TUCKER v. LASSEN SAVINGS AND LOAN ASSOCIATION

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Court of Appeal, Third District, California.

Jerry TUCKER et al., Plaintiffs and Respondents, v. LASSEN SAVINGS AND LOAN ASSOCIATION, a corporation, and Financial Federation, Inc., a corporation, Defendants and Appellants.

Civ. 13702.

Decided: September 19, 1973

Coshow, Barr & Tocher, by William Coshow, Redding, for defendants-appellants. Price, Burness & Price, by Robert Burness, Chico, for plaintiffs-respondents.

Defendants and appellants, hereinafter referred to as defendants, appeal from a judgment entered in favor of plaintiffs and respondents, hereinafter referred to as plaintiffs, in the sum of $3,724.85. The facts giving rise to the litigation are as follows.

Three of the four plaintiffs were engaged either as real estate brokers or salesmen. In January of 1969, plaintiffs purchased a parcel of property for the sum of $11,400, making a down payment of $4,000 and financing the remainder with a loan from defendants in the usual form of a deed of trust secured by a note. The note contained a customary provision that if the makers of the note should ‘sell, convey or alienate the property described in the Deed of Trust securing this note, or any part thereof, or any interest therein, or shall be divested of title, or interest therein in any manner or way, whether voluntary or involuntary, the holder hereof may, at its option, declare any portion of the entire amount of principal and interest to be immediately due and payable.’

The plaintiffs also executed a ‘Borrower's Statement of Understanding’ containing the following language: ‘We understand that your loan committee has approved this loan not only because they consider the property adequate security but also because of our credit rating. Therefore, should we sell or transfer the property to some other person whose credit the loan committee has had no opportunity to examine, the Association reserves the right to either approve the new party or parties or declare the entire sum due and payable.’

The deed of trust executed by the plaintiffs as trustors contained language almost identical to that in the note it secured. Although the plaintiffs admitted that they knew that the documents contained some language about acceleration clauses, they denied they understood it. There is testimony from plaintiffs, however, that when they were considering a sale they inquired around as to the meaning of the language but did not contact defendants.

On November 7, 1969, plaintiffs entered into a contract of sale of the subject property to Joseph A. Noll and Delia M. Noll. Defendants were not notified of this transaction, but several months later became aware of it and gave notice that in accordance with the note and deed of trust held by them they were calling for full payment of the loan. The plaintiffs were unable to pay the loan and were unable to find any other lending agency to take over the financing. Although defendants filed a ‘notice of default and election to sell under the deed of trust,’ an arrangement was worked out whereby the defendants permitted the Nolls to assume the loan at a higher rate of interest and upon paying certain charges.

The court found in favor of plaintiffs and awarded them damages in the amount of $3,724.85, the amount plaintiffs had invested and lost in the property. The court made findings of facts and conclusions of law, but the only significant conclusion made was that the exercise by defendants of the acceleration clause, which we shall hereafter refer to as the ‘due on sale’ clause, was an unreasonable restraint on alienation under Civil Code section 711. Although plaintiffs had pleaded a cause of action in estoppel, the court made no findings thereon, limiting itself to a finding that defendants' security was not impaired by the sale to the Nolls.

Plaintiffs, in a well written brief, urge a number of general contentions in support of the judgment: That the ‘due on sale’ clause is unreasonable and unnecessary inasmuch as defendants' security was unimpaired; that the contract was ambiguous; that plaintiffs could have entered into a lease with an option to buy with the Nolls and have avoided the operation of the acceleration provisions.

The judgment cannot be supported on any of the grounds urged by plaintiffs. The trial court makes no conclusion that the agreement is ambiguous and we find no ambiguity. The argument that plaintiffs might have entered into a lease with an option to purchase does not avail them as that is not what they did. They made a contract of sale, an exhibit in this case, which clearly operates to transfer equitable title to the buyers at this time and fee title when the contract is fully performed. In fact, plaintiffs advance no serious argument that the contract of sale to the Nolls did not come within the purview of acceleration provisions of the ‘due on sale’ clause, contending instead, as we have said, that under the circumstances of this case its enforcement is unjust and unreasonable inasmuch as the lenders' security was not jeopardized by the sale.

Were we to view this case as a case of first impression, our task would require an analysis of the entire field of justifiable and unjustifiable restraints on alienation. But this case is far from being such case of first impression. Thus we are limited in our view to the precise points here involved. The landmark case in the field of permissible restraints on alienation wherein a lender imposed conditions as a condition of making a loan is Coast Bank v. Minder-hout (1964) 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265. In that case, plaintiff bank made loans to defendant upon the condition that defendant borrower would not transfer or encumber without the bank's consent, and if such transfer or encumbrance was made, the entire indebtedness would immediately become due. The original borrower, Enright, conveyed to the defendant, and plaintiff bank instituted foreclosure proceedings when the defendant was unable to pay off the entire loan which the bank had declared due under the acceleration provisions of the loan. The Supreme Court held the accelerated clause valid, declaring: ‘A restraint on alienation in an executory land contract has been upheld because of the vendor's interest in the upkeep of the property and in the character and integrity of the purchaser. (Sloman v. Cutler, 258 Mich. 372, 376, 242 N. W. 735; see Goddard, Non-Assignment Provisions in Land Contracts, 31 Mich.L. Rev. 1; In re Congested Dists. Board (1919) 1 Irish R. 146, 150; cf. Rest., Property, § 416.) In the present case it was not unreasonable for plaintiff to condition its continued extension of credit to the Enrights on their retaining their interest in the property that stood as security for the debt. Accordingly, plaintiff validly provided that it might accelerate the due date if the Enrights encumbered or transferred the property.’ (Id., 61 Cal.2d at p. 317, 38 Cal.Rptr. at p. 508, 392 P.2d at p. 268.)

