7970 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 11-20-97 22 7971 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 7972 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 7973 1 2 EXAMINATION INDEX 3 4 Page 5 DOUGLAS LOVELL 6 Cont'd Cross-Examination by Mr. Dueffert.7976 7 Cross-Examination by Mr. Blankenstein....8055 8 Cross-Examination by Mr. Keeton..........8127 9 Redirect-Examination by Mr. Leiman.......8133 10 Recross-Examination by Mr. Dueffert......8172 11 Recross-Examination by Mr. Blankenstein..8173 12 Recross-Examination by Mr. Keeton........8176 13 14 15 16 17 18 19 20 21 22 7974 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be on the record. 6 I wanted to ask the parties, what's the 7 next witness? 8 MR. LEIMAN: The next witness after 9 Mr. Lovell would be Mr. Bruce Williams. 10 THE COURT: And how long is he going to 11 take? 12 MR. RINALDI: Mr. Williams, we 13 anticipate will come on this afternoon. He's a 14 local witness. We expect that he will probably go 15 through the rest of the week or the rest of 16 tomorrow. 17 THE COURT: Well, what I was thinking 18 about is adjourning at noon tomorrow for various 19 reasons. 20 MR. RINALDI: Okay. 21 THE COURT: If he's local, I don't 22 believe that would create a problem. 7975 1 MR. RINALDI: Okay. I think it had 2 been our expectation, given where things are now 3 with Mr. Lovell, the only slippage, that 4 Mr. Williams is probably going to go over until 5 Monday anyway with the expectation that there is 6 probably going to be substantial cross-examination 7 on him. So, presumably, he may be the better part 8 of Monday if we're only going to have half a day 9 Monday. 10 MR. BLANKENSTEIN: I don't think we're 11 going to be here Monday. 12 MR. RINALDI: The first day we come 13 back. Fine. Thank you. I will. 14 THE COURT: All right. We'll adjourn 15 at 12:00 tomorrow. We'll be on the record. 16 Mr. Dueffert, you may continue. 17 MR. LEIMAN: Your Honor, before 18 Mr. Dueffert continues his cross-examination of 19 the witness, I'd just like to clarify whether 20 Exhibit T7135 was offered or introduced by 21 Mr. Dueffert, which is this document. 22 MR. DUEFFERT: This is the version of 7976 1 R-41B that the witness said was in error. So, I 2 didn't offer it or introduce it. I see no 3 evidentiary value to it. 4 THE COURT: Fine. 5 MR. LEIMAN: All right. I just wanted 6 to be certain that had not offered. Thank you, 7 Your Honor. 8 9 CONT'D CROSS-EXAMINATION 10 11 12 Q. (BY MR. DUEFFERT) Good morning, 13 Mr. Lovell. 14 A. Good morning, Mr. Dueffert. 15 Q. Will you agree with me that the 16 officers and directors of United weren't obligated 17 to rely on your personal thinking as to what 18 ideally should be in an appraisal report in 1986? 19 MR. LEIMAN: I'm going to object to the 20 question because the time frame seems to be rather 21 distorted. Mr. Lovell was never part of the 22 underwriting team, and Mr. Dueffert seems to be 7977 1 indicating that he had something to do with the 2 underwriting of the loan. 3 THE COURT: Well, he's giving testimony 4 that -- as to the safety and soundness with 5 respect to relying on these appraisal reports, and 6 I think it's a relevant question. Denied. 7 Q. (BY MR. DUEFFERT) One more time 8 Mr. Lovell. 9 Will you agree with me that the 10 officers and directors of United weren't obligated 11 to rely on or follow your personal thinking as to 12 what ideally would be in an appraisal report? 13 A. I'll agree. 14 Q. And in this courtroom, we are not 15 talking now about what could be in ideal appraisal 16 reports in an ideal world. Right? 17 A. Well, I don't live in an ideal world. 18 Q. And in this courtroom, we're not 19 talking about what could be in an ideal appraisal 20 report in an ideal world. Right? 21 A. No. 22 Q. For guidance as to what was required to 7978 1 be in appraisal reports, thrift officers and 2 directors would be expected to look to the text of 3 Memorandum R-41B, correct? 4 A. That would be reasonable, yes. 5 Q. For purposes of your testimony, are you 6 pointing the Court to any other published 7 standards of the time? 8 A. Well, I certainly have already 9 commented on the standards of professional 10 practice of the American Institute of Real Estate 11 Appraisers, which you have entered into evidence, 12 I believe. 13 Q. Is that Exhibit 11133? 14 A. I don't know what the exhibit number 15 is. Yes. 16 Q. For the record, it's located at Tab 17 841. 18 Are you pointing the Court to any other 19 published standards? 20 A. Well, I think as a matter of course, 21 what we commonly think of as being requirements in 22 the way of an appraisal report are what is a part 7979 1 of the literature, what is commonly taught. I 2 mean, clearly, the standards of professional 3 practice are not some kind of a guidebook as to 4 how you construct an appropriate appraisal report. 5 There are general guidelines as to the concept of 6 data and analyses that an appraiser is expected to 7 perform. But part and parcel, and even though 8 they aren't directly addressed in here, we would 9 commonly expect an appraiser to follow the general 10 teachings that are expounded in the appraisal 11 courses. 12 Q. For what you're saying, for purposes of 13 your opinion, are you going to direct the Court -- 14 or do you direct the Court to any other particular 15 documents you brought with you here today, 16 identified by title and date, that you think the 17 officers and directors of USAT should have relied 18 on? 19 A. Other documents that I have brought, 20 no. 21 Q. And this is your opportunity. If 22 you're going to direct the Court to any other 7980 1 published standards of the time and suggest that 2 the appraisal reports that you've looked at were 3 in violation of some objective standards, please 4 identify those documents by name and date. 5 A. Well, let me answer perhaps a little 6 bit more explanatory than you'd like. But the 7 standards of professional practice, this Exhibit 8 A11133, is fundamentally broken down into two 9 standards. There is Standard 1, which essentially 10 addresses what an appraiser is supposed to do in 11 the process of performing an appraisal assignment. 12 Standard 2 is essentially the requirements 13 relative to the written document, the appraisal 14 report, if you will. And if you'll bear with me a 15 second, we'll look at Standard 2, which starts on 16 Page 8. Now, we're talking about the written 17 standards. It says Standard 2-1, "Each written or 18 oral report or communication concerning the 19 results of an appraisal must contain sufficient 20 information to enable the persons who receive or 21 rely on the report or communication to understand 22 it properly." 7981 1 Clearly, that statement doesn't define 2 what "sufficient information" is. And clearly, 3 these professional practice standards are relying 4 upon a general body of knowledge relative to 5 appraisals. And I think it would be reasonable to 6 expect that the officers and directors who are 7 making real estate loans and making decisions 8 relative to real estate loans would be familiar 9 with the so-called body of knowledge of appraisal 10 theory. Now, we don't have the appraisal course 11 materials here, to the best of my knowledge, that 12 have been entered into evidence. 13 Q. So, you're not pointing to anything 14 else. Right? 15 A. I'm pointing to a general body of 16 knowledge out there. I mean, we can proceed 17 through Standard 2. And I would point out, for 18 example, that Standard 2 relative to written 19 reports says that you're supposed to identify a 20 definition of value that you're going to use. It 21 doesn't identify which particular definition of 22 market value you should use in an assignment. 7982 1 There are no -- nowhere in these requirements will 2 you find what is commonly accepted appraisal 3 practice to include things like photographs of the 4 subject property and comparable property, sales 5 location maps, all of those sorts of things. 6 Those are commonly incorporated as a part of 7 appraisal assignments, and most people who hire 8 appraisers would expect those documents to be 9 there. Professional practice standards do not, in 10 fact, require them to be there. 11 Q. You said yesterday that nothing in the 12 text of R-41B required the appraisers to present 13 an as-is value. Right? 14 A. Well, it does. It addresses it 15 specifically relative to REO and LTF. 16 Q. For purposes of the appraisal reports 17 we're looking at in this proceeding, R-41B doesn't 18 require an as-is value. Right? 19 A. For loan appraisal, there were no 20 definitions relative to as-is, as of complete, as 21 of stabilized occupancy. They simply weren't 22 included. 7983 1 Q. Looking at these standards of 2 professional practice, May 3, 1985, Exhibit 3 A11133, and even though this isn't a regulation 4 and it's not even a regulatory interpretive 5 memorandum, does anything in this document say 6 that the appraisers should have included an as-is 7 value? 8 A. To the best of my knowledge, no. 9 Q. You know the document, don't you? 10 A. We're talking the American Institute 11 standards here? 12 Q. Yes. 13 A. Yes. I mean, it's an old set here. 14 So, I haven't perused through it in depth and 15 detail to bring myself back to where we were some 16 ten plus years ago. 17 Q. In trying to figure out what should be 18 in appraisal reports, would underwriters at 19 savings and loans be expected to rely on guidance 20 from federal thrift examiners? 21 A. Could you repeat the question? 22 MR. DUEFFERT: Could the court reporter 7984 1 read the question? 2 3 (Whereupon the requested portion 4 was read back by the reporter.) 5 6 A. No, I don't think we ever expected them 7 to necessarily rely on our guidance. 8 Q. (BY MR. DUEFFERT) Was guidance ever 9 offered? 10 A. Oh, sure. All the time. 11 Q. But it was unreliable? 12 A. I don't understand the point, the 13 question. Perhaps you could rephrase it for me. 14 Q. Let me try it this way. Are you saying 15 that thrift managers couldn't rely on the federal 16 examiners' interpretation of their own regulatory 17 interpretative memorandum? 18 A. I think they could rely on statements 19 that were made by personnel. 20 Q. So, the answer is "yes"? 21 A. Well, somehow, I'm missing the question 22 here. You seem to have something about wanting 7985 1 unreliability here versus people who are 2 knowledgeable on the subject who would offer 3 advice, suggestions to thrift institution 4 managers. I don't know that every piece of 5 information that an examiner has ever passed along 6 was 100 percent accurate, no. 7 Q. Have you taken the time to look at the 8 audit files of Peat Marwick or the federal 9 examination work papers relative to these two 10 credits? 11 A. No, I have not. 12 Q. Did you agree with me yesterday that in 13 the early and mid-1980s, there was in the 14 appraisal industry widespread misunderstanding 15 about the requirements of R-41B? 16 MR. SCHWARTZ: Your Honor, I think 17 we're going over some old ground here. 18 THE COURT: Let's have it. Denied. 19 A. I think there were some 20 misunderstandings. I think we covered this 21 yesterday. But I mean, I went to great length 22 about the appraised equity capital regulation and 7986 1 what role it played bringing R-41B to the 2 forefront of both savings and loan and appraisers. 3 Q. (BY MR. DUEFFERT) In the early and 4 mid-1980s, was there in the appraisal industry 5 widespread misunderstanding about the requirements 6 of R-41B? 7 A. Could I have a date? 8 Q. Can you answer my question? 9 A. Not without defining what "widespread" 10 means and what kind of context we're talking about 11 here. Were there disagreements, perhaps? Some 12 misunderstandings? I believe I've pointed already 13 out that appraisers had misunderstandings about 14 what their own professional practice standards 15 required. 16 Q. After 1982, were there any regional 17 variations in the interpretation of R-41B? 18 A. A common misconception about R-41B. 19 Q. I don't understand. 20 A. I think that was a common 21 misconception, that there were regional 22 variations. I don't believe it. 7987 1 Q. Common among who? 2 A. Appraisers. I've heard that 3 allegation, and I don't believe it. 4 Q. Do you have any sense of what gave rise 5 to that allegation? 6 A. Do you want me to speculate? 7 Q. Could we have Exhibit A11132, please? 8 Mr. Lovell, can you identify Exhibit A11132 for 9 the record? 10 A. Well, it says it's "R-41B and the 11 Appraiser" by Dr. William Kinnard. 12 Q. What else does it say? 13 A. Society of Real Estate Appraisers, 14 copyright 1985, revised October 1985. 15 Q. Do you have any understanding as to the 16 nature of this document? 17 A. Well, it was the society's version of 18 the seminar. Bill Kinnard was the educational 19 consultant for the Society of Real Estate 20 Appraisers. 21 Q. And is it similar in nature then to the 22 seminar document we looked at yesterday? 7988 1 A. Well, obviously, it's much thicker and 2 has a lot more information in it, a lot of which 3 represents, I think, various other documents that 4 have been copied in here. 5 MR. DUEFFERT: We move the introduction 6 of Exhibit A11132. 7 MR. LEIMAN: Did Mr. Dueffert, Your 8 Honor, ask if this witness was familiar with the 9 document and had seen it before? If he has done 10 that and established that, I have no objection to 11 the document. 12 MR. DUEFFERT: Your Honor, I can 13 represent this has been produced to Mr. Leiman a 14 long time ago in depositions this summer. We've 15 been talking about it all summer in depositions. 16 I will also say that I have a witness who isn't 17 talking about documents, and I think it's fair to 18 put into the record evidence of professional 19 standards at the time. 20 MR. LEIMAN: Your Honor -- 21 THE COURT: I think he identified that 22 he knows the author of the document. Unless you 7989 1 have some reason to think that he's not the 2 author, I'll receive the document. 3 MR. LEIMAN: I'm sorry, Your Honor. 4 Did you say if he's not the author -- he's not the 5 author of this document. Is that what you said? 6 THE COURT: Well, I said if you have 7 some reason to suggest that he is not, then maybe 8 you have some grounds to object. But otherwise, I 9 think the document is received. 10 MR. LEIMAN: May I ask him, sir, if he 11 is the author? 12 Are you the author of this document? 13 THE WITNESS: No. I clearly am not the 14 author. 15 THE COURT: That's not what I asked. I 16 apologize. I was referring to Kinnard as being 17 the author of which on its face states, and he 18 seems to recognize who Mr. Kinnard is. 19 MR. LEIMAN: All right. 20 Q. (BY MR. DUEFFERT) Mr. Lovell, I'll 21 direct you to the second page of the exhibit, the 22 second paragraph, and ask you to read into the 7990 1 record the last two sentences of that paragraph. 2 A. Last two of the second paragraph? 3 Q. Correct. 4 A. "From those meetings which, 5 incidentally, are still being held on a regular 6 schedule as of this writing, there emerged a 7 realization that the provisions of R-41B were 8 widely misunderstood. It also became apparent 9 that the impact of regional variations in 10 interpretation and enforcement of those provisions 11 was widely unappreciated and unintended." 12 Q. Is that information false? 13 A. I disagree with Bill, Bill Kinnard's 14 position on that. And having had a great many 15 discussions with Mr. Kinnard over the years, I 16 think that once he understood that we were pretty 17 consistent across the board in the United States 18 in our interpretation of R-41B, that there weren't 19 these widespread regional variations. I think 20 it's very much a perception, when you have 12 21 regions, 12 districts at that point in time with 22 12 people responsible to say, "Well, everybody's 7991 1 doing it differently than one another." But I 2 don't think the facts ever bore that out. I don't 3 believe anybody ever proved it. 4 Q. Am I correct in understanding that 5 there were significant differences of opinion 6 among practicing appraisers in the early and 7 mid-1980s as to what was meant by requirements of 8 R-41B, such as the one that an appraisal report 9 be, open quote, "totally self-contained," close 10 quote? 11 A. There were questions about 12 self-contained. 13 Q. And I think at your deposition you told 14 me that practicing appraisers were presenting 15 reports that went from a range of a letter 16 appraisal to a file cabinet. Right? 17 A. Yes. I think I said from the 18 ridiculous to the sublime, quite literally. I 19 mean, I had appraisers in seminars stand up with a 20 straight face and suggest that what the Federal 21 Home Loan Bank Board thought an appropriate 22 appraisal was was some kind of a massive document 7992 1 that represented the entire body of knowledge they 2 had accumulated over their entire appraisal 3 careers. I mean, clearly, that is in the 4 ridiculous category, in my opinion. 5 Q. If you -- if that's the case, how could 6 you tell this Court yesterday that the language of 7 Memorandum R-41B was so straightforward and clear 8 that even a non-appraiser could understand what it 9 required of an appraisal report? 10 A. I don't understand what's not to 11 understand about language when we say that it's 12 totally self-contained so that when it's read by 13 any third party, they can understand the 14 appraiser's logic and reasoning. 15 Q. Is it your opinion that when the Court 16 reviews the appraisal reports that you've 17 reviewed, the Court could understand the logic and 18 reasoning? 19 A. Could you repeat that question? 20 MR. DUEFFERT: I'll withdraw it. 21 Q. (BY MR. DUEFFERT) In 1985 and 1986, 22 did you teach hundreds of seminars on R-41B? 7993 1 A. I did hundreds of seminars. 2 Q. And did all of those seminars have 3 anything to do with the fact that many experienced 4 credentialed appraisers could not figure out 5 exactly what R-41B required them to do? 6 A. The most remarkable thing about those 7 seminars, Mr. Dueffert, is that I would go to -- 8 before a group of perhaps 200 people and they had 9 never read R-41B. They had heard lots of things 10 about R-41B. And after I had finished with a 11 seven- or eight-hour session with them, they felt 12 very comfortable relative to R-41B because, in 13 essence, they understood our objectives where we 14 were asking for well-documented and well-supported 15 appraisal reports that were prepared in accordance 16 with the standards of practice of the leading 17 professional groups at the time. We weren't 18 asking for something unusual, unrealistic. The 19 suggestion that we were requesting appraisers to 20 routinely prepare so-called demonstration 21 appraisal reports is absolutely false. 22 Q. Whose suggestion are you talking about? 7994 1 A. I think that there were comments 2 certainly made to me in various seminars that, 3 well, what you-all seem to be suggesting are 4 demonstration appraisal reports. 5 THE COURT: What's that? 6 THE WITNESS: A demonstration appraisal 7 report is something that you're required to 8 prepare as a part of becoming a member of the 9 Appraisal Institute or the Society of Real Estate 10 Appraisers. It is supposed to be an actual 11 appraisal problem where you actually go out, do 12 solid research, and write an appraisal report, 13 render an opinion of value. Those reports are 14 subsequently graded as a part of the process of 15 obtaining the designation. And they, in fact go 16 out and check the data in the report to be certain 17 that you didn't fabricate the information, that 18 the sales are genuine, bona fide, and that the 19 appraiser followed appropriate procedure for that 20 market area and property type that he was 21 appraising. 22 THE COURT: And how does the ordinary 7995 1 appraisal differ? 2 THE WITNESS: Well, functionally, Your 3 Honor, it doesn't differ significantly from it. I 4 think most appraisers can see that the outline 5 that you follow as a part of the preparation 6 process for a demonstration appraisal report is 7 generally just a good outline to follow relative 8 to how you would create an appraisal. Probably 9 the functional difference between a demonstration 10 appraisal report is you tend to add a little bit 11 more explanation than you might, a lot more 12 exhibits, a lot more color photographs. I mean, 13 you're trying to, in part, dazzle the reader and 14 reviewer of the report to show that you've got a 15 very complete product here, extremely complete. 16 Every aspect has been considered. 17 There are certain minimum standards for 18 those assignments, as well. You have to pick 19 properties. They can't be new, for example. They 20 have to have some elements of depreciation 21 exhibited so that as an author, as the appraiser, 22 you can go through and show the techniques of 7996 1 estimating accrued depreciation in a property. 2 You have to have a property type that is such that 3 you can apply all three approaches to value on. 4 The normal recommendation is to pick something 5 fairly simple, quite honestly, to appraise. My 6 commercial property demonstration appraisal report 7 actually was a Jewish synagogue who's highest and 8 best use was to convert to office space, and that 9 was subsequently done. 10 THE COURT: Excuse me, Mr. Dueffert. 11 You may continue. 12 Q. (BY MR. DUEFFERT) As a review 13 appraiser, you saw a lot of poor quality appraisal 14 reports in 1986, didn't you? 15 A. I've seen a lot of poor quality 16 appraisal reports over my entire career. 17 Q. Including 1986? 18 A. My career covers 1986. 19 Q. That's a "yes"? 20 A. That's a "yes." 21 Q. Looking at the appraisal reports in 22 this case, were they prepared by properly 7997 1 credentialed appraisers? 2 A. They appear to be, yes. 3 Q. None of the appraisers had mail-order 4 designations, did they? 5 A. To the best of my recollection, I 6 believe they all hold MAI designations. 7 Q. Do you know if Mr. Dugger had a good 8 reputation in the appraisal community? 9 A. I really don't know anything about 10 Mr. Dugger's personal reputation or work product, 11 and I have not had occasion to review in the past 12 his work. 13 Q. Do you have any sense of the reputation 14 of his partner, Scruggs Love? 15 A. Yes. Scruggs Love is a personal friend 16 of mine and, to the best of my knowledge, Scruggs 17 has a decent reputation. 18 Q. But you nonetheless told me at your 19 deposition that the 1986 work product of that firm 20 that we've looked at was, open quote, 21 "depressing," close quote. Right? 22 A. That's true. 7998 1 MR. LEIMAN: Your Honor, excuse me. 2 I'd like to interpose an objection. If 3 Mr. Dueffert's going to inquire about very 4 specific passage in his deposition, Mr. Lovell's 5 deposition, we have the right to know where they 6 are in his deposition, as does the witness. 7 THE COURT: I believe the question was 8 answered. Are you going to pursue it further? 9 MR. DUEFFERT: No. And for the record, 10 what was your answer? 11 A. I forget the question now. 12 MR. DUEFFERT: Could the reporter read 13 back the question, please? 14 15 (Whereupon the requested portion 16 was read back by the reporter.) 17 18 A. Yes, that's what I said. True. 19 Q. (BY MR. DUEFFERT) Do I understand 20 that you know nothing about the reputations of 21 Mr. Ed Schulz and Mr. Rex Bolin? 22 A. No, I do not. 7999 1 Q. Do you know anything about Mr. Schulz' 2 resources outside of Houston? 3 A. No, I do not. 4 Q. And you don't know what was available 5 to him in San Antonio when he did his report. 6 Right? 7 A. That's correct. 8 Q. How far from Houston is San Antonio? 