Alfred R. Chouinard, II and Ginger Leigh Chouinard v. Alfred F. Chouinard
568 F.2d 430, 1978 U.S. App. LEXIS 12422 (1978)
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Rule of Law:
To void a contract for economic duress, the party seeking relief must show that their financial distress was caused by a wrongful or unlawful act of the other party. Merely taking advantage of another's self-created financial necessity to settle a legitimate, pre-existing claim is not wrongful and does not constitute duress.
Facts:
- Fred Chouinard, his father Al, and his twin brother Ed started ARC Security, Inc., with each contributing capital, leading to a long-standing dispute over the percentage of Al and Ed's ownership.
- By early 1974, due to Fred's self-admitted 'foolish' business decisions, ARC Security was in severe financial distress and could not meet its upcoming payroll, facing imminent collapse.
- Fred arranged for a critical loan from a commercial lender, the Walter E. Heller Company, to save the business.
- Heller conditioned the loan on the resolution of the internal stock ownership dispute between Fred, Al, and Ed.
- Aware of the company's financial peril and the loan condition, Al and Ed refused to release their ownership claims unless Fred and his wife, Ginger, signed promissory notes totaling $190,000 to them.
- To prevent the business from failing, Fred and Ginger executed the notes, which allowed them to close the loan with Heller and meet the payroll.
- After executing the notes, Fred made monthly payments to Al and Ed for over a year.
Procedural Posture:
- Fred and Ginger Chouinard sued Al and Ed Chouinard in federal district court seeking to cancel two promissory notes.
- A jury found the notes were executed under duress, but also found that the plaintiffs had waived the duress claim by making voluntary payments.
- The district court entered a judgment in favor of the defendants, Al and Ed Chouinard.
- The plaintiffs' motions for judgment notwithstanding the verdict and for a new trial were denied by the district court.
- The plaintiffs, as appellants, appealed the district court's judgment to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Does a party's refusal to release a pre-existing, good-faith legal claim unless the other party executes a promissory note, at a time when the other party is in severe financial distress and needs the release to secure third-party financing, constitute a wrongful act sufficient to establish economic duress?
Opinions:
Majority - Thornberry, J.
No. A contract is not voidable for economic duress when one party uses the other's financial distress to its advantage, so long as the party did not wrongfully create that distress. Here, the financial pressure experienced by Fred Chouinard was of his own making, not the result of any wrongful act by his father and brother, Al and Ed. A claim of economic duress must be based on the wrongful or unlawful conduct of the defendant, not merely on the plaintiff's pressing financial circumstances. Al and Ed were asserting a pre-existing, colorable legal right to a share in the company. Insisting on a settlement of this legitimate dispute, even at a time of maximum leverage, does not constitute a wrongful act. Because there was no wrongful act by the defendants to create the financial hardship, the crucial element for an economic duress claim is missing.
Analysis:
This decision clarifies the 'wrongful act' requirement for the defense of economic duress. It establishes that hard bargaining, even when one party is in a desperate financial situation, is not sufficient to invalidate a contract. The precedent holds that the party accused of duress must have actively and unlawfully caused the financial distress, not simply capitalized on a pre-existing vulnerability. This reinforces the legal system's general reluctance to interfere with contractual agreements based on unequal bargaining power, unless that inequality was created by illicit means.
