In re Rothenberg, Bankruptcy No. 88-00754

CourtUnited States Bankruptcy Courts. District of Columbia Circuit
Writing for the CourtS. MARTIN TEEL, Jr.
Citation203 BR 827
PartiesIn re Barbara ROTHENBERG, Debtor. David A. ROLL, Receiver, ex rel. Ralph D. Kaiser Company, Inc., a District of Columbia Corporation, Plaintiff, v. Barbara ROTHENBERG et al., Defendants.
Decision Date03 September 1996
Docket NumberAdversary No. 95-0075.,Bankruptcy No. 88-00754

203 B.R. 827 (1996)

In re Barbara ROTHENBERG, Debtor.
David A. ROLL, Receiver, ex rel.
Ralph D. Kaiser Company, Inc., a District of Columbia Corporation, Plaintiff,
Barbara ROTHENBERG et al., Defendants.

Bankruptcy No. 88-00754, Adversary No. 95-0075.

United States Bankruptcy Court, D. Columbia.

September 3, 1996.

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Howard Teller, Rockville, MD, for Barbara Rothenberg.

Marc Albert, Trustee, Tyler, Bartl, Burke and Albert, Alexandria, VA.

Nelson C. Cohen, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Washington, DC, for Allen W. Rothenberg.

Emil Hirsch, Freedman, Levy, Kroll & Simonds, Washington, DC, for David A. Roll, Ralph D. Kaiser Company, Inc.


S. MARTIN TEEL, Jr., Bankruptcy Judge.

This decision addresses what interest is owed on a promissory note held by Allen Rothenberg which is secured by a deed of trust on the home of his former wife, Barbara Rothenberg, the debtor.1 The plaintiff

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is David A. Roll, receiver of the Ralph D. Kaiser Company, Inc. ("RDK"), which holds Barbara Rothenberg's deed of trust on the home which is junior to Allen Rothenberg's deed of trust. Whatever interest is owed Allen Rothenberg diminishes the amount which Roll can recover from the home pursuant to RDK's junior lien.2

Subject to the later resolution of an issue concerning the Statute of Frauds, the court concludes:

(1) By oral agreement, the note bears interest post-maturity on the unpaid amount owed at maturity at "the highest legal rate."

(2) The oral agreement for interest at "the highest legal rate" is not limited by D.C.Code § 28-3303(1) to 6 percent because the usury statute does not apply to post-maturity interest.

(3) The parties intended the highest legal rate which could be expressed in writing when the note was executed, i.e., 8 percent per annum, to be the applicable highest legal rate.

(4) The interest is due in annual installments.

(5) The note specifies that each installment of interest is to bear interest at "the highest legal rate." This is a limited form of compounding, with each annual installment of interest bearing interest at "the highest legal rate" but without such additional interest being compounded in the future.

(6) "The highest legal rate" for computing interest on installments of interest is the maximum legal rate that could be expressed in writing when the note was executed, i.e., 8 percent per annum.

(7) Any expenditures by Allen Rothenberg to protect or enforce his deed of trust, including his attorney's fees, are to bear interest, after making demand on Barbara Rothenberg for reimbursement thereof, at the highest legal rate in effect on the date of demand but without compounding of interest.


A. The Meaning of the Note as explained by its Drafter

Allen Rothenberg and Barbara Rothenberg were husband and wife and owned a residence ("Property") located at 12 Logan Circle, N.W., Washington, D.C. They decided to get divorced and entered into a written property agreement (the "Agreement") on December 23, 1976.

Under the Agreement Allen Rothenberg conveyed his interest in the Property to Barbara Rothenberg. In turn, Barbara Rothenberg agreed to give Allen Rothenberg $50,000 to consist of $23,500 in cash, stocks and bonds, and $26,500 as follows:

Five Thousand Dollars ($5,000.00) not later than December 31, 1977; Ten Thousand Dollars ($10,000.00) not later than December 31, 1978; approximately Eleven Thousand Five Hundred Dollars ($11,500.00) or the balance due to make the total of Fifty Thousand Dollars ($50,000.00). To be secured by a second trust on 12 Logan Circle, Washington, D.C. Amounts due to be adjusted by cost-of-living changes from date of settlement to date of payment.

Agreement par. 12. As was made clear by a later promissory note, the parties intended the last installment to be paid on December 31, 1979.

The Agreement included what is often called an integration clause, providing that:

The parties have incorporated in this Agreement their entire understanding. No oral statement or prior written matter
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extrinsic to this Agreement shall have any force or effect. The parties are not relying upon, and specifically herein repudiate, any representations other than those expressly set forth herein. All prior agreements between the parties, whether written or oral, are hereby revoked and held for not.

