Oceanside 84 Ltd. v. Fidelity Federal Bank

OCEANSIDE 84, LTD., Plaintiff and Appellant, v. FIDELITY FEDERAL BANK, Defendant and Respondent. Nos. B101583, B104345 (Super. Ct. No. BC 083318) California Court of Appeal Second Appellate District Division Four Filed August 11, 1997 CERTIFIED FOR PARTIAL PUBLICATION
THE COURT:*
        Good cause appearing, it is ordered that the opinion in the above entitled matter, filed July 30, 1997, be certified for partial publication in the official reports. Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of part II.


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*VOGEL (C.S.), P.J., EPSTEIN, J., BARON, J.









OCEANSIDE 84, LTD., Plaintiff and Appellant, v. FIDELITY FEDERAL BANK, Defendant and Respondent. Nos. B101583, B104345 (Super. Ct. No. BC 083318) California Court of Appeal Second Appellate District Division Four Filed July 30, 1997 CERTIFIED FOR PARTIAL PUBLICATION                 APPEAL from a judgment of the Superior Court of Los Angeles County, Aviva K. Bobb, Judge. Affirmed.
        Perona, Langer & Beck, R. Paul Katrinak, Major A. Langer and Ellen R. Serbin for Plaintiff and Appellant.
        Gibson, Dunn & Crutcher, Martin C. Washton and Jody L. Johnson for Defendant and Respondent.

        In 1987, plaintiff and appellant Oceanside 84, Ltd., a limited partnership (appellant), borrowed $2.45 million from defendant and respondent Fidelity Federal Bank (Fidelity). According to the terms of the loan agreement, Fidelity was authorized to adjust the interest rate charged to appellant every six months. In 1993, appellant filed a lawsuit for breach of contract and unfair trade practices against Fidelity, alleging that Fidelity was overcharging interest. In brief, the allegations of the complaint centered around the date that Fidelity selected to recalculate interest payments on appellant's loan. Fidelity's motion for summary adjudication was granted as to the unfair trade practices cause of action in May 1994. Fidelity filed a motion for class certification, and the issue of liability was bifurcated and tried before the court prior to a determination of the class certification motion. Judgment was entered on behalf of Fidelity in February 1996, and appellant appealed (Case No. B101583), contending the trial court erred in denying its request for jury trial and in interpreting the terms of the contract. In April 1996, the trial court granted Fidelity's postjudgment motion for attorney's fees and appellant filed a second appeal (Case No. B104345). Both appeals were consolidated by order of this court in October 1996. We shall affirm.

FACTUAL AND PROCEDURAL BACKGROUND The Loan Documents
        Appellant's general partners executed a promissory note and an amendment (the Amendment) in favor of Fidelity, dated September 4, 1987. The promissory note (the Note) reflects "value received" in the full amount on September 4 and appellant promised to pay the principal sum of $2.45 million with interest at the rate of 8.5 percent per annum, payable in monthly installments of $18,838.38 on the first day of every month, beginning November 1, 1987, and continuing until October 1, 2017. Each payment "shall be credited first on interest then due and the remainder on principal."
        The Amendment modified the Note to add provisions regarding interest rate adjustments, which included the following: "The initial interest rate specified in the Note shall be adjusted by increasing or decreasing the interest rate beginning with the 6th month after the first payment and every 6 month(s) thereafter. All adjusted interest rates shall be established on the 26th day of the applicable month by adding a rate differential of 2.250% to the following index: the most recent available monthly weighted average cost of Savings, Borrowings and Advances by the Federal Home Loan Bank of San Francisco ('Bank') to the 11th district members of the Bank based on statistics tabulated by the Bank." ¹ (Italics added.) The Amendment further provided that "No prior notification of interest rate adjustments shall be required."
        Fidelity sent appellant its first notice of interest rate change (change notice) on February 26, 1988. The new rate was based on the 11th District rate, which was announced on the last working day of the previous month--in this case, January 29, 1988. The change notice indicated that a new monthly payment would be effective May 1, 1988, that the interest rate would be 9.5 percent, based on a "present index" of 7.645. As in the loan documents, the change notice specified that that rate differential or margin was 2.250 and that the interest rate would be adjusted every 6 months. The change notice indicated that the next scheduled payment adjustment would be November 1, 1988, and provided a name and telephone number to call for further information. Change notices were sent every six months thereafter (on August 26th and February 26th of each successive year). Each change notice was identical in form and informed appellant of an adjusted payment to be made approximately 65 days later (in November and May of each successive year) and provided a history of rate adjustments.
        In 1992, appellant, apparently after learning that some banks were overcharging interest, made inquiries regarding Fidelity's practices and filed this lawsuit. The gist of appellant's lawsuit is that by calculating changes in its payments 65 days before payment was due, Fidelity was overcharging interest. Fidelity's defense was essentially that calculation of the interest rate change 65 days in advance was necessary in order to compute the applicable interest rate and to send notice to its borrowers of the impending payment change.

