Lipps v. First American Service Corp.

• Decision Date: 22 January 1982
• Docket Number: No. 800908,800908
• Parties: Albert B. LIPPS, et al. v. FIRST AMERICAN SERVICE CORPORATION, et al. Record
• Court: Virginia Supreme Court

Page 215

286 S.E.2d 215

223 Va. 131

Albert B. LIPPS, et al. v. FIRST AMERICAN SERVICE CORPORATION, et al.

Record No. 800908.

Supreme Court of Virginia.

Jan. 22, 1982.

Joseph E. Bankert, Alexandria, Robert E. Swan, Oakton (Brock & Bankert, Alexandria, on brief), for appellants.

Richard R. Nageotte, Woodbridge (Carol L. Hill, Robert J. Zelnick, Nageotte, Borinsky & Zelnick, Woodbridge, on brief), for appellees.

A. J. Brent; Lee F. Davis, Jr.; Peter E. Broadbent, Jr.; Christian, Barton, Epps, Brent & Chappell, Richmond, on brief, amicus curiae Virginia Savings and Loan League, for appellee.

Before CARRICO, C. J., COCHRAN, POFF, COMPTON, THOMPSON and STEPHENSON, JJ., and HARRISON, Retired Justice.

THOMPSON, Justice.

In this appeal we determine the validity of a "due-on sale" acceleration clause in a deed of trust. The trial court upheld the validity of the clause, and we affirm that judgment.

On July 27, 1976, Albert B. Lipps and Judith W. Lipps (Borrowers) executed a deed of trust conveying residential real estate in Prince William County to secure First American Savings and Loan Association (Lender) the payment of a promissory note for $31,500 with interest at the rate of nine and one-half percent per annum. The deed of trust contained the following "due-on sale" acceleration provision (Covenant 17):

UNIFORM COVENANTS. Borrower and Lender covenant and agree as follows:

....

17. Transfer of the Property: Assumption. If all or any part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent ... Lender may, at Lender's option, declare all the sums secured by this Deed of Trust to be immediately due and payable. Lender shall have waived such option to accelerate if, prior to the sale or transfer, Lender and the person to whom the Property is to be sold or transferred reach agreement in writing that the credit of such person is satisfactory to Lender and that the interest payable on the sums secured by this Deed of Trust shall be at such rate as Lender shall request. If Lender has waived the option to accelerate provided in this paragraph 17, and if Borrower's successor in interest has executed a written assumption agreement accepted in writing by Lender, Lender shall release Borrower from all obligations under this Deed of Trust and the Note.

Pursuant to Code § 6.1-330.34 ¹, the deed of trust also contained this notice in the margin of the first page: "NOTICE: THE DEBT SECURED HEREBY IS SUBJECT TO CALL IN FULL OR THE TERMS THEREOF BEING MODIFIED IN THE EVENT OF SALE OR CONVEYANCE OF THE PROPERTY CONVEYED."

On April 21, 1979, Borrowers entered into a "Land Contract for Sale of Improved Real Property-Virginia" (Land Contract) with Sandmar Associates, Inc. (Purchaser). In the Land Contract, Purchaser agreed to pay to Borrowers at closing a lump sum of $5,400, to take possession of the property and make all payments due under the note secured by the deed of trust, and to hold Borrowers harmless from any liability under the deed of trust. Borrowers agreed to execute a general warranty deed to be held in escrow until payment by Purchaser of the remaining balance of $30,986.97 due on the note at the time of closing.

Borrowers and Purchaser closed under the Land Contract on May 10, 1979, and settlement between the parties reflected the charges made in a typical real estate closing. On May 14, 1979, Purchaser recorded the Land Contract in the Clerk's Office of the Circuit Court of Prince William County.

Lender became aware of the Land Contract on October 22, 1979, and after investigation, gave notice to Borrowers and Purchaser on November 18, 1979, that it was exercising its option to declare the balance on the deed of trust note immediately due and payable.

Lender offered to let Purchaser assume the loan, provided that Purchaser (i) make application to assume the loan with satisfactory credit, (ii) pay two "points" (a two percent assumption fee) on the outstanding note balance, and (iii) allow the interest to be increased to thirteen and one-quarter percent.

