Court Opinion

ID: 9761410
Source: CourtListenerOpinion
Date Created: 2023-08-29 01:42:17.824773+00
Date Added: 2024-06-11T07:29:23.542392
License: Public Domain

PHILLIPS, Chief Justice,
dissenting.
I respectfully dissent.
In my judgment, this case, divested of frills, presents the question of whether a lender fortified by a “due on sale” provision in the mortgage agreement can enforce that agreement in a subsequent sale solely for the purpose of securing a higher interest rate, such a change of rate not having been provided for in the mortgage contract.
This, apparently, is a case of first impression in Texas; however, a case with similar facts has recently been decided by the New York Court of Appeals, Silver v. Rochester Savings Bank, 73 A.D.2d 81, 424 N.Y.S.2d 945 (1980).
In Silver, where the due-on-sale clause contained a provision that the approval of the mortgage would not be unreasonably withheld, the court held that the normal inference to be drawn from the due-on-sale clause is that the lender is concerned about the security of the mortgage upon the transfer of ownership of the property. It concluded that the parties intended the clause to grant to the bank only the right to approve the charter and financial ability of the buyer and not to authorize it to alter the terms of the mortgage by raising the interest rate thereon as a condition of approval. For a similar conclusion see Continental Federal Savings & Loan Association v. Fetter, 564 P.2d 1013 (Okl.1977).
This brings us to the controlling point in this case which is whether the trial court abused its discretion in denying the injunction. I would hold that it did.
The pertinent facts are as follows.
This attempted foreclosure involves the sale in 1979 of an office building located in Austin, Texas, by a Michigan corporation, Foremost Insurance Company (appellee), to a California partnership, Crestview Company, the managing general partner of which is Robert I. Feirman, and a subsequent sale of the property in 1980 to an unrelated California limited partnership, Crestview, Ltd. (appellant), the general partner of which is Doerring & Associates, Inc., a California corporation with offices in San Diego and Austin. Foremost is attempting to foreclose on the property now owned by Crestview, Ltd., under a “due-on-sale” clause in a deed of trust. Crestview, Ltd., claims that Foremost is not entitled to foreclose because Foremost unreasonably withheld its consent to the sale and seeks to enjoin the sale until this issue is determined at the trial on the merits.
The property at issue is a three-story office building located on a seven-acre tract on South I.H. 35. Foremost purchased the land and constructed the building in 1972 for one of its subsidiaries which was in the business of servicing mobile home loans for mobile home dealers. The subsidiary stopped doing business in Austin in 1975 and the building remained vacant for nearly a year. Foremost then hired a local company, Parker-Bienvenu Company, to act as its leasing agent and to manage the building. The building was leased to various tenants until 1978 when Foremost decided to place the building on the market.
In October of 1978, Foremost entered into an agreement to sell the property for $1,000,000 to Robert I. Feirman with the *831understanding that title would be taken in the name of a then undisclosed partnership of which Feirman would be the general partner. The sale was closed on February 16,1979, and title was taken in the name of Crestview Company, a California partnership. Crestview Company paid $160,000 cash to Foremost and executed a no-liability promissory note for $840,000 payable over 15 years at 9.5% interest. Foremost felt that the building was adequate security and that a 9.5% rate of interest was a sound investment. The note was secured by a deed of trust of which Foremost was the beneficiary. Foremost insisted that a due-on-sale clause be included in the deed of trust which would require Feirman to obtain Foremost’s consent to any future sale. Feirman agreed to the inclusion of the due-on-sale clause only on the condition that it be modified to provide that Foremost shall not unreasonably withhold its consent. The agreed upon clause appears as paragraph 28 in the deed of trust and provides that:
“In the event Grantors, or any owner of the Mortgaged Premises, without first obtaining approval of Noteholder (which approval shall not be unreasonably withheld), should sell or otherwise dispose of the Mortgaged Premises, or any part thereof, at any time before this Deed of Trust is fully released and discharged, Noteholder shall have the option to declare the indebtedness hereby secured due and payable. . . . ” (Emphasis added).
Crestview Company employed Parker-Bienvenu to continue leasing and managing the property. Two of the tenants subsequently moved from the building and Crest-view Company experienced difficulty in making the monthly payments on the note. Feirman requested that Foremost grant a six-month moratorium on the interest-only portion of the monthly payments so that the vacancy problem could be solved, but Foremost refused to make any concessions.
