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First National Bancshares of Beloit, Inc. v. Geisel
853 F. Supp. 1344 (D.Kan. 1994)
Saffels, District Judge
Memorandum and Order
This matter is before the court on the motion of the defendants for
summary judgment (Doc. 128).
The parties
The plaintiffs, a bank holding
company and its minority shareholders, initially filed this action in the District
Court of Mitchell County, Kansas, on November 5, 1992. The defendants, the co-trustees of
the Frances H. Giblin Trust No.1 and the conservator
of Frances H. Giblin, n2 removed the action to this
court on the basis of diversity pursuant to 28 U.S.C. § 1332. The defendant trust was
established for the benefit of Frances H. Giblin during her lifetime, and it is the
majority shareholder of plaintiff First National Bancshares of Beloit, Inc. ("the
holding company"). The holding company in turn owns 100 percent of the stock of the
First National Bank of Beloit ("the bank").
Nature of the Case
Plaintiffs essentially seek to enforce an alleged stock option
agreement originally executed by Frances H. Giblin in 1982, as modified in 1989 by Frances
H. Giblin individually and by Frances H. Giblin and Jerome J. Eilert, then the co-trustees
of the Frances H. Giblin Trust No. 1 ("the trust"). The option agreement at
issue purports to give the plaintiff holding company a first right and option to purchase
the trust's majority interest in the holding company for a flat price of $1,898,803,
within one year after the death of Frances H. Giblin. All parties agree that this figure
significantly understates the present value of the trust's 770 shares, n3 which constitute 61 percent of the outstanding voting
stock of the plaintiff holding company. The remaining 39 percent of the outstanding stock
is collectively owned by the other plaintiffs to this action (hereinafter "minority
shareholder plaintiffs").
The defendants, who represent the interests of Frances H. Giblin, the
lifetime beneficiary of the defendant trust, have repudiated the alleged option agreement
by communicating their intent to revoke it. Among other claims, the minority shareholder
plaintiffs bring this suit as a shareholder derivative action on behalf of the holding
company. They allege that the defendants, as recently elected directors of the holding
company, wrongfully refuse to take action in the interest of the corporation to enforce
the option agreement against the trust. Plaintiffs also seek a declaratory judgment that
the option agreements are valid and enforceable. The defendants have filed a counterclaim
seeking a declaratory judgment to the effect that both the 1982 option contract and the
1989 modification are unenforceable, contending among other things that they were not
supported by consideration and that the defendants properly revoked them.
. . .
Facts
The relevant facts underlying this controversy are for the most part
uncontroverted, at least for purposes of resolving this motion for summary judgment.
Plaintiff holding company presently owns 100 percent of the stock of
the bank. A total of 1,259 shares of holding company stock are presently outstanding. The
plaintiffs, other than the holding company, collectively own 489 shares, or about 39
percent of the outstanding stock. The other 770 shares, representing about 61 percent of
the outstanding stock, were originally owned by Frances H. Giblin.
On March 26, 1982, Frances H. Giblin signed a document titled
"Option" ("the 1982 option agreement"). The 1982 option agreement
purported to give the plaintiff holding company a first right and option to purchase
Frances Giblin's stock in the holding company within 12 months of her death, for an amount
computed on the basis of a formula tied to the value of the bank. Although the agreement
states that it was given for "One Dollar ($1.00) and other valuable
consideration," no monetary consideration was paid to Frances Giblin by the holding
company at the time the 1982 option agreement was signed.
In 1985, Frances Giblin transferred her shares in the holding company
to the trust, a revocable inter vivos trust established for her sole benefit during her
lifetime. Frances H. Giblin and Jerome J. Eilert were originally designated Co-trustees.
Subsequently, defendants Joseph S. Geisel, Edward P. O'Connor, and Terrence L. Lillis have
been duly authorized to serve as trustees of the trust.
