Mutual Federal S & L Assn. v. American Medical Services, Inc.

• Decision Date: 20 December 1974
• Docket Number: No. 205,205
• Citation: 223 N.W.2d 921,66 Wis.2d 210
• Court: Wisconsin Supreme Court
• Parties: MUTUAL FEDERAL S & L ASSN., a corp., Appellant, v. AMERICAN MEDICAL SERVICES, INC., et al., Respondents.

Page 921

223 N.W.2d 921

66 Wis.2d 210

MUTUAL FEDERAL S & L ASSN., a corp., Appellant, v. AMERICAN MEDICAL SERVICES, INC., et al., Respondents.

No. 205.

Supreme Court of Wisconsin.

Dec. 20, 1974.

Frisch, Dudek, Slattery & Denny, Edward A. Dudek, Robert D. Scott and James D. Friedman, Milwaukee, of counsel, for appellant.

Godfrey & Kahn, S.C., Gerald J. Kahn, James Ward Rector and William B. Graves, Milwaukee, of counsel, for respondents.

ROBERT W. HANSEN, Justice.

The validity of a 'due on sale' provision in a mortgage was upheld in the Wire Works Case. ¹ As to an acceleration clause, phrased in the exact language of the provision involved in the case before us, this court held such "due . . . if . . . convey(ed) away . . . of if the title thereto shall become vested in any other" clause not to be against public policy and held it to be '. . . enforceable as a contractual condition of the note and mortgage.' ² However, it also held that the invocation of the acceleration clause must be 'in accord with equitable principles,' with the trial court to determine whether, '. . . in accordance with the equitable standards that are imperative upon the foreclosure of a mortgage, . . .' ³ foreclosure under a 'due on sale' provision will be permitted.

In this case the trial court balanced the equities involved and concluded that: 'It would be inequitable under the circumstances to decree foreclosure of the mortgages.' We find that conclusion or holding amply supported by the record in this case, and affirm it, specifically approving the balancing of equities approach used by the trial court in reaching it. As this court made clear in the Wire Works Case, enforcement of 'due on sale' clauses is not automatic, and '. . . (w)hether they 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.' ⁴ In this record, and in the opinion of the trial court, we find three major factors that tip the scales of equity in favor of the mortgagor, and against the mortgage-fore-closer. They are as follows:

I. NO IMPAIRMENT OF SECURITY. The trial court here held that the transfers of title here involved '. . . did not affect substantially the beneficial ownership of the mortgaged property or fall within the purpose of the mortgage restrictions upon transfer of title to the mortgaged premises.' The trial court opinion set forth this conclusion as alone sufficient, not to establish the weight of the equities involved, but to constitute a condition precedent not met to the implementation of a 'due on sale' provision in a mortgage. We do not go that far. While the Wire Works Case apparently viewed an acceleration clause as related to preservation of the security of the mortgage holder, ⁵ the decision does not make proof of actual impairment of security a condition precedent to a foreclosure under the 'due on sale' clause. However, an absence of impairment of security is a factor that a trial court may put on the scales in weighing the equities involved. Here the argument could be and is made that the transfers involved materially improved Mutual's security and enhanced its ability to collect the mortgage indebtedness. Without the funds which the building corporation was able to supply by reason of the merger effected, it appears questionable whether the nursing home could have continued in operation. At least the mortgage was then in default. When the nursing home was restored to a corporation exclusively engaged in the nursing home business, the basic purpose appears to have been to strengthen the viability of the nursing home operation conducted on the mortgaged premises. With timely payments of increased monthly installments replacing repeated defaults, we uphold the trial court's conclusion that there was here no substantial impairment of security sustained by the mortgagee by reason of the transfers made.

II. AGREEMENT NOT TO FORECLOSE. The trial court here found that Mutual had '. . . agreed with Defendant River Hills Nursing Home, Inc., and West Side Bank to refrain from foreclosing the mortgages so long as the sum of $13,000 . . . was paid monthly,' and that there '. . . has been no failure to make a payment required under the agreement not to foreclose.' The reference is to a letter sent in 1965 by Mutual, by its president, to the West Side Bank stating that as long as the sum of $13,000 was paid monthly to Mutual it would forbear instituting foreclosure proceedings. Also, there was the endorsement by Mutual of a cashier's check purchased by River Hills II by which payment of $69,000 was made to Mutual and the agreement to forbear foreclosure was repeated. The trial court held the letter and check to constitute a three-party agreement binding Mutual not to foreclose in lieu of actual default and barring this action to foreclose under the acceleration clause. We need not, in balancing the equities involved, reach or review the trial court holding that all elements of a contractual agreement are met by the letter and endorsement on the check. We do hold that the agreement by Mutual to forbear instituting foreclosure proceedings as long as it received $13,000 per month, which amount it did receive, as contained in its letter to the bank and endorsement of the check, constitutes a substantial equitable consideration undergirding and supporting the trial court conclusion so that equity would not be served by permitting Mutual to foreclose where no default had occurred.

III. DEFENSE OF LACHES. In the Wire Works Case, this court held that an action to foreclose a mortgage is equitable in nature, and ". . . the defense of laches may be raised against the mortgagee . . ." ⁶ This court has set forth the three essential elements of the defense of laches to be: '. . . (U) nreasonable delay in commencing the action; knowledge of the course of events and acquiescence therein; and prejudice to the party asserting the defense. . . .' ⁷

Here we have a four to six-year delay in the seeking to enforce the acceleration provision. Assuming that Mutual can be found to have had knowledge of the transfers, this is certainly a sufficiently lengthy delay to meet the first element of the laches test. While actual notice at the time of transfers was not given to Mutual, the trial court held that Mutual '. . . knew or should have known, when it entered into the agreement not to foreclose, of the changes in legal title to the mortgaged premises. . . .' Constructive notice is enough. ⁸ The receipt of checks by Mutual, as far back as 1965, drawn on the building company's account; balance sheets submitted to Mutual; an insurance endorsement noting that title was changed to include the building company; along with the letter to the bank and the endorsement on the $69,000 check including the promise to forbear foreclosure, sufficiently support the trial court's conclusion that Mutual knew or should have known of the transfers of title made. We find the second element of the three-pronged test here met. As to the third element, prejudice to the defendant, while the trial court made no finding in this regard, the record clearly establishes that the respondents have become indebted to the West Side Bank for $250,000, have made the $13,000 monthly payments called for by the 1965 agreement and have made improvements to the nursing home at a cost of $275,000. The trial court found that mortgage interest rates have '. . . increased substantially during the period intervening between the agreement not to foreclose and the...