Denn v. Anderson
DO NOT CITE. SEE RAP 10.4(h).
Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 42954-0-I
Title of Case: Edward S. Denn, Appellant
v.
John O Anderson, Respondent
File Date: 02/14/2000
SOURCE OF APPEAL
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Appeal from Superior Court of King County
Docket No: 96-2-32737-9
Judgment or order under review
Date filed: 06/29/1998
JUDGES
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Authored by Mary K. Becker
Concurring: H. Joseph Coleman
Walter E. Webster
COUNSEL OF RECORD
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Counsel for Appellant(s)
Sandra B. Gay
Gay & Steinacker
10500 NE 8th St Ste 1900
Bellevue, WA 98004-4351
Charles K. Wiggins
Attorney At Law
241 Madison Ave N
Bainbridge Is, WA 98110
Kenneth W. Masters
Wiggins Law Ofc.
241 Madison Ave N
Bainbridge Is, WA 98110
Counsel for Respondent(s)
Stephen R. Black
2112 Pacific Building
720 Third Avenue
Seattle, WA 98104
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION I
EDWARD S. DENN, a single person, ) No. 42954-0-I
)
Appellant, )
)
v. ) UNPUBLISHED OPINION
)
JOHN O. ANDERSON and WENDY )
ANDERSON, Husband and Wife, )
)
Respondents. ) FILED
BECKER, J. -- Denn and Anderson were partners in a printing franchise.
Anderson agreed to purchase Denn's stock. Anderson insisted that Denn
should assign to him the existing lease on the building and when Denn
refused to do so, Anderson did not close the purchase. Denn then acquired
Anderson's stock on favorable terms under the buy-sell provision in their
partnership agreement. As the sole owner of the building where the
business was located, Denn had no duty to assign the existing lease to
Anderson. The court erred in finding that Denn breached an implied duty of
good faith by insisting on his right to raise the rent, and this error
requires reversal of the judgment.
In 1980, Ed Denn acquired a Sir Speedy Printing franchise. He later
incorporated the business as Graphics Communications, Inc., and owned it as
the sole shareholder. He became interested in sharing ownership of the
business with someone who would eventually be able to buy him out. John
Anderson, first employed by Graphics when he was a high school student,
entered into a shareholder agreement with Denn in 1990 and bought 50
percent of Denn's corporate shares. Anderson did not pay cash; he gave
Denn a promissory note for $309,091, and received a larger salary to enable
him to make the monthly payments.
Graphics prospered and its gross sales and profits steadily increased. In
1995, Graphics moved its business to a larger building. The partners had
intended that the corporation would purchase the building, but the lender,
Key Bank, required personal guarantees. Because Anderson did not have
enough collateral to satisfy the bank's requirements for a personal
guarantee, Denn purchased the building in his own name. Key Bank held a
first deed of trust on the property, and took all the business assets as
additional collateral, to be released upon completion of certain
improvements to the building. Denn leased the space to the corporation at
Key Bank's recommended rent.
In 1996, the business relationship between Denn and Anderson
deteriorated to the point where they could no longer agree on major
business decisions. In October, Anderson offered to sell his stock to Denn
for $450,000, or a net of $250,000 plus cancellation of the balance due
under the promissory note. Denn refused this offer. Denn then offered to
sell his stock to Anderson under Section 11 of their Shareholder Agreement
- the buy-sell or 'shotgun' provision. Section 11 provided that either
shareholder could submit to the other shareholder a Price Notice specifying
a price at which the initiating shareholder would sell all of his stock to
the other. If the non-initiating shareholder failed or refused to purchase
the initiator's stock within 30 days of the offer, the initiating party
then had the right to purchase the other party's stock on the same terms.
Denn's Price Notice specified the following terms by which Anderson could
obtain Denn's shares: Anderson would pay off the balance on the promissory
note he owed to Denn - then approximately $200,000 -- and pay the
additional sum of $201,000; and Anderson would procure a release 'from each
personal guaranty the seller has made in behalf of the Corporation.' In
return, Denn promised to deliver at closing clear title to all of his
shares of stock.
