W. J. Seufert Land Co. v. Greenfield

• Decision Date: 26 April 1972
• Citation: 496 P.2d 197,262 Or. 83
• Parties: W. J. SEUFERT LAND CO., an Oregon corporation, Respondent, v. Ralph W. GREENFIELD and Wilma T. Greenfield, husband and wife, Appellants.
• Court: Oregon Supreme Court

Page 197

496 P.2d 197

262 Or. 83

W. J. SEUFERT LAND CO., an Oregon corporation, Respondent, v. Ralph W. GREENFIELD and Wilma T. Greenfield, husband and wife, Appellants.

Supreme Court of Oregon, In Banc.

Argued and Submitted April 6, 1972.

Decided April 26, 1972.

R. W. PicKell, Salem, argued the cause and filed briefs for appellants.

Edward L. Clark, Jr., Salem, argued the cause for respondent. On the brief were Clark & Marsh, Norma Paulus, Salem, and Dick & Dick, The Dalles.

TONGUE, Justice.

This is an action upon a guaranty agreement under which defendants guaranteed payments of rent due under the lease of a building owned by plaintiff in The Dalles and leased for use as a restaurant to a corporation which became insolvent.

Defendants' answer alleged, as an affirmative defense, that plaintiff entered into an agreement with the trustee in bankruptcy under which plaintiff 'settled and abandoned any and all claims on account of rental incurred' by the lessee, with the effect of releasing the obligation of defendants as obligors. ¹ Plaintiff's reply denied these allegations and also alleged that the guaranty agreement included a provision under which defendants, as guarantors, agreed that they would 'assert no defense whatever to any action * * * to enforce this guarantee * * * except the defense of the payment of rental at the times and in the manner specified' in the lease agreement. ²

After trial before a jury plaintiff moved for a directed verdict, which was granted. ³ Defendants appeal.

Defendants contend on this appeal (1) that because the guaranty agreement included a provision under which all defenses (except payment) were waived in advance, that agreement was against public policy and void, and (2) that the agreement by plaintiff with the 'bankruptcy court' was, in effect, a compromise settlement with the principal debtor, with the approval of the bankruptcy court, and therefore released the obligation of defendants as guarantors, thus constituting a valid defense, contrary to the holding of the trial court. ⁴

Plaintiff responds by contending (1) that defendants failed to raise in the trial court the issue of the illegality of the guaranty agreement; and that the contract provision for waiver of defenses was not invalid, but in any event, did not invalidate the entire guaranty agreement so as to prevent its enforcement; and (2) that the order of the bankruptcy court, which confirmed the surrender of the premises to plaintiff and the sale of the restaurant equipment back to plaintiff, was not an abandonment of plaintiff's claim against the lessee for unpaid rent and did not discharge defendants' obligation as guarantors.

For the purposes of this decision we shall assume, without deciding, that defendants were not foreclosed from raising on appeal, for the first time, the question of the illegality of the guaranty agreement because of its provision under which defendants agreed to waive all defenses to enforcement of the guaranty agreement other than payment of the rent. ⁵

We have previously held some contracts to be void in their entirety as against public policy. ⁶ Where, however, the entire contract is not contrary to public policy, but includes a separable provision which is invalid as contrary to public policy, we have enforced the remaining provisions of such a contract. ⁷ In our opinion, the provision of this guaranty agreement waiving defenses, if invalid, is a separable provision and does not invalidate the remaining provisions of this guaranty agreement.

Coming to the more specific question of the validity of contract provisions waiving defenses, we have not previously had occasion to consider contract provisions under which all defenses would be waived. Neither has our attention been called to any previous case in which we have held to be invalid contract provisions to waive any particular defenses, except to the extent that such provisions may be invalid because of the terms of a particular statute. ⁸

We have indicated, however, that agreements waiving some defenses may be valid and not contrary to public policy. Thus, we recently held that 'choice of forums' provisions of a contract under which the parties agreed that any litigation under the contract could not be filed in the courts of Oregon, but only in the courts of Ohio, was a valid contract provision in the absence of a showing that its application would be unfair or unreasonable. Reeves v. Chem Industrial Company, Or., 495 P.2d 729 (April 4, 1972). ⁹

