Prepayment Penalty: Collectable on Acceleration?

If a promissory note has a prepayment penalty, when the lender accelerates can it collect the prepayment penalty? That question was answered in this case* which said No. It flatly held that by accelerating the note the payees lost their right to collect the prepayment penalty. The Court found that the prepayment penalty did not attach when the loan is accelerated because the act of acceleration advances the maturity of the debt; the debt becomes immediately due and payable. The Court did note, however, that where the prepayment provision by its terms provided that the prepayment penalty would be payable "whether or not said prepayment is voluntary or involuntary, including any prepayment effected by the holder's exercise of the Acceleration Clause" the prepayment penalty could be collected.

The Court followed the majority view of other state courts that have held that unless the note otherwise provides, a holder of a note cannot simultaneously accelerate the note and collect their prepayment penalty. However, a lender can help itself by providing that the prepayment penalty would be due and payable whether by voluntary prepayment or involuntary prepayment occasioned by the borrower's default.

*Ferreira et al v. Yared et al 32 Mass. App. Ct 328, 588 NE 2d 1370

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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