Court Opinion

ID: 2976954
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:00:27.357241+00
Date Added: 2024-06-11T11:44:03.983171
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                                     Pursuant to Sixth Circuit Rule 206
                                              File Name: 08a0322p.06

                        UNITED STATES COURT OF APPEALS
                                         FOR THE SIXTH CIRCUIT
                                           _________________

                                                     X
                               Plaintiff-Appellant, -
 216 JAMAICA AVENUE, LLC,
                                                      -
                                                      -
                                                      -
                                                          No. 07-3967
          v.
                                                      ,
                                                       >
 S & R PLAYHOUSE REALTY CO.,                          -
                              Defendant-Appellee. -
                                                     N
                      Appeal from the United States District Court
                     for the Northern District of Ohio at Cleveland.
                  No. 06-01288—Christopher A. Boyko, District Judge.
                                            Argued: June 12, 2008
                                   Decided and Filed: August 27, 2008
             Before: KEITH and SUTTON, Circuit Judges; ACKERMAN, District Judge.*
                                              _________________
                                                   COUNSEL
ARGUED: David H. Thompson, COOPER & KIRK, PLLC, Washington, D.C., for Appellant.
Gary Lee Walters, THOMPSON HINE, LLP, Cleveland, Ohio, for Appellee. ON BRIEF: David
H. Thompson, Charles J. Cooper, Dean J. Sauer, COOPER & KIRK, PLLC, Washington, D.C., for
Appellant. Gary Lee Walters, Stephen D. Williger, THOMPSON HINE, LLP, Cleveland, Ohio, for
Appellee.
                                              _________________
                                                  OPINION
                                              _________________
       SUTTON, Circuit Judge. At stake in this case is the enforceability of a “gold clause”
contained in a 1912 lease agreement.
                                                          I.
        In 1912, Salmon and Samuel Halle leased a parcel of land in downtown Cleveland from its
owner, Realty Investment Corporation. The term of the lease was 99 years (through March 31,
2011), and the Halle brothers and their successors in interest retained the option of renewing the
lease for another 25, 50 or 99 years (through as late as March 31, 2110). The lease agreement fixed

         *
         The Honorable Harold A. Ackerman, Senior United States District Judge for the District of New Jersey, sitting
by designation.

                                                          1
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                    Page 2