On August 1, 1989, Frances Giblin on her own behalf executed a document
titled "Option" ("the 1989 option agreement"). This document was also
signed by Frances Giblin and Jerome Eilert in their capacities as co-trustees of the
trust. The 1989 option agreement purports to give the holding company a first right and
option to purchase the trust's stock in the holding company for a flat price of
$1,898,803, within one year after the death of Frances H. Giblin. The 1989 option price
was calculated by applying the previous formula to the book value of the bank as of
December 31, 1988. By its terms, the 1989 agreement superseded the 1982 option agreement.
Like the 1982 option agreement, the 1989 agreement recites that it was given for $1.00 and
other valuable consideration. However, the holding company did not pay monetary
consideration to either Frances H. Giblin or to the trust at the time the 1989 option
agreement was signed.
On March 21, 1991, Frances H. Giblin was declared mentally incompetent
by the Probate Division of the Circuit Court of Jackson County, Missouri. Defendant Terrence J. Lillis is the duly appointed guardian of
Frances M. Giblin and the conservator of her estate.
By letter dated June 24, 1992, the defendant co-trustees of the trust
advised the holding company of their repudiation of the 1989 option agreement. Jerome J.
Eilert, then the president of the holding company, received actual notice at the trustees'
meeting on June 24, 1992, that the co-trustees intended to revoke the 1989 option
agreement. The holding company received the letter repudiating the 1989 option agreement
on June 25, 1992. On that date, the holding company attempted to pay the $1.00
consideration for the 1989 option agreement by depositing $1.00 in the trust's bank
account. On July 10, 1992, when the trustees discovered the deposit, the $1.00 was
returned to the holding company. The co-trustees also expressly rejected the holding
company's attempt to pay the consideration for the 1989 option agreement.
On September 3, 1992, the holding company paid one dollar to Terrence
Lillis, guardian and conservator of Frances H. Giblin. This payment was intended to convey
the $1.00 consideration recited in the 1982 option agreement. The one dollar payment was
returned by the defendants to the holding company on or about September 8, 1992, along
with a letter giving notice that the defendant trustees repudiated the 1982 option
agreement.
Between March 1, 1982, when the holding company's stock was originally
issued, through August 1, 1989, the holding company paid dividends totalling $22,499.40 to
Frances H. Giblin or to the trust on her behalf. Since the 1989 option agreement was
executed, however, the holding company has paid no dividends to the trust. However, the
bank has paid dividends totalling $1,250,000 to the holding company since the 1989 option
agreement was signed. The dividends paid by the bank to the holding company have been held
for the purpose of purchasing the 770 shares of stock owned by the trust.
Plaintiffs Jerome Eilert, Robert Lampert, Phil Thull, and Francis
Gronewoller have continued serving as officers of First National Bank of Beloit from 1982
until the present time. Plaintiff Robert Meats has been employed by the bank continuously
from 1987 until the present time.
Since 1982, the Bank has paid compensation in the form of a salary,
bonus, and fringe benefits, including a non-taxable contribution to each employee's
profit-sharing plan, to those plaintiffs who are presently employed by the bank. The bonus
portion of the compensation package is tied to the profitability of the bank. The
individual plaintiffs who have been employed by the bank have been adequately compensated
for their work. Their compensation package is at least average compared to the
compensation of similar bank officers in comparable Kansas banks.
The book value of the holding company in 1982 was $2.2 million. As of
December 31, 1992, the holding company's net worth was approximately $6.9 million.
The Issues
The defendants generally contend that they are entitled to summary
judgment against the plaintiffs on each of their claims and in favor of the defendants on
their counterclaim seeking a declaratory judgment. Specifically, the defendants contend
that the holding company did not pay the monetary consideration recited in the option
agreements, that plaintiffs' promissory estoppel theory of recovery fails as a matter of
law, and that plaintiffs' material benefit theory also fails as a matter of law.
Defendants also seek a declaratory judgment that they properly revoked the option
agreements because they lacked legally sufficient consideration and therefore were not
binding and irrevocable option contracts.
Recited Consideration
Every contract requires consideration to be enforceable. The
consideration sufficient to support an ordinary contract, such as a promise for a promise,
will also support an option. Lack of consideration is an affirmative defense in a
breach of contract action, and as a general rule it must therefore be asserted and
established by the person claiming it. The defendants in this case therefore have
the burden of establishing their affirmative defense that consideration was lacking for
the two option agreements.
