Rosenberg v. Son, Inc., 920072

• Decision Date: 06 October 1992
• Docket Number: No. 920072,920072
• Citation: 491 N.W.2d 71
• Parties: Harold ROSENBERG and Gladys E. Rosenberg, Plaintiffs and Appellants, v. SON, INC. and Mary Pratt, Defendants and Appellees. Civ.
• Court: North Dakota Supreme Court

Page 71

491 N.W.2d 71

Harold ROSENBERG and Gladys E. Rosenberg, Plaintiffs and Appellants, v. SON, INC. and Mary Pratt, Defendants and Appellees.

Civ. No. 920072.

Supreme Court of North Dakota.

Oct. 6, 1992.

Brink, Sobolik, Severson, Vroom & Malm, PA, Hallock, Minn., for plaintiffs and appellants; argued by Ronald C. Vroom.

Olson, Sturdevant and Burns, Minot, for defendant and appellee Son, Inc.; argued by Richard P. Olson.

Moosbrugger, Ohlsen, Dvorak & Carter, Grand Forks, for defendant and appellee Mary Pratt; argued by Shaun G. Jamison, Sr. Law Student; appearance by Shirley A. Dvorak.

ERICKSTAD, Chief Justice.

Harold Rosenberg and Gladys E. Rosenberg (Rosenbergs) appeal two district court decisions granting summary judgment in favor of Son, Inc., and Mary Pratt. We reverse and remand for further proceedings.

On February 8, 1980, Pratt entered into a contract for the sale of a business with the Rosenbergs, agreeing to purchase the Rosenbergs' Dairy Queen located in the City Center Mall in Grand Forks. The terms of the sales contract for the franchise, inventory, and equipment were a purchase price totaling $62,000, a $10,000 down payment, and $52,000 due in quarterly payments at 10 percent interest over a 15-year-period. The sales contract also contained a provision denying the buyer a right to prepayment for the first five years of the contract.

Mary Pratt assigned her rights and delegated her duties under the sales contract to Son, Inc., on October 1, 1982. ¹ The assignment agreement contained a "Consent To Assignment" clause which was signed by the Rosenbergs on October 14, 1982. ² The assignment agreement also included a "save harmless" clause in which Son, Inc., promised to indemnify Pratt. ³ Subsequent to this transaction, Mary Pratt moved to Arizona and had no further knowledge of, or involvement with, the Dairy Queen business. Also following the assignment, the Dairy Queen was moved from the City Center Mall to the corner of DeMers and North Fifth Street in Grand Forks.

The sales contract was then assigned by Son, Inc., to Merit, Corporation (Merit) on June 1, 1984. This assignment agreement did not contain a consent clause for the Rosenbergs to sign. However, the Rosenbergs had knowledge of the assignment and apparently acquiesced. They accepted a large prepayment from Merit, reducing the principal balance due to $25,000. Following this assignment, Merit pledged the inventory and equipment of the Dairy Queen as collateral for a loan from Valley Bank and Trust of Grand Forks.

Payments from Merit to the Rosenbergs continued until June of 1988, at which time the payments ceased, leaving an unpaid principal balance of $17,326.24 plus interest. The Rosenbergs attempted collection of the balance from Merit, but the collection efforts were precluded when Merit filed bankruptcy. The business assets pledged as collateral for the loan from Valley Bank and Trust of Grand Forks were repossessed. The Rosenbergs brought this action for collection of the outstanding debt against Son, Inc., and Mary Pratt.

The trial court denied a summary judgment motion by the Rosenbergs, stating that there were questions of fact remaining which could not be resolved by a summary judgment motion. ⁴ Several months later, Pratt and Son, Inc., renewed their summary judgment motions. The trial court granted Pratt's motion on December 2, 1991, and granted Son, Inc.'s motion on January 10, 1992, dismissing the Rosenbergs' claims against both parties. The trial court based its decision on the case of Tri-Continental Leasing Corp. v. Gunter, 472 N.W.2d 437 (N.D.1991). It concluded that once Pratt assigned her contract she became a guarantor. Under Tri-Continental and North Dakota guaranty law, any alteration in the original obligation exonerates a guarantor. ⁵ The trial court found that moving the business, the second assignment to Merit, and pledging business assets as collateral, all without Pratt's knowledge, constituted alterations in the underlying obligation. Therefore, because it determined that Pratt was a guarantor on the contract, she was exonerated by the trial court. ⁶ We disagree with the trial court's analysis and decision to grant summary judgment.

