John Margeson, An Individual, And Jennifer Margeson, An Individual Vs. Theresa A. Artis A/k/a Terri Artis, An Individual, And Masyd Enterprises, L.l.c., An Iowa Limited Liability Company ( 2009 )

IN THE SUPREME COURT OF IOWA
No. 07–0944
Filed December 18, 2009
JOHN MARGESON, an Individual,
and JENNIFER MARGESON, an Individual,
Appellees,
vs.
THERESA A. ARTIS a/k/a TERRI ARTIS, an Individual,
and MASYD ENTERPRISES, L.L.C., an Iowa Limited Liability Company,
Appellants.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Karen A.
Romano, Judge.
Further review of court of appeals decision affirming summary
judgment enforcing contract modification. DECISION OF COURT OF
APPEALS VACATED; DISTRICT COURT JUDGMENT REVERSED; CASE
REMANDED.
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.
2
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
1Inches-A-Weigh was actually owned by A Perfect Fit, L.L.C. The Margesons are
manager-members of A Perfect Fit. A limited liability company formed by Artis, MASYD
Enterprises, L.L.C., was also a party to the contract.
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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).
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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
2For example, the enforceability of some promises has proven malleable as courts
and scholars have rethought the theoretical underpinnings of the element of consideration.
See I E. Allan Farnsworth, Farnsworth on Contracts § 2.2, at 77–79 (3d ed. 2004).
5
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.
3Artis also argues that, even if the addendum is supported by consideration, the two
writings are ambiguous, requiring interpretation and precluding summary judgment. Our
ruling on the consideration issue relieves us from the need to address this alternative
argument.
4The parties to a contract are free to rescind the contract and subsequently form a
contract requiring identical promises or performances by either side. Recker v. Gustafson,
279 N.W.2d 744, 755 (Iowa 1979). When a rescission is followed by a subsequent contract,
the consideration for the two contracts can be identical. Id.
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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. Id. 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.
5It is noteworthy, however, that a significant number of commentators and a growing
number of courts deride the preexisting-duty rule as outdated and unnecessary. See, e.g.,
7
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
Corneill A. Stephens, Abandoning the Pre-Existing Duty Rule: Eliminating the Unnecessary, 8
Hous. Bus. & Tax L.J. 355 (2008) (labeling preexisting-duty rule as unnecessary in view of
modern contract doctrines such as duress); Farnsworth on Contracts § 4.22, at 528–29 n.3
(listing numerous law review articles and a modest amount of case law questioning the rule);
2 Joseph M. Perillo & Helen H. Bender, Corbin on Contracts § 7.1, at 342 (rev. ed. 1995)
(“The pre-existing duty rule is undergoing a slow erosion and, as a general rule, is destined
to be overturned.”); Robert A. Hillman, Contract Modification in Iowa—Recker v. Gustafson
and the Resurrection of the Preexisting Duty Doctrine, 65 Iowa L. Rev. 343 (1980) (questioning
utility of preexisting duty rule in Iowa). The Restatement (Second) of Contracts and the
Uniform Commercial Code have adopted different rules. The Restatement approach allows
contract modification in the absence of independent consideration when there is a change in
circumstance, statutory support, or detrimental reliance. Restatement (Second) of
Contracts § 89 (1979). The Uniform Commercial Code entirely eliminates the requirement to
show independent consideration in sale-of-goods cases in order to permit “necessary and
desirable modifications of sale contracts without regard to the technicalities which at
present hamper such adjustments.” 1A U.C.C. § 2–209(1) & cmt. 1 (2004).
Interestingly, Recker noted the Restatement (Second) approach, but refrained from
endorsing or rejecting it because “no unanticipated circumstances” existed to support the
modification. 279 N.W.2d at 758.
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for their business than agreed in the original purchase agreement. Although
Artis agrees she promised in the addendum to pay $30,000 more for the
business, she claims the Margesons did not provide a return promise or
performance in exchange for her promise to pay more money.
The Margesons argue the independent-consideration requirement is
fulfilled in this case. They argue the addendum is supported by three
instances of additional consideration: (1) a financing plan, (2) flexibility in
payments, and (3) the ability to renegotiate the payment terms. The district
court found these provisions to amount to independent consideration, as did
the court of appeals.
The three terms of the addendum identified by the Margesons were not
part of the original purchase agreement. However, additional terms in a
modification agreement do not, alone, constitute new consideration for the
modification. The additional terms must furnish consideration for the party
seeking to enforce the modification.
New financing terms can constitute sufficient consideration to support
the modification of a preexisting obligation. See Meincke, 756 N.W.2d at
227–28 (finding future financing sufficient to support a subordination
agreement). Yet, the new financing terms would need to apply to the
preexisting obligations under the original agreement to satisfy the
consideration requirement needed for the modification that the promisee
promise to do something the promisee has no prior legal obligation to do or
refrain from doing something that the promisee has a legal right to do.