The motion for jury trial
        At a pretrial status conference the court ordered the parties to submit briefs on the issue of whether appellant's request for a jury trial should be granted. A hearing was set on March 17, 1995, but there is nothing in the record which indicates that such a hearing was held. We assume the request was denied since the court's minutes dated May 19, 1995, indicate that the matter was trailing as a non-jury trial.

Trial Testimony
        At trial, Myron Mueller, Fidelity's Loan Service Manager, testified that his understanding of the term "applicable month" based on existing practices at Fidelity since 1986 and in effect at during the relevant time period, ² was "the month in which the index would be reviewed in this case to determine the rate change and/or the corresponding payment change." He was not aware of any other custom and practice in the industry other than to abide by the terms of the loan documents. The interest rate on appellant's loan and other adjustable rate mortgages was adjusted approximately 65 days prior to the payment change date. This time period was necessary to allow review of the 11th District index and to send notices to borrowers. The 11th District index was released by the Federal Home Loan Bank of San Francisco on the last day of each month and available late that day or the next day. Mueller explained that a fairly detailed process takes place before adjustable rate mortgage notices are sent to customers. First, a preliminary report was issued which indicated whether certain loans had to be reviewed individually for special circumstances. Then the appropriate interest rate indices had to be input into the computer system, and the indices had to be verified. The change notices were generated on the 26th day of the month and were mailed the following day. Notices were sent to customers well in advance of the actual payment change date because there could be significant increases in payments, and the notice period allowed borrowers to prepay their loans or refinance. No distinction was made between the notices sent to individual and commercial borrowers, although federal regulations only required notice to be given to individuals.
        According to Mueller, apart from the change notices, no other explanation of the computation of the interest rate changes was given to the customers, but customers did call the telephone number provided on the change notices to obtain information regarding the interest rate indices.
        Mueller testified that appellant made all monthly payments on a timely basis.
        Bernard Lomax, appellant's expert on the financial industry, testified that it was customary to calculate interest rate adjustments in accordance with the terms of the promissory note. He testified, according to his review of appellant's loan documents, that the "applicable month" for an interest rate change would be the month immediately preceding the date of the authorized change in payment, for example the May payment change should be computed on April 26, and that there would be no reason to calculate the interest rate any earlier.
        Steven Spierer, one of appellant's general partners and an attorney at law, testified that he did not negotiate the terms of the loan documents in any manner with Fidelity. In early 1992, after reading various articles about miscalculations by lenders, Spierer and his partners hired an investigative agency to examine the terms of their loan from Fidelity. After uncovering a discrepancy, they asked Fidelity to correct the problem, but no action was taken. Appellant continued to make payments on the loan. Spierer testified that at that time he had no knowledge of how Fidelity calculated the 11th District index rate and that he relied on Fidelity to calculate the interest rate pursuant to the terms of the loan documents.

