United States Court of Appeals for the Federal Circuit

                                      05-5072


                           NATIONAL AUSTRALIA BANK,

                                                    Plaintiff-Appellee,

                                         v.


                                 UNITED STATES,

                                                    Defendant-Appellant.


        Ryan T. Scarborough, of Williams & Connolly LLP, of Washington, DC, argued
for plaintiff-appellee. With him on the brief was Paul Martin Wolff.

       Scott D. Austin, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellant. With him on the brief were Stuart E. Schiffer, Deputy Assistant Attorney
General and David M. Cohen, Director. Of counsel on the brief was Jeanne E.
Davidson, Deputy Director. Of counsel was Brian L. Owsley.

Appealed from: United States Court of Federal Claims

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


                                       05-5072


                           NATIONAL AUSTRALIA BANK,

                                                     Plaintiff-Appellee,

                                          v.


                                  UNITED STATES,

                                                     Defendant-Appellant.

                             ______________________

                             DECIDED: June 22, 2006
                             ______________________



Before GAJARSA, DYK, and PROST, Circuit Judges.

GAJARSA, Circuit Judge.

      In this Winstar-related case, the United States appeals a judgment of the Court of

Federal Claims granting summary judgment of liability for breach of contract and

awarding expectation damages to appellee National Australia Bank ("NAB").          Nat'l

Australia Bank v. United States, 55 Fed. Cl. 782 (2003) ("Summary Judgment

Decision"); Nat'l Australia Bank v. United States, 63 Fed. Cl. 352 (2004) ("Damages

Decision"). The Court of Federal Claims exercised jurisdiction pursuant to the Tucker

Act, 28 U.S.C. § 1491(a)(1), and entered final judgment on December 29, 2004. We

have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3). For the reasons set forth in this
opinion, we hereby affirm in part, reverse in part, and remand the case to the Court of

Federal Claims.

                                I.     FACTS

       This case is another of the many cases arising from the savings and loan crisis of

the 1980s. One of this court's recent Winstar decisions offered a brief summary of the

events that precipitated the Winstar litigation:

       In response to the large number of failing savings and loan
       institutions in the economic conditions of the 1980s, the United
       States, acting through the Federal Savings and Loan Insurance
       Corporation (FSLIC) and related regulatory bodies, encouraged
       solvent banks to infuse capital and management resources into
       failing thrift institutions. The government offered various incentives
       for that purpose, including tax and accounting benefits, regulatory
       relief and forbearances, and cash payments, as discussed in
       [United States v. Winstar Corp., 518 U.S. 839, 847-56 (1996)].

First Nationwide Bank v. United States, 431 F.3d 1342, 1344 (Fed. Cir. 2005). The

FSLIC entered into contracts providing financial incentives and benefits to institutions

that acquired failing thrifts. One such benefit provided for cash reimbursement of the

difference between the book value and the sales price of "covered assets" sold off by

the financial institution. "Covered assets" included thrift assets acquired in foreclosure,

loans made by the financial institution pursuant to obligations of the acquired thrift, and

various other loans and investments made by the financial institution. A companion

provision of the Internal Revenue Code permitted acquiring institutions to exclude from

gross income payments received as reimbursement for covered asset losses.

Summary Judgment Decision, 55 Fed. Cl. at 783. Thus, participants in the FSLIC's

program received both cash payments and significant tax benefits.




05-5072                                   2
        NAB1 entered into an "Assistance Agreement" with FSLIC in connection with

NAB's acquisition of a failing thrift, Beverly Hills Savings & Loan, on December 31,

1988.       The Assistance Agreement provided for, among other things, "tax-sharing"

between NAB and FSLIC, such that NAB was required to share with FSLIC a

percentage of the tax benefits received for covered asset losses. Summary Judgment

Decision, 55 Fed. Cl. at 787. The exact percentage to be shared is in dispute. As of

the date the Assistance Agreement was executed, Beverly Hills' covered assets were

estimated at $786.1 million—that is, a substantial amount of potential tax benefits. NAB

began to "aggressively manage the covered assets, to categorize them, and then

negotiate transactions that would minimize losses to FSLIC." Id. at 788. Each year,

FSLIC and its successor entity FDIC "audited [NAB] to ensure that [NAB] was

maximizing the tax benefits for covered asset losses." Id.

