LLOYD'S CREDIT CORP. v. MARLIN MGT. SERVICES, INC

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Docket Number

No. 90-311

Attorney(S)

David Watts of Blodgett, Watts Volk, Burlington, for Plaintiff-Appellant. Patricia L. Rickard and Michael B. Rosenberg of Miller, Eggleston Rosenberg, Ltd., Burlington, for Defendant-Appellee.

Judges

Johnson, J.

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Smart Summary

Factual and Procedural Background

In September 1983, Air Vermont, Inc. purchased aircraft flight and liability insurance from Hansman McAvoy, an insurance agent and broker. Lloyd's Credit Corporation advanced funds to Hansman McAvoy for Air Vermont's insurance premiums, with Air Vermont executing a financing agreement promising repayment. Lloyd's Credit held the right to cancel the insurance policy upon default and to receive unearned premiums if cancelled.

In January 1984, Hansman McAvoy notified Air Vermont of impending cancellation of insurance due to nonpayment. Marlin Management, a group considering investing in Air Vermont, provided presigned checks to the airline to pay the delinquent insurance and other emergencies. On January 26, 1984, a check for $16,473 was issued to Hansman McAvoy and endorsed to Lloyd's Credit, which deposited it.

Shortly thereafter, Air Vermont filed for bankruptcy on January 30, 1984, triggering a stay that prohibited cancellation of the insurance policy until May 11, 1984. On the morning of the bankruptcy filing, Marlin stopped payment on the check, which was returned unpaid. Lloyd's Credit sued Marlin for payment.

The trial court dismissed Lloyd's Credit's claim, holding that the check was not a negotiable instrument and that Lloyd's Credit was not entitled to payment because Marlin received no consideration for the check. Lloyd's Credit appealed this ruling.

Legal Issues Presented

Whether Marlin received or Lloyd's Credit gave consideration for the check.
Whether Marlin was estopped from raising the defense of failure of consideration.
Whether there was sufficient evidence to support a finding that Air Vermont's insurance would have been cancelled prior to bankruptcy absent the check.
Whether Lloyd's Credit was a holder in due course entitled to payment even without consideration.

Arguments of the Parties

Marlin Management's Arguments

There was no consideration for the check because Lloyd's Credit suffered no detriment and Marlin received no benefit.
The trial court found that Lloyd's Credit would not have cancelled Air Vermont's insurance before bankruptcy even without the check.
The court also found that Marlin received no immediate benefits from issuing the check, as it had taken no equity position in Air Vermont.
Marlin urged application of a clearly erroneous standard to uphold the trial court's findings and conclusions.

