VALIDITY
THE
OF
"DUE-ON"
RIGHT
TO
MORTGAGE
CLAUSES
ACCELERATE
IN
FURTHER
EVENT
OF
GRANTING
BALANCE
TRANSFER
ENCUMBRANCE
MORTGAGED
GERALD
OF
PROPERTY
W.
EDDINS
249
MORTGAGEE
DUE
OR
ON
I.
Nature and Background
The most sensitive indicators of the unsettled economic
conditions in the United States in the past few years have
been volatile rates of interest.
The real estate business,
highly dependent on the availability of credit to finance
most transactions, is particularly vunerable to increases
in interest rates.
Mortgage lenders, in order to combat
rising interest rates, have turned to the
use of clauses
which were originally designed to protect their security
or amortize loan expenses."'"
These clauses are commonly
known as "due-on-sale" and "due-on-encumbrance" clauses.
Both of these involve application of the so-called acceleration clause, a common device in mortgage law.
These acceleration provisions are often found in the
mortgage or deed of trust, or in the promissory note secured
2
thereby, or in both instruments.
Due-on-sale clauses
reserve to the lender or secured party the right to accellerate the balance due on the obligation upon the alienation,
transfer, sale, or conveyance of the mortgaged property by
mortgator.
Due-on-encumbrance clauses provide for acceler-
ation if the mortgagor further encumbers the object property
such as executing a junior mortgage upon the premises.
The
condition precedent explains the difference in classification although they operate the same after being triggered.
In the present context, because we will consider the clause
1
250
16
in its overall operation as an acceleration device, we will
refer to it generically as a "due-on" clause and make specific reference, where appropriate, to the applicable
triggering event.
A typical due-on-sale clause reads:
Grantors specifically agree that should grantors convey or contract to convey the property herein described in whole or in part, the holder of said
note shall have the right and option to declare the
entire amount of the indebtedness secured thereby
due and payable. In order to exercise such right
and option, the holder of said note shall give
written notice to grantors and to the party to
whom such property was conveyed by grantors, that
the entire indebtedness has been declared due and
payable and demand payment thereof. Such right
and option may be exercised at any time during
the period of one year from the date the contract
to convey or conveyance is executed and notice
thereof given to holder. The failure to pay such
indebtedness so declared to be due in full within
forty-five (45) days after the giving of such
notice shall constitute an event of default under
this deed of trust.
"Mortgage assumption" has been a common means of sell4
m g already-mortgaged property.
In this process, the buyer
agrees to "take-up" the amount still due on his seller's
mortgage and gives the seller the difference between the
sales price and the amount of the debt assumed.
The due-on
clause allows the lender to protect its security interest
by scrutinizing the credit risk of the potential purchaser.
If the mortgagee believes the purchaser to be of poor credit
or unreliable, he will so notify the mortgagor that the note
will be called due if the sale is completed.
251
It is apparent
that the mortgagee has at least a quasi veto power over whom
will assume the existing mortgage.
The lender can effec-
tively prevent a proposed transfer by threatening to accelerate the balance due on the mortgage.
While this right
allows the mortgagee to help prevent waste or dimunition
in value of its security by a change in possession of the
mortgaged property, the lender may require that the purchaser pay a higher rate of interest on the unpaid balance
before it will consent to the transaction.
This latter
privilege is of particular importance and utility to the
lender.
At a time of rising interest rates in the mortgage
market the holder of the mortgage can utilize the due-onsale clause to maximize interest income (or at least to
5
soften profit declines).
It was no surprise to find in-
creasing use of such clauses during the mortgage interest
rates spiral of the 1960's.
The actions of lending institutions in California,
which led the way in implementing these clauses, prompted
one writer to allege that the clauses were being employed
for commercial advantage rather than fulfillment of security
purposes.^
Indeed, some officials of lending institutions
have candidly admitted that interest rate maximization was
the real impetus for the increasing use of these acceleration
7
clauses.
Thus, the exercise of the clause came to rest not
upon the bad credit risk of the prospective buyer, but upon
conditions in the money market.
