CONTRACTS-CHARITABLE SUBSCRIPTIONS-IOWA SUPREMIE COURT

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1 CONTRACTS-CHARITABLE SUBSCRIPTIONS-IOWA SUPREMIE COURT FINDS SUBSCRIPTION AGREEMENT BINDING WTHOUT SHOWING- OF CONSIDERATION OR DETRIMENTAL RELIANCE_Saisbury v. Northwestern Bell Telephone Co., 221 N.W.2d 609 (Iowa 1974). The enforcement of charitable subscriptions' has long presented a dilemma for the courts. Courts have shown a strong desire to enforce subscription agreements for public policy reasons, 2 but have been faced with a lack of adequate legal theories on which to do so. 8 Thus, some of the earlier American cases flatly refused to enforce charitable subscriptions and held that such agreements were strictly gratuitous. 4 However, most courts have subsequently decided that charitable subscriptions are enforceable, using one of several tenuous theories of consideration or promissory estoppel as a legal basis. 5 A solution to this dilemma has been offered by the Iowa Supreme Court in Salsbury v. Northwestern Bell Telephone Co. 6 with the holding that charitable subscriptions are enforceable without any showing of consideration or detrimental reliance. 7 Although a few lower courts have so held, 8 the Iowa court appears to be the first state high court to take this position. FACTS AND HOLDING The Salsbury case is the third subscription case to reach the Iowa Supreme Court involving the unsuccessful attempt to establish a college at Charles City, Iowa. 9 In the first two cases, sub- 1. A charitable subscription may be defined as an agreement executed by a donor whereby he promises, pledges or states an intention to give an amount of money or property to a religious, educational or other charitable organization. 2. See note 21 infra. 3. See notes and infra and accompanying text. 4. See Phillips Limerick Academy v. Davis, 11 Mass. 113 (1814); Boutell v. Cowdin, 9 Mass. 254 (1812). 5. See notes and infra and accompanying text N.W.2d 609 (Iowa 1974) [hereinafter cited as Salsbury]. 7. Id. at More Game Birds in Am. v. Boettger, 125 N.J.L. 97, 14 A.2d 778 (1940) (although sufficient consideration present, promise could be enforced on a public policy basis alone); Caul v. Gibson, 3 Pa. 416 (1846) (moral obligation sufficient consideration to support an express promise); Billig, The Problem of Consideration in Charitable Subscriptions, 12 CoR- NELL L.Q. 467, n.51 (1927) [hereinafter cited as Billig]; 29 GEORGE- TOWN L.J. 245, (1940). 9. The two earlier cases were Pappas v. Bever, 219 N.W.2d 720 (Iowa

2 19751 CASE NOTES scribers signed pledge forms indicating their intent to subscribe a certain dollar amount to the college fund. 10 After the college closed for lack of funds, its receiver brought actions against the above subscribers to collect on the unfulfilled pledges." In both cases the supreme court held that the pledges were not enforceable since the use of the word "intend" in the pledge form indicated that the pledges were not meant to be legally binding. 1 2 In the Salsbury case the subscriber did not use the standard pledge form, but instead wrote a letter to the fund raiser as follows: This is to advise you that the contribution from Northwestern Bell Telephone Co. to the Charles City College has been approved by Mr. E. A. McDaniel, District Manager, Mason City. The $15,000 contribution will be made over a three year period, in three equal payments. Our first $5,000 payment will be made in We are very pleased to add our name to the list of contributors to this fine community undertaking. If I can be of further assistance, please feel free to contact me.' 8 The supreme court upheld the trial court's determination that the letter set its own terms and that it was not subject to the same defenses as the pledge cards.' 4 It also upheld the lower court's exclusion of evidence of circumstances extrinsic to the execution of pledge cards indicating that they were not binding.' 5 Thus, the language of the letter stating that "[tfhe $15,000 contribution will be made..." was interpreted as an unconditional promise to pay 1974) [hereinafter cited as Bever] and Pappas v. Hauser, 197 N.W.2d 607 (Iowa 1972) [hereinafter cited as Hauser]. 10. Bever at 721; Hauser at 609. The printed pledge form read: I/we intend to subscribe to the College Founder's Fund the sum of Dollars. I intend to pay [ Monthly [] Quarterly [] Semi-Annually [ ]Annually over 36 months beginning or as follows: 11. Bever at 721; Hauser at In Hauser, the court felt that the word "intend" made the language of the pledge form sufficiently uncertain to warrant the admission of parol evidence. This evidence revealed statements made by a fund raiser to the subscriber that the pledge could be disregarded if the subscriber died or had financial reverses or if the college failed. From these statements the court concluded that the signed pledge was not meant to be legally obligatory since only an "intention" to give was stated, and not a promise. Hauser at In Bever, the court arrived at the same conclusion but without considering the use of parol evidence. Bever at Salsbury at Id. at Id.

