Pipkin v. Thomas & Hill, Inc.

258 S.E.2d 778, 298 N.C. 278, 4 A.L.R. 4th 667, 1979 N.C. LEXIS 1373

• Court: Supreme Court of North Carolina
• Decided: October 17, 1979
• Docket: 104
• Status: Published

Opinion

SHARP, Chief Justice. 1

Initially, the primary relief which plaintiffs sought in this action was a decree ordering defendant to specifically perform its commitment to provide long-term or “permanent” financing to enable plaintiffs to take up CCB’s interim construction loan on their motel-restaurant project. Historically, courts of equity refused to decree specific performance of a contract to lend money on the ground that the disappointed borrower could be fully compensated by damages because, presumably, money could always be found elsewhere. 2 More recently, however, courts have employed the equitable remedy of specific performance when the circumstances of the particular case demonstrate the inadequacy of money damages to afford appropriate relief. 3 In this case the parties’ stipulation that defendant is financially unable to comply with its contract rendered the availability of the remedy of specific performance immaterial. Plaintiffs, therefore, are relegated to such damages as they are legally entitled to recover, and are able to collect, from defendant.

A borrower’s claim for damages resulting from a lender’s breach of a contract to lend money is primarily circumscribed by the rule of Hadley v. Baxendale, 156 Eng. Rep. 145, 151 (Ex. 1854). This rule limits generally the recovery of damages in actions for breach of contract. To recover, a disappointed borrower must not only prove his damages with reasonable certainty, he must also show that they resulted naturally — according to the usual course of things — from the breach or that, at the time the contract was made, such damages were in the contemplation of the parties as a probable result of the breach. Additionally, the borrower must demonstrate that, upon the lender’s breach, he minimized his damages by securing the money elsewhere if available. When alternative funds are unavailable, however, the borrower may recover the damages actually incurred because of the breach, subject to the general rules of foreseeability and certainty of proof. See 5 Corbin, Contracts § 1078 (1964); 11 Williston on Contracts, § 1411 (3d Ed. Jaeger 1968); Annot., 36 A.L.R. 1408 (1925); 22 Am. Jur. 2d Damages §§ 68, 69 (1965); Coles v. Lumber Co., 150 N.C. 183, 63 S.E. 736 (1909); Anderson v. Hilton and Dodge Lumber Co., 121 Ga. 688, 49 S.E. 725, 727 (1905); Bond Street Knitters, Inc. v. Peninsula National Bank, 266 App. Div. 503, 42 N.Y.S. 2d 744 (1943); Davis v. Small Business Investment Co. of Houston, 535 S.W. 2d 740, 742-43 (Tex. Civ. App.-Texarcana 1976).

The rule governing damages for breach of a contract to lend money is nowhere stated more succinctly than in Restatement of Contracts § 343 (1932):

“Damages for breach of a contract to lend money are measured by the cost of obtaining the use of money during the agreed period of credit, less interest at the rate provided in the contract, plus compensation for other unavoidable harm that the defendant had reason to foresee when the contract was made.

“Comment:

a. This Section is an application of the general rules of damages to a special class of contracts. The damages awarded are affected by the fact that money is nearly always obtainable in the market. If the loan was to be repayable on demand, or if the contract rate of interest is as much as the current market rate and the money is available to the borrower in the market, his recoverable damages are nominal only. He is expected to avoid other harm by borrowing elsewhere if he can, the reasonable expenses being chargeable to the defendant. Sometimes inability to borrow elsewhere or the delay caused by the lender’s action results in loss of a specific advantageous bargain, an unfinished building, or an equity of redemption in mortgaged land; damages are recoverable for losses if the lender had reason to foresee them.”

