Crockett v. First Federal Savings & Loan Ass'n of Charlotte

224 S.E.2d 580, 289 N.C. 620, 20 U.C.C. Rep. Serv. (West) 34, 1976 N.C. LEXIS 1370

• Court: Supreme Court of North Carolina
• Decided: May 14, 1976
• Docket: No. 36
• Status: Published

Opinions

COPELAND, Justice.

There is one principle question for us to determine: Does defendant, as beneficiary under a deed of trust containing the language above described, have a lawful right to require the proposed purchasers of the property secured by said deed of trust to agree to pay an increased rate of interest as a condition to its assent to a transfer of the security property, and the assumption of the loan ?

Plaintiff contends that since the due-on-sale clause permits defendant to declare the entire debt due and payable when the owner of the property (mortgagor) sells it without the consent of the beneficiary in the deed of trust, it is a restraint on alienation and contrary to public policy and therefore void.

Our Court has consistently held that a condition annexed to the creation of an estate in fee simple disabling the conveyee from alienating it for any period of time is void as a restraint on alienation. Welch v. Murdock, 192 N.C. 709, 135 S.E. 611 (1926); Christmas v. Winston, 152 N.C. 48, 67 S.E. 58 (1910); Pritchard v. Bailey, 113 N.C. 521, 18 S.E. 668 (1893); Munroe v. Hall, 97 N.C. 206, 1 S.E. 651 (1887); Dick v. Pitchford, 21 N.C. 480 (1837). Similarly, we have held such restraints void where alienation is restricted to a limited class. Norwood v. Crowder, 177 N.C. 469, 99 S.E. 345 (1919); Brooks v. Griffin, 177 N.C. 7, 97 S.E. 730 (1919). Likewise, we have consistently held that a condition annexed to the creation of an estate in fee simple which for any period of time causes a forfeiture of the estate upon alienation is void as a restraint on alienation. Latimer v. Waddell, 119 N.C. 870, 26 S.E. 122 (1896); Twitty v. Camp, 62 N.C. 61 (1866); Pardue and wife v. Givens and others, 54 N.C. 806 (1854). Furthermore, we have treated restraining provisions in the form of covenants in the same manner as if they had been written as conditions. Lee v. Oates, 171 N.C. 717, 88 S.E. 889 (1916).

Also, we have held that the doctrine against restraints on alienation applies to equitable estates as well as legal estates. Lee v. Oates, supra; Dick v. Pitchford, supra. We have applied the restraints doctrine to conditions annexed to the creation of (legal and equitable) life estates. Lee v. Oates, supra; Wool v. Fleetwood, 136 N.C. 460, 48 S.E. 785 (1904); Dick v. Pitchford, supra. Additionally, we have held that a provision annexed to the creation of an estate in fee simple giving the conveyor a right for an indefinite time and at an unspecified price to repurchase the land when it is sold is void as a restraint on alienation. Hardy v. Galloway, 111 N.C. 519, 15 S.E. 890 (1892).

We have also held that restraints against partition or division are void. Mangum v. Wilson, 235 N.C. 353, 70 S.E. 2d 19 (1952); Johnson v. Gaines, 230 N.C. 653, 55 S.E. 2d 191 (1949).

In Lee v. Oates, supra, we noted that an estate created with a condition annexed which prevented a married woman from anticipating her separate equitable estate was a recognized exception to the restraints doctrine. So long as the married woman had not become discovert by death or by absolute divorce, the policies in favor of protecting the married woman’s separate equitable estate from the control of her husband outweighed the policies against restraints on alienation.

We have also held that a condition against alienation annexed to the creation of a charitable trust is an exception to the restraints doctrine. Trust Co. v. Construction Co., 275 N.C. 399, 168 S.E. 2d 358 (1969). Of course, this restraint may be modified by the courts under their equitable powers in order to preserve the trust estate or protect the cestuis que trustent upon the happening of some exigency, contingency, or emergency not anticipated by the trustor.

