PEOPLE v. Federal Home Loan Bank Board, Intervenor and Appellant.

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

The PEOPLE ex rel. George Deukmejian, as Attorney General, etc., Plaintiffs and Appellants, v. GLENDALE FEDERAL SAVINGS AND LOAN ASSOCIATION, a federally chartered association;  and Verdugo Service Corporation, a California corporation, Defendants, Respondents and Appellants, Federal Home Loan Bank Board, Intervenor and Appellant.

Civ. 60306.

Decided: August 21, 1981

George Deukmejian, Atty. Gen., Arthur C. De Goede, Asst. Atty. Gen., Joseph M. O'Heron, Deputy Atty. Gen., and Richard M. Mosk, W. Gary Kurtz, Los Angeles, for plaintiff, appellant and respondent Business and Transportation Agency. McKenna, Conner & Cuneo, William F. McKenna, Aaron M. Peck, G. Howden Fraser, Terry O. Kelly, C. Steven McMurry, Los Angeles, for defendant, respondent and appellant Glendale Federal Savings and Loan Association. Jonathan Heffron, Los Angeles, for intervenor and appellant Federal Home Loan Bank Board. John R. Hetland, a Professional Corporation, John R. Hetland, Berkeley, Charles A. Hansen, Oakland, amicus curiae.

The issue here presented is whether the so-called “Wellenkamp rule” (Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970) restricting enforcement of the “due on sale” clause is applicable to a federally chartered savings and loan association.   In our opinion, as a result of the doctrine of federal preemption, the rule may not be applied against such an association.

This action for declaratory and injunctive relief was commenced by the State of California acting through the Attorney General and the Secretary of the Business and Transportation Agency in 1976, against Glendale Federal Savings and Loan Association (Glendale) a federally chartered institution.   The trial court's decision was not rendered until September of 1979.   The decision in Wellenkamp was announced in 1978.

In a triumvirate of cases, La Sala v. American Sav. & Loan Assn., 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113, Tucker v. Lassen Sav. & Loan Assn., 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169, and Wellenkamp v. Bank of America, supra,—all actions by individuals against lending institutions holding either mortgages or trust deeds on property owned by those individuals as security for loans—the Supreme Court of California has, without declaring them invalid, progressively restricted the enforceability of the so-called “due on” clauses in lending documents.

These various “due on” clauses provide for an acceleration of the due date of a secured loan upon the occurrence of a triggering event such as the further encumbering of the property, the executing of an installment contract for sale or an outright sale of the property without approval from the holder of the security.

Starting with La Sala, the court found enforcement of the clause to be a restraint on alienation where enforcement was triggered by the addition of a junior encumbrance.   In Tucker v. Lassen Sav. & Loan Assn., supra, the same result obtained where the property owner entered into an installment contract for sale of the property.

Finally in Wellenkamp, in a departure from its former holdings, and contrary to the overwhelming weight of authority in other jurisdictions, the court found a restraint on alienation in the enforcement of the “due on sale” clause in the case of an outright sale of the property at a time when “tight money” and high interest rates rendered the obtaining of new financing difficult and expensive.

The Home Owners' Loan Act (HOLA) 12 U.S.C., §§ 1461–1468 adopted by Congress in 1933, authorized the establishment of federally chartered savings and loan associations and created the Federal Home Loan Bank Board (Board) which was empowered to supervise and regulate the activities of these federally chartered savings and loan associations.

HOLA, of course, makes no specific reference to the use by federal savings and loans of the myriad of contractual provisions for their protection, including the “due on sale” provision which were, and continue to be, in wide use by lending institutions.

Instead, Congress granted plenary power to the Board to regulate and mandated in its preamble to HOLA that the Board give “․ primary consideration to the best practices of local mutual thrift and home financing institutions in the United States.”  (12 U.S.C. § 1464, subd. (c)(1).

