Crockett v. First Federal Sav. and Loan Ass'n of Charlotte

• Decision Date: 14 May 1976
• Docket Number: No. 36,36
• Citation: 224 S.E.2d 580,289 N.C. 620
• Court: North Carolina Supreme Court
• Parties: , 20 UCC Rep.Serv. 34 Elizabeth E. CROCKETT et al. v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHARLOTTE, North Carolina.

Page 580

224 S.E.2d 580

289 N.C. 620, 20 UCC Rep.Serv. 34

Elizabeth E. CROCKETT et al. v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHARLOTTE North Carolina.

No. 36.

Supreme Court of North Carolina.

May 14, 1976.

Mraz, Aycock, Casstevens & Davis by John A. Mraz and Robert P. Hanner, II, Charlotte, for plaintiffs-appellees.

Perry, Patrick, Farmer & Michaux by Roy H. Michaux, Jr., Charlotte, for defendant-appellant.

Brooks, Pierce, McLendon, Humphrey & Leonard by L. P. McLendon, Jr., and Michael D. Meeker, Greensboro, for the North Carolina Savings and Loan League, Inc. as amicus curiae.

COPELAND, Justice.

There is one principle question for us to determine: Does defendant, as beneficiary under a deed of trust containing the language above described have a lawful right to require the proposed purchasers of the property secured by said deed of trust to agree to pay an increased rate of interest as a condition to its assent to a transfer of the security property and the assumption of the loan?

Plaintiff contends that since the due-on-sale clause permits defendant to declare the entire debt due and payable when the owner of the property (mortgagor) sells it without the consent of the beneficiary in the deed of trust, it is a restraint on alienation and contrary to public policy and therefore void.

Our Court has consistently held that a condition annexed to the creation of an estate in fee simple disabling the conveyee from alienating it for any period of time is void as a restraint on alienation. Welch v. Murdock, 192 N.C. 709, 135 S.E. 611 (1926); Christmas v. Winston, 152 N.C. 48, 67 S.E. 58 (1910); Pritchard v. Bailey, 113 N.C. 521, 18 S.E. 668 (1893); Munroe v. Hall, 97 N.C. 206, 1 S.E. 651 (1887); Dick v. Pitchford, 21 N.C. 480 (1837). Similarly, we have held such restraints void where alienation is restricted to a limited class. Norwood v. Crowder, 177 N.C. 469, 99 S.E. 345 (1919); Brooks v. Griffin, 177 N.C. 7, 97 S.E. 730 (1919). Likewise, we have consistently held that a condition annexed to the creation of an estate in fee simple which for any period of time causes a forfeiture of the estate upon alienation is void as a restraint on alienation. Latimer v. Waddell, 119 N.C. 370, 26 S.E. 122 (1896); Twitty v. Camp, 62 N.C. 61 (1866); Pardue and wife v. Givens and others, 54 N.C. 306 (1854). Furthermore, we have treated restraining provisions in the form of covenants in the same manner as if they had been written as conditions. Lee v. Oates, 171 N.C. 717, 88 S.E. 889 (1916).

Also, we have held that the doctrine against restraints on alienation applies to equitable estates as well as legal estates. Lee v. Oates, supra; Dick v. Pitchford, supra. We have applied the restraints doctrine to conditions annexed to the creation of (legal and equitable) life estates. Lee v. Oates, supra; Wool v. Fleetwood, 136 N.C. 460, 48 S.E. 785 (1904); Dick v. Pitchford, supra. Additionally, we have held that a provision annexed to the creation of an estate in fee simple giving the conveyor a right for an indefinite time and at an unspecified price to repurchase the land when it is sold is void as a restraint on alienation. Hardy v. Galloway, 111 N.C. 519, 15 S.E. 890 (1892).

We have also held that restraints against partition or division are void. Mangum v. Wilson, 235 N.C. 353, 70 S.E.2d 19 (1952); Johnson v. Gaines, 230 N.C. 653, 55 S.E.2d 191 (1949).

In Lee v. Oates, supra, we noted that an estate created with a condition annexed which prevented a married woman from anticipating her separate equitable estate was a recognized exception to the restraints doctrine. So long as the married woman had not become discovert by death or absolute divorce, the policies in favor of protecting the married woman's separate equitable estate from the control of her husband outweighed the policies against restraints on alienation.

We have also held that a condition against alienation annexed to the creation of a charitable trust is an exception to the restraints doctrine. Trust Co. v. Construction Co., 275 N.C. 399, 168 S.E.2d 358 (1969). Of course, this restraint may be modified by the courts under their equitable powers in order to preserve the trust estate or protect the Cestuis que trustent upon the happening of some exigency, contingency, or emergency not anticipated by the trustor.