In August of 1980, Crestview Company entered into an agreement with James T. Hoover, Executive Vice President of Doer-ring & Associates, Inc., to sell the property for $1,250,000. On August 21, 1980, an attorney for Doerring & Associates, Inc., wrote a letter to Foremost attaching a copy of the agreement and requesting Foremost to execute the standard “estoppel letter” required under the agreement and advising Foremost that if it needed further information about the transaction or the purchaser to please contact the attorney or Fred Schmidt, Vice President of Doerring & Associates, Inc. The attached estoppel letter advised Foremost that the property would be sold to a limited or general partnership of which Doerring & Associates would be the general partner.
On September 12, 1980, Foremost responded with a letter requesting financial information on the proposed purchasers including financial statements from the controlling shareholders of the corporation, Doerring & Associates, Inc., and information relative to their management experience and expertise. The letter concluded:
“As you are no doubt aware, Section 28 of the Renewal Deed of Trust dated February 16, 1979 requires the approval of the note holder before any sale or other disposition of the mortgaged premises by the grantors. Upon completion of a thorough review of the requested information, I will advise you further of Foremost’s position in this matter.”
The admitted purpose of that paragraph of the letter was to put Doerring & Associates on notice that Foremost intended to use the leverage it had as a result of the due-on-sale clause.
Fred Schmidt responded to Foremost’s letter by sending to Foremost on September 23, 1980, a company profile on Doerring & Associates, Inc., which set out the history of the company, the market research and statistical analysis it makes in acquiring properties, the fact that its holdings included properties in Odessa, Abilene, Brownwood, San Angelo, Austin and San Antonio, as well as properties in California and Colorado, and information regarding the qualifications and real estate experience and expertise of its key personnel. Detailed financial statements of the three controlling shareholders were also provided which revealed *832that they had a total net worth in excess of $2.4 million.
A few days later, Schmidt called Foremost’s office and talked to Ken Snedegar, Foremost’s vice president in charge of real estate, Tom Frain, and John Rigas, a corporate attorney. Schmidt asked them what Foremost’s position was going to be on the sale and Snedegar replied that they wanted the interest rate increased from 9.5% to 12.0%. Schmidt explained the reasons why he did not believe an increase was appropriate and Snedegar said he would get back to him. Schmidt called Snedegar twice more and each time Snedegar said Foremost still wanted a 12.0% interest rate. At the end of the third conversation, Schmidt asked Sne-degar for a written response to the request for consent and Snedegar said that Jack Siebers, a Foremost vice president and attorney, was preparing a letter stating that Foremost objected to the sale because of concerns about credit worthiness and lack of management experience. These concerns had not been mentioned in any of the prior conversations.
Sieber’s letter of September 30, 1980, stated that Foremost was unable to approve the sale because Foremost had concluded “for the following reasons, among others, that the proposed purchasers present a substantial investment risk:
1. The financial statements indicate a heavy reliance on real estate investments the values of which are speculative and heavily mortgaged.
2. The financial statements submitted indicate the existence of substantial liabilities for each of the proposed purchasers.
3. The proposed purchasers have failed to provide sufficient evidence of expertise in office building management.”
The letter concluded that, “Should you provide Foremost at some future date with additional financial and/or business information relative to the proposed purchaser sufficient to overcome Foremost’s present concerns, Foremost would be willing to reconsider its position at that time.”
By letter dated October 16,1980, Schmidt provided such additional information to Sie-bers, including: that $30,000-$40,000 would be allocated to renovate and upgrade the building; that a substantial operating reserve would be established which would provide additional security to Foremost; that Doerring & Associates would relocate its management company to the building thereby leasing 3,500 square feet of the vacant space and providing on-site management; that the values of the real estate holdings shown on the financial statements were based on actual cash investments or on values currently in escrow or to be sold in the immediate future, that the validity of those values could be verified by contacting two M.A.I. appraisers; that the financial capability of Doerring & Associates, Inc., could be verified by contacting the financial references provided in the company profile; that its current inventory of properties exceeds $40 million and over $11 million of property was in escrow; that its management personnel had extensive experience; and again requested that Foremost consent to the sale “or provide specific reasons why Foremost Insurance Company’s security for their loan will not be equal to, if not substantially increased by our acquisition, capital improvements and on-site management.”