Denn, aware that Anderson lacked collateral, did not expect that Anderson
would be able to accept the offer. His letter accompanying the Price
Notice acknowledged that if Anderson was unable to buy Denn's stock on
these terms, Denn would buy Anderson's stock on the same terms. Denn
stated that he was prepared to do so.
Anderson, however, did accept Denn's offer. On November 22, after
receiving a financing commitment from the National Bank of Tukwila,
Anderson formally notified Denn of his agreement and acceptance of the
terms in the Price Notice. He deposited $25,000 forfeitable earnest money,
and agreed to pay the balance at closing as well as to provide appropriate
documents releasing Denn from his guaranty obligations.
Anderson originally scheduled the closing of his purchase of Denn's stock
for November 26. On that date, he wrote to Denn stating that he needed a
little more time to take care of all the guarantees. Denn had attached to
the Price Notice a list of the firm's 249 trade creditors without
identifying the ones to whom he had given a personal guaranty. Anderson
said, 'We have already taken care of the big ones, but need the list from
Ed to make certain everything else is covered.' Responding the next day,
Denn informed Anderson that he could not remember which of the
corporation's suppliers had requested his personal guaranty. He suggested
that Anderson send a form to each vendor, soliciting a release of Denn or a
statement to the effect that no such guarantee was in effect. The closing
of Anderson's purchase of Denn's stock was delayed by agreement, and
ultimately rescheduled for Monday, December 23, 1996.
Assignment of the lease on Denn's building, a topic Denn did not mention in
the Price Notice, then emerged as a major obstacle to closing. The issue
arose when Key Bank asked Denn for a copy of the proposed premises lease.
On December 12, Denn advised Anderson that if he chose to continue to
operate the business in Denn's building, he would have to establish a new
lease and pay a higher rent to meet Denn's increased risk inherent in
having a non-owner tenant. Anderson responded that he was willing to re-
execute the existing lease on the same terms. On December 16, Denn
rejected this offer, and insisted that he was entitled to collect what he
considered to be a market rate rent with security provisions. Anderson
responded on December 18 that the square foot rate quoted by Denn was
exorbitant, and restated his position that it was not necessary to
renegotiate a lease. In his letter to Denn, he stated that he had the
funds to satisfy all of the financial requirements of the price notice and
was prepared to proceed. He added, however, that 'The only thing which
precludes going forward at this time is Mr. Denn's insistence that the
lease be renegotiated on terms wholly favorable to him as a landlord.'
The transfer of the franchise, another matter not mentioned in the Price
Notice, also became an issue. The franchise agreement with Sir Speedy
contained provisions barring transfer of the franchise without the
franchisor's consent; giving the franchisor a right of first refusal to
purchase the business on the same terms offered by the third party; and
retaining secondary liability for Denn in the event of a transfer. By
December 18, Denn had not received any notice from Sir Speedy consenting to
the transfer of the franchise. By letter to Anderson, he expressed his
concern that the consent had not been obtained.
Denn's letter of December 18 also emphasized that as a landlord, he was
entitled to renegotiate the lease. He expressed his view that it did not
appear that Anderson was able to perform. Denn at this time declined to
consent to a further extension of the closing date, now less than a week
away.
On December 19, Anderson informed Denn that he had been unable to obtain
the required releases from all the vendors. As an alternative, Anderson
offered to pay the vendor accounts to zero and close each vendor account.
As to the franchise, he said he had spoken to certain individuals at Sir
Speedy about transferring the franchise and expected their answer within a
day. He said he had been given no reason to anticipate an unfavorable
decision. As to the lease, Anderson stated again that he was prepared to
re-sign the existing lease in order to satisfy Key Bank's request.
On December 20, Denn wrote back, reiterating his belief that Anderson would
not be in a position to close in a timely fashion. Denn again refused to
re-sign the lease on its existing terms. He stated that he was willing to
waive the requirement for supplier releases on a case by case basis, but
refused to accept Anderson's proposal of paying off all the accounts. Denn
said he did not believe that procedure would assure that he had no
lingering liability as a guarantor for the debts the business would
necessarily incur in its on-going operations. Denn also complained that
Anderson had waited too long to take care of the releases and the transfer
of the franchise, and expressed doubt that Sir Speedy would regard Anderson
as financially qualified to become the sole franchisee.