Lloyd's Credit Corporation's Arguments

There was consideration supporting the check because Lloyd's Credit gave up its right to cancel the insurance policy (a legal detriment).
Marlin received a benefit by preserving Air Vermont as a viable business and obtaining a foothold in the airline for potential future investment returns.
The timing of benefit or detriment is irrelevant; consideration must be evaluated at the contract's formation.
Even a slight advantage or mere expectation of benefit suffices as consideration.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Quazzo v. Quazzo, 136 Vt. 107, 386 A.2d 638 (1978)	Holder in due course status and defense of failure of consideration	The trial court relied on this precedent to hold Lloyd's Credit took the check subject to failure of consideration defense; the appellate court distinguished and reversed on consideration grounds.
Gulden v. Sloan, 311 N.W.2d 568 (N.D. 1981)	Consideration is a question of law, not fact	The court applied this principle to review de novo the legal question of whether consideration existed.
Hargrave v. Canadian Valley Electric Coop., 792 P.2d 50 (Okla. 1990)	Consideration is a question of law	Supported the court's legal analysis that consideration must be evaluated as a matter of law.
Pierce v. Plogger, 223 Va. 116, 286 S.E.2d 207 (1982)	Consideration as a legal question	Reinforced the court's approach to consider the existence of consideration on appeal.
Howard National Bank Trust Co. v. Newman, 115 Vt. 61, 50 A.2d 896 (1947)	Either benefit to promisor or detriment to promisee suffices as consideration	Applied to hold that the findings of detriment to Lloyd's Credit and benefit to Marlin support consideration.
Farmer v. Farmer, 720 P.2d 174 (Colo. Ct. App. 1986)	Consideration must be evaluated at the time the contract was made	Used to reject the trial court's reliance on subsequent events to deny consideration.
Bayshore Royal Co. v. Doran Jason Co., 480 So.2d 651 (Fla. Dist. Ct. App. 1985)	Consideration evaluated at formation	Supported the court's temporal approach to consideration.
Affiliated Enterprises v. Waller, 40 Del. 28, 5 A.2d 257 (1939)	Mere expectation or hope of benefit is sufficient consideration	Supported the court's holding that Marlin's expectation of future profits sufficed as consideration.
Travelers Insurance Co. v. Gebo, 106 Vt. 155, 170 A. 917 (1934)	Expectation as consideration	Illustrated that expected benefits can constitute consideration.
Omaha National Bank v. Goddard Realty, Inc., 210 Neb. 604, 316 N.W.2d 306 (1982)	Consideration sufficient if perceived as valuable by promisor	Supported the broad definition of benefit applied by the court.
Brewer v. First National Bank of Danville, 202 Va. 807, 120 S.E.2d 273 (1961)	Very slight advantage suffices as consideration	Used to reinforce that the extent of benefit is immaterial so long as some advantage exists.
Hancock Bank Trust Co. v. Shell Oil Co., 365 Mass. 629, 309 N.E.2d 482 (1974)	Court will not relieve party from contract due to bad bargain	Applied to reject relief for Marlin despite unsuccessful investment.
Hyde v. Shapiro, 216 Neb. 785, 346 N.W.2d 241 (1984)	Agreement will not be set aside because consideration proves a bad bargain	Supported affirming contract validity despite lack of economic benefit.
H.P. Hood Sons v. Heins, 124 Vt. 331, 205 A.2d 561 (1964)	Commercial contract presumptively valid	Reinforced presumption that Marlin's check was valid and supported by consideration.

Court's Reasoning and Analysis

The court reviewed the trial court's findings and concluded that the question of consideration is one of law, not fact, allowing de novo review. It found that the trial court erred in holding there was no consideration because it improperly focused on whether Lloyd's Credit would have cancelled the insurance prior to bankruptcy absent the check. The court emphasized that consideration must be evaluated at the time the contract was made, not based on subsequent events.

The court recognized that Lloyd's Credit gave up a legal right to cancel the insurance policy, constituting a legal detriment, and that Marlin received a benefit by preserving Air Vermont as a viable business and gaining a foothold for potential investment. The court rejected the argument that Marlin's lack of immediate economic benefit negated consideration, citing that mere expectation or hope of benefit suffices. It referenced authoritative contract law sources and precedents to support this broad and flexible concept of consideration.

The court further noted that once consideration is found, courts do not relieve parties from contracts simply because the bargain turned out poorly. Marlin, as an experienced commercial entity, took a risk that did not yield the anticipated rewards but remains bound to its obligation to pay. The court found no convincing reason to overturn the presumption of validity of the commercial contract represented by the check.

Holding and Implications

The court REVERSED the superior court's holding that the check was not supported by consideration and remanded for entry of judgment in favor of Lloyd's Credit Corporation.

The direct effect of this decision is that Marlin Management Services, Inc. is obligated to pay the amount of the check to Lloyd's Credit. The court did not establish new legal precedent but reaffirmed established principles regarding consideration, emphasizing that legal detriment and benefit need only be evaluated at contract formation, and that expectation of future benefit suffices as consideration.

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Lloyd's Credit Corporation v. Marlin Management Ser

1. Contracts — Consideration — Generally

Whether there is consideration for a contract is a question of law, not fact.

2. Contracts — Consideration — Sufficiency

Either benefit to promisor or detriment to promisee is sufficient consideration for a contract.

3. Contracts — Consideration — Generally

Consideration must be evaluated at the time a contract was made.

