Opinion
H024286.
7-29-2003
KEITH ALAN WATT, Plaintiff and Appellant, v. SARATOGA CAPITAL, INC., Defendant and Appellant.
Keith Watt obtained an interest-only loan of $ 1.1 million from Saratoga Capital (SC) to finance the purchase of commercial property in downtown San Jose. When Watt paid off the loan, SC assessed a maturity late charge of $ 110,000 (10 percent of the original loan amount) because the final balloon payment was made more than 10 days after it was due. SC also claimed that the principal amount of the loan had increased by $ 34,849.22 over the original loan amount as a result of late payments and assessed an administrative fee of $ 320. Watt paid the amount claimed by SC and sued SC for reimbursement on a breach of contract theory.
After a court trial, the court concluded that the maturity late charge was an invalid provision for liquidated damages under Civil Code section 1671, subdivision (b) and awarded Watt $ 110,000, plus the administrative fee. The court found that the $ 34,849.22 increase in the loan balance was made in accordance with the terms of the loan and denied Watt reimbursement of that portion of his claim.
All further statutory references are to the Civil Code.
SC appeals, arguing that the maturity late charge was not an invalid liquidated damages provision. Watt has filed a cross-appeal, challenging the courts finding regarding the $ 34,849.22 addition to principal. We will affirm the judgment.
FACTS
Watt is in the business of renting residential properties to others and owns several properties in downtown San Jose. In September 1989, Watt sought funding to purchase property located at 156-160 East Saint John Street in San Jose with the intent of building an apartment house on the site. He obtained funding from SC.
SC is in the business of securing capital and making loans. SC sells its loans to private investors. At all times, there were 34 or 35 investors who had invested in the Watt loan. SC guaranteed its investors a return on the loans and was obligated to pay its investors within 90 days of the loans final maturity date. If a borrower defaulted on a loan, SC still had to pay the total amount due to the investors. In the case of default, SC would have to borrow the money it paid its investors.
On September 14, 1989, SC made a written offer to lend Watt $ 1.1 million at 13.50 percent interest, due in three years. The loan was to be an interest-only loan with monthly interest payments of $ 12,375. SCs proposal included provisions for two types of late charges: (1) a charge of $ 1,237.50 per month (10 percent of the monthly payment amount) if the monthly payment was received more than 10 days after the due date (hereafter "the monthly late charge"); and (2) a fee equivalent to 10 percent of the unpaid principal balance if the final balloon payment was not made within 10 days of the final maturity date (hereafter "the maturity late charge"). SCs proposal also included a "loan fee" of six percent of the loan amount ($ 66,000), payable to SC.
The parties also referred to this fee as "points."
On September 18, 1989, Watt advised SC that he would accept SCs proposal if certain changes were made. He asked that the interest rate be reduced to 13.25 percent, that the monthly payment amount and the monthly late charge be reduced accordingly, and that the loan fee be reduced to five percent ($ 55,000). On September 19, 1989, SC agreed to Watts proposed changes.
The loan was evidenced by a promissory note that was secured by deeds of trust on six properties Watt owned in downtown San Jose, as well as a deed of trust on the property that the loan was used to purchase (156-160 East Saint John Street). Three of the properties that were used to secure the loan were already encumbered by loans from the First Christian Assembly (Church) totaling $ 743,811.03. Although there is evidence that two other properties were also encumbered, the extent of the indebtedness on those properties is not clear from the record. As to the properties that were already encumbered, SCs loan was secured by either a second or third deed of trust, depending on the extent of the previous indebtedness.
The addresses of the six properties were: 72 North Fifth Street, 54 North Fifth Street, 61 North Sixth Street, 237 East San Fernando Street, 379 East Saint John Street, and 122 North Eighth Street.
SCs loan was secured by second deeds of trust on the properties at 54 North Fifth Street, 122 North Eighth Street, and 237 East San Fernando Street and third deeds of trust on 72 North Fifth Street and 61 North Sixth Street. The loan was secured by first deeds of trust on the properties at 379 East Saint John Street and 156-160 East Saint John Street.
