Schiffer v. United Grocers, Inc.

• Decision Date: 15 July 1999
• Parties: Dwaine SCHIFFER and White City Development, Respondents on Review, v. UNITED GROCERS, INC., an Oregon Corporation, Petitioner on Review.
• Court: Oregon Supreme Court

989 P.2d 10

329 Or. 86

Dwaine SCHIFFER and White City Development, Respondents on Review, v. UNITED GROCERS, INC., an Oregon Corporation, Petitioner on Review.

(CC 94-2411-L-2; CA A87467; SC S43670)

Supreme Court of Oregon.

Argued and Submitted January 14, 1997.

Reassigned February 3, 1998.

Decided July 15, 1999.

David J. Sweeney, of Brownstein, Rask, Arenz, Sweeney, Kerr & Grim, Portland, argued the cause for petitioner on review. With him on the briefs was Paul G. Dodds.

Charles M. Zennache, of Muhlheim Palmer Zennache & Wade, Eugene, argued the cause for respondents on review. With him on the brief was R. Scott Palmer.

Before CARSON, Chief Justice, and GILLETTE, VAN HOOMISSEN, DURHAM, and KULONGOSKI, Justices.¹

KULONGOSKI, J.

We are asked in this case to reconsider the rule of law in Oregon that a release of one joint and several obligor on a promissory note releases the other joint and several obligors. This court recognized the "release of one releases all" rule in the context of a joint and several obligation as a matter of common law in Crawford v. Roberts, 8 Or. 324, 325-26 (1880).² For the reasons explained below, we now agree with the overwhelming number of jurisdictions that have abrogated, either by judicial decision or by statute, the "release of one releases all" rule in contract.³ We hold today that the release of one joint and several contract obligor does not release automatically the other joint and several obligors; instead, the release must be given effect according to the intentions of the parties to that release. The rule that we announce today is the same rule applied by this court to releases in tort. See, e.g., Cranford v. McNiece, 252 Or. 446, 452-53, 450 P.2d 529 (1969)

(stating rule), citing Hicklin v. Anders, 201 Or. 128, 135-36, 253 P.2d 897 (1953). The decision of the Court of Appeals is reversed. The judgment of the circuit court is reversed. The case is remanded to the circuit court for further proceedings.

The facts of the case are uncontroverted, and we take them from the opinion of the Court of Appeals:

"In 1989, [Dwaine] Schiffer and John Gast located property in White City on which to build a grocery store. The property was owned by John and R.J. Batzer. Schiffer, Gast, and the Batzers then formed a partnership, White City Development (`White City'), for the purpose of constructing and operating a grocery store on the property. In order to finance the construction of the store, Schiffer and Gast approached defendant [United Grocers, Inc.] with the following proposal: Defendant would lease the property from White City and, in turn, sublease the property to Schiffer and Gast. The financial strength of defendant, as prime lessee of the property, would enable Schiffer and Gast to secure financing for the construction of the grocery store.

"Under the lease between White City and defendant, White City agreed to pay defendant $68,802, which represented the cost of `lease guarantee' insurance that defendant was to purchase, by which defendant would be indemnified if Schiffer and Gast defaulted on the sublease. Specifically:

"`45. LESSOR'S INDEBTEDNESS—LEASE INSURANCE: Lessor, [White City] hereby acknowledges an indebtedness to Lessee [defendant] in the amount of $68,802 (together with interest thereon as evidenced by the promissory note attached hereto and executed contemporaneously with this lease) representing Lessee's premium for lease guarantee insuring Lessee of the Sublessee's [Schiffer's and Gast's] performance of all obligations set forth under the Lessee's sublease. If such sum is not paid according to its terms, Lessee has the right to assert said sum as a right of set off against any sums due hereunder. If the lease is terminated prior to grant of possession, then this note shall be null and void.'

"On March 17, 1989, defendant and the partners of White City (Schiffer, Gast, and the Batzers) executed the prime lease. On the same day, White City's partners signed and executed a promissory note in favor of defendant in the amount of $68,802. That note provided, in part:

"`We, jointly and severally, promise to pay to the order of [defendant], at Portland, Oregon, the sum of SIXTY-EIGHT THOUSAND EIGHT HUNDRED TWO AND NO/100 DOLLARS due and payable at such time as [defendant] under a Lease Agreement dated March 17, 1989 is granted possession of the subject property pursuant to the terms of said Lease Agreement.'

