Opinion
NOT TO BE PUBLISHED
Super. Ct. No. 03AS02159
HULL, J.Plaintiff, Parkside Apartment Partners (Parkside), appeals from a judgment of the trial court dismissing its complaint against defendant, The Cadle Company II, Inc. (Cadle), in which Parkside sought to recoup a late charge paid to Cadle on a note. Cadle had imposed the late charge following Parkside’s default on the final payment of the note. Parkside claimed the late charge provision of the note applied only to interim installment payments and not the final payment. The trial court disagreed, concluding the late charge provision applied to all scheduled payments. We conclude the language of the late charge provision, read in the context of the rest of the note, the conduct of the parties, and legal principles relating to penalty clauses, demonstrates it was not intended to apply to the final payment. We therefore reverse the judgment.
FACTS AND PROCEEDINGS
On August 12, 1991, Metropolitan Life Insurance Company (Metropolitan) loaned $4.1 million to William Wanagaitis, Paul Eblen, Edward Johanson, Steve Thinglum, Albert and Joella Durst, Richard and Akiyo Walker, and Keith and Mary Larkin, as trustees of the Keith R. and Mary A. Larkin Living Revocable Trust (the Partners) to pay off a construction loan on an apartment complex located at 6251 through 6291 Jacinto Avenue, Sacramento, California (the Property). In return, the Partners executed a promissory note (the Note) in favor of Metropolitan in the same amount, secured by a deed of trust (the Deed of Trust) on the Property.
The Note carried an initial interest rate of 9.25 percent and called for monthly payments of $33,730. It also provided for increases in the interest rate and monthly payments, at the option of Metropolitan, after 37 and 73 months. The Note specified a maturity date of August 1, 2001, at which time “a substantial portion of the original principal sum” of the note would be due.
In the event of a default by the Partners, including failure to make any payment when due, Paragraph No. 6 of the Note provided for an increase in the interest rate charged on the remaining balance to the lesser of 4 percent above that previously charged or the highest rate permitted under the laws of the State. (Further “Paragraph” references followed by a number refer to the corresponding paragraphs of the Note.) In addition, Paragraph No. 4 provided that a 4 percent late charge may be applied to any overdue installment.
On or about August 1, 1993, Metropolitan and the Partners entered into an agreement to modify the Note (the 1993 Modification) to provide for a temporary reduction in the monthly payments and an acceleration of the maturity date to December 1, 1994.
In January 1995, Metropolitan and the Partners entered into another agreement (the 1995 Forbearance) whereby Metropolitan agreed to delay exercising its rights under the Note and the 1993 Modification until September 1, 1995, and the Partners agreed to pay all sums due in full on or before that date.
Sometime in 1995, the Partners formed Parkside, a California general partnership, and, on February 24, 1995, transferred ownership of the Property to Parkside.
Final payment was not made on the Note on September 1, 1995. On November 15, 1995, Parkside filed a voluntary bankruptcy petition under title 11 of the United States Code (11 U.S.C. § 101 et seq.). Thereafter, without notice of the bankruptcy filing, the trustee of the Deed of Trust caused a notice of default and election to sell to be recorded on the Property.
On December 31, 1996, Metropolitan, the Partners and Parkside entered into a Loan Assumption and Modification Agreement (the 1996 Modification), which expressly superseded the 1993 Modification and the 1995 Forbearance. The 1996 Modification recited the amount due as $4,777,976.18 and increased the interest rate to 9.5 percent. It also provided for a new monthly installment payment of $37,530 and a new maturity date of February 1, 2002. The 1996 Modification waived all prior defaults and provided that Parkside would assume the debt of the Partners, with the Partners remaining individually liable.
On November 2, 2001, three months before the revised maturity date, Metropolitan assigned the Note and its rights under the Deed of Trust to Cadle.
On January 22, 2002, Cadle notified Parkside that the amount due on the maturity date would be $4,295,539.30 plus interest of $27,205.08. Cadle further informed Parkside that, if the amount due is not paid by that date, a late charge of $172,909.78 would be imposed.
Parkside attempted to obtain substitute financing to pay off the note, but was unsuccessful. Parkside failed to pay Cadle the amount due on the revised maturity date.
On March 27, 2002, Cadle filed suit against Parkside and the Partners for breach of the Note. Cadle sought specific performance of a provision in the Deed of Trust for appointment of a receiver. Cadle also sought injunctive relief and a judicial foreclosure.
