Prompt payor's prepayment penalty was proper, rules MD Court of

Daily Record, The (Baltimore), Oct 18, 2005 by Cynthia Di Pasquale

A woman was appropriately penalized nearly $10,000 for prepaying her mortgage with a Maryland-based bank, even though her contract referenced both state and federal laws that differed in permitting the fee.

Nancy Heist argued that a loan contract she signed with Eastern Savings Bank was ambiguous regarding the penalty.

In an opinion issued last week, however, the Court of Special Appeals held that the document was rather clear. It affirmed a lower court ruling that the contract unmistakably called for a fee if Heist fully repaid the loan within five years.

The court applied a basic principle of contract law: That an agreement means what a reasonable person in the position of the parties would have thought it meant when signing it.

As a purely intuitive, common sense matter, we do not see how a reasonable person in the borrower's shoes could have thought she was not agreeing to a prepayment penalty, Judge Arrie W. Davis wrote.

Counsel for the parties and a representative from Eastern Savings Bank could not be reached for comment by press time.

Heist's mortgage contract, for $141,500, stated it was governed by both Maryland law, which prohibits prepayment penalties, and pre- emptive federal law, which permits penalties for federal lending institutions, according to the court opinion. Eastern Savings was a federal savings bank.

Significantly, the contract also included an addendum, signed by Heist, agreeing to the penalty.

Yet once the bank charged her a penalty of $9,531.97, Heist filed suit in Frederick County Circuit Court. The circuit court dismissed the complaint for failure to state a claim, and Heist appealed.

But the appellate court also failed to find in Heist's favor.

The Note is not - ambiguous in the least, Davis wrote. Very simply, a reasonable person signing that Note, and separately signing its addendum, could not have believed that no prepayment would be collected.

Even assuming, for argument's sake, that the contract was not clear and required judicial interpretation, Heist would not have had much success, according to the court. It would simply apply another fundamental rule of contract law, that where two parts of an agreement seem to be in conflict, with one general in nature and one specific, the specific will take precedence.

Thus, the specifically-expressed and separately-signed addendum calling for a penalty would rule.

Both Heist and the bank focused, in their appellate briefs, on whether the Maryland law was pre-empted by federal law. But the court found that had little to do with the case.

Heist's attorneys relied on the 2003 case, Wells v. Chevy Chase Bank, for their argument. At issue in that case was a credit card agreement requiring notice if the terms of the agreement were amended. While the lending activities were federally regulated, notices required by Maryland and referenced in the cardholder agreement, were not pre-empted by federal law, the Court of Appeals concluded in Wells.

The Court did not decide whether, by virtue of the reference to State law, the parties' agreement was rendered ambiguous, which is precisely the issue appellant has put before us, Davis wrote. Although the Wells Court declined to address that issue, we have no hesitation in agreeing with the circuit court that appellant ambiguously agreed to the prepayment penalty, rendering the preemption arguments of the parties inapplicable to the case at hand.

WHAT THE COURT HELD

Case:

Nancy Heist v. Eastern Savings Bank, FSB, CSA No. 1949, Sept. Term 2004. Reported. Opinion by Davis, J. Filed October 12, 2005.

Issue:

Was a mortgage contract ambiguous regarding a prepayment penalty because it incorporated both state law, which prohibits the penalty, and a federal law, which permits it?

Holding:

No; judgment affirmed. An addendum to the contract, signed by the parties, made it clear that there would be a penalty if the loan was paid back early.

Counsel:

Scott C. Borison for appellant; Jonathan E. Claiborne for appellee.