. It depends on what his answer 7 is whether we need more specificity. 8 A. Well, I think I've answered the 9 question, actually. I mean, my assumption at that 10 time and at virtually any other time is that, you 11 know, these are all big boys. They are going to 12 be acting in their economic interest. 13 Q. (BY MR. DUEFFERT) And that was your 14 belief at the time. Right? 15 A. Yes. 16 Q. And when GMR submitted a loan 17 application and later closed on a loan that 18 entailed it putting $4 million at risk through 19 letters of credit and potentially additional risk 20 through a guaranty, did it believe that the 21 project was financially viable, given the 22 structure of the 1986 loan? 7830 1 A. Yes. 2 Q. Did the -- was the October 1985 loan 3 application submitted by GMR fraudulent? 4 A. No. 5 Q. Did it reflect your firm -- 6 A. I'm not an attorney. I can't testify. 7 But, no. I mean, from my perspective, no. 8 Q. Did it reflect your best judgment at 9 the time as to the costs and expenses and other 10 factors that would be attendant with the project? 11 A. Yes. I had spent a year of my life 12 putting it together. 13 Q. Yesterday, did you or did you not 14 accuse Mr. David Graham of doing something wrong? 15 A. I don't know what you're referring to. 16 What did I say yesterday would cause you to ask 17 that question? 18 Q. You don't recall anything you said 19 yesterday that would cause you to -- cause me to 20 ask that question? 21 MR. SCHWARTZ: Your Honor, 22 Mr. Dueffert's question used the word "accuse," 7831 1 and I think that that word was never used during 2 yesterday's testimony. 3 MR. DUEFFERT: Your Honor, that was my 4 question; and I don't think the witness needs 5 further coaching. 6 MR. SCHWARTZ: Your Honor, I think it's 7 appropriate that questions be clear for the 8 record. My question is certainly not coaching the 9 witness. 10 THE COURT: I don't know what your 11 objection is. 12 MR. SCHWARTZ: My objection is, Your 13 Honor, that Mr. Dueffert's question used the word 14 "accused," which mischaracterizes perhaps 15 testimony of yesterday. Mr. Graham -- excuse 16 me -- Mr. White testified yesterday about a great 17 number of things. If Mr. Dueffert has a specific 18 number, would you ask it? 19 THE COURT: Is there a question 20 pending? 21 MR. DUEFFERT: I'm not sure. Let me 22 try the question again. 7832 1 Q. (BY MR. DUEFFERT) In your view, 1985 2 and 1986, did you see David Graham do anything 3 that you felt was improper? 4 A. Well, I mean, from what I know now, 5 the -- this business on the appraisal and 6 Mr. Graham's involvement in the selection of the 7 appraiser to solve the R-41B problem was likely 8 improper. 9 Q. What do you mean from what you know 10 now? 11 A. Well, I now know that -- I mean, you 12 have to recall the time period. We're now in the 13 time period when it's shortly before the fall of 14 all the S&Ls. And part of the common knowledge 15 that we all know, the way in which these S&Ls came 16 apart was they had a buddy-buddy appraiser. And 17 certainly in this case, this was an appraiser that 18 was hand selected by United, instructed in terms 19 of the numbers that he needed to come up with, and 20 he did that. 21 Q. So, your testimony is that -- what 22 facts do you have personal knowledge of regarding 7833 1 that? I'm trying to figure out when you figured 2 this out and how. 3 A. Well, the facts that I know is that 4 Mr. Graham called me, told me to go see 5 Mr. Schulz, told me that Mr. Schulz was aware of 6 the number that United needed in order to close 7 the loan, and told me that I needed to have a pro 8 forma number in gross sales proceeds that 9 approached the 125-million-dollar number. 10 Q. Okay. And that -- 11 A. I mean, I know that with certainty. 12 Q. And that was a telephone conversation 13 when? 14 A. That would have been in -- somewhere 15 in -- probably in January of '86. Maybe December. 16 Q. And was that -- 17 A. I don't know the specific date that I 18 met with Gerald Schulz, but I can tell you that he 19 would have called me on, like, a Tuesday and I was 20 in Mr. Schulz' office here in Houston two days 21 later. 22 Q. And your understanding at that time was 7834 1 that there was something wrong with what 2 Mr. Graham did? 3 A. At that time? 4 Q. Yes. 5 A. Didn't even occur to me. 6 Q. Could you explain further? 7 A. Well, as I think I'm trying to tell 8 you, that my job in this case was to get this 9 R-41B appraisal done at a number that we could 10 proceed and close the loan on. I mean, Mr. Graham 11 had been through -- and United had been through 12 this -- and this isn't the only loan they made. I 13 mean, this was standard operating procedure in 14 1985 and nineteen -- well, certainly 1985 and 15 1986. 16 Q. Standard operating procedure for who? 17 What is the procedure? What are you talking 18 about? 19 A. I'm talking about -- 20 MR. SCHWARTZ: Objection. It's 21 multiple questions, Your Honor. 22 THE COURT: Let's get the answers. 7835 1 A. Standard operating procedure for 2 lenders to have a select group of appraisers and 3 to be able to lean on them to gain the appraisal 4 numbers they needed in order to make loans. 5 Q. (BY MR. DUEFFERT) And how did you 6 come to the understanding that that was industry 7 practice? 8 A. Well, here I am with a lender -- 9 substantial lender that had been in business, had 10 done real estate deals, and knew how the game was 11 played. And certainly at the time, my assumption 12 was this must be the way it was done. 13 Subsequently, as the S&L industry came apart, you 14 had the Southwest Plan emerge. You had eventually 15 the RTC. You had all the news and the media. 16 There was a significant amount of focus and 17 questions asked, "How did this industry get in 18 this mess?" Part of the way they got in the mess 19 was through this good ol' boy system involving the 20 appraisers. 21 Q. So, when you're testifying to industry 22 practices, you're testifying to what, one, you 7836 1 concluded from dealings between you and Mr. Graham 2 and, two, what you've read about the thrift crisis 3 after it happened? Is that a fair summarization? 4 A. Yes. I think that's what I said. 5 Q. This communication with Mr. Graham, was 6 it a secret one? 7 A. No. By no means secret. I mean, you 8 always have written documentation from -- letters 9 from Mr. Graham, Mr. Gindy, conversations with 10 Mr. Gindy that all said the same thing. 11 Q. What documentation are you referring 12 to? 13 A. Well, we looked at a memo yesterday, a 14 letter from Mr. Gindy to me covering a letter, I 15 think, from Mr. Graham, a note on a telephone 16 conversation that Mr. Gindy had with Mr. Graham, 17 as well. 18 Q. Is that, like, a three-sentence letter? 19 Is that what you're thinking of? 20 A. There were two letters, one or two 21 paragraphs each, I think. 22 Q. Do you recall ever seeing anything more 7837 1 substantial back in 1985, 1986 on the subject? 2 A. Do you need anything more substantial 3 than a letter? I mean, what do you want -- you 4 define "substantial." What do you want more than 5 substantial? You've got a letter. You've got 6 phone conversations with different people, all 7 indicating the same thing. That's pretty 8 substantial. What more do you want? 9 Q. You were supposed to get to 10 123 million. Is that your testimony? 11 A. In the range of 125 million, yes. 12 Q. And your understanding was that that 13 would somehow make the deal work for United? 14 A. In terms of gross sales proceeds, that 15 was my understanding, that the pro forma I was 16 preparing needed to show those kinds of numbers in 17 order to gain an R-41B appraisal that United had 18 to have in order to make the loan. 19 Q. And what was the size of that 20 appraisal? 21 A. Are you talking about Mr. Schulz' 22 appraisal? 7838 1 Q. Yes. What was the size of the 2 appraisal that was needed to make the loan as 3 Mr. Graham communicated that information to you, 4 if you recall? 5 A. Well, the final R-41B appraisal that 6 was needed in order to cover an 80-million-dollar 7 loan needed to be in the 90-million-dollar range. 8 Q. Could we have Exhibit T7077, please? 9 This is admitted at Tab 706. 10 Mr. White, is Exhibit T7077 a letter 11 dated February 6, 1986, from David Graham to Noel 12 Simpson? 13 A. Yes. 14 Q. And are you copied on this letter? 15 A. Yes. 16 Q. Do you recall receiving this letter? 17 A. Yeah. Certainly, I must have. 18 Q. Is this one of the documents that 19 Mr. Leiman and Mr. Schwartz went over with you? 20 A. I think this is the first time I've 21 seen this one. 22 Q. Take a moment to read it through and 7839 1 refresh your recollection, please. 2 A. (Witness reads the document.) Okay. 3 I've read it. 4 Q. Okay. In the first paragraph of the 5 letter, Line 2 -- actually, Sentence 2, is a 6 reference to a 79-million-dollar loan. 7 Do you see that? 8 A. Yes. 9 Q. What was the final loan amount that 10 closed in April 1986? 11 A. It was very close to this number. I 12 mean, I always refer to it as an 80-million-dollar 13 loan. 14 Q. Is it your belief that at the point 15 this letter was written, the deal was not yet 16 finalized or approved or there wasn't a commitment 17 letter yet? 18 A. No. We didn't ever get a commitment 19 letter. 20 Q. The next sentence reads, "Accordingly, 21 we will need and, quite frankly, you should not 22 have a major problem obtaining, based on your 7840 1 sales projections of $120,289,938, an appraisal 2 indicating an R-41B regulatory value of 3 $98 million which would indicate the loan to be 4 80 percent of appraised value, which is typical." 5 The paragraph finishes, "I really do not believe 6 Ed Schulz should have a problem achieving this 7 figure or at least something close to it." 8 Mr. Graham here is citing your 9 120-million-dollar sales projection from your 10 October 1985 loan application. Right? 11 A. I believe that was the number. 12 Q. He indicates that he wants an appraisal 13 that complies with Memorandum R-41B. Right? 14 A. Yes. 15 Q. And he indicates that you should, open 16 quote, "not have a major problem obtaining," close 17 quote, a 98-million-dollar appraisal based on 18 GMR's 120-million-dollar sales projection. Right? 19 A. Yes. I see that. 20 Q. He references Ed Schulz. Right? 21 A. Yes. 22 Q. Did you understand that Ed Schulz was 7841 1 one of the appraisers with whom United frequently 2 worked? 3 A. Yes. 4 Q. Going down for the next two paragraphs, 5 Mr. Graham talks about such things as release 6 prices. Right? 7 A. Yes. 8 Q. And then at the bottom paragraph on 9 that page, he states, "One concern did arise in 10 analyzing your figures. It appears that there 11 will be very little profit generated in the sale 12 over the last 83.2 acres if original pro forma 13 holds true since the maximum sales prices achieved 14 are projected to be only $12 per square foot." 15 Do you see that? 16 A. Yes. 17 Q. Why would Mr. Graham be addressing the 18 issue of your profit on those 83.2 acres? 19 A. Well, it was not only our profit. It 20 was his profit, too. 21 Q. To some extent, you were all being 22 committed to the project. Right? 7842 1 A. Everybody was committed. United had 2 more money at risk at this time than GMR did. 3 Q. What was United's collateral under the 4 proposed loan? 5 A. Under the proposed loan, they got out. 6 They got their cash back out. 7 Q. And at that point, the borrowers had 8 more risk. Right? 9 A. Yes. At that -- well, "risk" defined 10 here is -- no, not actually. The lender would 11 have an 80-million-dollar loan. We only had 12 $10 million up. We would only have $10 million up 13 and then the other guaranties, but the lender's 14 loan was 80 million. 15 Q. And what was the collateral on that 16 80 million? 17 A. The 10 million. 18 Q. Anything else? 19 A. Well, I don't know. I can't recall -- 20 well, like I said, it wouldn't include the 21 guaranties. That would be the sum total of 22 collateral. 7843 1 Q. Would United have a first lien on the 2 property? 3 A. Yes. 4 Q. Is that also collateral? 5 A. The property itself? Yes. 6 Q. Next page, Mr. Graham requests a series 7 of documents from you. 8 A. Yes. 9 Q. Point 1 is documentation regarding the 10 entity which will own the property. 11 Do you see that? 12 A. Yes. 13 Q. What would be the entity that owned the 14 property pursuant to the Park 410 loan of 1986? 15 A. I believe the name of the entity would 16 be -- what's the formal name of that thing -- 17 Westplex? No. I'm failing on the formal name of 18 the joint venture. Westplex Investment 19 Corporation maybe. 20 Q. Point 2, there is a request about 21 financial data regarding IPIC. 22 Do you see that? 7844 1 A. Yes. 2 Q. Point 3, financial statements on GMR, 3 as well as updated statements on Stanley, who I 4 presume is Stanley Rosenberg. Right? 5 A. Correct. 6 Q. He also wants annual cash flow 7 statements and projections on your company, as 8 well as on Stanley Rosenberg, correct? 9 A. Yes. 10 Q. He cites that requirement as now being 11 mandatory. Right? 12 A. Yes. 13 Q. He wants revised pro formas and 14 economic projections. Right? 15 A. Yes. 16 Q. He wants to discuss Phase 3 and get 17 information regarding the holdback on that phase. 18 Right? 19 A. Yes. 20 Q. He wants title policies and 21 documentation regarding easements. Right? 22 A. Yes. 7845 1 Q. And finally, he wants an updated 2 survey. Right? 3 A. Yes. 4 Q. Do you recall if you sent all of that 5 information to him? 6 A. Well, it was certainly sent to him. 7 Whether I sent it or it was sent from the Dallas 8 office, he certainly got all this information. 9 Q. Could we have B834, please? This is at 10 Tab 771. Turning back -- I'm sorry -- for a 11 moment to the February 6th letter from Mr. Graham. 12 The top of Page 2, top paragraph, last line. 13 Mr. Graham states that in light of his concerns, 14 open quote, "It might be wise to review the entire 15 matter of releases, the allocation of loan value, 16 sales projections, et cetera, so that we do not 17 have any initial confusion on future releases." 18 Did you respond to Mr. Graham's 19 request? 20 A. I'm certain that we did. I mean, I 21 suppose -- I mean, here we're trying to get to the 22 portion of the allocation of the loan value, sales 7846 1 projections as they impact the issue of release 2 prices. 3 Q. Could you read out loud the last 4 paragraph on that page? 5 A. "I will need all the information as 6 soon as possible so I can complete the approval 7 process and legal documents in order that the loan 8 closing will not be held up, as I know that time 9 is critical in negotiating a discounted price on 10 the land." 11 Q. Can you turn for a moment now to the 12 next document, B834? 13 MR. SCHWARTZ: Mr. Dueffert, we don't 14 have a copy of B834. When was that admitted? 15 MR. DUEFFERT: It's Tab 771. 16 MR. SCHWARTZ: Thank you. 17 MR. DUEFFERT: I think this is the 18 document that reputedly didn't reflect a dialogue. 19 Q. (BY MR. DUEFFERT) Mr. White, did your 20 firm respond to Mr. Graham's requests in his 21 February 6th, 1986 letter? 22 A. Yes, certainly. 