DPJ Company v. FDIC ( 1994 )

August 16, 1994 UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 93-2145
DPJ COMPANY LIMITED PARTNERSHIP,
Plaintiff, Appellant,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION,
AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,
Defendant, Appellee.
ERRATA SHEET
The opinion of this court issued on July 27, 1994, is amended as
follows:
On page 7, footnote 1, line 3, change "Cobblestone" to
"Cobblestone".
On page 8, paragraph 2, line 1, change "reliance of damages" to
"reliance damages".
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 93-2145
DPJ COMPANY LIMITED PARTNERSHIP,
Plaintiff, Appellant,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION,
AS RECEIVER FOR BANK OF NEW ENGLAND, N.A.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge]
Before
Torruella, Circuit Judge,
Coffin, Senior Circuit Judge,
and Boudin, Circuit Judge.
Robert D. Loventhal with whom Robert D. Loventhal Law Office was
on brief for appellant.
Gregory E. Gore, Counsel, Federal Deposit Insurance Corporation,
with whom Ann S. DuRoss, Assistant General Counsel, and Robert D.
McGillicuddy, Senior Counsel, were on brief for appellee.
July 27, 1994
BOUDIN, Circuit Judge. DPJ Company Limited Partnership
("DPJ") is a Massachusetts real estate developer. On
February 12, 1988, it entered into a commitment letter
agreement with the Bank of New England. Subject to various
conditions being satisfied, the agreement contemplated the
creation of a three-year $2.5 million line of credit on which
DPJ could draw to finance primary steps in land development
ventures (e.g., deposits, option payments, and architectural
and engineering services).
The commitment letter provided that the creation of the
line of credit--an event called the "closing" (as in
"closing" a deal)--would occur after DPJ met various
requirements, such as the delivery to the bank of certain
documents, appraisals, and the like. DPJ also had to pay a
non-refundable loan commitment fee of $31,250 immediately.
In satisfying the conditions, DPJ spent a total of
$180,072.37 in commitment fees, closing costs, legal fees,
survey costs, points, environmental reports and other such
items.
The line of credit was "closed" on July 23, 1988.
Between that time and January 6, 1991, DPJ borrowed
approximately $500,000 from the bank pursuant to the line of
credit. The bank failed on January 6, 1991. On February 1,
1991, the bank's receiver, the Federal Deposit Insurance
Corporation, disaffirmed the line of credit agreement
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pursuant to its statutory authority to repudiate contracts of
failed banks. 12 U.S.C. 1821(e)(1). Although the FDIC may
repudiate such contracts, the injured party may under the
statute sue the FDIC as receiver for damages for breach of
contract; but, with certain exceptions, the injured party may
recover only "actual direct compensatory damages," 12 U.S.C.
1821(e)(3)(A)(i), and may not recover inter alia "damages
for lost profits or opportunities." Id. 1821(e)(3)(B)(ii).
On May 22, 1991, DPJ filed an administrative claim with
the FDIC to recover the costs and expenses it incurred
pursuant to the commitment letter mentioned to obtain the
line of credit. 12 U.S.C. 1821(d)(5). The FDIC disallowed
the claim. DPJ then brought suit in the district court to
recover its claimed damages. Id. 1821(d)(6)(A). Both
sides moved for summary judgment.
The district court entered a decision on September 10,
1993, denying recovery to DPJ. The court concluded that DPJ
was "really seek[ing] to recoup its closing costs as
compensation for its lost borrowing opportunity resulting
from the FDIC's disaffirmance." In substance, the court held
that the "loss of borrowing capability" does not constitute
"actual direct compensatory damages." In support of its
decision it cited and relied upon Judge Zobel's decision in
FDIC v. Cobblestone Corp., 1992 WL 333961 (D. Mass. Oct. 28,
1992). DPJ then appealed to this court.
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The critical statutory phrases--"actual direct
compensatory damages" and "lost profits and opportunities"--
have been the recurrent subject of litigation. See, e.g.,
Howell v. FDIC, 986 F.2d 569 (1st Cir. 1993); Lawson v. FDIC,
3 F.3d 11 (1st Cir. 1993). We have read the limitation of
recovery to compensatory damages, and the exclusion barring
lost profits or opportunities, against the background of
Congress' evident purpose: "to spread the pain," in a
situation where the assets are unlikely to cover all claims,
by placing policy-based limits on what can be recouped as
damages for repudiated contracts. Howell, 986 F.2d at 572;
Lawson, 3 F.3d at 16.