As early as 1948, the Board adopted a regulation which provided, inter alia, that each loan contract of a federal savings and loan association “shall provide for full protection to the federal association.”  (12 C.F.R., § 545.6–11.)

The Board itself construed that regulation as authorizing the use of the “due on sale” clause as one of the widely accepted methods of protection for a lender.

On June 8, 1976, the Board adopted a more detailed regulation as follows:

“An association continues to have the power to include as a matter of contract between it and the borrower a provision in its loan instrument whereby the association may, in its options, declare immediately due and payable sums secured by the association security instrument, if all or any part of the real property securing a loan is sold or transferred by the borrower without the association's prior written consent.”  (12 C.F.R. § 545.6–11(f), amended and recodified at § 545.8–3(f) (1980).)  (Emphasis added.)

In 1977, Glendale entered into an agreement with the developer of a condominium project to provide “take out” loans to prospective purchasers of the condominium units.   When the California Department of Real Estate refused to approve the arrangement on the basis that Glendale's mortgage loan forms contained a “due on sale” provision, Glendale commenced an action against the California Real Estate Commissioner in the Federal District Court for the Central District of California.

In that action, Glendale contended that the terms of its loan agreements were governed exclusively by federal law and regulations.   Inasmuch as the agreement in question was entered into subsequent to the adoption of 12 C.F.R. 545.8–3 in 1976, the district court decision dealt only with the issue of whether that regulation preempted any attempt by California to prohibit the use of the “due on sale” clause and thus found federal preemption as to any loan made after June 8, 1976.  (Glendale Fed. Sav. & Loan Ass'n. v. Fox, 459 F.Supp. 903.)

The trial court in the instant action declared that by virtue of the judgment in Glendale Federal Sav. & Loan Assn. v. Fox, supra, the State was collaterally estopped from claiming that the Wellenkamp rule applies to any lending instruments executed by Glendale after June 8, 1976, but that the rule did apply to lending instruments executed prior to that date.

The trial court also, in its conclusions of law, declared that it had jurisdiction over the Board, and inferentially that the Board was bound by the judgment because of Board's intervention in the case.   All three parties have appealed from those portions of the judgment which are adverse to them.

In our opinion, the trial court's reliance on the doctrine of collateral estoppel was misplaced and produced an anomalous result.   The issue is much broader than the collateral estoppel effect of a decision of the federal district court.

The issue is whether or not the regulatory power of the Board is such as to oust state attempts to regulate the activities of federally chartered savings and loans.   If it is, there is no basis for distinguishing between loans made before and after the date of the latest federal regulation.   The regulation makes it clear that the Board has always intended federal associations to avail themselves of the “due on sale” clause and any attempt to enforce such clauses in the future will have the blessing of the Board regardless of when the loan was actually executed.  (See Conference of Fed. Sav. & Loan Associations v. Stein (1979) 495 F.Supp. 12.)

It is important to note and reiterate that even in Wellenkamp, the court did not invalidate or bar the use of the “due on sale” clause in lending documents, it only prohibited its enforcement under certain market conditions.

The trial court signed a series of written “Findings of Fact” in support of its decision that the Wellenkamp rule applied to lending instruments executed prior to the effective date of the latest Board regulation—a decision which in substance held there was no federal preemption.

In summary, these “findings” declare that the California rule against the enforceability of the “due on sale” clause has an insignificant impact on federal savings and loan associations in general, and Glendale in particular, and therefore does not interfere with interstate commerce, nor conflict with the power of Congress or the regulatory power of the Board.   All of this in the face of uncontroverted and powerful evidence that the inability to enforce the “due on sale” clause has had a serious and deleterious impact on the ability of any lending institution to survive in an era of volatile and rising interest rates.

We can only conclude that those statements which purport to be “Findings of Fact” are in reality conclusions of law by the trial court which we find to be erroneous.

