Naumburg v. Pattison

• Decision Date: 30 December 1985
• Docket Number: No. 15351,15351
• Citation: 711 P.2d 1387,1985 NMSC 120,103 N.M. 649
• Parties: Peter H. NAUMBURG and Haila H. Naumburg, husband and wife, Plaintiffs- Appellants, v. Buell N. PATTISON and Jean D. Pattison, husband and wife, Defendants-Appellees.
• Court: New Mexico Supreme Court

Page 1387

711 P.2d 1387

103 N.M. 649

Peter H. NAUMBURG and Haila H. Naumburg, husband and wife, Plaintiffs- Appellants, v. Buell N. PATTISON and Jean D. Pattison, husband and wife,

Defendants-Appellees.

No. 15351.

Supreme Court of New Mexico.

Dec. 30, 1985.

[103 N.M. 650] Simons, Cuddy & Friedman, Daniel H. Friedman, Santa Fe, for plaintiffs-appellants.

Garrett, Richards & Associates, David F. Richards, Clovis, for defendants-appellees.

OPINION

SOSA, Senior Justice.

Due to defendants' refusal to accept prepayment on a real estate contract, plaintiffs, relying on the Residential Home Loan Act (RHLA), sought a declaratory judgment, an injunction and damages. Defendants answered and brought a counterclaim seeking recission in the event the trial court declared plaintiffs' right to prepay. The trial court found that the RHLA did not apply; nevertheless, the court held that plaintiffs were entitled to prepay the contract provided they also pay defendants a reasonable penalty for prepayment. We reverse the trial court except as to the issue of tender.

The pertinent facts are that on September 30, 1982, plaintiffs Peter and Haila Naumburg entered into a real estate contract with defendants Buell and Jean Pattison for the purchase of a tract of land and house in Taos County, New Mexico. Under the terms of the contract, the purchase price of the property was $120,000.00, payable as follows: (1) a down payment in the amount of $20,000; (2) the interest on the remaining balance of $100,000.00 at a rate of 20 percent per annum to be paid in ten equal annual installments of $20,000.00, beginning on September 30, 1983; (3) the remaining balance to be paid in one lump sum payment of $100,000.00 on September 30, 1993.

The contract contained the provision that "[b]uyer shall not have the right of prepayment during the pendency of the contract." On April 11, 1983, however, plaintiffs' attorney wrote a letter to defendants' attorney stating:

In behalf of my client Peter Naumburg, I hereby notify you that Peter will shortly pay the outstanding balance on the Real Estate Contract between the parties dated September 30, 1983 [sic]. I note a prohibition against prepayment in that contract. I have advised Peter that said clause is unenforceable under State law * * *.

Nine days later, defendants' attorney wrote in response:

This will acknowledge your letter of April 11, 1983. I am of the opinion that prohibition against prepayment is enforceable, although a prepayment penalty or premium would not be.

I would be most appreciative if you would site [sic] any authority you might have for your conclusion that [the prepayment prohibition] is unenforceable.

I have provided a copy of your letter to my client and have advised him that he has the right to receive payments under the contract as outlined * * *.

On April 28, 1983 plaintiffs filed a four count complaint. Count I requested that the court declare the prepayment prohibition unenforceable under the RHLA, NMSA 1978, Sections 56-8-22 to -30 (Cum.Supp.1982). In Count II, plaintiffs sought a permanent injunction, enjoining defendants from enforcing the prepayment prohibition and requiring defendants to direct the escrow agent to deliver the Warranty Deed upon payment by plaintiffs of all sums currently due. Count III requested the award of damages in the amount of $150,000.00 for defendants' arbitrary refusal to allow prepayment. And finally, Count IV alleged that in making the loan to plaintiffs, defendants had failed to comply with NMSA 1978, Section 56-8-11.2 (Cum.Supp.1982) and that defendants should, therefore, forfeit all interest, charges or other advantages of the sale.

After a bench trial, the trial court concluded in its Judgment and Order that the RHLA did not apply "because the property was not purchased by [p]laintiffs as a principal residence, is not a residence within the definitions of the Act, and the real estate [c]ontract is not a home loan as defined in the Act." Relying on common law, rather than the Act, the court found that the contract was a valid, binding and enforceable contract between the parties except for the absolute prohibition against prepayment. Plaintiffs were to be allowed to prepay but defendants could extract a reasonable prepayment penalty, in an amount determined by the court. ¹ Nevertheless, the court found that plaintiffs' letter of April 11, 1983 constituted an invalid tender of prepayment.

