Court Opinion

ID: 6703403
Source: CourtListenerOpinion
Date Created: 2022-07-20 22:15:08.110998+00
Date Added: 2024-06-11T16:01:25.214566
License: Public Domain

Justice Lake
dissenting.
On 13 February 1968, Domar Corporation made its note in the amount of $80,000 payable in monthly installments, with interest at 7 per cent, to First Federal Savings & Loan Association. The note was secured by a deed of trust on real estate on which several apartment houses, each containing numerous rental apartments, are located. The interest rate could not be changed so long as Domar owned the property and was not in default. The note provides for acceleration of its maturity at the option of the holder in event of failure of the maker to remain a member of the Association, default in the payment of any installment, or default “in the performance or observance of any of the covenants or agreements of any instrument now or hereafter evidencing of securing this note.”
The deed of trust contains covenants by the mortgagor that it will pay all taxes, keep the property insured, keep the premises in good order and not permit any waste thereof and will comply with the provisions of the note and the bylaws of the lending Association. The deed of trust provides for acceleration of the maturity of the note upon default in any of these respects and further provides that “if the property herein con*633veyed is transferred without the written assent of Association,” the maturity date of the note may be accelerated, at the option of the Association, and the deed of trust foreclosed.
It will be observed that the deed of trust does not contain a “covenant or agreement” by the maker of the note that it will not, without the assent of the Association, transfer the land. It merely provides that if such transfer occurs the Association may accelerate the maturity of the note. Consequently, a transfer of the land without the assent of the Association is not a default by the maker of the note “in the performance or observance of any of the covenants or agreements of any instrument * * * evidencing or securing” the note. Thus, the accelerating event stated in the note, itself, is not activated by such transfer of the land.
It will be further observed that the provision for acceleration of the maturity date of the note, upon transfer of the property without the assent of the Association, does not expressly extend to transfers by owners subsequent to the mortgagor. This provision is in a section of the deed of trust appearing under a caption reading: “With Respect to Repayment of the Indebtedness Hereby Secured and Performance of Mortgagor’s Other Agreements; With Respect to Foreclosure.” Apparently, the mortgagor was a corporation engaged in the development of real estate and the construction for resale of apartment houses and, possibly other residences, thereon. Since such mortgagor could reasonably be expected to transfer promptly such property to a grantee, intending to make it, in whole or in part, the home of the grantee’s family, the lending association could well be concerned with the identity of the first such transferee but have a less substantial interest in subsequent transferees who would, normally, take the property after the debt had been substantially reduced.
In the present instance, the accelerating event, as now construed by the money lender, is a “sleeper” provision, tucked away in the printed portion of the deed of trust so that its meaning, as now asserted by the money lender, would not readily catch the attention of a mortgagor, or a subsequent purchaser of the property, reading the deed of trust. A moderately alert and wary reader could easily assume the provision contemplated that the mortgagee’s assent to a subsequent conveyance would not be unreasonably withheld and that the provision was intended only to protect the mortgagee’s security. *634In my opinion, it would not readily occur to such a reader, usually a person inexperienced in real property development and financing, purchasing a home for his family, that this seemingly innocuous clause meant the money lender could refuse to consent to a sale of the property to a purchaser of unimpeachable credit and character and foreclose unless the money lender was paid a toll on the transaction.
If such be the meaning of the clause, as the majority opinion seems to hold, the demandable toll could be $1,000, or any other fixed lump sum, just as easily as it could be an increase in the interest rate. I recognize that the language used in the present deed of trust is without qualification and so is entirely susceptible of the construction the money lender and the majority opinion now put upon it. To prevent this clause from being a loan shark’s trap for the unwary borrower, it should state explicitly that it is intended to permit the money lender to increase the interest rate or to require any other penalty to be paid to the lender.
