De La Cuesta v. Fidelity Fed. Sav & Loan Assn.

• Decision Date: 02 July 1981
• Citation: 121 Cal.App.3d 328,175 Cal.Rptr. 467
• Parties: Reginald D. de la CUESTA, et al., Plaintiffs and Appellants, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents. Alphonso MOORE, et al., Plaintiffs and Appellants, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents. John D. WHITCOMBE, Plaintiff and Appellant, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents. Civ. 23253.
• Court: California Court of Appeals Court of Appeals

Page 467

175 Cal.Rptr. 467

121 Cal.App.3d 328

Reginald D. de la CUESTA, et al., Plaintiffs and Appellants, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents.

Alphonso MOORE, et al., Plaintiffs and Appellants, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents.

John D. WHITCOMBE, Plaintiff and Appellant, v. FIDELITY FEDERAL SAVINGS & LOAN ASSOCIATION, et al., Defendants and Respondents.

Civ. 23253.

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

July 2, 1981.

Hearing Denied Aug. 26, 1981.

[121 Cal.App.3d 330] Fred Crane, David M. Ramirez and Mark A. Hiller, Robert E. Boehmer, Riverside, for plaintiffs and appellants.

Hahn, Cazier & Leff, Andrew E. Katz, Steven G. Polard, and Walter L. Blackwell, III, Los Angeles, for defendants and respondents.

Henry L. Judy, Maud Mater, Gary S. Smuckler, Marilyn E. Nathanson and Mark

C. Ellenberg, Washington, D. C., for amicus curiae Federal Home Loan Mortg. Corp. in support of defendants and respondents

George Deukmejian, Atty. Gen., Joseph M. O'Heron, Deputy Atty. Gen., Richard M. Mosk and W. Gary Kurtz, Los Angeles, for amicus curiae Secretary of the Business and Transp. Agency of the State of California in support of plaintiffs and appellants.

John R. Hetland, Berkeley, and Charles A. Hansen, Oakland, for amicus curiae, John R. Hetland, Berkeley, in support of plaintiffs and appellants.

John W. Dumas, Irvine, for amicus curiae in support of plaintiffs and appellants.

OPINION

KAUFMAN, Acting Presiding Justice.

INTRODUCTION

This is an appeal from summary judgment in favor of defendants in three cases consolidated in the trial court. Where appropriate, the cases will be referred to as the de la Cuesta case, the Moore case, and the Whitcombe case. Each action was commenced by the purchaser of property encumbered by a deed of trust seeking declaratory and injunctive relief against threatened foreclosure of the deed of trust by trustee's sale following the purported exercise of the trust deed's due-on-sale clause. The principal defendant in each action is the beneficiary named in the deed of trust, Fidelity Federal Savings and Loan Association, and the defendants will be referred to collectively as Fidelity Federal. The plaintiffs made motions for summary judgment asserting that in the absence of any showing it was reasonably necessary to avoid impairment of the security or risk of default resulting from the sale, Fidelity Federal was precluded from exercising the due-on-sale clause by the California law as set forth in Wellenkamp v. Bank of America (1978) 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970. The trial court granted Fidelity Federal's cross-motion for summary judgment on the ground that application of the state law is precluded by federal preemption.

The principal issues are whether the trial court correctly determined that application of the state law has been federally preempted and, in the Moore and Whitcombe cases, the effect of a provision in each deed of trust that it "shall be governed by the law of the jurisdiction in which the Property is located." A determination that there has been no federal preemption of the state law raises an additional issue in the de la Cuesta case as to whether or not the rule announced in Wellenkamp applies to commercial, income-producing property. We have concluded that application of the state law has not been federally preempted and that the Wellenkamp rule does preclude exercise of the due-on-sale clause in the deed of trust encumbering the commercial property involved in the de la Cuesta case. Accordingly, we reverse the judgment as to each case with directions to the trial court to enter summary judgment in favor of the plaintiffs.

On June 1, 1981, after oral argument and after unanimous agreement of the panel members as to the proper disposition of the issues and the appeal, but before the opinion could be prepared, Division One of the First Appellate District of the Court of Appeal filed its opinion in the case of Stanley E. Panko, et al. v. Pan American Federal Savings and Loan Association, et al., 1 Civ. 47918. In that case in respect to the federal preemption issue the court reached conclusions identical to those reached by us, based on reasoning with which we agree. The reasons and conclusions were ably and succinctly stated in the Panko opinion, and it would serve no useful purpose for us to attempt to craft a wholly original opinion. On the other hand, inasmuch as the Panko decision is not yet final, it is inappropriate that we simply cite it as controlling authority. We have, therefore, resolved to adopt substantial portions of the language of the Panko opinion as our own with appropriate additions and deletions. To avoid the necessity of a multitude of quotes and internal quotes, we simply here state that the substantive portion (as opposed to the statement of fact and disposition) of part I of this opinion, including footnotes, are quoted from the Panko decision except for material enclosed in brackets, including footnotes, which we have added. Deletions from quotations from the Panko opinion, other than the deletion of the name of Pan American and the substitution therefor of Fidelity Federal, will be indicated by ellipses or other appropriate designation.