        Shortly after the Assistance Agreement was executed, "Congress and the press

began to inquire into the wisdom of the covered asset loss tax deductions." Id. In 1993,

Congress enacted the so-called Guarini legislation, Pub. L. 103-66, § 13224, 107 Stat.

312, 485 (1993), which eliminated the deduction for covered asset losses. Id.; see also

Centex Corp. v. United States, 395 F.3d 1283, 1289 (Fed. Cir. 2005).            Shortly

thereafter, on September 29, 1994, the parties entered into a new agreement (the

"Termination Agreement") terminating the Assistance Agreement, settling "certain

disputes under" that agreement, and expressly reserving NAB's right to file a claim for

damages arising out of the Guarini legislation. Damages Decision, 63 Fed. Cl. at 355.



        1
             The contracting party was actually Michigan National Corporation, which
was subsequently acquired by NAB. In the interest of simplicity, we will refer to
Michigan National as NAB in this opinion.


05-5072                                 3
This action, and hundreds of others like it, followed, as financial institutions which had

acquired failing thrifts to reap the now-revoked tax benefits sought damages from the

government for breach of contract.

       The Court of Federal Claims granted NAB's motion for partial summary judgment

as to Count I of its complaint, which alleged breach of the implied covenant of good faith

and fair dealing that attends all government contracts. Summary Judgment Decision,

55 Fed. Cl. at 790-91. The trial court concluded that both the government and NAB

"thought the tax benefits were important and the division of those benefits was an

integral part of the negotiations," such that "neither party could alter [the tax-sharing

arrangement] without being liable for a breach." Id. at 790. Therefore, by using "its

power as sovereign to deprive plaintiff of one of its negotiated contract benefits," the

United States "violated its obligation to act in good faith and fairly towards plaintiff not to

use its sovereign powers to deprive plaintiff of the agreed upon benefits." Id. The trial

court then granted NAB's motion for summary judgment as to damages, concluding that

NAB had borne its burden of demonstrating its expectancy damages with reasonable

certainty, and construing the applicable contracts to impose a sharing ratio of 75/25 on

all tax benefits arising from covered asset losses, such that NAB received 75% of such

benefits while the FSLIC received the remaining 25%. Damages Decision, 63 Fed. Cl.

at 362-63.

       We review both the Court of Federal Claims' grant of summary judgment and all

questions of law de novo. Cienega Gardens v. United States, 194 F.3d 1231, 1238

(Fed. Cir. 1998).




05-5072                                    4
                                    II.        DISCUSSION

       On appeal, the government alleges that the Court of Federal Claims erred in four

respects. First, it argues that the trial court incorrectly held that the United States was

liable for any of the damages sought by NAB for breach of contract. Second, it claims

that, assuming that liability was correctly imposed, NAB nevertheless failed to prove its

expectation damages with "reasonable certainty." Third, the government argues that, if

expectation damages were properly awarded, the trial court erred in its calculation of

the quantum of damages owed to NAB. Finally, the government argues that if the

contracts with NAB cannot be construed to favor the government's position on their

face, then either the Assistance Agreement or the Termination Agreement, or both,

should be reformed to reflect the parties' true agreement as to the correct ratio

applicable to the calculation of NAB's damages claims.

                                      A.        Liability

       The government withdrew its challenge to the trial court's determination of liability

shortly before oral argument in this case, conceding that such a challenge was

untenable in view of this court's decisions in Centex Corp v. United States, 395 F.3d

1283 (Fed. Cir. 2005), and First Nationwide Bank v. United States, 431 F.3d 1342 (Fed.

