Alby v. Banc One Financial

f 1 — The issue in this case is whether a restriction in a deed, which provides that the deeded property automatically reverts to the grantor if the property is mortgaged or encumbered during the life of the grantor, is a valid restraint on alienation. We find the clause to be reasonable and justified by the interests of the parties and, therefore, valid. We affirm the Court of Appeals.

C. Johnson, J.

FACTS

¶2 In 1992, Eugene and Susan Alby sold part of their family farm to their niece, Lorri Brashler, and her husband, Larry Brashler. Although the property’s market value was $100,000, the parties agreed to a purchase price of $15,000. The contract and the deed contained nearly identical clauses providing for automatic reverter to the Albys if the property were subdivided, mortgaged, or otherwise encumbered during either of the Albys’ lifetimes. The restriction at issue provided:

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 time of either Grantor.

Clerk’s Papers (CP) at 48-49.

f 3 The parties included these restrictions as a means of ensuring that the land remained within the family during the Albys’ lifetimes.¹ CP at 39-40. Additionally, the real estate contract provided that if Lorri and Larry Brashler ever divorce, the property would remain Lorri Brashler’s because the property was in essence a gift to her as separate property. CP at 7. The parties recorded the real estate contract on April 28, 1992. After the Brashlers satisfied their obligations under the contract, the warranty deed was recorded on September 27, 1996.

¶4 Notwithstanding the restrictions, the Brashlers obtained a loan for $92,000 from First Union Mortgage Corporation by executing a deed of trust for the property on February 26, 1999. This loan was recorded on March 3, 1999. The Brashlers executed a second deed of trust to obtain a second loan for $17,250 from CIT Group on March 31, 1999. This loan was recorded on April 2, 1999. CIT Group assigned the loan to petitioner, Banc One Financial (Banc One). The Brashlers defaulted on their payments on their first loan and the lender held a trustee’s sale on October 27, 2000. Banc One purchased the property at the sale for $100,822.16 and recorded the trustee’s deed on November 2, 2000.²

¶5 On April 18, 2002, Susan Alby filed a quiet title action in Stevens County Superior Court against Banc One, arguing the title to the property automatically reverted to her when the Brashlers encumbered the property.³ On competing motions for summary judgment, the trial court quieted title in Banc One and declared the clause void against public policy as an unreasonable restraint on alienation. The Court of Appeals reversed, concluding that the clause is valid because it is not a restraint on alienation and even if it were, the restraint is reasonable. Alby v. Banc One Fin., 119 Wn. App. 513, 82 P.3d 675 (2003). We granted review to determine whether the clause is a restraint on alienation, and if so, whether it is reasonable.

ANALYSIS

¶6 The first step in resolving the dispute in this case is to identify the type of interest conveyed. Banc One and Susan Alby agree that the interest conveyed to the Brashlers is a fee simple determinable. A “fee simple determinable” is an estate that will automatically end and revert to the grantor if some specified event occurs. Black’s Law Dictionary 649 (8th ed. 2004). We agree that the Al-bys conveyed a fee simple determinable interest to the Brashlers because the estate would revert to the Albys if the property were mortgaged or encumbered during their lifetimes.

¶7 Though we conclude the transferred estate is a fee simple determinable estate, that conclusion does not end the analysis. Fee simple determinable estates are subject to the rule against restraints on alienation, which prohibits undue or unreasonable restraints on alienation. Black's Law Dictionary defines a “restraint on alienation” as:

[a] restriction, usu[ally] in a deed of conveyance, on a grantee’s ability to sell or transfer real property; a provision that conveys an interest and that, even after the interest has become vested, prevents or discourages the owner from disposing of it at all or from disposing of it in particular ways or to particular persons.

Black’s, supra, at 1340.

¶8 Here we have a restraint on alienation because the clause prevented the Brashlers from disposing of the property in a particular way: they could not mortgage or encumber the property without the property automatically reverting to the Albys. Additionally, though the clause did not directly prevent the Brashlers from selling the property, it limited the property’s marketability because it prevented potential buyers from financing the purchase of the property.

¶9 Because we find the prohibition on mortgaging or encumbering to be a restraint on alienation, we must next determine the validity of the restraint. Washington follows the reasonableness approach to restraints on alienation. “Unreasonable restraints on alienation of real property are . . . invalid; reasonable restraints on alienation . . . are valid if justified by the legitimate interests of the parties.” McCausland v. Bankers Life Ins. Co., 110 Wn.2d 716, 722, 757 P.2d 941 (1988) (emphasis added). In determining whether a restraint is reasonable, we balance the utility of the purpose served by the restraint against the injurious consequences that are likely to flow from its enforcement.⁴ See Restatement (Third) of Property § 3.4, at 440 (2000). Whether a restraint is limited in scope or time is often highly significant. 17 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Property Law § 1.26, at 50 (2d ed. 2004). In addition to the scope and duration of the restraint, we look at the purpose of the restraint and whether the restraint is supported by consideration.

