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United States Court of Appeals for the Seventh Circuit - 941 F.2d 588
Tags: Contracts, Duty of good faith, Misrep
tl;dr:
One company invoked a clause in an agreement with another company in hopes that the this company had forgotten one particular paragraph in the agreement that would prove useful.Video Summary
Case Summary
In the 1991 case, Market Street Associates v. Frey, the U.S. Court of Appeals for the Seventh Circuit dealt with an important topic concerning the duty of good faith and fair dealing in commercial lease agreements. This case clarified the extent of this implied covenant, which is crucial for making sure that contract parties fulfill their duties in line with each other's reasonable expectations.
J.C. Penney entered a sale-leaseback agreement with General Electric Pension Trust (defendant), selling properties to the trust and leasing them back for 25 years. The lease allowed for financing requests for property improvements, and the ability to buy the property if those financing requests were denied.
J.C. Penney assigned a lease to Market Street Associates Limited Partnership (the plaintiff), who sought financing for a drugstore construction. After unsuccessful financing attempts, Market Street tried buying the property back but found the trust's $3 million price too high. Market Street requested $2 million in financing without referencing the clause in the lease (specifically paragraph 34) that allowed the leasee, now Market Street, to buy back the property a low price if the leasor (General Electric Pension Trust) did not finance improvements.
The trust only considered loans over $7 million. Failing to find financing, Market Street tried exercising its purchase option, but the trust refused. Market Street sued to compel specific performance, but the district court granted summary judgment to the trust, leading to an appeal.
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The legal case involves a contract dispute between J.C. Penney Company and General Electric Pension Trust over a sale and leaseback arrangement. The court confirms diversity of citizenship between the parties and reminds lawyers and judges to carefully monitor federal jurisdiction, especially in diversity cases involving unconventional entities such as partnerships and trusts. The judge granted summary judgment for the pension trust on the grounds that Market Street Associates failed to mention paragraph 34 of the lease in their correspondence with the pension trust, which prevented negotiations over financing, a condition precedent to the lessee's exercise of the purchase option. The judge also found that this failure violated the duty of good faith, which is read into every contract in Wisconsin. The duty of good faith prohibits opportunistic behavior that a mutually dependent, cooperative relationship might facilitate without any governing rules. The concept of "good faith" in contracts could be replaced with the idea of implied conditions that are necessary due to the unpredictability of the future at the time the contract was made. The district judge agreed with the pension trust's argument that Market Street Associates has a possible remedy, and therefore, the pension trust's position is untenable.
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