Court Opinion

ID: 857679
Source: CourtListenerOpinion
Date Created: 2013-04-10 14:18:49.210892+00
Date Added: 2024-06-11T12:38:37.376474
License: Public Domain

In the

United States Court of Appeals
              For the Seventh Circuit

No. 11-3208

M ICHAEL B URKE,
                                                 Plaintiff-Appellant,
                                 v.

401 N. W ABASH V ENTURE , LLC,
                                                Defendant-Appellee.

            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
           No. 08-CV-05330–George M. Marovich, Judge.

    A RGUED N OVEMBER 26, 2012—D ECIDED A PRIL 10, 2013

 Before R OVNER, W ILLIAMS, and T INDER, Circuit Judges.
  W ILLIAMS, Circuit Judge. Michael Burke signed a con-
tract to purchase a condominium unit and two parking
spaces in the Trump International Hotel & Tower in
downtown Chicago for about $2.2 million. Burke made
two earnest payments totaling 20% of the purchase
price. When it came time to close, however, Burke
refused to pay. He filed this lawsuit after the developer
declined to refund his earnest money. Burke maintains
2                                             No. 11-3208

that the developer made a material change when it
placed parking on the Trump Tower’s sixth floor. But the
documents he signed demonstrate that Burke was on
notice that the use of the sixth floor for parking was
always a possibility. Burke also argues on appeal that
the agreement he signed was unenforceable from the
start, but the agreement is not void for lack of mutuality
as the developer had an obligation to act in good faith
to convey the condominium to him. Nor is the con-
tract unenforceable due to a penalty clause, because
the contract did not give the developer the option to
choose between actual or liquidated damages. For
these reasons, we affirm the district court’s dismissal
of Burke’s second amended complaint.

                  I. BACKGROUND
  On December 31, 2006, when the real estate market
was still strong, Michael Burke, a citizen of Ireland,
signed a contract with 401 N. Wabash Venture, LLC, the
developer for the Trump International Hotel & Tower
in Chicago, to buy a condominium unit and two parking
spaces in the Trump Tower. The total purchase price
was $2,282,130, which included $150,000 for the
parking spaces. Burke deposited $456,426 in earnest
money, an amount equal to 20% of the purchase price.
  Before he signed the purchase agreement, Burke
received a copy of the initial Trump Tower Property
Report that was dated September 24, 2003. The Prop-
erty Report stated that the development would contain
an “undetermined number of unit parking spaces within
No. 11-3208                                                3

the above-ground facilities that the Developer currently
intends will be located on some floors three (3) through
twelve (12) . . . .” The developer later set a closing
date of August 7, 2008. On August 6, the developer
gave Burke a copy of the condominium’s Declaration
and Special Amendment to the Covenants, Conditions,
and Restrictions (CCR’s). The Special Amendment stated
that the sixth floor would be used for parking spaces.
  Burke did not close on the unit, asserting that the use
of the sixth floor for parking lowered the value of his
investment and increased the amount of maintenance
fees he would be required to pay. Burke sought to
rescind the contract. He asked the developer to refund
his earnest money, but it refused. Burke then filed
this lawsuit, styling it as a class action.
  The developer moved to dismiss Burke’s suit for
failure to state a claim upon which relief could be
granted. After the district court dismissed Burke’s
original complaint, Burke amended his complaint
twice. The second amended complaint contained sixteen
counts. The district court struck five counts, it granted the
developer’s motion to dismiss for failure to state a claim
on nine counts, and Burke voluntarily dismissed two
counts. In light of its conclusion that the complaint
failed to state any claims for relief, the court did not
reach the issue of class certification. Burke appeals.

                      II. ANALYSIS
  We review dismissals under Federal Rule of Civil
Procedure 12(b)(6) de novo. Citadel Group Ltd. v. Wash. Reg’l
4                                               No. 11-3208

Med. Ctr., 692 F.3d 580, 591 (7th Cir. 2012). In doing so
here, we construe the amended complaint in the light
most favorable to Burke, accept Burke’s well-pleaded
facts as true, and draw all reasonable inferences in
Burke’s favor. See Ashcroft v. Iqbal, 556 U.S. 662, 678,
(2009); McReynolds v. Merrill Lynch & Co., 694 F.3d 873,
979 (7th Cir. 2012). To survive a motion to dismiss, the
complaint must contain enough facts to state a claim
for relief that is plausible on its face. Citadel Group, 692
F.3d at 591.