Clearly, the plaintiffs in this case have been injured by defendant’s breach of contract. Without defendant’s commitment to provide long-term financing they would not have begun construction of the motel project. When it was completed and the construction loan from CCB became due they were unable to obtain alternative long-term financing because none was available at any rate of interest. Plaintiffs were able to forestall foreclosure only by refinancing the construction loan with a demand note at a fluctuating rate of interest which varied from 2 to 3°/o above CCB’s prime rate and was always in excess of the contract rate. At the time of the trial CCB was still carrying the construction loan. 4 Thus, this case differs significantly from those cases involving a disappointed developer-borrower who, unable to obtain specific performance or an alternative permanent loan, either suffers foreclosure 5 or obtains alternative permanent funds at additional expense, for a shorter time, or at a higher but constant rate of interest. 6

Specifically, the question for our determination is the following:

What is the measure of damages for breach of a contract to make a loan of $1,162,500 at 9V2°/o interest per annum, the loan to be amortized over 300 monthly installments and to be used to take out a short-term construction loan, when a substitute loan was unobtainable upon any terms at the time of the breach and, in order to forestall foreclosure, the borrowers had to refinance the construction loan by a demand note at a fluctuating rate of interest for a period of 18 months?

At trial plaintiffs sought to recover — and the judge purported to assess — their past, present and prospective damages. The case was tried upon the fiction that at the time of trial plaintiffs had obtained a permanent loan at 10V2°/o interest, which the court found was the lowest prevailing rate of interest for a comparable long-term commercial loan as of 1 October 1974, the date of the breach. In attempting to fashion a rule which would appropriately measure plaintiffs’ damages the trial judge analogized this case to those in which the borrower actually obtained another loan. On this theory, the trial court awarded plaintiffs general damages in the amount of $120,000, this amount being the difference between the interest on a 25-year loan of $1,162,500 at 10V2°/o per annum and a similar loan at 9V2°/o, reduced to present value and “discounted for the likelihood of early payment.” As special damages, Judge McKinnon awarded plaintiffs $5,888.12, the total of amounts which plaintiffs reasonably expended in refinancing their construction loan with CCB to prevent foreclosure, and in their unsuccessful attempts over 18 months to secure a replacement long-term loan. The judge, however, refused to allow any recovery of the $184,619.49 in interest which plaintiffs paid CCB on the demand note during that 18-month interim.

The Court of Appeals affirmed the trial judge’s award of $5,888.12 in special damages. This ruling was clearly correct, and we affirm it. As the Court of Appeals pointed out, additional title insurance and brokerage, accounting and appraisal fees “were foreseeable expenses which, but for the breach, plaintiffs would not have incurred.” With reference to these expenditures, defendant concedes in its brief filed in this Court that “in view of the evidence and the Trial Court’s explicit and implicit factual findings pertaining to these items there is no room for further argument and the judgment of the Trial Court is binding as to such damages.”

The Court of Appeals also ruled that the trial judge was correct in using the lowest prevailing rate of interest for a long-term commercial loan (10V2 °/o) to determine “the basic measure” of plaintiffs’ damages, i.e., the difference between the interest on the loan at the contract rate during the agreed period of credit and the rate (not exceeding that permitted by law) which plaintiffs would have had to pay for the money in the market on the date of breach. 7 Defendant argues that the use of a hypothetical loan at the lowest prevailing rate of interest for comparable long-term loans, at least in cases where an alternative lender cannot be found, is too speculative and uncertain a technique for approximating the borrower’s prospective losses. However, a party seeking recovery for losses occasioned by another’s breach of contract need not prove the amount of his prospective damages with absolute certainty; a reasonable showing will suffice. “Substantial damages may be recovered though plaintiff can only give his loss proximately.” Wilkinson v. Dunbar, 149 N.C. 20, 22, 23, 62 S.E. 748 (1908). See Tillis v. Cotton Mills & Cotton Mills v. Tillis, 251 N.C. 359, 366-67, 111 S.E. 2d 606, 612, 613 (1959); Thrower v. Dairy Products, 249 N.C. 109, 113, 105 S.E. 2d 428, 430, 431 (1958); Perkins v. Langdon, 237 N.C. 159, 171, 74 S.E. 2d 634, 644 (1953).

