Facts
- A creditor sold a business on credit to a husband and held an overdue debt for the purchase price.
- At the husband’s request, the wife endorsed a demand promissory note made by the husband and delivered to the creditor as security for the preexisting, past-due debt.
- The creditor claimed the wife’s endorsement was supported by his agreement not to transfer the note or place it in bank for collection, and to “hold it until such time as he wanted the money,” at which point he would demand payment.
- There was no express agreement to forbear for any fixed period, and the creditor retained the ability to sue on the demand note immediately.
- The creditor in fact refrained from demanding payment for about two years.
- The trial court entered judgment for the creditor; an intermediate appellate court reversed; the state high court reviewed on the creditor’s appeal.
Issues
- Whether a creditor’s statement that he will hold a demand note “until such time as I want my money” constitutes legally sufficient consideration for a third party’s endorsement securing an overdue debt.
- Whether actual delay in demanding payment supplies consideration when the creditor never assumed an enforceable duty to forbear.
Decision
- The court affirmed judgment for the endorser.
- The creditor’s asserted promise imposed no binding obligation to forbear, because it left the time of demand entirely to his own election.
- Without a binding forbearance commitment (or a proved request-and-reliance forbearance arrangement), there was no consideration for the endorsement, rendering the endorser’s obligation unenforceable in an action between the original parties.
Legal Principles
- A promise requires consideration to be enforceable in a suit between the original parties to a negotiable instrument; the payee may be met with a defense of lack of consideration.
- An agreement by a creditor to forbear collection of a debt presently due can be consideration for a third party’s suretyship or endorsement obligation.
- A promise is not consideration if it is illusory—i.e., if performance is entirely within the promisor’s discretion and the promisor remains free to act immediately.
- Forbearance may supply consideration where (i) the debtor requests extension, (ii) a third party undertakes liability in exchange for forbearance, and (iii) the creditor actually forbears in reliance for a reasonable time; mere expectation of delay, without such a showing, is insufficient.
Conclusion
Because the creditor never bound himself to forbear for any definite or reasonable time and could sue at once on the demand note, his asserted “forbearance” promise was illusory and did not constitute consideration for the wife’s endorsement, so she was not liable as an indorser in the payee’s action.