Purchaser refused to make an application to assume the loan. Neither Borrowers nor Purchaser paid the outstanding balance due on the deed of trust note as a result of Lender's exercise of Covenant 17. On January 7, 1980, the Trustee under the deed of trust gave notice of the proposed sale of the property. Borrowers and Purchaser petitioned the lower court to enjoin the sale, but it denied such injunctive relief.

On appeal, Borrowers contend that Covenant 17 is invalid as an unreasonable restraint on alienation. They assign error to the action of the lower court upholding its validity, especially where Lender did not prove impairment of security or risk of nonpayment, and to the holding of the trial court that the execution and delivery of the Land Contract was a breach of Covenant 17.

I. Restraint on Alienation.

Is Covenant 17 an unreasonable restraint on alienation? We hold that it is not. In Hutchinson v. Maxwell, 100 Va. 169, 175, 40 S.E. 655, 657 (1902), we restated the general rule:

It is well settled in this country and in England, from which country we derive the principles of our jurisprudence, that a gift or grant of a beneficial estate, in fee or absolutely, whether legal or equitable, has certain legal incidents of which the estate cannot be divested, and all conditions adopted for that purpose are necessarily repugnant and void. Among those incidents are the donee's or grantee's power of alienating such estate, and its liability for his debts. [Citations omitted.]

The reasons for this doctrine or principle is the repugnancy of such restraints upon the ordinary rights of property, and that property would thereby be withdrawn from the ordinary rules and channels of commerce and trade.

Since that time, we have had occasion to recognize statutory exceptions to the doctrine in Sheridan v. Krause, 161 Va. 873, 172 S.E. 508 (1934) (upholding validity of spendthrift trusts), and to define "reasonableness" in this context in Hercules Powder Company v. Continental Can Company, 196 Va. 935, 940, 86 S.E.2d 128, 131 (1955):

The reasonableness of a restraint on the use of property "is to be determined by considering whether it is such only as to afford a fair protection to the interest of the party in favor of whom it is given, and not so large as to interfere with the interest of the public." Merriman v. Cover, 104 Va. 428, 51 S.E. 817 [1905].

The Supreme Court of North Carolina faced this identical problem in Crockett v. First Federal Savings, etc., 289 N.C. 620, 625-26, 224 S.E.2d 580, 584 (1976), and said:

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 and 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."

The present state of the law is summarized in 3 L. Simes and A. Smith, The Law of Future Interests § 1164 (2d Ed.Supp.1981), where the author states:

Mortgages payable in installments often contain provisions entitling the mortgagee to declare the entire balance due if the mortgagor's interest in the mortgaged premises is transferred. Such acceleration clauses have usually been enforced in accordance with their terms but there is some authority that they are invalid as restraints on alienation or, alternatively, that a court of equity will deny enforcement in the absence of a showing that the transfer jeopardized the mortgagee's security.

For amplication, see cases there cited. See also Annot., 69 A.L.R.3d 713 (1976). For typical cases upholding the validity of the clause, see Crockett v. First Federal Savings, etc., supra, and Occidental Savings and Loan Association v. Venco Partnership, 206 Neb. 469, 293 N.W.2d 843 (1980). For contrary cases, see Silver v. Rochester Savings Bank, 73 A.D.2d 81, 424 N.Y.S.2d 945 (1981), and Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970 (1978). For an elaborate treatment of the whole subject, including its comment on the instant case while pending in the trial court, see Williams v. First Federal, 651 F.2d 910 (4th Cir. 1981).

Our analysis of the language used in Covenant 17 shows that enforcement of the covenant does not defeat or forfeit the estate conveyed. The transaction does not affect the quantity or quality of the conveyance between Borrowers and Purchaser. Its effect is confined to the acceleration of the due date of the indebtedness.

Since public policy is at the heart of this controversy, we repeat observations previously made. In Wallihan v. Hughes, 196 Va. 117, 125, 82 S.E.2d 553, 558 (1954), we stated:

The law looks with favor upon the making of contracts between competent parties upon valid consideration and for lawful purposes. Public policy has its place in the law of contracts--yet that will-o'-the-wisp of the law varies and changes with the interests, habits, need, sentiments and fashions of the day, and courts are averse to holding contracts unenforceable on the ground of public policy unless their illegality is clear and certain.

Code § 55-59 details elaborate provisions governing deeds of trust whether actually written therein or not:

Every deed of trust to secure debts ... unless otherwise provided...