7847 1 Q. And does the text of this letter 2 reflect Mr. Simpson's and your firm's comments on 3 some of the subject matter raised in Mr. Graham's 4 February 6th letter? 5 A. Yes. That's what it appears to do. 6 Q. Who was -- turning back to the prior 7 letter, who was copied -- 8 MR. SCHWARTZ: What exhibit number? 9 MR. DUEFFERT: T7077. 10 Q. (BY MR. DUEFFERT) Who is shown as 11 being copied on this letter? 12 A. Stanley Rosenberg, Ken Gindy, Charles 13 White, Steve Lerner. 14 Q. And Ellen Lane? 15 A. Excuse me. Ellen Lane. 16 Q. Stanley Rosenberg was a partner in the 17 joint venture. Right? 18 A. Yes. 19 Q. And he was a sophisticated and 20 successful businessman? 21 A. Yes. 22 Q. Kenneth Gindy was the lawyer to the 7848 1 joint venture partners, correct? 2 A. Yes. 3 Q. Stephen Lerner was a lawyer for United, 4 correct? 5 A. Yes. 6 Q. Ellen Lane was a lawyer for United, 7 correct? 8 A. Yes. 9 Q. Who was copied on your firm's response 10 to Mr. Graham? 11 A. Ken Gindy, John Grieshaber, Dan Crump, 12 Lee Faris, Charles White, and Lindsay McNeile. 13 Q. Did Dan Crump work in Mr. Grieshaber's 14 office? 15 A. No. At that time, Dan Crump worked for 16 Gulf Management Resources, I believe. 17 Q. What was his role in your organization? 18 A. He was executive officer of the -- of 19 Gulf Management Resources in Dallas. 20 Q. And Lee Faris was your superior, 21 correct? 22 A. No. At this time, Noel Simpson was my 7849 1 superior. I worked directly under him. 2 Q. I'm sorry. What was Lee Faris' title 3 at your office? 4 A. At this time, he had just been hired. 5 I don't know what his official title was at the 6 time. He was -- his background was in accounting. 7 Q. And who was Mr. Lindsay McNeile? 8 A. Lindsay McNeile was -- he would be a 9 representative in the IPIC -- in IPIC. 10 Q. Your dealings with Mr. Graham regarding 11 the appraisal and regarding revisions to pro 12 formas wasn't a secret, was it? 13 A. My dealings with Mr. Graham was not a 14 secret? 15 Q. Yes. 16 A. No. 17 Q. And the other people at your office 18 were aware of what you and he were doing. Right? 19 A. Certainly. 20 Q. Could we have T7345, please? This is 21 at Tab 823, and it has been admitted. 22 Is Exhibit T7345 the -- one of the 7850 1 financial statements that you and Mr. Schwartz 2 discussed yesterday? 3 A. We looked at a lot of pro formas. I 4 mean, I don't know if we looked at this particular 5 one yesterday or not. I mean, did we? 6 Q. If you would jump ahead to Bates 7 No. CN082646. 8 A. 646. Okay. 9 Q. Do you see a "total sales" line? 10 A. Yes. 11 Q. Going across, the total listed there is 12 123,448,953? 13 A. That's correct. 14 Q. What is the date of this financial 15 statement? 16 A. 18 February '86. 17 Q. And am I right in thinking that is 12 18 days after Mr. Graham's February 6th letter? 19 A. Yes. 20 Q. And did this provide Mr. Graham with 21 the information he was seeking? 22 A. This was part of his request for 7851 1 revised financials, I believe. 2 Q. If you'll look at Pages CN082675 3 through 678. 4 A. Okay. I have it. 5 Q. Could you explain to the Court the 6 significance of those four pages? 7 A. Well, as stated at the top, this is a 8 summary of changes to the October 6th, 1985 9 financial analysis. 10 Q. And does this explain the various 11 adjustments you had made to the pro formas 12 contained in the October 1985 loan application? 13 A. Yes. 14 Q. Are there any statements in these four 15 pages that are untruthful? 16 A. Not to my knowledge. Certainly not 17 intentionally. 18 MR. DUEFFERT: One moment, Your Honor. 19 THE WITNESS: Excuse me. I'd like to 20 get some water, too. 21 MR. DUEFFERT: Your Honor, I have no 22 further questions for this witness at this time. 7852 1 THE COURT: How much redirect does the 2 OTS have? 3 MR. KEETON: Your Honor, I have some 4 questions for him. 5 THE COURT: All right. Mr. Keeton. 6 7 CROSS-EXAMINATION 8 9 (11:14 a.m.) 10 Q. (BY MR. KEETON) Mr. White, you said 11 you got a BA in 1969 from the University of 12 Arizona at Tucson? 13 A. About that time, yes. 14 Q. About that time? Did you attend your 15 graduation? 16 A. I mean, I can go get a transcript; but 17 it was about that time. 18 Q. What was your degree in? 19 A. It was a bachelor's of art in 20 sociology. 21 Q. Following graduation, what did you do? 22 A. Well, immediately following graduation, 7853 1 I went to work for the City of San Antonio urban 2 planning department. Subsequently, I formed my 3 own consulting company and did some campaign 4 management. 5 Q. In San Antonio? 6 A. No. This is in Tucson before I came to 7 San Antonio. Subsequent to that, I became the 8 general manager of a construction company there. 9 Q. How long were you running campaigns? 10 A. About two years. 11 Q. Did you concentrate on one party or the 12 other? 13 A. It was democratic. 14 Q. We saw earlier this morning that the 15 second Love & Dugger appraisal came out with 16 something like $123 million in gross sales? 17 A. That's correct. 18 Q. Did you tell them to come out with that 19 number? 20 A. I provided -- I don't know specifically 21 which pro forma I would have provided them. I'd 22 have to go back and look, I guess. But I would 7854 1 have provided them a pro forma. I don't know 2 exactly when we had those different pro formas 3 going. So, it was -- it was either the 4 120 million -- it was likely the 120 million one 5 that was in the loan application, considering the 6 time frame. 7 Q. Would you expect that the Love & Dugger 8 appraisal, though, would come out with their own 9 judgment of what was proper on gross sales? 10 A. Certainly. That's the obligation of 11 any appraiser. 12 Q. And they came out with 123 million? 13 A. On the gross sales. 14 Q. Right. 15 A. Yes. 16 Q. Did you know Mr. Ed Schulz before you 17 met with him? 18 A. No. 19 Q. You met with him in Houston? 20 A. Yes. Houston and then subsequently in 21 San Antonio. 22 Q. Did you meet with him several times in 7855 1 San Antonio? 2 A. Probably at least twice. 3 Q. At the property? 4 A. Certainly there would have been a trip 5 to the property and then probably also in the 6 offices there. 7 Q. Did you form any impression of him on 8 those occasions? 9 A. He was a likable guy. 10 Q. Did he seem professional? 11 A. He was asking the right questions and 12 asking for the right information. I mean, asking 13 for the information you would expect of an 14 appraiser that's trying to perform an R-41B 15 appraisal. 16 Q. You did not feel that he was doing a 17 sloppy job at the time, did you? 18 A. It didn't occur to me. 19 Q. Nothing you saw indicated he was doing 20 less than his best, and his best was professional, 21 correct? 22 A. That's correct. 7856 1 Q. Now, you personally did not invest in 2 this project? 3 A. No. 4 Q. Did you have any kind of interest if it 5 was successful? 6 A. I mean, it was one of several assets 7 that GMR had. I had a job with GMR before that. 8 If it went through, I would have a job doing that. 9 I mean, it's not as if I wouldn't have a job if I 10 didn't do it, if that's what you're trying to get 11 to. 12 Q. No. I'm talking about if this project 13 had been successful, since you were the project 14 manager, would you have had some financial reward 15 tied to this project's success? 16 A. No. You mean an incentive on this 17 project? No. 18 Q. Right. 19 A. I was on a salary basis. 20 Q. When you put out your papers and 21 investment packages to investors, did you feel you 22 were defrauding those investors? 7857 1 MR. SCHWARTZ: Objection, Your Honor. 2 Calls for a legal conclusion from the witness. 3 A. No. 4 THE COURT: Denied. 5 MR. KEETON: I think anyone this 6 educated knows what the word "defraud" means. 7 THE COURT: We had an answer. Let's 8 move on. 9 Q. (BY MR. KEETON) What was your answer? 10 A. My -- I think my answer was no. 11 Q. Okay. 12 A. If I -- yeah. 13 Q. Did you think it was a good project for 14 your investors to invest in at the time? 15 A. Yes. 16 Q. Do you have any fact to support the 17 statement you made that Ed Schulz was somehow a 18 captive appraiser who made his numbers fit 19 United's against his best professional judgment? 20 A. Could you ask that again? 21 Q. Yeah. Do you have any fact to say that 22 Ed Schulz was a captive appraiser who didn't use 7858 1 his best judgment when he made up his appraisals? 2 MR. SCHWARTZ: Your Honor, may I ask 3 for a time clarification? 4 MR. KEETON: I don't think we need a 5 time clarification. I think the witness knows 6 when we're talking about. 7 MR. SCHWARTZ: Well, Your Honor, there 8 was testimony from Mr. Dueffert's examination that 9 referred to what he's read and come to understand 10 since the late Eighties. And Mr. Nickens -- 11 Mr. Nickens' question is -- 12 MR. KEETON: I'm Keeton. 13 MR. SCHWARTZ: I'm sorry. I apologize. 14 Mr. Keeton's is spread over a substantial period 15 of time. 16 MR. KEETON: If he's got an answer, I 17 want to hear it. That's why I asked it that 18 broadly. 19 THE COURT: Denied. Can you answer? 20 A. Do I have any facts -- please just ask 21 the question again. 22 Q. (BY MR. KEETON) Do you know any fact 7859 1 that would support the conclusion that Mr. Ed 2 Schulz did not exercise his best professional 3 judgment when he made up his appraisal back in 4 1986? 5 A. Yes. 6 Q. What? 7 A. Well, when you're conducting an R-41B 8 appraisal, part of the calculation that you have 9 to figure in there is your developer's profit. 10 And part of the way in which Mr. Schulz achieved 11 the number that he was asked to achieve, as 12 compared to the Love & Dugger appraisal, was in 13 how he dealt with the developer's profit. And 14 that's how he was able to get to the 15 88-million-dollar number. 16 Q. So, he didn't come up to a 17 '97-million-dollar number, did he? 18 A. No. I believe we just reviewed his 19 proposal. It was 88 million. 20 Q. All right. Now, at the time that you 21 got that appraisal, you looked at it, didn't you? 22 A. Yes. 7860 1 Q. And so, how did Mr. Schulz deal with 2 the profit that differed from Love & Dugger? 3 A. Well, he assumed, I believe -- I'd have 4 to go back and read the whole document again, 5 but -- 6 MR. SCHWARTZ: Your Honor, the witness 7 makes a good point. If he could have an 8 opportunity to look at the two documents, I think 9 that's fair. 10 MR. KEETON: If he wants to, he can. 11 I'm trying to get through this examination instead 12 of going slow like molasses like we seem to every 13 day in this courtroom. 14 THE COURT: Well, can you answer the 15 question without looking at the exhibits? 16 THE WITNESS: Well, Your Honor, I think 17 I would like to look at them. I mean, he's asking 18 me for some detailed response rather than -- 19 THE COURT: All right. We'll take a 20 short recess. 21 THE WITNESS: If I could look at those 22 and read them, I think I could tell you how he got 7861 1 to those numbers. 2 3 (A short break was taken 4 at 11:24 a.m.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. Mr. Keeton, you may 8 cross-examine. 9 (11:40 a.m.) 10 Q. (BY MR. KEETON) Mr. White, did you 11 locate the place you wanted to refer me to? 12 A. Yes. If you'll look at Mr. Schulz' 13 appraisal, Exhibit A10331, Page OW0202567, we 14 looked at it before, a couple of things. First of 15 all, I think this is this mysterious $110 -- 16 110-million-dollar number which indicates a 17 present retail value. I think that's just simply 18 a straight-out error because that number should 19 be, I believe, the 878,988.70. 20 Q. That one, you think, is a typo? 21 A. I would believe so. Now, what you 22 don't see in this analysis is a provision for your 7862 1 development cost, a provision for your developer's 2 profit in this analysis. And I believe that a 3 proper R-41B appraisal would take those factors 4 into consideration. 5 Q. Do you know if that's included in the 6 discount rate? 7 A. No. I mean, I know it's not included 8 in the discount rate. 9 Q. And the development costs are not 10 included? 11 A. Development costs are not there and 12 developer's profit is not there. 13 Q. All right. Now, it's based on those 14 two omissions that you say Mr. Schulz is somehow 15 in cahoots with Mr. Graham to jimmy this appraisal 16 to get a number? 17 A. No. This is the result. I'm basing my 18 comments on the telephone conversations I had with 19 Mr. Graham and based on the letters which we've 20 already reviewed. It was quite clear that 21 Love & Dugger would be unable to get to the number 22 we got to -- the number that we needed in order to 7863 1 make the loan. 2 Q. Excuse me. That's not my question. My 3 question to you is: Is it based on these two 4 errors or omissions that you say Mr. Schulz is in 5 cahoots with Mr. Graham -- 6 A. No. And I'm telling you that my 7 comments regarding the relationship between 8 Mr. Schulz and United Savings is based on my 9 conversations with Mr. Graham and on the letters 10 that we received in this reference. The result of 11 that is that we have an R-41B appraisal that does 12 not meet the government standards promulgated at 13 the time. 14 Q. Did you know that when you received it? 15 A. No. It was subsequent to that. 16 Q. If fact, you learned it from interviews 17 with the OTS people, didn't you? 18 A. No, that's not true. 19 Q. When did you learn it? 20 A. Well, subsequently -- and I don't know 21 when this would be after the closing of the loan. 22 But at some point subsequent to the closing of the 7864 1 loan, I had occasion to review these documents 2 with Mr. Dan Crump and, also, to look in detail at 3 what an R-41B appraisal required. And it is from 4 that analysis, which would have been in -- 5 probably toward the end of 1987. 6 I mean, you have to understand that as 7 we began to realize that the loan was in trouble, 8 we started to ask the question, "Well, how did we 9 get here?" And one of the ways we got here was 10 through this appraisal. So, it was a review that 11 Mr. Crump and I made of this document sometime in 12 the fall of 1987. 13 Q. Did you call Mr. Graham or anyone at 14 USAT about this? 15 A. No. 16 Q. Did you advise your investors? 17 A. I don't think so. 18 Q. Anything else about Mr. Schulz that 19 would say he did not exercise his best 20 professional judgment in making his appraisal? 21 A. Anything else besides these two main -- 22 Q. Right. 7865 1 A. -- items? No. 2 Q. Any other evidence that Mr. Schulz has 3 put forward appraisals in other instances that he 4 did not believe in or he did not use his best 5 professional judgment on? 6 A. This is the only appraisal I've ever 7 reviewed by Mr. Schulz. 8 Q. When did you leave GMR's employment? 9 A. Well, I left them as a salaried 10 employee and became a consultant somewhere in that 11 '89 to '90 time frame. And then I worked for them 12 as a consultant for several years thereafter. 13 Q. What project? 14 A. Pardon? 15 Q. What project? 16 A. What project? 17 Q. (Nods head affirmatively.) 18 A. We have a -- there was the Market 19 Street Investment Company in downtown San Antonio 20 involving -- well, we also purchased the old 21 San Antonio Drug Company building there. That 22 would be the main project. 