Uptown Heights Associates Ltd. Partnership v. Seafirst Corp.

• Decision Date: 20 April 1994
• Citation: 127 Or.App. 355,873 P.2d 438
• Parties: UPTOWN HEIGHTS ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, Leavitt, Shay (Uptown), Inc., a Washington corporation, and Leavitt, Shay & Company, Inc., a Washington corporation, Appellants, v. SEAFIRST CORPORATION, a Washington corporation and registered bank holding company, and Seattle-First National Bank, a national banking association, Respondents. 9203-02042; CA A75880.
• Court: Oregon Court of Appeals

Page 438

873 P.2d 438

127 Or.App. 355

UPTOWN HEIGHTS ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, Leavitt, Shay (Uptown), Inc., a Washington corporation, and Leavitt, Shay & Company, Inc., a Washington corporation, Appellants, v. SEAFIRST CORPORATION, a Washington corporation and registered bank holding company, and Seattle-First National Bank, a national banking association, Respondents.

9203-02042; CA A75880.

Court of Appeals of Oregon.

Argued and Submitted June 16, 1993.

Resubmitted In Banc Dec. 8, 1993.

Decided April 20, 1994.

Jacob Tanzer, Portland, argued the cause for appellants. With him on the briefs were Mark L. Cushing, Rochelle Lessner and Ball, Janik & Novack.

Rodney E. Lewis, Jr., Portland, argued the cause for respondents. With him on the brief were John F. McGrory, Jr., and Davis Wright Tremaine.

DEITS, Judge.

Plaintiffs appeal the dismissal for failure to state claims of their action for contractual and tortious breach of the duty of good faith and fair dealing and for wrongful interference with contractual and business relationships. ORCP 21A(8). We affirm in part and reverse in part.

We take the facts as alleged by plaintiffs, together with the reasonable inferences that may be drawn from them. In June, 1989, plaintiffs entered into a multimillion dollar construction loan agreement with defendant Seafirst Corporation (Seafirst), a Washington bank holding company. ¹ The loan was made principally to finance plaintiffs' joint project to construct the Uptown Heights (Uptown) apartments in Portland. Seafirst was plaintiffs' principal bank and lender, and plaintiffs were prominent and longstanding customers of Seafirst's. During the relationship, Seafirst had always worked closely with plaintiffs' principal, conducted business in an informal manner, treated him as a special customer, and had not strictly enforced its rights.

Seafirst solicited plaintiffs' business for the financing of Uptown. The loan was secured by a deed of trust on the land and buildings at the apartment project. As part of the loan process, plaintiffs obtained an appraisal of $10,250,000 from a third-party appraiser recommended and approved by Seafirst. Seafirst also independently evaluated the project and updated the appraisal during construction to $10,400,000. The principal amount of the loan was due January 1, 1991, with a provision for two six-month extensions until January, 1992.

Shortly after construction of the apartments was completed, the market for their rental changed considerably from the pre-construction forecast. Plaintiffs recognized in the early fall of 1990 that there would be short-term cash flow problems in paying the required monthly interest payments on the loan. They discussed that problem with Seafirst personnel. Plaintiffs stayed current with the loan payments, and in October, 1990, Seafirst granted plaintiffs the first six- month extension. Seafirst told plaintiffs that it would continue to work with them on loan extensions.

In April, 1991, plaintiffs were unable to make their full interest payment. Plaintiffs and Seafirst continued to negotiate about how to resolve the situation. Plaintiffs had already relinquished their developer's fee of approximately $350,000 and further invested $450,000 of additional funds. Seafirst ordered an additional appraisal, which was $8,850,000 or approximately $1 million over the outstanding loan balance of $7.8 million.

Plaintiffs' business had always been conducted through Seafirst's "Private Banking" department for preferred, large customers and, after a bank reorganization, through the real estate department. Plaintiffs were continually assured by personnel in these departments that Seafirst would work with them to solve any problems on the Uptown project. Nevertheless, in June, 1991, Seafirst did not grant the second six-month loan extension. It transferred the Uptown loan and all of plaintiffs' other business to its problem department, "Special Credits," even though no other accounts were in trouble or at risk. It also refused to loan money for an unrelated joint venture project unless plaintiffs were removed as a participant. Seafirst began to threaten plaintiffs with foreclosure of the Uptown project.