Under Kansas statutes, it is presumed that consideration has been given
in support of a written contract. The presumption of consideration "extends to
any fact which under the situation and circumstances of the parties might reasonably
supply a consideration, and it cannot be overthrown except by proof of facts warranting an
inference of no consideration of any kind." The presumption of consideration is a
presumption
of fact.
The question of the presence of a benefit or detriment to the promisor [sic], sufficient to constitute consideration, is
ordinarily a question of fact. If controverted, the question of what constitutes the true
consideration for the contract is also a question of fact. A conflict between evidence
that consideration is lacking, and the statutory presumption of valuable consideration
having been given, is sufficient to require submission of the question of consideration to
the jury. Nevertheless, when the defendant to a breach of contract action files a motion
for summary judgment asserting lack of consideration, supported by substantial competent
evidence, the statutory presumption of fact is rebutted. The burden then shifts to the the
party seeking to enforce the contract to come forward with sufficient evidence to show
that a genuine issue of fact exists as to whether the contract in question was supported
by consideration.
An option contract [sic] not
supported by consideration may be withdrawn by the offeror at any time prior to its
acceptance by the offeree. The defendants in this case have presented substantial
competent evidence that the $1.00 consideration recited in the 1989 option agreement was
not paid by the holding company prior to the date the holding company received actual
notice that the defendant trust repudiated the 1989 option. The court finds that the
plaintiffs have presented insufficient evidence to withstand summary judgment on the
defendant's assertion that the monetary consideration of $1.00 recited in the 1989 option
agreement was not paid prior to the date of its repudiation. n6 The defendants therefore had the right to revoke the
1989 option agreement, and they are entitled to partial summary judgment on this issue as
it pertains to the 1989 option agreement.
However, the defendants are not entitled to summary judgment on the
issue of whether the 1982 option agreement was revoked prior to the plaintiffs' tender of
the recited monetary consideration of $1.00. There is documentary evidence in the record
from which a trier of fact could conclude that the 1982 agreement was not repudiated until
after the plaintiffs tendered payment. n7 If so, the
defendants are not entitled to judgment as a matter of law on the issse of whether they
properly revoked the 1982 agreement, at least not on the basis of the arguments presented
in their motion for summary judgment.
The defendants argue for the first time in their reply that the
plaintiffs cannot elect to pursue enforcement of the 1982 option agreement as an
alternative to the 1989 option agreement. Whether or not the 1982 option agreement may be
enforced in lieu of the 1989 agreement, which the court has determined was revoked before
plaintiffs tendered the consideration recited in the agreement, turns on whether the 1989
agreement was a novation or an executory accord. If the 1989 agreement was a novation, it
superseded and extinguished the 1982 option agreement. If it was instead an executory
accord, the revocation of the 1989 agreement would allow the plaintiffs to pursue
enforcement of the 1982 agreement in the alternative.
In raising this issue, the defendants essentially contend that the 1989
option contract was a novation, extinguishing the 1982 option agreement by superseding it.
Novation, however, is an affirmative defense which must be pleaded as such. The
defendants have raised 20 distinct affirmative defenses in their answer to the first
amended complaint, but none of them raise the issue of novation as a defense to
enforcement of the 1982 option agreement. The court therefore declines to address this
issue, having been raised for the first time in the defendant's reply.
Even if the court were to address the issue of novation, one of the
requisite elements is that the new contract must be valid. If consideration was
lacking for the 1989 option agreement, as the defendants contend, it would not have been a
valid contract.
Promissory Estoppel
As previously noted, an option contract not supported by consideration
is merely an offer to sell, which may be withdrawn by the offeror at any time prior to
acceptance by the offeree. However, the doctrine of promissory estoppel may serve as
a substitute for traditional consideration in support of an option contract. If
proof of an express contract fails for lack of consideration, but refusal to enforce a
party's promise would be unjust because of the plaintiff's reliance upon it, promissory
estoppel is the appropriate theory of recovery. It is an equitable doctrine that may
be employed for the enforcement of promises that are noncontractual and otherwise
unenforceable.
