Court Opinion

ID: 9856655
Source: CourtListenerOpinion
Date Created: 2023-09-24 06:54:24.648403+00
Date Added: 2024-06-11T09:40:14.162890
License: Public Domain

MOSK, J.
I dissent.
In this commercial transaction, involving a “bridge loan” in connection with the building for sale of a luxury “spec” home, the loan document included a clause to the following effect: If borrowers prepaid the loan within six months, there would be a prepayment charge of six months’ interest. After that time, “provided all scheduled payments have been received not more than 15 days after their scheduled due date” and there were no other defaults, no prepayment charge would be assessed. Borrowers made timely scheduled payments for the first few months of the loan; thereafter, their payments were untimely. When they subsequently prepaid the loan, lender demanded the prepayment charge. The trial court ruled that the charge was an invalid penalty for late payment; the Court of Appeal *983reversed, concluding that the charge was a valid prepayment charge, not a penalty or liquidated damages for a late payment.
The majority now reverse the Court of Appeal decision. They conclude that although lender had a right to impose a prepayment charge in a commercial transaction of this kind, the fee here was a disguised penalty for late payment that bore no reasonable relation to the lender’s administrative costs.
I disagree. The prepayment clause was a negotiated agreement between sophisticated commercial parties. The original loan agreement included a straight prepayment requirement. For an additional consideration, the lender agreed to modify the loan agreement to waive the prepayment charge after six months, on the condition that borrowers made timely payments and avoided default. The condition was not met. Borrowers were late on several payments. The late payments did not trigger a penalty; indeed, lender waived late fees and even agreed to a new payment schedule. Borrowers, however, failed to meet the condition that they had negotiated for avoiding a prepayment charge. They could have continued to make payments through the life of the loan. They chose instead to prepay. Even with the prepayment charge they incurred a significant savings—in the amount of approximately two months of scheduled payments.
Prepayment charges do not constitute a forfeiture; they are a valid contractual obligation. “Early California cases firmly established that a lender may refuse to accept payment of a debt before the debt is due. [Citations.] In the absence of statutory or contractual permission, ‘a debtor has no more right to pay off the obligation prior to its maturity date than he does to pay it off after its maturity date.’ [Citation.] Therefore, a lender who is willing to accept early payment may extract additional consideration from the borrower in exchange for the privilege of prepayment.” (Gutzi Associates v. Switzer (1989) 215 Cal.App.3d 1636, 1644 [264 Cal.Rptr. 538].) The prepayment charge is merely the equivalent of unearned interest. “The lender may agree to give the borrower an option to prepay, but may charge a premium or penalty for exercise of this option to compensate for the anticipated interest payments lost by prepayment.” (Pacific Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Assn. (1986) 184 Cal.App.3d 817, 823 [229 Cal.Rptr. 269].)
Under these clear precedents, it is unquestionable that the lender was entitled unconditionally to impose a penalty in the event of prepayment. Unlike the majority, I do not conclude that such a provision is rendered invalid simply because it is made conditional, to the obvious advantage of the borrower, in an arm’s-length commercial transaction.
There is nothing illogical or unfair about the agreement. Borrowers evidently determined that it was worth paying an additional consideration to *984negotiate a modification of the agreement that would permit them to avoid a prepayment charge if they assumed the risk that they would not be in default under its terms. For its part, lender may have been willing to make the loan to a customer who was in perfect compliance because of risks it assumed and consequences it faced from mounting loan defaults in a high-risk real estate market. The consequences of default for a lender, e.g., in the form of required reserves for losses and chargeoffs for accounts past due, can be significant, particularly for a small lender. There is no indication that lender or borrower viewed their negotiated agreement as a means of avoiding restrictions on excessive late charges.
Nor do I agree that regarding the provision at issue here as a conditional waiver of the prepayment charge would encourage hypothetical devious lenders to achieve a result prohibited by the Legislature. (See maj. opn., ante, at p. 982.) Rather, the result of the majority’s holding will be to limit the ability of commercial borrowers to negotiate to avoid the expense of prepayment charges.
In this highly specialized area, the Legislature, rather than the courts, is the more appropriate vehicle for limiting the bargaining options of commercial parties. “[Cjontrol of charges, if it be desirable, is better accomplished by statute or by regulation authorized by statute than by ad hoc decisions of the courts. Legislative committees and an administrative officer charged with regulating an industry have better sources of gathering information and assessing its value than do courts in isolated cases. Besides, institutions which lend vast sums of money should be informed, not by judgments after the facts on a case-by-case basis, but by laws or regulations which are in existence in advance of the undertaking to execute loans, of the validity or invalidity of terms that are commonly used.” (Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan Assn. (1971) 22 Cal.App.3d 303, 311 [99 Cal.Rptr. 417].)
For the foregoing reasons, I would affirm the judgment of the Court of Appeal.