Citizens Bank & Trust Co. v. Barlow Corp.

Rodowsky, J., delivered the opinion of the Court. This case presents the question under a commercial lease to a corporate tenant of whether the merger of the tenant into another corporation violates a nonassignment clause which expressly includes assignments by operation of law. We shall hold that the nonassignment clause was breached. The problem arises out of the merger of Century National Bank, a national banking association (Century), into The Citizens Bank & Trust Company of Maryland, a Maryland banking association (Citizens).

Century had used as its principal office certain premises located in a building at 5454 Wisconsin Avenue, Chevy Chase. The premises were leased by Century from The Barlow Corporation (Barlow) for an initial term of 15 years beginning November 1, 1976 at a fixed rent which was subject to escalation, based on a consumer price index, in alternate years beginning with the third year of the term. Paragraph 19.01 of the lease, in relevant part, provided: Tenant shall not assign this Lease in whole or in part, nor sublet ... all or any part of the Premises without the prior written consent of Landlord in each instance .... This prohibition against assigning, or subletting shall be construed to include a prohibition against any assignment, or subletting by operation of law.

Stricken from the lease was a proposed paragraph 19.02 which, in part, would have provided that [t]he present shareholders with a controlling interest in Tenant shall not relinquish or otherwise transfer control of Tenant either through the sale, issuance, or redemption of stock therein, or otherwise without the prior written consent of ⁴⁷⁵ Landlord, if in the opinion of an independent Certified Public Accountant chosen by Landlord, the security for Tenant’s performance of the terms of this lease is impaired or lessened by such transfer of control. Assignment by Century, except as permitted in paragraph 19.01, was specified to be a default under the lease. During default Barlow could, at its option, give Century written notice of intent to terminate the lease in five days. Century and Citizens entered into their agreement and articles of merger on July 17, 1980.

Century undertook to use its best efforts "to obtain the consent of third parties to the assignment of all contracts to which it is a party, in every instance where such consent is required, and particularly of all leases for the banking offices of Century.” Paragraph 8 of the agreement, entitled "Effect of Merger,” provided: On the effective date of the merger, the resulting bank shall be considered the same business and corporate entity as each constituent bank with all of the rights, powers and duties of each constituent bank except as limited by the charter and By-Laws of the resulting bank. All the rights, franchises and interests of each constituent bank in and to every species of property .. . shall be deemed to be transferred to and vested in such resulting bank without any deed or other transfer. The resulting bank, by virtue of the merger and without any order or other action on the part of any court or otherwise, shall hold and enjoy the same and all rights . . . including appointments, designations and nominations and all other rights and interests as trustee, executor, administrator . . . and in every other fiduciary capacity, in the same manner and to the same extent as such rights . .. were held or enjoyed by each constituent bank at the time of the merger. ⁴⁷⁶ On August 15,1980 Century sent Barlow a form of consent to assignment. Century’s covering letter in part stated that "[w]hen the merger is effective, our leasehold interest ... will be transferred by operation of law to Citizens . .. .” Barlow replied on August 20,1980 by transmitting a revised consent which was conditioned on an increase in rent effective the first of the month following the completed merger.

After the requisite federal, state, and shareholder approvals had been obtained, the merger became effective on March 13,1981. Four days later Barlow gave notice to Century and Citizens of its intent to terminate the lease on March 23, 1981. Thereupon Citizens brought the instant action for a judgment declaring that it had not breached the nonassignment clause. Barlow sought a counter declaration which additionally requested a determination that Citizens was liable to it for the fair market rental value of the premises from March 23, 1981.

The trial court held that the merger had effected an assignment of the lease within the meaning of paragraph 19.01, that Barlow had not consented, and that the lease had terminated on March 23. The parties agreed as to the liability of Citizens to Barlow, and the trial court incorporated their stipulation in its judgment. Citizens appealed to the Court of Special Appeals, and we granted certiorari prior to consideration of the case by the intermediate appellate court. Citizens’ first contention is that there has been no assignment.

We do not agree. The parties have treated this merger, in which the state bank is the surviving corporation, as governed by Md. Code (1980, 1982 Cum. Supp.), §§ 3-701 through 3-712 of the Financial Institutions Article. 1 Of principal significance is § 3-712 which provides in relevant part: ⁴⁷⁷ (a) General rule. — Consummation of a consolidation or merger has the effects provided in this section. (b) Cessation of separate existence. — The separate existence of each constituent bank, except the successor, ceases.

(c) Transfer of property; rights, duties, and franchises. — (1) The successor shall be considered the same business and corporate entity as each of the constituent banks and, except as limited by its charter or bylaws, has all of the rights, powers, and duties of each constituent bank. (2) Each constitutent bank’s rights, franchises, and interests in any property become the property of the successor without any deed, transfer, or other action. (3) The successor has the same powers that each constitutent bank had as to any property held in any fiduciary capacity without any deed, transfer, or other action. The successor may be removed or replaced as fiduciary in the same manner and to the same extent as the constituent bank.

(d) References to constituent bank; use of constituent’s name. — (1) Unless this construction would be unreasonable, any reference to any constituent bank in any writing, whether executed or taking effect before or after the consolidation or merger, shall be interpreted as a reference to the successor. (2) The successor may use the name of any constituent bank if it can do any act more conveniently under that name. ⁴⁷⁸ In the instant matter, by virtue of the terms of the merger agreement and under the provisions of § 3-709, the merger became effective when the executed agreement, together with shareholders’ resolutions, were filed with the Maryland Bank Commissioner on March 13, 1981. Century’s separate corporate existence thereupon ceased. § 3-712 (b). 2 Century’s leasehold interest in the subject premises thereby became the property of Citizens. § 3-712 (c) (2). The transfer of the property from the extinguished corporation to the surviving corporation was by force and effect of the statute.

