Redd v. Western Sav. & Loan Co.

• Decision Date: 21 May 1982
• Docket Number: No. 17231,17231
• Citation: 646 P.2d 761
• Court: Utah Supreme Court
• Parties: Stanley Martin REDD, Sheila M. Redd, his wife; Sterling Hardson Redd, Jill D. Redd, his wife; Paul Dutson and Donna R. Dutson, his wife, Plaintiffs and Appellants, v. WESTERN SAVINGS & LOAN COMPANY, Defendant and Respondent.

Page 761

646 P.2d 761

Stanley Martin REDD, Sheila M. Redd, his wife; Sterling Hardson Redd, Jill D. Redd, his wife; Paul Dutson and Donna R. Dutson, his wife Plaintiffs and Appellants, v. WESTERN SAVINGS & LOAN COMPANY, Defendant and Respondent.

No. 17231.

Supreme Court of Utah.

May 21, 1982.

Neil R. Sabin, Salt Lake City, for plaintiffs and appellants.

Richard W. Giauque, James R. Holbrook, Stephen T. Hard, Salt Lake City, for defendant and respondent.

HOWE, Justice:

Plaintiffs, Stanley Martin Redd and Sheila M. Redd, his wife; Sterling Hardson Redd and Jill D. Redd, his wife; Paul Dutson and Donna R. Dutson, his wife, who are the trustors in a trust deed, brought this action for declaratory relief, for damages, and for an injunction against the defendant beneficiary, Western Savings & Loan Company, which had begun foreclosure proceedings pursuant to a "due-on-sale" clause contained in the trust deed. The trial court rejected the plaintiffs' motion for an injunction and granted summary judgment in favor of the defendant. Plaintiffs appeal.

On November 18, 1976 the plaintiffs borrowed $108,000 from the defendant at 93/4% interest per annum to finance the purchase of a 24-unit apartment building. Plaintiffs executed to the defendant a trust deed note secured by a trust deed on the property. The note contained provision for acceleration of the principal amount in the event of default in the payment of the monthly installments or in the performance of any agreement in the trust deed. Paragraphs 29 and 30 of the deed of trust contained provisions requiring the borrowers to notify the lender of any sale or further encumbrance of the property, and requiring immediate payment of all remaining indebtedness at the election of the lender. Should lender not so elect, and the purchaser assumed the indebtedness, defendant was given the right to increase the rate of interest.

Concurrent with the execution of the trust deed note and trust deed, the plaintiffs also executed a document which specifically directed their attention to the acceleration provisions contained in paragraphs 29 and 30 of the trust deed.

Approximately three years later, plaintiffs entered into an installment contract for the sale of the property whereby they would remain the obligors under the trust deed note and would continue to be responsible for making payments to the defendant Western Savings & Loan Company through an escrow account set up for that purpose. Title to the property was not to pass until the purchasers had made all required payments to the plaintiffs.

When the defendant Western Savings discovered that the monthly payments were being received from an escrow service company, it investigated and found that the property had been sold. It requested the plaintiffs to have their buyer make application with defendant to assume the loan at an increased interest rate. When the plaintiffs refused to comply with these demands, the defendant recorded a Notice of Default on March 9, 1980 and commenced non-judicial foreclosure proceedings based on the violation of the due-on-sale provisions contained in the trust deed.

The plaintiffs have made timely payment of all installments and the defendant has not alleged any default therein. Since February 1980 the defendant has returned all payments tendered by plaintiffs to avoid any waiver of its contractual rights. Plaintiffs are currently depositing the returned payments in a savings account which has been assigned to the defendant.

In response to the defendant's foreclosure proceedings the plaintiffs filed this action praying for an injunction against the foreclosure, for damages, and for a declaration that the due-on-sale clause in the trust deed was unenforceable. Plaintiffs moved for a preliminary injunction and defendant moved to dismiss the action. The trial court treated defendant's motion as a motion for summary judgment since supportive materials were presented which were outside the pleadings and were not excluded. Rule 12(b), Utah Rules of Civil Procedure. Harvey v. Sanders, Utah, 534 P.2d 905 (1975). The trial court was presented with the undisputed evidence showing the existence of the due-on-sale clause, the sale of the property to third persons and the failure of the trustors to notify the defendant of the sale. Based on these facts and other matters outside the pleadings, the trial court granted defendant's motion and determined that the defendant was entitled to judgment as a matter of law because the due-on-sale clause did not constitute an unreasonable restraint on the plaintiffs' right to alienate their property. Whether the trial court was correct in that determination is the sole question before us.