According to the promissory note, interest payments of $ 12,145.83 were due on the second of each month "beginning on November 2, 1989 and continuing monthly thereafter until October 2, 1992, at which time all sums of principal and interest then remaining unpaid shall be due and payable in full." If any interest payment was more than 10 days late, Watt agreed to pay "a LATE CHARGE on each such installment of $ 1,214.58," which was 10 percent of the amount of the monthly payments. The note also provided that if the "final balloon payment is not received within TEN days of the maturity date," Watt agreed to pay "a MATURITY LATE CHARGE of 10.00 percent of the final balloon payment." (All caps in original.) The note also contained provisions regarding the calculation of interest and the allocation of the monthly payments.
In the fall of 1992, shortly before the balloon payment was due, Watt attempted to refinance the note. Watt asked SC for a two-month extension of the maturity date to allow additional time to obtain his financing. SC agreed. Under the terms of their extension agreement, Watt was to continue making the monthly interest payments. Watt also paid an extension fee of $ 5,500.
In December 1992, Watt requested a further extension from SC because his bank was unable to offer him a loan at that time. He and SC subsequently agreed to extend the maturity date on the note four more times, with a final maturity date of September 1, 1998. Pursuant to their written extension agreements, all other terms of the note, including the requirement to make monthly interest payments, remained in effect. In 1997, Watt paid another extension fee of $ 5,000.
As the September 1, 1998 maturity date drew near, Watt asked SC for another extension. Over time, the encumbrances on the properties that were subject to the Church loans and were senior to SCs loan had increased from approximately $ 750,000 to $ 1,500,000 due to refinancing. SC told Watt that it would not extend the loan unless certain conditions were met with respect to the Church loans, property taxes, and the rehabilitation of an apartment building at 156-160 East Saint John Street that was fire-damaged. However, SC agreed not to file a notice of default, the first step in foreclosure proceedings, as long as Watt continued to make the monthly interest payments.
Watt never met the conditions set by SC for a further extension of the loan. However, Watt continued to make the interest payments.
In late 1999, Watt opened an escrow account to refinance one of the properties securing SCs loan. Watt requested a payoff demand from SC. According to the payoff demand, the principal had increased to over $ 1.13 million. SC also demanded a maturity late charge of $ 110,000 and other fees. According to Watt, the principal balance should have been only $ 1.1 million, the original amount of the loan. He also disputed SCs entitlement to the maturity late charge. In order to close escrow on the new transaction, Watt paid the entire amount claimed by SC and reserved his right to sue SC for any overpayment.
On January 20, 2000, SC issued a final payoff demand to Watt. SC claimed the following amounts were due:
Loan balance:$ 1,134,849.22Unpaid interest (through 1/20/2000):3,295.73Maturity late charge:110,000.00Administrative fees:320.00TOTAL:$ 1,248,464.95
On January 21, 2000, Watt paid the total amount claimed in SCs final payoff demand, plus $ 411.97 for one days interest.
PROCEDURAL HISTORY
On December 22, 2000, Watt sued SC for breach of contract, seeking to recover amounts allegedly overpaid on the note. He claimed that only $ 1,100,000 was due and asserted that the $ 110,000 maturity late charge was "an unenforceable and unconscionable forfeiture."
SC answered the complaint on January 12, 2001.
The case was tried before the court in January 2002. At trial, Watt claimed he was entitled to the return of the $ 110,000 maturity late charge, the $ 320 administrative fee, and the $ 34,849.22 by which the loan balance exceeded $ 1,100,000 (the original loan amount), plus prejudgment interest from January 21, 2000, the day he paid off the loan.
Section 1671, subdivision (b) provides that "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." The court found that Watt had met this burden and concluded that the maturity late charge was invalid. When a liquidated damages clause is declared invalid, the party seeking to recover under the provision can collect only the actual damages sustained. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 931, 216 Cal. Rptr. 345, 702 P.2d 503.) Since there was no evidence of the amount of actual damages suffered by SC on account of Watts default, the court awarded Watt the entire $ 110,000 he had paid as a maturity late charge. The court also found that there was no provision in the parties contract for administrative fees and awarded Watt $ 320 for the administrative fees he had paid. In addition, the court found that the $ 34,849.22 by which the loan balance exceeded the original loan amount was "accurately computed according to the terms of the note" and found for SC as to this element of Watts claim. The court awarded Watt $ 110,320, plus prejudgment interest and costs of suit.