252
II.
Validity and Enforceability
of "Due-On" Clauses
After this brief sketch of the background of due-on-sale
and due-on-encumbrance clauses, it is fitting to examine in
depth the case law which they generated.
It is not surprising that due-on-sale and due-onencumbrance clauses gave rise to litigation.
Their validity
came under attack against a host of objections, such as
their constituting a penalty or forfeiture, their unreasonableness and inequities, or more commonly as unlawful
g
restraints on alienation or against public policy.
Case law interpreting the validity of due-on clauses is
skimpy (Texas has no decisions on this exact point of law).
California has more decisions concerning due-on clauses
than any other state.
In addition to the quantity of cases,
most of the opinions provide excellent analysis into the
pros and cons of such clauses.
A careful consideration of
the California trend will provide the reader with an insight
into the problem of due-on clauses and the prevalent judicial attitude toward them.
In 1964, the California Supreme Court handed
down the
9
landmark decision m
Coast Bank v. Mmderhout
the validity of the due-on-sale clause.
upholding
In that case,
Burton and Donald Enright received several home improvement
loans from Coast Bank.
In a separate instrument (later
253
recorded) they executed an "Agreement Not to Encumber or
Transfer Property" which provided inter alia:
[Borrowers] . . . will not, without the consent in
writing of Bank, first had and obtained, create or
permit any lien or other encumbrances (other than
those presently existing and/or securing the payment of loans and advances made to them by Bank)
to exist on said real property and will not transfer, sell hypothecate, assign, or in any manner
whatever dispose of said real property, or any
interest therein or any portion thereof . . ."10
Approximately a year later, the Enrights conveyed the property
to the defendants without Coast Bank's consent or knowledge.
The bank first sought to accelerate the due date, but was
unable to collect the outstanding balance of the indebtedness.
It then argued that the instrument was a disguised
security transaction which created an equitable mortgage and
brought an action to foreclose the mortgage.
The trial
court agreed with Coast Bank and ordered foreclosure of the
property.
The district court of appeals reversed, holding
that the agreement was void as a direct restraint on alienation."'""'"
On appeal, a unanimous supreme court reversed the
intermediate court and held a valid equitable mortgage was
created which was not voided by tempering an acceleration
12
clause on a reasonable restraint on alienation.
The court, per Justice Traynor, flatly stated that the
provision prohibiting the Enrights from transferring the
property without the plaintiff's consent was a restraint on
alienation. 13
Justice Traynor went on to say the belief
254
that "the common-law rule against restraints on alienation
prohibits all such restraints has been forcefully criticized
on the ground that it loses sight of the purposes of the
rule and needlessly invalidates reasonable restraints
14
designed to protect justifiable interests of the parties."
He then listed several examples in which reasonable restraints have been permitted:
(1) spendthrift trusts, (2)
restraints imposed on a lessee under a term of years, (3)
restrictions imposed on life estates, (4) restrictions
placed upon the transferability of corporate stock, and
(5) restrictions on alienation by vendees under executory
land contracts.
The last example is upheld because of the
seller's interest in the upkeep of the property and the
character and integrity of the purchaser.
Justice Traynor
saw similar restraint-justifying interests in the case
before him and ruled "it was not unreasonable for plaintiffs
to condition its continued extension of credit to the
Enrights on their retaining their interest
in the property
15
that stood as security for the debt."
Therefore, the pro-
vision to accelerate the due date if the Enrights transferred or further encumbered the property was valid.
The facts of Coast Bank do not present the best basis
for testing the validity of due-on-sale clauses.
The agree-
ment in question was not a true deed of trust or mortgage.
It did not clearly appear to be a security agreement.
otrt;
The
real issue in the case was the validity of the separate
agreement restricting the right to convey or encumber,
16
rather than the validity of a due-on-sale clause.
