Lincoln Mortg. Investors v. Cook

• Decision Date: 23 November 1982
• Docket Number: No. 57017,57017
• Citation: 659 P.2d 925
• Parties: LINCOLN MORTGAGE INVESTORS, a business trust, Appellant, v. J.J. COOK, an individual; John R. Methvin and Kie Methvin, husband and wife; Hoshall F. Thomas and Oleta I. Thomas, husband and wife, Appellees.
• Court: Oklahoma Supreme Court

Page 925

659 P.2d 925

1982 OK 137

LINCOLN MORTGAGE INVESTORS, a business trust, Appellant, v. J.J. COOK, an individual; John R. Methvin and Kie Methvin,

husband and wife; Hoshall F. Thomas and Oleta I.

Thomas, husband and wife, Appellees.

No. 57017.

Supreme Court of Oklahoma.

Nov. 23, 1982.

As Corrected March 21, 1983.

Rehearing Denied March 22, 1983.

Appeal from the District Court, Oklahoma County; William R. Saied, District Judge.

Appeal by Mortgagee from refusal of trial court to foreclose a mortgage in default under a due-on-sale clause.

REVERSED AND REMANDED WITH DIRECTIONS TO FORECLOSE.

McAfee & Taft by Joseph H. Bocock, Oklahoma City, for appellant.

Spradling, Alpern, Friot & Gum by Paul Walters, Oklahoma City, for appellee, J.J. Cook.

Talley & McIlroy by Robert N. McIlroy, Norman, for appellees, John R. Methvin, Kie Methvin, Hoshall N. Thomas and Oleta I. Thomas.

DOOLIN, Justice:

This case presents an issue of first impression in Oklahoma: the validity of due-on-sale clauses in mortgages when the lender is not a federal lending institution. ¹ Specifically at issue is whether the due-on-sale clause is invalid per se as a clog on the equity of redemption; if not, whether the due-on-sale clause is unenforceable as an unreasonable restraint on alienation absent a showing by the lender that his security has been impaired and/or that foreclosure is fair, reasonable and equitable under the circumstances. We must respond to both in the negative.

Lincoln Mortgage Investors (Mortgagee), a California business trust, brought suit in district court against J.J. Cook (Mortgagor) and the Thomases and Methvins (Buyers) to foreclose a mortgage in default under a due-on-sale clause. The cause was submitted to the trial judge on a stipulation of facts, briefs and affidavits of the parties.

On March 1, 1976 Mortgagor and Mortgagee renegotiated a note seriously in default for nonpayment. The Mortgagee had elected to allow the Mortgagor time to sell the commercial property securing the note or to refinance rather than foreclosing. The Mortgagee agreed to refinance the loan when it became apparent that Mortgagor could not find a buyer or new lender. The new agreement was evidenced by a new promissory note and a modification and renewal of the pre-existing mortgage. Both instruments contained acceleration clauses. ² The mortgage also contained a provision allowing renegotiation of the interest rate on transfer of the property at the Mortgagee's option. ³

On October 18, 1979, Mortgagor transferred the property by warranty deed to Buyers without seeking prior written consent from Mortgagee. Mortgagee first learned of the transfer when Buyers tendered the monthly payment required by the note. Mortgagee refused the tendered payment and promptly elected to exercise the due-on-sale clause. Mortgagor refused to recognize that the unpaid balance of the mortgage debt was immediately due and payable under the acceleration clause. Mortgagee acknowledges that its motives in exercising The trial court made the following conclusions of law:

the due-on-sale clause were primarily to divest itself of Oklahoma property interests and secondarily to protect itself from rising interest rates.

"1. Under Oklahoma law, a mortgagee may not foreclose a mortgage by invoking a due-on-sale clause unless foreclosure is fair, reasonable and equitable under the circumstances of the specific case in dispute.

2. Under Oklahoma law, a mortgagee may not foreclose a mortgage by invoking a due-on-sale clause unless the mortgagee can demonstrate that its security has been impaired by the unauthorized transfer.

3. Plaintiff has admitted ... that [its] primary motive in foreclosing under the instant due-on-sale clause was to divest itself of the mortgaged real property and that [its] secondary motive in foreclosing ... was ... to protect itself against rising interest rates. These are not proper motives for foreclosure, under the circumstances of this case, and thus foreclosure in this case would be unfair, unreasonable and inequitable.

4. Plaintiff has demonstrated no impairment to its security.

..."

Judgment was entered for Mortgagor and Buyers; Mortgagee appeals from this judgment, asserting as error all of the above conclusions of law. Mortgagor supports the holdings of the trial court and also argues that the due-on-sale clause is invalid per se as a clog on the equity of redemption, an issue raised, but not decided, below.