SC appeals, challenging the portion of the judgment that found the maturity late charge invalid and awarded Watt $ 110,000. Watt has filed a cross-appeal, claiming that the court erred when it failed to award him the $ 34,849.22 addition to principal.
DISCUSSION
I. SCs Appeal
A. Law Governing Liquidated Damages Clauses
The California Supreme Court discussed the law governing liquidated damages clauses in Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 953 P.2d 484 (Ridgley). We shall quote from the courts comprehensive discussion of the applicable legal standards. "Section 3275, unchanged since 1872, provides: Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in the case of a grossly negligent, willful, or fraudulent breach of duty. The breaching party may raise section 3275 as an equitable defense to enforcement of the contractual provision or as grounds for relief in an action for restitution of the property forfeited. [Citations.]" (Ridgley, supra , 17 Cal.4th at p. 976, fn. omitted.)
The court also stated: "California law has also long recognized that a provision for liquidation of damages for contractual breach-for example, a preset late payment penalty - can under some circumstances be designed as, and operate as, a contractual forfeiture. To prevent such operation, our laws place limits on liquidated damages clauses. Under the 1872 Civil Code, a provision by which damages for a breach of contract were determined in anticipation of breach was enforceable only if determining actual damages was impracticable or extremely difficult. (1872 Civ. Code, §§ 1670 , 1671.) As amended in 1977, the code continues to apply that strict standard to liquidated damages clauses in certain contracts (consumer goods and services, and leases of residential real property (§ 1671, subds. (c), (d)), but somewhat liberalizes the rule as to other contracts: [A] provision in a contract liquidating the damages for 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. ( § 1671, subd. (b) (hereafter section 1671(b)).)" (Ridgley, supra, 17 Cal.4th at pp. 976-977, fn. omitted.)
"A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. (Garrett v. Coast & Southern Fed. Sav. & Loan Assn. [(1973)] 9 Cal.3d [731,] 739 (Garrett) [superseded by statute on other grounds as stated in Walker v. Countrywide Home Loans, Inc. (2002) 98 Cal.App.4th 1158, 1171].) In the absence of such relationship, a contractual clause purporting to predetermine damages must be construed as a penalty. (Ibid .) A penalty provision operates to compel performance of an act [citation] and usually becomes effective only in the event of default [citation] upon which a forfeiture is compelled without regard to the damages sustained by the party aggrieved by the breach [citation]. The characteristic feature of a penalty is its lack of proportional relation to the damages which may actually flow from failure to perform under a contract. [Citations.] (Ibid.)" (Ridgley, supra, 17 Cal.4th at p. 977.)
"In short, an amount disproportionate to the anticipated damages is termed a "penalty." A contractual provision imposing a "penalty" is ineffective, and the wronged party can collect only the actual damages sustained. [Citations.]" (Ridgley, supra, 17 Cal.4th at pp. 977-978.)
"Pursuant to these principles, charges for late payment of loan installments have been held unenforceable where they bore no reasonable relationship to the injury the creditor might suffer from such late payments. In Garrett, supra, 9 Cal.3d 731, a lender included in its standard promissory note a provision assessing a late payment charge equal to 2 percent annual interest on the loan balance prorated to the period of default. The plaintiffs, in a class action, challenged the charge as an unreasonable attempt to set stipulated damages for contractual default. (Id. at pp. 734-735.)" (Ridgley, supra , 17 Cal.4th at p. 978.) In Garrett, the Supreme Court rejected the lenders contention that the clause merely provided an alternative mode of performance, and assessed the reasonableness of the clause as a provision for liquidated damages. (Garrett, supra, 9 Cal.3d at pp. 735-742.) The court concluded that "a charge for the late payment of a loan installment which is measured against the unpaid balance of the loan must be deemed to be punitive in character. It is an attempt to coerce timely payment by a forfeiture which is not reasonably calculated to merely compensate the injured lender." (Id. at p. 740, fn. omitted.)
