Young v. Sodaro
Annotate this Case
January 1995 Term
___________
No. 22349
___________
RALPH R. YOUNG, JR. AND
MARION M. YOUNG,
Plaintiffs Below, Appellees
v.
SHERYL SODARO,
Defendant Below, Appellant
___________________________________________________
Appeal from the Circuit Court of Kanawha County
Honorable John Hey, Judge
Civil Action No. 92-C-3700
REVERSED
___________________________________________________
Submitted: January 18, 1995
Filed: February 21, 1995
James T. Cooper
Lovett, Cooper & Glass
Charleston, West Virginia
Attorney for the Appellant
J. H. Crewdson
Charleston, West Virginia
Attorney for the Appellees
JUSTICE McHUGH delivered the Opinion of the Court.
Justice Brotherton did not participate.
Judge Fox sitting by temporary assignment.
SYLLABUS BY THE COURT
Under the rule of perfect tender in time, a debtor,
absent statutory authority or contractual language to the contrary,
has no right to prepay a promissory note secured by a deed of trust
prior to the date of maturity.
McHugh, Justice:
This is an appeal from the March 14, 1994 order of the
Circuit Court of Kanawha County, which allowed the prepayment, in
full, of a promissory note, the terms of which did not provide for
such prepayment. This Court has before it the petition for appeal,
all matters of record and the briefs and argument of counsel. For
the reasons stated below, the order of the circuit court is
reversed.
I
The facts of this case are, for the most part,
undisputed. Appellees Ralph R. Young, Jr. and Marion M. Young, by
deed dated November 5, 1990, conveyed to B & J Equipment Company,
Inc. (hereinafter "B & J Equipment") certain real estate consisting
of approximately 1.748 acres located in Union District, Kanawha
County, West Virginia. The purchase price for the property was
$415,000.
Appellant Sheryl Sodaro loaned B & J Equipment $135,000
to assist in the financing of the purchase of the property.
Accordingly, a note in the original principal sum of $135,000 was
executed by B & J Equipment and William E. Mattingly and Janice E.
Mattingly, individually, and made payable to appellant. This note,
dated November 29, 1990, carries interest at the rate of fourteen
percent (14%) per annum, on the unpaid principal balance until
paid. The note further provides that the principal and interest
are to be paid in monthly installments of $1,678.75 each,
"commencing on the first day of January, 1991 and continuing thereafter on the first day of each succeeding month until a total
of sixty monthly payments have been made, at which time the
remaining balance of principal and interest shall become due and
will be paid in full. Each of the said monthly installments shall
be applied first to the interest due hereon and the balance, if
any, to the principal."See footnote 1
The record reveals that B & J Equipment and the
Mattinglys initially tendered to appellant a note granting them the
right to prepay the unpaid principal sum prior to maturity.See footnote 2
However, appellant specifically rejected the proposed note
containing prepayment language, as it was her desire to have the
principal and interest paid to her over a sixty-month period. The
note upon which the parties eventually agreed did not confer upon
the makers the right to prepay the loan prior to maturity. B & J
Equipment and the Mattinglys executed a first deed of trust on the
property securing the payment of the aforementioned $135,000 note,
also dated November 29, 1990, payable to appellant.
B & J Equipment and the Mattinglys subsequently executed
a second note, dated November 29, 1990, in the amount of $290,000,
payable to appellees. This second note is secured by a deed of
trust on the subject property which is a second lien thereon,
junior to the deed of trust held by appellant.
When B & J Equipment became delinquent on both notes,
appellant advised appellees that she was going to foreclose on the
subject property under her first deed of trust if payments due on
her note were not brought up to date. In response, appellees
sought to foreclose under their second deed of trust so that their
lien would not be extinguished by foreclosure under the first lien.
Appellant agreed and on February 27, 1992, appellees purchased the
subject property at the foreclosure sale for $297,000, which was
the total sum then due and owing, including any costs and interest
owed thereon. Appellees, consequently, owned the property subject
to the note and deed of trust held by appellant.