On December 19, the Bank of Tukwila informed Anderson that if he executed a
lease on new terms, the bank would view it as a material change. 'If a
lease on new terms is executed it will be necessary for us to review the
final lease document prior to disbursement of your loans.' Also on
December 19, Sir Speedy informed Anderson that it would need as much as ten
days more to be able to make a decision about the transfer.
Anderson responded to Denn's December 20 letter on the same day. He took
the position that Denn had implicitly consented to assign the lease on the
same terms when he offered to sell his stock. If Denn was refusing to
close without a renegotiated lease, Anderson took that as evidence that
Denn had no intention of complying with the Price Notice and transferring
his stock. Therefore, he wrote, 'Tendering funds would be a useless and
vain act.'
Anderson did not appear for closing on the scheduled date. Denn promptly
informed Anderson that he would proceed to buy Anderson's stock. He
assumed sole ownership of the corporation; terminated Anderson's
employment; and shut him out of the premises. Denn also sued Anderson for
specific performance. Anderson counterclaimed seeking damages for breach
of contract. He alleged that Denn's actions constituted a breach of an
implied duty of good faith and fair dealing.
The competing claims went to a bench trial in May, 1997. The court found
that Denn had intentionally manipulated his demands as landlord so as to
cause Anderson's stock purchase to become 'financially infeasible'; had
unreasonably rejected proposed alternatives to obtaining releases of his
personal guaranty; and had actively discouraged Sir Speedy from giving its
consent to the transfer of the franchise. The court found that Denn had
endeavored to contrive a technical default so that he would be able to
reverse the terms of the Price Notice. The court concluded that Denn's
direct and indirect efforts to frustrate the transaction and hinder
Anderson's performance constituted a breach of the implied covenant of good
faith and fair dealing in the Shareholder Agreement and Price Notice. The
court also concluded that Denn's breach excused Anderson's failure to
close. The court awarded Anderson substantial damages for Denn's
conversion of his stock. Denn appeals.
Every contract contains an implied covenant of good faith and fair dealing,
including a duty not to interfere with the other party's performance of the
contract. State v. Trask, 91 Wn. App. 253, 272-73, 973 P.2d 781 (1998),
review denied, 137 Wn.2d 1020 (1999). The implied duty does not, however,
impose a 'duty to affirmatively assist in the other party's performance.'
Trask, 91 Wn. App. at 273. The implied duty arises only in connection with
obligations imposed by the agreement of the parties. Badgett v. Security
State Bank, 116 Wn.2d 563, 569, 807 P.2d 356 (1991). Thus, a lease
agreement does not give rise to an implied duty of good faith and fair
dealing unless there are specific contractual obligations to which the duty
can attach. A landlord may arbitrarily refuse to consent to a lease
assignment when the lease prohibits assignment without the landlord's
consent and imposes no explicit standard of conduct. Johnson v.
Yousoofian, 84 Wn. App. 755, 760-62, 930 P.2d 921 (1996), review denied,
132 Wn.2d 1006 (1997).
The central issue here is whether the trial court erred in finding that
Denn breached an implied duty of good faith by insisting on his right to
refuse to assign the lease to Anderson without renegotiating new terms.
The trial court was well aware of the case law stated in Johnson v.
Yousoofian, and did not rely on the lease as the source of the duty that
Denn breached. Instead, the court found it important that the lease was
only one of many documents affecting their legal relationship. The court
reasoned that the duty to act in good faith with respect to the lease could
arise from the totality of the circumstances even if it did not arise from
the lease. The court remarked that Denn's implied duty to act in good
faith under the Shareholder agreement and Price Notice would be illusory
'if he could then put on his landlord hat and do whatever he pleased'.
Accordingly, the court entered as a conclusion of law, 'In determining
whether the parties proceeded in good faith the Court may consider Mr.
Denn's unreasonable demands for a renegotiated lease as part of the
totality of circumstances bearing on whether he acted in good faith in
connection with the obligations imposed by the Shareholder Agreement and
Price Notice."
