In the

United States Court of Appeals

For the Seventh Circuit

No. 07-3910

CLASSIC CHEESECAKE COMPANY, INC., et al.,

Plaintiffs-Appellants,

v.

JPMORGAN CHASE BANK, N.A.,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 1:05-cv-0236-JDT-WTL—William T. Lawrence, Judge.

ARGUED SEPTEMBER 25, 2008—DECIDED OCTOBER 17, 2008

Before POSNER, FLAUM, and EVANS, Circuit Judges.

POSNER, Circuit Judge. This appeal requires us to interpret a gloss that the Indiana courts have placed on their

state’s statute of frauds: an oral agreement that the

statute of frauds would otherwise render unenforceable

creates a binding contract if failing to enforce the agreement would produce an “unjust and unconscionable

injury and loss.” E.g., Brown v. Branch, 758 N.E.2d 48, 52

(Ind. 2001). The issue arises from the plaintiffs’ supple-
2 No. 07-3910

mental claims, 28 U.S.C. § 1367, which are based on

Indiana law. The federal claim on which the district court’s

jurisdiction was originally based, a claim based on the

Equal Credit Opportunity Act, 15 U.S.C. §§ 1691 et seq.,

was resolved in the plaintiffs’ favor but gave them only

modest relief. The appeal challenges the court’s dismissal under Rule 12(b)(6) of the supplemental claims.

Classic Cheesecake, a bakery company, managed to

interest several hotels and casinos in Las Vegas in buying

its products. To serve these new customers Classic

needed additional capital—capital to establish a distribution center in Las Vegas, to hire employees to staff it, and

to buy additional equipment. On July 27, 2004, principals

of Classic visited a local office of the defendant bank and

made a pitch, to a vice president named Dowling, for a

loan that would be partially guaranteed by the Small

Business Administration and therefore would have to be

approved by that agency. They emphasized to Dowling

that time was of the essence.

Dowling asked them for tax returns, accounts receivable,

and other documentation in support of the loan application, and having received the documents she orally assured

Classic’s principals (according to Classic) that the loan

would be approved, provided that student loans of one

of the principals were paid off—a condition on which

the Small Business Administration insisted because the

loans had been financed in part by the federal government and were in default. On September 17 Dowling told

Classic that the loan was a “go,” and three days later one

of Classic’s principals asked Dowling to request that letters
No. 07-3910 3

from the student loan agencies confirming that the loans

had been repaid be sent directly to Dowling “to speed up

the confirmation process.” So Classic knew that Dowling’s

saying the loan was “a go” did not mean that the loan

had been approved. But it seemed likely that it would be.

Yet in an email to Dowling on August 19, Dowling’s

superior at the bank had told her “I am still declining

this request [Classic’s request for a loan] primarily based

on the following issues/concerns”—and he mentioned

excessive leverage, lack of an established earnings record,

inadequate cash flow, undercapitalization, insufficient

revenues, too much reliance on projections, and “serious

delinquencies and derogatory public record of guarantor”

(referring to the principal who had defaulted on her

student loans). He added that he had discussed the

matter with the SBA and “the same issues/concerns as

identified above prevailed.”

Although the email was a downer, it did not flatly turn

down the loan request, and Dowling must have expected

that it would be approved, perhaps with modifications,

eventually—for what had she to gain from stringing

Classic along if she knew the loan would never be approved? But she may have exaggerated her confidence

in the loan’s eventual approval to prevent Classic from

shopping elsewhere, though the plaintiffs do not allege

that.

