Promenade Towers Mutual Housing Corp. v. Metropolitan Life Insurance

⁵⁹⁰ 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.” ⁵⁹¹ 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 extin ⁵⁹² guished 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 ⁵⁹³ Property ¶ 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); North- ⁵⁹⁴ way 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., 172 A.D.2d 915 , 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); Peryer v. Pennock, 95 Vt. 313, 315 , 115 A. 105, 105 (1921); Wilson v. Holyfield, 227 Va. 184, 188 , 313 S.E.2d 396, 398 (1984); Annotation, Right of Purchaser Under Land Contract to Anticipate Time of Payment Fixed by Contract, 17 A.L.R. 866 , 866 (1922).

Alexander, Mortgage Prepayment: The Trial of Common Sense, 72 Cornell L.Rev. 288 (1987) (Alexander), dates the origin of the rule to the early nineteenth century. ⁵⁹⁵ “Since the early nineteenth century the general rule has been that a debtor cannot, without the lender’s consent, prepay a mortgage debt. More precisely, when a specific amount of indebtedness is secured by a mortgage covering the debtor’s real property, and the note specifies a date certain for repayment of the debt, the debtor is not entitled to pay the indebtedness before that date unless the lender agrees to accept such payment. This is the requirement of perfect tender in time.” Id. at 290-91 (footnotes omitted). Professor Alexander presents the thesis, based on his “reexamination of the leading cases and commentaries,” that it is “unjustified” to assume that “a borrower’s inability to prepay mortgage indebtedness without the lender’s consent was a principle embedded in the common law since its early beginnings.” Id. at 289. “Even at the turn of the nineteenth century,” the article states, “debtors in the United States successfully argued for prepayment.” Id. at 302.

As examples the author cites McHard v. Whetcroft, 3 H. & McH. 85 , 91 “(Md.1791)” and Quynn v. Whetcroft, 3 H. & McH. 136 , 139 “(Md.1798).” Id. at 302 n. 76. 1 Professor Alexander describes the cases as ones in which “the Court of Appeals of Maryland reversed two lower court opinions which held that tender before the specified date was ineffectual.” Id. at 302 (footnote omitted). Inspired by Professor Alexander’s discussion, and by the fact that the Whetcroft cases have never been reversed, PTMHC argues that for 200 years the common law of Maryland has been just the opposite of the general rule. PTMHC submits that a proper regard for stare decisis compels reversal of the judgment of the Court of Special Appeals in this case. ⁵⁹⁶ II There are three Whetcroft cases, McHard v. Whetcroft, 3 H. & McH. 85 (1794) (Whetcroft I), Quynn & McHard v. Whetcroft, 3 H. & McH. 136 (1794) (Whetcroft II), and Quynn & McHard v. Whetcroft, 3 H. & McH. 352 (1797) (Whetcroft III). 2 Each is an appeal from the General Court. In each the reporter outlines the arguments of counsel.

Each sets forth the mandate of this Court. In none is an opinion of this Court reported; in none does the Maryland Archives reveal an unreported opinion. All three cases involved debts evidenced by bonds due “at or upon” September 1, 1788. The Maryland lawyer of today can reasonably read the arguments of counsel reported in Whetcroft I as consistent with an inference that the rationale underlying the mandate is that Maryland law permitted prepayment of a debt due at a specific time.

Today’s lawyer does not consider that a rejected tender of full payment, even if the debtor had a right to prepay and the rejection is wrongful, extinguishes the obligation to pay the principal amount of the debt and to pay interest to the date of tender. Yet, extinguishment of the underlying obligation by tender, without actual payment, was the result mandated by a statute in force at the time of the tenders in the Whetcroft cases. When the Whetcroft cases are read against that historical background, it is far from clear that we should infer that the unreported rationale is that for which PTMHC contends. Chapter 9 of the Acts of 1777, February Session, (the Act) was in effect until March 20,1781, when the Act’s repeal by Chapter 5 of the Acts of 1780, October Session, became effective.

