## Facts

- Borrowers, operating as a general partnership, developed a motel-restaurant project using an interim construction loan from a bank.
- The borrowers contracted with a lender for “permanent” financing intended to retire the construction loan at a scheduled closing.
- Approximately two months before closing, the lender refused to fund the promised permanent loan.
- To avoid foreclosure and protect their equity, the borrowers refinanced the construction loan for 18 additional months at a higher, floating interest rate and continued efforts to obtain replacement financing.
- The case proceeded on findings that (i) comparable long-term commercial loan rates at the breach date were higher than the contract rate and (ii) commercial loans commonly are paid off earlier than their stated term (average life about seven years).

## Issues

1. What is the proper measure of general damages for breach of a commitment to provide permanent financing, including whether damages may be calculated using an evidence-based estimate of the loan’s probable life rather than the loan’s stated term?
2. Which consequential (special) damages are recoverable for breach of a loan commitment under foreseeability, reasonable certainty, and mitigation principles, including refinancing costs and interim interest paid to avoid foreclosure?

## Decision

- The Supreme Court of North Carolina held that specific performance was not available because the parties stipulated the lender was financially unable to perform; the borrowers were limited to damages.
- The court held general damages are primarily the increased cost of obtaining substitute funds, measured by the interest-rate differential between the promised loan and available substitute financing.
- The court approved using competent evidence of the probable life of a comparable commercial loan to determine the period over which to apply the interest-rate differential, rather than automatically using the stated loan term.
- The court held some special damages (such as reasonable refinancing-related costs and other proven expenses incurred to mitigate and avoid foreclosure) may be recoverable if foreseeable and proven with reasonable certainty, but recovery is limited to non-speculative items within the parties’ contemplation.
- The court modified the approach taken below and remanded for further proceedings consistent with these damages standards.

## Legal Principles

- Contract damages for breach of a loan commitment are limited by foreseeability and contemplation-of-the-parties rules and must be proven with reasonable certainty.
- A borrower must mitigate by seeking substitute financing if available; recoverable damages are constrained to losses reasonably caused by the breach after mitigation efforts.
- General damages for breach of a promise to lend money are ordinarily the borrower’s increased cost of substitute financing, commonly measured by the interest-rate differential.
- The time period used to compute an interest-rate differential award may reflect evidence of the loan’s probable duration in practice, to avoid awards based on speculative assumptions.
- Consequential damages (including refinancing costs or certain interim financing expenses) are recoverable only if they were a natural result of the breach or were within the parties’ contemplation at contracting, and are shown with reasonable certainty.

## Conclusion

The court treated a breached permanent-financing commitment as a contract-damages case: absent specific performance, borrowers may recover the foreseeable, reasonably certain increased cost of substitute financing and limited consequential losses incurred in mitigation, with the duration of any interest-rate differential tied to realistic evidence of how long the loan would likely have remained outstanding.


Pipkin v. Thomas & Hill, Inc., 298 N.C. 278, 258 S.E.2d 778 (N.C. 1979)