Source: https://law.justia.com/cases/california/court-of-appeal/4th/32/424.html
Timestamp: 2019-04-21 06:43:42+00:00

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WELLS FARGO BANK, N.A., as Trustee, etc., et al., Plaintiffs and Appellants, v. BANK OF AMERICA NT&SA, Defendant and Respondent.
Tilles, Webb, Kulla & Grant, Stephen P. Webb, David L. Ainbender, Greines, Martin, Stein & Richland, Kent L. Richland and Feris M. Greenberger for Plaintiffs and Appellants.
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.
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."
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.
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, reconsideration 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 [32 Cal. App. 4th 431] 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.
[1a] 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 United States Code 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.
[1b] In the present case, the 1981 transaction transferring the lease to the bank was a novation. The bank's purchase of the lease from Triangle completely extinguished Triangle's obligations to plaintiffs, leaving plaintiffs to look only to the bank for performance of the lease. Specifically, Triangle conveyed to the bank in 1981 all of its "right, title and interest in and to the Ground Lease," and under the terms of the 1981 assignment of the ground lease the bank agreed to be bound by and perform "all of the agreements, covenants and obligations" under the lease. The bank deemed "the leasehold estate of the lessee [as] sold and assigned to [it]." As to the requisite intent to extinguish the prior obligation of Triangle, the 1929 lease itself expressly provided that the lessee "shall be relieved of all liability accruing under this lease from and after the date of any assignment ...."
It is undisputed that Senator Helms intended the 1977 amendment to permit, in the words of the senator, "gold clause contracts entered into after [32 Cal. App. 4th 435] the enactment of the bill." However, contrary to the view taken by the bank, the reference by Senator Helms to the intent to "stand neutral with regard to the enforceability of gold clause obligations issued in the past" does not defeat plaintiffs' application of the law of novation. The 1977 amendment stands neutral in that it does not specifically abrogate the 1933 joint resolution, as a previously introduced but unpassed version of Senator Helms's bill would have done. However, the 1977 amendment is also neutral in that pre-1933 contracts with gold clauses remain subject to the traditional laws of contract, as judicially interpreted, which include the concept of novation. Accordingly, notwithstanding Senator Helms's remarks, subsequent actions of the parties to a contract, including successors in interest, can amount to a novation and thus a new obligation within the meaning of the 1977 amendment.
Any other interpretation would fly in the face of the California law of novation which, as previously discussed, deems a novation a new obligation which completely extinguishes the original obligation. The bank mistakenly interprets plaintiffs' theory as an effort to "revive" a pre-October 27, 1977, gold clause. The term "revival" is appealing in characterizing the chronology of events but is misleading and erroneous in describing a novation, which extinguishes the original obligation and creates a new one.
If Congress (or Senator Helms) had intended to restrict the 1977 amendment only to an original contract involving the original parties and not to a [32 Cal. App. 4th 436] novation amounting to a new obligation with, as here, successor parties, such narrowing language could have been used in the amendment. As worded, the 1977 amendment is applicable to the general contract law of novation, and there is no indication that Congress intended otherwise.
According to the bank, apart from the Fay case, every other court which has faced this issue has refused to enforce or to revive pre-1977 gold clauses. However, the salient fact is that no case but Fay has involved a gold clause in the context of a novation analysis. The bank's reliance on the holding in other cases is thus misplaced.
For example, Gold Bondholders etc. v. Atchison, Topeka, supra, 649 P.2d 947, involved bonds issued in the 19th Century where latter-day purchasers of the bonds demanded payment of interest owing in gold coin. The Alaska Supreme Court rejected their claim, holding that although the bonds were delivered in 1980, no new contractual obligation was issued, i.e., entered into, at that time. (Id. at p. 950.) It is difficult to accept the bank's argument that the case dealt with novation when the opinion never once mentioned the word.
Equally inapplicable is the bank's reliance on REC Centers, Inc. v. Shaughnessy (Fla.Dist.Ct.App. 1981) 407 So. 2d 971, where the issue before the court was whether particular language in a 1967 lease constituted a gold clause, and the court noted without discussing novation that the "obligation here was created prior to October 28, 1977." (Id. at p. 972, fn. 1.) Rudolph v. Steinhardt, supra, 721 F.2d 1324, also has no application to a novation. In Rudolph, the court rejected the argument that a gold clause in a 1970 lease was enforceable with regard to rent due after October 27, 1977, because each payment due under the lease was purportedly a separate obligation "which is 'issued' when the payment is due." (Id. at p. 1330.) In rejecting this argument, the court held instead that the phrase "obligation issued on or after" in the 1977 amendment referred to the point when the lease obligation was entered into and not to each payment as it became due. (Id. at pp. 1330-1331.) As the court in Fay Corp. v. BAT Holdings I, Inc., supra, 646 F.Supp. at page 949, footnote 6, observed, there was no transfer at issue in the 1970 lease in the Rudolph case. Nor is Henderson v. Mann Theatres Corp. (1976) 65 Cal. App. 3d 397 [135 Cal. Rptr. 266] applicable; it addressed whether the gold clause ban survived certain 1973 federal legislation permitting individuals to deal in gold as a commodity and did not involve novation.
