Lucas v. Jones

Opinion

CROSBY, J. Sellers (Jones) sold two parcels of real property in 1973, carrying secondary financing for the buyers. When the buyers transferred the property to subsequent purchasers (Lucas) subject to sellers’ loan in [101019]79, Jones sought to enforce the due-on-sale clause in the promissory note and the deed of trust securing the property. The second sale occurred after the decision in Wellenkamp v. Bank of America (1978) 21 Cal.3d 943 [148 Cal.Rptr. 379, 582 P.2d 970], where the Supreme Court prohibited automatic enforcement of due-on-sale clauses as unreasonable restraints on alienation, except where security is impaired.1 In Wellenkamp, however, the court declined to express a “. . . present opinion on the question whether a private lender, including the vendor who takes back secondary financing, has interests which might inherently justify automatic enforcement of a due-on clause in his favor upon resale.” (Id., at p. 952, fn. 9.)

Lucas cross-complained for injunctive relief to prevent foreclosure under the due-on-sale clause. On January 19, 1982, the trial court applied the Wellenkamp rationale and enjoined Jones, private lenders who took back secondary financing, from enforcing the due-on-sale clause. The preliminary injunction also required Lucas to post a bond, keep the payments current, and cure all defaults on the property. Implicit in the court’s action was a finding Jones’ security was not impaired by the Lucas purchase. Jones appealed.

The trial court’s action appeared to be validated almost immediately; on February 4, 1982, the Supreme Court affirmed Wellenkamp’s application to private lenders and transfers of commercial property. (Dawn Investment Co. v. Superior Court (1982) 30 Cal.3d 695 [180 Cal.Rptr. 332, 639 P.2d 974].) But the state policy against enforcement of due-on-sale clauses was short lived. The Garn-St. Germain Depository Institutions Act of 19822 (Act) was signed into law on October 15, 1982, and all state legislative and judicial restrictions on enforceability of due-on-sale clauses, except for certain “window period” loans, were preempted.

The Act defines the window period as “. . . the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision . . . prohibiting such exercise, and ending on October 15, 1982 . . . .” (12 U.S.C. § 1701j-3(c)(l).) Real property loans originated or assumed, including transfers of the property “subject to” the loan, between the date of state action restricting enforcement of the due-on-sale clause and October 15, 1982, are exempt from the Act and subject to state law until October 15, 1985.3 The Act does not establish the