Market Street Associates Limited Partnership, a Wisconsin Limited Partnership, and William Orenstein, as General Partner of Market Street Associates Limited Partnership, Plaintiffs v. Dale Frey, Arthur Bahr, John H. Myers

Citations: 21 F.3d 782; 1994 U.S. App. LEXIS 7475Docket: 93-2119

Court: Court of Appeals for the Seventh Circuit; April 13, 1994; Federal Appellate Court

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Market Street Associates Limited Partnership and its general partner, William Orenstein, appeal a judgment favoring defendants, including General Electric Pension Trust, regarding a contract for financing property improvements. The case, previously reviewed by the Seventh Circuit, involved questions of whether Market Street breached its duty to negotiate in good faith with the Trust. The district court, following remand, found that Orenstein did not act in good faith during negotiations, leading to a ruling that denied Market Street specific performance of the contract.

The dispute centers on a sale and leaseback arrangement initiated by J.C. Penney Company, which sold four properties to the Trust in exchange for a long-term lease, intended to finance Penney's growth. Market Street acquired one of these properties, the West Allis property, and sought to improve it for a potential tenant, Phar-Mor. The original contract stipulated that any improvements required the Trust's consideration for financing, with an obligation for both parties to negotiate in good faith. After failed negotiations in 1988 for financing or sale of the property, Market Street filed suit. The court's remand focused on Orenstein's intent and witness credibility, ultimately concluding that Market Street's lack of good faith precluded them from specific performance of the contract.

Following a bench trial, the district court established critical findings of fact regarding the negotiations between Market Street and the Trust, which led to the conclusion that Market Street did not engage in good faith contract performance, disqualifying it from seeking specific performance. The findings examined a series of communications, particularly letters and phone calls between Orenstein and David Erb, an investment manager for General Electric Investment Corporation, which advises the Trust's Trustees.

Initially, Market Street expressed interest in purchasing the West Allis property, believing that ownership would facilitate financing and resale. Orenstein sent a letter to Erb on June 8, 1988, to initiate discussions about the potential purchase. Although Erb did not recall receiving this letter, he typically would forward it for review. When Erb failed to respond, Orenstein followed up and learned from Erb that the Trust was open to selling the property for $3 to $3.1 million—substantially higher than the amount specified in the lease's paragraph 34, although Orenstein could not confirm whether he calculated this figure at that time. Following this exchange, Orenstein perceived a lack of interest from the Trust in continuing negotiations.

On July 28, 1988, Orenstein proposed a financing arrangement for property improvements in a letter to Erb, indicating Market Street's negotiations with Phar-Mor, Inc. for a $2 million addition. However, on August 10, 1988, Erb rejected this financing request, stating it did not align with the Trust's investment criteria. Before receiving this rejection, Orenstein sent a follow-up letter on August 16, 1988, reiterating the urgency of the financing request without referencing paragraph 34 or the buyout clause, citing an office practice of avoiding specific lease provisions to prevent errors in referencing contract details.

On August 17, Orenstein received a rejection letter from the Trust dated August 10, prompting him to respond on August 22, expressing disappointment and indicating that Market Street would seek financing elsewhere. Orenstein did not refer to paragraph 34 of the contract until September 27, 1988, when he informed Erb, through a counsel-drafted letter, that Market Street was exercising its purchase option under that paragraph. Erb testified that this was the first instance the Trust became aware of paragraph 34. On December 15, 1988, during a meeting in Milwaukee, Erb proposed to negotiate financing, which Orenstein declined, citing prior commitments made by Market Street. When the closing date came, the Trust refused to convey the property, leading Market Street to file a lawsuit for specific performance of the contract under paragraph 34.

The court's review of factual determinations from the bench trial is for clear error, while legal conclusions are evaluated de novo. This distinction arises because the district court is better positioned to assess evidence and witness credibility. Wisconsin law implies a duty of good faith in contracts, which serves to protect parties from opportunistic behavior that exploits oversights. The central question is whether Market Street acted in bad faith by misleading the Trust regarding its rights under the contract during their interactions in 1988, an inquiry that will be assessed for factual accuracy under Wisconsin law.

