Foreclosure of the Deed of Trust Executed by Bonder, Matter of

• Decision Date: 06 October 1972
• Citation: 293 S.E.2d 798,306 N.C. 451
• Parties: In the Matter of the FORECLOSURE OF THE DEED OF TRUST EXECUTED BY Murray BONDER and Wife, Anne S. Bonder (Property now owned by Richard S. Robinson and wife, Irene K. Robinson) dated
• Court: North Carolina Supreme Court

Page 798

293 S.E.2d 798

306 N.C. 451

In the Matter of the FORECLOSURE OF THE DEED OF TRUST

EXECUTED BY Murray BONDER and Wife, Anne S. Bonder (Property

now owned by Richard S. Robinson and wife, Irene K.

Robinson) dated October 6, 1972, and recorded in Book 739,

page 87, Johnston County Register of Deeds, Charles H. Young, Trustee.

No. 56PA82.

Supreme Court of North Carolina.

Aug. 3, 1982.

Womble, Carlyle, Sandridge & Rice by A. L. Purrington, Jr., and H. Grady Barnhill, Jr., Raleigh, for petitioner-appellee.

Mast, Tew, Armstrong & Morris by George B. Mast and L. Lamar Armstrong, Jr., Smithfield, for respondents-appellants.

Brooks, Pierce, McLendon, Humphrey & Leonard by L. P. McClendon, Jr., Edward C. Winslow, III and Randall A. Underwood, Greensboro, amicus curiae for the North Carolina Savings and Loan League.

COPELAND, Justice.

The most significant issue precisely raised in this appeal is whether a savings and loan institution may demand full and present payment of the total outstanding amount of a loan secured by a deed of trust upon residential real estate if the borrowers breach their covenant in the deed not to convey the property without the institution's consent and then, in the event of the borrowers' failure to comply with the demand for payment, institute foreclosure proceedings upon the property in accordance with our statutes. We hold that the lending institution may indeed do so where, as here, the language of the promissory note and deed of trust clearly bestow such a right in its favor.

Our previous decision in the case of Crockett v. Savings & Loan Assoc., 289 N.C. 620, 224 S.E.2d 580 (1976), is both instructive and controlling here. The loan instruments in Crockett contained similar language which permitted the beneficiary in the deed of trust (mortgagee) to call the entire debt due and payable if the owner of the property (mortgagor) sold or transferred the property without the beneficiary-lender's consent. Recognizing that this kind of contractual language constituted a due-on-sale clause, we allowed full enforcement thereof by the savings and loan association and held that: (1) the due-on-sale clause was not a per se invalid restraint upon the property owner's right of alienation; (2) the clause could be validly exercised by the lender even though the transfer of the property did not actually impair its security or affect repayment of the original loan; and (3) the lender could withhold its consent to the conveyance for the sole purpose of seeking an increased interest rate upon the owner's original indebtedness so long as there were no prepayment penalties, and the demand therefor was not fraudulent, inequitable, oppressive or unconscionable. Our basic reasoning in Crockett is, on its face, applicable to the facts at bar and apparently requires some repeating:

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. Moreover, the due-on-sale clause is part of an overall contract that facilitates the original purchase and, thus, promotes alienation of property....

....

... [U]nder 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.

... 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 ability to pay off his loan at no greater than the initial interest rate, and he can get a more favorable loan if interest rates decline. The lender can get a more favorable loan agreement if interest rates rise and there is a new owner of the realty.

In essence, it is the lender who has provided the opportunity for the initial purchaser to buy the realty. It seems fair for the lender to be able to contract to receive an increased interest rate, on the very loan that is facilitating transfer of the property, in the event the original purchaser decides he is not going to continue ownership or pay off the loan so as to have full equity in the realty. A prime purpose of the loan was to enable the buyer to purchase the realty. If the buyer sells before he obtains full equity, this purpose ceases. Under our free enterprise system the lender may lend his money under such terms as maximize his profits within the limits set by law....

In the absence of a due-on-sale clause, plaintiff-trustor-borrower would receive a premium for a favorable loan assumption when he sold his realty. This premium would be the result of the long term loan contract and a fortuitous rise in interest rates. By operation of the due-on-sale clause plaintiff is not able to realize this premium. Upon sale of the realty plaintiff receives the fair market value of the realty without further benefiting from the loan he received.

289 N.C. at 625-27, 224 S.E.2d at 584-85 (emphases added). We reaffirm this sound reasoning today.

In essence, respondent-appellants attack the citadel of Crockett with little more than the same arguments advanced there by Justice Lake in his dissent. See 289 N.C. at 632-44, 224 S.E.2d at 588-95; see also Note, Real Property Security--North Carolina Deals Mortgagors a Bad Hand, 13 Wake Forest L.Rev. 490 (1977). We shall not plow this ground again; instead, we stand firmly upon that which we so carefully tilled before. Nevertheless, we find it necessary to dispose of two contentions emphasized by respondents in their brief and during oral argument.

First, respondents say that the prior construction of a due-on-sale clause in Crockett should not be authoritative as to the enforceability of such a provision with respect to all real estate loan instruments since the property involved there was commercial, and here it is residential. We disagree. Our analysis in Crockett did not rely upon or refer to such a distinction, and we do not believe that one is merited now. Our opinion in Crockett was wholly based upon the unambiguous character of the contractual provisions of the loan instruments, not upon the specific character of the underlying property or the bargaining position of its purchaser. Justice Lake even conceded in his dissent that the rationale employed by the Court extended to "mortgages of typical family residences," 289 N.C. at 642, 224 S.E.2d at 594, and we expressly so hold. We shall not assume that a residential borrower (or his attorney) is per se less capable than a commercial borrower of reading and understanding that which is printed in plain English in the instruments required for his obtention of a real estate loan. ¹ The due-on-sale clause is purely a matter of contract, and we shall not interfere with what the parties clearly contracted to do in that regard, whomever they may be, or retroactively change the manner in which they agreed to bind themselves. In sum, it is appropriate to quote once again the wise words of Justice Higgins in Roberson v. Williams, 240 N.C. 696, 700-01, 83 S.E.2d 811, 814 (1954): "Ordinarily, when parties are on equal footing, competent to contract, enter into an agreement on a lawful subject, and do so fairly and honorably, the law does not permit inquiry as to whether the contract was good or bad, whether it was wise or foolish." See Crockett, supra, 289 N.C. at 630, 224 S.E.2d at 587.

Secondly, respondents argue that the language in the loan instruments which is at issue in this case does not actually "amount to" a due-on-sale clause. Their sole basis for saying so is that the provision in the deed of trust requiring the Association's consent to conveyance of the secured property does not appear, as it did in Crockett, supra, in the same paragraph with the provision stating that the borrower's breach of agreements, covenants or conditions in the deed would trigger the Association's right to accelerate the maturity of the loan and demand full and present payment thereof. Such a distinction would certainly be artificial, and it would completely ignore the unmistakeable substance of the deed's terms when they are, as they should be, read together as a consistent whole. In any event, we are satisfied that any doubt whatsoever concerning the interrelated nature...