Heist v. EASTERN SAVINGS BANK, FSB.

• Decision Date: 12 October 2005
• Docket Number: No. 1949,1949
• Citation: 884 A.2d 1224,165 Md. App. 144
• Parties: Nancy HEIST v. EASTERN SAVINGS BANK, FSB.
• Court: Court of Special Appeals of Maryland

884 A.2d 1224

165 Md. App. 144

Nancy HEIST v. EASTERN SAVINGS BANK, FSB.

No. 1949, September Term, 2004.

Court of Special Appeals of Maryland.

October 12, 2005.

Scott C. Borison (Douglas B. Bowman, Legg Law Firm, LLC, on brief), Frederick, for appellant. Jonathan E. Claiborne (Whiteford, Taylor & Preston, LLP, on brief), Baltimore, for appellee.

Panel MURPHY, C.J., DAVIS, CHARLES E. MOYLAN, JR. (retired, specially assigned), JJ.

DAVIS, J.

Appellant, Nancy Heist, borrowed $141,500 from appellee, Eastern Savings Bank, FSB and, in a separately-signed addendum, appellant agreed that, if she fully repaid the loan within five years, she would incur a prepayment penalty. Appellant did prepay the loan, and, under the terms of her agreement, she was charged $9,531.97 for doing so.

Appellant filed suit in the Circuit Court for Frederick County, seeking a refund of the penalty and other relief. Upon appellee's motion,¹ the circuit court dismissed the complaint. Appellant noted an appeal and presents two questions for our review, which we have consolidated into one:

Did the circuit court err in concluding that the Note included a prepayment penalty and, therefore, dismissing appellant's complaint for failure to state a claim?

We shall affirm the judgment.

BACKGROUND

The Note that appellant signed includes two provisions key to our discussion. First, in paragraph 11, "APPLICABLE LAW," the Note states: "This Note shall be governed by the provisions of Subtitle 10 of Article 12 of the Commercial Law Article of the Annotated Code of Maryland, as amended from time to time, and by federal law." Second, as we have explained, the Note included an addendum in which the parties agreed upon a prepayment penalty.

Next, there are, basically, just two legal provisions key to our discussion. First, prepayment penalties are prohibited by Md.Code (2005 Repl.Vol.), Com. Law II § 12-1009(e),² but that statute—as a statute—does not apply to appellee or this loan because it has been preempted by federal law. See 12 C.F.R. § 560.2(b)(5). Second, the applicable federal regulation governing prepayment penalties states: "Subject to the terms of the loan contract, a Federal savings association," such as appellee, "may impose a fee for any prepayment of a loan." 12 C.F.R. § 560.34.

Appellant argues that her cause of action is based in contract law, not the Commercial Law Article. She argues that the Note incorporated into the parties' agreement all of Title 12, subtitle 10 of the Commercial Law Article, including § 12-1009(e)'s proscription of prepayment penalties, converting that proscription from a public law into a term of a private agreement; appellant concedes that § 12-1009(e), as a statute, is preempted by federal law. She argues that the reference to the Commercial Law Article rendered the parties' agreement ambiguous, because it incorporated § 12-1009(e) as a contract term, while the Note also contained a prepayment penalty. Due to this ambiguity, she asserts, the trial judge erred in dismissing her complaint, because a reasonable person could conclude that the parties had agreed that the loan would not include a prepayment penalty.

Appellee offers several bases for affirmance. It presents two arguments under federal preemption principles: first, that the parties could not have incorporated § 12-1009(e) into their agreement, and second, that they did not incorporate that section. But most strenuously, appellee argues that there was no ambiguity in the parties' agreement: they plainly agreed to a prepayment penalty, notwithstanding the reference to the Commercial Law Article.

STANDARD OF REVIEW

Under Maryland Rule 2-322(b)(2), a defendant may seek a dismissal on the ground that the complaint fails "to state a claim upon which relief can be granted." Md. Rule 2-322(b)(2)(2005). When moving to dismiss, a defendant is asserting that, even if the allegations of the complaint are true, the plaintiff is not entitled to relief as a matter of law. Hrehorovich, M.D. v. Harbor Hosp. Ctr. Inc., et al., 93 Md.App. 772, 784, 614 A.2d 1021 (1992). Thus, in considering a motion to dismiss for failure to state a claim, the circuit court examines only the sufficiency of the pleading. Id. "The grant of a motion to dismiss is proper if the complaint does not disclose, on its face, a legally sufficient cause of action." Id. at 785, 614 A.2d 1021 (citation omitted). This Court, therefore, shall assume the truth of all well-pleaded, relevant facts as alleged in appellant's complaint and all reasonable inferences drawn therefrom. Morris v. Osmose Wood Preserving et al., 340 Md. 519, 531, 667 A.2d 624 (1995) (citations omitted). Accordingly, because they were directly taken from appellant's complaint, we shall assume the truth of the facts set forth above. Lubore v. RPM Assocs., Inc., 109 Md.App. 312, 322-23, 674 A.2d 547 (1996).

