Schiffer v. United Grocers, Inc. , 329 Or. 86 ( 1999 )

KULONGOSKt, J.

We are asked in this case to reconsider the rule of law in Oregon that a release of one joint and several obligor on a promissory note releases the other joint and several obligors. This court recognized the “release of one releases all” rule in the context of a joint and several obligation as a matter of common law in Crawford v. Roberts, 8 Or 324, 325-26 (1880).¹ For the reasons explained below, we now agree with the overwhelming number of jurisdictions that have abrogated, either by judicial decision or by statute, the “release of one releases all” rule in contract.² We hold today that the release of one joint and several contract obligor does not release automatically the other joint and several obligors; instead, the release must be given effect according to the intentions of the parties to that release. The rule that we announce today is the same rule applied by this court to releases in tort. See, e.g., Cranford v. McNiece, 252 Or 446, 452-53, 450 P2d 529 (1969) (stating rule), citing Hicklin v. Anders, 201 Or 128, 135-36, 253 P2d 897 (1954). The decision of the Court of Appeals is reversed. The judgment of the circuit court is reversed. The case is remanded to the circuit court for further proceedings.

The facts of the case are uncontroverted, and we take them from the opinion of the Court of Appeals:

“In 1989, [Dwaine] Schiffer and John Gast located property in White City on which to build a grocery store. The property was owned by John and R. J. Batzer. Schiffer, Gast, and the Batzers then formed a partnership, White City Development (“White City’), for the purpose of constructing and operating a grocery store on the property. In order to finance the construction of the store, Schiffer and Gast approached defendant [United Grocers, Inc.] with the following proposal: Defendant would lease the property from White City and, in turn, sublease the property to Schiffer and Gast. The financial strength of defendant, as prime lessee of the property, would enable Schiffer and Gast to secure financing for the construction of the grocery store.

“Under the lease between White City and defendant, White City agreed to pay defendant $68,802, which represented the cost of lease guarantee’ insurance that defendant was to purchase, by which defendant would be indemnified if Schiffer and Gast defaulted on the sublease. Specifically:

“ ‘45. LESSOR’S INDEBTEDNESS - LEASE INSURANCE: Lessor, [White City] hereby acknowledges an indebtedness to Lessee [defendant] in the amount of $68,802 (together with interest thereon as evidenced by the promissory note attached hereto and executed contemporaneously with this lease) representing Lessee’s premium for lease guarantee insuring Lessee of the Sublessee’s [Schiffer’s and Gast’s] performance of all obligations set forth under the Lessee’s sublease. If such sum is not paid according to its terms, Lessee has the right to assert said sum as a right of set off against any sums due hereunder. If the lease is terminated prior to grant of possession, then this note shall be null and void.’

“On March 17, 1989, defendant and the partners of White City (Schiffer, Gast, and the Batzers) executed the prime lease. On the same day, White City’s partners signed and executed a promissory note in favor of defendant in the amount of $68,802. That note provided, in part:

“ We, jointly and severally, promise to pay to the order of [defendant], at Portland, Oregon, the sum of SIXTY-EIGHT THOUSAND EIGHT HUNDRED TWO AND NO/100 DOLLARS due and payable at such time as [defendant] under a Lease Agreement dated March 17, 1989 is granted possession of the subject property pursuant to the terms of said Lease Agreement.’

“Due to an oversight, defendant failed to collect, and White City failed to remit, the $68,802 due under the lease and promissory note; consequently, defendant never purchased the lease guarantee insurance.

“Schiffer and Gast operated the grocery store until the business failed in July 1993. Following the failure of the store, Schiffer and Gast entered into a ‘Surrender Agreement’ with defendant. That agreement addressed Schiffer’s and Gast’s defaults under the sublease and various equipment and inventory loans on open account with defendant. The agreement further provided:

“ ‘United agrees to release * * * Gast from all claims, demands, and causes of action arising out of the parties’ prior course of dealings and under all open accounts, loans, security agreements, and promissory notes with United.’

“In July 1993, following the execution of the surrender agreement, defendant notified White City that the $68,802 lease insurance premium had never been paid and requested full payment. In September 1993, defendant again requested payment on the promissory note and stated that it intended to offset $68,802 against the balance of the rent it owed under the prime lease, as contemplated by paragraph 45 of the lease set out above. After receiving no response, defendant notified White City in May 1994 that it would begin to withhold rent under the prime lease.

