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Assignment #21 - Late Payment and Prepayment


A. Late Payment

Mattvidi Associates Limited Partnership v. NationsBank

B. Prepayment

Carlyle Apartments Joint Venture v. AIG Life Insurance Co.

Problem Set 21


Problem Set 21

21.1. Tertius Lydgate is a physician for whom you’ve done work from time to time (going back to Problem Set 1). He approaches you now with a problem about a promissory note on which he is liable. The payment terms are precisely the same as the payment terms in the promissory note in Assignment 19, except that the monthly payment is exactly $20,000. Because he is in serious financial difficulty, he wants your help in calculating how much it would cost him to stop making payments on the note for a while. He has several questions for you. {For purposes of this problem, assume that the Maximum Lawful Rate applicable to the Promissory Note is 18% per annum.}

(a) First, he wants to know what the lender could do to him if he simply stopped making payments for three months. Could he cure the default at that time by paying the three late payments? What if he also paid interest and late charges on those payments? Would that be enough to cure the default? Promissory Note §§1, 6, 8, 9.

(b) Tertius points out that §6 of the note includes a fixed late charge of 4%. He sees that interest accrues under the note at 10% per year. Does that mean that he actually saves money if he can hold out on making a late payment for more than 4/10 of a year? Assuming that the lender never accelerates, what would Tertius owe if he managed to defer making a single payment for six months? Promissory Note §§1, 6, 9.

21.2. While eating lunch with you, Bill Robertson (your client the grocery-store operator) asks you a question about one of his loan transactions. The promissory note includes standard provisions regarding application of payments. Those provisions are identical to those in Sections 4 and 5 of the Promissory Note, except that Section 4 of Bill’s note allows partial prepayments and does not require any prepayment fee for prepayments made less than five years before maturity of the note. Noticing that he was getting ahead on his cash flow, he made a total of four payments on his regular payment date last month (his regular payment and three month’s worth of prepayment). Because the note comes due in four years, the lender did not assess a prepayment fee. Bill tells you that he did not make a payment on the first day of this month, and planned also to skip payments the next two months. The way he looks at it, the lender is ahead because it got those three payments early. Accordingly, he was astonished when he got a call from the lender’s office yesterday telling him that he was in default for failing to make this month’s payment.

(a) Can you explain the basis for the lender’s complaint? Is the lender correct? Promissory Note §§4, 5.

(b) If the lender is correct, what benefit does Bill get from making the prepayments? Promissory Note §§1(ii), 5.

21.3. You are pleasantly surprised this afternoon to find Jodi Kay (your regular client from CountryBank, most recently from Problem Set 20) waiting in your office when you return from lunch. She brings you a special drafting problem. She wants you to evaluate CountryBank’s standard promissory note provisions regarding prepayment fees. In particular, she is concerned about the possibility that fees imposed under those provisions would be invalidated as unlawful penalties. Does it matter whether she uses a fixed-percentage prepayment fee (like the one in Promissory Note §4) rather than a yield-maintenance prepayment fee (like the one at issue in Carlyle)? As she leaves, she cautions you not to worry about usury issues or other matters, just the penalty question. Promissory Note §§4, 6.

21.4. While she is with you, Jodi also raises some difficulties that she is having with a long-term promissory note that she has from La Domain, Ltd. (in the form set forth in Assignment 19). Jean La Domain has just called to ask Jodi to renegotiate the interest rate to drop it to 7%. Jean explained that interest rates have fallen dramatically in the five years that have elapsed since Jean signed the note. Jean threatened to prepay the note and take her business elsewhere if Jodi did not agree to lower the interest rate. Jodi thought that the note barred prepayment and wants to know where she stands. She acknowledges that the market rate for a similar note now would be only 7% per annum. She wants to know what Jean’s rights are under the Promissory Note. Furthermore, is there anything Jodi can put in her form notes to avoid similar problems in the future? Promissory Note §4; 11 U.S.C. §1129(b)(2).


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