The separate instrument contained language granting
to Coast Bank their choice of methods to enforce the
agreement:
. . . [I]f default be made in the performance of any
terms hereof . . . Bank may, at its election, in
addition to all other remedies it may have by law,
declare the entire remaining unpaid principal and
interest of any obligations or indebtedness then
remaining unpaid to the Bank due and payable
forthwith."17
Thus, Coast Bank had the choice of traditional contractual
remedies to enforce the promise not to convey or to accelerate the maturity of the note.
Since the bank elected
acceleration, it became a due-on-sale case.
The court did not have any trouble finding that the
due-on-sale clause was a direct restraint, since it burdens
the mortgagor's ability to alienate the property.
But the
opinion concluded that the due-on-sale clause is not void
as an invalid restraint on alienation.
It therefore appears
that Justic Traynor judicially ratified the concept that
"reasonable restraints" are valid and found due-on-sale
clauses to be reasonable.
In 1967, the first case involving validity of due-onsale clauses since Coast Bank reached the appellate level
in California.
In Jones v. Sacramento Savings and Loan
Association, 18 the Court of Appeal for the Third District
256
stated in dictum that a due-on-sale clause was not an
19
invalid restraint on alienation.
In Jones, construction money trust deeds were placed
on lots already
subject to purchase money trust deeds.
The latter contained subordination provisions to the effect
that they would be subordinated to the construction mortgage if the construction loan were accompanied by a permanent take-out commitment.
Suit was brought by Jones, who
had bought the purchase money notes and bid in the property
at his trustee's sale, against Sacramento Savings, which
had bought at sales held by its own trustee.
The court ruled that the construction mortgage fell
short of the permanent loan required by the purchase money
mortgage as a condition of subordination.
Therefore, the
court did not have to squarely consider the validity of a
due-on-sale clause contained in the construction mortgages.
In a footnote, the court, citing Coast Bank, stated that
the clause was enforceable. 20
A third case, Hellbaum v. Lytton Savings and Loan
21
Association
involved a $270,000 note containing a due-on-
sale clause along with a prepayment fee clause.
The latter
clause was made expressly applicable to any accelerated payment the mortgagors might be required to pay if the due-onclause was activated.
The Hellbaums, successors-in-interest
to the original mortgagors (through transactions not
257
material here) executed a contract of sale for $295,000
with a prospective purchaser.
In addition, the Hellbaums
requested that Lytton Savings (mortgagee) approve an assumption by the purchasers of the approximately $264,000 balance
of the mortgage.
Lytton responded that it would so consent
without use of the acceleration clause and prepayment fee
only if the potential purchaser would pay a 5 percent assumption fee.
Thereupon, the buyers withdrew their offer to
purchase.
After default by the Hellbaums, the property was
foreclosed and sold by Lytton.
Later, the Hellbaums brought
suit against Lytton for the difference between the proposed
sales price and the balance of the note (31,000).
The
Hellbaums argued that the prepayment fee coupled with the
exercise of the due-on-sale clause amounted to an invalid
restraint on alienation.
Lytton filed a general demurrer which was sustained by
the trial court.
The court of appeal, citing Coast Bank,
affirmed the trial court and ruled that the actions of a
lender in protecting its security interest in this manner
does not constitute an unlawful restraint on alienation.
The court, in addressing the combined effect of the prepayment and acceleration clauses, stated that a lender may
spread its administrative costs in setting up a loan differently over the term of the loan.
The court went on to say
that a lender has a justifiable interest in refraining a
258
debtor from early payment and such interest permits recovery, through a prepayment fee, of the lender's net costs
22
and loss of profit due to the early payment.
Another California intermediate court case demonstrates
that a transfer "subject to" a deed of trust is also
affected by a due-on-sale
clause.
23
and Loan Association,
In Cherry v. Home Savings
the mortgagors executed a note in
favor of defendant Home Savings secured by a deed of trust
containing a due-on-sale clause.
The Cherrys negotiated to
purchase the property subject to the mortgage and approval
of the transfer was sought.
Home Savings answered that it
would forego acceleration if the Cherrys would assume the
existing note, pay $471 as an assumption fee, and agree to
pay a higher rate of interest on the mortgage.
