Opinion ID: 2584198
Heading Depth: 4
Heading Rank: 2

Heading: the proper measure of damages

Text: The circuit court concluded that, when a defrauded party elects to affirm the settlement agreement and sue for fraud, the remedy available [( i.e., damages)] . . . is the fair compromise value of the claim at the time of the settlement. (Emphasis added.) The plaintiffs, however, argue that the circuit court erroneously limit[ed] the amount of recoverable damages to the difference between what [they] actually settled for, and what they could have settled for, had there been no fraud. Such limitation, according to the plaintiffs, has never been accepted in this jurisdiction. To the contrary, the Hawai`i [a]ppellate [c]ourts have continually held that the desired remedy in fraud cases is to restore the victim to the position he would have occupied but for the misrepresentation. (Citations omitted.) The plaintiffs, thus, believe that the circuit court's ruling deviated from the goal of the available remedy  to restore them to the former positions they occupied but for DuPont's deceit  and instead served to deprive [the p]laintiffs of any possibility of recovering that which, in all likelihood, they could reasonably have achieved had the fraudulent conduct not occurred. The decision was contrary to the established law of Hawai`i, and contrary to the proper outcome dictated by the facts of the litigation, and should now be set aside. DuPont, on the other hand, maintains that the fair compromise value is the proper measure of damages for full and adequate compensation of a fraudulent inducement claim, and is not a cap or limit on damages. (Emphasis in original.) (Internal quotation marks and other emphases omitted.) In DuPont's view, [t]his measure of damages is consistent with the general objective of fraud, which is to place the defrauded plaintiff in the position he would have been but for the fraud. Since [the plaintiffs] claim their settlement amounts were less than they were worth because DuPont had induced them to settle through certain fraudulent misrepresentations, their measure of damages logically is what their settlement amount would have been if there had been no fraud. It is well-settled that all tort claims require that damages be proven with reasonable certainty. See, e.g., Weinberg v. Mauch, 78 Hawai`i 40, 50, 890 P.2d 277, 287 (1995) ([I]t is of the essence in an action . . . that the plaintiff suffer damages as a consequence of the defendant's conduct, and these damages cannot be speculative or conjectural losses. (Internal quotation marks and citation omitted.)); see also Roxas v. Marcos, 89 Hawai`i 91, 141 n. 33, 969 P.2d 1209, 1259 n. 33 (citing a collection of cases for the same proposition). Specifically, in a fraud case, the plaintiff must have suffered substantial actual damage, not nominal or speculative. Zanakis-Pico v. Cutter Dodge, Inc., 98 Hawai`i 309, 320, 47 P.3d 1222, 1233 (2002) (citation and emphasis omitted). The plaintiffs suing in fraud are required to show both that they suffered actual pecuniary loss and that such damages are definite and ascertainable, rather than speculative. Id.; see also Hawai`i's Thousand Friends v. Anderson, 70 Haw. 276, 286, 768 P.2d 1293, 1301 (1989) (plaintiff must show that he [or she] suffered substantial pecuniary damage). The aim of compensation is to put the plaintiff in the position he or she would have been had he or she not been defrauded. Zanakis-Pico, 98 Hawai`i at 320, 47 P.3d at 1233 (quoting Ellis v. Crockett, 51 Haw. 45, 52-53, 451 P.2d 814, 820 (1969)) (original brackets and ellipsis omitted). This court has further explained that: A distinction is made in the law between the amount of proof required to establish the fact that the injured party has sustained some damage and the measure of proof necessary to enable the jury to determine the amount of damage. It is now generally held that the uncertainty which prevents a recovery is uncertainty as to the fact of damage and not as to its amount. However, the rule that uncertainty as to the amount does not necessarily prevent recovery is not to be interpreted as requiring no proof of the amount of damage. The extent of plaintiff's loss must be shown with reasonable certainty and that excludes any showing or conclusion founded upon mere speculation or guess. Chung v. Kaonohi Ctr. Co., 62 Haw. 594, 605, 618 P.2d 283, 290-91 (1980) (emphasis added) (citation and brackets omitted) (format altered), abrogated on other grounds by Francis v. Lee Enters., Inc., 89 Hawai`i 234, 971 P.2d 707 (1999). In other words, where the fact of damage is established, this court will not insist upon a higher degree of certainty as to the amount of damages than the nature of the case permits, particularly where the uncertainty was caused by the defendant's own wrongful acts. Coney v. Lihue Plantation Co., 39 Haw. 129, 138 (1951). This court, however, has recognized that [t]he problem of how to measure damages, and how to establish them in fraud cases, is always a difficult one since the person defrauded has, because of the fraud, not pursued alternative courses of action, and the results of those untaken courses therefore remain