City of Chicago v. Michigan Beach Housing Cooperative

THIRD DIVISION
June 10, 1998



No. 1-96-0646

THE CITY OF CHICAGO,

Plaintiff-Appellant,

v.

MICHIGAN BEACH HOUSING COOPERATIVE,
JAYSON INVESTMENTS, INC., MICHIGAN BEACH
COOPERATIVE PARTNERS LIMITED
PARTNERSHIP, MICHIGAN BEACH LIMITED
PARTNERSHIP, ICF DEVELOPMENT
CORPORATION, CINCINNATI MORTGAGE
CORPORATION, IDA C. FISHER, JAY CANEL,
and SCOTT CANEL,

Defendants-Appellees.)
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)Appeal from the
Circuit Court of
Cook County

No. 91 CH 5558

Honorable
Albert Green,
Judge Presiding.


JUSTICE CAHILL delivered the opinion of the court:
The City of Chicago appeals the trial court's grant of
summary judgment for defendants on misrepresentation and breach of
contract claims against defendants. We affirm summary judgment for
all defendants on counts I and II of the city's complaint. We also
affirm summary judgment for defendant Michigan Beach Housing
Cooperative (Cooperative) on count II of its counterclaim. We
affirm summary judgment for defendant Cincinnati Mortgage
Corporation (CMC) on count III of the city's complaint, but reverse
summary judgment for the remaining defendants on count III and
remand.
The facts underlying this case are set out in City of Chicago
v. Michigan Beach Housing Cooperative, 242 Ill. App. 3d 636, 609 N.E.2d 877 (1993) (Michigan Beach I). After Michigan Beach I was
decided the trial court allowed the city to file a third amended
complaint incorporating theories not resolved in the first appeal.
We here summarize only those facts necessary to resolve the issues
appealed.
In 1988, under a reorganization plan devised by Jayson
Investments, Inc. (Jayson), the city loaned the Cooperative
$3,295,230 to transform a high-rise rental apartment building into
a cooperative. Before dispersing the loan, the city required
written certification that 50% to 70% of the cooperative units had
been sold. ICF Development Corporation (ICF) was hired to sell the
units.
Defendant Ida Fisher, president of ICF, provided a sworn
statement that "the 51% presale requirement of cooperative
memberships [had] been satisfied as of the date of closing."
Documents purporting to show who had bought the units were
attached. The parties executed a promissory note and the city
received a junior mortgage on the Michigan Beach property. Under
the note, repayment is not due for 42 years from the date of the
junior mortgage. Annual interest payments are to be paid only from
"surplus cash." The terms of the mortgage prohibit the city from
foreclosing without the consent of the senior mortgagee. CMC held
the senior mortgage on a United States Department of Housing and
Urban Development (HUD) co-insured loan.
On May 16, 1989, the developers informed the city's housing
commissioner by letter that the cooperative project was not
economically viable. The developers said, "[o]n the basis of
recent audits, it is clear that the building was never 51% presold
and that in fact the actual presale number was probably less than
20%. As a result, the building is more than $1,200,000 behind
projections at this time and there is no way for it to make up lost
ground." The developers asked the city to issue tax credits that
the developers would then market to raise money. The developers
said that if the city did not issue tax credits, "the present
cooperative unit owners of the building will lose in excess of
$250,000 and the City will lose its entire $3,300,000 loan."
The city continued to disburse money under the loan until mid-
July 1989. In July 1989, the city also awarded $300,000 of low-
income housing tax credits to Michigan Beach Limited Partnership
(MBLP), an entity created by the developers to acquire title to the
building from the Cooperative.
The developers then sought to convert the project back into
low-income rental housing and to syndicate the tax credits granted
by the city. The city objected to the conversion of the project to
low-income rental housing, but did not rescind the tax credits.
The property was later transferred from the Cooperative to Jayson,
and then to MBLP, and the tax credits were syndicated. MBLP paid
$1,065,600 on the senior mortgage under an agreement with HUD. In
return, HUD agreed not to consent to an attempt by the city to
foreclose on the property. As of June 12, 1991, the Michigan Beach
property was converted back into a low-income rental project.
In July 1991, HUD sanctioned the city by deducting $1,383,240
from the city's grant of HUD rental rehabilitation program funds.
This penalty was the amount of city loan funds HUD determined had
been spent on items not eligible for reimbursement with rental
rehabilitation program funds under HUD regulations. See 24 C.F.R.
511.10(f) (1997). HUD claimed that city loan funds had been used