9 A. I don't know. I haven't looked at a 10 map in ages. A hundred miles maybe. 11 Q. Do I understand correctly from your 12 deposition that your principal criticism of the 13 1986 Love & Dugger appraisal is that it doesn't 14 contain an as-developed value and that it 15 improperly anticipates the construction of the 16 Westside Expressway? 17 A. Those are certainly some of the reasons 18 I think I cited, yes. 19 Q. Did you cite them as your principal 20 reasons? 21 A. No. I think I said that I took all of 22 these things into account together. I guess I 8000 1 didn't find one particular item that was the 2 critical key point. I think I stressed the fact 3 that the fundamental problem with the appraisal 4 reports is that they were not useful tools in the 5 loan underwriting process. I believe that's what 6 I said. 7 Q. Pages 14 and 15 of your deposition 8 dated October 21, 1997, Lines 14 through -- Line 9 14 on Page 4 through 9 on Page 15. 10 Question, "Did you reach any opinions 11 or conclusions as to whether the February 12th, 12 1986 Love & Dugger appraisal report was in 13 compliance with Memorandum R-41B?" 14 Answer, "Yes. I do have an opinion 15 about that." 16 Question, "What is your opinion?" 17 Answer, "I don't believe that the 18 appraisal report complies with Federal Home Loan 19 Memorandum R-41B." 20 Question, "Why not?" 21 Answer, "I think my principal comment 22 would be -- is if you look at R-41B, it explicitly 8001 1 states that an appraisal needs to be a useful tool 2 in the loan underwriting process. And while they 3 have presented an interesting appraisal report, it 4 unfortunately represents only a hypothetical value 5 of what the apparent raw land would be if the 6 expressway was going to be built out there. 7 Unfortunately, we have no valuation as a part of 8 this appraisal report that reveals, one, the 9 as-developed value at a subsequent date, nor do we 10 have an as-is value of the property as it 11 physically and legally exists at the date of 12 valuation." 13 Question, "So, it's something of a 14 hybrid?" 15 Answer, "It is incomplete for loan 16 underwriting purposes." 17 Does that refresh your recollection as 18 to what your principal criticisms of the 19 Love & Dugger report were? 20 A. It refreshes my recollection as to what 21 I said. Sounds accurate to me. 22 Q. And the Love & Dugger report is 8002 1 incomplete because it doesn't value the collateral 2 of Park 410 property at the end of the loan 3 process; isn't that right? 4 A. That's one of the defects, yes. One of 5 the things that would make -- you'd have to have 6 as an ingredient in underwriting that type of 7 loan. 8 Q. I think you also said when you began 9 your testimony last week on November 14th, you 10 told Mr. Leiman, "The major" -- and this is on 11 Page 7255 and 7256. "The major problem, I think, 12 with the Love & Dugger appraisal report, 13 irrespective of some of the niceties of what they 14 have done, I think this aspect of assuming the 15 existence of the freeway." 16 Does that refresh your recollection as 17 to the nature -- 18 A. It was an important ingredient. No 19 question about it. 20 Q. The major problem? 21 A. It's one of the major problems. 22 Q. You testified at your deposition that 8003 1 your principal criticism of the Ed Schulz 2 appraisal is that it doesn't contain an as-is 3 value. Right? 4 MR. LEIMAN: Your Honor, I request that 5 Mr. Dueffert refer to a specific page and line if 6 he's going to question about specific parts of the 7 deposition. 8 MR. DUEFFERT: I think it's fair to 9 question the witness as to the thrust of his 10 opinions. 11 THE COURT: Well, we'll test his 12 recollection of what he said. 13 A. Would you repeat the question? 14 Q. (BY MR. DUEFFERT) Let me try it 15 again. Is your primary reason for criticizing Ed 16 Schulz' appraisal report is that in attempting to 17 develop the property in the state of completion, 18 he fails to supply the as-is value of the land as 19 it physically and legally existed on the date of 20 valuation? 21 A. That's one of my objections to the 22 appraisal from an R-41B perspective, yes. 8004 1 Q. Is that your primary reason? 2 A. Is it the only reason? No. 3 Q. Is it the primary reason? 4 A. There are many reasons why I don't 5 believe the appraisal report was not useful. We 6 had an extensive line of questioning, I believe, 7 from you about that issue. 8 Q. Is it the primary reason? 9 A. I think we went through in great depth 10 and detail about all of the relative observations 11 that I made when I read the appraisal report. I 12 take them in total. 13 Q. Page 15 and 16 of your deposition, Line 14 23 of Page 15 through Line 16 of Page 16. 15 "Have you reached any opinions or 16 conclusions as to whether the March 19, 1986 17 appraisal report of Mr. Edward B. Schulz complied 18 with Memorandum R-41B?" 19 Answer, "I have." 20 Question, "And what is your opinion or 21 conclusion?" 22 Answer, "My opinion is that the 8005 1 appraisal does not comply with R-41B, again, 2 because it is not a useful tool in the loan 3 underwriting process." 4 Question, "What is the basis for that 5 opinion?" 6 Answer, in Mr. Schulz' appraisal 7 report, he attempts to develop the value of the 8 property in the state of completion but fails to 9 supply the as-is value of the land as it 10 physically and legally existed on the date of 11 valuation." 12 Question, "Any other reasons?" 13 Answer, "That's sufficient." 14 Question, "Is that your primary 15 reason?" 16 Answer, "Yes." 17 Was your response in your deposition 18 truthful? 19 A. Yes. Would you have reason to believe 20 otherwise? 21 Q. Do I understand that your principal 22 criticism of the Rex Bolin appraisal on the 8006 1 Norwood property is that it also doesn't contain 2 an as-is value and that it fails to consider some 3 proposed changes to US Highway 183 that would make 4 it more of a limited-access highway? 5 A. Those are certainly ingredients of why 6 I would object to it, yeah. I believe we had an 7 extensive amount of questioning that involved the 8 market study involving that property. 9 Q. So -- is it your testimony that 10 appraisers are obligated not to communicate with 11 their clients orally about value ranges in the 12 course of putting together appraisal reports? 13 A. Appraisers will discuss with their 14 clients the nature of the assignment. 15 Q. Was it -- and there is nothing 16 prohibited about oral communications about values 17 between appraisers and their clients. Right? 18 A. Not that I'm aware of. 19 Q. It was common in the industry in 1986, 20 wasn't it, for clients to give appraisers an idea 21 of the value that would be needed to make a 22 transaction work? 8007 1 A. Appraisers were required to be very 2 cautious when a client would request a specific 3 value estimate. It was common practice to talk in 4 terms of perhaps some generalized ranges as to 5 where the assignment was going. And the reason 6 for that is the standards of professional practice 7 did not want appraisers rendering value opinions 8 without having done the proper research. So, 9 generally speaking, from a professional practice 10 standards point of view, the appraiser, if he was 11 rendering an opinion of value, needed to have 12 completed the assignment work prior to making his 13 pronouncement of what his opinion of value was. 14 Q. Was it common in the industry for 15 clients to give appraisers an idea of the value 16 that would be needed to make a transaction work? 17 A. Sure. They would try to steer 18 appraisers. 19 Q. And it was common? 20 A. It was done. 21 Q. Was it ever done for a reason other 22 than to try to steer appraisers? 8008 1 A. I imagine it was. I mean, I guess I'm 2 sitting here trying to fathom other reasons. But 3 certainly, there were people who would direct 4 appraisers, make it clear that "We need a number 5 of X number of dollars in order to make the deal 6 work." 7 Q. Did that communication, that type of 8 information, ever happen for a reason other than 9 to steer a number? 10 A. I'm aware of it. I have personal 11 experience in my own professional practice with 12 this sort of thing. 13 Q. On large projects, wasn't it common for 14 appraisers to call up the client halfway through 15 the project and indicate roughly the range they 16 were going to come to? 17 A. If they had done the assignment, if 18 they had sufficient information to have analyzed 19 to have already arrived at that conclusion. 20 Professional practice standards prohibit them from 21 doing so unless they have, in fact, completed the 22 appraisal. 8009 1 Q. Was it common on big projects for 2 appraisers, halfway through the process -- not -- 3 before they have a final report. They get a 4 range. It's going to come in between, you know, 5 20 and 22 or 118 and 120. They call up their 6 client and they say, "Here's the range I think I'm 7 going to come to." 8 Did that happen commonly? 9 MR. SCHWARTZ: I object to the 10 hypothetical. Just a minute, please. I believe 11 it's an incomplete hypothetical. We don't have a 12 time frame, and Mr. Dueffert is now changing from 13 halfway through a project to some point in the 14 project. If he's going to give a hypothetical 15 which is completely appropriate, it should be a 16 complete one. That's my objection, Your Honor. 17 THE COURT: Did you understand the 18 question? 19 THE WITNESS: I guess I'd like to 20 explain, perhaps for your benefit. It was common 21 for appraisers to violate their practice 22 standards. This was occurring. This is one of 8010 1 the reasons why we had hearings that went on in 2 1985 relative to the impact of faulty and 3 fraudulent appraisal reports. 4 THE COURT: And you're saying that that 5 would be fraudulent or -- 6 THE WITNESS: It was considered 7 improper practice. It's a violation of your 8 professional practice standards to cite a value 9 estimate prior to actually having done the 10 analyses and the appraisal report. 11 THE COURT: So, he would have to 12 complete -- 13 THE WITNESS: He would have to have all 14 of the analyses work completed. Now, the report 15 might not be physically, literally completed in 16 the preparation process; but he had to have gone 17 far enough to have had adequate information to 18 formulate that opinion before sharing it with the 19 client. 20 Q. (BY MR. DUEFFERT) Sir, do you know 21 who Jay Massey is? 22 A. Yes. 8011 1 Q. Is he -- has he been designated as an 2 appraisal expert by the OTS in this case? 3 A. I believe they have retained him for 4 some reason, yes. 5 Q. And you have reviewed his report, have 6 you not? 7 A. I have read, I think, one of the 8 documents that he prepared. I don't know what 9 else he may have prepared. 10 Q. Do you know if his report was filed 11 with this Court? 12 A. I do not know. 13 Q. Pages 118 and 119 of Mr. Massey's 14 deposition, Line 4 on Page 118 through Line 18 on 15 Page 119. 16 MR. LEIMAN: Your Honor, Mr. Massey's 17 deposition is not in evidence. Mr. Massey has not 18 been called as a witness in this matter. It's 19 completely inappropriate to test this witness 20 unless he's testing him in connection with 21 specific questions that Mr. Massey may have been 22 asked and the answers -- with respect to the 8012 1 answers that this witness may give. If that's the 2 purpose of this, that's fine. But I object to him 3 being tested and quizzed on documents he's never 4 seen and read. 5 THE COURT: Well, if another person has 6 given an opinion, he can be asked -- Mr. Lovell 7 can be asked whether he agrees with it, I think. 8 MR. DUEFFERT: Thank you, Your Honor. 9 Do we have the transcript? 10 Q. (BY MR. DUEFFERT) The question on 11 Page 117, Line 25, "Did R-41B appraisals in Texas 12 as of early 1986 commonly address all of those 13 different questions?" 14 Answer, "Mine did. The people I 15 associate with did. Absolutely." 16 "Very quickly, from 1984 till about 17 1986, I had trouble getting my experience credits 18 because at least 50 percent of the reports that I 19 wrote were never completed." 20 Question, "Why?" 21 Answer, "It was traditional in the 22 market at that point in time to get half the fee 8013 1 up front, to pay the other half or receive the 2 other half upon completion of the report. I begin 3 the report and focus on typically the income 4 capitalization approach for an improved property 5 or for a proposed improved property. And when I 6 got to where I figured I'm within a reasonable 7 range of what the rest of the report is going to 8 point to, we call the client and tell them, "Man, 9 here's the range. We're going to be somewhere in 10 here once this thing is concluded." And they'd 11 say, "Stop what you're doing. Box it up and send 12 it to us. Keep the up-front money." 13 Question, "Why would they tell you 14 that?" 15 Answer, "Because it wasn't the number 16 they wanted. Easily half that I couldn't get. I 17 had trouble getting experience credits for because 18 of stopping midway through the analysis because it 19 couldn't hit their number. Their number didn't 20 make no damn sense." 21 Question, "Did you commonly know what 22 their number was before you made the call?" 8014 1 Answer, "Sure." 2 Question, "How did you learn of the 3 number?" 4 Answer, "Oh, they would tell you 5 directly or indirectly. Or write it on a scrap of 6 paper or whatever, you know. I mean, they needed 7 the number to make the deal work to do the 8 financing and to get started to acquire the land 9 and get moving, you know. I usually knew what it 10 was they -- or if they didn't tell me directly or 11 indirectly, hell, I can figure it out, you know, 12 because I know what their -- I have to have some 13 indication of what their pro forma of rents were 14 and expenses." 15 Mr. Lovell, do you feel that Mr. Massey 16 was violating ethical rules when he was dealing 17 with his clients? 18 A. Well, it certainly sounds like he's 19 telling on himself. 20 Q. Can you answer my question? 21 A. Which is? 22 MR. LEIMAN: Your Honor, I object to 8015 1 the question because it doesn't contain a specific 2 example. If there is a specific example that 3 Mr. Dueffert would like to talk about and he would 4 like to render an opinion, that's fine. 5 THE COURT: There is a practice 6 described there in some detail. I think the 7 witness can give us his opinion on whether it's 8 proper. 9 Q. (BY MR. DUEFFERT) Is it your opinion 10 that Mr. Massey, in engaging in the conduct he 11 described in his deposition, was violating ethical 12 rules? 13 A. I don't think he's supposed to tell 14 them about the number. So, I guess from what he's 15 saying here, the indication is -- without looking 16 at the rest of the context the statement is made 17 in -- but the indication certainly is here that he 18 was perhaps violating the Appraisal Institute 19 standards. 20 Q. It remains today a common practice, 21 does it not, for appraisers to discuss orally 22 possible valuations with their clients before any 8016 1 report is issued? 2 A. No. What's common today is that they 3 will take on an assignment where a client perhaps 4 needs a particular number as a part consulting 5 assignment where they will go through and work to 6 a particular point where the appraiser can tell 7 whether or not there is any likelihood that the 8 value estimate the client is looking for makes 9 some sense or not. At that point, then the 10 assignment, if it does make sense, would be 11 converted into an appraisal assignment. And 12 before the appraiser would come up with a finished 13 file number that he would cite in the appraisal 14 report, he would finish all of the rest of the 15 work. 16 So, nowadays, the way the standards of 17 professional practice course suggest appraisers to 18 handle this kind of situation is that they should 19 literally break the assignment down into phases to 20 avoid the appearance of being directed to produce 21 a particular estimate. 22 Q. I'm sorry. I don't understand your 8017 1 answer. 2 Does it remain today a common practice 3 for appraisers to discuss orally possible 4 valuations with their clients before a report is 5 issued? 6 A. I don't think it's accepted standards, 7 unless you've done the work, to cite a value 8 estimate for the property. 9 Q. So, you're saying it's not a common 10 practice? 11 A. Well, what's common practice versus 12 what the standards say you're supposed to be doing 13 may be at variance with one another. I've already 14 pointed that out. 15 Q. I'm not asking about standards. 16 A. I think standards are very important. 17 Q. I know that. Was it -- is it a common 18 practice today? 19 A. It happens. 20 Q. Is it a common practice today? 21 A. I'm not sure how common it is anymore. 22 Q. Mr. Lovell, your deposition, Page 115, 8018 1 Lines 16 through 22. "Despite CEBA" -- which I 2 understand was passed in 1987 -- right? 3 A. Yeah. 4 Q. "Despite CEBA, did appraisers 5 commonly" -- no. I'm sorry. "Despite CEBA, did 6 appraisers continue commonly to get target numbers 7 from lenders?" 8 Answer, "I think that it's probably 9 common practice for lenders to at least tell 10 appraisers what type of number is necessary." 11 Is your testimony at your deposition 12 truthful? 13 A. I said it, and you reported it 14 accurately. 15 Q. Was it truthful? 16 A. Yes, it's truthful. 17 Q. We talked yesterday about as-is versus 18 as-developed. I'd like to move on. Perhaps this 19 is a good time for a break. 20 THE COURT: All right. We'll take a 21 short break. 22 8019 1 (A short break was taken 2 at 11:01 a.m.) 3 : 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Dueffert, you may continue. 7 MR. DUEFFERT: Thank you, Your Honor. 8 (11:20 a.m.) 9 Q. (BY MR. DUEFFERT) Mr. Lovell, in your 10 career, have you ever been based in Texas? 11 A. I'm not sure what you mean by "based." 12 Q. I think it's a clear question. Have 13 you ever been based in Texas? 14 A. If the question is have I ever done 15 work in Texas, the answer would be yes. 16 Q. No. I want you to answer the question. 17 A. Have I worked for an employer and had 18 this as my residence, the answer would be no. 19 Q. I'd like you to answer the question I 20 asked so the record is clear. 21 Have you ever been based in Texas? 22 MR. LEIMAN: Your Honor, maybe if we 8020 1 could cut it short, perhaps -- perhaps the 2 question might be phrased if it was ever his duty 3 stationed for any period of time, such as in 4 excess of two weeks. Perhaps that might -- put in 5 that clarification. Would you like to -- 6 MR. DUEFFERT: I think I have a right 7 to ask the questions I would like to ask. 8 THE COURT: Well, you've got your 9 answer. So, I think we'll have to go to the next 10 question. 11 MR. DUEFFERT: Okay. 12 Q. (BY MR. DUEFFERT) Do you recall that 13 you criticized the Love & Dugger and Schulz 14 appraisals for hypothesizing the construction of 15 the Westside Expressway? 16 A. Yes. I see that as a problem. 17 Q. Did they anticipate the construction of 18 the expressway, or just its four lanes of access 19 roads? 20 A. I believe there was some type of 21 construction work, it's my understanding, going on 22 on the access roads. But the contracts had not 8021 1 been let for the main driving lanes for the 2 freeway. 3 Q. My question is: Did the appraisers 4 anticipate the construction of the expressway, all 5 eight lanes or whatever it eventually would have, 6 or did they anticipate the construction of its 7 four lanes of access roads? 8 A. Their analyses anticipated the eventual 9 completion of the freeway within a very short time 10 frame. 11 Q. And how do you define "freeway"? 12 A. Well, most people would define 13 "freeway" as being a limited-access facility. 14 Q. You just said that the appraisers 15 anticipated the construction of the freeway. 16 Right? 17 A. Their report is predicated on the 18 assumption that the freeway is going to be built. 19 Q. And when you say that, are they 20 predicating the assumption on the four lanes of 21 access roads to be built or something more? 22 A. No. I think it was part and parcel of 8022 1 the access roads, including the freeway itself. 2 Q. So, they predicated their valuation 3 estimates on the assumption that all eight lanes 4 would be built in the next two years? 5 A. Well, I don't know how many lanes were 6 intended to be built. I haven't ever seen the 7 specifications for the freeway. But they were 8 anticipating that the freeway and any access roads 9 and the like were going to be built, including 10 other roads in the vicinity. It's my 11 understanding that there were other proposed roads 12 that were part and parcel of this whole area. 13 Q. You've criticized the appraisers for 14 anticipating the opening of the freeway. Right? 15 A. I don't criticize them for anticipating 16 the opening of the freeway. 17 Q. I thought we had about a day and a half 18 of testimony in which you routinely criticized 19 them for anticipating the freeway. 20 A. There is no problem -- and I think I 21 made this clear -- for the appraiser to recognize 22 that the freeway is going to be built. But from 8023 1 an institution's perspective, they need to know 2 what it is worth on the date they extend the money 3 on the property. And we didn't have a freeway, 4 it's my understanding, when that was being done, 5 when the loan was being underwritten. And I do 6 think it makes a big difference in the value of 7 the property. It's my understanding, I believe, 8 they cite several thousand feet of highway 9 frontage were going to be on this proposed 10 freeway. 11 Q. Could we have Exhibit T7143, please? 12 Also at Tab 711. 13 MR. LEIMAN: Could you identify what 14 that is, Mr. Dueffert? What specific appraisal is 15 that? 16 MR. DUEFFERT: I'm sorry. This is the 17 1986 Love & Dugger appraisal report. 18 MR. LEIMAN: Thank you. 19 Q. (BY MR. DUEFFERT) Mr. Schulz, could 20 you turn briefly to Page 34 and 35 with me? 21 A. Mr. Schulz? 22 Q. I apologize. I was looking -- I'm 8024 1 reading too many appraisals. 2 Mr. Lovell, could you turn to the 3 bottom of Page 34, please? Are you with me? 4 A. Okay. Page 34. 5 Q. Could you read into the record the last 6 line on Page 34 that carries onto the top of 7 Page 35? 8 A. It says, "G, capital improvement 9 projects and annexations. The growth and amount 10 of activity" -- 11 Q. No, sir. Just the last line. 12 A. Excuse me. "This 10.1-mile 13 thoroughfare will cost approximately 100 million 14 to build." 15 Q. And the next line? 16 A. "At the present, the State Highway 17 Department has approved the low bid by H.B. Zachry 18 Company to construct approximately 5 miles of 19 access roads between Loop 410 and 1604." 20 Q. Could you read the next line? 21 A. "Initial site work started 22 January 1986. Additional bids for construction of 8025 1 bridges, as well as interchanges, will be let 2 June 1986." 3 Q. The Love & Dugger report at that point 4 is talking about access roads. Right? 5 A. Let me read the rest of it. No. I 6 believe it talks about the Westside Expressway, as 7 well as the access roads. 8 Q. And it distinguishes between the two. 9 Right? 10 A. Yes. On Page 34, it says "To date, the 11 most important transportation plan" -- I mean, 12 most important -- "is that of the Westside 13 Expressway." 14 Q. As of early 1986, did market prices for 15 properties in the neighborhood of Park 410 reflect 16 the belief that the access roads would be 17 completed in the near future? 18 A. I don't know if I know the answer to 19 that for sure. 20 Q. You have no opinion? 21 A. I don't know that I have adequate data 22 to make that judgment. It certainly is possible, 8026 1 but... 2 Q. Is it anything more than possible? 