7866 1 Q. And when did you give up consulting for 2 GMR? 3 A. That would be somewhere in the '92 to 4 '93 time frame. 5 Q. And what did you do subsequent to that? 6 A. Property management in real estate 7 sales. 8 Q. For yourself? 9 A. As an independent contractor to various 10 owners. 11 Q. You said you met with Mr. Leiman and 12 Mr. Schwartz for a couple of hours in San Antonio. 13 Where did you meet? 14 A. We met in that old San Antonio Drug 15 Company building, which is now Homewood Suites. 16 It's right there on the river, the intersection of 17 St. Mary and Market Street. 18 Q. And how long ago was that? 19 A. Two to three weeks. 20 Q. And have you met with them subsequent 21 to that? 22 A. Well, they have been driving me back 7867 1 and forth to the hotel. I mean, they won't even 2 go to dinner with me. 3 Q. I'm sorry? 4 A. They won't even go out to dinner with 5 me. 6 Q. Did you discuss the case back and forth 7 to the hotel? 8 A. No. 9 Q. You haven't discussed the case with 10 them? 11 A. Not since I've been here. 12 Q. The only occasion was that one occasion 13 in San Antonio? 14 A. Yes. 15 Q. Did they show you any documents here 16 other than those they have shown you in the 17 courtroom? 18 A. Did they show me any other documents? 19 Q. Prior to getting into the courtroom. 20 A. You mean, did I look at documents there 21 in San Antonio that I haven't seen here? 22 Q. No. I know you looked at some in 7868 1 San Antonio. Have you looked at any in Houston? 2 A. Outside of this courtroom? 3 Q. Yes. 4 A. No. 5 Q. Did they leave that stack of documents 6 with you? 7 A. No. 8 MR. KEETON: Thank you. 9 A. The documents were always here. 10 MR. KEETON: I have no further 11 questions. 12 THE COURT: Do any of the other 13 respondents' counsel have cross-examination? 14 MR. EISENHART: I have no questions, 15 Your Honor. 16 MR. BLANKENSTEIN: No questions at this 17 time, Your Honor. 18 THE COURT: Redirect? 19 MR. SCHWARTZ: Yes, Your Honor. Just a 20 couple of questions. 21 22 7869 1 2 REDIRECT-EXAMINATION 3 4 (11:50 a.m.) 5 Q. (BY MR. SCHWARTZ) Mr. White, you 6 talked about an understanding that you had of the 7 phrase "mission creep" during Mr. Dueffert's 8 examination. 9 Do you recall that? 10 A. Yes. 11 Q. Was the end result of mission creep the 12 comment that you made yesterday about "damn the 13 torpedoes"? 14 MR. DUEFFERT: Your Honor, I don't know 15 if that -- I object to that question. It's -- it 16 doesn't sound like evidence. 17 MR. SCHWARTZ: The witness went into a 18 rather long explanation, Your Honor, of what his 19 understanding of "mission creep" was. And he went 20 into the juggernaut attitude of getting this loan 21 done. And in my examination of him earlier on the 22 first day, he used the phrase "damn the 7870 1 torpedoes." And I'm just trying to clarify for 2 the record whether or not this concept of mission 3 creep was what led him to the statement "damn the 4 torpedoes." It's a fair question from redirect, 5 considering that the basis for it started from 6 Mr. Dueffert's cross-examination. 7 THE COURT: All right. Objection is 8 denied. You may answer. 9 A. Well, the way I'd characterize this is 10 this. As I indicated in my comments on mission 11 creep is that this size of deal takes on a 12 character of its own. And what everybody begins 13 to do is narrow their focus. It's almost as if 14 you have blinders on so that what you're doing is 15 you're doing everything you can do to provide the 16 documentation, the due diligence, the pro formas, 17 all those things you've got to have to close the 18 loan to the exclusion of anything -- of any other 19 considerations. So, we never arrived at the point 20 of even considering the question of, "Well, maybe 21 we should just let this one go." So, the comment 22 of "damn the torpedoes" is that -- is, you know, 7871 1 don't bother me with these distractions about 2 what's happening out in the marketplace or these 3 other concerns. Right now, we're going to close 4 this loan, and we'll deal with that down the road. 5 Q. You also addressed some issues with 6 Mr. Dueffert concerning the letters of credit and 7 the collateral issues. 8 Do you recall that? 9 A. Yes. 10 Q. And you testified that each of the 11 partners put up money for the letters of credit; 12 is that correct? 13 A. That's correct. 14 Q. I believe you testified that you did 15 not recall the date when Mr. Rosenberg's and 16 Mr. Grieshaber's letters of credit were called by 17 United; is that correct? 18 A. That's correct. 19 Q. Do you recall whether or not 20 Mr. Rosenberg's or Mr. Grieshaber's letters of 21 credit were called at any time while UFG 22 controlled United Savings? 7872 1 MR. DUEFFERT: Objection. Foundation. 2 THE COURT: Well, if he knows. 3 A. I can recall the occasion on which the 4 Gulf Management Resources letters of credit were 5 called. I think I was still a consultant to GMR 6 at that time. 7 Q. (BY MR. SCHWARTZ) And why was that 8 letter of credit called? 9 A. That was called because of a failure on 10 GMR's part to renew their letters of credit in 11 London. 12 Q. And with regard to the letters of 13 credit by Mr. Rosenberg and Mr. Grieshaber, do you 14 recall whether those letters of credit were called 15 before or after the receivership of United? 16 A. I do not know. 17 MR. SCHWARTZ: No further questions, 18 Your Honor. 19 THE COURT: Any recross? 20 MR. DUEFFERT: A few questions. 21 22 7873 1 2 RECROSS-EXAMINATION 3 4 Q. (BY MR. DUEFFERT) Did anyone in the 5 1980s, in all of your dealings in this property, 6 ever use the phrase "damn the torpedoes"? 7 A. Was that ever used then? 8 Q. Yes. 9 A. No. I mean, not -- not to my 10 recollection anyway. 11 Q. Have you ever heard that phrase used 12 since then in connection with this transaction? 13 A. Only by myself. I mean, that's my 14 characterization. 15 Q. And that characterization is based on 16 your belief that your firm, as well as the other 17 borrowers, were suicidal? 18 MR. SCHWARTZ: Objection, Your Honor. 19 That's an unfair question. I don't even 20 understand what the question is. 21 THE COURT: Well, maybe the witness 22 does. 7874 1 Do you understand it? 2 THE WITNESS: Well, I can attempt to 3 answer it. 4 A. From where I sit today in 1997, the 5 lender, Gulf Management, Stanley Rosenberg, John 6 Grieshaber, all of us, committed suicide. We got 7 ourselves into a deal that cost the taxpayers and 8 this country a lot of money and cost each of the 9 partners a lot of money. 10 Q. (BY MR. DUEFFERT) That's your 20/20 11 hindsight. Right? 12 A. That's hindsight. 13 Q. What did you think at the time? 14 A. At the time, as I've tried to indicate, 15 my entire focus and energy was dedicated to 16 getting the loan closed. The only way out from 17 everybody's self-interest -- perceived financial 18 self-interest at that time, was to go through 19 rather than to say "King's X." 20 Q. And that's because the property and the 21 project was felt to be a feasible and profitable 22 one, correct? 7875 1 A. Well, it was certainly hoped so. I 2 mean, the self-interest is motivated by a lot of 3 different factors. I mean, every player had their 4 own reason. United could drop somewhere $4 and a 5 half million to their bottom line. You have to 6 understand that the IPIC investors are entirely 7 offshore in the Middle East. Saving face is a 8 very important prospect there. Saying "King's X" 9 at that point was not a prospect that would even 10 occur to us at that time. 11 So, for different reasons, everybody 12 got to the same place which is, yeah, we have some 13 concerns here. But on the strength of the 14 location of this property and what was perceived 15 as what could happen in San Antonio in terms of a 16 recovery, the focus stayed on "Let's get the deal 17 closed, get it under development, get the 18 marketing campaign going, and we'll work our way 19 out." 20 Q. In early '86, did you arrive at a 21 conclusion for what the property would be worth at 22 the end of its development? 7876 1 MR. SCHWARTZ: Objection, Your Honor. 2 That goes beyond the scope of redirect. 3 MR. DUEFFERT: I think it's highly 4 relevant. 5 THE COURT: All right. How many more 6 questions do you have? 7 MR. DUEFFERT: I would say five 8 minutes. 9 THE COURT: All right. Can you answer? 10 A. I'm sorry. I have to ask you to ask 11 that again. 12 Q. (BY MR. DUEFFERT) Regardless of 13 Mr. Schulz, in early 1986 did you arrive at any 14 conclusion as to the value of the property after 15 it was going to be developed? 16 A. Well, that was the intention of all 17 those pro formas that I was working on, was to 18 arrive at what the property would be worth. 19 Q. And you exercised your best judgment in 20 developing those pro formas. Right? 21 MR. SCHWARTZ: Clarification for which 22 point in time again, Your Honor? 7877 1 MR. DUEFFERT: Your Honor -- 2 THE WITNESS: I mean, we're talking 3 about early '86. 4 THE COURT: Denied. 5 A. Ask it again, please. 6 Q. (BY MR. DUEFFERT) When GMR and the 7 other investors decided to make their commitment 8 in cash equity to this project, they relied on 9 their own internal estimates, correct? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 THE COURT: Would you speak up? 13 A. Yes. 14 Q. (BY MR. DUEFFERT) And did those 15 internal estimates indicate to them and to you at 16 the time that, with your best judgment, it would 17 be a profitable endeavor to develop Park 410? 18 A. Yes. 19 Q. You've mentioned a Love & Dugger number 20 of $67 million for the developed value of the 21 property. Right? 22 A. I mean, we're talking about -- no. I 7878 1 think we're looking at an appraisal here from 2 Love & Dugger in the 46-million-dollar range. 3 Q. What appraisals are those? 4 A. This is the one, T7143. 5 Q. That's an as-is appraisal. Right? 6 A. Yes. 7 Q. Did you understand that to extend this 8 loan, an as-developed appraisal would have to be 9 obtained? 10 A. You mean to secure the development 11 loan? 12 Q. Yes. 13 A. An R-41B appraisal would have to be 14 obtained, yes. 15 Q. And what do you mean by "an R-41B 16 appraisal"? 17 A. That's the format under which the 18 government prescribes how you conduct that 19 appraisal. 20 Q. But you didn't know the methodology 21 that was prescribed by that memorandum. Right? 22 A. Well, I was somewhat familiar with it. 7879 1 Q. Well, do you know the point in 2 valuation of the property that the valuation would 3 have to be made in order to comply with Memorandum 4 R-41B? 5 MR. SCHWARTZ: Your Honor, this is well 6 beyond the scope of my redirect examination. 7 THE COURT: It sounds like it's -- 8 MR. DUEFFERT: I'm actually just trying 9 to find out -- there has been discussion now about 10 Ed Schulz' appraisal and issues like what was in 11 it. And I'm just trying to find out if they had 12 an internal number that they were using. 13 THE COURT: All right. Objection 14 denied. 15 A. Being an internal R-41B appraisal 16 number? 17 Q. (BY MR. DUEFFERT) What number did you 18 project the land would be worth at the end of the 19 process? 20 A. Well, those are in my pro formas. The 21 final projection was that 123-million-dollar 22 number in terms of gross sales proceeds. Now, did 7880 1 I conduct a discounted cash flow analysis of that? 2 Yes, there probably was done a discounted cash 3 flow analysis of that income stream. 4 Q. Were you uncomfortable at any point 5 with Ed Schulz' value conclusion on the property? 6 A. Never occurred to me to be 7 uncomfortable. As I've been trying to indicate, 8 those kinds of concerns got -- I mean, the focus 9 was on closing the deal. We were happy we got 10 that appraisal because that meant we could close 11 the loan. Whether or not it conformed to R-41B or 12 all those other kinds of concerns didn't even 13 occur to me at that time. 14 MR. DUEFFERT: Two more minutes, Your 15 Honor. 16 Q. (BY MR. DUEFFERT) It was an 17 80-million-dollar loan. Right? 18 A. Yes. 19 Q. And for collateral, United had 20 $10 million in letters of credit. Right? 21 A. Yes. 22 Q. Underneath that was the first lien on 7881 1 the property. Right? 2 A. Yes. 3 Q. Take Love & Dugger's 67-million-dollar 4 number that I think we heard about yesterday and 5 put the $10 million in letters of credit on top of 6 that, and you've got a value of collateral of 7 $77 million. Right? 8 A. 67 plus 10 is 77. 9 MR. DUEFFERT: I'm almost there, and it 10 is important. 11 MR. SCHWARTZ: Could I have the 12 question and answer reread, please? I did not 13 hear the question and answer. I apologize to 14 counsel. 15 16 (Whereupon the requested portion 17 was read back by the reporter.) 18 19 MR. SCHWARTZ: I object to the question 20 as an incomplete hypothetical, Your Honor. And 21 also, beyond the scope of redirect. 22 THE COURT: Denied. Next question. 7882 1 Q. (BY MR. DUEFFERT) The loan had 2.4 2 million in points, correct? 3 A. Correct. 4 Q. The actual disbursements on the loan 5 never went above $77 million, did they? 6 A. I don't think so. 7 Q. So, if there is a default, USAT's 8 disbursed the full amount, $77 million. 9 Love & Dugger is right. The property is worth 10 $67 million in what I understood some testimony, 11 perhaps, to be yesterday. And there is 12 $10 million in letters of credit. 13 USAT is covered. Right? 14 A. Well, given those assumptions that you 15 have there that the value of the property is 16 $67 million with the $10 million of collateral, 17 they would be -- they would be covered. Now, 18 that's not what the lender likes, of course. They 19 always like higher coverage than that. I mean -- 20 Q. There was no 67-million-dollar 21 Love & Dugger number that you were relying on. 22 Right? 7883 1 A. Well, I wasn't relying on -- I mean, in 2 terms of securing the loan, we were relying on the 3 Ed Schulz appraisal. That's -- 4 Q. And for every dollar you and your 5 investors inflate the value of the property, 6 assuming USAT is covered at $77 million, who is at 7 risk? 8 A. I'm not understanding your question. 9 You mean who is at risk if -- 10 Q. If you inflate -- 11 A. If you have revenue stream in excess of 12 the $77 million, you mean whose money is at risk 13 above $77 million? I mean, we didn't make 14 anything until we got to pay back the $77 million. 15 So, we had to earn $77 million of net sales 16 proceeds to return that money to United. 17 Q. And so, for every dollar you inflate 18 the value of the property above $67 million, the 19 people who would be placed at risk were the 20 borrowers. Right? 21 MR. SCHWARTZ: Objection. Incomplete 22 hypothetical, Your Honor. 7884 1 THE COURT: Denied. 2 THE WITNESS: I'm sorry. 3 THE COURT: Can you answer? 4 THE WITNESS: I don't know if I can. I 5 mean, that's -- that's not the way the deal works. 6 I mean -- 7 Q. (BY MR. DUEFFERT) Your -- 8 A. You're at risk -- that $10 million that 9 the joint venture had up plus their guaranties is 10 at risk until you repay that loan 100 percent. 