First Nationwide Bank v. United States

United States Court of Appeals for the Federal Circuit

03-5128

FIRST NATIONWIDE BANK, FIRST GIBRALTER HOLDINGS, INC.,
and MACANDREWS & FORBES HOLDINGS, INC.,

Plaintiffs-Appellees,

v.

UNITED STATES,

Defendant-Appellant,

Harry M. Reasoner, Vinson & Elkins L.L.P., of Houston, Texas, argued for
plaintiffs-appellees. With him on the brief was Thomas P. Marinis, Jr. Of counsel on
the brief were John D. Taurman and John M. Faust, of Washington DC. Of counsel was
Gary L. Leshko, Cozen O’Connor, of New York, New York.

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 Scott D. Austin, Trial Attorney.

Appealed from: United States Court of Federal Claims

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

03-5128

FIRST NATIONWIDE BANK, FIRST GIBRALTER HOLDINGS, INC.,
and MACANDREWS & FORBES HOLDINGS, INC.,

Plaintiffs-Appellees,

v.

UNITED STATES,

Defendant-Appellant,

__________________________

DECIDED: December 13, 2005
__________________________

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

NEWMAN, Circuit Judge.

This case arose from the savings and loan crisis of the 1980s and the ensuing

regulatory regime, as summarized in United States v. Winstar Corp., 518 U.S. 839 (1996).

The United States Court of Federal Claims ruled that the government, in enacting and

implementing the 1993 Guarini Amendment to the Internal Revenue Code, breached its

contractual obligations to the First Nationwide Bank, and awarded damages. First

Nationwide Bank v. United States, 48 Fed. Cl. 248 (2000) (Nationwide I); 49 Fed. Cl. 750
(2001) (Nationwide II); 51 Fed. Cl. 763 (2002) (Nationwide III); 56 Fed. Cl. 438 (2003)

(Nationwide IV). The judgment is affirmed.

BACKGROUND

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 Winstar,

518 U.S. at 847-56.

In accordance with a plan called the "Southwest Plan," the FSLIC sought a buyer for

five failing savings and loan institutions: First Texas Savings Association, Gibraltar Savings

Association, Killeen Savings and Loan Association, Montfort Savings Association, and

Home Savings Association. These five institutions had total liabilities of over twelve billion

dollars. On December 28, 1988 First Nationwide Bank and associated investors

(collectively "Nationwide") agreed to acquire the assets and liabilities of the five failing

institutions, and also to provide $315 million in cash; the terms and conditions were set

forth in an Assistance Agreement between Nationwide and the FSLIC.

The Assistance Agreement provided, inter alia, that in addition to the tax deductions

available for losses, FSLIC would provide tax-exempt reimbursement of 90% of each

covered asset that was liquidated at a loss. The Court of Federal Claims explained that

Nationwide and the government "negotiated to convert one-third of the anticipated tax

savings into a reduction in reimbursements," Nationwide III, 51 Fed. Cl. at 768, in that the

03-5128 2
10% reduction in loss reimbursement was one-third of the 30% tax rate set in the

Assistance Agreement. Id. at 764.

The transfer to Nationwide of the five Southwest Plan thrift institutions was

completed in December 1988. In August 1989 enactment of the Financial Institutions

Reform, Recovery, and Enforcement Act (FIRREA) eliminated many of the incentives that

had been employed by the FSLIC to salvage failing thrifts, and required the newly formed

Resolution Trust Corporation (RTC) to evaluate all existing agreements with respect to loss

reimbursement, tax consequences, and other concessions and considerations. 12 U.S.C.

§1441a(b)(10)(B) (1989). Upon such evaluation the RTC and other cognizant agencies

proposed no change in the arrangement with Nationwide, and the Assistance Agreement

continued in effect in accordance with its terms.

In 1993, in response to concerns that the various assistance agreements granting

tax benefits for covered asset losses had created an incentive to maximize losses,

Congress enacted a remedial provision as part of the Omnibus Budget Reconciliation Act of

1993 (OBRA). Section 13224 of the OBRA, known as the "Guarini Legislation," disallowed

tax deductions for savings and loan losses that were reimbursed with tax-exempt FSLIC

assistance; this disallowance was made retroactive to years ending on or after March 4,

1991. Pub. L. No. 103-66, 107 Stat. 485 (1993), 26 U.S.C. §165 note. The effect was to

eliminate a substantial benefit provided by the Assistance Agreement. Nationwide (and

others) filed suit against the FDIC, as successor to the FSLIC.

