Magney v. Lincoln Mut. Sav. Bank, 4929-III-9

• Decision Date: 17 February 1983
• Docket Number: No. 4929-III-9,4929-III-9
• Citation: 659 P.2d 537,34 Wn.App. 45
• Parties: Richard A. MAGNEY and Lynn F. Magney, husband and wife, Respondents and Cross Appellants, v. LINCOLN MUTUAL SAVINGS BANK, a corporation, Appellant, and Gary L. Nickeson and Marilyn B. Nickeson, husband and wife, Respondents and Cross Appellants, John A. Powell and Floreine M. Powell, husband and wife; and Larry J. Christian and Leauna M. Christian, husband and wife, Respondents.
• Court: Washington Court of Appeals

Page 45

34 Wn.App. 45

659 P.2d 537

Richard A. MAGNEY and Lynn F. Magney, husband and wife, Respondents and Cross Appellants, v. LINCOLN MUTUAL SAVINGS BANK, a corporation, Appellant, and Gary L. Nickeson and Marilyn B. Nickeson, husband and wife,

Respondents and Cross Appellants,

John A. Powell and Floreine M. Powell, husband and wife;

and Larry J. Christian and Leauna M. Christian,

husband and wife, Respondents.

No. 4929-III-9.

Court of Appeals of Washington,

Division 3, Panel Four.

Feb. 17, 1983.

Reconsideration Denied March 15, 1983.

Paul Allison, Randall & Danskin, Spokane, for appellant.

Joseph Simpson, James E. Winton, John T. Krall, Richter, Wimberley & Ericson, Spokane, for respondents.

ROE, Chief Judge.

The issue in this case is whether a state chartered mutual savings bank may enforce a "due-on-sale" provision in a deed of trust when the borrower later assigns his interest in the property and there is no increased risk to the lender.

In 1977, plaintiffs Richard and Lynn Magney purchased a four-family dwelling. To finance the purchase price of $76,000, Magneys borrowed $55,000 from defendant Lincoln Mutual Savings Bank. They signed a promissory note at 9 1/2 percent interest for 25 years, which note was secured by a deed of trust. The Magneys also executed a mortgage of $8,000, junior to the deed of trust, to Powell and Christian, from whom they purchased the property.

In 1979, the Magneys entered into a purchase and sale agreement agreeing to sell the fourplex to Gary and Marilyn Nickeson for $100,000 with $25,000 as down payment and $75,000 to be paid at 10 percent interest. This sale agreement did not mention either the deed of trust in favor of Lincoln or the mortgage. The Magneys informed Lincoln of the proposed sale and after discussions Lincoln informed the Magneys the new buyer would have to be acceptable to the bank, that the interest rate on the loan would be increased and that a 1 percent fee would be charged. The Magneys refused to accept these conditions as the Nickesons were not assuming the Magneys' loan. After further discussion, the Magneys and Nickesons closed the sale on July 14, 1979. The final wraparound contract provided both encumbrances remained the obligation of the Magneys and also established an escrow through which payments on both encumbrances would be made. On August 31, 1979, Lincoln gave 30-day notice of acceleration of the loan. The Magneys then sought a declaratory judgment and injunction. Later, they amended their complaint to include a violation of the Consumer Protection Act.

The trial court found paragraph 17 ¹ of the deed of trust was an unreasonable restraint on alienation and unenforceable unless Lincoln could show its security was impaired which it could not. It thus enjoined Lincoln from accelerating the loan, dismissed Lincoln's counterclaim for foreclosure and also denied the Magneys' consumer protection claim. Both Lincoln and the Magneys appeal. We affirm the result.

Lincoln contends either that paragraph 17 is not a restraint on alienation or that if it is a restraint, it is a reasonable one.

Although unreasonable restraints on alienation are invalid, reasonable restraints are valid if justified by legitimate interests of the parties. Bellingham First Fed. Sav. & Loan Ass'n v. Garrison, 87 Wash.2d 437, 439, 553 P.2d 1090 (1976); Miller v. Pacific First Fed. Sav. & Loan Ass'n, 86 Wash.2d 401, 403, 545 P.2d 546, 92 A.L.R.3d 815 (1976). Both Miller and Bellingham, which are thoroughly briefed by both parties, discussed an enforced increase in interest rates and due-on-sale clauses which allow the lender to accelerate payment upon transfer of mortgaged property. ²

In Miller, the plaintiffs purchased property and executed a note and mortgage to defendant savings and loan which note provided:

I understand this loan is personal to me and is to be secured by a mortgage or deed of trust on real property and that my personal responsibility and occupancy and/or control of such real property is a material inducement to lender to make said loan. If title to said property shall pass from me by deed or otherwise, or said property shall be sold on contract, or if the property shall be vacated by me, then such change in title or occupancy shall be deemed to increase the risk of lender, and lender or other holder may declare the entire balance immediately due and payable, or at its sole option it may consent to said change in title or occupancy and may increase the interest rate of said loan not to exceed two per cent per annum to compensate for such increased risk. Such increase in interest shall entitle the holder to increase monthly payments on the loan so as to retire the obligation within the original stipulated time.