Under the doctrine of promissory estoppel, an option contract may be
made binding and irrevocable by subsequent action in reliance upon it, even though such
action is neither requested nor given in exchange for the option promise. This is
true even if the monetary consideration recited in the option contract itself was not
paid. See Berryman v. Kmoch, 559 P.2d at 793-94; see also Restatement (Second) of
Contracts § 87 cmt. c (option agreement is not necessarily invalidated by proof that the
recited nominal consideration was not in fact given); n10
see also Restatement (Second) of Contracts § 218 cmt. e (incorrect statement of
consideration does not prevent proof either that there was no consideration or that there
was a consideration different from that stated). Because promissory estoppel is an
equitable theory under which otherwise noncontractual promises may be enforced, lack of
consideration is not a defense to such a claim but rather a prerequisite.
In order for the doctrine of promissory estoppel to be invoked as a
substitute for consideration, the plaintiff must establish that (1) the defendant made a
promise, (2) the promise was made under such circumstances that the promisor intended and
reasonably expected the promisee to act in reliance on the promise, (3) the promisee acted
reasonably in relying on the promise, and (4) a refusal by the court to enforce the
promise would result in an injustice.
The offeree's power of acceptance of a proposed option contract is
terminated if the offeror takes definite action inconsistent with an intention to enter
into the proposed contract and the offeree acquires reliable information to that effect.
Berryman v. Kmoch, 559 P.2d at 795 (quoting Restatement (Second) of Contracts § 42). In
this case, as in Berryman, there is no genuine dispute that on or about June 24, 1992, the
plaintiffs obtained reliable information from the defendants inconsistent with their
intent to be obligated by the 1989 option agreement. The plaintiffs' power of acceptance
of the 1989 option contract was thereby terminated, unless there was substitute
consideration under the plaintiffs' alternate theory of promissory estoppel prior to the
date of the repudiation, thereby rendering it binding and irrevocable.
Plaintiffs have presented considerable evidence that Frances H. Giblin
over the years promised at least some of the individual minority shareholder plaintiffs
that she would give them the opportunity to purchase her controlling interest in the
holding company after her death, if they would continue to work for the bank during her
lifetime. There is also evidence in the record from which the trier of fact could infer
that at least some of the plaintiffs relied on Frances Giblin's alleged promises in
electing to remain employed with the bank rather than pursuing other opportunities in
banking.
. . .
Since the plaintiffs have submitted admissible evidence to establish
that Frances Giblin made the alleged promises, the defendants are not entitled to summary
judgment on the ground that there is no competent evidence that the alleged promises were
made.
. . .
Finally, defendants argue that the plaintiffs cannot establish that
they relied on the alleged promises to their detriment. They contend that the plaintiffs
were adequately compensated for their services as employees of the bank, and therefore
evidence is lacking that any of the individual plaintiffs detrimentally relied on the
promises allegedly made by Frances Giblin. In response, the plaintiffs argue only that
plaintiffs Eilert, Lampert, Thull and Gronewoller remained as officers and directors of
the bank since 1982, and that plaintiff Meats has remained as an officer of the bank from
1987 when he was first employed until the present time, all in reliance on the alleged
promises.
The court agrees that the evidence advanced by the plaintiffs does not
demonstrate detrimental reliance on the part of the plaintiffs "of a substantial
character." See Restatement (Second) of Contracts
§ 87(2). Hence the refusal of the court to enforce the alleged promise would not
result in injustice. The plaintiffs do not dispute that they were very adequately
compensated for the years they remained employees of the bank. Some of the plaintiffs
testified by deposition that they had declined to pursue other opportunities based upon
their understanding that they would someday have the opportunity to control the bank.
However, this is insufficient evidence as a matter of law to support an inference that the
plaintiffs substantially relied on the alleged promises and as a result suffered
detriment. See Restatement (Second) of
Contracts § 87(2) cmt. e.
