Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.

U S WEST FIN. SERVS. v. MARINE MIDLAND REALTY CRED

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


November 18, 1992

U S WEST FINANCIAL SERVICES, INC., Plaintiff,
v.
MARINE MIDLAND REALTY CREDIT CORPORATION and DAYS BAKERSFIELD LIMITED PARTNERSHIP, Defendants. MARINE MIDLAND REALTY CREDIT CORPORATION, Plaintiff, v. U S WEST FINANCIAL SERVICES, INC., Defendant.

The opinion of the court was delivered by: MICHAEL B. MUKASEY

OPINION AND ORDER

 MICHAEL B. MUKASEY, U.S.D.J.

 These actions arise out of a conditional standby mortgage loan commitment by U.S. West Financial Services, Inc. to Days Bakersfield Limited Partnership ("Days"), an entity formed to construct a Days Inn hotel in Bakersfield, California. U.S. West moves for summary judgment (1) declaring that it was not required to fund the standby loan as stated in its First and Third Causes of Action in 90 Civ. 5357, and (2) dismissing claims in 91 Civ. 1837 by Marine Midland Realty Credit Corporation ("Marine"), the construction lender to Days, for breach of contract and breach of duty of good faith. In a previous opinion, familiarity with which is assumed, this Court granted summary judgment for U.S. West against other defendants. U S West Fin. Servs., Inc. v. Tollman, No. 90 Civ. 6745 (S.D.N.Y. February 28, 1992).

 On November 18, 1992 this Court denied U.S. West's motion for summary judgment in these actions. U S West Fin. Servs., Inc. v. Marine Midland Realty Credit Corp., 810 F. Supp. 1393 (S.D.N.Y. 1992). U.S. West moves for reargument of that portion of this Court's November 18, 1992 decision which pertains to the issue of damages. Because of an ambiguity in one paragraph of that decision, and because the parties overlooked -- in both their summary judgment memoranda and their initial memoranda on motion for reargument -- numerous arguments and cases, including a major Second Circuit decision on the issue of damages, Sharma v. Skaarup Ship Management Corp., 916 F.2d 820 (2d Cir. 1990) (Winter, J.), U.S. West's motion for reargument is granted, the November 18, 1992 decision is withdrawn, and this decision is substituted. Nonetheless, for the reasons stated below, U.S. West's motion for summary judgment is denied.

 I.

 This case is a dispute about three connected but conflicting documents. In the first document, a contract dated February 13, 1987, as amended on February 17, April 23 and 28, 1987 (collectively, the "Commitment"), U.S. West, for an $ 87,500 fee, committed to provide to Days, on 45 days notice before the expiration date of a loan to Days, a standby mortgage loan of up to $ 8.75 million (the "Standby Loan"), conditioned upon Days providing to U.S. West certain documents and meeting certain financial conditions. (Miller Aff. Ex. 1) In the second document, a letter dated April 23, 1987, Marine agreed to lend $ 8.45 million to Days for construction of a Days Inn hotel in Bakersfield, California. (Grant Aff. Ex. 2) In the third document, a contract also dated April 23, 1987 (the "Three-Party Agreement"), U.S. West, Days, and Marine agreed that U.S. West's obligation to fund the Standby Loan (and thereby refinance Marine's loan to Days) expired on April 23, 1990, and U.S. West agreed that "if [Days] is in default under the Agreement or the Commitment and the default is curable, . . . [U S West] shall have notified [Marine] of such default . . . and [provided] 30 days after receipt of written notice from [U S West] to cure such default . . . ." ( Grant Aff. Ex. 11 P 7.2) None of the three documents defined "default" or "curable." (Marine Rule 3(g) Statement PP 10-11)

 The Commitment is incorporated by reference into the Three-Party Agreement (Miller Aff. Ex. 2, P 1 and Recitals), and those documents should be read together. See Carvel Corp. v. Diversified Management Group, Inc., 930 F.2d 228, 233 (2d Cir. 1991) ("instruments executed at the same time, by the same parties, for the same purpose and in the course of the same transaction will be read and interpreted together").