speculative. In 3 Restatement (Second) of Torts (1977), a discussion of the problem of damages proof appears under § 549. [[8]] In the Comment to subsection (2) of that section, the following appears: When the plaintiff has made a bargain with the defendant, however, situations arise in which the rules stated in Subsection (1), and particularly that stated in Clause (a) of that Subsection, do not afford compensation that is just and satisfactory. . . . The frequency of these situations has led the great majority of the American courts to adopt a broad general rule giving the plaintiff, in an action [for] deceit, the benefit of his bargain with the defendant in all cases, and making that the normal measure of recovery in actions of deceit. Leibert v. Fin. Factors, Ltd., 71 Haw. 285, 290-91, 788 P.2d 833, 837 (1990) (emphases added); see also Zanakis-Pico, 98 Hawai`i at 320, 47 P.3d at 1233 (In fraud or deceit cases, the measure of pecuniary damages is usually confined to either the `out-of-pocket' loss or the `benefit of the bargain[.]' (Citation and ellipses omitted.)). Notwithstanding the aforementioned well-established general principles regarding the proof of damages, this court has not had the occasion to articulate what must be proven in order to bring a meritorious settlement fraud claim. To this end, Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353 (9th Cir.2005), cert. denied, ___ U.S. ___, 126 S.Ct. 2861, 165 L.Ed.2d 895 (2006), is instructive. In that case, the Ninth Circuit reversed the federal district court's ruling in Matsuura v. E.I. du Pont de Nemours & Co., 330 F.Supp.2d 1101 (D.Haw.2004) [hereinafter, Matsuura II ]. Relying upon Urtz v. New York Central & Hudson River Railroad Co., 202 N.Y. 170, 95 N.E. 711 (1911), and Automobile Underwriters, Inc. v. Rich, 222 Ind. 384, 53 N.E.2d 775 (1944), the federal district court in Matsuura II had determined that a `settlement fraud' plaintiff must prove not only that the settled claim had merit, but also that the value of the claim exceeded the amount of the fraudulently-induced settlement. 330 F.Supp.2d at 1123. Applying this rule to the facts of that case, the federal district court concluded that DuPont [wa]s entitled to summary judgment on all of the Matsuura [p]laintiffs' claims due to their inability to prove either the fact or [the] amount of damages with reasonable certainty. Id. at 1125. In Urtz, the New York Court of Appeals determined that, where the underlying claim has no viability, there is no potential for recovery for fraud in the inducement of settlement because plaintiff would not be able to show any injury by reason of abandonment of an entirely valueless claim. 95 N.E. at 713. In Urtz, the plaintiff, relying on alleged misrepresentations, settled her claims for the wrongful death of her husband. Id. at 712. The jury found in favor of the plaintiff in her fraud action but the appellate court reversed based upon the trial court's refusal to charge the jury that, in order to maintain the action, the plaintiff must demonstrate that her original claim for wrongful death was valid and existing at the time of settlement. Id. at 714. The court offered the following example of a plaintiff claiming that she was fraudulently induced to settle a claim based on a promissory note and stated: [S]he, in an action to recover her damages caused by the fraud[,] must have given evidence in proof of the validity of the note to afford the jury a starting point for the measurement of her damages, and, if they found that the note was forged and not made by [the] defendant, they would find also that she had sustained no damage and could not maintain the action. Unless she had the valid note of the defendant, she had and released in the compromise nothing of value. Id. at 712. By ascribing error to the jury instructions, the Urtz court essentially specified that, in the trial of a fraudulently induced settlement claim, the plaintiff carries the burden of proving some merit to the underlying cause of action. Likewise, in Automobile Underwriters, the Indiana Supreme Court indicated that, when the plaintiff elects to proceed with the fraud action, he or she recognizes that the settlement is a bar to the original action and that it is incumbent on him to allege and prove not only that the settlement was procured by fraud and to his damage, but also that he had a good cause of action against the original tort feasor at the time of the settlement. 53 N.E.2d at 777 (emphases added). In Living Designs, the Ninth Circuit implicitly expressed its disapproval of Urtz and Automobile Underwriters to the extent that these cases required a plaintiff in an action based on settlement fraud to prove that he or she had a good cause of action against the tortfeasor at the time of settlement. The Ninth Circuit reasoned that, to conclude that plaintiffs must demonstrate that their settled claim had merit is inconsistent with the aim of compensation in fraud cases, which is to restore plaintiffs to the position they would be in absent the fraud and to provide plaintiffs with the benefit of the bargain, see Leibert, [71 Haw. at 288-90,] 788 P.2d at 836-37, particularly as a party's decision to settle is often made as a result of a cost-benefit analysis rather than an assessment of the claim's merits. 