## Facts

- American Savings & Loan Association used a form deed of trust containing a “due-on-encumbrance” clause allowing acceleration if the borrower created a junior lien on the property.
- Frank and Grace La Sala obtained a loan secured by such a deed of trust; after they executed a junior encumbrance, American offered to waive acceleration only if they paid a charge and accepted a higher interest rate.
- Dorothy Iford obtained a loan secured by the same form deed of trust; after she executed a junior encumbrance, American similarly conditioned waiver on payment and an interest-rate increase.
- The borrowers filed a putative class action on behalf of similarly situated borrowers seeking declaratory and related relief, alleging the clause and its enforcement operated as an unlawful restraint on alienation and that American’s waiver-for-payment practices were improper.
- During the case, American provided waivers to the named plaintiffs (without extending comparable relief to the putative class).
- The trial court concluded the named plaintiffs were no longer class members or adequate class representatives and dismissed the entire action.

## Issues

1. Whether a court may dismiss a putative class action after the defendant grants individualized relief to the named plaintiffs, without notice to absent class members.
2. Whether loss of the named plaintiffs’ class membership after receiving waivers permits immediate dismissal, or instead requires an opportunity to amend to cure representative defects (including substitution of representatives).
3. Whether the standardized, adhesive nature of the challenged trust deed provisions precludes class treatment.
4. Whether a due-on-encumbrance clause is per se an invalid restraint on alienation, or instead facially valid but unenforceable when not reasonably related to protection of the lender’s security.

## Decision

- The California Supreme Court reversed the dismissal and remanded for further proceedings.
- The court held that when dismissal results from the defendant’s grant of benefits to representative plaintiffs not extended to the class, dismissal may not occur without notice to the absent class.
- The court held that even if the named plaintiffs became unrepresentative after receiving waivers, the action should not be dismissed without affording an opportunity to amend (including to substitute suitable class representatives).
- The court rejected the argument that alleging the trust deeds were contracts of adhesion barred maintenance of the matter as a class action.
- On the merits, the court held the due-on-encumbrance clause was not void on its face, but its enforcement is an unlawful restraint on alienation when the junior encumbrance does not endanger the lender’s security.

## Legal Principles

- A defendant may not defeat a putative class action by “picking off” the named plaintiffs with individualized relief and then obtaining dismissal; if dismissal is sought on that basis, notice to the class is required.
- When representative plaintiffs become inadequate due to post-filing events attributable to the defendant’s actions, courts should generally allow amendment and potential substitution of class representatives rather than dismiss the entire class action.
- The presence of standardized, form-contract terms (including adhesive terms) does not preclude class treatment and may support it where common issues predominate.
- A due-on-encumbrance clause is not per se an unlawful restraint on alienation; enforcement is permissible only to the extent reasonably related to protecting the lender’s security, and is unlawful when invoked absent a genuine security risk.

## Conclusion

The court reinstated the putative class action because the defendant’s individualized waivers could not justify dismissal without protecting absent class members through notice and an opportunity to cure representative defects, and it clarified that due-on-encumbrance clauses are facially valid but may not be enforced as a restraint on alienation unless enforcement is tied to legitimate security concerns.


La Sala v. Am. Sav. & Loan Ass’n, 5 Cal. 3d 864, 489 P.2d 1113 (Cal. 1971)