In August 1996 Nationwide and the FDIC entered into a Settlement and Termination

Agreement (the "Termination Agreement"), terminating both the Assistance Agreement and

03-5128 3
the suit against FDIC. FDIC made certain payments to Nationwide, and the Termination

Agreement released the FDIC from further liability:

12.2. Release by First Nationwide and the Acquirers. First Nationwide
and the Acquirers each hereby release, hold harmless, acquit, and forever
discharge the FDIC Manager [a term used for the FDIC in its capacity as
Manager of the FRF (the FSLIC Resolution Fund)] and the FDIC in all its
capacities other than as Manager of the FRF, and their respective present
and former parents, subsidiaries and affiliates, and the respective present
and former officers, directors, successors, assigns, employees, agents, and
representatives of all the foregoing (collectively, the "FDIC Released
Persons") from and against any and all actions and causes of actions, suits,
disputes, debts, accounts, promises, warranties, damages, claims,
proceedings, demands and liabilities, of every kind and character, direct and
indirect, known and unknown, at law or in equity, that First Nationwide and
the Acquirers now have, have had at any time heretofore, or hereafter may
have against the FDIC Released Persons by reason of any act or omission
whatsoever by any FDIC Released Persons in connection with the Lawsuit,
the Assistance Agreement, the supervision of the FDIC Released Persons
with respect to the Covered Assets, Related Claims or any other matters
governed by the Assistance Agreement, GLOS, the Acquisition Agreements,
the ACSI Settlement, the Excess Proceeds Agreement, or any other
agreements related thereto; provided, however, that the release provided in
this Section 12.1 [sic] shall not limit the rights of First Nationwide and the
Acquirers to bring any claim based on fraud, willful misrepresentation of a
material fact, willful failure to disclose a material fact, or willful misconduct.

Section 4.2 of the Termination Agreement excepted all claims against the United States by

reason of the Guarini Legislation, while preserving the release of the FDIC and the RTC:

4.2. Excepted Claims. Excepted entirely from this Agreement (and
hereinafter referred to as the "Excepted Claims") are any and all actions and
causes of action, suits, disputes, debts, accounts, promises, warranties,
damages, claims, proceedings, demands, and liabilities, of every kind and
character, direct and indirect, known and unknown, at law or in equity, that
First Nationwide or the acquirers now have, have had at any time heretofore,
or hereafter may have against the United States of America for breach of
contract or constitutional taking by reason of the enactment of Section 13224
of the Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66 (the
"Guarini Legislation"). It is the intention of the parties hereto that all claims
and counterclaims asserted in the Lawsuit be dismissed with prejudice,
except that such dismissal shall expressly preserve the rights, if any, of First
Nationwide and the Acquirers to assert the Excepted Claims solely

03-5128 4
 against the United States of America in the United States Court of
Federal Claims. The Excepted Claims shall not be based on any acts or
omissions of the FDIC in any capacity or the Resolution Trust Corporation
("RTC"), and shall not be asserted against the FDIC in any capacity or the
RTC as a named defendant in any forum at any time in the future. Nothing
contained in this Agreement shall, or shall be deemed to, constitute an
admission of any allegation in the Lawsuit, or waive or relinquish any
defenses that the United States of America may have to the Excepted Claims
preserved by this Section 4.2. [Emphasis added.]

Nationwide, invoking Section 4.2, filed suit in the Court of Federal Claims in September

1996, seeking damages for breach of contract or unconstitutional taking arising from the

Guarini Legislation. Responding to the government's motion for partial summary judgment,

the court held in Nationwide I that Section 4.2 preserved this claim against the United

States. 48 Fed. Cl. at 258. In further proceedings the court held that the government, as

contracting party to the Assistance Agreement, breached the implied covenant of good faith

and fair dealing with enactment of the abrogating Guarini Legislation, Nationwide II, 49 Fed.