A. No Material Change
  Burke argues that after he and the developer signed
the purchase agreement, the developer made a material
change to the Property Report, and that it did so without
the approval of 75% of the Trump Tower owners. So
he maintains that he is entitled to a remedy under sec-
tion 22 of the Illinois Condominium Property Act,
765 Ill. Comp. Stat. 606/22, or under a common law
breach of contract theory.
  The Illinois Condominium Property Act requires that,
with respect to the initial sale of any condominium
unit, the seller must make certain disclosures and
provide copies of certain documents to the prospec-
tive purchaser including the declaration, bylaws of
the association, the projected operating budget for the
condominium unit, and the unit’s floor plan. 765 Ill.
Comp. Stat. 605/22(a)-(e). The parties use the term “Prop-
erty Report” to refer collectively to the documents
No. 11-3208                                               5

that the seller must disclose to the buyer in section 22,
as do we.
   In reviewing Burke’s claim, we first note that the
district court properly considered the Property Report
in ruling on the motion to dismiss even though Burke
had not attached the Property Report to his complaint.
In general, a court may only consider the plaintiff’s com-
plaint when ruling on a Rule 12(b)(6) motion. Rosen-
blum v. Travelbyus.com Ltd., 299 F.3d 657, 661 (7th Cir.
2002). However, Federal Rule of Procedure 10(c) pro-
vides that “[a] copy of any written instrument which
is an exhibit to a pleading is a part thereof for all pur-
poses.” We have concluded that this rule includes a
limited class of attachments to motions to dismiss
pursuant to Rule 12(b)(6). Rosenblum, 299 F.3d at 661.
“ ‘[D]ocuments attached to a motion to dismiss are con-
sidered part of the pleadings if they are referred to in
the plaintiff’s complaint and are central to his claim.’ ”
McCready v. eBay, Inc., 453 F.3d 882, 891 (7th Cir. 2006)
(quoting 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 735
(7th Cir. 2002)) (additional quotation omitted). These
documents may be considered by a district court in
ruling on the motion to dismiss without converting
the motion into a motion for summary judgment. Id.
The court “ ‘is not bound to accept the pleader’s allega-
tions as to the effect of the exhibit, but can independently
examine the document and form its own conclusions
as to the proper construction and meaning to be given
the material.’ ” Rosenblum, 299 F.3d at 661 (quoting 5
Charles Alan Wright & Arthur R. Miller, Federal Practice
& Procedure: Civil 2d, § 1327 at 766 (1990)).
6                                              No. 11-3208

  Here, Burke’s complaint makes repeated reference to
the Property Report, and the Property Report is central
to his claims that the developer violated the Illinois
Condominium Property Act and breached a contract.
He alleges that the developer made a material change
to the information in the Property Report, and that it
did so without sufficient buyer approval. The Property
Report is clearly central to these claims, and the district
court was right to consider it.
 In addition to requiring the disclosure of certain docu-
ments, section 22 of the Condominium Act also provides:
    All of the information required by this Section
    which is available at the time shall be furnished
    to the prospective buyer before execution of
    the contract for sale. Thereafter, no changes or
    amendments may be made in any of the items
    furnished to the prospective buyer which would
    materially affect the rights of the buyer or the
    value of the unit without obtaining the approval
    of at least 75% of the buyers then owning
    interest in the condominium. If all of the infor-
    mation is not available at the time of execution
    of the contract for sale, then the contract shall
    be voidable at option of the buyer at any time
    up until 5 days after the last item of required
    information is furnished to the prospective
    buyer, or until the closing of the sale, whichever
    is earlier. Failure on the part of the seller to
    make full disclosure as required by this Section
    shall entitle the buyer to rescind the contract
No. 11-3208                                               7