 The concept of federal preemption of state law is grounded in the Supremacy Clause of the United States Constitution, art. VI, clause 2.   Preemption may be found in the express declaration of Congress of an intent to totally occupy a particular field, by congressional silence on one or more specific phases of an area clearly within the federal domain and fully occupied by Congressional action or by the sheer pervasiveness of the federal regulation.  (Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315;  Hines v. Davidowitz (1941) 312 U.S. 52, 66–67, 61 S.Ct. 399, 403–04, 85 L.Ed. 581.)

In assessing the ability of the states to regulate in an area occupied by federal regulation, the courts generally apply one of two tests.  (1) Is there an express congressional intent to preempt the field, or (2) is there an irreconcilable conflict between the two regulations?  (Florida Avocado Growers v. Paul (1963) 373 U.S. 132, 83 S.Ct. 1210, 10 L.Ed.2d 248.)   In our opinion, the application of either test to the issue here leads inexorably to the conclusion that state law has been effectively preempted.

There can be no question but that the Wellenkamp rule in California is in direct and unavoidable conflict with the Board's regulation, in that California would deny enforcement of a contractual clause specifically authorized by the Board.   As we view it, the issue is simply whether the Board's regulation is a valid exercise of the power which Congress intended to bestow on it.

We must assume that Congress intended, at the very least, that the financial institutions it created would make use of the customary and accepted contractual devices employed by similar institutions, especially those devices designed to protect those institutions' solvency.   It follows that the Board would be authorized to effectuate that intent by adoption of regulations.

“Pursuant to its valid statutory authority, [the Board] has promulgated comprehensive regulations covering all aspects of every federal savings and loan association, ‘from its cradle to its corporate grave’.  People v. State of California v. Coast Federal Savings & Loan Ass'n., S.D.Cal. 1951, 98 F.Supp. 311, 316.”  (Meyers v. Beverly Hills Federal Savings & Loan Assn., 9 Cir., 1974, 499 F.2d 1145, at 1146–1147.)

In Meyers v. Beverly Hills, supra, the issue was whether California Civil Code section 1670, which declares void any contractual provision for predetermination of damages for breach, except under specified circumstances, applied to prepayment penalty provisions in real property loan documents executed by federal savings and loan associations.   A board regulation, 12 C.F.R. 545.6–12(b), specifically authorized such prepayment provisions.

The United States Court of Appeals for the Ninth Circuit held that the Board's regulation was a “valid exercise of the [Board's] delegated power, ․ so that any California law in the area is inapplicable to federal savings and loan associations operating within California.''  (Meyers, at 1147.)   Inasmuch as enforcement of the provision at issue in Meyers could occur at the time of a resale or refinancing and ultimately lead to foreclosure of the property which secured the loan, the issue in Meyers was identical to the issue of enforcement of the “due on sale” clause.   In fact, our research discloses that federal court decisions dealing with the issue of the preemptive effect of the Board's regulations are singularly uniform in holding that there is federal preemption.

We are aware of the fact that in Panko v. Pan American Fed. Sav. & Loan Assn., 119 Cal.App.3d 916, 174 Cal.Rptr. 240, and De La Cuesta v. Fidelity Fed. Sav. & Loan Assn., 121 Cal.App.3d 328, 175 Cal.Rptr. 467, the California Court of Appeal for the First and Fourth Districts respectively, have held that there was no federal preemption.

The Panko court placed considerable stress on the fact that HOLA, while specifically empowering the federal associations to make real estate loans, is silent with respect to “loan details.”   We find that silence perfectly understandable and consistent with the finding of preemption.   The very purpose and objective of establishing administrative regulatory agencies is to relieve the legislative body of the task of legislating such details.  (See Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 60 S.Ct. 907, 84 L.Ed. 1263.)

It would seem that if Congress had intended federal savings and loan practices to be subject to state regulation as to “loan details”, it would have been a simple matter for it to say just that.   Congress' failure to specifically authorize by legislation all of the various permissible clauses to be used in lending instruments cannot be read logically to indicate such an intent.