The due-on-sale clause involved in the present case does not cause the kind of substantial or direct restraint on alienation involved in the previous cases considered by this Court and held to be invalid. Plaintiff-trustor-borrower is not disabled from alienating his realty to any class for any period of time. Likewise, his realty is not subject to forfeiture for any period of time upon an attempted alienation. There is also no restraint preventing partition or division of the realty for any period of time. Furthermore, no one has a right for an indefinite time and at an unspecified price to repurchase the land when it is sold. Instead, plaintiff-trustor-borrower has an absolute right to alienate his realty as he chooses at any time to any willing buyer without the realty being forfeited on account of the transaction or being subject to an unrestricted right to repurchase.

Merely by paying off the loan, plaintiff-trustor-borrower or the prospective conveyee can comply with the due-on-sale clause and insure that upon alienation the buyer will not lose his property by exercise of the right to foreclose. It is significant that requiring the loan to be paid off does not involve an extraction of a penalty. Unless the debtor pursues another course of action, the creditor is merely returned the still outstanding amount of the loan that was made to facilitate plaintiff’s original purchase. Thus, there is no real freezing of assets or discouragement of property improvement on account of the due-on-sale clause since the property can be freed by simply paying off the loan. Moreover, the due-on-sale clause is part of an overall contract that facilitates the original purchase and, thus, promotes alienation of property. Additionally, North Carolina has approved employment of an acceleration clause in a mortgage, a note secured by a mortgage, and an unsecured note. Walter v. Kilpatrick, 191 N.C. 458, 132 S.E. 148 (1926); Bizzell v. Roberts, 156 N.C. 272, 72 S.E. 378 (1911); Trust Company v. Duffy, 153 N.C. 62, 68 S.E. 915 (1910).

One factor that significantly affects the nature of this acceleration clause so far as the restraints doctrine is concerned is the fact that the creditor’s right to accelerate arises only when the realty is alienated. Thus, the practical effect of the due-on-sale clause when it is considered in isolation is that the owner is encouraged not to alienate his property if it would be more advantageous to enjoy a loan which has become favorable because of changed interest rates in the market. This is what may be termed a hindrance or an indirect restraint on alienation. As defined in L. Simes & A. Smith, The Law of Future Interests § 1112 (2d Ed. 1956), “An indirect restraint on alienation arises when an attempt is made to accomplish some purpose other than the restraint of alienability, but with the incidental result that the instrument, if valid, would restrain practical alienability.” Indirect restraints historically have been restricted by the rule against perpetuities and related rules and have not been as harshly struck down as the classical direct restraints. L. Simes & A. Smith, supra at § 1116. The classical direct restraints include the previously discussed provisions in a deed, will, contract or other instrument which, by their express terms, or by implication of fact, purport (1) to prohibit alienation of the estate which was granted by that instrument or (2) cause a forfeiture of the estate which was granted by that instrument upon an attempted alienation. Also, a covenant in an instrument of conveyance or contract in which the prom-isor agrees not to alienate the property that he has been granted therein involves a direct restraint. See generally L. Simes & A. Smith, supra at § 1131.

Continuing our consideration of this particular due-on-sale clause and loan contract, we find noteworthy that under the loan agreement entered into in this case, plaintiff could prepay at anytime without penalty. Thus, defendant-beneficiary-lender would lose any profit or advantage he otherwise would have if he retained the loan, interest rates declined, and plaintiff prepaid. Although plaintiff-trustor-borrower might have to pay a re-financing charge, he would be able to prepay whenever he chose and take advantage of lower interest rates in the market. Plaintiff would not have to wait for an alienation of the property before being permitted to take advantage of changed interest rates. Thus, as between plaintiff-trustor-borrower and defendant-beneficiary-lender, plaintiff is in a more favorable position for taking advantage of fluctuations in interest rates assuming the due-on-sale clause is permissible. If the due-on-sale clause is not permissible, the plaintiff would have an even superior position. Additionally, we note that a lender could have charged a prepayment penalty of 1% for prepayment of a loan within the first year of the loan under G.S. 24-10, but otherwise no prepayment penalty would have been permissible. Thus, in order to balance the ability of lender and borrower to take advantage of fluctuations in interest rates, equities favor the limited adjustment permissible by the due-on-sale clause.