In our view, plaintiffs have reasonably demonstrated that as a consequence of defendant’s breach of its loan commitment they will suffer prospective losses; and we agree with the Court of Appeals that the trial court’s use of the lowest prevailing rate for comparable long-term loans as a figure to be compared with the contract interest rate represents effort to provide relief from these prospective damages. We also agree that the trial judge erred in reducing the present worth of plaintiff’s prospective damages ($143,282.03) to the amount of $120,000 “for the likelihood of early payment.”

Although a witness for defendant opined that the average life of a commercial loan such as the one defendant was committed to make for plaintiffs was “approximately seven years,” no witness attempted to fix the value of such a probability. Further, there was no evidence that plaintiffs contemplated early payment of the loan. The Court of Appeals, therefore, properly ordered this reduction stricken, and we affirm.

Finally, the Court of Appeals concluded that the trial judge erred in refusing to allow plaintiffs to recover the $184,618.49 in interest which they paid CCB on the demand notes during the 18 months elapsing between the date of defendant’s breach of its contract and the date of the trial. This interest, that court said, was recoverable as special damages which defendant should have foreseen as the probable consequence of its failure to provide plaintiffs the promised long-term financing. Thus, the question remaining is whether, in order to avoid foreclosure, a disappointed borrower to whom a defaulting lender had committed long-term financing to pay off a temporary construction loan, is entitled to obtain temporary refinancing at a higher rate of interest and to recover the cost of this refinancing as special damages.

On the ground that such refinancing was an unforeseeable consequence of the breach defendant argues that the trial court properly denied plaintiffs any recovery of the interest they paid on the demand note which refinanced the temporary construction loan. In our view, this contention by a defaulting lender, fully aware of the purpose for which plaintiffs had secured its commitment, is entirely unrealistic. In 11 Williston on Contracts § 1411 (3d Ed. Jaeger 1968) it is stated:

“It will frequently happen that the borrower is unable to get money elsewhere, and, if the defendant had notice of the purpose for which the money was desired, he will be liable for damages caused by the plaintiff’s inability to carry out his purpose, if the performance of the promise would have enabled him to do so.”

The case of St. Paul at Chase Corp. v. Manufacturers Life Ins. Co., 262 Md. 192, 278 A. 2d 12, cert. denied, 404 U.S. 857 (1971), grew out of the defendant’s breach of a commitment to provide the plaintiff with permanent financing “to take out” a construction loan on a high rise apartment building. When the defendant canceled its commitment and the plaintiff was unable to obtain a substitute loan, the bank carrying the construction loan foreclosed the property and obtained a deficiency judgment against the plaintiff, which then sued the defendant for damages. In affirming the trial court’s award of compensatory damages which would enable the plaintiff to pay the deficiency judgment and other “consequential damages,” the Court of Appeals of Maryland also adopted both the judge’s rationale and his succinct statement of it. After noting that in loan transactions such as the one in suit “the parties, of course, anticipate that everything will proceed according to Hoyle — that there will be no breach by either party,” Judge Proctor added:

“On the other hand, the would be permanent mortgage lender must contemplate that if, at the last minute, it cancels its commitment such action would be disastrous to the borrower; that in such event obtaining a new permanent mortgage loan would be well-nigh impossible, for the reason that whatever brought about the cancellation would in all likelihood prevent another lender from entering the fray; that one doesn’t find someone willing and able to lend $4,800,000 at a moment’s notice; that, under such circumstances, foreclosure under the construction mortgage would not only be a probability, it would be almost inevitable.” (Emphasis added.) 262 Md. at 243, 278 A. 2d at 36.

Whether the loan commitment be for $4,800,000 or $1,162,500, we harbor no doubt that a committed permanent lender on a substantial building project certainly must foresee that a breach of his commitment a relatively short time before the date he has contracted to provide the money to pay off the interim construction loan will result in substantial harm to the borrower.