On April 17, 2002, Cadle entered into a stipulation with Parkside whereby Parkside agreed to pay Cadle $48,324.82 per month in post-default interest at a rate of 13.5 percent until Cadle’s lawsuit is settled or the Property is sold at foreclosure.
On January 31, 2003, Parkside obtained a new loan secured by the Property and used the proceeds to pay off its debt to Cadle. In addition to the other sums due, Cadle demanded payment of a late charge in the amount of $172,909.78. Parkside objected to the late charge. However, in order to close escrow on the new loan, Parkside paid the late charge under protest.
On April 17, 2003, Parkside filed the present matter against Cadle to recover the late charge. Parkside alleged breach of contract, intentional and negligent misrepresentation, and fraud, and sought declaratory relief and an accounting of the loan payoff charges.
On March 22, 2005, the trial court entered judgment for Cadle. In its statement of decision, the court concluded Cadle had given Parkside sufficient notice that a late charge would be imposed, and the late charge was properly applied to Parkside’s failure to make the final payment on the revised maturity date. The court further concluded the late charge provision of the Note was not an unlawful penalty. Finally, the court awarded Cadle its costs, including attorney fees.
DISCUSSION
This matter concerns the proper interpretation of Paragraph No. 4 of the Note. It reads: “In the event that any installment of interest, principal, principal and interest or required escrow deposits shall become overdue for a period in excess of seven (7) days, a ‘late charge’ of four cents ($0.04) for each dollar ($1.00), or part thereof, so overdue may be charged to Maker by Holder for the purpose of defraying the expenses incident to handling such delinquent payments. This charge shall be in addition to, and not in lieu of, any other remedy Holder may have and is in addition to Holder’s right to collect reasonable fees and charges of any agents or attorneys, which Holder employs in connection with any Event of Default. Such late charges if not previously paid shall become part of the indebtedness evidenced hereby, and shall, at the option of Holder, be added to any succeeding monthly payment due under the Loan Documents. Failure to pay such late charges with such succeeding monthly payment shall constitute an Event of Default and such late charges shall bear interest at the Default Rate from the date due. Holder agrees to comply with California Civil Code Section 2954.5 with respect to the giving of notice prior to imposing a late charge.”
Parkside contends the express language of Paragraph No. 4 and the Note as a whole, as well as the parties’ course of conduct, demonstrate the parties’ intent that Paragraph No. 4 apply only to interim “installment” payments and not to the much larger, final payment. Cadle counters that the express language of the Note reveals an intent that Paragraph No. 4 apply to any and all payments, including the final one. Cadle further argues the conduct of the parties does not prove a different intent. Parkside has the better argument.
“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. [Citation.] If the court decides the language is reasonably susceptible to the interpretation urged, the court moves on to the second question: what did the parties intend the language to mean?” (Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839, 847.) The overriding goal of contract interpretation is to give effect to the mutual intention of the parties at the time of contracting. (Civ. Code, § 1636; Ticor Title Ins. Co. v. Employers Ins. of Wausau (1995) 40 Cal.App.4th 1699, 1707.)
Interpretation of a written instrument is generally a question of law which we review de novo. (Kitty-Anne Music Co. v. Swan (2003) 112 Cal.App.4th 30, 37.) Even where extrinsic evidence is admitted on the meaning of a written instrument, interpretation is a question of law if that evidence is undisputed. (Solis v. Kirkwood Resort Co. (2001) 94 Cal.App.4th 354, 360-361.) As we shall explain, that is the case here.
Paragraph No. 4 permits the imposition of a late charge whenever an “installment” is not paid within seven days of its due date. It is undisputed Parkside failed to make the final payment on the Note within seven days of its due date. Thus, the question on appeal is whether that final payment was an “installment” within the meaning of the Note.
Where contract language is clear and explicit and does not lead to absurd results, we normally determine intent from the written terms alone. (Civ. Code, § 1638.) Those terms are to be understood in their ordinary and popular sense, unless used by the parties in a technical sense, or unless a special meaning is given to them by usage. (Id., § 1644.)
