Los Quatros, Inc. v. State Farm Life Ins. Co., 18443

• Decision Date: 23 August 1990
• Docket Number: No. 18443,18443
• Citation: 110 N.M. 750,1990 NMSC 82,800 P.2d 184
• Parties: LOS QUATROS, INC., a New Mexico corporation, Plaintiff-Appellee, v. STATE FARM LIFE INSURANCE COMPANY, a New Mexico corporation, and Southwest Mortgage Company, a New Mexico corporation, Defendants-Appellants.
• Court: New Mexico Supreme Court

Page 184

800 P.2d 184

110 N.M. 750

LOS QUATROS, INC., a New Mexico corporation, Plaintiff-Appellee, v. STATE FARM LIFE INSURANCE COMPANY, a New Mexico corporation and Southwest Mortgage Company, a New Mexico corporation, Defendants-Appellants.

No. 18443.

Supreme Court of New Mexico.

Aug. 23, 1990.

[110 N.M. 751] Sutin, Thayer & Browne, Sasha Siemel, Tila Fleming Hoffman, Albuquerque, for defendants-appellants.

Cole & Myers, David Campbell, John A. Myers, Albuquerque, for plaintiff-appellee.

OPINION

MONTGOMERY, Justice.

The last sentence of NMSA 1978, Section 48-7-19(A) (Repl.Pamp.1987), enacted in 1983, provides: "There shall be no enforcement of a prepayment penalty in said mortgages." The phrase "said mortgages" means, the parties to this appeal seem to agree, real property loans made or assumed between March 15, 1979 and October 15, 1982. The mortgage in this case represents such a loan, and it contains a prohibition on prepayment by the obligor. The questions on this appeal are whether the statute is properly construed to prevent enforcement of this prohibition and, if so, whether it unconstitutionally impairs the obligations of a contract.

The district court applied the statute as written and entered a declaratory judgment in favor of the obligor, declaring that the ban on prepayment could not be enforced. The mortgagee appeals, raising essentially two issues of statutory construction along with the constitutional issue just mentioned. We affirm the judgment of the district court.

I.

The loan in this case, in the principal amount of $600,000.00 and bearing interest at the rate of 12 7/8% per annum, was made on October 17, 1980 by American Bank of Commerce to Mr. and Mrs. Pickard. It was secured by a mortgage on certain commercial, nonresidential real estate in Bernalillo County. The mortgage note contained the following provision regarding prepayment: "This Promissory Note may not be prepaid in full or in part during the first twelve loan years."¹ Subsequently, the bank sold the note and mortgage to appellant State Farm Life Insurance Company. (The other appellant, Southwest Mortgage Company, services the note and mortgage as agent for State Farm.) On June 15, 1982, the appellee, Los Quatros, Inc., purchased the property subject to the mortgage and assumed the Pickards' obligations under the note and mortgage.

In 1983, Los Quatros began to try to market the property subject to the mortgage. Its attempts to sell the property, according to the papers submitted to the district court, failed because State Farm would not consent to prepayment of the loan and would not approve a transfer of the mortgage unless the purchaser would assume the current loan or a new loan at 12 7/8% interest, which was above the then-current market rate for real estate loans in the applicable market. In March 1988, Los Quatros sought to prepay the note without having sold the property and without a declaration by State Farm that the loan was due. State Farm refused to accept the attempted prepayment. Los Quatros thereupon filed suit for a declaratory judgment that it had the right to prepay; State Farm counterclaimed for a declaratory judgment that Los Quatros had no such right. The parties stipulated to the facts and filed cross-motions for summary judgment. The district court granted Los Quatros's motion and entered a judgment declaring that Los Quatros could prepay the note.

On appeal, State Farm contends, first, that Section 48-7-19(A) does not apply to the loan in this case. It makes that contention for essentially two reasons: First, Los Quatros notes that the quoted sentence is part of legislation enacted in 1983 relating to "due-on-sale" provisions in real property loans, and Section 48-7-19 specifically deals with such loans made or assumed during the period March 15, 1979--October 15, 1982 (the "window period") and prohibits the lender from exercising its rights under a due-on-sale clause except as permitted in the section. Los Quatros argues that the prohibition on enforcement of a prepayment penalty in the last sentence of the section applies only when there is a sale of the property and the lender is seeking to exercise one of its options under a due-on-sale provision in the mortgage. In other words, argues State Farm, Section 48-7-19 should be construed as applicable only when there is a sale of the property and the lender is exercising an option under the due-on-sale clause.

State Farm's second statutory-construction argument is that Section 48-7-19 should be construed as applicable only to loans secured by residential real estate consisting of not more than four housing units. It makes the argument because of the statute's historical background and in order to avoid a conflict with the federal Garn-St. Germain Depository Institutions Act of 1982, which preempts the field of due-on-sale clauses in real property loans. See 12 U.S.C. Sec. 1701j-3(b)(1) (1988); 12 C.F.R. Sec. 591.5(a) (1989).

