Sonny Arnold, Inc. v. Sentry Sav. Ass'n

• Decision Date: 09 June 1982
• Docket Number: No. C-496,C-496
• Citation: 633 S.W.2d 811
• Parties: SONNY ARNOLD, INC. et al., Petitioners, v. SENTRY SAVINGS ASSOCIATION et al., Respondents.
• Court: Texas Supreme Court

Page 811

633 S.W.2d 811

SONNY ARNOLD, INC. et al., Petitioners, v. SENTRY SAVINGS ASSOCIATION et al., Respondents.

No. C-496.

Supreme Court of Texas.

June 9, 1982.

McCleskey, Harriger, Brazill & Graf, George H. McCleskey, Bass & Hobbs, R. Byrn Bass, Lubbock, for petitioners.

Galey & Cummings, Charles E. Galey, Lubbock, for respondents.

McGEE, Justice.

Sonny Arnold, Incorporated, (hereinafter "Arnold"), Foxmoor of California and Jeffry Leland Wilson, petitioners herein, appeal from the judgment of the court of appeals affirming the trial court's denial of a temporary injunction. The petitioners sought to enjoin a sale of real property by authority of an optional acceleration clause contained in a deed of trust. They argue that the above mentioned provision is an unreasonable restraint on alienation and therefore invalid and unenforceable. We hold that the particular clause in question is valid and enforceable, and affirm the judgment of the court of appeals denying the application for writ of temporary injunction.

The opinion of the court of appeals correctly states the nature of this case. 615 S.W.2d 333. Our principal concern is with the validity of the clause in question and therefore we refer to the court of appeals opinion for a complete recitation of the facts.

Paragraph 19 of the deed of trust is the provision in question and reads as follows:

19. TRANSFERS OF THE PROPERTY OR BENEFICIAL INTERESTS IN BORROWER: ASSUMPTION. On sale or transfer of (i) all or any part of the Property, or any interest therein, or (ii) beneficial interests in Borrower (Arnold) (if Borrower is not a natural person or persons but is a corporation, partnership, trust or other legal entity), Lender (Sentry) may, at Lender's option, declare all of the sums secured by this Instrument to be immediately due and payable, and Lender may invoke any remedies permitted by paragraph 27 of this Instrument. This option shall not apply in case of

(b) sales or transfers when the transferee's creditworthiness and management ability are satisfactory to Lender and the transferee has executed, prior to the sale or transfer, a written assumption agreement containing such terms as Lender may require, including, if required by Lender, an increase in the rate of interest payable under the Note.

The language of paragraph 27, which provides for acceleration and remedies, permits the lender (Sentry) the option of invoking the power of sale afforded by the deed of trust without prior judicial hearing.

In an effort to meet the issue squarely, for the purpose of this opinion we will assume the lender has invoked the acceleration provision for the purpose of increasing the rate of interest on the mortgage loan and not because the lender was attempting to prevent impairment of the security for the loan.

The petitioners contend that the clause in this case constitutes an unreasonable restraint on alienation and therefore it is invalid and unenforceable. They urge us to adopt the rule that the restraint is unreasonable unless the lender proves enforcement of the clause is reasonably necessary to protect against impairment to its security or the risk of default. Wellenkamp v. Bank of America, 21 Cal.3d 943, 582 P.2d 970, 148 Cal.Rptr. 379 (1978); Patton v. First Federal Savings & Loan Association, 118 Ariz. 473, 578 P.2d 152 (1978); Tucker v. Pulaski Federal Savings & Loan Association, 252 Ark. 849, 481 S.W.2d 725 (1972).

The test set out by the California Supreme Court in Wellenkamp recognized that all restraints on alienation are not per se invalid, and thus included consideration of not only the quantum of restraint imposed by enforcement of the clause, but also the justification for imposing the restraint. The Wellenkamp majority believed that the restraint was unreasonable because the lender was attempting to enforce the clause to gain a higher rate of interest, without the necessity of proving that its security had been impaired by the conveyance of the property.

In order for the clause to operate as an unreasonable restraint on alienation, we must necessarily decide if a restraint exists. Therefore, we first address the issue of whether the clause before us constitutes a restraint on alienation.

The Restatement of Property defines restraints on alienation. ¹ It classifies restraints into three types: (1) disabling restraints, (2) promissory restraints, and (3) forfeiture restraints. ² Since the clause in this case does not attempt to cause a later conveyance to be void or terminate the property interest conveyed, it is neither a disabling restraint nor a forfeiture restraint. As a result, we must determine if the clause constitutes a promissory restraint on alienation.

