Grand Ave. Partners, L.P. v. Goodan, CV 95-1425-GHK.

• Decision Date: 16 May 1996
• Docket Number: No. CV 95-1425-GHK.,CV 95-1425-GHK.
• Citation: 25 F.Supp.2d 1064
• Court: U.S. District Court — Central District of California
• Parties: GRAND AVENUE PARTNERS, L.P., Plaintiff, v. Douglas GOODAN, et al., Defendants. And Related Counterclaims.

25 F.Supp.2d 1064

GRAND AVENUE PARTNERS, L.P., Plaintiff, v. Douglas GOODAN, et al., Defendants. And Related Counterclaims.

No. CV 95-1425-GHK.

United States District Court, C.D. California.

May 16, 1996.

James L. Goldman, Pircher, Nichols & Meeks, Los Angeles, CA, for plaintiff and counter-defendant Grand Avenue Partners, L.P.

Steven J. Dawson, Burke, Williams & Sorensen, Los Angeles, CA, for defendants/counterclaimants Douglas Goodan & Jean Barclay, Trustees of the E.W. Goodan Trust.

Paul J. Matzger, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, San Francisco, CA, for defendant Sumitomo Bank of California.

AMENDED MEMORANDUM AND ORDER

KING, District Judge.

I. INTRODUCTION

This is an action brought by plaintiff Grand Avenue Partners, L.P. ("GAP") against Douglas Goodan and Jean Barclay, Trustees of the E.W. Goodan Trust ("Trust"). Plaintiff seeks declaratory relief establishing that, inter alia, the monthly rental amount to be paid by GAP on the ground lease ("Lease") of the Checkers Hotel is $2,000.00, payable in United States currency, until December 31, 2025. GAP seeks preliminary and permanent injunctions preventing defendants from evicting GAP on the basis of rent calculated under the Lease's "gold clause."

Trust counterclaims against GAP and Sumitomo Bank of California ("Sumitomo") for, inter alia, a declaration that the gold clause required that rent be increased from $2,000.00 to approximately $41,817.00 per month on April 1, 1994 as a result of an alleged novation occurring when Sumitomo assigned its leasehold interest to GAP. The counterclaim also alleges that Sumitomo's transfer of the leasehold estate to GAP constituted a material breach of the Lease, giving rise to damages and termination of the Lease.

This matter is before the court on Sumitomo and GAP's joint motion for summary adjudication. (For convenience, we henceforth jointly refer to the counter-defendants as "Sumitomo.") Sumitomo seeks to establish that its transfer of the leasehold estate to GAP was not a novation constituting a "new obligation" within the meaning of 31 U.S.C. § 5118(d)(2) so as to re-activate the Lease's gold clause. Trust requests that its Opposition also be considered by the court as a cross-motion for summary adjudication. It is sensible to do so because the two motions concern a distinct legal issue with no factual disputes. See Cool Fuel, Inc. v. Connett, 685 F.2d 309, 311-12 (9th Cir.1982).

II. BACKGROUND

Trust is the owner and successor of original lessors E.W. and Nellie Goodan, who entered into a ninety-nine year lease with original lessee William Hart Anderson on December 15, 1926. The Lease terminates on December 31, 2025. Rent was set at $1,000.00 monthly for the first year, $1,500.00 monthly for the next two years, and $2,000.00 per month for the remaining 96 years. Takaguchi Decl., Ex. A ("Lease") at 2.

As a control on inflation, the rental amount was subject to increase or decrease under a gold clause which defined all the dollar figures in the Lease in terms of the value of gold, and allowed for rent to be payable in U.S. currency "equivalent in market value" to the amount of gold that $2,000.00 in currency could buy at the time of the Lease formation. Lease at 3. The gold clause thus requires payment of the Lease obligations in gold dollars valued at the time the obligation was assumed. See Adams v. Burlington Northern Railroad Co., 80 F.3d 1377, 96 Daily Journal D.A.R. 4135, 4135 (9th Cir. 1996). The Lease specified that a dollar at the time the Lease was created in 1926 equaled a gold coin of 25.8 grains of gold .900 fine. Under this standard, the $2,000.00 gold dollar rent amount allegedly would have approximated $41,817.00 in U.S. currency on February 17, 1995 (an example, because of the fluctuating price of gold). See First Amended Counterclaim ("FACC"), Ex. D.

However, in 1933, Congress invalidated gold clauses when it banned the private ownership of gold. See 48 Stat. 112, 113 (1933). In 1934, gold was abolished as legal tender in the United States, only to be reinstated as legal tender in 1985. See Adams, supra, at 4137, 80 F.3d 1377; see also 48 Stat. 337, 340 (1934); Gold Bullion Coin Act of 1985, Pub.L. No. 99-185, 99 Stat. 1177 (codified as amended at 31 U.S.C. § 5112 (1994)). The 1933 statute that, inter alia, invalidated gold clauses was amended on October 28, 1977 by a joint resolution of Congress that repealed the Depression-era ban on private gold ownership. See Fay Corp. v. BAT Holdings I, Inc., 646 F.Supp. 946, 948 (W.D.Wash.1986); see also 91 Stat. 1227, 1229 (1977). This resolution established that "[o]bligations payable in gold are discharged by payment in any United States legal tender, but that command does not apply to obligations issued after October 27, 1977." Adams, supra, at 4137, 80 F.3d 1377.