Not only did Dowling not share the contents of the

discouraging email with Classic, but she continued to

make verbal assurances that the loan would be approved. The plaintiffs must have been shocked when on
4 No. 07-3910

October 12 she told them that the loan had been turned

down. (As reasons she gave the concerns that her

superior had expressed in the August email.) Classic

claims that it and the other plaintiffs (the company’s

principals plus an affiliate) lost more than $1 million

because of the bank’s breach of what Classic deems an

oral promise to make the loan. It claims that the breach

delayed it from seeking loans elsewhere for a critical

two and a half months and that as a result of the delay

it and the other plaintiffs incurred in the aggregate a loss

of more than $1 million. We’ll assume the loss consisted

entirely of costs incurred in reliance on the loan’s being

approved, although some of it undoubtedly consisted of

consequential damages that could not be recovered in a

suit for breach of contract consistently with the doctrine

of Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145

(1854). That is true of the tax penalties that the plaintiffs

had to pay because the loss allegedly due to the delay in

obtaining a loan drained them of the cash they needed to

pay their taxes, and it is even truer of the emotional

distress they claim to have suffered as a result of the

delay and ensuing financial loss.

The Indiana statute of frauds requires that agreements

to lend money be in writing. Ind. Code § 26-2-9-5. The oral

agreement alleged by Classic contained a promise by

the bank on which Classic relied (whether reasonably is

another question). But to allow the statute of frauds to be

circumvented by basing a suit to enforce an oral promise

on promissory estoppel rather than breach of contract

would be a facile mode of avoidance indeed. Someone

who wanted to enforce an oral promise otherwise made
No. 07-3910 5

unenforceable by the statute of frauds would need only

to incur modest costs in purported reliance on the

promise—something easy, if risky, to do, as a premise

for seeking to enforce an oral promise that may not

have been made or may have been misunderstood.

The plaintiffs also charge that Dowling’s assurance

that the loan was “a go” when she knew it had been at

least tentatively rejected was fraudulent, and therefore

tortious. Courts resist efforts by a plaintiff to get around

limitations imposed by contract law by recasting a

breach as a tort; a recent example is Extra Equipamentos

e Exportação Ltda. v. Case Corp., No. 06-4389, 2008 WL

4059787, at *3-4 (7th Cir. Sept. 3, 2008). With specific

reference to efforts to get around the statute of frauds,

the Indiana Court of Appeals has explained that “the

substance of an action, rather than its form, controls

whether a particular statute has application in a particular

lawsuit . . . . Regardless of whether the present cause of

action is labeled as a breach of contract, misrepresentation,

fraud, deceit, [or] promissory estoppel, its substance is

that of an action upon an agreement by a bank to loan

money. Therefore, the Statute of Frauds applies.” Ohio

Valley Plastics, Inc. v. National City Bank, 687 N.E.2d 260,

263-64 (Ind. App. 1997). So the plaintiffs are remitted to

their remedies under the law of contracts, as they seem

to concede, for their briefs do not argue that fraud is an

independent ground for negating a defense based on the

statute of frauds.

And so the question becomes whether the bank’s conduct could have been found to inflict an “unjust and
6 No. 07-3910

unconscionable injury and loss” and so trump the bank’s

defense based on the statute of frauds. To answer the

question requires us to explore the provenance of a

phrase at once vague (what does “unjust and unconscionable” mean?) and redundant (how does “injury” differ

from “loss”?).

The statute of frauds has long been controversial. The

Farnsworth treatise says that “it has been the subject of

constant erosion.” 2 E. Allan Farnsworth, Farnsworth on

Contracts § 6.1, p. 107 (3d ed. 2004). The particular erosive

process that culminates in the doctrine of “unjust and

unconscionable injury and loss” began—where else?—in

an opinion by Justice Traynor, Monarco v. Lo Greco, 220

P.2d 737 (Cal. 1950), that allowed the statute of frauds to

be circumvented by a claim of promissory estoppel.

(Even before then, the statute of frauds could be circumvented by equitable estoppel, but that required a misrepresentation concerning the statute of frauds itself, as

where one party assured the other that no writing was

necessary, or promised not to plead the statute of frauds

in the event of a lawsuit. 2 Farnsworth, supra, § 6.12,

p. 203.) Importantly, however, Justice Traynor limited

the use of promissory estoppel to defeat the statute of

frauds: only if “either an unconscionable injury or unjust

enrichment would result from refusal to enforce” an oral

promise would a defense based on the statute of frauds

be negated. 220 P.2d at 741.