    for sale at any time before the closing of the con-
    tract and to receive a refund of all deposit
    moneys paid with interest thereon at the rate
    then in effect for interest on judgments.
765 Ill. Comp. Stat. 605/22.
   Burke maintains that the developer made a change
or amendment to the information in the Property
Report that affected him without obtaining approval of
at least 75% of the buyers. The developer responds that
rescission for a violation of the disclosure obligation
is the only remedy provided to a buyer under section 22,
yet Burke does not allege that the developer failed to
make full disclosure about any matter required by
section 22. The parties do not point us to any Illinois
state court decision squarely answering whether the
Condominium Act contains a private right of action or
remedy when a buyer alleges that the developer made
a material change without 75% approval. Cf. Luster v.
Jones, 388 N.E.2d 1029, 1033 (Ill. App. Ct. 1979) (ruling
that rescission due to seller’s failure to disclose is a
remedy for the prospective buyer only prior to closing,
not after); Goldberg v. 401 N. Wabash Venture, LLC, 2010
WL 1655089, at *6 (N.D. Ill. 2010) (concluding that
Illinois Condominium Act does not include an im-
plied private right of action for violation of section 22’s
amendment provision).
   We need not predict whether the Supreme Court of
Illinois would find that Burke has an available remedy
because there was no material change. Cf. Allstate Ins.
Co. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir. 2002)
8                                               No. 11-3208

(discussing obligation of federal court sitting in di-
versity to ascertain how state’s highest court would
decide). The only purported material change Burke
asserts is the “addition” of parking on the sixth floor. The
initial Trump Tower Property Report was issued in
September 2003, and Burke received a copy of it before
signing the purchase agreement. It states in relevant part:
    The Condominium will contain . . . an undeter-
    mined number of unit parking spaces within
    the above-ground parking facilities that the Devel-
    oper currently intends will be located on some
    of floors three (3) through twelve (12) . . . .
Consistent with the Property Report, the purchase agree-
ment Burke signed stated:
    In addition to the Condominium and the
    Hotel Condominium, the Building will likely
    include: . . . (B) a public parking garage area,
    currently anticipated to contain parking spaces
    located on floors LL2, LL3, and LL4 of the
    Building and some of floors three (3) through
    twelve (12) of the Building . . . .
  So from the outset, it was clear from the documents
Burke received that the number of parking spaces had
yet to be determined and also that Wabash Venture
planned to locate parking on “some of floors three (3)
through twelve (12).” Burke was put on notice of the
possibility that any of those floors could be used for
parking. Clearly, floor six was a possibility for parking.
Locating parking on the sixth floor was not a change or
amendment from the disclosed plans that materially
No. 11-3208                                                9

affected his rights or his unit’s value. Indeed, it was not
a change at all. The parking space matter does not
amount to material breach under either the Condo-
minium Act or a common law breach of contract theory.

B. Agreement Does Not Fail for Lack of Mutuality
  Burke also argues that the purchase agreement was
faulty from the outset and that he is therefore entitled
to rescission. For one, Burke argues that the purchase
agreement is unenforceable for lack of mutuality.
Because Burke breached the agreement, the developer
maintains that under the contract it can keep the earnest
money Burke deposited that is equal to 20% of the pur-
chase price. Burke emphasizes that the purchase agree-
ment states that if the developer had instead been the
party that defaulted, the return of earnest money is
Burke’s sole remedy. (He does not mention the possi-
bility of specific performance, nor does he seek it here.)
Burke maintains that the developer’s obligations under
the contract are therefore merely illusory and that it
could simply sell the unit to a new buyer willing to pay
a higher price than the existing contract price with
no harmful consequences.
  “In its most elemental sense, the doctrine of mutuality
of obligation means that unless both parties to a
contract are bound by its terms, neither is bound.”
Schwinder v. Austin Bank of Chi., 809 N.E.2d 180, 193 (Ill.
App. Ct. 2004); see also Kraftco Corp. v. Kolbus, 274 N.E.2d
153, 155 (Ill. App. Ct. 1971). The idea of a strict mutuality
requirement is, however, disfavored. See, e.g., Carter v. SSC
10                                                 No. 11-3208

Odin Operating Co., 976 N.E.2d 344, 351 (Ill. 2012); Restate-
ment (Second) of Contracts § 79 cmts. a, f (1979). The
Supreme Court of Illinois has explained:
     While consideration is essential to the validity of
     a contract, mutuality of obligation is not. Where
     there is no other consideration for a contract,
     the mutual promises of the parties constitute
     consideration, and these promises must be
     binding on both parties or the contract falls for
     want of consideration, but where there is any
     other consideration for the contract, mutuality of
     obligation is not essential.
Carter, 976 N.E.2d at 351 (quoting Armstrong Paint &
Varnish Works v. Cont’l Can Co., 133 N.E. 711, 714 (Ill. 1922));
see also McInerney v. Charter Golf, Inc., 680 N.W.2d 1347,
1351-52 (Ill. 1997).
   In Illinois, courts have imputed an implied promise of
good faith and fair dealing in real estate purchase agree-
ments. Schwinder, 809 N.E.2d at 194. As a result, Illinois
courts have rejected arguments similar to the one
Burke makes now. In Borys v. Josada Builders, Inc., 441
N.E.2d 1263 (Ill. App. Ct. 1982), for example, the Illinois
appellate court considered a dispute over the sale of
condominium units. The contract provided that if the
seller failed to deliver good title to the unit, the buyers’
remedy was limited to a return of all funds paid or de-
posited. Borys, 441 N.E.2d at 1266. The buyers argued
that because the seller could control the quality of the
title and the seller’s liability was limited to return of
the deposit, the seller was free to perform or not
No. 11-3208                                             11

perform at will and that the contract therefore lacked
mutuality. Id. In light of the implied promise of good
faith and fair dealing, however, the court rejected the
buyers’ argument. Id. The court concluded that when
the contract was construed, as it said it must be, as re-
quiring the parties to act in good faith, the seller had an
obligation to obtain the quality of title required under
the contract to consummate the sale. Id. at 1267. There-
fore, mutuality of obligation existed. Id.
  More recently, in Schwinder v. Austin Bank of Chicago,
809 N.E.2d 180 (Ill. App. Ct. 2004), the Illinois appellate
court analyzed a condominium purchase agreement
that contained a provision similar to the one here. That
contract provided that return of the earnest money to
the purchaser was the purchaser’s “sole exclusive rem-
edy” in the event of the seller’s default. 809 N.E.2d
at 185. Although neither party contended that the
clause was invalid, the court analyzed whether there
was mutuality of obligation because of the buyer’s claim
that the seller had an unfettered right to terminate
the purchase agreement. Id. at 194-95. The court stated
that the duty of good faith and fair dealing was
imposed on the provision of the contract granting the
seller the right to terminate the contract, with the
result that there were mutually binding obligations on
both the buyer and seller. Id. at 195.
  Under Illinois law, then, Burke’s argument that the
purchase agreement is unenforceable on the basis that
the developer can “breach at will and all he has to do is
give [Burke’s] money back” has no merit. As in Borys
12                                                No. 11-3208

and Schwinder, Illinois law imputes the implied obliga-
tion of good faith and fair dealing into the developer’s
obligation to convey the condominium unit and parking
spaces to Burke. And although Burke contends that
applying the implied covenant of good faith “overrides”
contract provisions, we have rejected that argument
before. See, e.g., L.A.P.D., Inc. v. Gen. Elec. Corp., 132 F.3d
402, 403-04 (7th Cir. 1997) (explaining that “good faith” in
Illinois contract law is a gap-filling approach and is
essentially used as construction aid). The developer
had the obligation under the contract to convey the con-
dominium unit and parking spaces to Burke. In light
of the implied obligation of good faith and fair dealing,
the agreement did not lack mutuality.

C. Liquidated Damages Clause Enforceable
   Burke’s complaint also contains a count asserting he
can rescind the agreement on the ground that it contains
an unenforceable penalty clause. As an initial matter,
Burke does not point to any case suggesting that the
remedy for an unenforceable damages clause under
Illinois law is rescission of the contract. Cf. Grossinger
Motorcorp, Inc. v. Am. Nat’l Bank and Trust, 607 N.E.2d
1337, 1348 (Ill. App. Ct. 1992) (“In sum, we conclude
that the liquidated damages provision is unenforceable
and that consequently defendant is only allowed to
recover actual damages resulting from the breach.”); see
also Hamming v. Murphy, 404 N.E.2d 1026, 1032 (Ill.
App. Ct. 1980).
No. 11-3208                                                   13

