You Be the Judge: Citizens Trust Bank v. White1
Facts: Herbert White refinanced his home through Citizens Trust Bank. When he fell behind on his
payments (he owed about $43,000) the Bank notified White that it intended to foreclose. The Bank sent
White a formal notice that it would sell his house at a foreclosure sale. The finance agreement stated
that if the Bank foreclosed, White owed the full amount.
On the sale date, White offered the Bank a cashier’s check for $35,000 to stop the foreclosure. The
Bank’s collection manager accepted the letter and drafted an agreement that he and White signed. The
agreement stated:
Citizens Trust Bank agrees to postpone the foreclosure [based on] a payment of $33,000 in certified
funds and a possible $2,000 from the account of Cora White Cummings on the above-referenced
property. Our Attorney William A. Broughman will forward you a written agreement, for your
signature, to consummate this transaction. The payoff balance as of 11:05 AM is $7,986.43. If his
sister pays the $2,000, the balance will be $5,986.43.
White paid the extra $2,000. The collection manager did not send an additional document. He
believed that White would pay the balance within 30 days, but White never did. The Bank sold White’s
home through foreclosure.
White sued the Bank claiming that is had breached its contract not to foreclose. A jury agreed,
awarding White $250,000. The Bank appealed arguing that White gave no consideration for the
agreement because he was already obligated to pay the full balance.
You Be The Judge: Was the signed letter an enforceable contract?
Holding: No, judgment of the trial court is reversed. According to the court, for a contract to be
binding, there must be a definite offer and complete acceptance for consideration. Here, there is an
offer and acceptance: White offered to pay $ 35,000 in exchange for the Bank’s agreement not to
proceed with the foreclosure. The Bank accepted the payment and stopped the foreclosure sale. White
owes the Bank money, even after making the $35,000 payment. Although the Bank’s act of forbearance
constituted adequate consideration for a contract, White’s payment of a debt that he already owed was
not. “An agreement on the part of one to do what he is already legally bound to do is not a sufficient
consideration for the promise of another.” Thus, there was no enforceable contract; judgment of the
trial court is reversed.
Question: If the Bank’s collection manager thought there was a valid forbearance, doesn’t that
matter? After all, the Bank is the creditor who will lose money if White does not pay.
Question: Was there anything White could have done to make the letter an enforceable contract?
Question: Why didn’t White do that?
Exception: Unforeseen Circumstances
When unforeseen circumstances cause a party to make a promise regarding an unfinished project, that
promise is generally valid consideration.
Settlement of Debts
Liquidated Debt — A liquidated debt is one in which there is no dispute about the amount owed. For a
liquidated debt, a creditor’s promise to accept less than the full amount is not binding.
1 274 Ga.App.508, 618 S.E.2d 9, Georgia Court of Appeals, 2005.
Exception: Different Performance: If the debtor offers a different performance to settle the liquidated
debt, and the creditor agrees to take it as full settlement, the agreement is binding.
Unliquidated Debt: A debt is unliquidated for either of two reasons: (1) the parties dispute whether
any money is owed, or (2) the parties agree that some money is owed but dispute how much. For an
unliquidated debt, if the parties agree that the creditor will accept less than the full amount claimed and
the debtor performs, there is an accord and satisfaction and the creditor may not claim any balance.
Accord and Satisfaction
An accord and satisfaction is an agreement in which parties to an unliquidated debt agree that the
creditor will accept less than the amount of her claim as full payment to settle the debt, followed by the
debtor’s payment of that amount. In most states payment by a check that has a “full payment” notation
will create an accord and satisfaction unless the creditor is an organization that has notified the debtor
that full payment offers must go to a certain officer.
Case: Henches v. Taylor2
Facts: Jim Henches, a licensed massage therapist, treated Benjamin Taylor after he was injured in a car
accident. Henches billed Taylor for more than $7,000. Taylor’s insurance company thought the bill was
too high and paid only $2,625 for 24 massages.
