Opinion ID: 1426976
Heading Depth: 3
Heading Rank: 5

Heading: g., Continental Plants Corp. v. Measured Marketing Service, Inc., 274 Or. 621, 547 P.2d 1368, 1372 (1976). We will therefore apply the clearly erroneous standard of review.

Text: Alaska's law on foreseeability of damages is somewhat confused. In Skagway City School Board v. Davis, 543 P.2d 218 (Alaska 1975), the court quoted the Hadley v. Baxendale test. [4] It then noted that the test had undergone some refinement at the hand of Mr. Justice Holmes in Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 23 S.Ct. 754, 47 L.Ed. 1171 (1903). In Globe, Justice Holmes, speaking for the court, stated: It is true that, as people when contracting contemplate performance, not breach, they commonly say little or nothing as to what shall happen in the latter event, and the common rules have been worked out by common sense, which has established what the parties probably would have said if they had spoken about the matter. But a man never can be absolutely certain of performing any contract when the time of performance arrives, and, in many cases, he obviously is taking the risk of an event which is wholly, or to an appreciable extent, beyond his control. The extent of liability in such cases is likely to be within his contemplation, and, whether it is or not, should be worked out on terms which it fairly may be presumed he would have assented to if they had been presented to his mind... . We have to consider, therefore, what the plaintiff would have been entitled to recover ... and that depends on what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made. Globe, 190 U.S. at 543-44, 23 S.Ct. at 755-56, 47 L.Ed. at 1173. This language is commonly referred to as the tacit or presumed agreement test of foreseeability of damages. In a later case, Arctic Contractors, Inc. v. State, 564 P.2d 30, 44-45 (Alaska 1977), this court, in dicta, recommended the Hadley rule, but mentioned Justice Holmes' tacit agreement test in a footnote. In City of Whittier v. Whittier Fuel & Marine Corp., 577 P.2d 216, 220 (Alaska 1978), after stating that the Hadley v. Baxendale rule is the applicable rule in Alaska, we used language more closely aligned with Justice Holmes' tacit agreement test. The tacit agreement test has come under attack in modern times. Restatement (Second) of Contracts § 351 comment a, at 135-36 (1981) states: Furthermore, the party in breach need not have made a tacit agreement to be liable for the loss. Nor must he have had the loss in mind when making the contract, for the test is an objective one based on what he had reason to foresee. Moreover, 5 A. Corbin, Corbin on Contracts § 1009, at 77 (1964) provides: The existing rule requires only reason to foresee, not actual foresight. It does not require that the defendant should have had the resulting injury actually in contemplation or should have promised either impliedly or expressly to pay therefor in case of breach. (Emphasis added). To the extent that prior Alaska case law suggests adoption of the tacit agreement test, it is expressly disapproved. We find the Restatement test to be the clearest expression of Alaska's test of foreseeability of damages. Restatement (Second) of Contracts § 351, at 135 (1981) provides: (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. [5] The trial court found that damages which would have flowed from UBA's repudiation of the loan in the ordinary course of events were limited to mitigation damages, i.e., the expenses of (1) obtaining a replacement loan, (2) higher interest charges on the replacement loan, (3) demobilizing the project and preserving the aircraft while seeking the replacement loan, and (4) remobilizing the project after the replacement loans were obtained. The court found that NAR-PC reasonably incurred expenses of this type worth $86,705.97. NAR-PC's claims for expectation and reliance damages were found not to have been incurred in the ordinary course of events. The trial court rejected NAR-PC's argument that UBA was aware of details surrounding the S-2 loan which rendered NAR-PC's failure to obtain replacement financing foreseeable as a probable result of UBA's breach. One circumstance which rendered UBA's S-2 loan unusual was the fact that security in the S-2 airplanes could not be perfected until the planes were delivered in the United States. The court found that if UBA accepted six of these planes as collateral on its $200,000 loan, it could have expected another bank to accept the other five planes as collateral on a $100,000 loan. This, however, misperceives the test. The proper inquiry is whether the fact that collateral could not be perfected until the planes were on United States soil would cause a reasonable lender to foresee that NAR-PC would not be able to find a replacement loan. UBA officers who began working for UBA after the S-2 loan was entered into indicated at trial that they would not have taken the planes as collateral had they been involved with the bank at the time the loan was approved. Jenner stated in his deposition and at trial that he found it appalling that the bank would make a loan based on planes now in Japan as collateral. Mr. Erksine, UBA's president since April 1978, testified, [w]e had security agreements on the airplanes, but in my experience, collateral is not worth