3 A. I don't understand the question. 4 What's "more than possible"? There is some 5 quality here I'm missing. 6 Q. This is a blowup of the Park 410 area 7 between the Northwest Loop 410 and Loop 1604. It 8 is from Exhibit T7084, which is located at Tab 9 709. For the record, it is located -- it is the 10 page marked OW015432. 11 To your understanding, is this a fair 12 representation of the land in the Park 410 area as 13 it existed in early 1986? 14 A. It's a representation. 15 Q. Do you have any reason to challenge it? 16 A. Well, I'm not sure how accurate it is. 17 I mean, frankly, it's a picture that was, I guess, 18 in the appraisal report. 19 Q. Is a copy of -- is it your testimony 20 that the Park 410 land's value in early 1986 21 didn't reflect the market's anticipation that four 22 lanes of access roads would be built between Loop 8027 1 410 and Loop 1604? 2 A. It would have been something to 3 consider. 4 Q. Wouldn't an appraiser actually be 5 obligated to reflect the market's anticipation 6 that that highway would be built? 7 A. He can certainly consider it. There is 8 no problem with that. 9 Q. Well, if, indeed, the market is valuing 10 the property higher because it's been announced 11 that there is going to be the freeway, the 12 appraiser has to take that into consideration. 13 Right? 14 A. That's fine. But, you know, from a 15 lender's perspective, he still has to recognize 16 that until the freeway is there, we don't have a 17 freeway. It's an important element of the value 18 of the property. This situation isn't any 19 different than a zoning change. If you can 20 achieve the zoning on a particular tract, then 21 perhaps it will be valuable or more valuable than 22 it currently is. But until the zoning has become 8028 1 consummated, until the change has occurred, you 2 don't have reality there. And you do have 3 considerable risk in this type of loan. 4 Q. In reality, doesn't the price of 5 property change if everyone in the market is 6 anticipating that a major freeway will be built 7 between loop -- two loops in a city? 8 MR. LEIMAN: Object to the hypothetical 9 as being incomplete. Is he talking about Park 410 10 or just some other hypothetical property? 11 THE COURT: This is an expert. He can 12 answer the question. 13 A. Not only will it change; but if the 14 freeway isn't built, it will change in reverse. 15 Q. (BY MR. DUEFFERT) At the point when 16 all the contracts are let, after the State Highway 17 Department has announced that the freeway will be 18 built, doesn't that change market values in the 19 neighborhood? 20 A. It can affect it, but not necessarily 21 so. 22 Q. Is it your opinion that the Park 410 8029 1 property, as it sat there in early 1986, would 2 have been worth the same if no Westside Expressway 3 had been announced? 4 MR. LEIMAN: I object to that as an 5 incomplete hypothetical. The same as what? 6 THE COURT: Did you understand the 7 question, Mr. Lovell? 8 THE WITNESS: Well, I think value, 9 since it's dependent on a particular point in time 10 and condition that we're looking at, I think we 11 need to be a little bit more specific about the 12 "whens." 13 Q. (BY MR. DUEFFERT) We'll get back to 14 it later. 15 Last week, you told the Court, open 16 quote, "As I guess I understand it, it hasn't been 17 built to this day," close quote. 18 Do you recall that? 19 A. That's what I understand. 20 Q. And where did you get that 21 understanding? 22 A. At this point, I'm not sure because 8030 1 we've covered so much language. It seems like I 2 remember from perhaps Brian Schuler's testimony 3 and it might have been Auvy McBride's deposition 4 that I read. Somewhere in there, it appeared. 5 But to be perfectly frank, I don't recall at this 6 point. 7 Q. Perfectly frankly, might it have come 8 from Mr. Leiman or Mr. Schwartz? 9 A. Well, I have seen, I believe, what is 10 an aerial photograph of the property at the 11 present time, or recent photograph of it. 12 Q. Before you said in court that you guess 13 you understand it hasn't been built to this day 14 and created that impression, did you verify that 15 information anywhere? 16 A. I have not been out there to the 17 property. 18 Q. Could we have Exhibit B3854, please? 19 Before you created an impression in this courtroom 20 that the freeway had never been built, did you 21 look in an atlas? 22 A. No, I did not. 8031 1 Q. What type of road does the atlas 2 signify -- I think it's called US Highway 151 -- 3 now is? 4 A. I'll be honest with you, Mr. Dueffert. 5 My eyesight isn't as good as it used to be, and 6 the copy here is not the best. Perhaps you can 7 point me to a page. 8 Q. No. We'll move on. Do you know if a 9 1987 Love & Dugger appraisal report discloses the 10 fact that the four lanes, indeed, were completed 11 in 1987? 12 A. As I recall -- and perhaps I should 13 refer to it. I don't know that I have it here. 14 As I recall, I think they commented something 15 about that. 16 MR. LEIMAN: Let me object on the basis 17 that the question is not clear as to which four 18 lanes we're talking about, Mr. Dueffert. Could 19 you clarify that, please? 20 Q. (BY MR. DUEFFERT) Let me just try it 21 again. As an appraisal expert, do you know if a 22 1987 appraisal report by Love & Dugger discloses 8032 1 the fact that four lanes of access roads, indeed, 2 were completed in 1987? 3 A. I'd like to refer to it. May I have a 4 copy of it? 5 Q. Have you looked at a 1987 Love & Dugger 6 appraisal report on the Park 410 property? 7 A. I have looked at an update report, yes. 8 Q. The '87 Love & Dugger appraisal? 9 A. I believe that's the date. 10 Q. You don't recall if it disclosed that 11 the highway, in fact, was completed? 12 A. I would prefer to refer to the specific 13 document to be certain. 14 Q. Perhaps later. 15 How far was Sea World from Park 410? 16 A. Not far. 17 Q. How far? 18 A. I'd have to refer to the appraisal. I 19 think they do site some relative distances there. 20 Q. It is an important fact regarding the 21 valuation of the Park 410 property, is it not, the 22 distance between it and the proposed Sea World? 8033 1 A. There was certainly a fair amount of 2 perception created, I think, from the appraiser's 3 commentary that Sea World was going to be of 4 benefit to the Park 410 property. 5 Q. Do you think that impression was 6 reasonable at the time? 7 A. No, I don't. 8 Q. What was the best available projection 9 in 1986 regarding how many visitors a year were 10 expected to visit Sea World after it opened? 11 A. I don't recall. 12 Q. Any idea? 13 A. Nothing comes to mind. 14 Q. You've read the appraisal reports, have 15 you not? 16 A. Yes. I've read the appraisal reports. 17 Q. Was that a significant prediction to 18 your analysis? 19 A. What? The attendance at Sea World? 20 Q. Well, if you recall, we talked about 21 San Diego and Orlando and San Antonio. And I 22 think you were critiquing Mr. Dugger's appraisal 8034 1 report because he looked at San Diego instead of 2 Orlando. Right? 3 A. Well, I'd have to refer back. I don't 4 know that Mr. Dugger went to San Diego. I think 5 we have a market study, a Tremar market study that 6 went to San Diego and comments on it. 7 Q. Looking at the Love & Dugger appraisal 8 that you critiqued, do you recall that you focused 9 on the Sea World section because you were saying 10 it wasn't comparable in San Antonio to San Diego. 11 Right? 12 A. I don't think that the market areas are 13 comparable, no, I don't. 14 Q. So, when you were focusing on that 15 section, did you also focus on the predictions as 16 far as Sea World attendance? 17 A. No. 18 Q. Because it wasn't relevant to you? 19 A. I don't see Sea World as being this 20 very important significant factor relative to this 21 particular property. 22 Q. And it's not significant to the 8035 1 neighborhood between Loop 1604 and Loop 410 on the 2 Westside Expressway? 3 A. Well, I can tell you this, 4 Mr. Dueffert. Sea World and Orlando, for example, 5 would never have been built, unless Disney World 6 had been built. 7 Q. Sir? 8 A. It isn't a stand-alone -- 9 Q. I'm not asking about Orlando. Can we 10 turn back to T7143, please, which is the 1986 11 Love & Dugger report? If you turn to Page 36, 12 towards the bottom -- are you with me? 13 A. Impact of Sea World. 14 Q. I believe it it's the second full 15 sentence. Could you read it out loud for the 16 record? 17 A. Where we start "upon its completion"? 18 Q. That's a good sentence, yes. 19 A. "Upon its completion, Sea World is 20 projected to attract 3 million tourists a year, 21 making it the largest theme park in the state." 22 Q. Did you focus on that sentence as you 8036 1 were looking at the reasonableness of whether Sea 2 World would, in fact, impact values in the area? 3 A. No. I take it for what it says. It 4 will be the largest theme park in the state. 5 Q. Is it your understanding that the 6 developments around Sea World, the land was 7 largely raw land between Loop 1604 and Loop 410 8 along the proposed Westside Expressway? 9 A. My understanding, there was a great 10 deal of undeveloped land, I believe, some 11 9,000 acres in that particular direction of town. 12 Q. If you're having 3 million visitors a 13 year attending the proposed Sea World site, they 14 are going to have to get there, at least many of 15 them, from the downtown area. Right? 16 A. I don't know that to be true. 17 Q. Would the fact that 3 million tourists 18 a year were visiting the neighborhood of Sea World 19 suggest that some reasonable developers might 20 think that that part of town would support gas 21 stations and motels and perhaps some retail? 22 A. Well, I'm sure developers would think 8037 1 that it would support something. 2 Q. Developers who would be willing to put 3 some of their own money on the line? 4 A. They might even actually come up with 5 some money and put it down. 6 Q. Would you say that the people who 7 invested in developments near Sea World were being 8 foolish with their money? 9 MR. LEIMAN: I'm going to object to the 10 question. There was no testimony as to whether or 11 not the people that might have invested in 12 surrounding areas around Park 410 were foolish or 13 not foolish or whether it was a good investment or 14 otherwise. 15 THE COURT: Well, that's the question. 16 Let's have the witness' answer. 17 A. Well, I think if they paid too much, 18 they were foolish. 19 Q. (BY MR. DUEFFERT) I didn't have that 20 in my question. 21 MR. DUEFFERT: Could you read back my 22 question, please? 8038 1 2 (Whereupon the requested portion 3 was read back by the reporter.) 4 5 A. I don't know. I don't know how much 6 they paid. 7 Q. (BY MR. DUEFFERT) Sir, do you agree 8 that it would be reasonable to expect that even in 9 light of soft market conditions in San Antonio, 10 substantial development would occur in the 11 vicinity of a theme park that was expected to draw 12 3 million visitors a year? 13 A. Could you repeat the question for me, 14 please? 15 THE COURT: Reporter, could you read 16 the question back? 17 18 (Whereupon the requested portion 19 was read back by the reporter.) 20 21 A. I don't see development in the face of 22 the oversupply going on as being necessarily a 8039 1 reasonable thing to have done. 2 Q. (BY MR. DUEFFERT) I'm not asking 3 about not necessarily reasonable. Could you -- do 4 you agree that it would be reasonable to expect 5 that despite soft market conditions, substantial 6 development would occur in the vicinity of a theme 7 park that was expected to draw 3 million visitors 8 a year? 9 MR. LEIMAN: Asked and answered, Your 10 Honor. He already has an answer to the question. 11 He's arguing with the witness and wants a 12 different answer. 13 MR. DUEFFERT: I don't think he 14 answered my question. 15 THE COURT: All right. Can you answer 16 it again? 17 A. I would anticipate that some foolish 18 development might occur, yes. 19 Q. (BY MR. DUEFFERT) Did you ever hear 20 of the Hill Country Hyatt? 21 A. No. 22 Q. This, I think, is the aerial photo you 8040 1 referred to a couple minutes ago. It is marked 2 but not admitted as Exhibit B3851. Perhaps it 3 might refresh your memory. 4 Do you know if there is a large hotel 5 operation immediately across the Westside 6 Expressway from Sea World called Hyatt Regency 7 Hill Country Resort? 8 A. I don't know anything about it. 9 Q. And you don't know -- 10 A. And if it was there on the date the 11 appraisal was written, it's not clear from either 12 of the appraisals or from the market study that 13 that facility was there. 14 Q. You don't know when it was built? 15 A. No. 16 Q. You don't know how successful it is? 17 A. I do not. 18 Q. Is it your -- is it your opinion that 19 if that facility was, in fact, built in the late 20 1980s, its developers were being foolish? 21 A. It might be questionable. It's my 22 understanding that the Sea World San Antonio 8041 1 property has had some financial difficulties. 2 Q. I'm asking about the developers of the 3 Hill Country Hyatt. Were they being foolish with 4 their money? 5 A. I don't know what they had in mind. 6 Q. You also used the term in your 7 testimony last week, "no man's land." Right? 8 A. Yes, that's true. 9 Q. And I think the thrust of your 10 testimony is that major corners, major 11 intersections of freeways and highways are often 12 bad because they are just too busy. Right? 13 A. Frequently, there is too much traffic, 14 that's correct. Congestion. 15 Q. Hypothetical for you. I drive around 16 Houston's loop, as I did over the weekend, and I 17 noted that wherever the Loop joins up with a 18 significant highway, I don't see warehouses. I 19 see retail. I see gas stations. I see shopping 20 malls. Am I to assume that all of the developers 21 of those properties were foolish? 22 A. Well, I see a lot of questionable real 8042 1 estate, too, as I drive around the expressway 2 system. Some of it's good and some of it's 3 indifferent. I don't know whether they are 4 foolish or not. 5 Q. So, you would suggest to me that I 6 should assume that most of the investors in all of 7 those projects are throwing away their money? 8 A. I don't know whether they are throwing 9 away their money or not. 10 Q. Is it your view that no reasonable 11 developer would construct a multi-use development 12 at a site like Norwood or Park 410 because there 13 is just too much traffic? 14 A. Well, I think that would be an 15 important consideration to look at because of 16 known problems with those types of properties. 17 Q. But you don't have an opinion. Right? 18 A. Relative to what? 19 Q. You say it raises a consideration. 20 You're not here to talk about raising 21 considerations. Right? You're here to testify as 22 to what you know? 8043 1 A. A developer -- a reasonable developer 2 would proceed very cautiously with the development 3 of a property of this type. 4 Q. Would want to do due diligence? 5 A. A lot of due diligence and would want 6 to phase the project, probably, because of its 7 size. 8 Q. And is that view based on your reading 9 of Memorandum R-41B? 10 A. I think it relates to prudent 11 underwriting. 12 Q. But you haven't seen the loan files in 13 this case. Right? 14 A. I've already testified to that effect. 15 Q. You criticize Mr. Bolin's report, I 16 think, for failing to anticipate certain changes 17 to US Highway 183, or was it the AAA report that 18 Mr. Minch had? 19 A. No. The study -- the market study that 20 we have on it, mentions -- 21 Q. The Burke, O'Hara? 22 A. The Burke, O'Hara study mentions the 8044 1 fact that we have a freeway or likelihood that 183 2 is going to be converted into a limited-access 3 highway. And our appraiser, the Rex Bolin 4 appraisal says within the body of the appraisal 5 that he's relied upon the data contained in that 6 study, even incorporated -- went so far as to 7 incorporate portions of the report, the market 8 report, in his appraisal. 9 Q. Did those proposed changes involve curb 10 cuts? 11 A. I don't believe it's defined. Curb 12 cuts from the expressway? 13 Q. I'm just asking because we've had some 14 questions in this courtroom about curb cuts, and 15 I've never been able to quite figure out where 16 that was coming from. 17 Do I understand that you fault 18 Mr. Dugger and Mr. Schulz for anticipating the 19 construction of a four-lane expressway or at least 20 four lanes of access roads in San Antonio but then 21 you fault Mr. Bolin for failing to anticipate 22 whatever changes were going to be made in US 8045 1 Highway 183? 2 A. I think it reflects on -- 183 reflects 3 on the future utility of the property. Certainly 4 you'd want to look at it. If we're projecting 5 that go we're going to have access for certain 6 commercial uses and then we're perhaps going to 7 lose that access, that would be an important 8 consideration. 9 Q. But the Westside Expressway would not 10 be an important consideration with Park 410? 11 A. The Westside Expressway is an important 12 consideration. Again, going back to loan 13 underwriting, however, from the lender's 14 perspective of what information he needs to make a 15 rational credit decision here, he needs to proceed 16 very cautiously because until that expressway is 17 built, an important component that might affect 18 the value of that property is lacking. 19 Q. I understand that. But you're here to 20 talk about the appraisal reports. Right? 21 A. That's true, yes. 22 Q. Do you know if United or its borrowers 8046 1 evaluated whether the Norwood property would 2 become a no man's land suitable only for 3 warehouses because there were just too many cars 4 there? 5 A. I believe I've stated I have not 6 reviewed the loan file. 7 Q. Could we have Exhibit B564, please? 8 Sir, for the record, would you identify this 9 document? 10 A. It is a traffic impact analysis for 11 Deauville, August 1985. 12 MR. DUEFFERT: Your Honor, I move 13 Exhibit B564 into evidence. 14 MR. LEIMAN: Your Honor, I think that 15 the witness should -- additional foundation should 16 be laid in connection with this because I don't 17 know that the witness has ever seen this before. 18 MR. DUEFFERT: Your Honor, this is 19 outrageous. We are being accused of insufficient 20 due diligence and insufficient underwriting. And 21 we have a witness who comes in here and talks 22 about no man's land. I then present the witness 8047 1 with documents from the files that show that this 2 property was evaluated for traffic. Mr. Leiman's 3 putting in articles from newspapers, and I want to 4 put in a document that evidences thought about 5 this property. 6 MR. LEIMAN: If Mr. Dueffert is 7 finished, Your Honor, may I respond? 8 MR. KEETON: Your Honor, could we ask 9 Mr. Leiman to speak a little bit louder? 10 MR. LEIMAN: May I respond, Your Honor? 11 THE COURT: Yes, you may. 12 MR. LEIMAN: Mr. Lovell has testified 13 that the purpose of his review of these appraisal 14 documents was to determine whether they were 15 self-contained and in and of themselves would have 16 provided adequate underwriting tools for USAT. He 17 has not stated he has looked at every shred of 18 evidence that the underwriters considered. He has 19 not stated that he has looked at every conceivable 20 document that might have been available. And one 21 of the reasons he would not have seen this 22 document was because it was not attached, Your 8048 1 Honor, to the appraisal document itself, which 2 indicates further it wasn't self-contained. 3 So, the fact that Mr. Dueffert is 4 complaining about the fact that I have some 5 objections to failure to lay some foundation for 6 this as to whether or not he's an appropriate 7 sponsor for the document, to me seems somewhat 8 disingenuous. 9 MR. DUEFFERT: Your Honor, we're not 10 talking about handwritten notes. We're talking 11 about an integrated document that reflects due 12 diligence that was done. 13 MR. LEIMAN: Your Honor, there is no 14 indication what file this came from. There is no 15 suggestion that it was ever used by anybody. For 16 all I know, it may be a new document with a new 17 page. 18 MR. DUEFFERT: Your Honor, the Bates 19 stamp reflects, as I understand it, that it was 20 produced by the parties. I think, to my 21 understanding, OTS has a copy, as they have the 22 originals of most of these documents. And it's a 8049 1 box labeled "Norwood." 2 MR. LEIMAN: Your Honor, might I add 3 that this, as we saw earlier in this case, is the 4 mark that was provided by the respondents in their 5 imaging of this or their so-called imaging. Where 6 they got this document, how these numbers appeared 7 on here, since they did not provide us with a copy 8 of their diskette that contained these documents, 9 we have no way of knowing. If Mr. Dueffert would 10 like to proffer the document and ask questions, 11 that's appropriate. But I don't believe that this 12 is a proper sponsor for this document. 13 MR. EISENHART: Your Honor, the bar 14 code label would indicate that it came from the 15 OTS files. 16 MR. LEIMAN: That's what Mr. Eisenhart 17 is suggesting, and I don't necessarily agree with 18 it. I don't have any reason to think that that's 19 true. 20 THE COURT: Well, the witness hasn't 21 seen it; and he can't testify as to who did see 22 it. You're representing that it came from the 8050 1 loan files; is that right? 2 MR. DUEFFERT: As I understand it, Your 3 Honor. The problem is we have a great many 4 documents that OTS has custody of, and they are in 5 boxes. And some things have letters on top. But 6 a lot of due diligence documents don't have 7 enclosures. That's not the way I did things. So, 8 we see these documents and, there is a room full 9 of this kind of stuff. 10 MR. LEIMAN: Exactly the point, Your 11 Honor. There is a room full of this kind of 12 stuff. Whether USAT ever considered this 13 document, whether any appraiser ever looked at it, 14 there is no way of knowing. 15 MR. DUEFFERT: Your Honor, "this stuff" 16 is a traffic impact analysis for the property 17 that's at issue. 18 THE COURT: Well, I don't think this 19 witness can help us. 20 MR. DUEFFERT: I'll withdraw this 21 exhibit for this witness. 22 Q. (BY MR. DUEFFERT) I will ask you, 8051 1 Mr. Lovell: Before you ventured your opinions 2 about no man's land or no man's lands, did you ask 3 Mr. Leiman or Mr. Schwartz or any of the other 4 enforcement attorneys if any due diligence or 5 studies had been done on that subject? 6 A. No, I did not. 7 Q. And they didn't provide you with such 8 information? 9 A. No. I have never seen this before. 10 Q. And if I were to show you a deed, land 11 deed, regarding the Westside Expressway that is 12 taken from the Park 410 closing binder, you 13 wouldn't have any -- you wouldn't have seen that 14 either. Right? 15 A. That's correct. 16 Q. And although you are presenting 17 testimony as an underwriting specialist, you 18 wouldn't testify in this courtroom as to the 19 significance of such a document? 20 A. I wouldn't know what the significance 21 is without taking it into context of all the other 22 facts that may be present. 8052 1 Q. In talking about a no man's land, are 2 you really challenging the highest and best use 3 conclusions in those appraisals? 4 A. Well, I think it obviously enters into 5 the highest and best use analysis. Highest and 6 best use is, you know, sort of the heart and soul 7 of the appraisal process. 8 Q. So, are you saying the three or four 9 appraisers that you've looked at were all wrong in 10 their highest and best use conclusions? 11 A. I think they were overly optimistic 12 about this property. 