Cl. at 755, and that Nationwide is entitled to recover damages for that breach. Nationwide

III, 51 Fed. Cl. at 769. Upon further hearing, the court awarded $70,018,647 in damages.

Nationwide IV, 56 Fed. Cl. at 449. The United States challenges all of these rulings. The

United States also asks this court to review and decline to follow our precedential decision,

on similar facts, in Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005).

03-5128 5
 DISCUSSION

A

In Nationwide I the Court of Federal Claims held that the release provision in the

Termination Agreement does not bar Nationwide from pressing this claim against the

United States. The government argues that Section 12.2 of the Termination Agreement

released the FDIC from all liability under the Assistance Agreement, and that since the

FDIC was the government's party to the Termination Agreement in its capacity as

successor to FSLIC, the release of the FDIC also released the United States from all

liability for breach. Thus the government argues that the Excepted Claim provision, Section

4.2, did not preserve a breach claim against the United States. The government also

argues that any judgment against the United States would be satisfied from the FSLIC

Resolution Fund (FRF) which is managed by FDIC and, because of the release of FDIC in

Section 12.2, the FRF cannot be called upon to satisfy any judgment against the United

States under Section 4.2. Thus the government argues that since Nationwide agreed not

to sue the FDIC, it cannot sue the United States despite the express reservation of this

right.

This question arose in Centex and was decided by the Court of Federal Claims in

the same way as in Nationwide I, and affirmed by the Federal Circuit. In Centex the plaintiff

bank had entered into a termination agreement with the FDIC as successor to the FSLIC,

terminating an assistance agreement that contained tax benefits expunged by the Guarini

Legislation. The Centex termination agreement released the FDIC from claims related to

the assistance agreement, but reserved to the bank the right to bring a claim against the

United States "based on legislation that resulted in the reduction or elimination of

03-5128 6
contractual benefits" of the FSLIC-assisted acquisition of failing thrifts. The bank then sued

the United States, alleging that the Guarini Legislation constituted a breach of contract and

incurred liability for damages. On the government's argument that the reservation of the

right to sue the United States was ineffective, this court on appeal held:

The agreement barred an action directly against the FDIC, but to the extent
that an action against the United States is considered to implicate the FDIC,
such as by requiring that any judgment be paid from the FRF, the reservation
of the right to sue the United States in the Termination Agreement must be
interpreted to permit such an action.

Centex, 395 F.3d at 1313. The government now asks this court to decline to follow Centex

and to disregard or hold ineffective Section 4.2 in the Termination Agreement.

In Nationwide I, which was decided before the Federal Circuit reached Centex on

appeal, the Court of Federal Claims held that this contract claim against the United States

was preserved by Section 4.2. The court also held that it is not controlling whether the

FDIC manages the fund from which damages may be paid, for the claim for breach by

reason of the Guarini Legislation was expressly excepted by Section 4.2. We agree that

the Court of Federal Claims correctly construed the Termination Agreement. The principle

that a contract is construed to give effect to all of its provisions does not exempt contracts

with the United States. See Tecon Corp. v. United States, 411 F.2d 1262, 1264 (Ct. Cl.

1969) ("A construction of a contract provision which gives meaning to all its language is to

be favored."); Hol-Gar Mfg. Corp. v. United States, 351 F.2d 972, 979 (Ct. Cl. 1965) ("Also,

an interpretation which gives a reasonable meaning to all parts of an instrument will be

preferred to one which leaves a portion of it useless, inexplicable, inoperative, void,

insignificant, meaningless or superfluous"). The government's proposed interpretation

would materially change the bargain by eliminating a remedy that had been expressly

03-5128 7
reserved. The Court of Federal Claims correctly held that the Termination Agreement

cannot be interpreted as eliminating Section 4.2 while preserving Section 12.2, for such an

interpretation would deprive a material contract provision of effect.

