Brady v. Kang S. Park

• Decision Date: 18 April 2013
• Docket Number: No. 20110208–CA.,20110208–CA.
• Citation: 732 Utah Adv. Rep. 8,302 P.3d 1220
• Parties: Don BRADY, Sinikka Brady, Don Brady Interior Design, and Finnish Touch Day Spa, Plaintiffs, Appellees, and Cross-appellants, v. Kang S. PARK, Bank of Utah, and Paul M. Halliday, Defendants, Appellants, and Cross-appellees.
• Court: Utah Court of Appeals

302 P.3d 1220

732 Utah Adv. Rep. 8

Don BRADY, Sinikka Brady, Don Brady Interior Design, and Finnish Touch Day Spa, Plaintiffs, Appellees, and Cross-appellants,

v.Kang S. PARK, Bank of Utah, and Paul M. Halliday, Defendants, Appellants, and Cross-appellees.

No. 20110208–CA.

Court of Appeals of Utah.

April 18, 2013.

Robert E. Mansfield, Christine R. Poleshuk, and Nathan E. Wheatley, Attorneys for Appellants and Cross-appellees.

Clark R. Nielsen and Kathryn J. Steffey, Attorneys for Appellees and Cross-appellants.

Opinion

VOROS, Judge:

¶ 1 This is a dispute over a $675,000 promissory note. The note was amortized over thirty years, but a balloon payment was due in about ten years. Although Appellees (the Bradys) made every monthly payment for nearly ten years-albeit some late-Appellants (Park) won a judgment against them for more than $2.4 million.

¶ 2 On appeal, both parties contest the trial court's reading of the note. For different reasons, both challenge the trial court's ruling with respect to compound interest. In addition, Park challenges the trial court's refusal to enforce the note's 10% late fee, while the Bradys challenge the trial court's enforcement of the 20% default interest rate. Finally, the Bradys challenge the trial court's exclusion of evidence and dismissal of their claim for breach of the implied covenant of good faith and fair dealing. We affirm in part, reverse in part, and remand for further proceedings.

BACKGROUND

¶ 3 This dispute arises from a seller-financed real estate transaction. The Bradys purchased commercial property from Park in 1996 for $750,000. In connection with the purchase, they gave him two promissory notes. The smaller note was for $80,625 and the larger for $675,000. Each note was secured by two trust deeds: one on the commercial property and one on a Summit County investment property owned by the Bradys. Only the larger note (the Note) is at issue here. The Note bore interest at the rate of 10% per year on the unpaid principal. It called for monthly payments starting in January 1997 of $5,923.61 and a balloon payment in October 2006 consisting of “the entire principal balance together with interest thereon.” Of relevance here, the Note specified two consequences for a late payment—a 10% late fee and a 20% default interest rate:

If payment is not made within five (5) days of due date, a late fee of 10 per cent will be due. If payment is not made within 5 days of due date the entire balance shall bear interest at the rate of 20% until note is brought current.

The Note was prepared by a title company. However, according to the title company's attorney, the 20% default interest provision was not boilerplate but was included “at the instructions of Dr. Park.”

¶ 4 The Bradys made the first three payments on time but made the April 1997 payment late. On May 2, 1997, they made a double payment comprised of the April and May payments plus a 10% late fee for the April payment, but paid no default interest. The Bradys made other payments late but never missed a payment. Seeking to refinance the Note, and believing their payments had kept the Note current, the Bradys approached Park through a bank loan officer in 2000 to obtain a payoff amount.

¶ 5 According to the Bradys, Park did not respond to their payoff request until 2002, when he provided a payoff amount between $1.4 million and $1.5 million. That is when the Bradys first learned that Park believed the Note had not been current since March 1997. The Bradys disputed Park's calculation and over the next four years asked Park for a corrected payoff. They claim Park did not respond until October 18, 2006–thirteen days before the balloon payment was due-when he notified the Bradys that the payoff amount was $2,585,398. Park calculated these amounts assuming that the Note had not been current since the March 1997 payment and thus bore interest at 20%. Litigation ensued.

¶ 6 In October 2006, after receiving the second payoff amount, the Bradys sued Park, seeking a judicial determination of the amount due. The Bradys also alleged predatory lending and breach of the implied covenant of good faith and fair dealing and sought damages for Park's alleged refusal to accept their tenders of payment. Park counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

¶ 7 After a four-day bench trial and two days of supplemental hearings, the trial court ruled that the Note unambiguously provided for compound default interest and that it had not been current since March 1997. The trial court concluded that the Note had not been current since that date because the Bradys had failed to pay all accrued default interest. The trial court concluded that, under the Note, “if a payment was late, any amount then owing, including principal and accrued interest, would bear interest at the rate of 20% until the note returned to a current status” and that “[t]his agreement under the [Note] has the result of compounding interest being charged, on an annual basis, during the delinquent period.” In effect, the trial court ruled that the amount accrued under the 20% default interest rate was due not with the balloon payment but with each monthly payment. However, the trial court also ruled that the 10% late fee was “not allowed[,] because it is not a measure of damages that can be awarded by the Court.” A final judgment was entered in February 2011, awarding Park $2,440,845 (as of June 2010) plus $179,340.97 in attorney fees and costs.