Agreement par. 25.

Allen Rothenberg's office colleague, Dennis R. Santoli, a non-practicing lawyer, assisted in the drafting of the Agreement, not representing either side because the parties wanted an amicable divorce. Santoli had no extensive experience in drafting divorce agreements. According to Santoli, the language regarding the consumer price index ("CPI") was to insure that Allen Rothenberg was made whole pending receiving payments in full by December 31, 1979, but it was not intended to give him a profit.

On January 31, 1977, Barbara Rothenberg executed a deed of trust note (the "Note") payable to Allen Rothenberg. The Note was a Washington Law Reporter Form 213 Deed of Trust Note. Santoli, who prepared the Note, typed interlineations in the form in order to carry out what he understood was the agreement between Allen and Barbara Rothenberg based on meetings with the two. The Note reads, in the pertinent part, as follows:

35 months after date Barbara Levitt Rothenberg promises to pay to the order of Allen W. Rothenberg the sum of twenty five thousand seven hundred seventeen and 48/100 dollars, for value received with interest at -0- per centum per annum until paid, payable $5,000.00 December 31, 1977; $10,000.00 December 31, 1978; $10,717.48 plus an amount equal to the increase in the consumer price indexes on unpaid balances from December 31, 1976. Each installment of interest to bear interest after maturity, if not paid, at the highest legal rate.

According to Santoli, whereas the property Agreement had not addressed the question of interest after the final installment was due to Allen Rothenberg, the parties reached agreement in that regard in discussions which led to the promissory Note and the deed of trust.3 Specifically, Allen Rothenberg was not to be entitled to have interest accrue on the Note before the maturity date of December 31, 1979. Rather, the discussion was that he would simply be made whole via the provision for CPI adjustments, without making a profit as long as the Note was paid on the maturity date. Regarding what would happen after the maturity date, the parties orally agreed that Allen Rothenberg would no longer simply be made whole. Rather, he would be entitled to receive interest, with interest compounded annually on that interest, at the highest legal rate. The intention was that the provision regarding adjustments for the CPI would cease to run after the Note's maturity date and that interest would then commence.

Santoli looked to the deed of trust itself, executed on the same date as the Note, January 31, 1977, as providing for interest and as expressing its rate. Specifically, the deed of trust, again a Washington Law Reporter form, provides:

That he meaning Barbara Rothenberg will pay the indebtedness evidenced by the note secured hereby, all taxes and assessments relating to the land and premises herein described, ground rents, all charges against the property, and all other sums which are required to be paid by him under the terms of said promissory note or this Deed of Trust, including costs, expenses and attorney\'s fees incurred by the Trustees or the holder of said note with respect to this trust, the said note or the land and premises herein described, and in default of any such payment the holder of said note may pay the same, and any sum or sums so paid shall be added to the debt hereby secured, shall be payable on demand, shall bear full legal interest, and shall be secured by this Deed of Trust.

Deed of Trust, par. 1.

Santoli obviously misunderstood this deed of trust provision. It only applies to

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amounts that Allen Rothenberg had to pay with respect to protecting his interests under the deed of trust. There is no evidence that Allen Rothenberg paid any principal or interest on the Note that he himself held, and it would not have made sense for him to make such payments. From a common sense perspective, it is obvious that the provision is not aimed at defaults in paying principal and interest. Rather, the provision is aimed at the secured party's having to expend funds in protection of the deed of trust. Such expenditures are payable only on demand and, hence, ought to bear interest only from the date of demand for payment

Santoli's erroneous view of what the deed of trust's language provided does not mean that no interest is owed. The Note itself is still ambiguous, and the court may receive Santoli's testimony to explain that ambiguity. Santoli's mistaken interpretation of the deed of trust does not alter the parties' intention that there was to be interest charged after the Note matured.

Furthermore, the conclusion that the parties intended that the Note bear interest after maturity is not negated by an alteration to the recitals of the deed of trust form. Form language in the recitals referring to interest on the principal amount has been stricken. The alteration deleted the reference to interest because until maturity the Note was not to be an interest-bearing note. It does not establish that interest was not to begin accruing after maturity. To construe the striking of the language otherwise would be at variance with the provision in the Note which clearly contemplates that some form of interest is to be paid.

Santoli's testimony explains why the Note refers to interest being added to interest when the Note provides that zero percent interest is to be paid. The...

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