Cain vs. Price (Nev. Supreme Ct. – Apr. 12, 2018)
The promisor in this case failed to fulfill its contractual obligations under a settlement agreement. The third-party beneficiaries claimed they were entitled to the contract’s release provision when the non-breaching party elected to seek damages for the promisor’s breach of the contract.
The Cains, as owners of Heli Ops International, entered into a joint venture agreement (JVA) with C4 Worldwide, Inc. The JVA provided that Heli Ops would loan $1,000,000 to C4 for the purpose of acquiring and then leveraging Collateralized Mortgage Obligations (CMOs). In return, Heli Ops would receive the first $20,000,000 in profits from C4’s leveraging of the assets, while retaining a 49 percent security interest in the CMOs until C4 had paid out that amount. The Cains transferred $1,000,000 to C4, but C4 did not distribute any profits to the Cains.
The Cains subsequently entered into a Settlement Agreement and Release of All Claims with C4 and its CEO. In the Settlement Agreement, C4 agreed to pay the Cains $20,000,000 no later than 90 days from February 25, 2010. In return, the Cains agreed to release C4 and its officers from any liability for C4’s financial misfortunes and resultant inability to timely pay. The Agreement further provided that California law governed its construction and interpretation and that the prevailing party in any action arising under the Settlement Agreement would be entitled to fees and costs.
C4 failed to pay $20,000,000 by the date specified in the Settlement Agreement. Consequently, the Cains sued C4 and six of its officers, including Price and Shackelford. The Cains alleged breach of the Settlement Agreement, fraud, civil conspiracy, negligence, conversion, and intentional interference with contractual relations. After extended litigation, the district court awarded default judgment against C4, its CEO, and two other C4 officers on all claims in the amount of $20,000,000, plus costs and fees. Following the default judgment, only Price, Shackelford, and a third officer remained as defendants. The third officer subsequently settled with the Cains.
Price and Shackelford moved for summary judgment, claiming that the Settlement Agreement released them from liability for C4’s actions and precluded the Cains’ suit. The Cains opposed, arguing that the Settlement Agreement was invalid for lack of consideration. The district court granted summary judgment to Price and Shackelford, reasoning that the Settlement Agreement was supported by consideration and that the Cains bound themselves to that Agreement’s release provision when they elected to seek damages for C4’s breach of contract.
The Cains appealed from that order granting summary judgment as well as several interlocutory and post-judgment orders.
On appeal, the Cains argued that summary judgment was inappropriate for two reasons. First, the Cains argued that the Settlement Agreement was invalid, so the release provision had no effect. Second, the Cains argued that, even if the Settlement Agreement was valid, C4’s material breach of that Agreement released the Cains from their obligation under that Agreement not to sue C4’s officers.
Was the Settlement Agreement valid?
The Cains first argued that the Settlement Agreement did not release Price and Shackelford from liability because the Settlement Agreement was invalid for lack of consideration. They argued that the Settlement Agreement merely acknowledged C4’s preexisting obligation to pay the Cains $20,000,000 and thus provided no consideration to the Cains in exchange for the release of liability.
The Supreme Court of Nevada explained that to be legally enforceable, a contract “must be supported by consideration.” Jones v. SunTrust Mortg., Inc., 128 Nev. 188, 191, 274 P.3d 762, 764 (2012). “Consideration is the exchange of a promise or performance, bargained for by the parties.” Id. A party’s affirmation of a preexisting duty is generally not adequate consideration to support a new agreement. See Cty. of Clark v. Bonanza No. 1, 96 Nev. 643, 650, 615 P.2d 939, 943 (1980). However, where a party’s promise, offered as consideration, differs from that which it already promised, there is sufficient consideration to support the subsequent agreement. 3 Williston on Contracts § 7:41 (4th ed. 2008).
The Court further explained that when contracting, a promisor may incorporate into the agreement a condition precedent – that is, an event that must occur before the promisor becomes obligated to perform. McCorquodale v. Holiday, Inc., 90 Nev. 67, 69, 518 P.2d 1097, 1098 (1974). An implicit condition precedent can be inferred from a contract’s terms and context, even when the contract does not explicitly so provide. Las Vegas Star Taxi, Inc. v. St. Paul Fire & Marine Ins. Co., 102 Nev. 11, 12, 714 P.2d 562, 562 (1986).
The Court noted that the JVA provided that C4 would pay the Cains “[t]he first twenty million USD ($20,000,000) received from the proceeds and profits of leveraging the CMOs.” Implicit in that statement is that there must be $20,000,000 in proceeds and profits for the Cains to receive that money. Thus, the existence of $20,000,000 in proceeds and profits was a condition precedent to the Cains receiving $20,000,000 from C4.