“In June 1994, plaintiffs [Schiffer and White City] brought this action seeking, inter alia, a declaration that: (1) their joint and several obligations under the March 17, 1989 promissory note were extinguished by defendant’s release of their co-obligor, Gast; and (2) consequently, defendant was not entitled to offset amounts allegedly due and owing on the note amounts it owed White City on the prime lease.”

Schiffer v. United Grocers, Inc., 143 Or App 276, 278-80, 922 P2d 703 (1996) (footnote omitted).

Plaintiffs moved for summary judgment on the theory that defendant’s release of Gast from his obligation to defendant had, as a matter of law, concomitantly discharged Schiffer’s and the Batzers’ joint and several obligations to defendant. The circuit court, relying on Crawford, granted plaintiffs’ motion. Defendant appealed. The Court of Appeals affirmed, also relying on Crawford. Schiffer, 143 Or App at 278. We allowed review to determine the continuing validity of the rule that the release of one joint and several obligor on a promissory note releases automatically the other joint and several obligors.

The promissory note that underlies the present action could be deemed to be a negotiable instrument. Before proceeding further, therefore, we must answer the threshold question whether the common law of contract or the applicable version of Article 3 of the Uniform Commercial Code (UCC), former ORS chapter 73,³ controls the outcome of this case. As explained below, we conclude that the common law of contract controls this case because the promissory note in question is not a negotiable instrument under the version of the UCC in effect when the note was made.

To be a negotiable instrument subject to former ORS chapter 73, a note calling for the payment of money, such as the one under consideration here, had to be payable either on demand or at a definite time. Former ORS 73.1040(1).⁴ Former ORS 73.1080 provided the applicable definition of “on demand”:

“Instruments payable on demand include those payable at sight or on presentation and those in which no time for payment is stated.”

We conclude that the promissory note here is not payable on demand. The note, on its face, is not payable at sight or on presentation. The note designates the time for payment as “due and payable at such time as [defendant] under a Lease Agreement dated March 17,1989 is granted possession of the subject property.”

Former ORS 73.1090 defined “payable at a definite time”:

“(1) An instrument is payable at a definite time if by its terms it is payable:

“(a) On or before a stated date or at a fixed period after a stated date; or

“(b) At a fixed period after sight; or

“(c) At a definite time subject to any acceleration; or

“(d) At a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.

“(2) An instrument which by its terms is otherwise payable only upon an act or event uncertain as to time of occurrence is not payable at a definite time even though the act or event has occurred.”

None of the conditions in former ORS 73.1090(l)(a) to (d) applied to the promissory note. Therefore, the note is not “payable at a definite time.” Moreover, under former ORS 73.1090(2), the note did not become “payable at a definite time” after the grant of possession of the property. Because the promissory note is neither payable on demand nor payable at a definite time, it is not a negotiable instrument under former ORS 73.1040(1). Because former ORS chapter 73 does not apply, the common law of contract controls the outcome of this case.

The issue before us is the continuing validity of the common-law rule that the release of one joint and several obligor on a promissory note releases automatically the other joint and several obligors. We approach that issue by first discussing the common-law origins of the “release of one releases all” rule and the theoretical bases used historically to justify that rule. We then discuss the Crawford decision, in which this court recognized the “release of one releases all” rule in contract in the context of a joint and several obligation, and one other Oregon case, State v. Cummings, 205 Or 500, 288 P2d 1036 (1955), in which this court, in dicta, spoke with approval of the “release of one releases all” rule. We then briefly examine the theories advanced in support of and in opposition to the “release of one releases all” rule in contract. Finally, we state our own analysis that we believe dictates a different rule as to the effect of a release in contract given to a joint and several co-obligor. See Heino v. Harper, 306 Or 347, 351, 759 P2d 253 (1988) (discussing analytical factors).

