Opinion ID: 1866589
Heading Depth: 2
Heading Rank: 2

Heading: The executory nature of the agreement.

Text: This issue is inextricably intertwined with the essence of the agreement issue. Dodgen and Iowa Growthland contend that the agreement was still executory when the bank was closed because the trustees had physical possession of the stock. While the trustees are still able to turn over the stock, Dodgen and Iowa Growthland argue such a gesture would be meaningless because the asset that the stock represents is nonexistent. So, they argue, there was a failure of consideration when the bank was closed. This argument is predicated on a rule of law that excuses performance when the subject matter of a contract is destroyed. Dodgen and Iowa Growthland rely heavily on this rule and cite in support of it the Restatement (First) of Contracts section 281 (1932). Section 281, entitled, Prospective Inability of One Party Caused by Destruction of Subject-Matter, provides that [i]n promises for an agreed exchange, a promisor is discharged from the duty of performing his promise if substantial performance of the return promise is impossible because of the nonexistence, destruction or impairment of the requisite subject-matter or means of performance.... See also Wood & DuVall v. Iowa Bldg. & Loan Ass'n, 126 Iowa 464, 470-71, 102 N.W. 410, 411-12 (1905); Mahaska County State Bank v. Brown, 159 Iowa 577, 585-86, 141 N.W. 459, 462 (1913). Comment c to section 281 significantly provides that a seller of goods [who] retains a lien or a title merely for the purpose of security [is entitled to receive the purchase price although the goods are destroyed.] [Such a case], however, [is] not [an exception] to the rules stated in [section 281,] since when recovery of the price is allowed, the result is based on the premise that the substantial incidents of ownership had already passed to the buyer before the destruction. (Emphasis added.) The italicized language is another way of saying that failure of consideration is not available as a defense to the buyer because the seller has substantially performed. Similarly here the substantial incidents of ownership to the stock had already passed to Dodgen before the bank was closed. Dodgen and St. John expressly acknowledged this in the agreement which clearly recognized that Dodgen could exercise all ownership rights in the stock. The stock was reissued in Dodgen's name; St. John merely held the stock as security for Dodgen's promise to pay. For all intents and purposes St. John did everything essential to an executed sale except to surrender physical possession of the stock to Dodgen. Cf. Hull-Dobbs Motor Co. v. Associates Discount Corp., 241 Iowa 1365, 1368-69, 44 N.W.2d 403, 406 (1950) (recognizing that a conditional sales contract divides itself into two parts: one of a fully effected sale and one of a provision for securing payment). St. John had to retain possession to establish his security interest in the stock as the agreement allowed him to do. Under our law that was the proper way to perfect a security interest in the stock. See Iowa Code §§ 554.9305, 554.9105(1)(i), 554.8102(1). Even though a seller retains physical possession of the stock as collateral under a stock purchase agreement, there may be constructive delivery of the stock from the seller to the buyer. Cf. In re Application of Stewart Becker, Ltd., 94 Misc.2d 766, 772, 405 N.Y.S.2d 571, 575 (1978) (Although a transfer of stock requires delivery (U.C.C. § 8-309), title may pass by constructive delivery and, if the parties so intend, title passes to the buyer by delivery to an escrow agent for ultimate delivery to the buyer upon payment of the purchase price or part thereof.); accord Banker's Trust Co. v. Rood, 211 Iowa 289, 233 N.W. 794 (1930). Constructive delivery occurs when the buyer does not retain physical possession of the stock but is entitled to full voting rights as well as dividends. In re Application of Stewart Becker, Ltd., 94 Misc.2d at 772, 405 N.Y. S.2d at 575. Once constructive delivery takes place, the defense of failure of consideration becomes inapplicable. This is so because consideration must be ascertained on the day of sale. Herrmann & Henican v. De La Perriere, 47 Ga.App. 541, 171 S.E. 232, 233 (1933). So, a subsequent depreciation [in the value of the stock] would give the defendant no greater right to avoid his obligation to pay the stipulated price for the property than an enhanced value would give the plaintiff an excuse for the nonfulfillment of his agreement. Id. Here we think the parties intended title to the stock to pass to Dodgen once the stock was registered in his name. At this point several things had occurred. Dodgen had made the down payment called for in the agreement and began exercising control of the bank. Likewise, St. John had substantially performed his part of the agreement. Only two promises remained unperformed: Dodgen's full payment of the purchase price and St. Johns' delivery of physical possession of the stock. In these circumstances, we think there was a constructive delivery of the stock to Dodgen. Although the collateral provision of the agreement denied Dodgen physical possession of the stock, it did give him the right to such possession upon full payment. The provision also gave him rights of ownership in all other respects. Risk of loss passed with this constructive delivery. The decline in the stock's value gave Dodgen no greater right to avoid his obligation to pay than an enhanced value would have given St. John an excuse for not delivering the stock.