## Facts

- The original borrowers bought Riverside County residential property using a $19,100 Bank of America loan at 8% interest, secured by a deed of trust.
- The deed of trust included a due-on-sale clause permitting the lender, at its option, to declare the note immediately due upon any sale or transfer of an interest in the property.
- Cynthia J. Wellenkamp later purchased the property, paid the sellers their equity, and agreed with them to assume the outstanding loan balance.
- After receiving notice of the transfer and a timely payment from Wellenkamp, the bank returned the payment and asserted a right to accelerate under the due-on-sale clause.
- The bank offered to permit an assumption only if Wellenkamp agreed to an increased interest rate (from 8% to 9.25%) and signed an assumption agreement.
- When Wellenkamp refused the higher rate, the bank began foreclosure proceedings, and Wellenkamp sued for declaratory and injunctive relief, alleging unreasonable restraint on alienation.

## Issues

1. Whether enforcement of a due-on-sale clause upon an outright sale, when the lender’s security is not impaired, is an unreasonable restraint on alienation under California law.
2. Whether a lender may accelerate solely to obtain a higher interest rate or other economic advantage unrelated to protection of its security.

## Decision

- The California Supreme Court reversed the judgment for Bank of America.
- The court held that automatic enforcement of a due-on-sale clause upon an outright sale is an unreasonable restraint on alienation when the lender’s security is not jeopardized.
- The court ruled the lender may not accelerate merely to extract a higher interest rate or other economic concessions.
- The matter was remanded for relief consistent with the holding, permitting enforcement only upon a showing that acceleration is reasonably necessary to protect against impairment of security.

## Legal Principles

- A due-on-sale clause, when invoked upon transfer of the security property, operates as a restraint on alienation and is subject to California’s prohibition on unreasonable restraints.
- The validity of a restraint on alienation turns on reasonableness in light of the parties’ justifiable interests and the public interest in free transferability of real property.
- A lender’s legitimate interest is protection of its security; enforcement of a due-on-sale clause must be reasonably necessary to protect against impairment of that security.
- Acceleration based solely on the lender’s desire to capture market-rate interest, without evidence of a security risk, is an unreasonable restraint and is unenforceable.

## Conclusion

The court limited due-on-sale enforcement in residential transactions by requiring a lender to justify acceleration as reasonably necessary to protect its security; using the clause to force higher interest rates or other economic concessions, absent security impairment, is invalid as an unreasonable restraint on alienation.


Wellenkamp v. Bank of Am., 21 Cal. 3d 943 (Cal. 1978)