 United States Court of Appeals for the Federal Circuit



                                    04-5021, -5022

                           FIRST HEIGHTS BANK, FSB,
                       PULTE DIVERSIFIED COMPANIES, INC.,
                             and PULTE HOMES, INC.,

                                                     Plaintiffs-Cross Appellants,

                                           v.

                                   UNITED STATES,

                                                     Defendant-Appellant.



        Robert K. Huffman, Miller and Chevalier Chartered, of Washington, DC, argued for
plaintiffs-cross appellants. With him on the brief were Alan I. Horowitz and Lisanne E.S.
Cottington.

      David M. Cohen, Director, 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, Jeanne E.
Davidson, Deputy Director, and Jeffery T. Infelise, Trial Attorney.

Appealed from: United States Court of Federal Claims

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

                                     04-5021, -5022


                           FIRST HEIGHTS BANK, FSB,
                       PULTE DIVERSIFIED COMPANIES, INC.,
                             and PULTE HOMES, INC.,

                                                       Plaintiffs-Cross Appellants,

                                            v.

                                   UNITED STATES,

                                                       Defendant-Appellant.

                            __________________________

                              DECIDED: August 17, 2005
                            __________________________

Before MICHEL, Chief Judge, NEWMAN, and LOURIE, Circuit Judges.

MICHEL, Chief Judge.

      The United States appeals from the judgment of the United States Court of

Federal Claims, awarding $48.7 million in damages to First Heights Bank, FSB, Pulte

Diversified Companies, Inc., and Pulte Homes, Inc. (collectively, “plaintiffs”).      The

appeal was submitted after oral argument on July 6, 2005. Because the trial court

properly determined liability and damages in this breach of contract action, we affirm.

                                            I

      This case is one of many arising out of the savings and loan crisis of the 1970s

and 1980s. See United States v. Winstar Corp., 518 U.S. 839 (1996) (discussing the

savings and loan crisis). At the heart of these “Winstar” cases are government actions
that were taken to induce otherwise healthy businesses and financial institutions to

acquire troubled savings and loan associations (“thrifts”).

        This case is based on the “Assistance Agreement” involving two of the three

plaintiffs and the government.       The details of the Assistance Agreement and the

negotiations leading up to it are explained in several of the trial court’s opinions and will

not be repeated here. See First Heights Bank, FSB v. United States, 51 Fed. Cl. 659

(2001); First Heights Bank, FSB v. United States, 53 Fed. Cl. 195 (2002); First Heights

Bank, FSB v. United States, 57 Fed. Cl. 162 (2003).                In short, after extended

negotiations with representatives of the Federal Home Loan Bank Board and the

Federal Savings and Loan Insurance Corporation (“FSLIC”), plaintiffs acquired five

failing thrifts in exchange for various considerations detailed in the Assistance

Agreement. A primary benefit of the Assistance Agreement from plaintiffs’ perspective

was the expected ability to claim the net liabilities of the failing thrifts as tax deductions,

even if the net liabilities were offset by payments from the government (“reimbursed net

liabilities”).

        Several years after plaintiffs acquired the failing thrifts, Congress enacted section

13224 of the Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13224,

107 Stat. 312, 485-86, which is also known as the Guarini Amendment. The Guarini

Amendment had the effect of disallowing the acquiring firms from claiming reimbursed

net liabilities as tax deductions.

        Plaintiffs brought suit in the Court of Federal Claims in 1996, alleging that the

Guarini Amendment breached the Assistance Agreement.                The trial court entered

summary judgment in favor of plaintiffs, concluding, inter alia, that the Guarini




04-5021, -5022                                2
Amendment breached the implied covenant of good faith and fair dealing and awarding

damages of $48.7 million in favor of plaintiffs. The government appeals the trial court’s

summary judgment as to liability and damages, and plaintiffs cross-appeal the trial

court’s rejection of its claim for lost profits.   We have jurisdiction under 28 U.S.C.

§ 1295(a)(3).

                                             II

       The facts of this case are closely connected to a subset of Winstar cases in

which the primary allegation is that the Guarini Amendment breached agreements

between the government and various private entities that acquired failing thrifts. The

first case in which we considered this subset of Winstar cases was Centex Corp. v.

United States, 395 F.3d 1283 (Fed. Cir. 2005). In that case, we concluded that prior to

the Guarini Amendment the law allowed the acquiring firm to deduct reimbursed net

liabilities. Id. at 1291-1304. We also concluded that the enactment of the Guarini

Amendment breached the implied covenant of good faith and fair dealing by

retroactively eliminating the ability to claim those deductions. Id. at 1304-11.

       The liability issues in this case are largely governed by the decision in Centex.

