United States Court of Appeals,

Fifth Circuit.

No. 94-10691.

McCALLUM HIGHLANDS, LTD., Plaintiff-Appellant,

v.

WASHINGTON CAPITAL DUS, INC., Defendant-Appellee.

Oct. 10, 1995.

Appeal from the United States District Court for the Northern District of Texas.

Before HIGGINBOTHAM, SMITH and STEWART, Circuit Judges.

STEWART, Circuit Judge:

McCallum Highlands, LTD., appeals from an adverse summary judgment on an action to

avoid certain amended portions of a loan agreement with Washington Capital Dus, Inc. Affirmed in

part, vacated in part, and remanded.

FACTS

Ari Susman owned an apartment complex, McCallum Highlands, and wanted to refinance its

mortgage. In order to refinance at a lower rate of interest through Washington Capital Dus

("Washington"), he reorganized as a limited partnership, McCallum Highlands, LTD, ("McCallum")

with himself as general partner. He also obtained an agreement from his previous mortgaging

company foregoing a hefty prepayment penalty provided he refinanced by April 30, 1991.

Washington is in the business of making loans and then selling them to the Federal Home Loan

Mortgage Association ("Fannie Mae").

On January 9, 1991, McCallum accepted Washington's offered loan commitment for

$6,700,000 at an interest rate of 9.75% per annum. The loan commitment also provided that

McCallum could lower the interest rate through a buy-down process and increase the amount of the

loan to Susman's originally requested amount of $7,015,000. This amount of money (allegedly)

would allow him to pay off the Hancock mortgage and would also provide some extra capital with

which to refurbish McCallum apartments. Susman made a good faith deposit of $134,000 in
acceptance of the loan commitment.

Sometime earlyin 1991, Fannie Mae changed the guidelines describing what loanstheywould

buy. This change included a provision to grandfather out the kind of loan Susman wanted. The

provision required that a borrower like McCallumselect the applicable interest rate byApril19, 1991,

and that the loan close by April 30, 1991—the same date that Hancock had set as McCallum's final

date to avoid the prepayment penalty.

Additionally, Fannie Mae criticized another loan Washington had made to Susman (the

"Fountains" loan) because Susman had several properties in default at the time, and was not a good

risk. Because of Fannie Mae's criticism, on March 22, 1991—less than one month before

closing—Washington told Susman that they wanted to lower the amount loaned, and that they

thought they could get out of the commitment through a loophole. Susman told Washington that he

expected them to honor their commitment. On April 18 (one day before the April 19 deadline),

Washington told Susman that they would allow him to select an interest rate for the McCallum loan

only ifthe maximumamount loaned waslimited to $6,400,000 with no buy-down provision. Susman,

feeling that he had no choice because he needed to have the loan in place before April 30, signed up

for the loan even though (allegedly) the proposed amount, after closing costs, provided less than

enough to pay off the previous loan. He claims that Washington's actions amounted to economic

duress, resulting in McCallum's bankruptcy, or alternatively, that there was no consideration for the

modification of the loan commitment so that it is void, (and Washington is therefore in breach of the

original agreement).

The trial court found for Washington on summary judgment with regard to both claims.

DISCUSSION

Texas substantive law governs this diversity suit. See Erie Railroad v. Tompkins, 304 U.S.

64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Rule 56 of the Federal Rules of Civil Procedure, however,

governsthe propriety ofsummary judgment. Summary judgment shall be granted if the record, taken

as a whole, "together with the affidavits, if any, show that there is no genuine issue as to any material

fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. We
 

1McCallum argues that there is a question as to whether the fourth element is part of the test. 

This court has plainly held that it is. Lee v. Wal-Mart Stores, Inc., 34 F.3d 285, 289 (5th

Cir.1994); Beijing Metals & Minerals v. American Bus. Ctr., 993 F.2d 1178, 1185 (5th

Cir.1993). 

review the district court's summary judgment de novo. Lee v. Wal-Mart Stores, Inc., 34 F.3d 285,

288 (5th Cir.1994). However, we resolve factual controversies in favor of the nonmoving party, but

only when there is an actual controversy, that is, when both parties have submitted evidence of

contradictory facts. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994). We do not, in

the absence of any proof, assume that the nonmoving party could or would prove the necessary facts.

Id. Moreover, unsupported allegations or affidavits setting forth "ultimate or conclusory facts and

conclusions of law" are insufficient to either support or defeat a motion for summary judgment.

Galindo v. Precision American Corp., 754 F.2d 1212, 1216 (5th Cir.1985).

A. Economic Duress

 To avoid summary judgment on its economic duress claim, McCallum must demonstrate a

genuine issue of material fact as to each of the following elements of economic duress required by

Texas law: (1) a threat to do something that the threatening party has no legal right to do; (2) some

illegal exaction or fraudulent deception; (3) the restraint is imminent and such as to destroy a person's

free will without adequate means of protection; and (4) the claimant's financial distress was caused

by the party accused of duress.1Simpson v. Mbank Dallas, N.A., 724 S.W.2d 102

(Tex.App.—Dallas 1987, writ ref'd n.r.e.).

