Market Street Associates Limited Partnership v. Frey

Brief Fact Summary. Market Street Associates Limited Partnership (Plaintiff), lessee, brought an action against Dale Frey (Defendant), lessor, alleging breach of lease.  Plaintiff appealed from a judgment of the district court granting summary judgment for the Defendant.

Synopsis of Rule of Law. There is a duty of good faith implied in every contract, which states that there is an implied undertaking by the parties not to take advantage in way that could not have been contemplated at the time of drafting the contract and which was not resolved by the parties.

Facts. In 1968, J.C. Penney Company (Penney) entered into a sale contract and leaseback arrangement with General Electric Pension Trust (Defendant) in order to finance Penney’s growth.  The arrangement provided that Penney was to sell properties to the Defendant, which the trust then leased back to Penney for a term of 25 years.  Paragraph 25 of the lease entitled lessee to request that lessor (pension trust) to finance the costs and expenses of construction of additional improvements provided the amount of the costs and expenses is at least $250,000.00.  Upon receiving the request the lessor agrees to give it reasonable consideration and provides that they shall negotiate in good faith.  Paragraph 34 also states that if negotiations shall fail the lessee shall be entitled to repurchase the property at a price roughly equal to the price at which Penney sold it to the Defendant plus 6% a year for each year since the original purchase.  One of the leases was a shopping center, which in 1987, Penney assigned to Plaintiff.  Plaintiff received an inquiry from a drugstore chain a year later to open a store in the shopping center provided that Plaintiff build the store.  The lessor of the shopping center sought financing from other sources than the Defendant.  They were also unwilling to lend the necessary funds without a mortgage on the shopping center, which Plaintiff could not obtain because it was not the owner of the shopping center.  Therefore, Plaintiff tried to buy the property back from the Defendant.  Plaintiff contacted the Defendant and finally received an offer to buy the property for $3 million, however, Plaintiff considered this to be too high.  Plaintiff then wrote a letter to the Defendant requesting funding for $2 million in improvements to the shopping center. However it made no reference to paragraph 34 of the lease.  The Defendant did not respond.  Plaintiff sent a second letter with a general reference to the lease and said that if the pension trust was unwilling to provide financing then the wanted to enter into negotiation to amend the round lease.  The following day, the pension trust sent a letter refusing the original request for funding.  Plaintiff sent a letter in response stating that they would seek financing elsewhere.  Then Plaintiff sent another letter to the Defendant stating that they were exercising the option in paragraph 34 to purchase the property in the event that negotiations over financing broke down.  The Defendant refused to sell, and this suit was brought by the Plaintiff for specific performance.  The district court granted summary judgment for the Defendant on the grounds that by failing to correspond with Defendant to mention paragraph 34 of the lease Plaintiff prevented negotiations over financing that are a condition precedent to the lessee’s exercise of the purchase option from taking place; and on the ground that failure violated the duty of good faith.  Plaintiff appeals.

Issue. Whether the Plaintiff violated the implied duty of good faith under the lease agreement?

Held. A question of whether the Plaintiff violated the implied duty of good faith exists.  Judgment reversed and remanded. 
•    There is a genuine issue of fact as to whether Plaintiff acted in bad faith in failing to point out to the Defendant, a paragraph in the lease which gave lessee right to purchase property under terms specified in that paragraph in the event negotiations over financing improvements to property broke down.  The duty of good faith is not a duty of candor. You can make a contract to purchase something that you know your seller undervalues.  However, you may not take advantage of an oversight by your contract partner concerning his rights under the contract.  This is sharp dealing and may be actionable as fraud or deceit.  However, this is a contact case and not a tort case so the conduct may not rise to the level of fraud necessary to violate the duty of good faith.  Therefore, the duty of good faith is between a fiduciary duty and the duty to refrain from fraud.  Good faith is an implied undertaking not to take advantage in way that could not have been contemplated at the time of drafting and which therefore was not resolved explicitly by the parties.  Emphasis is put on the post-contractual rather than the pre-contractual stage. 
•    Here, Plaintiff tried to trick the Defendant and succeeded in doing so.  Plaintiff did not want financing from the Defendant and when it learned that it could not get the financing without owning the property the Plaintiff wanted to purchase the property.  Therefore, Plaintiff tried to trick the Defendant into forcing them to sell the Plaintiff the property under paragraph 34 by not mentioning it in the various letters requesting financing.  However, the facts must be construed in favor of the nonmoving party when a motion for summary judgment is before the court.  Thus, it could appear that the Plaintiff was not at fault.  Therefore, there is a genuine issue of fact whether the Plaintiff acted in good faith and the Motion for Summary Judgment should be dismissed.

Discussion. This case also had a jurisdictional issue; the suit was filed in a Wisconsin state court and removed to federal district court.  Defendants were required to file a petition for removal to federal court.  In this petition, there was a mistake as to the  citizenship that counts in the case of a limited partnership, and it stated that the partnership was a resident of Wisconsin.  However, the citizenship of all of the partners of the limited partnership needs to be taken into account.  Affidavits proved that none of the Defendants were residents of Wisconsin.  The court decided that there was complete diversity of citizenship, although not all of the limited partners are from Wisconsin, none of them are citizens of the same state as the Plaintiff.