much in a foreign country, until it's in your physical control in the United States. In addition, Conkle, an airplane appraisal expert with Bank of America, testified in his deposition that Bank of America had a policy against accepting aircraft located in foreign countries as collateral. Therefore, it would appear that the trial court's reliance on UBA's prior action of accepting the planes as collateral was not well founded. The fact that UBA acted unreasonably in accepting the planes as collateral should not justify an inference that UBA could not foresee that another lender would refuse to act similarly, should UBA breach in the future. The refusal of other lenders to accept the remaining five planes as collateral, whether or not subjectively foreseen by UBA, should have been foreseeable to a reasonable lender in UBA's position. The trial court also noted that UBA could have expected other lenders to loan $100,000 to NAR-PC based upon Risley's financial statement showing a net worth of $1.2 million. The court apparently rejected NAR-PC's argument that UBA should have known that other lenders would not have relied upon the net worth statement, since the statement showed that $820,000 of the $1.2 million derived from the value of stock owned in closely held corporations, an illiquid asset. Again, statements by UBA's employees and officers are highly probative on the issue of how other bank officers might have viewed Risley's financial statement. UBA's loan officer, Sutton, analyzed the statement and determined that Risley had a tangible net worth of $107,651 (funds which Risley could turn into ready cash within 12 months). Jenner, after reviewing the S-2 loan, wrote a list of questions and comments, two of which were: I can't see any real net worth behind this, especially when the planes are in [the] Orient and Inflated NW [net worth] for our benefit. Mr. Lentfer, who became UBA's executive vice-president in January 1979, testified that after examining Risley's personal financial statement, he concluded that the $200,000 appeared to be an unsecured advance to a company with a deficit net worth, with no source of repayment... . We conclude that the trial court erred in placing as much reliance on Risley's statement of $1.2 million net worth as it did. The evidence at trial clearly indicated that a reasonable lender would probably not have accepted the $1.2 million net worth figure. The fact that UBA did rely on the statement should not have been used by the trial court as proof that it was therefore foreseeable that a reasonable lender would have done the same when UBA breached in June 1978. NAR-PC also argued that UBA should have foreseen that UBA's act of withdrawing loan support for NAR-PC in breach of the loan agreement by itself, would dissuade other lenders from entering the picture and therefore render NAR-PC's inability to obtain a replacement loan all the more foreseeable. The trial court concluded that NAR-PC failed to establish such an impact on other lenders. While a review of the record supports the trial court's conclusion, that lack of evidence is irrelevant to our central inquiry, which is what losses did UBA have reason to foresee when the contract was made. Restatement (Second) of Contracts § 351(1) at 135 (1981). Surely UBA had reason to know when it chose to make the loan to NAR-PC that sudden repudiation of that loan would tend to make other lenders more cautious about lending money to NAR-PC. Despite this lack of evidence, however, common sense would indicate that a replacement lender would be more cautious about loaning money to NAR-PC after UBA's sudden withdrawal. It is a close question whether or not the trial court clearly erred in concluding that it was not foreseeable that NAR-PC would be unable to obtain replacement financing. A review of the record leaves us with the general impression that UBA's loan officer Sutton acted unreasonably in recommending the S-2 loan without obtaining additional collateral, and the loan committee as it existed in January 1978 also acted unreasonably in approving the loan. When the new UBA officers took over, they attempted to clean house by getting rid of their predecessors' poor work. Erskine testified that when he took over in April 1978, he determined that many UBA loans contained sub-par loan documentation, inadequate collateral, insufficient credit information on the borrower, and inadequate prospects of repayment. NAR-PC's S-2 loan apparently fell in this category and by June 1978, UBA, under new management, quickly took steps to save itself by reneging on the letter of commitment and requesting accelerated payment on the outstanding loans. We find the trial court's ruling on the foreseeability issue clearly erroneous. The trial court relied too heavily upon the fact that UBA issued the S-2 loan based on what UBA officers later recognized to be inadequate collateral and insufficient documentation of Risley's net worth. The actions and testimony of UBA's own officers amply demonstrate that it was foreseeable that a reasonable lender would not have issued a replacement loan in reliance upon the planes as collateral and Risley's personal statement of self-worth. On remand, the trial court should reconsider its award of damages in light of Restatement (Second) of Contracts § 351(3) at 135 (1981). [6]