Farm Crop Energy, Inc. v. Old Nat. Bank of Washington, 51009-1

• Decision Date: 04 February 1988
• Docket Number: No. 51009-1,51009-1
• Citation: 109 Wn.2d 923,750 P.2d 231
• Parties: FARM CROP ENERGY, INC., a Washington corporation, Respondent, v. OLD NATIONAL BANK OF WASHINGTON, a national banking association, Petitioner.
• Court: Washington Supreme Court

Page 923

109 Wn.2d 923

750 P.2d 231

FARM CROP ENERGY, INC., a Washington corporation, Respondent, v. OLD NATIONAL BANK OF WASHINGTON, a national banking association, Petitioner.

No. 51009-1.

Supreme Court of Washington En Banc.

Feb. 4, 1988.

Witherspoon, Kelley, Davenport & Toole, P.S., Jeffrey L. Supinger, John E. Heath, Jr., Spokane, for petitioner.

Ries & Kenison, Gerald J. Moberg, Harry E. Ries, Moses Lake, for respondent.

BRACHTENBACH, Justice.

This case involves conditional promises, recovery of lost profits from a nonexistent business, sufficiency of the evidence as to those lost profits, and promissory estoppel.

Petitioner Old National Bank (ONB) challenges a Court of Appeals decision affirming a $295,000 jury verdict in favor of Farm Crop Energy, Inc. (Farm Crop). See Farm Crop Energy Inc. v. Old Nat'l Bank, 38 Wash.App. 50, 685 P.2d 1097 (1984). We granted discretionary review, reverse, and remand for new trial.

In 1980, 10 investors incorporated Farm Crop to build a fuel alcohol plant in Royal City, Washington. The investors envisioned a plant that would produce 1 million gallons of fuel-grade alcohol per year from grain screenings readily available as a byproduct of wheat harvesting. The investors planned to sell on the open market the fuel produced. Farm Crop contacted ONB to discuss financing for the project.

In December 1980, Farm Crop submitted a plant feasibility study to an ONB commercial lending officer, Dan Danelo. Although Danelo expressed interest in the project, ONB initially rejected Farm Crop's loan request because the company hired by Farm Crop to construct the plant, Alcohol Equipment Corporation, had never built a fuel alcohol plant.

Subsequently, ONB agreed to reconsider Farm Crop's loan application if Farm Crop could find a company that had built an operating fuel alcohol plant to build the one proposed by Farm Crop. Farm Crop soon reached a tentative agreement with Matrix Energy Company (Matrix) to have Matrix build the plant. Farm Crop president Hugo Van Binsbergen introduced Danelo to Paul Petersen of Matrix. Although Matrix had been only recently formed, Petersen had built a fuel alcohol plant similar to the one proposed by Farm Crop.

Upon reconsideration, ONB approved Farm Crop's loan application. On February 19, 1981, ONB issued a commitment letter in which it agreed to lend Farm Crop $1,475,000 subject to certain terms and conditions. Among other conditions, ONB required personal guaranties from Farm Crop Investors, some limited and some unlimited. ONB also required Farm Crop to obtain a $500,000 guaranty from the Small Business Administration (SBA) as a condition of the loan.

The SBA agreed to provide the necessary guaranty if Farm Crop could satisfy certain additional conditions including unlimited personal guaranties by all Farm Crop investors. The SBA also required Farm Crop to execute contracts both to purchase grain screenings and to sell the alcohol produced by the plant in its first operating year.

From February through May 1981, Danelo and Farm Crop worked together to satisfy the loan conditions imposed by ONB and the SBA. At one point, when the SBA required Farm Crop investors to provide cash and collateral for the loan, Danelo approved of one investor's plan to pay an increased amount of cash in return for another investor's pledge of increased collateral.

In May 1981, Matrix told the Farm Crop Investors that Farm Crop could realize substantial tax savings and take advantage of favorable discounts by immediately advancing $175,000 to Matrix for construction costs. Farm Crop Investors met with Danelo on May 28, 1981, to discuss the proposal by Matrix. Several Investors testified at trial that Danelo assured them that the ONB loan would go through. Another investor testified that Danelo reminded the investors that ONB would fund the loan only if Farm Crop satisfied the conditions. Danelo testified that he reminded the investors of the ONB and SBA conditions and left the decision whether to advance the money to Matrix solely to the Farm Crop investors.

The next day, Farm Crop advanced $175,000 to Matrix. Several investors testified that the advance was made based on Danelo's assurance that ONB would fund the loan.

Danelo testified that on June 3, 1981, he learned for the first time that Farm Crop could not obtain a contract to purchase grain screenings as required by the SBA for its guaranty without a $500,000 letter of credit. Danelo further testified that on June 9, 1981, he was told that three Farm Crop investors refused to sign unlimited guaranties. One of the investors later testified he was reluctant to sign, but ultimately would have signed. Another investor testified that he refused to sign on the basis of Danelo's agreement to allow him to give additional cash in lieu of collateral, which another investor promised to pledge in his stead.