3 CREIGHTON LAW REVIEW [Vol. 8 a certain amount of money to the college and provided a basis for contractual liability. 16 The court then considered defendant's contention that there was no consideration for its promise since the college had failed before any payments were due. 17 The court reviewed its theory of consideration used in earlier subscription cases and acknolwedged that the criticism aimed at this and other theories was valid.' 8 It noted that a number of courts had responded to this criticism by substituting promissory estoppel for the consideration requirement, but decided not to follow this trend, contemplating that its adoption would result in fewer enforceable subscriptions due to the requirement that plaintiff must prove reliance. 19 The court then turned to Section 90, subsection (2), of the Restatement Second of the Law of Contracts and adopted it in conjunction with Section 90, subsection (1). Section 90 reads as follows: (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance. 20 The court indicated that it felt this rule was supported by public policy and that it was logical to find charitable subscriptions binding without a showing of consideration or detrimental reliance Id. at The author of the letter was an office manager for Northwestern Bell Telephone Company in Charles City and had also been active himself in the fund raising campaign. As a fund raiser he had been given pledge forms identical to those used in the Bever and Hauser cases but apparently did not have any available when the company's management authorized the pledge. The court's opinion implies that if the letter had contained language similar to that used in the printed forms the pledge would not have been binding. Id. at Id. at Id. at 612. See text accompanying notes infra for discussion of the theories and their criticisms. 19. Salisbury at See note 20 infra for explanation of promissory estoppel and its relationship to the rule adopted by the court. 20. Salsbury at 613, quoting RESTATEMENT (SECOND) OF CONTRACTS 90 (Tent. Drafts Nos. 1-7, 1973). Subsection (1) of this section is commonly known as promissory estoppel. J. CALAMARI & J. PERILLO, HANDBOOK OF of THE LAw OF CONTRACTS 99 (1970) [hereinafter cited as CALAMARi & PERmLO]. In order to hold a promise binding under this doctrine a court would require proof that the promisor made a promise likely to induce reliance and that the charity did in fact rely on it. The addition of subsection (2) eliminates this need for proof of actual reliance. 21. Id. at 613. The court's reference to public policy reflects a prey-

4 1975] CASE NOTES 851 In closing, it clarified its position by explaining that the enforceability of any pledge would still depend on the language of the pledge agreement. 22 If the language indicated that the pledge was not to be binding, the pledge would not be enforced; 23 if the subscription language was unequivocal, however, as in the letter in the principal case, it would be enforced. 24 PRIOR THEORIES FOR ENFORCEMENT OF PLEDGES As the court noted, enforcement of charitable subscriptions has quite often been based on tenuous theories of consideration. 25 In attempting to find consideration to support charitable subscriptions, courts have usually relied on one of three basic theories. 26 Perhaps alent judicial attitude that it is desirable to enforce charitable subscriptions whenever possible because charities perform acts of great benefit to society and because they are financially dependent on such pledges and gifts. See, e.g., Irwin v. Lombard Univ., 56 Ohio St. 9, -, 46 N.E. 63, 65 (1897), where the court said: The general course of decisions is favorable to the binding obligation of such promises. They have been influenced, not only by such reasons as those already stated, but in some cases, at least, by state policy as indicated by constitutional and statutory provisions. The policy of this state, as so indicated, is promotive of education, religion, and philanthropy. In addition to the declarations of the constitution upon the subject, the policy of the state