11 Q. And your firm and the other investors 12 wouldn't manipulate numbers if the net effect of 13 it was to increase their own risk, would they? 14 A. Would we increase -- would we push 15 numbers to increase our own risk? 16 Q. Yes. 17 A. Well, I don't think that action in and 18 of itself generates risk is the problem I'm 19 having. I mean, what -- the risk involved here is 20 you're taking this loan. You've got your 21 $10 million at stake. Got your guaranties at 22 stake. You're at risk until you repay that loan. 7885 1 In terms of the profit potential for the 2 developer, that's the risk you take in 3 development, that there will be a profit at the 4 end of the day. That's the reason why you jump 5 into it. And in terms of any land deal, what 6 you're -- it is risk from the beginning. You're 7 putting money at risk in order to make money. 8 So -- 9 Q. And however Mr. Schulz arrived at his 10 value conclusion, GMR believed that the Park 410 11 project would be feasible and profitable. Right? 12 A. At the time of the closing, we believed 13 that to be true. 14 MR. DUEFFERT: Thank you, Your Honor. 15 MR. SCHWARTZ: One moment, Your Honor. 16 Your Honor, we have no further 17 questions. 18 THE COURT: All right. Thank you, 19 Mr. White. You may step down. We'll adjourn 20 until 1:30. 21 MR. SCHWARTZ: Your Honor, may we go 22 off the record a moment? 7886 1 (Luncheon recess taken at 12:03 p.m.) 2 3 THE COURT: Be seated, please. I 4 believe the schedule for this afternoon will be 5 cross-examination by Mr. Dueffert of Mr. Lovell. 6 7 (Discussion off the record.) 8 9 MR. DUEFFERT: Yes, Your Honor. I 10 would call Mr. Doug Lovell to the stand. 11 THE COURT: The witness has been sworn 12 and remains under oath. 13 THE WITNESS: Perhaps we could do a 14 little housekeeping. 15 THE COURT: Yes. Would you clean up 16 the witness box and give the witness a glass of 17 water, please? Mr. Dueffert. 18 MR. DUEFFERT: Thank you, Your Honor. 19 20 21 22 7887 1 2 CROSS-EXAMINATION 3 4 (1:35 p.m.) 5 Q. (BY MR. DUEFFERT) Welcome back, 6 Mr. Lovell. For the record, my name is Paul 7 Dueffert. I think we first met at your deposition 8 a couple weeks ago, correct? 9 A. That's correct. 10 Q. Have you brought with you here today 11 the documents that you've reviewed in preparation 12 of your opinions for purposes of this proceeding? 13 A. Well, I haven't brought all the 14 documents; but I brought the appraisal reports and 15 the market studies, yes. 16 Q. And when you're referring to appraisal 17 reports and market studies, for the record, would 18 you identify which documents you're referring to 19 by name of firm and date? Thank you. 20 A. I suspect that's what you wanted since 21 we've had a number of appraisals here. Okay. I 22 have a June 11th date of letter transmittal, 7888 1 June 11th, 1986 appraisal prepared by Appraisal 2 Associates of Austin Incorporated. It involves a 3 99.43-acre and a 24.85-acre tract of land in 4 Austin, Texas, which I believe is better known as 5 the Norwood property. The appraisal was prepared 6 by a Jim Fredrick and a William Gordon. 7 Q. Next? 8 A. And then we have an appraisal of the 9 Norwood Park property prepared by Rex Bolin, and 10 the letter -- cover page shows a date as of 11 June 5th, 1986. 12 Q. Next? 13 A. Did you want the market analyses, as 14 well? 15 Q. Certainly. 16 A. I have a market analyses prepared by 17 Burke, O'Hara, Fort & Associates involving the 18 Norwood Properties. The date of the letter of 19 transmittal is June 4th, 1986. And I also have an 20 update of that same study that's dated June 17th, 21 1986, by Burke, O'Hara, Fort & Associates. We 22 have the Tremar Real Estate Research study dated 7889 1 October 9th, 1985, and that involves the analysis 2 of the market potential of the Park 410 West 3 development. 4 Q. Finally? Or was that it? 5 A. Should have two more appraisals. 6 Q. Proceed. 7 A. We have an appraisal prepared by Edward 8 B. Schulz of the Park 410 West property. The 9 letter of transmittal is dated March 19th, 1986. 10 And we have an appraisal of the Park 410 Joint 11 Venture prepared by the firm of Love & Dugger. 12 The letter of transmittal is dated February 12th, 13 1986. That's all of them. 14 Q. Have you reviewed other documents in 15 the course of preparing your testimony in this 16 case? 17 A. Well, obviously, I've taken a look at 18 R-41B. You asked me for a rather extensive 19 document production for the deposition, including 20 various articles that I've written over the years 21 and participated in the writing. So, I have 22 looked at some of them, as well, yes. 7890 1 Q. Did you review any other documentation 2 from the files of United Savings Association of 3 Texas? 4 A. I have seen an update as of this 5 morning of the Love & Dugger appraisal report on 6 the Park 410 development. I believe the date on 7 the update -- it was a fairly short letter -- was 8 1987. 9 Q. Do you have that document before you? 10 A. No, I do not. 11 Q. How did you come to see that document? 12 A. Mr. Paul Leiman handed it to me this 13 morning. 14 Q. Did he say anything about it? 15 A. He said, "You might want to read it." 16 Q. Did Mr. Leiman or Mr. Schwartz discuss 17 with you your testimony since you've last 18 testified in this courtroom? 19 A. We've talked about it, but not much. I 20 can say that. We haven't had much of an 21 opportunity. I've, of course, been out of town 22 myself. 7891 1 Q. Can you tell me what you did talk 2 about? 3 A. Talked about some of the factors 4 relative to each one of the appraisal reports, the 5 market study. And I certainly did mention that I 6 have now read through the -- which I had not done 7 completely before -- the City of Austin study that 8 was done on the northwest quadrant of the City of 9 Austin involving the Norwood property. 10 Q. And when did those conversations take 11 place? 12 A. Those conversations took place -- well, 13 last night at dinner briefly and briefly this 14 morning. 15 Q. And did you discuss any particular 16 aspects of any of the appraisal documents or 17 market analyses? 18 A. Well, after reading the City of Austin 19 study, I found it even less encouraging than just 20 looking at the executive summary of the study. 21 Looking at the total amount of -- or total level 22 of supply going on, I can see why the city 7892 1 planners were expressing some serious concern 2 about the City of Austin's ability to have 3 appropriate infrastructure to handle that level of 4 development and what it would mean. They 5 essentially seemed to indicate that the level of 6 development that was being planned would exceed 7 growth projections that they had previously done 8 through 2020, that we were potentially building 9 out something in the order of about a 35-year 10 supply of office space. So, that would naturally 11 be of concern. 12 They were also concerned in that study 13 about the change in usage. They make a comparison 14 between the percentage of land area in Austin 15 devoted to residential versus commercial property, 16 and they point out that there is a -- in the 17 northeast -- the north quadrant, that that 18 particular study addresses, there is a dramatic 19 shift in heavy commercial usage, which is likely 20 to have some impact on the infrastructure in the 21 City of Austin more heavily than had been 22 anticipated in the past. 7893 1 They also point out that the level of 2 density of development -- they have a good chart 3 in there with floor area ratios by major product 4 and project type that's planned. And they point 5 out that the density of development on each one of 6 the individual properties is, on average, a little 7 bit higher than had been previously existing in 8 the City of Austin. In fact, the subject 9 property's development density is on the order of 10 about twice what had previously been developed, 11 apparently, in the City of Austin according to 12 their summary on other projects. 13 MR. DUEFFERT: Would you read out loud 14 my question, please? 15 16 (Whereupon the requested portion 17 was read back by the reporter.) 18 19 Q. (BY MR. DUEFFERT) Do I take it that 20 all of what you just said you discussed with 21 Mr. Leiman and Mr. Schwartz since you last 22 testified? 7894 1 A. That's correct. 2 Q. Did you discuss any other aspects of 3 any of these documents with Mr. Leiman and 4 Mr. Schwartz? 5 A. I pointed out that because of -- 6 constant question, I think, arises often about 7 what R-41B requires versus professional practice 8 standards, and I pointed out with the Appraisal 9 Institute standards of practice at that particular 10 time what was required in the way of a proposed 11 property, which is namely Standard 1-2 of the 12 Appraisal Institute. 13 Q. Do I understand that when you testified 14 last time about the Austin Growth Watch Report you 15 had only read the executive summary of it? 16 A. That's correct. I had only seen that 17 study, I think, the morning of my testimony. 18 Q. And yet, you testified about what it 19 said without reading the whole thing. Right? 20 A. I had read the executive summary, and I 21 believe I testified to that effect. 22 Q. Have we covered all the basis of the 7895 1 things you've been discussing with Mr. Leiman and 2 Mr. Schwartz in the last week and a half since you 3 testified? 4 A. Well, certainly what comes to mind. I 5 mean, I guess there is probably one other document 6 that I mentioned to him -- I was kind of amusing 7 myself this morning -- which was submitted as a 8 part of the evidence here. The document titled 9 Appraisal Concerns of Thrift Institution Lenders 10 which go through many of the common problems 11 dealing with property types of the nature we're 12 talking about here even. I remember the document 13 well because each one of the examples in there is 14 actually a real case. Several of them involve 15 properties here in Texas. 16 Q. We'll get to it later. 17 A. Sure. 18 Q. Apart from the documents you've 19 referenced so far in your testimony this 20 afternoon, did you look at anything else from the 21 files of United Savings Association of Texas? 22 A. No. 7896 1 Q. You didn't review the loan files on the 2 Park 410 and Norwood credits, did you? 3 A. I have not done so. 4 Q. And in light of that, what is exactly 5 the nature of your project here? 6 A. To answer your questions. 7 Q. Are you rendering an opinion? 8 A. If you ask me for one, I can certainly 9 render an opinion. 10 Q. I think you said when you last 11 testified that you felt that the appraisals and 12 market studies you identified didn't make the 13 case. Right? 14 A. I believe I used that language, yes. 15 Q. Are you saying that those documents 16 failed to meet some objective published criteria 17 that existed at the time, or are you saying 18 something else? 19 MR. LEIMAN: Your Honor, I'll just ask 20 Mr. Dueffert if he could specifically identify 21 what documents he's talking about since there is a 22 stack that's about 6 or 7 inches high right in 7897 1 front of him. If he's talking about all of them, 2 then I would appreciate that being identified 3 MR. DUEFFERT: Your Honor, I think I'm 4 entitled to generally get a sense of where the 5 expert is coming from. 6 THE COURT: All right. The witness 7 seems to understand. 8 A. Would you repeat it again? 9 Q. (BY MR. DUEFFERT) In saying that 10 these documents don't make the case, are you 11 referring to objective published criteria, or are 12 you just saying given your experience and 13 understanding in your own head, you're not happy 14 with them? 15 A. Well, I think it would be incorrect to 16 characterize it as being something that's resident 17 within my own head. On the other hand, if you're 18 looking for a detailed checklist or laundry list, 19 so to speak, or a tick list that we could 20 reference and go down and say, "This is exactly 21 what's involved in doing loan underwriting," to 22 the best of my knowledge, no such document exists 7898 1 anywhere in the United States. I have never seen 2 it. I have been familiar with many lenders. I 3 have written certainly extensively about and 4 talked extensively about loan underwriting, but I 5 don't know that anybody has ever written a 6 detailed list of what needs to be done. 7 So, when I reference the fact that an 8 appraisal need to be a useful tool, yes, there is 9 an element of judgment there. I believe that. 10 Q. Well, you're looking at other factors 11 as to whether the appraisal documents are useful 12 tools for loan underwriting purpose, correct? 13 A. Well, it depends on the unique lending 14 situation what would be necessary in order to make 15 a responsible lending decision. 16 Q. Well, in light of the two loans that 17 we're looking at in this case, what do you know 18 about the extent to which United actually relied 19 on the documents you reviewed? 20 A. I have no knowledge. 21 Q. Would it be fair to say you have no 22 knowledge about the other information that was 7899 1 available to United? 2 A. I think that's fair. 3 Q. Have you reviewed testimony by any of 4 the individuals involved in the Norwood and 5 Park 410 transactions? 6 A. Well, as I stated during my deposition, 7 I have reviewed certainly the testimony by 8 Mr. Brian Schuler, and I have also reviewed two 9 days' worth of testimony by Mr. Auvy McBride. 10 Q. Were either of those individuals 11 involved in the Norwood and Park 410 transactions? 12 A. Not to the best of my knowledge. 13 Q. They are both expert witnesses, 14 correct? 15 A. That's correct. 16 Q. Do you know anything apart -- strike 17 that. 18 Do you know anything about the 19 borrowers involved in the Park 410 and Norwood 20 loans? 21 A. I don't even know who the borrowers 22 are. 7900 1 Q. And you don't know anything about the 2 terms of the loans either. Right? 3 A. No, I do not, nor do I know the dollar 4 amounts. 5 Q. Have you reviewed any loans made by 6 United or any loan documents apart from documents 7 related to the Norwood and Park 410 transactions? 8 A. Well, let me answer it this way because 9 I have been involved over the years with so many 10 institutions. I have never kept a list of 11 everything that I've reviewed. To the best of my 12 knowledge, I don't recall directly having ever 13 reviewed anything from them; but it is certainly 14 possible that I did. 15 Q. For purposes of your testimony in this 16 proceeding, you're only looking at the Norwood and 17 Park 410 loan documents. Right? 18 A. That's correct. 19 Q. Have you looked at the asset mix of 20 United to determine what percentage of its loan 21 portfolio was constituted of development loans or 22 ADC projects? 7901 1 A. No, I have not. 2 Q. Have you analyzed the conduct of any of 3 the directors or officers of United? 4 A. I am not familiar with who the officers 5 or directors are. 6 Q. Do you know anything about a man by the 7 name of David Graham? 8 A. I don't recognize the name, no. 9 Q. Gem Childress? 10 A. (Witness shakes head negatively.) Not 11 the same Childress I'm aware of in Atlanta. 12 Q. Dr. Barry Munitz? 13 A. No. 14 Q. Arthur Berner? 15 A. No. 16 Q. Michael Crow? 17 A. Not that I'm aware of. 18 Q. Charles Hurwitz? 19 A. No. 20 Q. Ron Huebsch? 21 A. No. 22 Q. Have you analyzed the conduct or 7902 1 actions of the senior loan officer or senior loan 2 officers at United? 