Opinion ID: 877999
Heading Depth: 1
Heading Rank: 2

Heading: the award of $511,695 for lost profits

Text: To support this award, the District Court found and concluded that the bank's wrongful breach of contract prevented Stensvad from earning profits in his business; that Stensvad had enough qualified investors to fill the lots to capacity; that the term of the investment contracts with the investors was the time required to fatten two cycles of cattle; that the bank's contract, though not expressed definitely, would reasonably require financing for two cycles of fattening; that Stensvad would realize net profits on yardage services, a 12 1/2 percent bonus from the investor's profits, and its anticipated feed profits; that a reasonable estimate of such profits was $511,695. The bank objects to this item on the grounds that the Stensvad operation was not shown to be profitable; that the profits found by the court are gross, and not net profits, and are duplicative of other damages allowed. The proper objective of an award of damages for wrongful breach of contract is to place the party wronged in as good position as if the contract had been performed. Kirby v. Kenyon-Noble Lumber Company (1976), 171 Mont. 329, 332, 558 P.2d 452, 454. The bank contends that the measure of damages should be limited to the cost of obtaining money elsewhere, when money is wrongfully withheld. See Miller v. Federal Land Bank of Spokane (9th Cir.1978), 587 F.2d 415, 424, cert. den. 441 U.S. 962, 99 S.Ct. 2407, 60 L.Ed.2d 1067. Damages for loss of profits may be awarded if not speculative. Silfvast v. Asplund (1935), 99 Mont. 152, 161, 42 P.2d 452, 456. The rule that prohibits speculative profits does not apply to uncertainty as to the amount of such profits but to uncertainty or speculation as to whether the loss of profits is the result of the wrong and whether such profit would have been derived at all. Tri-Tron Intern. v. Velto (9th Cir.1975), 525 F.2d 432, 437. Once liability is shown, that is the certainty that the damages are caused by the breach, then loss of profits on a reasonable basis for computation and the best evidence available under the circumstances will support a reasonably close estimate of the loss by a District Court. Smith v. Zepp (1977), 173 Mont. 358, 370, 567 P.2d 923, 930. But no damages are recoverable which are not clearly ascertainable both in nature and origin, and only profits which are reasonably certain may be awarded. Smith v. Fergus County (1934), 98 Mont. 377, 386, 39 P.2d 193, 195. The award of lost profits in this case may be sustained only if we can say that the profits are not based on speculation, since no profit record of the Stensvad enterprises was shown prior to the breach. We find here clearly that the damages for lost profits are speculative. There is no reasonable certainty in the record that Stensvad lost profits as the result of the wrong, or that a profit would have been derived at all. Tri-Tron Intern., supra. In reaching our decision on this phase of the case, we have looked at evidence presented during the main trial, and in supplemental hearings. The procedural situation came about because the court ordered that the bank's claims of set off would be heard subsequent to the trial. The court made findings on all of the issues, except loss of profits by its order of December 14, 1978, and provided for supplemental hearings in that order respecting the loss of profits and additional evidence to be offered by the parties on the remaining claims. A supplementary hearing was held before the District Court on January 22, 1979, and at that time, the parties entered into certain stipulations of fact, offered to enter into other stipulations of fact, and eventually agreed that affidavits or other forms of evidence would be offered to the court for its consideration. Thereafter, on February 20, 1979, an affidavit of Larry D. Stensvad was filed setting forth his claimed valuation of certain items, including cost of assets, proceeds from the sale of personal property by the bank and other items. On March 27, 1979, the bank filed a motion asking the court to adopt as facts certain proposed stipulations of fact which were attached to the motion, to take judicial notice of the accuracy of certain calculations, and to strike the affidavit of Larry Stensvad earlier mentioned. We find no record of how the court ruled on these motions, except that we find that some of the proposed facts were used in the court's final judgment from the affidavit of Stensvad. Inasmuch as all relevant evidence is admissible (Rule 402, Mont.R.Evid.), we will advert to certain of the proferred evidence, as well as the record of the trial, in explaining why we determine that there is no reasonable certainty in the record or otherwise that Stensvad lost profits as the result of the claimed wrong of the bank, or that a profit would have been derived at all. The financial statements for Agri-Services, Inc., show that on June 30, 1971, on total assets of $426,228.80, the corporation had retained earnings of $1,739.89. Included in the liabilities was an overdraft to the bank of $65,692.67. Cash on hand was $2,793.36. The statement as of October 31, 1971, for the same corporation, showed retained earnings totaling $4,368.15 on total assets of $401,871.10. In that four month interim, however, the short-term notes payable to the bank had increased to $198,999.99, from $187,000.00 on June 30, 1971. The financial statements for M & S Cattle Feeders, Inc., show as of November 30, 1971, retained earnings of $7,813.89 on total assets of $260,638.59. Claimed assets include a stock subscription