Ran Corp. v. Hudesman , 823 P.2d 646 ( 1991 )

OPINION

MATTHEWS, Justice.

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 pri-ma 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 Rein-wand’s influence in the capital to further his business interests. Specifically, Hudes-man 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. Rein-wand 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 Hudes-man’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. Hudes-man 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:

[PJroof 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 plaintiffs 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 subsidiary 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, 1 Ill.App.3d 486, 288 N.E.2d 15 (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 tor-tious interference does not exist against one who is himself a party to the business relationship allegedly interfered with.”);

Birkenwald Distrib. Co. v. Heublein, Inc., 55 Wash.App. 1, 776 P.2d 721 (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 interferes 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 Hudes-man 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 his¹ threat to sue.

For the reasons above we AFFIRM the judgment of the superior court.

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, Tor-tious 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, 287 Or. 357, 600 P.2d 371, 374 (1979) (quoting Top Service Body Shop, Inc. v. Allstate Ins. Co., 283 Or. 201, 582 P.2d 1365, 1371 (1978)); Lewis v. Oregon Beauty Supply Co., 302 Or. 616, 733 P.2d 430, 434 (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 desire-able. 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).

1 . 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).