Phillip C. GOLDSTICK and Joseph W. Smith, individually and
on behalf of Goldstick & Smith, a partnership in
dissolution, Plaintiffs-Appellants,
v.
ICM REALTY, a Maryland real estate investment trust,
Defendant-Appellee.
No. 85-1285.
United States Court of Appeals,
Seventh Circuit.
Argued Nov. 4, 1985.
Decided April 14, 1986.
Steven J. Rotunno, Joyce & Kubasiak, Chicago, Ill., for plaintiffs-appellants.
Marjorie Press Lindblom, Kirkland & Ellis, Chicago, Ill., for defendant-appellee.
Before CUMMINGS, Chief Judge, POSNER, Circuit Judge, and CAMPBELL, Senior District Judge.*
POSNER, Circuit Judge.
The plaintiffs, former law partners named Goldstick and Smith, brought this diversity suit for breach of contract against John Kusmiersky, U.S. Managers Realty, Inc., and ICM Realty, seeking payment of a legal fee for getting real estate taxes reduced on a large apartment complex owned by ICM, leased by Kusmiersky, and managed by U.S. Managers. ICM moved for summary judgment, which was granted,
Neither the district court nor any of the parties noticed a serious question of federal jurisdiction. ICM is a real estate investment trust, not a corporation. Its citizenship is not, as all concerned assumed, the state where it is chartered, Maryland. The citizenship of a trust is determined for purposes of diversity jurisdiction by the citizenship of the trustee or, in this case, trustees, all of whom must be citizens of a different state from the plaintiff for the suit to be maintained under the diversity jurisdiction. Navarro Savings Ass'n v. Lee,
Although the original record did not show what states the trustees of ICM are citizens of, in response to our request for supplemental briefs on jurisdiction the parties submitted an affidavit attesting that on the date the suit was filed all of the trustees were in fact citizens of different states from the plaintiffs. Therefore the requirements of diversity jurisdiction are satisfied. But they easily could not have been; and then we would have had to dismiss the case, and three years of litigation would have gone down the drain. So once again we remind the bench and bar of this circuit of the importance of verifying the existence of federal jurisdiction at the outset of litigation. See, e.g., Kanzelberger v. Kanzelberger,
On the merits of the appeal we note first the parties' agreement that the governing substantive law is that of Illinois and that, under Rule 56 of the Federal Rules of Civil Procedure, ICM in moving for summary judgment had the burden of proving that there was no genuine issue of material fact on any of the liability theories advanced by the plaintiffs--no triable issue of fact. We therefore construe the facts as favorably to the plaintiffs as is reasonable to do, without meaning to suggest that the plaintiffs will succeed in proving these facts at trial.
In 1969 ICM bought an apartment complex in Rolling Meadows, Illinois, from Walter Kassuba, to whom ICM leased back the land and sold the improvements. He went broke, however, and in 1975 ICM leased the land to Kusmiersky, a "work-out specialist," who also bought the improvements. In a separate agreement ICM promised to advance Kusmiersky $1.5 million to operate the property and pay past-due real estate taxes, hoping that this advance would enable him to resuscitate the property so that ICM could recover its investment in the land. Kusmiersky retained the plaintiffs under a contingent-fee arrangement to seek a reduction in the past-due taxes. ICM approved this arrangement and by 1977 the plaintiffs had succeeded in getting them reduced by some $870,000. The plaintiffs billed Kusmiersky $290,000 for their legal services. The bill was never paid, though neither its reasonableness nor its conformity to the terms of the contingent-fee contract has ever been questioned.
The property continued to decline, and Kusmiersky and ICM entered into negotiations to transfer Kusmiersky's interest to Ted Netzky, who agreed to invest fresh capital in the property. Netzky refused to close the deal, however, unless ICM agreed to pay the remaining past-due real estate taxes and the plaintiffs released their claim for legal fees. In an effort to obtain this release Kusmiersky offered the plaintiffs a reduced fee of $250,000, payable over 10 years with interest at 7 percent per annum. Goldstick (for the plaintiffs) refused the offer. ICM drafted a release for the plaintiffs to sign which stated that the $250,000 would be paid over time but only out of the profits of the property; if there were none, the fee would not be paid. Goldstick refused to sign the release until Kusmiersky assured him that ICM was honorable and that something would be worked out, which Goldstick took to mean that he and Smith would receive the $250,000, over time but with interest, regardless of whether the property showed a profit. The plaintiffs signed the release and the deal with Netzky closed. Goldstick and Smith continued to negotiate with Kusmiersky and ICM over the terms of payment of their fee, but no agreement was reached, for ICM held steadfastly to the position that the payment of the fee would have to be out of the profits, if any, of the property. There were no profits, and eventually Goldstick and Smith demanded payment of the full $290,000 and when that was refused brought this suit.