The trial court's ruling
        The trial court concluded that the facts were undisputed and the matter centered around the interpretation of the term "applicable month." It determined that because the clause could be reasonably interpreted to mean the second month preceding the change of payment date or the third month preceding the change of payment date, the term was ambiguous, as determined by Civil Code section 1643. ³ The trial court did not construe the ambiguity against Fidelity, the drafter of the contract, however, because appellant had accepted the Bank's course of conduct in using a review date 65 days prior to the payment date for five years without complaint. Further, the court concluded that the change notices were clearly written. Accordingly, the court found in favor of Fidelity as to liability on the breach of contract cause of action.
        Appellant contends that the term "applicable month" is not ambiguous, and even if it were, it should be construed against Fidelity, the drafter of the document.
        Next, appellant contends that the change notices directly contradict the terms of the loan agreement and that they thus are inadmissible parol evidence. Appellant also contends that its conduct in making payments to Fidelity for a five-year period was inadmissible evidence with respect to interpretation of the loan agreement.
        Appellant does not contend that Fidelity made incorrect mathematical calculations, that it changed interest rates more frequently than every six months, or that there was any kind of bank error involved. Appellant contends only that by calculating the interest rate so far in advance, Fidelity used a rate that was no longer in effect by the time the payment actually changed. Appellant argues that no notice was required, either by the terms of the loan documents or federal regulations, so there was no justification for a 65-day advance notice period.