The Cherrys
went ahead and purchased the property pursuant to these
provisions, but later brought action against Home Savings
seeking declaration of their rights under the deed of trust.
The trial court sustained Home Savings1 demurrer and the
court of appeals affirmed.
The plaintiffs argued that an implied term in the trust
deed required Home Savings to act reasonably in withholding
its consent to any transfer of the property.
The court
rejected this contention relying upon the standard justification for the use of due-on-sale clauses, i.e., protection
of the lender's security.
The court's reasoning was to the
fwi
jl
effect that the lender had a "known quantity" in the existing borrower and that a new owner could possibly allow the
premises to depreciate thereby diminishing the value of the
security interest.
The other basis utilized by the court pertained to
shifting interest rates.
The court's reasoning went:
a
decrease in interest rates permits the mortgagor to refinance at the prevailing, more advantageous rates.
When
the rates increase, lenders are stuck with a portfolio of
loans at unfavorable rates and unable to reap the benefits
of late increases.
Mortgage assumptions would insure that
the loans would remain at the lower, older rates.
The opin-
ion stated that lenders should be protected against increases in interest rates.
(The court did not mention that
lenders can deter refinancing by use of prepayment clauses
as observed in Hellbaum).
The plaintiffs also advanced the invalid restraint on
alienation argument despite the prior decisions upholding
their enforcement.
The court simply answered that the clause
did not amount to an invalid restraint based upon Coast Bank,
24
Jones, and Hellbaum.
Up to this point in the discussion, there has been
basically only one approach in testing the validity of the
due-on-sale clause.
This original approach, set forth by
Justice Traynor, is a per se validation of those clauses
260
that amount to reasonable restraints on alienation.
In 1971,
the California Supreme Court had an opportunity to reevaluate
the per se validity status of due-on clauses.
25
In La Sala v. American Savings and Loan Association,
the supreme court examined the harsh effects that per se
enforcement of due-on-encumbrance clauses had upon a particular mortgagor.
In La Sala, the plaintiffs had received
loans prior to 1964 from American Savings or its predecessors at interest rates under 7 percent.
They had executed
notes and deeds of trusts in favor of American containing
due-on-encumbrance clauses.
In 1969, the two separate
borrowers executed second deeds of trusts to third parties
without American's consent.
About a month later, American
threatened to accelerate under the clauses unless the borrowers agreed to pay nominal waiver fees and higher rates
of interest on the first mortgages.
The plaintiffs answered
with a class action for themselves and others similarly situated.
They sought injunctive relief against enforcement
of the due-on clause by American, declaratory relief that
the clause was void, and punitive and compensatory damages.
After American's demurrer, but before the hearing thereon,
American appeared in the trial court and orally offered to
waive its right of acceleration against the named plaintiffs.
The trial court accordingly dismissed the action on the
basis that the plaintiffs were no longer representatives of
2 61
26
the class-
The court of appeals affirmed.
On appeal, the
supreme court, with one dissent, found the dismissal
unjustified.
The court first considered the nature of a class action.
The court reasoned that the named plaintiffs became fidu ciaries to those on whose behalf they sued.
The plaintiffs
could not compromise the group for individual gain—to do so
would jeopardize the purpose of class actions.
The court
went on to recognize the defendant's action as part of
alleged methods used by lenders to keep a due-on case from
reaching the highest state court.
Justice Tobriner, speak-
ing for the court, said:
If we sanction American's tactic defendants can
always defeat a class action by the kind of special
treatment accorded plaintiffs here and thus deprive
other members of the class of the benefits of the
litigation and any notice of opportunity to enter
into it. 2 7
After resolving the propriety of the class action and
other procedural issues, the court considered the substantive issue in the case:
the validity of the due-on-
encumbrance clause.
Justice Tobriner commenced his discussion of the restraints doctrine with a review of Coast Bank and its
progeny.