is indicated by numerous legislative enactments providing for the incorporation of colleges, churches, and other institutions of philanthrophy, which are intended to be perpetual, and which, not only for their establishment, but for their perpetual maintenance, are authorized to receive contributions from those who are in sympathy with their purposes and methods,-the only source from which, in view of their nature, their support can be derived. Looking to the plainly declared purpose of the lawmaking department, promises made with a view to discharging the debts of such institutions, to providing the means for the employment of teachers, to establishing endowment funds to give them greater stability and efficiency, and whatever may be necessary or helpful to accomplish their purposes or secure their permanency, must be held valid... The Iowa Supreme Court adopted this language in Brokaw v. McElroy, 162 Iowa 288, , 143 N.W. 1087, 1090 (1913). 22. Salsbury at Id. Such language was used in the pledge forms of the Hauser and Bever cases. See note 10 supra. 24. Id. 25. CALAMARI & PFRLLO 103, at 177 (1970); 1A CORBIN ON CONTRACTS 198, at 204 (1963) [hereinafter cited as CORBIN]; 1 WILLISTON, CONTRACTS 116, at 474 (3d ed. 1957) [hereinafter cited as WILLISTON]; RESTATEMENT (SECOND) OF CONTRACTS 90, comment f, at 219; Billig, supra note 8, at 479; 26 BAYLOR L. REV. 256 (1974); 34 HARV. L. REv. 220 (1920); 15 HARV. L. REV. 312 (1901); 13 IowA L. REv. 332 (1928); 23 MICH. L. REV. 910 (1925); 22 MICH. L. REv. 260 (1924); 62 U. PA. L. REV. 296 (1914). 26. See CALAMARI & PERILLO 103; IA CORBIN 198; 1 WILLISTON 116; Annots., 151 A.L.R (1944), 115 A.L.R. 589 (1938), 95 A.L.R (1935), 38 A.L.R. 868 (1925),; 11 VA.'L. REv. 643 (1925). See generally 73

5 CREIGHTON LAW REVIEW [Vol. 8 the rule most often recited is that a subscription is an offer which is accepted and becomes enforceable when the promisee incurs expenses or obligations in reliance on the promise. 27 The incurring of expenses here is the consideration used to support the promise to pay the subscription. This theory has been criticized because in the typical subscription agreement the donor has no idea that he is bargaining for consideration, but only considers his action a gift. 28 Another accepted theory is that the promises of subscribers provide consideration for each other. 29 Under this theory the courts find that the subscription agreement is a contract with other subscribers, with the charity a beneficiary. 0 The main criticism of this has been that it is not factually realistic because in most charitable subscription situations the donors make promises not to each other but directly to the charity. 8 ' Furthermore, if other subscriptions serve as an inducement to the donor, they only affect his motive and are not actually given in exchange for his promise. 8 2 A third theory of consideration relied on is that the promisee, by accepting the subscription, impliedly makes a return promise to AM. JuR. 2d Subscriptions 9-13 (1974); 83 C.J.S. Subscriptions 5 (1953); cases cited in notes 27, 29 and 33 infra A CoRnI 198, at ; 1 WILLISTON 116, at ; Annot., 38 A.L.R. 868, 881 (1925). See Commissioner v. Bryn Maur Trust Co., 87 F.2d 607 (3d Cir. 1936); Trustees of Baker Univ. v. Clelland, 86 F.2d 14 (8th Cir. 1936); Brokaw v. McElroy, 162 Iowa 288, 143 N.W (1913); American Life Ins. Co. v. Melcher, 132 Iowa 324, 109 N.W. 805 (1906); First M.E. Church v. Donnell, 110 Iowa 5, 81 N.W. 171 (1899); Cottage Hosp. v. Merrill, 92 Iowa 649, 61 N.W (1894); McCabe v. O'Connor, 69 Iowa 134, 28 N.W. 573 (1886); University of Des Moines v. Livingston, 65 Iowa 202, 21 N.W. 564 (1884); McDonald v. Gray, 11 Iowa 508 (1861); Albert Lea College v. Brown's Estate, 88 Minn. 524, 93 N.W. 672 (1903); In re Field's Will, 15 Misc. 2d 950, 181 N.Y.S.2d 922 (Sur. Ct. 1959); I. & I. Holding Corp. v. Gainsburg, 276 N.Y. 427, _, 12 N.E.2d 532, (1938); Furman Univ. v. Waller, 124 S.C. 68, 117 S.E. 356 (1923). 