Page 7 - John Hundley 2012

Sharp Thinking

No. 59 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. March 2012

Posner Pens a Primer on Promissory Fraud

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

The murky waters surrounding alleged “promissory fraud” and “letters of intent” received
noteworthy explications from the U.S. Court of Appeals for the Seventh Circuit recently.

Writing in BPI Energy Holdings, Inc. v. IEC (Montgomery), LLC, 664 F.3d 131 (7th Cir. 2011),
Circuit Judge and prolific author Richard Posner shed significant light on those two areas of law,
which pose significant risks for lawyers and businessmen.

“Letters of Intent”: In BPI, plaintiffs and defendants entered into first a “memorandum of
understanding” and then a “letter of intent”
under which plaintiffs were to transfer their
options and leases for potential coal-
producing properties to defendants and
defendants were to lease to plaintiffs the
right to extract methane from those
properties. Both documents stated that
they did not constitute binding agree-
ments and contemplated a further
written contract. Nonetheless plaintiffs commenced transferring their leases
and options to defendants before any final agreement had been signed.
Posner

Posner rejected the idea that such documents could constitute or evidence a contract
notwithstanding the disclaimers. While a “document can be a contract without calling itself a
contract,” he wrote, “when a document says it isn’t a contract, it isn’t a contract.”

“Promissory Fraud”: Next the court addressed the allegations of fraud. Illinois recognizes
“promissory fraud” only if it is part of a scheme to defraud, Posner noted. As defined by Illinois
courts, a “scheme to defraud” requires a pattern of fraudulent statements “or one particularly
egregious fraudulent statement,” he wrote.

However, “the fact that a party breaks a contract doesn’t show that its promise to perform
it had been fraudulent when made – that is, that the party had never
intended to perform it,” the court said. “Otherwise every victim of a breach of
contract could sue for fraud, trading a slightly higher burden of pleading and
proof (pleading with particularity, and proof by clear and convincing evidence
rather than by a mere preponderance), and a shorter statute of limitations . . .
for a shot at punitive as well as compensatory damages, while avoiding the
Statute of Frauds and the parol evidence rule and any other defenses to suits

●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●
Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
constitute educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain
legal advice on your particular situation, contact a Sharp lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.