Defendant, in this case, being unable to find a lender willing to make the permanent loan it had committed itself to provide plaintiffs, formally notified them on 6 August 1974 — less than two months before the scheduled closing date — that it would not make the loan. At that time the same conditions which had thwarted defendant’s efforts to obtain the loan also thwarted plaintiffs. In a reasonable effort to minimize their losses, while they continued their search for another permanent loan plaintiffs refinanced the construction loan to prevent foreclosure of property in which they had acquired equity of approximately $627,500. That their search during the subsequent 18 months proved futile is no reason to deny them compensation for the resulting damages they sustained during that period.

However, our conclusion that plaintiffs should recover as foreseeable damages their losses arising from the interest payments on the demand notes does not necessarily entail an award for the full amount of interest actually paid to CCB. On the contrary, we hold that the Court of Appeals erred insofar as it awarded plaintiffs both the full amount of interest actually paid CCB from the date of the breach until the date of trial and the present value of the difference between the interest on $1,162,500 amortized over 25 years from the date of the trial at the hypothetical rate of 10V2°/o per year and the contract rate of 9V*%.

In Bridgkort Racquet Club v. Univeristy Bank, 85 Wis. 2d 706, 271 N.W. 2d 165 (1978), plaintiffs contracted with defendant University Bank for a loan of $250,000 at 10V4°/o to be amortized over a 15-year period. The loan closing, which was scheduled for 13 January 1976, involved both the short-term construction lender, and long-term financiers. The short-term loan was closed on 13 January, but on 23 January 1976 plaintiffs discovered that the defendant University Bank had breached its contract and would not make its long-term loan. After extensive attempts to obtain financing at a comparable rate, the plaintiffs obtained financing at 11% for the same 15-year period. The Wisconsin court recognized the plaintiff’s damages as the difference between the cost of obtaining substitute money at an increased rate of interest and the interest rate specified in the contract. In the case at bar, plaintiffs contracted with defendant to have the use of $1,162,500 from 1 October 1974 until 1 October 1999. To award plaintiffs the entire amount of interest paid to CCB from the time of the breach until the time of the trial ($184,619.49), with no deduction for interest at the contract rate of 9 ¥2%, would give plaintiffs the use of $1,162,500 interest-free for that 18 months period. When defendant failed to make the agreed loan on 1 October 1974 it became liable to plaintiffs at that time for the increased cost of obtaining the use of the money “during the agreed period of credit,” that is, 25 years from 1 October 1974.

We are of the opinion that the Wisconsin Court in Bridgkort Racquet Club, supra, was correct in determining the plaintiffs’ damages to be the differential between the cost of obtaining new financing and the interest payments specified in the contract. Based on this principle, plaintiffs’ recovery of interest payments made to CCB during this 18-month period must be reduced by the amount of interest which would have been payable to defendant at the contract rate of 9 ¥2%.

Having concluded that plaintiffs are entitled to compensatory damages for the cost of refinancing during the 18-month period between the date of defendant’s breach and trial, and a general damages award resulting from defendant’s breach, we believe the most equitable remedy will be achieved by compensating plaintiffs for the amount of their actual losses up until the date of trial and using the difference between the hypothetical interest rate of 10¥2% and the contract rate as the basis for determining the damages sustained after the trial. The record shows that for each of the 300 months of the loan plaintiffs contracted for, the amount of interest which plaintiffs would have been obligated to pay defendant can be determined with exactitude. Therefore the amount of plaintiffs’ actual damages prior to trial can be computed by subtracting from the $184,619.49 actually paid CCB by March 31, 1976, the amount of interest plaintiffs would have paid to defendant under the contract by that date. As to plaintiffs’ prospective losses from the contractural breach, they can be calculated by using the differential between the 10 ¥2% per an-num rate which the trial court hypothesized to be the lowest prevailing rate of interest on 1 October 1974 for a long-term commercial loan on a project such as plaintiffs’ and the contract rate of 9 ¥2%. Plaintiffs are therefore entitled to the present value of the difference in interest payments owed under the contract from 1 April 1976, the date of the trial, until 1 October 1999 and the in terest which would have been paid during the same period for a loan bearing interest at 10V2°/o per annum.