Contract damages are often calculated to place the
injured party in the position that that party would have
enjoyed if the other side had fulfilled its part of the
bargain. Subject to various limitations, lost profits and
opportunities are sometimes recovered under such a "benefit
of the bargain" calculation. A. Farnsworth, Contracts
12.14 (2d ed. 1990); C. McCormick, Damages, 25 (1935). Yet
where an injured claimant cannot recover the full benefit of
the bargain--for example, because profits cannot be proved
with sufficient certainty--there is an alternative, well-
established contract damage theory:
[O]ne who fails to meet the burden of
proving prospective profits is not
necessarily relegated to nominal damages.
If one has relied on the contract, one
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can usually meet the burden of proving
with sufficient certainty the extent of
that reliance . . . . One can then
recover damages based on reliance, with
deductions for any benefit received
through salvage or otherwise."
Farnsworth, supra, 12.16, at 928 (emphasis added).
As McCormick has explained, "[t]his recovery is strictly
upon the contract," McCormick, supra, 142 at 583. It is
not a remedy for unjust enrichment, nor is it rescission of
the contract. It is a contract damage computation that
"conform[s] to the more general aim of awarding compensation
in all cases, and [it] departs from the standard of value of
performance only because of the difficulty in applying the
[latter standard]." Id. at 583-84. See generally In re Las
Colinas, Inc., 453 F.2d 911, 914 (1st Cir. 1971) (citing
numerous authorities), cert. denied, 405 U.S. 1067 (1972).
Subject to common-law limitations, to which we shall
return in due course, expenditures by DPJ in fulfilling its
part of the bargain can properly be recovered as compensatory
damages under this alternative reliance theory. Certainly
damages so computed do not offend the terms of the federal
statute. The FDIC does not dispute that the $180,072.37 in
costs and expenses were "actual" expenditures. And, as they
were apparently made to fulfill specific stipulations laid
down by the bank, the resulting damages can fairly be
described as "direct," a term normally used to filter out
damages that are causally remote, unforeseeable or both.
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Farnsworth, supra, at 12.14-12.15.
Similarly, DPJ's expenditures are not, by any stretch of
literal language, "lost profits or opportunities." One might
argue that since lost profits and opportunities are
unrecoverable, the recovery of reliance damages would also
offend the policy of the statute. But the policy underlying
the statutory ban on lost profits and opportunities is
Congress' apparent view that these benefits have, in some
measure, an aspect of being windfall gains. This same policy
is reflected in the disallowance of punitive or exemplary
damages, 12 U.S.C. 1821(e)(3)(B)(i), and damages for future
rent when the FDIC disaffirms a lease and surrenders property
previously leased by the bank. Id. 1821(e)(4)(B).
There is normally no windfall involved in the recovery
of reliance damages. DPJ is seeking to recapture money
actually spent under the commitment letter agreement to
obtain a line of credit that the FDIC has now repudiated.
Whether or not one shares Congress' belief that "lost profits
and opportunities" are a special category of damages which
should be disfavored, that policy is not even remotely
offended by returning DPJ its out-of-pocket expenditures
which, because of the FDIC's repudiation, have made DPJ's own
expenditures (at least in part) fruitless.
The district court called DPJ's claim one to recover for
a "lost opportunity" since the breach of contract deprived
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DPJ of the opportunity to secure further loans. This could
be so if, as in Cobblestone, DPJ were claiming profits that
would have been realized through further loans.1 It might
be arguably so (we do not decide the point) if DPJ was
claiming as damages the cost of securing a substitute line of
credit. But reliance damages do not compensate for a lost
opportunity; they merely restore to the claimant what he or
she spent before the opportunity was withdrawn.
In sum, DPJ has claimed reliance damages in this case
and we hold that reliance damages--or at least those claimed
by DPJ--are "actual direct compensatory damages," are not
compensation for "lost profits and opportunities," and are
not barred by Cobblestone. Construction of the quoted
statutory phrases is, of course, a matter of federal law, and
the concept of reliance damages has long been recognized both
in federal litigation, Rumsey Mfg. Corp. v. United States
Hoffman Mach. Corp., 187 F.2d 927, 931-32 (2d Cir. 1951) (L.
Hand), and in Massachusetts. Air Technology Corp. v. General
Elec. Co., 199 N.E.2d 538, 549 n.19 (Mass. 1964).