The Centex court also heard the argument that since damages for breach of contract

would be paid from a fund of which FDIC is the manager, the release of the FDIC means

that the United States could not pay any damages if such were awarded, and thus the

United States cannot be liable for damages. In Centex the court explained that the

asserted source of funds neither insulated the United States from liability, nor freed it from

the obligation to pay damages if such were incurred. We agree that the Termination

Agreement, which preserved Nationwide's claims against the United States, did not in

Section 12.2 place the FDIC in the position of preventing payment of a judgment against

the United States. The holdings of Nationwide I are affirmed.

B

The government also argues that the Guarini Legislation could not incur

governmental liability for breach of contract with respect to elimination of tax incentives that

were included in the Assistance Agreement with Nationwide, because the Tax Code did not

authorize these tax incentives. The government argues that Nationwide was never entitled

to the tax benefits that it received in the Assistance Agreement, and thus suffered no

deprivation by the Guarini Legislation. The argument appears to be that this aspect of the

Assistance Agreement was contrary to law and that the Guarini Legislation simply

eliminated the illegality. This argument had been made in Centex, and the Federal Circuit

affirmed the comparable holding of the Court of Federal Claims. 395 F.3d at 1304.

03-5128 8
 Various statutes were enacted to facilitate government intervention when the savings

and loan institutions began to fail in large numbers. The Economic Recovery Tax Act of

1981, Pub. L. No. 97-34, 95 Stat. 172, codified at 26 U.S.C. §597, was the foundation of

several tax incentives, including authorization to the FSLIC to grant tax benefits in

consideration for investment in and acquisition of weak or insolvent thrift institutions. See

Centex, 395 F.3d at 1292. For example, the Internal Revenue Code at 26 U.S.C. §597(a)

provided that assistance payments to acquiring institutions in FSLIC-assisted transactions

would not be taxed as income to the acquiring institutions, and 26 U.S.C. §597(b) provided

that such assistance payments would not reduce the basis of the acquired assets for tax

purposes. Although the government argues that these provisions did not override other

provisions of the tax code, specifically 26 U.S.C. §§165, 166, and 1001, which the

government states are in conflict with §597, that is not a tenable argument.

The favorable tax treatment was enacted as an incentive to facilitate the acquisition

of failing thrifts, by providing benefits to the acquiring and merged financial institutions.

Indeed, §597 of the Internal Revenue Code was directed explicitly to the tax treatment of

such acquisitions. As a principle of statutory interpretation, a specific provision prevails

against broader or more general provisions, absent clear contrary intent. See Radznower

v. Touche Ross & Co., 426 U.S. 148, 153 (1976) (specific statute not vitiated by general

statute absent manifest intent); Morton v. Mancari, 417 U.S. 535, 550-51 (1974) ("Where

there is no clear intention otherwise, a specific statute will not be controlled or nullified by a

general one, regardless of the priority of enactment.") This court ruled in Centex, 395 F.3d

at 1295, that §597 was enacted as a tax incentive to attract solvent financial institutions to

03-5128 9
invest in and manage failing thrifts, and in this application superseded the general

provisions of §§165 and 166.

Similarly, the general principle of 26 U.S.C. §1001(a) was overtaken by §597.

Section 1001(a) concerns deduction of losses from disposition of property, measuring such

loss as "the excess of the adjusted basis provided in such section [1011] for determining

loss over the amount realized." The government argues that FSLIC reimbursement of

losses on thrift property should always have been included in the "amount realized," and

should not have been treated in the way that was authorized in the Assistance Agreement.

However, Code §597 explicitly authorized these tax incentives to FSLIC-assisted thrift

acquisitions, until abrogated by the Guarini Legislation. This court explained in Centex:

After a close examination of the series of statutory provisions enacted in the
1980s and early 1990s that specifically addressed FSLIC-assisted
acquisitions, we agree with the trial court that, prior to the enactment of the
Guarini amendment in 1993, Congress allowed built-in losses to be deducted
even though they were offset by FSLIC assistance payments.

395 F.3d at 1295.

Nationwide entered into the Assistance Agreement on the premise and promise of

the tax benefits that were included in the Agreement. Section 597 of the Internal Revenue

Code permitted the tax incentives that were implemented by the FSLIC, and were

recognized until abrogated by the Guarini Legislation. The government cannot reasonably

take a contrary position years after entry into the performance it solicited and authorized.