the annual rent at $10,000 for the first two years, then increased the rent in periodic intervals until
it reached $35,000 in the eleventh year, where it remained until the end of the lease. The lease also
contained a “gold clause,” which provided that “[a]ll of said rents shall be paid in gold coin of the
United States of the present standard of weight and fineness.” JA 125. At that time and up through
the Depression, such clauses commonly appeared in long-term leases “as a sort of price-indexing
mechanism to protect a lessor from the effects of inflation.” Trostel v. Am. Life & Cas. Ins. Co., 92
F.3d 736, 738 (8th Cir. 1996) (Trostel I), vacated on other grounds, 519 U.S. 1104 (1997),
reinstated by 133 F.3d 679 (8th Cir. 1998) (Trostel II).
         In the early 1930s, as part of a series of measures designed to implement the Roosevelt
Administration’s overhaul of American monetary policy, Congress withdrew gold from circulation
and banned nearly all private ownership of it. See id. at 738; see also Kenneth W. Dam, From the
Gold Clause Cases to the Gold Commission: A Half Century of American Monetary Law, 50 U. Chi.
L. Rev. 504, 509–514 (1983). And in 1933, Congress passed a Joint Resolution that declared gold
clauses to be “against public policy,” barred their inclusion in any future contract and suspended the
operation of existing gold clauses by allowing all contract obligations to be paid in paper currency
instead. See Joint Resolution of June 5, 1933, § 1, 48 Stat. 112, 113 (originally codified at 31 U.S.C.
§ 463, recodified as amended at 31 U.S.C. § 5118(d)(2)) (providing that no gold clause “shall be
contained in or made with respect to any obligation hereafter incurred” and that “[e]very 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”).
        Four decades later, Congress changed course. It repealed the ban on private ownership of
gold in 1975. And in 1977, it amended the 1933 Joint Resolution, providing that the resolution
“shall not apply to obligations issued on or after” the amendment’s date of enactment. Act of
Oct. 28, 1977, Pub. L. No. 95-147, § 4(c), 91 Stat. 1227, 1229 (originally codified at 31 U.S.C. § 463
note, recodified as amended at 31 U.S.C. § 5118(d)(2)); see also Trostel I, 92 F.3d at 738–39.
Although the amendment made clear that parties could include gold clauses in contracts formed after
1977, Congress’s choice of words (authorizing “obligations issued . . . after” the amendment)
generated a small stream of litigation regarding the amendment’s effect on gold clauses contained
in contracts made prior to 1977 but transferred after that date. See, e.g., Trostel I, 92 F.3d 736;
Grand Ave. Partners, L.P. v. Goodan, 25 F. Supp. 2d 1064 (C.D. Cal. 1996), aff’d, 160 F.3d 580
(9th Cir. 1998); Fay Corp. v. BAT Holdings I, Inc., 646 F. Supp. 946 (W.D. Wash. 1986), aff’d sub
nom. Fay Corp. v. Frederick & Nelson Seattle, Inc., 896 F.2d 1227 (9th Cir. 1990) (per curiam);
Nebel, Inc. v. Mid-City Nat’l Bank of Chicago, 769 N.E.2d 45 (Ill. Ct. App. 2002); Wells Fargo
Bank, N.A. v. Bank of Am. NT & SA, 38 Cal. Rptr. 2d 521 (Cal. Ct. App. 1995).
        In an effort to clarify the matter, Congress passed a law in 1996 saying that owners could
enforce pre-1977 gold clauses only if the parties to a new obligation issued after 1977 “specifically
agree[d] to include a gold clause” in their new agreement. Economic Growth and Regulatory Act
of 1996, Pub. L. No. 104-208, § 2609, 110 Stat. 3009, 3009-475 (Sept. 30, 1996). Just over a year
later, however, Congress repealed the 1996 statute. See Treasury and General Government
Appropriations Act of 1998, Pub. L. No. 105-61, § 641, 111 Stat. 1272, 1318 (Oct. 10, 1997).
        So far as the record is concerned, the gold clause in this contract never attracted anyone’s
attention or at least never generated any disputes during the first 90 years of its existence. Since
1982, when the current lessee, S&R Playhouse Realty, assumed the lease, it has paid annual rent of
$35,000 in American currency. And there is no indication in the record that either the original
lessees, the Halle brothers or the other lessees prior to S&R paid more than $35,000 in the preceding
70 years. Nor is there any indication that the previous owners ever demanded more than $35,000.
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                     Page 3

