Lake v. Equitable Savings & Loan Ass'n

SHEPARD, Justice,

dissenting.

I am required to dissent because I believe the opinion of the majority fails to address the public policy question presented here and provides no rationale whatsoever for the decision, but rather contents itself with string citations and references to the specious “reasoning” of the United States Supreme Court in Fidelity Federal Savings Loan Association v. De LaCuesta, 458 U.S. 141 , 102 S.Ct. 3014 , 73 L.Ed.2d 664 (1982). As has been said in another context, the *928 lack of reasoning and rationale makes today’s opinion similar to a clock which strikes thirteen: not only is the instant pronouncement suspect, but its future pronouncements will be viewed with suspicion.

I deem it important to review what is actually at issue. The lender here purports to be able to control entirely the property which stands as security for the loan. The lender, in its prepared document, forbids not only the transfer of title to the property, but also any possession thereof, by anyone other than the borrower. Insofar as the document is concerned, it governs all situations, is sweeping and all-inclusive. Taken literally, it prohibits the property owner from renting his property, from entering into a contract of sale, from making a gift, and perhaps even from a transfer upon his death. In short, the terms of the document cannot reasonably be viewed as anything but a complete and absolute prohibition upon the alienation of the property. The lender in Fidelity Federal Savings & Loan Association v. De LaCuesta, supra, at least had the compassion to exclude from its control of that property “(a) the creation of a lien or encumbrance subordinate to this Deed of Trust, (b) the creation of a purchase money security interest for household appliances, (c) a transfer by devise, descent or by operation of law upon the death of a joint tenant or (d) the grant of any leasehold interest of three years or less.” See fn. 2, 102 S.Ct. at p. 3018 , Fidelity Federal, supra.

I must agree with the majority’s holding that Fidelity Federal Savings & Loan Association v. De LaCuesta, supra, is inapplicable to this case, since the lending institution here is not a federal savings and loan association. I also must agree with the majority’s decision as to the non-applicability of the Garn-St. Germain Depository Institutions Act of 1982. My agreement, however, should not be construed to mean that I join in the majority’s adoption of the “rationale” of Fidelity Federal. That opinion, as pointed out in the dissent of Mr. Justice Rehnquist, is enormously far-reaching and, boiled down to its essence, holds that the pronouncement of three bankers will preempt the laws of 50 states relating to real property conveyancing and the equity powers of state judges to control foreclosure proceedings in their own courts. In my view, such preemption doctrine is neither necessary nor desirable, is blatantly in conflict with basic tenets of federalism contained in the tenth amendment to the United States Constitution, and cannot but redound to the detriment of our federal system of government.

The opinion is purportedly grounded in congressional enactment of 1933 (HOLA). How incongruous! That legislation of the great depression, designed to provide relief from “home mortgage indebtedness” and the “burden of excessive interest” and to permit the people “to finance their homes and the homes of their neighbors,” is now warped in its intent by the allowance and requirement of the exaction of excessive interest, making home financing difficult if not impossible, and stultifying the national real estate market. The Garn-St. Germain legislation is no less an unconstitutional invasion of our federal-state system of government and cannot be viewed as anything but blatant special interest legislation at the expense of the public.

At bottom, the instant case reduces to a question of whether Idaho courts, exercising their equitable jurisdiction in foreclosure actions, are to be bound by the provisions of a due-on-sale clause or whether they are, depending upon the circumstances, free and able to rule that such clauses are void or voidable as a matter of public policy as being unreasonable restraints on alienation or an unconscionable advantage to a lender resulting from a contract of adhesion. Put another way, the question becomes whether that contract clause, regardless of the benefit to the lender, results in widespread and adverse consequences to the general public.

