Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 2290-Milton I. Shadur, Judge.
Before CUMMINGS, Chief Judge, POSNER, Circuit Judge, and CAMPBELL, Senior District Judge.*fn*
POSNER, Circuit Judge. The plaintiffs, former law partners named Goldstick and Smith, brought this diversity suit for breach of contract against John Kusmiersky, U.S. Managers Realty, Inc., and ICM Realty, seeking payment of a legal fee for getting real estate taxes reduced on a large apartment complex owned by ICM, leased by Kusmiersky, and managed by U.S. Managers. ICM moved for summary judgment, which was granted. 593 F. Supp. 639 (N.D. Ill. 1984). After settling with Kusmiersky and U.S. Managers, Goldstick and Smith appealed the judgment for ICM.
Neither the district court nor any of the parties noticed a serious question of federal jurisdiction. ICM is a real estate investment trust, not a corporation. Its citizenship is not, as all concerned assumed, the state where it is chartered, Maryland. The citizenship of a trust is determined for purposes of diversity jurisdiction by the citizenship of the trustee or, in this case, trustees, all of whom must be citizens of a different state from the plaintiff for the suit to be maintained under the diversity jurisdiction. Navarro Savings Ass'n v. Lee, 446 U.S. 458, 64 L. Ed. 2d 425, 100 S. Ct. 1779 (1980). The trust in Navarro was a Massachusetts business trust, though like ICM it had been created to invest in real estate. ICM is a formal real estate investment trust. But this is a distinction without a difference, so far as diversity jurisdiction is concerned. As the Court said in Navarro, "a trustee is a real party to the controversy for purposes of diversity jurisdiction when he possesses certain customary powers to hold, manage and dispose of assets for the benefit of others." Id. at 464 (footnote omitted). ICM's trustees have all of these powers; although Maryland law places few formal restrictions on the allocation of governance between the trustees and shareholders of a real estate investment trust, see Md. Corps. & Ass'ns Code Ann. § 8-202, ICM's declaration of trustees. The special circumstances in Betar v. De Havilland Aircraft of Canada, Ltd., 603 F.2d 30 (7th Cir. 1979), are not present here, making it unnecessary for us to decide whether Betar survived Navarro, as several members of this court have doubted, see Wilsey v. Eddingfield, 780 this court have doubted, see Wilsey v. Eddingfield, 780 F.2d 614, 619 (7th Cir. 1985) (opinion dissenting from denial of rehearing en banc).
Although the original record did not show what states the trustees of ICM are citizens of, in response to our request for supplemental briefs on jurisdiction the parties submitted an affidavit attesting that on the date the suit was filed all of the trustees were in fact citizens of different states from the plaintiffs. Therefore the requirements of diversity jurisdiction are satisfied. But they easily could not have been; and then we would have had to dismiss the case, and three years of litigation would have gone down the drain. So once again we remind the bench and bar of this circuit of the importance of verifying the existence of federal jurisdiction at the outset of litigation. See, e.g., Kanzelberger v. Kanzelberger, 782 F.2d 774 (7th Cir. 1986).
On the merits of the appeal we note first the parties' agreement that the governing substantive law is that of Illinois and that, under Rule 56 of the Federal Rules of Civil Procedure, ICM in moving for summary judgment had the burden of proving that there was no genuine issue of material fact on any of the liability theories advanced by the plaintiffs - no triable issue of fact. We therefore construe the facts as favorably to the plaintiffs as is reasonable to do, without meaning to suggest that the plaintiffs will succeed in proving these facts at trial.
In 1969 ICM bought an apartment complex in Rolling Meadows, Illinois, from Walter Kassuba, to whom ICM leased back the land and sold the improvements. He went broke, however, and in 1975 ICM leased the land to Kusmiersky, a "work-out specialist," who also bought the improvements. In a separate agreement ICM promised to advance Kusmiersky $1.5 million operate the property and pay past-due real estate taxes, hoping that this advance would enable him to resuscitate the property so that ICM could recover its investment in the land. Kusmiersky retained the plaintiffs under a contingent-fee arrangement to seek a reduction in the past-due taxes. ICM approved this arrangement and by 1977 the plaintiffs had succeeded in getting them reduced by some $870,000. The plaintiffs billed Kusmiersky $290,000 for their legal services. The bill was never paid, though neither its reasonableness nor its conformity to the terms of the contingent-fee contract has ever been questioned.
The property continued to decline, and Kusmiersky and ICM entered into negotiations to transfer Kusmiersky's interest to Ted Netzky, who agreed to invest fresh capital in the property. Netzky refused to close the deal, however, unless ICM agreed to pay the remaining past-due real estate taxes and the plaintiffs released their claim for legal fees. In an effort to obtain this release Kusmiersky offered the plaintiffs a reduced fee of $250,000, payable over 10 years with interest at 7 percent per annum. Goldstick (for the plaintiffs) refused the offer. ICM drafted a release for the plaintiffs to sign which stated that the $250,000 would be paid over time but only out of the profits of the property; if there were none, the fee would not be paid. Goldstick refused to sign the release until Kusmiersky assured him that ICM was honorable and that something would be worked out, which Goldstick took to mean that he and Smith would receive the $250,000, over time but with interest, regardless of whether the property showed a profit. The plaintiffs signed the release and the deal with Netzky closed. Goldstick and Smith continued to negotiate with Kusmiersky and ICM over the terms of payment of their fee, but no agreement was reached, for ICM held steadfastly to the position that the payment of the fee would have to be out of the profits, and eventually Goldstick and Smith demanded payment of the full $290,000 and when that was refused brought this suit.