Cir. 2005), both of which found the government liable in circumstances indistinguishable

from those presented here.        We therefore affirm the Court of Federal Claims'

determination of liability.

                 B.     Expectation Damages and "Reasonable Certainty"

       The trial court granted NAB's motion for summary judgment on the issue of

damages, awarding NAB $27,101,530 in damages, plus costs. Damages Decision, 63




05-5072                                    5
Fed. Cl. at 363. The damage figure derived from NAB's assertion that "because of the

Guarini legislation, it was not permitted to deduct $103,155,357 in covered-asset losses

on its tax returns and, as a result, paid an additional $36,135,373 in taxes it would not

have otherwise paid." Id. at 353. The trial court determined that, pursuant to section

9(f) of the Termination Agreement, NAB was entitled to damages in the amount of 75%

of the $36,135,373 in tax losses, or $27,101,530. Id. The United States challenges that

determination on appeal, arguing that "NAB did not prove its damages with reasonable

certainty." It points out that NAB's claimed damages are based on the calculation of

covered-asset losses, which are calculated as "the difference between the proceeds

received upon disposition or sale of an asset and the tax basis of that asset." Summary

Judgment Decision, 63 Fed. Cl. at 354. NAB was unable, however, to provide evidence

of its actual tax basis in any of the covered assets; thus, according to the government,

NAB cannot establish any covered asset losses, and its damages claims are too

speculative to support an award.

      It is axiomatic that expectancy damages must be proved with "reasonable

certainty." Bluebonnet Sav. Bank v. United States, 266 F.3d 1348, 1355 (Fed. Cir.

2001) ("Expectation damages are recoverable provided they are actually foreseen or

reasonably foreseeable, are caused by the breach of the promisor, and are proved with

reasonable certainty."). Here, the trial court noted that "taxable gains or losses on

covered assets were computed as the difference between the proceeds received upon

disposition or sale of an asset and the tax basis of that asset," and calculated damages

on that basis. Damages Decision, 63 Fed. Cl. at 354. The government argues that

because NAB "did not know the tax basis for any of its covered assets," and instead




05-5072                                 6
"assumed" that aggregate tax basis was equal to aggregate book basis, it failed to

prove the amount of its damages with reasonable certainty.                The government

challenges the trial court's reliance on the assertion of NAB's expert that although NAB

could not establish the tax basis for individual covered assets, it could reasonably

conclude that the tax basis for all covered assets in the aggregate was "not less than

the book basis in such assets." That conclusion, the United States claims, was "an

insufficient basis to support the trial court's conclusion concerning the amount of lost

deductions," because it could not "compensate[] for [NAB's] inability to . . . compute

covered asset losses on an asset by asset basis." The government also argues that the

trial court erroneously shifted the burden of proving reasonable certainty to the

government, alleging that the trial court's "cursory dismissal" of the government's

expert's testimony amounted to "requiring the Government to disprove that [NAB's

damages evidence] constituted an acceptable means to document the unknown tax

basis of an individual covered asset."

       We disagree. Contrary to the government's assertions, the trial court did not

"assume" that the tax basis of the covered assets was equal to the book basis. The use

of book basis as a proxy for tax basis was simply an estimate based upon substantial

evidence, including the analysis and testimony of outside tax experts. For example, the

accounting firm then known as Deloitte, Haskins & Sells was hired to review the tax

position of the failing thrift in the years preceding its acquisition. Regarding that review,

a witness testified that "Based on the analysis that was done post and pre-acquisition . .

. the gross book value for book purposes and the tax basis of an asset are the same."

Other tax experts testified that they reached the same conclusion. It is clear from the




05-5072                                   7
trial court's opinion that it carefully reviewed the evidence offered by NAB in support of

its damage calculations and concluded that while "it is incumbent upon plaintiff to

demonstrate that it is more likely than not that . . . it would have been entitled to claim

the $103 million in covered asset losses . . . under the standard articulated by

defendant, plaintiff has met its burden" of proof. Damages Decision, 63 Fed. Cl. at 358.

