Nichols v. Ann Arbor Federal Sav. and Loan Ass'n

• Decision Date: 05 January 1977
• Docket Number: 25529,Docket Nos. 25528
• Citation: 250 N.W.2d 804,73 Mich.App. 163
• Parties: Charles D. NICHOLS and Laverne I. Nichols, his wife, Plaintiffs-Appellees, v. ANN ARBOR FEDERAL SAVINGS & LOAN ASSOCIATION, a corporation under Home Owners Loan Act of 1933, Defendant-Appellant. Herbert KEMPF and Virginia Kempf, Plaintiffs-Appellees, v. ANN ARBOR FEDERAL SAVINGS & LOAN ASSOCIATION, a United States Corporation, Defendant-Appellant. 73 Mich.App. 163, 250 N.W.2d 804
• Court: Court of Appeal of Michigan — District of US

Page 804

250 N.W.2d 804

Charles D. NICHOLS and Laverne I. Nichols, his wife, Plaintiffs-Appellees, v. ANN ARBOR FEDERAL SAVINGS & LOAN ASSOCIATION, a corporation

under Home Owners Loan Act of 1933,

Defendant-Appellant.

Herbert KEMPF and Virginia Kempf, Plaintiffs-Appellees, v. ANN ARBOR FEDERAL SAVINGS & LOAN ASSOCIATION, a United

States Corporation, Defendant-Appellant.

Docket Nos. 25528, 25529.

73 Mich.App. 163, 250 N.W.2d 804

Court of Appeals of Michigan.

Jan. 5, 1977.

Released for Publication Feb. 28, 1977.

[73 MICHAPP 164] Laird & Grace by Robert J. Grace, Ann Arbor, for defendant-appellant.

Lawrence A. Thompson, Livonia, for Kempf.

Lawson & Anderson, P.C. by James P. Lawson, Farmington, for Nichols.

Before CAVANAGH, P.J., and MAHER and BEASLEY, JJ.

MAHER, Judge.

Defendant Ann Arbor Federal Savings and Loan Association held a mortgage on certain real estate located in the City of Brighton owned by Mr. and Mrs. Kempf. The mortgage contained a provision that allowed defendant to demand immediate payment of the entire mortgage debt if there was any change in ownership of the property.

Approximately six months after the execution of the mortgage, the Kempfs sold the property in question to the Nichols on land contract. Defendant then accelerated the mortgage indebtedness and commenced foreclosure proceedings by publication. The Kempfs and the Nichols filed independent actions in the Livingston County Circuit Court seeking to permanently enjoin the foreclosure. The actions were consolidated and the parties submitted the case to the trial court for disposition[73 MICHAPP 165] on cross motions for summary judgment under stipulated facts.

The trial court granted summary judgment for all plaintiffs. The trial court found that the 'due-on-sale' clause in the mortgage was unenforceable as an unreasonable restraint on alienation, and concluded that defendant was not entitled to foreclosure since there were no allegations that defendant's security was being wasted, impaired or lost. Defendant appeals and we affirm.

We must first determine whether the clause in question is a restraint on alienation. It reads:

'That the mortgage shall become due and payable forthwith at the option of the mortgagee if there shall be any change in the ownership of the mortgaged property, then and in such event, the aforesaid principle sum with accrued interest shall, at the option of the mortgagee, become due and payable immediately, notwithstanding anything herein contained or contained in the mortgage to the contrary.'

Strictly speaking, as defendant points out, the 'due-on-sale' clause in question does not fit within the definition of a restraint on alienation found in the Restatement of the Law of Property. ¹ Neither [73 MICHAPP 166] expressly nor by implication does it prohibit plaintiffs Kempf from alienating their interest. It does not provide that they are to be divested of their interest upon alienation. An author dealing with this type of clause, however, has written:

'Although written as an acceleration clause, the due on sale clause directly and fundamentally burdens a mortgagor's ability to alienate as surely and directly as the classical promissory restraint. As such, the due-on-sale clause is truly a direct restraint insofar as the category of direct restraints can be articulated.' Volkmer, The Application of the Restraint on Alienation Doctrine to Real Property Security Interests, 58 Iowa L.Rev. 747, 774 (1973).

Support for this position may be found in the many cases from other jurisdictions which have held that 'due-on-sale' clauses operate as restraints on alienation. ² See, E.g., Coast Bank v. Minderhout, 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265 (1964); Tucker v. Lassen Savings and Loan Association, 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169 (1974); Malouff v. Midland Federal Savings and Loan Association, 181 Colo. 294, 509 P.2d 1240 (1973); Baker v. Loves Park Savings and Loan Association, 61 Ill.2d 119, 333 N.E.2d 1 (1975).

If the mortgage clause defendant seeks to enforce can be labeled a restraint on alienation only by expanding the restatement definition, we do not [73 MICHAPP 167] hesitate to stretch the term to include this 'due-on-sale' clause. '(I)t would appear that the due-on-sale clause is so closely akin to the promissory restraint as to justify designating it a direct restraint.' 68 Iowa L.Rev., Supra, 773--774.

