Story Case

The Middlesex Grocery Company was financially embarrassed, and there was a possibility that the firm would be compelled to go into bankruptcy. To prevent this, the creditors assembled and agreed to take in payment of their claims 90 cents on the dollar. Later, Levy & Co., who were among these creditors, decided to sue for their entire claim, instead of taking 90 cents on the dollar. They brought suit against The Middlesex Grocery Company for $1,000, the balance due to them.

The Middlesex Company defended on the ground that Levy & Co. had agreed to take 90 cents on the dollar and hence, that the claim was only $900. Levy & Co. answered this defense, by saying that the promise to take $900 was not supported by any consideration. To this, the Middlesex Co. replied that the promise of each creditor was consideration for the promise of every other creditor.

What is your decision?

Ruling Court Case. Langston Vs. Stewart Brothers, Volume 103 Georgia Reports, Page 290

Stewart Brothers were partners conducting a retail grocery store. The firm owed Langston $158 for goods delivered, upon an open account. In 1895, Stewart Brothers became involved financially and could not satisfy their obligations. The firm's creditors, thereupon agreed among themselves with Stewart Brothers to accept fifty per cent of their claims in full settlement of all obligations. Under such an arrangement entered into with all the creditors, Stewart Brothers were able to secure money to pay the debts in this proportion. Langston became a party to this written contract.

When the money was tendered to Langston under this contract, he refused to accept, insisting that the contract was without consideration. Thereupon, he started this suit for the full amount. Stewart Brothers entered the composition contract as a defense.

Justice Lewis gave the opinion of the Court: "It is well established that a contract is binding when it forms a part of a composition in which several creditors join, mutually agreeing, on account of the embarrassed or insolvent condition of their common debtor, to forbear pressing their claims to the full amount.

The new consideration which enters into and supports such an agreement is the undertaking of the other creditors to give up a portion of their demands. To allow a creditor, who has entered into such an agreement, upon which all the others had acted, to repudiate his contract and sue for the entire amount of his original debt, would be sanctioning the perpetration of a fraud".

Judgment is given for Charles D. and John L. Stewart.

Ruling Law. Story Case Answer

A composition with creditors rests upon an intrinsic consideration, namely, the mutual agreement of the creditors to forego their legal rights and to accept what is offered for their common benefit. The promise of each creditor is the consideration for that of the others. Each creditor enters into a new agreement with the- debtor, the consideration of which is the forbearance of all the other creditors who became parties to the composition to insist upon their claims in full. In the Story Case, the defense of the Middlesex Grocery Company is effective.