There is no basis for the government's assertion that the trial court misapplied the

burden of proof.

       The government's argument is reduced to a broad assertion that damages based

on estimates are never sufficient to establish "reasonable certainty." It cites no authority

for that position, and we decline to declare such a sweeping rule.2 In this connection,

we note that in contract cases, "where responsibility for damage is clear, it is not

essential that the amount thereof be ascertainable with absolute exactness or

mathematical precision: It is enough if the evidence adduced is sufficient to enable a

court or jury to make a fair and reasonable approximation." Bluebonnet Sav. Bank, 266

F.3d at 1355 (internal quotation omitted). The trial court's grant of summary judgment

as to the availability of expectancy damages was correct.

                              C.      Quantum of Damages

       The Court of Federal Claims concluded that, under the terms of the Assistance

Agreement and Termination Agreement, NAB was required to share only 25% of its tax

benefits with FSLIC.    Damages Decision, 63 Fed. Cl. at 362-63.          The government

challenges that determination, arguing that "the Termination Agreement provided that

tax benefits were to be shared on a 50/50 basis," and that "[t]o the extent there was any

       2
            We note, however, that estimates may not be sufficient to establish
reasonable certainty in every case.


05-5072                                  8
ambiguity" in the Termination Agreement, "the extrinsic evidence . . . removes any

doubt that the parties intended to share the tax benefits on a 50/50 basis."          The

government's position would reduce NAB's damages award from $27,101,530 to

$18,067,687.3

       It is undisputed that section 9(f) of the Assistance Agreement provided for a

75/25 tax-benefit split for each year in which "the Net Investment Account of the

ACQUIRER is greater than zero" and for a 50/50 split for each year in which "the Net

Investment Amount [sic] of the ACQUIRER is equal to or less than zero." It is also

undisputed that because of a flaw in the definition of "Net Investment Account of the

ACQUIRER," the amount in that account was unlikely ever to drop to zero.4 Id. at 362

n.23. Thus, under the Assistance Agreement, the tax-benefit split would have always

been 75/25, because the trigger for changing the ratio to 50/50 would never have

occurred.

       The government argues that the Termination Agreement altered that result, and

that it was the intent of the parties in drafting that agreement to set a fixed 50/50 ratio

for sharing benefits accruing after 1994.     The relevant provision of that agreement

states that if NAB sues for damages arising out of the Guarini legislation, "then the

amount of damages or refunds sought in such Claims shall not include the amount that

would have accrued to the benefit of the FDIC Manager under the Assistance

Agreement or that would accrue to the benefit of the FDIC Manager under this

       3
             The figure $18,067,687 represents 50% of the claimed tax losses of
$36,135,373. The government's brief, for reasons that are not clear, consistently uses
$17,054,381 as the correct damages figure.
       4
             Neither the briefs nor the Court of Federal Claims' opinion explains the
precise nature of the flaw, but the existence of the flaw and its consequences are
undisputed.


05-5072                                  9
Agreement." The trial court construed this provision to "unambiguously" incorporate the

Assistance Agreement "for the limited purpose of calculating a damage award for

plaintiff's Guarini claim," resulting in a 75/25 split. Damages Decision, 63 Fed. Cl. at

362.   In reaching that conclusion, the trial court noted that "[r]ead literally, there is

nothing" in the Termination Agreement "that establishes [a 50/50] ratio with respect to

the current claim." Id. at 362.

       The government maintains that the trial court's construction of section 8.4 of the

Termination Agreement cannot stand. To construe the provision to incorporate the

Assistance Agreement's 75/25 split in all circumstances, the government argues, would

effectively read the words "or that would accrue to the benefit of the FDIC Manager

under this Agreement" out of the provision entirely. For that language to have meaning,

the Termination Agreement itself must somewhere provide for a tax-sharing split with a

ratio different than 75/25.       The government claims that, read as a whole, the

Termination Agreement unambiguously provides for a 50/50 split for all years after

1994. It also argues, in the alternative, that if the agreement is found to be ambiguous,

the trial court should have admitted extrinsic evidence of the parties' intent, which would

demonstrate that the government's position is correct.

