Our next case, Bernstein versus Nemeyer involves a lawsuit that emerged from a complicated investment arrangement. In 1983, Nemeyer and several others formed the CMC Southwest limited partnership, in order to quote purchase and renovate two apartment complexes in Houston Texas. In 1984, they persuaded Bernstein and other plaintiffs to invest $ 1,050,000 in the partnership in part, because the defendants made a negative cash flow guarantee. Nemeyer and the Cheshire management company agreed to lend money to the partnership each year as part of this negative cash flow guarantee to cover for any loss. That is, they would lend any amount by which the operating costs exceeded income from rent. The loans would be repaid from future years income, or from the gains realized when the buildings were sold. And Nemeyer and the guarantors claims were to be paid on the negative guarantee loans before any claims of Berstein or the other investors. Instead of gaining value as the partnership at hope, the apartment complexes in fact declined in value along with the rest of Houston's real estate as you can see in this graph. By late 1985, the defendants had made loans of three million dollars under their negative cash flow guarantee. They stopped paying in an effort to renegotiate the mortgage, but the property ended up in foreclosure and the whole partnership lost its entire investment. Bernstein and other limited partners then sued the general partners for rescission of the contract and restitution of their investment. The trial court ruled for the defendants finding that the defendants breach was not material and that quote, " the plaintiffs losses resulted from a bad market, rather than the defendants breach." We're reading the decision on appeal at the Supreme Court of Connecticut, written by Chief Justice Ellen Peters. Justice Peters used to teach contracts at Yale, and I often look up at her portrait when I'm teaching. She found that the defendants breach was material, the defendants breached their promise to keep lending money to cover any negative cash flows, not lending money that you promised to lend is pretty material. So, Justice Peters went on to look at whether the plaintiffs could get restitution. The question was, Can a plaintiff obtain restitution when the breeching defendant got no benefit from the contract? First, let's review the different measures of the plaintiffs possible recovery. We have mostly been concerned in this course with expectation damages and reliance damages. As you'll recall from Sullivan versus O'Connor, expectation damages seek to put the non breaching party usually the plaintiff, in as good a position as he or she would be in if the other party hadn't breached. In this case, the defendants would have kept making negative cash flow loans, but remember the loans had to be paid off before the plaintiffs got anything. The underlying property was going to decline in value either way. And so, the plaintiffs probably wouldn't have benefited from the defendants pouring good money after bad. In other words, expectation damages would be zero or at least very small because the plaintiffs couldn't expect to receive any of the money back if the defendants kept making first priority loans. Reliance damages on the other hand, try to put the plaintiff in as good a position as she would have been in had the contract never been made. Here, that would mean that Bernstein would get the whole original investment, the plaintiffs would get back their million and fifty thousand dollars. Both of these calculations for damages take the situation or the position of the plaintiff as their focus. But the plaintiffs didn't choose to go for either of these because plaintiffs are usually limited to the lesser of reliance and expectation damages. More specifically, if a plaintiff elects to pursue reliance damages, courts will reduce them to the expectation about if the defendants persuade the court that expectation damages would be smaller. Instead, the plaintiff in this case sued for restitution, for which the calculation of damages focuses on the defendant, the defendant's position or situation. The goal of restitution damages is to prevent the defendants from being unjustly enriched by their breach of contract. That is, restitution tries to put the party in breach back in the position he would have been in, if the contract had not been made. The damages take back the benefit the breaching party got from being in the contract. Section 371 of the second restatement sets out two different ways of calculating restitution damages. The first in subsection A says that, a plaintiff can get the fair market value of whatever goods or services she gave the defendant. The second calculation in Subsection B says, the plaintiff can get whatever increase in value to the defendant of those goods or services. In analyzing this case, Chief Justice Peters first, looked at whether the plaintiffs had done what they needed to do in order to earn restitution. It is quote, " A condition of rescission and restitution that the plaintiff offer as nearly as possible to place the other party in the same situation that existed prior to the execution of the contract." Before you can sue for restitution, you must have already given back anything you got from the contract. Here there is no evidence that Bernstein and his fellow plaintiffs had done so in part, because their shares in the partnership are already worthless when the breach occurred and so, giving back their partnership interests would have been meaningless. But it's even more problematic for the plaintiffs claim that there doesn't seem to have been unjust enrichment. Instead, the defendants suffered a great loss of their own about three million dollars. Even if each additional investor conferred a marginal benefit to the defendants putting the defendants back in their ex ante position would require giving them money, not taking it away from the defendants. Restitution isn't really meant for so-called losing contracts like this one, where all the parties ended up worse off. So, nobody has gains here for restitution to claw back. Stepping back, we can see how this decision helps teach us about the shifting burdens in the election of remedies. At common law, the plaintiff initially gets to choose among any of the three classic measures, for damages, expectation, reliance, or restitution. And the plaintiff has the burden of proving the amount of the elected damage measure. If the plaintiff chooses reliance or restitution and meets her burden of proving these damages, the burden then shifts to the defendant to show that expectation damages would be smaller. A defendant who shows that expectation damages would be smaller than reliance, is it's fairly well established that that defendant will be able to reduce the damages down to the expectation amount. This case shows a similar effect with regard to restitution, because the same losses that reduced the expectation measures effectively down to zero are the same with losses that reduce the restitution measure. But you should also know that restitution is decidedly more of an equitable remedy, and many courts are much less clear than Justice Peters in deciding what justice requires. So, here's a quiz. A homeowner hires a gardener to landscape her front and back yards for twenty $25,000. The homeowner breaches when the gardner is finished with the front yard. Assume it costs the gardener $8,000 to do the front yard, that the market price for the completed work on the front yard was $10,000, and it increased the home's value by $12,000. The whole job would have cost the gardener $16,000. Match the dollar values in the left hand column to the types of damages that the gardener might get under these different theories of damages. Well, the $8,000 figure is for reliance damage. This is how much worse off the gardener is for having entered into the contract, he already spent $8,000 in doing the front yard. The $10,000 figure, is for the first type of restitution from Section 371 (a), in which the plaintiff gets back the market price of the services the defendant received. The $12,000 figure is for the second type of restitution from Section 371 (b), in which the plaintiff gets back the value that those services provided to the defendant, their effect on the property's value. Here, this is the increase in value of the home. Finally, the $17,000 figure is for expectation damages. This is the full $25,000 the homeowner was supposed to pay the gardener, minus the $8,000 that the gardener saved by not landscaping the backyard. We have seen that restitution damages seek to take back the unjust enrichment of the defendants by putting them back in the position they were in before they entered the contract. It does this by forcing them to pay back the value of what they received from the contract. Unfortunately, in situations like the one in Bernstine, this means that where defendants lost money due to the contract, plaintiffs cannot recover any restitution.
