Statute Of Frauds Does Not Apply To Illinois Promissory Fraud Claim
BPI ENERGY HOLDINGS v. IEC (MONTGOMERY), LLC (December 8, 2011)
BPI is in the business of producing natural gas from coal. Drummond Company is a large coal mining company. Because companies like BPI need access to coal from which to extract natural gas and companies like Drummond need someone like BPI to extract the gas before it can be safely mine the coal, alliances between companies like these are common. BPI and Drummond entered into a memorandum of understanding pursuant to which the parties agreed that BPI would sell its coal rights to Drummond and Drummond would lease to BPI the extraction rights in its coal holdings. The MOA stated that it was not a binding agreement and merely was intended to form the basis of an agreement. The parties soon entered into a letter of intent that was more specific. It identified BPI's coal interests and Drummond's gas extraction opportunities and further described the alliance expectations of the parties. It also provided, however, that it was not binding upon the parties and it did not provide the terms for the gas extraction leases. Notwithstanding the nonbinding nature of the agreement, BPI began transferring some of its coal rights to Drummond. Drummond did not return the favor and eventually terminated the alliance. BPI brought suit against Drummond for promissory fraud. Chief Judge Herndon (S.D. Ill.) granted summary judgment to Drummond. BPI appeals.
In their opinion, Seventh Circuit Judges Posner, Sykes, and Hamilton affirmed. Because there was no contract between the parties, BPI brought its action based on promissory fraud. Although promissory fraud is recognized in Illinois, it is recognized only if it is part of a scheme to defraud. Illinois’ "scheme" requires either a pattern of fraudulent statements or a particularly egregious one. The Court first addressed and rejected Drummond's statute of frauds defense. Although it characterized Illinois' position as "murky," it concluded that Illinois has adopted the majority rule that promissory fraud is a tort and not subject to the Statute of Frauds. Turning to the merits of the fraud claim, the court simply concluded that BPI's evidence was insufficient. The Court also noted that the case would fail for lack of reliance. Both the memorandum and the letter of intent with were nonbinding. Both anticipated that a final, binding agreement would be negotiated. They had not yet even agreed on the terms for the gas extraction leases. Drummond's reliance on these nonbinding agreements was reckless and does not satisfy the justifiable reliance element of fraud.
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Before its bankruptcy, Goldblatt's operated six stores in the Chicago area. In January 2003, Great American Group agreed to buy the inventory at two of the stores at a deep discount. Shortly thereafter, Great American agreed to do the same with the inventory at the other four stores. Both sales were contingent on the independent appraisal of the inventories. Both sales were approved by LaSalle Bank, Goldblatt's principal creditor. Before the sales, Great American learned that inventory purchased for $450,000 had been moved from the four stores to the two stores. Great American did not advise the Bank of that fact. The independent appraisal of the first sale confirmed that the inventory was worth at least as much as it had been represented. The appraisal of the inventory from the four other stores, however, indicated that the inventory was worth at least $2 million less than Goldblatt's had estimated. The results of the second appraisal entitled Great American to a refund of approximately $1 million from Goldblatt's. LaSalle Bank, although required by contract to pay, refused to do so. The bankruptcy court, after a trial, concluded that Great American was legally obligated to disclose the movement of the inventory to LaSalle. The court concluded, however, that LaSalle would not have acted any differently had it known and that LaSalle had not shown that it incurred any loss from the movement. On appeal, the district court reversed. The district court agreed that Great American owed a duty of disclosure to LaSalle. However, it held that the fraud excused LaSalle Bank from any obligation to perform. Great American appeals.
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