431 F.3d at 367. Rather, the Ninth Circuit, relying upon DiSabatino, held that the relative strength of the claim in the absence of fraud should be used by the trier of fact to determine the amount of the defrauded party's damages. Whether the defrauded party could have won its case if it proceeded to trial is irrelevant to this calculation. The critical consideration is the settlement value of the case on the date settlement was reached. Such a determination is not beyond the power of a jury to determine. The use of probability analysis, for example, in calculating settlement value is not uncommon. 431 F.3d at 368 (emphasis added). [9] As stated above, DiSabatino dealt with the question whether the plaintiff was permitted to affirm the settlement agreement and institute an independent cause of action based on fraud, to which the court answered affirmatively. 635 F.Supp. at 351. In declining to follow other courts' limitation of remedies to rescission based, inter alia, on the assumption that damages are too speculative, the court explained that: In any action based on fraud, the fact finder will simply measure the extent of the plaintiff's damages by examining what the agreement would have been, had the parties known the actual material facts. The nature of the injuries in the foregone tort action are relevant only to the extent of how they would affect the value of the claim to be compromised[.] Id. at 355. The court further indicated that: Whether a good cause of action existed at the time of the settlement was a material fact that the parties already considered in reaching a settlement. Requiring a plaintiff to prove in a court of law the existence of a good cause of action for a tort would be inconsistent with affirmance of a settlement agreement. Evidence of the legal and factual strength of the claim merely goes to the value of the claim that was compromised in determining damages from the fraud. Id. (citation omitted) (emphasis added). According to the DiSabatino court, the better approach is for the trier of fact to determine the probable amount of settlement in the absence of fraud after considering all known or foreseeable facts and circumstances affecting the value of the claim on the date of settlement[;] the amount in settlement already received should [then] be deducted from this total amount. Id. at 355 (citation omitted). Stated differently, the defrauded plaintiff may recover such an amount as will make the settlement an honest one. Id. (internal quotation marks and citation omitted). [T]he measure of damages[, therefore,] is the loss of the bargain. Id. (citation omitted). Moreover, although the Ninth Circuit rejected the holdings in Urtz and Automobile Underwriters that a defrauded plaintiff must prove that his or her settled claims had merit, the analyses of both courts as to the method of determining damages are in accord with Living Designs and DiSabatino. Specifically, the Urtz court explained that the measure of damages is how much could the plaintiff have reasonably demanded and the defendant reasonably have allowed as [a] final compromise above and beyond the [amount] in fact allowed and received? . . . [In determining the amount, the jury] would take into view the probabilities of the successful enforcement of the cause of action, the probable extent and expense of the expected litigation over this disputed claim, the law's delays, the probability of the continuing solvency of the defendant, and such other facts pertinent to the question of damages as the evidence presented. 95 N.E. at 713. Stated differently, the court believed that the plaintiff, affirming the compromise agreement and unable to recover the contract balance, is entitled in accordance with the general rule to have such compromise agreement made as good for him as it reasonably and fairly would have been if only the truth had been told instead of a falsehood asserted. Id. at 714 (internal quotation marks omitted). The Automobile Underwriters court expressed that the measure of damages in a fraud action must take into consideration the salable value of the right of action for the purpose of compromising, and the nature and extent of the injuries known and foreseeable as of the time of the settlement, under the particular circumstances of the parties then shown existing. 