When he had had no response to his letter, Schmidt called Siebers and Siebers told him that Foremost would consent to the sale if Foremost were paid $400,000 as a reduction on the principal of the note. Schmidt was shocked at that proposal; he had never heard of a lender demanding a 50% pay-down on a note as the price of giving consent. Siebers confirmed the demand in a letter the same day. Schmidt discussed the matter with his partners and they decided that if Foremost were sincere about its concerns of “investment risk,” Schmidt and his two partners would offer to guarantee personally repayment of the note and to retain the Parker-Bienvenu Company to continue managing the building. Snedegar previously had told Schmidt that Foremost was satisfied with Parker-*833Bienvenu’s management of the building, and Schmidt knew the offer of three personal guarantees would improve substantially Foremost’s security since the existing note was a no-liability note. Schmidt thus believed that his offers would eliminate any sincere concerns Foremost might have had. Schmidt spelled out his offers in a letter to Siebers dated October 27, 1980. Siebers replied by letter dated October 31, 1980, saying that Foremost still would not approve the sale and that any future correspondence should be directed to the present owner of the property.
Schmidt did not believe that Foremost could validly enforce the due-on-sale clause under these circumstances, so he and his partners decided to go ahead and close the sale. The sale was closed on November 14, 1980, and Crestview Company conveyed an undivided 83.05% interest to Crestview, Ltd., and an undivided 16.95% to Doerring & Associates, Inc. In simultaneous transactions, Doerring & Associates conveyed its 16.95% interest to the limited partners of Crestview, Ltd., and the limited partners conveyed those interests to Crestview, Ltd., so that Crestview, Ltd., acquired a 100% interest in the building and seven acres on which it was situated. Since the sale, Crestview, Ltd., has tendered the monthly payments every month to Foremost.
On December 15, 1980, Foremost gave notice that it was accelerating the note under the due-on-sale clause and would pursue its remedies. Crestview, Ltd., filed suit on December 22,1980, seeking a declaratory judgment and temporary and permanent injunctions enjoining Foremost from accelerating the note and foreclosing under the due-on-sale clause of the deed of trust. On February 5, 1981, Foremost posted notice that it intended to sell the property at a trustee’s sale to be held on March 3, 1981. A temporary injunction hearing was held on February 17 and 18, 1981. At the conclusion of the. hearing, the trial judge announced that he would deny the injunction, even though if he were the President of Foremost, he would not do what Foremost is attempting to do. The order denying the temporary injunction was signed on February 19, 1981, and findings of fact and conclusions of law were signed on March 3, 1981. Crestview, Ltd., perfected this appeal by filing its deposit in lieu of cost bond on February 25, 1981, and on the same day filed with this Court a motion for leave to file petition for writ of injunction pending appeal. This Court conducted a hearing on February 27, 1981, granted the motion and issued an injunction enjoining foreclosure pending final disposition of the merits of this appeal.
Two strong arguments in favor of the court’s granting an injunction emerge from the facts listed above. The first is the fact that under the original sale of the building, the appellee Foremost, the lender, looked solely to the building for security as the vendee’s avoided personal liability on the mortgage. The second, is that the subsequent purchasers agreed that, in addition to the security afforded by the building itself, they themselves would assure personal liability on the note. Moreover, the subsequent purchasers are, apparently, financially sound, both personally and as corporate entities.
Although the appellate courts are loathe to find trial courts in abuse of discretion, the rule must not become so all-encompassing as to deny an appellant his right to a full and thorough review of a denial of a temporary injunction. General Telephone Co. v. City of Wellington, 156 Tex. 238, 294 S.W.2d 385 (1956).
Additionally, I would hold that the status quo should have been preserved until the questions presented herein can be finally determined at the trial on the merits. Deliberate action is essential for the accurate determination of legal rights and upon occasion this can be secured only by issuing a temporary decree protecting a status quo. Southwest Weather Research, Inc. v. Jones, 160 Tex. 104, 327 S.W.2d 417 (1959). This principle has been applied in foreclosure cases where the courts held that when substantial questions are presented, it is proper to reserve decision of those questions by the issuance of a, temporary injunction until the *834facts and law are fully developed at a trial on the merits. Smith v. Vial, 555 S.W.2d 215 (Tex.Civ.App.1977, no writ); Irving Bank & Trust Co. v. Second Land Corp., 544 S.W.2d 684 (Tex.Civ.App.1976, writ ref’d n. r. e.); Branham v. Short, 526 S.W.2d 639 (Tex.Civ.App.1975, no writ).
Appellee Foremost has no authority to be sole judge of its own unreasonableness. The laws of this State give a jury the authority to decide ultimately whether Foremost unreasonably withheld its consent. Until the jury can decide that question, Foremost should not be allowed to foreclose.