reserve of $17,499.57. The notes payable to the bank increase from $82,500.00 on June 30, 1971, to $110,874.79 on November 30, 1971. On June 30, 1971, this corporation had no cash on hand, and an overdraft to the bank of $241.22. The financial statements for M.V. Enterprises, Inc. show retained earnings before provision for income taxes of $55,261.86, on total assets of $336,261.51. Notes payable to the bank at that time are shown in the sum of $159,597.86. The accountants noted with respect to the June 30, 1971 statement, that inasmuch as M.V. Enterprises, Inc. was part of a brother-sister group of controlled corporations, and the accountants not having been able to determine any intercorporate transactions, the income tax liability could not be determined. We find no November 30, 1971 statement for M.V. Enterprises. The financial statement of L.D. Stensvad Cattle Co. for June 30, 1971, is worthless. As it is, it reflects total assets of $421,802.55, and total liability of $692,860.72, for a negative net worth of $271,058.17. Even the claimed assets are questionable. The accountant reports: NOTE 3. This amount of $76,500.00 is represented by a check of $45,000.00 that did not clear Mr. Wilson's bank and $31,500.00 that Mr. Wilson did not remit to L.D. Stensvad Cattle Co. on client's deposit. Collection probability not ascertained as of now. NOTE 4. This $121,000.00 represents amounts withheld by Mr. Jack Dean from California cattle feeding clients as a commission. L.D. Stensvad Cattle Co. believes this is an error and steps to collect this are in process. Collection probability not ascertained as of now. The liabilities include an item of $383,568.26 owed to Custom Feeding clients for advance payments on feed. Most telling are the reports of the bank examiners who investigated the bankability of the loans made by this bank to the Stensvad corporations. With respect to the Agri-Services, Inc. statement of June 30, 1971, the examiners noted: The operating results mentioned above indicate insufficient cash flow to service and repay indebtedness over a reasonable period of time, there is no evidence of control of the proceeds of sales from inventory, and the extent to which collateral is shared between this loan and placed paper behind the SBA loan, indicates questionable margin at best. Furthermore, the indicated 7 1/2% owner equity is too small to be expected to protect against shrinkage in value in the event it should be necessary to resort to force liquidation. With respect to M.V. Enterprises, Inc.: A review of the checking accounts of subject and affiliated companies indicates frequent transfers of funds in substantial amounts between the various affiliates to cover checks being presented for payment and which apparently were issued without sufficient funds on deposit to cover at the time of issue or when originally presented here for payment. In view of these intercompany transactions and the apparent common controlling ownership vested in Larry D. Stensvad the borrowings of the affiliated companies must be considered together, and all of them appear to have the common weaknesses of undercapitalization and disproportionate total debt and short-term debt and virtually no working capital which necessitates reliance on credit to sustain operations. With respect to M & S Cattle Feeders: Review by bank management subsequent to date of examination and subsequent to 60 M [$60,000] advance made by bank indicates current assets regarded as a source of repayment funds are limited to feed inventories aggregating 31.4 M [$31,400]. With respect to L.D. Stensvad Cattle Co.: Checks on subject company have been issued in substantial amounts at times when insufficient funds were on deposit to cover them. In this connection it is observed that the checking account of this firm was overdrawn in the amount of $83,907.10 on 3-22-71 and the firm was indebted on loans here on that date in the amount of 110 M so that the liabilities of that firm were far in excess of subject banks lending limit on that date. Overdrafts have been noted on other occasions also. At the time of a return visit to the bank on 11-12-71 a fiscal year end (6-30-71) P.S. [financial statement] had not been received for the L.D. Stensvad Cattle Company, Inc. Despite the nearly 3 1/2 months since the end of the fiscal year reportedly the accountant for the firm has been unable to compile a financial statement that will balance or which he is prepared to certify and it has been indicated that unresolved differences are in excess of 200 M, an amount between 2 and 3 times the NW [net worth] of the corporation in the 12-31-70 PS above. In the absence of the statement for this firm a consolidated PS for the affiliated corporations cannot be compiled, thus, the overall financial condition of the related firms cannot be determined. Furthermore the PSs on hand for the other corporations do not include information on intercompany receivables and payables that also would be needed for meaningful consolidation. Also, the bank is without information as to any obligations to other creditors of the L.D. Stensvad Cattle Company, Inc., and does not have a PS of Patton-Stensvad Cattle Feeders in which L.D. Stensvad has a minority (40%) stock interest and which has dealings with the L.D. Stensvad Cattle Company, Inc. It appears that the bank is providing virtually all of the operating capital for the various enterprises in addition to financing the fixed assets of the corporations and conclusive evidence of collateral coverage cannot be ascertained. Assets sufficient to cover liabilities is suggested but not definitely established