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RAN Corp. v. D. Hudesman & H. Smith, Jr. (12/27/91), 823 P 2d 646
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Notice: This is subject to formal correction before
publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors
to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, in order that
corrections may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
RAN CORPORATION, )
) Supreme Court No. S-3639
Appellant, )
) Trial Court No.
v. ) 1JU-88-349 Civil
)
DAVID HUDESMAN and ) O P I N I O N
H. MARTIN SMITH, Jr., )
) [No. 3790 - December 27, 1991]
Appellees. )
_________________________)
Appeal from the Superior Court of the
State of Alaska, First Judicial District,
Juneau,
Thomas E. Schulz, Judge.
Appearances: William G. Ruddy, Ruddy,
Bradley & Kolkhorst, Juneau, for Appellant.
Joan Travostino, Preston, Thorgrimson,
Shidler, Gates & Ellis, Anchorage, for
Appellees.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, Compton, and Moore,
Justices.
MATTHEWS, Justice.
BURKE, Justice, dissenting.
RAN Corporation contracted with a lessee for the
assignment of a lease, conditional on the approval of the lessor.
David Hudesman, the lessor, refused to consent to the assignment
because Hudesman had identified another tenant who offered
greater economic benefit. RAN sued, alleging, inter alia,
intentional interference with contractual relations and
intentional interference with prospective economic advantage.
The superior court found that RAN had not established a prima
facie case for either tort, and that, in any event, Hudesman was
privileged to interfere with the assignment contract because he
acted to protect his direct financial interest.
We find that the trial court correctly ruled that
Hudesman was privileged, as a matter of law, to intentionally
interfere with the proposed assignment of the lease of his
property.
I.
For many years the Red Dog Saloon, a combination bar
and gift shop, occupied the premises at 159 South Franklin Street
in Juneau. David Hudesman owned the property. It was leased to
Don Harris, the Saloon's owner and operator.1 In the lease,
Hudesman retained the right to approve any assignment. Section
10(a) of the lease agreement provided that
lessees shall not assign this lease or
any interest therein, and shall not sublet
the said premises . . . without the written
consent of lessor . . . , but such consent
shall not be withheld unreasonably, it being
understood that the lessees have a right to
any assignee or subtenant who is financially
responsible and who will properly care for
the premises. Lessor may require that
adequate security be furnished to him as a
condition to such consent . . . .
Harris decided to move his business. He intended to
relinquish all interest in the property at 159 South Franklin by
assigning the lease, which still had some four years left on its
term.
Richard Stone, President of both R.D. Stone, Inc., and,
later, the RAN Corporation (RAN), contacted Harris after reading
about the planned relocation and expressed his interest in
leasing the premises. Stone, an operator of Alaskan artifacts
galleries in Ketchikan, wanted to open an artifacts gallery in
Juneau.
Initial negotiations occurred in September 1987.
Harris told Stone that he would assign the lease for $15,000. He
explained that Hudesman retained the right to approve of the
assignment and Stone would be required to submit documentation
describing RAN's financial status and proposed use of the
premises. Stone delivered a check for $15,000 along with all
requested documents.
Harris contacted Hudesman's agent, H. Martin Smith,
Jr., about the potential assignment. Smith directed Harris to
send Stone's prospectus material to Smith "on behalf of Mr.
Hudesman,"which Harris did.
Around the time Harris and Stone were negotiating,
Jerry Reinwand contacted Hudesman about the property at 159 South
Franklin. Reinwand, a long-time resident of Juneau, had served
in a variety of high-level government positions and as a
lobbyist, and Hudesman hoped to use Reinwand's influence in the
capital to further his business interests. Specifically,
Hudesman wanted Reinwand's help in securing government leases for
a large building Hudesman owned in Juneau. Reinwand agreed to
help. In return, Hudesman promised that if Don Harris moved the
Red Dog Saloon out of 159 South Franklin, Reinwand could move in.
In early January 1988, Smith told Harris that Hudesman
refused to consent to the assignment of the lease to RAN. Smith
warned Harris that if he persisted in "pushing" RAN as a
prospective assignee, Harris "would be looking at litigation"
because "Mr. Hudesman wanted Mr. Reinwand in there."
