Malouff v. Midland Federal Sav. and Loan Ass'n

• Decision Date: 23 April 1973
• Docket Number: No. 25663,25663
• Citation: Malouff v. Midland Federal Sav. and Loan Ass'n, 509 P.2d 1240, 181 Colo. 294 (Colo. 1973)
• Parties: Virginia A. MALOUFF, Individually, and as a representative of a class, Plaintiff-Appellee, v. MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant, and Gordon Price, Defendant.
• Court: Colorado Supreme Court

Page 1240

509 P.2d 1240

181 Colo. 294

Virginia A. MALOUFF, Individually, and as a representative of a class, Plaintiff-Appellee, v. MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant and Gordon Price, Defendant.

No. 25663.

Supreme Court of Colorado, En Banc.

April 23, 1973.

As Modified on Denial of Rehearing June 4, 1973.

Cole, Hecox, Tolley, Edwards & Hero, Lawrence A. Hecox, Michael R. Bromley, Colorado Springs, for plaintiff-appellee.

Fairfield & Woods, Charles J. Beise, Charlton H. Carpenter, Denver, for defendant-appellant.

No appearance for Gordon Price, Defendant.

LEE, Justice.

This appellate proceeding was transferred on motion from the Court of Appeals in view of the significant public interest in the subject matter of the appeal and because of the major significance of the legal principles involved. 1969 Perm.Supp., C.R.S.1963, 37--21--9. The principal issue concerns the validity of the acceleration clause contained in a deed of trust, a matter of first impression in Colorado. The clause in controversy, sometimes designated as a 'due on sale' clause, provides as follows:

'The said party of the first part (Borrower) further covenants and agrees:

'Not to alienate nor to encumber to the prejudice of the Association said real estate nor to commit, permit, or suffer any waste, impairment, or depreciation of said property and, in the event of any sale or transfer of title to the property herein described, such purchaser or new owner shall be deemed to have assumed and agreed to pay the indebtedness owing the Association hereunder, whether or not the instrument evidencing such sale or transfer expressly so provides, And at any time after such sale or transfer, without limiting the foregoing, the Association may, at its option, declare all of the remainder of the indebtedness immediately due and collectible, whether or not any default exists; this covenant shall run with said land and remain in full force and effect until said indebtedness is liquidated and the Association may, without notice to party of the first part, deal with such new owner of owners with reference to the debt secured hereby in the same manner as with the party of the first part, without in any way altering or discharging the party of the first part's liability hereunder upon the indebtedness hereby secured.' (Emphasis added.)

We are primarily concerned with the italicized portion of the above provision, which was specifically challenged by appellee, Virginia A. Malouff, and which was declared to be void by the trial court as an invalid restraint on alienation. We reverse the judgment.

I.

The facts are essentially without basic dispute. In 1966 the subject property, a duplex located at 2170--72 Broadmoor Circle in Colorado Springs, was encumbered by a deed of trust from the owner, Gordon Price, to the use and benefit of appellant, Midland Federal Savings and Loan Association (Midland). The indebtedness secured thereby was in the principal sum of $33,000 bearing interest at 7% Per annum, payable in monthly installments of $233.25. In May of 1971 appellee (Malouff) contracted to purchase the duplex for $57,000, by a cash payment of $27,000 and the assumption of the Midland encumbrance balance which was approximately $30,000. Malouff applied to Midland for permission to assume the loan. Midland agreed not to accelerate the indebtedness if Malouff would comply with Midland's assumption requirements, which included the execution of an Assumption and Modification Agreement. This provided that in consideration of Midland's permitting Malouff to assume the existing loan and agreeing not to exercise its acceleration privilege contained in the trust deed, the unpaid loan balance would bear interest at the increased rate of 8% And the monthly payments would thereby be increased to $254.29.

At the sale closing on July 9, 1971, Malouff's regular attorney could not be present. However, she was represented by his associate, who had previously examined the closing documents. Malouff signed the required assumption agreement. She testified that its terms were not read or explained to her. This was disputed by the testimony of the closing agent. In any event, the sale was closed and title to the duplex was transferred Subject to the Midland trust deed. The closing documents were left with the agent for recording and appropriate distribution.

The next day, Malouff examined her copy of the assumption agreement and, upon reconsideration of its terms, she called the real estate agent and instructed that the papers not be delivered to Midland until her regular attorney had an opportunity to examine them.