The Court of Federal Claims correctly held in Nationwide II that the tax provisions of the

Assistance Agreement were in accordance with law, and that the provisions were

abrogated by the Guarini Legislation.

C

03-5128 10
 It is undisputed that the Guarini Legislation deprived Nationwide of a significant

aspect of the consideration set forth in the Assistance Agreement. The Court of Federal

Claims held that this statutory deprivation constituted a breach of the implied covenant of

good faith and fair dealing. This covenant reflects the duty that each party owes to its

contracting partners. As Professor Williston explained, such a covenant underlies every

contract:

The underlying principle is that there is an implied covenant that neither party
shall do anything which will have the effect of destroying or injuring the right
of the other party to receive the fruits of the contract....

5 Williston on Contracts §670 (3d ed. 1961). This court elaborated in Centex that:

The covenant imposes obligations on both contracting parties that include the
duty not to interfere with the other party's performance and not to act so as to
destroy the reasonable expectations of the other party regarding the fruits of
the contract.

395 F.3d at 1304. The United States, when it enters into contracts, is subject to this

covenant. See Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1330 (Fed. Cir. 2003) (the

United States is bound by the covenant of good faith and fair dealing); Mobil Oil Exploration

& Producing Southeast, Inc. v. United States, 530 U.S. 604, 607-08 (2000) (the United

States is bound by the same principles of contract law as in contracts between private

persons).

03-5128 11
 The Court of Federal Claims recognized that the added tax benefits were a

significant part of the consideration to Nationwide in entering this arrangement to salvage

the five failing thrift institutions of the Southwest Plan. The Resolution Trust Corporation

had reported, at the inception of the FIRREA: "Assistance payments by FSLIC are not

considered taxable to the acquirer. This indirect assistance is significant to acquirers with

other profitable lines of business." See Report to the Oversight Board of the Resolution

Trust Corporation and the Congress on the 1988/89 Federal Savings and Loan Insurance

Corporation Assistance Agreements at 6 (Sept. 18, 1990) (reprinted in Hearing before the

Committee on Banking, Housing, and Urban Affairs United States Senate, S. Hrg. 101-113

(Sept. 20, 1990)). It is not disputed that the Guarini Legislation deprived acquiring banks

such as Nationwide of a substantial benefit, upon imposing the tax liability that had been

eliminated by the Assistance Agreement.

The government presents three principal arguments as to why the Court of Federal

Claims erred in finding the government liable for breach: first, that the Assistance

Agreement contained no express or implied covenant to preserve the tax benefits, and

therefore no covenant was breached; second, that even if there were an implied covenant,

Congress was not bound by that covenant; and third, that the Court of Federal Claims erred

in declining to apply the doctrine of unmistakability.

1.

The government argues that its only contractual obligation concerning covered asset

losses was its promise to pay 90% reimbursement of such losses and that it had no

obligation to preserve the tax treatment of such reimbursement, despite the tax terms of the

Assistance Agreement. The government states that since it had no obligation as to future

03-5128 12
tax treatment, it cannot be charged with violation of a covenant when the Guarini

Legislation eliminated the favorable tax treatment. If the government's position is that the

promised tax benefits in the Assistance Agreement were not part of the contractual bargain,

that position is contrary to the Agreement itself. The Assistance Agreement by its terms

would have expired in 1998 and contained no suggestion that the tax benefits could end

while the other contract obligations would continue.

The covenant of good faith and fair dealing requires a party to respect and

implement the contract in accordance with its terms; removal of this material tax benefit

was reasonably held by the Court of Federal Claims to violate this covenant. The Guarini

Legislation changed the balance of contract consideration, whereby the unilateral removal

of this tax benefit was reasonably found to have violated the covenant. Cf. Freedom NY,

329 F.3d at 1330 (government breached express terms of the contract or implied covenant

of good faith and fair dealing by withholding payments).

2.

The government argues that no governmental entity could promise that the tax

benefits or any other aspect of the Assistance Agreement would never be changed.