Noting that the language in Jones, Hellbaum, and
Cherry concerning due-on-encumbrance clauses was dictum, he
took a fresh look at the clause.
262
Justice Tobriner stated
14
that the justification behind due-on-sale clauses in prior
cases (lender's protection against dimunition in value of
security) does not apply equally to the restraint against
future encumbrances.
He reasoned that:
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. A junior
lien does, of course, create a possibility of future
foreclosure and thus of future transfer of possession. But the risk of future foreclosure—a risk
which reaches fruition in only a minority of cases
—cannot justify an endowment to a lender of an
uncontrolled discretion to accelerate upon the
making of a junior encumbrance. A right to accelerate when foreclosure occurs, or looms imminent,
would fully protect the lender.28
The court went on to hold that the clause was not an inherently illegal restraint upon alienation, but that its
enforcement unlawfully restrains alienation whenever the
mortgator's execution of a junior lien does not endanger
29
the lender's security.
At this stage of the opinion, the borrowers had a major
victory.
They viewed the change from Justice Traynor's
per se approach to Justice Tobriner's flexible approach in
the due-on-encumbrance context as a step forward.
However,
to the opponents chagrin, the court felt obligated to discuss the due-on-sale clause, too.
The court approved Cherry's reasoning that the due-onsale clause was necessary to protect the lender from dangers
263
15
of waste and poor credit risk of the buyer, as well as to
enable him to keep a loan portfolio at current rates.
The
court added in its conclusion:
Following our ruling upholding reasonable restraints
on alienation, we have distinguished the due-on-sale
clause from the due-on-encumbrance clause; 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 respose an absolute
power in the creditor to enforce the clause under
any and all circumstances could lead to an abusive
application of it or in some cases an arbitrary
exaction of a quid pro quo from debtors.
This statement, allowing automatic exercise of a due-on-sale
clause without a court proceeding on its necessity to protect the security, placed opponents of the clause in a
worse position than they were prior to La Sala.
This dictum
gives blanket approval to the mechanical application of the
due-on-sale clause.
Thus, the court appears to ratify im-
plicitly Justice Traynor's per se approach in the due-onsale context, but withdraw from it in due-on-encumbrance
situations, preferring instead a reasonable-under-the circumstances approach.
Further commentary on La Sala and the enforceability of
the due-on-sale clause was soon forthcoming from the California Supreme Court.
The case was Tucker v. Lassen Savings
and Loan Association. 31
16
In Lassen, the plaintiffs executed a promissory note
secured by a deed of trust to Lassen Savings and Loan.
Both
instruments contained due-on-sale clauses to the effect that
i fa
if plaintiffs should "sell, convey or alieyiate the property
. . . or any part thereof, or any interest therein, or shall
be divested of title, or any interest therein in any manner
32
or way,"
Lassen could accelerate the balance.
In addition,
the plaintiffs also executed a document entitled "Borrower's
Statement of Understanding" which stated:
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
'.es or declare the entire sum owing
Ten months later, plaintiffs executed an installment
land contract with the Nolls, who had been month-to-month
tenants on the premises.
The plaintiffs were to retain
legal title to the property until the complete purchase price
had been paid.
After learning of the contract, Lassen
demanded that plaintiffs pay off the outstanding balance
along with prepayment fees of $230.
Plaintiffs were unable
to do so, but they quitclaimed the property after the Nolls
arranged to assume the loan at a rate of 1.75% higher than
the outstanding mortgage.
265
Plaintiffs brought suit against Lassen on unreasonable
restraint upon alienation grounds.
The trial court found
the events surrounding the contract in no way impaired
Lassen's security, and ruled that Lassen's exercise of the
due-on-sale clause constituted an unreasonable restraint
under California law.
On appeal, the supreme court stated that two factors
must be considered in viewing such due-on cases:
(1) the
justification for the particular restraint, and (2) the
quantum of restraint involved.
In explaining the relation-
ship between these two elements, Justice Sullivan wrote:
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.^
In applying these factors to the case at hand, Justice
Sullivan found that the difference in the tolerable quantum
of restraint in situations involving installment land contracts and those involving outright sales was striking.
