  United States Court of Appeals for the Federal Circuit

                                     06-5037, - 5043


    CARABETTA ENTERPRISES, INC., CARABETTA MANAGEMENT COMPANY,
      JOSEPH F. CARABETTA, CR HEDGEWOOD LIMITED PARTNERSHIP,
       CR NORWICH LIMITED PARTNERSHIP, CR SLEEPING GIANT LIMITED
     PARTNERSHIP, CR REDSTONE LIMITED PARTNERSHIP, CR SAYBROOK
     LIMITED PARTNERSHIP, CR STONEYCREST LIMITED PARTNERSHIP, CR
   WILLOWCREST LIMITED PARTNERSHIP, KINGSWOOD APARTMENTS, LTD.,
    NEWFIELD TOWERS REALTY CO., NEW MEADOWS REALTY CO., ORANGE
  APARTMENT ASSOCIATES, PATTON APARTMENT ASSOCIATES, SILVER POND
    REALTY CO., SOUTHFORD PARK REALTY CO., SPRINGFIELD INVESTORS,
   SPRINGFIELD II INVESTORS, SPRINGFIELD III INVESTORS, STONEYCREST
     TOWERS REALTY CO., VILLAGE PARK REALTY I CO., and VILLAGE PARK
                              REALTY II CO.,

                                                  Plaintiffs-Cross Appellants,

                                           V.


                                     UNITED STATES,

                                                       Defendant-Appellant.


        Steven J. Rosenbaum, Covington & Burling, of Washington, DC, argued for
plaintiffs-cross appellants.

       Jane W. Vanneman, Senior Trial Attorney, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for defendant-
appellant. With her on the brief were Peter D. Keisler, Assistant Attorney General, and
David M. Cohen, Director. Of counsel were Gerald M. Alexander, Nancy D. Christopher,
and Arnette L. Georges, Department of Housing and Urban Development, of Washington,
DC.

Appealed from: United States Court of Federal Claims

Senior Judge Robert H. Hodges, Jr.
United States Court of Appeals for the Federal Circuit
                                  06-5037,-5043


   CARABETTA ENTERPRISES, INC., CARABETTA MANAGEMENT COMPANY,
      JOSEPH F. CARABETTA, CR HEDGEWOOD LIMITED PARTNERSHIP,
     CR NORWICH LIMITED PARTNERSHIP, CR SLEEPING GIANT LIMITED
PARTNERSHIP, CR REDSTONE LIMITED PARTNERSHIP, CR SAYBROOK LIMITED
PARTNERSHIP, CR STONEYCREST LIMITED PARTNERSHIP, CR WILLOWCREST
LIMITED PARTNERSHIP, KINGSWOOD APARTMENTS, LTD., NEWFIELD TOWERS
REALTY CO., NEW MEADOWS REALTY CO., ORANGE APARTMENT ASSOCIATES,
       PATTON APARTMENT ASSOCIATES, SILVER POND REALTY CO.,
         SOUTHFORD PARK REALTY CO., SPRINGFIELD INVESTORS,
          SPRINGFIELD II INVESTORS, SPRINGFIELD III INVESTORS,
     STONEYCREST TOWERS REALTY CO., VILLAGE PARK REALTY I CO.,
                    and VILLAGE PARK REALTY II CO.,

                                             Plaintiffs-Cross Appellants,

                                        v.

                                UNITED STATES,

                                             Defendant-Appellant.


                         __________________________

                            DECIDED: April 4, 2007
                         ___________________________



Before LOURIE, RADER, and BRYSON, Circuit Judges.

BRYSON, Circuit Judge.

      The plaintiffs, Joseph F. Carabetta and a group of companies associated with

him, are the owners and managers of properties that have provided low-income rental

housing under several programs sponsored by the Department of Housing and Urban

Development (HUD). Based on a dispute with HUD, the plaintiffs, which we refer to
collectively as “Carabetta,” brought a breach of contract action against the United States

in the Court of Federal Claims. On cross-motions for summary judgment, the court held

the United States liable for breach of contract. 58 Fed. Cl. 563, 568 (2003). The court

then conducted a trial on damages and entered an award. 68 Fed. Cl. 410, 426 (2005).

