Contracts Q - Consideration, extending interest repayment

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Esc
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Contracts Q - Consideration, extending interest repayment

Postby Esc » Mon May 10, 2010 2:26 am

Seeking input on a K's question. Debtor borrows money from creditor at fixed interest rate, the interest and principal to be due in a lump sum at the end of 1 year. Debtor can't pay at end of 1 year period, negotiates with creditor to extend the obligation to repay for a second year. Interest will accrue at the original rate for the second year.

Does the interest that will accrue during the second year (at the original rate) constitute valid consideration for the promise to give the debtor another year in which to repay his debt? The E&E, which uses benefit/detriment theory, says no, because the interest is a pre-existing benefit to creditor/detriment to debtor. BarBri 1st year review, which from what I can tell uses bargain theory, says yes, because the extra year of interest was inducement for the creditor to extend the repayment period.

I'm leaning towards BarBri, since they seem to be using bargain theory and we are following the Restatement 2nd, but I really don't know what my professor thinks on this, and its too close to the exam to ask questions.

Input?

Leeroy Jenkins
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Re: Contracts Q - Consideration, extending interest repayment

Postby Leeroy Jenkins » Mon May 10, 2010 2:32 am

The answer here is obvious:

Explain both views, and then apply one.

Enjoy the A.

Esc
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Re: Contracts Q - Consideration, extending interest repayment

Postby Esc » Mon May 10, 2010 2:33 am

Leeroy Jenkins wrote:The answer here is obvious:

Explain both views, and then apply one.

Enjoy the A.


Multiple Choice Exam. FML

Leeroy Jenkins
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Re: Contracts Q - Consideration, extending interest repayment

Postby Leeroy Jenkins » Mon May 10, 2010 2:49 am

fwiw i don't buy the E&E's explanation. doesn't make any sense...how is an extra year's worth of interest on top of what was originally agreed to a pre-existing benefit? there is a clear monetary benefit to the lender

Renzo
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Re: Contracts Q - Consideration, extending interest repayment

Postby Renzo » Mon May 10, 2010 8:39 am

The second year of interest didn't induce the bargain (the threat of non-payment of what was already owed did), so no K.

Renzo
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Re: Contracts Q - Consideration, extending interest repayment

Postby Renzo » Mon May 10, 2010 12:15 pm

betasteve wrote:
Renzo wrote:The second year of interest didn't induce the bargain (the threat of non-payment of what was already owed did), so no K.

Creditor benefit by more interest, detriment with longer repayment, Debtor benefit with longer repayment, detriment with more interest to pay. Not contracting for the same thing as before.

But there's no bargain if the creditor was induced to make the new loan because of debtors inability to pay the original debt, as opposed to being induced by the additional interest.

It could be a reasonable modification of the original contract, and can certainly be argued both ways, but if it's a true-or-false "is this valid" question, I say no mutual inducement and no K.

Renzo
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Re: Contracts Q - Consideration, extending interest repayment

Postby Renzo » Mon May 10, 2010 12:22 pm

betasteve wrote:
Renzo wrote:
betasteve wrote:
Renzo wrote:The second year of interest didn't induce the bargain (the threat of non-payment of what was already owed did), so no K.

Creditor benefit by more interest, detriment with longer repayment, Debtor benefit with longer repayment, detriment with more interest to pay. Not contracting for the same thing as before.

But there's no bargain if the creditor was induced to make the new loan because of debtors inability to pay the original debt, as opposed to being induced by the additional interest.

It could be a reasonable modification of the original contract, and can certainly be argued both ways, but if it's a true-or-false "is this valid" question, I say no mutual inducement and no K.

See... I am looking at it like Creditor was induced to extend in exchange for additional interest and forgoing his legal right to sue for the debt. If Debtor got the extension, but only owed a sum total to payment over 1 yr, then I agree. But here, Creditor is getting additional benefit, something "different." I think I'd fall on the other side of you on this one Renzo, if T/F — But clearly I think we'd both argue each side in an essay.

You make a compelling case. I'd hate to see this hypo come up on a multiple choice.

solidsnake
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Re: Contracts Q - Consideration, extending interest repayment

Postby solidsnake » Mon May 10, 2010 12:35 pm

I have in my notes that where obligor makes a new promise to repay a debt even though the term of the debt has ran its course -- either on its own terms (the hypo here) or by running of statute of limitations, the new promise can be seen by most courts as giving the obligor a relief from moral obligation, and that relief from moral obligation suffices for valid consideration even though it is technically a species of past consideration. Policy supports finding a K as well; we want want parties to negotiate their own terms instead of litigate, and we want obligors to honor their debts. If debtor couldn't pay by the end of year anyway, putting him in breach isn't going to make a judgment lien against him that much more efficient.

Esc
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Re: Contracts Q - Consideration, extending interest repayment

Postby Esc » Mon May 10, 2010 1:08 pm

From what I'm seeing and what I read on my own, it looks like each jurisdiction will likely approach this problem differently. Really too bad that its a multiple choice and T/F exam. :|

nleefer
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Re: Contracts Q - Consideration, extending interest repayment

Postby nleefer » Tue May 11, 2010 12:58 am

Esc wrote:From what I'm seeing and what I read on my own, it looks like each jurisdiction will likely approach this problem differently. Really too bad that its a multiple choice and T/F exam. :|


My approach for T/F or multiple choice questions where the answer depends on which rule is followed was to stick with the restatement. This is because my professor puts a lot of emphasis on it, so your class may be different. In this case:

Restatement 2nd of Contracts §89D
1. A promise modifying a duty under a contract not fully performed on either side is binding if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made.

I'd be inclined to say that the modification is binding, though I suppose you could argue about whether the circumstances was anticipated or not. You could also argue that the contract was already fully performed on the lender's side. Still the modern trend is to enforce contract modifications as long as its fair and reasonable. See the UCC

U.C.C. §2-209
1. An agreement modifying a contract within this article needs no consideration to be binding.




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