                              In the

United States Court of Appeals
                For the Seventh Circuit

No. 07-3910

C LASSIC C HEESECAKE C OMPANY, INC., et al.,

                                               Plaintiffs-Appellants,
                                  v.


JPM ORGAN C HASE B ANK, 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.



   A RGUED S EPTEMBER 25, 2008—D ECIDED O CTOBER 17, 2008




  Before P OSNER, F LAUM, and E VANS, Circuit Judges.
  P OSNER, Circuit Judge. This appeal requires us to inter-
pret 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 agree-
ment 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 dis-
missal 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 distribu-
tion 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 applica-
tion, 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 govern-
ment 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 ap-
proved? 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 ap-
proved. 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 con-
duct 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 unconsciona-
ble” 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 circum-
vented by equitable estoppel, but that required a mis-
representation 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 in-
    tended 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 independ-
    ent 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 unconscion-
able 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 enrich-
ment—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 “uncon-
scionable” 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 plain-
tiff 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 oppor-
tunity 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 Coopera-
tive 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 pur-
chase 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 pur-
poses 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 com-
pany 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 contract-
speak 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 infer-
ence 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 re-
sources—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 be-
tween 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 enhance-
ment 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 remunera-
tion.
  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. Duff-
Gordon, 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 credi-
ble. The formulas the cases use to describe these situa-
tions, 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 con-
sidered 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 unrea-
sonable, 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.
                                               A FFIRMED.




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