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MAY'S FAMILY CENTERS, INC. v. GOODMAN'S

United States District Court, Northern District of Illinois, E.D


September 19, 1983

MAY'S FAMILY CENTERS, INC., PLAINTIFF,
v.
GOODMAN'S, INC., DEFENDANT.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER*fn*

May's Family Centers, Inc. ("May's") has sued Goodman's, Inc. ("Goodman's") for (1) breach of contract and (2) tortious interference with a business relationship between May's and Zayre Corp. ("Zayre").*fn1 Goodman's moves under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss May's six-count Amended Complaint (the "Complaint")*fn2 for failure to state a claim upon which relief can be granted. For the reasons stated in this memorandum opinion and order, each component of Goodman's motion is denied.

Facts*fn3

Central National Bank of Chicago ("CNB"), legal titleholder to the Premises,*fn4 leased them to Goodman's in December 1964. Then in November 1971 Goodman's and CNB, as lessors, leased the premises to Kankakee Bell Discount Department Store, Inc. ("Kankakee"), which later assigned that lease as amended (the "Main Lease") to Belscot Department Stores of Illinois, Inc. ("Belscot of Illinois").*fn5

On June 22, 1978 Belscot of Illinois in turn demised the Premises to May's (under the "Sublease") with Goodman's consent. Sublease ¶ 10 provides:

    INCORPORATION BY REFERENCE: The provisions of the
    Main Lease are incorporated herein and made part of
    this Sublease with the same force and effect as if
    set forth at length herein, and this Sublease is
    subject and subordinate to all of the terms,
    provisions, covenants, undertakings, agreements,
    obligations and conditions contained herein.

However, because Goodman's consent had been given in advance by a June 15 letter,*fn6 there is nothing in the record to show Goodman's had any knowledge of Paragraph 10.

On January 21, 1981 May's (with Belscot's agreement) entered into an agreement with Zayre (the "Agreement") to assign the Main Lease to Zayre for $500,000. Almost exactly a year later May's asked Goodman's to consent to the assignment pursuant to Main Lease § 6.01 ("Section 6.01"):

    Lessee will not assign this Lease in whole or in
    part, nor sublet all or any part of the leased
    premises, without the prior written consent of
    Lessor in each instance, which consent shall not be
    unreasonably withheld. It shall not be deemed to be
    unreasonable for Lessor to refuse consent to a
    proposed assignee which does not have a net worth
    equal to Belscot's net worth as of the date of the
    assignment and which does not have a history of
    operating retail discount or department stores in a
    manner similar to that of Lessee. The consent by
    Lessor to any assignment or subletting shall not
    constitute a waiver of the necessity for such
    consent to any subsequent assignment or subletting.
    This prohibition against assigning or subletting
    shall be construed to include a prohibition against
    any assignment or subletting by operation of law. If
    this Lease be assigned, or if the leased premises or
    any part thereof be underlet or occupied by anybody
    other than Lessee, or its permitted licensees and
    concessionaires, Lessor may collect rent from the
    assignee, under-tenant or occupant, and apply the
    net amount collected to the rent herein reserved,
    but no such assignment, underletting, occupancy or
    collection shall be deemed a waiver of this
    covenant, or the acceptance of the assignee,
    under-tenant or occupant as tenant, or a release of
    Lessee or any Guarantor from the further performance
    by Lessee or any Guarantor of covenants on the part
    of Lessee herein contained. Notwithstanding any
    assignment or sublease, Lessee or any Guarantor
    shall remain fully liable on this Lease and shall
    not be released from performing any of the terms,
    covenants and conditions of this lease unless Lessor
    has consented to said sublease as herein provided.
    Nothing contained herein shall prevent Lessee from
    granting sublicenses or concessions for the conduct
    of any department within Lessee's store as long as
    said department is operated as part of Lessee's
    store and its gross sales are reported as part of
    Lessee's herein.

Goodman's refused such consent even after May's told Goodman's (1) the Agreement would expire February 6, 1982*fn7 and (2) May's needed the $500,000 to carry on its retail business.

After the Agreement had already expired, Goodman's did belatedly consent to May's proposed assignment to Zayre. May's then asked Zayre to renew its offer. Zayre agreed to do so if May's would deliver Goodman's consent before April 2, 1982. Some time before April 2 Goodman's communicated directly with Zayre and led it to believe Goodman's would not consent. Zayre then refused to negotiate further with May's.