We hold it was error for the court to regard Denn's insistence on a new
lease as a breach of the duty of good faith implied by the Shareholder
Agreement and Price Notice. The law does not allow a court to find a duty
arising from 'the totality of circumstances.' The law requires a court to
point out the specific contractual obligation that gave rise to the
supposed duty of good faith. 'As a matter of law, there cannot be a breach
of the duty of good faith when a party simply stands on its rights to
require performance of a contract according to its terms.' Badgett, 116
Wn.2d at 570.
Denn's obligation as expressed in the Price Notice was to deliver the clear
title to his shares at closing. His implied duty of good faith in this
transaction required that he not interfere with Anderson's purchase of
those shares. But it did not require him to treat Anderson as a favored
tenant. The court found that Denn insisted on raising the rent simply
because he 'wanted to earn more from the lease', and not because of any
'business necessity.' Nothing express or implied in any of the agreements
between the parties precluded Denn from raising the rent solely for his own
financial benefit.
Even assuming that the Price Notice and Shareholder Agreement imposed upon
Denn a duty not to be unreasonable in his demand for a new lease, the
evidence does not support a finding that it was unreasonable for him to
obtain a new lease on terms that would secure his interest in a building
that he was no longer going to occupy. Anderson, by flatly refusing even
to negotiate and insisting instead that he had a right to re-sign the
existing lease, overestimated the extent of Denn's obligation to cooperate.
If Anderson was not willing to come to terms with Denn about a new lease,
he had the choice of moving the business to a new location. If both
choices were beyond Anderson's reach financially, then his acceptance of
Denn's buy-sell offer was unrealistic.
In summary, Denn agreed to sell his share of the corporation. He did not
agree to sacrifice, for Anderson's benefit, his own ability to prosper from
his separate investment in the commercial property. Thus, Denn's refusal
to assign the lease did not deny Anderson anything that he had bargained
for, and cannot be the basis for excusing Anderson's failure to perform.
In its conclusion that Anderson was excused from further performance, the
trial court relied not only on the lease problem but also, to a lesser
degree, on findings that Denn unreasonably rejected Anderson's proposed
alternative method of releasing Denn from his guarantees, and that Denn
rather than Anderson was responsible for obtaining Sir Speedy's consent to
transfer the franchise. But Anderson's performance may be excused only if
Denn's specific breaches actually caused Anderson's failure to perform.
Barrett v. Weyerhaeuser Co. Severance Pay Plan, 40 Wn. App. 630, 636-38,
700 P.2d 338 (1995).
The nonperformance (breach) of a promise made by A does not necessarily
excuse the performance of a different promise made by B.
If A's performance of one promise is not a condition precedent to B's
performance of a different promise, A's nonperformance (breach) renders A
liable for damages; it does not, however, excuse B's performance of the
other promise.
Trask, 91 Wn. App. at 273.
Anderson had agreed to close by tendering over $400,000 and the releases.
He did not tender the funds. As for the releases, he did not tender
performance. Anderson even failed to satisfy his alternative proposal of
closing all the vendor accounts and reopening them in his own name.
Anderson has not shown that Denn's obligations to waive the release
requirement and to ensure Sir Speedy's acceptance of the new franchisee
were conditions precedent. Therefore, it was error to conclude that Denn's
breaches of these obligations assuming he did have these obligations, and
breached them excused Anderson's obligation to tender his own promised
performance. Indeed, the record indicates that the reason Anderson did not
have his cash ready at the time of closing was that both Key Bank and
National Bank of Tukwila were unwilling to take the necessary steps so long
as the dispute about the lease remained unresolved.
Because of the erroneous conclusion that Denn breached an implied duty of
good faith excusing Anderson's performance, the judgment in favor of
Anderson must be reversed and his suit dismissed.
What remains is Denn's contention that he is entitled to judgment on his
suit for specific performance requiring Anderson to transfer his stock to
Denn, and forfeiting the $25,000 earnest money due to his failure to close.
For resolution of Denn's claim, the case is remanded to the trial court for
further proceedings not inconsistent with this opinion.
Reversed.
WE CONCUR: