Pacific First Bank v. New Morgan Park Corp.

• Decision Date: 21 July 1994
• Citation: 319 Or. 342,876 P.2d 761
• Parties: PACIFIC FIRST BANK, a Federal Savings Bank, by successor in interest Washington Mutual, a Federal Savings Bank, Petitioner on Review, v. The NEW MORGAN PARK CORPORATION, a Delaware corporation, Respondent on Review. CC 9010-06729; CA A71494; SC S40692.
• Court: Oregon Supreme Court

Page 761

876 P.2d 761

319 Or. 342

PACIFIC FIRST BANK, a Federal Savings Bank, by successor in interest Washington Mutual, a Federal Savings Bank, Petitioner on Review, v. The NEW MORGAN PARK CORPORATION, a Delaware corporation Respondent on Review.

CC 9010-06729; CA A71494; SC S40692.

Supreme Court of Oregon.

Argued and Submitted May 10, 1994.

Decided July 21, 1994.

Barnes H. Ellis, of Stoel Rives Boley Jones & Grey, Portland, argued the cause for petitioner on review. With him on the petitions were Joyce A. Harpole and Mary K. VanderWeele.

Thomas W. Sondag, of Lane Powell Spears Lubersky, Portland, argued the cause for respondent on review. With him on the responses was James H. Clarke.

Before CARSON, C.J., and GILLETTE, VAN HOOMISSEN, FADELEY, UNIS and GRABER, JJ.

GRABER, Justice.

This case involves a commercial lease and presents the following questions: (1) Under a lease agreement providing that the tenant "shall not assign, sell, mortgage, pledge or in any manner transfer the Lease or interest herein whether voluntary or involuntary or by operation of law * * * without the prior written consent of the Landlord," was the tenant required to obtain the landlord's consent when the tenant merged into its wholly owned subsidiary? (2) If the tenant was required to obtain the landlord's consent, was the landlord entitled to withhold its consent at its sole discretion, or was it permitted to do so only reasonably, because of a duty of good faith? ¹

We answer those questions as follows: (1) The tenant's merger into its wholly owned subsidiary effected a transfer of the lease "by operation of law," requiring the landlord's consent. (2) A duty of good faith applies to lease agreements; here, however, the landlord's refusal to consent did not contravene that duty, because the landlord's refusal did not contravene the "reasonable expectations" of the parties as manifested in the express terms of the lease agreement at issue.

Pacific First Federal Savings Bank (Tenant) was a tenant in a building owned by The New Morgan Park Corporation (Landlord). Article 18 of the lease agreement between the parties ² provided in part:

"ARTICLE 18. ASSIGNMENT, SUBLEASE AND HYPOTHECATION.

"Section 18.1 Definitions. The cumulative (i.e., in one or more sales or transfers by operation of law or otherwise) transfer of an aggregate of 50% or more of the voting stock, including by creation of or issuance of new stock, of the corporation which is Tenant, or of any corporate assignee of Tenant, by which an aggregate of 50% or more of such stock shall be vested in a party or parties who are not stockholders as of the date hereof, shall be deemed an assignment of this Lease. * * * This Section 18.1, however, shall not apply to Pacific First Federal Savings and Loan Association so long as it is the Tenant hereunder.

"Section 18.2 Assignment etc. Except as provided in Section 18.3, Tenant shall not assign, sell, mortgage, pledge, or in any manner transfer the Lease or any interest herein whether voluntary or involuntary or by operation of law * * * without the prior written consent of Landlord. If consent is once given by Landlord to assignment * * * of this Lease or any interest therein, Landlord shall not be barred to refuse to consent to any further assignment * * *.

"Section 18.3 Permitted Subleases. Landlord will not unreasonably withhold its consent to a sublease to a subtenant in the opinion of Landlord (i) with the financial worth and business background and experience necessary to enable it to perform its obligations under its sublease consistent with this Lease and (ii) whose personal identity and use of the subleased premises shall be compatible with the overall character, use and purposes of the Improvements as a whole as established by Landlord at the time of the sublease."

On July 30, 1990, Tenant notified Landlord that it intended to merge on the following day into Tenant's wholly owned subsidiary, Pacific First Bank (Bank). Tenant asked that Landlord consent to transfer of the lease. ³ Landlord did not consent. The merger proceeded on July 31.

Landlord notified Bank, the post-merger corporate entity, that the merger was an "assignment" without consent constituting a breach of the lease agreement. Bank filed this action seeking a declaration that it became the tenant of the property in compliance with the lease. Landlord counterclaimed to recover possession of the property.