The government appeals from the trial court’s liability determination, and Carabetta

cross-appeals with respect to the damages award. We affirm as to both the liability

appeal and the damages cross-appeal.

                                            I

      During the 1960s and 1970s, the plaintiffs acquired a number of low-income

housing properties using mortgages insured by the federal government under sections

221(d)(3) and 236 of the National Housing Act, Pub. L. No. 73-479, 48 Stat. 1246

(1934), as amended by Pub. L. No. 87-70, § 101, 75 Stat. 149, 150-51 (1961), and Pub.

L. No. 90-448, § 201, 82 Stat. 476, 498-501 (1968). Deeds insured under that program

gave the owners the option of paying off the mortgages early, once 20 years had

passed since the mortgage was issued.

      As the mortgage program neared its 20-year anniversary, Congress became

concerned that owners of properties insured under the program would pay off their

mortgages and, freed of the mortgage restrictions, would convert the properties from

low-income housing to more profitable rental units. Accordingly, Congress passed the

Emergency Low Income Housing Preservation Act of 1987 (ELIHPA), Pub. L. No. 100-

242, 101 Stat. 1877, and the Low-Income Housing Preservation and Resident

Homeownership Act of 1990 (LIHPRHA), Pub. L. No. 101-325, 104 Stat. 4249. Both

statutes prohibited owners from prepaying section 221(d)(3) mortgages without



06-5037,-5043                               2
approval from HUD. The statutes instead authorized HUD to guarantee private loans

on the properties in amounts up to 90 percent of the equity in the properties plus any

approved rehabilitation costs. As a condition of granting such a guarantee, HUD was

required to ensure that the properties would continue to operate as low-income housing

and that the property owners satisfied certain other requirements.           One of the

requirements was that property owners had to be in compliance with all applicable HUD

regulations governing the condition of the properties. 24 C.F.R. § 248.145(a)(12). The

loans that HUD guaranteed were known as section 241(f) equity loans because the

guarantees were authorized under section 241(f) of the National Housing Act, as

amended by ELIHPA, 101 Stat. at 1884.

      When Carabetta applied for section 241(f) equity loans on its properties, HUD

refused to process the necessary paperwork on the ground that Carabetta was not in

compliance with certain HUD regulations. Carabetta and HUD resolved that issue in

August 1994 when they executed what they termed a Repayment Agreement. The

Repayment Agreement provided that HUD would insure loans on eight of Carabetta’s

properties. Carabetta would then use $11 million of the loan proceeds to bring itself into

compliance with HUD regulations. Both HUD and Carabetta fulfilled their obligations

under that portion of the agreement in 1995.

      The Repayment Agreement further provided that once Carabetta brought itself

into compliance with the HUD regulations, HUD would insure loans on all the Carabetta

properties listed on schedule D of the agreement, so long as those properties met the

other eligibility requirements. Schedule D listed 25 properties the parties agree were to

be insured under this provision.     Another property was inadvertently omitted from



06-5037,-5043                               3
schedule D, but the parties have agreed to treat that property as if it had been included.

Accordingly, the parties agree that there were at least 26 properties for which HUD

promised to insure loans. Carabetta additionally contends that HUD was obligated to

insure a loan for a twenty-seventh property, Southford Park, which was listed on

schedule D under the designation “subject to appeal.”

       While Carabetta was waiting for HUD to process the loan paperwork on the

schedule D properties, Congress enacted the Department of Veterans Affairs and

Housing and Urban Development, and Independent Agencies Appropriations Act, 1997

(“Appropriations Act”), Pub. L. No. 104-204, 110 Stat. 2874 (1996).           Among other

things, that statute repealed section 241(f) of the National Housing Act, thus prohibiting

HUD from insuring any more section 241(f) equity loans. 110 Stat. at 2884-85. Instead,

the statute authorized HUD to issue $75 million in interest-free “capital loans” directly to

low-income properties in three enumerated categories, the first of which included the

Carabetta properties. 1 The statute gave HUD discretion regarding how to distribute the




       1
           The relevant portion of the Appropriations Act reads as follows:

       $75,000,000 shall be available for obligation until March 1, 1997 for
       projects (1) that are subject to a repayment or settlement agreement that
       was executed between the owner and the Secretary prior to September 1,
       1995; (2) whose submissions were delayed as a result of their location in
       areas that were designated as a Federal disaster area in a Presidential
       Disaster Declaration; or (3) whose processing was, in fact or in practical
       effect, suspended, deferred, or interrupted for a period of twelve months or
       more because of differing interpretations . . . .

