Fay Corp. v. Bat Holdings I, Inc., C86-542D.

• Decision Date: 23 October 1986
• Docket Number: No. C86-542D.,C86-542D.
• Court: U.S. District Court — Western District of Washington
• Parties: The FAY CORPORATION, a Washington corporation, Plaintiff, v. BAT HOLDINGS I, INC., also known as Marshall Field & Co., a Delaware corporation; and Frederick & Nelson Seattle, Inc., a Delaware corporation, Defendants.

646 F. Supp. 946

The FAY CORPORATION, a Washington corporation, Plaintiff, v. BAT HOLDINGS I, INC., also known as Marshall Field & Co., a Delaware corporation; and Frederick & Nelson Seattle, Inc., a Delaware corporation, Defendants.

No. C86-542D.

United States District Court, W.D. Washington, at Seattle.

October 23, 1986.

Hall Baetz, Joseph D. Weinstein, Davis, Wright & Jones, Seattle, Wash., for plaintiff.

Bruce Corker, Edward W. Kuhrau, Michael F. Mogan, Perkins Coie, Seattle, Wash., Samuel J. Silverman, Martin Flumenbaum, Paul, Weiss, Rifkind, New York City, for defendants.

MEMORANDUM DECISION AND ORDER

DIMMICK, District Judge.

Plaintiff, the Fay Corporation ("Fay"), and defendant, BAT Holdings I, Inc. ("BAT"), cross move for summary judgment. At issue is a 99-year lease containing a provision for payment in gold coin (a "gold clause") originally executed by Fay as lessor in 1929. The Court concludes that a 1982 transfer of the lease to BAT created a new contract (a novation). Thus the gold clause, otherwise unenforceable under a 1933 statute, is revived and enforceable under a 1977 statute.

The parties agree that the issues before the Court can be determined as questions of law. BAT first moved for summary judgment dismissal on the pleadings. Fay cross moved for summary judgment in three alternative forms: (1) enforcement of the gold clause as partial judgment, with resulting rent to be determined; or (2) cancellation of the lease as full judgment due to impossibility of performance; or (3) equitable relief (reformation or rescission) as partial judgment.

After consideration of memoranda and hearing of oral argument, the Court grants Fay's motion for partial summary judgment on the first alternative. It is therefore unnecessary to address the remaining issues.

BACKGROUND

Prior to the Depression era, "gold clauses" in contracts were a popular method of adjusting for inflation. These clauses mandated payment in gold coin, its equivalent, or, with some other wording, tied the dollar amount demanded with the price of gold.¹

In 1933, a joint resolution of Congress invalidated all gold clauses and provided that "dollar for dollar" payments in United States currency would discharge the obligation. 48 Stat. 112, 113 (1933) (formerly codified at 31 U.S.C.A § 463).² The following year, the Gold Reserve Act banned private ownership of gold. (Repealed, formerly codified in part at 31 U.S.C.A. §§ 442, 443 (1976).) The holding of gold remained prohibited until 1973, when Congress repealed the 1934 ban on private ownership of gold (87 Stat. 352 (1973), as amended by 88 Stat. 445 (1974), but did not address the 1933 prohibition of gold clauses. This omission was remedied in 1982, when the statute at issue was adopted (31 U.S.C.A. 5118(d)(2) (1983), (hereinafter "section 5118"). The language provided that obligations covered by gold clauses prior to 1977 are, as before, dischargeable dollar for dollar with United States currency. But "an obligation issued after October 27, 1977" is not so limited.³

FACTS

The Fay Corporation owns the land and building in downtown Seattle now occupied by a major department store. In 1929, Fay executed a 99-year lease of the property and premises to Frederick & Nelson. This lease contained a then-valid gold clause providing that the $8,333 monthly rental be paid "in lawful gold coin of the United States of America of the present standard of weight and fineness."

Between the execution of the lease and the 1982 transfer at issue, the leasehold changed hands twice in transfers which are not before the Court. In 1982, five years after section 5118 created an October 27, 1977 validity date for gold clauses, the lessee in possession, Marshall Field & Company, transferred its rights in the lease by "assignment" to the defendant, BAT Holdings I. BAT accepted the "assignment" and explicitly assumed Marshall Field's obligations under the lease. This was accomplished using the transfer language required in Article XIII of the original lease.⁴ Upon a proper assumption by the transferee, the 1929 lease further provided that the assignor would be released from any and all obligations under the Lease after the date of "such sale, conveyance or assignment...."⁵ BAT does not dispute the 1982 transfer or the release of Marshall Field's obligations under the lease.

ISSUE

Thus, the issue before this Court is whether plaintiff Fay's discharge of Marshall Field's obligations through Article XIII of the lease constitutes a valid "prior mutual assent" to novation, creating a new contractual obligation in the 1982 transfer to defendant BAT and resulting in an enforceable gold clause of an "obligation issued after" the October 27, 1977 effective date of section 5118.

