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Court of Appeal, Fourth District, Division 1, California.

Sam L. WILHITE, Jr., Plaintiff and Respondent, v. Henry W. CALLIHAN, et al., Defendants and Appellants.

Civ. 22782.

Decided: July 17, 1981

Gordon H. Rubin, Los Angeles, for defendants and appellants. Jenkins & Perry and Jerome E. Eggers, San Diego, for plaintiff and respondent.

Henry W. and Lucille G. Callihan (the Callihans) appeal the granting of a permanent injunction barring their nonjudicial foreclosure of a second deed of trust on real property purchased by Sam L. Wilhite, Jr. (Wilhite). The Callihans also complain of attorney fees granted to Wilhite. The appeal turns on the right of the Callihans who claim “noninstitutional” lender status to enforce a “due-on-sale”1 clause contained in the second deed of trust securing real property where there has been an unconsented to outright sale of that property. California's lead case, Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970, holds, as to a California institutional lender such as a bank

“that a due-on clause contained in a promissory note or deed of trust cannot be enforced upon the occurence (sic) of an outright sale unless the lender can demonstrate that enforcement is reasonably necessary to protect against impairment to its security or the risk of default.” (Id., at p. 953, 148 Cal.Rptr. 379, 582 P.2d 970; fns. omitted.)

But the Supreme Court limited that holding, saying:

“In the instant case the party seeking enforcement of the due-on clause is an institutional lender. We limit our holding accordingly. We express no present opinion on the question whether a private lender, including the vendor who takes back secondary financing, has interests which might inherently justify automatic enforcement of a due-on clause in his favor upon resale.” (Id., at p. 952, fn. 9, 148 Cal.Rptr. 379, 582 P.2d 970.)

Here we confront that precise but unanswered question.


Mr. Callihan, a retired engineer, is the manager of his own investment portfolio. Mrs. Callihan assists in the management of the portfolio. A substantial portion of the portfolio consists of second trust deed loans. The Callihans have made at least 20 loans secured by trust deeds in the last 5 years. Many of the loans were made through San Diego Home Loan Corporation (SDHLC), trustee on the trust deed and collector of installments due on the loans.

On September 23, 1977, Callihan made a $5,000 “hard cash” loan to Mr. and Mrs. Rogers (not parties to this action) in return for a second deed of trust encumbering the Rogers' residence. The loan was to be paid off in three years and the terms included a prepayment penalty and a “due-on-sale” clause requiring retirement of the loan upon sale of the residence.

On February 15, 1978, when the loan was in default, the Rogers sold and conveyed title in the residence, subject to the second deed of trust, to Wilhite. Wilhite cured the default and continued to make all the installment payments due under the loan by cashier's checks and money orders. In September of 1979, Wilhite made a payment on the loan by means of personal check. The trustee, SDHLC, alerted the Callihans that the Rogers had sold the encumbered property, therefore the balance of the debt, $2,132.55, was due by the express terms of the deed of trust.

A notice of default on the second deed of trust was filed on October 18, 1979. Wilhite promptly sought a permanent injunction from the superior court to bar foreclosure proceedings. The record from the trial court discloses that Wilhite had $44,900 of equity in the house, the house had appreciated in value and Wilhite was at least as solvent as the Rogers. The trial court made these express findings:

a. Wilhite, upon acquiring title to the subject real property, cured the default in installment payments due on the note;

b. Wilhite was more creditworthy than Rogers;

c. Since acquiring title, Wilhite neither committed nor permitted any waste to the subject real property;

d. Since the date of sale, the real property had appreciated in market value.

The trial court characterized the Callihans as “private” lenders, yet held they had failed to meet their burden to justify enforcement of the due-on clause. The Callihans were permanently enjoined from foreclosing on the security and the court awarded attorney fees to Wilhite in the sum of $2,623.75. Pending the Callihans' appeal, the note was paid off on time and in full.



We confront preliminarily Wilhite's contention that the issues tendered by this appeal are moot since the trust deed note has been paid in full. It is well settled law that where the issues on appeal affect the general public interest and there is reasonable probability that the same questions will again be litigated and appealed, an appellate court may adjudicate the issues involved. (In re William M. (1970) 3 Cal.3d 16, 89 Cal.Rptr. 33, 473 P.2d 737; People v. West Coast Shows, Inc. (1970) 10 Cal.App.3d 462, 89 Cal.Rptr. 290.) The claim of a noninstitutional private lender presents just such an issue. Since the disclaimer in Wellenkamp, supra, the private lender or buyer of property has been left in a purgatory of uncertainty. Moreover, the widespread practices of loan brokerage institutions (such as SDHLC) as well as private individuals are at stake. Moreover, where, as here, the loans are short term, it is reasonably probable the issue could never be resolved by an appellate court before payment of the debt. The question before this court is an issue of first impression that demands an early answer.2

Second, there is a viable question as to responsibility for attorney fees depending upon who was the prevailing party in the primary issue. We therefore proceed to grapple with the Callihans' appeal.