"Due to an oversight, defendant failed to collect, and White City failed to remit, the $68,802 due under the lease and promissory note; consequently, defendant never purchased the lease guarantee insurance.

"Schiffer and Gast operated the grocery store until the business failed in July 1993. Following the failure of the store, Schiffer and Gast entered into a `Surrender Agreement' with defendant. That agreement addressed Schiffer's and Gast's defaults under the sublease and various equipment and inventory loans on open account with defendant. The agreement further provided:

"`United agrees to release * * * Gast from all claims, demands, and causes of action arising out of the parties' prior course of dealings and under all open accounts, loans, security agreements, and promissory notes with United.'

"In July 1993, following the execution of the surrender agreement, defendant notified White City that the $68,802 lease insurance premium had never been paid and requested full payment. In September 1993, defendant again requested payment on the promissory note and stated that it intended to offset $68,802 against the balance of the rent it owed under the prime lease, as contemplated by paragraph 45 of the lease set out above. After receiving no response, defendant notified White City in May 1994 that it would begin to withhold rent under the prime lease.

"In June 1994, plaintiffs [Schiffer and White City] brought this action seeking, inter alia, a declaration that: (1) their joint and several obligations under the March 17, 1989 promissory note were extinguished by defendant's release of their co-obligor, Gast; and (2)consequently, defendant was not entitled to offset amounts allegedly due and owing on the note amounts it owed White City on the prime lease."

Schiffer v. United Grocers, Inc., 143 Or.App. 276, 278-80, 922 P.2d 703 (1996) (footnote omitted).

Plaintiffs moved for summary judgment on the theory that defendant's release of Gast from his obligation to defendant had, as a matter of law, concomitantly discharged Schiffer's and the Batzers' joint and several obligations to defendant. The circuit court, relying on Crawford, granted plaintiffs' motion. Defendant appealed. The Court of Appeals affirmed, also relying on Crawford. Schiffer, 143 Or.App. at 278,

922 P.2d 703. We allowed review to determine the continuing validity of the rule that the release of one joint and several obligor on a promissory note releases automatically the other joint and several obligors.

The promissory note that underlies the present action could be deemed to be a negotiable instrument. Before proceeding further, therefore, we must answer the threshold question whether the common law of contract or the applicable version of Article 3 of the Uniform Commercial Code (UCC), former ORS chapter 73,⁴ controls the outcome of this case. As explained below, we conclude that the common law of contract controls this case because the promissory note in question is not a negotiable instrument under the version of the UCC in effect when the note was made.

To be a negotiable instrument subject to former ORS chapter 73, a note calling for the payment of money, such as the one under consideration here, had to be payable either on demand or at a definite time. Former ORS 73.1040(1).⁵Former ORS 73.1080 provided the applicable definition of "on demand":

"Instruments payable on demand include those payable at sight or on presentation and those in which no time for payment is stated."

We conclude that the promissory note here is not payable on demand. The note, on its face, is not payable at sight or on presentation. The note designates the time for payment as "due and payable at such time as [defendant] under a Lease Agreement dated March 17, 1989 is granted possession of the subject property."

Former ORS 73.1090 defined "payable at a definite time":

"(1) An instrument is payable at a definite time if by its terms it is payable:

"(a) On or before a stated date or at a fixed period after a stated date; or

"(b) At a fixed period after sight; or

"(c) At a definite time subject to any acceleration; or

"(d) At a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.

"(2) An instrument which by its terms is otherwise payable only upon an act or event uncertain as to time of occurrence is not payable at a definite time even though the act or event has occurred."

None of the conditions in former ORS 73.1090(1)(a) to (d) applied to the promissory note. Therefore, the note is not "payable at a definite time." Moreover, under former ORS 73.1090(2), the note did not become "payable at a definite time" after the grant of possession of the property. Because the promissory note is neither payable on demand nor payable at a definite time, it is not a negotiable instrument under former ORS 73.1040(1). Because former ORS chapter 73 does not apply, the common law of contract controls the outcome of this case.

The issue before us is the continuing validity of the common-law rule that the release of one joint and several obligor on a promissory note releases automatically the other joint and several obligors. We approach that issue by first discussing the common-law origins of the "release of one releases all" rule and the theoretical bases used historically to justify that rule. We then discuss the Crawford decision, in which this court recognized the ...