to pay ineligible expenses, including a developer service fee, a
marketing fee, organization expenses and financing-related
expenses.
In an earlier appeal of this case, we reviewed the dismissal
of counts I through V of the city's first amended complaint.
Michigan Beach I, 242 Ill. App. 3d 636. In counts I through V, the
city sought to accelerate payments under the city's note and to
recover syndication proceeds, alleging that the syndication was an
event of default under the mortgage. We affirmed the dismissal.
We held that the city waived the right to declare default based on
the syndication when it subsequently issued tax credits. We also
held that the city was not entitled to recover syndication funds as
collateral.
The city now appeals summary judgment granted to defendants on
a third amended complaint and count II of MBLP's counterclaim.
Counts I and II of the city's third amended complaint allege that
the city is entitled to damages resulting from the developers'
fraudulent (count I) or negligent (count II) misrepresentations
that more than 50% of the cooperative units were presold. Count
III alleges that CMC, MBLP, Jayson, and the Cooperative breached
their agreements to ensure that city loan proceeds were spent only
on expenses eligible for rental rehabilitation reimbursement.
Count IV alleges that the developers and the Cooperative
fraudulently transferred the project from the Cooperative to MBLP
to prevent the city from obtaining a remedy for fraud. Count V
alleges a conspiracy to fraudulently transfer the assets of the
Cooperative to MBLP to deprive the city of a meaningful remedy.
The city did not appeal summary judgment on count IV or V.
Count II of MBLP's counterclaim alleges that the city is
obligated to advance the last $110,295 of the loan to MBLP.
The city filed a motion for summary judgment on counts I
through III of its complaint and count II of the counterclaim.
Defendants Jayson Investments, Michigan Beach Cooperative Partners
Limited Partnership, Jay Canel, and Scott Canel filed a cross-
motion for summary judgment on all city claims and on count II of
MBLP's counterclaim, arguing that the city was not damaged by the
presale misrepresentations. CMC filed a cross-motion for summary
judgment on count III of the city's complaint. The trial court
granted summary judgment for all defendants. The trial court found
that "because the [c]ity loan is not in default and the [c]ity will
be repaid in accordance with its terms, defendants are entitled to
judgment as a matter of law." The court also granted MBLP relief
on count II of its counterclaim, directing the city to make its
last loan payment.
We review summary judgment de novo. Ocasek v. City of
Chicago, 275 Ill. App. 3d 628, 630, 656 N.E.2d 44 (1995). Summary
judgment is proper when the pleadings, depositions, and affidavits,
taken in the light most favorable to the nonmovant, present no
genuine issue of material fact and show that the movant is entitled
to judgment as a matter of law. Golla v. General Motors Corp., 167 Ill. 2d 353, 358, 657 N.E.2d 894 (1995).
We first address the city's argument that the circuit court
erred by ordering the city to make the last disbursement of the
loan to MBLP. The city argues that it should not be required to
pay the loan because "it is black letter law that the
misrepresentations *** vitiate any obligation that party has under
the contract." See Ainsworth Corp. v. Cenco, Inc., 107 Ill. App.
3d 435, 439, 437 N.E.2d 817 (1982) ("fraud in the inducement
vitiates all contracts"). As with most legal generalizations,
there are exceptions. We have one of them here.
The city had two legal remedies available when it became aware
of defendants' misrepresentations: (1) rescind the contract and
recover the consideration paid; or (2) affirm the contract and sue
for damages. DeSantis v. Brauvin Realty Partners, Inc., 248 Ill.
App. 3d 930, 936, 618 N.E.2d 548 (1993), quoting Beaton &
Associates Ltd. v. Joslyn Manufacturing & Supply Co., 159 Ill. App.
3d 834, 844, 512 N.E.2d 1286 (1987). When the city learned of the
misrepresentation, it did not rescind the contract, but sued for
damages. But the city continued to disburse monies under the loan
through July 1989 and awarded $300,000 of tax credits in an attempt
to save the project. If a defrauded party does not "disaffirm or
abandon the transaction with all reasonable diligence" and
"conducts himself *** as though [the contract were] still
subsisting and binding," he waives his right to rescind and must
continue to perform his obligations under the contract. Eisenberg
v. Goldstein, 29 Ill. 2d 617, 622, 195 N.E.2d 184 (1963). Having
failed to promptly exercise the option to rescind the contract, the
city remains obligated under it, though still free to sue for
