Viereck v. Peoples Sav. and Loan Ass'n

• Citation: 343 N.W.2d 30
• Decision Date: 20 January 1984
• Docket Number: CX-82-1600,Nos. C1-82-870,s. C1-82-870
• Parties: Paul J. VIERECK and Donna M. Viereck, (C1-82-870) Respondents, v. PEOPLES SAVINGS AND LOAN ASSOCIATION, (C1-82-870) Appellant, and David W. HUEY and Marcia K. Huey, () Respondents, v. FIRST STATE FEDERAL SAVINGS AND LOAN ASSOCIATION, () Appellant. Nos. C1-82-870, .
• Court: Supreme Court of Minnesota (US)

Page 30

343 N.W.2d 30

Paul J. VIERECK and Donna M. Viereck, (C1-82-870) Respondents, v. PEOPLES SAVINGS AND LOAN ASSOCIATION, (C1-82-870) Appellant, and David W. HUEY and Marcia K. Huey, (CX-82-1600) Respondents, v. FIRST STATE FEDERAL SAVINGS AND LOAN ASSOCIATION, (CX-82-1600) Appellant.

Nos. C1-82-870, CX-82-1600.

Supreme Court of Minnesota.

Jan. 20, 1984.

Syllabus by the Court

1. Federal law does not preempt Minnesota law governing exercise of conventional real estate mortgage due-on-sale clauses contained in property security instruments on borrower-occupied residences executed prior to June 1, 1979, even though the original state-chartered mortgagee, subsequent to execution, acquired a federal charter or assigned the security agreement to a federally-chartered savings and loan institution.

2. State law concerning enforceability of due-on-sale clauses in conventional real estate mortgages is not preempted by the Garn-St. Germain Depository Institutions Act of 1982, Pub.L. No. 97-320, 96 Stat. 1469 (1982), in construing due-on-sale clauses in mortgages executed or transferred prior to June 1, 1979.

3. Absent credit or security risks, a mortgagee holding a conventional mortgage on borrower-occupied real estate executed prior to June 1, 1979, may not accelerate the payment of the balance due on the mortgage or charge a greater interest rate when the borrower-occupier transfers the mortgaged property.

Christian, Slen, Savelkoul, Johnson, Broberg & Kohl, Henry J. Savelkoul, Phillip A. Kohl, Albert Lea, for Peoples Savings and Loan Ass'n.

Hessian, McKasy & Soderberg, William J. Utermohlen, Minneapolis, for First State Federal Sav. and Loan.

O'Neill Goggins, Traxler & Zard, Norbert B. Traxler, New Prague, for Paul and Donna Viereck.

Muir, Meyer, Storey, Simons & Costello by Wm. P. Simons and David W. Huey, Jackson, for Hueys.

Moss, Flaherty, Clarkson & Fletcher by Maher J. Weinstein, Minneapolis, amicus curiae, for the Savings League of Minnesota.

Considered and decided by the court en banc without oral argument.

KELLEY, Justice.

In each of these cases separate trial judges held due-on-sale clauses in conventional mortgages on borrower-occupied residential property executed prior to June 1, 1979, were unenforceable by mortgagees who, although state chartered at the time of the execution of each mortgage, were federally chartered at the time of the attempted accelerations of payment upon transfer of the mortgage property by the mortgagors. We affirm.

The Vierecks executed a uniform FNMA/FHLMC mortgage ¹ on residential property owned and occupied by them to Peoples Savings and Loan Association (Peoples) on July 12, 1978. This mortgage contained a due-on-sale clause. The Vierecks in 1980 bought a new home and hoped to sell their old home. When they attempted to sell the mortgaged home on a contract for deed, Peoples informed them that it would accelerate the payment of the unpaid balance of the mortgage. Because the sale of the mortgaged property could not be consummated without a loan assumption, the Vierecks rented the property and commenced a declaratory judgment action to determine the enforceability of the due-on-sale clause. The trial court held the clause unenforceable absent an increase in credit risk or risk to the mortgagee's security interest.

In September 1976, the Hueys mortgaged their Minneapolis home to Knutson Mortgage and Financial Corporation (Knutson). That mortgage likewise was on the uniform FNMA/FHLMC form and contained a due-on-sale clause. In December 1979, the Hueys requested the assignee of the mortgage, First State Federal Savings and Loan Association (First State), to consent to the sale of the property on a contract for deed without acceleration of the unpaid balance of the mortgage. First State refused to consent. Hueys then commenced a declaratory judgment action to challenge the validity of the due-on-sale clause. ² Both First State and the Hueys moved for summary judgment. The trial judge granted summary judgment in favor of the Hueys. In doing so he held that federal law, generally validating due-on-sale clauses, did not preempt state law. He concluded that Minnesota common law governs mortgages executed prior to June 1, 1979, and that Minnesota law considered due-on-sale clauses in mortgages on borrower-occupied residences an unreasonable restraint on alienation.