In this case, all three new financing terms pertained only to the
promise made by Artis to pay the additional $30,000. Thus, the new
financing terms under the modification were merely part of the new promise
by Artis to pay an additional sum of money for the business. The terms did
not establish that the Margesons promised to do something they were not
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otherwise already obligated to do (sell business for $125,000 due at closing)
or promised to refrain from doing something they had a legal right to do. Of
course, the Margesons would have furnished new consideration for the
modification if the financing terms under the modification applied to part or
all of the $125,000 due at the time of closing of the original agreement.
Under such a case, the Margesons would have furnished consideration
because they would have promised to refrain from doing something (giving
up the right to receive the original purchase price in a lump sum at the time
of closing) that they had a legal right to do.
Consequently, just as occurred in the Recker case, the modification
was nothing more than a unilateral price hike. Recker relied on numerous
authorities in approving the rule that “ ‘a promise of additional performance
for the same compensation or to pay additional compensation for the same
performance is invalid for want of sufficient consideration.’ ” 279 N.W.2d at
754 (quoting 1A Corbin on Contracts § 175, at 114 (1963)). Here, Artis
promised additional compensation for the same performance by the
Margesons. Thus, the Margesons cannot enforce the promise by Artis to pay
more money for the business because they failed to produce any evidence to
show they promised to do something more than they had promised to do
under the first agreement. The addendum does not reflect independent
consideration and the summary judgment record does not demonstrate even
a “horse, hawk, or robe” provided by Margesons in exchange for the
additional purchase money.
B. Estoppel and Waiver. Despite the absence of consideration, we
must further consider if the decision of the district court can be affirmed on
the alternative grounds of estoppel and waiver. The district court found
Artis was estopped from arguing the absence of consideration in the
modification by her conduct in making payments to the Margesons
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consistent with the addendum. It further found Artis waived the
requirement for independent consideration to support the addendum by the
provision in the original agreement that allowed written modifications of the
agreement.
We recognize the doctrine of equitable estoppel in contract law. Under
this doctrine, the parties to a valid contract may “ ‘estop themselves from
asserting any right’ ” under the contract “ ‘by conduct inconsistent with the
continued existence of the original contract.’ ” Recker, 279 N.W.2d at 755
(quoting Severson v. Elberon Elevator, Inc., 250 N.W.2d 417, 421 (Iowa
1977)). The doctrine looks both to the acts of the parties and the contract
itself. Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 380 (Iowa 1983).
Nevertheless, estoppel used to override the requirement of consideration to
support a modification requires a showing that the party asserting estoppel
detrimentally relied on the conduct of the other party so as to make it
inequitable to allow that party to assert the lack of consideration. See
Republic Nat’l Bank of N.Y. v. Sabet, 512 F. Supp. 416, 425–26 (S.D.N.Y.
1980).
In this case, the summary judgment record revealed no evidence to
establish any inequity to the Margesons in allowing Artis to assert the legal
defense of lack of consideration. The district court relied only on evidence
that Artis acted inconsistently with the purchase price terms under the
original agreement for a period of time to support the application of equitable
estoppel. However, this evidence does not establish the required element of
detrimental reliance. 6
6The Margesons do not even argue they refrained from breaching the agreement and
selling to another suitor at a higher cost, an argument which some commentators suggest
may constitute a detriment to the seller sufficient to amount to consideration. See
Farnsworth on Contracts § 4.17, at 506–07.
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Parties to a contract can also agree to waive certain legal
requirements. The district court found Artis and the Margesons waived the
requirement of consideration for a modification agreement by including the
following contract term in the original agreement:
The aggregate purchase price for the assets, licensing and rights
of the business shall be $125,000 payable at closing, in lump
sum or as otherwise allowed by the sellers in writing,
contemporaneously or following execution of this agreement.
The interpretation of a written contract is a question of law, unless the
contract is ambiguous. Allen v. Highway Equip. Co., 239 N.W.2d 135, 139
(Iowa 1976). Thus, the meaning of an unambiguous contract presents a
legal question, which may be properly resolved by summary judgment.
McCormack v. Citibank, N.A., 100 F.3d 532, 538 (8th Cir. 1996).
The plain language of the contract provision at issue in this case
reveals it unambiguously applied only to the timing of the payment of the
agreed purchase price of $125,000. It did not allow the Margesons to modify
the amount of the purchase price. Consequently, the clause did not support
a waiver of the requirement of consideration for a modification of the
purchase price.
IV. Conclusion.
The addendum was not supported by independent consideration. 7 The
Margesons were not entitled to summary judgment on their breach-of-
contract claim. The decision of the court of appeals is vacated, and the
district court judgment is reversed.
DECISION OF COURT OF APPEALS VACATED; DISTRICT COURT
JUDGMENT REVERSED; CASE REMANDED.
All justices concur except Wiggins and Baker, JJ., who take no part.
7Based on our determination the addendum is not supported by consideration, in
favor of Artis, we forego consideration of Artis’s alternative argument that the two writings
referenced in this case are ambiguous, precluding summary judgment.