McCallum Highlands, Ltd. v. Washington Capital Dus, Inc.
1995 WL 564139, 66 F.3d 89, 1995 U.S. App. LEXIS 28050 (1995)
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Rule of Law:
A modification to a contract not fully performed on either side requires new consideration to be binding, unless the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made.
Facts:
- Ari Susman, owner of the McCallum Highlands apartment complex, sought to refinance a mortgage through Washington Capital Dus, Inc. ('Washington').
- Susman had an agreement with his previous lender to waive a significant prepayment penalty if he refinanced by April 30, 1991.
- On January 9, 1991, Susman's company, McCallum Highlands, LTD. ('McCallum'), accepted a loan commitment from Washington for $6,700,000, with options to increase the amount and buy down the interest rate.
- Fannie Mae, the entity to whom Washington sells its loans, changed its guidelines, creating an April 19 deadline for McCallum to lock in an interest rate and an April 30 deadline for the loan to close.
- Fannie Mae also criticized a separate loan Washington had made to Susman, viewing him as a poor credit risk.
- On March 22, 1991, Washington informed Susman it wanted to lower the loan amount and suggested it could exit the commitment.
- On April 18, 1991, one day before the rate-lock deadline, Washington conditioned proceeding with the loan on McCallum's acceptance of a reduced loan of $6,400,000 with no buy-down provision.
- Facing the April 30 deadline to avoid the prepayment penalty, Susman accepted the modified terms.
Procedural Posture:
- McCallum Highlands, LTD., sued Washington Capital Dus, Inc., in federal district court (a diversity suit) to avoid amended portions of a loan agreement.
- McCallum's complaint alleged claims of economic duress and lack of consideration for the contract modification.
- The district court granted summary judgment in favor of the defendant, Washington, on both claims.
- McCallum, as the appellant, appealed the summary judgment to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Under Texas law, is a modification to a loan agreement that reduces the loan amount and eliminates favorable terms for the borrower enforceable when the borrower accepts the changes under time pressure and receives no new bargained-for benefit?
Opinions:
Majority - Stewart, Circuit Judge
No. A modification to a contract not yet fully performed requires new, bargained-for consideration to be enforceable. While an exception exists for modifications that are fair and equitable in light of unanticipated circumstances, a modification that exclusively benefits the party leveraging the circumstances to extract concessions is not fair and equitable and is therefore unenforceable. The court affirmed the summary judgment on the economic duress claim, finding McCallum failed to prove all four required elements, including that Washington caused its financial distress or that McCallum had no other means of protection. However, the court reversed the summary judgment on the consideration claim. The court rejected the trial court's finding that the amended agreement contained new consideration, reasoning that the changes—a smaller loan for McCallum and less to be repaid to Washington—were not bargained for by McCallum. McCallum did not bargain for a smaller loan; it was forced to accept it. The court then considered exceptions to the pre-existing duty rule, adopting the test from the Restatement (Second) of Contracts § 89. While Fannie Mae's actions constituted an unanticipated circumstance, the resulting modification was not 'fair and equitable' to McCallum because it solely benefited Washington at McCallum's expense. Therefore, the modification was unenforceable for lack of consideration.
Analysis:
This decision reinforces the pre-existing duty rule in contract modifications while formally adopting the modern exception outlined in the Restatement (Second) of Contracts § 89 into Texas law. It clarifies that unforeseen difficulties alone do not justify any modification a party might demand; the modification must also be 'fair and equitable.' The ruling provides a crucial avenue for relief for parties who are coerced into accepting unfavorable contract modifications that do not meet the high threshold for economic duress. By distinguishing between a bargained-for exchange and a coerced concession, the court strengthens protections for parties in weaker bargaining positions when unexpected events disrupt a contractual relationship.
