Court Opinion

ID: 9587692
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:25:18.087226+00
Date Added: 2024-06-11T12:45:05.366985
License: Public Domain

UNIS, J.,
dissenting.
The majority holds that the “downstream” merger1 of the parent corporation, Pacific Federal Savings Bank, a federally-chartered savings bank (Tenant), into its wholly-owned subsidiary, Pacific First Bank, a federally-chartered savings bank (Bank), triggered the assignment-consent clause (Section 18.2) of the commercial lease agreement, requiring the prior written consent of The New Morgan Park Corporation (Landlord). The majority also holds, paradoxically, that, although the implied duty of good faith and fair dealing requires that a landlord’s “consent shall not be unreasonably withheld,” 319 Or at 353, in this case, Landlord could nevertheless arbitrarily withhold its consent.
I do not agree that the merger was an event as defined in Section 18.2 that required the consent of Landlord. However, even if the merger was an event as defined in Section 18.2 that required the consent of Landlord, as the majority holds, I conclude that Landlord unreasonably withheld its consent. Consequently, I would hold that the lease continues in full force and effect and that Bank is entitled to a declaration that it is the tenant of the property. Accordingly, I would reverse the decision of the Court of Appeals and affirm the judgment of the trial court.
For its thesis that Tenant’s merger into its wholly owned subsidiary (i.e., a “downstream” merger) was an event as defined in Section 18.2 that requires the consent of Landlord, the majority essentially relies on the following. First, Section 18.2, which does not expressly refer to mergers, ‘ ‘does * * * expressly provide that a ‘transfer’ of the lease ‘in any manner,’ ‘whether voluntary or involuntary or by operation of law,’ is an event requiringthe consent of Landlord.” 319 Or at 348. Second, the word “transfer” “covers all forms of passing of rights and obligations.” Id. Third, “[a] downstream merger is one way in which the rights and obligations under a lease pass — that is, transfer — from one corporate *357entity to another.” 319 Or at 349. Fourth, “whichever law relating to the effect of mergers — federal, state, or both — applied here, that law ‘operated’ to give the rights and liabilities of Tenant (one entity) to Bank (another entity), with respect to the lease.” 319 Or at 350.2 Finally, “the merger of Tenant into its wholly-owned subsidiaryt, Bank,] effected a ‘transfer’ of the lease ‘by operation of law’ that, under the express and unambiguous terms of Section 18.2, required the consent of Landlord.” Id.
On the surface, the majority’s reasoning and holding appear to be logical and persuasive. On close scrutiny, however, serious flaws are disclosed. The majority’s conception of the effect of the downstream merger and its resulting holding that the merger was an event as defined in Section 18.2 that required the consent of Landlord are not in accordance with statutory law that governs and controls bank mergers. The majority’s conception of the effect of the downstream merger also is not in harmony with the objectives of banking laws.
12 CFR § 546.3, which deals with the transfer of assets on merger in which the resulting association is a federal savings bank,3 provides:
“On the effective date of a merger in which the resulting association is a Federal association, all assets and property of the merging associations[4] shall immediately, without any further act, become the property of the resulting association to the same extent as they were the property of the merging associations, and the resulting association[5] shall be a continuation of the entity which *358absorbed the merging associations. All rights and obligations of the merging association shall remain unimpaired, and the resulting association shall, on the effective date of merger, succeed to all those rights and obligations.” (Emphasis added.)
Similarly, 12 CFR § 552.13(1) states the effect of a merger on each of the constituent federal savings association’s property rights and interests:
“Upon the effective date of merger or consolidation under this section, if the resulting association is a Federal savings association, all assets and property (real, personal, and mixed, tangible and intangible, choses in action, rights and credits) then owned by each constituent association[6] or which would inure to any of them, shall immediately by operation of law and without any conveyance, transfer, or further action, become the property of the resulting association. The resulting association shall be deemed to be a continuation of the entity of each constituent association, the rights and obligations of which shall succeed to such rights and obligations and the duties and liabilities connected therewith.” (Emphasis added.)7
*359The majority states that statutory law, on the effective date of the merger, operated to give Bank, the resulting association, all rights, interests, and obligations of Tenant, the merging association, with respect to the lease. 319 Or at 350. That statement is correct as far as it goes. Federal law also makes it clear that (1) Bank succeeded to all of Tenant’s rights, interests, and obligations with respect to the lease without further action, (2) Bank succeeded to all of Tenant’s rights, interests, and obligations with respect to the lease without impairment, (3) Bank, on the effective date of the merger, is a continuation of the entity of each constituent association (here, Tenant and Bank), and (4) Bank holds and enjoys all rights, interests, and obligations in the same manner and to the same extent as such rights, interests, and obligations were held or enjoyed by Tenant with respect to the lease.
