Century Federal Sav. and Loan Ass'n of Bridgeton v. Van Glahn

• Decision Date: 15 June 1976
• Citation: 144 N.J.Super. 48,364 A.2d 558
• Parties: CENTURY FEDERAL SAVINGS AND LOAN ASSOCIATION OF BRIDGETON, a Savings and Loan Association organized and existing under the laws of the United States of America, Plaintiff, v. Edward W. VAN GLAHN et al. Defendants.
• Court: New Jersey Superior Court

Page 48

144 N.J.Super. 48

364 A.2d 558

CENTURY FEDERAL SAVINGS AND LOAN ASSOCIATION OF BRIDGETON, a Savings and Loan Association organized and existing under the laws of the United States of America, Plaintiff, v. Edward W. VAN GLAHN et al. Defendants.

Superior Court of New Jersey Chancery Division.

June 15, 1976.

Michael Brooke Fisher, Bridgeton, for plaintiff (Lummis, Kleiner, Moore, Fisher, Pancari & Pagliughi, Bridgeton, attorneys).

William F. Reilly, Jr., Millville, for defendants Edward and Anna VanGlahn (Waltman & Reilly, Millville, attorneys).

Darrell Fineman, Vineland, for defendants Wayne and Joan Johnson and Florence Roberts (Kavesh, Basile & Fineman, Vineland, attorneys).

GRUCCIO, J.S.C.

On December 11, 1972, defendants Edward and Anna VanGlahn executed a mortgage and promissory note to plaintiff Century Federal Savings and Loan Association of Bridgeton (Century). The mortgage and note provided, among other things, that '(i)f there be any change in ownership of the mortgaged premises, except by operation of will or intestacy laws, the principal and interest secured by this mortgage shall, at the option of the Mortgagee, become due and payable immediately * * *.'

On September 3, 1974 the VanGlahns entered into a long-term contract for sale with defendants Johnson and Roberts, seeking to convey the mortgaged premises. This contract was later recorded in the office of the Cumberland County Clerk. Century, by this foreclosure action, seeks to enforce the 'acceleration' or 'due on sale' clause which is recited above. The matter is presently before the court on Century's motion for summary judgment.

Essentially, two questions are presented. First, is this acceleration clause valid and enforceable, or is it unenforceable as a penalty or unlawful restraint on alienation? Second, assuming that the acceleration clause is valid, have the VanGlahns violated the clause by their contractual relations with defendants?

I. Validity of Acceleration Clause

It has long been the law in this State that an acceleration clause is a legitimate and valid contractual term, Weiner v. Cullens, 97 N.J.Eq. 523, 526, 128 A. 176 (E. & A.1925), not 'disfavored in the law or in equity.' Poydan, Inc. v. Kiraki, 130 N.J.Super. 141, 150, 325 A.2d 838, 843 (Ch.Div.1974). Thus, a mortgagee has a right to insist upon strict observance of such a clause unless the default of which he complains is attributable to the conduct of the mortgagee himself. In fact, our courts have even held that an improper motive will not defeat the rights of the mortgagee under the acceleration clause. Glorsky v. Wexler, 142 N.J.Eq. 55, 57, 59 A.2d 233 (Ch.1948).

The validity of an acceleration clause similar to that here was recently upheld in Poydan, Inc. v. Kiraki, supra. In Poydan a note was secured by a real estate mortgage on a restaurant and by a security agreement covering personalty in the restaurant and its liquor license, and by the pledge of the restaurant stock. The note and mortgage provided for the acceleration of the principal and interest should the ownership of the mortgaged property change. When the mortgagors sold their stock, the mortgagee sought the entire amount remaining on the note and mortgage. The court held that the mortgagee had the right to accelerate the due date of the unpaid balance. The court based its decision on the fact that a mortgagee has an interest in the identity of his debtor. Even though the security may be adequate, an unreliable owner may allow it to deteriorate or even remove or conceal a portion thereof. Id., 130 N.J.Super. at 148, 325 A.2d 838. The court also relied on the fact that acceleration of a mortgage by reason of the failure of the mortgagor to abide by the term of the contract 'is not a penalty or forfeiture disfavored in the law or in equity.' Id. at 150, 325 A.2d at 843.