The Court of Appeal for the Fourth District adopted much of the language of Panko but expanded on it as follows:

“In the event of a foreclosure, a federal savings and loan association would undoubtedly also be subject to state law in obtaining possession of the property.   And it can hardly be otherwise, for there is no federal common law of mortgages or real property.  [Citations.]  The Wellenkamp decision, of course, was based on California Civil Code section 711, the source of California law on the validity of restraints against alienation of real property [citations], ․ and is part of the California law of real property and mortgages.”  (De La Cuesta, at pp. 337–8, 175 Cal.Rptr. 467.)

That rationale, as noted, is in direct conflict with the decision in Meyers v. Beverly Hills, supra.   Beyond that, however, in our opinion, it erroneously characterizes the role and effect of Wellenkamp.   There is, of course, no issue raised here whether in foreclosure, recordation, priority of liens, etc. California procedure shall be applied.   Whether California because of the “Wellenkamp rule”, can deny the remedy of foreclosure to federal savings and loan associations is another matter entirely.

Although Wellenkamp arose in the context of a foreclosure (the exercise of a power of sale in a trust deed) the rule it enunciated has little to do with the traditional law of mortgages and real property.  Wellenkamp did not postulate a rule that the “due on sale” clause itself constituted a restraint on alienation, as is popularly believed.

What Wellenkamp did was to create for California a variable transitory rule on the transferability of a secured loan, which rule is measured by the current market rate of interest on real property loans.   The “restraint on alienation” condemned by Wellenkamp is thus not a restraint imposed by the individual lending institution when it includes a “due on sale” clause in its lending documents.   The restraint, if it is one, is imposed by strangers to the transaction, i. e., the “going rate” of new financing and the effect of inflation on the seller's equity.

The Wellenkamp majority clearly eschewed any holding that the enforcement of the “due on sale” clause was under all circumstances, a restraint on alienation.   In reality, the Wellenkamp court held that where, as a result of high interest rates and “tight money,” a proposed buyer could not “afford” to pay enough money down and obtain sufficient financing for the seller to obtain cash to pay off his loan and realize his inflated equity, the loan or credit of the seller was marketable or transferable.

While we are obligated under the principle of Auto Equity Sales, Inc. v. Superior Court, 57 Cal.2d 450, 20 Cal.Rptr. 321, 369 P.2d 937, to follow Wellenkamp where it is applicable, we do not feel compelled to extend its application unnecessarily or give to it a status that ousts federal regulation.

 In summary, under federal law, a secured real property loan made by a federal savings and loan association, is not automatically transferable to the buyer of the property regardless of the condition of the real estate or money market, Wellenkamp notwithstanding.

 Turning now to the appeal of the Board, we conclude that the Board was not subject to the jurisdiction of the state court.

When the complaint was originally filed in the Superior Court of Los Angeles County, the Board was not named as a party defendant.   Shortly after the filing of the complaint, Glendale caused the matter to be removed to the federal district court.

The Board intervened in the action in the federal court to assert the claim of federal preemption.   When the matter was later remanded to the state court, the Board made a special appearance to contest the state court's jurisdiction over the Board.   The trial court maintained that the Board had submitted to its jurisdiction as a result of its intervention in and remand by the federal court.   We disagree.   The Board was not subject to state court jurisdiction because of the doctrine of sovereign immunity and did not voluntarily submit to the state court jurisdiction.

In view of our disposition of the merits of this appeal, however, the issue has become moot.   Our holding is that the field of regulating federal savings and loan associations is exclusively within the federal jurisdiction.

The judgment is reversed and the matter is remanded to the trial court with directions to enter a judgment in favor of Glendale on the basis that federal law preempts any attempt by the state to apply the Wellenkamp rule against Glendale.   The Board is dismissed from the action.   The state to bear costs.

COMPTON, Associate Justice.

FLEMING, Acting P. J., and BEACH, J., concur.