Facts
- First American Commerce Co. (First American) obtained a loan from First Security Realty Services (First Security) to finance a commercial building owned by First American.
- The loan was secured by the building and included documents giving the lender the right to approve new leases in the building.
- The loan agreement also provided for a “hold-back” (a percentage of the loan proceeds retained by the lender until First American completed specified tenant improvements).
- On the same day the loan documents were executed, First Security assigned the loan to Washington Mutual Savings Bank (WAMU) with First American’s knowledge and consent.
- When a leasing opportunity arose, First American requested lease approval from both First Security and WAMU, but neither approved the lease.
- After First American completed the required tenant improvements, First American requested release of the hold-back funds.
- First Security responded that it was not required to release the hold-back funds because it had delegated that obligation to WAMU through the assignment.
- First American sued both First Security and WAMU. The trial court granted summary judgment for defendants on all claims except one fraud claim against First Security.
- First American appealed the summary judgment rulings.
Issues
- Does First Security’s assignment of the loan to WAMU (and related delegation of performance) discharge First Security’s contractual duties to First American as a matter of law?
- Did First American’s knowledge of and consent to the assignment establish a novation as a matter of law—i.e., an intent to release First Security and substitute WAMU as the sole obligor?
Decision
- The Utah Supreme Court reversed the summary judgment in favor of First Security on the non-fraud claims and remanded for further proceedings.
- The court held that assigning contract rights and delegating performance do not, by themselves, relieve the original obligor of its duties to the other contracting party.
- The court further held that whether a novation occurred turned on the parties’ intent and could not be resolved on summary judgment on the record presented.
Legal Principles
- An assignment generally transfers contractual rights; a delegation concerns who will perform contractual duties.
- A party that delegates its contractual duties ordinarily remains liable for performance unless the other contracting party agrees to release that party.
- A novation requires (i) an intent to discharge the original obligor and (ii) an intent to substitute a new obligor; the controlling question is intent.
- A counterparty’s consent to an assignment, without more, does not conclusively prove an intent to release the original obligor.
- Summary judgment is improper when competing inferences may reasonably be drawn about whether the parties intended a novation.
Conclusion
First American Commerce Co. v. Washington Mutual Savings Bank holds that First Security’s assignment of the loan to WAMU did not automatically discharge First Security’s duties under the loan documents; absent clear proof that First American intended a novation, First Security could remain liable, and disputed intent required reversal of summary judgment and a remand for further proceedings.