In Ridgley, the court concluded that a provision for the payment of six months interest on the entire principal imposed for any late payment or other default in a real estate loan was an unenforceable penalty for a late payment. (Ridgley, supra , 17 Cal.4th at p. 981; see also Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal. App. 3d 818, 829-830, 214 Cal. Rptr. 531 [provision allowing lender to foreclose because of late installment payments unenforceable as forfeiture]; Sybron Corp. v. Clark Hosp. Supply Corp. (1978) 76 Cal. App. 3d 896, 900-903, 143 Cal. Rptr. 306 [in a contract for the payment of $ 72,000 in monthly installments, clause allowing creditor to obtain stipulated judgment for $ 100,000 upon any default, including late installment payment, was unenforceable].)
B. Standard of Review
The parties disagree on the applicable standard of review. SC maintains that the applicable standard is de novo review because "the trial courts finding that the liquidated damages provision was invalid was based upon an erroneous application of the law and not based upon the resolution of any factual dispute." Watt argues that the substantial evidence test applies, citing Beasley v. Wells Fargo Bank (1991) 235 Cal. App. 3d 1383 (Beasley).
The validity of a liquidated damages provision is to be determined by the trial court, not a jury. (Beasley, supra, 235 Cal. App. 3d at p. 1393.) Applying the standards outlined above, the trial court must determine (1) whether the contract provision results from a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained and (2) whether the contract provision has a reasonable relationship to the range of actual damages the parties could have anticipated would flow from a breach. (Ridgley, supra , 17 Cal.4th at p. 977.)
The factual nature of the trial courts inquiry impacts the standard of review on appeal. As the court explained in Beasley, "ordinarily, a trial judges decision on a question of law is not binding on appeal, and the appellate court will make its own independent determination. [Citation.] The problem here is that the validity issue is not really a classic question of law, but is one of fact that, because of its character, is nevertheless committed to judicial determination. One authority explains that each of the various questions pertinent to validity is a question of fact in the sense of not being a question as to the content of a legal rule. Each of them, however, involves the application of a vague standard to a hypothetical situation. A jury is likely to make little effort to consider the imaginary picture of what could have been foreseen to the exclusion of what later actually happened, . . ., and the courts seem wise, therefore, in holding, as they do almost unanimously, that the trial judge, not the jury, decides in the light of all the facts whether the stipulation is for liquidated damages or for a penalty. (McCormick, Handbook on the Law of Damages [(1935)] § 157, pp. 623-624.)" (Beasley, supra, 235 Cal. App. 3d at p. 1394.) "Validity being a factual issue, it would be particularly inappropriate for [the appellate court] to decide that issue independently if it turns on witness credibility." (Ibid.)
In spite of SCs attempt to characterize this as a case involving undisputed facts, as our discussion of the evidence will show, the testimony regarding the parties negotiations regarding the maturity late clause and their efforts to estimate a fair average compensation for any loss that may have been occasioned by Watts failure to make the balloon payment on time was disputed. Since the validity issue thus involves witness credibility, we shall apply the substantial evidence test to our review of the trial courts finding.
C. Evidence on Validity Issue
Section 1671(b), contains a presumption that a liquidated damages provision in a 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." In order to rebut the statutory presumption that the maturity late charge was valid, Watt (the party challenging the provision) had to prove that it was unreasonable under the circumstances that existed when he signed the promissory note. ( § 1671(b).) As noted above, in evaluating the validity of the maturity late charge, the trial court had to determine (1) whether the contract provision regarding the maturity late charge resulted from " a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained " and (2) whether the provision had a "reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach." (Ridgley, supra, 17 Cal.4th at p. 977.)
There were only two witnesses at trial, Watt and Michael Torres, vice president of SC. Watt testified that no one at SC ever discussed the maturity late charge with him before he signed the note. Watt recalled discussing the interest rate and the loan fee (points) during the negotiations for the loan.
According to Torres, he discussed all of the loan terms with Watt, including the maturity late charge. SC did not have any documents that were created before the loan was funded that set forth the cost to SC if the balloon payment was late. Initially, SC had proposed a maturity late charge of five percent of the principal balance at the time the loan matured. Torres told Watt that the reason for the five percent maturity late charge was that if Watt did not pay the loan balance when it was due, SC would have to pay its investors $ 1.1 million and would have to borrow money to do so. He also told Watt that the cost of raising money to pay off the investors was five to six percent of the amount of the loan.
