This аppeal requires us to interpret a gloss that the Indiana courts have placed on their state’s statute of frauds: an oral agreement that the statute of frauds would otherwise render unenforceable creates a binding contract if failing to enforce the agreement would produce an “unjust and unconscionable injury and loss.” E.g.,
Bromi v. Branch,
Classic Cheesecake, a bakery company, managed to interest several hotels and casinos in Las Vegas in buying its products. To serve these new customers Classic needed additional capital — capital to establish a distribution center in Las Vegas, to hire employees to staff it, and to buy additional equipment. On July 27, 2004, principals of Classic visited a local office of the defendant bank and made a pitch to a vice president named Dowling for a loan that would be partially guaranteed by the Small Business Administration and therefore would have to be approved by that agency. They emphasized to Dowling that time was of the essence.
Dowling asked them for tax returns, accounts receivable, and other documentation in support of the loan application, and having received the documents she orally assured Classic’s principals (according to Classic) that the loan would be approved, provided that student loans of one of the principals were paid off — a condition on which the Small Business Administration insisted because the loans had been financed in part by the federal government and were in default. On September 17 Dowling told Classic that the loan was a “go,” and three days later one of Classic’s principals asked Dowling to request that letters from the student loan agencies confirming that the loans had been repaid be sent directly to Dowling “to speed up the confirmation process.” So Classic knew that Dowling’s saying the loan was “a go” did not mean that the loan had been approved. But it seemed likely that it would be.
*841 Yet in an email to Dowling on August 19, Dowling’s superior at the bank had told her “I am still declining this request [Classic’s request for a lоan] primarily based on the following issues/concerns”- — and he mentioned excessive leverage, lack of an established earnings record, inadequate cash flow, undercapitalization, insufficient revenues, too much reliance on projections, and “serious delinquencies and derogatory public record of guarantor” (referring to the principal who had defaulted on her student loans). He added that he had discussed the matter with the SBA and “the same issues/concerns as identified above prevailed.”
Although the email was a downer, it did not flatly turn down the loan request, and Dowling must have expected that it would be approved, perhaps with modifications, eventually — for what had she to gain from stringing Classic along if she knew the loan would never be approved? But she may have exaggerated her confidence in the loan’s eventual approval to prevent Classic from shopping elsewhere, though the plaintiffs do not allege that.
Not only did Dowling not share the contents of the discouraging email with Classic, but she continued to make verbal assurances that the loan would be approved. The plaintiffs must have been shocked when on October 12 she told them that the loan had been turned down. (As reasons she gave the concerns that her superior had expressed in the August email.) Classic claims that it and the other plaintiffs (the company’s principals plus an affiliate) lost more than $1 million because of the bank’s breach of what Classic deems an oral promise to make the loan. It claims that the breach delayed it from seeking loans elsewhere for a critical two and a half months and that as a result of the delay it and the other plaintiffs incurred in the aggregate a loss of more than $1 million. We’ll assume the loss consisted entirely of costs incurred in reliance on the loan’s being approved, although some of it undoubtedly consisted of consequential damages that could nоt be recovered in a suit for breach of contract consistently with the doctrine of Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854). That is true of the tax penalties that the plaintiffs had to pay because the loss allegedly due to the delay in obtaining a loan drained them of the cash they needed to pay their taxes, and it is even truer of the emotional distress they claim to have suffered as a result of the delay and ensuing financial loss.
The Indiana statute of frauds requires that agreements to lend monеy be in writing. Ind.Code § 26-2-9-5. The oral agreement alleged by Classic contained a promise by the bank on which Classic relied (whether reasonably is another question). But to allow the statute of frauds to be circumvented by basing a suit to enforce an oral promise on promissory estop-pel rather than breach of contract would be a facile mode of avoidance indeed. Someone who wanted to enforce an oral promise otherwise made unenfоrceable by the statute of frauds would need only to incur modest costs in purported reliance on the promise — something easy, if risky, to do, as a premise for seeking to enforce an oral promise that may not have been made or may have been misunderstood.
The plaintiffs also charge that Dowling’s assurance that the loan was “a go” when she knew it had been at least tentatively rejected was fraudulent, and therefore tor-tious. Courts resist efforts by a plaintiff to get around limitations imposed by contract law by recasting a breach as a tort; a recent example is
Extra Equipamentos E Exportação Ltda. v. Case Corp.,
And so the question becоmes whether the bank’s conduct could have been found to inflict an “unjust and unconscionable injury and loss” and so trump the bank’s defense based on the statute of frauds. To answer the question requires us to explore the provenance of a phrase at once vague (what does “unjust and unconscionable” mean?) and redundant (how does “injury” differ from “loss”?).