Because the briefing in this case closed before Centex was decided, the government’s

briefs contained many legal arguments that were rejected in Centex. To determine

which arguments remained at issue after Centex, we issued an order before oral

argument directing the parties to file supplemental briefing addressing the impact of

Centex on this case. In its supplemental briefing, the government argued only that

Centex was wrongly decided. Such an argument is misplaced because we must follow

Centex, regardless whether we or the government think it was incorrectly decided.




04-5021, -5022                               3
Failing to distinguish Centex in its supplemental briefing, the government, nevertheless,

raised two points during oral argument to explain why it cannot be held liable for

damages.

      The government first argues that damages cannot be awarded in this case

because Pulte Homes, Inc. (“Pulte”), the parent corporation of Pulte Diversified

Companies, Inc. (“PDCI”), is the only plaintiff that could be entitled to damages, but

Pulte lacks standing to assert a claim for damages as it was not a party to the

Assistance Agreement. In Centex, we rejected an indistinguishable contention that the

parent corporation in that case, Centex Corporation, was the only party that could be

entitled to damages but could not assert a damages claim. Specifically, we held:

      As a member of the Centex Consolidated Group, CTX [Centex’s
      subsidiary] was eligible to share its tax benefits with the Group, and it was
      severally liable for the Group’s tax liabilities. While it is true that CTX
      retained its status as a separate taxable entity, CTX was nonetheless a
      member of the Centex Consolidated Group that consented to the filing of a
      consolidated tax return. As a consequence, it enjoyed the benefits and
      was subject to the liabilities flowing from the consolidation of the tax
      accounts of the various affiliated entities. CTX was therefore in a position
      to benefit, through the reduction of the Consolidated Group’s tax liability,
      from deductions that would reduce the Consolidated Group’s taxable
      income. For that reason, CTX has a legal stake in the question whether
      the Consolidated Group was entitled to the tax benefits that were
      assertedly revoked by the Guarini amendment. We therefore reject the
      government’s argument that neither [Centex nor CTX] has standing to sue
      for breach of contract.

Centex, 395 F.3d at 1291 (citations omitted).

      Similarly in this case, Pulte and PDCI filed consolidated tax returns.          PDCI,

therefore, “enjoyed the benefits and was subject to the liabilities flowing from the

consolidation of the tax accounts.” Id. Because PDCI thus has standing to assert the

damages claimed in this case, the first premise of the government’s argument -- that




04-5021, -5022                             4
Pulte is the only plaintiff that could be entitled to damages -- fails. Accordingly, we

reject this argument that damages cannot be awarded.1

       The government next contends that damages cannot be awarded because the

Assistance Agreement in this case includes a provision, not at issue in Centex, that

supplies the exclusive remedy for the breach, and plaintiffs cannot prove damages

under that remedy. The provision to which the government refers is section 9(i) of the

Assistance Agreement, which provides in pertinent part:

       Disallowed Deductions. In the event and to the extent Net Tax Benefits
       are credited to Special Reserve Account I or paid to the CORPORATION
       with respect to Tax Benefit Items that are subsequently disallowed or that
       are subsequently determined not to be excludible, or that cease to be Tax
       Benefit items because it is determined that payments with respect to such
       Tax Benefit Items are not to be excludible from gross income, such Net
       Tax Benefits shall be debited to Special Reserve Account I or, if this
       Agreement has terminated, paid to the PARENT ACQUIRING
       CORPORATION.

The effect of section 9(i) is to allow plaintiffs to seek reimbursement from the

government of payments made to FSLIC related to deductions that were subsequently

disallowed. Because plaintiffs did not make any such prepayments, the government

argues that plaintiffs are not entitled to any damages.

       We find the government’s argument unpersuasive. Although reimbursement of

prepayments on subsequently disallowed deductions is undoubtedly one remedy under

the Assistance Agreement, there is no evidence that such reimbursement was intended

to be the sole remedy. Indeed, section 25 of the Assistance Agreement provides to the



       1
                Because we reject the first premise of the government’s argument, we
need not reach its second premise -- that Pulte lacks standing to assert the damages
claimed in this case -- including the contention that representations Pulte made during
litigation in the United States District Court for the Eastern District of Michigan estop it
from claiming to be a party to the contract here.


04-5021, -5022                               5
contrary. It states that “[t]he rights, powers, and remedies given to the parties by this

Agreement shall be in addition to all rights, powers, and remedies given by any

applicable statute or rule of law.” Because that remedy is not exclusive, section 9(i)

does not preclude plaintiffs from seeking damages other than mere reimbursement of

such prepayments. Hence, we conclude that section 9(i) does not limit the remedies

available to plaintiffs and, therefore, does not provide a basis for the government to

avoid liability.

