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Court of Appeal, Fourth District, Division 2, California.

Cynthia J. WELLENKAMP, Plaintiff and Appellant, v. BANK OR AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a National Banking Association, and Continental Auxiliary Co., Defendants and Respondents.

Civ. 15974.

Decided: March 10, 1977

Badger Law Corp. and Fred R. Crane, Riverside, for plaintiff and appellant. George W. Coombe, Jr., Harris B. Taylor, Alfred T. Twigg and John A. Judge, Los Angeles, for defendants and respondents. Jerome Zamos, Santa Barbara, as amicus curiae in support of plaintiff and appellant.

For Opinion on Hearing, see 148 Cal.Rptr. 379, 582 P.2d 970.


This appeal is from a judgment of dismissal entered after the trial court sustained, without leave to amend, a general demurrer to a first amended complaint for declaratory relief. By her first amended complaint, appellant sought a declaration of her rights as purchaser of property which was subject to a trust deed containing an acceleration clause upon sale or transfer of the property.

The complaint alleges the following facts: In 1973, plaintiff's predecessors in interest, Birdie May Mans, Fred Mans and Dorothy L. Mans (hereafter referred to as Mans), executed a promissory note secured by a deed of trust on the subject property in favor of Bank of America National Trust and Savings Association (hereafter Bank of America). In 1975 plaintiff Cynthia Wellenkamp purchased the property from the Mans. A grant deed transferring title to plaintiff was recorded on July 10, 1975. Thereafter, on September 10, 1975, defendant Bank of America caused to be executed and delivered to plaintiff a notice of default and election to sell under deed of trust. A copy of the ‘Notice of Breach’ is attached as an exhibit and made a part of the complaint. The sole breach recited in the notice was the defendant's decision to exercise its option to accelerate the due date because of the sale to plaintiff of the property which was subject to the deed of trust.

Paragraph 5 of the trust deed provided in pertinent part as follows: ‘. . . in the event Trustor or any successor in interest to Trustor in the property sells, conveys, alienates, assigns or transfers said property, or any part thereof, or any interest therein, . . . or becomes divested of his title or any interest therein in any manner or way, whether voluntary or involuntary, or upon default by Trustor in the performance of any agreement hereunder . . . Beneficiary shall have the right, at its option, to declare said note or notes and any other indebtedness or obligation secured hereby, irrespective of the maturity date specified in any note or written agreement evidencing the same, immediately due and payable without notice . . ..’

The controversy alleged to exist between the parties is that plaintiff contends that the above clause is unenforceable, either absolutely or under the circumstances of this case; whereas defendant contends that it is enforceable here, and that the sale by Mans entitles defendant bank to accelerate the due date, without further showing by defendant.

The complaint asks for a preliminary injunction staying the foreclosure proceedings until the case can be heard on its merits, and for a judicial determination that the acceleration (due-on-sale) clause is unenforceable in the absence of a showing by defendant that the sale endangers the lender's security interest in the property.

The inquiry on this appeal is confined to the consideration of whether the amended complaint states facts sufficient to support an action for declaratory relief, and whether it is necessary to return the matter to the trial court for a declaration of rights and duties of the parties under the deed of trust.

Section 1060 of the Code of Civil Procedure provides in pertinent part as follows: ‘Any person interested under a deed, will or other written instrument, or under a contract, or who desires a declaration of his rights or duties with respect to another, or in respect to . . . property . . . may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action in the superior court . . . for a declaration of his rights and duties in the premises, including a determination of any question of construction or validity arising under such instrument or contract. . . . The declaration may be either affirmative or negative in form and effect, . . .’

