Kaski v. First Federal Sav. and Loan Ass'n of Madison

• Decision Date: 07 April 1976
• Docket Number: No. 684,684
• Citation: 72 Wis.2d 132,240 N.W.2d 367
• Parties: Wayne E. KASKI et al., Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF MADISON, Respondent. (1974).
• Court: Wisconsin Supreme Court

Page 367

240 N.W.2d 367

72 Wis.2d 132

Wayne E. KASKI et al., Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF MADISON, Respondent.

No. 684 (1974).

Supreme Court of Wisconsin.

Argued March 4, 1976.

Decided April 7, 1976.

Ken Hur Law Offices, Madison, and J. Thomas Haley, Madison (argued), for appellant.

Axley, Brynelson, Herrick & Gehl, Madison, and Frank J. Bucaida, Madison (argued), for respondent.

HEFFERNAN, Justice.

The plaintiffs, Wayne E. and Lillyan Kaski, brought an action on behalf of themselves and others allegedly similarly situated to declare that an interest rate escalation clause contained in the mortgage note given to First Federal Savings and Loan Association of Madison is invalid because it is unconscionable and is vague and indefinite. They ask that the mortgage interest be restored to the rate agreed upon in the original mortgage and note executed in June of 1967.

Following defendant's demurrer, the trial judge held that the plaintiffs had failed to state a cause of action under Wisconsin law and entered judgment dismissing the complaint. We conclude that Wisconsin law, however, is inapplicable, because the defendant, a federal savings and loan association, is, in respect to the matters under consideration, subject to federal law. Because the applicability of federal law, or the requirements of the federal law, were never presented to the trial court, we reverse under sec. 251.09, Stats., for reconsideration.

The facts of this case reveal that the Kaskis originally contracted to pay First Federal Savings and Loan Association six and one-half percent interest on their mortgage loan balance. In September of 1973, the Kaskis were notified that, because of economic conditions, and pursuant to the interest escalation clause contained in the mortgage agreement, the rate of interest was being increased to seven and one-half percent ¹ on February 1, 1974.

This action was commenced on January 29, 1974. In the course of the proceedings, the circuit court held, pursuant to a demurrer, that the class action was inappropriate, because it was alleged that the original signing of the escalation clause was procured by deceit. The basis for this holding, with which we agree, was that a cause of action based upon deceit--apparently a form of fraud in the original execution of the mortgage papers--was for a personal tort, which does not lend itself to a class action.

The trial judge also held that the agreement was not vague or indefinite, was not unconscionable or contrary to public policy, and did not violate the statute of frauds. Basically, the trial judge concluded that the escalation clause was lawful, because it followed the provisions of sec. 215.21(3)(b), Stats., ² which expressly authorizes escalation clauses.

While the trial judge did not approach the problem posed by sec. 215.21(3)(b), Stats., in the manner that this court did in the recent case of Security Savings & Loan Asso. v. Wauwatosa Colony, Inc. (1976), 71 Wis.2d 174, 237 N.W.2d 729, he concluded that section was controlling and validated the escalation practice of the defendant, First Federal Savings and Loan Association. Were there no more to this case than the right of a savings and loan association organized under ch. 215, Stats., to incorporate an interest escalation clause in the mortgage note, the issues in this case would be moot.

Security Savings & Loan Asso., supra, validated escalation clauses in respect to Wisconsin savings and loan associations and held that even a second escalation may be permitted under a properly drafted agreement between the parties. We conclude, however, that, under the language of the Wisconsin statutes, ch. 215, Stats., is inapplicable to federal savings and loan associations.

In sec. 215.01, Stats., the legislature distinguished state savings and loan associations from federal savings and loan associations. Sec. 215.01(1) defines an association organized under sec. 215.05, while sec. 215.01(7) defines federal savings and loan associations as being those organized under the Federal Home Owners' Loan Act of 1933.

A perusal of the statutory rules in ch. 215, Stats., shows that most of them apply only to state associations. Whenever the statute is intended to apply to federally organized savings and loan associations, they are specifically referred to by that name. By its terms, sec. 215.21, under which appears the escalation clause, sec. 215.21(3)(b), in its initial sentence, appears to limit that section to 'associations.'

