by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

Today's comment is by Reporter Harris Ominsky of the Blank, Rome firm in Philadelphia.

MORTGAGES; PREPAYMENT: Discount for "prepayment" is not available for those prepayments made upon release of individual parcels from the mortgage. Larson v. Jacobson, 659 A. 2d 753 (Conn. App. 1995). The loan documents provided for a five percent discount for prepayment. While the term "prepayment" was used in the mortgage documents, it was not defined. The court found that this discount was intended to encourage the borrower to make early payments.

The documents also contained a mechanism for releasing individual properties from the blanket mortgage. When the borrower sold the properties in 1982 and 1983, he made substantial payments to release those properties but did not ask for the prepayment credit on either occasion. After the borrower went bankrupt, the trustee prepaid the remaining loan balance and did not receive a credit.

Almost six years later, the borrowers sued the lenders seeking credit for the earlier prepayments. After hearing evidence on the intent behind the prepayment credit, the trial court found that the borrower was entitled to credit for the final payment, but not the earlier ones which were connected to the released property. The Connecticut Appellate Court held that the parties intended the credit only when the borrower built up equity in the property, and not when he merely obtained a release of part of the security. Also it interpreted the mortgage to mean that a qualifying prepayment must not be based on any other term of the note and the mortgage, such as a release prepayment.

Reporter's Comment: It is somewhat surprising that the borrower succeeded in obtaining a prepayment credit even though suit was not instituted until six years after the loan was repaid.

This case presents a factual setting which reverses more frequently encountered prepayment and release issues. Here the borrower was given a bonus for prepayment. In contrast, very often the borrower must pay a premium or penalty on prepayment. Here the parties were disputing whether a release payment should be considered a "prepayment". More commonly, parties dispute whether a regular payment of a mortgage or a prepayment, may be credited towards a later release.

The Larson case highlights the importance of spelling these issues out in loan documents.

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