In the particular case before us on this appeal, the original mortgagor appears to have been a real estate developer and builder of houses for resale and the specific property was commercial in nature (apartment houses). Thus, this mortgagor and the Crocketts were engaged in dealing in and financing property commercial in nature. The more customary borrower from a savings and loan association is a prospective home owner, less sophisticated in the intricate patterns of real estate financing, contemplating a resale of the property as a remote possibility of secondary importance, or is a home owner compelled by some financial difficulty to borrow and limited in ability to shop about for the most favorable terms. The majority opinion makes no distinction between these types of borrowers and the rule it now establishes for the first time in this State is, apparently, intended to apply to all loans secured by mortgages or deeds of trust.
Provisions for acceleration of the maturity of a long term note, and for a resulting foreclosure of the deed of trust securing it, are fraught with danger of oppression of the debtor by the money lender. These instruments are, almost invariably, upon printed forms prepared by counsel for the money lender. Such provisions should be strictly construed. If there were no other reason for doing so, it is my view that the equitable relief against acceleration of the maturity of this note and foreclosure *635of the deed of trust should have been granted on the ground that the acceleration clause, properly construed, does not permit acceleration and foreclosure upon the facts here stipulated. There are, however, in my opinion, other sufficient reasons for affirming the judgment of the Superior Court.
The stipulated facts upon which the case was heard and determined in the Superior Court show (paraphrased and renumbered) :
(1) On 10 October 1968, eight months after the note and deed of trust were executed, Domar Corporation conveyed the property to Mrs. Crockett and her husband, its deed to them providing that the grantees “specifically assume and agree to pay the present unpaid balance of said indebtedness as part of the purchase price for this conveyance.”
(2) The defendant Association was not notified of and did not consent to this transfer prior thereto, but, on the day when the transfer to the Crocketts occurred, it was notified thereof by Domar Corporation. Five days later, the Crocketts, in. response to the defendant’s requirement that she do so, executed an “Assumption Agreement” which stated that the defendant consented to the conveyance of the premises to the Crocketts, and the Crocketts “hereby assume and agree to pay said mortgage indebtedness, evidenced by said note and mortgage and to perform all of the obligations provided therein.” (Again, it will be observed that neither in the deed of trust, nor in the note secured thereby, was there any covenant by the original mortgagor that it would not convey the land without the assent of the defendant Association. Thus, there was no “obligation” assumed by the Crocketts with reference to any retransfer of the property by them. It is not lightly to be assumed by us that this was an inadvertence of the draftsman of the deed of trust for it is, at least, equally reasonable to assume that the draftsman was carefully seeking to avoid an express covenant restraining the alienation of the property for fear that such covenant might be declared against public policy by this Court.)
(3) For nearly five years the Crocketts made regular payments upon the note to the defendant. Mr. Crockett then died. For two more years Mrs. Crockett continued to make all such payments to the defendant, there being no suggestion in the record that the defendant was requested to or did assent to the transfer of the property, by operation of law, to Mrs. Crockett as the surviving tenant by the entireties.
*636(4) On 24 April 1975, two years after the death of her husband, Mrs. Crockett contracted to convey the property to her co-plaintiffs, Mr. and Mrs. Proctor, the contract providing that it was contingent upon the ability of the purchasers “to assume First Federal 7% loan” and to obtain the written approval from the defendant Association of such assumption “at 7% interest.”
(5) Mr. and Mrs. Proctor are presently members of the defendant Association and have a loan from it which loan is “current.”
(6) The defendant Association refused to approve the transfer of the property and assumption of the loan by Mr. and Mrs. Proctor unless they would agree to pay “an increased rate of interest on said indebtedness.”
(7) This refusal of the defendant to consent to the requested transfer and assumption “is not based on fear that the security property may become impaired” or upon a desire of the defendant to maintain “direct responsibility of the current debtor (Mrs. Crockett).” (Of course, such transfer of the property and assumption of the indebtedness by Mr. and Mrs. Proctor would not release Mrs. Crockett from her liability to the defendant upon her own assumption of the indebtedness represented by the note of Domar Corporation.)