In 1982, the 1933 statute and its 1977 amendment were recodified in the following provision:

An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. This paragraph does not apply to an obligation issued after October 27, 1977.

31 U.S.C. § 5118(d)(2).

Since then, two cases¹ have held that if a post October 27, 1977 assignment of a lessee's interest in a lease containing a gold clause constitutes a novation under state law, a new "obligation" arises within the meaning of 31 U.S.C. § 5118(d)(2), and the gold clause may be enforced to increase the rent. According to these cases, the nature of the leasehold transfer under state law determines whether the gold clause is re-activated pursuant to the federal statute.

On March 29, 1994, Sumitomo foreclosed on a deed of trust secured by the leasehold interest, thereby acquiring that interest from then-tenant Checkers Hotel Partners, L.P. Trust contends that the bank's assumption of the right to possession or actual possession of the premises, by virtue of foreclosing on the security interest, constituted a novation as a matter of law.

Sumitomo assigned its interest as lessee to GAP on April 1, 1994 in a document entitled Assignment of Ground Lease. FACC, Ex. C.² Thereafter, on February 23, 1995, Trust wrote to GAP demanding increased rent based on the theory that the transfer from Sumitomo to GAP constituted a novation that re-activated the gold clause.³

III. DISCUSSION

The narrow issue in this case is whether an assignment under the provisions of the Lease constitutes a novation under state law.

A. Terms of the Lease

The relevant sections of the Lease are as follows:

Section 1 of Art. XV states:

No assignment of the leasehold estate created hereby shall be made by the Lessee, and no such assignment shall be binding upon the Lessor unless such transfer shall be evidenced by an instrument in writing duly executed by the Lessee and the assignee with a certificate of acknowledgment of the execution in due form attached thereto, and which instrument shall be executed in duplicate and by its provisions bind the assignee to assume the obligations of the Lessee hereunder, and one of such executed instruments delivered unto the Lessor.

Lease at 33-34.

Section 3 of Art. XV states that after the leasehold is improved by a building,

... any assignment of the leasehold estate made in accordance with the provisions of Section 1 of this article shall release the assignor from all direct liability hereunder accruing after the making of such assignment and delivery of such instrument to the Lessor; provided, however, that nothing herein contained shall be construed to relieve any such assignor of liability hereunder while he remains in possession of the demised premises or any part thereof or of his statutory or other liability as a stockholder of any corporate assignee.

Lease at 34 (emphasis added).

Finally, Section 5 of the article provides:

Every assignee and succeeding assignee shall be subject to the same terms and conditions as to future assignments as is the original lessee, and subsequent assignees shall in similar manner be relieved from direct liability hereunder accruing after the making of any assignment in accordance with the foregoing conditions and restriction.

Lease at 34-35 (emphasis added).

B. Novation Under State Law

The parties agree that although a federal statute is involved (the statute providing for re-activation of gold clauses), the novation issue is a matter of state law. Wells Fargo Bank, supra, 32 Cal.App.4th at 432 n. 3, 38 Cal.Rptr.2d 521; Fay Corp., supra, 646 F.Supp. at 950. The question of whether a novation occurs when a lessee assigns its interest in the leasehold estate to a third party is a legal issue to be decided by the court. See River Bank America v. Diller, 38 Cal.App.4th 1400, 1413 n. 9, 45 Cal.Rptr.2d 790, 796 (1995) (where no extrinsic evidence was offered as aid in interpreting waiver provisions of guaranty agreements, the court resolved the issue as a question of law).

"Novation is the substitution of a new obligation for an existing one." Cal.Civ.Code § 1530.⁴ Pursuant to Cal.Civ.Code § 1531, a novation can occur by one of three methods:

1. By the substitution of a new obligation between the same parties, with intent to extinguish the old obligation;

2. By the substitution of a new debtor in place of the old one, with intent to release the latter; or,

3. By the substitution of a new creditor in place of the old one, with intent to transfer the rights of the latter to the former.

For a novation to occur by the second method, there must be a complete release of the original debtor. See Engineering Service Corp. v. Longridge Inv. Co., 153 Cal.App.2d 404, 414, 314 P.2d 563 (1957); Wells Fargo Bank, 32 Cal.App.4th at 431, 38 Cal.Rptr.2d 521 (novation is new contract that supplants preceding agreement and "completely extinguishes" original obligation). An essential requirement of novation is that "it `clearly appear' that ...