Daily Development for
Wednesday, August 13, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; PREPAYMENT: Alabama Supreme court considers prepayment rule, but ultimately rejects any change.

Ex Parte Brannon, 683 So.2d 994 (Ala. 1996).

A lower appeals court had urged the Supreme Court to follow the 1983 Pennsylvania decision in Mahoney v. Furches, 468 A.2d 458, which had established as a "default rule" that a borrower could prepay unless the documents provided otherwise, thus reversing the common law approach.

Here, two dissenters agree with this suggestion, but the majority of the Alabama Supreme Court sees no benefit in the court's altering established contractual expectations by changing the common law.

Comment: Note that we're only talking about presumptive rights of the parties. No great equitable change would be accomplished by the court's adopting the Mahoney approach, because in 99% of the cases lenders would insert "no prepayment" clauses or restricted prepayment clauses in their mortgages when it suited them, and borrowers would meekly accept this language. The only borrowers likely to object and win the battle would be sophisticated borrowers with the power to alter events, and such borrowers likely would be able to bargain for prepayment rights under the present state of the law just as easily.

Consequently, the change proposed in this case would make little change except where the mortgagee neglects to consider the possibility of prepayment. That, indeed, could have been the case here, where the noteholder was an elderly widow who was relying upon a long term payout under the note as part of her retirement planning, but did make this objective explicit in the language. Notwithstanding the existing common law favoring her, the widow's client might have been well advised to include a specific provision, but is there any great victory for equity in forcing such parties to accept prepayment when they did not anticipate it when they made the deal?

Almost always, clear doctrines which don't change with the winds are likely to insure appropriate results in the greatest number of cases.

There is the question, of course, whether the courts should require that notes be prepayable, and prohibit parties from agreeing otherwise. Occasionally, overreaching by one party of another in the consumer context reaches the point where a court should intercede to with a non-waivable protective rule. In an even smaller number of cases, rules of construction do not track the established marketplace expectations of the parties, and here, again, change of the rule might be in order. But lenders and borrowers for a century and a half have accomodated to the prepayment rule and there is no strong rationale for departing from it. Further, legislatures in a number of states have required prepayment rights by statute in consumer mortgage contexts, suggesting that there is less need for judicial intervention of that magnitude.

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