Powell v. Phenix Federal Sav. & Loan Ass'n

• Decision Date: 17 June 1983
• Parties: Sara POWELL, et al. v. PHENIX FEDERAL SAVINGS & LOAN ASSOCIATION. 81-758.
• Court: Alabama Supreme Court

Page 247

434 So.2d 247

Sara POWELL, et al. v. PHENIX FEDERAL SAVINGS & LOAN ASSOCIATION.

81-758.

Supreme Court of Alabama.

June 17, 1983.

David S. Yen, of Legal Services Corporation of Ala., Opelika, for appellants.

Robert P. Lane, of Phillips & Funderburk, Phenix City, for appellee.

BEATTY, Justice.

This appeal involves a mortgage foreclosure begun when the plaintiffs sold part of their land in order to be able to keep their house. The plaintiffs brought suit to enjoin foreclosure by the defendants. The issue is whether the trial court erred in allowing foreclosure based on the due-on-sale clause in the mortgage. We reverse and remand for further consideration by the trial court.

FACTS

The plaintiffs-appellants, Sara and Era Powell, live in a house on 46 acres of land that Sara Powell inherited. On November 30, 1978, they borrowed $25,000 from the defendant-appellee, Phenix Federal Savings & Loan Association, to make home improvements and repay debts. The Powells signed a promissory note and as security gave a mortgage on the property, which was unimproved except for the house. The interest rate on the note was 11% per annum and the monthly payments were $284.15.

When Mr. and Mrs. Powell signed the note and mortgage, they were not represented by an attorney and did not read the documents. In reference to the mortgage, Mr. Powell later testified, "If I had read it, I wouldn't have understood it." The note, unlike the mortgage, contained a prepayment penalty clause. ¹ The Powells testified without contradiction that an employee of Phenix Federal explained that they could not pay off the loan during the first year but did not explain the consequences of selling the property under the mortgage.

The mortgage document signed by the parties was the FNMA/FHLMC Uniform Mortgage Instrument, which was developed by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. This document contains a due-on-sale clause reading as follows:

"17. Transfer of the Property: Assumption. If all or any part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent, excluding (a) the creation of a lien or encumbrance subordinate to this Mortgage, (b) the creation of a purchase money security interest for household appliances, (c) a transfer by devise, descent or by operation of law upon the death of a joint tenant or (d) the grant of any leasehold interest of three years or less not containing an option to purchase, Lender may, at lender's option, declare all the sums secured by this Mortgage to be immediately due and payable. Lender shall have waived such option to accelerate if, prior to the sale or transfer, Lender and the person to whom the property is to be sold or transferred reach agreement in writing that the credit of such person is satisfactory to Lender and that the interest payable on the sums secured by this Mortgage shall be at such rate as Lender shall request. If Lender has waived the option to accelerate provided in this paragraph 17, and if Borrower's successor in interest has executed a written assumption agreement accepted in writing by Lender, Lender shall release Borrower from all obligations under this Mortgage and the note.

"If Lender exercises such option to accelerate, Lender shall mail Borrower notice of acceleration in accordance with paragraph 14 hereof. Such notice shall provide a period of not less than 30 days from the date the note is mailed within which Borrower may pay the sums declared due. If Borrower fails to pay such sums prior to the expiration of such period, Lender may, without further notice or demand on Borrower, invoke any remedies permitted by paragraph 18 hereof."

Under this clause, therefore, the Powells were to obtain Phenix Federal's prior written consent to transfer all or part of the property in order to avoid acceleration of the debt. Alternatively, Phenix Federal could waive its acceleration rights by approving the prospective buyer's creditworthiness and a new interest rate.

The Powells used the loan proceeds to repay debts and make extensive home improvements. About a year after the loan was made, Mr. Powell underwent surgery and had to stop working. Because at that point their only regular income was Mrs. Powell's social security benefit, they experienced difficulty in making the mortgage payments.

To reduce their financial burdens, the Powells considered selling part of their land. In the fall of 1980, Johnny and Cora Jenkins contacted the Powells and agreed to buy 35 acres of land for a $4,600 down payment and assumption of the mortgage in full. The Powells would keep 11 acres with the house and pay taxes and insurance.

