Honey v. Davis

• Decision Date: 20 May 1997
• Docket Number: No. 63429-7
• Citation: Honey v. Davis, 131 Wn.2d 212, 930 P.2d 908 (Wash. 1997)
• Parties: Yvonne HONEY, individually, and Yvonne Sikes and Steven Honey, in their capacity as testamentary trustees, Respondents, v. Robert J. DAVIS, d/b/a Mid-Valley Mall Ltd. Partnership, a Washington general partnership; Robert J. Davis, individually and as general partner; and Robert J. Davis, in his separate estate, Petitioner.
• Court: Washington Supreme Court

Page 212

131 Wn.2d 212

930 P.2d 908

Yvonne HONEY, individually, and Yvonne Sikes and Steven Honey, in their capacity as testamentary trustees Respondents, v. Robert J. DAVIS, d/b/a Mid-Valley Mall Ltd. Partnership, a Washington general partnership; Robert J. Davis individually and as general partner; and Robert J. Davis in his separate estate, Petitioner.

No. 63429-7.

Supreme Court of Washington En Banc.

Argued June 11, 1996.

Decided Feb. 6, 1997.

As Amended May 20, 1997. ^*

Eisenhower & Carlson, Ronald A. Roberts, P. Craig Beetham, Tacoma, for petitioner.

Velikanje, Moore & Shore, Inc., P.S., Patrick F. Hussey, Yakima, for respondents.

ALEXANDER, Justice.

We granted review of a decision of the Court of Appeals to the effect that lessors in a long-term ground lease who subordinated their interest in the leased land to a lending institution, in order to assist the lessee in securing financing for improvements to the leasehold, were, as a matter of law, sureties for the lessee. We reverse the Court of Appeals, concluding that the lessors, under the facts of this case, are not sureties.

Dr. Robert Davis and Earl McCarthy were partners doing business as Mid-Valley Ltd. (Mid-Valley), a partnership that was formed for the purpose of developing a shopping mall. In 1979, Mid-Valley purchased land in Sunnyside, Washington and developed a shopping mall on it known as the Mid-Valley Mall.

In 1983, Mid-Valley decided to expand the mall. Toward that end, McCarthy began negotiating the purchase or lease of a 6.8 acre tract of land that was contiguous to the mall. The tract was owned by Sunnyside Theaters, Inc., a corporation, the stock of which was entirely owned by Lloyd and Yvonne Honey.

On February 23, 1984, with Yvonne Honey signing as president, Sunnyside Theaters, Inc. (hereinafter referred to as the Honeys) ¹ entered into an agreement to lease the 6.8 acre tract to Mid-Valley for a period of 40 years. The lease agreement provided that for the first seven months of the lease, during which it was contemplated that Mid-Valley would be constructing improvements on the leased tract, Mid-Valley was to pay the Honeys, as lessors, a lump sum lease payment of $29,317. According to the lease, after seven months Mid-Valley was to pay an annual rent of $50,256 in addition to 15 percent of any "excess rents" paid by sublessees. "Excess rents" were defined in the lease as those rents collected in excess of the sublessee's minimum annual rents. The lease provided further that in no event could the rent paid by Mid-Valley be less than 10 percent of the gross rent received by Mid-Valley from its sublessees. All of the improvements on the leased land, according to the terms of the lease, were to revert to the Honeys at the end of the 40-year term of the lease.

As part of the lease agreement, the Honeys agreed to subordinate their interest as lessors to the lien of any deed of trust that Mid-Valley would find it necessary to give to a lending institution in order to secure a loan of funds to cover the cost of constructing additions to the mall on the land covered by the lease. The lease did not indicate that the Honeys were sureties for Mid-Valley. It did, however, contain a statement that "[n]othing in this Lease shall be construed to render the Lessor in any way or for any purpose a partner, joint venturer or associate in any relationship with Lessee other than that of landlord and tenant." Clerk's Papers at 39.

In June 1985, Mid-Valley borrowed $3.18 million from Rainier Financial Services Company (Rainier) as financing for "Phase I" of the expansion of the mall onto land contiguous to the mall, including the leased property. ² Mid-Valley signed a promissory note for that amount and gave Rainier a deed of trust. The Honeys did not sign the promissory note, but did sign the deed of trust. They also signed a "Rider To Deed Of Trust," in which they indicated that they executed the deed of trust

solely for the purpose of subjecting their interest in the Property described herein to the lien of this Deed of Trust and, except for subjecting their interest in said Property to the lien of this Deed of Trust, shall have no responsibility for payment of the Loan or performance of any of the obligations of the Borrower with respect to this Deed of Trust or any of the other Loan documents.

Clerk's Papers at 59.