Parkside argues the trial court’s interpretation of the word “installment” is contrary to the “‘ordinary and popular’ meaning” of the word. Parkside cites Kenny v. Los Feliz Investment Co., Ltd. (1932) 121 Cal.App. 378 (Kenny), where the court said: “The word ‘installment’ is one of common use and has a well-accepted meaning. Century Dictionary defines installment as ‘Partial payments on account of a debt due.’ Standard Dictionary gives this definition: ‘A partial payment of a price or debt due.’ Bouvier’s Law Dictionary gives this definition: ‘A part of a debt due by contract and agreed to be paid at a time different from that fixed for the payment of the other part.’” (Kenny, supra, at pp. 384-385.) Parkside argues that if the final payment had been equal to the prior payments, it would fall within the foregoing definition of “installment.” However, according to Parkside, a final, balloon payment does not.
We find nothing in the definitions quoted in Kenny to suggest that, in order for a final payment to be considered the last of the installments in an installment contract, that payment must be equal to those that preceded it. Those definitions suggest that, to be an “installment,” the payment need only be a part of the whole. (Accord, Powell v. Central Cal. Fed. Sav. & Loan Assn. (1976) 59 Cal.App.3d 540, 547 [“[T]he term ‘installment loan’ was defined in 12 Code of Federal Regulations section 541.14 (23 Fed. Reg. 9890) as follows: ‘The term “installment loan” means any loan repayable in regular periodic payments, equal or unequal, sufficient to retire the debt, interest and principal’”].) In Mills v. Herrod (1974) 37 Cal.App.3d 213, 217, the court defined an installment as “‘one of several successive payments in settlement of a debt.’” No mention was made of the relative values of each payment or whether it was the first, middle or last payment in the sequence.
Parkside argues the final payment under the Note is not an installment but a “classic ‘balloon payment.’” (See Wyatt v. Union Mtg. Co. (1979) 24 Cal.3d 773, 780 [“[B]alloon payment is the amount necessary to amortize principal and interest unpaid at maturity when the prescribed monthly installments have been insufficient to do so”].) However, there is no reason a final, balloon payment cannot also be an installment payment. As noted above, the fact the payment amount is different from earlier installments is not controlling. Indeed, 7 Code of Federal Regulations part 1941.18, which concerns the rates and terms of operating loans from the federal Department of Agriculture, states that installment payments “may include equal, unequal, or balloon installments.” (7 C.F.R. § 1941.18(b)(4) (2007).)
However, the fact that a final, balloon payment may be considered an installment within the common meaning of the latter term does not mean the parties so intended here. As noted above, we use the ordinary meaning of words unless the parties intended something else. (Civ. Code, § 1644.) Specific provisions of a contract should not be considered in isolation. “The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.” (Id., § 1641.)
Paragraph No. 4 permitted imposition of a late charge whenever an “installment of interest, principal, principal and interest or required escrow deposits” becomes overdue for more than seven days. (Italics added.) Paragraph No. 1, subdivision (a), required the payment of “equal monthly installments of principal and interest” in the amount of $33,730. (Italics added.) Paragraph No. 1, subdivisions (b) and (c), also required the payment of “monthly installments of principal and interest” after any future adjustment of the interest rate. (Italics added.) However, Paragraph No. 1, subdivision (d), provided: “On the Maturity Date, a final payment in the aggregate amount of the unpaid principal sum evidence [sic] by this Note, all accrued and unpaid interest thereon, and all other sums evidenced by this Note or secured by the Deed of Trust . . . shall become immediately due and payable in full.” (Italics added.)
Parkside contends use of the word “installment” in Paragraph No. 1, subdivisions (a), (b), and (c), and in Paragraph No. 4, but not in Paragraph No. 1, subdivision (d), demonstrates the parties did not intend the late charge provision to apply to the final payment. Parkside argues the parties used the word “installment” to mean all payments on the Note except the last. Parkside points to Paragraph No. 2, which specifies how each “payment” shall be applied among prepayment fees, late charges, escrow deposits, interest, and principal. This provision applied to “[a]ll payments,” including the last. Parkside argues that if the parties had intended Paragraph No. 4 to apply to all payments, they would have said so, as they did in Paragraph No. 2. Instead, they made the provision applicable to “any installment.”
Cadle argues this construction of the Note is actually belied by Paragraph No. 2, which specifies how “all payments” shall be applied and indicates they may be allocated to late charges. However, all this proves is the parties intended that payments, including the last, could be allocated to those late charges that had previously been imposed. It says nothing about whether a late charge may be imposed on the past payment.
Cadle also argues Parkside’s interpretation conflicts with the language of Paragraph No. 4, which allows any late charge imposed to become part of the indebtedness and subject to future interest charges. However, the fact that any late charge imposed will become part of the indebtedness does not answer the question of whether a late charge imposed was authorized. Presumably, only late charges authorized by the Note would become part of the indebtedness.
