Movitz v. First Nat. Bank of Chicago

• Decision Date: 25 August 1998
• Docket Number: 97-3818,Nos. 97-3761,s. 97-3761
• Citation: 148 F.3d 760
• Parties: Louis A. MOVITZ, as Trustee, and Estock Corporation, N.V., Plaintiffs-Appellees, Cross-Appellants, v. FIRST NATIONAL BANK OF CHICAGO, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 760

148 F.3d 760

Louis A. MOVITZ, as Trustee, and Estock Corporation, N.V., Plaintiffs-Appellees, Cross-Appellants, v. FIRST NATIONAL BANK OF CHICAGO, Defendant-Appellant, Cross-Appellee.

Nos. 97-3761, 97-3818.

United States Court of Appeals, Seventh Circuit.

Argued May 26, 1998.

Decided June 23, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied Aug. 25, 1998. ^*

Jerold S. Solovy, Jenner & Block, Chicago, IL, Peter Flynn (argued), Myron M. Cherry, Cherry & Flynn, Chicago, IL, for Louis A. Movitz in No. 97-3761 and Estock Corporation.

Kathleen M. McCarthy, Winston & Strawn, Chicago, IL, Lynn A. Goldstein, First National Bank of Chicago, Chicago, IL, James D. Dasso, Foley & Lardner, Chicago, IL, Marjorie P. Lindblom (argued), Kirkland & Ellis, New York City, for First National Bank of Chicago in No. 97-3761.

Peter Flynn (argued), Cherry & Flynn, Chicago, Il, for Louis A. Movitz in No. 97-3818.

Jerold S. Solovy, Jenner & Block, Chicago, Il, Peter Flynn, for Estock Corporation in No. 97-3818.

Before POSNER, Chief Judge, and BAUER and COFFEY, Circuit Judges.

POSNER, Chief Judge.

A jury awarded Estock Corporation some $3.3 million in damages in a diversity suit against the First National Bank of Chicago for breach of contract and of fiduciary duty. The bank appeals, and Estock cross-appeals seeking the addition of prejudgment interest to the judgment. The principal ground of appeal, and the only one we shall have to consider, is that Estock failed to prove that the bank's conduct was the "cause" of its loss within the meaning that the law attaches to this term when a plaintiff is seeking an award of damages. The applicable law, the parties agree, is that of Illinois.

Back in 1980, Jawad Hashim, a foreign businessman, told an executive of the First National Bank that he wanted to invest $2 million in U.S. real estate. The bank's real estate acquisition department located an office building in a Houston suburb and took Hashim on a tour of it and he liked it well enough. He created Estock to be the vehicle for his investment in the building, and Estock in turn signed an agreement with the bank under which the bank was to evaluate, buy (for Estock), and operate and maintain the building. Movitz, the other plaintiff, is Hashim's trustee in bankruptcy. His claims were dismissed, and he has appealed the dismissal, but he concedes that the appeal is moot unless we order a new trial; we are not going to do that and so we can ignore him and treat Estock as the sole plaintiff.

The bank bought the building for Estock for $5.1 million, with Estock putting up $2.2 million in cash and assuming a $2.9 million mortgage. The purchase turned out to be a disaster. In April of 1984 Estock transferred the operation of the building to another bank, which could not stem the losses despite Estock's investing another $800,000; in June of the following year the mortgagee foreclosed and Estock's entire investment, minus some trivial earnings ($50,000), was lost. The jury awarded Estock its total out-of-pocket loss and more, but the more may represent the opportunity cost of the investment--the return that Estock would have received had it invested the money otherwise. Since the purpose of an award of damages is to put the plaintiff in the position that he would have occupied but for the wrongful act of the defendant, there is no objection in principle to awarding a plaintiff not only lost principal but lost profit, though such awards are frequently denied as too speculative. See, e.g., Doll v. Bernard, 218 Ill.App.3d 719, 161 Ill.Dec 407, 578 N.E.2d 1053, 1057 (1991); Messer v. E.F. Hutton & Co., 833 F.2d 909, 922-23 (11th Cir.1987). Whether it was too speculative in this case is another issue that we won't have to resolve.

