Martin v. Peoples Mut. Sav. and Loan Ass'n

• Decision Date: 19 May 1982
• Docket Number: No. 66054,66054
• Citation: 319 N.W.2d 220
• Parties: James F. MARTIN and Georgeann J. Martin, Appellees, v. PEOPLES MUTUAL SAVINGS AND LOAN ASSOCIATION, Appellant.
• Court: Iowa Supreme Court

Page 220

319 N.W.2d 220

James F. MARTIN and Georgeann J. Martin, Appellees, v. PEOPLES MUTUAL SAVINGS AND LOAN ASSOCIATION, Appellant.

No. 66054.

Supreme Court of Iowa.

May 19, 1982.

George Keith of Martin, Keith & Pederson, Waterloo, and Jon Fister of Beecher, Beecher, Holmes & Rathert, Waterloo, for appellant.

Robert L. Rausch of Cutler & Rausch, Waterloo, for appellees.

Thomas J. Miller, Atty. Gen., and Steven G. Norby, Asst. Atty. Gen., for amicus curiae State of Iowa.

George Cosson, General Counsel, Iowa Housing Finance Authority, Des Moines, for amicus curiae Iowa Housing Finance Authority.

Considered en banc.

REYNOLDSON, Chief Justice.

Plaintiffs, James F. and Georgeann J. Martin, purchased a residential property from a borrower-mortgagor of defendant Peoples Mutual Savings and Loan Association (Association). They then brought this declaratory judgment action to nullify the due-on-sale acceleration clause in the Association's mortgage. Trial court granted the requested relief and the Association appealed. We reverse and remand.

The Waterloo, Iowa, home involved in this litigation was purchased new by Brian C. and Kathleen S. Jorgensen in April 1978 for $73,500. The purchase was financed in part by a $59,860 loan from the Association, secured by a first mortgage. Paragraph seventeen of the mortgage stated in relevant part:

17. Transfer of the Property: Assumption. If all or any part of the Property ... 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 Mortgage 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 Mortgage 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 Mortgage and the Note.

Paragraph seventeen also provided for at least a thirty-day notice of an intent to accelerate the balance due. ¹

Mrs. Jorgensen, who apparently assumed the leading role in the family's financial dealings, testified that at the time the mortgage was signed she "did have some information besides what was in the mortgage as to whether the loan was assignable or not." She thought that Mr. Burns, the Association's loan officer, had gone through with her the written "Notice to Customers Required by Federal Law--Federal Reserve Regulation Z." That notice, placed in evidence, states in typing twice as large as its printed provisions that "[t]his loan is not assumable without Lender consent." Mrs. Jorgensen had signed the notice on the day the mortgage was signed, as an acknowledgment that she received "the disclosures made in this notice."

In the spring of 1979 the Jorgensens decided to go back to college and listed their home for sale. At approximately the same time, the Martins had consulted broker Michael Ott about purchasing a house. After analyzing Martins' income with them, Ott had advised them to look at houses in the $60,000 to low $70,000 price range. Nonetheless, the Martins were captivated by the Jorgensen house and on September 9, 1979, after negotiations, contracted to buy it for $82,500. The contract contained this provision:

If this sale contemplates a mortgage assumption, buyers may declare this contract null and void and demand a refund of their down payment if such mortgagee accelerates said mortgage or raises the interest rate thereon to a rate exceeding 9% per annum.

The Martins then made application to the Association to assume Jorgensens' loan. The application was processed and Martins were found to meet credit and income requirements. They were approved to assume the loan at a contract interest rate of eleven percent. That was then the maximum legal rate. It was being charged at the time by the Association and comparable lending agencies. The Martins declined to enter into an assumption agreement on those terms. They subsequently signed a supplemental agreement with Jorgensens to withdraw the mortgage-assuming condition in the sales contract. Martins agreed in writing that "If Peoples Mutual Savings & Loan Association prevails in asserting the call clause, Buyer herein will secure new financing."

