First Interstate Bank of Gallup v. Foutz , 107 N.M. 749 ( 1988 )

OPINION

STOWERS, Justice.

We have granted certiorari to consider whether the trial court correctly instructed the jury on the measure of damages in this action for negligent misrepresentation.

Respondents-plaintiffs, Cal and Keith Foutz, brought this case against petitioner-defendant, First Interstate Bank of Gallup (FIBG), for fraud and negligent misrepresentation in connection with a transaction involving the respondents, FIBG, and a nonparty, Robert Berni. The respondents claimed that they were fraudulently or negligently induced to enter into a continuing guaranty and a hypothecation agreement by an officer of FIBG, and sought rescission of these contracts. The trial court granted petitioner’s motion for a directed verdict on the fraud claim and on some of the claims of negligent misrepresentation, but denied the motion on the claim of negligent misrepresentation of the value of Berni’s assets. The jury returned a verdict in the amount of $75,000 for respondents and petitioner appealed. The court of appeals in a 2 to 1 decision affirmed the trial court. We agree with the dissenting opinion of the court of appeals and reverse and remand to the trial court to enter judgment for petitioner.

The basic facts are not in dispute and have been set out more fully in the court of appeals’ opinion. In 1981 the Foutzes entered into a business transaction with Berni. Each of the brothers contributed $50,-000 in cash to begin two businesses with Berni known as Buddy’s Used Cars and B & F Auto Service and Wrecker Service. Berni contributed a wrecker service, including a wrecker’s license and various car servicing equipment. The two businesses were managed and operated by Berni. Other than a written partnership resolution, there were no documents evidencing any contracts between the Foutzes and Berni. Thereafter, they had several disagreements about the operation of the businesses. In August 1981, Berni executed a $100,000 promissory note to Keith and Cal Foutz to reimburse them for their partnership investment. Berni made some payments on the note, but by December 1982 the note was past due.

In December 1982 or January 1983, the exact date is unclear in the record and briefs, Cal Foutz was told by an employee of FIBG that he was delinquent on a note. Since Cal was unaware of a past due note, he spoke with Kenneth Agee, who handled his accounts at FIBG and who was then its vice-president. Agee informed Cal that in September 1981 FIBG had extended Berni a $50,000 unsecured loan and in conjunction with this loan Berni had supplied FIBG with the partnership resolution. At the time of Cal’s meeting with Agee, the $50,-000 loan was past due and FIBG was looking to the Foutzes to make the payments.

After the initial meeting with Cal, another meeting was held with both Foutzes and Agee. FIBG agreed to loan Berni an additional $100,000 to pay the Foutzes’ promissory note and, thereby, increase Berni’s indebtedness to $163,703 (the other $63,703 was used to consolidate all of Berni’s outstanding loans with FIBG). The Foutzes agreed to put the $100,000 in a certificate of deposit (CD) at FIBG. The Foutzes also signed a continuing guaranty of this loan to Berni up to the amount of $150,000 as well as a hypothecation agreement pledging their CD as security for the loan to Berni (a hypothecation agreement gives a creditor a right over personal property belonging to another and the power to take or sell that property to satisfy the creditor’s claim). In the event Berni defaulted on his loan with FIBG, the hypothecation contract provided that the CD could be attached to satisfy Berni’s indebtedness. FIBG also took a security interest in all the assets of Buddy’s Used Cars and B & F Auto Service and Wrecker Service, and a security interest in Berni’s residence and some of his personalty. As a result of this transaction, the Foutzes obtained a return on their $100,000 partnership investment in the form of quarterly interest payments from the CD and Berni’s loans were consolidated and increased to $163,703.

The Foutzes received three quarterly interest payments on the CD for $7,200. Berni, however, defaulted on his loan. By a letter dated January 11, 1984, FIBG notified Cal that the bank had repossessed all collateral available to it under the loan agreement with Berni, and under the hypothecation agreement and continuing guaranty, it exercised its right to take the CD. At the time FIBG took the CD and applied it against the outstanding loan balance, there was a remaining balance in the amount of $21,741.08, which FIBG was expecting to satisfy out of the contract receivables from Buddy’s Used Cars.

At issue in this case is jury instruction No. 19 given by the trial court on the measure of damages available to respondents in an action for negligent misrepresentation. That instruction, in relevant part, stated:

If you should decide in favor of the [respondents] on the question of liability, you must then fix the amount of money which will reasonably and fairly compensate them for any of the following elements of damages proved by the [respondents] to have resulted from the negligent misrepresentation as claimed: The value of the loss of the Certificate of Deposit. The value of the loss of interest on the Certificate of Deposit.

FIBG argues that this instruction is an improper statement of the damages under a theory of negligent misrepresentation because it instructs on the benefit of the bargain and not on actual out-of-pocket losses. The majority of the court of appeals did not agree with FIBG.

