Opinion
B161250.
11-3-2003
BARRY M. ORLYN et al., Plaintiffs and Appellants, v. NOVASTAR MORTGAGE, INC., Defendant and Respondent.
Barry M. Orlyn for Plaintiffs and Appellants. Dreyfuss, Rayn & Weifenbach and Lawrence J. Dreyfuss for Defendant and Respondent.
In this appeal, we hold that the trial court properly sustained a demurrer without leave to amend where all of the alleged and proposed causes of action were based on an unreasonable contractual interpretation.
FACTUAL AND PROCEDURAL BACKGROUND
On March 30, 2001, Barry and S.A. Orlyn (Appellants) executed a Deed of Trust in favor of Novastar Mortgage, Inc. (Novastar) in the amount of $500,000. Paragraph 26 of the Deed of Trust provides "If one or more riders are executed by Borrower and recorded together with this Security Instrument, the covenants and agreements of each rider shall be incorporated into and shall amend and supplement the covenants and agreements of this Security Instrument as if the rider(s) were a part of this Security Instrument." Underneath this provision a box titled "Adjustable Rate Rider" (Rider) was checked.
The Rider provided that "it is incorporated into and shall be deemed to amend and supplement the Mortgage, Deed of Trust or Security Deed . . . ." The Rider defined "Interest Rate Change Dates" as follows: "The interest rate I will pay may change on the 1st day of April 2003, and on the 1st day of every 6th month thereafter." The parties also executed an Adjustable Rate Note that contained the same definition of "Interest Rate Change Dates."
Finally, the parties executed an Addendum To Adjustable Rate Rider (Addendum). The Addendum provided that it "is incorporated into and shall be deemed to amend and supplement the adjustable rate rider . . . to the Mortgage Deed of Trust." The Addendum described when the conversion option could be exercised: "The Conversion Option will be available to me only during the period beginning on the 1st Interest Rate Change Date, and ending on the 6th Interest Rate Change Date (the `Option Period)."
On November 7, 2001, Appellants sent Novastar a letter indicating that they were exercising the conversion option to convert their loan from an adjustable rate loan to a fixed rate loan. Novastar replied, indicating, among other things, that the terms of the agreement specified Appellants payment would remain unchanged until April 1, 2003, the first Interest Rate Change Date.
In a letter to Novastar, Appellants disputed this contractual interpretation, arguing that the "Adjustable Rate Note and Adjustable Rate Rider . . . are separate documents separately prepared and executed." Appellants subsequent payments reflected their calculation based on a fixed rate loan. Novastar informed Appellants that that payments were insufficient and eventually sent a notice that the home was in pre-foreclosure.
On April 10, 2002, Appellants sued for breach of contract, intentional tort, fraud, and sought a temporary restraining order and permanent injunction. Novastar demurred to the complaint. The trial court granted the demurrer without leave to amend and dismissed the case. This appeal followed.
CONTENTIONS
Appellants argue that (1) the court failed to adequately explain the basis for its ruling; (2) the court should not have considered the merits of the claim on demurrer; and (3) they should have been permitted to amend the complaint to assert a cause of action for declaratory relief.
DISCUSSION
I
At the outset, we note that Appellants correctly point out that the trial court must specify the grounds of a demurrer. (Code Civ. Proc., § 472d.) The trial court failed to satisfy this requirement. However, the failure to request a statement of reasons constitutes a waiver of this requirement. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 962.) The record does not show that Appellants requested a statement of reasons and Appellants do not advance this claim. Accordingly, Appellants have waived this requirement.
The remaining threshold issue is whether the trial court erred in considering the meaning of the contract on demurer. Appellants argue the trial court should have waited for summary judgment to consider the merits. As we shall explain, we find no error.
The purpose of a demurrer is to test the sufficiency of a complaint as a matter of law. (Sargoy v. Resolution Trust Corp. (1992) 8 Cal.App.4th 1039, 1041.) Appellants attached the loan documents, including the Deed of Trust, Rider, Adjustable Rate Note, and Addendum, to their complaint and "made" the contract "a part" of the complaint. "Where, as here, the complaint incorporates the terms of a contract, we consider those terms as part of the pleading." (Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, 1120.) Because the complaint does not allege that the terms of the contract have a special meaning, the rule applicable on demurrer is that we must "construe the language of the contract on its face to determine whether, as a matter of law, the contract is reasonably subject to a construction sufficient to sustain" the causes of action alleged by Appellants. (Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, 1561-1562.)
II.
We now turn to the merits. We review de novo whether Appellants complaint alleges facts sufficient to state a cause of action under any legal theory. (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879.) We will uphold the denial of a request for leave to amend unless the trial court abused its discretion. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.)
All of Appellants causes of action arise out of what they allege to be Novastars improper refusal to honor a fixed rate conversion option. Novastar argues that the parties agreement specifies that the option could not be exercised prior to April 1, 2003, and that therefore, Appellants purported attempt to exercise the option on November 7, 2001 had no effect.
The express language of the parties agreement supports Novastars argument. The Addendum provided a Conversion Option and limited the borrowers right to exercise the option as follows: "The Conversion Option will be available to me only during the period beginning on the 1st Interest Rate Change Date, and ending on the 6th Interest Rate Change Date (the `Option Period)." The Rider defined "Interest Rate Change Dates" as follows: "The interest rate I will pay may change on the 1st day of April 2003, and on the 1st day of every 6th month thereafter." Based on these provisions, Appellants could not exercise their right to convert their mortgage from an adjustable rate mortgage to a fixed rate mortgage until the first Interest Rate Change Date — April 1, 2003. (See Oakland-Alameda County Coliseum, Inc. v. Oakland Raiders, Ltd. (1988) 197 Cal.App.3d 1049, 1056 ["it is fundamental that a contract must be so interpreted as to give effect to the intent of the parties at the time the contract was entered into, and that whenever possible, that intention is to be ascertained from the writing alone."].)
In their opposition to Novastars demurrer, Appellants argued that the definition in the Rider cannot be applied to the Addendum. However, that contention ignores the following express provision: the Addendum "is incorporated into and shall be deemed to amend and supplement the adjustable rate rider . . . to the Mortgage Deed of Trust." "`A contract may validly include the provisions of a document not physically a part of the basic contract . . . . "It is, of course, the law that the parties may incorporate by reference into their contract the terms of some other document. . . . "" (Shaw v. Regents of the University of California (1997) 58 Cal.App.4th 44, 54.) Here the reference in the Addendum expressly and unequivocally states that it is incorporated into the Rider.
Appellants sought leave from the trial court to amend their complaint to assert a cause of action for declaratory relief. The trial court did not abuse its discretion in denying Appellants leave to amend. Appellants have shown no reasonable possibility of curing the defect because their proposed cause of action, like their alleged causes of action, is based on an unreasonable contractual interpretation. Appellants have not shown that they can plead facts sufficient to support a viable cause of action. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349-350.)
DISPOSITION
The judgment is affirmed. Respondent is entitled to costs.
We concur: RUBIN, J., BOLAND, J. --------------- Notes: Citing In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650, Novastar argues that this court should impose sanctions on Appellants for pursuing this appeal. Although the issue is close, we find sanctions to be unwarranted.