The deed of trust was modified several times as Mid-Valley obtained additional funds from Rainier to cover the cost of expanding the mall onto the leased land. Finally, in May of 1989, Mid-Valley borrowed an additional $7 million from Rainier. That obligation was combined with all of Mid-Valley's prior obligations into a single promissory note for $11,600,000. Mid-Valley also provided Rainier with an amended deed of trust. The Honeys, again, did not sign the promissory note, but did join Mid-Valley in executing the amended deed of trust, pledging the entire mall, including the land leased from the Honeys, as security for the full debt.

Mid-Valley eventually defaulted on the promissory note. Consequently, Rainier began nonjudicial foreclosure proceedings in January 1992. It eventually purchased the entire mall, including the land that Mid-Valley leased from the Honeys, for $9 million at the foreclosure sale.

The Honeys subsequently brought suit in Spokane County Superior Court against Davis doing business as Mid-Valley Ltd. ³ for the fair market value of the land covered by the lease. They contended that by subordinating their interest in the leased land to Rainier's lien, they had become sureties for Mid-Valley and were, thus, entitled to reimbursement from Mid-Valley.

Mid-Valley, in addition to raising certain affirmative defenses, denied that a principal-surety relationship existed between itself and the Honeys. Both parties moved for summary judgment. The trial court granted Mid-Valley's motion, without reaching Mid-Valley's affirmative defenses, and dismissed the Honeys' action, stating that "the transactions and relation between the parties did not create a suretyship ... between the Plaintiffs and the Defendants by operation of law." Clerk's Papers at 339. The Honeys appealed the superior court's decision to Division Three of the Court of Appeals. That court reversed the trial court, concluding that the Honeys were sureties as a matter of law. It also concluded that Mid-Valley's affirmative defenses were without merit and remanded the case to the superior court for a determination of the amount of damages sustained by the Honeys. We granted Mid-Valley's petition for review.

When reviewing an order of summary judgment, an appellate court engages in the same inquiry as the trial court. In re Estates of Hibbard, 118 Wash.2d 737, 744, 826 P.2d 690 (1992). After considering the facts in the light most favorable to the nonmoving party, summary judgment should be granted only when there is no genuine issue of material fact, and the moving party is entitled to a judgment as a matter of law. Hibbard, 118 Wash.2d at 744, 826 P.2d 690. We are satisfied there is no material factual dispute here and the case is, therefore, ripe for summary judgment. ⁴

The parties agree that the issue before us is whether, by subordinating their fee interest in the leased property to Rainier in order to enable Mid-Valley to secure financing for construction of additions to the mall on the leased land, the Honeys became sureties for Mid-Valley.

A general definition of a suretyship can be found in the restatement of security:

Suretyship is the relation which exists where one person has undertaken an obligation and another person is also under an obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.

Restatement of the Law of Security § 82 (1941). Thus, in such a relationship both the surety and the principal are bound upon the obligation, with the principal having the primary obligation. If, however, the surety performs the obligation of the principal, or where the surety's property is used to satisfy the principal's duty, the principal is required to reimburse the surety. Restatement of the Law of Security § 104; Leuning v. Hill, 79 Wash.2d 396, 400, 486 P.2d 87 (1971).

A written contract is not necessary to create a principal-surety relationship. Indeed, we have recognized that a person or entity can become a surety by pledging or mortgaging property as security for another's debt. ⁵ Fluke Capital & Management Servs. Co. v. Richmond, 106 Wash.2d 614, 620-21, 724 P.2d 356 (1986); Laurence P. Simpson, Handbook on the Law of Suretyship § 18, at 31 (1950) (One becomes a surety "where a person, without assuming any personal obligation, pledges or mortgages his property to secure another's debt."). In such cases, there is an implied promise by the principal to indemnify the surety notwithstanding the absence of an express written agreement. Fluke Capital & Management Servs. Co., 106 Wash.2d at 620, 724 P.2d 356.

"The principal and not the surety, however, is the one to whom or for whom the consideration for the main obligation flows, and this is one basis on which the two parties may be distinguished." Arthur A. Stearns, The Law of Suretyship § 1.4, at 3 (James L. Elder rev., 5th ed.1951). Therefore, "one who receives and retains the consideration or benefit of a contract cannot occupy the position of a surety." 74 AM.JUR.2D Suretyship § 3, at 13 1974); Johnson v. Jouchert, 124 Ind. 105, 108, 24 N.E. 580 (Ind.1890) ("One who has received, and who retains, the consideration or benefit of a contract can not, in equity, occupy the attitude of a surety."). We are inclined to follow these authorities, and thus conclude that evidence of consideration for an obligation flowing to both obligors belies a contention that either is a surety.

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