Henches continued to send bills to Taylor including charges for time spent consulting with Taylor’s
other health care providers, preparing to testify in Taylor’s personal injury lawsuit, and attempting to
collect his debts. In response to a bill for $11.945.86, Taylor’s lawyer sent Henches a letter stating:
I have reviewed your billing statements and am having a difficult time understanding a number
of charges you included. By my calculations, the amount owed to you is approximately
$5,243.45. I have enclosed a check for that amount as payment in full to settle Mr. Taylor’s
account with you.
The letter was accompanied by a check with “final payment: written on the notation line. Henches filed
suit seeking the full balance. Then he wrote “attorney/fee” on the check over the word “final” and
deposited the check.
The trial court gave summary judgment to Taylor, holding that the deposit of the check was an accord
and satisfaction. Henches appealed.
Issue: Was there an accord and satisfaction, discharging the debt?
Decision: Yes, depositing the check created an accord and satisfaction.
Reasoning: An accord and satisfaction exists when three circumstances arise. Parties have a
legitimately disputed debt. They agree that a partial payment of the debt will settle the dispute. Finally,
the defendant accepts the partial payment.
In this case, the defendant easily established the first and third elements. The parties had a genuine
dispute over the costly treatments and Henches deposited the check. But Henches claimed that he had
not agreed to accept the check as full payment of the debt. In the end, his own actions contradicted his
argument.
When he wrote “attorney/fee” over the word “final,” Henches indicated that he knew that Taylor
intended for the check to be a final settlement. If an amount is in dispute and the defendant offers
partial payment as full settlement, then accepting this money counts as full satisfaction, no matter what
else the plaintiff may do. When Henches deposited the check, he lost the ability to seek any further
payment.
Question: How does an accord and satisfaction raise issues of consideration?
Question: How did Taylor create an accord and satisfaction?
2 138 Wash. App. 1026, 2007 WL 1241525, Washington Court of Appeals, 2007.
Answer: By stating in the letter that the payment of $5,243.45 was payment in full. And by writing
Question: Was that all that was necessary in order for the accord and satisfaction to be valid?
Consideration: Trends
Employment Agreements
A covenant not to compete is an agreement in which an employee promises not to work for a
competitor for some time after leaving the company. It used to be that these covenants were rare and
reserved for top officers but they have now become commonplace throughout many organizations.
Oftentimes, these covenants raise an issue of consideration: What consideration does the employee
receive for signing a covenant not to compete?
Case: Snider Bolt & Screw v. Quality Screw & Nut3
Facts: James Scott signed a covenant not to compete when he went to work for Snider Bolt & Screw.
The agreement prohibited him from taking a job with a competitor for one year after leaving Snider.
Three years later, Mr. Scott quit his job at Snider and immediately went to work for Quality Screw &
Nut (QSN).
Snider obtained a temporary restraining order that banned Scott from working at his new job. QSN
argued that the covenant not to compete was void for lack of consideration. It asked the court to lift the
temporary restraining order.
Issue: Was there consideration for the covenant not to compete?
Decision: Yes, the covenant was supported by adequate consideration. The motion to lift the temporary
restraining order is denied.
Question: Did the 2002 covenant have consideration? Did both Snider and Scott receive new
benefits?
Answer: From 1999 to 2002, Scott worked for Snider without a contract. Snider could have fired
him at any time. Upon signing the employment agreement, Scott promised not to compete with
Question: Is that true?
Answer: No, the employment contract did bind Snider in a new way. In the contract, Snider
Promissory Estoppel and “Moral Consideration”
Judges have a tool by which they can enforce agreements even if there is no consideration. Under the
doctrine of promissory estoppel, a judge has the discretion to “ignore” the fact that consideration does
not exist if a promise causes foreseeable reliance by a plaintiff and a great injustice would be done if
the promise were broken. Some courts will use the phrase “moral consideration” to describe this basic
idea.