4. Contracts — Consideration — Forbearance

Where prospective investor issued a check which was to be used to pay airline's delinquent insurance payments in return for insurer's forbearance in cancelling airline's insurance, and insurer acted to its detriment by giving up its right to cancel the policy, a contract came into existence when the check was issued, and whether insurer would have chosen not to exercise its right to cancel even without the check was irrelevant to whether consideration existed at the time the contract was made.

5. Contracts — Consideration — Benefit

Where prospective investor issued a check which was to be used to pay airline's delinquent insurance payments in return for insurer's forbearance in cancelling airline's insurance, finding that prospective investor received no immediate benefits from its actions was irrelevant to issue of consideration for the check.

6. Contracts — Consideration — Benefit

Nothing in contract law suggests that promisor must benefit immediately.

7. Contracts — Consideration — Benefit

Mere expectation or hope of benefits is sufficient to serve as consideration for a contract.

8. Contracts — Consideration — Benefit

Contract promisor must receive something desired for his or her own advantage.

9. Contracts — Consideration — Benefit

Even in commercial transactions, consideration for a contract can exist without economic benefit or advantage; benefit need not be measurable in money.

10. Contracts — Consideration — Benefit

Extent of contract benefit is not important; very slight advantage is sufficient to constitute consideration.

Johnson, J.

Plaintiff Lloyd's Credit Corporation appeals from a superior court order holding that a check, written by defendant Marlin Management Services, Inc., and endorsed to Lloyd's Credit by its wholly owned subsidiary, Hansman McAvoy Co., Inc., was not supported by consideration. We hold that there was consideration and reverse.

In September 1983, Air Vermont, Inc., purchased aircraft flight and liability insurance from Hansman McAvoy, an insurance agent and broker. Lloyd's Credit advanced Hansman McAvoy the money for Air Vermont's insurance premiums. Air Vermont executed a financing agreement promising to pay Hansman McAvoy the money advanced for the premiums, and Hansman McAvoy assigned the financing agreement to Lloyd's Credit. Under the agreement, Lloyd's Credit had the right to cancel the insurance policy at any time for default and, if cancelled, to receive all of the unearned premiums under the policy.

In January of 1984, Hansman McAvoy notified Air Vermont that the insurance coverage on the airline was going to be cancelled for nonpayment of the amount due under the financing agreement. Without flight insurance, Air Vermont would lose its federal license to fly commercially and would be forced to cease operations. Air Vermont's managers met to discuss the airline's financial difficulties. John F. Chapple, president of Marlin Management, a group considering investing in Air Vermont, was present at the meeting. Chapple provided Air Vermont with ten presigned blank checks, drawn on a Marlin account. Air Vermont was to use one check to pay the delinquent insurance payment and the other checks in case of other emergencies, so that the airline could continue operating while Marlin investigated the viability of investing in Air Vermont. On January 26, 1984, one of the presigned checks was issued to Hansman McAvoy to pay the delinquent insurance balance of $16,473. Hansman McAvoy endorsed the check to Lloyd's Credit, which deposited the check.

During the last weekend of January 1984, Chapple met with officers of Air Vermont to discuss further the airline's financial difficulties. At this meeting, a decision was made that Air Vermont should file for bankruptcy, which was done on Monday, January 30, 1984. The bankruptcy court issued a stay prohibiting cancellation of the insurance policy; the stay remained in effect until May 11, 1984.

On the morning of the bankruptcy filing, Chapple stopped payment on the $16,473 check. The check was returned unpaid to Lloyd's Credit. Lloyd's Credit brought this action against Marlin for payment of the check.

The trial court dismissed the case on the merits. It concluded that the check was not a negotiable instrument because it lacked words of negotiability, such as "pay to the order of" or "pay to bearer." 9A V.S.A. § 3104(1). Consequently, Lloyd's Credit could not be a holder in due course of the check, 9A V.S.A. § 3-805, and took the check subject to a defense of failure of consideration. 9A V.S.A. § 3-306(c); Quazzo v. Quazzo, 136 Vt. 107, 112, 386 A.2d 638, 641 (1978). The court then held that Lloyd's Credit was not entitled to payment because Marlin received no consideration for the check.