3 A. Well, as I stated, I haven't reviewed 4 the rest of the loan file information. So, 5 obviously, I have no knowledge of who the officers 6 were, let alone what actions they took. 7 Q. Do you know anything about 8 Jenard Gross? 9 A. No. 10 Q. And do you know anything about the 11 background or experience of any of these 12 individuals? 13 A. No, I do not. 14 Q. In your opinion, Mr. Lovell, exactly 15 what did United do wrong? 16 A. Well, based on the information that I 17 have in front of me and recognizing the nature of 18 these loans, I think you have to first recognize 19 that you're dealing with a very high-risk 20 transaction here and we're dealing with large 21 dollar amounts. That being said, that behooves 22 you to have a very careful appraisal analysis of 7903 1 these properties. And because supply and demand 2 are such a critical component in estimating the 3 highest and best use of the properties, you 4 probably would have surely commissioned a very 5 detailed market analysis to be done. And I mean a 6 market analysis that perhaps is structured much 7 the way the City of Austin study is done that 8 actually not only contains data but it tells you 9 where they got their conclusions relative to 10 growth projections, level of employment per 11 population, household family size, percentage of 12 participants versus residential property versus 13 land use activity in the neighborhood. That level 14 of detail, that level of analysis, you would 15 probably expect in loans of this size to be 16 incorporated in there. 17 The appraisal, if I was commissioned 18 the assignment, I certainly would ask the 19 appraiser to very specifically address the 20 economic feasibility of the property. I mean, to 21 do more than just give the classic textbook 22 definition of what highest and best use is, but 7904 1 actually go into the nitty-gritty details to 2 demonstrate why it's reasonable to extend the 3 credit on this with a solid appraisal in front of 4 me with factual information that would have 5 developed some value estimates, one, an as-is 6 value of what the land is legally, physically in 7 place on the date that we're going to do the loan, 8 as well as perhaps reflecting if we've got any 9 kind of zoning changes that are going to occur, 10 expressway construction that is not in place yet 11 but remains to be done in the future. I might 12 have asked the appraiser to evaluate specifically 13 what impact that type of improvement is likely to 14 have on the subject property. And then clearly, I 15 would have asked for a value estimate that 16 reflected the worth of the property at the point 17 of completion. 18 With that information and the cash flow 19 force cash schedule that would have been contained 20 both in the market studies and the appraisal 21 reports, I should have a reasonable amount of 22 information that will allow me to design the loan 7905 1 so that we have a likelihood of being repaid. 2 Q. I understand that you would like to see 3 a lot of stuff and that you might ask for this or 4 you might ask for that. My question, I guess, is: 5 Are you testifying that the documents in front of 6 you failed to reach the standards of what 7 appraisers generally did as of 1985, 1986? 8 A. I guess -- maybe I need to ask you to 9 rephrase that or define it better. When you say 10 "what appraisers commonly did," I'm not sure what 11 that has to do with anything. 12 Q. Well, in your view -- first off, do you 13 offer an opinion, and did you in your testimony a 14 week and a half ago, that it would have been 15 unsafe and unsound as a lending practice to rely 16 on the documents before you? 17 A. That's correct. 18 Q. When you say "unsafe and unsound," how 19 do you define that? 20 A. I'm looking at it, I guess -- and you 21 certainly have a part of the documents that we 22 furnished you, the examiner's handy-dandy guide to 7906 1 the Garn-St. Germain bill. I think on Page 1 or 2 2 of that handy-dandy guide they define the concept 3 of safety and soundness and prudence. And I guess 4 it's basically the prudent man rule, if you will, 5 what a knowledgeable individual, skilled in the 6 area, would prudently be expected to do. It's not 7 some tightly-defined concept. 8 Q. So, as you review the appraisal 9 documents in front of you -- by the way, before I 10 get into that, are you saying that anyone at 11 United did commit an unsafe and unsound lending 12 practice? 13 A. No. The question you asked me was not 14 that at all. The question you asked me is if you 15 relied on these appraisal reports, would it be 16 unsafe and unsound? And I believe I have 17 affirmatively said yes. 18 Q. So, your answer is no? 19 A. To which question? 20 Q. The question I asked was: Are you 21 offering an opinion that any of the officers or 22 directors at United did engage in unsafe and 7907 1 unsound lending practices? 2 A. All that I can offer an opinion about 3 is what I've got here. I knew -- do not know to 4 what extent the officers, directors, or others at 5 the institution utilized or relied upon these 6 appraisals. 7 Q. So, the answer is "no"? 8 A. You're asking me to stretch beyond the 9 limits, I think, of what I know about the case. 10 Q. So, the answer is "no"? 11 A. I think the answer is "no," if I'm 12 interpreting what you're saying correctly. 13 Q. Are you offering a conclusion of yours, 14 based on your review of whatever you've looked at, 15 that the officers and directors or any of them did 16 engage in unsafe and unsound lending practices? 17 A. If the officers and directors of the 18 institution relied upon these appraisals to make 19 whatever loans were made, I would say they were 20 engaging in unsafe and unsound practice. 21 Q. But you don't know? 22 A. I don't know what they did. 7908 1 Q. Now, you referred to what you called 2 the "prudent man rule." And I think I wrote down 3 you were looking at what a knowledgeable man 4 skilled -- I'm sorry. Could you fill that in? 5 A. Well, perhaps Mr. Leiman can help us 6 out if we have a copy of my handy-dandy guide that 7 I furnished with the testimony. 8 THE COURT: I think you're the witness. 9 You should answer the question. 10 A. Well, I guess I use the definition 11 that's cited in there because I think the concept 12 that's expressed there is a very old one that's 13 done by an old fellow who -- Horn, I believe, was 14 his name -- who was chairman of the Federal Home 15 Loan Bank Board back in the Thirties when asked in 16 Congress what is the concept of a prudent man. 17 And he basically put it down to the -- called it 18 something that a rational, reasonable person would 19 clearly understand would be the reasonable thing 20 to do. 21 Q. (BY MR. DUEFFERT) So, when you are 22 offering your critique of these appraisal 7909 1 documents, are you confining yourself to what 2 rational, reasonable appraisers would commonly do 3 in 1986; or are you imposing some higher 4 obligation in your review? 5 A. I'm looking at it from the perspective 6 of what R-41B requires. Now R-41B clearly 7 requires something more than the average standards 8 of practice. We've discussed this prior to today. 9 We've asked for -- self-contained, for example, is 10 a requirement of R-41B. We suggested that 11 appraisal reports ought to contain all of the data 12 analyses and reasoning so that a reader doesn't 13 have to refer to any other document when reading 14 the appraisal report in order to understand it. 15 If you look at the professional 16 practice standard, professional practice standards 17 permit you to put together, legitimately, a very 18 much of a summarized report. In fact, I've 19 pointed out repeatedly over the years to people 20 that many of the things that people think commonly 21 should be in an appraisal report are not 22 professional practice standards. There is no 7910 1 requirement that you have a photograph of the 2 subject property, a map of the subject property. 3 Those aren't professional practice requirements. 4 Yet, I don't know of many appraisers who would 5 write an appraisal report up and not include at 6 least a photograph. 7 Q. So, do I understand that in your review 8 of those documents, you are offering opinions and 9 conclusions that are defined with reference to 10 generally-accepted practices of the time under 11 R-41B as fee appraisers out in the field were 12 interpreting it as of 1985 and 1986? 13 A. I think so. Now, admittedly, I've 14 already said, too, before, that we had a 15 considerable amount of problems going on in the 16 industry. We obviously had some appraisers who 17 were errant, and that's what led to the hearings 18 at the end of 1985 on the impact of faulty and 19 fraudulent appraisal reports where it was 20 concluded that it was a very significant factor 21 that was contributing to losses to the insurance 22 funds, that there wasn't just a minor number of 7911 1 appraisers who were practicing inappropriately. 2 Q. What do you mean by "errant"? 3 A. Appraisers who were failing to follow 4 their professional practice standards. 5 Q. And were they doing that because they 6 were corrupt? 7 A. I don't know the answer to that. 8 Q. Is it your position that R-41B was 9 sufficiently clear so that non-appraisers could 10 understand what it required to -- what it required 11 of an appraisal report? 12 A. If we're talking about the average man 13 on the street, probably not. But then the average 14 man on the street would probably not know what 15 really needs to be in an appraisal report. 16 Q. Do you think it was written 17 sufficiently clear so that a non-appraiser like me 18 or the Court could clearly understand what it 19 required of a professional appraisal report in 20 1986? 21 A. I think it is. Certainly, you're of 22 reasonable average to above-average intelligence. 7912 1 I think the words -- the language is clear. I'm 2 certain the judge could understand easily, as 3 well. It's a very straightforward document. 4 Q. To your knowledge, did any of the 5 respondents violate any law or regulation? 6 A. Well, since I don't know the details to 7 the rest of what went on here, I don't know. I 8 don't know the answer to that. 9 Q. Have you ever appraised or valued, 10 yourself, either Park 410 or Norwood at any stage 11 of its development? 12 A. No. I have not performed an appraisal 13 on these properties. 14 Q. And do I understand correctly that 15 because you've made no independent valuation of 16 the properties, you aren't challenging the value 17 conclusions in the appraisal reports you see 18 before you? 19 A. I think they are suspect. But have I 20 developed alternative value conclusions? No. I 21 don't think there is adequate data here to do 22 that. 7913 1 Q. So, your testimony here is limited to 2 criticizing the work of people like Mr. Dugger and 3 Mr. Schulz and Mr. Bolin. Right? 4 A. I have certainly done that, yes. 5 Q. And you're not doing anything else, are 6 you? 7 A. I've certainly reviewed the appraisals 8 in light of what would be loan underwriting, 9 prudent loan underwriting practice and what R-41B 10 would require. 11 Q. I recall that you pointed out a 12 typographical error in one of the appraisal 13 reports. 14 Do you remember that? 15 A. Yes. 16 Q. And I think you indicated that while 17 the error wasn't material to the value conclusion, 18 it would indicate a lack of care on the part of 19 the appraiser? 20 A. That's true. 21 Q. Do I understand that you feel that 22 appraisers generally should exercise care to check 7914 1 and verify information before they commit it to 2 paper? 3 A. Yes. 4 Q. And your testimony here is no 5 different. Right? 6 A. As far as what? 7 Q. That you shouldn't offer it without 8 exercising care to check and verify the 9 information you're offering. 10 A. I have done what I was asked to do, and 11 that is read the appraisal reports. 12 Q. Do you remember talking about the 13 mythical bank of Antioch? 14 A. Yes, I sure do. 15 Q. And the nature of the hypothetical was 16 take a dollar -- 17 A. Uh-huh. 18 Q. -- place it in a 5 percent compound 19 account for 2,000 years -- 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. -- and you wind up with more dollars 7915 1 than there are particles in the universe? 2 A. That's what they tell me. 3 Q. Did you verify that information before 4 you offered it? 5 A. Yes. As a matter of fact, I have. In 6 fact, I've got my 12C calculator with me today. 7 Q. Could you run the interest calculation? 8 A. Sure. 9 Q. Please do. 10 A. What basis would you like it? 11 Q. What do you mean, "what basis"? 12 A. Well, we've got the term 2000 years at 13 a 5 percent interest rate. Would you like it 14 compounded annually? 15 Q. Continuously if the computer will do 16 it, the highest number you can reach. 17 MR. RINALDI: Your Honor, may I 18 interpose an objection as to where we're going 19 with this? I'm not sure that the mythical Bank of 20 Antioch has a great deal to do with the issues at 21 hand in this case and I'm not sure that even if 22 the witness were impeached, it would lead us 7916 1 anywhere. 2 MR. DUEFFERT: He did raise it himself, 3 and he has criticized appraisal reports for lack 4 of care. It won't take long. 5 THE COURT: All right. He's got his 6 calculator. Let's go. 7 A. Well, using an annual compounding, just 8 for the sake of argument, I get 4.78 times 10 to 9 the 43rd power. That's 4 followed by 43 zeros, 10 according to scientific notation. 11 Q. (BY MR. DUEFFERT) Okay. And I take 12 it before you used that -- you've used that 13 analogy in a lot of your seminars, correct? 14 A. I use it for a variety of reasons. I 15 mean, there is variation on it. There is 16 certainly analyzing the effect of the Dutch 17 purchase of Manhattan Island for something like 18 $24 under the same scenario. The current present 19 value at 6 percent interest is actually greater 20 than not only the land but all existing 21 improvements estimated on Manhattan Island. So, 22 yeah, there is lots of examples like that. 7917 1 Q. Do you -- how many particles are there 2 in the universe? 3 A. Well, I -- the last time I saw 4 something done on it, I suppose it was some Carl 5 Sagan program that I was watching, but I think we 6 were talking in magnitude of several tens of 7 factors below 4 to the 43rd power. 8 Q. Could we have Exhibit B3848, please? 9 Mr. Lovell, before you offered your 10 analogy in your seminars and before you offered it 11 in this Court, did you just rely on a TV show? 12 A. Well, of course, there has never been 13 and never will be an accurate estimate of the 14 number of particles in the universe. So, I think 15 the point of the exercise is to show that we're 16 talking about an impossibly large number. 17 Clearly, a number with 43 zeros behind it is 18 impossibly large. I don't know what -- how you 19 would describe such a number, other than it's very 20 big. 21 Q. This exhibit is an excerpt from a book 22 called Sizing Up Science by R. Houwink, 7918 1 H-O-U-W-I-N-K. If you'll look at Page 41, it 2 states in the top full paragraph -- 3 MR. RINALDI: Your Honor, I object to 4 Mr. Dueffert reading into evidence information 5 that he's obviously capsulized or synopsized or 6 sent somebody to the library to get. We don't 7 know what book this is from. 8 THE COURT: I'm going to sustain the 9 objection. I don't think that we need to proceed 10 with this. 11 MR. DUEFFERT: Thank you, Your Honor. 