Elements one and two are very similar: the plaintiff must establish that the defendant

threatened to do something he had no legal right to do, and that threat involved an illegal exaction

or a fraudulent deception. The law, in general, is that the "threat to break a contract does not in itself

constitute duress." Hartsville Mill v. United States, 271 U.S. 43, 49, 46 S.Ct. 389, 391, 70 L.Ed.

822 (1926); Palmer Barge Line v. So. Petroleum Trading Co., Ltd., 776 F.2d 502, 505 (5th

Cir.1985). Thus, Washington's advising Susman of its belief that there could be loopholes in the loan

commitment is not sufficient to constitute economic duress. Moreover, as regards the second

element, the trial court found that there is no summary judgment evidence of illegal exaction or fraud
or deception. There is no showing that Washington did not intend to honor the McCallum

commitment when the agreement was originally made. Neither Washington nor Susman could

foresee or controlFannie Mae's dissatisfactionwith the Fountainsloan, or the guidelines change, both

of which materially altered the atmosphere surrounding the loans. In renegotiating the loan terms,

there is no showing that Washington engaged in any deceptive or fraudulent behavior.

Asregardsthe third element, the district court also correctly held that Susman failed to show

an imminent threat that destroyed his free will and against which he had no present means of

protection. Given the short amount of time available to him, it is not clear that Susman could or

could not have pursued other financing opportunities, but he made no showing that he could not have

pursued legal remedies. Thus, McCallum failed to establish that there was an imminent threat which

destroyed free will. Tower Contracting Co., Inc. v. Burden Bros., Inc., 482 S.W.2d 330, 336

(Tex.Civ.—Dallas 1972, writ ref'd n.r.e.).

Finally, as regards the fourth element, Susman made no showing other than conclusory

allegations that his financial predicament was caused by Washington. Apparently, it was Susman's

financial situation that led to his need to refinance the apartments, it was also his financial situation

that led to Fannie Mae's criticism of the other loan underwritten by Washington. Washington's

renegotiation of the loan may have been the proverbial straw that broke the camel's back, but that

does not make Washington responsible for McCallum's financial distress. Moreover, McCallum

waited for fifteen months after the amended agreement to allege duress. This court has indicated that

a "delay in raising a claim of duress in addition to the existence of a negotiated agreement between

parties represented by counsel is compelling evidence t hat there was in fact no duress." Palmer

Barge Line, Inc., v. Southern Petroleum Trading Co., Ltd., 776 F.2d 502, 506 (5th Cir.1985). Thus,

because Susman failed to provide evidence for allfour elements, summary judgment for Washington

on the issue of economic duress was appropriate.

B. Consideration

McCallumarguesthat it was provided no consideration for signing Amendment Three to the

loan commitment. Consideration is a present exchange bargained for in return for a promise. Roark
v. Stallworth Oil and Gas, Inc., 813 S.W.2d 492, 496 (Tex.,1991) (citation omitted). It consists of

either a benefit to the promisor or a detriment to the promisee. Id. The detriment must induce the

making of the promise, and the promise must induce the incurring of the detriment. Id.

In general, under the "pre-existing duty rule," an agreement to do what one is already bound

to do cannot serve as "sufficient consideration to support a supplemental contract or modification."

Signs v. Bankers Life & Casualty Co., 340 S.W.2d 67, 73 (Tex.Civ.App.—Dallas, 1960, no writ).

Thisrule usually comesin to play when one party becomes unhappy with the contract as agreed upon

and wants to change it. 3 WILLISTON ON CONTRACTS § 7:36 (1992). He has to offer some new

consideration to the other party to induce that other party to agree to the change. Thus, merely

offering the preexisting duty he had already contracted to perform cannot serve as consideration for

the change. See Okemah Construction, Inc., v. Barkley-Farmer, Inc., 583 S.W.2d 458, 460

(Tex.Civ.App.—Houston [1 Dist.], 1979, no writ).

In the case at bar, Washington became unhappywith the McCallumcommitment when Fannie

Mae criticized the prior loan. The loan as amended was not in accord with the initial agreement, and

Washington claimsthat original agreement was properly modified with new consideration. The trial

court, citing Taylor v. Bonilla, 801 S.W.2d 553, 556 (Tex.App.—Austin 1990, writ denied), found

that the Amendment imposed new mutual obligations on both McCallum and Washington, and that

this constituted sufficient consideration: McCallum gave up its right to receive a larger loan amount

and Washington gave up its right to receive the additional money in repayments. The trial court's

finding of new consideration is erroneous because there was no showing made by Washington that

this exchange was bargained-for.

In Taylor v. Bonilla, an insured agreed to surrender an old whole life policy as well as to pay

an additional premium in exchange for a new term policy. He then died after applying for the term

policy and accepting payment of the cash value of the whole life policy but before making the first

premium on the term policy. The issue was whether the insurance company had received

consideration for the term policy. Taylor v. Bonilla, 801 S.W.2d at 555-557. Both parties had

deliberately, and thoughtfully participated in negotiating this agreement. Id. The court held that the
consideration the insurance company had received was partlya release fromthe obligations ofthe old

policy, and partly the new premium, for which the company had bargained. The consideration that

the insured received was the new policy for which he had deliberately bargained. Applying the

rationale of Taylor, the instant issue is whether Susman bargained for and received some new

consideration in exchange for accepting a lower loan amount with more restrictions, not whether he

received consideration for the agreement as modified.