It has been said that a contract provision agreeing to waive All defenses is invalid. ¹⁰ The most obvious reason in support of such a position is that such a contract provision, by its terms, would not only bar defenses which may be the proper subject of such a contract, such as the agreements relating to procedural remedies or rules of evidence, ¹¹ but would also bar defenses which cannot properly be contracted away, such as the defense of fraud or usury. ¹²

In our opinion, the more rational position is that a contract provision under which one party agrees to waive all defenses is not Per se invalid, and does not render the entire contract void, but that such a contract provision is only invalid when urged as a bar against a defense which may not be legally contracted away, while not invalid as a bar against a defense which may legally be the subject of such an agreement. ¹³

Thus, it becomes necessary to determine whether a provision in a guaranty agreement under which the guarantor agrees to waive all defenses, except the defense of payment by the principal debtor, is a bar against the defense that an agreement between the lessor-creditor and the receiver in bankruptcy of the lessee-debtor to surrender possession of the leased premises and to abandon claims against the trustee in bankruptcy for rental payments accruing during the period of the bankruptcy estate, thereby releasing the obligation of defendants as guarantors, was a defense which could be subject to a legal and valid waiver agreement. This assumes, without deciding, that such an arrangement would otherwise constitute a compromise settlement between the creditor and debtor, so as to release the guarantor and thus constitute a defense, as contended by defendants. The answer to this question depends, in turn, upon whether an agreement to waive such a defense is contrary to public policy. ¹⁴

We have previously declined to state any 'hard and fast rule' for determining whether a contract is invalid as against public policy, but have held that each case must be determined in the light of its own facts and that '* * * the test is the evil tendency of the contract and not its actual injury to the public in a particular instance * * *.' Pyle v. Kernan, 148 Or. 666, 673, 36 P.2d 580, 583 (1934). To the same general effect, 6A Corbin on Contracts 19, § 1375 (1951), quotes with approval from Bartron v. Codington County, 68 S.D. 309, 2 N.W.2d 337 (1942), as follows:

'That a policy reflected by the established trend of constitutional or statutory provisions, or of the decisions of the courts, or of administrative practices, is public in character, is generally accepted. * * * After a broad review of the adjudications of the courts, we deem it unwise to attempt to limit the sources we may consult in determining whether a policy has become fixed in the community mind or conscience. Until firmly and solemnly convinced that an existent public policy is clearly revealed, a court is not warranted in applying the principle under consideration. It has been well said, 'that the right of private contract is no small part of the liberty of the citizen, and that the usual and most important function of courts of justice is rather to maintain and enforce contracts than to enable parties thereto to escape from their obligation on the pretext of public policy unless it clearly appear that they contravene public right or the public welfare.' Baltimore & Ohio Southwestern Railway Co. v. Voigt, 176 U.S. 498, 20 S.Ct. 385, 387, 44 L.Ed. 560.'

We can presently perceive no 'evil tendency' which 'clearly appear(s) (to) contravene the public right or public welfare' to be the result of such a settlement agreement, at least when applied in normal circumstances and, in particular, as applied to facts such as those involved in this case.

Defendants say that what they contend to be the compromise settlement in this case would preclude them from their right of subrogation against the principal debtor. It is not at all clear that such would be the effect of the order of the bankruptcy court in this case. Defendants also say that at the time of the order by the bankruptcy court confirming this arrangement there were sufficient funds to pay all or a large part of plaintiff's claim for rental payments due during the period of the bankruptcy proceedings if such claim had been considered to be an administrative expense. At that time, however, the trustee in bankruptcy and his attorney apparently denied that this claim was an administrative expense, placing plaintiff in the position of litigating that issue for some further period, during which the return of possession of the leased premises would still be withheld, without rent.

In any event, we do not believe that it is contrary to public policy for a creditor and a guarantor to enter into an agreement which may have the effect of limiting or destroying a right of subrogation under these circumstances. Moreover, the fact that the effect of a contract provision waiving such a defense may be harsh as applied to one of the contracting parties does not mean that the agreement is, for that reason alone, contrary to public policy. ¹⁵ This is particularly true where, as in this case, the contract in question was freely entered into between parties in equal bargaining positions and did not involve a contract of adhesion, such as some retail installment contracts and insurance policies.

Accor...