Tan v. California Fed. Sav. & Loan Assn.

• Decision Date: 15 March 1983
• Parties: Nini Myrna TAN, et al., Plaintiffs and Appellants, v. CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants and Respondents. Civ. 23471.
• Court: California Court of Appeals Court of Appeals

Page 775

189 Cal.Rptr. 775

140 Cal.App.3d 800

Nini Myrna TAN, et al., Plaintiffs and Appellants, v. CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants and Respondents.

Civ. 23471.

Court of Appeal, Fourth District, Division 2, California.

March 15, 1983.

Fred Crane, Riverside, Mark A. Hiller, Santa Ana, and Alan L. Green, El Centro, for plaintiffs and appellants.

William W. Berryhill, Cohen & Ziskin, Ziskin, Rubenstein, Kaplan & Crowe, Terry S. Kaplan, and Peter Collisson, Los Angeles, for defendants and respondents.

McKenna, Conner & Cuneo, Aaron M. Peck, Terry O. Kelly, Daniel H. Willick and C. Steven McMurry, Los Angeles, for amicus curiae California Sav. and Loan League in support of defendants and respondents.

OPINION ON REMAND FROM THE UNITED STATES SUPREME COURT

KAUFMAN, Associate Justice.

Plaintiffs appeal from a judgment of dismissal after the trial court sustained defendants' general demurrer with leave to amend and plaintiffs elected not to amend. For convenience the defendants collectively will be referred to as California Federal.

California Federal is a private mutual savings and loan association chartered by the Federal Home Loan Bank Board pursuant to Section 5(a) of the Federal Home Owners' Loan Act of 1933 (12 U.S.C. § 1461 et seq.). On April 5, 1976, California Federal made a loan of $102,800 to Raymond G. and Juli A. Wilson evidenced by a promissory note secured by a deed of trust on their residential real property located at 4732 Pearce Street, Huntington Beach, in the State of California. Both the note and deed of trust contained a due-on-sale clause purporting to give California Federal the right to declare the unpaid balance of the loan immediately due and payable in the event the property or any interest therein was sold or otherwise transferred or conveyed by the borrowers. The promissory note contained a "prepayment privilege" provision that called for payment of a premium or penalty in the event of certain prepayments. ¹

On or about September 26, 1976, the Wilsons sold and conveyed the property to Richard L. and Doris I. Newman who took the property subject to the deed of trust. At the Newmans' request, California Federal agreed to accept their loan payments under a reservation of rights agreement. The Newmans then sold a partial undivided interest to Paul L. Callihan. Together, the Newmans and Paul Callihan sold and conveyed the property to Philip V. and Marie Currie. The Curries then sold a partial undivided interest in the property to George Gosling. Except for the original transfer from the Wilsons to the Newmans, California Federal apparently had no knowledge of the intervening transfers. On April 17, 1977, the Curries and George Gosling sold and conveyed the property to plaintiffs.

On or about June 9, 1977, plaintiffs' attorney advised California Federal the property had been conveyed to plaintiffs and requested that California Federal execute a new reservation of rights agreement. Having learned of the intervening transfers, California Federal refused to execute a new reservation of rights agreement with plaintiffs, suggesting the original Newman reservation of rights agreement should be assigned to plaintiffs and executed by the intervening transferees. Plaintiffs declined to follow that procedure.

California Federal then gave notice that it was exercising the due-on-sale clause in the deed of trust, and on April 18, 1978, caused to be recorded a notice of default and election to sell under the deed of trust.

Plaintiffs then instituted this action seeking primarily declaratory and injunctive relief against the threatened foreclosure. After obtaining a preliminary injunction, plaintiffs, however, sold the property to persons not parties to this action. Although California Federal was demanding payment of the loan in full on the basis of the due-on-sale clause it nevertheless demanded as a precondition to reconveyance, payment of a prepayment penalty of $3,688.80 in addition to the unpaid balance of principal and interest and foreclosure costs. Plaintiffs objected to the payment of the prepayment penalty as well as one or more of the other sums demanded by California Federal but nevertheless paid the full amount in order to effectuate their sale of the property.

Plaintiffs thereupon filed an amended and supplemental complaint seeking a declaration of the correct amount owing to California Federal on account of the note and deed of trust, damages on account of their economically coerced overpayment to California Federal, and damages for slander of title resulting from California Federal's publishing and recording the notice of default. Injunctive relief was also sought.

