
USCA1 Opinion

	




        August 16, 1994     UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                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                                     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                                         -2-                                         -2-            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.                                         -3-                                         -3-                 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                                         -4-                                         -4-                      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.                                         -5-                                         -5-            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                                         -6-                                         -6-            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.                                         -7-                                         -7-            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,                                         -8-                                         -8-            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                                         -9-                                         -9-            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                                         -10-                                         -10-            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.                                         -11-                                         -11-