damages. The trial court did not err in ordering the city to pay
the final loan disbursement.
The city next argues that the trial court erred in finding
that the city was not damaged by a fraudulent inducement to make
the loan. The city argues the following damages resulted from the
fraudulent misrepresentations: (1) the "diversion of [the city's]
scarce housing funds from cooperative housing to subsidize instead
a low-income rental high-rise project"; (2) a loan with a lesser
value than the loan, absent the fraud, would have had; (3) the
$1,383,240 HUD sanction; and (4) the tax credits, which the city
claims were issued in "mitigation" of the city's damages.
The elements of the tort of fraudulent misrepresentation are:
(1) a false statement of material fact; (2) known or believed to be
false by the party making it; (3) intent to induce the other party
to act; (4) action by the other party in justifiable reliance on
the truth of the statement; and (5) damage to the other party
resulting from such reliance. Gerill Corp. v. Jack L. Hargrove
Builders, Inc., 128 Ill. 2d 179, 193, 538 N.E.2d 530 (1989). The
torts of negligent and fraudulent misrepresentation differ only in
the mental state element: the defendant who makes a negligent
misrepresentation need not know the statement was false. Rather,
plaintiff must show that defendant owes a duty to plaintiff to
communicate accurate information and that the defendant was
negligent in ascertaining the truth of the statement. Board of
Education v. A, C, & S, Inc., 131 Ill. 2d 428, 452, 546 N.E.2d 580
(1989).
The trial court found that the city failed to establish the
last element under either theory: damage resulting from the city's
reliance on the statement. Damage is an essential element of
fraud. See Gerrill, 128 Ill. 2d at 193; Shah v. Chicago Title &
Trust Co., 119 Ill. App. 3d 658, 661, 457 N.E.2d 147 (1983).
Absolute certainty about the amount of damage is not necessary to
justify a recovery if damage is shown, but damages may not be
predicated on "mere speculation, hypothesis, conjecture or whim."
In re Application of Busse, 124 Ill. App. 3d 433, 438-39, 464 N.E.2d 651 (1984). The evidence must show a basis for computing
damages with a "fair degree of probability." Barnett v. Caldwell
Furniture Co., 277 Ill. 286, 289, 115 N.E. 389 (1917). See also
Posner v. Davis, 76 Ill. App. 3d 638, 645, 395 N.E.2d 133 (1979).
The city claims that it was damaged by losing an opportunity
to convert low-income rental housing into cooperative housing. We
agree that the city's goal of converting low-income rental housing
into cooperative housing was frustrated by the misrepresentation.
But the tort of common-law fraud primarily addresses the invasion
of economic interests. Giammanco v. Giammanco, 253 Ill. App. 3d
750, 761-62, 625 N.E.2d 990 (1994), citing D. Dobbs, Remedies 9.1,
at 591 (1973). "'[D]eceit belongs to that class of tort of which
pecuniary loss generally constitutes part of the cause of action.'"
Giammanco, 253 Ill. App. 3d at 762, quoting 37 Am. Jur. 2d Fraud &
Deceit 282, at 378 (1968). We cannot conclude based on our
examination of the case law that fraudulent interference with the
city's policy and efforts to encourage cooperative housing,
standing alone, is tangible enough evidence to establish a
pecuniary loss.
The city cites City of Chicago v. Roppolo, 113 Ill. App. 3d
602, 614, 447 N.E.2d 870 (1983), for the proposition that "this
court has recognized that the [c]ity is damaged when important
municipal policies are frustrated by fraud." In Roppolo, the city
and a class of its citizens sought damages and a constructive trust
on property obtained through misrepresentation. We did not decide
the issue of whether the city was entitled to damages, for lack of
a sufficient record. Nor did we articulate a standard or under
what circumstances damages for the frustration of municipal
policies might be appropriate. We remanded the cases to allow the
circuit court to conduct a hearing on damages. See Roppolo, 113
Ill. App. 3d at 617. Whatever elements might make up a case for
damages based on frustration of municipal policies through fraud,
the party defrauded must establish a measure for those damages.
Roppolo stands for the proposition that the frustration of
municipal policies can be caused by fraud, but it does not stand
for the proposition that a court can arbitrarily assign a dollar
figure to the city's frustration.
The city argues here that it is entitled to a "benefit-of-the-
bargain" measure of damages. Benefit-of-the-bargain damages are
developed by "assessing the difference between the actual value of
the property sold and the value the property would have had if the
representations had been true." Gerill Corp., 128 Ill. 2d at 196.
"[T]o show injury, plaintiffs must allege facts which show the
