Milestone Fin., LLC v. Moon (In re Moon)

Decision Date18 January 2023
Docket NumberBAP Nos. NC-22-1103-SGB,NC-22-1117-SGB (cross-appeals),Bk. No. 20-30711,Adv. No. 20-03117
Citation648 B.R. 73
Parties IN RE: E. Mark MOON, Debtor. Milestone Financial, LLC, Appellant/Cross-Appellee, v. E. Mark Moon; Lori H. Moon, Appellees/Cross-Appellants.
CourtU.S. Bankruptcy Appellate Panel, Ninth Circuit

Bernard Kornberg, Esq. of Practus LLP argued for appellant/cross-appellee.

John P. McDonnell, Esq., Los Altos, argued for appellees/cross-appellants.

Before: SPRAKER, GAN, and BRAND, Bankruptcy Judges.

SPRAKER, Bankruptcy Judge:


When is a usurious forbearance not a usurious forbearance? According to the California Supreme Court, when it is a mere modification of a credit sale transaction under the "time-price" doctrine. Ghirardo v. Antonioli , 8 Cal. 4th 791, 804, 35 Cal.Rptr.2d 418, 883 P.2d 960 (1994), as modified on denial of reh'g (Feb. 2, 1995). Ghirardo held that a pre-foreclosure modification of a credit sale transaction—including a forbearance on collection or enforcement of the underlying debt—is not subject to California's usury laws. Id. (citing with approval DCM Partners v. Smith , 228 Cal. App. 3d 729, 739, 278 Cal.Rptr. 778 (1991) ). Ghirardo reasoned that the seller otherwise can and likely will foreclose and then could charge a "new" buyer—including the prior owner—a high interest rate free of usury law constraints as part of a new credit sale. Id. Ghirardo , therefore, concluded that applying usury laws to credit sale modifications would elevate form over substance. Id.

Milestone Financial, LLC appeals from the bankruptcy court's judgment that its Settlement Agreement, Indemnity and First Amendment to Promissory Note Secured by Deed of Trust ("Settlement Agreement") with chapter 71 debtor E. Mark Moon, and his wife Lori H. Moon, was a usurious forbearance. It contends that Ghirardo ’s holding should be extended to forbearances subject to California's usury laws when the original loan transaction was subject to, but exempt from, those laws. We disagree with Milestone that Ghirardo can, or should be, extended to cover the Settlement Agreement. Accordingly, we AFFIRM the bankruptcy court's usury ruling.

The Moons cross-appeal from the bankruptcy court's award of post-maturity interest on the obligation underlying Milestone's forbearance. None of the Moons’ arguments persuade us that we should depart from the settled rule that creditors generally are entitled to interest at California's legal rate when the loan matures but remains unpaid. Thus, we also AFFIRM the bankruptcy court's post-maturity interest ruling.

A. The Milestone loan and the subsequent Settlement Agreement.

The Moons purchased their residence in 1993. In late 2014, facing foreclosure, Lori Moon filed bankruptcy but dismissed it several months later as part of the Moons’ efforts to refinance with Milestone. In May 2015, the Moons applied for a loan from Milestone to pay off the outstanding mortgage encumbering their residence. Roughly a month later, the Moons borrowed from Milestone $795,000, payable in two years, and used the loan to pay off all existing encumbrances against their residence. A licensed real estate broker represented the Moons in obtaining the Milestone loan.

The Moons executed a promissory note ("Note") in favor Milestone providing for interest only payments of $7,482.94 per month with a balloon payment for the balance due on July 31, 2017. The Note specified that interest would accrue on the loan at a rate of 11.30% per annum. The Moons secured the Note with a deed of trust against their residence.

Almost immediately, the Moons began to struggle to make the required payments on the loan. At times, Milestone needed to advance tax and insurance payments for the residence. Roughly a year into the loan, in an attempt to stave off foreclosure, the parties entered into the Settlement Agreement. Neither party was represented by a real estate broker in entering into the Settlement Agreement.

The parties’ recitals reflect that the principal purpose of the Settlement Agreement was to extend the maturity date of the Note, which was reset to come due on July 31, 2019. Despite this evident purpose, the Settlement Agreement contained a provision stating that neither party intended or understood the Settlement Agreement to qualify as a loan or forbearance. The Settlement Agreement also identified the outstanding principal balance of the Note as $902,525.34 and reduced the interest rate from 11.30% to 11.05%. The new monthly payment under the Settlement Agreement was $8,310.75, which again paid interest only. The Settlement Agreement also added a provision that any past due payment, "including the final balloon payment," would incur a 10% late charge. As consideration for the extension of the maturity date and for the interest rate reduction, the Moons agreed to pay Milestone $6,008.71.