3 2009 U.S. Dist. LEXIS 50797 United States District Court for the Western District of Kentucky, 2009
Multiple Choice Questions
1. For consideration to exist, there must be:
(a) A bargained-for exchange
(b) A manifestation of mutual assent
(c) Genuineness of assent
(d) Substantially equal economic benefits to both parties
2. Which of the following requires consideration in order to be binding on the parties?
(a) Modification of a contract involving the sale of real estate
(b) Modification of a sale of goods contract under the UCC
(c) Both (a) and (b)
(d) None of the above
3. Ted’s wallet is as empty as his Bank account, and he needs $3500 immediately. Fortunately, he has
three gold coins that he inherited from his grandfather. Each is worth $2500, but it is Sunday, and
the local rare coins store is closed. When approached, Ted’s neighbor Andrea agrees to buy the first
coin for $2300. Another neighbor, Cami, agrees to buy the second for $1100. A final neighbor,
Lorne, offers “all the money I have on me” – $100 – for the last coin. Desperate, Ted agrees to the
proposal. Which of the deals is supported by consideration?
(a) Ted’s agreement with Andrea, only
(b) Ted’s agreements with Andrea and Cami, only
(c) All three of the agreements
(d) None of the agreements
4. In a(n) ____________ contract, the seller guarantees to sell 100% of its output to one buyer, and the
buyer agrees to accept the entire quantity. This kind of arrangement ____________ acceptable
under the Uniform Commercial Code.
(a) output; is
(b) output; is not
(c) requirement; is
(d) requirement; is not
5. Noncompete agreements are common features of employment contracts. Currently, courts
____________ enforce these clauses.
(a) always
(b) usually
(c) rarely
(d) never
Essay Questions
1. American Bakeries had a fleet of over 3,000 delivery trucks. Because of the increasing cost of
gasoline, the company was interested in converting the trucks to propane fuel. It signed a
requirements contract with Empire Gas, in which Empire would convert “approximately 3,000”
trucks to propane fuel, as American Bakeries requested, and would then sell all required propane
fuel to run the trucks. But American Bakeries changed its mind and never requested a single
conversion. Empire sued for lost profits. Who won?
Answer: Empire won over $3.2 million dollars, and the appeals court affirmed. Empire Gas Corp. v.
American Bakeries Co., 840 F.2d 1333, 1988 U.S. App. LEXIS 2482 (7th Cir. 1988). Since this was
2. CeCe Hylton and Edward Meztista, partners in a small advertising firm, agreed to terminate the
business and split assets evenly. Meztista gave Hylton a two-page document showing assets,
liabilities, and a bottom line of $35,235.67, with one half due to each partner. Hylton questioned the
accounting and asked to see the books. Meztista did not permit Hylton to see any records, and
refused to answer her phone calls. Instead, he gave her a check in the amount of $17,617.83, on
which he wrote “Final payment/payment in full.” Hylton cashed the check, but wrote on it, “Under
protest—cashing this check does not constitute my acceptance of this amount as payment in full.”
Hylton then filed suit, demanding additional monies. Meztista claimed that the parties had made an
accord and satisfaction. What is the best argument for each party? Who should win?
Answer: Hylton argued that in denying her access to the books, Meztista had not shown the good
faith required to support accord and satisfaction. Meztista argued that the good faith requirement
applies only to offering the accord, not to any of the underlying business negotiations. The court
3. ETHICS Melnick built a house for Gintzler, but the foundation was defective. Gintzler agreed to
accept the foundation if Melnick guaranteed to make future repairs caused by the defects. Melnick
agreed but later refused to make any repairs. Melnick argued that his promise to make future
repairs was unsupported by consideration. Who will win the suit? Is either party acting
unethically? Which one, and why?