Each of the six counts in the Complaint is premised on that series of events but alleges a different theory or different damages:

      1. Count I alleges breach of the Main Lease,
    causing the loss of Zayre's $500,000.

      2. Count II asserts $10 million in consequential
    damages resulted from that breach (because May's
    lost its entire retail business for want of the
    $500,000).

      3. Count III is like Count I, except that May's
    advances the claim as Belscot's agent as well as on
    its own behalf.

      4. Count IV asserts the same agent-and-principal
    theory as Count III and the same $10 million
    consequential damages as Count II.

      5. Count V charges Goodman's interfered with May's
    business relationship with Zayre, causing $500,000
    in damages.

      6. Count VI makes the same substantive claim but
    asserts $20 million in damages because of May's loss
    of its retail business.

Complaint Counts I-IV: Theory of Liability

Counts I through IV all turn on the same issue: Can May's sue to enforce Section 6.01? Goodman's says May's, as a non-party to the Main Lease, cannot do so because:

1. May's is not in privity with Goodman's.

      2. Nor is May's an intended third-party
    beneficiary of the Main Lease.

May's responds to both contentions by asserting:

      1. Privity exists because Sublease ¶ 10
    incorporated all provisions of the Main Lease, and
    Goodman's consented to the Sublease. Indeed
    Goodman's admitted such privity exists by asserting
    a claim directly against May's in the bankruptey
    proceeding.

      2. May's is within the class of entities intended
    to benefit from Section 6.01. As a third-party
    beneficiary it can enforce the Main Lease.

Only one of May's theories need be successful to sustain its claims. Because the second does the job, this Court need not consider the dubious first theory.

Under Illinois law a non-party can sue on a contract only if the parties intended to benefit that non-party. Carson Pirie Scott & Co. v. Parrett, 346 Ill. 252, 257, 178 N.E. 498, 501 (1931). Though the contract need not name the third party specifically, it must sufficiently describe or designate the non-party. Candlewick Lake Utilities Co. v. Quinones, 82 Ill. App.3d 98, 103, 37 Ill.Dec. 479, 483, 402 N.E.2d 369, 373 (2d Dist. 1980). Whether someone may sue as a third-party beneficiary depends on the intent of the parties, determined on a case-by-case basis. Securities Fund Services, Inc. v. American National Bank and Trust Co. of Chicago, 542 F. Supp. 323, 329 (N.D. Ill. 1982).

Application of those principles to the present case brings May's squarely under the mantle of Section 6.01 as an intended beneficiary of Goodman's promises. By its specific terms Section 6.01 contemplated the possibility of successive assignments or sublettings:

      1. It expressly negated any one consent as "a
    waiver of the necessity for such consent to any
    subsequent assignment or subletting."

      2. Most significantly, Goodman's express
    contractual undertaking in favor of the proposed
    assignor ("consent shall not be unreasonably
    withheld") is also expressly made applicable to
    every proposed assignment ("prior written consent of
    Lessor [Goodman's] in each instance").

Goodman's direct contemplation of successive assignments, coupled with its direct promise as to each such assignment,*fn8 sharply distinguishes this case from Goodman's effort to rely on such cases as Slate Printing Co. v. Metro Envelope Co., 532 F. Supp. 431, 433-34 (N.D.Ill. 1982)(where this Court held a mere assertion the supplier knew the manufacturer intended to sell the product did not make the buyer an intended third-party beneficiary).

Thus May's has alleged the facts required under Rule 12(b)(6) standards to state a claim as an intended third-party beneficiary of Section 6.01. That sustains the Complaint's first four counts in terms of liability, but it remains necessary to examine the sufficiency of the added damage claims of the even-numbered among those counts.

Complaint Counts II and IV: Consequential Damages

Counts II and IV seek consequential damages*fn9 based on Goodman's alleged violation of Section 6.01. That claim is based on May's having told Goodman's the Agreement would expire February 6, 1982 and the Zayre $500,000 "was necessary to enable May's to continue to carry on its retail business" (Count II ¶ 11 and Count IV ¶ 12). Goodman's counters such knowledge of possible consequential damages has to be communicated at the time the contract (in this case the Main Lease) was entered into, not at some later date when the situation arises. Unfortunately neither party has really addressed the conceptual underpinnings that should be examined to decide the question.

To recover consequential damages based on lost profits, May's would ordinarily have to prove (1) the fact and amount of the loss with a reasonable degree of certainty, (2) Goodman's wrongful act caused the loss and (3) the profits were reasonably within the contemplation of Goodman's when the contract was entered into. Student Transit Corp. v. Board of Education of the City of Chicago, 76 Ill. App.3d 366, 369-70, 32 Ill.Dec. 122, 124, 395 N.E.2d 69, 71 (1st Dist. 1979). Both elements (1) and (2) are adequately asserted by the Complaint (given Rule 8's notice pleading approach). What remains for decision is whether the third component is applicable to a situation like that presented here.

