Sterling Savings Bank v. Emerald Development Co.

DUNCAN, J.,

dissenting.

The trial court found that Northwest acted on behalf of Hanson and the Oak Brook defendants. That finding is supported by evidence. As detailed in the majority’s opinion, the trial court found that Hanson controlled Northwest; indeed, it found that Northwest was “effectively Steven Hanson’s alter ego.” 266 Or App at 337-38. The trial court also determined that,

“as co-guarantor and co-defendant, [Hanson] directly or through his control over [Northwest], paid money to Sterling Savings Bank which in turn then assigned its rights under the Note, the Guaranties of Mr. Hanson’s co-guarantors *343 and co-defendants, and any resulting Judgment, to Hanson and/or [Northwest], [Northwest] is Steve Hanson’s alter ego. The Note and any Judgment resulting or based thereupon have thus been satisfied, released, or discharged.”

Thus, the trial court concluded that, when purchasing the assignment of Sterling’s rights, Northwest was acting as a coguarantor or, at least, on the behalf of a coguarantor. That conclusion is supported by the record as well. As the majority describes, Sterling entered into a settlement agreement with the Oak Brook defendants, in which Sterling released the Oak Brook defendants from liability on the note, and the Oak Brook defendants agreed to execute a judgment by confession in the amount of $800,000, which Sterling would not submit except under certain prescribed conditions. 266 Or App at 318-19. On the same day, Sterling executed an agreement with Northwest, in which Sterling agreed to sell, convey, and assign the 2008 promissory note, a deed of trust, and the commercial guaranties to Northwest for $800,000; and, upon payment of that amount, Sterling would deliver to Northwest the Oak Brook defendants’ judgment by confession. 266 Or App at 319. Based on that and other evidence, the trial court treated Northwest as a coguarantor, or at least an entity acting on behalf of a coguarantor.

As the majority notes, there are two competing approaches to determining a coguarantor’s rights against his or her coguarantors when he or she has purchased a note and obtained an assignment of the underlying obligations and guaranties. 266 Or App at 326-28. The majority employs the first, under which a coguarantor who purchases a note can assert a cause of action against his or her coguarantors to collect on the note, although the collection may be limited by equitable principles. The trial court employed the second, under which purchase of a note by a coguarantor extinguishes the note, and the purchaser can only recover from his or her coguarantors through a cause of action for contribution.

In doing so, the trial court reasoned that, when “the two antagonistic rights of creditor and debtor” are merged in one and the same person, the debt is extinguished. The court relied on Jackman v. Jones et al., 198 Or 564 , 258 P2d 133 (1953). In Jackman, the Supreme Court cited, among *344 other cases, Lillie v. Dennert, 232 F 104, 109 (6th Cir 1916). In Lillie, the original plaintiff, Horrie, obtained a judgment against the defendants and joint tortfeasors Daggett and Dennert. 232 F at 105. At that time, joint tortfeasors did not have a right of contribution against one another. Id. at 108. After Horrie notified Daggett that he was about to obtain an execution on the judgment, Daggett offered to pay Horrie one-half of the judgment if Horrie would agree to collect the other half from Dennert. Id. at 107. Horrie declined the offer, but stated that, in order to assist Daggett, he would be willing to assign the entire judgment to a third party. At that point, Daggett prevailed upon Lillie, a friend and business associate, to purchase and take an assignment of the judgment from Horrie. Daggett and Lillie went to Daggett’s bank and arranged for a loan to Lillie for the full amount of the judgment. Daggett also deposited a certificate of deposit for one-half of the amount as security for the loan. When the loan matured, Daggett paid the interest. Id.

Lillie applied for an execution and garnishment against Dennert, which the court granted. Id. at 105. In response, Dennert filed a petition alleging that, although Lillie purported to have paid Horrie, the payment had actually been made by Daggett, and, thus, the judgment should have been extinguished. Lillie filed an answer denying Dennert’s allegations. The trial court entered an order that the judgment was fully paid and satisfied as of the date of the assignment to Lillie. The court also recalled the execution and dismissed the garnishment proceedings. Id.

Lillie appealed, and the Sixth Circuit affirmed. The Sixth Circuit held that evidence in the record supported the trial court’s conclusion that the judgment was discharged when Lillie purchased and took an assignment of it from Horrie:

“It is not disputed that if the judgment was in fact paid by Daggett, one of the joint tort feasors and judgment debtors, this operated as a satisfaction and discharge of the judgment. ***

“* * * [U]nder the undisputed evidence, there was ample room for an inference of fact that while the entire loan in the bank was ostensibly made in Lillie’s name, and the note, as *345 between himself and the bank, constituted his individual debt, yet, as between Lillie and Daggett, the entire transaction amounted, in substance and in effect, to the borrowing of the money by Lillie as the agent for Daggett, as an undisclosed principal, the entire note constituting, as between them, Daggett’s obligation rather than Lillie’s; that the judgment having been purchased with the proceeds of this note was, in substance and effect, bought by Daggett, acting by indirection, through the instrumentality of Lillie; in short, that Lillie acted in the entire transaction merely as a man of straw for and in behalf of Daggett, as the real actor.”

Id. at 108. Thus, the Sixth Circuit concluded that (1) if Daggett had paid the judgment directly, the judgment would have been satisfied and discharged, (2) Lillie was merely a “man of straw for and in behalf of Daggett, as the real actor [,]” and therefore (3) when Lillie purchased and took an assignment of the judgment, it was satisfied and discharged as if Daggett himself had purchased and taken an assignment of it. Id. at 109. As the Jackman court put it, “in substance and effect the judgment was bought by Daggett.” 198 Or at 571 .

I believe that the trial court found that what happened in this case is akin to what happened in Lillie. Like the putative purchaser in Lillie, Northwest was a straw man. Northwest, controlled by Hanson and acting for his benefit, seeks to collect the face value on the note, which Hanson, if he had acted on his own, could not do because he would be limited to collecting pro rata contributive shares from his coguarantors. Through Northwest, Hanson is using his purchase of the note as a sword against the other coguarantors, which the law disfavors, and which the merger doctrine protects against. I would affirm the trial court’s use of that doctrine.

Haselton, C. J., and Wollheim, J., join in this dissent.