13 Q. Are you challenging whether they were 14 wrong in their highest and best use conclusions? 15 A. I don't believe their best use 16 conclusions were supported. 17 Q. So, that means they are wrong? 18 A. I don't believe they made -- they 19 created or evaluated and presented enough 20 information to make it clear that the bases that 21 they came up with was a rational one. 22 Q. They didn't make their case to you? 8053 1 A. Yeah. They didn't make the case. 2 Q. And do you know if there were other 3 appraisals of the property in the 1980s that you 4 haven't looked at? 5 A. I am not aware of other appraisals. 6 That's not to say they probably don't exist. 7 Q. Did you seek them out to see what their 8 highest and best use conclusions were? 9 A. I have not looked at them, if they do, 10 indeed, exist. 11 Q. Well, if, indeed, they do exist, would 12 you be surprised if I told you that there were 13 others out there that agreed with the highest and 14 best use conclusions of the appraisals you looked 15 at? 16 MR. LEIMAN: Your Honor, if 17 Mr. Dueffert would like to show the witness some 18 additional appraisals, that would be fine. But in 19 this case, he's giving him an incomplete 20 hypothetical. 21 THE COURT: Well, he can answer that 22 question without having another appraisal. 8054 1 A. I guess the source of the other 2 appraisals, you know, were they part of the loan 3 file? 4 Q. (BY MR. DUEFFERT) All I'm saying is 5 as an expert -- I'm just trying to find out the 6 nature of your opinion. If I were to stack up a 7 few more appraisal reports in front of you that 8 reached similar highest and best use conclusions, 9 would that influence your testimony? 10 A. Not if I didn't see anything better 11 documented and supported than I've seen thus far. 12 Q. And the four appraisals you've looked 13 at all were not well documented in that regard? 14 At least not well enough? 15 A. Not what I would consider well enough 16 for the scale of property we're talking about. 17 Q. And if different appraisers looked at 18 the same properties and reached similar value 19 conclusions, would that signify anything to you? 20 A. No. 21 MR. DUEFFERT: I would say I have about 22 half an hour more. 8055 1 THE COURT: All right. We'll adjourn 2 until 1:30. 3 4 (Luncheon recess taken at 12:05 p.m.) 5 6 THE COURT: Be seated, please. Okay. 7 We'll be back on the record. 8 Mr. Dueffert, you may continue. 9 MR. DUEFFERT: Yes, Your Honor. 10 Actually, I have no further questions for this 11 witness. 12 MR. BLANKENSTEIN: Your Honor, I have 13 some cross-examination. 14 THE COURT: All right. 15 16 CROSS-EXAMINATION 17 18 (1:35 p.m.) 19 Q. (BY MR. BLANKENSTEIN) Good afternoon 20 Mr. Lovell. My name is Paul Blankenstein, and I 21 represent Jenard Gross, one of the respondents in 22 this case. 8056 1 Although we've been together in the 2 courtroom for a few days now, Mr. Lovell, we've 3 never really met or spoken before now; isn't that 4 right? 5 A. Not that I'm aware of. 6 Q. I wasn't there when Mr. Dueffert 7 deposed you in this case about a month ago on 8 October 21st; isn't that right? 9 A. That's correct. 10 Q. Did you make an effort during that 11 deposition to be careful in answering 12 Mr. Dueffert's questions? 13 A. I certainly tried to be. 14 Q. Did you try to tell the truth as best 15 as you could at the time? 16 A. I tried to be responsive to the 17 questions and tell what I knew of the subject. 18 Q. Well, did you try to tell the truth, 19 Mr. Lovell? 20 A. Yes. 21 Q. Were you also careful in answering the 22 questions posed to you during your testimony in 8057 1 this courtroom? 2 A. I think I was reasonably careful, yes. 3 Q. Did you also do your best to tell the 4 truth during your testimony? 5 A. Yes. 6 Q. The reason I ask, Mr. Lovell, is that 7 I'm confused about your testimony concerning the 8 general awareness in the appraisal industry of 9 R-41B during the 1982 to 1986 period. If you 10 remember, at your deposition, you and Mr. Dueffert 11 engaged in the following exchange: Question, "So, 12 to your knowledge, there was no difference in the 13 understanding of the appraisal industry of R-41B 14 between, say, 1982 and 1986?" 15 Answer, "I think there was a general 16 unawareness of the memorandum." 17 Question, "When?" 18 Answer, "From 1982." 19 Question, "Until?" 20 "Even as late as 1986." 21 Do you remember that? 22 A. Yes, I do. 8058 1 Q. Do you remember yesterday when 2 Mr. Dueffert asked you: "So, you're saying that 3 even after that date in 1982, there was a general 4 awareness of R-41B in the appraisal industry" and 5 you answered "You bet you"? 6 Do you remember that? 7 A. I think that was in the context of 8 something that went much further than that. 9 Q. The question, "So, you're saying after 10 that date in 1982, there was general awareness of 11 R-41B in the appraisal industry?" 12 "You bet you." 13 Do you remember that testimony? 14 A. I think the reference conversation 15 pertained to my discussion of the appraised equity 16 capital regulation that -- and I was proceeding 17 from my general awareness that it was either late 18 '82, '83. But it was after that, I believe, I 19 explained at some depth and detail that R-41B 20 became widely aware of its existence. 21 Q. So, it was after October of 1982 that 22 there was a general awareness of R-41B in the 8059 1 appraisal industry? 2 A. Well, it's either '82, '83. I don't 3 remember the precise date on the appraised equity 4 capital. 5 Q. At your deposition, you said that there 6 wasn't a general awareness, that there was a 7 general unawareness until 1986; is that right? We 8 just read that. Do you want me to read it to you 9 again? 10 A. I guess I'm trying to understand the 11 significance of -- 12 Q. Can you answer my question? You said 13 at your deposition, correct, that there was a 14 general unawareness of R-41B in the appraisal 15 industry even as late as 1986? 16 A. There were some appraisers who clearly 17 were unaware of R-41B as late as '86. I've said 18 that. 19 Q. There was a general unawareness; isn't 20 that right? That's what you said. You didn't say 21 "some." You said there was a general unawareness. 22 A. What does "general" mean? 8060 1 MR. LEIMAN: Your Honor, perhaps we can 2 get a page reference. 3 MR. BLANKENSTEIN: It's Page 42 of the 4 deposition, Lines 8 through 16. 5 Q. (BY MR. BLANKENSTEIN) Were you 6 telling the truth at your deposition when you said 7 that there was a general unawareness in the 8 appraisal industry as late as 1986 of R-41B? 9 A. We have a continuum of awareness that 10 occurred from the release of R-41B until it was 11 discontinued in 1986. There certainly was a key 12 period there following the appraised equity 13 capital regulation, which I believe is what I've 14 testified to. 15 Q. Mr. Lovell, maybe my question wasn't 16 clear. 17 Were you telling the truth at your 18 deposition when you said that there was a general 19 unawareness of R-41B as late as 1986? Is that 20 question clear to you? 21 A. There was unawareness. 22 Q. Is that question clear to you? 8061 1 A. There was some unawareness. 2 Q. A general unawareness, correct? 3 MR. LEIMAN: Mr. Blankenstein, why 4 don't you ask him what he meant by "general 5 unawareness" rather than trying to trap him into 6 some kind of untruth? 7 Q. (BY MR. BLANKENSTEIN) When you said 8 there was a general unawareness in -- at your 9 deposition -- as late as 1986 and you testified 10 yesterday that there was a general awareness in 11 1982 and 1983, did you change the definition of 12 awareness in answering those questions? 13 A. No. 14 Q. You used the same definition. Right? 15 Now, can you go back to my question? 16 A. Uh-huh. (Witness nods head 17 affirmatively.) 18 Q. Can you tell me whether you were acting 19 carefully, were you speaking carefully at your 20 deposition when you said that as late as 1986, 21 there was a general unawareness in the appraisal 22 industry of R-41B? Were you speaking carefully? 8062 1 A. I think that I covered this whole 2 subject of the awareness of R-41B and its 3 evolution at considerable depth and detail. 4 Q. Can you answer my question? Can you? 5 Is it possible for you to tell me whether you were 6 speaking carefully or not at that time when you 7 made those statements? 8 A. I think I was speaking carefully, yes. 9 Q. Were you speaking carefully yesterday 10 when you said that there was a general awareness 11 of R-41B in the appraisal industry in '82 or '83? 12 Were you speaking carefully then? 13 A. Well, you have to recognize the context 14 in which all of these comments are made. I'm 15 trying to -- 16 Q. Mr. Lovell, can you answer my question? 17 A. Pulling out a statement of the middle 18 of an overall discussion seems -- 19 Q. Is it possible -- 20 A. -- cumbersome to me. 21 Q. Is it possible Mr. Lovell, for you to 22 answer my question? 8063 1 A. I don't think it is. 2 Q. Okay. Were you telling the truth 3 yesterday when you testified -- 4 A. I was telling the truth, yes. 5 Q. So, which time were you telling the 6 truth? At the deposition or yesterday? 7 A. I was telling the truth both times. 8 Q. Okay. Would you agree with me, 9 Mr. Lovell -- when you say you were telling the 10 truth both times, did you consider as you 11 testified yesterday that you were just answering 12 the same question in different ways; is that 13 right? 14 A. There is certainly different ways of 15 looking at the same problem. 16 Q. So, a "yes" and a "no" answer are just 17 answering the same questions in different ways; is 18 that right? 19 A. Well, it depends on how the question is 20 phrased. 21 Q. Now, would you agree with me, 22 Mr. Lovell, that if the appraisal industry was 8064 1 itself generally unaware of R-41B during the 1985 2 to 1986 period, it would be difficult for you to 3 offer an opinion that non-appraisers, like my 4 client, Jenard Gross, and the other respondents 5 engaged in unsafe and unsound lending practices to 6 the extent they may have relied on an appraisal 7 prepared by a professional appraiser that you now, 8 some 10 years later, conclude in your expert 9 opinion didn't conform to the standards of R-41B? 10 Would you agree with me? 11 A. They don't conform with R-41B. 12 Q. Would you agree with me that it would 13 be difficult for you to have an opinion that my 14 client, Jenard Gross, engaged in an unsafe and 15 unsound practice? 16 A. I don't know your client. 17 Q. Let me try the question again. 18 Would you agree with me Mr. Lovell, 19 that if the appraisal industry was itself 20 generally unaware of R-41B during the 1985 to 1986 21 period, it would be difficult for you to offer an 22 opinion that non-appraisers, like my client, 8065 1 Jenard Gross, engaged in an unsafe and unsound 2 practice to the extent that he may have relied on 3 an appraisal prepared by a professional appraiser 4 that you, some 10 years after the fact, have 5 concluded didn't conform to the standards of 6 R-41B? 7 A. I don't know what role your client 8 played in any of this. 9 Q. My client was a member of the senior 10 loan committee of USAT, and he was involved in 11 both the Park 410 and Norwood loans. 12 With that information, can you answer 13 my question? 14 A. Did he rely on these appraisal reports? 15 Q. Now, you know -- one of the few 16 benefits of being a lawyer is that you get to ask 17 the questions. So, can you answer my questions? 18 Those are our roles. Okay? Is that a fair way to 19 proceed? 20 A. It certainly is. I believe that same 21 issue came up, it seems like, yesterday. 22 Q. Now, can you deal with my question? Is 8066 1 that okay? 2 A. I will try to. 3 Q. Okay. Do you understand it? 4 A. Perhaps you need to repeat it for me. 5 Q. Okay. Let me see if I can do it a 6 third time for you. 7 Would you agree, Mr. Lovell, that if 8 the appraisal industry itself was generally 9 unaware of R-41B during the 1985 to 1986 time 10 period, it would be difficult for you to offer an 11 opinion that a non-appraiser like my client, 12 Jenard Gross, who served on the senior loan 13 committee of USAT, engaged in an unsafe and 14 unsound lending practice to the extent that he may 15 have relied on that appraisal or an appraisal 16 prepared by a professional appraiser that you, 17 some 10 years later, have concluded didn't conform 18 to the requirements of R-41B? 19 A. You've worn me out, the question is so 20 long. I'm not sure what to answer here. I would 21 say this, though: That your client, if he was, 22 indeed, a member of the senior loan committee that 8067 1 was involved with whatever loans were granted on 2 this property, he can't advocate his 3 responsibility to be sure that the appraisals that 4 he's relying upon adequately meet the lending 5 institution's needs. 6 Q. That's not the question I asked you. I 7 take it you can't answer my question; is that 8 right? 9 A. I'm not sure where to begin or that I 10 understand it properly, perhaps. 11 Q. Can you start by assuming that the 12 appraisal industry was unaware of the -- generally 13 unaware of R-41B during 1985 and 1986? Can you 14 assume that? 15 A. No, I can't start there. 16 Q. I would like you to assume that. 17 You're an expert witness. Can you assume that? 18 A. If you wish. 19 Q. Thank you. Assuming that, would it be 20 difficult for you to offer an opinion as an expert 21 witness that my client, Jenard Gross, one of the 22 respondents in this case, someone whose testimony 8068 1 you've been called as a witness in connection with 2 the claims by your agency against Mr. Gross -- do 3 you understand that? 4 A. I have no idea what the charges are 5 against Mr. Gross. 6 Q. You haven't even read the notice of 7 charges; is that right? 8 A. I have not. 9 Q. You have no interest in the notice of 10 charges? 11 A. I have no interest in the case beyond 12 what I was asked to address here. 13 Q. You've come here to present testimony 14 without any concern about what the context of that 15 testimony is; is that right? 16 A. I'm here to answer questions. 17 Q. You don't -- is that right? You don't 18 know what context your testimony is being put to? 19 A. I'm not aware of the strategy for the 20 case or any of this. 21 Q. You're not aware of the nature of the 22 claims? 8069 1 A. No. 2 Q. You're not aware that OTS is trying to 3 assert liability of tens of millions of dollars 4 against the respondents based, in part, on your 5 testimony; is that right? 6 A. I don't know what the claims are. 7 Q. And that was not a matter of interest 8 to you; is that right? 9 A. No. 10 Q. You're ready to come here and testify 11 without particular care and you come here to 12 testify without regard to the consequences of your 13 testimony; is that right? 14 MR. LEIMAN: Your Honor, 15 Mr. Blankenstein has had an opportunity to ask 16 questions of this witness that relate to the scope 17 of this witness' review and expertise in the case. 18 Whether or not he read all of the enforcement 19 documents that pertain to the notice of charges, 20 whether or not Mr. Lovell has gone ahead and 21 committed to memory each and every deposition 22 answer that he's provided is a matter of -- I 8070 1 don't think any large consequence. Now, 2 Mister -- 3 MR. BLANKENSTEIN: I'll move on. 4 MR. LEIMAN: Thank you, 5 Mr. Blankenstein. 6 Q. (BY MR. BLANKENSTEIN) Did you change 7 your deposition testimony with regard to R-41B and 8 the general awareness in the appraisal industry 9 because you realized that it wouldn't be helpful 10 to OTS' case against the respondents if the 11 requirements of R-41B were not well known in the 12 appraisal community in the 1985 to 1986 time 13 period when the Park 410 and Norwood loans were 14 under consideration by USAT? 15 MR. LEIMAN: Your Honor, I object to 16 the question. He's stated he doesn't have a 17 familiarity with the particulars of the case. To 18 incorporate that into the same question is just a 19 continuation of his last question. If he'd like 20 to take -- 21 THE COURT: I think the last question 22 was appropriate cross-examination. 8071 1 A. There has been no attempt on their part 2 to influence me. 3 Q. (BY MR. BLANKENSTEIN) I asked 4 whether -- did you change your testimony because 5 you realized -- 6 A. I'm not here to advocate whatever the 7 case is. 8 Q. Can you answer my question? Did you 9 change your testimony because you realized it 10 would not be helpful to OTS' case against the 11 respondents if the requirements of R-41B were not 12 well known in the appraisal community in the 1986 13 time period when the Park 410 and Norwood loans 14 were under consideration by USAT? 15 A. I do not know whether it's helpful or 16 not helpful to their case. 17 Q. Did you learn anything new about R-41B 18 between the time of your deposition and the time 19 you testified in court? 20 A. Have I learned anything new about 21 R-41B? 22 Q. Right. 8072 1 A. No, not that I'm -- that comes to mind. 2 Q. So, you had the same understanding of 3 the awareness in the appraisal industry of R-41B 4 at the time of your deposition as you did when you 5 testified yesterday about that general awareness; 6 is that right? 7 A. I think I've been responsive to the 8 questions and answered them as best I can. 9 Q. Let's move on, Mr. Lovell, to some 10 testimony that you gave on November 14th when you 11 were examined by Mr. Leiman. If I remember 12 correctly, Mr. Lovell, you testified that the 13 lending -- underwriting decision on the real 14 estate loans required some analysis of three broad 15 categories of risk: Borrower risk, property risk, 16 and market risk? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Is that right? 20 A. (Witness nods head affirmatively.) 21 Q. You need to respond audibly. 22 A. Yes. 8073 1 Q. I believe you also testified that while 2 an appraisal is, by its very nature, incapable of 3 addressing borrower risk, it provides key 4 information relative to the other two categories 5 of risk you identified: Property risk and market 6 risk? 7 A. That's correct. 8 Q. In fact, I think you testified last 9 week that the appraisal is so crucial to the 10 proper underwriting of a real estate loan since it 11 provides critical primary information relative to 12 those two risks; is that right? 13 A. Yes. It addresses critical issues 14 relative to those risks. 15 Q. In fact, in your view, the value the 16 appraisal assigns to the collateral is not really 17 the issue and that the part of the appraisal that 18 recites the value of the collateral is the least 19 important piece of information that the lender 20 needs when deciding whether or not to make a loan; 21 is that right? 22 A. I've written that. In fact, you've 8074 1 been supplied with documents of -- articles that 2 I've written that makes that point because the 3 value estimate is frequently maybe the least 4 important number to focus on. 5 Q. In your opinion, the appraisal is such 6 a critical element of the underwriting process 7 that it would be an unsafe and unsound practice 8 for a savings association to approve a real estate 9 loan without first having in hand a written 10 appraisal; is that right? 11 A. Yes, I think so. 12 Q. And that would be true in your opinion 13 without regard to the quality of the underwriting 14 conducted by the savings association; is that 15 right? 16 A. If we assume that an appraisal is a 17 critical document that's necessary to properly 18 underwrite a loan, then not having that particular 19 document available is an information source to 20 evaluate things like ability of the property to 21 repay the scheduled debt service that's being 22 planned. I mean, minus that information, how can 8075 1 you make an intelligent judgment? I don't know 2 how. 3 Q. The thrift could have done a 4 superlative job in gathering all of the pertinent 5 data and analyzing the facts relative to the 6 property and market risks. And it would still be 7 your opinion that the association would violate 8 safety and soundness principles if it approved the 9 loan without first having a written appraisal in 10 hand; is that right? 11 A. They need to have the appraisal. 12 Q. They couldn't approve the loan without 13 first having the appraisal on hand; isn't that 14 right? 15 A. No, they would not approve it. And 16 it's considered unsafe and unsound practice. Even 17 if the loan commitment was issued, it still would 18 have to be -- a commitment would be issued subject 19 to the acceptance of an acceptable appraisal 20 report that meets the institution's needs to 21 finalize it. 22 Q. Do they first -- 8076 1 A. So, yeah, you have to have the 2 appraisal first before it becomes -- 3 Q. You have to have the appraisal? 4 A. Yes. That's been OTS' and the Federal 5 Bank Board's position over the years. 6 Q. Are you sure about that? 7 A. Well, as sure as I'm aware of it for 8 the almost 20 years I've been there. 9 Q. Now, if I remember right, you never 10 reviewed USAT's loan files with regard to either 11 the Park 410 or the Norwood loans, correct? 12 A. I have not reviewed the loan files. 13 Q. So, you don't know what information was 14 available to USAT when it did its underwriting of 15 those loans; isn't that right? 16 A. That's true. 17 Q. For all you know, the material in 18 USAT's files that you haven't reviewed may have 19 fully supported the decision to make both the 20 Norwood loan and the Park 410 loan; isn't that 21 correct? 22 A. It's possible that they have other 8077 1 appraisals that were -- addressed the needs that 2 they had. It's possible, I suppose. I can only 3 comment on what I've read. 4 Q. Now, let me try that again. For all 5 you know, the material in USAT's files that you 6 haven't looked at may have fully supported the 7 decisions to make the Park 410 and Norwood loans, 8 correct? 9 A. I do not know what is in the USAT's 10 loan files. 11 Q. Will you admit to the possibility that 12 the information in there could have fully 13 supported both of those loans? 14 A. Theoretically, there could be anything 15 in the file. 16 Q. So, the answer to my question is "yes"? 17 A. Theoretically, there could be anything 18 in the file. 19 Q. And you don't know what's in the file. 20 So, the possibility exists that information 21 supportive of both loans was in the file, correct? 22 A. It's theoretically possible. 8078 1 Q. Would it be fair to say that your 2 opinions that you expressed during your testimony 3 about USAT's underwriting practices with respect 4 to the Park 410 and Norwood loans were based on 5 your views as to the role of an appraisal in the 6 underwriting process? 7 A. I was questioned relative to the role 8 of appraisals in the underwriting process. 9 Q. It's based on the appraisal; isn't that 10 right? Your opinions that you expressed are based 11 on the quality appraisals; isn't that right? 12 A. I believe my comment was -- and I'm 13 sure you'll refresh my memory. But I believe I've 14 stated that if these appraisals were, indeed, the 15 basis for it, then it would have been unsafe and 16 unsound practice. 17 Q. And you believe that a thrift can't 18 undertake its separate underwriting of a loan 19 without the benefit of an appraisal; isn't that 20 right? 21 A. Can't complete it. 22 Q. It can't even undertake -- undertake 8079 1 the primary underwriting; isn't that right? 2 A. I don't understand what "primary 3 underwriting" means. 4 Q. Isn't it true that non-financial 5 institutions often make extremely large commercial 6 real estate loans without the benefit of obtaining 7 an appraisal? 