It was a transfer by operation of law. See Dodier Realty & Investment Co. v. St. Louis National Baseball Club, 361 Mo. 981 , 238 S.W.2d 321 (1951) (transfer of assets from merged corporation to surviving corporation under general corporation law, including merged corporation’s leasehold interest, was effectuated under and by force of the statute itself and was by operation of law); Segal v. Greater Valley Terminal Corp., 83 N.J. Super. 120 , 199 A.2d 48 (1964) (short form merger of wholly-owned subsidiary corporation into parent passed the subsidiary’s leasehold interest by operation of law). See also United States v. Seattle-First National Bank, 321 U.S. 583 , 64 S. Ct. 713 , 88 L. Ed. 944 (1944) (transfer of title to real estate, stocks and bonds owned by a state bank which merged into a national bank was "wholly by operation of law” within a Treasury Regulation exemption from documentary stamp taxes for such transfers). ⁴⁷⁹ Citizens, however, contends that § 3-712 (c) (2) means that the merged bank’s property interests "become the property of the successor without any ... transfer . .. .” This language, of course, must be read in its full context, i.e., "without any deed, transfer, or other action.” This simply means that the transfer is effected without any instrument of transfer being required in addition to those which effect the merger. Rather than providing that there is no transfer at all, the language provides for a transfer by operation of law.

Accordingly, § 3-710 (b) states that the certificate of merger issued by the Bank Commissioner "may be recorded in any office where deeds are recorded to evidence the new name in which the property of the constituent banks is held.” (Emphasis added.) But, says Citizens, the language of § 3-712 (c) (1), whereby the "successor shall be considered the same business and corporate entity as each of the constituent banks,” and of § 3-712 (d) (1), under which "any reference to any constituent bank in any writing .. . shall be interpreted as a reference to the successor,” dovetail with Citizens’ reading of subsection (c) (2) and result in no transfer being effected by a merger. The "same corporate entity” language of § 3-712 (c) (1) on which Citizens relies is derived from a provision in the National Banking Act which deals with the consolidation and merger of national banks into state banks. See former 12 U.S.C. § 34a (1958), now codified as 12 U.S.C. § 215 . 3 The ⁴⁸⁰ provision was explained in Fidelity-Baltimore National Bank v. United States, 328 F.2d 953 (4th Cir. 1964), cert. denied, 379 U.S. 823 , 85 S. Ct. 48 , 13 L. Ed. 2d 34 (1964). The case arose out of the merger of Fidelity Trust Company, a Maryland bank, into Baltimore National Bank.

In an effort to obtain a refund of stamp taxes, the surviving corporation argued that no transfer had taken place because the statute provided that the "consolidated” corporation was to be deemed the same corporation as each of the constituent institutions. The district court agreed, 213 F. Supp. 631 (1963), and was reversed. Judge Haynsworth, writing for the court, pointed out that the language relied upon had been added in 1933 to § 34a of the National Bank Act to remove an impediment to amalgamations of national and state banks resulting from a Supreme Court decision holding that the identity of a state bank, which merged into a national bank, was lost, so that the consolidated bank could not act as an executor under a previous appointment of the state bank. 4 The Fourth Circuit said that "[tjhere is no evidence whatever that the 1933 amendment was intended to do anything other than to preserve to the consolidated corporation previously existing rights of the state bank constituents, including those rights it exercised under fiduciary appointments of state courts. . . . Congress did not intend by the 1933 amendment to provide for the kind of hermaphroditic institution which Fidelity-Baltimore contends resulted . .. .” 328 F.2d at 956 .

The court summed up as follows: The provision of § 34a for the continuation of the identity of each of the constituents can be harmo ⁴⁸¹ nized with the requirement that the state bank be merged into the national bank by limiting the former provision to the purpose for which it was adopted. Utilized to protect the operation of the consolidated bank and, so far as consistent with federal and state law, its enjoyment of all rights and privileges of the state bank, it usefully serves its intended office. Incidentally, it assists in answering such collateral but related questions as to whether or not a fiduciary’s exchange of stock of a constituent state bank for the stock of the consolidated national bank is a change of investment beyond his authority. Thus limited, it can be harmonized with the clear intendment of other provisions of the statute without impairment of its usefulness in the areas in which it was intended to operate. [Id. at 959 (footnote omitted).] Financial Institutions Article, § 3-712 (c) (1) does not prevent a transfer by operation of law from having taken place in the instant merger.

Shifting from statutory to case law grounds, Citizens urges that the significance of the "identity of an entity before and after a transaction” is illustrated by Ruberoid Co. v. Glassman Construction Co., 248 Md. 97 , 234 A.2d 875 (1967). Claim was made by the material supplier to a subcontractor on a public school construction project against the general contractor’s payment bond surety. Under the condition of the bond it was necessary for the claimant to have a direct contract with a subcontractor of the general contractor. At the time the subcontract was made the subcontractor was a sole proprietor.

The materials were ordered after the subcontractor had incorporated his business and were ordered in the name of his corporation. Because the subcontract contained a covenant not to assign without the written consent of the general contractor, the surety contended that the claimant had a direct contract only with the corporation, but not with the sole pro ⁴⁸² prietor-subcontractor. We rejected this argument and said that" 'if an assignment results merely from a change in the legal form of ownership of a business, its validity depends upon whether it affects the interests of the parties protected by the nonassignability of the contract.’ ” Id. at 104 , 234 A.2d at 879 (emphasis omitted) (quoting Trubowitch v. Riverbark Canning Co., 30 Cal. 2d 335, 345 , 182 P.2d 182, 188 (1947)). Because the purpose of the prohibition against assignment was to assure the