Smart Oil, LLC v. DW Mazel, LLC

• Decision Date: 17 August 2020
• Docket Number: No. 19-2542,19-2542
• Citation: 970 F.3d 856
• Parties: SMART OIL, LLC, Plaintiff-Appellee, v. DW MAZEL, LLC, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

970 F.3d 856

SMART OIL, LLC, Plaintiff-Appellee,

v.DW MAZEL, LLC, Defendant-Appellant.

No. 19-2542

United States Court of Appeals, Seventh Circuit.

Argued May 21, 2020

Decided August 17, 2020

Rehearing Denied September 4, 2020

Jeffrey E. Crane, Attorney, Chicago, IL, for Plaintiff - Appellee

Kevin M. Lougachi, Attorney, Law Offices of Kevin Lougachi, Chicago, IL, for Defendant - Appellant

Before Manion, Barrett, and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Smart Oil, LLC agreed to sell thirty parcels of land with gas stations and convenience stores to DW Mazel, LLC ("DWM"). DWM failed to close under the agreement, which by its terms granted Smart Oil the earnest money for the transaction as liquidated damages. But DWM never paid that money, and Smart Oil sued. DWM counterclaimed for breach of contract and fraudulent inducement.

The district court granted Smart Oil summary judgment, ruling that DWM breached the agreement by not paying the earnest money, which Smart Oil was entitled to as liquidated damages under Illinois law. The court also ruled that DWM's counterclaims for breach of contract and fraudulent inducement failed for the same reason. DWM appeals. The district court ruled correctly in all respects, so we affirm.

I. BACKGROUND

During 2014, Smart Oil's sole member, Mehmood Syed, marketed for sale numerous properties with gas stations and convenience stores. After lengthy negotiations, Smart Oil and DWM executed a Purchase and Sale Agreement and Joint Escrow Instructions (the "Agreement") by which DWM agreed to purchase thirty such parcels of real property for $67 million. Both parties were represented by counsel throughout the negotiations.

The Agreement requires DWM to initially deposit $300,000 into an escrow account. That deposit was to take place during a due diligence period following acceptance of the Agreement. The Agreement obliges the escrow account holder to transfer that deposit to the title company. Then, at the close of the due diligence period, DWM is to pay a second deposit of $450,000 to the title company. The total earnest money of $750,000 is about one percent of the total purchase price.

DWM never paid the initial earnest money deposit. Despite DWM's failure to do so, the parties continued their due diligence investigations and negotiations. By the close of the due diligence period, the Agreement requires DWM to provide Smart Oil with written notice if, after its investigations, DWM disapproved of the purchase. If DWM had provided this written notice, the Agreement would have terminated, and the earnest money would have been returned to DWM. If DWM did not provide that written notice, section 4(a)(i) of the Agreement states that such "failure to timely deliver [written] notice [of its disapproval] shall be deemed Buyer's approval of such investigations," and Smart Oil would be entitled to keep the earnest money if the deal otherwise fell through. DWM asserts it negotiated with Smart Oil to lengthen the due diligence period, extending the time to provide written notice of disapproval. Regardless, DWM failed to provide written notice of disapproval, which DWM does not dispute. At the close of the due diligence period, DWM also did not pay the second deposit.

In the meantime, Syed contacted property owners about selling their properties to Smart Oil which would then sell them in the aggregate to DWM. This is known as a "flip deal," and according to Smart Oil was contemplated under section 17(c) of the Agreement, which states in bold: "The parties acknowledge that Seller is the holder of a portfolio of gas station businesses, real estate and/or leases and only nominal title holder for purposes of transferring title to the Buyer." To make good on its end of the Agreement, Smart Oil executed contracts with various property owners for the sale of their properties.

Ultimately, DWM failed to close under the terms of the Agreement and the parties’ deal fell through. The individual property owners did not sell their properties to Smart Oil under the individual contracts, and Smart Oil never flipped those properties to DWM.

Smart Oil sued DWM for breach of contract, arguing it was entitled to $750,000 in earnest money as liquidated damages under the following term: "If Buyer defaults in its performance ... under this Agreement, including the obligation of Buyer to purchase the Property if all conditions precedent to such obligations has been satisfied, Seller shall receive the entire Earnest Money Deposit and all accrued interest thereon as complete liquidated damages." The Agreement explains the need for liquidated damages in conspicuous language: "IT BEING UNDERSTOOD THAT THE DAMAGE TO SELLER CAUSED BY ANY SUCH DEFAULT OF BUYER WOULD BE EXTREMELY DIFFICULT TO OR IMPOSSIBLE TO ASCERTAIN." The liquidated damages clause survives termination of the contract per section 17(a). Both parties signed under that clause demonstrating their consent and agreement.