        Accordingly, the government has failed to demonstrate that the trial court erred in

holding it liable for breach of contract.

                                             III

        The government also raises three arguments regarding the amount of damages

awarded by the trial court. First, the government claims that $32.7 million in additional

tax “charge-offs” should not be included in the damages calculation. The government

bases its contention on what it describes as two alternative grounds. The first so-called

alternative ground relates to mitigation. The government contends that there exists a

genuine issue of material fact as to the reasonableness of plaintiffs’ mitigation efforts

because “nothing prevented plaintiffs from amending their tax returns to take

advantage” of these charge-offs. In the government’s view, because plaintiffs could

have, but did not, accelerate the $32.7 million in additional charge-offs as deductions to

the tax years preceding March 4, 1991, the effective date of the Guarini Amendment,

plaintiffs should be barred from recovering damages based on those charge-offs.

        The trial court rejected the government’s mitigation argument after careful

consideration of the facts. In 1993, plaintiffs amended their consolidated federal income




04-5021, -5022                               6
tax returns for 1989 and 1990 to lessen the impact of the Guarini Amendment by

accelerating available charge-offs to pre-Guarini tax years.         During this litigation,

however, one of plaintiffs’ experts, Linda McCall, determined after “extensive analysis

and review” that “documentation errors” were made in the calculation that led to the

previously accelerated charge-offs. These errors amount to an additional $32.7 million

in tax charge-offs being asserted in this litigation.      In rejecting the government’s

mitigation argument, the trial court held that “[a] party that attempted to mitigate should

not be penalized for overlooking minor additional damage avoidance, particularly when,

as in this case, further mitigation might cause the risk of IRS scrutiny and audit.”

       We agree with the trial court that the government has not raised a triable issue of

fact as to the reasonableness of plaintiffs’ mitigation efforts. The law requires that the

non-breaching party make only “those efforts that are fair and reasonable under the

circumstances.” Home Sav. of Am., FSB v. United States, 399 F.3d 1341, 1353 (Fed.

Cir. 2005) (internal quotation omitted).         To support its mitigation argument, the

government relies solely on its assertion that “nothing prevented” plaintiffs from taking

the additional charge-offs prior to the effective date of the Guarini Amendment. The

mere assertion that mitigation was possible, however, does not raise a triable issue of

fact because it does not address the reasonability of the actions actually taken. Indeed,

several facts strongly suggest that plaintiffs’ mitigation efforts were reasonable. As

emphasized by the trial court, the additional $32.7 million in charge-offs claimed in this

litigation are minor as compared to the amount previously accelerated. Moreover, there

is no evidence to suggest that the documentation errors associated with the $32.7

million in charge-offs were themselves unreasonable. On the contrary, the fact that




04-5021, -5022                               7
these errors were uncovered only after “extensive analysis and review” during litigation

suggests that the errors were not so unreasonable as to constitute a failure to mitigate.

       The government characterizes its second so-called alternative ground as one of

causation, arguing that “if there were tax charge-offs that could have been taken by

plaintiffs prior to the effective date of [the Guarini Amendment], but were not, any

damages suffered by plaintiffs as a result of the loss of those charge-offs could not be

attributed to the breach.”    The clear import of the government characterizing its

argument as one of causation is to avoid the reasonability element of the mitigation

doctrine. We disagree, however, with the causation label that the government assigns

to its argument.    The sole allegation underlying the government’s argument is that

plaintiffs failed to take actions that would have eliminated some of the damages from

the breach.      Such an allegation is covered by the mitigation doctrine and its

reasonability element. We thus conclude that the government’s so-called causation

argument is identical to the government’s mitigation argument and reject it for the

reasons described above.

       Second, the government contends that a genuine issue of fact exists as to the

amount of the $32.7 million in additional charge-offs calculated by plaintiffs’ expert, Ms.

McCall. The government claims that Ms. McCall failed to establish the validity of the

$32.7 million number because her calculation involved over 200 transactions, but she

explained her rationale in detail for only two such transactions.            Because the

government has not identified any specific error with the expert’s methodology or result,

the government’s assertion is too general to raise a genuine issue of material fact. We




04-5021, -5022                              8
thus see no error in the district court accepting Ms. McCall’s explanation for her

calculation.

       Third, the government makes a somewhat complicated argument about Ms.

McCall’s calculation of single return limitation year net operating losses (“SRLY NOLs”).

