Meyers v. Home Sav. & Loan Assn.

• Decision Date: 27 March 1974
• Citation: 113 Cal.Rptr. 358,38 Cal.App.3d 544
• Court: California Court of Appeals Court of Appeals
• Parties: Stephen Z. MEYERS et al., Plaintiffs and Appellants, v. HOME SAVINGS AND LOAN ASSOCIATION et al., Defendants and Respondents. Civ. 41582.

Page 358

113 Cal.Rptr. 358

38 Cal.App.3d 544

Stephen Z. MEYERS et al., Plaintiffs and Appellants, v. HOME SAVINGS AND LOAN ASSOCIATION et al., Defendants and Respondents.

Civ. 41582.

Court of Appeal, Second District, Division 3, California.

March 27, 1974.

As Modified April 17, 1974.

Hearing Denied June 26, 1974.

Stephen Z. Meyers, Meyers, Jacoby & Mosten, Los Angeles, for plaintiffs and appellants.

McKenna, Fitting & Finch, Bernard Kolbor, Daniel N. Belin, Aaron M. Peck, Los Angeles, for respondents Allstate Savings and Loan Ass'n, First Charter Financial Corp., Gibraltar Savings and Loan Ass'n, Hawthorne Savings and Loan Ass'n, Home Savings and Loan Ass'n, Lincoln Savings and Loan Ass'n, United Savings and Loan Ass'n of California, and Trans-World Financial Co.

De Marco, Barger & Beral, Richard C. Greenberg, Los Angeles, for respondent Avco Savings and Loan Ass'n.

Gibson, Dunn & Crutcher, G. Edward Fitzgerald, Martin C. Washton, Los Angeles, for respondent Prudential Savings and Loan Ass'n.

ALLPORT, Associate Justice.

In a so-called class action plaintiffs seek to have the court declare that the 'pre-payment penalties' required of persons seeking to pay loans in advance of the normal maturity dates in real estate loan contracts used by defendants are void as being in contravention of Civil Code section 1670. ¹ The claims against eight federally chartered defendants were removed to the United States District Court pursuant to 28 U.S.C. section 1441(b). The balance of those, chartered under state law, demurred upon the ground that no cause of action was stated. Certain of these defendants also raised the question of proper parties plaintiff and defendant but for reasons to be stated herein we need not consider this ground or the effect of the lack of unanimity of defendants' claims in this respect. On April 12, 1972, all demurrers were sustained and plaintiffs given 10 days to amend. Upon failure of plaintiffs to amend a motion to dismiss pursuant to Code of Civil Procedure section 581 subdivision 3 was granted and an order of dismissal filed. Plaintiffs appeal from the order of dismissal. The order constitutes a judgment and is appealable. (Code Civ.Proc. §§ 581d, 904.1(a); Morales v. Camello, 12 Cal.App.3d 370, 371, 90 Cal.Rptr. 718.)

It is contended on appeal the 'pre-payment penalty' provisions contained in all real estate loan contracts employed by defendants constitute liquidated damages in violation of California Civil Code section 1670 and are therefore void and since the complaint so alleged it was error to sustain the demurrers for failure to state a cause of action. We do not agree.

The typical 'pre-payment penalty' clause is alleged to be as follows:

'The holder of said promissory note agrees to accept additional payments provided, however, that in any calendar quarter in which payments made thereon exceed twenty (20%) percent of the original amount of said promissory note the holder will require the additional payment of an amount equal to 180 days interest on such original amount at the rate of interest set forth hereinabove.'

The clear import of this provision is to give the borrower an option to either pay the note in the manner contemplated by the contract or to prepay the balance due upon condition that a surcharge be added for the privilege of exercising the option. The clause does not penalize for the 'breach of an obligation' as contemplated by section 1670. No breach is involved in the prepayment transaction, only the exercise of the option given to the debtor for an alternative method of paying the debt. The bulk of plaintiffs' arguments regarding the social and economic undesirable aspects of a loan transaction involving such a prepayment clause is more appropriately addressed to the Legislature than the courts and is not persuasive or controlling of our decision herein.

In Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan Assn., 22 Cal.App.3d 303, at page 311, 99 Cal.Rptr. 417, at page 422, in upholding the validity of a similar prepayment requirement the court, inter alia, said:

'Finally, we remark that the control of charges, if it be desirable, is better accomplished by statute or by regulation authorized by statute than by Ad hoc decisions of the courts. Legislative committees and an administrative officer charged with regulating an industry have better sources of gathering information and assessing its value than do courts in isolated cases. Besides, institutions which lend vast sums of money should be informed, not by judgments after the facts on a case-to-case basis, but by laws or regulations which are in existence in advance of the undertaking to execute loans, of the validity or invalidity of terms that are commonly used. Otherwise, the lending institutions themselves may be the object of lawsuits in which a penalty is demanded, as in the third cause of...