       The trial court held that the agreement was not ambiguous, and in one sense we

agree: the meaning of § 8.4, at least, is quite clear. It provides that in litigation arising

from the Guarini legislation, the damages sought by NAB will not include the shared

portion of tax benefits under the Assistance Agreement or the Termination Agreement.

The question remains, however, whether any of the damages sought in this case

include amounts that would have "accrue[d] to the benefit of the FDIC Manager under"




05-5072                                  10
the Termination Agreement, and if so, at what ratio those benefits were to be shared.

The trial court concluded that the 75/25 ratio set forth in the Assistance Agreement was

to apply in all circumstances. This was error. Although the Termination Agreement

does contemplate use of the Assistance Agreement ratio in some circumstances, it also

contemplates the use of a different, unidentified ratio in other circumstances. Intensive

scrutiny of the provisions of the Termination Agreement, however, fails to conclusively

establish what alternative ratio should be employed, or under what circumstances. The

Termination Agreement provides for a 50/50 sharing ratio in several scenarios, but the

government is unable to identify any provision of that agreement that requires such a

ratio for benefits accruing from the losses at issue in NAB's claim—covered asset

losses. It admits that the provision on which it relies most heavily, § 2.5, applies by its

terms to net operating loss carryovers and does not "explicitly mention[ ]" covered asset

losses. NAB, for its part, eagerly embraces the portion of § 8.4 that incorporates the

75/25 ratio, but offers no plausible construction of the portion that expressly

contemplates the use of some other ratio for amounts accruing to the benefit of the

government under the Termination Agreement.

       In these circumstances, it appears that the Termination Agreement is ambiguous

and does not, on its face, support the trial court's conclusion that the 75/25 split applies

to all damages accruing to NAB. The Court of Federal Claims' award of damages must

therefore be reversed, and the case remanded to that court for consideration of extrinsic

evidence relevant to determining the true intentions of the parties in drafting § 8.4,

including the question whether any provision of the Termination Agreement can be or

should be construed to provide for a ratio of damage sharing other than a 75/25 split.




05-5072                                  11
                                    D.      Reformation

       Reformation of a written agreement on the ground of mutual mistake is an

extraordinary remedy, and is available only upon presentation of satisfactory proof of

four elements:

       (1)    the parties to the contract were mistaken in their belief
              regarding a fact;
       (2)    that mistaken belief constituted a basic assumption
              underlying the contract;
       (3)    the mistake had a material effect on the bargain; and
       (4)    the contract did not put the risk of the mistake on the party
              seeking reformation.

Atlas Corp. v. United States, 895 F.2d 745, 750 (Fed. Cir. 1990).5 An erroneous mutual

belief about the contents of a written agreement is sufficient to constitute a "mistake" for

this purpose: reformation is available "'when the parties, having reached an agreement

and having attempted to reduce it to writing, fail to express it correctly in the writing.'"

Indiana Ins. Co. v. Pana Cmty. Unit Sch. Dist. No. 8, 314 F.3d 895, 903-04 (7th Cir.

2003) (quoting Restatement (Second) of Contracts, § 155, cmt. a (1981)); see also

Phillipine Sugar Estates Dev. Co. v. Gov't of Phillipine Islands, 247 U.S. 385, 389 (1918)

(noting that "[i]t is well settled that courts of equity will reform a written contract where,

owing to mutual mistake, the language used therein did not fully or accurately express

the agreement and intention of the parties," and that "[t]he fact that interpretation or

construction of a contract presents a question of law and that, therefore, the mistake

       5
              Contracts with the United States entered into pursuant to federal law are
governed by federal law in most circumstances, except where, for example, "the direct
interests and obligations of the United States are not in question." Smith v. Cent.
Arizona Water Conservation Dist., 418 F.3d 1028, 1034 (9th Cir. 2005). Both contracts
here at issue provide that they shall be governed by Michigan law "to the extent that
federal law does not control." We need not decide whether Michigan or federal contract
law governs in this instance, because the general principles of contract reformation do
not differ materially under the two legal regimes.


