Pipkin v. Thomas & Hill, Inc.

• Citation: 298 N.C. 278,258 S.E.2d 778
• Decision Date: 17 October 1979
• Docket Number: No. 104,104
• Court: United States State Supreme Court of North Carolina
• Parties: , 4 A.L.R.4th 667 T. A. PIPKIN, D. J. Dudley, P. M. Williams, and Mack Donald Weeks, Individually and trading as P.W.D. & W., a North Carolina General Partnership v. THOMAS & HILL, INC.

Page 778

258 S.E.2d 778

298 N.C. 278, 4 A.L.R.4th 667

T. A. PIPKIN, D. J. Dudley, P. M. Williams, and Mack Donald

Weeks, Individually and trading as P.W.D. & W., a North Carolina General Partnership v. THOMAS & HILL, INC.

No. 104.

Supreme Court of North Carolina.

Oct. 17, 1979.

Manning, Fulton & Skinner by M. Marshall Happer, III, and Charles L. Fulton, Raleigh, for plaintiffs.

Smith, Anderson, Blount & Mitchell by H. A. Mitchell, Jr., and Michael E. Weddington, Raleigh, for defendant.

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. Texarkana 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% 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 91/2% 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 101/2% 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 101/2% Per annum and a similar loan at 91/2%, reduced to present value And "discounted for the likelihood of early payment." As special damage, 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 (101/2%) 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, 750 (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...