 The Days Inn Bakersfield hotel was completed in 1988, and soon began a gradual financial decline. (U S West Mem. at 4; Marine Mem. at 12) On March 5, 1990, less than 45 days before the expiration of Marine's loan to Days, Marine requested that U.S. West fund the Standby Loan. (Grant Aff. Ex. 12) On April 17, 1990, U.S. West notified Days that its obligation to fund the Standby Loan had terminated, because Days was in default under the Commitment and the Three-Party Agreement. (Grant Aff. Ex. 13)

 U S West sought a declaration that it was not required to fund the loan. Marine never foreclosed on the loan to Days; rather, it sued U.S. West for breach of contract and breach of good faith. On October 17, 1991, Marine sold its right to foreclose on the loan to Oleifera Investments, Ltd. for $ 4.65 million. (Marine Rule 3(g) Statement P 73)

 A standby loan, also known in the banking industry as a take-out commitment, is issued expressly to enable a builder to obtain construction financing. Such a commitment is designed to encourage a construction loan by assuring a construction lender that its loan will be paid at the end of its term by the standby lender. See, e.g., First Nat'l State Bank v. Commonwealth Fed. Sav. & Loan Ass'n, 455 F. Supp. 464, 467 (D.N.J. 1978), aff'd, 610 F.2d 164 (3d Cir. 1979). Thus, subject to certain conditions, Marine was entitled to have its loan funded by U.S. West's Standby Loan on April 23, 1990. According to the contract terms, U.S. West would then assume the risk of default by Days.

 II.

 U S West claims that because "the undisputed facts show that Marine was not damaged by any alleged breach of contract," even if U.S. West breached an obligation to fund the Standby Loan, it is nevertheless entitled to summary judgment on the issue of damages. (U S West Mem. at 23)

 A.

 Under New York law, "the basic principle of recovery for breach of contract is that the injured party should be placed in the same position it would have been in had the contract been performed." Teachers Ins. & Annuity Ass'n v. Butler, 626 F. Supp. 1229, 1236 (S.D.N.Y. 1986) (citations omitted). This principle is modified by the "fundamental proposition of contract law . . . that the loss caused by a breach is determined as of the time of breach." Sharma v. Skaarup Ship Management Corp., 916 F.2d 820, 825 (2d Cir. 1990) (citing Simon v. Electrospace Corp., 28 N.Y.2d 136, 145, 269 N.E.2d 21, 26, 320 N.Y.S.2d 225, 232 (1971)). A showing of a breach of contract alone does not necessarily entitle a plaintiff to damages. See, e.g., Lincoln Nat'l Life Ins. Co. v. NCR Corp., 772 F.2d 315, 320 (7th Cir. 1985); Meteor Indus., Inc. v. Metalloy Indus., Inc., 149 A.D.2d 483, 539 N.Y.S.2d 972 (2d Dep't 1989). Rather, "the proper measure of damages for breach of contract is determined by the loss sustained or gain prevented at the time and place of breach." Simon v. Electrospace, 28 N.Y.2d at 26, 269 N.E.2d at 26, 320 N.Y.S.2d at 232.

 The parties' approach to these principles, what with radical shifts of position and theory, has resembled more libretto than legal argument. Nevertheless, the parties' arguments have evolved to clarify the damages issue and they merit description.

 U S West argued first in its summary judgment motion that Marine's damages must be "based on the difference, on the date of the alleged breach, between the amount of the [loan] and the value of the [loan property]." (U S West Mem. at 25) Marine responded that summary judgment was not warranted because of disputed fact issues regarding the value of the loan property at the time of breach. (Marine Mem. at 94-105) U.S. West maintained that the only evidence in the record showed that Marine was not damaged, (U S West Reply at 38) but this Court denied U.S. West's motion for summary judgment in a decision which included a nine-page discussion of the damages issue. U S West Fin. Servs., Inc. v. Marine Midland Realty Credit Corp., 810 F. Supp. 1393 (S.D.N.Y. 1992).