8 MR. LEIMAN: Your Honor, I object to 9 the relevance of the question as to what none -- 10 regarding the loans in this context. I'm not sure 11 what the relevance is or what his qualification 12 stands for. 13 MR. BLANKENSTEIN: He's made -- 14 THE COURT: I'll deny the objection. 15 MR. BLANKENSTEIN: Thank you. 16 THE COURT: If you know, you may 17 answer. 18 A. I don't think I understand what 19 non-financial institutions we're talking about 20 here. 21 Q. (BY MR. BLANKENSTEIN) Insurance 22 companies. Is an insurance company a 8080 1 non-financial institution? 2 A. If that's how you're defining it, sure. 3 Q. Do insurance companies often make real 4 estate loans based on their own underwriting 5 without ever obtaining an appraisal? 6 A. Oh, it's common practice in the 7 insurance industry to obtain an appraisal as a 8 part of their underwriting practice. 9 Q. So, your testimony is that it's common 10 practice; is that right? 11 A. For insurance companies, sure. 12 Q. Do you know whether Mass Mutual Life 13 Insurance Company requires an appraisal in 14 connection with its real estate lending 15 activities? 16 A. I'm unfamiliar with Mass Mutual's real 17 estate activities. 18 Q. Do you know whether Nationwide 19 Insurance requires or obtains an appraisal in 20 connection with its real estate loan activities? 21 A. I'm not familiar with their particular 22 operation either. 8081 1 Q. But how about American General? 2 A. No. 3 Q. CIGNA? 4 A. No. 5 Q. UNIM Insurance? 6 A. No. 7 Q. Berkshire Life? 8 A. No. 9 Q. Great Northern Annuity? 10 A. No. 11 Q. General American Insurance? 12 A. No. 13 Q. All American Insurance? 14 A. No. 15 Q. Ohio Insurance? 16 A. No. 17 Q. Would you be surprised to learn that 18 every one of those insurance companies made real 19 estate loans without the benefit of a third-party 20 appraisal? 21 MR. LEIMAN: Your Honor, I object to 22 the question. There isn't a time frame. And as 8082 1 to whether or not they ever made a loan in 2 connection with that, I don't know what the 3 relevance is again. 4 THE COURT: Denied. 5 Q. (BY MR. BLANKENSTEIN) Would you be 6 surprised to learn -- strike that. 7 Would you be surprised if every one of 8 those insurance companies made real estate loans 9 without the benefit of a third-party appraisal? 10 A. The older I get, nothing surprises me 11 anymore. 12 Q. Isn't it true, Mr. Lovell, that 13 although savings associations were and still are 14 required to obtain an appraisal for real estate 15 loans, the appraisal is a supplementary tool to 16 the principal underwriting process that is being 17 adopted by the thrift itself and that the 18 appraisal serves, for the most part, to confirm 19 the value of the collateral that's the subject of 20 the real estate loan? 21 A. Would you repeat that question again? 22 Q. Sure. Let me -- sure I can. 8083 1 Thrifts are required to obtain an 2 appraisal; isn't that right? 3 A. That's correct. 4 Q. But isn't the appraisal a supplementary 5 tool for -- in the underwriting process? 6 A. No. In fact, it's now a mandatory 7 requirement of commercial banks. 8 Q. That's not what I asked you. Isn't the 9 principal obligation for underwriting on the 10 thrift? 11 A. It's not supplementary. I'm not sure 12 what you're asking here. 13 Q. Isn't the principal purpose of an 14 appraisal to confirm the value of the collateral 15 and not to be a substitute for the underwriting of 16 the various risks that we've discussed which still 17 remains with the thrift? 18 A. An appraisal is an information tool to 19 assist the loan underwriter. 20 Q. Is the principal underwriting 21 responsibility on the savings association? 22 A. Of course. 8084 1 Q. And is the role of the appraisal in 2 that process to confirm the value of the 3 collateral? 4 A. That is only part of its role. 5 Q. Isn't that the principal role? 6 A. Not in my opinion. 7 Q. You're currently employed by OES as the 8 chief appraiser of the Atlanta regional office; is 9 that correct? 10 A. That's correct. 11 Q. So, you should be familiar with OTS' 12 regulations regarding the role of appraisals in 13 the underwriting process for real estate loans, 14 correct? 15 A. I don't think we have a regulation 16 relative to the role of appraisals in the 17 underwriting process. 18 Q. I'd like to show you what I've marked 19 as Exhibit B3858, Mr. Lovell. These are an 20 excerpt from Volume 12 of the CFR, and they deal 21 with Part 564 of OTS' regulations pertaining to 22 appraisals. 8085 1 Do you see that, sir? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 THE COURT: Would you speak up, please? 5 A. Yes. 6 Q. (BY MR. BLANKENSTEIN) Are you 7 familiar with these regulations? 8 A. Part 564, yes. 9 MR. BLANKENSTEIN: Your Honor, I move 10 Exhibit B3858 into evidence. 11 MR. LEIMAN: No objection. 12 THE COURT: Received. 13 Q. (BY MR. BLANKENSTEIN) Can you turn to 14 Section 468.8? It's the next -- it's on the 15 next-to-the-last page of the exhibit. 16 A. Are you saying 564.8? 17 Q. 564.8. It's on the next-to-the-last 18 page of the exhibit, and it's on the right-hand 19 column at the bottom. 20 Do you see that? 21 A. Yeah. 22 Q. Can you read out loud -- 8086 1 A. Sure. 2 Q. -- the first two sentences? 3 A. "Introduction. The soundness of a 4 savings association mortgage loans and real estate 5 investments and those of its service corporations 6 depends to a great extent upon the adequacy of 7 loan underwriting used to support these 8 transactions. An appraisal standard is one of 9 several critical components of a sound 10 underwriting policy because appraisal reports 11 contain estimates of the value of the collateral 12 held or the assets owned. This section sets forth 13 the responsibilities of management to develop, 14 implement, and maintain appraisal standards in 15 determining compliance with the appraisal 16 requirements of 563.17 and 563.172 of this part." 17 Q. The second sentence says an appraisal 18 standard is one of several critical components of 19 a sound underwriting policy because appraisal 20 reports contain estimates of the value of the 21 collateral. Right? 22 A. That's one of the reasons. 8087 1 Q. That's the only one that's identified 2 in this regulation; isn't that right? 3 A. That's the only one that's cited here. 4 Q. You, on the other hand, believe that 5 the part of the appraisal that deals with the 6 value is the least important part of the 7 appraisal; isn't that right? 8 A. No, I don't believe that's right. I 9 said it's frequently the least important piece of 10 information. 11 Q. Do you remember when you were here on 12 Friday, Mr. Dueffert asked you a question "In your 13 experience, in your opinion, Mr. Lovell" -- and 14 I'm reading now from Page 7176, Line 12. In your 15 experience, in your opinion, Mr. Lovell, what 16 value would an appraisal be that arrives after the 17 loan committee has already decided to approve the 18 credit?" 19 Then turn to the next page. There is 20 colloquy, further exchange. And you go on to say 21 on Page 7177 at Line 10, "The value isn't really 22 the issue. The issue is having an appropriate 8088 1 level of information in front of the loan 2 underwriter to make an intelligent decision. By 3 knowing the value of the asset may be the least 4 important piece of information you need to be 5 aware of." 6 Do you remember saying that? 7 A. Excuse me. You really kind of lost me 8 when you mentioned Mr. Dueffert's questioning of 9 me last Friday. 10 Q. Mr. Leiman asked you the question. 11 A. Oh. 12 Q. Let me just read it again. "The 13 value" -- and you're talking about an appraisal. 14 It says, "The value isn't really the issue. The 15 issue is having an appropriate level of 16 information in front of the loan underwriter to 17 make an intelligent decision. By knowing the 18 value of the asset may be the least important 19 piece of information you need to be aware of." 20 Do you remember saying that? 21 A. It's part of some of what I said, I'm 22 sure. 8089 1 Q. You said it was -- the value of the 2 collateral was the least important information; 3 isn't that correct? 4 A. I had a great deal to say about that 5 subject. 6 Q. And among the things you had to say was 7 the value of the collateral was the least 8 important piece of information for the loan -- 9 A. It's frequently the least important. 10 Q. Let me finish my question. 11 -- for the loan underwriter; isn't that 12 correct? 13 A. Frequently, it's the least important. 14 Q. Would you agree with me that your views 15 on this subject are idiosyncratic and don't 16 reflect the official views of OTS, which is the 17 principal regulator of savings associations? 18 A. Well, excuse me, but we're -- you've 19 lost me. We're talking about current OTS 20 regulations and appraisal standards and we're 21 dealing with a case that's before OTS came into 22 existence back in 1985 when it was still the 8090 1 Federal Home Loan Bank Board and Part 564 didn't 2 even exist at that particular point in time. 3 You're going to have to, I guess -- I'm sorry -- 4 frame it a little tighter for me here what we're 5 talking about. 6 Q. We've looked at a regulation that talks 7 about appraisal and sets forth appraisal policy 8 which identifies the appraisal as being a critical 9 component because it states the value of the 10 collateral; isn't that right? That's the 11 regulation you just read out loud. 12 A. This is current appraisal regulations. 13 The appraisal regulation that references the time 14 frame that I believe we're presumably discussing 15 here is not the same one. 16 Q. And you believe that -- well, did it 17 change? Did the value of the collateral suddenly 18 become far more important in 1997 than it was in 19 1986? 20 A. This appraisal regulation didn't exist. 21 THE COURT: Mr. Leiman. 22 MR. LEIMAN: May I interpose? 8091 1 THE COURT: Yes, you may. What's your 2 objection? 3 MR. LEIMAN: My objection is that 4 Mr. Blankenstein is not referring directly to even 5 this particular regulation that he's citing but, 6 rather, he's interpreting it himself. The 7 regulation states "An appraisal standard is one of 8 several critical components of sound underwriting 9 policy because appraisal reports contain estimates 10 of value of collateral held or assets owned." 11 It's not exclusive, and it doesn't say that that's 12 the only -- 13 MR. BLANKENSTEIN: My point was -- 14 THE COURT: All right. I don't know 15 what the point of your objection is. I think the 16 witness can answer the question. 17 MR. LEIMAN: Your Honor, the point of 18 the objection is that Mr. Blankenstein is arguing 19 his interpretation of this regulation. If he 20 would like to get the interpretation of the 21 witness, he should ask about it. 22 THE COURT: Well, the witness has the 8092 1 regulation before him, does he not? 2 THE WITNESS: Yes, I do. 3 Q. (BY MR. BLANKENSTEIN) Have basic 4 principles of safety and soundness changed from 5 1986 to 1997? 6 A. I don't think there has been any 7 material change, no. 8 Q. Has there been any material change in 9 the role of the appraisal in the underwriting 10 process? 11 A. I don't think so. 12 Q. So, if the current OTS regulation 13 identifies as the critical component the fact that 14 the appraisal report contains an estimate of the 15 value, that was true in 1986, as well; isn't that 16 right? 17 MR. LEIMAN: Your Honor -- I withdraw 18 the objection. 19 A. The value estimate is important. That 20 hasn't changed. 21 Q. (BY MR. BLANKENSTEIN) But that's not 22 what you said before. You said it was the least 8093 1 important part of the appraisal. 2 A. No. I said it's frequently the least 3 important. 4 Q. Can you show me where in your testimony 5 you told me the least important? 6 A. No, I cannot. 7 Q. So, you're amending your testimony now; 8 is that right? 9 A. No. I'm not amending my testimony. I 10 said it and, in fact, Mr. Dueffert has been 11 furnished articles that you'll find that very 12 statement appears in there. 13 Q. Now, do you remember last week, 14 Mr. Leiman asked you what value would an appraisal 15 have that arrived after the loan committee of the 16 savings association had already committed to 17 approve the credit? Do you remember that? 18 A. I remember a question along those 19 lines. 20 Q. And you said that -- I'll quote -- "We 21 consider that improper underwriting." 22 Do you remember saying that? 8094 1 A. Yeah. 2 Q. And you went on to state that "We 3 charge it in the exam report as an unsafe and 4 unsound appraisal practice." 5 Do you remember that? 6 A. We'd have probably a comment that would 7 appear in the exam report to that effect. 8 Q. Do you remember saying that? 9 A. Yeah. 10 Q. And who's the "we" in that testimony? 11 A. Examinations. 12 Q. Is that the federal regulators? 13 A. Yes. 14 Q. And do you also remember saying that 15 "As long as you've been associated with the 16 lender" -- with lending, excuse me -- "the lender 17 had to have an appraisal in hand before deciding 18 to approve a non-residential real estate loan"? 19 A. It's a critical -- an appraisal is a 20 critical component of loan underwriting in 21 non-residential property. 22 Q. Do you remember that? 8095 1 A. I remember saying something to that 2 effect. Without reading into the record the 3 entire context of it -- 4 Q. Hasn't it been a common practice 5 expressly accepted by the regulators for thrifts 6 to approve real estate loans based in the first 7 instance upon their own underwriting and without 8 first having an appraisal? 9 A. No. We have accepted over the years 10 the condition that an institution who did a very 11 careful job could theoretically condition the loan 12 approval process on receipt of the appraisal 13 report. However, the loan may not be granted, the 14 file documents may not be done until a fully 15 acceptable appraisal report has been received by 16 the institution. 17 Q. So, the loan could be approved without 18 having an appraisal; is that right? 19 A. It could be subject to the appraisal, 20 completion of an acceptable appraisal. Normally, 21 the commitment letter, if such a thing was done, 22 would outline specifically that it was at the 8096 1 institution's final acceptance and review of the 2 appraisal report. 3 Q. Now, you didn't have that qualification 4 when you testified last week, did you? 5 A. You didn't ask me about it. 6 Q. Last week, you said, "Because the 7 appraisal is a critical element in the loan 8 underwriting process and not having a critical 9 piece of information to make a decision is 10 tantamount to not following appropriate procedure. 11 I mean, we charge it in the exam report as unsafe 12 and unsound lending practice." 13 Do you remember saying that? 14 A. Yeah. 15 Q. Now, are you familiar with the 16 regulations that pertain to the need to have an 17 appraisal? 18 A. I'm aware of the appraisal regulation. 19 I would need you to probably be specific about 20 which one we are referencing. 21 Q. Do you remember what the practice was 22 in 1987? 8097 1 A. Well, the appraisal regulation in 1987 2 was Insurance Reg 563.17-1(c)(1) Roman Numeral 3 III. 1987. Did you say -- 4 Q. 1987? 5 A. 1987, it would have been Roman Numeral 6 IV by '87. 7 Q. I'd like to -- this is Exhibit B87, and 8 I admire your memory, Mr. Lovell. You got the 9 regulation exactly right. And if we look on 10 563.17-1(c)(1), it provides what records need to 11 be in a loan file with regard to real estate 12 loans; is that right? 13 A. Well, that's what 563.17 addresses, 14 yes. It's record keeping requirements. 15 Q. And Subparagraph Roman IV talks about 16 the requirement for an appraisal; isn't that 17 right? 18 A. Well, subparagraph, technically, (c)(1) 19 Roman Numeral IV, yes. 20 Q. I'll take your amendment to my 21 question. And it provides that a written 22 appraisal is required; is that right? 8098 1 A. Yes. 2 Q. And it has to be signed prior to the 3 approval of the application? You see that? 4 A. Yeah. 5 Q. And -- but it goes on for an important 6 exception, doesn't it? 7 A. Uh-huh. (Witness nods head 8 affirmatively.) Yeah. 9 Q. Why don't you read the exception? 10 A. "Accepting the case of approval and 11 upon obtaining an appraisal that satisfies the 12 requirements of Paragraph (c)(1) Roman Numeral IV 13 prior to any loan disbursement by a person or 14 persons duly appointed and qualified as appraisers 15 by the board of directors of such lender 16 disclosing the market value of the security 17 offered by the borrower and containing sufficient 18 information and data concerning the appraisal, 19 appraised property, to substantiate the market 20 value of the security described in such reports or 21 if such loan is insured loan or a guaranteed loan, 22 a certificate of valuation assigned to real estate 8099 1 security by the appraiser accepted by the insuring 2 or guarantying agency and furnished to the lender 3 by such agency." 4 Do you want me to keep going? 5 Q. No. I think that's fine. And so, the 6 savings association can, in fact, approve a real 7 estate loan without having an appraisal in hand; 8 isn't that right? 9 A. Well -- 10 Q. As long as it gets an appraisal after 11 the fact that confirms the value of the 12 collateral; isn't that right? 13 A. Well, you don't have much of a loan 14 prior to disbursal of any funds. I think that's a 15 critical component that's specified here. 16 Q. They make the decision to approve the 17 loan without having the appraisal; isn't that 18 right? 19 A. I've stated earlier, I believe -- and I 20 thought I made myself clear at that point -- that 21 it's possible to issue a loan commitment 22 contingent on receipt of the appraisal report. 8100 1 Q. And this is a long-accepted practice; 2 isn't that right? 3 A. As well as including language in the 4 commitment letter that stated that the final 5 appraisal had to be fully acceptable to the 6 institution. That's true, yes. That's -- 7 Q. It's a long-accepted practice? 8 A. That's a practice. 9 Q. I'm sorry. I didn't mean to talk over 10 you. 11 A. That's accepted practice. 12 Q. And it's a long-accepted practice. 13 Didn't start in 1987. It was a practice in the 14 industry accepted by the regulators before 1987; 15 isn't that right? 16 A. Actually, it was used in fairly rare 17 instances. 18 Q. Okay. Now, let me show you what's 19 been -- what I've marked as B3857. 20 MR. BLANKENSTEIN: Your Honor, this is 21 an excerpt from the Federal Register of 22 August 29th, 1986, that announces the final rule 8101 1 that is set forth in 12 CFR 563.171. 2 Your Honor, I've been reminded that I 3 didn't move B -- Exhibit B87 into evidence. I so 4 move it now. 5 MR. LEIMAN: No objection. 6 THE COURT: Received. 7 Q. (BY MR. BLANKENSTEIN) Mr. Lovell, you 8 were in 1986 with the Federal Home Loan Bank of 9 Atlanta; isn't that correct? 10 A. That's correct. 11 Q. And you were chief of appraisals; isn't 12 that right? 13 A. Uh-huh, yes, sir. 14 Q. And you would have -- you would have 15 reviewed, in some form, what is B3857; is that 16 right? 17 A. Yes, I'm familiar with it. 18 MR. BLANKENSTEIN: And I'll move 19 Exhibit B3857 into evidence, Your Honor. 20 MR. LEIMAN: No objection. 21 THE COURT: Received. 22 Q. (BY MR. BLANKENSTEIN) And if you look 8102 1 under -- on the first page of the exhibit under B, 2 it says "General Scope and Requirements." It 3 provides the main purpose of the proposal 4 clarifying and expanding the existing record 5 keeping provisions of Section 563.17-1C was not 6 intended to introduce a series of new underwriting 7 concepts but, as many commenters recognize, to set 8 forth in greater detail existing prudent lending 9 requirements as required by the board and the 10 courts. 11 Is that right? 12 A. And the final rule is not intended to 13 be an exhaustive listing of necessary records for 14 each and every loan transaction. I think that's 15 an important add-on to that statement. 16 Q. Why don't you turn to the next page? 17 A. Well, are we going to look at the 18 regulation or the commentary here? 19 Q. We're going to look at what I'll direct 20 you to, I hope. And Mr. Leiman, if he wants to 21 ask you more questions, can direct you elsewhere. 22 In the left-hand column, do you see 8103 1 under Point 2 a requirement with respect to loans 2 made on security of real estate? Do you see that? 3 If you could go down that column, do you see the 4 sentence that begins -- about halfway down, the 5 sentence that begins with "several"? Do you see 6 that? 7 A. Is that following where I see Federal 8 Housing Administration? 9 Q. No. If you look at Page 300849. 10 A. I'm there. Which column? 11 Q. Okay. And if you see on the left-hand 12 column, it says 2. 13 A. 2, yes. 14 Q. "Requirements with respect to loans 15 made on the security of real estate." 16 Do you see that? 17 A. Yes. 18 Q. If you go about halfway down the page, 19 can you see the sentence that begins with 20 "several?" 21 A. Well, this is what I'm asking you. The 22 "several" right before that is Federal Housing 8104 1 Administration, FHA. Is that the "several" I 2 should stop at? 3 MR. RINALDI: Is it the second 4 paragraph, Counsel? 5 MR. BLANKENSTEIN: No. It's in the 6 first paragraph. 7 THE COURT: I think the witness is at 8 the right place. Why don't you read it? 9 Q. (BY MR. BLANKENSTEIN) Why don't you 10 read that, sir? 11 A. "Several commentators expressed concern 12 that the proposed regulation does not incorporate 13 the board's view stated in the preamble that a 14 loan may be approved prior to the receipt of an 15 appraisal if the approval is conditioned upon 16 receipt of the appraisal as satisfactory appraisal 17 before funds are disbursed." 18 Q. And why don't you look all the way down 19 to the last sentence on the page with where the 20 word begins "lastly"? 21 MR. LEIMAN: What page are we on? 22 MR. BLANKENSTEIN: Page 30849. 8105 1 MR. LEIMAN: Under 2? 2 MR. BLANKENSTEIN: The left-hand 3 column. If you could read the last sentence that 4 begins with "lastly." 5 A. The one that says "Lastly, the board is 6 incorporating"? 7 Q. Yes. 8 A. Okay. "Lastly, the board" -- 9 MR. LEIMAN: Hold up for just a second 10 until I find where we're reading from. Thank you. 11 Okay. 12 A. "Lastly, the board is incorporating in 13 the final regulation its previously expressed view 14 that it's acceptable to grant a loan without prior 15 appraisal if the approval is conditioned upon 16 receiving a satisfactory appraisal which meets the 17 standards of the R series Memorandum 41B issued by 18 OES before funds are disbursed." 19 Q. So, in 1986, the bank board made it 20 very clear that it was acceptable for a savings 21 association to grant a loan without receipt of an 22 appraisal if the condition -- if the approval of 8106 1 the loan was conditioned upon the subsequent 2 receipt of an appraisal. Right? 3 A. Upon receiving a satisfactory appraisal 4 which meets the standard of the R series 5 memorandum, yes. 6 Q. Excuse me. After the decision to 7 approve the loan was made; isn't that right? 8 A. Well, I can only read what it says 9 here. 10 Q. And what it says, it is acceptable to 11 grant a loan without prior appraisal if the 12 approval is conditioned upon receiving a 13 satisfactory appraisal after the fact, correct? 14 A. It doesn't say "after the fact." 15 Q. Now -- 16 A. It says "If the approval is conditioned 17 upon receiving a satisfactory appraisal which 18 meets the standards of R series Memorandum No. 41B 19 issued by OES before funds are disbursed." 20 Q. So, the loan is approved and then funds 21 are disbursed; is that right? 22 A. Well, we certainly hope so. It's not 8107 1 always the case. 2 Q. And the appraisal serves as a check on 3 the value of the collateral once the loan approval 4 decision is made; isn't that right? 