Scappaticci v. Southwest Sav. and Loan Ass'n, 16266

• Decision Date: 10 March 1983
• Docket Number: No. 16266,16266
• Citation: 135 Ariz. 456,662 P.2d 131
• Parties: Dominic SCAPPATICCI and Rose Scappaticci, husband and wife; and William P. Kelly, Jr., and Mary Lou Kelly, husband and wife, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. SOUTHWEST SAVINGS AND LOAN ASSOCIATION, an Arizona corporation, and Catalina Savings and Loan Association, an Arizona corporation, Defendants-Appellants.
• Court: Arizona Supreme Court

Page 131

662 P.2d 131

135 Ariz. 456

Dominic SCAPPATICCI and Rose Scappaticci, husband and wife; and William P. Kelly, Jr., and Mary Lou Kelly, husband and wife, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. SOUTHWEST SAVINGS AND LOAN ASSOCIATION, an Arizona corporation, and Catalina Savings and Loan Association, an Arizona corporation, Defendants-Appellants.

No. 16266.

Supreme Court of Arizona, In Banc.

March 10, 1983.

Rehearing Withdrawn April 11, 1983.

Daughton, Feinstein & Wilson by Allen L. Feinstein and Jeffrey S. Leonard, Phoenix, for plaintiffs-appellees.

Fennemore, Craig, von Ammon & Udall by Philip E. von Ammon, Drew M. Brown Rosemary J. Shockman, Phoenix, for defendants-appellants.

HAYS, Justice.

This is an appeal from a partial summary judgment of the Superior Court. The order of the trial court contained rule 54(b) language. 16 A.R.S.Rules of Civil Procedure, rule 54(b). We have jurisdiction of the appeal pursuant to A.R.S. § 12-2101(B) and 17A A.R.S.Rules of Civil Appellate Procedure, rule 19(e).

The plaintiffs/appellees, Scappaticci and Kelly, are representatives in a class action filed against defendants/appellants, Southwest Savings and Loan Association and Catalina Savings and Loan Association, both Arizona chartered associations. ¹ Appellees and other members of the class are the owners of residences subject to mortgages or deeds of trust executed to secure the repayment of loans made by appellants. ² Each of the mortgages or deeds of trust contains a provision known as a "due-on-sale" clause which states that if the borrower transfers the subject property without the consent of the lender, the lender may accelerate the outstanding balance of the loan. Beginning in 1981, appellants adopted a policy to enforce their rights under the due-on-sale clauses and demand immediate payment of the balance of the loan unless the purchaser of the subject property assumed the loan and agreed to an increase in the interest rate to one-half the difference between the existing rate and the current market rate for new loans, with a maximum rate of 14 percent.

The appellees filed a motion for partial summary judgment on the grounds that appellants' due-on-sale policy constituted an unreasonable restraint on alienation, violated public policy and was impermissible under A.R.S. § 33-806.01. The trial court granted the motion and entered a partial summary judgment enjoining Southwest and Catalina from pursuing their due-on-sale policies:

"The due on sale policy of defendants, Southwest Savings and Loan Association and Catalina Savings and Loan Association, whereby upon the sale of his home by a member of the class, defendants will demand and enforce immediate payment of the entire balance of the loan, without regard to the responsibility of the purchaser, unless an interest rate increase in excess of the limits prescribed by Arizona Revised Statutes section 33-806.01 is agreed to or paid, constitutes an unreasonable restraint upon alienation, is void as against public policy, is in violation of Arizona Revised Statutes section 33-806.01, and is unenforceable, and defendants, Southwest Savings and Loan Association and Catalina Savings and Loan Association, are enjoined from implementing that due on sale policy."

It is from this judgment that Southwest and Catalina Savings and Loan Associations have appealed.

Appellants recognize that Arizona case law supports the trial court's ruling, but urge us to reconsider our prior holdings in light of the danger to the financial integrity of the savings and loan associations should they not be allowed to enforce due-on-sale clauses. ³ Although both parties and amicus curiae have thoroughly briefed the issue, a recent act of Congress obviates the necessity to decide whether the savings and loan associations' enforcement policy is in fact a restraint upon alienation. This act, the Garn-St. Germain Depository Institutions Act of 1982 (hereinafter "Garn Act"), ⁴ preempts state restrictions on the enforcement of due-on-sale clauses.

