Wellenkamp v. Bank of America

CLARK, J., Dissenting.

Holding that exercise of a “due-on clause” upon outright sale of real property unreasonably restrains that sale, the majority opinion either misreads or rejects the very decisions on which it relies, particularly Tucker v. Lassen Sav. & Loan Assn. (1974) 12 Cal.3d 629 [ 116 Cal.Rptr. 633 , 526 P.2d 1169 ]. Additionally, the majority opinion awards the owner of encumbered real property a bonus in that he can now sell his property for something in excess of what he could sell it for if unencumbered.

We have thus come full circle. In attempting to take away contractual rights of lenders in order to assist borrowers in selling encumbered properties, the majority opinion has devised a scheme which affords yesterday’s borrower a clear advantage over today’s seller who comes to the marketplace with his property free from encumbrance. But our beneficence may be shortsighted. For in attempting to assist the Wellenkamps, the majority opinion must necessarily restrict if not dry up mortgage funds otherwise available to the next generation of borrowers.

I briefly review the route by which we arrive at the threshold of today’s decision. In Coast Bank v. Minderhout (1964) 61 Cal.2d 311 [ 38 Cal.Rptr. 505 , 392 P.2d 265 ], our unanimous court agreed that reasonable restraints *955 on alienation of real property were lawful, and held that it was reasonable for a lender to condition its continued extension of credit to borrowers “on their retaining their interest in the property that stood as security for the debt.” (Id., at p. 317.)

In La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864 [ 97 Cal.Rptr. 849 , 489 P.2d 1113 ], we dealt with a due-on-encumbrance clause and distinguished Coast Bank . We first noted that enforcement of a due-on-sale clause as in Coast Bank was justified because of lender concern for a borrower’s continued interest in maintaining the property, but concluded that because the creation of a junior encumbrance in the property did not terminate the borrower’s continuing interest, enforcement of the due-on clause was not necessary to protect the lender. We held that enforcement of a due-on-encumbrance clause could thus be an unreasonable restraint on alienation. (Id., at p. 880.) However, a near unanimous court noted that if particular circumstances indicated the lender’s security was endangered “the enforcement of the due-on-encumbrance clause may be reasonably necessary . . .” (id., at p. 881), relying on Coast Bank (id., at p. 882).

Finally, in Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d 629 , we dealt with a due-on clause in the context of a proposed installment sale contract. We reviewed the existing law, refined the rules announced in Coast Bank and La Sala and proclaimed that the reasonableness of a restraint on alienation is to be measured by balancing the quantum of resulting restraint when a borrower is forced to comply with a due-on clause, against the justification for the restraint, that is, the measure of the hazard to the lender’s security should the property be alienated as proposed. We unanimously concluded that the restraint was not reasonably justified when weighed against the quantum of restraint imposed on the borrower in an installment sale context. But as in La Sala we reaffirmed Coast Bank by demonstrating decreased justification for—and increased quantum of restraint in—an installment sale when compared with an outright sale. (Id., at p. 638.)

The majority opinion now proposes to abandon what Coast Bank, La Sala and Tucker have taught us. Having recognized the due-on clause in junior encumbrances and installment sales to constitute unreasonable restraints only because they were deemed to require striking a different balance from that in an outright sale, the majority opinion leaps to the conclusion that a due-on clause in an outright sale is unenforceable, thus obliterating our prior distinction.

*956 While the majority opinion purports to weigh justification for restraint against quantum, it errs by failing to accurately weigh relevant factors. It first recognizes that if “automatic exercise of the clause in these circumstances results in little, if any, restraints on alienation, we need not reach the question whether there exists justification sufficient to warrant enforcement.” (Ante, p. 949.) It then purports to weigh the restraint which may result to the seller. In doing so, it must guess the marketplace. It imagines a market condition whereby money is “tight” or unavailable, and lenders are reluctant to loan except at interest rates higher than that at which the seller is obligated on an older existing loan. Exercise of a due-on clause in such circumstances, the opinion argues, restrains the seller because he cannot sell except by taking cash or a note for his “equity.” If the lender is unwilling to permit assumption of its loan at the original interest rate, the seller is unreasonably restrained from selling his house. So it is argued.

What the majority opinion fails to recognize is that the “restraint” in its hypothetical case results not from exercise of the contractual clause but rather from the bleak and unpredictable economic conditions it paints. Of course, whenever money is tight and interest rates are high, a brake on those sales requiring financing naturally results. 1 A seller possessing property and a buyer lacking sufficient funds can seldom do business if financing is unavailable. It may be they cannot do business at all because of the seasonal unavailability of funds to the prospective buyer. 2 If they can do business other than by a contract of sale it follows that the buyer must pay the going interest rate and the seller, as an incentive to the buyer, may be required to reduce the selling price. If a loan exists on the property with a due-on clause, no increased restraint on selling results if the lender cannot accept the proposed buyer, the situation then being the same as in the case of the unavailability of funds to the proposed buyer. If the lender will permit assumption but only at an increased interest rate, again no increased restraint results because without the existing loan the buyer would be required to pay the higher interest rate and the seller may be required to compromise his selling price. There is thus no increased restraint on alienation beyond that inherent in the economic conditions *957 postulated by the majority. But is it the province of this court to predict the unpredictable?

