The Second District Court of Appeals Holds That Due To Inconsistencies Between The Provisions Of A Promissory Note And A Deed Of Trust, A Prepayment Provision Under The Loan Documents Does Not Arise Until Payment, Rather Than An Earlier Acceleration Date

January 6, 2015 | Bulletin No. 1170511.1

Facts

U.S. Bank's predecessor bank extended a $62,000,000 loan (Loan) to three legal entities (Borrowers).  The Loan was secured by a deed of trust on real property.  Mr. and Mrs. Yashouafar (Yashouafars) guaranteed the Loan.  The Borrowers defaulted on the Loan by failing to make required payments.  Counsel for U.S. Bank sent a letter dated June 24, 2011 to the Borrowers providing notice of default and accelerating payment of the unpaid balance of the Loan.  The Borrowers filed bankruptcy petitions.  U.S. Bank sued the Yashouafars for breach of their guaranty seeking damages for the principal balance of the Loan, accrued interest, and all other fees and charges.  Pursuant to a motion for summary judgment, the trial court granted U.S. Bank a judgment against the Yashaouafars in the amount of $81,850,619.33, which included a prepayment fee of $14,007,811.30 calculated from the date of acceleration of payment set forth in the default letter sent by U.S. Bank's counsel.  U.S. Bank v. Yashouafar (December 17, 2014, No. B249057.) ___ Cal.App.2d  ___ )

Discussion

On appeal, the Yashouafars argued that the Borrowers did not prepay the promissory note until January 24, 2013 when U.S. Bank purchased the real property collateral at a foreclosure sale for a full credit bid.  Apparently, this foreclosure sale occurred after the trial court ruled on U.S. Bank's motion for summary judgment but before entry of judgment.  The Appellate Court  compared the prepayment provision in the promissory note to the prepayment provision in the deed of trust.  The prepayment provision in the promissory note stated that the prepayment fee was immediately due and payable when the promissory note was prepaid.  The prepayment provision in the deed of trust stated that the prepayment fee was immediately due and payable when the promissory note was declared due and payable.  The deed of trust contained a provision that stated when a conflict between the provisions of the promissory note and the deed of trust conflict, the provisions of the promissory note control.  The Appellate Court held that under the clear and explicit terms of the promissory note and deed of trust, no prepayment fee was due until the Borrowers actually prepaid the promissory note's indebtedness.  The Appellate Court remanded the matter to the trial court to determine if and when Borrowers prepaid the Note's indebtedness and to calculate the prepayment fee, if any.

Questions

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Bruce A. Emard | 916.321.450