The Monarco opinion, like so many of Justice Traynor’s

innovations, caught on. 2 Farnsworth, supra, § 6.12, p. 206.

Eventually it was picked up—and expanded—by the
No. 07-3910 7

Restatement (Second) of Contracts (1981), which in section

139(1) allows promissory estoppel to defeat the statute

of frauds “if injustice can be avoided only by enforcement

of the [oral] promise.” This notably loose formulation

has been influential too, 2 Farnsworth, supra, § 6.12,

pp. 206-13—but not in Indiana. “Indiana courts have

declined to embrace § 139 [of the Restatement], but have

recognized the possibility of relief for ‘injustice’ in

limited circumstances, while defining it much more

narrowly than in § 139.” Coca-Cola Co. v. Babyback’s Int’l,

Inc., 841 N.E.2d 557, 569 (Ind. 2006).

The Indiana definition is as follows:

In order to establish an estoppel to remove the case

from the operation of the Statute of Frauds, the party

must show [ ] that the other party’s refusal to carry out

the terms of the agreement has resulted not merely in

a denial of the rights which the agreement was intended to confer, but the infliction of an unjust and

unconscionable injury and loss.

In other words, neither the benefit of the bargain

itself, nor mere inconvenience, incidental expenses, etc.

short of a reliance injury so substantial and independent as to constitute an unjust and unconscionable

injury and loss are sufficient to remove the claim

from the operation of the Statute of Frauds.

Id., quoting Brown v. Branch, supra, 758 N.E.2d at 52, which

in turn was quoting Whiteco Industries, Inc. v. Kopani,

514 N.E.2d 840, 845 (Ind. App. 1987).

The formula itself—“unjust and unconscionable injury

and loss”—does not tell us much, and it has not been
8 No. 07-3910

further elaborated by the Indiana courts. Comparison

with Justice Traynor’s formula—“either an unconscionable injury or unjust enrichment”—deepens the mystery.

The Traynor formula suggests two grounds for getting

around the statute of frauds: unjust gain to the promisor

or “unconscionable” injury to the promisee. The former

seems the solider ground but is omitted in the Indiana

formulation unless the “unjust” in “unjust . . . injury”

should be understood as shorthand for unjust enrichment—but that would imply, contrary to the second

paragraph of the formulation in Babyback’s, that the rule

is inapplicable if there is no gain to the party pleading

the statute of frauds. In both formulas, the word “unconscionable” is confusing rather than clarifying, since if it

is meant to invoke the doctrine of unconscionability it

would duplicate unjust enrichment in the Traynor

formula and contradict the second paragraph in the

Indiana formula.

We can at least set aside any issue of unjust enrichment

in this case. The bank made no money in its dealings

with Classic and gained no other advantage; all it gained

was this lawsuit against it. And anyway, to invoke the

doctrine of unconscionability Classic would have to

show that it had been taken advantage of because of

its obvious ignorance or desperate circumstances, e.g.,

Weaver v. American Oil Co., 276 N.E.2d 144, 146 (Ind. 1971),

and there is nothing like that here. The bank was not

trying to drive a hard bargain with Classic—it insisted on

no unreasonable terms. And though a small business,

Classic is not a hapless consumer, poor tenant, or mom

and pop grocery store. It wanted a bank loan not to stave
No. 07-3910 9

off disaster but to finance an expansion of its business to

take advantage of an exciting business opportunity.

Insistence on the repayment of the student loans that one

of its principals had defaulted on (yet was capable of

repaying, as events showed) was hardly unconscionable

and anyway came from the Small Business Administration

rather than from the bank. All else aside, the doctrine

of unconscionability is a defense to the enforcement of a

contract, see, e.g., id., and the bank is not trying to

enforce a contract; it denies there was a contract.