Harris complied with Smith's demand to deal with
Reinwand. On February 5, Harris returned Stone's $15,000 deposit
and formally notified him in writing of Hudesman's rejection.
Harris' letter enclosed a copy of a letter, dated February 2,
1988, that Harris had received from Smith in which Smith
explained:
Mr. Hudesman does not approve your
assigning your lease, or subletting, to a
business different than what is called for in
your lease. Instead, he prefers that the
premises be taken over by his friend, Mr.
Jerry Reinwand, as a home for his various
business activities. Mr. Hudesman will
approve an assignment of your leasehold
rights to Mr. Reinwand, provided your
decision to vacate is final.
By March, Harris had assigned his lease to Reinwand, who paid
Harris $15,000 and took possession of the premises.
RAN filed suit for an injunction to invalidate
Reinwand's lease and to enforce the assignment contract that RAN
had with Harris. RAN also sought damages, naming Smith,
Hudesman, Reinwand, Don Harris, and Perry Harris as defendants.
The superior court denied RAN injunctive relief; RAN pursued its
damage claims. After a year of litigation, RAN settled with
Reinwand and entered into a stipulation of dismissal with Don and
Perry Harris. RAN's only remaining claims were against Hudesman
and Smith for negligent interference with contract or prospective
economic advantage, intentional interference with contractual
relations, and intentional interference with prospective economic
advantage. All parties moved for summary judgment. The superior
court granted the summary judgment motions of Smith and Hudesman.
RAN has appealed these rulings on its intentional tort claims
only.
II.
The elements of the tort of intentional interference
with contractual relations are:
[P]roof that (1) a contract existed, (2)
the defendant . . . knew of the contract and
intended to induce a breach, (3) the contract
was breached, (4) defendant's wrongful
conduct engendered the breach, (5) the breach
caused the plaintiff's damages, and (6) the
defendant's conduct was not privileged or
justified.
Knight v. American Guard & Alert, Inc., 714 P.2d 788, 793 (Alaska
1986). The fourth, fifth, and sixth elements also apply to the
related tort of intentional interference with prospective
economic advantage. Oaksmith v. Brusich, 774 P.2d 191, 198
(Alaska 1989). As our analysis in this case is equally
applicable to either tort, we will refer to them collectively in
this opinion.
The sixth element of the intentional interference tort,
that the interferer's conduct not be privileged, is troublingly
vague. The Restatement (Second) of Torts 767 (1965) speaks not
in terms of "privilege,"but requires that the actor's conduct
not be "improper." Other authorities use the catch word
"malice." Prosser and Keeton on Torts 129 at 983 (W. Keeton
5th ed. 1984) (hereinafter Prosser). Regardless of the phrase
that is used, the critical question is what conduct is not
"privileged"or "improper"or "malicious." The Restatement 767
lists seven factors for consideration,2 and while these factors
are relevant in some or all of the incarnations of the
interference tort, they are hard to apply in any sort of
predictive way.3
We recognized this fact in Bendix Corp. v. Adams, 610
P.2d 24, 30 (Alaska 1980). Instead of relying on the Restatement
factors, we adopted a test of privilege based on a number of
cases which hold that where an actor has a direct financial
interest, he is privileged to interfere with a contract for
economic reasons, but not where he is motivated by spite, malice,
or some other improper objective.4
Our conclusion is that, where there
is a direct financial interest in a contract,
the essential question in determining if
interference is justified is whether the
person's conduct is motivated by a desire to
protect his economic interest, or whether it
is motivated by spite, malice, or some other
improper objective.
Id. at 31.
In our view, this rule applies to this case. Although
the defendant in Bendix was a corporation which forced its subsi
diary to breach a contract with the plaintiff, we recognized that
another economic interest which would support a claim of
privilege was the interest which a lessor had "in his property to
interfere in a sublease." Id. (citing Bergfeld v. Stork, 288
N.E.2d 15 (Ill. App. 1972)).
