Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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CLASSIC CHEESECAKE CO. v. JP MORGAN CHASE BANK  (October 17, 2008)

Classic Cheesecake Co. (“Classic”) is a bakery that successfully generated some interest from several Las Vegas casinos and hotels in its products. It needed additional capital to fund its expansion. In July of 2004, Classic’s principals made a pitch to Dowling, a vice president at JP Morgan Chase Bank (“Bank”). After receiving documentation, Dowling assured Classic that its loan would be approved, provided that one of its principals repaid an old student loan. Dowling continued to provide assurances to Classic as late as September 19. Meanwhile, as early as August 19, Dowling’s superior at the Bank advised her that he was “still declining” the request for funds. Dowling finally advised Classic on October 12 that the loan was not approved. [These are allegations of the complaint, taken as true.] Classic brought suit under the Equal Credit Opportunity Act (“ECOA”) and for breach of contract under Indiana law. It alleged losses of more than $1 million. The district court resolved the ECOA claim in Classic’s favor (with only modest relief) but dismissed the breach of contract claim.  Classic appeals. 

In their opinion, Judges Posner, Flaum, and Evans affirmed. The Court first rejected Classic’s attempts to cast the controversy as one of simple promissory estoppel or fraud. It limited Classic to its breach of contract remedy. The Court turned to the Indiana statute of frauds. Although the statute of frauds requires that contracts to lend money be in writing, Indiana courts have created an exception. Oral agreements unenforceable under the statute of frauds will be enforced if a failure to enforce the agreement would create an “unjust and unconscionable injury and loss” that is independent of the benefit of the bargain. The Court’s task was to decide whether the allegations of Classic’s complaint could meet that standard. The task was not an easy one, given the “vague . . . and redundant” nature of the test and the relative dearth of case law. The Court explored some history of the exception to the statute of frauds:

• The California Supreme Court’s (Traynor, J.) 1950 decision in Monarco that first allowed promissory estoppel as a defense to the statute of frauds but only if “unconscionable injury or unjust enrichment” would otherwise result
• Restatement (Second) of Contracts section 139(1) which allows promissory estoppel as a defense if “injustice” is avoided but which Indiana has not embraced
• The only two cases (Madison Tool & Die and Keating) that survived summary judgment under the Indiana formula

The Court noted that Monarco contained an element of unjust enrichment but neither Madison nor Keating did. Each of the cases contained significant “reliance” losses beyond the loss of the contract bargain, but the Court said that simple reliance losses (i.e., promissory estoppel) certainly does not meet the Indiana test. The Court held that the Indiana test, a compromise between the policy behind the statute of frauds and the desire to protect reasonable reliance, requires proof of "enhanced" reliance. The common thread among Monarco, Madison, and Keating was a time factor. In each case, the reliance continued for a longer time (20, 3, and 1.5 years) than the few months at issue for Classic. The Court also observed that Classic’s reliance may not have been totally reasonable. The Court concluded that Classic did not meet the enhanced promissory estoppel test and the complaint was properly dismissed.