110 Stat. at 2884.



06-5037,-5043                                4
$75 million among the three groups of properties, but it limited the amount of each loan

to 65 percent of the equity in the property plus any approved rehabilitation costs.

       Pursuant to the authorization provided by the Appropriations Act, HUD chose to

issue a total of $25 million in direct loans to seven of Carabetta’s schedule D properties.

It used the remaining $50 million to fund loans to properties falling in the other two

categories. The government acknowledges that it had no contractual duty to fund any

of the non-Carabetta properties in the other two categories.

       When HUD failed to provide capital loans for the other Carabetta properties listed

on schedule D of the Repayment Agreement, Carabetta brought suit against the

government in the Court of Federal Claims. It claimed that HUD had breached the

Repayment Agreement and that HUD was obliged to use what was needed from the

remaining $50 million of the Appropriations Act funds to provide capital loans to an

additional 15 schedule D properties. Those properties included Southford Park but

excluded five properties that did not qualify for loans under HUD regulations.        The

government argued that the Appropriations Act made performance of its obligations

impossible and that the “sovereign acts doctrine” excused the government from liability.

In an opinion issued in response to cross-motions for summary judgment on liability, the

Court of Federal Claims agreed with the government that the Appropriations Act was a

sovereign act. The court found, however, that HUD’s offer of capital loans for the seven

funded Carabetta properties constituted an offer to modify the Repayment Agreement

by substituting capital loans for the section 241(f) loans.      According to the court,

Carabetta accepted that offer when it accepted the loans on the first seven properties.




06-5037,-5043                               5
HUD’s failure to fund the loans on the remaining schedule D properties, the court

concluded, was a breach of the modified Repayment Agreement.

       The Court of Federal Claims then conducted a trial on damages. Following that

trial, the court denied Carabetta’s request that damages be calculated to include three

contested categories: (1) a “tax gross-up” on the proceeds of the capital loans that

should have been issued; (2) additional damages attributable to the rehabilitation loans

for the schedule D properties; and (3) damages attributable to the loan that Carabetta

contends should have been issued for the Southford Park property, which the court did

not include among the properties as to which HUD was obligated to make loans. The

government appeals the liability determination, and Carabetta cross-appeals the court’s

ruling on those damages issues. We affirm with respect to all issues.

                                            II

       The government argues that the trial court was correct insofar as it concluded

that the Appropriations Act constituted a sovereign act that shielded HUD from liability

for breach of the original, unmodified contract. The government contends, however,

that the trial court erred when it found that the parties agreed to a modification of the

Repayment Agreement, which the government breached. Because we hold that the

government is liable under the original, unmodified Repayment Agreement, we do not

address the arguments relating to whether that contract was modified and, as modified,

was breached.

       The sovereign acts doctrine is designed to balance “the government’s need for

freedom to legislate with its obligation to honor its contracts.” Winstar v. United States,

518 U.S. 839, 895 (1996). It holds that “the United States when sued as a contractor



06-5037,-5043                               6
cannot be held liable for an obstruction to the performance of [a] particular contract

resulting from its public and general acts as a sovereign.” Id. at 890 (quoting Horowitz

v. United States, 267 U.S. 458, 461 (1925)). Accordingly, the sovereign acts doctrine

exempts the “[g]overnment as contractor from the traditional blanket rule that a

contracting party may not obtain discharge if its own act rendered performance

impossible.” Winstar, 518 U.S. at 904. Yet even if the sovereign acts doctrine applies,

“it does not follow that discharge will always be available, for the common-law doctrine

of impossibility imposes additional requirements before a party may avoid liability for

breach.” Id.

