Meyers v. Home Savings & Loan Ass'n

Opinion

ALLPORT, J.

In a so-called class action plaintiffs seek to have the court declare that the “pre-payment penalties” required of persons seeking to pay loans in advance of the normal maturity dates in real estate loan contracts used by defendants are void as being in contravention of Civil Code section 1670.

1

The claims against eight federally chartered defendants were removed to the United States District Court pursuant to 28 United States Code section 1441(b). The balance of those, chartered under state law, demurred upon the ground that no cause of action was stated.

[546]

Certain of these defendants also raised the question of proper parties plaintiff and defendant but for reasons to be stated herein we need not consider this ground or the effect of the lack of unanimity of defendants’ claims in this respect. On April 12, 1972, all demurrers were sustained and plaintiffs given 10 days to amend. Upon failure of plaintiffs to amend a motion to dismiss pursuant to Code of Civil Procedure section 581 subdivision 3 was granted and an order of dismissal filed. Plaintiffs appeal from the order of dismissal. The order constitutes a judgment and is appealable. (Code Civ. Proc., §§ 581d, 904.1, subd. (a);

Morales

v.

Camello,

12 Cal.App.3d 370, 371 [90 Cal.Rptr. 718].)

It is contended on appeal the “pre-payment penalty” provisions contained in all real estate loan contracts employed by defendants constitute liquidated damages in violation of California Civil Code section 1670 and are therefore void and since the complaint so alleged it was error to sustain the demurrers for failure to state a cause of action. We do not agree.

The typical “pre-payment penalty” clause is alleged to be as follows: “The holder of said promissory note agrees to accept additional payments provided, however, that in any calendar quarter in which payments made thereon exceed twenty (20%) percent of the original amount of said promissory note the holder will require the additional payment of an amount equal to 180'days interest on such original amount at the rate of interest set forth hereinabove.” The clear import of this provision is to give the borrower an option to either pay the note in the manner contemplated by the contract or to prepay the balance due upon condition that a surcharge be added for the privilege of exercising the option. The clause does not penalize for the “breach of an obligation” as contemplated by section 1670. No breach is involved in the prepayment transaction, only the exercise of the option given to the debtor for an alternative method of paying the debt. The bulk of plaintiff’s arguments regarding the social and economic undesirable aspects of a loan transaction involving such a prepayment clause is more appropriately addressed to the Legislature than the courts and is not persuasive or controlling of our decision herein.