Sonny Arnold, Inc. v. Sentry Savings Ass'n
633 S.W.2d 811, 25 Tex. Sup. Ct. J. 359, 1982 Tex. LEXIS 309 (1982)
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Rule of Law:
A 'due-on-sale' clause in a deed of trust, which allows a lender the option to accelerate the loan's maturity upon the sale of the property unless the transferee agrees to an increased interest rate, is a valid and enforceable contract provision and does not constitute an unreasonable restraint on alienation.
Facts:
- Sonny Arnold, Incorporated (Arnold) obtained a loan from Sentry Savings Association (Sentry) secured by a deed of trust on real property.
- The deed of trust contained a 'due-on-sale' clause giving Sentry the option to declare the entire loan balance due if the property was sold or transferred.
- This clause stated the option would not apply if the new buyer's credit was satisfactory and they signed an assumption agreement, which could include an increased interest rate at Sentry's discretion.
- Arnold negotiated a sale of the property to Foxmoor of California.
- Sentry agreed to the assumption of the note by Foxmoor but conditioned its approval on an agreement to a higher interest rate.
- To avoid the higher rate, Arnold sold the property to Foxmoor but structured the deal so that Arnold remained liable on the original note.
- Upon learning of the transfer without its required approval, Sentry exercised its option under the clause to accelerate the debt and initiate foreclosure proceedings.
Procedural Posture:
- Sonny Arnold, Inc. sued Sentry Savings Association in a state trial court, seeking an injunction to prevent a foreclosure sale.
- The trial court denied Arnold's application for a temporary injunction.
- Arnold, as appellant, appealed the trial court's denial to the court of appeals (an intermediate appellate court).
- The court of appeals affirmed the trial court's decision, siding with Sentry, the appellee.
- Arnold, as petitioner, then appealed to the Supreme Court of Texas (the state's highest court).
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Issue:
Does a 'due-on-sale' clause in a deed of trust, which gives the lender the option to accelerate the entire debt upon transfer of the property unless the new owner agrees to an increased interest rate, constitute an unreasonable restraint on alienation?
Opinions:
Majority - McGee, Justice.
No, the 'due-on-sale' clause is not an unreasonable restraint on alienation. The clause is a valid and enforceable contractual provision. The court reasoned that the clause does not fit within the Restatement of Property's classifications of prohibited restraints (disabling, forfeiture, or promissory) because it does not prohibit the conveyance or impose contractual liability for the act of conveying. The owner remains free to sell the property; the consequence is merely the acceleration of the existing debt. Therefore, the clause's validity should be assessed under general contract principles. As an optional acceleration provision, it is enforceable so long as it is clear, unequivocal, and not the result of fraud or inequitable conduct, and conditioning approval of a transfer on a higher interest rate serves a valid business purpose for the lender.
Concurring - Spears, Justice,
No, the restraint is not unreasonable, but the majority is wrong to conclude it is not a restraint at all. This concurring opinion argues that the majority's interpretation of the Restatement is overly formalistic and ignores the practical reality that a due-on-sale clause significantly lessens the likelihood of conveyance and therefore does function as a restraint on alienation. The proper analysis is not whether the clause is a restraint, but whether it is a reasonable one. In this case, the clause is a reasonable and enforceable restraint because it represents a bargained-for allocation of risk regarding interest rate fluctuations. The utility of the clause in allowing lenders to adjust their portfolios outweighs the restraint it places on the property's alienation, especially where, as here, the contract explicitly contemplated an interest rate increase upon transfer.
Analysis:
This decision solidifies the enforceability of due-on-sale clauses in Texas, treating them as matters of contract rather than property law restraints. It rejects the approach taken by courts in other jurisdictions (like California's Wellenkamp rule) that required lenders to show their security was impaired before enforcing such a clause. The ruling prioritizes freedom of contract and allows lenders to use these clauses as a legitimate tool to manage economic risks associated with fluctuating interest rates, shifting the risk of a rising market to the borrower. This precedent provides certainty for lenders and clarifies that the primary justification for a due-on-sale clause can be economic, not just security-based.