The court of appeals stated that the tort of negligent misrepresentation as articulated in the Restatement (Second) of Torts Section 552 (1977) was adopted in New Mexico in Stotlar v. Hester, 92 N.M. 26, 582 P.2d 403 (Ct.App.), cert. denied, 92 N.M. 180, 585 P.2d 324 (1978). Accord Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 106 N.M. 757, 761-62, 750 P.2d 118, 122-23 (1988). Comments (a) and (b) to Section 552 indicate that damages for negligent misrepresentation are determined by out-of-pocket loss or reliance damages. That measure of damages is set forth in Section 552B and provides:

Damages for Negligent Misrepresentation

(1) The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is a legal cause, including

(a) the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and

(b) pecuniary loss suffered otherwise as a consequence of the plaintiffs reliance upon the misrepresentation.

(2) The damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiffs contract with the defendant.

Restatement (Second) of Torts § 552B (1977). Because New Mexico follows the tort of negligent misrepresentation as set forth in the Restatement, it is not unreasonable to conclude that we would also follow the damages as set forth therein. Using 552B(l)(a) as the proper measure of damages, the court of appeals reasoned that, in the present case, the out-of-pocket loss was equal to the difference between the amount the Foutzes gave and the amount they received in the secured transaction with FIBG. In other words, the difference between what the Foutzes gave, a $100,000 CD plus unpaid interest, and what they received, nothing, was $100,000 plus interest. The majority opinion concluded that because the Foutzes gave the $100,000 CD and received nothing the value of the CD plus interest represented their out-of-pocket loss and instruction No. 19 correctly stated that measure of damages.

Jury instructions must state the law correctly and be based on the evidence. Pittard v. Four Seasons Motor Inn, Inc., 101 N.M. 723, 727, 688 P.2d 333, 337 (Ct.App.), cert. quashed, 101 N.M. 555, 685 P.2d 963 (1984). “All instructions must be read together and, if they fairly present the issues and the applicable law, they are sufficient.” Id. Reversal is warranted where the party complaining of faulty instructions shows evidence of prejudice. Jewell v. Seidenberg, 82 N.M. 120, 124, 477 P.2d 296, 300 (1970).

The dissent in the court of appeals’ opinion agreed that the proper measure of damages in the present case is the out-of-pocket loss and not the benefit of the bargain, but disagreed that instruction No. 19 corresponds to that out-of-pocket loss or that respondents’ proof established any out-of-pocket losses. Thus, the trial court’s instruction could be considered a correct statement of damages if respondents’ argument was accepted that what they gave in the transaction with FIBG was the $100,-000 CD; otherwise jury instruction No. 19 instructed on the benefit of the bargain, an inapplicable measure of damages in negligent misrepresentation.

We agree with the dissent that the instruction was on the benefit of the bargain and not on any out-of-pocket losses. At the time of the transaction with FIBG, the Foutzes had a past due $100,000 unsecured promissory note from Berni. No principal payments and only interest payments total-ling $3,400 had been made on the note even though the Foutzes should have received $40,000 by then. FIBG had four outstanding loans to Berni with balances totalling $63,703. These loans were secured by personalty and Berni’s mobile home. Berni wanted to consolidate them and in exchange was willing to give the bank a security interest in all of his business assets and in his personal residence. To refinance Berni’s loans, the bank gave the Foutzes a $100,000 CD that retired the unsecured promissory note from Berni. In exchange for the CD, the Foutzes agreed to hypothecate that CD as security for the Berni loan of $163,703, and also to sign a continuing guaranty of the Berni loan up to $150,000.

The dissent correctly pointed out that the Foutzes would not have had the CD had FIBG not advanced that amount of money to Berni. FIBG certainly did not advance without any expectation of security or collateral in return that additional $100,000 to Berni so that he could pay off the Foutzes’ promissory note. Instruction No. 19 directed the jury to award respondents the value of the CD, plus the value of the loss of the interest on the CD, if the jury found for respondents. The instruction allowed the Foutzes to recover the benefit of their bargain with FIBG and actually placed them in a better position than they occupied before entering into the transaction. As a result, the jury verdict in favor of respondents, which was for $75,000, represented the CD less 25 percent fault apportioned to respondents and Berni. Thus, the Foutzes recovered the benefit of their bargain, not their out-of-pocket losses.

The damages the Foutzes could have recovered under a theory of negligent misrepresentation, as set out in the Restatement, was the consideration they gave for entering into the transaction minus any value they received from that transaction, plus any pecuniary loss proximately resulting from reliance on the misrepresentation. The loss of the CD does not represent the difference between the value of what was received and its purchase price. Nor does it represent any other pecuniary loss as a result of reliance on the misrepresentation. It cannot be a pecuniary loss because the Foutzes would not have had the CD if they had not entered into the transaction with the bank, and, agreed that the CD could be attached if Berni defaulted. The Foutzes failed to present substantial evidence of any out-of-pocket damages they sustained as a result of their transaction with FIBG.

The verdict of the district court is reversed and judgment is entered in favor of petitioner.

IT IS SO ORDERED.

SCARBOROUGH, C.J., and RANSOM, J., concur. WALTERS, J., specially concurs. SOSA, Senior Justice, dissents.