The plaintiffs advance several alternative grounds for recovery, all of which the district court rejected. The first is that ICM was a party to their original contract with Kusmiersky to seek a reduction in back taxes in exchange for a contingent fee. If Kusmiersky was merely ICM's tenant, however, the district judge was certainly correct in concluding that Kusmiersky was not its agent in the original fee negotiation with the plaintiffs. If a tenant hires a plumber to fix a leaking faucet, the contract of repair is between the lessee and the plumber; the landlord is not a party. See, e.g., County of Kane v. Midway Landfill, Inc.,
What blurs this picture is that the agreement between ICM and Kusmiersky concerning the payment of the real estate taxes, an agreement separate from the lease, provided for only a conditional advance of money to Kusmiersky. He was to try to settle the claims for past-due taxes as cheaply as possible but he had to advise ICM on whether to accept the settlements he negotiated, and ICM would make the final decision. The agreement makes no reference to legal fees but Kusmiersky testified in his deposition that it was meant to include fee arrangements too. If so, this meant that ICM had to approve any such arrangement as well as any tax settlements and as a matter of fact it did approve Kusmiersky's contract with the plaintiffs, and did so only after the plaintiffs agreed to reduce the contingent fee they had originally negotiated with Kusmiersky.
The district court compared ICM's role to that of a lender who insists on a right of approval of his borrower's use of the borrowed funds in order to make sure they aren't dissipated, which would reduce the lender's security. That is one possible interpretation but not the only one. ICM owned the land and would be the loser if it were seized for nonpayment of real estate taxes. The agreement with Kusmiersky regarding the payment of those taxes could be interpreted as making Kusmiersky ICM's agent. If so, ICM was bound as his principal. The proper characterization of the relationship created by the agreement is not so clear on this record that it could be determined on a motion for summary judgment.
We add that it would make no difference whether the agency agreement (if that is what it was) authorized Kusmiersky to make a contingent-fee arrangement--although as a matter of fact there is little doubt that it did, for Kusmiersky could not get the tax liability reduced without hiring a lawyer and the usual method of compensating a lawyer for getting real estate taxes reduced is to give him a percentage of the reduction. ICM's approval of the contract with the plaintiffs would (assuming that Kusmiersky was ICM's agent in paying past-due taxes) in any event bind ICM on the contract by the doctrine of ratification, whether or not the agent had authority to make the contract in the first place. See, e.g., Johnston v. Suckow,
As an original matter one might wonder why ratification should make the principal liable. The effect seems to be to confer a windfall on the other party to the contract, who did not bargain for this additional promisor. The explanations that have been offered are conclusional. See, e.g., Seavey, Handbook of the Law of Agency 57-59 (1964). The best explanation may be that the principal would not have ratified the contract unless he had seen a commercial advantage in doing so, and that advantage would be less if the ratification had no binding effect. Ordinarily a principal ratifies an agent's unauthorized transaction in order to protect the principal's relationship with the other party to the transaction, usually a customer or supplier; and for ratification to have this protective effect it has to be more than an idle gesture, signifying nothing because unenforceable. In any event Illinois law is clear in binding the principal to contracts of his agent that he has ratified.
On either theory--actual authorization to make the fee arrangement, or ratification--the existence of an agency relationship is the key question and is a question of fact, Phipps v. Cohn,
We come to the negotiations with Netzky, upon which the plaintiffs' other theories are founded. One theory is that the plaintiffs had a contract with ICM to be paid $250,000 in exchange for a release of their claim, but we agree with the district judge that they did not. When Kusmiersky offered to pay $250,000 over 10 years (and with no payment of principal in the early years, just interest at 7 percent), Goldstick turned him down; so there was no contract, express or implied. Later Kusmiersky assured Goldstick that something would be worked out. But just what that "something" was is hopelessly vague. Even if Goldstick could reasonably have understood Kusmiersky to mean that the obligation would be unconditional--and maybe he could, as we shall see--there would still be the question of the period over which the money was to be paid. When Kusmiersky spoke to Goldstick about working something out, it was after Goldstick had refused to accept payment conditioned on the property's turning a profit. We cannot know whether, faced with ICM's proposal to make payment conditional in this way, Goldstick would gladly have embraced Kusmiersky's previous offer, for payment over 10 years; or whether he would have accepted payment over this period only if the fee was restored to its original level of $290,000; or whether he would have insisted on much more if it was to be paid over 10 years--bearing in mind that at a discount rate of 10 percent per annum (for example), $290,000 paid in equal annual installments over 10 years is worth only $178,000 today, and $250,000 is worth only $154,000. It would be impossible to fix within reasonable bounds the present value of the contract that Goldstick and Kusmiersky made, if Kusmiersky's reference to working something out is treated as an offer and Goldstick's thereafter signing the release as an acceptance. An offer must be more definite to create an enforceable contract.