53 N.E.2d at 777 (citations omitted). The proper procedure for determining damages, in the court's view, was for the jury to calculate the probable amount the parties would have agreed upon absent the fraud, taking into account all of the known or foreseeable facts and circumstances which in any way affected the value of the claim on the date of settlement[.] Id. at 779. The amount received by the releasor in exchange for signing the release is then deducted, and the balance constitutes the true measure of the damage suffered inasmuch as [t]he ultimate fact to be ascertained is the actual damage caused by the fraudulent representations and not the damage for the original injury. Id.; see also Slotkin v. Citizens Cas. Co. of New York, 614 F.2d 301, 312-13 (2d Cir.1979), cert. denied, 449 U.S. 981, 101 S.Ct. 395, 66 L.Ed.2d 243 (1980) (holding that, under New York law, the plaintiffs could recover as damages the fair settlement value less the sum they had received under the settlement; the true measure of damages was the difference in settlement value before and after discovery of the fraud); Dilley v. Farmers Ins. Group, 250 Or. 207, 441 P.2d 594, 595 (1968) (if fraud had been committed, the measure of damages was the difference between the amount plaintiff received in settlement and that she would have received by way of settlement had the alleged false representations not been made); Rochester Bridge Co. v. McNeill, 188 Ind. 432, 122 N.E. 662, 665 (1919) (same). The plaintiffs, however, urge this court not to follow the aforementioned measurement of damages enunciated by the Ninth Circuit and other jurisdictions because such limited remedy (1) is contrary to several significant policy concerns expressed by this court in Matsuura I and (2) clearly deviated from the goal of the available remedy  to restore them to their former positions they occupied but for DuPont's deceit. The plaintiffs' contentions are without merit. In support of their position that the limited remedy imposed by the circuit court is contrary to policy concerns, the plaintiffs rely upon this court's pronouncement in Matsuura I that limiting liability for fraud is unfavored in light of the policy of encouraging settlements. 102 Hawai`i at 155-62, 73 P.3d at 693-700. Specifically, the Matsuura I court was presented with the certified question whether, under Hawaii law, a party is immune from liability for civil damages based on that party's misconduct, including fraud, engaged in during prior litigation proceedings[.] Id. at 154, 73 P.3d at 692. In answering negatively to the inquiry, we examined several policies underlying the litigation privilege, such as those promoting the candid, objective, and undistorted disclosure of evidence, avoiding the chilling effect resulting from the threat of subsequent litigation, encouraging settlement, and discouraging abusive litigation practices. Id. We essentially determined that the policies associated with the litigation privilege doctrine do not favor limiting liability in a subsequent proceeding where there is an allegation of fraud committed in the prior proceeding. Id. at 155-62, 73 P.3d at 693-700. We, therefore, concluded that, [u]nder Hawaii law, a party is not immune from liability for civil damages based upon that party's fraud engaged in during prior litigation proceedings. Id. at 162, 73 P.3d at 700. The plaintiffs' reliance upon the Matsuura I's policy reasonings, however, is misplaced. The court in Matsuura I was not confronted with the issue concerning the method of measuring damages, but only whether a fraud action based on a party's conduct in prior litigation proceedings exists in the first instance. Furthermore, the plaintiffs' argument that the limitation of their damages to the settlement differential is essentially contrary to the well-settled aim of compensation in deceit cases, i.e., to put the plaintiff in the position he or she would have been had he or she not been defrauded[,] Zanakis-Pico, 98 Hawai`i at 320, 47 P.3d at 1233 (citation and original brackets omitted), is unavailing. The plaintiffs argue that the appropriate remedy is to allow the parties to determine what damages they claim and seek to prove under the particular circumstances of the claim. In other words, the plaintiffs appear to assert that the proper measurement of their damages, if the jury so determined, could be the actual judgment value of their product liability claims (less the amount they received pursuant to the settlement agreements). In support of their position, the plaintiffs cite to Farm Bureau Mutual Insurance Co. of Indiana v. Seal, 134 Ind.App. 269, 179 N.E.2d 760 (1962), Siegel v. Williams, 818 N.E.2d 510 (Ind.Ct.App.2004), and Edrei v. Copenhagen Handelsbank A/S, No. 90 Civ. 1860(CSH), 1992 WL 322027 (S.D.N.Y. Oct.29, 1992) (unreported). The plaintiffs partially quote from Farm Bureau Mutual Insurance that the proper evidence of damages involves the nature and extent of the injuries known and forseeable [sic] a[t] the time of the settlement, under the particular circumstances of the parties then shown existing. 179 N.E.2d at 764. The full quote, however, actually makes clear that the nature and extent of injuries are pertinent only for measuring the compromise value of the claim: [T]he measure of damages must take into consideration the salable value of the right of action for the purpose of compromising, and the nature and extent of the injuries known and forseeable [sic] a[t] the time of the settlement, under the particular circumstances of the parties then shown existing. Id. (emphases added). In fact, Farm Bureau Mutual Insurance, an Indiana appellate case, follows its supreme court's Automobile Underwriters case, which held that, when a plaintiff affirms the settlement agreement, his damages are the probable amount the parties would have agreed upon absent the fraud, taking into account all of the known or foreseeable facts and circumstances which in any way affected the value of the claim on the date of settlement[.] Automobile Underwriters, 53 N.E.2d at 779. Similarly, the plaintiffs rely upon Siegel to demonstrate that the parties in that case proffered an estimation of the potential jury verdict in the underlying claim as evidence of damages. 