Before negotiations were completed, the amount of the maturity late charge was increased from five percent to 10 percent. Torres testified that the maturity late charge increased after he learned that some of the properties that were used as collateral were already encumbered by approximately $ 750,000 in debt owed to the Church. Since the SC loan was junior to the Church loans, SC reasoned that in the event Watt defaulted on the Church loans or in the event the Church failed to renew its loans and Watt could not come up with the money to pay off the Church, SC would have to pay off the Church in order to collect on its loan. Torres estimated that it would cost $ 40,000 to $ 50,000 to pay off the Church loans.
Torres also testified that in the event Watt defaulted on the Church loans, the amount SC spent to pay off the Church loans would be considered an advance under the note between Watt and SC. The amount advanced to pay off the Church would be added to the principal and as such would be subject to the 10 percent maturity late charge. Torres admitted that a five percent maturity late charge on the increased principal (the original $ 1.1 million plus the $ 750,000 needed to pay off the Church loans) would have covered the cost of raising money to pay off the Church and SCs investors. Torres also testified that five percent was a common loan fee in commercial real estate transactions.
Torres testified that the cost of obtaining a loan to pay off its investors in the event of Watts default was $ 55,000 and that the cost of paying off the Church loans was $ 40,000 to $ 50,000. Adding those numbers together, the cost of paying off both the investors and the Church loans was $ 95,000 to $ 105,000, which is between 8.6 and 9.5 percent of the original loan amount. Torres also testified that the $ 750,000 spent to pay off the Church loans would be added to the principal due under SCs loan, thereby increasing principal from $ 1.1 million to $ 1.85 million. A 10 percent maturity late charge on $ 1.85 million is $ 185,000, which is approximately twice what Torres testified it would cost to pay off SCs investors and the Church loans.
Torres also stated that, at the time of their negotiations, he did not consider the possibility that any funds SC might have to raise to pay off the Church loans would be added to the principal on the SC loan and thus become subject to the maturity late charge. He thought the maturity late charge only applied to the original $ 1.1 million loan. The problem with this testimony is that it is inconsistent with Torress testimony that amounts advanced would be added to principal and with the terms of the note.
The promissory note did not limit the maturity late charge to the original loan amount. According to Torres, the parties based the maturity late charge on a percentage of the final balloon payment, rather than a flat dollar amount, because the amount of the final balloon payment could vary depending on the history of the loan. If Watt had prepaid principal, any amounts paid toward principal would have been deducted from the loan balance, thereby reducing the amount of the balloon payment. Unpaid late charges, unpaid interest, and advances were added to principal, increasing the loan balance and the amount of the balloon payment.
The note provided that "each payment shall be credited first on late charges due, then on interest due and the remainder applied to principal." It provided further that "Should the monthly payment be insufficient to pay in full all accrued late charges and unpaid interest . . ., then the unpaid amount of such accrued interest will be added to the principal balance of this Note, and will thereafter bear interest at the rate prescribed in this Note." The note also provided that advances made by SC would bear interest from the date of the advance. Under the terms of the note, the amount of the principal could increase over time because of advances or unpaid interest, resulting in a final balance that was greater than the original loan amount, as had occurred in this case. As a result of unpaid late charges and unpaid interest, the loan balance increased from the original loan amount of $ 1.1 million to $ 1,134,849.22.
The note provided that Watt would "pay a MATURITY LATE CHARGE of 10.00 percent of the final balloon payment." Thus, the maturity late charge was to be assessed against the final loan balance, not the original loan amount.
We note a discrepancy between the terms of the note and the amount claimed by SC as the maturity late charge in its final payoff demand. At the time the loan was paid off, the loan balance was $ 1,134,849.22. A 10 percent maturity late charge on that amount would have been $ 113,484.92. However, SC only demanded $ 110,000 for the maturity late charge. The latter amount appears to have been based on the original loan amount, not the loan balance. This discrepancy is not discussed or explained in the record or the briefs.