Although the Uniform Commercial Code has made inroads into the common law principle that a contract that does not fix a price is unenforceable, see UCC Sec. 2-305, it has done so in order to make contracts for the sale of goods at whatever the market price is on the day when the goods are delivered enforceable, and in such a case the court has an objective basis for determining the contract price. That is not the case here and anyway this contract is not governed by the Code. The common law principle that a contract cannot be enforced if its terms are indefinite (see Farnsworth, Contracts Sec. 3.27 (1982)) retains a core of vitality. If people want the courts to enforce their contracts they have to take the time to fix the terms with reasonable definiteness so that the courts are not put to an undue burden of figuring out what the parties would have agreed to had they completed their negotiations. The parties have the comparative advantage over the court in deciding on what terms a voluntary transaction is value-maximizing; that is a premise of a free-enterprise system.
This is not to say that enforcement should be denied if the parties by inadvertence failed to specify some peripheral term. Such omissions both are the unavoidable consequence of the limitations of human foresight and can be repaired by the courts without undue difficulty. But in this case essential terms were missing: the contract price, the period over which that price would be paid, the interest rate, and the repayment profile (e.g., equal annual installments or a balloon payment at the end?). See Whitelaw v. Brady,
The plaintiffs have two other strings to their bow. The first is promissory estoppel. If an unambiguous promise is made in circumstances calculated to induce reliance, and it does so, the promisee if hurt as a result can recover damages. See, e.g., Yardley v. Yardley,
The part of the district judge's opinion in which he rejected the plaintiffs' argument for promissory estoppel is very brief and essentially all it says is that the promise was ambiguous because the question whether payment would be contingent on the property's turning a profit was left unresolved. However, a jury could find that Goldstick reasonably understood Kusmiersky's statement that something would be worked out to mean that ICM would not insist on conditioning payment on profit. If so, Kusmiersky could be understood to be promising to do better than his previous offer of $250,000 over 10 years with interest at 7 percent but no principal the first few years. How much better is unclear, but that is not critical. If the minimum value of a promise is unambiguous, that should be enough to work an estoppel to the extent of that value, though no more.
Although to our knowledge the precise issue has not arisen before, we find nothing in principle or in the cases to exclude recovery on a theory of promissory estoppel when the promise is unambiguous on the downside but not the upside. In Yardley there was no promise, period. In Levitt Homes Inc. v. Old Farm Homeowner's Ass'n,
The fact that Goldstick rejected Kusmiersky's offer does not show that he did not rely on it. He may have regarded it as a floor, once the possibility of its being only contingent was dispelled by the assurance (if that is what it was) that something would be worked out. Thus reassured, he may have been sufficiently encouraged to execute the release that Kusmiersky and ICM needed to complete the deal with Netzky, even though he hoped to get a better settlement than Kusmiersky had offered. At least this is sufficiently plausible to create a triable issue of reliance as well as of the existence of a promise.
Should the plaintiffs prevail on this theory, it will become necessary to consider the proper measure of damages. As a matter of strict logic one might suppose that since the promise was not accepted, the plaintiffs, even if they succeeded in establishing a promissory estoppel, would not necessarily be able to recover the value of the promise--the $250,000 discounted to present value. It would seem they would have to show their actual damages: what they gave up when they signed the release in reliance on Kusmiersky's promise. Maybe they gave up little. Maybe in the end they would have signed the release without any promises, knowing that if they did not the Netzky deal might fall through and with it all prospects for recovering their fee without a lawsuit. Or maybe as ICM argues the plaintiffs were more optimistic about the prospects of the property's showing a profit than they have let on in this lawsuit.
