Court Voids $1.5M Contract For Lack Of Consideration

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact

In Yessenow v. Hudson (no. 2:08-cv-00353-PPS-APR), the U.S. District Court for the Northern District of Indiana found that the indemnification agreement and guaranty that Hilton Hudson, M.D. signed with Jeffrey Yessenow, M.D. lacked any consideration and, therefore, was unenforceable. The court’s decision represents one of the rare cases where a contract was found to lack any consideration, and it is a good reminder that a contract is enforceable only if mutually beneficial or detrimental to all signatories.

In the early 2000s, a group of doctors founded and developed Heartland Memorial Hospital in Munster, Indiana. Yessenow was one of the founding doctors. In 2005, the hospital ran into financial trouble, and the doctors decided to sell it. In March 2006, an investment group led by Wright Capital bought the majority of the doctors’ interests in the hospital through a complex series of merger agreements.

Wright Capital did not have the money necessary to finance the transaction, so it raised almost $19 million by selling part of the hospital’s ancillary properties to a Texas finance company called NL Ventures. NL Ventures then leased the properties back to the hospital. As part of the merger, NL Ventures required a promissory note for a year’s rent, approximately $1.5 million. Yessenow agreed to provide the note, which he secured with a mortgage on his $3 million Chicago condominium, by signing several written contracts in early March 2006. Hudson was one of the minority investors in Wright Capital and a new doctor at the hospital, but he was not involved in negotiating the merger agreements. Nor did Hudson sign any documents in connection with Yessenow’s promissory note. The merger was completed in mid-March 2006.

Two weeks after the merger, on March 31, 2006, Yessenow asked Hudson and several other individuals to sign an indemnification agreement and guaranty for Yessenow’s note. Yessenow told Hudson that the agreement would spread the responsibility for the note should the hospital fail to pay its rent. Hudson signed the agreement, not knowing that the agreement shifted to him the risk of having to pay the entire note. The rest of the story did not take long to unfold. Less than a year later, the hospital was driven into bankruptcy by several creditors. The hospital failed to make the lease payments, and a company that purchased the note from NL Ventures sought payment from Yessenow. Yessenow sued Hudson for indemnification of the note, as well as for fees and costs.

Yessenow argued that the note was part of the merger agreements signed in mid-March 2006. The court analyzed a mountain of paper and considered half a dozen arguments proffered by Yessenow, but ultimately the indemnity agreement was held to be unenforceable because it lacked any consideration. The court applied long-standing contracts law providing that a contract requires consideration, which is a “bargained for exchange” with either “a benefit accruing to the promisor or a detriment to the promisee.” A benefit is a legal right given to the promisor to which he would not otherwise be entitled. If a party “[receives] nothing in return,” he may be excused from performing under a contract.

The court held that the only consideration extended to Hudson was past consideration, i.e., the acquisition of the doctors’ interests in the hospital that closed in mid-March, almost two weeks prior to the execution of the indemnification agreement. Past consideration generally cannot support a new obligation or promise. The court rejected the argument that a “throwaway” phrase providing the parties received “good and valuable consideration” actually constituted consideration. The court found: “And addressing the existence of consideration, it is also black-letter contract law that a ‘false recital of consideration’ is ‘a mere pretense of bargain [that] does not suffice’ to create a contract.”

There are a couple of valuable lessons to be learned from this case. First, all parties to a contract must read and have legal counsel review it, regardless of how well the parties know each other or how good their intentions are. Hudson and Yessenow ended up serving on the Board of Directors for the hospital, yet both offered conflicting versions of what was said in connection with the signing of the indemnity agreement. Second, as the court held, there is no socially useful reason for a legal system to enforce agreements that are not supported by consideration. Even though courts are hesitant to invalidate written agreements, a court will not allow one party to off-load its risk to another party unless the party receiving the burden of that risk receives something in return. Since Hudson received nothing in return for signing the indemnity agreement, the court held it was not enforceable.

John K. Henning, IV is a shareholder in the Indianapolis office of Ogletree Deakins.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Written by:

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact
more
less

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.