Miller, at 402, 545 P.2d 546. The Millers then sold the property on a real estate contract subject to the note, not an assumption of the note. The bank raised the interest rate on the loan .5 percent. The court affirmed a summary judgment for the lender, even though there was no showing of actual increase in the lender's risk by virtue of the sale to a third party. Miller, at 405, 545 P.2d 546, citing Gunther v. White, 489 S.W.2d 529, 532 (Tenn.1973). The court reasoned that

[g]enerally, the common-law rule is that limitations on the free alienation of property are invalid. See Malouff v. Midland Fed. Sav. & Loan Ass'n, 181 Colo. 294, 299, 509 P.2d 1240, 1243 (1973); Richardson v. Danson, 44 Wash.2d 760, 766, 270 P.2d 802 (1954). But reasonable restraints that are justified by legitimate interests of the parties are not necessarily void. See Malouff v. Midland Fed. Sav. & Loan Ass'n, supra at 299, 509 P.2d 1240. In fact, some states have upheld "due-on-sale" clauses where payment is accelerated and the entire amount of the loan becomes due upon transfer of the mortgaged property. See, e.g., Malouff v. Midland Fed. Sav. & Loan Ass'n, supra at 301, 509 P.2d 1240; Gunther v. White, 489 S.W.2d 529, 530 (Tenn.1973); Mutual Fed. Sav. & Loan Ass'n v. Wisconsin Wire Works, 58 Wis.2d 99, 110, 205 N.W.2d 762 (1973).

Often a lender-mortgagee utilizes a due-on-sale clause in its loan agreements to achieve indirectly an increase in the loan interest rate upon a transfer of the property. The lender simply demands an increased interest rate in exchange for his consent to the transfer and for his agreement not to enforce the acceleration clause in the agreement. See, e.g., Malouff v. Midland Fed. Sav. & Loan Ass'n, supra at 297, 509 P.2d 1240; Gunther v. White, supra at 529; Note, Judicial Treatment of the Due-on-Sale Clause: The Case for Adopting Standards of Reasonableness and Unconscionability, 27 Stan.L.Rev. 1109, 1110-11 (1975). Some states, however, have refused to enforce due-on-sale clauses, holding them to be unreasonable restraints on alienation of property and contrary to public policy in the absence of a showing that an increase in the interest rate is reasonably necessary to protect the lender's security. In those states the transfer of the property must in fact increase the lender-mortgagee's risk before the due-on-sale clause will be held valid. See, e.g., Baltimore Life Ins. Co. v. Harn, 15 Ariz.App. 78, 81, 486 P.2d 190, 193 (1971); Tucker v. Lassen Sav. & Loan Ass'n, 12 Cal.3d 629, 638, 526 P.2d 1169, 116 Cal.Rptr. 633 (1974); cf. La Sala v. American Sav. & Loan Ass'n, 5 Cal.3d 864, 882, 489 P.2d 1113, 97 Cal.Rptr. 849 (1971).

Miller, 86 Wash.2d at 403-04, 545 P.2d 546. But the court found Miller did not involve an acceleration clause. The lender did not declare the entire balance due because Millers sold. Rather, the lender merely increased the interest rate .5 percent.

This only affects the vendor-mortgagor's asking price for the property. It does not restrain alienation. Hence, a loan agreement which permits the lender to increase the interest rate upon transfer of the mortgaged property is not invalid per se as an unreasonable restraint on alienation of property.

However, courts of equity may relieve parties from such a provision if the results are unconscionable or inequitable. Gunther v. White, supra at 531. See Malouff v. Midland Fed. Sav. & Loan Ass'n, 181 Colo. 294, 303, 509 P.2d 1240 (1973); see also Jacobson v. McClanahan, 43 Wash.2d 751, 755, 264 P.2d 253 (1953).

Whether [acceleration clauses] may be utilized in a particular case is dependent upon the facts and whether the invocation of the acceleration clause would be inequitable under the circumstances.

(Italics ours.) Mutual Fed. Sav. & Loan Ass'n v. Wisconsin Wire Works, supra at 106, 205 N.W.2d 762. We feel that the increased interest rate clause in the present case should be subject to the same standards. Therefore, this kind of clause is enforceable except in situations where its operation "would be inequitable under the circumstances" and thus would justify the exercise of the court's equitable powers. See Malo v. Anderson, 62 Wash.2d 813, 815, 384 P.2d 867 (1963).

Miller, 86 Wash.2d at 405-06, 545 P.2d 546. The court held that the .5 percent increase in interest rate was not inequitable or unconscionable.

In Bellingham the owner borrowed $185,000 from plaintiff savings and loan, executing two promissory notes and mortgages which contained the following due-on-sale clause:

The mortgagors further agree that they will not make any voluntary inter vivos transfer of the premises or any part thereof without first obtaining the written consent of the mortgagee. Any such transfer, if the mortgagee shall not so consent, shall constitute a default under the terms of this instrument ... If the mortgagee shall so consent, it shall consent also to substitution of mortgagor's transferee as obligor under this mortgage and the aforesaid note.

Bellingham, 87 Wash.2d at 438, 553 P.2d 1090.

Garrison contracted to sell to Rietman. The lender did not consent and interpreted the Rietman sale as a default of the loan and declared the balance due on such sale. The...