 U S West recommenced the dispute about damages on December 3, 1992, when it moved for reargument to clarify one paragraph of this Court's November 18, 1992 decision. (U S West Rearg. Mem. at 6) Marine rejoined with a new theory: "'the value of the loan property' to Marine at the time of the breach is measured not by the appraised or market value of the property, but rather, by the value, at that time, of its interest in the property, which consisted of its mortgage lien." (Marine Rearg. Mem. at 2) Marine supported this theory with lengthy affidavits and exhibits detailing California's costly procedure for foreclosing on a mortgage lien. In its reply, U.S. West argued that Marine's new theory was invalid, and quoted extensively from Sharma -- the first reference by either party in these proceedings to Judge Winter's recent and highly relevant opinion on computing damages. (U S West Rearg. Reply Mem. at 7-12) On January 15, 1993 Marine filed its purported coup de grace, a surreply distinguishing Sharma from these proceedings. (Marine Rearg. Surreply Mem. at 1-3)

 U S West's current position is that Marine's damages are the value of the loan minus the value of the loan property an the date of breach. Marine's current position is that its damages are the value of the loan minus the value of its right to foreclose on the date of breach.

 Although the parties have documented extensively the damages issue, and thereby equipped the trier of fact in this case with copious factors to consider in computing damages, they have not articulated the proper measure of damages in this case. As stated above, the proper measure of damages is determined by the loss sustained by Marine at the time of breach. Simon v. Electrospace, 28 N.Y.2d at 26, 269 N.E.2d at 26, 320 N.Y.S.2d at 232.

  Applying this measure, the value of the loss sustained by Marine at the time of the alleged breach is equal to the value of the additional risk Marine was forced to assume, after breach, that Days would default and that Marine would have to either foreclose or sell its right to foreclose. In other words, Marine was damaged by the value on the date of breach of its right to have the loan to Days monetized. Because Marine's damages are the amount needed to compensate it for the additional risk it was forced to assume on the date of breach, its damages depend on the value of the loan property and the value of the right to foreclose on the loan property, in addition to other factors such as the value of the loan and the status on the date of breach of the real estate market, interest rates, and expectations about the probability that Days would not repay the loan.

 Put another way, the damages to Marine are the value on the date of breach of U.S. West's performance in funding the loan -- irrespective of any subsequent events. Only this value incorporates the value of the loan property, the value of the right to foreclose, and the probability that Days would not repay the loan. By contrast, the parties' proposed measures of damages simply assume that Days would not have repaid the loan, as it ultimately did not. As Judge Winter explained in Sharma, measuring contract damages by the value of the asset at the time of breach takes into account future expectations because the value of an asset is the discounted value of the stream of future income that the asset is expected to produce. Sharma, 916 F.2d at 826. In this case, the value of the asset -- Marine's right to the Standby Loan -- at the time of breach depends on the future expectations about whether Days would repay the loan. The parties' measures of damages do not take into account future expectations that Days might repay or renegotiate the loan to avoid foreclosure; rather, they assume no repayment. The proper measure of damages is based on the value of Marine's right to the Standby Loan: the difference between the value of the loan and the discounted value of the stream of income expected from the loan to Days, including future expectations about repayment. Id.

 Accordingly, that Days did not repay its loan is not dispositive of the damages to Marine. When U.S. West breached the contract, it forced Marine to assume some risk that Days would not repay. However, there was also some chance that Days would repay the loan. In computing damages, New York courts have rejected explicitly the use of changes in the value of assets subsequent to breach. See, e.g., Sharma, 916 F.2d at 825 (refinancing); Lotito v. Mazzeo, 132 A.D.2d 650, 651, 518 N.Y.S.2d 22, 23 (App.Div. 2d Dep't 1987) (real estate); Webster v. DiTrapano, 114 A.D.2d 698, 699, 494 N.Y.S.2d 550, 551 (App.Div. 3d Dep't 1985) (real estate); Aroneck v. Atkin, 90 A.D.2d 966, 967, 456 N.Y.S.2d 558, 559 (App.Div. 4th Dep't 1982) (securities).

