Memorandum of Decision Re: Economic Compulsion

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re MARY MORGAN, INC.,                                       No. 1-90-01026      Debtor. ___________________________/
Memorandum of Decision Re Objection to Claim
     In August, 1984, debtor Mary Morgan, Inc. hired claimant Paul Eller & Associates to act as general contractor for the construction of a motel. The contract was originally for a fixed price, but later modified to a cost plus fixed fee contract.      Construction did not proceed smoothly. There were numerous delays, which Morgan attributed to Eller's poor performance and Eller attributed to changes made by Morgan. By the time the motel was finally completed in February, 1987, relations between them had broken down into open hostility and the construction lender was threatening to foreclose. Between early February and late April, Eller placed four mechanics' liens against Morgan's property in progressively higher amounts. On April 24, 1987, the construction lender filed a notice of default and informed Morgan that it intended to foreclose if Morgan did not resolve the situation.      On April 25, 1987, the principals of Eller and Morgan met and negotiated a full settlement of their disputes. Under the terms of the settlement, upon the close of the escrow set up for the take-out financing of the motel Eller would recieve $20,000.00 in cash and a note for $162,140.35 secured by the motel property. The agreement represented give-and-take by both sides. It was signed by the principals of both parties and their respective counsel.      On May 11, 1987, Morgan requested that Eller sign a supplemental agreement. The supplement was very short and mainly dealt with subcontractor problems, but provided that the entire agreement was to take effect upon the commitment of Great American First Savings Bank to provide take-out financing and further provided that the entire agreement was to be of no effect and not binding on either party if the commitment had not been made by June 30, 1987.      There had been little question that Great American would provide the take-out financing if Morgan resolved its problems with Eller. However, a written commitment was not made by Great American until July 7. Since the supplemental agreement did not mention if the commitment had to be formal and in writing, the parties were unclear as to whether the settlement was still in place. Morgan, still feeling that it was entitled to damages from Eller due to delay and rankling at the prospect of paying more to Eller, wanted to treat the settlement as a nullity. Eller wanted to have the matter resolved, but filed suit to enforce its mechanics' lien rights in case it turned out that the agreement had been abrogated. During this period, however, counsel for both sides continued to work with each other.      In the end, the situation was resolved by Great American. It informed both sides that it would foreclose immediately unless their dispute was resolved. Eller placed its demand for $20,000.00 in cash a secured note for $168,316.49 into escrow, along with releases of its liens and a dismissal of its lawsuit. It also and placed into escrow a document entitled "Agreement re Promissory Note and Deed of Trust" which stated the terms for the cash and note, obliged Eller to reconvey part of its lien at a future date, and incorporated by reference the May 11 agreement. The principals of Morgan signed all the documents, escrow closed on February 18, 1988, and Morgan made payments thereafter on the note until it filed its Chapter 11 petition in 1990.      Morgan has now objected to Eller's claim based on the note. It points out that one of its principals wrote "under protest" on the note and deed of trust and then signed his name over it. Morgan argues that it was forced to sign the note, deed of trust, and Agreement re Note and Deed of Trust under duress and therefore they are unenforceable and Morgan is free to seek damages against Eller for the delays it claims Eller caused.      The court sees no merit whatsoever to Morgan's assertions that the note is unenforceable. While it is true that Morgan was "under the gun" and had no choice except to sign the documents put into escrow by Eller, and that Eller knew this, Eller did not use the opportunity to extort anything from Morgan. Instead, Eller demanded only what the parties had substantially agreed to in an arm's length good faith settlement reached at the April 25 meeting. The court accordingly finds no overreaching such as would justify cancellation of the note and reopening the dispute.      The April 25 settlement was clearly reached in good faith. It is by no means clear that the settlement expired on June 30, as even after that date the attorneys for both parties were trying to "nurse this thing along in the hopes that the Morgans would get bailed out by somebody, some lender and that the Ellers would get paid." Where ambiguous, settlement agreements should be interpreted in such a manner as to give effect to the settlement. 15A Corpus Juris Secundum, Compromise and Settlement, section 21. Moreover, even if the settlement is deemed to have died on June 30 the court does not find its revival by the Agreement re Note and Deed of Trust to be unenforceable. The fact that Morgan had no alternative except to meet Eller's demands does not mean that the resulting agreements are void due to economic compulsion; that doctrine is only applicable where the demands made upon the one under compulsion are wrongful, such as a claim known to be false. See Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal.App.3d 1154, 1159. Here, all Eller demanded was what the parties had already substantially agreed to in fair settlement negotiations.      For the foregoing reasons, Morgan's objection to Eller's claim will be overruled. This memorandum constitutes the court's findings and conclusions. Counsel for Eller shall submit an appropriate form of order.
Dated: April 22, 1991                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy