Opinion
No. 205.
Argued December 2, 1974. —
Decided December 20, 1974.
APPEAL from a judgment of the circuit court for Waukesha county: CLAIR VOSS, Circuit Judge. Affirmed.
For the appellant there were briefs by Frisch, Dudek, Slattery Denny, attorneys, and Edward A. Dudek, Robert D. Scott and James D. Friedman, of counsel, all of Milwaukee, and oral argument by Edward A. Dudek.
For the respondents there was a brief by Godfrey Kahn, S.C., attorneys and Gerald J. Kahn, James Ward Rector and William B. Graves, of counsel, all of Milwaukee, and oral argument by Gerald J. Kahn and Mr. Graves.
Facts.
This is a foreclosure action brought not for default in payments but under a "due on sale" acceleration clause. It is brought by Mutual Federal Savings Loan Association, plaintiff-appellant, against defendants-respondents: American Medical Services, Inc., current record title holder of the mortgaged premises (a nursing home); Continental Bank Trust Company (formerly the West Side Bank) as holder of a second mortgage on the property; Assured Realty and Construction Company, Inc., guarantor of the second mortgage; and Harry E. Samson, Harold Nash and Harold W. Rosenthal, guarantors of the first mortgage.
The mortgage loans here involved were made by plaintiff to River Hills Nursing Home, Inc. (River Hills I), in the amounts of $1,400,000 on May 18, 1962, and $50,000 on March 7, 1963. Both mortgages contained the following clause: "In the event of the sale or leasing or any conveyance of the premises herein, or any portion thereof, unless the consent in writing of the Mortgagee herein, its successors or assigns, is first obtained, this mortgage shall, at the option of the Mortgagee, become immediately due and payable."
On October 30, 1963, the River Hills I corporation was merged with Admiral Builders, Inc. (Samson and Nash were officers and directors of both River Hills I and Admiral Builders. Together they owned about 70 percent of the stock of each corporation.) Samson testified that the nursing home was not then making a profit and that the merger was effected to gain tax benefits and to use Admiral's cash and capital for the nursing home's operating expenses. Mutual's consent in writing to the merger was not obtained. On October 13, 1964, a deferred payment agreement was entered into with Mutual and signed by Samson and Nash as officers of River Hills Nursing Home, Inc.
By May of 1965, the mortgage loans were in default and Mutual was threatening to foreclose. On October 1, 1965, Admiral Builders quitclaimed its interest in the nursing home to a newly formed corporation, River Hills Nursing Home, Inc. (River Hills II). In consideration for the conveyance, River Hills II agreed to take over Admiral Builders' liabilities, including the mortgages owed Mutual. Samson testified that, upon forced sale, the nursing home property at best would realize $200,000 less than the mortgage due; that Mutual ". . . told us they would be willing to take anybody who was a good risk;" and that formation of the new corporation would allow him to separate himself from Admiral Builders and stay with the operation of the nursing home. Consent in writing of Mutual to the conveyance was not sought or secured.
However, in connection with the organization of River Hills II, Samson negotiated a $250,000 loan from West Side Bank. Assured Realty and Construction Company, Inc., was a guarantor of the loan. The loan proceeds were applied to payments of amounts owing to creditors of River Hills II, with $69,000 going to Mutual. West Side Bank agreed to make the loan upon the following assurance by Mutual: "As long as said sum of $13,000.00 or any increased amount, due to tax and insurance expenses exceeding $30,000.00 annually, is paid monthly on or before the 10th day of each month, Mutual Federal Savings and Loan Association will forbear instituting foreclosure proceedings to the extent that it has legal power to so do." This promise by Mutual to forbear foreclosure was contained in a letter, dated October 26, 1965, from Michael Crowley, president of Mutual, to the West Side Bank, and also in an endorsement on the back of the $69,000 check received by Mutual. Samson testified that he agreed to the terms of the letter and that River Hills II has met the payments called for under the letter of October 26, 1965. (Crowley of Mutual also testified that River Hills II was not delinquent under the schedule of payments under the revised agreement.)
On December 3, 1968, River Hills II changed its name to American Medical Services, Inc. (Samson and Nash were officers, directors and controlling shareholders of River Hills II, American Medical Services and Assured Realty and Construction.) When American Medical Services made a public offering of its stock in 1969, Mutual notified defendants of its decision to accelerate and commenced foreclosure proceedings under the "due on sale" clause. Defendants brought a declaratory judgment action against Mutual seeking to bar the foreclosure action. Mutual's demurrer to the declaratory judgment complaint was sustained. On appeal, this court affirmed the lower court's ruling. ( See: American Medical Services, Inc. v. Mutual Federal Savings Loan Asso. (1971), 52 Wis.2d 198, 188 N.W.2d 529.)
Following a trial to the court, judgment was entered on November 20, 1972, dismissing Mutual's complaint on the merits. From this judgment Mutual appeals.
The validity of a "due on sale" provision in a mortgage was upheld in the Wire Works Case. As to an acceleration clause, phrased in the exact language of the provision involved in the case before us, this court held such "`due . . . if . . . convey[ed] away . . . or if the title thereto shall become vested in any other'" clause not to be against public policy and held it to be ". . . enforceable as a contractual condition of the note and mortgage." However, it also held that the invocation of the acceleration clause must be "in accord with equitable principles," with the trial court to determine whether, ". . . in accordance with the equitable standards that are imperative upon the foreclosure of a mortgage, . . ." foreclosure under a "due on sale" provision will be permitted.
Mutual Federal Savings Loan Asso. v. Wisconsin Wire Works (1973), 58 Wis.2d 99, 205 N.W.2d 762.
Id. at page 110.
Id. at page 112.
In this case the trial court balanced the equities involved and concluded that: "It would be inequitable under the circumstances to decree foreclosure of the mortgages." We find that conclusion or holding amply supported by the record in this case, and affirm it, specifically approving the balancing of equities approach used by the trial court in reaching it. As this court made clear in the Wire Works Case, enforcement of "due on sale" clauses is not automatic, and ". . . [w]hether they may be utilized in a particular case is dependent upon the facts and whether the invocation of the acceleration clause would be inequitable under the circumstances." In this record, and in the opinion of the trial court, we find three major factors that tip the scales of equity in favor of the mortgagor, and against the mortgage-forecloser. They are as follows:
Id. at page 106.
I. No impairment of security. The trial court here held that the transfers of title here involved ". . . did not affect substantially the beneficial ownership of the mortgaged property or fall within the purpose of the mortgage restrictions upon transfer of title to the mortgaged premises." The trial court opinion set forth this conclusion as alone sufficient, not to establish the weight of the equities involved, but to constitute a condition precedent not met to the implementation of a "due on sale" provision in a mortgage. We do not go that far. While the Wire Works Case apparently viewed an acceleration clause as related to preservation of the security of the mortgage holder, the decision does not make proof of actual impairment of security a condition precedent to a foreclosure under the "due on sale" clause. However, an absence of impairment of security is a factor that a trial court may put on the scales in weighing the equities involved. Here the argument could be and is made that the transfers involved materially improved Mutual's security and enhanced its ability to collect the mortgage indebtedness. Without the funds which the building corporation was able to supply by reason of the merger effected, it appears questionable whether the nursing home could have continued in operation. At least the mortgage was then in default. When the nursing home was restored to a corporation exclusively engaged in the nursing home business, the basic purpose appears to have been to strengthen the viability of the nursing home operation conducted on the mortgaged premises. With timely payments of increased monthly installments replacing repeated defaults, we uphold the trial court's conclusion that there was here no substantial impairment of security sustained by the mortgagee by reason of the transfers made.
Id. at pages 106, 107, this court saying of decisions in other jurisdictions:
"The New York courts sanction the use of `due on sale' acceleration clauses, but the mortgagee's option to accelerate the mortgage debt will be enforced only if it does so in good conscience and fairness to the mortgagor. . . .
"The Florida Court of Appeals has held that a mortgage foreclosure is an equity matter and that a mortgagee has a right to accelerate on the default of the mortgage conditions only if they are necessarily related to the preservation of the security. A Florida court will refuse to enter a foreclosure judgment when the acceleration of the due date would be unconscionable and its result would be inequitable and unjust. . . .
"The California Supreme Court . . . upheld this type of clause as a reasonable restraint on alienation, because it was designed to protect a justifiable security interest of the mortgagee. . . ."
Citing: Blomgren v. Tinton (1962), 33 Misc.2d 1057, 225 N.Y. Supp. 2d 347; Clark v. Lachenmeier (Fla.App. 1970), 237 So.2d 583, 584; Coast Bank v. Minderhout (1964), 61 Cal.2d 311, 317, 38 Cal.Rptr. 505, 392 P.2d 265.
But see: Tucker v. Lassen Savings Loan Asso. (1974), 116 Cal.Rptr. 633, 639, 526 P.2d 1169 , holding ". . . a `due-on' clause contained in a promissory note or deed of trust . . . can be validly enforced only when the beneficiary-obligee can demonstrate a threat to one of his legitimate interests sufficient to justify the restraint on alienation inherent in its enforcement. . . ."
II. Agreement not to foreclose. The trial court here found that Mutual had ". . . agreed with Defendant River Hills Nursing Home, Inc., and West Side Bank to refrain from foreclosing the mortgages so long as the sum of $13,000 . . . was paid monthly," and that there ". . . has been no failure to make a payment required under the agreement not to foreclose." The reference is to a letter sent in 1965 by Mutual, by its president, to the West Side Bank stating that as long as the sum of $13,000 was paid monthly to Mutual it would forbear instituting foreclosure proceedings. Also, there was the endorsement by Mutual of a cashier's check purchased by River Hills II by which payment of $69,000 was made to Mutual and the agreement to forbear foreclosure was repeated. The trial court held the letter and check to constitute a three-party agreement binding Mutual not to foreclose in lieu of actual default and barring this action to foreclose under the acceleration clause. We need not, in balancing the equities involved, reach or review the trial court holding that all elements of a contractual agreement are met by the letter and endorsement on the check. We do hold that the agreement by Mutual to forbear instituting foreclosure proceedings as long as it received $13,000 per month, which amount it did receive, as contained in its letter to the bank and endorsement of the check, constitutes a substantial equitable consideration undergirding and supporting the trial court conclusion so that equity would not be served by permitting Mutual to foreclose where no default had occurred.
III. Defense of laches. In the Wire Works Case, this court held that an action to foreclose a mortgage is equitable in nature, and "`. . . the defense of laches may be raised against the mortgagee. . . .'" This court has set forth the three essential elements of the defense of laches to be: ". . . Unreasonable delay in commencing the action; knowledge of the course of events and acquiescence therein; and prejudice to the party asserting the defense. . . ." Here we have a four to six-year delay in the seeking to enforce the acceleration provision. Assuming that Mutual can be found to have had knowledge of the transfers, this is certainly a sufficiently lengthy delay to meet the first element of the laches test. While actual notice at the time of transfers was not given to Mutual, the trial court held that Mutual ". . . knew or should have known, when it entered into the agreement not to foreclose, of the changes in legal title to the mortgaged premises. . . ." Constructive notice is enough. The receipt of checks by Mutual, as far back as 1965, drawn on the building company's account; balance sheets submitted to Mutual; an insurance endorsement noting that title was changed to include the building company; along with the letter to the bank and the endorsement on the $69,000 check including the promise to forbear foreclosure, sufficiently support the trial court's conclusion that Mutual knew or should have known of the transfers of title made. We find the second element of the three-pronged test here met. As to the third element, prejudice to the defendant, while the trial court made no finding in this regard, the record clearly establishes that the respondents have become indebted to the West Side Bank for $250,000, have made the $13,000 monthly payments called for by the 1965 agreement and have made improvements to the nursing home at a cost of $275,000. The trial court found that mortgage interest rates have ". . . increased substantially during the period intervening between the agreement not to foreclose and the institution of this action." Permitting an acceleration of foreclosure proceedings, based on the "due on sale" provision, clearly would involve financial detriment or prejudice to respondents. So we find all three elements of laches present, and laches alone to be a sound basis for the trial court conclusion that "it would be inequitable under the circumstances to decree foreclosure of the mortgages."
