Hatcher v. Rose

• Decision Date: 14 August 1991
• Docket Number: No. 171PA90,171PA90
• Court: North Carolina Supreme Court
• Parties: M.S. HATCHER and wife, Betty M. Hatcher v. Earl G. ROSE and wife, Bonnie H. Rose.

Page 172

407 S.E.2d 172

329 N.C. 626

M.S. HATCHER and wife, Betty M. Hatcher v. Earl G. ROSE and wife, Bonnie H. Rose.

No. 171PA90.

Supreme Court of North Carolina.

Aug. 14, 1991.

On discretionary review of the decision of the Court of Appeals, 97 N.C.App. 652, 389 S.E.2d 442 (1990), reversing the judgment entered in favor of defendants by Wallace, J., on 7 April 1989 in the District Court, Richmond County, and awarding summary judgment for plaintiffs. Heard in the Supreme Court 14 November 1990.

Page, Page & Webb by John T. Page, Jr., Rockingham, for plaintiffs-appellees.

Leath, Bynum, Kitchin & Neal, P.A. by Henry L. Kitchin and Stephan R. Futrell, Rockingham, for defendants-appellants.

FRYE, Justice.

In this appeal, defendants present us with the issue of whether prepayment is allowed on a promissory note executed for the purchase of real estate when the note does not by specific language either prohibit or permit prepayment. We answer this question in the affirmative and reverse the Court of Appeals' decision directing summary judgment for plaintiffs.

Defendants Earl G. Rose and Bonnie H. Rose, who are husband and wife, purchased real property for the sum of $70,000 from the plaintiffs, M.S. Hatcher and Betty M. Hatcher, who are also husband and wife. Defendants executed a promissory note on 7 July 1983 in favor of plaintiffs. The note was in the amount of $70,000 plus interest at the rate of nine percent (9%) per annum and was secured by a deed of trust on the subject property which consisted of two tracts of real property in the Beverly Hills Subdivision in Richmond County, North Carolina. The first payment on the note was due on 1 August 1983 in the amount of $629.81. The remaining payments of $629.81 were due on the first day of each successive month until the note was paid in full. Defendants' attorney, using a 1977 North Carolina Bar Association Form No. 5A, prepared the deed of trust securing the note. The deed of trust provided: "The final due date for payment of said promissory note, if not sooner paid, is July 1, 2003."

Defendants alleged in their answer that they notified plaintiffs in writing in February 1988 that they wanted to pay off the remaining balance of the principal of the note and interest due at that time because they had secured alternate financing for the amount due plaintiffs. Plaintiffs indicated that they would refuse to accept payment of the remaining balance. Defendants made each monthly installment through 1 March 1988 and tendered full payment of the outstanding balance and interest in the amount of $63,601.21 on 11 May 1988. Plaintiffs refused this tender and brought this action on 27 September 1988, asking only for recovery of the installments which were unpaid at the time of this action, the payments for April, May, June, July, August, and September of 1988. In defense, defendants asserted that the instruments in this transaction did not expressly contain any restriction against prepayment and that defendants were entitled to prepay this obligation and have the deed of trust cancelled of record.

Both parties moved for summary judgment, and the trial judge, in a judgment filed 7 April 1989, granted summary judgment in favor of defendants. In the judgment, the trial judge concluded that defendants were entitled to prepay the note and directed plaintiffs to mark the promissory note "Paid and Fully Satisfied" upon defendants' payment of $63,601.21. The Court of Appeals reversed and remanded the case to the trial court for entry of judgment for plaintiffs. Hatcher v. Rose, 97 N.C.App. 652, 655, 389 S.E.2d 442, 444 (1990). We allowed defendants' petition for discretionary review on 13 June 1990.

Defendants contend that at common law there was a presumption of a right of prepayment when the note was silent. Plaintiffs contend that the Court of Appeals was correct in its conclusion that at common law the debtor could not compel the creditor to accept prepayment when the note was silent. Id. at 654, 389 S.E.2d at 443. Unfortunately the common law in North Carolina on this matter is not clear, and we must now determine whether defendants have the right to prepay the note and have their land released from the deed of trust when the note is silent as to that right.

As a starting point, we turn to the law as it exists today in our General Statutes and then look backward to determine how the law evolved to its present state. In 1985, the North Carolina General Assembly enacted N.C.G.S. § 24-2.4 which provides:

A borrower may prepay a loan in whole or in part without penalty where the loan instrument does not explicitly state the borrower's rights with respect to prepayment or where the provisions for prepayment are not in accordance with law.

