Glendale Federal Bank, Fsb, Plaintiff-Cross v. United States
239 F.3d 1374, 2001 WL 135442, 2001 U.S. App. LEXIS 2350 (2001)
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Rule of Law:
When expectancy damages for a breach of contract are too speculative to prove, reliance damages are the appropriate remedy over restitution if the restitution claim is based on a speculative, non-materialized benefit conferred on the breaching party.
Facts:
- During a savings and loan crisis in the early 1980s, the U.S. government encouraged healthy thrifts to acquire failing ones to avoid exhausting the federal insurance fund.
- The government offered an accounting incentive: acquirers could count the acquired thrift's negative net worth as an asset ('supervisory goodwill') for regulatory capital purposes and amortize it over a long period.
- In 1981, Glendale Federal Bank, FSB ('Glendale') entered into a contract with the government to acquire the failing Broward thrift, which had net liabilities of approximately $734 million.
- Pursuant to the contract, Glendale acquired Broward, and the government permitted Glendale to book the deficit as supervisory goodwill to be amortized over 40 years.
- In 1989, Congress passed the Financial Institutions Recovery, Reform and Enforcement Act (FIRREA), which breached these contracts by disallowing the use of supervisory goodwill on the agreed-upon terms.
- As a direct result of FIRREA, Glendale, which had relied on the supervisory goodwill to meet its capital requirements, fell out of regulatory compliance.
- To regain compliance, Glendale was forced to shrink its operations, sell subsidiaries, and raise $451 million in new capital, incurring over $24 million in transaction costs.
Procedural Posture:
- Glendale Federal Bank, FSB sued the United States in the U.S. Court of Federal Claims for breach of contract.
- In a series of rulings culminating in a U.S. Supreme Court decision (United States v. Winstar Corp.), the courts affirmed that the government was liable for breach of contract.
- The case was remanded to the U.S. Court of Federal Claims for a trial solely to determine the amount of damages.
- The Court of Federal Claims awarded Glendale $908,948,000, primarily composed of restitution damages and some non-overlapping reliance damages.
- The United States (appellant) appealed the damages award to the U.S. Court of Appeals for the Federal Circuit.
- Glendale (appellee) filed a cross-appeal concerning certain denied reliance damages, to be considered if the restitution award was reversed.
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Issue:
Is restitution, measured by the full net liabilities of an acquired failing thrift, the appropriate measure of damages for the government's breach of a contract when that liability was contingent and never actually materialized for either party?
Opinions:
Majority - Plager, Senior Circuit Judge
No. Restitution is not the appropriate measure of damages when it is based on a speculative liability that never materialized; the proper remedy is reliance damages, which compensate for actual losses sustained due to the breach. The trial court's restitution award, which equated the government's 'benefit' with the net liabilities of the failing thrift Glendale acquired, is unjustifiable because it is based on a speculative assessment of what might have been. It is not clear that the government would have had to liquidate the thrift and pay that amount; its actual benefit was gaining 'time,' which has no proven value. Furthermore, due to a subsequent drop in interest rates, the potential losses that motivated the contract never came to pass for either party. Therefore, an award based on a 'liability that never came to pass' is improper. The more rational and firm basis for damages is reliance, which reimburses the non-breaching party for actual losses sustained as a result of relying on the broken promise, such as the costs incurred to raise new capital and mitigate the effects of the breach.
Analysis:
This decision significantly clarifies the appropriate measure of damages in the landmark Winstar-related government contract cases. By rejecting a large restitution award based on a speculative 'benefit' to the government, the court established a preference for the more concrete and provable remedy of reliance damages. This holding steered the resolution of over 100 similar cases away from theoretical calculations of avoided costs and towards compensating plaintiffs for their actual, out-of-pocket losses incurred because of the government's breach. It underscores the principle that contract damages should be based on demonstrable financial harm, not on hypothetical scenarios that never occurred.