We can get some help from the case law. In Monarco, the

fons et origo of the doctrine that the Indiana courts call

“unjust and unconscionable injury and loss,” there was

both a big loss and unjust enrichment. When the plaintiff reached 18 and wanted to leave home and forge his

own path in the world, his mother and stepfather

promised him that if he stayed and worked on the

family farm they would leave almost all their property

(which was in joint tenancy) to him. He stayed, and

worked hard, receiving in exchange only room and board

and spending money. The farm prospered. But when the

stepfather died 20 years later, he left his half interest in

the farm to his own grandson. 220 P.2d at 738-39. The

element of unjust enrichment lay in the fact that the

plaintiff had worked the farm for slight compensation

for 20 years (giving up among other things the opportunity to obtain an education beyond high school) in the

expectation that he would be well compensated when

either his mother or his stepfather died. The farm had

done well, in part no doubt because of the plaintiff’s

undercompensated efforts—his “sweat equity.” So the
10 No. 07-3910

grandson was indeed unjustly enriched. The plaintiff’s

having the rug pulled out from under him after working

for 20 years for slight remuneration faintly echoed

Laban’s fraud on his son-in-law Jacob. After promising

the hand of his younger daughter, Rachel, to Jacob in

marriage in return for seven years’ service to him, Laban

tricked Jacob—whose work had enriched Laban—into

marrying Laban’s elder daughter, Leah, instead. Jacob

was compelled to serve Laban for another seven years

in order to be permitted to marry Rachel. As in Monarco,

there was both unjust enrichment of the oral promisor

and heavy loss to the promisee—seven more years of

unpaid labor.

Only two cases (one a federal district court diversity

case governed by Indiana law) have allowed a claim

based on the Indiana formula to survive a motion for

summary judgment, though in neither case did the plaintiff

ultimately prevail. (In three other cases—Hardin v. Hardin,

795 N.E.2d 482, 487-88 (Ind. App. 2003); Tincher v.

Greencastle Federal Savings Bank, 580 N.E.2d 268, 272-74

(Ind. App. 1991), and Tipton County Farm Bureau Cooperative Ass’n v. Hoover, 475 N.E.2d 38, 41-42 (Ind. App.

1985)—Indiana courts allowed a statute of frauds defense

to be overcome by simple, unadorned promissory

estoppel, but the Indiana Supreme Court disapproved

those decisions in Babyback’s. 841 N.E.2d at 569-70.)

In the diversity case, Madison Tool & Die, Inc. v. ZF Sachs

Automotive of America, Inc., 2007 WL 2286130 (S.D. Ind.

Aug. 7, 2007), the defendant orally agreed to make the

plaintiff its auto parts supplier. To induce the plaintiff to
No. 07-3910 11

retool its facilities so that it could supply the parts, the

defendant announced that it was not working with any

other suppliers and would therefore need the plaintiff

to begin production within 30 days. So the plaintiff went

out and bought a special machine for $415,000 to

produce the parts for the defendant. The plaintiff made

test parts for the defendant with the new machine, but

rather than ordering any parts the defendant assured

the plaintiff for three years that it would begin ordering

parts soon. Yet it never did, and at the end of the period

declared that it would not be using the plaintiff as a

supplier after all.

In the other case, Keating v. Burton, 545 N.E.2d 35 (Ind.

App. 1989), the defendant orally agreed to hire the

plaintiff as a full-time employee with an option to purchase 49 percent of the defendant’s company after three

years of employment. In reliance on the agreement the

plaintiff went to work for the defendant and claimed to

have shut down his own company, which had been

growing. (The court eventually found that the plaintiff

had not abandoned his business entirely. But for purposes of getting a fix on Indiana law, all that matters is

the evidence that was before the court when it decided

not to grant summary judgment to the defendant.) After

the plaintiff had been working for the defendant’s company for a year and a half, the defendant so limited the

plaintiff’s responsibilities that he quit.