B. The lawsuit, the bankruptcy filing, and the adversary proceeding.

The Moons again fell behind on their payments and other loan obligations. As a result, in February 2019, Milestone notified the Moons that it was accelerating the loan, that the entire loan balance needed to be paid off by March 3, 2019, and that a 10% late fee would be assessed unless the loan balance was paid by that date.

The Moons did not pay off the loan balance. They did, however, seek to refinance the balance with a new lender and requested a payoff statement from Milestone to facilitate those efforts. According to the Moons, Milestone was slow to provide the payoff statement and issued multiple quotes with differing amounts. They also contend that the quotes included inaccurate and illegal charges for late fees, interest accrual, and other charges, which significantly inflated the payoff amount. Each of the payoff quotes included a 10% "acceleration penalty." Milestone explained that this was a late charge for nonpayment of the accelerated balloon payment as provided for in the Settlement Agreement.

In September 2019, Milestone recorded a notice of default. In November 2019, the Moons sued Milestone in the San Mateo Superior Court. The operative complaint is the Moons’ first amended complaint for breach of contract, fraud, intentional interference with contract, and declaratory relief. The complaint sought damages and an injunction of Milestone's foreclosure proceedings. The gravamen of the claims focused on Milestone's conduct in providing the payoff quotes. For instance, the Moons alleged that Milestone breached its contract "by demanding a payoff amount far in excess of the amount required by any contract, and demanding amounts that were illegal under the law."

Though the state court initially issued a temporary restraining order, it denied the Moons’ motion for a preliminary injunction. Shortly thereafter, Mr. Moon filed a voluntary chapter 13 petition, which he later converted to chapter 11. In October 2020, the Moons removed the state court litigation to the bankruptcy court thereby commencing the underlying adversary proceeding.

C. The cross-motions for summary judgment in the adversary proceeding.

The Moons moved for partial summary judgment, but their moving papers focused on three claims not raised in their complaint. They sought determinations that the Settlement Agreement was a usurious forbearance which rendered the 11.05% interest rate void, that the 10% "acceleration fee" on the balloon payment was an illegal and unenforceable penalty, and that the other late fees Milestone assessed were unenforceable and improperly charged multiple times against a single missed payment.

Milestone opposed the Moons’ summary judgment motion and moved for summary judgment to dismiss the four causes of actions stated in the first amended complaint. Milestone originally asserted that the Settlement Agreement was exempt from usury restrictions under Cal. Civ. Code § 1916.1 because Carolyn Stuart, one of Milestone's owners, was a licensed real estate broker and was involved in the parties’ entering into the Settlement Agreement.3 Alternately, Milestone claimed that the Settlement Agreement was neither a loan nor a forbearance subject to California's usury laws under the holdings of Ghirardo v. Antonioli , 8 Cal. 4th 791, 804, 35 Cal.Rptr.2d 418, 883 P.2d 960, (1994), as modified on denial of reh'g (Feb. 2, 1995); and DCM Partners v. Smith , 228 Cal. App. 3d 729, 739, 278 Cal.Rptr. 778 (1991).

The court issued a memorandum decision in January 2022, resolving the cross-motions for summary judgment. It granted Milestone summary judgment dismissing the declaratory relief cause of action holding that the Moons failed to state a claim for relief. On the other hand, the court determined that there were triable issues of fact with respect to the Moons’ fraud and intentional interference claims.

On the breach of contract claim, the court initially expressed an intent to deny summary judgment. According to the court, neither of the parties established whether Milestone's payoff demands were in excess of the contractual amount owed or whether Milestone thereby breached the parties’ contract. Even so, the court later granted summary judgment in favor of the Moons on their "Second Cause of Action" for breach of contract. However, it held only that the Moons were not liable for interest prior to the maturity date of the loan, or for the acceleration fee, and that the $902,525.34 principal amount owed needed to be reduced to the extent the Moons paid pre-maturity interest.

The court determined that Milestone's charges for pre-maturity interest were unenforceable because the Settlement Agreement was a usurious forbearance. It explained that Cal. Civ. Code § 1916.1 ’s exemption for broker-orchestrated loans and forbearances did not apply because Milestone's forbearance was not connected to a contemporaneous or prior sale, lease, or exchange of real property. The bankruptcy court also rejected Milestone's arguments positing that all forbearances arising from exempt loans...

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