Williams v. First Federal Sav. and Loan Ass'n of Arlington

• Decision Date: 07 July 1981
• Docket Number: 80-1005,Nos. 80-1446,WASHINGTON-LEE,s. 80-1446
• Citation: 651 F.2d 910
• Parties: 1981-1 Trade Cases 64,095 Jeffrey W. WILLIAMS, Susan K. Williams On their own behalf and as representatives of a class of homeowners, J. Peter Bittner, Marsha H. Bittner, Mary S. Boyd, Richard E. Nault, Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ARLINGTON, Individually and as rep. of a class of lenders, Federal Home Loan Mortgage Corp., Arlington-Fairfax Savings and Loan Association, Herndon Federal Savings and Loan Association, Appellees. Arthur G. POTE, Laura R. Pote, Angel Saltos, Beatriz De Saltos, Appellants, v.SAVINGS AND LOAN ASSOCIATION, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 910

651 F.2d 910

1981-1 Trade Cases 64,095

Jeffrey W. WILLIAMS, Susan K. Williams On their own behalf

and as representatives of a class of homeowners,

J. Peter Bittner, Marsha H. Bittner,

Mary S. Boyd, Richard E.

Nault, Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ARLINGTON,

Individually and as rep. of a class of lenders, Federal Home

Loan Mortgage Corp., Arlington-Fairfax Savings and Loan

Association, Herndon Federal Savings and Loan Association,

Appellees.

Arthur G. POTE, Laura R. Pote, Angel Saltos, Beatriz De

Saltos, Appellants, v. WASHINGTON-LEE SAVINGS AND LOAN ASSOCIATION, Appellee.

Nos. 80-1446, 80-1005.

United States Court of Appeals, Fourth Circuit.

Argued March 5, 1981.

Decided May 26, 1981.

Rehearing and Rehearing En Banc Denied July 7, 1981.

Paul D. Scanlon, Fairfax, Va., for appellants.

E. Waller Dudley, Fairfax, Va., and Robert T. Lasky, Washington, D. C. (Boothe, Prichard & Dudley, Paul C. Kincheloe, Jr., Kincheloe & Carlson, Jesse B. Wilson, III, McCandlish, Lillard, Church & Best, Fairfax, Va., Robert T. Lasky, Mark C. Ellenberg, Cadwalader, Wickersham & Taft, Washington, D. C., on brief in No. 80-1446) (W. Curtis Sewell, John E. Coffey, Thomas & Sewell, Alexandria, Va., on brief in Nos. 80-1446 and 81-1005) for appellees.

Before BUTZNER, PHILLIPS and MURNAGHAN, Circuit Judges.

MURNAGHAN, Circuit Judge:

The case touches many Americans, for it involves the common experience of purchasing a home. Customarily one contemplates a borrowing secured by a lien on the residential parcel to meet a substantial portion of the purchase price. Few are able first, before buying a house, to accrue all the necessary funds.

It is from that common experience that the present case evolves. The facts are influenced by another common experience of less ancient lineage, namely, persistent, consistently high, rates of inflation, accompanied by increased interest rates.

The plaintiffs in the four consolidated cases ¹ are (a) in two of the cases, the persons who, when they bought their homes some time ago, imposed deeds of trust on the parcels of residential real estate as security for loans incurred to meet part of the purchase price and (b) in all four cases, the persons who subsequently bought the real estate, and, in doing so, sought to assume the liabilities secured by the deeds of trust and to have them continue in force for the balance of their original terms, typically 30 years. The defendants are the lending institutions, and the questions at issue all coalesce into the ultimate one of whether provisions in the deeds of trust known as due-on-sale clauses purporting to permit acceleration of the maturity of the loans upon sales of the premises (a) were triggered, and (b), if triggered, were legally enforceable. ²

We choose, for simplicity's sake, in dealing with the first question, which is whether the due-on-sale clauses were, in fact, triggered, to single out for detailed description the transactions involving Jeffrey W. Williams et ux, since their case is the one which happens to supply the caption for reference purposes. However, since Thomas A. Bailey and Sharon S. Bailey actually had the contractual relations with First Federal Savings and Loan Association of Arlington, and not the Williams, who merely sought to assume the obligation of Mrs. Bailey (to whom all joint interests in the property had been conveyed by Mr. Bailey), we concentrate on the interests of Mrs. Bailey through whom the rights of the Williams derive.

On April 27, 1977, the Baileys purchased a home located at 8061 Powder Brook Lane, Springfield, Virginia. In Virginia, the forms used to impose a mortgage security interest, or lien, on land commonly employed in other parts of the United States are not used. Instead, resort has been to the deed of trust. While the formalities differ, for many essential intents and purposes, though by no means all, a deed of trust is equivalent to a mortgage. ³

While appellants urge that differences in the two types of security device play a relevant role in the formulation of the method employed to shift ownership of the homes in the several consolidated cases, and, in particular, from Mrs. Bailey to the Williams, it is not evident to us why that is so. ⁴

The purchase price paid by the Baileys on April 27, 1977 ($63,831) was met in part by a loan from First Federal Savings and Loan Association of Arlington, in the face amount of $55,000 at the time of settlement, secured by a deed of trust. By 1980, the outstanding principal had been reduced to $53,903.63. The term of the loan was 30 years. Interest on the loan was fixed at 10% per annum. ⁵ Repayment was to be made in level monthly installments of $492. The deed of trust dated April 27, 1977, constituted a first lien in favor of the lender, First Federal Savings and Loan Association of Arlington.

