Glendale Federal Bank, FSB v. United States

United States Court of Appeals, Federal Circuit
378 F.3d 1308 (2004)

ELI5:

Rule of Law:

In Winstar-type cases involving the government's breach of contract, reliance damages are the preferred remedy and can include 'wounded bank' damages, which compensate for actual, proven, and non-speculative increased operational costs incurred by a financial institution as a direct result of the breach.

Facts:

Glendale Federal Bank, a savings and loan institution ('thrift'), entered into a contract with the Federal Savings and Loan Insurance Corporation (FSLIC).
Pursuant to the contract, Glendale acquired Broward Savings and Loan, a financially troubled thrift.
In exchange for the acquisition, the government permitted Glendale to use a special accounting method, known as supervisory goodwill, to meet its regulatory capital requirements.
Congress subsequently enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
FIRREA and its implementing regulations eliminated the use of supervisory goodwill for regulatory capital purposes.
As a direct result of this regulatory change, Glendale fell out of capital compliance.
Glendale claimed this non-compliance financially 'wounded' the bank, causing it to incur higher costs to attract depositor funds and pay increased fees for deposit insurance.

Procedural Posture:

Glendale Federal Bank sued the United States in the U.S. Court of Federal Claims (trial court) for breach of contract.
The trial court found the government liable; this liability determination was ultimately affirmed by the U.S. Supreme Court in United States v. Winstar Corp.
The case was returned to the Court of Federal Claims for a trial on the amount of damages.
Following the damages trial, the Court of Federal Claims awarded Glendale $909 million in restitution and reliance damages.
The United States appealed the damages award to the U.S. Court of Appeals for the Federal Circuit.
The Federal Circuit vacated the $909 million award, finding the damage theories employed by the trial court were flawed, and remanded the case for a new determination of damages based on a reliance theory.
On remand, the Court of Federal Claims awarded Glendale $381 million in 'wounded bank' reliance damages but denied Glendale's claim for an additional $527.5 million.
The United States (appellant) appealed the $381 million award, and Glendale (cross-appellant) appealed the denial of the additional damages to the U.S. Court of Appeals for the Federal Circuit.

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Issue:

In a breach of contract case against the government, are 'wounded bank' damages, a form of reliance damages representing increased operational costs after the breach, a legally appropriate and sufficiently proven measure of damages?

Opinions:

Majority - Plager, Senior Circuit Judge

Yes. In a breach of contract case against the government, 'wounded bank' damages are a legally appropriate form of reliance damages if they represent actual losses that are fully proven. The court affirmed the trial court's award, reasoning that reliance damages provide a firmer and more rational basis for recovery than speculative expectancy (lost profits) or flawed restitution theories in the context of Winstar cases. The court determined that the focus of reliance damages is on the real costs incurred by the non-breaching party that it would not have incurred 'but for' the contract and its breach. While expectancy damages are generally too speculative and broad restitution has been rejected, reliance damages for actual, proven losses like the increased cost of funds are recoverable. The court deferred to the trial court's factual findings, holding it was not clear error for the trial judge to find that Glendale had sufficiently proven its $381 million in 'wounded bank' costs but had failed to prove its claim for an additional $527.5 million in other operating losses.

Analysis:

This decision solidifies reliance damages as the primary and most practical remedy in the extensive Winstar litigation. It provides crucial judicial approval for the 'wounded bank' damages theory, allowing recovery for tangible, post-breach increased operational costs, a less direct but significant consequence of the government's actions. By expressing deep skepticism toward expectancy damages (lost profits) and rejecting broad restitution theories in this context, the court established a clear and pragmatic path for resolving the dozens of similar pending cases. The ruling signaled that courts would favor claims based on concrete, ascertainable losses over more theoretical or speculative damage models, thereby shaping the landscape for future government contract breach litigation.

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