The plaintiffs advanced several alternative grounds for recovery, all of which the district court rejected. The first is that ICM was a party to their original contract with Kusmiersky to seek a reduction in back taxes in exchange for a contingent fee. If Kusmiersky was merely ICM's tenant, however, the district judge was certainly correct in concluding that Kusiersky was not its agent in the original fee negotiation with the plaintiffs. If a tenant hires a plumber to fix a leaking faucet, the contract of repair is between the lessee and the plumber; the landlord is not a party. See. e.g., County of Kane v. Midway Landfill, Inc., 23 Ill. App. 3d 1080, 1083, 321 N.E.2d 91, 94 (1974). If the tenant absconds without paying and the landlord repossesses the property, the plumber might conceivably (though not in a case such as this, as we shall see later) have a claim against the landlord for restitution of benefits conferred: the faucet has been fixed, and the benefit enures to the landlord. But the plumber's claim would be for unjust enrichment rather than breach of contract and would fail if the landlord had already paid the tenant to fix the faucet, for there would be no enrichment in that case-or in this, at lease so far as the original deal with the plaintiffs is concerned. ICM had promised Kusmiersky $1.5 million, which among other things was to be used to pay off the back taxes on the property. If Kusmiersky could get a net reduction in this tax liability by paying a lawyer less than the reduction in taxes that the lawyer obtained, the payment for the lawyer, like the payment for the taxes for which it was a substitute, would come out of the $1.5 million. ICM had paid once, and didn't want to pay again. Of course ICM would still have to worry about liens being slapped on the property by virtue of its lessee's operations but it would not have to worry about being sued for breach of the lessee's contracts - after the property had been written off as a loss-merely by virtue by being the lessor.
What blurs this picture is that the agreement between ICM and Kusmiersky concerning the payment of the real estate taxes, an agreement separate from the lease, provided for only a conditional advance of money to Kusmiersky, He was to try to settle the claims for past-due taxes as cheaply as possible but he had to advise ICM on whether to accept the settlements he negotiated, and ICM would make the final decision. The agreement makes no reference to legal fees but Kusmiersky testified in his deposition that it was meant to include fee arrangements too. If so, this meant that ICM had to approve any such arrangement as well as any tax settlements and as a matter of fact it did approve Kusmiersky's contract with the plaintiffs, and did so only after the plaintiffs agreed to reduce the contingent fee they had originally negotiated with Kusmiersky.
The district court compared ICM's role to that of a lender who insists on a right of approval of his borrower's use of the borrowed funds in order to make sure they aren't dissipated, which would reduce the lender's security. That is one possible interpretation but not the only one. ICM owned the land and would be the loser if it were seized for nonpayment of real estate taxes. The agreement with Kusmiersky regarding the payment of those taxes could be interpreted as making Kusmiersky ICM's agent. If so, ICM was bound as his principal. The proper characterization of the relationship created by the agreement is not so clear on the record that it could be determined on a motion for summary judgment.
We add that it would make no difference whether the agency agreement (if that is what if was) authorized Kusmiersky to make a contingent-fee arrangement - although as a matter of fact there is little doubt that id did, for Kusmiersky could not get the tax liability reduced without hiring a lawyer and the usual method of compensating a lawyer for getting real estate taxes reduced is to give him a percentage of the reduction. ICM's approval of the contract with the plaintiffs would (assuming that Kusmiersky was ICM's agent in paying past-due taxes) in any event bind ICM on the contract by the doctrine of ratification, whether or not the agent had authority to make the contract in the first place. See, e.g., Johnston v. Suckow, 55 Ill. App. 3d 277, 279-80, 370 N.E.2d 650, 653, 12 Ill. Dec. 846 (1977).
As an original matter one might wonder why ratification would make the principal liable. The effect seems to be to confer a windfall on the other party to the contract, who did not bargain for this additional promisor. The explanations that have been offered are conclusion. See, e.g., Seavey, Handbook of the Law of Agency 57-59 (1964). The best explanation may be that the principal would not have ratified the contract unless he had seen a commercial advantage in doing so, and that advantage would be less if the ratification had no binding effect. Ordinarily a principal ratifies an agent's unauthorized transaction in order to protect the principal's relationship with the other party to the transaction, ordinarily a customer or supplier; and for ratification to have this protective effect it has to be more than an idle gesture, signifying nothing because unenforceable. In any event Illinois law is clear in binding the principal to contracts of his agent that he has ratified.
On either theory - actual authorization to make the fee arrangement, or ratification - the existence of an agency relationship is the key question and is a question of fact, Phipps v. Cohn, 139 Ill. App. 3d 210, 212, 487 N.E.2d 428, 430, 93 Ill. Dec. 761 (1985), which, if contestable and contested, as it was here, could not be taken away from the jury by granting a motion for summary judgment. E.G., American Nurses' Ass'n v. Illinois, 783 F.2d 716, 726 (7th Cir. 1986). Of course we do not mean to imply that there was an agency relationship - only that there is a jury issue on the question. There may indeed not have been such a relationship - only that there is a jury issue on the question. There may indeed not have been such a relationship. Some evidence that there is a jury issue on the question. There may indeed not have been such a relationship. Some evidence that there was not is the provision in the original lease to Kassuba that he would not have any recourse against ICM for any losses he might incur operating under it. Ordinarily gains and losses he might incur in operating under it. Ordinarily gains and losses are either borne by the principal or shared with the agent, for the agent is acting on behalf of the principal, and the principal hopes to make profits and takes the risk of loss as a normal concomitant. But this evidence is not conclusive, not only because as we ...