(8) As a result of the refusal of the defendant to consent to the conveyance to Mr. and Mrs. Proctor, without an agreement by them to pay a higher rate of interest upon the balance due on the note, Mr. and Mrs. Proctor refused to consummate the proposed transaction with the plaintiff, Mrs. Crockett.
(9) Mrs. Crockett “is willing to consummate the said transaction without being released from further liability to the defendant.”
(10) Mrs. Crockett’s contract with the Proctors provided for a sale of the property for $88,415.95, which was $24,500 in excess of the amount remaining unpaid on the note to the defendant. (Thus, that note had been reduced from $80,000 to approximately $55,000. Nothing in the record suggests that the mortgaged property has deteriorated in value so as to impair the defendant’s security.)
In this action the plaintiffs seek: (1) A declaratory judgment that the defendant’s refusal to consent to the transfer *637of the property is “arbitrary, unreasonable and capricious” and is in violation of G.S. 25-1-208; (2) a declaratory judgment that the provision in the deed of trust for acceleration of the maturity date of the note upon a transfer of the property without the consent of the defendant is unenforceable; (3) a preliminary injunction and a permanent injunction restraining the defendant from accelerating the maturity of the note in the event of a transfer of the property by the plaintiff Crockett; and (4) damages.
The Superior Court denied the defendant’s motion for summary judgment, granted a like motion by the plaintiffs and adjudged that “the defendant has no lawful right to call its loan due upon a transfer of the property securing said loan from the plaintiff Crockett to the plaintiffs Proctor.” The court reserved for trial the claim of Mrs. Crockett for damages.
The question for decision on this appeal (apart from the question of construction above discussed) is: Under the law of this State, may the holder of a note, secured by a deed of trust on real estate, accelerate the maturity of the note and foreclose the deed of trust upon a conveyance of the property by the owner of the equity of redemption without consent of the holder of the note, the deed of trust providing for such acceleration at the option of the holder and the only reason for the holder’s refusal to consent to the conveyance being the transferee’s refusal to agree to pay a higher rate of interest than that stated in the note?
This is a matter of first impression in this Court. There is substantial diversity among the decisions of the courts of other states which have considered the question.
Such acceleration provisions are commonly referred to as “Due-on-Sale Clauses.” One group of decisions takes the view that a “Due-on-Sale Clause” is not invalid per se, but its exercise will not be permitted unless the proposed transfer threatens the security interest of the holder of the note. Cases illustrating this view are: Tucker v. Pulaski Federal Savings & Loan Assoc., 252 Ark. 849, 481 S.W. 2d 725 (1972); Baltimore Life Ins. Co. v. Harn, 15 Ariz. App. 78, 486 P. 2d 190 (1971); LaSale v. American Savings & Loan Assoc., 5 Cal. 3d 864, 489 P. 2d 1113 (1971); Tucker v. Lassen Savings & Loan Assoc., 12 Cal. 3d 629, 526 P. 2d 1169 (1974); Clark v. Lachenmeier (Fla. Ct. App.), 237 So. 2d 583 (1970); Baker v. Loves Park Savings *638& Loan Assoc., 61 Ill. 2d 119, 333 N.E. 2d 1 (1975). A second view is that a “Due-on-Sale Clause” is valid when reasonable, a demand for higher interest not being sufficient, per se, to make the action of the lender unreasonable. This view is illustrated by Cherry v. Home Savings & Loan Assoc., 276 Cal. App. 2d 574 (1969); Malouff v. Midland Federal Savings & Loan Assoc., 181 Colo. 294, 509 P. 2d 1240 (1973); Gunther v. White, 489 S.W. 2d 529 (Tenn. 1973); Mutual Federal Savings & Loan Assoc, v. American Medical Services, Inc., 66 Wis. 2d 210, 223 N.W. 2d 921 (1974). A third view is that a “Due-on-Sale Clause” is valid and enforceable regardless of the lender’s reason for exercising his option to accelerate. Though the decisions in this group are not entirely clear, it is illustrated by Coast Bank v. Minderhout, 61 Cal. 2d 311, 392 P. 2d 265 (1964); and Stith v. Hudson City Savings Institution, 313 N.Y.S. 2d 804 (N.Y. Misc. 1970). Thus, the decisions by the courts of other states do not provide for us a clear guide. The majority opinion appears to adopt the third of these views.