As prelude to analysis of Wellenkamp, we note Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265, where the Supreme Court held Civil Code section 711, which proscribes restraints on alienation,3 forbade only unreasonable restraints. The reasonableness of the due-on-sale clause was to be determined by analyzing its necessity in preventing impairment of the lender's security. In that case, the Supreme Court found the due-on clause reasonable, and enforceable.

A due-on clause providing for acceleration of a loan upon encumbrance of property was denied enforcement by the court in LaSala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1353. The suspect clause was found to involve significant restraints on alienation such as to preclude enforcement of the clause unless the lender could show enforcement was necessary to protect its security. (Id., at p. 881, 97 Cal.Rptr. 849, 489 P.2d 1353.)

In Tucker v. Lassen Sav. & Loan Assn. (1974) 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169, the court found enforcement of a due-on clause upon sale of the encumbered property by installment contract constituted an unreasonable restraint against alienation. The court balanced the justification for enforcement of a particular restraint against the quantum of restraint. Again, the burden was placed on the lender to justify the restraint.

Finally, in Wellenkamp v. Bank of America, supra, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970, the court held the automatic enforcement by an institutional lender of a due-on clause upon outright sale of the encumbered property was an unreasonable restraint on alienation. At the outset, the court found the due-on-sale clause was indeed a restraint on alienation:

“The buyer, faced with the lender's demand for increased interest, may insist that the seller lower the purchase price. The seller would then be forced to choose between lowering the purchase price and absorbing the loss with the resulting reduction in his equity interest, or refusing to go through with the sale at all. In either event, the result in terms of a restraint on alienation is clear.” (Id., at pp. 950-951, 148 Cal.Rptr. 379, 582 P.2d 970; fns. omitted.)

The court next examined whether there was reasonable justification such as to overcome the quantum of restraint imposed by the due-on clause. A legitimate interest of the lender must be threatened to justify imposition of the restraint:

“We indicated that such interests, which pertain to protection against impairment to the lender's security, included preservation of the security from waste or depreciation and protection against the ‘moral risks' of having to resort to the security upon default by an uncreditworthy buyer.” (Id., at p. 951, 148 Cal.Rptr. 379, 582 P.2d 970.)

The court found no such overriding interests but specifically limited its holding to those cases involving institutional lenders. (Id., at p. 952, fn. 9, 148 Cal.Rptr. 379, 582 P.2d 970.)

Shortly after Wellenkamp, in Pas v. Hill (Dec.1978) 87 Cal.App.3d 521, 151 Cal.Rptr. 77, this court (2d Div.) faced a similar factual situation to the case at bench. Hill, a private lender, attempted to exercise a first trust deed due on sale clause after the trustor conveyed the real property to a junior mortgagee in lieu of foreclosure by the junior. The court avoided the application of the Wellenkamp rule to a private lender situation by the process of treating the conveyance as an encumbrance rather than an outright sale. With the triggering act so metamorphosed, the court extended the LaSala, supra, rule, reasoning:

“(U)pholding an exercise of the due-on-sale clause here without requiring justification would inhibit not only outright sales but also the making of loans secured by junior encumbrances on the property.” (Pas v. Hill, supra, at p. 529, 151 Cal.Rptr. 77.)

The automatic enforcement of any due-on clause is questionable on two grounds: First, there is the possibility that enforcement of the clause constitutes an unreasonable restraint on alienation in violation of Civil Code section 711. Given even a minimal restraint, the lender must justify the restraint by demonstrating that enforcement is necessary to protect the security from impairment. Moreover, the possibility that a lender's security will be impaired by conveyance of the property is not determined by the lender's status whether institutional or as a private lender. Absent sufficient justification, the private lender is in the same situation as is the institutional lender he violates the longstanding rule against unreasonable restraints on alienation.

The second concern is that the clause is adhesive, albeit of noninstitutional origin. Traditionally, when examining an arguably adhesive contract, the courts look both to the conditions under which the parties entered the agreement (relative bargaining power, unavailability of alternative terms) as well as the conditions under which the terms of the agreement are to be executed (“reasonableness as applied”). (Hetland, Secured Real Estate Transaction (Cont.Ed.Bar 1974) pp. 73-80.)

In the case at bench the contract was prepared by the trustee, an institutional broker. It was a standardized form used by brokerage institutions which included a boilerplate due-on clause. While the rule used to be that unequal bargaining power at inception of the agreement alone could render a contract unenforceable, generally the courts will look further to the reasonableness of the offending clause at the time of attempted execution. (Hetland, supra.) Thus, the due-on clause here albeit adhesive4 at inception would be enforceable upon execution, providing the lender can demonstrate the reasonableness of the application of the due-on clause.