Federal preemption of state restrictions has occurred in two steps. Fidelity Federal Savings and Loan Association v. De la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982), handed down in June of that year, held that a federal regulation ⁵ permitting federally chartered savings and loan associations to exercise due-on-sale clauses in mortgages bars application of contrary state doctrine. The Garn Act, passed in October, 1982, contains a section designed to place the disadvantaged state-chartered lenders on a more competitive footing with the federally chartered lenders and to eliminate the uncertainty regarding the enforceability of due-on-sale clauses. ⁶

Title III, Part C, Sec. 341 of the Garn Act provides for federal preemption of state laws and judicial decisions which restrict the enforcement of due-on-sale clauses with respect to real property loans. The lender's right to enforce the clause is to be governed by the terms of the loan contract and the lender is encouraged to permit assumption of the loan at a blended interest rate (a rate between the contract rate and market rates). The bill enumerates nine exceptions to the lender's option to enforce the due-on-sale clause which are designed to protect consumers.

In order to protect homebuyers who relied on state due-on-sale restrictions and reasonably believed they had assumable loans, subsection (c) of the Act creates a "window period" exception for loans made or assumed after state action restricted the enforcement of due-on-sale clauses. This "window period" begins "on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise" and ends on the date of enactment of the legislation, October 15, 1982. Loans originated by federal savings and loan associations and federal savings banks are exempt from the window-period exception. Window period loans are subject to state law for three years (until October 15, 1985), after which time the provisions of Section 341 will apply. However, during those three years, the state legislature may act to otherwise regulate loans originated by state-chartered lenders.

What we must decide here is whether Arizona qualifies as a window period state and, if so, what act or judicial decision triggers the beginning date of the period. The Senate and Conference Reports accompanying the Garn Act indicate that the members of Congress contemplated that state laws or judicial decisions which restrict the exercise of due-on-sale clauses will suffice to qualify the state as a window period state:

"Most commonly, statutes or judicial decisions prohibit the exercise of due-on-sale clauses by limiting their enforcement to instances where the lender's security interest in the property collateralizing the loan will be impaired, or where the person assuming the loan fails to meet customary credit standards. Other statutory restrictions prohibit the full exercise of due-on-sale clauses by limiting the fee lenders can charge for transfer of a loan, or by restricting or disallowing interest rate changes during the life of the mortgage, or upon assumption of the mortgage loan." ⁷

The evolution of state restrictions on the enforcement of due-on-sale clauses in Arizona begins with Baker v. Leight, 91 Ariz. 112, 370 P.2d 268 (1962), wherein the court held that an agreement to sell is a conveyance within the meaning of an acceleration clause. In Baker, we expressly declined to determine whether the right to enforce such a clause was in all events enforceable.

On July 8, 1971, in Baltimore Life Insurance Company v. Harn, 15 Ariz.App. 78, 486 P.2d 190, petition for review denied, 108 Ariz. 192, 494 P.2d 1322 (March 29, 1972), the Court of Appeals held that Baltimore Life, the mortgagee of property belonging to Harn, could not accelerate payment of the loan absent a showing that Baltimore Life's security in the property was threatened. The Harns had agreed to sell their property to a third party. Baltimore Life asserted that they were therefore entitled by their contract to acceleration and foreclosure. The court held that the parties may enter such agreements as they deem necessary and that acceleration clauses are bargained-for elements of mortgages designed to protect the mortgagee's security in the property and from other unanticipated risks. But where the acceleration clause restricts the mortgagor's ability to dispose of his property, it is a restraint against alienation. "It follows that the invocation of the [acceleration] clause must be based on grounds that are reasonable on their face." 15 Ariz.App. at 81, 486 P.2d at 193. Thus, Harn operated to restrict the enforcement of due-on-sale clauses to the situation where the lender's security interest was threatened and to other "reasonable" situations.

Shortly after the Harn decision was rendered, the Arizona Legislature enacted the Arizona Deeds of Trust Act, A.R.S. § 33-801 et seq., effective August 13, 1971. Section 33-806.01, which applies only to property of two and one-half acres or less not used for commercial purposes and limited to dwelling units not to exceed four single-family units, limits the charge a beneficiary or trustee of a deed of trust may make to a trustor who transfers his interest in the trust property. Subsection C provides that the beneficiary or trustee shall not increase the interest rate upon a transfer unless the transferor is released from liability and further provides that the amount of increase in interest shall not exceed one-half of one percent per annum.

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