The rule that the release of one co-obligor releases all co-obligors, at least for some specific types of obligations, has been part of the common law since the early 17th century. In Cocke v. Jennor, Hob 66, 80 Eng Rep 214, 214-15 (KB 1614), the court ruled that a release of one joint tortfeasor in an action for trespass released the other joint tortfeasors, reasoning that a release “is as good a satisfaction in law, as a satisfaction in deed,” and that a plaintiff could have only one satisfaction, whether on a debt or in an action for trespass. Under this approach, a release operates as a satisfaction at law of a debt or obligation, as if the debt or obligation had in fact been paid in full. Consequently, a release of one contract co-obligor forecloses all other options for recovery, including maintaining actions against the remaining co-obligors. As the Montana Supreme Court observed eight years before this court’s decision in Crawford, “this seems to be the language of the books since before the time of Lord Coke.” Collier v. Field, 1 Mont 612, 619 (1872).

Commentators have pointed out that, on its face, that justification for the “release of one releases all” rule is unsound:

“For when a claim is liquidated, a release may be given for less than the full amount, and there is consequently less than complete satisfaction. If the claim is unliquidated, the settlement is most often below the claimant’s evaluation, and it cannot be known whether there has been complete satisfaction until there has been a determination by court or jury of its value. Consequently, it would appear that if amounts paid in settlement to one obligor are credited upon the claim and suit permitted against one or more co-obligors only for the balance, there is no possibility of more than one satisfaction.”

Harold C. Havighurst, The Effect of a Settlement With One Co-Obligor Upon the Obligations of the Others, 45 Cornell L Q 1, 4 (1959) (hereinafter Havighurst).

In addition to the “one satisfaction” justification for the rule that a “release of one releases all,” three other theories in support of the rule historically have been advanced: (1) the construction of the instrument against the releasor; (2) the difficulties presented by the right of contribution; and (3) the unitary character of a joint obligation. Havighurst at 3. We address those three theories each in turn.

Lord Coke noted that a release by deed given to one of two joint trespassers released the other as well. Lord Coke justified this rule on the theory that the deed of the injured party “shall be taken most strongly against himself,” i.e., that a deed is to be construed against the grantor. Ibid., citing Lord Coke, Commentary upon Littleton, § 376. Whether this theory was accepted widely in Lord Coke’s time as sufficient theoretical support for the “release of one releases all” rule is not clear. However, as Havighurst notes:

“[A]lthough a few modern cases refer to the passage [discussed above], there is little disposition to accept this as the rationale. The release is no longer looked upon as a deed but as an informal contract, and there is no principle of construction applicable to contracts which requires an interpretation operating most strongly against the releasor. There is, to be sure, a principle of contract law under which an instrument is construed against the party responsible for its drafting, but since releases are usually drafted by releasees, if this principle is applied, it would more often than not require the opposite result. Coke’s reason therefore is of no service today.”

Havighurst at 3-4 (footnotes omitted). We agree.

Although adherence to the “release of one releases all” rule certainly avoids any difficulties presented by the nonreleased obligor’s right of contribution, at least one commentator has noted that the “release of one releases all” rule “has been applied with perhaps the greatest rigor * * * in jurisdictions where there is no right of contribution.” Havighurst at 6. Given that context, any difficulties presented by the right of contribution must be regarded as an insufficient theoretical justification for the “release of one releases all” rule.

Historically, the “release of one releases all” rule was not applied uniformly to all types of obligations in all jurisdictions. Some jurisdictions applied the rule only to joint obligations,⁵ and some applied the rule to joint and several obligations as well as to joint obligations.⁶

At common law, a joint obbgation was treated as a single obbgation of all the obligors together and the individual obbgation of no one of those co-obligors. Samuel Wilhston and Walter H. E. Yaeger, 2 A Treatise on the Law of Contracts, § 327 (3d ed 1959 and Supp 1988). Because there was only one obbgation, there could be only one action for breach of that obbgation: an action in which ab the joint obligors were joined as defendants. Id. In contrast, joint and several obligations at common law involved a joint obbgation of all the co-obligors together and, in addition, a separate obbgation on the part of each individual obligor. The creditor thus had the option of suing each obligor individually; joinder of all the co-obligors was not necessary. Id. at § 328. See also Anderson v. Stayton State Bank, 82 Or 357, 373-74, 159 P 1033 (1916) (noting the differences between joint obligations and obligations that are joint and several).

