Uptown Heights Associates Ltd. Partnership v. Seafirst Corp.

873 P.2d 438, 127 Or. App. 355, 1994 Ore. App. LEXIS 617

• Court: Court of Appeals of Oregon
• Decided: April 20, 1994
• Docket: 9203-02042; CA A75880
• Status: Published

Opinions

DEITS, J.

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 P2d 557 (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 P2d 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 P2d 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 P2d 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 P2d 1000 (1989); Tolbert v. First National Bank, 96 Or App 398, 772 P2d 1373 (1989), [aff’d in part, rev’d in part, 312 Or 485, 823 P2d 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 performance of ongoing contracts by a party on whom the contract confers the unilateral authority to specify those conditions in accordance with the interests or expectations of both parties. As Sheets and Harris make clear, neither “discretion” specifically nor the rationale for the implied good faith doctrine generally has any relevance to a party’s election to pursue a remedy that the contract expressly gives that party for the party’s sole benefit, and the pursuit of which effectively ends the contractual relationship. It is true that Seafirst had discretion, in the sense that the contract did not require it to foreclose. However, that is not the kind of discretion that Best and its progeny envision, and it does not alter the fact that Seafirst had the contractual right to do what it did and breached no implied contractual duty by doing so. The contract claim was properly dismissed.

Plaintiffs next assign error to the dismissal of their tort claim based on a breach of the duty of good faith. They note that they pleaded the existence of a “special relationship” between Seafirst and themselves, as borrower and lender. Assuming that that can constitute a special relationship, for purposes of the tort claim, see Georgetown Realty v. The Home Ins. Co., 313 Or 97, 831 P2d 7 (1992), the pleaded facts show no breach of the duty as a matter of law. Plaintiffs rely on Harper v. Interstate Brewery Co., 168 Or 26, 120 P2d 757 (1942), which they characterize as standing for the proposition that “a secured lender/borrower relationship can impose an extra contractual standard of duty upon a lender in choosing its remedies. ’ ’ However, we read Harper as stating a much narrower proposition. In Cascade Steel Fabricators v. Citizens Bank of Oregon, 46 Or App 573, 612 P2d 332, rev den 298 Or 741 (1980), we explained Harper and discussed the availability of the tort theory that plaintiffs seek to allege. The plaintiff in Cascade brought a tort action for bad faith, asserting that the defendant bank’s conduct in demanding payment of a loan and foreclosing on the collateral was tortious, in the light of the parties’ long history of dealing and the alleged prediction by a bank representative “that further financing would he forthcoming.” We said:

“Plaintiff cites two cases to support its tort theory of bad faith: Harper v. Interstate Brewery Co., 168 Or 26, 120 P2d 757 (1942), and Skeels v. Universal C.I.T. Credit Corporation, 222 F Supp 696 (WD Penn), judgment vacated on other grounds 335 F2d 846 (3d Cir 1964). In Harper the Supreme Court held that a deed given to secure an indebtedness was, in effect, a mortgage, and that a right given to the mortgagee to sell the property at a private sale required the mortgagee to use good faith to secure the best possible price on the sale. The court’s holding was specifically directed to the manner in which the mortgagee had exercised its power of sale, which bears no relationship to the facts and the issue in the present case.

“In Skeels the plaintiff, an automobile dealer, brought an action against the defendant, a credit and financing agency, for failure to provide additional financing. A representative of defendant, knowing that plaintiffs request for an additional $15,000 loan had been denied by the home office, repeatedly assured plaintiff that the loan was forthcoming and that plaintiff could act accordingly, including paying its accounts payable. Thereafter, plaintiff became delinquent in its obligation to the defendant financing agency and the agency took possession of all of plaintiffs inventory. The decision of the Court of Appeals described defendant’s actions in assuring plaintiff that he would receive the loan when it knew that loan had been rejected as a ‘willful wrong. ’ 335 F2d at 849.