Lloyd's Credit raises four issues on appeal: (1) whether Marlin received or Lloyd's Credit gave consideration for the check, (2) whether Marlin was estopped from raising the defense of failure of consideration, (3) whether there was sufficient evidence to support a finding that Air Vermont's insurance would have been cancelled prior to its bankruptcy if the check had not been issued, and (4) whether Lloyd's Credit was a holder in due course of the check and thus entitled to payment even without consideration. Because we reverse the court's finding of lack of consideration and hold that Lloyd's Credit is entitled to payment of the check from Marlin, we need not reach the other issues.

Marlin argues that there was no consideration for the check because Lloyd's Credit suffered no detriment and Marlin received no benefit in the transaction. It points to two key trial court findings that it contends support its position. First, the court stated that, on the evidence presented, it could not find

that had Lloyd's Credit Corporation not received the check in question on January 26, 1984 that it would have cancelled Air Vermont's insurance policy prior to the date that Air Vermont filed bankruptcy, which was on January 30, 1984.

It further found that

although John Chapple expected [Marlin] to receive some benefit from its infusion of money into Air Vermont, Inc., no evidence was presented and the Court cannot find what immediate benefits [Marlin] received. At the time, [Marlin] had taken no equity position in Air Vermont, Inc.

On the basis of these facts, the court concluded, without further explanation, that Marlin received no consideration in exchange for the check. Marlin asserts that we should apply a clearly erroneous standard to the court's findings and conclusions and affirm. That standard, however, does not apply to the court's conclusion that consideration did not exist.

Whether there is consideration for a contract is a question of law, not fact. See, e.g., Gulden v. Sloan, 311 N.W.2d 568, 572 (N.D. 1981); Hargrave v. Canadian Valley Electric Coop., 792 P.2d 50, 56 (Okla. 1990); Pierce v. Plogger, 223 Va. 116, 120, 286 S.E.2d 207, 210 (1982). Either a benefit to the promisor or a detriment to the promisee is sufficient consideration for a contract. Howard National Bank Trust Co. v. Newman, 115 Vt. 61, 69, 50 A.2d 896, 901 (1947). Even assuming the trial court's findings are not clearly erroneous, the issue remains whether, as a matter of law, they support a conclusion that there was no consideration. We hold that the court's findings show consideration, manifested by both a detriment to Lloyd's Credit and a benefit to Marlin.

The first finding — that even if Lloyd's Credit had not received a check from Marlin on January 26, 1984, it would not have cancelled Air Vermont's insurance before January 30, 1984 — is irrelevant to whether consideration existed. Consideration must be evaluated at the time the contract was made. See Farmer v. Farmer, 720 P.2d 174, 177 (Colo. Ct. App. 1986); Bayshore Royal Co. v. Doran Jason Co., 480 So.2d 651, 653 (Fla. Dist. Ct. App. 1985).

According to the court's findings, in January 1984, Lloyd's Credit had the right to cancel Air Vermont's insurance and receive all unearned premiums if the airline defaulted on its payments. Air Vermont was notified that the policy was going to be cancelled for nonpayment. On January 26, 1984, Marlin issued a check for $16,473 to Hansman McAvoy, which endorsed it to Lloyd's Credit. The contract came into existence at that time. By writing the check, Marlin promised to pay the money due for insurance in exchange for Lloyd's Credit's forbearance in cancelling the insurance. At the time the contract was made, Lloyd's Credit acted to its detriment by giving up the right to cancel the policy. See 1 Williston on Contracts § 102A, at 382 (3d ed. 1957) ("legal detriment" is not the same as detriment in fact; rather, it means "giving up something which immediately prior thereto the promisee was privileged to retain"). Whether Lloyd's Credit would gratuitously have chosen not to exercise its right to cancel even without Marlin's check is irrelevant to whether consideration existed at the time the contract was made.