The “unitary” nature of the joint obbgation at common law frequently was held up as a theoretical justification for the rule that a “release of one releases ab.” Havighurst derides this “unitary obbgation” theory as an “intellectual figment,” and asserts that it provides no support for the “release of one releases all” rule in the context of either joint, or joint and several, obligations. Havighurst at 7. We need not go so far. Given the well-understood differences at common law between joint obligations and obligations that are joint and several, we cannot conclude that a joint and several obbgation is “unitary” in nature. Whatever assistance is rendered in support of the “release of one releases all” rule by the unitary nature of a joint obligation, that theory is not helpful in the context of a release of a joint and several obligation because a joint and several obligation is not unitary in nature and the promisee thus can elect to maintain separate actions against the nonreleased co-obligors. As Havighurst correctly concludes,

“[the ‘unitary obligation’ rationale for the ‘release of one releases all’ rule] appears to have proper application only to obligors who are jointly bound as distinguished from those who are bound jointly and severally.”

Havighurst at 6. It follows that the unitary obligation rationale, like the other theoretical rationales advanced in support of the “release of one releases all” rule, must be abandoned as unhelpful in the context of a joint and several obligation.

That conclusion accords with the conclusions of others who have commented on the “release of one releases all” rule. The “release of one releases all” rule in contract has been criticized as being anomalous and unjust, Restatement (Second) of Contracts, § 294 comment a (1981), and as lacking a sound theoretical basis. Havighurst at 1-2. Professor Corbin notes that many jurisdictions regard the “release of one releases all” rule as an unfair “trap.” Arthur Linton Corbin, 4 Corbin on Contracts, § 931 (1951 and 1998 Supp). Professor Williston points out that a “technically satisfactory” reason for the “release of one releases all” rule is “not easy to find.” Williston and Jaeger, 2 A Treatise on the Law of Contracts, § 334.

In Crawford, Roberts and Freeland executed a promissory note in favor of Crawford, under the terms of which they agreed to be held jointly and severally liable in the event of default.⁷ 8 Or at 324. Crawford later released Freeland from all liability on the note and then brought an action on the note against Roberts. Id. at 324-25. In that action, Roberts contended that Crawford’s release of Free-land automatically discharged Roberts’ liability under the note. Id. This court agreed:

“The facts alleged in the second separate answer we think are sufficient to constitute a defense to this action, and that the demurrer to said defense was properly overruled by the court. It is a well-settled rule of elementary law that ‘a release of one joint maker by the holder * * * will discharge all the joint parties, for such a release is a complete bar to any joint suit, and no separate suit can be maintained in such case.’ Story on Promissory Notes, § 425 [(5th ed 1859)]; Chitty on Bills, 314 [(12th ed 1854)].”

Id. at 325-26.

The Crawford court relied heavily on the theory that there could be only one action against co-obligors on a joint debt. That reliance is clear when one considers the full text of section 425 of Story’s treatise on promissory notes, cited in Crawford:

“A release of one joint maker [of a promissory note] * * * by the holder will discharge all the joint parties; for such a release is a complete bar to any joint suit, and no separate suit can be maintained in such a case.”

J. Story, Commentaries on the Law of Promissory Notes, § 425 (5th ed 1859). The Crawford court also relied heavily on the “one satisfaction” theory, as is demonstrated by examination of the passage from Chitty’s treatise on bills of exchange cited in Crawford:

“In general, a release to one of several joint and several debtors or parties to a bill or note operates as a release of the whole, for the debt is thereby in law discharged.”

J. Chitty, A Practical Treatise on Bills of Exchange, 314 (12th ed 1854) (emphasis in original). The Crawford opinion offered no additional or alternative theoretical justifications to support the “release of one releases all” rule in contract in the context of a joint and several obligation.

The Crawford decision also failed to consider and address a then-current movement toward making some allowance for consideration of the intent of the parties to a release when determining the effect of that release. For example, some English cases involving releases to co-debtors, decided well before Crawford, gave effect to a reservation of rights in the particular release involved. See, e.g., Solly v. Forbes, 2 Brod & B 38 (1820) (giving effect to reservation of rights against nonreleased co-obligor); Thompson v. Lack, 3 CB 540 (1846) (same). This consideration of the intent of the parties to a release had been adopted in the United States as well. See, e.g., Benjamin v. McConnell, 9 Ill 536, 544 (1847) (release of one joint debtor, absent an express reservation of rights against other co-obligors, is a release of all).