California Federal generally demurred to the amended and supplemental complaint contending that no cause of action was stated because a regulation of the Federal Home Loan Bank Board preempted state law and authorized it to exercise the trust deed's due-on-sale clause on sale of the property. It further asserted the amounts demanded from plaintiffs as a condition to its releasing its lien on the property were proper. In opposition to the demurrer and as the primary basis for their lawsuit, plaintiffs asserted that California Federal was not entitled to exercise the trust deed's due-on-sale clause automatically and without a showing that its security would be impaired by plaintiffs' sale of the property in accordance with Wellenkamp v. Bank of America (1978) 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970, and that state law was not preempted by the federal regulation.

In its opposition to California Federal's demurrer, however, plaintiffs also asserted: "Even if federal law preempts with respect to enforcement of the due-on sale clause, defendant cannot collect a prepayment penalty if a loan is paid off through enforcement of the due-on sale clause." After referring to a Federal Home Loan Bank Board regulation prohibiting imposition of a prepayment charge upon exercise of a due-on-sale clause in respect to loans on borrower occupied homes made by federal savings and loan associations after July 31, 1976, plaintiffs noted the loan involved in this case was made prior to that date. Plaintiffs urged, nevertheless, that the Bank Board was on record as stating that the enforcement of a due-on-sale clause and the simultaneous demand for a prepayment penalty in connection with the payment resulting from the exercise of the due-on-sale clause "is unfair."

The trial court sustained California Federal's demurrer with leave to amend. However, plaintiffs declined to amend and a judgment of dismissal was entered. This appeal ensued.

In an opinion filed July 2 and modified July 31, 1981, this court concluded state law was not preempted and the Wellenkamp rule was applicable, precluding automatic exercise of the due-on-sale clause. We therefore reversed the judgment of dismissal.

However, the United States Supreme Court noted probable jurisdiction and in an opinion issued June 28, 1982, determined the regulation issued by the Federal Home Loan Bank Board effective July 31, 1976 (now 12 CFR § 545.8-3(f) (1982)), governing due-on-sale clauses in the security instruments of federal savings and loan associations preempted the law of the State of California and precluded application of the Wellenkamp rule to federally chartered savings and loan associations. (Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta (1982) 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664.) On the basis of that decision the judgment of this court in this case was vacated and the case was remanded to us for further consideration in light of the Supreme Court's decision. --- U.S. ----, 102 S.Ct. 3503, 73 L.Ed.2d 1380.

We recalled the remittitur and invited counsel for plaintiffs to submit a supplemental letter brief setting forth any argument why the judgment of the trial court should not be affirmed on the basis of the United States Supreme Court's decision in de la Cuesta. Plaintiffs filed a supplemental letter brief making in substance two contentions. First, noting that the trust deed in this case is a "pre-regulation" trust deed, that is, it was created prior to the effective date of the federal regulation, plaintiffs contend the preemptive effect of the federal regulation on "pre-regulation" trust deeds was not decided in the Supreme Court's de la Cuesta decision. Plaintiffs acknowledge the Supreme Court indicated in footnote 24 of its opinion that before the Wellenkamp decision California law permitted the automatic exercise of a due-on-sale clause in the event of an outright sale of the property and that therefore federally chartered savings and loan associations are at liberty automatically to exercise due-on-sale provisions in trust deeds on California property created prior to the effective date of the federal regulation. However, it is contended that the Supreme Court's conclusion was based on an erroneous interpretation of state law which it is urged is not binding on this court because state courts have paramount authority to construe state law.

In response California Federal and amicus urge the Supreme Court in its de la Cuesta decision determined the federal regulation preempts state law even as to "pre-regulation" trust deed due-on-sale clauses the determination set forth in footnote 24 of the Supreme Court's decision constitutes the law of the case; the Supreme Court's determination as to what California law was before the Wellenkamp decision was not incorrect; and even if it was, this court is not at liberty to redetermine the question contrary to the Supreme Court's determination. As a back-up, California Federal and amicus also urge that, failing all else, the Garn-St. Germain Depository Institutions Act of 1982 (the Garn Act) signed into law on October 15, 1982, expressly preempts state law both prospectively and retroactively except for a so-called "window period" during which state law will...