Due to the pressure from Seafirst and concerns about their business reputation, plaintiffs decided to find a buyer for Uptown. Plaintiffs asked Seafirst not to bring a foreclosure action before a sale, because it would endanger the sale and plaintiffs' additional investment. Plaintiffs explained that they were concerned that the buyer would wait to buy the property at a bargain price after the foreclosure. Two days after plaintiffs notified Seafirst of an offer, Seafirst initiated a foreclosure action and filed a complaint for the appointment of a receiver. Before the hearing on the receivership, plaintiffs provided Seafirst with details of the purchase offer for Uptown. Seafirst refused to postpone the hearing to permit further negotiations with the buyer. The buyer withdrew the offer.

Subsequently, plaintiffs received another offer for $8.6 million. They notified Seafirst of that offer and asked it not to proceed with the foreclosure. However, Seafirst continued with the foreclosure sale. It purchased the property for the amount of the loan due, $7.8 million, and immediately resold it for the same amount. Plaintiffs received nothing for the sale and lost all their equity. They brought this action against Seafirst, which was dismissed for failure to state facts sufficient to constitute a claim.

Plaintiffs first assign error to the dismissal of their claim against Seafirst for breach of the implied contractual duty of good faith and fair dealing by foreclosing before plaintiffs could sell Uptown. Seafirst argues that plaintiffs have no right to claim breach of the implied duty, because plaintiffs defaulted on the interest payment, and the remedies that Seafirst pursued are specifically permitted by the parties' contract in the event of such a default. ²

Plaintiffs respond that Seafirst had discretion as to whether it would pursue the foreclosure remedy provided by the contract and, therefore, it was required to act in good faith in exercising that discretion. Plaintiffs rely on Best v. U.S. National Bank, 303 Or. 557, 563, 739 P.2d 554, 558 (1987), where the court said:

"When one party to a contract is given discretion in the performance of some aspect of the contract, the parties ordinarily contemplate that the discretion will be exercised for particular purposes. If the discretion is exercised for purposes not contemplated by the parties, the party exercising discretion has performed in bad faith."

Plaintiffs conclude:

"Here, the purpose of Seafirst's power to foreclose was to secure its loan. Because the property's value was well in excess of the loan balance, however, a jury may infer that Seafirst acted for some other purpose not consistent with the parties' expectations when they agreed that Seafirst would have this power."

Seafirst answers that its right to foreclose was an express term of the contract and, as such, the implied duty of good faith and fair dealing has no application to its exercise. Seafirst relies principally on Badgett v. Security State Bank, 116 Wash.2d 563, 807 P.2d 356 (1991), where the Washington court so reasoned in rejecting the contention that the implied duty arose in connection with loan extension negotiations between a bank and its customer. ³ However, we believe that there is Oregon authority that is on point and that supports Seafirst's argument. In Sheets v. Knight, 308 Or. 220, 779 P.2d 1000 (1989), the court held that a party's invocation of the power to terminate an at-will employment contract could not violate the implied duty of good faith and fair dealing, because

"[t]he foundation of the at-will employment agreement is the express or implied understanding that either party may terminate the contract for any reason, even for a bad cause. A duty of good faith and fair dealing is appropriate in matters pertaining to on-going performance of at-will employment agreements. It is not appropriate to imply the duty if it is inconsistent with a provision of the contract." 308 Or. at 233.

The court, therefore, concluded that an express unilateral right to terminate is not subject to the implied duty of good faith.

In Harris v. Griffin, 109 Or.App. 253, 258, 818 P.2d 1289 (1991), we applied Sheets in a case involving a real property seller's right to invoke a contractual default remedy, and said:

"Assuming, without deciding, that the implied duty of good faith and fair dealing can have any application in connection with a seller's exercise of an express contractual right to declare a default and accelerate, but see Sheets v. Knight, 308 Or. 220, 779 P.2d 1000 (1989); Tolbert v. First National Bank, 96 Or.App. 398, 772 P.2d 1373 (1989), [aff'd in part, rev'd in part, 312 Or. 485, 823 P.2d 965 (1991) ], the specific points that defendants make to support their argument show nothing except that plaintiffs exercised that right under circumstances that entitled them to do so, but which defendants think called for forebearance [sic ]. In other words, defendants maintain, plaintiffs breached the implied duty by doing exactly what the contract expressly permitted them to do. As the court said in Sheets v. Knight, supra, 308 Or. at 233, , 'It is not appropriate to imply the duty if it is inconsistent with a provision of the contract.' We reject the argument."

The same reasoning applies equally to a lender's invocation of remedies that the parties' contract expressly allows in the event of a borrower's default.

The underlying flaw in plaintiffs' argument is their supposition that Seafirst's act was "discretionary," in the sense that that word is used in Best v. U.S. National Bank, supra, and similar cases. As used there, the word refers to the establishment of conditions in the...