12 Q. (BY MR. DUEFFERT) Were the origins of 13 Memorandum R-41B related at all to changes in the 14 industry, the thrift industry, in the wake of the 15 Garn-St. Germain Act? 16 A. No. Garn-St. Germain had nothing to do 17 with the creation of 41B. 18 Q. Was R-41B tailored to the valuation of 19 development loans or properties undergoing 20 development? 21 A. It addresses them, but it was not 22 specifically intended to address just that 7919 1 property type as the only one. 2 Q. Is it your testimony -- I'm sorry. It 3 was a general purpose memorandum regarding 4 appraisal reports. Right? 5 A. Absolutely. It was designed to 6 interpret Insurance Regulation 563-17. 7 Q. Is it your testimony that there was, in 8 fact, general unawareness of Memorandum R-41B from 9 1982 until as late as 1986? 10 A. No. I don't think I said that at all. 11 Q. Did you say it at your deposition? 12 A. Well, I certainly don't recall. I 13 think what I said is that what really brought 14 R-41B to light is a regulation called Appraised 15 Equity Capital which specifically required that 16 all appraisals of institutions, office buildings, 17 and office lands had to comply with R-41B. 18 Q. On Page 42 of your deposition, you 19 stated, "I put on seminars on R-41B from 1982 20 forward. I asked for the Appraisal Institute's -- 21 your answer, "For various chapters of the 22 Appraisal Institute, yes." 7920 1 Question, "So, to your knowledge, there 2 was no difference in the understanding of the 3 appraisal industry of R-41B between, say, 1982 and 4 1986?" 5 Answer, "I think there was general 6 unawareness of the memorandum." 7 Question, "When?" 8 Answer, "From 1982." 9 Question, "Until?" 10 Answer, "Even as late as 1986." 11 Does that refresh your recollection? 12 A. There certainly were some people who 13 were unaware of the memorandum as late as '86. 14 Q. My question -- 15 A. There were some people who were unaware 16 of it even when R-41C was released, frankly. I 17 had a packed house the day after R-41C was 18 released that I did a seminar, and there were many 19 of them who had no idea that R-41C was a successor 20 memorandum to anything. 21 Q. You just testified about "some people." 22 Do I understand from your testimony in 7921 1 your deposition that there was a general 2 unawareness of the memorandum from 1982 until even 3 as late as 1986? 4 A. Well, the correct perception here is -- 5 and I believe what brought this up -- is that the 6 appraised equity capital reg brought what probably 7 would have remained a relatively obscure document 8 to light because institutions took advantage of 9 the appraised equity capital regulation pretty 10 much in mass around the United States at that 11 point. And I don't recall the exact date that 12 appraised equity capital came into being. It was 13 either -- the end of '83, I think. It might have 14 been the end of '82. It was either October of '83 15 or October '82. It was very shortly after that 16 when the district appraiser started reviewing, in 17 mass, large numbers of appraisal reports taking 18 into account whether they conformed with R-41B. 19 And we rejected a very large number of them at the 20 time. That got everybody's attention. There is 21 no question about it. 22 Q. I'm sorry, but what is the "that" that 7922 1 got everybody's attention? 2 A. R-41B got everybody's attention. 3 Q. In 1982? 4 A. No. After appraised equity capital. 5 Q. And when was appraised equity capital? 6 A. Well, again, I don't know. We'd have 7 to look it up. It's either, I believe, 8 October '82 or October '83 it was passed. And 9 appraisals came in almost immediately after the 10 regulation was passed. 11 Q. So, you're saying after that date in 12 1982, there was general awareness of R-41B in the 13 appraisal industry? 14 A. You bet you. 15 Q. In the mid-Eighties and today, do 16 you -- did you and do you consider yourself 17 unusually knowledgeable about the requirements of 18 R-41B? 19 A. Well, I think given the fact that I'm 20 one of, I guess, 12 people who participated in 21 writing it, I would guess I would be regarded as 22 being unusual in what I know about it. 7923 1 Q. Do you recall that at your deposition, 2 you stated that you were more familiar with it 3 than even Auvy McBride, who at that point was the 4 district appraiser of the Federal Home Loan Bank 5 of Dallas? 6 A. That's correct. Auvy clearly was not 7 an employee of ours when R-41B came into 8 existence. 9 Q. But he was an employee as an appraiser, 10 in-house appraiser at the Federal Home Loan Bank 11 of Dallas by the mid-1980s, 1986, wasn't he? 12 A. Yeah. But by 1986, we had R-41C. 13 Q. When did -- 14 A. Ivy's first -- my real first encounter 15 with Auvy was at a meeting in San Antonio in, I 16 believe, probably March or April 1986. And the 17 topic of that meeting, district appraisers 18 meeting -- that's the first one he attended, and I 19 believe he had just been recently employed -- was 20 R-41C. In fact, that was a three-day meeting. 21 That was the sole discussion. 22 Q. Before he was employed for the Federal 7924 1 Home Loan Bank of Dallas, was he a practicing fee 2 appraiser? 3 A. That's what I understand. But I really 4 know very little of his background. 5 Q. When, in your career, have you been a 6 practicing independent fee appraiser? 7 A. In the early Seventies. 8 Q. And since 1975, you haven't done 9 independent fee appraisal work. Right? 10 A. Since 1976. Actually, about December 11 of 1976. 12 Q. Could we have Exhibit A11129? I think 13 the substance of this document is in already as 14 Exhibit T7760. Is R -- Mr. Lovell, is this a copy 15 of the R-41B memorandum? 16 A. A poor one, but it appears to be. If 17 you don't mind, I'll use my better version. 18 Q. I only use this because it has an 19 exhibit stamp from your deposition. 20 Could we also have T7135, please? Do 21 you recognize this document, Mr. Lovell? 22 A. It's probably a copy of mine. 7925 1 Q. Comparing the two exhibits, I was 2 shocked and puzzled to find out that they are 3 different. They are signed by different people. 4 The entire last page of A11129 is basically gone 5 out of Exhibit T7135. And the text in Paragraphs 6 4, 6, and 7, as well as 5, is markedly different 7 between the two exhibits. 8 Do you want to take a look at that? 9 A. Well, this is not certainly R-41B, 10 although the first page says it is. 11 Q. So -- 12 A. I mean, it's from James Croft, but it's 13 signed by a Bill Sprague. Bill Sprague wasn't 14 even on the Bank Board staff in 1982. 15 Q. So, this Exhibit T7135 is just not the 16 right thing? 17 A. It's missing something. 18 Q. Why don't we use the "A" exhibit, then? 19 First off, is it fair to call -- I think you've 20 already said this document was not a regulation. 21 Right? 22 A. That's correct. 7926 1 Q. Is it fair to call them guidelines, the 2 contents of this document? 3 A. Sure. 4 Q. There is a reference on Page 2 under 5 the header "appraisal procedures" stating that 6 "The appraisal content shall follow 7 generally-accepted and established appraisal 8 practices as reflected in the standards of the 9 nationally-recognized professional appraisal 10 organizations." 11 Do you see that? 12 A. Sure do. 13 Q. What standards are referenced in that 14 passage of R-41B? 15 A. Well, R-41B doesn't say who the leading 16 national professional appraisal organizations are. 17 That's a fact. That was one of the shortcomings 18 of the memorandum. 19 Q. But did you have an understanding in 20 1986 as to what organizations were referenced in 21 that passage? 22 A. I knew it as of 1982 when we wrote it. 7927 1 Q. Was there any misunderstanding in the 2 industry as to what was referenced by that 3 passage? 4 A. No. Actually, I think that was 5 probably the easiest one for everybody to 6 understand. 7 Q. Could you explain? 8 A. As a matter of course, well over 95 9 percent of all commercial real property loans were 10 appraised by MAIs who are, of course, members of 11 the Appraisal Institute. And they were considered 12 to be at 1982, 1986, the premier professional 13 appraisal organization, as would have been the 14 Society of Real Estate Appraisers, probably on par 15 with one another. 16 Q. So, looking at this memorandum as you 17 would interpret it for credits extended in 1986 or 18 appraisal documents prepared in 1985 or 1986, do 19 you have an opinion or -- do you have an opinion 20 as to what standards are referenced as of that 21 time by that passage? 22 A. Yeah. There is no question. We 7928 1 were -- specifically had in mind the standards of 2 the Appraisal Institute as well as the Society of 3 Real Estate Appraisers. 4 Q. Could we have A11133, please? 5 Mr. Lovell, this is a document that you 6 produced to us at your deposition. For the 7 record, I'd ask you to identify it. 8 A. It's the American Institute of Real 9 Estate Appraisers standards of professional 10 practice, effective date May 3rd, 1985. 11 Q. And is this what's referred to in 12 R-41B? 13 A. This would be one set of professional 14 practice standards that we referred to, yes. 15 Q. Can you identify the others that is 16 referred to? 17 A. I would say certainly the standards of 18 practice of the Society of Real Estate Appraisers. 19 Q. Is there a substantial difference 20 between these standards and those standards? 21 A. There is a difference, but it's not 22 substantial in, I think, in most people's opinion. 7929 1 And I think it's also important to be aware of -- 2 that well over 80, 85 percent of all Society of 3 Real Estate Appraisal members were members of the 4 Appraisal Institute at that point in time. So, in 5 essence, they were bound by the Appraisal 6 Institute standards. 7 MR. DUEFFERT: Move the introduction of 8 Exhibit A11133. 9 MR. RINALDI: We have no objection, 10 Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. DUEFFERT) Do I understand 13 part of your testimony to be that bad appraisals 14 caused the thrift crisis? 15 A. I believe I said improper or 16 inappropriate appraisals. 17 Q. Could you explain how inappropriate 18 appraisals caused the thrift crisis? 19 A. Yeah. It's kind of a long story. 20 Q. Then we needn't go into it now. 21 A. I mean, I'll be happy to reiterate the 22 whole ugly affair. But I mean, there is many, 7930 1 many, many different factors. To give reasonable 2 treatment of the subject, I think we'd have to say 3 something more than a word or two. 4 Q. Is it your testimony that the critical 5 thing about appraisals under R-41B is that they 6 have to be a useful tool for underwriting 7 purposes? 8 A. That's the key distinguishing feature 9 between an R-41B appraisal versus an appraisal 10 that meets professional practice standards. 11 Q. Who makes the decision as to what is a 12 useful tool for underwriting purposes under R-41B? 13 A. Well, I think it's left at the 14 discretion of people who are experienced in the 15 subject to understand what is reasonable and 16 responsible. 17 Q. For purposes of the appraisals you've 18 looked at in connection with the extending of the 19 Norwood and Park 410 loans, under R-41B, who 20 decides what constitutes a useful tool for 21 underwriting purposes? 22 A. Well, I think the memorandum is 7931 1 reasonably clear. I mean, it starts out in its 2 introduction and talks about an association or 3 service corporation's mortgage loan and real 4 estate investments depend upon the adequacy of 5 appraisals. This memorandum provides guidelines 6 for the appraisal management procedures to assist 7 in determining compliance with the requirements of 8 the regulation. 9 Clearly, the memorandum is directed to 10 the OES professional staff, but it talks about 11 management's responsibilities to establish 12 appropriate policies and procedures relative to 13 appraisal reports and in the kinds of loans we're 14 discussing here in these proceedings. 15 THE COURT: We'll take a short recess. 16 17 (A short break was taken 18 at 2:29 p.m.) 19 20 THE COURT: Be seated, please. 21 Mr. Dueffert, you may continue. 22 MR. DUEFFERT: Thank you, Your Honor. 7932 1 I'd ask the court reporter to read back 2 the last question and answer, please. 3 4 (Whereupon the requested portion 5 was read back by the reporter.) 6 7 (2:46 p.m.) 8 Q. (BY MR. DUEFFERT) Mr. Lovell, at your 9 deposition, I asked you the following question: 10 "Pursuant to Memorandum R-41B, who is the person 11 or persons who decide what is and what is not 12 useful? Who makes that determination?" 13 Answer, "The loan underwriter," end of 14 answer. 15 Did you hear a different question that 16 I asked right before the break than what I asked 17 in your deposition? 18 A. I think it's just different ways of 19 answering the same question. 20 Q. In your answer here in the courtroom 21 just now, did you include the loan underwriter 22 anywhere in that list of text we just heard? 7933 1 A. I think he's part of management. 2 Q. Pursuant to Memorandum R-41B, who is 3 the person or persons who decide what is and what 4 is not useful? 5 A. The institution. I mean, the 6 examination staff at the Federal Home Loan Bank 7 Board doesn't decide what loans should be 8 underwritten or how they should be underwritten. 9 That has always been the responsibility of 10 institution management. My responsibility extends 11 to evaluating the fashion in which they have 12 underwritten the loans, whether it's appropriate 13 or not. 14 Q. As of 1986, were there any standards or 15 regulations governing the contents of market 16 analysis like the Tremar and Burke, O'Hara 17 reports? 18 A. Well, there has been various 19 publications, I know, and educational materials 20 that have been outstanding on it. I think we 21 probably in -- what was it -- Bank Board 22 Memorandum R-38 may have addressed some of those 7934 1 issues as well about feasibility analyses. But 2 it's been so many years since I've looked at that 3 memorandum, my memory is probably a little foggy 4 at this point. 5 Q. Are you saying that R-38 might be 6 relevant to your critique of the Tremar and the 7 Burke, O'Hara studies but you haven't read it 8 recently? 9 A. I don't think it was necessary. I 10 mean, the studies as they relate to the appraisal 11 reports, I think, are pretty clear. The 12 appraisers relied upon the studies as to how the 13 best use of the properties were ascertained. 14 Q. I understand that, but I'm asking -- 15 A. R-38 is a service -- addresses service 16 corporations, if I remember correctly. Service 17 corporation investments. We're talking about 18 lending here. 19 Q. So, as you look at the Tremar report 20 and the Burke, O'Hara study and opine as to 21 whether they were adequate or not, are you 22 pointing to any kind of regulations or standards 7935 1 as a guide to the rest of us? 2 A. Well, I'm certainly looking at the 3 Appraisal Institute standards of professional 4 practice. I'm certainly -- while we certainly 5 haven't entered it into evidence here, I'm 6 referring to the educational teachings of the 7 Appraisal Institute and the Society of Real Estate 8 Appraisers. 