Indeed, we do not hold that Congress cannot act in a way that affects existing government

contracts, and we do not assess the merits of the Guarini Legislation. In Winstar, 518 U.S.

at 881, the Court responded to a similar argument and explained: "The Government's

position is mistaken, however, for the complementary reasons that the contracts have not

been construed as binding the Government's exercise of authority to modify banking

regulation or of any other sovereign power, and there has been no demonstration that

awarding damages for breach would be tantamount to any such limitation."

03-5128 13
 The issue is not whether Congress can enact legislation that abrogates or modifies

existing government contracts; the issue is whether the government is liable for the

consequences of such action. While a contract does not prevent Congress from enacting

legislation, the government may incur liability for damages when the legislation materially

affects performance of the contract. Winstar, 518 U.S. at 870; see Mobil Oil Exploration,

530 U.S. at 619-20 ("the fact that Interior's repudiation rested upon the enactment of a new

statute makes no significant difference"). When the government as contracting party

makes a promise in exchange for a benefit, it is bound by mutual obligations, as any party

to a contract is bound.

The Guarini Legislation was described at the time of enactment as a remedial action

implementing a change in policy. It was directed at existing contracts to which the

government was a party, and retroactively abrogated contract provisions entered into under

the prior policy. As observed in Centex, 395 F.3d at 1306, "the Guarini amendment was

the paradigm of targeted tax legislation." The Court of Federal Claims correctly held that

the United States is liable for the financial consequences of this action as it affected

existing contracts.

3.

The "doctrine of unmistakability" is explained in Winstar, where the Court makes

clear that when the government enters into a contract with a private person, the

government is not precluded from acting in its sovereign capacity notwithstanding the

contract unless there is an unmistakable promise not to act; but neither is the government

immune from damages incurred as a result of the legislation. The Court explained that the

application of the unmistakability doctrine varies "according to the different kinds of

03-5128 14
obligations the Government may assume and the consequences of enforcing them." 518

U.S. at 880.

The government argues that this means that Nationwide must accept the

consequences of the Guarini Legislation, because there is no unmistakable promise in the

contract to exempt Nationwide from future congressional action. The Court of Federal

Claims did not agree, and explained that the question of unmistakability "cannot be

resolved in isolation from the question of whether the alleged breaching statute is a

sovereign act," quoting Coast-to-Coast Financial Corp. v. United States, 45 Fed. Cl. 796,

803 (2000). The government proposes that the unmistakability doctrine and the sovereign

acts doctrine are separate, and that the Centex court, like the Court of Federal Claims,

erred in stating that "[a] prerequisite for invoking the unmistakability doctrine is that a

sovereign act must be implicated." Centex, 395 F.3d at 1307 (citing Winstar, 518 U.S. at

879). The court in Centex explained that "[t]he enactment of the Guarini amendment

cannot be regarded as a sovereign act because it was not generally applicable legislation in

form or substance, but was specifically targeted at appropriating the benefits of a

government contract." 395 F.3d at 1308.

We have reviewed the matter, and agree that the doctrine of unmistakability is not

here applicable. Congress was not bound to refrain from enacting a regulatory measure to

remedy perceived abuses in the FDIC-initiated savings and loan administration. The issue

is not whether Nationwide must comply with the Guarini Legislation, for it has so complied;

the issue is whether the government can be held liable in damages for the economic effect

of the abrogated contract provisions. The Court in Winstar explained that "a requirement to

pay money supposes no surrender of sovereign power by a sovereign with the power to

03-5128 15
contract." 518 U.S. at 881. Analogy to Winstar makes clear that the obligation of the

government to pay damages caused by the Guarini Legislation is not inimical to the nature

of the contract. The Court of Federal Claims correctly held in Nationwide III that the

government is liable in damages for this breach.

D

As damages, the Court of Federal Claims required the government to pay

Nationwide the 10% of the covered asset losses that had been withheld from

reimbursement in accordance with the Assistance Agreement. The court called this

remedy a form of "partial restitution," explaining that "there are situations in which a fair

solution requires partial rescission or equivalent relief, and a failure to recognize this can

result in manifest injustice." Nationwide III, 51 Fed. Cl. at 769 (quoting George E. Palmer,

The Law of Restitution §12.6(d)) (1978).