He
reasoned that in the latter, the mortgagor-vendor normally
pays off the prior deed of trust with proceeds from the
sale.
This avoids operation of the due-on clause.
There-
fore, little, if any restraint upon alienation arises.
However, in installment land contract cases, the situation is different.
The mortgagor-vendor most often does
266
not receive enough down payment to discharge the balance of
the existing mortgage.
Justice Sullivan concluded that
automatic enforcement of the due-on-sale clause would virtually eliminate conveyance by installment land contracts in
all situations where the balance due on the mortgagorvendor's note was substantial.
For these reasons, the court said, a due-on-sale clause
is not to be "enforced simply" because the mortgagor-vendor
"enters into an installment land contract for the sale of
35
the security."
Instead, the clause can be lawfully
enforced only after the beneficiary-mortgagee demonstrates
"a threat to one of his legitimate interests sufficient to
justify the restraint on alienation inherent in its enforce36
ment."
The court stated that such legitimate interests
include protection from waste and guarding against the
"moral risks" of having to foreclose upon default, but suggested in a note that other interests may have similar
37
effect.
One interest that will not justify the restraint
imposed by a due-on clause is the lender's maintaining its
portfolio at current rates of interest.
This was expressly
rejected
the court in the installment land contracts
8
4- ^ 3 by
context.
Justice Sullivan placed the burden upon the mortgagee
to show that the party in possession under the contract is,
or likely to be, treating the property in such a way which
will probably result in impairment of the security.
After
this is demonstrated, the mortgagee "may properly insist
39
upon enforcement of the due-on clause.
Since Lassen made
no such showing here, the court ruled that Lassen's exercise
of the due-on-sale clause constituted an unreasonable
restraint on alienation in violation of California law.
Thus, the California Supreme Court has rejected automatic enforcement of both types of due-on clauses in two
instances.
In La Sala, the reasonble-under-the-circumstances
approach was adopted to test the validity of due-onencumbrance clauses.
The Lassen court employed the same
flexible approach, requiring lender justification for the
exercise of a due-on-sale clause, where the vendor seeks to
convey by means of an installment land contract.
In other
contexts involving due-on-sale clauses, the per se validity/
automatic enforcement doctrines still appear to be good law.
In the above discussed cases, the due-on clauses were
attached as invalid restraints on alienation.
However,
three recent decisions in the Florida and Arizona intermediate appellate courts have refused to sanction automatic
enforcement of due-on-sale clauses on other grounds. 4 0 The
most notable of these cases is Tucker v. Pulaski Federal
41
Savings and Loan Association
decided by the Arkansas high
court in 1972.
268
In Pulaski, the mortgagor executed a mortgage containing a due-on-sale clause upon an apartment complex to
Pulaski Federal.
The mortgagor began experiencing diffi-
culties in renting out the apartments as the neighborhood
changed from all white to black.
The mortgagors negotiated
with a black couple (Belchers) for the sale of the property
upon request for its consent to the proposed transfer,
Pulaski refused.
Nevertheless, the Belchers purchased the
complex "subject to" the mortgage.
Pulaski then brought
action against both parties for violation of the clause and
prayed for foreclosure under the mortgage.
The defendants
responded, alleging that the acceleration was "arbitrary"
and an "unconscionable restraint," and that the clause was
invalid and void.
The trial court, finding that Pulaski
had no obligation to justify its refusal
to consent and
that Pulaski had "valid business reasons" for its refusal,
ordered foreclosure.
The supreme court reversed the lower
court on the basis that a court of equity will not enforce
a penalty.
The court stated that even though there is no Arkansas
case governing the facts at hand, a prior case held "that
equity will grant relief against an attempted acceleration
42
for inequitable conduct."