When we turn to the final issues in this case--the
common-law limitations on reliance damages--the choice of
1In Cobblestone, the company took the position that it
had lost approximately $5 million because the FDIC repudiated
a line of credit used by Cobblestone to finance equipment
that it expected to lease to customers. We agree with the
denial of such a lost-profits recovery in Cobblestone, but
think the decision quite distinguishable.
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governing law is more debatable. The underlying obligation
on which DPJ sues is a contract created by Massachusetts law.
Federal law imposes statutory limits on the damages that may
be awarded against the FDIC when it repudiates the contract.
Whether the nuances and qualifications that shape reliance
damages should be decided under Massachusetts law, federal
law or conceivably both is an interesting question. It need
not be answered here, because Massachusetts' view of reliance
damages does not appear to depart from general practice. We
turn, then, to possible common-law limitations on DPJ's
recovery of reliance damages in this case.
First, because reliance damages seek to measure the
injured party's "cost of reliance" on the breached contract,
"an injured party cannot recover for costs incurred before
that party made the contract." Farnsworth, supra, 12.16,
at 928 n.2. The FDIC in this case argues that, at the time
DPJ made its expenditures, the bank had no obligation to make
a loan at all, for that obligation arose only after the bank
later made a discretionary judgment to "close" the
transaction and establish the line of credit. Farnsworth,
supra, 12.16, at 928 n.2. The FDIC concludes that DPJ's
pre-loan expenditures were not made in reliance upon the line
of credit promise but were made in order to secure it.
This will not wash. The commitment letter was itself an
agreement that gave rise, upon the satisfying of conditions,
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to the bank's obligation to create and maintain DPJ's line of
credit. Whether the bank reserved for itself the discretion
to refuse to close (e.g., if dissatisfied with the documents
submitted to it), the DPJ expenditures were made pursuant to
the agreement and so "in preparing to perform and in part
performance" by DPJ. McCormick, supra, 142, at 583. As a
practical matter, companies do not normally spend almost
$200,000 in satisfying loan conditions without very good
reason to expect that the loan itself will be approved.
Thus, we think it is unrealistic to separate the expenditures
by DPJ from the bank's promise to provide the line of credit
and to make loans pursuant to it.
Second, where full performance of a contract would have
given claimant no benefit, or at least less than the reliance
damages claimed, this fact may justify limiting or
disallowing reliance damages. The notion is that claimant
should on no account get more than would have accrued if the
contract had been performed. Farnsworth, supra, 12.16, at
930 & nn. 11-14 (citing cases). Prior to the bank's closing,
DPJ had borrowed only $500,000; DPJ in turn says that it was
preparing to borrow further on its line of credit when the
FDIC put an end to the opportunity. If it has not waived the
issue, on remand the FDIC might conceivably try to show that
DPJ would in fact not have borrowed further on the line of
credit and, therefore, that DPJ had in fact received
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everything it would have received had FDIC not disaffirmed
the line of credit agreement.
Third, a reliance recovery may be reduced to the extent
that the breaching party can prove that a "deduction" is
appropriate "for any benefit received [by the claimant] for
salvage or otherwise." Farnsworth, supra, 12.16, at 928-29
& nn. 1, 3 & 7 (citing cases). Compare Restatement (Second),
Contracts 349 (benefits not mentioned). It is an
intriguing question whether, assuming that the issue is open,
there should be any deduction for the benefit already
received by DPJ by virtue of the $500,000 in loans actually
made and, if so, how that deduction should be measured.
These are by no means easy issues to resolve in the
abstract. On the one hand the FDIC could argue, if it has
not waived the issue, that DPJ received some portion of
benefits promised by the agreement, such as 20 per cent of
the potential loan amount ($500,000 out of $2.5 million) or
the availability of credit for two and one half of the
promised three years. On the other hand DPJ might have
arguments as to why no equitable offset is proper. Neither
side has briefed the relatively sparse caselaw pertaining to
a possible deduction for benefits received where reliance
damages are claimed.
There is no indication that the FDIC argued in the
district court that DPJ would assuredly have declined to
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borrow further on the line of credit or that a deduction from
the amount claimed should be made to account for benefit
received. Certainly no such arguments have been made in this
court. If the FDIC does press such arguments on remand, the
district court can determine whether the arguments have been
waived by a failure to assert them in a timely manner.
The judgment of the district court is vacated and the
matter remanded for further proceedings consistent with this
opinion.
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