In re Mediscan Research, Ltd.
| Decision Date | 30 October 1989 |
| Docket Number | No. LA-80-00915-BR,Adv. No. LA-86-3316-BR.,BAP No. CC-88-1753,LA-80-00915-BR |
| Citation | 109 BR 392 |
| Parties | In re MEDISCAN RESEARCH, LTD., Debtor. GREENAMYER ENGINEERING AND TECHNOLOGY, INC. a California Corporation, Appellant, v. MEDISCAN RESEARCH, LTD., a California Limited Partnership, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Brian R. Shumake, South Pasadena, Cal., for appellant.
Christopher M. Laquer, Jett & Laquer, Pasadena, Cal., for appellee.
Before JONES, MOOREMAN and VOLINN, Bankruptcy Judges.
Appellant, Greenamyer Engineering and Technology, Inc. appeals a bankruptcy court's refusal to enforce an amendment and note to an agreement entered into by Appellant and the debtor, Mediscan Research, ltd. We Affirm.
On January 17, 1986, Mediscan filed a petition for relief under Chapter 11 of the Bankruptcy Code. Mediscan is a limited partnership that was formed in 1981 to fund the development of a human temperature and monitoring device ("Project"). The research and the development of the Project was to be performed by Appellant. In order to raise funds for the Project, the general partners of Mediscan, American Principals Corporation ("APC"), published a Private Placement Memorandum ("PPM"). The PPM stated that $4,917,500.00 was to be raised through the sale of 35 limited partnership units at $140,500.00 per unit. The PPM further provided that the investors' funds were to be held in an escrow account until all 35 units were sold. The funds were to be returned to the investors if all the units were not sold by December 31, 1981.
As of December 31, 1981, only 13.5 units were sold; however, instead of returning the investors' money, Mediscan and the Appellant entered into a Research and Development Agreement ("Agreement"). The Agreement modified Mediscan's original contract with Appellant by directing Mediscan to pay the Appellant $1,601,871.00 rather than $4,153,000.00. $1,601,871.00 is 13.5/35ths of the $4,153,000.00 provided for in the PPM. In addition, the modification, which enabled Appellant to begin performance, limited Appellant's research and development to tax deductible research and development.
About a year later, on November 17, 1982, Appellant and APC executed an amendment to the Agreement ("Amendment"). Even though Appellant's obligations under the Agreement were not changed by the Amendment, the Amendment required Mediscan to pay Appellant the original $4,153,000.00 rather than the agreed $1,601,871.00. In addition, by way of the Amendment, the remaining 21.5 units were offered and sold. APC then executed a Promissory Note ("Note") to Appellant. The Note obligated Mediscan to pay Appellant $1,953,000.00.
Shortly after the issuance of the Note, the Securities and Exchange Commission brought an action against APC alleging various violations of the federal securities laws. (SEC v. American Principals Holdings, Inc., Case No. CV-84-1383 (S.D.Cal. 1984)). The court appointed a receiver who subsequently informed the investors in APC of the apparent securities violations. As a result, the limited partners of Mediscan formed Mediscan Technology, Inc., which replaced APC as general partner of Mediscan. It should be noted that in January, 1988, the Chief Executive Officer and sole shareholder of APC, W. Carl Zimmerman, was indicted on several counts of mail fraud based on his activities relating to APC and various investment limited partnerships.
To date, Mediscan has paid Appellant $2,204,003.00. Mediscan contends that since the research and development of the Project was completed with those funds, it is no longer indebted to the Appellant. However, Appellant contends that pursuant to the terms of the Amendment it is still owed the balance of the Note.1 As a result of this disagreement, Mediscan filed an adversary action seeking a return of funds paid to Appellant on the grounds that the money paid was not spent for tax deductible research pursuant to the original Agreement. Appellant answered by filing a counterclaim asserting that Mediscan's Note was valid and enforceable and that due to Mediscan's breach Appellant was entitled to $1,953,000.00 plus interest at 10% per annum from January 1, 1985. After taking the matter under submission, the Honorable Barry Russell, Judge of the United States Bankruptcy Court for the Central District of California, determined that Mediscan was not entitled to a return of the funds it paid Appellant and that Appellant was only entitled to the monies it had received.2 Appellant timely appealed.
This Panel reviews the bankruptcy court's findings of fact by the clearly erroneous standard of review enunciated in Fed.R.Civ.P. 52(a). In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1377 (9th Cir.1985).
Mediscan contends that an amendment to a contract which does nothing more than change the price to be paid is without valid consideration and is unenforceable. In support of its contention, Mediscan cites Krobitzsch v. Middleton, 72 Cal.App.2d 804, 165 P.2d 729, 731 (1946) for the proposition that an amendment is itself a contract which must be supported by independent consideration. Specifically, Mediscan argues that a modification whereby one party agrees to pay more for the same performance by the other party is not enforceable. Cal.Civ.Code § 1698. Section 1698 states:
Cal.Civ.Code § 1698 (1989).
In Motown Record Corporation v. Brockert, 160 Cal.App.3d 123, 133, 207 Cal. Rptr. 574, 581 (1984), the California Appellate Court stated:
. . . The California Supreme Court has interpreted the language of section 1698 literally, holding that an executory written modification must meet the requirements of a valid contract. (See Timbie, Modification of Written Contracts in California (1972) 23 Hast.L.J. 1549, 1553). Specifically, the court has held the modification must be supported by new consideration. (Main St. & Agricultural Park R.R. v. Los Angeles Traction Co. (1900) 129 Cal. 301, 305, 61 P. 937). Accordingly, an executory agreement to pay for the same performance is unenforceable. (Fairlane Estates v. Carrico Constr. Co. (1964) 228 Cal. App.2d 65, 71, 39 Cal.Rptr. 35).
Motown Record Corporation, 160 Cal. App.3d at 133, 207 Cal.Rptr. 574. In the instant case, Appellant agreed to perform what it was already obligated to perform for $1,601,871.00. Consequently, since doing that which one is legally bound to do is not sufficient consideration, we conclude that the Amendment and Note are not enforceable. See Pacific Finance Corporation. First National Bank of Puente, 4 Cal.2d 47, 47 P.2d 460, 461 (1935).
Appellant contends that when the Agreement was executed, it and APC orally agreed that Appellant would perform only part of the written contract if additional investors were not found. Appellant also contends that its subsequent oral agreement to do all the research and development constituted consideration for the Amendment. However, Appellant's duty to perform the research and development of the Project was expressly stated in the Agreement and was not modified by the Amendment. Specifically, Exhibit A to the Agreement includes a schedule of task plans and sub-tasks necessary to complete the Agreement. The Amendment did not change these tasks. Furthermore, paragraph 10.01 of the Agreement states that Appellant is to receive $1,601,871.00 in "full consideration" of its performance. With regard to oral agreements, paragraph 16 of the Agreement states:
16. No Verbal Agreement. No change in, addition to, or erasure of a printed portion of the Agreement (except for the filling of specific blank spaces and lines) shall be valid or binding upon either of the parties hereto and no verbal agreement of any nature, relating to the subject matter of this Agreement, or to any relationship between the parties, will be considered valid or enforceable. This Agreement may be amended only in writing.
Accordingly, Appellant's contention that it orally agreed to do only 13.5/35ths of the research and development needed to complete the Project is contrary to the express terms of the Agreement.
Section 2 of the Agreement provides that all amounts paid by Mediscan to Appellant must qualify as tax deductible research and experimental expenditures under 26 U.S.C. § 174 of the Internal Revenue Code.3 Section 174 permits deduction in full of research and experimental expenses in order to encourage such activities by new as well as ongoing...
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