and the bank is making every effort to exercise control of cash proceeds for application on debts here. We turn now to examine the method used by the District Court in arriving at the lost profits figure of $511,695.00. In its findings of fact, the District Court found that L.D. Stensvad Cattle Company derived net profits from fees charged cattle owners for yarding services, and from 12 1/2% bonus based upon the cattleowners' profit from the sale of cattle. It found that the profit figure of $511,695.00 is the amount the plaintiffs would reasonably have been expected to realize from yardage fees and the 12 1/2 percent bonus payments based upon the completion of existing business. The District Court did not indicate what portion of the profit figure it attributed to bonus payments. In order to determine bonus payments, however, it must have utilized plaintiffs' trial exhibit no. 49, which purported to establish a net margin for investors based on a 600 pound steer when purchased, and sold at 1,050 pounds for a gain of 450 pounds. In that exhibit, figures are utilized from the United States Department of Agriculture which showed the price that feeder cattle would bring in Kansas City as compared to the price that fat or fed cattle would bring in Omaha on the same day. The difference was tabulated to find the gross margin on that day for the cattle investor. Offset against this margin was the cost of feed which the witness determined from barley prices published by the Montana Crop Reporting Service, plus 30 cents for freight and handling. From these figures, based on the ratio of feed used to pound of weight gained, the witness computed a cost of gain, (averaging 20.8 cents per pound in 1972) which when multiplied by the theoretical 450 pound gain in the steer, produced the cost of feed for the steer. The difference between the gross margin and the cost of feed represented a net profit, on exhibit no. 49, to the cattle investor. The witness testified that irrespective of different prices that might prevail in the Roundup market or other Montana markets for the purchaser's sale of feeder cattle or fed cattle, the margin of profit could nevertheless be determined in the manner set forth in exhibit no. 49 because it would be the same nationwide. Such figures were computed for each month from November 1971 until December 1974 on exhibit no. 49. The evidence does not indicate the date of each month on which the computations were made. It is strongly speculative whether such figures had any relationship to the Stensvad feeder operation. Most important, no computation for interest cost to the California investor that would be charged by the bank or by the PCA for the monies advanced by these institutions appears in exhibit no. 49. Likewise, plaintiffs' exhibit no. 52 purports to show the income to be derived by Stensvad's operations, based upon the numbers of cattle to be fed in the pens from the business on hand on the date of the bank's alleged breach. A number is given in that exhibit for the average number of cattle per month, usually 13,000 head in the pens. Income is determined by multiplying the average number of cattle times 15 cents per day for 30 days. Offset against the income thus generated are fixed costs and variable costs. Fixed costs are shown as an unvarying $11,604.36. Variable costs are determined by multiplying the average number of cattle for that month by the figure of $1.44. The difference between the income generated, and the sum of the fixed costs and variable costs yields a profit to Stensvad on the exhibit. When exhibit no. 52 was offered in evidence, it was stated that the computation for fixed costs and variable costs on that exhibit would be connected up. However, such connecting up was never done. The result is a very speculative figure of profit used by the District Court in computing lost profits. Stensvad contends in brief that the net operating profits of the Stensvad operation for the fiscal year ending June 1972 would be $207,615.12 and for the 1973 fiscal year $334,237.68. In addition, the bonus payments that would have been received under the projections would equal $230,985.00 for 1971-1972, and $103,400.00 for 1972-1973. The total of these figures is $876,237.80. The court's finding of lost profits is approximately 59 percent of this total figure. We are unable to determine, and no brief of the parties delineates the basis for the award. We cannot escape the conclusion that on the basis of the record here presented and the underlying evidence, that the award of the court for lost profits was based entirely on speculation, and no reasonable certainty appears to us to indicate that such profits were lost by the alleged wrong of the bank in refusing to further finance the Stensvad operations. This is not to say that in a proper case, damages for lost profits are not recoverable, arising out of a breach by a lender of a contract to loan money. The authorities agree that such damages may be awarded, see Hunt v. United Bank & Trust. Co. (1930), 210 Cal. 108, 291 P. 184, especially when the lender knows the intended use of the proceeds. In such case the profits which would have been made, as contemplated by the parties, are recoverable, Milbourn v. Buzzard (1926), 123 Okl. 89, 252 P. 15, if they are established by factual data to a reasonable certainty, even in the absence of a past history of profitable operations. Welch v. U.S. Bancorp. Realty and Mortg. (1979), 286 Or. 673, 596 P.2d 947, 963-964. The borrower is not restricted in his damages to the cost of obtaining money elsewhere, as the bank contends in this case. See Welch, supra.