The Fay case, on the other hand, did involve the question of novation, and we similarly conclude that a novation is a new obligation within the meaning of the 1977 amendment. The suggestion by the bank in the present case that the litigants in Fay erroneously stipulated that the lease agreement fit into the 1977 amendment's definition of an obligation issued after its effective date is unpersuasive. In fact, the Fay parties stipulated only that the phrase "obligations issued after October 27, 1977" in the statute was "intended to mean an obligation (including contractual obligations) 'entered into' after that date." (Fay Corp. v. BAT Holdings I, Inc., supra, 646 F.Supp. at p. 949.) Indeed, the bank agrees with the appropriateness of interpreting "issued" as meaning "entered into," as did the parties in Fay. (See also Rudolph v. Steinhardt, supra, 721 F.2d at p. 1330 ["issued" was intended to mean "entered into"].) In sum, we reach the same conclusion as did Fay, the only case to address a gold clause in the context of novation.
 A party asserting the defense of estoppel must establish the following elements: (1) the party estopped must know the facts; (2) the party [32 Cal. App. 4th 438] estopped must engage in conduct intended to be acted upon by the party asserting estoppel; (3) the party asserting estoppel must be ignorant of the true state of facts; and (4) injury must result from reliance on the other's conduct. (Hair v. State of California (1991) 2 Cal. App. 4th 321, 328 [2 Cal. Rptr. 2d 871].) "It is the burden of the party asserting estoppel to prove all of its requisite elements, and the doctrine is strictly applied and must be substantiated in every particular." (El Camino Community College Dist. v. Superior Court (1985) 173 Cal. App. 3d 606, 614 [219 Cal. Rptr. 236].)  In the present case, uncontradicted evidence established that (1) plaintiffs were ignorant of the bank's purchase of the lease until after the transaction had been completed; (2) despite plaintiffs' delay in filing litigation, there is no indication plaintiffs intended such delay would result in a transaction of the sort indulged in by the bank; (3) the bank was fully aware of the risk that the gold clause might be enforced, as indicated by the opinion of counsel it had solicited; and (4) the bank was not injured but rather obtained a financial windfall.
Delay alone cannot be the basis for a finding of estoppel. (See City and County of San Francisco v. Pacello (1978) 85 Cal. App. 3d 637, 645 [149 Cal. Rptr. 705]; Donovan v. City of Santa Monica (1948) 88 Cal. App. 2d 386, 396 [199 P.2d 51].) Accordingly, although plaintiffs delayed in initiating [32 Cal. App. 4th 439] their gold clause claim, the bank has failed to establish any of the requisite elements of the defense of estoppel.
In the present case, the complaint alleges two causes of action concerning money damages. One, breach of contract, is clearly an action at law for damages; the other, seeking declaratory relief, is essentially also a dispute regarding money.
The judgment is reversed, and the superior court is directed to enter judgment in plaintiffs' favor. Plaintiffs are entitled to costs on appeal.
Concurring.-The facts underlying the present proceeding appear to be virtually sui generis. That is, still operative pre-1933 gold-clause leases are apparently most rare and one that expressly grants preapproval for the complete and automatic release of the lessee upon assignment, essentially unique.
I, therefore, concur in the judgment but express no opinion regarding what determination would have been appropriate even in this peculiar instance had the lessee-assignor and the assignee not been fully aware of, and consequently knowingly assumed the risk of, the potential consequences of their transaction prior to its consummation.
A petition for a rehearing was denied March 16, 1995, and respondent's petition for review by the Supreme Court was denied June 6, 1995. Lucas, C. J., Mosk, J., Baxter, J., and George, J., did not participate therein.
FN 1. As stated in chapter 48 of 48 Statutes at Large, supra, at page 113: "[E]very provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold ... is declared to be against public policy .... Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts."
In Norman v. B. & O. R. Co. (1935) 294 U.S. 240 [79 L. Ed. 885, 55 S. Ct. 407, 95 A.L.R. 1352], the Supreme Court held that Congress could, as a proper exercise of its power over the monetary system of the nation, alter the obligations of gold clauses in private contracts, and that the constitutional power of Congress prevails over private contracts which attempt to require payment in gold or its equivalent value in dollars. (Id. at pp. 307-311, 316 [79 L.Ed. at pp. 901-906].) Congress thus validly rendered gold clauses unenforceable.
FN 2. At the gold clause rate, the monthly rent due under the lease could have ranged, for example, from a low of $31,772.70 (based on the Mar. 1, 1993, price of gold) to a high of $47,107.58 (based on the Dec. 1, 1987, price of gold).
FN 5. The bank raises the specter that as to bonds which contain gold clauses, bondholders would only need to sell their bonds to revive the gold clauses for the buyer. However, we note that a bond's "date of issue" for determining when an "obligation issued" (31 U.S.C. § 5118(d)(2)) and applying a gold clause has been deemed only the date of the first purchase of the bond, not each purchase or delivery of the bond after its first purchase. (Gold Bondholders etc. v. Atchison, Topeka (Alaska 1982) 649 P.2d 947, 950.) Such an interpretation focuses on the legal structure of bonds and not novation.
FN 6. It is unnecessary to determine the extent to which the expenses cited by the bank may be offset by the rent reduction the bank obtained by purchasing the lease and paying rent of only $2,000 per month rather than at the market rate it previously had been paying Triangle, aside from the bank's profits from a parking garage concession and the market rate rent received from a restaurant subtenant. However, plaintiffs allege if the bank has not yet broken even regarding its expenses attendant to the 1981 transaction, it will do so soon and have a substantial net gain during the approximately 40 years remaining on the lease.

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