Occidental Sav. and Loan Ass'n v. Venco Partnership

• Decision Date: 17 June 1980
• Docket Number: No. 42741,42741
• Citation: 293 N.W.2d 843,206 Neb. 469
• Court: Nebraska Supreme Court
• Parties: OCCIDENTAL SAVINGS AND LOAN ASSOCIATION, a corporation, Appellee, v. VENCO PARTNERSHIP, a partnership, and Midwest Crating and Packing Services, apartnership, Appellants.

Page 843

293 N.W.2d 843

206 Neb. 469

OCCIDENTAL SAVINGS AND LOAN ASSOCIATION, a corporation, Appellee, v. VENCO PARTNERSHIP, a partnership, and Midwest Crating and Packing Services, apartnership, Appellants.

No. 42741.

Supreme Court of Nebraska.

June 17, 1980.

Syllabus by the Court

1. "Due on Sale" Clauses: Restraints on Alienation. "Due on sale" clauses are not direct restraints on alienation within the meaning of the law.

2. "Due on Sale" Clauses: Restraints on Alienation. Generally, "due on sale" clauses are neither direct nor indirect restraints on alienation as a matter of law and, therefore, are not void as such.

3. Public Policy: Contracts: Void Contracts. The rules which hold a contract void as against public policy should not be unduly extended. Persons should not be unnecessarily restricted in their freedom to make their own contracts; and, therefore, the court should act cautiously and not hold contracts void as being contrary to public policy unless they are clearly and unmistakably so. The usual and most important function of courts is to enforce and maintain contracts rather than to enable parties to escape their obligations on the pretext of public policy.

4. Public Policy: Contracts: Courts. It is not the province of courts to emasculate the liberty of contract by enabling parties to escape their contractual obligations on the pretext of public policy unless the preservation of the public welfare imperatively so demands.

5. Mortgages: Acceleration Clauses: Penalties and Forfeitures. A stipulation in a mortgage, providing that the whole debt secured thereby shall become due and payable upon failure of the mortgagor to pay the interest or any installment of principal upon maturity thereof or to comply with any other condition of the mortgage, is a legal, valid, and enforceable stipulation and is not in the nature of a penalty or forfeiture which a court of equity will refuse to enforce.

6. "Due on Sale" Clauses: Mortgages: Public Policy. A "due on sale" clause contained in a mortgage contract is not contrary to the public policy of this jurisdiction and is, therefore, valid and enforceable.

7. "Due on Sale" Clauses: Acceleration Clauses: Words and Phrases. A "due on sale" clause is a form of acceleration clause and, as such, should be subject to the same rules as other acceleration clauses, including the protection of equitable defenses.

8. "Due on Sale" Clauses: Equity: Burden of Proof. If permitting the lender to exercise the "due on sale" clause in a particular case would be inequitable, a court of equity is not helpless to fashion appropriate relief. However, the burden to plead and prove the facts in that regard should be upon the mortgagor and not upon the mortgagee.

Norman Denenberg, Omaha, for appellants.

Robert M. Zuber of Zuber & Ginsburg, Omaha, for appellee.

William A. Tinstman, Omaha, for amicus curiae Neb. League of Sav. Ass'n.

Heard before KRIVOSHA, C. J., and BOSLAUGH, McCOWN, CLINTON, BRODKEY, WHITE, and HASTINGS, JJ.

KRIVOSHA, Chief Justice.

The instant appeal presents the court with its first opportunity to consider the validity and enforceability of what is commonly referred to as a "due on sale" clause frequently found in a real estate mortgage. The trial court concluded that the "due on sale" clause was both valid and enforceable and, accordingly, ordered foreclosure of the mortgage containing the questioned clause. We have reviewed the files and records and the law applicable to such matters and conclude that the trial court was correct in its conclusions. Accordingly, therefore, we affirm the judgment of the trial court.

While "due on sale" clauses take a number of forms, essentially they are, in form, similar to the clause involved in the instant case, which provided "(I)n the event of a sale of said premises without the written approval of said (lender), then the whole indebtedness hereby secured shall, at the option of the said (lender), immediately become due and collectible without further notice, and this mortgage may then be foreclosed to recover the amount due on said note or obligation . . . ." Another variation on this theme is what is commonly referred to as a "due on encumbrance" clause, which is essentially the same as a "due on sale" clause, except that the triggering mechanism is the placing of a subsequent lien or encumbrance upon the mortgaged property. We concern ourselves here only with the "due on sale" clause.