5 A. It's one of its functions. 6 Q. And it serves that complimentary or 7 secondary function; isn't that right? 8 A. R-41B makes it pretty clear it should 9 be a useful tool in the loan underwriting process, 10 and this commentary clearly says, "Well, the 11 satisfactory appraisal, as long as it meets R-41B 12 standards is -- you can approve the loan subject 13 to receipt of such appraisal." That's a useful 14 tool, yeah. 15 Q. And so, the loan -- an application is 16 made. Approval is granted. And an appraisal is 17 received, correct? Is that the way -- is that the 18 sequence of events? 19 A. Approval is conditioned upon receipt of 20 an appropriate appraisal. I think that's what it 21 says here. "If the approval is conditioned upon." 22 Q. Isn't that what happened with both the 8108 1 Park 410 and Norwood loans? 2 A. I don't know. 3 Q. Did you think it was important to your 4 opinion to inquire as to whether or not that was 5 the process by which -- or the sequence of events 6 by which the Park 410 and Norwood loans were made? 7 A. I was not asked to review the loan file 8 or render a decision one way or the other or any 9 kind of opinion relative to those issues. 10 Q. Do you think it would have been 11 important for you to know the sequence in which 12 the loans were applied for, approved, and the 13 appraisals were received in connection with the 14 opinions that you testified to? 15 A. I don't think those other issues were 16 necessary ingredients to what I have testified to 17 to this point. 18 Q. And your testimony, then, is that if 19 USAT relied upon certain appraisals in making its 20 principal and primary underwriting decisions, they 21 would have engaged in unsafe and unsound 22 practices; is that right? 8109 1 A. If they relied on appraisals? They 2 are -- you've really lost me. 3 Q. Is it your testimony that if USAT 4 relied upon the Bolin appraisal in connection with 5 the Norwood loan, it would have engaged in an 6 unsafe and unsound practice? 7 A. If they relied on the Bolin appraisal. 8 Q. Did you think in that connection it was 9 important to know whether the principal 10 underwriting and decisions made by USAT preceded 11 receipt of the Bolin appraisal? 12 A. I don't know what the sequence of the 13 decision process was. I haven't reviewed the loan 14 file. 15 Q. I've asked -- that's exactly the 16 question I've asked you. Did you think it was 17 important for your opinion to know what that 18 sequence was? 19 A. I don't see what that has to do, I 20 guess, with anything. 21 Q. Well, I want you to assume then that 22 the sequence was that USAT undertook its own 8110 1 underwriting of the Norwood loan, made the loan 2 conditioned upon receipt of the Bolin appraisal. 3 Would that have any effect on your 4 opinion? 5 A. Well, it might have some effect. I 6 suppose I'd wonder if they ever read it. 7 Q. Is that all -- that's the only thing 8 that would be relevant to you? 9 A. What? Whether they read the appraisal 10 relative to some of these other issues? Well, you 11 see, one of the reasons I guess I find it 12 interesting to learn whether they have read it or 13 not -- 14 Q. My question is -- 15 MR. LEIMAN: Excuse me. Has the 16 witness finished his answer? 17 THE COURT: All right. Finish your 18 answer. 19 A. I guess one of the reasons why I'd find 20 it curious whether they read it is the Bolin 21 appraisal purports to be an R-41B appraisal. I 22 think on, I don't know, Page 2, 3, 4 or something, 8111 1 he states in there the purpose of the appraisal is 2 to estimate market value as defined in R-41B, and 3 he proceeds to site the wrong definition. It 4 isn't the definition that's in 41B. I mean, he 5 couldn't have possibly read 41B and been familiar 6 with it. 7 Q. (BY MR. BLANKENSTEIN) And if we 8 assume that your deposition testimony was true and 9 that there was a general unawareness in the 10 appraisal industry as late as 1986 with respect to 11 R-41B, is it your testimony that my client, 12 Jenard Gross, in reviewing Mr. Bolin's appraisal, 13 would have engaged in an unsafe and unsound 14 practice if he had not suspended distribution of 15 the proceeds on that loan because the Bolin 16 appraisal didn't conform to the requirements of 17 R-41B? 18 A. I think he should have noticed that 19 Mr. Bolin says it's a 41B appraisal and he cited 20 the wrong definition of market value. 21 Q. He should have noticed that even though 22 the appraisal industry was generally unaware of 8112 1 R-41B? Is that your testimony? 2 A. I don't understand how Mr. Bolin can 3 purport that this report complies with 41B when he 4 uses the incorrect definition of value. 5 Q. I'm not asking you about Mr. Bolin. 6 I'm asking you about Mr. Gross, my client. 7 A. I don't know your client. 8 Q. My question is: When Mr. Gross read 9 Mr. Bolin's appraisal, should he have stopped 10 distribution of the proceeds of the loan because 11 the R4 -- because the appraisal didn't conform to 12 the requirements of R-41B if we assume that your 13 deposition testimony was true that even appraisers 14 were generally unaware of the requirements of 15 R-41B? 16 A. I think he should have stopped 17 distribution of loan funds, yes. 18 Q. So, your testimony, if I understand it, 19 is even though appraisers were unfamiliar with 20 R-41B, Mr. Gross engaged in an unsafe and unsound 21 practice because he didn't know what -- because he 22 was not aware of the requirements of R-41B; is 8113 1 that right? 2 A. Let me get this straight and perhaps I 3 can understand this. But Mr. Gross, I believe, 4 was senior loan official at USAT. 5 Q. He was -- 6 A. And Mr. Gross would be expected to be 7 familiar with the Federal Home Loan Bank Board 8 regulations and, as head of the lending 9 department, if I got his position correct here, we 10 would expect him to be well-informed about prudent 11 lending decisions. I would certainly then expect 12 him to be aware of whether this appraisal report 13 adequately meets the lending institution's needs, 14 yeah. 15 Q. That's not the question I asked you. 16 The question I asked you is whether he should know 17 about the requirements of R-41B, if your 18 deposition testimony is true that the appraisal 19 industry was generally unaware of R-41B. That's 20 my question. 21 Can you answer that one? 22 A. I don't know that I understand the 8114 1 question. 2 THE COURT: We'll take a short recess. 3 4 (A short break was taken 5 at 2:34 p.m.) 6 : 7 THE COURT: Be seated, please. We'll 8 be back on the record. Mr. Blankenstein, you may 9 continue. 10 MR. BLANKENSTEIN: Thank you, Your 11 Honor. 12 (2:55 p.m.) 13 Q. (BY MR. BLANKENSTEIN) Mr. Lovell, why 14 don't you pick up Exhibit B87, which is the 1987 15 version of the regulations of the Federal Home 16 Loan Bank Board dealing with appraisals? 17 A. I've got it. 18 Q. Okay. Let me see if I understand the 19 sequence of the loan process. An application is 20 made to a savings association for a real estate 21 loan which includes -- and that application may 22 include certain information describing the 8115 1 transaction; is that correct? 2 A. Yes. 3 Q. The bank -- the association undertakes 4 to examine, does it not, the three risks that you 5 identified: The borrower risk, the property risk, 6 and the market risk. Correct? 7 A. That's one way of describing it, yes. 8 Q. And they conduct whatever the 9 appropriate investigations may be in those areas, 10 correct? 11 A. They should, yes. 12 Q. They make a decision to approve the 13 loan at that point subject to obtaining the 14 subsequent appraisal, and that's what's permitted 15 under the 1987 regulations; isn't that right? 16 A. Well, there is a caveat there, yes. 17 Q. So, the bank's underwriting activities 18 are essentially complete at the date they make 19 their loan approval decision; isn't that right? 20 A. No. 21 Q. The thrift's underwriting activities 22 are complete; isn't that right? They made a 8116 1 decision to approve the loan subject to an 2 appraisal that they will receive at a later date 3 that discloses the market value of the security 4 offered by the buyer -- by the borrower? I'm 5 sorry. 6 Isn't that what happens? They can't 7 distribute the proceeds, but they made their 8 decision to approve the loan; isn't that right? 9 A. Well, they shouldn't have. Their 10 decision -- their commitment is contingent upon 11 receiving an acceptable appraisal. 12 Q. They made the decision to approve the 13 loan subject to the receipt of an appraisal that 14 conforms with the requirements of Section 563.17 15 (C)(1) Roman Numeral IV, correct? 16 A. And if they don't get a report that 17 complies, then they don't make any disbursements. 18 Q. But the bank's underwriting or the 19 association's underwriting is complete at the time 20 of the loan approval decision; isn't that right? 21 Its activities? 22 A. Not -- 8117 1 Q. Let's put aside the approval, reading 2 the appraisal for a moment. Its investigations 3 are complete; isn't that right? 4 A. They are not complete. 5 Q. The association is not required to 6 undertake full underwriting and examination of the 7 three categories of risks that you've identified 8 prior to making the decision to grant the loan 9 even if it's contingent upon receipt of an 10 appraisal? 11 A. Subparagraph 4 of your Exhibit B87 on 12 Page 317, the one that we had been quoting from 13 says, "One or more written appraisal reports 14 prepared at the request of the lender or its agent 15 and for the lender's use and signed prior to the 16 approval of such application, except in the case 17 of an approval conditioned upon obtaining the 18 appraisal that satisfies the requirements of this 19 paragraph." 20 You're not done until you've got the 21 appraisal report. And I think they make it, by 22 virtue of the way the language there is, that 8118 1 that's really kind of an exception. 2 Q. Loan proceeds can't be distributed 3 before the receipt of the appraisal; is that 4 correct? 5 A. If the decision is therefore not 6 consummated, you don't have a transaction that's 7 gone forward, yeah. 8 Q. The loan proceeds can't be distributed; 9 is that correct? 10 A. And it's not a valid loan because it's 11 been conditioned upon receipt of a fully 12 acceptable appraisal report. 13 Q. Maybe we're having semantic 14 difficulties, Mr. Lovell. It says here that they 15 can approve the loan, correct, conditioned upon 16 the receipt of an appraisal. So, it's an approval 17 subject to the receipt of an appraisal that 18 satisfies the requirements of this subparagraph; 19 isn't that right? 20 A. And, therefore, it's a conditional 21 approval. 22 Q. And the appraisal is to disclose the 8119 1 market value of the securities offered by the 2 borrowere and is to contain sufficient information 3 and data concerning the appraised property to 4 substantiate the market value of the security. 5 So, what the appraisal does is confirm 6 the initial underwriting conducted by the bank or 7 the association; isn't that right? 8 A. No. I think you've got it backwards. 9 But, you know, I'll -- I've seen it done that way, 10 and losses have been incurred. 11 Q. I see. The appraisal contains the 12 principal underwriting, and the association's role 13 is really minimal; is that right? 14 A. No. The appraisal is a critical 15 component of the underwriting process. 16 Q. So, in your view, when the Federal Home 17 Loan Bank announced and promulgated this 18 regulation in final which allowed an association 19 to make a loan subject to an appraisal that 20 disclosed the market value, they were under the 21 impression that the appraisal would still be 22 critical to the bank's underwriting of the loan; 8120 1 is that right? 2 A. There is a permitted exception there; 3 but yes, it was considered to still be critical. 4 Q. And the critical part of the appraisal 5 is that it discloses the market value, correct? 6 A. That's only one portion of it. 7 Q. And that's what we saw the OTS 8 regulation provide; isn't that right? 9 A. OTS is Federal Home Loan Bank Board 10 memorandum -- excuse me, not OTS's -- but Federal 11 Home Loan Bank Board's Memorandum R-41B suggests 12 that you have to have an appraisal that's a useful 13 tool in the loan underwriting process. The 14 current regulation does not exclusively limit it 15 to only a valuation of the property. Certainly, 16 we expect an appraisal to have a supported 17 estimate of value. 18 Q. And when we looked at the OTS 19 regulation, what -- the only feature of the 20 appraisal that they expressly identified was that 21 it contained an estimate of the value of the 22 collateral, correct? 8121 1 A. That's not true, no. We'd have to read 2 all the rest of 564. There is an awful lot in 3 there. 4 Q. Now, let's go back to my client, 5 Mr. Gross, for a moment. I want you to assume 6 with the Norwood loan that USAT conducted its 7 underwriting and you never looked at that 8 underwriting, have you? 9 A. I have stated so. 10 Q. So, you don't know what's in there. 11 You don't know the quality of that underwriting. 12 You don't know what facts they gathered. You 13 don't know analysis they made of the property? 14 A. I have not reviewed the loan file. 15 Q. They make the loan conditioned on the 16 receipt of Mr. Bolin's appraisal. The appraisal 17 arrives. It provides a value consistent with the 18 loan. 19 A. In what sense, please? 20 Q. It provides a value number consistent 21 with the loan. It discloses the market value in a 22 way that's consistent with the amount of the loan. 8122 1 I want you to assume that. 2 Can you do that for me? 3 A. In the sense, I guess, that they make 4 the deal? 5 Q. That it provides a dollar amount that 6 sets forth a dollar amount of the value of the 7 property. 8 Can you assume that? 9 A. It sets forth a dollar amount of the 10 value of the property. 11 Q. Now, Mr. Gross now reviews Mr. Bolin's 12 report. 13 A. Okay. 14 Q. Okay? And you say -- if I understood 15 your testimony earlier, it was that his obligation 16 as an officer of a savings association was to be 17 familiar with the requirements of R-41B and review 18 the appraisal to see that it complied with R-41B; 19 is that right? 20 A. Yeah. I think the institution needs an 21 appraisal report that meets their needs. And I 22 think in the process of him reading it, I think he 8123 1 would have surely noticed on, what, Page 3 of the 2 appraisal report -- 3 Q. Do you remember my question, or are you 4 answering one of your own? 5 A. I think he would have read it to see 6 that it conforms. 7 Q. Okay. And on -- do you have the Bolin 8 appraisal before you? 9 A. That's what I'm looking at. 10 Q. Okay. And if you look at Page 5 -- 11 A. I am looking at it. 12 Q. And it has a statement on there that 13 the report conforms to R-41B? 14 A. That's what it says. 15 Q. And Mr. Gross should have reviewed 16 this? 17 A. That's what I've been telling you. 18 Q. And can you tell me, if he reviewed 19 this, what error should he have found in this 20 statement? 21 A. He should have noticed down there on 22 Subparagraph E of the definition of market value 8124 1 that that is the incorrect statement that should 2 have been included at that point. 3 Q. That's what he should have noticed? 4 A. Sure. Why not? It's a glaring error. 5 Q. That's the error he should have made? 6 That's the error he made? 7 A. Well, since the purpose of the 8 appraisal specifies the basis of the value 9 estimate, I mean, I think it would have been 10 noteworthy to have noticed, for example, that he 11 estimated the value in use. 12 Q. All right. Now, take a look at R-41B. 13 And that's Exhibit A11129. 14 A. Yes. 15 Q. And it has on Page 3 and over to Page 4 16 a list of the items that should be set forth in an 17 R-41B appraisal -- is that right -- in No. 7? 18 A. Well, let me be sure I'm understanding. 19 Yes, addresses itself to market value, and the 20 specific definition of market value is recited 21 there, yes. 22 Q. Okay. And if we compare Subparagraph F 8125 1 with R-41B with subparagraph of Mr. Bolin's 2 report, this is the -- what exactly did Mr. Bolin 3 get wrong? 4 A. Paragraph F? Nothing that I see. 5 Q. Excuse me. E. I misspoke. I'm sorry. 6 A. Paragraph E? He says "Financing, if 7 any, is on terms" -- "the financing actually in 8 place or in terms generally available in the 9 community." 10 I look at R-41B's Paragraph E and it 11 says "Financing, if any, is on terms generally 12 available in the community at the specified date 13 and typical for the property type and its locale." 14 Q. Okay. So -- 15 A. It doesn't say anything about actually 16 in place. 17 Q. So, what Mr. Gross' failure was that he 18 failed to notice that Mr. Bolin had inserted the 19 phrase "the financing actually in place or on 20 terms" -- is that correct -- and that Mr. Bolin 21 had left out the word "type" in the last line of 22 Subsection E? Is that what -- 8126 1 A. I think if you're familiar with the 2 appraisal practice, you would have noticed it. 3 Q. Excuse me? 4 A. I think if you're familiar with 5 appraisal practice, you'd notice it. 6 Q. And that brings us back to the general 7 awareness of R-41B in 1986 where you testified at 8 your deposition that there was general 9 unawareness. And when you got here to court, 10 suddenly you had an epiphany and concluded that 11 there was general awareness in 1986; isn't that 12 right? 13 MR. LEIMAN: Your Honor, I object to 14 the -- to Mr. Blankenstein's characterization. I 15 believe he's taking Mr. Lovell's testimony out of 16 context. And if he would read the entire context 17 of Mr. Lovell's statement, I believe it would be 18 clear that -- exactly what it was that Mr. Lovell 19 stated. I mean, that there was no inconsistency. 20 Would you like to do that, 21 Mr. Blankenstein? 22 THE COURT: All right. We've been over 8127 1 that. 2 MR. BLANKENSTEIN: I have no further 3 questions for this witness. 4 THE COURT: Are there any other 5 questions? 6 MR. EISENHART: I don't have any 7 questions, Your Honor. 8 MR. KEETON: One moment, Your Honor. I 9 may. Yes, I do. 10 11 CROSS-EXAMINATION 12 13 (3:09 p.m.) 14 Q. (BY MR. KEETON) Mr. Lovell, keeping 15 the same two exhibits in front of you that you 16 just looked at, on Page 5 of Mister -- whatever 17 his name is -- Bolin's appraisal, he includes a 18 definition of market value. Right? 19 A. Yes, he does. 20 Q. Now, when it gets into the indented and 21 the single-spaced portion, that is straight out of 22 R-41B as existed at the time. Right? 8128 1 A. In Mr. Bolin's definition? 2 Q. Right. 3 A. No, it's not. 4 Q. Well, the first paragraph there is? 5 A. The first paragraph, as near as I can 6 tell. I haven't compared every comma; but the 7 sense of it seems to be there, yes. 8 Q. That's, first of all, a very important 9 part of the definition, isn't it? 10 A. All of the parts are important. 11 Actually, the implicit conditions down there are 12 probably more important even than the first 13 statement. 14 Q. Because you know there is no error in 15 the first statement, don't you? 16 A. If we didn't believe that all of this 17 was important as a part of the definition of 18 market value, the Appraisal Institute wouldn't 19 have included all of it. 20 Q. The implicit paragraph is verbatim. 21 Right? 22 A. The implicit paragraph appears to be 8129 1 verbatim. 2 Q. A is verbatim? 3 A. Appears to be. 4 Q. B is verbatim? 5 A. Appears to be. 6 Q. C is verbatim? 7 A. Appears to be. 8 Q. D is verbatim? 9 A. Appears to be. 10 Q. F is verbatim? 11 A. Appears to be. 12 Q. And it looks like his typewriter did a 13 little funny stuff on E, doesn't it? 14 A. Not on my copy. 15 Q. Are you going to tell me you think the 16 definition in E is materially at variance with 17 41B? 18 A. Yes. 19 Q. And someone reading the Bolin appraisal 20 reading -- going down here to the definition of 21 market value, et cetera, et cetera, is -- 22 A. They would have ascribed significance 8130 1 to it, absolutely. 2 Q. Okay. Tell me what you subscribe or 3 what significance you subscribe to E. 4 A. Well, I believe -- and I don't know 5 that I have it here in front of me at the moment; 6 but I know that we had Mr. Bob Foreman's R-41B 7 seminar materials in front of me. And if we're 8 willing to pull up that exhibit, I'll be more than 9 happy to go to the back part of that material 10 where he cites that financing actually in place is 11 not acceptable, that it has to be the definition 12 of market value that's in R-41B. 13 Q. Well, financing wasn't in place on this 14 place, was it? 15 A. But there is no accident for that type 16 of change is what I'm saying. 17 Q. There is no room for even a comma to be 18 wrong in your world? 19 A. There are almost an infinite array of 20 different definitions of "value" that have been 21 rendered over particularly the last 200 years. It 22 makes a difference. Market value is definition 8131 1 dependent. 2 Q. Now, again, there wasn't financing in 3 place at the time this was received, though, was 4 it? 5 A. I don't know. 6 Q. So, if the reader knows that, then if 7 you look at the rest of the definition are you 8 okay? 9 A. But it's still the wrong definition. 10 Q. Because it's got financing in place? 11 A. That's right. 12 Q. Very technical. Right? 13 A. And very important. 14 Q. What was the reader supposed to do? 15 Say, "Hey, appraiser. Throw it back. Start 16 over"? 17 A. I think the reader should have returned 18 it to the appraiser and said, "Please use the 19 correct definition. You say here in your 20 appraisal report 'The current economic definition 21 of market value is defined in Federal Home Loan 22 Bank Board Memorandum R-41B dated March 12th, 8132 1 1982, is as follows' and you didn't copy it 2 correctly." 3 Q. Do you think in your expert opinion 4 that the appraiser would have said, "Oh, yeah. 5 Put in a few extra words. I'll correct that and 6 send it back." Do you think he would have changed 7 the rest of his appraisal? 8 A. I don't know. 9 Q. What do you think? Come on. You know 10 better than that. You're not going to even render 11 a guess for me? 12 A. I don't know what he would have done. 13 Most appraisers would change it, though, since 14 they -- 15 Q. Let's assume he would have changed the 16 words and taken out those words. Do you think he 17 would have changed the rest of the appraisal? 18 A. It might have. 19 Q. What's your best guess on that, 20 Mr. Lovell? 21 A. I don't know what effect it would have 22 had. 8133 1 Q. You're just not willing to cut any 2 slack for anybody on this case, are you? 3 MR. KEETON: I don't have any more 4 questions. You don't need to answer. 5 THE COURT: Mr. Leiman, do you have any 6 questions? 7 MR. LEIMAN: Yes, Your Honor. I do 8 have some questions. 9 10 REDIRECT-EXAMINATION 11 12 (3:15 p.m.) 13 Q. (BY MR. LEIMAN) Mr. Lovell, 14 Mr. Blankenstein read you a portion of your 15 statement in your deposition that you gave to 16 Mr. Dueffert on or about October 21st, 1997. 17 Right? 18 A. Uh-huh. Yes, sir. 19 Q. Okay. I'd like to now refer you to the 20 balance of what you said in connection with the 21 availability of R-41B. 22 Mr. Dueffert said, "I understand from 8134 1 prior testimony that there was a time in the 2 industry in 1982 and 1983 and perhaps into 1984 3 and later where appraisers in the field weren't 4 widely aware of R-41B. Is that an accurate 5 understanding?" 6 I objected to the form of the question. 7 Answer, "It was always widely 8 available. Whether appraisers had read it or not, 9 I don't know." 10 He went on to ask you, "Why don't" -- 11 MR. BLANKENSTEIN: Excuse me, Your 12 Honor. Where is that? Can you just cite me -- 13 MR. LEIMAN: Page 41, Line 4. 