In order to satisfy the Restatement definition of a promissory restraint, the clause must attempt to "cause a later conveyance to impose contractual liability ³ on the one who makes the later conveyance when such liability results from a breach of an agreement not to convey ..." (emphasis added). Restatement of Property, § 404(1)(b) (1944). The clause in this case does not contain an agreement not to convey as required by the Restatement. ⁴ Mattern v. Herzog, 367 S.W.2d 312, 319 (Tex.1963). As noted by the Supreme Court of Nebraska in Occidental Savings & Loan Association v. Venco, 206 Neb. 469, 293 N.W.2d 843 (1980),

The questioned clause in no manner precludes the owner-mortgagor from conveying his property. The owner is free to convey without legal restraint and the conveyance does not cause a forfeiture of title, but only an acceleration of the debt.

It is true that the possibility of acceleration may impede the ability of an owner to sell his property as he wishes; nonetheless, not every impediment to a sale is a restraint on alienation, let alone contrary to public policy. It is a fact that zoning restrictions, building restrictions, or public improvements may impede the sale and substantially affect the ability of an owner to realize a maximum price, yet no one suggests that such restrictions or covenants, as a class, are invalid simply because they affect the ease with which one may dispose of one's property. We are somewhat at a loss to understand how or why so many courts have been willing to describe a 'due on sale' clause as a restraint on alienation and we are unwilling to do so.

293 N.W.2d at 845. The Supreme Court of Washington in Miller v. Pacific First Federal Savings & Loan Association, 86 Wash.2d 401, 545 P.2d 546 (1976), made the following observation:

In practical terms this provision merely affects the vendor-mortgagor's total asking price for his property. A higher interest rate will probably cause the vendor-mortgagor to lower his sales price in order to compete pricewise with similar property. (citations omitted) Thus the vendor-mortgagor's ability to command his preferred asking price might be somewhat impaired. Nevertheless, the increased interest provision does not restrain the actual transfer of the property because there is no constraint on the vendor-mortgagor's freedom to alienate his property....

Furthermore, the transfer of property does not impose any contractual liability on the transferor. As explained by the Miller court:

The increased rate was neither a measure of damages nor a penalty for a breach of contract. Instead, the increase was just an agreed upon method of adjustment to changes in the conditions underlying the agreement. The provision at issue simply specified some of the parties' obligations during the course of performance. Appellants (mortgagors) did not breach the agreement; on the contrary, they remained liable on the note even after the real estate contract was executed. The increase in interest was merely one of the terms of the agreement to become operative upon certain occurrences and was not a penalty ....

545 P.2d at 550.

In light of the foregoing authority, we do not believe the clause before us constitutes the type of restraint on alienation prohibited by the Restatement of Property. Even if we were of the opinion that the clause operates by indirection as a restraint, it would not fit into the usual classifications of invalid restraints on alienation. See Mattern v. Herzog, supra.

A mortgage is governed by the same rules of interpretation which apply to contracts. See generally 55 Am.Jur.2d Mortgages § 175 (1971). Thus, the issue of the validity of the clause before us should be resolved by an application of contract principles. Such an approach recognizes the parties' right to contract with regard to their property as they see fit, so long as the contract does not offend public policy and is not illegal. Curlee v. Walker, 112 Tex. 40, 244 S.W. 497 (1922); Goodstein v. Huffman, 222 S.W.2d 259 (Tex.Civ.App.-Dallas 1949, writ ref'd).

At the outset, we referred alternatively to the clause as an optional acceleration provision. As such, it is subject to the equitable rules and defenses applicable to other acceleration provisions. As stated by the court in Parker v. Mazur, 13 S.W.2d 174 (Tex.Civ.App.-San Antonio 1928, writ dism'd),

A court of equity may relieve against a provision for acceleration where the default of the debtor is the result of accident or mistake, 'when it is procured by the fraud or other inequitable conduct of the creditor himself.'

13 S.W.2d at 175 (citations omitted). See also Vaughn v. Crown Plumbing & Sewer Service, Inc., 523 S.W.2d 72 (Tex.Civ.App.-Houston (1st Dist.) 1975, writ ref'd n. r. e.); Brown v. Hewitt, 143 S.W.2d 223 (Tex.Civ.App.-Galveston 1940, writ ref'd). The record in this case is devoid of any allegation of fraud or trickery on the part of Sentry.

The harsh nature of the acceleration remedy demands that any contractual provision therefor, in order to be effective, should be clear and unequivocal. The clause at issue clearly states the acceleration option shall not apply when the transferee agrees to the lender's requirement of an increase in the rate of...