The net result of the majority opinion is best illustrated by analyzing the real effect on all parties upon denying the lender its contractual right to exercise a due-on clause. As we have noted, in a tight money market, the seller of unencumbered real property is already seriously handicapped. However, if his neighbor’s home possesses an existing loan with a now unenforceable due-on clause, that seller is granted an immediate competitive advantage. In spite of his original agreement, he can now “sell” the loan without regard to the lender’s wishes. His buyer has automatic financing where none is otherwise available. The interest he will be required to pay is less than market. Because that seller has a marketable, sought-after asset in the form of a low-interest transferable loan—something he never bargained for—he can ask for and expect to get additional considerations from his buyer. And the buyer may also look forward to the same advantage on resale. The loan has thus become not a restraint on alienation but a factor making salable what before could not be sold. 3

The majority opinion, after declaring the due-on clause imposes a serious restraint in the circumstances it postulates, proceeds to negate justification. It declares that factors this court has unanimously deemed to justify exercise of the clause in the past are of little consequence now. It acknowledges that we have—up to now—held that a lender could exercise a due-on clause on an outright sale to protect interests “which pertain to protection against impairment to the lender’s security, included preservation of the security from waste or depreciation and protection against the ‘moral risk’ of having to resort to the security upon default by an uncreditworthy buyer. (See Hetland, Real Property and Real Property Security: The Well-Being of the Law (1965) 53 Cal.L.Rev. 151, 170; see also Cal. Real Estate Secured Transactions (Cont.Ed. Bar 1970) § 4.56, p. 184.)” (Ante, p. 951.) However, the opinion dismisses such recognized usage with the gratuitous comment that “we are now convinced that, *958 although the original borrower/seller no longer retains an interest in the property after transfer of legal title in an outright sale . . . this fact does not necessarily increase the risk to the lender that waste or default will occur.” (Ante, pp. 951-952.) The majority refers to no authority in support of its conclusion that the mere fact of an outright sale “is not in itself sufficient to warrant enforcement” of a due-on clause “in the absence of a showing by the lender that such circumstances exist.” (Ante, p. 952.)

The lack of citation to authority in support of the majority’s conclusion is understandable in view of its purported but inaccurate application of principles enunciated in Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d 629 . In justification for holding a due-on clause unenforceable on sale of property by installment contract, the unanimous Tucker court stated: “Thus in the normal case the vendor, having received a small down payment and retaining legal title, has a considerable interest in maintaining the property until the total proceeds under the contract are received; in this he differs markedly from the vendor of property where there has been an outright sale.” (Tucker v. Lassen Sav. & Loan Assn., supra, 12 Cal.3d 629, 638 ; italics added.)

The majority opinion errs first in concluding that a due-on clause unreasonably restricts outright sale of property; errs again in concluding there is little or no justification for the clause, contrary to our earlier holdings. We err again in failing to recognize that lenders and borrowers, owners and prospective owners, should be allowed to run their own affairs with minimal governmental intrusion—particularly from this branch.

Appellant’s petition for a rehearing was denied September 20, 1978. Bird, C. J., and Mosk, J., were of the opinion that the petition should be granted.

If the sale does not require outside financing, there is no problem as there is money available to retire the outstanding loan. The majority opinion also recognizes there is no problem when a tight money market does not exist: “Thus, when new financing is available and economically feasible, a buyer will be able to arrange to pay the seller the purchase price in full,...” (Ante, p. 950.)

They could, of course, do business by a contract of sale. (Tucker v. Lassen Sav. & Loan Assn. (1974) 12 Cal.3d 629 [ 116 Cal.Rptr. 633 , 526 P.2d 1169 ].)

The majority cling to the thesis that its decision today serves to eliminate restraints on alienation. However, in footnote 7 ((ante, p. 951) it concedes its concern only for properties with existing financing to the disadvantage of unencumbered properties, when such properties are competing on the same market. In an attempt to justify its lack of equal concerns, it argues that sellers of unencumbered real property “have presumably benefitted from lower interest rates in achieving their position,” and now such advantage should be balanced in favor of those who have not benefited, they being the sellers of encumbered real property. The presumption by the majority is completely gratuitous —nothing in the record nor in sound reason supports it. The declared policy is manifestly one which would be better left to our Legislature.