Appellees claim that it was not until after they paid the
delinquencies on the first note that they learned that the interest
rate thereon was 14 percent per annum. Upon learning of the terms
of the note, appellees made arrangements to borrow money at a lower
rate of interest to pay off the first note in full. On March 20,
1992, appellees delivered a check in the amount of $137,939.54 to
appellant's attorney as payment in full of the first note.
Appellant refused to accept the check on the grounds that the note
payable to her does not contain a provision allowing prepayment and
that, absent her agreement to the contrary, she is not obliged to
accept payment in full of the note in advance of its terms, without
inclusion of future interest.
A declaratory judgment actionSee footnote 3 was subsequently filed in
Kanawha County Circuit Court.See footnote 4 The circuit court held that
appellant was required to accept payment in full of the note in the
amount of $137,939.54 and that any interest accrued after March 20,
1992, the date appellees attempted to tender payment to appellant,
is forfeited and barred. It is from this ruling that appellant now
appeals.
II
The sole issue before this Court is a matter of first
impression in West Virginia: whether a debtor has a right to
prepay a promissory note, which is secured by a deed of trust, when
the instruments are silent and do not expressly grant that right.See footnote 5
Though some states have conferred upon borrowers a statutory right
to prepay a loan,See footnote 6 no such legislation has been passed in West Virginia. We, therefore, look to the common law as it exists in
other jurisdictions.
The majority rule is sometimes referred to as the default
rule of perfect tender in time, which may be expressed as follows:
Absent statutory authority or express contractual language to the
contrary, a borrower has no right to prepay his mortgage or deed of
trust obligationSee footnote 7 prior to the maturity date specified on the
underlying promissory note and the agreed upon payment schedule is to be enforced. See Metropolitan Life Ins. Co. v. Promenade Towers
Mut. Hous. Corp., 581 A.2d 846, 849 (Md. Ct. Spec. App. 1990),
cert. granted, 597 A.2d 1377 (Md. 1991);See footnote 8 Metropolitan Life Ins.
Co. v. Strnad, 876 P.2d 1362 (Kan. 1994). See also 55 Am. Jur. 2d
Mortgages § 397 (1971). In both Met. Life II, supra at 1380 and
Strnad, supra at 1367, the Court of Appeals of Maryland and the
Supreme Court of Kansas, respectively, noted:
'Since the early nineteenth century the
general rule has been that a debtor cannot,
without the lender's consent, prepay a
mortgage debt. More precisely, when a
specific amount of indebtedness is secured by
a mortgage covering the debtor's real
property, and the note specifies a date
certain for repayment of the debt, the debtor
is not entitled to pay the indebtedness
before that date unless the lender agrees to
accept such payment. This is the requirement
of perfect tender in time.'
(quoting Frank S. Alexander, Mortgage Prepayment: The Trial of
Common Sense, 72 Cornell L. Rev. 288, 290-91 (1987)).
Justification of the rule of perfect tender in time has
been expressed in both economic and philosophic terms. Conferring
the right of prepayment when such right is absent from the note or
mortgage instrument may cause economic hardships upon the lender,
"not the least of which include the loss of the bargained-for-rate
of return, an increased tax burden, unanticipated costs occasioned
by the need to reinvest the principal, and for those creditors
anxious to ensure regular payments not unlike an annuity, it undoes the mortgagee's purpose in making the loan."See footnote 9 In re Arthur v.
Burkich, 520 N.Y.S.2d 638, 639 (N.Y. App. Div. 1987) (citing,
Alexander, supra at 310-17) (footnote added). See also Strnad,
supra at 1368; Dugan v. Grzybowski, 332 A.2d 97, 99 n. 2 (Conn.
1973).See footnote 10 In the present case, appellant has indicated that as a
result of liquidating certain assets in order to loan B & J
Equipment $135,000 to purchase the property, she incurred
additional income tax liability.
