First National Bank of Logansport v. Logan Mfg. Co.
1991 Ind. LEXIS 130, 577 N.E.2d 949, 18 A.L.R. 5th 999 (1991)
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Rule of Law:
A promise that the promisor should reasonably expect to induce action or forbearance, and which does induce such action or forbearance, is binding under the doctrine of promissory estoppel if injustice can be avoided only by its enforcement; however, the remedy may be limited to reliance damages rather than expectancy damages.
Facts:
- Max Brandt, a senior loan officer at The First National Bank of Logansport, was interested in bringing new industry to the Logansport area.
- In late 1982, Donald Moore and Clifford Garrett became interested in acquiring and relocating a struggling Michigan plastics company, Winamac Plastics.
- In January 1983, Garrett and Moore met with Brandt, who informed them his personal lending authority was limited to $100,000 and larger loans required committee approval.
- Brandt approved a $100,000 personal loan to Garrett and Moore, knowing it would be used to acquire an interest in the business and begin relocation, and that significantly more funding was necessary.
- After an initial loan application for the existing company was denied, Brandt assured Garrett and Moore the bank would still help them purchase the machinery under a new corporate entity and encouraged them to continue with the move.
- Brandt prepared a new loan application for a larger amount on behalf of Garrett and Moore's new company, which the bank's committees approved.
- The bank issued commitment letters that, for the first time, required a state agency to guarantee the loan.
- Brandt assured Garrett and Moore that the guaranty was not essential and the bank would lend the money regardless, but the bank later refused to close on the loans.
Procedural Posture:
- Garrett and Moore sued The First National Bank of Logansport in an Indiana trial court.
- Following a bench trial, the trial court found in favor of Garrett and Moore and awarded them $726,582 in damages for breach of contract.
- The bank, as appellant, appealed the judgment to the Indiana Court of Appeals.
- The Court of Appeals affirmed the bank's liability and the award for lost profits but reversed the awards for other damages.
- The bank then petitioned the Indiana Supreme Court to accept transfer of the case.
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Issue:
Is a bank liable under the doctrine of promissory estoppel for damages caused by a borrower's reasonable reliance on the bank's promise to provide a loan, even when no formal oral or written contract was formed?
Opinions:
Majority - Justice Krahulik
Yes. A bank is liable under the doctrine of promissory estoppel for a promise to lend money when the promisee reasonably relies on that promise to their detriment. The court first determined that no enforceable oral contract existed because essential terms like the interest rate, duration, and repayment schedule were never agreed upon. It also found no enforceable written contract because the bank's commitment letter was a conditional offer, and Garrett and Moore never fulfilled the condition precedent of obtaining a state guaranty. However, the court adopted the Restatement (Second) of Contracts § 90 and found all five elements of promissory estoppel were met: (1) the bank, through Brandt, made a promise to provide financing; (2) the bank reasonably expected Garrett and Moore to rely on this promise; (3) Garrett and Moore's reliance, by spending the initial $100,000 loan to prepare for the business relocation, was reasonable; (4) this reliance was of a definite and substantial character; and (5) injustice could only be avoided by enforcing the promise. Therefore, while no contract was formed, the promise is enforceable under promissory estoppel.
Dissenting - Justice Dickson
Justice Dickson dissented without a separate written opinion.
Analysis:
This decision formally adopts the Restatement (Second) of Contracts § 90's formulation of promissory estoppel into Indiana law, clarifying its role as a distinct cause of action separate from breach of contract. The case is significant for establishing that promissory estoppel can provide a remedy even when the indefiniteness of terms or failure of a condition precedent prevents the formation of an enforceable contract. Critically, the court distinguishes the remedy for promissory estoppel from contract remedies, limiting damages to reliance losses (out-of-pocket expenses) rather than expectancy damages (lost profits). This holding provides a shield for parties who reasonably rely on promises in business negotiations but also limits their recovery to what is necessary to prevent injustice, rather than placing them in the position they would have been in had the promise been fulfilled as a contract.