14 Q. (BY MR. LEIMAN) Your answer was, "It 15 was always widely available. Whether appraisers 16 had read it or not, I don't know." 17 Question, "Why don't you know that?" 18 "Well, the document, first off, is 19 addressed directly to the examination staff of the 20 Office of Examination and Supervision. So, it's 21 not a document that would be mass mailed, for 22 example, to the entire appraisal industry as a 8135 1 matter of course. It would certainly appear as a 2 part of our regulatory structure as an 3 interpretation memorandum at that particular 4 point, which all of the savings and loans would 5 have received in due course which would have come 6 probably to no more than a week or two or three 7 after the publication of the memorandum. It would 8 have been mass mailed out to the entire industry. 9 But as far as the appraisal community, they would 10 have only been made aware of it as part of their 11 savings and loan clients who might have requested 12 them to follow R-41B so-called requirements." 13 Do you remember that part of your 14 answer, Mr. Lovell? 15 A. Yes, I do. 16 Q. Now, when Mr. Blankenstein asked you 17 about whether or not there was a conflict in a 18 portion of your answer that stated that you 19 thought there was a general unawareness of the 20 memorandum versus what I asked you in court here 21 last week and you said that the industry was aware 22 of it, how do you square those two? 8136 1 A. Well, I think I've tried to describe 2 that there was a progression from the release of 3 the memorandum until it was finally retracted in 4 1986 in the level of awareness that was 5 recognized. Clearly, one of the landmark issues 6 that occurred at the time involved the appraised 7 equity capital regulation, which I've already 8 mentioned occurred either at the end of '82 or 9 October of '83. 10 Following that release of that 11 regulation, it was very soon thereafter the 12 industry became widely recognizing that R-41B was 13 in existence because appraisal reports were being 14 rejected on their appraised equity capital 15 submissions. 16 Q. All right. 17 A. And I think it's also important to 18 recognize that a considerable amount of 19 educational effort was exerted on my part in the 20 way of seminars. We also had the industry's 21 cooperation. All of the appraisal groups 22 eventually published R-41B as a part of their 8137 1 monthly or quarterly newsletters to their members. 2 So, that was made widely available to the 3 appraisal community, even though the initial 4 release of the memorandum would have been mass 5 mailed to the thrift industry itself. 6 Q. S&Ls received copies of this Memorandum 7 R-41B, to the best of your knowledge? 8 A. Yes. 9 Q. Would you have expected S&L executives 10 to have read the memorandum? 11 A. It was regarded to be as important as 12 any other regulation and interpretation memorandum 13 that we released to the industry. Yes, we would 14 expect them to be familiar with it. 15 Q. In or about 1982, 1983, 1984, was there 16 a regulation that dealt with equity and 17 mark-to-market? 18 A. The so-called appraised equity capital 19 regulation? 20 Q. Yes. 21 A. Yes. 22 Q. What did that require? 8138 1 A. Well, in essence, what it permitted, it 2 allowed the industry to appraise their so-called 3 office building and office land and mark those 4 assets on their books and records to their current 5 appraised value, so-called mark-to-market. 6 Q. And did they have to use an R-41B 7 appraisal in that regard? 8 A. They specifically -- the regulation 9 specifically required two things. One was that 10 the appraisal reports had to conform with R-41B 11 and, two, the appraisal reports would be reviewed 12 by the district appraiser staff of the Federal 13 Home Loan Bank Board. 14 Q. Now, of course, you don't know if USAT 15 went ahead and used that regulation, do you? 16 A. I have no idea. 17 Q. All right. Mr. Blankenstein asked you 18 some questions about current regulations. 19 Do you remember those questions about 20 regulations and the role of appraisals in the 21 scheme of things? 22 A. About current OTS regulations, yes. 8139 1 Q. Okay. Do you remember he asked you 2 about Section 564.8. Right? 3 A. That's correct. 4 Q. He read you a part of that regulation, 5 didn't he? 6 A. That's very much true. 7 Q. All right. Let me read you some 8 additional parts of the regulation to which I 9 believe you were alluding in one of your answers. 10 The portion he read was, "An appraisal 11 standard is one of several critical components of 12 sound underwriting policy because appraisal 13 reports contain estimates of the value of 14 collateral held or assets owned." 15 Do you remember that? 16 A. Yes, I do. 17 Q. Okay. It goes on to say, "This section 18 sets forth the responsibilities of management to 19 develop, implement, and maintain appraisal 20 standards in determining compliance with the 21 appraisal requirements of Sections 563.170 and 22 563.172 of this part." 8140 1 Do you remember that? 2 A. Yes. 3 Q. I don't know if you remember him 4 reading that. I'm reading it to you. 5 Do you remember those sections? 6 A. I am familiar with them, yes. 7 Q. Let me read you down farther in this 8 regulation, Part C, where it states -- under 9 "responsibilities of management," it says, 10 "Therefore, management shall develop, implement, 11 and maintain appraisal policies to ensure that 12 appraisals reflect professional competence and to 13 facilitate the reporting of estimates of market 14 value upon which savings associations may rely to 15 make lending decisions. To achieve these results, 16 one, management shall develop written appraisal 17 policies subject to formal adoption by the savings 18 association's board of directors that it shall 19 implement in consultation with other appropriate 20 personnel. These policies shall ensure that 21 adequate appraisals are obtained and proper 22 appraisal procedures are followed, consistent with 8141 1 the requirements of this Part 564." 2 Is there -- my question to you, 3 Mr. Lovell, is this: To your knowledge, has there 4 been a change of any significance or magnitude 5 between the requirement for appraisals between 6 1985, '86, and 1997? 7 A. Actually, no. 8 Q. Why do you say that? 9 A. Well, we started out with R-41B that 10 said we expected appraisals to be prepared in 11 accordance with the standards of the leading 12 national professional appraisal organizations. 13 Those standards are now embodied in what's now 14 commonly known as the Uniform Standards of 15 Professional Appraisal Practice that all licensed 16 or certified appraisers are required to comply 17 with. The Uniform Standards of Professional 18 Appraisal Practice were directly based upon the 19 initial draft of them, the Appraisal Institute's 20 requirements relative to professional appraisal 21 practice that has been entered into evidence here. 22 Q. Let's go back to an earlier regulation, 8142 1 one that Mr. Blankenstein provided you with, 2 563.17-1. It would have been in Exhibit B87. And 3 on the second page of the exhibit, under (1) Roman 4 IV, Mr. Blankenstein quoted you some language. 5 Do you remember that? 6 A. Yes, he did. 7 Q. Now, in connection with the conditional 8 approval Mr. Blankenstein was asking you about, do 9 you see the portion of the regulation which 10 specifically states, eight lines from the bottom 11 of the left column, "and containing of that 12 appraisal shall contain sufficient information and 13 data concerning the appraised property to 14 substantiate the market value of the security 15 described in such reports." 16 Do you see that? 17 A. I sure do. 18 Q. What does that mean? 19 A. That's the part that we really were 20 referencing in R-41B when we said we're 21 interpreting this particular regulation section 22 here about an appraisal needs to be a useful tool 8143 1 and contain sufficient information and to be 2 self-contained. Sufficient information so a 3 reader can understand how the appraiser got to his 4 estimate. 5 Q. I don't know if you have R-41B in front 6 of you, Mr. Lovell. 7 A. I do. 8 Q. If you would, turn to the section that 9 deals with appraisal management. And in the 10 second full paragraph, it states, "An appraisal 11 should serve an underwriter's needs by providing a 12 supported opinion of a property's market value as 13 of a specified date, sufficiently current so as to 14 reduce the likelihood of material value 15 fluctuation prior to the loan investment 16 decision." 17 Do you see that? 18 A. Yes, I do. 19 Q. What does that mean? 20 A. I think it means exactly what it says, 21 that you need to have an appraisal report as a 22 part of the loan underwriting process. 8144 1 Q. All right. Look a little further down 2 the page under "appraisal procedures." It states, 3 "The appraisal content shall follow generally 4 accepted and established appraisal practices as 5 reflected in the standards of the 6 nationally-recognized professional appraisal 7 organizations." 8 Were those the organizations you 9 referred to earlier as the Appraisal Institute 10 regulations? 11 A. Yes. The Appraisal Institute 12 standards. 13 Q. All right. And what about the 14 standards that were promulgated by the Society of 15 Real Estate Appraisers? What about those? 16 A. Well, I've already testified -- and I 17 believe the facts would support it -- that the 18 Society of Real Estate Appraisers standards were, 19 for all practical purposes, essentially identical 20 to the Institute's. 21 Q. Do you have a copy in front of you of 22 the Appraisal Institute's standards? 8145 1 A. I believe I do. 2 Q. All right. Would you pull those out? 3 Mr. Lovell? 4 A. Yes, sir. 5 Q. Would you turn to -- would you please 6 turn to Standard SR1-2 on Page 4? 7 A. Yes, sir. 8 Q. This is in Exhibit A11133, sir. Do you 9 see that? 10 A. I do. 11 Q. First of all, let me ask you a 12 question. When were these standards promulgated? 13 When were they issued? 14 A. May 3rd, 1985. That was the effective 15 date. 16 Q. Okay. Who was supposed to follow these 17 standards? 18 A. All members of the Appraisal Institute, 19 including candidates for the designations. 20 Q. Okay. Now, you're talking about 21 Appraisal Institute members. Is that the same as 22 MAI? Is that what that means? 8146 1 A. And RMs. 2 Q. And what? 3 A. They have a second designation, RM, for 4 residential member. 5 Q. All right. Now, in that regard, 6 Mr. Lovell, is there some kind of an oath that 7 appraisers take that MAI appraisers take in 8 connection with adhering to these standards? 9 A. Yes, there is. 10 Q. What does the oath generally say, if 11 you know? 12 A. It generally says that you subscribe to 13 uphold the standards of the Appraisal Institute 14 and to follow them. 15 Q. All right. Turn with me here -- let's 16 look at SR1-2 and, specifically, I'm interested in 17 your reading A in its context. 18 A. Well, SR1-2 starts out with "In 19 developing a real estate appraisal analysis 20 opinion or conclusions, an appraiser must observe 21 the following specific appraisal guidelines." And 22 Paragraph A says "Identify the real estate, the 8147 1 real property interest under consideration, define 2 the opinion that is the purpose of the appraisal, 3 consider the scope of the appraisal and identify 4 the effective date of the opinion." 5 I mean, essentially what that paragraph 6 requires you to do is to have a definition of 7 market value and identify the scope of your 8 analysis. 9 Q. Now, why do you say that? Why do you 10 say it essentially requires them to do that? Is 11 there some other standard in here? Specifically, 12 I'd like you to turn to Page 8 of this document, 13 SR2-4. 14 Are there specific requirements for 15 appraisals? 16 A. As far as the contents of the reports 17 go, absolutely. 18 Q. Okay. Let's look at 2-4. What are the 19 contents of the report that were specifically 20 required by the organization that designated MAI 21 appraisers? Would you read those? 22 A. Well, 2-4 -- and, of course, it's one 8148 1 of several substandards here that are listed. But 2 2-4 says "Each written report or communication 3 concerning the results of an appraisal must comply 4 with the following specific reporting guidelines. 5 An appraiser must identify and describe the real 6 property being appraised, identify the real 7 property interest being appraised, define the 8 opinion that is the purpose of the appraisal and 9 describe the scope of the appraisal. Set forth 10 the effective date of the opinion and the date of 11 the report. Set forth the appraiser's opinion of 12 highest and best use of the real estate being 13 appraised when such an opinion is necessary and 14 appropriate. Set forth the appraisal procedures 15 followed, the data considered, and the reasoning 16 that supports the analysis, opinions, and 17 conclusions. Set forth all assumptions and 18 limiting conditions that affect the analysis, 19 opinions, and conclusions in the report. Set 20 forth any additional information that may be 21 appropriate to show compliance with and identify 22 permitted departures from the requirements of 8149 1 Standard 1 and include" -- the last paragraph, 2 "Include a signed certification in accordance with 3 Standard Rule 2-5." 4 Q. Was it your intent in assisting in the 5 writing of R-41B to include the standards that -- 6 among the standards that are included in R-41B, 7 those which you just read? 8 A. As well as the other ones here. I 9 mean, notably, I think Standard 2-1, it says "Each 10 written or oral report or communication concerning 11 the results of an appraisal must contain 12 sufficient information to enable the persons who 13 receive or rely on the report or communication to 14 understand it properly." 15 Q. Is that what you meant when, in R-41B, 16 you said the appraisal content shall follow 17 generally accepted and established appraisal 18 practices as reflected in the standards of the 19 nationally-recognized professional appraisal 20 organizations? 21 A. This is certainly one organization 22 standard that we were referencing. 8150 1 Q. All right. Now, let's take a quick 2 look here at this appraisal that Bolin did for 3 Norwood Park. Okay? This is the July 22, '86 4 transmittal as of -- for the appraisal as of 5 June 5, '86. It's T7029. 6 Do you see where Mr. Bolin on the 7 second page of this exhibit, just above his 8 signature, states that it's his opinion the report 9 complies with FHLBB Memo R4 -- do you have that 10 yet? 11 A. Which page are you on? 12 Q. I'm on the second page of the exhibit. 13 I'm sorry if I'm moving quickly. It's late in the 14 day, Mr. Lovell. I'm sorry. 15 A. I do not have Mr. Bolin's letter of 16 transmittal here in my copy. Let me look here. 17 MR. LEIMAN: Your Honor, is there any 18 objection if I show Mr. Lovell the certification? 19 THE COURT: No. 20 MR. LEIMAN: Thank you, Your Honor. 21 I'll cover up my writing on this. 22 Q. (BY MR. LEIMAN) Do you see that? 8151 1 A. Yes. 2 Q. All right. What does it mean when an 3 appraiser certifies that? 4 A. I'm not sure what it means, to be 5 honest. Part of the problem that I see with that 6 type of certification statement is that since the 7 appraisal is intended to be a useful tool in the 8 loan underwriting process, we certainly never 9 intended for the appraiser to become the loan 10 underwriter. I'm not sure, since the loan 11 underwriter is the one whose supposed to be 12 specifying the requirements of the appraisal and 13 the kind of data that he needs to make his 14 decision, how the appraiser can somehow make that 15 leap of getting involved directly in the loan 16 underwriting process beyond what he's been asked 17 to do. 18 Q. Who's responsible for the loan 19 underwriting, as you understand it? 20 A. The institution is responsible. 21 Q. Were they responsible for reading these 22 reports of appraisal? 8152 1 A. Absolutely. 2 Q. Mr. Schulz similarly represented that 3 his appraisal complied with R-41B. That's on the 4 very first page of Exhibit T7084. In fact, it's 5 in the -- on the fourth line down in the first 6 full paragraph. 7 A. The letter of transmittal, you're 8 referencing, I believe? 9 Q. Yes, sir. 10 A. Yes. 11 Q. All right. Mr. Dugger also did that in 12 his appraisal of T7143 of the Park 410 property, 13 Page III. 14 Do you see that on Page III? Do you 15 see what Mr. Dugger wrote? He said "The appraisal 16 report's been prepared in an attempt to conform to 17 the standards of the American Institute of Real 18 Estate Appraisers" -- 19 A. Yes. 20 Q. -- "and the regulations set forth in 21 Federal Home Loan Bank Board Memorandum R-41B. 22 Did Mr. Gross, as Mr. Blankenstein has 8153 1 represented him to you, have an obligation to 2 determine whether or not these appraisals that 3 we've seen for Park 410 and for Norwood satisfied 4 R-41B? 5 A. Yes, he did. 6 Q. Why do you say that? 7 A. Because he would have had 8 responsibility to perform an adequate underwriting 9 job. And an adequate underwriting job would have 10 required him to have an appropriate appraisal in 11 front of him as a part of the underwriting 12 process. 13 Q. Would that have been as a member of the 14 underwriting committee, or would that also be in 15 connection with -- as a member of the board of 16 directors? 17 A. I think R-41B makes it clear that it's 18 the responsibility of the board of directors and 19 certainly management of the institution to ensure 20 that they have appropriate appraisal policies and 21 procedures in place. 22 Q. Now, Mr. Blankenstein was asking you, 8154 1 going back to the notion of the -- having what he 2 referred to, I think, as a conditional loan 3 approval subject to obtaining an appraisal. 4 Do you remember that discussion? 5 A. I remember that. 6 Q. Okay. After a loan is conditionally 7 granted subject to the receipt of an R-41B 8 appraisal, would it be your expectation, 9 Mr. Lovell, that the loan underwriter would review 10 the appraisal and not disburse the loan unless the 11 underwriter was satisfied that the appraisal met 12 the requirements of R-41B? 13 A. That would be my expectation. 14 Q. What kind of a review would it be 15 necessary to include in that regard? 16 A. Well, there's certainly no specific 17 requirement that they had to create a written 18 review. However, in larger loans such as the 19 types we're looking at here, it would have been a 20 reasonable expectation to have found in the loan 21 file some kind of documentation relative to the 22 analysis of all of the data, including the 8155 1 appraisal report that was considered in the 2 underwriting process. It would have been common 3 practice, for example, in a loan of the size 4 credit we're talking about here for the board of 5 directors to actually have debated actively the 6 entire contents of the appraisal report. 7 Q. Why is that? Why is it important that 8 the board of directors discuss the contents of the 9 appraisal report? Is it something related to the 10 collateral? 11 A. Well -- and it's because it's their 12 responsibility. I mean, functionally, the buck 13 stops with the board of directors. They are 14 responsible. 15 Q. Would it have been safe and sound 16 practice to have disbursed the loan proceeds 17 absent there being a review? 18 A. I think a review of some type needed to 19 have been performed, yes. 20 Q. Now, Mr. Dueffert asked you a number of 21 questions that related to Mr. Massey. 22 Do you remember those questions? 8156 1 A. Yes, I do. 2 Q. Okay. Do you remember I commented that 3 perhaps it was not the entire context in which you 4 made -- you hadn't had an opportunity to fully 5 review Mr. Massey's statement in connection 6 with -- when you rendered your opinion or partial 7 opinion in your statement regarding him? Do you 8 remember that? 9 A. Yes, I do. 10 Q. Okay. I've handed you, Mr. Lovell, a 11 partial copy of the sworn deposition testimony of 12 J.M. Massey from Volume 1, May 29th, 1997. 13 Do you have that in front of you? 14 A. Yes, I do. 15 Q. Okay. Now, you had a chance -- had you 16 been -- had I sent you a copy of Mr. Massey's 17 full-blown testimony prior to today? You remember 18 did that, don't you? 19 A. I think you did, yes. 20 Q. Did you read it closely and scrutinize 21 every sentence? 22 A. I read it. I wouldn't say that I 8157 1 dwelled on every word or necessarily remembered 2 absolutely everything he had to say. 3 Q. Okay. But you got a copy? 4 A. Sure. 5 Q. Okay. 6 MR. LEIMAN: Your Honor, I would move 7 exhibit T7772 into evidence. 8 MR. DUEFFERT: Your Honor, I object. I 9 did not put in my chart as evidence. I think it's 10 appropriate if he'd like to ask the witness 11 questions about someone else's testimony, but I 12 don't think the testimony itself comes in. 13 THE COURT: Sustained. 14 Q. (BY MR. LEIMAN) Would you read -- 15 read to yourself, sir, Mr. Massey's testimony from 16 Page 116, Line 18, through Page 121, Line 1 17 inclusive. 18 MR. DUEFFERT: One more time, 19 Mr. Leiman. Are you asking him to read five 20 pages? 21 MR. LEIMAN: Well, as it appears here, 22 Mr. Dueffert, it's only about a single page of -- 8158 1 MR. DUEFFERT: I'm sorry. I didn't get 2 the -- 3 MR. LEIMAN: 116, Line 18, through Line 4 1 of Page 121. 5 MR. DUEFFERT: So, it... 6 A. (The witness reviews the document.) 7 Through Page 121, was it? 8 Q. (BY MR. LEIMAN) Through the first 9 line of 121. 10 A. Excuse me. Okay. I have read it. 11 Q. Mr. Dueffert put up here on this 12 easel -- I don't know if we can find it. He put 13 up on the easel a portion of what I've asked you 14 to read; isn't that right? 15 A. Yes. 16 Q. All right. 17 MR. LEIMAN: Mr. Dueffert, is that here 18 in the courtroom? Do we have it available? 19 MR. DUEFFERT: If you'd like. 20 MR. LEIMAN: Thank you. 21 Q. (BY MR. LEIMAN) Mr. Lovell, have you 22 had a chance to compare what I've provided you in 8159 1 this document that I've proffered to the Court 2 which is not admitted and what I've asked you to 3 read and contrast and compare it with the 4 questions and answers that Mr. Dueffert had blown 5 up? Have you done that? 6 A. Yes, I have. 7 Q. Do you believe that you have -- is 8 there -- do you have a better context of the 9 statement that Mr. Massey made in that regard? 10 A. Well, I think it's always best to 11 understand any kind of statement that's made in 12 the context in which it was made. There is 13 clearly a generalized discussion going on about 14 appraisal practices in a number of respects here 15 in Texas. 16 Q. Having now read the context, do you 17 believe that Mr. Massey's conduct, as he seems to 18 be alluding to in these pages that I've asked you 19 to read, would have violated the standards of 20 practice in -- the Appraisal Institute standards 21 of practice in some way? 22 MR. KEETON: Your Honor, I want to 8160 1 object to that question. It's too ambiguous for 2 me. Why don't you make it specific so we'll know 3 what his answer means? 4 MR. LEIMAN: I believe, Your Honor -- 5 THE COURT: We're talking generally 6 here now. When we had the prior questions, the 7 statement was clearly stated on the record. Now 8 we're saying, "Well, we're in the context and some 9 other statement may contradict or explain this." 10 I think we need the statements that you're 11 referring to. 12 MR. LEIMAN: You're right, Your Honor. 13 I'll try and provide that context. 14 Q. (BY MR. LEIMAN) Do you remember you 15 reached a conclusion regarding whether or not 16 Mr. Massey had violated standards of conduct that 17 had been promulgated by the Appraisal Institute? 