I THE MOORE CASE

A. The Facts

A fact common to all three cases is that Fidelity Federal is a private mutual savings and loan association chartered by the Federal Home Loan Bank Board pursuant to section 5(a) of the Home Owner's Loan Act of 1933 (12 U.S.C. §§ 1461-1468).

On February 22, 1978, Fidelity Federal made a loan of $58,800 to Paul M. and Debra J. Stitch secured by a deed of trust on their residential real property at 3109 Roosevelt Way, Costa Mesa, in the State of California. The deed of trust contained a due-on-sale clause purportedly giving Fidelity Federal the right to declare the unpaid balance of the loan immediately due and payable in the event the property was sold or otherwise transferred or conveyed by the borrowers.

The deed of trust also contained a provision identified as paragraph 15 stating that the deed of trust "shall be governed by the law of the jurisdiction in which the Property is located." ( ¹ )

On September 15, 1978, the Stitches sold and, by grant deed, transferred the property to plaintiffs Alfonso Moore and Alice Moore.

Having learned that the property had been sold and conveyed to the Moores, Fidelity Federal gave notice of its intention to exercise the due-on-sale clause in the deed of trust and on December 7, 1978, caused to be recorded a notice of default and election to sell under the deed of trust. Whereupon, the Moores instituted this action.

B. Federal Preemption

Background

In recent years the validity of due-on-sale clauses has been a matter of considerable controversy in state and federal courts. In California our Supreme Court has determined that enforcement of a due-on-sale clause upon occurrence of an outright sale constitutes an unreasonable restraint on alienation "unless the lender can demonstrate that enforcement is reasonably necessary to protect against impairment to its security or the risk of default." (Wellenkamp v. Bank of America, supra, 21 Cal.3d at p. 953, 148 Cal.Rptr. 379, 582 P.2d 970.) The court's decision was grounded on Civil Code section 711, ²... (which, as interpreted, invalidates unreasonable restraints on the alienation of real property. (21 Cal.3d at p. 948, 148 Cal.Rptr. 379, 582 P.2d 970.))

Here, (Fidelity Federal makes no claim) ... of an impairment to its security or risk of default as a result of the outright sale of the property to plaintiffs. Consequently, under California law the due-on-sale clause contained in the deed of trust herein would not be enforceable. (Fn. omitted.) (Fidelity Federal) ... contends that it can not be bound by California law since it is exclusively governed by regulations of the Federal Home Loan Bank Board (Board) which preempt conflicting state laws.

In 1933 the Home Owners' Loan Act (HOLA) (12 U.S.C. §§ 1461-1468) was enacted by Congress authorizing the establishment of federal savings and loan associations. While the associations are specifically empowered to extend real estate loans (12 U.S.C. § 1464(c)(1)(B) and (c)(2)(A)), the statute is silent with respect to due-on-sale clauses or other loan details.

The Board (created in 1932 by the Federal Home Loan Bank Act (12 U.S.C. §§ 1421-1449)) is statutorily authorized to promulgate regulations ⁴... ("to provide for the organization, incorporation, examination, operation, and regulation of" federal savings and loan associations. (12 U.S.C. § 1464, subd. (a)(1).) (From 1933 to June 8, 1976, the Board's regulations were silent with respect to due-on-sale clauses.) ( ² ) The first specific mention of due-on-sale clauses, ... (appears in) a regulation ... enacted (June 8, 1976 and) ... effective July 1, 1976, (purporting to restrict the exercise of due-on-sale clause in certain circumstances and) providing in part 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, at its option, declare immediately due and payable sums secured by the association's security instrument if all or any part of the real property securing the loan is sold or transferred by the borrower without the association's prior written consent. Except as provided in paragraph (g) of this section (restricting exercise of due-on-sale clauses) with respect to loans made after July 31, 1976, on the security of a home occupied or to be occupied by the borrower, exercise by the association of such option (hereinafter called a due-on-sale clause) shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the association and borrower shall be fixed and governed by that contract." (...