The government argues that restitution is not an available remedy unless there was

a "total breach" or repudiation of the entire contract, requiring termination of all performance

by both parties. The government argues that because Nationwide continued to perform its

contractual obligations after enactment of the Guarini Legislation, and continued to accept

payment of only 90% of covered asset losses for the five thrift institutions, Nationwide

waived recovery of the lost tax benefits. However, a non-breaching party is not required to

create an even worse situation by abandoning all performance in order to preserve access

to remedy. As explained in the Restatement (First) of Restitution §68, comment b, a non-

breaching party does not waive the right to restitution "where he continues to perform only

for the purpose of preserving what he has already invested in the performance." Also,

Nationwide promptly protested the Guarini Legislation, filing suit first against the FDIC and

03-5128 16
then against the United States. The Court of Federal Claims correctly held that

Nationwide's continuing performance was not a waiver of the right of recovery for the

government's breach.

The government also argues that the proper remedy (if remedy is held to be

warranted) should be measured as expectation damages. The Court of Federal Claims

deemed expectation damages unreliable and imprecise in this case, for it would require

projection into the uncertain future as well as requiring hypothetical reconstruction of the

past. Thus the court held that expectation damages could not be determined with

reasonable certainty. See Restatement (Second) of Contracts §352 ("Damages are not

recoverable for loss beyond an amount that the evidence permits to be established with

reasonable certainty.") This court has held that when expectation damages in the savings

and loan context would be too speculative or indeterminate due to the complexities of the

transactions, "the law provides a fall-back position for the injured party -- he can sue for

restitution." Glendale Fed. Bank v. United States, 239 F.3d 1374, 1380 (Fed. Cir. 2001).

We agree with the Court of Federal Claims that it is preferable to apply a measure of

damages that can be reasonably determined, as against a measure that cannot be

established with reasonable certainty. The court recognized that the parties had

"negotiated to convert one-third of the anticipated tax savings into a reduction in

reimbursements," Nationwide III, 51 Fed. Cl. at 768, and awarded this reduction as a

reasonable and fair measure of damages in that it balanced those parts of the contract

consideration and benefits that are most readily related. Id. at 767-68. We discern no error

in the court's analysis and resolution. The decision as to the measure of damages is

affirmed.

03-5128 17
 E

The government argues that the damages, even if measured by the 10% withheld

reimbursement, are nonetheless subject to reduction. The government states that the

award should be reduced by the payments by the FDIC to Nationwide in settlement of the

litigation with the FDIC. The government also argues that the settlement payment for

differences in the book and tax basis of covered asset losses should be deducted, and that

the damages now assessed should be reduced by any covered asset gains. The Court of

Federal Claims held that the sections of the Assistance Agreement dealing with covered

asset gains and covered asset losses were distinct and that the Guarini Legislation affected

only covered asset losses. Nationwide points out that the Termination Agreement with the

FDIC exempted any future action against the United States arising from breach of the

Assistance Agreement caused by the Guarini Legislation, and that the settlement with the

FDIC related to other matters. We discern no error in the ruling of the Court of Federal

Claims that the settlement payment by FDIC did not include damages flowing from the

Guarini Legislation and ensuing breach of the contractual tax benefits.

The government also argues that the trial court erred in including in the damage

base the covered asset losses of a Nationwide subsidiary, specifically, the tax treatment of

the Centennial Mortgage Corporation for the period before the FDIC purchased Centennial

from Nationwide. Nationwide contends, and the Court of Federal Claims held, that the

Guarini Legislation applied to these losses, and that "there was no 'wash' to the

consolidated entity." Nationwide IV, 56 Fed. Cl. 447. Contrary to the government's

position, Nationwide by consolidated return could include the covered asset losses of

subsidiaries.

03-5128 18
 We have considered all of the government's arguments, and discern no reversible

error in the rulings of the Court of Federal Claims.

SUMMARY

Section 4.2 of the Termination Agreement preserved the right of suit against the

United States flowing from the Guarini Legislation. The Assistance Agreement including its

tax provisions was a valid contract, and the obligation of good faith and fair dealing was

breached by the Guarini Legislation. The remedy in this case was reasonable, and the

withheld 10% reimbursement of covered asset losses is an appropriate and fair measure of

damages.

AFFIRMED

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