The plaintiffs do not dispute the district court's factual findings but challenge its conclusion that Orenstein intended to deceive the Trust. The district court found that Market Street's communication with the Trust, limited to three letters from Orenstein to Erb, indicated a lack of good faith. Initial correspondence began on June 8, when Orenstein proposed purchasing the West Allis property. After negotiations, the Trust offered to sell the property for $3 to $3.1 million, significantly higher than the price in paragraph 34. When Orenstein realized Market Street could not afford the property, he sought financing, sending a letter on July 28 regarding $2 million in improvements. The Trust, not interested in financing under $10 million, sent a rejection letter on August 10.

Prior to receiving this rejection, Orenstein sent an August 16 letter inquiring about financing per the lease, without mentioning paragraph 34. Following the rejection, he sent an August 22 letter stating that Market Street was pursuing financing with other lenders, thereby misleading the Trust into thinking no further action was necessary. The district court determined that Orenstein's actions implied an intent to deceive the Trust, which violated the duty of good faith. The court found no clear error in this assessment, supported by substantial evidence, though the plaintiffs argue the court did not address Orenstein's state of mind. However, the court effectively concluded that Orenstein knew the Trust had not considered paragraph 34 after receiving the August 10 rejection.

Orenstein initially assumed that the Trust would evaluate the lease for financing in accordance with paragraph 34 but later recognized that the Trust was not operating under that paragraph. Despite this knowledge, he failed to inform the Trust and continued to send ambiguous correspondence until he sought to use a purchase option for the property at a reduced price. The court concluded that Orenstein breached his duty of good faith in dealings with the Trust, leading to Market Street's ineligibility for specific performance. The court found that Orenstein intended to deceive the Trust through his actions, developing a plan to acquire valuable property at significantly below market value. 

The plaintiffs argued their conduct did not breach good faith, referencing correspondence from August 1988. They contended that an August 16 letter corrected any misunderstanding about the Trust's awareness of financing being sought under the lease. However, the court emphasized that the critical issue was Orenstein's silence regarding paragraph 34 rather than the lease itself. By failing to mention paragraph 34, Orenstein effectively concealed Market Street's intent to purchase the property at the discounted price, violating the implied duty of good faith in contract performance. The court found no clear error in the determination that Orenstein's vague letters were intended to mislead the Trust, thus affirming the judgment for the defendants and ruling out specific performance.

1 Market Street is a Wisconsin partnership focused on real estate development, while the defendant, General Electric Pension Trust, is established for the benefit of General Electric Co. employees. The trustees of the Trust are also named as defendants in their representative roles. The key issue involves a contract provision (paragraph 34) allowing the lessee to request financing for additional improvements, with specific requirements for the request to qualify (minimum of $250,000). If the parties cannot agree on financing terms, the lessee can repurchase the property at a calculated price, approximately $1.1 million according to briefs, based on the unamortized cost and accrued interest.

The district court did not calculate this repurchase price. Market Street argues that the Trust did not honor its obligation to negotiate in good faith regarding financing due to a misunderstanding that paragraph 34 was personal to another party. However, the court found that the real issue was Orenstein's state of mind and good faith, not causation, and determined that the Trust was willing to negotiate financing in December 1988.

Market Street's claim that the Trust had a final opportunity to correct its misunderstanding after receiving a September letter is dismissed, as the Trust had already offered financing earlier. The argument that the Trust's late assertion of a good faith defense indicates trickery is also rejected, as there was no evidence that the Trust would have negotiated in summer 1988.

Orenstein's testimony regarding the Trust's review of the lease and the implications of paragraph 34 was not included in the district court's findings, possibly due to credibility issues or speculation. This testimony does not contradict the district court's finding that Orenstein recognized the Trust's misunderstanding after receiving a rejection letter.