DWM counterclaimed for breach of contract and fraudulent inducement, asserting Smart Oil failed to perform conditions precedent under the Agreement and deceived DWM into executing the Agreement. According to DWM, Smart Oil did not have authority to convey the properties and failed to provide adequate due diligence materials. After discovery both parties moved for summary judgment.

The district court ruled that Smart Oil satisfied all conditions precedent of the Agreement and that DWM breached the contract by not paying the earnest money. First, the court found that Smart Oil had authority to convey the properties, relying on numerous sworn statements from property owners verifying that they were ready to sell the properties to Smart Oil for Smart Oil to "flip" them to DWM. Second, the court found that DWM failed to give written notice of disapproval of the due diligence investigations, and that failure was "deemed Buyer's approval of such investigations" under Section 4(a)(i) of the Agreement. Because DWM approved of the due diligence materials under the Agreement, Smart Oil satisfied its condition precedent for due diligence disclosures. So DWM's obligation to pay the earnest money remained, and DWM admits it never paid.

The district court also held that Smart Oil was entitled to the earnest money as liquidated damages under Illinois law, noting that DWM's representative signed the liquidated damages clause that explicitly stated actual damages would be extremely difficult or impossible to ascertain. The court found the liquidated damages figure to be a fair and reasonable amount and granted Smart Oil's motion for summary judgment.

The district court also denied DWM's cross-motion for summary judgment on its breach of contract and fraudulent inducement claims. Construing the facts in the light most favorable to Smart Oil, the court found that the property owners authorized Smart Oil to effectuate the flip transactions and that they were ready to sell their properties to DWM. The Agreement includes a prevailing party attorneys’ fees and costs provision, under which the court granted fees and costs to Smart Oil. DWM appeals.

II. DISCUSSION

As a federal court sitting in diversity, we honor the Agreement's choice-of-law clause specifying Illinois law as controlling, unless to do so would be contrary to public policy. Life Plans, Inc. v. Sec. Life of Denver Ins. Co. , 800 F.3d 343, 357 (7th Cir. 2015). We review the district court's decision granting summary judgment de novo, construing the facts in a light favorable to the non-moving party. Westfield Ins. Co. v. Nat'l Decorating Serv., Inc. , 863 F.3d 690, 694–95 (7th Cir. 2017).

A. Breach of Contract

Under Illinois law, a plaintiff suing for breach of contract must prove: (1) the contract existed, (2) the plaintiff performed the conditions precedent required by the contract, (3) the defendant breached the contract, and (4) damages. DeliverMed Holdings, LLC v. Schaltenbrand , 734 F.3d 616, 626 (7th Cir. 2013) (citing Law Offices of Colleen M. McLaughlin v. First Star Fin. Corp. , 357 Ill.Dec. 570, 963 N.E.2d 968, 981 (Ill. App. Ct. 2011) ).

The parties agree a contract exists, and they also agree DWM never paid the earnest money. They disagree whether Smart Oil performed its conditions precedent under the Agreement. DWM asserts Smart Oil's breach of contract claim fails because DWM is excused from paying the earnest money. DWM reasons that Smart Oil is only entitled to keep the earnest money under Section 17(a) of the Agreement if it has satisfied conditions precedent, which DWM alleges Smart Oil failed to do. Smart Oil's alleged failure to satisfy its conditions precedent is also the basis for DWM's breach of contract counterclaim.

A "condition precedent is one that must be met before a contract becomes effective or that is to be performed by one party to an existing contract before the other party is obligated to perform." Catholic Charities of the Archdiocese of Chicago v. Thorpe , 318 Ill.App.3d 304, 251 Ill.Dec. 764, 741 N.E.2d 651, 653 (2000) (quoting McAnelly v. Graves , 126 Ill.App.3d 528, 81 Ill.Dec. 677, 467 N.E.2d 377, 379 (1984) ). Section 4 of the Agreement provides that DWM's obligation to consummate the transaction is subject to the following conditions precedent for DWM's benefit: (1) due diligence investigations and materials; (2) title insurance commitments for each of the properties; (3) inventories of the personal property for each of the businesses; and (4) that Smart Oil's representations and warranties were truthful and accurate under Section 15 of the Agreement. DWM argues Smart Oil failed to satisfy two of these conditions: it did not have authority to convey the properties, and it failed to produce the requisite due diligence materials. Both arguments fail, however.

First, Smart Oil has shown that it had authority to execute the Agreement. Section 17(c) of the Agreement states in bold: "The parties acknowledge that Seller is the holder of a portfolio of gas station businesses,...