Finally, such a clause in the trust deed, standing alone, is ambiguous and misleading to the trustor. The normal inference to be drawn from it is that the lender is concerned about the security for his deed of trust upon the transfer of ownership of the property. To construe it as granting to the lender an unlimited right to decline to accept a grantee for any reason, including the lender's refusal to consent to a change of the mortgage contract by increasing the rate of interest, is a giant (and undisclosed) step away from the oft protested purpose of this clause. (See Silver v. Rochester Sav. Bank, 73 A.D.2d 81, 424 N.Y.S.2d 945, 947.)

Here the Callihans' agent SDHLC prepared the instrument in question and any ambiguity therein should be resolved against Callihans.

Finally, if foreclosure is not enjoined, a reasonably foreseeable result if the accelerated amount due is not paid is a forfeiture. Neither law nor equity favors forfeiture or a construction of a document so as to result in a forfeiture. (Universal Sales Corp. v. Cal., etc., Mfg. Co., 20 Cal.2d 751, 771, 128 P.2d 665.)

The foregoing constellated reasons and rules lead us to conclude, as a matter of law, the private lender, like the institutional lender, is not entitled to an automatic enforcement of a due-on-sale clause; he must justify the restraint by showing impairment of the security.

The trial court made a series of express findings, supported by uncontradicted and substantial evidence, compelling the conclusion that the Callihans could not, did not, show any danger to or diminution of their security. In fact, to all intents and purposes, their interest was more secure after the sale than before. Thus the Callihans, even conceding a diminished burden in light of their private lender status, show no basis in law or in equity or fact to enforce what is on its face a restraint on alienation. The trial court had both legal and factual grounds to support its grant of injunction.


The Callihans next assert the trial court erred when it awarded Wilhite $2,623.75 in attorney fees pursuant to Civil Code section 1717. The trust deed agreement provided for the payment of attorney fees by the trustor in the event the trustee or mortgagee takes any legal action:


“(3) ... to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which the Beneficiary or Trustee may appear.”

Section 1717 was enacted to establish mutuality of remedy where contractual provision, such as the above provision, provides for the unilateral recovery of attorney fees.

“In any action on a contract, where such contract specifically provides that attorney's fees and costs, which are incurred to enforce the provisions of such contract, shall be awarded to one of the parties, the prevailing party, whether he is specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements ....” (Civ. Code, s 1717.)

The Callihans rely upon Pas v. Hill, supra, 87 Cal.App.3d 521, 151 Cal.Rptr. 77, as basis for the contention that section 1717 is inapplicable where the prevailing party was not personally liable under the contract by virtue of his status as a nonassuming grantee. As to that issue, Pas v. Hill was expressly overruled (by the authoring court) in Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309, 168 Cal.Rptr. 552. The Saucedo court pointed out that although a nonassuming grantee is under no obligation to pay attorney fees should the foreclosing party prevail, in order to protect his equity, the nonassuming grantee must pay attorney fees “actually incurred not exceeding ... ($50) in case of a deed of trust ... (to) cure the default ....” (Civ.Code, s 2924c, subd. (a).)

“This practical liability of the nonassuming grantee is sufficient to call into play the remedial reciprocity established by Civil Code section 1717.” (Id., at p. 315, 168 Cal.Rptr. 552.)

In the circumstances of this case, Wilhite was forced to seek an injunction against foreclosure proceedings in order to protect his equity in the property. Had Wilhite lost in that action, his “practical” obligations for attorney fees would in no wise differ from that of Saucedo or Wilhite's grantor, the Rogers. Wilhite would have been placed in a position where he would have to proffer attorney fees to forestall foreclosure and protect his security. Any renegotiation of the debt or relief from the due-on clause would most certainly involve payment of attorney fees. Wilhite's “practical liability” under the deed of trust provisions for litigation costs justified the trial court's invocation of section 1717.

Judgment affirmed and and cause remanded to the superior court to determine attorneys fees allowable to Wilhite for his successful appeal


1.  The “due-on clause” in issue here provides in part:“(S)hould the (subject real property) ... be conveyed by trustor ... all sums secured shall ... become immediately due and payable.“....“... TRUSTOR AGREES: ... to pay all costs ..., including attorney's fees in a reasonable sum, in any ... action (purporting to affect the rights or powers of Beneficiary or Trustee).”

2.  Three cases are presently pending in the California Supreme Court which involve issues surrounding the noninstitutional lender and the right to enforce a “due-on” clause. (Dawn Investment Co. v. Superior Court (LA 31413, hrg. granted Apr. 29, 1981); Niantic Corp. v. Mill Corp., SF 24283; Tam. v. Calif. Fire Service, SF 24305.)

3.  Section 711 reads: “Conditions restraining alienation, when repugnant to the interest created, are void.”

4.  The trial court concluded the Callihans were private lenders, yet the trust deed in question originated in circumstances not unlike those resulting from an institutional loan. SDHLC a mortgage loan broker was at the operative heart of this transaction. This was not a person to person borrower to lender negotiated loan or trust deed but has many of the characteristics of an institutional loan.

STANIFORTH, Acting Presiding Justice.

WIENER and LANGFORD,* JJ., concur.

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