Unquestionably a justiciable controversy has arisen and exists between the parties as to their rights and duties under the deed of trust. There is an actual controversy touching ‘the legal relations of parties having adverse legal interests' and capable of ‘specific and conclusive relief by judgment within the field of judicial determination.’ (Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 57 S.Ct. 461, 81 L.Ed. 617; Silva v. City & County of San Francisco, 87 Cal.App.2d 784, 789, 198 P.2d 78; Monahan v. Dept. of Water & Power, 48 Cal.App.2d 746, 751, 120 P.2d 730.) The theory of the demurrer and of defendant's argument on this appeal is that the complaint fails to state a cause of action for declaratory relief because it appears from the allegations therein that the plaintiff is not entitled to a favorable declaration. This view has been expressly rejected by the California Supreme Court. In Maguire v. Hibernia S. & L. Soc., 23 Cal.2d 719, 146 P.2d 673, the Supreme Court, after discussing the trial court's discretion, under section 1061 of the Code of Civil Procedure, to refuse to make a binding declaration of rights and duties where its declaration is not necessary or proper at the time under all of the circumstances, then stated: ‘But the fact that the party seeking to set the judicial machinery in motion is on the wrong side of a controversy cannot be ascertained prior to the court's consideration and determination thereof, and it cannot be said that a declaration embodying that determination would not be necessary or proper merely because the plaintiff entertained a misconception of the law. Thus, as previously noted, it has been held that where the plaintiff is not entitled to a favorable declaration, the court should render a judgment embodying such determination and should not merely dismiss the action. (Anderson, Declaratory Judgments, p. 271.)’ (Maguire v. Hibernia S. & L. Soc., supra, at p. 731, 146 P.2d at p. 679.)

Therefore, it was error to test the sufficiency of the amended complaint herein by a determination of the merits of the controversy alleged therein. However, where it appears that any declaration of the rights of the parties would necessarily have been unfavorable to the plaintiff, the procedural error of the trial court does not constitute ground for reversal of the judgment. In Anderson v. Stansbury, 38 Cal.2d 707, 242 P.2d 305, the court declined to reverse where the trial court erred in entering a nonsuit rather than a declaratory judgment in disposition of one count, where the disposition of the remaining counts constituted the equivalent of a declaration that plaintiff had failed to establish any rights. (Id., at p. 717, 242 P.2d 305.) In Haley v. L. A. County Flood Control Dist., 172 Cal.App.2d 285, 342 P.2d 476, the reviewing court affirmed a judgment of dismissal on sustaining of a demurrer, where the object of declaratory relief could be obtained by the ruling of the Court of Appeal. (Id., at pp. 293–294, 342 P.2d 476; see also Pylon, Inc. v. Olympic Ins. Co., 271 Cal.App.2d 643, 657, 77 Cal.Rptr. 72; Davis v. City of Santa Ana, 108 Cal.App.2d 669, 239 P.2d 656.)

Having determined that the complaint states facts sufficient to constitute a cause of action for declaratory relief, we now consider whether it is necessary to reverse the judgment of dismissal and remand the case to the trial court for further proceedings. We have concluded that it is not. As in Haley v. L. A. County Flood Control Dist., supra, the object of declaratory relief may be obtained by the ruling of this court.

The facts are not in dispute. The case involves a trust deed containing a ‘due-on-sale’ clause; the property was sold and title transferred; the defendant elected to enforce the acceleration clause. The plaintiff has made no attempt, either in the complaint or in her argument, to suggest that this was anything but an outright sale. There is no suggestion that it had any elements of a land sale contract or that the original borrower retained any interest in the property. On the other side, the defendant has made no contention that the sale in question endangered the lender's security interest in the property. The defendant relies upon the right to an automatic enforcement of the ‘due on’ outright sale clause.

Upon these facts the plaintiff contends that automatic enforcement without a showing that it is reasonably necessary to protect the security interest constitutes an unreasonable restraint on alienation in violation of section 711 of the Civil Code. Defendant contends that the restraint is reasonable, in that the ‘quantum of restraint’ in an outright sale is slight and that ample lender justification may be found in the lender's economic pressures.