 The measure of damages U.S. West proposes -- loan value minus loan property value -- is incorrect because it assumes certainty on the date of breach that Days would default, and places upon Marine the entire cost and risk associated with foreclosing on the loan property. If a contract is for the sale of property, damages due to breach are measured by the value of the property on the date of breach, because the non-breaching party is deprived of its entitlement to the property. See Webster, 114 A.D.2d at 699, 494 N.Y.S.2d at 551. However, at the time of breach, Marine was not deprived merely of its entitlement to the loan property; rather, it was deprived of its right to have its loan funded, a right which includes the right not to expend resources necessary to foreclose on the loan property. Therefore, if one applies U.S. West's measure, Marine can never be made whole following a breach, because Marine can never foreclose immediately and costlessly to recover the entire loan property value. Moreover, if one applies U.S. West's measure, if a standby lender expects both that a borrower will default and that the value of the loan property will not appreciate significantly, then the standby lender will always breach. The difference to a standby lender between the loan value and the loan property value on the date of breach (the damages the standby lender must pay) will not exceed its estimate of the value of the rights of the lender (to foreclose if the borrower defaults) unless the standby lender expects that the value of the property will appreciate significantly. Because standby lenders who expect default normally should not expect significant appreciation in the value of loan property, U.S. West's measure would assure defaults, and thereby impair the credit market for construction loans.

 Marine's proposed measure of damages -- loan value minus right-to-foreclose value -- is incorrect also, because it assumes default and places upon U.S. West the entire cost and risk associated with foreclosing on the loan property, even if Days would have repaid the loan to Marine. If the contract had been for the sale of a mortgage on the property, then damages might be measured by the value of the right to foreclose at the time of breach, an issue this Court need not decide. See Golbar Properties, Inc. v. North American Mortgage Investors, 78 A.D.2d 504, 431 N.Y.S.2d 820 (1st Dep't 1980), aff'd, 53 N.Y.2d 856, 440 N.Y.S.2d 180, 422 N.E.2d 825 (1981). However, again, at the time of breach, Marine was not deprived merely of its entitlement to foreclose on the loan property; it was deprived of its right to have its loan funded, as described above. A standby lender who anticipated Marine's measure of damages would lend, if at all, only at an interest rate high enough to compensate for the additional risk of liability for Marine's foreclosure costs and any decline in the value of the loan property subsequent to a breach. New York courts have upheld damage awards based on "what knowledgeable investors anticipated the future conditions and performance would be at the time of the breach" and have rejected awards based on what "the actual economic conditions and performance" were in light of hindsight. Sharma, 916 F.2d 826 (quoting Aroneck, 90 A.D.2d at 967, 456 N.Y.S.2d at 559). New York courts have refused to adopt a "wait and see" theory of damages. Id.

 To clarify this discussion, consider the following hypothetical example: X possesses both (1) some real, personal, or intangible property right (the "Asset"), and (2) a contractual right to transfer this Asset to Y for a certain price (the "Contract Price"). If Y breaches, X is deprived of its contractual right to transfer the Asset, but retains the Asset. Therefore, X is entitled to recover the Contract Price to which X was entitled minus the value of the Asset X retained at the time of breach. X is not entitled to recover any amount based on the value of the Asset after breach.

 New York cases apply the analysis in this example. For example, Webster v. DiTrapano, 114 A.D.2d 698, 699, 494 N.Y.S.2d 550, 551 (App.Div. 3d Dep't 1985), can be described as follows. X possesses (1) a house, and (2) a contractual right to sell the house to Y for $ 63,500. At the time Y breaches, the house is worth $ 57,500. Therefore, X may recover only $ 6,000, the Contract Price minus the value of the Asset at the time of breach, even if X was able to sell the house after B's breach only for $ 55,000.

 These proceedings follow the example as well. Prior to U.S. West's alleged breach, Marine possessed (1) an Asset -- its rights under the loan agreement with Days -- including the right to foreclose on the loan property if Days defaulted, and (2) the right to sell that Asset to U.S. West at the Contract Price, the amount of the Standby Loan. If U.S. West breached, then Marine was deprived of its right to sell its Asset at the Contract Price, but retained the Asset -- its rights under the loan agreement with Days. Accordingly, Marine would be entitled to the amount of the loan minus the value of its right to have the loan funded by U.S. West.

