Cosgrove v. Bartolotta
150 F.3d 729 (1998)
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Rule of Law:
For purposes of federal diversity jurisdiction, the citizenship of a limited liability company (LLC) is determined by the citizenship of all its members. For a promissory estoppel claim, reliance is established if the promisee incurs a cost, which can include the assumption of a legally binding risk, such as a loan pledge, even if the loan is never disbursed.
Facts:
- Joseph Bartolotta sought to open a new restaurant and asked Barry Cosgrove, an experienced corporate lawyer and family friend, for assistance.
- Bartolotta promised Cosgrove a 19 percent ownership interest in the restaurant in exchange for Cosgrove's business and legal advice and a $100,000 loan.
- In reliance on this promise, Cosgrove pledged to make the $100,000 loan, an action which helped Bartolotta secure necessary bank financing for the venture.
- Cosgrove also provided professional services by assisting Bartolotta in negotiating the restaurant's lease, arranging the bank loan, and advising that the business be structured as an LLC.
- After all arrangements were complete and Cosgrove was prepared to make the loan, Bartolotta secured alternative financing.
- Bartolotta then cut Cosgrove out of the deal, refusing to grant him the promised ownership interest.
- The restaurant subsequently opened and became a successful venture.
- Cosgrove never actually made the $100,000 loan to Bartolotta.
Procedural Posture:
- Barry Cosgrove filed a diversity suit against Joseph Bartolotta and Mary-Bart, LLC in the United States District Court.
- A jury found for Cosgrove on claims of promissory estoppel, misrepresentation, and unjust enrichment, awarding him a total of $135,000 in damages, but found against him on a breach of contract claim.
- The defendants filed a motion under Fed. R. Civ. P. 59(e) to alter or amend the judgment.
- The district court judge granted the motion in part, vacating the $117,000 award for promissory estoppel on the grounds that Cosgrove failed to prove reliance.
- The judge subsequently denied Cosgrove's motion for costs, ruling his remaining damage award was below the statutory minimum for diversity jurisdiction.
- Both parties appealed to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a promisee's pledge to make a loan, which is never actually disbursed, and the provision of professional services constitute sufficient costly reliance to support a claim for promissory estoppel under Wisconsin law?
Opinions:
Majority - Posner, Chief Judge
Yes. A promisee's pledge to make a loan and the provision of professional services are sufficient to establish reliance for a promissory estoppel claim. The court first established federal diversity jurisdiction by holding that the citizenship of a limited liability company (LLC) is determined by the citizenship of its members. On the merits, the court found that the district judge erred in setting aside the jury's verdict. Reliance, a key element of promissory estoppel, requires that the promisee incur a cost. Here, Cosgrove incurred costs in two ways. First, his pledge of a $100,000 loan was not costless; it put him at legal risk because Bartolotta could have enforced the pledge under the doctrine of promissory estoppel, especially if the venture had become risky and other financing was unavailable. Second, Cosgrove, a professional, rendered valuable legal and business services, the cost of which is the forgone opportunity to use that time for other valuable purposes. Because a reasonable jury could find Cosgrove incurred these costs in reliance on a firm promise, not merely a speculative hope, the promissory estoppel claim was valid.
Analysis:
This decision clarifies two significant legal points. First, it establishes the prevailing rule for determining the citizenship of an LLC for federal diversity jurisdiction, treating it like a partnership rather than a corporation. This holding prevents parties from using the LLC structure to easily manufacture diversity jurisdiction. Second, the opinion broadens the definition of 'reliance' in promissory estoppel beyond direct out-of-pocket expenses. By recognizing that incurring a legally binding risk constitutes a detrimental cost, the court strengthens the ability of promisees to enforce promises made during the formative stages of business ventures, even when the promised actions are not fully executed.
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