If Landlord could withhold consent, as the majority holds, then Bank would not receive unimpaired all the rights, interests, and obligations that Tenant had enjoyed at the time of the merger, as required by law. Moreover, requiring Tenant to obtain Landlord’s consent before Bank succeeds to all of Tenant’s rights, interests, and obligations with respect to the lease would be to require “further action,” contrary to federal law. The majority’s holding that the merger was an event as defined in Section 18.2 that required the consent of Landlord is, therefore, incompatible with federal banking law relating to the merger.
There is another reason why the majority’s holding misses the mark. Generally, this court will not enforce a *360contract that conflicts with a statute where the purpose of the statute is to protect the public. Mountain Fir Lbr Co. v. FBI Co., 296 Or 639, 643-44, 679 P2d 296 (1984). Banking laws are intended to “promote the safety” and “well-being” of banks. Schramm v. Bank of California, 143 Or 546, 574, 20 P2d 1093, 23 P2d 327 (1933). In achieving that objective, the paramount consideration is the protection of the interests of depositors and stockholders. 1 Michie on Banks and Banking 15, § 3 (1993). See also Schramm v. Bank of California, supra, 143 Or at 574 (objective of promoting safety of banks cannot be achieved unless safety of depositors is the paramount consideration). Here, the legislative objectives of protecting depositors and shareholders that underlie banking laws relating to merger would be frustrated if Landlord could withhold its consent.
For the foregoing reasons, the majority’s holding that the “downstream” merger was an event as defined in Section 18.2, requiring the consent of Landlord, is wrong.
Even if the merger was an event as defined in Section 18.2 of the lease that required the consent of Landlord, as the majority holds, the majority misapplies the principles enunciated by this court concerning the implied duty of good faith and fair dealing. I agree with the majority that an implied duty of good faith and fair dealing applies to lease agreements as it does to other contracts. 319 Or at 352.1 also agree with the majority that even “if [a] lease states that ‘tenant may assign only with the landlord’s consent’ or ‘tenant may not assign without landlord’s consent,’ there is engrafted on that language by implication the phrase ‘which consent shall not be unreasonably withheld.’ ” 319 Or at 353 (quoting 1 Friedman on Leases § 7.304a (3d ed 1990)). I also agree with the majority that the implied duty of good faith and fair dealing “is to be applied in a manner that will effectuate the reasonable contractual expectations of the parties” and that an objective standard is to be used for determining whether the implied duty of good faith and fair dealing has been met. 319 Or at 353 (internal quotation marks omitted).
Whether Landlord’s consent was unreasonably withheld in this case is determined by the objectively reasonable contractual expectations of the parties. See Tolbert v. First National Bank, 312 Or 485, 494, 823 P2d 965 (1991) (“it is *361only the objectively reasonable expectations of parties that will be examined in determining whether the [implied] obligation of good faith has been met”).
My disagreement with the majority is with its method of determining the objectively reasonable expectations of Tenant and Landlord with respect to Section 18.2 of the lease, the assignment-consent clause, and the majority’s astounding conclusion that, although Section 18.2, by implication, requires that Landlord’s “consent shall not be unreasonably withheld,” 319 Or at 353, the objectively reasonable contractual expectations of the parties in this case are met even if Landlord arbitrarily withheld its consent.
To support its conclusion, the majority explains:
“Section 18.2 of the lease agreement prohibited Tenant from transferring the lease ‘without the prior written consent of Landlord. ’ Under that provision, the parties expressly agreed to a unilateral, unrestricted exercise of discretion by Landlord. By contrast, Section 18.3 in the same article of the lease agreement provides that ‘Landlord will not unreasonably withhold its consent to a sublease to a tenant’ in certain described circumstances. (Emphasis added.) Taken together, those provisions show that the parties freely bargained for, and agreed on, certain conditions related to transfer of the lease and that their bargain did not include other conditions. Considering the terms of all the lease provisions pertaining to transfer, we conclude that Tenant could not have had an objectively reasonable expectation that Landlord’s right to grant or withhold consent to the transfer of the lease, provided in Section 18.2, was constrained in the manner suggested by Bank.
a* * * * *
“In summary, * * * Landlord’s refusal to consent did not contravene the ‘reasonable expectations’ of the parties as to Landlord’s right to withhold that consent, as those expectations were manifested in the express terms of Article 18 of the lease agreement.” 319 Or at 353-55.
In Best v. U.S. National Bank, 303 Or 557, 563-64, 739 P2d 544 (1987), this court described “good faith and fair dealing” as follows:
“This court * * * has not attempted to set forth a comprehensive definition of good faith. But in line with the Restatement [(Second) Contracts § 205 (1970)] and traditional *362principles of contract law, the court has sought through the good faith doctrine to effectuate the reasonable contractual expectations of the parties. See Comini [v. Union Oil Co.], 277 Or [753,] 756-57[, 562 P2d 175 (1977)]; Perkins [v. Standard Oil Co.], 235 Or [7,] 15-17[, 383 P2d 107, 383 P2d 1002 (1963)]. When one party to a contract is given discretion in the performance of some aspect of the contract, the parties ordinarily contemplate that that 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. * * *