While this is our first opportunity to examine the validity of "due on sale" clauses, many other courts have already made such an examination and reached varying results. The clause has also been the subject of numerous articles. Relevant opinions and articles are collected in an appendix to this opinion.

Most of the cases which have considered this issue have started their analysis by concluding without much discussion that the "due on sale" clause is a restraint on alienation. They have then either upheld the clause or struck it down depending on whether they thought that, under the particular facts, the restraint was reasonable. Likewise, appellants herein urge this court to find that the "due on sale" clause is an unreasonable restraint on alienation, absent the mortgagee pleading and proving that the security is impaired; while the appellees urge us to find that the clause is a reasonable restraint on alienation. We believe that the error committed by most jurisdictions in deciding this matter is their willingness to assume that a "due on sale" clause is a restraint on alienation and that the only issue is reasonableness. In our view, the "due on sale" clause is not a restraint on alienation as that concept is legally defined.

Both parties seem to concede that the language in the questioned clause is not, in a technical sense, a direct restraint on alienation but appellants maintain that the clause has the practical effect of a restraint on alienation and, therefore, should be struck down unless necessary to protect the lender's security.

An examination of the law pertaining to restraints on alienation makes it clear that a "due on sale" clause is not a restraint on alienation and cannot be so considered for any purpose, theoretical or practical.

The Restatement of Property § 404 (1944) defines a restraint on alienation as follows:

(1) A restraint on alienation, as that phrase is used in this Restatement, is an attempt by an otherwise effective conveyance or contract to cause a later conveyance

(a) to be void; or

(b) to impose contractual liability on the one who makes the later conveyance when such liability results from a breach of an agreement not to convey; or

(c) to terminate or subject to termination all or a part of the property interest conveyed.

(2) If a restraint on alienation is of the type described in Subsection (1), Clause (a), it is a disabling restraint.

(3) If a restraint on alienation is of the type described in Subsection (1), Clause (b), it is a promissory restraint.

(4) If a restraint on alienation is of the type described in Subsection (1), Clause (c), it is a forfeiture restraint.

One need simply read the various subparts of § 404 to conclude that a "due on sale" clause does not, in any manner, bring about any of the effects noted there and cannot, therefore, be a direct restraint on alienation.

The questioned clause in no manner precludes the owner-mortgagor from conveying his property. The owner is free to convey without legal restraint and the conveyance does not cause a forfeiture of the title, but only an acceleration of the debt.

It is true that the possibility of acceleration may impede the ability of an owner to sell his property as he wishes; nonetheless, not every impediment to a sale is a restraint on alienation, let alone contrary to public policy. It is a fact that zoning restrictions, building restrictions, or public improvements may impede the sale and substantially affect the ability of an owner to realize a maximum price. Yet no one suggests that such restrictions or covenants as a class, are invalid simply because they affect the ease with which one may dispose of one's property. We are somewhat at a loss to understand how or why so many courts have been willing to describe a "due on sale" clause as a restraint on alienation and we are unwilling to do so. Therefore, we begin our analysis by holding that "due on sale" clauses are not direct restraints Appellants next argue that, if a "due on sale" clause is not a direct restraint on alienation and, therefore, void, it is, at least, an unreasonable indirect restraint on alienation which should be declared invalid and unenforceable as a matter of public policy unless a mortgagee pleads and proves that his security is in jeopardy. That argument may be due, in part, to some overly broad language in our decision in Cast v. National Bank of Commerce T. & S. Assn., 186 Neb. 385, 391, 183 N.W.2d 485, 490 (1971), wherein we said:

on alienation within the meaning of the law.

A majority of this court, including the writer, has come to the conclusion that the law is the same on direct and indirect restraints on alienation. The authorities are not in accord on the question. While much has been written on the subject, we adopt the following as a proper statement of the law: "As used in this treatise, the expression 'restraint on alienation' refers not merely to the restriction of the legal power of alienation, but also the restriction of alienability as a practical matter. Any provision in a deed, will, contract, or other legal instrument which, if valid, would tend to impair the marketability of property, is a restraint on alienation." Simes and Smith, The Law of Future Interests (2d Ed.), § 1111, p. 4. "In brief, the law is concerned primarily with practical alienability, not with a theoretical power of alienation." Simes and Smith, The Law of Future Interests (2d Ed.), § 1115, p. 8.

Whatever an indirect restraint on...