Citadel Grp. Ltd. v. Wash. Reg'l Med. Ctr.

• Decision Date: 15 August 2012
• Docket Number: No. 11–3124.,11–3124.
• Citation: 692 F.3d 580
• Parties: CITADEL GROUP LIMITED, a Delaware Corporation, Plaintiff–Appellant, v. WASHINGTON REGIONAL MEDICAL CENTER, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

692 F.3d 580

CITADEL GROUP LIMITED, a Delaware Corporation, Plaintiff–Appellant,

v.WASHINGTON REGIONAL MEDICAL CENTER, Defendant–Appellee.

No. 11–3124.

United States Court of Appeals,Seventh Circuit.

Argued April 11, 2012.

Decided Aug. 15, 2012.

John H. Anderson (argued), Attorney, Seyfarth Shaw LLP, Chicago, IL, for Plaintiff–Appellant.

Michael P. Tomlinson (argued), Attorney, Tomlinson Law Office, Chicago, IL, for Defendant–Appellee.

Before WOOD, WILLIAMS, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

This is a diversity case arising from the breakdown of contract negotiations between Citadel Group Limited and Washington Regional Medical Center over the development, construction, and lease-back arrangement of a medical office building. Washington Regional entered into a contract with Citadel to proceed with pre-construction project development, which contemplated the subsequent execution of ground and space leases. Yet, negotiations over the leases proved unfruitful and Washington Regional decided to move forward on construction internally (without an outside developer). Citadel sued for its costs and lost profits on the deal.

We found in a previous opinion that the district court had personal jurisdiction over Washington Regional to resolve this dispute. See Citadel Grp. Ltd. v. Washington Reg'l, 536 F.3d 757 (7th Cir.2008). On remand, the district court dismissed Citadel's claim for failure to negotiate in good faith at the pleading stage and granted summary judgment in favor of Washington Regional on Citadel's claim for breach of contract (lost profits). The parties settled Citadel's claims for costs and fees incurred pre-construction. Citadel appeals the district court's dismissal and summary judgment ruling. We affirm. Citadel failed to show that Washington Regional entered into a binding agreement to complete the lease-back arrangement in the absence of executed leases. At the time the parties' relationship ended, they still had not agreed on essential lease terms, most notably, rental rates. Citadel's breach of contract claim for lost profits therefore fails as a matter of law. Citadel's claim for breach of the duty to negotiate in good faith also fails because no language in the parties' agreement required them to engage in good faith negotiations, nor did it establish a framework for the negotiation process. Absent such language, we do not infer a duty.

I. FACTS

Washington Regional is a non-profit organization that operates medical facilities in Arkansas. Citadel is a corporation engaged in real estate development with a focus on the healthcare industry. In early 2005, Washington Regional sought to develop a medical office building through a lease-back arrangement with an outside developer. Washington Regional planned to execute a long-term ground lease on the property to the developer. The developer would then design (according to Washington Regional's specifications), finance, construct, and own the medical facility, while leasing back building space to Washington Regional. This structure allowed Washington Regional to avoid incurring substantial debt on its balance sheet. Washington Regional CEO William Bradley placed Senior Vice President Tami Hutchison in charge of the project. Hutchison issued a “Request for Proposal” to several developers, including Citadel. The request indicated that Washington Regional was interested in executing a “long-term ground lease” for the purpose of developing a 30,000 square foot medical facility. Washington Regional proposed a 30–year ground lease starting at $1,812 per month and increasing every five years.

Citadel submitted a proposal in response, whereby it would assume responsibility for the project and third-party financing of the building. See Citadel, 536 F.3d at 759. Citadel included a “comprehensive development proposal” with an appended “Authorization to Proceed.” It noted that “[t]he Project's exact construction cost will be driven by [Washington Regional's] specifications” and provided an anticipated interest rate and fee on the project loan. If Washington Regional chose Citadel, the letter requested Washington Regional to sign the Authorization to Proceed and return it along with the requested deposit.

Attached to the proposal letter was a three-page “Preliminary Leasing Terms Sheet.” The terms sheet was prefaced by the following language:

The following terms reflect interest rates as of May 9, 2005. This terms sheet is subject to credit review, commitments committee approval and changing market conditions among other considerations. The project costs as well as structural terms are subject to change following review of the final project design along with architect's and construction manager's final cost estimate.

