Olean v. Treglia

• Decision Date: 26 July 1983
• Citation: 463 A.2d 242,190 Conn. 756
• Court: Connecticut Supreme Court
• Parties: , 37 UCC Rep.Serv. 19 John K. OLEAN v. Frank TREGLIA et al.

Page 242

463 A.2d 242

190 Conn. 756, 37 UCC Rep.Serv. 19

John K. OLEAN v. Frank TREGLIA et al.

Supreme Court of Connecticut.

Argued May 11, 1983.

Decided July 26, 1983.

Robert G. Zanesky, Westport, for appellants (named defendant et al.).

Robert A. Fuller, Wilton, with whom was Louis S. Ciccarello, Norwalk, for appellee (plaintiff).

Theodore M. Space and Mary M. Ackerly, Hartford, submitted a brief as amici curiae.

Before SPEZIALE, C.J., and PETERS, HEALEY, PARSKEY and SHEA, JJ.

PETERS, Associate Justice.

This case involves the enforceability of a due-on-sale clause in an action by a private lender to foreclose a mortgage on income-producing residential property. The plaintiff, John K. Olean, brought an action for strict foreclosure and other relief against the defendants, Donald A. Byington and Shirley Byington, Samuel E. Pair and Mary E. Pair, and Frank Treglia, Michael Treglia and Patrick Treglia. After a hearing, the court granted the plaintiff a judgment of strict foreclosure, from which only the defendants Treglia have appealed.

The underlying facts are established by the trial court's memorandum of decision and the pleadings. The plaintiff, prior to March 28, 1969, owned property in Norwalk. ¹ On that date, he sold the property to the Byingtons for $150,000, taking back a $120,000 recorded purchase money mortgage at six and one-half percent interest for a term of twenty years. On July 7, 1970, the Byingtons transferred their interest in the real estate to the Pairs, and the Pairs, on June 19, 1979, transferred their interest to the Treglias, all transfers occurring by duly recorded warranty deeds.

The mortgage deed between the plaintiff and the Byingtons contained the following acceleration clause: "If title to the premises which are mortgaged to secure this note shall become vested in anyone other than the makers hereof, then the whole principal of this note and the interest thereon shall, at the option of the holder, become immediately due and payable without the necessity of demand or notice." When the Byingtons sold the property to the Pairs, themselves taking back a purchase money mortgage, the plaintiff agreed, in writing, not to exercise the acceleration clause but expressly reserved his right to accelerate "in the event a future disposition of the property is contemplated." The Pairs assumed payment of the plaintiff's mortgage. When the Pairs transferred their interest to the defendants Treglia, subject to the plaintiff's mortgage and the Byingtons' mortgage, the plaintiff was not notified. The plaintiff has not expressly consented to the transfer to the Treglias.

The plaintiff first learned of the transfer to the defendants Treglia in July, 1979, when he received a mortgage payment from the Treglias. The plaintiff did not cash this check but turned it over to his attorney with instructions to notify the Treglias of the acceleration clause and to call the mortgage unless new terms, essentially an increase in the interest rate from six and one-half percent to twelve percent, could be negotiated. Between July and November of 1979, the plaintiff's attorney communicated with the attorney for the Treglias and the Treglias themselves, to inform them that the acceleration clause would be exercised unless the mortgage could be renegotiated to bring its interest rate into line with current rates. During these negotiations, the Treglias continued to tender mortgage payments which the plaintiff retained but did not cash. On November 26, 1979, the Treglias were advised by letter that the mortgage would be foreclosed unless they forwarded, by November 30, 1979, a certified check reflecting the proposed increased interest rate. When the Treglias failed to comply with this demand, the plaintiff commenced the present action on December 6, 1979.

On this finding of facts, the trial court concluded that the plaintiff had properly exercised his option to accelerate. With respect to the option's validity, the court concluded that the due-on-sale clause was not an unreasonable restraint on alienation and that the defendants had not established that enforcement of the clause would be unconscionable. The court held that the plaintiff was entitled to recover $87,763.90 on the underlying indebtedness, as well as $6000 for attorney's fees and $700 for appraisal fees, and ordered strict foreclosure and set appropriate law days.

The appeal of the defendants Treglia contests each of the trial court's conclusions of law. The defendants claim that the acceleration clause in the plaintiff's mortgage is unenforceable because: (1) a due-on-sale clause is an unreasonable restraint on alienation; (2) the plaintiff failed to give notice of default and to make demand for payment before commencing his foreclosure action; (3) the plaintiff failed to exercise his option to accelerate within a reasonable time and failed to give reasonable notice of his intent to exercise it; and (4) the plaintiff waived his option to accelerate by consenting to a prior transfer without acceleration. We find no error.