Chief Justice Harris, speaking
for the court, wrote:
2G9
Of course, we can certainly see why a mortgagee
would object to some transfers; a mortgagor, if
permitted could sell his equity in property and
transfer the indebtedness to a person who had
been convicted of operating a bawdy house, operating a gambling house, or illegally selling
whiskey or drugs, and naturally a mortgagee would
not desire to accept such a person, realizing
that the property could be used by that person for
a similar purpose. The same might be true of an
individual who persistently had failed to pay his
obligations, who was without a job, or who had a
record of permitting property to deteriorate.
On the other hand, and this frequently happens,
a mortgagor could be transferred from his job to
another location and, if persons to whom he desired to sell the property could be arbitrarily
disapproved by the loan company he could be in a
position of being forced to sell to someone at a
great sacrifice. This could well be true even
though a loan might be three-fourths paid. The
validity of such a requirement would leave a
mortgagor at the mercy of the mortgagee. Accordingly, we are in full agreement with the court
that decided the case cited [Harn] that there must
be legitimate grounds for refusal to accept a
transfer to a particular individual or concern.^
[emphasis added]
After finding that the refusal must be based upon rea
sonable grounds, the court concluded that Pulaski did have
reasonable grounds for refusing to accept the Belchers.
The court pointed out a number of facts which led to the
conclusion:
(1) the Belchers' good payment record on a
prior loan from Pulaski was not considered by the loan com
mittee before the loan was disapproved, (2) any bad items
on the Belchers credit report were prior to the prior loan
and (3) Pulaski could look to the personal liability of
the mortgagor-vendor.
The Pulaski court thereby arrived at essentially the
270
same result, that all due-on-sale clauses are not automatically enforceable, as La Sala and Lassen by employing the
rationale that a county of equity will not enforce a penalty.
In light of the above discussion, it is clear that the
acceleration clause is obviously a restraint on the mortgagor's ability to dispose of the property.
Nevertheless,
as long as the due-on clause does not attempt to restrict
absolutely the mortgagor's ability to dispose of his
property, there is not present the type of restraint on
alienation that would render the clause void.
The restraint
may or may not be unlawful depending upon its reasonableness
compared to the justifiable interests of the parties.
This
reasonable-under-the circumstances approach requires the
lender to allege and prove protection of its security in
order to justify enforcement of due-on clauses.
It appears
that commercial advantage will not justify enforcement of
the clause.
If the lender fails in demonstrating legitimate
grounds for exercising the clause, it risks judicial disapproval of its action in a later proceeding.
FOOTNOTES
1.
Bonnanno, Due on sale and prepayment clauses in real
estate financing in California in times of fluctuating interest rates, 6 Univ. of San Francisco
L. Rev. 267, 271 (1972).
2.
Note, The Case for Relief From Due-on-Sale Provisions:
A Note to Hellbaum v. Lytton Savings and Loan Association, 22 Hastings L. J. 431 n.6 (1971).
3.
Warren, 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, 13 So. Tex. L.J. 296, 297
(1972).
4.
Storke and Sears, Transfer of Mortgaged Property, 38
Cornell L. Q. 185, 188-91 (1953).
5.
Bonnanno, supra note 1, at 271.
6.
Valensi, The Due-on-Sale Clause—A Dissenting Opinion,
45 L.A. Bar. Bull. 121 (1970).
7.
See, Volkmer, The Application of the Restraints on
Alienation Doctrine to Real Property Security
Interests, 58 Iowa L. Rev. 747, 770 (1973).
8.
See, Annot., 69 A.L.R.3d 713 (1976).
9.
61 Cal. 2d 311, 392 P.2d 265, 38 Cal. Rptr. 505 (1964).
10.
61 Cal. 2d at 313 n.2, 392 P.2d at 266 n.2, 38 Cal.
Rptr. at 506 n.2.
11.
Coast Bank v. Minderhout, 32 Cal. Rptr. 584, 586 (Dist.
Ct. App. 1963).
12.
61 Cal. 2d at 315-17, 392 P.2d at 267-69, 38 Cal. Rptr.
at 507-09.
13.
Id. at 316, 392 P.2d at 268, 38 Cal. Rptr. at 508.
14.