DISCUSSION I         The core of this dispute is the term "applicable month." The term is not defined in the loan documents. Both parties offered evidence at trial about what they thought it meant. There was no evidence presented that the parties discussed the term "applicable month" at the time the loan documents were executed or that there were any oral representations made regarding the method of calculating interest rate changes. The only communication between Fidelity and appellant are contained in the loan documents and notices of rate changes.
        Because that is so, the interpretation of the contract is a question of law, for the trial court, and for this court. (See Greater Middleton Assn. v. Holmes Lumber Co. (1990) 222 Cal.App.3d 980, 989-990; Titan Group, Inc. v. Sonoma Valley County Sanitation Dist. (1985) 164 Cal.App.3d 1122, 1127.)
        In deciding the issue, we employ the framework utilized by Division Seven of this District in Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839: "When a dispute arises over the meaning of contract language, the first question to be decided is whether the language is 'reasonably susceptible' to the interpretation urged by the party. If it is not, the case is over. (Consolidated World Investments, Inc. v. Lido Preferred, Ltd. (1992) 9 Cal.App.4th 373, 379.) If the court decides the language is reasonably susceptible to the interpretation urged, the court moves to the second question: what did the parties intend the language to mean? (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.) [¶] Whether the contract is reasonably susceptible to a party's interpretation can be determined from the language of the contract itself (United Teachers of Oakland v. Oakland Unified Sch. Dist. (1977) 75 Cal.App.3d 332, 330) or from extrinsic evidence of the parties' intent (Winet v. Price, supra, 4 Cal.App.4th at p. 1165)." (37 Cal.App.4th at pp. 847-848.) If a contract is capable of two different reasonable interpretations, the contract is ambiguous. (Ibid.)
        A well-settled maxim states the general rule that ambiguities in a form contract are resolved against the drafter. (Civ. Code, § 1654; Victoria v. Superior Court (1985) 40 Cal.3d 734, 739.) But that is a general rule; it does not operate to the exclusion of all other rules of contract interpretation. It is used when none of the canons of construction succeed in dispelling the uncertainty. (Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576, 596.)
        The pertinent reference to "applicable month" in this case appears in the Amendment to the Note. It provides that the "adjusted interest rates shall be established on the 26th day of the applicable month." This reference follows immediately after a sentence which explains that the interest rate shall be adjusted on the 6th month after the first payment and every six months thereafter. If this is read to mean that the "applicable month" is the sixth month, it would lead to an untenable situation: the adjusted payment cannot be made on the first day of the sixth month since the rate must be ascertained on the 26th day of that month. Neither party puts forth such an interpretation. Each concedes that the rate must be determined prior to the first day of the sixth month. Because the term is left unresolved by the language of the contract, we are entitled to consider whether it was reasonably susceptible to the meanings urged by the parties.
        Appellant contends that the "applicable month" is the month immediately preceding the sixth month. By that reading, the calculation would be computed on April 26th for a change effective May 1. Appellant's retained expert testified that such an adjustment could have been made and would have been reasonable if Fidelity had the resources to immediately advise the customer of the changed payment and the customer was not inconvenienced by the scant notice period. We conclude this is a reasonable interpretation.
        Respondent contends that the "applicable month" is the second month preceding the sixth month; in other words, the rate set by the 11th District at the end of January, effective in February, for payment due on May 1. Mueller explained that Fidelity calculated the rate on the 26th of the second month preceding the change for administrative reasons, as a courtesy to a borrowers, and that it was merely following a procedure which was in place prior to appellant's loan. There is no evidence that Fidelity miscalculated or in any way attempted to overcharge appellant on its loan. We conclude this is also a reasonable interpretation.
        Since both parties offered reasonable interpretations, we must look to other objective manifestations of the parties' intent. In instances such as this, where there is no evidence that the parties specifically agreed, or even discussed, how the interest rate was to be adjusted, the conduct of the parties after the execution of the contract, and before any controversy arose, may be considered in order to attempt to ascertain the parties' intention. (Kennecott Corp. v. Union Oil Co. (1987) 196 Cal.App.3d 1179, 1189-1190.) "It is well settled that although an agreement may be indefinite or uncertain in its inception, the subsequent performance of the parties will be considered in determining its meaning for they are least likely to be mistaken as to the intent. [Citations.]" (Crawford v. Continental Cas. Co. (1968) 261 Cal.App.2d 98, 102; Southern Cal. Edison Co. v. Superior Court, supra, 37 Cal.App.4th at p. 851; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 689, p. 622.)
        Pursuant to the terms of the loan, adjustments are to be made every six months, but not until the sixth month following the first payment, in other words the seventh payment. The loan was originally effective September 4, 1987, and the original interest rate was set on that date, but the first payment was not to be made until November 1, 1987, 58 days after the loan began accruing interest. Therefore, the first payment to reflect an adjustment would be May 1, 1988, almost a full eight months after the initial interest rate was set. In reality, adjustment of the interest rate the second month preceding the adjustment payment date more accurately reflects six month adjustments from the beginning date of the loan. ⁴
        Appellant argues that its failure, for five years, to protest respondent's method of calculation cannot be considered because it was unaware of how the calculations were made. But the evidence shows that it was on notice of the month utilized by Fidelity as the "applicable month." Appellant received a dated notice from Fidelity 65 days before the adjusted payment was due. This first notice was dated February 26, 1988 and was mailed on that date or the next day. It advised appellant of the interest rate and payment due for May 1, 1988. It must have been obvious to anyone reading this announcement in February 1988 that it could not have been, and was not, based on the 11th District's index in March or April, or even in February, since the District does not release its numbers until the end of the month. ⁵ The same reasoning applies to each of the succeeding notices, covering a period of five years.
        Fidelity's conduct during the five years subsequent to the execution of the loan documents was consistent and in no way deceptive. Appellant offers no evidence to demonstrate that it had any understanding one way or the other about how the interest rate was being calculated. There was no attempt to inquire about what the term "applicable month" meant at the time the loan was entered into or during the five-year period before the lawsuit was filed. The fact of appellant's payments without objection and the failure to question the method of calculation in the face of periodic notice of rate adjustments, each sent 65 days before the affected payment was due, is the only evidence we have about appellant's intent. Based on that evidence, appellant may be considered to have at least acquiesced in Fidelity's interpretation of the term "applicable month." We conclude the court did not err in deciding there was no breach of contract.

