Essay on "Damages"

Quoted Instructions for "Damages" Assignment:

Essay Question (Based on Texas Law)

Your client is Bank of America (“the Bank”), a New York National Bank registered to do business in the State of Texas. The Bank is facing a lawsuit by two disgruntled loan applicants. It appears that the senior vice-president and senior loan officer for the Bank, Max Brandt, was approached by two individuals, residents of the State of Indiana, Wayne Garret and John Moore, about a loan in November, 2004. They wanted to obtain the loan in order to take over Pace Picante Sauce, Inc., a small company near San Antonio (“Pace”), incorporated in Texas. After numerous telephone conversations and meetings between Brandt and Garret and Moore, Brandt informed Garret and Moore that the Bank would make the loan. He was able to do this because he had reviewed Pace’s financial condition and determined that with new management and some additional capital, it would be a good loan risk. However, Brandt told Garret and Moore that except for an initial $250,000 loan, the loan would have to go through the Bank’s loan committee for final approval.

Brandt had authority to lend up to $250,000 without seeking approval from the Bank’s loan committee. Pursuant to this authority, Brandt approved a loan in December 2004 to Garret and Moore in their individual capacities, jointly and severally, for $250,000, $200,000 of which was to be used by Garret and Moore to obtain a 2/3 interest in Pace, and the $50,000 balance to cover the legal and other expenses they had or would incur to consummate the purchase.

In March, 2005, Brandt prepared an application for a $750,000 working capital loan to Pace, for an aggregate loan to G&M of $1,000,000. . The Bank’s loan committee rejected the loan request because of Pace’s already heavy debt load. When Garret and Moore learned about the rejection, they were upset and frustrated because they had already borrowed $250,000 from the Bank and spent all of it to acquire the 2/3 interest in Pace. Without additional loans, they would not have adequate working capital to conduct operations profitably.

When they confronted Brandt with their dilemma, Brandt assured Garret and Moore the Bank would help them, if, instead of seeking a loan for Pace with its poor debt/equity ratios, they would set up a new corporation with a clean balance sheet to purchase Pace’s assets and operate the business in a stock for assets transaction. Garret and Moore agreed to proceed in that direction.

Garret and Moore incorporated a new business, Good Hot Stuff, Inc. (“Hot Stuff”), and caused all of the Pace shareholders, through their control of 2/3 of the stock, to transfer all of the assets in Pace in exchange for Hot Stuff stock, which was then distributed to all of the former Pace shareholders in a tax free reorganization. Hot Stuff then made a new application for a loan for $750,000, and the loan committee immediately approved the application, since the debt of Pace was not on Hot Stuff’s balance sheets. The Bank informed Garret and Moore about the approval the same day.

On March 31, 2005, the Bank issued the formal letter of commitment for the $750,000 loan. This commitment stated for the first time all of the terms and conditions under which the loan approval had been made. Included among the conditions was that, for the first time to Garret and Moore’s knowledge, the loan had to be guaranteed by the State of Texas, Economic Development Program, and that the commitment was valid only through July 1, 2005.

When Garret and Moore questioned Brandt about these new requirements, Brandt indicated that although the guaranty would be a good thing, the Bank really didn’t need it. He assured them that the Bank would loan the money whether or not they got the guaranty. However, subsequently the Bank’s loan committee did refuse to waive the condition, and to close the loan when the Texas Economic Development Program refused to guaranty the loan because Garret and Moore refused to relocate their principal residences to Texas, a requirement under the program’s regulations.

When the loan fell through, Garret and Moore were forced to sell Hot Stuff to another group that purchased their 2/3 interest for the amount of the $250,000 loan, plus interest accrued. In the first year of operation of Hot Stuff, the new group had the following financial results from operations:

Hot Stuff Profit and Loss Statement

Gross Sales $ 2 million Cost of Goods Sold $ 1 million

Gross Profit $1 million

Sales, General & Administrative $ .500 million

EBIT $ .500 million Interest $ .060 million Depreciation $ .050 million

Profits Before Tax $ .360 million Taxes @35% $. 136 million

Net Profits After Tax $.254 million

Experts agree that the capitalization rate for this high risk start-up is 33%, and the multiple is therefore 3. Garret and Moore have filed suit, seeking unspecified damages for breach of contract above the minimum jurisdictional limits of the State District Court. Your client, the Bank, wants a realistic evaluation of its position, and what is its best and worst case prospects in this litigation. Prepare a memorandum to your client outlining the contract issues and the likely outcomes. Another paralegal is handling the fraud/tort questions, so do not waste time on those types of issues.

Use only 2 source one source MUST be the book "law of contracts" fourth edition ***** A. Frey -Phyllis Hurley Frey One source it is your choice and one sources as you wish