216 Jamaica Avenue, LLC v. S & R Playhouse Realty

• Decision Date: 27 August 2008
• Docket Number: No. 07-3967.,07-3967.
• Citation: 540 F.3d 433
• Parties: 216 JAMAICA AVENUE, LLC, Plaintif-Appellant, v. S & R PLAYHOUSE REALTY CO., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

540 F.3d 433

216 JAMAICA AVENUE, LLC, Plaintif-Appellant, v. S & R PLAYHOUSE REALTY CO., Defendant-Appellee.

No. 07-3967.

United States Court of Appeals, Sixth Circuit.

Argued: June 12, 2008.

Decided and Filed: August 27, 2008.

ARGUED: David H. Thompson, Cooper & Kirk, PLLC, Washington, D.C., for Appellant. Gary Lee Walters, Thompson Hine, LLP, Cleveland, Ohio, for Appellee. ON BRIEF: David H. Thompson, Charles J. Cooper, Dean J. Sauer, Cooper & Kirk, PLLC, Washington, D.C., for Appellant. Gary Lee Walters, Stephen D. Williger, Thompson Hine, LLP, Cleveland, Ohio, for Appellee.

Before: KEITH and SUTTON, Circuit Judges; ACKERMAN, District Judge.^*

OPINION

SUTTON, Circuit Judge.

At stake in this case is the enforceability of a "gold clause" contained in a 1912 lease agreement.

I.

In 1912, Salmon and Samuel Halle leased a parcel of land in downtown Cleveland from its owner, Realty Investment Corporation. The term of the lease was 99 years (through March 31, 2011), and the Halle brothers and their successors in interest retained the option of renewing the lease for another 25, 50 or 99 years (through as late as March 31, 2110). The lease agreement fixed the annual rent at $10,000 for the first two years, then increased the rent in periodic intervals until it reached $35,000 in the eleventh year, where it remained until the end of the lease. The lease also contained a "gold clause," which provided that "[a]ll of said rents shall be paid in gold coin of the United States of the present standard of weight and fineness." JA 125. At that time and up through the Depression, such clauses commonly appeared in long-term leases "as a sort of price-indexing mechanism to protect a lessor from the effects of inflation." Trostel v. Am. Life & Cas. Ins. Co., 92 F.3d 736, 738 (8th Cir.1996) (Trostel I), vacated on other grounds, 519 U.S. 1104, 117 S.Ct. 939, 136 L.Ed.2d 829 (1997), reinstated by 133 F.3d 679 (8th Cir.1998) (Trostel II).

In the early 1930s, as part of a series of measures designed to implement the Roosevelt Administration's overhaul of American monetary policy, Congress withdrew gold from circulation and banned nearly all private ownership of it. See id. at 738; see also Kenneth W. Dam, From the Gold Clause Cases to the Gold Commission: A Half Century of American Monetary Law, 50 U. Chi. L.Rev. 504, 509-514 (1983). And in 1933, Congress passed a Joint Resolution that declared gold clauses to be "against public policy," barred their inclusion in any future contract and suspended the operation of existing gold clauses by allowing all contract obligations to be paid in paper currency instead. See Joint Resolution of June 5, 1933, § 1, 48 Stat. 112, 113 (originally codified at 31 U.S.C. § 463, recodified as amended at 31 U.S.C. § 5118(d)(2)) (providing that no gold clause "shall be contained in or made with respect to any obligation hereafter incurred" and that "[e]very obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts").

Four decades later, Congress changed course. It repealed the ban on private ownership of gold in 1975. And in 1977, it amended the 1933 Joint Resolution, providing that the resolution "shall not apply to obligations issued on or after" the amendment's date of enactment. Act of Oct. 28, 1977, Pub.L. No. 95-147, § 4(c), 91 Stat. 1227, 1229 (originally codified at 31 U.S.C. § 463 note, recodified as amended at 31 U.S.C. § 5118(d)(2)); see also Trostel I, 92 F.3d at 738-39. Although the amendment made clear that parties could include gold clauses in contracts formed after 1977, Congress's choice of words (authorizing "obligations issued . . . after" the amendment) generated a small stream of litigation regarding the amendment's effect on gold clauses contained in contracts made prior to 1977 but transferred after that date. See, e.g., Trostel I, 92 F.3d 736; Grand Ave. Partners, L.P. v. Goodan, 25 F.Supp.2d 1064 (C.D.Cal.1996), aff'd, 160 F.3d 580 (9th Cir.1998); Fay Corp. v. BAT Holdings I, Inc., 646 F.Supp. 946 (W.D.Wash.1986), aff'd sub nom. Fay Corp. v. Frederick & Nelson Seattle, Inc., 896 F.2d 1227 (9th Cir.1990) (per curiam); Nebel, Inc. v. Mid-City Nat'l Bank of Chicago, 329 Ill.App.3d 957, 263 Ill.Dec. 843, 769 N.E.2d 45 (2002); Wells Fargo Bank, N.A. v. Bank of Am. NT & SA, 32 Cal.App.4th 424, 38 Cal.Rptr.2d 521 (1995).