The rule of perfect tender in time has further been
rationalized philosophically, viewing the rights of creditor and
debtor as equal and reciprocal:See footnote 11
"'A creditor can no more be compelled to
accept payments on a contract before, by the
terms thereof, they are due, than can a debtor
be compelled to make such payments before they
are due. The time of payment fixed by the
terms of a pecuniary obligation is a material provision, and each party has the right to
stand on the letter of the agreement and
perform accordingly.'"
Kruse v. Planer, 288 N.W.2d 12, 14 (Minn. 1979) (citing Peryer v.
Pennock, 115 A. 105 (1921)). See also Strnad, supra at 1367 ("a
debtor has no more right to pay off an obligation prior to its
maturity date than the creditor has to compel collection of the
debt prior to its maturity"); Alexander, supra at 317.
In contrast, the minority of jurisdictions has adopted
the rule that, absent a statute or contractual provision to the
contrary, there is a presumption of a right to prepay a note where
a mortgage is silent as to that right. Mahoney v. Furches, 468 A.2d 458 (Pa. 1983). Though the Mahoney court agreed with the
majority's rationale that "the use of the mortgage for private
investment purposes is increasing and may also support a policy
encouraging such use[,]" it found the more dominant policy to be
the free alienability of land "since the fundamental purpose of the
mortgage note in most instances is to secure a debt incurred in the
purchase of land from which the debt arises rather than to secure
investment income for the mortgagee." Id. at 461. But see Strnad,
supra; Met. Life I, supra; Met. Life II, supra; Burkich, supra (all
of which reject the restraint on alienation argument).
Though we are mindful of the minority rule and the
various reasons for which it has been adopted in some states,
Hatcher v. Rose, 407 S.E.2d 172 (N.C. 1991);See footnote 12 Skyles, supra; Spillman v. Spillman, 509 So. 2d 442 (La. Ct. App. 1987), we,
nevertheless, find the majority rule to be more compelling.
Therefore, we hold that, under the rule of perfect tender in time,
a debtor, absent statutory authority or contractual language to the
contrary, has no right to prepay a promissory note secured by a
deed of trust prior to the date of maturity.
For the reasons stated herein,See footnote 13 the order of the Circuit
Court of Kanawha County, dated March 14, 1994, is reversed.
Reversed.
Footnote: 1
The deed of trust contains language similar to that in
the note, including the annual rate of interest and monthly
payments.Footnote: 2
The proposed prepayment language provided: "The maker
hereof reserves the right to pay the whole, or any part of the
principal and interest due hereon at any time."Footnote: 3
See The Uniform Declaratory Judgments Act, W. Va.
Code, 55-13-1, et seq.Footnote: 4
Appellant also filed a third-party complaint against
B & J Equipment and the Mattinglys alleging they would be liable
for payment of the note, plus the interest thereon. Appellant
has not pursued this third-party claim.Footnote: 5
A prepayment clause may prohibit prepayment of a debt
entirely or it may confer upon the borrower such right, with
limitations thereon. Robert K. Baldwin, Note, Prepayment
Penalties: A Survey and Suggestion, 40 Vand. L. Rev. 409, 412
(1987). A prepayment clause might charge a fee, or penalty, for
the right to prepay. A prepayment penalty might be a percentage
of the prepaid principal or of the original loan amount. Id. at
412-13. See, e.g., McCausland v. Bankers Life Ins. Co., 757 P.2d 941 (Wash. 1988) (fifteen-year note prohibited prepayment of
principal during first seven years of loan but principal payment
permitted during years eight through ten, if accompanied by 5%
fee; after year ten, note could be prepaid without restriction).Footnote: 6
See, e.g., Fla. Stat. Ann. § 697.06 (West 1994)
("[a]ny note which is silent as to the right of the obligor to
prepay the note in advance of the stated maturity date may be
prepaid in full by the obligor or his successor in interest
without penalty"); N.C. Gen. Stat. § 24-2.4 (1986) ("borrower may
prepay a loan . . . without penalty where the loan instrument
does not explicitly state the borrower's rights with respect to
prepayment"); N.J. Stat. Ann. § 46:10B-2 (West 1989)
("[p]repayment of a mortgage loan may be made by or on behalf of
a mortgagor at any time without penalty").
