Case Name: Marco T. CASTANO and Garnet C. Castano v. Sue Ethel Barrentine BELLINA
Court: Louisiana Court of Appeal
Jurisdiction: Louisiana
Decision Date: 1987-02-12
Citations: 503 So. 2d 195
Docket Number: No. CA-5119
Parties: Marco T. CASTANO and Garnet C. Castano v. Sue Ethel Barrentine BELLINA.
Judges: REDMANN, C.J., and GULOTTA, LOBRANO, WARD, and WILLIAMS, JJ.
Reporter: Southern Reporter, Second Series
Volume: 503
Pages: 195–202

Head Matter:
Marco T. CASTANO and Garnet C. Castano v. Sue Ethel Barrentine BELLINA.
No. CA-5119.
Court of Appeal of Louisiana, Fourth Circuit.
Feb. 12, 1987.
Rehearings Denied March 19, 1987.
Writ Denied May 29,1987.
Patrick M. Reily, New Orleans, for plaintiff-appellant.
Albert J. Derbes, II, Windhorst, Patorek & Gaudry, Harvey, for defendant-appellee.
REDMANN, C.J., and GULOTTA, LOBRANO, WARD, and WILLIAMS, JJ.

Opinion:
WARD, Judge.
In this action by the makers of a note against the payee for return of a prepayment penalty not provided for in the note, we must decide whether the payee was entitled to the penalty and if so, whether she can collect attorney fees for protecting her right to the penalty. We hold that the payee could not legally demand a prepayment penalty. Consequently, the payee cannot collect attorney fees. We also hold that any agreement by the makers to pay the penalty to obtain surrender of the note from the payee cannot be enforced.
On October 5, 1978, Sue Ethel Beilina sold a tract of land in Jefferson Parish to Garnet and Marco Castaño for $675,000. As part of the purchase price, Mrs. Beilina accepted the Castaños' note for $325,000. The note provided for nine per cent annual interest with principal and interest to be paid in 180 monthly installments of $3,296.48 each. The note made no provision for prepayment. As security for the note, Garnet and Marco Castaño gave Mrs. Beilina a mortgage on the property. Mrs. Beilina's mortgage was the second on the property, the first being held by National American Bank which had lent the Casta-ños their down payment. A third mortgage was held by Citizens and Southern International Bank, which also held a mortgage on the Castaños' home.
Faced with financial difficulties, the Cas-taños arranged in October 1983 to refinance their home and the Jefferson Parish property by borrowing money from Pelican Homestead to pay off the loans from the banks and Mrs. Beilina. Mrs. Beilina, however, was reluctant to have the Castaño loan balance paid out in a lump sum. She decided to accept the Castaños' prepayment of the outstanding principal of $264,006.06 only if they paid a five percent penalty amounting to $13,000. The Castaños thought Mrs. Beilina's demand was unreasonable, and they walked out of the Pelican Homestead loan closing when she insisted upon it. Two days later, however, in the face of imminent bank foreclosures, the Castaños closed the Pelican Homestead loan and paid Mrs. Beilina the balance on her loan plus $13,000. Mrs. Beilina surrendered the note and cancelled the mortgage on the Castaños' property.
The Castaños then filed suit to recover the $13,000. Mrs. Beilina reconvened, seeking attorney's fees payable under the terms of the note which she claims to have surrendered only because the Castaños fraudulently misrepresented that they agreed to her conditions for prepayment of the loan. After a trial, the District Judge denied both the Castaños' claim for return of the $13,000 and Mrs. Beilina's demand for attorneys fees. Both parties appeal.
In ruling against the Castaños, the Trial Judge held that a maker of a note generally has no right to payment before maturity without consent of the holder who is entitled to demand a penalty for prepayment even though the note contains no penalty provision. We disagree and reverse his decision denying the Castaños' claim for return of the $13,000.
The Trial Judge found Lindsay Realty Corp. v. Bellina, 320 So.2d 572 (La. App.4th Cir.1975), dispositive of the prepayment penalty issue. We do not believe Lindsay Realty is controlling. That case held only that there was a substantial difference between a real estate listing that did not contain a right of prepayment by the purchaser and a purchase offer that included the right to prepay the entire balance at any time without penalty. Although Lindsay Realty stated as a basis for its holding that "the maker of a note has no right to payment before maturity without the consent of the holder," we do not believe this rule applies to the facts of the case now before us.