        That changed in 2006, when the current owner, 216 Jamaica Avenue, purchased the land for
$845,000, then sought to enforce the gold clause, demanding rent equivalent to the value of 35,000
1912 gold dollar coins. The current lessee, S&R, balked at the prospect of paying several multiples
of what it had been paying, prompting 216 Jamaica Avenue to file this breach-of-contract action in
federal court premised on diversity jurisdiction. After the parties filed cross-motions for summary
judgment, the district court ruled for the lessee, refusing to enforce the clause.
                                                  II.
         The parties share considerable common ground about how to resolve this dispute. They
agree that the question at hand is whether the gold clause constitutes an “obligation[]
issued . . . after” October 1977. Act of Oct. 28, 1977, § 4(c), 91 Stat. at 1229. They agree (or at
least do not seriously dispute) that a gold clause may be an “obligation[] issued . . . after” 1977
either because it is part of a contract written and signed after that date or because it is part of an
earlier contract incorporated into a new contract formed after that date. They agree that the previous
owner assigned the underlying lease to the current lessee in 1982. They agree (or at least do not
seriously dispute) that an assignment under state law by itself ordinarily would not suffice to make
the gold clause enforceable. And they agree that an assignment combined with a novation, which
substitutes a new agreement for a prior one and releases the obligations of the prior lessee, would
suffice to satisfy the obligation-issued-after requirement. What the case boils down to, then, is
whether the 1982 transfer of the lessee’s interest to S&R amounted to a novation.
        Under Ohio law, “[a] contract of novation is created where a previous valid obligation is
extinguished by a new valid contract, accomplished by substitution of parties or of the undertaking,
with the consent of all the parties, and based on valid consideration.” Chicago Title Ins. Corp. v.
Magnuson, 487 F.3d 985, 994 (6th Cir. 2007) (internal quotation marks omitted, alteration in
original); see also Lexford Prop. Mgmt., LLC v. Lexford Prop. Mgmt., Inc., 770 N.E.2d 603, 607
(Ohio Ct. App. 2001). The party invoking a novation (here, the current owner, 216 Jamaica) bears
the burden of establishing its existence. See Chicago Title, 487 F.3d at 994.
        Neither party disputes that the 1982 assignment amounted to a valid new contract supported
by adequate consideration. What divides them is whether the owner at that time agreed to release
the prior lessee (Halle Bros. Co.) from its obligations under the lease and to substitute the new lessee
(S&R) in its place. Under Ohio law, the parties’ consent to a novation need not be express, see
McGlothin v. Huffman, 640 N.E.2d 598, 601 (Ohio Ct. App. 1994), but may be implicit “from the
circumstances or a party’s conduct,” id.
        The key piece to the puzzle, it seems to us, is that the underlying 1912 lease agreement lays
out the rules by which the owner agrees in advance to permit the substitution of a new lessee under
the contract for the old lessee—the central benchmark of a novation. See Hunter v. BPS Guard
Servs., Inc., 654 N.E.2d 405, 411 (Ohio Ct. App. 1995); Miller v. C.K.L., Inc., No. 84-CA-26, 1985
WL 9401, at *2 (Ohio Ct. App. July 19, 1985); Restatement (Second) of Contracts § 280 cmt. d
(1979). Under the agreement, the lessee may “assign or transfer” the lease in one of two ways:
either by obtaining the owner’s written consent or by satisfying four conditions: (1) paying all rents
and charges then due and satisfying all other relevant promises under the lease; (2) establishing that
the new lessee has “expressly assume[d] the lessee’s engagements” under the lease; (3) recording
the instrument of assignment in the appropriate recorder’s office; and (4) “plac[ing] in the hands of
the lessor for inspection during a period of ten (10) days a legal and sufficient instrument of
assignment and acceptance.” JA 127. If the existing lessee satisfies one of these two routes for
assigning the lease, the underlying agreement not only allows the assignment, but it also expressly
releases the prior lessee from its obligations. “[A]ll personal liability of the lessees upon this lease
and for the performance of the covenants herein contained,” it says, “shall cease and determine upon
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                    Page 4