It is clear that restraints on alienation are disfavored in the law. Funk v. Funk, 102 Idaho 521 , 633 P.2d 586 (1982); Bellingham v. First Federal S. & L. Ass’n v. Garrison, 87 Wash.2d 437, 553 P.2d 1090 (1976). *929 “A ‘restraint on alienation’ is any provision in a trust or other instrument which, either by express terms or by implication, purports to prohibit or penalize the use of the power of alienation.” (Emphasis added.) Black's Law Dictionary, p. 1183 (5th ed. 1979). Simes and Smith define a restraint on alienation as follows:

“[T]he expression ‘restraint on alienation’ refers not merely to the restriction of the legal power of alienation, but also to the restriction of alienability as a practical matter. Any provision in a deed, will, contract, or other legal instrument which, if valid, would tend to impair the marketability of property, is a restraint on alienation.” Simes and Smith, The Law of Future Interests § 1111 (2d ed. 1956).

See also Volkmer, “The Application of the Restraints on Alienation Doctrine to Real Property Security Interests, 58 Iowa L.Rev. 747 (1973).

It does not require the application of esoteric economic principles to understand that when, in today’s marketplace, an owner of real property encumbered by a mortgage or trust deed is desirous of or required to sell that property, his power of alienation is severely penalized by a due-on-sale clause. If that owner-seller has a buyer who is equally creditworthy to himself and who is willing to pay the fair value of the property and undertake the obligation of the mortgage or trust deed, assuredly, either the buyer or the seller, or both, will be penalized by the due-on-sale provision. Either the seller will be required to reduce the price of the property below the fair value, or the buyer will be forced to pay a bonus windfall to the lending institution. Usually, the former alternative will be the case. As stated in Wellenkamp v. Bank of America, 21 Cal.3d 943 , 148 Cal.Rptr. 379 , 582 P.2d 970, at 974-75 (1978),

“The availability of new financing often depends upon general economic conditions. In times of inflation, when money is ‘tight’ and funds available for real estate loans are in short supply, new financing may be difficult, if not impossible to obtain. The same result may occur when interest rates andthe transactional costs of obtaining new financing are high, making it economically unfeasible for the buyer to acquire a new loan. When economic conditions are such that new financing is either unavailable or economically unfeasible, the seller and buyer will normally agree to a form of financing arrangement wherein the buyer will assume the seller’s loan. In such circumstances, if the lender is unwilling to permit assumption of the existing loan, and instead elects to enforce the due-on-sale clause, transfer of the property may be prohibited entirely, because the buyer will be unable to substitute a new loan for the loan being called due, and the seller will not receive an amount from the buyer sufficient to discharge that loan, particularly when the balance due is substantial. [Citation.] Even when the lender is willing to waive its option to accelerate in return for the assumption of the existing loan at an increased interest rate, an inhibitory effect on transfer may still result. The buyer, faced with the lender’s demand for increased interest, may insist that the seller lower the purchase price. The seller would then be forced to choose between lowering the purchase price and absorbing the loss with the resulting reduction in his equity interest, or refusing to go through with the sale at all. In either event, the result in terms of a restraint on alienation is clear. (See Note, Judicial Treatment of the Due-On-Sale Clause: The Case for Adopting Standards of Reasonableness and Unconscionability (1975), 27 Stan.L. Rev. 1109, 1113.)”

Hence, it is clear to me that the enforcement of the due-on-sale clause under the instant circumstances constitutes an unreasonable restraint on alienation. Here, there is no assertion that the lender’s degree of risk is increased due to the lesser creditworthiness of the Lakes, or that there is any danger of waste to the property. Rather, the lender is blunt to argue that it should be allowed to recoup from either the Lakes or the Norfleets a sum sufficient to insulate it from its poor judgment in originally lend *930 ing at what it now perceives as too small an interest rate. Therefore it should be allowed to earn a return on its investment closer to or equal to the now-going interest rate.

It cannot be gainsaid that the instant deed of trust, and indeed almost all similar transactions, constitute contracts of adhesion much like contracts of insurance. The borrower is economically disadvantaged; he is not able to “shop around” to other institutions who, in any case, will demand the same provisions; the documents are drafted by and are standard with lending institutions; the due-on-sale clause is hidden away in the body of the document and seldom, if ever, called to the attention of, or the impact thereof explained to, the borrower; in contrast with other times and with other types of contracts, the borrower rarely consults an attorney regarding the legal impact of the contract; and lastly but importantly, because of superior economic knowledge in planning, the lender understands while the buyer does not that the lender anticipates that it will gain a considerable economic advantage if, as demonstrated by its averages, the properties will turn over every five to seven years.

The majority here adopts the “reasoning” of Fidelity Federal, supra, wherein it is asserted that allowing lending institutions to prevent sales by their enforcement of due-on-sale clauses will somehow make more mortgage money available. Such is, of course, fatuous nonsense. As in the instant case, if the new buyers are allowed to assume the seller’s obligation, the entire indebtedness will not be paid off nor will the lending institution be allowed to reloan those moneys, but rather the bank will simply extract from the new buyers a monthly increase in the amount of interest. Some argument is also made regarding the poor secondary market for mortgages. If that indeed is the case, it is a sad commentary that federal agencies such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, which are purportedly concerned with the public interest, not only permit but require due-on-sale clauses. Last, but not least, is the suggestion advanced in Fidelity Federal, supra, that state-chartered lending institutions in the state suffered substantial' losses by reason of the elimination of due-on-sale clauses in Wellenkamp, supra. In my opinion, that assertion demonstrates only the ability of the court to seize upon and adopt, without examination, statements put forth by parties who admittedly have a large stake in the outcome of litigation such as Wellenkamp and the present case. If the lending institutions did indeed sustain a loss, and if that loss is attributable to elimination of the due-on-sale clauses, it is probative of one thing and one thing alone, i.e., that the institutions were no longer able to obtain that large amount of money from unwary borrowers or their assignees. It tells absolutely nothing as to whether the due-on-sale clause should, as a matter of policy, remain part of our economic scene. It states only that, if an institution has profitably engaged in unconscionable practices and is forbidden to do so, its business will not no longer be quite as profitable.

The proper holding in the instant case is that which has been reached not only in Wellenkamp but in other jurisdictions, i.e., that the acceleration clause is an unreasonable restraint, unless there is a clear showing that enforcement is necessary to protect the lender’s security. See Patton v. First Fed. Sav. & Loan Ass’n, 118 Ariz. 473 , 578 P.2d 152 (1978); Bellingham First Federal Savings & Loan Association v. Garrison, 87 Wash.2d 437 , 553 P.2d 1090 (1976); Sanders v. Hicks, 317 So.2d 61 (Miss.1975); United States v. Angel, 362 F.Supp. 445 (E.D.Pa.1973); Baltimore Life Insurance Co. v. Harn, 15 Ariz.App. 78 , 486 P.2d 190 (1971); Clark v. Lachenmeier, 281 So.2d 583 (Fla.App.1970). Cf. I.C. § 28-1-208.

As stated in Continental Fed. Sav. & Loan Ass’n v. Fetter, 564 P.2d 1013, 1018 (Okl.1977), “Whatever restraint is larger than the necessary protection of the party can be of no benefit to either; it can only be oppressive, and if oppressive[,] it is, in the eye of the law, unreasonable.” I again insist that what is at issue here is the proper public policy for the State of Idaho *931 m its law of conveyancing and its law regarding the equity powers of our courts in foreclosure proceedings. It is clear from our state’s strict regulation of banking, saving and insurance institutions that they must be conducted in conformance with public interest. Here, it is asserted that such institutions need have no concern for anything but their own profitability and that whatever results flow from these transactions are risks to be assumed by the public. I disagree. In a time of increasing interest cost, the borrower finds himself unable to convey unless an interest premium is paid. In a time of falling interest, a borrower is prevented from refinancing by obtaining a loan at lower interest and paying off the original loan without likewise paying the original lender a premium/penalty for prepayment. The home owner is placed at the mercy of forces he does not understand and cannot control or plan against. I find it nothing short of incredulous that such practices and procedures can be viewed as in the “public interest.”