It has long been settled that a clause in a note permitting the holder to accelerate its maturity and, thereupon, to foreclose a deed of trust securing the note, is not invalid, per se, and does not impair negotiability. Thus, in Walter v. Kilpatrick, 191 N.C. 458, 132 S.E. 148 (1926), a clause providing for acceleration of an entire series of notes upon failure of the maker to pay, when due, any note in the series, or interest thereon, was held valid and enforceable and not to impair the negotiability of the note. In Bizzell v. Roberts, 156 N.C. 272, 72 S.E. 378 (1911), in sustaining a similar provision for acceleration upon default by the maker in payments of an installment of his indebtedness, this Court, speaking through Justice Hoke, said:
“Authority here and elsewhere is to the effect that where a debt is payable in installments, and same is secured by a mortgage containing provision that the entire debt shall mature on failure to pay the interest or specified portions of the principal as it comes due, or any other reasonable stipulation looking to the care and preservation of the property or the maintenance of the lien thereon, such stipulation, in the absence of circumstances tending to show fraud or oppression or ‘unconscionable’ advantage, is enforceable as a valid contract obligation.” (Emphasis added.)
*639G.S. 25-1-208, a part of the Uniform Commercial Code adopted in this State in 1965, provides:
“Option to accelerate at will. — A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral ‘at will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.”
This provision of the Uniform Commercial Code does not extend to an accelerating clause in which the accelerating event is some act or default by the debtor, such as conveyance of the mortgaged land, or default in a payment. However, it is indicative of a legislative concern for the protection of debtors from oppressive and unreasonable acceleration of the due date of their obligations calculated to extort from the debtor more collateral or some other benefit to the creditor.
G.S. 25-2-302, a portion of the Uniform Commercial Code, originally omitted when the Code was enacted in this State but added by the Session Laws of 1971, Chapter 1055, provides:
“Unconscionable contract or clause.— (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
“(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the party shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.”
This provision of the Uniform Commercial Code, by the express provision of the Act inserting it into the Code, does not apply to transactions entered into prior to 1 October 1971. Thus, it does not apply to this case. However, this statute also is indica*640tive of a legislative policy to guard debtors against “unconscionable” provisions in their contracts.
The courts have authority, in proper cases, to declare provisions in a contract unenforceable because they are contrary to the public policy. Lamm v. Crumpler, 233 N.C. 717, 65 S.E. 2d 336 (1951); Burbage v. Windley, 108 N.C. 357, 12 S.E. 839 (1891); Covington v. Threadgill, 88 N.C. 186, 189 (1883). Thus, in Tinsley v. Hoskins, 111 N.C. 340, 16 S.E. 325 (1892), this Court held unenforceable a provision in a note that, in event the note was not paid when due and had to be collected by legal process, the maker would pay an attorney’s fee in addition to the principal and interest due on the note. The Court said that such contract was oppressive and contrary to public policy. This was followed in Bank v. Lumber Co., 128 N.C. 193, 38 S.E. 813 (1901), and other cases. Thus, the power of courts to declare provisions in notes unenforceable because oppressive and contrary to public policy is clear. Especially is this true when the court is called upon to exercise its equity powers.
G.S. 24-10(d) provides:
“(d) Any lender may charge any person * * * that assumes a loan made under the provisions of G.S. 24-1.1, where the principal amount assumed is not more than fifty thousand dollars ($50,000) and is secured by real property, a fee not to exceed one percent (1%) of the principal amount due or twenty-five dollars ($25.00), whichever is less.”
