Opinion ID: 479181
Heading Depth: 2
Heading Rank: 1

Heading: Proper Measure of Damages for Negligent Misrepresentation

Text: 21 The Employees contend that they are entitled to receive the full value of their pensions or, benefit-of-the-bargain damages for Ward's negligent misrepresentations. Hawaii law governs the damages issue. See Tenneco West, Inc. v. Marathon Oil Co., 756 F.2d 769, 771 (9th Cir.), cert. denied, --- U.S. ----, 106 S.Ct. 134, 88 L.Ed.2d 111 (1985). 22 The district court stated that Hawaii law was uncertain, but it concluded that the Supreme Court of Hawaii would follow the Restatement (Second) of Torts' position, which limits recovery for negligent misrepresentation to out-of-pocket damages. 2 23 The Hawaii Supreme Court has not ruled definitively regarding allowable damages in negligent misrepresentation cases. Under these circumstances, the federal court sitting in diversity reasonably must attempt to determine how the highest state court would rule. We must base the decision on statutes, treatises, restatements and published opinions. Molsbergen v. United States, 757 F.2d 1016, 1020 (9th Cir.), cert. dismissed, --- U.S. ----, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985). 24 Although Hawaii courts have not formulated a rule, the courts have twice cited the Restatement's view on negligent misrepresentation with approval. Most recently, in Shaffer v. Earl Thacker Co., 716 P.2d 163, 165 (1986), the appellate court relied on the Restatement (Second) of Torts Sec. 552 (1977) [hereinafter cited as the Restatement] in holding that an action for negligent misrepresentation could be brought for misrepresentations by a seller's real estate agent to a prospective buyer. Because the action was before the court on summary judgment, the court never reached the issue of damages. However, the court quoted Secs. 552 [liability] and 552 B [damages], indicating that these sections contained the material elements of the tort of negligent misrepresentation. Id. 25 Earlier, in Chun v. Park, 51 Haw. 462, 462 P.2d 905 (1969), which involved a title company's failure to discover an existing second mortgage during a title search, the Hawaii Supreme Court had recognized the tort of negligent misrepresentation. The Chun court cited the Restatement with approval, stating that [w]e believe Sec. 552 of Restatement (Second) of Torts (Tentative Draft No. 12, 1966) is a fair and just restatement of the law on the issue of negligent misrepresentation. 462 P.2d at 909. In Chun, the Court found that the title company could not be considered the proximate cause of damages suffered in transactions subsequent to that for which the title certificate had been issued. As a result, the Court denied the plaintiff's request for benefit-of-the-bargain damages arising out of a later sale of the house. Id. 26 In two cases involving fraudulent, rather than negligent misrepresentation, the Hawaii Supreme Court discussed both out-of-pocket and benefit-of-the-bargain recovery, but found it unnecessary to reach the issue. See State Savings and Loan Association v. Corey, 53 Haw. 132, 144, 488 P.2d 703, 711 (1971) (Hawaii Supreme Court, noting that some courts adopt a flexible rule in fraud cases, declined to adopt either approach at the time), cert. denied, 406 U.S. 920, 92 S.Ct. 2452, 32 L.Ed.2d 817 (1972); Ellis v. Crockett, 51 Haw. 45, 451 P.2d 814, 820 (1969) (same). 27 Thus, the Hawaii courts have never decided whether a benefit-of-the-bargain or out-of-pocket rule applies in negligent misrepresentation cases. However, the Chun and Shaffer courts emphasized that Hawaii respects the Restatement position on this subject. 3 We are confident that if confronted with this issue under the circumstances of this case, the Hawaii courts would apply the Restatement position. 4 28 The Employees raise the additional argument that even if out-of-pocket damages normally should apply, we should use a more generous rule when the negligent party and injured party have a fiduciary relationship. We decline to adopt this suggestion. Our research has not uncovered, nor have the parties directed us to any Hawaii case suggesting such a rule. 5 The Employees have cited California authority for this proposition. See Walters v. Marler, 83 Cal.App.3d 1, 25-26, 147 Cal.Rptr. 655, 670-71 (1978). However, as the Walters court acknowledged, California courts had not applied this rule uniformly. See id. Because Walters found the damage award excessive under either an out-of-pocket or benefit-of-the-bargain theory, the court did not have to resolve the issue. Id. at 26, 147 Cal.Rptr. at 621. Moreover, the California Supreme Court cast considerable doubt on Walters 's holding. See Gray v. Don Miller & Associates, Inc., 35 Cal.3d 498, 674 P.2d 253, 198 Cal.Rptr. 551 (1984) (holding that the plaintiff could recover only actual damages for the defendant fiduciary's negligent misrepresentation; court cited Gagne v. Bertran, 43 Cal.2d 481, 275 P.2d 15, 22 (1954) with approval, a case that limited plaintiff to an out-of-pocket recovery); see also Overgaard v. Johnson, 68 Cal.App.3d 821, 825-27, 137 Cal.Rptr. 412, 414-16 (1977) (advocating flexibility in damages awards when a fiduciary relationship exists, but considering itself bound by Gagne 's out-of-pocket limitation). 29 We also note that other courts have not found the fiduciary status of the tortfeasor to be significant. See Freeman v. Jacques Orthopaedic & Joint Implant Surgery Medical Group, Inc., 721 F.2d 654, 655-56 (9th Cir.1983) (discussing possible damages remedies for an employer's misrepresentations about the pension plan and citing Restatement Secs. 549 [fraud] and 552B [negligence] as the applicable provisions); Sedco International, S.A. v. Cory, 522 F.Supp. 254, 323-24 (S.D.Iowa 1981) (the court concluded that the defendants, as special advisors and consultants, had cultivated a relationship of trust and confidence with the plaintiff; court stated that the plaintiff could recover out-of-pocket damages for negligent misrepresentations and benefit-of-the-bargain damages for fraudulent misrepresentations), aff'd, 683 F.2d 1201 (8th Cir.), cert. denied, 459 U.S. 1017, 103 S.Ct. 379, 74 L.Ed.2d 512 (1982). 30 Both Ward and the Employees rely upon Gediman v. Anheuser Busch, Inc., 299 F.2d 537, 543-44 & nn. 5-6 (2d Cir.1962). However, the Employees' reliance is misplaced. In Gediman, the court, citing Restatement Sec. 552 and New York law, awarded a plaintiff employee damages for the employer's negligent misrepresentation of the consequences of the employee's election of a pension option at retirement. In Gediman, pension advisors responded to the employee's written query, and voluntarily undertook to advise him of the effects of various available benefit elections. In so doing, the advisors negligently misrepresented the implications of the choices. The court awarded the plaintiff the difference between the option that the plaintiff would have selected had he not been swayed by the misrepresentations, and the actual amount payable under the option that the plaintiff did select. Gediman, 299 F.2d at 541, 548. 31 We agree with Ward that this amount does not represent benefit-of-the-bargain damages, i.e., the difference between what the plaintiff expected he would receive, had the defendant's representations been true, and the amount actually received under that option. Instead, he was awarded the difference between the value parted with at the time of the misrepresentation, and the value of what he received in return. 32 In our view, Hawaii would in this case look to the rationale set forth in the Restatement: 33 The considerations of policy that have led the courts to compensate the plaintiff for the loss of his bargain in order to make the deception of a deliberate defrauder unprofitable to him, do not apply when the defendant has had honest intentions but has merely failed to exercise reasonable care in what he says or does. 34 Restatement Sec. 552 B, comment (b). We therefore agree with the district court's refusal to award benefit-of-the-bargain damages for Ward's negligent misrepresentation. 6 35