       One such requirement is embodied in the doctrine of partial impossibility or

partial impracticability. According to the Restatement of Contracts, “[w]here only part of

an obligor’s performance is impracticable, his duty to render the remaining part is

unaffected if . . . it is still practicable for him to render performance that is substantial,

taking account of any reasonable substitute performance that he is under a duty to

render.” Restatement (Second) of Contracts § 270 (1981); Yost v. Council Bluffs, 471

N.W.2d 836, 840 (Iowa 1991); Heinrich v. R.L. Oil & Gas Co., 442 N.W.2d 467, 470

(S.D. 1989); E. Allan Farnsworth, Farnsworth on Contracts § 9.9 (2001). Comment b to

section 270 of the Restatement states that “if the obligor can render a reasonable

substitute performance in place of the impracticable part, he must do so under his duty

of good faith in performance, and that substitute performance will be considered in

determining whether his performance would be substantial.” Restatement (Second) of

Contracts § 270, cmt. b (internal cross-references omitted); Spalding & Son, Inc. v.

United States, 28 Fed. Cl. 242, 248 (1993); Heinrich, 442 N.W.2d at 470; Farnsworth



06-5037,-5043                                 7
§ 9.9. In other words, if the obligor is able to render reasonable substitute performance

for what has become impossible, and that performance would substantially fulfill the

contract’s requirements, the obligor has a duty to render that substantial performance.

Whether the aggregate performance would be considered substantial depends on the

expectations of the obligee. Restatement (Second) of Contracts § 270, cmt. b.

      The Appropriations Act made it impossible for HUD to insure any of the section

241(f) loans for Carabetta’s schedule D properties. However, the Act simultaneously

provided HUD with the authority and capacity to render reasonable substitute

performance: It gave HUD discretion to issue $75 million in capital loans to Carabetta

and others. Carabetta made clear that it would consider such loans to be substantial

performance under the Repayment Agreement; it accepted capital loans for seven of its

properties and contended that the Repayment Agreement obligated the government to

provide capital loans for the remaining qualifying schedule D properties. Accordingly,

even if the Appropriations Act was a sovereign act, HUD was still obligated to fulfill its

obligations under the Repayment Agreement through the substitute performance of

providing direct loans to Carabetta’s qualifying schedule D properties to the extent

authorized under the Appropriations Act.

      The government argues that capital loans are “markedly different” from section

241(f) equity loans. It points out that the new loans were direct loans instead of simply

insured loans, that the size of each loan was reduced, and that the recipients were

required to satisfy additional requirements to qualify for capital loans. Those differences

are insufficient to make capital loans ineligible to serve as substitute performance for

the promised section 271(f) equity loans. Any decrease in the amount of the loan or



06-5037,-5043                               8
increase in the qualification requirements only benefits the government by lowering its

potential liabilities. Since Carabetta was prepared to accept the capital loans in place of

HUD’s promised performance, only an additional burden on HUD sufficient to make

providing capital loans to Carabetta unreasonable would make the capital loans an

inappropriate substitute for the section 241(f) equity loans. The only additional burden

the government points to is the fact that issuing capital loans required HUD to make

direct monetary outlays instead of just insuring private loans. At best, that argument is

only an assertion that substituting direct capital loans for the section 241(f) loans made

its performance more costly. HUD does not suggest that it lacked the capacity or legal

authority to provide capital loans for the schedule D properties in dispute. Indeed, HUD

admits that it had no obligation to provide loans to any non-Carabetta property and that

it had discretion to divide the $75 million in capital loans in any way it saw fit.

Accordingly, while providing capital loans for the disputed schedule D properties may

have made performance more expensive than it would have been absent the statutory

change, HUD has not met its burden of showing that providing capital loans was

unreasonable as a form of substitute performance. Because HUD was obligated to

provide capital loans as substitute performance but failed to do so, we affirm the trial

court’s grant of summary judgment of liability on that ground.