28. CALAMARI & PERILLO 103, at 177; 1 WILLISTON 116, at 476; Billig, supra note 8, at CALAMARI & PERILLO 103, at 177; 1A CORBIN 198, at 210; 1 WIL- LISTON 116, at 476; Annot., 38 A.L.R. 868, 906 (1927). See Brokaw v. Mc- Elroy, 162 Iowa 288, , 143 N.W. 1087, (1913); Board of Trustees of Upper Iowa Conference of M.E. Church v. Noyes, 165 Iowa 601; 146 N.W. 848 (1914); Furman Univ. v. Waller, 124 S.C. 68, 117 S.E. 356 (1923). This was the consideration the Iowa court referred to in Salsbury in its discussion of theories used to enforce charitable subscriptions. Salsbury at A CoRBIN 198, at 210; Billig, supra note 8, at A CORBIN 198, at ; 1 WILLISTON 116, at ; Billig, supra note 8, at CALAMARI & PEmLLO 103, at 177; 1 WILLISTON 116, at

6 1975] CASE NOTES 853 apply the funds in conformity with the subscription agreement. 88 However, it has been pointed out that the trustee or fund raiser who accepts subscriptions on behalf of a charity is required by law to apply these funds to the purposes of the charity. 34 Thus, his implied reciprocal promise can hardly be considered as having been made in exchange for the donor's promise. 8 5 It should be noted that throughout many of these decisions the courts have intimated that charities and other organizations dependent on contributions should be given a special status when it comes to contract theories. 36 Courts have at times expressly recognized that the consideration they were finding to support the subscription would not be sufficient in an ordinary business setting. 8 " Also, considerable fear has been expressed that if subscriptions were not held binding many charities would fail for a want of funds. 8 These statements have led several writers to suggest that 33. CALAMARI & PERILLO 103, at 177; 1 WILLISTON 116, at 478; Billig, supra note 8, at 476. See In re Couch's Estate, 170 Neb. 518, 103 N.W.2d 274 (1960); In re Griswold's Estate, 113 Neb. 256, 202 N.W. 609 (1925); Allegheny College v. National Chautauqua City Bank, 246 N.Y. 369, 159 N.E. 173 (1927); Furman Univ. v. Waller, 124 S.C. 68, 117 S.E. 356 (1923). This approach was followed by the Nebraska court in In re Couch's Estate, supra, and In re Griswold's Estate, supra, which appear to be the only Nebraska cases dealing with the issue of consideration in relation to charitable subscriptions. 34. CALAMARI & PERILLO 103, at 177; Billig, supra note 8, at WILLISTON 116, at See, e.g., Barnes v. Perine, 12 N.Y. (2 Kern.) 18, 24, 3 N.Y. Ct. App. R. 172, (1854), where it is stated: The general principle is recognized in every case, that all simple contracts executory, whether in writing or verbal, must be founded upon a good consideration, and that the want of a legally adequate consideration, that is, a consideration recognized as sufficient in law, will vitiate every executory contract not under seal; still, the objection of a want of consideration for promises like the one before us has not always been regarded with favor; and judges, considering defenses of that character as breaches of faith toward the public, and especially toward those engaged in the same enterprise, and an unwarrantable disappointment of the reasonable expectations of those interested, have been willing, nay apparently anxious to discover a consideration which would uphold the undertaking as a valid contract; and it is not unlikely that some of the cases, in which subscriptions have been enforced at law, have been border cases, distinguished by slight circumstances from agreements held void for a want of consideration. 37. See, e.g., Allegheny College v. National Chautauqua City Bank, 246 N.Y. 369, _ 159 NE. 173, 174 (1927) (Cardozo, J.): [T]hough professing to apply to such subscriptions the general law of contract, we have found consideration present where the general law of contract, at least as then declared, would have said that it was absent. 38. See, e.g., Brokaw v. McElroy, 162 Iowa 288, 293, 143 N.W. 1087, 1089 (1913): To lightly withhold judicial sanction from such obligations would