“Unlike Skeels, in the case at bar the plaintiff was not falsely advised that the additional financing was forthcoming and encouraged to act on that advice. Optimism may have caused plaintiff to believe it was going to receive additional financing, but that was not what it was told by the bank. On the contrary, the bank representative told plaintiff he did not see any problem but that he would have to consult with his superiors, which would take a few days. The ‘willful wrong’ that existed in Skeels is not present here and no tort was committed against plaintiff. If we accept plaintiffs position, then a bank could he hable to anyone merely by indicating that a loan appeared to he favorable, saying that time was needed to consider it, and then refusing the additional financing and foreclosing on its collateral.” 46 Or App at 576-77. (Footnote omitted.)

In this case, similarly, plaintiffs’ allegations, viewed as favorably as possible to them, show nothing approximating the willful misconduct that the court described in Skeels v. Universal C.I.T. Credit Corporation, supra. As in Cascade Steel Fabricators, to hold that Seafirst’s conduct was tortious or violated an implied good faith duty here would make any default remedies unavailable to a lender that had offered assistance or expressed encouragement to the borrower before pursuing the contractual remedies.

We do not suggest that we condone the course of dealing in which plaintiffs allege that Seafirst engaged. If the issue were whether Seafirst’s conduct estops it from pursuing the contractual remedy, we might agree that there is enough alleged here to get plaintiffs past the pleading stage. However, that is not the argument that plaintiffs make. Rather, they contend that the express remedy under the contract is subject to the implied duty. That contention is at odds with Sheets v. Knight, supra, and Harris v. Griffin, supra. Both the contract and tort good faith claims were correctly dismissed.

In their remaining assignments, plaintiffs contend that the court erred by dismissing their third, fourth and fifth claims, in which they alleged that Seafirst interfered with their business and contractual relationships with the prospective buyer of Uptown and the prospective participant in the unrelated joint venture. We agree that it was error to dismiss those claims. Interference with contractual relations or future business relations is actionable if the defendant acts with the improper objective of harming the plaintiff or uses wrongful means that in fact cause injury to the plaintiffs contractual or business relationships. Top Service Body Shop v. Allstate Ins. Co., 283 Or 201, 205, 582 P2d 1365 (1978). Moreover, as we explained in Hickman Construction v. South Umpqua State Bank, 109 Or App 527, 532, 820 P2d 838 (1991):

“[A] plaintiffs burden in an intentional interference action is not to negate every possible proper basis for the defendant’s actions. All that is necessary to prove improper means or motive is evidence of an improper means or motive that the jury can believe was the reason for the action.” (Emphasis in original.)

The intent element of an interference claim is either an actual intent to cause the harm or acting with knowledge that the “interference is substantially certain to occur from [the] action or is a necessary consequence thereof.” Straube v. Larson, 287 Or 357, 361, 600 P2d 371 (1979). The plaintiff must allege some injury, and the interference must be wrongful beyond the fact of the interference.

Here, plaintiffs pleaded that they informed Seafirst of the offer that they received to buy Uptown for between $300,000 to $800,000 more than the outstanding debt, which would have allowed them to recoup a substantial portion of their investment. They asked Seafirst not to appoint a receiver or foreclose in order to allow the sale of Uptown to proceed. Because Seafirst went forward with the receivership and foreclosure, plaintiffs lost the sale and, subsequently, all their equity in Uptown. Plaintiffs have alleged sufficient facts to support an inference that Seafirst acted without a proper business purpose and with the improper objective of harming plaintiffs. Plaintiffs also pleaded that, acting with an intent to injure them, Seafirst made funding on the unrelated project contingent on plaintiffs being removed as partners. Their pleadings of the three interference claims meet the minimum requirements necessary to survive a motion to dismiss.

Some response to Judge Edmonds’ dissent is necessary. He would hold that the third, fourth and fifth claims were properly dismissed. The critical step in his reasoning is that liability for intentional interference by one acting with a privilege — which he postulates Seafirst was — may arise if the defendant employed improper means, but not if the theory of liability is that the defendant acted with an improper motive. We do not agree that the pertinent Oregon case law permits that distinction or permits the conclusion that a defendant’s improper motive cannot result in liability for an intentional interference tort arising out of privileged conduct.