value of what they received was not equal to the value of what they
were promised." Giammanco, 253 Ill. App. 3d at 759.
We note that the city made no argument for benefit-of-the-
bargain damages in its complaint or in response to defendants'
motion for summary judgment. Arguments raised for the first time
on appeal are waived. Softa Group, Inc. v. Scarsdale Development,
260 Ill. App. 3d 450, 452, 632 N.E.2d 213 (1993).
Even if the issue were properly before us, the city has not
shown a genuine issue of material fact that damage may have been
sustained. We agree that the "benefit-of-the-bargain" is a
proper measure of damages. See Gerill Corp., 128 Ill. 2d at 196.
In an appropriate case, a plaintiff may recover the difference
between the value of the note or security interest as represented,
and the value of the note or security interest received. See
Sigman v. Stevens-Norton, Inc., 70 Wash. 2d 915, 919, 425 P.2d 891,
895-96 (1967) (measuring damages as the difference in the value of
the note as represented and its true value); Busse, 124 Ill. App.
3d at 440 (measuring damages as the difference between the value of
the security interest as represented and the value of the security
interest received). But the city neither alleged in its complaint
nor offered evidentiary materials at summary judgment that such
damages were sustained.
The city argues that even though the loan is not yet in
default, it has been injured by defendants' inability to pay and
the increased risk to the city's investment. But we can only
speculate about whether the loan will be repaid when it becomes due
after 42 years, or whether the building's use as rental housing
makes the investment "riskier." The city's claim that the loan
will never be repaid, and that this possibility of nonpayment
affects the value of the loan, is not supported by expert opinion
or other evidence in the record. We can only conclude that the
argument is based on "speculation, hypothesis, [and] conjecture."
See Posner, 76 Ill. App. 3d at 645.
The city now claims that, if this case is remanded, experts
will testify to the reduced value of the loan. But the city did
not assert before the trial court that such evidence was available.
While a plaintiff need not prove his case at summary judgment, he
must come forward with enough evidence to create a genuine issue of
material fact. Holland v. Arthur Andersen & Co., 212 Ill. App. 3d
645, 651, 571 N.E.2d 777 (1991).
The city, relying on Busse, 124 Ill. App. 3d 433, 464 N.E.2d 651, next asserts that the "benefit-of-the-bargain" measure of
damages entitles it to "damages *** equal [to] the amount of the
loan." Even if this argument were properly developed before the
trial court, we are not persuaded. In Busse, the defendants
fraudulently replaced a note and trust deed that gave plaintiffs a
senior security interest. The replacement was a note and trust
deed that subordinated the plaintiffs' purchase-money security
interest in the subject property. The issue was whether plaintiffs
established the value of the senior security interest lost as a
result of the misrepresentation. The court concluded that a recent
sale price of the property was evidence of its value. Busse, 124
Ill. App. 3d at 440. The plaintiffs were entitled to the
difference between the value of the security interest as
represented, $225,000, and the value of the security interest
received, which was nothing. The court then limited the recovery
to the amount due under the note. Busse does not stand for the
proposition that a plaintiff is always entitled to the full amount
loaned on a fraudulently induced promissory note and mortgage.
Unlike the plaintiffs in Busse, where there was evidence of a
recent sales price, the city has offered no evidence that the value
of its mortgage or loan is less than it would have been if
defendants' misrepresentations had been true.
The city also argues it is entitled to consequential damages.
As a general rule, a plaintiff may recover damages for injuries
proximately caused by defendant's representations. Gold v. Dubish,
193 Ill. App. 3d 339, 351, 549 N.E.2d 660 (1989). First, the city
suggests that it is entitled to damages in the amount of the HUD
sanction. The city argues that absent the misrepresentation, the
city would not have made the loan, and, going a little farther down
the road, money dispersed would then not have been misappropriated
and HUD then would not have imposed sanctions. The proximate cause
problem is evident.
The city is not entitled to all losses that would not have
occurred "but for" the misrepresentation. See Giammanco, 253 Ill.
App. 3d at 760. In an action for fraud, "'damages *** must be a
proximate, and not remote, consequence of the fraud.'" See Martin
v. Heinold Commodities, Inc., 163 Ill. 2d 33, 59, 643 N.E.2d 734