I

The first issue on this appeal is whether a due-on-sale clause constitutes an unreasonable restraint on alienation. Although the validity of due-on-sale clauses has not previously been directly addressed by this court, we do not write on an entirely clean slate. In this state, we are counseled to uphold such clauses both by common law precedent and by legislative expressions of public policy. From other states, we are guided by an ever growing line of cases adopting the view that due-on-sale clauses do not fall within the prohibited ambit of illegal restraints on alienation but rather are presumptively valid contractual undertakings.

In Connecticut, an early precursor of a due-on-sale clause came into litigation in Lewis v. Culbertson, 124 Conn. 333, 336-39, 199 A. 643 (1938). In that case, the mortgage note provided that " 'upon failure to obtain the written assumption and agreement to pay this note according to its terms by the grantee in the event of a conveyance, then the entire balance remaining unpaid hereon shall immediately become due and payable at the option of the holder hereof.' " Id., 336, 199 A. 643. This court held that a default permitting acceleration had occurred when the mortgaged real property was conveyed by the mortgagor "subject to mortgages and encumbrances of record"; Id., 335, 199 A. 643; even though the grantee, through a private vote of its board of directors, had agreed to assume the mortgage. Id., 339, 199 A. 643. The opinion in this court did not address the issue of illegal restraints on alienation but noted only that a mortgagee was entitled to bargain contractually for a form of conveyance that would enable a mortgagee to bring a direct suit against a subsequent owner of the equity of redemption. Under General Statutes § 52-75, which was General Statutes (1930 Rev.) § 5489 when Lewis v. Culbertson was decided, a direct action was possible against a grantee who "shall assume and pay such encumbrance ...."

Lewis v. Culbertson, although not identical to the present case, is nevertheless instructive on two counts. The mortgagee in that case was held entitled to exercise his option to accelerate, because that was what the mortgage note provided, without having first to demonstrate that a subsequent conveyance in fact impaired his security. Further, the opinion notes that a mortgagee has less need to call a mortgage when a subsequent taker "assumes" the mortgage than he would if the transferee merely took "subject" to the mortgage. Id., 338-39, 199 A. 643. In the present case, the Pairs, upon receiving consent for the transfer from the original mortgagors, "assumed" the mortgage, while the Treglias only took the property "subject" to the recorded mortgage to the plaintiff. ² Lewis v. Culbertson is thus a precedent for the proposition that, in Connecticut, contracting parties have the power to make unauthorized transfers of mortgaged property an event of default, triggering an acceleration clause, especially when an unauthorized transfer places the property in the hands of grantees who fail to assume the recorded mortgage. See also Society for Savings v. Bragg, 38 Conn.Sup. 8, 444 A.2d 919 (1982).

On the legislative front, there are no statutes that directly control real property due-on-sale clauses negotiated in 1969, when the plaintiff's mortgage was recorded. The legislature has nonetheless indicated, in related statutes, that the public policy of this state does not consider such clauses to be illegal restraints on alienation.

In 1979, the General Assembly enacted General Statutes § 36-9g to regulate alternative mortgage loans. ³ In that context, the legislature allowed financial institutions, upon the agreement of the mortgagor and the mortgagee, to stipulate that the entire unpaid balance of a reverse annuity mortgage loan might become due and payable upon "[t]he sale or other transfer of the real estate securing the loan to a person other than any of the original mortgagors." General Statutes § 36-9g(f)(2)(B). Presumably the legislature expressly authorized such clauses in order to encourage financial institutions to offer alternative mortgages to the borrowing public. Having conferred such authority upon institutional lenders, however, it is unlikely that legislative policy would thereafter deprive private lenders of the power to include similar clauses in conventional mortgages.

A second source of legislative policy is the Uniform Commercial Code. ⁴ We have on several occasions recognized that the code, General Statutes § 42a-1-101 et seq., although formally limited to transactions involving personal property, may furnish a guide for the law governing real property mortgages. Conference Center Ltd. v. TRC, 189 Conn. 212, 225, 455 A.2d 857 (1983); Hamm v. Taylor, 180 Conn. 491, 494-95, 429 A.2d 946 (1980). For present purposes, we may usefully consult General Statutes §...