7 CREIGHTON LAW REVIEW [Vol. 8 the real basis for the enforcement of charitable subscriptions has been public policy rather than any finding of consideration and have recommended that the courts forego their reliance on theories of consideration and recognize the rule for what it really is. 89 In response, several courts have abandoned these theories of consideration and have turned to the doctrine of promissory estoppel. 40 Thus, if a donor promises to give money to a charity and the charity expends money in reliance on that promise, the donor will be estopped from alleging a want of consideration as a defense to enforcement of the promise. 41 However, it has been suggested that the adoption of this doctrine may actually result in fewer enforceable subscriptions since the plaintiff will be required to prove that he relied on the promise to his detriment. 42 Although the doctrine may be more sound than some of the consideration theories, it would partially defeat the ultimate objective the courts are trying to accomplish. 48 ANALYSIS AND EFFECTS OF SALSBURY The Iowa court's adoption of Section 90 of Restatement Second of the Law of Contracts appears to be a direct response to these problems. The Restatement rule obviously makes unnecessary any showing of consideration and also eliminates the requirement of be to destroy millions of assets of the most beneficial institutions in our land, and to render such institutions helpless to carry out the purpose of their organization. See also note 21 supra. 39. CALAMARI & PERILLO 103, at , and Billig, supra note 8, at 480, suggest the following rule of law: "A written subscription to a charity, signed by the subscriber or his agent, and delivered to the charity, shall not be invalid or unenforceable for want of consideration." (Citations omitted). See also 23 MICH. L. REv. 910 (1925). 40. CALAMARI & PEMLLO 103, at 177; 1 WLrSTON 116, at See University of S. Cal. v. Bryson, 103 Cal. App. 39, 283 P. 949 (1930); Beatty v. Western College, 177 Ill. 280, 52 N.E. 432 (1898); In re Drain's Estate, 311 Ill. App. 481, 36 N.E.2d 608 (1941); Simpson Centenary College v. Tuttle, 71 Iowa 596, 33 N.W. 74 (1887) (dictum), noted in 13 IOWA L. REv. 332 (1928); Allegheny College v. National Chautauqua City Bank, 246 N.Y. 369, 159 N.E. 173 (1927) (dictum). Refer to note 20 supra and accompanying text for definition of promissory estoppel. 41. This doctrine is somewhat similar to the theory of consideration discussed at text accompanying notes supra where the incurring of expenses or obligations serves as consideration for the subscriber's promise. The difference between the two is that under a consideration theory the promisee's actions are bargained for, whereas under the promissory estoppel theory they are not. CALAMARi & PsiuaO 99, at CALAMARI & PERILLO 103, at See note 21 supra.

8 1975] CASE NOTES proving detrimental reliance on the promise. 44 What will be required, however, is a showing that a promise has been made by the promisor which he "should reasonably expect will induce action or forbearance on the part of the promisee or a third person. '45 The court's opinion implies that whether or not a promise meets this requirement is to be determined by the wording of the subscription itself. 4 6 If the promise is unequivocal, it will be enforced; if, however, the language indicates that no firm promise is intended and that only an intention to give is expressed, the subscription will not be binding. 47 The Salsbury decision undoubtedly makes a break with previous case law in the area of charitable subscriptions. However, any changes effected by it will probably be visible more in theory than in practical results. Most courts have already been enforcing charitable subscriptions without requiring consideration, although they diligently maintain that it is still required. If the decision is followed, it probably will not result in the enforcement of more subscription agreements, but will only result in a change in the theories relied on in their enforcement. The new rule more accurately reflects the underlying rationale of the courts in subscription cases, and in this sense is more desirable. Robert Schwarzkopf--' RESTATEMENT (SECoND) or CoNTRAcTs 90 (2). 45. Id. at 90(1). 46. Salsbury at Id.