Wellenkamp v. Bank of America

Decision Date25 August 1978
Citation148 Cal.Rptr. 379,21 Cal.3d 943
CourtCalifornia Supreme Court
Parties, 582 P.2d 970 Cynthia J. WELLENKAMP, Plaintiff and Appellant, v. BANK OF AMERICA et al., Defendants and Respondents. L. A. 30776.

Fred R. Crane, Riverside, for plaintiff and appellant.

Jerome Zamos, Santa Barbara, Kipperman, Shawn, Keker & Brockett, Steven M. Kipperman, Friedman & Sloan, Stanley J. Friedman and Gary Garfinkle, San Francisco, as amici curiae on behalf of plaintiff and appellant.

George W. Coombe, Jr., San Francisco, Harris B. Taylor, Alfred T. Twigg and John A. Judge, Los Angeles, for defendants and respondents.

McKenna & Fitting, Bernard Kolbor, Aaron M. Peck, Thomas A. Seaton, Hahn, Cazier, Hoegh & Leff, Arthur Fine and Andrew E. Katz, Los Angeles, as amici curiae on behalf of defendants and respondents.

MANUEL, Justice.

We address today the question whether enforcement of a due-on clause, 1 contained in a deed of trust securing real property, upon an outright sale of that property, constitutes an unreasonable restraint on alienation in violation of California law.

In July 1973, Birdie, Fred and Dorothy Mans (Mans) purchased a parcel of real property in Riverside County which they financed by a loan from defendant Bank of America in the amount of $19,100 (at 8 percent interest per annum) giving the bank their promissory note secured by a deed of trust. The deed of trust contained the standard due-on clause which provided that if the trustor (the Mans) "sells, conveys, alienates . . . said property or any part thereof, or any interest therein . . . or becomes divested of (his) title or any interest therein . . . in any manner or way, whether voluntarily or involuntarily, . . . Beneficiary shall have the right at its option, to declare said note . . . secured hereby . . . immediately due and payable without notice. . . ." The Mans' deed of trust named defendant Continental Auxiliary Company as trustee.

In July 1975, plaintiff Cynthia Wellenkamp purchased the property from the Mans. She paid the Mans the amount of their equity in the property, that is, the difference between the total selling price to plaintiff and the balance outstanding on the Mans' loan, and agreed with the Mans to assume the balance of their loan from defendant. A grant deed, transferring title to plaintiff was recorded on July 10, 1975. Defendant bank (hereinafter defendant) was given prompt notice of the transfer of title to plaintiff as well as her check for the July payment on the Mans' loan. Defendant thereupon returned this check to plaintiff with a letter notifying her of its right to accelerate upon transfer of the property by the Mans. The letter offered to waive defendant's right to accelerate in return for plaintiff's agreement to assume the Mans' loan at an increased rate of interest (from the original 8 percent to 9 1/4 percent per annum). A printed assumption agreement was enclosed with defendant's letter for plaintiff's signature.

Upon plaintiff's failure to accede to defendant's demand that the interest on the loan be raised to the then current rate, defendant filed a notice of default and election to sell under the deed of trust.

Plaintiff then filed the present action in which she sought an injunction against enforcement of the due-on clause, and a declaration that exercise of such a clause, without any showing that defendant's security had been impaired as a result of the sale of the property to plaintiff, constituted an unreasonable restraint on alienation in violation of California law.

After the superior court granted plaintiff's motion for a preliminary injunction restraining defendant's foreclosure sale of the property, defendant demurred to plaintiff's complaint on the ground that it failed to state facts sufficient to constitute a cause of action for declaratory relief because automatic enforcement of a due-on clause after transfer of the property in an outright sale is valid under California law, and therefore, plaintiff could not prevail on the merits. After a hearing the superior court sustained the general demurrer, without leave to amend, and entered a judgment dismissing plaintiff's complaint. 2 This appeal follows.