It is a well-established principle in the law of contracts that a contracting party cannot escape its liability on the contract by merely assigning its duties and rights under the contract to a third party. This principle is codified in Section 41-02-17(1), N.D.C.C.:

"Delegation of performance--Assignment of rights.

1. A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach [Emphasis added.]."

Professor Corbin explained this point succinctly in his treatise on contract law.

"An assignment is an expression of intention by the assignor that his duty shall immediately pass to the assignee. Many a debtor wishes that by such an expression he could get rid of his debts. Any debtor can express such an intention, but it is not operative to produce such a hoped-for result. It does not cause society to relax its compulsion against him and direct it toward the assignee as his substitute. In spite of such an 'assignment,' the debtor's duty remains absolutely unchanged. The performance required by a duty can often be delegated; but by such a delegation the duty itself is not escaped."

4 Corbin on Contracts Sec. 866 at 452.

This rule of law applies to all categories of contracts, including contracts for the sale or lease of real property, service contracts, and contracts for the sale of goods, which is present in the facts of this case.

"In the case of a contract for the sale of goods, the assignment and delegation may be by the buyer as well as by the seller. The buyer's assignment of his right to the goods and his delegation of the duty to pay the price are both effective; but he himself remains bound to pay the price just as before. If the assignee contracts with the assignor to pay the price, the seller can maintain suit for the price against the assignee also, as a creditor beneficiary of the assumption contract; the seller has merely obtained a new and additional security."

Id. at 454-455 (emphasis added) (footnotes omitted).

Thus, when Pratt entered into the "assignment agreement" with Son, Inc., a simple assignment alone was insufficient to release her from any further liability on the contract. See Jedco Development Co Inc. v. Bertsch, 441 N.W.2d 664 (N.D.1989) (lessee is not relieved of this obligation to pay rent merely because he had assigned lease with lessor's consent absent a novation); Brooks v. Hayes, 133 Wis.2d 228, 395 N.W.2d 167 (1986) (party delegating duties under contract is not relieved of responsibility for fulfilling an obligation or liability in the event of a breach). See also Restatement (Second) of Contracts Sec. 318; 6A C.J.S. Assignments Sec. 97 at 753; 6 Am.Jur.2d Assignments Sec. 110; 67 Am.Jur.2d Sales Sec. 383 at 649.

It is not, however, a legal impossibility for a contracting party to rid itself of an obligation under a contract. It may seek the approval of the other original party for release, and substitute a new party in its place. In such an instance, the transaction is no longer called an assignment; instead, it is called a novation. ⁷ If a novation occurs in this manner, it must be clear from the terms of the agreement that a novation is intended by all parties involved. "An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a novation." Restatement (Second) of Contracts Sec. 318 cmt. d. Therefore, both original parties to the contract must intend and mutually assent to the discharge of the obligor from any further liability on the original contract. See Schmitt v. Berwick Township, 488 N.W.2d 398 (N.D.1992); Butler v. Roberts, 437 N.W.2d 839 (N.D.1989); Jedco Development Co., Inc. v. Bertsch, 441 N.W.2d 664; First Nat. Bank v. Meyer Enterprises, 427 N.W.2d 328 (N.D.1988); Herb Hill Ins., Inc. v. Radtke, 380 N.W.2d 651 (N.D.1986); North Dakota Public Serv. Commission v. Valley Farmers Bean Association, 365 N.W.2d 528 (N.D.1985).

It is evident from the express language of the assignment agreement between Pratt and Son, Inc., that only an assignment was intended, not a novation. ⁸ The agreement made no mention of discharging Pratt from any further liability on the contract. To the contrary, the latter part of the agreement contained an indemnity clause holding Pratt harmless in the event of a breach by Son, Inc. Thus, it is apparent that Pratt contemplated being held ultimately responsible for performance of the obligation.

Furthermore, the agreement was between Pratt and Son, Inc.; they were the parties signing the agreement, not the Rosenbergs. An agreement between Pratt and Son, Inc., cannot unilaterally affect the Rosenbergs' rights under the contract.

As mentioned earlier, the Rosenbergs did sign a consent to the assignment at the bottom of the agreement. However, by merely consenting to the assignment the Rosenbergs did not consent to a discharge of the principal obligor--Pratt. Nothing in the language of the consent clause supports such an allegation. A creditor is free to consent to an assignment without releasing the original obligor.

"Where the obligee consents to the delegation, the consent itself does not release the obligor from liability for breach of contract. More than the obligee's consent to a delegation of performance is needed to release the obligor from liability for breach of contract. For the obligor to be released from liability, the obligee must agree to the release. If there is an agreement between the obligor, obligee and a...