First American Commerce Co. v. Washington Mutual Savings Bank
66 Utah Adv. Rep. 19, 743 P.2d 1193, 1987 Utah LEXIS 779 (1987)
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Rule of Law:
A party who delegates duties under a contract to a third person is not relieved of their responsibilities to the original contracting party, but remains ultimately responsible for the performance of those duties, unless a novation agreement discharging the original party has been clearly shown and intended by all parties.
Facts:
- First American Commerce (Borrower) obtained a loan from First Security Realty Services (Lender), securing repayment with a deed of trust and an assignment of rents on a commercial building.
- The loan documents required Lender's written approval for new leases and stipulated that a percentage of the loan would be held back pending completion of certain tenant improvements.
- On the same day the loan documents were signed, Lender assigned the loan to Washington Mutual Savings Bank (Assignee) with Borrower's knowledge and consent.
- Borrower sought to lease space in the building and contacted both Lender and Assignee, but neither would provide written consent, causing Borrower to lose the opportunity.
- Upon completing the tenant improvements, Borrower made a written request for Lender to release the held-back funds.
- Lender refused to release the funds, asserting that its duty had been delegated to Assignee.
Procedural Posture:
- First American Commerce (Borrower) sued First Security Realty Services (Lender) and Washington Mutual Savings Bank (Assignee) in a trial court.
- Lender obtained a summary judgment from the trial court, which dismissed all claims against it except for fraud.
- First American Commerce (Borrower) filed an interlocutory appeal to the Utah Supreme Court, seeking relief from the partial summary judgment.
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Issue:
Does a lender remain obligated to perform its duties under a loan agreement after assigning the loan and delegating those duties to another entity, absent a clear and intended novation agreement with the borrower?
Opinions:
Majority - Durham, Justice
Yes, a lender remains obligated to perform its duties under a loan agreement even after assigning the loan and delegating those duties to another entity, unless a clear and intended novation agreement has been reached. The court clarified the distinction between an 'assignment' (transfer of rights) and a 'delegation' (transfer of duties), stating that a party who delegates contractual duties is not relieved of responsibility but remains ultimately accountable to the original contracting party for successful performance. This general contract principle, designed to protect the expectations of the party receiving performance, applies equally to duties under loan documents. The court rejected the Lender's argument for special rules for bank loans, finding the cited cases concerning federal guarantee programs irrelevant. The court emphasized that a novation, which would discharge the original party, requires a clear intent by all parties to substitute a new performer, and this intent is a matter of fact. The loan documents in this case did not unambiguously provide for a novation, and Borrower's affidavit attested to an intent to continue looking to Lender for the funds.
Analysis:
This case clarifies a foundational principle in contract law distinguishing between assignment of rights and delegation of duties, particularly within the context of commercial lending. It provides critical protection for the party receiving performance by ensuring that an original obligor cannot unilaterally evade its responsibilities simply by delegating them. The ruling reinforces the high bar for establishing a novation, emphasizing that intent to discharge an original party must be clear and not presumed, which has significant implications for how contracts are drafted and how parties conduct business relationships involving third-party transfers. This precedent helps maintain predictability and accountability in contractual agreements.