818 N.E.2d at 513-14. The Siegel court, however, was not presented with the issue as to what would be the proper measure of damages. Rather, the issues before the court concerned the sufficiency of the evidence to support a finding of fraud and the weight of expert testimony. Id. at 515-17. However, Siegel is another Indiana appellate court case and, thus, followed Automobile Underwriters in allowing the plaintiff to recover the probable settlement amount, absent fraud. The plaintiffs' reliance on Edrei for the proposition that [t]he case law is clear that[,] when a party is defrauded into releasing a claim against another party, the proper measure of damages is the value of the foregone claim, 1992 WL 322027, at , is also misplaced. The Edrei court, in explaining what the value of the foregone claim means, quoted Slotkin for the proposition that the true measure of damages was the difference between the settlement value before and after the discovery of the fraud[.] Id. (emphasis added) (citation omitted). Accordingly, the plaintiffs have failed to provide any authority that would convince us that the proper measure of damages should be, as they contend, extended to the actual judgment value of their product liability claims. [10] Indeed, as previously indicated, the plaintiffs had made an unequivocal and knowledgeable election of remedies to affirm the settlement agreements and pursue an action for fraud. However, the plaintiffs apparently sought to recover damages based upon what they would have been able to recover in their product liability suits against DuPont. [11] They cannot have it both ways, i.e., affirm an agreement not to sue for such product liability injuries and yet recover damages for those injuries. In other words, they cannot accept the settlement money, sign a release, affirm the release, keep the money, and then sue for the same damages. As DuPont asserts, the plaintiffs are seeking the rescission remedy that, by their election to affirm their settlement contracts and sue . . . for fraud, is not available to them. (Emphasis in original.) See Morse/Diesel, Inc. v. Fid. & Deposit Co. of Maryland, 768 F.Supp. 115, 117 (S.D.N.Y. 1991) (stating the rule that a plaintiff cannot elect to pursue damages for fraud and rescission because an award of damages for fraud affirms the contract while [r]escission vitiates the contract and places the parties in status quo prior to the transaction) (citation omitted); Davis v. Hargett, 244 N.C. 157, 92 S.E.2d 782, 786 (1956) (holding that the plaintiff could not affirm the release and recover the difference between the value of his original claim and what he received in settlement). Here, the plaintiffs had foregone seeking the actual judgment value of their product liability claims via rescission of the settlement agreements and instead elected to affirm the agreements and seek damages in a fraud action, and, thus, their election precludes them from seeking damages for the injuries sustained in the product liability actions. To conclude as the plaintiffs would have it would constitute an impermissible double recovery. If this court were to permit the plaintiffs to retain the benefits of the settlement agreements while seeking to recover the actual judgment value of their product liability claims, the plaintiffs would be in a better position than they would have been had the settlement negotiations been conducted in good faith. Such a result would be inconsistent with the aim of compensation in deceit cases, i.e., to put the plaintiff in the position he would have been had he not been defrauded. Ellis, 51 Haw. at 52, 451 P.2d at 820 (citation omitted). Accordingly, we believe that the method enunciated by the DiSabatino court and followed by the Ninth Circuit in Living Designs is persuasive  namely, that the trier of fact determines the probable amount of settlement in the absence of fraud after considering all known or foreseeable facts and circumstances affecting the value of the claim on the date of settlement[.] DiSabatino, 635 F.Supp. at 355 (citation omitted). Stated differently, [t]he critical consideration is the settlement value of the case on the date settlement was reached. Living Designs, 431 F.3d at 368. Consequently, we hold that the circuit court did not err in concluding that the measure of damages for the plaintiffs' fraud action is the fair compromise value of the claim at the time of the settlement. Inasmuch as the plaintiffs submitted evidence in opposition to DuPont's motion, we examine whether the circuit court properly determined that the evidence was insufficient, as a matter of law, to establish the plaintiffs' damages. Preliminarily, however, we must first determine whether, in proving damages, i.e., the fair compromise value of the claim at the time of the settlement, attorney expert testimony was necessary in the first instance.