The due-on-sale clause involved in the present case does not cause the kind of substantial or direct restraint on alienation involved in the previous cases considered by this Court and held to be invalid. Plaintiff-trustor-borrower is not disabled from alienating his realty to any class for any period of time. Likewise, his realty is not subject to forfeiture for any period of time upon an attempted alienation. There is also no restraint preventing partition or division of the realty for any period of time. Furthermore, no one has a right for an indefinite time and at an unspecified price to repurchase the land when it is sold. Instead, plaintiff-trustor-borrower has an absolute right to alienate his realty as he chooses at any time to any willing buyer without the realty being forfeited on account of the transaction or being subject to an unrestricted right to repurchase.

Merely by paying off the loan, plaintiff-trustor-borrower or the prospective conveyee can comply with the due-on-sale clause and insure that upon alienation the buyer will not lose his property by exercise of the right to foreclose. It is significant that requiring the loan to be paid off does not involve an extraction of a penalty. Unless the debtor pursues another course of action, the creditor is merely returned the still outstanding amount of the loan that was made to facilitate plaintiff's original purchase. Thus, there is no real freezing of assets or discouragement of property improvement on account of the due-on-sale clause since the property can be freed by simply paying off the loan. Moeover, the due-on-sale clause is part of an overall contract that facilitates the original purchase and, thus, promotes alienation of property. Additionally, North Carolina has approved employment of an acceleration clause in a mortgage, a note secured by a mortgage, and an unsecured note. Walter v. Kilpatrick, 191 N.C. 458, 132 S.E. 148 (1926); Bizzell v. Roberts, 156 N.C. 272, 72 S.E. 378 (1911); Trust Company v. Duffy, 153 N.C. 62, 68 S.E. 915 (1910).

One factor that significantly affects the nature of this acceleration clause so far as the restraints doctrine is concerned is the fact that the creditor's right to accelerate arises only when the realty is alienated. Thus, the practical effect of the due-on-sale clause when it is considered in isolation is that the owner is encouraged not to alienate his property If it would be more advantageous to enjoy a loan which has become favorable because of changed interest rates in the market. This is what may be termed a hindrance or an indirect restraint on alienation. As defined in L. Simes & A. Smith, The Law of Future Interests § 1112 (2d Ed. 1956), 'An indirect restraint on alienation arises when an attempt is made to accomplish some purpose other than the restraint of alienability, but with the incidental result that the instrument, if valid, would restrain practical alienability.' Indirect restraints historically have been restricted by the rule against perpetuities and related rules and have not been as harshly struck down as the classical direct restraints. L. Simes & A. Smith, supra at § 1116. The classical direct restraints include the previously discussed provisions in a deed, will, contract or other instrument which, by their express terms or by implication of fact, purport (1) to prohibit alienation of the estate which was granted by that instrument or (2) cause a forfeiture of the estate which was granted by that instrument upon an attempted alienation. Also, a covenant in an instrument of conveyance or contract in which the promisor agrees not to alienate the property that he has been granted therein involves a direct restraint. See generally L. Smies & A. Smith, supra at § 1131.

Continuing our consideration of this particular due-on-sale clause and loan contract, we find noteworthy that under the loan agreement entered into in this case, plaintiff could prepay at anytime without penalty. Thus, defendant-beneficiary-lender would lose any profit or advantage he otherwise would have if he retained the loan, interest rates declined, and plaintiff prepaid. Although plaintiff-trustor-borrower might have to pay a re-financing charge, he would be able to prepay whenever he chose and take advantage of lower interest rates in the market. Plaintiff would not have to wait for an alienation of the property before being permitted to take advantage of changed interest rates. Thus, as between plaintiff-trustor-borrower and defendant-beneficiary-lender, plaintiff is in a more favorable position for taking advantage of fluctuations in interest rates assuming the due-on-sale clause is permissible, If the due-on-sale clause is not permissible, the plaintiff would have an even superior position. Additionally, we note that a lender could have charged a prepayment penalty of 1% For prepayment of a loan within the first year of the loan under G.S. 24--10, but otherwise no prepayment penalty would have been permissible. Thus, in order to balance the ability of lender and borrower to take advantage of fluctuations in interest rates, equities favor the limited adjustment permissible by the due-on-sale clause.

Although the freedom to contract is limited by the restraints doctrine and the policy reasons therefore, the equities in this case indicate that the policy factors behind the restraints doctrine are not really affected under the circumstances of this case. In fact, a fair contractual agreement would appear to support a loan with no prepayment penalty and a due-on-sale clause. The immediate buyer has the security of having the...