In Ramirez v. Selles, 308 Or 609, 612, 784 P2d 433 (1989), the Supreme Court reversed our holding that an intentional interference claim had been properly dismissed under ORCP 21A(8). See 96 Or App 340, 772 P2d 952 (1989). The Supreme Court said:

“The Court of Appeals then continued with this statement:

“ ‘Because plaintiff alleges facts showing that defendants are business competitors of plaintiff, plaintiff must also allege facts showing that they were not privileged to interfere with the relationship between plaintiff and his clients.’

“96 Or App at 343. The court found no allegations by plaintiff that adequately negated defendants’ privilege to advance their own interests by competing with plaintiff. The legal question therefore is whether defendants must allege facts that bring their conduct within the privilege of competitors to interfere with another’s contract or whether a complaint that on its face shows defendants’ status as competitors must also allege facts to negate the privilege.

“The Court of Appeals cited North Pacific Lbr. v. Moore, 275 or 359, 369, 551 P2d 431 (1976), where this court stated that the plaintiff ‘was required to prove that [defendant] purposely caused a third person not to continue a business relation with plaintiff and that [defendant] was not privileged to do so.’ Subsequently, this court held that once the complaint alleges an intentional interference with a contractual relationship for an improper motive or by improper means, a defendant’s privilege is a matter of defense and the absence of privilege is not a part of plaintiff’s affirmative case. ‘No question of privilege arises unless the interference would be wrongful but for the privilege; it becomes an issue only if the acts charged would be tortious on the part of an unprivileged defendant.’ Top Service Body Shop v. Allstate Ins. Co., 283 Or 201, 582 P2d 1365 (1978). A defendant therefore can obtain dismissal of a complaint that does not allege the necessary factual elements of the tort by an unprivileged defendant. But what if facts giving rise to a potential privilege, here the privilege of business competition, appear on the face of the complaint? Top Service Body Shop continued: ‘Even a recognized privilege may be overcome when the means used by defendant are not justified by the reason for recognizing the privilege.’ 283 Or at 210. The defense of a competitor’s privilege depends on remaining ‘within the reason for recognizing the privilege.’ ” (Emphasis supplied.)⁴

Judge Edmonds appears to read the second emphasized passage in the quotation as either leaving open or resolving negatively the question of whether an improper motive, like the improper means mentioned in the passage, can overcome a privilege. For two reasons, we disagree. First, his reading is not consistent with the first of the emphasized passages. That passage says that an allegation of an improper motive or improper means by the plaintiff suffices to state the claim and to make the question of privilege one of defense. It follows, when the two passages are read together and as being consistent with each other, that improper motives and improper means bear the same relationship to the issue of privilege, i.e., either can overcome a privilege.

Second, the later passage in Ramirez is a quotation from Top Service Body Shop v. Allstate Ins. Co., supra. Although the passage itself does not refer to “improper motives,” the five pages of the Top Service Body Shop opinion that follow the passage are devoted to the questions of whether there was evidence that the privileged defendant had acted with an improper motive, and whether the defendant acted only within its privilege. Having answered the first question in the negative and the second affirmatively, the court went on to summarily reject the plaintiffs “alternative theory of tortious interference by improper means,” 283 Or at 215, because that theory had not been submitted to the jury and the plaintiff did not assign error to the trial court’s refusal to instruct the jury on it. We do not think that it is reasonable to read a brief selective passage from Top Service Body Shop as suggesting that only improper means can overcome a privilege, or that improper motives cannot, when the intentional interference issue in the case that the court discussed at length was an improper motive theory and when no question of improper means had been preserved.