As noted, this court has considered the “release of one releases all” rule in contract on one other occasion, again speaking with approval of the rule. In Cummings, Mrs. Burrell loaned Charles and Marjorie Cummings, husband and wife, the sum of $5,000. Mr. and Mrs. Cummings executed an acknowledgment of the debt, and Burrell then wrote across the text of the acknowledgment the words “void in the event of my death.” Burrell died before the loan was repaid, and her estate brought an action against Mr. and Mrs. Cummings seeking repayment of the loan. This court held that Burrell granted a valid conditional release and that her death extinguished the Cummings’ obligation. Crawford, 205 Or at 534. In dicta, the court noted, in response to the trial court’s finding that Burrell had forgiven Mrs. Cummings’ debt, that the “release of one releases all” rule would have resulted in the release of Mr. Cummings as well. Id. at 528. The court gave no justification or theoretical basis for that statement.

From the foregoing discussion, the briefs of the parties, and our own research, it is possible to set out the competing arguments advanced for and against the “release of one releases all” rule in contract. We do so here in outline form to facilitate further analysis.

A. Factors Favoring Retention of the “Release of One Releases Ml” Rule in Contract

1. The unitary nature of a joint obligation;

2. The limitation of the claimant to one satisfaction;

3. The construction of an instrument of release against the releasor;

4. The difficulties presented by the right of contribution, where such right exists; and

5. The argument that the rule should be changed, if at all, only by the legislature.

B. Factors Favoring Abrogation of the “Release of One Releases All” Rule in Contract

1. The rule is not founded on a substantively correct theoretical basis;

2. The rule is at odds with Oregon rules for contract interpretation;

3. The rule is at odds with Oregon rules for releases in tort; and

4. The great majority of other United States jurisdictions have, either by judicial decision or by statute, abrogated the “release of one releases all” rule in contract.

As this court stated in G.L. v. Kaiser Foundation Hospitals, Inc., 306 Or 54, 757 P2d 1347 (1988),

“[o]rdinarily this court reconsiders a nonstatutory rule or doctrine upon one of three premises: (1) that an earlier case was inadequately considered or wrong when it was decided, see, e.g., Winn v. Gilroy, 296 Or 718, 681 P2d 776 (1984) (reconsidering parental immunity); (2) that surrounding statutory law or regulations have altered some essential legal element assumed in the earlier case, see, e.g., Dahl v. BMW, [304 Or 558, 567, 748 P2d 77 (1988)] (enactment of comparative fault statutes supports re-examination of prior case holding that failure to wear a safety belt is not a proper defense); Norwest v. Presbyterian Intercommunity Hosp., 293 Or 543, 562-67,652 P2d 318 (1982) (wrongful deathlaw did not alter liability to child if parent survives injury); or (3) that the earlier rule was grounded in and tailored to specific factual conditions, and that some essential factual assumptions of the rule have changed. Without some such premise, the court has no grounds to reverse a well-established rule besides judicial fashion or personal policy preference, which are not sufficient grounds for such a change, see Norwest, 293 Or at 553.”

G.L., 306 Or at 59. Based on the foregoing discussion, we conclude here that Crawford was “inadequately considered or wrong” when it was decided. G.L., 306 Or at 59. Specifically, the Crawford court did not give adequate consideration to the distinctions between joint obligations and joint and several obligations and, because it did not do so, it failed to consider fully the various theories on which the “release of one releases all” rule supposedly is founded, the strengths and weaknesses of those theoretical bases with regard to joint obligations and those that are joint and several, and the different approaches across jurisdictions as to the application of the “release of one releases all” rule at the time that Crawford was decided. In short, the rule was neither as “well-settled” nor as “elementary” as the Crawford court apparently believed. Accordingly, the “release of one releases all” rule is ripe for reexamination by this court. Heino, 306 Or at 375.