Id.
23
15
15.
Id. at 317, 392 P.2d at 268, 38 Cal. Rptr. at 508.
16.
Hetland, Real Property and Real Property Security: The
Weil-Being of the Law, 53 Calif. L. Rev. 151, 16567, 170 (1965).
17.
61 Cal. 2d at 313 n.2, 392 P.2d at 266 n.2, 38 Cal.
Rptr. at 506 n.2.
18.
248 Cal. App. 2d 522, 56 Cal. Rptr. 741 (Dist. Ct.
App. 1967).
19.
Id.
at 527 n.3, 56 Cal. Rptr. at 745 n.3.
20.
Id.
21.
274 Cal. App. 2d 456, 79 Cal. Rptr. 9 (Dist. Ct. App.
1969).
22.
Id. at 459, 79 Cal. Rptr. at 11.
23.
276 Cal. App. 2d 574, 81 Cal. Rptr. 135 (Dist. Ct.
App. 1969) .
24.
Id. at 580, 81 Cal. Rptr. at 139.
25.
5 Cal. 3d 864, 489 P.2d 1113, 97 Cal. Rptr. 849 (1971).
26.
91 Cal. Rptr. 238 (Dist. Ct. App. 1970).
27.
5 Cal. 3d at 873, 489 P.2d at 1118, 97 Cal. Rptr. at
854.
28.
Id. at 880, 489 P.2d at 1123, 97 Cal. Rptr. at 859.
29.
Id. at 869, 489 P.2d at 1145, 97 Cal. Rptr. at 851.
30.
Id. at 883-84, 489 P.2d at 1126, 97 Cal. Rptr. at 862.
31.
12 Cal. 3d 629, 526 P.2d 1169, 116 Cal. Rptr. 633 (1974).
32.
Id. at 630, 526 P.2d at 1170, 116 Cal. Rptr. at 634.
33.
34.
Id.at
at 635
631
n.3,
526 P.2d
at 1171
Cal.
n.3.
Id.
at
633,
526 P.2d
at 1173,
116 n.3,
Cal. 116
Rptr.
at Rptr.
637.
f
«„•
35.
Id. at 635, 526 P.2d at 1175, 116 Cal. Rptr. at 639.
36.
Id.
37.
Id. at 635 n.10, 526 P.2d at 1175 n.10, 116 Cal. Rptr.
at 639 n.10.
38.
Id.
3940.
Id. at 635, 526 P.2d at 1175, 116 Cal. Rptr. at 639.
Clark v. Lachenmeier, 237 So. 2d 583 (Fla. App. 1970).
Baltimore Life Insurance Company v. Harn, 15 Ariz.
App. 78, 486 P.2d 190 (1971).
41.
252 Ark. 849, 481 S.W.2d 725 (1972).
42.
Id. at 852, 481 S.W.2d at 728.
43.
Id. at 853, 481 S.W.2d at 729.
»* f
APPENDIX
Sample clause from Deed of Trust used by a Lubbock
savings and loan association.
Transfer of the Property:
Assumption.
If all or any
part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent
excluding (a) the creation of a lien or encumbrance subordinate to this Deed of Trust, (b) the creation of a purchase
money security interest for household appliances, (c) a
transfer by devise descent or by operation of law upon the
death of a joint tenant or (d) the grant of any leasehold
interest of three years or less not containing an option to
purchase.
Lender may, at Lender's option, declare all the
sums secured by this Deed of Trust to be immediately due and
payable.
Lender shall have waived such option to accelerate
if prior to the sale or transfer.
Lender and the person to
whom the Property is to be sold or transferred reach agreement in writing that the credit of such person is satisfactory to Lender and that the interest payable on the sums
secured by this Deed of Trust shall be at such rate as Lender
shall request.
If Lender has waived the option to accelerate
provided in this paragraph 17, and if Borrower's successor in
interest has executed a written assumption agreement accepted
in writing by Lender, Lender shall release Borrower from all
obligations under this Deed of Trust and the Note.
26