Pacific First Bank v. New Morgan Park Corp.

• Decision Date: 27 October 1993
• Citation: 857 P.2d 895,122 Or.App. 401,318 Or. 170
• Parties: PACIFIC FIRST BANK, a Federal Savings Bank, Respondent, v. The NEW MORGAN PARK CORPORATION, a Delaware corporation, Appellant. 9010-06729; CA A71494.
• Court: Oregon Court of Appeals

Page 895

857 P.2d 895

122 Or.App. 401

PACIFIC FIRST BANK, a Federal Savings Bank, Respondent, v. The NEW MORGAN PARK CORPORATION, a Delaware corporation, Appellant.

9010-06729; CA A71494.

Court of Appeals of Oregon.

Argued and Submitted Feb. 22, 1993.

Decided Aug. 18, 1993.

Reconsideration Denied Oct. 27, 1993.

James H. Clarke, Portland, argued the cause for appellant. With him on the briefs were Wayne Hilliard, David G. Hosenpud, Thomas W. Sondag and Lane Powell Spears Lubersky, Portland.

Joyce A. Harpole, Portland, argued the cause for respondent. On the brief were Barnes H. Ellis, Mary K. VanderWeele and Stoel Rives Boley Jones & Grey, Portland.

Before DEITS, P.J., and RIGGS and DURHAM, JJ.

DURHAM, Judge.

Defendant appeals from a judgment declaring, in effect, that plaintiff is defendant's tenant. We reverse.

Defendant and Pacific First Federal Savings and Loan Association (Association) were parties to a lease that provided that Association could not assign its interest without defendant's prior written consent. On July 30, 1990, Association notified defendant that, on the next day, it intended to merge into plaintiff, which was Association's wholly owned banking subsidiary. Association asserted that it notified defendant because the merger, which would substitute plaintiff for Association as defendant's tenant, could be considered an assignment. Association requested that defendant promptly consent to the merger. Although defendant did not consent, the merger proceeded on July 31.

Defendant notified plaintiff that the merger was an assignment without consent, in breach of the lease. Plaintiff filed this action to obtain a judicial declaration that it became the tenant in compliance with the lease, and defendant counterclaimed to recover the property. The trial court declared that the merger did not require defendant's consent, that defendant was equitably estopped from denying that it gave consent, that a refusal by defendant to consent would be a breach of the implied covenant of good faith and fair dealing, and that any breach by Association in failing to obtain prior consent was technical and immaterial. Defendant assigns error to each alternative holding and to the dismissal of its counterclaim. We review de novo the issue of equitable estoppel. Nedry v. Morgan, 284 Or. 65, 67 n. 1, 584 P.2d 1381 (1978). The parties submit, and we agree, that the other issues raise pure questions of law. Timberline Equip. v. St. Paul Fire and Mar. Ins., 281 Or. 639, 643, 576 P.2d 1244 (1978); Southern Oregon Production Credit Assn. v. Patridge, 71 Or.App. 53, 55, 691 P.2d 135 (1984).

We combine for discussion defendant's assignments that the court erred in declaring that the merger was not an assignment that required consent, and that failure to obtain consent was not a material breach. The lease provides, in part:

"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, or sublet the Premises or any part or parts thereof, or permit occupancy of all or any part thereof by anyone with, through or under it, without the prior written consent of Landlord. * * *

"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."

The merger agreement combined Association and plaintiff in a downstream merger, i.e., the parent corporation, Association, merged into its subsidiary, plaintiff. That transaction is distinguishable from an upstream merger in which a parent corporation absorbs a subsidiary. The parties agree that the lease did not present an obstacle to an upstream merger because Association would continue as the tenant, and Section 18.1 permitted Association to freely reorganize its stock "so long as [Association] is the Tenant hereunder."

The trial court stated in a letter opinion that the downstream merger was distinguishable from an upstream merger in form only, because "the only difference in this 'downstream' merger is in the name of the surviving entity." It found "substantial evidence that the post-merger entity was stronger financially than any of its predecessors (Tenant)." It also said:

"In addition, Section 18.1 of the lease 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 court's conclusion that the merger was not an assignment requiring consent is erroneous. The merger agreement provided, in part:

"[A]ll assets and property * * * then owned by [Association] * * * shall immediately by operation of law and without any conveyance, transfer, or further action, become the property of [plaintiff] * * *."

Plaintiff does not dispute that the merger transferred Association's stock and its interest in the lease to plaintiff. Association ceased to exist and plaintiff became the tenant. Section 18.1 of the lease exempted certain stock transfers by Association from the assignment restriction in Section 18.2 "so long as [Association] is the Tenant hereunder." The court's suggestion that the parties agreed in Section 18.1 that changes in Association's structure or ownership would not constitute an assignment is incorrect, because that clause applies only if Association continues as the tenant. That requirement is not affected by plaintiff's superior financial strength, its continuation of Association's business operation, or by the fact that Association could have achieved roughly the same business combination in an upstream merger.

We also conclude that Association's failure to secure consent was a material breach.

"A breach is material if it goes to the very substance of the contract and defeats the object of the parties in entering into the contract." McKeon v. Williams 104 Or App 106, 109, 799 P2d 198 (1990), aff'd 312 Or 322, 822 P2d 699 (1991).

The trial court concluded that any failure to secure consent was "technical and immaterial" because there was no substantive change in the tenant or any increased risk that defendant would not receive what it had bargained for.

For the reasons stated, we conclude that there was a substantive change in the tenant. We also conclude that the assignment without consent deprived defendant of an important contractual right. Section 18.3 of the lease provides that defendant "will not unreasonably withhold its consent to a sublease to a subtenant" under specified conditions. However, Section 18.2 prohibits an assignment "without the prior written consent of Landlord." The assignment clause does not require defendant to be reasonable in withholding consent. The difference in terminology indicates that the parties intended to create a right in defendant to grant or withhold consent to an assignment at its sole discretion. Because Association assigned its lease without consent, the merger defeated one of the parties' objectives in entering into the lease. The breach was material.

Defendant assigns error to the court's alternate conclusion that it was obligated to consent to the assignment by the implied duty of good faith and fair dealing in the lease. The authorities are in conflict as to whether that duty controls the manner of exercising rights granted, expressly or impliedly, to one contracting party. Compare Comini v. Union Oil Co., 277 Or. 753, 562 P.2d 175 (1977), and City of Portland v. George D. Ward & Assoc., 89 Or.App. 452, 457, 750 P.2d 171, rev. den. 305 Or. 672, 757 P.2d 422 (1988), with Tolbert v. First National Bank, 312 Or. 485, 492, 823 P.2d 965 (1991), and Sheets v. Knight, 308 Or. 220, 233, 779 P.2d 1000 (1989). However, we do not accept the parties' invitation to decide, on the basis of these and other conflicting authorities, whether defendant had an implied obligation to refuse consent to the assignment only for a commercially reasonable purpose. We are bound by what the Supreme Court said in Abrahamson v. Brett, 143 Or. 14, 22, 21 P.2d 229 (1933):

"Where a subletting or assignment of the leased premises without the consent of the lessor is prohibited, [the lessor] may arbitrarily withhold his assent without giving any reasons, and in granting...