Cadle nevertheless argues Parkside’s interpretation “directly contradicts” the express wording of Paragraph No. 4, which refers to “any payment.” Actually, Paragraph No. 4 says “any installment,” and the question here is whether “installment” as used in Paragraph No. 4 is synonymous with “payment” as used in Paragraph No. 1, subdivision (d).
The language of the Note, read as a whole, supports Parkside’s interpretation of the late charge provision in the contract. Paragraph No. 4 permits a late charge on unpaid installments. Paragraph No. 1, subdivisions (a), (b), and (c), specify the amount of installment payments. However, Paragraph No. 1, subdivision (d), indicates a final payment shall be due on the maturity date. Paragraph No. 2 describes how each payment may be allocated. The use of these different terms suggests the parties intended that a different meaning be placed on them.
Parkside’s interpretation is also supported, to some extent, by the parties’ conduct. The mutual intention of the parties to a contract “is determined by objective manifestations of the parties’ intent, including the words used in the agreement, as well as extrinsic evidence of such objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties.” (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.) “‘The conduct of the parties after execution of the contract and before any controversy has arisen as to its effect affords the most reliable evidence of the parties’ intentions. [Citations.]’ [Citation.] Thus, courts will adopt and enforce the parties’ practical construction when reasonable.” (Hernandez v. Badger Construction Equipment Co. (1994) 28 Cal.App.4th 1791, 1814.)
The trial court does not appear to have considered the parties’ conduct in arriving at its conclusion upholding the application of Paragraph No. 4 to the final payment. However, in our view, such evidence was clearly relevant to the question of the parties’ intent. Furthermore, as described below, that evidence was essentially undisputed. Therefore, interpretation of the Note in conjunction with that evidence remains a question of law.
In the 1996 Modification, which was entered into by Metropolitan after Parkside failed to make the final payment on an earlier maturity date, the parties recited the amounts owed by Parkside. In this recital, there was no mention of a late charge for the final payment. Likewise, in connection with Parkside’s 1995 bankruptcy, Metropolitan submitted a declaration describing the amount owed by Parkside and again failed to include a late charge for Parkside’s failure to make the final payment.
Cadle argues the recitals in the 1996 Modification are not binding on the parties. However, nobody is saying the recitals are binding, only that they suggest the parties did not include a late charge because they did not believe one was owed. Cadle further argues the 1996 Modification made some changes but otherwise left the terms of the Note intact, including Paragraph No. 4. However, that says nothing about how Paragraph No. 4 is to be interpreted.
As to the bankruptcy filing, Cadle argues the failure to include a late charge in the recitation of amounts owed cannot be interpreted as a waiver of Metropolitan’s right to collect such charges. Again, however, nobody is saying the absence of the late charge is a waiver. It is simply further evidence that the parties did not think Paragraph No. 4 applied to the final payment.
Of course, the fact Metropolitan did not impose a late charge does not prove it could not do so. Paragraph No. 4 says a late charge “may” be imposed. Thus, the fact Metropolitan did not impose a late charge on these early defaults may prove nothing more than it chose not to do so. On the other hand, the fact Metropolitan chose not to impose a late charge, when it was in its financial interest to do so, is some evidence of its understanding that Paragraph No. 4 did not apply to the final payment.
Parkside also cites Cadle’s complaint filed on March 27, 2002. There, Cadle too failed to include a late charge in the recital of amounts due. However, as Parkside acknowledges, Cadle’s intent with respect to the meaning of terms in the Note is immaterial. The question here is the intent of the original contracting parties. “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting . . . .” (Civ. Code, § 1636.) “[S]uccessors in interest are bound by the construction reasonably given contractual terms by the original parties.” (Doll v. Maravilas (1947) 82 Cal.App.2d 943, 949; see also Gregers v. Peterson Ice Cream Co., Inc. (1958) 158 Cal.App.2d 746, 754.)