   In any event, the clause is enforceable. Whether a pro-
vision constitutes a valid liquidated damages clause or
an unenforceable penalty clause is a question of state
law that we review de novo. Energy Plus Consulting, LLC
v. Ill. Fuel Co., LLC, 371 F.3d 907, 909 (7th Cir. 2004).
Paragraph 12(a) of the purchase agreement provides, as
it relates to damages:
   In the event of a default or breach of this Purchase
   Agreement by Purchaser, . . . Seller may terminate
   this Purchase Agreement and, as its sole and
   exclusive remedy upon termination, retain as
   liquidated damages . . . [the] Earnest Money de-
   posit . . . and if Seller is otherwise entitled to
   the liquidated damages described above, Seller
   shall return to Purchaser amounts paid to
   seller . . . . In accordance with Section 1703(d) of the
   Interstate Land Sales Full Disclosure Act, if Seller
   is otherwise entitled to the liquidated damages
   described above, Seller shall return to Purchaser
   amounts paid to Seller . . . in excess of (x) 15%
   of the Purchase Price (excluding any interest
   paid under the Purchase Agreement) or (y) the
   amount of Seller’s actual damages, whichever
   is greater.
  In Illinois, a provision that allows a defendant the
option to receive liquidated damages or seek actual
damages is unenforceable as a penalty. Karimi v. 401 N.
Wabash Venture, LLC, 952 N.E.2d 1278, 1287 (Ill. App. Ct.
2011) (citing Grossinger, 607 N.E.2d at 1347). Such a pro-
vision is unenforceable because it gives the defendants
14                                             No. 11-3208

a minimum recovery regardless of actual damages, yet
also allows the defendants to disregard liquidated dam-
ages if the actual damages were greater than the
specified amount. Id. That negates the purpose of liqui-
dated damages, which is to provide parties with an
agreed upon, predetermined damages amount when
actual damages may be difficult to ascertain. Id.; Hickox
v. Bell, 552 N.E.2d 1133, 1140-41 (Ill. App. Ct. 1990).
  Here, the developer maintains that the clause does
not give it the option to choose between liquidated
and actual damages, and we agree. The plain language
of the provision shows that the only “option” the devel-
oper has upon the buyer’s breach is whether to
terminate the agreement, as the clause states that the
seller “may terminate” upon the buyer’s default or
breach. But there is no “may” in the provision as it
relates to the type of damages.
  Notably, the Illinois appellate court construed this
same liquidated damages provision in response to
another suit against the developer here and rejected the
argument Burke makes now. Karimi, 952 N.E.2d at 1287.
The court ruled that despite paragraph 12(a)’s reference
to actual damages, it did not give the seller the option
to seek them. Id. Rather, “[a]lthough a calculation of
actual damages may be necessary to determine a
liquidated damages amount, defendants can receive no
more than the amount plaintiffs have deposited
pursuant to the agreement, even if actual damages
prove greater than the sum deposited.” Id. The court
also rejected the plaintiffs’ argument that paragraph 12(a)
No. 11-3208                                               15

was a penalty because the developer sold the unit at
issue for more than the price in the plaintiffs’ purchase
agreement, reasoning that under the terms of the agree-
ment, it was irrelevant to the liquidated damages
issue whether the unit was later resold. Id. We see no
indication that the Supreme Court of Illinois would
disagree with this reasoning.

D. No Violation of Interstate Land Sales Full Dis-
   closure Act
  Burke also maintains he has stated claims for viola-
tions of the Interstate Land Sales Full Disclosure Act
(“ILSFDA”), 15 U.S.C. § 1703(d). One of the Act’s core
purposes is “ ‘to prevent false and deceptive practices in
the sale of . . . land by requiring developers to disclose
information needed by potential buyers.’ ” Bacolitsas v.
86th & 3rd Owner, LLC, 702 F.3d 673, 680 (2d Cir. 2012)
(quoting Flint Ridge Dev. Co. v. Scenic Rivers Ass’n of
Okla., 426 U.S. 776, 778 (1976)); see also Long v. Merrifield
Town Center Ltd. P’ship, 611 F.3d 240, 244 (4th Cir. 2010)
(“ILSFDA is a remedial statute enacted to prevent inter-
state land fraud and to protect unsuspecting and ill-
informed investors from buying undesirable land.”).
In instances where the statute applies (the developer
does not argue that any of its exemptions apply here),
section 1703(d)(3) permits revocation at the option of
the purchaser for two years after the date the pur-
chase agreement is signed if the agreement does
not provide that
16                                                 No. 11-3208

