Brief Fact Summary.
In an action for damages after the Government (Defendant) breached a contract with Glendale Federal Bank, FSB (Plaintiff), Defendant argued that the reliance damages awarded were too speculative and Plaintiff argued that it was entitled to additional out-of-pocket losses.
Synopsis of Rule of Law.
In a breach of contract action, reliance damages may be awarded if they are not speculative and are actual costs the plaintiff would not have incurred but for the breach, and if other theories of damages are inappropriate.
As a result of the 1980s savings and loan crisis, the Government induced healthy savings and loan banks, such as Plaintiff, to acquire failed savings and loans in order to reduce the potential liability of the Federal Savings and Loan Insurance Corporation. In exchange for acquiring these failed banks, the Government would attribute the amount these healthy banks paid over the fair market value for the acquired banks (the goodwill) to its capital reserve requirements. The Government then enacted new regulations in 1989 that reversed course and required the acquiring banks to meet its capital reserve requirements without consideration of the goodwill. Three years after the breach, Plaintiff could no longer meet its capital reserve requirements and as a result of depositors’ resulting reservations, was required to pay more interest to attract depositors and to pay higher fees for deposit insurance. Plaintiff and other banks sued for breach of contract, resulting in the United States Supreme Court decision in United States v. Winstar, 518 U.S. 839 (1996). In Winstar, the Court found the Government liable but remanded the cases to the Federal Court of Claims for a determination of damages. In Plaintiff’s first damages trial, Plaintiff was awarded $909 million in restitution and expectancy damages. On appeal, the Federal Circuit vacated the judgment and remanded the case for a new damages trial, allowing only reliance damages to be awarded. Plaintiff’s reliance damages totaled $381 million. At the second damages trial, Plaintiff sought these reliance damages, which it called “wounded bank” damages as well as an additional $527 million in out-of-pocket losses. Defendant argued that no damages were due, as Plaintiff did not prove that it would have met its capital reserve requirements without the breach. The trial court awarded the “wounded bank” damages but denied the out-of-pocket damages as an inaccurate measure of actual losses sustained due to the breach. The Government appealed the award of “wounded bank” damages and Plaintiff appealed the denial of the out-of-pocket damages.
In a contract action, may reliance damages that are not speculative and represent the actual costs the plaintiff incurred from the breach be awarded when other theories of damage recovery are inappropriate?
(Plager, J.) Yes. In a breach of contract action, reliance damages may be awarded if they are not speculative and are actual costs the plaintiff would not have incurred but for the breach, and if other theories of damages are inappropriate. Expectancy damages are not appropriate here because damages such as lost profits are too speculative and difficult to prove. The theory itself is not barred from application as a matter of law, but in this type of case is a waste of time. Restitution is also a flawed theory in this case because it is based on the Government’s theoretical gains, which are also speculative and difficult to determine. Restitution could be appropriate where it is used to return the acquiring bank to the status quo ante when specific initial contributions to an acquired bank can be established. Reliance damages, those based on recovery of expenditures by the bank in performing the contract, are available when they are based on proven actual losses. Here, Plaintiff’s “wounded bank” reliance damages are the increase in the cost of funds Plaintiff incurred when it had to pay higher interest to attract depositors and pay higher deposit insurance when it could not meet its capital reserve requirement. The trial court was correct to reject the Government’s argument that Plaintiff has not proven that it would have met its requirement but for the breach since Plaintiff’s damages were not clearly erroneous and were supported by the record. Whether such damages properly include the higher cost of doing business post-breach is a matter of proof, and should be denied if they are too speculative. If a reasonable probability of damage can be clearly established, uncertainty as to the amount does not prohibit recovery. It is the court’s duty to make a fair and reasonable approximation of damages. Reliance damages that are susceptible of proof should be used in all the Winstar cases. Here, there was no clear showing that the trial court’s decision was clearly erroneous. Affirmed.
We have not, however, barred as a matter of law the use of expectancy/lost profits theory, but, given the speculative nature of such a damages claim, one that has yet to be successfully established in any Winstar case, experience suggests that it is largely a waste of time and effort to attempt to prove such damages.View Full Point of Law
Certain types of damages are appropriate for certain types of cases. One of the primary purposes of damages in a contract action is to put the nonbreaching party in the position it would have been in had the breaching party fully performed. In some cases it is difficult to determine what position that would have been. Damages are therefore usually limited to those that can be reasonably determined and proven. In this case, that uncertainty limited recovery to reliance damages.