On appeal, plaintiffs' main contentions are that: (1) the RHLA does apply because the property in question is a residence as defined in the Act; (2) the complete prohibition against prepayment is a penalty and, therefore, specifically forbidden by the Act; (3) the letter sent by plaintiffs' attorney constituted a valid tender; in the alternative a formal tender was not required since defendants manifested the intention to refuse prepayment; and (4) the defendants are liable for any damages resulting from their refusal to accept prepayment. Defendants answer each of these points on appeal and, furthermore, cross-appeal on the ground that the trial court erred in holding the prepayment prohibition unenforceable under common law principles.

I. Applicability of the Residential Home Loan Act

The RHLA forbids a lender from requiring a penalty or premium for the prepayment of the balance of indebtedness. Sec. 56-8-30. This restriction only applies to real estate contracts made for the purchase of a "residence". "Residence", in turn, is defined as "a dwelling and the underlying real property designed for occupancy by one to four families * * *." Sec. 56-8-24 A.

Plaintiffs argue that, at the time of purchase, the lot contained a log cabin, which was clearly a single-family, residential structure; that they made improvements to the cabin after purchase, to make it "more attractive for single family use"; and that they intended to use it for recreational purposes, though the best and highest use would be commercial. Defendants, relying on the trial court's findings below, contend that the property is located in the center of a commercial area; that prior to putting the property up for sale, defendants had taken steps to develop the property commercially; that the Naumburgs' residence is in Santa Fe and that the property in question is nothing more than a "recreational second-home" which the Naumburgs use sporadically; and that the RHLA was not meant to benefit sophisticated buyers.

In interpreting the statutory definition of "residence", we must ascertain the legislative intent from the language used and words will be given their ordinary meaning unless a different intent is clearly indicated. Davis v. Commissioner of Revenue, 83 N.M. 152, 153, 489 P.2d 660, 661 (Ct.App.), cert. denied 83 N.M. 151, 489 P.2d 659 (1971). Section 56-8-24 A is plain and unambiguous in defining a residence as a dwelling designed for occupancy by one to four families. Our task, then, is to review the record to determine whether the log cabin falls within this definition.

The record reveals that, at the time of purchase, the log cabin was a structure designed for single-family use, notwithstanding its location in a commercial area. The cabin contained three bedrooms, a family room, a kitchen, and a bathroom. Furthermore, it is undisputed that plaintiffs intended to use, and did in fact use, the property for recreational and not commercial purposes. Thus, the property clearly fits the statutory definition of residence.

To answer each of defendants' claims, specifically, we note first that the Act contemplates protecting purchasers of dwellings intended to house four families or less regardless of whether the dwellings are located in residential or commercial areas. The RHLA makes no distinctions based on the locale of the property. Second, although the record reveals that defendants had begun excavation in front of the cabin to put in a parking lot, this does not render the dwelling commercial. Third, Section 56-8-24 A contains no requirement that the dwelling be the primary family residence. Hence, it makes no difference that the log cabin was a vacation home. We will not presume, absent some indication to the contrary, that the Legislature intended to limit the protection of the RHLA to primary family residences. Lastly, in response to defendants' recurring argument that the RHLA was not intended to protect sophisticated purchasers of real estate, such as Mr. Naumburg, we find no indication, either express or implied that the RHLA applies only to unsophisticated and naive purchasers of real estate. Unless and until the Legislature directs otherwise, we assume that the Act applies to all New Mexicans who purchase a residence designed for occupancy by one to four families.

The trial court erred in finding that the RHLA did not apply to the real estate contract between the Naumburgs and the Pattisons.

II. Complete Prohibition Against Prepayment as a Penalty

Having determined that the RHLA applies to the contract in question, we next consider whether the complete prohibition against prepayment is a penalty forbidden by the Act. Section 56-8-30 provides that "[n]o provision in a home loan, the evidence of indebtedness of a home loan, a real estate contract or an obligation secured by a real estate mortgage requiring a penalty or premium for prepayment of the balance of the indebtedness is enforceable." Plaintiffs argue that a complete prohibition against prepayment is as much a penalty as requiring a surcharge when prepayment occurs. Defendants assert that the RHLA does not apply and that under common law principles, a purchaser has no right to prepay, absent a contract provision allowing him to do so. Thus, defendants reason, prohibiting that which one has no right to do cannot amount to a penalty.

We observe that since the RHLA applies, it confers upon plaintiffs the statutory right to prepay the balance of the contract and we need not resort to common law doctrines,...