We may assume that the agreement implicitly required the bank to exercise due care in the performance of the duties that the agreement imposed on it, Index Futures Group, Inc. v. Ross, 199 Ill.App.3d 468, 145 Ill.Dec. 574, 557 N.E.2d 344, 348 (1990); Outboard Marine Corp. v. Babcock Industries, Inc., 106 F.3d 182, 185 (7th Cir.1997); Spartech Corp. v. Opper, 890 F.2d 949, 951-52 (7th Cir.1989), and that it failed to do so. According to testimony that a reasonable jury could credit, the bank carelessly failed to check in advance of the purchase the building's structural soundness and as a result failed to discover that the building had not been properly designed to prevent its foundation from settling and that the air conditioning ducts could not deliver enough cool air to keep the tenants comfortable--a serious problem in Houston's climate. A reasonable jury could also find that the bank carelessly miscalculated the net income that the building would generate. Even though it had complete information about the building's rental income in the near term because the building was fully occupied, the bank managed to overestimate the net cash flow in the very first year of Estock's ownership by a factor of almost four ($135,000 versus $35,000).

In the following year, 1982, the Houston office market began to turn down, yet the bank did not consider selling the building. By the end of 1983, with the market now "terribly ill," the building was more than 30 percent vacant; it was almost 40 percent vacant when the building was turned over to new management a few months later. Although the foundation and air conditioning problems could have been corrected at a total cost of less than $100,000, they had not been (though they were later). As a result there was rising tenant dissatisfaction and even a threat (never carried out, though) of a tenants' strike.

Had the bank been more careful at the outset and discovered then that the building was less profitable than it appeared to be and that it required significant repairs, the deal might never have gone through: the bank might not have recommended the purchase, Hashim might have gotten cold feet, or Estock might have offered the owner of the building a lower price which the owner would not have accepted. So had it not been for the bank's negligence in evaluating the property, Estock might indeed be $3.3 million to the good. Of course, this depends on what it would have done with the money had the deal fallen through. Had it invested it in another office building in Houston, the money might well have been lost, given what happened to the market. But if instead the money had been invested in an office building or other commercial property in an area that did not experience the disastrous downturn that the Houston real estate market experienced in the early 1980s (as a result of overbuilding and a sharp decline in the price of oil that hurt business in the city), probably the money would not have been lost; its investment might even, as we noted earlier, have generated a significant profit. At any rate, there was enough evidence (though only barely, as we shall see later) that the bank's negligence was a "but for" cause of Estock's losing its investment to allow the jury to find that it was.

As Estock reluctantly concedes, however, a finding of "but for" causation (what philosophers call a "necessary condition") is not a sufficient basis for imposing legal liability. If it were, then the estates of Santa Anna, Sam Houston, or Columbus might also be liable to Estock, plus the inventor of the elevator or the steel girder, or Hashim's parents, or OPEC, which brought about the increase in oil prices that fueled Houston's real estate boom in the 1970s, a boom that made investing in that real estate seem so attractive a prospect in 1980.

The principle that but-for causation is not enough to establish civil liability for carelessness or other wrongdoing is pertinently illustrated by the famous old English case of Gorris v. Scott, 9 L.R.-Exchequer 125 (1874). The plaintiff's sheep were being transported on a ship owned by the defendant. A storm arose and the sheep were swept overboard to a watery death. The defendant had failed to equip the ship with pens for the sheep, as he was required to do in order to prevent the spread of disease among the animals. Had he complied with his duty the sheep would have been saved. And so the violation of the duty was a "but for" cause of their loss. Yet the plaintiff was not allowed to recover any damages. The loss of the sheep was a consequence, but not a foreseeable consequence, of the violation of a legal duty, because the duty was to take precautions against a different kind of loss from the one that materialized. See also Israel Travel Advisory Service, Inc. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1258 (7th Cir.1995); Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 708-09 (7th Cir.1984); Restatement (Second) of Torts § 281, comments e and f and illustration 3 (1965); Robert E. Keeton, Legal Cause in the Law of Torts 3-11 (1963). It is the same here. The bank had no contractual or other legal duty to build pens that would prevent the Houston real estate market from diving overboard. The care that the bank was contractually required to take in advising Estock with regard to the purchase of the office building was not intended to prophesy or avert market fluctuations but to make sure that the building was a sound purchase under current market conditions.

The distinction between "but for" causation and actual legal responsibility for a plaintiff's loss is particularly well developed in securities cases, where it is known as the distinction between "transaction causation" and "loss causation." E.g., Isquith v. Caremark Int'l, Inc., 136 F.3d 531, 535 (7th Cir.1998); Bastian v. Petren Resources Corp., 892 F.2d 680, 685 (7th Cir.1990); LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir.1988); Robbins v. Kroger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir.1997). Suppose that an issuer of common stock misrepresents the qualifications or background of its principals, and if it had been...