United States v. Med O Farm, Inc. (9th Cir. 1983)

United States v. Med O Farm, Inc., 701 F.2d 88 (9th Cir. 1983), This case addresses whether a lender administering a nationwide federal loan program may enforce a due‑on‑sale clause notwithstanding state law that would otherwise restrict enforcement.

Background

Med O Farm, Inc. obtained an Economic Emergency loan from the Farmers Home Administration (FmHA) pursuant to the Emergency Agricultural Credit Adjustment Act of 1978. The loan was secured by a promissory note and a real estate mortgage, both of which prohibited the borrower from selling, transferring, or encumbering the property without the government’s prior written consent.

The case states:

The morgage provided that "neither the property nor any portion thereof or interest therein shall be leased, assigned, sold, transferred or encumbered, voluntarily or otherwise, without the written consent of the Government." It also empowered the government to require payment of the entire amount outstanding and to enforce the instrument through foreclosure if Med O Farm failed to discharge any mortgage obligation. Appellant's Excerpt of Record 1, Ex.B. The promissory note incorporated these provisions. Id., Ex. A.

The sole shareholders of Med O Farm sold all of the corporation’s stock to a third party without government consent. The purchaser attempted to assume the loan at the existing interest rate. FmHA declared the loan in default and commenced foreclosure.

The borrowers argued that under Washington law, due‑on‑sale clauses were unenforceable absent impairment of the lender’s security.

Holding

The Ninth Circuit affirmed summary judgment for the United States, holding that:

1. Federal law, not state law, governs enforcement of due‑on‑sale clauses in nationwide federal loan programs; and
2. The sale of all stock in a corporation constitutes a transfer of an interest in the underlying real property sufficient to trigger a due‑on‑sale clause.

Reasoning

The court rejected application of Washington’s restraint‑on‑alienation doctrine, explaining that “federal, and not state, law governs questions involving the rights of the United States under nationwide federal programs.”

Allowing purchasers who had not met federal eligibility requirements to assume the loan would frustrate the objectives of the federal agricultural lending program. Enforcement of the due‑on‑sale clause was therefore necessary to preserve the integrity of the program.

The court further held that transferring all corporate stock necessarily transfers an interest in the corporation’s underlying assets, including real property, and thus qualifies as a “transfer” under the mortgage instruments.

Even apart from the stock sale, the transaction also violated the mortgage by encumbering the property, providing an independent basis for enforcement.

Key Takeaway

Med O Farm confirms that:

• in federally administered loan programs state law limitations on due‑on‑sale clauses do not apply;
• changes in corporate ownership can trigger due‑on‑sale provisions; and
• lack of impairment to the lender’s security does not bar enforcement.

For related posts and primary authority, see: Due‑on‑Sale Clause.