     if the purchaser . . . loses rights and interest in the
     lot as a result of a default or breach of the con-
     tract or agreement which occurs after the pur-
     chaser . . . has paid 15 per centum of the purchase
     price of the lot, excluding any interest owed under
     the contract or agreement, the seller . . . shall
     refund to such purchaser . . . any amount which
     remains after subtracting (A) 15 per centum of
     the purchase price of the lot, excluding any
     interest owed under the contract or agreement,
     or the amount of damages incurred by the seller . . .
     as a result of said breach, whichever is greater,
     from (B) the amount paid by the purchaser . . . . .
15 U.S.C. § 1703(d)(3).
  Burke argues that the purchase agreement’s state-
ment that the “Seller may terminate this Purchase Agree-
ment and, as its sole and exclusive remedy upon ter-
mination retain as liquidated damages . . .” fails to
comply with the ILSFDA’s requirement that the pur-
chaser be notified that “if the purchaser . . . loses rights
and interest . . . the seller . . . shall refund to such
purchaser . . . any amount which remains after
subtracting . . . .” (emphases added). This argument is
meritless. The word “shall” in that part of the statute
refers to the requirement that the seller refund any
amount remaining after application of a liquidated dam-
ages formula, if an amount must be refunded. The agree-
ment’s use of “may” comes in a different context alto-
gether, namely in giving the seller the choice of whether
to terminate the agreement or keep it in effect if the
purchaser defaults.
No. 11-3208                                             17

  Burke also argues that even if the contract is
enforceable and the developer is entitled to keep some
of his earnest money as a result of his breach, the
ILSFDA means that the developer may only keep an
amount equal to 15% of the purchase price. Once again,
we disagree. Section 1703(d)(3) does not create a maxi-
mum of 15% of the purchase price as the measure of
liquidated damages upon a purchaser’s breach. It
explicitly states that the amount the seller is to refund
is 15% of the purchase price, “or the amount of damages
incurred by the seller,” whichever is greater, 15 U.S.C.
§ 1703(d)(3) (emphasis added), so the 15% figure in
the ILSFDA is not a cap on damages.

E. No Breach of Contract in Retaining Earnest Money
   After Breach
  Burke’s complaint also asserts the developer’s failure to
return $114,106.50 of the earnest money he deposited,
an amount equaling 5% of the purchase price, means
that the developer breached paragraph 12(a) of the pur-
chase agreement. Paragraph 12(a) provides in relevant
part: “if Seller is otherwise entitled to the liquidated
damages described above, Seller shall return to
Purchaser amounts paid to Seller . . . in excess of (x) 15%
of the Purchase Price (excluding any interest paid
under the Purchase Agreement) or (y) the amount of
Seller’s actual damages, whichever is greater.”
 The district court dismissed this claim because Burke
made no allegations that the developer’s actual damages
were not greater than 20% of the purchase price. Without
18                                            No. 11-3208

an allegation that the developer’s actual damages were
less than 20% of the purchase price, the complaint fails
to state a claim upon which relief could be granted.
Indeed, as the district court stated, it is widely under-
stood that the value of the residential real estate market
fell after December 2006, when Burke entered into the
contract. We also note that the 20% figure is not so high
as to be unenforceable on public policy grounds. In
Illinois, “[c]ourts have considered earnest money repre-
senting up to 20% of the purchase price a reasonable
sum as liquidated damages.” Karimi, 952 N.E.2d at 1288.
Burke received three opportunities to plead an ac-
tionable claim. We agree with the district court that
he failed to plead a plausible claim for relief on this
breach of contract claim or any of the claims he chal-
lenges on appeal.

                  III. CONCLUSION
  For the foregoing reasons, we A FFIRM the judgment of
the district court.

                          4-10-13