Promenade Towers Mut. Housing Corp. v. Metropolitan Life Ins. Co.

• Decision Date: 01 September 1991
• Docket Number: No. 2,2
• Citation: 597 A.2d 1377,324 Md. 588
• Parties: PROMENADE TOWERS MUTUAL HOUSING CORPORATION v. METROPOLITAN LIFE INSURANCE COMPANY
• Court: Maryland Court of Appeals

Page 588

324 Md. 588

597 A.2d 1377

PROMENADE TOWERS MUTUAL HOUSING CORPORATION v. METROPOLITAN LIFE INSURANCE COMPANY.

No. 2 Sept. Term, 1991.

Court of Appeals of Maryland.

Nov. 8, 1991.

G. Vann Canada, Jr. (Miles & Stockbridge, both on brief), Rockville, for petitioner.

Charles A. Trainum, Jr. (John F. Hyland, Jr., Christopher J. Kersting, Trainum, Snowdon, Hyland & Deane, P.C., all on brief), Washington, D.C., for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, CHASANOW, KARWACKI and ROBERT M. BELL, JJ.

RODOWSKY, Judge.

In this case a debtor claims the right to prepay in full the debt incurred in a commercial transaction and secured by a deed of trust that is silent on prepayment. We shall apply the general rule, namely that, absent a statute or agreement permitting prepayment, the mortgagor has no right to prepay. But, before we reach that conclusion, we must address the debtor's contention that the Maryland rule on mortgage prepayment is the opposite of the general rule. That contention requires us to divine the reasoning underlying the mandate in a 1794 decision of this Court that was issued unaccompanied by any reported or unreported opinion.

Petitioner, Promenade Towers Mutual Housing Corporation (PTMHC), owns a housing complex known as The Promenade in Montgomery County. As of 1975, the respondent, Metropolitan Life Insurance Company (Metropolitan), held a deed of trust on the property securing a $23 million indebtedness, evidenced by a single note that consolidated certain prior notes. Subsequently, that consolidated note and deed of trust were twice modified. In June 1980 the "First Modification" provided for an annual interest rate of fourteen percent through June 1990 and for an adjustable rate of at least fourteen percent from July 1990 through June 2005. The First Modification included the following right of prepayment:

"From and after July 1, 1989, Borrower shall have the right to prepay, without the imposition of any prepayment fee, the entire unpaid principal sum evidenced by this Note, but no part thereof, provided that (a) such prepayment is made on the date [of] any monthly installment ... (b) Borrower shall have given Beneficiary at least Sixty (60) days' prior irrevocable written notice ... (c) such prepayment is accompanied by payment of all interest accrued under this Note to the date of such prepayment.... There shall be no right of prepayment prior to July 1, 1989."

PTMHC negotiated a refinancing with Metropolitan, resulting in the "Second Modification," dated September 1, 1986, and prepared by Metropolitan. The Second Modification reduced the interest rate to 11.875%, maintained the monthly payments at essentially the same level as under the First Modification, and provided for a final, "balloon" payment due on September 1, 1996. The Second Modification did not contain an explicit clause on prepayment rights.

The Second Modification set forth the terms of the note, as thereby modified. Those terms were introduced as follows: "The Consolidated Note is hereby modified and amended so that, from and after the date of this Agreement, the Consolidated Note shall read and be deemed to read in full as follows." The paragraph following the promissory note, as modified, provided:

"4. Borrower hereby confirms and reaffirms the terms, covenants and conditions of the Consolidated Note, as amended hereby, and hereby confirms and reaffirms its promise to pay to the Beneficiary ... the full principal amount evidenced by the Consolidated Note, with interest thereon, all in accordance with the terms of the Consolidated Note, as amended hereby."

Additionally, paragraph 8 of the Second Modification provided:

"That, except as amended hereby, nothing herein contained invalidates or shall impair or release any covenant, condition, agreement or stipulation in the Consolidated Note as previously amended and Consolidated Deed of Trust as previously amended, and the same, except as amended hereby, shall continue to be in full force and effect, and Borrower further covenants and agrees to perform, comply with and abide by each and every of the covenants, agreements, conditions and stipulations of the Consolidated Note and Consolidated Deed of Trust, as amended hereby."

In January 1989, PTMHC wrote to Metropolitan, expressing its intent to prepay the debt after July 1, 1989. Metropolitan replied that the Second Modification had extinguished the right of prepayment "as consideration for the reduction of the [interest] rate."

PTMHC sought a judgment declaring that it could prepay the debt. The circuit court, on summary judgment, entered the declaration sought by PTMHC. The judge reasoned that the Second Modification did not extinguish the right of prepayment contained in the First Modification, but incorporated that right by reference. The judge alternatively decided that a mortgagee may prepay when the writings are silent as to any such right.

Metropolitan appealed to the Court of Special Appeals, which reversed. Metropolitan Life Ins. Co. v. Promenade Towers Mut. Hous. Corp., 84 Md.App. 702, 581 A.2d 846 (1990). That court held that Maryland follows the general rule precluding prepayment, absent a specific clause permitting prepayment. The intermediate appellate court also construed the Second Modification not to incorporate the right to prepay that had been expressed in the First Modification.