                                            III

       On cross-appeal, Carabetta argues that the trial court erred as a matter of law

when it denied expectation damages for (1) a tax gross-up on the damages amount

corresponding to the loans Carabetta would have received, (2) the repair and

rehabilitation loans Carabetta would have received had it been granted the capital



06-5037,-5043                               9
loans, and (3) the loan allegedly owed to Southford Park, the property whose inclusion

on schedule D was designated as being subject to appeal. We hold that the trial court

was correct to reject each of those damages claims.

                                              A

       The parties agree that the capital loans Carabetta would have received absent

the breach would have been tax-free, but that the damages award it will now receive is

taxable. Carabetta argues that in light of the differing tax treatment accorded to funds

that would have been obtained through actual performance and to the funds that will be

obtained pursuant to a damages award, it is entitled to an increase in the amount of the

award to offset the taxes it will be required to pay.

       While it is true that a “tax gross-up” is appropriate when a taxable award

compensates a plaintiff for lost monies that would not have been taxable, Home Sav. of

Am. v. United States, 399 F.3d 1341, 1356 (Fed. Cir. 2005), that is not the case here

because Carabetta is not being compensated for the loss of untaxable funds. The

measure of Carabetta’s expectation damages is the amount it would have gained from

receiving the capital loans. Because Carabetta would have had to repay the loans, the

only benefit Carabetta would have realized from each loan was the investment income

earned on the principal minus any interest it would have been required to pay over the

life of the loan. HUD’s capital loans were interest-free, meaning that Carabetta’s benefit

would be measured by the total amount of the loan’s investment income.

       Carabetta’s method of measuring damages is actually consistent with the

foregoing analysis. Where Carabetta’s argument for an additional tax gross-up on that

amount goes awry is the point at which it assumes that its method results in a damages



06-5037,-5043                                10
amount attributable to something other than interest earned on the loan principal.

Carabetta measured its expectation damages by starting with the amount of the loans it

would have received under the contract, adjusting that amount to present value, and

subtracting the amount it would have had to repay on the maturity date of the loans,

adjusted to present value. Because the capital loans would have been provided on an

interest-free basis, the amount Carabetta would have received under the contract is the

same as the amount it would have had to repay.          Accordingly, the only difference

between the two amounts is the adjustment to present value. Since the adjustment to

present value is a way of accounting for the estimated value of interest over time,

Carabetta’s damages model simply takes into account the amount of interest, in today’s

dollars, that would accumulate over the life of the loan.        That is another way of

describing investment income. Because, as Carabetta admits, investment income from

tax-free money is taxable, Carabetta’s lost income would have been taxable and thus

Carabetta is not entitled to a tax gross-up. 2




       2
              This point can be illustrated with a simple example. Assume a one-year
zero-interest loan of $1000 and an investment interest rate of 10 percent per year. At
the end of the year, the loan recipient will have $1100 and will have to pay back $1000,
leaving a profit equal to the (taxable) investment income of $100. At oral argument,
Carabetta’s counsel asserted that this was the wrong way to think about the problem.
Counsel argued that if, on the day the loan issued, Carabetta invested the portion of the
loan principal that, together with the accrued interest on that sum, would be sufficient to
repay the loan at the end of the loan term, the remainder would be equivalent to cash
given to it tax free. In the example, Carabetta would need to invest $909.09 of the
principal to repay the loan at the end of the year and would have $90.91 remaining in a
second account to invest separately. The $909.09 invested principal would produce
$90.91 in (taxable) interest income, and the $90.91 in the second account would
produce $9.09 in (taxable) interest income. At the end of the year, the loan recipient
would use the invested principal to pay back the $1000 loan and would be able to keep
the $100, consisting of the $90.91 initially in the second account plus the $9.09 interest


06-5037,-5043                                11
                                            B

      Carabetta next argues that it is entitled to damages corresponding to the capital

loans it would have received to rehabilitate and repair the properties. When processing

loan application paperwork, HUD would identify and approve certain necessary repairs

to the properties collateralizing the loans. The Appropriations Act provided that the

capital loan granted to a property could include the amount needed to pay for those

repairs. 110 Stat. at 2885 (limiting the amount of the loan to “the cost of rehabilitation

. . . plus 65 percent of the property’s preservation equity”). Repair funds were placed in

escrow accounts and disbursed only as the approved repairs were completed, so

Carabetta would have had the funds only long enough to pay the contractor or supplier.