These cases are not as dramatic as Monarco or Genesis

29 and do not involve (so far as appears) substantial

gain to the (oral) promisor. But there is a family resem-
12 No. 07-3910

blance, which helps us to understand the scope and

operation of the Indiana formula as elaborated in the

second paragraph of the indented quotation from

Babyback’s and as paraphrased in Spring Hill Developers,

Inc. v. Arthur, 879 N.E.2d 1095, 1103 (Ind. App. 2008), as

follows: the “injury must be not only (1) independent

from the benefit of the bargain and resulting incidental

expenses and inconvenience, but also (2) so substantial as

to constitute an unjust and unconscionable injury.” The

benefit of the bargain would be what the promisee hoped

to gain from the promise, which in Madison would have

been the profit from selling auto parts to the defendant

and in Keating the 49 percent share of the defendant’s

company. The plaintiffs lost those expectancies of course,

but they suffered other losses as well—the cost of the

machine in Madison that the plaintiff would not have

bought had it not been for the oral promise and in Keating

the plaintiff’s alleged loss of his company. And those

losses were significant in relation to the plaintiffs’ net

worth, satisfying the second part of the Indiana formula.

But what these cases really show is the mercury-like

slipperiness of the Indiana formula, as of the Monarco

formula as well. The “benefit of the bargain” is contractspeak for the expected profit from performing a contract;

the “independent” loss of which the Spring Hills opinion

spoke is the reliance loss—the expenses a party incurs

to perform the contract. The plaintiff in Madison

incurred the expense of the machine in reliance on the

defendant’s promise, and likewise with the plaintiff’s

giving up his business in Keating. A promise plus a reliance
No. 07-3910 13

loss is what you need for promissory estoppel, yet the

Indiana Supreme Court refused in Babyback’s to endorse

a general exception to the statute of frauds for promissory

estoppel. 841 N.E.2d at 568-70; see Spring Hill Developers,

Inc. v. Arthur, supra, 879 N.E.2d at 1100-04. So the whole

weight of the doctrine of “unjust and unconscionable

injury and loss” falls on the gravity of the injury, and the

decisive distinction between Monarco, Madison, and

Keating (and for that matter Jacob’s grievance) on the

one hand and the present case on the other hand is

simply the duration of the injury in those cases relative

to this one: 20 years, 3 years, 1.5 years, and 7 years (Jacob’s

case), versus in our case at most 2.5 months but more

likely 3.5 weeks—the time that elapsed between Dowling’s

telling Classic on September 17 that the deal was a “go”

and on October 12 that the loan application had been

rejected. The more protracted the period during which

reliance costs are being incurred, the stronger the inference that the oral promise was as the plaintiff represents

it to be; for had there been no promise the plaintiff’s

conduct—his immense reliance cost relative to his resources—would be incomprehensible.

Remember that the objection to placing promissory

estoppel outside the statute of frauds is that it is too

easy for a plaintiff to incur reliance costs in order to

bolster his claim of an oral promise. The objection is

attenuated if the reliance is so extensive that it is unlikely

that the plaintiff would have undertaken it (buying an

expensive specialized machine or giving up a growing

company) merely to bolster a false claim. He might of

course have misunderstood the “promisor” or been
14 No. 07-3910

gambling on getting a contract, but courts seem not to

think those possibilities likely enough to warrant a

sterner rule. The compromise that the courts strike between the value of protecting reasonable reliance and the

policy that animates the statute of frauds is to require a

party that wants to get around the statute of frauds to

prove an enhanced promissory estoppel, and the enhancement consists of proving a kind or amount of reliance

unlikely to have been incurred had the plaintiff not had

a good-faith belief that he had been promised remuneration.