On June 10, 1981 ONB revoked its loan commitment, contending that Farm Crop had failed to comply with the requisite conditions. In October 1981, Farm Crop filed suit against ONB alleging breach of contract and promissory estoppel. After trial, the jury returned a general verdict in favor of Farm Crop for $295,000. The trial court denied ONB's motion for new trial. ONB appealed; the Court of Appeals affirmed. We granted discretionary review. ONB's petition raises two issues: (1) did the trial court err in allowing the jury to consider lost profits? and (2) did the trial court err in failing to instruct on the effect of a conditional noncontractual promise?

I

ONB challenges the trial court's instructions allowing the jury to consider lost profits as part of its damage award. See instruction 11, Clerk's Papers, at 126. ONB contends that in an action for promissory estoppel, damages awardable should be limited to those incurred in reliance on the alleged promise, here the $175,000 advanced by Farm Crop to Matrix. Alternatively, ONB argues that even if lost profits can be recovered in promissory estoppel cases, here the trial court erred in submitting the issue of lost profits to the jury because there was lacking substantial and sufficient evidence upon which a jury verdict as to anticipated profits could be based. Because we agree that under the facts of this case the issue of lost profits should not have been presented to the jury on any theory, we do not address the question whether lost profits are recoverable in promissory estoppel cases generally.

In Larsen v. Walton Plywood Co., 65 Wash.2d 1, 16, 390 P.2d 677, 396 P.2d 879, 32 A.L.R. 125 (1964), this court stated:

The usual method of proving lost profits is from profit history. It is argued that where a plaintiff is conducting a new business with labor, manufacturing and marketing costs unknown, prospective profits cannot be awarded. This is the so-called new business rule and has long been the law of Washington. Engstrom v. Merriam, 25 Wash 73, 64 Pac. 914 [ (1901) ]; Webster v. Beau, 77 Wash. 444, 137 Pac. 1013 [ (1914) ]; Andreopulos v. Peresteredes, 95 Wash. 282, 163 Pac. 770 [ (1917) ]; Lockit Cap Co. v. Globe Mfg. Co., 158 Wash. 183, 290 Pac. 813 [ (1930) ]; Hole v. Unity Petroleum Corp., 15 Wn. (2d) 416, 131 P. (2d) 150 [ (1942) ]; Ingersol v. Seattle-First Nat. Bank, 63 Wn. (2d) 354, 387 P. (2d) 538 [ (1963) ].

In Larsen, the court noted that the new business rule should not bar recovery of lost profits when a reasonable estimation of damages can be made through analysis of market conditions and a profit showing of identical or similar businesses in the vicinity, operating under substantially the same conditions. Larsen, at 17, 390 P.2d 677. The court concluded that expert testimony could alone form a sufficient basis for an award of lost profits. Larsen, at 17, 19, 390 P.2d 677. The court cautioned, however, that

Although expert testimony is a sufficient basis for an award of lost profits, their [sic ] opinions must be based upon tangible evidence rather than upon speculation and hypothetical situations. Bogart v. Pitchless Lbr. Co., [72 Wash. 417, 130 Pac. 490 (1913) ] supra. Consequently, our judicial concern is limited to the question: Was there a substantial and sufficient factual basis upon which the respective opinions could be based? Warner v. Channell Chemical Co., 121 Wash. 237, 208 Pac. 1104 [ (1922) ].

Larsen, at 19, 390 P.2d 677.

We note that the proposed fuel alcohol plant from which the anticipated profits were to flow was not built. None of the officers or investors in Farm Crop had built or operated a similar plant. Farm Crop relied solely on expert testimony at trial to substantiate its claim for lost profits. The expert was Paul Christensen, president of Matrix Energy Company, the company hired by Farm Crop to build the plant. Our analysis here focuses on the question whether Farm Crop's expert's testimony was based upon substantial and sufficient facts to support an award of lost profits instruction.

Prior to forming Matrix, Christensen worked as a bank loan officer and raised venture capital; both activities were unrelated to the industry in question. He had been in charge of purchasing and traffic for an unrelated enterprise.

In his words, Christensen "did a lot of study and work on alcohol." He subscribed to two trade journals, one of which was untitled. Verbatim Report of Proceedings, at 722-23. As to whether this was a profitable industry, he said "I'm sure that it's been a profitable operation ... or else they [three existing plants] wouldn't still be in existence producing the alcohol." Verbatim Report of Proceedings, at 733.

The only other plant Christensen was involved with had been shut down just before trial and was expected to be down for a couple of months. He was familiar with five other Northwest plants, four of which were operating. One was operated with wood pulp as its raw material, not grain screenings as proposed here, another operated with brewer's waste, and the others were...