Half-Way Mark Reached in the Demise of the Inequitable Application of the “Due-On-Sale” Clause

such that a contract containing the clause would be void. 7 The lender in Coast Bank had not sought to foreclose because the borrower transferred the property without his permission, but rather because the borrower was in default in payment of his note.' 8 The court was observing the clause in the abstract. There was no application of the clause to be considered by the court. As noted in the next case to be considered, it is not so much the clause itself, but the lender's application of it that may effect an invalid restraint on the alienation of property. 19 La Sala-A NEW BURDEN OF PROOF FOR LENDERS The second of the high court's three decisions was La Sala v. American Savings and Loan Association, 2 0 decided in October, 1971. In this case, properties of two named plaintiffs were subject to deeds of trust. The defendant was the beneficiary in each case. Each of the plaintiffs negotiated a, junior encumbrance, secured by a second deed of trust, on his respective property. The defendant sent each a notice that it would waive its right to accelerate the due date for the note in exchange for a fee and a substantial increase in the interest rate on the note. Plaintiffs' action was framed as a class action. After the suit was filed, the defendant offered to waive enforcement of the provision as to the two named plaintiffs. The trial court then dismissed the action, reasoning that there were no longer representatives of the class before the court. The Supreme Court reversed, holding that notice must be given to the class before dismissal. The court proceeded further to discuss the due-on-encumbrance clause,2' which provided for acceleration of the due date of the note upon any further encumbrance of the property without the prior consent of the lender. The court reasoned that the due-onencumbrance clause was not invalid in the abstract. 22 In those instances in which enforcement is necessary to protect the lender's security, the restraint on alienation remains reasonable and lawful; however, when enforcement is unnecessary to protect the security but is used instead to exact collateral benefits, the clause must be held an unlawful restraint on alienation. 23 17. Valensi, The Due on Sale Clause-a Dissenting Opinion, 45 L.A. BAR BULL. 121, 124 (Jan. 1970). 18. Id. at 123-24. 19. La Sala v. American Say. & Loan Assn., 5 Cal. 3d 864, 489 P.2d 1113, 97 Cal. Rptr. 849 (1971). 20. Id. 21. Supra, note 3. 22. 5 Cal. 3d at 882, 489 P.2d at 1124, 97 Cal. Rptr. at 860. 23. Id. at 882, 489 P.2d at 1124, 97 Cal. Rptr. at 861. [VOL. 3: 111, 1975] Due on Sale Clause PEPPERDINE LAW REVIEW As a result, the burden of proof now lies with the lender who would accelerate upon authority of the due-on-encumbrance clause to show that the subsequent encumbrance endangers his security. This requires a case-by-case analysis, which this writer applauds. In concluding its opinion, the court inserted the following obiter dictum, dealing with the sale of encumbered property: ... [We] have concluded that the lender may insist upon the automatic performance of the due-on-sale clause [upon the sale of the property] because such a provision is necessary to the lender's security. This language is unfortunate, to the extent the court may be reluctant to change the position it has adopted, even though only