9 Q. Was the Burke, O'Hara report a market 10 analysis or a feasibility study? 11 A. I don't believe it characterizes itself 12 as a feasibility study. 13 Q. You critiqued it, I believe, for 14 assuming away the profit factor. Is that fair? 15 A. They specifically state in that study 16 that assuming profit isn't of interest or words to 17 that effect, that the following types of 18 development under a certain set of assumptions 19 would be reasonable. 20 Q. If the document calls itself a market 21 analysis and not a feasibility study, is there 22 anything wrong with not addressing the profit 7936 1 issue? 2 A. I don't think it makes any sense if you 3 don't address the profit issue. I mean, quite 4 honestly, the reason developers build and develop 5 is so that they are going to earn a profit 6 hopefully. At least, that's what we're led to 7 believe in the western economies. Admittedly, 8 there is a whole group of people on this planet 9 that don't believe profit's a motive. 10 Q. I'm just asking. The thing is labeled 11 a market analysis. It doesn't run the numbers for 12 the project. Right? 13 A. Absolutely doesn't, no. 14 Q. And it says that inside. Right? It 15 says "We're not dealing with profit"? 16 A. Yeah. 17 Q. A market -- 18 A. Nor considering it. 19 Q. That's the difference or one of the 20 differences between a feasibility study and a 21 market analysis. Right? 22 A. I don't recognize it as being a 7937 1 distinguishing feature. 2 Q. What do you recognize as distinguishing 3 features between feasibility studies and market 4 analyses? 5 A. I don't know that there is any 6 definition of a difference between either one. I 7 don't know that anybody has ever set out a 8 complete definition of what a market analysis is 9 or a feasibility study. I can tell you this, that 10 the Appraisal Institute has a course nowadays -- 11 it's called Market Analysis -- that deals with 12 highest and best use. And so, they very 13 specifically view, under current teachings at any 14 rate, economic feasibility to be a key component 15 of market analysis. 16 Q. In this courtroom for purposes of this 17 proceeding, we're talking about 1985 and 1986. 18 Right? 19 A. I assume so. 20 Q. In order for an appraisal to be a 21 useful tool for loan underwriting purposes, the 22 appraiser would, after getting an assignment, 7938 1 would first have to get from its client a good 2 sense of the assignment. Right? 3 A. Absolutely. 4 Q. And could you tell the Court how that 5 process would work with an appraisal for a 6 development loan like Park 410 and Norwood? 7 A. Well, I think one of the key 8 ingredients -- and it's certainly a requirement of 9 professional practice -- that the appraiser would 10 want to have is a complete set of plans and 11 specifications for the development, a definitive 12 set of plans and specifications. There might be a 13 number of other documents the appraiser might want 14 to have available, including information relative 15 to surveys, details relative to the developer's 16 plan because, clearly, the appraiser is going to 17 be appraising a proposed development in these 18 types of properties. So, he has to have some idea 19 of what the developer plans buildout-wise. Are we 20 going to do it in one phase as one big project? 21 Are we going to split it up into two, three, four 22 phases, sell it off over a period of time? 7939 1 That information would need to be 2 supplied. The lender would tell the appraiser 3 specific areas that they would like them to 4 address in the appraisal report, but mainly the 5 highest and best use and the feasibility analysis 6 because those would be critical issues that they 7 would want to be sure the appraiser has documented 8 and supported properly, and they would want to 9 make that clear in making at assignment. 10 Those are a few of the things. Some of 11 the other items that they would certainly pass 12 along to the appraiser is the specific definition 13 of market value that they expect them to use. In 14 the case of R-41B appraisals, for example, there 15 is a specific definition that is required to be 16 used. 17 Q. One of the things the lender could talk 18 about in the assignment is whether the lender 19 requires an as-is or an as-developed value for the 20 property. Right? 21 A. Absolutely. 22 Q. Did R-41B require an appraiser 7940 1 presenting an appraisal report for development 2 loan like Park 410 or Norwood to present both 3 as-is and as-developed value conclusions? 4 A. R-41B only uses the as-is conclusion in 5 connection with REO and LTF lending decisions for 6 the purposes of establishing the book value of the 7 assets, which mainly require the as-is value of 8 them. There is nothing in R-41B that says 9 anything about as-is, as of completion, as of 10 stabilized occupancy, for example. 11 Q. This isn't an REO or LTF situation, is 12 it? 13 A. Well, it's my understanding it wasn't 14 at that point, no. 15 Q. When is the last time you prepared an 16 appraisal report, full narrative appraisal report 17 like we're looking at here, in the first instance 18 rather than reviewing someone else's work? 19 A. Well, I don't know that -- I do a lot 20 of secondary type of analysis and a lot of 21 evaluation type reports after the fact. I would 22 say earlier this year, but I couldn't really put a 7941 1 finger on it. 2 Q. Earlier this year? 3 A. Sure. 4 Q. What kind of report did you prepare 5 earlier this year? 6 A. Well, the last one that comes to 7 mind -- and I have a tendency to remember larger 8 dollar assets -- involved a property in the 9 San Diego area, just north of San Diego, which 10 happened to be something like in the 1200-acre 11 subdivision property, had an alleged value of 12 130 million, or at least we had that much loan 13 outstanding on it. 14 Q. Your title is district appraiser for 15 the bank of Atlanta? 16 A. No. I work for the Office of Thrift 17 Supervision, and my title now is regional 18 appraiser. 19 Q. I apologize. Thank you. How is it 20 that as a regional appraiser you're out going -- 21 doing appraisals in places like San Diego? 22 A. Loan loss purposes. 7942 1 Q. Could you explain further? 2 A. Well, part of our -- part of the 3 institution's responsibility is to maintain 4 accurate books and records. However, as 5 examiners, we come back through the institution 6 and we evaluate the decision process that the 7 institution uses for establishing loan losses on 8 their books and records. And in the larger cases, 9 I'm frequently called in to evaluate appraisals 10 and real estate assets. At that point, we usually 11 have a considerable amount of history and 12 information that's readily available to me. 13 Q. So, are you going out, then, and doing 14 your evaluation and preparing your own appraisal 15 report? 16 A. I will develop a valuation of the 17 property, yes. 18 Q. Do you visit the site? 19 A. That's not a requirement, curiously 20 enough, of the standards of professional practice. 21 And usually, I don't. 22 Q. Have you ever participated in the 7943 1 appraisal peer review process? 2 A. I used to be central Atlantic regional 3 member of the Ethics Administration Division of 4 the Appraisal Institute. In fact, back in the 5 years that we're talking about. 6 Q. What years? 7 A. I'm wanting to say '83, '84, '85? 8 Q. You were -- would it be fair to 9 characterize at least part of your work in the 10 1980s as that of an appraisal reviewer? 11 A. Oh, absolutely. 12 Q. In the mid-1980s, can you estimate 13 about how many narrative appraisal reports for 14 major development projects you would have 15 reviewed? 16 A. I don't know that I could put a number 17 on it because I never kept an accurate count. I 18 used to keep a running tally just for my own 19 information's sake of dollar volume of assets that 20 I reviewed. The last time that I had looked and 21 had any records of it, I had reviewed some time 22 around, I would guess, early Nineties, late 7944 1 Eighties, over $200 billion worth of real property 2 assets all over the country. It adds up rather 3 quickly when you're dealing with a lot of 4 100-million-dollar, 50-million-dollar, 5 billion-dollar, in some cases, assets. 6 Q. Would it be fair to say that you saw 7 hundreds? 8 A. I think it would be fair to say 9 thousands. 10 Q. And among the ones in those that you 11 were reviewing -- and again, we're focused here in 12 the mid-1980s, did you see many that you felt were 13 not useful tools for loan underwriting purposes? 14 A. Sure. I saw many that weren't useful 15 tools. 16 Q. Was part of your work to do summaries 17 or write-ups on those appraisal reports? 18 A. Yes. 19 Q. Of the ones you reviewed, can you 20 estimate how many of those You determined were 21 100 percent in compliance with Memorandum R-41B? 22 A. I don't think I've ever evaluated 7945 1 appraisals from the perspective of whether they 2 were 100 percent in compliance with R-41B. 3 Q. Could you explain? 4 A. Well, just as we had -- you had 5 mentioned earlier about a typographic error, 6 clearly, where the appraiser said there is an 7 average growth rate of 37 percent expected 8 annually, why focus on that particular typographic 9 error, other than as an interesting fact that 10 there seems to have been some, perhaps, lack of 11 care exercised in the appraisal report? It might 12 have some significance relative to that. But, you 13 see, we didn't sit down with a detailed list that 14 we would go by to say, "Well, it was 100 percent 15 or 99 percent." We didn't use a grading sheet. 16 Q. Looking at those narrative appraisal 17 reports, how often would you have just accepted 18 them without writing any kind of critical comment? 19 A. It kind of depends on what 20 circumstances the reports would be handed to me. 21 Q. If you were reviewing it for purposes 22 of your work. 7946 1 A. Well, you have to understand how some 2 of the work comes to pass. For example, it might 3 be on an examination site and an examiner will 4 hand me an appraisal report and say, "Take a quick 5 look at it. What do you think?" 6 If nothing immediately comes to mind 7 that leads me to believe that there is some 8 serious problem here for one reason or another, 9 that may be the extent of the review. And it 10 becomes simply a pass on the examiner's part. The 11 formal review report isn't created. There is 12 really nothing. 13 Q. What do you mean, "pass"? 14 A. Well, the way we look at them is if a 15 credit is reviewed and the examiner's going to 16 make no comment, they just mark it a pass. 17 Q. The review that you've done of these 18 documents is rather more in depth. Right? 19 A. Yes. 20 Q. So, of all of the appraisal reports you 21 were looking at in the mid-1980s that were full 22 narrative appraisal reports and when you were 7947 1 conducting in-depth review of reports, how often 2 did you just say, "This is acceptable under R-41B" 3 and move on? 4 A. Quite often. 5 Q. Found them to be 100 percent in 6 compliance? 7 A. I found them to be acceptable. 8 Q. You would make no critical comment? 9 A. I would make no critical comment. 10 Q. In your write-up? 11 A. In my write-up. 12 Q. When was the last time you did a full 13 appraisal in connection with the initial 14 underwriting of a loan? 15 A. The last time would have been sometime 16 in 1976, late '76. 17 Q. Is that when you were still a fee 18 appraiser? 19 A. That's when I still had my practice, 20 yes. 21 Q. Now, you've looked at four appraisal 22 reports in connection with your testimony here. 7948 1 Right? 2 A. I think we're up to four. I believe 3 that's an accurate count. 4 Q. Do I understand that all of them, in 5 your view, violated the standards of R-41B? 6 A. Well, actually, we have the one 7 appraisal on the Norwood property that appears to 8 have at least a reasonable effort. I have not 9 studied that report in depth. But of the group, I 10 would say it's probably closer to making an 11 attempt. 12 The problem I think I recited last time 13 we were here when questioned about that particular 14 appraisal report involved the question about the 15 expressway situation and the apparent lack of 16 considering that aspect of Highway 183 becoming a 17 limited-access highway. And I still have some 18 questions relative to the absorption that was 19 calculated in there of the sellout of the 20 property. He did make an effort to do a market 21 analysis and attempt to inventory the supply in 22 the market at that point in time and did attempt 7949 1 to evaluate how this property fit in. But I'm a 2 little bit suspicious of the conclusions that are 3 reached, largely due to the fact that we now have 4 not only the institution's study, but we have a 5 study done by the Austin government, apparently, 6 of the market that seems to suggest a very extreme 7 level of overbuilding going on, which leads me to 8 believe that a five-, six-year absorption period 9 seems very optimistic. 10 Q. What report were you just talking 11 about? 12 A. That's the Appraisal Associates of 13 Austin report, June 11th, 1986. 14 Q. And you say that that appraiser, in 15 your view, made a reasonable effort? 16 A. I think he made a reasonable effort at 17 market analysis. I still question the validity of 18 the conclusions, however, in light of the other 19 data that's present. 20 Q. Does R-41B say anything about a 21 reasonable effort? 22 A. Indirectly, yes. 7950 1 Q. Could you explain? 2 A. Well, I think it's accepted standards 3 of practice for the appraiser to do a reasonable 4 analyses of market information to support the 5 conclusions that he's reached. If I have that 6 appraisal report sitting by itself without any 7 other information in the entire world sitting on a 8 desert island, knowing what I know about R-41B, my 9 inclination would be to say, "It appears to be 10 okay." 11 Q. And "okay" means 100 percent in 12 compliance with R-41B? 13 A. No. "Okay" means that we're talking in 14 qualitative -- it seems to have the elements of an 15 appraisal report. 16 Q. Seems to you? 17 A. Yeah. 18 Q. And when you testify in here, are 19 you -- is one of your standards whether the 20 appraiser made, in your view, a reasonable effort? 21 A. Well, I don't think appraisers can make 22 analyses in a vacuum. I certainly try to avoid it 7951 1 myself. I mean, knowing that I know about the 2 existence of two other studies of this particular 3 market and knowing what I know anyway about Austin 4 and the State of Texas economy at the time, it 5 would be difficult for me to ignore these other 6 facts in evaluating any of these appraisals. 7 Q. What other facts are you talking about? 8 A. Well, we've got other market studies 9 here. It was well known about the extent of 10 overbuilding in the State of Texas in the early 11 Eighties. 