Damages Awards Are Not “Payments” Under Reinstatement Clauses: Comerica Bank v. Pratt

Introduction

In Comerica Bank, Inc. v. Larry Pratt, 25a0228n.06 (6th Cir. May 5, 2025), the Sixth Circuit considered whether a multi‐million‐dollar damages judgment in Montana state court operated to “disgorge” collateral such that it reinstated a guaranty agreement. Comerica Bank—the successor in interest to the original lender—had foreclosed on collateral and later was found liable in Montana for breaching a forbearance agreement, resulting in a $10.5 million damages award. After paying that award, Comerica sued Pratt in federal court to revive his $9 million guaranty. The district court granted Pratt summary judgment, concluding that the Montana award was compensatory damages—not a returned or rescinded payment—and thus did not trigger the guaranty’s reinstatement clause. The Sixth Circuit affirmed.

Key issues:

Whether a state‐court damages award for wrongful seizure of collateral qualifies as a “returned, disgorged, or rescinded” payment under a guaranty agreement’s reinstatement clause;
How Michigan contract interpretation principles apply to the plain language of guaranty agreements;
The role of state‐court judgments under the Full Faith and Credit Act (28 U.S.C. § 1738).

Parties:

Plaintiff–Appellant: Comerica Bank, Inc.
Defendant–Appellee: Larry F. Pratt, individually and as trustee of his living trust.

Summary of the Judgment

The Sixth Circuit affirmed the district court’s grant of summary judgment to Pratt. It held:

The guaranty provision triggers only when a creditor must “return, disgorge, or rescind” an actual payment or credit previously received on the debt.
The Montana state‐court award was traditional compensatory damages for breach of the forbearance agreement, not a refund or rescission of the original $10.5 million loan.
Under Michigan contract law, the plain language is unambiguous: a damages award separate from the underlying debt cannot revive the guaranty.
Bankruptcy preference–action cases, where a creditor is compelled to return payments to a bankruptcy estate, are inapposite to this context.

Accordingly, Pratt’s guaranty remained extinguished, and Comerica’s action for $9 million under the guaranty failed.

Analysis

Precedents Cited

Masters Group Int’l, Inc. v. Comerica Bank (Masters I), 352 P.3d 1101 (Mont. 2015): Initial Montana Supreme Court decision vacating a $52 million jury verdict and clarifying available damages.
Masters Group Int’l, Inc. v. Comerica Bank (Masters II), 491 P.3d 675 (Mont. 2021): Bench‐trial affirmance of $10,595,514.16 in “seizure damages”—actual returns of wrongfully seized collateral.
Rasheed v. Chrysler Corp., 517 N.W.2d 19 (Mich. 1994) and City of Grosse Pointe Park v. Mich. Mun. Liab. & Prop. Pool, 702 N.W.2d 106 (Mich. 2005): Michigan principles on contract interpretation.
Restatement (Third) of Suretyship & Guaranty § 70 (1996): Reinstatement of guaranties when collateral is surrendered under legal compulsion, primarily in bankruptcy preference actions.
Wallace Hardware Co. v. Abrams, 223 F.3d 382 (6th Cir. 2000): Guaranty reinstated on preference‐action settlement forcing return of collateral value.
In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009): Similar preference‐action disgorgement leading to guaranty revival.

Legal Reasoning

1. Contract Interpretation (Michigan Law)
The court applied Michigan’s rule that unambiguous contract language controls. The guaranty’s reinstatement clause covered only sums “returned, disgorged or rescinded”—terms which the court interpreted in their ordinary senses as requiring the clawback of an actual payment previously applied to the debt.

2. Nature of the Montana Award
The Sixth Circuit held that “seizure damages” were compensatory in nature—an award of money to compensate for wrongful breach—rather than a rescission or refund of the original loan. Though numerically equal to the loan, the damages arose from a distinct contract (the forbearance agreement) and served a different remedial purpose.

3. Distinction from Bankruptcy Preference Actions
Preference‐action jurisprudence compels creditors to disgorge payments improperly received shortly before bankruptcy, triggering guaranty clauses. The court explained that those equitable, time‐limited statutory remedies differ fundamentally from state‐court breach‐of‐contract damages aimed at making the injured party whole.

4. Full Faith and Credit
By ratifying the Montana Supreme Court’s damages award, federal courts must give it effect under 28 U.S.C. § 1738. The Sixth Circuit would not relitigate the factual determination that Comerica’s breach caused a $10.5 million injury.

Impact

This decision clarifies that:

Guaranty reinstatement clauses will not be lightly invoked—state‐court damage awards do not equal refunds of original debt.
Lenders and sureties must carefully distinguish “disgorgement” in bankruptcy settings from compensatory damages in ordinary contract disputes.
Parties drafting guaranties should specify whether compensatory awards or only refunds of principal trigger reinstatement.
Federal courts will respect state‐court damage determinations as a matter of comity and Full Faith and Credit.

Complex Concepts Simplified

Forbearance Agreement: A temporary standstill arrangement allowing a borrower to avoid default if certain conditions are met.
Reinstatement Clause: A provision in a guaranty that revives the guarantor’s obligation if a payment is invalidated or returned.
Disgorgement: The legal compulsion to give up ill‐gotten gains or returns under threat of sanction, often used in bankruptcy preference actions.
Compensatory/Actual Damages: Money awarded to make an injured party whole for actual losses suffered.
Preference Action: A bankruptcy‐court remedy allowing a trustee to recover payments made to one creditor shortly before bankruptcy for fair distribution among all creditors.

Conclusion

Comerica Bank v. Pratt establishes that state‐court awards of compensatory damages for breach—however numerically identical to the underlying debt—do not constitute “returned, disgorged, or rescinded” payments under a guaranty’s reinstatement clause. By distinguishing ordinary breach‐of‐contract damages from bankruptcy‐style disgorgement, the Sixth Circuit preserves the finality of guaranty extinguishment unless the creditor actually surrenders principal under legal compulsion. This ruling underscores the importance of precise drafting in guaranty agreements and reaffirms interstate comity in enforcing state judgments.