The statute of frauds has long been controversial. The Farnsworth treatise says that “it has been the subject of constant erosiоn.” 2 E. Allan Farnsworth,
Farns-worth on Contracts
§ 6.1, p. 107 (3d ed.2004). The particular erosive process that culminates in the doctrine of “unjust and unconscionable injury and loss” began — where else? — in an opinion by Justice Traynor,
Monarco v. Lo Greco,
The
Monarco
opinion, like so many of Justice Traynor’s innovations, caught on. 2 Farnswоrth,
supra,
§ 6.12, p. 206. Eventually it was picked up — and expanded — by the
Restatement (Second) of Contracts
(1981), which in section 139(1) allows promissory estoppel to defeat the statute of frauds “if injustice can be avoided only by enforcement of the [oral] promise.” This notably loose formulation has been influential too, 2 Farnsworth,
supra,
§ 6.12, pp. 206-13 — but not in Indiana. “Indiana courts have declined to embrace § 139 [of the
Restatement
], but have recognized the possibility of relief for ‘injustice’ in limited circumstances, while defining it much more narrowly than in § 139.”
Coca-Cola Co. v. Babyback’s Int’l, Inc.,
Indiana’s formula is as follows:
In order to estаblish an estoppel to remove the case from the operation of the Statute of Frauds, the party must show [ ] that the other party’s refusal to carry out the terms of the agreement has resulted not merely in a denial of the rights which the agreement was intended to confer, but the infliction of an unjust and unconscionable injury and loss.
In other words, neither the benefit of the bargain itself, nor mere inconvenience, incidental expenses, etc. short of a reliance injury so substantial and inde *843 pendent as to constitute an unjust and unconscionable injury and loss are sufficient to remove the claim from the operation of the Statute of Frauds.
Id.,
quoting
Brown v. Branch, supra,
The formula itself — “unjust and unconscionable injury and loss” — does not tell us much, and it has not been further elaborated by the Indiana courts. Comparison with Justice Traynor’s formula — “either an unconscionable injury or unjust enrichment” — deepens the mystery. The Tray-nor formula suggests two grounds for getting around the statute of frauds: unjust gain to the promisor or “unconscionable” injury to the promisee. The former seems the solider ground but is omitted in the Indiana formulation unless the “unjust” in “unjust ... injury” should be understood as shorthand for unjust enrichment — but that would imply, contrary to the second paragraph of the formulation in Baby-back’s, that the rule is inapplicable if there is no gain to the party pleading the statute of frauds. In both formulas, the word “unconscionable” is confusing rather than clarifying, since if it is meant to invoke the doctrine of unconscionability it would duplicatе unjust enrichment in the Traynor formula and contradict the second paragraph in the Indiana formula.
We can at least set aside any issue of unjust enrichment in this case. The bank made no money in its dealings with Classic and gained no other advantage; all it gained was this lawsuit against it. And anyway, to invoke the doctrine of uncon-scionability Classic would have to show that it had been taken advantage of because of its obvious ignorance or desperate circumstances, e.g.,
Weaver v. American Oil Co.,
We can get some help from the case law. In
Monarco,
the
fans et origo
of the doctrine that the Indiana courts call “unjust and unconscionable injury and loss,” there was both a big loss and unjust enrichment. When the plaintiff reached 18 аnd wanted to leave home and make his own way in the world, his mother and stepfather promised him that if he stayed and worked on the family farm they would leave almost all their property (which was in joint tenancy) to him. He stayed, and worked hard, receiving in exchange only room and board and spending money. The farm prospered. But when the stepfather died 20 years later, he left his half interest in the farm to his own grandson.
Only two cases (one a federal district court diversity case governed by Indiana law) have allowed a claim based on the Indiana formula to survive a motion for summary judgment, though in neither case did the plaintiff ultimately prevail. In three other
cases
— Hardin
v. Hardin,
In the diversity case,
Madison Tool & Die, Inc. v. ZF Sachs Automotive of America, Inc.,
In the other case,
Keating v. Burton,
These cases are not as dramatic as
Mon-arco
or
Genesis
29 and do not involve (so far as appears) substantial gain to the (oral) promisor. But there is a family resemblance, which helps us to understand the scope and operation of the Indiana formula as elaborated in the second paragraph of the indented quotation from
Ba-byback’s
and as paraphrased in
Spring Hill Developers, Inc. v. Arthur,
But what these cases really show is the mercury-like slipperiness of the Indiana formula, as of the
Monarco
formula as well. The “benefit of the bargain” is contract-speak for the expected profit from performing a contract; the “independent” loss of which the
Spring Hill
opinion spoke is the reliance loss — the expenses a party incurs to perform the contract. The plaintiff in
Madison
incurred the expense of the machine in reliance on the defendant’s promise, and likewise with the plaintiffs giving up his business in
Keating.
