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Abdul-karim v. First Fed. S. & L. Ass'n





Appeal from the Appellate Court for the Fourth District; heard in that court on appeal from the Circuit Court of Champaign County, the Hon. George S. Miller, Judge, presiding.


This appeal presents the flip side of the factual situation we considered in Provident Federal Savings & Loan Association v. Realty Centre, Ltd. (1983), 97 Ill.2d 187, in which we permitted the enforcement of a due-on-sale clause. In that case the note set forth the due-on-sale clause and incorporated by reference all of the provisions of the mortgage. The mortgage did not contain a due-on-sale provision, but it did state that it was "`[t]o secure performance of the * * * agreements in said note, which are hereby incorporated herein and made a part hereof * * *.'" 97 Ill.2d 187, 190.

In this case the note executed by the plaintiffs and secured by a properly recorded mortgage which the plaintiffs acknowledged they executed neither contained a due-on-sale clause nor incorporated the mortgage by reference. The note had no default provision except for one relating to default in timely payment of principal and interest and providing in that event for acceleration of the due date of the principal sum. The only reference in the note to the mortgage was the following sentence:

"This note is secured by mortgage of even date to said Association on real estate located in Champaign County."

The mortgage both evidenced the debt and contained a due-on-sale clause. It stated:

"* * * to secure the payment of one promissory note of even date herewith, executed by the said mortgagors * * * in the principal sum of FORTY THOUSAND DOLLARS ($40,000.00), and payable to the order of said mortgagee * * * with interest at 9 1/4 percent per annum, both principal and interest being payable in monthly installments of $367.00 on or before the 20th day of each month * * * [In] case of the sale of said real estate without the written consent of the mortgagee * * * then all said mortgage indebtedness shall be at the option of the mortgagee become due and payable, and this mortgage may be foreclosed, the foreclosure suit to be sufficient notice and evidence of the exercise of such option."

Thus, this case presents a due-on-sale clause which appeared in the mortgage but was neither incorporated nor referred to in the note.

Plaintiffs, who desired to sell their mortgaged property, sought a declaratory judgment that the due-on-sale clause in the mortgage was unenforceable because of the absence of a similar clause in the note. The complaint also prayed for an injunction to prevent the lender from enforcing that clause in the mortgage or changing the interest rate. The circuit court of Champaign County allowed the motion of the defendant, First Federal Savings and Loan Association of Champaign, the mortgagee and holder of the note, for summary judgment and the appellate court affirmed (116 Ill. App.3d 579). We allowed the mortgagor's petition for leave to appeal. 87 Ill.2d R. 315.

This court recognizes due-on-sale provisions as valid per se. (Baker v. Loves Park Savings & Loan Association (1975), 61 Ill.2d 119.) We recently adhered to that holding in Provident Federal Savings & Loan, although the rule that due-on-sale clauses are per se valid has been criticized by one recent commentator. See McGuire, The Due-On-Sale Controversy: Restraints on Alienation and Federal Regulation of Real Estate Mortgages after de la Cuesta and the Garn-St. Germain Act, 1982 S. Ill. U.L.J. 487, 510-11.

The plaintiffs rely on two decisions which declared that the general rule of contract law that documents executed at the same time as a part of the same transaction should be read and construed as a single instrument does not apply in the case of a note and a mortgage securing the note. (Conerty v. Richtsteig (1942), 379 Ill. 360, 365; Oswianza v. Wengler & Mandell, Inc. (1934), 358 Ill. 302, 306.) Those decisions recognized an exception in that case and regarded each instrument as a separate undertaking. Oswianza held that the noteholder may sue on a matured note without foreclosing on the mortgage instrument even though the latter instrument precludes his taking such action without the approval of other noteholders. If such preclusion provisions are not expressly set forth in the note or bond, the court announced in Oswianza, the creditor may ignore the mortgage entirely and sue on the note at maturity. Consistent with the conclusion reached in Oswianza, we see no reason why the mortgagee may not foreclose on the real estate subject to the mortgage and disregard the personal obligation the maker of the note assumed in executing the note. Oswianza did not consider whether the parties may agree upon additional terms to be contained in the mortgage without restricting the common law action on the note, and it does not prohibit rights of action with respect to the security in addition to those based upon the note.

The question in Conerty v. Richtsteig (1942), 379 Ill. 360, 365, was whether a provision incorporated in the mortgage but not in the note could be the basis for imposing personal liability on the maker of the note. Conerty dealt with the personal liability of the maker of a note which had been assumed by a third party when the noteholder granted extensions of time for payment to the third party without the knowledge of the maker. The trust deed, but not the note, permitted such extensions. Here, the mortgagee is not seeking to impose personal liability on the plaintiffs, the makers of the notes, but only to foreclose on the mortgage in the event the mortgagor breaches a condition of the mortgage.

Neither Oswianza nor Conerty present any basis for restricting a mortgagee from electing to enforce its rights under the mortgage rather than the note and foreclosing as the mortgage permits him to do. This conclusion is buttressed by the holdings in both cases that the mortgage and note represent separate and distinct covenants. The note is evidence of the personal liability on the part of the maker, while the mortgage represents a pledge of real estate as security and creates a lien on the property pledged. In fact the language in both Oswianza and Conerty is more helpful to the defendant (the mortgagee) in this case than to the plaintiffs (the mortgagors). In Oswianza, the court said:

"True, if he [the bondholder] would seek to enforce the trust deed he is bound to follow and is limited by its provisions, but it does not follow that when he waives the security and sues by virtue of his common law right there is notice to him that his bond, by reference to the trust deed or otherwise, denies him that right. * * * Enforcement against the security and a suit at law are matters of radically different import, and to destroy the right to sue at law, a provision of such character in the trust deed must be ...

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