Questions 19-20 are based on the following fact situation. Betty Bower, an adult, asked Jeff Geetus to lend her $1,000. Geetus replied that he would do so only if Bower’s father, Cash, would guarantee the loan. At Bower’s request, Cash mailed a signed letter to Geetus, “If you lend $1,000 to my daughter, I will repay it if she doesn’t.” On September 15, Geetus, having read Cash’s letter, lent $1,000 to Bower, which Bower agreed to repay in installments of $100 plus accrued interest on the last day of each month beginning October 31. Cash died on September 16. Later that same day, unaware of Cash’s death, Geetus mailed a letter to Cash advising that he had made the $1,000 loan to Bower on September 15. Bower did not pay the installments due on October 31, November 30, or December 31, and has informed Geetus that she will be unable to make repayments in the foreseeable future.
On January 15, Geetus is entitled to a judgment against Bower for which of the following amounts?A. Nothing, because if he sues before the entire amount is due, he will be splitting his cause of action.
B. $300 plus the accrued interest, because Bower’s breach was only a partial breach.
C. $1,000 plus the accrued interest, because Bower’s unexcused failure to pay three installments is a material breach.
D. $1,000 plus the accrued interest, because the failure to pay her debts as they come due indicates that Bower is insolvent and Geetus is thereby entitled to accelerate payment of the debt.
The correct answer is B -- here's the explanation provided to students in our program:
The rule for installment contracts is that failure to pay installments is only a partial breach, and the lender is limited to recovering for payments past due unless the contract contains an acceleration clause. Here we have no acceleration clause, so the lender will be limited to recovering for past payments. Therefore, answer choice “A” is wrong because it says the lender can recover nothing, and contains an inaccurate rule about “splitting his cause of action.” Answer choice “C” is incorrect because it says that the failure to pay the first three installments constitutes a material breach making the whole amount recoverable. Answer choice “D” basically says that an acceleration clause will be implied by the borrower’s failure to pay, which is also an inaccurate rule of law. Thus, answer choice “B,” which states that only the past due portion (plus interest) can be recovered, is correct.
I had a student ask a question about anticipatory repudiation based on this fact pattern. The student wanted to know why Bower's statement to Geetus (implied from the last sentence) "that she will be unable to make repayments in the foreseeable future" doesn't imply anticipatory repudiation.
To understand why anticipatory repudiation doesn't apply, we need to understand what anticipatory repudiation is. It's a "term of art" (that's law school jargon for "a phrase that means something") in contract law where one party informs the other party that they don't intend to honor their obligations under the contract. When one party "repudiates" a contract, they are in immediate breach and they can be sued right away by the other party.
An anticipatory repudiation must be unequivocal -- if John tells Landon "I might not be able to pay you what I owe", that's very different from John saying "Landon, I will not pay you what I owe you." The former would not be an anticipatory repudiation, the latter would be. In the latter scenario, Landon can sue John right away for breach of contract.
Why would anybody ever do that, ever? Once one party is informed by the breaching party of the intent not to perform (in plain English, once John tells Landon "I'm not paying"), the other party has a duty to "mitigate damages" as a result of the breach. In other words, the non-breaching party must take reasonable steps to address whatever damages they're going to suffer because of the breach.
What does that have to do with the above fact pattern? Well, in an installment contract, the party owed money (here, Geetus) has specifically allowed the debtor (here, Bower) to pay back the amount due over a certain amount of time. Mere inability to pay by itself -- even the announcement of a future inability to pay -- does not give the creditor (Geetus) the ability to demand all of the money right away. Even if Betty HAS repudiated the contract, Geetus is still only entitled to money on the schedule he bargained for with Betty Bower. Remember, in an installment contract, the payment schedule is typically part of the bargained-for exchange (here, the fact pattern discusses it in detail). You don't lose that right by not paying -- unless the contract says you do (acceleration clause). An acceleration clause would allow him to collect right away in the event of missed payment or a repudiation. (clauses like that are common in finance contracts -- if you buy a TV from Best Buy on credit but you miss a payment, the entire amount of the TV becomes due when you miss one payment...but that's specifically because of a clause written into the contract that says exactly that.)
An additional problem with treating this as an anticipatory repudiation issue is that no answer really gives a correct statement of law regarding anticipatory repudiation. Answer choice D, I think, would be the closest, if "Bower is insolvent" is read to mean "Bower has anticipatorily repudiated." But even answer choice D says "the failure to pay her debts as they come due." It does not reference her words and discuss the effect of them, which I think you would need to confidently treat her statement as a repudiation.
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