First Federal Savings & Loan Ass'n of Rapid City v. Clark Investment Co.

322 N.W.2d 258, 1982 S.D. LEXIS 353
South Dakota Supreme Court·Decided July 21, 1982·No. 13616·Published·Cited by 13 cases

Opinions

FOSHEIM, Justice.

First Federal brought a mortgage foreclosure action against mortgagors Clark Investment Company and William E. Clark and other named defendants based on the due-on-sale clause contained in the long-term redemption mortgage, executed November 8, 1971, First Federal held on the mortgaged property. First Federal also sought enforcement of a separate assignment of rents agreement it had with mortgagors Clark Investment Company and William E. Clark and for attorney fees incurred in the commencement and prosecution of this action. The trial court entered a Partial Judgment and Decree of Foreclosure, ordering the mortgaged property sold and awarding First Federal $6,592.40 in attorney fees. Subsequently the trial court entered a Supplemental Judgment, ordering the assignment of rents agreement enforced and directing that First Federal make proper accounting, as provided by law, to defendants and the court upon conclusion of the foreclosure proceedings. The ordered sale was conducted by the Sheriff of Hughes County. First Federal, the only bidder, purchased the property; there was no deficiency. Clark Investment Company and William E. Clark (appellants) appeal from the Judgments and Order Confirming Sale. We affirm in part, reverse in part, and remand.

The first issue is the enforceability of the due-on-sale clause. In First Federal Savings & Loan Association of Rapid City v. Kelly, 312 N.W.2d 476 (S.D.1981), we held that in the case of a 180-day redemption mortgage, executed pursuant to SDCL ch. 21-49, the lender need not show an impairment of security before its rights under a due-on-sale clause can be enforced. In Kelly, as in this case, appellants argued that a due-on-sale clause is a restraint on alienation. In Kelly, citing Occidental Savings and Loan Association v. Venco Partnership, 206 Neb. 469, 293 N.W.2d 843 (1980), we stated:

Since historically the law has abhored any unreasonable or inequitable restraints on the alienation of property, and the purpose of a due on sale clause is to protect the lender’s security, these courts have generally concluded that absent any such impairment, the lender cannot prevent the borrower from transferring the property involved to a third party. Inherent in this rationale is the premise that due on sale clauses are, at least, an indirect restraint on alienation and thus violative of public policy.

Kelly, supra at 479. In Kelly we said we were precluded from deciding whether a due-on-sale clause constitutes a restraint on alienation due to the explicit language of SDCL 21-49-13(7).1 Kelly also noted that SDCL ch. 43-5, relating to restraints on [260] alienation of property, contains no reference to due-on-sale clauses.

Appellants attempt to avoid the result in Kelly by arguing that this case concerns a long-term redemption mortgage and therefore Kelly is inapplicable. We do not consider this distinction persuasive in light of SDCL 44-8-27 and 28,2 enacted by the 1981 Legislature, defining a due-on-sale clause and allowing its enforcement if the real estate mortgage contains such a clause. While appellants concede that a due-on-sale clause is not per se against public policy (we note SDCL 44-8-27 and 28 are conclusive as to that), they do argue that, absent a showing of impairment, enforcement is an unreasonable restraint on alienation. Since we did not expressly address this issue in Kelly, we will do so now.

In support of their position appellants refer to numerous cases cited in Kelly, and particularly to Dawn Investment Co., Inc. v. Superior Court, Etc., 30 Cal.3d 695, 180 Cal.Rptr. 332, 639 P.2d 974 (1982). Dawn continues the line of recent California cases3 holding that the enforcement of a due-on-sale clause is an unreasonable restraint on alienation absent a showing of impairment of security or risk of default. California has based its holding of unreasonable restraint on its interpretation of Civil Code § 711, which provides: “Conditions restraining alienation, when repugnant to the interest created, are void.” This statute was adopted by the Dakota Territory Legislature, and subsequently by South Dakota, verbatim from the California code. See Territory of Dakota Revised Civil Code 1883, § 200. South Dakota’s current codification of § 711 is SDCL 43-3-5.4 Appellant urges this court to interpret SDCL 43-3-5 as California has interpreted its § 711, and to hold the due-on-sale clause unenforceable absent a showing of security impairment or risk of default. Although many of our statutes have been lifted in whole or in part from California codes, and this court has often looked to the California courts for guidance in interpreting those statutes, we decline to follow California in this instance. We conclude that a due-on-sale clause is not a direct or indirect restraint on alienation. In Occidental Savings & Loan Assn., supra, 293 N.W.2d at 848, the Nebraska Court said that “[t]he restraint, if any, in this case does not attach itself to the title and the conveyance thereof but rather to the mortgage and the assumption thereof. The lender never promised the seller that another could assume the mortgage; as a matter of fact, it told the seller the contrary.” We follow the rationale of that decision.5

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First Federal Savings & Loan Ass'n of Rapid City v. Clark Investment Co., 322 N.W.2d 258, 1982 S.D. LEXIS 353 (S.D. 1982).

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First Federal Savings & Loan Ass'n of Rapid City v. Clark Investment Co.
322 N.W.2d 258 (South Dakota Supreme Court, 1982)