18 Do you remember that? 19 A. Well, I don't know that I reached a 20 conclusion, per se. 21 Q. All right. Did you reach a tentative 22 opinion? 8161 1 A. I expressed an opinion, yes. 2 Q. All right. And was that tentative 3 opinion in connection with a statement by 4 Mr. Massey that he made in connection with 5 providing a range of numbers without having fully 6 completed an appraisal report? 7 A. Well, my reading of the testimony 8 that's expressed here is that, apparently, he did 9 a relatively complete job or certainly felt that 10 he did. I mean, this is just one segment of some 11 overall comments that the gentleman made relative 12 to his own professional appraisal practice. It's 13 really inadequate, in my opinion, to draw any 14 final conclusion -- conclusions, I mean -- 15 relative to it. Had he gone on and on and on, 16 maybe we could be a little more definitive on 17 precisely what he had to say. But in my 18 experience, I can tell you from the Appraisal 19 Institute, this sound byte, if you will, in and of 20 itself would not be adequate to probably make a 21 charge of practice violations. 22 THE COURT: Well, can you give us a 8162 1 reference to the testimony that you've just been 2 provided which supports what you've just said? 3 A. Well, I think if we start on Page 117 4 perhaps, without getting too much into the 5 information here, the question is "Did R-41B 6 appraisals in Texas as of early '86 commonly 7 address all of those different questions?" 8 "Mine did. The people I associated 9 with did absolutely. Very quickly, from 1984 till 10 about '86, I had trouble getting my experience 11 credits because at least 50 percent of the reports 12 that I wrote were never completed." 13 The question then was, "Why?" 14 "It was a tradition in the market at 15 that point in time to get half of the fee up 16 front, to pay the other half or receive the other 17 half upon completion of the report. I begin the 18 report and focus typically on the income 19 capitalization approach for an improved property 20 or for a proposed improved property. And when I 21 got to where I figured I'm within a reasonable 22 range of what the rest of the report is going to 8163 1 point to, we call the client and tell them, 'Man, 2 here's the range. We're going to be somewhere in 3 there once this thing is concluded.' And they 4 say, 'Stop what you're doing, box it up, and send 5 it to us.'" 6 Now, he's clearly not stated that he's 7 specified a specific value opinion here, but he 8 has indicated that he specified a range. It would 9 be of some concern had he gone on here and 10 explained further that he was rendering an opinion 11 without having done an analysis. But he really 12 hasn't given a description from his statement here 13 as he goes through this as to how far along he was 14 in the appraisal process. 15 And I guess my reading on it would be 16 the information here is not enough to make a 17 definitive determination as to how complete his 18 analysis was at the point he was asked to stop. 19 THE COURT: But you had that statement 20 with you earlier when you were questioned about 21 it. What is the new statement that makes you 22 qualify that now? 8164 1 THE WITNESS: Well, I think if you -- 2 I'm looking at when we're talking about the 3 relative completeness of his appraisal reports and 4 the kind of data that he's explaining in the 5 preceding comments here, he's indicating that his 6 reports contained all of the information and 7 analysis that he commonly would come up with his 8 opinion of value. I think that's important. He's 9 not saying, "Well, I only did a half of an 10 appraisal as a rule and I didn't prepare complete 11 appraisal reports." 12 He seems to be of the opinion in his 13 preceding comments here that he went through a 14 relatively careful analysis of the properties that 15 he was appraising. And that's certainly one of 16 the requirements of the professional practice 17 standards. 18 THE COURT: If he completed the report 19 and did a thorough -- 20 THE WITNESS: Well, he doesn't have to, 21 Your Honor -- to be a little more explanatory 22 here, he doesn't, in fact, have to write the 8165 1 appraisal. He has to have sufficient information 2 and have done a sufficient level of analyses at 3 the point that he renders a value opinion. 4 Whether the report has actually been 5 typed up at that point is not a prerequisite of 6 it, but he has to have done an adequate level of 7 analysis and examined appropriate market 8 information. 9 He doesn't say how far he was in the 10 process here. At 50 percent of the way through 11 the appraisal doesn't tell me, well, did the 12 50 percent that he has examined, in fact, was that 13 the information that would have been requisite to 14 rendering a final opinion of value in here? We 15 just don't have enough information here to make a 16 definitive determination on it. I don't feel he 17 did. 18 THE COURT: Excuse me. Mr. Leiman, you 19 may continue. 20 Q. (BY MR. LEIMAN) Following up on the 21 judge's question, let's look for a minute at 22 Page 116, specifically Line 18. And reading down, 8166 1 Massey suggests that the user should be provided 2 with a macro economic perspective. 3 Do you see that? 4 A. Yes. 5 Q. And a micro perspective. Do you see 6 that? 7 A. Yes. 8 Q. All right. He goes on to say that -- 9 he references a conclusion of economic feasibility 10 and he refers to the highest and best use 11 analysis. 12 Do you see that? 13 A. Yes. 14 MR. DUEFFERT: Your Honor, I'd ask if 15 we could get line numbers just so we can follow 16 along. 17 THE COURT: All right. Can you -- 18 MR. LEIMAN: Yes, Your Honor. I'll be 19 happy to provide them. With regard to macro 20 economic perspective, that would be Page 116. 21 Massey talked about that at Line 20 on 116. The 22 micro perspective, Your Honor, is at Line 22 of 8167 1 Page 116. Conclusion of economic feasibility is 2 on Line 6 of Page 117. Highest and best use 3 analysis is referenced at Line 8 on Page 117. 4 Q. (BY MR. LEIMAN) He also talks about 5 that the appraisal should have dealt with 6 inventory of space representing highest and best 7 use by component in the proposed development, and 8 that would be at Lines 15, 16, and 17 at Page 117. 9 Is there any way of knowing, having 10 looked at what you've referred to as the sound 11 byte, that Massey was referring back to the other 12 information that I've just mentioned to the Court 13 that was on Pages 116 and 117? 14 A. Well, I think it's part of the overall 15 context of what he's describing here. I mean, 16 from my perspective as a practicing appraiser, 17 he's starting on Page 116 at the point where 18 you've begun here on Line 18, I guess it is. It's 19 a pretty much traditional way that you go about 20 creating appraisal reports. You generate a macro 21 economic information and then you ultimately bring 22 it down and focus it on the final valuation of the 8168 1 property itself. 2 Q. Mr. Lovell, are you saying that you 3 wouldn't know how many of these components Massey 4 would have addressed prior to -- assuming that he 5 gave one -- prior to having given some kind of a 6 report, an oral report? 7 A. Well, he certainly is suggesting here 8 that we've done some kind of highest and best use 9 analysis. And the highest and best use analysis 10 is, you know, the critical part of the appraisal 11 report. Functionally, if you blow that part of 12 the analysis, everything else that follows is kind 13 of nonsense at that point. 14 So, he's indicating here that he'd go 15 through and relate this feasibility information to 16 ascertain the relative merits of the property, 17 what is supply and what is demand. And his 18 general comments here are just a general 19 description of what would be expected in property 20 types that we're looking at. 21 Q. Mr. Lovell, I'm glad you mentioned 22 highest and best use analysis. In the Bolin 8169 1 appraisal, turning back to that at Exhibit T7029, 2 looking at Pages -- I believe it's Pages 19 and 20 3 of this report by Bolin. He uses the language -- 4 do you have that? 5 A. Yes, I do now. 6 Q. He uses the language "highest and best 7 use." 8 Do you see that? 9 A. Yes. 10 Q. You read Bolin's appraisal report, 11 didn't you? 12 A. Yes, I have. 13 Q. Okay. Does the information contained 14 in Mr. Bolin's report regarding the Norwood 15 property support the highest and best use 16 conclusion that he reached? 17 A. I don't think it supports it. I have 18 previously expressed that he indicates that he's 19 reviewed the Burke, O'Hara Associates report, and 20 we're in agreement with the conclusions reached in 21 the study. I mean, that's the bottom paragraph 22 there on Page 19 of his appraisal report. He 8170 1 concurs with it. I have previously expressed some 2 problems because the Burke, O'Hara study indicates 3 that this is a 10-year development time horizon. 4 Yet, his cash flow forecast that he's utilized in 5 the appraisal in valuing the property is only 6 two-year duration. 7 Q. Whose appraisal? Whose forecast is two 8 years in duration? 9 A. Mr. Bolin's forecast. 10 MR. DUEFFERT: Your Honor, I object. 11 We're getting beyond redirect now. The witness 12 said this last week. 13 MR. LEIMAN: I only have a few more 14 questions, Your Honor. If I might continue, I'll 15 be done in a moment. 16 THE COURT: All right. Objection is 17 denied. 18 Q. (BY MR. LEIMAN) In summary, you don't 19 feel that the report itself supports the highest 20 and best use conclusion? 21 A. I don't believe so. 22 Q. And that's because of the absorption 8171 1 periods. Right? 2 A. Certainly the absorption is one major 3 element of it that's at variance with the study 4 he's relying on. 5 Q. Do any of the three appraisals, the 6 Schulz 88-million-dollar appraisal, 7084, the 7 Love & Dugger appraisal, which is T7143, and the 8 Bolin appraisal, 7029, satisfy R-41B? 9 A. Not in my opinion. 10 Q. Have you heard -- have you any reason 11 to have changed your testimony between the time 12 you gave it when I was asking you about these 13 appraisals and today regarding whether or not it 14 would have been unsafe and unsound for the loan 15 underwriters -- for loan underwriters to have 16 relied upon these appraisals? 17 A. The appraisals I did not find to be 18 useful tools in the loan underwriting process. 19 MR. LEIMAN: Thank you, Mr. Lovell. 20 MR. DUEFFERT: Your Honor, I'm sorry, 21 but I do have two questions. 22 THE COURT: All right. 8172 1 2 RECROSS-EXAMINATION 3 4 (4:00 p.m.) 5 Q. (BY MR. DUEFFERT) Mr. Lovell, since 6 we're talking about Mr. Massey's deposition, I 7 just have to ask you about one more passage, same 8 exhibit. Page 120 on the top, and I just want to 9 know if you agree with him. 10 Actually, the bottom of Page 119, Line 11 25. "Do you feel" -- question, "Do you feel that 12 receiving the -- a target number from your client 13 ever" -- and it reads "abrupted your integrity?" 14 I will say that I was there and the word was 15 "affected." 16 "Do you feel that receiving a target 17 number from your client ever affected your 18 integrity?" 19 Answer, "Never." 20 Then we discuss the practices of MAI 21 appraisers at the time. Then down on Page 22 -- 22 I'm sorry. Line 22 on the same page, 120, "Do 8173 1 clients have a right to presume that you'll be 2 following that code?" And here we're talking 3 about the code of ethics. 4 Answer, "Absolutely. They have every 5 right and should do something about it if they 6 perceive that I am not or somebody else is not." 7 Do you agree with Mr. Massey's 8 testimony? 9 A. As far as what he's got to say here 10 seems to go, yeah. 11 MR. DUEFFERT: Thank you, Mr. Lovell. 12 MR. BLANKENSTEIN: I have a question, 13 Your Honor. 14 15 RECROSS-EXAMINATION 16 17 (4:02 p.m.) 18 Q. (BY MR. BLANKENSTEIN) A savings 19 association makes a loan or receives a loan 20 application, submits the application for this real 21 estate loan thoroughly, completely, makes its 22 decisions with regard to the borrower risk, the 8174 1 credit -- the market risk and the property risk, 2 conditionally approves the loan, obtains an 3 appraisal, has one of its senior loan officers 4 who's in charge of the loan review the appraisal 5 to determine that -- and the appraisal is 6 determined -- shows that the market value of the 7 property is consistent with the loan to supply 8 sufficient collateral to support the loan. 9 In those circumstances, is it your 10 testimony that the board of directors should sit 11 around and review and debate the loan? Excuse me. 12 Review and debate the appraisal? 13 A. I believe I said that it was common 14 practice on large loans, sure. 15 Q. That after they have reviewed -- done 16 their own underwriting extensively, discussed this 17 loan at the board of directors meeting, if that's 18 where it needs to be approved, that -- and made a 19 conditional approval, the board of directors was 20 required to -- and they receive an appraisal that 21 shows a value consistent with the loan that shows 22 the collateral is sufficient to support the loan, 8175 1 the board of directors personally had to review 2 the appraisal and discuss it at a board meeting? 3 Is that your testimony? 4 A. I don't believe I said that at all. 5 Q. So, it's not -- that's not your 6 testimony? 7 A. I don't believe I said what you've just 8 stated. 9 Q. Well, would they be required to do 10 that? 11 A. I don't know of any requirement that 12 states the board of directors had to read the 13 appraisal report. I'm just telling you that it 14 was common practice in large loans. 15 Q. But there was no requirement that they 16 do that? 17 A. No. 18 Q. It wouldn't be unsafe and unsound 19 practice if they didn't do that; is that right? 20 A. In and of itself, it wouldn't be 21 regarded as unsafe and unsound. 22 MR. BLANKENSTEIN: No other questions, 8176 1 Your Honor. 2 3 RECROSS-EXAMINATION 4 5 (4:04 p.m.) 6 MR. KEETON: Mr. Lovell, R-41B, did you 7 also give seminars to examiners? 8 A. Yes. I talked at a great number of 9 appraisal courses, for example, to the examination 10 staff at least up and through 1985. 11 Q. This would be all over the country? 12 A. Yeah. I taught probably -- I think it 13 was 24, I believe, separate courses to the Federal 14 Home Loan Bank Board examiners. At one point, I 15 had a count on it. I believe it was some 700 16 examiners overall. 17 Q. So, you would expect an examiner, at 18 least by '85 or '86 to be conversant with, if not 19 expert in R-41B? 20 A. We certainly would expect them to be 21 conversant. 22 Q. And you would expect them with large 8177 1 loans to look at those particularly when they were 2 looking at an institution. Right? 3 A. That would be common practice. 4 Q. And if they made no report, what would 5 you think that it probably was okay? 6 A. Not necessarily. 7 Q. They might have missed it? 8 A. There is a variety of reasons why it 9 may have been missed. 10 Q. Okay. 11 MR. KEETON: I have no further 12 questions. 13 MR. EISENHART: I have no questions, 14 Your Honor. 15 THE COURT: Thank you, Mr. Lovell. You 16 may step down. It's past 4:00 o'clock. I don't 17 think that we should call another witness today. 18 MR. GUIDO: Your Honor, we -- 19 THE COURT: Okay, Mr. Guido. 20 MR. LEIMAN: He appears out of nowhere. 21 Mr. Guido's back, Your Honor. 22 MR. GUIDO: I've been walking the halls 8178 1 all afternoon. We have a procedural matter that 2 we would like to raise with you that Mr. Nickens 3 and Mr. Villa and I have been discussing over the 4 last few days. And before you break today, we 5 would like to raise this with you because it deals 6 with a scheduling issue. 7 We've looked at the schedule and, 8 obviously, we're not going to finish by the 19th 9 of December, the time that has so far been 10 allocated to this matter. And what we have been 11 discussing among ourselves, the three of us 12 primarily because we have the major sort of 13 scheduling difficulties, and we felt that we 14 needed to ask Your Honor if we could put together 15 a proposal for going forward with this proceeding 16 into next year and setting out a schedule. 17 Some of us have major commitments going 18 forward with other trials that we've been 19 discussing, the respondents' counsel have. And 20 we've been discussing it. And for us to be able 21 to go forward with our negotiations to come back 22 with a proposal, it would be helpful if we could 8179 1 have some idea of what time you might have 2 available over this next six to eight months, 3 because of the scheduling difficulties, to 4 complete this proceeding so that we can sit down 5 among ourselves and negotiate a proposal that we 6 could make to Your Honor about how we would 7 complete the proceeding, if that's acceptable to 8 you. 9 THE COURT: Well, I don't have my 10 calendar before me; but I know that after the 11 Henderson case, which is also an OTS case -- 12 MR. GUIDO: I'm aware of that, Your 13 Honor. 14 THE COURT: I have some other cases, 15 but I will be inclined to give priority to this 16 one up until that, and I may even complete this 17 one and have to postpone that one. 18 MR. GUIDO: One of our problems is both 19 Mr. Nickens and Mr. Villa are committed to other 20 trials during the first part of the year. And 21 what we need to do is get a sense of what the 22 available time is so that I can negotiate with 8180 1 them about what would be an appropriate schedule 2 for those. It's in everyone's interest, we 3 believe, because of the logistics, if we can 4 figure out a substantial block of time. But we're 5 probably talking upwards to six weeks of 6 additional time is what it looks like. 7 THE COURT: Well, why don't you put 8 together your schedule, and I'll see if I can 9 accommodate? 10 MR. GUIDO: Okay, Your Honor. We will. 11 THE COURT: I can postpone -- 12 MR. GUIDO: We'll see what we can do. 13 THE COURT: I gather you're intending 14 now you would not go in January; is that correct? 15 MR. GUIDO: Well, I haven't made any 16 commitments at all, Your Honor. They have 17 indicated to me what their scheduling problems 18 are. And what we were looking for is some way 19 that we could resolve any of our differences by 20 having a sense of what our alternative blocks of 21 time might be available given your schedule, Your 22 Honor. 8181 1 THE COURT: Well, if you give me your 2 schedule, I can postpone or even advance. But at 3 this point, it's far enough ahead that I would 4 feel -- 5 MR. GUIDO: Okay, Your Honor. 6 MR. VILLA: Your Honor, I might as well 7 tell you because I think I'm the single largest 8 sticking point in the scheduling, I moved one case 9 and, essentially, two cases to accommodate this 10 12-week block. And I've got a criminal trial, 11 multi-defendant criminal trial that's going to go 12 to trial at the very beginning of March in 13 Jacksonville for two months in which I'm lead 14 counsel. It's under the Speedy Trial Act, and I 15 don't expect I'll be able to move it. I have 16 another case that's supposed to go in early June, 17 and they extended discovery in the second of the 18 two cases through the month of January in order to 19 accommodate this trial. They wanted -- the judge 20 wanted to close it, the other jury trial, he 21 wanted to close discovery on December 31st and I 22 asked him if he would hold it open for 30 days to 8182 1 allow me to participate in discovery in January of 2 this year so that I could devote my three months 3 to this trial. 4 So, I face some very severe time 5 problems with respect to my trials. The March 3rd 6 trial is expected to go two months. So, that 7 would take up the months of March and April. So, 8 I raise that. I know that Mr. Nickens also has 9 problems with timing. Quite frankly, we are 10 hopeful and probably overly optimistic that this 11 case would be completed in 12 weeks. But as a 12 result, I stacked up my trials. I moved my trials 13 past the date of this trial to clear this 12 weeks 14 and now I'm afraid I have other federal judges I 15 have to respond to. 16 MR. NICKENS: My problems are similar, 17 Your Honor. We had a case scheduled for October 18 which we moved for this case. It is specially set 19 in the last week of February. It's not as long as 20 Mr. Villa's case. It will be tried in three 21 weeks. But the discovery period and all of those 22 types of things were moved into the early part of 8183 1 the year in order to be able to go to trial the 2 last week of February. So, the early part of next 3 year presents major difficulties for Mr. Villa and 4 myself, particularly. 5 THE COURT: Sound like the first half 6 of the year is a problem. 7 MR. NICKENS: Unless Mr. Villa is able 8 to move the second case, that is true. There 9 is -- I think he thinks there is -- 10 MR. VILLA: I would be prepared, if it 11 is the -- if that's the opening, if that's the 12 window, starting in June or July because my other 13 trial is going to take quite a while, I would go 14 to this federal judge, who has a reputation for 15 wanting to move his calendar and tell him what the 16 problem is and ask him if he would move what he 17 has set as a June 15th trial date. And I would be 18 prepared to do that. And if he would do that, 19 then that would open up that window for us. But I 20 think clearly for the first five months of this 21 year, I'm either going to be in trial or I'm going 22 to be in extremis trial preparation or in 8184 1 discovery for trial. 2 THE COURT: Well, I think you and 3 Mr. Guido and OTS enforcement will have to work 4 out a schedule, and I'll try to see if I can 5 arrange my calendar -- 6 MR. GUIDO: Your Honor, my discussions 7 with Mr. Nickens -- which is how all of this 8 started -- did not contemplate starting or 9 reconvening in the middle of next year. And the 10 OTS feels that this should be brought to a close 11 as quickly as possible. Unfortunately, we all had 12 an unrealistic assessment of the amount of time it 13 would take us to proceed, given the amount of 14 documents, it seems that -- it's unfortunate that 15 we're faced with that. But we do believe that 16 this should be finished as expeditiously as 17 possible. 18 I will sit down and negotiate with 19 Mr. Villa and Mr. Nickens and hopefully, we can 20 come up with some resolution that's mutually 21 acceptable. 22 THE COURT: All right. I think that's 8185 1 the way it should be. At this point, where I have 2 far enough ahead, I'm reluctant to change a 3 hearing date that's approaching. But when I have 4 two months or three months -- and I do have cases 5 scheduled through, I think, June next year that I 6 can shuffle, I think. 7 MR. GUIDO: We wanted to bring this to 8 your attention. So, we alerted you as early as 9 possible to the problem that we were having. 10 MR. BLANKENSTEIN: Your Honor, I've 11 learned today of a tentative trial in a case in 12 the Eastern District of New York in the middle of 13 January. I'm not -- as I said, it's very 14 tentative and we may very well get postponed for 15 other criminal cases. 16 THE COURT: You must have some 17 troubles, Mr. Eisenhart. 18 MR. EISENHART: I do, Your Honor, but 19 what -- 20 MR. NICKENS: They are redundant of 21 ours. 22 MR. EISENHART: That's right. I 8186 1 haven't heard anything that puts me out on the 2 fringes on this. 3 THE COURT: All right. We'll adjourn 4 until 9:00 o'clock tomorrow. 5 6 (Whereupon at 4:14 p.m. 7 the proceedings were recessed.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8187 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 8188 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