In answering the next question facing us, whether the due-on-sale clause is a reasonable restraint on alienation, we are helped by two decisions of this Court that deal with nonassignment provisions in land contracts. In Pellerito v. Weber, 22 Mich.App. 242, 177 N.W.2d 236 (1970), this Court considered the validity of the following paragraph contained in a land contract:

'The purchaser covenants and agrees that he will not assign or convey his interest, or any part thereof, in this contract without having first obtained the written consent of seller. Any violation by the purchaser of this condition shall be considered a default of one of the conditions of this contract.'

In our decision we declined defendant's invitation to declare that the clause in question was absolutely null and void as an unreasonable restraint on alienation. Instead we held as follows:

'Restraints on alienation of property are strongly disfavored in Michigan. Mandlebaum v. McDonell (1874), 29 Mich. 78, 107; Fratcher, Restraints on Alienation of Equitable Interests in Michigan Property, 51 Mich.L.Rev. 509 (1953). Where they are permitted, they are strictly construed to prevent a forfeiture. Ortmann v. First National Bank of Monroe (1882), 49 Mich. 56, 12 N.W. 907; Hodges v. Buell (1903), 134 Mich. 162, 95 N.W. 1078; Hull v. Hostettler (1923), 224 Mich. 365, 194 N.W. 996. Here plaintiffs have not made any allegations of waste or impairment or loss of security. They continue to enjoy the benefit of their 1953 contract. See Jankowski v. Jankowski (1945), 311 Mich. 340, 18 N.W.2d 848. Under the facts of this case we will not require a forfeiture; to do so would be to impose an unreasonable [73 MICHAPP 168] restraint on the alienation of an equitable interest in real property.'

In Lemon v. Nicolai, 33 Mich.App. 646, 190 N.W.2d 549 (1971), the land contract provided that an assignment by the defendants without plaintiffs' written consent would amount to a breach of the contract and that upon such breach plaintiffs could bring suit to accelerate the payments, recover possession of the property and enforce their rights in law or equity. After an assignment, plaintiffs obtained a judgment that forfeited defendants' rights in the land contract. After noting that plaintiffs made no allegations about waste or impairment of security, we reversed the order of the trial court awarding possession of the land to the plaintiffs. In remanding the matter to the trial court for a determination as to whether the assignment resulted in waste or impairment, we said:

'If it has not so resulted, then the action of these plaintiffs has amounted to an unreasonable restraint on the alienation of this property and is not enforceable in the circuit court.'

The bottom line in these two decisions is that Michigan has adopted a flexible approach in the area of restraints; a restraint on alienation will not be enforced unless it is found to be reasonable in a particular case.

We see no appreciable difference between the restriction at issue in Lemon and the due-on-sale clause in the instant case.

Recently the Supreme Court of California, faced with a situation similar to the one now before us, also adopted a flexible approach to restraints on alienation. In Tucker v. Lassen Savings and Loan Association, supra, the Court held [73 MICHAPP 169] '(A) 'due-on' clause contained in a promissory note or deed of trust is not to be enforced simply because the trustorobligor enters into an installment land contract for the sale of the security. Rather, in such a case the clause can be validly enforced only when the beneficiary-obligee can demonstrate a threat to one of his legitimate interests sufficient to justify the restraint on alienation inherent in its enforcement. Such legitimate interests include not only that of preserving the security from waste or depreciation but also that of guarding against what has been termed the 'moral risks' of having to resort to the security upon default. (See Hetland, Real Property and Real Property Security; The Well-Being of the Law (1965) 53 Cal.L.Rev. 151, 170; see also, Cal. Real Estate Secured Transactions, Supra, § 4.56, p. 184.) Thus, for example, if the beneficiary can show that the party in possession under the installment land contract is, or is likely to be, conducting himself with respect to the property in a manner which will probably result in a significant wasting or other impairment of the security, he may properly insist upon enforcement of the 'due-on' clause. Similarly, if the beneficiary can show that the prospects of default on the part of the vendor (requiring the inconvenience of resort to the security) are significantly enhanced in the particular situation, such circumstances might constitute a sufficient justification for enforcement of the clause despite its restraining effect. Other legitimate interests of the lender may have a similar effect.' 12 Cal.3d at 638--639, 116 Cal.Rptr. at 639, 526 P.2d at 1175.

Defendant, arguing that enforcement of the clause should be allowed without a showing of waste or impairment, cites to Baker v. Loves Park Savings and Loan Association, 61 Ill.2d 119, 333 N.E.2d 1 (1975). In holding a similar 'due-on-sale' clause reasonable the Illinois court analogized from covenants against transfer in land contracts:

'We see little difference in the end to be promoted by [73 MICHAPP 170] the restraint contained in the mortgage in this case from the end which is recognized as a legitimate object of protection by a restraint contained in a...