This approach treats promissory estoppel as a tort doctrine for purposes of damages, though it is conventionally classified as a contract doctrine, see, e.g., Restatement (Second) of Contracts Sec. 90 (1979); its cousin, equitable estoppel (which requires proof of misrepresentation), is the tort doctrine, A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chemical Group, Inc.,
There is much to be said for using the value of the promise as the measure of damages, simply on grounds of simplicity. The alternative would be to try to reconstruct the hypothetical bargaining between ICM and the plaintiffs--the former threatening to walk away from the deal, the latter threatening to kill the deal: a classic bilateral monopoly situation, the indeterminacies of which we discussed in Chicago & North Western Transportation Co. v. United States,
Consistently with our leanings, the Restatement of Contracts implies, if somewhat unclearly, that the value of the promise is the presumptive measure of damages for promissory estoppel, to be rejected only if awarding so much would be inequitable. See comment d to section 90. That would not be inequitable here when we recall that no one has ever questioned the reasonableness of the plaintiffs' original--and higher--legal fee. But we need not decide whether this is the correct approach under the law of Illinois. The issue may wash out on remand; anyway we would want the district judge's views before deciding a difficult question of state law.
For the same reason we decline to reach ICM's alternative argument, which the district court did not reach either, that the plaintiffs' claim for promissory estoppel is barred by the statute of frauds because the promise that the plaintiffs seek to enforce ($250,000 over 10 years) could not be completed within one year. Two difficult questions are presented by the statute of frauds defense. The first is whether the promise was within the statute of frauds at all. Although the Illinois statute requires a writing for "any agreement that is not to be performed within the space of one year from the making thereof," Ill.Rev.Stat. ch. 59, p 1, the Illinois courts have interpreted this to mean, incapable of being performed within one year; if performance though unlikely is possible, that is enough to take the agreement outside the grasp of the statute. Martin v. Federal Life Ins. Co.,
Courts tend to take the concept of "capable of full performance" quite literally. See Farnsworth, supra, Sec. 6.4. They do this because they find the one-year limitation irksome. The limitation is apparently founded on a concern with the tendency of evidence to go stale with the passage of time, but the foundation is weak because the limitation applies even if the promise is broken the day after it is made and suit on it is brought immediately. The Illinois courts evidently share the prevailing dislike for the provision, for in a case very like this the Illinois Appellate Court held that the statute of frauds was not a bar. See Hubbard v. Logsdon,
We may seem to have overlooked an even more direct route to the conclusion that the statute of frauds is not a bar: our decision in R.S. Bennett & Co. v. Economy Mechanical Industries, Inc.,
In Bennett, a case involving a contract for the sale of goods, we relied heavily on a then-recent decision of the Illinois Appellate Court, Jenkins & Boller Co. v. Schmidt Iron Works, Inc.,
The picture in Illinois is decidedly mixed, especially when we reflect that both Bennett and Jenkins involved the statute of frauds in the Uniform Commercial Code, though Hux did not. Ceres Illinois, Inc. v. Illinois Scrap Processing, Inc.,
If forced to guess what the Illinois Supreme Court would do in a case like this we would guess (a word used deliberately) that it would hold the statute of frauds applicable to promissory estoppel (since to do otherwise would require the court to overrule two of its decisions), and thus would disapprove Bennett. But we do not think we should guess, at least without the benefit of the district judge's views. Although the issue is a pure issue of law which ordinarily we would feel free to resolve without the benefit of the district court's view, we follow the practice in diversity cases of giving substantial deference to the district judge's interpretation of the law of the state in which the judge sits. See, e.g., American Motorists Ins. Co. v. Trane Co.,
The last string on the plaintiffs' bow is restitution. Assume that if Kusmiersky had broken his contract with the plaintiffs before Netzky came on the scene, they would have had no recourse against ICM because ICM had paid Kusmiersky for the benefits they had conferred; still, by the time Netzky came into the picture, everything had changed. Kusmiersky was on his way out and ICM was on the verge of abandoning the property. Netzky appeared as a possible savior but attached two conditions to putting new capital into the property: that the back taxes be paid by ICM and that the plaintiffs release their claim. The back taxes were lower as a result of the plaintiffs' efforts, and while it is true that ICM had paid Kusmiersky to pay off the taxes he had not done so. They loomed as an obligation of ICM--an obligation less onerous as a result of the plaintiffs' efforts than it otherwise would have been. In addition, by executing the release the plaintiffs conferred a benefit on ICM by making it possible to close the deal with Netzky.