CLOGGING THE EQUITY OF REDEMPTION

The doctrine prohibiting "clogs" on the equity of redemption is of equitable origin. It is codified in Oklahoma in 42 Okla.Stat.1981, § 11. ⁴

Simply stated, the doctrine voids any provision in an original mortgage agreement limiting or modifying the right of redemption by payment of the full mortgage debt after default for any reason. Osborne, Mortgages, 144-147 (2nd Ed.1970). Examples of contract provisions which have been struck down as impermissible clogs are: limitations on the time period in which to redeem, warranties not to redeem, limitations on who may redeem, provisions giving the Mortgagee an option to purchase on default and limitations on the quantity of property that may be redeemed. Id. at 146.

Mortgagor relies primarily on Coursey v. Fairchild ⁵ in arguing that due-on-sale clauses fall within the class of clogs. In Coursey, this Court struck down an agreement by the Mortgagor to transfer mineral interests in the mortgaged property to the Mortgagee in consideration for renewal of the mortgage after default. Such an agreement was held to clog the equity of redemption because it prevented the Mortgagor from reacquiring the entire mortgaged property on payment in full of the mortgage debt. We stated:

"In a jurisdiction such as ours, where the common law doctrine of mortgages has been abrogated and an equitable theory of mortgages prevails, what is meant by a right to redeem is that upon discharge of the debt within the maximum permissible time, the Mortgagor is entitled, by force of law, to have the mortgaged premises relieved from the lien and his entire estate restored to that extent which he would have had if the transaction had never taken place." 436 P.2d at 38 citing Worley v. Carter, 30 Okl. 642, 121 P. 669, 673 (1912).

Mortgagor interprets the language "right to redeem ... within the maximum permissible time" as creating a right in mortgagors to make installment payments, after default, as set out in the mortgage. He argues that a provision giving the Mortgagee the option to accelerate the loan debt clogs both his and Buyers' rights to redeem because it prevents them from making installment payments over the life of the loan. We believe Mortgagor has misinterpreted Coursey and has failed to understand the nature both of the right to redeem and of acceleration clauses.

The right to redeem means no more than a second opportunity for a Mortgagor in default to pay the mortgage debt in full, discharge the lien and acquire unencumbered title to the mortgaged property. This right is exercisable any time between default and confirmation of the sheriff's sale. ⁶ A precondition to curing a default is tender of the mortgage debt in full. Mid-State Homes, Inc. v. Jackson, 519 P.2d 472, 476 (Okl.1974).

An acceleration clause is an agreement between the parties to a mortgage advancing the due date of the mortgage indebtedness in the event of default or breach by the Mortgagor. Acceleration clauses have generally been held legal, valid and enforceable. Murphy v. Fox, 278 P.2d 820, 824 (Okl.1955); Union Central Life Ins. Co. v. Adams, 169 Okl. 572, 38 P.2d 26 (1935); Bollenbach v. Ludlum, 84 Okl. 14, 201 P. 982 (1921). A due-on-sale clause is a particular type of acceleration clause: here, the default triggering acceleration of the mortgage debt is failure of the Mortgagor to obtain prior written consent by the Mortgagee to a transfer of an interest in the mortgaged property.

The foregoing discussion makes clear that the language relied upon by Mortgagor in Coursey merely restates the general principle that mortgagors in default have a right to redeem the mortgaged property by tender of the full unpaid amount of the mortgage debt after default for the maximum time allowed by law, i.e. until confirmation of the sheriff's sale. Coursey does not establish the proposition that any mortgage provision altering the due date of the mortgage debt on default is invalid per se as a clog on the equity of redemption. Coursey does not give a right to continued enjoyment of the benefits of a mortgage agreement to one who has breached its terms.

The instant due-on-sale clauses do not require forfeiture of the mortgaged property on unauthorized transfer; nor do they purport to nullify or limit Mortgagor's or Buyers' right to redeem on default. We hold that the due-on-sale clauses do not constitute a clog on the equity of redemption.

RESTRAINT ON ALIENATION

The controversy about the validity of due-on-sale clauses is largely the result of a clash between principles of property and contract law: that is, the equitable principle prohibiting unreasonable restraints on alienation and common law freedom to contract. Courts taking the former position, such as the California Court in Wellenkamp v. Bank of America, ⁷ insist that in order for enforcement of a due-on-sale clause to be reasonable, the mortgagee must show that his security has been impaired by the unauthorized transfer. Courts adopting a contract position see the due-on-sale clause as a reasonable business practice designed to protect the Mortgagee from risks inherent in transfer of mortgaged property. ⁸ There are a variety of intermediate positions. ⁹

We hold that the validity of a due-on-sale clause is to be determined by principles of contract law. As previously noted, acceleration clauses have generally been enforced as written in Oklahoma. ¹⁰ In Continental Federal Savings & Loan Association v. Fetter, 564 P.2d 1013 (Okl.197...