First Nat. Bank of Logansport v. Logan Mfg. Co., Inc.

Decision Date28 June 1991
Docket NumberNo. 66S03-9106-CV-494,66S03-9106-CV-494
Citation577 N.E.2d 949
PartiesThe FIRST NATIONAL BANK OF LOGANSPORT, Appellant, (Defendant Below), v. LOGAN MFG. CO., INC., Donald F. Moore, Sondra S. Moore, Clifford L. Garrett and Judith Ann Garrett, Appellees, (Plaintiffs Below).
CourtIndiana Supreme Court

KRAHULIK, Justice.

In a memorandum decision, the Court of Appeals affirmed, with certain amendments and corrections, the trial court's judgment against The First National Bank of Logansport, awarding $726,532 in damages for breach of a loan commitment, allegedly made to the plaintiffs below, Logan Manufacturing Co., Inc., Donald Moore, Sondra Moore, Clifford Garrett and Judith Ann Garrett (collectively "Garrett and Moore"). The bank has petitioned us to accept transfer of this case. We accept the request.

The issues presented are whether a contract to loan money was entered into by the parties and what damages are recoverable. The facts relevant to our discussion follow.

In 1982, Max Brandt was a senior vice president and senior loan officer at the bank. During this time, there was high unemployment in Logansport and Brandt was interested in bringing new industry to the area and in obtaining new business for the bank. In 1982, Brandt became aware of a small corporation in Michigan called Winamac Plastics Drinkwear which was undercapitalized and had suffered losses as the result of high rental payments, high labor costs and some questionable management practices, but which also was considering a move to Indiana. Representatives of the bank reviewed the products and potential of Winamac Plastics, its customer lists, contracts, equipment lists and appraisals, and its financial data, and determined that with additional capital and new management, the business was viable.

Thereafter, in late 1982, Garrett and Moore became interested in Winamac Plastics. In January 1983, Garrett and Moore met with Brandt at the bank. Numerous meetings and telephone conversations over the following weeks culminated in Brandt's determination that the bank would get involved with financing the business if Garrett and Moore were involved and the business moved to Logansport.

Both Garrett and Moore were told by Brandt that the limit on his lending authority was $100,000, and that requests for loans above that amount had to be approved by certain bank committees. Pursuant to that authority, Brandt approved a loan to Garrett and Moore personally for $100,000, $80,000 of which was to be used to acquire a two-thirds interest in the business for Garrett and Moore. Ultimately, Garrett and Moore borrowed a total of $100,000 from the bank.

In March, Brandt prepared a loan application for Winamac. The request was for a term loan of $420,000 and an operating loan of $120,000. At the same time, Brandt prepared a loan request for Garrett and Moore for $206,000 which included the $80,000 already borrowed. Brandt submitted the Winamac loan request to the bank's loan committee and it was turned down because of the company's heavy debt load. When Garrett and Moore learned that the loan had been denied, they were upset and frustrated because they already had borrowed money from the bank and spent it on the project. Without additional loans, they would not be able to proceed with operation of the business.

Brandt assured Garrett and Moore that the bank would help them purchase the Winamac machinery and go into operation under a new corporate entity. Brandt encouraged them to continue the process of moving the business to Logansport and setting up a new corporation to operate it. Garrett and Moore decided to proceed in that fashion.

Brandt then prepared a new loan application using the name Logan Drinkwear, Inc., which was one of the names proposed by Garrett and Moore for the new corporation. Neither Garrett nor Moore were asked to sign the new application. This application, for a term loan of $346,000 and a line of credit of $250,000, was approved the same day it was submitted (four days after the Winamac application was denied) by both the officer's loan committee and the director's loan committee of the bank. Garrett and Moore were advised of the approval that day also.