 Finally, U.S. West relies on the policy behind Sharma that "the efficiency of the credit market will be impaired if a measure of damages other than the value of the collateral at the time of breach were applied to secured financing agreements." 916 F.2d at 826. U.S. West is correct that "under the rule espoused by [Marine], lenders would have to take into account the risks of post-foreclosure litigation involving the value of the collateral at some unknown future time. [This rule] would thus benefit neither lenders nor borrowers, because it would render secured loans more risky, thereby impairing the availability of credit and increasing interest rates." 916 F.2d at 827.

 However, U.S. West is incorrect that Sharma stands for the proposition that the measure of damages will always be based on the value of the collateral. For example, damages for the breach of an option contract are not based on the value of the underlying shares at the time of breach, but rather on the value of the option to acquire those shares at a particular price and time. The proposition for which Sharma stands is that damages are based on the value of the rights of which the non-breaching party was deprived, valued at the time of breach, excluding subsequent changes in value. 916 F.2d at 826. In Sharma, a borrower sued its lending bank, alleging that the bank breached a financing agreement which the parties had renegotiated after the borrower defaulted on its original loan. The bank had sold the collateral -- three ships -- and the borrower sought to recover, not the value of the ships on the date of breach, but the profits it claimed the ships would have generated. By comparison, Judge Winter reasoned that "under New York law, if the contract in question were for the sale of the vessels to appellants and the seller were to breach the contract, appellants' recovery would be limited to the value of the vessels on the date of the breach." Id. Because the Court found that damages should be measured by the value of the ships at the time of breach, Judge Winter could "see no reason to reach a different result in the instant matter." Id.

 Similarly, if the contract in this case were for the sale of the property, recovery would be limited to the value of the property on the date of breach. Also, this limited measure of damages would apply if, as in Sharma, a borrower (Days) who was entitled to the loan property had sued the lending bank. Neither of these situations is this case here. Marine was deprived neither of its right to the loan property nor of its right to foreclose on the loan property. Rather, Marine was deprived of its right to the Standby Loan. Therefore, recovery must be measured by the value of this right. Thus, the stark contrast between the proper measure of damages in this case and the proper measures in Sharma and cases cited therein is "reason to reach a different result in the instant matter." Id.

 B.

 Although this Court does not apply U.S. West's proposed measure of damages, U.S. West's contention remains that Marine was not damaged on April 23, 1990, the date of breach, because the loan property was worth $ 8.5 million at that time, slightly more than the outstanding principal amount of the loan. Accordingly, U.S. West claims that had Marine foreclosed on the property on April 23, 1990, it would not have been damaged. U.S. West asserts that "the undisputed evidence is that the value of the mortgage . . . equalled or slightly exceeded the outstanding principal amount of [Marine's loan] as of the date of the breach." (U S West Mem. at 28) U.S. West asserts that this "undisputed evidence" entitles it to summary judgment because Marine would not be able to prove damages. Katz Comm., Inc. v. Evening News Assoc., No. 79 Civ. 5931 (JMC) slip op. (S.D.N.Y. June 3, 1982). However, the only undisputed facts related to damages are as follows: the outstanding principal amount of Marine's loan to Days on April 23, 1990 was $ 8.45 million; U.S. West breached the contract, if at all, on April 23, 1990 or before; and Marine sold its loan to Oleifera Investments for $ 4.65 million on October 17, 1991. (U S West Rule 3(g) Statement P 47, Miller Aff. Ex. 57 at 7, Grant Aff. Ex. 66 at 12-13) The other "facts" to which U.S. West refers are three appraisals of the loan property, none of which valued the property as of April 23, 1990. Marine commissioned these three appraisals, one by Joseph J. Blake and Associates, Inc., and two by Cushman & Wakefield, Inc.: Date Property Appraiser Valued as of: Appraised Value Joseph J. Blake August 1, 1990 $ 8.5 million Cushman & Wakefield December 11, 1990 $ 5.8 - $ 6.1 million Cushman & Wakefield July 8, 1991 $ 5 million

19921118

© 1992-2004 VersusLaw Inc.



Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.