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Seventh Circuit Remands Prepayment Premiums Case For Trial

I previously blogged about yield maintenance provisions, also known as prepayment premium clauses, on 1-25-07 and 2-2-07.  My prior posts addressed whether Indiana law permitted lenders to pursue yield maintenance remedies and the rules that may apply.  Then, on 9-11-08, I discussed BKCAP, LLC v. CAPTEC, a decision from the Northern District of Indiana that tacitly recognized the validity of prepayment premiums/yield maintenance provisions.   

Reversed.  On 7-13-09, the Seventh Circuit issued its opinion in the appeal of the BKCAP case.  Here’s the cite:  BKCAP, LLC v. CAPTEC, 2009 U.S. App. LEXIS 15369 (7th Cir. 2009, amended Aug. 5, 2009).  The decision reversed the District Court’s holding and remanded the case “for a trial on the question of the parties’ intended meaning of the prepayment premium.”  Click here to review the opinion.

The lesson of the latest BKCAP opinion is that the contract language should be simple and clear.  Note Judge Tinder’s opening remarks:

This case demonstrates that even experienced, sophisticated business entities can encounter difficulty when drafting carefully negotiated loan documents.  Since July 2007, the plaintiffs and the defendant have been at loggerheads over the meaning of just a handful of lines out of several hundred in their five-page, single-spaced Note.  Unfortunately, this appeal cannot bring their stalemate to an end, and more litigation lies ahead. 

Judge Tinder ultimately concluded that “the meaning of the prepayment premium is a question of fact that requires an examination of relevant extrinsic evidence.”  Since trials translate to further delays and expense for lenders, as a practical matter Judge Tinder’s holding is a bad result.  For more on how the Seventh Circuit reached its conclusion and how a court might analyze the meaning of a yield maintenance provision/prepayment clause, please review the opinion. 

Still fine.  Despite the remand, the Seventh Circuit did not in any way, shape or form question the validity of yield maintenance fees.  As such, it would appear that my prior conclusions remain true as they related to Indiana’s view of the legitimacy of prepayment premiums under certain circumstances.