The issues thus presented in this appeal are controlled by the Supreme Court decision in Coast Bank v. Minderhout, 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265. That case involved the foreclosure of an equitable mortgage. The property owner had executed a promissory note for certain indebtedness to plaintiff and had executed a separate instrument providing for acceleration if the owner transferred or encumbered without the lender's consent before their indebtedness was paid. Upon the sale of the property to the defendant before the debt was paid, the plaintiff elected to accelerate the due date. Being unable to collect the unpaid balance, the plaintiff brought an action to foreclose.

The court held, ‘In the present case it was not unreasonable for [the lender] to condition its continued extension of credit to the [borrowers] on their retaining their interest in the property that stood as security for the debt. Accordingly, [the lender] validly provided that it might accelerate the due date if the [borrower] encumbered or transferred the property.’ (Id., at p. 317, 38 Cal.Rptr. at p. 508, 392 P.2d at p. 268.)

Plaintiff finds it significant that the Supreme Court reserved the question whether the promise not to transfer or encumber would be directly enforceable by injunction or specific performance. However, that reservation has no application to the facts of this case. The defendant herein was not seeking direct enforcement of the promise not to transfer, but sought, just as did the plaintiff in the Coast Bank case, to accelerate the due date upon the transfer of the property by the borrower.

Plaintiff contends that later Supreme Court decisions have modified the holding of the Coast Bank case so that the acceleration provision may not be enforced absent a showing that there is a reasonable need to call the loan in order to protect the lender's security. In support of this contention plaintiff cites La Sala v. American Sav. & Loan Assn., 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113, and Tucker v. Lassen Sav. & Loan Assn., 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169.

In the La Sala case the facts involved attempts by the lender to enforce due on encumbrance provisions in deeds of trust. The action for declaratory relief was brought as a class action seeking to have the due on encumbrance provisions declared invalid as a restraint on alienation.

The Supreme Court, after summarizing the California law on restraints on alienation, pointed out that the reasoning of Coast Bank v. Minderhout, supra, and subsequent Court of Appeal decisions, holding ‘due-on-sale’ clauses valid, was inapplicable to the due-on-encumbrance restraints. The primary difference noted was, ‘A sale of the property usually divests the vendor of any interest in that property, and involves the transfer of possession, with responsibility for maintenance and upkeep, to the vendee. A junior encumbrance, on the other hand, does not terminate the borrower's interests in the property, and rarely involves a transfer of possession.’ The court then concluded as follows: ‘Following our ruling upholding reasonable restraints on alienation, we have distinguished the due-on-sale from the due-on-encumbrance clauses; we have concluded that the lender may insist upon the automatic performance of the due-on-sale clause because such a provision is necessary to the lender's security. We have decided, however, that the power lodged in the lender by the due-on-encumbrance clause can claim no such mechanical justification. We sustain it only in the case of a trial court's finding that it is reasonably necessary to the protection of the lender's security . . ..’ (La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d at pp. 880, 883–884, 97 Cal.Rptr. at pp. 859, 862, 489 P.2d at pp. 1123, 1126.)

In Tucker v. Lassen Sav. & Loan Assn., supra, the Supreme Court considered the question whether a lender may automatically enforce a ‘due-on’ clause when the trustor-obligor has contracted to sell the secured property on an installment land sale contract. In that case, the court concluded that such a contract does not necessarily justify enforcement of the clause by the lender. The court again reviewed the Coast Bank case and considered the principles applicable to the problems as they were introduced in La Sala. The principles applied by the Supreme Court in considering acceleration in ‘due-on’ clauses, as those principles were elucidated in Tucker, relate to ‘justification’ for a particular restraint on alienation and the ‘quantum of restraint’ involved in any particular situation.

‘It is the relationship between these two factors which must govern our consideration of the enforcement of a ‘due-on’ clause in particular circumstances: To the degree that enforcement of the clause would result in an increased quantum of actual restraint on alienation in the particular case, a greater justification for such enforcement from the standpoint of the lender's legitimate interests will be required in order to warrant enforcement.' (Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d at p. 636, 116 Cal.Rptr. at p. 637, 526 P.2d at p. 1173.)