A number of other cases have recognized that a landlord
has a sufficient interest to interfere with a prospective or
actual lease assignment. Toys "R"Us, Inc. v. NBD Trust Co. of
Illinois, 904 F.2d 1172, 1178 (7th Cir. 1990) (recognizing
privilege where lessor wished to maintain control over appearance
and character of shopping center); Walner v. Baskin-Robbins Ice
Cream Co., 514 F. Supp. 1028 (N.D. Tex. 1981). The right to
intervene has also been recognized in the analogous setting of
transfers of distributorships. Genet Co. v. Annheuser-Busch,
Inc., 498 So.2d 683, 684 (Fla. App. 1986) ("[A] cause of action
for tortious interference does not exist against one who is
himself a party to the business relationship allegedly interfered
with."); Birkenwald Distrib. Co. v. Heublein, Inc., 776 P.2d 721
(Wash. App. 1989).
It seems beyond reasonable argument that an owner of
property has a financial interest in the assignment of a lease of
the property he owns. An effective lease assignment makes the
assignee the tenant of the owner; the assignee becomes the lessee
and has a direct contractual relationship with the owner. See
generally R. Cunningham, W. Stoebuck & D. Whitman, The Law of
Property 12.40, at 898-99 (Lawyers ed. 1984). The tenant also
has an obligation to pay rent directly to the owner, and the use,
or abuse, of the property by the assignee may affect its value to
the owner. Further, the owner may know of another potential
assignee who will pay more rent than the prospective assignee.
Moreover, the owner may wish to terminate the lease based on
knowledge of a more profitable use for the property. If so, the
owner is obviously financially interested in a proposed
assignment as the assignor may consent to the termination of the
lease while the proposed assignee might not.
For the above reasons, we conclude that the Bendix
formulation of privilege applies to an owner-landlord who inter
feres with his tenant's lease assignment contract. Since
Hudesman had a direct financial interest in the proposed
assignment of the lease, "the essential question in determining
if interference is justified is whether [Hudesman's] conduct is
motivated by a desire to protect his economic interest, or
whether it is motivated by spite, malice, or some other improper
objective." Bendix, 610 P.2d at 31. As there is no evidence of
spite, malice or other improper objective -- Hudesman did not
even know RAN Corporation's principals -- and since it is clear
that Hudesman refused to approve the assignment because he
believed that he would receive a greater economic benefit from a
tenancy by Reinwand, the interference was justified and summary
judgment was properly entered.
Hudesman's threat of litigation does not seem relevant
to RAN's claim for intentional interference. RAN's assignment
agreement with Harris was explicitly conditional on Hudesman's
approval. When Hudesman disapproved of the assignment the
interference was complete. Hudesman's disapproval may have been
a breach of the Hudesman/Harris lease, but it was privileged from
a tort standpoint because of Hudesman's pre-existing interest as
a property owner/lessor. The threat of litigation may, at worst,
have been another breach of the Hudesman/Harris lease. However,
it too was not tortious5 and it was, in any case, superfluous to
the interference, because RAN's prospective economic relationship
was terminated by Hudesman's disapproval, not by his threat to
sue.
For the reasons above we AFFIRM the judgment of the
superior court.
BURKE, Justice, dissenting.
I respectfully dissent.
We once observed that "[b]ona fide competition for
customers . . . not only is allowable, but is fundamental to our
economic system." Ellis v. City of Valdez, 686 P.2d 700, 707
n.14 (Alaska 1984). Thus, we have held that one may be
privileged to interfere with another's contract when the actor
has a direct financial interest in the contract. Bendix Corp. v.
Adams, 610 P.2d 24 (Alaska 1980). In determining the question of
privilege, however, "the essential question . . . is whether the
person's conduct is motivated by a desire to protect [the
person's] economic interest, or whether it is motivated by spite,
malice, or some other improper objective." Id. at 31.6
One is privileged to interfere with another's contractu
al interests only when acting to promote the interest of oneself,
others, or the public, and only if the interest promoted by the
invasion is superior in social importance to the interest
invaded. See Alyeska Pipeline Service Co. v. Aurora Air Service,
Inc., 604 P.2d 1090, 1094 (Alaska 1979); see also 2 F. Harper, F.
James & O. Gray, The Law of Torts 6.12, at 350 (2d ed. 1986).