The Settlement Agreement, by contrast, contained no condition precedent. It unconditionally obligates C4 “to pay the sum of $20,000,000, plus all accumulated interest, to Cains no later than 90 days from February 25, 2010.” The Court explained that the effect of the Settlement Agreement was to remove the condition precedent from C4’s $20,000,000 obligation. Elimination of that condition precedent constitutes adequate consideration for the Settlement Agreement to be legally enforceable. See Jones, 128 Nev. at 191, 274 P.3d at 764. Therefore, the Court determined that the district court correctly held that the Settlement Agreement was a valid contract.
Did C4’s breach of the Settlement Agreement release the Cains from their obligation under the Agreement?
The Cains next contended that, assuming the Settlement Agreement was a valid contract, the district court nonetheless erred in holding that the Settlement Agreement released Price and Shackelford from liability. In particular, they attacked the district court’s conclusion that the Cains bound themselves to the terms of the Settlement Agreement when they declined to rescind that Agreement and instead sought damages for C4’s breach. The Cains argued that their suit for damages did not bind them to the terms of the Settlement Agreement.
The Court explained that when parties exchange promises to perform, one party’s material breach of its promise discharges the non-breaching party’s duty to perform. Restatement (Second) of Contracts § 237 (Am. Law Inst. 1981). If the non-breaching party’s duty was to a third-party beneficiary, the same principle applies: the breaching party’s failure of performance discharges the beneficiary’s right to enforce the contract. Id. at § 309(2) & cmt. b. There are several possible exceptions to this rule – for example, where the beneficiary changes its position in reliance on the agreement, or where the contract expressly or implicitly guarantees a beneficiary’s right regardless of other parties’ performance. See Restatement (Second) of Contracts § 309 cmt. B. However, the facts of this case do not implicate those exceptions. Moreover, a material breach of contract also gives rise to a claim for damages. Id. at § 243(1). Thus, the injured party is both excused from its contractual obligation and entitled to seek damages for the other party’s breach. See id. § 243 cmt. a, illus. 1.
The Court noted that the Settlement Agreement was an exchange of one promise to perform for another promise to perform. That is, C4 promised the Cains $20,000,000 in exchange for the Cains’ promise to release C4’s officers from liability for C4’s conduct. The Cains were bound by their promise until C4 materially breached the contract 90 days after February 25, 2010, the date on which C4’s $20,000,000 was due. The Court determined at that point, the Cains were released from their promise not to sue C4’s officers.
The Court further noted that the complication in this case stems from the $20,000,000 default judgment previously awarded to the Cains. In briefing before the district court, the Cains elected to enforce that default judgment and rejected the possibility of rescinding the Settlement Agreement. The Court explained that based on those facts, the district court reasoned that the Cains elected to honor the Agreement and therefore bound themselves to its terms – namely, the promise not to hold C4’s officers liable.
The Court explained that in so reasoning, the district court conflated two remedy concepts: specific performance and damages for total breach of contract. Specific performance requires the parties to perform as they promised in the original agreement. See Mayfield v. Koroghli, 124 Nev. 343, 351, 184 P.3d 362, 367-68 (2008) (discussing when it is appropriate for a court to order specific performance). Damages for total breach, by contrast, awards the non-breaching party a monetary award sufficient to place that party in the position it expected to find itself had all parties honored the contract. See Restatement (Second) of Contracts § 347.
The Court explained that the district court erroneously interpreted the $20,000,000 default judgment to be an order for specific performance. That misinterpretation likely occurred because $20,000,000 would have been the appropriate amount had the district court ordered specific performance. But the Cains never sought specific performance of the Settlement Agreement, and that is not what the district court ordered when it granted default judgment to the Cains. Rather, the district court awarded damages for breach of contract, fraud, and other claims. The Court further explained that while $20,000,000 may greatly exceed the amount of damages the Cains actually suffered, the propriety of that amount was not before it. The Court determined that because the default judgment awarded damages rather than specific performance, it did not bind the Cains to their original promise within the Settlement Agreement. See Restatement (Second) of Contracts § 243 cmt. a, illus. 1.
Thus, the Court found that C4’s breach of the Settlement Agreement relieved the Cains of their obligation to Price and Shackelford, third-party beneficiaries under that Agreement. The Court therefore reversed the district court’s order granting summary judgment to Price and Shackelford. The Court also vacated the district court’s order awarding $95,843.56 in attorney fees to Price and Shackelford as prevailing parties, noting that since they are no longer prevailing parties, that award is inappropriate. See Wheeler Springs Plaza, LLC v. Beeman, 119 Nev. 260, 268, 71 P.3d 1258, 1263 (2003) (involving the reversal of an award of attorney fees where the district court’s judgment on the verdict was overturned).