We need not reach the details of this argument, however, because the conclusion that

the government draws is that if the SRLY NOLs had been accurately calculated, “First

Heights would have been able to utilize all of its SRLY NOLs before they expired” and,

therefore, plaintiffs failed to mitigate damages. This argument fails for the same reason

that the mitigation argument as to the $32.7 million in charge-offs fails, that is, the

government’s argument addresses only the possibility of mitigation, not the reasonability

of the actions actually taken. As stated by the trial court, the SRLY NOLs arguments

made by the government’s expert “merely reflect his view of how plaintiffs should have

conducted their affairs.    He has not presented any proof that plaintiffs, in fact,

unreasonably or illegally conducted their affairs.”2    First Heights Bank, 57 Fed. Cl.

at 172.

       Accordingly, the government has not demonstrated that the trial court erred in the

amount of its damages award.




       2
               The government also contends that the trial court abused its discretion in
finding that the government’s expert’s “criticisms cannot be taken into account.” First
Heights Bank, 57 Fed. Cl. at 172. The government argues that the trial court effectively
excluded the expert’s testimony and erred in doing so because the identification of a
means for mitigation is relevant to the mitigation issue. This contention misreads the
context of the trial court’s statement. The trial court did not exclude the expert’s
testimony on relevancy grounds but instead carefully considered the opinion and
determined that the criticisms raised by Mr. Wolf were insufficient to raise a triable issue
of fact.


04-5021, -5022                               9
                                             IV

       Plaintiffs cross-appeal the trial court’s denial of lost profits as damages. Plaintiffs

assert that Pulte would have reinvested into its homebuilding business the money it

would have received in tax benefits had the government not breached the Assistance

Agreement. Plaintiffs also claim that the government was made aware of their intention

to reinvest during the negotiations of the Assistance Agreement. According to plaintiffs,

the government was made aware of three facts: (1) that Pulte was involved in

homebuilding, (2) that Pulte had been profitable for 32 years in a row, and (3) that the

tax benefit sharing provision would provide benefits only if Pulte remained profitable.

       In Wells Fargo Bank, N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996), we

set forth the following requirement for determining entitlement to lost profits:

       If the profits are such as would have accrued and grown out of the
       contract itself, as the direct and immediate results of its fulfillment, then
       they would form a just and proper item of damages, to be recovered
       against the delinquent party upon a breach of the agreement. . . . But if
       they are such as would have been realized by the party from other
       independent and collateral undertakings, although entered into in
       consequence and on the faith of the principal contract, then they are too
       uncertain and remote to be taken into consideration as a part of the
       damages occasioned by the breach of the contract in suit.

Id. at 1022-23 (internal quotation omitted; alteration in original). Applying that standard,

we rejected a claim by Wells Fargo to recover not only the amount due on its loan to a

developer named High Plains that was guaranteed by the government but also the

profits the bank might have earned by reinvesting that money into its banking business.

We reasoned that “Wells Fargo’s loss of interest on additional loans it allegedly could

have made had there been no breach [was] too uncertain and remote” in part because

“the purpose of the guarantee was to enable Wells Fargo to make profits from the




04-5021, -5022                               10
interest on its loan to High Plains, not on some other loans it might make.” Id. at 1023

(internal quotation omitted).

       In this case, the trial court held “that the subject of the bargain was confined to

the opportunity to take advantage of the tax laws; that it would not have been forseeable

to federal negotiators that plaintiffs were entering into the arrangement to secure future

funds for homebuilding projects.” First Heights Bank, 57 Fed. Cl. at 174. We agree that

whatever additional profits plaintiffs might have earned on whatever additional projects

might have been undertaken had the government not breached the Assistance

Agreement are too remote to be compensable. Although the government was aware of

background information about Pulte being a profitable homebuilder, no specific

reference was made during negotiations to homebuilding projects for which the tax

benefits were to be used. Nor did the Assistance Agreement inherently refer to the

alleged additional homebuilding projects. The subject of the contract in this case was

simply money. Plaintiffs could have used the money in any number of ways, including,

but not limited to, funding additional homebuilding projects. Accordingly, we conclude

that the lost profits plaintiffs seek are not “such as would have accrued and grown out of

the contract itself, as the direct and immediate results of its fulfillment” and, therefore,

cannot be awarded. Wells Fargo, 88 F.3d at 1023.




04-5021, -5022                              11
                                              V

       In sum, we conclude that PDCI has standing to assert the damages claimed in

this case, section 9(i) of the Assistance Agreement does not provide the exclusive

remedy for a breach of the kind asserted in this case, plaintiffs reasonably mitigated

damages, the trial court properly considered plaintiffs’ expert testimony on the amount

of damages, and plaintiffs are not entitled to lost profit damages.   Accordingly, the

judgment of the trial court is affirmed.

                                           AFFIRMED




04-5021, -5022                                12