The second finding cited by Marlin — that Marlin received no "immediate benefits" from its actions — is likewise irrelevant to the issue of consideration. Nothing in contract law suggests that the promisor must benefit immediately. To the contrary, a "mere expectation or hope of benefit is sufficient" to serve as consideration. Affiliated Enterprises v. Waller, 40 Del. 28, 36, 5 A.2d 257, 260 (1939); see also Travelers Insurance Co. v. Gebo, 106 Vt. 155, 163, 170 A. 917, 920 (1934) (husband's expectation that wife would continue to support him and pay expenses related to his illness was consideration supporting his promise to repay her by naming her as beneficiary of his life insurance policy).

The definition of a benefit is extremely broad. Simply put, the promisor must receive something desired for his or her own advantage. 1 Williston, supra, § 102A, at 382; see also Omaha National Bank v. Goddard Realty, Inc., 210 Neb. 604, 609, 316 N.W.2d 306, 310 (1982) (consideration is sufficient if promisor perceives it as valuable). Even in commercial transactions, consideration can exist without economic benefit or advantage; a benefit need not be measurable in money. 1 Corbin on Contracts § 121, at 519 (1963). The extent of a benefit is not important; a "very slight advantage" is sufficient to constitute consideration. Brewer v. First National Bank of Danville, 202 Va. 807, 815, 120 S.E.2d 273, 279 (1961).

Here, the court found that, "at the time Mr. Chapple turned over the checks to Air Vermont, Inc., he and several others investors were investigating the airline to determine whether they would get involved in the ailing company hoping for future profits." That Marlin anticipated future benefits in exchange for the initial investment in Air Vermont was supported by uncontroverted evidence. Chapple testified that at the time he made the investment his intention was "to put Marlin Management in a position to explore the possibility of investing substantially in Air Vermont." Although he was vague and evasive about his current and anticipated roles in the airline, in response to the question, "But the plan was to invest money for financial return to you?", he answered unequivocally, "Absolutely."

Marlin received benefits from both Lloyd's Credit and Air Vermont. See Quazzo, 136 Vt. at 112, 386 A.2d at 641 (consideration may be given by third party instead of promisee); see also Restatement (Second) of Contracts § 71 comment e (1981) ("It matters not from whom the consideration moves or to whom it goes. If it is bargained for and given in exchange for the promise, the promise is not gratuitous."). As a potential investor in Air Vermont, Marlin wanted the airline to remain a viable business. Without insurance, Air Vermont could not operate, and its value would surely deteriorate. Lloyd's Credit gave Marlin the means of keeping the airline aloft while negotiating for some financial or ownership interest in it. Air Vermont gave Chapple permission to attend meetings at which the financial condition of the airline was discussed and to take part in decision-making about the company's future. Paying the airline's insurance premium was not a charitable act; it gave Marlin a foothold in the company which it hoped to translate into future profits.

That Air Vermont was unable to work out its financial problems and instead filed for bankruptcy does not render the consideration Marlin received worthless. Once consideration has been found, "courts have traditionally declined to relieve a party from the terms of a contract merely because he made what he regards as a bad or uneven bargain." Hancock Bank Trust Co. v. Shell Oil Co., 365 Mass. 629, 629, 309 N.E.2d 482, 483 (1974); see also Hyde v. Shapiro, 216 Neb. 785, 789, 346 N.W.2d 241, 244 (1984) (agreement made between two sophisticated parties will not be set aside because the consideration ultimately does not prove to be a benefit to the promisor).

Marlin was in the business of providing management services and making investments. It was an experienced commercial player seeking to advance its interests by saving Air Vermont. It took a risk that did not reap the rewards it had hoped for, but it should not, on that account, be relieved from its obligation to pay Lloyd's Credit. As a commercial contract, Marlin's check to Hansman McAvoy, endorsed to Lloyd's Credit, is presumptively valid, H.P. Hood Sons v. Heins, 124 Vt. 331, 336, 205 A.2d 561, 564 (1964), and nothing in the trial court's findings convinces us that the check lacked consideration.

Reversed and remanded for entry of judgment for plaintiff.