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).
Assignment Update
No update is needed at this time.
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