Id. at pages 110, 111.
Estate of Korleski (1964), 22 Wis.2d 617, 622, 623, 126 N.W.2d 492.
See: Johnson v. Blumer (1924), 183 Wis. 369, 377, 197 N.W. 340, 198 N.W. 277, this court stating: ". . . Having held that the mortgagee and the plaintiff had no actual or constructive notice of the breach of warranty of Dahms until after the latter's death, it follows that the defense of laches herein cannot prevail." (Emphasis supplied.) See also: 30A C. J. S., Equity, p. 64, sec. 117, stating: ". . . Acquiescence cannot be imputed to one without actual or constructive knowledge of his own claim and of the infringement of it. . . ." (Emphasis supplied.)
To this balancing of the equities approach, followed by the trial court and followed by this court upon review, Mutual answers that equitable defenses are not available to respondents because their failure to give actual notice of transfers at the time made constitutes an intentional breach of contractual obligation, foreclosing resort to equity. We deal here with an option given Mutual to accelerate, not a promissory obligation by respondents to refrain from transferring. Moreover, the equitable approach is dictated by the nature of the proceedings: an action to foreclose under a "due on sale" clause. It is the right of Mutual to proceed that must meet the test equity, not just defenses raised by respondents. The claim that fraud is involved in the transfers made and that respondents, in consequence thereof, enter court with unclean hands is not supported by this record. The test for finding actionable fraud is certainly not here met. Not only was fraud not pleaded, but reasonable inferences drawn from this record cannot be accordioned into a foundation for a claim of fraud. Because the finding made by the trial court as to knowledge on the part of Mutual, actual or constructive, has been upheld by this court earlier in this opinion, there remains no basis for a claim that Mutual was here misled, or that Mutual would have foreclosed had it known of the transfers at the time they were made. We find in this record no reason to conclude other than that the balancing of equitable considerations involved was here entirely appropriate and, in fact, required. Such balancing of the equities led the trial court to conclude that here "it would be inequitable under the circumstances to decree foreclosure of the mortgages." We uphold that finding, agreeing that it indeed would, and affirm the trial court judgment.
As to distinction between a promissory right and an option right, see: Marion v. Orson's Camera Centers, Inc. (1966), 29 Wis.2d 339, 138 N.W.2d 733.
See: Estate of Demos (1971), 50 Wis.2d 262, 266, 184 N.W.2d 117, this court stating: "`To be actionable the false representation must consist, first, of a statement of fact which is untrue; second, that it was made with intent to defraud and for the purpose of inducing the other party to act upon it; third, that he did in fact rely on it and was induced thereby to act, to his injury or damage.'"
Laehn Coal Wood Co. v. Koehler (1954), 267 Wis. 297, 300, 64 N.W.2d 823, quoting 37 C. J. S. Fraud, p. 271, sec. 29, stating: "`It is generally held that whether the party would have acted in the absence of the representation is the test of whether or not he relied thereon; that to secure redress for false representation complainant must show that he would not have acted but such representation; and that there can be no recovery for concealment where it does not appear that plaintiff would have acted otherwise had he known the facts; but that, if complainant was so influenced by misrepresentations that without them he would not have acted, sufficient reliance is shown to warrant recovery. . . .'"
By the Court. — Judgment affirmed.