Metropolitan Life Insurance v. Promenade Towers Mutual Housing Corp.

Citations: 581 A.2d 846; 84 Md. App. 702; 1990 Md. App. LEXIS 177Docket: 94, September Term, 1990

Court: Court of Special Appeals of Maryland; November 8, 1990; Maryland; State Appellate Court

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Metropolitan Life Insurance Company appealed a Circuit Court decision that granted summary judgment in favor of Promenade Towers Mutual Housing Corporation. The trial court found that a subsequent note and deed of trust incorporated prepayment rights from earlier documents, ruling that a debtor can prepay a note unless explicitly prohibited. The appellate court identified two key issues: 1) whether it was erroneous for the trial court to conclude that a promissory note can be prepaid at any time unless explicitly prohibited; and 2) whether the amended instrument effectively incorporated prepayment provisions from the prior note. The appellate court found that the trial court erred on both counts and reversed the decision.

Promenade, owning a 24-acre property with 1,071 apartments, succeeded Landcon Associates Phase One, which had executed two deed of trust notes and a deed of trust. These were consolidated into $23 million in debt, modified in 1980 to allow prepayment without a fee starting July 1, 1989, but prohibited prior prepayment. In 1986, a second modification removed the prepayment provision while lowering the interest rate from 14% to 11.875%. When Promenade sought to refinance and prepay the loan, Metropolitan denied the request, leading Promenade to seek declaratory and injunctive relief, claiming Metropolitan's position constituted an unreasonable restraint on the property's alienation. The trial court also considered the parties' intentions and the construction of the agreement in its proceedings.

Indebtedness under a promissory note and deed of trust may not be prepaid at the borrower's option if the instruments lack a specific prepayment provision. An appellee argues that permitting prepayment is necessary to avoid unreasonable restraints on alienation, emphasizing public policy in Maryland. However, Promenade acknowledges the majority rule, which states that without an express prepayment clause, a borrower lacks the unilateral right to pay off a mortgage early. They advocate for adoption of a minority rule from Mahoney v. Furches, which permits a presumption of prepayment rights in the absence of a clause. 

Despite this, a review of relevant cases shows that, under common law, without a prepayment provision, the payee is not obligated to accept early payment. In some jurisdictions, even an offer to pay the full interest does not allow for prepayment. The rationale against mandatory prepayment includes potential adverse impacts on the lender's expected return and unexpected reinvestment costs. The Mahoney case, while supporting a minority view, is critiqued for its inconsistency, as it emphasizes the importance of free alienability of land over accommodating modern investment trends in mortgages. Ultimately, the document underscores the prevailing policy against restraints on alienation, arguing against presuming prepayment rights without explicit contractual terms.

A presumption of a right to prepayment of a mortgage note is favored when the mortgage is silent on this right, which can be rebutted by evidence of mutual intent to the contrary. This presumption does not disadvantage the mortgagee, who typically drafts the mortgage note and can include a non-prepayment clause to inform the mortgagor of potential restrictions on selling the property. The case at hand is one of first impression in Maryland, although several precedents exist concerning prepayment in other scenarios, aligning with the majority rule. 

Contract law principles dictate that a party cannot unilaterally modify a contract or expect courts to alter agreements simply due to unfavorable circumstances. In *Meinecke v. Goedeke*, the Court upheld that a contract purchaser could not prepay when the seller refused. Similarly, in *Great United Realty Co. v. Lewis*, it was established that contracts cannot be rescinded without mutual consent, even if conditions change. The *Pierson v. Pyles* case reinforced that contractual provisions preventing prepayment serve as valuable rights that cannot be disregarded. Furthermore, in *Andresen v. Young Contracting Co.*, it was determined that a debtor must adhere to the payment terms of a note lacking a prepayment clause. The Supreme Court of Washington noted that legislative action, not judicial intervention, should address regulations on prepayment penalties. Thus, the majority rule is adopted: absent a prepayment provision in a debt contract, prepayment is not permitted without lender consent unless specified by statute.

The trial court erroneously concluded that a prepayment clause from a prior promissory note was incorporated into a subsequent modification of the note. The court held that the prepayment clause survived because it was not expressly removed, but this interpretation was legally incorrect. There was no factual dispute warranting a 'clearly erroneous' review standard, as the issue was purely a matter of law regarding contract interpretation. Maryland law mandates that contract construction is based on the objective meaning understood by a reasonable person at the time of agreement. If the language is clear and unambiguous, courts must adhere to its plain meaning without considering the parties' intentions. The relevant modifications clearly stated that the Consolidated Note was fully amended, and terms like "in full" and "modify" indicated an exclusion of previous provisions, including the prepayment terms. Therefore, the trial court's decision to include those terms was inappropriate, as it misinterpreted the unambiguous language of the contract.

The trial court erred by not applying the law regarding a contract of indebtedness that did not provide for prepayment, resulting in reversible error. The judgment was reversed, with costs to be paid by the appellee. The appeal highlights the principle that one should avoid being a borrower or lender, referencing Shakespeare's "Hamlet." The issues presented were reordered to address a matter of first impression in Maryland. The record lacked a copy of the consolidated note, and the Second Modification fully restated the amended promissory note executed within the agreement. Although these issues were not included in Promenade's initial complaint, they were raised in support of a motion for summary judgment. Various cases cited illustrate that unreasonable restraints on reconveyance do not relate to the current case. The majority rule regarding real estate financing is deemed applicable, as demonstrated by numerous cited cases asserting that neither party has the right to demand payment before the debt's maturity. The debtor cannot insist on prepayment, even when offering principal and interest prior to maturity.

Mortgage documents often include a prepayment privilege to counteract the common law rule that prohibits prepayment unless expressly stated. This is supported by the Connecticut case Dugan v. Grzybowski, which illustrates that such agreements clearly define payment terms. The Pennsylvania courts, particularly in Beth-June, Inc. v. Wil-Avon Merchandise Mart, Inc., have ruled that mortgages requiring installment payments to fully amortize the debt do not grant the mortgagor a right of prepayment, establishing minimum payments to be accepted by the mortgagee. The Mahoney court referenced this ruling but held a contrary position. The clarity of the Skyles Court's endorsement of the Mahoney view remains uncertain and will require further judicial examination in Missouri. Other jurisdictions align with the definitions presented, affirming that terms like "full" mean complete, while "amendment" and "modify" involve alterations through changes, deletions, or additions.