James P. Stephenson v. Leon A. Greenblatt , 408 F.3d 512 ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 04-2261
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In re: MJK Clearing, Inc., *
*
Debtor. *
----------------------------- *
James P. Stephenson, Trustee for *
the Estate of MJK Clearing, Inc., * Appeal From the United States
* District Court for the
Trustee-Appellee, * District of Minnesota.
*
v. *
*
Leon A. Greenblatt; Banco *
Panamericana, Inc.; Loop Corp.; *
Nola, LLC; Repurchase Corp. *
*
Creditors-Appellants. *
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Submitted: March 16, 2005
Filed: May 24, 2005
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Before MURPHY, HEANEY, and SMITH, Circuit Judges.
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HEANEY, Circuit Judge.
James Stephenson, trustee for the Estate of MJK Clearing, Inc. (MJK), brought
this proceeding against Appellants Leon A. Greenblatt, Banco Panamericano, Inc.,
Loop Corp., Nola LLC, and Repurchase Corp. (collectively, the Greenblatt entities),
for amounts due under promissory notes signed by the Greenblatt entities and
Greenblatt’s personal guaranty of those notes. The bankruptcy court granted
summary judgment to the trustee. Greenblatt appealed this decision to the district
court,1 which affirmed that the promissory notes were valid and enforceable. In the
present appeal, the Greenblatt entities claim that the agreements cannot be enforced
because there was a failure of consideration. We affirm the decision of the district
court.
BACKGROUND
Loop, Banco and Repurchase2 are Illinois corporations formed by Leon A.
Greenblatt. Nola is an Illinois limited liability company formed by Greenblatt. These
entities operate as holding companies for investments and real estate. They held
margin loan accounts with the firm R.J. Steichen & Co., a brokerage owned by John
E. Feltl. The brokerage was sold to Stockwalk Group, Inc., which formed Miller,
Johnson, Steichen, Kinnard, Inc. (MJSK), on January 1, 2001. MJSK later became
a subsidiary of MJK, which itself was a subsidiary of Stockwalk.
In early 2001, the value of the stock held in the Greenblatt entities’ margin loan
accounts fell dramatically, resulting in a combined negative balance of over
$7,100,000. MJSK issued margin calls in May 2001, requiring the Greenblatt entities
to deposit funds to the accounts to cover the debit balances. No funds were deposited
in the accounts, and the appellants entered into a series of agreements to settle the
debt. In a letter dated July 12, 2001, the parties set out the terms relating to the
purchase of the debit balances existing in the MJSK margin accounts. Greenblatt,
Banco, and Loop agreed to execute promissory notes for a total of $3,850,000, and
1
The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
2
Repurchase has filed for Chapter 11 bankruptcy protection, and the trustee is
therefore not seeking relief from Repurchase.
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all the entities agreed to take the actions necessary to transfer to MJSK and MJK the
benefit of up to $3,000,000 in tax credits generated by another venture. On
August 22, 2001, Banco and Loop each signed promissory notes in the amount of
$1,425,000 plus interest, to be paid by August 1, 2002. Greenblatt signed a
promissory note in the amount of $1,000,000 plus interest, to be paid by August 1,
2002, and executed a personal guaranty for payment of the amounts due under the
Loop and Banco promissory notes in the event of a default. MJSK also negotiated
a guaranty of up to $3,000,000 of the Greenblatt entities’ indebtedness with John E.
Feltl, who had originally opened the margin accounts.
In September 2001, MJK entered bankruptcy. MJSK assigned the promissary
notes, Greenblatt guaranty, and rights to tax credits to MJK in June 2002 as part of
a settlement relative to the bankruptcy. The notes matured August 1, 2002, and MJK
submitted demand letters to the entities and Greenblatt. No payment was made and
the tax credits were not delivered. MJK initiated this suit in February 2003, seeking
recovery on the original margin accounts and in the alternative seeking recovery
based on the July 12 Agreement, promissory notes, and Greenblatt guaranty. MJK
moved for summary judgment on the claims rising out of the promissory notes,
Greenblatt guaranty, and July 12 Agreement. The bankruptcy court granted this
motion, and Greenblatt, Banco, and Loop appealed to the district court. The district
court affirmed the grant of summary judgment, but reduced the award to MJK by
$3,000,000.3 Greenblatt, Loop, and Banco appeal.
ANALYSIS
Appellants contend that the July 12 Agreement was essentially an agreement
to sell the debit balance accounts to Greenblatt in exchange for the promissory notes,
3
This amount had been paid by Feltl as part of a settlement with MJK of all
claims, including the guaranty of the Greenblatt entities’ debit margin accounts.