“To illustrate, in Comini the defendant oil company had a contractual right to disapprove the plaintiff distributorship’s transfer of the distributorship. This court concluded that the right was intended by the parties to protect the oil company’s legitimate business interests in its distribution system. Comini, 277 Or at 756. Thus, the oil company could, consistent with its obligation to perform in good faith, reject a transfer to someone inexperienced in the oil business and even reject a transfer to an experienced distributor when it had decided to consolidate the distributorship with another distributorship. Id. at 756-57. But the oil company would have performed in bad faith if, for example, it had rejected a transfer in order to retaliate against the distributor for some reason. Similarly, the parties to an employment contract generally contemplate that an employer may use its discretion to fire an at-will employee if the employer is dissatisfied with the employee’s performance or if the employee’s services are no longer required. The parties do not ordinarily contemplate, however, that the employer may fire the employee in order to deprive the employee of benefits to which the employee would otherwise have become entitled if the employment had continued. An employer who does the later breaches its obligation to perform in good faith. State ex rel Roberts v. Public Finance Co., 294 Or 713, 719 n 4, 662 P2d 330 (1983); cf. Swanson v. Van Duyn Choc. Shops, 282 Or 491, 494, 579 P2d 239 (1978).” (Emphasis added.)
Good faith and fair dealing in the performance and enforcement of a contract thus emphasize faithfulness to an agreed common purpose and consistency with the objectively justified expectations of the parties. Restatement (Second) Contracts § 205, comment a at 100 (1981). According to Best, the “reasonable contemplation” standard of good-faith performance focuses the inquiry on (1) the discretion-exercising party’s purpose in exercising that discretion, and (2) whether *363that purpose was within the objectively reasonable expectations of the parties.
Instead of following that method of inquiry, the majority focuses its inquiry entirely on the express terms of Article 18 of the lease agreement. 319 Or at 353-55. As a result, the majority holds that the implied duty of good faith and fair dealing requires that a landlord’s “consent shall not be unreasonably withheld,” and at the same time, paradoxically, also holds that Landlord could arbitrarily withhold its consent.
Applying the method of inquiry stated in Best to the facts of this case, whether the discretion exercised by Landlord here in withholding its consent is consistent with the implied duty of good faith and fair dealing depends on the particular purposes reasonably contemplated by the parties in giving Landlord discretion to withhold its consent.
One of those purposes is to protect Landlord from a significant adverse change in the use of the premises or in the ability of Tenant to pay rent. In the words of the Restatement, “[t]he landlord may have an understandable concern about certain personal qualities of a tenant, particularly [its] reputation for meeting [its] obligations. The preservation of the values that go into the personal selection of the tenant justifies upholding a provision in the lease that curtails the right of the tenant to put anyone else in [its] place by transferring [its] interest[.]” Restatement (Second) Property (Landlord and Tenant) § 15.2, comment a at 100-01 (1977).8 Consistent with its obligation to perform in good faith, Landlord could, therefore, refuse to consent to a financially unreliable tenant or to a tenant whose use of the property would lead to waste of Landlord’s interests in the property. On the other hand, if Landlord arbitrarily refused to consent, it breached its implied obligation to perform in good faith. See Restatement (Second) Property (Landlord and Tenant) § 15.2, comment a at 101 (justification for consent provision *364“does not go to the point of allowing the landlord to arbitrarily and without reason to refuse to allow the tenant to transfer an interest in the leased property”).
A fact-specific analysis is necessary to determine whether, in refusing to consent, Landlord has complied with the implied duly of good faith and fair dealing. Several factors are involved in that analysis, including, but not limited to, (1) the overall financial responsibility of the new tenant, (2) whether the use of the premises would lead to waste of the landlord’s interests in the property, (3) the legality of the proposed use, (4) the nature and extent of alterations needed by the proposed new tenant, (5) the proposed new tenant’s suitability to use the property, and (6) the expected economic feasibility of the proposed new tenant to meet rent obligations based on the intended use.9
Here, the evidence clearly establishes that Bank, the resulting tenant, was, for all practical purposes, the old tenant. The merger here of parent (Tenant) and subsidiary (Bank) did not result in any change in the use of the premises. Bank’s ability to fulfill its financial obligations to Landlord under the lease after the merger was not in any way impaired. Management of Tenant became management of the merged parent-subsidiary, Bank. The name and business of both parent and subsidiary and the use of the premises continued unchanged and uninterrupted. In the hearing before the trial court, Tenant’s and Landlord’s witnesses agreed that there was not a single adverse effect from the merger.
The record in this case, therefore, demonstrates that Landlord arbitrarily refused to consent. That refusal was in bad faith.
For the foregoing reasons, I respectfully dissent.
Fadeley, J., joins in this dissenting opinion.