Although the freedom to contract is limited by the restraints doctrine and the policy reasons therefore, the equities in this case indicate that the policy factors behind the restraints doctrine are not really affected under the circumstances of this case. In fact, a fair contractual agreement would appear to support a loan with no prepayment penalty and a due-on-sale clause. The immediate buyer has the security of having the ability to pay off his loan at no greater than the initial interest rate, and he can get a more favorable loan if interest rates decline. The lender can get a more favorable loan agreement if interest rates rise and there is a new owner of the realty.

In essence, it is the lender who has provided the opportunity for the initial purchaser to buy the realty. It seems fair for the lender to be able to contract to receive an increased interest rate, on the very loan that is facilitating transfer of the property, in the event the original purchaser decides he is not going to continue ownership or pay off the loan so as to have full equity in the realty. A prime purpose of the loan was to enable the buyer to purchase the realty. If the buyer sells before he obtains full equity, this purpose ceases. Under our free enterprise system the lender may lend his money under such terms as maximize his profits within the limits set by law. As the court stated in Cherry v. Home Sav. & Loan Assn., 276 Cal. App. 2d 574, 81 Cal. Rptr. 135 (1969), the due-on-sale clause is employed by sensible lenders to minimize their risks and avoid losing the benefit of future increases in the interest rate.

In the absence of a due-on-sale clause, plaintiff-trustor-borrower would receive a premium for a favorable loan assumption when he sold his realty. This premium would be the result of the long term loan contract and a fortuitous rise in interest rates. By operation of the due-on-sale clause plaintiff is not able to realize this premium. Upon sale of the realty plaintiff receives the fair market value of the realty without further benefiting from the loan he received.

“The policy against restraints on alienation is said to be based upon the belief that restraints remove property from commerce, concentrate wealth, prejudice creditors, and discourage property improvements.” A. Casner & W. Leach, Cases and Text on Property 1008 (1969 Ed.); accord, Volkmer, The Application of the Restraints on Alienation Doctrine to Real Property Security Interests, 58 Iowa L. Rev. 747, 750 (1973) [hereinafter cited as Volkmer]; see also L. Simes & A. Smith, supra at §§ 1133-35; Schnebly, Restraints upon the Alienation of Legal Interests, 44 Yale L. Rev. 961 (1934-35) [hereinafter cited as Schnebly]; Comment, The Development of Restraints on Alienation since Gray, 48 Harvard L. Rev. 373, 401-406 (1934-35). We cannot see how any of these policy factors or other equitable factors can be unfavorably affected by the use of the due-on-sale clause under the circumstances of this case. Also, we do not feel that approval of this kind of due-on-sale clause in connection with a loan for which there is no penalty for prepayment will bring about any confusion or uncertainty in the land law.

Restatement of Property § 410, Comment a, at 2429 (1944) reasons that restraints on alienation may be justified “if the objectives behind the imposition of the restraint are sufficiently important to outweigh the social evils which flow from the enforcement of the restraint or if the interference with the power of alienation is so insignificant that no appreciable harm results from the enforcement of the restraint.” The due-on-sale clause in this case is justified under these criteria.

Furthermore, under the circumstances of this case, the practical effect upon alienation is so insignificant or speculative that no appreciable harm has been shown to result from enforcement of the due-on-sale clause. Numerous buyer and seller preferences determine the practical alienability of property as well as the actual effect a due-on-sale clause has on the practical alienability of property. Additionally, the practical effect on restraining alienation is no greater in this case than that in many areas where a practical restraint has traditionally been permitted. Moreover, the policy reasons for upholding the due-on-sale clause employed under the circumstances of this case are equally sound. Examples of these other areas include (1) trusts and powers of revocation and appointment, (2) the spendthrift trust permitted by G.S. 41-9 (limited to a trust for relatives of the grantor of property yielding an annual income at the time of the transfer of no greater than $500 and lasting no longer than the life of the relative). Fowler v. Webster, 173 N.C. 442, 92 S.E. 157 (1917), (3) future interests (because they require the joint action of two or more persons to effect a complete alienation), (4) restrictions and restraints imposed on leaseholds and life estates and (5) other factors affecting free marketability of property. See Coast Bank v. Minderhout, 61 Cal. 2d 311, 392 P. 2d 265, 38 Cal. Rptr. 505 (1964); L. Simes & A. Smith,.swpra at §§ 1115, 1168; Schnebly.

