## Facts

- Cedar Ridge Investments, LLC sought financing to develop a residential subdivision in Flagstaff, Arizona.
- TierOne Bank (later succeeded by Great Western Bank) made an acquisition and development (A&D) loan secured by a deed of trust; LJC Development, LLC guaranteed the A&D loan.
- The parties also executed a separate written “Loan Agreement” for construction financing to fund homebuilding on improved lots; the project assumed home sales would generate revenue to retire the A&D loan.
- Before the construction loan term expired, the bank stopped funding construction projects in Arizona and informed Cedar Ridge it was canceling the construction loan.
- Cedar Ridge halted construction, could not obtain replacement construction financing, and later defaulted on the A&D loan.
- The bank foreclosed, conducted a trustee’s sale, and sued LJC (as guarantor) for a deficiency on the A&D loan.
- LJC asserted a setoff based on Cedar Ridge’s damages from the bank’s breach of the construction loan, seeking to offset the deficiency with lost profits from planned home sales.

## Issues

1. Whether the construction “Loan Agreement” was an enforceable commitment to lend (rather than a discretionary line of credit) and whether the bank breached it by terminating funding before the agreed term ended.
2. Whether lost profits from anticipated home sales were recoverable contract damages, and whether they were proven with reasonable certainty and causally linked to the breach.
3. Whether a guarantor may assert the borrower’s breach-of-contract damages as a setoff against the guarantor’s liability for a deficiency on a related loan.
4. How damages should account for the effect of deteriorating market conditions versus the lender’s cessation of construction funding.

## Decision

- The Court of Appeals affirmed the finding that the construction agreement was an enforceable loan contract and that the bank breached it by terminating funding before the contractual expiration.
- The Court affirmed that lost profits could be a permissible category of contract damages in this setting and could be asserted by the guarantor as a setoff, subject to proof.
- The Court reversed the trial court’s damages determination to the extent it credited the full projected profits and eliminated the deficiency entirely without properly addressing causation and the role of the market downturn.
- The case was remanded to reassess damages and the allowable setoff consistent with requirements of causation and reasonable certainty.

## Legal Principles

- A written construction loan agreement with definite terms (loan amount, maturity, and disbursement standards) is enforceable according to its text; a lender cannot avoid its obligations based on internal labels such as “line of credit.”
- Contract damages aim to place the nonbreaching party in the position it would have occupied absent breach.
- Lost profits are recoverable for breach of contract when they were within the parties’ contemplation, proximately caused by the breach, and proven with reasonable certainty; expert projections may be used if they provide a reliable basis.
- When external economic conditions materially affect profitability, the factfinder must separate losses attributable to the breach from losses attributable to the market; damages must be limited to the portion caused by the breach.
- A guarantor may, absent waiver, assert defenses and setoffs available to the principal obligor, including contract-damage claims, to reduce liability on a deficiency judgment.

## Conclusion

The court held that the lender breached an enforceable construction loan agreement and that the borrower’s lost-profit damages could be used by the guarantor to offset a deficiency, but required a remand because the damages award failed to apportion losses between the breach and adverse market conditions.


Great W. Bank v. LJC Dev., LLC, 238 Ariz. 470, 362 P.3d 1037 (Ct. App. 2015)