In addition to the wording of the Note, and the parties’ conduct after the note was executed and before a dispute arose, Parkside’s interpretation of Paragraph No. 4 saves that provision from being an unlawful penalty. To avoid uncertainty and the cost of litigation if a breach occurs, the parties to a contract may include a liquidated damages clause to preset the measure of damages. (Allen v. Smith (2002) 94 Cal.App.4th 1270, 1278.) “[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” (Civ. Code, § 1671, subd. (b).) Such a provision will be considered unreasonable if the amount specified bears no reasonable relationship to the range of actual damages the parties could have contemplated at the time of contracting. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.) “In the absence of such relationship, a contractual clause purporting to predetermine damages ‘must be construed as a penalty.’” (Ibid.) “‘A contractual provision imposing a “penalty” is ineffective, and the wronged party can collect only the actual damages sustained.’” (Ibid.)
The trial court concluded Paragraph No. 4 was not an unlawful penalty when applied to the final payment. The court concluded: “The amount of the late charge is less than the costs incurred by CADLE by the default of PARKSIDE. CADLE was required to service the loan it had taken out to purchase the herein loan, and CADLE paid the sum of $211,197.96 in interest from the time the NOTE went into default until it was paid. Further, CADLE incurred labor costs of $7,311.42 in working the defaulted loan.”
The trial court’s analysis erred on two fronts. First, the court looked at Cadle’s actual losses rather than the losses that reasonably could have been contemplated by the parties at the time of contracting. The question is whether the parties made a reasonable attempt to estimate the damages that might be suffered in the event of a breach. (Ridgley v. Topa Thrift & Loan Assn., supra, 17 Cal.4th at p. 977.)
Second, the trial court erroneously calculated Cadle’s actual damages. Cadle presented evidence that it took out a loan of $3.6 million at 6.25 percent interest to buy the Note. During the period between the maturity date of the Note and when the final payment was made, Cadle incurred interest expenses of $211,197.96. Cadle also had four employees working to get the Note paid, at an expense of $7,300.
At the time of contracting, it is reasonable to assume the parties contemplated a late payment would result in the payee’s loss of use of the amount due. However, Paragraph No. 6 provided for a 4 percent increase in the interest rate charged in the event of a default. Thus, at the time of contracting, the parties provided that, in the event of a default, not only would interest charges at the contract rate continue, but also the rate would increase by 4 percent. It is reasonable to find that, in effect, by virtue of Paragraph No. 6, the parties to the original contract expected the payee would be more than compensated for the loss of use of the money due.
Paragraph No. 4 was never intended to compensate Metropolitan or its successor for loss of use of the money due. It provides for a late charge that is “in addition to, and not in lieu of” other remedies available to the holder, including Paragraph No. 6. Paragraph No. 4 provides that, in the event an installment becomes overdue, a late charge of 4 percent may be imposed “for the purpose of defraying the expenses incident to handling such delinquent payments.” Thus, the purpose of Paragraph No. 4 was to compensate the holder for administrative, or “handling,” expenses.
There is no reason to believe “handling” expenses caused by failure to make an installment payment would vary appreciably depending on the amount of the overdue payment. Nevertheless, while overdue payment of one of the original installments of $33,730 would have resulted in a late charge of $1,349.20, overdue payment of a final payment in the range of $4 million would result in a late charge of $160,000. If Paragraph No. 4 was intended to apply to both interim installments and the final payment, it could not possibly be considered a reasonable estimate of the damages contemplated by a breach. Rather, it would be an unenforceable penalty provision.
“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.” (Civ. Code, § 1643.) The only interpretation of Paragraph No. 4 that would make it lawful, operative, definite, reasonable, and capable of being carried out is one that would make it inapplicable to the final payment. Such interpretation is also consistent with the intention of the parties, as revealed by the words used in the Note as a whole and the conduct of the parties. We, therefore, conclude the trial court erred in entering judgment for Cadle.
Because Cadle could not enforce Paragraph No. 4 on Parkside’s default of the final payment, Cadle is limited to actual damages sustained. (Ridgley v. Topa Thrift & Loan Assn., supra, 17 Cal.4th at p. 977.) Parkside is entitled to a refund of the $172,909.78 late charge paid in protest, less actual damages suffered by Cadle, plus interest. The actual damages owed to Cadle do not include any amount for loss of use of the final payment.
DISPOSITION
The judgment is reversed and the matter remanded to the trial court with directions to determine Cadle’s actual damages for breach and enter judgment for Parkside for the amount of the late charge, less actual damages suffered by Cadle, plus interest. With reversal of the judgment for Cadle, the award of costs and attorney fees to Cadle is also vacated. Parkside shall receive its costs on appeal.
We concur: NICHOLSON, Acting P.J., RAYE, J.