Other states have, similarly, passed legislation
concerning the right to prepay a loan, with variations and
limitations thereon. See, e.g., 41 Pa. Cons. Stat. Ann. § 405
(1992) (right to prepay residential mortgages only); Mass. Gen.
Laws Ann. ch. 183, § 56 (West 1981) (right to prepay mortgage
note secured by first lien on dwelling house of three or less
separate households occupied by mortgagor); 815 Ill. Comp. Stat.
Ann. 205/4 (Smith-Hurd 1993) (prepayment penalty prohibited where
the interest rate is greater than eight percent per annum).Footnote: 7
While the deed of trust, and not the mortgage, is the
instrument used in West Virginia to secure the payment of a debt,
this Court has stated that "a deed of trust is in effect a
mortgage, the primary difference being the manner in which it is
foreclosed." Firstbank Shinnston v. West Virginia Insurance Co.,
185 W. Va. 754, 758, 408 S.E.2d 777, 781 (1991) (citing Rock v.
Mathews, 35 W. Va. 531, 536, 14 S.E. 137, 139 (1891)). See also
Villers v. Wilson, 172 W. Va. 111, 115 n. 4, 304 S.E.2d 16, 19 n.
4 (1983). In the event there is a default in payment of a debt
secured by a deed of trust, the holder thereof need not apply to
a court to foreclose it, as the holder of a mortgage would.
Instead, the property merely becomes liable to sale under the
power of sale conferred upon the trustee. W. Va. Code, 38-1-3
[1923]; 13A M.J., Mortgages and Deeds of Trust, §§ 4, 7 (1991).Footnote: 8
The Court of Appeals of Maryland granted certiorari
(hereinafter "Met. Life II") from the decision by the Court of
Special Appeals of Maryland (hereinafter "Met. Life I"),
affirming, inter alia, the presumption against prepayment .Footnote: 9
This is particularly true in the present case
considering the creditor is an individual and not a lending
institution.Footnote: 10
Note 2 of Dugan states: "'[t]his freedom of the
mortgagee from anticipation [of prepayment] is of increasing
value as the mortgage becomes more and more an investment
instrument, designed to secure a regular flow of income. Current
institutional mortgages customarily exact substantial amounts as
conditions of accepting prepayment.' 3 Powell, Real Property, p.
656 n. 4. In contrast, a mortgage note designed primarily to
give the lender security for the timely repayment of his money at
a profitable rate of interest, will more likely contain a
prepayment clause without a penalty attached. The object of the
clause is generally to encourage repayment, whereas in the
absence of such a clause, courts tend to construe the mortgage
note as intended to secure regular investment income to the
mortgage over a definite period of time." (emphasis added and
citations omitted).Footnote: 11
Skyles v. Burge, 789 S.W.2d 116, 119 (Mo. Ct. App.
1990).Footnote: 12
The relevant North Carolina statute permitting
prepayment of a loan where the loan instrument is silent thereon,
previously cited in n. 6, was not applicable to the Hatcher case
in that the note was signed before the effective date of the
statute. Hatcher, at 173.Footnote: 13
We find appellees' contentions that they were not the
original makers of the note nor aware of it prior to foreclosing
under their second deed of trust to be without merit.
Specifically, appellees maintain they were unaware that the note
carried an annual interest rate of fourteen percent. The first
deed of trust was properly recorded and reflected the terms of
the underlying promissory note. Appellees clearly had notice of
these instruments and should have been cognizant of their terms
considering that, upon purchase of that property, they stood in
the shoes of the instruments' original makers. See W. Va. Code,
40-1-9 [1963]; Lightner v. Lightner, 146 W. Va. 1024, 1034, 124 S.E.2d 355, 362 (1962). See also Highway Properties v. Dollar
Savings Bank, 189 W. Va. 301, 431 S.E.2d 95 (1993).
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