¶ 8 Park appeals.¹ He contends that the trial court erred (1) in calculating compound interest on an annual rather than a monthly basis and (2) in concluding that the 10% late fee provision was an unenforceable penalty.

¶ 9 As appellees and cross-appellants, the Bradys argue that the trial court erred (1) in ruling that the Note calls for compound interest at all, (2) in ruling that the Note requires all accrued default interest to be paid for the Note to be brought current, (3) in ruling that the 20% default interest provision is enforceable, (4) in excluding evidence of tender, and (5) in dismissing their claim for breach of the implied covenant of good faith and fair dealing.

ISSUES AND STANDARDS OF REVIEW

¶ 10 Park first contends that the trial court erred in ruling that the Note called for interest to be compounded annually rather than monthly. The Bradys respond that the trial court erred in ruling that the Note called for compound interest at all. A promissory note “is a contract that is interpreted according to the well-settled rules of contract construction.” WebBank v. American Gen. Annuity Serv. Corp., 2002 UT 88, ¶ 16, 54 P.3d 1139. We review “a district court's interpretation of a contract for correctness, giving no deference to the district court. Whether a contract is ambiguous is a question of law, which we also review for correctness.” Bodell Constr. Co. v. Robbins, 2009 UT 52, ¶ 16, 215 P.3d 933;see also Richardson v. Hart, 2009 UT App 387, ¶ 6, 223 P.3d 484.

¶ 11 Park next contends that the trial court erred in concluding that the 10% late fee provision was an unenforceable penalty and in placing the burden of proof on the party seeking to enforce a liquidated damages clause. “The determination of whether a contract is unconscionable is ... a question of law for the court,” which we review for correctness. Sosa v. Paulos, 924 P.2d 357, 360 (Utah 1996); Hi–Country Estates Homeowners Ass'n v. Bagley & Co., 2008 UT App 105, ¶ 8, 182 P.3d 417. “[W]hether the trial court placed the burden of proof on the appropriate party [is a] question[ ] of law, which we review for correctness.” Fisher v. Fisher, 2009 UT App 305, ¶ 7, 221 P.3d 845.

¶ 12 On cross-appeal, the Bradys contend that the trial court erred in interpreting and in enforcing the 20% default interest provision. We review these claims for correctness. See Bodell, 2009 UT 52, ¶ 16, 215 P.3d 933.

¶ 13 The Bradys also contend that the trial court improperly excluded as irrelevant certain documents offered in support of their claim that they had tendered full payment to Park in 2000. “A trial court has broad discretion in deciding whether evidence is relevant, and we review a trial court's relevance determination for abuse of discretion.” State v. Fedorowicz, 2002 UT 67, ¶ 32, 52 P.3d 1194.

¶ 14 Finally, the Bradys contend that the trial court erred in dismissing their claim for breach of the implied covenant of good faith and fair dealing. “When reviewing the denial of a motion for involuntary dismissal, [we] defer to the trial court's findings and inferences under a clearly erroneous standard and review the trial court's conclusions of law for correctness.” Markham v. Bradley, 2007 UT App 379, ¶ 13, 173 P.3d 865.

ANALYSIS

I. The Note Does Not Call for Compound Interest

¶ 15 Park contends that the trial court misread the Note. He maintains that because the Note is “unambiguous and specifically calls for interest payments on a monthly basis, the trial court erred in its ruling that interest should be compounded annually.” As calculated by Park's trial expert, by the time the balloon payment was due in October 2006, the principal on the Note, including unpaid interest that he had converted to principal, had grown from $675,000 to $2,590,422.04. The Bradys respond that the Note called for simple interest only.

¶ 16 Compound interest is defined as “interest paid on both the principal and the previously accumulated interest.” Black's Law Dictionary 887 (9th ed. 2009). “ ‘Compound interest means interest on interest, in that accrued interest is added periodically to the principal, and interest is computed upon the new principal thus formed....’ ” Mountain States Broadcasting Co. v. Neale, 783 P.2d 551, 554 (Utah Ct.App.1989) (quoting 45 Am.Jur.2d Interest and Usury § 76 (1969)).

¶ 17 “Compound interest is not favored by the law.” Watkins & Faber v. Whiteley, 592 P.2d 613, 616 (Utah 1979...