by Frank Thomas
When is a Deal NOT a Deal?
Ellen Brown has raised an excellent damage recovery option for cities across America – e.g., Oakland, California – that have entered into “interest rate swap” contracts which in essence have become quasi-contracts or not true contracts. This option emanates from the Common Law of restitutionary obligations for “unjust enrichment” of the defendant (e.g., the Goldman Sachs) at the plaintiff’s expense (e.g., the Oaklands) … and imposes on the defendant a duty to pay for unfair benefits under the principle of restitution.
In brief, the Law of Obligations covers contractual, tort, and restitution obligations (liabilities) … in effect, these obligations represent three interests deserving legal protection as identified by Professor Lon Fuller in 1936: expectation, reliance, and restitution.
Contractual liability is generally not making things better by not rendering the expected performance – which is Not the Oakland situation. Tort liability is generally for action(s) making things worse or reliance on the acts of another that results in a worsening change for the other – which MIGHT BE the Oakland situation. Restitution liability is for unjustly taking the defendant’s money triggering a restitution obligation of making good to the aggrieved party – which IS the Oakland situation!
In the Oakland interest swap deal, unjust enrichment is a deal where a benefit is obtained from another that is not legally justifiable for which the beneficiary must make restitution. Such a deal is not a true contract and in fact falls outside the area of contract law. A restitution obligation in the Oakland case may be created by law when money (e.g., an above market interest rate) has been obtained unjustly by one party (the defendant, Goldman Sachs) at the expense of another party (the plaintiff, Oakland) under circumstances that in equity and good conscience the defendant party (Goldman Sachs) ought not to retain the benefit received.
STANDARD TEXT EXAMPLE of UNJUST ENRICHMENT:
Bart plants shrubbery under a contract with Joan. Joan dies before Bart is paid, and Gail buys Joan’s house. Gail must pay Bart for the shrubbery, for if she does not, she will be unjustly enriched and Bart will be out the value of the plantings.
CORRELATING EXAMPLE OF UNJUST ENRICHMENT IN OAKLAND INTEREST SWAP DEAL WITH GOLDMAN:
Oakland signs a variable interest rate contract with a bank for 5.7%. Goldman Sachs subsequently signs an interest swap contract with Oaklandthat for a fee insures latter for a fixed interest rate of 5.7%. This means Goldman accepts all risk if interest rates go higher and Oakland pays Goldman if interest rates fall below 5.7%. BUT, then comes the Fed’s deliberate move in colluding concert with the big banks (and very likely knowledge/support of Goldman) to save the big banks by artificially retaining historically very low interest Fed rates for a long period to prevent further financial chaos.
Result? In a major mini-depression crisis, Oakland is forced to pay the exorbitant unjustified high market interest rate for the sake of Oakland’s (and California’s) financial stability—while Goldman makes out like a bandit as city policemen, firemen, and teachers are fired en masse to correct deficits. Goldman has thus been unjustly enriched. Oakland can sue to be recompensed by Goldman for the excess interest costs Oakland paid starting from the moment abnormally low interest rates and fraudulent LIBOR rate manipulations were set in effect. Restitution is equitable and proper for Oakland’s monetary injury as a result of Goldman’s unjust enrichment.
Of course, there are defenses to restitution claims for unjust enrichment. Goldman can argue the financial crisis was not “foreseeable.” That retaining the very low Fed interest rates was not their responsibility in a financial crisis situation. Goldman could claim (however, seemingly ludicrously) that its position has changed in some negative way by incurring costs in reliance on a monthly contractual interest payment received from Oakland. Goldman can argue Oakland is unjustly reversing the contractual allocation of risks by non-contractual actions and/or market conditions beyond Goldman’s control.
Generally, all contract damage awards are subject to the requirement of “causation” and “certainty.” The plaintiff is responsible for showing that the injury for which restitution is sought actually resulted from the defendant’s breach of contract, as well as showing the money cost of such injury with reasonable certainty. The type of injury claim must also be “foreseeable” (as noted above) to the defendant at the time the contract was made. HOWEVER, there are numerous types of ‘general damages’ where the “foreseeability” of which is taken for granted as a matter of law. Only in the case of ‘special’ or “consequential” damages does the plaintiff have to prove the defendant knew (or had reason to know or should have known) of the possibility of an injury resulting from breach of contract.
Despite these defendant defense arguments, I believe Ellen Brown is on solid legal grounds in suggesting that “Goldman Sachs was unjustly enriched by the collusion of its banking colleagues and the Fed” in setting very low interest rates bearing no relation to market demand. The law should take its course and impose a duty on the Goldman Sachs’ types to pay compensation to cities across the U.S. to stop the non-transparent toxic interest swap casino of trillions of dollars and other “I win , you lose” financial products bankrupting our nation.
When will we ever marshal the integrity and courage to call an end to our multi-faceted parasitic banking system in the common interest of ALL Americans ? We desperately need state banks like in North Dakota and banking cooperatives focusing primarily on regional interests. The global giants must be broken up.
Do we need another financial crisis to effect these changes?
Frank Thomas
The Netherlands
July 22, 2012