This cause is returned to the Court of Appeals for remand to the Superior Court of Wake County with instructions that, after hearing such additional evidence as may be necessary to make the calculations required to determine the amounts defined in subsections (b) and (c) below, that court shall enter judgment that plaintiff recover of defendant as damages the sum of the amounts specified in subsections (a), (b), and (c) as follows:

(a) $5,888.12 expended for additional title insurance, brokerage, accounting, and appraisal fees necessitated by defendant’s breach;

(b) $184,619.49, less the amount of interest plaintiffs contracted to pay defendant from 1 October 1974 until 31 March 1976;

(c) the present value of the amount determined by subtracting the interest payments which were to have been made by plaintiffs pursuant to the contract from 1 April 1976 until 1 October 1999, from the interest payable during the same period on a loan of $1,162,500, amortized over 300 months from 1 October 1974 bearing an interest rate of 10V2% per annum.

The judgment entered shall also provide that the damages therein awarded plaintiff shall bear interest at the legal rate of six percent from 28 May 1976, the date of the judgment from which the parties appealed. See G.S. 24-1 and 24-5 (1965); 45 Am. Jur. 2d Interest and Usury § 109 (1965). See also Jackson v. Gastonia, 247 N.C. 88, 100 S.E. 2d 241 (1957).

For the reasons stated and specified above, the decision of the Court of Appeals is

Affirmed in part, and

Reversed in part.

1 . This opinion was written in accordance with the Court’s decision made prior to the retirement of Chief Justice Sharp and was adopted by the Court and ordered filed after she retired.

2 . Annot., 41 A.L.R. 357 (1926); Draper, The Broken Commitment: A Modern View of the Mortgage Lender’s Remedy, 59 Cornell L.R. 418 (1974). See Norwood v. Crowder, 177 N.C. 469, 472, 99 S.E. 345, 346 (1919).

3 . See Columbus Club v. Simons, 110 Okla. 48, 236 Pac. 12; Annot., 41 A.L.R. 350 (1925); Vandeventer v. Dale Construction Co., 271 Ore. 691, 534 P. 2d 183 (1975); Cuna Mutual Insurance Society v. Dominguez, 9 Ariz. App. 172, 175, 450 P. 2d 413, 416 (1969); Cohen v. Leaman and C'test, 152 So. 136 (La. App. Ct. Orleans 1934); Selective Builders, Inc. v. Hudson City Savings Bank, 137 N. J. Super. 500, 507, 349 A. 2d 564, 569 (1975); 81 C.J.S. Specific Performance § 94 (1977); 71 Am. Jur. 2d Specific Performance § 104 (1973); 5A Corbin, Contracts § 1152, 167-68 (1964); Gro'ot, Specific Performance of Contracts to Provide Permanent Financing, 60 Cornell L.R. 718, 736-742 (1975).

4 . Upon oral argument here, in response to questions from the Court, counsel for plaintiffs stated that CCB was still carrying the construction loan.

5 . St. Paul at Chase Corporation v. Manufacturer's Life Ins. Co., 262 Md. 192, 278 A. 2d 12, cert. denied, 404 U.S. 857 (1971).

6 .Bridgkort Racquet Club v. University Bank, 85 Wis. 2d 706, 271 N.W. 2d 165 (1978).

7 . Hedden v. Schnebhn, 126 Mo. A. 478, 104 S.W. 887, 890 (1907); Annot., 36 A.L.R. 1408, 1410-11 (1925); Restatement, Contracts § 343 (1932); 22 Am. Jur. 2d Damages § 68 (1965).