Margeson v. Artis

• Decision Date: 18 December 2009
• Docket Number: No. 07-0944.,07-0944.
• Citation: 776 N.W.2d 652
• Parties: John MARGESON, an Individual, and Jennifer Margeson, an Individual, Appellees, v. Theresa A. ARTIS a/k/a Terri Artis, an Individual, and MASYD Enterprises, L.L.C., an Iowa Limited Liability Company, Appellants.
• Court: Iowa Supreme Court

776 N.W.2d 652

John MARGESON, an Individual, and Jennifer Margeson, an Individual, Appellees, v. Theresa A. ARTIS a/k/a Terri Artis, an Individual, and MASYD Enterprises, L.L.C., an Iowa Limited Liability Company, Appellants.

No. 07-0944.

Supreme Court of Iowa.

December 18, 2009.

Thomas G. Fisher, Jr. of Parrish, Kruidenier, Dunn, Boles, Gribble, Cook, Parrish, Gentry & Fisher, L.L.P., Des Moines, for appellants.

Jack H. Pennington and Allison E. Wallace of Dreher, Simpson & Jensen, P.C., Des Moines, for appellees.

CADY, Justice.

In this appeal, we must decide whether a contract modification was supported by consideration. We conclude no consideration supported the modification under the record presented. We vacate the opinion of the court of appeals and reverse the summary judgment granted by the district court.

I. Background Facts and Proceedings.

John and Jennifer Margeson entered into a contract to sell a weight-loss franchise business called "Inches-A-Weigh" to Theresa Artis.¹ The parties memorialized their agreement in an "Asset Purchase Agreement" executed on October 1, 2004. The purchase price was $125,000, payable at the time of closing, unless "otherwise allowed by the sellers in writing, contemporaneously or following execution" of the agreement.

The parties subsequently executed a second document entitled "Sales Agreement Addendum" (the addendum). This addendum was signed on October 7, 2004. It set the price of the sale of the business at $155,000, with $135,000 payable at the time of the closing. Of the amount to be paid at closing, $125,000 was identified as the proceeds of a loan secured by Artis from First Bank, and $10,000 was to be paid in cash. The remaining portion of the purchase price was to be paid to the Margesons in monthly installments in amounts based on sales.

The closing was set for October 18, 2004. On that date, Artis tendered the $125,000 proceeds of the loan from First Bank, together with an additional $10,000 from two personal checks drawn on her bank.

The parties ran into some disputes following the closing. Artis stopped payment on one of the personal checks delivered at the time of closing and stopped making the monthly payments in March 2005. The Margesons responded by filing a lawsuit for breach of the addendum. During the course of the litigation, Artis admitted she failed to make the full cash payment of $10,000 required to be paid at the time of closing under the addendum and stopped making the monthly payments required under the addendum.

The Margesons eventually filed a motion for summary judgment. They claimed there was no genuine issue of material fact as to any of the elements of their claim for breach of contract. Artis asserted the addendum was unenforceable because it was not supported by consideration and that genuine issues of material fact existed over the interpretation of the original contract and the addendum.

The district court found the addendum was supported by consideration. It also found Artis was estopped to enforce the original agreement and that she waived the legal requirement for the addendum to be supported by consideration. It granted summary judgment to the Margesons.

Artis appealed, and we transferred the case to the court of appeals. The court of appeals affirmed the ruling of the district court. We granted further review.

II. Standard of Review.

The parties agree the standard for reviewing rulings granting summary judgment is for correction of errors at law. Carr v. Bankers Trust Co., 546 N.W.2d 901, 903 (Iowa 1996). Summary judgment is only appropriate when the record demonstrates "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Iowa R. Civ. P. 1.981(3).

III. Discussion.

It is fundamental that a valid contract must consist of an offer, acceptance, and consideration. Taggart v. Drake Univ., 549 N.W.2d 796, 800 (Iowa 1996). While the element of consideration can be confusing,² it has been an essential part of the development of our contract law and the traditional notion that contract law exists to enforce mutual bargains, not gratuitous promises. See I E. Allan Farnsworth, Farnsworth on Contracts § 2.5, at 85 (3d ed.2004) [hereinafter Farnsworth on Contracts].

