Opinion ID: 1720745
Heading Depth: 1
Heading Rank: 2

Heading: enforcement of the due-on-sale clause

Text: A threshold issue in this case is whether federal law preempts any Alabama law limiting the enforceability of due-on-sale clauses. In 1976 the Federal Home Loan Bank Board issued a regulation, now 12 CFR § 545.8-3(f) (1982), confirming the authority of federal savings and loan associations to include due-on-sale clauses in mortgage contracts. Recently the United States Supreme Court has held that this regulation was meant to pre-empt conflicting state limitations on the due-on-sale practices of federal savings and loans, Fidelity Federal Savings & Loan Association v. de la Cuesta, ___ U.S. ___, 102 S.Ct. 3014, 3025, 73 L.Ed.2d 664 (1982). This preemption argument has only been asserted on appeal. Phenix Federal never cited the federal regulation and never otherwise argued preemption at the trial level. Moreover, in this case federal preemption operates as an affirmative defense that is waived if not pleaded. Rule 8(c), Alabama Rules of Civil Procedure; Robinson v. Morse, 352 So.2d 1355 (Ala.1977). Since the federal regulation cannot be applied here, the trial court correctly relied on Tierce v. APS Co., 382 So.2d 485 (Ala. 1980), for the applicable standard of law. In that case APS Co. sold an apartment complex it held under mortgage, and the mortgagee began foreclosure proceedings based on the due-on-sale clause. We reversed the trial court's granting of an injunction against foreclosure. The determinative issue was whether a due-on-sale clause is per se invalid, unless a separate consideration has been given for it, when the mortgagee's primary purpose for accelerating payment is to obtain a higher interest rate, id. at 486. We found this to be a valid business purpose, subject to certain limitations: We further recognize that `due-on-sale' clauses are not enforceable in every situation since mortgage foreclosure is generally an equitable matter; thus a court of equity might refuse to foreclose a mortgage when acceleration of the due date for payment of the note secured by it would render the acceleration unconscionable and the result would be inequitable and unjust. Id. at 487. We concluded that there was no evidence foreclosure would be unconscionable, noting that APS Co.'s own attorney had prepared the mortgage. See also McJenkin v. Central Bank of Tuscaloosa, N.A., 417 So.2d 153 (Ala.1982) (temporary injunction granted against foreclosure to enforce due-on-sale clause). Our scope of review is limited. Granting injunctive relief under Rule 65, A.R.Civ.P., is within the trial court's sound discretion, especially when the facts are in dispute and evidence was presented ore tenus. Paint Rock Properties v. Shewmake, 393 So.2d 982 (Ala.1981); City Council of City of Prichard v. Cooper, 358 So.2d 440 (Ala.1978). The trial court's exercise of its discretion is subject to reversal when it is in violation of some principle of equity or based on misapprehension of controlling law. Lorch, Inc. v. Bessemer Mall Shopping Center, Inc., 294 Ala. 17, 20, 310 So.2d 872 (1975); McJenkin v. Central Bank of Tuscaloosa, N.A., supra . Examination of the judgment below reveals that the trial court misapprehended the law as stated in Tierce, supra . Its factual findings were relevant to whether the due-on-sale clause was triggered, not to whether enforcement of the clause would be inequitable in light of the particular factors cited by the parties. The trial court's only finding specifically directed to the Tierce standard simply concerned the validity of the purpose for acceleration: Phenix Federal has accelerated the outstanding loan balance because the interest rate it has to pay to obtain monies for lending have increased. This is the reason for Phenix Federal's acceleration of the sum due. The acceleration is for a valid business purpose. The trial court concluded that the Tierce case is dispositive and requires that the plaintiff's petition be denied. We disagree. In view of the factual differences between the two cases, Tierce could be dispositive here only if it held that a due-on-sale clause is enforceable whenever the lender accelerates to obtain a higher interest rate, regardless of other circumstances. The Tierce opinion cannot be read in this way, because it gave separate consideration to the question of enforceability after determining that the lender's valid business purpose was to obtain a higher interest rate. The trial court may also have taken the view that Tierce was dispositive because the due-on-sale clause in this case specifically allows the lender to demand a higher interest rate as a condition to waiving its acceleration rights. Thus, no question arises here of a hidden purpose to raise the interest rate. This question was important to the dissenters from denial of rehearing in Tierce and to the Court of Civil Appeals in First Southern Federal Savings & Loan Association of Mobile v. Britton, Ala.Civ.App., 345 So.2d 300 (1977), which was overruled by Tierce. The Tierce majority opinion itself did not reach this question because the instrument construed lacked the specific language used here. We must determine, then, whether use of a due-on-sale clause to obtain a higher interest rate is permissible whenever the mortgage instrument so provides. In other words, we must determine whether the mere presence of specific language in the mortgage precludes further inquiry into the equities of any case where the lender's actual purpose is to increase the interest rate. In our view to