Court of Appeals rules that purchaser’s right of prepayment was “necessarily implied”

Mollie Pawlosky Iowa Banking Law Dickinson Law Des Moines, Iowa

Posted on 08/04/2016 at 12:00 AM by Mollie Pawlosky

In Hoffman v. Kounkel, No. 15-1363 (July 27, 2016), the Iowa Court of Appeals found that the debtor’s right to prepay was “necessarily implied.” Paragraph 20 of the Kounkels’ contract to sell land to Hoffman stated, “It is further agreed between the parties hereto that Buyer shall make no prepayment of principal balances owing hereunder prior to September 2, 2012 without Sellers’ written permission.”

The contract originally called for a balloon payment due on September 1, 2012, and no prepayment of principal before September 1, 2012, without the Kounkels’ consent. Before execution, Hoffman requested, and the Kounkels agreed, to remove the balloon payment, and the entire balance was due at the end of the thirty-year amortization term. The other terms remained the same, except that Kounkels requested, and Hoffman agreed, to Paragraph 32, which allowed the Kounkels to demand prepayment on March 1, 2013, 2018, and 2023.

In July and September 2014, Hoffman tendered an amount in excess of the remaining balance. Both prepayments were refused.

On January 12, 2015, Hoffman filed suit for specific performance of the contract. Both parties moved for summary judgment. The Kounkels also moved to amend to reform the contract. The district court denied Hoffman’s motion for summary judgment, granted the Kounkels’ motion for summary judgment, and denied as moot the Kounkels’ motion to amend. Hoffman appealed.

The contract provided that Hoffman was prohibited from prepaying the balance before September 1, 2012, without the Kounkels’ written consent. Iowa law presumes no right to prepayment. The parties disputed whether this provision granted Hoffman the ability to prepay after that date.

Paragraph 23 stated, “…shall not be removed from the property being sold hereunder prior to May 1, 2002 without Sellers written permission.” The Kounkels admitted, “prior to May 1, 2002,” meant Hoffman could act after May 1, 2002, supporting Hoffman’s interpretation of Paragraph 20.

Paragraph 32, stating, “It is specifically agreed between the parties hereto, and notwithstanding anything set out above, that [the Kounkels], at their option, may call for full prepayment of the remaining principal balances owing hereunder, plus any accrued interest thereon, on the dates of March 1, 2013, March 1, 2018 and March 1, 2023, upon Sellers giving 90 days prior written notice to [the IADA], or Beginning Farmer assignees hereunder, namely [Hoffman],” simply gave the Kounkels the right to demand, at certain times, prepayment.

As executed, the Kounkels had to wait until Hoffman tendered payment after September 1, 2012, or when the Kounkels demanded payment per Paragraph 32. Removing the balloon payment delayed the Kounkels’ right to get their remaining principal for another fifteen years, subject to their right to demand payments per Paragraph 32. There was no indication the Kounkels were unhappy with the original fifteen-year balloon. Hoffman requested removing the balloon; the Kounkels tempered that by adding Paragraph 32. “Hoffman’s interpretation of Paragraph 20, allowing, but not requiring, prepayment after September 1, 2012, seems perfectly consistent with the negotiations and intentions of the removal of the balloon, yet allowing payment after fifteen years.”  The Court of Appeals held that any restraint on investment income was arguably more favorable to the Kounkels as executed than in the earlier draft.

The first paragraph of the contract, “[Hoffman] agree[s] to and shall pay the sum of $8,438.79 principal plus interest on the 1st day of September and the 1st day of March of each year hereafter until the full principal balance owing hereunder . . . is paid by [Hoffman] to [the Kounkels],” simply addressed the general timeframe and did not affect the more specific Paragraph 20.

Viewed as a whole, the contract terms supported Hoffman’s claim he had the right to prepayment after September 1, 2012. By providing a limiting date, some different action can occur after that time limitation has expired. To interpret “prior to September 1, 2012” otherwise rendered the provision superfluous. Thus, the right of prepayment is “necessarily implied” in Paragraph 20. The district court erred in concluding that the contract did not allow Hoffman to prepay balances owing after September 1, 2012.

Regarding extrinsic evidence, as the agreement was, at least, “partially integrated,” the parole evidence rule barred the parties from contradicting those terms. The parties did not explicitly discuss granting Hoffman a right to prepayment.  So, extrinsic evidence could not be used to show what the Kounkels meant to say.

Regarding mistake, the record showed no reason for Hoffman to know the Kounkels did not intend the contract to say what was written.  There was no reasonable basis for the Kounkels to believe a provision limiting prepayment prior to a certain date would also limit prepayment thereafter. The Kounkels’ grant of summary judgment was reversed, the denial of Hoffman’s motion for summary judgment was reversed, and the proceedings were remanded.

Iowa follows the “perfect tender in time” rule; a borrower has no right to pay off a debt before the maturity date, absent a loan agreement provision allowing prepayment. Hoffman v. Kounkel found that prepayment was “necessarily implied.” Those monitoring debtor/creditor suits will be curious to see if the Kounkels seek further review from the Iowa Supreme Court, in order to confirm whether a contractual term where prepayment is “necessarily implied” is sufficient under Iowa Supreme Court precedent.  For further information regarding Hoffman v. Kounkel, or debtor/creditor litigation in general, contact Mollie Pawlosky.

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