October 25, 1979, in Ott's office, Jorgensens conveyed the property to Martins, subject to the $59,263.69 mortgage, which Martins agreed to pay. November 6, 1979, the Association sent Jorgensens an acceleration letter, requesting payment of the mortgage balance by December 14, 1979. November 30, 1979, Martins brought this declaratory judgment action, seeking to prevent the Association from using the due-on-sale provision to accelerate payment of the loan. Martins' litigation is supported by the Iowa Association of Realtors.

The rationale for trial court's ruling, as expanded following a motion to enlarge, appears to be based on an asserted violation of subsection 535.2(4), The Code 1979. In further support of trial court's judgment, the Martins contend here, as they did in district court, that the due-on-sale clause is unenforceable because it is a restraint on alienation.

I. Does subsection 535.2(4), The Code 1979, prohibit the Association from accelerating the loan balance under its mortgage due-on-sale clause?

Subsection 535.2(4), The Code 1979, in its entirety reads:

Notwithstanding the provisions of subsection 3, with respect to any agreement which was executed prior to August 3, 1978, and which contained a provision for the adjustment of the rate of interest specified in that agreement, the maximum lawful rate of interest which may be imposed under that agreement shall be nine cents on the hundred by the year, and any excess charge shall be a violation of section 535.4. ²

(Emphasis added.) Trial court's ruling was based on its finding "that Paragraph 17 of the mortgage agreement has a provision for the adjustment of interest inasmuch as Paragraph 17 states, in part, '... that the interest payable on the sums secured by this mortgage shall be at such rate as Lender shall request.' "

The language of subsection 535.2(4) restricts its application. It only applies to "agreements" (1) that were executed prior to August 3, 1978, and (2) that contain a provision for the adjustment of the rate of interest specified in that agreement. It is plain that the subsection's restriction limiting interest rate changes to nine percent only applies if the interest rate is to be imposed "under that agreement." Of course it follows that if the interest rate is to be imposed under another agreement, subsection 535.2(4) does not apply.

Paragraph seventeen of the mortgage is part of an agreement between the Jorgensens and the Association. Because the promissory note refers to the mortgage provision controlling acceleration, the total contract is combined in the note and mortgage. However, because only the note refers to the interest Jorgensens were to pay to the Association, its provisions are the terms of the agreement for subsection 535.2(4) purposes. See Frenzel v. Frenzel, 260 Iowa 1076, 1080-81, 152 N.W.2d 157, 160 (1967) (note is the primary contract, the mortgage an incident thereto). Mortgage paragraph seventeen in no way controls the interest agreement between the Jorgensens and the Association. Neither party could invoke the paragraph to alter their agreement about interest rates. The note sets the interest rate at nine percent without any provision for changing the rate. Subsection 535.2(4) does not apply to the agreement between Jorgensens and the Association because it did not contain "a provision for the adjustment of the rate of interest specified in that agreement."

It is true that mortgage paragraph seventeen contemplates an interest rate change and refers to an agreement. But the agreement that paragraph seventeen refers to is between "the Lender [Association] and the person to whom the Property is to be sold or transferred," not the interest rate agreement between Jorgensens and the Association. The agreement that would change the interest rate in this case would be in neither the note nor the mortgage, but in an assumption agreement between the Association and a third party. This second agreement cannot invoke the subsection 535.2(4) interest ceiling because an interest rate in a subsequent agreement is not imposed "under that agreement" that "contained a provision for the adjustment of the rate of interest." It is equally clear this definitional requirement must be met for application of subsection 535.2(4) according to its terms.

This conclusion necessarily limits application of subsection 535.2(4), The Code 1979, to variable interest rate mortgages, as we believe the legislature intended. Such a construction finds support in other provisions of section 535.2. Subsection 535.2(3)(d), immediately preceding the subsection under scrutiny, specifically describes a variable rate agreement.

Martins argue mortgage paragraph seventeen is a provision for the "adjustment" of the rate of interest, that being the term employed in subsection 535.2(4). Any such "adjustment," however, would not trigger the subsection 535.2(4) interest ceiling due to the "under that agreement" language of that statute. Moreover, paragraph seventeen obviously is a mechanism for initiating negotiations with different parties, not adjusting terms in the original agreement. "Adjustment" as used in subsection 535.2(4) invokes the concept of modifying an existing agreement "executed prior to August 3, 1978," not creating a new contract with a different party. The interest rate increase the...