We believe the better authority is La. C.C. art. 1779 (former C.C. art. 2053) as interpreted by In Re Liquidation of Hibernia Bank & Trust Co., 189 La. 813, 180 So. 646 (1938) and State ex rel. Elliott v. Ratzburg, 215 La. 295, 40 So.2d 395 (1949). Article 1779 states: "A term is presumed to benefit the obligor unless the agreement or the circumstances show that it was intended to benefit the obligee or both parties." In the Hibernia Bank case, the Court found that all the stipulations in the note were expressly stated to be in favor of the creditor bank, and hence, the maker could not pay its note before maturity. In the Elliott v. Ratzburg case, the Court held that the debtor could retire the debt before maturity without paying interest for the full term of the note. Although this holding was supported partially by the note's provision for the due date of installments "on or before" the fifth day of each month, it was based primarily upon the presumption that a term of payment is agreed upon in favor of the debtor. Accordingly, we presume that the provision in the note for monthly payments over 15 years was for the benefit of Mr. and Mrs. Castaño.
There is nothing in the note, which constitutes the agreement between the parties, to indicate that the extended term was also intended to benefit Mrs. Beilina. She asserted, however, in her answer to the Cas-taños' suit for recovery of the penalty that she was unwilling to terminate the arrangement for monthly payments because it provided a substantial part of her income. Additionally, at trial Mrs. Beilina testified that she believed that the 15 year payment schedule was advantageous to her for tax purposes. We do not believe these circumstances are sufficient to overcome the presumption that the scheduled payment of the note over 15 years was for the benefit of the Castaños.
Civil Code Article 1780 provides that the party for whose exclusive benefit a term has been established may renounce it. Although this article was enacted after the Castaños executed the note and after they prepaid it, the Comments to the article state that it does not change the law. Comment (b) reads:
This Article asserts a principle that seems unquestionable. It also reflects the very common contemporary practice of including prepayment clauses in loan agreements. In Louisiana jurisprudence a term or condition can be waived by a party for whose benefit it has been established. See Morrison v. Mioton, 163 La. 1065, 113 So. 456 (1927); Bach v. Slidell, 1 La.Ann. 375 (1846).
Accordingly, we hold that the Castaños were entitled to renounce the term of the note providing for payment over 15 years and that Mrs. Beilina could not require payment of a penalty when the Castaños chose to prepay the balance of the loan before maturity.
Mrs. Beilina urges as an alternative argument that her dispute with the Casta-ños was the subject of a compromise settlement, and therefore, the Castaños should be precluded from suing for return of the penalty they paid. She contends that she offered to accept the Castaños' prepayment of the balance of the note and surrender the note only if they also paid the $13,000 penalty and that when the Castaños paid the penalty, they accepted her offer, and upon surrender of the note a binding compromise agreement was formed.
We reject this argument because even if the Castaños agreed to pay the penalty without further contesting Mrs. Beilina's right; to it — which the Castaños' attorney denies — any compromise between the parties was without lawful cause and, therefore, a nullity. No agreement exists without a lawful cause. La.C.C. art. 1966. A cause is unlawful when the enforcement of the obligation would produce a result prohibited by law or against public policy. La. C.C. art. 1968. We have held that Mrs. Beilina was not legally entitled to the $13,-000 penalty. We believe that enforcement of any agreement which required payment of a penalty before the Castaños could obtain that to which they were entitled by law — the note — is against public policy.
Moreover, the Castaños' attorney insists that he told Mrs. Beilina that if the exigencies of his clients' financial situation forced them to pay the penalty in order to pay off Mrs. Beilina and secure a new loan, his clients reserved their right to litigate Mrs. Beilina's right to extract the penalty. Therefore, the Castaños' payment of the penalty was conditional — subject to the condition that she be found legally entitled to it. We find this view of the Castaños' payment supported by the obligation Mrs. Beilina has to restore a thing which was paid on the supposition of an obligation which does not exist. La.C.C. arts. 2301 et. seq.
Mrs. Beilina appeals the portion of the judgment which dismissed her claim for attorney fees. Having held that Mrs. Beili-na is not entitled to the prepayment penalty, we find no basis for an award of attorney fees and affirm the Trial Court's denial of Mrs. Beilina's claim.
For the foregoing reasons, the portion of the judgment of the Trial Court denying the Castaños' claim is reversed. Judgment is rendered in favor of Marco T. Castaño and against Sue Ethel Barrentine Beilina for $13,000.00 plus legal interest from October 14, 1983. The Trial Court's denial of Mrs. Beilina's claim for attorney fees is affirmed. All costs to be paid by Mrs. Beilina.
REVERSED AND RENDERED IN PART; AFFIRMED IN PART.
REDMANN, C.J., dissents.