As to the range of damages that the parties could have anticipated would flow from a breach, Torres also testified that if the Church foreclosed on its senior loans, it would not have affected SCs security on the other properties in which SC held a first deed of trust. In the event Watt defaulted, as an alternative to paying off the Church loans, SC could allow the Church to foreclose on the properties that secured its loans and SC could foreclose on the non-Church properties to recover on its loan, without incurring the cost of obtaining funds to cover the Church loans. Another option for SC in the event Watt defaulted on SCs loan would have been to foreclose on all of the properties. By foreclosing, it ran the risk that it would not recover the amount spent to pay off its investors plus any amounts advanced when it sold the properties. Although Torres testified regarding these various possibilities in the event Watt defaulted on SCs loan, he did not testify that the parties contemplated or discussed each of these possibilities when they negotiated the 10 percent maturity late charge.
According to Watt, the fair market value of the properties that were used to secure the loan was $ 5 million at the time the loan was made. Some of the properties were encumbered by $ 800,000 in debt, resulting in a net equity of $ 4.2 million in 1989. Torres could not recall the appraised value of the properties that were used to secure the loan. However, it was more than the amount of the loan.
Although the properties had been appraised, the appraisals were not in evidence at trial.
Based on this record, we conclude that there was substantial evidence to support the courts finding that a 10 percent maturity late charge was unreasonable under the circumstances existing at the time the contract was made. Torres testified that a common loan fee for commercial real estate transactions was five percent, that five percent was what SC charged to make this kind of loan, and that, assuming the amounts paid to the Church were added to the principal as an advance under the loan, five percent would have been enough to cover the cost of raising money to pay off both the Church loans and SCs investors. However, the contract provided for a 10 percent maturity late charge. Thus, Torress own testimony supports the conclusion that the 10 percent maturity late charge provided for in the contract, twice the amount needed to cover SCs estimated damages, was unreasonable.
SC argues that "the trial court acknowledged that the negotiated liquidated damages figure of 10 [percent] of the outstanding balance was reasonable." SC then quotes from the portion of the decision in which the court stated, "The court has no dispute with [SC]s contention that if the loan went into default for nonpayment of the principal balance, and [SC] was required to pay off its investors and the church loans, it would incur costs in the range of ten percent of the original loan amount." (Italics added.) While the trial court may have found that 10 percent of the original loan amount may have been reasonable in the event of default on both the SC and the Church loans, it did not state that the maturity late charge, which was 10 percent of the final balloon payment, was reasonable. SCs reliance on this language from the statement of decision is therefore misplaced.
The trial court also qualified its statement with the following language: "At the time the agreement was made, however, it was not reasonably certain that harm to this degree would be suffered by [SC] if the loan balance was not paid within ten days of the maturity date." SC argues that the trial court applied the wrong standard and that under the test set forth in Ridgley, supra, 17 Cal.4th at p. 977 "there is no requirement that the parties ascertain the certainty upon which harm will occur." After reviewing the balance of the courts statement of decision, we are not persuaded that the court applied the wrong standard. For one, the court articulated the standards set forth in Ridgley. Second, the courts use of the phrase "reasonably certain" could be construed as part of an analysis of whether the maturity late charge had a reasonable relationship to the range of actual damages anticipated. Furthermore, even if the court had articulated the wrong standard, it does not preclude us from affirming on appeal. An appealed judgment correct on any theory will be affirmed, even though the trial courts reasoning may have been erroneous or flawed. "We do not review the trial courts reasoning, but rather its ruling. A trial courts order is affirmed if correct on any theory, even if the trial courts reasoning was not correct." (J.B. Aguerre, Inc. v. American Guarantee Liability Ins. Co. (1997) 59 Cal.App.4th, 6, 15-16.) As discussed above, there is substantial evidence that supports the trial courts conclusion that the maturity late charge was unreasonable under the circumstances that existed at the time the parties entered into the contract.
The court stated: "A liquidated damages provision will generally be considered unreasonable if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The provision in the instant case purports to liquidate the damages which would reasonably flow from late payment of the loan balance. While these damages may be as high as ten percent of the loan amount, they may be as little as zero. It is unreasonable to require a borrower who is one day late with final payment to pay damages based on a scenario of nonpayment requiring the raising of substantial funds to cover the loss. [P] The amount set as liquidated damages "must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." In the absence of such a relationship, a contractual clause purporting to predetermine damages "must be construed as a penalty." Ridgley v. Topa Thrift & Loan Association (1998) 17 Cal.4th 970, 977, 953 P.2d 484 (emphasis added) (citations omitted). The clause at issue, which attempted to estimate damages under the worst-case scenario, was not an estimate of fair average compensation given the range of potential actual damages. [P] The court finds, therefore, that the maturity late charge is invalid." (Underscore in original.)
