Snow v. Western Sav. & Loan Ass'n, 1
| Citation | 152 Ariz. 20,730 P.2d 197 |
| Decision Date | 26 September 1985 |
| Docket Number | CA-CIV,No. 1,1 |
| Court | Court of Appeals of Arizona |
| Parties | William J. SNOW and Eleanor J. Snow, aka Kelly Snow, husband and wife, Plaintiffs-Appellants, v. WESTERN SAVINGS & LOAN ASSOCIATION; John Does 1-20, Defendants-Appellees. 7971. |
Westover, Choules, Shadle, Bowen & Clark, P.C. by Ted B. Bowen, Yuma, for plaintiffs-appellants.
Streich, Lang, Weeks & Cardon by Peter W. Sorenson, Louis A. Stahl, Deana S. Peck, Phoenix, for defendants-appellees.
This is an appeal from a judgment in favor of Western Savings & Loan Association ("Western Savings") on William J. and Eleanor J. Snow's ("Snows") complaint for declaratory relief and damages. The case arose from the Western Savings' assertion of certain claimed rights under a due-on-sale clause in two separate transactions concerning the mortgaged real property. The Snows urge the following issues for our consideration: (1) whether the trial court erred in denying their motion for partial summary judgment as to Western Savings' liability; (2) whether as a matter of law the 1977 assumption agreement under which the Snows agreed to pay Western Savings' increased rate of interest upon their assumption of the mortgage lacked consideration; and (3) whether the trial court erred in refusing to declare that the conditions under which Western Savings stated it would consent to appellants' proposed sale of the mortgaged property to third persons in 1982 breached the mortgage and were invalid as an improper restraint on alienation.
The facts material to resolution of this appeal are not in dispute. On February 19, 1973, the Snows' predecessors in interest, George R. Leonard and Gene E. Rice, executed in favor of Western Savings a mortgage on a thirteen-unit apartment house to secure a loan in the amount of $107,000.00. Paragraph 18 of the mortgage provided in pertinent part:
Mortgagor agrees that they will not, nor will they attempt to encumber, sell, transfer, assign, convey, lease, or in any other manner dispose of the property herein mortgaged or any part thereof ... without the prior written consent of Mortgagee. Upon default by the Mortgagor in the performance of any one or more of the terms, conditions, agreements, stipulations or covenants contained herein, the entire indebtedness secured hereby shall, at the option of Mortgagee, become immediately due and payable without notice or demand.
The contract interest rate on the promissory note secured by the mortgage was 8% per annum.
In early 1977 Leonard and Rice agreed to sell the mortgaged property to the Snows. As part of the transaction, on March 25, 1977 Leonard and Rice and the Snows executed a modification agreement and an assumption agreement on forms provided by Western Savings. The assumption agreement provided that the Snows would assume and agree to pay the $100,733.01 principal balance on the note at the rate of 9.25%. The modification agreement recited that the interest rate on the note was 8.0%, and expressly modified the note "by changing the interest rate as of the Effective Date to 9.25% per annum; ..." The Snows thereafter operated the apartment building and made regular monthly installment payments to Western Savings pursuant to the note and mortgage as modified. Until the instant controversy arose, the Snows did not object to paying the increased interest at the rate of 9.25%.
In early 1982 the Snows contracted to sell the apartment building to William R. Jewett and William E. Flavin. In April of that year the Snows solicited Western Savings' consent to the transaction. In a letter of April 19, 1982 to the escrow officer in charge of the transaction, a loan officer for Western Savings advised in part as follows:
Pursuant to the terms and conditions of the promissory note and realty mortgage, any transfer (whether structured as a wraparound, a subject to sale, contract for sale, or otherwise) of the secured property must be approved by Western Savings. Western Savings will approve such a transfer upon the following terms and conditions:
1. Approval and qualification of Buyer/Buyers by Western Savings. A financial qualification package has been forwarded for each of the proposed Buyers.
2. An interest rate increase on the loan from 9.25% per annum to 12.25% per annum. This quote is good for a thirty (30) day period only.
3. Modification of the note to come due five (5) years after close of escrow.
4. Payment of a transfer fee in the amount of 1% of the unpaid loan balance.
5. Assumption by Buyer of all covenants and liabilities of Seller under the promissory note and mortgage.
6. Execution of an assumption agreement, modification agreement, letter of understanding and notice of modification, all of which will be prepared by this office.
