Lenders sometimes impose fees triggered by the borrower’s payoff of the loan before the maturity date.
Normally, the “prepayment fee” issue is a subject for negotiation at the outset of the loan. And if the borrower agrees to it, there is very little wiggle room to escape its application.
But, as illustrated by a recent decision from the California Court of Appeal (Second District in Los Angeles), U.S. Bank Nat’l Assn. v. Yashouafar, there are ways prepayment fees can be botched….
In the Yashouafar case, the loan included a prepayment fee (also referred to as a Yield Maintenance Amount). The Note specified that the prepayment fee was not due unless and until the Note’s indebtedness was prepaid. The Note also provided that the borrowers had no right to challenge the calculation of the prepayment fee “in the absence of manifest error.”
The deed of trust
The Deed of Trust contained different provisions regarding the prepayment fee. Under the Deed of Trust, a prepayment fee would be imposed immediately if the Note was accelerated (whether or not the debt was prepaid). The Deed of Trust also stated that in the event of any inconsistency between the terms of the Note and the Deed of Trust, the Note would control.
The lawsuit script is a familiar one: The borrowers defaulted. The lender accelerated the loan. The borrowers filed for Chapter 11 bankruptcy protection. The lender sued the guarantors.
The trial court granted the lender’s motion for summary judgment, and awarded the full amount of the accelerated loan with interest plus a $14 million prepayment fee.
The prepayment fee was calculated based on the date the loan was accelerated in June 2011. The record was unclear, but suggested the Note was not fully prepaid until January 2013.
The Court of Appeal’s holding
The Court of Appeal reversed. The court held that the prepayment provisions from the Note and Deed of Trust plainly conflicted with each other, and that, as set forth in the “conflict” provisions of the Deed of Trust, the Note’s prepayment provisions controlled.
The lender attempted to rely on broad language in both the Note and Deed of Trust stating that all remedies set forth therein were “cumulative” and would not bar other available remedies. The Court held that these provision “simply define the range of remedies available” to the lender, but “do not address how inconsistencies between such remedies are resolved.”
The Court of Appeal remanded the case to the trial court, instructing the trial court to determine if and when the Note was prepaid, and to calculate a new prepayment fee (if any) based on that date instead of the acceleration date.
Key provisions from a Note and related Deed of Trust should be consistent. Inconsistencies lead to enforcement headaches, and easy borrower/guarantor defenses.