N.C.G.S. § 24-2.4 (1986). Under the provisions of this statute, clearly defendants have both the right to prepay this note and the right to prepay without paying a penalty. However, this statute is not applicable in the present case because the note was signed before the effective date of this statute.

In concluding that summary judgment was appropriate for plaintiffs because defendants had no right of prepayment, the Court of Appeals cited two cases, Barbour v. Carteret County, 255 N.C. 177, 120 S.E.2d 448 (1961), and Smithwick v. Whitley, 152 N.C. 366, 67 S.E. 914 (1910), as authority. Hatcher v. Rose, 97 N.C.App. at 653-54, 389 S.E.2d at 443. The Court of Appeals acknowledged that neither case is on point but concluded that Barbour is analogous. Id. at 653, 389 S.E.2d at 443. We disagree.

Barbour involved the prepayment of county bonds rather than prepayment of a note secured by a deed of trust. This point alone is enough to distinguish Barbour from the present case because municipal bonds and a promissory note secured by real estate are different instruments which by their nature serve different purposes. However, we also find that the language in Barbour, which is quoted by the Court of Appeals, is inapplicable in the present situation. From Barbour, the Court of Appeals quotes the following, "a debtor cannot compel his creditor to accept payment before maturity except upon terms stipulated." Id. (quoting Barbour v. Carteret County, 255 N.C. at 181, 120 S.E.2d at 451). For this proposition, Barbour cited Bell Bakeries, Inc., v. Jefferson Standard Life Ins. Co., 245 N.C. 408, 96 S.E.2d 408 (1957).

Bell Bakeries involved a note which expressly permitted prepayment and also provided for a penalty if the debtor chose to prepay. The note provided that the creditor could charge the debtor an additional amount as a penalty for prepayment. Id. at 418, 96 S.E.2d at 410. The plaintiff in Bell Bakeries paid the penalty and then brought the action to recover the money which it had paid, claiming that it paid the money as a result of duress. Id. This Court concluded, "This provision was legal and plaintiff could not elect to repay the entire loan without complying with this provision." Id.

Unlike the present case where the note is silent as to prepayment, Bell Bakeries clearly provided for prepayment. Thus, the language, "except upon terms stipulated," found in Barbour with a cite to Bell Bakeries cannot stand for the proposition that prepayment is not allowed unless specifically provided for in the note since Bell Bakeries did not involve a situation where the note was silent on prepayment. Bell Bakeries held that if the agreement includes a provision for payment of a penalty for prepayment, the debtor must pay that penalty and the penalty can be legally enforced. Bell Bakeries did not answer the question of whether a right to prepayment exists when the note is silent as to that right. The words, "except upon terms stipulated," clearly refer to the terms provided for the penalty upon prepayment and not to whether there is a right to prepayment when the note is silent on that point. Thus, the language in Barbour, quoted by the Court of Appeals as support for the proposition that there is no right to prepay except where the note specifically provides for it, does not stand for that proposition.

The Court of Appeals also cited Smithwick for the statement that a creditor is "not required by law to accept payment of the unmatured notes before maturity or to surrender the mortgage." Smithwick v. Whitley, 152 N.C. at 369, 67 S.E. at 915. Smithwick is not on point because Smithwick was an action for usury. Id. In Smithwick, plaintiff gave defendant ten different notes which matured each January for ten consecutive years. Plaintiff wanted to pay off some of the notes early, and defendant agreed to accept the early payment but told plaintiff he would only accept the prepayment if plaintiff made an additional payment equaling the amount of interest on each note if it had not been paid early. Id. at 366-67, 67 S.E. at 914. Plaintiff made the additional payment and then sued defendant for usury. Smithwick is different from the present case because the creditor in Smithwick, unlike plaintiffs in the present case, agreed to accept prepayment and thus Smithwick did not involve a resolution of the issue of whether a right to prepayment existed if the note was silent. Furthermore, Smithwick does not cite any legal authority for the statement which the Court of Appeals quoted from Smithwick.

The Court of Appeals stated, "based upon Barbour ... and the language in Smithwick ... we hold that at common law there was no right to compel the creditor to accept prepayment of a debt where the contract was silent as to prepayment." Hatcher v. Rose, 97 N.C.App. at 654, 389 S.E.2d at 443. Plaintiffs likewise contend that Barbour, Smithwick, and Bell Bakeries all stand for the proposition that the common law in North Carolina had no presumption of a right to prepay when the note was silent. We do not read Barbour, Smithwick, and Bell Bakeries as supporting the proposition that the common law in North Carolina does not allow prepayment when the note is...