Because of the economic and legal problems involved, a number of law review articles have elaborated on this problem. Bonanno, Due on Sale and, Prepayment Clauses in Real Estate Financing in California in Times of Fluctuating Interest Rates —Legal Issues and Alternatives, 6 U. of San. Fran. L. Rev. 267 (1971-72); Yolkmer; Warren, Is the Practice of Raising the Interest Rate in Return for Not Exercising an Acceleration Clause on Assumption of a Mortgage Illegal in Texas as a Restraint on Alienation? 13 S. Tex. L.J. 296 (1971-72); Comment, Mortgages — A Catalogue and Critique on the Role of Equity in the Enforcement of Modern-Day “Due-on-Sale” Clauses, 26 Ark. L. Rev. 485 (1972-73); Comment, Mortgages: Restrictions on Transfer of the Fee — Effect of Due-on-Sale Clauses, 28 Okla. L. Rev. 418 (1975); Comment, Acceleration Clauses as a Protection for Mortgagees in a Tight Money Market, 20 S.D. L. Rev. 329 (1975); Comment, Judicial Treatment of the Due-on-Sale Clause: The Case for Adopting Standards of Rear-sonableness and Unconscionability, 27 Stan. L. Rev. 1109 (1974-75); Comment, Debt Acceleration on Transfer of Mortgaged Property, 29 U. of Miami L. Rev. 584 (1975); Note, The Case for Relief from Due-on-Sale Provisions: A Note to Hellbaum v. Lytton Savings and Loan Association, 22 Hastings L. J. 431 (1970-71).

Under the facts of this case, the due-on-sale clause was validly exercised even though the security property was not impaired and the transfer of the security property did not affect repayment of the original loan. Courts in other jurisdictions have recognized that a valid reason for exercise of a due-on-sale clause is to obtain higher interest rates or accelerate repayment of the loan (in effect determining that the clause is reasonable per se unless there is a showing of fraud, duress or inequitable or unconscionable conduct on the part of the lender). Coast Bank v. Minderhout, supra; Cherry v. Home Sav. & Loan Assn., supra; Malouff v. Midland Federal, 181 Colo. 294, 509 P. 2d 1240 (1973); People’s Savings Assn. v. Standard Industries, 22 Ohio App. 2d 35, 257 N.E. 2d 406 (1970); Gunther v. White, 489 S.W. 2d 529 (Tenn. 1973); Mutual Federal S. & L. v. American Med. Services, 66 Wis. 2d 210, 223 N.W. 2d 921 (1974); Mutual Fed. S. & L. Asso. v. Wisconsin Wire Wks., 58 Wis. 2d 99, 205 N.W. 2d 762 (1973). There is a split of authority on this point, and other cases have indicated that the due-on-sale clause can be validly exercised only if the security of the lender is threatened. Tucker v. Pulaski Fed. S. & L., 252 , 481 S.W. 2d 725 (1972); Tucker v. Lassen Sav. & Loan Assn., 12 Cal. 3d 629, 526 P. 2d 1169, 116 Cal. Rptr. 633 (1974); La Sala v. American Sav. & Loan Assn., 5 Cal. 3d 864, 489 P. 2d 1113, 97 Cal. Rptr. 849 (1971) (due-on-encumbrance clause); Clark v. Lachenmeier, 237 So. 2d 583 (Fla. Ct. App. 1970); Baker v. Loves Park Savings & Loan Association, 61 Ill. 2d 119, 333 N.E. 2d 1 (1975) (restraint held to be reasonable) .

These classifications inherently are subject to interpretation since they entail generalizations concerning cases involving specific fact situations. Baltimore Life Insurance Company v. Harn, 15 Ariz. App. 78, 486 P. 2d 190 (1971), cert. denied, 108 Ariz. 192, 494 P. 2d 1322 (1972), is an example of a case dealing with high prepayment penalties as well as the fact that the clause was not exercised for security purposes. The court concluded that an award of some $20,000 in penalties and attorneys fees by operation of an acceleration clause would be unconscionably harsh considering the fact that the action to accelerate and foreclose was an equitable proceeding. The facts of this case render classification impractical, as is also true with respect to Lane v. Bisceglia, 15 Ariz. App. 269, 488 P. 2d 474 (1971), a subsequent Arizona case citing Baltimore Life Insurance Company.