Section 2 of the Act in part reads: “That from and after the twentieth Day of April next, the Bills of Credit emitted and made current by Congress, and also the Bills of Credit emitted and made current by ⁵⁹⁷ Acts of Assembly or Resolves of the Conventions of this State, shall pass current therein, and be received in Payment and Discharge of all Manner of Debts ... whatsoever, due or hereafter to become due, payable or accruing upon or by Reason of any Mortgage, Bond, Specialty, Bill, Note, Account, Promise, or any other Contract, according to the Sums the said Bills respectively entitle the Bearer thereof to receive____” 3 Section 3 of the Act provided: “That if any Creditor, from and after the said twentieth Day of April next, shall refuse to receive any of the said Bills of Credit, when tendered in Payment of any Debt, or any other Demand above specified, such Creditor, so refusing, shall for ever be barred from suing for or recovering such Debt or Demand, if tendered, or so much thereof as shall be tendered as aforesaid ... and the said Debt or Demand ... shall be for ever extinguished; and if any Suit shall be commenced for the Recovery of such Debt or Demand, after Tender and Refusal as aforesaid, the Defendant may plead Payment, and give this Act and the special Matter in Evidence.” In Moore v. Pearce, 2 H. & McH. 236 , 242 (Gen.Ct.1788), Judge Alexander C. Hanson said that “[t]he tender law [i.e., the Act] indeed provides, that a debt shall not be recovered after tender and refusal, and compels the creditor, if required, to relinquish his security.” 4 In a 1787 work, compiling various Maryland statutes, by Judge (later Chancellor) Alexander C. Hanson and Samuel Chase, the authors described the Act as follows: “This memorable law was repealed by the act of October, 1780, ch. 5. To this law, and to similar acts in the other states, is by some men ascribed the preservation of ⁵⁹⁸ our liberties, whilst others deny it the least merit, and, at the same time, impute to it the perversion of our morals, and every other political evil under which we have laboured since its passage.” Laws of Maryland Made Since 1763 (A. Hanson & S. Chase eds. 1787). State-issued paper money had devalued rapidly during the American Revolution, in part because of the heavy debt loads the states incurred in financing the war. According to one schedule of depreciation, 100 pounds in specie that had exchanged for 105 continental dollars in January of 1777, exchanged for 7500 dollars in February of 1781. 2 J.T. Scharf, History of Maryland 476 & n. 1 (1879 & photo, reprint 1967).

By March 1781 the exchange rate reached 130:1, according to one report. The Chancellor’s Case, 1 Bland 595 , 633 (Md.Ch.1825). As of March 20, 1781, the bills of credit that had been made legal tender by the Act were ordered out of circulation, following a period when exchange for new currency could be effected at the rate of forty (old) to one (new). See Acts of 1780, October Session, ch. 5, §§ 2-3. “Legal-tender laws” or “tender laws,” such as the Act of 1777, were one of a variety of statutory responses state' legislatures made in order to curb rampant wartime inflation.

See J.T. Main, The Sovereign States, 1775-1783, at 235, 253 (1973). The legislators who enacted Maryland’s tender law, which may have been the first one enacted, were quite aware that it would have an unjust effect on creditors. See generally R. Hoffman, A Spirit of Dissension: Economics, Politics, and the Revolution in Maryland 210-23 (1973). Charles Carroll of Annapolis, a wealthy man who bitterly opposed the Act from proposal to repeal, suggested that it be renamed “ ‘an act to take away the money of all creditors and give it to all their debtors.’ ” Id. at 250.

Most other legislators, however, supported the measure for reasons that ranged from broad constituent support to personal greed to patriotism—some viewed the tender law as the “price of Revolution.” Nevertheless, as ⁵⁹⁹ the inflation rate escalated some creditors simply refused to accept paper money, id. at 216; see R. Brugger, Maryland: A Middle Temperament, 1634-1980, at 136-37 (1988), which eventually resulted in a spate of debt and contract actions for the courts to resolve, see, e.g., Dunlop v. Funk, 3 H. & McH. 318 (Gen.Ct.1793); Moore v. Pearce, 2 H. & McH. 236 (Gen.Ct.1788). In the Whetcroft cases, William Whetcroft had issued three or four bonds on September 24, 1778, after the Act was in effect. He promised to pay 442 pounds and 10 shillings, plus interest, “at or upon” September 1, 1788. There is no indication that the debts were secured by a mortgage.

On March 7, 1781, Whetcroft sought to pay the bonds by tendering payment in the form of the greatly depreciated bills of credit that would go out of circulation about two weeks later. The creditors refused to accept the tenders. Whetcroft I was an action of debt brought by one of the bondholders on September 30, 1788. Whetcroft pleaded, inter alia, payment on March 7, 1781.

The case was submitted on special issues to a jury which found that, if the tender of March 7, 1781, was good, Whetcroft owed approximately thirteen pounds, but if the tender was not good, Whetcroft owed approximately eighty-eight pounds. The General Court in 1791 entered judgment for the creditor for the larger amount, with interest from September 24, 1778. 5 In this Court counsel for the creditor submitted three points: “1st. That the Act did not mean to make paper a tender, or payment in cases where gold and silver would not have been so, but only to place them on the same footing. ⁶⁰⁰ “2d. That the contract being to pay on a certain day, and not on or before, a tender, or payment before, would not be good unless received and accepted in satisfaction. “3d.

In this case it was refused, and therefore the obligee is entitled to payment at the day, according to the terms of his contract.” Whetcroft I, 3 H. & McH. at 87-88. Counsel for Whetcroft, responding to the first point, denied contending that the Act “meant to make paper a tender where gold or silver could not be tendered or paid; therefore the observation may be laid out of the case.” Id. at 88. Debtor’s counsel further denied that the language of the bond was intended to prevent speculation in currency by the debtor, and counsel further submitted that the bond should be construed in accordance with the civil law rule, which viewed the covenant to pay at a specific future date to be exclusively for the benefit of the debtor. In the June Term, 1794, this Court reversed the judgment of the General Court.