A complaint for declaratory relief is legally sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the parties under a written instrument or with respect to property and requests that the rights and duties of the parties be adjudged by the court. (Code Civ.Proc., § 1060; Maguire v. Hibernia Sav. and Loan Soc. (1944) 23 Cal.2d 719, 146 P.2d 673.) If these requirements are met and no basis for declining declaratory relief appears, the court should declare the rights of the parties whether or not the facts alleged establish that the plaintiff is entitled to favorable declaration. (Bennett v. Hibernia Bank (1956) 47 Cal.2d 540, 550, 305 P.2d 20; Columbia Pictures v. DeToth (1945) 26 Cal.2d 753, 161 P.2d 217.)

The complaint herein alleges a controversy over the legal rights and duties of plaintiff and defendant under the deed of trust containing a due-on clause. Plaintiff contends that this clause is unenforceable absent a showing by the lender of impairment to its security; whereas defendant contends that it can automatically enforce the clause without any further showing. It is clear that the complaint shows the existence of an actual controversy sufficient to state a cause of action for declaratory relief. Therefore, the trial court committed error when it tested the sufficiency of the complaint by a determination of the merits and sustained the demurrer on the ground that no cause of action for declaratory relief had been stated. Defendant urges that, notwithstanding this procedural error by the trial court, judgment of dismissal should nonetheless be affirmed on appeal because plaintiff would not be entitled to a favorable declaration on remand. Defendant bases this proposal on its contention that automatic enforcement of the due-on clause after transfer of the subject real property in an outright sale does not constitute an unreasonable restraint on alienation. We do not agree.

We begin our discussion with a summary of the California law on restraints on alienation. Civil Code section 711 sets forth the basic law on the subject and states simply that "conditions restraining alienation, when repugnant to the interest created, are void." Our decision in Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265, recognized that this rule was not absolute in its application, but forbade only Unreasonable restraints against alienation. In determining whether a due-on clause was unreasonable in Coast Bank We looked at whether the restraint was necessary to prevent impairment to the lender's security. We concluded that the restraint was reasonable in that case.

We next had occasion to determine whether a given restraint was unreasonable within the meaning of Coast Bank in La Sala v. American Sav. and Loan Assn. (1971) 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113. The restraint involved in La Sala was a due-on clause which provided for acceleration of the maturity of the loan upon encumbrance of the subject property. In determining whether enforcement of this clause constituted an unreasonable restraint on alienation, we considered not only whether the restraint was necessary to prevent impairment to the lender's security, but also the effect that enforcement of the restraint would have on alienation. We concluded that enforcement of a due-on clause upon encumbrance of the subject property involved a significant restraint on alienation such as to preclude enforcement of the clause unless the lender could show that enforcement was reasonably necessary to protect its security.

Three years later, in Tucker v. Lassen Sav. & Loan Assn. (1974) 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169, we confronted the question whether automatic enforcement of a due-on clause upon the sale of the subject property by installment contract constituted an unreasonable restraint against alienation. Examining the principles developed in La Sala we recognized that a direct relationship exists between the Justification for enforcement of a particular restraint on the one hand, and the Quantum of restraint, the actual practical effect upon alienation which would result from enforcement, on the other. Thus, the greater the quantum of restraint that results from enforcement of a given clause, the greater must be the justification for that enforcement. Applying this test in Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169, we concluded that enforcement of a due-on clause upon sale of the property by installment contract involved a high quantum of restraint requiring a significant showing that enforcement was necessary to protect the lender's security.

We now proceed to apply the principles set forth in La Sala and Tucker to the case at bench which presents the issue, stated at the outset of this opinion, whether a due-on clause contained in a promissory note or deed of trust may be automatically enforced upon an outright sale of the property securing the loan. 3

We first discuss the Quantum of restraint imposed by enforcement of the due-on clause after transfer of the property by outright sale, for if as defendant contends, automatic exercise of the clause in these circumstances results in little, if any, restraint on alienation, we need not reach the question whether there exists justification sufficient to warrant enforcement.

Although we suggested in Dicta in both Tucker And La Sala that the restraint on alienation resulting from acceleration after an outright sale appeared to be de minimis, we indicated in those decisions that by the term "outright" sale, we were referring to transactions wherein the seller/trustor...

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