PTMHC petitioned for certiorari. The petition cited, for the first time in this litigation, McHard v. Whetcroft, 3 H. & McH. 85 (1794). PTMHC contends that this 1794 decision established, and continues to provide as a matter of Maryland common law, that a mortgagor has the right to prepay absent a provision in the documents which limits or abrogates that right. We granted certiorari to resolve this important question.

I

It is clear that the majority rule in this country is, and for a long time has been, that, absent special agreement, the mortgagor in an unregulated transaction who promises to repay the loan, in installments at specified times or at a specified date, does not have a right to compel the creditor to accept prepayment. See 4 American Law of Property § 16.161, at 381 & n. 6 (1952); 3 R. Powell, The Law of Real Property p 457, at 696.12 n. 4 (1979); 14 Williston on Contracts § 1694A & n. 2, at 768 (Jaeger 3d ed. 1972).

Fairly typical of the cases is Atlantic Life Ins. Co. v. Wolf, 54 A.2d 641 (D.C.1947). The lender held the borrower's promissory note, secured by a first deed of trust on the borrower's real estate. The note called for monthly installments in specified amounts for fifteen years. Four years into the life of the loan the borrower insisted on prepaying the principal with interest only to the date of prepayment. The lender demanded, in addition, the interest which would have accrued to the maturity date of the loan under the payment schedule. The debtor paid the amount requested by the lender and, then, sued to recover part of the payment as usurious. The court held:

"[T]he payment of the premium or charge involved cannot be considered as interest. The note constituted a contract which provided for payment of the loan on specified terms over a period of fifteen years. Unlike many notes of this kind it contained no 'on or before' provision and no other language reserving to the borrower any option or right to accelerate payment. Therefore, neither borrower nor lender had the right to advance the maturity date. When the borrower, for reasons advantageous to him, sought to do so he was merely asking a privilege and not demanding a right. He was seeking to pay off a fifteen-year contract with all of its accompanying obligations for interest, in less than five years. The lender was within its rights in demanding compensation for that privilege."

Id. at 642-43.

The presumption against prepayment has been widely cited and applied in cases involving promissory notes secured by real property, see Houston N. Hosp. Properties v. Telco Leasing, Inc., 680 F.2d 19, 22, aff'd on rehearing, 688 F.2d 408 (5th Cir.1982); Westminster Investing Corp. v. Equitable Assurance Soc'y, 443 F.2d 653, 657 & n. 5 (D.C.Cir.1970); Baybank Middlesex v. 1200 Beacon Properties, Inc., 760 F.Supp. 957, 965-66 (D.Mass.1991); Northway Lanes v. Hackley Union Nat'l Bank & Trust Co., 334 F.Supp. 723, 732 (W.D.Mich.1971), aff'd, 464 F.2d 855 (6th Cir.1972); Gutzi Assocs. v. Switzer, 215 Cal.App.3d 1636, 1644, 264 Cal.Rptr. 538, 542 (1989) (citing earlier California authority); Dugan v. Grzybowski, 165 Conn. 173, 176 & n. 2, 332 A.2d 97, 99 & n. 2 (1973); Abbe v. Goodwin, 7 Conn. 377, 384 (1829); In re Agostini, 33 A.2d 306, 309 (Del.Super.1943), later proceeding, 36 A.2d 33 (Del.Ch.1944); MacIntyre v. Hark, 528 So.2d 1276, 1277 (Fla.App.1988); Bowen v. Julius, 141 Ind. 310, 312, 40 N.E. 700, 700 (1895); Trahant v. Perry, 253 Mass. 486, 489, 149 N.E. 149, 150 (1925); Skyles v. Burge, 789 S.W.2d 116, 118, 119 (Mo.App.1990) (suggesting also that the rule should not apply in residential mortgages when principal and interest to maturity are tendered); Moore v. Kime, 43 Neb. 517, 521, 61 N.W. 736, 738 (1895); Peter Fuller Enters. v. Manchester Sav. Bank, 102 N.H. 117, 120, 152 A.2d 179, 181 (1959); Geller v. Fairmont Assocs., --- A.D.2d ----, 568 N.Y.S.2d 202, 203 (N.Y.App.1991); Arthur v. Burkich, 131 A.D.2d 105, 106-08, 520 N.Y.S.2d 638, 639-40 (1987); Henderson v. Guest, 197 Okl. 443, 445, 172 P.2d 605, 606 (1946); Pyross v. Fraser, 82 S.C. 498, 64 S.E. 407 (1909); McCausland v. Bankers Life Ins. Co., 110 Wash.2d 716, 723, 757 P.2d 941, 944-45 (1988) (en banc), and in cases involving various forms of land installment contracts, see Carpenter v. Winn, 39 Colo.App. 238, 566 P.2d 370, 371 (1977); Lindsay Realty Co. v. Bellina, 320 So.2d 572, 574 (La.App.1975); Baldwin v. Corcoran, 320 Mo. 813, 7 S.W.2d 967, 968 (1928); Goetz v. Hubbell, 66 N.D. 491, 502, 266 N.W. 836, 840 (1936); ...