On October 3, 1977, Mr. Bailey had relinquished all his interest in the Springfield, Virginia premises to Mrs. Bailey. She, in 1979, decided to sell. In the interim, since the time of the 1977 purchase, interest rates on financing for purposes of acquiring a house had radically altered, with the going rate having risen to approximately 15% per annum instead of the 10% financing which had been available to the Baileys when they purchased in 1977. As a consequence, in the secondary market in first mortgages, the actual value of the loan secured by the Bailey deed of trust was approximately $38,000, despite its face value of $53,903.63. In other words, a discount of approximately 29% had occurred.

To guard against the possibility of the adverse impact of such discounts, home lending organizations had resorted to insertion in the instruments covering loan transactions of "due-on-sale" clauses. ⁶ The clauses provided that, on transfer of the premises, by the borrower, unless the approval or consent of the lender was first obtained, the loan would be fully callable, becoming immediately due and payable, at the option of the lender. ⁷

In current market conditions, the due-on-sale clause obviously would be viewed with distaste by people in the shoes of Mrs. Bailey, for a mortgage or deed of trust which could otherwise continue until the original fixed maturity date (here 2007) at an extremely favorable interest rate (10% as against the current 15%) would be lost to them. Such a loan, if transferable to a buyer through assumption thereof as part of his purchasing arrangements, would have a distinct economic value. To illustrate, Mrs. Bailey, if the loan were transferable, would be able to realize more from the sale of her house than if she were forced to comply with the due-on-sale clause. ⁸

In the final analysis, one must conclude that people like Mrs. Bailey are simply too eager to shift to others burdens properly belonging on their own shoulders. Even if the due-on-sale clause is valid, and has been triggered, and Mrs. Bailey, must, therefore, accelerate and pay off the balance due on her deed of trust loan, she, nevertheless, has been a beneficiary economically, vis-a-vis the deed of trust lender, as a result of the borrowing. The effects of inflation have served to erode the real, as distinct from the face, value of money. Hence, paying off $53,903.63 borrowed in 1977 with $53,903.63 of 1980 or 1981 dollars provides Mrs. Bailey with a tidy economic advantage. ⁹

I. Sale, Conveyance or Transfer.

The first thrust on behalf of appellants, in the jousting with the savings and loan association lenders, is a contention that the residential properties never were "sold or transferred," or "sold or conveyed" or that title was not "transferred." ¹⁰ Hence, the contention runs, the due-on-sale clauses have never, in fact, operated to accelerate the loans. Reliance is placed on the artificially elaborate form of the transactions employed for transferring title to the purchasers.

The transactions between Mrs. Bailey and the Williams began routinely enough. On November 7, 1979, Mrs. Bailey entered a typical form real estate contract containing terms of sale, and details as to settlement, brokerage commissions, and the like. Foreshadowing what was to come, however, the November 7, 1979 contract, in an addendum, described the subject of the sale as the beneficial interest in a land trust to be created by Mrs. Bailey.

That contract of November 7, 1979 was reinforced by one of the following day, November 8, 1979, called a "Contract to Purchase by Assignment the Beneficial Interest in a Land Trust Holding Real Estate." It called for Mrs. Bailey to name herself as trustee and to bring about a situation in which she, individually, and she, as trustee, between them would have "full and complete legal and equitable title ... without lien or encumbrance of any kind, except as noted in any Deed of Trust on the real estate ...."

No point has been made that those contracts, of themselves, operated to trigger the due-on-sale clause. We, therefore, do not address that question, which might not prove easy of resolution. On the one hand, the contracts did not affect possession, but only the right to possession, upon satisfaction of contingencies, especially meeting of the purchase price. On the other hand, equitable title in the Williams, whatever verbiage to the contrary may have been employed, was created by the contracts of November 7, 1979 and November 8, 1979. See Bellingham First Federal Savings & Loan Association v. Garrison, 87 Wash.2d 437, 439, 553 P.2d 1090, 1091 (1976) ("Thus the real estate contract executed by appellants and defendants is an 'inter vivos transfer' within the meaning of the (due-on-sale) clause."); Mutual Federal Savings & Loan Association v. Wisconsin Wire Works, 58 Wis.2d 99, 105, 205 N.W.2d 762, 766 (1973) ("In view of common and technical usage of the term 'convey' and the purpose of the 'due-on-sale clause' of the mortgage and note, there is no ambiguity. The land contract was a conveyance that gave the purchaser an...