an assignment hereof.” Id. A permitted assignment, the contract makes clear, also operates as a
permitted novation.
        No doubt, an assignment under Ohio law by itself normally would not establish that a
novation occurred. A lessee might sublet a property and still remain obligated under the original
lease, acting in effect as a surety or guarantor of the underlying lease obligations. See House of
LaRose Cleveland, Inc. v. Lakeshore Power Boats, Inc., No. 60904, 1992 WL 140074, at *4 (Ohio
Ct. App. June 18, 1992). That is not a novation. But here we have a lease agreement that prohibits
any assignment unless it satisfies certain criteria, and the agreement establishes that an assignment
that meets these criteria not only is permitted but also serves to release the original lessee from its
obligations under the contract. What we have in other words is a lease agreement that prohibits an
assignment unless it is a novation.
        Neither party, unsurprisingly, takes the position that the 1982 transaction did not amount to
a permitted assignment. S&R does not say that its acquisition of this lease interest 26 years ago was
invalid, and it does not say that the prior lessee remains obligated to make the lease payments or to
guarantee them. And 216 Jamaica, like its predecessor lessor, repeatedly has accepted the validity
of the 1982 assignment and declined to contest its validity. Because the 1912 lease authorized the
1982 assignment, the assignment also served to release the prior owner from its obligations under
the contract—or, in the words of the agreement, to terminate “all personal liability” of the assignor
under the contract. JA 127.
         In reaching a contrary conclusion, the district court reasoned that 216 Jamaica had not shown
that the 1982 assignment was valid. There was no evidence that the prior lessor had consented in
writing to the assignment, it observed, and it appeared that only three of the four other prerequisites
for an assignment had been established. Namely, while the 1982 assignment agreement and
surrounding documentation indicated that the lessee was current on payments, that the proposed new
lessee had agreed to accept all of the obligations under the 1912 agreement and that the assignment
was recorded, 216 Jamaica did not show that the pre-1982 lessee provided the assignment instrument
to the lessor for the ten-day inspection period required by the lease. In the absence of evidence by
216 Jamaica that this condition had been satisfied, the court concluded that there could not be a
novation. But these four requirements go not to whether there was a novation but to whether there
was a permitted assignment. And all agree, one way or another, that an assignment
occurred—which is why, ever since 1982, all parties to the agreement have accepted the validity of
the assignment that occurred that year and why, in accordance with the underlying agreement, no
one takes the position that S&R’s predecessor in interest remains on the hook for the lease payments
or for any other obligation under the lease.
       The box in which S&R finds itself is that the only permissible assignment under this lease
was a novation. Either there was a valid assignment (and novation) or there was not, because the
underlying lease offered no middle ground. And given the release of the prior lessee’s obligations,
the company cannot tenably maintain that a novation under this agreement is somehow just an
assignment.
        S&R, moreover, offers no reason why it ought to be able to challenge the validity of the 1982
assignment at this late date, and we can think of none. At this point, surely any interest in enforcing
the 10-day review period has come and gone, and the provision at any rate was designed to benefit
the lessor, nor the lessee (S&R), and neither 216 Jamaica nor its predecessor in interest has ever
sought to enforce it. Cf. Finkbeiner v. Lutz, 337 N.E.2d 655, 658 (Ohio Ct. App. 1975). If, in short,
the 1982 assignment was valid or if any potential objections to it have long been waived by the party
with a right to waive them, that leaves us with a 1912 lease agreement that treats any such
assignment as having the characteristics of a novation—most pertinently that the lessor releases the
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                     Page 5