Since the plaintiffs have not submitted any clear, cogent, and
convincing evidence to show they substantially relied on the alleged promises of Frances
Giblin to their detriment, they cannot withstand summary judgment on their claim asserting
promissory estoppel.
Material Benefit Rule
In addition to their claim based on the doctrine of promissory
estoppel, plaintiffs also contend that they are entitled to enforce the option agreements
on the basis of what is known as the "material benefit rule." The material
benefit rule is an implied contract theory under which the law deems that a pecuniary
benefit already received affords consideration for a subsequent promise to pay for the
benefit. The doctrine rests on the principle that a moral obligation to make
recompense for a pecuniary benefit received will sustain a subsequent promise to pay for
the benefit.
The Restatement (Second) of Contracts § 86 states the material benefit rule as follows:
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
The material benefit rule as a matter of law is not
applicable in this case. The rule does not apply to a promise to pay more than called for
in a pre-existing bargain between the same parties. Restatement (Second) of Contracts §
86 cmt. f. Further, if a third person, such as Frances Giblin, receives a benefit as a
result of the performance of a pre-existing bargain, such as that between the plaintiff
bank employees and the bank, the material benefit rule does not render binding the
subsequent promise of the third person to pay extra compensation to the performing party.
See id. In this case, the minority shareholder plaintiffs who have been employed by the
bank have a pre-existing contract of employment. The material benefit rule therefore may
not be invoked against Frances H. Giblin on the basis of her alleged promise to
essentially provide additional compensation to them for providing their services to the
bank.
Furthermore, the material benefit rule may not be invoked to enforce a
promise if the value to the promisee would be disproportionate to the benefit conferred.
Restatement (Second) of Contracts § 86(2)(b). In this case, enforcement of the 1989
option agreement would result in a windfall to the minority shareholders by significantly
increasing the collective value of their stock in the holding company by the difference
between the 1989 option price, about $1.9 million, and the current fair market value of
the trust's 770 shares, in excess of $4.2 million. Particularly because the plaintiffs who
have remained employed by the bank have already been adequately compensated for their
services, enforcement of the 1989 option agreement would have the result of
disproportionately benefiting them, to the detriment of the trust.
Finally, Frances H. Giblin and the trust have not been unjustly
enriched by the services performed by the plaintiff bank employees. See Restatement
(Second) of Contracts § 86(2)(a). As the majority shareholders of the holding company
that owned the bank, Frances Giblin, and later her trust, accepted the risks of such
ownership as well as the benefits. For example, the compensation packages of the bank
employees, as operating expenses of the bank, have a direct and ongoing impact on the
value of the trust's stock in the bank holding company. That the bank has been successful,
and as a result the value of the holding company stock has increased, does not mean that
the majority shareholder has been unjustly enriched as a result of the services performed
by the plaintiff bank employees, who were adequately compensated by the bank.
Consequently, as a matter of law the plaintiffs are not entitled to
invoke the material benefit rule to enforce either the 1982 option agreement or the 1989
option agreement. The defendants are therefore entitled to summary judgment on plaintiffs'
material benefit claim.
IT IS BY THE COURT THEREFORE ORDERED that the defendants' motion for
summary judgment (Doc. 128) is hereby granted in part and denied in part.
IT IS FURTHER ORDERED that the defendants are granted summary judgment
on the plaintiffs' claim in Count III of the first amended complaint based on the material
benefit rule.
IT IS FURTHER ORDERED that the defendants are granted summary judgment
on the plaintiffs' claim in Count VII of the first amended complaint based on promissory
estoppel.
IT IS FURTHER ORDERED that the defendants are granted partial summary
judgment on their counterclaim seeking a declaratory judgment.
IT IS FURTHER ORDERED that the 1989 option agreement is unenforceable
for lack of consideration; that the 1989 option agreement was repudiated and revoked prior
to the date plaintiffs tendered the recited consideration therefor; and that the Frances
H. Giblin Trust No. 1 is not obligated to sell its 770 shares of holding company stock to
the holding company at the price stated in the 1989 option agreement.
[Now read further about the people and events introduced in this opinion.]