A succession of cases followed, all affirming the principle that acceleration clauses were not an invalid restraint on alienation. (See Jones v. Sacramento Savings & Loan Assn. (1967) 248 Cal.App.2d 522, 56 Cal.Rptr. 741, Hellbaum v. Lytton Sav. & Loan Assn. (1969) 274 Cal.App.2d 456, 79 Cal.Rptr. 9, both citing with approval the Coast v. Minderhout case, supra; for a critique of the Hellbaum case, see 22 Hastings L.J. (1971) p. 431.)1

The case, however, which most nearly coincides factually with the instant case is that of Cherry v. Home Sav. & Loan Assn. (1969) 276 Cal.App.2d 574, 81 Cal.Rptr. 135. The plaintiff in that case had executed a note and deed of trust in favor of the defendant with an acceleration clause for all purposes identical with the one under our consideration. The plaintiff there also entered into a contract of sale with a third party but was unable to secure the consent of defendant lender to the sale unless plaintiff agreed to assume a higher rate of interest on the indebtedness due defendant. He then brought an action for declaratory relief seeking a determination of the court that the acceleration clause under the circumstances was invalid. The court affirmed the decision of the lower court sustaining a demurrer without leave to amend, observing (at pp. 578–579, 81 Cal.Rptr. at p. 138):

‘The due-on-sale provisions of paragraph 12 of the trust deed are not unusual and appear frequently in this type of agreement. The business reasons for it are obvious. First, a substantial loan ordinarily is not obtained for the asking. Lenders run the risk that security may depreciate in value, or be totally destroyed. This risk of loss is reduced in the lender's viewpoint if the borrower is known to be conscientious, experienced and able. Often, as here, a trust deed requires the borrower to maintain the property in good repair, secure and keep adequate insurance in force, satisfy liens, taxes and other encumbrances and in other ways to protect the security. If a borrower were able to sell the security without concern for the debt, he may take the proceeds of the sale, leaving for parts unknown, and the new owner of the property might permit it to run down and depreciate. Thus, the lender places some value on his belief that the person who takes out the loan is reliable and responsible. A lender may, indeed, be willing to loan money to some persons or entities at one rate of interest but to other, less desirable risks only at an increased interest rate.

‘Secondly, loan agreements frequently permit a borrower to pay off a loan before it is due. When interest rates are high, a lender runs the risk they will drop and that the borrower will refinance his debt elsewhere at a lower rate and pay off the loan, leaving the lender with money to loan but at a less favorable interest rate. On the other hand, when money is loaned at low interest, the lender risks losing the benefit of a later increase in rates. As one protection against the foregoing contingency, a due-on-sale clause is employed permitting acceleration of the due date by the lender so that he may take advantage of rising interest rates in the event his borrower transfers the security. This is merely one example of ways taken to minimize risks by sensible lenders.’

The trial judge herein in his memorandum opinion construed the most recent case on the subject, La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113, as enunciating the opinion that the test even in ‘due on sale’ agreements is whether the lender acted reasonably in exercising the acceleration clause. We do not so interpret the La Sala case. In fact, in the La Sala case the court sharply distinguishes ‘due on acceleration’ clauses from ‘due on sale’ clauses.

‘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; to repose an absolute power in the creditor to enforce the clause under any and all circumstances could lead to an abusive application of it and in some cases an arbitrary exaction of a quid pro quo from debtors.’ (Id. at pp. 883–884, 97 Cal.Rptr. at p. 862, 489 P.2d at p. 1126.) (Emphasis ours.)

While it may be true that the language in the La Sala case Supra, is dicta insofar as it relates to ‘due on sale’ clauses, it has the force of declaring existing law in that it distinguishes between ‘due on encumbrance’ clauses from ‘due on sale’ clauses, requiring a showing of reasonableness as a condition precedent to enforcing the former while unmistakably declaring that no such showing is required with respect to ‘due on sale’ provisions. To affirm the case before us, we would have to overturn rather than apply the La Sala case. This, of course, we may not do.

The judgment is reversed.

FOOTNOTES

FOOTNOTE.  

1.  The only definitive textual discussion we have been able to find on the subject generally of acceleration clauses is in South Texas Law Journal, volume 13, page 296, entitled: ‘Is The Practice Of Raising The Interest Rate In Return For Not Exercising An Acceleration Clause On Assumption Of A Mortgage Illegal In Texas As A Restraint On Alienation?’ The article is of significance in its general discussion of the history and underlying philosophy of the problem and the more so because every recent case discussed is a California case.

THOMPSON,* Associate Justice. FN* Assigned by the Chairman of the Judicial Council.

RICHARDSON, P. J., and REGAN, J., concur.