A person who confers benefits gratuitously--officiously--obtains no legal claim for compensation. If Goldstick had appeared at a meeting of ICM's shareholders and serenaded them with his violin, and the shareholders had listened raptly, still Goldstick would have no claim of restitution against ICM for benefits conferred; he would have had to negotiate a contract with ICM in advance. But when a businessman confers benefits in circumstances where payment is normal and any inference of altruism can be rejected, a claim for restitution, or "quasi-contract," arises. Industrial Lift Truck Service Corp. v. Mitsubishi Int'l Corp.,
A second benefit was conferred but its legal significance is different. As a result of Kusmiersky's departure from the scene without paying the back taxes, by the time of the negotiations with Netzky it was clear that the plaintiffs' legal work had conferred substantial benefits on ICM by reducing the amount of money it would have to pay in back taxes in order to get Netzky to put in additional capital. In this way too the plaintiffs facilitated the transaction, a transaction that conferred benefits on ICM ex ante though not ex post. But they cannot recover these benefits on a theory of restitution. The reason is the original contract that the plaintiffs signed with Kusmiersky to do the legal work that resulted in the reduction of the taxes that were past due. If the contract was authorized or ratified by ICM as Kusmiersky's principal, it defined the plaintiffs' rights against ICM and they cannot rewrite the contract by suing for restitution rather than breach of contract. Industrial Lift Truck Service Corp. v. Mitsubishi Int'l Corp., supra,
If on the other hand the contract was just between the plaintiffs and Kusmiersky, the plaintiffs cannot bring ICM in through the back door by pointing out that their contractual performance conferred benefits on ICM. To illustrate, if you do work pursuant to a contract with X, you don't expect that Y, a nonparty, will pay you if X defaults, merely because Y was benefited by your work; and expectation of payment is an essential element of a claim for restitution. For the doctrine of restitution does not make altruism a paying proposition. As its synonym "contract implied in law" brings out, it allows damages to be recovered in settings where (unlike our example of the unsolicited serenade) the parties would have agreed that there was a contractual obligation had the point occurred to them. If Kusmiersky was merely a tenant of ICM and not an agent, ICM would not have expected to have to make good on a claim by the plaintiffs arising from the performance of their contract with him; and this, as the Illinois cases make abundantly clear, defeats a claim of restitution for the benefits conferred on ICM by that performance. See, e.g., Daley v. G'Sell,
The district judge emphasized another point: that under a functional definition of ownership ICM was not the owner of the Rolling Meadows property, so much control had it given up to Kusmiersky and intended to give up to his successor, Netzky, and therefore it was not liable under Illinois law for payment of back taxes on the property. We do not understand the significance of this point. Whether under Illinois law ICM had to pay the back taxes or Netzky would have had to pay them has no economic significance. Someone had to pay them--that, or the property would have to be abandoned. Netzky was unwilling to pay them. So ICM's choice was either to pay them or abandon the property and with it all hope of recouping its investment. Since it wasn't prepared to abandon the property it had to pay the back taxes, as a matter of economics if not law; and this being so it derived a real benefit from the fact that the taxes were lower thanks to the efforts of Goldstick and Smith. It just is not the kind of benefit for which compensation can be obtained under the law of restitution.
But concerning the separate benefit that the plaintiffs conferred on ICM by releasing their contract claims against it and thereby enabling the deal with Netzky to go through, the plaintiffs may be entitled to restitution, for they would expect to be paid for the release, and paid by ICM, the beneficiary. So far as liability is concerned, it makes no difference (it could make a difference with respect to damages) whether Goldstick and Smith could have slapped a lien on the property to enforce the payment of their legal fee by Kusmiersky. Netzky refused--it doesn't matter why--to go through with a deal that ICM very much wanted unless ICM procured a release of the lawyers' claim, and by executing that release Goldstick and Smith conferred a benefit on ICM for which they are entitled to be compensated. Of course it is possible that the only compensation they sought and received was contingent on the property's yielding a profit; if so, though they are entitled to compensation, that compensation would be zero. But that is an issue in hot dispute, and a jury could find that Goldstick and Smith never accepted an offer of contingent payment.
If the plaintiffs conferred a benefit for which they reasonably expected to be compensated, and not on a contingent basis either, the next question is the "reasonable worth" of the benefit. In re Estate of Milborn,
Other grounds presented by the defendants for upholding the district judge's decision are unpersuasive. To summarize, we agree with the district judge that the plaintiffs have no claim for breach of an express contract made at the time of the deal with Netzky. They may however have claims for promissory estoppel, restitution, and breach of a contract made by Kusmiersky but authorized or ratified by ICM. We do not say they do. We hold only that they have raised genuine issues of material fact which preclude summary judgment for the defendants.
REVERSED AND REMANDED.
Notes
Hon. William J. Campbell of the Northern District of Illinois, sitting by designation