Moreover, few privileges are sufficiently well recognized to
support their application as a matter of law:
[R]ecurrent factual patterns may have
developed, reflecting identifiable standards
of business ethics or recognized community
customs as to acceptable conduct and leading
the court to feel that the determination of
whether the interference was improper should
be made as a matter of law . . . . [But] when
there is room for different views, the deter
mination of whether the interference was im
proper or not is ordinarily left to the jury,
to obtain its common feel for the state of
community mores and for the manner in which
they would operate upon the facts in ques
tion.
Restatement (Second) of Torts 767 comment l, at 39 (1979).
In the case at bar, the record provides no reasonable
assurance that Smith and Hudesman interfered in the assignment
contract in order to protect Hudesman's economic interest in the
property. In fact, the record suggests that Smith and Hudesman
were motivated to interfere in the assignment to RAN solely
because they wanted to consummate a business deal with Reinwand.
There was no direct economic reason to prefer either of the
competing tenants; RAN and Reinwand proposed to use the property
in nearly identical ways, and both agreed to pay precisely the
same rent. Overall, it is quite apparent that it was Reinwand's
interest in the property, not Hudesman's, that motivated Smith
and Hudesman to interfere with the Harris-RAN assignment
contract.
Also, the interest Smith and Hudesman had in the
contract differed greatly from the personal stake that formed the
basis of the privilege that we applied as a matter of law in
Bendix. When Smith and Hudesman threatened Harris with
litigation if he "pushed"RAN as his assignee, they did so free
of any real economic concern. They stood to lose nothing by
forcing Harris to relinquish his right to assign his lease to the
person of his choice.
Opposite RAN's conditional interest in the assignment
contract stands the interest Smith and Hudesman had in furthering
Hudesman's business connections.7 In evaluating the relative
social importance of these two interests, we consider factors
such as "the nature of the actor's conduct,"Restatement (Second)
of Torts 767(a), at 26 (1979), and "the social interests in
protecting the freedom of action of the actor and the contractual
interests of the other."Id. 767(e), at 27. When these factors
are considered, I think the proper disposition of this case
becomes obvious.
Society's interest in protecting contractual rights
such as RAN's is certainly important, despite the conditional
nature of that right. In contrast, there is no societal interest
in protecting conduct which includes threats of litigation such
as those made by Smith and Hudesman in the instant case. In
particular, Hudesman's agent, Smith, threatened Harris with
litigation in order to dissuade him from exercising his right to
assign his lease rights to RAN.8 Relative to this subject, the
Restatement has this to say:
Litigation and the threat of litigation
are powerful weapons. When wrongfully
instituted, litigation entails harmful
consequences to the public interest in
judicial administration as well as to the
actor's adversaries. The use of these
weapons of inducement is ordinarily wrongful
if the actor has no belief in the merit of
the litigation or if, though having some
belief in its merit, he nevertheless
institutes or threatens to institute the
litigation in bad faith, intending only to
harass the third parties and not to bring his
claim to definitive adjudication.
Restatement (Second) of Torts at 767 comment c, at 30-31.
The evidence of threats made in the case at bar should
temper any consideration we might otherwise give to the
importance of Smith's and Hudesman's freedom to conduct business.
A lawsuit instituted or threatened only to harass may constitute
actionable interference with contractual relations, even if it
has merit. See, e.g., C.N.C. Chemical Corp. v. Pennwalt Corp.,
690 F. Supp. 139, 143 (D.R.I. 1988) (initiation of lawsuit "with
out probable cause and for the purpose of interfering with . . .
contractual relations"constituted improper interference); Nesler
v. Fisher & Co., 452 N.W.2d 191, 198 (Iowa 1990). Consequently,
we should be especially troubled by evidence in the record tend
ing to show that Smith and Hudesman held no belief they had a
meritorious claim to assert against Harris, or a claim that even
arguably had merit. Such evidence easily supports the inference
that Smith threatened Harris with litigation in utter bad faith
for no other purpose than disrupting the Harris-RAN assignment
contract. There is, of course, no societal interest to be served
by affording privileged status to such behavior.
The privilege we recognized in Bendix is indeed broad,9
but not so broad as to encompass, as a matter of law, the conduct
alleged here. The question in this case is whether Smith and
Hudesman acted acceptably, given the current community standards
and the manner in which business persons are expected to conduct
their affairs. See Restatement (Second) of Torts 767 comment l
(1979). This is not a theoretical problem to be resolved by this
court according to abstract notions of how society should work.
