Wells Fargo Bank v. Bank of America

• Citation: 38 Cal.Rptr.2d 521,32 Cal.App.4th 424
• Decision Date: 16 February 1995
• Docket Number: No. B079817,B079817
• Court: California Court of Appeals
• Parties: WELLS FARGO BANK, N.A., as Trustee, etc., et al., Plaintiffs and Appellants, v. BANK OF AMERICA NT & SA, Defendant and Respondent.

Page 521

38 Cal.Rptr.2d 521

32 Cal.App.4th 424

WELLS FARGO BANK, N.A., as Trustee, etc., et al., Plaintiffs and Appellants, v. BANK OF AMERICA NT & SA, Defendant and Respondent.

No. B079817.

Court of Appeal, Second District, Division 2, California.

Feb. 16, 1995.

Rehearing Denied March 16, 1995.

Review Denied June 6, 1995.

Tilles, Webb, Kulla & Grant, Stephen P. Webb, Beverly Hills, David L. Ainbender, Los Angeles, Greines, Martin, Stein & Richland, Kent L. Richland and Feris M. Greenberger, Beverly Hills, for plaintiffs and appellants.

White & Case, John A. Sturgeon, David J. Wilson, Matthew P. Lewis and Ullar Vitsut, Los Angeles, for defendant and respondent.

BOREN, Presiding Justice.

The parties contest the enforceability of a "gold clause," a price-indexing contract clause used to adjust for inflation, which was contained in a 95-year ground lease executed in 1929. Plaintiffs, a small group of family trusts and individuals, are owners and lessors, and defendant is the current tenant and lessee. The parties are successors in interest to the 1929 ground lease of prime real estate in Beverly Hills. The lease provided for an unadjusted monthly base rent of only $2,000.

We hold that although the lease's gold clause was rendered unenforceable by a 1933 federal statute, a tenant's assignment of the lease in 1981 amounted to a new obligation and a novation which rendered the gold clause enforceable under a 1977 federal statute permitting gold clauses. Our conclusion is premised on the law of novation and legislative intent in the 1977 federal legislation which permitted gold clauses in "an obligation issued" (31 U.S.C. § 5118(d)(2)) after the statute's effective date.

BACKGROUND

Prior to the economic depression of the 1930's, gold clauses were popularly used in contracts as a crude price-indexing mechanism to adjust for inflation. (Fay Corp. v. BAT Holdings I, Inc. (W.D.Wash.1986) 646 F.Supp. 946, 948.) Gold clauses operated by mandating payment in gold coin or its equivalent, or by tying the dollar amount due under a contract (e.g., monthly rent due under a lease) to the price of gold. (Ibid.)

In 1933, however, in the midst of the Great Depression, a joint resolution of Congress invalidated all gold clauses and provided that "dollar for dollar" payments in United States currency would discharge any obligation which had required payment in gold. (H.J.Res. No. 192, 73d Cong., 1st Sess. (June 5, 1933) ch. 48, 48 Stat. 112, 113 (formerly codified at 31 U.S.C. § 463).) ¹ Also as a monetary reform measure, Congress banned the private ownership of gold from 1934 until the repeal of such legislation in 1973. (Fay Corp. v. BAT Holdings I, Inc., supra, 646 F.Supp. at p. 948.) However, Congress did not address the 1933 joint resolution which invalidated gold clauses in contracts until October 28, 1977, when it amended the law to provide that the joint resolution "shall not apply to obligations issued on or after the date of enactment of this section." (Pub.L. No. 95-147 § 4(c) (Oct. 28, 1977), 91 Stat. 1229, former 31 U.S.C. § 463 note; hereinafter referred to as the 1977 amendment.) The current version of this enactment provides as follows: "An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. This paragraph does not apply to an obligation issued after October 27, 1977." (Pub.L. No. 97-258 (Sept. 13, 1982) 96 Stat. 985, 31 U.S.C. § 5118(d)(2).) Accordingly, "obligations covered by gold clauses prior to 1977 are, as before, dischargeable dollar for dollar

with United States currency. But 'an obligation issued after October 27, 1977' is not so limited." (Fay Corp. v. BAT Holdings I, Inc., supra, 646 F.Supp. at p. 948, fn. omitted.)

FACTS

In March of 1929, members of several families who owned commercial real property located at the southwest corner of Beverly Drive and Little Santa Monica Boulevard in Beverly Hills granted a 95-year ground lease on the property to the First National Bank of Beverly Hills. The stated monthly rent under the lease was $2,000. However, the lease also contained the following gold clause, intended to increase the rent due as the price of gold fluctuates: "Said net rental ... shall be paid in gold coin of the United States of America of the present standard of weight and fineness.... It is expressly understood and agreed that by the word 'dollar' whenever used in this lease is meant a United States of America gold coin composed of 25.8 grains of gold .900 fine, which is the present standard of weight and fineness of said United States of America gold coin."