Sec. 215.26(7), Stats., does, however, confer upon federal savings and loan associations:

'. . . all of the rights, powers, privileges, benefits, immunities and exemptions that are now provided or that may be hereafter provided by the laws of this state for associations organized under the laws of this state . . ..'

While this statute could in some instances be construed to constitute a general grant of power to federal savings and loan associations, other sections of the statutes clearly support the conclusion that the legislature is precluded from the regulation of the lending practices of federal savings and loan associations, and the purpose of sec. 215.26(7) appears merely to prohibit discrimination against federal associations.

Still stronger evidence of an intent to exclude federal savings and loan associations from state regulation is found in sec. 215.29(2), Stats., which provides that, upon the conversion of a state association to a federal savings and loan association, it 'shall cease to be supervised by this state.'

Therefore, the Wisconsin statutes, in the main, disclaim any attempt to control, regulate, or supervise the practices of federal savings and loan associations doing business in this state. If the law of savings and loan associations were merely silent on the question of the authority of the state to regulate interest escalation clauses, it would be the duty of the trial court, and of this court, to determine the efficacy of the agreement between the parties under the Wisconsin common law and other statutes that may be pertinent to contracts entered into in this jurisdiction.

The defendant, however, is a federal savings and loan association organized and chartered by the Federal Home Loan Bank Board, Home Owners' Loan Act of 1933, as amended, sec. 1461, ff., of Title 12 U.S.C.A. By the congressional act, savings and loan associations receiving their charters under that act are instrumentalities and agencies of the United States. Ochs v. Washington Heights Federal Savings and Loan Asso. (1966), 17 N.Y.2d 82, 268 N.Y.S.2d 294, 215 N.E.2d 485, and People of State of California v. Coast Federal Savings & Loan Asso. (1951, S.D.Cal.), 98 F.Supp. 311.

The fact that a federal savings and loan association, such as the defendant in the instant case, is chartered under a comprehensive federal law and is, by law, an instrumentality of the United States raises the question of whether the law applicable to it in respects not specifically acknowledged to be within the authority of the states is preempted by the comprehensive statutory scheme enacted by Congress and by the rules of the Home Loan Bank Board pursuant to the United States Code.

That the rules and statutory regulations in respect to federal savings and loan associations are comprehensive and almost allinclusive is not to be questioned. It has been said that a federal savings and loan institution is regulated by the Federal Home Loan Bank Board 'from its cradle to its corporate grave.' Meyers v. Beverly Hills Federal Savings & Loan Assoc. (1974, 9th cir.), 499 F.2d 1145, 1147. Among the powers delegated to the Federal Home Loan Bank Board is the regulation of the lending and investment practices of federal savings and loan associations. 12 C.F.R., sec. 500.3 The Board has adopted comprehensive and detailed rules and regulations governing the lending of money for the purchase of real estate. 12 C.F.R., sec. 545.6.

12 U.S.C.A., sec. 1464, outlines specific procedures that are to be followed by the Board in enforcing the act and any rules and regulations thereunder. Sec. 1464(a) provides:

'In order to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes, the Board is authorized, under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as 'Federal Savings and Loan Associations', and to issue charters therefor, giving primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States.' (Emphasis supplied.)

To implement this general authority, there are comprehensive rules regulating lending procedures, the power of the Board to enforce rules and regulations, authority of the Board to regulate lending and investment powers, procedures and methods of setting rates of interest, the regulation of installment rules, and a general proviso in regard to charters and bylaws, which in itself is subject to detailed regulation.

12 C.F.R., sec. 543.8, specifically acknowledges that state law controls in part in respect to the process of conversion to a federal savings and loan association.

In none of these regulations does there appear to be any reference to the authority of the Federal Home Loan Bank Board to permit escalation clauses of the nature utilized here or to prohibit them.

At oral argument, both parties conceded that no specific federal regulation was to be found on the subject. While the parties also agreed at oral argument that state usury statutes were applicable to interest rates by federal savings and loan associations, 12 U.S.C.A., sec. 1425b(e), ³ specifically excepts certain obligations from the operation of state usury laws. See, however, First Federal Savings & Loan Asso. v. Norwood Realty Co., Inc. (1956), 212 Ga. 524, 93...