Jara v. Suprema Meats, Inc.
Facts
Rodriguez and Miguel Jara, Jr. sought to create a wholesale meat distribution business, Suprema Meats, Inc. (D), to serve Hispanic restaurants. Rodriguez contributed $20,000 and Jara Jr. approached his father, Jara Sr. (P), for financial backing. Jara Sr. agreed to obtain a $150,000 line of credit in return for a 20 percent equity stake in the new company. He also helped negotiate leases on refrigerated trucks, paid $12,000 for the first and last months of the lease, and paid several thousand dollars for other expenses. Jara Sr. was given an additional ten percent stake. He also became a vice president and member of the board of directors.
The plaintiff and his son came to an understanding regarding the payment of salaries. The deal was that whenever they were going to withdraw funds, all of them were to agree on the amount.
The business experienced rapid growth. Jara Jr. and Rodriguez earned salaries of $43,367, or $800 per week, throughout the first three and a half years of operation. A board meeting was held to increase salaries. Jara Jr. and Gonzalez each wanted 25 percent of the profits. Votes were not unanimous. Eventually Rodriguez announced that it was decided by a two-to-one vote. Jara Jr. suggested that they hire an expert to determine what the compensation would be.
The plaintiff retained an attorney to assist him in negotiating a shareholder agreement. A financial analysis of a retained accountant indicated that $135,000 was ‘likely to be a good number for executive compensation.’ Jara Jr. and Rodriguez increased their weekly draw from $800 to $2,000 per week.
Suprema Meats stopped making meat deliveries to Jara Sr.’s restaurants. A new board meeting was conducted and he was not notified of the meeting and did not attend. Miguel and Jara Jr. voted themselves bonuses of $220,000 and $180,000, respectively. Plaintiff attended one more meeting and was formally removed from the board and Suprema established a two-person board of directors.
By 2002 the company had revenues of $44,3450,000 and gross margin of $4,950,000. The plaintiff was happy with the way his son and Rodriguez ran the company, but he objected to the payment of executive compensation without his consent or approval. In July 2002, Suprema for the first time paid him a dividend of $129,000. Plaintiff sued for breach of fiduciary duty and breach of contract. Plaintiff won the verdict and the defendant appealed on the grounds that the trial court erred in finding an enforceable agreement among shareholders to require the approval of all shareholders for an increase in executive compensation.
Issue
- Must consideration arise from a bargained for exchange that induces current performance and offers detriment?
Holding and Rule of Law
- Yes. Consideration must arise from a bargained for exchange that induces current performance and offers detriment.
A performance or a return promise must be bargained for in order to constitute valid consideration. A performance or return promise is bargained for if it is sought by the promissor in exchange for his promise and is given by the promisee in exchange for that promise. Generally, the consideration and promise bear a reciprocal relationship to each other of motive or inducement. The consideration induces the making of the promise, and the promise in turn induces the furnishing of the consideration. Any benefit conferred upon the promissor to which the promissor is not otherwise lawfully entitled, or any prejudice suffered by such person other than such as he is lawfully bound to suffer, as an inducement to the promissor, is valid consideration for a promise.
The phrase ‘as an inducement to the promissor’ reflects the requirement, more clearly enunciated in the Restatement, that the consideration be a bargained-for exchange. We have repeatedly refused to enforce gratuitous promises, even if reduced to writing in the form of an agreement. Jara Jr.’s promise not to increase compensation without unanimous shareholder agreement was unsolicited. Jara Jr. first raised the idea. Rodriguez and Jara Jr. accepted the plaintiff’s advice and then volunteered an entirely unsolicited promise that they would make sure that all three of them agreed on the amount.
No part of this exchange arose from any earlier conversation about shareholder approval or that the promise responded to any suggestion, objection or inducement that the plaintiff may have made. Jara Jr.’s promise was gratuitous in the sense of being offered without expectation of any exchange promise or performance. It does not matter if Jara Jr.’s promise arose from a fear that the plaintiff would retract his support for the line of credit the company needed. The existence of consideration does not depend a subjective state of mind but on whether the objective manifestations of agreement by the parties constituted a bargain. Jara Jr’s promise was neither induced by promises or conduct of the plaintiff nor given to induce a return promise or performance.
The trial court held that three shareholders exchanged promises to refrain from voting in favor of an increase in officer compensation without the approval of the other two shareholders is a valid bilateral contract, analogous to a voting trust, to protect each shareholder from a combination of the other two in setting officer compensation. The record contains nothing suggesting that Jara Jr. sought a return promise from the plaintiff or contemplated anything resembling a voting trust.
Disposition
Judgment reversed.