A promise plus a reliance loss is what you need for promissory estoppel, yet the Indiana Supreme Court refused in
Baby-back’s
to endorse a
general
exception to the statute of frauds for promissory estop-pel.
Remember that the objection to placing promissory estoppel outside the statute of frauds is that it is too easy for a plaintiff to incur reliance costs in order to bolster his claim of an oral promise. The objection is attenuated if the reliance is so extensive that it is unlikely that the plaintiff would have undertaken it (buying an expensive specialized machine or giving up a growing company) merely to bolster a false claim. He might of course have misunderstood the “promisor” or been gambling on getting a contract, but courts seem not to think those possibilities likely enough to warrant a sterner rule. The compromise that the courts strike between the value of protecting reasonable reliance and the policy that animates the statute of frauds is to require a party that wants to get around the statute of frauds to prove an enhanced promissory estoppel, and the enhancement consists of proving a kind or amount of reliance unlikely to have been incurred had the plaintiff not had a good-faith belief that he had been promised remuneration.
This seems to us a better understanding of the “unjust and unconscionable” rule than asсribing it to judicial indignation at dishonorable behavior by promisors. It is a strength rather than a weakness of contract law that it generally eschews a moral
*846
conception of transactions. Liability for breach of contract is strict, rather than based (as tort liability generally is) on fault; punitive damages are unavailable even for deliberate breaches (and again note the contrast with tort law); and specific performance is exceptional — and when the only remedy for a breach of contract is compensatory damages, a promisor has in effect an option to perform or pay damages rather than a duty to perform (the duty the civil law expresses by the phrase
pacta sunt servanda).
Even such contract doctrines as “good faith,” “best efforts,” and “duress,” which have a moral ring, seem aimed not at vindicating the moral law but at protecting each party to a contract from the other party’s taking advantage of a temрorary monopoly (not in an antitrust sense) that contracts often create when the performance of the parties is not simultaneous. See, e.g.,
Professional Service Network, Inc. v. American Alliance Holding Co.,
Even though the behavior of the defendants in Monarco and the other cases we have discussed may well shock the сonscience, the outcomes of those cases are defensible on the practical ground of protecting reasonable reliance in situations (and this is key) in which the contention that the reliance was induced by an oral promise is credible. The formulas the cases use to describe these situations, however, are not illuminating. Holmes warned that “the law is full of phraseology drawn from morals, and by the mere force of language continually invites us to pass from one domain to the other without perceiving it, as we are sure to do unless we have the boundary constantly before our minds.” O.W. Holmes, “The Path of the Law,” 10 Harv. L.Rev. 457, 459-60 (1897). Ruminating on the meaning of “unjust” and “unconscionable” will not separate the cases we have discussed from this case; reflection on reliance will.
The duration of reliance in the present case was much shorter than in the other cases that we have discussed, and the reliance is more easily imagined as based on hope than on a promise. And not all of it could be considered reasonable reliance, which is the only kind that can support a claim of promissory estoppel and a fortiori an invocation of the enhanced promissory-estoppel doctrine of the Indiana cases. The only reasonable reliance that the plaintiffs placed on Dowling’s assurances was to cure (for less than $20,000) a delinquency somewhat earlier than they would otherwise have been forced tо do. For the plaintiffs to treat the bank loan as a certainty because they were told by the bank officer whom they were dealing with that it would be approved was unreasonable, especially if, as the plaintiffs’ damages claim presupposes, the need for the loan was urgent. Rational businessmen know that there is many a slip ’twixt cup and lips, that a loan is not approved until it is approved, that if a bank’s employee tells you your loan application will be approved that is not the same as telling you it has *847 been approved, and that if one does not have a loan commitment in writing yet the need for the loan is urgent one had better be negotiating with other potential lenders at the same time. The level of reliance that could be thought to have been reasonable in this case was not comparable to that involved in the other cases. In the end, this case turns out to be a routine promissory estoppel case, and that is not enough in Indiana to defeat a defense of statute of frauds.
Affirmed.