old lessee in return for accepting the new lessee as the party responsible for meeting the lease
obligations.
        The 1912 agreement also defeats the argument that one cannot establish a novation merely
by showing that the lessor has accepted payments from the new lessee. See Wenner v. Marsh USA,
Inc., No. 01AP-1211, 2002 WL 826021, at *3 (Ohio Ct. App. May 2, 2002) (concluding that no
novation occurred where the only evidence of an obligee’s consent to assignment and release of the
original obligor was its acceptance of payment without objection from the assignee). The key point
here is not that 216 Jamaica’s predecessor in interest accepted lease payments from the new lessee,
S&R, after 1982; it is that the 1912 agreement permitted just one kind of assignment, one that
released the prior lessee from its obligations and one that thus established a novation.
        S&R objects that the 1912 agreement cannot establish the lessor’s consent to the assignment
because that consent was not contemporaneous with the novation. But why that is so is never
explained or supported. There is nothing exceptional about permitting two parties to a contract to
establish ahead of time the ground rules for consenting to the substitution of one party to the contract
for another. And with respect to long-term contracts, that may well be the most efficient and fair
way to do business: What long-term lessee would prefer to give the lessor a long-term veto power
over any requests to be released from the lease? Why not permit the parties to negotiate up front
the rules for permitting the lessee to be released from its obligations under the lease?
         The parties to a contract are free to structure it however they wish, so long as they do not
offend a constitutional, statutory or common-law prohibition. Yet S&R offers no constitutional or
statutory reason why the original parties were prohibited from drawing up the 1912 lease in this way,
and none of the common-law cases upon which it relies turns on this point, much less establishes
such a restrictive principle. In Bahner’s Auto Parts v. Bahner, No. 97-CA-2538, 1998 WL 470494
(Ohio Ct. App. July 23, 1998), the court held that no novation occurred because the parties never
extinguished their obligations under the prior agreement, see id. at *7–8. In Scioto Savings Ass’n
v. Porter, No. 77AP-788, 1978 WL 216705 (Ohio Ct. App. Mar. 2, 1978), the court held that no
novation occurred because the transfer at issue did not release the previously obligated party, see
id. at *1–2. And in Baker v. All States Life Insurance Co., 96 N.E.2d 787 (Ohio Ct. App. 1950), the
court held that no novation occurred because the agent who signed the second agreement lacked
authority to do so, see id. at 793. S&R offers no other case—and we have identified none—in which
an Ohio court has embraced this proposed requirement.
         The authority we have found all goes the other way. The commentary to the provision in the
Restatement (Second) of Contracts dealing with novations observes that “[i]t is not necessary . . .
that all of the parties to the novation manifest their assent simultaneously nor that they all be in the
same place,” so long as “their manifestations of assent . . . have reference to one another.” Id. § 280
cmt. c; see Rockwell Int’l Corp. v. Reg’l Emergency Med. Servs. of Nw. Ohio, 688 F.2d 29, 31 n.1
(6th Cir. 1982) (relying on Restatement (Second) § 280); Pilkington N. Am., Inc. v. Travelers Cas.
&. Sur. Co., 861 N.E.2d 121, 128 (Ohio 2006) (relying on the Restatement (Second)). Williston and
Corbin come to the same conclusion. See 30 R.A. Lord, Williston on Contracts § 76:18 (4th ed.
1990) (noting that contracting parties may provide advance consent to a novation); 13 Joseph M.
Perillo, Corbin on Contracts § 71.3 (rev. ed. 2003) (noting that advance consent is permissible).
        Several cases have addressed the issue in this precise context—alleged novations stemming
from an agreement containing a gold clause and a previously negotiated method for releasing an
original obligee to the contract. All of them permitted the novation. See Trostel I, 92 F.3d at 741
n.8 (concluding that the terms of a pre-1933 lease established the owner’s consent to a post-1977
transfer and sufficed to establish a novation); Fay Corp., 646 F. Supp. at 951–52 (finding prior
consent in the lease sufficient for a novation); Wells Fargo, 38 Cal. Rptr. 2d at 525 (noting that
advance consent in the underlying contract may suffice to authorize a subsequent novation).
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                      Page 6