¶10 The balance in this case is between the operation of a free market in land and the right to maintain property in family ownership for a limited time period. Family ownership is not always subordinated to immediate and free alienability. The fact that restraints may negatively affect marketability does not necessarily render them unreasonable. The Albys conveyed a restrained interest in long-held family property to their niece and her husband for a substantially reduced price with the purpose of maintaining family ownership of the property through the Albys’ lifetimes. This restraint prevents the property from being mortgaged or encumbered but does not restrict the right to sell or transfer the property. The restraint has a limited scope of preventing only mortgaging or encumbering, a limited duration of the Albys’ lifetimes, and a legitimate purpose of keeping the property in the family. The restraint is also supported by the consideration apparent in the significantly reduced purchase price. The recorded deed provides notice to potentially affected parties. Balancing the relevant factors, we conclude that the potentially injurious consequences of not mortgaging or encumbering the property and reducing its marketability are outweighed by the utility of enforcing the limited restraint to keep the property in the family for the Albys’ lifetimes.

¶11 We next consider the legitimate interests of the parties. The Albys have a legitimate interest in keeping the property in the family and in preventing the property from being lost through foreclosure. The Brashlers have a legitimate interest in realizing the right to freely dispose of their property. However, the Brashlers’ interest in free alienation is limited by the fact that they agreed to the restraint in consideration for the substantially reduced price. Enforcement of the restraint still provides the Brashlers with a legitimate interest in owning the property with every aspect of absolute ownership except the right to mortgage or encumber the property. Both parties also have legitimate interests in enforcing the terms of their contract.

¶12 When evaluating the reasonableness of any agreement placing a restraint on alienation, courts should be reluctant to invoke common law principles disfavoring restraints to invalidate a bargained for contract freely agreed to by the parties. The parties here contracted to transfer property with the purpose of keeping the family farm in the family during the lifetimes of the grantors. We find nothing unreasonable about this purpose. We conclude that the restraint, which prevents the Brashlers from mortgaging or encumbering the property, is reasonable and justified by the legitimate interests of the parties. Accordingly, we affirm the Court of Appeals and remand to superior court with directions to enter summary judgment in favor of and quieting title in Susan Alby.

Sanders, Owens, Fairhurst, and J.M. Johnson, JJ., concur.

1 Susan Alb/s uncontested affidavit states:

Because this piece of property had been in the ALBY family for several generations, GENE and I wanted to make sure that the property always stayed in the family. After several discussions with LORRI about what she and her husband, LARRY R. BRASHLER, could afford to pay for the home, my husband GENE and I decided that $15,000.00 was what LORRI and her husband could afford, even though we believed the property and home was of considerably greater valued [sic]. Since we were so concerned about the property staying in the family, we consulted with an attorney ... to make a contract with the proper and appropriate language so that LORRI and her husband could not do three things:

1. Sell the property to someone who was not a member of the family;

2. Divide the property in any way; and

3. Encumber the property with a mortgage or deed of trust.

We even told LORRI that we would buy the property back from her and her husband should they ever decide that they did not want it.

My husband GENE ALBY, now deceased, received this property from his mother. His father had received part of this property from his father who immigrated to the United States from Norway. This property has been in the ALBY family for all these generations and for this reason, my husband and I had the [attorney] place the necessary language in the real estate contract and deed that should LORRI and her husband attempt to do any of the above mentioned acts, the property would automatically revert back to us.

CP at 39-40 (emphasis added) (Although neither the contract nor the deed contains restrictions on selling the property to someone who is not a member of the family, the Albys reserved a right of first refusal in the contract.).

2 Because the deed containing the restrictions had been recorded, Banc One had actual or constructive notice of the reversion that was created when the Brashlers mortgaged the property.

3 Eugene Alby died after the Brashlers purchased the property and before Susan Alby filed this action.

4 Restraints on alienation of land are used for a variety of legitimate purposes: retaining land in families; preserving affordable housing; furthering conservation, preservation, and charitable purposes to which land is devoted; and facilitating land investment and creating investment opportunities. Potentially harmful consequences that may flow from restraints on alienation include impediments to the operation of a free market in land, limits on the prospects for improvement, development, and redevelopment of land, and limits on the mobility of landowners and would-be purchasers. Restatement (Third) op Property § 3.4 cmt. c at 442 (2000).