Entitlement to a jury trial
        Appellant contends that since the issue of contract interpretation depended on the credibility of the parties' experts concerning custom and practice in the industry, it was entitled to trial by jury.
        We are mindful of the principle that the right to trial by jury is a basic and fundamental part of our system of jurisprudence and that in cases of doubt, the issue should be resolved in favor of preserving a litigant's right to trial by jury. (Titan Group, Inc. v. Sonoma Valley County Sanitation Dist., supra, 164 Cal.App.3d at p. 1128.) However, "The interpretation of a written instrument, even though it involves what might properly be called questions of fact [citation], is essentially a judicial function to be exercised according to the generally accepted canons of interpretation so that the purposes of the instrument may be given effect. [Citations.] . . . It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence." (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865.)
        In arguing this issue before the trial court, appellant stated that it proposed to offer the testimony of Bernard Lomax. Mr. Lomax had indicated in deposition testimony that, in his opinion, it was custom and practice in the banking industry to determine an index review date by reference to the language contained in the promissory note. While Fidelity objected to Lomax's qualifications, it did not attempt to assert that the index review date was established by some other document. But, as we have discussed, the note in this case contained no guidance as to what the index review date should be, and there were no conflicting factual assertions regarding the interpretation of that term. The trial court properly determined that the issue in this case involved a matter of law and that appellant was not entitled to a jury trial.