Answer: Gintzler should, and did, win. The consideration to support Melnick’s promise of repairs
4. Sami walks into a restaurant. She is given a menu which indicates that lobster is $30. Sami orders
the lobster. It arrives and Sami thinks it is very tasty. When the bill arrives, Sami tries to execute a
clever ploy she learned about in her business law class. She writes a check to the restaurant for
$20, and writes “full settlement” across the top. The waiter accepts the check without looking at it,
and the restaurant manager later deposits it in the restaurant’s Bank account. Is this a liquidated or
an unliquidated debt? Is Sami off the hook for the last $10?
Answer: It is a liquidated debt because there is no reasonable dispute as to the amount of the debt.
5. In the bleachers…
“You’re a prince, George!” Mike exclaimed. “Who else would give me a ticket to the big game?”
“No one, Mike, no one.”
“Let me offer my thanks. I’ll buy you a beer!”
“Ah,” George said. “A large beer would hit the spot right now.”
“Small. Let me buy you a small beer.”
“Ah, well, good enough.”
Mike stood and took his wallet from his pocket. He was distressed to find a very small number of
bills inside. “There’s bad news, George!” he said.
“What’s that?”
“I, ah, I can’t buy you the beer, George.”
George considered that for a moment. “I’ll tell you what, Mike,” he said. “If you march to the
concession stand right this minute and get me my beer, I won’t punch you in the face.”
“It’s a deal!” Mike said.
Discuss the consideration issues raised by this exchange.
Answer: Mike’s initial promise to buy the beer is a gratuitous promise. He did receive a ticket from
George, but the ticket was not given to induce Mike to promise to buy the beer.
6. Jack Tallas came to the United States from Greece in 1914. He lived in Salt Lake City for nearly 70
years, achieving great success in insurance and real estate. During the last 14 years of his life, his
friend Peter Dementas helped him with numerous personal and business chores. Two months before
his death, Tallas dictated a memorandum to Dementas, in Greek, stating:
PETER K. DEMENTAS, is my best friend I have in this country and since he came to the United
States he treats me like a father and I think of him as my own son. He takes me in his car grocery
shopping. He drives me to the doctor and also takes me every week to Bingham to pick up my mail,
collect the rents and manage my properties. For all the services Peter has given me all these years, I
owe to him the amount of $50,000 (Fifty Thousand Dollars.) I will shortly change my will to include
him as my heir.
Tallas signed the memorandum, but he did not in fact alter his will to include Dementas. The estate
refused to pay and Dementas sued. Was there consideration? Please rule.
Discussion Questions
Apply the following material to the next three questions:
Some view consideration as a technicality that allows people to make promises and then back out
of them. Perhaps all promises should be enforced. In Japan, for example, promises to give gifts are
enforceable without consideration.
In the United States, if I promise to give you a gift merely because I feel like being nice, I can
freely change my mind as far as contract law is concerned. A court will not make me follow
through because there is no consideration.
In Japan, I would be obligated to buy the gift if all other elements of a contract were present – an
offer and acceptance and so forth.
Some argue that consideration in U.S. law is a doctrine leftover from centuries long gone by, that
lacks any reasonable modern purpose, and that it should be abolished.
1. Do you agree with this statement: “A person should always keep his or her word.”?
2. When it comes to giving gifts, which is better — the Japanese or American rule?
3. Are there any specific types of agreements (perhaps high value, long term, extremely time
consuming) that should definitely require consideration?
4. In the gold rush example, Embola gave Tuppela $50 in exchange for a promise of $10,000 later.
Under the peppercorn rule, the deal was a contract. Is the peppercorn rule sensible? Should courts
require a more even exchange of value?
5. In the last two chapters, we have examined clickwrap boxes. Sometimes, courts refuse to enforce
clickwrap terms because of problems with acceptance or consideration, but usually, the terms are
enforced. Is there a way to make clickwraps fair to both sides? Would it be better to ban clickwrap
boxes altogether?