Anotherreason that Washington's argument that McCallumbenefitted by having lessto repay

cannot be regarded as new consideration is because the amended commitment recites different terms

for initiation, not just less money due under the contract. In the amended contract, Susman was not

allowed to pick t he interest rate, or determine the amount of money loaned, or opt for the

"buy-down" provision as he had been in the initial contract. The only thing Susman received in

exchange for giving up these rights is a smaller loan. Moreover, by asserting that the good will of

Washington and Fannie Mae could serve as consideration for the modification, Washington is

asserting that this good willwas a motivating factor inducing Susman's agreement. Again, McCallum

has urged and Washington has not contradicted that Susman did not agree to the modification for any

reason other than that he could not obtain alternative financing at that late date.

Washington additionally arguesthat, as consideration for the modification, Washington gave

up the right to assert its claims that it had no obligation to loan any money to McCallum Highlands.

Certainly, if there is an honest dispute over the interpretation ofthe original agreement, itssettlement

can furnish sufficient consideration for a new promise. 3 WILLISTON ON CONTRACTS § 7:36 (4th Ed.,

1992). However, there is nothing in the record showing that McCallum bargained for the surrender

of this right. McCallum has urged and the appellees have not contradicted that Susman believed the

contract to be binding on both parties as written and that he expected Washington to honor its

commitment as written.

Because no bargained-for consideration was granted to Susman in exchange for his

agreement to modify the loan commitment, the issue then becomes whether one of the exceptions to

the requirement of new consideration applies. Parties can agree to first rescind an original agreement,
and subsequently enter into a new one, thus avoiding the new-consideration requirement. See

Blaylock v. Akin, 619 S.W.2d 207, 209 (Tex.Civ.App.—Texarkana, 1981, writ ref'd n.r.e.);

Crossland v. Nelson Auction Service, Inc., 424 S.W.2d 318, 319 (Tex.Civ.App.—Amarillo, 1967,

writ ref'd n.r.e.). However, where an alleged rescission is coupled with a simultaneous re-entry into

a new contract and the terms ofthat new contract are more favorable to only one ofthe parties, doubt

is created as to the mutuality of the agreement to rescind the original contract. 3 WILLISTON ON

CONTRACTS § 7:37 (1992). Lurking beneath the surface in such cases is an implied threat by the

promisor to withhold performance unless he receives the additional compensation or other changes

he wants. See id. Moreover, this exception is based on circular logic because the validity of the new

agreement depends upo n the rescission while the validity of the rescission depends upon the new

agreement. 1A CORBIN ON CONTRACTS § 186 (1963). As a result, the validity of this exception to

the preexisting duty rule has been questioned by a number of authorities. See e.g., 3 WILLISTON ON

CONTRACTS § 7:37; 1A CORBIN ON CONTRACTS § 186 (1963), RESTATEMENT (SECOND) OF

CONTRACTS § 89 comment b (1981); JOHN D. CALAMARI & JOSEPH M. PERILLO, CONTRACTS 206

(3d ed. 1987). Because the rescission of the original commitment occurred simultaneously with the

creation of the amended loan agreement, and because the terms were more favorable to Washington

than McCallum, the facts of this case place it neatly into the category of cases where this exception

is most criticized.

A more appropriate exception to the preexisting duty rule is presented in § 89 of the

Restatement Second of Contracts:

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated

by the parties when the contract was made.

RESTATEMENT (SECOND) OFCONTRACTS § 89 (1981). Whether a modification is fair and equitable

goes beyond absence o f coercion and requires an objectively demonstrable reason for seeking a

modification. Id. at § 89 cmt. b. The reason for modification must rest in circumstances not

anticipated when the contract was made. Id. When such a reason is present, the relative financial

strength of the parties, the formality with which the modification is made, the extent to which it is
performed or relied on and other circumstances may be relevant to show or negat e imposition or

unfair surprise. Id.

This exception to the requirement of new consideration for a modified contract is integrated

into Texaslaw. See Wiedeman v. Howell, 276 S.W.2d 380, 383 (Tex.Civ.App.—Austin, 1955, writ

ref'd n.r.e.); Allied Chemical Corporation v. DeHaven, 752 S.W.2d 155, 159 (Tex.App.—Houston

[14 Dist.], 1988, writ denied). Fannie Mae's criticism of the earlier loan was such an unforeseen

circumstance, but we conclude that, to use the language in the Restatement, the modification was not

"fair and equitable" to McCallum.

We conclude, as a matter of law, that McCallum did not receive consideration for agreeing

to the modification of the original loan commitment thus the entry of summary judgment on this

ground was error by the trial court. Accordingly, we AFFIRM IN PART, VACATE IN PART, and

REMAND for further proceedings consistent with this opinion.