Appeals court holds that a holder of a note cannot charge a prepayment premium upon acceleration unless the note clearly provides for it. Forty Pine, LLC v. Country Bank for Savings, 95 Mass.App.Ct. 1108 (2019).
By: Kevin Braun (Morgan, Lewis)
In September 2009, defendant Country Bank for Savings (the “Bank”) extended a commercial note in the amount of $250,000 to Henry J. Macuga (the “Original Borrower”), which was secured by a mortgage and a security agreement on a property. In January 2011, with the Bank’s consent, the Original Borrower transferred the property to plaintiff Forty Pine, LLC — a limited liability company wholly owned and controlled by the Original Borrower (the “Borrower”), who assumed the note and the mortgage.
James Malandrinos (the “Buyer”) sought to acquire a small portion of the property from the Borrower. Pursuant to Section 2.09 of the mortgage (which provides the Bank with a consent right over transfers of the mortgaged property), the Borrower sought the Bank’s consent for the sale. The Bank responded with multiple requests for additional information about the proposed transaction. The Buyer, however, eager to expedite the transaction, purchased the Borrower outright despite ongoing negotiations with the Bank and informed the Bank about the sale and sought the Bank’s approval for a continuous financial relationship. The Bank, in response, requested that the Borrower pay the note in full, including a prepayment premium and legal fees and expenses. The Bank acknowledged that it was accelerating the note because the Borrower had violated Section 2.09 of the mortgage by failing to secure the Bank’s consent prior to the sale of the Borrower and the subsequent sale of the property to the Buyer. The Borrower, in response, argued that it was not required under the terms of the mortgage to pay a prepayment premium upon acceleration and sued for breach of contract.
A Superior Court judge granted summary judgment to the Bank on all counts of the Borrower’s complaint and on the Bank’s breach of contract counterclaim against the Borrower for default of the mortgage. A second judge awarded damages in the amount of $393,687.58 to the Bank. On appeal, the court considered the question of whether the note allowed the Bank to charge a prepayment premium, including legal fees and expenses, upon acceleration.
With respect to the Borrower’s breach of contract claim, the court concluded that the lower court’s dismissal of its claim was erroneous because the note failed to expressly provide that a prepayment premium is due upon acceleration. Specifically, the court disagreed with the lower court’s inference that the highlighted language of the provision of the note below means that the prepayment premium was to be applied to payments on demand: “[a]ll Prepayments, whether by acceleration or otherwise, shall be applied against the principal payments due hereunder in the inverse order of their maturity”. The court noted that the general rule is that a “[a] prepayment premium does not attach when a loan is accelerated because the act of acceleration advances the maturity date of the debt; the debt becomes immediately due and payable.” A holder of a note, in short, cannot simultaneously accelerate the note and collect a prepayment penalty — unless the note provides for otherwise.
There is an exception to the general rule, however, where the note’s clear and unequivocal language concerning prepayments and acceleration provides that the prepayment premiums are enforceable on acceleration of the loans at issue. The Court cited to specific precedent where a note contained an acceleration provision that clearly stated that in the event of a default, the note would become due in full immediately “together with . . . the Make-Whole Amount.” That note also acknowledged that “the Make-Whole Amount due at any option or required prepayment of the note (including any prepayment required pursuant to . . . [the acceleration clause]) has been negotiated . . . and is not a penalty.”
Unlike the precedent, in this case, the court found that the provision defining the prepayment premium (which referred to the prepayment premium being paid when a borrower prepays the note) does not include any reference to acceleration. The provision defining a prepayment (defined as “any payment of principal in advance of its due date”) also did not include any reference to acceleration. Instead, the reference to acceleration is only found in the section that explains how prepayments shall be applied, “whether by acceleration or otherwise”. This distinction was critical from the court’s perspective. Given the definition of acceleration, the court reasoned that if the reference to acceleration in the foregoing quoted language was intended to exempt the note from the general rule prohibiting prepayment penalties upon acceleration, the note would have contained clearer and more specific language in this respect.
Therefore, the court found that the note failed to expressly provide that a prepayment premium was due upon acceleration, no such premium was due and therefore the lower court’s dismissal of the Borrower’s breach of contract claim was erroneous and reversed the lower court’s judgment on this count.