Finally, State Farm makes the broad assertion, without much supporting authority, that Section 48-7-19, if applied to the prohibition on prepayment in its mortgage, is unconstitutional as impairing the obligations in its contract and thus violating Article I, Section 10, of the United States Constitution and Article II, Section 19, of the New Mexico Constitution.

We shall discuss each of State Farm's arguments in turn.

II.

Section 48-7-19 became effective on April 7, 1983 as Section 5 of N.M. Laws 1983, Chapter 314. Subsection (A), set out in full in the margin,² begins with the phrase, "In the exercise of its options under a due-on-sale clause," and continues with the prohibition on a lender's accelerating the indebtedness and declaring the loan due and payable. When the last sentence of the subsection is read in context, State Farm argues, the statutory ban on enforcement of prepayment penalties applies only to a lender who is exercising an option under a due-on-sale clause. The state act defines such a clause as a provision in a contract involving a real property loan which authorizes a lender, at its option, to accelerate the indebtedness if all or any part of the property is sold or transferred. NMSA 1978, Sec. 48-7-16(A) (Repl.Pamp.1987). Accordingly, State Farm contends the last sentence of Subsection (A), when read in context, should be construed to apply only when the property securing the loan is sold or transferred (which it concededly has not been in this case) and the lender is attempting to exercise its option to accelerate the indebtedness or to demand an increase in the interest rate as a condition of approving an assumption of the loan. While State Farm's contention has some facial plausibility, we reject it for the reasons that follow.

State Farm resorts to some of the usual canons of statutory construction, such as the rule that statutes should be construed as a whole and the statutory language taken in context. See Fort v. Neal, 79 N.M. 479, 481, 444 P.2d 990, 992 (1968); State ex rel. Witt v. State Canvassing Bd., 78 N.M. 682, 691, 437 P.2d 143, 152 (1968). In construing a statute, we attempt to determine and effectuate its purpose or, as it is sometimes said, the "intent of the legislature." See NMSA 1978, Sec. 12-2-2 (Repl.Pamp.1988); Bradbury & Stamm Constr. Co. v. Bureau of Revenue, 70 N.M. 226, 231, 372 P.2d 808, 812 (1962). We thus need to answer the question: What is the purpose of the statute precluding enforcement of a ban on prepayment in real property loans made or assumed between March 15, 1979 and October 15, 1982?

To answer this question we should, as State Farm urges, review the history and prior condition of the law. See Munroe v. Wall, 66 N.M. 15, 18, 340 P.2d 1069, 1070 (1959). Chapter 314 of N.M. Laws 1983 (the 1983 Act) replaced N.M. Laws 1979, Chapter 45, Sections 1 through 4 (formerly codified as NMSA 1978, Sections 48-7-11 to -14 (Cum.Supp.1982) (the 1979 Act). The 1979 Act generally declared unenforceable due-on-sale clauses in mortgages on residential property consisting of not more than four housing units. The legislature found that such clauses may constitute unreasonable restraints upon alienation to the detriment of the public welfare. 1979 N.M. Laws, ch. 45, Sec. 1 (formerly Sec. 48-7-11).³ In the "purpose" section of the 1983 Act, the legislature found that continuation of the then current prohibition on enforcement of due-on-sale clauses would discourage investors from investing through mortgage bankers in New Mexico real property loans and suggested that the ability to increase the interest rate on assumed loans would enable such loans to be sold and thereby attract additional capital to this state. See NMSA 1978, Sec. 48-7-15(C)(3) (Repl.Pamp.1987). The legislature further found that state restrictions on enforcement of due-on-sale clauses had been preempted by the Garn-St. Germain Act, except as provided in Section 341(c)(1) of that act.⁴ The legislature declared its intention to restrict, as permitted by federal law, the enforcement of due-on-sale clauses in "window period" loans--i.e., loans made or assumed during the period March 15, 1979 through October 15, 1982. As to all other loans, the legislature declared that, notwithstanding any provision of the statutory or common law of this state to the contrary, a lender may enter into or enforce a contract containing a due-on-sale clause. NMSA 1978, Sec. 48-7-17 (Repl.Pamp.1987).

It is thus clear that Section 48-7-19(A) is intended to carry forward the 1979 Act's prohibition on enforcement of a due-on-sale clause in a window-period loan. See State ex rel. Bardacke v. New Mexico Fed. Sav. & Loan Ass'n, 102 N.M. 673, 676-77, 699 P.2d 604, 607-08 (1985). To the extent permitted by federal law, our legislature has reiterated the policy, reflected in the 1979 Act, of protecting the borrower (who will usually be the owner of the mortgaged property) from the inhibitory effects, as restraints on...