Moreover, in Top Service Body Shop and the subsequent intentional interference cases decided by the Supreme Court and this court, the phrases “improper motives” and “improper means” are uniformly used in tandem in the general descriptions of the law. There is no basis in the case law for concluding that the two play a different role, or that the role of only one of them changes, when the context changes from unprivileged to privileged conduct. Especially noteworthy in that regard is Welch v. Bancorp Management Services, 296 Or 208, 675 P2d 172 (1983), modified 296 Or 713, 679 P2d 866 (1984). There, in discussing the privilege of advisors, employees and agents acting on behalf of their principals, which is possibly the most protected of all of the privileges in the law of intentional interference torts, the court made clear that both improper motives and improper means could serve as grounds for the intentional interference claim, see 296 Or at 715-16, and it expressly defined the nature of the improper motive that could overcome that particular privilege (“acts against the best interests of the principal or acts solely for [the agent’s] own benefit”). 296 Or at 216-19. There would have been no occasion to discuss or define the improper motive if it could have had no legal effect on the defense of privilege that was undisputably present in Welch.

Because we read the Supreme Court’s decisions to have decided the question differently from the way Judge Edmonds would, it is not necessary to say a great deal about the rationale that leads him to conclude that improper motives cannot overcome privileges, while improper means can. Judge Edmonds states that “[t]here is no public policy reason to provide a defendant with tort immunity when he acts with improper means.” 127 Or App at 376. However, we are unaware of any public policy that favors improper motives and we do not understand why improper motives, such as an intentional design to injure another, should be less redress-able than improper means.⁵

The other issues in Judge Edmonds’ dissent that call for commént are his alternative arguments that the dismissal of the intentional interference claims should be sustained because the pleadings are conclusory or otherwise technically defective. We do not agree that the trial court’s rulings can be upheld on those grounds. See Hendgen v. Forest Grove Community Hospital, 98 Or App 675, 678, 780 P2d 779 (1989). We also do not agree that this case is analogous to Conklin v. Karban Rock, Inc., 94 Or App 593, 767 P2d 444 (1989). The decisive principle in the part of that opinion on which Judge Edmonds relies was that, as pleaded, the purported improper motive was incidental to and a part of conduct that was itself properly motivated. Here, the claims allege that Seafirst’s motives were to injure plaintiffs and their interests, quite apart from the alleged conduct itself.

Reversed and remanded on third, fourth and fifth claims; otherwise affirmed.

1 According to the complaint, defendant Seattle-First National Bank acted as Seafirst’s agent in connection with the events. The roles of the two defendants were interconnected and our references to “Seafirst” include both.

2 Although the terms of the contract are not fully spelled out in the complaint, the parties agree that the remedies that Seafirst pursued are expressly provided for in the contract.

3 Seafirst also relies on Tolbert v. First National Bank, 312 Or 485, 823 P2d 965 (1991). We do not consider that case to be of decisive significance here.

4 For purposes of this opinion, we accept Judge Edmonds’ understanding that Ramirez holds that a complaint that shows the existence of a privilege on its face, but does not “negate” the privilege, is subject to dismissal. However, the Supreme Court’s opinión is not completely clear on that point. Our concern is not with that aspect of Ramirez, but with whether improper motives, as well as improper means, can suffice to negate the alleged privilege.

5 Judge Edmonds states that we misread his opinion as suggesting that improper motives are irrelevant to any privileged conduct, when his view is that the “materiality of an improper motive will depend on the particular privilege involved.” 127 Or App at 375. However, his opinion offers no persuasive reason why this particular privilege should be more insulated from redress than others or why it or any other privilege should be absolutely protected from “improper motives” but not “improper means” claims. The dissent’s reasoning is difficult to reconcile with Welch v. Bancorp Management Services, supra, where the court effectively held that any proper motivation on the part of an employee or agent acting for a principal is sufficient to defeat liability, however much bad motivation might also be involved. See 296 Or at 218. Even in that highly insulated setting, the court declined to go as far as to hold that the privilege was an absolute defense to a claim based on improper motives. Judge Edmonds offers only subjective value judgments for taking the extra step here that the Oregon Supreme Court has never taken in any intentional interference case, and has strongly indicated is an impermissible step.