Powell v. Central Cal. Fed. Sav. & Loan Assn.
| Decision Date | 25 June 1976 |
| Docket Number | No. 14839,14839 |
| Citation | 130 Cal.Rptr. 635,59 Cal.App.3d 540 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Robert C. POWELL et al., Plaintiffs and Appellants, v. CENTRAL CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, Defendant and Respondent. |
Malcolm L. McConnell, Sacramento, for plaintiffs-appellants.
Miller, Starr & Regalia, Oakland, by M. Janice Smith, San Francisco, amicus curiae for appellant.
Angell, Adams & Holmes, San Francisco and Purtell & Hoppin, Woodland, by Barry Hovis, San Francisco, for defendant-respondent.
After trial by the court, plaintiffs appeal from a judgment that they take nothing from defendant in their action for damages and declaratory and injunctive relief.
Defendant is a federal savings and loan association chartered by the Federal Home Bank Board ('board') and is subject to the board's regulations. (12 U.S.C. §§ 1462, 1464; see generally, Woodard v. Broadway Fed. S. & L. Assn. (1952) 111 Cal.App.2d 218, 244 P.2d 467.) On June 26, 1963, Beatrice L. Powell, the mother of plaintiff Robert C. Powell, executed an $850,000 promissory note payable to defendant and secured by a deed of trust. The note and deed of trust were given for a loan obtained by Beatrice, with her son's prior knowledge, to finance an apartment house which he was building. The note provided for interest at 7 per cent per annum, with principal and interest payable in 240 monthly installments of not less than $6,591 commencing October 1, 1964. The note further stated that '(i)n any event, the whole of said principal and interest shall be paid on or before September 1, 1984,' and it contained the following variable interest provision:
'On or after one year from date, on three months written notice to the obligor, the holder (defendant) may increase or decrease the above interest rate by a maximum of 1% Per annum in any calendar year, after an increase or decrease in the dividend rate paid by Central California FEDERAL SAVINGS and Loan Association (defendant) to the holders of its savings accounts over or under the now existing rate, provided within said three months period the obligor may pay in full the balance due with interest at the original rate specified above and without any prepayment penalty.'
On May 28, 1964, plaintiffs (husband and wife) assumed the indebtedness evidenced by the aforesaid note and agreed to pay it as in the note provided.
On August 20, 1964, plaintiffs borrowed another $50,000 from defendant and executed a promissory note therefor, secured by the same earlier trust deed. The $50,000 note provided for interest at 7 percent per annum, with principal and interest payable in 240 monthly installments of not less than $388 commencing October 1, 1964. Like the $850,000 note, the $50,000 note provided that all principal and interest be paid on or before September 1, 1984, and it contained the same variable interest provision.
On September 13, 1967, plaintiffs borrowed yet another $600,000 from defendant and executed a third promissory note therefor, secured by a separate deed of trust on other property. This note provided for interest at 7 1/2 percent per annum, with principal and interest payable in 300 monthly installments of $4,434 commencing August 1, 1968. It stated that '(i)n any event, the whole of said principal and interest shall be paid on or before July 1, 1993,' and it contained the following variable interest provision:
'On or after one year from date, on three months written notice to the obligor, the holder (defendant) may increase or decrease the above interest rate by a maximum of 1% Per annum in any calendar year, after an increase or decrease in the earning rate paid by the holder (defendant) to the holders of its savings accounts over or under its now existing rate, provided within said three months period the obligor may pay in full the balance due with interest at the original rate specified above and without any prepayment penalty.'
Each of the notes was drafted by defendant. The trial court found that it was of no substantive importance that there were minor differences in language in the two forms of variable interest provisions; in particular, it found that 'dividend rate' (the phrase used in 1963 and 1964) and 'earning rate' (the phrase used in 1967) were intended to mean 'the cost of savings' to defendant, i.e., the interest paid by it to depositors. On appeal, this finding is not attacked.