While not fully articulated in the earlier cases, the Supreme Court has consistently applied this test since the first pronouncement in the Coast Bank case.

In case of an outright sale, acceleration of the due date has substantial justification in the creditor's interest in maintaining the direct responsibility of the parties on whose credit the loan was made, yet the restraint is slight, since the buyer is placed in the same position as other buyers of property who must borrow to finance their purchase of property. Therefore, automatic enforcement of acceleration of the due date has been repeatedly approved. (Tucker v. Lassen Sav. & Loan Assn., supra, at pp. 635–636, 116 Cal.Rptr. 633, 526 P.2d 1169; La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d at pp. 879–880, 97 Cal.Rptr. 849, 489 P.2d 1113; Coast Bank v. Minderhout, supra, 61 Cal.2d at p. 317, 38 Cal.Rptr. 505, 392 P.2d 265; Cherry v. Home Sav. & Loan Assn., 276 Cal.App.2d 574, 578–579, 81 Cal.Rptr. 135; Hellbaum v. Lytton Sav. & Loan Assn., 274 Cal.App.2d 456, 458, 79 Cal.Rptr. 9.)

In the case of a junior encumbrance, acceleration of the obligation secured by the senior trust deed is not automatically justified, since the taking of such encumbrance may or may not endanger the security of the existing lien. The original borrower retains direct responsibility for the debt and for the property and the creditor retains his superior rights to foreclose. Balanced against this slight justification is the more substantial restraint on alienation. Since a junior encumbrance often represents only a small fraction of the borrower's equity, such transactions would be substantially discouraged by an acceleration clause which gives the lender the option of automatically accelerating or imposing interest penalties as a condition of waiver. Therefore, in the case of junior encumbrances the enforcement of an acceleration of the due date is conditioned upon the lender being able to show that his security is in danger of impairment. (Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d at pp. 634–635, 116 Cal.Rptr. 633, 526 P.2d 1169; La Sala v. American Sav. & Loan Assn., supra, 5 Cal.3d at pp. 880–881, 97 Cal.Rptr. 849, 489 P.2d 1113.)

Finally, in the case where the trustor-obligor has entered into an installment land sale contract, the Supreme Court concluded that the automatic enforcement of a ‘due-on’ clause would result in a restraint on alienation of very considerable proportions. ‘In fact it is clear that such enforcement would operate to virtually eliminate alienation by installment land contract in all situations where the property to be conveyed was subject to a deed of trust and the obligation under the note remained substantial. From this standpoint the contrast between an outright sale and an executory sale by installment land contract is striking.’ (Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d at p. 637, 116 Cal.Rptr. at p. 638, 526 P.2d at p. 1174.) Furthermore, the justification for acceleration is slight. ‘It is to be emphasized in this respect that in the case of the installment land contract the vendor retains legal title until the purchase price has been fully paid. Thus in the normal case the vendor, having received a small down payment and retaining legal title, has a considerable interest in maintaining the property until the total proceeds under the contract are received; in this he differs markedly from the vendor of property where there has been an outright sale.’ (Id., at p. 638, 116 Cal.Rptr. at pp. 638–639, 526 P.2d at pp. 1174–1175.)

In view of these repeated statements by the Supreme Court, we must conclude that this is not an area in which subsequent Supreme Court decisions can be read as undermining the rationale of an original holding. Even if it were, it is not for the trial court, nor for this court, to modify or overrule a Supreme Court holding. Any reconsideration of the principle established in the above cases must be by the Supreme Court.

Since the trial court would be compelled to enter a judgment unfavorable to plaintiff, no benefit would result from reversal of the judgment of dismissal and remand to the trial court for further proceedings.

The judgment is affirmed.