Hadley v. Baxendale and its progeny proceed from the premise a party cannot fairly be saddled with the "costs of untoward consequences of a course of dealing" unless there is real "foreseeability of harm." EVRA Corp. v. Swiss Bank, 673 F.2d 951, 957, 959 (7th Cir. 1982). In economic terms the need for notice before formation of the contract is to enable the risk-taker to build the cost of that risk into the price for its goods or services. 11 Wihiston, Contracts § 1357, at 295 (3d ed. 1968); cf. 5 Corbin, Contracts § 1008, at 74-75 (1964).

Somehow the general goods-and-services rule does not appear to fit here, at least at the threshold pleading stage. In the very different situation posed by this case, this Court's Erie function is not simply to parrot the conventional formulation from Illinois cases on which Goodman's relies. EVRA put it well, 673 F.2d at 956:

  As so often in diversity cases, there is an
  irreducible amount of speculation involved in
  attempting to predict the reaction of a state's courts
  to a new issue. The best we can do is to assume that
  the Illinois courts would look to the policies
  underlying cases such as Hadley and Siegel [v. Western
  Union Tel. Co., 312 Ill. App. 86,  37 N.E.2d 868
  (1941)] and, to the extent they found them pertinent,
  would apply those cases here.

As an original matter, the reasons that support the requirement of notice when the contract was formed do not necessarily operate here. After all the Main Lease's "not unreasonably withhold consent" clause does not normally have a price attached to it.*fn10 On this Rule 12(b)(6) motion, Goodman's as lessor has advanced nothing to show any unfairness in its having to bear risks that were, after all, identified before it was required to act on the request for consent. And Section 6.01 may perhaps be viewed in the same way as an ongoing offer by Goodman's as lessor — an offer that ripens into a contract whenever the current lessee seeks consent to a new assignment.

As our Court of Appeals said in EVRA, 678 F.2d at 957:

      [T]he animating principle of Hadley v. Baxendale
    . . . is that the costs of the untoward consequence
    of a course of dealings should be borne by that
    party who was able to avert the consequence at least
    cost and failed to do so.

That would seem to point to Goodman's rather than May's at this point in the lawsuit (with May's having the benefit of all favorable inferences).*fn11 When this Court becomes better informed in factual terms farther into the litigation, perhaps the result may change. For the present, however, Counts II and IV survive.

Complaint Counts III and IV: May's as Belscot's Agent

May's has alleged it acted as Belscot's agent (Count III and Count IV ¶¶ 5-7) in attempting to procure Goodman's consent to the Zayre assignment. Goodman's moves to dismiss that claim because the alleged principal, Belscot, has released all claims against Goodman's.*fn12 May's retorts its agency is coupled with an interest and was thus not revocable by Belscot's settlement of its own claims.*fn13

Although the Complaint does not allege specific facts in support of its theory, it does allege May's was an agent. Under Rule 12(b)(6) standards, May's is entitled to a chance to prove any set of facts that would uphold the agency-coupled-with-an-interest relationship.*fn14 Mathers Fund, 564 F.2d at 783. Thus Counts III and IV also withstand Goodman's motion to dismiss based on the Belscot release.

Complaint Counts V and VI: Tortious Interference

Initially Goodman's argued Counts V and VI of the original complaint failed to state a claim for tortious interference with contractual relationships. May's has now shifted (by its Complaint amendment) to allegations of tortious interference with its business relationship with Zayre. This opinion of course deals with the revised claims.

May's has pleaded facts providing the elements of such a cause of action:

      1. May's reasonable expectancy of entering into a
    business relationship with Zayre (Counts V and VI
    ¶¶ 4, 8);

      2. Goodman's knowledge of that expectancy
    (Counts V and VI ¶¶ 5, 9);

      3. Goodman's intentional interference that
    prevented the expectancy from ripening (Counts V and
    VI ¶ 9); and

      4. May's damages as a result of Goodman's
    action (Counts V and VI ¶ 11).*fn15

See Woerner v. Brzeczek, 519 F. Supp. 517, 523 (N.D.Ill. 1981). Counts V and VI also survive attack at the pleading stage.

Conclusion

As this opinion has made plain, it does not necessarily represent the final word on the subject in some respects. But at least for the present, Goodman's motion to dismiss is denied in its entirety. Goodman's is ordered to answer the Complaint on or before September 30, 1983.


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