LEGAL ANALYSIS

I

We quote appellant's assignment of error as set forth in her brief:

Appellee is a federal savings bank. As a federal savings bank, it's lending activities are subject to the Home Owners Loan Act, 12 U.S.C. § 1461 et seq., ("HOLA") and its implementing regulations. Appellee convinced the trial court that it had the right to charge the Appellant a prepayment penalty because federal law allowed it to charge such a fee. Appellant does not dispute that federal law permits inclusion of a prepayment penalty provision in a loan contract. 12 C.F.R. § 560.34 provides:

Any prepayment on a real estate loan must be applied directly to reduce the principal balance on the loan unless the loan contract or the borrower specifies otherwise. Subject to the terms of the loan contract, a Federal savings association may impose a fee for any prepayment of a loan.

Where the parties part company is whether or not the parties' contract provided for a prepayment penalty because there are two conflicting provisions in the parties' contract. One provision allows a prepayment penalty. Another provision adopts Subtitle 10 of Maryland law, which prohibits prepayment penalties. 12-1009(a) and (e). "It is a basic principle of contract law that, in construing the language of a contract, ambiguities are resolved against the draftsman of the instrument." (Citation omitted.)

From the foregoing premise, she concludes:

Appellant contends the ambiguity arises from the two conflicting provisions in regard to prepayment penalties should be construed against the Appellee. Therefore, Appellee wrongfully collected a prepayment penalty from Appellant. Therefore, the trial court erred when it dismissed the Appellant's action to recover the prepayment penalty that she paid to the Appellee.

The parties, in their briefs, discuss extensively whether § 12-1009(e), as either a statute or a contract term, is preempted by federal law. As we see it, however, this case has little to do with preemption. This is a routine contract case.³

Appellant contends that the Note is ambiguous. Regarding contract construction, the Court of Appeals explained:

Maryland has long adhered to the objective law of contract interpretation and construction ... A court construing an agreement under this test must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. In these circumstances, the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.

Wells v. Chevy Chase Bank, FSB, 377 Md. 197, 224 n. 12, 832 A.2d 812 (2003). (Quoting Taylor v. NationsBank, 365 Md. 166, 178-79, 776 A.2d 645 (2001)). (Citations omitted.) "The test for ambiguity is whether the terms are reasonably susceptible to two or more meanings." Metro. Life Ins. Co. v. Promenade Towers Mut. Hous. Corp., 84 Md.App. 702, 717, 581 A.2d 846 (1990).

The Note appellant signed stated, at paragraph 4, "BORROWER'S RIGHT TO PREPAY": "I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a `prepayment.' When I make a prepayment, I will tell the Note Holder in writing that I am doing so." In the very next line, there appears the following instruction: "* See Addendum to Note." The addendum, of course, was the separately-signed part of the Note in which appellant expressly agreed to the prepayment penalty she now contests.

Applying the general principles of contract law quoted above, and as a purely intuitive, common sense matter, we do not see how a reasonable person in the borrower's shoes could have thought she was not agreeing to a prepayment penalty. Appellant contends that the agreement was rendered ambiguous by the reference to (and incorporation of) Maryland law, which prohibits prepayment penalties, and the reference to federal law, which leaves the matter up to the contracting parties. We, however, do not see either reference as equivocating on appellant's express agreement to the prepayment penalty addendum. The Note is not, as we see it, ambiguous in the least: very simply, a reasonable person signing that Note, and separately signing its addendum, could not have believed that no prepayment penalty would be collected.

Assuming, arguendo, as appellant contends, that the contract requires interpretation, our conclusion is supported by oft-cited canons of interpretation.

There is a well-established rule of contractual construction that where two provisions of a contract are seemingly in conflict, they must, if possible, be construed to effectuate the intention of the parties as collected from the whole instrument, the subject matter of the agreement, the circumstances surrounding its execution, and its purpose and design. And, if a

...