[This Part Is Not Certified For Publication]
II         The Note contained the following provision: "If action be instituted on this Note, I promise to pay the holder hereof any expenses incurred thereby, including, but not limited to, reasonable attorney's fees and court costs."
        Following trial, Fidelity filed a noticed motion for attorney's fees. Appellant objected, claiming that Fidelity was required to file a memorandum of costs in addition to the noticed motion, pursuant to California Rules of Court, rule 870, which provides that "[a] prevailing party who claims costs shall serve and file a memorandum of costs within 15 days after the date of mailing of the notice of entry of judgment or dismissal by the clerk" and legislative history to Code of Civil Procedure section 1033.5 which indicates that "attorney's fees are costs which are to be awarded only upon noticed motion."
        The trial court rejected this argument and awarded Fidelity $56,250 in attorney's fees.
        Code of Civil Procedure section 1033.5 provides in pertinent part:
        "(a) The following items are allowable as costs under Section 1032:
        ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
        "(10) Attorney fees, when authorized by any of the following:
        "(A) Contract.
        "(B) Statute.
        "(C) Law.
        ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
        "(c) Any award of costs shall be subject to the following:
        ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
        "(5) . . . Attorney's fees allowable as costs pursuant to subparagraph (B) of paragraph (10) of subdivision (a) may be fixed as follows: (A) upon a noticed motion, (B) at the time a statement of decision is rendered, (C) upon application supported by affidavit made concurrently with a claim for other costs, or (D) upon entry of default judgment. Attorney's fees allowable as costs pursuant to subparagraph (A) or (C) of paragraph 10 of subdivision (a) shall be fixed either upon a noticed motion or upon entry of a default judgment, unless otherwise provided by stipulation of the parties. [¶] Attorney's fees awarded pursuant to Section 1717 of the Civil Code are allowable costs under Section 1032 as authorized by subparagraph (A) of paragraph (10) of subdivision (a)."
        Subdivision (c)(5) indicates that if attorney's fees are awarded pursuant to statute, they may be claimed either by the filing of a noticed motion or a memorandum of costs. Fees awarded pursuant to contract, as in this case, are specifically to be fixed by filing of a noticed motion. Since the statute clearly makes mention of a memorandum of costs as an alternate procedure for claiming fees awarded pursuant to statutes, we cannot read into the relevant language for contract attorney's fees that a memorandum of costs is required in addition to a noticed motion.
        Appellant relies primarily on the cases Bankes v. Lucas (1992) 9 Cal.App.4th 365 and Nazemi v. Tseng (1992) 5 Cal.App.4th 1633. Neither of these cases stands for the proposition argued by appellant, that both a memorandum of costs form and a noticed motion must be filed before attorney's fees are awarded.
        In Bankes, judgment was entered June 18, 1990, and included a $62,589 award of attorney's fees to the defendant and cross-complainant pursuant to the contract and Civil Code section 1717. On June 26, Lucas filed a separate memorandum of costs for $1,016.28. (Id. at p. 367.) In September 1990, Lucas filed a motion for attorney's fees incurred in post-trial proceedings. The trial court's award of the post-trial attorney's fees was set aside on appeal after the Court of Appeal determined that neither party was the prevailing party on the contract causes of action. The court also noted, as an additional grounds for reversing the postjudgment award of fees, that Lucas was not entitled to the post-trial attorney's fees because his request for such fees was not made "at the same time the memorandum of costs" was filed and served as required by California Rules of Court, rule 870.2. (Id. at p. 371.)
        In Nazemi v. Tseng, supra, 5 Cal.App.4th 1633, judgment was entered in favor of defendant and cross-complainant Tseng on August 31, 1989, containing a blank space for attorney's fees and costs incurred in conjunction with his cross-complaint. Plaintiffs filed a notice of appeal in October of that year, and the judgment was affirmed in March 1991, with plaintiffs ordered to bear costs on appeal. Tseng filed a motion for attorney's fees for both the trial and appeal, as well as a memorandum of costs on appeal in April 1991. The trial court awarded attorney's fees for both the trial and appeal. The portion of the order awarding attorney's fees for trial was reversed on appeal because Tseng's motion was not filed more than a year after the judgment was entered in the trial court. The Court of Appeal, in reviewing the California Rules of Court, and the Code of Civil Procedure, ascertained a legislative intent to limit the discretion of the trial court and concluded that "attorney fees, when an item of costs, must be claimed within specified time limits." (Id. at p. 1641.) Tseng did not set forth a requirement that both a memorandum of costs and a motion for attorney's fees be filed; in fact, the record in that case contained no evidence that a memorandum of trial costs was ever filed. (Id. at p. 1636, fn. 2.)
        In any event, as Fidelity points out, both Bankes v. Lucas and Nazemi v. Tseng dealt with the interpretation of California Rules of Court, rule 870.2, as it existed prior to 1994. The rule then stated: "Any notice of motion to claim attorney fees as an element of costs under Civil Code section 1717 shall be served and filed before or at the same time the memorandum of costs is served and filed. If only attorney fees are claimed as costs, the notice of motion shall be served and filed within [15 days of the mailing of notice of entry of judgment]."
        Rule 870.2 was amended in 1994, and now provides that "[a] notice of motion to claim attorney fees for services up to and including the rendition of judgment in the trial court shall be served and filed within the time for filing a notice of appeal under rules 2 and 3."
        We find no error in the trial court's award of attorney's fees to Fidelity.

[End Of Part Not Certified For Publication]
DISPOSITION         The judgment is affirmed. Respondent Fidelity shall recover costs on appeal.

We concur:
        VOGEL (C.S.), P.J.
        BARON, J.


¹ 1.         For simplicity's sake, we shall refer to this index as the "11th District Index."
         ² .         It was established that Fidelity's internal procedures had changed subsequent to the filing of the lawsuit.
         ³ .         Civil Code section 1643 provides that: "A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties."
         ⁴ .         We note parenthetically that the time lag in computing the interest rate roughly evened out over the life of the loan. A review of the change notices reveals that the interest rate increased and decreased between 1988 and 1993, from a high of 11.173 in November 1989 to a low of 6.610 in May 1993. Appellant does not contend that Fidelity changed its method of calculation depending on the direction of the index rate.
         ⁵ .         Appellant's contention that the trial court erred in admitting evidence of the change notices is without merit. The change notices did not purport to add to or vary the terms of the agreement with appellant, but gave information about Fidelity computations of interest rate changes, and of appellant's awareness of how the computations were made.