Contracts II, Pages 809–821

Market Street Associates Limited Partnership v. Frey

United States Court of Appeals for the Seventh Circuit, August 27, 1991

Facts:

J.C. Penney entered into a sale and leaseback agreement with defendant where J.C. Penney agreed to sell properties to defendant if defendant leased them back to J.C. Penney for 25 years. In paragraph 34, the contract also entitled J.C. Penney to request that defendant finance the costs of addition improvement upon the premises that cost over $250,000. It required the parties to negotiate in good faith and for defendant to sell the premises back for market value minus 6% per year since the original purchase if the negotiations failed.

Nineteen years later, one of these stores was assigned to plaintiff by J.C. Penney. Plaintiff desired to improve the premises, but could not secure funding since it did not own the shopping center. Plaintiff's general partner, Orenstein, tried to contact Erb, defendant's investment manager responsible for the property, to buy back the property. Erb initially did not reply, but eventually was contacted and said they would sell the property for $3 million dollars, which was too high for plaintiff.

Orenstein then requested $2 million in funding from defendant, with a letter that was not replied to. Plaintiff then requested it again, mentioning the contract this time, although not paragraph 34 about the improvement financing. Erb then replied before receiving plaintiff's second letter and said that defendants were not interested in in making loans for less than $7 million. Orenstein expressed his disappointment at this and stated that plaintiff would seek financing elsewhere.

A month later, Orenstein sent Erb a letter invoking the option of paragraph 34 to purchase the property at market value minus 6% per year since the sale 20 years prior. The cost after this calculation was only $1 million.

Notes:

  • 94%20 ≈ 29%

  • $1,000,000 ÷ 29% ≈ $3.4 million

Procedural History:

Trial court awarded summary judgment to defendants because plaintiff did not mention paragraph 34 during the negotiations, which was a precedent to exercising the purchase option and a violation of the duty of good faith.

Issue:

Did plaintiff's conduct violate the duty of good faith?

Rules:

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    [A] contracting party cannot be allowed to use his own breach to gain an advantage by impairing the rights that the contract confers on the other party.

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    "'Good faith' is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties."

Reasoning:

  • While the provision is implied to be contingent upon plaintiff notifying defendant about paragraph 34, it required defendant "to give reasonable consideration to providing the financing." As defendant broke the contract, it cannot be allowed to use its breach to impair plaintiff's rights.

  • Good faith does not prevent one from making a good deal that harms the other party. It would only be violated if plaintiff tried to trick defendant and succeeded in doing so. While this is possible if the facts were construed as favorably as possible to the the defendant as the trial court did, summary judgment requires that they be construed to the plaintiff's favor as the nonmoving party.

Holding:

If Orenstein believed that Erb know would find out about paragraph 34, it was not a violation of good faith, although a trial is necessary to decide this. Reversed and remanded.


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