Market Street Associates Limited Partnership v. Dale Frey
21 F.3d 782, 1994 U.S. App. LEXIS 7475 (1994)
Rule of Law:
The implied duty of good faith in contract performance prohibits a party from deliberately taking advantage of a counterparty's inadvertent oversight or mistake regarding their rights and obligations under the agreement.
Facts:
- J.C. Penney sold a property to the General Electric Pension Trust and leased it back under an agreement containing 'Paragraph 34,' which allowed the lessee to repurchase the property at a specific formula price if the Trust refused to negotiate financing for improvements.
- Market Street Associates (MSA) later acquired the leasehold interest from Penney and sought to add a drugstore to the property, which required capital improvements.
- MSA initially inquired about purchasing the property, and the Trust offered to sell it for $3 million, a price significantly higher than the Paragraph 34 formula price, indicating the Trust was unaware of the provision.
- Realizing the Trust's ignorance of the clause, MSA's general partner Orenstein sent a letter requesting financing for $2 million in improvements without explicitly referencing Paragraph 34 or the buy-back consequences of a refusal.
- The Trust, viewing the request as a standard business proposal, sent a form rejection letter because the request was below their $10 million minimum investment threshold.
- Immediately upon receiving the rejection, Orenstein wrote back accepting the refusal and stating MSA would look elsewhere, preventing the Trust from reconsidering.
- Shortly thereafter, MSA notified the Trust it was exercising its option under Paragraph 34 to purchase the property at the lower calculated price based on the Trust's failure to negotiate financing.
Procedural Posture:
- MSA sued the Trust in federal district court seeking specific performance to force the sale of the land.
- The district court initially granted summary judgment in favor of the Trust.
- The Court of Appeals (7th Circuit) reversed the summary judgment and remanded the case for a trial specifically to determine if MSA acted in good faith.
- The district court held a bench trial and entered judgment for the Trust, finding MSA breached the duty of good faith.
- MSA appealed the district court's post-trial judgment to the Court of Appeals (7th Circuit).
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Issue:
Does a party breach the implied duty of good faith in contract performance when it knowingly takes advantage of a counterparty's unilateral mistake by requesting financing under a contract provision without disclosing that a refusal will trigger a buy-back option at a significantly discounted price?
Opinions:
Majority - Wood, Jr.
Yes, a party breaches the duty of good faith when it attempts to trick a contracting partner by exploiting a known oversight. The court affirmed the district court's finding that Orenstein intended to deceive the Trust. Under Wisconsin law, the duty of good faith is implied in every contract to prevent opportunistic behavior. The evidence showed that Orenstein knew the Trust was not operating under Paragraph 34 because the Trust had previously quoted a sale price far above the contract's formula price. By sending ambiguous letters that deliberately omitted reference to the critical lease provision, Orenstein ensured the Trust would reject the financing request, thereby triggering the option for MSA to buy the property at a discount. This calculated silence was designed to keep the Trust 'blind and stupid' regarding the consequences of their rejection, constituting a breach of the duty of good faith.
Analysis:
This case serves as a critical illustration of the 'good faith' doctrine in contract law, particularly regarding 'opportunistic behavior.' While parties to a contract are not fiduciaries and do not have a duty to prioritize the other's interests, they cannot actively exploit a partner's obvious error or oversight. The decision distinguishes between sharp business practices (which are allowed) and active trickery or deceit (which violates good faith). It reinforces the principle that contract performance requires a minimum standard of honesty and fair dealing, specifically prohibiting conduct intended to trap a counterparty into an unintended forfeiture or loss.