As we have demonstrated above, the theoretical justifications for the “release of one releases all” rule that this court applied in Crawford and upon which plaintiffs here rely provide insufficient support for retaining that rule in the context of a joint and several obligation. The “unitary nature of the obligation” rationale is technically deficient because it fails to recognize the well-understood distinctions between a joint obligation, which could be understood as unitary in nature, and a joint and several obligation, which is not unitary. The “one satisfaction” rationale is unsound because it fails to account for releases given in exchange for less than a complete satisfaction of a claim. The rationale based on construction of the releasing instrument against the releasing party finds no support in modem rules of contract construction, and probably more strongly supports abrogation of the “release of one releases all” mle rather than adherence to it. Last, the rationale for the “release of one releases all” rule based on the difficulties presented by the right of contribution, where it exists, cannot serve as the sole theoretical basis for the rule because it fails to explain the use of the rule in jurisdictions or contexts in which the right of contribution is not available.

On full consideration of the competing arguments, some of which were not advanced in Crawford, we today hold that the release of one joint and several contract obligor does not release automatically the other joint and several obligors. Instead, the release must be given effect according to the intentions of the parties to that release. See Cranford, 252 Or at 452-53 (stating rule in tort context), citing Hicklin, 201 Or at 135-36.

The rule we adopt today offers several advantages. It explicitly recognizes that a release is a contract, in accord with this court’s holding in Lindgren v. Berg, 307 Or 659, 665, 772 P2d 1336 (1989) (“release is a contract in which one or more parties agree to abandon a claim or right”). The new rule thus harmonizes the rule for interpretation of a release of a joint and several contract obligor with Oregon’s rules for interpretation of contracts generally. See, e.g., Hoffman Construction Co. v. Fred S. James & Co., 313 Or 464, 469, 836 P2d 703 (1992) (primary and governing rule of contract construction is to ascertain the intention of the contracting parties). The rule we adopt today also harmonizes the rule for interpretation of a release of a joint and several contract obligor with the Oregon rule that the intent of the parties to the release governs the interpretation of a release of one joint tortfeasor. Cranford, 252 Or at 452-53. In our view, there is no logical reason that those rules should differ.

It is argued here, as noted above, that if the “release of one releases all” rule is to be changed or abolished, that action should be taken by the legislature rather than by this court. We affirm our statement in Heino v. Harper, 306 Or at 378, that, where we have competence to act, we should not hide from our responsibilities with regard to judge-made law just because we share those responsibilities with the legislature.

The decision of the Court of Appeals and the judgment of the circuit court are reversed. The case is remanded to the circuit court for further proceedings.

1 Crawford addressed the “release of one releases all” rule in the context of a joint and several obligation. See the discussion of Crawford below, 329 Or at 96-97. This case similarly addresses only the effect of a release on a joint and several obligation. Apparently, Oregon did not ever adopt, either by judicial decision or by statute, the “release of one releases all” rule in the context of a joint obligation.

2 For the current status of the law of releases in contract in the other 49 states and the District of Columbia, see the appendix to this opinion.

3 In 1993, well after the execution of the promissory note under consideration here, the Oregon Legislature substantially revised ORS chapter 73 (Article 3 of the UCC, relating to negotiable instruments). We consider the issue under the version of the UCC applicable at the time of the making of that instrument.

4 Former ORS 73.1040(l)provided:

“Any writing to be a negotiable instrument * * * must:

“(a) Be signed by the maker or drawer; and

“(b) Contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by ORS 73.1010 to 73.8050; and

“(c) Be payable on demand or at a definite time', and

“(d) Be payable to order or to bearer.”

(Emphasis added.)

5 Illinois, for example, applied the “release of one releases all” rule only to joint obligations. See, e.g., Rice v. Webster, 18 Ill 331, 332-33 (1857) (release of one joint debtor is a release of all).

6 Massachusetts, among other jurisdictions, applied the “release of one releases all” rule to joint and several obligations as well as to joint obligations. See, e.g., Hale v. Spaulding, 145 Mass 482, 483, 14 NE 534, 535 (1888) (release of one joint debtor is a release of all); Tuckerman, et al v. Newhall, 17 Mass 580, 584 (1822) (release of one joint and several debtor releases all).

7 The Crawford opinion states in dicta that a release of one joint obligor releases all. Commentators have recognized, however, that the facts of that case limit the holding of that case to joint and several contract obligations. See, e.g., Charles G. Howard, The Restatement of the Law of Contracts With Oregon Notes, 12 Or L Rev 201, 205, 207 (1932).