Miller v. Pacific First Federal Sav. and Loan Ass'n

• Decision Date: 29 January 1976
• Docket Number: No. 43808,43808
• Parties: , 92 A.L.R.3d 815 Larry R. MILLER and Mary Ann Miller, husband and wife, Appellants, v. PACIFIC FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation, Respondent.
• Court: Washington Supreme Court

Page 401

86 Wn.2d 401

545 P.2d 546, 92 A.L.R.3d 815

Larry R. MILLER and Mary Ann Miller, husband and wife, Appellants, v. PACIFIC FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation, Respondent.

No. 43808.

Supreme Court of Washington, En Banc.

Jan. 29, 1976.

Walstead, Mertsching, Husemoen, Donaldson, & Barlow, Barry J. Dahl, Longview, for appellants.

Gordon, Thomas, Honeywell, Malanca, Peterson, O'Hern & Johnson, Valen H. Honeywell, Tacoma, for respondent.

HUNTER, Associate Justice.

On June 19, 1972, Larry R. Miller and Mary Ann Miller, the appellants executed a general promissory note and accompanying real estate mortgage with Pacific First Federal Savings and Loan Association, the respondent. The promissory note contains the following provision:

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 charge 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.

(Italics ours.)

On January 21, 1974, the appellants executed a real estate contract in which they sold their interest in the property to a third party, subject to the note and real estate mortgage. Respondent then invoked the italicized portion of the provision quoted above and raised the interest rate on appellants' loan 1/2 of one percent, effective March 1, 1974. The appellants sought to have the provision declared void and sued both for an injunction to prevent respondent from applying the provision and for damages. The trial court, relying solely on the language of the promissory note, granted summary judgment in favor of respondent and dismissed appellants' claim. Appellants have appealed from this judgment. We affirm.

Appellants contend that the trial court should not have granted summary judgment. They argue that they should not have been held to the express and clear language of the agreement, but rather that at least they should have been allowed to demonstrate that there was no Actual increase in respondent-lender's risk on the loan by virtue of the third-party real estate contract. Appellants' theory is that before the lender-mortgagee can increase the interest rate on the loan, it should be required to demonstrate an actual increase in risk due to the transfer of the property. They contend that enforcement of the provision in this agreement without a showing of actual increased risk would create an unreasonable restraint on alienation of their property contrary to public policy.

Specifically before us, in our consideration of this contention, is the language in the note that permits the respondent lender, in the absence of demonstrated increased risk, to raise the interest rate on the loan when the mortgaged property is transferred. Generally, the common law rule is that limitations on the free alienation of property are invalid. See Malouff v. Midland Fed. Savings & Loan Ass'n, 181 Colo. 294, 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. Savings & Loan Ass'n, supra, 509 P.2d at 1243. In fact, some states have upheld 'due-on-sale' clauses where payment is accelerated and the entire amount of the loan become due upon transfer of the mortgaged property. See, e.g., Malouff v. Midland Fed. Savings & Loan Ass'n, supra, 509 P.2d at 1244; Gunther v. White, Tenn., 489 S.W.2d 529, 530 (1973); Mutual Fed. Savings & 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. Savings & Loan Ass'n, supra, 509 P.2d at 1242; 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 Savings & Loan Ass'n, 12 Cal.3d 629, 638, 116 Cal.Rptr. 633, 526 P.2d 1169 (1974); Cf. LaSala v. Amercian Savings & Loan Ass'n, 5 Cal.3d 864, 882, 97 Cal.Rptr. 849, 489 P.2d 1113 (1971).

The present case, on the other hand, does not involve the operation of an acceleration clause but instead involves the portion of the loan agreement provision quoted above that directly permits the respondent mortgagee to increase the interest rate upon transfer of the property. In practical terms this provision merely affects the vendor-mortgagor's total asking price for his property. A higher interest rate will probably cause the vendor-mortgagor to lower his sales price in order to compete pricewise with similar property. See Note, Judicial Treatment of the Due-on-Sale Clause: The Case for Adopting Standards of Reasonableness and Unconscionability, 27 Stan.L.Rev. 1109, 1113 (1975). Thus the vendor-mortgagor's ability to command his Preferred asking price might be somewhat impaired. Nevertheless, the increased interest provision does not restrain the actual Transfer of the property because...