(1994), quoting Brown v. Broadway Perryville Lumber Co., 156 Ill.
App. 3d 16, 25, 508 N.E.2d 1170 (1987), and citing Key v. Jewel
Cos., 176 Ill. App. 3d 91, 530 N.E.2d 1061 (1988). While the city
would not have been sanctioned if it had not entered the
fraudulently induced transaction, "proximate causation limits
recovery to 'those damages which might foreseeably be expected to
follow from the character of the misrepresentation itself.'"
Martin, 163 Ill. 2d at 61, quoting W. Prosser, Torts 110, at 732
(4th ed. 1971). There was nothing in the original
misrepresentation that would lead one to conclude that HUD funds
would be misused and lead to a government sanction.
The city next argues that it is entitled to the $300,000 worth
of tax credits the city issued to MBLP. We disagree. The tax
credits had no independent value when issued to MBLP. The credits
only became valuable as a benefit to investors after syndication.
See Michigan Beach I, 242 Ill. App. 3d at 647. Fraud damages are
measured by the plaintiff's loss, not the defendant's gain. Shah,
119 Ill. App. 3d at 662.
We finally address the city's argument that it is at least
entitled to nominal damages. If a party proves all the elements of
fraud or negligent misrepresentation, including the essential
element of damage, nominal damages can be recovered. See
Giammanco, 253 Ill. App. 3d at 758 (1994). Here the city has not
established the essential element of damage and is not entitled to
nominal damages. See Purcell & Wardrope Chartered v. Hertz Corp.,
175 Ill. App. 3d 1069, 1084, 530 N.E.2d 994 (1988). Even if we
concede the point, the city has waived this argument. The city did
not argue that it was entitled to nominal damages before the trial
court or seek nominal damages in its complaint. See Softa Group,
260 Ill. App. 3d at 452.
We finally address the city's argument that the trial court
erred in granting summary judgment to defendants for all defendants
named in count III of the city's third amended complaint.
Defendants do not respond to this argument on appeal.
Count III alleges that defendants CMC and the Cooperative, as
agent of MBLP and Jayson, breached contractual duties to ensure
that city loan proceeds were spent only on eligible rehabilitation
expenses. The trial court denied the city's motion for summary
judgment, finding that several disputes of material fact remained,
including "the [contractual] duties of CMC and the city ***, the
performance of their respective obligations, and the city's having
incurred any resulting damages." The trial court then, without
explanation, granted summary judgment to all defendants named in
count III.
Although the trial court did not give a reason for granting
summary judgment on count III, we may affirm summary judgment based
on any grounds supported by the record. Pepper Construction Co. v.
Transcontinental Insurance Co., 285 Ill. App. 3d 573, 577, 673 N.E.2d 1128 (1996)
The city, CMC, and the Cooperative entered into an "agreement
pursuant to 24 C.F.R. 221.540(e) and 207.19(c)(7)." The
agreement provided that rehabilitation funds "must be used solely
for eligible costs associated with the rehabilitation project."
The agreement also said "CMC will have the sole authority to
resolve any significant disputes arising out of the inspection
process and out of the disbursement of Rental Rehabilitation Grant
Program monies of the City loan." CMC also "retain[ed] the right
to approve construction advances after giving full consideration to
any reported noncompliance by the City of Chicago." In its summary
judgment motion, the city argued that these provisions "remove
control of the disbursement of [rental rehabilitation funds] from
the city and rest control in [CMC], who certified eligible costs."
These provisions indicate that CMC has the power to decide
whether disbursement is proper only if a "dispute arise[s]" or in
response to "reported noncompliance." The city's complaint does
not allege that CMC was faced with a dispute or report of
noncompliance. The city cites no other contract language to show
that CMC had an obligation to oversee compliance with HUD
regulations. Summary judgment for CMC was proper.
The trial court also granted summary judgment for the
Cooperative, Jayson, and MBLP on count III. The agreement required
the Cooperative, an alleged agent of Jayson and MBLP, to spend city
loan funds in compliance with HUD regulations. But the trial court
made an oral finding that questions of fact remain regarding
performance of those obligations. We agree with that finding. We
must reverse the trial court's grant of summary judgment for
Jayson, MBLP, and the Cooperative on the city's count III, and
remand for further proceedings.
Affirmed in part and reversed in part; cause remanded.
LEAVITT, P.J., and GORDON, J., concur.