In Shalit v. Investors S. & L. Ass'n, 101 N.J.Super. 283, 244 A.2d 151 (Law Div.1968), the validity of an acceleration clause was again accepted by the court. In that case plaintiffs (borrowers) sought to recover a payment which they had made in return for defendant's (lender's) waiver of its right to accelerate payment under a bond and mortgage executed by plaintiffs. Plaintiffs had executed the bond and mortgage in order to finance a multi-unit dwelling. Several years later plaintiffs contracted to sell the premises subject to the mortgage and so advised defendant. The parties entered into negotiations for the waiver of defendant's right to accelerate and agreed on an amount, which plaintiff paid. Plaintiff later started suit for the return of the premium.

The court concluded that receipt of a premium in exchange for waiver of the acceleration privilege was within the proper discretion of the mortgagee. Accordingly, since it is proper to accept a premium in place of the acceleration, the acceleration itself necessarily must be proper.

Furthermore, the court phrased the issue as defendant's Right to call in the full amount of the principal and likened it to the right of a bank to continue the investment of its funds in That particular mortgage. See Bloomfield Savings Bank v. Howard Stainton & Co., 60 N.J.Super. 524, 159 A.2d 443 (App.Div.1960). In Bloomfield the mortgage did not provide for prepayment. Thus, the mortgagee bank was not required to accept prepayment. The court further stated that the bank's acceptance of prepayment only upon payment of an additional penalty was neither usurious nor fraudulent. Considering the development of our case law, then, it is apparent that the acceleration clause in this case is a valid term of the contract between the VanGlahns and Century.

One further point is raised by defendants, namely the impropriety of Century's motive for the acceleration. Defendants claim that Century is not interested in preserving its security but seeks only to secure an increase in the rate of interest. This claim is accepted by the court for the purpose of this motion, although it might be noted that there is some suggestion that the mortgagee has had 'trouble' with the purchasers before.

As stated above, an improper motive does not necessarily invalidate the foreclosure action. Glorsky v. Wexler, supra. However, I need not explore the present-day validity of this principle since I hold that the institution of a foreclosure action in order to maintain the portfolio of the Association at current interest rates is eminently proper.

Defendants rely primarily on Tucker v. Lassen S. & L. Ass'n, 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169 (Sup.Ct.1974). In that case the court dealt with an acceleration clause which the lender claimed became effective upon the entry of the mortgagor into an installment land contract. The court found that such a clause may be enforced, as in La Sala v. American S. & L. Ass'n, 5 Cal.3d 864, 97 Cal.Rptr. 849, 489 P.2d 1113 (Sup.Ct.1971), ¹ only when the mortgagee can show a threat to his security resulting from the installment contract. In Tucker the mortgagee's only concern was in maintaining its portfolio at the current interest rate. There was no suggestion that the security value of the mortgaged property would be lessened by the transaction. Accordingly, the court would not allow the foreclosure, holding that the Association's purpose in maintaining its portfolio at the current interest rate was insufficient.

It must be realized in this respect that the California result flows from a specific statute forbidding unreasonable restraints on alienation. Cal.Code § 711. New Jersey has no such statutory authority nor, as recited above, does our case law prohibit this 'restraint' as unreasonable.

I am mindful that N.J.S.A. 17:12B--12 states that the purpose of a savings and loan association is for the promotion of 'thrift, home ownership and housing or otherwise investing funds in accordance with the provisions of this act.' Likewise, the purpose of this federal association is to provide a thrift institution in which people may invest their funds and which provides for the financing of homes. North Arlington Nat'l Bank v. Kearny Federal S. & L. Ass'n, 187 F.2d 564 (3 Cir. 1951). Cert. den., 342 U.S. 816, 72 S.Ct. 30, 96 L.Ed. 617 (1951). As noted above, this effort to protect and preserve the assets of the Association and thus fulfill its purpose may be better accomplished by 'accelerating' the balance (or accepting a premium in lieu thereof) when a transfer of the mortgaged premises to a third party has been effected. Shalit v. Investors S. & L. Ass'n, supra. Calling a loan in order to get the full benefit of current interest rates is a legitimate and reasonable business practice--one which protects the Association members and their savings investments as well as fulfilling the statutory purpose of the...