This statute does not apply to the present case because the unpaid balance upon the loan exceeds $50,000, and also because the statute was not enacted until 1971, after the present note and deed of trust were executed. However, it is strongly indicative of a legislative intent to protect mortgagors against demands of the money lender for more than nominal fees upon sale of the mortgaged property to a purchaser who assumes the mortgage debt.
It is true that the quality of the mortgagee’s security may be impaired by a conveyance of the mortgaged property to an irresponsible person who will permit the property to fall into disrepair or otherwise cause it to deteriorate in value. It does not follow, however, that a “Due-on-Sale Clause” is reasonably necessary for the protection of the mortgagee. Virtually all carefully prepared mortgages and deeds of trust today contain pro*641visions requiring the mortgagor to keep the property in repair and to avoid waste. A clause permitting acceleration of the maturity of the note and foreclosure of the deed of trust for violation of such a covenant is customary and clearly valid. There is such a clause in the deed of trust involved in this litigation. A general acceleration clause set into operation by a conveyance of the property to anyone not approved by the mortgagee is closely akin to a provision for acceleration when the holder of the note “deems himself insecure.” Because such a clause subjects the debtor to the grave risk of oppression by an arbitrary holder, G.S. 25-1-208 provides that acceleration of maturity under such a clause is permitted only if the holder “in good faith believes that the prospect of payment or performance is impaired.” It is my view that the same result should be reached by the courts when the holder seeks to accelerate the maturity of the note because of a conveyance of the mortgaged property which cannot, in good faith, be claimed to impair the holder’s security for the payment of the debt. Where, as here, the note and deed of trust provide for acceleration in event the mortgagor fails to keep the property in repair, a “Due-on-Sale Clause” cannot be justified on the theory that it is a reasonable safeguard against waste of the security.
In the present case, it is clear that the proposed conveyance from Mrs. Crockett to Mr. and Mrs. Proctor presents no threat to the security interest of the defendant in the property or to the defendant’s right otherwise to enforce payment of the note. The conveyance of the property to Mr. and Mrs. Proctor, whether or not they assume the payment of the indebtedness, does not release Mrs. Crockett from her liability arising from her own assumption of the mortgage debt. Obviously, there is no reasonable basis for the defendant to suppose that such conveyance will endanger its security interest in the property. It is stipulated that the Proctors, themselves, own other property upon which this defendant holds a deed of trust and their indebtedness thereon is not in default. Indeed, it is stipulated that the defendant’s withholding of its approval of the proposed transfer from Mrs. Crockett to the Proctors has no relation to any fear of impairment of the security by reason of such transfer.
The sole reason for the defendant’s refusal to approve the transfer and for its threat to accelerate the maturity of the note and to foreclose the deed of trust is that the defendant thereby *642seeks to coerce an increase in the interest hereafter to he paid on the unpaid portion of the principal of the note. It is my view that this is sheer extortion and the Superior Court was correct in refusing to permit the defendant to use the acceleration clause for this purpose. In my view the money lender’s withholding of the approval of the transfer under these circumstances is unconscionable. The defendant, like Shylock in the Merchant of Venice, says, “So says the bond, doth it not, Noble Judge? * * * Those are the very words.” Merchant of Venice, Act IV, Scene 1. The majority opinion agrees that it is “so nominated in the bond” and, therefore, reverses the judgment of the Superior Court.
In reaching this conclusion, the majority opinion says the provision in the contract is clear, the parties to the contract were on equal footing when they entered into the agreement, “As a man consents to bind himself, so shall he be bound,” and the debtor can avoid acceleration and foreclosure by simply paying off the debt or refraining from conveying his property.