The Powells retained J.C. Perdue, who prepared a "warranty deed," stating the above terms. In a meeting with the Jenkinses at Perdue's office on November 6, 1980, the Powells signed the deed without reading it and received a $2,000 check from the Jenkinses. The Powells deposited this check in their bank and made a payment to become current on their mortgage at Phenix Federal, where they spoke with Robert DeGrange, a vice president. What was said is in dispute. According to Mr. Powell's testimony, he and his wife

"went into Mr. DeGrange's office and told him I had made arrangements with a friend of mine to take 35 acres of my land and make the payments on my property, and if he fell down--behind on them that maybe I could pick them up and maybe we wouldn't get behind any more on them; that I wanted to bring it up and make a payment up to date on it. He accepted the--the lady down at the cashier's desk accepted the money.... No one at that time told me that I could not sell the property, which I didn't sell it fully."

DeGrange testified as follows concerning the November 1980 discussion:

"Mr. and Mrs. Powell were delinquent on their loan at that time. They came in, discussed with me the possibility of selling part of their land in order to make the payments. I told them at that time that if they were going to sell or transfer to let us know and we might be able to work something out with them at the time."

The Powells then paid the property taxes at the probate court and returned to their attorney's office where they left documents to be delivered to the Jenkinses. Thus, it is undisputed that the deed was executed before any possible notice to Phenix Federal; what notice was given before delivery of the deed to the Jenkinses is unclear.

The Jenkinses began making the $284.15 monthly payments to Phenix Federal in December 1980. The Jenkinses testified that they never agreed to pay more per month than the Powells had paid, nor did they agree to a higher rate of interest. The Jenkinses also testified that they did not receive a copy of the mortgage and were not told of any possible interest rate increase.

Phenix Federal's position is that it did not become aware of the transfer until some time in the spring of 1981 when confusion arose over an increase in the monthly payments to pay for insurance purchased by Phenix Federal. Both the Powells and the Jenkinses spoke with Robert DeGrange and William Bryan of Phenix Federal. At this time the loan file was turned over to Phenix Federal's attorneys. Both the Powells and the Jenkinses were told of the due-on-sale clause in the mortgage and of the possibility that payments could increase to reflect higher interest rates. Phenix Federal's witnesses testified that the rate sought was 15% or 16%, which was still below the market rate.

On June 10, 1981, Phenix Federal's attorney wrote the Powells, demanding full payment of $22,936.72 within ten days to avoid foreclosure (the due-on-sale clause allows the borrower 30 days from notice of acceleration to pay). Payment was not made and a nonjudicial foreclosure sale was advertised to be held on July 30, 1981.

On July 23 the Powells, represented by J.C. Perdue, filed the present action to enjoin foreclosure, and on July 29 a preliminary injunction was granted. On August 26, 1981, a hearing was held and the injunction was dissolved on September 1. Phenix Federal had continued to accept monthly payments from the Jenkinses through August, but refused the payment they tendered for September. On September 3 and 4, 1981, Phenix Federal sent new demand letters to the Powells, giving them 30 days to make full payment and avoid foreclosure. On September 22, 1981, the Powells, represented by different attorneys, filed a motion for a new trial, which was granted on October 19. Mr. and Mrs. Jenkins were made parties, a preliminary injunction was reentered, and the Powells filed an amended complaint. On November 24 a hearing was held to determine whether the preliminary injunction should continue in effect.

A final hearing on the merits took place on February 2, 1982, and the trial court found in favor of Phenix Federal. The judgment, as amended on motion of Phenix Federal, held that the conveyance to the Jenkinses is not a junior encumbrance under part (a) of the due-on-sale clause, that Phenix Federal has not consented to the sale to the Jenkinses, that Phenix Federal and the Jenkinses have not agreed upon a new interest rate, that the sale breached the terms of the mortgage, and that Phenix Federal has not waived its option to accelerate.

ENFORCEMENT OF THE DUE-ON-SALE CLAUSE

A threshold issue in this case is whether federal law preempts any Alabama law limiting the enforceability of due-on-sale clauses. In 1976 the Federal Home Loan Bank Board issued a regulation, now 12 CFR § 545.8-3(f) (1982), confirming the authority of federal savings and loan associations to include due-on-sale clauses in mortgage contracts. Recently the United States Supreme Court has held that this regulation "was meant to pre-empt conflicting state limitations on the due-on-sale practices of federal savings and loans," Fidelity Federal Savings & Loan Association v. de la Cuesta, 458 U.S. 141, 102...