Generally, the element of consideration ensures the promise sought to be enforced was bargained for and given in exchange for a reciprocal promise or an act. Magnusson Agency v. Pub. Entity Nat'l Co.-Midwest, 560 N.W.2d 20, 27 (Iowa 1997). Thus, a promise made by one party to a contract normally cannot be enforced by the other party to the contract unless the party to whom the promise was made provided some promise or performance in exchange for the promise sought to be enforced. In other words, if the promisor did not seek anything in exchange for the promise made or if the promisor sought something the law does not value as consideration, the promise made by the promisor is unenforceable due to the absence of consideration. In this way, a promise is supported by consideration, in one of two ways. First, consideration exists if the promisee, in exchange for a promise by the promisor, does or promises to do something the promisee has no legal obligation to do. See Meincke v. Nw. Bank & Trust Co., 756 N.W.2d 223, 227-28 (Iowa 2008) (noting the rule that "[c]onsideration can be either a legal benefit to the promisor, or a legal detriment to promisee"). Second, consideration exists if the promisee refrains, or promises to refrain, from doing something the promisee has a legal right to do. 3 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 7:4, at 61 (4th ed.2008).

Generally, we presume a written and signed agreement is supported by consideration. Meincke, 756 N.W.2d at 227. Thus, a party asserting a lack-of-consideration defense has the burden to establish the defense. Id. We look for consideration from the language in the contract and by "what the parties contemplated at the time the instrument was executed." Id. (citing Hubbard Milling Co. v. Citizens State Bank, 385 N.W.2d 255, 259 (Iowa 1986)).

The Margesons seek to recover under the terms of the addendum. In doing so, they seek to enforce the promise by Artis to purchase the business for $155,000. Artis argues the terms of the addendum are not a legally binding part of the contract.³ More precisely, Artis argues the addendum, which was a modification of the original agreement, requires independent consideration to be binding. Artis argues there was no consideration in this case because the Margesons had a preexisting duty under the first agreement to sell the business to her for $125,000.

The Margesons do not argue the addendum was a new contract formed after rescission of the original contract.⁴ Similarly, the Margesons do not question the legal requirement of consideration to support the contract modification. Instead, they argue additional consideration was present to support the modification.

A. Independent Consideration for Contract Modification. Generally, a promise to perform a preexisting duty does not constitute consideration. Recker v. Gustafson, 279 N.W.2d 744, 758 (Iowa 1979). No consideration exists when the promisee has a preexisting duty to perform because a promisor is already entitled to receive the promise made by the promisee and the promisee has only made what amounts to a gratuitous promise. We have specifically applied this rule to preexisting contractual obligations when parties to an original contract agree to modify that contract.

In Recker, we addressed the consideration to support a modification of a contract for the sale of real estate. 279 N.W.2d at 753-55. In that case, two couples contracted to convey 155 acres of farmland for $290,000 with an option for the buyers to purchase a contiguous five-acre tract for $30,000 if the sellers decided to sell the five acres at a future date. Id. at 746. A few weeks later, the parties conferred and agreed to modify the first agreement in two respects. Id. at 747. The buyers agreed to pay an additional $10,000 for the 155 acres and also agreed to alter the option to buy the additional five acres at a purchase price to set by the sellers at the time of the sale. Id.

After reviewing the case law concerning contract modifications, we "affirm[ed] our prior holdings that new consideration is necessary to support a contract modification." Id. at 759. We found "[t]he price hike, apparently, was motivated by a desire for more money," no new consideration existed, and the modification was not binding. Id. at 758-59. The parties in this case do not question the rule, so we likewise refrain from revisiting the precedent.⁵ Our law clearly requires some new consideration to support the modification of a contract.

Of course, the law of contracts is not concerned with the actual value of the consideration, only that some new consideration exists. As legal commentators point out, courts often search for even minimal benefit or detriment to satisfy the independent-consideration requirement. See Farnsworth on Contracts § 4.23, at 535 (noting Lord Coke held, "although the mere payment of a lesser sum cannot discharge a greater debt, `the gift of a horse, hawk, or robe . . . in satisfaction is good'" (quoting Foakes v. Beer, L.R. 9 A.C. 605 (H.L.1884))). This court has likewise held "[a] sufficient legal detriment to the promisee exists if the promisee `promises or performs any act, regardless of how slight or inconvenient, which he is not obligated to promise or perform. . . .'" Meincke, 756 N.W.2d at 228 (quoting 3 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 7:4, at 41 (4th ed.1992)). The critical inquiry is whether the promisee at least promises to give up something.

Consistent with Recker, Artis argues the addendum was unenforceable because it arose only from a desire by the Margesons to obtain more money for their...