12 Q. Is it possible for an appraisal report 13 to violate R-41B and still be a useful tool in the 14 loan underwriting process? 15 A. Well, I can't think of why it would. 16 Q. I'm sorry. Let's try again. Is it 17 possible for an appraisal report to violate R-41B 18 and still be a useful tool in the loan 19 underwriting process? 20 MR. RINALDI: Asked and answered, Your 21 Honor. 22 MR. DUEFFERT: It was asked. 7952 1 MR. RINALDI: It was answered. 2 THE COURT: Is your answer "no"? 3 THE WITNESS: I think my answer is 4 "no," if I'm understanding what he's asking here. 5 Q. (BY MR. DUEFFERT) You testified last 6 time that you admired the author of that Austin 7 Appraisal Associates report for valuing the 8 property at a future date. 9 Do you remember that testimony? 10 A. Sure do. 11 Q. In fact, I think you indicated that you 12 appreciated the moxie of the appraiser. 13 A. I believe I used that language, yes. 14 Q. And once again for the record, why did 15 you appreciate that moxie? 16 A. Well, I think when you're evaluating a 17 proposed development type property and you make an 18 assumption when all we physically have today is 19 raw land, you assume that we have improvements in 20 place on the same date. You obviously have made 21 an assumption that's incongruous with reality 22 here. I mean, we clearly have -- you cannot have 7953 1 a property in two statuses on the same date. We 2 can't have it both empty, vacant raw land and have 3 an improvement place on the same date. What the 4 appraiser has done here is reflected the fact that 5 the reality in the real world here is that it 6 takes some time to install the streets, sewer, 7 water before you have a product that you can sell 8 in the open market. So, he did recognize that, 9 which was rather bright on his part, I think. 10 Q. Could we have A11131, please? 11 Mr. Lovell, do you recognize this 12 document that's before you? 13 A. Sure. 14 Q. What is it? 15 A. It is the seminar materials for R-41B 16 prepared by Mr. Bob Foreman from Newport Beach, 17 California. 18 MR. DUEFFERT: Move Exhibit A11131 into 19 evidence. 20 MR. LEIMAN: I'd like additional 21 foundation, Your Honor, to see what he's going to 22 use this document for since Mr. Lovell has merely 7954 1 stated he recognizes it and he knows who the 2 author was. 3 MR. DUEFFERT: He's testifying about 4 standards in the industry. 5 THE COURT: All right. I'll receive 6 the document. 7 Q. (BY MR. DUEFFERT) If you would turn 8 to Page 9, Mr. Lovell. Did these seminar 9 materials reflect standards in the industry as of 10 1985, 1986? 11 A. No. They reflected Mr. Foreman's 12 opinion. 13 Q. So, just because it's a seminar put on 14 by the American Institute of Real Estate 15 Appraisers doesn't mean that this guideline 16 reflects industry standards of the time? 17 A. Shoot. They would have as a part of 18 their educational program the standard disclaimer. 19 They put that in their textbook, that these 20 teachings that are cited in the book do not 21 represent institute policy. 22 Q. Is it your testimony that the contents 7955 1 of a document like this is not even reflective 2 what was going on in the industry in 1985, 1986? 3 A. Well, I think it's very much reflective 4 of what Bob's view was at that particular point in 5 time, yeah. 6 Q. Well, let's take a look at Bob's view. 7 Could you read out loud Paragraph F, towards the 8 bottom of Page 9? 9 A. "The date of value is always current or 10 past, never future. The appraiser may supply 11 forecast to value trends, but the value conclusion 12 must represent present value even though value is 13 the present worth of future benefits." 14 Q. The Austin Appraisal Associates report 15 on the Norwood property fixed a future value -- a 16 future date for its valuation conclusion. Right? 17 A. Yes, it did. 18 Q. And Bob is saying that you can never 19 have a future value under R-41B. Right? 20 A. We changed his mind. 21 Q. When did you change his mind? 22 A. I know his mind was changed by the time 7956 1 we got to R-41C. You see, he didn't work with the 2 Federal Home Loan Bank Board district appraiser 3 staff when he developed these particular seminar 4 materials. 5 Q. Where did he work? 6 A. He prepared them himself. We were 7 never contacted or consulted. 8 Q. And so, you don't adopt any of the text 9 that's in seminar materials as -- like the one 10 before you? They are not relevant to your 11 analysis? 12 A. Well, I think he makes a statement here 13 and I think I -- knowing Bob personally or knew 14 Bob, I should say, since we're talking in the past 15 tense with Mr. Foreman. I know what Bob's 16 thinking was going on at that particular point and 17 what he was getting at, yeah. 18 Q. What was Bob getting at? 19 A. Bob represented a school of thought at 20 that particular point in time that said value can 21 only be either current or past. It could not be a 22 future estimate, particularly market value. 7957 1 Q. You referred to R-41C. Could we have 2 it, please? It's Exhibit T7136. 3 Mr. Lovell, does this exhibit appear to 4 you to be a copy of Memorandum R-41C? 5 A. Well, without reading every word of it, 6 but I believe it probably is. I also have 7 attached another memorandum, AB80. 8 Q. Mr. Lovell, I believe this is what you 9 produced in connection with your deposition. I 10 will represent to you that I -- 11 A. I don't believe it is. 12 Q. Okay. 13 A. I don't believe I furnished you with 14 R-41C. 15 Q. Does it appear to you to be a copy of 16 R-41C? 17 A. If you represent it as such, unless we 18 have reason to believe otherwise, I'll accept it, 19 yes. 20 Q. I thought I got it from you. I can 21 tell you in faith this is what I understand it to 22 be. 7958 1 A. That's fine. 2 MR. DUEFFERT: Move the introduction of 3 Exhibit T7136. 4 MR. RINALDI: I have no objection. If 5 Mr. Dueffert's going to question on R-41C, then I 6 would suggest, I guess, removing the portion which 7 Mr. Lovell has indicated is not relevant. 8 THE WITNESS: Well, it's not a part of 9 R-41C. 10 MR. RINALDI: If it's removed, I have 11 no objection, Your Honor. 12 THE COURT: Well, if he's talking about 13 the last page, it says "R-41C clarification." It 14 seems to me it's related to the other part. 15 MR. RINALDI: Your Honor, if he intends 16 to question him about the entire exhibit, I have 17 no objection, with the notation simply for the 18 record that the last page is AB80, which is a 19 slightly different document that has some 20 pertinence, as Your Honor points out, to R-41C. 21 THE COURT: Well, I'm going to receive 22 the document. 7959 1 Q. (BY MR. DUEFFERT) Mr. Lovell, what 2 was the effective date of R-41C? 3 A. September 11th, 1986. 4 Q. Were you personally involved in the 5 preparation of this memorandum? 6 A. I certainly was. 7 Q. Would you call yourself perhaps the 8 primary author of the document? 9 A. That would be a fair statement. 10 Q. Did R-41C change anything about the way 11 fee appraisers out in the field were doing their 12 work? 13 A. I think its intent was to change what 14 they were doing. 15 Q. How? 16 A. Well, as architect to 41C, I can tell 17 you exactly what my thought process was. One of 18 the complaints about R-41B is the statement that 19 you should use the standards of the leading 20 national professional appraisal organizations. 21 Since there are or were two primary appraisal 22 organizations, as I've cited earlier, amongst many 7960 1 other groups, some 74 -- someone once showed me a 2 list of groups that could claim national 3 prominence. 4 I think I have also mentioned that out 5 of those 74 groups of organizations, we had those 6 that had standards of practice and bodies of 7 knowledge and educational courses and then we had 8 those organizations that were a little more than 9 diploma-mail type arrangements, if you will. 10 In order to clarify exactly what 11 standards we were talking about, one of the things 12 that we did -- I did when I wrote R-41C is I took 13 the standards of professional practice of the 14 Appraisal Institute and I literally sat down and I 15 wrote them into R-41C. 16 Q. What exhibit are you referring to 17 there? 18 A. I'm referring to -- looks like it's 19 truncated here, but it looks like A11133. 20 Q. Did R-41C change the standards of 21 appraisal practice in any way? 22 A. It clarified, I think, standards of 7961 1 appraisal practice. 2 Q. Take a look at Page 8 of R-41C. Look 3 at Paragraph 18 at the top. It requires an 4 appraisal report for development property to set 5 forth both an as-is and as-developed value on the 6 property. Right? 7 A. Yes. 8 Q. That language was not in R-41B. Right? 9 A. That's part of the clarification that 10 went into 41C. There is no question that that -- 11 in fact, there was one other value. And that is 12 as a stabilized occupancy. I believe that is 13 cited in here, as well. We clarified those 14 issues. 15 Q. The requirement for both an as-is and 16 an as-developed value, was that something then 17 that you incorporated from language in the 18 standard of professional practice marked as 19 Exhibit A11133? 20 A. As-is, as-completed values? I do not 21 believe that the Institute standards address that 22 issue at all in this particular edition. In later 7962 1 years, there were perhaps some comments that were 2 made. Certainly, the current edition, for 3 example, because the Institute has essentially 4 adopted the uniform standards of professional 5 appraisal practice and they have now clarified 6 this issue of as-is, as of completion, and as of 7 stabilized occupancy. And they are now accepted 8 definitions to be used in appraisal analyses. 9 Q. Before September 1986, were there 10 published standards that required appraisal 11 reports to have both as-is and as-developed 12 values? 13 A. That was a loan underwriting issue. 14 But did we publish standards that say you had to 15 have this number or that number? No. 16 Q. Like R-41C did do. Right? 17 A. R-41C clarified the issue. 18 Q. Could you take a look at Exhibit T7748, 19 please? This is admitted at Tab 798. 20 Do you have it before you, sir? 21 A. I certainly do. 22 Q. Mr. Leiman introduced this. 7963 1 Mr. Lovell, do you recall that Mr. Leiman 2 introduced this exhibit to you and asked you some 3 questions about the views you expressed in this 4 article? 5 A. I remember it being submitted. I don't 6 recall what he asked; but yes, I remember it. 7 Q. When was that article published? 8 A. It was published in October 1983 in the 9 Appraisal Journal published by the American 10 Institute of Real Estate Appraisers. It was 11 actually submitted for publication in 1982. It 12 took their editorial staff over a year before we 13 were able to get it into print. 14 Q. Why did it take so long? 15 A. Backup in article submissions. 16 Q. Did this article endorse the current 17 practice of the day with regard to discounting? 18 A. It discusses a number of subjects and 19 cites a revised financial model for going and 20 calculating the value of condominium subdivision 21 properties at the point of completion in a more 22 simplistic fashion. Prior to the existence of 7964 1 this article, there was a misimpression, I think, 2 because of some -- maybe the state of art, 3 frankly, of computers and mathematics at that 4 point in time -- that in order to calculate a 5 condominium or subdivision valuation of the 6 property as a whole, you would have to do some 7 kind of interpolation. And what I showed is that 8 there was a way to put a mathematical formula 9 together to arrive at a value of the overall 10 property in one fell swoop rather than having to 11 deal with it piecemeal. 12 Q. And is that the formula set forth on 13 Page 15? 14 A. Yes. And I would -- to be fair, that 15 particular formula on Page 15, if we had the 16 actual article that was published, whenever you 17 write a formula like this, you always run the risk 18 that somebody misprints it. And sure enough, they 19 did. The very last term, you'll notice, is a P (N 20 minus 1), and that is a subscript. Unfortunately, 21 in the published version of the article, they put 22 that term as P [N minus 1] as being a part of the 7965 1 actual equation. 2 Q. Did that equation ever become a 3 recognized cash flow model in the industry? 4 A. Yeah. Sure is. 5 Q. When did that happen? 6 A. It really happened over time. One of 7 the surprising things -- and I did not include 8 here because as a part of the original article, 9 there was a calculator program that was designed 10 for the HP38C calculator. Unfortunately by 1983 11 when this article was published, the HP38C 12 calculator had been replaced by the Hewlitt 13 Packard 12C calculator. The programming 14 keystrokes in the 12C are slightly different than 15 the programming keys in the 38C. 16 And so, as a result, you can't put the 17 program in the state-of-the-art calculator at that 18 particular point in time. The reason I know that 19 it was widely accepted is because I used to get 20 calls constantly from appraisers and letters from 21 them around the country of applying it. One of 22 the fellows up in the Washington, D.C. area took 7966 1 enough interest in it, he actually took the 38C 2 calculator program to the Hewlitt Packard 3 technical staff and asked them to reevaluate it 4 and reprogram it in 12C language. And they 5 assigned it to their engineering group and gave 6 it, for some reason, a very high priority and 7 ultimately published the revised calculator 8 program on it. And I've had a lot of requests 9 over the years for it. Of course, now with 10 computers being what they are, there isn't the, 11 inclination to use this particular formula because 12 there are more direct ways to get at it now with 13 software. 14 Q. Do you recall discussing this formula 15 with Mr. Leiman? 16 A. He commented on it. 17 Q. Is it your testimony that the officers 18 or directors of United Savings Association of 19 Texas should have taken this formula and looked at 20 the appraisal reports and tried to determine 21 whether they were in compliance with your formula? 22 A. Lord, no. 7967 1 Q. And do you know why -- 2 A. This formula is very simple, you 3 understand. It's really a present value notation 4 designed for a specific application. 5 Q. I guess I'm just asking: Why in your 6 direct testimony did you talk about this formula? 7 A. I would never have brought it up. I 8 don't know what the importance is. Today, there 9 is software you buy off the shelf that does this 10 formula calculation automatically for you. 11 MR. DUEFFERT: Your Honor, in light of 12 the court reporters, this might be a good time to 13 break. 14 THE COURT: All right. We'll -- 15 pursuant to prior discussions, we'll adjourn until 16 10:00 o'clock tomorrow. 17 MR. DUEFFERT: Thank you, Your Honor. 18 19 (Whereupon at 3:28 p.m. 20 the proceedings were recessed.) 21 22 7968 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 19th day of 17 November, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 7969 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 19th day of 18 November, 1997. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22