 Merger law distinguishes a “downstream” merger, i.e., a parent corporation merges into its subsidiary, from an “upstream” merger, i.e., a subsidiary merges into its parent corporation. Henn and Alexander, Laws of Corporation 981 (3d ed 1983).

 Without deciding what law governs the merger, the majority simply refers to numerous provisions of federal and state law. See 319 Or at 350.

 On April 10,1990, Tenant, Bank, and another federal savings bank affiliate from California executed a “Combination Agreement,” in which Tenant and the California affiliate agreed to merge into Bank, with all shares of Tenant’s stock to be converted into stock of Bank, the resulting savings bank. That agreement provided, inter alia, that the obligations of Tenant, Bank, and the federal savings hank affiliate from California, to effect the merger “shall he subject to the satisfaction” of certain conditions, one of which was the approval by stockholders “[pjursuant to 12 C.F.R. § 552.13.” Section 11.2 of Article XI of that agreement further provided that “[tjhis agreement shall be governed by and construed in accordance with federal law.”

 A “merging association” is “a savings association absorbed by merger.” 12 CFR § 546.1(b).

 A “resulting association” is defined as “[a]n association whose corporate *358existence continues after a merger, or the association resulting from a consolidation of two or more associations.” 12 CFR § 552.1305)0).

 A “constituent association” is the “[rlesulting or disappearing association.” 12 CFR § 552.13(b)(4).

 To comply with federal law, the terms of Article IV of the “Combination Agreement” between Tenant, Bank, and a federal savings bank affiliate from California provided:
“4.1 Upon the Effective Time of the Initial Merger, all assets and property (real, personal, and mixed, tangible and intangible, choses in action, rights and credits), including existing branches and approved branches that are not yet operating, then owned by Pacific First and PFB/OR, or which would inure to either of them, shall immediately by operation of law and without any conveyance, transfer, or further action, become the property of the resulting association, PFB/OR. PFB/OR shall be deemed to be a continuation of the entity of both Pacific First and PFB/OR and all of the rights and obligations of Pacific First and PFB/OR shall remain unimpaired; and PFB/OR, upon the Effective Time of the Initial Merger, shall succeed to all those rights and obligations and the duties and liabilities connected therewith.
“4.2 Upon the Effective Time of the Merger, all assets and property (real, personal, and mixed, tangible and intangible, choses in action, rights and credits), including existing branches, approved branches that are not yet operating and extraordinary branching rights, then owned by PFB/CA and PFB/OR, or which would inure to either of them, shall immediately by operation of law and without any conveyance, transfer, or further action, become the property of the resulting association, PFB/OR. PFB/OR shall be deemed to be a continuation of *359the entity of both PFB/CA and PFB/OR and all of the rights and obligations of PFB/OR and PFB/CA shall remain unimpaired; and PFB/OR, upon the Effective Time of the Merger, shall succeed to all those rights and obligations and the duties and liabilities connected therewith.” (Emphasis added.)
ORS 711.040(2), which deals with the effect of mergers of certain banks, similarly provides:
“All property, all debts, all choses in action and every other interest of each merging or converting bank is transferred to and vested in the resulting bank without any further act or deed of any party to the merger or conversion. The title to or any interest in any real estate vested in any merging or converting bank may not revert or be impaired because of the merger or conversion.”
See also ORS 60.497(b) (when a merger of private corporations takes effect, “[t]he title to all real estate and other property owned by each corporation party to the merger is vested in the surviving corporation without reversion or impairment’ ’).

 A modem business lease is predominantly a contract (an exchange of promises) and incidentally a sale of a part of the lessor’s interest in the land. Wright v. Baumann, 239 Or 410, 413, 398 P2d 119 (1965). Because of the duel nature of a lease as a conveyance of a leasehold and a contract, principles of both contract law and property law are applicable to leases.

 Assignment-consent clauses have particular significance where the rent is based on a percentage of the tenant’s sales and an assignment or transfer to a lower volume tenant would reduce the landlord’s income. That is not the case here.