In an effort to clarify the matter, Congress passed a law in 1996 saying that owners could enforce pre-1977 gold clauses only if the parties to a new obligation issued after 1977 "specifically agree[d] to include a gold clause" in their new agreement. Economic Growth and Regulatory Act of 1996, Pub.L. No. 104-208, § 2609, 110 Stat. 3009, 3009-475 (Sept. 30, 1996). Just over a year later, however, Congress repealed the 1996 statute. See Treasury and General Government Appropriations Act of 1998, Pub.L. No. 105-61, § 641, 111 Stat. 1272, 1318 (Oct. 10, 1997).

So far as the record is concerned, the gold clause in this contract never attracted anyone's attention or at least never generated any disputes during the first 90 years of its existence. Since 1982, when the current lessee, S & R Playhouse Realty, assumed the lease, it has paid annual rent of $35,000 in American currency. And there is no indication in the record that either the original lessees, the Halle brothers or the other lessees prior to S & R paid more than $35,000 in the preceding 70 years. Nor is there any indication that the previous owners ever demanded more than $35,000.

That changed in 2006, when the current owner, 216 Jamaica Avenue, purchased the land for $845,000, then sought to enforce the gold clause, demanding rent equivalent to the value of 35,000 1912 gold dollar coins. The current lessee, S & R, balked at the prospect of paying several multiples of what it had been paying, prompting 216 Jamaica Avenue to file this breach-of-contract action in federal court premised on diversity jurisdiction. After the parties filed cross-motions for summary judgment, the district court ruled for the lessee, refusing to enforce the clause.

II.

The parties share considerable common ground about how to resolve this dispute. They agree that the question at hand is whether the gold clause constitutes an "obligation[ ] issued . . . after" October 1977. Act of Oct. 28, 1977, § 4(c), 91 Stat. at 1229. They agree (or at least do not seriously dispute) that a gold clause may be an "obligation[ ] issued . . . after" 1977 either because it is part of a contract written and signed after that date or because it is part of an earlier contract incorporated into a new contract formed after that date. They agree that the previous owner assigned the underlying lease to the current lessee in 1982. They agree (or at least do not seriously dispute) that an assignment under state law by itself ordinarily would not suffice to make the gold clause enforceable. And they agree that an assignment combined with a novation, which substitutes a new agreement for a prior one and releases the obligations of the prior lessee, would suffice to satisfy the obligation-issued-after requirement. What the case boils down to, then, is whether the 1982 transfer of the lessee's interest to S & R amounted to a novation.

Under Ohio law, "[a] contract of novation is created where a previous valid obligation is extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking, with the consent of all the parties, and based on valid consideration." Chicago Title Ins. Corp. v. Magnuson, 487 F.3d 985, 994 (6th Cir.2007) (internal quotation marks omitted, alteration in original); see also Lexford Prop. Mgmt., LLC v. Lexford Prop. Mgmt., Inc., 147 Ohio App.3d 312, 770 N.E.2d 603, 607 (2001). The party invoking a novation (here, the current owner, 216 Jamaica) bears the burden of establishing its existence. See Chicago Title, 487 F.3d at 994.

Neither party disputes that the 1982 assignment amounted to a valid new contract supported by adequate consideration. What divides them is whether the owner at that time agreed to release the prior lessee (Halle Bros. Co.) from its obligations under the lease and to substitute the new lessee (S & R) in its place. Under Ohio law, the parties' consent to a novation need not be express, see McGlothin v. Huffman, 94 Ohio App.3d 240, 640 N.E.2d 598, 601 (1994), but may be implicit "from the circumstances or a party's conduct," id.

The key piece to the puzzle, it seems to us, is that the underlying 1912 lease agreement lays out the rules by which the owner agrees in advance to permit the substitution of a new lessee under the contract for the old lessee—the central benchmark of a novation. See Hunter v. BPS Guard Servs., Inc., 100 Ohio App.3d 532, 654 N.E.2d 405, 411 (1995); Miller v. C.K.L., Inc., No. 84-CA-26, 1985 WL 9401, at *2 (Ohio Ct.App. July 19, 1985); Restatement (Second) of Contracts § 280 cmt. d (1979). Under the agreement, the lessee may "assign or transfer" the lease in one of two ways: either by obtaining the owner's written consent or by satisfying four conditions: (1) paying all rents and charges then due and satisfying all other relevant promises under the lease; (2) establishing that the new lessee has "expressly assume[d] the lessee's engagements" under the lease; (3) recording the instrument of assignment in the appropriate recorder's office; and (4) "plac[ing] in the hands of the lessor for inspection during a period of ten (10) days a legal and sufficient instrument of assignment and acceptance." JA 127. If the existing lessee satisfies one of these two routes for assigning the lease, the underlying agreement not only allows the assignment, but it also expressly releases the prior lessee from its obligations. "[A]ll personal liability...