At the time of the execution of the Viereck mortgage, Peoples was a state-chartered savings and loan association. It became federally chartered effective May 3, 1982. A few weeks after the execution of the Huey mortgage, Knutson, a state-chartered institution, assigned the Huey mortgage to First State, a federally-chartered savings and loan association. Each lending institution appeals the determination of the trial court below that the due-on-sale clause was unenforceable. Because the issues on appeal in each case are identical, we consolidated the cases for our consideration.

1. Appellants argue that Minnesota law governing the exercise of mortgage due-on-sale clauses executed prior to June 1, 1979 is preempted by the Garn-St. Germain Depository Institutions Act of 1982 (Garn Act), Pub.L. No. 97-320, 96 Stat. 1469 (1982), and federal regulation. They contend that federal law governs the acceleration of payment of these mortgages because, despite the origination by state-chartered institutions, they are now held by federally-chartered lending associations. They rely on Fidelity Federal Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982), which held that federal savings and loan institutions could exercise due-on-sale clauses pursuant to federal regulation, state law to the contrary notwithstanding. We conclude that reliance is misplaced. Two of the security instruments in de la Cuesta were originated prior to the effective date of the preempting federal regulation. Under California law as it existed when the loans were executed, acceleration was permitted. Between the date of execution and the date the federally-chartered institution sought to accelerate on transfer of the mortgaged property, California law was changed so as to bar or restrict acceleration. See Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970 (1978). This change in the California law was not applicable, however, to federally-chartered savings and loan institutions since the federal regulation adopted in 1976 was preemptive. ³ Thus, the Court never addressed the issue whether the federal regulation could apply to impair contractual rights acquired under state law. de la Cuesta, 458 U.S. at 170-71, n. 24, 102 S.Ct. at 3031. Other federal courts have questioned the application of this federal regulation to mortgages originated by state-chartered institutions and later held by federally-chartered lending institutions. See Williams v. First Federal Savings and Loan Association of Arlington, 651 F.2d 910, 922-23 (4th Cir.1981); Bleecker Associates v. Astoria Federal Savings and Loan Association, 544 F.Supp. 794, 797-99 (S.D.N.Y.1982). Moreover, the assignment of mortgages to the Federal Home Loan Mortgage Corporation (FHLMC), a federal instrumentality, has been held not to alter the application of state law requiring payment of interest on escrowed tax and insurance funds. See, e.g., Federal National Mortgage Association v. Lefkowitz, 390 F.Supp. 1364, 1370 (S.D.N.Y.1975); cf. Derenco, Inc. v. Benjamin Franklin Federal Savings and Loan Association, 281 Or. 533, 537-49, 577 P.2d 477, 482-87 (1978), cert. denied, 439 U.S. 1051, 99 S.Ct. 733, 58 L.Ed.2d 712 (1978) (federal regulation governing interest paid on escrowed tax and insurance funds not retroactive). We see no reason to treat an assignment to a federally-chartered savings and loan association any differently from an assignment to the FHLMC.

Finally, we note that Congress in enacting the Garn Act included a "window period." Garn Act, Pub.L. No. 97-320, Sec. 341(c)(1), 96 Stat. 1469, 1505-07 (1982) (codified at 12 U.S.C.A. Sec. 1701j-3(c)(1) (West Supp.1983)). The policy evinced by the inclusion of the "window period" is to insure that mortgagors who relied upon state law prohibiting or limiting loan acceleration prior to enactment of the Garn Act are protected by state law during the transition period between October 15, 1982 and October 15, 1985. See, e.g., S.Rep. No. 536, 97th Cong., 2d Sess. 22 (1982), reprinted in 1982 U.S.Code Cong. & Ad.News 3054, 3076. Accordingly, if state-chartered institutions may circumvent state law restrictions on due-on-sale clauses by selling old mortgages to federal savings and loans or by acquiring a federal charter, this policy is thwarted.

Therefore, because neither the federal regulation (12 C.F.R. Sec. 545.8-3(f) (1982)) nor the Garn Act are to be applied retroactively, and since Congress has recognized the policy that state law at the time of assumption or execution of the mortgage would apply in some cases by inclusion of the "window period" in the Garn Act, we hold there is no federal preemption which would permit these appellants to accelerate the payment of mortgage balances on the occasion of the mortgagor seeking to transfer the mortgage on borrower-occupied residential property.

2. That conclusion, however, does not end our inquiry. If, under Minnesota law at the time of the original execution of these two mortgages, due-on-sale clauses in mortgages could be exercised by lenders upon resale of the mortgaged property by buyers, appellants would prevail. Appellants contend that Minnesota law was silent on the enforcement of due-on-sale clauses prior to the enactment of Minn.Stat. Sec. 47.20, subd. 6 (1982). ⁴ Therefore, they contend, since Minnesota's "window period" only applied to loans originating on or after June 1, 1979 and before May 9, 1981, the preemption rule of the Garn Act applies to these loans. 12 U.S.C.A. Sec. 1701j-3(b)(1) (West Supp.1983). Resp...