Daily Development for Wednesday, February 22,
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
RESTRAINTS ON ALIENATION; TERM: A forfeiture restriction in a deed prohibiting encumbrance of land during the grantors' lifetimes is not an invalid restraint on alienation.
Alby v. Banc One Financial, ___ Wn. 2d ___ , 1006 WESTLAW 307903 (Wash. 2/9/06). .
Albys owned a farm that had been "handed down" from parents and grandparents.
In 1992, the Albys agreed to sell a portion of the farm to their niece, Lorri Brashler, and her husband, Larry. Although they believed it was worth $100,000 the Albys agreed to sell the land for $15,000, which is what the Brashlers could afford to pay.
Since the land had been in the family for three generations, the Albys wanted to make sure it would not be conveyed to someone outside the family during their lifetimes. So they went to a lawyer who prepared a land sale contract and warranty deed which gave the Albys a right of first refusal in the event of a proposed sale by the Brashlers, and also contained restrictions against any division of the land, any conveyance to Larry should he and Lorri divorce, and any encumbrance against the land. If the Brashlers should attempt any of the restricted actions the property would revert back to the Albys. In part, the contract and deed documents stated:
"RESERVATION in favor of the Grantors, their heirs and assigns, an automatic reverter, should the property conveyed herein ever be mortgaged or encumbered within the life of either Grantor."
The land sale contract was recorded in April 1992 and, after the Brashlers paid the $15,000, the warranty deed was recorded in September 1996.
Later, unbeknownst to the Albys, Lorri and Larry mortgaged the property, twice. Thus, in March 1999 there was recorded a deed of trust from the Brashlers to First Union Mortgage Corporation, securing repayment of $92,000, and in April 1999 there was recorded a second deed of trust from the Brashlers to CIT Group, securing repayment of $17,250.
Meanwhile, Gene Alby died.
The Brashlers defaulted and the first deed of trust was foreclosed. The holder of the second deed of trust (Banc One, by assignment from CIT Group) acquired the property with a bid of $100,822. The trustee's deed was recorded in November 2000.
Susan Alby learned of the foreclosure and filed suit against Banc One to quiet title.
On cross motions for summary judgment, the trial court ruled in favor of Banc One, holding the deed restriction void as against public policy and an unreasonable restraint on alienation. Susan Alby appealed, and the court of appeals reversed. The court of appeals concluded the restriction is not a restraint on alienation and, even if it were, the restraint is reasonable. Banc One appealed, and the Washington Supreme Court agreed to review the case.
In a 5-to-4 decision, the Supreme Court affirmed the court of appeals. The Supremes acknowledged the restriction is a restraint on alienation, but said the inquiry does not stop there. In Washington, the Court said, validity of a restraint on alienation is determined by "the reasonableness approach." In other words, is the restraint "reasonable" in light of the legitimate interests of the parties balanced against potentially harmful consequences to the public and "a free market in land."
Here, the Court concluded, it is reasonable to enforce the restraint in order to preserve "family ownership" of the land "for a limited time period" (i.e., the lifetimes of Gene and Susan Alby). The Court also commented that "the Brashlers' interest in free alienation is limited by the fact that they agreed to the restraint in consideration for the substantially reduced price." As for Banc One, the Court noted it had actual or constructive notice of the restraint by virtue of language in the recorded contract and deed.
A dissenter argued that the restraint was invalid because of the "cherished value that our state places on free alienability outweighs the value to the Alby family of maintaining the property in family ownership."
Another dissenter argued that the condition in the deed operated as a forfeiture should be considered unreasonable as a matter of law. Saying that the law should be "clear" and "predictable," the Justice criticized the "reasonableness" test employed by the majority for its tendency to detract from predictability and promote litigation.
Reporter’s Comment: Watching in the wings in this case was Ticor, because (apparently) someone insured a lender without looking at the borrowers' vesting deed. Big mistake!
What is most interesting, seems to me, is how "close" this case was. Once again, we have the spectacle of a court wrestling with private property interests vs. the common good (or, in this case, the "free market in land"). Shades of the recent decision of the U.S. Supreme Court in Kelo v. City of New London, 125 S.Ct. 2655 (2005). Which, come to think of it, was another close case.
Editor’s Comment: The case is a good law school casebook candidate. The two dissenters clearly articulate the preference for alienability over family dynastic concerns. Further, the second dissenter argued that clarity in the law would best be served by declaring unenforceable all forfeiture restraints. Both of these arguments contain important values relevant to the role of courts in overseeing real estate transactions. Like the Reporter, the Editor doesn’t see them as of sufficient concern here, where the restraint is only going to last for a lifetime, and the property clearly was conveyed at a bargain price, even a “gift price” because of personal family concerns of the grantors. The grantors weren’t trying to be greedy - they just didn’t want to see the land pass out of their family during their lifetimes. Under the circumstances, the court properly honored their desire.
The Reporter for this item was Burt Rush of First American Title Insurance Company, writing in that Company’s internal journal, Landsakes. The Editor has edited substantially the original copy and is responsible for the content.
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