Opinion ID: 1267906
Heading Depth: 3
Heading Rank: 1

Heading: Lost Value Damages

Text: Among the several damages theories presented at trial, the Court of Federal Claims awarded lost value damages of $276 million based on Meritor's market valuation on August 1, 1988, immediately before the government's first breach, on the theory that all of this value was lost by the chain of consequences initiated by the FDIC's first breach. All parties agree that the shareholder value after seizure was zero. In reaching the $276 million, Slattery's damages expert, Dr. Finnerty, calculated the actual stock market valuation of the bank on August 1, 1988 to be $171 million. He also calculated an adjusted market capitalization to correct the negative effect of publicity on the pending regulatory action against Meritor, totaling $196 million. He then applied a 50% control premium to each amount, yielding $256 million and $296 million, and averaged these two numbers to arrive at $276 million. This was the amount adopted by the trial court. The court referred to this award as a form of expectancy damages. The basic principle of expectancy damages for breach of contract is to place the nonbreaching party in as good a position as it would have occupied had the contract been performed. See Restatement (Second) of Contracts งง 344(a), 347. As stated in Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 496 (2d Cir.1995), when the breach of contract results in the complete destruction of a business enterprise and the business is susceptible to valuation methods, such an approach provides the best method of calculating damages. The government has not challenged the viability of this basic theory of damages based on lost value. However, the government does dispute when and how to determine the lost value that was causally related to the FDIC's breach. The government argues that the trial court erred in selecting August 1, 1988 as the date from which to measure Meritor's loss in value, stating that the bank's Board of Directors, and therefore its shareholders, continued to control its operations after the FDIC's first breach in 1988 and continuously until December 11, 1992 when the bank was seized. The government argues that it cannot be assumed that all of the losses in bank value over that four-year period were due to the breach that occurred in 1988. The government cites the testimony of Slattery's expert, Dr. Goldstein, who stated that even without the FDIC's breach Meritor would have had to shrink during the period from 1987-1992 by at least $10 billion in assets in order to satisfy the prevailing 5.5% capital requirements, with hypothetical losses of $650.9 million for the years 1988-1991. This testimony was cited by the trial court in explaining its decision not to award reliance/cost-of-performance damages under Slattery's alternative damages theory. See Damages Ruling, 69 Fed.Cl. at 577-78. The government argues that these hypothetical losses after 1988 should be set off against the actual market value in 1988, reducing the damages award to zero. The Court of Federal Claims deemed this argument unpersuasive, finding that the series of events whereby the bank was seized would not have occurred at all, but for the 1988 breach and the ensuing FDIC actions and pressures based on the FDIC's distaste for goodwill capital. The court observed that while Dr. Goldstein's model predicted losses, his model also predicted an ultimate return to profitability โ a goal that was never realized because of FDIC's breaches that led to seizure of the bank. Hence, after considering testimony by Slattery's damages experts about the hypothetical non-breach world and other evidence, the court found it unlikely that Meritor would have failed in the relevant time period had the FDIC not breached the contract it entered in 1982. The government has not shown clear error in these findings. The government also argues that, at a minimum, the damages must be offset by any benefits the shareholders realized from the bank's operations during the period after the 1988 breach, citing LaSalle Talman Bank, F.S.B. v. United States, 317 F.3d 1363, 1366 (Fed.Cir.2003) (damages due to the breach are subject to offset or mitigation by the benefits of the actions taken after the breach). We agree with the proposition, but observe that it is qualified by the next sentence in LaSalle, which states, However, the mitigation is limited to actions reasonably directly related to the breach and its proximate consequences. Id. The trial court found that the breach was the but for cause of the seizure, and that Meritor's actions after the 1988 MOU were heavily directed to attempts to comply with the FDIC's new capital requirements. The court did not accept the theory that the damages for breach should be offset by whatever gain or loss in value might have occurred due to subsequent economic conditions, both for lack of proof, and because the court determined that but for the breach upon imposition of the new 1988 capital requirements, the bank would have survived. These findings, and their application to the damages award, have not been shown to be clearly erroneous. We discern no error in the court's determination that the government did not establish any offsetting benefits, and in any event Slattery correctly observes that any benefits that may have accrued were subsequently appropriated by the government when it seized the bank and liquidated its remaining assets, for the parties state that none of the liquidation proceeds, reported to be $181 million, has been returned to the shareholders. The lost value measure of damages is affirmed.