7. Western Savings' title insurer must issue its written modification endorsement ensuring that Western Savings mortgage, as modified, remains a valid first and prior lien against the subject property.
8. Receipt of a copy of the purchase contract and escrow instructions relative to this transfer.
In the event the property is transferred without Western Savings' consent or the foregoing conditions are not met, Western Savings will bring legal action in court to protect its rights. Western Savings does not wish to and will not attempt in any way to prevent or interfere with the proposed sale, but we do reserve all our rights and remedies incident to transfer of the property (including our right to accelerate the loan and call it due, collect back interest and attorneys' fees, etc.). In this way, the needs and desires of all parties will be preserved and protected. If Western Savings is successful in litigation, the loan will have to paid off in full, or at Western Savings' option, the foregoing terms will have to be met and the back interest from the sale date as well as all costs and attorneys' fees of the litigation, will have to be paid.
For the purposes of this appeal both parties agree that that communication caused Jewett and Flavin to forego the proposed purchase.
On August 5, 1982 the Snows commenced this action against Western Savings seeking a declaration that their agreement to pay 9.25% interest on the loan they assumed in 1977 was unsupported by consideration and that Western Savings could only disapprove a transfer of the mortgaged property on grounds unrelated to the interest rate or the remaining term of the underlying loan. The Snows also sought damages for overpayment of interest charges and for the loss of the sale to Jewett and Flavin. After Western Savings had answered and discovery had commenced, the Snows moved for partial summary judgment on liability. Western Savings filed a cross-motion for summary judgment. The trial court granted summary judgment for Western Savings. As finally entered, the judgment additionally awarded Western Savings its costs and $10,037.70 for attorney's fees. This appeal followed.
A brief review of Arizona decisions applicable to the enforcement of due-on-sale clauses is necessary for a clear understanding of the issues. This court rendered Arizona's first due-on-sale decision in Baltimore Life Insurance Co. v. Harn, 15 Ariz.App. 78, 486 P.2d 190 (1971). In Harn the note and mortgage contained provisions allowing the debt to be accelerated and the mortgage foreclosed, at the mortgagee's option, upon any conveyance or transfer of title to the mortgaged property. The mortgagors conveyed the property, and the mortgagee sued to foreclose the mortgage. The trial court dismissed the complaint for failure to state a claim upon which relief could be granted, and this court affirmed. We noted that an acceleration clause is a bargained-for element of a mortgage that protects the mortgagee from unanticipated risks. We stated:
We believe that so long as an acceleration clause does not purport to restrict absolutely the mortgagors' ability to dispose of their property there is not the type of restraint on alienation that would render the clause void. It follows that the invocation of the clause must be based on grounds that are reasonable on their face.
An action to accelerate and foreclose a mortgage being an equitable proceeding, Arizona Coffee Shops v. Phoenix Downtown Parking Ass'n, 95 Ariz. 98, 387 P.2d 801 (1963), it is not enough to allege merely that the acceleration clause has been violated. Absent an allegation that the purpose of the clause is in some respect being circumvented or that the mortgagee's security is jeopardized, a plaintiff cannot be entitled to equitable relief. Otherwise the equitable powers of the trial court would be invoked to impose an extreme penalty on a mortgagor with no showing that he has violated the substance of the agreement, that is, that he would not make a conveyance that would impair the security. (Emphasis added.)
15 Ariz.App. at 81, 486 P.2d at 193. Although the Snows assert that Harn "involved a multi-unit condominium loan," the Harn opinion itself does not make clear whether the mortgaged property was residential or commercial, and the rationale of Harn rests on no such distinction.
Our supreme court considered due-on-sale clauses in Patton v. First Federal Savings & Loan Association, 118 Ariz. 473, 578 P.2d 152 (1978). Patton concerned a deed of trust on a residence. The trustor, Patton, sold the residence to a third person under a wraparound financing arrangement under which Patton remained liable on the debt secured by the deed of trust. Shortly thereafter, the beneficiary, First Federal, informed Patton that unless she paid First Federal a transfer fee and increased the interest rate on the loan by one-half of one percent, First Federal would accelerate the balance under a due-on-sale clause. Patton declined to do so, and First Federal initiated a trustee's sale. On appeal the court held that the granting of summary judgment for First Federal was error. The court stated:
The...
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