On March 31, 1983, the bank issued letters of commitment for a $346,000 term loan and a $250,000 operating loan. This commitment provided, for the first time, that the term loan ($346,000) had to be guaranteed by the state. When Garrett and Moore questioned Brandt about this requirement, he indicated that the guaranty would be a good thing, but that the bank did not need it, and assured them that the bank would lend the money to buy the machinery whether or not the Indiana Economic Development Commission guaranteed the loan. The commitment also provided that Garrett and Moore would give the bank a security interest in the machinery, equipment, furniture and fixtures. The letters of commitment carried an expiration date of May 31, 1983. Subsequently, the bank refused to close on either loan. Garrett and Moore used the remaining $20,000 from the $100,000 initially borrowed, and they sought loans elsewhere without success, until 1987. Then, with loans from state agencies, they opened a similar plastics business in Iowa.

Garrett and Moore sued the bank for damages suffered as a result of its refusal to make the term loan and extend the line of credit as provided in the loan commitment letters, and proceeded to trial on the theories of breach of contract, breach of implied contract, promissory estoppel, interference with contractual relations, and fraud. Following a bench trial, a judgment in favor of Garrett and Moore in the amount of $726,532 was entered, consisting of the following components:

                1.  Lost profits from mid-1983 to mid-1987;                         $583,452
                2.  Loss of equity in their personal machinery and equipment; and   $ 70,000
                3.  Out-of-pocket expenses.                                         $ 73,080

Item one included lost profits from mid-1983, after the bank refused to make the loan, until mid-1987 when Garrett and Moore began operations in Iowa. Both sides presented expert testimony relating to the issue of lost profits.

The second item of damages was assessed for "the difference between the fair market value of assets which were repossessed and the fair market value as unrepossessed items." This finding refers to personal property owned by Garrett and Moore which secured a loan from a Crawfordsville bank unrelated to the loans in question here. After the defendant bank refused to go ahead with the loans at issue here, Garrett and Moore were unable to repay the Crawfordsville bank loan. The Crawfordsville bank then repossessed the personal property and sold it to satisfy the outstanding loan it had made. Garrett testified at trial that the value of the equipment repossessed was "somewhere between $70,000 and $80,000."

The third item of damages reflects the amount spent by Garrett and Moore in preparing to move the business from Michigan to Logansport and includes amounts for monies spent on a facility in Logansport. This item of damage was computed as follows: total amount spent on preparing to operate the business in Logansport ($154,000) plus interest on this amount of eight per cent from June 1983 through December 1987 ($19,080), less the amount Garrett and Moore borrowed from the bank ($100,000), resulting in a sum of $73,080.

On appeal, the bank challenges both liability and damages. It claims that there was no enforceable oral agreement to make the loan, and that, because Garrett and Moore had failed to comply with the pre-closing conditions, one of which required that a state agency would guarantee the loan, the bank was not obligated to make the loan pursuant to the loan commitment. With respect to damages, the bank argues that the proper measure of damages was the interest rate differential or, alternatively, that Garrett and Moore had not adequately proved entitlement to lost profits. The Court of Appeals held that the trial court's determination of liability was not clearly erroneous and affirmed the award of lost profits. However, the Court of Appeals determined that the second item of damages was not reasonably foreseeable and the third item was included within the lost profits and, therefore, reversed the award of items two and three. In its petition to transfer to this Court, the bank again challenges the finding of liability for breach of contract and the award of damages for lost profits. Garrett and Moore, conversely, urge us to reinstate the award for the second and third items of damages.

I. Oral Contract

The trial court concluded that there was an enforceable oral contract to lend money 1 as early as February 1983, and before any loan application was submitted to the bank on behalf of Garrett and Moore. We find this legal conclusion to be unsupported by the evidence.

The trial court found that Garrett and Moore were aware of the extent of Brandt's lending authority, that they knew that his individual lending authority reached only to loans of $100,000 or less, and that approval by the bank's loan committee was required for loans above that amount. It is uncontested that they also were well aware that in February 1983, the loan committee had not given authorization for any such loans to them. Garrett and Moore demonstrated this awareness by accepting a loan of $100,000, the maximum of Brandt's authority, and allowing Brandt to submit a separate loan application for the additional sums they desired to borrow. Thus, Garrett and Moore conclusively demonstrated that they understood...

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