On or about May 13, 1970, defendant notified plaintiffs by letter that (1) effective September 1, 1970, the interest rate on the 1963 and 1964 loans (totaling the face amount of $900,000) would be increased from 7 percent to 8 percent and the total monthly payment on the two loans would be increased to $7,650; and (2) like-wise effective September 1, 1970, the interest rate on the 1967 loan ($600,000) would be increased from 7 1/2 percent to 8 1/2 percent and the monthly payment thereon would be increased to $4,806. Defendant's letters stated that it was necessary to resort to the variable interest provisions of the promissory notes because defendant was required to pay higher interest rates to its savings depositors.
Plaintiffs, through their attorney, thereupon advised defendant that the interest increase was invalid and that the notes called for specific monthly payments which could not be increased by defendant without plaintiffs' consent. On August 26, 1970, defendant wrote plaintiffs that the interest rates would be increased as previously indicated, but that it would not be necessary for plaintiffs to increase their monthly payments if they did not wish to do so. The obvious consequence of increases in the interest rate without concurrent increases in the monthly payments was that in the future there would be required either (1) increased or 'balloon' payments at the end of the designated terms of the notes or (2) an extension of the designated maturity dates. Plaintiffs elected not to increase monthly payments.
On the dates the notes were executed, defendant offered the following types of savings accounts:
Types of Accounts
Date of Note Amount of Note Offered by Defendant
------------ -------------- --------------------
6/26/63 $850,000 Savings Passbook
8/20/64 $ 50,000 Savings Passbook
9/13/67 $600,000 Savings Passbook
1/2% Bonus Account
1/4% Bonus Account
On September 1, 1970, when defendant invoked the variable interest provisions, it offered six different types of savings accounts, namely:
Savings Passbook
1 /2% Bonus Account
1/4% Bonus Account
5.5% Notice Passbook
5.75% Fixed rate fixed term certificate
Fixed rate fixed term certificates for deposits of $5,000 through $100,000 minimum deposits.
The interest rates paid by defendant to depositors on the dates relevant to this case were as follows:
Interest Paid on Weighted Average
Savings Passbook of Interest Paid on
Date Event Accounts only All Types of Accounts
------- ---------------- ---------------- ---------------------
6/28/63 $850,000 4.75% 4.82%
Note Executed
8/20/64 $50,000 4.85% 4.74%
Note Executed
9/13/67 $600,000 5% 5.06%
Note Executed
9/1/70 1% Interest 5% 5.26% 1
increase invoked
The increases in the interest rates which defendant paid depositors between the dates the notes were executed and September 1, 1970, were as follows:
Interest Rate Increased Interest Rate Increases
on Savings Passbook on Weighted Average for
Accounts Only All Types of Accounts
----------------------- -----------------------
$850,000 Note .25% .44%
$ 50,000 Note .15% .52%
$600,000 Note 0% .26%
Plaintiffs commenced this action on September 17, 1970, approximately two weeks after the date set by defendant for the variable interest increases to become effective. At trial on October 31, 1972, at the conclusion of plaintiffs' case, they filed a first amended complaint to conform to proof. In relevant part, plaintiffs' amended pleading alleged that the variable interest provisions were unenforceable because they were ambiguous, constituted contracts of adhesion, and, as utilized by defendant, would result in balloon payments at the end of the loan terms in violation of the board's regulations.
On or about December 11, 1972, while the cause was under submission, plaintiffs obtained from another lender a new loan on the real properties which were encumbered by the three trust deeds. Defendant made escrow demands for payment of the principal and interest claimed to be due on its three loans, including the variable interest increases. The demands were paid. Plaintiffs brought these events to the trial court's attention by a declaration of their attorney in support of a motion to reopen filed on January 26, 1973. After hearing thereon, the court granted the motion and gave defendant an opportunity to dispute the computations set forth in the declaration of plaintiffs' attorney; no dispute was made.
The declaration of plaintiffs' attorney alleged damages of $21,099.71 resulting from the 1 percent interest increase on the 1963 and 1964 loans, and $15,680.25 resulting from the 1 percent interest increase on the 1967 loan. The court found that if the variable interest increase of 1 percent had not been invoked, plaintiffs would have been required to pay defendant '21,099.71 less than the amount they were required to pay defendant' on the 1963 and 1964 loans, and $15,680.25 less than the amount they were...
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