The trial court concluded that "the merger in this case did not require consent of the Landlord." As pertinent here, the trial court reasoned that, like an "upstream" merger, ⁴ this "downstream" merger ⁵ resulted only in a change of form, including a change in the name of the post-merger entity, and that there was evidence that the post-merger entity, Bank, was stronger financially than Tenant, its predecessor. The trial court also stated that Section 18.1 of the lease agreement "indicates an understanding on the part of Landlord that Tenant might, during the term of the lease, deem it appropriate to change or alter its structure and/or ownership and that this would not constitute an assignment." The trial court also held that, even if the merger constituted a breach of the agreement, in this case the breach was "technical and immaterial," because Landlord did not show any substantive change in its tenant's financial condition that increased Landlord's risk that it would not receive the benefit of its bargain. The trial court entered a judgment in favor of Bank. Landlord appealed.

The Court of Appeals held that the merger was an "assignment" requiring the consent of Landlord and that failure to obtain that consent was a material breach of the lease agreement. Pacific First Bank v. New Morgan Park Corp., 122 Or.App. 401, 405, 857 P.2d 895 (1993). The Court of Appeals first noted that "the lease did not present an obstacle to an upstream merger" because, in such a merger, Tenant would have continued as the tenant and because Section 18.1 expressly stated that a transfer of 50 percent or more of Tenant's stock to another entity or entities would not constitute an assignment of the lease "so long as [Tenant] is the Tenant [under the lease]." Id. at 404, 857 P.2d 895. The court concluded, however, that the downstream merger that occurred in this case was "distinguishable," ibid., because, in "transferr[ing] [Tenant's] stock and its interest in the lease" to Bank, Tenant ceased to exist and Bank became Landlord's tenant, id. at 405, 857 P.2d 895. The Court of Appeals also noted that, although Section 18.3 provides that Landlord "will not unreasonably withhold its consent to a sublease to a subtenant" under certain specified conditions, Section 18.2 places no conditions on the Landlord's right to withhold consent. Id. at 406, 857 P.2d 895.

The Court of Appeals also referred to this court's statement in Abrahamson v. Brett, 143 Or. 14, 22, 21 P.2d 229 (1933), that,

"[w]here a subletting or assignment of the leased premises without the consent of [the landlord] is prohibited, [the landlord] may arbitrarily withhold [its consent] without giving any reasons, and in granting [its consent] may impose such conditions as [it] sees fit."

The Court of Appeals concluded that, consistent with this court's quoted statement in Abrahamson, Landlord's right to consent to the assignment of the lease was not constrained by a duty of good faith. 122 Or.App. at 406-07, 857 P.2d 895. The court reversed and remanded the case to the circuit court. Id. at 408, 857 P.2d 895.

Bank sought review in this court, arguing that the merger did not require Landlord's consent, because the quoted statement in Abrahamson v. Brett, supra, was merely dictum; because, under other decisions of this and other courts, every contract contains a duty of good faith; and because lease provisions relating to consent to assignments carry an implied obligation of reasonableness. ⁶ We allowed review of Bank's petition and now affirm the decision of the Court of Appeals on different grounds.

In answering the questions presented, we employ general principles of contract construction. Unambiguous contracts must be enforced according to their terms; whether the terms of a contract are ambiguous is, in the first instance, a question of law. OSEA v. Rainier School Dist. No. 13, 311 Or. 188, 194, 808 P.2d 83 (1991). If a contract is ambiguous, the trier of fact will ascertain the intent of the parties and construe the contract consistent with the intent of the parties. Ibid.; see also ORS 42.240 (in the construction of a written instrument the intention of the parties is to be pursued if possible). Words or terms of a contract are ambiguous when they reasonably can, in context, be given more than one meaning. Shadbolt v. Farmers Insur. Exch., 275 Or. 407, 411, 551 P.2d 478 (1976).

We first consider whether the lease agreement was ambiguous as to whether, by merging with its wholly owned subsidiary, Tenant "transfer[red]" the lease "in any manner," within the meaning of Section 18.2 of the lease agreement, so as to require Tenant to obtain the consent of Landlord. Section 18.2 does not expressly state whether a merger of Tenant with another corporation effects a "transfer" of the lease for which Tenant must obtain the consent of Landlord. It does, however, expressly provide that a "transfer" of the lease "in any manner," "whether voluntary or involuntary or by operation of law," is an event requiring the consent of Landlord.

We conclude that there is no ambiguity on that point in Section 18.2. ⁷ The terms of Section 18.2 are broad and all-encompassing, including transfers "in any manner." The word "transfer"--even without the extra expansiveness of the phrase "in any manner"--covers all forms of passing of rights and obligations. To "transfer" means "to cause to pass from one person or thing to another"; "to make over * * * the possession or control of"; "CONVEY." Webster's Third New Int'l...