Carabetta, 68 Fed. Cl. at 420. Carabetta argues that repairs enabled by the loans

would have maintained or enhanced property values while making the properties more

appealing, thereby facilitating the attraction and retention of quality tenants. It argues

that it is entitled to damages for those lost benefits and that the correct measure of

damages is, again, the present value of the loan disbursement less the present value of

the repayment amount.      That measure equals the investment income on the dollar

amount of the repair loans.




earned in that account. Because a total of $100 in the two accounts would be
investment income, that amount would be subject to tax. The example thus
demonstrates that no matter how the loan principal is divided at the outset, the value of
the loan to the recipient is $100, and because that $100 is all investment income, it is
taxable. To put it simply, the value of a zero-interest loan is always equal to the
investment proceeds obtained from it.




06-5037,-5043                              12
       As the trial court correctly held, the flaw in that argument is that the benefits lost

do not correspond to the damages claimed. Carabetta’s method of measuring damages

uses the same interest and discount rates that are used to measure the return on

unencumbered funds.       But the repair portion of the loan was not unencumbered;

Carabetta was required to invest it in repairing the mortgaged properties. While there

might be some positive return on that investment, Carabetta did not introduce evidence

sufficient to demonstrate, with reasonable certainty, what the rate of return would be.

See Nat’l Austl. Bank v. United States, 452 F.3d 1321, 1326 (Fed. Cir. 2006) (“It is

axiomatic that expectancy damages must be proved with reasonable certainty.”).

Carabetta’s damages model is predicated on a “cash-flow” theory, which measures the

difference in cash flows over time between the real world and a hypothetical world

where there was no breach.        The property value increase would be realized as a

positive cash flow, if at all, only when the properties were sold, 3 and would then need to

be discounted back to present value from the time of sale. Yet no evidence was offered

to show what the change in property values would be at that time. There was also no

reliable evidence presented on any cash flows associated with the easier retention and

attraction of quality tenants. Accordingly, Carabetta has presented no evidence from

which the court can conclude that Carabetta is entitled to the income that could be




       3
            As correctly noted by the trial court, the very short time the repair funds
would have been in Carabetta’s account between repair completion and payment would
not generate a net positive cash flow to Carabetta. Any benefit earned in that time
would be negligible.



06-5037,-5043                                13
made by investing the repair loans at the same rates of return that would be available if

the same funds were unencumbered. 4

      Carabetta also argues that, as when a contractor fails to complete work on a

property, the value of the repairs is the cost of the repairs. On that theory, Carabetta

contends that the value of the repairs is measured by the amount of the loan as

approved by HUD. That argument is also inconsistent with the measure of damages

requested, which was restricted to the investment value of the loan principal because

the Repayment Agreement was a contract for a loan, not a contract for repairs. To give

Carabetta the amount the repairs cost to perform, which is a portion of the loan

principal, would be to treat Carabetta as if it were not obligated to repay the loan.

Because the value of the repair loans is not equal to either the amount of the loan

disbursement or the investment value of the repair loan at the rates used for

unencumbered cash, the trial court properly concluded that Carabetta failed to prove its

entitlement to those damages.



      4
               One of Carabetta’s damages experts, David Smith, testified that Carabetta
would also have benefited from the repair loans by avoiding the need to expend its own
funds to perform the repairs. Mr. Smith may have been indicating that Carabetta would
have been able to take the money it no longer needed for repairs and invest it
elsewhere, just as it could do with the cash disbursements. That might mean that
Carabetta should recover the amount it expended to complete repairs at the same
interest and discount rates as the cash disbursements. Mr. Smith, however, also
indicated that Carabetta did not perform all the repairs listed, and there is no evidence
relating to the amount Carabetta expended on the repairs it performed. Accordingly,
even if that theory would otherwise be viable, Carabetta failed to demonstrate damages
to a reasonable certainty and thus is not entitled to recovery on that ground. See Nat’l
Austl. Bank, 452 F.3d at 1326. Nor can the court grant Carabetta the investment value
of the full amount of the repair loans, as is requested, without giving Carabetta an
impermissible double recovery. Some of the money that would be compensated for
was not used to repair the properties and thus was available for unencumbered
investment regardless of the breach.