SC attacks various aspects of the courts statement of decision, arguing that the parties were not required to "engage in a mathematical analysis involving averages in order to set liquidated damages" and that Ridgley only requires the contracting parties to " estimate a fair average compensation for any loss that may be sustained, " not that they consider all losses. (Bold in original.) SC argues also that it is permissible for the parties to a contract to estimate their worst-case scenario and set liquidated damages at that amount. Ridgley requires the contracting parties to make a " reasonable endeavor . . . to estimate a fair average compensation for any loss that may be sustained. " (Ridgley, supra, 17 Cal.4th at p. 977.) While the parties may take a worst-case scenario into consideration, the language of Ridgley, requiring the parties to "estimate fair average compensation" is not consistent with the position advanced by SC. A worst-case scenario is not the same as a fair average.
For these reasons, we conclude that the trial courts finding that the maturity late charge was invalid is supported by substantial evidence.
II. Watts
Cross-appeal
At the time the loan was paid off, SC claimed a loan balance of $ 1,134,894.22, which was $ 34,894.22 more that the original loan amount. At trial, Watt challenged SCs entitlement to the additional $ 34,849.22 and referred to the amount claimed as the "unexplained sum." He claimed this amount was not due under any provision of the note or deed of trust. The trial court concluded that SCs loan balance demand, which included the disputed sum, "appears to have been accurately computed according to the terms of the note." On appeal, Watt contends that the trial courts finding with regard to the additional sum is not supported by substantial evidence. We disagree.
The evidence before the trial court included copies of the promissory note, the deed of trust, and a document entitled "Loan Master File Data." The latter document was a compilation of the payments made over the life of the loan and shall hereafter be referred to as "the compilation." The information on the compilation included the date each payment was due, the date the payment was received, the amount paid, the amount of interest due at the time the payment was made, the amount of any late charges assessed, and the allocation of the payment between the monthly late charge, interest, and principal. The compilation also indicated the amount of any adjustments to the loan balance as a result of each payment. For example, Watts first payment was eight days late. On the date the payment was received, the amount of interest due was $ 15,573.29. The amount of the payment was $ 12,145.83. In accordance with the terms of the note, Watts payment was applied to interest and the $ 3,427.46 shortfall was added to principal.
Watt did not make a single interest payment on time. Typically, he was three to 10 days late. On 10 occasions, he was between 11 and 39 days late. If a payment was more than 10 days late, Watt was assessed a late charge of $ 1,214.58. Sometimes Watt included the late charge with his payment; other times he did not. Each month, the loan balance (principal) was adjusted to account for shortfalls or overages in the payments. Over the life of the loan, the principal balance increased by $ 34,849.22 because of shortfalls in the amounts of the payments. In our view, the compilation and the promissory note support the trial courts conclusion that the payoff demand was computed in accordance with the terms of the note.
Although the payments were always late, if there were less than 30 days between payments, the amount of interest due was less than the monthly payment amount specified in the note, resulting in an overage. Overages reduced the amount of principal.
Watt also argues that SC had waived any claims to past interest when it entered into the extension agreements with him. The extension agreements provided: "No payment of principal, interest or any other amount is overdue nor, to the actual knowledge of Watt, is there any default under the promissory Note except for the fact that the Promissory Note, . . . has matured and all principal and accrued interest is due and payable." At trial, Torres explained that if a payment was insufficient to cover the interest due at the time the payment was made, the amount of the unpaid interest was added to the principal of the loan. As a result, the loan was never in default. However, the principal amount did increase. By converting unpaid interest into principal, there was no overdue interest at the time the parties entered into the extension agreement and thus, no waiver. The trial court accepted this explanation. Its finding is supported by the terms of the note and the compilation.
For these reasons, we conclude that the trial courts ruling with regard to the $ 34,849.22 sum is supported by substantial evidence.
DISPOSITION
The judgment is affirmed. Each party to bear his or its own costs on the appeal and the cross-appeal.
WE CONCUR: Bamattre-Manoukian, Acting P.J., Mihara, J.