In Page v. Page, 15 Utah 2d 432, 394 P.2d 612 (1964), this Court expressed a strong preference for the free alienability of property. We quoted with approval the following from an annotation at 42 A.L.R.2d, § 2, p. 1247:

... any provision of an instrument of conveyance or of any later instrument which purports to prohibit or restrain the conveyee or owner in fee from alienating the property or to withhold from him the right or power to alienate ... is void. (Footnotes omitted.)

In Pride Oil Co. v. Salt Lake County, 13 Utah 2d 183, 370 P.2d 355 (1962), we held that the right to own and enjoy property includes the right to sell it. And in Ritholz v. City of Salt Lake, 3 Utah 2d 385, 284 P.2d 702 (1955), we stated:

Clearly among the rights attendant upon ownership and enjoyment of property are the rights to exchange, pledge, sell or otherwise dispose of it-rights which must be adequately protected.

3 Utah 2d at 389, 284 P.2d at 705.

In determining what restraints are invalid, some writers and scholars have declared that all direct restraints on alienation are invalid unless they fall within certain recognized categories of exceptions. Malouff v. Midland Fed. S. & L., 180 Colo. 294, 509 P.2d 1240 (1973). It was this view which was apparently accepted by the majority of this Court in Page v. Page, supra.

Defendant points out that a due-on-sale clause does not constitute a restraint on alienation as defined by § 404 of the Restatement of the Law of Property ¹ and cites Occidental Savings & Loan v. Venco, 206 Neb. 469, 293 N.W.2d 843 (1980) in support thereof. Defendant argues that the due-on-sale clause merely affects the amount of money the seller may be able to get for his property, but does not restrain in any manner the actual transfer of the property. Some courts have accepted that view. Miller v. Pac. First Fed. S. & L., 86 Wash.2d 401, 545 P.2d 546 (1976); Gunther v. White, Tenn., 489 S.W.2d 529 (1973). Plaintiffs counter that such view is unsound in at least one situation, viz., where interest rates or the transactional costs of obtaining a loan have risen to a point where few would-be purchasers could qualify for a loan, and the original lender is unwilling to allow the new buyer to assume the outstanding indebtedness and elects to enforce the due-on-sale clause, the transfer of the property could well be effectively prohibited since the amount of down payment the new buyer tenders may not be adequate to discharge the underlying mortgage. Furthermore, plaintiffs argue, even if the lender is willing to allow the new buyer to assume the underlying debt but increases the interest rate for the privilege to assume, that increase may prevent the sale. For a discussion of this point see Tucker v. Lassen S. & L. Assoc., 12 Cal.3d 629, 116 Cal.Rptr. 633, 526 P.2d 1169 (1974) discussed infra; Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970 (1978), and authorities cited therein. One author has stated:

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). This position is supported by cases from jurisdictions which have held that due-on-sale clauses can operate as restraints on alienation. See, e.g., Nichols v. Ann Arbor Federal Savings & Loan Assoc., 73 Mich.App. 163, 250 N.W.2d 804 (1977); Patton v. First Federal Savings & Loan Assoc., 118 Ariz. 473, 578 P.2d 152 (1978); Tucker v. Pulaski Federal Savings & Loan Assoc., 252 Ark. 849, 481 S.W.2d 725 (1972).

In the instant case, any restraint that there may be is not one of the classical direct restraints such as we were considering in Page v. Page, supra and as categorized in § 404 Restatement of the Law of Property ² as disabling restraints, promissory restraints and forfeiture restraints. We view it as an indirect restraint or a hindrance. Crockett v. First Federal S. & L., 289 N.C. 620, 224 S.E.2d 580 (1976) and Lipps v. First American Service Corp., --- Va. ---, 286 S.E.2d 215 (1982). In those cases the following is quoted approvingly from L. Simes and A. Smith, the Law of Future Interest § 1112, (2d Ed. 1956):

An indirect restraint on alienation arises when an attempt is made to accomplish some purpose other than the restraint of alienability, but with the incidental result that the instrument, if valid, would restrain practical alienability.

Irrespective of whether they have categorized it as a direct restraint or as an indirect restraint, courts generally have upheld and enforced this non-classical type if it is found reasonably necessary to protect a justifiable or legitimate interest of the parties. Malouff v. Midland Fed. S. & L., supra; Tucker v. Lassen S. & L. Assoc., supra. See examples cited by Justice Traynor in Coast Bank v. Minderhout, 61 Cal.2d 311, 38 Cal.Rptr. 505, 392 P.2d 265 (1964). We agree with this approach and believe that the burden of proof should be with the party...