The parties agree that the legislative history of section 5118 reveals that the phrase "obligations issued after October 27, 1977" is intended to mean an obligation (including contractual obligations) "entered into" after that date. The Eleventh Circuit supports that interpretation in Rudolph v. Steinhardt, 721 F.2d 1324 (11th Cir.1983)⁶:

The legislative history to the amendment reveals that the word "issued" was intended to mean "entered into".... Senator's Helm's construction of the word "issue" corresponds with its normal meaning in law....

Id. at 1330.

If the transfer to BAT was a mere assignment, as BAT contends, BAT holds as assignee under the original 1929 contract, and the enforcement of the gold clause is barred by section 5118. If, however, as Fay argues, the transfer was a novation, the contract is a new obligation "entered into" after October 27, 1977 and the gold clause is again effective.⁷

ASSIGNMENT

An assignment differs from a novation in two ways: (1) an assignment creates no contract between lessor and assignee, and (2) an assignment does not discharge the assignor's original obligation to the lessor.

At common law, the original tenant's obligation to the landlord arises by virtue of both privity of contract (express terms) and privity of estate (duties that run with the land). When the original lessee assigns his rights to a third party (the assignee), the original lessee, as assignor, is no longer liable to the lessor/owner under privity of estate, but remains liable under privity of contract unless relieved by the lessor. See, e.g., Shadeland Development Corp. v. Meek, 489 N.E.2d 1192 (Ind. App.1986); Restatement (Second) of Contracts § 318 (1979); Restatement (Second) of Property (Landlord and Tenant) § 16.1 (1976).

A duty cannot be "assigned" in the sense rights are assigned. Properly, rights are assigned and duties are delegated. See, e.g., J. Calamari and J. Perillo Contracts § 254, at 596 n. 6 (1970).

The Restatement (Second) of Contracts § 328(1), recognizes the common usage of the term "assignment" by asserting that, unless language or circumstances are to the contrary, an assignment of "the contract" or of "all rights under the contracts" is to be interpreted as an assignment of assignor's rights and a delegation of his unperformed duties under the contract. However, as noted in comment (a) to this section and recognized by all courts, an assignor's intention that the assignee be substituted for him or her is not completely effective unless the obligor of the assigned rights (the lessor) assents, thus creating a novation.

Section 323(1) of the Restatement provides that "a term of a contract manifesting an obligor's assent to the future assignment of a right or an obligee's assent to future delegation of a duty is effective...." The effect of an obligor's assent may be, as comment (a) explains, "an offer of a new contract by novation, or the acceptance of an offer of novation...."⁸

NOVATION

A novation is commonly defined as the replacement of an unexpired contract by another contract reached through renegotiation, or the substitution of a new party concurrent with the release of an original party from liability. Williams Petroleum Co. v. Midland Cooperatives, Inc., 679 F.2d 815 (10th Cir.1982).

Strictly speaking, a "novation" is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty. Restatement (Second) of Contracts § 280.⁹ As a novation is a new contractual relationship, it must conform to basic contractual requirements. The four essential elements of a novation are set forth by the Washington Supreme Court in MacPherson v. Franco, 34 Wash.2d 179, 182, 208 P.2d 641 (1949): (1) A mutual agreement (2) among all parties concerned (3) for the discharge of a valid existing obligation (4) by the substitution of a new valid obligation or substitution of one party for another.

This definition is consistent with other Washington cases and cases from other states. See, e.g., Boise Cascade Corp. v. Distinctive Homes, Inc., 67 Wash.2d 289, 407 P.2d 452 (1965); Pacific States Securities Corp. v. Austin, 146 Wash. 492, 263 P. 732, 734 (1928); Sutter v. Moore Investment Co., 30 Wash. 333, 70 P. 746 (1902); Shiflet v. Marley, 58 Ariz. 231, 118 P.2d 1107 (1941); Sans Souci v. Division of Florida Land Sales & Condomiums, 421 So.2d 623 (Fla.App.1982), appeal after remand, 448 So.2d 1116 (Fla.App.1984).

ANALYSIS

The parties before the Court do not dispute the validity of the old or new obligation (except for the applicability of the gold clause), or the fact that the transferor's liability was extinguished by the transfer. The dispute is whether the necessary "mutual agreement among all parties" exists to complete a novation.

BAT cites MacPherson v. Franco, supra at 182, and Sutter v. Moore Investment Co., supra, 30 Wash. at 336, 70 P.2d 746, in support of its argument that FAY's alleged prior consent in the lease clause does not satisfy the "mutual agreement among ALL parties" requirement.

In MacPherson and Sutter, novation fails and succeeds, respectively. MacPherson concerned a real estate sale where the seller told the buyer to pay the...