Rather, this is a genuine issue of material fact. As such, it
should be determined by the trier of fact, after thorough review
of the evidence produced at trial. See C.N.C. Chemical Corp.,
690 F. Supp. at 143; Powers v. Leno, 509 N.E.2d 46, 49 (Mass.
App. 1987); see also Snow v. Western Savings & Loan Ass'n, 730
P.2d 204 (Ariz. 1986).10
I would hold that the superior court erred in
concluding, as a matter of law, that the conduct of Smith and
Hudesman was privileged because such conduct was protective of a
direct financial interest. I would reverse the judgment and
remand the matter for trial.
_______________________________
1 Hudesman had leased the property to Don's brother Perry.
In late 1986, Perry Harris transferred ownership and control of
the Red Dog to his brother Don.
2 The seven factors are:
(a) the nature of the actor's
conduct,
(b) the actor's motive,
(c) the interests of the other with
which the actor's conduct interferes,
(d) the interests sought to be
advanced by the actor,
(e) the social interests in
protecting the freedom of action of the actor
and the contractual interests of the other,
(f) the proximity or remoteness of
the actor's conduct to the interference and
(g) the relations between the
parties.
Restatement (Second) of Torts 767.
3 As Prosser puts it, these factors are "no doubt all
appropriate enough but not a list that would inspire one to
predict an outcome, or decide one's rights or duties." Prosser,
supra, at 984 n.63.
4 Many commentators have noted the pervasive vagueness of
the intentional interference tort. See, e.g., Perlman,
Interference with Contract and Other Economic Expectancies: A
Clash of Tort and Contract Doctrine, 49 U. Chi. L. Rev. 61, 61
(1982) ("The absence of a coherent doctrine is understandable.
The idea that a person should not interfere with another's
economic relationships is easier to expound in the abstract than
to apply in the particular."). Further, they observe that the
tort seems to cover without discernable limiting principles much
conduct which in our competitive society seems distinctly
valuable. Perlman, supra, at 83 (While contract law facilitates
efficiency gains derived from a breach of contract, interference
torts seem "designed to reduce the number of such breaches and
thus run[] counter to a plausible objective of contract
doctrine."); Dobbs, Tortious Interference with Contractual
Relationship, 34 Ark. L. Rev. 335, 343 (1980) ("Liability is
imposed for acts permissible in themselves--honest
representations, for example--and impermissible only because the
defendant's purpose is thought insufficiently laudable. Indeed,
the act involved in these cases is often the act of speech, the
most protected of all social acts."); Prosser, supra, 130
(interference with prospective advantage). But see Loewensein,
Tender Offer Litigation and State Law, 63 N.C. L. Rev. 493 (1985)
(finding tort of interference with prospective economic advantage
effective in controlling abuses in tender offers).
Because of these concerns, the Supreme Court of Oregon has
held that where the defendant does not purposefully act to harm
the plaintiff, the tort should be limited to where the
interference is independently wrongful in the sense of a tort or
a breach of some statutory or regulatory duty "`beyond the fact
of the interference itself.'" Straube v. Larson, 600 P.2d 371,
374 (Or. 1979) (quoting Top Service Body Shop, Inc. v. Allstate
Ins. Co., 582 P.2d 1365, 1371 (Or. 1978)); Lewis v. Oregon Beauty
Supply Co., 733 P.2d 430, 434 (Or. 1987). This result has been
endorsed by a number of commentators. Perlman, supra; Dobbs,
supra. Perlman suggests "an unlawful means test that restricts
tort liability to those cases in which the defendant's act is
independently wrongful." Perlman, supra, at 62. Such an
approach provides a clearer rule on which potential plaintiffs
and defendants can rely in evaluating conduct.
These observations suffice to counsel caution in the
application of the interference tort to new fact situations. The
Oregon rule may be desireable. However, it is not necessary to
decide whether it should be adopted at present because the direct
financial interest privilege which we adopted in Bendix applies
to this case.
5 The threat may have been a breach of the covenant of good
faith and fair dealing which is implied in all contracts. A
breach of the covenant is not tortious and does not give rise to
a cause of action in favor of a third party. O.K. Lumber Co. v.