preclude as a matter of law further inquiry into enforcement of the clause would unduly limit the traditional oversight powers of courts of equity. For the reasons discussed below, this may be a case in which further inquiry is appropriate. Therefore, we find it necessary for the trial court on remand to separately consider whether acceleration would be inequitable or unconscionable in the particular circumstances presented. The Tierce opinion did not define what circumstances would render enforcement of a due-on-sale clause inequitable or unconscionable. In addition this case differs from Tierce and from most other due-on-sale clause cases in that here the mortgagor sold only a part of the property. To assist the trial court in applying the Tierce standard to the facts presented here, we make some further observations on that standard. In Tierce we upheld the lender's desire to obtain a higher rate of interest on transfer because we found that doing so is a legitimate way for a lender to pass on its costs: With the tremendous rise in interest rates, lenders are forced to try to obtain higher interest rates because they are forced to pay higher interest in order to obtain funds for lending.... `Finally analyzed, the situation here is simply that [the mortgagors] can sell their property at a higher price if they can sell it at the lower interest rate.... In this situation equity should not depart from the law which requires it to enforce valid contracts and strike down the acceleration option simply because its exercise will let the [mortgagees], not the [mortgagors] make the profit on the interest rate occasioned by the increased cost of money.' Id. at 488, quoting Gunther v. White, 489 S.W.2d 529, 532 (Tenn.1973). See also Subcommittee on Due-On Clauses of the Committee on Real Estate Financing, Section of Real Property Probate and Trust Law, American Bar Association, Enforcement Of Due-On-Transfer Clauses, 13 Real Prop. Prob. & Trust J. 891, 916, 925-29 (1978). In these cases both parties have an investment interest to protect, and in Tierce we simply allowed the parties to place some economic risk on the mortgagor, who may still be better off than he would be with a variable rate mortgage. Indeed, from a policy perspective, due-on-sale clauses may benefit not only lending institutions but also borrowers as a class. If market forces operate, lower mortgage rates should result from a reduction in the average time a mortgage loan is outstanding, which reduces the interest rate risk to which lenders are subject in any fixed rate mortgage. Dunham v. Ware Savings Bank, 384 Mass. 63, 423 N.E.2d 998, 1001-2 (Mass.1981). Moreover, due-on-sale clauses remove the advantage otherwise held by sellers who happen to be able to offer low interest mortgages and by buyers who have sufficient net worth to more easily assume existing mortgages. G. Osborne, G. Nelson and D. Whitman, Real Estate Finance Law 307-8 (1979). Tierce involved a commercial mortgage, but its holding is beneficial from the borrower's point of view in the context of residential mortgages as well. A residential mortgagor has not only an investment interest to protect but also an interest in keeping his home as a place to live. From this standpoint a due-on-sale clause is a reasonable compromise between a variable rate mortgage, which gives the borrower no protection against economic forces that may make his home unaffordable, and a fixed rate, assumable mortgage, which a lender might accept only at an interest rate that the borrower could not afford from the outset. With the due-on-sale clause in a fixed rate mortgage, the borrower is free from the effects of rising interest rates until he decides to sell and no longer needs his home as a place to live. At this point he may experience some difficulty in selling the home without a considerable reduction in the sale price. Such an outcome is reasonable for a residential mortgagor for whom investment considerations are secondary. Usually, at least in the residential setting, the borrower is concerned most with his immediate cost ... not ... with his mortgage as a method for facilitating a future sale of his home. Real Estate Finance Law, supra, at 307. So long as the homeowner continues to own and occupy the house, he is interested in the protection against call, in the preservation of his right not to pay more than the level monthly payment fixed at the outset. Williams v. First Federal Savings & Loan Association of Arlington, 651 F.2d 910, 924 (4th Cir. 1981). This perspective is important in any case where a homeowner seeks to keep his residence as a place to live by transferring some other parts of the property under mortgage. Clearly, the due-on-sale clause's effect on the interests to be balanced by a court of equity would be different in the case of a property owner seeking to keep unimproved land. It is from this perspective that the trial court must consider whether enforcement of the due-on-sale clause here would be unconscionable or inequitable. We emphasize that this approach is consistent with a focus on the reasonable expectations of the mortgagor at the time a mortgage loan is made. Real Estate Finance Law, supra, at 307. Such scrutiny by a court of equity need not amount to rewriting the mortgage contract. Accordingly, we remand the case for the trial court to make further findings in accordance with this opinion. REVERSED AND REMANDED. EMBRY and ADAMS, JJ., concur. TORBERT, C.J., and MADDOX and SHORES, JJ., concur specially. FAULKNER, JONES and ALMON, JJ., concur in the result.