The sheet stated that Project Cost was “$5,000,000 (estimated, final budget to be determined by the Hospital's facility design specifications).” It further provided that “Citadel will provide development services for a fee of 4% to be included in the Project Cost.” In later correspondence, Citadel informed Washington Regional that there was no mark-up on construction costs other than the fee for project development.

The terms sheet set forth the lease term, the square feet of leased space, the tenant improvement allowance, and a variable and fixed lease rate for a primary care practice, ambulatory surgery center, and medical office space. Citadel proposed the following fixed term lease rates: $11.20 per square foot for the primary care practice, $18.27 per square foot for the ambulatory surgery center, and fair market value for the medical office space. Citadel noted flexibility with respect to the ground lease term, suggesting a 60–year term, with two 10–year extension options and a fair market lease rate, as reasonably determined by Washington Regional.

Washington Regional subsequently requested additional information about Citadel's proposal, asking Citadel to make various assumptions. Citadel provided a detailed development budget of $6,200,000 with developer's fees of $248,000 (4 percent) in response. Citadel CEO and President David Varwig testified that he informed Washington Regional that the Preliminary Terms Sheet set forth an economic formula for determining lease rates so that Washington Regional had flexibility in deciding the type of building it wanted. (Citadel described this as a “build-to-suit” lease-back arrangement.) The formula: Total project cost x the capitalization rate (8.84 percent) ÷ total square feet = average rent per square foot.

Under this formula, the building lease rates fluctuated depending on the project costs, which were dependent in large part on Washington Regional's chosen building specifications (including size and interior layout). Varwig also testified that a “whole host of things” could cause the total project cost to fluctuate, including cost of raw materials, cost of labor, financing fees, interests rates, etc. But the formula cannot be found anywhere in the Preliminary Terms Sheet or any other document exchanged between the parties. According to Varwig, he informed Washington Regional that “when you go to the closing you'll be able to look at the lease and look back here and mathematically tie it together.” Hutchison testified that she understood that the higher the cost of construction, the higher the lease rates.

Bradley presented Citadel's and another developer's proposal to Washington Regional's board members in July. Citadel's budget presented to the board reflects the increased cost of $6,200,000 and corresponding revised building rental rates. It is not clear how Washington Regional obtained the corresponding higher rental rates. Bradley recommended Citadel's proposal and the Board approved moving forward on the project with Citadel, authorizing payment of the $60,000 deposit. Around this time, Citadel sent Hutchison a further revised budget showing a total project cost of $8.5 million.

The following month, Citadel presented Washington Regional with a letter identified as its “comprehensive development proposal.” This second letter was similar to Citadel's initial proposal in all material respects, except that it added the last sentence to the following appended “Authorization to Proceed”:

[Washington Regional] authorizes Citadel ... to proceed with Project development at a fee of four percent (4%) of project costs according to the following schedule: (i) a 1% good faith deposit upon execution of this proposal, and (ii) the balance from Project funding. [Washington Regional] is responsible for all legal expenses and other costs associated with Project development, except architectural and engineering fees, whether or not the project is ultimately developed. Project costs and expenses may be included in the Project's budget and hence, refunded to [Washington Regional] at Project funding. [Washington Regional] will only be responsible for architectural and engineering fees in the event [Washington Regional] does not execute its space leases and ground lease.

(emphasis added). Bradley, on behalf of Washington Regional, signed the Authorization to Proceed in September and informed the Washington Regional board members that Citadel “is moving forward and construction should begin in March or April 2006.”

Citadel began working on the project. It hired attorneys, architects, engineers, refined building plans, engaged in zoning review, and began the process of securing financing. All the while, the parties continued to negotiate lease terms. In March 2006, Adam Lynch from Citadel sent Hutchison an email attaching “a preliminary calculation for [the building's] lease rates.” The email included a document with a summary of costs for the project of $10.8 million and higher lease rates (e.g., the primary care space had a revised fixed rate of $28 per square foot). The document compared the original lease rates with the new lease rates; Lynch explained to Hutchison that it was a ...