Providence Washington Ins. Co., 759 P.2d 523, 525-26 (Alaska
1988).
6 There is nothing in the record which indicates that Smith
and Hudesman caused the termination of the Harris-RAN contract
because they wished to harm RAN. However, "[i]t has long been
clear . . . that `malice' in the sense of ill-will or spite is
not required for liability"in interference with contract or
prospective business advantage actions. W. Keeton, D. Dobbs, R.
Keeton & D. Owen, Prosser and Keeton on The Law of Torts 129,
at 983 (5th ed. 1984); Long v. Newby, 488 P.2d 719, 722 (Alaska
1971).
7 Hudesman, as owner, probably had a strong interest in any
contract that affected his property. But, as lessor, he had
relinquished to Harris much of his right in the property. For
example, although Hudesman retained the right to exercise
reasonable approval prerogative over the assignment to RAN, he
simultaneously lost his right to deny approval merely because he
preferred to have some other tenant take possession of the
property. See Hendrickson v. Freericks, 620 P.2d 205, 211
(Alaska 1980) (if lessor's consent is required for assignment,
lessor may withhold consent only with reasonable grounds). Thus,
just as the conditional nature of its contract weakened RAN's
interest, so did the lease weaken Hudesman's interest. Even
assuming, then, that Smith and Hudesman acted, in part, for the
purpose of protecting Hudesman's interest in the property, the
relative social importance of that interest does not by itself
render RAN's conditional interest unworthy of protection.
Additionally, it is important to underscore the distinction
between an interest in a contract and an action undertaken for
the purpose of protecting that interest. Smith and Hudesman must
show the latter in order to prove that their interference was
privileged.
8 The majority concludes that "the condition precedent in
the proposed lease agreement between Harris and RAN . . .
fail[ed]" at some moment before Smith and Hudesman threatened
Harris with litigation. As a result, the majority considers the
threats of litigation "irrelevant." The majority first presumes
to construct from the record the exact condition RAN and Harris
had agreed to include in their contract, then presumes to find
that its own version of the condition "failed." Such fact
finding by this court ranges well beyond the review of the record
that is appropriate in an appeal from a grant of summary
judgment. Moreover, even on its own version of the facts, the
court's conclusion that Hudesman's "disapproval" unilaterally
terminated RAN's contract seems suspect. A conditioned
contractual duty is discharged when the condition becomes
"impossible of performance." 3A A. Corbin, Corbin on Contracts
630, at 20 (1960). At the earliest, Hudesman's approval became
"impossible" to obtain only after Harris decided not to assert
his rights to assign to the subtenant of his choice. We may
reasonably infer that Hudesman's litigation threats coerced
Harris not to resist Hudesman's disapproval of the assignment.
Thus, the threats are essential to an evaluation of this case.
9 Other courts have adopted a similar, but narrower
privilege, limited only to cases involving the interference of
parent corporations in their subsidiaries' contracts. E.g., Phil
Crowley Steel Corp. v. Sharon Steel Corp., 702 F.2d 719, 722 (8th
Cir. 1983); James M. King & Assoc. v. G.D. Van Wagenen Co., 717
F. Supp. 667, 681 (D. Minn. 1989). Although the facts of Bendix
involved only a parent corporation's interference with the
contract of its subsidiary, we stated the direct financial
interest privilege in very broad terms, and as a result the
privilege logically could apply generally to cases in which the
interferer has a direct stake in the contract interfered with.
See Bendix, 610 P.2d at 29-31.
10 In Snow, a mortgagee threatened to invoke a due-on-sale
clause in an attempt to interfere with the mortgagor's contract
to sell the mortgaged property. Snow, 730 P.2d at 206-07. The
Arizona Supreme Court reversed a grant of summary judgment for
the mortgagee and remanded for the trier of fact to determine
whether the threats to invoke the due-on-sale clause were made in
good faith and to determine whether the mortgagee truly had acted
to protect any of its interests related to the sale of the
mortgaged property. Id. at 213-14. Similar determinations
should concern the trier of fact in this case. See id.; see also
Phil Crowley Steel Corp. v. Sharon Steel Corp., 782 F.2d 781, 784
(8th Cir. 1986).
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