06-5037,-5043                              14
                                            C

       Last, Carabetta argues that an additional property, Southford Park, is entitled to

damages under the Repayment Agreement. In 1983, Southford Park executed a “Use

Agreement” with HUD in order to receive a flexible subsidy loan under section 221(d)(3)

of the National Housing Act, 75 Stat. at 150-51.       Paragraph 1 of that agreement

obligated Southford Park to operate in accordance with the requirements of section

221(d)(3) until February 2010. A typewritten addition to that paragraph, however, stated

the following: “[HUD] will consider a request from [Southford Park] for permission to

cease operation under Section 221(d)(3). Under certain circumstances such permission

will not be unreasonably withheld.”

       In 1992, Carabetta applied for benefits under section 241(f) for Southford Park.

HUD denied that application because Southford Park’s obligations under the Use

Agreement made it ineligible to participate in the 241(f) equity loan program. Later,

during negotiations over the Repayment Agreement, HUD argued that Southford Park

should not be included on schedule D because of that ineligibility determination. In the

end, Southford Park was placed on schedule D “subject to appeal,” and a footnote was

added to the contract stating that “schedule D also includes . . . Southford Park, which

Carabetta is appealing to HUD to include as Sec. 241(f) eligible in light of HUD’s current

determination that it is not.”

       Shortly after the Repayment Agreement was signed, Carabetta sought to have

HUD reverse its eligibility determination for Southford Park.     One of the steps that

Carabetta took was to submit a “waiver request” in which it argued that the Use

Agreement footnote constituted an “extenuating circumstance[]” that allowed Southford



06-5037,-5043                              15
Park to terminate the agreement and made Southford Park eligible for a section 241(f)

loan. In its response, HUD refused the requested waiver and noted that waivers were

occasionally given to properties that had virtually no equity and that were being sold to

non-profit organizations for operation as low-income housing in perpetuity. Because

Southford Park did not fit that profile, HUD concluded that it was not appropriate to

waive the section 221(d) requirements and allow Southford Park to receive section

241(f) incentives.

       Carabetta now argues that, by operation of law, it must be deemed to have been

released from its obligations under the section 221(d)(3) program because HUD

unreasonably withheld its permission to withdraw from that program. Carabetta further

argues that the Repayment Agreement obligated HUD to include Southford Park on

schedule D and to insure its section 241(f) loan.       Were these arguments correct,

Southford Park would be entitled to damages.

       Carabetta’s argument, however, fails at the first step. To prevail, Carabetta must

show that Southford Park was eligible for the section 241(f) incentives, which requires it

to establish that HUD was obligated to allow Southford Park to withdraw from the

section 221(d)(3) program. In an effort to make that showing, Carabetta argues that

HUD did not present any reasonable justification for refusing to waive all of Southford

Park’s obligations under the Use Agreement. Carabetta, however, does not address

HUD’s explanation for denying Carabetta’s waiver request, which was that Carabetta’s

request did not comport with HUD’s standard policy for determining when to grant such

waivers. Instead, Carabetta focuses on negating HUD’s arguments that Southford Park

would be ineligible for 241(f) incentives regardless of whether HUD allowed that



06-5037,-5043                              16
property to be withdrawn from the section 221(d)(3) program. Accordingly, Carabetta

has failed to show that HUD’s denial of the requested waiver was unreasonable or that

it violated the terms of the Use Agreement for HUD to apply its standard policies to

Carabetta’s waiver request. Because Carabetta has failed to show that HUD breached

its contractual obligations with respect to Southford Park, it is not entitled to damages

for HUD’s denial of loan benefits for that property.

       Because the trial court did not err with respect to any of the appealed damages

issues, we affirm the trial court’s judgment on the cross-appeal.

       Each party shall bear its own costs for this appeal and cross-appeal.

                                       AFFIRMED.




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