By 1977, after transfers of parties under the lease, the First National Bank of Beverly Hills was no longer the lessee. Triangle Company (Triangle) was the lessee, paying plaintiffs, the successors in interest to the original lessors, $2,000 per month in rent. From October 1977 to October 1981, defendant Bank of America NT & SA (the successor in interest in this litigation to the original defendants Pacific Southwest Realty and Security Pacific National Bank and hereinafter referred to as "the bank") was Triangle's subtenant under a 35-year sublease and was paying Triangle $325,000 in rent per year (approximately $27,000 per month).

In September 1981, Triangle and the bank entered into a transaction by which the sublease agreement between them was terminated and the bank became the new lessee under the 1929 lease, assuming all obligations owed under it. The terms of the transaction by which the bank became the new lessee entailed payment of $4,225,000 to Triangle for the assignment.

Both Triangle and the bank were aware before they entered into this transaction that the lease contained a gold clause. They also were aware that Congress had enacted legislation making the 1933 joint resolution of Congress prohibiting gold clauses not applicable "to obligations issued" after the effective date of the 1977 amendment.

Indeed, prior to entering into the transaction with Triangle, the bank obtained legal advice concerning the enforceability of the gold clause. The bank's legal counsel indicated it was possible that the gold clause would be enforceable, although counsel believed the risk of such a legal interpretation was less than 50 percent. In view of the risk, the bank asked Triangle for a provision that would indemnify the bank if the gold clause were later found to be enforceable. When Triangle refused to agree to such a provision, the bank nonetheless proceeded with the transaction.

Meanwhile, the plaintiffs were not informed that the bank was acquiring the lease until October 1981, after the transfer was completed. Since that month, the bank paid plaintiffs $2,000 per month in rent. ²

In November 1986, one of the plaintiffs became aware it might be possible to require the bank to honor the gold clause after he read a newspaper article regarding a ruling in a case then pending in federal district court in Washington State, Fay Corp. v. BAT Holdings I, Inc., supra, 646 F.Supp. 946, recon. denied (W.D.Wash.1987) 651 F.Supp. 307, on related grounds (W.D.Wash.1988) 682 F.Supp. 1116, affirmed sub nom. Fay Corp. v. Frederick & Nelson Seattle, Inc. (9th Cir.1990) 896 F.2d 1227. The Fay ruling endorsed the view that the post October 27, 1977, transfer of a long-term lease containing a gold clause could constitute a novation of the lease contract and therefore amount to a new obligation issued after that date within the meaning of 31 United States Code section 5118(d)(2).

In March 1988, one of the plaintiffs sent the bank the first in a series of letters demanding that the bank pay rent at the gold clause rate. The bank continued to pay rent at the lower rate, and plaintiffs subsequently endorsed all rent checks received as noting that they constituted partial payment and did not waive rights under the lease for full payment.

On October 31, 1991, plaintiffs filed their complaint for breach of contract and declaratory relief. The case was tried without a jury. The evidence before the court included deposition testimony, documentary evidence and stipulated facts to which certain witnesses would testify. The trial court ruled that the assignment or novation of the lease from Triangle to the bank did not revive the gold clause, which had been declared invalid by act of Congress in 1933, and that the transfer of the lease in 1981 did not create an "obligation issued after October 27, 1977," within the meaning of 31 United States Code section 5118(d)(2). The trial court also found that the delay in bringing suit established the defenses of laches and estoppel and barred plaintiffs' claims. The trial court thus granted judgment for the bank and against plaintiffs. Plaintiffs appeal.

DISCUSSION

I. Novation

The essence of plaintiffs' argument is that the bank's 1981 purchase of the lease was a novation of the lease contract and thus constituted a new obligation entered into after October 27, 1977, within the meaning of 31 U.S.C.A. section 5118(d)(2), thereby rendering the gold clause enforceable against the bank and entitling plaintiffs to rent at the gold clause rate. The argument is thus premised upon the existence of a novation.

"Novation is the substitution of a new obligation for an existing one." (Civ.Code, § 1530.) The substitution is by agreement and with the intent to extinguish the prior obligation. (Civ.Code, §§ 1530, 1531; see 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 906, p. 811.) The substitution of a new obligation for an existing one may be either (1) a new obligation between the same parties, or (2) a new obligation arising because of new parties, either a new debtor or new creditor. (Civ.Code, § 1531; 1 Witkin, supra, § 906, p. 811; see, e.g., Alexander v. Angel (1951) 37 Cal.2d 856, 860, 236 P.2d 561 [novation exists where new debtor is substituted for...