This seems to us a better understanding of the “unjust

and unconscionable” rule than ascribing it to judicial

indignation at dishonorable behavior by promisors. It is a

strength rather than a weakness of contract law that it

generally eschews a moral conception of transactions.

Liability for breach of contract is strict, rather than based

(as tort liability generally is) on fault; punitive damages

are unavailable even for deliberate breaches (and again

note the contrast with tort law); and specific performance

is exceptional—and when the only remedy for a breach

of contract is compensatory damages, a promisor has in

effect an option to perform or pay damages rather than a

duty to perform (the duty the civil law expresses by the

phrase pacta sunt servanda). Even such contract doctrines

as “good faith,” “best efforts,” and “duress,” which have

a moral ring, seem aimed not at vindicating the moral

law but at protecting each party to a contract from the

other party’s taking advantage of a temporary monopoly

(not in an antitrust sense) that contracts often create when

the performance of the parties is not simultaneous. See,
No. 07-3910 15

e.g., Professional Service Network, Inc. v. American Alliance

Holding Co., 238 F.3d 897, 900-01 (7th Cir. 2001); Market

Street Associates Limited Partnership v. Frey, 941 F.2d 588,

594-97 (7th Cir. 1991). To give just one example, when a

seller grants an exclusive dealership the dealer is obliged

to use his best efforts to promote the seller’s product

because the seller has bound himself by the grant of

exclusivity not to create a competing dealership and

thus has placed himself in the dealer’s hands for the

duration of the contract. A best-efforts clause, which

contract law reads into exclusive dealerships, Wood v. DuffGordon, 118 N.E. 214 (N.Y. 1917) (Cardozo, J.), protects

the seller from the dealer’s exploiting the position that

the exclusivity conferred (because it has eliminated

competition from other dealers) by failing to promote

the seller’s product vigorously.

Even though the behavior of the defendants in Monarco

and the other cases we have discussed may well shock

the conscience, the outcomes of those cases are defensible

on the practical ground of protecting reasonable reliance

in situations (and this is key) in which the contention

that the reliance was induced by an oral promise is credible. The formulas the cases use to describe these situations, however, are not illuminating. Holmes warned that

“the law is full of phraseology drawn from morals, and by

the mere force of language continually invites us to pass

from one domain to the other without perceiving it, as

we are sure to do unless we have the boundary constantly

before our minds.” O.W. Holmes, “The Path of the Law,”

10 Harv. L. Rev. 457, 459-60 (1897). Ruminating on the
16 No. 07-3910

meaning of “unjust” and “unconscionable” will not

separate the cases we have discussed from this case;

reflection on reliance will.

The duration of reliance in the present case was much

shorter than in the other cases that we have discussed,

and the reliance is more easily imagined as based on

hope than on a promise. And not all of it could be considered reasonable reliance, which is the only kind that

can support a claim of promissory estoppel and a fortiori

an invocation of the enhanced promissory-estoppel

doctrine of the Indiana cases. The only reasonable reliance

that the plaintiffs placed on Dowling’s assurances was

to cure (for less than $20,000) a delinquency somewhat

earlier than they would otherwise have been forced to

do. For the plaintiffs to treat the bank loan as a certainty

because they were told by the bank officer whom they

were dealing with that it would be approved was unreasonable, especially if, as the plaintiffs’ damages claim

presupposes, the need for the loan was urgent. Rational

businessmen know that there is many a slip ‘twixt cup

and lips, that a loan is not approved until it is approved,

that if a bank’s employee tells you your loan application

will be approved that is not the same as telling you it has

been approved, and that if one does not have a loan

commitment in writing yet the need for the loan is urgent

one had better be negotiating with other potential lenders

at the same time. The level of reliance that could be

thought to have been reasonable in this case was not

comparable to that involved in the other cases. In the

end, this case turns out to be a routine promissory
No. 07-3910 17

estoppel case, and that is not enough in Indiana to defeat

a defense of statute of frauds.

AFFIRMED.

10-17-08