As I read the majority opinion, it holds that use of a “Due-on-Sale Clause” for the sole purpose of requiring an increase in the rate of interest is reasonable and not oppressive and, therefore, entitled to the protection of the court. In the present case, the mortgaged property is not a single family residence but is a block of apartment houses. The mortgagor and Mrs. Crockett are thus investors in business property. They may, therefore, be on approximately “equal footing” with the defendant. The majority opinion, however, does not rest upon this circumstance. It extends, apparently, to mortgages of typical family residences. When so extended, even if not when applied to the present case, the entire basis for the majority opinion seems to be utterly unrealistic.
Consider the case of the typical young couple buying a home. Their purpose is not investment for profit but acquisition of a residence. They borrow substantially all of the purchase price because they cannot pay cash for the property. Substantially all of their own funds become tied up in the property. After a time the husband’s employer transfers him to another city, or a better employment opportunity in another city presents itself. When it moves the family must acquire a new residence. As before, they do not have the ability to do so unless they can get their money out of their present residence by a sale of it. It is a matter of common experience that most of *643their prospective buyers are in a comparable financial condition so that they cannot purchase the house, for its fair value, unless they can assume the existing mortgage or refinance it. If the prospective purchaser has to . refinance the house, the cost of such financing must, as a practical matter, come, in whole or in part, out of the price he is otherwise willing to pay the seller. To permit the mortgagee to charge the prospective purchaser a higher rate of interest, or a substantial fixed sum, for the privilege of carrying on the existing mortgage is, in effect, a penalty upon the seller, for it must inevitably reduce what he will receive from the sale of his house.
In such a situation it is completely unrealistic to say that the homeowner and the money lender were on equal footing in making the original contract and equally unrealistic to say that the homeowner can avoid the loss resulting fom the threat to accelerate the due date of his note by paying off the mortgage or by refraining from selling his home. He has to sell and he cannot pay off the mortgage. This use of the acceleration clause to coerce an increase in the rate of interest is oppressive, extortionate and unconscionable.
Consider, again, the homeowner who loses his job, suffers disabling illness or some like financial disaster. He borrows and mortgages his property through necessity, not in order to speculate. It is utterly unrealistic to say he has equal bargaining ability with the money lender. If finally he must sell his home because his financial storm continues to rage, is it not unreasonable and oppressive to permit the money lender further to drive his net price down by threatening to foreclose unless the prospective purchaser will agree to pay a higher rate of interest? It is small consolation to such a man to be told, “Well, you don’t have to sell; just pay off your mortgage.”
Such use of the acceleration clause to extract a higher rate of interest is clearly a restraint upon alienation of the property. This would clearly appear if the provision were that the mortgagor must pay the mortgagee $1,000 if he conveyed the property without consent of the. mortgagee. There is no difference in nature or in effect between such a provision and a provision permitting the mortgagee to accelerate the maturity date and foreclose the mortgage unless the proposed purchaser pay the mortgagee a higher rate of interest. Such a restraint on alienation of real property should be held contrary to public policy and void. See: Schwren v. Falls, 170 N.C. 251, 87 S.E. 49 *644(1915); Christmas v. Winston, 152 N.C. 48, 67 S.E. 58 (1910); Latimer v. Waddell, 119 N.C. 370, 26 S.E. 122 (1896); Pritchard v. Bailey, 118 N.C. 521, 18 S.E. 668 (1893); 5 Tiffany on Real Property, 3d Ed., 1343; Annot., 42 A.L.R. 2d 1243, 1302. “Although written as an acceleration clause, the due-on-sale clause directly and fundamentally burdens a mortgagor’s ability to alienate as surely and directly as the classical promissory restraint.” Volkmer, The Application of the Restraints on Alienation Doctrine to Real Property Security Interests, 58 Iowa L. Rev. 774 (1973).
It is my view that a “Due-on-Sale Clause” is valid only when the mortgagee shows a reasonable basis for belief that the proposed transfer will adversely affect his security interest in the mortgaged property in a way which the covenant to keep in repair will not remedy. It being stipulated in the record that this is not true in the present case, the judgment of the Superior Court should be affirmed.