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tax credits, and guaranty. They claim that there are genuine issues of material fact
regarding whether the debit balances were actually transferred to Greenblatt. If they
were not transferred, appellants argue, the July 12 Agreement, notes, and guaranty are
not enforceable for failure of consideration.
We review the district court’s grant of summary judgment de novo, viewing the
record in the light most favorable to the nonmoving party. Credit Card Debt
Solutions, Inc. v. Home Fed. Bank, 363 F.3d 805, 808 (8th Cir. 2004). Summary
judgment is appropriate if there is no genuine issue of material fact and the moving
party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The parties
have agreed that the applicable laws of Illinois and Minnesota are sufficiently similar
that the court need not resolve which of the conflicting choice-of-law provisions in
the parties’ agreements should be applied.
Viewing the record in the light most favorable to the nonmoving parties leads
to the conclusion that the debit account balances were not transferred to Greenblatt
prior to August 2002. The parties agree that there was no physical transfer of the
debit balances, nor was there any record of a transfer. The issue on appeal is whether
this constitutes a failure of consideration rendering the July 12 Agreement,
promissory notes, and Greenblatt guaranty unenforceable.
Consideration is something of value exchanged for a performance or promise
of performance. E.J. Baehr v. Penn-O-Tex Oil Corp., 104 N.W.2d 661, 665 (Minn.
1960). It means “not so much that one party is benefitted, as that the other suffers
detriment.” Estrada v. Hanson, 10 N.W.2d 223 (Minn. 1943) (quoting Johnson v.
Kruse, 285 N.W. 715, 717 (Minn. 1939); Weger v. Robinson Nash Motor Co., 172
N.E. 7, 10 (Ill. 1930). “When there is failure of consideration, a contract valid when
formed becomes unenforceable because the performance bargained for has not been
rendered.” Franklin v. Carpenter, 244 N.W.2d 492, 495 (Minn. 1976); Watson v.
Hobson, 81 N.E. 2d 885, 888-89 (Ill. 1948). Where a promisor received what he
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bargained for, however, there is no failure of consideration. Miller v. O.B.
McClintock Co., 297 N.W. 724, 730 (Minn. 1941). In addition, where one express
term in the contract is not completed, the contract may nonetheless be enforceable
where supported by other consideration. Estrada, 10 N.W.2d at 223; accord
Stellwagon v. Schmidt, 234 Ill. App. 325 (Ill. App. Ct. 1924).
A promise to perform an act in the future may constitute consideration for a
promissory note; in that case the promise, not the performance, is the consideration.
Noreen v. Park Constr. Co., 96 N.W.2d 33, 37-38 (Minn. 1959); Keller v. Hyland
Builders Corp., 186 N.E.2d 787, 789 (Ill. App. Ct. 1963). Non-performance of an act
does not result in failure of consideration in these cases; rather, the non-breaching
party may have a claim for damages. See Franklin, 244 N.W.2d at 495 (rejecting the
argument that there was a failure of consideration where a promise to purchase
insurance was never fulfilled).
The July 12 Agreement sets out the terms of the purchase of the debit balances
existing in the MJSK margin accounts. The guaranty signed by Greenblatt indicates
that it is related to the purchase of the debit balances of the Greenblatt entities.
Despite the purchase and sale language in the July 12 Agreement and Greenblatt
guaranty, the transfer of the debit balances was not the only consideration given to
the defendants. The parties do not dispute that their agreements set out a reduction
in the amount to be paid, and allowed the Greenblatt entities an additional year in
which to make payment. Both the bankruptcy and district court correctly concluded
that this was the substance of the agreement between the parties.4 The reduction in
the amount owed, and the agreement granting the Greenblatt entities an additional
4
Because the parties do not dispute either the initial amounts owed, or that
those amounts were reduced in the July 12 Agreement, the district court did not
engage in improper fact finding to reach this conclusion.
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year in which to make payment each constitute adequate consideration for the parties’
agreements.
Because they were adequately supported by other consideration, the guaranty,
promissory notes, and July 12 Agreement are valid and enforceable, despite the
parties’ failure to transfer the margin accounts. The Greenblatt entities therefore may
not avoid the obligation of their promissory notes; they may, however, bring an action
to recover the debit accounts.5
The Greenblatt entities have in large measure received what they bargained for;
the promissory notes secured both a reduction in the debt owed and additional time
to make payment. These concessions by MJK are consideration for the notes, and we
conclude that there was not failure of consideration. We therefore affirm the decision
of the district court.
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5
At oral argument, counsel for MJK represented that MJK would do everything
it could to complete the debit balance transfers. We assume it will do so.
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