05-5072                                   12
was one of law is not a bar to granting relief."). The general rule is that the elements of

a claim for reformation must be proved by clear and convincing evidence. See, e.g.,

Dingeman v. Reffitt, 393 N.W.2d 632, 636 (Mich. App. 1986) (stating that "[t]he burden

of proof is upon the party seeking reformation to present clear and convincing evidence

that the contract should be reformed in order to carry out the true agreement of the

parties"); Phillipine Sugar Estates, 247 U.S. at 391 (stating that reformation will not be

granted "unless the proof of mutual mistake be of the clearest and most satisfactory

character"); see also 27 Williston on Contracts § 70.54 (4th ed.) (stating that "the

preferred way of appraising the quantum of proof" in reformation cases "is to state quite

simply that the evidence must be clear and convincing," and citing Phillipine Sugar

Estates); Restatement (Second) of Contracts § 155 cmt. c (1981) (noting that the law of

contract typically "requires the trier of the facts to be satisfied by 'clear and convincing

evidence' before reformation is granted").

        We dispense, first, with the government's argument that the Assistance

Agreement should be reformed. The trial court considered this question sua sponte and

concluded that reformation would be inappropriate because the parties' intentions

regarding the distribution of tax benefits received following litigation were accurately

captured in the Termination Agreement.        In addition, the trial court noted that the

government's claim would be barred by the equitable doctrine of laches, because "[t]he

parties continued to operate under the formula in the Assistance Agreement even

though they recognized the flaw" it contained. Damages Decision, 63 Fed. Cl. at 363

n.27.




05-5072                                  13
       We agree that reformation of the Assistance Agreement is inappropriate. As the

government concedes in its brief, the flaw in the Assistance Agreement has already

been remedied by the parties in the Termination Agreement, which, according to the

government's brief, "cured the flaw in the Assistance Agreement concerning the tax

benefit sharing formula." Whatever its other ambiguities, the Termination Agreement

clearly contemplates the continued use of the known-to-be-flawed Assistance

Agreement formula in at least some circumstances.             To reform the Assistance

Agreement would undermine the parties' clear intent in drafting the Termination

Agreement, and would deny NAB the benefit of its bargain. This we decline to do.

       The Termination Agreement, however, requires a different result.          We have

already concluded that the Termination Agreement is ambiguous and that, on remand,

the Court of Federal Claims must consider extrinsic evidence to determine the parties'

intent in drafting the agreement. Such evidence is always admissible, in any case, to

determine the need for reformation of an instrument. See, e.g., Walden v. Skinner, 101

U.S. 577, 583 (1879) (noting that "Courts of equity afford relief in case of mistake of

facts, and allow parol evidence to vary and reform written contracts"); Travelers Indem.

Co. v. Calvert Fire Ins. Co., 798 F.2d 826, 835 (5th Cir. 1986) (noting that "[p]arol

evidence is admissible to prove . . . mutual mistake of fact"); see also Williston on

Contracts § 70:135 (4th ed.) ("The right of reformation . . . is necessarily an invasion or

limitation on the parol evidence rule."). On remand, the Court of Federal Claims must

review all relevant evidence and consider whether the Termination Agreement is

suitable for reformation to reflect the parties' intent.




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                                     CONCLUSION

      We hereby affirm the Court of Federal Claims' grant of NAB's motion for

summary judgment on the availability of expectancy damages. We reverse the trial

court's grant of summary judgment on the quantum of damages, and remand the action

to the Court of Federal Claims for further consideration in accordance with this opinion.

              AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

      No costs.




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