After inspecting Midland's assumption agreement, Malouff's attorney informed Midland that his client would not agree to the higher 8% Interest rate. The closing agent was then instructed by the attorney to record the deed. This was done. Thereafter, Malouff tendered to Midland monthly payments at the 7% Rate, as originally provided in the note and deed of trust. The tendered payments were refused by Midland. Midland elected to accelerate the indebtedness and demanded payments in full by September 1, 1971. To this demand Malouff responded by commencing this action.

II.

Malouff's complaint, brought in her behalf individually and as a representative of a class, sought relief under three claims. The first claim requested a preliminary and permanent injunction enjoining Midland from foreclosing its trust deed, and for a declaration that Malouff was legally entitled to assume the Midland loan. The second claim was asserted solely against the seller of the property, Gordon Price, and requested rescission of the contract of sale in the event the first claim was decided adversely to Malouff. We are not here concerned with this claim, as the trial court found in favor of Malouff on the first claim. The third claim related to the class action and sought injunctive relief for those members of the class, similar to Malouff, who were not permitted to assume the existing loan but were required by pay increased interest to Midland on assumption, and for return of the increased interest paid.

After an evidentiary hearing, the court preliminarily enjoined Midland from foreclosing against Malouff, thus maintaining the status quo pending final determination of the merits. Malouff filed a motion for summary judgment. It was stipulated thereafter that all the facts necessary for the court to enter final judgment on the claims between Malouff and Midland were before the court, as shown by the evidence and exhibits at the hearing on preliminary injunction and as contained in the affidavits filed on behalf of Midland, and, therefore, no further evidentiary hearing was necessary. The trial court on February 29 entered extensive findings of fact, conclusions of law and final judgment in favor of Malouff, holding the acceleration clause invalid as an unlawful restraint on alienation, and, further, that it was too vague and uncertain to be enforceable; that the specific terms of the clause requiring assumption of the indebtedness on sale by a purchaser were unenforceable and void; and that plaintiff was entitled to proceed under the class action to obtain final declaratory and injunctive relief.

III.

The common law doctrine of restraints on alienation is a part of the law in Colorado. C.R.S.1963, 135--1--1. As declared in Atchison v. Englewood, 170 Colo. 295, 463 P.2d 297, public policy demands that property interests be freely alienable and that restraints which withdraw property from the stream of commerce are invalid. In determining what restraints are invalid, some legal scholars have declared that all restraints on alienation are invalid unless they fall within certain recognized categories of exceptions. This view was adopted and followed by the trial court, which held that the due-on-sale clause here involved did not fall within one of the exceptions and it was an invalid restraint. For a discussion, see 'The Minority Doctrine Concerning Direct Restraints on Alienation,' 57 Mich.L.Rev. 1173.

In contrast to this rigid approach, is the view that holds a restraint on alienation may or may not be invalid, depending upon the reasonableness of the restraint. As suggested in Atchison v. Englewood, Supra, the rule against restraints on alienation relates to Unreasonable restraints. In discussing this problem, Mr. Justice Traynor in Coast Bank v. Minderhout, 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265, observed:

'The view that the common-law rule against restraints on alienation prohibits all such restraints has been forcefully criticized on the ground that it loses sight of the purposes of the rule and needlessly invalidates reasonable restraints designed to protect justifiable interests of the parties. (See Sweet, Restraints on alienation, 33 L.Q.Rev. 236, 246--253; Manning, The Development of Restraints on Alienation Since Gray, 48 Harv.L.Rev. 373, 398--400, 406; Northwest Real Estate Co. v. Serio, 156 Md. 229, 236, 144 A. 245 (Chief Judge Bond dissenting); cf. Simes & Smith, Future Interests (2d ed.) §§ 1115, 1168. Bernhard, The Minority Doctrine Concerning Direct Restraints on Alienation, 57 Mich.L.Rev. 1173, 1177.)'

We subscribe to the view that the question of the invalidity of a restraint depends upon its reasonableness in view of the justifiable interests of the parties.

Coast Bank, supra, considered a landmark decision in the area of due-on-sale clauses, upheld generally the validity of such a clause and in effect rejected the view that such a clause in a security instrument is per se an invalid restraint. Following Coast Bank, supra, numerous decisions have upheld the validity of such provisions in various circumstances. Jones v. Sacramento Savings and Loan Association, 248 Cal.App.2d 522, 56 Cal.Rptr. 741; Hellbaum v. Lytton Savings and Loan Ass'n of No. Cal., 274 Cal.App.2d 456, 79 Cal.Rptr. 9; Cherry v. Home Savings & Loan...