        The terms of the 1982 assignment agreement answer another objection raised by S&R: How
could the assignment resuscitate the 1912 gold clause, which no party to the lease had been able to
enforce since 1933? In accordance with the express terms of the 1982 assignment agreement, S&R
“assume[d] and agree[d] to perform each and all of the covenants, obligations, and engagements of
the Assignor and lessee under said Lease and all other terms and provisions thereof on the part of
lessee to be observed and performed after the date hereof.” JA 132 (emphasis added). The
agreement also clarifies that the assignment was made “subject . . . to the payment of the rents and
the observance of all and singular the covenants, conditions, terms and agreements in said Lease
contained.” JA 132 (emphasis added). The assignment agreement, in short, says it all: It explicitly
incorporates all of the terms of the 1912 lease, including the gold clause.
        S&R insists that the 1982 assignment could not revive the gold clause because it had lain
“dormant” since 1933. Appellee Br. at 2, 22–24. Whether S&R means to argue that it agreed to
take on only the obligations performed by the most recent assignor or that the 1933 Joint Resolution
operated to erase the gold clause from the lease, it is mistaken either way. As to the first possibility,
S&R expressly took on responsibility for all of the lessee’s obligations specified in the original
lease, gold clause and all. One of the four requirements for an assignment under the 1912 lease
(absent written consent from the lessor) was that the assignee accept all of the lessee’s obligations
under the 1912 agreement, not merely those obligations then being performed by the lessee. Nor
can S&R deny that it was on notice of this requirement, as the entire paragraph from the 1912 lease
agreement setting forth those four requirements was reprinted verbatim in the 1982 assignment.
Other appellate courts faced with this issue have come to the same conclusion. See Trostel II, 133
F.3d at 682; Wells Fargo, 38 Cal. Rptr. 2d at 528–29.
        As to the second possibility, the 1933 federal statute did not purport to, and did not in effect,
delete the gold clause permanently from the lease agreement. The law, sure enough, made existing
clauses unenforceable by providing obligors an alternative route for satisfying gold-denominated
obligations, by declaring them to be against public policy and by forbidding their inclusion in future
contracts. See Joint Resolution of June 5, 1933, § 1, 48 Stat. at 113. But it stopped short of voiding
or invalidating existing gold clauses, and it did nothing to prevent parties from reviving those
clauses after the 1977 amendment. As the Eighth Circuit correctly explained, “[t]he 1933 act did
not magically erase the gold clause from the [pre-1933] lease.” Trostel I, 92 F.3d at 742.
         Fine, S&R responds: But even if the 1933 Joint Resolution did not remove the gold clause
from the 1912 agreement, the several-decades bar on enforcing the clause precluded the parties to
the 1982 assignment agreement from having any meeting of the minds over this obligation. No one
contemplated the possibility, it explains, that a lease establishing a flat $35,000 in annual rent
secretly obligated S&R to pay many times that figure, permitting the current owner to spin this paper
obligation into gold at S&R’s unforeseen and unintended expense. But to many a law student’s
confusion, the meeting-of-the-minds formulation often requires far less than it suggests. As in most
jurisdictions, Ohio law does not require contracting parties to share a subjective meeting of the
minds to establish a valid contract; otherwise, no matter how clearly the parties wrote their contract,
one party could escape its requirements simply by contending that it did not understand them at the
time. What it does require is that the terms of the agreement establish an objective meeting of the
minds, which is to say that the contract was clear and unambiguous. See Nilavar v. Osborn, 711
N.E.2d 726, 733 (Ohio Ct. App. 1998); cf. Kreller Group, Inc. v. WFS Fin., Inc., 798 N.E.2d 1179,
1186 (Ohio Ct. App. 2003). Here, the parties entered into an assignment agreement under which
S&R expressly took on all of the original lease obligations for the next three (and, at its option, up
to thirteen) decades, and the written instrument not only refers to and incorporates the underlying
lease but quotes it at length. That clarity precludes S&R from establishing that the parties failed to
have an objective meeting of the minds. Were the 1982 assignment agreement unclear, that would
be another matter, one that might permit them to introduce extrinsic evidence of their intent in
signing the contract. But there is nothing unclear about the relevant terms of this contract.
No. 07-3967           216 Jamaica Avenue v. S & R Playhouse                                    Page 7

        As a final matter, it is worth addressing the parties’ respective efforts to cast themselves as
victims in this nearly century-long saga. As S&R sees things, it took on a lease obligation of
$35,000 a year and now is being asked to pay several multiples of that. As 216 Jamaica sees things,
S&R had every reason to know this risk. The 1977 legislation permitted gold clauses to be enforced;
the 1912 agreement contained a gold clause; the 1982 assignment required S&R to accept each of
these obligations; and S&R chose not to condition acceptance of the assignment on removing the
gold clause. And, what is more, S&R wishes to pay $35,000 per year for space that is worth
multiples of that and wants that option not just through 2011 but presumably for 99 more
years—through 2110. The record does not say how much comparable space rents for in Cleveland,
but one can certainly assume that it is more valuable than it was in 1912 without having to accept
the truth of 216 Jamaica’s assertion that it is worth more than 75 times what S&R currently pays for
it. Reply Br. at 3–4 & n.2. As a matter of sheer economics, it is hard to say which party has the
sharper elbows.
        Either way, in light of this ruling, the parties now know one of the effects of the 1982
assignment. By March 31, 2011, S&R will decide whether it wishes to exercise its option to renew
the lease. In the interim, the case needs to be remanded to the district court. Because the court
found that the gold clause was not enforceable under the 1933 statute, it did not reach the question
of the gold clause’s effect on the rent owed under the lease. Because we conclude that the clause
is enforceable, we thus remand the case to the district court to interpret the clause, to determine the
obligation it imposes on S&R and to address any other defenses the district court has not yet had an
opportunity to address in the first instance, including S&R’s estoppel-by-deed and waiver defenses.
                                                 III.
       For these reasons, we reverse and remand for further proceedings.