In conclusion, we believe that insofar as the second line of cases prohibits exercise of due-on-sale clauses except for security purposes, it is too restrictive in its approach and, under the circumstances of this case where there were no prepayment penalties, it was appropriate to exercise the due-on-sale clause even though the security of the lender was not threatened.

As was wisely said by Justice Higgins speaking for our Court in Roberson v. Williams, 240 N.C. 696, 700, 701, 83 S.E. 2d 811, 814 (1954), “Ordinarily, when parties are on equal footing, competent to contract, enter into an agreement on a lawful subject, and do so fairly and honorably, the law does not permit inquiry as to whether the contract was good or bad, whether it was wise or foolish.” “It is the simple law of contracts that ‘as a man consents to bind himself, so shall he be bound [cases cited].’” Troitino v. Goodman, 225 N.C. 406, 414, 35 S.E. 2d 277, 283 (1945).

We, therefore, hold that in the absence of allegations and proof that the lender acted fraudulently, inequitably, oppressively or unconscionably in its demand for increased interest rates in return for the lender’s consent to the sale, then the exercise of the due-on-sale clause is reasonable and not invalid as a restraint on alienation.

Plaintiff additionally contends that the language of the deed of trust does not permit defendant to accelerate the debt for the sole purpose of collecting a higher interest rate upon a transfer of the security property. This contention is without merit. The language of the contract is unambiguous:

“[I]f the property herein conveyed is transferred without the written assent of Association, then . . . the full principal sum with all unpaid interest thereon shall at the option of Association, its successors or assigns, become at once due and payable without further notice and irrespective of the date of maturity expressed in said note.”

This language does not purport to restrict Association from withholding assent and accelerating except for security purposes. Where the terms of the contract are not ambiguous, the express language of the contract controls in determining its meaning and not what either party thought the agreement to be. Howell v. Smith, 258 N.C. 150, 128 S.E. 2d 144 (1962); Casualty Co. v. Teer Co., 250 N.C. 547, 109 S.E. 2d 171 (1959).

Plaintiff’s final contention is that G.S. 25-1-208 precludes defendant from accelerating the debt. Assuming arguendo that this statute applies to contracts involving land, we note that it imposes a “good faith” standard on the creditor where it is agreed that he may accelerate the debt at his option. Where the acceleration clause purports to give the creditor the right to accelerate “at will” or “when he deems himself insecure” or in words of similar import, the creditor may accelerate only if he has a “good faith” belief that the prospect of payment or performance is impaired. “Good faith” is defined in G.S. 25-1-201(19) as “honesty in fact in the conduct or transaction concerned.” G.S. 25-1-208 imposes this “good faith” standard only on insecurity-type clauses. These clauses are clearly distinguished from default-type clauses (such as the due-on-sale clause involved in our case) where the right to accelerate is conditioned upon the occurrence of a condition which is within the control of the debtor. See Volkmer. For this reason G.S. 25-1-208 is inapplicable to our case and provides no relief for plaintiff.

The amicus curiae brief, in addition to presenting an argument under state law similar to that of defendant, asserts that federal law preempts the field insofar as “due-on-sale” clauses in loan instruments of federal savings and loan associations are concerned. The amicus curiae then argues that under federal law the due-on-sale clause involved in this case is valid. At no time have the parties in this action addressed themselves to the question of the applicability of federal law or incorporated by reference the amicus curiae brief. Under Rule 28, N. C. Rules of Appellate Procedure, 287 N.C. 669, 741 (Appendix 1975), appellate review is limited to the arguments upon which the parties rely in their briefs. Moreover, the amicus curiae argues only one side of the federal question and does not fully present the evidence necessary for a determination on this issue. Under these circumstances the question of the applicability of federal law is not properly presented for consideration.

We conclude that the trial judge should have rendered summary judgment for defendant and his decision must be

Reversed.